Budget Factor - Don't get carried away

One more year passed by with India sustaining the 8+% GDP growth. The stage this week is set for one more dream budget to be delivered by finance minister.

The question remains if India can going forward sustain the 8+% GDP growth and also how the budget addresses the following concerns

1) Impact of Indian economy on US, Other major economy slowdown and the high probability of US economy entering into recession.

2) Rising raw material and crude oil prices. This leaves no room for Interest rate cut due to rising inflation.

3) Hard hit export intensive sector due to dampening of US consumer spending and appreciating rupee, especially textiles which is the major source of employment in India.

4) Losses booked by Oil Marketing and Oil Exploration PSU's due to Subsidy burden related to high crude oil prices.

5) Widening trade deficit.

6) Increase rural infrastructure spending and open up new employment opportunity. Widening gap between state's economic growth has resulted in a divergence in national per capita income.

Even though most of the concerns above is expected to be addressed in the budgetary note this week, We suggest our subscribers to take a cautionary view on the market and not get carried away by movements of stock on the back of Budget benefits.

The two key factors which we look forward to guide the Indian stock market are

1) Q4' 08 earnings. This will give us a clear picture on Impact of margins due to increase in raw material and oil prices. Also will help us gauge the repercussion of US economy slowdown on export intensive Indian firms.

2) US Economy outlook. With losses from subprime lending mounting to around $350 billion, US is admist a major economy slowdown. The US housing market as well is not showing any sign of recovery and the deteriorating consumer spending shows negative signal on consumer confidence with the economy.

Our Budget Wishlist

1) Increase rebate u/s 80c from 1 lakh to 1.5 lakh. Out of which make 30K mandatory in Infrastructure bond/GOI tax saving bonds.

2) Keep corporate tax unchanged and reduce excise duty and freight charges for Metals, Cement sector. This will keep the inflation at lower levels.

3) Tax FII's on short term capital gain. This will help market fundamentals on a longer term basis.

4) Extend tax benefit under 80 1 B (8 A) for pure research and development-based companies. This will help India move from a Order Taker outsourcing country to a Solution/Product Innovator country in the global arena.

5) Work on pension fund flavors. Protected - Existing. Dynamic pension fund - Choice of Investing 30% of the total pension money in Stocks (Namely Sectoral Index). Individuals can invest in any of the Exchange sectoral index and switch between indexes as and when required. This will help pension fund individuals to cash in from the growing economy.

Rural Electrification Corporation - Compelling Valuation

Rural electrification Corporation (REC) is one of the leading public financial institutions in Indian power infrastructure. REC is engaged in the financing and promotion of transmission, distribution and generation projects throughout India. The company has come out with a IPO of 15.61 crore shares at a price band of 90-105 Rs.

This Issue has been assigned CRISIL IPO GRADE 3/5, indicating that the fundamentals of the issue are average, in relation to other listed equity securities.

At the upper price band of Rs. 105/- the stock is available at 13.65 times it FY07 EPS of 7.69 on a post-diluted equity base. In the first half of FY08 the company topline grew by 30% and the bottomline by around 25%. Based on the annualized FY08E EPS of the 9.32 the stock at the upper price band is valued at around 11.26 times it's earnings on a post-diluted equity base.

At the upper price band the IPO is priced attractively compared to its peer Power Finance Corporation (PFC). PFC is currently trading at 16.7 times it's FY08E EPS against REC offer of 11.26 times.

REC gross non-performing assets (NPA) stand at well under 2.39 percents of its total outstanding loan assets. It also posted a healthy net interest margin of 3.30 per cent in FY07 on par with leading banking and financial services.

We recommend Invest on REC IPO with a horizon of one year. Those looking for listing gains can do so at their own risk. Our recommendation is based on the compelling valuation at the current price band and to profit from the huge Investment required by the power sector as part of the 12th planning commission.

Fundamentals

1) Robust Financial Performance.
2) Availability of cheap funding.
3) India huge investment plan in Power and Infrastructure sector by the terminal year 2012.

Risks

1) Continued access to cheap funds through tax free capital gain bonds.
2) Delay in payments from SEBs and rural electricity cooperatives.

Stocks we love

Gift your valentine a House. Among Indians real estate is considered to be the best Investment avenue where the returns are always secured. But with soaring real estate prices it has been difficult for even an decent Income earner to afford buying a property.

So, Forget flowers and chocolates. Gift your valentine stocks in real estate and Infrastructure sector which are available in cheap valuation and can secure your future returns. Check out our picks for this year's most lovable stocks in real estate and Infrastructure Sector.

How we chose the stocks

In honor of Valentine's Day, we carefully selected two stocks in the booming Indian Real estate and Infrastructure Sector that will make your portfolio swoon.

We screened thousands of stocks to come up with the most appealing combination of earnings and sales growth, reasonable valuations and having huge land bank or Order Book.

But we know how easy it is to get your heart broken in a market as volatile as this. So we picked stocks that we think you'll want to commit to for the long term.

If you want some financial love this Valentine's Day, look no further. Invest right away.

1) Omaxe Limited (CMP Rs. 269/-)

Omaxe is one of the largest Real Estate Development company in India. The company currently has 52 projects under development. These include 21 group housing projects,16 integrated townships,14 shopping malls and commercial complexes and 1 hotel. The company is at present developing over 150 million sq ft of saleable area across 30 towns in 9 states in Northern and Central India. The total valuation of the land bank stands at around Rs. 13,000 crores.

The stock currently trades at less than 10 times it's FY08E EPS of 28 and around 6 times it's FY09E EPS of 45. The stock is available at a extreme cheap valuation compared to it's peers (DLF, Parsvnath Developers etc)

Future Growth

1) The company is expecting to develop 40 million sq ft of land in FY09 double from 20 million sq ft in FY08.
2) The company has won 25 acre development land in Hyderabad for which the work is expected to commence in March' 08. The project value for the same is around USD 450 million.
3) The current project value for Omaxe is in excess of Rs. 28000 crores.

2) Hindustan Construction Company (HCC) (CMP Rs. 169/-)

HCC is a large private sector construction company with high value projects across segments like transportation, power, marine projects, oil and gas pipeline constructions, irrigation and water supply, utilities and urban infrastructure.

The stock currently trades at around 51 times it's FY08E EPS of 3.3. The stock valuation seems to be extremely attractive based on the current order book position and the revenue supposed to go on stream by the current fiscal from it's 100% subsidiary HCC Reality.

Future Growth

1) HCC current order book stands at around 9000 crore of which 2000 crore is pending High Court Decision. The current order book constitutes to around 2 times it's expected FY08 sales.
2) The first phase of Lavasa project a hill station developed by HCC at a hour drive from pune is expected to go on stream in the current year.
3) Mumbai's largest IT park constructed by HCC in Vikhroli is expected to be Operation by March' 09. This is supposed to earn a return of 100 crores yearly.

HCC has already booked losses to a tune of 350 crores in the much delayed Bandra-Worli sealink. We do not see any further loses due to the same.

Risk associated with both the firms are in similar lines

1) Reality price crashes.
2) Economical down trend.
3) Huge Interest Rate burden.

But considering the Huge Infrastructure and Urbanization growth in India for the next 20 years these stocks will be one of the few multibaggers in the reality space.

Buy Ashok Leyland - Compelling Growth ahead

Ashok Leyland Limited (ALL) is the Second largest commercial vehicle manufacturer in India, Mainly operating in Medium to Heavy Commercial Vehicle (CV) and Bus Segments. ALL currently exports to over 30 countries in Asia, Middle East and Africa.

Sector Outlook

At the beginning of the 11th planing commission period India has registered a GDP growth of close to 9%. The manufacturing sector has been a significant contributor to this growth. The government initiative of developing road infrastructure on par with developed economies translates into significant growth in Commercial Vehicle (CV) space.

The growth going forward in the CV space will also be attributed to exports of CV and the changing domestic dynamics. The domestic bus segment is seeing a change in product modernity. The city buses with low entry height, stepless entry, air suspension and pneumatic doors emphasized safety, comfort and a faster turnaround time is gaining demand. Ashok Leyland strong presence makes it a first few entrant in this modern buses arena.

Overloading restrictions imposed by most of the state governments on heavy vehicles is also expected to spur demand in CV procurement.

Ashok Leyland Outlook

FY08 did not start of in a good note for ALL. The company registered a 7% negative growth in the first 9 months of this fiscal. We expect the CV market to stabilize in the coming year. The upcoming capacity enhancement during the course of next 2 years and the increase in market share of higher margin business (Defence, Engines and Parts) is excepted to be the key driver for ALL. Currently Defence, Exports, Engines and Spare Parts contributes around 18% of revenue.

Capacity Enhancements

1) ALL is enhancing it's vehicle capacity production from the current 84,000 vehicles to 100,000 vehicles by the current financial year.
2) The capacity of Ennore facility is expected to be increased by 50,000 Vehicles by June' 08.
3) The Company has entered into a joint venture with Ras Al Khaimah Investment Authority (RAKIA) in the U.A.E. to put up a plant for building bus bodies in the U.A.E. This is expected to go on stream by March' 2008.
4) ALL Investment in Uttarakhand is expected to be EPS assertive in 2010. The company is setting up a plant to manufacture 70,000 vehicles.
5) The company JV with Nissan to manufacture and sell LCV range of vehicles is expected to be commenced in 2010.
6) ALL Engine volumes is expected to double in 2 yrs. The company has tied up with Chinese sources for procurement of 25 hp to 75 hp engines.

Acquisitions Progress

The acquisition of AVIA truck unit a czech company is expected to provide the Company with an entry into the East European and Mediterranean markets and will also offer benefit of synergy with the Company’s product development efforts, especially in respect of a modern cabin for the medium vehicles. The acquisition is already EPS assertive.

The Company has signed a Share Purchase Agreement to acquire the entire equity capital of Defiance Testing and Engineering Services, Inc, Michigan, USA. This Company is engaged in the business of providing testing services to automobile OE manufacturers in northern USA. This acquisition is expected to provide significant synergy to the existing business activities of Ashley Design and Engineering Services Division of Ashok Leyland. It will also help ADES to provide greater value-added services to various customers in the USA.

Valuation

At the current market price of Rs. 34/- the stock trades at around 11 times it FY08E EPS of 3.10. Investor with low to medium risk profile can consider investment into this stock with a horizon of 18 to 24 months. The company investment phase is in the verge of partial completion and the investment hereon is expected to get translated in revenues. We recommend a buy rating in this stock with a target of Rs. 68/- based on our FY10E EPS of 4.25.

Risks

1) Slow down in market demand.
2) Continuing increase in input costs.
3) High domestic Interest rates.
4) Margins under squeeze. The Company is pursuing plans to increase the market share of high margin business like exports, non-auto engines and sale to Defence sector to mitigate the impact of margin pressure.