HUL : CATCH IT IF YOU CAN !!!

Scrip Code: 500696 / HINDUNILVR

CMP:  Rs. 569.45; Buy at Rs. 565-570 levels.

Target for 6 month - 1 year: Rs. 600.00; STOP LOSS – Rs. 480.00; Market Cap: Rs. 1,23,110.42 Cr; 52 Week High/Low: Rs. 580.45 / Rs. 325.20. 

Total Shares: 216,19,18,098 shares; Promoters: 113,48,49,460 shares – 52.49 %; Total Public holding: 102,70,68,638 shares – 47.48 %; Book Value: Rs. 15.88; Face Value: Rs. 1.00; EPS: Rs. 15.62; Div: 650 %; P/E: 35.85 times; Ind. P/E: 44.19; EV/EBITDA: 39.74 

Total Debt: Rs. ZERO Cr; Enterprise Value: Rs. 1,24,980.48 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:

HUL’s management has successfully turned around the business in the past two years through focusing on volume growth, cost rationalisation and faster innovation. From a situation where the company was growing below market average and losing market share in 2009, HUL has consistently delivered near-double-digit volume growth for nine quarters. This has come despite the company raising blended prices by 10 % YoY to pass on raw material cost inflation. HUL’s Management has delivered a strong and sustainable turnaround. HUL’s strong investments in innovation starting from FY10 have imparted volume growth momentum to the business. In a departure from the company’s strategy over the 2000's on rationalising brand portfolio and aligning to the parent’s global objectives, HUL has become more focused on the local market, improved agility (means the capability of rapidly & efficiently adapting to changes) in responding to competition and is churning out a significantly larger number of innovations. Over 60 % of HUL’s large portfolio was touched by innovation in FY12, with a clear focus on premiumisation in established categories and growth in new categories such as deodorants and face washes. HUL’s see a moderate scope for margin expansion as the key raw materials for HUL such as LAB, palm oil and packaging have not seeing an absolute decline in prices besides having seen a moderation in YoY inflation. Given the volume growth momentum, HUL continues to gradually increase prices which should help inch up gross margins in FY13. Also, the strong revenue growth is imparting operating leverage to the business. However, post 1H FY 13, HUL will not have the benefit of a weak base; this could limit margin expansion. In the period of 2000-08, HUL had actually curtailed its portfolio of brands in categories such as soaps, detergents and tea, de-focusing on ‘local brands’ while increasing investments into global brand platforms. However, given the local nature of competition in these three categories, this led to market share losses in many states where HUL de-focussed on regionally strong brands. This is changed now, with management focusing on every part of their portfolio. Thus, local brands such as Sunlight, Hamam, Breeze, Ruby and Lakme have also seen innovation activity in the past two years. In FY12, the company took a strong jump in its rural distribution (which was already the best in the industry) by expanding its coverage by three times. With this, HUL’s total direct retail coverage is over 20 Lakh outlets, compared with 5 -11 lakh outlets of its key competitors. Another positive for HUL is that the high-margin in personal products business has seen very stable growth in the range of 15 %- 20 % over the past nine quarters, driven by strong double-digit volume growth.

Outlook and Valuation:

As an organisation, HUL has become more agile in responding to competitive moves and volatility in input costs, which is needed to remain competitive in the market. HUL’s Soaps & Detergents revenue growth over the past few quarters has been well above the average growth. While drivers like premiumisation should continue to drive a 10 %-15 % sustainable growth in these categories, most of the listed companies are reporting growth well in excess of these levels. One of the reasons is that unbranded products or local brands in these categories are losing share as they become uncompetitive in a high input cost environment. Also, the high cost of capital and the volatility in currency could be impacting small businesses much more than larger companies.

However, the share gain of the branded players should stem at some stage, leading to moderation in revenue growth. Soaps and detergents continue to be an important part of HUL’s profits. For FY12, the segment constituted 47 % of revenue and 36 % of operating profit. Thus, any moderation in growth here could be a key risk for HUL. These categories, being the two largest FMCG categories, are also highly susceptible to down-trading by consumers as they form large parts of the consumer wallet within FMCG. Here is the 13 year short details on HUL's Financial - 

YEAR	EPS (in Rs.)	P/E (X)	BV (in Rs.)	Div/Sh (in Rs.)
1999	4.86	46.29	9.55	2.90
2000	5.95	34.68	11.30	3.50
2001	7.46	29.97	13.82	5.00
2002	8.04	22.60	16.62	5.16
2003	8.05	25.42	09.71	5.50
2004	5.44	26.37	09.50	5.00
2005	6.40	30.82	10.47	5.00
2006	8.41	25.74	12.34	6.00

5 YR	EPS (in Rs.)	P/E (X)	BV (in Rs.)	Div/Sh (in Rs.)
2007	8.73	24.50	06.61	9.00
2008	11.46	20.72	09.45	7.50
2010	10.10	23.63	11.84	6.50
2011	10.58	26.89	12.19	6.50
2012	12.46	32.89	16.25	7.50

HUL has traded at an average one-year forward P/E of 24.3x over the past 10 years, which includes the period of eight years between CY03 and FY11 when the company delivered less than 3 % earnings CAGR, significantly below its listed peers. Even during the peak of the price war with P&G from 2004 to 2006, the stock traded at an average one-year forward P/E of 24.2x. Hence, HUL should trade at a premium to its valuation during these periods given the high visibility of mid-teens earnings CAGR over the next three years. The turnaround affected by management over the past two years was based on investments made in innovation and distribution, which could reap benefits over the next two-three years. Hence, the valuation of HUL comes at 30x one-year forward earnings, which is a 20 % premium to the stock’s 10-year trading average. At the CMP of Rs. 569.45, the stock is trading at 5.62 x FY2012E and 5.22 x FY2013E EV/EBITDA, the stock is trading at a P/E of 37.81 x FY13E and 32.22 x FY14E respectively. Earnings per share (EPS) of company for FY13E and FY14E are seen at Rs. 15.06 and Rs. 17.67 respectively. One can buy HUL with a target price of Rs. 600.00 for a minimum of 6 month to 1 year.

KEY FINANCIALS	FY12	FY13E	FY14E	FY15E
SALES (Rs. Crs)	21,735.60	25,722.81	29,965.11	34,912.91
NET PROFIT (Rs. Crs)	2,691.41	3,255.35	3,820.24	4,517.14
EPS (Rs.)	12.45	15.06	17.67	20.90
PE (x)	41.20	34.10	29.10	24.60
P/BV (x)	31.60	27.10	23.20	19.80
EV/EBITDA (x)	33.20	26.90	22.60	19.00
ROE (%)	87.20	85.50	85.90	86.80
ROCE (%)	87.48	92.91	94.43	95.67

I would buy HINDUSTAN UNILEVER LTD with a price target of Rs. 610 for minimum of 6 months to 1 year. 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  Rs. 480.00 on every purchase as it is the for the 1 year target.

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

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THE BASICS OF CAPITAL BASE : EXPLAINED IN SHORT !!!

Many beginners ask me that what is share capital and how a company is formed, so here is a short explanation to that. Company can have Equity Shares, Preference Shares and or Differential Voting Rights Equity shares as its Share Capital. 

Share Capital denotes to the amount of capital raised by the issue of shares (viz Equity, Preference, DVR or all of them), by a company. It is collected through the issue of shares and remains with the company till its liquidation. Share Capital is owned capital of the company, since it is the money of the shareholders & so these share holders are the owners of the company. The total share capital is divided into small parts & each part is called a 'SHARE'. Share is the smallest part of the total capital of company. 

In India, Share holding of 51% in a company is considered as a controlled holding. Any company willing to go public or willing to have an IPO has to maintain at least 10% of its total issued shares with the general public. Recently SEBI have extended the deadline for all the companies in India to maintain at least 25% of their total issued shares with the general public. So, it means promoters cannot hold more than 75% of the total issued shares in a company. 25% public shareholding is must.

Types of SHARE CAPITAL : 
Authorized Capital - The maximum amount of capital which a company can collect or raise by selling its shares, it is also known as Nominal Capital or Registered Capital. Issued Capital -  Is the part of the Authorized capital which is actually issued to general public. Subscribed Capital - Is the part of the issued capital which is actually subscribed by the general public. Paid Up Capital - Is that part of the called up capital which is actually paid up by the shareholders. Now in general companies are not in practice to have partly paid up or call up money. The Company takes full face value money on the issue. So fully paid up Face value is the Paid Up Capital of the Company.

What is Share Capital Base :
When I form a company, I use my personal wealth as Capital i.e. I invest my own money into the company and into the business activities. In the process of forming & registering a new company under the Companies Act 1966 it needs to be Capitalized whereby I infuse money or assets into the company and get shares of that company in return. e.g. If I infuse Rs. 5000 or assets worth Rs. 5000 to form a company , I will be getting Shares worth Rs. 5000 of that newly formed company & so I become the promoter of the company. Capitalization is the process in which owners have to come with number of shares and its face value.

Here in India, per share value used is Rs. 10 , Rs. 5, Rs. 2, Re. 1 as its face value  which is then multiplied by number of shares issued or divided by total invested money. Let’s take some example – In my company I invest Rs. 5,000 - Thus the capitalization of my company is as follows –

1. Authorized capital is Rs. 5,000 i.e. 500 Shares x Rs. 10/share.
2. Paid up Equity Capital is Rs. 5,000, thus Rs. 5,000 becomes the total capital base of my company at the time of registration or inception.

There can also be second scenario where, I can have my capital base of Rs. 6,000…but I paid only Rs. 5,000. Therefore –

1. Authorized capital will be Rs. 6,000 i.e. 600 shares x Rs. 10 each.
2. Issued, Subscribed & Paid up Equity share capital is Rs. 5,000 i.e. issued capital is only of Rs. 5,000 & Issued equity shares is only 500 shares.

This is also the VALUE of business because it is still not generating any profits or it is still not established etc. I will use the second scenario for the further discussion which is in usual practice. To increase the value of my company, I work hard and increase the value of my company by branding, marketing, market positioning, revenue, profits, future potential, and market share. I keep all the profits as I am the only share holder having all the company's paid up equity capital and so my business has high net-worth. The total earnings of my company are divided by 500 shares. So the company’s Earnings Per Share (EPS) is based on 500 shares that are issued to me.

Remember, according to my authorized capital, I still have 100 shares of Rs. 10 face value more remaining to be issued. They are not yet issued or not been paid up & hence authorized capital is not considered while calculating EPS - its just taken as a note.

Going forward, at some point in the future, I feel that I am in need of more money or capital for the expansion or I want to grow my business – I have 2 ways – either I can go to banks or  go to other sources of finance or I forgo a little bit of my equity holdings.

If I go to banks which are loans/debts taken from banks – then I have to pay Interest which under all circumstances I have to pay. And, If I issue shares i.e. I forgo a little bit of my equity holding then in this case I don’t have to pay interest to them (my new shareholders) nor its compulsory to declare dividends, but I have to share my profits, losses and even bankruptcy with my new shareholders.

            So I decide to go for raising capital by diluting the equity i.e. I am taking additional partners by issuing them new shares. These partners can be Private Equity players, financial institutions or any public investor (if it is opened to common public which is called IPO) which will be my new shareholders. During this course of time, the value of my business has raised much more than Rs. 6,000 as it is now an established business making lots of good profit and with lots of potential & whoever wishes to become partner or stakeholder will be getting partial ownership of the well established profitable business with minimum risk and so I will be demanding Premium on the face value of Rs. 10 from my new shareholders, this premium will be as per the present value of the business.

How to determine Present Value – 

For example – Consider that the present value of the business comes to Rs. 1,20,000. With this increased value of the business, the market value per share will be Rs. 200/share. (Rs. 1,20,000/600 shares). I decide to issue 50 share from remaining 100 shares to go public. I use public offering (IPO) & price my share at Rs. 200/sh. I raise Rs. 10,000 (50 x Rs. 200). Now, the capital structure is as under –

1. Authorised capital is still Rs. 6,000 (600 sh of Rs.10 each).
2. Issued, Subscribed & Paid up Equity is Rs. 5500 (original 500 sh & additional 50 share).
3. Share premium Account will now come to existence with Rs. 9500 (Rs. 10,000 – 50 x 10)  

Share premium is considered as part of total shareholders’ equity. Additional money beyond face value is called Share Premium. Total Shareholder's Equity is also known as Net-worth or Stockholders Equity or Shareholders Fund or Share Capital.

            A company can also issue Preference shares or DVR share along with Equity shares. Many beginners presume that Equity base is the IPO price x IPO shares, but the fact is that in IPO the owner is only opening partial ownership to raise additional capital for growing business. At this point the total earnings of the company is divided by 550 shares. Because now a total of 550 shares have been issued & issued subscribe & paid up equity has increased to 550 shares. Even though the mass public has only 50 shares, it is not the only shares in company, IPO shares are add on to existing 500 shares. 

Company issues lavish Bonuses of Shares before IPO -
If one reads the Draft Red Herring Prospectus of any IPO one will notice that before the IPO the promoters or pre IPO shareholders are given lavish bonuses of shares reducing the net worth of company and increasing the issued, subscribed & paid up capital base of the company. I have seen some issues whereby the promoters are given bonus in the ratio of 100 shares for every 1 share held before the IPO this makes the promoter's acquisition price of equity share less than its Face value, in some cases it goes into paise. This is because before IPO, the value of shares are much higher due to the past profits are accumulated as "Reserves" in the balance sheet. And to draw back my capital I issue fresh new shares as bonus thus reducing my reserve to that extend and hence increasing the share base reducing its value. You can see many big investors exit wholly or partially in the IPO as they already have taken back their invested money in the form of Bonus shares, So one should also consider this while investing in the IPO's.    

EROS INTERNATIONAL MEDIA: Shaping the future of Indian Entertainment !!!

Scrip Code: 533261 / EROSMEDIA

CMP:  Rs. 162.55; Buy at current levels.

Medium to Long term Target – Rs. 180; STOP LOSS – Rs. 149.55; Market Cap: Rs. 1,491.84 Cr; 52 Week High/Low: Rs. 276.95 / Rs. 153.00

Total Shares: 9,17,77,720 shares; Promoters : 7,14,07,000 shares –77.80 %; Total Public holding : 2,03,70,720 shares – 22.20 %; Book Value: Rs. 72.99; Face Value: Rs. 10.00; EPS: Rs. 13.74; Div: NIL % ; P/E: 11.91 times; Ind P/E: 29.33; EV/EBITDA: 8.76.

Total Debt: Rs. 354.20 Cr; Enterprise Value: Rs. 1,846.04 Cr.

EROS INTERNATIONAL MEDIA: EROS INTERNATIONAL MEDIA was incorporated as in 1977 and is based in Mumbai, India. It is subsidiary of EROS WORLDWIDE FZ LLC. Eros International Media Limited operates in the media and entertainment sector in India and internationally. It engages in sourcing content through acquisition, co-production, or production; the theatrical distribution network operation; licensing films for cable, satellite, and terrestrial television; and the distribution of Tamil film content in Western Europe through its own television station. The company also distributes content through physical formats, such as DVD, VCD, and Blu-rays, as well as the digital mediums comprising VOD, DTH, Internet, mobile, and in-flight entertainment; and involved in music publishing and distribution activities. In addition, it provides production planning and visual effects services for films; engages in the acquisition, production, and distribution of Tamil films worldwide; and involved in cable or DTH licensing, as well as trading and exporting international film rights. The company owns approximately 1,100 films comprising Hindi, Tamil, and other regional languages & has aggregated rights to over 1,900 films plus additional 700 films for which the company holds digital rights only. In the year 2006, Eros International Plc, the holding company of the Eros Group, became the first Indian company to list on the Alternative Investment Market (AIM) of the London Stock Exchange. It distributes content through retail outlets and it’s Website under the Eros and Ayngaran labels. EROSMEDIA can be compared with PVR Ltd, Prime Focus ltd, Tips Industries Ltd.

Investment Rationale:

Eros International Media Ltd is a leading global company in the Indian filmed entertainment industry that acquires co-produces and distributes Indian language films in multiple formats.The Company has strong distribution capabilities which enable them to target a majority of the 1.2 billion people in India, primary market for Hindi language films. The company has distribution offices in Mumbai, Delhi, Punjab, Mysore and Chennai. The group has a distribution network that spans over 50 countries, with offices in India, UK, USA, Dubai, Australia, Fiji, Isle of Man and Singapore. The company also holds license of airborne rights to certain airlines for in-flight movie viewing. 

Eros International Media Ltd has announced the launch of its online music channel Eros Now Music on YouTube. Eros has leveraged its wide reach and the subscriber base of its YouTube presence to launch a new channel Eros Now Music for established and emerging artists. Eros Now Music will feature established as well as emerging talent including Shaan, DJ Sheizwood, UK based pop artist Kimeli, Shweta Yogendra, Farhan Saeed, Gajendra, Simmy and Tippy, Rahul / Shah Rule among others. The content on the newly launched channel will include music videos and special behind the scenes footage. Eros International collaborates with Anurag Kashyap Films Pvt Ltd & Sikhya Entertainment to present Peddlers in the International Critics' Week, Cannes 2012. EIML has been honored with a Certificate of Excellence at the recently held Annual Inc. India Awards. EIML released 23 films during Q1FY13 in different languages; 5 Hindi, 18 Tamil & other regional language films. EIML recently signed a licensing agreement with colors’ Viacom18 Media Pvt. Ltd. EIML has been honored with a Certificate of Excellence at the recently held Annual Inc. India Awards. Eros International Media Ltd has released 23 films during Q1FY13 in different languages (19 films in Q1 FY12); 5 Hindi, 18 Tamil & other regional language films. The company has written a story of growth and positive start for Q2 FY13 with the successful release of “Cocktail” in July 2012, which has done a net box office collection of Rs. 100 crore worldwide. Eros International announces satellite television licensing deal with COLORS' Viacom18 Eros International Media Ltd has signed a licensing agreement with COLORS’ Viacom18 Media Pvt. Ltd for new and forthcoming releases and library films to be shown exclusively on Viacom18's COLORS channel in India.

Outlook and Valuation:

The recent KPMG report anticipates the market size of Indian Music & Entertainment sector to touch Rs 1,45,700 Cr (US$ 25.51 billion) by 2016. There is increased penetration in Indian markets, which is expected to even intensify further, owing to a revolution brought in by digital technology. Wireless broadband, growing internet usage, cable digitisation and higher DTH adoption would further drive Indian M&E industry. The report also noted that smart phones, tablets, gaming devices have laid the foundation of a new wave in the industry. The company reported net profit of Rs. 31.41 Cr as against Rs. 21.66 Cr in the last quarter, the revenue last quarter was Rs. 2,570.30 Cr, the company posted an tremendous growth of 44.44 % in EPS which stood at Rs. 3.42/sh in the last quarter. At the current market price of Rs. 162.55, the stock P/E ratio is at 8.37 x FY13E and 7.16 x FY14E respectively. Earning per share (EPS) of the company for the earnings for FY13E and FY14E is seen at Rs. 19.40 and Rs. 22.69 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 25 % and 21 % over 2011 to 2014E respectively. On the basis of EV/EBITDA, the stock trades at 5.33 x for FY13E and 4.57 x for FY14E. Price to Book Value of the stock is expected to be at 1.52 x and 1.26 x respectively for FY13E and FY14E. It is expected that the company's surplus scenario is likely to continue for the next three years, will keep its growth story in the coming quarters also. One can ‘BUY’ in this particular scrip with a target price of Rs. 180.00 for Medium to Long term investment. 

KEY FINANCIALS	FY11	FY12	FY13E	FY14E
SALES (Rs. Crs)	706.97	943.88	1,170.41	1,388.69
NET PROFIT (Rs. Crs)	117.23	147.84	178.04	208.25
EPS (Rs.)	12.82	16.12	19.40	22.69
PE (x)	13.05	10.38	8.62	7.37
P/BV (x)	2.29	1.84	1.52	1.26
EV/EBITDA (x)	9.26	6.62	5.49	4.71
ROE (%)	17.67	17.87	17.73	17.19
ROCE (%)	19.47	18.70	19.47	19.58

I would buy EROS INTERNATIONAL MEDIA LTD with a price target of Rs. 180 for the medium to long 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. 149.55 on your every purchase.

READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

CMC : The IT Partner for your Portfolio !!!

FOR HIGH RISK APPETITE INDIVIDUALS ONLY

Scrip Code: 517326 / CMC

CMP:  Rs. 1165.80; Buy at Rs. 1155 - Rs. 1165 levels.

Medium to Long term Target – Rs. 1200; STRICT STOP LOSS – Rs. 1073.00; Market Cap: Rs. 3,532.37 Cr; 52 Week High/Low: Rs. 1,187.30 / Rs. 721.30

Total Shares: 3,03,00,000 shares; Promoters : 1,54,89,922 shares –51.12 %; Total Public holding : 1,48,10,078 shares – 48.87 %; Book Value: Rs. 229.84; Face Value: Rs. 10.00; EPS: Rs. 53.06.82; Div: 125 % ; P/E: 21.71 times; Ind P/E: 7.20; EV/EBITDA: 19.18.

Total Debt: Rs. ZERO Cr; Enterprise Value: Rs. 7,065.05 Cr.

CMC LTD: The Company was founded in 1975 and is based in New Delhi, India. CMC Limited is a subsidiary of Tata Consultancy Services Limited which holds 51% as a promoter. CMC Limited was formerly known as Computer Maintenance Corporation Private Limited and changed its name to CMC Limited in August 1984. CMC Limited engages in the design, development, and implementation of software technologies and applications, as well as the provision of professional IT services in India and internationally. The company’s Customer Services segment is involved in the provision of IT infrastructure architecture, design, and consulting services; turnkey system integration of large network and data centre infrastructures; procurement, installation, commissioning, warranty, and maintenance of imported/indigenous computer and networking systems, and software; and provision of on-site and remote support services. Its Systems Integration segment undertakes the activities of solution deployment that includes embedded systems, software development, software maintenance and support, turnkey project implementation, and systems consultancy. The company’s IT enabled Services segment provides business process outsourcing and knowledge process outsourcing services for front end and back office, which include on-demand software services, office records digitization and document management, recruitment and examination results management, and legacy data migration management. Its Education and Training segment offers education and training programs in the areas of information technology, soft skills training, integrated career development, skills development, and vocational programs to corporate organizations, government institutions, and individuals. The company’s Special Economic Zone (SEZ) segment rents its SEZ campus facilities located in Hyderabad to TCS. It serves customers in banking and financial services, ecommerce, e-governance, defense and space, power and utilities, government, and hi-tech and telecommunication industries. The Company is compared with NIIT Technologies, Sonata Software ltd, Kpit Cummins Infosystems Ltd  

Investment Rationale:

CMC is a leading systems engineering and integration company in India under the strong parentage of TCS. CMC’s unique solutions approach in the System integration space along with the focus in the Hi-tech space has enabled CMC to post a robust growth in an uncertain environment and also ensured revenue stickiness for future. The company has been working for last several years with TRW a large automotive electronic player primarily due to its unique domain capabilities and hi-tech approach. It is believed that like other successful mid cap focused players CMC’s expertise has been the Hi-tech space where competition has been limited which enables significant revenue and client stickiness. The above solutions and technology approach along with TCS parentage will provide CMC with all advantages of a large player (inspite of being a small player) right from capabilities to offer services across geographies to a large balance sheet required to participate in huge projects like the Indian passport project. Looking at the result side CMC has posted an average 36 % growth (YoY) over the past nine quarters in the System Integration segment driven by robust traction in the US market, which contributes more than 70 % to the vertical’s revenue. The segment’s PBIT margin has also been above 20 % and management expects it to rise further with increase in offshore execution. Also, with the rising government focus, particularly on e-governance & on faster economic developments, the Indian markets are rightly placed in the fastest growing category in the APAC region. CMC’s execution track in the domestic space currently contributes 35 % - 40 % of total revenues. CMC gives services to Indian Railways’ online reservation, ICR for Office of Registrar and this clearly exhibits its powers in executing complicated projects. The company also expects offshore execution to increase by at least 10 % in the System Integration (SI) business which will enable its margins to improve by at least 300bps or 3 %. It is believed that there is a scope for at least 400bps or 4 % margin improvement in this vertical, which will boost overall margin by at least 200bps or 2 % over the next couple of years. CMC has been able to emerge strongly in the SI business in both revenue and margin primarily due to its arrangement with TCS. CMC and TCS have an arrangement whereby contracts are won by the latter in the international market and executed by the former, for which CMC pays a marketing fee. There are also instances where the companies have executed projects jointly with a revenue sharing model, more so in case of extremely large size and complex projects like the Indian government’s passport project, requiring varied skill sets and a strong capability at the project winning stage.

Outlook and Valuation:

According to Nasscom Indian IT has predominantly been known for strong exports (23% CAGR over FY04-12) in the past vis-a-vis domestic spend (18% CAGR over FY04-12). India is significantly underpenetrated (going by even per capita IT spend) versus most developed nations and both governments at the Centre and state levels have time and again emphasized on the importance of IT adoption and its role in streamlining key work processes like land records, e-rolls etc. The government’s National e- Governance Programmes (NeGP) and Unique Identification Development (UID) programme are just a first few key steps towards digitisation. It is believed that UID will lay a significant stepping stone for the future IT infrastructure. Nasscom predicts India to be the fastest growing IT services market worldwide. Management has clarified that the company has exited from loss making equipment deals in Q1FY13 and will maintain 10 % margin going forward. CMC has consistently paid dividends over the years with payout ratio being in the 17-25% range. Going ahead too, the company plans to continue the policy of paying dividends. An estimated dividend payout ratio of 30% for FY13 and FY14 is expected. CMC is expected to post robust revenue and earnings CAGR over FY12-14E, respectively, driven by strong growth in SI business and exit from loss making deals in the CS segment.  CMC could be bought with a long-term due to strong uptick expected from government spends, timing of which is difficult. In my view CMC could report FY13E EPS of Rs. 79.70/sh and for FY 14E of Rs. 104.40/sh. The stock could be bought for the target price of Rs. 1255 and recommend Accumulate on the stock.

KEY FINANCIALS	FY11	FY12	FY13E	FY14E
SALES (Rs. Crs)	1,096.20	1,469.30	1,873.60	2,313.40
NET PROFIT (Rs. Crs)	179.40	151.80	241.30	316.40
EPS (Rs.)	59.20	50.10	79.70	104.40
PE (x)	16.30	19.30	12.20	9.30
P/BV (x)	4.50	3.80	3.20	2.60
EV/EBITDA (x)	11.90	12.10	8.80	6.80
ROE (%)	27.40	21.30	28.40	30.70
ROCE (%)	31.20	27.40	34.10	36.50

I would buy CMC LTD with a price target of Rs. 1200 for the short term and Rs. 1255 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. 1073.00 on every purchase. 

READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

ARE SHARE BUYBACKS BENEFICIAL TO SHAREHOLDERS !!!

Some few months back Coal India Ltd. (CIL), the near-monopoly coal producer announced that it will seek shareholder approval at its upcoming Annual General Meeting to amend its Articles of Association in order to facilitate buyback as it was sitting on cash pile of around Rs. 58,202 Cr as on March 2012. As soon as this news was out, stock prices of CIL rose by more than 2%.  The reason for this price rise was primarily the expectation that the company will announce a share buyback.

Historically, share buybacks or even company announcements of a share buyback have had a similar effect on the respective stock prices. The market is usually quick to react positively to such news. But are share buybacks always beneficial to investors? Before we answer this, let’s understand what is a share buyback.

What is a Share Buyback ?

The repurchase of outstanding shares by a company in order to reduce the number of shares on the market either to increase the value of shares still available or reducing the supply. There are four basic options available to a company when it makes a profit: sit on the cash, re-invest it into profitable opportunities, pay a dividend or buyback shares.

Buyback is generally seen as a method of rewarding shareholders by returning excess cash to them, when a company doesn't see good growth avenues to deploy its resources. This can be done in two ways:

• It can tender an offer to existing stockholders to buy up to a certain number of shares at a fixed price within a fixed period of time, or,
• It could offer to buy the shares in the open market over a period.

What are the main intentions behind a Share Buyback? 

There are different motives that prompt the management to go in for a buyback of shares:

1. To reward shareholders: When a cash-rich company doesn't see good growth avenues to deploy its resources, it can choose to return cash to its shareholders via buyback of shares. Such an action can be viewed positively by the analyst community and reflect positively on the management.

2. To send out a confidence signal to the market: When a company announces a share buyback, investors see it as a positive sign in terms of the management’s belief in the company’s future growth & earnings. This could act as a confidence booster and leads to investor's buying into the company’s shares leading to a price rise.

Take for example, the Reliance Industries buyback scheme which was announced in February this year. After a series of quarterly results which were below expectations, the share price was languishing at INR 700. The share buyback announcement which was just 2 days before announcement of its quarterly results, led to a 5 % jump on the day of announcement. It was largely seen as an attempt to shore up the market sentiment in order to prevent a further fall in share prices after the announcement of another set of poor quarterly results.

3. To improve Financial Ratios: A buyback gives a temporary boost to some of the key financial ratios of the company that are based on the number of shares and cash as an asset. Suppose a company buys back 10 lakh shares at INR 15 per share for a total cash outlay of INR 1.5 crores. Below are the components of the Return on Assets (ROA) and Earnings per Share (EPS) calculations and how they change as a result of the buyback.

In the this grid, following a buyback, the company’s cash holding reduces from INR 2 crores to INR 0.5 crore, and the total assets of the company (cash being an asset) reduces from INR 5 crores to INR 3.5 crores. This leads to an increase in its ROA (Earnings/Assets) from 4 % to 5.71 %, even though earnings have not changed. A similar effect can be seen in the EPS number (Earnings/Shares Outstanding), which increases from INR 0.20 to INR 0.22.

4. To prevent dilution of control: A buyback helps to absorb the excess shares, which were caused due to dilution, may be due to the exercise of employee stock option programs or due to conversion of FCCBs or warrents. Thus, a buyback reduces the total number of shares outstanding in the market and helps to increase shareholders value.

5. To prevent unfriendly takeovers: By undertaking a buyback, the company makes it more difficult for a raider to take control by acquiring majority stake from the open market.

Now when we have clearly known about the prime intentions behind the Share buybacks, but are these buybacks always an good idea or can it decrease shareholder value. ?

When  are the Share Buybacks not good for Shareholders ?

1. Buyback of overvalued shares: a company buying overvalued shares from the market would lead to destroying shareholder value, and would be better off paying that cash out as dividends, so that shareholders can invest it more effectively.

2. To boost earnings per share: contrary to popular wisdom, increasing EPS doesn't increase fundamental value of the shares. Though the EPS derived from the P&L statements of the company may seem to rise, there is no net increase in the cash EPS. Since companies have to spend cash to purchase the shares, valuations are adjusted for reductions in both, cash and shares.. The result is a cancelling out of any impact in the cash EPS, as now lower cash earnings are divided between fewer shares to produce no net change in the earnings per share.

3. Using borrowed money to fund the buyback: Using debt to fund a buyback could have an adverse effect on the credit rating of the company, since in effect the company reduces its equity, increases its debt, with no net increase in cash to serve as a cushion for the increased leverage.

So, are Share Buybacks really beneficial for Shareholders ? 

Stock buybacks can be great for shareholders if the company cannot utilise the excess cash productively. As mentioned before, it could lead to a cash inflow for shareholders as also lead to appreciation in share price. However, the price at which the company buys back the shares should be right.

On the other hand, you should be careful and assess the reasons for the buyback. You must exercise a reasonable amount of caution in the following cases:

• Where a stock grant to employees by way of employee stock options or a stock issuance for merger & acquisition is offsetting the shares taken out of circulation, thereby resulting in no net increase in share value.
• Where the management aims to cover up weak ratios or improve the market price of the shares by playing with investor sentiments.

The new norms for Share Buybacks :

Market regulator SEBI on February 7^th 2012 modified norms for share buyback through the tender offer route under which companies will have to reserve 15 per cent of the offer for small shareholders.

"15 per cent of the number of securities which the company proposes to buy back (through tender offer)... shall be reserved for small shareholders," the Securities and Exchange Board of India (Buyback of Securities) (Amendment) Regulations 2012 said. Small shareholder refers to a shareholder who holds shares not exceeding Rs. 2 lakh of a listed company. The buyback process through the tender offer route can be completed within 41 days of the board approval.

As per the guidelines, a company would have to publish advertisement in newspapers within 2 days after securing board approval for the buyback and after 5 days it has to file the offer document with the Sebi. The offer for buyback shall remain open for 10 working days & within 7 days the company would have to pay the buyback amount to the shareholders.

Before this amendment there were two ways by which a company can come out with a buyback - open market and tender offer. While in open market offer companies can buy back shares from shareholders without knowing the buyer, under tender offer the company has to write to every shareholder saying it is willing to buy back shares in proportion to the issue.

Under Section 77A(2) of the Companies Act, 1956, Buyback of Equity shares by a company shall be up to 25 % of the total paid- up Capital and the amount intended to use for buyback shall not exceed 25 % of total paid-up Capital and Free Reserve and requires the approval of members by way of Special Resolution. 

• Promoters shall not participate in the buyback.
• As per the Act, the ratio of the Debt owed by the company should not be more than Twice the Share Capital & Free Reserves after Buyback.
• The Company will not be allowed to issue fresh equity shares within a period of 6 months after the completion of the Buyback except by way of Bonus issue or in the discharge of subsisting obligation such as conversions of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity.
• The company should confirm that there are no defaults subsisting in the repayment of deposits, redemption of debentures or preference shares or repayment of term loans to any financial institution or Banks.

Example of calculation of the Buy Back - 

The Total number of Equity shares as on 31st March were 218,16,86,781 shares

Maximum Amount permissible for Buy-back i.e. 25 % of the Total paid up and free reserve of Rs. 2,551.26 Cr = Rs. 637.81 Cr.

Maximum Shares permissible for Buy-back i.e. equity bought back cannot exceed 25 % of 218,16,86,781 shares = 54,54,21,695 shares.

So, Company can buy back 54,54,21,695 shares & money to be used should not be more than Rs. 637.81 Cr.