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Saturday, November 18, 2006

ICICI - Blue Bird (India) Ltd


Blue Bird (India) Ltd was incorporated in 1999 as Anil Apporv Printers & Manufacturers Private Ltd and the name of the company was changed Blue Bird in 2005. The company is engaged in making student/ exercise books and stationery, commercial printing and publications. Mr Nitin P Sontakke and Ms Vidya N. Sontakke are the promoter-directors of the company. Mr Sontakke is a diploma holder in Printing Technology and is in this business since 1975. Ms Sontakke is a graduate in science. Promoters’ and other key employees holding will be 52.6% and18.9% of the post issue paid-up equity capital respectively.
The issue

Issue Size: 8,775,000 fresh issue of equity shares of Rs 10 each fully paid-up of which
Employee Reservation: Nil
Net Issue to the Public:8,775,000 equity shares of Rs 10 each fully paid-up
Objectives of the issue

The objective of the issue is to raise capital to set up new manufacturing facilities and expand existing facilities; replenish the internal accruals of the company used for purchase of factory land located at Pune; purchase of existing registered/ corporate office premises presently on leave and licence; capital expenditure for setting up of new regional sales offices, repayment of existing long term debts, augmentation of long term working capital and for general corporate purposes.

Key Investment Rationale

High growth opportunities
Blue Bird derived 87.9% of its revenue from student/ exercise books and stationery for FY06. Growth in demand for these products derives from growth in economy, increase in rates of education and increase in government outlay for the education sector. GDP has been showing a consistent growth rate of 6-7% in last five years and per capita spending on education has also increased from 1.2% of GDP in 1983 to 4.4% of GDP in 2003.

Size of the market for student/ exercise books and stationery is estimated at approximately Rs 8000 crore and is growing at approximately 20% as per AC Nielson ORG MARG survey report commissioned by the company. Organized players have 20% market share and unorganized players have 80% market share. Apart from growth due to increase in demand BBIL has growth opportunities from increase in market share of the organized sector. Being in organized sector the company has advantages of superior quality products, automated production processes, economies of scale and greater marketing resources.

Market leader in paper-based notebook industry
Blue Bird is the market leader with a 48% share in organized segment of the paper-based notebook industry. The total size of this segment is estimated at Rs 743 crore. Due to higher market share BBIL would be the maximum beneficiary of growth in the organized sector.

Nationwide sales and distribution network
Blue Bird has 18 regional sales and marketing offices. Out of this 9 are in Maharashtra, and the remaining 9 are in other different parts of the country. The company is strengthening its network further and has plans to open additional 10 such offices in FY07, 20 in FY08 and 10 in FY09. BBIL expects to have a total of 118 regional offices by FY11.

New plant in south India
The company is setting up a new plant in south India, which will further enhance its market share in that region and also save on transportation costs.

Key concerns

Export obligation
The company has imported some of its equipment under Export Promotion Capital Goods (EPCG) scheme and has export obligation of Rs 52.6 crore by March 18, 2014. In case the company is not able to fulfil these obligations, it will have to make payment of Rs 14.4 crore towards custom duty saved. The company also intends to import machinery under EPCG scheme for the additional manufacturing facility. This will create further export obligations and contingent liabilities for the company.


Operating income has grown by 21.2% to Rs 400.9 crore for FY06 from Rs 330.8 crore in FY05. EBITDA has grown by 51.7% to Rs 53.0 crore from Rs 34.9 crore. PBT has grown by 42.6 % to Rs 39.3 crore from Rs 27.5 crore. PAT has grown by 42.2% to Rs 25.1 crore from Rs 17.7 crore. The company made an EPS of Rs 10.0 for FY06. For FY06 the company had a RoNW of 49.8% and RoCE of 17.0%.


The issue price of Rs 90-105 discounts its FY06 earnings of Rs 7.2 per share on the diluted post-issue share capital by 12.6x - 14.6x. Navneet Publications, which is in the same line of business, is currently trading at Rs 57.5 at a P/E of 13.3x. Valuations of shares at the issue price band are reasonable and growth prospects also look good. We recommend subscription to the issue.

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Anand Rathi - Balrampur Chini Mills - Result Analysis

Balrampur Chini Mills (BCML), one of the largest integrated sugar manufacturing company in India, reported 35% increase in net sales for the quarter ended September’06 to Rs 388.22 crore mainly due to growth in sugar and co-generation segment revenue. However decrease in stock value to Rs 287.30 crore burdened the cost side and margins, which led to decline in operating margins to 15.2%. The bottom-line of the company declined by 7% on Y-o-Y basis to Rs 32.21 crore primarily due to sharp fall in PBIT margins of sugar division.

Commenting on the performance Viivek Saraogi, MD BCML said, "We have always believed that the sugar business is cyclical in nature and after three good years, going forward we foresee real challenges that will affect profits from sugar operations. While we expect realizations to remain subdued, increase in cane price will add to cost. With higher capacities and well spread out earnings drivers we are optimistic of posting a reasonable performance in the future."

During the reported quarter the average realizations were at Rs 1764 per quintal against Rs 1701 per quintal in corresponding previous quarter. The distillery operations delivered 5,616 KL in quarter ended September’06 with average realization at Rs 20.97 per litre compared to Rs 21.51 in corresponding previous quarter. During the quarter, co-generation segment presented 48 salable million units as compared 18 million units in corresponding previous quarter. The realization per unit for the quarter was Rs 2.89 per unit.

Performance for the quarter ended September’06

The sales of the company for the quarter ended September 2006, rose by 35% to Rs 388.22 crore. The growth in sales was mainly from sugar and co-generation segment while the alcohol segment witnessed fall in sales. During the quarter the average realization from sugar was Rs 1764 per quintal. The operating margins of the company declined during the quarter by 430 bps to 15.2% mainly due to sharp increase in other expenditure and staff costs. In fact, decrease in stock at the end of quarter by Rs 287.30 crore burdened the cost side and margins, which led to decline in operating margin.

As a percentage of net sales (net of stock), raw material cost declined by 90 bps to 7% while staff and other costs increased by 300 bps to 13% and 310 bps to 21.5% respectively. As a result of which the operating profit of the company could record a rise of only 5% to Rs 59.01 crore. The other income for the quarter was Rs 2.04 crore (Rs 0.36 crore in corresponding previous quarter).

The interest cost of the company for the quarter was Rs 7 crore (up 88%) and depreciation cost was Rs 14.38 crore (up 67% on Y-o-Y). The increase in interest and depreciation cost resulted in to decline in PBT by 10% to Rs 39.67 crore. The provision for tax for the quarter was Rs 7.46 crore (21% lower on Y-o-Y) and the effective tax rate for the quarter also declined to 18.8% from 21.3% in corresponding previous quarter. The decrease in provision for tax restricted the decrease in PAT only by 7% to Rs 32.21 crore.

Performance for the year ending (18 months period) September’06

The topline for the period was Rs 18.98 crore and the OPM for the period was 24.2%. With Rs 34.51 crore as interest cost and Rs 67.09 crore as depreciation cost, the profit before tax for the period stood at Rs 364.89 crore. After providing Rs 73.30 crore for tax the net profit of the company for the period stood at Rs 291.59 crore.

Segmental performance for the quarter ended September’06


The revenue from sugar (91% of total revenue) increased by 38% to Rs 381.53 crore while the PBIT from sugar segment declined by 8% to Rs 39.93 crore (constituting 78% of the total PBIT). The PBIT margin of the segment declined to 10.4% against 15.7% in corresponding previous quarter. The capital employed in sugar segment increased by 63% on Y-o-Y to Rs 1092.55 crore.

The company expects that higher sugar volumes owing to augmented capacities in the sugar division will drive revenues going forward.


Distillery operations witnessed a marginal reduction in production owing to lower off-take of distillery products. The segment revenue declined by 15% to Rs 21.50 crore and the PBIT declined by 15% to Rs 5.71 crore. The PBIT margin from this segment was 26.5% (almost same in corresponding previous quarter).

The Govt of India has recently issued directives to the oil marketing companies to blend ethanol with petrol to the extent of 5 percent. The Oil marketing companies have revised the ethanol rate to Rs 21.50 per litre from 18.75 per litre. This will enhance viability of distillery business in long run.


Revenues from the co-generation segment expanded significantly as the Company’s facilities were operated for additional number of days owing to better availability of bagasse. This was on account of higher cane crushed in the 2005-06 sugar season and intra-plant transfer of bagasse. BCML demonstrated robust performance from the co-generation business resultant to higher production of power leading to improved sales to Uttar Pradesh Power Corporation (UPPCL).

The revenue from this segment increased by 194% to Rs 18.17 crore and PBIT from this business increased significantly to Rs 6.07 crore (Rs 0.74 crore in corresponding previous quarter). The PBIT margin from this segment was 33.4%.

An anticipated increase in sugarcane crushing in the coming 2006-07 sugar season should lead to further improvement in bagasse availability which combined with augmented capacities will help the company noticeable growth from this business.

Key Developments

BCML is in the process of acquiring a 3,000 TCD sugar unit from Indo-Gulf Industries located at Maizapur in eastern Uttar Pradesh in accordance with SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

Cogeneration Power and Sugar plants at Mankapur greenfield integrated sugar complex were commissioned on 19th September and 16th November 2006 respectively and distillery would be commissioned by March 2007.

Work at the greenfield integrated sugar complexes at Kumbhi and Gularia in District Lakhimpur Kheri in Uttar Pradesh is progressing as per schedule.

The Board of Directors has recommended a final dividend of Rs 1.50 per equity share (150%) for the 18 months ended 30th September 2006.

The shares of Balrampur Chini Mills are trading at around Rs 91 (LTP on 17th November 2006) at BSE.

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Interview- YC Deveshwar, Chairman, ITC

A few weeks from now, ITC will unleash a new ad campaign focusing on how it's saving the environment - it is carbon and water positive and will have zero solid waste in two years. ITC Chairman YC Deveshwar thinks it will revolutionise the way corporates treat the environment since his products deliver better value for money anyway. He spoke to Sunil Jain about this, the company's new growth drivers, including urban retail, and their increasing share in the company's top and bottomlines. Excerpts:

Tobacco's still 70 per cent of your topline, and 83 per cent of bottomline. Most of your new initiatives, the choupal and FMCG are still loss makers, and their expansion is funded through tobacco. So when you talk of Corporate Social Responsibility - carbon and water positive, and so on - it sounds a bit hollow.

It is not my remit to shut down the tobacco business as long as the law allows it - but our presence here also means tobacco is in responsible hands, it would have been smuggled in if we were not in the business! What's important is the new drivers of ITC's sales and profits.

Our CSR effort is unrelated to tobacco, it is about creating value through business models that are sustainable, in paper, in our agri business through choupals, in other areas.

Today, except for getting solid waste contribution to zero (where we're 90 per cent there already), we're not a drag on the environment - we replenish more water and reduce more carbon emissions than we create.

We are the only Indian company to produce chlorine free paper - our water discharge is so safe, it is being used for irrigating crops. We did this in 2002 even though the tough emission norms come into effect only in December 2008.

Does CSR pay?

For society, there's no doubt. Many of our competitors use imported pulp to produce paper, we do social forestry since that's where the employment is created - we've greened 63,000 hectares with 254 million saplings, creating employment for 600,000 tribals.

The impact on water, carbon and so on is obvious. From a commercial point of view, there are huge savings in electricity and other costs - making existing paper mills environment friendly will cost Rs 50 crore (Rs 500 million) per lakh tonne capacity, which is a large sum of money but we've already done it.

By the end of the month, we'll do TV ads - they'll bring a lump to your throat - telling customers that they can save the environment while buying our products. Unlike other such programmes in the past, our products don't cost more, so I think this will get consumer power behind CSR�others will have to follow suit.

How fast are your non-tobacco businesses growing?

Our non-tobacco business comprised 38 per cent of net turnover in 2003-04, and this was up to over 51 per cent in the second quarter of this year. While our tobacco business grew 13 per cent last year, non-tobacco grew 53 per cent.

But your FMCG, minus the cigarettes, is cash negative.

We can be cash positive in no time, the day we decide to slow down investments. No one in the world has created 20 new brands, 13 of them big ones such as Aashirwad wheat flour where we're the number one after just three years with a 52 per cent market share; our market share in biscuits is today around 10 per cent. To create new brands, you have to spend like the existing number one, but without the revenue base - we've done precisely that, hence the losses. Our aim is to be the number one player in each segment.

In Q2 this year, our hotel net revenues were Rs 185 crore (Rs 1.85 billion) versus Rs 267 crore (Rs 2.67 billion) for the top competitor, but our PBDIT was Rs 73 crore (Rs 730 million) versus their Rs 84 crore (Rs 840 million) - so we're getting there (our PBDIT to sales is already higher).

For paperboards, paper and packaging, we were below the market leader in the September quarter (Rs 522 crore versus Rs 577 crore) but our PBDIT was higher (Rs 142 crore versus 134 crore).

Your board doesn't look at the losses?

It does, but you have to look at the balance and at the value created. On an annualised basis, my FMCG business will be worth around Rs 2,000 crore (Rs 20 billion) by the end of the year.

If you go to buy this business, you'll spend at least Rs 2,000 crore to do this. So, I've created value of Rs 2,000 crore by spending a few hundred crore rupees.

Five years from now, the turnover will be Rs 5,000 crore (Rs 50 billion). I'm happy to spend up to 10 per cent of my PBDIT on creating new businesses at any point in time, today this is around 5 per cent.

Has e-choupal's progress slowed?

We've changed the model from simply having e-choupals to having a Choupal Sagar for 25-30 e-choupals, this is a 100,000-150,000 square feet space with a trading area, weighing facilities, telemedicine kiosks, shops for various products, specialists to give farmers guidance on crops � we have radio feeds all the time in each area (we have 6,500 e-choupals in 38,000 villages in nine states) giving information tailored for that area only � I don't derive profits from choupals, I derive value.

We source 70 per cent of all our raw materials through e-choupals. Choupals allow me to buy 18 grades of wheat and blend them differently for each market. It is because of my e-choupal initiative in Uttar Pradesh that I got into the wheat brand, I had no way of selling all of this otherwise.

The choupals are empowering farmers and, in turn, helping create new businesses for us. We don't brag, but we've got pilot Choupal Fresh that sells fresh vegetables in Hyderabad, Pune and Chandigarh � once we study the results, we'll ramp up, by how much and when I can't say. Choupals are our supply chain, moving up the value chain is the next logical step.

Are you going to set up big retail formats like Reliance and Bharti are planning?
We don't announce our plans in advance. What I can say is that we're bringing in organised retail in rural areas through Choupal Sagars. We're in the premium-to-mid-range clothing and accessories range already in urban areas with Wills Lifestyle, John Players and so on. Then there's Choupal Fresh for urban retail.

This is our 2000th Post :)

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Stocks you can pick this week

CMP: Rs 874.80
Target Price: Rs 1,085

Brokerage house Macquarie Securities has upgraded its price target for ICICI Bank by 27% to Rs 1,085. Macquarie has cited increased visibility on its capital requirements and, partly, receipt of branch licences from the RBI as the key reasons for the upgrade. The brokerage has pegged at the value of ICICI Bank’s subsidiaries at Rs 195 per share. “We also see a slowdown in opex (operational expenses), especially given the trend of lower payments to outsourced agents for loan sales,” the Macquarie note to clients said.

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CMP:Rs 1113.60
Target Price: Rs 1,280

Merrill Lynch has initiated coverage on Tech Mahindra (TML) with a ‘buy’ rating and a price target of Rs 1,280. The brokerage has forecast a 27% CAGR between FY07 to FY09, driven by accelerating IT spend by top client BT (British Telecom) and rapid ramp up by AT&T, another key client. Merrill is of the view that the company can command a premium, compared with peers, given its domain focus, higher margin and returns.

CMP: Rs 132.30
Target Price: NA

ICICI Securities has downgraded MTNL to 'hold' and lowered earnings estimates, citing margin pressures on account of the recent tariff revision for local and national long distance calls, and also the higher-than-expected dip in realisations from its mobile service business. The brokerage has accounted for income tax refunds over FY07 to FY09 as extraordinary income. "Accordingly, we value core operations at Rs117/share, tax-related upside at Rs30/share and surplus real estate at Rs27/share," the brokerage said.

S Kumar's Nationwide
CMP: Rs 77.65
Target Price: NA

Citigroup has reaffirmed its sell rating on S Kumar's Nationwide, citing rich valuations and pressure on operating margins. "Although the growth outlook for the company appears robust, at valuations of 13x FY08E (price earning ratio of 13 times estimated FY08 earnings), a 44% premium to the sector appears excessive, and we believe most of the growth is priced in," the Citigroup note on the stock said. The brokerage is of the view that the company's margins will stagnate ahead due to higher overheads on aggressive rollouts of stores and expansions.

Punjab National Bank
CMP: Rs 534.15
Target Price: Rs 660

Brokerage house Motilal Oswal Securities has retained its 'buy' target on Punjab National Bank with a price target of Rs 660, citing its low non-performing asset ratio as one of the key factors. "With slippages likely to remain low, NPA recoveries can provide upside to our estimates," the brokerage said in a note to its clients.

Gujarat Ambuja Cement
CMP:Rs 136.05
Target Price: NA

Brokerage house First Global Research is now betting on Gujarat Ambuja Cement as it feels the stock is more attractively valued compared to ACC. "The margin gap between GACL and ACC has not changed over the last four quarters, although the valuation gap has definitely narrowed and, in fact, GACL appears to be less expensive than ACC," the brokerage said in a note to clients. According to First Global, ACC is trading at a price earning ratio of 17 times estimated FY08 earnings, while GACL is available at a forward PE of 14.