Saturday, November 04, 2006
You know, till sometime back-actually, until a few weeks ago when BT pulled me out of retirement and asked me to look at the findings of its Best Companies to Work for in India 2006 survey-I was ruing my retirement. Not anymore. I don't think I could be an HR manager today; not if the stories coming out of the top 10 companies are anything to go by. It's a mad world out there: HR managers are scrambling for workers and spending sleepless nights, worrying over compensation, recruitment and retention. Worse, almost no employee at the top 10 companies says that she is happy with the money she's making or the career counselling she's getting at her company. It includes Infosys employees, who have been promised Rs 126 crore in bonuses this year.
- Lanco Infra Tech Ltd. (LITL) was originally incorporated on March 26, 1993 as “Lanco Constructions Limited” in Andhra Pradesh. On November 24, 2000 the company’s name was changed to present. LITL is an infrastructure development company in India with interests in power, construction and property development.
- It has experience in the execution of several power projects, transportation networks, water supply works, and commercial and residential building complexes. The power business is expected to contribute significantly to the income and profits in the near future. The property development business is still in the early stages of growth.
- It owns 11 power projects (of which five are in operation and six are under development) with current operating capacity of 149.75 MW in operation and 1,260.0 MW under development. Company’s power assets consist of gas, bio-mass, hydro, coal (indigenous and imported) and wind-based power plants. It also commenced power-trading operations in January 2006.
- Various projects executed by the company are the coffer dam for the Tehri Dam project, the Veeranam water supply project, modernisation of an 825-bed hospital for the Indian Navy in Mumbai, a cable-stayed flyover in Navi Mumbai, and construction of the Kondapalli Power Plant and the Aban Power Plant.
- In the property business, company owns or have won bids to develop approximately 19.5 mn square feet of saleable area, including a 100-acre integrated IT park and township and a 21.8-acre residential development, both located in Hyderabad.
- LITL is coming up with the issue for the purpose of the reorganization and consolidation (started in May 2006) of the power and property development businesses into one company to derive synergies from operating across various businesses in infrastructure development. Currently, it has 19 subsidiaries. Also as part of the reorganization, Lanco Kondapalli Power Private Ltd. (LKPPL) is expected to become a consolidated subsidiary of LITL by the quarter ending December 31, 2006.
- Upon completion of the issue, promoter’s holding will get reduced to 75% of the post issue equity share capital from current 93.75%.
- Investment in various subsidiaries
- Investment in Nagarjuna Power Project
- Payment for acquisition of 13.3% equity stake in Aban Power to Aban Ventures
- Payment for acquisition of 25.1% equity stake in Lanco Kondapalli to Globeleq
- LITL has strong order book of Rs. 16,118.3 mn as of September 30, 2006, of which Rs. 12,299.5 mn (76.3%) represents contracts with affiliates of the company.
- LITL’s OPM & NPM have improved substantially in FY06 at 12.2% & 6.2% from 6.9% & 1.8% in FY05 respectively.
- Company’s FY06 revenue & net profit was Rs.1471 mn & Rs.91.5 mn where as in Q1FY07 LITL’s revenue stood at Rs.1102 mn & PAT Rs.93 mn (more than full year FY06 PAT).
- LITL has entered into strategic and financial partnerships with leading international firms and have strong relationships with leading Indian financial institutions, which help in easy access of funds. In the power sector, it has worked, or are currently working, with Genting Group (Malaysia), Doosan Engineering (Korea) and General Electric Company. For construction projects, it had strategic partnerships with Hyosung – Ebara Company, Voist-Alpine Tech Wabagh (India) and Punchak Niaga Holdings (Malaysia).
- Benefits from the use of the Lanco brand. LITL is the flagship company of the Lanco Group. Due to the long-standing history of the Lanco group of companies in India (over 40 years), the Lanco brand enjoys brand recognition in India. Company uses the Lanco brand in each of its power, construction and property development businesses.
- Company is present in the construction industry which is witnessing high growth fueled by the large spends on the ongoing infrastructure development projects by the Government of India. Over Rs.60,000 crores of investment is expected to be made in key infrastructure sectors like road, ports, railway and power plants in the next five years.
- LITL’s has been witnessing inconsistent revenue since past five years starting FY02. Also, revenues have declined at a CAGR of 4.2% since FY02.
- LITL’s had witnessed decline in net profits from Rs.107mn in FY02 to Rs.32.7 mn in FY05, however FY06 witnessed a whooping 180% rise in net profit.
- LITL’s debtors/sales ratio has increased from 10% in FY05 to 26% in FY06.
- The company has been generating negative operating cash flow for last two years. Cash from operations as on 31st Mar 2005 & 2006 was –Rs.372.59 mn & -Rs.99.65 mn respectively.
- Company’s RONW & ROCE has shown declining trend since FY02, from 16.1% &16.4% to 4.2% & 5.6% in FY05 respectively. However, both ratios showed some improvement in FY06 with RONW at 9.6% & ROCE at 6.9%.
- Construction companies are highly dependent on timely supply of the requisite raw materials. Also, prices of key raw material like cement are firming up which can have an adverse effect on company’s profit margins.
- The company’s net worth as on 31st March 2006 is Rs.954.28mn and book value per share at Rs.15.5 per share (pre equity issue) and Rs.4.3 post equity issue. However in Q1FY07, company’s net worth has increased substantially to Rs.3000.92 mn. On Q1FY07 post issue book value per share is Rs.13.5.Hence, company’s post issue price to book value band is14.8-17.8 times.
- Post issue annualized EPS based on 30th June 2006 earnings is Rs.1.67 per share. The shares are being offered in the price band of Rs.200-240. At P/E range of 119-143. The average industry P/E is 39 for construction industry & 11.4 for power industry.
- Parsvnath Developers Ltd. (PDL) was incorporated in July 1990. Its core business is real estate development. PDL has operations in 41 cities of 14 states in India. As of October 15, 2006 it directly owned or held development rights for an estimated 108.64 million square feet of saleable area of land.
- Presently PDL have acquired land or development rights in connection with the development of 20 integrated townships, 27 commercial complexes including shopping malls, multiplexes, office space and a complete metro station and 25 residential projects. Also, the company intends to construct 14 hotels and 4 information technology parks. In addition, it has completed 17 projects including 9 housing projects and 8 commercial complexes. Further, PDL has obtained in principle approvals from GoI for the development of 9 SEZ projects.
- PDL’s scale of operation has expanded and total revenue has increased from Rs.27.3 crore in fiscal 2002 to Rs.6,53.77 crore in fiscal 2006, at a CAGR of 121.23%. During the same period, profit after tax has increased from Rs.3.3 crore to Rs.106.9 crore, at a CAGR of 138.67%.
- Post issue promoter’s shareholding would reduce from 100% to 81.7%, if Green shoe option is exercised, else it would be 80.33%
- To meet cost of development and construction of projects.
- General corporate purposes and expenses of issue.
- For the first quarter ending June 30, 2006 and fiscal 2006, 88.09% and 99.65% of revenue came from projects undertaken in non-Metro cities within India. PDL intends to continue to be a real estate developer with a pan-India presence. This strategy is also instrumental in providing it the early mover advantage in these cities and towns.
- PDL has a strong order book of Rs.1,428.5 crore. Around 65% of the projects are scheduled to be completed by FY2008.
- PDL derives tax benefits as per the provisions of Section-80 IC. The company can claim exemption on payment of income tax on residential projects approved before March 31, 2007.
- The company has strong financial record with income increasing @ 113% in FY2006 (Rs.653.76 crore) over FY2005 (Rs.306.85 crore). Net profits have also been increasing consistently. The same surged 62.93% in FY2006 (Rs.107 crore) over FY2005 (Rs.65.67 crore).
- The tenth five-year plan estimated a shortage of 22.4 million dwelling units. Thus, in the coming 15-20 years, 80-90 million housing units will have to be constructed with a majority catering to the low-income group. The investment required for constructing these and related infrastructure in these period would, be of the order of USD 666 billion to USD 888 billion at roughly USD 33 billion to USD 44 billion per year. This gives immense growth potential to PDL.
- PDL has negative cash flows from operations for FY2006 and first quarter ending June 30, 2006 of Rs.102.27 crore and Rs.48.28 crore respectively.
- PDL is highly dependent on timely supply of the requisite raw materials. The construction cost is range of 70% of total income. Prices of key raw material like cement are firming up which can have an adverse effect on company’s profit margins.
- The company is exposed to risk of fluctuation in market prices of land and constructed inventory. Real estate boom in the country has seen a surge in prices. Any correction in it would hamper the revenues of the company.
- Real Estate industry is highly fragmented and competitive. PDL faces competition from the unorganized sector of local constructors, who cater to the local demands at reduced costs.
- Total income increased from Rs.149.76 crore in the three month period ended June 30, 2005 to Rs.249.02 crore in the three month period ended June 30, 2006, which represents an increase of 66.27%.
- Net profit increased from Rs.16.12 crore in Q1 FY2006, to Rs.36.55 crore in the Q1 FY2007, which represents an increase of 126.75%. Net margins for the same period increased from 10.76% to 14.67% respectively.
- Post issue EPS is Rs.8.05 if the Green Shoe option is not exercised, else it would be 7.91. Post issue P/E will be in the range of 31-38 for a price band of Rs.250/- to Rs.300/-. Industry average P/E is 40.6.
- Net worth for FY2006 is Rs.201.15 crore.
Most of the heavyweights of India Inc have announced their 2QFY07 results and if there were any doubts over the continuation of the growth story, the companies have performed well enough to dispel those notions. Quite fittingly then, the benchmark indices have surged ahead on the back of strong capital inflow by investors and have continued to attain new landmarks. It would be pertinent to add that in the month of October, BSE Sensex, the Indian benchmark for the first time in history breached the 13k barrier. While it closed the month a tad below 13k, point-to-point gains for the entire month for the Sensex as well as its peer, the S&P CNX Nifty, stood at 5%. Against this backdrop, let us have a look at the top five gainers for the month on the S&P CNX Nifty, which in our view is a more correct barometer of the Indian stock market.
ABB: Despite its lofty valuations, ABB, one of India's largest engineering companies continues to remain in investors' good books as is clear from the 22% gains that the company has enjoyed over the past one month. ABB is believed to be the foremost beneficiary of the gargantuan investments that the power sector is expected to undertake in order to improve its T&D infrastructure. Combine this with the company's age-old presence in India and a solid technological support from its parent and we have a winner on our hands. Little wonder that despite the 'Infosysque' valuations accorded to the company, flocking to the stock continues unabated. However, the key word here is 'long-term'.
HPCL: While ABB, the top ranked company is currently undergoing what we call momentum investing, HPCL, the second highest gainer for the month, can surely be classified as a turnaround story albeit with a lot of caveats. There are very few sectors on the face of this planet where both on the raw material sourcing front as well as product front, rationality time and again loses out to political histrionics and when this happens, tossing a coin becomes easier than predicting the prospects of a company from that sector. The Indian oil refining and marketing sector surely falls into this category and thus while HPCL has found a mention in the list of gainers for the month of October, given the uncertainty associated with the sector, we are not sure how long it is going to stay there. Although investing in the sector is not a strict no-no for us, we would definitely require a huge margin of safety.
Infosys: Occupying third place on the list with an impressive gain of 15% is Infosys, one of India's biggest success stories in recent times. Outguessing or outsmarting the street has now become a habit for the company and 2QFY07 was no different. Just as we start thinking that with increased size comes less growth, the company in its trademark style defies it and sets the bar higher for the rest of the year. Most analysts then start crunching their numbers again and the increased projections then lead to a concomitant increase in market cap. While growth may not be a problem for the company, finding enough people to man them could consume a lot of man-hours of the top management. However, until they raise some alarm, let us bask in the success of the company and intensify our search of finding the next Infosys. The task though, is as difficult as predicting the next quarter EPS of the company.
Siemens: Not making ABB feel lonely is Siemens, the 55% Indian subsidiary of the German engineering giant that gained over 14% during the month of October. And just like ABB, Siemens has been a big beneficiary of the upturn in the capex cycle in the country and increased investments in the power sector. The company is also increasingly playing an important role as an outsourcing arm of its German parent. Also in terms of valuations, as in the case of ABB, the time horizon in mind has to be really long-term, as the current price seems to be factoring the growth prospects of the company in the medium term.
M&M: Completing the list is M&M, India's largest UV and farm equipment manufacturing company. The company has added a sizeable 14% to its market cap in the last month. The optimism towards the company has seemingly stemmed from the fact that it announced among the best 2QFY07 numbers in the auto sector. But it is now not the only one driving its growth, as its investments in growth sectors like real estate and software have also started yielding rich dividends. While the divestment of some of its stake in Mahindra Gesco and M&M Financial Services earlier helped it unlock significant value, the IPO listing of Tech Mahindra, its tech subsidiary, has also given a further fillip to its fortunes. Going forward, while inherent cyclicality might subdue the performance of its automotive division, the immense potential of its subsidiaries could well ensure that M&M's growth engine keeps on chugging.
Having had a look at the top five stocks in the past month, we continue to find current valuation levels as slightly disturbing. While we have full faith in the long-term India story, selecting a fundamentally strong value stock based on a 2 to 3 year horizon is getting increasingly difficult. It will be as crucial at this juncture to identify the potential downside, as it will be to analyse future growth prospects, which is what we have always maintained. Happy investing!
BSE Code: 532348
CMP: Rs. 580
52 Wk H/L: 887/355
Price target: Rs. 900
Subex Azure was formerly known as Subex Systems. The Group's principal activity is to provide revenue maximization solutions to communications service providers worldwide. These solutions improve the revenues and profits of the communications service providers through identification and elimination of leakages in their revenue chain. It markets in Canada, United Kingdom, China and the United States of America. On 25-Apr-2006, the Group acquired Azure Solutions.
So what’s new?
Subex with the acquisition of Azure Solutions will be a market leader in terms of revenues and installations for Fraud Management Systems (FMS) and Revenue Assurance (RAS). The merged entity will have a 25% share of its target market that is growing at a CAGR of 15%. With this acquisition, Subex will leverage on one of the most powerful brands in this space and will establish its leadership position.
Till recently Subex had a steady growth in its market and have consolidated. Post the merger; Subex has entered an exponential growth phase. The market dominance of the products and its sheer size will lead to a surge in revenues and profitability. We believe that Subex, has the potential to increase the under penetrated market for Revenue Assurance.
There were many skeptics as far as this deal is concerned, as it was highly dependant on the successful integration of Azure with Subex. However, taking the recent developments and the management views into consideration, we at SAANS believe that the integration is well under way and the concerns regarding the same can be laid to rest. It is extremely encouraging to know that the integration of Subex Systems and Azure, almost 70% complete, is well ahead of schedule, with financial consolidation completed. In Q2 FY07, 60 employees of Azure have been made redundant. This itself is an indicator of the degree of integration completed. Though financial consolidation has been effective from Q2 FY07, the company had already re-aligned its accounting policies in Q1 FY07.
Now, with this acquisition in place, Subex has access to 23 of the 40 Tier I Telco customers. Post the integration the growth opportunity lies in leveraging these clients. As the quality of the clients improves, we expect the average revenue per contract to improve significantly from US$0.95m to US$1.2m.
Subex recorded a staggering 137 per cent QoQ growth in 2QFY07 to Rs. 103 crores as compared to Rs. 43.4 crores in the quarter ending June 2006. This growth was mainly fuelled by the successful integration of Azure with Subex. The bottom line of the company almost jumped three times to Rs. 17.1 crores in 2QFY07 as compared to Rs. 3.75 crores in 1QFY07. We expect this strong growth to continue in the medium to long-term future too.
At the current market price of Rs. 558, the scrip is discounting the FY07E EPS by 27x. We expect this exponential growth to continue at least for a period of another two years. Apart from this, we also expect the management’s concentration over small acquisitions to bring in some good client base will continue to drive the stock performance. We at SAANS expect the stock to trade at Rs. 900, which will mean a discounting of 20x its FY08E EPS in another 6 – 12 months.
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Expect them to create quite a flutter like the days when Reliance Communications (then Reliance Infocomm) came in with those Rs 500 connections
Thanks Vishesh for the pointer
Way2Wealth - Bharat Electronics
Way2Wealth - SBI
Way2Wealth - Madras Cements
Way2Wealth - Elecon Engineering
Way2Wealth - AIA Engineering
Way2Wealth - Zee
Way2Wealth - Tulip IT
Price target: Rs250
Current market price: Rs171
A decent bounce back
- The Q2FY2007 consolidated net profit of Gateway Distriparks Ltd (GDL) at Rs21.7 crore is in line with our expectations.
- The consolidated revenues for the quarter stood at Rs38.16 crore, marking a growth of 6.5%. The realisation per twenty-feet equivalent unit (TEU) dropped by 11.8% year on year (yoy) due to stiff competition faced by the company at its Mumbai container freight station (CFS) and higher volume from the non-Jawaharlal Nehru Port Trust (JNPT) CFSs. However the throughput handled rose impressively by 20.7% to 60,497TEUs.
- The operating profit margin (OPM) for the quarter declined by 750 basis points to 57.4%, as the realisation dropped and transportation cost increased substantially on account of the ban on the overloading of trucks. Also Q2FY2006 was an exceptional quarter when the company had earned substantial income on account of higher ground rent due to floods and water logging at JNPT. The fall in the OPM caused the operating profit for the quarter to decline by 5.9%.
- However a three-fold increase in the other income (on account of the cash garnered through global depository receipt [GDR] deployed in bank deposits) help the earnings before interest, depreciation, tax and amortisation (EBIDTA) to jump up by 12.1% yoy to Rs27.9 crore.
- The interest expense declined by 51.6% as the company repaid a substantial part of its debt. The consolidated net profit for the quarter jumped 22.2% to Rs21.7 crore.
Cluster: Apple Green
Price target: Rs970
Current market price: Rs750
Profits hit by high raw material costs
- Tata Tea Ltd (TTL) reported a 32% year-on-year (y-o-y) jump in its consolidated net profit (adjusted for extraordinary items) for Q2FY2007. The growth was driven by a higher other income and a lower tax rate.
- The consolidated net sales grew by 25.1% year on year (yoy) to Rs974 crore backed by a healthy growth in the domestic operations and the consolidation of the accounts of the companies acquired by TTL over last year. Tetley’s sales were stagnant during the quarter under review.
- The consolidated operating profit grew by a mere 11.5% yoy to Rs71.4 crore as the operating profit margin (OPM) dipped by 220 basis points driven by higher row tea prices and stagnant operations of Tetley.
- With the outgo on interest almost doubling during the quarter, the profit before tax and extraordinary items grew by a mere 4.4%. Eight O’clock Coffee (EOC), a company recently-acquired by Tata Coffee and 51% subsidiary of TTL, was profit accretive.
- Compared with a 30% stake in Energy Brands Inc (EBI), as announced earlier, Tata Tea (GB) Ltd (TTGBL; a 98.7% subsidiary) will hold only a 25% stake in EBI. The balance 5% will be directly held by Tata Sons Ltd (TSL). After the equity infusion by TSL, TTL’s stake in TTGBL will reduce to 75%.
- The ambiguity prevailing over the recent acquisitions made by the company and the funding structure of the same will act as a drag on the stock in the short term. However, over a longer period of time a lot of value unlocking is likely to happen, as the synergies amongst the various companies recently acquired materialise and as EBI goes for its initial public offering (IPO). We maintain our Buy recommendation on the stock with a price target of Rs970.