Weekly Global Equity Market Update (13 Dec 2013 - 20 Dec 2013)

Weekly Summary:

Most of the global Equity markets except a few such as China, Kuwait and Qatar ended in green for the week ending 20 Dec 2013. Highest gainer for the Week was Germany’s Dax 30 with 4.4% gains for the week. It was followed by Abu Dhabi’s ADX (+3.5%), France’s CAC 40 (+3.3%) and Russia’s Micex (+3.1%). The highest losing index of the week was China’s Shanghai SE Composite which lost about 5.1% during the week.

US Equity Market (13 Dec 2013 – 20 Dec 2013)

US Equity Markets witnessed some volatility with markets beginning on a positive note on account of positive manufacturing data but later contracting ahead of the Federal Reserve Meeting. However, Fed’s decision of a low interest rate policy for an extended period coupled with  a marginal taper of its stimulus program by US$10bn led to market rallying to an all time high during the week.

European Equity Market (13 Dec 2013 – 20 Dec 2013)

European markets of Germany, France and UK ended in green for the week supported by a strong manufacturing data, good GDP numbers reported by UK as well as Fed’s decision which was viewed favorably by the market.

BRIC Equity Market (13 Dec 2013 – 20 Dec 2013)

All BRIC index market, except China, reacted positively to Fed’s decision and reported positive gains for the week ending 20 Dec 2013. China’s Shanghai SE Composite retracted over liquidity concerns in equity markets following People’s Bank of China’s decision to infuse liquidity into select banks.

GCC Equity Market (12 Dec 2013 – 19 Dec 2013)

Performance of GCC region’s indices was mixed.  While Saudi Arabia’s Tadawul All Share Index, Abu Dhabi’s ADX, Dubai’s DFM and Muscats’ MSM 30 reacted positively to Fed’s decision, Kuwait’s index and Qatar’s DSM 20 declined for the week. Dubai’s stock exchange rally was also supported by its successful bid to host World Expo 2020, recovery in real estate prices and Emaar Properties stock gaining after it approved a bond conversion that will result in fewer new shares than expected. 

Index with over 100% returns YTD!!!

Forget stocks, name one INDEX which went up by more than 100% in 2013?? ....Dubai Financial Market (DFM). 

DFM is up 104% YTD!!!

More FII money inflow possible in GCC with the expected upgrade of Qatar and UAE to 'Emerging market' status, by equity index compilers MSCI and S&P Dow Jones (expected in 2014).

Was so excited, didn't even wait to convert it into an article! Maybe will cover some more details for my readers in future....

Kalpataru Power Transmission Limited

I have been looking at potential companies to invest in the capital goods segment and like the Transmission & Distribution (T&D) segment as this industry is already under-invested  compared to govt. spending in the power generation space and so should show momentum even if the rest of the power sector takes time to recover. 

In this space there are 3 key players, Kalpataru Power Transmission Limited, KEC International and Jyoti Structures. Here we are looking at Kalpataru Power Transmission Limited (Kalpataru). Lets look at why I like the stock....

Kalpataru Power Transmission Limited

BSE Scrip code:522287

Industry: Heavy Electrical Equipment

Marketcap: Rs14.27bn

Company Overview: Kalpataru is a leading EPC contractor in the Transmission & Distribution industry. The company also operates in oil & gas, railways, infrastructure development, civil contracting, agri-logistics and warehousing business.  Its key subsidiaries are JMC Projects India Ltd. (JMC) which is into civil and structural works for Factories and Buildings, roads and bridges, power plants, water pipelines, rail and metro infrastructure projects and Shree Shubham Logistics Ltd is into warehousing and agri-logistics. Kalpataru’s consolidated order book is of Rs120bn and standalone order book of Rs67bn as of 1H 2014. The company has a global footprint in 37 countries and its international business contributes 60% of the total order book of the company.

The company reported 35% y-o-y growth in standalone revenues to Rs.9.6bn in 2Q 14 while operating profit grew 42% y-o-y to Rs.7.4bn and operating margins expanded 40bps to 7.7%. The company’s standalone operating margins were at 8.6% levels in 1Q 14 but moderated in 2Q 14 owing to execution of the lower margin Infrastructure orders. 

Investment Overview: 

Focus on international markets pays off, leads to strong order book: The company’s strategy of expanding its international business to offset the weakness and uncertainty in domestic market has paid off. 55% of revenues clocked in 2Q 14 and 57% of the standalone order backlog of Rs67bn is from international business. Its standalone order book as of 1H 2014 is 2 times its FY 2013 standalone revenues giving good revenue visibility over the near term. The management expects to increase international contribution to 70% of the T&D business over the next 1-2 years. Furthermore, international orders tend to have price variation clause and tighter working capital management which also benefit company’s performance.

Significant domestic opportunity: The T & D industry’s fortune is linked to the power industry. India is a power deficit country and government plans to add significant power capacity to address this problem. Compared to the power sector, The T&D sector is even more under-invested. Transmission segment investment target is of Rs.1.8Tn and Rs.2.3Tn for 12^th and 13^th 5year plan. Power Grid (PGCIl) which is a major client for the T&D companies has a planned investment of bout Rs.1Tn for the 12^th 5year plan of which is nearly half of the total industry spending  for the transmission segment. Furthermore,  Kalpataru is a leading player in the Transmision & Distribution EPC business with an established execution record and as such stands to benefit.  

Consolidation in domestic industry to support order wins and margins: In the past the T&D space witnessed significant competition from Chinese players which negatively impacted order wins and margins for domestic players. However, Power grid has become has become increasingly tightened the qualifying norms for bidding for its businesses which has led to many companies been disqualified from the bidding process.  This has led to a consolidation in the industry and bodes well for Kalpataru. 

Margins have potentially bottomed-out: Consolidation in the domestic T& D industry and comparatively better margins in international T & D projects bores well for the company’s margins. Furthermore, the company has executed 95% of its low margin order backlog for JMC and hence should start seeing improvement in margins even on a consolidated level post 3Q 14. Hence, I believe that margins for the company have bottomed out.

Better working capital and debt management: The company’s consolidated cash conversion cycle and debt/equity at 52 days and approx. 0.3 (based on FY 2013) is lower than KEC’s cash conversion cycle of 74 days and debt/equity of 1.5.

Financials & valuation:

I expect the company’s standalone revenues to grow at a CAGR of 13.5% from FY 2013-FY 2015 while standalone operating margin is expected to expand steadily from 9.7% in FY 2013 to 10% in FY 2014 and 10.5% in FY 2015. Consecutively, net profit is also expected to increase at a CAGR of 19.6% from FY 2013-FY 2015.

Valuing the company at 8x FY 2015 EPS, the standalone value of the company comes to Rs101. Furthermore, the value of the JMC business is arrived at Rs 10 per share. This leads to a valuation of Rs111 per share for the company on a SOTP basis. The company has run up significantly since I started analyzing it (went up from Rs78 to Rs 93 in just the last 4 trading days) but still provides significant upside potential from CMP of Rs93.

The target price excludes company’s investment in shubham and other investments which could provide further upside. Additionally, stock is trading at a discount to its historical multiples due to relatively weaker performance and could be a potential re-rating target once it starts delivering. It is also at a discount to KEC (trading at a P/B of 0.6 compared to KEC’s P/BV of 1.6). Hence, I am positive on the kalpataru stock. 

Sample Portfolio Performance – Outperformance of 14.3% compared to Sensex in 2 months!!

In this post we are re-visiting my last post titled ‘Decoding the Indian markets – Bull or Bear?’ dated 23 September 2013 to see if the expectations expressed then have turned out to be correct. If you re-call, in my last post, I had voiced my views that the markets are likely to remain volatile in the near term. I also expected investments in ‘Defensives’, particularly ‘Export-oriented’, and ‘Monsoon Plays’ as prospective investment themes to do well in the near term and outperform the broader markets. 

So lets see how things have unfolded.....

The markets have seen a lot of volatility in the last 2 -3 months on the back of volatile FII investments.  The Sensex rose from  19,900 (18,619 on 30 August 2013) on 23 September 2013 to peak at 21,239 on 03 November 2013 before correcting to 20,217 levels by 22 November 2013. Disregarding the interim highs and lows for the market and our sample set, let us just look at how a sample portfolio of the above mentioned investment ideas has performed  visavis the Sensex from:

(a) 30 August 2013 to 22 Nov 2013 and 
(b) from the date of my post (23 Sept 2013) till 22 Nov 2013.

For Monsoon Plays we have considered 2 Wheeler and Tractor stocks* and for Defensives/Export-oriented we have considered BSE-IT and BSE -Healthcare Indices.

We have included returns from 30 August 2013 to show how resilient our Selected Portfolio has been versus the highly volatile the stock market (highlighted by pink box).

As can be seen from the table, if someone had invested Rs. 10,000 in the Sensex on the date of the post, that amount today would be Rs. 9,977 (-0.2% returns) whereas the same amount if invested in the sample portfolio would have yielded Rs. 11,407 (14.1% returns). An outperformance of 14.3% over the same period!  Moral of the story, stay invested but in the right place!!

Till we meet again…. Happy and safe investing!

Please note that the tactical ideas such as ‘Monsoon Plays’ will change with change in strategy and stock performance & hence we may not continue to be positive on them now. 

 * 2-Wheeler and Tractor stocks were mentioned as ‘Monsoon Plays’ in the comment section of the same post on my blog. 

Decoding the Indian markets - Bull or Bear?

Indian markets have shown a lot of volatility in recent times. The market rallied 15 percent (about 2,650 points) in 15 trading days between 28 August 2013 and 19 September 2013 on account of the fading threat of US military attack on Syria, steps announced by the new RBI chief Mr. Raghuram Rajan to address depreciation of the Rupee and liquidity constraints and also the dovish stance by Fed which postponed the anticipated QE taper and thus resulted in an increase in FII investment into Emerging Markets (EMs) like India. FIIs made Net Equity investments of Rs.11,138crs in September (till 19^th September 2013) as compared to a net outflow of Rs. 6200crs in August 2013.

However, markets lost nearly 400 points on 20 September 2013 on Mr. Rajan’s decision to hike repo rates by 25bps and the blood-bath continues. So where exactly is the market headed and what are the factors to watch out for?

Well to address this let us rewind a bit and look at the concerns the markets were facing pre- the rally – CAD issues, depreciating rupee, economic slowdown, inflation worries, debt burden for corporates, policy paralysis and low visibility on core- policies owing to the looming elections. The Rupee regained some of its lost luster from the historic lows of 68.80 per dollar reached on 28 August 2013, benefiting from Mr. Rajan’s measures (including enhanced limits for exporters to re-book cancelled forward exchange contracts and a swap window to swap foreign currency deposits,etc) and renewed interest in EMs owing to Fed postponing the taper. However, India’s other macro-economic concerns remain, the impact of which will play out in the upcoming corporate results session which is expected to be disastrous.

In view of all these factors, I believe that while the Fed taper postponement might lend support to Indian markets as capital gets reallocated to EMs, markets are still likely to remain highly volatile in the next few months owing to risks related to the impending taper, weak fundamentals, impending elections and lack of visibility on implementation of pro-growth policies.  Moreover, in addition to RBI policies, even Government support in the form of policy implementation will be a key factor for the up-turn of India’s economic and investment cycle. 

I believe, the markets are likely to move in an uptrend post elections since the new government, whichever be it, will be under a lot of pressure to deliver. It is likely that we will see the resurgence of the new investment cycle once we start seeing policy implementations aimed at structural changes in the country. However, until all these macro-factors play out, the markets are more likely to be a Trader’s market rather than an Investor’s. Also, there is a high possibility of markets correcting further if the Fed tapering occurs before we see any structural changes in the Indian economic/policy scenario. Till either of these happen, the market may continue to be a ‘Defensives’ and ‘Export oriented’ market in the near term as has been the case during historically weak periods and periods of a stronger dollar respectively. Additionally, there might be some interest in stocks which are 'Monsoon plays' in the near term owing to a good monsoon session. However, I believe that the core India-centric ‘Cyclicals’ will start gaining traction only after visible improvements in the economic and policy space.

Will Mallya have the last laugh?



Everyone seems to be talking about Kingfisher Airlines Ltd. (KFA) and Vijay Mallya these days…on how hopeless KFA is and how Mallya will possibly have to sell his other assets to raise money to appease KFA lenders and keep the airline operational. But is this really the end of ‘Good Times’ for ‘King’ Mallya or are we jumping the gun in labeling him as a goner? Let’s look at the facts:

Once amongst the top domestic carriers in India, grounded flights, layoffs etc resulted in KFA’s market share dipping from over 15% in 2011 to 3% in July 2012and spiraling losses for the company. The airline cut down its operations from 66 aircrafts in 2011 to 12-13 in 1H 2012 and now only 7 are operational. Financials pose even a more grim picture. As of FY 2012, the company has a debt of Rs8,030cr (short term debt is 2,335) + over Rs 1,300 crs in current liabilities in addition to payables to airport operators and exchequer. Increasing loss for the company during the year just adds to the gloom.  According to an August 2012 study on ‘Analysis of Indian carriers Q1-FY13 performance’ published by The Centre for Asia Pacific Aviation, KFA requires about $600mn by October 2012 and a further $400mn over the next 12-18 months to save the company. As the 17-member banking consortium led by State bank of India (SBI), which loaned about Rs.7,000crs to KFA seems to be closing in, the key question on everyone’s minds seems to be- Where does this leave Mallya?

One positive for Mallya seems to be that after a long drawn wait, the government has finally opened up FDI in aviation of upto 49% in the second week of Sept 2012. This opens up one avenue for Vijay Mallya. But with the current state of the airline (high debt, huge losses, minimal mkt share, curtailed operations) it will hardly be a surprise if foreign players are averse to investing money in KFA. Just for the sake of simplicity even if we assume that some player is ready to invest in money at current market price of Rs14.45 it will still raise about Rs572crs. At a higher price of Rs20-25 the amount raised would still be between Rs800-1000crs, quite below the required levels.

Another option would be selling non-core assets such as Mangalore Chemicals and Fertilizers Ltd. (Mangalore Chemicals). Vijay Mallya has a stake of about 30% in this company. At CMP of Rs14.45 the stake is valued at about Rs.177crs, far less than the required amount. Even if we assume that the stock price increases considerably, the stake sale would not garner enough by itself to meet KFA’s obligatory amount.

For that matter, the yields from both the above measures combined (FDI in KFA plus a stake sale in Mangalore chemicals) would still be significantly below of the amount required by KFA or Mallya in the near term.

In case KFA is unable to raise the required capital in time lenders will resort to selling of non-core assets (as is being currently planned) as well as corporate guarantees of United Breweries Holdings Ltd. (UBH) will be called upon. UBH itself has Rs2,122crs in debt compared to Rs4,710crs in assets and of these assets 20% are invested in KFA. With limited scope for repayment of its own debt or KFA guarantees, stake sale in holdings seem to be only option out. We have already discussed how selling of non-core assets will not yield sufficient capital and FDI is also not a viable option (atleast till Mallya injects some capital into his airline), hence the remaining option is selling stake in United Breweries Ltd. (United Breweries) or United Spirits Ltd. (United Spirits).

Let’s look at both these avenues in terms of risk that Mallya faces. Currently about 7.56% shares or 10% of promoter’s stake of United Breweries is pledged. Compare this to United Spirits where 97.32% of UBH’s stake of 18.03% and 100% of Kingfisher Finvest’s stake of 9.69% is pledged. In short, 98% of promoter’s equity is pledged. In case of any event default in debt servicing, 98% of promoter’s stake in United Spirits will be at risk- a possibility of Mallya ceasing to be the controlling stakeholder of the company. In view of this we believe that United Spirits can better serve as the vehicle to drive mallya to safe shores.

A positive way of looking at solving the current crisis would be…. at current market price of Rs1,147.7, the United Spirits’ pledged amount would be valued at Rs4,085 crs. Hence, selling of stake in United Spirits could, I believe, create a win-win situation for all concerned. As per news reports, Diageo Plc (Diageo), the world’s largest spirit company, is looking at buying a stake in United Spirits. It is looking at a valuation of Rs1,200-1,300 per share while United Spirits is looking at a Rs1,400-1,600 price level. Diageo is also willing to retain Mallya as the chairman for life even if it gains a majority stake in United Spirits. At the above mentioned price range of Rs1,200-1,600 per share, even a stake sale of 15% would yield Rs2,354-3,139crs, there by solving Mallya’s near term worries. It would also leave him with a remaining stake of 13% in United Spirits, to enjoy the future growth of the company, as well as allowing him to continue as the chairman of United Spirits. United Spirits stands to benefit from synergy and new avenues of growth and funding brought to the table by global giant Diageo. With respect to Diageo, apart from the anticipated 15% stake from Mallya, the company is also expected to raise another 10% from other investors making it the largest shareholder in United Spirits and giving it a foothold in the key market of India which is expected to grow by 5-6% in volume terms, the fastest in emerging markets as India benefits from growing population and per capita income levels (Source: International Wine and Spirit Research).

With the required cash in hand Mallya can appease the lenders in the upcoming KFA lenders meeting (to be held in 1H Oct 2012), draw plans to restructure the airline and work on getting an FDI partner for KFA at better valuations.

The United Spirits stock has increased about 22% in the past 1 month and 134% Ytd while United Breweries has risen about 26% in the past 1 month and 84% Ytd. The KFA stock has increased about 55% in the past 1 month (Ytd: -31%). Additionally, UBH has increased about 35% in the past 1 month and 121% Ytd.

In view of the above mentioned factors I believe that the United Spirits stock could surge higher from current price levels either due to speculation on the stake sale or  re-rating due to change in fundaments (in actual event of a stake sale). Consequently, we could see further upside in the KFA and UBH stocks from current levels in the near term.  The good times remain for Mallya..for now...

Please note: The Current market Price (CMP) is BSE last traded price as of 25 Sept 2012. 1 month and YTD figures courtesy google finance. Picture courtesy google images.

  

Wipro ADR trading at a premium of 50% to domestic stock!!

Yups you read right! The Wipro ADR (ratio 1:1) is trading at a premium of 50% to the domestic stock. Lets look into the why’s of it, how investors stand to benefit and the possible way forward.

Considering the ADR and local stock are for the same company, ideally they should trade at similar prices, adjusted for exchange costs. However, it is found that most of the ADRs generally trade at a premium or discount to the local. The reason for discrepancy in prices of ADRs and local stocks is many-fold. Various reasons are demand for the stock (ADR) in foreign market, limited supply of ADR and difficulty in conversion of local shares to ADRs. ADR’s of Indian companies command a premium to their domestic counterparts due to demand mainly from Exchange traded Funds (ETFs), as it is easier for foreign investors to take exposure in Indian companies via the ADR route rather than going through regulatory approvals in India. Preference for trading in local markets also plays an important part. The premium is also due to difficulty in converting common shares to ADRs, which makes it difficult for arbitrageurs to execute trade.

Coming back to the Wipro ADR. Back in January 2007, the ADR was trading at an average premium of approximately 20%. The premium was totally eradicated in March 2008. However, since then the premium again started widening, reached 58% in October 2008 and peaked at 80% in Dec 2008 before reducing to a premium of 30% in May 2009. Over the past 1 year the ADR has traded at an average premium of 48%. So how does one benefit from this discrepancy in prices? The answer is arbitrage. One way would be buying the stock from local market, converting it into the various levels of ADRs and then selling these in the foreign market. Investors in local shares also benefit in a sponsored ADR program by tendering in their shares.





Going ahead, the Indian finance ministry’s recent mandate at requiring a minimum public shareholding of 25% in listed companies may play a vital role in reducing the Wipro ADR premium. As of March 2010, Azim Premji and family held approximately 80% stake in the company, which would require them to dilute the stake by around 5%. The ideal option in this case would seem the ADR route considering they would get a premium for the shares issued there. This may in-turn result in increased ADR volumes and subsequently reduced premium for the Wipro ADR in times ahead. Reminds me of the saying…if possible…’Make hay when the sun shines!’

Stocks mentioned here are: ADR ticker: WIT US, Domestic ticker: WPRO IB