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Archive for December 2011

Mahindra Finance- Rural And Semi Urban Market Growing

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We recently met the management of Mahindra Finance. These are some of the key highlights.

Rural and semi urban markets are growing at 20% plus rates versus urban and metros where growth rates have dropped considerably.

Multi product multi application and multi customer is the way forward. These benefits lower concentration to particular states which reduces state specific risks. This is one of the reasons the company is reasonably sure of not breaching the gross npa levels of FY08 and FY09.

The process of securitization which was dead post the draft guidelines have once again begun and the company has securitized Rs300 crs in November 2011. However the difference is in the process of accounting for securitization revenue which has moved from the upfront accounting to amortization

Public sector banks which were aggressive in the market have lowered their enthusiasm as they are battling issues of credit loss and customer defaults. Hence competition has intensity has come down

The company is not strapped for asset growth. Even on its internal benchmark of financing 40% M&M vehicles it is at the 30% mark leaving ample room for growth within the parent portfolio. Outside M&M portfolio, it has tied up with Hyundai, Tata Motors, Ashok Leyland.  It has built relationships with dealers and OEMs and hence a certain process of growth is an automatic process.

This year the focus will be on liabilities (securitization guidelines, acquiring excess liquidity from banks and diversifying sources) and on policies (the regulator has tightened the screws on consumer lending, Usha Tharot Committee report)

The company will continue to access the variability of the market through – collection efficiencies and the regular nomenclature – underline cash flows of the product – dealer pressure on financing activities. Based on these activities the company takes a call on LTVs and product strategy and growth level targets.


Written by Fundamental Side

December 22, 2011 at 5:46 pm

Weakening Rupee & Dividend Yield Stocks

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Weakening Rupee & Dividend Yield Stocks

With the rupee weakening by more than 19% this year we find ourselves caught up in an inflationary environment despite a series of rate hikes by the RBI. India Inc is now caught in a scenario of slack demand, rising input costs ,wage costs and interest cost coupled with MTM losses on its FX loans. In such a scenario it is no surprise that Infosys continues to remain a safe heaven for investors as it will continue to report earnings growth and has proven ability of displaying the best organic revenue growth among leading IT companies over the past 10 years with a return on capital of more than 65%.  

As the market continues to hide in IT stocks like Infosys, TCS & HCL Technologies in times of rupee weakening, the thirst for good dividend yield stocks beyond the NIFTY FIFTY is still prevailent and we find that the steep rupee depreciation has now caught up with some of the so called “Dividend Yield” stories which are part of the BSE 500. One such example is the Pune based pipe producer – Finolex Industries which apparently has a dividend yield of 7% at the current price- but one look at its debt equity and import intensity is enough to get the sense that earnings would degrow thereby casting a shadow on such dividend yield themes. It is for this reason that we like free cash generating business and prefer to buy such business for dividend yield despite low growth and when you do get growth out of such business then you reap it big like in the case of the cigarette company – VST Industries.


Written by Fundamental Side

December 16, 2011 at 12:46 pm

OIL India – going strong

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OIL India – going strong

Q2FY12 crude oil & natural gas production were record highs for the company.

Crude oil production rate has been increasing continuously and OIL is presently producing crude at a rate of 3.96 MMTPA (FY12 MoU target: 3.76 MMT). This is noteworthy as most of its production is coming from aging fields in the North East. There has been a steady growth in oil production since the last 3 years through induction of new technologies and accelerated exploration and drilling campaign. Q2 FY12 production rate is even higher than the FY13 MoU target of 3.91 MMT.

Gas production is set to increase at CAGR of 7.1% from FY11-13 driven by steady production from its NE & Rajasthan fields and monetization of contingent reserves. Gas supply to Numaligarh Refinery Ltd (NRL) would also be ramped up to 1 mmscmd. Revision in APM & non-APM gas prices after FY14 is expected to provide another jump to gas sales going forward.

We assume 39% of the gross subsidy burden to be borne by the upstream sector in perpetuity. Taking into account the fact that the upstream sector has shared 33% of the subsidy burden in H1 FY12, we expect the upstream sector to share 51% of the total under recoveries for H2 FY12. However, we expect OIL to post FY12 net realization of $ 67/bbl.

Oil India will also be holding a Board Meeting on Dec 20, 2011 to consider the declaration of Interim Dividend for FY12. As the company is holding a cash balance of Rs 136 bn as of Sept 2011 which translates into a whopping Rs 565/share, we expect a big dividend which will act as a trigger for the stock price.

We maintain our BUY rating with a target price of Rs 1,526.

Written by Fundamental Side

December 16, 2011 at 12:41 pm

Mixed bag in Motown

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Mixed bag in Motown


With festive season falling completely in the month of October, November was seasonally a lean month for a few companies sequentially. However, on a yoy basis, most of the companies have posted strong growths. TVS numbers were disappointing in line, while Maruti, Hero and Tata Motors exceeded our expectations. M&M’s UV sales were robust in line, while FES segment sales were below our expectations.  Maruti saw a sequential rise on the back of labor issues getting settled off in November, while Hero Motocorp surprised the street with resilient demand and a sequential growth. Going forward, some moderation in growth is expected to set off in the auto sector with macro concerns like inflation, fuel costs and interest rates remain high. Within the 2 wheeler sector, there will be lower yoy growth rates due to high base effect and with competition setting to increase with Honda’s aggressive strategy impacting profitability. Bajaj Auto’s domestic growth will remain weak, but exports are expected to boost the overall sales, while Hero will observe subdued growth on higher base and capacity constraints over the next one year. M&M will continue posting strong UV sales while FES segment will observe moderation from October sales numbers, as seen in November. Any hike in excise duty on diesel vehicles may impact UV sales. Tata Motors will see positive movement in their CV sales as CV cycle is expected to turn strong if interest rates no more increase from here.


Hero Motocorp – (TP – Rs1,928, Underperformer) – Unexpected sequential surge!

HMCL has surprisingly posted a sequential 5% growth at 5.36 lakh units above our expectations. On a yoy basis, the company posted a 27% yoy growth. The company is a proxy to the rural growth in India and continues to post stellar numbers on growing rural economy. However, on the back of stretched valuations, we believe that the stock is factoring all the expected positives like the upcoming production plant, foreign venture and improvement in margins on softening RM costs. Market news suggest that slowing down on the macro front may force the company to put their expansion plans on the backburner, which may lead to capacity constraints on them.


Mahindra and Mahindra – (TP- Rs889, BUY) – Sequential decline in FES segment, UVs remain robust

M&M sold 40,722 units, a 53% growth yoy while it was slightly down on mom basis. UV sales in the month grew by 46% yoy to 16,686 units, which was flattish mom. 4W pick-up segment which includes Gio, Genio and Maxximo posted a robust 74% growth yoy as the LCV segment continued to grow at a strong pace indicating expansion in the total sub 1 tonne LCV market. Verito sales were soft in the month at 1,127 units , down 38% mom v/s 1,818 units. Export sales moved up by 71% yoy with traction seen in major export markets. Farm Equipment Segment (FES) which had posted a very robust growth of 71% in October almost halved to 17,527 as inventory correction happened in this month and we expect the current monthly run rate of tractors to slightly improve hereon and grow close to 17-18% in FY12. The festive launch of new SUV XUV500 priced in the range of Rs11-14 lakhs is expected to boost the UV sales as it has already attracted bookings of 8000 units in Tier 1 cities and the company has stopped taking any more orders. Capacity ramp up of XUV500 will boost UV sales going forward and also provide margin traction.


Maruti Suzuki – (TP – Rs 930, Underperformer)- Month on month numbers improve on resolution of labor unrest, however decline in FY 12 inevitable

Maruti Suzuki (MSIL)‘s sales in November came at 91,772 units, a sharp growth of 65% mom, while on yoy basis it was down by 18% as labor unrest got resolved in November. However, macro factors are spoiling the game as PV sector is struggling to gain its lost luster. The bread and butter segment, the mini segment de-grew by 27% yoy as it is the petrol portfolio of MSIL and rising petrol prices have taken a toll on this segment. The compact segment fell by 4% yoy.  Vans segment also declined by 34.5% yoy. Exports were down by 11.4% yoy. However, SX4 and Dzire segments posted growth, albeit in a single digit. We do not see Maruti to punch more than one lakh units in the near future and hence report a negative growth in FY 12. Additionally December may see a maintenance shutdown which may hit volumes by ~8000-10,000. MSIL’s market share in the first half of the year has gone down below 40%. Going forward, the recent and any more hike in interest rate by RBI will lead to it getting passed to customers sooner or later, which will further impact demand. New launches from competitors and fuel price hikes will add fuel to this. Hence, we believe that Maruti will continue to underperform its peers and the auto industry over the next one year.


Tata Motors – (TP- Rs195, Neutral)- Festive mood continues

November sales for the company were at 76,823 units, 41% up yoy and 11% up mom. CV sales grew by a healthy 28% yoy, out of which LCV sales were up by 41% yoy, signifying regaining of market share lost in October. New launches like the variant of Ace Zip led to the growth. MHCV sales also grew by a good 9%. This reflects strong CV sales despite macro headwinds. PV segment sales showed recovery as they grew by 81% on some strength coming from Indica Vista (up 91% yoy) on new launch of Indica Vista launched couple of months back. Utility segment sales went up by 35% yoy. Indigo range sales were slightly up by 3% yoy. Nano sales grew at 6,401 units on 3,868 units mom and 506 units yoy.


TVS Motor – (TP – Rs79, BUY)- Disappointing month

TVS Motor failed again this month to sell 2 lakh units. In October they had missed due to an unexpected maintenance shutdown. However, the fall in November came on weak motor cycle sales. This was in line with our expectations. Total sales grew by 12% yoy, while sequentially they de-grew by 5%. Scooter sales grew by 22%, while motor cycle sales remained flat. Exports grew by 53% yoy. Management still maintains their guidance of 15% volume growth with YTD growth close to 12.5%. They expect Q4 to be very strong on seasonality and couple of new launches.


Written by Fundamental Side

December 12, 2011 at 11:36 am