Archive for April, 2010

Greece Crisis: Is Spain the next Greece??

PIGS as the financial media call the four countries: Portugal, Italy, Greece and Spain are one of the biggest risks to the current global financial stability. When much of the attention is grabbed by the troubled Greece, the Spanish economy is in reality in a position worse than that of the Greece.

While other European nations like France and Germany — and even Britain — are beginning to show signs of economic growth, Spain remains stuck in recession. Spain is the only G20 country that remained in recession in 4Q of 2009 and the IMF forecasts that it will remain so till 2011.

Some of the most worry-some statistics from Spain, which clearly highlights the risks are:

  • Unemployment of around 18% while the average for EU is only 9.5
  • Although lower than average Debt to GDP ratio, it has doubled in last one year, etc

There are some noted economists who believe that it will take Spain 7-8 years running the same amount of deficits to become the next Greece, however others say that the crisis is much serious than it looks at the face.

Hence, I believe that Spain’s problems coupled with debt issues of other EU countries poses a serious threat to the financial markets. We can expect more sovereign rate cuts like what has happened to Portugal and Greece last Tuesday.

Author name: Rahul Sonthalia, Research Head, Kredent

Annual Monetary policy 2010 – Highlights

RBI Governor Dr D Subbarao announced the annual monetary policy on Tuesday. RBI seems to have taken a more dovish stance than expected. Many analysts and market participants had expected a 50 bps hike in the policy rates. As expected, RBI took cognizance of the fact that inflation seems to be moderating and has opted to raise rates in steps rather than at one go. Inflation is the primary concern but at the same time it needs to ensure that high policy rates do not become a hindrance for growth. Following are the highlights of the monetary policy. Equity markets along with Government securities bounced back from the falling spree of last few days following the announcement of the policy.

  • CRR hiked by 25 bps; to absorb Rs. 125 billion from the system
  • Benchmark Repo and Reverse Repo rates hiked by 25 bps each to 5.25% and 3.75% respectively
  • SLR and Bank Rate kept unchanged at 25% and 6%, respectively
  • Bank credit growth expectations increased to 20% in fiscal 2011, compared to 17% in fiscal 2010
  • Bank deposit growth expectations increased to 18%, marginally higher than 17% reported in fiscal 2010
  • GDP forecast hiked to 8.0% with a positive bias for fiscal 2010-11 as compared with expected 7.2-7.5% in fiscal 2010
  • Inflation, as mesured by WPI, estimated to moderate to 5.5% by March 2011
  • Policy stance is to support “non-disruptive” growth in demand for credit while anchoring inflation expectations; to maintain an interest rate regime consistent with price, output and financial stability
  • Banks‟ investments in Non-SLR Bonds of infrastructure companies with residual maturity of more than 7 years allowed to be classified under HTM category
  • Provisioning requirement for sub-standard unsecured infrastructure exposures reduced to 15% from 20%
  • Scheduled Commercial Banks (SCBs) and Non Bank Finance Companies(NBFCs) with networth more than Rs. 10 billion to migrate to IFRS converged Accounting Standards by April 2013
  • Discussion paper on mode of presence of foreign banks by September 2010
  • Discussion paper on guidelines for new bank to be placed
  • Differential regulatory treatment for Core Investment Companies with asset size of over Rs. 1 billion

 Click here to read our projections of the monetary policy.

Sector View: Aviation

Indian Aviation Industry: When will it Fly High…?

Our expert Mr Rahul Sonthalia offers his advice regarding sectors you should invest in and where you should stay away from. Visit our Stock tips sections for company specific views on investing.

Hospitality and Aviation Industry performed below the potential in spite of their good days and later a move towards heavy losses were noticed due to competition & recession backed by cost curtailing techniques & restricted investments. An expected boom in the Travel & Tourism Industry is expected in next upcoming decade that will contribute Rs. 8500 billion to the GDP.

However, Government’s contribution to the Tourism Infrastructure sector stands around 0.1% with Rs.1050 crore in the Budget 2010. In contrast to other neighbouring nations, India seems to be an expensive nation in hospitality industry. However, currently they are offering budgeted category rooms but norms related to acquisition of licenses may hinder their process to promote the same sector.

The Aviation Industry on the other hand can be backed up by Government support by introduction of low cost carriers and speeding up Infrastructural Projects.

Weakening Head wings

  • Although Travel & Tourism Industry has gained much potential over last few years with increase in number of Travelers but it is still the Airlines Industry that finds traces of financial crises. to see rising credit costs for new planes, while hedging against fuel prices would become increasingly difficult as a result of the crisis
  • It is yet not clearly defined that how any rescue package will work for the airline unless it deals with big expenses such as rising credit costs for new planes & hedging against fuel prices would become increasingly difficult as a result of the crisis
  • Jet Airways has already taken up initials for Business Re engineering by converting up to two thirds of its capacity to its low cost services, Jet Konnect. Besides leasing out at least seven of its Boeing 777-300ER planes, even selling one to an Emirate in UAE
  • Company like Kingfisher Airlines saddled with high volume of debt canceled the proposal to buy new airbus instead are returning their leased A320 aircrafts With 15%, market Share currently Indigo Airlines has taken competitive advantage over other operators by paring with thrift conscious customer base & operating in limited sectors. It is expected to increase its business more at a decreasing rate with its competitor Spicejet

In the near future both Kingfisher Airlines and Jet Airways are expected to diversify their operations to international sectors with doubling the units of aircraft they are currently earned with. However, with increased number of operations, infrastructural drawback at airports may be a hurdle for swift operation. However, the year 2010 may be a good opportunity for the Tourism & Aviation Industry backed by government support and the Common Wealth Games in 2010.

Author name: Rahul Sonthalia, Research Head, Kredent

RBI Monetary Policy 2010

Monetary Policy Predictions

Finally the D-day is here..the day when RBI Governor Dr.D Subbarao will announce the monetary policy putting (or rather saying probably putting) an end to the much speculated move of RBI..will it hike the rates, which rate will be hiked and how much..before RBI announces the rates here is MoneyBol’s take on the same…

Inflation

As known to all, inflation is the biggest concern for RBI. In our  Inflation WPI March 2010 update a few days back, we saw that the inflation rate, has already crossed RBI’s target of 8.5%, The YoY inflation number of 9.9% for March 2010 is much higher compared to 1.2% observed a year earlier. The food articles have risen 16.65% since March 2009. The manufactured products too have sharply risen by 7.13% since March as compared to 2.29% observed a year earlier. Measures to alleviate pressures from excess liquidity that may exacerbate inflationary concerns have been taken by the Central Bank earlier. Liquidity had been curtailed via a CRR hike of 75 bps in the January Policy.

Mr. C.Rangarajan, Chairman, Prime Minister’s Economic Advisory Council (PMEAC) remarked “The RBI may want to wait for a few weeks to see if food prices will decline on account of the rabi output. Then it might want to tighten liquidity and if inflation still persists, then it will act on policy rates”

Going forward, inflationary concerns are expected to subside slowly with forecasts of normal monsoons, better crop production, good performance of manufacturing sector and lagged effect of monetary policy changes. On the upside risk of rising crude oil prices remain which could trigger inflation again.

Industrial Production

IIP is still growing at double digits and poses good for the economic growth of the country. However in the last month’s release, it seems that IIP seems to be moderating. As stimulus measures are wound up, IIP growth will be mainly driven by domestic demand. Thus in the coming days, IIP may not be able to post the god growth that has been observed post June 2009. A moderation in IIP growth may prevent RBI from taking aggressive measures.

Liquidity

Since the last 75 bps hike in CRR in February, liquidity has come down from the highs of +100,000 cr mark seen in January, but liquidity exists in the system to the extent of Rs 50,000-Rs 60,000 cr. RBI may want to retain some liquidity in the system in order to carry out the G-Sec auctions process smoothly, but on the flip side it will also not like the liquidity to fan inflation. Thus it would like to get rid of some liquidity from the system.

Conclusion

These are some of the most important considerations that will dictate RBI’s decision. A 25 bps hike in all the rates viz Repo, reverse repo and CRR. It is also expected that it may hike the rate by 50 bps. A 25 bps hike in CRR removes about Rs 12,000 cr of liquidity from the system. Considering this, I think that RBI may hike the CRR by 25 bps only and wait for hiking it by another 25 bps for some time. Regarding, repo and reverse repo rates, with RBI’s mid policy hike in March, it has given strong signal of a tightening stance. It will continue with the same. But at the same time, it will not like to derail the growth process by indulging in aggressive rate hikes. A 50 bps hike after the 25 bps hike in March, may pose threat to the nascent growth prospects. Recent developments have given early signals of a moderating inflation, thus RBI may hike the policy rates by 25 bps only instead of 50 bps and prefer to resort to mid policy hike for any further increases in the rates.

Author name: Praveen Bajaj, MBA (SCMHRD)

Valuation of Business: Analysis of environment and Industry

“Valuation of Business” (valuation of companies) is a series of articles launched by MoneyBol to apprise our readers about different aspects Valuation of business. In first such articles we will look at analysis of environment and the respective industry.

Analysis of environment

Before analyzing any business concern, it is very important to analyze the environment it exists in on the date of valuation. The aspects of environment which should not be overlooked in any case are:

  • Political
  • Social
  • Legal
  • Economic
  • Socio-political
  • Technological

These forces are largely outside the control and influence of a business, yet each one of them has the potential to impact the business both positively and negatively.

Analysis of industry trends

The kind of industry a business belongs to largely determines the valuation technique to be used. To assess the structure of any industry it is important to determine the strength of the following 5 forces:

  • Bargaining power of suppliers
  • Bargaining power of buyers
  • Threat of new entrants
  • Threat of substitutes
  • Rivalry among competitors

Together, the strength of these forces determines the profit potential in an industry by influencing the prices, costs, and required investments of businesses—the elements of return on investment. Stronger forces are associated with a more challenging business environment.

Also, the general price movement of the shares of companies of a particular industry largely influences the price movement of any individual company. Hence this factor must not be ignored before jumping into any conclusions.

Keep visiting our website for further articles which would take up company specific ananlysis for valuation.

Author name: Preeti Patawari, MBA- Intl Business (IMT)

India Inflation : WPI March 2010

  • The WPI for the month of January stood at 9.90% against 1.20% in the corresponding month of the last year. The same figure posted 9.89% in the previous month. The figure released was below market expectationswhich was pegged at around 10.37%
  • The figure registered increased at the fastest pace in 17 months, driven by higher food and fuel prices. The market was hardly moved by the figure and continued falling instead of rising as the inflation figure posted was below expectation.
  • Acc. to the Finance Minister Pranab Mukherjee, the numbers were on expected terms as they were expecting a double-digit figure. The RBI had already raised the interest-rates to curb the inflation and is expected to do so once again in the monetary policy in April’10.

Inflation Internals

  • The sub-group of primary articles rose by 14.10% y-o-y against 5.21% in Mar’09.It surged high due to jump in the food articles inflation by 16.65% on a yoy basis but it declined by 0.5% on a mom basis due to lower prices of cereals, fish-inland fruits & vegetables and tea. However, prices of stuffs like poultry chicken, pork, milk, jowar, barley and coffee moved up.
  • In the same sub-group, the non-food articles decreased by 0.82% m-o-m but increased 12.77% on a yoy basis. The monthly decline was because of lower prices of vegetable seeds, soybean, copra, raw silk and tobacco. The index for minerals rose by 9.79% y-o-y which was due to higher prices of barites, steatite, chromite iron-ore and asbestos
  • The second sub-group of fuel, power, lights and lubricants increased by 6.9% y-o-y from -6.0% in Mar’10. It registered a growth of 0.28% m-o-m due to higher prices of petrol, light diesel oil, aviation turbine fuel and furnace oil
  • The third sub-group of manufactured products registered an increase of 7.13% y-o-y from 2.29% in Mar’10. It registered a growth of 0.28% m-o-m mainly because of huge increase in the prices of food-products, sugar and rubber & plastic products. Prices of commodities like cotton textiles, man-made textiles and chemical products too moved in upward direction while wood products, paper products declined.
  • Food products declined by 1.15% m-o-m due to decline in the prices of edible food products. Sugar declined by 3.73% while there was a decrease of 0.96% in edible oils. Man-made textiles surged by 0.4% due to increase in the yarn and fibre prices Iron & steel decelerated by 0.31% m-o-m

I believe that the current WPI levels are way beyond the comfort zone of the Reserve Bank of India and a hike in the key rates (repo rate, reverse repo rate) in the April 20 monetary policy review is almost certain. This is also because of the fact that the growth in IIP and the profitability of India Inc. is also back on track, thus leaves ample room for RBI to hike the key rates by at least 50 bps without hindering the growth process.

Author name:Rahul Sonthalia, Research Head, Kredent

SRF Limited – A Good Value Pick

Through various articles in this (Stock Tips) category we are trying to answer one simple question – Where should you invest?

Our expert Rahul Sonthalia gives you a sound suggestion with strong background investment research for Value Investing

Growing at a 5 years CAGR of 22 per cent, huge capex lined up, 17 year dividend track record, high

dividend yield, and EV/EBITDA of mere 4x makes the company an attractive bet.The three business segments contribute the following amount to the total revenue:

  • Technical textile business: 50 per cent
  • Chemicals and polymers business: 34 per cent
  • Packaging film business: 16 per cent

The company has chalked out an impressive plan for future growth earmarking a capex of Rs 1,400

crore for expansion and backward integration which will be under the following heads

  • Setting up a 14,500 TPA polyester yarn at a cost of Rs 184 crore
  • Investing Rs 257 crore towards capacity enhancement
  • Investing Rs 40 crore for a dipping tyre cord plant
  • Investing Rs 92 crore for wind power project and Rs 60 crore for laminates

Apart from organic growth the company also isn’t shy of treading the inorganic route and has

recently completed major acquisitions and will look for further opportunities as well as a result of the acquisitions the company has become the 2nd largest player in the nylon tyre cord fabric (NTCF) segment which has good prospects considering the revival of the auto sector and the anti dumping duty imposed on NTCF being dumped in from China
What’s more to the company is the sale of carbon credits which is estimated to earn around Rs

271- 338 crore until 2014 which is an added bonus
Considering the financials the company trades at a P/E of 4.8x nd compared to Century Enka which

trades at a P/E of 6x and has given an interim dividend of Rs 7 having a dividend yield of around 7

per cent and thus makes it a good value buy.

Author: Rahul Sonthalia, Research Head, Kredent

Fixed Assets / Property, Plant & Equipment : Differences between Indian GAAP and IFRS

  1. Under Indian GAAP the terminology used is Fixed Assets  where as under IFRS it is termed as Property, Plant and Equipment
  2. Standard IAS 16 covers Property, Plant and Equipment (PPE) where as there are 2 standards for Fixed Assets under Indian GAAP i.e. AS-10 Fixed Assets and AS-6 Depreciation
  3. As per Indian GAAP subsequent expenditure related to item of fixed assets are to be capitalized only if they increase the future benefit from the existing asset beyond its previously assessed standard of performance where as under IFRS subsequent costs are evaluated on the basis of same recognition principles as that of initial cost for recognizing as item of PPE
  4. Under IFRS cost of major inspections should be capitalized where as under Indian GAAP there is no specific provision for the same.
  5. IFRS for PPE is based on component approach. Under this approach “Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separately” where as Indian GAAP does not mandatory require full adoption of the component approach
  6. Under IFRS the residual value and useful life of an asset be reviewed at least each financial year end and if it differs from previous estimate then it is considered as change in accounting estimate where as such a review is not required under Indian GAAP
  7. Change in depreciation method is considered as change in accounting estimate under IFRS where as under Indian GAAP it is considered as change in accounting policy
  8. IFRS requires an entity to choose either the cost model or the revaluation model as its accounting policy and to apply that policy to entire class of PPE. Kindly refer http://moneybol.com/treatment-of-tangible-assets under-ifrs/ Under Revaluation model; revaluation will be with respect to fair value of item of PPE. It also says that revaluation shall be made with sufficient regularity to ensure that the carrying amount does not materially differ from the fair value as at the balance sheet date where as under Indian GAAP revaluation approach does not specifically state adoption of fair value basis and also about frequency of revaluation of assets.

Judgment required in applying Depreciation rates and Method

When deciding on depreciation rates and method, most common factors that can be taken into account are expected rate of technological developments, expected market requirement and the expected pattern of usage of the assets.

Review of Residual life

When reviewing residual values, an entity would estimate the amount that it would currently obtain for the disposal of the asset after deducting the estimated cost of disposal if the asset were already of the age and condition expected at the end of its useful economic life.

How to do Component Accounting?

Firstly allocate amount to significant parts and depreciate separately. Then group together significant parts with same useful life and depreciation methods.

The remainder of the item is to be also depreciated separately. Remainder consists of parts that are individually not significant.

Regular major inspection performed can also be considered as component of an item of PPE and can be depreciated separately.

For Instance

Suppose Cost of Acquisition of Building is Rs. 100,000 allocated to following components:

Component Amount Depreciation period
Interior 10000 5 years
Restoration 12000 10 years
Elevators 15000 15 years
Building 63000 30 years

Above is an illustrative example. An opinion of expert valuers has to be sought for above information by companies for component accounting.

Replacement of components of PPE

  • Capitalize the cost of replacing major component as separate assets such as replacement of elevators
  • Net book value of old component is removed
  • Routine repair and maintenance expenditure is to be expensed as incurred

Author name: CA Shalini Tibe

Infosys Q4 results update

Infosys declared its fourth quarter result yesterday. The results came in line with the street expectations. Sales were around 1% above the Bloomberg consensus estimate, whereas the net profit was almost same as per the street estimates. Despite the fact the numbers are in-line with the street expectations; the disappointment is on the rupee guidance front, however the dollar guidance is positive.

Result highlights:

  • The consolidated net sales for the quarter ended March 10 was up by 5% to Rs. 5,944 cr, this was mainly on account of recovery the Financial Services Sector
  • Company’s net profit on a consolidated basis contracted by around 1% to a level of Rs. 1,600 cr, this is mainly on account of a higher tax out go. Since the company has provided a branch profit tax of Rs 232 cr for its overseas branches
  • Company’s operating margin remained fairly stable around 30.10% on account of increased utilizations
  • Company’s diluted EPS fell by around 1%, to Rs. 28. / share from Rs 28.29/share, a year ago
  • The company recruited 27639 employees in FY10 and has made 19000 campus offers for FY11
  • Its USD 200 million plus client was down from 2 in Q3 to 1 in Q4. Top 5 client’s contribution was down from 17.6% to 15.8% in Q4 versus Q3
  • Dollar Guidance:
    • In dollar terms, the company expects 16-18% growth in revenues for the next year i.e. FY11. It expects revenues at USD 5.57-5.67 billion
    • EPS growth at 4.3-8.6% for the next financial year
  • Rupee Guidance:
    • In rupee terms, company lowered its guidance for FY11. It expects EPS at Rs 106.82-111.28 per share and revenue growth of 9-11%

 I strongly believe that despite the fact the Infosys results and the guidance are muted the Indian IT sector will see out performance in the Indian equity markets as, due to expected rate hike by RBI, funds will start moving from rate sensitive sectors to rate defensive sectors.

Author name:Rahul Sonthalia, Research Head, Kredent

Indian equity markets:Overvalued Zone…?

Well some say that the Indian equity markets are all set to become mother of all the bull markets and from here there is no looking back. While others say that we are currently in a kind of over bought zone and a correction of at least 200-300 points in the Nifty index is definitely warranted.
While, what i see this is as the events holds the key to this. In the month of April there are three very important news flow that will shape the directions for markets:

  • The Q4FY10 earnings of India Inc.
  • Indian WPI for the month of March
  • RBI’s Q4 credit policy release on 20th April

While inflation is a cause of concern, given the way the food price and other key individual indices are behaving, this will also have a major impact on RBI’s Q4 policy guideline. I believe that there is a strong possibility of at least a 50 bps hike in the key policy rates. This I believe could be a problem story for the ever singing markets of ours.

On the other hand the corporate India is expected to show decent Q4 numbers, however much of this growth I believe is already factored into the stock prices and hence there is nothing much left on the table that should excite the investors. Infosys Q4 results tomorrow morning will set the stage for the rest of India Inc.

Hence, I strongly believe that instead of chasing the markets at a broader level, it makes sense to invest in good stocks with reasonable valuations.

As Mr. Lynch Says
“Often, there is no correlation between the success of a company’s operations and the success of its stock over a few months or even a few years. In the long term, there is a 100 percent correlation between the success of the company and the success of its stock. This disparity is the key to making money; it pays to be patient, and to own successful companies.” – Peter Lynch

 

Author name: Rahul Sonthalia, Research Head, Kredent

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