Wednesday, February 23, 2011

Analysts' corner Bse Nse Stock

Bharat Electronics, Dishman Pharmaceuticals, Dish TV & GSFC

Bharat Electronics
Reco Price: Rs 1,662,
Target Price: Rs 2,200

Bharat Electronics (BEL) will be a major beneficiary of rising electronic spending for modernisation of India’s armed forces. The order traction remains strong, with the current book at Rs 16400 crore and is expected to rise to Rs 18000–19000 crore by the fiscal-end. The robust project pipeline would help sustain the order book over the next 2–3 years. BEL’s Q3 performance was largely in line and analysts expect Q4 to be a strong quarter which could act as a share price trigger in the near term. BEL reported Q3FY11 revenues of Rs 1370 crore, up 11 per cent YoY. EBIT margins came in at 14 per cent, down from 22 per cent last year. Strong cash generation and a solid cash balance provide adequate downside support. Maintain buy.

— Religare Institutional Research

Dishman Pharmaceuticals
Reco Price: Rs 102,
Target Price: Rs 123

Dishman Pharmaceuticals (Dishman) reported lower-than-expected results for 3QFY2011 impacted by the poor performance of Carbogen Amcis, currency movement and rising material costs. The management expects revenues to remain flat, margins to remain under pressure owing to which net profit would decline in FY2011. Going forward, excluding Carbogen Amcis, the company has guided a 15 per cent top-line growth for FY2012. The research house has lowered its estimates due to the slower-than-expected recovery in the CRAMS segment as well as the time lag required for restructuring of Carbogen Amcis. Management expects a flat performance in FY2011 on the top-line front, with a decline in net profit as margins are expected to be under pressure. However, we expect net sales and net profit to come in at Rs 1,045 crore and Rs 77.3 crore respectively, in FY2012. However, the stock has corrected and at current levels factors in most of the negatives. Maintain buy.

— Angel Broking

Dish TV
Reco Price: Rs 59,
Target Price: Rs 77

Dish TV is set to tap most of the exponential growth in the Indian Pay TV market (akin to telecom growth), led by rising affluence and regulatory push to digitalisation. India is evolving towards direct-to-home (DTH) as digital cable has failed to rise up to the challenge owing to poor funding and execution, and last mile concerns. Dish TV, after making a head start backed by the first-mover advantage, has been able to maintain its incremental market share as it has aggressively invested in subscriber acquisition. In our view, Dish TV will turn free cash flow positive positive in FY13 and net profit positive in FY14, with its revenues growing 3x through FY11E-15E. Our target price assumes an upside of 31 per cent from the current levels – a further upside of 27 per cent (Rs16/share) exists if the licence fee is reduced to 6 per cent as proposed. The DCF based target price assumes an EV/sub/ARPU of 40 times FY13E, in line with global peers. Initiate with buy.

— ICICI Securities

Reco price: Rs 335,
Target price: Rs 530

Higher caprolactam and lower benzene prices have improved spread (contribution margin) increased from $1,260/mt in January 2010 to $1,850/mt by Dec 2010. Caprolactam prices increased further by 25% to $3,480 / mt till February 2011 (over Q3FY11 average price at $ 2,790/mt). With benzene prices up by 20% to $1,150 / mt (over Q3FY11 average of US$ 960 /mt), this spread has further increased to US$ 2,330 /mt against Q3FY11 average of US$ 1,830 / mt Feb’2011 The current all time high caprolactam prices are unlikely to sustain. It has a buy recommendation on the stock with price target of Rs 530, implying 51% upside. The stock trades at compelling valuations of FY12E P/E of 5x and EV/EBITDA of 2x. Further P/BV of 0.9x (FY12E) estimated book value of Rs 390 a share and per share investment value of Rs 120 protects downside risk.

— Emkay Global   

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Thursday, February 17, 2011

Analysts' corner Bse Nse Stock

 M&M, Taj GVK Hotels & Resorts, Deccan Chronicle Holdings & Parsvnath Developers

Reco Price: Rs 668,
Target Price: Rs 819

M&M would effect a fresh round of price increases across its tractor portfolio effective from February 12-15, 2011 in the range of 2-3 per cent. This would mean for nine months of 2010-11 price increase of 7-8 per cent for the tractor portfolio. While dealers said demand was steady, higher demand is seen for 40-45 Hp segment. Though lending rates have increased by 100-150 bps over the last 3 months for M&M Finance, at 12-13 per cent, and for nationalised banks at 10-11 per cent, this has not affected demand so far. Analysts believe the price increases would help M&M partially mitigate the input cost pressure. This, coupled with steady demand for tractors, augurs well for M&M. Maintain buy.

—Centrum Broking

Taj GVK Hotels & Resorts
Reco Price: Rs 100,
Target Price: Rs 165

Taj GVK Hotels & Resorts (Taj GVK) reported Rs 70 crore sales, up 9 per cent Y-o-Y. It posted ORs of 65-75 per cent for its hotels in Hyderabad against 65 per cent in Chennai and 77 per cent in Chandigarh. ARRs grew flat to marginally, both Q-o-Q and Yo-Y. The company sounded cautious on any big jump in ARRs, as there is enough supply coming in the next 2-3 years across its major markets. Taj GVK reported 40 per cent EBIDTA margins, flat on a Y-O-Y basis. Edelweiss has reduced its FY11 and FY12 EBIDTA estimates by 20 per cent and 22 per cent respectively, due to lower-than-estimated rise in ARRs. With the opening of Begumphet property, in Q2FY12, Edelweiss expects EBIDTA margins to decline to 36.2 per cent in FY12 from 37.5 per cent in FY11. Maintain buy.

—Edelweiss Securities

Deccan Chronicle Holdings
Reco Price: Rs 81,
Target Price: Rs 128

Post Deccan Chronicle Holdings’ (DCHL) Q3FY2011 results, Angel Broking has revised its estimates downwards primarily to factor in lower revival in advertisement volume. The company posted dismal results for the quarter, with top-line de-growth of 15 per cent yoy to Rs 200 crore and earnings decline of 55 per cent yoy to Rs 35 crore, , impacted by increase in interest expense, depreciation charge and margin contraction, though cushioned by higher other income. Its Ebitda margin contracted by 1648 bps yoy, led by squeeze in gross margin and lower operating leverage. Angel Broking has lowered its target P/E multiple from 12x to 10x owing to concerns relating to the merger of its 100 per cent subsidiaries, Deccan Chargers Sporting Ventures, Odyssey Indian and Netlink Technologies with itself and high volatility in garnering advertisement volumes owing to the political instability in Andhra Pradesh. The stock trades at attractive valuations. Maintain buy .

—Angel Broking

Parsvnath Developers
Current market price: Rs 29,
Fair value: Rs 63

CRISIL Equities has assigned fundamental grade of 2/5 to Parsvnath Developers Ltd (Parsvnath), indicating Rs moderate’ fundamentals. Parsvnath's strong development pipeline and fast construction activity provide a strong revenue visibility over the next decade. The grade is constrained by the high amount of debt which was borrowed to fund its aggressive project execution plans. Though the recent fund raising through QIP and project level private equity investment has eased the overall liquidity, CRISIL believes that Parsvnath’s huge development plans will necessitate more funding and may lead to further debt raising.

CRISIL Equities expects Parsvnath’s revenues to grow at a three-year CAGR of 17 per cent to Rs 1520 crore in FY13, while EPS is expected to increase from Rs 3.0 in FY10 to Rs 9.3 in FY13.   

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Wednesday, February 16, 2011

Analysts' corner Bse Nse Stock

Cipla, Reliance Capital, Pantaloon & Bayer CropScience

Reco Price: Rs 313,
Target Price: Rs 311

Cipla continued its disappointing performance in Q3 FY11 with a 20 per cent yoy decline in net profit (adj) at Rs 230 crore, which was the fifth consecutive quarter of weak bottomline growth. This decline was due to lower technology knowhow fees at Rs 15 crore (Rs 70 crore in Q3 FY10) and a rise in employee expenses (up by 52 per cent yoy) and other expenses (up by 17 per cent yoy). Cipla’s domestic formulations sales rose 11.5 per cent yoy to Rs 2,170 crore during the nine months of FY11. Growth was driven by branded formulations and partly offset by low growth in generic formulations. Analysts expect domestic formulations to grow at a modest 12 per cent CAGR until FY13 on the back of a significantly large base. Maintain sell.

—Reliance Securities

Reliance Capital
Reco Price: Rs 442,
Target Price: Rs 563

Reliance Capital (RCap) reported a profit of Rs 106 crore in Q3FY11 (down 5 per cent QoQ). Earnings traction in core businesses was strong — profitability in asset management and consumer financing grew 30 per cent QoQ and for securities/distribution business, it grew 40 per cent QoQ. Life insurance business reported profits due to sharp decline in opex and increased share of high margin policies. Losses continued in general insurance business (Rs 24 crore vis-à-vis Rs 28 crore in Q2FY11). In the asset management business, unconducive capital markets resulted in AUMs coming off 5 per cent QoQ. Upgrade to buy.

—Edelweiss Securities

Reco Price: Rs 256,
Target Price: Rs 338

Pantaloon’s retail demand continues to be buoyant as same-store sales (SSS) growth for lifestyle, value and home remained strong at 21, 12 and 18 per cent yoy, respectively in Q2FY11. Overall, core retail revenues rose a healthy 31 per cent yoy. Ebitda margin contraction of 150 bps yoy to 8.6 per cent for core retail was led by 220 bps gross margin decline yoy — disappointing, as management had guided to an improvement in margins in Q2 on account of the full-price sales in the festive season. Consequently, core retail net profit rose a modest 6 per cent yoy to Rs 47 crore. E-zone would move into a step-down subsidiary, in which management would induct a strategic partner. E-Zone reportedly had an Ebitda loss of Rs 12 crore – its hive-off should improve profitability in the core Home Business (which is Ebitda positive). Maintain buy .


Bayer CropScience
Reco price: Rs 776,
Target price: NA

For 3QFY2011, Bayer CropScience’s (BCS) results were marginally ahead of estimates. Total sales grew by 38 per cent yoy to Rs 531 crore, while Ebitda margin rose 112 bps to 11.8 per cent. Net profit came in at Rs 36 crore, up 66 per cent yoy. Going ahead, analysts expect BCS to be on a strong growth trajectory on the back of high agro-commodity prices. BCS’s staff cost and other cost rose only 12.5 per cent and 19 per cent, respectively, which led to margin expansion. During the quarter, sales were affected due to late and slightly above-normal monsoons. However, analysts believe the same will be booked in Q4FY11. Maintain Neutral.

—Angel Brokin 

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Tuesday, February 15, 2011

Analyst's corner Bse Nse Stock

 Monnet Ispat & Mundra Port & SEZ

Reco price: Rs 536
Target price: Rs 697

Monnet Ispat’s Q3FY11 revenue at Rs 350 crore declined 7 per cent YoY as contribution from power sales declined 40 per cent YoY due to reduced tariff. Operating margin expanded by 120bps YoY to 31.4 per cent. However, net profit at Rs 70 crore grew 3 per cent YoY on higher other income and lower interest. Steel sales declined 10 per cent YoY to 151kt on lower sales of steel (down 98 per cent YoY to 626 tonnes). The company has increased focus on steel production and expects to ramp-up output and sales in Q4. The company sold 210mn units of power at an average tariff/unit of Rs3.4 (Rs 4.9 in Q3FY10). With 1.4mntpa expansion by FY13, Monnet is on the path of transforming itself from primarily sponge iron maker to an integrated steel producer. This transition will boost Monnet's steel segment EBITDA by 54 per cent CAGR over FY10-12. Upgrade to buy.

— Pinc Research

Reco price: Rs 129
Target price: Rs 191

Mundra Port and SEZ’s (MPSEZ) Q3 FY11 results were in line with expectation. Revenue for the quarter grew 33.4 per cent yoy to Rs450 crore, led by strong volume growth. Realisations (adjusted for contracting and SEZ revenue) were up about 16 per cent yoy. EBITDA margin for the quarter declined marginally by about 30bp to 68.7 per cent yoy due to higher operating expense( up 56 per cent to Rs1,09 crore). Interest expense, declined by 27 per cent yoy to Rs 36 crore. The effective tax rate was lower by about 500bp to 6.5 per cent . Net profit for the quarter grew by 40 per cent yoy to Rs230 crore. MPSEZ cargo volume grew by 26.2 per cent yoy to 12.4 MMT. Crude volumes for the quarter were negatively affected on account of the pipeline overhauling work being done in relation to capacity expansion at IOC’s Panipat refinery. Maintain buy.    

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Today's Bse Nse Stock Picks

Axis Bank, Tata Steel & L&T

Current price: Rs 1,270,
Target price: Rs 1,300

The stock closed strong on high volumes. It may have made a small upward breakout and should test resistance at Rs 1,300-1,310. Keep a stop at Rs 1,250 and go long. Increase the position between Rs 1,280 and Rs 1,285. Book profits above Rs 1,300. If the Rs 1,250 stop is broken, the stock could fall till Rs 1,205, so reverse and short with a stop loss at Rs 1,255.

Current price: Rs 620,
Target price: Rs 632

The stock has jumped on appreciably lower volumes. This is a rally driven by short covering, but it could continue till around the Rs 630-635 band. Keep a stop at Rs 612 and go long. Increase the position between Rs 627 and Rs 630. Above Rs 632, start booking profits. If Rs 612 is broken, the stock could correct back to support around Rs 595.

Current price: Rs 1,660,
Target price: Rs 1,690

The stock has registered its third successive up-session on expanding volumes. It could run up till it hits resistance at Rs 1,685-1,695. Keep a stop at Rs 1,635 and go long. Increase the position between Rs 1,670 and Rs 1,675. Start booking profits above Rs 1,690. If you can hold three to five sessions, look for a target of Rs 1,730.

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Friday, February 11, 2011

Analyst's corner Bse Nse Stock

Monnet Ispat & Mundra Port & SEZ

Reco price: Rs 536
Target price: Rs 697

Monnet Ispat’s Q3FY11 revenue at Rs 350 crore declined 7 per cent YoY as contribution from power sales declined 40 per cent YoY due to reduced tariff. Operating margin expanded by 120bps YoY to 31.4 per cent. However, net profit at Rs 70 crore grew 3 per cent YoY on higher other income and lower interest. Steel sales declined 10 per cent YoY to 151kt on lower sales of steel (down 98 per cent YoY to 626 tonnes). The company has increased focus on steel production and expects to ramp-up output and sales in Q4. The company sold 210mn units of power at an average tariff/unit of Rs3.4 (Rs 4.9 in Q3FY10). With 1.4mntpa expansion by FY13, Monnet is on the path of transforming itself from primarily sponge iron maker to an integrated steel producer. This transition will boost Monnet's steel segment EBITDA by 54 per cent CAGR over FY10-12. Upgrade to buy.

— Pinc Research

Reco price: Rs 129
Target price: Rs 191

Mundra Port and SEZ’s (MPSEZ) Q3 FY11 results were in line with expectation. Revenue for the quarter grew 33.4 per cent yoy to Rs450 crore, led by strong volume growth. Realisations (adjusted for contracting and SEZ revenue) were up about 16 per cent yoy. EBITDA margin for the quarter declined marginally by about 30bp to 68.7 per cent yoy due to higher operating expense( up 56 per cent to Rs1,09 crore). Interest expense, declined by 27 per cent yoy to Rs 36 crore. The effective tax rate was lower by about 500bp to 6.5 per cent . Net profit for the quarter grew by 40 per cent yoy to Rs230 crore. MPSEZ cargo volume grew by 26.2 per cent yoy to 12.4 MMT. Crude volumes for the quarter were negatively affected on account of the pipeline overhauling work being done in relation to capacity expansion at IOC’s Panipat refinery. Maintain buy.

Reliance Securities

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Thursday, February 10, 2011

Today's Bse Nse Stock picks

    Reliance Communications, Bank Nifty, Hindalco

Reliance Communications
Current Price: Rs 94.65,
Target Price: Rs 90

The stock plunged on massive volumes from 110. The chart pattern predicts a move till support at 90 and maybe, till 85. Keep a stop at 97 and short. Increase the position between 92-93. Start booking profits at 90 unless you can hold a 3-session position with a target of 85. If the 97 stop is broken, the stock could rebound to 100.

Bank Nifty
Current Price: 10116 (Feb futures: 10131),
Target Price: 9950 (Feb futures target)

The financial index tested support at 10025-10o50 before making a small recovery. It is likely to test that zone again and probably break it to land at 9950 or lower. Keep a stop at 10200 and short. Increase the position between 9975-10025. Start booking profits below 9950.

Current Price: Rs 219,
Target Price: Rs 205

There was a breakout below support at 220 on high volumes. The downside target could now be 205. Keep a stop at 225 and go short. Increase the position between 214-217. Start booking profits below 207. If the 225 stop is broken, there could be a rebound till 232 on short-covering so it may be worth reversing and taking a long position.         

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Analysts' corner Bse Nse Stock

Godawari Power & Ispat, Greaves Cotton, ONGC, ARSS Infrastructure Projects

Godawari Power & Ispat
Reco Price: Rs 165,
Target Price: Rs 247

Godawari Power & Ispat (GPIL)’s net sales increased by 13.2 per cent yoy to Rs 229 crore in Q3-FY11, while net profit grew by 55.6 per cent yoy to Rs 21 crore. Sales growth was driven by increased pellet sales volumes and higher realisations across product categories. During the quarter, sponge iron realisation increased by 38 per cent yoy to Rs 16,988/tonne and billet realisation increased by 19.1 per cent yoy to Rs 25,331/tonne. Despite other expenses as a percentage of net revenue increasing to 16.7 per cent from 9.7 per cent in Q3-FY10 on account of higher fuel consumption, lower raw-material cost resulted in a 728bp yoy Ebitda margin expansion to 23 per cent. Maintain buy.

— Angel Broking

Greaves Cotton
Reco Price: Rs 91,
Target Price: Rs 108

Bajaj Greaves Cotton (GRV)'s engine revenue grew 10 per cent q-o-q at Rs 350 crore led by robust demand from Piaggio; infrastructure segment revenue inching up toward Rs 50 crore . The strong demand for Piaggio will help GRV maintain strong growth in the engine segment in the rest of FY11. In addition to this, the recently announced 10-year engine supply contract for 0.5-MT Tata Motors mini-truck ACE Zip would also add to growth momentum of the engine segment of GRV in the next few quarters. GRV is planning to increase its automotive engine capacity by almost 40 per cent to 0.52 mn by FY12-end for Rs 100 crore to meet potential demand growth momentum in the LCV engine segment. Operating margin returned to four-year high of 17 per cent with infrastructure segment turning EBIT-positive first time in eight quarters. Brokerages expect the infrastructure segment to attain 10-12 per cent EBIT margin levels on the back of rising segmental revenue.Maintain buy.

— Reliance Securities

Oil & Natural Gas Corp
Reco Price: Rs 1,191,
Target Price: Rs 1,360

Oil & Natural Gas Corpn Ltd (OILNAT) ’s earnings will be positively correlated to the increase in crude prices, as an increasing proportion of its international revenues (through OVL in a deregulated environment) will lead to higher realisations on crude. Also, OVL will be the major driver for volumes in the future and is also currently scaling up its production assets aggressively. Significant APM gas price hike at one go is definitely positive for ONGC and will support the substantial capital investments by it. However, till clear subsidy sharing mechanism emerges, uncertainty may prevail. Analysts' outlook on ONGC has improved due to increase in gross crude realisation and recent correction in stock price. The stock is currently trading at a P/E of 11.3 times FY11 earnings. Maintain buy.

—Edelweiss Securities

ARSS Infrastructure Projects
Current price: Rs 919,
Fair value: Rs 638.80

ARSS is an Orissa-based infrastructure development company engaged in EPC projects across diverse segments such as railways, roads and water sewerage. ARSS’ healthy order book of Rs 3400 crore (3.4x FY10 revenues) provides revenue visibility for the next three years. ARSS’ higher inventory days strain its financials as the company needs to raise debt to fund its working capital requirements and execution delay in recently bagged bus terminal contract. CRISIL Equities expects ARSS’ revenues to grow at a three-year CAGR of 28 per cent to Rs 210 crore in FY13 backed by a healthy order book. EPS is expected to double from Rs 60.7 in FY10 to Rs 115 in FY13.

— Crisil Equitie   

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Tuesday, February 8, 2011

Today's Bse Nse Stock picks

ICICI Bank, NTPC & Mahindra & Mahindra

Current price: Rs 979
Target price: Rs 955

The stock made a downside breakout that predicts a potential target of 945-955 or 930 if you're looking at 3-5 sessions. Keep a stop at 995 and go short. Increase the position between 965-970. Start booking profits below 950-955. If the 995 stop loss is broken, the scrip could jump back to 1020 so be prepared to reverse in a hurry.

Current price: Rs 180
Target price: Rs 185

The stock hgas bounced on short covering off its 52-week low of 175. Though the move isn't strong, it could last till around the 185-186 mark. Keep a stop at 176 and go long. Add to the position between 181-182. Start booking profits above 185.

Current price: Rs 669
Target price: Rs 695

The stock shows signs oif bottoming above its recently established 52-week low of 661. It could climb till around 695 on short covering. Keep a stop at 661 and go long. Increase the position between 673-680. Start booking profits above 695.         

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Saturday, February 5, 2011

How to Read Balance Sheet for Stock Analysis

1. What is Balance Sheet Analysis?
2. What are the main components of Balance Sheet?
3. How Balance Sheet is Make-Up?
4. To which areas do the Balance Sheet Analysis concentrates?

Balance sheet analysis assesses the financial strengths and weaknesses of the company primarily from the point of view of the shareholders and potential investors, but also as part of management's task to exercise proper stewardship over the funds invested in the company and the assets in its care.

The three main components of a balance sheet are:

    Assets = what the business owns;
    Liabilities = what the business owes; and
    Capital = the owner's interest in the business.

The balance sheet equation
    The balance sheet equation is:
                                               Capital + Liabilities = Assets.
    Capital plus liabilities comprise where the money comes from, and assets are where the money is now.


    The balance sheet contains three major sections:

   1.Assets or capital in use divided into the following:
     * Long-term or fixed assets which the company owns and needs to carry on its business: land and buildings; plant and machinery; fixtures and fittings; and motor vehicle fleet.
     *Short-term or current assets which change rapidly as the company carries on its business stocks of raw material; work in-progress; stocks of finished goods; debtors; bank balances and cash. The heading current assets covers an important operating cycle within the company, which is vital for both profitability and liquidity.
      In this cycle, cash flows out of the business up to the point where the customer, or debtor, takes delivery of the finished goods. When the customer pays, cash flows back, and if the goods yield a profit, current assets increase.
   2. Current liabilities, the amounts owed which will have to be paid within 12 months of the balance sheet date. These will be shown under the heading of creditors in the balance sheet and will include tax, bank overdraft and dividend payments due to shareholders.
   3. Net current assets or working capital, which is current assets less current liabilities. Careful control of working capital lies at the heart of efficient business performance.
   4. Sources of capital, comprising: 
        * Share capital;
        * Reserves which include retained profits, which are distributable, and any funds in the share premium account (money paid in by shareholders over and above the nominal value of the shares they hold) which are non-distributable; and
        *Long-term loans.


    Balance sheet analysis concentrates on two areas: liquidity and capital structure.

Liquidity analysis

    Liquidity analysis aims to establish that the company has sufficient cash resources to meet its short-term obligations. The key balance sheet ratios used in liquidity analysis are as follows:

   1. The working capital ratio (current ratio). This relates the current assets of the company to its current liabilities and is calculated as:
             Current assets  /     Current liabilities
            There is no categorical rule of what this ratio should be but, clearly, if it is less than 1, there may be danger because the liquid resources are insufficient to cover short-term payments. However, too high a ratio (say more than 2) might be due to cash or stock levels being greater than is strictly necessary and might therefore be indicative of the bad management of working capital requirements.The working capital ratio is susceptible to 'window dressing', which is the manipulation of the working capital position by accelerating or delaying transactions close to the year-end.

2.The quick ratio (acid-test ratio). The working capital ratio includes stock as a major item and this may not be convertible very readily into cash if the need arises to pay creditors at short notice. The quick ratio, as its name implies, concentrates on the more readily realizable of the current assets and provides a much stricter test of liquidity than the working capital ratio.
The quick ratio is calculated as: Current assets minus stocks/ Current liabilities

        Again, there are no rigid rules on what this ratio should be. But it should not fall below 1 because this would mean that if all the creditors of a company requested early payment there would be insufficient liquid, or nearly liquid, resources available to meet the demands. The company would fail the 'acid test' of being able to pay its short-term obligations and would therefore be in danger of becoming insolvent. The seriousness of the situation would depend on the availability of loan or overdraft facilities.

Capital structure analysis

        Capital structure analysis examines the overall means by which a company finances its operations. Companies are usually financed partly by the funds of their ordinary shareholders and partly by loans from banks and other lenders. These two sources of finance are referred to as equity and debt respectively, and the relationship between the two indicates the gearing or leverage of the company.

        The higher the proportion of debt to equity, the higher the gearing ratio, i.e., a company is said to be highly geared when it has a high level of loan capital as distinct from equity capital. The problem, which can arise from high gearing, is that providers of loan capital have priority for payment over shareholders and, in hard times, the latter might suffer. On the other hand, gearing provides the benefit of a predictably fixed amount of interest every year, and the priority given to providers of loan capital over shareholders on liquidation should make the cost of debt capital less than that of equity. The gearing position of a company can be assessed by the use of the following balance sheet ratios:

   1. Long-term debt to equity ratio. This is the classic gearing ratio and is calculated as:
( Long-term loans plus preference shares /  Ordinary shareholders funds)*100
   2.Long-term debt to long-term finance ratio. This ratio calculates the amount of debt finance as a proportion of     total long-term finance as follows:

      (Long-term loans plus preference shares/Long-term loans plus preference shares
      plus ordinary shareholders funds)*100

          The implications of this ratio are similar to those of the long-term debt to equity ratio. The higher the ratio, the higher the proportion of debt in the capital structure of a company and therefore the higher the amount of the interest charges that might be expected.

          There is no such thing as an optimum ratio. It depends on circumstances. But a company with a low level of business risk with stable operating profits may be able to withstand higher gearing than a company whose operating profits fluctuate widely.
   3. Total debt to total assets ratio. This ratio shows the proportion of the total assets of the company that is financed by borrowed funds, both short term and long term. It is calculated as:
                                                  Long-term loans plus short-term loans
                                                  --------------------------------------    X 100
                                                                        Total assets

        The total debt to total assets ratio recognizes the fact that short-term bank loans and overdrafts are often almost automatically renewable and are therefore effectively a source of long-term finance. Again, this ratio gives an indication of the extent to which interest payments will have to be made.


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Friday, February 4, 2011

How to Analyse Bse Nse Stocks From PE Ratios

The PE ratio is the most common tool used by investors and financial analysts to ascertain how expensive or how cheap a stock is. Unfortunately, it is also one of the most misunderstood tools in the investment business. A stock which may be having a PE of 5 may be thought to be cheap and yet it may turn out to be quite an expensive mistake. Similarly, a stock which may be having a PE of 100 may thought to be too expensive may actually turn out to be a bargain.

What are the determinants of a stock's PE ratio? There are eight. These are: (1) Stability; (2) Growth; (3) Dividends; (4) Return on invested capital; (5) Leverage; (6) The proportion of non-operating assets in a company's asset base; (7) Financial community's appraisal about the industry and the company, including its managers; and (8) Interest Rates.


Stable earning power is worth more than volatile earning power. The most stable and predictable the earnings, the higher will be the PE ratio, other things remaining unchanged.. Markets do not like unpleasant surprises. They love companies which can grow their earnings in a stable, predictable way. Such companies are rewarded by markets by making their stocks sell at relatively high PE multiples as compared to stocks of cyclical companies. Never expect a cyclical stock to sell at a very high PE multiple of normalised earning power.


Growing earnings are worth more than non growing earnings. Assume that you were offered to pay a lump-sum of money in exchange of a promise to receive ten thousand rupees a year forever and ever. How much should you pay to buy this future stream of non-growing earnings? That will depend upon your opportunity cost of capital. Suppose that instead of investing your money in this future earning stream, you could lend money by incurring the same risk and earn a return of, say 10% a year.

The formula for valuing a perpetuity is C/[r-g] where C is the cash to be received one year from now, r is the opportunity cost of capital, and g is the annual growth rate in C. In this case, since the growth rate is zero, the formula reduces to C/r or Rs 10,000/10% which is equal to Rs 1,00,000. The value of this perpetual, non-growing earnings stream to you is Rs 1,00,000, or 10 times annual amount receivable. You should, therefore, agree to pay somewhat less than Rs 1,00,000 to buy this earning stream.

The figure of 10 times arrived at above can be likened to the PE ratio. Suppose, instead of the earning stream, you were offered a 100% stake in a firm which was expected to earn Rs 10,000 ever year, forever and ever. Also suppose that this firm would pay you all of its earnings to you as dividends. Then the maximum price that you would put on this business, given your cost of capital of 10% a year, would be Rs 1,00,000, implying a PE of 10.

Now assume that instead of receiving a non-growing earning stream, you were to receive an earning stream which grew at 5% p.a. Then the value of this growing perpetuity to you would double to Rs 2 lakhs i.e. 10,000/[10%-5%] implying a PE multiple of 20. The non-growth earnings stream was valued at a PE multiple of 10. The 5% growth earnings stream was valued at a PE multiple of 20.

When investors' expectations about the growth prospects of after-tax earnings of a company are revised due to some developments, the PE multiple of its stock will change. This makes investing in growth stocks, which are already selling at high PE multiples quite risky. The market's expectation about future growth are already discounted by the high PE multiple. If earnings growth were to slow down, then the PE multiple could decline quite rapidly.


Generally speaking markets tend to be wary of companies which retain much of their earnings instead of paying them out as dividends. If you were to rank stocks on the basis of dividend-payout ratios and PE ratios, you will find that there is a strong positive correlation between the two. Most MNCs in India pay out a large part of their earnings as dividends. This is one reason why their stocks tend to sell at higher PE multiples than Indian-promoted companies.

While it is true that sometimes, companies which do not pay any dividends (e.g. Infosys) sell at high PE multiples, but such companies are quite rare.

Return on Invested Capital

Stocks of companies which earn high returns on their invested capital and are expected to do so in the future tend to command high PE ratios. The important point to note here is that the relationship between the return on invested capital and PE ratios is not linear. If a company earns 15% return on its invested capital and rationally sells at a PE of 15, this does not mean that a company which earns a 25% return on its invested capital should sell at a PE of 25. The reason for this is very simple. The second company is compounding its shareholders funds at a much faster pace than the first company. If you compound Rs 1,000 @ 15% a year for 20 years, your terminal wealth will be Rs 16,366.54. If, instead you were able to compound Rs 1,000 @ 25% a year for 20 years, then your terminal wealth will be Rs 86,736.17. This vast difference in terminal wealth would be the result of seemingly small difference in the two compounding rates. However, markets would tend to discount that differences in future terminal wealths of both companies today by according vastly differnent PE multiples to their stocks. The second company's stocks could easily sell at a PE multiple of 40.


Stocks of companies which have large amounts of debt, in relation to their total assets, sell at low PE multiples as compared to stocks of low-debt companies. Companies with high debt levels are correctly perceived to be far more risky by the market than companies with low, or no debt. That is why stocks of financial companies, which typically are highly leveraged, tend to sell at relatively low PE multiples.

Non Operating Assets

A company may be in possession of a large quantity of assets which are not contributing anything significant to the company's bottomline. However, such assets could still be very valuable and would enter into the company's total valuation. However, since these assets are not contributing much to the reported earnings of the company, the denominator in such companies' PE ratio will be low, implying a high PE multiple.

Financial Community's Appraisal

Markets are frequently irrational in valuing companies in the short-term. At any given point of time, there is usually a group of companies which are held in high esteem by the financial community. Such companies' stocks tend to sell at high PE multiples. If it was finance companies in 1992-94, it is software companies today. MNC stocks have always sold at relatively high PE multiples in India because the financial community views the economics of these companies' businesses as well as the quality of their managements in a favourable light.

Interest Rates

The final factor affecting PE ratios is the factor of interest rates. When interest rates decline, two things happen: (1) the opportunity cost of capital declines, making the present value of perpetual income streams in equities go up; and (2) the savings of the public are diverted away from fixed income securities markets, which are no longer attractive, given lower interest rates, and is pumped into the stock market. These two factors, of a rise in intrinsic value of equities and the weight of money results in a rise in the general level of PE ratios. When interest rates rise, the reverse happens. Stocks, which are perpetuties, fall in intrinsic value and money is moved from the stock market to the bond market where the interest rates have become more attractive than before.

These, then, are the eight determinants of a stock's PE ratio. However, it must be emphasised that these factors are interrelated and sometimes work in the opposite direction. For example, a company which pays out a large proportion of its earnings as dividends may deserve a high PE multiple. However, by paying out large sums of money to shareholders, the company could end up with less cash to finance its growth, which implies a low PE multiple. Which of the two factors will have a more significant impact of this company's PE multiple is impossible to predict. Nevertheless, I find the above framework useful in trying to understand and interpret PE ratios.

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Thursday, February 3, 2011

Today's Bse Nse Stock picks


Current Price: Rs 1,214, 
Target Price: Rs 1,165/ 1,260 
The stock is dropping lower on strong volumes. It is likely to test support at Rs 1,155-1,165 in the next three sessions. On the upside, short covering could take it to Rs 1,260-1,270. Try trading the Rs 1,160-1,260 range. Short with a stop at Rs 1,235, and a target of Rs 1,160. If the initial Rs 1,235 stop is broken, go long with a target of Rs 1,260 and a stop loss at Rs 1,220. If the short gains, increase the position between Rs 1,190 and Rs 1,205 and 'double-plus', reversing at Rs 1,165 with a stop loss at Rs 1,150 and a target of Rs 1,235.


Current Price: Rs 10,481 
(Feb futures: 10,497), 
Target Price: Rs 10,275 
The financial index is likely to test support at Rs 10,400 today or tomorrow. If Rs 10,400 is broken, it could fall till around Rs 10,250. Keep a stop at Rs 10,600 and go short with an initial target of Rs 10,400. If Rs 10,440 is broken, increase the position between Rs 10,350 and Rs 10,400 and reset the stop to Rs 10,425. Start booking profits below Rs 10,300.


Current Price: Rs 117, 
Target Price: Rs 113 
The stock has hit successive 52-week lows on high volumes in the past two sessions. It closed weak yesterday and it could slide till around the Rs 112-113 mark if there's more selling in the next three-sessions. Keep a stop at Rs 119 and short. Increase the position between Rs 114 and Rs 115 and reset the stop to Rs 116. Book profits below Rs 113.

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Analysts' corner Bse Nse Stock

DLF Reco Price: Rs 221, 
Target Price: Rs 205 
DLF’s management continued to sound highly optimistic on its business outlook and still hopes to meet its earlier guidance of 12mn sq ft of home sales in 2010-11. Accounting for the 6.5 mn achieved in 9M (including c.1mn of plotted sales), this implies 6-7 mn sq ft of fresh sales booking in the 4Q alone. While DLF has indicated a launch pipeline of 8 mn sq ft for the 4Q, analysts believe the target is highly optimistic. On the other hand, lease momentum is picking up well and DLF appears on-track to clock 5mn sq ft of fresh lease in 2010-11. Maintain sell.

— JM Financials

NTPC Reco Price: Rs 185, 

Target Price: Rs 199 
Adjusted net profit came in at Rs 2,320 crore (up 15 per cent y-o-y). Power generation increased by a muted one per cent to 54.7 bn units, as an extended monsoon restricted demand growth and state utilities instructed NTPC to back down generation. Units sold increased in line with the growth in generation, by one per cent y-o-y to 51.3 bn units. Average realisations grew in line with estimates by 23 per cent to Rs2.64 a unit, led by incentives on higher plant availability during the quarter. Maintain neutral.

— IDFC Securities

AHLUWALIA CONTRACTS Current Price: Rs 136.3, 

Fair Value: Rs 202
CARE Equity Research assigns fundamental grade of 4 on 5 to Ahluwalia Contracts (India) Limited (ACIL), indicating very good fundamentals. ACIL’s significant and increasing order-book of Rs. 6,000-crore provides revenue visibility of around two years. However, the order-book is primarily biased towards the private sector. Any slow-down in the real estate sector and/or the corporate capital expenditure would hurt the company in terms of sluggish order inflows. The company’s recent foray into BoT projects and power sector will help it mitigate the said risks and improve revenue visibility over the long term. High working capital cycle, which is the characteristic of this industry, is also a challenge for the company.

— CARE Equity Research

PVR Reco Price: Rs 132, 

Target Price: NA 
PVR’s Q3FY11 exhibition business revenue and net profit stood at Rs 1,03 crore and Rs 8 crore up 5 per cent and down 6 per cent, respectively. Q3FY11 Ebitda margin for the exhibition business stood at 20.5 per cent. The company enjoyed 28 per cent occupancy in Q3FY11 against 37 per cent in Q3FY10. Occupancies in Q3FY11 were adversely impacted on account of poor performance of movies such as Action Replay, Khelein Hum Jee Jaan Sey, Guzaarish, No Problem, Tees Mar Khan against Q3FY10 that saw the release of 3 Idiots and Ajab Prem Ki Ghajab Kahani. Footfalls increased 2 per cent. ATP for the quarter grew at 5 per cent over Q3FY10. F&B spending per head and advertising & royalty income increased 3 per cent and 35 per cent, yoy, respectively. Company’s movie production and distribution segment reported EBIT level loss of Rs 18 crore against profit of Rs 0.9 crore in Q2FY11. PVR's new businesses such as movie production and distribution and alternative entertainment are expected to contribute positively to the company’s overall performance. Maintain buy.

— Edelweiss Securities Limited        

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Wednesday, February 2, 2011

Today's Bse Nse Stock picks

HDIL, Reliance Industries, Tata Motors

Current Price: Rs125, Target Price: Rs120

The stock's seen three sessions of heavy selling with successive 52-week lows. It has a target of Rs119-120 and it could fall further. Keep a stop at Rs128 and go short. Increase the position between Rs122 and Rs124 and reset the stop to Rs126. Start booking profits below Rs120.

Reliance Industries
Current Price: Rs895, Target Price: Rs870

The stock broke support at Rs915-920 on volume expansion and fell to a new 52-week low. Difficult to set a target but it could drop to Rs870 today. Keep a stop at Rs905 and go short. Increase the position between Rs880 and Rs885 and reset the stop to Rs895. Start booking profits below Rs870.

Tata Motors
Current Price: Rs1,069, Target Price: Rs1,025

Tata Motors made a classic downside breakout on volume expansion, breaking support at Rs1,150. It could bounce back to around Rs1095 on short-covering but it's more likely to slide till around the Rs1,010-1,020 zone. Keep a stop at Rs1085 and short. Increase the position between Rs1,050 and Rs1,060 and reset the stop to Rs1,065. Book profits below Rs1,025.        

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Analyst's corner Bse Nse Stock

ONGC, GNFC, Lupin, Emami

Reco Price: Rs1,133, Target Price: Rs1,260

ONGC’s Q3-FY11 net profit of Rs7,080-crore was significantly ahead of estimates on account of 44 per cent q-o-q decline in dry-well write-offs and Rs1,900 crore of gas pool reimbursement from GAIL. Domestic crude and gas production grew 3 per cent and 2 per cent, respectively, and OVL production for Q3-FY11 came in at 2.63 mmtoe( million tonnes oil equivalent). ONGC benefited from higher crude prices with net realisation up 3 per cent to $64.8 a barrel. Recouped costs declined 17 per cent, driven by 44 per cent decline in dry-well write-offs. Analysts expect the cap of one-third of total under-recovery burden on upstream companies to provide some certainty to FY12ii EPS, while increase in production from marginal fields will aid EPS growth. Maintain buy.


Reco Price: Rs112, Target Price: Rs157

GNFC’s Q3FY11 results were ahead of estimates mainly due to strong performance of the fertiliser segment. However, fertiliser segment also accounted for some subsidy amount (amount not disclosed) related to previous year. Fertiliser segment revenues increased 14 per cent y-o-y to Rs490 crore. Though high Ebit of current quarter may not be sustainable (since it includes subsidy related to previous year), analysts estimate fertiliser business' profitability has improved under the NBS regime and contribution is likely to improve. Chemical segment revenues increased 3 per cent to Rs336 crore, while this segment witnessed Ebit margin expansion of 170 bps to 27.6 per cent on account of increasing chemical prices. Emkay has upgraded 2010-11 EPS estimates by 7 per cent to Rs12.4 (previous Rs11.6) and maintained 2011-12 EPS estimates at Rs22.4. Maintain buy.

—Emkay Global Financial Services

Reco Price: Rs422, Target Price: Rs525

Lupin reported 49 per cent growth in the adjust net profit to Rs240 crore during Q3- FY11, which is the highest ever quarterly adjusted profit. Robust growth was despite various problems in the form of rebates and lower branded business in the US, price erosion in major generic products in the US, inventory correction in India and higher expenses on Indore facility completed but not yet contributing to sales. Bottomline growth was also aided by a lower tax rate of 9 per cent. Management has guided for a 11-12 per cent tax rate for 2010-11. Ebitda margin expanded 45 bps at 20.8 per cent, aided by higher operating income of Rs43 crore given higher dossier sales. Net sales increased 17 per cent at Rs1470 crore. Growth was led by strong growth across all business segments. Maintain buy.

—Reliance Securities

Reco Price: Rs410, Target Price: NA

Emami’s Q3FY11 revenue increased 15 per cent to Rs406 crore and net profit rose 9 per cent to Rs86 crore. Muted sales growth was because of slow sales of Boroplus and Fair & Handsome (lower SKU is not doing well). The company initiated Project Swadesh with an intention to increase rural coverage; consequently, rural area sales catapulted 40-50 per cent. Ebitda margin declined 464 bps. COGS inflation (up 553 bps) was partially offset by lower other expenses (down 10 bps), lower advertising and sales promotion (A&P) costs (down 66 bps), and lower staff expenses (down 13 bps). Menthol, light liquid paraffin (LLP), and HDPE prices increased sharply in Q3FY11, leading to gross margin decline. Emami has hiked prices 3 per cent till nine months 2010-11 and increased prices further 3 per cent in Q4FY11, which should offset commodity inflation. The company anticipates little risk to volumes on back of these price increases. Its Egypt expansion plans are on track. Maintain buy.

—Edelweiss Securities Limited

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