Auto, realty drag the markets

Tue, 14 Dec 09:30 am

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Asian markets have opened today on a mixed note. While China and Singapore are down a bit, gains are seen in Hong Kong and Japan. As for the Indian markets, these have opened marginally in the red. Realty and auto stocks are leading the losses currently. Engineering and energy stocks are however trading with some gains.

The BSE-Sensex is trading lower by around 5 points, while the NSE-Nifty is down about 1 point. Mid and small cap stocks are however trading stronger, with the BSE-Midcap and BSE-Smallcap indices up by 0.5% apiece. The rupee is trading at 45.00 to the US dollar.

Auto stocks have opened on a mixed note. While gains are seen in TVS Motor and Ashok Leyland, selling pressure marks trading in Hero Honda and M&M. A leading business daily has reported that the promoters of Hero Honda, the Munjal family, is looking to buy out Honda's 26% stake in the company for US$ 1 bn, or just about half the company's valuations in the stock markets as of now. This acquisition is likely to be done through a special purpose vehicle (SPV) by taking up a bridge loan. Munjals will subsequently divest a 60-70% stake in this SPV to private equity firms to pay back the loan. The likelihood of this deal has already caused damage to Hero Honda's stock price, which is down almost 12% since its November highs. Investors also fear that Honda won't lose out from this deal to sell its shares at a discount. This is given that Hero Honda would then compensate it (Honda) by paying a higher royalty on technology that the latter provides to the former. The agreement in technology transfer between the two companies will last till its expiry in 2014.

Plastics major Sintex yesterday announced the acquisition of 30% stake in Delhi based Durha Constructions Pvt. Ltd. (DCPL). DCPL is into the business of civil & mechanical construction in sectors like power, cement, ports, roads and mines. Sintex would pay Rs 420 m for this stake, thereby valuing DCPL at Rs 1.4 bn. It will acquire a further 21% stake in the latter by early next fiscal. Given DCPL's sales and operating profit (EBIDTA) of Rs 1.5 bn and Rs 252 m, the company has been valued at 0.9 times sales and 5.6 times EBIDTA, which we see as reasonable. DCPL also has an order backlog of Rs 7.5 bn, which provides it good revenue visibility for the future. This acquisition falls in the line with Sintex's plans of inorganic growth in the construction space, which the company was talking about a few months back. DCPL will also bring EPC (engineering, procurement, construction) business to Sintex's fold from its current role of just being a contractor.