Even though Indian markets have recovered from their March 2009 lows, there are still many companies and sectors where investor interest hasn’t caught up in the same breadth. As a result, the share prices of some companies are still at depressed levels as compared to their peaks in 2008.
There could be genuine concerns which in turn justify the valuations of these companies. Reasons could be weak demand, subdued margins, excess debt, heightened competition, lower capacity utilisations and so on. To put in simple words, in some of these cases due to absence of clarity over the future prospects and the financial position of the companies, the share prices continue to trade at lower levels.
The positive side is that, ever since the global economic downturn and its impact on the Indian industries and companies, lot of things have changed for the better, which is also reflecting in the key indicators. These indicators suggest a recovery in industrial production, higher GDP growth, turnaround in the exports market and pick up in credit growth among others. Also, on the corporate front, companies have been able to report better sales and profit margins; in many cases there has been a clear turnaround viz., from losses to profits.
Change is the only constant
Meanwhile, many of these concerns pertaining to these companies could still hold true. However, as it typically happens during any economic recovery, there is a tendency that certain sectors and companies lag others and recover only in the later part of overall recovery or when demand improves visibly leading to enhanced confidence levels. This is also a reason that despite the economic recovery some companies are yet to show improvement in growth.
Meanwhile, many of these concerns pertaining to these companies could still hold true. However, as it typically happens during any economic recovery, there is a tendency that certain sectors and companies lag others and recover only in the later part of overall recovery or when demand improves visibly leading to enhanced confidence levels. This is also a reason that despite the economic recovery some companies are yet to show improvement in growth.
Nevertheless, it could be a good time to look at companies, whose stocks are quoting at lower levels, which appear to have the potential to rebound once the economic momentum picks up further. Here are six companies, which are operating in growing industries with some of them enjoying leadership in their respective segments. While there are some medium-term concerns, a turnaround (whenever it happens) could lead to strong gains for investors.
Aban Offshore
Aban Offshore, a leading offshore rig provider, suffered due to the two critical events. Due to the correction in crude oil prices, the day rates at which the company deployed its rigs came down. Simultaneously, some its rigs were rendered ideal, leading to lower revenues and profits. But, crude oil prices have now stabilised and are showing an upward bias. Analysts, thus, believe that the day rates for the rigs should also improve from $125,000 currently (still lower by 50 per cent compared to its highs in 2008).
Aban Offshore, a leading offshore rig provider, suffered due to the two critical events. Due to the correction in crude oil prices, the day rates at which the company deployed its rigs came down. Simultaneously, some its rigs were rendered ideal, leading to lower revenues and profits. But, crude oil prices have now stabilised and are showing an upward bias. Analysts, thus, believe that the day rates for the rigs should also improve from $125,000 currently (still lower by 50 per cent compared to its highs in 2008).
For Aban, the bigger issue pertains to capacity utilisation. Currently, of Aban’s fleet of 20 rigs/jacks, 16 are deployed and remaining ideal. If all of these are deployed, the company will be able to generate good cash flows. However, analysts expect the utilisations to only improve in the medium term. Aban’s management is expecting to deploy three rigs by mid 2010-11. More importantly, it is working towards reducing its dependence on a single market.
On this front, it has already deployed six rigs in India and is looking to deploy the remaining one rig in the country.
ABAN OFFSHORE | |||||
in Rs crore | FY08 | FY09 | FY10E | FY11E | FY12E |
Revenue | 2,021 | 3,185 | 3,452 | 4,590 | 4,487 |
EBITDA margin (%) | 61.7 | 55.4 | 61.1 | 59.4 | 57.2 |
PAT | 93 | 556 | 456 | 1,010 | 1,022 |
EPS (Rs) | 24.3 | 146.5 | 104.4 | 231.4 | 234.2 |
Interest cover (x) | 1.2 | 2.6 | 1.6 | 2.6 | 2.7 |
ROE (%) | 14.7 | 43.5 | 19.7 | 29.9 | 23.3 |
Free cash flow to equity | -2,973 | -3,605 | 812 | 1,464 | 1,511 |
Net debt-equity ratio (x) | 15.3 | 9.2 | 5.0 | 3.4 | 2.4 |
Source: BNP Paribas | |||||
The other major concern is the high debt in its books. Notably, Aban’s debt-equity ratio has improved to 9 times in 2008-09 and is further expected to fall to about 5 times in 2009-10. While these levels are still high, the company is looking at ways to reduce it further. While the Rs 700 crore it raised through a QIP in December 2009 quarter helped pay some debt (should result in a lower debt-equity ratio in 2009-10), analysts expect Aban to generate cash flow of about Rs 3,500 crore from operations during the next two years. This should help bring down its debt further. Also, the company might dilute its equity further to reduce its debt. Any improvement in the business such as higher day rates will only be icing on the cake.
Mahindra Satyam
Post the scandal at Satyam Computer Services not many analysts cover the stock now; even investors have stayed shy of the stock. While the problems were for real, the market is awaiting clarity about the company’s financials. Positively, post the Mahindra group company, Tech Mahindra, acquiring ownership things seem to be improving as the management is trying to turnaround the company. Also, in the recent past, the outlook for the IT sector has improved as a result of the ongoing global economic recovery. This has also resulted in improved pricing power for IT players.
Post the scandal at Satyam Computer Services not many analysts cover the stock now; even investors have stayed shy of the stock. While the problems were for real, the market is awaiting clarity about the company’s financials. Positively, post the Mahindra group company, Tech Mahindra, acquiring ownership things seem to be improving as the management is trying to turnaround the company. Also, in the recent past, the outlook for the IT sector has improved as a result of the ongoing global economic recovery. This has also resulted in improved pricing power for IT players.
MAHINDRA SATYAM | |||
in Rs crore | FY10E | FY11E | FY12E |
Revenues | 5,420 | 6,072 | 7,137 |
Net profit | 662 | 1,213 | 1,429 |
EBITDA margin (%) | 17.0 | 25.6 | 24.1 |
RoE (%) | 17.1 | 19.2 | 18.6 |
EPS (Rs) | 5.6 | 10.3 | 12.2 |
PE (x) | 17.1 | 9.4 | 7.9 |
Source: BNP Paribas; E: estimates | |||
For now, the company’s biggest challenge of retaining employees seems to be cooling off after the recent hike in salaries. Besides, the big worry relating to Upaid’s $1 billion claim, which is being settled out-of-the-court by paying $70 million or Rs 325 crore, has not only eased worries but now, will also help the company get worldwide royalty-free license for the related products.
The confidence is also increasing as the company is able to retain its existing clients. It recently bagged a four-year offshore contract work with KMD valued at Rs 218 crore. This is in addition to the GE’s extension of multi-million dollar contracts for the next three years. In last one year, the company has signed about 90 new deals, including over 35 new accounts. As a result of higher confidence, the company is also planning to hire around 5,000 people by March 2010. However, analysts believe that the stock captures most of these positives, and at a one-year forward PE is fairly valued. Also, given that the financials are awaited, it is better to adopt a wait-and-watch approach.
Punj Lloyd
Punj Lloyd’s stock has also been impacted on account of concerns over its prospects. For instance, in the case of Simon Curve’s (its subsidiary) ethanol project, analysts expect Punj to book additional liquidated damages in the March 2010 quarter. While Punj has already booked Rs 300 crore so far in 2009-10, its client raised a claim of Rs 160 crore in early March 2010. Punj’s large project in Libya, which is delayed and accounts for about 43 per cent of its order book, could mean more earnings downgrades by analysts in the near term. Also, concerns over its ONGC project exists, even as the company has booked most of the likely cost overrun. In terms of revenue visibility, too, Punj’s order book has been shrinking in the last few quarters on account of lower order inflows due to the lower capex in the global oil and gas industry.
PUNJ LLOYD | ||||
in Rs crore | FY09 | FY10E | FY11E | FY12E |
Net sales | 11,910 | 11,910 | 13,700 | 15,630 |
Net profit | -230 | 350 | 510 | 630 |
EBITDA margin (%) | 2.6 | 9.0 | 10.0 | 10.5 |
EPS (Rs) | -7.7 | 10.7 | 15.3 | 18.9 |
RoE (%) | -8.9 | 11.9 | 13.5 | 14.6 |
EV/EBITDA (x) | 25.5 | 7.8 | 6.1 | 5.1 |
Order flow | 13,100 | 14,200.0 | 15,300 | 21,100 |
Closing order book | 20,800 | 22,900 | 25,200 | 30,200 |
Order book/sales (x) | 1.7 | 1.9 | 1.8 | 1.9 |
Source: Macquarie Equities Research, ENAM Direct Securties | ||||
Overall, there are some concerns surrounding Punj’s near to medium-term prospects, which should gradually get resolved. On the positive side, Punj Lloyd is a leading company with superior engineering skills in hydrocarbon and infrastructure sectors. If these concerns, which are partly easing, are resolved, Punj’s performance should improve. Also, the company is gradually trying to de-risk its business model by focusing on the domestic E&P market and infrastructure projects, particularly in the road and power BOP segments. The strategy has paid off given that share of infrastructure projects in the order book has risen from 35 per cent in March 2008 quarter to 60 per cent in December 2009 quarter.
Also, contribution of South East Asia, including India, in overall order book has increased to 20 per cent. Going ahead, the company is eying about Rs 3,000 crore worth of new orders in the oil and gas industry in 2010-11. The years 2010-11 and 2011-12 would be crucial as its order book could bounce back and by that time the concerns over project delays and possible write offs relating to the existing projects should become history.
Suzlon Energy
Due to various concerns, Suzlon Energy’s share price dropped from a high of Rs 455 in January 2008 to Rs 36 in December 2008.
Due to various concerns, Suzlon Energy’s share price dropped from a high of Rs 455 in January 2008 to Rs 36 in December 2008.
In January 2008, it traded at a one-year forward P/E of about 25 times. But now, even as it is at just 10 times, investors continue to stay shy of the stock. Notably, while concerns exist, things seem to be changing for the better.
For instance, the company has repaid its outstanding acquisition loan of $780 million by selling a 35.22 per cent stake in Hansen (an erstwhile subsidiary) besides, securing a new five-year dollar denominated loan of $465 million. This has led to a 15 per cent reduction in debt and hence, interest cost. Along with improving fundamentals, analysts say, Suzlon’s net debt-equity ratio will fall further to 0.7 times by 2011-12.
SUZLON ENERGY | |||||
in Rs crore | FY08 | FY09 | FY10E | FY11E | FY12E |
Total sales (mw) | 2,384 | 2,790 | 1,713 | 2,110 | 2,547 |
Domestic installations (mw) | 976 | 749 | 723 | 884 | 1,079 |
Exports (mw) | 1,408 | 2,041 | 990 | 1,226 | 1,468 |
Consolidated revenues | 13,679 | 26,082 | 22,380 | 21,264 | 25,089 |
EBIDTA margin (%) | 14.9 | 11.4 | 6.6 | 10.2 | 11.3 |
PAT | 10,154 | 2,364 | -2,609 | 3,255 | 9,624 |
EPS (Rs) | 7.8 | 7.6 | -1.6 | 1.8 | 5.3 |
RoE (%) | 33.2 | 14.0 | -3.1 | 3.9 | 10.4 |
Net debt-equity ratio (x) | 0.4 | 1.4 | 1.3 | 0.9 | 0.7 |
PE (x) * | - | - | -47.4 | 42.2 | 14.3 |
Source: Morgan Stanley; E: Estimates, *PE is on current market price | |||||
On the demand side, again, concerns have not eased out completely but, there has been some recovery – new orders have started flowing from key markets like the US and Europe. Suzlon’s Germany-based subsidiary, REpower Systems AG, in November bagged its largest ever onshore order for supplying equipments worth 954 mw. A significant recovery, however, is seen starting the second half of CY2010, which should improve Suzlon’s order book which stood at 1,484 mw as of end-January 2010.
This in turn will drive Suzlon’s revenue growth and improve utilisation of existing capacities leading to better margins and profitability, going ahead.
Meanwhile, the domestic market has seen a pickup in new orders. Also, steps such as imposition of cess on coal and allowing higher RoE (return on equity) on power plants based on renewable energy are positives for the sector, and companies like Suzlon. Currently, India’s installed wind power capacity is about 11,000 mw as against the potential of 45,000 mw. Even globally, due to higher crude oil and coal prices, many countries are favouring wind energy projects, indicating huge growth potential. Suzlon, which is the fifth largest wind turbine player globally with large market share, strong product portfolio and distribution network, will be a key beneficiary in the long run.
Unitech
The stock price of India’s second largest realty company by market capitalisation has had a remarkable recovery from the March 2009 lows of Rs 24.60 to currently Rs 74, though it is still far from its peak of Rs 546.80 in January 2008. The economic downturn caught most realty companies, which were in the midst of expansion sprees, unawares resulting in unsold inventory and a pile of debt. While the situation has improved a bit, especially on the residential front, there are demand concerns in the commercial realty segment.
The stock price of India’s second largest realty company by market capitalisation has had a remarkable recovery from the March 2009 lows of Rs 24.60 to currently Rs 74, though it is still far from its peak of Rs 546.80 in January 2008. The economic downturn caught most realty companies, which were in the midst of expansion sprees, unawares resulting in unsold inventory and a pile of debt. While the situation has improved a bit, especially on the residential front, there are demand concerns in the commercial realty segment.
On the operational front, for the December 2009 quarter, the company has been able to record revenue growth of 76 per cent year-on-year to Rs 774 crore largely on sales which have occurred in the previous fiscal and realised now due to the percentage completion method. Part of the surge in growth rates is also due to the low base of previous year. Though margins have dropped by half to 24 per cent due to cost overruns, they are expected to move to 35 per cent levels in 2010-11. The company is focussing on affordable homes and expects the segment to contribute about half of the overall volumes in 2010-11 of about 16 million square feet. Considering the demand for this category of houses, the move could pay off for Unitech going ahead.
UNITECH | ||||
in Rs crore | FY08 | FY09 | FY10E | FY11E |
Net sales | 4,114.0 | 2,844.0 | 2,771.0 | 4,013.0 |
Ebdita | 2,266.0 | 1,632.0 | 1,316.0 | 1,826.0 |
Net profit | 1,661.0 | 1,196.0 | 803.0 | 1,195.0 |
P/E (x) | – | – | 22.8 | 15.6 |
E: Estimates Source: Company, Bloomberg | ||||
The company is also focussing on Mumbai where it has tied up with Mumbai-based developers for slum rehabilitation projects. Coupled with its own projects in Mumbai, Unitech is looking at developing saleable area of 42 million square feet in the city.
The recovery in the realty market from the December quarter lows and the easing of credit has helped the company raise resources through a QIP and pay a part of outstanding loans. The company has been able to bring down its debt to Rs 6,200 crore from Rs 6,600 crore at the end of September quarter. Debt-to-equity ratio is now at around 0.5 times. In the medium-term, the company’s decision to hive-off its non-core businesses like power, telecom, hotels and SEZs into separate ventures, including getting in a PE investor to further reduce debt, should improve sentiments towards the stock.
At Rs 73.70, the stock is trading at 20.5 times its 2010-11 estimated earnings of Rs 3.59. Given its land bank (7,500 acres), move to lower debt and focus on affordable homes, the scrip could be looked at dips from a 2-3 year horizon.
Wockhardt
While the Wockhardt’ stock has doubled from its 2009 low of Rs 67, it is still 68 per cent adrift of its 2008 highs. The reason for this has been the over Rs 3,500 crore debt the company incurred primarily due to the 2006 and 2007 acquisitions of Negma Labs of France for Rs 1,000 crore and Pinewood Labs of Ireland for Rs 663 crore.
While the Wockhardt’ stock has doubled from its 2009 low of Rs 67, it is still 68 per cent adrift of its 2008 highs. The reason for this has been the over Rs 3,500 crore debt the company incurred primarily due to the 2006 and 2007 acquisitions of Negma Labs of France for Rs 1,000 crore and Pinewood Labs of Ireland for Rs 663 crore.
To reduce its debt and as a part of the corporate debt restructuring programme, the company sold its animal health, nutrition and its German business for Rs 170 crore, Rs 627 crore and 120 crore, respectively. However, the sale of nutrition business is stuck in the courts as its foreign unsecured lenders have refused to give up on the proceeds from the sale in favour of secured lenders. The resolution of this dispute is key, if the company has to move ahead on its plan to restructure its debts.
WOCKHARDT | ||||
in Rs crore | CY08 | CY09 | CY10E | CY11E |
Net sales | 3,592.0 | 3,629.0 | 3,898.0 | 4,096.0 |
Ebdita | 678.0 | 665.0 | 565.0 | 601.0 |
Net profit | -138.0 | -435.0 | 236.0 | 251.0 |
EV | 4,948.0 | 5,043.0 | 5,255.0 | 5,289.0 |
EV/Sales (x)* | 1.4 | 1.4 | 1.3 | 1.3 |
EV/Ebidta | 7.3 | 7.6 | 9.3 | 8.8 |
E: Estimates; * EV/Sales for CY09 is estimated Source: Company, Bloomberg | ||||
Operationally, the company saw a 9 per cent year-on-year fall in revenues to Rs 889 crore for the December 2009 quarter, while operating profits were down 36 per cent on higher raw material and other expenditure. A mark-to-market forex loss of Rs 235 crore meant that Wockhardt reported losses of Rs 181 crore.
For CY2009, revenues were flat at Rs 3,629 crore and higher raw material consumption meant a 15 per cent drop in operating profit to Rs 665 crore. Losses for the year were at Rs 435 crore largely due to the forex loss of Rs 661 crore.
While interest coverage ratio is at a mere over 2 times, the more worrying metric is the debt-equity ratio of 4. It is this debt overhang which is the reason why investors have shunned the stock, which at the current market capitalisation trades at an attractive enterprise value/sales of about 1.38 as compared to over 4 for other pharma majors. A risky bet, but worth a shot given that the core Indian and European businesses (over 50 per cent of revenues) are reporting steady growth in revenues.
Some more…
Unlike the above companies, below are three more companies that due to a few events or near-term concerns have their stock valuations take a hit. It could be a matter of time before the operating environment improves or concerns ease, which could lead to better valuations.
Unlike the above companies, below are three more companies that due to a few events or near-term concerns have their stock valuations take a hit. It could be a matter of time before the operating environment improves or concerns ease, which could lead to better valuations.
Glenmark Pharma
The announcement in August last year that Oglemilast used in the treatment of lung disease had failed clinical tests had a negative impact on the stock, which lost a fifth of its value. Till then, the molecule had fetched Glenmark Rs 158 crore in milestone payments. Since then, the stock has recovered and its operational performance has also been good. For the December 2009 quarter, Glenmark’s speciality business (56 per cent of consolidated revenues) grew by a robust 19 per cent. However, the markets are awaiting the IPO of its generics business, which could be a trigger for the stock.
The announcement in August last year that Oglemilast used in the treatment of lung disease had failed clinical tests had a negative impact on the stock, which lost a fifth of its value. Till then, the molecule had fetched Glenmark Rs 158 crore in milestone payments. Since then, the stock has recovered and its operational performance has also been good. For the December 2009 quarter, Glenmark’s speciality business (56 per cent of consolidated revenues) grew by a robust 19 per cent. However, the markets are awaiting the IPO of its generics business, which could be a trigger for the stock.
Reliance Communications
The Reliance Communications’ scrip bore the brunt of the price war among mobile telephony service providers falling 53 per cent (the most among the three major listed players) since its 2009’s highs in May. Competition has led to a drop in operating profit margins as well as market share. Though capex (for the existing operations) should come down going ahead, 3G licence fee would add to the Rs 25,000 crore gross debt pushing the current debt-equity metric of 0.67. Positively, the expected IPO of its tower subsidiary, sale of other assets along with reasonably good cash flows should offset some of this pressure.
The Reliance Communications’ scrip bore the brunt of the price war among mobile telephony service providers falling 53 per cent (the most among the three major listed players) since its 2009’s highs in May. Competition has led to a drop in operating profit margins as well as market share. Though capex (for the existing operations) should come down going ahead, 3G licence fee would add to the Rs 25,000 crore gross debt pushing the current debt-equity metric of 0.67. Positively, the expected IPO of its tower subsidiary, sale of other assets along with reasonably good cash flows should offset some of this pressure.
Sintex Industries
Sintex Industries’ stock is trading at half the levels it touched in January 2008; the decline was consequent to worries over its foreign subsidiaries and pressure on financials. The latter, however, is seen improving and earnings are expected to grow at 25-30 per cent over the next two years on the back of improving demand from the retail, infrastructure and industrial segments. Also, worries about its foreign subsidiaries are easing as a result of higher integration and better performance in the recent past. Margins, too, will improve as a result of better pricing and lower input cost due to lower crude oil prices. Overall, the stock can be considered at dips.
Sintex Industries’ stock is trading at half the levels it touched in January 2008; the decline was consequent to worries over its foreign subsidiaries and pressure on financials. The latter, however, is seen improving and earnings are expected to grow at 25-30 per cent over the next two years on the back of improving demand from the retail, infrastructure and industrial segments. Also, worries about its foreign subsidiaries are easing as a result of higher integration and better performance in the recent past. Margins, too, will improve as a result of better pricing and lower input cost due to lower crude oil prices. Overall, the stock can be considered at dips.
Time frame 6months - 1year
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