GAIL: Shortage of Gas Poses a Challenge

Gail’s steady growth resumed in the June ’11 quarter, after the blip of March ’11 quarter, which was affected by a jump in subsidy burden. Its volume growth stagnated while profit growth came mainly from lower subsidy burden and higher margins in gas transmission. It completed a major work on the Dahej-Vijaypur II pipeline. However, sourcing additional gas will be a key challenge, as its additional infrastructure comes into play. Only its natural gas trading segment for Gail pulled its numbers up, a visible trend for the past few quarters. The segment, which represents nearly 80% of Gail’s revenues, posted a strong 32.2% growth even as volumes slipped 2.6% to 82.63 mmscmd. A strong 140-bp margin expansion to 4.3% nearly doubled segment’s profit to . 313.1 crore.
The LPG and liquid hydrocarbons business turned in a decent profit of . 228.5 crore. This was 2% below the year-ago period. But it is better than . 73-crore loss in the March ’11 quarter.
Gail had to contribute . 682 crore towards oil retailers’ under-recoveries in the June ’11 quarter, which were 53% higher against the year-ago period. Still, they were nearly 25% lower to the March ’11 quarter, though under-recoveries had increased in the June ’11 quarter. This proved vital in its profit growth to its highest level in almost three years.
The scrip trades at 15.9 times its earnings for trailing 12 months. The company’s valuations are at a substantial discount to smaller players. But it faces challenges in continuing with its volume growth, particularly when domestic availability of natural gas is not improving.

CAIRN INDIA: Royalty Burden a Value Destroyer

The continuing delays in government approvals will mean that Cairn India is likely to miss out on its production growth targets in Rajasthan beyond the current 125,000 barrels per day.
Although the company has invested in expanding production capacity, actual output of every incremental barrel depends on government approvals. Experts view these delays as tactics by the government to force Cairn to accept the royalty burden for its portion of production — a compromise that will significantly erode the company’s value.
“We see a clear case of the government armtwisting Cairn India through approval delays in output ramp-up till Cairn India accepts the royalty conditions, which will hurt Cairn India’s valuations significantly,” mentioned a result update report of Elara Capital. The broking firm maintained its ‘sell’ rating with target of . 270.
“We believe Cairn has little choice but agree, as any opposition would mean that government and JV approvals required for either daily operation or long-term production ramp-up would become difficult,” mentioned a HSBC Securities’ report on the company. HSBC downgraded its rating to ‘neutral’ from ‘overweight’ with a price target of . 350.
Since the Cairn India’s board had earlier assured its shareholders that no government condition would be accepted that is detrimental to shareholder value, it has decided to approach the shareholders for their view on the compromise. However, this is likely to be a mere formality considering 80% of the company’s shares are held between Cairn and Vedanta Group — both of which are eager to see the deal through.
The company’s Mangala field is producing 125,000 barrels per day and its Bhagyam field will be ready by the end of 2011. However, the company can’t produce anything more than current 125,000 bpd without government approvals. A delay here means the company’s production would stagnate at current levels for an extended period.
Cairn India’s June 2011 quarter results were better from the March 2011 quarter. Since the production is unlikely to change for the next couple of quarters, the company’s profitability will depend mainly on oil prices. The company’s acceptance of the royalty burden could prove a value destroyer for its retail shareholders in the near term.

RELIANCE INDUSTRIES: Strong Refining Margin Plays Saviour, but this Show’s Unlikely to Go on

Reliance Industries has managed well to meet the market’s expectations as strong growth in its refining business outweighed the weakness in petrochemicals and oil & gas segments. Although the results were the company’s best ever in any single quarter, its sustenance in the coming quarters is doubtful.
RIL’s gross-refining margin for the June ’11 quarter rose to double digits for the first time after the December 2008 quarter — a gap of more than two years. This was made possible by the unusually high differential between sweet and sour qualities of crude oil and high gasoline prices. However, in view of rising refining operations, globally, the situation is not expected to continue in the next quarter.
The drop in margins of its petrochemicals division was alarming. At 12.2% of net sales, profit margins were the lowest in the past two years. Still, the company managed to post a 7.9% YoY growth in profits of this segment, thanks to a double-digit volume growth. However, a large part of this volume growth was due to lower production in the year-ago period due to maintenance shutdowns. Going forward, as the benefit of low base vanishes and margins remain stagnant, the company could see a fall in profitability of this segment.
The natural gas production from KG basin dropped to around 48 million cubic meters per day during the June 2011 quarter, which was down 18% against year-ago period. This was somewhat lower to the 49 MMSCMD estimated by most of the analysts, and is not expected to improve in foreseeable future. The company, which grew its net profits by a strong 24.9% in FY11 YoY, has seen its growth rate drop lower quarter after quarter. The average profit growth, which stood at 30% in the first half of FY11, came down to 20% in the second half. For the first quarter of FY12, it stood at 16.7%. This trend will continue in the coming quarters.
It is expected that the performance of RIL’s refining division, which played the role of saviour of the June 2011 quarter, will stagnate in the second half of 2011. During the September 2011 quarter, the company has planned a maintenance shutdown, which will lower its volumes. The woes of its other two businesses are yet to be over. These expected trends cast doubts over RIL’s ability to maintain its bottomline in quarters to come.

Up THE VALUE CHAIN

Want to play in equities, but don’t know how to pick the winners? Can’t crunch numbers to uncover the big picture, but find the call of the stock market impossible to resist? Don’t worry. There are some simple ways to play the market. One of them is go with the Big Daddies — the business houses. The ET Intelligence Group has crunched the numbers and done the maths for you to identify business houses that topped the value-creation charts last year

Stock market investing is an art where every investor has to use his own set of colours. Everyone is likely to have a different approach to making investment decisions. Some investors may analyse fundamentals to identify an undervalued company. And technical buffs can search endlessly for that positive break-out. But not all are that savvy. There are several simple investment approaches followed by lay investors that have proved to be equally profitable over a period of time. Betting on a business house, which is big, well known and has a successful history, is one such strategy.
The logic is simple. If a business house has created value and weathered the storms in the past it shall continue to do so in future. These large business houses hold significant resources within the group to help out an occasional laggard and the management has a reputation to defend, which makes it more conservative and sound. This investment strategy won’t suit someone looking for large gains in a short period of time, but investors seeking steady growth without having to worry about safety of capital do follow this strategy.
The ET Intelligence Group has tried to figure out the business houses that have created maximum value for their shareholders over the last one year. A key finding of the analysis was that although all leading business houses — Tatas, Birlas or Bajajs —created decent value for their shareholders, a horde of smaller or lesser-known business houses outperformed them by a wide margin. These business houses —the proverbial dark horses as one may call them — are thriving across various sectors and have the potential to make it big. If you are someone, who can justify an investment decision on the Tata, Birla or Bajaj brand, it is time to look beyond them. The Wockhardt group turned out to be the biggest value creator for its shareholders thanks to the turnaround in its flagship company Wockhardt (For details refer to story on Page 2). Its smaller sibling Carol Info Services, which is engaged in contract manufacturing of neutraceutical and milk products, also witnessed a substantial jump in its market capitalisation.
The Lalbhai group was a beneficiary of the turnaround in the textiles industry as the market value of Arvind Mills almost tripled in one year. Chemicals maker Atul saw its valuations jump in the first half of FY11 and then remain steady for most of the year as its profitability improved.
The TTK Group represented by TTK Prestige and TTK Healthcare enriched its shareholders by over 167% in the last year. While TTK Prestige tripled in value, TTK Healthcare gained 18%. Kitchenware manufacturer TTK Prestige had a fabulous year in FY11 as its profits jumped 60%. The growth juggernaut continues as its profit for the June quarter was up 58%.
Inox Group’s excellent performance came mainly from Gujarat Fluorochemicals, which saw 149% jump in valuations over the last one year although its FY11 profit was down 21%. In comparison, multiplex company Inox Leisure had a bad year with profits falling 73%. Still the fall in its market value was substantially lower at around 30%.
Packaging film maker Uflex doubled its market value in the last one year as its profits tripled in FY11. This ensured Flex Group a berth in the top 10 value creating small business houses. It was mainly the spurt in PET film prices that boosted its profits through FY11. This may not continue in FY12 or beyond. Its sibling Flex Foods, which sells frozen mushrooms and vegetables, lost 12.5% of its market value as its profits dropped 9%. Still considering its 2 per share dividend that it announced for FY11, it is giving a substantially high yield of 6.7%.
Apple Industries Group, which controls Hexaware Technologies and Apple Finance, Sujana Group, which is present in steel and capital goods, Firodias of the Kinetic fame, Jatia Group which runs Asian Hotels and plastic and petrochemicals player Taparia Group are the others that have created over 50% value for their shareholders over the last one year.
Two business houses — LN Bangur Group and Camlin — should have made it to the list of top value creators. However, in both these cases the substantial jump in market value of their group companies has come due acquisitions by MNCs. Andhra Pradesh Paper Mills of the Bangurs was acquired by International Paper for a substantial premium. Similarly, Japan's Kokuyo picked up a controlling stake in Camlin for a premium. Thanks to the mandatory open offers following these deals, the market value of the firms has skyrocketed. However, with the ownership change we could no longer keep them under their earlier business houses.
Given below are a few companies from these leading small business houses, which an investor may consider adding to his portfolio. The companies have a sound business model, healthy financials and steady growth prospects. A few of these companies may not come from the business houses that have figured in the Top 10, but from groups that would come in the Top 15.

Performance Appraisal of the Large Business Houses

The bigger you grow, the more difficult it becomes to grow faster. This is the general rule, which is why when companies such as Apple Inc double their profits in a quarter it becomes talk of the town. After all, it is much easier to double a company's profits from `10 crore than if it were, say, `1,000 crore. Still, bigger the size, higher is the stability and so are the expectations. Among the bigger ones, Adani Group proved to be the largest value creator for investors with the combined market capitalisation of its three listed entities — Adani Enterprises, Adani Power and Mundra Port — going up 60% in last one year. In fact, the market capitalisation of the holding company Adani Enterprises jumped 182%, while its two subsidiaries faced stagnation.

The Zydus Cadila Group, which represents both the FMCG and pharma industries that became hot cakes when things are not so well, proved to be the second largest value creator among the big boys. The group’s market capitalisation rose 43% with both Zydus Wellness and Cadila Healthcare growing in tandem.

Pharma major Sun Pharma's superior performance on the bourses made the group eligible to occupy a third position in our ranking. Its sibling Sun Pharma Advanced Research was more or less stagnant. From the Tata Group, Tata Power was the only large company to have stagnated in the last one year. The investors of all other large Tata Group companies — TCS, Tata Motors, Tata Steel, Titan and Tata Chemicals — enjoyed steady growth. With 80% growth in market capitalisation in a year, Titan proved to be the fastest of the lot

Within the mid-sized companies from the Group, Tata Coffee more than doubled investor wealth. On the other hand, Indian Hotels, Tata Global Beverages and Voltas ended up as laggards. Although at the fifth position in our ranking, the Murugappa Group distinguished itself with all its listed companies gaining in market capitalisation. Among those not doing well over the last one year, both the Ambani brothers make a prominent appearance with the Anil Ambani Group losing more than one-third of its value. Almost all the industries in which Indiabulls Group operates — real estate, brokerage and power — lost favour with the investors, which undermined the group’s performance. Similarly, loss of market interest in Torrent Power proved costly for the Torrent Group.

JATIA GROUP’s Asian Hotels North is known for its premium hotels brand Hyatt Regency. It operates one Hyatt Regency hotel in Delhi, where it is planning to add 35 more rooms. The company is also erecting a new tower with a total built up area of around 1.66 lakh square feet which marks its foray into ‘service apartments’. These will become available in FY12. With these additions, the company's room capacity will increase by 60%. The company joined hands with an overseas hospitality consultant to invest around `400 crore in the company through a preferential allotment in December 2010. These funds would be used for capacity expansion. The scrip is trading ata price to earnings multiple of 14.5 times which is reasonable considering a P/E of 16 for its peer TajGVK Hotels. Besides this, a history of consistent dividend payouts and low debt makes the company a better investment bet in the mid-size hotels segment.

PODDAR GROUP’s Siyaram Silk Mills is one of the few textile companies which have been making profits consistently for the last 15 years. It derives 80% of its revenues from blended fabric. Around 85% of the company's raw material is polyviscose. This has ensured higher return on capital employed and less dependence on cotton for the company. A strong distribution network of more than 60,000 franchise and retail units has helped the company to retain its brand power among the masses. A good track record of dividends and low debt on its books has ensured the company maintains its growth momentum. Currently, the company is trading at a priceto-earnings multiple of six times. This is significantly lower to its peers such as Donear Industries and Bhilwara Spinners

LALBHAI GROUP's chemicals manufacturer Atul has been on a steady growth path with expansion of product portfolio and a gradual increase in capacities. In the last three years, its profits grew at cumulative annualised growth rate (CAGR) of 35%, while sales grew at 14%. This indicates that the company’s efforts at improving margins have borne fruit. The company is aiming to grow revenues by a third in FY12 and FY13 without any inorganic growth plans. The company has systematically improved its return ratios over the last five years. The return on total employed capital has jumped to 22.6% in FY11 from just 9.9% in FY07. Its debt-equity ratio too has improved in the same period with a consistent record of steady cash flows and annual dividends.

This ABG GROUP company, India’s largest private shipyard, is enjoying a strong order book of 15,000 crore, which is seven times its FY11 revenues. FY11 may not have been the best year for the company, which saw revenues grow 15% and profits by merely 5.2%. However, it has aggressive growth plans ahead and is targeting 30% higher revenues in FY12. The company is steadily reducing its debt burden. This will bring down interest costs and add to profitability. Its acquisition of Western India Shipyard marked its entry in the ship repair business, which is growing fast. Its price-to-earnings ratio of below 10 appears attractive.

This TAPARIA GROUP company manufactures polystyrene and was suffering till FY09 due to an industry-wide oversupply situation that squeezed margins. However, its fortunes improved substantially in FY10, and yet the company's profits for FY11 were 45% higher than FY10. In these two years, the company shifted from commodity polymer to more value added products and expanded its capacities. A global rationalisation in polystyrene capacities is benefiting the company as domestic demand picks up. The scrip has gained 41% in last one year and is still trading at around 8 times its earnings for the trailing 12 months.

Increasing production capacity, entry into other electrical appliances and addition of franchisee stores are likely to lend support to TTK GROUP’s kitchen appliance maker. TTK’s cooker business is growing at 20%, which is higher than the industry growth rate of 10-15% as consumer preference grows towards brands. To cater to this growing demand, the company plans to almost double its cooker and cookware capacity to 80 lakh units by 2013- end. It is also planning to increase its kitchen appliances stores to 500 by FY13 from 285 through the franchisee model.Its net sales have grown at a 32% CAGR in the last three years to 776 crore in FY11. Profits have grown at 60% to 84 crore in FY11. The ROE for FY11 was 45%. The only concern is the high valuation of a P/E of 41. Investors can buy on dips.
For the purpose of this story we considered only the business houses with two or more listed entities. A combined market capitalisation of 10,000 crore in July 2011 was taken as a benchmark to differentiate between large and small business houses. In the small business houses shortlist those with a market capitalisation of less than 500 crore were excluded. The value creation is interpreted as an increase in market capitalisation over the last one year.

RELIANCE INDUSTRIES: Refining to Help Pump Up Record Profits

But gas output from KG-D6 field to have big say in performance

As Reliance Industries unveils its June 2011 quarter numbers on Monday, investors will be watching to see to what extent the strength in its refining profits offsets a drop in oil & gas profits and stagnation in petrochemicals. Most analysts expect the improvement in refining margins to outweigh RIL’s challenges in other businesses and enable it post its largest-ever quarterly profits. However, the already visible slowdown in year-on-year growth rates is set to continue. RIL’s net profit for the quarter is set to grow 16.6% YoY to . 5,658 crore for the June 2011 quarter while revenues will grow 28.7% to . 74,960 crore, according to the average of nine broking firms’ estimates. This will be 5.2% higher than its March 2011 profit of . 5,376 crore, which was the company’s highest-ever quarterly profit hitherto.
The company’s petroleum refining segment is set to drive the profit growth, thanks to improved gross-refining margins. “We estimate RIL will report gross-refining margin of $10.3 per barrel against $9.2 in the March 2011 quarter, led by an increase in the product cracks,” said Motilal Oswal in its result estimate report. Other broking firms have estimated RIL’s gross-refining margins between $10 and $11 for the June 2011 quarter.
The petrochemicals division is expected to witness pressure as PE, PP and polyester margins remained weak during the quarter. How much gas RIL’s KG-D6 field produced during the quarter could be an important factor in determining its net profit. The Street is expecting the average production to be around 49 million standard cubic meters per day (mmscmd). However, there is a possibility of downside risk.
Although another record level, the company’s YoY profit growth has been seen slowing down over the past four quarters. The June 2011 numbers will be an extension of this trend. “The June 2011 quarter may be a slow-growth quarter with only marginal decline in E&P volumes and a slight decline in petrochemical EBIT being offset by a small increase in refining margins,” said a result preview report from JM Financials, which estimated RIL’s net profit to rise 15.9% YoY at . 5,621 crore.
In spite of the company achieving new record profit levels, its performance on bourses has suffered due to a series of negative news, including CAG’s adverse report on its KG-D6 capital costs. With the government finally giving a go-ahead for a substantial part of the RIL-BP deal last Friday, investor sentiment is likely to receive a big boost. A strong quarterly result will go a long way to help it sustain the positive sentiment.

L&T Fin Holdings’ IPO a Long-Term Value Buy

L&T Finance Holdings’ IPO valuations are almost at par with its peers. The company enjoys a better quality loan book, has higher margins besides and the advantage of L&T parentage. However, considering the general skepticism in the market about infrastructure and infra-financing companies, the IPO will be mostly appeal to only longterm investors and existing employees, who will get 2 discount. L&T Finance Holdings (LTFHL), a subsidiary of Larsen & Toubro is approaching the capital market with an initial public offering to raise up to 1,245 crore out of which 161 crore has been raised from anchor investors. This is in addition to an institutional share placement of 330 crore which the company raised earlier at 55 per share.
The company plans to use the proceeds of the issue to repay a 345-crore inter-corporate deposit to its promoter group (L&T) besides augmenting the capital base of L&T Finance by 570 crore and L&T Infra by 535 crore.

BUSINESS
L&T Finance Holdings offers a range of financial products and services across the corporate, retail and infrastructure finance sectors.
It also offers mutual fund products and portfolio management services through its whollyowned subsidiaries L&T Finance and L&T Infrastructure Finance Company. The company's focus is on infrastructure and rural India. It has established a strong reach in rural areas through 500 points of presence.
It has a high quality loan portfolio mainly comprising of funding of income-generating assets. Both L&T Finance and Infra have a credit rating of AA+ from ICRA and CARE enabling them to access funds at competitive rates.

GROWTH DRIVERS
The greatest strength of the company is the strong backing of its brand name and an experienced management team. LTFHL has a diversified loan book and strong distribution network with 837 points-of-presence across India.
Although its sources of funds are limited at present, the company has the flexibility to raise funds through various alternatives such as external commercial borrowings, securitisation, pension funds etc. This can enable it to maintain a low cost of funds in future.
The proposed IPO would allow the corporation to increase its loan book by at least 6,000 crore, or nearly 35% of its current loan book.

FINANCIALS
The NBFC registered a healthy net profit growth of 53% in 2011 on the back of 49% growth in net sales. Two-thirds of the total income came from asset financing activity while income from infrastructure financing contributed 30% for FY11.
LTFHL’s loan book grew 59% to 17,506 crore by the end of FY11 of which 65% was accounted by large ticket exposures and the balance 35% by retail loans.
The company improved its net interest margin (NIM) to 7.88% in 2011 as against 7.83% in 2010. It also brought down its non-performing assets (NPAs) at gross as well as net level from 2.42% to 1.11% and from 1.69% to 0.67%, respectively. Currently, the company depends on banks for around 60% of its borrowings. This could result in 50-70 bps pressure on NIM in FY12.

VALUATIONS
LTFHL’s book value per share will stand between 25.9 and 26.5 of the post IPO equity depending on the allotment price. Correspondingly, the price to book value (P/BV) ratio will stand between 2 and 2.2. This is in line with peers like IDFC and Reliance Capital that are trading at a P/BV of 2.0-2.25. LTFHL’s better asset quality and higher margins should prove attractive for IPO investors.

Decoding The Matrix

10 Things to Watch Out for When Investing in the Stock Market

Everyone wants his money to make even more money. And if you can do that without putting the principal at peril, it’s even better. But risk and reward are intrinsically linked, particularly in the case of equity markets. The ET Intelligence Group decodes some of the tricks of the trade to help an investor avoid common pitfalls and make a more informed decision

Equity investments are touted as the best form of long-term investments. But the twists and turns on the route to the stock market are sure to put off many a lay investor. Interesting trading patterns tell a story to an experienced hand, but it may all be Latin and Greek for a newcomer. He may learn only by making mistakes, some of them costly.
ET Intelligence Group throws light on a few of these myths, interesting trends and market gimmicks. Not only can they save an investor from investment disasters, but one can also use them to make significant gains

1 The Big Public Offer Impact
What is common to Reliance Power, Coal India, Reliance Petroleum and DLF other than the fact that they were the four biggest IPOs to hit the Indian stock market? The answer lies in what happened after these offers. All four IPOs were followed by a correction in the overall stock market. Coincidence? A strong one, if at all it was that.
Though the Reliance Power IPO mess is well-known, not many would have linked the corrections that followed the other three IPOs. The BSE Sensex corrected 9% post the Coal India IPO, 7% after the DLF offer and 16% after Reliance Petroleum’s IPO. (See chart: The Great Fall).
These facts lead us to believe that there is a link between overall market performance and a large public offer. One thing is certain that these IPOs, when over-subscribed several times, suck out the liquidity from markets. For example, Coal India’s IPO was over-subscribed 15.2 times. This locked up nearly 2.34 lakh crore for over two weeks till allotments were made and shares started trading. Such a huge strain on the liquidity front is bound to result in markets going down. Many bac

k the view that big IPOs come typically when the market valuation of the company is at a peak, and hence a correction is only natural. At the same time, there is no dearth of people who deny any linkage between the two and calling these instances as pure coincidence.
Nevertheless, one cannot deny empirical evidence that a correction follows a large IPO. The next big public offer expected to hit the market is ONGC’s followon public offer or FPO of around 11,500 crore. Once the FPO dates are announced, an investor may go short in index futures to benefit from a possible correction.

2 Insider Selling
If you had not figured out the last one, try this. What is common to GTL, Satyam and Orchid Chemicals? Company insiders sold stock in large quantities in the open market before the share price crashed. The trend was visible in all four companies.
Promoters and key employees have access to information that an ordinary retail shareholder may not have. When such investor groups start selling their shares, it should send an alert signal. Don’t be surprised if a company’s stock falls sharply after they have offloaded a large chunk of their stake in the company

3 Share Buybacks
Announcing a share buyback from the open market is one way a company tries to protect its share price in a weak market. These open market share buybacks are typically open for a long time, give a ceiling price below which the company would buy shares and earmark a specific sum to be expended for the purpose. This sends a signal to the market that the company would be ready to buy if the price falls below a certain level, thereby helping the share price. For example, Reliance Infrastructure has completed three such buyback schemes and is now in the midst of a fourth one. Similarly, Sasken Communications carried out a buyback in 2010 after a not-too-impressive performance for a few quarters and couldn’t succeed in gaining investors attention.
However, this is entirely a voluntary exercise and there is no compulsion on the company to buy shares if the price falls below the acceptable limit. Also, the company can discontinue the scheme at any point in time. Thus, in practice the buyback offer wouldn’t do anything more than boosting shareholder sentiment. In fact, the practice has already lost its sheen and fewer companies are taking this route to protect their market value

4 Delisting Trick
When it comes to the game of buying low and selling high, one can’t blame the promoters if they wish that the value of their companies falls before they move to buy it out. What typically happens is the exact opposite. A delisting or buyback rumour could drive the share price skywards. Still, seen in retrospect, there appears to be a trend that immediately before going in for a delisting the quarterly earnings numbers start to deteriorate.
This trend was visible in companies such as Binani Cement, Sulzer India, Parry Agro, GE Capital Transportation Financial Services and Rayban Sun Optic that have delisted in last couple of years. Even in the case of Nirma, which got delisted in May 2011, the FY11 profits were down 69% yo-y, when other FMCG players showed a decent profit growth.
There are notable exceptions. Atlas Copco and Micro Inks continued to give substantially strong earnings growth numbers till their delisting. Of course, they had to pay dearly to convince retail shareholders to tender their shares.

5 Timing The Bad News
“All publicity is good publicity” may be the motto for a few, but there are others who would use every possible way to stay out of the public eye when things are bad. This becomes evident if one closely follows the results calendar. A vast majority of corporate results that are published on the weekend or on the last day of the results season are typically bad. On the contrary, the initial results of a season are invariably good.
The inverse of this fact infers that companies about to report bad earnings tend to announce them late on Friday evenings, weekends or towards the end of the results season. Why would they do that? To avoid media attention and a negative impact on their share prices.
Not that it helps their valuations when the markets open next. However, the cooling off period of a couple of days certainly helps in muting the impact.
One classic example of this is HUL. In 2009, the company posted three out of four results on weekends. The ones posted on weekends were perceived to be very disappointing, while the one, which was perceived to be good, came out on a Tuesday. Another example of this is ICICI Bank. Its December 2008 result was perceived to be bad with a 35% decline in its earnings. This result was released on Saturday evening, the first day of a long weekend. A recent example is Reliance Communications. Its financial performance was perceived to be below expectation for the previous three quarters and each time, whether it was a coincidence or not, results were declared on a Saturday evening. While one shouldn’t take it for granted, a company scheduling its results board meeting on a weekend or delaying it for no apparent reason could be a hint of insipid earnings performance

6 Holding Companies Theory
Traders and analysts often recommend stocks of holding companies or of companies with assets such as land, property etc. The rationale is that the value of these assets is much higher than the market capitalisation of these companies. But to what extent does that impact how the market values such companies.
Not much if the value remains locked up. A number of holding companies are traded in the stock market — UB Holding, JSW Holding, Bajaj Holding, Kalyani Investments etc. These are companies from different business houses and hold stakes in various group companies. If one were to value their investments at current market prices, their market capitalisation appears to be extremely cheap. However, this is natural as the companies being part of the respective promoter groups are highly unlikely to sell any part of their investments. Therefore, due to this lack of marketability these holding companies will always trade at a substantial discount to their net asset value.
At the same time, a company like Tata Capital, which is in the investment business, but holds investments in varied listed companies outside the Tata Group, tends to attract a lesser discount, as it sells its investments from time to time.

7 Seasonal Flavours
Somesectors gain more market attention in certain seasons like agrochem before monsoon or fertliser and education etc before the Budget.
The volatility in equity markets, which might appear chaotic, has some method to it. Just like the weather, equity markets and various stocks have seasons of their own. Knowing that a January or September is typically good for the markets and March and May are bad is a helpful piece of information.
January and February typically see Budget-sensitive companies garnering market attention. This includes names like Navneet Publication, Educomp, Jain Irrigation and the fertiliser sector. Companies working for the railways sector — Kalindee Rail, Texmaco, Titagarh Wagon etc - are also in the limelight ahead of the Railway Budget.
The summer season with all its load shedding finds the power industry attractive, which can charge higher rates for merchant sales. As summer ends and monsoon is about to start, the agro-input sectors such as fertiliser, agrochemicals and seeds gain market favour. The post-monsoon harvest season, which is full of festivities and increased consumer spending, finds cement, construction, paints, consumer durables, retail etc sectors gaining currency.
An investor can benefit from these trends if he can invest in companies sufficiently before they become the market flavour and exit when they are at top of their valuations. This investment strategy is also known as ‘Tactical Asset Allocation’.

8 Big IPOs: The Feel-good Factor
Initial public offers (IPOs) are much-publicised affairs for any company seeking funds from the market for the first time. Of course, the hullabaloo is much more when the IPO is from a large company. It is interesting to note that such large IPOs almost always help improve the valuation of the entire sector. DLF is a classic example. Its IPO was preceded by a rally in all real estate stocks. Gitanjali Gems’ IPO in February 2006 also had improved the valuations of gems & jewellery firms. Cox & Kings IPO in December 2009 had pushed up Thomas Cook’s market value.
When hydropower major SJVN’s IPO came in May 2010, its peers NHPC and JP Power Ventures witnessed renewed investor interest. Similarly, the recent IPO of Orient Green Power helped valuation of its peer Indowind Energy.
A large company would always like to charge a premium for its IPO from investors looking to participate in its growth story. This has a rub-on effect on the already listed companies in the sector, which see their valuations improve. In such scenarios, staying invested in companies from industries that are likely to see major IPOs coming in near future could be a good idea. Of course, one can limit the applicability of this observation to bull rallies.

9 Dividend March
Once the March quarter kicks in, it is common to see a flurry of advertisements relating to equity-linked savings schemes or ELSS. This is a typical gimmick adopted by the mutual fund industry to attract new customers looking for avenues to save tax. An investor would be attracted by schemes that give out maximum dividends.
However, unlike companies, where dividend implies a share in the profits of the company, a dividend payout in the case of mutual funds is simply a portion of capital appreciation returned back to the investor. There is thus a corresponding decline in the value of the investment (net asset value) in the mutual fund scheme equivalent to the value of the dividend declared by the scheme.

10 Small Wonders
When a company is about to raise funds from capital markets for the first time, the only information potential investors have is through its prospectus. Many a time one finds that financial numbers of such companies have suddenly improved in the financial year prior to the IPO. Unfortunately, this growth trajectory fails post the IPO.
Surely any company would like to list when the going is not just good but great so as to get the best valuation possible. However, the additional capacities for which the IPO funds are raised take time to materialise. This could be a possible explanation of this trend.
On the other hand, there are companies that try to push up sales by extending excessive credit to pump up the pre-IPO profit numbers. A check of the cash flows and working capital can reveal the reality.

ESSAR OIL Cash Flows Promising but Higher Debt a Worry

It was mainly strong refining margins that boosted Essar Oil’s profit margins and profits in the June ’11 quarter. After years of losses, the company's prospects appear promising with improving cash flows and projects achieving critical mass. Challenges still remain, but the achievements so far indicate that the company could overcome them soon.
Improved global refining scenario during the June ’11 quarter helped Essar Oil improve its gross refining margins to $7.38 per barrel against $5.79 a year ago but lower than $8.15 in the quarter to March ’11. Operating profit margins improved to 5.8% from 3.8% last June — a doubling of operating profit. Better working capital helped lower the interest cost burden by 5%, while depreciation stagnated. Considering the write-back towards minimum alternate tax or MAT, net profit was . 469 crore. The company’s key projects are now in the final lap and will be commissioned in FY12. Its 14-million-tonne refinery is being expanded to 18 million tonne by December ’11, which will also make it more complex and enable it to process cheaper varieties of crude oil and thereby boost margins. Its CBM block in Raniganj is ready for commercial operations with the potential to generate annual revenues over . 1,250 crore by FY14 when the full potential of 3.5 million cubic meters per day is reached. For a company that embarked upon corporate debt restructuring in FY05, this was the first time it posted four consecutive quarters of profits. This provides the company confidence to expedite its exit from corporate debt restructuring before March ’12. The company is now being valued almost 20 times its profits for the last 12 months.
A high debt burden still remains a key concern for Essar Oil which paid a steep . 1,214 crore towards interest in FY11. Still, its 2:1 debt-equity ratio at the end of FY11 was the best in the last 10 years. Essar Oil is now trying to raise $1.5 billion in external commercial borrowings to pare its interest costs.
A key positive for the company all along has been the tax benefits it enjoys. Essar Oil is eligible for sales tax deferral benefit worth $1.8 billion by August 2020 and a seven-year income tax holiday under section 80-IB of the Income Tax Act.

Prudence Pays: 100 Cos Sit on a Big Stack of Cash

CASH PILE OF BSE 500 COMPANIES RISES 17%

Afifth of Bombay Stock Exchange’s 500 constituents, including staterun Bharat Heavy Electricals and Lakshmi Machine Works, are sitting atop huge cash piles, thanks to prudent business practices that filled their coffers when the rest are squeezed by rising cost of funds.
Total cash with companies in the BSE 500 index, which represents 93% of the total market capitalisation of BSE shares, has risen 17% in the past fiscal, though the number of cash-rich companies has fallen to 100 from 116 a year earlier, a study by ET Intelligence Group shows.
The myth that most capital goods manufacturers are burdened with debt and higher funding costs in times of rising interest rates is also shattered with BHEL, Bharat Electronics, Siemens and Alstom Projects drawing comfort from their fat cash reserves.
For many of these, earnings from treasury operations are substantial and often these investment gains reflect in their net profit during tough times. These are also used to hand out hefty dividend payouts.
“Most corporate treasuries have large investments in liquid debt funds,” Tarun Bhatia, director (capital markets), Crisil Research, told ET recently. “Only companies with large surpluses will take some risk and invest in equities. These longterm investors expect just 14-15% returns on equity investments.”
The total cash pile of BSE 500’s Richie Rich has grown to . 128,500 crore from . 110,000 crore last year, excluding banks and NBFCs. NMDC, Infosys, Oil India, BHEL and Coal India are the top five companies in terms of cash balances adjusted for debts.
It is not just drugmakers and FMCG companies which are on top of the heap, even IT and extractive industries — mining and oil exploration — are on a strong footing. Holding Cash in Excess of Capital Needs
Many companies, such as BHEL, Bharat Electronics, Siemens and Crompton Greaves, hold substantial cash much in excess of what they need for capital investments or working capital requirements. BHEL, for instance, has always maintained huge cash reserves, which now stand at more than . 9,500 crore.
This surplus has prompted the state-run capital goods maker to attempt a model that the US conglomerate General Electric has mastered — a finance company that boosts sales. BHEL plans to float an NBFC that will lend to buyers of its equipments.
Bharat Electronics Limited bagged a large number of orders last year. For each order, it received about 15% of the contract amount as advance. This inflow has almost doubled its cash balance since FY10 to more than . 6,500 crore. The funds would be invested in modernising equipment.
Within this class of rich is a subclass of super rich companies. At least seven companies held cash in excess of their debt and net worth put together. These companies are able to work on high negative working capital, i.e., their suppliers or customers are funding them.
Leading these companies was Bharat Electronics, which ended FY11 with cash of . 6,519 crore — 1.3 times its total assets of . 4,346 crore. Others in the pack are Alstom Projects and Engineers India, who join the traditionally cash-rich Castrol, Colgate-Palmolive, GSK Consumer and GSK Pharma.
Having a little extra cash is always helpful during times of turbulence, as is the case now. But when a company’s capital is invested more in building a bank balance than in businesses, it could be worrisome. A number of them, however, have their strategies planned for the cash they carry.
For example, Infosys, which has a bank balance worth more than half of its total assets, follows a policy of carrying a year’s expenses in bank. The company, which spent Rs19,399 crore on its operations in FY11, has a cash pile of . 13,665 crore. In contrast, Hexaware maintains cash for potential acquisitions. The high cash balance of capital goods firms helps them provide payment flexibilities and win orders.
Still, several companies, particularly public sectors majors such as Oil India and Coal India, hold cash positions much in excess of their capital expenditure for the next few years. Container Corporation, for example, has a capex plan of . 600 crore for FY12 while its cash reserves exceed . 2,360 crore. Similarly, Oil India, which has a cash balance of over . 10,700 crore, plans to invest just . 3,200 crore in FY12.

Turn Around STARS: To Hell & Back

It is a tough game, and the road to success is littered with markers for those who fell by the wayside. Some did not have it in them. Others made it big, but could not weather the storm. But out there is a rare breed of companies who made it back after being down and out. Investors could bet on this resilient group that holds the potential to create immense wealth, says the ET Intelligence Group

When the going gets tough for a company, it is natural for its stock price to react negatively. It could be one major problem or a fatal cocktail -- mounting losses, a surge in debts or erosion in market value. And the result could be disastrous. Whether the company tides over the hurdles and stays in business or goes bust depends on the nature and quantum of the adverse pressures. Many fail to hang on. But a few make it back after an arduous struggle that at times seems like a lost battle. Investors would do well to watch out for these turnaround stars that hold the promise of becoming multi-baggers.
But don't take things at face value. Before betting on a turnaround candidate, an investor should always try to figure out the reasons behind the target's ailment and what it is doing to cure it. A company could have made a costly acquisition or been too aggressive in its growth plans. It could be saddled with a bad product or have just been in the wrong place at the wrong time — taken down by an industry-wide problem. An investor should study the steps the company has taken or is taking to come out of the tight spot before putting any money in it. After all, the number of failures is always larger than those who live through the darkness to see the light at the end of the tunnel. Get it right, and you can rake it in. The right pick is sure to earn you high rewards in the end. For example, the scrip of Shoppers Stop touched a high of around 300 in January 2008 before crashing to 40 after it faced two consecutive years of losses in FY08 and FY09. However, after the company turned profitable it has regained all its value and is currently trading at 470. That's a return of almost 12 times from its bottom level. Pantaloon Retail is another such example. The company saw strong growth till 2005. It diversified into multiple businesses such as insurance, logistics and financial services. Since then, the company's profits gradually declined and eventually it became a loss making company in 2008. The key for an investor is to identify a 'real' turnaround company. So how does one do just that? There's no magic formula, but we will list a few things that an investor should keep in mind. We will show you how to separate the real gems from the stones and evaluate what can lead to real turnaround in a loss-making company. During a period of loss, generally all companies move to reduce costs. Depending on the quantum of loss, a few may also go in for financial restructuring and sale of non-core assets. While cutting costs and rationalising sales are measures adopted to correct minor problems, major and chronic problems need total restructuring. For a company that has amassed a large quantity of loans that hinder its performance, a debt restructuring can lend a hand. For example, last year Kingfisher Airlines underwent a successful debt restructuring that converted a chunk of its debt into equity and eased repayment terms on the rest. The company is still to report any profit, but the restructuring will help to ensure it does not choke on interest payments.
It helps to bet on companies that have a healthy business model and strong parental support. For example, Tata Motors and Tata Steel — the two flagship companies from the Tata group turned loss-making in FY09 and FY10, respectively. However, their strong fundamentals ensured that they remained in the red for just one year.
Loss-making companies that are likely to return to profitability always intrigue value investors. The dilemma is when to invest in a potential turnaround candidate. Enter late when the turnaround is confirmed and most of the juice would have already vanished; enter early and the inherent risk of a failure is too high.
In this article, we have tried to look at a few companies which have posted some profits after a series of losses and hence can be considered likely candidates for a turnaround. However, they come with varying degrees of uncertainty. An investor needs to understand that some challenges still remain and the sustainabiliy of initial signs of profits will depend on getting several things right.

PUNJ LLOYD
From a 300 crore loss year ago to a 17crore profit that Punj Lloyd reported for Mar ‘11 quarter marks its turnaround. Higher other operating income and higher revenues of its overseas subsidiary made this possible. It is carrying a huge order book, but is unable to translate it in earnings growth due to unresolved issues with its clients. But the turnaround has been acknowledged by the markets as its scrip gained 22% in last one month outperforming its peers. Consistent execution of orders in the coming quarters is crucial for the company.

DISH TV
Despite being the first entrant in the direct-to-home (DTH), Dish TV has been making losses due to slow customer adoption of digital services and high equipment costs. This is changing fast with consumer awareness rising. It has been able to differentiate from the competition thanks to its unique offerings such as the introduction of 30 HD (high definition) channels. It has consistently reduced its quarterly losses and is likely to post first profits in FY12. Govt’s push for rapid digitisation of cable services provides it with sustainable growth opportunity.

SUZLON ENERGY
After seven quarterly losses, Suzlon Energy finally reported a profit of 431 crore in the March ‘11 quarter. Still, 109 crore of it came from accounting adjustments and 220 crore from forex gains. It carries a huge order book of 30,100 crore and projects 44% revenue growth in FY12. Yet challenges are huge. 12,500 crore of debt burden means its interest cost will remain high. FCCBs issued in 2007 need to be repaid in FY12. Nearly 1,000 crore of debts have remained unrecovered for long. Passing these hurdles is key to sustainable profitability.

WOCKHARDT
Wockhardt returned to profits in FY11 after huge losses for three consecutive years. A series of high-cost overseas acquisitions between FY03 and FY08 was . A huge debt position and derivative bets that went bad almost sank the ship. It has undergone a major financial restructuring and sold various businesses. Although the company is generating operating profits, several ongoing litigations against it are a key risk. One legal battle has blocked its plans to sell off the nutrition business, which would substantially reduce its debt. The company's ability to address these issues, while growing businesses holds the key to its sustained profitability.

SPIC
Breaking its long run of losses Southern Petrochemicals Industries (SPIC) posted a Rs 82-crore net profit in FY11 primarily due to disposal of assets. But the company had posted healthy operating profits in the last quarter of FY11. It has successfully undergone a debt restructuring and the promoters also infused Rs 50 crore in FY11. The company commissioned its urea plant in October 2010 which has boosted its revenues. Negative net worth and a huge debt burden are key challenges, which SPIC needs to cope with to report sustainable profits in coming quarters. The scrip has already gained over 60% in last three months.

DCM SHRIRAM CONSOLIDATED
Most business segments of diversified DCM Shriram Consolidated faced tough times in the first three quarters of FY11. Its revenues have stagnated over last two years. The management restructured its operations to improve profitability. It closed down a few agri-retailing units, improved inventory management and is expanding PVC capacity. Improved realisations from its farm solutions business and higher sugar prices enabled it to turnaround in the March 2011 quarter. However, the company’s ability to sustain its profits in coming quarters needs to be seen.

SPENTEX INDS
Unfavourable government policy on yarn exports impacted yarn-maker Spentex. Its net profit in FY11 came after three consecutive quarters of losses. It also brought down its debtto-equity ratio to 5.1 from 6.3 last year. The scrip is trading at 2.8 times its profits of last 12 months, which is inexpensive compared to peers. Overall increase in demand from the textile industry is the key positive.

SEAMEC
Dry-docking expenses and low utilisation rates resulted in five quarterly losses for Seamec. Still it remains debt-free with cash representing almost two-thirds of its 310-crore market capitalisation. The full availability of all its vessels in FY12 will be a key positive, which is expected to help it turn profitable once again. Overall weakness in charter rates remains a key challenge.

ONGC : With Reduced Subsidy Load, a Clear Flow Chart

ONGC is trading at attractive valuations, and headwinds for the company are receding ahead of its FPO. It should also gain from rising profitability of its subsidiaries and new projects that are close to completion

ONGC has become an attractive investment candidate after the fall in its valuations over the last year, and more so in view of recent developments. The government has finally taken steps to rein in the industry’s under-recoveries. This benefits ONGC as it bears the largest subsidy burden. The company’s tussle with Cairn India over royalty burden of Rajasthan fields was resolved in its favour. Besides, the government is expected to provide some clarity on ONGC’s subsidy burden ahead of its long-awaited follow-on public offer (FPO).
Over the last 12 months ONGC has lost 15.1% of its value, against a 5% growth in the Sensex. But the company was able to grow its earnings 15.7% in FY11, in spite of doubled up subsidy burden. As a result, ONGC is now trading at around 10.6 times its 12-month consolidated earnings as against 14.4 a year back.
The government recently raised fuel prices and reduced taxes to lower the industry’s under-recoveries. While this was done primarily to improve the liquidity position of oil retailing companies, ONGC’s potential burden has come down substantially.
ONGC ends up funding nearly 28% of the industry’s overall under-recoveries. Needless to say, if overall under-recoveries come down, ONGC directly benefits.

GROWTH DRIVERS
After stagnating for several years ONGC’s aggregate production of oil and gas showed a marked growth in FY11. This was driven by its subsidiaries and joint ventures. However, the company’s standalone production, too, showed signs of improvement in the last quarter of FY11.
ONGC Videsh (OVL), the company’s wholly-owned subsidiary, reported 6.5% production growth in FY11 to 9.45 million tonne thanks to the commissioning of the Odoptu field in Sakhalin, Russia. Its net profit for FY11 grew 29% at 2,691 crore. ONGC’s discoveries off the East Coast are expected to commence production from FY12 in phases. It has lined up capex of 31,150 crore for revamping and modernising existing fields and infrastructure. An additional 24,500 crore will be spent on developing new fields.
ONGC’s joint ventures are set to complete two mega-projects in downstream industries in FY12. These are the aromatics complex at Mangalore and the 725 MW gasbased power plant in Tripura. Its 1.4-million tonne petrochemical complex in Dahej under the name ONGC Petro-additions (OPaL) will be completed in FY13.
Cairn India agreeing to bear its proportionate burden of royalty is potentially worth 2,400 crore for ONGC in FY12. Also, the government finalising some formula to work out ONGC’s quarterly subsidy burden will bring transparency and help re-rate the stock.

FINANCIALS
ONGC has always been a cash-rich, debt-free company. Over the last eight years, it has shared nearly 1.25 lakh crore of the under-recovery burden. This has restricted its annual profit growth to single digits. Still it remains India’s single largest profit-making company at 22,456 crore for FY11. The feat was achieved thanks mainly to the refund of 1,898 crore from the gas pool account. The subsidy outgo at 24,892 crore was more than twice that of last year.

VALUATIONS
Its peers Cairn India and Oil India are trading at a P/E between 9.2 and 11.2. Being the largest of them all, ONGC’s P/E of 10.6 should be higher. A growing dividend return on the stock will make it even more attractive for a long-term investor. ONGC’s subsidy outgo in FY11 was 24,892 crore, more than double that of last year. Hence, if total under-recoveries decline, it makes a big gain