Indian Stock Market Blog

Various Reports October 12, 2006

RIL Ind Report.

LNT Report.

ONGC Report.

IT Services Reports.

BHEL Report.

Auto Report.

Bajaj Hindustan: HSBC October 12, 2006

Bajaj Hind Report.

Infosys All Thumbs Up. October 11, 2006

Its other income is at Rs 66 crore (Rs 660 million) versus Rs 128 crore (Rs 1.28 billion).
The EPS is at Rs 16.75
Infosys Q2 adds 45 clients, gross addition of 10,795 employees
Infosys’ Guidence FY07
The company’s FY07 revenue growth guidance revised upwards at 45.5%
Its revenue guidance is of over USD 3 billion, EPS guidance of Rs 66
Its revenue guidance is up from Rs 13,400 crore (Rs 134 billion) to Rs 13,899 crore (Rs 138.99 billion).
The EPS guidance up from Rs 62.25-62.87 to Rs 66.

Brokerages see 25% rise in Q2 earnings!! October 8, 2006

Brokerages see 25% rise in Q2 earnings of banking, auto and cement sectors.

The automobile, banking and cement sectors are likely to see 20 to 25 per cent increase in their topline for the quarter ended September 30 as India Inc is set to witness another round of robust results in the Q2 earnings season beginning this week with the results of Infosys to be declared on Wednesday.

According to earnings preview by brokerage houses, information technology, pharmaceuticals and oil and gas sectors could also throw up positive surprises in the second quarter.

The second quarter of 2006-07, which saw 17.4 per cent increase in benchmark share index BSE Sensex, has also seen significant upward revision in earnings estimate, as risks such as interest rate hikes and crude prices lowered, they said.

“Some of these risks have lessened during the quarter. The interest rate cycle has turned down, with 10-year G-Sec yields falling from a high of 8.4 per cent in July 2006 to the current levels of 7.6 per cent. Crude prices have dropped by nearly 20 per cent, in turn, improving the outlook for corporate earnings and current account deficit,” said brokerage house Motilal Oswal Securities Ltd.

Among the sectors, cement is likely to beat others with a 38 to 40 per cent increase in topline, predicts a report by Sharekhan Ltd.

“The cement sector is expected to pick up from where its impressive Q1 performance ended. We expect the cement sector as a whole to report an impressive performance during Q2 owing to 9 to 10 per cent growth in the cement volumes and a huge 29 to 30 per cent rise in cement realisations. Hence, this sets a benchmark of 38 to 40 per cent growth in the topline,” the report said.

Despite the seasonal slowdown in demand, cement prices have remained firm and are once again set to increase as monsoon retreats. “In fact, we estimate a price rise of Rs 20 Rs 25 a bag in the next 6 to 8 months,” said BRICS Private Client Group, in its earnings preview.

On the automobile sector, Motilal Oswal report said major auto companies are expected to register a revenue growth of around 20 per cent, with EBITDA growth of 30 per cent YoY.

“Despite higher input costs in the second quarter of 2006, EBITDA margins increased by 440 basis points. We believe that strong volume growth in FY07 would help automobile majors to maintain their margins at 2006 levels.”

“Input costs of players across the industry spiralled in the first quarter, but with easing metal prices, cost pressure is expected to reduce in Q2, hence we estimate operating margins to be stable,” said a report by Angel Broking.

Another key sector which is expected to report good numbers is banking. Gaining from 46 basis points fall in the yield rates during the quarter, most of the banks are expected to lower their mark-to-market losses, the brokerage houses said.

“Better treasury incomes would allow public sector banks to write back provisions made for depreciation in their debt investment and thereby enable them to report higher profits in Q2,” the Angel Broking report said.

On the IT sector, the Angel Broking report added, “Amidst fears of global slowdown in the years, we believe that IT discretionary spending will get affected. While data from the US economy have been mixed, the Indian software companies have been strong. We believe that strong results from IT majors will allay such fears, as they are a good indicator of the spending patterns of global corporations, which seem to be robust.”

Hindujas cut IndusInd stake. October 8, 2006

Hinduja group promoted Ashok Leyland has reduced its stake in IndusInd Bank to RBI stipulated 10%. It sold around 2.89% to Credo Capital at Rs 46.06 a share.

Ashok Leyland, which held close to 13% stake in the bank, had to pare its holding before June 2005 to adhere to RBI guidelines. However, it had sought an extension from the regulator. RBI, in its ownership guideline, states that no single corporate entity can hold more than 10% in a bank.

Leyland held 75% stake in Ashok Leyland Finance (ALF). Following the ALF merger with IndusInd Bank in June last year, its stake rose to 15.3% in the bank.

Another major shareholder in the bank — IndusInd International Holdings (IIHL), a Mauritius-based company_ — holds little over 23%.

IIHL is largely owned by the Hindujas. Promoter and promoter group holding in IndusInd is at 31.34%. To meet the RBI diktat, the promoters will also have to pare their stake further in the bank.

The Akpo field, about 200 km off the Nigerian coast and operated by French energy giant Total, is expected to produce 225,000 barrels of oil a day when it comes on stream in the second half of 2008.

However, the government insisted Sapetro must relinquish the entire block, which was originally set to run through 2008.

Tata Cofee- Buy. October 8, 2006

Investors can consider taking exposure in the Tata Coffee stock, which trades at about 18 times its 2005-06 earnings. The Eight O’ Clock (EOC) acquisition, instant coffee expansion plans, and the turnaround of the recently acquired tea plantations augur well for the stock.

The EOC acquisition provides Tata Coffee access to brands, while the Tata Tea distribution network provides its access to a wider geographical spread.

The company is planning a rights offer of partly convertible debentures (PCD) to partly finance its EOC acquisition and other capacity expansion requirements.

The PCD will have a face value of Rs 400, with Rs 250 convertible into equity on allotment and the debt component to be redeemed from the fourth year.

Tata Coffee derives a chunk of its revenue from coffee growing, processing and instant coffee manufacturing. Though the company has for long been susceptible to trends in coffee prices, the degree of this susceptibility is set to decrease with the company foraying into retailing and expanding its instant coffee operations.

Though prices are likely to remain flat on the back of strong inventory levels in major consuming countries, earnings growth for Tata Coffee would flow from its instant coffee and retail business.

Instant coffee business

Tata Coffee plans to focus on its instant coffee business. Higher value-addition from this segment is expected to be an earnings growth driver in the medium term. With this business providing higher margins and a respectable return on capital employed, Tata Coffee plans to increase the capacities of its existing instant coffee business. At present, the company operates two facilities with a total capacity of 4,500 tonnes. Volumes of its instant coffee business is set to rise with Tata Coffee setting up a 2,000 tonne plant.

Margins of this facility are likely to be higher as freeze-dried coffee commands higher realisations than spray dried-coffee.

Eight O’ Clock Coffee

In June, Tata Coffee entered in to an agreement for Eight O’ Clock Coffee (EOC), a coffee manufacturer and distributor in the US from Gryphon Investors for $220 million (about Rs 1,000 crore).

EOC is among the larger players in the gourmet coffee segment and among the top coffee retailers in the US. With EOC under its fold, Tata Coffee has access to a spectrum of established brands. With Tata Tea continuing its acquisition spree, prospects are bright for Tata Coffee as it could pursue other markets by leveraging Tata Tea’s distribution network in countries other than the US.

Tea business

With intent to diversify its risk profile, Tata Coffee acquired the South Indian tea plantation business of its holding company, Tata Tea, at the start of 2006. The decision is paying off with the company’s tea division having reported an earnings contribution in the first quarter of FY-07 despite lower prices compared to a year ago. With better Kenyan production figures and global tea prices heading southwards, sustaining earnings growth could be difficult in the near term. However, over the medium term, this division is expected to retain its profitability, with scope for a reduction in its growing costs.

Pepper, vanilla and timber, which are intercropped with coffee trees, contribute marginally to Tata Coffee’s revenue. Though revenues and earnings growth from these products are unlikely to be substantial, they provide the company an additional stream of revenue. Tata Coffee also cultivates cardamom, which helps in diversifying its risk profile. The company also has a presence in the vending business branded as Jiffy and coffee retail business in India through its Mr Bean outlets.

Petronet LNG-Buy. October 8, 2006

After being in hibernation for the last couple of months when it remained range-bound in the Rs 45-50 band, the Petronet LNG stock turned active on Thursday hitting the upper circuit filter at Rs 58. While the stock appears fully priced after the surge, long-term investors can still take positions at the current price.

The capacity expansion at Dahej and the prospect of an important deal for LNG supply being tied up soon offer confidence in the long-term even as near-term earnings get a boost from the company’s strategy of contracting spot LNG cargoes for ready buyers.

An acceptance by Qatar of the government’s offer to pick-up equity in the company will be a big positive as the former will turn into a stakeholder in Petronet from the position of just being a supplier of LNG. Given India’s growing appetite for energy, especially natural gas, Qatar’s interest in Petronet may ensure adequate LNG supply on favourable terms.

Sole LNG play

Petronet LNG, promoted by IOC, ONGC, BPCL and GAIL, has a 25-year agreement for import of 7.5 million tonnes of LNG from Ras Gas of Qatar.

The Dahej import and re-gasification terminal takes up five million tonnes of this now; supplies of the balance will commence in 2009 when the capacity at Dahej is doubled.

Petronet is also in the process of beginning work on a second import terminal at Kochi, which is likely to go onstream by 2011 taking the company’s total re-gasification capacity to 15 million tonnes per annum.

The demand for natural gas is projected to shoot up to 300 million standard cubic metres per day by 2011 with supply lagging, leaving enough scope for Petronet’s business.

The key, of course, will be availability of adequate quantum of LNG on long-term contract. Petronet is in talks with the operators of the Northwest Shelf LNG project in Australia for a possible long-term supply for the planned Kochi terminal.

This is in addition to the request for 10 million tonnes placed with Qatar last week. The LNG business has turned into a sellers’ market now and there is big demand for the existing un-contracted supply sources, including in Qatar.

Access to LNG and its pricing will, therefore, constitute the major challenges facing Petronet in the medium-term, which will be covered if Qatar becomes a stakeholder in the company.

Assuming this does not happen, Petronet will be faced with a stiff challenge in arranging long-term supply for its expansion projects at competitive prices.

Along with the prevailing price of liquid fuel alternatives such as naphtha and fuel oil, the economics of the natural gas market will be determined by domestically produced gas, which is expected to enter the market by 2009.

Therefore, it is important for Petronet to get the best possible LNG price from its suppliers for it to be competitive in the domestic market.

Spot support

Given that buoyancy in revenue and earnings can come only from higher volumes, Petronet has actively sought out spot market LNG cargoes. The company has contracted four such cargoes in the first half of this fiscal with an equal number likely in the second.

The company has not faced any difficulty in marketing this gas at almost double the existing price given the comparatively high prevailing prices of liquid fuel alternatives. The advantage of this strategy is that re-gasification charges go straight to the bottomline as there is no extra cost involved. Thanks to this, earnings received a boost in the first quarter.

Spot cargoes will be a critical factor in keeping near-to-medium/term earnings and revenues buoyant till capacity expansion is completed and LNG from long-term contracts starts flowing in.

Investors with a long-term perspective can accumulate the stock at current levels.

PSL- Buy. October 8, 2006

Investors can consider fresh exposure in small lots in PSL at its current price of about Rs 200.The stock is valued at about 10 times its likely FY-07 per share earnings. The stock’s current valuation has not fully captured the potential upside associated with its large-size orders. A robust order book, buoyancy in the oil and gas sector and a healthy volume growth from recently added capacities are encouraging trends for PSL in the medium term. However, there are concerns relating to the low trading volumes in the stock. Business prospects are positive and hence an expansion in its multiple is expected over the near-to-medium term.

PSL is a key enabler for infrastructure and construction projects and is engaged in various types of pipe coating and pipe manufacturing. Its supplies are largely to companies in the oil and gas transportation sector.

Currently, PSL has an order book of around Rs 1,600 crore, which is more than its revenue for FY-06. These orders are likely to be completed in the next 9-12 months, thereby improving its earnings visibility.

Activity in oil and gas exploration is set to intensify over the next few years; this is evident from the huge investment plans by various companies in the domestic and global markets. This is likely to translate into more orders for PSL.

That its order profile too has improved is another encouraging sign. From merely executing orders in the oil and gas business, PSL is now diversifying into areas such as design, engineering, supply and installation in offshore pipe coating. This model is likely to improve its margins.

PSL has an impressive clientele, which includes ONGC, GAIL, HPCL and IOC. It recently bagged an order from Reliance Ports and Terminal worth Rs 95 crore for the supply of anti-corrosion pipes, and another order from L&T worth Rs 270 crore for supply of coated pipes for the Rajasthan water pipeline project. These contracts are likely to act as catalysts in attracting more orders from the private sector.

PSL has virtually doubled the capacity of its pipes division with the addition of three pipe mills the last quarter. The aggregate pipe-manufacturing capacity of PSL now stands at 11,00,000 tonnes per annum. This is likely to ensure healthy growth in volumes for the company over the next few years.

PSL’s debt-equity ratio has improved from 3.8:1 last year to 2:1 now. This is still on the high side compared to the industry average of about 1.5:1. However, healthy cash flows from operations (in the region of Rs 100-150 crore) over the next few years are likely to be used to bring down its level of gearing.

Eyeing overseas markets

PSL is increasing focus in the overseas markets and has built a significant presence in West Asia and North-East African countries. It is in the process of implementing the high-pressure gas pipeline project in the UAE. The overseas operations, apart from de-risking its revenue-base, are also likely to result in widening its client base.

Lower-than-expected capacity utilisation and delays in project execution remain the principal risks to the recommendation.

Murudeshwar Ceramics- Buy. October 8, 2006

Investors can consider exposure in the stock of Murudeshwar Ceramics with a 1-2 year perspective.

Increase in demand for ceramic tiles, strong presence in the high premium vitrified tiles segment, and various cost efficiency measures adopted augur well for the company’s earnings growth. At the current market price of Rs 100, the stock trades at six times its likely FY-07 earnings (on a diluted basis) and is at a discount to peers such as Kajaria Ceramics.

Cost efficiencies

Murudeshwar’s operating profit margins (OPMs) at 32 per cent is far superior to competitors with OPMs of less than 20 per cent in 2005-06.

While the expansion in ceramic tiles business is likely to reduce margins, cost efficiency measures adopted by the company can offer some protection.

Murudeshwar’s Karaikal plant enjoys lower fuel cost with natural gas supply. While the same is not yet available in its Hubli plant, it produces value-added products in non-standard sizes that typically fetch higher realisation to maintain the OPM.

It has recently gone in for superior technology called dry process that consumes lower power.

The above factors offer an edge over peers such as Nitco Tiles. It has its own quarry and processing unit of china clay — a key raw material, thus keeping manufacturing costs at bay.

Murudeshwar has a market share of about 30 per cent in the vitrified tile capacity. Vitrified tiles are priced between ceramic tiles and Italian marbles.

The tile is more scratch and break resistant and offers a substitute to natural granite and Italian marble at a lesser price. Murudeshwar has expanded capacity of this high-margin product.

While the proportion of vitrified tiles in the total revenue can decline as a result of heightened activity in the ceramic tile division, increased volumes in the latter segment is likely to sustain the bottom line.

Murudeshwar’s institutional clients constitute 60 per cent of total sales. Increased activity in the retail and office space is likely to keep demand robust.

Risks

The domestic tile industry continues to be threatened by cheap imports of Chinese products.

Levy of anti-dumping duty has not provided the needed relief as the tiles are still being routed through countries such as Indonesia and Malaysia.

This can affect the price realisation and market share of organised players.

Competition from low-cost tiles from the unorganised market also remains a concern.

Ashok Leyland-Buy. October 8, 2006

Investors can consider buying Ashok Leyland at the current market price of Rs 49. The stock has been rising in the last two weeks following talk of a multinational commercial vehicle manufacturer picking up equity in the company. However, on fundamental factors alone the stock is an attractive buy for those with a long-term holding perspective.

There has been runaway demand growth in excess of 40 per cent for commercial vehicles in the first half of this fiscal, following the extraordinarygrowth in the overall economy. The strong freight market has ensured that neither high fuel prices nor higher interest rates would cause problems for transporters and in turn, vehicle manufacturers. Continued investment in infrastructure and on highway construction is likely to sustain demand for commercial vehicles, especially in the heavy category.

Ashok Leyland is well positioned to exploit the demand, especially for multi-axle and tractor-trailer trucks. The company has been unable to meet the demand from this segment in the first half and says the order book for the second is already full. However, in the other booming segment of sub-tonne commercial vehicles, where the Tata Ace is ruling the roost, Ashok Leyland does not have a presence. The recent acquisition of Czech light truck makerAvia may help the company fill up this gap in its portfolio, assuming that it decides to bring those models to India.

The company has a successful cost management programme in place, including e-sourcing of materials and components that has helped it reduce costs significantly. Ashok Leyland is also consciously de-risking its business model by focusing more on the non-cyclical sectors of defence supplies, spare parts and engine sales.

If the talk of a multinational vehicle manufacturer taking up equity in the company turns out to be true, it would be a major positive for Ashok Leyland’s business. The company needs to broad base its products and access latest technology to stay abreast of the high quality competition expected in the domestic market that now has almost all the big multinational commercial vehicle manufacturers. A big multinational partner will certainly help.