STOCK UPDATE
Mahindra &
Mahindra Cluster: Apple
Green Recommendation: Buy Price target:
Rs700 Current market price: Rs638
Expansion to drive future growth
Mahindra & Mahindra (M&M) has
announced the location for setting up its new multi-purpose
vehicle (MPV) platform code named Ingenio. For the same, it
has inked a memorandum of understanding (MoU) with the
government of Maharashtra to set up the facility at Nashik at
an investment of Rs550 crore. The production of the new
vehicle is expected to commence by the year 2008. With this
additional investment the production capacity at the existing
plant at Nashik will increase to 150,000 vehicles per annum
from the current 80,000 vehicles per annum.
The
total planned vehicle-production capacity of 150,000 a year at
Nashik will be divided between its Scorpio,
Logan and Ingenio models. With this capacity
addition at Nashik, M&M's total vehicle capacity at its
four manufacturing locations in the country is expected to
increase to about 300,000 units a year. The company plans to
increase its capacity further to 350,000 vehicles per annum by
2009.
Tube
Investments of India Cluster: Emerging
Star Recommendation: Book profit Current market price:
Rs82
Book profit
Result highlights
-
When we initiated coverage on Tube
Investments of India (TII) our primary argument was that the
company's focus on its high-margin tubes business and the
stable growing metal-form business would result in a
substantial improvement in its margins.
-
The improvement in the metal-form
business is in line with our expectation. However the
business environment for the other businesses has been
gradually deteriorating and this is expected to hurt TII's
performance going forward till FY2008.
-
First, TII's cycle business is still
bleeding with the profitability being severely affected.
Second, its strips business is severely hampered by stiff
competition in the domestic and export markets. Third its
capital expenditure (capex) plan for the high-margin tubes
division is delayed by 6-9 months on account of some
environmental clearance problems. The additional capacity is
now expected to go on stream only in Q3FY2007 as against
Q1FY2007 expected by us. This further raises the question
about the start and completion of the second phase of the
capex, which was earlier expected to be commissioned in
March 2007.
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On account of these developments, we are
downgrading our FY2007 earnings estimates by 34% to Rs5.8
per share. We are introducing our FY2008 earnings estimates
for TII, which stand at Rs8.7 per share. On account of these
developments, the earnings growth will gather momentum only
in H1FY2008.
-
At the current market price (CMP) of
Rs82, the stock is discounting its FY2007 earnings by 14x
and FY2008 earnings by 9.5x, and we believe the stock is
fairly valued given the earnings multiple commanded by its
peers. In the wake of the deteriorating conditions for the
mainstay engineering business and the uncertainty over the
completion of the capex we see no significant upside in the
company's earnings for the next 3-4 quarters. We suggest
that investors should book profit at these levels. However
given the strong balance sheet and significant value that is
likely to be unlocked from the company's strategic and
non-strategic investments, long term investors with a time
horizon of 2-3 years can stay invested.
Nelco Cluster: Vulture's
Pick Recommendation: Book out Current market price: Rs89
Book out Nelco's recent performance
has been much below our expectations due to the delay in the
orders from the Indian armed forces and the little progress in
the proposed additional development at its existing property
in Mumbai. The concerns were highlighted in the stock update
dated July 18, 2006 wherein we had downgraded the stock to a
Hold recommendation.
In the absence of any
meaningful re-rating triggers, we advise booking out of the
stock. |