Software: Scalability’s the name!

Introduction

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2005 has indeed been an eventful year for the Indian software industry. In many ways, the year can be considered as a landmark one, where numerous events unfolded. Large deals were signed, acquisitions were made, growth was witnessed in some companies, de-growth in others and so on. But the conclusion is undoubtedly that the growth story continues to play out in offshoring. As regards index performance, the BSE Infotech index’s performance has been neck-to-neck with the benchmark, the BSE Sensex. In fact, since the beginning of the year until very recently, the Sensex had actually outperformed the IT index. The recent strong rally in technology stocks has enabled the index to come on par with the Sensex in terms of year-on-year returns.

What was different in 2005 as compared to 2004?

The year 2005 was characterised by a strong performance from the Indian software industry. Earlier in the year, at the end of FY05 (March), NASSCOM’s reports showed that the software industry grew at its fastest pace since the dot-com bust. This is ample proof of the resilience of the country’s software industry. The long-term players have proved their ability to stick it out in difficult times and this will only make these companies stronger in future. The offshoring story continued to play out, amidst occasional bouts of paranoia from the US, UK and EU (continental Europe) about job losses. But clearly, the noises that were made against offshoring of jobs in 2004, particularly at the time of the US presidential elections, have died down. Corporations globally are, no doubt, conscious of the need to remain competitive and thus, focus their energies on their core competencies, leading to ever-increasing offshoring. The highlight of the year was, undoubtedly, the signing of the landmark ABN Amro deal. The deal, worth US$ 2.2 bn, was partly given to Infosys, Patni and TCS, apart from Accenture and IBM among the global technology majors. This has proven to the world, the ability of Indian software companies to execute deals of a global nature across diverse geographies, such as the US, Europe and Latin America by leveraging their global delivery networks. Taking an industry perspective, we expect more such deals to be signed in future and global reach and size will play an increasingly important role in deciding who gets the largest share of the spoils. The major ‘theme’ of the year, we would say, was that of scalability - scalability in terms of manpower, infrastructure, size and global reach. This is the major factor that we believe will be crucial for any Indian software company if it has global ambitions and hopes to compete against the Accentures and IBMs of the world. This was again reflected in the ABN Amro deal. To put it in numbers, TCS, the biggest of them all, crossed the US$ 2 bn mark during FY05, while Infosys is expected to do so in FY06. Satyam is expected to cross US$ 1 bn in revenues in FY06, making it the fourth Indian software company to achieve the ‘hallowed turf’.

The sector outperformer: Satyam

From the table below, it can be clearly seen that Satyam has been the major gainer in 2005. This has been due to the market re-rating the stock upwards. In the past, Satyam’s performance has been fairly inconsistent when compared with the top-tier companies. As a result, it had been trading at a big discount to Infosys. But during the past 2 years, Satyam has started to perform impressively, driven by its package implementation business that has grown at a CAGR of over 60% in that period. This has resulted in the stock’s valuations improving, reducing the gulf that separated it from Infosys. Of course, Infosys still gets a considerable premium to Satyam, but it has been steadily reducing. Going forward, we expect the package implementation business to continue to be the major growth driver for Satyam. Software: Key gainers in 2005

	24-Dec-04	23-Dec-05	% Change
Satyam Computers	409	711	73.8%
i-flex solutions	625	1,037	66.0%
NIIT Limited	176	287	62.8%
Geometric Software	73	111	50.8%
HCL Technologies	359	525	46.3%

The laggard: MphasiS BFL

In 2005, there were no losers in absolute terms from the software companies under our coverage. However, there were certain companies whose stock performance was far from satisfactory. After all, at the end of the day, one must compare relative performance as a measure of evaluation and not absolute performance. MphasiS BFL has faced some trouble in the recent past in maintaining consistent, industry-beating growth rates. The company’s major divisions - IT services and BPO – have, at different times, faced problems growing on a consistent basis. But the biggest problem faced by MphasiS BFL has been the inability of Barings, its largest shareholder, to sell its stake. The sell-off fell through during 2005, when Barings could not find a buyer that would give a satisfactory price. As a result, since then, sentiment on the stock has been poor and has contributed in a big way to its relative under-performance. Software: Laggards in 2005

	24-Dec-04	23-Dec-05	% Change
Kale Consultants	75	88	16.9%
PSI Data Systems	101	115	14.4%
MphasiS BFL	138	152	9.9%
NIIT Technologies	152	162	6.8%
Hexaware Technologies	121	126	4.4%

What to expect in 2006?

Indian software companies are increasingly beginning to show their clout in the global technology industry. The ABN Amro deal is just the beginning and we expect a lot more from the sector, going forward. Indian companies’ inherent advantages, like low cost and highly skilled labour, time zone differential, enabling regulatory environment, mastery of the art of global delivery, execution excellence and strong relationships with Fortune 1000 majors, are expected to enable them to continue to grab the lion’s share of the global offshoring pie. As we had mentioned in our ‘Reflections 2004’ write-up, the demand for technology solutions globally will be concentrated among a few players. This has certainly been the case in 2005 and is expected to continue. Indian software companies continue to climb higher up the value chain, as witnessed by the increasing share of higher-end services like package implementation, infrastructure management services, systems integration and consulting in the overall revenue mix. This is expected to continue, as these companies invest more in these businesses. Going forward, it will undoubtedly be a different ballgame competing against the likes of Accenture, IBM and Cap Gemini in their own space, where they have been the incumbents for many decades now. Thus, the building up of domain expertise is a critical factor that cannot be ignored. Security will be another key issue to watch out for in 2006, particularly in the BPO industry. This industry has seen scorching growth rates, as global corporations make a beeline for India as the ‘back-office of the world’. But recent incidents involving breach of security and leakage of confidential data have put the spotlight on security issues. We would like to mention here that these security issues are not unique to India – they occur all over the world and undoubtedly, while there is always room for improvement, targeting India alone will not do any good. The BPO business is not expected to get impacted, except, of course, for the ‘negative publicity’ that these issues generate. Given that, often, the credibility of the ‘supposed sting operators’ themselves is questionable, over the longer term, there will not be any major impact.

To sum it all up, as we had mentioned last year as well, it is clear that the cost arbitrage factor is becoming less relevant than it was before. Of course, it is still a big factor, but its importance is now beginning to reduce, as quality of work and domain expertise takes over. With Indian software companies getting increasingly into higher-end work, this will become more of a trend. The ‘Return on Investment’ factor will be closely watched and clients are now increasingly starting to work with the Indian companies on a more strategic level as partners in their growth. In other words, it is becoming more of a ‘strategic relationship’ now, as opposed to a mere ‘tactical relationship’ earlier. Watch out for scalability, movement up the value chain and domain expertise this year, as the industry moves into the next phase of growth!

Motilal Oswal - Goldiam

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Motilal Oswal - Wipro

Motilal Oswal recommends BUY on Wipro

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Hindu Businessline Recommendations

BUY >> TATA Steel, BHEL, TNPL,
>> VisualSoft, Vijaya Bank

HOLD >> Thomas Cook, Bajaj Hindustan

Ignoring the Herd - Outlook Money

In 1559 when the first tulip bulbs arrived in Holland and Germany, people fell in love with the exotic Turkish flowers. Soon speculators entered the tulip market purely for monetary gain and trading tulips became popular. Speculation led to high trading volumes and merchants and shopkeepers began to vie with one another for tulip bulbs.

Flower power. At the height of the tulip mania, in 1635, single tulip bulbs were being exchanged for as much as four tons of wheat, silver cups, two casks of wine and four oxen. It was bizarre as people sold homes, livestock, everything for the privilege of owning tulips, on the expectation that prices would continue to rise.

By 1636, tulips were being traded like stocks on the Amsterdam stock exchange. Smart players began to liquidate their tulip holdings as prices rose. Tulip prices weakened rapidly. Panic seized the market. Within six weeks, tulip prices crashed by a catastrophic 90 per cent and more.

Obviously tulips have little practical value. So, what could cause people to behave so irrationally? Nobody has a definitive answer but over the centuries, we’ve seen this collective insanity time and again. It’s a herd mentality–everybody rushes off to buy something and then suddenly, everybody stampedes in the opposite direction!

Economics theory is based on the assumption that individuals act rationally and consider all available information before making a decision. However, the tulip-mania and all the financial bubbles that have followed offer strong evidence that this is often not true.

All things being equal, in a rational market the fundamentals of a company should determine its market price. However investors usually overreact, often wildly, first pushing prices up too high and then pushing them too low.

A recent example can be culled from Infosys. In the first quarter of this fiscal, it delivered slightly disappointing results though the longterm prospects remained benign. Everybody sold and the stock price fell to Rs 1,900. Investors who kept their heads and bought at Rs 1,900 soon saw the price shooting back to Rs 2,650.

Similarly, a stock like Bharti Televentures Ltd, which had huge start up costs and capital outlay, offered windfall gains to those who recognised its intrinsic value. The stock traded below Rs 50 in 2003. Now it is priced at over Rs 300.

Most investors chase momentum and focus on rising stocks, rejecting those that fall. This causes them to overlook quality companies at low prices. This irrational behavior provides excellent opportunities if you can detach yourself from the crowd and move in the opposite direction.

This is the underlying rationale of ‘contrarian investing’. Contrarians do not risk money by blindly following the crowd; they look for opportunities when crowds act irrationally. Historically, contrarian strategy has paid off. The greatest investment guru, Benjamin Graham and his greatest chela, Warren Buffet are contrarians.

The mutual fund industry is eager to employ this strategy. Kotak MF and Tata MF have recently launched contra funds and the SBI Magnum Contra fund launched in July 1999 is one of the best performing diversified equity funds.

Conceptually, contrarian investing looks easy; buy when others are selling and sell when they are buying. But it’s easier said than done. Says Nitin Jain, fund manager SBI Mutual fund: "To think differently is certainly not easy. You might end up buying stocks in a contrarian manner and might just have to wait too long till others buy. Thus, your fund may not have performed at all for 2-3 months. It’s a skill to pick stocks ahead of others."

Picking stock ahead of others is what SBI’s Magnum Contra has done well. They bought top holdings like Cipla and BHEL some nine months ago. SBI’s Magnum Contra has been a consistent top performer. It has yielded 92.8 per cent over one year, 81.8 per cent for three years and 48.2 per cent on a 5-year CAGR basis. Jain further explains that contrarian investing involves ignoring over-heated sectors and picking the ignored ones.

Spot the difference

Contrarian investing is similar to value investing. A value investor also invests in undervalued stocks with long term potential. So what’s different?

Nilesh Shah, President Kotak Mutual Fund: "Value investors look more at the valuations such as the P/E multiples, Price/Book value etc. The focus is thus on value. A contrarian approach involves picking up quality stocks when the markets are ignoring them purely for temporary reasons like changes in government policy, competitive environment or the business environment."

The top picks in Kotak Contra are I-flex, PNB, EID Parry and Tata Steel. I-flex enjoys a lower valuation compared to its peers and the fact that Oracle has a stake could mean huge growth in the order book of I-flex. Most investors sold the stock after the rise once the Oracle news became public. Kotak bought it then, reviewing the long term potential.

The markets also seem to have ignored the growth potential in PNB and bought it purely for treasury profits. Similarly, EID Parry is not only a sugar business but it also has investments in fertilisers. These stocks are contra picks. Will they deliver? Only time can tell. Contra funds warrant a medium to long term horizon.

Tata Mutual Fund is the most recent entrant in the contrarian space. Says Ved Prakash Chaturvedi, Tata Mutual Fund "Contra strategy works well in an over heated market. Post the bull run of 2000, people who had invested in sectors like auto, metals, cement and engineering taking a contrarian view fared better. Over the long term, contra funds can deliver top returns". For their Contra fund, sectors like FMCG, fertilisers, tractors, pharma and oil refining and marketing are Tata Mutual Fund favourites.

Bottom-line

Several fund managers have demonstrated that they can implement the contrarian strategy effectively. The success of contrarian management depends on sticking consistently to the philosophy. Shah explains, "Over a period of time, what matters sticking to the contrarian philosophy and delivering good returns at the same time. The challenge is to get that balance".

Typically, contrarian investing involves less initial risk, since purchase prices are usually at the low end of valuations. Historically, stock markets move in cycles. The contrarian concept, like any other investment philosophy, will cycle in and out of favour. Diversification cannot be over-emphasised. Putting all your eggs in one basket is dangerous. The contrarian approach should be adopted only as one component of a diversified portfolio.

Karvy - NDTV

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RBI's Report Of Banking Sector

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Celebrity Fashions - IPO Analysis

Costly fashion

Aiming to push up exports as well as domestic retail sales

Celebrity Fashions (CFL) designs, manufactures and sells men's garments, catering to leading international brands and also to the domestic market through own brand, Indian Terrain. Set up in 1988 as a small 50-machine factory with 72 people in Chennai, the company has grown to eight factories (4,283 machines), housed over 300,000 square feet, employing over 5,000 employees.

The IPO will raise Rs 72.8 crore to Rs 81.9 crore. CFL proposes to spend Rs 46.26 crore to finance the acquisition of Ambattur Clothing, with a capacity of 6 million trousers per annum, and Rs 9.34 crore to set 20 exclusive Indian Terrain stores over the next three years. Moreover, the company will set up a new factory at Irrutgattukottai to manufacture tops with a capacity of 920 machines at a cost of Rs 23 crore. The company will utilise Rs 18 crore for working capital.

Strengths

• The abolition of the quota regime has opened new growth avenues for export-oriented garment companies such as CFL.

• The Indian retailing industry is set to grow and CFL, which has built its brand,is well positioned to ride the boom.

Weakness

• CFL’s revenues are highly dependent on a limited number of buyers. For example, its top most customer contributes nearly 32% of its export revenue. The loss of business from any one of its major buyers may adversely affect the top line and bottom line.

• CFL’s Indian operations, consisting of sales from Indian Terrain, were making losses till FY 2005 due to the high advertising expenses. They have started making profit from the current year.

• Bennet, Coleman and Company has been allotted 7.34% of the post-issue equity at Rs 110 (post-bonus), for which CFL would receive benefit over the next three years.

• CFL plans to spend huge amount on advertising.

• There are no plans to enter new segments like women’s wear or kids’ wear.

Valuation

In FY 2005, CFL reported a profit of Rs 5.80 crore with an EPS of Rs 3.2 on diluted equity. The PE ratio stands 50 times at the lower end of the offer price (Rs 160) and 56 times at the higher end (Rs 180). Gokaldas Exports and Zodiac Clothing, much better placed than CFL, are trading at PE of 19 and 31 times, respectively.

The first half results of FY 2006 give an annualised EPS of Rs 5.8. Considering this EPS, PE will be 27 to 31 times. On the same basis, PE on an annualised EPS of Gokaldas Exports and Zodiac Clothing is 15 and 33 times, respectively. As recently as October 2005, CFL allotted equity shares at Rs 110 to private equity investors.

Educomp Solutions IPO Analysis

Good market potential

Focus areas have good growth success in the US can open up huge opportunities

Educomp Solutions is promoted by the husband and wife team of Shantanu Prakash (IIM, Ahmedabad alumunus) and Anjlee Prakash (PHD in education). Headquartered in New Delhi, Educomp employs more than 850 professionals and has a presence in 27 locations in India. It has a fully owned subsidiary in the US.

Educomp Solutions focuses on K-12 (Kindergarten to Class 12) education. It mainly operates in four segments, Smart Class, Professional Development, ICT (Information Computer Technology) and Others (Retail). Smart Class is a technology-enabled learning solution, which caters to private schools in India under the BOOT (build, own, operate and transfer) model. In FY2005, this segment contributed around 8.5% (Rs 2.95 crore) of the total revenue and 3.5% of the total gross profit (Rs 63 lakh), with a gross margin of around 21.4%. The company is also planning to increase its presence in the US market through this product in the coming years. However, in the US market, only the content solution will be provided under license to private schools, and not the hardware as is done in the Indian market.

The professional development segment focuses on training teachers, by providing them skills in inquiry-based learning, creative thinking, and building problem-solving skills among students. In this segment, Educomp partners with Wipro, Microsoft, and the Azim Premji Foundation. This segment contributed around 30% to the top line in FY2005 and 40% to the gross profit, with an impressive gross margin of around 65%.

The ICT business segment caters to government and state schools in India. In this segment, Educomp Solutions enters into a long-term (usually five years) contract with the government schools to provide the entire IT solution for schools / institutes covered by the contract. The contract is a BOOT arrangement, translating all assets to the school at a nominal residual value at the end of the contract period. The payment terms are usually on a quarterly basis. The company has worked with a number of states in India such as Karnataka, Tamil Nadu, Andhra Pradesh, Assam and Orissa. This segment contributed around 38% of the total revenue in FY2005, and 20% of the gross profit, with gross margin of around 25%.

The forth segment is meant for catering the retail market, with a range of toys like Playgo, and Learning Road and educational CDs. Educomp Solutions plans to launch a chain of retail stores, "Play – n – learn", on a franchise model. The first of such stores has already been launched in Gurgaon, Haryana.

There are some other businesses like online tutoring for the US market, learning portal PlanetVidya.com, campus management system, eCampus, and annual maintenance contracts. The other business segmenst contributed around 24% of the total revenue with a gross margin of 88%, generating 41% to the gross profit in FY2005.

The proceeds of the current IPO will be utilised to fund the capex required for the Smart Class project (Rs 15.93 crore), capital expenditure for the Education Infrastructure Projects (Rs 30.83 crore), capital expenditure for the content development facility in Bangalore, India, for US Smart_Class project, (Rs 10.98 crore) and investment in US subsdiary (Rs 8 crore). Educomp Solutions has also earmarked Rs 10 crore for acquisition.

Strengths:

The market size is apparently huge as computer literacy is still very low and an increasing number of schools and state governments are realising the need to provide computer literacy and computer aided learning to students as well as teachers.

Over the next few years, Educomp Solutions plans to expand its global business with a focus on North America. It will also build on its existing initiatives to provide digital content to schools as well as online tutoring in the US, which is the world's largest education market, with a K-12 content spend of over $10.2 billion (2004 figures) and an online tutoring market spend of over $4 billion.

Weaknesses:

Educomp Solutions derived around 32% of its total revenue from the orders placed by trusts managed by the related parties. In FY 2005, Rs 10.29 crore of income (32.06% of total income) was generated from trusts and in the April-June quarter of FY2006; Rs 1.99 crore of income (36.64% of total income) was generated from trusts.

In the last three years (till FY 2005), the top line of Educomp Solutions grew at a CAGR of only 16% to Rs 33.13 crore. Net profit spurted from Rs 1.26 crore to Rs 7.93 crore, mainly due to the jump in the operating profit margin to 47.6%.

Educomp Solutions business is seasonal and most of the revenue and profit is booked in the second half, specially the fourth quarter.

Valuation:

The offer price band of Rs 110-125 discounts FY 2005 EPS of Rs 5 on post-issue equity capital by 22 to 25 times. The PE is high for a small company. But considering the market size in India and the US market opportunity, the offer looks interesting.

Bartronics India - IPO

Price is a big bar

The value-added reseller in a niche field is going for acquisition-based international growth

Bartronics India (BIL), a leading automatic identification and data collection (AIDC) and radio frequency Identification (RFID) solutions provider, is entering the capital market by issuing 65 lakh equity shares through a 100% book-building offer. The price band has been fixed in the range of Rs 63 to Rs 75. With the money raised through this issue, the company plans to enhance its technological base through R&D capability and to expand its business overseas.

The company ‘s current promoters are A B Satyavas Reddy and R Satish Reddy, both of whom are technocrats with about a decade of experience in various industries.

The business

BIL offers consulting services, design, software, hardware, customisation and full implementation of integrated and tailor-made AIDC- and RFID-based systems. The company also provides business and technology strategy, systems design and architecture, applications implementation, network and systems integration in this field.

BIL has three business segments: AIDC Solution, RFID Solution and Retail Solution. In the AIDC solution segment, the company provides bar code- and biometrics-based solutions, where the data related to the process flow get automatically fed into the computer system of the client. In the RFID solution segment, similar solutions are provided through RFID technology. However, in the Retail solution segment, inventory management solutions are offered based on both bar code- and RFID-based technology.

All the major equipment required for the solutions are imported. BIL provides the middle-ware solutions along with the imported hardware so as to integrate the systems to the requirement of the client. On an average, hardware constitutes approximately 60% of the contract value.

In FY 2005, BIL generated 80% of its revenue from the AIDC, 15% from RFID and 5% from Retail business. In half year ending September 2005, the contribution was 50%, 40% and 10%, respectively. Going forward, the revenue contribution will tilt more towards the RFID and Retail segments. On an average, the annual maintenance (AMC) revenue constitutes 20% of the company’s turnover and 60% of the business comes from repeat orders.

Project cost

For its new initiatives, BIL has planed a project cost of Rs 29.8 crore. Of which, a significant part goes to the establishment of the R&D center and international expansion. The company is raising Rs 34 crore to Rs 40.5 crore from the public issue. The surplus money will go for acquisition, for which Rs 4.5 crore has been earmarked.

Strengths

*BIL operates in a niche area of AIDC business, which is essential for the automated business processes of today. The implementation of organisationwide ERP software has made the requirement of automatic data-capturing and feeding to the automated systems essential for enhancing the pace of the business processes for organisations.

* Established in its field, BIL has a reputed clientele including corporate houses Tata Steel, Tata Motors, HLL, ITC, Ashok Leyland, TVS, CMC, Ranbaxy, Compaq, VST, Whirlpool, ITW, Dr.Reddy’s, and Nagarjuna Construction. .

* The recent focus on RFID technology, which will replace some bar code-led business, will enhance BIL’s scope of repeat business along with new business.

*The government of India favors foreign direct investment in the retail sector. Bar code technology plays a very important role in this sector. The hardware and software tools of this technology have become essential for retailing. With its experience, BIL is at an advantageous position to meet the demands of the retail sector.

Weaknesses

*The bar code business has reached saturation in the country. Therefore, the growth for BIL will come from adding more international clients and enhancing the RFID business. The company is targeting acquisitions abroad to enhance its international exposure. However, any overseas business, and that too based on acquisitions, involves risks.

*The technological depth of the business is low. It is more of a value addition. So the entry of global players with good technological depth is a threat to BIL’s new RFID business.

*All the service contracts entered by BIL are based on fixed price. Also, the project-based business model requires significant working capital till completion. Notably, the general contract size spans more than 180 days. In this context, any rise in cost of the project may affect the margin.

Financials

In FY 2005, BIL reported sales of Rs 18.06 crore and net profit of Rs 2.4 crore. Compared to the previous year, the operating profit was marginally affected due to rupee-dollar volatility. The company imports all its raw materials. In half year ended September 2005, BIL reported sales of Rs 12.77 crore and net profit of Rs 2.68 crore.

Valuation

*At the issue price of Rs 63 on an expanded equity of Rs 14.57 crore, the first half FY 2006 annualised EPS works out to Rs 3.7. PE stands at 17. At the issue price of Rs 75, PE works out to 20. There is no comparable listed player and PE is high for a small company.

Bartronics India: Invest at cut-off

AN investment can be considered in the initial public offering of Bartronics India as it has immense growth potential; it offers product-tracking services that are likely to play an increasingly important role with companies focussing on logistics to improve profitability. The boom in organised retailing, the increasing awareness of the need to ensure quality products and packaging, and the likelihood of mandatory tracking information for an expanding range of products in the domestic and overseas markets should drive growth.

Bartronics is likely to benefit from new product tracking services that are gaining popularity and may become the norm over a five-year period. Opportunities in the healthcare and security spaces are also likely to expand in the developed countries and in India. We expect Bartronics to post robust revenue growth.

Earnings are also to follow a similar path, though profitability levels could slip, as the company deals with bigger players in the years ahead. However, higher revenue growth could compensate for the slip in margins. The Bartronics IPO is in the Rs 63-Rs 73 price band. In line with the IPO trends over the past six months, this, too, appears a tad stiffly priced; there would have been a greater degree of cushion for investors had it been priced at the lower end of the price band. The stock is priced at 10-12 times its earnings for FY-07 based on conservative estimates of earnings growth. We expect the company to grow at higher rates and this could enhance the comfort level for investors. As a small-cap stock, Bartronics will be subject to a high degree of volatility; the returns are, however, likely to compensate for the risk element.

As a company that offers technology-based product tracking solutions and services, Bartronics is likely to be perceived as a logistics play. Stocks from this space have attracted investor fancy over the past year and as we expect this trend to continue, Bartronics is also likely to be a beneficiary. Our recommendation does not, however, factor gains on listing. Bartronics offers services that enable automatic identification of products and persons and creates the infrastructure to keep track of their movement. Such services are critical to efficient management of the supply chain; the availability of high-speed computer networks enhances the scope for using information generated in such a tracking process in a comprehensive manner and capitalise on every opportunity to maximise efficiency in logistics.

Bartronics has so far focussed on the manufacturing sector and has a clientele that includes frontline players in several industries. Even as opportunities open up in this space, we expect retailing to emerge the major avenue for such services in India.

Domestic retailing companies appear to be moving gradually towards comprehensive tracking information as it improves inventory management, ensures superior control over payments and billing, and enhances the ability to stock fast-moving products. Recently, they indicated that such information should be made mandatory. As suppliers benefit from such systems, we expect the market to grow at a rapid pace over the next five years.

As FDI in retail is only a matter of time in the Indian context, the entry of global majors will also lead to adoption of best practices. If their outsourcing from India increases in the process (as has happened in China), it could boost the product-tracking services.

But the demand for the more contemporary tracking services is likely to improve only when prices decline to form a small percentage of the cost of a product. This is likely to happen over three/five years as demand for such products rise in the global markets, driven by initiatives by companies such as Wal-Mart, Metro and Carrefour, to name a few. Declining costs of technology processors will also further the process.

As security concerns mount across the globe, tracking services in airports, Railways and where people congregate, will offer a revenue opportunity. Bartronics has implemented people management systems in Vaishno Devi and Tirupati and this should stand it in good stead to tap opportunities driven by security concerns.

We also note that the company, despite its small size, has pursued growth using debt, and managed to service it comfortably. Now, it aims to use the offer proceeds to acquire a debt-free status, the savings in interest cost will boost earnings. Expansion of its service network, and investment in a research and development facility are likely to prove beneficial over the longer term.

The principal risks to our recommendation are a threat from global players which may eye the Indian markets, and the possibility of a decline in profitability levels. The risks of a small-cap status will be neutralised by commensurate returns. Buy with a one-to-two year perspective.

Offer details: Bartronics is offering 6.5 million shares and will mobilise Rs 40 crore-50 crore depending on the pricing. The offer opens on December 20 and closes on December 24. The lead managers to the book-built offer are Karvy Investor Services and Centum Capital. The final offer document is available on www.bartronicsindia.com and www.sebi.gov.in.

Sharekhan - Investor's Eye

3i Infotech
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs186
Current market price: Rs148

Revenue guidance may be upgraded
According to media reports, 3i Infotech may raise its revenue growth guidance upwards for the current fiscal due to the incremental revenues from the inorganic initiatives taken over the last few months. The three acquired companies, Innovative Business Solutions Inc, FormulaWare Inc and SDG Software Technologies, have cumulative annual revenue run rate of around USD$10 million. Consequently, the management has indicated that the revenue growth guidance of 25-30% given earlier may be revised upwards in the forthcoming board meeting next month.

SKF India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs406
Current market price: Rs270

Rolled up to Rs406
SKF India's transformation from a product company to an engineering solution provider will reduce its dependence on the automobile sector (which is cyclical in nature) and could act as a big re-rating trigger for the stock. We maintain our Buy recommendation on the stock with a revised price target of Rs406. At our price target the stock would be trading at 13 X its CY2007 earnings and 7X its CY2007E EBIDTA.

UTI Bank
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs360
Current market price: Rs286

Price target raised to Rs360
At the current market price of Rs286, the stock is trading at 14.4x its FY2007E EPS and 2.5x its FY2007E book value per share. We reiterate our Buy recommendation with a price target of Rs360 with a 12-month perspective, which represents 20% upside from the current market price.

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Punj Lloyd

Pricey but Solid

Punj Lloyd is one of the largest engineering construction companies in India. It provides integrated design, engineering, procurement, construction and project management services for (a) energy industry (onshore and offshore pipelines, gas gathering systems, oil and gas tanks and terminals including cryogenic LNG and LPG storage terminals, process facilities in the oil and gas industry including refineries for power plant projects); and (b) infrastructure sector projects (highways, flyovers, bridges and elevated rail roads). Other services include comprehensive plant and facility maintenance and management.

Punj Lloyd has also executed small orders for laying optic fibers for the telecom sector. The company's operations are spread across the Middle East, the Caspian, Asia Pacific, Africa and South Asia with 12 project and marketing offices and 13 subsidiaries. With over 20 years of experience in construction projects Punj Lloyd has erected more than 5,300 kilometers of pipelines and four million cubic meters of tanks and terminal capacity and has executed 11 refinery modernisation and quality improvement projects. In FY 2005, it sold its equity in an annuity-based NHAI project and also earned bonus for early completion of the project. The current order book (November 2005) stands at Rs 7000 crore with an unexecuted order backlog of Rs 3700 crore (of which 47% is from NHAI).

The net proceeds from the issue of new equity shares will be utilised for investment in capital equipment (Rs 150 crore), prepayment of debt (Rs 300 crore) and investment in infrastructure projects (Rs 50 crore) besides for general corporate purpose.

Strengths:

1. Punj Lloyd is one of the few Indian construction players to own a large fleet of sophisticated construction equipment.
2. Projects under the higher-margin driven energy segment (40% of the order book), its area of specialisation, have relatively shorter completion period of 8-15 months as compared to two-three years of road projects (60% of the order book), where the margin is lower. In FY 2005, about 80% of the total revenue came from the energy sector
3. More than 180 projects executed in over 12 countries. In FY 2005, approximately 58% of consolidated sales and contract revenue generated from projects executed outside India. This is the highest in the Indian construction industry.
4. Worked on projects for leaders in the energy industry in India and abroad and has got repeat orders despite increased competition with 58% of the order book (FY 2005) comprising export orders. Moreover, has presence in all areas of oil and gas project management. Thus, the geographical spread has no concentration in a single region or country and non-dependence on single project is a major positive.
5. Successful execution of projects in different parts of the world adds to knowledge of working in different terrain and cultures. Additionally, its experience in the segment gives it a better chance at the pre-qualification stage. It is one of the few companies to have laid pipelines, including those with a 48-inch diameter, in shallow water and swampy or marshy terrain.
6. The recent discovery of large oil and gas reserves in the world (including India) is expected to increase the demand for pipelines, storage tanks, terminals and process facilities in the oil and gas industry. The national pipeline grid by Gail, the east-west pipeline by Reliance Industries and the increasing capital investment by major players in the energy industry in India are expected to further fuel this growth. Moreover, the increased thrust by the Indian government on increased and better infrastructure involving speedy procedures and new public-private partnership models augur well.

Weaknesses:

1. Punj Lloyd has performed substantial projects on a lump sum or fixed price. In FY 2005 and six months ended September 2005, approximately 41.61% and 35.48% of the consolidated revenue was derived from fixed price/ lump sum contracts. The actual expense for executing a lump sum or a fixed-price contract (mainly in the infrastructure projects) may increase substantially on account of unanticipated increases in input cost and delays in execution of projects. In FY 2005, the operating profit margin (OPM) slipped sharply due to the lower margin in annuity-based NHAI projects due to increased steel and cement costs.
2. Since 58% of the consolidated sales comes from projects outside India (FY 2005), there is risk arising from foreign exchange fluctuation as well as normal legal and political risks associated with operating in foreign countries.

Valuation:

With a price band of Rs 600- Rs 700, Punj Lloyd has an abnormally high PE of 113 to 131.8 times FY 2005 earning of Rs 5.3 (excluding extraordinary items) on a post-issue equity of Rs 52.22 crore. The fixed-price NHAI project has hit OPM severely in FY 2005 due to increased steel and cement prices. Moreover, the order inflow got delayed due to elections in India and Indonesia. Thus, the operating profit in FY 2005 had almost halved. However, it is expected that OPM will bounce back and growth in sales will accelerate in FY 2006. Thus, EPS in FY 2006 can cross Rs 20.4 achieved in FY 2004. This will bring down PE to around 25 to 35.

Larsen & Toubro (L&T), which is India’s largest engineering and construction company and more than 6.5 times the size of Punj Lloyd, trades at PE of 27.5 times expected FY 2006 EPS. L&T’s market cap to sales ratio is 1.57 compared to Punj Lloyd's 1.79-2.10 (at the upper and lower price band). The order backlog to sales ratio of L&T's Engineering & Construction division on September'05 stands at 1.7 against Punj Lloyd's 2.1 on November 2005. Overall the issue is costly (from short-to-medium term angle) even at Rs 600 and only long-term investors should consider the offer.

Unichem Laboratories

Cluster: Apple Green
Recommendation: Buy
Price target: Rs328
Current market price: Rs248

Unique(em)

Key points

• Unichem Laboratories (Unichem) is focusing on lifestyle drugs, like cardio vascular, neurology and diabetology drugs, which yield higher margins. With the help of new product launches it is building an excellent product portfolio, which is expected to result in higher margins.
• The new formulation plants being set up at Baddi shall increase its capacity by over 70%. The other upgradation programmes being carried out by the company shall improve its efficiency.
• The export market is expected to be the key growth driver of its formulation business. Unichem has shown a growth of 57% year on year (yoy) in FY2005 and a compounded annual growth of 118% over FY2000-05 in the formulation export market. We expect this strong growth to continue backed by the new product launches.
• The backward integration due to increasing captive use of bulk drugs by the company will lead to margin improvement. Unichem has strategically set up plants in Baddi where it can avail of tax benefits. The cumulative effect of the improved product portfolio, backward integration and tax savings will cause its net profit margins to rise from 11% in FY2005 to 15.3% in FY2007.
• The improvement in the margins due to the increased exports, a better portfolio and backward integration will lead to net profits of Rs80.8 crore in FY2007. At the current market price of Rs248 the stock is trading at 10.4x FY2007E earnings. Keeping in mind the company's growth prospects and efficiency improvements, we believe that a price of Rs328 with a price/earnings ratio (PER) of 13.8x FY2007E is a fair estimate for the stock. Hence we initiate coverage on Unichem with a Buy recommendation and a price target of Rs328.

Ramsarup Industries Limited IPO Analysis

Background :

• The company was incorporated in the year 1979 as Karunanidhi Investments & Trading Company Limited. In the year 2002 it changed its name to Ramsarup Engineering Industries Limited and subsequently to Ramsarup Industries Limited (Ramsarup) on March 30, 2005.
• Ramsarup manufactures Steel Wires, TMT Bars and Rods. These products are primarily used in the power, housing and infrastructure sector. The main customers for its steel wires include Power Grid Corporation of India Ltd., L & T, Kalpataru Transmission & Power Ltd, KEC Ltd. and Apar Industries. For TMT bars, leading customers are L & T, Gammon India, Reliance Energy and HCC. The Company is a large supplier to various State Electricity Boards.
• Ramsarup is having three operating units viz. Ramsarup Industrial Corporation (RIC) at Nadia in West Bengal, Ramsarup Bars & Rods (RBR) at Shyamnagar in West Bengal and Ramsarup Vidyut (RV) at Dhule in Maharashtra.
• RIC is one of the leading manufacturers of black and galvanized steel wires in the country with an annual production capacity of 1,73,000 tonnes. RBR, engaged in manufacturing wire rods, steel wires and TMT bars, has an installed capacity of 87,000 tonnes of TMT bars and 24,000 tonnes of steel wires. While RV has been set up, in March 2005, to generate 3.57 MW of power through windmill.

Objects of the Issue :

• Modernization cum expansion of the existing manufacturing facility of TMT Bars at Shyamnagar.
• Setting up of a Structural Mill with an installed capacity of 135000 TPA at Shyamnagar.
• Enhancing the Long Term Working Capital requirements of the Company.
• General Corporate Purposes including strategic initiatives and acquisitions.
• Repayment of Unsecured Loan.
• Meeting the Expenses of the issue.

Strengths :

• The Company is a leading and a broad based producer of steel wires and TMT Bars in the country. The Company has been producing steel wires for over three decades following stringent quality norms. The industry being capital intensive by nature is an inherent entry barrier for new entrants.
• Ramsarup has risen from a start up to amongst the leading brands and is now an established player. Ramsarup has one of the largest capacities in India and is the only manufacturer to provide the whole range of TMT products under Thermax technology. Further the company is one of the largest steel wire producers in India after TISCO. This gives the company a competitive edge over its competitors.
• The customers of the company are in the power, housing and infrastructure sector. These are the sectors that are gaining currency in the present scenario and getting an impetus from the government. Measuring the importance of these sectors, it is apparent that Ramsarup has immense growth prospects.
• Return on net worth of the company is 17.5% for March 2005, which is higher than the industry return on net worth i.e. 12.5%. This indicates that company has earned high profits during the year.

Weakness :

• State Electricity Boards (SEBs) constitute a significant part of the outstanding debt of the company. SEB's are known to have a bad fiscal condition and any default may cause serious damage to the financial well being of the company.
• Operating Profit Margin (OPM) of the company is 4.96% for March 2005, which is lower than the industry OPM i.e. 7.14%. This indicates that company has high operating expenses during the year.
• Companies of Promoter group of Ramsarup have incurred losses in the last three years. This could hamper the organic growth of the company.
• Ramsarup has taken loan from banks for the expansion project. There are restrictive covenants in the loan agreement. These covenants can confine the company from declaration and payment of dividend, expenditure in new projects, transfer/change in the key managerial personnel, change in the constitutional documents etc. Failure of the company to comply with any loan conditions may hamper progress of the expansion project.

Valuation :

• Revenue of the company increased at the CAGR of 56% in the four years. In the year 2002 the value of revenue was Rs.230.91 crore and in the year 2005 it is Rs. 877.54 crore. Total expenditure of the company increased at the CAGR of 55% from Rs. 221.00 crore in 2002 to Rs. 837.25 crore in 2005.
• Interest expenditure of the company increased at the CAGR of 37% from Rs. 5.11 crore in 2002 to Rs. 13.20 crore in 2005. Profit After Tax of the company has increased at the CAGR of 75% from Rs. 2.54 crore in 2002 to Rs. 13.67 crore in 2005. The net profit margin of the company has improved in the last four years from 1.10 % to 1.56%.
• Return on Net Worth of the company, for the year 2005, is 17.5% where as in the year 2004 it was 15.6%. NAV of the company stands at Rs.73.06 as on September 2005.
• Annualized post issue EPS is Rs.15. The shares are offered at the price of Rs.60. PE Multiple of the company is 4.04 where as the PE Multiple of the Industry is 8.58.

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Punj LLoyd - IPO

Source: opendb.net
Author: Mint

Business of Punj Lloyd

Punj Lloyd is an engineering and constructions company, which provides integrated design, engineering, procurement, construction and project management services for energy and infrastructure sector projects. The operations are spread across the regions of the Middle East, the Caspian, The Asia Pacific, Africa and South Asia. Punj Lloyd has got 13 subsidiaries and has executed upwards of 170 projects in 12 countries.
Punj Lloyd has over 20 years of experience in construction projects and in that time it has executed 11 refinery modernization and up gradation projects and engaged in 14 highway projects.

Financial Information

The topline of Punj Lloyd has grown consistently over the last few years. From revenues of around Rs. 500 crores in fiscal 2001, last year the company clocked in revenues of Rs.1492 crores. Although this was not significantly greater than the revenues it clocked in the year prior to that (Rs.14149 crores), when seen in the context of the growth overall in the last five years one can see that the growth enjoyed by the company is good.
While the topline has grown consistently the fluctuations in the bottomline and even the case of adjustments in the reported Net Profits is a cause for concern. From a profit of Rs.275 million in the year 2001 the profit was down to as low as Rs.6.25 million in the last fiscal.
Consequently the EPS last fiscal was just Rs.0.12 while it was Rs.12.58 the year before and Rs.4.52 the year before that and the Book Value per share last fiscal was Rs.209.80.

Objects of the Issue

The main reasons for the issue are to raise money for capital expenditure, to prepay debt and equity investments in infrastructure projects. Out of these three the company intends to spend Rs.1500 million on acquiring equipment like dozers, hydraulic excavators boring machines etc.
The company also intends to pay off debt to the tune of Rs.3500 million which it has taken from various financial institutions. Punj Lloyd has debt aggregating to Rs.11168 million both long term and short term as well as working capital.
Another Rs.500 million is to be raised to be invested in fully owned subsidiaries and bid in certain kind of projects both in India and abroad which required creation of Special Purpose Vehicles to execute projects of such nature.

Conclusion

The company has done well in its growth of revenues in the last few years and has been in existence for over 20 years and has expertise in the area of operations. The pricing of the IPO however must reflect the inconsistency in the profits over the past years and it should be at a considerable discount to its other peers like L & T.

PVR IPO - Way2Wealth

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PVR Ltd - Indiainfoline

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Tulip IT Services - Indiainfoline

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Ratnamani Metals and Tubes

Ratnamani Metals and Tubes
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs375
Current market price: Rs270

Stainless growth

Key points

• Ratnamani Metals and Tubes Limited (RMTL) is the largest player in the stainless steel (SS) tubes and pipes segment in the organised sector, with a market share of 35%. The company has an impressive list of clients including L&T, BHEL, IOC, HPCL and Reliance Industries.
• Given the buoyant demand for SS tubes and pipes and carbon steel (CS) pipes the company is increasing its capacity in both the segments. In SS tubes and pipes, the company is expanding its capacity from 6,960 metric tonne per annum (MTPA) to 14,460MTPA. The CS pipes capacity is being enhanced from 120,000MTPA to 220,000MTPA. This capacity expansion is being done through a greenfield expansion at Kutch, Gujarat.
• RMTL has a strong order book of Rs200 crore, to be executed over the next 6 months. We believe that the strong industrial activity and the solid order book position of its key clients will lead to a huge demand for its products. Moreover, RMTL's thrust in the export market has also led to strong export orders. The company is targeting an export turnover of Rs70 crore in FY2006 as compared to exports of Rs22 crore in FY2005.
• We expect RMTL's revenue to grow at a compounded annual growth rate (CAGR) of 45.9% over FY2005-07. We expect the net profit to grow at a CAGR of 63% during the same period due to the expansion in its operating profit margin (OPM). We expect RMTL to report an earning per share (EPS) of Rs27.2 in FY2006 and of Rs39.1 in FY2007. The stock trades at 9.7x its FY2006E and 6.7x its FY2007E earnings. Given the strong order book position and the company being a market leader in a growing industry, we believe the stock is grossly undervalued. We initiate coverage with a Buy in the stock with a target price of Rs375, which is 9.5x its FY2007E earnings.

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Tulip IT Services

Exciting track record

Tulip IT Services is into network integration and management services and Internet protocol (IP)/virtual private network(VPN) wireless connectivity. IP/VPN is a relatively new business, where the company provides inter-city and intra-city data connectivity to corporate clients. Inter-city connectivity is provided through leased lines and fibre optic cables from multiple service providers. Intra-city connectivity is provided wirelessly through owned network.

With the proceeds of the current IPO, Tulip IT Services proposes to expand its IP/VPN wireless business with a network coverage in 130 cities and to fund incremental working capital requirements.

Strengths

• Tulip IT Services’s track record is exciting, with a four-year CAGR of 69% to Rs 342.21 crore in sales in FY 2005 and an almost 100% CAGR to Rs 13.92 crore in net profit. However, the profit margin is very low due to the large hardware-trading portion.

• According to an analysis of IP VPN services by IDC, the Indian market was around Rs 230 crore in 2003 and is expected to reach Rs1100 crore by 2008. In this market, Tulip IT Services, which has created a wide area network in the country, has the first-mover advantage.

• Wireless network clients include Bank of Punjab, ABN Amro Bank, HDFC Bank, Bank of India, Indian Overseas Bank, Dupont, and Hindustan Times. The expertise in the market will attract new corporate clients.

• The in-house unit at Jammu to assemble networking equipment will provide various tax benefits including excise, sales tax and income tax exemptions

Weaknesses

• Low entry barriers for providing IP/VPN wireless services will attract more players. Also, dependency on basic service providers for inter-circle connectivity can lower bargaining power.

• Wipro Infotech, Sify, CMC, and the HCL group are the major players in network integration. They have deep pockets and expertise, and can offer stiff competition. Even Bharati Tele-Services, Reliance Infocomm and Tata Teleservices/VSNL can enter this business in a big way, with competitive advantage.

• Introduction of cost-efficient new technologies cannot be ruled out in this market. Also, changes in regulatory environment affect the sector.

Valuation

There is no listed company with a similar business model. The nearest comparable company is Ayava GlobalConnect (59% subsidiary of Avaya, US, and a major player in converged communication space) which commands a PE of 24.0 x FY05 earning of Rs 17.5. Tulip IT Services is offering shares in a price band of Rs 100- Rs 120, which gives a PE of 21.7 to 26.1 times FY05 earning of Rs 4.8 on a post issue equity of Rs 29.00 crore. Company’s track record and short-term prospects are encouraging. That’s why it is probably coming pricey. If growth continues at the same rate, investors will not repent.

PVR IPO Analysis

Pioneer in multiplexes

PVR is India's largest multiplex cinema operator by number of screens. The company established PVR Anupam, India’s first multiplex, in Delhi in 1997. It also owns, PVR Bangalore, the largest multiplex in the country.

Besides the public issue of 57 lakh shares, there is offer for sale of 20 lakh equity shares by The Western India Trustee and Executor Company (WITEC), a trust acting through its investment manager, ICICI Venture Funds Management Company. Notably, WITEC got the shares, now offered in the range of Rs 200-Rs 250, at just Rs 47.5 in March 2005.

Besides the public issue to meet the envisaged project cost, PVR also issued in September 200 lakh 5% redeemable preference shares to the promoter and WITEC at Rs 10 each.

The proceeds from the Issue will mainly be utilised to finance new cinema projects in Mumbai, Hyderabad, Delhi, Indore, Gurgaon, Lucknow, Chennai, Ludhiana, Aurangabad and Latur at an estimated cost of Rs 138 crore. PVR will also invest Rs 30 crore in the equity of CR Retail, a wholly-owned subsidiary for setting up a seven-screen multiplex at Lower Parel, Mumbai. It will also put in Rs 7 crore in the equity of PVR Pictures, another wholly-owned subsidiary distributing English and Hindi language films in India.

From 10 cinemas with 39 screens currently, PVR will have 28 cinemas with 121 screens by end of FY 2008.

Strengths

*The entertainment industry is currently on a high growth path owing to the rise in disposable income and favourable economic environment.

* As it is the largest multiplex operator in the country with property located in prime locations, PVR enjoys economy of scale in operation compared to other multiplex operators.

* The strong brand equity enables PVR to attract higher patrons with competitive ticket pricing and higher advertisement and royalty revenue compared to other competitors. It also gets the advantages of being a preferred anchor tenant in malls.

Weaknesses

*The multiplex business enjoy relatively low breakeven due to higher ticket rates and entertainment tax benefits. However, tax benefits are for a limited period and the ticket rates can be regulated by the states.

*In the short term, PVR can face pressure on profit due to the fast capacity ramp-up.

*Due to the rapid development of digital technology and the massive advancement in the broadband and networking space, the home entertainment sector may witness a fast growth in future. This can adversely affect multiplex business prospects.

*Ultimately, the film exhibition business’s fortunes depend on the success of the films they are showing. Hindi films, which dominate the business, do not have good success rates.

*PVR does not have presence in the lucrative area of Mumbai and the rest of Maharashtra. Other multiplex operators like Adlabs and Shringar Cinema have developed a good presence in these areas. So the proposed expansion here will face stiff competition from these players.

Valuation

In FY 2005, PVR reported sales of Rs 68.64 crore on a standalone basis. The reported net profit was Rs 3.65 crore. On an expanded equity of Rs 22.88 crore, FY 2005 EPS works out to Rs 1.6. Based on this, PE stand at 125 and 150 at the price band of Rs 200 and Rs 240.

In the half year ended September 2005, the company reported sales of Rs 54.32 crore and net profit of Rs 3.87 crore. However, the first half is the best for the industry and the figures cannot be annualised.

Also, there will be an annual dividend of Rs 1 crore on the preference capital, which will have to be deducted from net profit to calculate EPS.

The nearest comparable company is Shringar Cinemas, which, in spite of continued losses, is traded around Rs 80-85 (its IPO was priced at Rs 53 in April 2005). Another listed player Adlabs, which has a better business model and the backing of Anil Ambani, trades at a PE of 48. After all, multiplex is a sunrise industry and that too within the show biz. So there will be many investors – strategic as well as non-strategic -- and the demand-supply gap can continue to favour a high valuation.

IPOs on a record run

The number of companies wanting to cash in on the stock market boom is at afive-year high. A total of 128 companies had filed offer documents forequity issues with the Securities and Exchange Board of India (Sebi) tillDecember 2.

Of this, 63 companies have already mobilised Rs 18,904 crore from thecapital market this year. Five issues are in the market to collect Rs 4,500crore, taking the total amount to Rs 23,404 crore. In the pipeline are 63issues that plan to mobilise Rs 8,500 crore.

During the information, communication and entertainment boom of 2000, 126 issues had hit the market, but most of them were small in size and could mobilise only Rs 3,254 crore. The markets had seen over 1,000 issues inthree consecutive years -- 1994, 1995 and 1996. Collectively, 3,492companies mobilised Rs 16,939 crore through public offerings in those threeyears.

Of the offer documents filed by 128 companies with Sebi this year, only 13public offers (eight of them from banks) are by existing listed firms and 115 are initial public offerings (IPOs). In November alone, the promotersof 16 companies filed drafts of offer documents. According to data sourcedfrom the Sebi website, the number of companies that filed draft offerdocuments for public offers in November has been the highest in the lasttwo years.

Entertainment Network, Celebrity Fashions, Inox Leisure, Royal OrchidHotels, Shirt Company, Space Computer and Systems, Shivalik Global and Rohit Ferro-Tech had filed drafts of offer documents with Sebi last month.The sectoral classification shows five companies are from the informationtechnology sector, four each from entertainment, steel alloys, textiles andretail business, and three each from the engineering and power sectors. Thelist also includes three listed banks_ICICI Bank, Andhra Bank and Bank ofBaroda. However, Andhra Bank and Bank of Baroda have not yet decided theprice band for raising money through book-building.

Aditya Birla Nuvo

Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,031
Current market price: Rs714

Master of all trades

Key points

• Aditya Birla Nuvo (ABN) is a unique play on four of India's most exciting sectors: garments, insurance, telecom and information technology (IT)/IT enabled services (ITES). The Stock Idea is also a play on the strong Indian growth story, especially the strong consumer demand, the evolving outsourcing trends and the strengthening financial system.
• ABN has adopted the perfect recipe for growth: mint money from the cash-rich businesses of rayon, carbon black and fertiliser, and focus on the high-growth business of garments, telecom, insurance and IT/ITES. Consequently, the company expects the share of revenues from its high-growth businesses to rise from 53% in FY2005 to 75% in FY2008E.
• Owing to the diversified nature of its businesses, the company is valued using the sum-of-parts method. Using this method we have arrived at a fair value of Rs1,031 per share. The stock is available at a 44% discount to this fair value and we initiate a Buy on it with a 12-month price target of Rs1,031.

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Sharekhan - Godrej Consumer

Godrej Consumer Products
Cluster: Apple Green
Recommendation: Buy
Price target: Rs674
Current market price: Rs506

Rich lather and colour

Key points

• Godrej Consumer Products Ltd (GCPL) is a play on the expected consumption boom in India. A huge migration of households towards the above Rs90,000 annual income category and the rising proportion of middle-income families will translate into a strong demand for products like soaps, hair colour and toiletries. With its dominant position, GCPL is one of the best plays on the consumption boom in India.
• The gains in the market share in the soap segment through the consolidation of brands (Godrej No 1) and the launch of new products will see robust growth. Although the soap market is expected to grow in a single-digit number, we expect GCPL to grow at a compounded annual growth rate (CAGR) of 15% in FY2005-08 on the back of its prudent strategy.
• The hair dye market is expected to grow at 16% and the cream colour segment to grow at 25% annually (average growth in the hair colour segment at 19%). With a 30% market share, a quality products basket and an unexplored market, GCPL should post robust growth (around 19% CAGR in FY2005-08) and reap handsome gains.
• Cash flows are expected to grow at a CAGR of 22% in the FY2005-08 period; the same will be deployed in purchasing growth (shift from the earlier stance) through augmenting capacities and inorganic growth aspirations (attractive acquisitions like Keyline Brands Limited will be a positive surprise).
• GCPL should command premium valuation considering its inorganic growth triggers and shareholder value maximising strategy. We have valued the company at 20x its FY2008E consolidated earnings and recommend a BUY with a price target of Rs674, an upside of 33.2% from the current price.

ICICI Bank - Public Offer

Second IPO in as many years

Capitalising on the strong FII interest in the India growth story

ICICI Bank (ICICIBK), India's largest private sector bank and the second largest bank in India in terms of assets, is coming out with a second public offer 19 months after its first. The bank’s previous issue raised Rs 3500 crore including a green-shoe option of Rs 450 crore in April 2004. It now expects to raise up to Rs 5750 crore including a green-shoe option Rs 750 crore from the domestic market. Additionally, Rs 2300 crore including a green-shoe option of Rs 300 crore will be raised via an ADS issue.

In March 2002, ICICI, the company’s parent and a leading financial institution, along with two of its subsidiaries were merged with ICICI Bank, which pioneered the era of universal banking. ICICIBK and its subsidiaries offer a wide range of products and services to retail and corporate customers, both in the domestic and international market. Over the years, the bank has emerged as a one-stop shop for almost all the financial services. It has demonstrated its ability to spot and enter new market segments and establish the size and market leadership in a short span of time. Leveraging technology has been a key element of the bank’s strategy.

The main object of the issue is to augment long-term resources in line with the estimated growth in assets and maintain a comfortable capital adequacy ratio (CAR) taking into consideration the stringent Basel II requirement. The capital adequacy ratio (CAR) on September 2005 stood at 11.52% (including Tier-1 capital adequacy of 7.24%), well above RBI’s requirement of 9%.

Strengths

*Technology, leadership in retail finance (fastest growing segment with relatively better margin), one of the best network among private banks, and experience and balance sheet strength to finance infrastructure growth (emerging segment with tremendous potential) are ICICIBK’s key strengths. Rural finance and international banking are the two new growth drivers identified by the bank.

*The group companies involved in businesses like securities trading, insurance (life and general), mutual funds and venture capital provide tremendous growth opportunities in the coming years and ICICIBK will be a significant gainer in terms of synergy as well as their increasing valuations.

*Among the peer group, ICICIBK has one of the best productivity ratios in the industry with business per employee at Rs 880 lakh and profit per employee at Rs 11 lakhs. The return on average assets at 1.5% in FY 2005 is at par with the best in the industry considering its large asset base.

Weaknesses

*The net interest margin (NIM) has stayed stable at 2.4% in the past few quarters, which is lower than the peer group margin. Its long-term high cost borrowings and strategy to acquire market share by lowering interest rates on the lending side and offering aggressive rates on bulk deposits have restricted the NIM growth.

*The burden of relatively high provisions coupled with aggressive expansion-lead growth in operating expenses are not allowing one of the fastest growths in the business to get reflected in the bottomline growth.

*Due to frequent equity dilutions, the bank’s EPS growth is lower than its peers. Between FY 2003 and FY 2005, ICICIBK's year-end EPS had grown at CAGR of 17.5% compared to UTI Bank's 20.8% and HDFC Bank's 24.9%. This year again, ICICIBK’s equity will expand by around 20% due to the current issue, while net profit is likely to grow around 21% as per analysts’ consensus estimates. Thus, there will be insignificant growth in EPS.

H1FY06 results

In the six months ended September 2005, ICICIBK recorded a healthy growth of 37% to Rs 1805 crore in net interest income, driven by a 37% rise to Rs 4320 crore in interest on advances. The fee income advanced 43% to Rs 1362 crore and treasury profit increased 96% to Rs 423 crore. The operating profit was up 54% to Rs 2015 crore, but provision rose by a staggering 150% to Rs 602 crore mainly on account of an amortization premium of Rs 339 crore on government securities. The net profit has improved by 27% to Rs 1110 crore. The total business of the bank increased by 62% to Rs 227523 crore on September 2005, of which deposits grew 68% to Rs 120452 crore, while advances were up 56% to Rs 107071 crore.

On September 2005, its net NPA (NNPA) ratio stood at 0.97% (Rs 1080 crore). However, in June 2005 it stood at 1.96% (Rs 2030 crore). This improvement is attributed to the resolution of the Dabhol imbroglio.

Valuation

At the offer price band of Rs 505-545, PE, P/Book Value and P/Adjusted BV (based on pre-issue figures) work out to 18.6-20.1, 2.7-2.9, 2.9-3.1. Retail investors will get 5% discount on the issue price. The market price of Rs 536 crossed the upper limit on the announcement of the price band. The scrip was outperforming the BSE Sensex till the announcement of the IPO. After that it has underperformed the Sensex from the last issue closing date to the current issue opening date.

In FY 2006, the bottomline growth may not be significantly higher than the growth in equity, restricting the EPS growth to single digit. BV will improve about 30% due to the premium collected in the issue. The valuation ratios are high compared to the unexciting growth rate in EPS in the past as well as in the current year. However, in view of the growth potential in retail and infrastructure finance, foreign investors (who already own 72.4% and will get more buying scope after the IPO) will continue to get attracted to the stock, ensuring that the scrip tracks the broad market.