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Summary
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SHAREKHAN BUDGET SPECIAL
Run-up to Budget
2007-08
It's that time of the year again when wish lists
are drawn by all and sundry and expectations are high that at least
some of the wishes will be granted in the Union Budget. Yes, in
about two weeks from now, the incumbent United Progressive Alliance
(UPA) government will present its last but one budget before it goes
to general parliamentary elections in CY2009. Needless to say
investors will be hanging on every word of P Chidambaram when he
presents the budget for FY2008 on February 28, 2007. That's because
they will be eager to see if the finance minister uses the
opportunity to push forward fiscal reforms and announce
well-directed spending on infrastructure, education and the farm
sector. With the budget around the corner, we take this opportunity
to present our pre-budget report.
STOCK UPDATE
Tata
Motors
Cluster: Apple
Green
Recommendation: Buy
Price target: Rs1,075
Current
market price: Rs869
Deepening relationship with Fiat
Key points
-
Tata Motors (TAMO) has entered into an
agreement with Italy's Fiat to provide the design and technology
for manufacture of pick-ups in Argentina. Fiat will manufacture
and market it under the Fiat brand name. TAMO would get a licence
fee through this venture, both as a one-time fee and as sales
dependent fee.
-
TAMO has also signed a memorandum of
understanding (MoU) with Iveco to analyse the feasibility of their
co-operation, across markets, in the area of commercial
vehicles.
-
The joint venture agreement with Fiat for
manufacture of cars, engines and transmission components has
commenced trial production. The first batch of cars will roll out
in early 2007. This would require an aggregate investment of
Rs4,000 crore over a period of time.
-
TAMO has bid for a 43.5% stake in Punjab
Tractors together with the Fiat group's CNH (New Holland Tractors
India). This would mark TAMO's entry into the tractor business and
would catapult the TAMO-CNH combine to the third spot in India's
tractor market with CNH's market share of 5.23%.
-
We believe all these developments would have
positive implications for TAMO in the long term. At the current
market price of Rs869, the stock trades at 12.3x its consolidated
earnings and at an enterprise value/earnings before interest,
depreciation, tax and amortisation of 6.4x. We maintain our Buy
recommendation on the stock with a price target of Rs1,075.
SECTOR UPDATE
Cement
Dispatch growth slows down
Key points
-
The industry dispatches for January 2007 have
grown by 7% year on year (yoy) to 14 million tonne. The growth is
much slower as compared with that in January 2006 when dispatches
had grown by 16%. The growth has been slower because very few
players have added capacity in the last one year and therefore
been operating at full capacity.
-
Amongst the regions, the north witnessed the
highest dispatch growth of 14% yoy followed by the east, which
grew by 9% yoy, and the western region, which grew by 8.6% yoy.
-
Industry utilisation level continues to rise,
breaching the 100% mark and settling at 102%, driven by the
northern region where utilisation level stands at 110%.
-
With all the three demand drivers, ie the
housing, industry and infrastructure sectors, showing strong signs
of growth, the consumption of cement is expected to grow at a
compounded annual growth rate of 10-10.5% for the next three
years.
-
From January 1, 2007 Tamil Nadu implemented
value-added tax (VAT), reducing the sales tax rate in the state
from 14.5% to 12.5%. We maintain our earlier view that the savings
that the companies will enjoy on account of the reduction in the
tax on the selling price will be offset by the tax that will now
be payable on the freight component.
-
The prices have started rising in the south
post-monsoons. Andhra Pradesh and Tamil Nadu witnessed a
Rs10-per-bag increase in January. In the north, Delhi and Jaipur
have witnessed a Rs5-per-bag hike in the same month. Dealers
expect cement prices to rise across the country in the next couple
of months as the construction activity reaches its peak.
-
We believe that the import duty cut on cement
from 12.5% to nil will not have any impact on the cement prices,
as the landed cost of bulk cement translates into a 25% premium to
the current national average of Rs205 per bag.
-
The government has hinted that in the upcoming
budget it might take measures to reduce the input costs for cement
to contain the prices. On the other hand, it has ruled out any
excise duty cut on cement.
-
Taking cognisance of the third quarter
performance of cement companies, we have upgraded our FY2007 and
FY2008 estimates for UltraTech Cement, JK Cements, and Orient
Paper and Industries. We have upgraded only the FY2008 estimates
for Madras Cement. We also strongly believe that the south-based
cement companies, after a lacklustre third quarter performance,
would bounce back with better results in the fourth quarter.
-
We maintain our positive view on the sector and
believe that the companies that have taken a lead in announcing
capacity expansions, such as Grasim Industries, Shree Cement,
Jaiprakash Associates, UltraTech Cement and Madras Cement, will
benefit the most in a scenario of rising prices. We rate Grasim
Industries, UltraTech Cement and India Cements as our top
large-cap picks in the sector. Among the mid-caps, we like Shree
Cement and Madras Cement. We also like Orient Paper and
Industries, and JK Cement on account of their compelling
valuations, which are much less than the sector average.
MUTUAL FUND: INDUSTRY UPDATE
Equity AUMs rise in line with market
movement
The AUM for
equity funds increased by 2.2% to Rs146,749 crore in January 2007.
The rise in the equity AUM was in line with the 2.2% upward movement
in the
market. |
