2007 | Dalal Street

Jet Airways to Crash. Citi Puts Aggressive SELL

April 11, 20072 min read

Media reports suggest that Jet has sealed a deal to acquire Air Sahara at enterprise value of $450 million, marginally lower than $500 million that was decided upon when the two had inked the buy-out agreement in January 2006. The final price will only be clear after the formal announcement which is expected today, reports add.

Reports also suggest that Jet is willing to stick to its commitment to pay off outstanding creditors worth Rs 400 crore of Sahara which was part of the original enterprise value. After the January agreement, Jet had sought reduction in deal value. It had finally walked out of the deal in June 2006 after operating Air Sahara for about three months.

I may have never seen a research report recommendation as this one from Citigroup on Jet Airways. 3H – SELL because of High Risk. Target Price of Rs 390.

Citi analysts expect combined entity to report an EPS of Rs 23.83 for FY2008 and Rs 32.94 for FY2009. Visibility on Jet’s international operations remains limited; domestic market conditions are not expected to improve meaningfully over the next 12 months. Sahara integration another imponderable.

Target price of Rs390 is based on a 7.5x FY07E EV/EBITDAR multiple. Our multiple is based on a 15% discount to the average 8.8x CY06E EV/EBITDAR multiple of our regional airline universe (ex Air Asia). We believe the discount to the Asian airlines is justified given: a) the very competitive domestic landscape; b) delays in stabilization of Jet’s international operations; and c) soaring fuel costs (which Indian carriers cannot hedge).

Equity Research

Hercules Hoists

April 10, 20073 min read

A Shekhar Bajaj group (promoter stake 70%) company, Hercules Hoists produces chain-pulley block, electric hoists, trolleys and cranes in technical tie-up with Heinrich De Fries, GmbH, Germany. Hercules Hoists’s manufacturing facility is equipped with CNC, gear cutting and broaching machines. The combined installed capacity is 29,250 numbers per annum. The company is also developing a new range of wire-rope electric hoists jointly with Bull S.r.l., Italy. It holds a 40% market share in the chain-pulley-block market, 20% market share in wire-rope electric hoists, and a massive 90% in CEM.

The enviable set of customers include automobile manufacturers Tata Motors, Mahindra & Mahindra, Maruti Udyog, New Holland, Escorts, Premier Auto, Bajaj Auto, Kinetic, Ford India, Daewoo Motors, Ashok Leyland and Punjab Tractors. In the steel industry, the company caters to Tata Steel, Bokaro Steel Plant, Rourkela Steel Plant, Sail, Mukund, and Jindal. In the cement sector, the users are Ultratech, Ambuja Cements, ACC and Birla Cement. The state electricity boards include MPEB, RSEB, MSEB and BSES.

Hercules Hoist has invested Rs 12.50 crore to produce 2.5-MW wind energy, a new business. The company further invested Rs 6.25 crore in a 1.25-MW windmill in FY 2006 and started producing from the expanded capacity in March, 2006. It put in another Rs 6.25 crore for another 1.25-MW wind mill in FY 2007.

Net sales of Hercules Hoists registered a solid rise of 24% to Rs 22.31 crore and net profit 61% to Rs 4.12 crore in the December 2006 quarter,.

Sales rose 40% to Rs 62.32 crore, and profit after tax (PAT) shot up by 107% to Rs 12.90 crore in the nine months ended December 2006.

The handsome increase in revenue was due to the introduction of a range of higher capacity hoists in various models. Another reason for the rise in sales was market demand, aggressive marketing, wider product range, competitive product prices, and faster deliveries. Cost cutting and various operational restructuring have resulted in improved profitability.

Pick-up in capital expenditure across various industries including speciality steel, mining, power and automobile, and investment in infrastructure have lifted the demand for material-handling equipment. To cope with the rising demand, Hercules Hoists has planned an investment of Rs 5 crore in a new factory to enhance capacity. Approximately six acres of land have been purchased to put up the new factory in Village Dhamani at Khopoli, in district Raigad of Maharashtra.

Interestingly, Hercules Hoists has 83,694 shares of Bajaj Auto bought at Rs 73 lakh — a purchase price of just Rs 87 per share. At current rates, these shares are valued at a huge Rs 21.04 crore — a potential cash per share of Rs 131.5 of Hercules Hoists.

Hercules Hoists is expected to register sales of Rs 84.24 crore in the FY 2007. Net profit can be projected at Rs 16.77 crore. On an equity of Rs 1.60 crore and face value of Rs 10 per share, EPS works out to Rs 104.8. Book value can touch Rs 280. The company can register EPS of Rs 129.8 in FY 2008. The share trades at Rs 1320. This discounts our FY 2008 projected EPS only 10 times.

Economy, Markets and Macro Views

SRF jumps on bulging proceeds from carbon credit sales

April 10, 20072 min read

The rally in SRF was on a high volume of 22.1 lakh shares on BSE.

The scrip of SRF had risen 17.1% to Rs 139.65 on Monday (9 April), boosted by the news of the company raising large money from the sale of carbon credits in the last financial year.

The scrip of SRF had declined sharply in the market fall during the period from early February 2007 to early March 2007, when traders offloaded derivative positions in the counter. From Rs 204.85 on 5 February 2007, it had tumbled to Rs 116.70 on 6 March 2007. The scrip moved in a tight band of Rs 116 – Rs 126, from 7 March to 5 March.

SRF has been one of the early movers in India to cash in on the carbon emission trading (CET) opportunity. Under the Kyoto Protocol, industries in developed countries can offset carbon dioxide emissions by buying carbon credits from projects that cut emissions in developing countries.

SRF’s solid surge in net profit in Q3 December 2006, was due to a huge revenue of Rs 122.28 crore from the sale of carbon credits. Its net profit jumped 417.8% to Rs 70.11 crore from Rs 13.54 crore. Net sales rose 11% to Rs 328.08 crore.

SRF has just finished doubling its capacity to produce engineering plastic, which finds varied application in several industries from auto component to electrical appliances to mobile handsets.

SRF is also banking big on coated fabrics. It is looking at procuring technology from abroad to stay ahead of the competition in this business.

SRF produces refrigerant gases — Fluorochemicals and Chloromethanes — which are used for refrigeration and air-conditioning. SRF has also formed a joint venture (JV) for making anhydrous hydrogen fluoride in China. The project will cost $9 million.

Equity Research

ML Bullish on BHEL

April 2, 20071 min read

Merill Lynch is bullish on the state owned PSU giant, BHEL. In a research report published today, ML reiterated BUY with a price target of Rs 2,760. Merill expects BHEL to report an EPS of Rs 115.35 for FY08 and Rs 142.22 for FY09.

ML analysts met the management of BHEL and raised FY08E & FY09E earnings estimates by 4.2% & 14.6% respectively, as they are double sure of continued strong order pipeline. Following a series of orders from NTPC & SEBs to BHEL, ML expects a historic order intake Rs310bn +64%YoY & backlog of ~Rs500bn +35%YoY in FY07. This announcement on April 3rd should reassure market, which has been worried on new orders due to competition. Our view is that in power market which is likely to more than double in FY08-12E, BHEL would grow volumes at mid/high teens, while it may lose a few basis points of share to cheaper supplies (China/Russia).

Economy, Markets and Macro Views

Bears Occupy Dalal Street

April 2, 20071 min read

The BSE Sensex opened 350 points down and their was a war between the Bulls and Bears. The Bears mercilessly hammered all the SENSEX stocks around 2:00PM and the Index slipped by another 150 points. Weak hearted bulls joined the bears and bought the index down by 615 points to 12,400 levels. Sensex suffered the worst intra-day debacle since 28 Feb ’07.

This was expected because of the surprise CRR hike by RBI on Friday evening. Auto, Banking, Real Estate stocks were the worst hit. It was no good a day for IT stocks too. Mindtree, Wipro, HCL-Tech and Infosys were all dumped by fund managers.

I recommend Long Term Investors to stay away from the market. Are you Fu&*ing crazy ? Yes I am Fu&*ing insane. Long Term investors, keep away as you will get Indian stocks at still cheaper valuations. SIP investors need not worry at all.

Economy, Markets and Macro Views

Infosys guidance could be lower

March 31, 20071 min read

Infosys Technologies Ltd, will announce its results for the FY06-07 and will issue a guidance for FY08-09 on the 13th of April. With FBT coming into force from April-1st, Infosys was forcing all its employees to exercise options to avoid taxes. Adding to IT exporters woes is the weak dollar.

Infosys stock has taken a beating of 20% from its high of Rs 2,400. Merill Lynch expects Infosys guidance for EPS growth to be in early 20s and will disappoint the market. The report further adds that the outsourcing story is intact and Merill maintains a BUY with a 12 month target price of Rs 2,600 which is slightly optimistic.

In the near term, their will be weakness in Infy stock however one who wants to take exposure should do so only from long term perspective [12 Months]. TCS has fallen by just 8% from its high of Rs 1,300. I don’t agree with analysts who are biased in recommending a 5% discounted target for TCS compared to Infosys. I feel it is unjustified looking at the way TCS is cutting deals and expanding.

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