Maruti Suzuki Cluster: Apple Green Recommendation: Hold Price target: Rs1,639 Current market price: Rs1,369
Recalls A-Star
Maruti Suzuki has recalled one lakh units of its flagship model A-Star on account of a faulty fuel pump gasket and O-ring in the fuel tank of the car. The company has recalled all the units of A-Star produced in the lots from November 2008 (the period when it was launched) to August 22, 2009. The units produced in that time frame will be recalled from the domestic markets as well as the exports markets. The company has till date exported more than 1.2 lakh units of A-Star, wherein approximately 65,000 units are affected by the problem. In the domestic market, the company has recalled about 35,000 units to fix the problem in the fuel tank.
Maruti Suzuki will face challenges going forward in the form of the strong competition coming up in its bread?and-butter segment (the A2 segment). Apart from this, the company in order to protect its margins in the competitive scenario will also have to take price hikes on account of a significant increase in its raw material cost and the roll-back of the excise duty cut (if any), which may come up in the forthcoming budget. Moreover, the likelihood of the hardening of interest rates on account of inflationary pressure (70% of the company?s cars are being financed currently) coupled with the high base of the current financial year and the capacity constraints faced by the company currently (incremental capacity to come up only by April 2012) will also affect the volume growth of the company in FY2011.
Thus, we believe that though the stock has corrected sharply since our last update, we maintain our Hold recommendation on the stock in the wake of the above challenges. At the current market price, the stock is trading at 14.5x its FY2011E earnings and 12.4x its FY2012E earnings of Rs94.3 and Rs110.5. We maintain our Hold recommendation on the stock with a price target of Rs1,639.
Thermax Cluster: Emerging Star Recommendation: Hold Price target: Rs662 Current market price: Rs565
Settles pending legal dispute with Purolite
Thermax has entered into amicable settlement with Purolite International (Purolite) ending a five-year-long legal dispute regarding its ion exchange resin business in USA. The settlement is for a lawsuit filed by Purolite in the Eastern District Court of Pennsylvania, USA in 2005. Attached below is the series of events related to the litigation. As per the out-of-court settlement, Thermax will pay Purolite four installments of USD9.5 million each spread over calendar year 2010 to settle the litigation. The two parties will now be joint co-owners in perpetuity of the information and technology in dispute. The agreement permanently resolves all claims and counter claims.
Though there will be one-time extraordinary expense of Rs43.9 crore in Q4FY2010 and Rs131.8 crore in FY2011 assuming an exchange rate of Rs46.23/USD, it is a long-term positive given the uncertainties associated with jury trials as well as cost and time. Now, the company will also be joint co-owners in perpetuity of the information and technology involved in ion exchange resin business, which is another positive. The management has also confirmed that there will be no further financial obligation on this account in the form of royalty.
We continue to remain positive on Thermax? long-term business prospects and its possible entry into super critical boiler business in the near term. Nonetheless, the quantum of settlement charges has surprised us negatively. The management has however indicated that there are no more litigations of such nature in the offing. Hence, we maintain our adjusted earnings estimates at Rs22.7 for FY2010 and Rs29.7 for FY2011. At the current levels, the stock is trading at 21.3x FY2011 earnings per share (EPS) and 17.3x FY2012 EPS. We maintain our Hold recommendation on the stock with a price target of Rs662.
SECTOR UPDATE
Insurance
APE growth slows down in January 2010 The annual premium equivalent (APE) for the life insurance industry displayed a muted growth in January 2010. The APE grew by 2.3% year on year (yoy) as the 7.4% year-on-year (y-o-y) contraction in the APE for Life Insurance Corporation (LIC) weighed down the effect of the 12.3% y-o-y rise in the APE of the private players.
RAILWAY BUDGET SPECIAL
Rail Budget 2010-11: Reformist with a social face
Highlights of the Railway Budget
Passenger fares and freight rates left unchanged at a broader level except for some tinkering (lower service charges for passenger and lower freight on food grain and kerosene).
Strong emphasis on the public-private partnership (PPP) model with a new business model to be developed for meeting the huge funding requirement for improving the railway infrastructure. A special task force will be formed to ensure project clearance within 100 days and smooth execution of projects.
?Golden Rail Corridor?, a dedicated passenger route to be set up on the lines of the dedicated freight corridor.
Significant emphasis on improvement of railway infrastructure, increasing network coverage and providing better amenities, though clarity on the timeline of investments and actual actionable measures are yet to be spelt out.
New production facilities planned under the PPP model including five new wagon factories, one rail axel factory and ten auto ancillary hubs.
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