Investrading

India Economy Updates

2018-03-14T20:42:00.001+05:30

Economy News

The Reserve Bank of India (RBI) discontinued issuance of letters of undertaking (LoUs) and letters of comfort (LoCs) for importers with immediate effect, in an attempt to prevent fraud such as the one allegedly carried out by jewellers Nirav Modi and Mehul Choksi. Letters of credit (LCs) and guarantees will continue to be issued like before if they meet certain criteria. (BS)
All the 20 public sector banks (PSBs) have obtained approval from their respective boards for the terms and conditions put forth by the Union government to receive capital infusion through bonds as part of the recapitalisation plan. (BS)

Corporate News

Lenders are exploring the possibility of settlement of dues of Uttam Galva Steels, a move that could ease the way for ArcelorMittal’s bid for Essar Steel. ArcelorMittal was an early investor in Uttam Galva Steels. (BS)
Thomas Cook aims to spin off its human resource firm Quess within a year to simplify business structure and secure better valuation for its core travel business.Thomas Cook acquired Ikya (now known as Quess), a staffing solutions and facilities management company in 2013 and listed it on stock exchange through an IPO in 2016. Thomas Cooks owns 49 per cent in the firm and its stake is valued at Rs 20.40 billion on close of Tuesday's stock price. (BS)
Housing Development Finance Corp. and Standard Life will raise Rs 36 Bn by selling 12% stake in HDFC AMC through initial public offering in May, valuing the company at around Rs 300 Bn. HDFC owns 57.34% in the venture while Standard Life owns 38.24% and remaining is with others. (ET)
Shree Renuka Sugars said its Vice Chairman and Managing Director Narendra Murkumbi has resigned. In a regulatory filing, the company said "Narendra Murkumbi has tendered his resignation from his executive position as Vice Chairman and Managing Director of the company." (ET)
Bharti Airtel is believed to be looking to sell a higher stake in Bharti Telemedia, its DTH arm, to raise funds for building a war chest to fight Reliance Jio Infocomm, people familiar with the matter said. A precursor to such a sale was a board approval to transfer 19% additional stake in Bharti Telemedia to wholly-owned unit, Nettle Infrastructure Investments. This transfer will be in addition to a 25% block already transferred in January 2018, thus taking the block being transferred to 44%. (ET)
Torrent Pharma Ltd is likely to raise at least Rs15 Bn by selling shares to institutional investors, as it prepares a bid for the generic drugs unit of France’s Sanofi, two people aware of the development said. Torrent Pharma is readying a €2 billion (Rs160 Bn) binding bid for Sanofi’s unit Zentiva NV, Mint reported on 7 March. It has tied up funding from several banks for the bid, the deadline for which ends on 28 March, the report added. (Mint)

Nifty Outlook

2013-06-23T14:51:00.003+05:30

Nifty outlook for the short term

The Nifty (cmp 5667) closed on a weak note, down 141 points. If the decline continues early next week, the index can move to 5,618 or 5,477 over the next couple of weeks.

A rally on Monday will face resistance at 5,850 and then 5,970. Inability to move above 5,850 will be the cue for investors to play short with stop-loss at 6,000.

Decline to 5,500 or thereabouts will be followed by a recovery.

Market Update 2012

2012-10-21T10:23:00.003+05:30

In the second quarter, the much awaited government reforms finally came through. The government opened FDI in multi-brand retail and aviation, hiked price of diesel, reduced withholding tax on foreign borrowings and also suggested a debt recast for the state power utilities. Markets responded positively to the reforms moves by the government. Continued liquidity support by the Foreign Institutional Investors (FIIs), who have invest about 7b USD so far, also aided the positive momentum.

Now the Nifty is around 19,200 and post this rise (~10% gain for the Nifty in 2QFY13), valuations are at about 15x FY13 earnings, which is the average of the long term PE band for the benchmarks. Further sustainable rise in the markets will be led only by further initiatives on the core reforms. These core reforms are necessary to encourage more investments and help sustain the earnings and valuations at current levels.

Expectations from the results are not very high, which may act as a cushion for the markets. If the markets have to sustain the current levels and move up, it will need to have more confidence in the medium-to-long
term growth rates of Corporate India. Also, the above-mentioned concerns have to be effectively and immediately addressed. The room for disappointment is very limited and disappointment in earnings or on future outlook may result in corresponding specific corrections.

Crompton Greaves

2012-02-28T18:22:00.000+05:30

Crompton Greaves stock update:

Crompton Greaves (CRG) is taking steps to align its manufacturing base and

(1) increase associated sourcing from low cost countries, such as India, to supply material for a new transformer facility in Brazil;
(2) its Hungarian facility will cater to a greater share of European demand;
(3) its Belgian facility (high cost base) will have a reduced role;
(4) potential shut down of units in high cost areas.

Presently, each entity in the group (Pauwels, Ganz etc.) operates as an independent silo. CRG plans to integrate key business functions (such as finance, payroll and HR) across the entities, which would help to cut headcount and overhead costs. Besides, CRG’s overseas business may have potential to operate leverage-led margin expansion on a high proportion of fixed costs.

CRG plans to incrementally increase cross selling between recently acquired companies, leveraging group synergies across geographies, technologies and customers. CRG will (1) use Indian manufactured products in PTS and MSE, (2) align industrial products with EU standards,(3) manufacture for Emotron from the Indian facility and (4) bring QEI’s numeric technology to Nelco.

Going by the above developments and the EPS estimates for FY12 AND FY13( Rs6.4 and Rs10.3 respectively), long-term investors can buy on declines with a target of Rs170 (16X FY2013E EPS) based on visible potential for revenue growth and improvement in profitability.

Important Rules of investment

2011-12-19T19:20:00.001+05:30

Important Rules of investment.

Rather than make guesses regarding the direction of the market, here are some investment rules to follow:

Rule 1: Do not attempt to time the market. Statistically it is a certainty that a minority of the millions of investors can time the market in the short-run but the problem is that very few, if any, can time the market for sustainable periods of time. Thus don't try to time or predict the market instead keep invested for longer periods.

Rule 2: Patiently make good investments, regardless of the economic conditions. It is best to assume the market will go nowhere and invest accordingly. Paying attention to a hot or cold economy leads to investors chasing their tails. Good investments should outperform in the long-run, regardless of the macroeconomic environment.

Rule 3: Diversify. In the midst of the crisis, diversification didn't cure simultaneous drops in most asset classes; however ownership of government Treasuries, cash, and certain commodities provided a cushion from the economic blows. If you are invested for longer-term, the benefits of diversification become more apparent and it always makes absolute sense to spread your risk around.

NIIT Technologies acquires Proyecta Sistemas de Informacion S.A.

2011-11-07T20:14:00.000+05:30

NIIT Technologies:

NIIT has acquired Proyecta Sistemas de Informacion S.A. (Proyecta) and this acquisition by NIITT as a good strategic step. It will likely enhance the presence of NIITT in the European region and will also give it access to large accounts, which can be scaled in the future. The valuations accorded to Proyecta are also not demanding and we expect little impact on the EPS of NIITT.

The FY12E EPS stands at Rs.32.6 and DCF - based price target stands at Rs.276 (Rs.280), based on FY12 earnings. At this target price FY12 earnings will be discounted by about 8.5x which is undemanding. Long term investors can buy on declines, since NIITT has been achieving consistent revenue growth and margins over the past few quarters.

LIC Housing Finance

2011-05-07T09:40:00.000+05:30

LIC Housing Finance Results update:

NII grew 41.1% YoY (19.4% QoQ) on back of strong loan growth (34.2% YoY; 10.2% QoQ) along with margin expansion (15 bps YoY; 31 bps QoQ). Net Income was also up 47.4% YoY on back of strong core performance and robust non-interest income (2x Q4FY10; mainly aided by Rs.321 mn profit on sale on investment).

Growth in sanctions & disbursement continued during Q4FY11. Overall sanctions & disbursement grew at healthy pace of 25.3% (YoY) and 34.2% (YoY), respectively. LICHF also bought loan portfolio from LIC (Rs.12.5 bn); adjusting this individual disbursement/loan book grew 37.6% and 34.0%, respectively. Unsurprisingly, developer loan took a breather during Q4FY11 and its disbursement declined 74% YoY.

NIM improved both QoQ and YoY, which is a positive suprise. Asset quality continued to improve further - gross NPA and net NPA now stand at 0.47% (Q4FY10: 0.69%; Q3FY11: 0.67%) and 0.03% (Q4FY10: 0.12%; Q3FY11: 0.18%), respectively.

Long term investors can accumulate on declines, since the stock has performed well in last 3-4 months, with a target price of Rs.260 based on 2.5x its FY12 ABV.

Tata Consultancy Services

2011-01-18T18:41:00.000+05:30

Result Update: Tata Consultancy Services :

TCS' 3Q results beat market estimates on all fronts. A strong 5.7% volume growth was the highlight of the results. This was better than the growth rates reported by peers during the quarter and that too, on a larger base. The broad based nature of growth lends a degree of stability to the revenues.

Management commentary reflects greater optimism, likely on the back of strong pipeline and better deal flow. TCS won 9 large deals during the quarter. Management has seen continued revival in discretionary spends as well as in cost efficiency initiatives, which is encouraging.
Record hiring during the quarter also indicates good visibility. Realizations were higher, which is also encouraging from the margins perspective. Rate increases may continue, if demand sustains.

FY11E earnings now stand at Rs.44 per share (v/s 42 earlier) and FY12E earnings at Rs.51.7 (Rs.47.7), after considering higher tax rates for the fiscal. Accordingly the price target works out to Rs.1255 based on FY12 estimates. A sharp appreciation in the rupee against various currencies and a delay in recovery in major user economies remain the key risks to the stock.

IRB Infrastructure Developers

2010-12-12T12:16:00.000+05:30

IRB Infrastructures is a leading player in the transportation segment with expertise in constructing and operating large BOT projects. Company complements its BOT vertical by executing EPC and O&M (operation and maintenance) portion of its BOT projects. IRB has second largest BOT portfolio in the country with a total length of around 1250km as BOT operator.

With its dominant position in the road BOT projects, company is well equipped to benefit from upcoming order inflows in the road segment from NHAI. Along with maintaining and operating road assets, going forward company would also be developing and operating a Greenfield airport and will also diversify into real estate development.

Strong revenue growth and excellent margins are likely to drive growth in net profits at a CAGR of 16% between FY10-FY12. At current price of Rs.224 stock is trading at 16.4x and 14.3x P/E and 9.5x and 8.3x EV/EBITDA on FY11 and FY12 estimates. Long term investors can buy the stock with a target price of Rs.304 on FY12 estimates.

Infotech Enterprises

2010-10-15T20:17:00.000+05:30

Result Update: Infotech Enterprises.

Infotech's results were a mixed bag, while revenues were higher than expected, EBIDTA margins once again disappointed.Consequently, PAT for 2QFY11 was marginally lower and EMI volumes were up by 13% and UTG reported a 6% organic growth, which is encouraging.

Margins were flat (organically) QoQ, which was disappointing in light of the severe fall witnessed in 1Q. 刼 The company had to resort to further increments for scarce resources. This validates concerns about mid sized companies facing pressures on salaries due to strong hiring by larger peers in a buoyant sector.

Overall, earnings estimates for FY11 is expected to be Rs.13.2 v/s Rs.14.1 earlier and FY12 EPS estimates to be Rs.16.8. Hence long term investors can wait for substantial declines before entering this stock.

Edelweiss Capital

2010-09-04T07:58:00.000+05:30

Results Update: Edelweiss Capital Ltd.

Key factors from the results:

• Capital market volumes to remain muted for some time, while pressure on brokerage yield will continue to impact the core brokerage fee income.
• Anagram Capital acquisition to become effective from Q2FY11; consolidation will boost ECL's core brokerage revenue for FY11.
• Investment banking business expected to maintain a healthy growth over FY11-12; Scaling up of financing book to aid steady interest income growth.
• Operating margins improved sequentially during Q1FY11 at 31.8% from 28.6% in Q4FY10 while PAT margin improved to 22.3% from 20.2% in Q4FY10; consolidation of Anagram will further enhance bottom-line growth going forward.

Based on the above developments , the stock can be accumulated on declines with a price target of Rs. 55.

Madhucon Projects

2010-08-04T07:31:00.000+05:30

Result Update: Madhucon Projects.

• Madhucon Projects Ltd reported 43% YoY growth in revenues for Q1FY11 which was better than market estimates. This was led by strong order book.

• Operating margins stood at 10.68% for Q1FY11, marginally lower than the estimates. Company expects to maintain margins in the range of 11% for the full year.
• Net profits registered a growth of 3% YoY and are impacted by decline in margins in comparison with last year.
• At current price of Rs 153, stock is trading at 17x and 14.6x P/E for FY11 and FY12 respectively. Adjusted with BOT assets valuations, stock is trading at 6.3x and 5.4x P/E for FY11and FY12 respectively.

• Hence longterm investors can buy on declines a price target of Rs 186 on sum of the parts methodology on FY11 estimates.

Automobile Sector - Two Wheeler Industry

2010-06-06T15:43:00.000+05:30

Sector Update - Two Wheeler Industry:

2-Wheeler majors continued their streak of posting strong monthly numbers for the month of May 2010. Auto numbers posted by 2W players in the month of May 2010 reinforce our view of a strong year ahead for the players in the 2W space.

New launches in the past few months are also playing a critical role in expansion of the overall 2W market. Thus despite competition, all companies continued to grow at a fairly strong pace. With the onset of monsoon, one can expect cyclical slowdown in volumes on sequential basis, but YoY volume growth prospects are optimistic.

Increased government spending in the rural areas coupled with improved farm income will continue to remain critical growth driver for 2W volumes. The domestic 2W volumes are expected to grow by 15% in FY11E. Bajaj Auto and TVS Motor are top picks in the 2W space.

Bajaj Auto

2010-01-30T09:41:00.000+05:30

Bajaj Auto - Results Update.
Strong sequential volume growth helps Bajaj maintain margins despite raw material pressures.

Bajaj reported 3QFY10 PAT of Rs4.75 bn (up 189% yoy and 18% qoq), was in line with our estimate of Rs4.69 bn. 3QFY10 EBITDA margin at 22.9% grew 760bps yoy and 10 bps qoq versus 22.4%. The margin upside was driven by higher-than-expected other operating income, which includes export incentives. Average realizations declined 4% on a yoy and qoq basis, driven by the higher proportion of the newly launched Discover 100cc. Raw material costs as a percentage of sales increased by a larger-than-expected 300 bps, some of which must have been driven by the lower realization. 3QFY10 volumes grew 64% yoy led largely by the newly launched Discover100cc volumes and improvement in export and 3-wheeler volumes. Bajaj Auto will likely benefit from the Pulsar 135cc launched in December going forward on a sequential basis.

New launches to drive domestic volume growth in FY2011E; expect strong exports.

Bajaj’s volumes can be expected to grow 18% in FY2011E and 10% in FY2012E. The FY2011E volume growth to be driven largely by new launches in the 2W & 3W segment. Domestic volume growth will be strong as the company gets the full year benefit of Discover 100 cc and newly launched Pulsar 135cc. Besides, the success of the commercial vehicle RE-600 could continue well into the next fiscal. Expect strong export growth led by (1) recovery in global economies and (2) Bajaj’s strong focus on consolidating in existing markets and developing newer markets.

The key risks could be (1) disproportionately larger impact from Honda’s 110 cc bike to be launched in 4QFY10 and (2) higher-than-expected increase in raw material prices resulting in significant decline in operating margin.

The FY2010E and FY2011E EPS estimates are at Rs110 and Rs134.Hence long term investors can buy on declines, with a two year perspective.

Merger of Samruddhi with Ultratech Cement

2009-11-29T10:12:00.000+05:30

UltraTech Cement - Merger of Samruddhi with Ultratech—sequel to restructuring plan. The Boards of Ultratech (UTCEM) and Samruddhi have approved the merger of the two entities that will result in the creation of the largest pure-play cement company in the country. The merger ratio is earnings accretive, as UTCEM will benefit from the pan-India presence of the combined entity.

Swap ratio earnings accretive, implies equity value of Rs108 bn for Samruddhi. The proposed merger ratio of four shares in UTCEM for every seven shares held in Samruddhi is earnings accretive for UTCEM shareholders (EPS of Rs84/share compared to Rs74 currently in FY2011E) and implies an equity valuation of Rs108 bn and an enterprise value of Rs130 bn for Samruddhi.

The combined entity will have a market capitalization of Rs200 bn (US$4.3 bn). Combined entity to have pan-India presence, help combat regional disparities. The merger of Samruddhi with UTCEM will create India’s largest cement company with an aggregate capacity of ~48 mn tpa, earning UTCEM a place amongst the top-ten cement companies in the world. Hence long term investors can buy UTCEM with a target price of Rs925/share.

Monetary Rolicy Review

2009-10-28T18:52:00.000+05:30

Key Highlights:
Repo rate and Reverse Repo rate under the LAF window have been left unchanged at 4.75% and 3.25%, respectively.
Cash Reserve Ratio (CRR) left unchanged at 5.0% of net demand and time liabilities (NDTL).
Bank rate has been kept unchanged at 6.0%.
SLR (statutory liquidity ratio) has been restored to 25% of NDTL (from earlier 24%).
RBI has advised the banks to augment their provisioning coverage to 70% by September 2010.
The growth projection FY10 GDP has been retained at 6.0% with an upward bias.

The inflation (WPI) target for FY10 has been raised to 6.5% from 5% earlier.

RBI has left the key policy rates unchanged; however it has restored the SLR (statutory liquidity ratio) to 25% of NDTL, which was reduced earlier to 24%. The hike in SLR is not likely to impact the liquidity position of the banking system and credit to the private sector.

RBI has also taken some measures which constitute the first phase of its exit strategy.It has reduced the limit for export credit refinance facility along with discontinuing the two refinance facilities provided to the commercial banks to fund the NBFC, HFC and MFs.

This gives some indication about the exit strategy of the RBI. Hence RBI's exit from the accommodative policy is likely to be 'withdrawal of liquidity' first followed by 'rates hike' later.

ZEE Entertainment

2009-09-10T06:50:00.000+05:30

Zee Entertainment FY2009 annual report analysis—positives and negatives.

Positives.

ZEEL’s FY2009 debtors day have reduced considerably to 106 days from about 116 days in FY2008/

2HFY09 was an extremely challenging period for the broadcasting sector with advertisers searching for discounts and extended credit periods.

Large one-offs (gains and losses) in FY2009 cloud the core profitability of the franchise, which remains robust.

Negatives.

ZEEL’s operating cash flow position weakened considerably in FY2009 over FY2008 despite (1) robust book profits and (2) control over receivables.

The large increase in investments (Rs2.1 bn) in film production, film library rights and sports rights in FY2009 as representative of competitive cost pressures on ZEEL.

DCF-based target price works out to Rs170 - largely due to DCF roll forward and improvement in ZEEL’s receivables position. ZEEL stock seems fully valued at 21.6X FY2010E and 17.7X FY2011E .EPS estimates and risk-reward balance seems to be in favor the former. So investors can use the upswing to book profits.

Reliance Industries Update

2009-08-25T07:21:00.000+05:30

Reliance Industries - RIL is not the best Indian play on global economic recovery theme.

RIL stock offers low leverage to the global economic recovery theme compared to other commodity plays given (1) the ‘converter’ nature of its business as opposed to pure resource

plays in India and (2) large incremental supply in the case of both chemicals and refining that will well- exceed even higher demand arising from stronger-than-expected global GDP growth.

Also, the current stock price is already discounting new discoveries of ~55 tcf of additional gas

reserves over the next six years (see Exhibits 2 and 3). This is hard to justify despite the

reported high prospectivity of several RIL blocks in various stages of exploration.

Limited scope for upward revision to margin assumptions given generous assumptions.

FY2010E and FY2011E earnings assumptions are based on (1) refining margins of US$7.8/bbl and US$9.8/bbl, (2) strong chemical margins of US$550-600/ton and US$450-500/ton and (3) gas production of 45 mcm/d and 80 mcm/d. On the contrary, one cannot rule out downside risks to the earnings estimates from continued weakness in refining margins.

Difficult to justify valuation despite best efforts.

As one can see it is difficult to justify RIL’s current stock despite generous assumptions. Hence investors can book profits at current levels given (1) RIL’s stock price offers significant downside based on target price of Rs1,600 and (2) weak prospects of cyclical chemical and refining businesses despite emerging signs of global economic recovery.

Indian IT Stocks Update

2009-08-06T06:52:00.000+05:30

Indian IT stocks have moved from strong value plays three months back to momentum stocks, banking on consistent upgrades in earnings estimates to sustain prices. One can expect revenue upgrades will consistently accrue over the next 12-months; 1QFY10 results were a good starting point. The Tier 1 plays for the IT recovery story and it is better to stay away from Tier 2 names as revenue recovery is unlikely to materialize; cost rationalization is already played out and reflected in results.

1QFY10 performance—a good starting point.

The Indian IT companies, with only a few exceptions, beat the Street’s (low) expectations on

revenues as well as margins quite comfortably. More importantly, volume/pricing stability seen

across companies also provided comfort on the worst being over. Expectations of sequential

growth from the next quarter appear firmly set in, despite the companies’ commentary tending on the cautious side. In addition, sharp margin expansion seen across companies also cheered the Street.

Cost cutting the big surprise—sustainable for Tier 1 players but not for others 1QFY10 margin performance of the Indian IT companies drove home two important points—(1) the variable cost structure of the IT services business, and (2) the agile response of the Indian IT companies to the volume slowdown in the industry. Rather ironically, in the middle of a challenging phase for the sector, some of the mid-sized companies reported historically high profitability, and most companies generated robust free cash.

Valuations—stocks moving to peak cycle multiples.

Belief in the potential of the Indian IT sector appears to be back, as reflected in the sharp

expansion in multiples post the earnings releases, but the expectations are possibly running ahead of expectations. A 17-18X PE multiple implies 4-5 years of 15% earnings growth followed by a 5-6% growth in perpetuity. While earnings growth at these rates is not improbable, stocks’ already discounting such growth, leaves little room for disappointment on business improvement or execution. Therefore, tier-I companies are better placed given—(1) lower execution risks and (2) better, well-oiled sales and marketing engine to capture incremental growth opportunities.

Infosys,TCS and Wipro are top picks in the sector.

Tata Consultancy Services TCS Results update

2009-07-20T20:00:00.000+05:30

TCS Results update. TCS’ 1QFY10 performance exceeded consensus expectations on all counts. Revenues at US$1480 mn grew 3.3% qoq and were 3.6% higher than we expected. Volumes grew 3.5% qoq while pricing dipped 0.25%. Revenue growth was led by strong gains in the BFSI vertical, which grew 5.1% qoq. TCS management has cited BFSI, retail, utilities and life sciences verticals as the potential growth drivers.

Some number crunching:

EBIT margin increased 113 bps qoq to 24.8% led by 1) strong shift in revenues offshore contributing 95 bps to margins; (2) SG&A expenses declined 93 bps qoq. Benefit of the above factors was somewhat offset by weaker pricing (34 bps) and currency (41 bps).

Receivables collection cycle reduced further to 93 days versus 95 in 4QFY09 and 105 in 1QFY09. TCS had placed special emphasis in reducing credit cycle to weaker clients. TCS’ receivables days are still higher than peers like Infosys, Wipro and Cognizant.

FY2010E EPS is expected to inrcrease by 13% to Rs30.5 and FY2011E EPS by 14% to Rs33.8. FY2011E EPS builds in benefit from extension of STPI tax exemption by one year to end-FY2011. TCS’ tax rates in FY2012E may jump to 21% from 17.7% in FY2011E. On the back of these estimates, the FY2011E DCF based target price works out to Rs550. So long term investors can utilize any declines to buy TCS with a price targe of Rs.550.

Infosys Technologies - Stock Update

2009-07-14T06:49:00.000+05:30

Infosys Technologies - Results update.
Infosys reported strong performance for the June 2009 quarter, exceeding market expectations and that of consensus in terms of revenue, EBITDA and net income.

Infosys'FY2010E EPS guidance reduced to Rs96 from Rs101.2 earlier (Re/US$ now 47.9
Infosys has reduced FY2010E EPS guidance to Rs94.6-96, versus Rs96.7-101.2 earlier. This decline is lead by (1) revision in Re/US$ rate to Rs47.9 versus Rs50.72 earlier and (2) increase in tax rate assumption to 19-20% versus 16.5-17% earlier— the company is attributing this to slower-than-expected ramp up from SEZs.

The FY2010E guidance given by the company is excessively conservative and leaves room for significant outperformance. Improvement in decision making, lower project cancellations, and new deal wins will drive growth and positive surprises over the next 12-month. Long term investors can buy Infosys on declines with a price target of Rs.1750.

Sterlite Industries - ASARCO sale

2009-07-10T06:27:00.000+05:30

ASARCO sale entering the last lap: The ASARCO bidding process is entering the final round of hearning which is scheduled for on August 10, 2009. As per the latest filings by ASARCO, creditors have to approve one of the following 3 plans i.e. (1) the parent (Grupo Mexico) (2) the debtors (Sterlite) and (3) Harbinger Capital.

The Parent (Grupo Mexico) plan.
According to the re-organizaiton plan proposed by the Parent (Grupo Mexico) it would contribute US$1.46 bn to the claimants and would also use the US$1.4 bn cash in the books of ASARCO. However, it differs from other plans in its assessment of claims against Sterlite for breach of its initial agreement to acquire ASARCO for US$2.6 bn and has assessed the claim to be worth atleast US$400 mn to US$ 1bn compared to the Debtors’ Plan assessment of claim value at US$100 mn.

The Debtors’ (ASARCO with Sterlite) plan.
The debtors’ plan calls for initial payment of US$1.1 bn by Sterlite and deferred payment of US$770 mn for which the present value has been estimated at US$308.7 mn. It would also use the US$1.4 bn cash with ASARCO. Also, the plan pursues litigation against Grupo Mexico and values its claim at US$750 mn which would be used for claim settlements. According to this plan the claims would be settled in full.

The Harbinger plan.
As per the Harbinger plan, it would infuse US$500 mn and also use the US$1.4 bn cash in ASARCO’s books. Besides it would pursue claims against Grupo and Sterlite and has valued these claims at US$750 mn and US$100 mn, respectively.

One cannot assess which way the affected parties would vote. But in case they vote in favor of the Parent plan or the Harbinger plan, it would mean additional risk to Sterlite which could be in upwards of US$100 mn. However, Sterlite has also clarified that it holds no assets or bank accounts in the US, so pursuing claims would not be easy for Grupo Mexico.

Hence investors could stay out of the Sterlite stock for a while and wait for the things to pan out.

Voltamp Transformers

2009-07-04T12:40:00.000+05:30

Voltamp Transforms - Results update.

Unlike most other transformer makers, Voltamp is mainly focused on the industrial transformers including power and distribution and dry-type transformers. It was expected that the company's dependence on industrial customers would severely impact company's volumes in FY09 given that industrial capex was badly hit in FY09 due to high interest rates and liquidity crunch. Despite this, VTL managed to report 29% rise in transformer sales in volume terms.

VTL's margins have been on an uptrend in the past few years from 13.6% in FY06 to 23.3% in FY09. Consistent uptrend in operating margins was on account of favourable product mix and attractive pricing of product. VTL's cash and equivalent has increased from Rs 628 mn in FY08 to Rs 1.4 bn in FY09. The company is debt-free.

Valuations.
Free cash flow per share is forecast at Rs 43 per share. Considering better than expected working capital cycle resulting in robust cash generation earnings upgrade on better than expected order backlog reduction in cost of capital and general improvement in economic and market outlook, the stock is well priced now. Long term investors can buy Voltamp on declines with a price target of 850.

Reliance Capital - Diversified Financial Services

2009-07-02T16:08:00.000+05:30

Reliance Capital is focused on businesses across the spectrum of financial servces, including life insurance, asset management, retail broking and distribution.Its strong parentage and large capital base will help it achieve a substantial market share over time.

Reliance Life insurance (Rs453) and asset management businesses (Rs199) account for 74% of target price of Rs.875,though once can expect the fair value of other businesses to appreciate over time. Focus on wide reach, superior pricing strategy across businesses Reliance Capital's market position in asset management and life insurance has remained strong despite the slowdown in the industry during FY2009. After setting up a large network for broking and distribution, RCAP has begun to focus on asset reconstruction, private equity and institutional equities.

Despite its late entry into most segments, it can become a sizeable player over time given its (1) focus on expanding beyond metros, (2)technology support and (3) superior pricing strategy.

Financials:
Most of RCAP’s businesses are currently in nascent stages and reporting losses / marginal profits. Capital gains from its large equity investment book (Rs19 bn in March 2009) have largely supported earnings in the past. However, RCAP’s reported profits will likely decline by 16% CAGR in FY2009-11E due to lower capital gains, even as the earnings of its core businesses increase.

Key risks.
(1) RCAP is yet to establish itself as a sizable player and demonstrate long-term profitability.
(2) The company will likely face competition from banks (that have lower costs of funds and the ability to cross sell) and established NBFCs (niche-focused players with proven performance for several business cycles).

However, RCAP’s large capital base and parentage of ADAG are comforting.

Hindalco - Stock Update

2009-07-01T20:00:00.000+05:30

Novelis reports steady earnings.

Novelis reported EBITDA of US$252 mn and an adjusted EBITDA of US$54 mn despite a sharp 20% yoy drop in volumes. The drop in qoq EBITDA is just from US$100 mn to US$72 mn qoq if further adjusted for non-cash exhange variations. Management has guided for strong earnings in the coming quarters due to restructing initiatives, increase in volumes in Asia etc.

Steady earnings in a weak market.
Volumes in 4QFY2009 were sharply lower by 20% compared to last year due to sharp demand contraction in the auto, construction and other markets. However, can volumes were stable and have largely contributed to the profitability during the quarter.

Strong EBITDA improvement guidance for 1QFY2010.

Outlook for 1QFY2010 expected to improve significantly due to the following:
1) benefits from restructuring initiatives undertaken in 3QFY2009 and 4QFY2009 to start flowing through 2) non metal commodity price deflation 3) strong recovery in Asian shipments driven by China.

Valuations.

Investors could wait and buy Hindalco on declines with a target price of Rs135.