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Nervousness may persist

A sharp slump in the overnight US and European indices is likely to have a bearing on the domestic indices even as the Asian indices like Nikkei 225, Hang Seng index, Kospi index and Straits Times index are up nearly 1% each in the ongoing trades. With concerns of rising inflation in the US, investors in the domestic market would be closely watching the inflation data for further cues. Gammon India is expected to announce its earnings numbers today.

Concerns of rising infation spooked the US markets on Tuesday, with the Dow Jones registering its seventh loss in the last eight sessions at 10706, down 86 points, while the Nasdaq declining by 19 points to close at 2072.

Sharp fall in the domestic market weighed heavily on the Indian floats trading on the US bourses. Rediff was the major loser and tanked over 8% while VSNL, MTNL, Wipro, Dr Reddy's, Tata Motors and Patni Computers slumped over 2-5% each. Infosys, Satyam and HDFC Bank ended with losses of over 1% each.

International crude oil prices slipped below $70 mark, with the Nymex light crude oil for July delivery sliding by $1.80 to close at $68.56 per barrel. In the commodity space, the Comex gold for August series plummeted $44.30 to settle at $567 a troy ounce.

Stocks to watch
Tata Steel is considering a proposal to bid for a majority stake in South African firm Highveld Steel and Vanadium Corporation's steel and vanadium businesses.

Tata Motors has received an order worth Rs55 crore from the Congo for revamping the urban transport system of Kinshasa.

Reliance Communications has earmarked around Rs2,500 crore for its GSM foray into new circles.

Hot Picks - Bajaj Auto

Bajaj Auto
CMP = Rs 2,718
Price Target = Rs 3,500
  • With the help of new product launches over the last few years, Bajaj Auto Ltd (BAL) is well poised to take advantage of the secular growth in the two-wheeler market. BAL is likely to consolidate its position in the market further as the new product launches continue.
  • The three-wheeler segment, which is a high-margin business, is turning around after a brief lull. The changes in the regulatory regime in favour of vehicles using cleaner fuel is likely to boost the demand for threewheelers where BAL is the undisputed leader.
  • With the increased contribution of high-margin vehicles and the softening of the prices of steel, BAL is expected to see a 23% compounded annual growth in its earnings over FY2006-08E.
  • The stock is currently quoting at a PER of 16.1x its FY2008E earnings. The investment on the company.s books (Rs 648 per share) and the insurance subsidiaries (Rs920 per share) add substantial value to BAL.s fair value.

Stock Recommendations for this week

Recommendation: Buy
CMP = Rs 283
Price target: Rs 340
  • In a recent development, the energy division of Thermax Ltd has bagged three orders, details of which are given below.
  • 2 x 25 megawatt (MW) cogeneration plant from a PVC and caustic soda manufacturer in Tamil Nadu. The value of the order is Rs140 crore.
  • 1 x 40MW IPP being developed by a leading power utility company from Kolkata. The value of the order is approximately Rs150 crore.
  • A repeat order from a leading cement manufacturer in south India for a unit of 18MW to be set up in Andhra Pradesh valued at approximately Rs55 crore.
  • The above three orders are valued at Rs345 crore. These are large ticket orders, which in effect are accelerating the growth momentum in the company’s order book. Earlier the energy division of Thermax had bagged the single largest order valued at about Rs360 crore from Reliance Industries for their new refinery project.
  • This order was for the design, manufacture, supply, erection and commissioning of auxiliary boilers and a heat recovery stem generator (HRSG).

Stock Recommendation for this volatile season...

Welspun India
Recommendation: Buy
CMP = Rs 97
Price target: Rs 140
  • Welspun India Ltd (WIL) has reported a profit after tax (PAT) of Rs10.71 crore for Q4FY2006 and Rs41.55 crore for FY2006. The earnings per share for Q4FY2006 stood at Rs1.35 and that for FY2006 at Rs5.35.
  • The sales grew by 38.9% from Rs147.61 crore in Q4FY2005 to Rs205.10 crore in Q4FY2006. The exports grew by 37.5% from Rs135.59 crore in Q4FY2005 to Rs186.41 crore in Q4FY2006.
  • The operating profit grew at a lower pace of 20.4% from Rs26.11 crore in Q4FY2005 to Rs31.42 crore in Q4FY2006 mainly on account of the increased staff cost and other expenditure. The PAT stood at Rs10.71 crore in Q4FY2006 as against Rs10.17 crore in Q4FY2005, a growth of merely 5.1% on account of the higher depreciation and interest cost.
  • WIL's net sales have grown by 37.2% from Rs476.31 crore in FY2005 to Rs653.73 crore in FY2006, led by a 37.5% growth in exports. However, the PAT growth was muted at 7.7% year on year (yoy) for FY2006 and the same stood at Rs41.55 crore in FY2006 as against Rs38.58 crore in FY2005.
  • WIL spent Rs575 crore for capital expenditure (capex) for the phase I of its expansion, which has already gone on stream and the benefits of of the same will be reflected in FY2007. WIL has lined up a capex of Rs650 crore for phase II, most of which would be completed by Q4FY2007.
  • WIL will be a key beneficiary of the growth in the home textiles exports as its product offerings will include terry towels where it is a leading player as well as bed linen and decorative linen items, making it a complete home textiles shop.
  • I expect WIL's revenues to grow at a compounded annual growth rate (CAGR) of 48% over FY2006-08 and the earnings to grow at a CAGR of 52% over the same period from Rs41.2 crore in FY2006 to Rs95.9 crore in FY2008.
  • At the current market price of Rs97, WIL is trading at 7.7x its FY2008E earnings and 6.7x its FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). I maintain a Buy on WIL with a price target of Rs140.

Stock Recommendations in this volatile market

Omax Auto
Recommendation: Buy
CMP = Rs 82
Price target: Rs178
  • Omax Auto's Q4FY2006 net sales were flat at Rs142 crore. The earnings before interest, depreciation, tax and amortisation (EBIDTA) margin for the quarter declined by 230 basis points to 8.1% mainly due to an increase in the employee and fuel costs. The profit after tax (PAT) for the quarter is down by 7% to Rs4.95 crore.
  • For the full year, the sales have registered a growth of 9.2% to Rs578 crore. Exports for FY2006 were at Rs27 crore as compared with Rs15 crore in the previous year.
  • The operating profit for the year rose marginally by 1% to Rs49.8 crore, as the operating profit margin (OPM) declined from 9.3% to 8.6%. The net profit for the year was flat at Rs20.04 crore as compared with Rs20.29 crore in FY2005.
  • The company is aiming to double its exports in the next two years. The domestic operations are expected to recover with the stabilisation and improvement of the performance of its Bangalore and Binola plants.
  • The earnings estimate for FY2007 is upgraded by 6.4% to Rs14.9 and introducing our earnings estimate for FY2008 at Rs20.8.
  • At the current market price of Rs82, the stock trades at 4.1x its FY2008E earnings. I maintain Buy call on the stock with a price target of Rs178.
Recommendation: Buy
CMP = Rs 982
Price target: Rs 1,130
  • Lupin to market Cefdinir suspensions
  • Lupin has announced that the US Food and Drug Administration (US FDA) has approved the company's abbreviated new drug application (ANDA) for Cefdinir suspension 125mg/5ml.

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