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Wednesday, 30 September 2015

F N A September 30, 2015

Sharekhan's Fundamental News and Analysis

>>10: 59 AM

Natural Gas price has been cut by Government from $4.66/mmbtu to $3.82/mmbtu based on gross calorific value; down by ~17%. As per net calorific value the cut could be to $ 4.24/mmbtu. The price will be again revised by March 2016. This would be negative for ONGC, OIL and RIL, however it could be positive for select gas distribution companies like Gujarat Gas.  

>>10: 22 AM

CMC ltd: Suspension of trading of share in bourses upon amalgamation with TCS effective today
Event: Shares of CMC will turn ex-date today for the proposed merger with Tata Consultancy Services. Seventy nine shares of Rs 1 each of TCS will be issued and allotted as fully paid-up equity shares for every 100 shares of Rs10 each held by the public shareholders of CMC, whose names appear in CMC’s records as of October 1. Both companies have received all regulatory approvals, including from the high courts, for their merger.
Our call: Given the amalgamation of CMC with TCS effective from today, we hereby close our call on CMC Ltd, as CMC’s existing shareholders will get shares of TCS ltd as per the scheme of arrangements.

>>08: 41 AM

TOP NEWS

S&P downgrades outlook on Tata motors from Positive to Stable; negative for the stock
Rating agency S&P has downgraded the outlook for Tata motors from positive to stable. The slowdown in China and continued capital expenditure for its subsidiary Jaguar Land Rover (JLR) has been cited as the reason for the downgrade. However the rating agency reaffirmed its ‘BB” long term corporate rating for Tata Motors.

As per media reports Larsen and Toubro has emerged as the finalist for a $750-million (about Rs 5,000 crore) contract to supply 100 self-propelled artillery guns to the Indian Army. – Positive for L&T
Aditya Birla Nuvo get nods from FIPB for its FDI proposal – Positive; on the other hand, FIPB rejected Cipla’s proposal – Sentimentally negative for Cipla

Hindalco: two workers died in an accident at its copper smelter plant – Negative

Strides Arcolabs gets tentative approval from the US FDA for its generic of Janssen Pharma’s HIV drug Edurant - Positive

Dish TV: Apollo Private Equity to sell up to  3.6% stake via block deal , the deal size seen up to $60 mn; price band  for deal set at Rs 103.13-106.44/share. Price band implies 3.5% to 6.5% discount to market price

Reserve Bank allowed foreign investors to invest up to 49 per cent stake in Eveready Industries India Ltd under the Portfolio Investment Scheme 

INVESTMENT CALLS

Viewpoint – Emami: Fair & Handsome (View –positive; potential upside -20%)
·         Niche player with strong portfolio of brands: Emami is one of the largest players in the domestic FMCG market with a strong presence in the healthcare and personal care segments. The company is a market leader with above 60% market share in under penetrated categories, such as cooling oil, antiseptic cream, balms and men’s fairness cream segments. Zandu is a renowned brand in the (ayurvedic) healthcare space and is growing at a CAGR of 26% over the last five years. The expansion of its distribution reach (touched 4 million outlets in FY2015) and product portfolio through new launches and acquisitions (recently acquired: Kesh King; hair oil and She; feminine hygiene bands) remain the key growth pillars of the company.  
·         Kesh King acquisition–a strategic fit: Kesh King is a strong brand in the ayurvedic hair care space with 32% value market share. The brand has clocked revenues of Rs300 crore (grew at a CAGR of 60% over the last three years) and has gross profit margins of more than Emami’s consolidated gross margins. The brand will complement Emami’s existing portfolio of hair oils–Navratna hair oil (cooling oil) and 7-in-one oil (light hair oil) catering to varied customer base. Though the acquisition was partially done through debt, yet the brand is expected to be earning accretive by FY2017.  
·         Well poised to achieve 20% revenue growth; margin expansion on cards: Emami is well poised to achieve a revenue growth of about 20% over the next two to three years riding on a strong portfolio of brands and enhancing distribution reach. The company’s low cost of inventory of menthol, while inputs, such as LLP and HDPE have remained benign. This along with higher gross profit margins (GPMs) of Kesh King will help it to achieve GPMs of 66-67% in the next two years. The OPM of the company is expected to remain at around 26-27% in the coming years.
·         Positive stance on stock with 20% upside: The desire to enter into new markets with a strong and expanding portfolio of brands makes Emami one of the strongest FMCG players in India. Its earnings visibility of above 20% and stable balance sheet makes it one of the better plays in the mid-cap FMCG space. The stock is currently trading at 35.8x its FY2017E and 28.3x its FY2018E adjusted earnings. We have a positive view on the stock and expect 20% returns in the next 6 to 12 months.
Key risk: Any increase in competition in some of the niche categories, such as cooling oil and antiseptic creams would act as key risk to the revenue growth. Emami’s margins are susceptible to volatility in the input prices.


Viewpoint - Akzo Nobel India - close call due to unfavourable demand environment
·         Margin expansion as anticipated but volume growth lags expectations: We had recommended with a positive view on the stock of Akzo Nobel India, primarily on hopes of better recovery in demand coupled with potential improvement in margins (supported by softening raw material prices) which would drive healthy growth in earnings. Though the soft raw material prices have boosted gross profit margins, yet the volume growth has fallen short of our expectations in the past couple of quarters.
·         Erratic monsoon-led weak rural demand to put stress on volume growth: The below-normal monsoon further adds pressure on the demand outlook, as we don’t see any material improvement in the demand of decorative paints especially since the rural demand would weaken due to poor agriculture production this year. Also, the industrial activity remains weak due to weak global demand environment. Thus, we don’t see any meaningful trigger to push volume off-take in the near term.
·         Close call with no gain and no loss: Akzo Nobel India is a quality stock in the domestic paint segment with a strong balance sheet. But the near-term headwinds of subdued environment would take some time to reflect in enhancing the operating performance. Thus, in view of the near-term concerns, we close our call on the stock.


OTHER NEWS

SBI cuts base rate by 40 BPS to 9.3%
In response to the RBI’s 50 BPS cut in repo rate, the SBI has cut its base rate by 40 BPS to 9.3%, effective October 5th . The Bank also would cut its deposit rates on certain maturities by 25 BPS. The management has suggested that overall impact on the margins would be around 10-11 BPS on account of base rate cut. While the reduction in lending rate will hurt NIMs in near term, the likely pick in volumes, re-pricing of deposits will catch up with some lag. We have buy rating on SBI.

JP Associates plans to sell 49 MW of wind power plants.

Steel producers likely to hike prices by up to Rs 1,500 per tonne
As per media news, domestic steel producers are expected to take advantage of the hike in Safeguard Duty and increase prices by up to Rs 1,500 per tonne.Earlier this month, the government imposed a provisional Safeguard Duty of 20% on import of certain hot rolled flat steel products with a view to protect domestic producers from the recent surge in inward shipments from countries like China.It will be applicable for 200 days, during which the inquiry on whether to continue the duty, will be completed by the Directorate General of Safeguards

NMDC’s AGM highlights
·         Planned capex stands at Rs. 3,600 crore in FY2016 and Rs. 4,000 crore in FY2017.
·         Recently, the government moves to bring about certain restrictions on import of steel items has had a positive impact on domestic companies.
·         NMDC has also begun discussions with some buyers in Japan to enter into long-term export contracts.
·         The existing arrangement for supply of ore expired in March 2015, where about 10 per cent of the produce was exported.
·         The company’s Vision 2025 focuses on increasing iron ore mining capacity to 75 MT per annum by 2019 and 100 MTPA by FY 2022, which need investment outlay of about Rs. 40,000 crore.
·         It is proposed to strategically diversify into other commodities based on growth potential, it is looking at diversifying into mining of certain minerals required for defence and space applications.
Crompton Greaves has won order worth Euro 24 million (approx. Rs 178 crore) from Spanish utility firm Iberdrola to supply ZIV smart meter. – Positive for Crompton Greaves (News came during market hours)

Idea Cellular to launch 4G services in 10 cities from Jan 2016
Looking at the improving ecosystem for 4G, in terms of devices along with the competitive dynamics Idea Cellular has decided to take a plunge with its 4G offering s. Thus the company would be launching 4G services starting Jan 2016 in 10 cities.

Sadbhav Infrastructure project, listed arm of Sadbhav Engineering, is looking to refinance four of its operational road projects as per media reports. The interest rates currently ranging from 11.25%-11.50% will come down to 10.10%-10.30%, after refinancing, resulting in an annual saving of close to Rs50 crore. The development if implemented is positive for both Sadbhav Infrastructure and Sadbhav Engineering.

Jaiprakash Associates Board meeting will be held on September 30, 2015 to consider sale of Wind Power Plants of the Company having aggregate capacity of 49 MW.

Government is looking at an investment of around $50 billion (around Rs 3.3 lakh crore) in the transmission sector in the next five years -Positive for Kalpataru Power, KEC International 
NTPC has appointed a joint venture of Thriveni Earthmovers and Sainik Mining to develop a key Jharkhand coal deposit into a 15 million tonne per annum mine and run it. – Positive read thru for NTPC
Blue Star Infotech: Sells IT business to Infogain for Rs181 crore
Blue Star Infotech Limited (BSIL) has announced that its IT business is to be acquired by Infogain Inc., a ChrysCapital portfolio company. The aggregate  consideration for the IT business of BSIL and its subsidiaries in USA, UK and Singapore under the  transaction will be Rs 180.80 crore, payable upon completion of the sale. In addition, BSIL would retain a real estate undertaking, a certain amount of cash and tax receivables. The fair value of these net
assets to be retained by BSIL is expected to be around Rs 96.7 crore. Following the completion of BSIL’s IT business sale, it is proposed to merge BSIL with Blue Star with effect from April 1, 2015 under the provisions of section 391-394 of the Companies Act 1956 through. The current market cap of Blue Star Infotech  is around Rs312 crore, with deal value of IT business sale at Rs180 crore and company valuing real-estate business at Rs97 crore, the combined value is at Rs277 crore, lower than current market cap. In the last three months stock has seen a sharp run up from Rs200 to high of Rs300 odd.

MTDC plans tie-up with Oyo Rooms, Mahindra holidays – positive read through for Mahindra Holidays
The Maharashtra Tourism Development Corporation is planning to partner vacation ownership companies and budget aggregators to sell unsold rooms in its resorts. The state tourism agency is already in talks with Mahindra Group-owned Mahindra Holidays & Resorts and OYO Rooms. The plan is to offer around 20% of unsold rooms at MTDC resorts through these firms under a revenue-share agreement. MTDC has also received interest from Mahindra Holidays to invest in additional land owned by the tourism body near its existing resorts.
View: Tie-up (if happened) will be positive for Mahindra Holidays as it will help in selling out rooms in the lean period (helping occupancy to improve in off season). Also having a tie-up with government body would help the company to acquire land in the best locations and even getting permissions to them faster.

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