Stock trading research advisor S.P. Tulsian's views on Future of Reliance Industries and Reliance Petroleum shareholders. Guidance on what a common investor should do now? Should he be buying stocks of RIL / RPL? Should he trade stock of RIL / RPL for short term gains?
One can see the price correcting to about Rs 70 because ultimately everything depends on the conversion ratio, which is likely to hover between 18:1 and 24:1. It all depends on what stand Reliance Industries would take for extinguishment of their stake of 70% that they hold in Reliance Petroleum. If they go for extinguishment then it could be a better ratio of 18:1. If they go for non-extinguishment, then the ratio could be 24:1.”
Future of RPL shareholders
Tulsian gives an example of the state of RPL shareholders post merger:-
Book value of RIL shareholder as of March 31, 2009, which is likely to be the effective date of the merger, would be 700, while that of RPL would be Rs 30.
How he arrived at book value: Reliance Industries has been in existence for the last 30 years. So there has been an accretion in the value of the fixed assets of the company, while RPL being a new company, there has not been much accretion. The project cost of RPL of Rs 27,000 crore can be taken at about Rs 30,000-33,000 crore as of today.
Therefore, a shareholder of Reliance Industries will be shouting if the ratio is anywhere more than 24 to 1 because that is the ratio working out, based on the book value. If market value is the criteria for swap ratio, it works out to about 16-17.
Ratio would definitely be negative for RPL shareholders.
Future of RIL shareholders
Tulsian said that RPL itself is entitled under Section 10AA, therefore RPL’s profits would be exempted for the first five years being an EOU (Export Oriented Unit). “This merger is not being mooted or moved with a view to have any tax advantage because RPL as such is entitled, all its profits will be exempted for the first five years to the extent of 100% of Section 10AA being a 100% EOU.”
Benefits
Tulsian says, “RPL has an advantage of the higher Nelson Complexity also. They have Nelson Complexity of 14.7 against RIL which has 11.7, which will always be giving the merged entity an extra gross refining margin to the extent of USD 2 per barrel. So all these things definitely makes a synergy, may be in terms of increasing the capacity and saving slight payments and overhead cost.”
Tulsian is of the view that RIL-RPL merger can easily increase the debt equity ratio, by 10 bps on the merged entity but this will definitely be EPS accretive for the merged entity as well. He explains, "May be the retail investors will feel depressed or may be nervous that their price will get corrected closer to anywhere between Rs 65 to Rs 70.”
What should investors do?
Tulsian said the merger definitely strengthens the case for making investment in Reliance Industries. He advises investors to get out of RPL. “One can really play blind and without taking a know of the merger ratio, one can get out from RPL even if one gets the price of anywhere above Rs 70 and to move into Reliance Industries because before management does that conversion for investor, it is better to have that voluntary shifting from RPL to RIL on Monday itself.”
Source: moneycontrol.com
RIL and RPL Merger - Who Would be Benefitted?
The $34.5-billion Reliance Industries, India's largest private sector company, on Friday announced that it will consider a proposal next week to merge another group company into itself to bring in operational efficiency.The Reliance Industries Limited (RIL) board will meet on March 2 to consider merger with Reliance Petroleum Limited (RPL). The merger is effective retrospectively from April 1, 2009.
Reliance Petroleum has claimed an annual crude processing capacity of 580,000 barrels per day, making it the sixth largest refinery in the world. The parent is a Fortune Global 500 company and largest private sector entity in India.
RIL, will issue about 34-crore additional equity shares of market value of approximately Rs 11,000 crore. RIL sold 4% stake in RPL taking its stake down to 71%.
Value of RPL's assets has been put at Rs 21,000 crore by industry consultants and ChemSystems. ChemSystems is a firm providing support in the field of petroleum, chemical and petrochemical industries. The company offers data, analysis, forecasts, training and planning tools to improve understanding and planning in the areas of energy and chemicals.
CHECKOUT: RIL - RPL Merger - What Should Investors Do Now?
The merger would result in accretion of Rs 1,300 crore to RIL's net profit. Post-merger, the equity shareholding of the promoters in RIL would come down from the current 44% to 34%.
The merger would increase RIL's operational synergies and its cost efficiencies would optimise fiscal incentives, enhance financial strength and flexibility. It would also eliminate transfer pricing issues.
I strongly believe this would benefit RIL shareholders in long run considering the fact that now they also have indirect share of Reliance Petroleum and it's profits.
More updates to come soon....
RIL's shareholding pattern:
Promoters: 49%
MF/UTI: 2.53%
FII: 15.52%
RPL's shareholding pattern:
Promoters: 75.28%
Reference:
http://www.moneycontrol.com/
http://www.economictimes.com/
Should You Buy Gold @ Current Gold prices?
We will try to analyze if gold investment looks viable in current investment scenario. IF you take a look at gold prices in the past few months, they have been moving in upward direction. From Rs 10, 650 for 10 grams last January 2008, the gold price has moved to Rs 15,490 today. It is at a seven month high and is up by 10% since January this year.
The World Gold Council reports that global demand was up by 4 per cent in 2008.
Gold price in last few days:
Gold prices have been increasing for some time now, major reasons for this are:
Weak equity markets
The volatility and instability in the stock market has boosted investor’s sentiments to move towards gold as an investment. Gold has been viewed to give steady and assured returns and hence investors move from choppy market to save haven like gold. Analysts say that people are rather bullish on gold, due to which gold prices have been rallying for a while now where Sensex is down 45% during same time.
Depreciating rupee
In simple words, when rupee depreciates, gold price increases. The international price of gold depends on the strength of dollar.
Central bank buying
The monetary policies issued by the Reserve Bank of India influences the investors actions, which in turn affects the investors decision to invest in gold or any other asset class.
Global economic crisis
There are reports of several governments like the Chinese, Russian who are diversifying their reserves into gold which is giving additional momentum to gold demand that is apart from the investment demands through gold exchange traded funds or gold ETF.
The "Oracle of Omaha," Warren Buffett, once said this about gold :-
"It gets dug out in Africa or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
So, should you buy Gold now or hold on?
Traders
At this level, it would be wise to sell as you can clock in decent profit. Buying at this level is going to be an expensive deal, says Naveen Mathur, Head of Commodities, Angel Commodities. The past few days have seen very volatile sessions in gold prices internationally and Indian markets because of the rupee depreciation. The prices may shoot up a bit more before going through price correction.
Common investors
Checkout the statement made for traders. Buying at this level is going to be an expensive deal, says Naveen Mathur, Head of Commodities, Angel Commodities. Gold has moved very sharply in past few months in commodity markets. I strongly believe price correction in gold prices would happen soon. Do not get caught at these price levels. Gold is quoting very hoigh right now.
Ideally, an investor should have 15-20 per cent allocation in gold. If you have more than 20 per cent you can consider selling and if you think you allocation is not enough, it’s time to buy and balance your portfolio. Gold is an commodity and although it is performing exceedingly well, it doesn’t mean you should buy gold out of your entire investment allocation.
Apart from physical gold, best way to invest in gold could be via gold ETF. These are function like a mutual fund scheme for gold investment and is held in paper or dematerialized form, like stocks. Here you have advantages like you will not be paying any charges that normally jeweler charges. The brokerage that you would be paying will be definitely lesser in demat paper gold format.
GOLD ETF (Mutual Funds) returns
Reference: MoneyControl.com
The World Gold Council reports that global demand was up by 4 per cent in 2008.
Gold price in last few days:
Gold prices have been increasing for some time now, major reasons for this are:
Weak equity markets
The volatility and instability in the stock market has boosted investor’s sentiments to move towards gold as an investment. Gold has been viewed to give steady and assured returns and hence investors move from choppy market to save haven like gold. Analysts say that people are rather bullish on gold, due to which gold prices have been rallying for a while now where Sensex is down 45% during same time.
Depreciating rupee
In simple words, when rupee depreciates, gold price increases. The international price of gold depends on the strength of dollar.
Central bank buying
The monetary policies issued by the Reserve Bank of India influences the investors actions, which in turn affects the investors decision to invest in gold or any other asset class.
Global economic crisis
There are reports of several governments like the Chinese, Russian who are diversifying their reserves into gold which is giving additional momentum to gold demand that is apart from the investment demands through gold exchange traded funds or gold ETF.
The "Oracle of Omaha," Warren Buffett, once said this about gold :-
"It gets dug out in Africa or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
So, should you buy Gold now or hold on?
Traders
At this level, it would be wise to sell as you can clock in decent profit. Buying at this level is going to be an expensive deal, says Naveen Mathur, Head of Commodities, Angel Commodities. The past few days have seen very volatile sessions in gold prices internationally and Indian markets because of the rupee depreciation. The prices may shoot up a bit more before going through price correction.
Common investors
Checkout the statement made for traders. Buying at this level is going to be an expensive deal, says Naveen Mathur, Head of Commodities, Angel Commodities. Gold has moved very sharply in past few months in commodity markets. I strongly believe price correction in gold prices would happen soon. Do not get caught at these price levels. Gold is quoting very hoigh right now.
Ideally, an investor should have 15-20 per cent allocation in gold. If you have more than 20 per cent you can consider selling and if you think you allocation is not enough, it’s time to buy and balance your portfolio. Gold is an commodity and although it is performing exceedingly well, it doesn’t mean you should buy gold out of your entire investment allocation.
Apart from physical gold, best way to invest in gold could be via gold ETF. These are function like a mutual fund scheme for gold investment and is held in paper or dematerialized form, like stocks. Here you have advantages like you will not be paying any charges that normally jeweler charges. The brokerage that you would be paying will be definitely lesser in demat paper gold format.
GOLD ETF (Mutual Funds) returns
Reference: MoneyControl.com
Stock Market 2009 Predictions - Where would it be in Feb-March 2009?
Looking at current stock market situations worldwide, and especially US DOW trailing below 7500, Indian stocks can not remain isolated for long time since Indian economy is too dependent on world markets. Large companies like General Motors likely to go bankrupt in US, economy there is under severe pressure and chances are it would not grow at all and infact would be contracting in future for some time.
Read: BusinessWeek Article - What If GM Did Go Bankrupt...
Let's try analyzing market trend and understand when can one buy stocks in year 2009.
Dow Jones is at 6 years low. What do you think a level for BSE SENSEX or NIFTY it could be?
DOW JONES 10 YEAR CHART (Click To Enlarge)
The global disconnect between the global macro in the US and the rest of the world is actually narrowing. That’s bad news. China and India are slowing big time. There are big stimulus packages that have been announced by every country, especially the West. But how will you find enough buyers to subscribe to those bonds? Therefore, if they don’t find enough buyers then rates will go up.” Says Shankar Sharma of First Global.
People were looking at the DOW Jones for further direction in stock markets to buy stocks. Now that DOW closed firmly below 7500 yesterday, breaching November lows, there is a high probability that global markets would follow. What does it means for Indian markets? There is possibliy of markets retasting their October lows. Most of the stock market reports are indicating the same.
After breaking 7500 levels, DOW finds its support at 6000 - 6500 levels in near future. For Dow this fall comes to 20 % and so world markets could follow the same fall in terms of percentage.
SENSEX has closed today at 8843 points. If you consider 20 % fall, it comes around 7000. October 2008 lows are also in the same range. i.e. around 7200. SENSEX has long term support between 7000 and 7300.
SENSEX 10 YEAR CHART(click to enlarge)
CHECKOUT: Interesting Analysis On BSE SENSEX
Looking at weakening world economy, the downtrend is expected to continue in first half of 2009. Then onwards economies are expected to start reviving. So if you try to project the Financial results of last quarter i.e. Q-4 2008-2009, and for Q1 of FY 2009-2010, they are going to reflect the weak economical financial conditions. And so the stock markets would reflect the same. Probability is on higher side that SENSEX could taste it's OCTOBER 2008 lows.
Enough of analysis for SENSEX targets!! What should be investor doing?
SEAT ON CASH!!
BEST PLACE FOR YOUR CASH FOR NEXT 3 - 6 MONTHS COULD BE YOUR BANK ACCOUNT!
This is not investors market. These are traders markets.
One can think of buying stocks once the economic cues are in clear trends and it could be only after near end of first half of 2009. Meanwhile new investors can learn How to buy stocks and try finding out value stocks to accummulate. Start accumulating stocks to buy in small quantities.
Read: Stock Market in 2009 - Stocks to Buy
One should start searching for stocks to buy in 2009 - 2010, find the value stocks, make your own list of stocks to buy. You have lot of time for stock research. :)
Read: BusinessWeek Article - What If GM Did Go Bankrupt...
Let's try analyzing market trend and understand when can one buy stocks in year 2009.
Dow Jones is at 6 years low. What do you think a level for BSE SENSEX or NIFTY it could be?
DOW JONES 10 YEAR CHART (Click To Enlarge)
The global disconnect between the global macro in the US and the rest of the world is actually narrowing. That’s bad news. China and India are slowing big time. There are big stimulus packages that have been announced by every country, especially the West. But how will you find enough buyers to subscribe to those bonds? Therefore, if they don’t find enough buyers then rates will go up.” Says Shankar Sharma of First Global.People were looking at the DOW Jones for further direction in stock markets to buy stocks. Now that DOW closed firmly below 7500 yesterday, breaching November lows, there is a high probability that global markets would follow. What does it means for Indian markets? There is possibliy of markets retasting their October lows. Most of the stock market reports are indicating the same.
After breaking 7500 levels, DOW finds its support at 6000 - 6500 levels in near future. For Dow this fall comes to 20 % and so world markets could follow the same fall in terms of percentage.
SENSEX has closed today at 8843 points. If you consider 20 % fall, it comes around 7000. October 2008 lows are also in the same range. i.e. around 7200. SENSEX has long term support between 7000 and 7300.SENSEX 10 YEAR CHART(click to enlarge)
CHECKOUT: Interesting Analysis On BSE SENSEX
Looking at weakening world economy, the downtrend is expected to continue in first half of 2009. Then onwards economies are expected to start reviving. So if you try to project the Financial results of last quarter i.e. Q-4 2008-2009, and for Q1 of FY 2009-2010, they are going to reflect the weak economical financial conditions. And so the stock markets would reflect the same. Probability is on higher side that SENSEX could taste it's OCTOBER 2008 lows.
Enough of analysis for SENSEX targets!! What should be investor doing?
SEAT ON CASH!!
BEST PLACE FOR YOUR CASH FOR NEXT 3 - 6 MONTHS COULD BE YOUR BANK ACCOUNT!
This is not investors market. These are traders markets.
One can think of buying stocks once the economic cues are in clear trends and it could be only after near end of first half of 2009. Meanwhile new investors can learn How to buy stocks and try finding out value stocks to accummulate. Start accumulating stocks to buy in small quantities.
Read: Stock Market in 2009 - Stocks to Buy
One should start searching for stocks to buy in 2009 - 2010, find the value stocks, make your own list of stocks to buy. You have lot of time for stock research. :)
High Dividend Stocks
Dividend is a tax-free income in the hand of shareholders. Dividends are far more profitable today than it would have been in the last four years. ET Intelligence dug deep to find out companies, which are consistent in paying dividends and in some cases have also increased the payout ratio.
This is because the stock prices have crashed in last one year, as result the dividend yield (dividend per share divided by price per share) has gone up. Therefore, the dividend per rupee of investment is much more today than it was earlier. However, investors should not aim at accumulating stocks with high dividend yield because such high yields may not be sustainable in case profit falls due to economic slowdown.
ET Intelligence dug deep to find out companies, which are consistent in paying dividends and in some cases have also increased the payout ratio. A high payout ratio means a higher percentage of profits are distributed among shareholders as dividends.
The payout ratio has come down for most of the companies in the table. For instance, Great Eastern Shipping paid 38.6% of its profits as dividend in FY 2003, which came down to 17.3% in FY 2008.
The drop in payout ratio has to be seen in the light of high growth in profits. When profits rise at astronomical rates, the dividend growth tends to be a bit lesser because the company prefers to retain some amount with it for further investment.
Investors interested in earning dividends should steer clear of companies with high fluctuations in profits. For instance, Tata Motors had incurred losses in FY 2001 and FY 2002.
Though the company is incurring losses, it can still pay dividend from its past cash flows. But sustaining dividend payment will become extremely difficult in near future. Similarly, other auto manufacturers, like Ashok Leyland, were also excluded from the sample because they operate in highly cyclical industry.
Checkout: Time To Invest For High Dividend Stocks
As we all know that investing in stocks is a risky affair, so, an investor should always try to balance his investments between stocks and fixed interest instruments, which are less risky. We did a simulation (taking the stocks mentioned in the table) to calculate the return purely from the dividend the stocks have been paying.
We assume that an investor had put in Rs 1,000 in each of the 10 stocks on April 01, 2003, taking his total investment to Rs 10,000. The amount invested in all stocks was same to make a portfolio with equal proportions invested in different stocks. At the end of first financial year on April 01, 2004, the investor would have received dividends from the companies amounting to Rs 1,264.
To minimise risk, we assume that the investor had invested the dividend in a fixed deposit for one year at the interest rate of 5.25% and then kept on rolling the fixed deposit every year for another one year. This is called ‘hybrid strategy’ , wherein the income from risky investments (in this case equity) is routed to relatively less risky investments (in this case fixed deposit).
Similarly, every year on the first day of April, the investor would have got dividends, which he would have routed to fixed deposit of one year. Following this strategy, the investor would have made Rs 8,970 from dividend and interest on those dividends in five years.
It is noteworthy that adopting this hybrid strategy the investor would have almost recovered 90% of his entire investment in five years time. This translates to annual return of 13.7% per annum from dividends only.
The most interesting part of the result is that the investor would have made a much higher return on his investments than offered by any fixed rate instrument. On the top of it, that return would have had been entirely free from taxes. The interest on fixed deposit is taxed.
As the interest earned formed a lesser part of the return; the tax incidence would also had been much lesser. Moreover, we have not considered the capital gains. The value of the total portfolio stands at Rs 46,302 today— close to five times of the principal amount of Rs 10,000—though the market has crashed by more than 50% since its peak.
Source: Economic Times
This is because the stock prices have crashed in last one year, as result the dividend yield (dividend per share divided by price per share) has gone up. Therefore, the dividend per rupee of investment is much more today than it was earlier. However, investors should not aim at accumulating stocks with high dividend yield because such high yields may not be sustainable in case profit falls due to economic slowdown.
ET Intelligence dug deep to find out companies, which are consistent in paying dividends and in some cases have also increased the payout ratio. A high payout ratio means a higher percentage of profits are distributed among shareholders as dividends.
The payout ratio has come down for most of the companies in the table. For instance, Great Eastern Shipping paid 38.6% of its profits as dividend in FY 2003, which came down to 17.3% in FY 2008.
The drop in payout ratio has to be seen in the light of high growth in profits. When profits rise at astronomical rates, the dividend growth tends to be a bit lesser because the company prefers to retain some amount with it for further investment.
Investors interested in earning dividends should steer clear of companies with high fluctuations in profits. For instance, Tata Motors had incurred losses in FY 2001 and FY 2002.
Though the company is incurring losses, it can still pay dividend from its past cash flows. But sustaining dividend payment will become extremely difficult in near future. Similarly, other auto manufacturers, like Ashok Leyland, were also excluded from the sample because they operate in highly cyclical industry.
Checkout: Time To Invest For High Dividend Stocks
As we all know that investing in stocks is a risky affair, so, an investor should always try to balance his investments between stocks and fixed interest instruments, which are less risky. We did a simulation (taking the stocks mentioned in the table) to calculate the return purely from the dividend the stocks have been paying.
We assume that an investor had put in Rs 1,000 in each of the 10 stocks on April 01, 2003, taking his total investment to Rs 10,000. The amount invested in all stocks was same to make a portfolio with equal proportions invested in different stocks. At the end of first financial year on April 01, 2004, the investor would have received dividends from the companies amounting to Rs 1,264.
To minimise risk, we assume that the investor had invested the dividend in a fixed deposit for one year at the interest rate of 5.25% and then kept on rolling the fixed deposit every year for another one year. This is called ‘hybrid strategy’ , wherein the income from risky investments (in this case equity) is routed to relatively less risky investments (in this case fixed deposit).
Similarly, every year on the first day of April, the investor would have got dividends, which he would have routed to fixed deposit of one year. Following this strategy, the investor would have made Rs 8,970 from dividend and interest on those dividends in five years.
It is noteworthy that adopting this hybrid strategy the investor would have almost recovered 90% of his entire investment in five years time. This translates to annual return of 13.7% per annum from dividends only.
The most interesting part of the result is that the investor would have made a much higher return on his investments than offered by any fixed rate instrument. On the top of it, that return would have had been entirely free from taxes. The interest on fixed deposit is taxed.
As the interest earned formed a lesser part of the return; the tax incidence would also had been much lesser. Moreover, we have not considered the capital gains. The value of the total portfolio stands at Rs 46,302 today— close to five times of the principal amount of Rs 10,000—though the market has crashed by more than 50% since its peak.
Source: Economic Times
Income Tax Saving - Tax Planning - Equities Way
If you are looking at equity as an asset class and want tax reliefs as well, you can opt for ELSS, provided your goals are 5-7 years away. Equity is considered by many experts to be the asset class that can yield returns higher than many other instruments in the section 80C basket. ELSS provides you a chance to buy stocks thru mutual funds and at the time save income tax with higher returns on your long term investment.
Investing In Equities - Better Returns while Saving Income Tax
one of the best asset classes to provide that benefit is equity. Though its risky and volatile in the short-run , all kinds of long-term gains from equity, including capital returns and dividend income, are tax-free . In fact, as the investing period gets longer, dividend becomes a significant part of gains from the equity investment and it provides investors with a consistent flow of tax-free income.
ELSS - Income Tax Saving Instrument - Give It A Thought
If you haven't made the necessary investments already, it is time to go through your salary statement to find out the amount you need to set aside for claiming deductions up to Rs 1 lakh under the section 80C of the Income Tax Act.Since the valuations are quite low at the moment, it makes sense to invest in ELSS.
Investing In Equities - Better Returns while Saving Income Tax
one of the best asset classes to provide that benefit is equity. Though its risky and volatile in the short-run , all kinds of long-term gains from equity, including capital returns and dividend income, are tax-free . In fact, as the investing period gets longer, dividend becomes a significant part of gains from the equity investment and it provides investors with a consistent flow of tax-free income.
ELSS - Income Tax Saving Instrument - Give It A Thought
If you haven't made the necessary investments already, it is time to go through your salary statement to find out the amount you need to set aside for claiming deductions up to Rs 1 lakh under the section 80C of the Income Tax Act.Since the valuations are quite low at the moment, it makes sense to invest in ELSS.
Buying Stocks In Real Estate Sector - Stock Market Report
Motilal Oswal is bullish on and has recommended to buy stocks of DLF among all real estate players, in its February 10, 2009 report.
"DLF's reported 3QFY09 numbers were below expectations with revenue at Rs 13.6 billion versus our estimates of Rs 32.5 billion and net profit at Rs 6.7 billion versus our estimates of Rs 14 billion.
In 3QFY09, the management has adopted several critical measures to effectively deal with the downturn.
It has:
1) put on hold 26% of its ~62msf of ongoing projects aggregating to 16msf (commercial 12msf and retail 4msf) for lack of project financing,
2) guided for substantial delay in sales to DAL for the remaining 10msf of commercial projects,
3) postponed all new launches for the retail lease vertical,
4) suspended all hotel projects other than projects under Hilton JV for lack of funds."
The report also says, "Our FY10 NAV for DLF is Rs 211/sh. Our NAV does not include potential value creation from
i) Bidadi and Dankuni project,
ii) value creation possibility from subsidiary companies in the construction, life insurance and entertainment business, and
iii) potential value unlocking from large SEZs. We view DLF as one of the best managed real estate company in India due to its robust business model. Buy,"says Motilal Oswal's research report.
Read Earlier One: Top Stock in Real Estate Sector - DLF Real Estate - Motilal Oswal Report
Important Statistics:
Shareholding pattern
Total shareholding of Promoter and Promoter Group (A): 88.26%
Total Public shareholding (B): 11.74%
Mkt Cap: 26,604.87
P/E: 12.33
Div: 200.00
EPS (TTM): 12.67
B/V: 66.18
Mkt Lot: 1.00
FV: 2.00
Valuation and view
We have lowered our FY10 NAV for all RE companies in our coverage universe to account
for:
(1) further delay in project launches and completion across verticals,
(2) lower price assumptions across all projects across verticals, and
(3) higher cap rates for the commercial and retail projects.
Due to the virtual paralysis in the real estate sector since November 2008, we believe 4QFY09 could be worse than 3QFY09 and we expect FY09-10 to be a period of
consolidation, in which industry leaders would be differentiated from peers. We believe developers with staying power would utilize this consolidation phase to emerge stronger. Focus on companies with:
(1) high visibility on monetization of assets over the next 3-5 years,
(2) low leverage and robust financials, and
(3) strong execution track record.
Top stock to buy remains DLF.
Download the report on Real estate sector from Motilal Oswal.
"DLF's reported 3QFY09 numbers were below expectations with revenue at Rs 13.6 billion versus our estimates of Rs 32.5 billion and net profit at Rs 6.7 billion versus our estimates of Rs 14 billion.
In 3QFY09, the management has adopted several critical measures to effectively deal with the downturn.
It has:
1) put on hold 26% of its ~62msf of ongoing projects aggregating to 16msf (commercial 12msf and retail 4msf) for lack of project financing,
2) guided for substantial delay in sales to DAL for the remaining 10msf of commercial projects,
3) postponed all new launches for the retail lease vertical,
4) suspended all hotel projects other than projects under Hilton JV for lack of funds."
The report also says, "Our FY10 NAV for DLF is Rs 211/sh. Our NAV does not include potential value creation from
i) Bidadi and Dankuni project,
ii) value creation possibility from subsidiary companies in the construction, life insurance and entertainment business, and
iii) potential value unlocking from large SEZs. We view DLF as one of the best managed real estate company in India due to its robust business model. Buy,"says Motilal Oswal's research report.
Read Earlier One: Top Stock in Real Estate Sector - DLF Real Estate - Motilal Oswal Report
Important Statistics:
Shareholding pattern
Total shareholding of Promoter and Promoter Group (A): 88.26%
Total Public shareholding (B): 11.74%
Mkt Cap: 26,604.87
P/E: 12.33
Div: 200.00
EPS (TTM): 12.67
B/V: 66.18
Mkt Lot: 1.00
FV: 2.00
Valuation and view
We have lowered our FY10 NAV for all RE companies in our coverage universe to account
for:
(1) further delay in project launches and completion across verticals,
(2) lower price assumptions across all projects across verticals, and
(3) higher cap rates for the commercial and retail projects.
Due to the virtual paralysis in the real estate sector since November 2008, we believe 4QFY09 could be worse than 3QFY09 and we expect FY09-10 to be a period of
consolidation, in which industry leaders would be differentiated from peers. We believe developers with staying power would utilize this consolidation phase to emerge stronger. Focus on companies with:
(1) high visibility on monetization of assets over the next 3-5 years,
(2) low leverage and robust financials, and
(3) strong execution track record.
Top stock to buy remains DLF.
Download the report on Real estate sector from Motilal Oswal.
Bharti Airtel - Investing In Stock From Telecom Sector
Buy stock research report on Bharti Airtel with target price. Buying stocks of Airtel in current stock market scenario would be one of the best investments to make in year 2009. Stock analysis based on recent Q-3 2008 financial results.
Bharti Airtel ‘s Q3FY09 results were broadly in line with expectations with revenues growing by 6.8% QoQ to Rs96.3bn (v/s estimate of Rs96bn) led by healthy 9% growth in mobile business revenues and help by ~2% drop in ARPU. Operating profits increased by 6.6% QoQ to Rs39.4bn with margins remaining flat at 41%.
Margins expanded by 120bps and 220bps in mobile and carrier businesses respectively and absorbed Rs1bn EBIDTA loss from DTH business thus resulting in overall margins remaining flat. MOU’s declined by 4% accompanied by a 2% increase in RPM and 120bps up tick in mobile margins. Profits grew 5.5% QoQ to 21.6bn (v/s estimate of Rs22bn).
Checkout: Best stocks to buy in Indian telecom sector
Focused on sustainable model
During the investor call co management clearly stated that it would not react to competitive pricing adopted by RCOM and Idea towards pre-paid schemes as it expects them to be short term schemes and expects them to be withdrawn soon. While we believe that such low entry cost schemes without tariff cuts (as in case of RCOM) are aimed at gaining market share and additional spectrum and may not have material financial benefit for RCOM, we are more concerned about the tariff cuts (local call at Rs0.60 v/s competition at Rs1 undertaken by Idea.
Other key highlights:
(1) Bharti received additional spectrum in four more circles in Q309 and has applications pending for 8 more circles. The receipt of additional spectrum is also resulting in reduced site additions QoQ
(2) Effective 1st Jan-09, Indus towers would begin its accounting and hence 42% of it would be consolidated with Bharti Infratel.
(3) Its recent service launch in Srilanka at tariffs lower than market has received overwhelming response and co would report progress in Srilanka from Q4FY09 onwards.
Also Read: Bharti Airtel - Best stock in telecom for definite returns
Passive infrastructure – Tenancy growth healthy
Passive infrastructure revenues increased by 6% QoQ and EBIDTA grew by 6.7% QoQ.
The tenancy increase from 1.26x to 1.34x on QoQ basis led to 20bps increase in EBIDTA
margins. However the revenue per tower per month declined by 2% QoQ due to the
benefits being passed on to the operators on increase in tenancy. EBIT declined by 63% QoQ due to higher depreciation and share of losses in JV.
DTH business insignificant as of now
During Q309 Bharti launched its DTH services in 65 cities and is currently adding 100,000 subscribers per month. The company has not separately disclosed the details on DTH business as the numbers and impact are insignificant. We note that, the DTH launch has resulted in EBIDTA loss of Rs1bn, as classified among others segment.
Important Statistics
Shareholding Pattern (%)
(As on 31st Dec.’08)
Promoters: 67.2
FII/NRI: 22.6
Institutions: 6.5
Private Corp.: 2.6
Public: 1.2
Mkt Cap: 126,393.75
P/E: 16.94
Div: 0.00
EPS (TTM): 39.31
B/V: 106.32
Mkt Lot: 1.00
FV: 10.00
Maintain BUY with price target Rs1,025
We maintain our earning estimates of Rs44.3 and Rs56.3 for FY09E and FY10E respectively. Maintain BUY rating with a price target of Rs1025 Near term regulatory risks like
(1) reduction in IUC
(2) increase in spectrum usage charge
(3) 3G auction pricing
(4) MNP implementation pose threat to our earnings estimate.
Download Detailed Reference Stock Research Report PDF
Read: Stock Market in 2009 - Stocks to Buy
Bharti Airtel ‘s Q3FY09 results were broadly in line with expectations with revenues growing by 6.8% QoQ to Rs96.3bn (v/s estimate of Rs96bn) led by healthy 9% growth in mobile business revenues and help by ~2% drop in ARPU. Operating profits increased by 6.6% QoQ to Rs39.4bn with margins remaining flat at 41%.
Margins expanded by 120bps and 220bps in mobile and carrier businesses respectively and absorbed Rs1bn EBIDTA loss from DTH business thus resulting in overall margins remaining flat. MOU’s declined by 4% accompanied by a 2% increase in RPM and 120bps up tick in mobile margins. Profits grew 5.5% QoQ to 21.6bn (v/s estimate of Rs22bn).
Checkout: Best stocks to buy in Indian telecom sector
Focused on sustainable model
During the investor call co management clearly stated that it would not react to competitive pricing adopted by RCOM and Idea towards pre-paid schemes as it expects them to be short term schemes and expects them to be withdrawn soon. While we believe that such low entry cost schemes without tariff cuts (as in case of RCOM) are aimed at gaining market share and additional spectrum and may not have material financial benefit for RCOM, we are more concerned about the tariff cuts (local call at Rs0.60 v/s competition at Rs1 undertaken by Idea.
Other key highlights:
(1) Bharti received additional spectrum in four more circles in Q309 and has applications pending for 8 more circles. The receipt of additional spectrum is also resulting in reduced site additions QoQ
(2) Effective 1st Jan-09, Indus towers would begin its accounting and hence 42% of it would be consolidated with Bharti Infratel.
(3) Its recent service launch in Srilanka at tariffs lower than market has received overwhelming response and co would report progress in Srilanka from Q4FY09 onwards.
Also Read: Bharti Airtel - Best stock in telecom for definite returns
Passive infrastructure – Tenancy growth healthy
Passive infrastructure revenues increased by 6% QoQ and EBIDTA grew by 6.7% QoQ.
The tenancy increase from 1.26x to 1.34x on QoQ basis led to 20bps increase in EBIDTA
margins. However the revenue per tower per month declined by 2% QoQ due to the
benefits being passed on to the operators on increase in tenancy. EBIT declined by 63% QoQ due to higher depreciation and share of losses in JV.
DTH business insignificant as of now
During Q309 Bharti launched its DTH services in 65 cities and is currently adding 100,000 subscribers per month. The company has not separately disclosed the details on DTH business as the numbers and impact are insignificant. We note that, the DTH launch has resulted in EBIDTA loss of Rs1bn, as classified among others segment.
Important Statistics
Shareholding Pattern (%)
(As on 31st Dec.’08)
Promoters: 67.2
FII/NRI: 22.6
Institutions: 6.5
Private Corp.: 2.6
Public: 1.2
Mkt Cap: 126,393.75
P/E: 16.94
Div: 0.00
EPS (TTM): 39.31
B/V: 106.32
Mkt Lot: 1.00
FV: 10.00
Maintain BUY with price target Rs1,025
We maintain our earning estimates of Rs44.3 and Rs56.3 for FY09E and FY10E respectively. Maintain BUY rating with a price target of Rs1025 Near term regulatory risks like
(1) reduction in IUC
(2) increase in spectrum usage charge
(3) 3G auction pricing
(4) MNP implementation pose threat to our earnings estimate.
Download Detailed Reference Stock Research Report PDF
Read: Stock Market in 2009 - Stocks to Buy
PVR - If You Want To Buy Stock From Media & Entertainment
PVR Cinemas: Buy Stock report from K R Choksey stock research team. Stock analysis after Q-3 FY 2008 financial results of the company. PVR is one stock which would benefit from rising Indian middle class income and part of consumption growth story in India. More and more people in India are inclining towards multiplex experience of a movie and PVR is just providing that!
Reco price: Rs 88
Current market price: Rs Rs 88
Target price: Rs 180
Upside: 104.5%
Brokerage: KR Choksey
The current market price offers a good entry point for investors willing to hold on to the stock for a two-three year period. While the near-term outlook for earnings is likely to be dimmer than the past, amidst a sluggish period for the film industry, the long-term prospects for the company remain bright.
The Net sales for Q3 FY09 were up by 17 per cent Y-o-Y to Rs 78.4 crore driven by F&B income, revenue contribution from new properties and advertisement & royalty income. The Occupancy rates have declined by 580bps Y-o-Y but improved by 200bps q-o-q to 34.7per cent in Q3 FY09.
Q3FY09 Result Analysis
Topline not impressive, lack of quality content Overall occupancies Y-o-Y decline by 580bps to 34.7%, net operating income grew by 16.7% to Rs 76.6 crore, led by higher ticket / F & B realization from comparable properties, revenue contribution from new properties and robust growth in advertisement revenues.
Margins impacted, launch of new properties Operating margins Y-o-Y decline by 220bps to 18.8% due to increase in other expenditure by 16.1% to Rs 18.5 crore. (Promotion expenses for new properties) and rent increased by 8.1% (addition of new properties)
However, spend per head grew by 16 per cent Y-o-Y to Rs 37, out of which growth of 6 per cent was driven by existing properties and rest was driven by high average spend per head from new properties, including PVR Premiere. The average ticket price has also increased by 7.7 per cent Y-o-Y to Rs 140; the growth led by higher ATPs newly opened PVR Premiere properties.
Important Statistics
Shareholding Pattern
Total shareholding of Promoter and Promoter Group (A): 41.19%
Institutional Holding: 32.72%
Public and Non institutional: 26.08%
Mkt Cap: 206.20
P/E: 12.53
Div: 10.00
EPS: (TTM) 7.15
B/V: 85.98
Mkt: Lot 1.00
FV: 10.00
The brokerage expects PVR to post a robust growth in Q4 FY09 as occupancies at their multiplexes are higher on account of release of quality content such as Slumdog Millionaire, Victory and Raaz along with films like Delhi- 6, Billu Barber and Dev D in the pipeline. Further, in Q4 FY09, PVR would open a 24-lane Bowling Alley Center at Ambience Mall in Gurgaon, which would help them to diversify their revenue model. At Rs 88, the stock is trading at 8.1x FY09E EPS of Rs 10.9
Focus on metros
From a long-term perspective, however, PVR’s ability to maximise spends on tickets, food and advertisements augurs well for its overall profitability. PVR derives about 20 per cent of its revenues from food and beverages and, thanks to its large screen presence in metros, another 10 per cent from advertisements. Maximising revenue streams beyond the box office is key to maintaining profitability at a time when film hire costs (the cost to exhibit a film in a multiplex) are on the rise. PVR appears to have fared better than its peers on this score.
This may be partly due to PVR’s focus on metros even as its peers scout for properties in Tier-2 and Tier-3 cities. The company believes that metros remain the most profitable centers for multiplex operators, as spending habits are yet to mature in smaller towns and cities.
This view appears to be validated by its ability to command higher ticket prices in cities such as Delhi and Mumbai. Its existing properties clock superior occupancy levels of over 40 per cent, charge an average ticket price of Rs 130 and there has been an increasing trend in spends per head.
The company’s operating margins are likely to remain higher than its peers, who are now foraying into smaller towns and cities.
PVR recently launched PVR Premiere for the urban elite, with ticket prices ranging from Rs 150-750. The company also operates a low-cost multiplex model PVR Talkies in towns such as Aurangabad and Latur, where tickets are priced at Rs 40. The use of multiple formats that straddle across income segments enables the company to capitalise on both increasing footfalls and the increasing willingness to spend on entertainment.
Building on distribution
With increasing screen presence, PVR is well-placed to build on its distribution business, operated by subsidiary PVR Pictures. Although it is early days still, we expect PVR Pictures to make an increasing contribution to revenues and profits over the next couple of years.
The company’s first co-production Taare Zameen Par with Aamir Khan Productions was a runaway hit. More such projects have been lined up, including one from Aamir Khan Productions expected to release in July 2008.
PVR Pictures, which already has a track record of distributing strong English movie titles, has distributed fairly successful Hindi movies such as Bheja Fry, Omkara and Honeymoon Travels over the past year.
The distribution business appears to be closely tied with the exhibition business, considering that these films clicked particularly well with multiplex audiences. PVR’s multiplexes are present in six of the nine territories for film distribution, which makes it easier for PVR Pictures to drive distribution through its own multiplexes.
A presence in distribution will also keep a check on film hire costs for the multiplex chain.
Valuation
At the CMP of Rs 88, PVR is trading at 9.9x TTM EPS of Rs 8.9 and at 8.1x FY09E EPS of Rs 10.9 We believe the slowdown in rollout plans. As guided by the company, 33 screens would be coming in FY10, which would take total number of screens to 141.
We believe company to post a robust growth in Q4FY09 inspite of slowdown because till now the occupancy at multiplex are high because release of quality content such
as SLUMDOG MILLIONAIRE, VICTORY, RAAZ, LUCK BY CHANGE and beside above release of the movies in pipeline for the quarter are-DELHI- 6, BILLU BARBER, DEV D, Mere
Khwabon Mein Jo Aaye,etc
As in Q4FY09, company would be opening its first project - a 24-lane Bowling Alley Center at Ambience Mall in Gurgaon, which would help them to diversify their revenue model.
We maintain BUY rating with downward revision in target price from Rs 220 to Rs 180 based on SOTP valuations, an upside of 104.5% from current levels.
Download reference stock research report
Reco price: Rs 88
Current market price: Rs Rs 88
Target price: Rs 180
Upside: 104.5%
Brokerage: KR Choksey
The current market price offers a good entry point for investors willing to hold on to the stock for a two-three year period. While the near-term outlook for earnings is likely to be dimmer than the past, amidst a sluggish period for the film industry, the long-term prospects for the company remain bright.
The Net sales for Q3 FY09 were up by 17 per cent Y-o-Y to Rs 78.4 crore driven by F&B income, revenue contribution from new properties and advertisement & royalty income. The Occupancy rates have declined by 580bps Y-o-Y but improved by 200bps q-o-q to 34.7per cent in Q3 FY09.
Q3FY09 Result Analysis
Topline not impressive, lack of quality content Overall occupancies Y-o-Y decline by 580bps to 34.7%, net operating income grew by 16.7% to Rs 76.6 crore, led by higher ticket / F & B realization from comparable properties, revenue contribution from new properties and robust growth in advertisement revenues.
Margins impacted, launch of new properties Operating margins Y-o-Y decline by 220bps to 18.8% due to increase in other expenditure by 16.1% to Rs 18.5 crore. (Promotion expenses for new properties) and rent increased by 8.1% (addition of new properties)
However, spend per head grew by 16 per cent Y-o-Y to Rs 37, out of which growth of 6 per cent was driven by existing properties and rest was driven by high average spend per head from new properties, including PVR Premiere. The average ticket price has also increased by 7.7 per cent Y-o-Y to Rs 140; the growth led by higher ATPs newly opened PVR Premiere properties.
Important Statistics
Shareholding Pattern
Total shareholding of Promoter and Promoter Group (A): 41.19%
Institutional Holding: 32.72%
Public and Non institutional: 26.08%
Mkt Cap: 206.20
P/E: 12.53
Div: 10.00
EPS: (TTM) 7.15
B/V: 85.98
Mkt: Lot 1.00
FV: 10.00
The brokerage expects PVR to post a robust growth in Q4 FY09 as occupancies at their multiplexes are higher on account of release of quality content such as Slumdog Millionaire, Victory and Raaz along with films like Delhi- 6, Billu Barber and Dev D in the pipeline. Further, in Q4 FY09, PVR would open a 24-lane Bowling Alley Center at Ambience Mall in Gurgaon, which would help them to diversify their revenue model. At Rs 88, the stock is trading at 8.1x FY09E EPS of Rs 10.9
Focus on metros
From a long-term perspective, however, PVR’s ability to maximise spends on tickets, food and advertisements augurs well for its overall profitability. PVR derives about 20 per cent of its revenues from food and beverages and, thanks to its large screen presence in metros, another 10 per cent from advertisements. Maximising revenue streams beyond the box office is key to maintaining profitability at a time when film hire costs (the cost to exhibit a film in a multiplex) are on the rise. PVR appears to have fared better than its peers on this score.
This may be partly due to PVR’s focus on metros even as its peers scout for properties in Tier-2 and Tier-3 cities. The company believes that metros remain the most profitable centers for multiplex operators, as spending habits are yet to mature in smaller towns and cities.
This view appears to be validated by its ability to command higher ticket prices in cities such as Delhi and Mumbai. Its existing properties clock superior occupancy levels of over 40 per cent, charge an average ticket price of Rs 130 and there has been an increasing trend in spends per head.
The company’s operating margins are likely to remain higher than its peers, who are now foraying into smaller towns and cities.
PVR recently launched PVR Premiere for the urban elite, with ticket prices ranging from Rs 150-750. The company also operates a low-cost multiplex model PVR Talkies in towns such as Aurangabad and Latur, where tickets are priced at Rs 40. The use of multiple formats that straddle across income segments enables the company to capitalise on both increasing footfalls and the increasing willingness to spend on entertainment.
Building on distribution
With increasing screen presence, PVR is well-placed to build on its distribution business, operated by subsidiary PVR Pictures. Although it is early days still, we expect PVR Pictures to make an increasing contribution to revenues and profits over the next couple of years.
The company’s first co-production Taare Zameen Par with Aamir Khan Productions was a runaway hit. More such projects have been lined up, including one from Aamir Khan Productions expected to release in July 2008.
PVR Pictures, which already has a track record of distributing strong English movie titles, has distributed fairly successful Hindi movies such as Bheja Fry, Omkara and Honeymoon Travels over the past year.
The distribution business appears to be closely tied with the exhibition business, considering that these films clicked particularly well with multiplex audiences. PVR’s multiplexes are present in six of the nine territories for film distribution, which makes it easier for PVR Pictures to drive distribution through its own multiplexes.
A presence in distribution will also keep a check on film hire costs for the multiplex chain.
Valuation
At the CMP of Rs 88, PVR is trading at 9.9x TTM EPS of Rs 8.9 and at 8.1x FY09E EPS of Rs 10.9 We believe the slowdown in rollout plans. As guided by the company, 33 screens would be coming in FY10, which would take total number of screens to 141.
We believe company to post a robust growth in Q4FY09 inspite of slowdown because till now the occupancy at multiplex are high because release of quality content such
as SLUMDOG MILLIONAIRE, VICTORY, RAAZ, LUCK BY CHANGE and beside above release of the movies in pipeline for the quarter are-DELHI- 6, BILLU BARBER, DEV D, Mere
Khwabon Mein Jo Aaye,etc
As in Q4FY09, company would be opening its first project - a 24-lane Bowling Alley Center at Ambience Mall in Gurgaon, which would help them to diversify their revenue model.
We maintain BUY rating with downward revision in target price from Rs 220 to Rs 180 based on SOTP valuations, an upside of 104.5% from current levels.
Download reference stock research report
BEML - Buy Stock From PSU Pack
BEML Stock buying recommended in stock market report from K R Choksey stock research team. Looking at current stock market, public sector companies can be stocks to buy and best way to invest your money.
BEML Limited (formerly Bharat Earth Movers Limited) was established in May 1964 as a Public Sector Undertaking for manufacture of Rail Coaches & Spare Parts and Mining Equipment at its Bangalore Complex. The Company ha s partially disinvested and presently Government of India owns 54 percent of total equity and rest 46 percent is held by Public, Financial institutions, Foreign Institutional Investors, Banks and Employees.
During the financial year 2007-08, BEML achieved a sales turnover of INR 2713 crores and a pre tax profit of INR 348 crores. The export earnings touched INR 200.62 crores.
Let's analyze Q3FY09 results of BEML Ltd for investment guidance.
Q3FY09 – Result Snapshot
** Net Sales increased marginally by 1.7% to Rs 632.9 crore as against Rs 622.1 crore in Q3FY08
** EBIDTA gone up by 5.6% to Rs 105.6 crore as against Rs 100 crore in Q3FY08
** PAT decreased marginally by 0.8% to Rs 58.7 crore as against Rs 59.2 crore in Q3FY08
Analysis
** Net Sales of the company increased marginally by 1.7% (YoY) to Rs 632.9 crore due to slowdown in economy.
** Raw Material cost as a % of Net Sales decreased by 905bps to 52.9% as result of correction in the commodity prices.
** Interest and Depreciation expenses increased by 55.6% and 54.8% (YoY) to Rs 9.8 crore and Rs 6.1 crore due to higher interest rate and expanded capacity at Palakkad.
** PAT decreased marginally by 0.8% (YoY) to Rs 58.7 crore, being a result of sluggish performance and increase in non operating expenses.
** At end of Q3FY09, order book of the company stands at ~Rs 4,200 crore (~1.7x FY08 net sales).
Business Opportunities
Construction & Mining Equipment (CME) Industry
Bulk of infrastructure related investments is anticipated in areas like power, roads and irrigation, which requires relatively higher investments in CME. The investments in above mentioned areas will support growth in CME industry going forward.
As per Construction Industry Development Council Survey, CME cost as % of construction costs varies from industry to industry. As in Building CME cost constitutes to ~5%, Roads 21 to 23%, Bridges 16 to 18%, Dams 21 to 23%, Power 21 to 24%, Railway 6 to 8%, Mineral Plant 20 to 22%, Medium Industry 7 to 9%, Transmission 5 to 7%.
Railway & Metro Products Industry
With turnaround of Indian Railways (since 2004) and the resultant demand for rail
transport, the requirement of rolling stocks (Coaches & Electrical Multiple Units) has substantially increased. The coaches/ Electrical Multiple Units (EMUs) requirement is projected at 22,689 units over the Eleventh Five Year Plan. The combined production capacity of Railway is around 2,500 units per annum; hence the demand-supply gap for coaches/EMU is more than 10,000 units in the Eleventh Five Year Plan. Considering the expected gap between demand and supply of rolling stock during the Eleventh Five Year Plan, there is considerable scope for third parties (other than Railway) to fill in this gap.
Defense
The Department of Defence Production (DDP) controls production of defence equipments in India. DDP has developed substantial infrastructure over the years, consisting of 40 Ordinance Factories and 8 Defence Public Sector Undertakings (including BEML). The total defence budget for FY 2009 is proposed at Rs 1,056 billion, which is an increase of 10% over the previous year. Out of the total defence budget, Rs
480 billion is allocated for capital expenditures, which is an increase of 27% over the previous year.
Valuations
After Q3FY09 disappointing results and slowdown in economy, we have reduced our FY10E earning estimate by 9.5% to Rs 58.3. With a cautious view we are changing our target price of Rs 476 to Rs 426.
At CMP of Rs 346, the stock is trading at 6.7x on TTM earning of Rs 51.7 and 5.9x on FY10E earning of Rs 58.3. On back of diversified business model, rich cash reserves (~Rs 125.1 per share), healthy order book, railway business initiatives, we maintain our BUY rating on the stock.
Important Statistics
Shareholding Pattern
Promoters (Govt. of India): 54%
Institutions: 23.6%
FIIs: 13.3%
Other public: 9.3%
Mkt Cap: 1,433.40
P/E: 6.66
Div: 120.00
EPS: (TTM) 51.70
B/V: 409.56
Mkt: Lot 1.00
FV: 10.00
Download reference stock research report
BEML Limited (formerly Bharat Earth Movers Limited) was established in May 1964 as a Public Sector Undertaking for manufacture of Rail Coaches & Spare Parts and Mining Equipment at its Bangalore Complex. The Company ha s partially disinvested and presently Government of India owns 54 percent of total equity and rest 46 percent is held by Public, Financial institutions, Foreign Institutional Investors, Banks and Employees.
During the financial year 2007-08, BEML achieved a sales turnover of INR 2713 crores and a pre tax profit of INR 348 crores. The export earnings touched INR 200.62 crores.
Let's analyze Q3FY09 results of BEML Ltd for investment guidance.
Q3FY09 – Result Snapshot
** Net Sales increased marginally by 1.7% to Rs 632.9 crore as against Rs 622.1 crore in Q3FY08
** EBIDTA gone up by 5.6% to Rs 105.6 crore as against Rs 100 crore in Q3FY08
** PAT decreased marginally by 0.8% to Rs 58.7 crore as against Rs 59.2 crore in Q3FY08
Analysis
** Net Sales of the company increased marginally by 1.7% (YoY) to Rs 632.9 crore due to slowdown in economy.
** Raw Material cost as a % of Net Sales decreased by 905bps to 52.9% as result of correction in the commodity prices.
** Interest and Depreciation expenses increased by 55.6% and 54.8% (YoY) to Rs 9.8 crore and Rs 6.1 crore due to higher interest rate and expanded capacity at Palakkad.
** PAT decreased marginally by 0.8% (YoY) to Rs 58.7 crore, being a result of sluggish performance and increase in non operating expenses.
** At end of Q3FY09, order book of the company stands at ~Rs 4,200 crore (~1.7x FY08 net sales).
Business Opportunities
Construction & Mining Equipment (CME) Industry
Bulk of infrastructure related investments is anticipated in areas like power, roads and irrigation, which requires relatively higher investments in CME. The investments in above mentioned areas will support growth in CME industry going forward.
As per Construction Industry Development Council Survey, CME cost as % of construction costs varies from industry to industry. As in Building CME cost constitutes to ~5%, Roads 21 to 23%, Bridges 16 to 18%, Dams 21 to 23%, Power 21 to 24%, Railway 6 to 8%, Mineral Plant 20 to 22%, Medium Industry 7 to 9%, Transmission 5 to 7%.
Railway & Metro Products Industry
With turnaround of Indian Railways (since 2004) and the resultant demand for rail
transport, the requirement of rolling stocks (Coaches & Electrical Multiple Units) has substantially increased. The coaches/ Electrical Multiple Units (EMUs) requirement is projected at 22,689 units over the Eleventh Five Year Plan. The combined production capacity of Railway is around 2,500 units per annum; hence the demand-supply gap for coaches/EMU is more than 10,000 units in the Eleventh Five Year Plan. Considering the expected gap between demand and supply of rolling stock during the Eleventh Five Year Plan, there is considerable scope for third parties (other than Railway) to fill in this gap.
Defense
The Department of Defence Production (DDP) controls production of defence equipments in India. DDP has developed substantial infrastructure over the years, consisting of 40 Ordinance Factories and 8 Defence Public Sector Undertakings (including BEML). The total defence budget for FY 2009 is proposed at Rs 1,056 billion, which is an increase of 10% over the previous year. Out of the total defence budget, Rs
480 billion is allocated for capital expenditures, which is an increase of 27% over the previous year.
Valuations
After Q3FY09 disappointing results and slowdown in economy, we have reduced our FY10E earning estimate by 9.5% to Rs 58.3. With a cautious view we are changing our target price of Rs 476 to Rs 426.
At CMP of Rs 346, the stock is trading at 6.7x on TTM earning of Rs 51.7 and 5.9x on FY10E earning of Rs 58.3. On back of diversified business model, rich cash reserves (~Rs 125.1 per share), healthy order book, railway business initiatives, we maintain our BUY rating on the stock.
Important Statistics
Shareholding Pattern
Promoters (Govt. of India): 54%
Institutions: 23.6%
FIIs: 13.3%
Other public: 9.3%
Mkt Cap: 1,433.40
P/E: 6.66
Div: 120.00
EPS: (TTM) 51.70
B/V: 409.56
Mkt: Lot 1.00
FV: 10.00
Download reference stock research report
Stock Market in 2009 - Buying Stocks For Best Returns
Year 2009 started with all the gloom for Indian stock market & across the globe. Retail investors looking for good returns from stock buying are searching for good to buy stocks in 2009 which could fetch returns more than other investment instruments. Here is the series of articles published earlier about best stocks to buy and investing in 2009 - 2010.
Best Stocks For 2009 - Top Stocks To Buy Now
As uncertainties prevail and a revival expected only post second quarter of 2009, looking at current stock market situation it will pay to focus on buying stocks of large cap companies with a proven track record, high earnings visibility, low leverage, good book value and low debt. It is highly advisable to buy stocks with strong promoter holdings looking at recent Satyam fiasco.
Best 20 Stocks To Buy In 2009 - Buying Stocks Long Term Investing
Business Today magazine had recently published list of top 20 stocks to buy or watch out for in 2009. One may treat these as buy stocks advice, strictly for long term investment. Mentioned here are best stocks that are strong to survive the slowdown in 2009. Buying stocks which could emerge as best performing stocks to buy out of this gloom would help you in strengthening your portfolio in long term duration. They are very cheap stocks in terms of value stock investing for long term valuations. The list is in alphebetical order.
Stock Market 2009 Predictions - Where would it be in Feb-March 2009?
Looking at current stock market situations worldwide, and especially US DOW trailing below 7500, Indian stocks can not remain isolated for long time since Indian economy is too dependent on world markets. Large companies like General Motors likely to go bankrupt in US, economy there is under severe pressure and chances are it would not grow at all and infact would be contracting in future for some time
Best stocks in 2008. Should we buy these for 2009?
These stocks were the best stocks to buy in Indian stock market in year 2008 (based on their annual rate of returns). Even as the current stock market stands at half in value since touching an all-time high on January 10, 2008, there were nine stocks among India’s top 500 companies which delivered gains to their shareholders over a period of one year. Here is a stock report published in ET. Can we buy these best performing stocks in 2008 for 2009 as well?
How to buy stocks ? Buy stocks with confidence
Current stock market, as we all know, is in an uncertain situation with ups and downs in stocks every week. Every investor may be wondering about how to buy a stock as buying stocks for long term investment has become difficult when there are no clear market trends.
Top 9 Stocks To Buy For 2009
ET spoke to more than nine brokerage firms to find out the nine gems for 2009. Interestingly, there has been a consensus among stock market research firms in choosing these stocks to buy in 2009 from a vast list of scrips. Here go the gems...
Value Stocks To Buy In 2009
These pessimistic times do present an opportunity for long term, patient investors to buy stock with intrinsic value and make extraordinary returns.
Best stocks to buy now are banking stocks
Amid easing of liquidity, low bond yields and expectations of long term economic revival, banking stocks are seen as the best bet for investment - both in medium term and long term.
Best stocks to buy in Indian telecom sector
Most of the brokerage houses have put Buy stock recommendations on Bharti Airtel, Idea Cellular and Reliance Communications stocks in Indian telecom sector. These big three could be considered as best investment options in sector.
Indian Stock Markets : Which Stocks to invest in 2009
Markets have corrected about 60% from their peaks and have bounced 30% from their lows.For how long will the markets behave the way they are behaving right now? What to follow for best investments?
Best FMCG Companies - Stocks to Invest in 2009
FMCG Stocks are now catching eye of investors for investing as best option in stock market. Analysts and market experts are now putting a ‘buy stock’ recommendation on select FMCG stocks.
Economy will bounce back faster - Rakesh Jhunjhunwala
The Indian economy will bounce back much faster and more vigorously than most people anticipate. This will be driven by swift upswing in domestic demand, according to Mr Rakesh Jhunjhunwala, equity and investment guru.
Stock Markets in 2009 would be volatile - Marc Faber
Investment guru Marc Faber said that the volatility in stocks will continue in 2009. The markets would ease after an initial rebound.
Best Stocks For 2009 - Top Stocks To Buy Now
As uncertainties prevail and a revival expected only post second quarter of 2009, looking at current stock market situation it will pay to focus on buying stocks of large cap companies with a proven track record, high earnings visibility, low leverage, good book value and low debt. It is highly advisable to buy stocks with strong promoter holdings looking at recent Satyam fiasco.
Best 20 Stocks To Buy In 2009 - Buying Stocks Long Term Investing
Business Today magazine had recently published list of top 20 stocks to buy or watch out for in 2009. One may treat these as buy stocks advice, strictly for long term investment. Mentioned here are best stocks that are strong to survive the slowdown in 2009. Buying stocks which could emerge as best performing stocks to buy out of this gloom would help you in strengthening your portfolio in long term duration. They are very cheap stocks in terms of value stock investing for long term valuations. The list is in alphebetical order.
Stock Market 2009 Predictions - Where would it be in Feb-March 2009?
Looking at current stock market situations worldwide, and especially US DOW trailing below 7500, Indian stocks can not remain isolated for long time since Indian economy is too dependent on world markets. Large companies like General Motors likely to go bankrupt in US, economy there is under severe pressure and chances are it would not grow at all and infact would be contracting in future for some time
Best stocks in 2008. Should we buy these for 2009?
These stocks were the best stocks to buy in Indian stock market in year 2008 (based on their annual rate of returns). Even as the current stock market stands at half in value since touching an all-time high on January 10, 2008, there were nine stocks among India’s top 500 companies which delivered gains to their shareholders over a period of one year. Here is a stock report published in ET. Can we buy these best performing stocks in 2008 for 2009 as well?
How to buy stocks ? Buy stocks with confidence
Current stock market, as we all know, is in an uncertain situation with ups and downs in stocks every week. Every investor may be wondering about how to buy a stock as buying stocks for long term investment has become difficult when there are no clear market trends.
Top 9 Stocks To Buy For 2009
ET spoke to more than nine brokerage firms to find out the nine gems for 2009. Interestingly, there has been a consensus among stock market research firms in choosing these stocks to buy in 2009 from a vast list of scrips. Here go the gems...
Value Stocks To Buy In 2009
These pessimistic times do present an opportunity for long term, patient investors to buy stock with intrinsic value and make extraordinary returns.
Best stocks to buy now are banking stocks
Amid easing of liquidity, low bond yields and expectations of long term economic revival, banking stocks are seen as the best bet for investment - both in medium term and long term.
Best stocks to buy in Indian telecom sector
Most of the brokerage houses have put Buy stock recommendations on Bharti Airtel, Idea Cellular and Reliance Communications stocks in Indian telecom sector. These big three could be considered as best investment options in sector.
Indian Stock Markets : Which Stocks to invest in 2009
Markets have corrected about 60% from their peaks and have bounced 30% from their lows.For how long will the markets behave the way they are behaving right now? What to follow for best investments?
Best FMCG Companies - Stocks to Invest in 2009
FMCG Stocks are now catching eye of investors for investing as best option in stock market. Analysts and market experts are now putting a ‘buy stock’ recommendation on select FMCG stocks.
Economy will bounce back faster - Rakesh Jhunjhunwala
The Indian economy will bounce back much faster and more vigorously than most people anticipate. This will be driven by swift upswing in domestic demand, according to Mr Rakesh Jhunjhunwala, equity and investment guru.
Stock Markets in 2009 would be volatile - Marc Faber
Investment guru Marc Faber said that the volatility in stocks will continue in 2009. The markets would ease after an initial rebound.
How to buy multi bagger stocks? Rakesh Jhunjhunwala & Others Guidelines To You
For any investor, buying stocks which can be multibaggers are the most attractive option. Raamdeo Agrawal, Director, Motilal Oswal Financial Services owned over 10 multibagger stocks, while Sanjoy Bhattacharyya, Partner, Fortuna Capital owned over 100 baggers. And we all know about the success story of Rakesh Jhunjhunwala, legendary investor in Indian stock market.
But how does one identify a multibagger? Valuation, a company's fundamentals, a business that promises growth over time, management's integrity, rational allocation of capital etc decide if a stock is of the multibagger variety.
Explains Raamdeo Agrawal, "If you want a multi bagger, it has to be bought literally free of cost...the purchase price is insignificant to whatever is the expected value in the next 4-5-6 years." There is also another plot to this story--the market. Agrawal says a multibagger gets irrational quote from the market in three steps. It goes from being undervalued to fairly valued to being irrationally valued.
Rakesh Jhunjhunwala, Partner, Rare Enterprises, advice is that one needs to check what opportunity the business has, who are the entrepreneurs, how much capital is needed, is the business scalable, and what is the company’s valuation.
Here is a verbatim transcript of the exclusive interview with Raamdeo Agrawal and Rakesh Jhunjhunwala on CNBC-TV18. Also see the accompanying video.
Q: You had more than 10 multi-bagger stocks, what are the characteristics? How does one find 10 multi-bagger stocks? How does one start the process of thinking that the stock is going to be a 10 bagger?
Agrawal: You don’t pay anything to have multi-baggers. If you want a multi-bagger literally you have to buy free of cost, your purchase price decides your rate of return. That is a simple method.
Jhunjhunwala: That doesn’t mean that if Infosys has Rs 30 crore market capitalization, then at Rs 90 crore I should not buy it. We don’t buy it just because it has doubled. You have to see value when you buy.
Agrawal: The first fundamental thing is that you have got to buy extremely cheap and it is non-negotiable. If you want a multi bagger, it has to be bought literally free of cost. Like I could have bought Bharti Telecom around Rs 4,000-5,000 kind of valuation, today it commands a valuation of Rs 1,50,000 crore in just five years. So, when you buy these kind of things at those prices literally, the purchase price is insignificant to whatever is the expected value in the next 4-5-6 years. That is a non-negotiable kind of a trade for finding a multi bagger. Now, the market must become irrational about that stock. So, from under valuation it goes to a fair valuation and from fair valuation it goes to irrational valuation.
Q: You are too modest to say this but I know you have had 700 baggers. Where have you looked for your 100 baggers, give us intellectual hypothesis?
Bhattacharyya: Between being smart and being lucky, I know it will hurt your ego like hell because all you guys are IIM-A always ought to be lucky not smart. It seems that there are two things, which are very important. Agrawal spoke the need to buy cheap, so valuation is very much in your favour.
But two other things you must buy a business, which is of very high quality. What do I mean by high quality business is that a business which is capable of growing over time. I think in the modern lingua franca it is called scalable. I hate words like that. But I think that is what they teach you here, so scalable and the scalability doesn’t require linear inputs of capital.
In a really high quality business, which is disproportionate and where you don’t need to have equal amounts of money to finance incremental growth, that is a wonderful business. The cigarette business, the biscuit business are also highly predictable. What destroys most people is their inability to foresee change. Most of us are not as smart as we think and change can be very rapid and very destructive. So, you have got to be able to figure out change.
Unless you are Rakesh Jhunjhunwala, you are usually a minority holder.
Then, it is very important to understand, what is the agenda and the interest of the majority holder or management usually. If it’s a private equity firm which has the majority stake in the company, what is their agenda? What do they want and how well do they allocate capital? You can never have a multi-bagger if capital is irrationally allocated by the people who run the company. If they have this wild ambition that I am going to spend and earn lots of money, but I will spend even more in terms of capital expenditure and financing growth, you will have very high reported profit but zero cash flow or negative cash flow. You can never get a multi-bagger out of that situation. But you have obviously got to search for a management which has competence and then make sure that you sort of super-impose a huge dose of integrity on that and rational capital allocation. The minute that is missing you will be at risk. Your 10 baggers could reduce back to being a 2 baggers because you could wipe out 80% of your gains.
Q: Are Titan, Praj, Nagarjuna some of the great multi-baggers?
Jhunjhunwala: Titan was a retailer, it was a brand company, it always had a great business. That was a reality. So, it was a great business. In a moment of crisis and when they went into Europe, they lost money. That was a crisis primarily. To my mind what is most important for Titan is India’s prosperity. I envisaged the future and I thought Indians are going to buy far many watches, so that is how he said that the business should be great. So, in a moment of crisis you get great valuations and you envisage the future where the product could have great demand and great growth and that business doesn’t need money.
In MBA language, price is equal to EPS multiplies by P/E, so circumstance should arise where the P/E should grow and the EPS should grow. Suppose I buy a stock, which earns Rs 5. At 5 P/E and I pay Rs 25, if the earnings becomes Rs 15 and the P/E becomes Rs 20, that Rs 25 goes to Rs 300. So, the basic methodology is that can this EPS grow year-upon-year and will the P/E expand. P/E expansion is function of so many items. It is a function of size. So, many of my companies I don’t sell because I feel that P/E will expand, as their size increases and liquidity increases.
Q: Your favourite multi-bagger in your career?
Agrawal: Vysya Bank that was a very first one, second one was Hero Honda, and third one was Bharti.
Q: What has been your multi-bagger historically?
Jhunjhunwala: For me anything that gives me money is my favourite one. There is no emotion. But I think as I judge myself some of the finest investment decisions which I have taken in my life is the decision to invest in Titan, decision to invest in Crisil, decision to invest and retain my holding of Karur Vysya Bank. Now, it is14-15 years since I have bought them. But I think some investment of Rs 2,000 is worth sum I don’t know how many crores today.
Bhattacharyya: The important thing is to identifying the opportunity and then as Jhunjhunwala said is acting on it, being decisive, not getting stuck in a trap where you are perpetually seeking extra information. If you are looking to identify great opportunities, one other thing that all of you will do well is to make friends or associates with people who are called in the language of Dalal Street smart money. You have three of the smartest guys sitting here. But to say this if you have guys, who are really smart serious, thinking investors, one of the ways you will find 100 baggers is by talking to them frequently. I am not joking.
Jhunjhunwala: One important trade of any 10 bagger is there should not be any institutional ownership, it should be under research, nobody should know about it. Today also I was asking Mr. Bhattacharyya that have you researched Titan. Even if the stock have gone up 30 times, Mr. Bhattacharyya has not researched it, which is very good for Titan. I have not researched Bharti, which is very good for Bharti. The stock has appreciated so much but the amount of interest remains in the stock remains at low level. So, it should not be one of the popular not by rule but generally it is not a popular stocks and there should be deep scepticism.
Bhattacharyya: In fact one of the good test to follow is go and tell it to someone else who has experience and has been around in the market for a long time. He will laugh at you. The fact that he is laughing at you should be like a tremendous source of encouragement.
Jhunjhunwala: There are no rules. If two agree, it doesn’t mean that you don’t buy.
Agrawal: What Mr. Bhattacharyya said is a truest thing, when I like something very deeply and when he disagrees ‑ because he is my friend, I go and test with him – and when he disagrees that is going to be a multi bagger.
Q: When you look at buying stake in a company, what is the most important factor or criteria that you look at?
Jhunjhunwala: I cannot say whether the leg or head is more important or the brain is more important or the heart is more important. There are equally important factors, and any successful business is a combination of factors.
When I look at any investment or any business, I look at three-four factors. First, the external opportunity which is demand. For instance in Praj maybe because of the need of alternative fuels the demand for ethanol plants went through the roof. So, I look at the opportunity the business has.
Then I look at the entrepreneurs, I look at the capital needed, and I want to judge scalability. We could make money in Pantaloon because Kishore Biyani could scale the business. Then, it is important what you buy, it is important at what price you buy. So, I look at the valuation. I have no analysis paralysis. I judge very fast.
Q: Which are the sectors that one should invest in say for a period of one year given the current market level and fluctuations?
Bhattacharyya: My answer is not going to be a happy answer. First, you don’t buy a sector, you buy an individual company. Secondly, I don’t think one year is necessarily the ultimate timeframe because you have no idea 12 months later what the world will look like.
You are buying a business with specific players, a cast. You are buying the people who run that business; you are buying the assets and liabilities of that business, you are buying the balance sheet of the company. Within the same sector, different people have different opportunities.
So, if I were to say that the pharmaceutical sector is a great opportunity, there are different pharmaceutical companies. Say if you were buying Sun Pharma as opposed to buying Lupin, you are buying it at completely different valuations. Some sectors that are hot right now, I mean the whole world knows they are hot right now. So, the prices at which you are buying that sector reflect the hope and the enthusiasm that people have for that now.
But I don’t think that I understand anything other than what is called bottom-up. That means god lies in the details. There are specific opportunities or companies that I can tend to buy.
Agrawal: I would approach the financial sector, the large banks, which have large bond portfolios like SBI has Rs 2-2.5 lakh crore worth of bond portfolio, mark-to-market. When the yield drops you know what happens to bond prices and that goes directly to the P&L. In any case, you are buying that stock at 1-1.2 times book, insurance free thrown with the SBI stock. So, I would like to buy that for maybe 25-40% case for the next one year.
Secondly, I would say telecom. I think god communicates wirelessly. I think the telecom penetration in India is just about 25%. We are headed for 75% if not 100% in the next 5-6 years. We are going to see more than 10-15% compounded quarterly growth for the next 20-25 quarters in this country. Hence, we have a great opportunity in buying Bharti Telecom.
Q: Is there any sector you like?
Jhunjhunwala: I think that India-centric sectors will do well whether it is banking, retailing, infrastructure, all sectors that are related to India – SBI, Bharti, and Hero Honda.
Q: You were talking about recognising value in a stock. If you look at the power sector in India, there are some stocks like Tata Power and NTPC have significantly high ground assets, or whether some new companies like KSK Energy who have captive coal reserves. How do you compare these and what are the parameters that you use to identify value?
Jhunjhunwala: The first multi-bagger of my life was Tata Power. But after having earned a lot of money in Tata Power, I have promised myself I am not going to buy any power companies because after all it is a fixed return rate of return and the rate of return is 13-14%. It is a capital intensive industry. So god bless NTPC and KSK Energy. But that is not where my interest is, because I can’t think of any industry in the world where the rate of return as fixed, if it is going to give you multiple returns.
Bhattacharyya: In fact, I would like to endorse what Jhunjhunwala said. But I think of your question and I suspect it may be that how do you distinguish between companies that are asset plays, which don’t have at this stage earnings that you can identify with and see and therefore put a multiple to them as opposed to companies that have a stream of earnings.
Jhunjhunwala: But market will value them if within a comprehensible period those assets can return a stream of earnings. If I have a company whose office is worth Rs 5,000 crore, what can I do? I will wait for earnings for one, two, or five years. Nobody is going to buy that company because their office is there. Don’t forget all these coal reserves. You know what is the average value for oil reserves ‑ about USD 10-15 or maybe USD 20. You first have to say in what time period KSK Energy will get the coal reserves. If it gets it 15 years later and you bring it to present value, you come to 3% of the current market price. Then, you have value in the current coal prices. Are these prices going to last? So, therefore they may appear cheap.
Q: In the present market scenario both from an investors’ perspective and a speculators’ perspective, where would you put your money – in real estate, in fixed income, equities, or gold?
Agrawal: To tell you the truth, I don’t know any other trade. I know only stocks. So, I don’t have any other option but to buy stock.
Jhunjhunwala: We never allocate capital. We have money means it is for equities.
Agrawal: Just equities, not even cash and equities, only equities. So, when I wanted to play real estate, I bought hotel shares. I am not going to buy 100 acres here and there. I said let’s go and buy earning real estate, i.e. hotel shares.
Jhunjhunwala: I have allocated some part of my trading portfolio to debt – to buy bonds. Long-dated bonds with good yields are very good.
Q: How do you decide when to sell a multi-bagger?
Jhunjhunwala: I will sell a stock only in two circumstances: when I have limited capital and when I get an opportunity that is better than what I have now. So, if comparatively I need capital, I will sell it.
Secondly, when the perception of earnings peaks and the P/E is unsustainable. I think that is a time to sell. The earning may not peak but the expectations of hope like in 2000 everybody said Infosys’ earnings will double every year for the next 10 years. That was the expectation in the market and its P/E was at the current earnings, it was 100-150 times. So, when the expectation of earnings peaks and the P/E is unsustainable, I think that is a time to sell.
Agrawal: There are two types of stocks. One you buy forever and one you buy for a trade.
Jhunjhunwala: I strongly contest this. There is no stock forever in the world.
Agrawal: I contest that. There are clearly two types of stock. One you buy for selling and one you buy forever.
Source: Moneycontrol.com
But how does one identify a multibagger? Valuation, a company's fundamentals, a business that promises growth over time, management's integrity, rational allocation of capital etc decide if a stock is of the multibagger variety.
Explains Raamdeo Agrawal, "If you want a multi bagger, it has to be bought literally free of cost...the purchase price is insignificant to whatever is the expected value in the next 4-5-6 years." There is also another plot to this story--the market. Agrawal says a multibagger gets irrational quote from the market in three steps. It goes from being undervalued to fairly valued to being irrationally valued.
Rakesh Jhunjhunwala, Partner, Rare Enterprises, advice is that one needs to check what opportunity the business has, who are the entrepreneurs, how much capital is needed, is the business scalable, and what is the company’s valuation.
Here is a verbatim transcript of the exclusive interview with Raamdeo Agrawal and Rakesh Jhunjhunwala on CNBC-TV18. Also see the accompanying video.
Q: You had more than 10 multi-bagger stocks, what are the characteristics? How does one find 10 multi-bagger stocks? How does one start the process of thinking that the stock is going to be a 10 bagger?
Agrawal: You don’t pay anything to have multi-baggers. If you want a multi-bagger literally you have to buy free of cost, your purchase price decides your rate of return. That is a simple method.
Jhunjhunwala: That doesn’t mean that if Infosys has Rs 30 crore market capitalization, then at Rs 90 crore I should not buy it. We don’t buy it just because it has doubled. You have to see value when you buy.
Agrawal: The first fundamental thing is that you have got to buy extremely cheap and it is non-negotiable. If you want a multi bagger, it has to be bought literally free of cost. Like I could have bought Bharti Telecom around Rs 4,000-5,000 kind of valuation, today it commands a valuation of Rs 1,50,000 crore in just five years. So, when you buy these kind of things at those prices literally, the purchase price is insignificant to whatever is the expected value in the next 4-5-6 years. That is a non-negotiable kind of a trade for finding a multi bagger. Now, the market must become irrational about that stock. So, from under valuation it goes to a fair valuation and from fair valuation it goes to irrational valuation.
Q: You are too modest to say this but I know you have had 700 baggers. Where have you looked for your 100 baggers, give us intellectual hypothesis?
Bhattacharyya: Between being smart and being lucky, I know it will hurt your ego like hell because all you guys are IIM-A always ought to be lucky not smart. It seems that there are two things, which are very important. Agrawal spoke the need to buy cheap, so valuation is very much in your favour.
But two other things you must buy a business, which is of very high quality. What do I mean by high quality business is that a business which is capable of growing over time. I think in the modern lingua franca it is called scalable. I hate words like that. But I think that is what they teach you here, so scalable and the scalability doesn’t require linear inputs of capital.
In a really high quality business, which is disproportionate and where you don’t need to have equal amounts of money to finance incremental growth, that is a wonderful business. The cigarette business, the biscuit business are also highly predictable. What destroys most people is their inability to foresee change. Most of us are not as smart as we think and change can be very rapid and very destructive. So, you have got to be able to figure out change.
Unless you are Rakesh Jhunjhunwala, you are usually a minority holder.
Then, it is very important to understand, what is the agenda and the interest of the majority holder or management usually. If it’s a private equity firm which has the majority stake in the company, what is their agenda? What do they want and how well do they allocate capital? You can never have a multi-bagger if capital is irrationally allocated by the people who run the company. If they have this wild ambition that I am going to spend and earn lots of money, but I will spend even more in terms of capital expenditure and financing growth, you will have very high reported profit but zero cash flow or negative cash flow. You can never get a multi-bagger out of that situation. But you have obviously got to search for a management which has competence and then make sure that you sort of super-impose a huge dose of integrity on that and rational capital allocation. The minute that is missing you will be at risk. Your 10 baggers could reduce back to being a 2 baggers because you could wipe out 80% of your gains.
Q: Are Titan, Praj, Nagarjuna some of the great multi-baggers?
Jhunjhunwala: Titan was a retailer, it was a brand company, it always had a great business. That was a reality. So, it was a great business. In a moment of crisis and when they went into Europe, they lost money. That was a crisis primarily. To my mind what is most important for Titan is India’s prosperity. I envisaged the future and I thought Indians are going to buy far many watches, so that is how he said that the business should be great. So, in a moment of crisis you get great valuations and you envisage the future where the product could have great demand and great growth and that business doesn’t need money.
In MBA language, price is equal to EPS multiplies by P/E, so circumstance should arise where the P/E should grow and the EPS should grow. Suppose I buy a stock, which earns Rs 5. At 5 P/E and I pay Rs 25, if the earnings becomes Rs 15 and the P/E becomes Rs 20, that Rs 25 goes to Rs 300. So, the basic methodology is that can this EPS grow year-upon-year and will the P/E expand. P/E expansion is function of so many items. It is a function of size. So, many of my companies I don’t sell because I feel that P/E will expand, as their size increases and liquidity increases.
Q: Your favourite multi-bagger in your career?
Agrawal: Vysya Bank that was a very first one, second one was Hero Honda, and third one was Bharti.
Q: What has been your multi-bagger historically?
Jhunjhunwala: For me anything that gives me money is my favourite one. There is no emotion. But I think as I judge myself some of the finest investment decisions which I have taken in my life is the decision to invest in Titan, decision to invest in Crisil, decision to invest and retain my holding of Karur Vysya Bank. Now, it is14-15 years since I have bought them. But I think some investment of Rs 2,000 is worth sum I don’t know how many crores today.
Bhattacharyya: The important thing is to identifying the opportunity and then as Jhunjhunwala said is acting on it, being decisive, not getting stuck in a trap where you are perpetually seeking extra information. If you are looking to identify great opportunities, one other thing that all of you will do well is to make friends or associates with people who are called in the language of Dalal Street smart money. You have three of the smartest guys sitting here. But to say this if you have guys, who are really smart serious, thinking investors, one of the ways you will find 100 baggers is by talking to them frequently. I am not joking.
Jhunjhunwala: One important trade of any 10 bagger is there should not be any institutional ownership, it should be under research, nobody should know about it. Today also I was asking Mr. Bhattacharyya that have you researched Titan. Even if the stock have gone up 30 times, Mr. Bhattacharyya has not researched it, which is very good for Titan. I have not researched Bharti, which is very good for Bharti. The stock has appreciated so much but the amount of interest remains in the stock remains at low level. So, it should not be one of the popular not by rule but generally it is not a popular stocks and there should be deep scepticism.
Bhattacharyya: In fact one of the good test to follow is go and tell it to someone else who has experience and has been around in the market for a long time. He will laugh at you. The fact that he is laughing at you should be like a tremendous source of encouragement.
Jhunjhunwala: There are no rules. If two agree, it doesn’t mean that you don’t buy.
Agrawal: What Mr. Bhattacharyya said is a truest thing, when I like something very deeply and when he disagrees ‑ because he is my friend, I go and test with him – and when he disagrees that is going to be a multi bagger.
Q: When you look at buying stake in a company, what is the most important factor or criteria that you look at?
Jhunjhunwala: I cannot say whether the leg or head is more important or the brain is more important or the heart is more important. There are equally important factors, and any successful business is a combination of factors.
When I look at any investment or any business, I look at three-four factors. First, the external opportunity which is demand. For instance in Praj maybe because of the need of alternative fuels the demand for ethanol plants went through the roof. So, I look at the opportunity the business has.
Then I look at the entrepreneurs, I look at the capital needed, and I want to judge scalability. We could make money in Pantaloon because Kishore Biyani could scale the business. Then, it is important what you buy, it is important at what price you buy. So, I look at the valuation. I have no analysis paralysis. I judge very fast.
Q: Which are the sectors that one should invest in say for a period of one year given the current market level and fluctuations?
Bhattacharyya: My answer is not going to be a happy answer. First, you don’t buy a sector, you buy an individual company. Secondly, I don’t think one year is necessarily the ultimate timeframe because you have no idea 12 months later what the world will look like.
You are buying a business with specific players, a cast. You are buying the people who run that business; you are buying the assets and liabilities of that business, you are buying the balance sheet of the company. Within the same sector, different people have different opportunities.
So, if I were to say that the pharmaceutical sector is a great opportunity, there are different pharmaceutical companies. Say if you were buying Sun Pharma as opposed to buying Lupin, you are buying it at completely different valuations. Some sectors that are hot right now, I mean the whole world knows they are hot right now. So, the prices at which you are buying that sector reflect the hope and the enthusiasm that people have for that now.
But I don’t think that I understand anything other than what is called bottom-up. That means god lies in the details. There are specific opportunities or companies that I can tend to buy.
Agrawal: I would approach the financial sector, the large banks, which have large bond portfolios like SBI has Rs 2-2.5 lakh crore worth of bond portfolio, mark-to-market. When the yield drops you know what happens to bond prices and that goes directly to the P&L. In any case, you are buying that stock at 1-1.2 times book, insurance free thrown with the SBI stock. So, I would like to buy that for maybe 25-40% case for the next one year.
Secondly, I would say telecom. I think god communicates wirelessly. I think the telecom penetration in India is just about 25%. We are headed for 75% if not 100% in the next 5-6 years. We are going to see more than 10-15% compounded quarterly growth for the next 20-25 quarters in this country. Hence, we have a great opportunity in buying Bharti Telecom.
Q: Is there any sector you like?
Jhunjhunwala: I think that India-centric sectors will do well whether it is banking, retailing, infrastructure, all sectors that are related to India – SBI, Bharti, and Hero Honda.
Q: You were talking about recognising value in a stock. If you look at the power sector in India, there are some stocks like Tata Power and NTPC have significantly high ground assets, or whether some new companies like KSK Energy who have captive coal reserves. How do you compare these and what are the parameters that you use to identify value?
Jhunjhunwala: The first multi-bagger of my life was Tata Power. But after having earned a lot of money in Tata Power, I have promised myself I am not going to buy any power companies because after all it is a fixed return rate of return and the rate of return is 13-14%. It is a capital intensive industry. So god bless NTPC and KSK Energy. But that is not where my interest is, because I can’t think of any industry in the world where the rate of return as fixed, if it is going to give you multiple returns.
Bhattacharyya: In fact, I would like to endorse what Jhunjhunwala said. But I think of your question and I suspect it may be that how do you distinguish between companies that are asset plays, which don’t have at this stage earnings that you can identify with and see and therefore put a multiple to them as opposed to companies that have a stream of earnings.
Jhunjhunwala: But market will value them if within a comprehensible period those assets can return a stream of earnings. If I have a company whose office is worth Rs 5,000 crore, what can I do? I will wait for earnings for one, two, or five years. Nobody is going to buy that company because their office is there. Don’t forget all these coal reserves. You know what is the average value for oil reserves ‑ about USD 10-15 or maybe USD 20. You first have to say in what time period KSK Energy will get the coal reserves. If it gets it 15 years later and you bring it to present value, you come to 3% of the current market price. Then, you have value in the current coal prices. Are these prices going to last? So, therefore they may appear cheap.
Q: In the present market scenario both from an investors’ perspective and a speculators’ perspective, where would you put your money – in real estate, in fixed income, equities, or gold?
Agrawal: To tell you the truth, I don’t know any other trade. I know only stocks. So, I don’t have any other option but to buy stock.
Jhunjhunwala: We never allocate capital. We have money means it is for equities.
Agrawal: Just equities, not even cash and equities, only equities. So, when I wanted to play real estate, I bought hotel shares. I am not going to buy 100 acres here and there. I said let’s go and buy earning real estate, i.e. hotel shares.
Jhunjhunwala: I have allocated some part of my trading portfolio to debt – to buy bonds. Long-dated bonds with good yields are very good.
Q: How do you decide when to sell a multi-bagger?
Jhunjhunwala: I will sell a stock only in two circumstances: when I have limited capital and when I get an opportunity that is better than what I have now. So, if comparatively I need capital, I will sell it.
Secondly, when the perception of earnings peaks and the P/E is unsustainable. I think that is a time to sell. The earning may not peak but the expectations of hope like in 2000 everybody said Infosys’ earnings will double every year for the next 10 years. That was the expectation in the market and its P/E was at the current earnings, it was 100-150 times. So, when the expectation of earnings peaks and the P/E is unsustainable, I think that is a time to sell.
Agrawal: There are two types of stocks. One you buy forever and one you buy for a trade.
Jhunjhunwala: I strongly contest this. There is no stock forever in the world.
Agrawal: I contest that. There are clearly two types of stock. One you buy for selling and one you buy forever.
Source: Moneycontrol.com
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