Indian Stock Market Blog

MNM Buy. August 30, 2006

Broking house, Sharekhan is bullish on Mahindra and Mahindra. It has recommended buy rating on the stock with a price target of Rs 700.
The Sharekhan report on Mahindra and Mahindra:
“Mahindra and Mahindra, M&M is in the process of unlocking value in its subsidiaries. In February 2006 M&M divested its stake in Mahindra and Mahindra Financial Services MMFSL and now with the Tech Mahindra initial public offering, IPO, its stake in this subsidiary is also being valued by the public.”

“These divestments are in line with the company’s policy of promoting investments in appropriate businesses and monetising the same at an opportune moment for creating wealth for the company’s shareholders.”
“Investments account for 42% of the company’s total capital employed as on March 31, 2006. More than 50% of these investments are in equity shares of its subsidiary companies. The subsidiaries that are witnessing a huge jump in their profitability or improvement in their performances are being divested. Next on the cards for divestment is Mahindra and Mahindra Holiday Resorts.”
Gains from Tech Mahindra listing
“M&M had offered 4.7% of its stake for sale in the Tech Mahindra IPO. The value of the stake sold at Rs 365 per share works out to Rs 140 crore (Rs 1.40 billion). With the stock getting listed today the value of M&M’s remaining 46.4% stake at Rs 553 works out to Rs 2,973.83 crore (Rs 29.73 billion) and Rs 125 per share of M&M.”
Valuation of M&M’s stake in quoted subsidiaries
Subsidiaries M&M’s holding (%) Value per sh Basis of valuation
Tech Mahindra 46.4 Rs 125
MMFSL 67.7 Rs 56.4
Mahindra Gesco 40.5 Rs 38.2
Total Rs 220
Outlook and valuations remain attractive
“We believe that the IPOs of key companies will increase the visibility of M&M’s value in its subsidiaries. The outlook on the core business remains healthy with robust tractor sales, a normal monsoon and an entry into other business areas such as cars, commercial vehicles and auto components. Even amid the rising raw material cost scenario, the company has been able to increase its operating margins owing to its rising efficiencies and cost saving measures. We expect the company to maintain its margins going forward.”
“At the current market price of Rs 651, the stock quotes at 10.2x its FY2008E consolidated earnings. We maintain our Buy recommendation on the stock with a price target of Rs 700.”

HCL Tech Buy. August 30, 2006

Broking house, P-Sec is bullish on HCL Technologies and has recommended buy rating on the stock with a target of Rs 651.
P-Sec report on HCL Technologies:
“The topline of Rs 12538 million (11.75% q-o-q, 35.2% y-o-y) for the quarter has been better than our estimates, with strong traction in the ADM and IMS businesses. The robust topline has translated into even stronger PAT of Rs 2330 million (43.8% y-o-y, 19.0% q-o-q), a fall out of tax write backs. The operating margins have improved by 18 bps factoring in the rupee depreciation. With the company entering the salary revision phase of the year we expect the margins to remain under pressure.”
“The full year FY06 numbers have been above our estimates reflecting a stronger than expected Q4. We have introduced FY08 estimates with an EPS estimate of 37.2. The stock is trading at a P.E of 19.3x FY07P and 15.4x FY08P EPS, attractive enough to be recommended a BUY with a price target of Rs 651. The spread between the CMP and our target price is compelling enough to recommend a buy, but we still remain concerned about the lumpiness in the quarterly performance of the company.”

Oil Calms. August 29, 2006

Crude oil traded near an eight-day low in New York as Tropical Storm Ernesto is expected to miss oil and gas production sites in the Gulf of Mexico.

Royal Dutch Shell Plc plans to return workers to rigs and platforms after Ernesto, which struck southern Cuba yesterday, moved north-east on its way to Florida and South Carolina. BP Plc, the world’s third-largest oil company, said it has restored output from its Prudhoe Bay field in Alaska to about 200,000 barrels a day, half the daily production capacity.

“The bears have some ammunition here now,” said Mike Sander, a commodity broker at Altavest Worldwide Trading Inc. in Mission Viejo, California. Ernesto “looks like it’s heading up the eastern seaboard. It isn’t going to do any damage in the Gulf.”

Crude oil for October delivery was at $70.48 a barrel, down 13 cents, in after-hours electronic trading on the New York Mercantile Exchange at 9:40 a.m. in Singapore. Prices today are 4.9 percent higher than a year ago.

The contract reached $73.75 on Aug. 25 when Ernesto was forecast to strengthen to a hurricane before crossing the Gulf of Mexico, source of a quarter of U.S. oil production. It fell $1.90, or 2.6 percent, to $70.61 yesterday, the lowest close since Aug. 17.

Prudhoe Bay, the largest field in the U.S., is operating at about half its 400,000 barrel-a-day capacity after BP said Aug. 6 much of its pipeline network needs repairs. Output fell to about 110,000 barrels a day last week after a compressor failed.

Inventories, Iran

An Energy Department report tomorrow will probably show U.S. refinery activity reached a two-month high last week to meet the last of summer holiday gasoline demand. Aug. 31 marks the United Nation’s deadline for Iran, the world’s fourth-biggest oil producer, to halt its uranium enrichment.

“If the refiners are running at higher capacity and maybe nothing very negative comes out of Iran, then oil may go lower,” Altavest’s Sander said. “If the market can close below $70, I would be going short.”

Oil reached a record $78.40 on July 14 on concern fighting between Israel and Iranian-based Hezbollah forces in Lebanon may have spread in the Middle East, source of almost a third of the world’s oil.

France and Germany want the international community to preserve the “possibility for dialogue” with Iran, Agence France-Presse reported, citing a meeting of the two countries’ foreign ministers yesterday.

“It doesn’t look like there will be any clear-cut answers for quite a while,” Tom Bentz, an oil broker with BNP Paribas Commodity Futures Inc. in New York, said yesterday. “Even if we take a tough line against Iran on Aug. 31 it will probably take a long time before any action is taken.”

Gasoline

Gasoline for September delivery was at $1.7865 a gallon in after-hours trading. The contract, which expires Aug. 31, fell 11.2 cents, or 5.9 percent, to $1.7831 yesterday, the lowest close since March 22. October gasoline was at $1.7760 in after- hours trading after falling 5.7 percent yesterday.

Demand for the motor-fuel in the U.S., the world’s biggest oil user, eases after the Labor Day holiday early September marks the end of the summer vacations. The three-day holiday weekend ends Sept. 4.

An Energy Department report tomorrow will probably show U.S. refiners used 93 percent of their plant capacity last week, up from 92.8 percent the week before, according to a Bloomberg News analyst survey.

Oil stockpiles, 10 percent above the five-year average at 330.4 million barrels, probably fell by 1.4 million last week, based on the median estimate of the 10 analysts surveyed.

Gasoline supplies, also above average at 205.8 million barrels, probably fell by 600,000 barrels last week.

Tata Chemicals Buy. August 28, 2006

Investors can consider taking exposure in the Tata Chemicals stock, which trades at about 15 times its standalone earnings for FY-06. Buoyed by an upturn in its soda ash and cement businesses, the company’s inorganic chemicals division recorded a spurt in revenue and earnings in recent quarters. The uptrend in the soda ash and cement businesses is expected to continue in the medium term, bolstering earnings growth. The Brunner Mond acquisition enhances growth opportunities in the soda ash business. However, volumes are likely to be higher in the fertiliser business.

Soda ash

Soda ash contributes 20 per cent of Tata Chemicals’ standalone revenues. The company caters to a wide spectrum of the user industry as it makes a variety of grades. Growth opportunities in the realty space are likely to bolster demand for float glass. This, in turn, is likely to result in volume growth for the soda ash industry as the float glass sector is among the major consumers of dense soda ash. Tata Chemicals, which is among the larger manufacturers of dense soda ash, is poised to tap this growth opportunity. Growth in the automotive glass sector is likely to contribute to better offtake.

The buoyant trend in the steel industry is also likely to heighten the demand for soda ash. Higher offtake for detergents on the back of rising rural incomes, is likely to have a spin-off effect on light soda ash. The expansion in the paper industry, which is also among the larger consumers of soda ash, is likely to translate into higher volumes for the soda ash industry.

Growth opportunities are reflected in the extensive use by the construction industry of glass, for which soda ash is a key input.

Rising prices of soda ash in the domestic market are likely to improve margins for Tata Chemicals. This trend may continue in the medium term, as there are only a few players in this business. The global situation also provides comfort with FMC Wyoming Corporation of the US having raised prices by 10 per cent with effect from July after a similar hike in October 2005. Rising global prices reduces the threat of imports; however, declining prices of caustic soda — an alternative to soda ash — are a cause for concern.

Brunner Mond

The acquisition of Brunner Mond has propelled Tata Chemicals into the league of global soda ash majors. With this acquisition, Tata Chemicals’ soda ash business is expected to contribute about 50 per cent of its consolidated revenues. The Brunner Mond Group has manufacturing facilities in the UK, the Netherlands and Kenya with a capacity of 16 lakh tonnes, 45 per cent of which is for making dense soda ash,which has better realisations.

With Brunner Mond under its belt, Tata Chemicals has access to the markets of Europe, Africa, Pakistan and the Asean region and better reach to West Asia. The acquisition also gives Tata Chemicals access to the natural soda ash process, which is cost-competitive.

Tata Chemicals plans to leverage this competitiveness by doubling the capacity of its Kenyan facility to about 7lakh tonnes at a cost of about $100 million (about Rs 450 crore). Kenya is among the key players in the natural soda ash business, next only in size to the US. The acquisition has also enhanced Tata Chemicals’ sodium bicarbonate capacity to about 2.25 lakh tonnes.

Brunner Mond’s European sodium bicarbonate business caters mainly to the pharmaceutical sector. The company plans to tap Brunner Mond’s cost-reduction strategies in the soda ash business and technology in the sodium bicarbonate segment, besides increasing the salt business of its Kenyan operations.

Fertilisers

Tata Chemicals’ fertiliser division contributes about 60 per cent of its standalone revenues. The prospects of the fertiliser business depend largely on Government policy.

Abundant rainfall and healthy water storage levels across the country are likely to result in higher offtake for its fertiliser business. To ensure availability of phosphoric acid, Tata Chemicals acquired a 33 per cent stake in IMACID, which was earlier a 50:50 joint venture between the Kingdom of Morocco and Chambal Fertilisers and Chemicals.

Food and other businesses

Tata Chemicals, at its domestic facility, also manufactures sodium bicarbonate, cement and caustic soda and chlorine, sodium tri-polyphosphate (STPP), cooking soda and iodised salt. Though these businesses play a smaller role on the revenues front, they provide Tata Chemicals with sizeable cash flows. Volumes are expected to better for STPP, an active ingredient in detergents.

Growth in the realty and infrastructure space would provide volumes for cement; consolidation in the sector would help firm up prices. The caustic soda business is likely to face margin pressure in the medium term with global prices on the decline since December.

Investment book

Tata Chemicals’ sizeable investment book provides cushion against downside risk. The company would be among the key beneficiaries, should the Tata group decide to unlock its intra-group holdings.

Hotel Leela Buy. August 28, 2006

We reiterate our buy on the Hotel Leela Venture (Leela) stock and recommend exposure with a one/two-year perspective. Assuming a conservative growth estimate, the stock now trades at 16 times its expected per share earnings for FY-08 on a fully diluted basis. The valuations are at a discount to peers such as Asian Hotels.

Leela’s first quarter performance has been notable with revenue and earnings growth of 21 per cent and 63 per cent respectively, adjusted for the extraordinary income due to the sale of The Leela Business Park in Mumbai.

Leela would be one of the frontline hotel chains to gain from the well-poised economy, stable political environment and a healthy business-tourist traffic escalation. It has emerged as one of the major players in the premium segment, though it is present in western and southern India only. But it has identified this lacuna and embarked on an expansion spree to set up a pan-India presence to capitalise on the increasing demand in the country.

Leela’s Udaipur property is likely to contribute to revenues from FY-08 onwards. The palace hotel would host an array of restaurants and lounges, a spa and banquet facilities to cater to both the growing conventions and conference markets.

Growth avenues

With an increase in the IT and ITeS industries in Hyderabad and Pune, Leela’s entry into these cities should give a fillip to its revenues.

Both cities have in the recent past seen a surge in demand due to the growing number of business travellers; the occupancy rates (ORs) and the average room rents (ARRs) are on a high. Leela’s Hyderabad foray may, however, face stiff competition from the already-established players.

There are several players vying for Leela’s Chennai property that faces the sea, but with the growing demand-supply mismatch, this may not have an immediate effect on the occupancy rate.

The company’s bottomline could get affected due to softening of rates. However, the Chennai property is likely to contribute to revenues from FY-09 only.

With the growing need for serviced apartments, Leela’s entry into a contract to manage a Gurgaon property of 319 rooms and 90 apartments is a positive.

This move could help it cash in on the growing number of business travellers to the Delhi satellite that is emerging a major IT, ITeS and BPO centre.

Stable source of income

The revamping of the Mumbai property is expected to be completed by October, post which the contribution from the city is likely to improve further.

Leela’s Bangalore property, which has been enjoying the highest ARRs and ORs, recently expanded its capacity, but with the entry of other players, a softening of rates can be expected. This risk may be mitigated with the execution of other properties on time.

Leela’s Goa property saw a rise in ARR last year; room rents averaged around $400 per night.

With an increasing number of business conferences being conducted in the resort and a rise in the number of tourist arrivals, Goa would continue to attract revenues.

Leela’s food & beverages (F&B) business contributes significantly to the earnings and enjoys good margins.

With increased consumer spending, the F&B business would continue to be an alternate source of income for Leela.

Overseas Foray

Leela is eyeing the markets of West Asia, London and Singapore by way of management and operating contracts.

The Kempinski brand name that the group uses would help it attract West Asian travellers to its foreign and Indian properties.

Leela has funded its capex plans through a mix of debt and equity. Till such time the foreign currency convertible bonds (FCCBs) are converted fully, high gearing would be a cause for concern. The HUDCO settlement payment, when completed, would help it reduce debt considerably.

A slowdown in the growth of the economy, entry of foreign counterparts with comparable or lower tariffs, drop in tourist arrivals due to extraneous factors, and the possibility of supply outstripping demand, are key risks to our recommendation.

R System Buy. August 28, 2006

Investors can consider taking exposure in the R Systems International stock with a one/two-year perspective.

As the stock has run-up by about 10 per cent recently, investors can use any declines linked to the broad market to step up exposure. The stock trades at a price-earnings multiple of 13 times the expected per share earnings for calendar 2006.

Compared to the initial offer price of Rs 250, the stock trades at a 30 per cent discount. We had recommended that investors subscribe to the IPO in March, and we continue to remain bullish on the prospects for the company’s core business of outsourced product development (OPD). The relatively nascent growth of the OPD space, good client relationships, vertical expertise spanning banking/manufacturing and robust second-quarter performance lend strength to the stock.

The principal risks are the likely slowdown in the US economy, impacting IT spends in the OPD arena and higher volatility in financial performance owing to project relationships.

With greater willingness among Fortune 1000 companies to offshore their product portfolio, the OPD market has taken off in a big way. As offshoring continues to offer compelling cost and time-to-market advantage, several established and start-up companies in the US are capitalising on this potential. Using its proprietary pSuite execution framework and iPLM services that confer these advantages, R Systems has been able to build some established client relationships in this space. Though competition in the OPD space is stiff, the company’s visibility through these relationships is fairly high.

The company recently acquired the US-based WebConverse Inc., a technical support company with a special focus on the mobile applications market. The consideration payable on the acquisition works out to $10.7 million (inclusive of earn-outs). The company reported revenues of $5.1 million in calendar 2005.

To derisk its portfolio of offerings to some extent, R Systems had forayed into the banking domain by acquiring Indus Software in 2002 , and in manufacturing/logistics through a buyout of ECnet in 2004. Through Indus Software, the company offers solutions for the retail lending market and ECnet focusses on supply chain management solutions for manufacturing clients. GE is one of the key clients for the company’s banking suite, apart from ABN Amro and Standard Chartered.

Financial s

On a consolidated basis, for the second quarter-ended June, R Systems reported revenues of Rs 49.5 crore, up 26 per cent over the corresponding previous period. Post-tax earnings nearly doubled over this period and, even after excluding `other income’, have grown by over 70 per cent. With better control over operating expenses, the company has expanded its operating margins by nearly three percentage points to 13.6 per cent.

With higher utilisation levels and greater offshoring, R Systems will be able to steadily increase its operating margins.

Hindalco Buy. August 28, 2006

Investors may consider buying the Hindalco stock with a one- to two-year perspective. At its current price of Rs 172, the stock is trading at a multiple of about nine times its expected FY07 per-share earnings.

Hindalco has come out with a strong set of numbers for the June quarter. The highlight has been a strong rebound in its copper business. Higher capacity utilisation, coupled with a sharp recovery in treatment and refining charges (Tc/Rc), aided the copper division. Despite scheduled shutdown at one of its smelters, volume growth has been robust at 72 per cent. The spot Tc/Rc rates have contracted slightly on account of mining disruptions. However, contract Tc/Rc are likely to remain firm in the medium term, leaving scope for earnings expansion. The ramp up in copper production is likely to ensure higher volumes. This is also likely to buffer earnings from highly volatile prices. The overall outlook for copper business appears encouraging.

Hindalco’s aluminium business has also turned in an impressive performance. Firm aluminium prices and higher share of value-added products were factors behind the company’s strong numbers. Average realisations, which were higher by 35 per cent for aluminium and about 90 per cent for alumina on a YoY basis, helped in an over 10-percentage point expansion of the segment’s operating margins to 43.1 per cent. Alumina prices, which have nearly doubled over the last one year, are unlikely to sustain. Fresh supplies from China have already started flowing into the market. While this is expected to ease pressure on aluminium prices, higher demand and rising costs of fuel are likely to ensure that prices stabilise at higher levels. A superior product-mix, with value-added products currently contributing to 63 per cent of total output, is likely to place the company in a relatively comfortable position in the event of any cyclical downturn.

Hindalco has embarked on a series of brownfield and greenfield projects in alumina and aluminium. It expects these projects to commence operations in various stages starting December. This is likely to generate greater volumes and place Hindalco in a strong position to cater to the rising demand in the long term.

Aztec Software Target-Rs.204/=, Kotak Securities August 26, 2006

Kotak Securities maintained a price target of Rs.204 on Aztech software, which is based on FY08E earnings and continues to recommend a BUY. There could be potential non-linear growth arising from earnings-accretive acquisitions and/or co-ownership of IPRs.

Aztec added 16 new clients in Q1FY07. Higher billing rates and better leverage on costs is expected to lead to margin improvement over Q1FY07. Aztec has started recruiting employees from campuses. About 250 job offers have been made.

Aztec is currently looking at the emerging areas of wireless applications, network management, embedded software / device technologies and storage technologies. It may acquire companies in these spaces to cut down on the lead time required in penetrating these areas.

The company is expected to report net profits of Rs. 482 mn in FY07E and Rs.641 mn in FY08E. This will translate into earnings of Rs.14.6 per share in FY08. The current price discounts FY08E earnings estimates by 10x.

Buy BILT Target -161/=, EMKAY August 26, 2006

Emkay recommend a `Buy` on Ballarpur Industries with a target of Rs 161.

Revenues from the paper segment increased by 4.6% YoY for Q4FY06 to Rs 4.25 bn while pulp segment`s revenues improved by 19.9% YoY. The margins from paper was higher by 93 bps to 21% while the pulp margins increased by 53 bps to 5.3%.

The company is focused on increasing its market share in fast growing copier paper segment.

On major risks, rising fiber and energy prices are the two biggest concerns, since coal prices have started hardening and oil prices in global market are also on rising spree.

A price increase of Rs 750/- mt is expected in Sep, 06. This, coupled with the latest price rise in July, 06 shows increasing pricing power.

BILT’s acquisition of Sabah Forest (SFI), Malaysia, will help it to boost its topline in FY07 (partially) and FY08 (fully). SFI has total installed paper capacity of 144,000 mt and enjoys the benefit of full integration with captive pulp capacity and power plant.

The company now plans an expansion of 250,000 mtpa at bhigwan plant as against earlier 300,000 mtpa.

Copier paper market is expected to grow with 15-18% pa and BILT is aggressively targeting this growth opportunity.