[August 17, 2006]

[ViJiT]

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

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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.
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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.
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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.