Sunday, May 23, 2010

>How inflation can destroy shareholder value? (MCKINSEY)

If inflation rises again, companies will have to do more than just match it to keep up—they’ll have to beat it.

Whatever role low interest rates and high government spending may have played in helping
economies to stabilize during the recent global recession, they now have companies, investors, and policy makers alike on the lookout for inflation to come roaring back. Some economists are already warning of a return to the levels of the 1970s, when inflation in the developed countries
of Europe and North America hovered at around 10 percent. That’s not uncommon in Latin America and Asia, where emerging economies have seen double-digit inflation for many years.

At first glance, the effects of inflation on a company’s ability to create value might seem negligible. After all, as long as managers can pass increased costs on to the customer, they can keep inflation from eroding shareholder value. Most managers believe that to achieve this goal, they need only ensure that earnings grow at the rate of inflation.

Yet a closer analysis reveals that to fend off inflation’s value-destroying effects, earnings must
grow much faster than inflation—a target that companies typically don’t hit, as history shows. In
the mid-1970s to the 1980s, for instance, US companies managed to increase their earnings per
share at a rate roughly equal to that of inflation, around 10 percent. But to preserve shareholder
value, our analysis finds, they would actually have had to increase their earnings growth by
around 20 percent. This shortfall was one of the main reasons for poor stock market returns
in those years.

Not just a rising tide
Inflation makes it harder to create value for several reasons, especially when its annual growth rate exceeds long-term average levels—2 to 3 percent— and becomes unpredictable for managers and investors. When that happens, it can push up the cost of capital in real terms1 and lead to losses on net asset positions that are fixed in nominal terms. But inflation’s biggest threat to shareholder value lies in the inability of most companies to pass on cost increases to their customers fully without losing sales volumes. When they don’t pass on all of their rising costs, they fail to maintain their cash flows in real terms.

To read the full report: INFLATION

>Enabling Growth in Promising Indian Companies (KPMG)

Background: India has a very vibrant Venture Capital (VC) / Private Equity (PE) industry with USD 32.5 billion invested across more than 1500 VC/PE deals from January 2006 till date.
It is estimated that currently there are over 137 domestic and 135 foreign PE fund managers in India.

Over the last three years, VC/PE investments were the equivalent of 33 percent to 72 percent of the total equity raised from primary markets.

Importance of VC/PE investments for Indian companies
Economists estimate that India needs about USD 1.3 trillion dollars of investment over the next three years to sustain a GDP growth of 7-9 percent. This translates to USD 60-100 billion of VC/PE investments requirement over three years, against which industry estimates that PE investments would be in the range of USD 9-10 billion in the year ending December 31, 2010.

A study conducted in 2009 by Venture Intelligence on the impact of PE in India assessed how PE-funded companies have performed vis-à-vis non-PE funded companies in the same industry over eight years from 2000-2008. The study found that PE boosts the Indian economy by creating value for corporate India. This is through higher growth in sales and profitability of PE-funded companies; higher R&D spends which fuels greater innovation, and higher wage payment as compared to non PE funded companies.

To read the full report: INDIAN COMPANIES


Repricing of bonds will result into 9.8% dilution
Suzlon announced the reduction in conversion price of its US$211mn and US$121mn FCCB’s to Rs97.26/share from Rs359.68/share and Rs371.55/share respectively. The company also revised the floor price to Rs74/share for both these bonds. In addition it has agreed to pay ~US$6mn as incentive fee to the bondholders and has asked for the removal of financial covenants and waiver of any existing or prior breaches. Post conversion of these bonds, Suzlon’s equity will dilute by 9.8%. However, it will enable the company to improve its balance sheet as it could potentially reduce debt by ~Rs15bn.

Restructuring provides room to breathe
Suzlon recently completed refinancing its rupee facilities of ~Rs100bn. Under the restructuring, it will be allowed a two year moratorium for principal payments, thus providing interim cash
flows. The re-pricing of its FCCB’s, conversion of promoter loans into equity and sale of its remaining 26% stake in Hansen will enable it to further reduce its debt.

Steep correction in price makes valuations attractive, upgrade to BUY
Over the last one month, Suzlon’s market cap reduced by ~11%. We believe the current market price factors all negatives. Our estimates do not factor in this dilution but build in weak performance in FY11 – a repeat of FY10 – due to weak demand. We also reduce our gross margin estimates to reflect stiff competition. We believe Suzlon will continue to face pressure in the near term with order inflow and execution remaining muted. Revival in the global environment and a pick up in the financing activity will enable healthy growth in FY12. The recent correction in the price has made valuations attractive, hence we upgrade to BUY with a target price of Rs80/share.

To read the full report: SUZLON


Zylog is an ISO 9001 certified provider of Onshore, Offshore & Near shore technology services. The company offers IT outsourcing services, including offshore development and information technology outsourcing; application services consisting of application development, maintenance, and integration services; business intelligence and data warehousing services comprising consulting, reporting and analysis, and application management services; mobile computing services; replacement technology services; managed services in the areas of desktop management, security management, server and database management, and network monitoring;

IT virtualization services; and quality assurance and testing services, including performance
testing, functionality testing, white-box testing, security testing, product testing, and user
acceptance testing.

Company has strong presence and catering to clients in Banking and Finance,
Pharmaceutical, Healthcare & Life Sciences, Telecom, Retail, Utilities and Transportation,
Consumer Electronics, Recycling, High-Tech and Computer Software industries.
Its Product range consists of RTGS PayManager, a liquidity management product;
AMLDetector, an anti money laundering solution,Cheque Truncation System consists of a data
and image-capturing application, claims management system developed primarily for the
insurance claim agents/brokers; iPage - forms processing, which provides image-based forms
processing solution; and DPOnline system, a depository operation cum financial accounting
system. The company also offers mobile solutions for Mobile Banking Solutions; supply chain
management; insured Vehicle Accident Recovery System (iVARS),BPO services,e-Governence

CLIENTS: Include reputed corporate names like Metlife, HSBC, JP Morgan Chase,GE,Barclays, IOB,SBI, Verizon,Pfizer,Daiichi Sankyo etc to name a few

Company is planning to invest around 400 to 450 cr for creating infrastrastructure which will
help co to bag government prodects besides some overseas acquasitions.Also company is
launching pilot project to give internet thru towers.

Apart from above co has bagged orders from Karnataka & Gujrat Transport to issue smart cards
for the drivers it includes license and RC book which will contribute of revenue of Rs 200 crore.
Company is eyeing total revenue to tune of Rs 1000 crore for the current year from various

1) Company has robust growth histrory since past five years with sales CAGR of 51% and Profit CAGR of around 54% & opertating profit in range of 16 to 18%

2) Well Qualified & Experienced management.

3) Derisked sales model

To read the full report: ZYLOG SYSTEMS


Revenues rise 13.6%, substantially below expectations on account of lower throughout.

GRMs were at US$4.3/bbl as against US$6.6/bbl in Q4 FY09 and US$3.4/bbl in Q3 FY10.

Sequential increase in GRMs was on account of higher spreads of gasoline and diesel.

With recovery in demand expected from CY10, GRMs could sustain at current levels.

We maintain our BUY with a revised target price of Rs309.

To read the full report: CHENNAI PETROLEUM

>INDIAN STEEL SECTOR: Integration Less Significant: Buy JSW Steel, Hold TSL & SAIL (CITI)

Prefer steel to ore — We expect HRC prices to average $825/t (+41% yoy) in FY11 vs current $790/t, to partly compensate for the expected near-term rise in coal prices. Spot iron ore prices are ~$160/t but expected to average $130/t in FY11. With steel prices expected to show only a marginal upside and iron ore prices expected to come off, integration becomes less relevant. EBITDA/t rises in FY11 but is flat to lower in FY12. JSTL (Buy) remains our top pick followed by SAIL (raised to Hold) and Tata Steel (Hold).

Estimates/TP changes — FY11 estimates change by -28% to +36% on new prices, costs, updated volumes, FX changes and revised tax rates. We maintain our earlier valuation parameters for JSTL (6.5x EV/EBITDA for India) and Tata Steel (7x for India), but hike SAIL’s target EV/EBITDA to 6.5x (in line with JSTL) keeping in mind its largely domestic exposure (safer). We upgrade TPs by 12-55%.

JSTL offers many advantages — 1) Strong volumes +18-38% in FY11-12; 2) better product mix (reduction of semi-finished steel volumes from 22% to 2-3% is an EBITDA driver); 3) 15% captive coking coal by FY11, >40% by FY13; 4) lower costs with iron ore beneficiation; 5) reasonable valuations – 6.1x Jun11 EV/EBITDA. We expect JSTL to report $186/t of EBITDA in FY11-12. Maintain Buy.

Tata Steel appears interesting; but Europe could be drag — TSL’s Indian ops have several positives: a 33% jump in EBITDA/t to $420 in FY11 as they have 100% iron ore, 50% coking coal and 7% volume growth. At Corus, FY11 should be better as margins have risen in the past few months − but recent uncertainty in Europe and FX trends with risks of price cuts/lower utilizations makes us more cautious than before. We cut FY11 cons. EBITDA by 6% but PAT by 28% (higher tax). At TP of Rs590, TSL would trade at 6.2x June11 EV/EBITDA and 9.6x PE. Hold.

SAIL upgraded to Hold — SAIL has the advantage of largely domestic exposure but offers lower volume growth relative to JSTL until FY12. We expect iron ore prices to fall in 2H (100% is captive) but a rising trend in coking coal (only 5% captive), which does not help SAIL. Stock valuations are relatively rich, and we don’t expect Sensex outperformance. However, the stock has fallen 9% in the past month and with underperformance vs. the broader indices unlikely, we upgrade to Hold. At our TP Rs234 (vs.Rs151), SAIL would trade 11.9x June11 PE.

To read the full report: STEEL SECTOR