Stocks
Herd on the street: NTPC, Development Credit Bank, Financial Technologies, Avon Corporation, Titan Industries

What’s buzzing in these stocks right now

NTPC: The story doing the rounds is that the company has sought permission from the government to sell some of its land bank. However, the company is quite cash-rich and it is difficult to believe that it would need to raise money by selling its land. The company recently announced that for FY10 it paid a total dividend of Rs31 billion, 38% of its paid-up capital, and the highest-ever by its own standards.

Development Credit Bank: It was HDFC Bank a few weeks ago and now it's Axis Bank that is rumoured to be targeting a controlling stake in DCB. Moneylife had reported about the HDFC Bank-DCB buzz (http://www.moneylife.in/article/81/9476.html). In its June quarter, it posted a net loss of Rs29 million vs. Rs82 million q-o-q, and Rs353 million y-o-y.

Financial Technologies: There are some bonus/split rumours. The stock has taken a bad beating after SEBI rejected the plea of MCX Stock Exchange (MCX-SX) for full-fledged bourse status. Before its big fall, the stock had risen quite a bit on hopes that its tussle with SEBI could end on a positive note.

Avon Corporation: There are takeover rumours doing the rounds in this stock. This is a small-cap company with a total market-cap of just Rs330 million. Promoters hold only 14% of this company while FIIs hold 8% and the public holds 79%. FII holding in this stock has risen sharply this year. The Mumbai-based company makes weighing scales. In its June quarter its net profit was Rs52 million (Rs63 million consolidated; Rs2 million q-o-q, Rs34 million y-o-y) and its net sales were Rs220 million (Rs327 million q-o-q, Rs258 million y-o-y).

Titan Industries: Rumours are doing the round of a bumper dividend and bonus issue. Titan is trading at all-time high levels. In its June quarter, Titan earned a net profit of Rs812 million (Rs512 million q-o-q, Rs460 million y-o-y) and net sales of Rs12.5 billion (Rs13 billion q-o-q, Rs8.8 billion y-o-y). The next quarter (December) is expected to be a bumper one for this company as it will reflect festival sales (Dusserah, Diwali, Christmas). Its Q2 results are expected on 25th October.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).
 

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Q2 Earnings Preview–III: Metals, financials, engineering and retail to show strong numbers; cement, telecom and real estate could be underperformers

The quarter ending September has been full of exciting developments for both the economy as well as corporate India. The BSE Sensex has crossed 20,000 and the markets are eagerly waiting to see the Q2 numbers before taking fresh direction. Here is what analysts are expecting in the metal, oil & gas and pharmaceutical sectors

The second quarter of FY11 has turned out to be one of the best quarters for Indian markets with the Bombay Stock Exchange (BSE) Sensex breaking away from a tight range and reaching new highs. Between 1st July and 30th September, the Sensex rose 15% to 20,069 points.

However, during the quarter, markets were driven mostly by foreign institutional investors (FIIs) and not by domestic buyers. In Q2, FIIs infused almost $12 billion into equity markets, taking their total inflows to $14 billion for the first half that ended 30th September. At the same time, domestic institutional investors turned sellers. During Q2, domestic investor sales were at around Rs23,800 crore or $5 billion.

According to analysts, metals, financials, petrochemicals, engineering and retail sectors would come out with good numbers. Sectors like cement, telecom and real estate are most likely to be underperformers. Fast moving consumer goods (FMCG), capital goods and information technology (IT) sectors are likely to perform in line with the Sensex growth.

Although India Inc is expected to come out with strong sales figures, the net profit growth would not match top-lines due to decline in operating margins. "For 2QFY, while we have estimated net sales of Sensex companies to increase by about 20% year-on-year (y-o-y), net profit is expected to post 13.5% growth. A part of the same would be because of about 54 basis points (bps) dip in operating margins (OPMs). Overall, OPMs are expected to be around 25.6%, while net profit margins (NPMs) would decline to 14.4% for the quarter," said a brokerage in a note.

With all companies set to announce their second quarter profit & loss numbers, here is a preview of metals, oil and gas and pharmaceuticals…

METALS

During the second quarter, there was an increase in steel sales volume, as imports from China fell considerably and steel companies started clearing up inventory. On the other hand, higher prices of iron ore helped companies like NMDC. Metal companies are also expected to see an increase in Q2 earnings, such as NALCO, as alumina sales pick in the quarter, and Sterlite, as power business starts contributing.

The Indian steel ministry has raised its FY11 forecast for steel consumption to 10% from the earlier target of 9% because of increased demand from the automobile segment. While steel consumption rose 9.7% in the five months of FY11 to 24.8 million tonnes (MT), steel output increased by a mere 2.7% during the period.

Motilal Oswal Securities Ltd, in a research note said, "We believe steel prices will trend sideways due to lower global capacity utilisation rates and modest growth in global demand. There will be less volatility in the prices of raw material iron ore and coking coal."

"Aluminium producers have a key cost advantage due to the availability of high quality bauxite and coal in close proximity. But we expect the cost of production to rise gradually due to higher manpower costs, mining taxes, challenges in opening new bauxite mines and rising dependence on coal imports due to slower growth in coal production in India," the brokerage added.

Higher volume growth and stable metal prices are likely to result in a sequential rise in revenues for most non-ferrous companies. However, a rise in fuel cost and other expenditure may partially affect operating margins during the second quarter.

Factors to watch in the metals sector are price movement of raw material and steel.

Click to view earnings projections

 Source: IDFC Securities

OIL & GAS

For the oil & gas sector, the second quarter would be broadly in line with market expectations. During Q2FY11, crude prices moved in the narrow range of around $71-$83 per barrel (bbl). Natural gas prices, which were ruling firm at around $4.5-$5 per million British thermal unit (mmbtu) in the latter part of the previous quarter, showed weakness at around $3.75-$4.25 per mmbtu towards the end of the second quarter. During the quarter to end-September, the Moneylife Petrochemicals Index rose 14% to 246.1 points from 215.2 points as on 1st July.

The government, on one hand, doubled the administered price mechanism (APM) gas price to $4.2 per mmbtu and on the other deregulated petrol prices and increased kerosene and cooking gas (LPG) prices.

"Quarter-on-quarter (q-o-q) mildly lower crude realisations would hurt top-lines of upstream producers, but Mangala volume increases for Cairn India and lower subsidy and higher gas prices for ONGC and OIL more than offset the impact. Oil marketing companies (OMCs) are expected to post slender profits on the back of full effect of gasoline deregulation, and improved gross refinery margins (GRMs), despite no cash reimbursement being assumed for the quarter. No ramp-up in KGD6 and poor pet-chem margins should be offset by continually improving GRMs for Reliance Industries (RIL). Escalated spot cargo imports fill in the gap created by Panna-Mukta-Tapti (PMT) shutdown, providing Petronet with an earnings kicker and helping GAIL maintain transmission volumes," said Macquarie Research, in a note.

According to a report by Motilal Oswal, although RIL's KG-D6 gas production increased gas availability in India by 55% to 170 million standard cubic metres a day (mmscmd), there is a huge demand led by the power and fertiliser sectors. "RIL's indication that it will not ramp up KG-D6 gas volumes is unlikely to negatively affect the sector and given an expected sharp rise in gas availability after FY13, we expect infrastructure investment (pipelines and CGD) to peak in 2-3 years," the brokerage added. 

Factors to watch out for the oil & gas sector is lack of clarity on the subsidy-sharing mechanism and the timing of diesel de-regulation. The decline in petrochemical prices and capacity addition coming up in the Middle East and China may also put pressure on margins.

Click to view earnings projections
 
Source: Sharekhan Ltd

PHARMACEUTICALS

During the second quarter to end-September, the Indian pharmaceutical sector is expected to post modest growth on the sales front. The rupee's appreciation against the dollar, the muted revenue growth and the ongoing US Food and Drug Administration (USFDA) issues are taking their toll on the performance of select companies, especially Cipla, Dr Reddy's Laboratories and Ranbaxy.

Sharekhan said in a report, "We expect the pharmaceutical (pharma) companies to report a moderate growth for Q2FY11 as the earnings get into consolidation mode due to high base and lack of exclusivity income. The growth is expected to be driven by new product launches in the US, a strong growth in India, higher penetration in the emerging markets and the rebounding contract manufacturing business. A faster pick-up in the abbreviated new drug application (ANDA) approvals, updates on research & development (R&D) pipelines and out-licensing deals would act as rerating factors for companies like Glenmark Pharmaceuticals, Cadila Healthcare, Lupin and Sun Pharma under our coverage universe."
Focus on profitable growth adopted by leaders in the sector has started to pay dividends. "We have a positive outlook on the global generic pharmaceutical market, contract research and manufacturing services (CRAMS) and domestic pharma consumption. Dr Reddy's Lab is our preferred picks among the large-caps, as it now has got its act right in key markets of India, Russia and the US, which would drive the earning momentum. Among the mid-caps, Glenmark and Jubilant are our preferred pick given strong outlook and attractive valuations," said Macquarie Research, in a note.

Factors to watch out for in the pharmaceutical sector are key product launches in the US, revenues from emerging markets, domestic sales growth, product pipeline and ANDA approvals.

Click to view earnings projections
 
Source: Motilal Oswal Securities Ltd

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security).
 

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Regulator missed the boat on insurance company disclosures, says E&Y partner Ashvin Parekh

Even as IRDA readies its guidelines for insurance company IPOs, there are questions over the quality of disclosures mandated and whether investors would really be able to analyse the prospects of an insurance company

Even as insurance companies are waiting for guidelines on Initial Public Offerings (IPOs) to be issued by the Insurance Regulatory and Development Authority (IRDA), Ashvin Parekh, partner and national leader – Global Financial Services, Ernst & Young Pvt Ltd, has sharply criticised the regulators for dragging their feet over disclosure norms of insurance companies, raising the question whether investors are in a position to evaluate an IPO from an insurance company.

 

Speaking about the challenges in the valuation process of insurance companies at a seminar in Mumbai recently, Mr Parekh said, “Disclosures for profitability of different product lines should have been made long ago. It would have helped not just for IPOs, but also for corporate governance. But the regulators have already missed the boat by 7-8 years. The authorities kept dragging their feet on Embedded Value (EV) disclosure even after three committees have gone into it. They kept saying it was too technical for them. If it is introduced, now it is impossible for investors to get (an) accurate picture from the disclosure that will be submitted to regulators as per the new guidelines. The regulators should have taken the lead, but confirmed the age-old belief that business is always ahead of regulators.”

 

Hemant Kaul, managing director & CEO of Bajaj Allianz General Insurance Co Ltd said, “Correct valuations to shareholders may not be available. It will take a strong promoter and brave investor to complete the IPO.”

According to Mr Parekh, “Insurance company valuations can be done based on Market Consistent Embedded Value (MCEV). The valuation of Indian life insurance companies will be done differently than their counterparts from Europe because of the ‘savings’ aspect (rather) than ‘protection’. The liability from protection is much less. The valuation of a general insurance company will be trickier due to the element of reinsurance, risk on balance sheet and volatility due to external factors like calamities, etc. Life insurance in India is more stable due to (the) ‘savings’ aspect. The actuarial surplus is an important parameter for judging an insurer. The valuation should consider 14.4% taxation impact on actuarial surplus. LIC paid Rs3,800 crore tax last year on actuarial surplus. For an IPO, it is important to look at underwriting profit with not much impact from investing profit.”

 

He added, “There is no benchmark available to offer direction for valuation and regulators will have to come up with it.” There are three elements that make up the basic concept of MCEV: free surplus allocated to covered business, required capital, and VIF (value of in-force covered business).

 

The current guidelines specify that an insurer in business for 10 years can go for an IPO, but companies are trying to shorten this period. The booming IPO market will only motivate them more to launch a successful IPO.

 

The IPO will also provide an avenue for foreign investors holding up to 26% stake to dilute stake if they choose to do so. Gerry Grimstone, chairman, Standard Life told reporters last week at a CII insurance summit, “We would not like to dilute at 26% and (would) like to be invested in India. At the same time, we do not know if we want to increase our shareholding to 49%.”

 

As it is, the accounting process of insurance companies is complex. Frédéric Tremblay, actuarial consultant, Industrial Alliance, Corporate Actuarial Services, Canada, recently wrote in a report: “The financial results of life insurance companies are very complex to analyse. They are prepared according to accounting and actuarial principles varying from one country to another. The financial community often uses the price-to-earnings ratio as a tool to analyse and compare companies. The profits generated by the company in one year are no guarantee of the future. It is impossible to determine the value of a company using these simple results. Everything around a life insurance company is tied to solvency and the nature of the products sold is long term, which makes this type of business unique.”

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