Query Corner: Long-term correction seen in SAIL :: Business Line

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I want your opinion on Patni Computer purchased at Rs 563 and SAIL bought at an average rate of Rs 160.

Ravindra Davda

Patni Computer Systems (Rs 367.5): Patni Computer has long-term resistance around Rs 575 where it peaked in June 2007. The stock once again spluttered around this zone in June last year and is in a sharp correction since then. The stock declined below its key medium-term support at Rs 423 this month. Subsequent supports are at Rs 360 and Rs 300.

The stock is close to the first support but is not showing any sign of reversal from here.

Investors with long-term perspective can however hold the stock as long as it trades above Rs 300.

But the medium-term is likely to be choppy for this stock and it can face resistance at Rs 420 and Rs 500 in the days ahead. Investors with short-to-medium term perspective should exit the stock on failure to move beyond these resistances.

The area between Rs 600 and Rs 620 will continue to act as a strong long-term resistance over the next couple of years.

52-WEEK FLOP: ARSS INFRASTRUCTURE PROJECTS:: Business Line

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Hitting markets in March last year, the stock of ARSS Infra closed listing day with a gain of over 60 per cent. It proceeded to build on these gains for a good while longer, turning tail in the second half of 2010. ARSS Infra is a construction contractor for industrial projects, roads and railways.

ARSS Infra benefited in part from riding the first wave of the revival in initial public offers. The offer was also modestly priced. However, the collective rejection of the sector on slowing execution, delay in awarding of projects in roads and prolonged monsoons had a part to play in the nose-diving of the stock's price.

The stock had also commanded trailing valuations of over 20 times at its peak, high for a construction contractor, where valuations typically fall well short of even 16-17 times trailing earnings. The company did not also possess unique aspects that set it apart from other contractors which could have justified premium valuations.

Its order book was fragmented with a large number of small-sized orders, which does not support prospects of scaling up. Governance issues too popped their heads up as one of its promoters was facing criminal litigation proceedings at the time of the IPO. The December 2010 quarter saw net profits grow at just two per cent, against the tripling and doubling of profits in the two quarters before

52-WEEK FLOP: ARSS INFRASTRUCTURE PROJECTS:: Business Line

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Hitting markets in March last year, the stock of ARSS Infra closed listing day with a gain of over 60 per cent. It proceeded to build on these gains for a good while longer, turning tail in the second half of 2010. ARSS Infra is a construction contractor for industrial projects, roads and railways.

ARSS Infra benefited in part from riding the first wave of the revival in initial public offers. The offer was also modestly priced. However, the collective rejection of the sector on slowing execution, delay in awarding of projects in roads and prolonged monsoons had a part to play in the nose-diving of the stock's price.

The stock had also commanded trailing valuations of over 20 times at its peak, high for a construction contractor, where valuations typically fall well short of even 16-17 times trailing earnings. The company did not also possess unique aspects that set it apart from other contractors which could have justified premium valuations.

Its order book was fragmented with a large number of small-sized orders, which does not support prospects of scaling up. Governance issues too popped their heads up as one of its promoters was facing criminal litigation proceedings at the time of the IPO. The December 2010 quarter saw net profits grow at just two per cent, against the tripling and doubling of profits in the two quarters before

Buy ARSS Infra: Keepin’ the Road Hot:: Elara research,

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Keepin’ the Road Hot
Subdued topline, margin expansion keeps earnings in line
ARSS reported a depressing topline growth of 14.2% YoY at INR3bn (vs
our expectation of INR3.9bn), impacted by the extended monsoon
season during Q3FY11 across the Eastern region of the country. A
277bps YoY expansion in OPMs to 21.8%, led majorly by savings on
raw material and direct expenses, though ensured a 30.8% YoY rise in
operating profits to INR659mn. However, higher interest (+109.4%
YoY) and depreciation (+160.3% YoY) charges played a spoilsport,
containing net profits growth to a meagre 2% YoY to INR261mn.
Diversified order backlog, poised for growth
ARSS closed FY10 with an outstanding order backlog of ~INR35bn
(2.3x FY11E revenues). While high margin railways (45%) and road
projects (43%) have dominated majority of the order book in the past,
diversification into execution of irrigation and canal construction
works is presently on. The same is expected to mitigate the risk of
slowdown in revenues from any segment due to unforeseen
circumstances. The execution period of the present order backlog
stands at 18-24 months, with an average ticket size of INR1-1.25bn
Tone down earnings by 5.8% for FY12, upgrade to ‘Buy’
We tone down our earnings estimates for FY12 by 5.8%, factoring in a
higher than anticipated interest charges on account of rising working
capital requirements. Backed by the 18-24 months revenue visibility
pertaining to the present order backlog, ARSS looks set to deliver a
~30% earnings CAGR over the FY11-13 period. We remain confident
on its management to capitalize on the high growth opportunities in
the sector while maintaining the exhibited performance and
competitiveness. Post the near 43% fall in the stock price over the past
three months, valuations seem attractive for investors looking to make
fresh entries. Upgrade to ‘Buy’ with Mar’12 based price target of
INR796.