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Wednesday, April 27, 2011

Is it Time to worry about the Dollar??

The Fed’s so-called “QE2″ (Quantitative Easing/second round) which is purchasing of U.S. Treasury bonds by printing more and more currency notes to fulfill its purchases are supposed to come to an end on June 30, 2011, which would make July a crucial month – for the US economy, for the performance of the dollar and most of all for the Emerging Markets like INDIA.
For the last two years, the U.S. economy has been supported by the twin catalysts of fiscal and monetary stimuli. Fiscal stimulus seems to continue for some time as US have year’s $1.6 trillion deficit. But monetary stimulus is another matter. 

Since QE2 began in November 2010, the Fed has been buying about two-thirds of the Treasury bonds issued – or about $600 billion ($60,000 Cr) of the $900 billion ($90,000 Cr) in total bonds to be issued between November and June. Simply extending QE2 won’t solve this problem. The Fed would then be buying both too much of debt and not enough of debt at a same time.

Treasury bond purchases of $75 billion ($7,500 Cr) a month would be enough to push inflation sharply upwards. This is, after all, the very same policy that gave the German Weimar Republic its trillion-percent inflation. On the other hand, even if the Fed buys $75 billion ($7,500 Cr) of Treasuries a month, this will bring with them the need to place an additional $75 billion ($7,500 Cr) worth of bonds every month. And with inflation rapidly accelerating, the chances of a bond market and dollar crisis would still be great, which will affect the flows of foreign money (FII’s money) to the emerging markets like India. This is a concern!!!!

The one way to avoid the Death of the Dollar
With the U.S. market struggling under the burden of rising inflation and some ill-advised monetary and fiscal moves, the death of the dollar is looming as a worst-case – but still possible – scenario.
The Fed has one chance to avoid this outcome. Just to have a chance of staying level with inflation. U.S. central bank policymakers must boost short-term interest rates at least to the 3% level. That would burst the global commodities bubble like one in Sliver, and reduce inflationary pressures. With that, the Fed could then –continue with a “modified QE3.” For instance, it could buy $50 billion ($5,000 Cr) of bonds in the third quarter and $25 billion ($2,500 Cr) in the fourth quarter, thus breaking the Treasury bond market. With inflationary pressure reduced by the interest-rate increase, the chances of a Treasury-bond-market meltdown would thus be reduced to almost zero. Interest rates would rise and bond prices would decline, but it will be in an orderly manner. And inflation, if it continued, would do so at a more-moderate pace.

In fact, even inflation – should it remain stronger-than-desired – could be moderated, simply by raising rates a bit more, perhaps in several increments. And the U.S. dollar would be saved. There’s only one problem with this scenario and that won’t happen unless Bernanke won’t boost rates.
Visit my previous post on click here-  US PRINTING NOTES

Saturday, April 23, 2011

TATA MOTOR DVR : Buy for Dividend yields.

Scrip Code: 570001 / TATAMTRDVR
CMP:  Rs. 696.20; Buy at Rs.670 – Rs.685
Price Target: Short term Rs.725;Long term Rs. 920.
Market Cap: Rs. 6,707.30 Cr.
52 Week High/Low: Rs.940 / Rs. 407.35
Total Shares: 9,63,41,706  shares(15.2% of Sh Capital); Promoters : 1,84,01,430 shares – 19.10 %; Total Public holding : 7,79,40,276 shares – 80.89 %;
Book Value: Rs. 237.37*; Face Value: Rs. 10.00; EPS: Rs.28.99*; Div:150* %.
P/E: 23.80* times; Ind P/E: 32.39*; EV/EBITDA: 18.68*
Total Debt: Rs. 3,163.18* Cr; Enterprise Value: Rs. 1857.52* Cr
*Being DVR a class of equity capital, Tata motors financials are used.

Tata Motors, founded in 1945, was formerly known as Tata Engineering And Locomotive Company Limited changed its name to Tata Motors Limited in 2003. The company is leading manufacturer of commercial & passenger vehicles in India is among the top 3 passenger car manufacturers in India, the world's 4th largest truck manufacturer, and world's 2nd largest bus manufacturer. Tata Motors has operations in UK, South Korea, Thailand & Spain. The company has many subsidiaries but the most prominent among these is Jaguar-Land Rover (JLR) (a British car manufacturing company) which it acquired in 2008 at $230 Cr and turned it from a loss making company to a profit making company. JLR contributes 54% to the company’s revenues. The company’s product portfolio ranges from the ultra low cost car Nano to the luxurious cars from JLR, from its ground breaking invention of the light commercial vehicle (LCV) the Ace to the international Prima Truck range.

Experienced and Efficient Management: Tata Motors is a part of the Tata group which is headed by Mr. Ratan Tata, chairman of Tata Motors Ltd. Also the management includes Carl Peter Foster who has a vast experience. He headed the BMW Group for 20 years.
Strong Consolidated Growth: Tata motors had acquired Jaguar and Land Rover from Ford Motor Co. During acquisition the unit was a loss making one. But the management at Tata motors was capable enough to achieve a turn around and not just TTM stopped losses but converted it to a profitable venture. Today around 54% of Tata Motors Revenues comes from JLR.
Good Product Mix: Tata motors had begun as a commercial vehicle manufacturer. A decade ago, Tata Motors had begun to manufacturer passenger vehicles. Today Tata Motors is one of the leading automobile makers in the world. It is India’s largest Automobile manufacturer. Its passenger cars range from the worlds cheapest car, the Nano, to its newest cross over the Aria to the luxurious cars from JLR. The company has a vast portfolio of commercial vehicles ranging from its super successful LCV, the Ace, to the its sturdy tractor trailers, haulage vehicles, buses, hybrid buses, etc to the Prima trucks built for sale in international markets.
My view on Valuations: The performance of the company increased considerably during the Q2FY11 and Q3FY11 and the outlook for Tata Motors continues to be positive, given the robust growth in the economy, increase in sales and profitability of JLR, improvement in industrial and mining sector, completion of ramp-up at its Sanand plant for Nano. The only concern is the supply constraint it faces from Ford for engines and from other suppliers for raw material. At the CMP of Rs. 696.20, Tata Motors DVR is trading at 5x its FY11E EPS of Rs.138.4 and at 4.37x its FY12E EPS of Rs.159.2.
Globally DVRS trade between 10% - 15% discount to its Equity shares, TTM DVR currently trades at 44 % discount to its Equity shares. One should buy TTM DVR at 40% - 45% discount to its EQ SH & Sell when DVR is 10% - 15% discount to its EQ SH. TTM DVR can be a good “BUY” with a target price of Rs.900, with an upside of 30% in the long term.
Expect discount to the Equity Shares reduce (to at least 30%) over the next one year given the attractive valuations and increasing free float. For the shorter term it can be a good BUY, with a price target of Rs.725.00
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SALES (Rs. crs)92,519.31,15,576.81,30,024
NET PROFIT (Rs. crs)1,5268,680.49,986.6
EPS (Rs.)44.1138.4159.2
PE (x)
P/BV (x)

I maintain my BUY status on TATA MOTOR DVR with the price target of Rs. 725 in short term. For long term my target is of Rs.920. As I always say do respect the market and keep a strict stop loss of 8 % on your every purchase.

Wednesday, April 13, 2011

ILandFS TRANSPORT : Accumulate on every dip

Scrip Code: 533177 / ILFSTRANS
CMP:  Rs. 244.95; Buy at Rs.235 - 240.
Price Target: Rs. 300.00.
Market Cap: Rs. 4,745.96 Cr.
52 Week High/Low: Rs. 367.80 / Rs. 172.00
Total Shares: 19,42,67,732 shares; Promoters : 14,58,67,769 shares – 75.09 %; Total Public holding : 4,83,99,963 shares – 24.91 %;
Book Value: Rs. 81.11; Face Value: Rs. 10.00; EPS: Rs. 16.4; Div: 30 %.
P/E: 14.93 times; Ind P/E: 14.57; EV/EBITDA: 9.69
Total Debt: Rs. 1,525.00 Cr; Enterprise Value: Rs. 6,270.96 Cr
Fair Value: Rs.300.

IL&FS Transportation Networks Limited engages in the development, implementation, operation, and maintenance of surface transport infrastructure projects in India & internationally. Company constructs and operates national and state highways, roads, flyovers, and bridges under the Build, Operate, and Transfer (BOT) basis. It also provides maintenance services primarily for highways and roads in Spain, Portugal, and Latin America; advisory and project management for BOT road projects; trades in materials used in the maintenance of roads; and undertakes construction contracts. ITNL was formerly known as Consolidated Transportation Networks Limited and changed its name to IL&FS Transportation Networks Limited in September 2005. The company was incorporated in 2000 and is based in Mumbai, India. IL&FS Transportation Networks Limited is a subsidiary of Infrastructure Leasing & Financial Services Limited.

ILFSTRANS has Rs 13,460 Cr worth of project capital works remaining to be executed in over the period of 3-4 years. ILFSTRANS receives 10% of total project cost (TPC) as upfront charges and further 5%-8% as consulting charges from its subsidiaries. Further, the team of 120 engineers in the company designs supervises and out sources construction work to local subcontractors. This model allows it to focus on the core activities which optimizes leverage and maximizes the returns on assets and return on net worth.
ILFSTRANS collects Rs. 52 lakhs average toll per day from 5 operational road projects which is expected to increase by 9.8x up to Rs 5.12 crore per day by FY14E primarily led by functioning of 10 new road projects. The increase in toll revenue by 9.8x will leave enough free cash flow in the system.
National Highway Authority of India (NHAI) has planned to award 100 road projects of 7000 km to be awarded in current financial year. ILFSTRANS maintained 9% market share in FY10 and it is believed that it will be a natural beneficiary to grab these opportunities.

Valuation of ILFSTRANS on a SOTP method comes to Rs. 326. The value on   standalone basis, in which the company derives its revenues from advisory fees and EPC work comes at Rs. 98 based on the 5x its FY11E EPS of Rs 19.6. It is assumed that the cost of equity of 13% for toll & 12.5% for annuity projects which brings the valuation of existing BOT projects of ILFSTRANS at Rs 183.4, investment at Rs 19, Elsamex at Rs 19/share and ILFSTRANS’s stake in Noida Toll Bridge at Rs 6.7/ share.

KEY FINANCIALS20102011E2012E2013E
SALES (Rs. crs)2,4033,7416,2777,906
NET PROFIT (Rs. crs)335442546655
EPS (Rs.)14.619.323.828.6
PE (x)
P/BV (x)
RoE (%)19.720.421.921.7
RoCE (%)14.413.312.912.6

I maintain my accumulation status on ILFSTRANS with the price target of Rs. 255 in short term. As I always say do respect the market and keep a strict stop loss of 8 % on your every purchase.

Sunday, April 3, 2011

Cairn India : The only beneficiary of raising Oil Prices !!

Scrip Code: 532792 / CAIRN
CMP:  Rs. 354.35; Buy at current levels
Target: Rs. 370.00
Market Cap: Rs. 67,352.59 Cr.
52 Week High/Low: Rs. 368.05 / Rs. 253.40
Total Shares: 190,07,36,406 shares; Promoters : 118,32,43,791 shares – 62.25 %; Total Public holding : 71,74,92,615 shares – 37.75 %
Book Value: Rs. 167.80; Face Value: Rs. 10.00;
Total Debt: Rs. 3,503.00 Cr; Enterprise Value: Rs. 68,732.59 Cr

Cairn India is an Exploration and Production company, a leading player in the Indian oil and gas industry. Cairn India has its interests in 15 blocks. The firm has made more than 30 oil and gas discoveries in India during the last 13 years, was listed in January 2007 through an IPO after it spun off from its parent Cairn Energy Plc (current stake: 65%). Cairn has working interest in 14 E&P blocks. Ravva and Cambay blocks produce 51.4k boepd (Cairn WI 14k bpd).
Vedanta along with its subsidiary SESAGOA has made an offer of $8.5 - $8.6 billion to acquire controlling stake (51-60%) in Cairn India at Rs405/share with Rs50/share as non-compete fee. The deal will be 20 % from SESAGOA at $3 bln & 31 % from Vedanta. The open offer will be at Rs.355/share. However, the roadblock in the deal due to government and ONGC stand would keep stock price under pressure. Cairn has commissioned three trains at MPT and pipeline section from MPT to Salaya, through which it is delivering crude to refiners.

Latest developments on Cairn-Vedanta deal
The Oil Ministry has imposed 11 pre-conditions on Cairn India and its prospective buyer Vedanta Resources, for approving the deal. ONGC and Vedanta have shown willingness to accept most of the conditions except the change in royalty obligations and surrender of their rights to take legal resource on disputes with the government or its technical advisor DGH.
Currently, Cairn India does not pay any royalty on the crude and has even contested the payment of Rs 2,500 per ton cess on its 70% share in Rajasthan block.
Some of the key pre-conditions are as follows:
Royalty costs recoverable. It means royalty costs should be recovered from the sale of crude oil from the field before profit is shared between the companies and the government. ONGC's royalty obligation is in excess to US$3 Bn (Rs.14500 Cr) for the approved crude oil production for the life-time of the field.
Withdraw arbitration proceedings for Cess: ONGC also wants Cairn to withdraw arbitration proceedings challenging its liability to pay cess for oil produced from the Rajasthan block. The Company is currently paying under protest its share of cess at Rs.2500/Ton.
Guarantees to be provided: Vedanta will have to give financial and performance guarantee same as given by Cairn Energy.
Retain Technical capabilities: Vedanta has to retain the Cairn India's existing technical capability.
Adhere to the approved field development plans: Vedanta has to adhere to the approved field development plans and work programmes of the oil and gas fields as per contracts.
If Cairn India accepts the first two conditions (though looks very unlikely) then the valuations will be very expensive for Vedanta and will not make commercial sense for it to acquire stake in it. ONGC's contention is that its returns from its investment in the field should at least be higher than the cost of capital which is about 13-14%. As per Sebi regulation, an open offer requires 55-60 days to complete. The shareholders approval taken by Cairn and Vedanta is valid up to 15th April'11.
Valuation Details - 
I have tried to value CAIRN India on DCF method of valuation with 12.04% WACC. With the rise in the international crude oil price, the realization for the Company is also expected to improve. However, the stock price has under-performed in spite of improving fundamentals mainly due to uncertainty over the Cairn-Vedanta deal and also on the royalty and cess payment. It is expected that in the next twelve days i.e by 15th April 201, final outcome of the deal should be declared. Based on the current valuations the stock is available very cheap and is recommended to BUY with a target of Rs.378/share.
Based on the Rajasthan exploratory portfolio upsides and advancing production from the MBA block the Fair Value for the stock comes at Rs.378/share. In the DCF model, it is assumed a long-term static average crude oil price of US$86/bbls; Cairn crude oil realization @ 10% discount; Cess at Rs.2575/MT; plateau production at 240kbopd.
Rajasthan production details
In Q3FY11, the average gross production from Rajasthan block was 124.9 Kbopd as compared to 15.43 kbopd in Q3 FY10 and 116 Kbopd in Q2FY11 registering a growth of 709% YoY and 7.6% QoQ basis.
Cash (Net debt) as on 31st Dec'10 was Rs. 870 Cr. The Company replaced its rupee facility of Rs.4,000 Cr with a lower financing of Rs. 2,250 Cr. My estimates is of FY11E EPS of Rs.33.9 and FY12E EPS of Rs.49.9.  Stock is cheaply valued at 4.89x EV/EBIDTA and 6.3x P/E based on FY12 earnings estimates . The Brent crude oil price is trading around USD$107/bbls which is the benchmark for Cairn's crude oil. With the rise in the international crude oil price, the realization for the Company is also expected to improve. However, the stock price had under-performed in spite of improving fundamentals mainly due to the uncertainty over the Cairn-Vedanta deal (royalty and cess payment). It is expected that in the next 3 months, final outcome of the deal should be declared so based on the current valuations the stock is available very cheap and recommended to BUY Cairn India with a price target of Rs.378/Share.
NOW only concern on price movement is  that Petronas, a Malaysian oil major holds 14.91 % of Cairn a 28,34,31,438 shares, the BUZZ is that it may sell its stake in open market in order to save Capital Gain Tax, at current price of Rs.354.35 , Petronas's stake in Cairn is worth Rs.10,043.39 Cr. For which Petronas has shelled out just above Rs.5,000 Cr to buy 28.34 Cr Shares. If sale happens it will cause the prices to fall but the question will be that Why would Petronas Sell? lets hope ....till then some key financials -

SALES (Rs. crs)1,62311,590.615,695.1
NET PROFIT (Rs. crs)1,0366,433.39,457.6
EPS (Rs.)5.533.949.9
PE (x)
PRICE/BOOK (x)1.761.491.23
EV/EBITDA (x)58.687.054.89
RoNW (%)3.117.320.9
RoCE (%)2.217.824.4

I maintain my BUY status on CAIRN INDIA with the price target of Rs. 370 in short term. As I always say do respect the market and keep a strict stop loss of 8 % on your every purchase.
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