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Saturday, May 20, 2006

Gangotri Textiles

Gangotri Textiles (GTL) is one of the leading players in open-ended (OE) spinning in the organised segment. Its 5,904 rotors produce yarn with a count ranging from 2s and 20s for consumption in the home textiles segment. The 17,376 spindles produce fine count yarn, ranging from 14s to 40s, for hosiery manufacturers. The 1,000 pieces of men's trousers per day that are manufactured are sold under the brand name, Tibre. It has installed 2 X 1.65-MW wind mills.

The Rs 351-crore project of GTL covers expansion-cum-integration of facilities in spinning, weaving, processing, garmenting and installation of windmills. The company plans to add 19,200 spindles to produce 2/30's polyester-cotton yarn (to be commissioned by January 2007) and 31,200 spindles to produce 2/40's cotton yarn (to be commissioned by October 2007) at a cost of Rs 73.76 and Rs 77.46 crore, respectively. The company proposes to set up a weaving and processing capacity of 51,000 meters per day at a cost of Rs 128.83 crore (to be commissioned by October 2006). Its modern facility to produce 3,000 pieces of men and women garments will cost Rs 7.83 crore (to be commissioned by October 2006). The installation of 6 X 1.65MW wind mills will requires Rs 59.12 crore.

GTL recently announced a strategic alliance with Switzerland-based Trailer for joint marketing and branding for its brand Tibre, both in Europe and Asia

Of the Rs 351-crore expansion, Rs 273 crore will be financed through debt, Rs 55 crore through public issue, and the balance through internal accruals, promoter's contribution and subsidies.


  • With the current expansion, GTL will be able to extend its presence in weaving, which was the missing link between spinning and garmenting.
  • In FY 2005, yarn contributed nearly 92% to the overall sales. However, going forward, this share will reduce to around 40% and the balance will be come from fabrics (around 30-35%) and garments (around 20-25%) enjoying much better margin.


  • GTL aims to sell 30% of its fabric capacity in the export market, which is a new segment for the company and may take time to establish.
  • The present debt-equity ratio is around 3.4, which is considered to be relatively high. Similarly, the debt-equity ratio for the expansion project is also around 3.5.
  • The past performance is not consistent. For example, the net profit declined 95% from Rs 5.32 crore in FY 2001 to Rs 0.26 crore in FY 2002. Though it increased for two consecutive years, the net profit halved to Rs 3.25 crore in FY 2005. The profit has bounced back in the first nine months ended December 2005 to Rs 6.28 crore, but sales were 21% lower.


The market price crossed the upper band in April 2006 and is currently traded around Rs 60. At the offer price band of Rs 41-Rs 46, the post-issue equity works out to be between Rs 16.37 crore and 17.10 crore. EPS for TTM ending December 2005 is around Rs 2.4. PE is between 18 to 19 times at the lower and the upper price band. The Textiles-Cotton/Blended industry average is around 14 times.

Mutilated, humiliated and crushed

The Sensex finished below the pyscological level of 11,000 as selling pressure continued for the second straight day. The sentiment was worsened by a flurry of negative news, which confounded the situation further. Marketmen also attribute today's sharp slump to margin selling.

The BSE Sensex is in correction mode as it tanked another 453 points on the back of a whopping 846 point debacle yesterday. The correction on the second consecutive day came about on acute selling pressure as skeptic investors rushed to book profit at every new high.

The Sensex ended 452.82 points (3.98%) lower, at 10,938.61. It has slipped below the 11,000 mark for the first time since 22 March 2006.

The S&P CNX Nifty slipped 142 points (4.19%) to 3,246.90.

The BSE mid-cap index lost 4.02% while the BSE small-cap index has lost 4.54%.

The Indian Government said late on Wednesday that it planned guidelines that would help distinguish between investors and stock traders, so as to tax them differently. That raised concerns regarding foreign funds being taxed at a much higher rate than those prevailing now.

A clarification from the Finance Minister P Chidambaram that no FIIs have been assessed as traders came as a whiff of fresh air for the benchmark index that was gasping for breath.

It opened with an upward gap of 159 points, surged to hit a high of 11,697.11, as buying continued. However, minutes after hitting the high, it tanked lower.

It had plunged to a low of 10,799.01 in the last session of trade as investors became obsessed with selling.

The benchmark index wavered 898 points for the day, indicating a high degree of volatility.

The market breadth was strongly bearish on BSE. The advance to decline ratio was pegged at 1:10. Only 344 shares advanced, compared to 2,138 that declined. A meagre 33 remained unchanged.

The total turnover on BSE amounted to Rs 5,036 crore, which is lower than Thursday's turnover of Rs 4,863 crore.

Among the Sensex pack, 28 were battered while only 2 received a boost.

Cipla was the biggest loser, down 9.3% to Rs 222 on 21.44 lakh shares.

Tata Steel slumped 6.50% to Rs 510 after it reported a 14% fall in net profit for the quarter ended March 2006. It dipped more than 10% yesterday. As many as 35.26 lakh shares were exchanged on the counter.

FMCG doyen, HLL plunged 5.61% to Rs 244 on 10.83 lakh shares.

IT stocks Wipro (down 5.50% to Rs 482), Satyam Computers (down 5.37% to Rs 678) and TCS (down 2% to Rs 1885) were not spared the noose either.

SBI plunged 5% to Rs 863.10 after it reported a fall in net profit for the quarter ended March 2006. State Bank of India's net profit declined 19.8% to Rs 853.29 crore from Rs 1,064.88 crore in Q4 March 2005. Net interest income declined 10% to Rs 3,554.57 crore from Rs 3,950.65 crore. Other income rose 58% to Rs 2,677.02 crore (Rs 1690.65 crore). A sharp surge in taxation provision from Rs 187.03 crore to Rs 1,084.74 crore impacted the bottom line. The counter clocked a volume of 16.14 lakh shares.

Tata Motors lost 0.91% to Rs 865 after it reported a net profit after tax of Rs 458.11 crore for the quarter ended 31 March 2006 (Rs 388.17 crore). Total income increased to Rs 6,887.17 crore (Rs 5368.47 crore). It had earlier slumped all the way to Rs 810 in intra day trade, but recovered as results were in line with market expectations.

Bajaj Auto stunned the market. It was down a good 10.5% to hit a low of 2,660 closed 0.10% lower at Rs 3,010. Bajaj Auto's Q4 March 2006 profit-after-tax (before prior period and extra-ordinary items) jumped 51.5% to Rs 333.64 crore (Rs 220.22 crore). Net sales rose 31.5% to Rs 2,165.86 crore (Rs 1647 crore). Other income declined 18.5% to Rs 103.09 crore (Rs 126.55 crore). The stock recovered as the results were better than analysts' expectaions.

Jammu & Kashmir Bank slumped 10.83% to Rs 370 on poor Q4 results. The bank's net profit declined to Rs 22.79 crore for Q4 March 2006 as compared to Rs 45.86 crore Q4 March 2005. Total income has increased from Rs 426.07 crore to Rs 499 crore.

As per BSE data, 676 stocks hit the lower limit on BSE by late trading today. This includes stocks which hit the lower limit in intra-day trade and recovered after hitting the lower circuit limit.

As many as 303 stocks from trade-to-trade segment hit the lower limit. A total of 120 stocks from B2 group hit the lower limit. A total of 88 scrips from TS group hit the lower limit.

53 scrips from the S group hit lower limit and 47 stocks from Z group hit the lower limit.

Some of the top losers among small-cap and mid-cap space were Todays' Writing Products (down 20% to Rs 54.05), Birla Power (down 18% to Rs 27), Sree Rayalseema Alkalies (down 15% to Rs 13.10), Mahindra Gesco Developers (down 15% to Rs 876), Ciba Speciality Chemicals (down 13% to Rs 316), REI Agro (down 13% to Rs 127), ITI (down 11% to Rs 50.50), Nahar Exports (down 11% to Rs 89), Chemfab Alkalies (down 11% to Rs 129), Panacea Biotech (down 10.9% to Rs 346), Gateway Distriparks (down 10% to Rs 214) and NDTV (down 10% to Rs 216). There were a number of stocks which were down between 2-9% for the day.

As per provisional data, FIIs sold shares worth a net Rs 865 crore on Thursday (18 May). There was heavy selling by FIIs recently. In five trading sessions, between 11-17 May, FIIs sold shares worth a net Rs 2,865.80 crore.

According to the latest data available with the Securities and Exchange Board of India (SEBI), FIIs have sold a gross of Rs 12,891.40 crore worth of shares over the past five days, while purchasing shares worth a gross Rs 10,025.80 crore in the same period.

There are also apprehensions in the market that the foreign investors might consider moving away their funds from emerging markets following signals of further rate hikes by the US Federal Reserve.

On 17 May 2006, FIIs were net sellers of stocks to the tune of Rs 423.50 crore. They have been on a selling drive for the past couple of days.

Domestic mutual funds have offered some solace to the falling market, and purchased stocks to the tune of a net Rs 193.30 crore.

Concerns of rising inflation dragged the US indices for the third straight session, with the Dow Jones tumbling 77 points, to close at 11,128. The Nasdaq declined 15 points on weak tech stocks and closed at 2,180.

Crude oil prices edged higher, with the Nymex light crude oil for June series rising by 78 cents to close at $ 69.45 a barrel, off its day's low of $ 67.85. In the commodity segment, the Comex gold for June delivery slumped $10.90, to settle at $ 680.90 an ounce.

The Nikkei rose 0.42% on Friday as investors, encouraged by stronger-than-expected gross domestic product (GDP) data, picked up Canon Inc., and other stocks that had recently declined. The Nikkei average gained 68.27 points, to 16,155.45. It ended with a second straight weekly loss, declining 2.69% since last Friday.

WOW India Update

It was massacre on the street; Sensex lost 10% this week on global woes of metal crash and some Tax issues. Friday saw a classic trap for the retail investors.
It was a terrible week for investors. Unprecedented fall was the order of the day. Markets fell by over 1200 points which is exactly 10% down. Previous week we saw weakness because of Government talk of price control on really investors were complacent expecting the worries to get blown over. However, the metal crash caught everyone unawares..!

The week started off negatively with a terrible Monday with an over 600 point fall on the back of Metal price crash and negative global cues. Tuesday morning was another disaster day but recovery in metals had a smart bounce from the lows and markets ended marginal positives. Global stability on Wednesdays brought in smiles on the faces and markets had a rigorous run up up over 350 points as investors are now in a habit of expecting a strong run up post such a fall. Thursday was history as Markets dropped the maximum ever down over 850 points. The excuse was a US meltdown on worries of higher interest rates..and another one was a tax circular talking about higher taxes for Short term gains. FM made a statement only later in the day that FIIs could not be classified as traders. This fuelled in buying on Friday morning and set the stage for the meltdown as was seen. We actually predicted this movement for Friday. Do read hunters pick. It was a perfect set up and A classic trap for the retail investors.

Almost all the stocks in the index were losers... but the real big losers were Tisco, Hindalco, Maruti, ACC, Bajaja Auto, Reliance Energy, Satyam, SBI, Wipro, Tata Motors. Tisco Hindalco landed up losing over 20% for the week.

Its all about Greed and Fear and one needs to overcome that. Markets are certainly oversold.. and its time to pick some long term favourites.
This week was characterised by the meltdown of all global asset classes. This can't be said for real estate but even the real estate plays in the Indian Markets came in for severe selling and profit taking bout.

The CBDT circular talks about differentiating the capital gains to be paid depending on the kind of investor. Investors are allowed 10% short term capital gains. The circular attempts to categorise those investors who have been having short term capital gains. The important thing here is to assess whether the assessee is an investor or trader. If he is categorised as a trader then all short term gains will be taxed as business income. FM has categorically said that FIIs are not Traders which is ok.. but this has really opened up a can of worms for the individual segments. This puts a lot of power with the Income tax Assessing officer.

FIIs have been sellers this week and that has brought in the fear that there is a complete selloff. MFs have been buyers and have been deploying cash. Overall there has not been as much selling as the wealth has been destroyed.. Its just the change in sentiment.. When all investors wanted to buy when Index was at 12000 .. today no one seems to be interested 10% lower.. These are markets ruled by Greed and Fear.. It was Greed then.. and its Fear now. The one who win are those who are practical and can over come this sentiment of greed and Fear

The reason for the crash was accentuated by the huge F&O positions. We are nearing the end of May F&O cycle and the fall has created a huge demand for mark to market margins. The selling has happened in cases where traders have not been able to provide the margins and this has brought in more downsides and need for more margins. Its a cascading effect. Its just that when the cascading effect is over Markets will tend to bounce back fast. The long term story remains good and nothing has changed really.

We believe that this opportunity should be used. Cement stocks have corrected significantly. Demand conditions are robust. The supply is going to remain limited for the next 18 months and things look extremely exciting. There are also the Engineering stocks.. but, really it would be important to check out valuations and have an investment horizon for over 18 months to avoid disappointment.

In Support Of Anti-Reservation


Ashish Goel - Senior Resident, AIIMS - here

More from Ashish - here

Anay Joglekar - our reader writes - here

Subex Systems - B&K

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Morgan Stanley Reports

Tata Tea, TISCO, PNB, Lupin

IPOs below their offer price

Investors, who exited on Day One of new scrip listings, have reasons tocheer as 72 per cent of initial public offers (IPOs) listed over the lastfive months are now trading at a discount to their listing price (first dayclosing). The current crash has pulled down 31 of the 43 scrips listedduring January-May below their listing price, while 12 scrips are quotedbelow their offer price.
 The aggregate market value of the 43 IPOs declined by 11 per cent (Rs 2,114crore) to Rs 16,996 crore today. These companies, which collectively raisedRs 13,599 crore through the issues, clocked a total value of Rs 16,996crore on the day of listing.
 GVK Power and Infrastructures (11 per cent), Jagaran Prakashan (16 percent), R Systems International (35 per cent) and Sree Sakthi Papers (44 percent)

Sharekhan Investor's Eye

Aban Loyd Chiles Offshore  
Cluster: Emerging Star
Recommendation: Buy 
Price target: Rs1,760
Current market price: Rs1,170

Lining up another acquisition
Aban Loyd Chiles Offshore has commenced negotiations to acquire a 51.97% stake in PT Apexindo Pratama Duta Tbk (Apexindo), an Indonesian oil drilling company. The investment would be strategic in nature and the negotiations will be carried out as per the advice of the company's financial advisor. The terms and conditions of the acquisition, including the price, the rights and obligations of the parties, and the procedures for completion of the acquisition would also be discussed during the negotiations. 

Deepak Fertilisers & Petrochemicals Corporation 

Cluster: Ugly Duckling
Recommendation: Buy 
Price target: Rs126
Current market price: Rs92

A year of aberration 

Result highlights 

  • The Q4FY2006 and FY2006 results of Deepak Fertilisers and Petrochemicals Corporation Ltd (DFPCL) are below our expectations. That is because the company's performance was affected due to a lower availability of gas and floods in FY2006.
  • The net sales for Q4FY2006 grew by 17.7% year on year (yoy) to Rs170.2 crore. The revenue growth was driven by an 82% rise in the sales of the traded goods yoy. The sales of the manufactured goods declined marginally by 4.3% due to the lower availability of gas in Q4FY2006 as compared with Q4FY2005.
  • The Q4FY2006 operating profit declined by 48.5% yoy on account of two reasons. One, the contribution margins on the manufactured products declined. Two, the other expenditure almost doubled on account of extraordinary expenses. Adjusted for the extraordinary expenses, the decline in the operating profit was 27%.
  • The fall in the adjusted net profit was lower at 20.0% in Q4FY2006 due to a higher other income and the insurance claims for the damage caused to its machinery as well as the loss of profit on account of the floods in Q2FY2006.
  • For FY2006, the consolidated net sales were up by 15.6% to Rs609 crore owing to the higher sales of the traded goods. The adjusted operating profit was lower by 12.5% to Rs117 crore against our estimate of Rs137 crore.
  • The adjusted consolidated net profit was lower by 3.1% at Rs76.9 crore against our expectation of Rs72.9 crore. The fall in the net profit was lower primarily because of the higher other income.
  • At the current market price of Rs92, the stock trades at 5.4x its FY2007E earnings per share (EPS). 
  • We shall revise our estimates for DFPCL after achieving more clarity from the management on the company's new businesses. We believe that the profitability of the new businesses would be lower than our expectation, as the commercial commencement of both the isopropyl alcohol (IPA) plant and the Ishanya shopping mall would be delayed by a quarter. However, looking at the stock's cheap valuations and its dividend yield of 3.25%, we maintain our Buy recommendation on DFPCL.


Information Technology  

Beaten but not out
There are no untouchables in a falling market. The free-fall on the bourses has left its mark even on the best of the stocks and the front-line information technology (IT) companies were no exceptions. However, the extent of damage varied considerably. The extent of decline has been more profound in case of Satyam Computers and HCL Technologies with a respective loss of 26.4% and 28.7% from their 52-week high level. This is much higher than the 13.5% correction witnessed in the Sensex. On the other hand, industry leaders like Infosys Technologies and Tata Consultancy Services (TCS) have managed to comfortably outperform the overall market.

TVS Motor - Equitymaster - Stockselect

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Deccan Aviation -May not fly high

First low cost airline of the country coming up with an IPO. Has 16% market share

Air Deccan is the first low cost airlines in India. The Airline was the first one to revolutionise air travel in the country whereby even a common man could fly. The Air line now is coming with an IPO to set up a training centre, hangar facility and basic medium level of maintenance checks at Chennai and debt repayment. Setting up of training centre and maintenance facilities should help the airline in reducing its costs to some extent.

Air Deccan currently has about 16% of the airline market with Jet being the market leader with a little over 36% market share. Air Deccan's connectivity however is one of the best in the industry as the flies to 53 destinations across the country. The only other airline which flies to more destinations is Indian Airlines. IA flies to 58 destinations but that is using a fleet of 70 aircrafts. Air Deccan flies to 53 destinations with just 29 aircrafts. Air Deccan has ordered for a few more aircrafts which will take its total to 35. Out of these 11 are Airbuses A 320 and the balance are ATRs (both 48 and 72 seaters).

Three sources of revenues. Advertising revenue growing in a big way; Management is a strength.

Air Deccan is a low cost airline which offers no frills service unlike the Full service carriers (FSCs) like Jet Airways, IA or Kingfisher. A no frills service would mean that the Airline would not provide any in-flight service like meals or drinks. A passenger could nevertheless have it by paying for it. This also becomes a source of revenue for the Airlines.

Air Deccan basically gets revenue from 3 sources like Ticketing, Onboard service and Advertising, with ticketing obviously contributing the most. The Onboard service though contributes a very small percentage of revenues. The Airlines virtually uses every space for advertising. Air Deccan get revenues from advertising both outside and inside the aircraft. Air Deccan even gets its baggage tags and seats covers sponsored which reduces its costs to that extent. The Airline hence leaves no stones unturned when it comes to generating revenue. This is a good strategy considering it being a low cost carrier.

The management is extremely good and one can give them extra points for that. The COO of the company was previously with Rian air, one the most successful LCC in Europe after South West airlines in North America.

LCCs have low maintenance cost, having ATRs helps Air Deccan reduce that even further. Rising ATF price is a risk though

A Low cost carrier (LCC) manages to be one by adopting various strategies to reduce its costs. Fuel cost is something which none of the airlines can reduce and this happens to be about 35-40% of the expenses. If the government allows hedging ATF then it could reduce the cost to a certain extent. The LCCs reduce their costs by utilising the aircrafts for more hours in a day than an FSC. Air Deccan utilises its aircraft for about 12-13 hours a day compared to Jet which utilises its aircrafts for about 9 hours.

Most LCCs use an Airbus A320 or A319, which have only an Economy class and hence more seats than any other aircraft. Typically an A 320 aircraft would have about 180 seats while the same aircraft with a FSC would have about 120-140 seats including Business class and First class. Although realisations are higher in Business class and First class the seats are seldom full, hence reducing the yields.

LCCs use Internet as a medium to sell tickets rather than using selling agents and hence save on commission expenses which are as high as 12-14% of sales. Air Deccan has a marketing tie up with HPCL to sell tickets at all its petrol stations. The Airport charges vary slightly depending on the aircraft but it is significantly lower for an ATR. An ATR being a small aircraft, typically with a seating capacity of about 48, has lower landing, maintenance and handling charges. The Indian government is promoting connectivity of small cities with the metros and hence has some exemptions for the ATRs. The government has waived landing charges for ATRs and the handling charges too are just 4% compared to 7% for Airbuses. This is a big saving.

Hangar and maintenance charges are again huge costs for the airlines. Air Deccan can reduce this to a certain extent as it is setting up its own Hangar and maintenance facility using the money raised from the IPO. Air Deccan has another cost advantage compared to the other airlines by having lower average manpower per aircraft for maintenance. Air Deccan has about 70 people per aircraft for maintenance which is lowest in the industry. SpiceJet, another LCC, is closest at 160 per aircraft followed by Jet at 180 and Kingfisher at 200 and IA at 400 per aircraft.

Industry not matured yet and valuations seem to be on the higher side. Suggest avoiding for the time being

Air Deccan in the eight months of FY06 has done revenues of Rs 478 crores with a net loss of Rs 123.86 crores. The Airline currently operates with an overall load factor of nearly 73% while the breakeven load factor being 75%. The overall load factor being lower the breakeven load factors indicates that not all routes have broken even. In the meantime it also indicates that certain routes are operational at load factors much above 75%. Typically a route takes about 24 months to breakeven. Hence from here on, if the airline does not introduce new routes; we can safely assume all existing routes to breakeven in next 24 months. Higher ATF price is a big risk for the airline and that makes us a bit cautious.

The airline despite all the positives seems to be over valued. We compare the Airline industry on the basis of their market cap to sales ratio and while doing that we find Air Deccan highly priced. Considering the higher end of the price band the Airlnes market cap would be about Rs 1700 crores which is nearly 3 times the Ex FY06 revenues of Rs 600 crores. Meanwhile at the lower end of the price band the ratio would be about 2.5 times the sales. This again is expensive compared to the market leader Jet Airways which trades at a ratio of about 1.5:1.

The idea of a LCC is still a concept and it isn't a success yet and there is increasing competition not only from the other airlines but also the train AC 2 tier and AC 3 Tier. And that is because of a simple fact that the masses still prefer travelling by train. The biggest competitor for the LCCs is the AC two tier and three tier. However this could also be seen as an opportunity for the airlines who would move to airlines from trains. Although LCCs were a hit in North America and Europe, it is also likely to be a success. However for Deccan we would be positive given that what it has done so far on the business but the valuations is what deters us. The risk reward does not seem to be in favour. The current infrastructure and the hurdles of increased competition justifies a lower valuation. We are cautious on this and would suggest avoiding the IPO. This stock at a lower level would be another story. For now we are not buyers here.