De-growth in its intellectual property division coupled with a challenging market caused revenues to steady down and the company has been put on Hold by SBI Cap Securities
SBI Cap Securities has recommended its clients to put Persistent Systems on hold after valuing the company at Rs600 per share. The report said, “Considering challenging demand environment, the management’s commentary remains upbeat, backed up by strong growth in IP business, healthy pipeline and strong client additions. We have fine tuned our EPS estimate for the March 2014 fiscal after factoring in FY13 results, higher ETR and recent acquisitions. We maintain a Hold recommendation with a target price of Rs600.”
The company’s latest results were found to be disappointing, with its intellectual property (IP) business declining, on a quarter-on-quarter (q-o-q) basis. The chief result was a 1.7% q-o-q de-growth in its IP business. It contributed to 17.5% of the revenues in the March 2013 quarter compared to 18.2% for the previous quarter. The management expects IP-led business to drive growth in F14 and targets it to grow to 25% of overall revenues over the next two years, however, it expects quarterly volatility in revenues, the report said.
Persistent’s revenues increased 23.4% y-o-y in rupee terms, from Rs270.6 crore to Rs334 crore. On the other hand, its revenues increased only 14.6% y-o-y in dollar terms, from $54.2 million to $62.1 million. Net profit increased 25.9% y-o-y from Rs41.2 crore to Rs51.9 crore.
In its bid to boost IP revenues, the company acquired NovaQuest which contributed $1.07 million in the March 2013 quarter. The acquisition also added 40 clients to Persistent’s roster, out of which 10 clients are ‘large’ clients. According to the report, growth was driven by top client that grew at 4.7% QoQ and other than top 10 clients also grew 5.3% QoQ.
Other developments included a tie up with Hewlett-Packard for an automation software, which will supposedly buffet the income stream more. The report said, “During 4QF13, the company acquired licensing agreement with Hewlett Packard for HP Client Automation (HPCA) software. The acquisition further strengthens its offerings in PC Lifecycle Management (PCLCM), Virtual Desktop Infrastructure (VDI) and Mobile Device Management (MDM). The revenues from the acquisition would start accruing from 1QF14. The management expects gradual uptick in revenues as the customer agreements are transferred to Persistent Systems as and when deals come up for renewal”.
The company has even made a splash into the venture capital space and set up a separate division to be an angel investor to certain startups. The report said, “Persistent Ventures will focus on innovations and new technologies and invest in early stage ventures building intellectual property relating to platform solutions. The board has earmarked an investment of Rs350-500mn for the initiative”.
The company operates three divisions: telecom & wireless, life sciences & healthcare and infrastructure & systems. The majority contributor of revenues is infrastructure & systems, which showed Rs222.1 crore (a 21.3% y-o-y increase over corresponding period last year) of gross revenues out of the total gross revenue of Rs334 crore. Much of their revenues (85.1%) of their fourth quarterly revenues come from North America while 5.7% comes from Europe and the remainder comes from Asia Pacific.
Five years is a reasonable time-frame for equity investments, but at the same time returns of small-cap stocks can be volatile. Would this five-year close-ended scheme deliver?
Axis Mutual Fund recently filed an offer document with the Securities and Exchange Board of India (SEBI) to launch a five-year close-ended equity scheme—Axis Small Cap Fund. This close-ended scheme will automatically convert into an open ended equity scheme on completion of five years from its launch. As these schemes invest predominantly in small-cap stocks it is necessary to be aware of the risks associated with such investments. In just two months, for the period ending 31 March 2013, the S&P BSE Small-cap Index crashed by nearly 19%. The index, which consists of over 500 scrips, saw nearly 25 stocks crash by over 50%. Five years is a reasonable time frame for equity investments, but returns of small-cap stocks can be volatile. In a way, being a close-ended scheme would be beneficial for an investor as he/she would not get tempted to withdraw the funds seeing a huge decline or volatility in returns which is common in small-cap schemes. But at the same time, a lot would depend on when and where the scheme would invest to ensure the investors gets decent returns at the end of the period.
As per the offer document, the scheme would invest a minimum of 70% in small-cap companies which are defined as those which have a market capitalisation within the highest market-cap stock (or Rs5,000 crore, whichever is higher) and lowest market-cap stock on the BSE Small-cap index. The range of capitalization of BSE Small-Cap Index will be reviewed on an annual basis. Up to 30% of the assets would be invested in other equities, debt and money market instruments. As we have seen in the past, small- and mid-cap schemes use this allocation to their benefit and invest in large-cap stocks to reduce the downside risk. (Read: Small- and Mid-cap schemes: Cushioning the fall)
As per our analysis, only a few schemes where able to reduce their downside risk and still come up among the top performers when there is a sharp upmove. But to pick such schemes, a prior track record of performance is required. This being a new scheme from Axis Mutual Fund, it has no track record and could be risky. The fund house itself has been in existence for less than five years. The only two equity schemes from the fund house, which have a track record of above three years, are Axis Equity Fund and Axis Long Term Equity Fund. Both the schemes have done reasonably well compared to the benchmark.
The new scheme would be managed by Pankaj Murarka, who has over 11 years of experience in the equity markets. Managing a close-ended scheme would be an easier task as compared to an open-ended scheme as the fund manager would not have to deal with new inflows and outflows from the fund. However, when investing in small-cap stocks one needs to go deeper into the business and management of the company rather than relying only on the financials and valuations of the company.
This being a close-ended scheme, the units of the scheme cannot be redeemed by the unit holder directly with the fund until the maturity/ conversion date. Post maturity/ conversion date, scheme can be redeemed a) Physical units – with the fund, b) Demat unit – with the Depositor participants.
Other details of the scheme
BSE Small Cap
Minimum Application Amount
Rs5,000 and in multiples of Re1 thereafter
Maximum total expense ratio (TER) permissible under Regulation 52(6)(c)(i) and (6)(a): Up to 2.50%
Additional expenses under regulation 52(6A)(c): Up to 0.20%
Additional expenses for gross new inflows from specified cities: Up to 0.30%.
Supreme Industries, a leading plastics player in the country, has weathered a difficult economy and reported good numbers while making plans to expand
Supreme Industries has reported very good numbers for the March 2013 quarter. The stock was recommended in one of our Kensource stockletters, on 27 April 2012. Total income and operating profit for the third quarter ended 31 March 2013 amounted to Rs917.68 crore and Rs134.35 crore, as compared to Rs768.55 crore and Rs104.75 crore for the corresponding quarter last year, an increase of 19.4% and 28.26% respectively. Net profit amounted to Rs75.83 crore when compared to Rs54.68 crore for the same period last year.
The stock was recommended at Rs208 on 27 April 2012 in the stockletter. The share price of the stock is currently quoting at Rs312 on the Bombay Stock Exchange (BSE).
Our Moneylife database threw some interesting statistics. The company’s net sales grew at 19% which exceeded its three-quarter year-on-year (y-o-y) growth rate of 16%. Likewise its operating profit increased 28% y-o-y, to Rs134.28 crore, which has also exceeded its three-quarter y-o-y growth rate of 16%. Yet despite these good numbers, the valuation remains somewhat subdued, with its market capitalisation quoting at 7.34 times operating profit and just 1.07 times its net sales, while return on networth is a jaw-dropping 41% while return on capital employed is 26%.
Supreme Industries processed 2,01,125 metric tonnes (MT) of polymers for the nine months ended March 2013 when compared to the 1,77,439 MT processed during the corresponding period last year, achieving volume growth of 13%.
The company’s ongoing expansion plans involves a total capital outlay of Rs435 crore and is progressing as per the plan. Some of the money used will be spent on a new unit at Hosur for protective packaging products, a unit in Gujarat for expanding capacities of cross laminated film, a state-of-the-art plant for production of composite cylinders and pipes at Gujarat and, finally, a plastic piping system near Gwalior which will be in production by May 2013.
During the current year, the company envisages annual growth in volume and product value of about 16% and 23% respectively over the previous year.
Supreme Industries is India’s leading processors of plastics, offering a wide and comprehensive range of plastic products in India.
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