Investors with a long-term perspective may use attractive valuations and buy the stock of Amara Raja Batteries . At Rs 90.6, the stock trades at 8.9 times the trailing four quarter earnings, at a discount to competitor, Exide Industries, that trades at a trailing earnings price-multiple of 19.1 times. We had given a buy recommendation at Rs 100 in October 2008.
Since then, even with the automotive component sector facing a severe downturn on the back of reduced demand from automakers, ARB has made up through its industrial division and the battery replacement market. Capacity expansion plans, its entry into new segments and research efforts strengthen the potential of this stock.
Replacement demand makes for the bulk of ARB’s automotive revenues for ARB, constituting 61 per cent of sales with a 29 per cent market share in the automotive aftermarket sales. Ignoring the tame sales last year, vehicle sales have been robust in the years prior — year-on-year growth in passenger cars between 2006-07 and 2007-08 was 21.7 and 13.3 per cent respectively. Commercial vehicle sales grew 31.3 and 4.9 per cent in the same period. ARB supplies to both these segments, and replacement demand will, therefore, be a key factor boosting sales, since most batteries have maximum a four-year life span, and will necessarily have to be replaced.
Serving this demand is further helped by ARB’s extensive retail network — the company has over 18,000 retail outlets besides franchised distributors and Amaron Pitstops — its exclusive brand stores in urban areas. Rural markets have been tapped through PowerZone, which number more than 500 stores. The retail reach, coupled with brand building efforts will help stimulate sales.
Within the industrial segment, ARB supplies batteries for telecom infrastructure, UPS systems, railways, and has started supplying to the IT and banking segments. About 70 per cent of revenues in the industrial division stem from the telecom sector, and infrastructure investment in this sector will boost demand.
ARB addresses the OEM requirements of a vast number of automakers such as Honda, Ford, Fiat, Ashok Leyland, General Motors and others, catering to the passenger and commercial vehicles. This sector constitutes 25 per cent of revenues, and the company has attempted to combat the slowdown by reaching a wider section of automakers, entering the two-wheeler segment with its Amaron Pro-Bike and launching batteries with extended warranties and new ranges of batteries.
Exports account for 11 per cent of the automotive segment and the company, therefore is sheltered to an extent from the global auto slowdown though foreign exchange losses are still a concern.
An investment of Rs 96 crore will be made in manufacturing capacity expansion, ramping up production capacity from 1.2 million units to 1.8 for its VRLA battery and from 1.9 million units to 2.5 million units for its motorcycle batteries.
Sales have grown at a CAGR of 50 per cent, while profits posted a 50 per cent CAGR for the years between 2006 and 2009. Global lead prices were on the downswing between September and March 2009 hitting a low of $845 per tonne in December. Per tonne price of lead averaged $1,858 in September, dropping to $1,244 by end-March. The effect of this showed up in margins, with an improvement of 55 basis points to 11.3 per cent at the operating level in the March 2009 quarter over the March 08 quarter.
However, higher depreciation brought net margins down to 8.6 per cent, a slight drop from 8.9 per cent in the same quarter in 2008. Leverage is on the low side at 0.8 times equity, and interest payouts have remained steady at 1 per cent of sales turnover.
Thursday, June 18, 2009
CRISIL: Buy
Fresh investments can be considered in Credit Rating Information Services of India (CRISIL) stock. CRISIL is the largest credit rating agency in India also engaged in research and advisory services.
The credit rating business offers huge growth potential in India as the corporate debt and fixed income market in India is still in a nascent stage. While demand for rating services (especially bank loan ratings) provides high earnings visibility, CRISIL’s significant market share, zero debt, diversified revenue mix and superior margins (net profit margin of 27 per cent) are the key investment arguments.
At the current market price of Rs 3,265, the stock is trading at a trailing one year price to consolidated earnings multiple of 16.4.
That is at a discount to its lone listed competitor ICRA (20.2 times). CRISIL is essentially a defensive stock despite its mid-cap status. A low beta (0.47) led to its under-performance in the bull market, but the stock fared better than the market in the 2008 meltdown.
CRISIL claims a more than 55 per cent market share in bank loan ratings and a 70 per cent market penetration in debt ratings. The company’s net profit grew at 50 per cent compounded annual rate over the three years to 2008, while revenues grew at 42 per cent during the same period.
For the year 2008, 41 per cent of CRISIL’s revenues came from the research business, 30 per cent from ratings and the advisory business contributed to 19 per cent of the revenues.
In recent years, the contribution from the research business has steadily risen, from 11 per cent in March, 2005 to 44 per cent in December, 2008. However, ratings contributed 46 per cent in the latest March quarter.
After net profit growth of 68 per cent, on consolidated operations in the calendar year 2008, growth moderated to a modest 11 per cent for the quarter ended March 2009.
Lower revenue growth (3.1 per cent year-on-year), operating loss in its advisory business (Rs 1.4 crore loss against 2.36 crore profit last year) and discontinuation of revenues from the Gas Strategies group which CRISIL divested in December 2008, were triggers.
Operating margins moderated from 31 per cent to 38 per cent, even as the ratings business continued to grow at a strong pace (31 per cent for the quarter ended March) during the quarter.
An Rs 2.03 lakh crore Infrastructure investment is estimated to be required in the current Five Year Plan (2007-12). Even if this is funded through a debt-equity of 75:25; it offers immense scope for debt fund raising and thus, ratings.
Other rating opportunities include banks’ capital rising of over Rs 3 lakh crore to meet the minimum capital adequacy norm of 12 per cent.
The credit rating business offers huge growth potential in India as the corporate debt and fixed income market in India is still in a nascent stage. While demand for rating services (especially bank loan ratings) provides high earnings visibility, CRISIL’s significant market share, zero debt, diversified revenue mix and superior margins (net profit margin of 27 per cent) are the key investment arguments.
At the current market price of Rs 3,265, the stock is trading at a trailing one year price to consolidated earnings multiple of 16.4.
That is at a discount to its lone listed competitor ICRA (20.2 times). CRISIL is essentially a defensive stock despite its mid-cap status. A low beta (0.47) led to its under-performance in the bull market, but the stock fared better than the market in the 2008 meltdown.
CRISIL claims a more than 55 per cent market share in bank loan ratings and a 70 per cent market penetration in debt ratings. The company’s net profit grew at 50 per cent compounded annual rate over the three years to 2008, while revenues grew at 42 per cent during the same period.
For the year 2008, 41 per cent of CRISIL’s revenues came from the research business, 30 per cent from ratings and the advisory business contributed to 19 per cent of the revenues.
In recent years, the contribution from the research business has steadily risen, from 11 per cent in March, 2005 to 44 per cent in December, 2008. However, ratings contributed 46 per cent in the latest March quarter.
After net profit growth of 68 per cent, on consolidated operations in the calendar year 2008, growth moderated to a modest 11 per cent for the quarter ended March 2009.
Lower revenue growth (3.1 per cent year-on-year), operating loss in its advisory business (Rs 1.4 crore loss against 2.36 crore profit last year) and discontinuation of revenues from the Gas Strategies group which CRISIL divested in December 2008, were triggers.
Operating margins moderated from 31 per cent to 38 per cent, even as the ratings business continued to grow at a strong pace (31 per cent for the quarter ended March) during the quarter.
An Rs 2.03 lakh crore Infrastructure investment is estimated to be required in the current Five Year Plan (2007-12). Even if this is funded through a debt-equity of 75:25; it offers immense scope for debt fund raising and thus, ratings.
Other rating opportunities include banks’ capital rising of over Rs 3 lakh crore to meet the minimum capital adequacy norm of 12 per cent.
Dr Reddy’s Laboratories: Buy
Investors with a long-term horizon can consider buying the stock of Dr Reddy’s Laboratories (DRL) given its strong product pipeline, strengthening presence in key markets such as North America, Russia,Europe and India and the reduced uncertainty about the fortunes of its German business, Betapharm.
The earlier-than-expected approval for the company’s OTC generic Omeprazole by the USFDA also strengthen the case for investing in the stock. At the current market price of Rs 701, the stock trades at a somewhat high valuation of about 14 times its likely FY-10 per share earnings.
Dr Reddy’s has a fairly strong pipeline of over 68 new drug applications pending approvals by the US FDA, which represent a substantial earnings trigger for the company. The latest USFDA approval for the company’s Omeprazole Mg drug, which is the generic version of AstraZeneca plc’s Prilosec, is a case in point. The approval will grant DRL access into a roughly $360 million market, which features just another generic player, Perrigo.
That said, the company will be tested on its marketing and brand recall prowess since the product will be OTC and not prescription-based.
However, since the formulation patent expires only in 2016, it leaves DRL with sufficient time to capitalise on this business opportunity.
Sumatriptan sales, which had pepped up the revenues significantly since its Nov ‘07 launch now enjoys a share of over 50 per cent in the market, which features four players.
This revenue opportunity, however, may remain only till August ‘10, by when DRL is slated to lose its exclusivity. This may lead to a decline in the company’s operating performance.
Despite concerns of a falling ruble, DRL improved its revenues from Russia and CIS, well within the credit limit offered to its customers, by effecting price hikes.
It managed to grow its volumes by over 14 per cent in the country despite an industry de-growth of 0.2 per cent. Its stronghold is further reflected in the fact that its top ten brands in the country contributed to over 71 per cent of the revenue growth.
Overall, revenues from Russia registered a 41 per cent growth in FY-09. The management expects to maintain a healthy growth rate this year. However, excessive forex fluctuations can play spoilsport.
Concerns over DRL’s German arm appear to be on the wane, with Betapharm securing 23 contracts with German health insurer, AOK. Its contracts make up 18 per cent of the overall volumes awarded by the insurer.
For FY-09, the company recorded a one-time non-cash impairment loss with respect to intangible assets (Rs 326 crore) and goodwill (Rs 1,185 crore) in its German business, driven primarily by the shift in market dynamics towards tender-based supply model, characterised by decrease in market prices.
For FY-09, DRL’s sales growth in India remained muted at 6 per cent due to supply chain restructuring (to replenishment based-model) and a slow pace of product launches.
The management expects to ramp up product launches, both in-house and licensed, and increase product reach and coverage to grow from hereon.
The earlier-than-expected approval for the company’s OTC generic Omeprazole by the USFDA also strengthen the case for investing in the stock. At the current market price of Rs 701, the stock trades at a somewhat high valuation of about 14 times its likely FY-10 per share earnings.
Dr Reddy’s has a fairly strong pipeline of over 68 new drug applications pending approvals by the US FDA, which represent a substantial earnings trigger for the company. The latest USFDA approval for the company’s Omeprazole Mg drug, which is the generic version of AstraZeneca plc’s Prilosec, is a case in point. The approval will grant DRL access into a roughly $360 million market, which features just another generic player, Perrigo.
That said, the company will be tested on its marketing and brand recall prowess since the product will be OTC and not prescription-based.
However, since the formulation patent expires only in 2016, it leaves DRL with sufficient time to capitalise on this business opportunity.
Sumatriptan sales, which had pepped up the revenues significantly since its Nov ‘07 launch now enjoys a share of over 50 per cent in the market, which features four players.
This revenue opportunity, however, may remain only till August ‘10, by when DRL is slated to lose its exclusivity. This may lead to a decline in the company’s operating performance.
Despite concerns of a falling ruble, DRL improved its revenues from Russia and CIS, well within the credit limit offered to its customers, by effecting price hikes.
It managed to grow its volumes by over 14 per cent in the country despite an industry de-growth of 0.2 per cent. Its stronghold is further reflected in the fact that its top ten brands in the country contributed to over 71 per cent of the revenue growth.
Overall, revenues from Russia registered a 41 per cent growth in FY-09. The management expects to maintain a healthy growth rate this year. However, excessive forex fluctuations can play spoilsport.
Concerns over DRL’s German arm appear to be on the wane, with Betapharm securing 23 contracts with German health insurer, AOK. Its contracts make up 18 per cent of the overall volumes awarded by the insurer.
For FY-09, the company recorded a one-time non-cash impairment loss with respect to intangible assets (Rs 326 crore) and goodwill (Rs 1,185 crore) in its German business, driven primarily by the shift in market dynamics towards tender-based supply model, characterised by decrease in market prices.
For FY-09, DRL’s sales growth in India remained muted at 6 per cent due to supply chain restructuring (to replenishment based-model) and a slow pace of product launches.
The management expects to ramp up product launches, both in-house and licensed, and increase product reach and coverage to grow from hereon.
Sesa Goa: Buy
Acquired mining capacities that may deliver substantial volume additions and a likely recovery in iron ore prices over the next two years, make the stock of Sesa Goa a good investment for those with a three-year perspective. At Rs 200, the stock is trading at 8.6 times its fully diluted earnings for 2008-09. That is at a discount to its historic valuations as well as global iron ore majors such as BHP Billiton and Rio Tinto, making it an attractive investment within metal stocks.
Sustained signs of recovery in China’s steel sector, consolidation in the global iron ore sector and the additional volumes likely from Sesa Goa’s recent Rs 1,850-crore deal to acquire a 100 per cent stake in VS Dempo & Company, point to improved earnings prospects for the company.
A weak trend in spot prices of iron ore led to poor performance from Sesa Goa over the past two quarters, though the year 2008-09 saw a 50 per cent profit growth. Renewed Chinese buying this year and a recovery across the commodities pack has firmed up spot iron ore prices from their lows; though prices still hover far below their peaks.
The Dempo acquisition, funded entirely through internal accruals, will deliver numerous benefits for Sesa Goa. It is expected to give the company access to 60 million tonnes of mineable reserves, adding to its own reserve of 230 mt. Like Sesa Goa, Dempo markets much of its iron ore in the spot market. Apart from Nippon Steel of Japan, which procures a part of its requirement on long-term contracts; three fourths of the output goes to Chinese buyers at spot prices.
Dempo’s operations are also said to hold potential for margin optimisation. The 23 per cent addition to Sesa Goa’s sales volumes may offset any impact from lower iron ore realisations that are likely over the next couple of quarters. An unexpected dip in Chinese demand, rising freight rates and regulatory intervention to curb iron ore exports are the key risks to the earnings outlook.
Sustained signs of recovery in China’s steel sector, consolidation in the global iron ore sector and the additional volumes likely from Sesa Goa’s recent Rs 1,850-crore deal to acquire a 100 per cent stake in VS Dempo & Company, point to improved earnings prospects for the company.
A weak trend in spot prices of iron ore led to poor performance from Sesa Goa over the past two quarters, though the year 2008-09 saw a 50 per cent profit growth. Renewed Chinese buying this year and a recovery across the commodities pack has firmed up spot iron ore prices from their lows; though prices still hover far below their peaks.
The Dempo acquisition, funded entirely through internal accruals, will deliver numerous benefits for Sesa Goa. It is expected to give the company access to 60 million tonnes of mineable reserves, adding to its own reserve of 230 mt. Like Sesa Goa, Dempo markets much of its iron ore in the spot market. Apart from Nippon Steel of Japan, which procures a part of its requirement on long-term contracts; three fourths of the output goes to Chinese buyers at spot prices.
Dempo’s operations are also said to hold potential for margin optimisation. The 23 per cent addition to Sesa Goa’s sales volumes may offset any impact from lower iron ore realisations that are likely over the next couple of quarters. An unexpected dip in Chinese demand, rising freight rates and regulatory intervention to curb iron ore exports are the key risks to the earnings outlook.
Monday, June 1, 2009
Redington India: Buy
Investors with a three-year horizon may buy the shares of Redington India, an IT hardware and software distributor.
The company has potential for scaling up its sales in high growth markets of India, West Asia and Europe, even in a slowing global economy. Given the sharp rise in markets, investors may consider buying the stocks in a phased manner to capitalise on declines linked to broader markets. At Rs 230, the stock trades at 11 times its likely 2009-10 per share earnings.
In the recent March quarter, Redington’s revenues grew by 7.7 per cent over the same period in 2007, while net profits grew by 18.5 per cent over the same period.
Improving trends in IT hardware shipments, diversification from sales of electronic goods, and expanding after-sales services offer scope for revenue growth, while helping margin expansion. After three successive quarters of decline in hardware shipments around the world, sales growth is just starting to revive in the March quarter, especially in India, West Asian and African regions.
According to a recent IDC report, personal computer shipments in India have increased by 8 per cent sequentially in the recent March quarter. Further, hardware and software sales are likely to be to the tune of Rs 60,703 crore (7.1 per cent growth over 2008) and Rs 11,300 crore (17.4 per cent growth) in 2009.
This is expected to be led by Government spending on IT enablement, especially in schools and colleges, e-governance projects, and banking sectors. With the new Government in place, a continuity of policies is expected in these areas. IDC pegs the Middle-East and African IT markets to be worth $80 billion by 2013, up from $51 billion in 2008. Other research agencies such as TPI also point out the increasing average contract values in the West Asian region.
The company has also diversified into selling non-IT products such as cameras, consumer-durables, and mobile-phones. Redington has tied up with Nokia to distribute the latter’s mobile phones in Africa and Australia. Given the relatively under-penetrated African market and the interest shown by several operators such as Bharti Airtel, Vodafone and several Chinese operators in having a larger footprint there, this partnership could be quite fruitful.
Competition from well-entrenched distributors such as Ingram Micro and the resulting pricing pressure is a key risk to this recommendation. Given the capital intensive nature of business, interest costs have increased by 36.8 per cent for the company in 2008-09, but due to margin expansion, the interest cover has been stable.
The company has potential for scaling up its sales in high growth markets of India, West Asia and Europe, even in a slowing global economy. Given the sharp rise in markets, investors may consider buying the stocks in a phased manner to capitalise on declines linked to broader markets. At Rs 230, the stock trades at 11 times its likely 2009-10 per share earnings.
In the recent March quarter, Redington’s revenues grew by 7.7 per cent over the same period in 2007, while net profits grew by 18.5 per cent over the same period.
Improving trends in IT hardware shipments, diversification from sales of electronic goods, and expanding after-sales services offer scope for revenue growth, while helping margin expansion. After three successive quarters of decline in hardware shipments around the world, sales growth is just starting to revive in the March quarter, especially in India, West Asian and African regions.
According to a recent IDC report, personal computer shipments in India have increased by 8 per cent sequentially in the recent March quarter. Further, hardware and software sales are likely to be to the tune of Rs 60,703 crore (7.1 per cent growth over 2008) and Rs 11,300 crore (17.4 per cent growth) in 2009.
This is expected to be led by Government spending on IT enablement, especially in schools and colleges, e-governance projects, and banking sectors. With the new Government in place, a continuity of policies is expected in these areas. IDC pegs the Middle-East and African IT markets to be worth $80 billion by 2013, up from $51 billion in 2008. Other research agencies such as TPI also point out the increasing average contract values in the West Asian region.
The company has also diversified into selling non-IT products such as cameras, consumer-durables, and mobile-phones. Redington has tied up with Nokia to distribute the latter’s mobile phones in Africa and Australia. Given the relatively under-penetrated African market and the interest shown by several operators such as Bharti Airtel, Vodafone and several Chinese operators in having a larger footprint there, this partnership could be quite fruitful.
Competition from well-entrenched distributors such as Ingram Micro and the resulting pricing pressure is a key risk to this recommendation. Given the capital intensive nature of business, interest costs have increased by 36.8 per cent for the company in 2008-09, but due to margin expansion, the interest cover has been stable.
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