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Noida Airport Delay - JP Associates impacted

Monday, September 29, 2008

The indefinite delay in taking off of Greater Noida International Airport has impacted the Land Bank of JP Associates and its Yamuna Expressway project. JP Associates has around 3750 acres of land bank along the Yamuna Expressway around the proposed airport. Adding to JP Associates' woes is the weakening property prics in the NCR region. Merill has thus taken off the value of land bank in sum of parts valuation of JP Associates.

Merill has also factored-in higher cost of expressway Rs74bn (Rs66bn) on higher land / construction costs and lowered realization assumptions on NOIDA land bank till FY11E on continued weakness in NCR realty markets. JP Associates is expected to maintain an EPS of Rs 6.81 and Rs 9.29 for FY09 and FY10.

INR Sum of the Parts Valuation of JP Associates:
EPC - 82
Jaypee Infratech - NOIDA land on development & Agra parcel on land sale - 52
Jaypee Greens 10
Coal Mines - 18
Power Business - 112
Cement - 74
Hotels - 4
Steel - 2
Debt - (32)
Based on the above, Merill has set a target of Rs 325 on the stock downgrading it from Rs 395.

Taking the current scenario into account, we believe JP Associates is valued at a premium to its peers [EPS, Realty and Power].

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Published by Webmaster @ 10:29 AM IST. ,

Realty Stocks - Worst Performers

Saturday, September 27, 2008

The benchmark Indian indices Sensex and Nifty have corrected ~37% from their peak. However, the BSE Realty Index has fallen by 70% and some stocks in the property index have fallen more than that. Property prices have started correcting every where, Residential was the first one to be hit followed by Commercial and Retail now. Worli and Bandra Kurla Complex have seen big fall in rental values. We present to you the performance of Realty Stocks in the past 9 months.
Year To Date Performance of BSE Realty Stocks Index Courtesy: Citigroup
As you can see from the table, none of the stocks have been spared. What is the cause for such massive hammering / sell-off ?
Research Analysts want the company they invest in to be cash flow positive and EPS to grow YoY. However, in case of realty stocks most managements operate on the basis of "Assets / Land Bank" valuations in mind with very little importance to generate big cash out of it. If you study individual reports of each of these companies in the Realty Index, their earnings are expected to be flat in FY09.

Only investors in Tier-I cities had burnt their fingers in Real Estate so far. However, this time I am pretty sure Tier-II city investors / speculators will face the agony. It is a Myth that Real Estate and investment in Realty Stocks is a safe bet, only diversified Equity Asset Class will create wealth in the long run, compared to investment in any particular Sector or Asset :-)

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Published by Komal M @ 8:04 AM IST. ,

Axis Bank to Double in 2 Years - Goldman Sachs

Friday, September 26, 2008

Goldman Sachs [GS] in a report has released few stocks in the Asia-PAC region which have the potential to double within the next 2 years from current levels and Axis Bank from India has made it to the list.

According to GS strong consumer and corporate banking franchise, the latter to be driven by branch expansion, Axis is poised to emerge as a key competitor within Indian financial services. Corporate Banking will see strong capitalization, breadth of products, and cost competitiveness as key advantages.Management's differentiated approach in network planning, product focus and well-honed customer segmentation process as key competitive advantages in the Consumer Banking vertical.

Axis bank's superior credit selection process, portfolio orientation in favor of large corporates with stronger financial position and strong profitability, will protect it against an adverse environment.

At historical average P/E of 14.4X, implying a price of Rs 1,400, franchise growth value of 30% and normalized ROE of 20%. Axis is likely to report an EPS of Rs 40.59 and Rs 57 for FY09 and FY10 respectively.

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Published by Sunil K @ 12:24 PM IST. ,

Analysis - Sterlite Restructuring Cancellation

Wednesday, September 24, 2008

Vedanta / Sterlite has decided not to pursue the proposed group restructuring. According to the company, Vedanta/Sterlite remains committed to simplifying and streamlining its corporate structure in the interests of all shareholders. We view the restructuring cancellation positively.

Merill estimates the current year EPS to decline 14% to Rs54.3. This is based on forecast zinc price of US$1907/t, aluminum price of US$2912/t and copper tcrc of 15c/lb. For FY10, we forecast a marginal 4% increase to Rs56.2.

Merill has also cut the Target price to Rs 505 from Rs 655. The cut has been primarily in the metals business which is now discounted at 25% to its DCF earnings.
Metal Business - Rs 451
Power Business - Rs 54

Separately, Morgan Stanley has set a price Target of Rs 647 on the stock at 5.4x times FY09 earnings.

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Published by Sunil K @ 10:58 AM IST. ,

Patnaloon Retail - Highest EBITDA Margin

Monday, September 22, 2008

Pantaloon Retail India Ltd reported 56%, 114%, and 107% growth in revenues, operating profit, and adjusted net profit for F2008. Even though a number of subsidiaries are in investment mode, consolidated revenues and EBITDA grew by 68% and 130%, respectively.

The company changed the inventory accounting policy to lower of cost (including cost of bringing the goods to the store) and net realizable value. A huge positive as this was one of investors' most significant concerns.

F08 EBITDA margin improved from 6.7% to 9.1%, translating into 114% growth. Operating leverage in play as surplus organizational capacities created during the last 2 years are being utilized effectively, staff cost down 100 bps, and other operational expenses including rent down 280 bps.

It is worth noting that Promoters have already converted over 60% of the outstanding warrants at Rs500 per share.

Sum of the Parts Valuation:
DCF Value for Core Business 478
Subsidiaries Valuation
Home Solutions (73.32% stake) 60
Future capital (55% stake) 68
Future Bazaar (80% stake) 14
Future Media (85% stake) 12
Total Value 631

Morgan Stanley has set a target price of Rs 568 at a 10% discount to the sum of the parts valuation. The company has also declared a dividend of 30%.

Update:
Kotak has set a target price of Rs 400 on PRIL.

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Published by Komal M @ 12:57 PM IST. ,

Moser Baer - Roadmap

Saturday, September 20, 2008

The management of Moser Baer India is looking at the business as a "chain of value propositions" - attempt is to move from licensee of technologies to creator/developer of IP. The various businesses company is focused on are Optical media, Photovoltaic (PV) Cells, Home entertainment, and Consumer electronics / IT peripherals.

PV Business + Funding:
Moser indicated that Si-based PV should ramp up from 80MW to 180MW by end of year; Thin film based PV should ramp up from 40MW to ~600MW over the next couple of years. There will be small quantum of concentrator-based capacity as well. The total capex for PV is ~$2b out of which $600m will be complete by end of FY09. Mosers PV subsidiary recent raised Rs4.1b from global investors which is a big positive.

Optical Media:
Inventory Levels are down. There is some progress on licensing issues between Philips and Moser's competitors. Festive season demand is not showing signs of weakness. Blu-ray format is ramping up; should be at ~200m run rate by end of next year.

Home Entertainment:
Home entertainment business is already cash positive. The business has been hived off in a subsidiary and management will look at monetizing at appropriate time. Moser does not plan to make big investments in the movie production business.

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Published by Sunil K @ 9:57 AM IST. ,

Cummins India - Softening Steel + Weak INR

Wednesday, September 17, 2008

The softening of steel prices to benefit equipment makers like Cummins India. Raw material (mainly steel and cast iron) costs accounted for 64% of the revenues for Cummins India in FY08. In response to the sharp increase in material prices (Steel and Cast iron) in Jan-June 2008 period, Cummins had taken price hikes between 2-2.5% across its product categories in the first quarter. The full impact of these hikes is expected in current quarter.

Exporters on an ongoing basis contribute around 35% of revenues of Cummins. During the current quarter, Rupee is down 6.5% from the beginning of the quarter. We expect the company to benefit from rupee depreciation but the extent would depend on forward cover that the company has taken to hedge receivables.

CIL is a front-runner in the lean-burn engines segment which is being used to power the buses in New Delhi. Towards the preparation for the Commonwealth Games 2010, the Delhi Transportation Authority has given the entire order of 2500 engines based on the lean-burn technology to Cummins.

The company is expected to report an EPS of Rs 19.6 and Rs 23.4 for FY09 and FY10 respectively.

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Published by Sunil K @ 10:41 AM IST. ,

Buy IDFC - Modest Valuations

SBICap Securities has initiated coverage on IDFC with a BUY Rating due to High Quality and Low Leverage. IDFC is now a diversified financial institution with investment banking / stock broking under its hood by the acquisition of SSKI / Sharekhan and Standard Chartered Mutual Fund.

Infra Project Finance:
Project Finance continues to be the largest contributor in terms of volume and bottom line. Since this business is not a high RoE, valuations are pretty much on the lower side.The Project Financing requires high capital to maintain its AAA rating and is difficult in the current market scenario.

Apart from Private Equity and Project Equity all other businesses of IDFC are into near term uncertainties. The mutual fund business would take sometime before its AMC starts paying dividends to IDFC.

IDFC has fantastic asset quality with less than 0.9% NPAs. Using sum of the parts valuation, SBICaps has set a target price of Rs 104 on the stock.

IDFC Standalone Rs 90
PE Business Rs 3
Project Equity Rs 3
Mutual Fund Rs 5
Investments Rs 3

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Published by Komal M @ 9:38 AM IST. ,

Nagarjuna Construction - Promoters warrant lapses

Monday, September 15, 2008

During Feb 07, Nagarjuna Construction allotted 2.5m warrants to promoters (M/s. A V S R Holdings Private Ltd), with option to convert into equity shares at Rs217/share, within 18 months, entailing cash inflow of Rs543m. As the promoters have not paid the amount within stipulated time frame,warrants have lapsed and this comes as a negative surprise to us. NCC had received 10% upfront payment of Rs54m, which will now be forfeited.

During Aug 2007, NCC had issued 9.1m warrants to Blackstone, to be converted into equity at Rs225/sh, entailing cash inflow of Rs2.1b. We expect that these warrants would possibly not be converted into equity, given that it is deeply out of the money. Further, as the FIPB approval is not received, Blackstone had not paid 10% upfront premium also, and thus non-exercise will not result in any forfeiture.

At the CMP of Rs127, the stock trades at reported PER of 18x FY09E and 13.7x FY10E.

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Published by Webmaster @ 4:55 PM IST. ,

Hamara Bajaj Auto to Surive Bumpy Ride - Credit Suisse

Friday, September 05, 2008

The 2-wheeler industry demand in India is set to grow from FY09E (+8.5% pa in FY08-11E), after having declined -7.9% in FY08. Pricing power is back; discounts are the lowest in many years. In motorcycles, while Bajaj has lost market share in the recent past, it has rationalised its portfolio and is set to grow volume in the domestic market from 4QFY09E (+7.3% pa in FY08-11E). [Bajaj is no more into the nostalgic scooter business]

Two-wheeler demand has bounced back from a low base as 2 wheelers suffered from tightening credit more than a year ago. Only 30% of 2-wheelers are financed now, against 55% two years ago. We expect the domestic 2-wheeler industry to grow 8.5% pa in FY08-11E (7.9% decline in FY08).

3-wheeler business is likely to remain a low growth cash-cow. Bajaj's exports of two wheelers are growing strongly. Exports, which account for 27% of EBIDTA, will likely grow at ~16% pa in FY08-11E and provide support to underlying profitability. 3-wheelers will likely remain a source of cash flow. EBIDTA to grow 15.8% pa in FY09-11E and EPS to grow 17.7% pa in the same period.

Credit Suisse expects the company to report an EPS of Rs 55 and Rs 63 for FY09 and FY10 respectively. It has set a target price of Rs 687.

We recommend existing investors to HOLD.

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Published by Sunil K @ 1:54 PM IST. ,

RPL + ACC + Maruti - Out of Favor

Thursday, September 04, 2008

According to a report by Merrill, Reliance Petroleum, ACC and Maruti are out of favor stocks.

RPL:
RPL's refinery achieved 94% overall progress by end-June 2008. The main bureaucrat in the Indian petroleum ministry has been quoted as saying that it will start in September 2008. The first 3-4 months of operations (at least two months according to management), when the refinery uses light and sweet crude, are likely to be treated as trial production. Consequently it is likely that RPL will report only three months of commercial operations in FY09E.The government is considering the imposition of a minimum alternate tax (MAT) on units in SEZ like RPL. MAT would mean an 8-9% cut in RPL's FY09-FY11E earnings and 4% (Rs6/share) cut in its PO.

Maruti Suzuki:
Slowing sales on the back of loss in market share. Maruti does not have a mass-market model launch planned in 2008, while players like Hyundai and General Motors are gaining share with new launches and aggressive discounts. Tata Motors and Honda are also expected to introduce new models in 2HFY09. Expect YoY declines in 1HFY09, with a slight recovery only toward the end of the fiscal year.

ACC:
Owing to forecast further capacity additions across the industry and low likelihood of any strong demand revival, industry utilization at about 77% in March 2009. Overcapacity will likely hurt cement prices from 1Q09 onward. Note that the industry's capacity utilization has already eased to about 86% for July 2008 and about 89% for YTD FY09 (Apr-July) vs. about 97% utilization in FY08 (Apr 2007-March 2008).

ACC's BITDA and earnings to be flat-to lower YoY.

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Published by Sunil K @ 2:17 PM IST. ,

Stock Price Valuation - Double Whammy

Monday, September 01, 2008

Parak Parikh, CEO of PPFAS one of the well known Portfolio Management Advisers and relatively conservative broking house has beautifully written why stock price targets have been cut by as much as 50-60%. This is what he terms as the "double whammy" / double edged sword of lower profits and lower valuation.

It is common that during the final stages of bull market hype, most investors fall prey to the "Greater Fool Theory" ignoring all advise. Now how is this related to earnings downgrade ?

Well, lets say a company reports a fall in profits due to rising costs and inability to raise prices sufficiently to offset these costs. To add to their woes, staff and admin costs have also increased and put a further strain on net profits. This would of course lead to lower profits in subsequent quarters and the company may see its net profit contract by about 40-50%. The problem is that when this happens, the growth multiple assigned to a company will also correspondingly fall because of lower
expectations for growth.

Hence always use a valuation strategy before you buy into any stock. Think that you are acquiring that business and you have to be profitable in your acquisition. So this explains why we always write down EPS expectations etc in every report we publish here, so that even at times if we are blind, you may take a call based on the fundamentals and growth of the business.


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Published by Webmaster @ 10:29 AM IST. ,