Saturday, December 12, 2009

Stock Idea: ABB Limited

ABB Limited— BUY—735—INR
Sector — Engineering (others)
Regd.Off.— Khanija Bhavan, 49, Race Course Road, Bangalore – 560001
Listed — NSE, BSE.
Company overview—
Company was incorporated on 24th December 1949, at Mumbai. Company was involved mainly into manufacturing of transformers, electric motors, all-aluminium conductors, furnaces, extra H.T. air blast circuit breakers, panels and switchboards. Company’s parent ABB group, have more than 1000 companies, has operations in more than 100 countries and is involved in power generation, transmission and distribution (T&D), industrial equipments and systems, and factory automation. Company started Project for the manufacturing of industrial steam turbines with Gujarat Industrial Investment Corporation Ltd. with Government approving the collaboration agreement with AG Kunhle, Kopp & Kausch, West Germany. Company set up "Integra Hindustan Control Ltd." for the manufacture of relay and signalling equipment for the Railways using technology of Integra Ltd., Zurich, Switzerland. This project was set up at Halol in Panchmahan district of Gujarat State. Company also established National switchgears Limited, jointly with Pradeshiya Industrial and Investment Corporation of U.P. Ltd. Company formed a JV with Danish Windpower A/s, Denmark for the manufacture of wind energy conversion systems. Company also set up a factory at Mysore in Karnataka State for the manufacture of various electronics products including EPABX exchanges. Company introduced broad range of transformers, wiring accessories including switches, regulators and sockets for Indian market.
Products & Services—
Company is a leader in power and automation technologies in India that enable utility and industry customers to improve performance while lowering environmental impact. Company has 8 manufacturing units, 4 service centers, 25 marketing offices and 3 training centers in its list. Company also employs more than 3200 employees in India. ABB India serves utility and industry customers with the complete range of power, automation and industrial solutions. Company has a vast installed base, extensive local manufacturing at 8 units and a countrywide marketing and service presence. ABB has a national channel partner network, for the purpose of geographical reach and penetration of its products and services. In order to leverage India’s intrinsic technology strengths and the vast pool of highly qualified software professionals, ABB has set up a global R&D Centre in Bangalore, which focuses on Industrial IT development and deployment. It also helps maintain and support a range of software intensive products and acts as a partner for the ABB R&D centers as well as business areas within the group. Company is involved into manufacturing of control systems, Medium Voltage products, Force measurements, High voltage products (>50 KV), industry solutions, instrumentation and analytical, Low voltage Products (<1KV), Medium voltage products (1-50KV), motors, drives and power electronics, Power semiconductors, Robotics, Services, Transformers, Turbo-charging and industry Specific products.
The main areas for which company provides its services are —
Power Products: Power Products division incorporates ABB's manufacturing network for transformers, switchgear, circuit breakers, cables and associated equipment. It also offers all the services needed to ensure products' performance and extend their lifespan. The division is subdivided into three business units.
Power Systems: Power Systems offers turnkey systems and services for power transmission and distribution grids, and for power plants. Substations and substation automation systems are key areas. Additional highlights include flexible alternating current transmission systems (FACTS), high-voltage direct current (HVDC) systems and network management systems. In power generation, Power Systems offers the instrumentation, control and electrification of power plants. The division is subdivided into four business units.
Automation Products: This business serves customers with energy efficient and reliable products to improve customers' productivity, including drives, motors and generators, low voltage products, instrumentation and analytical, and power electronics. More than one million products are shipped daily to end customers and channel partners, spanning a wide range of industry and utility operations, plus commercial and residential buildings.
Process Automation: The main focus of this business is to provide customers with integrated solutions for control, plant optimization, and industry-specific application knowledge. The industries served include oil and gas, power, chemicals and pharmaceuticals, pulp and paper, metals and minerals, marine and turbo charging.
Robotics: Company has the world's largest installed base of industrial robots. Company also provides robot software, peripheral equipment and modular manufacturing cells for tasks such as assembly, painting and finishing, and machine tending. Key markets include automotive, foundry, packaging, material handling and consumer industries.
Recent developments—
In July, ABB has won orders worth Rs 14.10 billion from Maharashtra State Electricity Transmission Company (MSETCL) for substations to help improve the efficiency and reliability of the state’s network. The 220kv and 132kV substations will be located in the Nashik, Amravati and Nagpur zones of the western Indian state of Maharashtra, and are an integral part of MSETCL’s efforts to reduce transmission and distribution losses. The project is scheduled for completion in 2010.
In august, ABB has won Rs 1,283 million order from Power Grid corporation of India (PGCIL), for a 400-kV gas insulated switchgear (GIS) substation to strengthen the power transmission network in the country’s western grid. The substation will be located in Navsari, in the western Indian state of Gujarat. ABB will be responsible for the system design and engineering, civil works, supply, installation and commissioning. Major products included in the order are 400-kV and 220-kV gas insulated switchgear, transformers as well as control and relay panels. The project is scheduled for completion in 2011.
In December, ABB has won Rs 5.06 billion order from Bangalore Metro Rail Corporation (BMRCL) to provide power solutions for a planned metro network in Bangalore, India’s leading technology hub. It is a turnkey project for the first phase of the Bangalore mass rapid transport system (MRTS), which comprises two main lines covering 42 km of distance, about one-fifth of it underground, and serving 41 stations. ABB will design, supply, install and commission four substations that receive and distribute electricity, each rated at 66/33 kilovolts, as well as the auxiliary and traction substations.
Valuation—
At current market price, stock is trading at 26.5 P/E multiple of its FY2010 estimated earnings. We recommend investors to buy “ABB Limited” with medium to long-term investment horizon.
Source: Internet (Valuenotes by Abhishek Jain)

Stock Idea: Allied Digital Services Ltd (ADSL)

Allied Digital Services Ltd (Rs 226)
(BSE Code- 532875, NSE Code- ADSL)
(P/E - 8, Equity - Rs18.18 cr, Market Cap - Rs822 cr)
As businesses around the world grow, so do their IT spend and the complexity in managing IT infrastructures. With companies having their offices at multiple locations, it has become very important that their IT infrastructure is secure and running all the time. For this, outsourcing IT infrastructure to experts is the viable solution for any organisation, so that it can spend resources on its core activities and thereby save time and money. This trend favours IT infrastructure management company - Allied Digital Services (ADS), which has to its credit, the first Security Operation Center (SOC) that provides proactive protection and risk management for enterprise security round the clock. ADS is riding on high-growth domestic markets of system integration (SI); IT infrastructure management services (IMS) and remote infrastructure management (RIM). RIM is expected to be $13-15bn opportunity for the Indian IT industry by 2013 from the current $3.6 bn, as per the latest Nasscom and McKinsey report. Recent acquisition of EnPointe Global Services (EGS), the US-based IMS provider, marks ADS’s foray into international markets
ADS is into IT infrastructure management, security management and technical support services. The company, which has long been present in the domestic market, is now also looking at global markets. The company has started venturing into overseas territory, mainly the US and Australia. It acquired a US company called EnPointe Global Services, a carved-out subsidiary of Nasdaq-listed EnPointe Technologies in July this year. Since the deal is a mix of cash and stocks, Allied Digital will leverage the sales and marketing expertise of the parent company (EnPointe Technologies), which holds stocks of Allied Digital. This will drive its overseas earnings in future.
On the domestic front, the company sees IT-enabled services, pharma outsourcing, knowledge process outsourcing and contract manufacturing as some of the demand growth areas for its Network and security operations.
System integration, which involves designing and setting up of IT infrastructure for enterprises, accounts for 70% of ADS’s revenue and enjoys EBIDTA margins of about 18%. The balance 30% of the revenue is generated from ‘services’ comprising of Infrastructure Management Services (IMS), annual maintenance contracts and technical support. The company is working towards increasing the contribution from services to about 50% by FY10 as it enjoys a much higher EBIDTA margin of 50-60%. The company enjoys 13% market share in the domestic IMS segment and caters to a diverse customer base across the banking, manufacturing, retail, telecom and BPO industries. As per McKinsey, the global IMS industry size is estimated at $524 billion in 2008. Out of this, the addressable market for remote IT infrastructure management services (RMS) is estimated at $104 billion. RMS is a major thrust area for ADS. Through a global development centre, which comprises Network Operation Center (NOC) and Security Operation Center (SOC), ADS provides remote management services
ADS delivers services through its own facilities and centres, spread across 92 cities and follows a ‘direct’ model rather than a franchisee model, as adopted by its peers. This gives the company a direct control on the quality of service and helps it maintain the desired level of efficiency due to uniformity in training. Also worth noting is the fact that, ADSL has a vendor neutral approach and does integration based on the customer’s requirement. This has led ADSL to be a solution partner for some of the big names in the industry and develop technical expertise over a vast range of products. Since security compliance would be a subject of meeting regulatory requirement, US economic slowdown will pose minimal risk to ADSL’s prospects, while the currency risk is limited as more than 90% of ADSL’s revenue come from domestic operations.
ADS’s revenues and profits have grown at a CAGR of 45% and 70%, respectively in the last three years. The company is expected to deliver a phenomenal CAGR of 90% in revenue and 92% in profit during FY08-FY10E on the back of exponential growth expected in the RMS segment and recent acquisitions. For the half year ended September 2009, ADS posted a growth of 24% y-o-y in total sales to Rs 325.24 cr. whereas net profit grew 20% to Rs 47.82 cr. on consolidated basis. For the year ended March 2009, ADS had posted net profit of Rs 79.6 cr.(up 86%) on net sales of Rs 530 cr. (up 78%). On a equity of 18.18 cr.(Promoters’stake- 55.59% FII / MF stake-18.16%), the EPS on a Rs 10 paid up share stood at Rs 44. ADS is expected to post a growth 30%-40% CAGR in EPS over next 3 years. Recently ADS split its shares from Rs 10 to Rs 5. At the current market price of Rs 226, the stock trades at 8.3x and 6.6x of FY10E (Rs 27) and FY11E earnings(Rs 34), respectively. Strong revenue visibility, changing business mix, improving margins and higher return ratio make it a good investment bet. Investors can start accumulating the stock at current levels and add more on declines for decent returns of 40%-45% over the next 6-8 months.
Source: Internet (Valuenotes by Sanjay Chhabria)

Stock Idea: Paper Products Ltd

Paper Products Ltd (Rs 59) (A Mnc Packaging Company)
(BSE Code- 509820, NSE Code- PAPERPROD)
(P/E - 8, Equity - Rs12.54 cr, Market Cap - Rs370 cr)
Paper Products Limited (PPL) is India’s leading manufacturer of primary consumer packaging and labeling materials. The company has a history of over seven decades in the packaging field and its product folio includes flexible packaging, labelling technologies and specialized cartons. PPL has four fully integrated manufacturing units at Thane, Silvassa, Hyderabad and Rudrapur. PPL commands a 65% market share in the high end flexible packaging in India and its clientele includes some of the heavyweights of Indian FMCG players like HLL, Colgate, Nestle etc. Exports constitute around 22% of total revenues and the company's international division services large multinationals like Nestle, Unilever, Cadbury and Colgate Palmolive across 4 continents. In 1999, the company became a subsidiary of Huhtamaki, a global leader in consumer packaging, which holds a 59% stake. Huhtamaki is headquartered in Finland and is one of the top 10 consumer packaging companies in the world
Packaging being crucial to FMCG products, innovations and improved product development are necessary. The packaging industry being highly fragmented and competitive, differentiation is the only mode of survival. PPL has over the years realized the needs of the clients and has come out with new products. Its strong in-house research and development initiatives coupled with Huhtamaki (this Finland based company is PPL’s largest shareholder as well as one of the largest consumer packaging companies globally) have enabled PPL to continue its product development program. It has come out with its innovation initiative NASP (New Application, Structure and Products). This initiative includes new applications for existing products, new products for existing applications and new products for new applications.
Going forward, the FMCG sector is set to sustain the healthy growth. The growth in the packaging industry is directly linked to the growth in the FMCG industry. Apart from this, the growth in the food processing sector will also act as a positive trigger for the packaging industry. The government is increasing its focus on the food processing sector to reduce wastage in the agricultural sector. The growth in retail is already shifting consumer habit to sophisticated and attractive packed goods and articles. PPL meets the packaging needs of almost the entire range of the FMCG segment including personal products, personal wash, laundry, foods, sauces, beverages, bakery products, spices, chocolates and confectionery and dairy; and also for seeds, specialised chemicals, electronics and many other specific uses including anti-spurious packaging.
For the nine months ended Sept. 2009, PPL reported net profit of Rs 30 cr.(up 72%) on net sales of Rs 476 cr.(down 5%). Operating (EBITDA) margins for the company increased by 2% during nine months to stand at 13.6%. The increase in margins is attributed to a more favourable product mix and better cost efficiency margins. Net profit margins improved by 3% during nine months to stand at 6.7%. For the year ended December 2008, PPL’s net sales stood at Rs 620.7 cr..(up 8.7%) and net profit at Rs 21.29 cr.(down 25% due to forex losses). The EPS on a equity of 12.54 cr. on a Rs 2 paid up share stood at Rs 3.4 and the dividend declared was 90%(Rs 1.80 per share). PPL is the largest organized player with a market share of around 65% of the consumer packaging and labeling segment. It must be noted that PPL is not easily dispensable by FMCG players, as packaging plays an important role in not only creating a consumer appeal but is also important for retaining the quality of the product. Further, the company seems to have capitalised on NASP, the innovation strategy, whereby new products contribute to around 29% of total revenues. At the current market price of Rs 59, the stock trades at 9.5 times CY 2009E earnings(Rs 6.2)and at 7.8 times CY10E earnings(Rs 7.5), which is low for an MNC associate and an industry leader set for a decent growth in future.
Going forward, PPL's entrenched position in the premium segment of the flexible packaging industry, its emphasis on innovation and product quality, and increase in focus towards smaller FMCG companies augurs well for its revenue growth. PPL’s performance depends on the growth of the FMCG sector. PPL is a derived play on the FMCG industry. Paper Products is a play on India's long-term GDP growth and the performance of the FMCG sector. Given its focus on innovations and a strong product portfolio coupled with a healthy demand for packaging by the FMCG and retail sector, the company is set for better times going forward. Investors can start accumulating the stock at current levels and add more on declines for decent returns of 40%-45% over the next 6-8 months.
Source: Internet (Valuenotes by Sanjay Chhabria)

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