| STOCK UPDATE Bajaj Holdings & Investment
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,097
Current market price: Rs865 Price target revised to Rs1,097
Result highlights - Bajaj Holdings & Investment Ltd (BHIL) was created out of the demerger scheme of Bajaj Auto and primarily functions as an investment company with stake in various group companies, namely Bajaj Auto, Bajaj FinServ and Maharashtra Scooters.
- In Q2FY2011 the consolidated top line of the company stood at Rs426.8 crore as compared to Rs210.3 crore in Q2FY2010. The increase in the top line was mainly on account of a higher profit of Rs374 crore on the sale of investment as against that of Rs180 crore in the same quarter of the last year.
- The consolidated net profit almost doubled to Rs649 crore due to a 92% increase in the share of profit on investment in associate companies to Rs241 crore.
- BHIL holds Rahul Bajaj group?s strategic investments in Bajaj Auto, Bajaj FinServ, Bajaj Auto Holdings and Maharashtra Scooters; it also has investments in the equity markets, government securities, bonds, debentures and mutual funds.
- The market value of the investments as on September 30, 2010 stood at Rs22,100 crore as against Rs18,854 crore in Q1FY2011.
- The strong Q2FY2011 performance of Bajaj Auto has led to an upward revision in our valuation for BHIL. We value BHIL based on our price target for Bajaj Auto and on the base case scenario for Bajaj FinServ and the other group companies on cost. Hence, we accord the stock a holding company discount of 50%. Furthermore, the company has cash and liquid investments worth Rs5,805 crore on its balance sheet. However, we value these investments with a 40% discount on account of their volatile nature. Consequently, we arrive at a fair value of Rs1,097 for the stock (based on the company?s fully diluted equity), which is significantly above the current market price of Rs874. We, therefore, maintain our Buy recommendation on the stock with a revised price target of Rs1,097.
VIEWPOINT Pantaloon Retail India Strong demand, triggers ahead - The overall performance for Q2FY2011 has been good, with the core retail operations reporting a top line of Rs2,581 crore, a year-on-year (Y-o-Y) growth of 32%. The revenue growth momentum was led by a robust demand across all the categories which reflected in a superb same store performance. For the quarter, value, lifestyle, and home segments reported same store sales growth of 12.1%, 22.7% and 15.1% respectively. In line with other retailers (Shoppers Stop?s same store sales-13%, Titan?20% and Provogue-12%), the revenue growth and the same store performance of Pantaloon Retail (Pantaloon) stood as another testimony of the strong underlying demand across all consumption categories, especially in the lifestyle-discretionary products segment.
- Pantaloon?s stock has underperformed the Sensex by 9% over the past three months and we think that the current valuation of 24x FY2012E core retail earnings and 9x EV/EBITDA (FY2012) is reasonable considering secular growth prospects for organised retail coupled with the company?s thrust towards a profitable growth. We believe robust demand environment (same store sales trends), improving profitability for home retail business, potential unlocking of value in subsidiaries (Future Venture IPO, restructuring of financial subsidiaries) and further improvement in free cash flows will be the key drivers of stock performance going forward.
MUTUAL GAINS Sharekhan's top SIP fund picks We have identified the best equity scheme for SIP investment based on three parameters: Minimum corpus as indicated by at least 10% of the average category-corpus, the past performance as indicated by one, three and five year returns and risk returns ratios namely Sharpe, Information and Sortino.
Sharpe indicates risk-adjusted returns, giving the returns earned in excess of the risk-free rate for each unit of the risk taken. The Sharpe ratio is also indicative of the consistency of the returns as it takes into account the volatility in the returns as measured by the standard deviation.
Information ratio is one of the most important tools in active fund management. It is the ratio of active return (the return over the index return) to active risk annualised. A higher Information ratio indicates better fund manger.
Sortino ratio is similar to Sharpe ratio, except it uses downside deviation. The upward volatility as measured by Sharpe ratio does not lead to losses. It is the downward volatility that leads to losses; hence the use of which doesn't discriminate between up and down volatility. So, higher the Sortino ratio, higher would be the effective return over a period of time.
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