3i Infotech - A High Priced Offer

3i Infotech (earlier ICICI Infotech) has transformed itself from the back office of ICICI Bank to a software products-cum-services company focused on the banking, financial services and insurance field. Over the last two years, the company’s consolidated revenue has fallen from Rs 260.25 crore in FY 2002 to Rs 229.17 crore in FY 2004. After a profit before tax (PBT) and extraordinary (EO) items of Rs 14 crore in FY 2002, there was a loss of Rs 6.74 crore in FY 2003, which increased to Rs 7.8 crore in FY 2004. However, deferred tax credits and extraordinary items helped it to show profit throughout on restated (as per same accounting policies) basis.

3i Infotech's share of product revenue to the total revenue is increasing. From 5% in FY 2002 to 42.6% in the nine months ended December 2004, the product revenue share is set to increase further. However, this will bring more volatility to the company’s revenue and profit.

3i Infotech derives around half of its revenue from the domestic market, which is generally a low- margin business and not fancied on the bourses. Moreover, the ICICI Bank group accounts for around 30% of the total revenue, which ties its fortunes to the changing business plans of ICICI Bank. For example, when ICICI Bank terminated the contract to provide IT-related services for retail finance and card operations in FY 2003, 3i Infotech’s revenue and profit fell drastically. In fact, PBT before EO of Rs 14 crore turned into a loss of Rs 7 crore.

The latest nine months ended December 2004 proved to be very profitable for 3i Infotech. Sales on a consolidated basis stood at Rs 208.30 crore and profit before EO items and deferred tax credit zoomed to Rs 12.81 crore (it was loss of Rs 7.8 crore in FY 2004). After deferred tax credits and other adjustments, the net profit stood at Rs 16.26 crore.

Its not proper to treat deferred tax credits as recurring items. Annualising PBT gives an EPS of Rs 3.2. Moreover, 3i Infotech has a preference capital of Rs 150 crore funded by ICICI Bank (the current IPO funds will be used to redeem it). After deducting the dividend on preference capital, one gets a paltry EPS of Rs 1.4.on post-issue fully diluted equity.

The price band is Rs 90 to Rs 100, gives a P/E of 64 to 71. Even if one does not consider preference dividend on the assumption that the issue proceeds will be used to fully redeem preference capital, P/E works out to 28 to 31. One can get Infosys and TCS at P/Es of 30-35. Certainly 3i Infotech’s scale, business model and expected sustainable growth rates are nowhere near Infosys’s and TCS’s.

3i Infotech: Issue Highlights
Sector	Computer Software: Med/Sml
Sector P/E TTM	17.7
No. of shares on offer	20000000
GS size (no of shares)	3000000
Post-issue Equity
after GS (Rs cr)	54
Offer price band (Rs)	100 / 90
Post issue promoters
stake (%) after GS option	53.08
IPO Open / Close	30.03.05/04.04.05
Listing	BSE and NSE
Rating	40 / 100
GS-green shoe

Source : Moneypore.com

There seems be conflicting reports on the EPS of 3i Infotech. Please verify at multiple sources. The above report may be inaccurate.

KRC puts a BUY on Sundram Fastners

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3i Infotech - Way2Wealth IPO Analysis

Way2Wealth has put a subscribe with long term perspective and expect very little listing gains as the offer seems to be fairly valued. Click here to know more

Tisco: The price rise effect

Come April, steel prices are expected to rise further. While Tisco has already announced a hike in prices by about 20% for its long-term customers, the others are expected to follow soon. However, the quantum of price hike by the other players will not be as steep as that announced by Tisco owing to the fact that they have been increasing prices periodically.

It must be recollected here that Tisco had refrained from raising steel prices in August 2004 in wake of the high inflation, which had then hovered at over 8%. In fact, it had reduced prices by Rs 2,000 per tonne to aid the noble cause of reigning in the country's inflation!

However, this did not affect the company's profitability, as the company continued on its path of costs reduction and enhancing its realisations by improving its product mix, thus helping it to absorb the impact of the price cuts announced then. These are vindicated by the fact that the operating margins of the company were at over 43% in 9mFY05 while its realisations per tonne also was higher.

It must be noted that unlike other steel companies, Tisco is in a significantly advantageous position considering that it meets all of its iron ore requirements and a bulk of its coal requirements internally. This has enabled it to insulate itself from the adverse impact of increase in input costs, in comparison with other global and domestic steel majors, who are forced to pass on the steep rise in input costs to consumers. The rise in average steel prices over the past few quarters must be considered in the backdrop that prices of steel inputs like iron ore (up around 150% YoY), coal (up around 200% YoY), coke (up around 125% YoY) and scrap (up around 230% YoY) having skyrocketed.

So, considering that Tisco has managed to increase profitability substantially in FY05 despite reducing prices, will the price hike for the new fiscal i.e. FY06 improve profitability further? Well, not exactly. This is because the price hike announced by the company is effective for its long-term contracts, which as per a company presentation made sometime back, constitutes to about 15% to 20% of the company's total sales. This is considering only the annual and half-yearly contracts of the company. Even if we consider the quarterly contracts, the price hike would cover another 8% to 10% of its contracts, taking the total to about 25% to 30%. Thus, the remaining portion of its sales would be governed largely by short-term price movements, which we are not very bullish on.

Further, it must be noted that the long-term contracts entered into by companies for assured supply of steel at an assured price (irrespective of the spot price movements), are generally made at a price lower than the spot price. Our cautious view on steel prices is also supported by our interaction with steel user-industries who have indicated that steel companies, unlike a few quarters ago, are now more willing to enter into long-term contracts. This is an indication that steel prices are nearing their peak. All these are probably the reasons that have not seen any major action in the Tisco stock despite the announcements.

However, while we will be revisiting our Tisco numbers soon (post a management meet) to incorporate the impact of increased steel prices, a back of the envelope calculations reveal that even based on optimistic assumptions (price realisations would be higher by about 10% YoY in FY06 and operating margins would hover in the vicinity of 45%), the EPS and book value per share would be around Rs 75 and Rs 195 respectively. This means that at the current levels of Rs 420, the stock is trading at a price to earnings multiple of 5.6 times our FY06 expected earnings and 2.2 times its FY06 book value.

Now, while the stock looks attractive in terms of P/E valuations, this is a typical characteristic of any commodity stock. During peaks or close to peak prices, the company's earnings are robust. But sustainability is always a question. It is therefore, pertinent for investors to look at what is in store for the sector in the year forward. With China increasingly giving indications of meeting it steel requirements internally, the threat of increased supplies and consequent pressure on steel prices is all the more evident. Further, considering our valuation parameter for steel stocks i.e. price to book value, which in the current phase of the steel cycle seems apt at 1 time to 2 times, the Tisco stock is currently trading above the upper band of the valuation parameter.

Amidst the possible upside potential in the near-term, we believe that the downside risk is more important. Since commodity cycle cannot be timed to perfection, it may not be worthwhile to extend the downside risk. To that extent, we advise caution.

Are you a braveheart ?

News is BAD.. Bears are BACK.

Here is Sharekhan's Braveheart Strategy

Lose your horns

The toughest thing to say to bulls is to ask them to lose their horns. For that's their raison d'être. The bulls would be happier if bears just never came out of hibernation. But unfortunately for the bulls the bears resurface every time they go into hibernation. So for the bulls, it is not so much a matter of IF the bears would come back, as of WHEN the bears would come back. And after three long years the tables have turned again. Yes, the BEARS ARE BACK!


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IPO Analysis - Gokaldas Exports

Way2Wealth - Gokaldas Exports - Analysis here

Another - When to Sell - Article

On Equitymaster - click here

Hindu Business Line Recommendations

Buy >> Coramandel Fertilizers

Sell >> SKF India, Goodlass Nerolac

Hold >> Alfa Laval, Tata Tea

KSE Crash

Well , not Indian News .. but the Karachi Stock Exchange seems to be heading to abyss.

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Sharekhan says - possible bounceback

Click here for the research report.

Equitymaster - StockSelect - Wockhardt

Equitymaster puts a buy on Wockhardt in their Stockselect. Price target of 510. Dowload the stockselect here Wockhardt

ICICI Direct Research

Nice link - here

Fed Rate Hike - Indian Implications

The US Federal Reserve has yet again affected a 0.25% hike in its overnight rates, which now stand at 2.75%. This is the seventh quarter percent hike since the Fed started raising rates last June in its pursuit of tiding in the rising inflation. However, while the central bank kept the measured tone intact, it indicated that it is growing more concerned about the inflation. Give us a break, Mr. Greenspan. That does sound stale now!

In his recent testimony to the US Senate Banking Committee, Greenspan had hinted at a further hike in interest rates, citing reasons like improvement in the US economic fundamentals and low savings of consumers. He had further indicated that the rise in rates would continue to be 'gradual' (read measured) and that it was an 'imperative to restore fiscal discipline in the United States to help narrow the huge trade deficit.'

While not much should be read into this ¿measured¿ rate hike as this seems a repeat of what the Fed has consistently maintained in the past year, Indian investors should note that these are few of those times when Greenspan has confessed that the problem of high deficit is a consequence of the extensive liberal policies of the Fed with respect to interest rates in the past 2 years.

In the recently held 'Advancing Enterprise 2005 Conference' in London, Greenspan had owned up that the fall in US interest rates since the early 1990s has supported both home price increases (the asset bubble as it is termed) and, in recent years, an unprecedented rate of existing 'home turnover'. This combination has then led to a significant rise in debt on account of home mortgages. What Greenspan meant from the latter (home turnover) was that the sharp rise in home prices has created capital gains for owners, which become realised with the subsequent sale of a home. A large proportion of this money is then used to purchase another home and the remaining part is used for 'consumption' purposes. This has been the chief perpetrator of the rising US personal dissavings. And so the Fed decision to now raise interest rates at a faster clip to reign in the bubble.

A case in point was the minutes of the meeting of Federal Reserve (held on December 12, 2004) that were released a couple of months back. Some accompanying facts of the minutes led to investors across the world panicking in belief that the faster rise in the US interest rates will lead to the 'hot' FII money reversing its flow, back towards the relatively safer US treasury bills and bonds.

The minutes of the aforesaid meeting indicated that the US economy expanded at a moderate pace in the second half of 2004, with both consumer and investment spending remaining robust. However, while core inflation remained subdued, prices rose slightly higher than in 2003. This was much owing to the indirect effects of higher energy prices. It was also indicated that the recent depreciation of the US dollar against key currencies was also putting pressure on inflation, thus increasing risks of a faster rise in prices going forward.

These key details of the Fed meeting led market participants to believe that the US central bank might raise interest rates faster than in the past, thus increasing risks of re-allocation of FII money back to US equities in 2005. Apart from that, the fact that economic policies across the globe are now more integrated than ever before, investors seemed to have believed that in light of the US Fed raising interest rates at a faster pace, central banks across the world would follow soon.

So, what should Indian investors do?

In light of the concerns that have been mentioned above with respect to a faster rise in US interest rates and FII flows reversing their direction, thus leaving local investors in the lurch, we suggest that investors should not bank on just FII inflows to drive markets to new highs. Economic theory suggests that a country cannot sustain a GDP growth that is much higher than the prevailing interest rates as it leads to high inflation and overheating. Given the fact that the US interest rates still lie at 2.75% as compared to the GDP growth of around 3.5%, there is a case in point for the Fed to raise rates fast, at least till the 3.5% levels.

As for Indian investors, given the sharp rise in stock prices over the last two years, they have to be cautious when it comes to investing in equities at the current levels. Apart from the fact that return expectations have to be toned down, investments should be made on a staggered basis.

Source : Equitymaster

HDFC Securities - Raipur Alloys and Steel

Click here for the research report

Low volatility points to some big moves in investment markets!

Many commentators have recently pointed out that volatility in both the bond and stock markets around the world has been unusually low and that from the current low levels of volatility big market moves will emerge.

Financial pundits also expect these moves in the financial markets to be likely on the downside. And while I tend to agree that volatility will sooner or later rise, an increase in volatility does by itself not necessarily imply that rising volatility will lead to market sell-offs.

As an example, extremely low volatility in the bond market gave, in early 1987, way to a sharp sell off in bond prices and a rise in long term bond yields from 7.14% to 10.23% (bond prices bottomed out a week before the October 19th stock market crash).

Conversely, low volatility in April 1998, was followed by a sharp rise in bond prices. 10-year government bond yields fell from 7.11% to 4.11% and bottomed out, in September 1998, in the wake of the LTCM crisis.

So, all low volatility is suggesting is that a 'big move' is coming but it does not convey the direction of the next big move. Now, in the case of the stock markets around the world we have record low volatility and in the case of the US, the VIX volatility Index is hovering near a ten years' low.

In fact world equity implied volatility is at present far below the average volatility of the last 10 years. So, all we can say is that within the next few months a large stock market move can be expected, either up or down.

But the question is obviously whether an upward or downward move in stock and bond markets is more likely. For equities, most indicators do seem to suggest that the next big move will be on the downside.

Financial institutions have a record low level of cash hence there is little buying power left. Insiders continue to sell heavily. The public and fund managers are very bullish about the prospects of equities - a contrary indicator, which would rather point to a sell-off in equities.

Liquidity tightening

Moreover, global liquidity has been tightening. Earlier in the year, I showed that money supply growth had been decelerating. My friends at Gavekal Research compile a global monetary indicator that suggests tighter global liquidity, which is usually not very favorable for investment markets.

In the eyes of the American Federal Reserve the US economy appears to be sound (it is not - just look at GM) and, therefore, the Fed is likely to continue to raise short term interest rates - that is unless the US economy weakens suddenly once again badly.

Therefore, we should assume higher short term interest rates and tighter liquidity for the foreseeable future, which should not be good for equities.

Admittedly, the S&P made a new recovery high in the first week of March, but strength was concentrated in energy and basic material stocks while financial shares are underperforming. Usually, when financial stocks are under-performing while oils are strong the market is in the last stage of a bull market.

In addition, stock markets appear to be - after their recent renewed strength - to be overbought. This would especially apply to emerging markets, some of which had almost vertical upward moves. At the same time corporate bond spreads are at record low, suggesting widespread complacency about risk.

So all in all, as far as stock markets are concerned it is more likely that rising volatility will give way to possibly severe market downward moves.

For bonds the picture is murkier, since bullish sentiment on bonds is rather leaning on the bearish side. Still, bonds would seem to be vulnerable as either economic growth could surprise on the upside or as 'visible' inflation accelerates.

By 'visible inflation' I mean inflation that would show up not only in asset markets like housing, equities, art, and commodities but would manifest itself in a sharply higher CPI figures, which are at present kept through statistical anomalies artificially low.

Bonds to fall

Therefore, I lean toward the view that the next 'big move' in bond prices, given the risk of higher inflation and higher short term rates will rather be toward the downside. Needless to say that rising short and long term interest rates would not be favorable for the housing market.

I have pointed out to the vulnerability of sub-prime lenders before. Robert Prechter recently produced a figure of a sub-prime lender index, which measures the stock market performance of several sub-prime lending companies.

In fact, all financials including Fannie Mae, and mortgage, credit card and sub prime lenders, and providers of financial guarantee products such as Capital One Financial (COF), Countrywide Financial (CFC), Accredited Home Lenders (LEND), New Century Financial Corp (NEW), MBIA Inc (MBI), MBNA (KRB) appear to be rolling over. JP Morgan Chase (JPM) - heavily exposed to derivatives - is also not performing well.

As observed before, strength in oil stocks and weakness in financial stocks is usually not a particularly favorable omen for the stock market. In addition weakness in the shares of mortgage lenders is not a positive indicator for the housing industry. We are short some of the financial shares mentioned above and are looking to renter the homebuilders from the short side on any sign of weakness.

As can be seen from above figure, the S&P Homebuilding Index has risen ten-fold since 2000 and seems to be getting extremely overextended. This particularly in view of the weakness in financial stocks I highlighted above.

What about industrial commodities? There is a close correlation between Foreign Official Dollar Reserves (FODOR) and Crude Oil Demand (the same correlation exists between Foreign Official Dollar Reserves and industrial commodity prices).

FODOR growth has been decelerating, which confirms the tighter liquidity argument I made above. And since there is a close correlation between oil demand and industrial commodity prices, I would expect under normal conditions oil and other commodity prices to ease in the near future.

I am saying under 'normal conditions' because oil prices could rise much further if geopolitical tensions increase. In particular, US air strikes on Iran and Syria have become a distinct possibility and could lead to soaring prices. I also admit that copper prices have recently broken out on the upside from their yearly trading range.

Grains look promising

However, the breakout is not very convincing and might turn out to be a false breakout move. As a side, I may also add that when FODOR growth slows down, the US dollar tends to strengthen. So, whereas I remain wary of industrial commodity prices I maintain my positive stance toward the grains, about which we wrote a month ago.

Wheat, corn and soybeans have all strengthened recently and we would use any weakness as a buying opportunity.

I have mentioned before that since October 2003 all asset markets including equities, bonds, art, commodities and real estate have been inflated in concert. At the same time volatility and bond spreads have been coming down to almost unprecedented lows while sentiment among investors is either very bullish or at least extremely complacent. This would suggest to me that risks have been rising and that the next 'big move' in asset markets could be to the downside.

Finally, we should not forget that January was a down month for the stock market in the US, which is usually quite a reliable indicator for the market's direction during the year. So, while I am not ruling out some recovery potential for the US stock market until mid April, limited upside potential could give way, at any time, to a sharp increase in downside volatility.

Thus, the high risks in buying US stocks and other extended asset markets (real estate in the US, and industrial commodities) at this point would, in my opinion, hardly justify the very limited near term upside potential that might still exist in the asset markets.

Marc Faber

Shopping Time !

500 points down and more predicted ! Now thats what I call Shopping time !
Here is a list of stocks I will probably research and buy (again).

In no particular order..

• ONGC
• ITC
• Sesa Goa
• Avaya Globalconnect
• Geometric Software
  
• Alfa Laval
• SBI
• ICICI Bank
• Container Corporation
• Exide Industries
• Nicolas Piramal
• ABB
• Reliance
• Finolex Industries
  
• Rico Auto
• Pricol
• Shanti Gears
• Mphasis BFL
• Karur Vysya Bank
• Jammu and Kashmir Bank
• Canara Bank
• Visualsoft
• Bongaigaon Refineries
• Blue Star
• Subex Systems
• Asahi India Glass
• GNFC
• I-Gate
• Infosys ( Planning to attend the AGM )
• Mahindra & Mahindra
• MRPL
• Navabharat Ferro Alloys
• Upper Ganges Sugar
• Balrampur Chini
• NTPC
• Pfizer
• Glaxo Pharma
• Shyam Telecom
• Indian Hume Pipe Co. Ltd
  

Do your own research

Disclosure: I hold shares in all the companies listed above if thats the disclosure that you want.

Ability to Say No

“The ability to say "no" is a tremendous advantage for an investor.”

- Warren E. Buffett, in reference to his performance last year

Equitymaster - StockSelect - ACC Ltd

Equitymaster Stockselect - ACC Ltd - Click here

Mutual Fund & FII Figures

Mutual Fund Activity
FIIs Activity

When to Sell a Winner

Here is a nice article from Fool.com

There's no tougher question you can ask a value investor than "When do you sell?" Buying cheap stocks is (relatively) easy. Knowing when to sell them after they're no longer screaming bargains is hard. The good news, however, is that you really rarely need to sell at all

Investors, it seems, are getting antsy. They're starting to catch on to the fact that true bargains in stocks are very hard to come by -- a fact highlighted in Warren Buffet's recent letter to shareholders of Berkshire Hathaway (NYSE: BRKa). If the reigning king of successful investors can't find a bargain out there, Fool readers are asking, does this mean it's time to sell?

To which I reply with a question of my own: "Um, time to sell what?"

Could you be more specific?

Both are important questions, of course. But my question is better. Because when investors ask "is it time to sell?" they're making the unspoken assumption that all stocks are created equal -- that if "The Market" is overpriced, then it doesn't really matter whether you own XTO Energy (NYSE: XTO), Home Depot (NYSE: HD), or Lucent (NYSE: LU). If the market's overpriced, you oughtta sell 'em all.

Nonsense. It's entirely possible for the market as a whole to be overvalued, yet include stocks that are grossly overvalued, stocks that are fairly priced -- and, yes, stocks that are undervalued, too. To illustrate, let's take a look at one of the most widely used methods for determining fair value: the PEG ratio. A PEG is a company's price-to-earnings ratio (P/E) divided by its growth rate (G). When a company's PEG equals 1.0, it's probably close to fairly valued. The higher the PEG, the pricier; the lower the PEG, the cheaper.

Currently, the S&P 500, which we can use as a proxy for the market at large, has a PEG of 1.5. So Buffet is right in arguing that the market is expensive. (Big surprise. The guy is a genius, after all.) But among companies that make up the S&P 500, valuations vary widely. For example, at a PEG of 2.7, Lucent is nearly twice as "overvalued" as the average American company; Home Depot, at a PEG of 1.1, is pretty close to fairly valued; and XTO? At a PEG of 0.8, that one actually looks to be a bargain. Fancy that -- an underpriced stock in an overpriced market. Who'd have thought?

Us, that's who

As small-cap value investors, our team here at Hidden Gems knows that there's value to be found in even the most overpriced of markets. We actively seek out the best values in small companies and, to date, our members have been well rewarded for the effort: We're trouncing the S&P's return by a margin of nearly 4 to 1.

Perversely, that's created a bit of a dilemma for many of our members. They've seen their stakes in companies like FARO Technologies and Transkaryotic Therapies, Middleby and Saucony, all more than double in value over the course of a few months. And some are beginning to wonder whether it's time to take some winnings off the table. To perhaps invest that money in a few of our other recommendations. Or to just stash it away until the market in general becomes cheaper.

Easy question first

First things first. No, I do not believe you should sell stocks that have performed well and put that money in a mason jar buried in the backyard or in a savings account -- a near equivalent at today's interest rates -- "hoping" the market turns south so that you can buy back into it.

Do you remember when it was that Fed Chairman Alan Greenspan first decried "irrational exuberance?" 1996. Greenspan was right, sure. But the market proceeded to climb for another four years before heading south. If Alan Greenspan, a man whose body is approximately 92% brain, can't time the market accurately, there's scant chance that you or I can. Don't even try.

Now it gets harder

But let's say you've bought into a cheap stock, seen it rise impressively over the past few months, and now want to buy something that hasn't yet made its own climb to the heights. That's a dilemma I personally face right now with Nokia (NYSE: NOK), a stock that I bought "on sale" several months ago, and that's now up more than 50%. I don't intend to sell it any time soon, and here's why.

The market ain't your momma

The market doesn't know you. It doesn't know how much you paid for a stock. It doesn't care how much you've made or lost. The market just tries to value companies based on their intrinsic worth and future prospects. Your objective as an investor should be to emulate the market's dispassion, to avoid getting emotionally attached to your stocks.

What I mean is this: Whenever you are tempted to sell a stock, you should, to the best of your ability, attempt to forget how much you paid to buy it originally. If you bought Google (Nasdaq: GOOG) six months ago at $100, and it's now selling for nearly twice that, this does not necessarily mean you should sell quickly, before the stock collapses. The law of gravity doesn't apply to the stock market. Not all things that go up must come down.

Neither does gravity affect stocks in reverse. If you bought Ciena (Nasdaq: CIEN) last year at $5, and today it's selling for $2, your decision to hold onto the stock, to sell it, or to buy more, should have absolutely nothing to do with whether you think you will "get back to breakeven." This is important enough that I want to repeat it: The market does not care how much you paid for Ciena. There is no guarantee that, just because it once sold for $5, it will ever fetch that much again.

Valuation is everything

The right time to sell a winner is, as investing guru Philip Fisher famously wrote: "almost never." If you've done your research beforehand and determined that the stock you want to buy is a promising long-term investment, you should not want to sell it -- ever. Trust your instincts. And, more importantly, trust the research and effort you put into buying a stock in the first place. Don't throw that away for a couple of percentage points gain.

That said, when you're looking at not just a couple of percentage points, but a double- or triple-digit gain over the course of a few short months -- as many of our members are -- I understand that the temptation to lock in that gain can be immense. But don't succumb. Remember that a business resembles an individual, in that it's dynamic and always changing. But as Fisher pointed out, "…there is no limitation to corporate growth such as the life span places upon the individual." A business can easily be undervalued today -- and still undervalued next year, despite a rise in its stock price.

Consider: Company A earns $1 during Year 1, has a price of $10 and a resulting P/E of 10. Now assume that in Year 2, Company A earns $1.50. Meanwhile, its price has increased to $14. That's a 40% gain in price -- enough to make most investors want to take a bit of money off the table.

But hold on a sec. The company's P/E has actually fallen to 9.3 over the past year (and I won't even talk about its PEG.) Company A is therefore a better deal at the end of Year 2 than it was at the end of Year 1. This would be a perfect example of the kind of company you'd be foolish (small "f") to sell in order to capture some profits.

It's also a good example of what I'd suggest you do anytime you're tempted to sell a winner. You know why you bought the company in the first place. You know what calculations you used to determine that it was worth buying. So before selling, do it again. Run the numbers. Give the stock another chance to prove to you that it's worth owning. If the company fails the test, if you simply cannot convince yourself, no matter how hard you try, that the company is still worth owning, then fine -- sell it. But if the company proves itself to you, don't cut your profits off at the knees. Hold on to that little winner. Let it live. Let it grow. Let it continue to generate profits for you and your descendants for as long as you all may live.

Construction Cos with 40K Crore Orders

THE wheels of the domestic construction industry are spinning at a frenetic pace.

With the Government sharpening its focus on infrastructure development, the top 15-odd construction companies are today sitting on bulging order books that have projects, under various stages of implementation, worth an estimated Rs 40,000 crore.

And with the flow of orders expected to increase by at least 30 per cent in the next two-three years, the message is loud and clear — India is going through a significant makeover in the infrastructure sector.

"We have to now literally choose the projects we want to take up," says Mr E. Sudhir Reddy, Managing Director of the Hyderabad-based IVRCL Infrastructure & Projects Ltd.

The meaty order books of these companies found an echo on the bourses. Top gainers in this sector include Madhucon with 84 per cent, Patel Engineering 73 per cent, Gammon India 64 per cent (after adjustment for stock split) and Simplex Concrete Piles India Ltd 30 per cent in the last one month.

The top 10 construction firms among themselves have orders worth in the neighbourhood of Rs 30,000 crore, which will be executed in the course of the next two to three years.

Leading the band is L&T, which has an order book for over Rs 9,000 crore, with about 40 per cent coming from the infrastructure sector and 12 per cent from the power sector.

While Gammon is sitting pretty on orders worth Rs 4,500 crore, Hindustan Construction Co (HCC), Simplex, Nagarjuna Construction Co (NCC) and Patel Engineering are having orders aggregating Rs 4,000 crore, Rs 3,500 crore, Rs 3,400 crore and Rs 3,171 crore respectively.

Other companies such as ICRCL and Madhucon are executing orders worth between Rs 2,000 crore and Rs 2,500 crore each.

"Clearly our concern is now not on getting new orders, but enhancing our capabilities and expertise to execute them," points out Mr Amitabh Mundhra, Director of Simplex Concrete Piles.

The new orders indicate the broadening range of sectors that these companies are getting into. Consider some of the recent orders: Patel Engineering bagged irrigation projects worth Rs 878 crore in Andhra Pradesh, HCC secured a Rs 404-crore contract for construction of the Chennai by-pass phase II, IVRCL mopped up orders worth Rs 311 crore in water transmission and buildings sector and Simplex is implementing a Rs 107-crore order involving wharf/approach bridge construction and causeway reclamation.

Says Mr Y.D. Murthy, Vice-President of NCC: "This is only the tip of the iceberg. The sector to be watched is the BOT segment in road construction, which is estimated to generate orders worth Rs 60,000 crore in the next five years. Just to give you an idea, only 50 per cent of 58,000 km of national highway is now under proposed development, including the 5,800 km under the Golden Quardilateral and 7,300 km under the North-South-East-West corridor projects."

Literally struggling to keep pace with the flow of orders, these companies are on an expansion drive, raising money from the equity market to fund the new projects that are cropping up their way.

While IVRCL will be raising Rs 145 crore from the primary market and HCC Rs 130 crore through preferential allotment this month, others such as NCC and Gammon had earlier gone in for dilution of equity. Gammon's wholly owned subsidiary, Gammon Infrastructure Project Ltd, is planning an IPO of at least Rs 250 crore later this year.

Mphasis - Acquisitions

MphasiS acquisition: Our view

Recently, MphasiS BFL has acquired two companies Princeton Consulting in the UK, and Eldorado Computing Inc in the US. In this article, we analyse the impact of the same on the company.

What is the company's business?
MphasiS BFL is a mid-sized player in the Indian technology marketplace. It is a sort of a niche player in the sense that it is the only Indian technology company that obtains a major portion of its revenues from the BPO business. MphasiS has a broad range of service offerings, which includes IT consulting, architecting solution, development & maintenance of applications, transformation of legacy systems, application life cycle maintenance (ALCM), enterprise application integration (EAI) and testing. The foray into new businesses/verticals will help MphasiS to derisk its business model and grow in size.

Inorganic growth initiatives to fuel growth
The recent acquisitions are in line with the company¿s strategy to derisk its business model. This will enable it to reap the benefits of increased work being outsourced to India, a fair part of which is expected to come to Indian shores.

Princeton Consulting
MphasiS acquired Princeton Consulting in the UK in February 2005 for a consideration of GBP 7.73 m and after adjusting for the surplus cash of GBP 3.23 m in Princeton, the net consideration comes to GBP 4.5 m. Princeton Consulting is a profitable company with annual revenue in excess of GBP 6 m. Princeton Consulting has about 100 employees and its list of clients includes British Telecom, Marks & Spencer, Deutsche Telekom, Belgacom, Volvo, and Ford.

Benefits for MphasiS
The acquisition provides MphasiS access to high-level business process management consultancy skills, as well as an established list of globally renowned clients, thus, giving the company greater visibility. In terms of revenues, as mentioned above, Princeton Consulting has revenues in excess of GBP 6 m, which is approximately Rs 500 m. This will add around 6.9% to MphasiS¿ estimated FY05 revenues of Rs 7,232 m.

Eldorado Computing Inc
MphasiS acquired Eldorado Computing Inc in the US for a consideration of US $ 16.5 m in an all-cash deal. Eldorado Computing, a profitable entity with revenues of over $10 million, specializes in claims processing and benefit management solutions for the health insurance industry. With 128 clients representing 2.5 million members, the company is a leader in technology administration solutions for healthcare payers.

Benefits for MphasiS
The acquisition will enable MphasiS to strengthen its footprint in the US market and enable it to enter the healthcare insurance and payment market. The company will also be able to offer these services to a larger client base in the US through its global delivery capabilities. In terms of revenues, as mentioned above, Eldorado Computing has revenues of over US$ 10 m, which is around Rs 435 m. This will add another 6% to MphasiS estimated FY05 earnings of Rs 7,232 m.

Our view
Both the acquired entities will together account for Rs 935 m in revenues, adding almost 13% to estimated FY05 revenues for MphasiS. Both the acquisitions will be immediately EPS-accretive, hence, there will be an addition to the topline and bottomline from this quarter itself. We had recommended MphasiS BFL in our StockSelect section in February 2005 as a buy with a target price of Rs 360. Given the positive effects of these acquisitions on MphasiS, we maintain our BUY recommendation on the stock with a two to three year perspective.

Over-hyped stocks: Too good to be true

COMPANIES extolling their achievements in print is not news. But prominent advertisements of lesser-known listed companies appearing repeatedly on the front pages of leading, nationally circulated business dailies? That does seem a bit of an overkill. What do they wish to highlight for the benefit of the readers? Typically, they claim that their turnover and profits have grown by 40-50 per cent.

One company claimed to be servicing an impressive list of clients. Another claimed that it has bagged large orders from the Gulf region. A third claimed what appeared to be a leading Indian telecom player picking up a strategic stake in the company. Only that the telecom company in question turns out to be an entity incorporated in Nigeria!

For added effect, many of them claim that they have planned huge investments and bonus shares. On the face of it, these advertisements appear to be the quarterly financial statements of smaller listed companies as per the guidelines of the Securities and Exchange Board of India (SEBI).

But somewhere in small print, there would be an innocuous line: Not a statutory release. That is because the "statutory" release carrying all the information as per the SEBI-prescribed format would have appeared in some small newspaper that nobody gets to read. Only the rosy figures would make it to the front pages of leading business dailies.

Incidentally, SEBI guidelines also mandate that the company has to publish its results within 48 hours. For such companies, the non-statutory advertisements appear several days after the board takes on record the quarterly results.

Statutory or not, these advertising claims have not hurt their stock prices. A study of the price movements of the scrips of half-a-dozen highly advertised companies reveals upward movement to the tune of a 400-600 per cent in the last one month when the ads started appearing.

In the case of one particular stock, the price had climbed to Rs 148 from a yearly low of Rs 1.46. It has since fallen to Rs 45. But quite a handsome gain in stock price, nevertheless. What explains this seeming extravagance? Market players that this correspondent spoke to claimed that there is a cartel of brokers with promoters staying in the background that is out to snare unsuspecting small investors.

The cartel first takes a position in these stocks. Then, as the scrip price rises, pushed by a relentless advertising and media campaign, the unscrupulous operators suddenly dump the stocks and get away with their booty. The small investor is left with worthless paper.

The booming stock market has only made the task of these operators easier. The recent rally in the Sensex has tempted even the fence-sitting investors to try their luck in the market. Lack of awareness about investing, coupled with the hesitation to invest high-value stocks attracts the small investors to such companies. Of course, the brokers who are part of the cartel are always around to pass on "hot tips" and highlight how both, the company in question and its scrip, have been doing exceedingly well.

The media is not complaining though. When asked, the advertising manager of a leading media house said that there was no way a newspaper could check such advertisements.

"They rarely ask for a discount. They are willing to pay us the rack rate and that too in advance. We cannot be held responsible for the advertisements appearing in our paper as they break no rules. It is for the investors to exercise caution," the marketing executive said.

So, if some broker passes a "real hot tip" to you and shows you a newspaper or television advertisement about a company you have not even heard of, don't fall for it !

The Healthscare Sector

The healthcare sector has been growing at a frenetic pace in the past few years. The windfall began ever since the developed world discovered that it could get quality service for less than half the price.

• In the last five years, the number of patients visiting India for medical treatment has risen from 10,000 to about 100,000. According to Apollo group chairman Pratap Reddy, one out of every ten patients treated at his hospitals is from abroad.
• With an annual growth rate of 30 percent, India is already inching closer to Singapore, an established medicare hub that attracts 150,000 medical tourists a year.
• Hospitals in India boast of conducting the latest surgeries at a very low cost.

Comparative Price List
Surgery	US ($)	India ($)
Bone Marrow Transplant	400,000	30,000
Liver Transplant	500,000	40,000
Open Heart Surgery (CABG)	50,000	4,400
Neuro surgery	$29,000	8000
Knee Surgery	16,000	4,500

Source:IBEF Research

The healthcare industry employs over four million people, which makes it one of the largest service sectors in the economy. A joint study by the Confederation of Indian Industry and McKinsey shows:

• At the current pace of growth, healthcare tourism alone can rake in over $2 billion as additional revenue by 2012.
• Healthcare spending in the country will double over the next 10 years. Private healthcare will form a large chunk of this spending, rising from Rs 690 billion ($14.8 billion) to Rs 1,560 billion ($33.6 billion) in 2012. This figure could rise by an additional Rs 390 billion ($8.4 billion) if health insurance cover is available to the rich and the middle class.
• Voluntary health insurance market is estimated at Rs 4 billion ($86.3 million) currently but is growing fast. Industry estimates put the figure at Rs 130 billion ($2.8 billion) by 2005.
• With the expected increase in the pharmaceutical market, the total healthcare market could rise from Rs 1,030 billion ($22.2 billion) currently (5.2 percent of GDP) to Rs 2,320 billion ($50 billion)-Rs 3,200 billion ($69 billion) (6.2-8.5 percent of GDP) by 2012.

Government support

Last year, the finance minister announced a list of incentives for private hospitals to create and upgrade infrastructure, as well as reduce their operational costs:

• Tax sops to financial institutions lending to private groups setting up hospitals with 100 or more beds.
• Increase in the rate of depreciation from 25 percent to 40 percent for life-saving medical equipment.

Now, state governments, private hospital groups and even travel agencies have joined the fray.

• Leading travel houses like Sita and Kuoni have tied up with overseas players that focus on medical tourism.
• The Karnataka government is setting up Bangalore International Health City Corporation, which will cater to international patients for a wide variety of health care products and treatments.
• The Asian Heart Institute at Mumbai's Bandra-Kurla Complex, offers state-of-the art facilities for all types of heart complications. It has been set up in collaboration with the Cleveland Institute, US, and offers quality service at a reasonable cost.

However, it is not only the cost advantage that keeps the sector ticking. It has a high success rate and a growing credibility.

• Indian specialists have performed over 500,000 major surgeries and over a million other surgical procedures including cardio-thoracic, neurological and cancer surgeries, with success rates at par with international standards.
• The success rate in the 43,000 cardiac surgeries till 2002 was 98.5 percent.
• India's success in 110 bone marrow transplants is 80 percent.
• The success rate in 6,000 renal transplants is 95 percent.

Ratings

• India's independent credit rating agency CRISIL has assigned a grade A rating to super specialty hospitals like Escorts and multi specialty hospitals like Apollo.
• NHS of the UK has indicated that India is a favoured destination for surgeries.
• The British Standards Institute has now accredited the Delhi-based Escorts Hospital.
• Apollo Group - India's largest private hospital chain and Escorts Hospital are now seeking certification from the US-based Joint Commission on Accreditation of Healthcare Organisations.

Deadpresident's Valuepicks

Buy Karur Vysya Bank. This stock moves in spurts, this has been in consolidation phase for quite some time and has good potential to move up as it trades cheaply at p/e of 5 where as peers trade at much richer valuations. Buy at current levels of 435.


Disclosure: I own few shares of Karur Vysya Bank

StockSelect - Pidilite Industries

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Are we near the end?

Emerging markets will get a jolt in the next six months, which will affect India.

As the markets, both globally and more specifically in India, keep rising, the inevitable doubts begin to resurface. Are we at a stage of euphoria creeping in? Aren’t the markets too hot, isn’t the flow of capital towards India unsustainable?

All these doubts inevitably come to the fore with markets having effectively doubled over the past 24 months, and given India’s historical propensity to disappoint just when every thing looks extremely rosy.

The genesis behind my thinking is driven by an article I read recently written by Jonathan Wilmot of CSFB. Mr Wilmot is the global strategist of CSFB and tracks a global risk appetite indicator on a weekly basis. This indicator tracks the level of complacency among investors and their ability and desire to take risk driven by interest rates and liquidity.

The article was fascinating as the risk appetite indicator tracked by Mr Wilmot moved into the euphoria zone just last week(indicating high complacency among global investors).

Prior to last week, this was only the 7th time since 1981 that the indicator had moved into this rarefied zone.

Interestingly, if one looks at the performance of global financial markets post a move into the euphoria zone, in six out of the past seven episodes global markets posted a new high for the cycle within three months, and in the other case the return was basically flattish.

But 6-12 months after the risk appetite indicator entered the euphoria zone, global equity markets suffered a major correction or bear market four times out of seven, traded sideways twice and rallied strongly only once.

The record for emerging markets is even worse. After the risk appetite indicator enters the euphoria zone, within six months of this in every single case emerging market equity returns have been negative.

Returns have varied from -1 per cent to -27 per cent with the average being -10 per cent. The greater vulnerability of emerging markets reflects their greater susceptibility to global monetary tightening and their inherently greater cyclicality and volatility.

In that sense the countdown has begun. If past financial market history is any guide, then we should brace ourselves for a significant emerging markets equity correction within six months.

Tie in the above with all the emerging signs of euphoria one can see in India. Over the past six months, more than 20 India dedicated hedge funds have been set up, more than the number that existed prior to these six months.

India dedicated country funds have raised over $1.5 billion from Japan (of all places) and all the NYSE listed India country funds have now gone to a premium. If one looks at the list of new 52-week highs(of stock prices), I would wager that most professional money managers have heard of less than 50 per cent of the companies on that list.

There have been three India investor conferences arranged by leading international brokerages over the past 45 days, each attracting more than 125 investors, of which atleast 30-40 per cent are first-time visitors to the country.

Imagine that, prior to 2003 if an India conference was able to attract even 40-50 investors it would be considered a great success.

Today over the past 45 days at least 450 investors have visited the country! Another indicatoris when one gets off an international flight, the line for Indian passport holders is dramatically shorter than the foreigners’ line, again very different from even 12-18 months ago.

Invariably hotel rooms are unavailable and the whole place has the look and feel of 1994(prior episode of India phobia).

The whole country seems to want to raise money, meet any company today, and besides its vision for 2010, everyone talks of fundraising and that too in multiples of hundred million dollars. Atleast 10 one billion dollar plus ADRs are lined up for launch over the coming 12 months.

There was a time when if the entire country could raise a billion dollars in international equity markets, it would be considered a great achievement. Today, single issues of a billion dollars attract little notice.

Even in terms of FII fund inflows, last year India attracted almost as much foreign flows as Korea and atleast 60 per cent of the number for Taiwan, despite both of these markets having much higher weightings than India in all emerging market indices (atleast 3-4 times).

For most international brokerages, India is now the second-highest profit pool in Asia and growing much more rapidly.

India has clearly been discovered, and is now enjoying its day in the sun, but are things going over the top?

If one forgets the anecdotal type of signs indicated above, one would argue that there is still a long way to go. The market has not entered a zone of irrational valuation, trading at 13-14 times 03/06 earnings.

Also, if one looks at other countries like Taiwan or Thailand which have gone through a similar period of investor discovery in the past, these moves tend to be multi-year and secular, with the market eventually going up 3-4 times from its pre move bottom.

Also, there is absolutely no sign of any weakening of the fundamentals from any quarter. Volume growth seems universally strong across all sectors and types of companies.

In addition, retail investor interest, while strong, is still nowhere near the levels of 1994 or 2000. We are yet to see hordes of people lining up in the hot sun to get an application form for the latest mutual fund launch, or IPOs of dubious quality trading at grey market premiums of 100-200 per cent.

If I were to hazard a guess I think we are very likely to get a significant correction within the next six months, but it will be driven by external factors. Emerging markets will get a jolt sometime in the next six months, and given the quantum and type of money present in India, this will invariably hit our markets as well.

Given the outperformance of global emerging markets over the past three years and the record low EMBI+(Emerging markets bond index) spread over treasuries, there is clearly a lot of money in the emerging markets world which does not need to be here.

At the first signs of trouble, it will bolt. This will invariably have an impact on India as well.

As for India-specific issues, politics comes top of mind. The situation in Bihar is currently being ignored but has clearly weakened the ruling coalition.

Thus, while the long-term picture still looks very good for all the reasons stated many times before, investors should be aware that a significant correction is probably lurking out there waiting for total complacency to set in.

Business Standard

Deadpresident's Valuepicks

You can buy into Container Corporation of India - currently trading at 870. Its almost a monopoly and operates on very high profit margins. For more visit the website

Exide Industries - EquityMaster StockSelect

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Emami - Equitymaster report

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