Fw: Investor's Eye: Pulse - (Inflation rises to 7.55%); Stock Idea - CMC (Leveraging on its pedigree); Viewpoint - Prozone CSC (Provogue's demerged real estate arm makes its debut on bourses)

 

 

Investor's Eye [September 14, 2012]  Sharekhan www.sharekhan.com

Summary of Contents   PULSE TRACK Inflation rises to 7.55% The Wholesale Price Index (WPI)-based inflation for August 2012 came in at 7.55% as against 6.87% in July 2012. The inflation numbers were ahead of the market estimates and were mainly contributed by a pick-up in manufacturing and fuel inflation. Also, the inflation rate for June 2012 was revised upwards to 7.58% from 7.25% as per provisional estimates. The inflation rate for August 2012 was higher than the previous month's and was primarily led by an increase in the manufacturing and the fuel, power and light segment. On a year-on-year (Y-o-Y) basis, the prices of the manufacturing segment increased by 6.14% (as against by 5.58% in July 2012) while the fuel inflation increased to 8.32% from 5.98% in the year-ago period. However, the primary articles segment showed some moderation in inflation (10.08% vs 10.39% in July 2012) contributed by the food inflation.  On a month-on-month (M-o-M) basis the fuel index was up by 3.1% contributed by the electricity segment. The manufacturing index was up by 0.8% month on month (MoM) to 146.9 (compared with 145.7 in July 2012). The primary article index was marginally up (up 0.3% MoM) though the food inflation index remained almost unchanged compared with the July 2012 reading. After showing a significant moderation in July, the inflation rate again surged to 7.55% with an uptrend in the manufacturing inflation. Also, the inflation rate for June 2012 was revised upwards by 33 basis points which indicates inflation pressures in the system. Further, the recent hike in the fuel prices and the weak monsoon are likely to keep pressure on inflation especially food and fuel inflation. With the recent policy action the ball is in the Reserve Bank of India (RBI)'s court to take forward the monetary easing cycle. However, given the inflationary pressures the consensus expectation is that the RBI may keep the rates unchanged in the coming mid quarter policy review. STOCK IDEA CMC Cluster: Emerging Star Recommendation: Buy Price target: Rs1,551 Current market price: Rs1,108 Leveraging on its pedigree Key points Solid parentage, strong visibility: Over the years, under the Tata Consultancy Services (TCS) parentage CMC has transformed itself from a low-margin information technology (IT) equipment provider to a well-diversified IT services and solutions provider. CMC initiated its "Joint-Go-To-Market" approach with TCS in 2005, which is paying up handsomely now. In the last five years the contribution of the international revenues has tripled from 20% to around 60% of the total revenues in FY2012 whereas the share of the services revenues has gone up to almost 90% of the total revenues as compared with 53% in FY2005. The share of revenues achieved through synergies with TCS has crossed 51% in FY2012 from 43% in FY2007.  Going forward, the CMC management aims to be among the top 20 global system engineering and integration companies by 2020 by capitalising on the strong synergies with TCS. Synergies with TCS have been leveraged to win large mission mode projects (MMP) in the domestic market, eg e-Passport Seva and CBEC Project, and improve traction in the international market in the areas of embedded system and digitisation services. CMC's management has indicated the pipeline of deals is strong in both domestic and international markets which is likely to get exploited by CMC and TCS together in the coming years.  Strong foothold in domestic IT arena, expanding competencies in international markets: CMC has gained a strong foothold in the domestic IT arena by winning large turnkey deals, some on its own and the others in partnership with TCS. Another favourable factor driving its strong growth and helping it tap large government projects is its previous status as a public sector undertaking (PSU) which has given it an edge over the other players. The company counts some of the marquee names in the domestic market, like Reserve Bank of India (RBI), Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), Oil and Natural Gas Corporation (ONGC), coupled with the Indian Railways, other PSUs, defence sector, as its clients which is testimony to its strong presence in the domestic IT market. Currently, the domestic market contributes around 40% of its total revenues. Going forward, with an upswing in the domestic IT spending, CMC is well poised to tap this advantage.  Thrust on value-added services augurs well for margin trajectory: CMC started as a low-margin equipment provider and integrator with an asset heavy model. However, over the years its management has credibly brought down the low-margin equipment revenues to around 10% from 40% earlier. Over the same period, owing to the synergies with TCS, the revenue contribution of the relatively high-margin international business has increased significantly to over 60% of the total revenues. Strong growth traction in the system integration (SI) and IT enabled services (ITES) businesses, increasing acceptability of its industry specific solutions (asset-based solutions) and further scope for improving the offshore mix would drive the company's margins in the coming years.  Valuation: Over the years, CMC has gradually transformed itself from a low-margin equipment provider into a well-diversified IT services and solutions provider, and created a niche for itself in the field of large system engineering and integration projects. On the other hand, its Joint-Go-To-Market strategy with TCS is also playing a big role in the business transformation, with CMC gaining strong traction in the international markets. As a matter of fact, the international business constitutes more than 60% of CMC's total revenues. We believe CMC has already set the stage for the next level of growth and is likely to witness a much stronger growth in the coming years. We expect its earnings to grow at a CAGR of 43% over FY2012-14. At the current market price of Rs1,108, the stock is trading at 13.4x FY2013E and 10.7x FY2014E earnings respectively. We value the stock at 15x target multiple based on the FY2014 earnings estimate, in line with its two-year average trading multiple. We initiate coverage on CMC with a Buy rating and a one-year price target of Rs1,551.   VIEWPOINT Prozone CSC       Provogue's demerged real estate arm makes its debut on bourses Prozone Capital Shopping Centre (Prozone CSC), the demerged arm of Provogue India, got listed on the bourses recently. The demerger was effected on February 10, 2012 after which Provogue India had got listed on the bourses with an independent status, owning only the core retail business. On September 12, 2012, the retail real estate developer, Prozone CSC, got listed with a market capitalisation of Rs400 crore (at Rs26).    Valuation and outlook Prozone has the advantage of a healthy balance sheet, a substantially large land bank and a reputed strategic and financial partner. However, it has land bank situated in tier-II cities and little track record in terms of successful execution and management of the real estate business. Moreover, the long awaited re-listing can be seen as an exit route for many investors and result in pressure on the stock in the near term.  We have worked out the rough fair price by employing the sum-of-the-parts valuation method. At a cap rate of 14% taken to value the annuity based Aurangabad retail business and its other land banks (based on the indicated development plans) the valuation works out to Rs23-24 per share. We see upside to the fair price from the increasing visibility on the execution front of the residential projects (in Indore, Jaipur and Coimbatore) scheduled to be launched shortly.   Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Stock Idea: CMC (Leveraging on its pedigree)

 

 

Stock Idea [September 14, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK IDEA CMC Cluster: Emerging Star Recommendation: Buy Price target: Rs1,551 Current market price: Rs1,108 Leveraging on its pedigree Key points Solid parentage, strong visibility: Over the years, under the Tata Consultancy Services (TCS) parentage CMC has transformed itself from a low-margin information technology (IT) equipment provider to a well-diversified IT services and solutions provider. CMC initiated its "Joint-Go-To-Market" approach with TCS in 2005, which is paying up handsomely now. In the last five years the contribution of the international revenues has tripled from 20% to around 60% of the total revenues in FY2012 whereas the share of the services revenues has gone up to almost 90% of the total revenues as compared with 53% in FY2005. The share of revenues achieved through synergies with TCS has crossed 51% in FY2012 from 43% in FY2007.  Going forward, the CMC management aims to be among the top 20 global system engineering and integration companies by 2020 by capitalising on the strong synergies with TCS. Synergies with TCS have been leveraged to win large mission mode projects (MMP) in the domestic market, eg e-Passport Seva and CBEC Project, and improve traction in the international market in the areas of embedded system and digitisation services. CMC's management has indicated the pipeline of deals is strong in both domestic and international markets which is likely to get exploited by CMC and TCS together in the coming years.  Strong foothold in domestic IT arena, expanding competencies in international markets: CMC has gained a strong foothold in the domestic IT arena by winning large turnkey deals, some on its own and the others in partnership with TCS. Another favourable factor driving its strong growth and helping it tap large government projects is its previous status as a public sector undertaking (PSU) which has given it an edge over the other players. The company counts some of the marquee names in the domestic market, like Reserve Bank of India (RBI), Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), Oil and Natural Gas Corporation (ONGC), coupled with the Indian Railways, other PSUs, defence sector, as its clients which is testimony to its strong presence in the domestic IT market. Currently, the domestic market contributes around 40% of its total revenues. Going forward, with an upswing in the domestic IT spending, CMC is well poised to tap this advantage.  Thrust on value-added services augurs well for margin trajectory: CMC started as a low-margin equipment provider and integrator with an asset heavy model. However, over the years its management has credibly brought down the low-margin equipment revenues to around 10% from 40% earlier. Over the same period, owing to the synergies with TCS, the revenue contribution of the relatively high-margin international business has increased significantly to over 60% of the total revenues. Strong growth traction in the system integration (SI) and IT enabled services (ITES) businesses, increasing acceptability of its industry specific solutions (asset-based solutions) and further scope for improving the offshore mix would drive the company's margins in the coming years.  Valuation: Over the years, CMC has gradually transformed itself from a low-margin equipment provider into a well-diversified IT services and solutions provider, and created a niche for itself in the field of large system engineering and integration projects. On the other hand, its Joint-Go-To-Market strategy with TCS is also playing a big role in the business transformation, with CMC gaining strong traction in the international markets. As a matter of fact, the international business constitutes more than 60% of CMC's total revenues. We believe CMC has already set the stage for the next level of growth and is likely to witness a much stronger growth in the coming years. We expect its earnings to grow at a CAGR of 43% over FY2012-14. At the current market price of Rs1,108, the stock is trading at 13.4x FY2013E and 10.7x FY2014E earnings respectively. We value the stock at 15x target multiple based on the FY2014 earnings estimate, in line with its two-year average trading multiple. We initiate coverage on CMC with a Buy rating and a one-year price target of Rs1,551. Click here to read report: Stock Idea   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Pulse - (IIP growth remains tepid); Update - Apollo Tyres (Price target revised to Rs105), Cadila Healthcare (Price target revised to Rs1,064)

 

 

Investor's Eye [September 12, 2012]  Sharekhan www.sharekhan.com

Summary of Contents PULSE TRACK IIP growth remains tepid In July 2012 the Index of Industrial Production (IIP) grew by 0.1% after showing a decline of 1.8% in June 2012. The lower than expected growth in July IIP was mainly due to degrowth in the manufacturing and mining segments. Based on three monthly moving average's also the IIP growth is 0.3% vs 6.5% in July 2011. The manufacturing sector saw a decline of 0.2% year on year (YoY) as against a decline of 3.1% YoY seen in June 2012. The mining output declined by 0.7% as against growing by 0.2% in June 2012 whereas the electricity output grew by 2.8% vs an 8.8% growth in June 2012. In the use-based category, the consumer goods grew by 0.7% YoY driven by a 1.4% growth in the durable consumer goods. The production of capital goods reported a decline of 5% vs a decline of 28% in June 2012.  On a sequential basis (month on month [MoM]) the IIP declined by 0.7% in July 2012 to an absolute figure of 167.3 (168.4 in June 2012). The manufacturing segment declined by 0.7% MoM led by a 1.7% month-on-month (M-o-M) decline in the consumer goods segment. The mining segment reported a decline of 0.5% MoM followed by a 0.4% M-o-M decline in the electricity segment.  Growing risk of prolonged growth shock but RBI unlikely to cut policy rates: The highlight of the July IIP figures was the sharp deceleration in the consumer segments (on yearly and sequential bases) and contraction in almost 14 industry groups (out of the total 22 groups) of the manufacturing segment. But in spite of the growing risk of a deeper and more prolonged growth shock, the RBI is unlikely to reduce the policy rates in the forthcoming review meet due to the persistently high fiscal deficit and the inability of the government to take bold policy decisions.   STOCK UPDATE   Apollo Tyres Cluster: Apple Green Recommendation: Hold Price target: Rs105 Current market price: Rs100 Price target revised to Rs105  Natural rubber prices rebound following global stimulus but may remain in a range as we approach the peak tapping season Rubber prices have increased by 6-9% in the last two weeks following the large liquidity enhancement programmes announced by China and Europe. However, we expect the revival to remain capped as we approach the peak tapping season of October-January. The current conditions are indicating a range-bound movement in natural rubber prices or stability at the current levels.  Apollo Tyres' margin in a sweet spot on improved fundamentals We believe Apollo Tyres is currently in a sweet spot in terms of margins. The combined effect of a better replacement mix, an improved radial mix, firm pricing and lower raw material cost would result in a margin surprise on the upside for the stand-alone operations. The operating profit margin (OPM) touched a low of 6.8% in Q2FY2012 and thereafter improved to 10.3% in Q1FY2013. We are now building in an 11% OPM expectation for the stand-alone operations for FY2013 against 10.3% estimated earlier.  Valuation: upgrading EPS estimates but retaining Hold recommendation We are upgrading the stand-alone earnings estimates as we assume a 70-basis-point margin improvement in FY2013 as compared with our previous estimates. Owing to the expectation of improved stand-alone earnings, our consolidated earnings per share (EPS) estimates for FY2013 and FY2014 stand revised upwards by 6.4% and 6.8% respectively.  The margin expansion expectations over the next two quarters are partially priced in the stock. The medium-term concerns of natural rubber prices hardening again and crude-linked raw materials firming up further have not receded. The probable ruling of the Competition Commission of India (CCI) against tyre companies is expected to be contested but the development may limit the pricing power of the industry. We now turn conservative and recommend Hold on Apollo Tyres with a price target of Rs105 per share. Cadila Healthcare Cluster: Emerging Star Recommendation: Buy Price target: Rs1,064 Current market price: Rs936 Price target revised to Rs1,064  Year of acquisitions, restructuring and rejuvenation: Year 2012 witnessed a series of acquisitions, commencement of supply of new products under joint ventures, increased focus on domestic markets and entry into newer business areas for Cadila Healthcare (Cadila). The company entered into the $7-billion controlled substance product market through the acquisition of Nesher Pharma Inc in the USA. It expanded its footprint in the global animal health product market through the acquisition of Bremer Pharma GmbH, Germany as well as expanded its presence in the Indian branded formulation market through the acquisition of Biochem Pharma in India. Growth tapered in FY2012; expect better performance ahead: Despite contributions from three newly acquired entities, the net revenue of the company increased by 14% to Rs5,090 crore in FY2012, which is the slowest in seven years. Excluding the contribution from the newly acquired entities, the growth would have been even lower at 12.5%. The slower growth is mainly attributed to weaker revenues from the consumer business in India and the generic business in the US and emerging markets. The net profit declined by 8% to Rs652.5 crore due to a decline in the operating profit margin (OPM), a rise in the effective tax rate and a foreign exchange (forex) loss of Rs118 crore. The adjusted net profit (excluding forex loss) jumped by 10.6% to Rs770 crore in FY2012. We expect the growth to pick up from FY2013 onwards on better traction in the business and newer streams of revenues.  Multiple growth factors: There are multiple factors that should lead to a pick-up in the revenue and profit growth during FY2013 and FY2014: (1) the US business would see better traction owing to ramp-up in abbreviated new drug application (ANDA) filings after the clearance of the Moraiya facility by the US Food and Drug Administration (USFDA); (2) the contribution from Nesher Pharma (only one quarter's revenues captured in FY2012) would increase; (3) revenues from joint ventures will increase due to additional products and geographical expansions; (4) the Mexican business, which got its organisational set-up in place during FY2012, shall start contributing; (5) better traction in the consumer business; and (6) Bremer Pharma (the animal healthcare business) to start contributing to the global business.  We revise upwards earnings estimates and price target: We have revised our earnings estimates up by 3% and 5% for FY2013 and FY2014 respectively to factor in the new approvals in the USA and the other markets. We believe the stock will be re-rated as most of the concerns of the company have been addressed during the past few months and it is set to grow at a sustainable rate over a long period. We revise our price target up by 12% to Rs1,064 (implies 17x FY2014E earnings, a 10% discount to Lupin). Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Religare Finvest Ltd NCD - Opens on 14 Sept 2012

 

Options Particulars Issuer Religare Finvest Ltd Issue period 14 September 2012 to 27 September 2012 Issue Size Rs 500 Crores (Public issue of Rs 250 Crores with anoption to retain over-subscriptionof Rs 250 Crores) Basis of allocation First come first serve basis Listing Proposed to be listed on BSE and NSE Rating CARE AA- and ICRA AA- Face Value and Issue Price Rs 1,000 per NCD Minimum Application Rs 10,000 (10 NCDs) and in multiples of 1 NCD thereafter Interest Payable Interest on application 9% p.a and Interest on refund 9% p.a (Refer Terms and Conditions) Trading and Issuance Demat mode only Who can apply: Institutional, Non Institutional, Indian Nationals Resident in India and eligible NRIs, HUF Investor Category I (Institutional) II (Non Institutional) III (HNI) IV (Retail) Issue allocation % 20% 10% 30% 40% Specific terms for each series of Bonds: Series I II III IV V Frequency of Interest Payment Annual, paid on 1st April Cumulative Annual, paid on 1st April Cumulative Cumulative Tenor 36 months and 1 day 60 months Investor Cat IV Investor Cat I, II, III 70 months 72 months Coupon Rate - % p.a. 12.25 NA Cat IV Cat I, II, III NA NA 12.50 12.25 Effective Yield - % p.a. 12.25 12.25 Cat IV Cat I, II, III Cat IV Cat I, II, III Cat IV Cat I, II, III 12.50 12.25 12.50 12.25 12.6184 12.2462 Redemption Amount (Rs/NCD) Face Value + Interest 1,414.36 Face Value + Interest Cat IV Cat I, II, III 2,000.00 1,802.03 1,782.10 * Invest only after referring to final prospectus.

Registered Office: Sharekhan Limited, 10th Floor, Beta Building, Lodha iThink Techno Campus, Off. JVLR, Opp. Kanjurmarg Railway Station, Kanjurmarg (East), Mumbai - 400 042, Maharashtra. Tel: 022 - 61150000. Sharekhan Ltd.: SEBI Regn. Nos. BSE Cash-INB011073351; F&O-INF011073351; NSE - INB/INF231073330; DP: NSDL-IN-DP-NSDL-233-2003; CDSL-IN-DP-CDSL-271-2004; Mutual Fund: ARN 20669; For any complaints email at igc@sharekhan.com; Disclaimer: Client should read the Risk Disclosure Document issued by SEBI, relevant exchanges and the T&C on www.sharekhan.com before investing. Sharekhan Ltd is engaged as a distributor of IPOs/ Bonds/ NCDs/ FDs/ Mutual Funds. Sharekhan or any of its group concerns do not in any manner recommends any product or any of its characteristics. The client is advised to take his / her own independent decisions for investing in any financial product after understanding their respective nature and risk and returns involved. The client may also approach his / her own consultants for investing in financial products or in relation to the tax related aspects. We do not solicit any action based upon this promotional material. Please note that the product does not take into account any particular investment objectives, financial decisions or needs of individual recipients. Neither Sharekhan nor any person connected with Sharekhan accepts any liability arising out of investment suggested in this material.

Fw: Stock Idea: Relaxo Footwears (Catch this Flite)

 

 

Stock Idea [September 10, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK IDEA Relaxo Footwears Cluster: Emerging Star Recommendation: Buy Price target: Rs885 Current market price: Rs672 Catch this Flite  Key points Enviable position in the lucrative footwear segment: Relaxo Footwears (Relaxo) is present in the Indian organised footwear market, which has been growing at a CAGR of 15-18% for the last five years and is expected to maintain the growth momentum for the next five years. The company caters to customers from across socio-economic and demographic strata with its four top-of-the-mind-recall brands, viz, Hawaii, Sparx, Flite and Schoolmate. Its flagship brand, Hawaii, is the leader in the rubber slipper market, particularly in the north, while its other brands also command a significant share of their respective markets. The same is visible from the fact that during FY2008-12 the company outperformed the industry by growing at a CAGR of 29.5%.  A well-heeled distribution set-up complemented by a growing network of exclusive outlets: Relaxo sells its products primarily through distributors, who, in turn, sell the company's products to retailers on a pan-India basis. Over the years the company has developed a strong distribution network of over 700 distributors, making its products and brands available in over 50,000 retail touch-points across India. At present, around 90% of its revenues comes from this mode of distribution. Apart from this two-fold distribution model, Relaxo also sells directly to the customers, through its own retail outlets called "Relaxo Retail Shoppe". At present, it owns 154 such outlets which together contribute around 7% of its total sales. The company plans to improve the revenue flow from this segment by setting up 25-30 stores each over the next three financial years. To improve its brand reach and drive its volume growth, Relaxo is aggressively promoting its brands-it has roped in leading Bollywood actors as brand ambassadors (viz Salman Khan for Hawaii, Akshay Kumar for Sparx and Katrina Kaiff for Flite).  Soft raw material price outlook to drive margins and earnings going forward: Three raw materials, viz raw rubber, EVA and synthetic rubber, together constitute 55-60% of the company's total raw material cost. In the last two years, the prices of raw rubber and EVA have increased considerably, affecting the gross profit margin (GPM) and consequently the operating and net earnings of Relaxo. Of late, the input prices have cooled off and are currently ruling at their 24-month lows. The outlook for these raw materials is expected to be soft which would benefit Relaxo by driving up its GPM and earnings. We expect a considerable improvement in the company's operating profit margin (OPM) in FY2013 and FY2014. With new strategies in place and raw material prices softening, the company's top line and earnings are expected to grow at a CAGR of over 22% and 34% over FY2012-14 respectively. Consistent robust financial performance leading to re-rating of multiples; recommend Buy: Relaxo has emerged as an attractive investment opportunity in the domestic consumption space due to its growing scale of operations, strong brand positioning and consistent healthy financial performance. In addition to the steady volume growth and higher blended realisation due to a favourable product mix, the company is likely to benefit from the softening of the price of the key raw material (read rubber) and is a potential re-rating candidate. Thus, we recommend a Buy on the stock with a price target of Rs885. Click here to read report: Stock Idea   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.