Outlook Profit

Primary Fallout

Fri, 19 Feb 2010 00:00:00 GMT

Retail investors seem to have learnt a lesson from the high profile debacle of Reliance Power’s IPO in early 2008, by shunning most long gestation infrastructure IPOs. However, the same concerns are not being shared by qualified institutional buyers (QIBs) and high net worth individuals (HNIs), who have bailed out many an issue on their own strength, despite the fact that 30-35 per cent of the issues are reserved for retail investors. For example, JSW Energy, Godrej Properties, Cox and Kings and even the state-owned Oil India attracted impressive subscriptions because of massive participation from QIBs even though retail response was weak. Even in the case of Raj Oil Mills, it was HNIs who helped the issue sail through.

According to Jagganadham Thunuguntla, head of equities at SMC Capitals, the combination of expensive valuations and poor quality issues have made retail investors wary about the current IPO pipeline. A case in point is the Aqua Logistics issue, which wanted to raise Rs 150 crore in the price band of 200-225, but had to extend its closing date and trim its offer price from the earlier Rs 220-230 band. While some of the IPO issues are of unknown descendants, B Madhuprasad, vice-chairman of Keynote Corporate Services, which managed the small-sized Emmbi Polyarns and Thangamayil Jewellery issues, feels that since many of these entities are at an early stage of growth, they should not be deterred from accessing the public markets.

Burnt fingers

Retail investors are no longer making a beeline for IPOs


Subscription in (x)	Issue size	Overall	QIB	HNI	Retail

Emmbi Polyarns *	43	0.63	0.11	0.01	0.01
DB Realty *	1,500	3.38	3.29	3.15	0.02
DEN Networks	390	1.04	1	4.12	0.1
JSW Energy	2,700	1.66	2.88	0.74	0.17
Godrej Properties	462	3.99	7.45	0.41	0.33
MBL Infrastructure	103	1.97	3.35	2.65	0.4
Vascon Engineers	200	1.22	1.12	3.65	0.62
Raj Oil Mills	114	1.15	0.75	3.98	0.77
Cox and Kings	610	6.31	9.93	10.74	0.98
Edserve Softsystems	24	1.3	1.08	3.1	1.02
Globus Spirits	75	1.5	0.86	4.76	1.03
Indiabulls Power	1,529	21.84	40.49	5.76	1.09
Thangamayil Jewellery	29	1.22	0.56	3.79	1.09
Aqua Logistics*	150	0.77	0.09	1.62	1.37
Oil India	2,777	30.82	53.83	10.48	1.76
Euro Multivision	66	1.81	1.23	3.78	1.89
Astec Lifesciences	62	1.56	0.61	3	2.36
Excel Infoways	48	1.97	0.49	5.31	2.64
Pipavav Shipyard	513	8.25	10.63	14.82	2.9
Adani Power	2,488	21.64	39.48	8.62	2.97
Jindal Cotex	84	2.2	0.66	5.93	3.09
Mahindra Holiday	278	9.8	12.83	11.01	3.36
DB Corp	385	39.46	68.48	25.87	3.38
Jubliant Foodworks	33	30.98	59.38	51.95	3.79
NHPC	6,039	23.74	29.16	56.71	3.87
Thinksoft Global Services	46	2.57	0.31	6.05	4.31
Syncom Healthcare	56	5.17	0.99	16.6	6.25
Infinite Computers	190	44.35	48.44	106.02	11.06

*Subscription numbers as on Feb 2. Issue size in Rs cr. Source: SMC Capitals

Importantly, the appetite for long gestation projects such as power seems definitely out of favour and investors are pining for modestly priced issues which have the potential to offer reasonable returns, say merchant bankers. The exceptional response to Infinity Computers, which got oversubscribed almost 43 times, has stumped some industry observers.

Going ahead, market participants are unanimous that promoter expectations will have to be tempered. According to Thunuguntla, the unanticipated softness in the markets since January will act as a brake on unbridled pricing expectations. “Even the government will be on the back-foot with its divestment plans as they will have to offer a reasonable valuation for investors so that it leaves them with decent returns,” says the SMC executive. Issues such as NHPC, which were priced at 33 times earnings, may be a thing of the past. Market experts feel future issues may attract retail investors only if they are offered in the 15-16 times earnings band. But given that there is keen institutional interest, and promoters and merchant bankers have rarely played ball in the interest of retail investors, the possibility of lucrative offerings seems remote.

In The Danger Zone

Fri, 19 Feb 2010 00:00:00 GMT

Commodities headed for the biggest monthly drop in 13 months on concern that demand may wane as governments seek to control economic growth. The Standard & Poor’s GSCI Index of 24 raw materials dropped 6.8 per cent in January, the most since December 2008, led by slides of 17 per cent for both zinc and lead. Copper lost 8.5 per cent in January, also the most in 13 months, and crude oil fell 7.6 per cent, the first decline since July. Sugar, feeder cattle and platinum climbed.

Commodities last year rose the most in four decades, led by a doubling in copper, sugar and lead prices, as government spending programmes spurred speculation that raw-materials demand would increase after the biggest slump in the global economy since World War II. Investors poured a record $92 billion into commodities last year, Barclays Capital estimates. "The optimism that led into 2010 has dried up very quickly," said Jonathan Barratt, managing director at Commodity Broking Services Pty in Sydney. "Economies have been running off stimulus packages, not off genuine demand."

The Federal Reserve said it is taking steps to prepare investors for an end to stimulus. US economic growth expanded 5.7 per cent in the fourth quarter, the most in six years, according to a Commerce Department report. China started to restrict bank lending this month. Copper for delivery in three months dropped $148, or 2.2 per cent, to $6,750 a metric ton on the London Metal Exchange. Prices have declined 13 per cent from this year’s high three weeks ago. Inventories of copper in warehouses are at the highest since January 2004. China is the world’s largest buyer of copper used in pipes and wires and its purchases last year helped to support prices.

High copper

"China’s got very high copper stockpiles right now," said Charles Kernot, a mining analyst at Evolution Securities. "One would have to question how much more buying one can expect from them." Crude oil for March delivery was at $73.36 a barrel on the New York Mercantile Exchange, down 13 per cent from this year’s high of $84.45.

Commodities also have declined as the dollar strengthened, curbing investment demand for raw materials as an alternative asset. The US Dollar Index, a six-currency gauge of the greenback’s strength, has added 2 per cent this month after gaining 3 per cent in December.

Steep drop

The S&P GSCI Index fell 7 per cent in January

Source: Bloomberg

"The strength in the dollar is pushing back a lot of the metals, including copper," said Tom Hartmann, an analyst at Altavest Worldwide Trading LLC in Mission Viejo, California. "You would think that a stronger economy would improve demand for commodities, but right now it’s helping the dollar." Gold for immediate delivery fell 0.9 per cent to $1,077.55 an ounce, down 1.8 per cent this month. Investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by the metal, had dropped 1.9 per cent this month as of January 28, according to figures on the company’s website.

Liquidating gold

"Speculators are still liquidating gold, with no physical buying in sight," Andrey Kryuchenkov, an analyst at VTB Capital in London, said in a report. "Bullion is still trading on the back of swinging currency markets." Platinum, which is not in the GSCI index, has advanced 2.6 per cent this month after an ETF fund was introduced in the US.

Raw-sugar futures in New York have gained 12 per cent this month as buyers including India, the world’s biggest consumer, compete for limited supplies. Feeder cattle, calves that are not ready for slaughter, have climbed 3 per cent this month.

Grain and soybean prices have declined this month after the US Department of Agriculture raised its estimate of supplies. Corn futures have dropped 13 per cent in January, wheat is down 12 per cent and soybeans have slumped 12 per cent.

Balancing Act

Fri, 19 Feb 2010 00:00:00 GMT

As anticipated, Duvvuri Subbarao, governor of the Reserve Bank of India (RBI), has taken the first baby steps towards unwinding the easy money stance. In its third quarter review of the monetary policy end-January, the central bank hiked the cash reserve ratio (CRR), which is the portion of deposits banks must keep with the RBI, by 75 basis points to 5.75 per cent.

While the markets were expecting a 50 basis points hike in CRR together with a 25 basis points hike in the repo rate (the rate at which the central bank lends to banks), the central bank has shifted to “managing the recovery” from its earlier agenda of “managing the crisis”, and it has chosen to attack liquidity first.

The immediate impact of the CRR hike is that banks will have to place an additional Rs 36,000 crore with the central bank in two stages during the month. Today, more than the policy rate, liquidity is playing a critical role in driving the markets. While the hike will suck out about 50 per cent of excess liquidity from the system, the continued pick-up in credit, combined with seasonal tightness in liquidity closer to the financial year-end (when corporates make advance tax payments) is likely to push overnight rates higher in the coming months. That is why short-term interest rates are likely to have an upward bias as well.

The policy’s tone suggests that the central bank is more concerned about inflation, but it is also mindful that any measures it takes should not adversely impact growth. With wholesale price inflation surging to 7.3 per cent in December 2009 and the consumer price inflation in the teens, the RBI is focusing more on managing inflationary expectations.

Pay factor

Government’s fi nal consumption expenditure increased by 27 per cent in Q2 FY10, mainly on account of the disbursement of arrears from the Sixth Pay Commission

Source: RBI

Spending more

Government expenditure registered a sharp increase during April-November 2009

Source: RBI; Based on the budget documents of 27 state governments, of which two are vote-on-account

Yashika Singh, head of the economy analysis group at Dun & Bradstreet, says, “With the sustained increase in food prices posing the risk of wider inflationary pressures in the domestic economy, we had expected a hike in the CRR, albeit of 50 bps at this point, and another 25 bps by the end of the current financial year. The 75 bps hike indicates a faster tightening than what we had anticipated, thus, underscoring the central bank’s concern over containing inflationary expectations. Inflation is expected to be at 9 per cent by the end of the current fiscal, and, therefore, liquidity management has become paramount.”

While most experts believe that the central bank’s move is well calculated and calibrated, as the objective is to keep inflationary expectations anchored and maintain price stability, some differ. Tushar Poddar and Pranjul Bhandari of Goldman Sachs, said in a policy watch document that instead of sucking out liquidity, the central bank should have normalised policy rates, given the large increases in growth and inflation targets.

Comeback trail

GDP growth has been driven mainly by a rebound in industrial and services sector growth, after a noticeable fall in the wake of the global recession

Source: RBI

The RBI has changed its macro forecasts for the current fiscal (FY10). This includes GDP growth (from 6 per cent to 7.5 per cent), WPI inflation (from 6.5 per cent to 8.5 per cent), non-food bank credit (from 18 per cent to 16 per cent), broad money (from 17 per cent to 16.5 per cent) and bank deposits (from 18 per cent to 17 per cent). Elaborating on reasons behind the tepid credit growth, the central bank has reiterated that corporates have been increasingly accessing non-banking sources of funds this fiscal.

Banking analysts point out that though banks stand to lose out on account of the CRR hike, the current low interest rate regime, combined with reducing leverage in borrowers’ balance sheets owing to equity mop-up and rising earnings, would help revive credit demand from the current quarter onwards.

Vaibhav Agrawal, banking analyst at Angel Broking, expects that when interest rates begin to rise, banks with a higher share of low-cost deposits, also referred to as the CASA (current account savings account) ratio, and lower duration investment book, would be better positioned to protect their net interest margins. “Within the sector, we prefer private banks, on the likelihood of market share gains, as the external environment becomes more conducive from FY11 onwards. ICICI Bank, Axis Bank and HDFC Bank remain our top picks,” says Agrawal.

Now that Subbarao has played his cards, the action shifts to North Block, as the finance minister finalises the Union Budget that is to be presented by the month-end. While there is a strong case for phasing out transitory components of the stimulus and fiscal consolidation, some of these measures may have to be continued and even reinforced. Despite the hawkish tone, the policy statement clearly states that “the reversal of monetary accommodation cannot be effective unless there is also a rollback of government borrowing.” Now, that will depend on what the finance minister doles out on February 26.

Econo-Metric

57.5 India’s manufacturing Purchasing Managers’ Index rose to a 17-month high in January, signalling a considerable improvement in operating conditions of manufacturers. The seasonally adjusted HSBC Markit PMI was 55.6 a month ago.
19.34 mn tn Rice procured by the Food Corp of India and other state-owned companies in the current marketing season so far, that’s down around 540,000 tonne or 2.8 per cent from a year ago. Officials in the farm ministry as well as the Food Corp of India estimate that rice procurement will be down 15 per cent at 28 million tonne in the current marketing season ending September.
42% The year-on-year increase in Indian government’s fiscal deficit during April-December 2009-10, according to the Controller General of Accounts. Fiscal deficit in April-December accounted for 77.3 per cent of the budget target of Rs 4.010 trillion for the entire year. The government’s total receipts during the nine months rose 4.9 per cent to Rs 3.976 trillion, while net tax revenues declined by 0.8 per cent to Rs 3.076 trillion.
17.4% The increase in India’s food inflation rate in the 12 months to January 16, while fuel prices were also up by 5.7 per cent over the same period. Prices of potatoes have gone up by 57.56 per cent, pulses by 46.87 per cent, cereals by 14.06 per cent, rice by 12.6 per cent, wheat by 14.48 per cent, vegetables by 10.5 per cent, fruits by 4.17 per cent and milk by 13.95 per cent.
10.4% The year-on-year decline in non-food credit offtake from commercial banks as on November 20, 2009 as compared with 28 per cent on November 21, 2008, according to the RBI Macroeconomic and Monetary Developments Third Quarter Review 2009-10. The total outstanding credit as on November 20, 2009 was Rs 27,16,217 crore.

Beating A Retreat

Fri, 19 Feb 2010 00:00:00 GMT

In a reversal of fortunes, emerging market equity funds post their first net outflows in as much as 12 weeks on fears that the global recovery may take longer than earlier expected and that China would take strong monetary tightening measures.

According to EPFR Global, emerging Asia (ex-China) funds has seen net outflows of $3.9 billion in merely four trading days between January 22 and 27, while developing countries funds lost $608.5 million in the week ended January 27. During this period the MSCI Emerging Markets Index fell 3.7 per cent which was down 9.7 per cent from its January 11 highs.

On fears of overheating, the People’s Bank of China increased the reserve ratio by 0.5 per cent, its first hike since June 2008. In fact so committed the bankers seem on correcting the situation of lax loan regime that Industrial & Commercial Bank of China Ltd, China’s biggest lender by assets, has been reported to indicate to its branches in Beijing not to issue any fresh loans for the remaining of January.

Taking a knock

FII inflows into Indian equities has come off in the New Year

Source: Credit Suisse

To illustrate the overheating in the credit offtake, reports suggest that fresh loans during the first two weeks of the current year estimated to be around 1 trillion yuan ($146 billion) are already more than twice the monthly average of 400 billion yuan seen during the second half of last year.

Of the $3.9 billion outflow, India ranks third with net selling of $765 million preceded only by Taiwan which saw a selloff of $1.8 billion and Korea which saw $983 million leaving its door. China on the other hand has seen net outflows of $348 million, its highest in 18 weeks. Nearer home, the Reserve Bank of India has raised its GDP forecast to 7.5 per cent from the earlier 6 per cent projections even as it increased the cash reserve ratio by 75 basis points.

However, despite the selloff, emerging markets continued to see a net inflow of $1.9 billion in January. India saw net inflows of $788 million, still only a third of the $2,199 million it saw coming in December 2009.

For now there are contrasting views on what’s in store for the emerging markets. A recent HSBC report estimates the GDP of emerging countries to grow by 6.2 per cent in the current year, leaving developed countries far behind, which are expected to grow by only 1.9 per cent.

According to Stephen King, chief economist, HSBC, “No longer is it possible to argue convincingly that the US or European nations determine the agenda for the world economy as a whole. 2009 will surely go down as the year when we both uncovered the scale of the crisis in the developed world and celebrated the resilience of much of the emerging world in the face of what appeared to be a perfect economic storm.” The selling though, may not be quite all over yet. However, according to analysts Sakthi Siva and Kin Nang Chik of Credit Suisse, in spite of the huge selloff of $3.9 bn, going by historical basis, it would take a complete month for the net selling to end. Foreigners have been still being net buyers of $1.9 billion in January. So tighten your belts; there may be more potholes ahead.

Still Inhospitable

Fri, 19 Feb 2010 00:00:00 GMT

In a clear sign that the hospitality industry is facing headwinds even as the economic growth limps back to normalcy the Tata group-owned Indian Hotels Company’s net profit shrank by 23 per cent to Rs 65 crore in the third quarter ended December 2009, while revenues fell 4 per cent at Rs 437 crore. For the nine months ended December 2009, the company, which owns the Taj luxury chain, saw its profit after tax plummet 51 per cent at Rs 95 crore, while turnover declined 14 per cent to Rs 1,030 crore as average room rates (ARRs) remained subdued across major cities.

Debt continued to play spoilsport as servicing costs ate up more than half of the company’s earnings. At Rs 119 crore, interest costs amounted to 61 per cent of PBIT for the nine months.

In a bid to retire some of its offshore debt in international subsidiaries, the company has finalised a Rs 700 crore bond issue. The company has also moved the Rs 680 crore Sea Rock acquisition into a special purpose vehicle owned by the Tata Group and infused an equivalent sum back into IHCL. IHCL, which had acquired an 85 per cent stake in Sea Rock, said it continues to supervise Sea Rock’s development and operational management. IHCL now owns only 20 per cent stake in the property. The company disclosed that it has the option to repurchase the shares of the property at the end of a 37-month period. Analysts feel that with these steps the consolidated debt on the books will come to Rs 4,000 crore (from Rs 4,650 crore as on December 31, 2009) and ensure cash of around Rs 600 crore by the end of March 2010.

Under pressure

Growth in ARRs was subdued in the third quarter across major cities like Mumbai and Bangalore

Source: Company, KJMC Research

In a move indicating that Indian Hotels is not keen on pursuing the US-based Orient Express Hotels, the company stayed away from participating in the rights issue that concluded recently. As a result, IHCL’s stake in the US hotel chain is expected to decline to 7.75 per cent from earlier peak levels of 11.5 per cent in December 2007. The US chain had issued a rights issue for 12 million shares. According to media sources, one of the reasons why IHCL chose not to raise its investment was the rebuffing of partnership possibilities by OEH. But the fall in stake is not the only concern that IHCL may have to contend with. The value of its holding in OEH itself has collapsed as a result of the global meltdown. IHCL had invested $247 million, about Rs 1,000 crores (at 2007 rates) in OEH. That investment has now crashed to only a fourth at Rs 260 crore.

Despite concerns, analysts believe that the company will be able to improve its operations in the next fiscal driven by its domestic operations and stability in its overseas operations.

Enterprising!

Fri, 19 Feb 2010 00:00:00 GMT

As India’s fourth-largest IT services company, HCL Technologies has a lot going for it, a part of which comes from having made the largest acquisition yet by any technology company in India. Still, the Noida-based tech company hasn’t quite enjoyed the investor adulation that the top three IT companies — Infosys, TCS and Wipro — have received. Not without reason. Even though HCL Tech has been able to match the top three in revenue growth, it has exhibited too much volatility in earnings. Forex losses, interest costs and amortisation costs (arising from an acquisition) have severely dented the company’s profitability. Even in the recently concluded December 2009 quarter, net profit took a hit. HCL Tech posted a 20.5 per cent fall in consolidated net profit, hurt by forex losses, declining other income and higher costs. There’s also the issue of the company not being as transparent as the top three, in its disclosures. Combined, they’ve had a dampening effect on valuations.

The company’s December quarter numbers didn’t exactly set the markets on fire, as expectations were quite high post the stellar performances by Infosys, TCS and Wipro. So when HCL Tech reported flat sequential revenue growth, it got a thumbs down from the market. To be fair to HCL Tech, this performance comes off a relatively high base. Its growth was at the top end of the range among top-tier IT firms in the September quarter (3.8 per cent) and it was far ahead of the rest in the June quarter (7.6 per cent). It added revenues of around $466 million during the calendar year ending December 2009, the best among software services vendors, including TCS, Infosys, Wipro and Accenture and this is clearly evident in the revenue growth on a year-on-year basis. HCL Tech’s revenue growth in the last quarter was 22.8 per cent y-o-y. TCS’ revenue growth was just 5.1 per cent.

The company, which has transformed its business model by building a strong presence in niche high-growth areas, has been able to clinch a number of large deals over the past two years, fighting off competition from its larger domestic rivals and international companies. The company won 12 outsourcing deals in the October-December quarter, including two large deals in the financial services sector. It also recently bagged a $50 million (Rs 231 crore) deal from UK-based defence equipment maker Meggitt for providing engineering services. Analysts say these large deals and the growth potential in niche segments should keep the company’s revenues humming along nicely, but it will take a couple of quarters more for the volatility in earnings to smoothen out.

Driving growth

Clearly, HCL Tech’s infrastructure services, which primarily involves the management of a company’s IT infrastructure, has been the engine of growth, with large deals continuing to boost revenues. The business posted a double-digit jump in revenues in dollar terms — 26 per cent in the June 2009 quarter and 15 per cent in the September 2009 quarter. Despite a higher base, this segment still managed to deliver 8 per cent growth in the December quarter. Infrastructure service revenues have leaped by 10 times in the past five years. Its share in revenues has grown from 8 per cent in September 2005 to 20 per cent in September 2010. Operating margins have also improved from 10 per cent to 20 per cent during the same period.

Scaling up

Enterprise application services is expected to drive growth

Source: IIFL Research; Numbers are adjusted for noncash ESOP charges

Industry consultant Gartner predicts that the demand for infrastructure services will rise by 25-27 per cent over the next two years. For HCL Tech, in particular, a lot of deals in this area will come up for renewal in the next few years, which should feed revenues. The company anticipates that contracts worth about $60 billion will be renewed worldwide in the next 2-3 years, a significant portion of which will involve providing infrastructure services.

In the past two years, the company signed deals worth $2.65 billion with major clients such as Nokia,Xerox and Viacom. Most of these deals have been scaled up in recent months and will provide the necessary fuel to maintain growth momentum.

Another important focus area has been enterprise application services (EAS), which deals with automating a company’s entire operations, resulting in faster transactions and quicker response time. To buttress its presence here, HCL Tech completed its acquisition of UK-based Axon Group for £441 million in December 2008, making it the largest acquisition by any Indian tech company and outbidding rivals like Infosys Technologies. Axon is a consulting firm that offers services to companies that use SAP, an enterprise resource planning product which includes the implementation and management of the product.

Growth area

HCL Tech’s infrastructure services business has been the engine of growth

Source: HCL Technologies; BNP Paribas; Note: The company has fi nancial year ending June

The acquisition catapulted HCL Tech into the top 10 service providers in EAS, with a combined SAP consulting and support capability that is 60 per cent larger than TCS, its
closest Indian rival in this area. At that time, there were definite concerns that the deal would prove to be too much for HCL to handle, given that it happened in the middle of the global economic slowdown. HCL was, however, unfazed by the criticism, saying that it viewed Axon as a strategic acquisition, since it had identified EAS as one of the eight focus areas for growth. Indeed, the global market for SAP-related services is estimated at $26 billion, $7.5 billion of which is offshored. Yet, Indian companies only claim only about $1.5 billion of the offshore market, which indicates that there is plenty of opportunity to expand.

While the slowdown did hit revenues from this business, it looks like things are improving now. The EAS market is showing signs of an early recovery. (HCL Axon recently won an SAP implementation deal from drug giant GSK). In the December quarter, this business bounced back with a 4.6 per cent growth after a 5 per cent drop in revenues in the September quarter, putting all concerns about the integration of the acquired business to rest. Analysts say Axon will benefit from an increase in deals flow in the coming quarters. They estimate that Axon could haul in $400 million to HCL Tech’s revenues (nearly 15 per cent of the total) in 2010. Both companies are also increasingly cross-selling their services, which will lead to a deepening of their client base. Also, a large number from the senior management team of Satyam’s enterprise application services have moved to HCL Tech, boosting the company’s skills in this business. The high-end consulting capabilities resulting from the Axon acquisition, makes HCL Tech a formidable enterprise applications player.

Another business trying to find its groove is business process outsourcing (BPO). Client losses and a decline in the voice-based business have affected HCL Tech’s operations seriously in the BPO segment.

Rough ride

Currency fluctuation, amortisation of goodwill and higher interest expenses led to higher volatility in QoQ profit

Source: Company, IIFL Research

The chasm widens

The stock trades at a 42 per cent valuation discount to Infosys compared with the historical discount of 24 per cent

Source: Bloomberg, IIFL Research; *Note: Two-year rolling forward PER (Price earning ratio) considered due to the heavy impact of amortisation and forex charges during FY10

Till September 2008, the voice-based business accounted for all of BPO revenues. But today, it is just 65 per cent. The reduction is deliberate as the company is working on increasing its transaction-based services, which earn better margins. Consequently, revenues from voice-based services are likely to slip even further to 50 per cent in the next few years. The company says acquisitions will also be one of the growth drivers for this business. The company acquired US-based Control Point Solutions and UK-based Liberata Financial Services as part of this strategy. HCL has said that acquisitions will account for at least 55 per cent of its growth, while the rest would be derived through the organic route. The strategy seems to be working already. HCL landed a $200 million deal from UK-based Equitable Life. According to the management, the ongoing restructuring of the BPO business will keep its performance muted in the near term and a recovery is expected from the middle of next financial year.

Profit woes

While the company has been able to keep its nose ahead of its peers in revenue growth, profitability has been curtailed due to derivative losses, acquisition expenses and the amortisation of intangibles related to the Axon acquisition in 2009. HCL Tech took a $500 million foreign-currency loan to complete the acquisition in the September 2009 quarter. However, to mitigate the effect of foreign exchange rate volatility, the company converted $200 million of this into a rupee loan (of Rs 1,000 crore), with a coupon rate of 8 per cent. The company has managed to bring down its net debt from $220 million in September 2009 to $136 million in December 2009. At a post results press conference, chief financial officer Anil Chanana said that the company has already generated cash of $190 million in the first half of the current fiscal, as against $210 million in entire FY09. According to him, over the next two quarters the company will be debt-free and cash positive.

HCL Tech is doing its best to restore stability to earnings. For a start, it has significantly cut down its foreign-exchange cover. Outstanding hedges have come down to $645 million in December 2009 from $2.2 billion in March 2008. While losses on forex positions will continue, the good news is that the impact will no longer be as severe as it was a few quarters ago. Currency fluctuations and salary hikes have, nevertheless, put pressure on operating margins, currently at 16.6 per cent in the second quarter against 18 per cent in the September 2009 quarter. However, the company is hoping that there will be enough scope for improving profitability going forward. “We don’t want to be a low-margin vendor. We have only three quarters of bad news left, after that it will be only good news,” said Vineet Nayar, CEO, during the press conference to announce the December 2009 quarter results. For HCL Tech, rising revenues could offset some of the currency and salary-imposed pressures. Earnings are expected to stabilise in FY11. Even as amortisation costs and forex losses (both seen as non-recurring in FY11) keep profits subdued in 2010, analysts expect earnings to grow by 37 per cent in FY11. IIFL Research, however, expects a 58 per cent growth.

Although HCL Tech ranks among the top tier companies by revenues, it’s a different story with stock valuations, as its valuation is far lower than the top three. Analysts say this is because Infosys, Wipro and TCS have very high standards of transparency and corporate governance and on this front, HCL Tech has some catching up to do. No wonder then that the discount on HCL Tech’s valuations has widened to 30-45 per cent against that of its peers from the historical 17-25 per cent.

The management is confident that it will be able to match the revenue growth of its larger peers in dollar terms. While the top three companies may continue to do well, given the demand recovery, a chunk of the future gains already seem to be captured in their valuations. By getting its house in order, HCL Tech now seems ready to be a credible alternative to the top tier companies. While the valuation gap will continue to exist, it could narrow down in the coming quarters. At the current price of Rs 348, the stock trades at a P/E of 13 times its 2011 estimated earnings.

On Turnaround Track

Fri, 19 Feb 2010 00:00:00 GMT

Everybody loves a turnaround story. We know the ones in Bollywood because they’re the ones that are written about most. But there are many in real life that are perhaps more inspiring. It’s hard not to root for the underdog who beats the odds to come out a winner. Now, we have one from the stock markets that goes by the name of Stone India. After working its way through the economic slump, this G P Goenka group company seems to have readied its comeback script.

But what exactly is Stone India’s business? In a few words, it’s an engineering company which specialises in railway infrastructure and accessories. Stone India is hoping to become a one-stop shop for railway clients some day soon.

Today, its fortunes are closely intertwined with the spending plans of the Indian Railways, its biggest customer that accounts for about 90 per cent of the company’s sales. Going forward, there would be a continued surge in spending in this transport segment, taking into account the dedicated freight corridor or the metro rail projects across various cities. This should give the turnaround hero, Stone India, enough opportunity to surprise investors with a happy twist in the tale.

Cast in stone

First, a little bit about the industry that Stone India operates in. As economies expand, the demand for goods and commodities increases and so does the need to transport them from place to place. In India, the explosive economic expansion of the past few years has resulted in a shortage of various goods and transport modes.

On its part, Indian Railways, the largest railway operator in the country, has raised outlays for rolling stock. (See chart, On track) Rolling stock refers to all vehicles that move on the railway, powered and unpowered, like locomotives, railroad cars, coaches and wagons. In the past six years, the outlay has jumped by 17 per cent (compounded basis) and it currently stands at Rs 12,393 crore. In addition, the dedicated freight projects and expenditure on metropolitan rail transport projects are likely to lead to higher demand for rolling stock from public and private companies. For Stone India, therefore, a period of good growth is relatively assured.

Chugging along

The company’s fortunes are closely linked to the Indian Railways’ rolling stock outlay, which has grown at a good pace of 17 per cent CAGR since FY05

Source: Indian Railways, Brokerage reports

Stone India makes locomotive brake systems and offers a range of mechanical and electrical equipment for the railroad company. Says Amitava Mondal, managing director, Stone India, “At Stone, we have three main lines of business, namely carriage brake group, locomotive brake group and the train power group.” The carriage product group mainly deals with the supply of airbrake system for wagons and coaches and distributor valves. The locomotive product group deals with the supply of pneumatic braking equipment for the railways, as well as air dryers for locomotives and EMUs. The train power group supplies train lighting equipment for passenger coaches and pantographs. “In the brakes business, spread over carriage, diesel and electric locomotives, we have about 25 per cent of the market,” Mondal says.

The company has two plants, one in Kolkata (West Bengal) and the other in Nalagarh (Himachal Pradesh). Apart from the Indian Railways, Stone India’s other clients include Texmaco, Titagarh Wagons, Modern Industries, Hindustan Engineering Industries, Jupiter Wagon, and Jessop & Company. Its main competitors include companies like Knorr Bremse, Faively Transport, Kerala Electrics and Escorts.

Hitting a rough patch

After a good run, Stone India’s fortunes reversed in FY09 as raw material prices surged. Unable to pass on the costs to customers, it was forced to absorb most of the price hikes. “The main reason for a drop in profitably in 2008-09 was mainly on account of an unexpected rise in the steel prices and various input costs. Stone India takes up fixed-price tenders from various railway outfits, like Diesel Locomotive Works, Chittarajan Railway Works, Zonal Railways, and the input price increases could not be passed on for these tenders,” informs Mondal.

Strong traction

The company is likely to turn profitable led by strong sales growth in the current fiscal

In Rs cr	FY04	FY05	FY06	FY07	FY08	FY09	FY10E	FY11E
Sales	30	40.3	53	70.7	79.1	80.4	100	127.5
Op. profit	-1.9	2.2	8.1	11.9	3	-4.7	12	15.3
Net profit	-9	2.3	8.3	10.6	9.1	-8.6	5.5	9.6
EPS (Rs)*	-11.9	3.04	11.1	14.04	11.9	-11.3	7.2	12.6
Equity capital	7.5	7.5	7.5	7.5	7.6	7.6	7.6	7.6
Sales growth (%)	1.7	34.4	31.5	33.4	11.9	1.7	24.3	27.5

Source: Bloomberg, company estimates; *After extraordinary items

Jewel stone

Stone India has very attractive P/B & P/S

	Price (Rs)	M cap (Rs cr)	P/B (x)	P/S (x)
L&T	1,673	100,438	7	2.4
Siemens	638	21,519	7.7	2.3
ABB	819	17,362	8.2	2.5
Alstom	582	3,899	9.6	1.7
Bharat Bijlee	1,082	611	3.1	1.1
Stone India	69	52	1.5	0.7

Source: Bloomberg; Note: P/S is Price to sales ratio

Total sales plunged to less than Rs 81 crore from nearly Rs 90 crore a year, a fall of almost 10 per cent. It also reported a loss of Rs 8.60 crore against a profit of more than Rs 9 crore in FY08. Of course, in FY08, profit was also inflated by the fact that it had transferred Rs 8.10 crore from the capital reserve account, and this accounted for a big chunk of the net income reported by Stone India. Without the transfer, the company would still have reported a profit, albeit a nominal figure, for the year. “However, off late the Indian Railways is allowing price variation clauses,” says Mondal.

Building scale

Going ahead, freight may throw up phenomenal opportunities for Stone India. If the talk of a dedicated freight corridor becomes a reality, the company’s fortunes will get a super-boost. With the dedicated freight corridor project becoming a reality in the near future, there is enough opportuity for the company to grow. The recently developed bogie mounted brake system is expected to lead growth and there is also the emerging opportunity to retrofit the same in the existing fleet of 2.5 lakh wagons.

The company inked a joint venture deal with US-based RailRunner NA Inc in September last year for making freight cars. The business is likely to be routed through a wholly-owned subsidiary called Stone Intermodal. Says Mondal, “Stone Intermodal will manufacture specially designed rolling stock bimodal vehicles which will have the flexibility to operate on the road as well as on rail without any terminal facility or with major material handling equipment.”

On a roll

The stock has tripled in the last one year

Source: Bloomberg

Earlier, the company had suggested that it could invest close to Rs 150 crore in this venture in two phases. The company is expected to retain a majority stake in the subsidiary even after the infusion of private equity. Debt levels in the subsidiary are expected to be minimal.

Another tie-up that has benefited the company is one with Japan’s Sumitomo Electric Industries, for making air springs. (Air Springs provide superior air cushion ride for passengers on trains running at higher speed. Sumitomo Electric Industries is a lead supplier of air springs for Bullet Trains in Japan.) The company expects to sell about Rs 12 crore of air springs per annum. Most of the newer products are produced at the Nalagarh plant (in Himachal).

The company is also expanding its capacity in Kolkata for which land has been acquired. About Rs 14-15 crore will be needed for the expansion. Company officials emphasise that the existing capacity and the expansion at Kolkata, which may come on-stream in a year, will be more than sufficient to service the growth plans of the company.

“In the first nine months of the current year, we have clocked Rs 71 crore in top line and Ebitda is at 9 per cent. With high value products from our new unit at Baddi, which also enjoys tax holidays, we expect to improve top line and margins in the coming years,” says Mondal.

Even margins are expected to look up and may stabilise at around 12 per cent on the Ebitda level, and at a net level they may remain in a band of 7-8 per cent on a net income basis in FY11. The company expects to return to the black with a net profit of Rs 5-6 crore in FY10.

Going cheap

The stock appears cheap at current levels, given the turnaround status of the company. On a price-to-sales (P/S) basis, the company is definitely undervalued compared with its peers. Stone India trades at a P/S ratio of 0.65 and a price-to-book ratio of 1.5, much lower than large engineering companies like L&T, Siemens, ABB, Alstom and Bharat Bijlee. (See table. Jewel stone)

So far, few institutional investors have shown interest in Stone India. The only large investor is National Insurance Company, which holds a 2.3 per cent stake in the company. The company has paid nominal dividends in three out of the past five years (it is unlikely to pay dividends for FY10), with the dividend payout ratio averaging 10 per cent.

The potential embedded in the growth of the railways has attracted interest from even the larger players like L&T, which bought a 14 per cent stake in Kalindee Rail Nirman (a turnkey project executor in railway track, signaling and telecommunication projects) in November 2008.

Stone India’s shares are trading at less than six times estimated earnings for FY11, rather low for a company operating in a stable growth environment. Buy with a 24-30 months
horizon.

Disclosure: The author does not own shares of Stone India, but has recommended the stock to family and friends who may hold them.

Smokescreen Q3

Fri, 19 Feb 2010 00:00:00 GMT

Though expectations were muted, India Inc certainly didn’t disappoint. Corporate performance in the past quarter has been the strongest after the financial storm in October 2008 that brought the world economy to its knees. After four consecutive quarters of decline in profit growth, Sensex earnings grew in double digits in the December quarter. Sales of companies comprising the Sensex grew by 29 per cent during the quarter and net profit by 18 per cent. On the face of it this looks pretty. But scratch the surface and you will find that it is no great shakes.

Firstly, the growth numbers are exaggerated because it was achieved on a small base last year. The year-ago quarter was a washout and most companies saw their earnings take a dive because of a severe contraction in demand, inventory losses due to a crash in commodity prices, and mark-to-market losses arising from a weakening rupee. This quarter, growth returned to normalcy but the picture appears rosy only due to the comparison with an exceptionally bad quarter.

Secondly, the sectors that came back on track do not inspire confidence in future growth. The big growth in the past quarter was seen in automobiles (passenger cars and two-wheeler), cement and metals apart from software services. The disappointments came in banks, the lifeblood of an economy; commercial vehicles, a lead indicator of economic growth; real estate and telecom. Consumer and pharmaceuticals showed steady growth, but that is not good news as they have been resilient even in bad times. Infrastructure has been a mixed bag but the miserable performance of Larsen and Toubro has splashed cold water on buzzing infrastructure stocks.

Ironically, metals and software services are a function of global factors and given that recovery out there is still hazy, it may not be too wise to extrapolate into the future. For automobiles and cement, the key driver was the stimulus package. Auto sales perked up on account of low interest rates, excise duty cuts and most importantly the spending gush post the release of the 6th pay commission arrears while cement was up on good volumes and duty cuts.

So the question is how long can this growth momentum sustain? In India, though the size of direct stimulus measures at $10 bn (0.8 per cent of GDP) has been modest in comparison to say a China where the stimulus package is pegged at $586 bn (13.3 per cent of GDP), the overall government spending in the recent past has been very strong. Between October 2008 and September 2009, government consumption in India increased by 29 per cent in real terms as against the historic average of 4.5 per cent.

While that might have been the right move to restore business and consumer confidence, the government’s going slow on spending will have an impact on growth if private spending does not step up. So far there are no signs of the latter happening. The investment cycle has been on the downswing since fiscal 2007 and growth in investments in the September 2009 quarter at 1.9 per cent was the lowest in the last eight years. Nilesh Jasani of Credit Suisse believes that earnings projections for FY11 will be met if and only if private sector investments pick up and foster economic growth.

Analysts are counting on an earnings growth upwards of 20 per cent for the next fiscal. While the first two quarters of FY11 may see some growth again because of a relatively modest numbers same period this fiscal, there may be little for markets to cheer. Stock prices have already factored in possible upgrades.

As a matter of fact, over the past six months, earnings upgrades have been a key factor in keeping up the momentum. Since April 2009, Sensex earnings estimate for 2011 have been marked up almost 30 per cent.

The bigger risk to earnings estimates comes from commodities companies failing to deliver. Analysts forecast that around 45 per cent of the Sensex earnings growth in 2011 will come from global commodities, which heavily depends on how sustainable the global recovery is. Then, inflation and the onset of an early interest rate tightening cycle also pose formidable market risks. While it may be reasonable to expect earnings upgrades going forward, the extent of revisions most probably is not going to trigger a significant re-rating of stocks.

This then brings us to the point on valuations. Currently, the Sensex is trading at 17 times 2011 estimated earnings ahead of its long-term average of 14 times. And then the fact that stocks have already run-up significantly and there is hardly any pocket where stocks look grossly undervalued means that there is little room for disappointment on the earnings front.

There is another key risk that the market may not be appreciating at this point. And that is, the possibility of the massive supply of paper (around $7-8 bn including PSU disinvestments) which could absorb the available liquidity capping gains in the secondary markets.

The harsh reality is while the argument for India’s long-term growth story remains strong, with sectors focused on domestic consumption expected to do well, the current valuations give little room for comfort. With most of the near-term positives priced in, the market remains vulnerable to negative surprises and clearly, investing in 2010 will be a lot more challenging than it was in the year gone by. Here is a review of how various sectors fared in the past quarter and how they are poised.

Automobiles

Fri, 19 Feb 2010 00:00:00 GMT

While the auto pack has delivered a stellar performance driven by volume growth, what has surprised analysts the most is the improvement in margins for most players. Be it Bajaj Auto or Maruti or Tata Motors, all the bigwigs have shown margin improvement despite the third quarter coming after a bumper festive season. In terms of earnings, most companies have beaten Street estimates. Two companies that need special mention here are: Bajaj Auto and Tata motors. Bajaj Auto has seen significant improvement in market share, which has reportedly gone up to 32 per cent from 21 per cent compared with Hero Honda’s stable 59 per cent. This improvement has come on the back of positive response to its new product launches. However, the Street is sceptical about visibility on earnings growth beyond the current fiscal as sales growth is expected to return to normal levels and most analysts feel at 15.5x FY11 earnings, the stock is expensive. In the case of Tata Motors, the company tasted success following the launch of Vista and deliveries of Nano, helping the company arrest its market share decline in the passenger car segment. From a valuation perspective, the stock trades at a P/E multiple of 19x FY11 earnings, but analysts are bullish on the stock as they see increasing traction in the main commercial vehicles business. For the small car giant, Maruti Suzuki, competition is expected to hot up further and analysts expect the company to lose share in the passenger car market over the next two years. The stock, which analysts believe is fairly valued, trades at a P/E of 15.2x estimated one-year forward earnings. Though the auto industry is expected to feel the pinch of rising raw material prices, an increase in volumes aided by a robust economy and higher selling prices will, to a certain extent, help soften the blow on margins.

Autos have beaten most other sectors, posting healthy growth in volumes plus a decent improvement in margins


in Rs cr	Dec 2009 quarter					9-months ended Dec 2009

	Net sales	Op profit	OPM (%)	Net profit	NPM (%)	Net sales	Op profit	OPM (%)	PAT	NPM (%)

Maruti Suzuki	7,503	1,217	15	688	9	21,198	3,240	15	1,841	9
y-o-y % chg	62	159	10	222	5	48	76	13	88.7	7
Tata Motors	8,980	819	13	400	5	23,363	2,767	12	1,643	7
y-o-y % chg	89	LP	-	LP	LP	25	218	5	301	2
Bajaj Auto	3,296	713	34	475	15	8,522	1,774	21	1,171	14
y-o-y % chg	57	161	13	189	8	22	105	12	123.4	8
Hero Honda	3,827	720	30	536	14	11,709	2,238	19	1,633	14
y-o-y % chg	32.8	53.5	16	78.3	10	306	377	16	443.6	10

Source: BSE; Note: Numbers indicated in the y-o-y % change row for OPM and NPM are the actual margins for the corresponding period of the previous year

Banks

Fri, 19 Feb 2010 00:00:00 GMT

A sluggish loan growth at 11.3 per cent till December 2009, combined with the overall deterioration in asset quality and a fall in treasury gains tempered bottom line growth for banks. The net profit of listed banks grew only 5 per cent, even as interest income grew at 16 per cent for the quarter.

Gross non-performing assets (NPAs) grew over 27 per cent and net NPAs increased by 31 per cent. This was on account of slippages from restructured assets, witnessed mostly by state-owned banks. The RBI had, in December 2008, allowed banks to restructure standard assets, including commercial real estate. These restructured advances constitute more than 5 per cent of the total advances. With some of these assets having slipped into the non-performing category in recent times (on account of default in the revised schedules of repayment) there was a spike in the quantum of distress assets portfolio, analysts said. The provisions and contingencies were much higher for state-owned banks with State Bank of India alone accounting for 2/3rd of the incremental NPAs of state-owned banks. However, margin growth remained stable and grew by about 20 basis points for all banks, as they continued to reap the benefits of deposit re-pricing. Going ahead, analysts are expecting a better performance in the last quarter of the fiscal as credit growth will boost the net interest income of banks. However, margin growth is expected to be flattish as the benefits of re-pricing deposits are expected to taper off by then.

State-owned banks have, however, historically traded at significant discount to their private-sector peers. For instance, SBI is trading at 2x, PNB at 1.8x and BoB at 1.2x FY11 adjusted book value. Among private sector banks, HDFC is trading at 3.2 times, while Axis is at 2.3 times. ICICI Bank is an exception at 1.5x its estimated book value, due to its recent slow growth rates.

With valuations of private sector banks looking rich compared with PSU banks, downside risks persist owing to hardening interest rates and asset quality concerns over the medium term.

A sluggish loan growth, fall in treasury gains and overall slip in asset quality marred performance of banks. Tough times are ahead

View Enlarge

Source: Brokerage reports; Note: Numbers indicated in the y-o-y % change row for net interest margin are the actual margins for the corresponding period of the previous year

Cement

Fri, 19 Feb 2010 00:00:00 GMT

Round one of the capacity build-up has affected south-based companies particularly hard. Majors like India Cements and Madras Cements, in particular, saw a sharp drop in margins as prices tumbled to 15-year lows in key markets such as Hyderabad. While the price drop has abated and even moved up slightly, volume growth has been good for all companies. Of the lot, Shree Cements showed the best sales growth at 30 per cent and almost 40 per cent for the nine months ended December 2009.

The Commonwealth Games, to be held in New Delhi late this year, have also ensured that volume growth for companies in the north remains robust. Central India and north-based companies such as Shree Cements particularly outperformed in an otherwise sapping price environment. The current estimate of cement capacity in the country is approximately 235 million tonne per annum. Even on a capacity utilisation basis, north and central India-based companies have fared better with utilisation rates reigning north of 90 per cent compared with near 80 per cent in the south. Analysts are positive on Shree Cement, which apart from a strong operating performance has an additional revenue stream to augment its profit growth. The company has excess power available for sale on merchant basis, which is expected to contribute significantly to the bottom line going ahead. Margin expansion at the operating level is expected for most companies in the first half of the calendar year which might be followed by a period of weakening given the oversupply situation.

Most volume growth estimates currently hover in the 10-12 per cent range for FY11. Analysts are still cautious of stock valuations amid the possibility of a hike in fuel rates and the reversal of stimulus benefits in the forthcoming Union Budget.

South-based companies have been hit hard by the fall in cement prices but relatively firm prices in the north helped players in that region put up a decent show. New capacities are expected to hurt cement prices adversely next year


in Rs cr	December 2009 quarter					9-months ended Dec 2009

	Net sales	Op profit	OPM (%)	Net profit	NPM (%)	Net sales	Op profit	OPM (%)	PAT	NPM (%)

Grasim	3,052	880	28.8	596	19.5	9,081	2,584	28.5	2,137	23.5
y-o-y % chg	15	111.3	15.7	80.8	12.4	14.5	66.6	19.6	69.2	15.9
India Cements	864	71	8.2	35	4	2,807	552	19.7	316	11.3
y-o-y % chg	0	-50.2	16.5	-43.8	7.2	-4	-11	21.2	-6.5	11.6
Madras Cements	607	60	9.9	16	2.6	2,223	598	27.1	324	14.6
y-o-y % chg	-0.3	-51.3	20.3	-74.5	10.3	17.7	16.6	26.6	-63.8	15.4
Shree Cements	866	240	27.8	167	19.3	2,688	888	33	747	27.8
y-o-y % chg	30.2	36.6	26.5	35.1	18.6	40.8	74.8	26.6	118.4	17.9
Ultratech	1,652	303	18.3	196	11.9	5,145	1,332	25.9	865	16.8
y-o-y % chg	1.3	-18.4	22.7	-17.8	14.6	13.8	29.1	22.8	29.5	14.8

Source: Bloomberg

Real Estate

Fri, 19 Feb 2010 00:00:00 GMT

Though it is early days to judge if housing demand is picking up after a prolonged slump, revenues showed signs of a pick-up in the third quarter. Most large players such as DLF, Unitech and HDIL reported a 30-50 per cent year-on-year increase in revenues, ahead of analysts’ expectations. Mid-sized player, Orbit Corporation, too, reported over 200 per cent jump y-o-y in net sales on the back of increase in prices and higher number of projects reaching the revenue-recognition stage.

Though there was a revival in overall demand, there was a shift in the product mix from premium housing and commercial real estate towards affordable housing segment. As a result, the rise in operating margins could not keep up pace with the increase in sales. This also impacted the bottom line of developers. The overall PAT margins were at 35-40 per cent for the December quarter, but still 300-350 basis points higher than the September 2009 average of 32 per cent. Other developers such as Anant Raj, HDIL and Ackruti, too, reported net profit margins of over 30 per cent. Going ahead, analysts expect margins to improve sequentially on account of the improved leverage positions of developers and a further pick-up in affordable housing segment as the economy improves.

With most realty companies especially in the mid segment such as Purvankara (NAV Rs 171), Anant Raj (Rs 252) and Orbit Corp (Rs 396) trading below their net asset values (NAV) compared with the bigger peers, analysts are more upbeat on the prospects of the mid-rung players.

Most real estate companies showed signs of a pick-up in the third quarter posting 30 to 50 per cent revenue growth


in Rs cr	December 2009 quarter					9-months ended Dec 2009

	Net sales	Op profit	OPM (%)	Net profit	NPM (%)	Net sales	Op profit	OPM (%)	PAT	NPM (%)

DLF	2,026	843	41.6	468	23.1	5,427	2,501	46.1	1,304	24
y-o-y % chg	48.2	9.2	56.5	-30.2	49.1	-39.2	-53.1	59.8	-70.8	50.1
Unitech	774	186	24	176	22.7	1,799	824	45.8	512	28.4
y-o-y % chg	58.3	-24.5	50.3	29.4	27.8	-28.2	-43.9	58.6	-44.3	36.7
Indiabulls Real Est	37	-32	-	3	7.4	69	-95	-	-17	-
y-o-y % chg	-3.8	-	-	-75.6	29.1	-58.8	164.1	-	-152	-
HDIL	409	215	52.7	163	39.8	1,058	562	53.1	419	39.6
y-o-y % chg	30.3	85.7	37	115.1	24.1	-22.3	-24.9	55	-36.5	48.4
Parsvnath	305	237	77.6	25	8.2	594	451	76	100	16.9
y-o-y % chg	229.1	182.2	90.5	359.4	5.8	-14	-16.7	78.5	-1.1	14.7
Orbit Corp	150	43	28.4	32	21.4	401	148	37	75	18.7
y-o-y % chg	209.9	22.7	71.8	959.4	6.3	96.4	32.6	54.8	114.6	17.1
Sobha Devp	307	65	21	41	13.3	708	158	22.3	81	11.4
y-o-y % chg	70.1	27.7	28	444	4.2	-12.5	-34.2	29.7	-21	12.7
Ackruti City	208	125	59.9	79	37.7	316	210	66.4	109	34.5
y-o-y % chg	340	163.9	99.8	311.9	40.3	-41.2	-57.1	90.8	-71.5	71.1
Anant Raj	83	88	106.6	67	81.1	252	272	107.8	207	82.2
y-o-y % chg	17	7.4	116.1	1.3	93.8	6.2	5.1	108.9	3	84.7
Brigade Entp	65	8	12.5	6	9.1	215	30	14	143	66.4
y-o-y % chg	-37.6	-37.9	12.6	169.6	2.1	-35.8	-50.7	18.2	-78.8	201.3

Infrastructure

Fri, 19 Feb 2010 00:00:00 GMT

Despite robust GDP and IIP numbers quarter after quarter, the financials of infrastructure companies, across construction, power, engineering and capital goods segments, fell short of analysts’ expectations. The biggest disappointment came from companies in the power sector—the much-hyped theme in the infrastructure sector, while construction and engineering companies turned out to be the saving grace with some stand-out performances. Overall, the sector has reported a modest growth of 6.5 per cent year-on-year in revenues and 7 per cent increase in net profit. Operating profit jumped by 25 per cent and margins improved by 318 basis points, helped by lower raw material and interest costs.

Engineering and capital goods sector, which was suffering due to the slump in private capex, came back with a bang with strong performances from companies such as Siemens and BHEL. Siemens managed to double its operating profit on a modest 14 per cent revenue growth by keeping a tight leash on costs. Order inflows of the company more than doubled to Rs 5,168 crore, mainly due to a large export order.

Industry heavyweight BHEL recorded modest growth in revenues led by weak recovery in the industry segment with order inflows declining marginally by 3 per cent to Rs 15,500 crore. Its bright spot was the 35-40 per cent growth both in operating and net profits due to falling raw material and interest costs.

In the construction sector, larger players disappointed, while smaller players fared better. Larsen & Toubro’s revenues declined as execution was affected on account of delays in financial closure of projects, forcing the company to scale down its FY11 revenue target to 10 per cent instead of 15 per cent earlier. Operating profit inched up 8 per cent due to lower commodity price and operational efficiencies, while margins improved by 152 basis points. However, net profit declined substantially due to poor execution and decline in other income.

Mid-cap company, Nagarjuna Construction, reported robust financials with 16 per cent rise both in revenue and 30-40 per cent rise in operating and net profit despite problems in Andhra Pradesh and a 29 per cent increase in interest costs.

The power sector came up with the worst report card as revenues declined for NTPC, Lanco Infrastructure, Power Grid, Tata Power and GMR Infrastructure. A 2 per cent decline in raw materials and 17 per cent fall in interest costs helped the sector stay profitable with operating and net profit growing 10 per cent and 15 per cent, respectively. The country’s largest power generation company, NTPC, reported a marginal decline of 0.8 per cent in revenues, while operating and net profit inched up by about 5 per cent each due to a tight leash on costs. In sharp contrast, the recently listed and a relatively smaller player, JSW Energy, was the best performer in the power pack with a growth of 84 per cent in revenues to Rs 668 crore, while operating profit almost doubled to Rs 376 crore, albeit on a lower base. Net profit grew at 54 per cent, but it could have higher if not for rising interest costs.

Compared with its lacklustre performance in FY10 so far, the valuation of the infrastructure sector at 24 times average price to earnings (P/E) multiple for FY11 looks rather rich. Analysts expect most companies to underperform, especially in the power sector, until cash flows from newly expanded projects start flowing in. Companies in the power sector need to report much higher growth to justify the premium valuations of 39 times average FY11 P/E. Overall, the outlook for the capital-intensive infrastructure sector appears cautious amid a rising interest rate scenario.

Infrastructure turned in a modest performance with Larsen & Toubro shocking markets with a decline in revenues. Sector valuations look stretched and cannot be justified unless they can dramatically better performance


in Rs cr	December 2009 quarter					9-months ended Dec 2009

	Net sales	Op profit	OPM (%)	Net profit	NPM (%)	Net sales	Op profit	OPM (%)	PAT	NPM (%)

Punj Lloyd	2,904	210	7.2	13	0.4	8,736	719	8.2	192	2.2
y-o-y % chg	-6.9	LP	LP	LP	LP	0.5	90.21	1.7	540	0.8
L&T	8,071	956	11.8	769	9.5	23,448	2,683.50	11.4	2,937.00	12.5
y-o-y % chg	-6	8	4.7	-49	-	0.5	11.6	5.4	18.3	4.3
JP Associates	2,852	774	27.1	103	3.6	6,970	1,997.50	28.7	1,464.00	21
y-o-y % chg	101.3	125	7.1	-39	-	81	80.7	29.9	194.6	2.3
Reliance Infra	2,287	235	10.3	277	12.1	7,383	847	11.5	901	12.2
y-o-y % chg	-16	-25	-	10	3.1	-1	-3.1	15.3	13.6	4.7
BHEL	7,100	1,433	20.2	1,073	15.1	19,321	3079	15.9	2401	12.4
y-o-y % chg	18	40.5	4.8	36	5.1	23.1	46.3	4.5	34.1	6.2
Crompton Greaves	2,246	320	14.2	200	8.9	6,633	874	13.2	553	8.3
y-o-y % chg	4.5	42	3	63	2.1	5.7	31.1	3.7	51.1	2.4
Siemens	1,867	364	19.5	236	12.6	6,303	1,074.00	17	725	11.5
y-o-y % chg	14	114	1.9	-29	-	7	39.7	3.4	0.1	44.2
Power Grid	1,525	1,246	81.7	488	32	4,897	4,048.00	82.7	1,494.00	30.5
y-o-y % chg	3	2	-	31.2	4.1	11	9.1	-	39.1	4.2
NTPC	11,184	3,365	30.1	2,365	21.1	33,969	9,755.00	28.7	6,710.00	19.8
y-o-y % chg	-0.8	5	11.4	5	9.7	11.5	19.3	10	10.2	25.4
Tata Power	1,527	325	21.3	142	9.3	5,176	1,165.00	22.5	721	13.9
y-o-y % chg	-12	48	2.2	41	2.1	-8.5	62	2.1	39.7	2.4

Source: Companies; Note: LP is Loss to profit

FMCG

Fri, 19 Feb 2010 00:00:00 GMT

Fast moving consumer goods companies saw their good run continue during the quarter. Revenues, on an average, increased by 21 per cent y-o-y, while operating profits, helped by benign raw material prices, improved 53 per cent y-o-y. Star performer ITC did not disappoint, while bellwether HUL continued its struggle to maintain revenue growth and operating margins. HUL saw revenues grow by 4.4 per cent y-o-y driven by personal products, which were up by 15.5 per cent. Volume growth in the home and personal care business was offset by a reduction in prices of laundry products which kept revenue growth muted. Operating profit growth slowed down to 3.6 per cent as the company continued its advertising binge, which rose by 66 per cent last quarter. ITC continued to see robust volume growth in its mainstay cigarette segment and consumer goods business. While cigarette revenues were up by 13 per cent growth lead by 8 per cent volume growth, its FMCG revenues grew 23 per cent. The company narrowed its EBIT losses in the FMCG business to Rs 86 crore, while cigarette’s EBIT grew by 15.5 per cent. While ITC’s agri business did well, its hotels business continued to lag even as the sequential performance showed promising signs. It was a good quarter for Dabur with consolidated profits growing by 28 per cent and all its products segments reporting impressive growth rates- oral care portfolio (25 per cent), hair care (41 per cent) and skin care (32.5 per cent). Despite price reductions and one-time provisions, Marico also fared well on the profitability front with its bottom line increasing 24 per cent on a modest 8 per cent revenue growth helped by a healthy 14 per cent volume growth and low raw material costs. Despite putting up a good show, analysts like Percy Panthaki of HSBC, believe the sector’s short-term performance may be muted because of margin concerns. However, from a 12-month time frame, the outlook remains bullish. Analysts say sales growth is expected to remain robust and margin concerns should be minimal as more companies pass on costs to the consumer. Price increases are expected to happen in the next two-four months during which time the stocks are expected to take a breather. Analysts are waiting to see how companies manage the increase in raw material costs in the coming quarters. Stocks, in the meantime, remain a hold.

The winning streak continued for FMCG majors thanks to good volumes and benign raw material prices. But margins could be under pressure next year


in Rs cr	December 2009 quarter					9-months ended Dec 2009

	Net sales	Op profit	OPM (%)	Net profit	NPM (%)	Net sales	Op profit	OPM (%)	PAT	NPM (%)

GCPL	518	112	19.7	85	16.4	1,534	335	19.7	248	16.2
y-o-y % chg	53	87.2	13.1	112.5	11.8	45.9	130	13.2	117.6	10.8
HUL	4,573	826	17.2	649	14.2	13,345	2,274.20	16.1	1,621	12.1
y-o-y % chg	4.4	3.6	17.4	5.4	14.3	5	16.1	14.8	-5.8	13.7
ITC	4,580	1,867	37.3	1,144	25	13,058	5,000	35.9	3,033	23.2
y-o-y % chg	18.7	26.5	35.7	26.7	23.4	12.4	35.9	32	23.2	21.1
Dabur India	930.2	182	19.3	138	14.8	2,531.50	493	19.1	369	13.7
y-o-y % chg	18.6	186.2	17.3	28.3	13.7	21.3	31	16.9	29.3	6.59
Marico	670	104	14.8	63	9.4	2,059	303	14.1	182	8.8
y-o-y % chg	7.8	25.1	12.7	24	8.2	12.7	29.6	12.5	25.7	7.9

Infotech

Fri, 19 Feb 2010 00:00:00 GMT

It was probably the best quarter that the sector had witnessed in the recent past with leading companies beating analysts’ estimates by a significant margin. India’s top three companies Infosys, Tata Consultancy Services (TCS) and Wipro turned in strong performances. Revenue growth stood at 6-7 per cent q-o-q, in dollar terms, despite the quarter, traditionally, being a weaker one for technology companies. Most of this growth was volume-driven, indicating that demand recovery is well on its way, at least, for now. Stable pricing was another positive. Hiring continued with the top three adding 4-5 per cent to the employee base during the quarter. With utilisation rates staying high (early-80s for Wipro and high-70s for TCS), analysts expect companies to hire aggressively in the coming quarters. Hiring plans are often seen as a barometer for future revenue growth prospects and the confidence of companies in their business pipeline. Margins improved by around 100 bps q-o-q for Infosys and TCS, while it was flat for Wipro despite a 3.7 per cent rupee appreciation, which was offset by operational levers. Infosys not only absorbed the rupee appreciation and increased wages (2 per cent onsite & 8 per cent offshore), but also improved its operating margins.

Analysts say even as global IT budgets stay flat in 2010, clients will increasingly adopt offshoring and that will drive volume growth for technology companies. They are estimating a 20 per cent growth, in dollar terms, for FY11 and an even higher 25-30 per cent growth in FY12 for the top three companies. The BSE IT index has returned over 130 per cent in 2009 – outperforming the Sensex by over 50 per cent on the back of marginal 2 per cent outperformance against a declining market in 2008. Large cap IT stocks have tripled from their historic lows and are trading around 21-22 times -- about 30-35 per cent lower from their peak valuations. While analysts are bullish on the sector for the year, absolute gains from hereon could be limited given the sharp run-up in stock prices. Hence, 2010 will be a year of stock picking with high variance in returns for technology stocks.

Smart profit growth was backed by higher volumes and stable to rising billing rates. Expectations are growth will be buoyant next fiscal, but valuations look stretched


in Rs cr	December 2009 quarter					9-months ended Dec 2009

	Net sales	Op profit	OPM (%)	Net profit	NPM (%)	Net sales	Op profit	OPM (%)	PAT	NPM (%)

Infosys	5,741	2,038	35.5	1,583	27.6	16,798	5,121	30.5	4,619	27.5
y-o-y % chg	-0.8	0.3	35.5	0.1	27.6	4.6	7.7	30.1	5.9	27
TCS	7,650	2,272	29.7	1,797	23.5	22,291	6,356	28.5	5,000	22.4
y-o-y % chg	5.1	16.7	26.7	32.9	18.7	8	19.4	25.8	27.4	19.1
Wipro	6,966	1,362	19.6	1,217	17.5	20,157	3,825	19	3,395	16.8
y-o-y % chg	5.3	21.1	16.6	21.3	15.5	5.6	17.6	17	17.6	15.1
HCL Tech*	3,032	614	20.3	273	9	6,063	1,286	21.2	576	9.5
y-o-y % chg	22.8	18.6	21	-23	14.4	25.3	24.5	21.4	-16.9	9.3
Tech Mahindra	1,187	280	23.6	173	14.6	3,442	857	24.9	474	13.8
y-o-y % chg	4.9	-11.7	27.6	-22.4	19.1	0.8	-14.1	29.2	-39.5	23

Source: Analyst reports; Note: * HCL Tech follows a Jun-Jul financial year hence only 6 months figures are given

Weak Undercurrent

Fri, 19 Feb 2010 00:00:00 GMT

The country’s largest power generator with a 31 GW capacity, recently managed some firsts to its credit. It was the first PSU follow-on public offer of the year. It was also the first public offer to opt for the auction route. (Under this the highest bidder gets the entire amount of shares asked for.) And it was the first fast-track issue of the year, with the company going public on filing its prospectus, sans the market regulator’s approval. Aside from this, there is nothing new about the 35-year-old state-owned Navaratna, which accounts for 19 per cent of the nation’s power generation capacity of 1.53 lakh mw and 29 per cent of the total electricity generated in the country.

Even as the country’s demand for power grew at 6 per cent annually between FY93 and FY07, the average peak deficit over this period hovered at 14-15 per cent. In fact, capacity addition over the last three five-year Plans has consistently fallen short of the target by around 50 per cent. The net result: the country still faces a peak deficit of around 13 per cent (as of November 2009). Against such a backdrop, it’s not surprising to see that NTPC too has been a laggard. Of the targeted 22.4 GW capacity addition in the 11th plan ending FY12, the state-owned power company has managed only 4.2 GW to date.

Given that the tariff for the sale of power is governed by the Central Electricity Regulatory Commission, which provides for a mandated return of 15.5 per cent and an additional 0.5 per cent on timely completion of the project, most of the operating cost for tariff determination is based on operating norms. Therefore, maintaining better operating performance is vital.

Past not perfect

Despite the robust demand for power, NTPC’s capacity expansion has been slow


	FY05	FY06	FY07	FY08	FY09

Installed capacity (mw)	23,435	23,935	26,350	27,350	27,850
% chg		2.1	10.1	3.8	1.8
Generation (BU*)	159.1	170.9	188.7	200.9	206.9
% chg		7.4	10.4	6.5	3
Sales (BU)	147.8	159	176.5	188	193.7
% chg		7.6	11	6.5	3
Growth in energy demand (%)	5.7	6.8	9.3	7.1	4.7

Source: Company; *BU is billion units

Notwithstanding the shortcomings, NTPC’s stock performance has been impressive. Since its listing in 2004, the stock has quadrupled, outperforming the Sensex and leaving private players like Tata Power behind. However, analysts believe that the valuation gap between the company and its peers is likely to come down owing to the increased risk appetite of investors and NTPC’s track record of capacity addition. With the government, which is selling its 5 per cent stake, pricing the FPO at Rs 201 a share, there is practically nothing left on the table for investors. Importantly, given that the money is not flowing into the company, but into government coffers, it does not materially impact the PSU’s prospects.

While investors cannot ignore the largest player in the Indian power sector, analysts believe that the valuations are stretched and that the stock is unlikely to see a re-rating in the medium term.

Beneficiary by default

NTPC, the fourth-largest power generation company in Asia, will be a natural beneficiary of the government’s focus on power. Under the 11th Plan, the power sector is expected to attract 30.4 per cent of the total investment in infrastructure. Of the expected investment of Rs 7.25 lakh crore, investment in generation is expected to grab a 56 per cent share, or about Rs 4 lakh crore.

The company plays second fiddle to state electricity boards, which dominate the Indian power sector with a capacity of 76,627 mw. As on September 30, 2009, NTPC’s installed capacity of 28,350 mw (excluding 2,294 mw in joint ventures) constituted 19 per cent of the country’s total installed capacity. NTPC has 22 plants, of which 15 are coal-based and seven gas- and naphtha-based. Moreover, the plants are located at diversified locations, but mainly concentrated in the north (including NCR), where 33 per cent of total capacity is located, followed by the west and the east at 27 per cent and 26 per cent, respectively.

Slow and steady

Despite being in the high growth power sector, NTPC is expected to report a modest financial performance


in Rs cr	FY09	FY10E	FY11E

Revenues	44,245	48,881	55,557
Change (%)	14.5	10.5	13.7
Op profit	10,544	13,788	15,854
Change (%)	-7.6	30.8	15
Interest	2,143	2,421	3,273
% to sales	4.8	5	5.9
Net profit	8,093	8,597	9,062
Change (%)	8.3	6.2	5.4
Debt to equity	0.68	0.87	0.89

Source: Prabhudas Liladher, Goldman Sachs

According to R S Sharma, chairman and managing director, NTPC’s share of the country’s total installed capacity will go up to 25 per cent when it achieves the target of 75,000 mw by FY17. “Our experienced management – with a majority of them having more than 30 years experience in the industry – and our capabilities will help us deliver,” says Sharma.

Efficiency gains

Though NTPC accounts for 19 per cent of the country’s total installed generation capacity, its share of the total power generation is much higher at 29 per cent, or 206.94 billion units (FY09). A K Singhal, director-finance, attributes this to efficient operations. Over the past 15 years, the availability factor of coal-based stations has increased from 86.5 per cent (FY94) to 92.5 per cent in (FY09), while that of gas-based stations has jumped from 60.2 per cent to 86.7 per cent in this period. Similarly, the average plant load factor (PLF) of coal-based stations has increased from 78.1 per cent to 91.1 per cent and that of gas-based stations has increased from 50.3 per cent to 67 per cent. A heartening fact is that NTPC’s availability factor and plant load factor has been higher than the industry average. Availability factor is a measure of how often a station is available to generate power and PLF is a measure of how much of the capacity a plant actually uses to generate electricity. While higher availability results in incentives from the regulator, a higher plant load factor means higher output, and in turn a better financial performance. But a lot of that hinges on the fuel security.

Fuel for thought

Fuel security is the most critical aspect for any power generation company. Currently, NTPC sources more than 95 per cent of its coal domestically, for 12 of its 15 coal-based plants. This is based on long-term power supply agreements of about 20 years, mainly with subsidiaries of Coal India. The three other stations receive coal according to coal supply linkages allocated by the coal ministry. Similarly, it has also entered into agreements with several gas vendors such as GAIL and Reliance Industries for a fixed supply of gas. While the company’s coal-based plants are located within 80 km of the coal mines, the seven gas-based stations are located along major gas pipelines. This means lower transportation costs as well as minimal supply interruptions.

Missing the bus

As in the past, the company is unlikely to meet its targeted capacity addition in the 11th Plan

Source: Company, Goldman Sachs

However, to sustain its expansion plans, the company will have to gone in for higher imports. NTPC imported 4.2 per cent of its coal requirements in FY09. “Our coal imports are likely to increase from 8.25 million tonne to 14 million tonne by FY11,” says Singhal. But in order to save on import costs and secure fuel supply, the company intends to develop captive coal mines, either on its own or through joint ventures, both in the domestic market and abroad. Around 20 per cent of its total coal requirements of about 300 million tonne will be met through captive mines. Given that 86 per cent of its total generation capacity is coal-based and 14 per cent comes from gas and naphtha, the company wants to diversify across different fuels. Says Sharma, “By FY17, coal-based generation will be 70 per cent, 14 per cent will be gas-based, 12 per cent hydro, 3 per cent from nuclear power and the balance 1 per cent will be from other renewable sources.”

Diversifying revenues

Besides de-risking fuel supplies, the company also intends to strengthen other areas of business such as consultancy, power trading and equipment manufacturing. The company’s consultancy business, which it had developed to leverage on its technical and operational skills, has grown by 31 per cent CAGR to Rs 132.5 crore in FY09 from Rs 34 crore in FY04. Its subsidiary, NTPC Vidyut Vyapar Nigam (NVVN) has emerged as the second largest power trader in India with a 16 per cent share, after PTC India, which has 33 per cent. NTPC has formed joint ventures with various companies such as BHEL and Bharat Forge for equipment manufacturing, to ensure supply of critical equipment and spare parts. It is also planning to invest further in electricity distribution, through its subsidiary NTPC Electric Supply Company (NESCL).

Attractive peers

NTPC is a suitable investment for risk averse investors seeking steady growth

View Enlarge

Source: Bloomberg. *Reliance Infrastructure holds a 45 per cent stake in Reliance Power. **FY10 is likely to be the fi rst year of revenues (Rs 909 crore) and profi t (Rs 544 crore).

The company has a strong track record in turning around inefficient plants and enhancing their efficiency significantly. The best example is the troubled Dabhol power plant, now known as Ratnagiri Gas and Power, having an operational capacity of 1,480 mw that is likely to go up to 1,900 mw by March 2010. In 2005, NTPC and Gas Authority of India each acquired a 28.33 per cent stake in the power company. Thereafter, the company acquired four underperforming plants, namely Unchahar, Talcher, Tanda, Badarpur and successfully improved their PLFs substantially from around 20 per cent in the early 1990s to 90-94 per cent in FY09.

Safer strategy

Today, all the power generated is sold to state electricity boards and state-owned distribution companies through long-term power purchase agreements (PPAs). As a part of its strategy, it will continue to pursue PPAs and sell only a small part of the power generated on a merchant basis. Sharma says, “Merchant power will be only around 6,000 mw (8 per cent) of the 75,000 mw capacity by 2017.” Right now, the company’s average selling price hovers at about Rs 2.2-2.3 per unit. “If we assume Rs 5 per unit in the open market, we can earn additional revenue of Rs 8,000-10,000 crore over the next few years,” he says.

The markets are bullish about the power ministry’s proposal that a part of the government’s discretionary quota at central generation stations be allowed to be sold through open access. Right now, the central government has discretion over 15 per cent of the output, which is kept as ‘unallocated’ for distribution within the region or outside, depending on the overall requirement. The ministry has suggested 25 per cent of this discretionary quota in the case of existing capacity and 50 per cent for new capacity to be free for open access. Though this will be a big positive for NTPC and would lead to a re-rating, it is too early for exuberance as the union cabinet approval is pending. Moreover, some analysts feel that the approval
is very unlikely as there might be opposition from respective states.

Execution risk

NTPC is engaged in the construction of projects worth 17,930 mw, while projects for 33,000 mw are at various stages. Of the total 75,000 mw to be added by the end of 12th Plan, that is FY17, 22,400 mw is to be added in the 11th Plan (by FY12).

The biggest worry analysts have over these gigantic plans, is the delay in project execution. (See table, Past not perfect.) Venkatesh Balasubramaniam, analyst at Citigroup Global Markets, said in a report dated October 23, 2009: “Of the total 22,400 mw in the 11th Plan, we expect a 55 per cent achievement rate at 12,300 mw.” Besides, analysts expect NTPC to miss the 11th Plan target due to a delay in commissioning of plants by Russian equipment suppliers, delay in gas-based projects on account of litigation with RIL, and the agitation by environmentalists at its hydro sites.

Matching with peers

NTPC plans to expand by as much as its current capacity


Capacity (mw)	Own	Others*		Total

Current (as on September 2009)

Coal (15)	24,395	Coal (3)	814	25,209
Gas (6) & Naptha (1)	3,955	Gas (1)	1,480	5,435
Total	28,350		2,294	30,644

Projects under construction

Coal-based (11)	12,010	Coal-based (4)	4,000	16,010
Hydro (3)	1,920			1,920
Total (a)	13,930		4,000	17,930

Projects for which bids are invited from vendors

Coal-based (4)	5,120	Coal-based (3)	3,690	8,810
Hydro (1)	261	Hydro (2)	291	552
Wind (1)	100			100
Total (b)	5,481	Total	3,981	9,462
Grand Total (a+b)	19,411		7,981	27,392

Source: Company . * Under joint ventures and subsidiaries. The figure in brackets indicates the number of plants

Even the management does not deny slippages. Almost all the power generated by NTPC is sold to state electricity boards (SEBs) that suffered losses of about Rs 34,095 crore in FY08. Payments of course are secured through letters of credit and tripartite agreements under which dues from SEBs were securitised by the issue of 8.5 per cent tax-free state government special bonds. Populist measures, such as free power to farmers, will further affect the financial health of SEBs, which in turn would adversely affect their ability to make payments, and that too on time.

Modest performance

From FY06 to FY09, NTPC reported a compounded growth of 18 per cent in revenues and 9 per cent in profit after tax. In the next few years, the company is expected to report similar growth – 14 per cent CAGR in sales and 8 per cent CAGR in profit. (See table, Slow and steady.)

As on September 30, 2009, the company had foreign borrowings of about Rs 10,900 crore, which is 10 per cent of total assets and 27 per cent of total debt. Rupee depreciation will put a burden on the financials. For example, in FY09, the unfavorable exchange rate variation led to an addition of Rs 269 crore in interest costs, against a reduction of Rs 126 crore on interest expenses in FY08.

Fairly priced but…

At Rs 206, NTPC trades at 17 times price to earnings (P/E) and 2.5 times price to book value (P/BV) for FY11. The government is looking to raise Rs 8,300 crore by offloading a 5 per cent stake at Rs 201 a share which values NTPC at 17 times P/E and 2.68 times P/BV for FY11. NTPC’s closest private peer, Tata Power (one-third in terms of sales and one-fifth in terms of profit), is trading at 16 times P/E and 2.4 times P/BV for FY11. Also, many other private players such as Adani Power and JSW Energy, which are expanding capacities, are trading at over 20 times P/E and 3 times P/BV. However, premiums are mainly due to their higher proportion of merchant power, which leads to higher ROE.

In fact Durga Dath, analyst with Goldman Sachs, has a sell rating on NTPC with a target of Rs 174. In her report, dated January 4, 2010, she says “NTPC is trading at a premium to its historical one-year forward average P/E of 17 times and P/B of 2.2 times.”

However, the company’s valuations look attractive when compared to the largest public hydropower producer, National Hydropower Corporation (NHPC). NTPC is almost six times bigger in terms of capacity and profit and has 12 times larger revenues than NHPC. But NHPC is quoting at a P/E of 31 times and 1.8 P/BV over the same period. Even on an FY11 EV/Ebidta of 14 times the thermal power behemoth (NTPC) looks cheaper than the 21 times given to the smaller size hydropower major (NHPC).

Analysts feel that the stock is unlikely to give any substantial returns over the medium term, say one year, as the entire power sector captures the growth momentum for the next few years and valuations look stretched. Also, analysts expect NTPC to lag behind private players such as Tata Power, Reliance Power, Adani Power and JSW Energy in terms of growth, largely due to the lower base of the latter. (See table, Attractive peers.) Thus, as discounting will be faster in case of private players and capacities will get larger, they will start looking cheaper. However, a section of the market believes that the stock is a low-risk play. Vinod Chari of RBS feels that NTPC is a defensive stock within the utilities space, given that it underperforms relative to the power index in a rising market, and outperforms in a falling market. “While the outperformance may not be high, the downside risk is equally low,” says Chari.

"We Have Become Enablers In Story-Telling"

Fri, 19 Feb 2010 00:00:00 GMT

In October 2009, Adlabs Films, the Anil Dhirubhai Ambani Group company, changed its name to Reliance MediaWorks, which the management believes, is a full reflection of the entire gamut of work that the company offers. To its chief executive officer Anil Arjun, the new name signifies the coming of age of an end-to-end media services company which has moved on from being just a film processing lab. In an interview with Arundhati Bakshi Dighe, Arjun talks about how the business has transformed itself and what the future looks like.

Is the new name an indication of a change in focus?

The name change was long overdue. When Reliance ADAG acquired a controlling interest in Adlabs in 2005, a substantial part of the business, almost 85 per cent, was still coming from film processing. If you take a look at the FY06 numbers, of the Rs 100 crore turnover, Rs 85 crore came from film processing operations. Between March 2006 and March 2009, we have grown at 80 per cent CAGR into a Rs 680 crore company. We have achieved that by transforming the way we do business. So what was Adlabs’ major business, now constitutes just 15 per cent of the total revenues.

We have moved away from being just a film processing company to cover the entire spectrum of the media, including studios, DI lab, visual effects, post-production, TV production, and a cinema chain under the banner of Big Cinema. We have become enablers in story-telling through our integrated end-to-end media services offering. So, from that perspective the name change was necessary.

So what growth verticals is the company focusing on?

We have three business segments now: TV production, film and media services, and film exhibition. In TV production, under the name of Big Synergy, our focus is to build scale. Almost all the top reality shows across channels are done by us. In the second quarter of FY10 we crossed the Rs 40 crore turnover mark that was registered in FY09. We have grown this business from two to three shows in FY07 to five to six shows a month now. In the case of reality shows, we do not take the risk of talent. We just make the show and charge a fee of roughly around 25 per cent per show per episode.

In the case of the film and media services division, we build upon a complete value chain, right from film studios under construction, to cameras, to print processing, from FX to image correction, everything under one roof and under one brand. And everything is on a fibre optic network that connects Los Angeles and Mumbai. Our objective is to build scale and sustainable cash flows.

The third big business is the film exhibition business under the banner of Big Cinemas. Today, we have close to 509 screens across 115 cities in four countries.

What about the margins?

Being a B2B segment, the film and media services business is low on turnover, but high on margins and capital expenditure. By and large, the margins will be 40 to 45 per cent in the B2B space, but here again it is a function of the turnover.

Now showing

Reliance MediaWorks operates over 500 screens across India, the US, Malaysia and Holland

Source: Fullerton Securities

Scaling up

The profit margin took a hit in the last financial year as the company undertook expansion

The challenge in this business is to ensure asset utilisation. So my main concern is that as long as my film cameras do not have a down time of 10 per cent, it will work. You must understand that we have invested a substantial amount in the last one year, and most of the assets we have built are next generation. The only two challenges that we face are technology obsolescence and asset wear and tear. But at the moment, we have just started building assets. From an utilisation perspective, we are at 80-90 per cent. We do not want to over-invest. Look at our camera utilisation, we did not start with 50 cameras, but began with ten and then added ten. So our asset utilisation is maximum.

With intense competition in the exhibition space, what kind of traction do you see in the business?

We are very bullish on the business in India. The biggest film in India does about two crore admits (the number of people who watch it in theatres) in a year. Compared with a population of 100 crore, the number is just too small. In the US, a top-notch film does six crore admits for a population of 30 crore. The reason why admits are not higher in India is because we lack infrastructure. So, if we build more infrastructure (more cinema theatres), box office returns will just multiply.

If you compare the top five hits of 2005 with those of 2008, the gross returns from theatrical viewership have gone up by 250 per cent. So, we see that the market has a very good absorption capacity and that is where we have built theatres. Also, there is a preference for better quality experience, and the viewer is willing to pay for it. As I said earlier, we have close to 509 screens across 115 cities in four countries. We have 138 properties, 137,000 seats, and 40 million customers. Of the six cinema chains that contributed 48 per cent of the all-India theatrical collections of 3 Idiots, Big Cinemas accounted for 12 per cent.

That brings us to the third quarter, which produced a good set of numbers. Would you throw some light on this?

Yes, it was a very good quarter for us. Our revenue from operations was up 41 per cent y-o-y and 8 per cent q-o-q. Ebitda from operations was up by 125 per cent y-o-y. The main traction came from the film exhibition business, which still contributes about 55-60 per cent of overall revenues. In the exhibition space three things have happened: In the past one year we added 100 screens. Second, we have built on the admit numbers with close to 90 lakh admits in the quarter, which is a 50 per cent increase compared with that last year. Ninety lakh admits gave us a good top line and Ebitda. Besides, fair amount of efficiencies, in terms of operations, brought in a good amount of growth in terms of Ebitda margins.

Colourful projection

Revenues are expected to grow at a 38 per cent CAGR over the next 2 years

Source: Fullerton Securities

Big picture

RoE and RoCE are expected to improve going forward

We have to understand that the top line, to a large extent, depends on the content. This quarter (Q3) was important from two perspectives. It was a quarter that saw a large number of releases, almost 16 films. In fact, the Rs 30-35 hike in ticket charges also went down well with consumers. This indicates that viewers are willing to absorb ticket price hikes if the movie is worth it. Going forward, the pipeline is looking rich, with big star movies such as My Name is Khan and Raavan.

So where do you see the margins headed? What is the capex?

In the exhibition business, margins are a function of admits. Overall, from a blended perspective, margins are at about 20-25 per cent. Last quarter we saw Rs 189 crore operating income and Rs 34 crore Ebitda, but this quarter we did Rs 212 crore of operating income and Rs 41 crore Ebitda. Last quarter we had substantial income from Synergy, this quarter all shows are in the developmental stage. Over the last year and a half (up to December 2009), we have incurred capex of Rs 600 crore and that will reflect in the top line from the next financial year onwards. On an annualised basis we are looking at a capex of Rs 250 crore.

You still have high debt on the books?

Our debt of Rs 1,200 crore is at the gross level. We still have around Rs 50 crore of cash on the books and we are looking at raising up to Rs 600 crore through a rights issue. The enhanced networth of over Rs 1,000 crore by way of the rights issue will further strengthen the company’s financial base and leadership position. We are not under stress, all our projects are funded. The issue proceeds will also be used to retire a part of the debt. At a company level, we will have a debt-equity of less than one.

Our expansion, thus far, has been entirely debt-driven. The huge amount of investment we have done over the last few years and the depreciation have been a huge draw on profitability. Further, we went through a phase between January and June 2009 when the box-office was not doing too well. As a result, profitability took a hit. But as seen in the Q3 numbers, business is improving. As new facilities get commissioned and money starts flowing in, our profitability will improve.

So are you looking at breaking even any time soon?

We will look at a breakeven in the fourth quarter at the net level.

False Hope

Fri, 19 Feb 2010 00:00:00 GMT

Vital signs: stable. Prognosis: Patient is out of immediate danger but condition is still fragile and requires constant observation.

That, in short, pretty much sums up the state of the American economy, the world’s largest. After a financial crisis that ripped apart the heart of its financial system in late 2008, the American economy is slowly showing signs of consciousness, aided greatly by emergency procedures initiated by the government and monetary authorities.

A year on, the US economy is forecast to have grown at its fastest pace in about four years in the December quarter. A Bloomberg survey of economists indicates GDP is expected to expand by 4.6 per cent, more than twice the rate of the previous quarter. Because the worst of the financial crisis unfolded between the last quarter of 2008 and early 2009, GDP numbers for the first half 2010 are expected to look pretty robust because of the ‘low base’ effect. Yet there are other signs of improvement. Companies are starting to report improving revenue numbers, indicating a slight pickup in demand. Factory orders have climbed, helped mainly by depleting inventories. Orders for durable goods are predicted to have risen by 2 per cent in December, according to the Bloomberg survey. US productivity also gained all through 2009, rising by 2.5 per cent (in per hour terms), according The Conference Board as output declines were largely offset by dramatically lower working hours (employment fell by 3.6 per cent in 2009, while hours worked per worker slipped by 1.5 per cent). This year, productivity is projected to rise by 3 per cent. More importantly, US consumer confidence in January hit its highest level in nearly a year and a half. The Conference Board’s index of consumer attitudes rose to 55.9 in January, the highest level since September 2008 and up from 53.6 in December.

High confidence

US consumer confi dence in January hit its highest level since September 2008

Source: Bloomberg

That’s the best sign of optimism yet, because consumer spending is at the heart of this patient’s recovery. Consumer spending accounts for 70 per cent of the economy and any improvement in confidence bodes well. The big question is, how sustainable can this confidence be when the jobless rate is still at 10 per cent? Companies may be buying more equipment, but they’re not hiring much. Nursing losses from sunken house prices and equity markets, consumers are still not going to be able to go out and spend with abandon. “Consumers are still hunkering down and rebuilding their balance sheets and saving,” says Kevin Grice, senior international economist at Capital Economics, a research organisation in the UK. “Unless we see a sustainable improvement in the jobless rate, consumers are going to remain unwilling to spend.” He estimates the economy needs to create at least “150,000 jobs each month to get consumption rising again”. For now, that seems extremely unlikely. In the fourth quarter of 2009, job(non-farm) losses in the US averaged 69,000 per month. “While the US economy is recovering, it will be a jobless recovery and it will be a long time before we see a fall in the unemployment rate,” he adds.

One of the best gauges of consumer spending, retail sales, fell by 2.5 per cent in 2009, according to industry body National Retail Federation. This year, sales are predicted to climb by 2.5 per cent on the presumption that jobs and home prices will stabilise. That’s a big if, given that home prices were unexpectedly down 0.2 per cent in November from the earlier month, according to the Case-Shiller home price index released by Standard and Poor’s.

To encourage consumers and businesses to spend, the government unleashed a massive fiscal stimulus package that included schemes such as cash for clunkers, to spur Americans to buy more fuel-efficient cars using cash they received by trading in their old models. But that kind of spending support is expected to largely run out of steam by the middle of this year, and there are fears about how the economy will hold up if it is taken off the life support of government spending. Those fears will most likely hold back the Federal Reserve from raising interest rates even modestly for most of the year. The current bet among economists is that the target rate for overnight lending among banks will stay in the 0-0.25 per cent range for most of 2009, with a small chance that it could be raised by 50 basis points in the last few months of the year.

For banks, that will make little difference because even with record low rates, they aren’t lending and debt-burdened consumers aren’t borrowing. The Federal Reserve has released trillions of dollars into the financial system but very little of that has reached borrowers because most banks, nursing big losses from the sub-prime mortgage mess, are rebuilding capital and preferring to park their funds in money market instruments rather than take on the risk of lending and additional consumer defaults. With good reason. “Banks continue to face problems in two areas -- consumer credit and commercial real estate,” points out Grice. “Both are problem areas in which the troubles have not yet peaked, although we believe the two areas combined do not represent as big a problem as the sub-prime mortgage crisis.” It will still weigh on bank earnings. JP Morgan and Bank of America, two of the bigger banks in the US, recently warned of continuing losses on consumer credit.

US President Barack Obama’s proposals to prohibit commercial banks from making trades for their own accounts and prohibiting banks from owning or investing in hedge funds or equity funds isn’t helping matters any. On January 21, the day he announced the proposals for sweeping changes, the S&P 500 tumbled by 2 per cent, taking the overall drop to 4 per cent since.

All in all, this may not be the year that US shoppers come back to the stores in force, although the economy will continue to report improving numbers on other fronts. That will most likely mean choppy growth for the US, with economic output expanding strongly in the first half but faltering in the second. Of course, this assumes nothing terrible happens in the meantime.

It looks like this patient is set for a long stay in the recovery ward.

3-D Art Reinvented

Fri, 19 Feb 2010 00:00:00 GMT

Three-dimensional art in India has moved a long way away from the earliest-known sculptures of the Indus Valley civilisation, found in archaeological sites at Mohenjo-daro and Harappa. Today, the stone and bronze figures of yore are hailed as classical art – for post-modernist sculpture by Indian artists could combine anything from wire and text to light and sound.

This was emphasised in an exhibition held at The Guild Mumbai last month. Simply titled Sculpture, it displayed through the work of seven leading contemporary Indian artists that the parameters of sculpture have changed – making it a diverse and conceptually rich form of art.

Anant Joshi

He uses carefully-chosen toys that he breaks apart, paints over and re-contextualises (a process of de-construction and re-construction within his own context). Joshi’s multi-layered/sensory-filled works create experiences that hint at the deep, dark violence of our schizophrenic urban lives. His use of objects comes together in a dramatic theatre of public/private protest.

K P Reji

Often political in inflection, his works explore the connection between psychological states of mind and socio-political behaviour. Although they exude a matter-of-fact quality, his sculptures are multifaceted and complex in their analysis of the individual’s relationship to his/her external environment. Perhaps due to their apparent simplicity, the result seems rather enigmatic.

Prajakta Potnis

Though her works evolve from an appreciation of the private space, such as the interior of a middle-class residence, it’s the starting point for more complex observations. Walls become a metaphor for the human territories through which a city designates order and planning. Within these walls, Potnis creates notations of the fragility and disregard seen in everyday situations.

Rakhi Peswani

This artist’s experience of fragmentation has structured her focus to the processes of traditional crafts; allowing her to re-route the notion of oneself through the language of these processes. Peswani’s point of departure is to locate a visual/verbal/tangible language that blends the local character of our system and the global character of verbal language. She layers this juxtaposition with the inclusion of verbal text, fabricating discreet ironies to depict contemporary identities.

Riyas Komu

His subjects are charged with significance, bringing about a disturbance that depicts an element of political disquiet. For Komu, art is a medium for social comment on the situations the world is facing today. “Take Away is a work that provokes the agenda of capitalism... which a dominant country surreptitiously unleashes to exploit aspirational labour and imprison it in an intangible enclosure that makes them proudly compromise their dignity and freedom,” describes the artist.

Sudarshan Shetty

Through the process of editing and applying the scattered fragments of daily life, he superimposes facets of contemporary society. “I want to lure the viewer into this with deception – of the products that we negotiate with on a daily basis. I try to define this space with familiar objects, to create a dialogue between them that may reveal some truths to me about my own life. I find it the best way I can have a true communication with the world at large,” explains Shetty.

T V Santhosh

His works are an ethical and philosophical questioning of the current events across the globe. Speaking about the question of who is the real enemy, Santhosh says: “It is not just about terrorism that comes out of religious fundamentalism. It is about the violence that terrorism unleashes and the counter measures the state employs – which is actually more violence.”

Colours And Canvases Of The Season…

Fri, 19 Feb 2010 00:00:00 GMT

Artist of the fortnight: KS Radhakrishnan
Rating: Safe Bet

Maiya walking with a boat

***

If you stepped into Mumbai’s Jehangir Art Gallery at the end of January, you could not have missed the lyrical bronze sculptures of human figures that demonstrated the enviable flexibility of seasoned dancers. The handiwork of 53-year-old Kerala-born artist KS Radhakrishnan, who completed his BFA and MFA in Sculpture from the Viswa Bharati University, Santiniketan, in 1979 and 1981 respectively, these sensually expressive metal bodies with a palpable sense of motion are evidence of his redoubtable talent. Recipient of an award by the Birla Academy of Arts and Culture, Kolkata, in 1980 and a fellowship from the Lalit Kala Akademi to work at the Garhi studios in New Delhi in 1981, the sculptor’s work has been exhibited in many solo and group shows, including De la Sculpture Contemporaine, organised by the Salon International in France in 1994 and Contemporary Woman at the Hong Kong Visual Arts Centre in 2000. Drawing from the emotions and myths of the Hindu Gods such as Shiva, Kali and Radha, his sculptures are often larger than life – be it in size or stature. Over the years,

Landing figures on the lamp

Radhakrishnan has experimented with alternate sculpting mediums, working in molten bronze, beeswax and Plaster of Paris. His preference for modelling and bronze casting over new materials can be seen in his ongoing second solo exhibition with Art Musings. In the words of art historian R Siva Kumar, “Radhakrishnan’s recent works bring together all the sculptural devices and images he has employed during the last eight years, and thus reveals certain relations between them more pointedly. The mass on the ramp are miniaturized versions of Musui and Maiya with their individualities dissolved, as if seen at a distance; genderless, faceless figures. Reality, we are reminded, is a matter of perspective.”

Liminal Figures Liminal Space, the solo show of sculptures by KS Radhakrishnan, is on display at Art Musings, Mumbai, till February 13.

On Show

Fri, 19 Feb 2010 00:00:00 GMT

Anniversary Show: To mark the 11th year of the gallery launched and run by Pravina Mecklai, the works of 11 artists (Ajay De, Amrutraj Koban, Anand Panchal, Arzan Khambatta, AV Ilango, Bharti Prajapati, Gautam Mukherji, Samir Mondal, Sujata Achrekar, Sunil Padwal and Vijay Belgave) are on display at Jamaat, Mumbai, till February 7.
New Myths (First Incarnation): Solo show by Waswo X Waswo at Bombay Art Gallery, Mumbai, till February 7.
Selected Works (1965-2010): Paintings, drawings and prints by R B Bhaskaran, curated by Abhijeet Gondkar, at Jehangir Art Gallery, Mumbai, till February 7.
Organic/Abstract: Installations and outdoor sculptures by Madhvi Subrahmanian. Made at a residency in Pondicherry and in her studio in Singapore, these recent works are derived from natural forms such as the anthill and the seedpod. At Chemould Prescott Road, Mumbai, till February 13.
Ribbed Routes: Recent works by G R Iranna at The Guild, Mumbai, till February 15.
The Conflict Series: Delna Dastur demonstrates the struggle between Nature and Machinery, using dancing figures to celebrate the victory of Nature. These paintings, along with aerial views of landscapes and her experiments with gold, copper and bronze metallic paints, make up her solo show at Art Motif, Delhi, on display until February 17.

The writer, Maria Louis, is the editor of Architect & Interiors India