Mahindra and Mahindra Financial Services

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B.L. Kashyap and Sons

Steep price

Focusing on commercial and residential construction

B L Kashyap & Sons (BLK) constructs hospitals, hotels, industrial plants, IT/ITES campuses, malls and multiplexes. It is also undertakes turnkey residential and corporate projects including external finishing and fittings. The company provides furnishing and fittings fit outs through its subsidiary BLK Furnishers.

In the corporate sector, BLK has constructed projects for Escorts, Great Eastern, IBM, Hughes Software, Microsoft, Oberoi Hotels, Taj Hotels and other blue-chip companies. In the residential sector, the company’s projects for developers encompass multi-storeyed complexes, mainly in the northern and southern states.

Residential projects form about 32% of BLK’s order book, while corporate projects about 14%. Other projects (malls and multiplexes) comprise about 54% of the order book. The order book on 30 September 2005 stood at Rs 579 crore. Another Rs 300-crore orders were added till 31 December 2005, translating into orders worth 2.8x FY05 total sales.

Vinod, Vineet and Vikram Kashyap are the promoters of BLK. They have also promoted brokerage houses BLK Financial Services and BLK Securities.

BLK proposes to use the proceeds of the current issue for (a) investment in plant and machinery, (b) setting up a factory under its subsidiary BLK Furnishers, (c) acquiring land for storage of equipment used for construction work; and (d) financing long-term working capital.

Strengths

1. The up-trend in housing, retailing & ITES sectors augurs well.
2. As the private sector is the major clientele, default or delay in payment is not likely to be a problem.

Weaknesses

1. BLK is at the lower end of the construction value chain, thereby susceptible to competition from the unorganised sector.
2. The investment of Rs 20 crore to set up a factory for the manufacture of kitchen cabinets, doors, door frames, wooden flooring and other furnishings, through subsidiary BLK Furnishers, looks unconvincing. Furnishings form only a small part of total contract and can be outsourced in a construction project.

Valuation

With a price band of Rs 625 – 700, BLK’s PE for FY 2005 works out to be 62.7 – 70.2 times FY 2005 earnings and 26.1 – 29.3 times H1 FY 2006 annualised earning on the post-diluted equity (with greenshoe option).

TTM PE for the construction sector is 32.3. However, BLK cannot be compared with civil construction companies like Gammon, Hindustan Construction, Nagarjuna Construction, Patel Engineering, and IVRCL, which enjoying PE of 30 and above. Ansal Housing, which is a developer, is trading at a TTM PE of 16.8 times. However, BLK is not a developer but only takes up construction activities for residents and companies. Still, the price band looks steep.

BLK made a preferential allotment of 80,000 equity shares to a group company of the merchant banker at a price of Rs 400 on 14 October 2005.

Mahindra and Mahindra Financial Services

Asking too much for the rural reach

Paying five times the adjusted book value for the rural reach it commands is very costly

Mahindra & Mahindra Financial Services (MMFS) is one of India’s leading non-banking finance companies focused on the rural and semi-urban sector providing finance for utility vehicles (UVs), tractors and cars. It is a subsidiary of Mahindra & Mahindra (M&M), a leading tractor and UV manufacturer.

The objects of the issue are to achieve the benefits of listing, providing liquidity to present shareholders and augmenting Tier I capital base for further asset growth. The two crore equity-share public issue of face value Rs 10 each comprises a fresh issue and an offer for sale for one crore equity shares by M&M. The pre-issue promoter (M&M) holding, which stands at 89.8%, will come down to 67.7% post issue. The issue will constitute 23.26% of the fully diluted post-issue paid-up capital of the company.

MMFS aims to become the preferred provider of retail financing services in the rural and semi-urban areas of India by leveraging its nationwide distribution network. It seeks to position itself between the organised banking sector and local moneylenders. The company predominantly finances M&M UVs and tractors for commercial and personal purposes and plans to expand its lending for M&M vehicles.

Strengths

* Enjoys the brand equity and a ready market provided by M&M.

* MMFS has a superior nationwide network (295 branches end December 2005) compared to its peers, which it can leverage to its advantage. It will also benefit from the government’s focus on agriculture and rural development as tractors and UVs play a significant role in rural activities.

Weaknesses

*NPAs as a percentage of total assets (at 3.7% of net advances end December 20’05) are on the higher side compared to its peer group.

* MMFS’s credit rating at AA+ is not in the highest slab. Bajaj Auto Finance and Sundaram Finance enjoy higher ratings.

*Tractor & UV sales tend to be cyclical and affected by monsoon.

*MMFS faces severe competition from banks, adversely affecting its margin. The gross spread has come down continuously, from 12.9% in FY 2003 to 8.7% in the latest nine months. The return on average assets has also come down from 3.5% to 2% in this period.

Valuation

Among its peer group comprising Bajaj Auto Finance, Cholamandalam Investment & Finance and Sundaram Finance, MMFS has the best nationwide network. At the price band of Rs 170 to Rs 200, the scrip is at (18.2 to 21.4) x its FY 2005 EPS of Rs 9.3 (on post- issue equity and after deducting the preference dividend) and (3.4 to 3.9) x its FY 2005 book value(BV) of Rs 51 (on pre-issue BV end March 2005) and (4.7 to 5.5) x its FY 2005 adjusted BV of Rs 36 (on pre-issue book value end March 2005).

The valuations are high compared to the net profit growth of 26% in FY 2005 and just 15% in the latest nine months. The peer group gets a PE of 14.6 to 25.3 and P/BV of 1.4 to 3.3. However, the peer group valuations also factor in stakes of these companies in mutual fund and insurance business. MMFSL does not have any such stakes.

Besides, banks are better placed compared to NBFCs in the financing business and PSU banks are better placed in rural finance. Compared to the valuations of banks, NBFCs are getting very high valuations, which may not be sustained in the long run.

Sharekhan Investor's Eye

Aban Loyd Chiles Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs1,200
Current market price: Rs800

Price target revised to Rs1,200

At the current market price (CMP) of Rs800 the stock is discounting its FY2008 earnings by 13.4x and its earnings before interest, depreciation, tax and amortisation (EBIDTA) by 6.1x. However, as the rig day rates are expected to continue the uptrend and the favourable outlook for the re-pricing of all of Aban's rigs by FY2009, we believe FY2009 earnings are the correct earnings to value Aban. As mentioned earlier, we expect its earnings to register a CAGR of 80% with a net profit of Rs513.4 crore and an EPS of Rs135 in FY2009. Hence the stock is discounting its FY2009 earnings by only 5.9x and its cash earnings per share (CEPS) by 3.9x. Also the valuations are extremely attractive on EV/EBIDTA basis with a value of only 3.3x its FY2009 EBIDTA.

Given the favourable outlook for the re-pricing of Aban's rigs in FY2009, its strong cash generation and its continued appetite for growth through organic or inorganic routes, we see an increasing amount of earnings visibility for the company at least till FY2009. We are revising our price target to Rs1,200. We have arrived at our price target by discounting Aban's FY2009 earnings of Rs135.5 by 10x and bringing it to its present value by discounting it by the company's cost of capital of 12.8%.

Wockhardt
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs552
Current market price: Rs480

Price target revised to Rs552

Result highlights

• Wockhardt's net sales for Q4CY2005 were up 5.4% year on year (yoy) on a consolidated basis to Rs365.9 crore as against Rs347.1 crore in Q4CY2004.
• The earnings before interest, depreciation, tax and research (EBIDTR) margins were maintained at 27.7% during the quarter. A decrease in the research and development (R&D) expense by Rs4.8 crore helped in bumping the operating margins which rose by close to 200 basis points.
• A decrease in the other income contributed to the fall in the earnings before interest, depreciation, tax and amortisation (EBIDTA) that stood at Rs87.8 crore. The profit after tax stood at Rs62.9 crore, showing a rise of 9.4% yoy on an adjusted basis. The net profit margin increased by 116 basis points yoy.
• At the current market of Rs480, the stock is trading at 17.4x its CY2007 earnings estimate. We reiterate our Buy recommendation on Wockhardt with the revised price target of Rs552.

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