Monday, September 23, 2013

MNC Buybacks No Guarantee of Smart Gains

Experts warn against getting carried away by the recent success of two delisting offers, say co fundamentals, valuations key to decision

The response to the offers of Bayer Cropscience andFreseniusKabi todelist indicates that investor interest in share buybacks by the Indian arms of multinational companies (MNCs), has revived. But fund managers and investment advisors say investors should not get carried away hoping for huge gains. 

Expectations of big gains are high in the backdrop of a weak rupee, which helps the overseas parent, and reasonable valuations, besidesthe recent movesby theReserveBank of India to boost inflows.
Last year, stocks of listed subsidiaries of MNCs operating in India were in demand after the Securities and Exchange Board of India (Sebi) mandated them to meet the minimum public holding norm of 25% by June 2013. Investors made good returns when companies such as Alfa Laval and UTV Software delisted. On speculation that many other MNCs,too,wouldfollowsuit,the valuationsof such stocks rose to high levels. But the bubble 
burst as many companies preferred to dilute their promoters’staketo meet Sebi norms.
This was followed by a few MNCs buying back shares to raise promoter holding. The stocks of GSK Consumer and Hindustan Unilever spurted on completion of the buyback process. A number of MNCscrips are already seeing improved buying interest on rumours about potential delisting or buybacks, particularly after RBI allowedthem tobuy shares in the open market earlier in September.
Given this backdrop, retail investors are again looking at MNCs for ‘smart’ gains through delisting or buybacks. However, investment advisors say that investors should 
exercise caution. “Last time, when there was an MNC delisting fad, valuations went haywire, but finally when most MNCs decided to dilute stakes to meet Sebi rules, retail investors were the ones who burnt their fingers badly. So my advice is not to act on such fads,” says P Phani Sekhar, fund manager (PMS), Angel Broking. Sekhar says not all MNCs are doing well. Not allMNCs arefocusedon theIndian markets. “What HUL or Glaxo did shouldn’tbetaken asexample andextrapolated to all the MNCs,” he warns. Investors should not buy an MNC company’s shares justfor thesakeof delisting or buyback gains, says Gautam Trivedi, MD and head of equities, Religare Capital Markets. “We don’t know when such a development will take place or the premium at which such an offer wouldbe priced. Secondly,suchdecisionswill differ from company to company. So it will be basically speculation,” he says.
Yet, there are a few who see sense in buying into such companies. “The rupee is down some10-12% from a year ago and market valuations are down to more reasonable levels, so it makessensefor MNCsto raisestake in Indian subsidiaries,” says G Chokkalingam, managing director and chief investment officer with Centrum Wealth Management. “There willbeuncertainty in the marketsfor another six months. In this time, we expect to seen a few more such deals.”
Dipen Shah, head of private client group researchwithKotak Securities alsosaysthere is a case for some MNCs to either go for a buyback or to delist. “However, one shouldn’t give too much weightage to this theme in the overall portfolio,” he says. An investor willing to investbasedon thisthemehastotakedecision based on fundamentals and valuations of eachcompany,saytheseexperts. “If a favourable corporate action indeed takes place, it will be icing on thecake,”saysAngel’s Sekhar.
Centrum’s Chokkalingam suggests investors go through a quick checklist. “One should first check the company’s business model, which is most important. The parent company’s balance sheet and whether there were any previous delisting attempts should also be considered, followed by the price point and valuation multiple.”

Friday, September 20, 2013

Mid-caps Back on the Radar as Market Regains Swagger

No bull phase yet, but investors can look at quality mid-cap stocks, say experts

With the market getting its rhythm back over the past few weeks, and especially its swagger on Thursday, after the US Federal Reserve’s decision to maintain status-quo on bond-buying, retail investors have been left wondering if the next bull run has already begun. 

Their natural inclination will be to seek out mid-cap scrips, which typically outperform in an uptick. But they need to be choosy as well in such times. The ET Intelligence Group has figured out that a few such scrips have apparently suffered mainly due to market volatilities, in spite of posting healthy performance, and hence are more likely to bounce early in a recovery. “Sentiment has certainly improved, and mid-caps are certainly attractively valued at present, and now could be a good time to invest in them,” said Gautam Trivedi, MD and Head of Equities with Religare Capital Markets. But he isn’t sticking his neck out yet to say that a new bull phase has begun.
“It’s safer to invest in midcaps only with long-term horizon,” said G Chokkalingam, managing director and chief investment officer with Cen
trum Wealth Management. “Investing in only the best quality mid-caps is necessary since a number of concerns still exist,” he added.
Chokkalingam said, “The tax collection of top 100 companies for Q2 was up just 8% year-on-year against a 15% growth in the previous quarter. The earnings season starting October will be lacklustre. Similarly, the fiscal deficit for the first six months could re
ach the full year’s estimated figure in view of slowed-down tax income. Then there will be elections in May 2014. The next few months will be full of uncertainties.”
Religare’s Trivedi also takes a cautious view. “While the Federal Reserve’s decision is welcome from the liquidity point of view, it is an external event, which won’t repair domestic economic problems. Industrial recovery is slow and 
domestic economy is not doing very great.” ETIG has put together a list of mid-caps, keeping in mind such pitfalls. The companies chosen are currently trading at lower valuations in the past 18 months despite posting healthy profits and improved balance sheet — a clear case of market punishing the good with the bad. 

Rising Rupee to Help Offset Surge in Crude Prices

The US Federal Reserve’s decision to maintain the pace of buying bonds may have stoked global crude oil prices, but that should not be a worry for India as the sharp appreciation in the rupee will actually lower the cost of imports.
The benchmark Brent crude oil prices, which had, prior to the Fed’s decision, dropped to a six-week low level on easing Syrian tensions, gained 1.5% immediately after the announcement. This will be negative for India, which imports nearly 84% of its oil requirement. However, this will be set off by the rising local currency. The rupee appreciated over 2.2% to 61.74 against the US dollar on Thursday. Thanks to this, the import cost of crude oil for India is likely to have to dropped 0.8% to Rs 6,750 per barrel on Thursday over the previous day, according to ETIG calculations.
This will also mean that the import price of crude oil for India fell to the lowest in a 
month — nearly 12.5% down from Rs 7,750 on August 28, according to data from the Petroleum Planning and Analysis Cell.
The rupee appreciation has a positive impact on an import-dependent economy like India’s. A stronger rupee will mean a lower subsidy burden with the cost of imports also being lower. The under-recovery, or the cost of selling below cost, on diesel recently rose to Rs 14.5 per litre — the highest in 12 months.
This took the industry’s total under-recovery also to a yearly high of Rs 486 crore daily for the fortnight ending September 30.
Now with the rupee strengthening, the under-recovery for state-owned oil companies is bound to come down. Back-of-the-envelope calculations show the under-recovery on diesel could go down to . 10-11 per litre and the industry’s total daily under-recovery could fall below . 400 crore if this trend continues. That is a fall of nearly . 16,000 crore in under-recovery for the second half of FY14.

Friday, September 13, 2013

GUJARAT GAS: A Good Bet for the Long Term

City gas distribution company Gujarat Gas is showing great resilience while going through a challenging phase. Its profits have jumped 47% in the last 12 months despite dwindling volumes. Its cash-rich balance sheet and healthy dividend yield supported by slow but steady growth and attractive valuations augur well for long-term investors. Just like other natural gas utilities in the country, Gujarat Gas too faced pressure due to low availability of natural gas, with its volumes going down 7%, from 1,246 mmscmd in 2011 to 1,157 mmscmd in 2012. In the first half of 2013, volumes dipped further by 15% against a year ago. The company’s dependence on imported liquefied gas, or LNG, too has gone up steadily as domestic production dipped. In 2011, only 37% of the total gas it sold was imported, which rose to 50% in the first six months of 2013. By its very nature, the cost of LNG keeps fluctuating posing another challenge for maintaining profitability. Yet, the company has been successful in passing on its cost increases to final consumers. Its operating profit margin, which was on a downward trend from its high of 24% in year 2010 to 15.5% in 2012, improved to 17.5% for the 12-month period ended June ’13. The company has focused on gaining more customers who would replace liquid fuels — fuel oil, naphtha and the like — with natural gas and thus find even imported natural gas cheaper. Such customers represented only 40% in 2010, which rose to 58% in 2012. The company’s CNG and PNG businesses, which represented 17% of total volumes in 2010, have grown to 25% now thanks to steady conversion of more and more customers. CNG still remains 40% cheaper to petrol, while PNG is around 7-8% cheaper to LPG. The company recently signed an MoU with its parent for long-term supply of 0.85 mmscmd natural gas starting 2014. This will provide visibility to the company’s volume growth in the future. Gujarat Gas will always remain cash rich, as cash generation outstrips its capital expenditure requirements. The company is currently carrying over .560 crore of cash and has over .300 crore of operating cash flows, while its capital expenditure is close to .150-180 crore annually. The natural gas utility is valued at 8.3 times its past 12-month earnings and 2.5 times its net worth, besides offering 3.3% dividend yield, which is attractive for a long-term investor. 

Monday, September 9, 2013

Weak Rupee, High Petroleum Prices to Hit Textile Industry

The impact of rupee depreciation and higher petroleum prices is now being felt by the textile industry, as fabric and apparel makers remain hesitant to pass on higher costs to the final consumers on concerns over weak demand, raising questions on how the industry will cope with this challenge. While the prices of petro-based raw materials such as PTA and MEG have gone up by close to 44% in the past three years, the rise in fibre, yarn and textile prices has remained between 12% and 35%, according to industry sources, creating margin pressures.
Prices have been going up steadily over the past few years, but not enough, argue upstream players facing the direct brunt of rising petroleum prices and a weak local currency. “The segments across industry have witnessed substantial increase in other cost elements like the conversion cost,” said an industry veteran from a company in the upstream segment, asking not to be named. “However, the industry has been able to pass on only a part of the increased operating costs, which has resulted in squeezed margins,” he said. According to this official, the industry’s energy cost has almost doubled — fuel prices have increased by around 40%, packaging cost by almost 30% and labour cost has also gone up steeply in the past couple of years.
The sudden spike in raw material costs has rocked the boat for downstream players, who have managed to pass on the gradual increase in cost earlier. “Consumers have just about returned to the market after the removal of excise duty, which reduced prices by between 8% and 10%. We would not like to jeopardise this sentiment by again increasing garment prices,” said Rahul Mehta, president — clothing, Manufacturers Association of 
India (CMAI). According to him, a rising number of consumers are buying their requirements during the end-of-season discount sale, and it would be too risky to increase prices at this stage. Yet, a few are ready to accept the ground realities, notwithstanding the obvious risks, on expectation of an improved demand in the upcoming festive and marriage season.
“Costs are rising and margins are getting squeezed. Ultimately, the industry will have to go for price hikes,” said Srinarain Aggarwal, managing director of Surat-based Prafful Sarees. “It may affect demand, but other
wise, the survival of the entire industry will get impacted.” According to him, the fabric processing units around Surat region are demanding a 15-20% price hike in their dyeing and printing operations with immediate effect for grey fabric traders, but are unable to secure it due to a drop in volumes.
“Although cotton yarn prices have gone up 30% in the past few months, we are able to weather this by increasing our fabric prices by 20-30%,” said Mitesh Shah, CFO of Mandhana Industries. Raw cotton prices moved up nearly 15% to . 46,000 per candy in the last six months.

Friday, September 6, 2013

LNG IMPORT: Winter Demand, Global Cues may Trigger Price Hike

A fine demand-supply balance in the global spot LNG market has kept LNG prices range-bound during the past six months, despite the recent spurt in crude oil prices. However, high winter demand, prolonged shutdowns at Japan’s nuclear power plants and China’s increasing import capacity could lead to higher prices.
India is the world’s fifth biggest importer of LNG, which contributes one-third to the total domestic natural gas consumption. Approximately 70% of India’s LNG imports are on a long-term contract, while the rest is procured on a spot basis. Japan is the world’s biggest LNG importer, which has seen demand shoot up after the nuclear disaster of 2011. Importers have already started booking cargoes for delivery in October and November but the pricing is not seen going up despite a seasonal jump in demand. Higher additional availability, particularly from the 5.2-MTPA plant commissioned recently in Angola , apart from other countries such as Nigeria, Norway and Trinidad & Tobago, has weighed on prices.
However, demand could grow faster than supply. Japan’s nuclear power plants will remain shut longer than earlier expected. China is adding an import capacity of almost 15 MTPA in 2013 and 2014, while Brazil is using spot LNG to compensate for the fall in hydro power in a drought year. Spot LNG prices may start going up as all these start to have an impact.

Wednesday, September 4, 2013

PRAJ INDUSTRIES: The Worst is Over

The going may be tough for Pune-based engineering firm Praj Industries, but there are indications that the the worst is over. For a company which has been shunned by investors for the past six years and lost 85% of its value from the peak -- Praj Industries may be regaining investor interest going by the expansion of the order book to 1,010 crore in the quarter to June — 56% of which is from overseas. Similarly, the recent spike in oil prices and the depreciation in the rupee also bode well for the firm. The company is debt-free with over 200 crore or one-third of its market value held in cash. During the past couple of years it has also diversified into new businesses such as water treatment, which today contribute nearly 30% to its total revenues. Its low valuations have driven dividend yield above 4.5%. Praj has begun construction of Asia’s first second generation ethanol plant which, if successful in attracting investors, will be a key growth trigger.

Monday, September 2, 2013

Cash-rich Public Firms Underperform Pvt Peers

Several cash-rich state-owned companies have underperformed their private sector peers, which have a cash hoard, as well as benchmark indices in the past year, reflecting the lack of confidence of investors in the ability of the government which is the promoter of such firms to utilise the cash pile efficiently and boost growth when the economy is slowing down.
Compared to private corporates, a large number of state-owned companies have a huge cash pile. An ETIG analysis of cashrich companies which are part of BSE 500 shows that a majority of cash-rich PSUs have underperformed their private sector peers as well as benchmark indices. From the BSE 500 list, 117 companies held more cash compared to debt at the end of March 2013. This included 14 PSUs and 103 companies from the private sector. However, these 14 PSUs jointly had a net cash balance — cash in excess of outstanding debt — of . 1,26,600 crore, well in excess of the . 90,500 crore of 103 private firms.
Yet, the stock prices of over half of these state-owned companies are down over 30% from a year ago, while those of cash-rich privatefirms aredown only 13%,signalling that the market views private firms with a cash hoard as better bets, especially during aslowdown. Similarly,46%of cash-rich private sector companies outperformed the BSE500 index in the pastone year,whileonly 15% of the cash-rich PSUs could match that acheivement.
Says Gautam Trivedi, managing director and head of equities, Religare Capital Markets “Unfortunately, PSU stocks have historically traded at a discount to their private sector peers due to fear over government’s inaction or lack of direction, particularly, in view of failures such as MTNL. So even in case of cash-rich PSUs there is a perception that the government’s decisions based on its fiscal compulsions may be to put the cash to unfruitful use.”
The BSE PSU index has lost over 28% in the past year compared to a 3% drop in the BSE 500 and a gain of over 5%n in the Sensex. “Forced supply of equity through an offer for sale in a bearish market with lack of appetite from retail investors and 
domestic investors led to a crash in those PSU stocks,” says G Chokkalingam, executive director, Centrum Capital. The governmenthadtosellshares in severalstateowned companies this fiscal to conform to rules on a minimum public holding for listed companies. This had to completed by end July — the deadline set by Sebi, leaving many companies with no option but to offload shares in a bearish market. Says Vikram Dhawan, director, Equentis Capital, a UK-based investment analytic and advisory firm, “Each sector has its own challenges. For instance, there is a common perception that public sector banks are more vulnerable to bad loans than their privatesector counterpartsduring an economic slowdown. In the resources sector, public sector companies have marginally underperformed their private peers as the latter are morediversified.”
    Instability at the top man
agement level may also have weighed down public sector firms. “Rapid change in the top management every three to five years is also worsening the scenario for these companies,” says Nilesh Karani, head of research at Mumbai-based brokerage house Magnum Broking.
“We see a lot of churning happening in PSUs at the directors and CMD level at
shortdurations,whichleadsto a lackofconviction from investors.” However, analysts reckon that cash-rich state-owned firms will rebound faster.
“PSUs engaged in the infrastructure sector and production of resources will start improving from the October quarter onwardsduetosome recovery in the macroenvironment in the West while the rupee crash will improve realisations from importsubstitutesbesides government’s push towards infrastructure spending,” says Centrum’s Chokkalingam.
Noteveryone is asbullish. Magnum’sKarani believes the underperformance of PSUs will continue given the role of the state in policies which directly impinge upon the operations of these companies.