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Sunday, November 26, 2006

ICICIDirect - Ruchira Papers IPO

Capital Structure

Authorised Capital: 31,000,000 shares of Rs 10 each
Equity shares outstanding prior to issue: 10,030,500 of Rs 10 each
Equity shares outstanding after the issue: 38,530,500 of Rs 10 each
Promoters’ share before the issue: 43.51%
Promoters’ share post-issue: 24.30%


Ruchira Papers is one of the largest paper-manufacturing companies in the country that uses agro waste as raw material. It is also capable of using three types of feedstock to manufacture paper. It started commercial production in 1983 as an agro waste paper mill for manufacturing Kraft paper with a small capacity of 2,310 tonnes per annum. Over the years, the production capacity has been increased to 52,800 tpa. The paper industry is competitive and the company’s strategy is to enhance revenue in future through better realizations, quality control, cost reduction and yield improvement.

Objectives of the Issue

The company intends to use the issue proceeds to part finance setting up of a new 33,000 tonnes Writing & Printing paper plant along with a chemical recovery plant and 6 MW co-generation power plant.

Key Investment Rationale

Rising demand for paper
The paper sector follows the trends of the economic growth of a country. The domestic paper sector is expected to grow at a CAGR of 6-7% for the coming five years. Post its capacity expansion, the company would become one of the top few paper mills in the organized sector in India . The company is looking at reducing costs by setting up the chemical recovery plant and the power cogeneration plant. In a move to diversify its product portfolio, it has also entered the Writing and Printing paper segment.

Locational advantage

The company benefits from various tax waivers as its plant is located in Himachal Pradesh:

  • 100% excise duty exemption up to June 9, 2013

  • 100% income tax exemption for first five years, and thereafter 30% exemption for the next five years from the date of start of commercial production of the proposed project

  • Concessional rates of central sales tax at 1% as against 4% in other states

  • Capital investment subsidy @ 15% of investment in plant and machinery, subject to a ceiling of Rs 30 lakh.

Other advantages

The company has access to cheap and uninterrupted power supply. The power tariff in Himachal Pradesh is Rs 3.25 per unit as against Rs 4.00-4.50 in other states. Its cost of power after it sets up the co-generation plant would decline to Rs 1.90 per unit making it highly competitive. It also has an advantage of availability of ample raw materials and agro wastes from neighboring states of Haryana and Punjab .

Key Concerns

Intensifying competition
The writing and printing segment in the paper sector is highly competitive as far as pricing is concerned. Demand for writing and printing paper is expected to increase with a CAGR of only 4.8% - 5.6% for the coming five years as against the coated paper and specialty segment paper which enjoys a higher pricing flexibility and a CAGR of 9.2% and 7.2% respectively.

Product portfolio diversification
Though the company has diversified its product portfolio, it would be difficult to retain its competitive edge in case it shifts production to higher quality paper types that use pulp as the raw material. With a shift of product mix, the procurement of pulp and the cost of transportation would result in raw material costs rising.

No hedge against price fluctuations
The company does not have any long-standing purchase or sale agreement for its raw materials and products respectively. With almost all major paper manufacturers in the country expanding, paper prices are expected to face pressure.


The company posted a top line of Rs 62.61 crore and bottom line of Rs 4.65 crore in FY06. For Q2FY07 it clocked sales of Rs 37.75 crore and net profit of Rs 3.02 crore. Operating margins were 15.13% in FY06 and 13.56% for Q2FY07. Net margins are in the range of 7.44% in FY06 and 8% in Q2FY07. Raw material cost accounted for 60% of the top line. The capacity utilization for FY06 was 80.25% and is expected to increase to 85% for FY07. The company expects the new capacity to come on stream by June 2007.


At the price band of Rs 21 - 23, the issue is reasonably valued at 8.2x - 9x the annualized diluted FY07 EPS of Rs 2.60. The company’s profitability might dip due to interest cost of high debt. However, as utilization of the expanded capacity increases, the company is expected to reap the benefits of reduced expenditure on chemicals and power along with the tax benefits. Reduction in power cost is expected to increase operating profits by Rs 5.76 crore from FY08 this would boost up the company earnings. Investors could consider subscribing to the issue from a long-term prospective.

ICICIDirect - Sobha Developers IPO

Capital Structure

Authorised Capital: 800,000,000 equity shares of Rs 10 each
Equity shares outstanding prior to issue:
64,004,908 equity shares of Rs 10 each fully paid-up
Equity shares outstanding after the issue:
72,898,240 equity shares of Rs 10 each fully paid-up


Shobha Developers Ltd (SDL) is a leading Bangalore-based real estate development and construction company that focuses on residential and contractual projects. SDL is involved in the development of convention centres, software development blocks, multiplex theatres, hostels, guest houses, food courts, restaurants, educational and research centres and club houses in various states of India. As on June 30, 2006, its land reserves comprise of 2,592.83 acres and land arrangements amounted to 3,456.19 acres. As on September 30, 2006, its land reserves amounted to 2,747.06 acres and land arrangements to 3,373.28 acres.

The company has a unique backward integrated model with facilities and resources that include an architectural and design studio, concrete block making plant, metal and glazing factory, interiors and wood working factory, mechanical, electrical and plumbing division and project management team. The company has obtained an ISO 9001 (1994 series) and an ISO 9001 (2000 series) certification for its activities in the real estate and construction industry from Bureau Veritas Quality International.

The issue

Issue Size: 8,893,332 shares of Rs 10 each
Employee Reservation Portion:889,300 shares of Rs 10 each

Net Issue to the Public

QIBs: 4,802,450 shares
Non-Institutional Investors: 800,300 shares
Retail Investors: 2,401,282 shares

Objectives of the issue

The objectives of the issue are to fund land acquisition, finance the construction and development costs for existing and proposed residential projects, repay certain loans and fund expenditures for general corporate purposes.

Key Investment Rationale

Integrated player
In an industry where outsourcing is the norm, SDL has in-house resources to deliver projects from conceptualisation to completion. The company constructs its own projects and undertakes interior and finishing works as well as manufacture of raw materials. Thus, the company can control cost overruns and enjoy good margins with no dependence on suppliers. Buoyed by the success of its backward integration strategy, SDL now wants to diversify its portfolio by entering into specialised service segments. The company wants to build hotels, malls, integrated townships, shopping complexes, multiplexes, and undertake plot developments. Forward integration would enable the company provide products across the real estate value chain.

Extensive land reserves
The company's land reserves form an important asset for its business. Its land reserves aggregated to 2,593 acres of land, representing an aggregate of approximately 118 million sq. ft of developed or potential developed area, over 78 locations in 7 cities across India. Its land arrangements aggregating approximately 3,456 acres of land, representing an aggregate of approximately 117 million sq. ft of developed or potential developed area, over 13 locations in 3 cities across India.

Opportunities in contractual projects
The company has successfully executed contractual projects for major clients that include Infosys Technologies, MICO, Taj Group of Hotels and other companies. The execution of contractual projects is a key growth area for the company's business and it intends to pursue contractual assignments from existing clients and build its corporate client base by actively engaging in competitive bidding for the execution of projects.

Key Concerns

  • A significant portion of company's revenues from contractual projects is attributed to one client.

  • The increasing competition and applicable regulations are likely to result in land price escalation and a further shortage of developable land.

  • The company is currently availing of certain tax benefits under the provisions of the Income Tax Act, which if withdrawn, may adversely affect its financial performance and results of operations.

  • The real estate industry is competitive, highly fragmented, with low-entry barriers. This could adversely affect results.


SDL's revenues have grown at a CAGR of 75% between FY04-06 to Rs 597 crore in FY06. During the same period, operating profit and net profit have grown at a CAGR of 175% and 57%. RoNW stood at 65.21% in FY06.


At the issue price band of Rs 550-640, the stock discounts its FY06 EPS of Rs 13.96 by 45.86x (upper end) and by 39.39x (lower end). SDL is currently executing major projects across southern and western India and has huge quantities of land.

BW - If Google Shopped Until It Dropped

It was a glorious Thanksgiving for the founders of Google Inc. (GOOG ), whose shares now trade around $500, having more than quintupled in 27 months. Yes, a market value of $155 billion is some kind of cornucopia. So with tryptophan coursing through their veins and visions of search algorithms dancing in their heads, Sergey Brin and Larry Page let their post-meal thoughts drift to what most other Americans were fixating on: shopping.

If they didn't, they should have. The market has handed Google a pile of paper money that may or may not hold its value. Just ask rival Yahoo! Inc. (YHOO ). At its peak, it was worth $150 billion; now it's worth $37 billion and kicking itself for not having spent more of its stash.

Google's surging stock is practically begging to be used for acquisitions. The company trades at 37 times next year's expected earnings per share, more than twice the broader market's price-earnings ratio. Analyst Laura Martin of Soleil-Media Metrics notes that to justify its valuation, Google would have to deliver 25% annual compounded growth over the next decade. Can its killer search engine pull off that kind of streak? It's doubtful. "At some point, they'll have diminishing returns from paid search," says Martin P. Pyykkonen, senior Internet analyst at San Francisco investment bank Global Crown Capital. "There's no question they need to diversify." The $1.6 billion acquisition of Internet upstart YouTube Inc. was a start, but much more can be done.

Portfolio strategists say investors can allocate as much as 5% of their portfolios to purely speculative holdings, also known as mad money. But with the stakes so big, Google would be wise to put aside even more of its paper value--say, 7% or 8%--for investments to add some real diversification. Herewith: a $12 billion holiday shopping list.

It should start with a contrarian media play: the New York Times Co. (NYT ), now worth just $3.5 billion, roughly its 1998 level. The industry has never been so uncertain, and Google has already struck deals with some newspapers to post archived content. Meanwhile, Times management is under fire from a big shareholder, Morgan Stanley (MS ) Investment Management, which is trying to change its governance structure to take some power away from the controlling Sulzberger family. What better time for a white knight to step in?

The asking price, including the assumption of debt and the satiation of the Sulzbergers, might be $6.5 billion. That would land Google the Web site, 155 years of searchable Times archives, and swank new headquarters in Times Square--all for just 1/25 of the Google pie. If it acts now, Maureen Dowd might even emcee its holiday bash.

Next stop: real estate, of which Google has too little. Any self-respecting media giant needs a theme park. For a piddling $2 billion or so, Google could buy Walt Disney's (DIS ) aging Epcot Center in Orlando and rechristen it Google World. The prospect of animatronic Larrys and Sergeys might not get millions of tourists flooding in, but Google could actually use some losses to ease its tax load.

Commodities, baby! Google is light in natural resource holdings. Peruvian copper would kill two birds with one stone by providing emerging markets exposure as well. The problem is that pollution-spewing Peruvian copper mines kill thousands of birds each year. Google's Prius-loving staff won't go for that.

So why not invest in Pacific Ethanol Inc. (PEIX )? It can be had for an easy $1 billion, assuming a more than 20% premium. Besides improving the planet, ethanol would give Google reason to pursue another complementary asset: Ted Turner, America's largest individual landowner, with 2 million acres across seven states. Google's ethanol plants would need vast tracts of land on which to grow corn and switch grass--and Ted's 40,000 head of bison could happily fertilize that acreage. Price tag? Totally affordable.

That leaves emerging markets. How about assuming the balance of Turner's $1 billion philanthropic tab to the U.N.? Don't dawdle, guys. Use it or lose it.

Reliance Money - Garware Offshore Services

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Lanco plans Rs 4000 cr IT park in Hyd

Lanco Hills Technology Park Private Limited, belonging to the Lanco group, proposes to build one of the largest integrated IT parks in Hyderabad at a cost of Rs 4,000 crore.

Project work was expected to begin next month. The Hyderabad Property Project was likely to be completed in four years.

According to Lanco group vice-chairman, G Bhaskara Rao, the project will consist of 8 million square feet (sft) of IT-related built-up area, an equally large residential complex, 2.5 million sft shopping mall, 12 multiplex theatres, two star hotels and one tower for office space.

Lanco has purchased 100 acres from the Andhra Pradesh Industrial Infrastructure Corporation (APIIC) at a cost of Rs 427 crore in Manikonda, about 18 km from the upcoming Hyderabad International Airport, for the construction of the IT park.

The "Walk to Work" concept that would provide the occupants the flexibility of living within walking distance of their work place will be provided in the proposed project, Rao told Business Standard.

He said that the company would be investing Rs 500 crore in the project, of which Rs 375 crore had already been secured as loan from a consortium of banks led by Punjab National Bank.

The project would be completed in two phases and the first phase is expected to completed in two years.

Lanco has applied to the Airports Authority of India (AAI) for a no-objection certificate to construct buildings.

Rao said that the company had so far received AAI approval for 15 buildings out of the 28 buildings applied for.

While the residential space will comprise apartments from studios to three-bedroom apartments, the commercial space will have amenities such as modern fitness and recreation centres, health clinics, food courts, cafeterias, banking and foreign exchange facilities.

Retail space is intended to be a one-stop shopping and recreational space for people working as well as staying at the place.

Lanco proposes to build high-rise residential buildings of 20 to 25 floors.

"We also plan to construct a building with 70 floors, which would make it one of the tallest residential buildings in southern India," Rao said.

The company expects to enter into a development agreement with APIIC by next month and thereafter appoint an EPC contractor to execute the project.

It has already appointed separate architects and designers for the IT park and the housing project.

Thanks Akash

ICICIDirect - Pick of the Week - Havells India Ltd.

Havell’s India is likely to sustain its growth momentum on the back of booming user industries such as construction, engineering and power. The commissioning of new plants for electrical consumer durables – fans, CFL, etc, and switchgears in the excise- free zone of Uttaranchal and Himachal Pradesh would help it to expand its market share and improve margins.

Company Background

Havells India is one of the leading electrical and power distribution equipment companies in the country, manufacturing products ranging from building circuit protection, industrial & domestic switchgear, cables & wires, energy meters, fans, CFLs, luminaries, bath fittings and modular switches. Promoted by Qimat Rai Gupta and S K Gupta, Havell's India was incorporated in August 1983. It started by producing miniature circuit breakers and distribution boards in 1984. It entered into a technical collaboration with Christian Geyer, Germany, to manufacture miniature circuit breakers in India. In 1991, it was amalgamated with Elymer Havell’s, which had facilities to manufacture HRC fuses. The company has set up a new manufacturing facility for MCB's and other switchgear products at Baddi, Himachal Pradesh and an integrated ceiling fans manufacturing unit at Haridwar in Uttaranchal.

Investment rationale

Boom in user industries
Havell’s India is likely to sustain the growth momentum on the back of the boom in the user industries such as construction, engineering and power. Its top line has grown at a
CAGR of over 45% during the past 5 years from Rs 171.08 crore in FY01 to Rs 1108.25 crore in FY06. During this period the bottom line grew at a CAGR of over 59% from Rs 6.21 crore to Rs 63.21 crore. Domestic & industrial switch gears, cables and consumer electrical equipment contribute an equal 25% to its revenues while the balance rest 18% and 7% is contributed by wires and the newly acquired Crabtree revenue (cater to premium segment of modular switches and bath fittings) respectively.

The company is in a sweet spot as all its divisions are likely to sustain growth momentum given the ongoing boom in user industries such as construction, engineering and power.

(a) Switchgear Division

Havell’s is the largest manufacturers of MCBs, RCCBs, and distribution boards in India with the market share of around 25% in the market for MCBs. In FY06, switchgear contributed 30% at Rs 329.85 crore to its overall revenue. This segment is the most profitable one with operating margins to the tune of 31.17% in the H1FY07. The company currently exports MCBs to over 45 countries, including the quality conscious European countries. In order to accelerate its growth further, the company is in the process of setting up a 100% export-oriented unit (EOU) at Baddi, which would augment its capacities to 30 million poles of MCBs and would it in the top 10 league of manufacturers in the world.

(b) Cable & Wire Division

The cable & wire segment generated Rs 344.34 crore in the H1FY07 with operating margins of 13.30% at Rs 46.02 crore. In FY06, the cable division grew at 52% YoY to Rs 465.16 crore. The company is recognized as quality manufacturers of cable & wires and offers a complete range of low and high voltage PVC and XLPE cables, besides, domestic FR/FRLS wires, Co-Axial TV and telephone cables. During the FY06, the company had almost doubled its capacity.

(c) Electrical Consumer Durables Division

During FY06, the turnover of the division grew at 109% y-o-y to Rs 274.41 crore while in the first half of FY07, the revenue from the division increased by around 61% y-o-y to Rs 193.87 crore. The company generated operating profit of Rs 24.50 crore with 12.63% margin. In this division, the company expanded its CFL capacity to become the largest CFL manufacturer in the country. The company currently exports CFL to the neighboring countries of Sri Lanka, Bangladesh besides Middle East and African countries. The company has initiated marketing of this energy saving product in the smaller towns and rural areas, which is likely to push the demand and growth of the product.

The electrical consumer business is the fastest growing segment wherein company enjoys market leadership position in compact fluorescent lamps (CFL) segment, which is growing at 40% per annum.

Expansion to sustain growth momentum

The company is undertaking expansion in existing as well as new product categories to widen its offerings and reap the opportunities emerging in user industries. The company is entering into two new segments, electrical motors and power capacitors at a capex of Rs 100 crore which would be funded entirely through internal accruals. Initially the company would manufacture motors up to 100 HP and gradually ramp up to 300 HP in due course. The company also plans to set up a power capacitor unit in Haridwar with an initial capacity of 3,00,000 KVRs. The company hopes to generate revenues of about Rs 36 crore from capacitors and Rs 240 crore from motor business in its first year of operation.

Tax incentives from new plants to expand market share

It has commissioned new plants for electrical consumer durables – fans, CFL, etc. in the tax-free zone of Uttaranchal and Himachal Pradesh. The production in these zones would enable the company to expand market share along with margins. The company hopes to capture a bigger slice of the Rs 1,600 crore electric fan segment from the unorganized sector on the back of tax incentives which would help it to bridge the price differential. Besides pricing power, the company hopes to generate volumes from this segment that is likely to grow at 16% per annum through its innovative product, which consume 33% less power.

Risks & Concerns

1. The company’s principal inputs are aluminium and copper. Copper constitutes almost 40% of the total cost of production of electric equipment. The prices of these metals are currently on an upturn, which may put pressure on the margins. However, the company is able to pass on the incremental cost though with a time lag.

2. The domestic market for consumer electric products is highly competitive with presence of unorganized sector. As the unorganized sector does not pay excise, the company has set up plant in Baddi, where it would have excise benefit through which it would be able to take on the unorganized sector more efficiently.

The company’s top line has grown at a CAGR of over 45% during last 5 years from Rs 171.08 crore in FY01 to Rs 1108.25 crore in FY06. Bottom line grew at faster pace with a CAGR of over 59% from Rs 6.21 crore to Rs 63.21 crore during the same period. For the first half of FY07, the company reported a net profit of Rs 46.90 crore on sales of Rs 786.49 crore. We expect the company to sustain its growth momentum in the current financial year though the growth rate may moderate later due to high base effect. The company is likely to post a net profit of over Rs 95 crore in FY07E on a turnover of over Rs 1600 crore on a conservative basis though the company is targeting it to be Rs 2000 crore.


Havell’s India is likely to sustain its growth momentum on the back of the boom in the user industries such as construction, engineering and power. Commissioning of new plants for electrical consumer durables viz. fan, CFL, etc. in excise free zones would also lead to margin expansion. The company is currently trading at Rs 315, 18x the FY07E EPS of Rs 17.45. The company has an impressive return on equity of more than 45%, which along with margins expansion may trigger into further re-rating of stock. We expect the company to generate returns to the tune of 20% over 3-6 months with a target price of Rs 380.

Technical Outlook

The stock is currently trading above its 200 day moving average, which is around Rs 273. The stock has a strong support at Rs 302 level. It made a double bottom at these levels and bounced back to Rs 314 level. On the upper side, if it closes above Rs 324 with good volume, we expect a strong breakout and it could rise to Rs 351 – Rs 380 levels.

Way2Wealth - HP-Gate

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IPO - Ruchira Papers: Invest

Investors can consider subscribing to the initial public offer by Ruchira Papers. The company, which has been riding the boom in the textile industry, plans a foray into the writing and paper business, which is in a growth phase.

Valuations appear moderate, even on an expanded equity base. The high leverage proposition that the company has adopted, however, is a cause for concern.

Kraft Paper

Ruchira Papers' manufactures kraft paper, which is largely used by the packaging industry.

The company has recorded a commendable 16 per cent revenue growth over a four-year period, which appears to have been contributed by the textile industry boom. Kraft paper is used in the fabric and yarn industries.

With a slowdown of capacity additions in the textile industry revenue growth from this segment is expected to be sluggish in the medium term. The company operates in a raw-materials intensive business, with inputs accounting for about 74 per cent of operating costs. The company enjoys locational advantages as it is situated near the hub of agricultural activity.

Though operating margins have been on the decline, falling prices of caustic soda are expected to ease the pressure.

Writing and Printing Paper

The company plans to foray into the writing and printing paper segment, which is on an uptrend.

With the governments focus on education and scope for improvement in literacy levels, revenue growth prospects appear to be bright. The company proposes to use the same line of inputs that it uses for its kraft paper business — agri-waste.

Ruchira Papers plans to set up a 33,000-tonne facility at its existing site in Himachal Pradesh and plans to commence commercial production in the middle of FY-08. The company plans to sell the size — free paper to local players in the notebooks business.

Offer Details

Ruchira Papers plans to raise Rs 23.5 crore from the public by offering shares in a price band of Rs 21-23.

The promoters would also chip in, taking the total proceeds from the offer to Rs 28.5 crore. The company plans to set up a paper and chemical recovery plant and a 6-MW captive power plant.

The company plans to meet a substantial part of its project by raising debt to the tune of Rs 94 crore.

Punjab National Bank and A.K. Capital Services are the mangers to the offer, which opened on November 23, and closes on November 29.

IPO - LT Overseas: Avoid

Investment can be avoided in the initial public offering (IPO) of LT Overseas. Engaged in the business of milling, processing and marketing of branded and non-branded rice, LT Overseas is one of the top three volume players in the domestic basmati rice market. In the price band of Rs 50-56, the offer is priced at 10-12 times its expected March 2007 per share earnings on post-offer equity.

Though the industry's growth prospects appear bright, we feel that at the given price band the valuations appear stretched vis-à-vis its peers.

Investors with a long-term perspective are likely to find better options in the secondary market from players such as KRBL or Satnam Overseas, which enjoy better operating marginsand are available at attractive valuations.

Satnam Overseas, for instance, enjoys a strong presence in both the domestic and overseas market with its `Kohinoor' brand of basmati rice. Its foray into the ready-to-eat food segment has successfully de-risked its position in the branded basmati rice division.

The stock trades at about seven times its likely FY-07 earnings per share. KRBL, on the other hand, is the largest exporter of basmati rice, globally, and its `India Gate' brand enjoys the highest brand share in India. The stock trades at 9 times its likely FY-07 earnings per share.


LT Overseas has a presence in both domestic and international markets, with a share of 22 per cent in the former. The company has a pan-India presence with 100 distributors present in almost every State and in more than 35 countries. The company owns 19 brands; `Daawat' and `Heritage' are among the well-known ones, with the former enjoying a market share of 17.5 per cent in the domestic market (third in terms of market share).

A major part of the funds thus raised would be used for expansion, automation and modernisation of its Sonepet plant, with a new parboiled rice processing unit and storage facilities. It also plans to use the funds for setting up facility for captive power consumption.


LT Overseas has seen a healthy growth in revenues over the last three years due to increase in volume and realisation of basmati rice in the domestic market. Though the volumes in the export sales have remained more or less flat, improved realisation has led to an increase in the bottomline contribution from the export segment as well.

The operating margins have also improved marginally on account of decrease in manufacturing and sales and distribution expenses. However, the growth has been in line with the industry trend.

New Initiatives

LT Overseas plans to make a foray into the ready-to-cook rice segment. It would, however, face stiff competition from Kohinoor's ready-to-eat food products.

The company has also undertaken various R&D initiatives such as shrinking the seasoning time for basmati rice that will benefit it through reduced working-capital requirements. It has formed a strategic alliance with Phoenix Agri Silica Corporation for developing a silica plant to convert husk ash (a waste generated during milling process) into silica, a raw material used in cement industry. Besides, LT Overseas has also entered into a contract farming agreement with Tata Chemicals.

However, we do not believe that the company has a distinct competitive advantage that would enable it to outpace its peers. We feel that the market would certainly throw better opportunities for investors to enter the stock later when it is rightly valued.

Offer details

The initial public offer is open from November 27-30. The company seeks to raise Rs 35-39 crore through this offer. UTI Securities and IL&FS Investmart are the book-running lead managers. Bigshare Services is the registrar to the issue.

Pantaloon Retail: Book Profits partially

Investors can consider booking profit on a part of their holdings in Pantaloon Retail. The retail frontrunner would have to sustain the 45-50 per cent growth, which it has logged in the last couple of years, over the next five years to justify its current market capitalisation.

The current valuations do not appear to factor in the higher risks that have emerged with a new competitive scenario. Pantaloon is expanding at a tremendous pace. While it has already signed up much of its planned retail space, execution risks remain. (See lead story on Retailing for details).

While there may not be scope for much upside in the near term, there could be positive surprises in the form of new alliances or acquisitions. Investors may consider re-entering the stock in the event of steep declines linked to market weakness.

Tech Mahindra: Book profits partially

Investors can consider locking in gains on part of their holdings in Tech Mahindra, especially those who entered the stock through the initial public offer. The stock has recorded a three-fold rise from the offer price of Rs 365 and more than doubled from its listing price of Rs 525. We believe that the fundamentals of Tech Mahindra focussed on the telecom vertical rest on a solid footing. However, in our view, most of the upside linked to fundamentals is factored in the stock price.

The stock is trading at a price earnings multiple of 25 times its annualised per share earnings for 2006-07. Though it is a trading at a discount to some of its frontline peers, it commands a valuation that is superior to its mid-sized peers. The principal risks that it faces stem from the exposure to telecom as a single vertical, high client concentration (64 per cent of revenues from British Telecom, one of the promoters) and unexpected slowdown in the US affecting business volumes or billing rates.

Polaris Software Lab: Buy

nvestors with a penchant for risk can consider taking exposure in the Polaris Software Lab stock with a one/two-year perspective. Two straight quarters of robust financial performance with a sharp jump in operating margins, good pipeline of business across Tier I/II global banks, and reduced dependence on Citigroup, its largest client, lend confidence to the stock.

At the same time, the company remains exposed to risks arising from heightened competition in the banking products space, product acceptance, efficacy of its cross-selling capabilities across the banking and financial services space and execution issues on large projects. At the current price levels, the stock trades at a price-earnings multiple of 14 times its likely per-share earnings for 2006-07 on a conservative basis.


Since its merger with Orbitech in 2003, Polaris has passed through a troubled phase in restructuring its overall business model.

Its transition from a pure software services player to a hybrid model focussed on product-cum-services catering to the banking, financial services and insurance (BFSI) industry has been a slow process, with the first signs of turnaround evident in its financial performance and order pipeline.

In terms of structural changes to the business model, Polaris has created six sub-verticals within the BFSI space, which are: Retail banking and credit cards; consumer finance and mortgages; insurance; capital market and wealth; corporate banking and cash; and enterprise solutions and mainframe.

Around this, Polaris has created three distinct growth engines, as spelt out in the 2005-06 Annual Report:

Intellect product (its core suite)-led services, in which it has secured business wins from clients in the UK, West Asia, Latin America, Australia and Nordic region.

This is likely to be a high-margin business as it is IP-led playing to the strengths of its core products suite.

Domain-led services, which will be used to secure business from Wall Street Banks such as JP Morgan Chase or Bear Stearns. Generally, projects or solutions that are bagged on the strength of vertical expertise typically enjoy a reasonably high margin.

The senior management of Polaris has indicated that for 2005-06, 10 per cent each of the revenues can be categorised as intellect-led and domain-led services. As these two services start contributing more to revenues in the coming years, the operating margins and bottomline will expand significantly.

Application Maintenance services are typically the low-margin business, which are likely to come under greater pressure.


For the first half of 2006-07, Polaris' financial performance has turned out to be quite impressive. Not only did the company log two successive quarters of double-digit sequential revenue growth, its operating profit margins have also perked up. At 15.5 per cent in the first quarter-ended June 30 and 17.9 per cent in the second quarter-ended September 30, the operating profit margins were three and five percentage points higher than the same period in the previous year.

This is encouraging, as it creates the prospect of pushing up margins to 20 per cent in the coming quarters. As the Asia-Pacific region contributes over 30 per cent of its revenues, margins are lower. With rising contribution from Europe and the US, the overall margin picture may start moving northwards. For instance, in the latest quarter, the onsite billing rate per hour in Asia-Pacific was $41.5 compared to $68.3 across Europe and the US.


The company's efforts in strengthening its sales and marketing organisation over the past year are beginning to pay off. As of September 30, the company has 53 large global banks as its customers, comprising 15 AAA accounts (with revenues of $ 10 million or more), 14 AA ($5 million to $ 10 million) and 24 A ($ 1 million to five million).

These suggest the good client mining potential from these customer accounts. In the latest quarter, the company added 14 clients, including three global banks. Recently, the company inaugurated a specialty centre for technology solutions for the investment banking industry called `Capital' in Hyderabad. Seven out of the top 10 investment banks are the customers of Polaris serviced through this centre.

The contribution from Citigroup as its single largest client has been coming down steadily. In the latest quarter, Citigroup contributed 48.7 per cent of revenues, down from 51.7 per cent in the first quarter and 57.7 per cent in the corresponding previous period.

The contribution from the high-margin intellect-led business has also been going up. It contributed 16.65 per cent of overall revenues in the second quarter, up from 14.9 per cent in the previous quarter.

The robust order-book creates scope for this contribution to increase steadily in the coming quarters, with an improvement in its overall margins.

Vijaya Bank: Buy

Healthy business growth, improving asset quality, a relatively de-risked bond book, and undemanding valuation lend credibility to the Vijaya Bank stock.

Investors can consider fresh exposure to the stock at theits current price of Rs 53 with one/two-year perspective.

Insipid performance of the bank until last year is one of the reasons for the poor valuation of athe stock.

While net interest income has remained under pressure, bad loans piled up.

However, things are gradually changing now. Through a sharper focus on recoveries and stricter credit monitoring, Vijaya Bank has been able to bring down the level of net non-performing assets (NPAs) to 0.6 per cent in September 2006 against 1 per cent a year ago.

Further, the bad loan coverage ratio has also improved from 68.1 per cent a year ago to 78.5 per cent now.

This, coupled with excess floating provisions of Rs 30 crore (or 30 per cent of the net NPAs), is likely to provide cushion to the bank in case of loan delinquencies. This is also likely to keep provisioning charges lower over the next few quarters.

Business outlook

For the September quarter, the bank recorded a healthy 24 per cent growth in business volumes. Its business reached Rs 50,000 crore six months ahead of the target date, and the bank has set a goal of Rs 60,000 crore to be achieved by FY-07.

While its loan book has grown by about 25 per cent, pressure on margins still persists. The bank's cost of funds rose by about 30 basis points in the September quarter, affecting its net interest margins (NIMs).

Though yields on advances have improved, rising deposit costs along with a marginal fall in low-cost deposit base have resulted in NIMs declining by about 22 basis points. At 3.12 per cent, NIMs are still healthy and on a par with industry average.

Containing costs is likely to be a key element in determining earnings growth and, thus, holds greater significance. For Vijaya Bank, various technology-based initiatives are likely to help bring down the operating cost. The bank also has the leeway to re-deploy its excess investments in SLR in its loan book; this is expected to improve its margins over the medium term.

With the bank's credit at 61 per cent of deposits, there is still headroom to increase its loan book. If this happens, margins and profitability are likely to improve.

Investment portfolio

The bank's investment portfolio appears largely insulated from interest rate risk. This is because over 70 per cent of its holdings in government securities are under the held-to-maturity (HTM) category.

The continuing decline in bond yields this quarter is likely to have a positive effect on its bond book in the coming quarter or two.

At its current price, the stock quotes at a price-to-book multiple of 1.3 times against 1.5-1.6 times for most other public sector banks. The return on shareholder funds has improved sharply to 20 per cent.

The bank is likely to generate and sustain return on shareholders' funds in the 15-18 per cent range over the next year or two. This appears healthy and is enough to support the valuation of the stock and provide a cushion on the downside.

Unguaranteed Returns - Dhirendra Kumar

We're all very fond of guarantees. I don't think anyone of us would even dream of buying something like a TV set or a car without a guarantee, or indeed, whether TV or car manufacturers would dream of trying to sell their products without a guarantee. And now we have a fund - Franklin Templeton Capital Safety Fund - that's sort-of guaranteed. This fund does not actually come with a guarantee. Instead, Franklin Templeton's description of this fund has the same approach to the idea of guarantee that the dialogue of Dada Kondke's films has to sex - everyone knows what is actually being talked about, but no one can prove it.

Anyway, we're now set for many more of such funds. For quite some time now, the word in the mutual fund industry has been that capital-guarantee funds are on their way. These are supposed to be funds where there is a guarantee that the investors' capital will not be eroded. No matter how bad things get, at least the initially invested amount will always be protected.

In August this year, SEBI came out with the regulations under which such funds can be launched. SEBI's regulations on the matter were an interesting exercise. The regulations carefully tip-toed around the word 'guarantee' without quite mentioning it, thereby setting the stage for this new guarantee-suggestive style of describing funds' objectives. The regulations pave the way for the launch of what it names 'Capital Protection Oriented Schemes'. It says that these will be schemes that will 'endeavour' to protect the capital invested in them. The regulations also state that the funds will be rated by a credit rating agency 'from the viewpoint of the ability of its portfolio structure to attain protection of the capital invested therein'. Translated from Legalese to English, what this means is that such funds will try hard not to lose your money and they will be certified by a rating agency as having tried hard enough. But do note that we are only talking about an effort to protect capital no one has said anything about the effort actually having to succeed.

Will such funds actually deliver what they promise? My opinion is that they will deliver what they actually offer, but will substantially fail in delivering what most fund salesmen will orally promise in their sales pitches. This fund, (and probably others that will follow it) is basically an MIP with a more attractive packaging. Like many other MIPs that already exist, it will invest your money in debt with a little bit in equity. If things go well in the stock markets, it will deliver a few per cent more than what you would get in a bank FD, which by itself is not a bad deal. If the stock markets do badly, then it will try to gain in debt what it loses in equity and thereby manage to protect your capital. CRISIL (a rating agency) has rated the fund as having the 'highest degree of certainty regarding payment of face value of investment to the unit holders'. However, if you are somehow being led to believe that such funds will rocket up along with the Sensex during bull runs and then miraculously not fall when the markets crash, then you are being taken for a ride.

Fundamentally, there is no way to reap the full rewards of equity without also facing its full risk. Chasing vague guarantee-like promises is not the way to do it.

This Week in Stocks - Marching Ahead

Last week, after six successive trading sessions, the markets ended on a negative note on Friday (November 17) and FIIs turned out to be net sellers in the cash segment as well as the F&O segment. Everyone eagerly awaited Monday to see how the markets would fare.

Monday turned out to be a volatile day. Despite the Sensex plunging over 200 points, it managed to close in the green thanks to late buying in blue chip stocks like Bharti Airtel, Infosys, HLL, Hero Honda and M&M. The BSE benchmark Sensex ended flat to close at 13,430 and the Nifty closed at 3,856 up 3 points. FIIs were net purchasers to the tune of Rs 1,302 crore while MFs net sellers to the tune of Rs 285.78 crore.

On Tuesday, the Sensex surged 186 points to close at an all-time high of 13,616 and the Nifty added 62 points to close at 3,918. Ironically, FII net purchases were a far cry from Monday at just Rs 58 crore while MFs continued to be net sellers at Rs 78.81 crore. ITC, Bharti Airtel, Tisco and Gujarat Ambuja were the major gainers while HDFC, Tata Power, HLL and SCI were among the major losers. Info Edge made an impressive debut on the bourses. The scrip surged 85 per cent to Rs 594 (after touching an intra-day high of Rs 623 and low of Rs 480) as against the issue price of Rs 320.

On Wednesday, the Sensex touched another high to close at 13,706 and the Nifty at 3,954. All the key indices ended with gains excluding the FMCG index. FIIs were net purchasers to the tune of Rs 642 crore and MFs for this first time this week turned out to be net purchasers at Rs 184.25 crore.

Selling pressure in RIL, HLL, ITC, Satyam Computer and Tata Motors dragged the BSE Benchmark Sensex to close at 13,680 (25 points down) and the Nifty at 3,945 (10 points down) on Thursday. Select metal, bank and auto stocks stood firm preventing a further downslide. MFs were net sellers at Rs 276.24 crore. Siemens, a star performer on Wednesday, fell by over 4.2 per cent to Rs 1,271 on back of profit booking. The company announced its Q4 result with net profit up 31 per cent and revenue up 56 per cent.

The week ended with the Sensex closing above the 13,700 mark at 13,703 and the Nifty at 3,951.

Stocks that gained the most since last Friday were NTPC, Wipro, Satyam Computers, Hero Honda, Bharti Airtel, Reliance Communications, Reliance Energy and TCS.

Despite the ups and downs in the market, the CNX Midcap consistently rose over the week from 4,893 on Monday to close at 5,053 at the end of the week.