Hits & misses in Q3: Rajesh Jain analyses 4 stocks

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Hits & misses in Q3: Rajesh Jain analyses 4 stocks

Rajesh Jain, Independent Market Strategist

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ News and Notices about Opto Circuits See interviews with Opto Circuits Management See what other Experts & Brokerages are saying about Opto Circuits See previous Results of Opto Circuits

The third quarter results season of financial year 2011 is upon us. As expected, the early results have thrown its surprises and shocks. With the markets falling significantly in 2011, earnings are expectedly a big trigger to boost sentiment.

In an interview with CNBC-TV18, Rajesh Jain, independent market strategist analyses four stocks that he has reviewed in the quarter gone by.

Below is the verbatim transcript of the interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q:  Opto Circuit  did well pre-earnings also. Why did not you like its numbers?

A: Opto Circuits has been following a very aggressive acquisition path particularly overseas. We are used to seeing Opto Circuits give two times kind of a performance on a YoY basis, which more than 75% on the top-line and close to 45-50% on the bottom-line does not excite me because this has been growth company, which has been charting aggressive acquisitions and has high debts.

In order to mitigate this, it will need stellar performance, particularly from the existing old businesses, if it is not to get into some kind of excessive indebted balance sheet situation like we have seen in lot of other sectors. Hence, I am not enthused about their numbers.

Q: The stock that got punished severely was Exide . Do you think those numbers were a huge miss?

A: Yes. If you look at the contours of the numbers, the business is slowly getting volumes from the low margins in the OEM segment. The replacement market has suffered due to the uncontrollable higher lead cost of the company which has caused a sharp fall in the margin levels. We have seen negative PAT growth for the company. In the industrial segment, we have seen similar performance low volumes and more skewed towards the lower margin segment.

The auto industry could hit a road block. If this happens, the company could plateau out a little with the huge volume uptick that the company has benefited from. Essentially, you can see a top-line growth of 17 to 18% over the next couple of years while the bottom-line will be about a tad lower. We are looking out at a slow down of top-line and volumes in that situation. At the same time, the margins will see higher squeeze. Hence, the bottom-line performance has been a miss.

Q: GAIL has come off quite a bit. It is down to Rs 457-458 levels post results. Do you think the market reacted to the numbers which were not too great?

A: Absolutely. The numbers and likelihood of continued stress on the performance, it is clear that the recent commissioned pipelines may not see significant utilization for the next couple of years given the state of KG6. The numbers for the last quarter have also turned out to be well. The gas authority like Petronet LNG did a lot of spot business in LNG. The better realizations helped to offset the lower realizations on the older HPJ pipeline. Gail has suffered the composition of cost because of higher administered price by the government in gas. Essentially, that is the fuel for its own compressors which has been a burden on the margins. At the same time, the petro chemical business suffered a volume slow down, given the shut down and also for the LPG.

There has been a below expectation performance from the company both at the top-line and bottom-line level. The positive surprise was a special higher dividend from ONGC and the subsidy burden on the down stream marketing company that GAIL shares was a little lower than expected. The bottom-line also got some sucker. The utilisation levels for the pipeline seemed to be under some cloud. This was the reason why the market responded negatively. The performance has been significantly below expectation.

Q: Can you give your view on Container Corporation ?

A: Container Corporation did not excite the market with the second quarter numbers. The domestic and export business seem to be under serious cloud due to the JNPT accident. Investors are aware that Container Corporation runs 20 rakes to JNPT which is more than 60% of its total capacity. In the last quarter, the export business saw an excellent recovery, as a result of which, top-line has grown in double digits. The company has been posted 14% growth at the PAT level. The result signal continued stress on the domestic business. In the domestic business, the distances traversed and the company saw a margin contraction of 700 bps with the forced discounts that the company had to give out.

On the other hand, the exports higher rental realisation as well as better pricing has led to expansion of margins. As a result, we have seen 23% growth in the export business versus the decline in the domestic business. If Container Corporation tweaks its capex, we saw the company to not spend much over the last year and the depreciation growth has been flat signalling lower capex. If ConCorp gets back on track and the EXIM business picks up, it will be easy to visualize a greater than 25% CAGR growth at the top-line and bottom-line level. For quarter under review, the performance has been significantly better than expected. Signals have turn around from the flattish Q2.