Investment idea - Munjal showa

Munjal Showa

Munjal Showa is owned by the Munjal Group, the Hero part group. Now, with the recent restructuring into the Hero Honda stock itself, I feel Munjal Showa would be the largest beneficiary because Munjal Showa is a pioneer into the system. They have got the leading market share in the two-wheeler segment with 60% of market share with the only competitor being Gabriel.

What I have been observing into this company is if someone does the sensitivity analysis, the company can report earnings per share (EPS) which can easily double in next three to three-and-a-half years. The company has been recently reducing its debt, which is going to add to the bottom-line in terms of interest savings. So, if I take a call into a longer-term perspective, they have three plants at Manesar and others. That will result into a growth of sales of close to 34% in next three years because the management has guided close to 6-7% year-on-year (YoY) capacity expansion. So, in next three years, the company would do close to Rs 2,000 crore from current Rs 1,200 crore.

Now, if I see the last fiscal to this fiscal, the company has already shown a decent jump in terms of top-line. With margins improvement going forward, once the plant stabilises, the net profit margin would be hovering around close to 3.5%. That means the company would clock close to Rs 50-60 crore from three years down the line from current Rs 24-25 crore. That would result into a rerating for the stock. I feel the stock can easily touch that Rs 120-140 level.

If I take a call on the longer-term perspective, you get Rs 2 dividend from the stock like the company has been paying for last four-five years. That means a 5% dividend yield. So, someone would be sitting for next three years, I think the company would pay you Rs 6-7 of dividend itself plus with this capacity expansion and the net profit margin improving with our sensitivity models, I feel the company can get rerated in terms of P/E expansion.

Historically, the stock can easily trade between five times and 13 times and we have taken a median of 7.5 times, taking our target to close to Rs 120-140 mark trading range within next three years. That is a clear-cut upside of 200%. But because my view on the market is that the market would be consolidating in the longer-term , no one should be buying this stock at one go. They can make a systematic investment into the stock with 20-30% invested right now because I feel this stock will definitely hog limelight in days to come with both Hero group and Maruti announcing huge capacity and the company being a pioneer into their business.

Disclaimer

The information, analysis and estimates contained herein are based sources believed to be reliable. Weaccept noliability whatsoever direct or indirect that may arise from the use of information herein and shall not be responsible for the completeness and accuracy. It is not an offer to sell or a solicitation to buy securities. This informationis for circulation only

Investment idea - Muthoot finance IPO

The Initial Public Offer (IPO) from gold loan provider, Muthoot Finance (Muthoot), may be a suitable option for investors with a high-risk appetite.

The exceptional growth in gold loan disbursements (loans against gold jewellery) in recent years, the under-penetrated nature of this market and the high yields from these loans, despite being secured, make the gold lending business attractive within the banking/NBFC space.

Muthoot, market leader in gold lending with a 70 year record, may thus have bright growth prospects. However, the high margins and the rapidly-growing gold loan market may be vulnerable to risks from a reversal in gold prices, causing a dip in collateral value and a significant tightening of regulatory and capital adequacy norms.

At the upper end of the price band (Rs 160-175), the stock would trade at 2.46 times its estimated FY-12 book. At this valuation, it is at a premium to rival, Manappuram Gold, which trades at a price-to-book value multiple of 2.2 times. Valuations for most NBFC stocks have declined significantly from their highs of November 2010.

Muthoot has better reach than its competitors in terms of branch network. It also manages a bigger loan book, has better credit rating (LAA-) and higher return on net worth compared to Manappuram.

After this offer, Muthoot's capital adequacy ratio would improve to excess of 23 per cent from 15.06 per cent in November 2010, positioning it well to meet the 15 per cent requirement by April 2011. This may not only help Muthoot to maintain loan growth, but also aid net interest margins (NIM). Additionally, the company has been tapping Tier-II capital sources to augment its capital adequacy.

Industry and competition

The gold loan market is pre-dominantly un-organised with pawn-brokers lending against this collateral at high rates. Muthoot, the market leader in the organised gold financing business, according to the data compiled by IMacs (ICRA management consultants), had close to a one-fifth market share, as of March 2010. In the period to November 2010, Muthoot's loan book has grown by 75 per cent .

Indian households are estimated to have a gold holding of anywhere between 18,000 and 20,000 tonnes. Given that gold is not an income-generating asset, the only means to monetise gold holdings is through loans. Theoretically, this translates into a Rs 30 lakh crore lending business opportunity (assuming a 75 per cent loan-to-value). According to ICRA IMacs industry report, the organised market size was only Rs 37,640 crore in March 2010.

Muthoot Finance, as of November 2010, holds 97.6 tonnes of gold as security. Given the size of the potential market, competition is a limited threat as many players can co-exist.

Business

The company generally gives small ticket loans with a tenor not exceeding one year, thereby limiting interest risk and asset-quality concerns. The loan-to-value (value of loan to value of gold pledged) varies from 60 per cent to 90 per cent.

However, there is an additional margin of safety, considering that it calculates value solely based on the weight of the gold content and excluding value of the stones, and so on. Therefore, the value of the collateral in its books is understated. Muthoot's average loan-to-value of gold, as of November 30, was close to 60 per cent.

The loan book of Muthoot (inclusive of securitised portfolio) grew at 82 per cent during the period 2007-08 to 2009-10. The average ticket size of loan is Rs 31,500 per account. The net interest margin of Muthoot was 10.4 per cent for the eight month period ended November 2010.

The high net interest margins may fall to some extent due to rising interest rates and cost of funds. The priority sector status for gold loans, classified as agriculture loans, has recently been removed by the RBI, which too may dent Muthoot's ability to raise funds at low cost. ICRA estimates that priority sector status made for a cost saving of 1-1.5 percentage points, which may now be lost.

However, the management is confident that given the shorter tenor of the loans, the rising rates can be easily passed on to the customers. The rising competition may also put pressure on the yields.

The company has a huge branch network, which is why the current cost-to-income ratio is high compared to other NBFCs. Over the years, as the branches start contributing fully to the business, the ratio may fall.

Fee income opportunities are aplenty, given the strong branch network. Muthoot has added 1,144 branches over the last one year, taking its branch network to 2,749 branches; it plans to expand into under-penetrated markets of North India. This would enable it to geographically diversify and maintain loan book growth.

Risks

The buoyancy in the gold lending business in recent years is partly attributable to the steady uptrend in gold prices. With gold at a record high, a correction cannot be ruled out. For gold lenders, given that loan repayments are not in the form of EMIs, the principal will remain at risk if gold prices drop sharply.

The shorter tenor loans also require a high pace of customer additions to sustain high loan growth. Currently high growth in loan book is partly contributed by the rising value of gold pledged with the company. It is to be seen how this business works in a declining gold price environment.

Regulatory intervention in the interest rates, a la microfinance companies, too is a risk. There is a Supreme Court hearing awaited on inclusion of gold-financing companies in Kerala Money Lenders Act, which may cap the rate of interest.

According to the management, they have been excluded in other states from the Money Lenders Act. Increased focus of banks on gold loans may reduce the yields as they have access to lower cost funds. The existence of Muthoot Fincorp, a breakaway group, also in the gold financing business, may impede branding efforts.

Investment idea- Infosys Better late than never!

I’ve been a long-time admirer of Infosys and its outstanding management, specifically N. R. Narayana Murthy and Nandan Nilekani. The corporate culture, talent pool, world-class client base and deep management strength are formidable.

Everyone knows Infosys Technologies share would be the one of KING of stock market ups and downs. Today Infosys share down nearly 9% and reached Rs.3000/- levels. Now in everyone mind whether can we buy this share or sell it? In my case I would really think to buy when the this kind of share get into dips. I’m pretty sure that this share would reach another good levels I believe Rs.5000/- in next 6months however that depends on the market trends.

These kind of shares you can buy and keep for long years like your pension plans, daughter’s marriage, investment purpose etc.

At the same time I still don’t expect this to be the bottom for Infosys. We will see some

more downside from here. The reason being that over the next couple of days you will

have some more downgrades coming from various analysts and when that happened

you will have further selling coming in. So I see levels of closer to about Rs 2700-2800

One can again start buying in a small way. Again for long term you will not have an immediate bounce back. Whatever bounces back you will have from even that Rs 2700-2800 levels will be for Rs 100-150, not really beyond that. So only if one has a view of possibly 12 months plus then I think one should start buying at about Rs 2700 levels. In that fall it is possible that it can even breach that and go down. So I think one should buy more at lower levels. But Rs 2700-2800 levels are the levels at which you should start buying

I believe being the bellwether of the Indian IT sector Infosys is best valued using PE valuation. As can be seen from the PE graph Infosys has been trading in the 23x brand in recent times. I expect it to trade in the same range moving ahead. Therefore using a PE multiple of 23x for its’ FY13E EPS of Rs.144.98 per share I arrive at a target price of Rs.3663.
 Forbes magazine has named Infosys in its list of Global High Performers. For investors wanting their money to grow without compromising on safety factors, Infosys is the company to park their
funds.

All companies will have bad times and good times. So, it is prudent in long run to select to enter into a good company during its bad time, instead of a bad company at its good time.

I have started buying infosys... thinking better late than never!

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Disclaimer

The information, analysis and estimates contained herein are based sources believed to be reliable. We  accept no  liability whatsoever direct or indirect that may arise from the use of information herein and shall not be responsible for the completeness and accuracy. It is not an offer to sell or a solicitation to buy securities. This information  is for circulation only