That is possibly a reason to cheer, but not good enough. As we tread into 2010, worries are still top of mind and caution is the watchword. Unlike last year when markets were more than kind to investors, this year will belong to the discerning for sure. And be doubly sure that stock picking will be in vogue, and not an 18,000 feet top down view. Keeping this in mind, we approached a cross-section of market analysts for their best bets for this year – stocks that still represent good value and can deliver reasonable returns from the prices prevailing currently. Are these already in your portfolio? Read on.
Ajay Parmar
Head of institutional research,
Emkay Global Financial Services
Cadila is expected to grow at a CAGR of 28 per cent over six to eight months, with the US growing at 30 per cent, and France and Brazil at 22 per cent
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Ajay Parmar thinks that Cadila Healthcare has a key growth driver in its international business
My pick for 2010 is one of the top five pharma companies in India that has transformed itself from a pure domestic play into a global generics company, with a presence in the US, France, Brazil, Japan and some 40 other countries. Cadila Healthcare derives about 37 per cent of its income from the international market, up from 16 per cent in FY05.
In India, the company is focusing on the cardiovascular segment and women’s healthcare. Sixteen of Cadila’s brands figure among the top 300 pharma brands in India. The company is now aggressively moving from acute therapy management to lifestyle management. With this, the domestic business is expected to grow at 13 per cent in FY11.
Going forward, I see the international business emerging as the key growth driver for the company. This is expected to grow at a CAGR of 28 per cent, with the US growing at 30 per cent and France and Brazil at 22 per cent, over the next six to eight months. The turnover of the company is expected to reach the billion-dollar mark in FY11. Although Cadila was a late entrant in the international market, especially in the US, the company has been able to scale up in the past few years without any Para IV filings. We expect the US operations alone to contribute $125 million (about Rs 625 crore) to revenues in FY10.
Cadila is also working on a few novel drug delivery system (NDDS)-based products in the US that could provide an additional upside. Cadila had entered into a JV with Hospira to make anti-cancer injectible products. We expect income of about Rs 150 crore from the business through this joint venture in FY10.
Cadila’s French subsidiary Zydus France SAS enjoys a 2.5 per cent market share in the over $2 billion generics market, producing more than 100 generic products. Zydus France has a JV with Evolupharm, one of France’s largest distribution channels. Similarly, in Japan, of the $3 billion generics market, Cadila has a 16 per cent share in volume terms and a 5 per cent share by value. The Japanese generics market is likely to double by FY12 to meet the requirements of an ageing population and the government’s concerted efforts to reduce healthcare costs and that could see the company’s business grow also. Cadila is also working in some emerging markets in Asia, Africa and the Commonwealth of Independent States or CIS countries. Particularly, it hopes to become a major player in the Brazilian generics market (estimated at $12 billion) and towards this end it has acquired a local company, Nikkho, which caters to the prescription drugs market.
Overall, we expect Cadila’s sales to improve from Rs 2,862 crore in FY09 to Rs 4,106 crore in FY11 and PAT to move up from Rs 303 crore to Rs 573 crore. EPS for FY11 is expected at Rs 51 and ROE and ROCE ratios at 30 per cent and 27 per cent respectively. The company will have free operating cash flow of about Rs 406 crore. At the current market price of Rs 555 the stock is attractively priced at 13x its FY11 EPS and 9x its FY11 EV/Ebitda. I am confident about Cadila’s quality of management, its domestic and international marketing strategies and see a lot of upside in the stock from the current levels.
Murali Krishnan
Director of research, Ambit Capital
While it still has several margin levers (better margins in subsidiaries, higher product sales, further room for expansion in the employee pyramid), utilisation remains the key margin lever where Infosys seems to have the biggest advantage
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Murali Krishnan picks Infosys Technologies, which, he says, will benefit from a strong BFSI-led uptick
Infosys has seen a volume rebound in the second quarter (1.4 per cent q-o-q) after two consecutive quarters of decline, primarily led by a 4.5 per cent q-o-q pick-up in the BFSI vertical, which accounts for 33.5 per cent of revenues. The company is working on six M&A integration deals with a tenure of about 18 to 24 months. These M&A deals will result in a 4-5 per cent volume upside in FY11. It will continue to benefit from an expected uptick in discretionary spending within the BFSI vertical from more transformational projects and M&A work, leading to further IT outsourcing deals.
In FY09, Infosys had to grapple with severe trouble from BFSI clients as well as BT, its top client at the time. BT took a ‘slash and burn’ approach on its IT budgets, asking for rate reductions of up to 35 per cent from vendors. So Infosys, which has always stood by its stance on profitable growth, decided to move away from the account. Consequently, BT revenue declined by 16 per cent y-o-y in FY09 and reduced from 9.1 per cent of revenues in FY08 to 6.9 per cent in FY09. While the BT account continues to be subdued, the management has mentioned that the account has bottomed out and this will ensure that there is no further calamity in the telecom vertical. Newer wins, such as Telstra and France Telecom, should enable ramp-ups. The expected recovery in manufacturing (3.1 per cent q-o-q in the third quarter; 19.3 per cent of revenue) also provides further cushion going forward.
Infosys has been increasing its sales focus since FY09. It added over 200 people in FY09, the highest addition in the last five years. It has increased its FY10E hiring target by 4,000 to 24,000 employees (at the gross level). This comes on the back of an 11 per cent revision of the hiring target in Q2FY10. Infosys’ strategy of strengthening the sales force, especially during the downturn, is very impressive, as it emphasises that the company remains unfazed by the short-term pain and that cost control has not come at the cost of business investments. This will enable the company to partake more of client IT budgets in the demand upturn cycle.
Infosys has the highest margins in the industry. While its margins story has always been debated, the margins resilience is commendable. While the company still has several margin levers (better margins in subsidiaries, higher product sales, further room for expansion in the employee pyramid), with the higher visibility on volumes, utilisation remains the key margin lever where Infosys seems to have the biggest advantage (67.3 per cent as compared with TCS 73.6 per cent and Wipro 75.8 per cent).
Infosys has guided for Q4FY10E $ revenue growth of 0.6-1.5 per cent q-o-q. On an organic basis (excluding $7 million from the McCamish acquisition), the guidance implies a growth of 0.2-1.0 per cent q-o-q. FY10 revenue guidance has been revised upward by 2.8-3.3 per cent to $4.75-4.76 billion (implying a growth of 1.8-2.0 per cent y-o-y). EPS guidance for FY10 has been raised to Rs 106.90-107.10, which implies a growth of 2.2-2.6 per cent y-o-y. Given that the IT sector has already seen a sharp PE re-rating based on the demand uptick and a recovery in the global macro scenario, valuations now would typically depend on how long the good times last. We believe that the rosy days are just beginning and are here to stay for at least a couple of years. We see an upside of 20 per cent for the stock from current levels, implying a target PE of 22x.
DD Sharma
Senior vice-president, research, Anand Rathi Financial Services
JBF is very attractively priced at 2.5x FY10 estimated earnings and below 2x cash earnings. Its market cap stands at Rs 600 crore (on sales of Rs 5,000 crore) and it could generate cash of over Rs 350 crore in the current year
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DD Sharma says, polyester-maker JBF Industries is a great value pick, offering good dividend yield and potential for capital appreciation
My stock pick for 2010 is JBF Industries. I consider it a value pick with good yield, no downside, but having good potential to appreciate. The company is a leader in making polyester chips, and it is increasing its presence in value-added products like polyester yarn and PET films. JBF has the largest capacity of textile grade polyethylene terephthalate (PET) chips in the country and it makes bottle grade PET chips, partially oriented yarn (POY), fully dyed yarn (FDY) and other specialty yarns. JBF Global PTE Singapore, a wholly-owned subsidiary, wholly owns JBF RAK in the UAE, which operates in a tax-free zone, making PET grade chips and biaxially-oriented polyethylene terephthalate (BOPET) films.
On account of the reducing demand for chips, the company plans to move up in the value chain, to make value-added yarn, PET films, adding more value to its products, that would improve margins and profits. On a consolidated basis (this includes the UAE subsidiary), JBF has a huge capacity of over 5 lakh metric tonne of polyester chips, more than 2.5 lakh metric tonne of polyester yarn and 75,000 metric tonne of PET films. It is expanding the yarn capacity at the Silvassa unit by 72,000 metric tonne at a cost of Rs 210 crore, and the first phase of this production of 36,000 metric tonne begins in March and the remaining begins in June.
The polyester yarn demand has been improving due to the widening price differential between cotton and synthetic yarn. Stable crude prices and improved availability of purified terephthalic acid (PTA) and monoethylene glycol (MEG) have kept input costs under control. So margins are expected to be better for both yarn and film, in the second half of the year. JBF plans to raise Rs 300 crore either through the QIP or FCCB route, and the funds will likely be used for ongoing capacity expansion. The company had managed to cut interest costs significantly in the first half of the current year, from Rs 65 crore to Rs 30 crore.
During the second quarter, the promoters increased their holding in the company by 1.7 per cent, a good measure of confidence in the stock. Also, Citi Ventures Fund holds about 21 per cent of JBF. The company registered robust sales and profits in the last financial year and the performance in the first half of FY10 has been excellent, with an 85 per cent rise in profits and a 11.2 per cent increase in sales following the significant reduction in interest costs. The steady price trend in MEG and PTA, together with reduced interest costs, will boost JBF’s bottom line going ahead.
The stock is very attractively priced at 2.5x FY10 estimated earnings (Rs 40) and below 2x cash earnings (Rs 56). Its market cap stands at Rs 600 crore (on sales of Rs 5,000 crore), and it could generate cash of over Rs 350 crore in the current year.
Nikhil Vora
Managing Director
IDFC-SSKI
JISL’s consistent delivery (double-digit growth every quarter over the past five years) builds confidence in its execution capabilities
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Jain Irrigation Systems’ drip irrigation opportunity is the most compelling value proposition, says Nikhil Vora
Water and food security are gaining prime importance on the global stage and this is evident in the rush for farmlands, with over $60 billion invested over the last two years. Incrementally, India has the second largest arable land bank in the world (about 140 million hectares), but ranks 104th in terms of arable land per capita! Suppressed yields are the key reason, as less than half the land is under irrigation (but only 3 per cent under micro irrigation). Against this backdrop, Jain Irrigation Systems (JISL) is my stock pick.
JISL is the world’s second largest micro irrigation systems (MIS) player with a 15 per cent share of the business globally and a 55 per cent share in India. Its agri-focused business model also makes it a key proxy to play the macro theme of food security. JISL’s consistent delivery (double-digit growth every quarter over the past five years) builds confidence in its execution capabilities, highlighting its ability to manage three difficult variables – the weather, the farmers community and the government – in the Indian agricultural context.
There is huge potential for micro irrigation systems in India, as currently only three million hectares are covered under this system, and the government has given a strong push in this direction. The growth opportunity in the MIS business is driven by estimates of Rs 61,500 crore to be invested in these systems by 2015. India is expected to cover about 6.5 million hectares under MIS by 2012, which is a growth visibility of over 25 per cent for JISL’s micro systems business. About Rs 1,600 crore revenues is estimated by FY11. In anticipation of this growing market, the company increased its capacity aggressively, by as much as 34 per cent, in FY09.
While the MIS opportunity is the most compelling value proposition, the company’s food processing and vegetable dehydration units make its business model quite unique. JISL is also the largest fruit-processing and vegetable dehydration company in the country with a turnover of Rs 320 crore in FY09. It provided 65 per cent of Coca-Cola’s requirement for its mango-based beverage Maaza.
The Rs 1,500 crore organised fruit juice and fruit beverage market in India is growing at over 30 per cent and with rapidly growing organised retail driving the shift towards packaged foods, JISL’s food processing business should sustain the high growth traction in the long run. Resilience and scalability of its business model and the enormous growth potential for MIS are key for the positive bias on JISL. There is value in the MIS opportunity, a distinct business model and strong management bandwidth, which makes JISL a unique growth and value stock. Incrementally, with food security taking the center stage across the globe, JISL stands to be a key catalyst to bridge the gap and thereby an important beneficiary.
Further, improving sales mix (in favour of highest margin MIS and food processing businesses) would ensure sharper earnings growth trajectory. JISL has outperformed the Sensex by 53 per cent in the past one year and we maintain our ‘outperformer’ call on the stock with 30 per cent earnings growth CAGR over FY09-11.
Pankaj Pandey
Head of research
ICICI Direct
Jayshree Tea is aggressively looking to acquire tea gardens, with an annual capacity of 15-20 million kg, in Kenya and Uganda
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Jayshree Tea is well placed to benefit from rising tea prices and a global supply crunch, says Pankaj Pandey
Jayshree Tea, the second largest producer of tea in the country, has benefited from the synchronous rise in domestic and global tea prices over the past few months.
With the increase in tea realisations and increasing contributions from high quality Darjeeling tea, we expect the company’s net profit to grow at over 42 per cent CAGR in FY09-12. Tea prices are expected to remain firm due to negligible growth in the area under tea cultivation.
Jayshree’s sales are also expected to grow at about 11 per cent CAGR in FY09-12. Post the acquisition of Jayantika Tea in 2008 (which produces 1.1 million kg of tea per annum) the company’s volumes increased from 18.2 million kg in FY08 to 21.5 million kg in FY09. Now it is aggressively looking to acquire tea gardens, with an annual capacity of 15-20 million kg, in Kenya and Uganda.
The company grows about 10 per cent of its production in six estates in Darjeeling that produce high quality orthodox tea. Its exports of Darjeeling tea have increased from Rs 25 crore (15.8 per cent of sales) in 2006 to Rs 65 crore (22.8 per cent of sales) in 2009, and it plans to raise production from the Darjeeling estates. This would enhance overall Ebitda margins to 13.8 per cent by the end of this fiscal year.
Historically, the stock has traded in a range of 4x-15x its one-year forward earnings. At the current market price of Rs 339, the stock is trading at 11.8x its FY11E EPS of Rs 28.70 and 10.3x its FY12E EPS of Rs 32.80. On an EV/Ebitda basis, it is trading at 7.5x its FY11E and 6.4x its FY12E Ebitda.
With tea prices climbing higher on the back of increasing domestic demand and a global supply crunch, Jayshree Tea is well placed to benefit from this rise in prices and the concurrent rise in margins. We value the stock at 12.5x its FY12E EPS with a target price of Rs 410.
Rajat Rajgarhia
Head of research, Motilal Oswal Securities
Yields on loans have bottomed out in Q2FY10, but the benefits of deposit re-pricing would continue through FY11. Operating leverage will give a significant boost to RoE, as costs will grow slower than income
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Rajat Rajgarhia says that a gradual tightening by the RBI, coupled with higher loan demand, will boost SBI’s margins
My stock pick for 2010 is State Bank of India (SBI), for it is one of the best proxies to play the start of a new growth cycle in the Indian economy. Loan growth in the banking system is at a multi-year low and we expect this to recover from Q4FY10. As GDP growth remains strong at around 7 per cent, and it is likely to accelerate towards H2FY11, the demand for bank credit will also increase.
The next three to five years will mark a period of high loan growth for banks, with stable interest rates post H2FY11. SBI is well poised to benefit from this with its large network, adequate capitalisation and a strong balance sheet. The bank has huge liquidity on the balance sheet that has been deployed at low rates and, therefore, during a period of high loan growth its earnings would be higher. We believe that the yields on loans have bottomed out in Q2FY10, but that the benefits of deposit re-pricing would continue through FY11. Operating leverage will give a significant boost to RoE, as costs will grow slower than income. Over the last six years, SBI’s cost-to-average assets has declined from 2.4 per cent to 1.9 per cent.
Yes, over the last 12 months, asset quality concerns have risen due to restructured assets, but we believe that these concerns will diminish going forward. In Q4FY10, concerns over inflation and the resultant reaction from the RBI will be a key risk for the SBI stock’s performance in the near term. We are building in a 100 bps increase in CRR through FY11. However, a gradual tightening by the RBI coupled with higher loan demand will boost the bank’s margins.
On a consolidated basis, we expect earnings to grow at 22 per cent CAGR over FY09-11. We expect consolidated ROE to be at 17-18 per cent. The quality of SBI’s ROE in FY10-11 is marked by (a) lower contribution of trading gains, (b) higher efficiency, and (c) an in-built assumption of increase in the credit cost. In fact, the stock deserves a re-rating.
Long-term positives far outweigh the near-term concerns about slow growth and a tight monetary policy. The banking sector has the highest weightage in all benchmark indices, but it is dominated by private banks.
As the state-owned banks deliver strong earnings growth, their weightages will rise further and SBI will be a key contributor. We rate SBI as one of the best bets in the Indian markets over the next one to three years.
Rajen Shah
Chief investment officer Angel Broking
Finolex Cables will turn out to be an excellent turnaround story, going ahead, driven by an improving economy. The company will also benefit from stable input costs that could lead to steady margins
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Finolex Cables will gain from the expansion in power generation and distribution, says Rajen Shah
My top pick for 2010 is the power-to-telecom cables manufacturer, Finolex Cables. The Pune-based company derives 56 per cent of its revenues from its electrical cables division, which caters to high-growth industries like real estate, agriculture and automobiles. The huge capacity expansion in power generation will require increased supply of electrical cables to distribute power to the end consumer. This opportunity for cable manufacturers in power generation and distribution over the next decade is estimated at about Rs 37,000 crore.
It is also true that the cable industry has been crowded with unorganised players, who command about half the market. But the focus is shifting to branded players like Finolex, post the move to the VAT regime, as well as an aspirational drive for branded, quality products. This demand-supply situation, and the company’s market position, is an important driver for the stock on the upside.
The company faced challenging times in FY09 and in H1FY10, as volumes dropped in a weak economic scenario, and realisations also declined due to a drop in input prices (mainly copper). Higher inventory costs and foreign exchange losses also affected the financial performance. However, with the economy reviving, the company is geared for a strong comeback and will turn out to be an excellent turnaround story going ahead. Now, it will also benefit from stable input costs that could lead to stable margins. The company has also completed most of its capacity expansion, which should be sufficient to support growth over the next four to five years, and it will benefit from a high operating leverage.
Also, a major chunk of the production has been shifted to the Roorkee plant, which is eligible for excise duty and income-tax benefits for the first 10 years of its operation. This will result in a drop in excise duty expenses from 10.7 per cent to 7 per cent and a much lower effective tax rate from 24 per cent to 17 per cent in FY09-11E.
The top line is expected to grow by 16.6 per cent CAGR over FY09-11E, driven by volumes on the back of robust demand. Better still, the company, which registered losses totaling Rs 35.50 crore in FY09, is expected to make a stunning profit of Rs 73 crore this fiscal and Rs 105 crore in the following financial year, or a year-on-year growth of 44 per cent. Finolex Cables has traded historically in the price-to-earnings multiple band of 10-18 times. The stock touched a 52-week high of 71.30 in the first fortnight of January. At Rs 68.60, the stock trades at about 10 times, which is at the lower end of its historical P/E band. This accounts for the huge upside potential that is strengthened by an improving economy.
Amar Ambani
Head of research
India Infoline
HDFC Bank offers the best growth, profitability and asset quality in the industry and is the best play in the ensuing credit cycle
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Amar Ambani believes HDFC Bank’s loan growth will strengthen further after the stellar show in the first half of the fiscal
HDFC Bank has witnessed strong loan book expansion of 15 per cent in the first half of FY10, significantly higher than the overall banking system (3.7 per cent) and most other banks. More importantly, the growth has come despite a purposeful run-down in Centurion Bank of Punjab (CBoP) advances that now comprise only 5-6 per cent of the overall loan book. Recent growth has been solely driven by the corporate segment which grew by a robust 35 per cent in the first half of the current fiscal. The retail loan growth is set to revive from the third quarter with the bank making record disbursements (around Rs 3,000 crore) in October 2009. We expect HDFC Bank’s loan book to grow by 26 per cent in the current fiscal and 27 per cent in FY11, materially ahead of the growth expected for the banking system for both years.
HDFC Bank has managed net interest margin (NIM) in a narrow band of 4.1-4.3 per cent in the past six-seven quarters despite heightened interest rate volatility, a reversal in monetary stance by the RBI, a significant slowdown in credit demand, integration of relatively low-margin CBoP book and a change in the standalone advances mix. Through superior asset-liability management, the bank has consistently maintained the spread at 3.2 per cent-plus. Despite a downward bias in lending rates, HDFC Bank expects to maintain NIM at 4 per cent-plus in the near-term, aided by re-pricing of significant term deposits during the third quarter.
The bank’s gross non-performing loans (GNPLs) declined by 6 per cent in the second quarter, after increasing 1.4 times in the preceding five quarters. HDFC Bank has maintained non-performing loan (NPL) coverage at around 70 per cent, one of the highest among private banks, thereby adequately covering the increase in GNPLs. The bank has negligible restructured assets at around 0.6 per cent of advances, probably the lowest in the industry. Also, a consensus seems to be building about retail NPLs having largely peaked out. Therefore, we expect that further slippages, if any, would be minimal. GNPL would remain stable, or decline gradually, over the next two to three quarters.
In our view, HDFC Bank offers the best growth, profitability and asset quality in the industry and is the best play in the ensuing credit upcycle. During the previous cycle (FY05-FY09), the bank traded at, or above the current valuations of 3.6x one-year forward rolling price to book value (P/BV) for a long period. We, therefore, believe that a re-rating towards 5x P/BV is impending as we proceed further in the new credit cycle. This could happen soon with the bank poised to deliver superior results than its peers in the next few quarters. Using our proprietary valuation model for banks, Bank 20, and an adjudged premium, we assign FY11 P/BV multiple of 4.6x and arrive at a one-year price target of Rs 2,259.
Vikas Khemani
Co-head of institutional equities
Edelweiss Capital
HPCL is one of the under-owned stocks in the industry, as most institutional investors have deserted it following the uncertainty over under-recoveries
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Vikas Khemani says, HPCL is trading at attractive valuations at the bottom of the refining cycle, with many triggers on the upside
Hindustan Petroleum Corporation (HPCL), the state-owned refining and oil marketing company, is a very attractive investment bet. It has two refineries – one in Mumbai (7.9 mmtpa) and the other in Vizag (8.33 mmtpa) – and a network of more than 8,800 retail outlets across the country. The company is trading at about 1x price-to-book, around 0.5x replacement cost and less than 5x P/E ratio, with a 3-5 per cent dividend yield.
While refining margins continue to be low due to overcapacity in the global refining industry, the earnings outlook in the marketing segment has improved with better clarity on the sharing of the cost of under-recoveries. The government intends to fully reimburse cooking fuel (kerosene/LPG) under-recoveries to oil marketing companies.
The stock is trading very cheap at the bottom of the refining cycle, with many triggers on the upside. For one, the eagerly awaited Kirit Parekh Committee report could make policy recommendations like partial/total deregulation of auto-fuel pricing. Then, the government has shown a keenness to deregulate the sector and it is already focusing on divestment.
The HPCL-Mittal Energy Bhatinda refinery is slated to start in 2012, around the time when gross refining margins are expected to start recovering. With a high Nelson Complexity for the 9 mmtpa refinery, significant income-tax and fiscal benefits and opportune timing, the project could add significant value to HPCL. (Nelson Complexity is a measure of the secondary conversion capacity of a petroleum refinery relative to the primary distillation capacity.). On a relative basis, HPCL is trading at attractive valuations. On a one-year forward (FY10) price-to-book ratio, the stock is trading at 1x, while BPCL and IOCL are trading at 1.4x. On a one-year forward (FY10) price-to-earnings ratio, the HPCL, BPCL and IOCL stocks are trading at 4.3x, 7.7x and 7x, respectively. Being more marketing oriented compared to BPCL and IOCL, HPCL is best-placed to play the deregulation of the oil sector.
HPCL is one of the under-owned stocks in the industry, as most institutional investors have deserted it following the uncertainty over under-recoveries. But the stock could perform decently in future.
A key risk is higher oil prices. If crude prices move beyond $80/bbl, HPCL could again face significant under-recoveries. (Every dollar increase in the price of oil, results in under-recoveries of about Rs 600 crore.) Also, if the global economy recovers sharply and the markets rally, it is quite possible that given the defensive nature of the stock, there may be periods of underperformance relative to the rest of the market.
Vipul Sanghvi
President - sales, Religare Securities
M&M’s earnings will continue to grow strongly, backed by growth in both tractors and utility vehicles. Its margins are not likely to dip significantly from current levels despite a potential rollback in excise duty cuts
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Shortage of farm labour following schemes like NREG, will result in sustained growth in tractors sales, says Vipul Sanghvi
Mahindra & Mahindra is expected to see faster growth over the next couple of years, thanks mainly to the product successes in its utility vehicles. Like the recent launch of Gio, a four-wheeler with a payload of 0.5 tonne at a price of Rs 1,65,000 that became an instant success, particularly due to the absence of any other product in this category today. We also estimate higher margins as the company retains full benefit of lower commodity prices.
M&M, the flagship company of the Mahindra Group, has two main operating divisions for automobiles and farm equipment. The auto division makes utility vehicles (UVs), light commercial vehicles (LCVs) and three-wheelers, whereas the farm equipment division makes tractors and agricultural implements. The company also has investments in standalone entities operating in other businesses such as hospitality, trade and financial services, auto components, IT, telecom and infrastructure.
We believe that earnings will continue to grow strongly, backed by growth in both tractors and UVs. In FY10, so far, volume growth has remained pretty strong at 19 per cent for tractors and 35 per cent for utility vehicles. That has resulted in M&M’s margins improving significantly in the last two quarters. The company’s margins are not likely to dip much from current levels despite a potential rollback in excise duty cuts and higher material costs. We expect M&M’s UV segment to grow 12.5 per cent in volumes and the tractor segment will grow by 8 per cent in FY11.
While there have been concerns about a slowdown in tractor growth due to the poor monsoon this year, we believe that a shortage of farm labour, because of schemes like the National Rural Employment Guarantee scheme, will result in sustained growth in tractor sales. Moreover, tractor ownership in India is extremely low, with less than 10 per cent of farmers owning a tractor, but over 35 per cent of them using one. That is, if one farmer buys a tractor, more than three others end up using it. But as more farmers prosper, they will have their own tractors.
In the IT segment, the valuation for Tech Mahindra (44 per cent owned by M&M) is at Rs 1,140, well above the current Rs 1,000 levels. Increased spending by telecom clients will be a good trigger for the stock, even as legal issues surrounding Satyam seem to be getting resolved.
Valuing the listed subsidiaries at Rs 350 per share, M&M’s standalone business is trading at 12x its FY11E EPS, which, in our opinion, is fairly attractive. We expect earnings CAGR over FY09-FY11 to be 34 per cent, given that M&M is a direct play on the rural India story.
Kisan Ratilal Choksey
Chairman
K R Choksey Shares & Securities
Tata Motors is Autoline’s biggest customer, and with Tata Motors doing better, of late, the outlook for Autoline has improved
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Autoline is taking the inorganic growth path that could increase revenues by 25 per cent over the next couple of years, says Kisan Ratilal Choksey
With the automobiles sector doing better recently, the demand for auto components has increased, and with this the prospects of the auto ancillaries sector look brighter for the next 12 months. This is why I like Pune-based Autoline Industries, which is in the press metal business and also makes components like brakes, clutches, pedals and so on.
Tata Motors is Autoline’s biggest customer, accounting for about 60 per cent of standalone revenues, and with Tata Motors doing better of late, the outlook for Autoline has improved. This auto components company began operations back in 1995, with the name Autoline Pressings, but it got listed only in 2006. Last year, its performance took a hit because of the industrial slowdown, but over the next five years the company is expected to see a growth of 15 per cent annualised. Revenues in Q2FY10 increased by 3.5 per cent y-o-y at Rs 105.65 crore, while Ebitda was up by 72 per cent at Rs 10 crore on account of lower inventory and other cost control measures.
Late October, the company announced that it had bagged a $40 million (about Rs 200 crore) contract for the supply of 5,00,000 brake and clutch pedal systems over the next four years. Over the next couple of years, the management is aiming at a revenue growth of 25 per cent backed by its past acquisition.
Autoline has a US subsidiary, which was acquired from Dura Automotive Systems Inc, Indiana, in December 2007. The unit makes driver control systems, jacks and toolkits. In the same month, the company acquired a 51 per cent stake in DEP Autoline, in Michigan, and it also acquired the entire stake in Nirmiti Auto Components which makes pedals for the Indian market.
As of September 2009, Rakesh Jhunjhunwala held nearly 10 per cent stake in Autoline Industries. At the current market price of Rs 127, the company trades at a half-yearly annualised P/E ratio of 23x. It’s a good buy from a 12-month perspective.
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