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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.

 

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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

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

MRPL – play the refining cycle

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MRPL – play the refining cycle

Mangalore Refinery & Petrochemicals is expanding its refinery to 15 MMT by Jan/Feb 2012. The expansion will witness the refinery complexity rising from 5.5 to 9, which will be helpful for maximizing GRM. The expanded refinery will also consist of a 2.2 MMTPA Polypropylene (PP) FCCU which will mark the entry of the company into the petrochemical space. The PP unit is expected to achieve mechanical completion by Apr 2012 and commissioning by Jun 2012. Excellent product slate of the expanded refinery, due to reduction in fuel oil and introduction of PP, is expected to result in GRM jumping by ~$ 3.5/bbl during FY12-13. Realization for PP is currently ~$ 1500/ton, which is almost double that of other refined products. We estimate GRM of $ 5.1/bbl and $ 8.7/bbl in FY12 & FY13 respectively.

Upon completion of the expansion project, MRPL would be eligible for a 7 yr tax holiday under section 80IB of Income Tax Act. The company is also in talks with Karnataka State Govt. for Rs 1.25 bn Sales Tax deferment benefit, Rs 0.9 bn of CST benefit, Rs 0.8 bn of saving of Entry Tax on crude and one-time benefit of Rs 3 bn on exemption of Entry Tax on project benefits. GRM will be significantly higher than our estimates if the company is granted these tax incentives.

We value MRPL using a target EV/EBITDA multiple of 6x on FY13E EBITDA and reiterate BUY with a target price of Rs 81, which translates to upside of above 30%.

Written by Fundamental Side

November 16, 2011 at 6:24 pm

Savings Bank Interest finally deregulated

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Savings Bank Interest finally deregulated

Saving bank account interest rate deregulation has finally arrived. The first banks to lead the way with higher rates were the ones with nothing much to lose namely Yes Bank, IndusInd Bank and Kotak Bank. Low saving deposit balance meant that these banks have a greater scope as the gap between SA and term deposits remains a 400-450 bps gap.  The mammoths of the banking system have yet to budge. I understand the insistence that saving accounts are transaction related products. However, with standardization across transaction banking services and the small banks named above no less technologically savvy my guess is the argument won’t last too long.  So should we expect a rush at branches for account opening applications? Unfortunately the answer is NO. The reason being, large banks continue to enjoy huge network, yes it does matter even in the days of internet banking and cross linkages of ATMs, and not to mention transaction related tie ups and linkages. Savings account products are convenience related and with real interest rates negative on most retail deposits, it is hard to imagine savings accounts as the next investment vehicle. So will the large banks increase saving account rates? I believe that eventually they will, things have a way of balancing out, it’s just my hunch but they are holding off as long as they can.

There also seems a split in the nature of customers and between banks. One is the urban and rural divide. Rural customers sub Rs1 lakh deposits are a lot more loyal to banks. Can’t blame them really, a trip outside of the metros and Tier I cities will explain the presence PSU banks have built. PSU banks have thrived on this fact and dominate this category of rural and semi urban customers. The issue now comes to urban centers and metros. Here there is a mix of the sub Rs1 lac and higher depositor and PSU and Private Banks. This is where large banks cannot write off the rate increase by smaller technologically advanced new generation banks.  

A lot has been said on the subject over the past 2 weeks and a number of citations have been made of developed countries offering deregulated rates. However, there aren’t any free lunches. Deregulation has been introduced at a time when money supply is under pressure and banks may be pulling all strings to maintain a low cost deposit base. Hence we are experiencing a rising saving rate cycle. However, just like the pattern in developed countries this could reverse itself when money supply is easy. Also, banks could impose a levy on transaction services offered to saving account holders or pass higher cost of funds through higher base rate. From what we have seen over the past 2-3 quarters bankers are in no mood to absorb higher rates and if their second quarter margins are intact it only means that they have passed on the increase in cost of funds.

 

 

Written by Fundamental Side

November 9, 2011 at 11:29 am

No real cheer in Motown during the festive season

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No real cheer in Motown during the festive season

 With festive pre-buying set in the month of September, October showed comparatively subdued numbers sequentially. Going forward, we believe that seasonality will creep in towards the end of calendar year and the next two months will be even more subdued. Additionally, PVs will face the heat considering the interest rate hikes and fuel price hikes. Two wheeler demand is expected to be firm with positive developments happening in the rural markets such as good monsoon, rise in MSPs and employment schemes enforcement. CVs are expected to grow at a steady pace close to 10% on demand from LCV segment.

 Bajaj Auto – (TP – Rs1,893, BUY) – Curfew at Pantnagar led to a loss of 25,000 units

Bajaj Auto has posted a record October performance by selling 3.95 lakh units, a growth of 7% yoy while it declined 7% mom. This has been the third month post the launch of 150cc Boxer, which again sold 10,000 units. Production got affected due to curfew at Pantnagar to the extent of 25,000 units. The twin brands Pulsar and Discover reported strong growth and contributed ~70% of total motorcycle sales. The company has recorded highest ever motor cycle sales in any October thus indicating that the 2 Wheeler sector is insulated from any macro headwinds. Three wheeler sales came in at 44,191 units, a growth of 8% yoy, and a fall of 5% mom. On the export side, Bajaj Auto sold 1.31 lakh units, a growth of 20% yoy and contributed 33% of sales v/s 29.7% yoy, which indicates a better profitability in the month. For the first seven months of the year, the company reported 15% yoy growth to cross the 2.65 mn mark.

 Hero Motocorp – (TP – Rs1,928, SELL) – Sequential de-growth

HMCL had posted a record breaking volume performance in the month of September as it sold 5.49 lakh units in the festive environment. However, in October it failed to reach that mark and reported just 5.12 lakh units , a growth of 1.2% yoy and a decline of 7% mom. The company mentioned that at retail levels, the sales were more than 6 lakhs in October. With the 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.

 Mahindra and Mahindra – (Under Review) – Tractor sales robust, but auto sales slipped mom

M&M sold 41,506 units, a 20% growth yoy while it declined 6% mom. UV sales in the month grew by 6% yoy to 16,938 units, while declined 7% mom. 4W pick-up segment which includes Gio, Genio and Maxximo posted a robust 41% growth yoy as the LCV segment continued to grow at a strong paceindicating market share gain. Also new variants of Maxximo and Genio launched over the past month, which have performed well. Verito has posted yet another stellar month with a highest ever monthly sales recorded at 1,818 units , 16% mom growth v/s 1,560 units. Export sales moved up by 7% yoy with traction seen in major export markets. Farm Equipment Segment (FES) posted a very robust growth of 31% yoy to 31,838 units, while sequentially they zoomed up by a whopping 29% on festive demand post a strong monsoon and MSP on food grains being hiked. 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 and the company has stopped taking any more orders.

 Maruti Suzuki – (TP – Rs 930, Underperformer)- Lowest ever monthly sales in the last decade

Maruti Suzuki (MSIL) ‘s sales in October came at 55,595 units, a sharp decline of 53% yoy, while on mom basis it was down by 35% driven by labour unrest at its plants leading to a production loss of 40,000 units. Also macro factors spoiled the game as PV sector is struggling to gain its lost luster. The company was completely unable to enjoy the festive season this year. The bread and butter segment, the mini segment de-grew by 55%, while the compact segment fell by 56% yoy.  Exports were down by 64% yoy as A Star, the best selling export model faced the brunt of labor unrest at Manesar. 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. MSIL’s market share in the first half of the year has gone down below 40%. Going forward, the recent and the expected 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 – (Under Review)- Sales slip sequentially

October sales for the company were at 68,009 units, 5% up yoy and 16% up mom. CV sales grew by 13% yoy, out of which LCV sales were up by 6% yoy, signifying some loss of market share to M&M and MHCV sales were 23% higher yoy, a trend reversal. This reflects strong CV sales despite macro headwinds. PV segment sales declined by 3% on macro pressures on the PV segment to 25,746 units while utility segment sales went up by 23% yoy.  Indica range grew by 11% yoy as a new variant of Indica was launched 2 months back. Indigo range sales were also low by 24% yoy. Nano sales grew on lower base at 3,868 units albeit low, up 26% yoy , while on mom basis, Nano’s grew by 30%.

 

Written by Fundamental Side

November 4, 2011 at 5:18 pm

Cairn India does it again

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Cairn India does it again

Cairn Lanka (Pvt) Limited, a wholly owned subsidiary of Cairn India, has made a Gas Discovery in the block SL 2007-01-001, Mannar Basin, Sri Lanka. Cairn Lanka (Pvt) Limited is the Operator and has a 100% participating interest in the block. Further drilling will be required to establish commerciality. This well is the first to be drilled in Sri Lanka in 30 years and the first successful discovery in the country. Cairn has committed $ 100 mn for its 3-well drilling campaign in this block.

 Consequent to Cairn India’s acceptance of royalty as a cost recoverable item and cess liability on its share of production, the Board of ONGC has issued its NOC to the Cairn-Vedanta deal. We believe that this is a major step forward for the consummation of the deal as well as for obtaining the necessary approvals for production ramp up from Mangala and production start from Bhagyam. We expect news flow regarding production ramp up to be positive near term triggers for the stock going forward.

 We expect production levels to be ramped up to 210,000 bpd by Q4CY12. We expect EPS of Rs 37.5 and Rs 46.5 in FY12 & FY13 respectively. We expect free cash flows of Rs 33 bn & Rs 70 bn during FY12 & FY13 respectively.

 Following the steep correction in the stock price, we upgrade our rating to BUY with a target price of Rs 334, translating to an upside of 23.4%.

Written by Fundamental Side

October 13, 2011 at 12:38 pm