Bullish sentiment in new Samvat

The market continued to find new legs as it made net gains on strong volumes. The Nifty rose to new 2009 highs and closed at 5,142 points for week-on-week gains of 3.98 per cent. The Sensex behaved similarly, rising to 4.08 per cent to close 17,322 points. The Defty jumped 4.75 per cent as the rupee shot up.

Volumes were good all week and extraordinarily high on Friday. (This analysis is being written pre-Diwali session, where trading is usually token). Advances outnumbered declines and a large number of stocks were heavily traded. FIIs remained big net buyers while domestic institutions sold through most of the week. The BSE 500 rose 4.26 per cent while the Nifty Junior rose 6.4 per cent.

Outlook: The market reconfirmed its bullish status and the new upside targets would be in the range of Nifty 5,300. However, there could be another short-term correction next week pulling prices back till around the 4,950-5,000 level. Positive FII attitude remains a critical driver.

Rationale: The sequence of higher highs confirms that both the bullish long-term and bullish intermediate trends remain intact. However, the intermediate trend is now 13-weeks old and could reverse anytime. The market is overbought in the short-term. A fall below 4,900 would signal intermediate trend reversal with a target of 4,750.

Counter-view: High volumes and a series of new 2009 highs in pivotal stocks implies the market could continue to head North for an un-definable time. Balanced against that, this last burst of trading may have been triggered by traders exiting positions. Normally Indian operators ease off around Diwali and domestic institutions are also net-sellers at the moment. Hence, the FII attitude is vital to market direction – if they sell heavily, there will be no counter-parties at current prices.

Bulls & bears: A large number of pivotal stocks hit new 2009 highs last weeks and most were backed by strong volume expansions. Metals, for example, made a comeback with Sterlite, Sesa Goa both doing very well. Banks as a sector jumped over nine per cent with leaders like SBI and ICICI Bank both hitting new highs. Real estate also bounced up. Outside these sectors, there were scattered winners such as PTC, GVKPIL, Cairn, etc. This sort of pattern suggests further gains but it also sets up a tempting scenario for profit-booking and almost by definition, the market is overbought, with many individual stocks being over-extended and far ahead of reliable supports. Use trailing stop-losses to lock in profits, if there is a sharp reversal.

MICRO TECHNICALS

Bharti Airtel
Current Price: Rs 326
Target Price: Rs 345

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The stock may have seen a selling climax due to the intensifying competition, which has led to a tariff war among existing service providers. The stock fell on sustained hammering from Rs 435. On Thursday-Friday, there was volume multiplication without a further fall. This suggests all potential selling has been absorbed. Keep a stop at Rs 315 and go long since it could bounce till Rs 345.

Indiabulls Real Estate
Current Price: Rs 290.95
Target Price: Rs 270

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The stock has run into resistance between Rs 290-300, which has remained despite very high volumes. On a correction, it could fall till Rs 270 or lower. Keep a stop at Rs 295 and go short. If it does break Rs 295 and closes above Rs 300, reverse and go long with a stop at Rs 290 and a target of Rs 320.

Power Trading Corp
Current Price: Rs 103.8
Target Price: Rs 115

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The stock has made an extraordinary breakout on a big volume expansion. The formation's target would be about Rs 115. Keep a stop at Rs 101 and go long. Book 50 per cent profit at Rs 110 and move the stop up to Rs 106.

Sesa Goa
Current Price: Rs 354.7
Target Price: Rs 380

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Sesa Goa’s stock is making a sequence of successive record highs. Because of this, it is impossible to calculate a reliable target, however projections of Rs 380 appear to be reasonable. Traders are advised to keep a trailing stop at Rs 345 and go long at the counter. Raise the stop by 10-units for every 10-unit rise in the share price.

ICICI Bank
Current Price: Rs 959
Target Price: Rs 1,010

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The stock had a breakout to a 2009 high on strong volume expansion. It is difficult to calculate a target since anywhere between Rs 970 and Rs 1,010 is possible and there is no recent price history. Keep a stop at Rs 945 and go long. Raise the stop 10-units on every 10-unit rise.

Analysts' corner - September 28, 2009

3i Infotech
Reco price: Rs 85
Current market price: Rs 83.85
Target price: Rs 110
Upside: 31.2%
Brokerage: Sharekhan

On September 22, 3i Infotech decided to close the bid period for qualified institutional placement (QIP) and raised Rs 317.8 crore. The company would use the funds to retire debt, which would bring down its debt to equity ratio from 2.1 to 1.4. In terms of the equity base, the QIP issue would expand the fully diluted equity base by 23.4 per cent to 19.7 crore shares.

Consequently, 3i Infotech's 2009-10 and 2010-11 earnings are expected to get diluted by around 15-17 per cent. Considering the expanded equity and the likely interest expense savings, the 2009-10 EPS has been revised to Rs 12.8 and 2010-11’s to Rs 14.6.

Though the earnings dilution through QIP is likely to remain an overhang on the stock in near term, the company has taken necessary steps such as the QIP issue and sharp reduction in DSO days (121 days in 2008-09 v/s 151 days in 2007-08), which has allayed concern over its weakening balance sheet.

This coupled with an improvement in demand environment make 3i Infotech a strong case for re-rating. The brokerage has upgraded the stock with revised price target of Rs 110, assigning a target multiple of 7.5x, which is in line with its long-term average PE multiple since its listing in April 2005.

IPCA Labs
Reco price: Rs 721
Current market price: Rs 755
Target price: Rs 1,045
Upside: 38.4%
Brokerage: IDFC-SSKI

The newly-acquired scale, on the back of 70 per cent growth in revenues and 130 per cent jump in EBITDA between 2005-06 and 2008-09, imparts critical mass for IPCA Labs (IPCA) to grow.

Along with 18 per cent CAGR between 2008-09 and 2010-11 in domestic formulations sales, API momentum (at 13 per cent) and increasing formulation exports (22 per cent), the brokerage expects revenue growth of an average 18 per cent in the same period.

Given the high revenue growth visibility, IPCA would register 60 basis points expansion in its operating margins to 20.6 per cent by 2010-11. Adjusted net profit would likely see a 22 per cent CAGR over FY09-11 to Rs 238 crore in 2010-11.

With limited capex of around Rs 70 crore and operating profits in excess of Rs 300 crore per year, IPCA would start generating free cash from 2009-10. With 27 per cent return on equity (RoE) and high earnings visibility over FY09-11E, IPCA is trading at 9 times 2009-10 estimated earnings.

While frontline pharma stocks are trading at 18-20 times 2009-10 estimated earnings, IPCA is expected to get re-rated as the market starts valuing its growth visibility and healthy balance sheet. At the target price of Rs 1,045, the stock would trade at 11x 2010-11 estimated earnings. Reiterate outperformer.

Sesa Goa
Reco price: Rs 276
Current market price: Rs 256.8
Target price: Rs 325
Upside: 26.6%
Brokerage: Motilal Oswal Securities

Sesa Goa’s promoters have increased their stake in the company by 2.11 per cent to 57.12 per cent through open market purchases. Earlier in the year, the promoters had hiked their stake a little before the acquisition of Dempo. Sesa continues to look for opportunities of inorganic growth in Goa.

Iron ore prices have started strengthening. The imports of iron ore by China are expected to pick up in the coming months because Chinese mills will have to start re-stocking for winter months. Iron ore prices have also bottomed once again.

Exports from India have suffered in recent months due to prolonged monsoon and procedural hiccups post change of royalty to ad-valorem rate of 10 per cent. A strong demand-driven iron ore prices in China augur well for Indian iron ore exporters like Sesa Goa. Weaker freights due to commissioning of new cape-size bulk carrier would result in higher realisations for exporters.

The brokerage has raised its price assumption from $55 per tonne free-on-board at Indian ports for 63 per cent Fe grade iron ore to $65 per tonne. As a result, the EPS estimates for 2009-10 and 2010-11 has been raised to Rs 21.1 (earlier Rs 17.9) and Rs 27.7 (earlier Rs 20.2). The stock trades at 10 times 2010-11 estimated EPS and an EV of 5.3 times 2010-11 estimated EBITDA. Maintain buy.

Taj GVK Hotels & Resorts
Reco price: Rs 127
Current market price: Rs 126.95
Target price: NA
Brokerage: Angel Broking

Taj GVK is the market-leader in the Hyderabad market, where it has a share of 29 per cent in premium-segment rooms. In order to strengthen its foothold further and to tap mid-market room demand, the company is coming up with a 189-room property in Begumpet.

In 2007-08, about 78 per cent of Taj GVK's room inventory was located at Hyderabad. To diversify its presence, the company came up with Taj Mount Road in Chennai, in December 2008. It is planning to enter Bangalore and exploring the possibility of entering the mid-market segment through tie-ups with Indian Hotels.

As the economic revival gathers steam, tourist arrivals are expected to increase from Q2 2009-10. Moreover, Taj GVK is on an asset-light expansion strategy to strengthen its grasp on the Hyderabad market.

Moreover, Indian Hotels (one of Taj GVK’s promoters), the industry leader, currently has an EV per room of Rs 1.2 crore, which makes the risk-reward unattractive for an investment in Taj GVK. The brokerage remains positive on the industry, but considering Taj GVK's valuations, it maintains a neutral rating.

Zee News
Reco price: Rs 47
Current market price: Rs 47.05
Target price: NA
Brokerage: Edelweiss Securities

Zee News (ZNL) expects growth in advertising revenues from regional GEC channels. But, revenues from news channels are likely to be flat in Q2 2009-10. Also, increasing adoption of DTH and incremental revenues from analogue are expected to boost subscription revenues.

Till now, ZNL had three strong driver channels – Zee News, Zee Bangla and Zee Marathi. Zee Telugu competes closely with Eenadu and Maa Telugu for the second spot in viewership. Zee UP, launched in April 2009, too is performing well. Zee Kannada is also close to breaking even. Zee Business is likely to benefit from the strong IPO advertising pipeline. Going forward, Zee Telugu, Zee Kannada and Zee Business channels are to become other growth drivers for ZNL.

Unlike its competitor Star Jolsha, which is resorting to disruptive programming, Zee Bangla has continued with its strategy of gaining sticky viewership through low cost programming, which is likely to be a more sustainable strategy.

It has multiple drivers---strong bouquet of news and regional channels, improving viewer-ship, likely overall improvement in advertising industry from H2 2009-10, successful new shows, and strong management in place. The company is expected to benefit from likely revival in advertising spends in H2 2009-10.

Business Standard Analysts corner

State Bank of India
Reco Price: Rs 1,813
Current market price: Rs 1,918
Target price: Rs 2,109
Upside: 10%
Brokerage: Daiwa Securities

The broking house believes that one of State Bank of India’s (SBI) biggest advantages is the high interest spread on its bond portfolio. The incremental cost of funds for SBI has fallen by almost 210 bps over the past nine months, whereas the incremental yield on its government-bond portfolio has remained more or less the same. Currently, if SBI buys a 10-year government bond, then it is making an incremental interest spread of 200-250 bps, compared with a negative interest spread six months ago and a positive spread of around 10 bps nine months back.

SBI moved almost Rs 35,000 crore of short-term cash to statutory liquidity ratio (SLR) securities in 1Q FY10, and this is likely to have a positive impact and reflect in the NIM in the latter half of FY10. The re-pricing of high-cost deposits in November-December 2009 would also give the NIM a further boost. SBI has underperformed both the broader and Nifty banking indices over the past six months, but this trend will reverse over the next six months. The six-month target price is revised to Rs 2,109 from Rs 1,043, based on a target PBR of 1.5x on FY10 consolidated BVPS forecast and adding Rs160 per share for the life-insurance venture.

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Amtek Auto
Reco Price: Rs 183
Current market price: Rs 183.85
Target price: Rs 254
Upside: 38%
Brokerage: Anand Rathi

The research house expects Amtek Auto to benefit from the relatively strong growth in automobile demand at home and the nascent recovery globally. Its amalgamation with five group companies would lead to integrated operations and greater efficiencies. Domestic auto demand has rebounded, and overseas markets, too, are showing signs of improvement. Amtek has a significant presence in the overseas markets through subsidiaries, which would boost revenue from its subsidiaries as well its joint ventures with leading global suppliers such as Magna and ARI. Given the secular growth in demand ahead, Amtek (ex-merger impact) to register a robust 50 per cent CAGR in earnings over FY09-12.

Amtek is amalgamating five group companies with itself, bringing all the forgings and castings units under the ‘Amtek Auto’ umbrella. This is expected to lead to better integration of operations, clearer efficiencies in sourcing and negotiations, and greater transparency in operations. Amtek Auto is valued at 15x FY11e earnings, which is a 25 per cent discount to the target PE multiple for Bharat Forge. The target price is Rs 254 (without considering the impact of its amalgamation with four other group entities).

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Hindustan Unilever
Reco Price: Rs 273
Current market price: Rs 255.95
Target price: Rs 304
Upside: 18.7%
Brokerage: IIFL

Hindustan Unilever’s (HUL) top management is pursuing volume growth and this is now visible in every brand in its portfolio. HUL is re-launching earlier de-focussed soap brands Liril, Hamam, Rexona and Breeze to regain share from regional players in specific geographies. The company has reintroduced key price points of Rs 10 and Rs 5 toothpastes and soap brand Lifebuoy.

With competition (GPCL, Wipro and Ghari) not reacting to price cuts in HUL’s discount brands, prospects of a recovery have improved. Channel checks suggest that the new re-launches/price points/price cuts have been well received in trade, though it is too early to judge consumer offtake at this stage. HUL has lost the maximum ground over the past 15 months in soaps, with its market share dropping by over 650 bps from 53 per cent to just over 46 per cent. Its old brands are being re-focussed after 2-3 years to take on competitors such as Godrej No 1 and Santoor, which have specific regions of strength.

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Lanco Infratech
Reco Price: Rs 420
Current market price: Rs 422
Target price: NA
Brokerage: Edelweiss Securities

Lanco Infratech (LITL) currently has over 7,195 MW of new generation capacity under various stages of execution. Over half of this is already under construction and the balance has secured offtake agreements and fuel linkages and is likely to attain financial closure over the next 12 months. Post-commercialisation of RIL’s KG gas basin, Lanco has been receiving 1.6-1.65 mmscmd of gas, enabling its 368 MW Kondapalli power plant stage 1 to operate at 94 per cent PLF. The 366 MW second stage of the plant is expected to be operational in September/October.

The company has indicated that it will finalise plans to expand the capacity by about 750 MW (phase III & IV) at the same location. It also said that the proximity to Krishna river and anticipated higher KG basin output will alleviate water and gas issues. The research house has assumed earnings of Rs 71.7 crore from this plant in its FY10 estimates assuming merchant tariff and sale of about 610 million units. If LITL is able to operationalise the plant, sourcefuel, and execute merchant sales for the entire capacity, then there could be upside risks to earnings forecasts. At recommended price of Rs 420, the stock is trading at 2.8x FY10E and 2.2x FY11E book value.

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Tata Steel
Reco Price: Rs 441
Current market price: Rs 469
Target price: Rs 540
Upside: 15%
Brokerage: Deutsche Bank

The stock has been upgraded to buy based on three factors. The first is the view that the worst is over for Corus and that each quarter at Corus should be incrementally better, following the record negative EBITDA of $387 million in June quarter FY10. The second is a 132 per cent CAGR in consolidated EPS over FY10-12E, and finally an attractive valuation – the stock currently trades at a FY11E EV/EBITDA of 4.9x, an 18 per cent discount to the average valuation of its global peers. Worries over long-drawn earnings uncertainty at Corus have been a key stock overhang since late last year.

Nascent recovery in steel consumption in Europe, a rising capacity utilisation rate and a decline in coking coal prices should drive an EBITDA turnaround at Corus. We forecast Corus EBITDA to rise at a CAGR of 260 per cent over FY10-12. Tata Steel’s India operations (among the most competitive in the world) look set to benefit impressively from aggressive organic growth. EBITDA at Indian operations is likely to rise at 21 per cent CAGR over our forecast period. Increasing production in India should result in Indian operations constituting an overwhelming 67 per cent of consolidated EBITDA by FY12 from 46 per cent in FY08 when Corus was acquired.

Current market prices as on September 11

Rising market boosts returns

The markets were quite weak and lacklustre in the first half of the one year period in Smart Portfolios. However, we had an eventful second half, as the markets soared backed by renewed optimism of global economic recovery, better-than-expected corporate earnings and a thumping win by the UPA government in the general elections.

The market upswing saw a huge change in fortunes for investors with fund managers cashing in on the up move. Today, at the end of Smart Portfolios Season I, the benchmark (BSE 200) has given a return of 9.37 per cent.

In sharp contrast to the benchmark’s net returns, our four fund managers have out-performed by a wide margin. Amar Ambani’s networth has zoomed 161 per cent to Rs 26.12 lakh, Anand Agarwal’s portfolio value has soared over 120 per cent to Rs 22.02 lakh, Kashyap Pujara’s networth has appreciated by over 34 per cent to Rs 13.42 lakh and Sadanand Shetty’s portfolio value is up nearly 64 per cent at Rs 16.37 lakh.

In the week under review, the Smart Portfolios networth rose by 4.5 per cent.

QUIET WEEK
KASHYAP PUJARA
Fund Manager, ENAM Direct

Kashyap Pujara remained on the sidelines for the second straight week, while his portfolio value appreciated by 2.8 per cent. His top performing stocks were Century Textiles (up 74 per cent), Sterlite (up 70 per cent) and EID Parry (up 59 per cent).

Top Holdings	% of assets	Cost Price (Rs)	Current price (Rs)	Value (Rs lakh)
Balrampur Chini	25.34	96.27	113.35	3.40
Aditya Birla Nuvo	15.05	695.00	1009.70	2.02
Century Textiles	13.54	273.00	454.25	1.82
ONGC	13.18	1028.00	1179.20	1.77
EID Parry	9.67	313.99	324.25	1.30
Total investments	94.08	-	-	12.62
Cash	5.92	-	-	0.79
Net worth	-	-	-	13.42
Returns (%)	34.17	-	-	-

The laggards were Reliance Communications (down 53 per cent) and Madras Aluminum (down 30.3 per cent).

MARGINAL GAINS
ANAND AGARWAL
Head – Products & Investments, Reliance Money

Anand Agarwal was a net seller of stocks worth Rs 5.66 lakh, and his portfolio value moved up by 0.8 per cent (Rs 18,000) last week. His networth scaled over 120 per cent, thanks to Axis Bank (up 187 per cent) and TRF (up 61 per cent).

Top Holdings	% of assets	Cost Price (Rs)	Current price (Rs)	Value (Rs lakh)
Numeric Power	22.71	372.00	490.35	5.00
Rasoi	20.44	301.00	375.05	4.50
Sakthi Sugar	15.41	79.68	84.85	3.39
Prime Focus	4.49	171.25	197.65	0.99
Total investments	63.06	-	-	13.88
Cash	36.94	-	-	8.13
Net worth	-	-	-	22.02
Returns (%)	120.19	-	-	-

Jet Airways (down 56 per cent), Deccan Aviation (down 60 per cent) and Reliance Communications (down 37 per cent) were the major drags.

HEALTHY PROFITS
AMAR AMBANI
Vice President (Research), India Infoline

Amar Ambani’s networth rose by 5.3 per cent (Rs 1.32 lakh) in the week under review. He was a net seller of stocks worth Rs 15.85 lakh. His best pick was Hindustan Oil Exploration with a net gain of over 92 per cent followed by Elantas (up 79 per cent), and Falcon Tyres (up 65.4 per cent).

Top Holdings	% of assets	Cost Price (Rs)	Current price (Rs)	Value (Rs lakh)
Aban Offshore	12.03	1350.00	1571.30	3.14
Allied Digital	9.59	452.80	500.75	2.50
NIIT Tech	2.44	114.95	127.50	0.64
Jindal Drilling	2.39	517.00	624.25	0.62
Suven Life	1.86	22.75	32.40	0.49
Total investments	31.51	-	-	8.23
Cash	68.49	-	-	17.89
Net worth	-	-	-	26.12
Returns (%)	161.20	-	-	-

On the other hand, Jindal Saw Pipes, Axis Bank and Jaiprakash Associates were the top three laggards.

IN BUY MODE
SADANAND SHETTY
Vice President, Kotak Securities

Sadanand Shetty was a net buyer of stocks worth Rs 3.23 lakh, and his networth rose by 4 per cent last week. Orbit Corporation with an average gain of 100 per cent was the top performing stock in his portfolio. It was followed by Godrej Consumer (up 84 per cent) and Balrampur Chini (up 71 per cent).

Top Holdings	% of assets	Cost Price (Rs)	Current price (Rs)	Value (Rs lakh)
United Phos	7.88	166.21	166.45	1.29
GVK Power	6.27	43.15	47.45	1.03
NDTV	5.86	157.00	159.95	0.96
United Spirits	5.84	888.68	955.05	0.96
JSWSL	5.41	687.25	708.85	0.89
Total investments	83.63	-	-	13.69
Cash	16.37	-	-	2.68
Net worth	-	-	-	16.37
Returns (%)	63.66	-	-	-

On the other hand, Glenmark Pharma with an average loss of around 50 per cent was the biggest underperformer in his portfolio. Everest Kanto (down 50 per cent) and MIC Electronics (down 49 per cent) were the other big losers.

Smart Portfolios Season II

Over a year ago, we had taken the initiative to start a unique educational game – Smart Portfolios – for a one-year period. This initiative was started with four money managers who were given a virtual corpus of Rs 10 lakh to be used for creating a portfolio which could beat the benchmark, the BSE 200. The year-long exercise helped investors understand the investing philosophy of the fund managers as well as their picks. Your enthusiastic response has led to the launch of “Season II” of Smart Portfolios from September 1, 2009.

There are changes in the rules, the people playing the game and the benchmark. Two new fund managers – Ajay Parmar, head, Research-Institutional Equities, Emkay Global and Peeyoosh Chadda EVP & co-head Asset Management, Edelweiss will join Amar Ambani and Sadanand Shetty for the second season. The benchmark will also change to the S&P CNX 500.

Globus Spirits - Rich spirits

Increased capacities and foray into under-penetrated markets could sustain growth for Globus Spirits, but valuations aren’t cheap.

Globus Spirits, which manufactures and sells industrial alcohol (rectified spirit and extra-neutral alcohol), country liquor and Indian-made foreign liquor (IMFL), was less impacted than its peers during the downturn. A diversified revenue portfolio (35-40 per cent revenues from country liquor) and its flexibility to shift between raw materials (molasses and grain) in the production process helped. The company has been operating at higher capacities, and thus the need for an IPO, amongst other things. It plans to expand its capacities by 73 per cent to 500 lakh bulk litres. While the project cost of Rs 89.3 crore also includes setting up power generation capacity and modernisation of IMFL bottling plants, all these are likely to go on stream by March 2010.

Expansion plans
The company plans to expand its alcohol manufacturing capacities at its two distilleries at Samalkha (Haryana) and Behror (Rajasthan). IMFL sales, though constitute around 6-7 per cent of overall production volumes, are considered more profitable. From the expanded capacities, Globus plans to increase IMFL’s share to around 20 per cent over three years.

The company’s brand portfolio in the country-liquor segment includes Rana and Rajasthan No.1. In the IMFL segments, it has 20-20 Premium Whisky and Hannibal Legendry Rum. The company has allocated a third of the IPO proceeds towards brand and distribution development for its own IMFL brands, which indicates its intention to improve visibility and reach. Globus also does job work for IMFL brands such as Officer’s Choice Whisky (Prestige, Classic) and Officer’s Choice XXX Rum.

Margin cushion
The company’s production facilities can utilise either molasses or grain or both, thus mitigating the dependence on any specific raw material. This would enable it to manage margins in a scenario of rising input prices, given that raw materials account for over 60 per cent of costs. Better sourcing has also helped maintain EBITDA margins at around 13 per cent, on average of the last three years, however it is lower than some peers. Going ahead, Globus’ increasing focus towards IMFL would also provide cushion to margins.

ON A HIGH
in Rs crore	FY09	FY10E	FY11E
Net sales	197.1	252.4	347.8
EBITDA	26.0	36.6	50.4
Net profit	12.9	22.4	33.2
EPS (Rs)	10.6	11.2	16.6
PE (x) @ Rs 90	8.5	8.0	5.4
PE (x) @ Rs 100	9.4	8.9	6.0
E: Estimates

Conclusion
The negatives for the sector are the excessive regulation by the different state governments. Among positives, increasing disposable incomes, favourable demographics and lower penetration of alcohol in the country offers opportunities for players in the sector. Globus clocked about 35 per cent growth both in the bottom line and top line on an average in the last five years, albeit on a smaller base. This robust performance is expected to continue in the next two years also, though the near-term concerns include the uptick in raw material prices. Also, how successfully the company is able to break into new markets and establish presence of its own brands will reflect on the numbers.

Regarding valuations, Globus’ PE works out to 8.9 times its estimated 2009-10 earnings at the upper band, which is expensive as compared to its peers like Tilaknagar (PE of around six times trailing 12 months EPS). While the growth story of Globus looks good, immediate gains are ruled out as the IPO pricing is high.

Tata Steel - Regaining strength?

Early signs of a recovery in demand along with measures to improve profitability at Corus indicate that Tata Steel may bounce back into the black.

Tata Steel reported its second consecutive consolidated quarterly loss last week. The poor operating performance of its European business, lower metal prices and slow pick up in demand were among prime reasons for the losses and remain key concerns going ahead. Not surprisingly, the company expects the next few quarters to be challenging.

On the positive side, to deal with these challenges, the company has already taken several initiatives, which are aimed at bringing its operations, particularly European, on track. The company’s recent $500 million GDR offer should also ease some funding concerns and provide fuel for the company’s expansion plans, mainly the highly profitable domestic facilities. While the stock has been in the limelight for the wrong reasons, there are early signs of recovery which indicate that it the going ahead could be better. Here is an analysis of the recent events and the future outlook for the company.

Corus dents profit, once again
Tata Steel’s global operations weigh heavily on its overall performance as almost 80 per cent of its total capacities are based in the overseas markets. Its European operation alone, which comes under Corus, accounts for 75 per cent of the total capacity. The impact was clearly seen in June 2009 quarter. While Tata Steel’s standalone EBIDTA was Rs 1,789 crore, on a consolidated basis it reported an operating loss of Rs 29.9 crore; consolidated net loss stood at Rs 2,240 crore. The performance was weak on account of lower volumes and realisations at its European operation as the global economic slump shrunk demand. This in turn meant that Corus was able to utilise only 53 per cent of its capacity; its volumes dropped to 3.3 million tonnes in June 2009 quarter as compared to 6.2 million tonnes in June 2008. This along with high cost of opening inventory of raw material (iron ore and coal) impacted its operating performance.

The company, thus, reported a loss of $117 per tonne at the operating level as against a profit of $123 per tonne in June 2008 quarter.

Ready to bounce back?
In the current environment, to achieve a breakeven level at its European operations, analysts estimate that the capacity utilisations is required to move beyond 75 per cent levels, which is likely to happen in the second half of 2009-10 on the back of a pickup in demand. The company has already reached a 70 per cent capacity utilisation during the month of July 2009. They estimate that steel demand in Europe is stabilising and steel output is increasing along with de-stocking of inventory. According to the data provided by the World Steel Organisation, sequentially the demand in the European regions has increased from 9.42 million tonne in the month of April 2009 to 11.24 million tonne in July.

“As far as Corus is concerned, by December 2009 we could move to a breakeven level or a positive side, mainly helped by the combination of three components viz., lower raw material cost, additional cost savings and higher volumes,” says Koushik Chatterjee, Group CFO, Tata Steel.

Analysts also reckon this. “While 2009-10 will be challenging for Corus, we expect sequential improvement in prices and volumes as well as cost savings of $1.2 billion to lead to improved profitability,” says Edelweiss Securities’ analyst in a recent note. “We expect Corus to return to profitability, as steel prices in Europe are already $100 per tonne higher than the average price of $460 per tonne seen in quarter ending June 2009,” says Rakesh Arora, who tracks the metals sector at Macquarie Securities.

Trimming costs
Higher utilisation, better steel prices and improving volumes would be the key triggers, but only in the second half of 2009-10. On its part, the company has envisaged a cost saving of about Rs 6,200 crore for 2009-10 on the back of initiatives like ‘Weathering the Storm’ and ‘Fit for Future’. Under these initiatives, Corus has already achieved savings of Rs 2,200 crore during the June 2009 quarter. These initiatives include securing long-term captive supplies of raw materials like iron ore and coal.

In the near-term, expect inventory costs to also come down. Till June 2009 quarter, the company had high-cost inventory of raw materials. It now hopes to sign new contracts at the lower rates thus, leading to substantial savings in the coming quarters. Like in the case of coal, the average cost for Corus was about $300 per tonne as against the current prices of about $170 per tonne. The company is now negotiating new contracts at lower prices, which if signed would lead to substantial cost savings.

For the long-term, the company is looking at overseas mines. For instance, during 2009-10, Corus had captive sources of raw material to the extent of about 25 per cent of its requirements, but now it is eyeing new mines (acquisitions, equity stake) to take this figure to 50 per cent by 2015. Besides raw materials, Corus is also planning to reduce its staff cost by lowering its employee count from 40,000 to 35,000 in 2009-10. Thanks to these initiatives, analysts expect Corus’ EBIDTA to improve to $480-490 million in 2009-10 itself.

The lesser impacted
Tata Steel’s Indian operations have provided great support. Although here too, realisations have fallen, volumes have been growing on the back of steel demand in the country, particularly for long products from the infrastructure sector. Domestic sales volume grew by 22.4 per cent to 1.42 million tonne in June 2009 quarter. Even on the margins front, despite lower realisations, the company reported strong operating profit margins of 32 per cent due to its lower cost of production.

While domestic steel prices have recovered by about 10-12 per cent from their lows in April 2009, steel production has grown at 4.25 per cent in July 2009 on a year-on-year basis. Since Tata Steel’s domestic business figures among the top three cost-efficient steel operations globally, expect its performance to improve further on the back of higher sales volumes and better realisations in the coming quarters.

IMPROVING NUMBERS
	FY 09	FY 10E	FY 11E
Capacities (in million tonne)
Tata steel	5.23	6.7	7.22
Corus	19.7	17	18.9
Others	3.5	3	3.1
Total	28.43	26.7	29.22
in Rs crore
Avg. realisation (Rs/Tonne)	51,811	37,343	38,420
Consolidated sales	147,300	99,707	112,263
EBIDTA	18,130	11,624	15,795
Consolidated net profit	4,950	2,963	5,921
Consolidated EPS (Rs)	61.9	35	68
PE (x)	7.1	12.5	6.4
Source: Analyst estimates and Bloomberg

Easing liquidity
Tata Steel increased its domestic steel capacity to 6.8 million tonne last year. It intends to take this further to 10 million tonne by mid-2011. However, analysts were worried about the funding and consequent increase in debt levels. But, with the completion of its recent $500 million GDR issue, which the company will utilise for capital expenditure in India, acquisition of new mines in overseas markets and prepayment of debt at Corus, these concerns are easing out. Last week, it equipped itself with shareholder approval to raise additional funds worth Rs 5,000 crore, though the route has not been spelt out. Meanwhile, as at the end of June 2009 quarter, the company’s consolidated net debt stands reduced by Rs 3,891 crore to Rs 49,170 crore.

Outlook
Tata Steel’s major concern remains to be its international business where the improvement is only expected after September 2009 quarter. Meanwhile, as it is taking steps to bring down cost, there are early signs of demand picking up in the European region, which should help improve Corus’ utilisation levels. This along with the benefits of higher international steel prices should mean better profitability in the coming quarters. However, the full benefits of the initiatives and recent developments should only be seen from 2010-11, through a strong recovery in earnings believe analysts. “We think Tata Steel has reached the bottom of its earnings cycle, and we expect a sharp recovery from the December 2009 quarter,” says Arora. The stock, which is trading at 6.5 times estimated 2010-11 earnings, is partly factoring in a recovery, the sustainability of which will only get confirmed over the coming months. In this light, experts believe that investors can consider the stock on dips but with a 2-3 year perspective

TVS Motor: Stuck in second gear

Even on a low base, TVS Motor’s revenues for the June quarter were up just a shade over 7 per cent year-on-year to Rs 976 crore, driven by a 5 per cent increase in volumes. That’s probably because it was mainly scooters that drove up sales. On the back of lower raw material prices, the company, however, posted its highest Ebitda (earnings before interest, tax, depreciation and amortisation) of 5.3 per cent in almost three years.

Unless the cost of inputs remains stable, which seems unlikely, the company is unlikely to be able to sustain margins at the current level. Of course, a sharp increase in sales of motorcycles could help but despite a couple of new launches — variants of Apache and Flame — sales of motorcycles remain muted.

In the current year so far, they are down around 10 per cent. Besides, the ramp-up in volumes for three-wheelers has been somewhat disappointing though the TVS Scooty Streak has done well. TVS is expected to post revenues of around Rs 4,100 crore this year while net profit should come in at around Rs 65 crore. At the current price of Rs 57, the stock trades at a multiple of close to 21 times estimated 2009-10 earnings and is expensive.

GMR Infra: Flying low

Profitability could be under pressure in the near term due to high fixed costs on various projects.

GMR Infrastructure’s operating profit margins, at just over 27 per cent in the June 2009 quarter, were somewhat disappointing and came in 250-300 basis points lower than what analysts had pencilled in. While the margins were up 30 basis points year-on-year, they were muted thanks to the weaker profitability of the power division, for which margins came off by about 700 basis points.

The power division contributes slightly more than 50 per cent to the company’s revenues, with airports and roads bringing in the rest. During the June quarter, GMR was precluded from selling power from its Tanir Bavi plant in Karnataka as merchant sales. As a result, power was diverted to the state government and fetched lower realisations, leaving only a small surplus after production costs were taken care of. Nevertheless, GMR’s revenues for the quarter rose a reasonably good 33 per cent year-on-year to Rs 1,180 crore, with a couple of new roads commissioned and also revenues flowing in from the joint venture constructing the Sabiha Gokcen airport.

However, with air traffic yet to pick up, revenues from airports were up just 16 per cent. On the cost side, the commissioning of new roads led to higher depreciation and the company also paid out nearly Rs 200 crore by way of interest. All in all, the muted operating margins, coupled with high interest and depreciation charges, resulted in a fairly steep fall of 70 per cent in the profit after tax to Rs 22.5 crore. GMR has a fairly strong balance sheet and is well–positioned to cash in on the growth in infrastructure in the country in the next few years, given that it has a presence across sectors such as power, roads and airports.

However, industry watchers believe that revenues from airports and roads would remain muted in the near term, with the economy yet to recover from the downturn, while the high fixed costs (interest and depreciation) on the newer projects could hurt profitability. GMR is expected to turn in revenues of around Rs 5,300 crore in the current year, an increase of around 20 per cent over 2008-09, while the earnings per share are expected to go up by about 35 per cent. IDFC SSKI has a fair value of Rs 124 for the stock which currently trades at around Rs 132.

Asian Paints - A strong finish

The decline in housing loan rates, focus on affordable housing, cut in excise duty on paints as well as on automobiles and the emphasis on infrastructure should help Asian Paints sustain decent growth rates. The relatively lower input costs are also helping the Rs 13,500 crore paint industry, two-thirds of which is controlled by the organised segment.

Asian Paints is the largest domestic player with a market share of around 43-45 per cent in the organised sphere, about twice as large as its nearest competitor.

COLOURFUL PALETTE
in Rs crore	FY 09A	FY 10E	FY11E
Net sales	5,463.0	5,950.0	6,702.0
Operating profit	669.0	776.0	884.0
Adj net profit	401.0	467.0	538.0
EPS (Rs)	41.8	49.0	58.0
PE (x)	26.5	22.6	19.1
E: analyst estimates

Although the sharp slowdown seen in end-2008 also impacted Asian Paints, the company’s March 2009 quarter performance is reflecting visible signs of recovery and provides comfort.

The company’s Rs 400 crore expansion programme is also on track for commissioning in April 2010, which will result in a 35-40 per cent increase in its domestic production capacity. This should help it capture any recovery in demand in the medium-term.

Decorative: Looking better
If experts are to be believed, the worst (for the economy) is behind us, and even though growth rates may not look up in a hurry, the current scenario should hold on. For Asian Paints, its sales volumes which were impacted in the December 2008 quarter were up by 12-13 per cent in March 2009 quarter.

A combination of factors helped including strong demand in tier I and II cities, marriage season in March quarter and increased stocking by the trade post de-stocking in the December 2008 quarter.

Analysts now expect the company to clock 10-12 per cent volume growth in 2009-10, led by the improving environment and Asian Paints stronghold in the business.

The company has a strong brand portfolio, which along with a presence at various price points would help reach to diverse pockets in the decorative space. Popular brands include “Tractor” in the lower-end paint range (distemper), “Royale play” in emulsions, “Utsav” in enamels in the interior walls space.

Apart from leadership in interior walls space, the company has been focusing on external paints with brands like “Ace” and “Apex” and has emerged as the market leader in the external segment. Apart from its wide product range, access to distribution network of over 25,000 retail outlets ensures greater visibility for its products.

The other respite for the company has come in the form of lower costs. The paints sector uses around 300 raw materials (around 50 per cent crude-based derivatives) in the manufacturing process. The rapid fall in crude oil prices (and the rupee’s appreciation) have reduced pressure on the raw material front.

Besides raw materials, the announcement of duty cuts in December 2008 has meant that excise duty on paints has come down from 14 per cent to 10 per cent. These events have allowed paint players like Asian paints to pass on some gains (price cuts) to customers. Nonetheless, margins are likely to improve to 13.5-14.0 per cent levels seen in the past (excluding 2008-09).

Beyond domestic borders
International operations add around 17 per cent to consolidated revenues with regions like Middle-East contributing substantially. The Middle-East region along with emerging markets of South- Asia has been the major growth drivers, each growing at above 35 per cent. Superior growth rates in these regions helped international operations to grow at 28 per cent in 2008-09 as compared to 12 per cent growth seen in 2007-08.

As the slowdown is sparing none, the resultant fall in crude prices was also anticipated to impact demand in the Middle-East markets. Analysts believe that even as there could be some short-term pressures (in some markets), the longer-term potential is huge in these markets and Middle-East should continue to drive the company’s international sales.

Meanwhile, Asian Paints is setting up a new plant in Egypt, which is perhaps some indication of the future. Overall, the company’s focused initiatives like product introductions, dealer tinting systems and also increasing operating efficiency would boost growth rates in the future.

Financials: Enviable
Barring short-term blips like the one seen in 2008, Asian Paints’ performance has been good with consolidated sales and net profits growing by 19 per cent and 30 per cent, respectively on an average in the last five years.

Apart from positive cash flows for each of the last ten years, the company has also been generating high returns on the capital employed in its business (over 50 per cent in the last four years). These have helped it to payout an average 50 per cent of its net profit as dividend to its shareholders, which is high given that only a few Indian companies do so.

With the domestic economy showing signs of stability (expectations of an improvement from second half of 2009-10), the company should report decent growth in volumes. But, as realisations may not keep pace (due to price cuts), the sales growth is seen at 9-10 per cent in 2009-10. However, with prices of inputs lower, margins should improve helping the company report a profit growth of 15-18 per cent.

Outlook
The average sales volume growth in the industry has a high correlation to the general economic activity, thus earlier high GDP rates has helped decorative as well industrial paints segments do well. With the economic outlook seen improving, the growth pressures should also subside.

On the other hand, given India’s low per capita consumption of paint of around 750 grams; about half of China’s and much lower compared to developed market (15-20 kg), experts suggest that the demand should remain healthy in the long-run as well.

The improving demographics and income levels, rising individual aspirations and planned investments in industrial and infrastructure capex are some macro factors that will provide a fillip to demand for paints. The prospect in other global markets where Asian Paints operates is also reasonably decent. Thus, expect the company to gain in the years to come.

Meanwhile, analysts expect the company to clock 16-18 per cent annual growth in profits over 2009-10 and 2010-11. At Rs 1,108 the stock is trading at 19 times its estimated 2010-11 earnings. While it appears relatively expensive as compared to the BSE Sensex, it has commanded a healthy premium over the latter. Investors with a long-term perspective can consider the stock on dips.