MUNDRA PORT & SEZ : A Value Pick !!!

Scrip Code: 532921 / MUNDRAPORT

CMP:  Rs. 129.00; Buy at Rs. 120 - 125 levels. Short term Target: Rs. 140, Medium term Target – Rs. 181; STOP LOSS – Rs. 118.70; Market Cap: Rs. 25,843.78 Cr; 52 Week High/Low: Rs. 170.45 / Rs. 110.00
Total Shares: 200,33,94,100 shares; Promoters : 155,25,38,715 shares –77.50 %; Total Public holding : 45,08,55,385 shares – 22.50 %; Book Value: Rs. 21.42; Face Value: Rs. 2.00; EPS: Rs. 5.45; Div: 45.00 % ; P/E: 23.66 times; Ind. P/E: 19.43; EV/EBITDA: 19.95.

Total Debt: Rs. 3303.01 cr; Enterprise Value: Rs. 29,146.79 Cr.

Mundra Port and Special Economic Zone LTD: The Company was incorporated in 1998 as Gujarat Adani Port Limited and renamed as Mundra Port and Special Economic Zone Ltd in July 2006, based in Ahmedabad, India. Mundra Port & SEZ Ltd engages in the development, operations and maintenance of Mundra port & port based related infrastructure facilities – including multi product special economic zone in India. The company’s port related services include cargo handling and other value added port services. It handles bulk, liquid and containerized cargo, single point mooring, storage, and transportation of cargo by road, rail and pipeline. MPSEZL is in process of setting up coal cargo terminals at Murmugao Port, Goa. The company is also developing a non- LNG multi-user, multi-cargo port facilities at Hazira under the sub-concession route The company also operates container trains on specific railways routes; and provides multi-model cargo storage and logistics services through the development of inland container depots at various locations. It operates a fleet of approximately 2517 vessels. Mundra Port and SEZ ltd is compared with Rizhao Port Co. ltd; Shenzhen Chiwan Wharf Holdings Ltd. Mundra Port and Special Economic Zone Ltd is a subsidiary of Adani Enterprises Limited from September 2010.    

Investment Rationale:

MPSEZ has approved the change in name of the Company from 'Mundra Port and Special Economic Zone Limited' to 'Adani Port and Special Economic Zone Limited' which would be changed at some later date subject to approval by the Registrar of Companies -Gujarat and subject to the approval of Shareholders of the company. India's port capacity lags behind from rapidly rising demand. This comes at a time when traffic for coal, crude oil/POL, and container is set for a sustained period of high growth. It is expected that MPSEZ to benefit from the supply shortage due to its surplus capacity and advantageous location. Mundra Port is among the largest beneficiaries of an increasing demand-supply mismatch in India’s port capacity. MPSEZ’s competitive advantages and attractive location plus connectivity provides a strong visibility of traffic for MPSEZ. It is noted that 90 % of MPSEZ’s estimated traffic comprises of coal, crude oil, and container. Of this, coal and crude oil are not likely to see any impact from global macro concerns, while container traffic should continue to benefit from the shortage of capacity on India’s west coast. Adani Group has ambitious plans for its three key business verticals – power, coal and logistics and with the inter-linkages between them will drive MPSEZ’s future investment and growth plan. MPSEZ has started handling coal for Tata power’s Ultra Mega Power Project in Q2FY12 (2 million tonnes handled in the current quarter). This has led to the coal volumes surging to 5.13 million tonnes growing more than 60 % YoY. MPSEZ has entered into port service agreements with Adani Power (for 4,620 MW) and Tata Power (for 4,000 MW) for transporting imported coal from Indonesia and Australia to their respective power plants. These power plants, when fully operational would require about 30 metric per annum of coal cargo to be handled at Mundra port (peak estimated by FY15E of 35 million tonnes). It is estimate that MPSEZ to handle 11 million tonnes of coal in FY12 at the new coal terminal for both Adani Power and Tata Power. While coal is already used as a firing fuel at more than 100GW of all power plants in India, the cumulative capacity of all-India’s power plants is set to rise by another 125GW+ over FY11 to FY17, such demand for power has led to rapid reforms in the power sector, the coal industry has not had equally big reforms, it is expected that the demand for coal will rise rapidly, though the supply will not rise as fast as demand will lead to demand for imported coal. Levy of MAT in the beginning of FY12 will lead to additional cash outflow in tax. However, the company is claiming MAT credit for the same such that the P&L impact will be neutralised. Mundra port currently has a theoretical cargo handling capacity of 165mn tonnes, though the actual usage might be limited to 135mn tonnes. Theoretically, the two single point mooring systems (SPMs) at Mundra can handle 50mn tonnes in total, but the respective refinery capacity itself limits overall requirement to 20mn tonnes pa. Hence, whenever the IOC and HP-Mittal refineries at Panipat and Bhatinda, respectively, are expanded, the SPM capacity should be able to handle the incremental volumes up to a maximum of 50mn tonnes in total. It is learned that the port’s capacity is set to expand to >200mn tonnes by FY15. Mundra port would be generating more than enough free cash flow from FY12F, which it could deploy for green field port opportunities both in and out of India. MPSEZ has already ventured for a few projects within India as well as acquired a coal-handling terminal in Australia. The slowdown in global trade has already hit container traffic throughout ports sharply. It is expected that EXIM container traffic across all ports to rebound at a CAGR of around 12.4% over FY10-12F and look for container traffic to reach 10.4mn TEU by FY12F. Given the limited options available elsewhere on India’s west coast, a 25 % - 30 % CAGR in container traffic at Mundra over the next 3-4 years is expected.

Outlook and Valuation:

Despite been in a capital intensive business, the debt situation for MPSEZ is very comfortable. The stable cash flows from assured cargo and minimum working capital investment would be very important for the company to make more capex in the future for growth. It is believed that MPSEZ to generate around Rs. 1360 Cr of Free Cash Flow p.a. from FY12F, and MPSEZ is one of the few infrastructure companies in the country to do so. This allows MPSEZ to benefit from rising port opportunities both in and outside of India without too much of balance-sheet risk. While newer opportunities will likely to be ROE-dilutive. Mundra Port and SEZ has fallen by 21 % in last one month versus the fall of 8 % in the broader market Nifty, despite of strong operational performance of the company. Now the stock trades at attractive valuation of Price to Earnings of 16.29 x FY13E and RoE of over 20 %. Three year average historical one year forward P/E for MPSEZ is 22. In case of EV/EBIDTA multiple, it trades at 11.90 times FY13E, which seems to me undervalued in context of the healthy operating margin of 65 % with strong operational & free cash flows. Average historical one year forward EV/EBIDTA for MPSEZ for the last 3 years is 15. The valuation of the stock on SOTP (sum‐of‐the‐parts) basis, with the Mundra Port business comes at Rs. 181. In my view Mundra Port could report EPS in FY13E of Rs. 7.70 / sh. I would buy Mundra Port & SEZ LTD for the medium term with a price target of Rs. 181 and for the SHORT TERM PLAYERS it could be Rs. 140.00

Business Subsidiary FY13E	Value Per Share (in Rs.)
Mundra Port	136.00
Value of SEZ	19.00
Adani Petronet Dahej Pvt Ltd	7.10
Mormugao Port	1.20
Abbot Point Coal Terminal	4.00
Hazira Port	6.60
Vizag Port	2.00
Adani Logistics Ltd	5.00
TOTAL	180.90

KEY FINANCIALS	FY11	FY12E	FY13E
SALES (Rs. Crs)	2,000.10	2,581.80	3,391.60
NET PROFIT (Rs. Crs)	893.00	1,083.30	1,549.30
EPS (Rs.)	4.50	5.40	7.70
PE (x)	26.90	22.20	15.50
P/BV (x)	5.50	4.60	3.70
EV/EBITDA (x)	19.40	15.50	11.90
ROCE (%)	13.90	16.30	20.20
RONW (%)	22.30	22.50	26.60

I would buy MUNDRA PORT AND SEZ LTD with a price target of Rs. 140 for the Short term and Rs. 181 for the medium term target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 118.70 on every purchase.

 *As the author of this blog I disclose that I do hold MUNDRA PORT AND SEZ LTD in my investment portfolio.

HINDUSTAN UNILEVER LTD : Stock of the Decade !!!

Scrip Code: 500696 / HINDUNILVR

CMP:  Rs. 395.00; Buy at Rs. 375 - 385 levels. Medium term Target – Rs. 420; STOP LOSS – Rs. 353.00; Market Cap: Rs. 85,357.90 cr; 52 Week High/Low: Rs. 403.35 / Rs. 264.45

Total Shares: 216,09,59,717 shares; Promoters: 113,48,49,460 shares –52.52 %; Total Public holding: 102,61,10,257 shares – 47.48 %; Book Value: Rs. 12.19; Face Value: Rs. 1.00; EPS: Rs. 11.67; Div: 650 %; P/E: 33.84 times; Ind. P/E: 34.70; EV/EBITDA: 27.41

Total Debt: Rs. NIL cr; Enterprise Value: Rs. 85,770.65 cr.

HINDUSTAN UNILEVER LTD: The Company was founded in 1931 and is based in Mumbai, India. The company was formerly known as Hindustan Lever Limited and changed its name to Hindustan Unilever Limited in 2007.  Hindustan Unilever Limited, is a Fast Moving Consumer Goods (FMCG) company – it provides home and personal care products; foods and beverages in India and internationally. The company operates in 7 business segments. The company offers soaps and detergents, including soaps, detergent bars, detergent powders, detergent liquids, and scourers; and personal products - such as oral care, skin care, hair care, deodorant, talcum powder, and color cosmetic products, as well as Ayush services. It also provides beverages - including tea and coffee; foods, such as atta (flour), salt, and bread; culinary products comprising tomato and fruit based products, and soups; and ice creams, such as ice creams and frozen desserts. In addition, the company offers chemicals, such as glycerin and fine chemicals; agri commodities; and water purifiers, as well as exports marine and leather products. HUL has over 35 brands spanning 20 distinct categories. Its portfolio of brands includes the brand names like - 3 Roses, Annapurna, Brooke Bond, Taaza, Bru, Kissan, Knorr, Kwality Wall’s, Lipton, Modern, Red Label, and Taj Mahal brand names; personal products under the Aviance, Axe, Breeze, Clear, Clinic Plus, Closeup, Dove, Fair & Lovely, Hamam, LEVER Ayush Therapy, Lakme, Lifebuoy, Liril 2000, Lux, Pears, Pepsodent, Pond's, Rexona Soap, Sunsilk, and Vaseline brand names; and home care products under the Active Wheel, Cif, Comfort, Domex, Rin, Sunlight, Surf Excel, and Vim brand names and water purifiers under the brand name Pureit.

Investment Rationale:

Management indicated that there has been no down-trending witnessed in the market despite strong inflationary environment. Rural demand continues to remain strong and is likely to improve on back of good monsoon. Despite uncertain scenario and high inflation, management is confident of sustained growth in FMCG. Raw material cost coupled with rupee depreciation continues to remain a concern. However, the focus will be on maintaining consumer value proposition as against price hike to pass on the cost push. Further, it would continue to focus on cost saving programs. During the quarter, Soaps and Detergent witnessed some reduction in advertising spending. In Personal care, Packaged Foods and Beverages advertising spends were increased. Management clarified that lower ad-spend in Soap and Detergent does not indicate that the competitive intensity has reduced in the category.

Soaps and Detergent segment grew by 21.8 % driven largely by price increases. Detergent also posted a higher than industry growth. Premium portfolio in the soap segment continues to grow in double digit. Vim and Lux were relaunched during the quarter which also led to sharp growth. In the detergent portfolio, Surf, Rin and Wheel reported a double digit growth while in the soap portfolio Lux and Lifebouy grew in double digit.

Personal Products revenue grew by 18.2 % on back of strong double digit growth in Fair & Lovely, Vaseline and Ponds. Dove brand was expanded into face wash and nourishing oil care. It’s believed that Vaseline and Ponds would be the key growth driver in future in spite of their differentiated product strategy. HUL launched new products including Dove face wash; low unit SKUs in Dove oil care range helped the growth momentum. Packaged foods registered 21 % YOY revenue growth to Rs. 330 Cr due to relaunch of Kissan range and low unit pack of Kissan Soupy Noodles.

Bru World Café -

Hindustan Unilever in competition with US giants Starbucks (in collaboration with Tata Coffee) and Dunkin’ Donuts (in collaboration with Jubilant Foods) in coffee shop market segment has quietly opened a 'Bru World Café' outlet on pilot basis at JUHU - an up market western suburb of Mumbai. HUL wants to tap into increasing out – of - home consumption of coffee in the country. Bru World CafA will be bringing various coffee experiences across the globe to the Indian palette. With rising affluence in the country with the fact that consumers now spends more time at out of home point is the high potential of coffee retailing business. The organised coffee market in India is around Rs. 600 Cr or 20 % of the total domestic coffee consumption of Rs. 3,000 Cr and the coffee chain business is growing by 40 % in India. BRU was launched in 1962, which is Unilever’s only coffee brand sold in India. It’s believed that once this cafe is scaled up - HUL’s coffee shops can be served as point of purchases & which will help to create brand recall for in house consumption of its Bru brand to its customers. HUL faces competition from Nestle which has similar format called Café Nescafe; Café Coffee Day (a subsidiary of Bangalore based Amalgamated Bean Coffee Trading Company which runs 1,180 Café Coffe Day outlets ); Lavazza – Barista and Costa Coffee and Di Bella (Australia's premium coffee company planning to open 50 outlets in next 3 years by investing $441 million in this segment). HUL is the market leader in the overall coffee segment with a range of products in conventional coffee, ice & hot cappuccino & out of home vending space. It has roped in actors Shahid Kapoor & Priyanka Chopra as their brand ambassadors for BRU brand. Surely, with Macro – economic factors like higher per capita and disposable income which are the key sales trigger for coffee chains in the country. The per capita consumption of coffee in India is just 82 grams compare that with 4 kilos in US. There is a great opportunity for all players, given that collectively all the players have gone only to 200 cities in country of the potential 400 -500 cities that can offer growth. This will definitely help HUL in this segment. 

Outlook and Valuation:

HUL presented a fantastic Q2FY11 results with net sales at Rs. 5,610 Cr up by 17.8 % YoY. Domestic FMCG business grew by 19.8 % YoY due to strong growth in Soaps and Detergents. Everyone was surprised by a strong volume growth of 14 %. EBITDA margins expanded by 1.16 % to 14.7 % due to lower ad-spend and overheads. EBITDA was at Rs. 830 Cr up by 28 % YoY. Adjusted PAT at Rs. 650 Cr up by 22.2 %. Advertising spending remained at Rs. 650 Cr down by 1.96 % YoY. Though gross margins declined by 3.47 % YoY due to higher raw material price. HUL management indicated that cost pressures were managed through aggressive saving programs and price increase. Soaps & Detergent revenue grew by 21.8 % to Rs. 2,590 Cr and EBIT to Rs. 320 Cr. These margins are highest in the last six quarters. HUL re-launched its most famous soap brand LUX during the quarter and a strong double digit growth was witnessed in Laundry business. Personal Products reported a revenue growth of 18.2 % to Rs. 1,610 Cr and EBIT at Rs. 390 Cr up by 25.5 % YoY as margin expanded by 1.43 % to 24.4 %. Factoring higher volume growth and lower ad spend ratio, it is believed that in coming quarters the growth rates will improve on account of lower base (H2FY11 PAT grew by 6.5% YoY). While operating performance will continue to show improvement in the coming quarters, the sharp run-up in the stock price leaves little upside. But since the stock has broken its 15 years long consolidation, it will be the best performer for the forth coming decade. At the current market price of Rs. 395, the stock is trading at 32.91 x FY12E and 27.88 x FY13E respectively. Earnings per share (EPS) of company for FY12E and FY13E are seen at Rs. 12.00 and Rs. 14.20 respectively. One can buy HUL with a target price of Rs. 420.00 for Medium to Long term investment.

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	17,725.30	19,735.20	23,121.80	25,933.00
NET PROFIT (Rs. Crs)	2,058.70	2,156.30	2,600.50	3,070.10
EPS (Rs.)	9.40	10.00	12.00	14.20
PE (x)	41.10	38.90	32.20	27.30
P/BV (x)	32.80	31.80	25.10	19.70
EV/EBITDA (x)	29.70	30.00	23.80	19.80
ROCE (%)	131.10	128.60	134.10	121.20
RONW (%)	88.60	82.70	87.10	80.80

I would buy HINDUSTAN UNILEVER LTD with a price target of Rs. 420 for Medium to Long term. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 353.00 on every purchase.
READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

*As the author of this blog I disclose that I do hold HINDUSTAN UNILEVER LIMITED in my investment portfolio.

THE DOLLAR RUPEE STORY !!!

On 22nd November 2011 Rupee touched its year high of Rs. 52.73/1$, making RBI governor to give public statements. If US dollar weakens importers are benefited and exporters are at loss. Whenever Dollar weakens against Indian Re exporters blasts their feelings & so RBI have to step forward for their help. But have you ever imagine that once our 1 INR was equal to 1$ but eventually $ become strong against INR, how read on to know this -

When India got independence in the year 1947, there were no loans or external Debts on Indian government. The exchange rate as on 15 August 1947 was 1US$ equal to 1.00 INR. With the introduction of 5 year plans Indian government needed foreign borrowing and started devaluing INR. Which was further influenced by Indo- China war in 1962 and Indo- Pak war in 1965 which devalued INR more as India needed large funds for buying weapons.

In the year 1966, 6 June at the time of  Mrs. Indira Gandhi as the prime minister, inflation was increasing at a tremendous rate and also to keep on the aids given by US to India, USA government demanded and pressurised Mrs. Gandhi to devalue INR against US$. And kept the rate of 1US$= 7.50 INR. The then ministers Mr.Krismachari & Mr.Kamraj opposed these policy but it was of no use as Mrs. Gandhi was interested in getting help from US and kept INR weak against US$.

US$ grew stronger after 1971 –

After the year 1970, US$ grew stronger against INR due to incompetence of Indian politicians and bully of US. The exchange rate in 1970 was 1US$= 7.47 INR, which rise to 1US$= 8.40 INR in 1975, after the assassination of Mrs. Gandhi in the year 1984, and due to Boffors scandal tumbling Rajiv Gandhi’s government made the INR weaker and the rate was 1US$= 12.36 INR in the year 1985. In the year 1990 1US$ was equal to 17.50 INR.

Drastic drop in 1991 –

Whenever India faced economic or political problem, US made India to devalue INR against US$ by offering funds or trade benefits. In the year 1991 under the Narshima Roa government, India faced a drastic drop in INR against US$. At that time the Indian Forex reserve dropped to its bottom and there was a time where the balance of Forex reserve was such that India would be able to pay just 3months of Import bills. To fill in this gap India borrowed huge amounts from International Monetary Fund’s (IMF) with the condition that INR will be devalued against US$ and due to this 1US$ became 24.58 INR from Rs.16.31/1$. During this period exporters flourished as their exported products gained them more value in Rupee term.

History of Rates slowdowns -

In the year 1992 1US$ was equal to 28.97 INR; in 1995 1US$ was equal to 34.96 INR; in 2000 1US$ was equal to 46.78 INR; In the year 2002 June 1US$ was equal to 48.98 INR; After June 2002 INR became stronger against US$. In the year 2002 of December 1US$ was equal to 48.14 INR; in 2003 1US$ was equal to 45.57 INR; in 2004 1US$ was equal to 43.84 INR.

During the year 2004-06 RBI started buying $ and Indian Forex reserve raised to $200 cr, RBI stopped buying $ from January 2007 when 1US$ was equal to 44.25 INR; On 16^th May 2007 1US$ was equal to 40.79; on 27^th October 07 1US$ was equal to 39.21 INR it’s all time high when FII’s were flowing in tones of money in Indian capital markets; on 3^rd march 2009 1US$ was equal to 52.16 INR which was all time low of Indian Rupee. Which is now broken.

What can be the real value of US$?

Today $ is high against Re. But to determine the real value of any currency we have to see its Purchasing Power. This is known as Purchasing Power Parity (PPP).

The purchase rate of any product in US is compared with the rate to be given in Indian currency to buy that same good. For example to buy 1 dozen of fruit will costs 1$ in US, that same fruit would cost Rs.15 in India per dozen(of course inflation & other factors are not considered). This was just an example but to know real effective rate of any currency REER or Real Effective Exchange Rate index is referred to.

What Real Effective Exchange Rate (REER) index?

REER index measures a domestic currency’s competitiveness against other major currencies and is an indicator of currencies relative value versus foreign currencies. REER index is the 6 currency basket which uses 3 year moving averages for calculating weights of the index taking 2004 -05 as base year. The 6 currency REER index in India is calculated using Euro, US Dollar, Yen, Pound Sterling, Hong Kong Dollar & Renminbi. REER relates to purchasing power parity hypothesis. It's the invoicing currency that has more weightage and since 80 % of our trade is done in US$ it is assigned more weightage in REER INDEX.

It is believed that RBI intervenes currency market to suppress Rupee if REER index approaches 105 & props Rupee up if REER gets close to 95. REER above 100 indicates relative strength of the currency. REER levels as on 25 Aug 2011 was at 117.01 implies that rupee is weaker compared with the base year of 2004-05.

There is also a 36-currency REER index, which is also used to measure competiveness of currency. However, this index is not used too frequently since CPI data for many nations comes with a 3-month lag. On an average basis, the 6-currency real effective exchange rate (REER) appreciated by 12.7 per cent in 2010-11, the 30-currency REER by 4.5 per cent and the 36-currency REER by 7.7 per cent.

REER Trends:

The 6-currency REER index rose to 112.76 in the period leading up to the economic crisis in 2007-08. During the crisis, REER weakened as rupee depreciated due to fall in capital flows. In one of the sharpest fall during the period, it fell to 93 levels in March 2008. REER stood near 100 for almost two years in 2008 and 2009. As the economy gathered pace, REER started appreciating and scaled to 116 by April 2010. From April 2010, REER has stayed around 115 for 17 months. REER strength and weakness before and after the crisis have been due to demand and supply factors led by capital flows. However, recent slide in rupee has been triggered by euro-zone problems.


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ADITYA BIRLA NUVO LTD: Value Unlocking Candidate !!!

Scrip Code: 500303 / ABIRLANUVO

CMP:  Rs. 913.90; Buy at Rs.900 levels.
Short term Target: Rs. 950, Long term Target – Rs. 1050; STOP LOSS – Rs. 810.00; Market Cap: Rs. 10,373.65 Cr; 52 Week High/Low: Rs. 994.00 / Rs. 707.00

Total Shares: 11,35,09,729 shares; Promoters: 5,79,44,697 shares –51.05 %; Total Public holding: 5,55,65,032 shares – 48.95 %; Book Value: Rs. 475.41; Face Value: Rs. 10.00; EPS: Rs. 33.60; Div: 55.00 %; P/E: 27.19 times; Ind. P/E: 24.44; EV/EBITDA: 16.59

Total Debt: Rs. 4006.21 Cr; Enterprise Value: Rs. 15,259.11 Cr.

ADITYA BIRLA NUVO LTD: The Company was incorporated in 1956. Aditya Birla Nuvo Limited is a large diversified conglomerate, which engages into apparel, viscose filament yarn, carbon black, branded garments, textiles, agri business activities, life insurance business, IT solutions & telecom business. Its Apparel business consists of Madura Garments Lifestyle Brands Division, Peter England Menswear Brands Division, Peter England Fashions & Retail, Madura Garments Lifestyle Retail Co. Ltd., and Madura Garments Exports Ltd. Its Agri Business manufactures and markets urea, agricultural seeds and agrochemicals under the brand name of Birla Shaktiman Urea Gold, Birla Shaktiman Urea KrishiDev neem coated, traded fertilizers, Birla Shaktiman seeds - mainly paddy and wheat, and Birla Shaktiman pesticides. Its Viscose Filament Yarn (VFY) unit, consist of Indian Rayon, producer of viscose filament yarn in India. Company’s IT services business consists of Aditya Birla Minacs IT Services Ltd., which offers clients domain-centered solutions for the financial supply chain, enterprise solutions and business assurance. Its Life Insurance business consists of Birla Sun Life Insurance Company Limited (BSLI), which offers insurance-related wealth accumulation products and services for individuals, groups and NRIs. ABNUVO’s Asset Management consists of Birla Sun Life Asset Management Company Limited (BSLAMC), a joint venture between the Aditya Birla Group and Sun Life Financial Services of Canada, which provides ethical, innovative, research and analysis based investments and wealth management services. & also operates as the investment manager of Birla Sun Life Mutual Fund. It also includes ADITYA BIRLA MONEY which provides money management & brokerage services to domestic & international clients. ADITYA BIRLA NUVO is the major share holder with 51 % in telecom company - Idea Cellular Limited (IDEA), which is a major GSM mobile service operator in India.

Investment Rationale:

Manufacturing business:

This segment witnessed expansion led by revenue growth, margins impacted by raw material cost push. The manufacturing business (comprising of agri, carbon black, rayon and textiles) saw a strong revenue growth of +25.5 % on a Y-o-Y basis for the quarter, largely driven by a growth in textiles, agri and rayon yarn. Sales in the insulator segment declined by 8.2 % YoY as the dispatches got deferred. The EBIDTA margin in the manufacturing segment declined to 13.1 % during the quarter as against 17.6 % in Q2FY2011. EBIDTA remained flat at Rs. 44 cr against Rs. 42 cr in Q2FY2011. The business reported a profit of Rs. 12 cr for the quarter against Rs. 16 cr in the same quarter last year

IT & IT SERVICE:

ABNL acquired 11.72 % holding in Aditya Birla Minacs. The IT and the ITES subsidiaries have been merged and ABNL holds 99.71 % in the merged entity. For the quarter, the segment posted a top line growth of 19% on a Y-o-Y basis to Rs. 481 cr.

TELECOM:

Idea Cellular (Idea) services, Margins contracted due to the higher rural subscriber base Subdued revenues and the increasing overheads, coupled with enhanced losses from the circles resulted in an operating margin contraction from 26.7 % to 25.7 % in the quarter under review. Consequently the EBITDA declined by 1.4 % on a sequential basis. Earnings are down due to subdued operating performance, increased charges on 3G related expenses, and a foreign exchange (forex) loss; the reported earnings were down by a substantial 40.3 % on a sequential basis. GSM operators including Idea have increased tariff rates by 20%. But, with all this adversities the telecom business’ profitability was up by 37.2 %. The revenue and operating profit and OPM are likely to remain strong. It is expected that Idea can post a compounded annual growth rate (CAGR) of 23 % in the EBITDA over FY2011-13.

Life Insurance Business:

The efficiency and cost management efforts in the life insurance business made this segment to post an increase in profitability from Rs. 22.5 cr in Q2FY2011 to Rs. 105 cr in the quarter. The life Insurance business is in line with the industry trend, the new business premium for Birla Insurance also showed a deceleration of 14 % on a Y-o-Y basis. Last year with effect from September 1, 2010, the new ULIP guidelines came into force, which has not affected the new business premium much. With waning base & a growing in-force book and a lower new business strain led to a significant uproar in the profitability. The net profit showed an around 5x fold rise from a mere Rs. 20 cr in Q2FY2011 to Rs. 97 cr in Q1FY2012. For the full year FY2011 the insurance arm’s NBAP margin was amongst the highest in the industry at 27.5 % with the exit margin at 22 %.  Going forward, it is believed that second half of FY2012 is likely to witness a good growth in the new business premium. Thus experts estimate a 7 % growth for FY2012. The management remains confident of the medium to long term growth trajectory of the business and has guided for a steady and stable new business shall achieve a premium (NBAP) margin of 20-21 %.

Branded apparel:

This segment showed robust performance led by a strong volume growth of 28 %, the net sales showed a growth of 24 % on a Y-o-Y basis while the same store sales growth for the quarter stood strong at 15%. Due to rise in cotton prices and the mandatory excise duty level, the margin expanded from 9.4 % to 9.8 %. But the EBITDA posted a strong 28.9 % growth. The company launched 90 Exclusive Brand Outlets (EBOs), the company now has presence of 1,021 EBOs or a 1.5 million square feet of retail space. Company continues to explore value unlocking opportunities and is awaiting foreign direct investment (FDI) guidelines in this respect. Which is expected soon may be by end of DEC 2011.  

Outlook and Valuation:

Recently Department of Industrial Policy and Promotion (DIPP) floated the cabinet note proposing a 51% FDI in multi-brand retail and hike of 100% in single-brand retail. At present, the country allows 51% FDI in single brand retail, 100% in cash and carry (wholesale) business, but bars it completely in multi-brand retail. Cabinet have laid few conditions like  for Single Brand Retail - Cabinet note proposes that products should be sold under the same brand internationally;Single brand product only for manufactured brands;Foreign investor should be the owner of the brand. For Multi brand retail - note proposes that minimum amount to be brought in by Foreign Direct Investment should be US$ 100 million; At least 50 % of total FDI should be in back ended infra; 30 % of procurement of manufacturing products should be done from small industries; Government will have first right to procurement of agri products; fresh agri products can be unbranded; Retails locations should be in cities with the population above 10 lakhs. If this proposed note is approved in this winter session of parliament then the major beneficiary will be ADITYA BIRLA NUVO. On consolidated basis Aditya Birla Nuvo Ltd (ABNL) reported strong Q2FY2012 results with the consolidated net revenue growth of 17.80 %, operating profit growth at 25 % and adjusted profit grew at 11.6 % Y-o-Y basis. The company had strong growth in the fertilisers and agri business followed by telecom and the fashion & lifestyle business which led to the revenue growth, Efficiency and cost management efforts in the life insurance and the telecom businesses resulted in a strong operating performance. ABNL is best valued using the sum-of-the-parts (SOTP) method. Looking at the robust and resilient performance of the key segments, ADITYA BIRLA NUVO can bought with the price target of Rs. 1,050. 

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
NET PROFIT (Rs. Crs)	283.80	302.2	367.50	473.00
EPS (Rs.)	25.00	26.60	32.40	41.70
PE (x)	38.10	35.70	29.40	22.80
P/BV (x)	2.30	2.20	2.10	1.90
EV/EBITDA (x)	17.60	15.50	13.90	11.80
ROCE (%)	7.70	8.20	8.90	10.00
RONW (%)	6.10	6.30	7.10	8.30

I would buy ADITYA BIRLA NUVO LTD with a price target of Rs. 1050 for the short term and Rs. 1150 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 810.00 on every purchase.
As the author of this blog I disclose that I do hold ADITYA BIRLA NUVO LTD in my investment portfolio.

CRISIL LTD: Make your portfolio rate good !!!

Scrip Code: 500092 / CRISIL

CMP:  Rs. 929.30; Buy at Rs.910-920 levels. 

Short term Target: Rs. 1000, 6 month Target – Rs. 1150; STOP LOSS – Rs. 856.00; Market Cap: Rs. 6,595.09 Cr; 52 Week High/Low: Rs. 936.70 / Rs. 560.00

Total Shares: 7,09,68,440 shares; Promoters: 3,72,09,480 shares –52.43 %; Total Public holding: 3,37,58,960 shares – 47.57 %; Book Value: Rs. 51.08; Face Value: Rs. 1.00; EPS: Rs. 25.60; Div: 2000 %; P/E: 36.30 times; Ind. P/E: 34.60; EV/EBITDA: 24.52

Total Debt: Rs. NIL ; Enterprise Value: Rs. 6595.09 Cr.

CRISIL LTD: The Company was founded in 1987 and is headquartered in Mumbai, India. CRISIL Limited operates as a subsidiary of Standard & Poor's. It was formerly known as The Credit Rating Information Services of India Limited and changed its name to CRISIL Limited in December 2003. CRISIL Limited - together with its subsidiaries, provides ratings, research, and risk & policy advisory services primarily in India, United Kingdom and United States. It offers services in the areas of credit ratings; research on Indian economy, industries, companies; also provides with fund services, risk management & infrastructure advisory services. The company provides research and analytics services to commercial and investment banks, insurance companies, corporations, consulting firms, private equity players and asset management firms. It offers ratings for long-term instruments, such as debentures/bonds and preference shares, fixed deposits and loans, as well as pass through certificates and structured finance instruments and short-term instruments comprising commercial papers, certificates of deposits, and short-term debts. The company also provides equity and corporate research, industry reports, customized research assignments, subscription to data services, and initial public offer grading services. In addition, it offers fund research, rankings, and ratings to mutual funds industry; infrastructure advisory services in the renewable energy, transportation and logistics, oil and gas, and minerals sectors; and risk management services to banks, financial institutions, and corporations. The company has a joint venture with the National Stock Exchange of India Limited to provide various indices and index-related services and products to the capital markets.

Investment Rationale:

CRISIL witnesses robust growth in credit rating business. CRISIL currently has 60 % market share of the credit ratings business and 51 % market share in bank loan ratings (BLR).  Nearly 20,000 of the 35,000 clients are the clients who have taken loans of less than Rs. 10 crores & are yet to be rated. The growth will come from newer clients as there are enhancements of the limits of the existing clients and annual surveillance fees. More growth is expected from this segment. Basel II norms specify mandatory credit ratings for bank loans above Rs. 5 crores. The recent incidence of scams is also prompting more small and medium companies to get the respectability of an independent credit rating while raising funds. Apart from that, new products like Education ratings will continue to add to growth. The government and the regulators are currently focusing to increase access of the infrastructure sector to the bond market and to do so they have increased the FII limit in corporate bond to US$ 40 billion from US$ 20 billion; increased credit enhancement schemes for infrastructure entities and draft new CDS guidelines issued by RBI. In Dec'2010, CRISIL acquired Chicago-based Pipal Research Corp. - one of the leading players in the knowledge process outsourcing (KPO) industry from First Source Solution for US$13 mn (around Rs. 58 cr).  Pipal has a strong presence in the corporate sector mainly in North America and Europe and reported revenue of US$8 mn (around Rs. 37 cr) in FY2010. Pipal’s client base includes leading telecommunications, technology, consumer packaged goods and industrial companies. Pipal research is of the same size as what was Irevna in 2005 when CRISIL acquired it. Pipal has 30 Fortune 500 clients. The entire integration process is over and CRISIL is bullish on both Irevna and Pipal for CY'11. Infact, there is a significant increase in staff cost during Q1 CY'11 as the headcount of Pipal has increased by more than 1/3rd during the quarter. In Research business, the margins for CY'10 stood at about 32 % as against 36 % Y-o-Y largely due to forex losses. When CRISIL acquired Irevna in 2009, CRISIL’s turnover stood at Rs. 537 crores. Irevna acquired 23 new clients and its total number of clients stood at 63. This business derives its synergies from its tie ups with banks and as a provider of research for its treasury products. CRISIL launched CRISIL Real Estate Star (CREST) Rating, a first-of-its-kind service for retail investors in the real estate sector. It provides a city specific all round assessment of real estate projects and helps buyers benchmark and identify quality project within a city. The product has received an encouraging response from all stake holders, developers, buyers, investors and bankers. CRISIL has already evaluated 29 projects across 10 cities. CRISIL has also expanded operations at Global Analytical Center (GAC) to support Standard & Poor’s (S&P). It has expanded its geographical presence with sales office in Sydney and research center in China. With over 5500 bank loan ratings (BLR) outstanding which is the largest number of BLR in India; 2434 new ratings assigned during the year, the company has crossed one of the milestone of 17,500 small and medium enterprises (SME) ratings; 7800 new SME ratings was assigned in 2010.

Outlook and Valuation: 

CRISIL has been Ranked # 1 firm in the world in financial services research, risk management and actuarial services, corporate finance support and financial services analytics by the Black Book of Outsourcing – a Data monitor company which also assisted the Ministry of Rural Development, Government of India (GoI), in a unique and innovative public-private-partnership project to provide urban services in rural areas (PURA); the pilot project promises to be the first of many such endeavors. Helped the Ministry of Non-Conventional Energy, GoI, design the framework for exchange of renewable energy purchase obligations, and a platform for trading in renewable energy certificates. CRISIL received a renewed mandate from the World Bank to conduct training program in enhancing the regulatory reform capabilities of member regulators of the East Asia Pacific Infrastructure regulators forum (EAPIRF). CRISIL has won key accounts in the public and private banking sector – portfolio of customers now includes 9 of India’s top 10 banks. It also entered the global arena, winning two prestigious mandates including a reputed multilateral development institution in South East Asia. CRISIL has developed a loan origination system to enable automation of a bank’s credit appraisal process as an important module in its internal rating platform. The Company has a downside risk with respect to the slowing down of our economy. However this may get offset by the low value 20,000 odd SME’s accounts it expects to be added in Q3 of CY11. The company stock is trading currently near its 52 week high, in spite of the fact that most other stocks are trading at a huge discount of their inherent strength of the fundamentals of the company. CRISIL always trades at high P/E , the stock is not exactly cheap, but it commands a higher PE because of its strong market share & robust financial numbers that shows immunity to current economic downturn. CRISIL registered strong top-line growth in 2QCY2011. The company’s net sales grew by 35 % y-o-y to Rs. 203 crores led by strong growth in research segment because of addition of Pipal’s.

Recently Company declared split in face value of shares from Rs. 10 to Re. 1.00 on 20^th JULY 2011, stock quoted ex split basis from 28 Sep 2011. Crisil declared its Second buyback program which has already started from NOV 3rd, 2011, The buy back is for the aggregate amount of Rs. 87 Cr & the shares would be bought back up to Rs. 1,000/Share.
CRISIL's average operating cash flow over the last 4 years stood at Rs. 280 Cr. CRISIL completed its previous buy back in Nov, 2010 of 1,28,156 (12,81,560 post split) shares at an average price of Rs. 6,200 (Rs. 620 post split), totaling to Rs. 79.5 Cr. As per the current buy back rule Section 77A(2)(c) - a company can buy back 25 % of its Total paid up capital & free reserves, for CRISIL it amounts to Rs. 86.97 Cr (25 % of 347.87 Cr). At Rs 929.30/shares, CRISIL can buy back up to 9,36,188 shares or 1.31 % of the equity.

Peers comparison

Company	Face Value (Rs.)	EPS (Rs.)	P/E Ratio	RoNW (%)	Book Value (Rs.)
CRISIL	1.00	25.60	36.30	64.70	51.05
ICRA	10.00	33.26	27.71	23.90	242.34
Credit Analysis & Research Ltd*	10.00	31.89	---	30.11	105.92

(* Proposed IPO)
Some Key Financials

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	628.40	809.50	980.70	1173.50
NET PROFIT (Rs. Crs)	164.50	200.10	244.60	293.20
EPS (Rs.)	23.20	28.60	34.90	41.90
PE (x)	36.20	29.40	24.00	20.00
P/BV (x)	19.10	22.70	11.90	8.40
EV/EBITDA (x)	26.50	20.40	16.30	13.30
ROCE (%)	48.60	70.10	65.00	49.20
RONW (%)	64.70	83.30	76.70	65.30

I would buy CRISIL LTD with a price target of Rs. 1000 for the short term and Rs. 1150 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 856.00 on every purchase.