Q2FY12 Result Update Dhanuka Argitech Ltd:: Nirmal Bang

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The company reported good set of results
Seasonally best quarter in terms of sales: Dhanuka Agritech
reported sales of Rs 191.2 crs, registering a growth of 15.2%
yoy and 103% qoq. Due to erratic rains the sales was lower
than the expectations. The company is expecting higher
growth in Q3 however also believes that Q3FY12 will also have
some spillover effect of this irregular rains. (June and July
being the long dry months and August and Sept received
above average rains)
Seasonally weak quarter in terms of margins: Q2 is
seasonally weak quarter for the company in terms of margins
as material cost increases during the quarter. The company
reported EBITDA margins of 13.3% during the quarter as
compared to 16.2% in Q1FY12. However, there was an
improvement as compared to Q2FY11 where margins were
12.7%. EBITDA margins are expected to come back to normal
levels of around 14.5%-15.0% from Q3 onwards. For the full
year FY12E Dhanuka is expected to report EBITDA margins of
14.7%
Key highlights of the quarter
• Despite lower margins on sequential basis, PAT margins
were higher at 11% as compared to Q1FY12 of 10.7% due
to lower tax. The company has changed product mix at
its Uddampur facility (which is under 100% tax benefit
currently) in addition with usage of surcharge tax
resulted in lower tax rate during the quarter
• The company launched four new products during the
quarter with association with various MNCs.
• Dhanuka is in process of acquiring 25% stake in a Seed
Company and is expected to complete the process
during FY12.
Valuation & Recommendations
We still believe the outlook for the company looks promising
with factors like the low per-capita consumption of
pesticides, which provides opportunities for growth, increased
demand for food grains and the rising awareness about
pesticide usage among the farming community.
Based on our EPS of Rs. 12.7 for FY12E and a target multiple
of 11x we arrive at target price of Rs. 140 potential upside
of 38% from current levels.

Retiring early with just FD income is not viable ::Business Line

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I am 43, and live in Mysore. I worked in Singapore for 15 years and returned to India in June for good. I have four dependents — my wife (40), son (9) and aged parents. Our monthly expense is Rs 35,000. From my employment, I had savings of Rs 1.20 crore, out of which I have invested Rs 55 lakh in FD in my mother's name, and Rs 45 lakh in my wife's name; the balance Rs 10 lakh I hold in an SB account. From deposits, I earn a monthly interest of Rs 65000.

I have two insurance policies, namely, Jeevan Anand with Accident benefit riders, and Whole life Jeevan Tarang, for which I have to pay a yearly premium of Rs 1 lakh for 20 years.

My other investments are Rs 2000 a month in each of the following funds for the last three years. HDFC Top 200, Franklin India Flexi cap, and Kotak Opportunities fund. From last month, I am investing Rs 5000 in HDFC Prudence Fund.

I am staying with my parents in their own house. My father is a retired Central Government employee, and receives a monthly pension. I have medical insurance for my family and am paying a premium of Rs 6000. Last year, I have taken a car loan of Rs 2.5 lakh, and I will be repaying it in January. In future, I don't have the intention of buying a house and creating a liability. I have a plot in Mysore, which is worth Rs 30 lakh.

My concerns are: I want to know if my FD interest is enough for our future expenses to lead a comfortable middle-class life without having to work. Based on our family health history, I and my wife may live for another 35 years. My other concern is to provide for our son's education and marriage. — Chetan Gurkhi Ramachandra

With stressful work life these days, we often come across individuals eager to call it a day in their early 40s. It is important to start planning in the early part of their working life if the individual wants to retire in the mid-40s. This will allow them to park surplus in appropriate avenues to build a sufficiently large retirement nest. Even if the life expectancy is more than anticipated, with a bigger corpus, they can mitigate the risk of living longer.

Deciding Corpus: If you continue to invest only in fixed deposits, you run the risk of not meeting the monthly income on two accounts. One, at any point in time if your investment returns fall short of inflation, you need to sell the plot to meet the shortfall. Two, if your standard of living increases from the current level, you may be forced to take up employment in your late 50s.

For instance, your annual living cost of Rs 4.2 lakh will become Rs 13.2 lakh when you turn 60, if inflation is at 7 per cent. Whereas, if you continue to earn a post-tax return of 7 per cent, then your annual income will be Rs 8.4 lakh for an investment of Rs 1.2 crore. To neutralise this risk, you need to earn returns matching or ideally exceeding inflation. You should invest the monthly surplus in equity till you face the shortfall when you turn 53.

Once you clear your car loan, you may have a monthly surplus of Rs 19,000. If this is invested at 12 per cent for the next ten years, at the end of the period the accumulated fund value will be Rs 43.7 lakh. Along with the Rs 8.5 lakh of maturity proceeds of insurance, you can meet the shortfall to some extent.

New investment style: If you change your asset allocation pattern to say 60 per cent in debt and 40 per cent in equity, you can meet the shortfall. For instance, if you invest Rs 72 lakh in debt and earn an interest of 9 per cent, it will take care of your monthly needs till 50. If you invest the rest in a diversified equity mutual fund and earn a 12 per cent return at 50, this will be worth Rs 1 crore. With the years, as the number of dependents comes down, your monthly needs will come down, and this corpus will be enough to see you through life.

Meeting son's needs: As you haven't disclosed higher education needs, we go by the popular choice of engineering. The present cost for the course will be around Rs 5 lakh. When your son turns 16, if the current education cost is inflated at 7 per cent, engineering education expenses would be Rs 9.2 lakh.

If you break your SB savings and invest Rs 5 lakh at 10 per cent interest, in 7 years the accumulated value will be Rs 9.7 lakh. Your son's marriage, being a long- term goal, invest Rs 2 lakh in diversified equity schemes such as HDFC Equity, IDFC Premier Equity and the like. If your investment earns a return of 12 per cent, by the time he is 24, it will be Rs 11 lakh. Since your insurance policies are going to mature simultaneously, it can cushion any shortfall.

All the recommendations are based on the present input and it may be advisable to revisit your portfolio once in a year.

Save tax while you practise the art of giving ::Business Line

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While there is a cap on the tax deduction you can claim, you don't have to limit the joy you derive from giving.

‘Ask and ye shall receive', is a biblical quotation. But when it comes to charity, this can easily be modified to ‘Give and ye shall receive'. Indian tax laws encourage you to spend on your children's education, retirement and buy your own home.

They also encourage you to give away to the needy. Section 80G, the section of Income Tax law that allows you to claim a deduction on certain donations, is almost as old as the law itself. Here's how you can benefit from giving.

ELIGIBILITY

The law allows you (individual, company or non-resident Indian) to make a claim under this provision.

But you can't just donate to anyone or any organisation and claim a tax benefit; only certain funds and institutions qualify.

You can view the entire list of eligible organisations athttp://law.incometaxindia.gov.in/DIT/Income-tax-acts.aspx. Broadly, donations are classified as those you give to private trusts and those to trusts and funds set up by the Government of India.

The former include orphanages, old-age homes, and shelters for the destitute or charity hospitals.

The government-mooted funds, on the other hand, typically raise money during calamities or for various welfare measures. Donating to government institutions requires little verification, but exercise discretion when it comes to privately run trusts.

Legitimate trusts, verified by authorities, are registered with the Income Tax department and get an 80G certificate. The government releases a list of such institutions, but you can always ask for a copy of the registration before you donate.

When donating, you should keep a few things in mind. You cannot claim benefits for donations made to a foreign trust. You can make a tax claim for donation to political parties under a different provision called Section 80GGC.

Your donation must be either in cash or by cheque. Giving clothes or food during natural disasters, even to a qualified trust, doesn't count towards tax exemption.

DEDUCTION ALLOWED

The entire sum that you donate will not qualify for deduction.

Don't think that you can give Rs 1 lakh to some organisation and write it off in taxes. Not so easy! There are two stages to this. The first involves knowing the total amount that will qualify for deduction. The second involves calculating the actual deduction.

Let's take an example. You donate, say, Rs 1 lakh to a registered private trust.

The amount that qualifies for deduction – stage one – will be restricted to 10 per cent of your total income after all your investment-related deductions (called the 80C deductions), in certain cases.

In the above example, if your income is, say, Rs 6 lakh after deductions such as provident fund or insurance premium, only 10 per cent of this Rs 60,000 qualifies as a donation. This does not end here.

The tax authorities classify donations in two: those that qualify for full tax deduction and those where only half the amount is eligible for the benefit.

However, government relief funds or welfare funds usually will not have this restriction. If you donate to government funds, such as the Prime Minister's National Relief Fund or the National Children's Fund, you can deduct the entire amount. On the other hand, if you handed over your money to a private trust, only 50 per cent of the contribution will receive tax relief. The Web site link given above will provide more details on what is eligible for full deduction. To extend the above example, only Rs 30,000, which is half of the qualifying amount of Rs 60,000, can be deducted.

In all, Rs 1 lakh fetched you Rs 30,000 in tax break. But if you instead donate this to, say, the National Children's Fund or National Sports Fund, neither the 10 per cent restriction nor the 50 per cent deduction will apply. You will get the entire Rs 1 lakh as tax break from your Rs 6 lakh income.

CLAIMING THE BENEFIT

To avail tax benefits on your donations, you need to show proof, usually a stamped receipt that shows your name, the name and address of the trust and the amount donated.

But watch out for the more important component of the receipt- the registration number that the Tax department issued to the trust. Specifically look for the term ‘80G'.

Earlier the 80G status given to trusts had limited validity and required renewal. This is no longer the case, unless the tax authority specifically states such a requirement. You will, therefore, do well to ask for a copy of the certificate to know if such a condition is mentioned. Some organisations will give you a plain receipt and then follow it up with the 80G stamped receipt. The latter, in original, is what you need to submit at the time of filing your tax returns.

Barring certain donations to government sponsored funds (for which you can produce proof to your employer along with other investment proof that you submit) such as to the Drought Relief Fund, your employer will not take into account the eligible donation for calculating the tax to be deducted regularly from your salary, also called TDS. While this is a limitation, you don't have to limit the joy you derive from giving.

Hold Escorts, Target : Rs 86 ::ICICI Securities

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W h e n   w i l l   w i n d s   o f   c h a n g e   b e c k o n   f o r   E s c o r t s ?
Escorts announced its Q4SY11 results that were well below our
expectations with the topline coming in at | 773.0 crore reflecting a
decline of 15.0% YoY (I-direct estimate: | 811.3 crore). Tractor sales
volumes were clocked at 15,203 units (up 8.7% YoY) while adjusted ASP
rose ~8.4% YoY. EBITDA margins were below expectations at 5.1% due
to expected higher other expenses of | 110.5 crore as higher discounts,
ad spends and director remuneration accounted for the same. On the
positive front, it managed to control costs on the operations front after
four consecutive quarters of cost rise as cost per vehicle declined ~2%
QoQ to 3.3 lakh. The PAT came in at | 8.8 crore, which was below our
estimates owing to exceptional loss of | 9.9 crore, which was created as a
provision for doubtful debtors.
Highlights of the quarter
Escorts’ tractor sales have witnessed a volume increase of ~8.7% YoY at
15,203 units, which is below par compared to its peers (M&M’s tractor
volumes were up ~26% YoY) mainly due to a limited presence in the
fastest growing southern and western markets. Competitors like M&M
and John Deere have higher penetration in these areas. In the past, the
inability to control cost on the core business front has been a margin
dampener. However, after four successive quarters, it has witnessed a
trend reversal with cost per vehicle declining ~2% QoQ. The railway
equipment business performed well in Q4SY11 posting revenue of | 55.3
crore (flat YoY) and EBIT margins of 19.6% (up 810 bps YoY). The
construction equipment business (ECEL) posted revenue growth of ~60%
YoY at | 251.5 crore and margin improvement of ~100 bps on EBITDA.
V a l u a t i o n
We have factored in continuing market share pressures and slow growth
in the next fiscal improving towards SY13E. The previous weak operating
performance has led to multiples de-rating of the stock, which we do not
expect to witness a change soon. The stock is currently trading at | 79,
5.7x SY13E EPS of | 13.8. We have  valued the stock on an SOTP basis
with a target price of | 86. We have a HOLD rating on the stock.

Eicher Motors :Time to scale up :ICICI Securities

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T h e   t ime   h a s   c ome   t o   s c a l e   u p…    
We met the management of Eicher Motors (EML) to get an insight into the
specific growth plans of EML and understand their business model. EML’s
standalone operations consist of  niche cruiser motorcycles (Royal
Enfield), which encompasses strong growth possibilities with the
emerging trend of lifestyle biking in India. The consolidated operations
include commercial vehicle business through its JV with AB Volvo
(VECV). VECV has a strong presence in the intermediate commercial
vehicle (ICV) segment with numerous  product offerings in the 7.5-12
tonne category. Moreover, joint development of engines with Volvo
provides a technological edge, which  would serve as a revenue driver,
going ahead. We believe, with increasing focus on the HCV segment,
EML is poised to grasp growth opportunities by leveraging its partnership
with international CV giant Volvo.
ƒ Strong brand loyalty coupled with expansion to drive revenues
EML enjoys strong brand equity in the niche above 250 cc segment with
popular product offerings like Royal Enfield Classic and Bullet. Rising
income levels have backed the demand for cruiser bikes (low speed, high
torque) augur well for Royal Enfield. In view of the rising demand (~12
months waiting period), the company has plans to expand its capacity to
12,500/month by FY13E from 6000/month currently and has already
acquired land in Chennai.
ƒ Strong footing in intermediate CV space, HCV next target
EML has a strong presence in the domestic LCV (<12 tonne) segment
with market share of ~35%. However, its market share in the HCV space
is languishing at ~3%. We believe with the technological edge provided
by Volvo, EML is geared up to grasp opportunities in the HCV space. This
gradual shift in focus will lead to  a richer product mix yielding higher
realisation on a blended basis.
ƒ Joint engine development to provide technological edge
AB Volvo has made VECV its global manufacturing hub for supply of
medium duty engines to satisfy is global needs. Volvo plans to establish a
manufacturing hub at VECV’s Pithampur facility for supplying Euro 3 and
4 compliant engines and Euro 5 and 6 base engines. This would provide
the technological edge and an additional revenue lever for EML assisting
in realising its target of ~15% market share in the HCV market by 2015.
View
EML has a strong presence in the niche cruiser motorcycle segment and the
intermediate CV segment. Strong brand equity and expansion plans will fuel
revenue growth while JV with AB Volvo will grant technological benefits.
Strong return ratios, multiple growth levers and cash generating nature of
business make EML an attractive investment play. At the CMP of | 1610,
EML is trading at 22.8x CY10 EPS and 1.3x P/BV of its CY10 book value.

Metal Sector – 2QFY12 Result Review :: Nirmal Bang

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A Quarter Marred By Downgrades
The 2QFY12 results had more negative surprises than positive ones. Out of a total
of 11 companies (which represent 87% of total metal segment’s market
capitalisation) in the total metal universe, only three companies – NMDC, JSPL and
JSW Steel - were able to beat consensus earnings estimates at EBITDA level.
Besides this, only one company - NMDC - witnessed an upgrade in FY12/13 EBITDA.
Companies, which have seen major earnings downgrade include the likes of Sesa
Goa, NALCO and Sterlite Industries. We would also like to highlight that EBITDA
margin for the quarter was the lowest compared to the past six quarters. We expect
the dismal performance to continue, as the decline in metal prices is yet to reflect in
financials. We retain our negative view on the sector and Sell rating on all stocks in
our coverage universe i.e. Tata Steel, JSW Steel, SAIL, Sesa Goa and NMDC.
Raw material, power and fuel costs spoil the show: Our sample companies attained
19% YoY revenue growth for the quarter, but increase in raw material and power/fuel costs
was much steeper at 28% and 30%, respectively, YoY. This led to 201bps YoY decline in
margin and thereby EBITDA growth was confined to just 6% YoY. On sequential basis, the
situation was more grim and EBITDA margin contracted 465bps, which resulted in a 23%
drop in EBITDA. Raw material and power/fuel costs increased 9% and 13%, respectively,
QoQ, despite a 0.4% drop in revenue.
Higher interest costs, depreciation and forex loss mars PAT performance: Total
interest costs for our sample companies rose 52% YoY and 18% QoQ, while depreciation
increased 21% YoY and 4% QoQ. Besides this, the sharp rupee depreciation resulted in
MTM loss on foreign liabilities, while other income fell substantially sequentially because of
extraordinary gains of Tata Steel during 1QFY12. This resulted in 11% YoY and 41% QoQ
drop in PAT for the quarter.
A quarter marred by downgrades: The quarter’s performance, which was impacted by
global slowdown, saw a sizeable cut in FY12/13E earnings. Sesa Goa witnessed the
maximum downgrade followed by NALCO, Sterlite Industries, Hindustan Zinc and Steel
Authority of India. We would like to mention that the earnings cut was also driven by a drop
in global commodity prices. NMDC is the only company which witnessed 1% and 0.5%
upgrade in EBITDA for FY12 and FY13, respectively.
Further downgrade likely: We believe this may not be the last quarter in terms of
downgrade and prospects of a further downgrade are likely. Consensus metal price
assumption for FY12 and FY13 appears to be higher than current prices as market
participants expect recovery in the coming quarters. However, we are not as sanguine as
the street and expect a prolonged slowdown in developed countries, which will also slow
down the growth in India.