Movers and shakers

Dr Reddy's, Bhel, L&T, HDFC and Wipro were the top gainers in the November rally

After the selloff in October, the Sensex has recovered 10.5 per cent. Once again, the key driver was foreign institutional investors, which pumped in nearly Rs 1,516 crore in the first two weeks of November.

In contrast, in October, FIIs were net sellers of Rs 3,806 crore. Though domestic mutual funds, which have been cash-rich owing to huge subscriptions in new fund offerings, invested Rs 2,905 crore in October, there was no let-up in the market fall.

The Sensex fell to 7656 points on October 28 after touching a high of 8821.84 points on October 5. In November, FIIs returned owing to various reasons such as cheaper valuations, rupee depreciation and good results in some pockets of the market.

The result: the Sensex closed at 8494 points on November 14. The key gainers in this rally have been engineering, pharmaceuticals and information technology stocks.

The biggest gainer Dr Reddy's has appreciated 18.74 per cent on better results. The company also hived off its R&D operations to a separate company, where it has roped in other investors.

Engineering and capital goods companies are doing very well, thanks to the improvement in capex cycle. Bhel gained 17.04 per cent and Larsen & Toubro rose 15.52 per cent. HDFC has gained on account of its strong performance.

Two-wheeler companies Bajaj Auto and Hero Honda also gained 13.23 per cent and 12.93 per cent on robust sales. The appreciation in the dollar resulted in renewed buying in tech counters. Both Wipro and Satyam gained over 13 per cent.

This investment strategy of FIIs has led to the mid-cap segment lagging the Sensex over the past fortnight "" the CNX Midcap has gained only 8.9 per cent, while the S&P CNX 500 has gained 10.1 per cent.

The Sensex is trading at about 14.4 times estimated 2005-06 earnings but with the slowdown in growth rates of sales as well as net profit, the valuation may be high, point out analysts.

Godrej Consumer's UK acquisition

While there has been some consolidation in the FMCG space at home, it is probably the first time that a home-grown FMCG firm has taken over a foreign company. Godrej Consumer Products' (GCPL) buyout of the London-based Keyline Brands, for a reported sum of Rs 130 crore, is undoubtedly a good move.

What it does for GCPL is give it a basket of brands, a readymade institutional distribution network in global markets, and the opportunity to outsource manufacturing to its Indian operations. While Keyline does have a production base, a fairly large portion of the products is understood to be outsourced.

With revenues of Rs 132 crore in 2004 and a profit before tax of Rs 16 crore, Keyline has a presence in the hair care, skin care and toiletries. It owns the Cuticura, Adorn, Erasmic and Nulon brands.

The acquisition is not small: GCPL's revenues for 2004-05 were Rs 562 crore, so the addition to the top line will be 15 per cent for 2005-06. Thus, at the reported price of around 1.1 times sales, and a price-earnings multiple of less than 10, the deal has been struck at a fair value. More important, the acquisition will add to GCPL's earnings.

A third of the buyout cost has been funded through internal accruals with the remainder being funded through debt. GCPL did not have any long-term debt as on March 2005. It had net cash from operations of Rs 89.74 crore.

Post acquisition, the debt-equity ratio will go up but should be manageable. At the current price of Rs 485, GCPL trades at around 19 times estimated 2006-07 earnings (pre-acquisition). While the valuation is not cheap, the company has a track record and the potential to grow, especially after the acquisition.

NRB Bearings

Timken France SAS has decided to sell its 26 per cent stake in NRB Bearings, the ball and roller bearing manufacturer, to its Indian promoters "" the Sahney family. The Indian promoters held 59.68 per cent in the company in September 2005, which will now go up to 85.68 per cent.

Nadella, France, the original joint venture partner in NRB Bearings, was sold by Ingersoll-Rand to Timken in 2003. Since Timken already owns 80 per cent in Timken India, there was no reason for it to continue with its stake in NRB. For NRB, the technological collaboration ended in 1998, after which the foreign partner was only a financial investor.

Thanks to the automobile boom, NRB Bearings is on a roll. In the first half of 2005-06, its sales increased by 20 per cent to Rs 121.35 crore over previous corresponding period.

There was an impressive improvement in its net profit margin from 12.6 per cent in September 2004 half year to 14.3 per cent in the first half of 2005-06. The NRB Bearings stock trades at Rs 330 and is traded at a trailing P/E of 11.5 times.

With contributions from Amriteshwar Mathur and Shobhana Subramanian