2007 | Dalal Street

Budget 2007 – Impact and Analysis

March 1, 20073 min read

Looks like the FM had directions from Italian Lady to slowdown the growth and focus on “Common Man“, especially with UP elections around the corner. FM rightly said, Budget is presented in a context of Economic and Political conditions. Here are some thoughts,

Sector Cement: [Negative]
These guys have had an extended honeymoon and thus its good that they are punished hard.Increasing excise duty from Rs400 to Rs600 for price above Rs190 per bag and reducing from Rs400 to Rs350 is a negative as cement price per bag in most of the places is above Rs190 at present. With demand strong we believe the increase in the duty would be largely passed on, but continuous efforts by the Government to curb the price increase and reduce the profitability of the industry is visible.

Sector Oil & Gas: [Positive]
Reduction in ad valorem excise duties for petrol and diesel – positive for Oil Marketing Companies IOC, BPCL and HPCL. Reduction in custom duties on Plastics, polyester and intermediates – positive for Reliance Industries, GAIL, IOC and IPCL
Infrastructure status to cross-country pipeline projects – positive for Reliance Industries, GAIL, GSPL, Gujarat Gas and Indraprastha Gas Ltd.
Extension of service tax to mining of oil and gas – marginally negative for ONGC, Reliance, and Cairn India

Healthcare: [Positive]
Healthcare allocation increased. Allocation for immunization program is Positive for Panacea Biotech. HIV eradication to gain momentum – Positive for MNC, Cipla, Wockhardt. 150% weighted average tax deduction for R&D expenses extended for 5 years is Positive for research driven pharma companies-Ranbaxy, DR Reddys Labs, Sun Pharma, Cadila Healthcare, Biocon and Glenmark. Clinical trials out of service tax net. Medical insurance deduction u/s 80DD increased to Rs15,000 is positive for Apollo Group, Max India as more population would be covered by medical insurance.

Information Technology: [Negative] End of Honeymoon
The pampered kid of the Indian industry is all set to face some uphill tasks. Minimum Alternate Tax to be applied to IT companies to 11.2% on book profits. Inclusion of ESOPs under the FBT net negative for the sector. Non-extension of STP benefits beyond 2009 negative especially for medium & smaller sized IT companies. SEZ operations will be spared.

Construction: [Negative]
The budget proposed withdrawing the ten-year income tax breaks on infrastructure construction contracts available under section 80 IA, with retrospective effect from April 2000. WTF ? Am I Kidding ? No way. Before you do business in India be prepared to pay Taxes in retrospective LOL. What a D**k Head 🙂

The withdrawal of the benefit will raise the tax liability of construction firms which in turn will impact their profit margins, analysts say. Further, their short-term cash-flow may also be affected due to tax payment for previous years as the tax benefit has been withdrawn from April 2000. One of my favorite stock Punj Lloyd is also in the constructions business but more than half of its contracts are outside India just like L&T.

Real Estate:
Commercial Real Estate rentals bought under Service Tax net. Tax exemptions for Hotels and Convention centers in Delhi and NCR regions. But who knows after the commonwealth games, some other D**k Head Finance Minister may impose tax collections in retrospective. LOL

Their were no significant announcements for Banking, Telecom and Power Sectors in this budget.

Equity Research

Punj Lloyd – Investment Recommendation

February 27, 20072 min read

Delhi based construction company Punj Lloyd is doing extremely well after the takeover of SembCorp – SEC.

Punj Lloyd’s [PLL] order book has grown from Rs 1,200 crore to Rs 10,300 crore. On a consolidated basis the current order backlog is Rs 14,300 crore. PLL’s average order size has increased from $30 Million to $200 million and the company management is hopeful to achieve $ 300 million. PL is the second largest EPC contractor after L&T.

I went through the transcripts of their conference call [PDF] and find that they are trying to improve the margins of SEC by outsourcing engineering design work to India. For this they are hiring close to 700 engineers in FY08 and 1,300 in FY09. This will directly add to the bottomline of SEC.

Valuations and Investment Rationale:
PLL (including SEC) is expected to post a CAGR of 77% in revenues between FY06-09E and
99% in earnings for the same period. At the CMP of Rs 835, the stock trades at a P/E Ratio of 15.4x and 9.9x our FY08E and FY09E EPS estimates of Rs 54 and Rs 84. We have a 12-month price target of Rs 1,400, an upside of 65% using a 3-stage DCF model.

Budget time is a good opportunity to BUY if you are a long term investor as some stocks like PLL and TCS are available at attractive prices. However, just by 50% of your intended investment now as J P Morgan and other analysts are underweight on India.

Economy, Markets and Macro Views

FirstSource Solutions lists at 30% Premium

February 22, 20071 min read

FirstSource Solutions Ltd which recently completed its IPO got listed on the NSE with ticker “FSL” at Rs 83.0, a 30% premium to its issue price of Rs 64.

You can check the allotment status of FirstSource Solutions here. Long term investors can continue to hold the stock. Short Term investors must hold and book profit only when the IT stocks rally, i.e Q4 results will be out in April-07.

India IPO Reviews and Updates

Power Finance Corporation Allotment

February 20, 20071 min read

Power Finance Corporation IPO allotment status is now available online. All applications for 1120 shares @ Rs 95,200 have been allotted 136 shares.

If you are a long term investor you can hold Power Finance Corporation as it is one of the best managed Infrastrucre finance companies in Asia.

Mutual Funds Review

India Inc Profit Growth to Slowdown – Jain

February 19, 20073 min read

In an exclusive interview to Ramesh Damani, India’s star fund manager, Prashant Jain’s views are as follows,

How seriously should investors view the threat of inflation and what do you tell your investors and how do you protect your portfolio in this case?

Real inflation is actually much more than probably what the numbers are suggesting. The largest component in any household expenditure is a house and houses are clearly unaffordable by whichever measure you see. If you look at the inflationary impact on the total consumption expenditure of the household, inflation is way in excess of what these numbers suggest.

Banks are offering 10-11 per cent on deposits, and as we go into March they may start offering 12 per cent. So over long periods of time, there is certainly a strong case to be made that exposure to equities in Indian households which is very low should increase significantly but I don’t know at what pace it will happen. Given the fact that fixed maturity plans from mutual funds offer virtually safe 10 per cent return, which used to be 5-6 per cent two-three years back.

Economic growth will still accelerate, but profit growth will slow down. Profit growth will be lower in 2008 than the profit growth in 2007, and 2009 will be even lower.

Is Sensex earnings target of Rs 840-845 seem too optimistic to you?

Yes. I don’t look at the Sensex as one composite.

In fact, Sensex has two parts to it – the secular growth companies which would be companies like telecom, IT, consumer goods and the cyclicals. If you split the Sensex into these two parts, you will get a more realistic picture of the valuations. And it is not very good. If you look at the secular growth companies they are all trading at close to 20 times FY09 earnings, two years forward, which is not cheap.

And there are risks, telecom will certainly slow down by then. You cannot have 100 crore mobiles in India in the next four-five years. So it has to slow down. You can only argue whether it will take three months or six months or one year.

Cyclical growth companies are trading significantly above replacement cost and we are somewhere close to a peak cycle. So how the sectors will pan out, how zinc, lead, aluminium and steel prices behave, how the margins behave is very hard to forecast. One thing is clear that these are economically unsustainable prices and these profits are not likely to sustain for long time.

So for short term and medium term investors, do we have a big hurdle in the near future ? Yes I think so and I am going to start exiting stocks which have run up quite a bit.

Via [BS]

Equity Research

Citi reiterates BUY on ABB India

February 19, 20071 min read

Citigroup Research in its report on ABB has reiterated a BUY with Low Risk and has set a price target of Rs 4,400, 16% upside from current levels.

ANN (India) reported a 4QCY06 PAT at Rs1.35bn (up 43% YoY) was 7% ahead of estimate of Rs1.26bn on faster execution of orders leading to net sales of Rs14.3bn, which was 5% ahead of estimates.

ABB (India) booked Rs14.1bn (up 40% YoY) of fresh orders in 4QCY06, ending the year with an order backlog of Rs33.7bn (up 60% YoY). In CY06, the company booked orders worth Rs56.2bn (up 50% YoY). Strong industrial growth and power capex imply future order inflows.

The power capex cycle will be stronger for longer as the first concrete numbers of the Ministry of Power’s (MoP) generation targets for the XIIth Plan (FY12-17E) at 86.5GW has started trickling in, implying that capacity addition targets in the 10 years from FY07E-FY17E is likely to be 153.5GW.

Target price of Rs4,400 is based on a P/E of 34x FY08E which is a ~50% premium to BHEL, in line with the premium over the last 3 years.

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