We had initiated coverage on GNL on May 29, 2008 at a price of Rs.125.05 and recommended to accumulate on dips to Rs.106-110 band for a target of Rs.154. The stock subsequently made a high of Rs.133 on June 13, 2008. The stock later underperformed in line with the other small/midcaps and touched a low of Rs.70 on March 06, 2009. It later recovered and made a high of Rs.126 on June 03, 2009. Currently, the stock is quoting at Rs.101.80.
Company Profile:
Grindwell Norton Ltd. (GNL) came into being when a technical collaboration in 1967 between Grindwell and the then world leader in abrasives – Norton Company, USA, grew into a financial collaboration in 1971. GNL is a 51.3% subsidiary of Saint Gobain (SG) of France and India’s leading manufacturer of Abrasives (bonded, coated and super abrasives), Silicon Carbide and High Performance Refractories.
Q1CY09 Result Update
GNL recorded a 2.9% degrowth in revenues on a Y-o-Y basis in Q1CY09 and 2.3% fall Q-o-Q at Rs.114.3 cr. This was mainly on account of sharp fall in volumes and value of each of GNL’s products. Bonded abrasives witnessed fall of 15-20% in volumes, coated abrasives saw a fall of 5% whereas thin wheels volumes improved by 5% in Q1CY09. Performance Plastics and refractories also witnessed a volume degrowth of 10% and 15% respectively. However, the others division, which accounts for revenue from the Project Engineering has done well during the quarter.
The total expenditure fell by 3.3% Y-o-Y and by 3.8% Q-o-Q. Raw materials and staff cost have risen 250 bps and 150 bps respectively as a percentage of sales in Q1CY09. Staff cost increased on account of 6% hike in salary and higher wages post settlement been paid at one of GNL’s plant. Power and fuel cost has dipped by 170 bps Y-o-Y and 220 bps Q-o-Q as a percentage of sales. With the full-fledged commencement of operations at the Bhutan Plant in July 2009, the power and fuel cost could further see a dip on consolidated basis, which could ease the pressure on the margins. Other expenditure has dipped to 18.6% as a percentage of sales. Although the sales have dipped, control in costs have led to margin expansion by
40 bps Y-o-Y and 140 bps Q-o-Q to 14.3%.
Despite the benefit of excise and income tax for 5 years at the HP plant, GNL continues to pay 31% tax rate as the plant hasn’t been fully utilised. GNL has managed to keep its PAT margins at the same level of 10.4% in Q1CY09. During the quarter, GNL earned an EPS of Rs.2.1, down by 5.7% Y-o-Y and down by 4% Q-o-Q.
To see full report: GRINDWELL NORTON LIMITED
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пятница, 26 июня 2009 г.
суббота, 20 июня 2009 г.
>EVERONN SYSTEMS LTD. (HDFC SECURITIES)
Q4FY09 Results – A disappointing performance
Everonn Systems’ Q4FY09 results were much below our expectations. Revenues came in 22% below our estimates while EBITDA and Net Profit were 44% and 45% below our estimates. The company also missed its annual revenue guidance of Rs1,850 Mn and net profit guidance of Rs290 Mn by significant 22% and 24% respectively.
The main reason for this was the fact that the company added just 80 schools in Q2FY09 and could not manage to add a single school in the ICT segment in last 2 quarters. The total schools under this segment still stand at 4,442 (3,164 schools in FY08). The average revenue per school in this segment also came down by 41% YoY to Rs1.24lakh (Rs2.11lakh in FY2008), reflecting significant pricing pressure in this segment.
ViTELS revenues also decline on a quarterly basis
In Q4FY09, the ViTELS segment recorded revenues of Rs179 Mn (down 15.9% QoQ) and this was the prime reason for underperformance in overall revenues. However, for FY09, ViTELS segment recorded a growth in revenues and PBT of 98% each YoY. In the ViTELS segment, revenues from schools are annual in nature and the company added only 37 schools in Q4FY09 taking the total number to 557, while in the college segment, where revenues are non-annual in
nature the company added 185 colleges during the quarter taking total number to 800. While in FY09, the revenue and profit growth was driven by higher than estimated addition of colleges, to sustain growth in this segment going forward, faster additions has to be made in schools to make revenues and profits predictable.
Margins contract in the quarter due to revenue decline
In Q4FY09, Everonn’s operating margins contracted by 1,443 basis points YoY due to higher operating costs. In FY09 the company recorded a 105 basis points YoY decline in operating margins due to higher employee costs. Employee costs as a percentage of revenues rose by 618 basis points during the year.
Outlook & Valuation
At the CMP of 384, the stock is trading at a P/E of 17.7x and 14.6x our estimated EPS of Rs21.7 and Rs26.4 for FY10 and FY11 respectively. We have revised our estimates downwards to factor in slower growth in the ICT segments as seen in the last three quarters. We now expect Everonn to record revenue and net profit CAGR of 45% and 34.3% respectively over FY09 to FY11E. We now rate Everonn Systems a ‘Market Performer’ as against a ‘Buy’ rating earlier, with a target price of Rs326 based on 15x its estimated FY10 EPS of Rs21.7.
To see full report: EVERONN SYSTEMS
Everonn Systems’ Q4FY09 results were much below our expectations. Revenues came in 22% below our estimates while EBITDA and Net Profit were 44% and 45% below our estimates. The company also missed its annual revenue guidance of Rs1,850 Mn and net profit guidance of Rs290 Mn by significant 22% and 24% respectively.
The main reason for this was the fact that the company added just 80 schools in Q2FY09 and could not manage to add a single school in the ICT segment in last 2 quarters. The total schools under this segment still stand at 4,442 (3,164 schools in FY08). The average revenue per school in this segment also came down by 41% YoY to Rs1.24lakh (Rs2.11lakh in FY2008), reflecting significant pricing pressure in this segment.
ViTELS revenues also decline on a quarterly basis
In Q4FY09, the ViTELS segment recorded revenues of Rs179 Mn (down 15.9% QoQ) and this was the prime reason for underperformance in overall revenues. However, for FY09, ViTELS segment recorded a growth in revenues and PBT of 98% each YoY. In the ViTELS segment, revenues from schools are annual in nature and the company added only 37 schools in Q4FY09 taking the total number to 557, while in the college segment, where revenues are non-annual in
nature the company added 185 colleges during the quarter taking total number to 800. While in FY09, the revenue and profit growth was driven by higher than estimated addition of colleges, to sustain growth in this segment going forward, faster additions has to be made in schools to make revenues and profits predictable.
Margins contract in the quarter due to revenue decline
In Q4FY09, Everonn’s operating margins contracted by 1,443 basis points YoY due to higher operating costs. In FY09 the company recorded a 105 basis points YoY decline in operating margins due to higher employee costs. Employee costs as a percentage of revenues rose by 618 basis points during the year.
Outlook & Valuation
At the CMP of 384, the stock is trading at a P/E of 17.7x and 14.6x our estimated EPS of Rs21.7 and Rs26.4 for FY10 and FY11 respectively. We have revised our estimates downwards to factor in slower growth in the ICT segments as seen in the last three quarters. We now expect Everonn to record revenue and net profit CAGR of 45% and 34.3% respectively over FY09 to FY11E. We now rate Everonn Systems a ‘Market Performer’ as against a ‘Buy’ rating earlier, with a target price of Rs326 based on 15x its estimated FY10 EPS of Rs21.7.
To see full report: EVERONN SYSTEMS
среда, 10 июня 2009 г.
>RELIANCE COMMUNICATIONS (HDFC SECURITIES)
Wireless MOU expected to rise in Q1 FY10, but stabilize a bit lower in the long term
RCOM’s MOU in the fourth quarter decreased by a significant 9% qoq as the effect of the promotional minutes was felt only in half of the quarter. The promotional minutes were removed in the latter part and the tariffs were brought at par with its competitors. The effect of this will be fully seen in the first quarter, and as a result of this, there may be an increase in MOU on a qoq basis in Q1FY2010. However, with penetration rapidly increasing in the B &C circles, where usage is less, MOU may settle down a bit lower going forward. ARPM is also expected to settle a bit lower from the current levels of Rs 0.6.
GSM strategy
The company will soon enter into the postpaid GSM business, for which they have started mass media advertising for the first time. The company has plans of launching corporate offerings and utilizing its cross leveraging with its data card business. The existing CDMA network will enable RCOM to save costs to deploy an altogether new network for GSM, as slight further modifications to the CDMA network will ease the task of GSM deployment. New offer launches in the roaming business, strong brand positioning, selling its own equipments and handsets will add to RCOM’s advantage. Taking this discussion further, we believe the company is well poised for the launch of 3G, as wireless business of RCOM functions on EDGE platform and the cost required for converting an EDGE network to 3G is estimated to be lesser than the cost required for other companies to convert their 2G network to 3G. In this fashion, RCOM is expected to save a lot in 3G deployment. We also believe the impact of MNP will be felt lesser on RCOM, as the company has a huge chunk of low end GSM customers, who may switch to another operator even before MNP is implemented. As far as CDMA business is concerned, the management believes that MNP will require changing of handsets if a CDMA customer wants to switch to GSM. This will make customers reluctant to change their networks. Nevertheless, we believe the cost of retention per subscriber will increase post MNP, which may impact margins up to some extent.
Globalcom business to grow at 3-4% qoq growth in Q1 FY10
RCOM’s Globalcom business grew at 12% in Q4 FY10 on the back of some big contract wins and demand expansion in its Vanco and Yipes business. RCOM believes that this business will not witness such a strong growth in the first quarter as the contract wins are never consistent. Going forward, the Globalcom business is expected to grow at 3-4% on a qoq basis. Dollar depreciation may impact the business somewhat negatively.
Margin expansion to be seen in Broadband business
RCOM has completed the connection of 1 million buildings under its broadband business. The company has been reporting strong margin growth in this business. In Q4 FY09, the company has reported a 247 bps growth in broadband business EBITDA margins. As the company is amassing volumes, it is benefiting from economies of scale, as the company already has a vast broadband network and the only thing it has to do is the last mile connectivity. Due to this reason, a further margin growth is expected. IPTV business is further expected to boost the sales performance. The company’s broadband EBITDA is three times of its respective capex, which itself gives us the measure of its profitability. Management estimates this business to grow at 5-6% every quarter. In the DTH business also RCOM expects a strong growth in market share as the company has got strong distribution network and the technology platform of MPEC4, which provides more number of channels on the same transponder.
To see full report: RELIANCE COMMUNICATIONS
RCOM’s MOU in the fourth quarter decreased by a significant 9% qoq as the effect of the promotional minutes was felt only in half of the quarter. The promotional minutes were removed in the latter part and the tariffs were brought at par with its competitors. The effect of this will be fully seen in the first quarter, and as a result of this, there may be an increase in MOU on a qoq basis in Q1FY2010. However, with penetration rapidly increasing in the B &C circles, where usage is less, MOU may settle down a bit lower going forward. ARPM is also expected to settle a bit lower from the current levels of Rs 0.6.
GSM strategy
The company will soon enter into the postpaid GSM business, for which they have started mass media advertising for the first time. The company has plans of launching corporate offerings and utilizing its cross leveraging with its data card business. The existing CDMA network will enable RCOM to save costs to deploy an altogether new network for GSM, as slight further modifications to the CDMA network will ease the task of GSM deployment. New offer launches in the roaming business, strong brand positioning, selling its own equipments and handsets will add to RCOM’s advantage. Taking this discussion further, we believe the company is well poised for the launch of 3G, as wireless business of RCOM functions on EDGE platform and the cost required for converting an EDGE network to 3G is estimated to be lesser than the cost required for other companies to convert their 2G network to 3G. In this fashion, RCOM is expected to save a lot in 3G deployment. We also believe the impact of MNP will be felt lesser on RCOM, as the company has a huge chunk of low end GSM customers, who may switch to another operator even before MNP is implemented. As far as CDMA business is concerned, the management believes that MNP will require changing of handsets if a CDMA customer wants to switch to GSM. This will make customers reluctant to change their networks. Nevertheless, we believe the cost of retention per subscriber will increase post MNP, which may impact margins up to some extent.
Globalcom business to grow at 3-4% qoq growth in Q1 FY10
RCOM’s Globalcom business grew at 12% in Q4 FY10 on the back of some big contract wins and demand expansion in its Vanco and Yipes business. RCOM believes that this business will not witness such a strong growth in the first quarter as the contract wins are never consistent. Going forward, the Globalcom business is expected to grow at 3-4% on a qoq basis. Dollar depreciation may impact the business somewhat negatively.
Margin expansion to be seen in Broadband business
RCOM has completed the connection of 1 million buildings under its broadband business. The company has been reporting strong margin growth in this business. In Q4 FY09, the company has reported a 247 bps growth in broadband business EBITDA margins. As the company is amassing volumes, it is benefiting from economies of scale, as the company already has a vast broadband network and the only thing it has to do is the last mile connectivity. Due to this reason, a further margin growth is expected. IPTV business is further expected to boost the sales performance. The company’s broadband EBITDA is three times of its respective capex, which itself gives us the measure of its profitability. Management estimates this business to grow at 5-6% every quarter. In the DTH business also RCOM expects a strong growth in market share as the company has got strong distribution network and the technology platform of MPEC4, which provides more number of channels on the same transponder.
To see full report: RELIANCE COMMUNICATIONS
суббота, 6 июня 2009 г.
>BALRAMPUR CHINI MILLS (HDFC SECURITIES)
■ Higher realization to boost profitability
Average sugar realization for SY09E is expected to be around Rs 22.1 per kg against Rs 14.9 per kg in SY08, higher by about 47% YoY. Though we expect sales volume for SY09 to decline by ~23% YoY due to lower sugar production, higher realization will boost overall profitability of the company.
■ Better utilization of plant capacities
The company will also have better plant capacity utlisation as there are a limited number of sugar mills in the region and it has maintained good relations with farmers, ensuring easy availability of sugar cane.
■ Lower Debt burden
The company will have higher profit margins in SY09E and SY10E due to lower fixed costs (including interest and deprecation) than its peers as it chose not to expand at the pace of Bajaj Hindustan. The current debt equity ratio of the company is 1.33x, which is set to improve in SY09E to 0.71 and 0.32x in SY10E.
■ Significant drop in production estimates for SY09E
Domestic production of sugar is expected to be ~14.5 mn tonnes against our previous estimate of ~21 mn tonnes in SY09E mainly on the account of lower recovery rates, shorter crushing period due to lower availability of cane and higher sugar cane prices paid by gur and khandsari producers resulting in steep decline in the drawal rate.
Outlook & Valuation
As cane costs increase going forward, we believe firm sugar prices, higher realizations from distillery products and high inventories will enable the company to improve profit margins in SY09E and SY10E. However, due to a significant drop in sugar cane availability sales volumes will drop of distillery and cogen segments leading to an overall revenue drop in SY09E and SY10E. At the current market price of Rs. 93.8, the stock is trading at 11.6x and 9.5x its SY09E and SY10E earnings of Rs. 8.10 and Rs. 9.90 respectively. We have valued the stock at 6x EV/EBITDA for SY10E. We maintain our Buy rating on the stock with an increased target price of Rs. 103.5 (due to
higher sugar realizations) an upside of 10.3% over the CMP from our earlier target of Rs 90.5 on the stock.
To see full report: BALRAMPUR CHINI
Average sugar realization for SY09E is expected to be around Rs 22.1 per kg against Rs 14.9 per kg in SY08, higher by about 47% YoY. Though we expect sales volume for SY09 to decline by ~23% YoY due to lower sugar production, higher realization will boost overall profitability of the company.
■ Better utilization of plant capacities
The company will also have better plant capacity utlisation as there are a limited number of sugar mills in the region and it has maintained good relations with farmers, ensuring easy availability of sugar cane.
■ Lower Debt burden
The company will have higher profit margins in SY09E and SY10E due to lower fixed costs (including interest and deprecation) than its peers as it chose not to expand at the pace of Bajaj Hindustan. The current debt equity ratio of the company is 1.33x, which is set to improve in SY09E to 0.71 and 0.32x in SY10E.
■ Significant drop in production estimates for SY09E
Domestic production of sugar is expected to be ~14.5 mn tonnes against our previous estimate of ~21 mn tonnes in SY09E mainly on the account of lower recovery rates, shorter crushing period due to lower availability of cane and higher sugar cane prices paid by gur and khandsari producers resulting in steep decline in the drawal rate.
Outlook & Valuation
As cane costs increase going forward, we believe firm sugar prices, higher realizations from distillery products and high inventories will enable the company to improve profit margins in SY09E and SY10E. However, due to a significant drop in sugar cane availability sales volumes will drop of distillery and cogen segments leading to an overall revenue drop in SY09E and SY10E. At the current market price of Rs. 93.8, the stock is trading at 11.6x and 9.5x its SY09E and SY10E earnings of Rs. 8.10 and Rs. 9.90 respectively. We have valued the stock at 6x EV/EBITDA for SY10E. We maintain our Buy rating on the stock with an increased target price of Rs. 103.5 (due to
higher sugar realizations) an upside of 10.3% over the CMP from our earlier target of Rs 90.5 on the stock.
To see full report: BALRAMPUR CHINI
пятница, 22 мая 2009 г.
>EDUCOMP (HDFC SECURITIES)
• Smart class will continue to dominate private school segment
The company maintained that smart class would continue to be an industry leading product. Also, Educomp is changing its model for Smart Class. It plans to sell content and hardware together and receive money outright. The model would reduce the cash burden on the company and lighten its working capital needs. It plans to increase its sales staff by 40 people in FY10. We believe that Educomp will continue to get the early mover advantage in this space and will be able to ward off competition, thereby retaining its leadership positions. We have factored in 2825 schools for FY10 and 3750 schools for FY11.
• Gujarat ICT contract comes with better margin
The company recently won an ICT order from Gujarat government for 1,780 schools and the margin for this contract is comparatively better than the previous ones. In the ICT space, due to few PAN India participants, many state players have entered considering this a sound business opportunity. This has resulted in unwarranted competition. The local players offer huge discounts and have no proven management skills. The company said that this concern no longer exists and expected the ICT segment to be more profitable going forward. We have factored in 17,250 schools for FY10 and 22,500 schools for FY11.
• Dry management contracts to drive K12 business
The focus of K12 business of Educomp is shifting towards dry management contracts as this model does not involve any capex and Educomp gets a fair share of revenues (about 20%). The management attributed this change to the fact that many private schools were not managed properly and this model did not involve capex. The company currently operates 20 schools and has visibility of another 23 schools in FY10. We estimate it would take up 45 schools in FY10 and 60 in FY11.
• FCCB conversion is not a concern
Educomp had outstanding FCCBs of US$80m (raised in July ’07) convertible at Rs2,950. The bonds are due for redemption in July ’12. Currently, the bonds are trading at 5% discount. Considering the expected growth of the company, we believe the conversion price is not a concern and expect the entire FCCBs to get converted into equity.
• Outlook and Valuation
We expect Educomp to record a revenue and net profit CAGR of 46.4% and 45.3% between FY09 to FY11. At the CMP, the stock is trading at a P/E of 24.7x and 18.7x our estimated EPS of Rs106.8 and Rs140.9 for FY10 and FY11. With a stable government geared to growth at the centre we expect sectors including Education will get a boost benefiting companies like Educomp. We continue to rate Educomp a ‘Marketperformer’ with a revised target price of 2,670. Though, we earlier valued Educomp at 22x of FY10 estimated EPS, we now value Educomp at 25x of its FY10E EPS of Rs106.8 as we believe the PE ratios of high growth companies in the education sector will expand faster due to the strong government at the centre.
To see full report: EDUCOMP
The company maintained that smart class would continue to be an industry leading product. Also, Educomp is changing its model for Smart Class. It plans to sell content and hardware together and receive money outright. The model would reduce the cash burden on the company and lighten its working capital needs. It plans to increase its sales staff by 40 people in FY10. We believe that Educomp will continue to get the early mover advantage in this space and will be able to ward off competition, thereby retaining its leadership positions. We have factored in 2825 schools for FY10 and 3750 schools for FY11.
• Gujarat ICT contract comes with better margin
The company recently won an ICT order from Gujarat government for 1,780 schools and the margin for this contract is comparatively better than the previous ones. In the ICT space, due to few PAN India participants, many state players have entered considering this a sound business opportunity. This has resulted in unwarranted competition. The local players offer huge discounts and have no proven management skills. The company said that this concern no longer exists and expected the ICT segment to be more profitable going forward. We have factored in 17,250 schools for FY10 and 22,500 schools for FY11.
• Dry management contracts to drive K12 business
The focus of K12 business of Educomp is shifting towards dry management contracts as this model does not involve any capex and Educomp gets a fair share of revenues (about 20%). The management attributed this change to the fact that many private schools were not managed properly and this model did not involve capex. The company currently operates 20 schools and has visibility of another 23 schools in FY10. We estimate it would take up 45 schools in FY10 and 60 in FY11.
• FCCB conversion is not a concern
Educomp had outstanding FCCBs of US$80m (raised in July ’07) convertible at Rs2,950. The bonds are due for redemption in July ’12. Currently, the bonds are trading at 5% discount. Considering the expected growth of the company, we believe the conversion price is not a concern and expect the entire FCCBs to get converted into equity.
• Outlook and Valuation
We expect Educomp to record a revenue and net profit CAGR of 46.4% and 45.3% between FY09 to FY11. At the CMP, the stock is trading at a P/E of 24.7x and 18.7x our estimated EPS of Rs106.8 and Rs140.9 for FY10 and FY11. With a stable government geared to growth at the centre we expect sectors including Education will get a boost benefiting companies like Educomp. We continue to rate Educomp a ‘Marketperformer’ with a revised target price of 2,670. Though, we earlier valued Educomp at 22x of FY10 estimated EPS, we now value Educomp at 25x of its FY10E EPS of Rs106.8 as we believe the PE ratios of high growth companies in the education sector will expand faster due to the strong government at the centre.
To see full report: EDUCOMP
суббота, 16 мая 2009 г.
>BLUE STAR LTD. (HDFC SECURITIES)
Background
Blue Star Ltd (BSL) is an end-to-end solutions provider in the field of airconditioning and commercial refrigeration as a manufacturer, contractor and after-sales service provider. The company primarily operates in three segments – Central & Packaged Airconditioning systems, Cooling Products and Professional Electronics & Applied Industrial systems. The company currently has five modern state of the art manufacturing facilities in Thane, Bharuch, Dadra and Kala Amb (Himachal Pradesh) and at Wada in Thane district of Maharashtra.
Investment Rationale
Fall in price overly discounts slowdown related fears – Fundamentals remain strong
BSL has fallen more than 65% from its high of Rs. 548 created on 4th January, 2008 and is currently trading at about Rs. 181. The fall in price discounts factors such as the economic slowdown, liquidity crunch and diminishing earnings visibility. However, we feel that at the current levels the price overly discounts these fears. BSL is a market leader in the central airconditioning business, has a strong order book and a lean balance sheet with a debt to equity ratio of about 0.1x. Superior growth, strong profitability, prudent financial management and a liberal dividend payout policy have resulted into high return ratios for BSL. RoE and RoCE has increased from 28.3% and 20.6% in FY06 to 56.4% and 58.7% in FY08. BSL could be one of the main beneficiaries of revival in economic activity expected a couple of quarters down the line.
Strong growth in the order book
As of 31st December, 2008, BSL has an outstanding order book of Rs. 1,626 cr, with an execution period of 9–12 months. This exudes confidence that BSL will sustain its momentum of high growth and profitability in the coming years. Moreover, BSL has limited its presence in the highly competitive, low-margin, consumer durables segment of the room airconditioner market. Instead, it has focused on the high-margin, institutional segment i.e. central airconditioning,
Growing market catered by three players with significant entry barriers
The market for airconditioning products and commercial refrigeration equipment grew 27% and 22% respectively during FY06-08. Based on plans announced by several players, the cumulative non-residential airconditioning opportunity over the next 5 years is estimated to be around Rs. 38,000 cr. Given the current market conditions one could expect a slowdown in segments like IT and Retail, however, sectors like infrastructure (Delhi Metro) and power continue to show decent growth potential. Currently, the non-residential HVAC (heating, ventilating and air conditioning) market is catered to by Blue Star, Voltas and ETA. Project engineering capabilities at various locations across the country and licensing / approval process is a barrier to new players eyeing this market. Internationally, players who are strong in the residential airconditioning market (consumer durables segment) like Samsung, LG, Hitachi etc are not focusing on the HVAC (non residential) project business, which is largely catered to by local players.
Acquisition of Naseer Electricals to increase the addressable market
BSL’s recent acquisition of Naseer Electricals will help BSL expand its business scope in the airconditioning business to MEP (mechanical, electrical and plumbing) projects, which will nearly double the company’s targeted market going forward. Moreover, today many customers seek Electrical Contracting services from the same contractor executing HVAC. Currently, Naseer has presence only in southern India, which BSL intends to scale up to other regions.
Recent fall in commodity prices could help improve margins in the medium term
During H1FY09, BSL’s operating margins were under pressure due to the increase in raw material prices like copper and steel. However, over the past few months, metal prices have corrected substantially. For example, from an average price of about $6,900 in the month of September, 2008, copper is currently trading at about $4,700 registering a drop in excess of 30%. This could help BSL reaching the margins it earned a couple of quarters
back.
To see full report: BLUE STAR
Blue Star Ltd (BSL) is an end-to-end solutions provider in the field of airconditioning and commercial refrigeration as a manufacturer, contractor and after-sales service provider. The company primarily operates in three segments – Central & Packaged Airconditioning systems, Cooling Products and Professional Electronics & Applied Industrial systems. The company currently has five modern state of the art manufacturing facilities in Thane, Bharuch, Dadra and Kala Amb (Himachal Pradesh) and at Wada in Thane district of Maharashtra.
Investment Rationale
Fall in price overly discounts slowdown related fears – Fundamentals remain strong
BSL has fallen more than 65% from its high of Rs. 548 created on 4th January, 2008 and is currently trading at about Rs. 181. The fall in price discounts factors such as the economic slowdown, liquidity crunch and diminishing earnings visibility. However, we feel that at the current levels the price overly discounts these fears. BSL is a market leader in the central airconditioning business, has a strong order book and a lean balance sheet with a debt to equity ratio of about 0.1x. Superior growth, strong profitability, prudent financial management and a liberal dividend payout policy have resulted into high return ratios for BSL. RoE and RoCE has increased from 28.3% and 20.6% in FY06 to 56.4% and 58.7% in FY08. BSL could be one of the main beneficiaries of revival in economic activity expected a couple of quarters down the line.
Strong growth in the order book
As of 31st December, 2008, BSL has an outstanding order book of Rs. 1,626 cr, with an execution period of 9–12 months. This exudes confidence that BSL will sustain its momentum of high growth and profitability in the coming years. Moreover, BSL has limited its presence in the highly competitive, low-margin, consumer durables segment of the room airconditioner market. Instead, it has focused on the high-margin, institutional segment i.e. central airconditioning,
Growing market catered by three players with significant entry barriers
The market for airconditioning products and commercial refrigeration equipment grew 27% and 22% respectively during FY06-08. Based on plans announced by several players, the cumulative non-residential airconditioning opportunity over the next 5 years is estimated to be around Rs. 38,000 cr. Given the current market conditions one could expect a slowdown in segments like IT and Retail, however, sectors like infrastructure (Delhi Metro) and power continue to show decent growth potential. Currently, the non-residential HVAC (heating, ventilating and air conditioning) market is catered to by Blue Star, Voltas and ETA. Project engineering capabilities at various locations across the country and licensing / approval process is a barrier to new players eyeing this market. Internationally, players who are strong in the residential airconditioning market (consumer durables segment) like Samsung, LG, Hitachi etc are not focusing on the HVAC (non residential) project business, which is largely catered to by local players.
Acquisition of Naseer Electricals to increase the addressable market
BSL’s recent acquisition of Naseer Electricals will help BSL expand its business scope in the airconditioning business to MEP (mechanical, electrical and plumbing) projects, which will nearly double the company’s targeted market going forward. Moreover, today many customers seek Electrical Contracting services from the same contractor executing HVAC. Currently, Naseer has presence only in southern India, which BSL intends to scale up to other regions.
Recent fall in commodity prices could help improve margins in the medium term
During H1FY09, BSL’s operating margins were under pressure due to the increase in raw material prices like copper and steel. However, over the past few months, metal prices have corrected substantially. For example, from an average price of about $6,900 in the month of September, 2008, copper is currently trading at about $4,700 registering a drop in excess of 30%. This could help BSL reaching the margins it earned a couple of quarters
back.
To see full report: BLUE STAR
четверг, 2 апреля 2009 г.
>Ambuja Cement Limited (HDFC Securities)
• Benefits of capacity addition insignificant: ACEM has planned to increase its installed capacity by ~5.5 mt in different stages during CY09 and CY10. Though we expect the entire capacity to get commissioned by H1CY10, we don’t think this will result in a sales volume growth due to a demand-supply mismatch.
• Capacity Utilization rates set to decline: We expect the capacity utilization rate of ACEM to decline to the levels of 81% in CY09 and 77% in CY10 against ~95% in CY08 as we believe the company will perform in line with the industry. We expect the sales volume of the company to grow at a CAGR of 1.4% for the period CY08 to CY10E.
• Cost pressure expected to ease: ACEM is dependent on Imported coal for ~30% of its requirements. The cost of imported coal has corrected by ~50% over the last 5-6 months, which will protect the operating margins of the company in CY09.
• Operating benefits expected to come down in CY10E: ACEM enjoys one of the best operating margins in the Industry. However, we expect this benefit to ease in CY10 with the downturn in the cement cycle. We believe the realization of the company will decline by 3.3% in CY09 and by a further 5% in CY10. We expect the margins of the company to remain stable in CY09, but drop by 506 bps to 23.8% in CY10E.
• Earnings to decline: With operating benefits and realization set to decline over next two years, we believe the earnings of the company will decline at a CAGR of 17.4% for the period CY08 to CY10E.
• Merger with ACC can provide synergy benefits: We feel the merger of Ambuja with ACC can provide synergy benefits going forward, in terms of rationalization of the distribution system and reduction in duplication of work. However, the management has not indicated anything on this.
To see full report: AMBUJA CEMENT
• Capacity Utilization rates set to decline: We expect the capacity utilization rate of ACEM to decline to the levels of 81% in CY09 and 77% in CY10 against ~95% in CY08 as we believe the company will perform in line with the industry. We expect the sales volume of the company to grow at a CAGR of 1.4% for the period CY08 to CY10E.
• Cost pressure expected to ease: ACEM is dependent on Imported coal for ~30% of its requirements. The cost of imported coal has corrected by ~50% over the last 5-6 months, which will protect the operating margins of the company in CY09.
• Operating benefits expected to come down in CY10E: ACEM enjoys one of the best operating margins in the Industry. However, we expect this benefit to ease in CY10 with the downturn in the cement cycle. We believe the realization of the company will decline by 3.3% in CY09 and by a further 5% in CY10. We expect the margins of the company to remain stable in CY09, but drop by 506 bps to 23.8% in CY10E.
• Earnings to decline: With operating benefits and realization set to decline over next two years, we believe the earnings of the company will decline at a CAGR of 17.4% for the period CY08 to CY10E.
• Merger with ACC can provide synergy benefits: We feel the merger of Ambuja with ACC can provide synergy benefits going forward, in terms of rationalization of the distribution system and reduction in duplication of work. However, the management has not indicated anything on this.
To see full report: AMBUJA CEMENT
воскресенье, 15 марта 2009 г.
>Dividend Yield Picks (HDFC Securities)
In a volatile market such as now, should one invest in a stock for the dividend it pays? Conventional wisdom suggests one should. In a market downtrend, buying stocks of companies with a high dividend yield is considered a good defensive strategy. Dividend yield, which is dividend per share as a percentage of the market price, is a “value” measure that allows one to buy stocks that are only temporarily out of favor, or perhaps under-priced. Generally, the dividend yield strategy outperforms when the market recovers from the bottom.
In sudden sharp corrections, one may be able to pick up a stock that has a high dividend yield and gain once the market recovers. But timing the bottom of a correction is not easy. And in the interim the share price may fall further causing temporary capital erosion. Thus, such stocks may call for an active profit-booking strategy.
This brings us to the theory of ‘The Dogs of the Dow’ which is an investment strategy popularized by Michael O’Higgins in 1991. It proposes that an investor annually select for investment the ten Dow Jones Industrial Average stocks whose dividend is the highest fraction of their price.
Proponent of the Dogs of the Dow strategy argue that blue chip companies do not alter their dividend to reflect trading conditions and, therefore, the dividend is a measure of the average worth of the company; the stock price, in contrast, fluctuates through the business cycle. This should mean that companies with a high yield, with high dividend relative to price, are near the bottom of their business cycle and are likely to see their stock price increase faster than low yield companies.
Under this model, an investor annually reinvesting in high-yield companies should out-perform the overall market. The logic behind this is that a high dividend yield suggests both that the stock is oversold and that management believes in its company’s prospects and is willing to back that up by paying out a relatively high dividend. Investors are thereby hoping to benefit from both above average stock price gains as well as a relatively high dividend.
To see full report: Dividend Picks
In sudden sharp corrections, one may be able to pick up a stock that has a high dividend yield and gain once the market recovers. But timing the bottom of a correction is not easy. And in the interim the share price may fall further causing temporary capital erosion. Thus, such stocks may call for an active profit-booking strategy.
This brings us to the theory of ‘The Dogs of the Dow’ which is an investment strategy popularized by Michael O’Higgins in 1991. It proposes that an investor annually select for investment the ten Dow Jones Industrial Average stocks whose dividend is the highest fraction of their price.
Proponent of the Dogs of the Dow strategy argue that blue chip companies do not alter their dividend to reflect trading conditions and, therefore, the dividend is a measure of the average worth of the company; the stock price, in contrast, fluctuates through the business cycle. This should mean that companies with a high yield, with high dividend relative to price, are near the bottom of their business cycle and are likely to see their stock price increase faster than low yield companies.
Under this model, an investor annually reinvesting in high-yield companies should out-perform the overall market. The logic behind this is that a high dividend yield suggests both that the stock is oversold and that management believes in its company’s prospects and is willing to back that up by paying out a relatively high dividend. Investors are thereby hoping to benefit from both above average stock price gains as well as a relatively high dividend.
To see full report: Dividend Picks
среда, 10 декабря 2008 г.
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