Stock Idea - Tata Chemicals

Recommendation: Buy

CMP: Rs 276 (as of Wednesday)

Target Price: Rs 374


Key points:

·         The acquisition of Brunner Mond in Aug 2006 propelled Tata Chemicals (TCL) into the league of global soda ash majors. The Brunner Mond Group has manufacturing facilities in the UK, Netherlands and Kenya.

·         The capacity of the Magadi plant in Kenya has been doubled from 3.5 lakh tonnes to 7 lakh tonnes. I expect the expanded capacity to operate at 38% utilization levels in FY08E and attain full utilization from next year onwards.

·         In a nutshell, Potential upside: 36%, and I maintain Buy recommendation with a time frame of 12 months.

Invest in Tata Indo-Global Infrastructure Fund

Global Infrastructure – A Growth Story

As populations grow across the world and countries begin to adopt a free market economy, natural growth forces start driving economic prosperity. This economic prosperity then drives people to aspire for better quality of life, which in turn leads companies to aspire for higher business growth to service these aspirations. To support higher growth and better quality of life, the need for quality infrastructure comes to the fore.

Advantages of Tata Indo-Global Infrastructure Fund

·         Advantage of past experience – Tata Mutual Fund has experience in the infrastructure sector through managing the Tata Infrastructure Fund.

·         Advantage of spends on Indian and Global Infrastructure - Investors can now, for the first time, tap the wealth creation potential of both Indian and global infrastructure development.

·         Advantage of Diversification - Investment across a range of infrastructure assets and low co-relation with traditional asset classes leads to opportunity to reduce portfolio risk.

·         Advantage of need to build Infrastructure locally - Infrastructure cannot be imported and has to be built by local companies. Hence experience shows that local companies benefit from infrastructure spends

Key features of the fund:

·         A three-year, close-ended equity scheme. Upon completion of three years, the scheme will automatically be converted into an open-ended scheme, without any further reference from the mutual fund / trustee / unit holders.

·         The investment focus would be guided by the growth potential and other economic factors of the countries. Looking at the current global economic outlook and estimates of infrastructure spending, the fund managers expect to have a focus on investment opportunities in India and other growing economies.

·         Dividend and growth options available.

Note: Minimum application amount Rs 10,000 and in multiples of Re 1 thereafter.


Stock Idea - India Cements

Recommendation: Buy

CMP = Rs 285

Price target: Rs 300


Key points:

  • On implementation of the revised capex plan the company will emerge as one of largest cement players in the south with a capacity of 15MMT.
  • Consequently, it will have higher pricing power in the wake of the downturn in the cement cycle. The higher prices in the south coupled with the savings from blending will drive the profitability of the company going ahead.
  • Also, the company's strategy of putting up additional capacities through the brownfield route rather than the greenfield route will save its capital costs and thus enhance its RoCE.
  • I expect the company's earnings to grow at a compounded annual growth rate of 27% over FY2007-09 on an enhanced equity capital of Rs260 crore.
  • The stock has appreciated by 22% in the last one month. At the current market price of Rs 285, the stock is currently trading at 9.9x its FY2009 EPS and an enterprise value/EBITDA of 5.8x.
  • I maintain price target of Rs 300 per share on this stock.

Stock Idea - Marksans Pharma

Recommendation: Book Profits!

CMP: Rs 98

Key points:

  • Marksans Pharma's (Marksans) performance in FY2007 has been extremely disappointing. The company's revenues declined by 17% whereas its profits plunged by a massive 56% to Rs 9.9 crore. The company has reported poor revenues in all segments of its business. Sales of bulk drugs have decreased by 35.8% year on year (yoy), led by the decline in bulk drug sales in domestic and export markets, whereas the sales of formulations remained flat at Rs 136 crore in FY2007.
  • Ciprofloxacin and Ranitidine form the mainstay of Marksans' bulk business. With increasing commoditisation and competition from Chinese players, the prices for Ciprofloxacin bulk and Ranitidine bulk have fallen by approximately 28% each in the last one year, leading to a decline in the realisations. Due to this, the company's bulk business has plunged by almost 36% in FY2007 and 42% in Q1FY2008. The uncertainty over the future prices of these bulk drugs is a cause for concern and makes Marksans' bulk business unpredictable. 
  • Marksans had raised $50 million in November 2005 through a foreign currency convertible bond (FCCB) issue, primarily to fund acquisitions. Even though the redemption date for the FCCBs is distant--in November 2010--yet the conversion price of each bond into an equity share stands at Rs 336.92, which is almost three times the current market price of Rs 98 per share. Further, if the bonds are not converted into equity shares by November 2010, Marksans will have to redeem the bonds at 145.2% of their principal amount.
  • I believe the risk of non-conversion and the resultant burden of the redemption premium are causing Marksans to retain the FCCB money as cash instead of deploying it for acquisitions. Despite giving repeated promises and timelines, the management has not been able to deliver on several counts, ranging from growth in the domestic market, to execution of the CRAMS orders and approval of regulatory filings.
  • The company seems to be in an investment phase, planning for its future growth in the domestic market and its foray into newer markets such as South Africa, Europe and the USA. At the current price of Rs 98.0, the stock is trading at 52x its FY2007 consolidated earnings.
  • In view of the disappointing performance in FY2007 and the uncertain outlook on the future prospects of the company, I advise investors to book profits on the stock.

Stock Idea - Visa Steel Ltd.

Recommendation: Buy

CMP = Rs 32.95 (as of Friday)

Price Target = Rs 39.5

Key Points:

·         Visa Steel Ltd (VSL), an emerging integrated special and stainless steel player, is part of the Kolkata-based Visa Group based in Kolkata with manufacturing facilities in Kalinagar and Golagaoan, both in Orissa. The company produces pig iron, lam coke and chrome concentrates.

·         VSL is implementing a Rs 600 crore capex program that would transform its business profile from a secondary steel manufacturer to an integrated steel player with linkages across the entire value chain from critical raw materials such as iron ore, chrome ore and coal to value-added steel products. It is also integrating forward to manufacture special steel and stainless steel. Post expansion, we expect the company to emerge as one of the lowest cost producers of stainless steel in the country.

·         The company is integrating backwards with captive ownership of critical raw materials (iron ore), which would enable it withstand pricing pressures and face competition better compared to its peers. It is setting up a power plant, which would reduce its dependence on the grid power and in turn increase operating margin. The surplus from the coke oven will be sold to the market and directly get added to the bottom line.

·         In FY07, the company reported a top line of Rs 532.70 crore and bottom line of Rs 20.54. In Q108, sales dipped 38.3% y-o-y to Rs 69.41 crore, while bottom line fell 36.8% y-o-y to Rs 5.13 crore. The company's expansion project is expected to help it procure raw materials at the lowest cost and in turn increase margins. The usage of the coke is less as compared to actual production and hence the surplus could be sold.

·         I expect the benefits to partly accrue this year and fully in FY09. The integration to value-added products would drive the company's top line going forward and we expect it to post the topline of Rs 1,168 crore and a bottom line of Rs 57.4 crore in FY09.

·         The company is expected to double its top line and triple its bottom line on the back of capacity expansion and linkages into value added products. At the current price of Rs 32.90, the stock is trading at 5.84x the FY09E EPS. I expect the integration to drive the growth momentum going forward and the stock to rise 20% to Rs 39.50 within the coming 3-6 months.

·         The stock has seen a strong uptrend for the last one year. The major trend continues to remain positive. Currently, the stock has got into a consolidation zone between Rs 1,400 and Rs 1,600 range, providing accumulation opportunities and is expected to breakout outside this range to test new highs. The short and medium-term averages have once again converged and a crossover should see another run-up. The RSI indicator has bottomed out and shows strength, while the MACD has corrected and is awaiting a positive crossover.

·         Considering all above factors, I maintain Buy call on VSL with a price target of Rs 39.5.

Sector Overview - Banking

I expect the earnings of the major banks to grow at 20.5% in Q2FY2008. The net interest margin (NIM) is expected to remain under pressure (analyzed in detail later). However the fee income and treasury gains are likely to keep the non-interest component robust. I expect the core operating profit to grow at 28.5% driven by an improvement in the net core income and lower operating costs. However, provisions are expected to remain mixed with some banks likely to report higher provisions due to their asset mix (banks with higher retail exposure are likely to report higher provisions in line with the previous quarter).

I expect the NIM to remain under pressure for most public sector banks, however, the NIM for all the three leading private sector banks ICICI Bank, HDFC Bank and Axis Bank is likely to remain stable or report some marginal improvement due to the availability of higher float funds during Q2FY2008 after their recent round of capital raising. For banks like State Bank of India (SBI) and Punjab National Bank (PNB), I expect the NIM to remain under pressure (details provided later). Again, some banks may opt (not compulsory for banks) to deduct their investment amortisation expenses from the interest income from Q2FY2008 onwards as suggested by the Reserve Bank of India (RBI). Currently, the banks are adjusting the same through their other income, hence the readjustment.

Although the investment amortisation would not affect the earnings, it is likely to affect banks' NIMs based on the composition of their investment portfolio and amount of amortisation expenses. The core non-interest income component is likely to be steady driven by the fee income growth. However, the total non-interest income component is likely to get a boost from higher treasury gains likely to be reported during the quarter due to a decline in the benchmark yields in the bond market.

The operating expenses are expected to remain stable with some minor one-off items likely to be reported by Axis Bank due to its re-branding exercise undertaken. With a higher net income growth and stable operating expenses, I expect a robust 28.5% yoy increase in the core operating profits during Q2FY2008. Total provisions are also expected to be mixed for Q2FY2008. With the benchmark yields likely to decline sequentially, I do not expect any major marked-to-market investment depreciation on the statutory liquidity ratio (SLR) portfolio of banks.

However, after the subprime crisis, global yields have shot up significantly and among Indian banks only ICICI Bank has some exposure to foreign collateralised debt obligation papers. Hence I expect ICICI Bank to report higher MTM provisions on its non-SLR portfolio. Loan-loss provisions in absolute terms are likely to remain stable on a sequential basis but show a significant rise on a year-on-year (y-o-y) basis. Many credit rating agencies have also been voicing their concerns on the increase in defaults on the personal loan portfolios of banks.

Key Highlights & Expectations:

  • ICICI Bank: Float funds available with the bank after the follow-on offer should help it in improving the NIM marginally, however low domestic credit demand and increased CRR requirements could offset the positives from the float funds. The non-interest income growth will remain steady; however, provisions may remain high due to higher marked-to-market provisions on non-SLR portfolio. I have assumed that the bank would provide around Rs 150 crore on its non-SLR portfolio during the quarter. Any improvement in yields going forward would result in lower provisions and improvement in the profitability.
  • Axis Bank: The bank is expected to show best earnings growth among the private banks. Axis Bank's NIM is expected to benefit marginally from the float funds available after the combined GDR and domestic placements. The operating expenses are expected to remain high, as the bank has been hiring aggressively. Some one-time expenses related to re-branding exercise are expected.
  • SBI: I expect the NIM to decline sequentially by 8 basis points. Better money market yields after the ceiling on the reverse repo amount was abolished should help the bank to negate some of the pressure on the NIM from higher cost of deposits.
  • BOI: The bank is expected to show best earnings growth among the public sector banks. The NIM is likely to decline marginally, however the bank is expected to report robust non-interest earnings driven by higher treasury gains due to the stake sale of IL&FS Investments Managers for a profit of around Rs 40-42 crore.
  • PNB: I expect the net interest income growth to remain weak and the NIM to decline by 7 basis points sequentially. The staff expense component and the provision charges could significantly alter PNB's reported results compared with our expectations. In Q1FY2008 PNB had provided Rs 200 crore towards transitional shortfall as per revised AS-15 guidelines and had indicated that another Rs 700 crore would be adjusted during the current fiscal. I have assumed that whatever excess needs to be provided over and above the existing costs would be equally spread among the remaining three quarters. Hence, the treatment by the bank for these incremental expenses contrary to our expectations could materially alter the results.
  • BOB: I expect the NIM to show a marginal decline of 2-3 basis points. I have also not factored in any treasury gains from the second round of stake sale in National Stock Exchange by the bank. However, the overall treasury profits are expected to remain buoyant driven by normal trading gains.

Invest in ICICI Prudential Indo Asia Fund - NFO closes on September 21

"7 out of the top 10 fastest growing economies are from Asia - Gain from IT."

With Asia (excluding Japan) contributes over 42% to the World’s GDP growth, 23% of the world trade & 50 % of global population. Asia would very soon be one of the most rapidly developing and industrially diverse areas in the world with some of the world's most exciting investment opportunities.

The NFO - ICICI Prudential Indo Asia Equity Fund is a diversified equity scheme designed to invest predominantly in equity and equity related securities.


The NFO closes on Sept 21, 2007 and the units will be available at Rs.10 per unit.



·         Mutual Fund Family ICICI Prudential Mutual Fund 

·         Fund Class Equity Diversified

·         Fund Type Open-Ended

·         Investment plan  Growth & Dividend

Knowledge Nuggets - Why invest in an ARBITRAGE FUND?

An Arbitrage fund identifies and takes advantage of spreads between the stock price and its futures price. This results in a relatively high return at negligible risk for the investors.Tax incidences on Arbitrage Fund is much more favorable than FDs as its treated as Equity investment. This makes it very attractive for investors who otherwise invest in FDs...

Performance of Arbitrage Funds

Scheme Name3 Months*6 Months*
SBI Arbitrage Opportunities Fund -
UTI Spread Fund - Growth 9.84 9.17
JM Arbitrage Advantage Fund - Growth
9.16 9.16
ICICI Prudential Blended Plan - Option
A - Growth
9.37 8.85
Standard Chartered Arbitrage Fund -
Plan A (Regular) - Growth
8.12 8.52
JM Equity & Derivative Fund - Growth
9.14 7.53

  • Short Term Capital Gain - 10%
  • Long Term (over 1 year) Capital Gain - Zero
  • Dividend payout - Tax free
  • No TDS deduction on redemption

Stock Idea - Bartronics India

Recommendation: Buy

CMP = Rs 234 (as of Thursday)

Price Target = Rs 338


Key Points:

·         Bartronics India (BIL), one of the first Automatic Identification and Data Capture (AIDC) solutions company, is leveraging its existing client base and expertise to move up the value chain and emerge as the largest end-to-end AIDC solutions provider in the country.

·         It is investing more than Rs 270 crore into a new 80-million smart cards manufacturing facility that would make it one of the biggest players in South Asia and enable revenue growth by 130% CAGR over FY07-09E.

·         I recommend a price target of Rs 338 with a 6 months target.

Market Performance Update - Market slips on weak IIP numbers

After exhibiting firm trend for the better part of the session on Wednesday, September 12, the Sensex closed with a loss of 37 points. The market resumed on a positive note and rose over 118 points to touch the day's high at 15,661 in mid-morning trades. Reliance Industries and Larsen & Toubro led the rally, but caution and lack of news capped the gains as the market neared record highs.


However, the Sensex fell into negative territory soon after the release of weaker-than-expected industrial production data. The industrial output in July rose to 7.1% from a year earlier, well below the forecast of 9.6%. The market remained subdued thereafter with alternate bouts of buying and selling in index pivotal stocks. Selling intensified towards the close and the market touched the day's low at 15,487. The Sensex finally closed the session at 15,505, down 37 points. The Nifty ended the session at 4,497 with a little change.


The market breadth was positive, with the gainers outpacing the losers. Of the 2,753 stocks that traded on the BSE, 1,538 stocks advanced, 1,163 stocks declined and 52 stocks ended unchanged. Most of the sectoral indices ended in the red. The BSE FMCG index dropped 0.77% at 2,082 followed by the BSE Bankex index (down 0.73% at 7,980) and the BSE PSU index (down 0.61% at 7,324). However, the BSE Realty index gained 1.47% at 7,642, the BSE Metal index (up 1.24% at 11,918) and the BSE CD index (up 0.81% at 4,595).


Among the Sensex stocks, Reliance Energy was the leading gainer and its stock price soared 3.24% at Rs888. Among other stocks, Bajaj Auto advanced 2.58% at Rs 2,393, Reliance Industries jumped 1.34% at Rs 2,013, while HDFC, Tata Steel, M&M, SBI and HLL closed with marginal gains. Among the laggards, NTPC slipped 2.76% at Rs 190, ITC shed 2.07% at Rs 180, ICICI Bank declined by 1.83% at Rs 885, Cipla fell by 1.46% at Rs 175 and Hindalco lost 1.21% at Rs 155.


Over 2.03 crore Tata Teleservices shares changed hands on the BSE followed by Nagarjuna Fertilisers (1.85 crore shares), Ispat Industries (1.48 crore shares), IFCI (1.46 crore shares) and Vishal Exports (1.25 crore shares). Reliance Capital registered a turnover of Rs 209 crore on the BSE followed by Everonn Systems (Rs 154 crore), Reliance Industries (Rs 151 crore), L&T (Rs 142 crore) and Reliance Energy (Rs 133 crore). 

Stock Idea - Alphageo India

Recommendation: Buy

CMP = Rs 416 (as of Monday)

Price target: Rs 517


Key points

·         In FY2007, Alphageo India’s (Alphageo) revenues increased by around 128% year on year (yoy) to Rs 54.3 crore. The operating profit rose by 128% yoy to Rs 25.5 crore as compared with Rs 11.2 crore in FY2006. However, the operating profit margin (OPM) remained almost flat at 46.9% in FY2007. The net profit grew at 78.3% yoy to Rs 7.5 crore.

·         The company witnessed a significant improvement in its project mix in FY2007, where the 3D projects made up around 77% of the total revenues as compared with around 44% in FY2006.

·         The company's order book as on April 30, 2007 stood at Rs 117.1 crore, which is around 70% higher than that of Rs68.8 crore on April 30, 2006. Around 85% of the company's current order book comprises of 3D projects.

·         During the year, the company received a Rs 58.4 crore contract from ONGC in the operational blocks of the Cauvery basin, Tamil Nadu. The contract will reduce company's excessive dependence on non-monsoon assignments. The Company added one more 3D crew in FY2007. The crew strength of the company now stands at five of which three are 3D crew and two are 2D crew.

·         Alphageo is the largest private sector player with five crew (three 3D crew and two 2D crew) in operation for 2D and 3D seismic services. The company is well versed with almost all the terrains in the country, which makes the company one of the most experienced (private sector) players in the country to take the advantage of the ongoing boom in oil and gas exploration in the country.

·         At the current market price of Rs 416, the stock discounts its FY2009E earnings by 8.0x and is available at enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4.0x.

·         I maintain Buy recommendation on the stock with a price target of Rs 517.

Stock Idea - Bharat Heavy Electricals

Recommendation: Buy

CMP = Rs 1,910 (as of Monday)

Price target: Rs 1,954


Key points

·         Bharat Heavy Electricals Ltd (BHEL) had a splendid FY2007, registering a 29% growth in its revenues to Rs 18,739 crore and a 44% increase in its net earnings to Rs 2,414.7 crore. The operating profit margin (OPM) expanded marginally (by 60 basis points) to 19.1%.

·         The power business registered a healthy growth of 28% in its revenues while the industrial business recorded a rise of 32% in its revenues during the year.

·         It was a remarkable year for BHEL in terms of order inflow, which grew at 88.2% year on year (yoy) to Rs 35,643 crore. Consequently, the order backlog at the end of the year stood at Rs 55,000 crore. BHEL's cash pile stood at a huge Rs 5,808 crore at the end of FY2007, thanks to reduced working capital requirement and lower capital expenditure during the year.

·         The company has crafted a "Strategic plan 2012" targeting a turnover of $10 billion by 2012 vs $4 billion at present. In my view, the government's focus on increasing power generation in order to meet its mission of providing "power for all by 2012" would be one of the key catalysts for BHEL's order inflows, providing clear visibility to the company's earnings. 

·         I believe, in future, the execution capability of BHEL is going to be a key differentiating factor in this business and BHEL, which is a large player, will be better placed to secure the best orders in the industry.

·         Hence, I remain bullish on the stock and reiterate Buy recommendation with a price target of Rs 1,954. At the current market price Rs 1,910 the stock is trading at 30.4x its FY2008E earnings and 24.4x its FY2009E earnings.

Upcoming IPOs


Price Band: Rs 280/- to Rs 295/- per Share



No of shares being issued: 38,35,000 Equity Shares of Rs 10/- each 

Minimum Application: 20 Equity Shares and in multiples of 20 Equity Share.

Listing: Mumbai & NSE stock exchanges 



Offer Price: Rs 12/- per Share



No of shares being issued: 50,00,000 Equity Shares of Rs 10/- each 

Minimum Application: 500 Equity Shares and in multiples of 500 Equity Share.

Listing: Mumbai & NSE stock exchanges 



Price Band: Rs 44/- to Rs 52/- per Share



No of shares being issued: 573,932,895 Equity Shares of Rs 10/- each 

Minimum Application: 125 Equity Shares and in multiples of 125 Equity Share.

Listing: Mumbai & NSE stock exchanges 



Price Band: Rs 150/- to Rs 170/- per Share



No of shares being issued: 40,00,000 Equity Shares of Rs 10/- each 

Minimum Application: 40 Equity Shares and in multiples of 40 Equity Share.

Listing: Mumbai & NSE stock exchanges 



Price Band: Rs 370/- to Rs 415/- per Share



No of shares being issued: 35,24,349 Equity Shares of Rs 10/- each 

Minimum Application: not available

Listing: Mumbai & NSE stock exchanges 

New IPO - Power Grid Corporation of India - SUBSCRIBE

Company background:

Power Grid Corporation of India Ltd (PGCIL) started operations in 1992 as a part of the Government of India’s (GoI) initiative to consolidate all the interstate and interregional electric power transmission assets of the country in a single entity. As on June 30, 2007, PGCIL owns and operates 61,875 circuit kilometers of electric transmission lines and 106 electrical substations. This makes PGCIL Indias principal electric power transmission company, which owns and operates most of Indias interstate and inter-regional electric power transmission systems (ISTS). In FY2007 PGCIL transmitted approximately 298 billion units of electricity, representing approximately 45% of all the power generated in India. The GoI has entrusted PGCIL with the statutory role of Central Transmission Utility (CTU).


PGCIL has completed 101 transmission projects on its own aggregating to a value of Rs 25,181 crore. As on June 30, 2007, the company has 45 transmission projects in various stages of implementation and plans to invest another Rs 55,000 crore in transmission projects during the Eleventh Five Year Plan (2007-2012). It currently manages the national power grid with inter regional capacity of 14,100 mega watt (MW), which shall be enhanced to more than 37,000MW by 2012. The tariffs for PGCILs transmission projects are determined by the Central Electricity Regulatory Commission (CERC), pursuant to the electricity and CERC regulations. The transmission tariffs are presently determined on cost-plus tariff basis.


The company also holds stakes in public-private joint ventures established for the development of dedicated private transmission lines. It has a 26% stake in Torrent Power Grid and a 20.63% equity stake in Jaypee Power Grid. The partners in these ventures are Torrent Power and Jaiprakash Hydropower respectively. The company has also developed a 2,000MW Tala transmission project through a joint venture in which PGCIL and Tata Power Company have a stake of 49% and 51% respectively.


Objective of the issue:

The issue of 57.39 crore equity shares (of which 38.26 crore is fresh issue and 19.13 crore is offer for sale by the Government of India) is aimed at raising Rs 2,525.3 crore to Rs 2,984.4 crore (depending on the price band of Rs 44-52 per share). The objectives of the issue are:

·         To achieve the benefit of listing the equity shares on the stock exchanges

·         To meet the capital requirement for certain identified transmission projects

·         For general corporate purpose


Issue details:

·         Issue opens: September 10, 2007

·         Issue closes: September 13, 2007

·         Issue size: 57.39 crore-equity shares

·         Reservation for employees: 1.39 crore shares

·         Fresh issue to public: 55.99 crore shares

·         Face value: Rs 10 each

·         Break-up of fresh issue to public:

-          QIB's portion : 27.99 crore shares

-          Retail portion : 19.59 crore shares

-          Non-institutional portion : 8.39 crore shares

·         Price band: Rs 44-52

·         Verdict: SUBSCRIBE

Investors - Be Warned About Early Polls

A leading consultancy group warns investors in India that general elections may take place after the next Budget itself…


Asking investors in India to remain alert to possible early general elections next year, financial conglomerate Citigroup has said that the UPA government may go for snap polls after announcing welfare schemes in the next Union Budget.


The Congress-led UPA government is facing opposition from the Left parties, which provide the crucial support to the government from outside, to the India-US nuclear deal. “India investors must remain cognisant of potential early national elections, anytime starting 2008,” Citigroup said.


Good news for business?


In its recent report on ‘India Equity Strategy’, Citigroup said Congress will most likely determine the timing of the polls and not the Left parties as the relations between the groups would get worse when elections get nearer.


“The Left parties may indeed be less than certain to repeat their current tally in Parliament and may not be so keen on precipitating early elections, whatever is their public posturing on certain issues,” the report said. The Left parties’ current tally of 60 MPs in Lok Sabha is their best ever and they have rarely had the pleasure of driving central government policies as they do now, Citigroup said.


Congress, on the other hand, may feel emboldened by an uncertain BJP and emerging tie-ups with key regional parties (for example BSP in UP), it said. Expecting 2008 to turn out into a national election year in India, the report said that the most probable timing of an early election could be in the summer – around 12 months before schedule – after the government has had a chance to push through more welfare schemes in the Union Budget.


Source: Mumbai Mirror

Stock Idea - India Cements

Recommendation: Buy

CMP = Rs 263 (as of Wednesday)

Price target: Rs 300


Key points

  • With a revised capital expenditure (capex) plan of 14 million metric tonne (MMT) by the end of FY2009, India Cements will emerge as one of the top five cement players in India in terms of capacity. The company will witness a robust volume growth of 23% over FY2007-09. 
  • South India is expected to witness a strong cement demand in the next couple of years due to heightened industrial activity and upcoming government projects.
  • The company received the Madras High Court's approval for merger of Visaka Cements in Q1FY2008.
  • For Q1FY2008, the combined turnover of the company stood at Rs 701 crore. The turnover was much in line with our expectations. Backed by higher realisations, the operating profit margin (OPM) improved by 400 basis points year on year (yoy) to 38%, whereas the earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne stood at Rs1,150. Consequently, the profit before tax (PBT) stood higher at Rs 215 crore beating our expectation of Rs 200 crore for the same.
  • In the last couple of months, the cement retail price has touched Rs 280 per bag in certain regions and the dealers expect it to touch Rs 300 per bag in the coming months. Considering the rise in prices, we are upgrading our estimates by 33.9% for FY2008 and 32.5% for FY2009.
  • The company's strategy of augmenting its capacity through the brownfield route at a lower capital cost will enhance the company’s return on capital employed (RoCE) going forward. The Lower capital cost coupled with higher profitability will put the company's financials in an enviable position.
  • Healthy financials, a leadership position in the South and a lower promoter stake make the company a potential target for acquisition. Whether the promoters will sell their stake is a question that time will answer but in case that happens we believe the acquirer will have to pay a hefty premium to the company as it will directly make them the market leader in the South.
  • I expect the earnings of the company to grow at a compounded annual growth rate (CAGR) of 27% over FY2007-09 on an enhanced equity capital of Rs 260 crore.
  • At the current market price of Rs 263, the stock is currently trading at 9.5x its FY2009E earnings per share (EPS) and at an enterprise value (EV)/EBITDA of 5.1x. Considering all these aspects, I maintain positive outlook on the stock with a revised price target of Rs 300.

Stock Idea - Elder Pharmaceuticals

Recommendation: Buy

CMP = Rs 399 (as of Wednesday)

Price target: Rs 508


Key points:

  • Elder Pharmaceuticals (Elder) has acquired a 51% stake in Biomeda Group in Bulgaria for 5 million euros (around Rs 28 crore) in an all-cash deal.
  • Biomeda is among Bulgaria's top ten oral dosage formulation manufacturer and distributor. The manufacturing division of the company includes a manufacturing facility to produce oral formulations and hard gelatin capsules. The company imports products from the global players and distributes them to clients all across the European Union through its warehouses.
  • In line with its strategy to expand its global footprint, Elder's acquisition of a 51% stake in Bulgaria's Biomeda group is expected to provide it with an entry point into the European markets. With Biomeda's stable of nine products and its strong relationships with global pharmaceutical companies, Elder hopes to grow the existing business of Biomeda at an annual rate of 15-20% in the next two-three years. Further, Elder is also planning to introduce products from its own portfolio into Bulgaria and the other European countries through Biomeda. 
  • I believe that through the introduction of Elder's products into the Bulgarian and other key European markets, Biomeda's sales will grow by 20% to 12 million euros in CY2008/FY2009 and by 50% to 18 million euros in CY2009/FY2010.
  • Further, cheaper sourcing of the raw materials and rationalisation of operating costs will improve Biomeda's margins from the current level of 8-10% to 12% in the next three years. Our back-of-the-envelope calculations indicate that after minority interest, the Biomeda acquisition will dilute Elder's earnings by Rs 0.06 per share in FY2008, but add Rs 0.8 per share in FY2009 and Rs 2.3 per share in FY2010. 
  • At the current market price of Rs 399, Elder is quoting at 9.9x its estimated FY2008 earnings and at 8.8x its estimated FY2009 earnings.
  • I maintain Buy recommendation on the stock with a price target of Rs 508.

Stock Idea - Tata Motors

Recommendation: Buy

CMP = Rs 691 (as of Tuesday)

Price target: Rs 792


Key points:

  • Tata Motors' overall sales for the month stood at 45,144 vehicles. The overall sales declined slightly by 0.4% on year-on-year basis. 
  • The commercial vehicle sales grew by 1.6% to 23,431 vehicles. The sales growth was driven by strong sales of light commercial vehicles (LCVs), which grew by 23% year on year on the back of its new launches Magic and Winger. The medium and heavy commercial vehicles (M&HCV) sales declined by 13.6% to 11,625 vehicles as the low demand continued in the segment. Our channel checks also reveal that the lower demand for M&HCV vehicles (particularly in the 12-16-tonne segment) led to a greater inventory creation in the system. Consequently, to fuel the growth the company has been offering attractive discounts of almost 4-6%.
  • Lower cargo availability during the monsoons caused the truck rentals to fall by about 1.5-2% on an average during the month. The lower cargo availability also led to a sharp decline in the round trips for truck operators, which is affecting their profitability slightly. The situation is expected to improve from the next month with the start of the festive season.
  • The passenger vehicle sales remained weak and declined by 5% in August to 16,620 vehicles. Indica sales dropped by 4% while Sumo and Safari sales dropped by 12% during the month. The lack of new product offerings has been the prime reason for the decline in the sales. The company has been offering discounts on most of its products and the discounts are likely to continue in September as well.
  • The exports remained stable and grew by 8% in August to 5,093 vehicles.
  • At the current market price of Rs 691, the stock discounts its FY2009E consolidated earnings by 10.6x and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 5.3x.
  • I maintain Buy recommendation on the stock with a price target of Rs 792.

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