Sunday, August 26, 2007

Sharekhan Investor's Eye dated August 23, 2007

 

Summary of Contents

STOCK UPDATE

Esab India 
Cluster: Vulture's Pick
Recommendation: Buy
Price target: Rs575
Current market price: Rs484

Results ahead of expectations

Result highlights

  • ESAB India's revenues grew by 35% to Rs87.3 crore in the Q2CY2007, which is ahead of our expectation.
  • The operating profit grew by 36.8% to Rs21.7 crore in Q2CY2007 as against Rs15.8 crore in Q2CY2006. Consequently, the operating profit margin (OPM) also expanded by 30 basis points year on year (yoy) to 24.8%. The raw materials cost-to-sales increased by 130 basis points, while the staff cost-to-sales ratio increased by 290 basis points.
  • The commissioning of a new plant at Chennai and capacity additions in its existing plants lead to an increased top line in Q2CY2007. The equipment division registered a whopping 65.5% growth in its revenues and the revenues from the consumables increased by 25.6%.
  • The depreciation cost for the quarter increased by 26.7% as the company has commissioned its new plant.
  • Elexvia group India B.V. along with Charter plc and ESAB Holding Ltd have made an open offer to the shareholder of ESAB India to acquire 30.78 lac shares (Fully paid up equity share of Rs10 each) at Rs426 per share. These represent 20% of the total fully paid up capital. 
  • For the first half of CY2007 the net sales grew by 32.1% to Rs168.5 crore and the bottom line grew by 36.4% to Rs26.4 crore, subsequently generating an earnings per share (EPS) of Rs17.2 per share.

SECTOR UPDATE

Banking

Q1FY2008 earnings review 
In this sector update we have analysed the banks under our coverage based on certain parameters that we feel are important for the overall banking sector's performance going forward. We have also taken cognisance of the risks and positive triggers that the banking sector could face in the near to medium term. Based on our analysis we feel the risk/return ratio for banking stocks appears favourable for investors. We say so because we expect the USA to reduce rates in the near future and if that happens, the Reserve Bank of India (RBI) would not be able to sit on the sidelines for too long. A stable to falling interest rate scenario is generally best suited for the banking sector's performance. Hence, although we remain cautions in the near term, yet we feel the banking sector provides good investment opportunities after the recent correction. Our top picks in the banking sector remain State Bank of India in the public sector, and ICICI Bank and HDFC Bank in the private sector.

 

Information Technology

Concerns overdone
The tech sector has grossly underperformed the benchmark indices over the past few months. Going by the historic trend, the tech stocks tend to lag behind the overall markets in Q1. However, the underperformance has been much more pronounced this year, due to the added concerns related to the steep appreciation in the rupee, subprime issue and its possible fallout on the overall demand environment, and the slowdown in the earnings growth momentum (compounded annual growth rate [CAGR] over the next three years) on the back of technical issues such as higher tax rate in FY2010. 

These issues are largely related to external environment and consequently, not in the control of the domestic tech companies. However, the concerns appear to be overblown and more than priced in the current valuations. 

 In fact, the premium commanded by the tech stocks over the Sensex valuations (on one year forward basis excluding tech stocks) have reduced from a high of around 120% in the mid of 2004 to a historic low of 20%. This appears to be an overdoing given the fact that one of the key concerns of rupee appreciation is under control now and the performance of the tech sector is not likely to impacted by the rising political risk in the country. 

VIEWPOINT

Ambuja Cement

Holcim picks up 3.94% in Ambuja Cements
Continuing with the creeping acquisition of Ambuja Cements' shares, Holcim Mauritius has announced the acquisition of 6 crore equity shares of the company from its promoter and promoter companies (Narotam Sekhsaria, and Radha Madhav Investments and RKBK Fiscal Services). The acquisition has been carried out at a price of Rs154 per share and amounts to 3.94% of the equity capital of Ambuja Cements.

Posted by Tushar Surekha at 9:03 AM

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