Friday, September 30, 2005
Motilal Oswal - Dr. Reddy's Lab
Motilal Oswal recommends Buy On Dr.Reddy's Lab.@ 812 With Target Price 1065
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Thursday, September 29, 2005
Sharekhan Report
Emco
Cluster: Apple Green
Recommendation: Buy
Price target: Rs450
Current market price: Rs421
Healthy order book
At the current market price (CMP) of Rs421 Emco trades at 0.9x EV/order book. Going forward, we expect this trend to continue mainly on account of the huge investment lined up in upgrading the existing power infrastructure as well as in setting up new power facilities. We will review our recommendation and estimates at the time of Q2FY2006 results.
Thermax
Cluster: Emerging Star
Recommendation: Buy
Price target: Under review
Current market price: Rs797
Strong order book
We expect Thermax's earnings to grow at a compounded annual growth rate (CAGR) of 36.8% over FY2005-07, driven by a 20.5% CAGR in the revenues and a modest margin recovery. At the current market price the stock quotes at 1.0x EV/order book. We will review our recommendation and estimates upon receipt of Q2FY2006 results.
Sintex Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Under review
Current market price: Rs690
Raising funds
Sintex Industries, a dominant player in the textiles and plastic businesses, has raised USD50 million (approximately Rs220 crore) through a zero coupon unsecured and un-rated 5-year foreign currency convertible bond (FCCB) issue, with a yield to maturity set at 6.85%..
Wednesday, September 28, 2005
Paradyne Infotech - Capitalmarkets
Paradyne Infotech (Paradyne), promoted by technocrat Anand Sarnaaik, caters to the banking, financial services and insurance (BFSI) segment in the domestic market. Its wholly owned US-based subsidiary, Sundune Corporation, was set up to market and support implementation of its products in the US market. Paradyne holds 99.70% of the equity of Intercon Management Services, a management consultant for industrial, commercial and adminisatrative activities.
The objects of the issue include spreading Paradyne's operation in other parts of India from Mumbai, Bangalore, Chennai and Delhi, expanding the software development center in Mumbai, upgrading the core banking product FinWorQs and human resource product HrWorQ at a cost of Rs 5.19 crore, setting up a data and support centre, upgrading the research & development lab and quality certification to international standards, and investing in subsidiary Sundune Corporation in the US. To enhance the functioning of the marketing and support base, the company intends to make an investment of about Rs 3.75 crore.
Strengths
- Paradyne's performance in the last two years has been good, with sales rising from Rs 35.40 crore in FY 2003 to Rs 68.56 crore in FY 2005 and net profit jumping from Rs 30 lakh to Rs 5.11 crore.
- The company has a balanced business mix in terms of client-wise distribution of revenues, with no significant dependence on a single client.
- The current aggregate order booking (as on 1 September 2005) is around Rs. 12 crore, comprising following major customers: 3D PLM Software (Geometric Software), Amdocs, Department of Income Tax, J M Morgan Stanley, Acer India, BMC Software, Zensar Technologies, Mandvi Bank, Mercator Lines, KPIT Cummins, and Rochem Separations.
Weakness:
- More than 70% of Paradyne's revenue comes from system integration, which is a highly competitive and low profit margin area. The rest of the revenue is derived from software services and managed services.
- The company's business is focused on the BFSI vertical in India. This makes future success highly dependent on IT spending of banks, insurance companies and financial institutions and continuance of demand for its products and services from these industries in India. Therefore, any structural changes in the BFSI vertical may materially affect business. Further, BFSI is a highly crowded space with a large number of players, both small and large, providing software services and products. This translates into a high competitive risk for the company. In addition, the major market is India, which is a geographical risk.
- The quarterly revenue may fluctuate significantly from period to period in future as system integration and products constitute a major revenue stream. Further, the product business is highly exposed to technology risk.
Valuation
Consolidated FY 2005 EPS on post-issue equity of Rs 10.80 crore works out to Rs 4.7. The offer price of Rs 42 discounts this 8.9 times. If the company maintains its current growth tempo and succeeds in its new products, one can expect gains.
Tuesday, September 27, 2005
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Balmer Lawrie & Company
Cluster: Cannonball
Recommendation: Buy
Price target: Rs 481
Current market price: Rs 410
Bright prospects
We remain optimistic about the business outlook of Balmer Lawrie and there is no deviation from our earlier stance on the stock. Our investment arguments about the company remain intact and we have factored in all the possible downside in our estimates. The growth rate that we have assumed for each of the company's businesses is in line with the outlook shared by the company's management in the AGM. We reiterate our Buy recommendation on the stock with a price target of Rs481.
Monday, September 26, 2005
Signs of things to come ?
FIIs SELL finally ..
FIIs turned net sellers in equities worth Rs 325.50 crore($74.60 million) on September 23. They bought equity worth Rs 1018.60 crore and sold equity worth Rs 1344.20 crore.
AurionPro IPO Information
The 30 lakh book built IPO will have a price band of Rs 81-90 per share
aurionPro Solutions will launch its Initial Public Offering (IPO) of30,00,000 equity shares of Rs 10 each through the 100% book buildingprocess with a price band of Rs 81 to Rs 90 per share. The issue opens onTuesday, 27 September 2005 and will close on Tuesday 4 October 2005.
Of the total issue, the company has reserved 250,000 equity shares of Rs 10each for its employees. The book running lead managers (BRLMs) to the issueare Centrum Capital and Karvy Investor Services.
The proceeds of the issue will be deployed to expand currentinfrastructure, increase footprint in overseas markets and growinorganically through acquisition of products and customers. aurionProSolutions is an eight year old specialized software solutions companycatering to the Banking & Financial Services and Insurance (BFSI) sector.
aurionPro's strategy revolves around creating products that are beneficialto banks in enhancing their fee-based income and complementary to theircore banking IT investments. The company's current product range is in thedomain of cash management, treasury and risk management. The company hasbeen able to compile a marquee client list of names such as HDFC Bank, DBSBank, UTI Bank, Centurion Bank, BankServ Inc, Qatar Insurance, and ABN Amroamong other leading BFSI players.
aurionPro has embarked on a journey to attain leadership position in itschosen domain over the next three years by setting specific targets withrespect to size, focus and markets. The company plans to continue enhancingtheir products as per the emerging nature of their domain. The company hasalso continued with its historical offering of web-based IT solutions inthe non-BFSI sectors. This has also helped the company maintain bestpractices in product implementation, offshore delivery and technologyadoption.
The company proposes to list its equity shares on the Bombay StockExchange (BSE) and the National Stock Exchange (NSE). aurionPro Solutionsis an ISO 9001:2000 certified company headquartered in Mumbai, India with asubsidiary each in Singapore and USA.
Sunday, September 25, 2005
Hindu Businessline Recommendations
BUY >> Cadilla Healthcare, Mahavir Spinning,
>> Bank of Baroda, HDFC
SELL >> ICICI Bank
HOLD >> GTC Industries, EID Parry
Saturday, September 24, 2005
Friday, September 23, 2005
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Thursday, September 22, 2005
You still have a chance
Sept 21 2005 - Sharekhan
After nearly fifteen consecutive sessions of gains (barring a marginal dip of 4 points on September 15, 2005) the BSE Sensex saw a major fall in the morning only to recover subsequently. The day started with a downward slide that went all the way to a negative 230 points in the Sensex. However the index managed to close with meagre losses of 13 points. The fall in front-line stocks was accompanied by a sharper fall in mid-cap and small-cap stocks.
A couple of stocks in our coverage were also amongst the ones that saw a sharp correction. We believe that the correction presents one more buying opportunity
Sharekhan - Reliance Industries
Reliance Industries
GRMs to surge post-Rita
If further shut-downs happen and the supply of petroleum products remains under pressure, the gross refining margins (GRMs) shall shoot up. For the week ended September 2, 2005, after the crisis caused by Hurricane Katrina, the Singapore refining margins had moved up by nearly $4.5 to $10.95 over the week previous to that. A similar situation is likely to develop after the looming catastrophe.
Reliance Industries Ltd (RIL), which runs a complex refinery that has the ability to process heavy/sour crude, will be the prime beneficiary of the spurt in the refining margins. RIL further commands a premium over the regional refining margins in Asia.
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Alps Industries - Analysis
After failing to market its natural dyes, venturing into producing value-added fiber dyed yarns
Alps Industries's business model is focused on production and marketing of home furnishing and fashion accessories produced by its textile division. The company manufactures fabrics and made-ups and a range of fashion accessory products like shawls, stoles, mufflers, wraps, and scarves. Besides, the company has a range of interior decorative products such as window coverings (venetian and vertical blinds, and drapery rods), awnings, garden umbrellas and wooden floorings. In the domestic market, the products are marketed under the brand, Le Pashmina and Vista. It has its presence in the overseas markets,too. In FY 2005, exports contributed around 27% to the sales.
Alps Industries's exports to reputed stores like Park B. Smith; J.C. Penney; House of Fraser, UK; Marks & Spencer, UK; Pablo Panicker, EU; Springs, US; Habitat, UK and France; Sanders, Germany; and L'eclere, France. The company signed a license agreement in July 2005 with Walt Disney Company (India) Private Limited to use certain Disney characters on the specified product groups to be manufactured by it.
Alps Industries proposes to set up a 50-tonne per day plant for cotton yarn spinning. The unit will also have fiber dyeing facility. The dyed fiber will be used to produce value-added yarn. The Rs 139.51-crore project will be financed through this public issue and term loans from various banks, aggregating Rs 87 crore.
Strengths
The new plant will also have a dyeing facility will use natural dyes, a process on which Alps Industries has done considerable research over the last 14 years. Thus, by using this in-house developed technique, the company will manufacture higher value-added fiber dyed yarns with uniform colour consistency. The yarn will retain its premium eco-friendly appeal.
The project is nearing completion and will commence commercial production by October 2005.
Due to the housing boom, the domestic market for Alps Industries's existing products is growing at a healthy rate.
Weakness
Alps Industries had come out with an IPO in April 1995, offering shares at around Rs 54 per share. At that time, it had envisaged selling natural dyes in powder form. But it did not find a market. Now, it plans to produce dyed yarn using natural dyes.
A large portion of the production from the new project will have to be marketed outside. This will add to the already large number of product lines that Alps Industries markets.
Alps Industries's financial health improved substantially only in FY 2005, after three years of sluggish-to-adverse performance.
Valuation
EPS for trailing 12 months ended June 2005, on post- issue equity, works out to Rs 14.5. Currently, Alps Industries's shares trade around Rs 155. However, the scrip had crossed the offer price of Rs 120 only early June 2005. The shares are offered at a P/E of 8 times, which is reasonable considering that the project is set to be commissioned shortly amid a positive business environment on the domestic and export fronts.
Suzlon Energy - IPO Analysis
Suzlon Energy is India's leading manufacturer of wind turbine generators (WTG) since seven years with a market share of around 44.5% of the total installed capacity. The company, its 100% subsidiaries and associate companies provide services like the wind resource mapping, identification of suitable sites and technical planning of wind power projects and operation and maintenance (O&M) services.
Suzlon Energy's IPO comprises 29,340,000 equity shares, consisting 26,762,680 fresh shares and 2,577,320 existing shares owned by Citicorp International Finance Corporation Inc. Citicorp and Chrys Capital, were allotted 25,77320 and 20,49,180 equity shares at Rs 194 per share in 2004. On an ex-bonus basis, the price works out to Rs 48.5 and Rs 61 per share, respectively.
The main objective of the public issue is to set up and expand Suzlon Energy's manufacturing capacity in India. Nearly Rs 195 crore has been earmarked for the new facilities and expansion of existing facilities. The company is looking at locations such as Daman, Bhuj, Hyderabad and Dhule in India for setting up new manufacturing plants. It wants a complete backward integration over the next five years so as to increase profitability and reduce dependence on outside suppliers. Currently, more than 50% of components are imported in euro and nearly 30% procured domestically.
Suzlon Energy will spend nearly Rs 353 crore to set up a plant to manufacture rotor blades and towering facilities in the US, marketing offices in Denmark, R&D facilities in Germany through its 100% subsidiaries. The company has completed one international project in the US. It is aiming at international energy-growth markets like Australia, Europe, North America, China, Denmark, Newzealand are aimed at.
Further, Suzlon Energy plans to redeem its preference shares of Rs 100 crore and to establish new corporate offices at Pune and in New Delhi.
Strengths
The Electricity Act, 2003, specifies that a minimum percentage of power generation should come from non-conventional energy sources. For example, the Karnataka government has mandated 5% from non-conventional sources, and the Madhya Pradesh government 0.5% from wind power by 2007. This reflects the government's intention of reducing the dependence on fossil fuels and cut down carbon-dioxide emission. Moreover, perennial power shortages assure a sustained growth in demand for power generation.
According to the Ministry for Non-conventional Energy Sources, the gross wind power potential in India stands at 45000 MW. With 875-MW installations in 2004, India recorded the highest year-on-year growth rates in installed capacity and contributed 10.7% of the total new MW additions globally in 2004 and 6.3% in 2005. Suzlon Energy has completed the installations of 507 MW in FY 2005. Till June 2006, the company's order book position stands at 312 MW in the domestic market and 80 MW in the international market.
The WTG sales are higher in the second and fourth quarters of every year and sluggish in other quarters. However, with its focus on international growth markets such as Australia, Europe, North America and China, where the government is encouraging the development of renewable energy sources, Suzlon Energy can leverage its business model and, in the long run, can reduce its seasonality.
The global WTG installations have grown at a CAGR of 26.9% since the four years ended 2004. The International Energy Agency has estimated that wind power's share in electricity generation will grow from 0.2% in 2002 to 3% in 2030. It will be the second largest renewable source of electricity after hydroelectricity. The US is targeting 2,200 MW of electricity to be generated through wind power.
Suzlon Energy enjoys various tax benefits like income-tax deductions under section 80-IB, exemption from excise duty including countervailing duty (CVD) for WTG and concessional rate of customs duty for major components used in the manufacture of WTG as well as raw materials for rotor blade. The effective income-tax rate is hovering around 8-11% as the company is taxed only under the minimum alternate tax (MAT) regime, which will continue till 2008. Also, the user industries generating power through windmills can avail benefits like accelerated depreciation (80%) and carbon credits.
Weaknesses
The company is fully dependent on promoter Tulsi Tanti. In fact the board of directors have only two Tanti brothers as executive directors. Three other board members are non-executive independent directors.
Wind power projects require high upfront capital investment per kWh of energy. So demand will be sensitive to interest rates.
Suzlon Energy is dependent on associate companies (fully controlled by promoters) in many respects, reducing the transparency in operations. As a group, it offers integrated solutions. But, at the same time, takes up lot of risks and makes large investments, which a power equipment producer will not make.
The viability of the wind power is dependent on the wind patterns, which are not constant and can vary significantly. Excessive as well as very low winds can be detrimental. As Suzlon Energy gives performance warranty for one to three years, substantial changes in wind patterns could lead to large claims. Moreover, excessive wind can destroy/damage the installations or work-in-progress, causing financial losses.
Changes in government policies can affect Suzlon Energy. Tax incentives and supportive policies of the state electricity boards are essential for continued growth. The Central and state governments are, however, known for frequent changes in policies. Any adverse changes could derail the growth plans of the company. Due to reduction in depreciation rate from 100% to 80% and the consequent uncertainty regarding the future government policy, the company's FY 03 sales had halved and profits fell 80%.
Suzlon Energy is expanding overseas, where major players have established markets. The advantage of new markets and new orders may take time, while marketing, personnel and other initial costs could jump. Hence, this may put pressure on the margin in the short run. Risks involved in overseas business are also higher.
Valuation
The FY 2005 EPS on post-issue paid-up share capital comes to Rs 13.4. At the lower price band of Rs 425 and the upper price band of Rs 510, the P/E comes to 31.7 and 38, respectively. Suzlon Energy compares its P/E with the likes of Bhel, ABB, and Siemens. However, these companies not only have mature business models but also strong promoters, and are capable of growing at healthy rates without any special government support. Suzlon's continued high growth rates will be dependant on sustained favourable government policies and protracted high P/E multiples will be dependant on prolonged market fancy for 'renewable energy' and 'carbon credits'.
Wednesday, September 21, 2005
Tuesday, September 20, 2005
Investors watch out, warns BSE
NEW DELHI: The market always reacts to news, but India's capital market strangely seems to be ignoring a series of warnings against the rise in the country's key share index.
"Investors, Watch Out," screamed an advertisement issued in newspapers by the Bombay Stock Exchange, which asked the public to follow a list of "dos and don'ts" before putting their money in the market.
"There are attendant risks associated with it (market)," the advertisement said.
"Be cautious about stocks, which show a sudden spurt in price or trading activity, especially low priced stocks... don't deal with unregistered brokers...don't deal based on rumours generally called tips," it read.
But even such blatant warnings do not seem to cower down the market, whose benchmark 30-share index rose by 63.88 points to close at a new high 8,444.84 today.
The current spurt in the market contradicts the way it reacted to some unfriendly statements by members of the ruling coalition and shed 565 points on May 17, 2004 - a day that has come to be known as "Black Monday."
Today, the market seems to have learnt to ignore remarks that have negative connotations.
The index has been rising despite the CPI, a key supporter of the UPA government, demanding a probe into the bull-run, which it suspects to be a result of manipulation by notorious syndicates.
Even the Finance Minister, Mr P Chidambaram, had advised investors to take "informed decisions" after the Sensex touched the 8,000 mark on September 8, this month.
The BSE also warned investors against 'blindly' following media reports on corporate developments, saying these could be misleading. "Don't get carried away by the onslaught of advertisements about the financial performance of companies in print and elec tronic media".
It also cautioned investors against blindly imitating the investment decisions of others.
Further under the 'don'ts' list, it warned investors against being misled by companies showing approvals from Government agencies, "as the approvals could be for certain other purposes and not for the securities you are buying."
"Don't leave the custody of your demat transaction slip book in the hands of any intermediary."
Under the dos' list, the BSE asked investors to always deal with market intermediaries registered with SEBI/ Exchanges, give clear and unambiguous instructions to broker/agent, insist on contract notes from the broker and in case of doubt about the trans actions, verify the genuineness of the same on the Exchange Web site.
It also wanted investors to check the credentials of the companies, its management, fundamentals and recent announcements made by them before placing an order.
"The sources of information are the Web sites of the Exchanges and companies, databases of data vendor, business magazines etc," it said.
The BSE also asked investors to adopt trading/investment strategies commensurate with their risk bearing capacity as "all investments carry risk, the degree of which varies according to the investment strategy adopted."
Finally, it asked them to be "informed that there are no guaranteed returns on investment in stock markets." - PTI
Saturday, September 17, 2005
Suzlon IPO
Suzlon Energy is leveraging on the current euphoria for players involved in the power capex cycle. The issue size is between Rs 1,250 crore and Rs1,500 crore, based on a price band of Rs 425-Rs 510. Based on Suzlon's consolidated earnings per share for FY05, the issue is priced at avaluation of 30 to 36 times. Of course, other power equipment players too enjoy rich valuations. For instance, ABB gets a discounting of about 47times trailing earnings till March 2005 and in case of Siemens India it is41 times.
It's important to note here that when private equity investors Citicorp and ChrysCapital had picked up a stake in the company last year (in April and August respectively), the acquisition was at a valuation of about 4-4.5times 12-month earnings till March 2004. In share price terms, Citicorp and ChrysCapital's acquisition price worked out to Rs 24 on an average, andbased on the lower end of the price band of Rs 425, Suzlon's valuation has gone up about 1600 per cent in the past 12-18 months. Earnings, in fact,have risen at a much lower rate of 150 per cent in the year ended March2005.
Merchant bankers to the issue point out that Citicorp and ChrysCapitalinvested in Suzlon while the company was still in its investment phase and were partly responsible for the growth that has occurred since last fiscal.Moreover, although they invested only last year, they had committed capital even earlier. On the other hand, two other foreign investors bought Suzlonshares at an average Rs 385.6 a share this year. While that gives some comfort, the fact that the company's valuations have increased sharply inthe past 12 to 18 months is a cause for concern. Assuming that the highgrowth in the past two years continues, the stock would look reasonablypriced on forward PE multiple basis.
Suzlon is one of the largest players in the domestic wind turbinegenerators segment, with a 42 per cent market share. A key growth impetusfor Suzlon has been rising cost of inputs such as coal in conventionalpower generating equipment and the resulting need for user industries toevaluate alternative energy sources. Riding piggyback on this, thecompany's revenues grew 126 per cent and profit before tax and exceptional items grew 227 per cent to Rs 397.3 crore in FY05. Profit growth hasexceeded income growth thanks to efficiencies realised in the southern partof the country from the setting up of a factory in Pondicherry. Operatingprofit margin grew 723 basis points to 24.14 per cent in the previousfinancial year.
An energy consultant BTM Consult ApS has estimated that installed windpower capacity in the country is set to grow at a compound annual growthrate of 23 per cent from CY05 levels to 8300 mw by CY09. The company plansto use part of the resources (about 50-60 per cent) raised via its floatfor expanding its manufacturing facilities, capitalisation of subsidiaries,redemption of preference shares allotted to private equity investors andsetting up a corporate learning centre.
A key concern, going forward, remains the government policy on fiscal andtax benefits to promote alternate energy sources. For instance, in FY03,the company's net sales had halved on a y-o-y basis to Rs 269.7 crore, oneof the main reasons being the uncertainty relating to announcements of new depreciation rates. The company's profit before tax and exceptional itemshad fallen 81.7 per cent to Rs 22.7 crore. Senior company management highlighted that alternative energy sources are now cost-effective thanksto advances in technology and the importance of fiscal and tax benefits has been declining.
CapitalMarkets
Thursday, September 15, 2005
Monday, September 12, 2005
Sunday, September 11, 2005
Hindu Businessline Recommendations
BUY >> Timken India, Emco, Grasim, Kajaria Ceramics
HOLD >> Glenmark, Jindal Saw, Tanfac Industries
HOLD >> Glenmark, Jindal Saw, Tanfac Industries
Saturday, September 10, 2005
Narmada Gelatines
Up for grabs
Two strong contenders to acquire Narmada Gelatines are Bharti Healthcare and Sterling Biotech. If the deal with Bharti Healthcare takes place then Narmada's production advantage will be difficult to evaluate due to part captive usage. Although Bharti Healthcare has expertise in gelatine capsules manufacture, yet the gelatine manufacturing business will be a whole new ball game for it. Compared to this Sterling Biotech has over a decade's experience in the gelatine manufacturing industry and has been able to maintain a high operating margin of 47% against that of 10% for Narmada Gelatines
Thursday, September 08, 2005
Irrational Exuberance
It was Alan Greenspan who is reputed to have used these words in 1995 when the Dow was around 7500. Later the phrase passed into everyday lexicon when Robert Shiller produced his seminal book on the ongoing subsequent irrationality. And now Mr Chidambaram may have set the cat among the pigeons by saying something (in hushed tones) to the same effect and at the same Sensex value.
Coincidence? Sure. We see unfolding before us almost the same story here in India making you realise how "history does not repeat itself but it sure rhymes".
Mr Greenspan of course wasn't quite right. The Irrational Exuberance did not stop at 7500. US Markets rose nearly 60per cent before falling off the biggest asset bubble in the history of mankind.
Five years and a number of other bubbles later, India seems to be headed the same way. With bubbles blowing all over the world in housing, in commodities and even in precious metals, we are seeing unprecedented international financial flows.
There is talk in the media about the Japanese rebalancing their Asia portfolio, pulling out from China and pumping unbelievable cash into a much smaller market like India.
The logic being that the Japanese have zero cost of capital and find Indian P-Es low enough to invest. After all, what are their options? To buy T-Bills denominated in a heavily depreciating dollar, or to invest in the heavily over valued Euro?
It makes far more sense to invest in the world's only domestic-led growth story, probably the only part of the world which is not part of the US-China current account deficit imbroglio. When this structural imbalance unravels, any large investor like the Japanese banks will be left with massive portfolio losses. India, therefore, is a safe haven - this is the logic of the Japanese flows.
But look at it from India's point of view. You have an excess of cash that is flooding in, funding bubbles across all sectors. This cash will seep into other markets funding bubbles in real estate (e.g. Gurgaon and even Delhi are already running at more than 7 years income and a rental yield of 2per cent).
So what does poor Mr Chidambaram do? His small voice of sanity is hopelessly drowned in the chorus of protest from bullish investors who cannot see this party spoilt. He is like the arrack-shop owner who knows that you need a bouncer to stop a person after his 12th peg. The bullish consensus and the need for liquidity-fuelled overvaluation is now so strong that there are simply too many vested interests involved. The mutual fund industry, the FIIs, promoters of companies who need to make placements, and of course the public-at-large. There is almost no one who does not have a vested interest in bullishness.
But what is the objective of the regulator? He is supposed to aid price discovery and is supposed to cool any excessive distortions. Is anybody in India other than poor Mr Chidambaram concerned about the long-term damage this excess liquidity will do first to the stock market, and then after the asset bubble collapse, to the economy at large?
Let us go back to Mr Greenspan. After the 2000 asset price collapse, he did say that it was only possible for a regulator "to see a bubble after the fact (ie, after it has burst)". There have been few comments by central bankers as hilarious as this one. With this Pontius Pilate-like comment, Mr Greenspan washed his hands of any responsibility for what happened subsequently to the American economy. History will not judge him lightly.
No Indian politician can routinely be courageous (or he will not be a politician for long). But Mr Chidambaram is at the crossroads. Is he mustering up the courage to come down hard on almost every participant in the market and soak up liquidity through a sharp hike in interest rates or other stratagems? Or does he let the party continue? This may be just the start of a bubble that can take on unimaginable proportions.
When going into the details, company by company, I can just point to a few examples of the frenzy evident in the markets:
A) Interest rates, oil prices and auto stocks went up on the same day.
B) Companies which have never delivered an ROCE above 11 per cent are today quoted at 25 times forward earnings.
C) Temporary spikes in earnings and cash flows are discounted into forward earnings as if they are forever. In fact a growth rate is imbued into them. This is similar to the IT boom of 2000, when valuations were based on extrapolating current growth rates to infinity.
India is not a mature economy, Indians are not mature economic players and our country simply does not have the institutional infrastructure (or even the international standing) to soften an asset-price collapse in the manner that Mr Greenspan has done. There will be no bonds we can issue which will be picked up by willing foreigners who have a vested interest in the stability of our currency. The consequences would be closer to East Asia (crisis) than to America. If this trend is not arrested, I see a 1992-like situation with major bankruptcy spreading out into the retail segment followed by a fracturing of the ongoing housing bubble.
The top of every bull market is marked by scams, small and big. You can see them sprouting all over the place, simply too numerous to recount. They can come from mis-stated earnings, over-hyped news, multiple announcements of old-hat news, co-ordinated trading between institutions and operators….all of these simply impossible to "prove" except by anecdotal evidence. Recently, we saw bears getting squeezed out of a number of fundamentally weak stocks, that should be dropping in value.
This is a rare situation when the regulator needs to take an intelligent, broader view of markets. Just like the RBI intervenes in forex markets, or like in 1996, when Mr Manmohan Singh squeezed out excess liquidity to slow down a capex boom; we need a move to slow down this liquidity-driven rally.
If left unchecked, the market would move into territory where sentiment becomes a self-fulfilling prophecy. "Stock prices go up because stocks prices are going up". Such uni-directional sentiment cannot be healthy for the markets, or later the economy.
If the same phenomenon had been observed on the opposite side, ie, excessive and rampant bearishness, the government would have looked for scapegoats. Rather like it went after some brokers, merely because they had short-sold stock at the end of the IT boom. Somehow, it is virtuous to defend "bullishness", but it is okay to let bears be killed. This logic is flawed. Contrarians are the anti-bodies who keep the system healthy…killing them cannot be good for the markets.
The regulator should engineer a slowdown in hot FII inflows, or make them "sticky" (maybe with an "exit tax"). This will keep hot money out, and ensure relatively longer-term investments.
(Sanjeev Pandiya is a contrarian who invests, teaches at XIM and works in the auto ancilliary sector. He can be contacted at spandiya@hotmail.com)
Wednesday, September 07, 2005
How to make a killing in IPOs - CapitalMarket
| Investing in a primary offer is often touted to be less risky than buyingshares in the secondary markets. That is because invariably companies comeout with public offers to fund their growth plans. Since the cost ofraising loans is higher for younger companies, they opt for equity. From an investor's viewpoint, the idea is really to invest in a companywhen it is still at the nascent stage and holds promise for growth. Andprimary offers are also meant to leave some money on the table as a rewardfor investors who keep faith in the stock even before the company hasproved its worth. But most investors today subscribe to initial public offers (IPO) not tohold the stocks for a life-time, or even for a couple of years or months.Instead, they look to make a quick buck by selling their shares as soon asthe stock hits the bourses. As more and more individual and institutionalinvestors try to exit the counter on the very first day of listing, thestock goes through wild price swings. The volatility at the HT Mediacounter which made its debut on the bourses on Thursday last week is aclear indication of this trend. The stock which was issued at a price of Rs530, opened at Rs 685 and surged to an intra-day high of Rs 731 beforeclosing at Rs 557. A total of 199 lakh shares were traded, significantlymore than the 76.9 lakh shares issued in the public issue. How does one maximise gains from an IPO if the idea is to make some quickbucks? Here are a few things you should keep track of. Investors would do well to remember that stocks which are overpriced tobegin with may attract short sellers on listing. Conventional measures suchas the price-earnings multiple - something one looks at while decidingwhether or not to buy a share - should be an indication of whether thestock price is sustainable. But then, it is not just the valuation. Like any other commodity, stockprices are also influenced by the forces of demand and supply which may inthe short run deviate from the intrinsic worth of the stock. If there is ahuge demand for stocks - you can gauge the demand from the oversubscriptionnumbers - investors who got lesser allocations than desired may go on abuying spree in the secondary markets the moment the stock lists. Earlier,subscription numbers were exaggerated because of unscrupulous bids put inby institutional bidders. However, with the Securities and Exchange Boardof India (Sebi) recently introducing upfront margin payment while placingbids, the subscription figures should be a decent indicator of genuinedemand. The third point is the level of leveraged positions. This is a significantfactor that influences the stock price movement on Day 1. In other words,leveraged positions indicate proportion of investors who subscribed to theissue with borrowed money. Since the interest meter keeps running, leveraged investors usually look toexit the stock and take home whatever they can in double quick time. Thereis no way of finding out what portion of an issue is funded throughborrowed capital. All you need to do is to follow news papers and talk toyour stock broker. This is how it works. Assume that an investor avails of 100 per centborrowing to apply for share of ABC company priced at Rs 500. At aninterest rate of 12 per cent, if the investor borrows for one and a halfmonth, which is the case usually, the interest cost would be Rs 750. Now ifthe issue is oversubscribed 10 times, it would mean that every investorwould get only one-tenth of what he applied for. So instead of 100 shares,the investor is allotted only 10 shares. Dividing the interest cost of Rs750 by the number of shares allotted, the cost that has to be recovered pershare is Rs 75. The investor would make money only when the share prices goes beyond Rs575. So Rs 575 is an important threshold level beyond which leveragedinvestors would look to sell. Usually shares open high and head higher as leveraged investors try toartificially push up demand in an attempt to get "decent" exits, and thestock finds its level based on genuine buying interest. If the stockbreaches this threshold level, the fall can be precipitous. |
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Monday, September 05, 2005
Sunday, September 04, 2005
Wind Energy - Sharekhan Special
Wind energy: it is windy
Wind energy has registered a robust year-on-year growth of 44% in FY2005. The current installations in the country are approximately 3,595 megawatt (MW). The ministry of non-conventional energy has estimated that by 2012, 10% of the projected 240,000MW of the new capacity will come from renewables-mainly wind power. We are very positive on the sector since the wind power industry is on a high growth trajectory. The beneficiaries will be major suppliers of wind turbines like Suzlon, Enercon and NEPC and auxiliary service providers like Sanghvi Movers and Kemrock Industries.
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Hindu Businessline Recommendations
BUY >> Sanghvi Motors, GE Shipping, Satnam Overseas
HOLD >> Essar Steel, Aurobhindo Pharma, Clariant, Color Chem, Vanavil Dyes
Friday, September 02, 2005
Small-world effect
CONSIDER this. You receive private information that a certain stock is likely to move up. You share this information with your friend. Two days later, you find that the volumes have increased five-fold and the stock has hit the upper circuit! You wonder how the market knew about the stock. Such phenomenon can be explained by the small-world effect.
At a birthday party, you meet a person for the first time. After a couple of minutes, you find that you are related to that person, or that both of you come from the same hometown. You conclude that the world is indeed small!
In the mid-1960s, Stanley Milgram, then at the Harvard University, performed an experiment to test the small-world effect.
Suppose you give an unaddressed letter to your neighbour, asking him to give it to someone he thinks may know your friend in the US. Based on the experiments conducted by Milgram and others, chances are that your friend will receive the letter by the time it changes six hands. This came to be famously called as the six degrees of separation.
Academicians have applied these experiments to study networks. What if we want to connect various towns across the State?
The small-world effect shows that you need not build roads linking each town to every other town. Paul Erdos, the famous Hungarian mathematician, computed the minimum number required to link any network. Interestingly, the minimum number gets smaller, larger the network.
Now, we know that the investors' network is large. Your friend may have told his friend who, in turn, may have told some others. Soon, the message may have passed on to the entire market. That is, perhaps, why no market information remains private for a long time.
Hindu Business Line
Thursday, September 01, 2005
Talbros - FPO
Talbros Automotive Components
Diversifying into forgings
After establishing itself in the field of gaskets, the company is venturing into manufacture of forgings to meet group company's requirement
Talbros Automotive Components (Talbros) is a market leader in the manufacture of gaskets in India, with a market share of around 50%, and supplies to almost all leading vehicle and engine manufacturers. In the year ended March 2005, about 70% of the sales revenue came from the original equipment manufacturer (OEM) segment and about 16% from the replacement market. The remaining, about 14%, came from exports.
Long-term technical assistance agreements executed with Federal Mogul Sealing Systems (Slough) Ltd., U.K; Nippon Leakless Corporation, Japan; and Ishikawa Gaskets Company Ltd, Japan; have provided the company with contemporary technologies to cater to the demand of all kinds of gaskets to almost all OEMs in the country.
Talbros's issue is to raise funds for setting up a Rs 31.82-crore forging unit to cater to the existing demand within the group, make investment of Rs 4.80 crore in the joint venture with Nippon Leakless Corporation, Japan, for catering mainly to the Honda group of companies in India, and expansion of the current gasket manufacturing facility at the Faridabad and Pune plants at a cost of Rs 9.46 crore.
Strengths
Talbros is well positioned to benefit from the growth in the automobile industry in India. Though the growth rate of the auto industry may come down from the heady days of the last few years, it still will be decent, specially in view of the good monsoon, the continued expansion of road network and the low interest-rate regime.
Weaknesses
Talbros has increased its operating profit margin (OPM) significantly over the past year, which is unlikely to be sustained given the dynamics of the auto ancillary industry. There is a risk of lower OPM in future due to pricing pressures from OEMs, depressing the profit going forward.
Presently, Talbros derives 27% (Rs. 22.35 crore) of its revenue from sales to Honda and its associates in the domestic market. It has recently entered into a joint venture with Nippon Leakless Corporation, Japan (NLK) for catering to the Honda group's requirement, with a 40% share and NLK 60% . As per the terms of the joint venture agreement, the sales to Honda and its associates in India would be phased out of the company into the joint venture over three years. Consequently, there will be a loss of revenue to the extent of the sales transferred to the joint venture company.
Talbros is a new entrant in the forging industry and is yet to establish on quality and price parameters. Inability to meet the required quality standards and supply at competitive price will significantly affect the contribution from the project.
The forging project is being set up primarily cater to the requirement of an unlisted group company, which is engaged in the production of steerings and steering components. This gives rise to quesitons of transparency.
Valuation
The Talbros scrip currently trades around Rs 138, discounting the trailing 12-month earnings on pre-IPO equity by around 14 times, which is reasonable. However, after the current IPO, equity will almost double. The rise in OPM has been a major driver of its earnings growth, but the risk of a fall in OPM in future cannot be wished away due to the normal industry practice of OEM-led pricing pressure. The present offer is being made at a price of Rs 90 to Rs 102, which discounts the fully diluted FY 2005 EPS by 22 to 23 times. Benefits of the new projects are likely to be available mainly from FY 2007. Till then, the earnings growth will not be enough to sustain P/E of more than 20 times.
| Talbros Automotive Components :Issue Highlights | |
| Sector | Auto Ancillary |
| Sector P/E Ratio | 18.4 |
| Price | 90—102 |
| Issue Size | Rs 50 crore |
| Pre issue promoter holding | Rs 2.57 crore |
| Post issue promoter holding | Rs 2.82 crore to Rs 2.85 crore |
| Pre issue paid up capital | Rs 5.75 crore |
| Post issue paid up capital | Rs 10.65 crore to Rs 11.30 crore |
| Listing | BSE & DSE |
| Rating: 43/100 | |
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