OVERALL OUTLOOK:

• The three major Telecom Sector Operators Bharti Airtel , Reliance Communications & Idea Cellular came out with their Q2FY10 results in October 2009.

• While Bharti Airtel & Idea cellular came out with results around analysts expectations Reliance Communications posted figures which were way below street expectations

• The companies witnessed muted growth on top line front with sales not growing as analysts expected. This was due to less than expected growth in subscribers and with a decline in ARPU’s and MOU’s over the last five quarters

• Among the key revenue segments Wireless services registered a less than expected increase with Passive Infrastructure(towers) business registering a healthy increase The companies witnessed muted growth in EBITDA margins but PAT margins registered a healthy increase mainly on account of cost cutting and decreasing interest costs

• The current outlook of the telecom operators looks bleak considering growth which was a major factor for the valuations which the companies used to command is bottoming out because we are witnessing teledensity of more than 100% in the major metros which are major revenue drivers, intensifying competition because of entry of new players like MTS, Tata DOCOMO and with companies like Uninor, Swan, Loop due to start operations existing operators do have to slug it out to fight competition of falling call rates and subscriber churn

• Increasing competition and muted growth has made telecommunication a matured play and with the rural market being a low margin segment the rural growth story will not command higher valuations and with new services like 3G and Wimax being delayed due to regulatory hurdles the present outlook for the industry doesn’t looks favorable and with Mobile Number Portability (MNP) due to come there would be a churn in subscriber base making it all the more difficult for the existing players

• Our analysis concludes that declining sources of revenue, a declining trend witnessed in ARPU’s and MOU’S, saturation of urban customer base, increasing competition and regulatory hurdles makes telecom an unfavorable play to be in at the moment and until there is a clear picture on revenue front which would come out after 3G auctions and with the regulatory hurdles sorted out any valuations made for these companies would be unjustified so we would suggest staying away from this sector even though all major players have seen their stock price tumbling by 30-50% and with most of the damage already being discounted

• We strongly believe that Bharti Airtel is the only stock in the sector which is to some extent suited to investment and one can add the stock to their portfolio since it would benefit with entry into the 3G spectrum (largest 2G subscriber base) and value unlocking from Bharti Infratel and Indus Towers

• ARPUs have declined continuously with increasing competition leading to price wars
• MOUs have along being declining with saturation of high usage metro circle and entry into the low usage rural circles
• Bharti and Idea’s market share has declined and Reliance Communication’s has increased. However this is mainly on account of entry into the GSM spectrum
• All of this has lead to a slowdown in revenue growth, however the operating margins are maintained on account of reduction in advertising expenses and interest cost

Author: Rahul Sonthalia, Analyst, Kredent Group

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Company Description

Hawkins Cooker Limited is engaged in the manufacturing, trading and selling of kitchenware. The products manufactured by the Company include pressure cookers, idly stands, cookware and others. It sells kitchenware under the brand names HAWKINS, FUTURA, MISSMARY

Market Data as on 03.11.2009

PRICE PERFORMANCE (%)

FINANCIALS

RESULT HIGHLIGHTS:

• Hawkins declared its 2Q09 results on Saturday.
• The net sales for the quarter ended September 09 increased by 26% to Rs 76.23 cr from 60.74 cr.
• Its net profit increased by a robust 124% to Rs 10.11 cr as compared to Rs 4.51 cr, YoY
• Its EBIT margin increased by a strong 949 bps and this is mainly on account of a fall in its raw material costs as     compared to sales from 34% to 25%, YoY
• Since the company is currently operating at only around 60% of its operating capacity, its increase in sales is not because of an increase in additional depreciation expenditure, which is also leading to margin expansions
• Company’s EPS grew by around 125% to Rs 19.1 from Rs. 4.51

Investment Rationale

• Well established brand name
• The company has a low capacity utilisation being 31.5% in FY09 and an average utilisation of 25% in the last 5 years. Thus no future capex is required to fuel the growth in demand
• With growing brand aspirations among people and rural development to fuel demand the requirements in this industry are bound to grow in the near future
• The company has been maintaining a very healthy return on Equity from the last 5 years. Its ROE has grown from 26.2% in 2005 to 81.8% in the year 2009
• Cookware industry has always been associated with a stable growth rate which has reflected in the share prices of the company over the years
• The company has been growing the dividend payment every year and its dividend yield stands at around 4.8%
• At the current market price of Rs 522 the stock is currently trading at a trailing twelve month P/E of around 12, despite its earnings growing at an average of around 60%, over the last four quarters and good dividend payment track record and a dividend yield of over 4%

Hence, we maintain our BUY call on the stock with a year DDM based price target of Rs 625.

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Price performance

Reliance Industries Market Data as on 29th October 2009

Financials

Reliance Industries Ltd. declared its second quarter results today. The results came in line with the Bloomberg consensus expectations.

RESULT HIGHLIGHTS:

• Reliance’s standalone net profit fell by around 6% YoY, to  Rs. 3,852 cr. from Rs. 4,116 cr. This was mainly on account of a lower gross refinery margins (GRMs)
• The total turnover rose by around 5% YoY, to Rs. 46,848 cr from Rs. 44,688 cr.
• Its petrochemical segment sales are down by around 14% YoY at Rs. 13,340, while the refining segment revenues remained flat
• Its turnover from the Oil &  Gas segment rose on account of ramp up of the gas production from the KG basin
• Company’s GRMs stood at US$ 6.3/barrel for the half year and US$ 6.0/ barrel for the quarter ending 30^th September, 2009 which is one of the key causes of disappointment given the complex nature of its refinery
• Its operating margin improved by around 90bps from 15.5% to around 15.4%
• Depreciation cost for the company jumped 92.4% to Rs 2,432 crore. This is mainly on account of higher depreciation in Oil & Gas and Refinery & Marketing business
• Its other income jumped by around 316% and there was substantial gain on the inventory front too
• For the half year ending September 2009 the EBIT margin from its refinery business fell to 4.1% as compared to 8.4% in the previous year mainly on account of over capacity with the addition of SEZ refinery and lower demand at the global level
• Even though the half year EPS is only around Rs 46 we believe it to touch around 110 levels for the full year on account of further ramp up of the gas production

Experts on the street believe that the numbers are disappointing as per their estimates and on account of lower margins and higher other income and they expect the stock to test Rs. 1900 levels.

Author: Rahul Sonthalia, Analyst, Kredent Group

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