*Investors should accumulate 'fallen angels', hedge well in futures market*
7 Feb, 2008, 1041 hrs IST,Shailesh Menon, TNN
MUMBAI: Akin to batsmen who find it difficult to play a good line delivery
on the off-stump, investors too are passing through tough times with reverse
swinging markets, deceptive valuations and late stock movements. Though
there is consensus among market gurus that extreme caution must be exercised
while trading, not many are ready to press the panic button. As a matter of
fact, this is the right time for investors (with investible money) to
accumulate 'fallen angels' and the much pounded blue chips and hedge
themselves well in futures market, experts say.
"There is money to be made in bearish and volatile markets as well. The time
of entering a stock is very important in falling markets. One should start
investing when stock prices have depreciated significantly, " says Park
Financial Advisors' director Swapnil Pawar, adding, "Investors should try to
spot out 'fallen angels' in the market.
Fallen angels are stocks that have fallen 20 to 30 times as far PE
(price-to-earnings) multiple is concerned." However, a word of caution:
Never try to invest in a stock trading high on thin volumes. Try the reverse
— pick stocks trading on high volumes but low prices. "Seasoned investors
can also try investing in index futures," adds Mr Pawar.
According to investment experts, a high net worth individual could invest in
short-term money market instruments on bad market days. However, this should
be done by arriving at accurate stock exit points or setting a stop-loss and
reading market sentiment. Switching from equities to short-term debt should
be effected only on expert advise. Another option could be allocating a
certain portion of their investments into funds investing into commodities.
Generally, commodity markets do well when equities are volatile, say
investment experts.
Well-informed investors could also get into option trading in times of
falling markets. The advantage of buying a 'Put option' over shorting the
asset is that risk is limited to the premium. *For instance, concerns over a
probable slowdown in the US has caused a loss of confidence in IT companies,
causing their share prices to fall.* So by purchasing put option on IT
shares, investors could make money even as IT shares drop further.
*Investment strategy for small-retail investors would be adopt value
investment style that ensures capital protection*. Says Standard Chartered
AMC's senior fund manager Ajay Bodke, *"Investors should invest more on
stock dividend yields than price appreciation; the idea is to pick companies
where earnings growth is moderate and valuations attractive. Stocks with a
PEG ratio lower than 1 is generally considered attractive by experts."*
*Stock picking on the basis of historical beta values could be dangerous;
beta, valuation and past performance need not necessarily yield positive
(same) results all the time.*
"Avoid scrips that are dependent on markets (stocks riding on talks of
future earnings, listing of subsidiaries and spin-offs). Buy companies where
earnings are visible (where future potential is visible: as in
infrastructure companies). Use derivatives for hedging purposes. Do not
indulge in double leveraging; this is not the right time to make good your
loss," says Credit Suisse Securities' research head Nilesh Jasani.
--
Regards,
Beyond fear there is success.
Friday, February 8, 2008
Futures
CASH SHARES or WELL-COVERED FUTURES ... make your choice !
I list below some of my choicest futures, and how do they fare with an equivalent number of cash shares :
----------------------------------------------------------------------
Larsen & Toubro
(lot size 50, margin deposit 41K, as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 41K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE) : 50K
3. Cost of adding another future at bottom rates : 34K
4. Total investment YET on acquiring 100 shares : 125K
5. Total investment required for buying 100 cash shares : 370K
6. How about just BUYING a FUTURE upon a minor/major correction, and maintaining it for LIFE ?? I'm sure you won't EVER really regret it.
----------------------------------------------------------------------
ABAN Offshore
(lot size 50, margin deposit 57K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 57K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE) : 50K
3. Cost of adding another future at bottom rates : 48K
4. Total investment YET on acquiring 100 shares : 155K
5. Total investment required for buying 100 cash shares : 357K
----------------------------------------------------------------------
Sesa Goa
(lot size 75, margin deposit 98K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 98K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE): 75K
3. Cost of adding another future at bottom rates : 87K
4. Total investment YET on acquiring 100 shares : 260K
5. Total investment required for buying 100 cash shares : 455K
----------------------------------------------------------------------
MICO
(lot size 50, margin deposit 50K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 50K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE) : 50K
3. Cost of adding another future at bottom rates : 45K
4. Total investment YET on acquiring 100 shares : 145K
5. Total investment required for buying 100 cash shares : 376K
----------------------------------------------------------------------
Reliance Industries
(lot size 75, margin deposit 50K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 50K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE) : 75K
3. Cost of adding another future at bottom rates : 45K
4. Total investment YET on acquiring 150 shares : 170K
5. Total investment required for buying 150 cash shares : 383K
----------------------------------------------------------------------
BHEL
(lot size 75, margin deposit 34K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 34K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE): 75K
3. Cost of adding another future at bottom rates : 26K
4. Total investment YET on acquiring 150 shares : 135K
5. Total investment required for buying 150 cash shares : 310K
----------------------------------------------------------------------
HDFC
(lot size 75, margin deposit 42K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 42K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE): 75K
3. Cost of adding another future at bottom rates : 38K
4. Total investment YET on acquiring 150 shares : 155K
5. Total investment required for buying 150 cash shares : 450K
----------------------------------------------------------------------
EDUCOMP
(lot size 75, margin deposit 100K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 100K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE): 75K
3. Cost of adding another future at bottom rates : 95K
4. Total investment YET on acquiring 150 shares : 270K
5. Total investment required for buying 150 cash shares : 563K
----------------------------------------------------------------------
GRASIM
(lot size 88, margin deposit 58K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 58K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE): 88K
3. Cost of adding another future at bottom rates : 52K
4. Total investment YET on acquiring 176 shares : 198K
5. Total investment required for buying 176 cash shares : 532K
----------------------------------------------------------------------
Laxmi Machines
(lot size 100, margin deposit 69K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 69K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE): 100K
3. Cost of adding another future at bottom rates : 61K
4. Total investment YET on acquiring 300 shares : 230K
5. Total investment required for buying 200 cash shares : 410K
----------------------------------------------------------------------
State Bank of India
(lot size 132, margin deposit 57K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 57K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE): 132K
3. Cost of adding another future at bottom rates : 48K
4. Total investment YET on acquiring 264 shares : 237K
5. Total investment required for buying 264 cash shares : 577K
----------------------------------------------------------------------
BEML
(lot size 125, margin deposit 34K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 34K
2. Downside liability if it tanks by 1000 rupees (quitey IMPROBABLE): 125K
3. Cost of adding another future at bottom rates : 31K
4. Total investment YET on acquiring 250 shares : 190K
5. Total investment required for buying 250 cash shares : 332K
----------------------------------------------------------------------
MCDOWELL-N
(lot size 125, margin deposit 67K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 67K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE): 125K
3. Cost of adding another future at bottom rates : 58K
4. Total investment YET on acquiring 250 shares : 250K
5. Total investment required for buying 250 cash shares : 431K
----------------------------------------------------------------------
I list below some of my choicest futures, and how do they fare with an equivalent number of cash shares :
----------------------------------------------------------------------
Larsen & Toubro
(lot size 50, margin deposit 41K, as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 41K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE) : 50K
3. Cost of adding another future at bottom rates : 34K
4. Total investment YET on acquiring 100 shares : 125K
5. Total investment required for buying 100 cash shares : 370K
6. How about just BUYING a FUTURE upon a minor/major correction, and maintaining it for LIFE ?? I'm sure you won't EVER really regret it.
----------------------------------------------------------------------
ABAN Offshore
(lot size 50, margin deposit 57K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 57K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE) : 50K
3. Cost of adding another future at bottom rates : 48K
4. Total investment YET on acquiring 100 shares : 155K
5. Total investment required for buying 100 cash shares : 357K
----------------------------------------------------------------------
Sesa Goa
(lot size 75, margin deposit 98K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 98K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE): 75K
3. Cost of adding another future at bottom rates : 87K
4. Total investment YET on acquiring 100 shares : 260K
5. Total investment required for buying 100 cash shares : 455K
----------------------------------------------------------------------
MICO
(lot size 50, margin deposit 50K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 50K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE) : 50K
3. Cost of adding another future at bottom rates : 45K
4. Total investment YET on acquiring 100 shares : 145K
5. Total investment required for buying 100 cash shares : 376K
----------------------------------------------------------------------
Reliance Industries
(lot size 75, margin deposit 50K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 50K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE) : 75K
3. Cost of adding another future at bottom rates : 45K
4. Total investment YET on acquiring 150 shares : 170K
5. Total investment required for buying 150 cash shares : 383K
----------------------------------------------------------------------
BHEL
(lot size 75, margin deposit 34K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 34K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE): 75K
3. Cost of adding another future at bottom rates : 26K
4. Total investment YET on acquiring 150 shares : 135K
5. Total investment required for buying 150 cash shares : 310K
----------------------------------------------------------------------
HDFC
(lot size 75, margin deposit 42K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 42K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE): 75K
3. Cost of adding another future at bottom rates : 38K
4. Total investment YET on acquiring 150 shares : 155K
5. Total investment required for buying 150 cash shares : 450K
----------------------------------------------------------------------
EDUCOMP
(lot size 75, margin deposit 100K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 100K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE): 75K
3. Cost of adding another future at bottom rates : 95K
4. Total investment YET on acquiring 150 shares : 270K
5. Total investment required for buying 150 cash shares : 563K
----------------------------------------------------------------------
GRASIM
(lot size 88, margin deposit 58K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 58K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE): 88K
3. Cost of adding another future at bottom rates : 52K
4. Total investment YET on acquiring 176 shares : 198K
5. Total investment required for buying 176 cash shares : 532K
----------------------------------------------------------------------
Laxmi Machines
(lot size 100, margin deposit 69K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 69K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE): 100K
3. Cost of adding another future at bottom rates : 61K
4. Total investment YET on acquiring 300 shares : 230K
5. Total investment required for buying 200 cash shares : 410K
----------------------------------------------------------------------
State Bank of India
(lot size 132, margin deposit 57K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 57K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE): 132K
3. Cost of adding another future at bottom rates : 48K
4. Total investment YET on acquiring 264 shares : 237K
5. Total investment required for buying 264 cash shares : 577K
----------------------------------------------------------------------
BEML
(lot size 125, margin deposit 34K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 34K
2. Downside liability if it tanks by 1000 rupees (quitey IMPROBABLE): 125K
3. Cost of adding another future at bottom rates : 31K
4. Total investment YET on acquiring 250 shares : 190K
5. Total investment required for buying 250 cash shares : 332K
----------------------------------------------------------------------
MCDOWELL-N
(lot size 125, margin deposit 67K), as on 1.2.2008)
----------------------------------------------------------------------
1. Initial investment per lot : 67K
2. Downside liability if it tanks by 1000 rupees (quite IMPROBABLE): 125K
3. Cost of adding another future at bottom rates : 58K
4. Total investment YET on acquiring 250 shares : 250K
5. Total investment required for buying 250 cash shares : 431K
----------------------------------------------------------------------
NTPC singns MOU with BFL
National Thermal Power Corporation Ltd (NTPC) has informed that an MOU has been signed on February 08, 2008 between the Company and Bharat Forge Ltd (BFL) to promote a Joint Venture Company, with an equity participation of 49:51 by the Company and BFL respectively, to take up manufacture of castings, forgings, fittings and High Pressure piping required for Power and other industries, Balance of Plant (BOP) equipment for the power sector etc.
Inflation up 4.11%
Annual inflation. based on the wholesale price index gained 4.11% in the week ended 26 January 2008 from 3.93% in the week ended 19 january 2008.
The market estimate stood at 3.97%.
The market estimate stood at 3.97%.
Indian Economy
Seeing the bear messages here, I am starting this thread, Mostly I will cut/paste info from the net with comments in between.
(Bloomberg) -- India's government expects economic growth to slow for the first time in three years, as higher interest rates cool consumer demand for homes, motorcycles and electric appliances.
Asia's third-largest economy is forecast to expand 8.7 percent in the 12 months to March 31, the weakest pace since 2005, the statistics office said in a release in New Delhi today. Growth was 9.6 percent last financial year.
The pace of expansion will still be the quickest after China among the world's major economies. And it may remain so even if the U.S. suffers a recession as India's growth is being driven by the spending of a middle class of about 50 million people, equal to the combined population of Singapore, Hong Kong, Malaysia and Australia.
``This is not a collapse,'' said Sonal Varma, Mumbai-based- economist at Lehman Brothers Inc. ``Growth is slowing because of higher real interest rates. U.S. recession or not, the structural drivers of India's rising potential growth remain intact.''
The government's growth estimate beats the central bank's 8.5 percent forecast and is almost in line with the average 8.8 percent annual growth in the previous four years, the best expansion since the country's independence in 1947.
Final Figure
Finance Minister Palaniappan Chidambaram who said he was ``disappointed, but not too despondent,'' expects the final growth figure to be closer to target.
``Growth will be closer to 9 percent than what may appear at this moment,'' Chidambaram told reporters in New Delhi today.
Reserve Bank of India Governor Yaga Venugopal Reddy has raised interest rates nine times since October 2004 and ordered banks to set aside more money as reserves five times since December 2006 to contain inflation stoked by rapid consumer demand and high oil and food prices. The central bank has also allowed the rupee to strengthen to near a decade-high to make imports cheaper.
Six of nine economists surveyed by Bloomberg News last week said Reddy will maintain the repurchase rate at 7.75 percent, the highest in six years, in the next monetary policy statement on April 29, as inflation still doesn't reflect last year's 57 percent increase in crude oil costs.
Inflation Rate
Inflation, currently at a five-month high of 3.93 percent, may also accelerate on increased money supply caused by capital flows from overseas investors, seeking higher returns in India, where growth is almost three times that in the U.S., Europe and Japan. Only China among economies of more than $500 billion grew faster than India, at an 11.2 percent pace last quarter.
Global investors bought a record $17.2 billion of shares and $2.3 billion of bonds in India last year.
Higher interest rates have reduced demand in some segments of the Indian economy. Property prices, for example, have declined. The value of residential flats in Gurgaon, a suburb outside the capital New Delhi, have dropped 40 percent in the nine months ended Sept. 30, according to real estate company Cushman & Wakefield Inc.
India's manufacturing is expected to expand 9.4 percent this fiscal year, according to today's statement. Agricultural output may grow 2.6 percent and financial services will advance 11.7 percent. Bajaj Auto Ltd., India's second-largest motorcycle maker, posted a 7.2 percent drop in sales in December, its 11th straight month of declines.
`Consumption Growth'
``Rising incomes should support consumption growth,'' Andrea Richter Hume, an International Monetary Fund economist, said in a report on India this week. The IMF expects the South Asian nation to grow at 8 percent ``over the next few years.''
India's middle class, those with annual disposable incomes between $4,380 and $21,890, has more than doubled to 50 million in the past decade, according to McKinsey & Co., the New York- based consulting firm. It estimates this group will further increase 10-fold to 583 million people by 2025.
Incomes are rising in India because of a spurt in economic growth after Prime Minister Manmohan Singh started dismantling barriers to foreign investment and other Soviet-style controls on industry when he was finance minister in 1991.
India's economy has expanded at an average annual pace of 6.3 percent since 1991, compared with growth of about 3.5 percent between 1950 and 1980.
That acceleration in growth is attracting companies such as Glitnir Bank hf, Iceland's third-biggest lender by market value, and McDonald's Corp. to India.
`Perfect Time'
``We think this is the perfect time for us to come to India,'' said Bala Kamallakharan, executive director at Glitner, which yesterday unveiled an Indian joint venture with the LNJ Bhilwara Group to produce thermal energy.
Glitnir is not alone in trying to tap opportunities in India. McDonald's, the world's largest restaurant company, last month said it will boost its stores in India this year by as much as 30 percent.
Volvo AB, the world's second-largest truckmaker, plans to create a joint venture with India's Eicher Motors Ltd. to win a larger share of the fourth-largest truck market, the Swedish company said in December.
(Bloomberg) -- India's government expects economic growth to slow for the first time in three years, as higher interest rates cool consumer demand for homes, motorcycles and electric appliances.
Asia's third-largest economy is forecast to expand 8.7 percent in the 12 months to March 31, the weakest pace since 2005, the statistics office said in a release in New Delhi today. Growth was 9.6 percent last financial year.
The pace of expansion will still be the quickest after China among the world's major economies. And it may remain so even if the U.S. suffers a recession as India's growth is being driven by the spending of a middle class of about 50 million people, equal to the combined population of Singapore, Hong Kong, Malaysia and Australia.
``This is not a collapse,'' said Sonal Varma, Mumbai-based- economist at Lehman Brothers Inc. ``Growth is slowing because of higher real interest rates. U.S. recession or not, the structural drivers of India's rising potential growth remain intact.''
The government's growth estimate beats the central bank's 8.5 percent forecast and is almost in line with the average 8.8 percent annual growth in the previous four years, the best expansion since the country's independence in 1947.
Final Figure
Finance Minister Palaniappan Chidambaram who said he was ``disappointed, but not too despondent,'' expects the final growth figure to be closer to target.
``Growth will be closer to 9 percent than what may appear at this moment,'' Chidambaram told reporters in New Delhi today.
Reserve Bank of India Governor Yaga Venugopal Reddy has raised interest rates nine times since October 2004 and ordered banks to set aside more money as reserves five times since December 2006 to contain inflation stoked by rapid consumer demand and high oil and food prices. The central bank has also allowed the rupee to strengthen to near a decade-high to make imports cheaper.
Six of nine economists surveyed by Bloomberg News last week said Reddy will maintain the repurchase rate at 7.75 percent, the highest in six years, in the next monetary policy statement on April 29, as inflation still doesn't reflect last year's 57 percent increase in crude oil costs.
Inflation Rate
Inflation, currently at a five-month high of 3.93 percent, may also accelerate on increased money supply caused by capital flows from overseas investors, seeking higher returns in India, where growth is almost three times that in the U.S., Europe and Japan. Only China among economies of more than $500 billion grew faster than India, at an 11.2 percent pace last quarter.
Global investors bought a record $17.2 billion of shares and $2.3 billion of bonds in India last year.
Higher interest rates have reduced demand in some segments of the Indian economy. Property prices, for example, have declined. The value of residential flats in Gurgaon, a suburb outside the capital New Delhi, have dropped 40 percent in the nine months ended Sept. 30, according to real estate company Cushman & Wakefield Inc.
India's manufacturing is expected to expand 9.4 percent this fiscal year, according to today's statement. Agricultural output may grow 2.6 percent and financial services will advance 11.7 percent. Bajaj Auto Ltd., India's second-largest motorcycle maker, posted a 7.2 percent drop in sales in December, its 11th straight month of declines.
`Consumption Growth'
``Rising incomes should support consumption growth,'' Andrea Richter Hume, an International Monetary Fund economist, said in a report on India this week. The IMF expects the South Asian nation to grow at 8 percent ``over the next few years.''
India's middle class, those with annual disposable incomes between $4,380 and $21,890, has more than doubled to 50 million in the past decade, according to McKinsey & Co., the New York- based consulting firm. It estimates this group will further increase 10-fold to 583 million people by 2025.
Incomes are rising in India because of a spurt in economic growth after Prime Minister Manmohan Singh started dismantling barriers to foreign investment and other Soviet-style controls on industry when he was finance minister in 1991.
India's economy has expanded at an average annual pace of 6.3 percent since 1991, compared with growth of about 3.5 percent between 1950 and 1980.
That acceleration in growth is attracting companies such as Glitnir Bank hf, Iceland's third-biggest lender by market value, and McDonald's Corp. to India.
`Perfect Time'
``We think this is the perfect time for us to come to India,'' said Bala Kamallakharan, executive director at Glitner, which yesterday unveiled an Indian joint venture with the LNJ Bhilwara Group to produce thermal energy.
Glitnir is not alone in trying to tap opportunities in India. McDonald's, the world's largest restaurant company, last month said it will boost its stores in India this year by as much as 30 percent.
Volvo AB, the world's second-largest truckmaker, plans to create a joint venture with India's Eicher Motors Ltd. to win a larger share of the fourth-largest truck market, the Swedish company said in December.
Punj Lloyd
The stock of Punj Lloyd Ltd has seen a massacre of sorts, having lost a third of its value in slightly more than a month. Part of the reason lies in its results for the last quarter. Although net revenues for the consolidated entity increased by a respectable 48% compared with the year-ago period, the increase in interest, depreciation, exceptional items and tax was lower at 33%, indicating a sharp fall in margins. In fact, after taking into account the higher “other income” during the last quarter, operating profit margin was down to 4.9%, compared with 5.8% in the year-ago period.
That was way below analyst expectations, the nasty surprise being losses booked on legacy orders of the company’s Singapore subsidiary, Sembawang Engineers and Constructors Pte Ltd. Without these losses, operating margins would have been much higher, at 8.1%. In fact, for the stand-alone company, operating margins have actually improved to 8.5%, from 7.4% a year ago. In addition, to be fair to the management, they had indicated that in a particular quarter, if the proportion of legacy orders was higher than the proportion of new orders, then margins would be affected. They had said that margins at Sembawang would move “from the traditional levels of 1-1.5% when we did the acquisition, to levels above 7-8% once all the legacy orders are completed and that migration may take a period of 18 months or 24 months.”
At the same time, the Sembawang acquisition has paid off handsomely in terms of moving up the value chain, higher ticket sizes and new orders. To illustrate, Sembawang’s order backlog was Rs4,243 crore at end-June, compared with Rs6,239 crore now. The order backlog for Punj Lloyd’s other operations (excluding Sembawang) fell from Rs10,982 crore to Rs9,774 crore over the same period. Analysts say that’s a concern given that margins are lower on the Sembawang orders. They’re also worried whether the other legacy projects that Sembawang still has could result in similar losses in the next few quarters. However, given the continuing momentum in new orders, the bulging order book, the improving outlook on margins as the legacy projects get over, there’s no reason why the stock should not outperform over the longer term.
Analysts have been touting Punj Lloyd as the next Larsen and Toubro Ltd, which is the reason it quotes at a premium to its less fancied cousins in the infrastructure space. But those higher valuations come at a price—it doesn’t leave any room for disappointment.
That was way below analyst expectations, the nasty surprise being losses booked on legacy orders of the company’s Singapore subsidiary, Sembawang Engineers and Constructors Pte Ltd. Without these losses, operating margins would have been much higher, at 8.1%. In fact, for the stand-alone company, operating margins have actually improved to 8.5%, from 7.4% a year ago. In addition, to be fair to the management, they had indicated that in a particular quarter, if the proportion of legacy orders was higher than the proportion of new orders, then margins would be affected. They had said that margins at Sembawang would move “from the traditional levels of 1-1.5% when we did the acquisition, to levels above 7-8% once all the legacy orders are completed and that migration may take a period of 18 months or 24 months.”
At the same time, the Sembawang acquisition has paid off handsomely in terms of moving up the value chain, higher ticket sizes and new orders. To illustrate, Sembawang’s order backlog was Rs4,243 crore at end-June, compared with Rs6,239 crore now. The order backlog for Punj Lloyd’s other operations (excluding Sembawang) fell from Rs10,982 crore to Rs9,774 crore over the same period. Analysts say that’s a concern given that margins are lower on the Sembawang orders. They’re also worried whether the other legacy projects that Sembawang still has could result in similar losses in the next few quarters. However, given the continuing momentum in new orders, the bulging order book, the improving outlook on margins as the legacy projects get over, there’s no reason why the stock should not outperform over the longer term.
Analysts have been touting Punj Lloyd as the next Larsen and Toubro Ltd, which is the reason it quotes at a premium to its less fancied cousins in the infrastructure space. But those higher valuations come at a price—it doesn’t leave any room for disappointment.
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