Uniform Face Values - Will They Be a Reality Soon?

I am out of the office for a few days, which is why for this week I will not be able to post newsletters based on technicals. But I have requested my colleagues in the office to post some interesting stuff on the site so that the readers/regular visitors to my site don't go away disappointed. Not only my colleagues, any of my readers who would like their views/opinions/articles published on this site, I would request them to send an email to me and I will do the needful. But do not forget to add your name and email ID in your email so that you get 'due credit' for your article. Today's article has been sent in to me by Parul. She has collected some fundamental data and has posted her view on them. Please go through them.

Uniform Face Values???

The face value of shares of all listed companies may soon be Re .1/- if the SEBI board accepts a proposal by the Primary markets Advisory committee or the PMAC. The move aims to ensure uniform face values, so that investors can make informed stock comparisons. It could well be the first major policy decision that CB Bhave, the new SEBI Chairman, has to make, something that could change the way the Indian capital markets operate.

Sources say the proposal, if it gets through, will mean that companies that have a face value of more than Re.1/- will have to go in for a stock split. The aim of this move is to ensure uniform face values so that investors can make informed stock comparisons. The move could also result in greater public float of listed companies.

Sources in the PMAC said the ultimate aim is to do away with the face value concept. Stock exchanges abroad do not have the concept of face value, so any fresh listing does not carry either a premium or a discount with it. The PMAC wants SEBI to benchmark its policies to this international best practice. The other important fallout will be that the public float of stocks will go up, something the government has always wanted, though the market capitalization will remain the same.

Punj Lloyd - A Fundamental View

Punj Lloyd Limited (PLL), wholly owned subsidiary of Sembawang Engineers & Constructors Pte. Ltd. (SEC), has bagged a Rs.11.2 billion order from Marina Bay Sands Pte. Ltd. The current order win demonstrates the engineering prowess. In the past, SEC margins were low on account of legacy orders that had margins of around 1-1.5%. This impacted the PLL group i.e. PLL + SEC margins, which fell from 11.2% in FY2006 to 7.6% in FY2007. New order inflows will be positive for the group as rising share of new orders in SEC order backlog will help alleviate SEC margins. PLL’s consolidated EBIDTA (Earnings Before Interest, Depreciation, Taxes and Amortization) margins should also improve to 9.8% in FY2009E against 7.6% in FY2007.

At the Current Market Price (CMP) of Rs 367/-, the stock is trading at a PE Ratio (PER) of 17.7x FY2010E earnings and 8.8x FY2010E EV/EBITDA (EV=Enterprise Value). The core business is valued by average of price targets derived from PER of 25X FY2010E, EV/EBIDTA of 14X FY2010E and 3 Stage DCF(Discounted Cash Flow) Model with terminal growth rate of 4.0% and discount rate of 11.0%. The core business is valued at Rs 176.3 billion or Rs.549/- per share of PLL. New business like ship building, real estate and medicity project is valued at Rs.17.3 billion or Rs 54/- per share of PLL. This gives us a combined value of approximately Rs.600/- per share.

Maruti Suzuki Limited - Losing Ground?

Fundamentally, Maruti Suzuki is a great buy at these levels. All the talk about the company losing ground in wake of the launch of Tata Nano is just inaccurate. If you look at the sales figures of the cheapest car available in the Indian market today, the Maruti 800, the figures show a steady decline in numbers versus the steady rise in sales figures of the Alto and other models. Therefore, people choose not to buy the cheapest car but one that offers good features too. The sales of Tata Nano will only cut into the sales growth of higher priced motorcycles and to some extent that of Maruti 800 only. Maruti Suzuki will continue to outperform in the auto sector with the impending launch of its new models over the next year - not the least is the launch of the Swift platform based replacement for the Esteem. So one should just go ahead and accumulate on every fall - the valuation is very very attractive. Outlook on passenger vehicle segment looks positive fundamentally. With stronger macro economic indicators like GDP growth rate ranging between 7-8% annually, with rising income levels, more product choices being made available to customers by car manufacturers is expected to lead to a healthy domestic offtake of cars, wherein growth rates are likely to be around 13-15% CAGR for the next 3-4 years. But in the short to medium term, expect car manufacturers to face the hit of rising interest rates, whichwould impact the sales volume. The company should be able to retain its leadership in passenger cars market, if not increase, with its strong leadership position in compact car segment which accounts for 70% of overall car market size.

Indian market is expected to remain centered around compact cars due to poor roads, heavy traffic, high petrol prices and affordability issues for at least next three years. Factors like rising consumerism, favorable demographics, affordable financing, excise duty cuts (in the earlier Budget) coupled with wide-spread dealer network, superior customer rating and aggressive marketing with continuous new product launches will strengthen Maruti's position further in domestic car market. At present, the stock looks attractive at 10.5x FY09E & 8.6x FY10E earnings, 6.3x EV/ EBDITA FY09E & 5.1x EV/EBDITA FY10E and 1.1x FY09E MCap/Sales & 0.8x FY10E MCap/Sales. Buy Maruti with target price of Rs 1250 in the long term.

Contributed by: Parul

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