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Thursday, March 09, 2006

India Telecommunications - The Growth Continues

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Morgan Stanley Reports

Nestle - Marico - ITC - IDFC

Cipla - Morgan Stanley - Overweight

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Sharekhan - Shriram Transport

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Motilal Oswal Reports


Dr Reddy's Labs

The Indian Multinational

Not a Videocon advertisement

IT's big game: Indian breed much ahead of MNCs

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Kajaria Ceramics - MidcapSelect

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Tax Saving : Capital guarantee ULIPs: Get the real picture

Source: Equitymaster

Unit linked insurance plans (ULIPs) have been zooming up on the popularity charts with insurance seekers. ULIPs are life insurance plans whose returns are linked to the stock markets. So ULIP returns fluctuate with the ups and downs in the stock market. Given this scenario, there exists a category of ULIPs, which guarantees to give back (at least) the premiums to policyholders, irrespective of the market swings. These plans are called capital guarantee plans.

Simply put, capital guarantee life insurance plans are unit linked plans that ‘promise’ to return at least the premium paid by the individual on maturity. This is in case the policy’s maturity value is below the total premium paid by the individual till maturity. This ‘promise’ is made keeping the market vagaries in perspective.

However, one thing individuals need to understand is that the capital guarantee is not on the actual annual premium paid by the individual. It is on that portion of the premium, which is net of expenses (like mortality, sales and marketing, administration) plus declared bonuses (if any). Capital guarantee ULIPs have an expense structure that is similar to regular ULIPs with a comparable equity allocation.

An illustration will help in understanding how capital guarantee ULIPs work.

Capital Guaranteed? Think again
Age (Yrs) Sum Assured (Rs) Annual
Premium (Rs)
Guaranteed Maturity
Amount (Rs)
30 400,000 12,000 30 287,000

Let us take a 30-Yr individual who has opted for a ULIP with a capital guarantee for a 30-year tenure for a sum assured of Rs 400,000. The premium for the same is Rs 12,000. Over a period of 30 years, the total premium paid works out to Rs 360,000. From this figure, expenses (as applicable) are deducted and the net premium (plus bonuses as applicable), are payable to the individual on maturity. That is of course, assuming that the actual maturity value is lower than the ‘guaranteed amount’. In our example, the guaranteed amount works out to approximately Rs 287,000.

Capital guarantee ULIPs invest a portion of their money in equities. Though the exact percentage varies across companies, it is usually in the 25%-30% range. The remaining 70%-75% is invested in debt instruments like bonds and gsecs. The higher debt portion helps in capital preservation, while the equity component provides a kicker to the overall returns of the ULIP portfolio. Investors who are aware of the asset allocation in a mutual fund monthly income plan (MIP), will relate to the asset allocation in a ULIP capital guarantee.

However, ‘capital guarantee’ should not be ‘the’ reason for buying such products. The capital guarantee simply acts as a salvage act in a worst-case scenario. Several studies have established that equities are better equipped to deliver above average returns over the long term as compared to fixed income instruments like bonds and gsecs.

Another factor which should be given due weightage is the fact that generally capital guarantee ULIPs can invest upto 30% of their monies in equities. Individuals should be aware of this fact in addition to the expenses structure before zeroing in on this product. It should make for a good fit in the risk averse individual’s financial and insurance portfolio considering his overall investments in equities.

The Future of Technology

Businessweek - See here

Oracle and I-Flex - Not too close

The software giant may own a big stake of the Indian company. But i-flex Chairman Rajesh Hukku says his company has seen "zero interference" from the larger outfit -- and it's working well that way

Businessweek story

IPO - Shivalik Global

Sharp pricing

The processor plans to increase focus on garment exports, but offers shares at PE comparable to the best garment exporters

Shivalik Global (SGL) is engaged in dyeing, printing and processing of woven fabrics; knitting, dyeing and processing of knitted fabrics and yarn; manufacturing of readymade knitted garments, mainly T-shirts; and manufacturing of sewing threads at Faridabad, Haryana.

SGL plans to raise readymade garment manufacturing capacity by 36 lakh pieces, from 24 lakh pieces to 60 lakh pieces, with a capex of Rs 16.60 crore; dyeing, printing and processing capacity of woven fabrics by 90 lakh meters, from 360 lakh meters to 450 lakh meters, with a capex of Rs 5 crore; fabric knitting capacity by 1,000 million tonnes, from 1,150 million tonnes to 2,150 million tones, with a capex of Rs 2.76 crore; dyeing and processing of knitted fabrics by 1,500 million tones, from 4,000 million tonnes to 5,500 million tones, with a capex of Rs 6.24 crore; dyeing and processing of yarn by 500 million tones, from 1,400 million tones to 1,900 million tones, with a capex of Rs 2.50 crore.

Besides, the IPO will address additional working capital requirement of Rs 10 crore, and contingencies and issue expenses of Rs 2.90 crore and Rs 4 crore, respectively. Also proposed is repayment of term loans of Rs 10 crore. The entire project is to be completed by August 2007.

Around 80% of SGL’s turnover comes from dyeing, printing and processing of knitted and woven fabrics. The balance is generated through the garment business. However, when the new garmenting facilities get fully operational in August 2007, the share of the garment business is expected to go up to 45%. The company exports its entire garment production to internationally renowned buyers.


*After the completion of the project, SGL will become more evenly integrated and value addition will improve. Contribution from garment exports is targeted to reach 45%, from the current 18%.


  • The new garment capacities will be fully commissioned in August 2007. However, trade restrictions on China will also get lifted from 2008, thereby giving rise to severe competition that can impact margin.
  • Shyam Tex International (almost half the size of SZL) is a promoter (J P Agarwal) group company engaged in the same line of business as SGL. Therefore, conflict of interest is not ruled out. The promoter also has a number of companies engaged in variety of business. This could lead to diversion of attention.


SGL made a net profit of Rs 6.09 crore on sales of Rs 176.66 crore in FY 2005. EPS on post- IPO equity works out to Rs 2.5. Even current nine months’ annualised EPS on post-IPO equity works out to Rs 3. The shares are being offered at a price of Rs 60 at a PE of 24 times FY 2005 EPS and 20 times annualised FY 2006 EPS.

Only large and the best garment exporters can enjoy these kind of PEs. Near comparable company, Alok Industries, which is more than six times SGL’s size, is trading at a TTM PE of around 11 times. Even the industry composite TTM P/E is around 13, making the offer highly expensive

IPO - Solar Explosives

Holds good growth potential

Increased investments in coal and metal mining, roads and other infrastructure projects will boost demand for explosives

Solar Explosives (SEL) and its three 100% subsidiaries are among the largest manufacturers and suppliers of explosives and explosives accessories in India covering an entire range of products such as bulk and cartridge explosives, detonators, detonating cords, pentaerythritol tetranitrate (PETN) and cast boosters. It has six manufacturing facilities located in and around Nagpur.

The promoters of SEL, Satyanarayan Nandlal Nuwal and his associates, were one of the largest dealers of industrial explosives before setting up this company.

SEL has a licensed capacity of 1,75,000 tonnes of explosives, which include bulk and cartridge explosives, 140 million detonators, 20 million meters of detonating cord, 250 tonnes of PETN and 60 tonnes of cast boosters. The current capacity utilisation is around 24%, which is supposed to be the best in the industry as there are huge costs involved in the transportation of explosives. Transportation can be carried out easily within 35-40-km radius of the manufacturing unit.

SEL’s major clientele includes Coal India and its subsidiaries, Sail, Hindustan Zinc, and Singareni Collieries. It also supplies to national hydroelectric projects, the cement, infrastructure and construction sectors, and border road organisations. Its products are exported to Indonesia, Malaysia, Sri Lanka, Oman, Jordan, Syria, Lebanon, Ethiopia, Kenya, Tanzania and Nigeria.

SEL intends to set up support and transfer plants for bulk explosives, mostly in the eastern parts of the country to cater to coal and iron ore mines in that region. The project (costing Rs 76.38 crore) is to be set up in two phases. Phase I will include the setting up of bulk support plants at Asansol, Talchar and Ramgarh and transfer plants at Dhanbad, Bokaro, Jharsuguda and Manindragarh.

Phase I will also involve setting up manufacturing units of bulk and cartridge explosives and a magazine (storage) facility in Nigeria.

Phase II envisages setting up of Bulk Support Plants at Ramagundam, and Transfer plants at Manuguru, Barbil, North Karanpura and Rajmahal.

The expansion will allow SEL to capture the immense growth opportunities in the mining sector in the eastern parts of India, where most of the coal mines and big steel players are located.

The industrial explosives industry earns around 60% of its revenue in the last two quarters of the financial year as, in the first half, mining operations halt in the rainy season and there are more chances of machinery breakdown in the summer. Around 65% of the market is controlled by five players and the rest by other small players.


  • SEL enjoys around 13% market share in the industrial explosives market, which is second only to the largest players, Indian Explosives, with a market share of around 18%.
  • Backward integration is one of the key strengths of SEL. The company has in-house manufacturing facility for emulsifiers, sodium nitrate, and calcium nitrate, which acts as a protection against raw material price fluctuations.
  • SEL is a one-stop shop for industrial explosives as it not only provides the entire range of products but also has the capability to develop special tailor-made products as per customer’s requirement.
  • Increased investments in coal and metal mining, roads and other infrastructure projects will boost demand for explosives, going forward.


  • SEL is dependent on the growth of other industries, specially mining and infrastructure. Any slowdown in these industries due to bureaucracy and delay in decision-making on the part of government can hamper the demand for the products of the company.


*SEL has set a price band of Rs. 170 to Rs. 190, which translates into a PE of 13x to 14x annualised EPS (Rs 13.2) for the half-year ended (consolidated) September 2005 on post-issue equity. However, the second half is generally better, so actual EPS can be higher than the annualised one and, accordingly, P/E can become more reasonable.

Keltech Energies and Premier Explosives are the two prominent listed companies operating in a business similar to that of SEL. These companies are presently trading at TTM PE multiples of 7.6 and 21.2, respectively, on their annualised EPS. However, the operating profit margin and business model of SEL is better.

IPO - Shivalik Global - AVOID

Download Indiainfoline Analysis

Capita Telefolio - DIC India

BUY: DIC India at Rs 241
BSE Code : 500089
Market Lot: 1

DIC India is a 65.7% subsidiary of DIC Japan, which is the world's largest
manufacturer of printing inks and organic pigments. The company's products
mainly cater to publishing and FMCG sectors, both of which are witnessing
strong growth rates.

Actual consolidated adjusted EPS for December 2004: Rs 13.9
Actual consolidated adjusted EPS for December 2005: Rs 16.9
Projected consolidated adjusted EPS for December 2006: Rs 20.1

Sharekhan Investor's Eye

Cluster: Cannonball
Recommendation: Buy
Price target: Rs670
Current market price: Rs585

Price target revised to Rs670
Cipla is a bulk drug supplier to Roxane. We believe that Cipla has an alliance with Roxane for supplying the bulk drug for Flonase. This is expected to be a significant source of earnings for Cipla. We expect earnings of close to Rs32.6 crore in FY2007 (4.8% upside) and Rs14.7 crore in FY2008 (2% upside) from the sale of Flonase to accrue to Cipla.

Tata Motors
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,004
Current market price: Rs880

Upgrading estimates
Tata Motors quotes at 16.8x its FY2007E and 13.9x its FY2008E on our consolidated earnings per share (EPS) estimates of Rs55.2 and Rs67.1 respectively. Based on the improving momentum in the sales volumes and the earnings growth outlook we maintain our BUY recommendation on the stock and are revising our target price to Rs1,004. With a bounce back in the heavy truck cycle and the strong duty cut benefit coming for diesel Indica, car volumes of the company would get a strong push ahead. This coupled with the strong earnings growth in the company's subsidiaries like Tata Daewoo, Tata Technologies, Telcon, etc and a strong possibility of value unlocking in HV Axles and HV Transmissions through an IPO would drive up the valuations.