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Sunday, February 04, 2007
Midcaps.in Newsletter
Newsletter dated 04/02/2007
S.No. Scrips BSE Code Recommended Rate Target Rate. Analysis Report
1. TVS Electronics Ltd. 532513 49.95 63.00 TVS
2. Media Video Ltd. 530435 53.50 67.00 Media
3. Khaitan Chemicals 507794 60.85 77.00
Khaitan
4. Jaypee Hotels Ltd. 590027 74.80 94.00 Jaypee
5. MSK Projects 532553 92.60 116.00 MSK
Target rates are expected in three months frame of time, but we recommend you that whenever any scrip touches its target rate, you must dispose of all shares or in parts(If you have invested in that scrip),so that you may be able to invest those funds in other scrips recommended in further newsletters.
1. FORTHCOMING I.P.O.'s :-
S.No. Scrips Face Value Premium Issue Open Issue Close Rating
1. Power Finance Corporation Ltd. 10.00 75.00 31/01/2007 06/02/2007 **
2. Indian Bank 10.00 81.00 05/02/2007 09/02/2007 **
3. C&C Constructions Ltd. 10.00 281.00 05/02/2007 09/02/2007 *
4. Oriental Trimex Ltd. 10.00 38.00 08/02/2007 14/02/2007 *
Rating :- *** Very Good ** Good * Normal
2. SECTORS TO WATCH :-
Cement
Pharmaceuticals
Steel
3. STOCK IN FUTURES :-
S.No. Scrips BSE Code Recommended Rate Target Rate Stop Loss Analysis Report
1. Lanco Infratech Ltd. 532778 247.05 267.00 236.00 Lanco
4. MULTIBAGGER :-
S.No. Company Name BSE Code Recommended Rate Target Rate
(One Year) Analysis Report
1. International Travel House Ltd. 500213 155.40 240.00 International
5. LAST WEEK'S NEWS :-
25/01/2007
Silverline Tech to issue convertible warrants to promoters
Silverline Technologies' board at the meeting held on 24 January 2007, has considered to issue on preferential placement, convertible warrants at Rs 25.5 per share, to the promoters and persons acting in concert to the extent of 26% on fully diluted equity.The board has decided to hold an EGM on 5 March 2007.Further, the board ratified the de-merger decision and instructed the management to initiate the procedural formalities in terms of required statutory approvals.
29/01/2007
Surya Roshni's board approve expansion of CFL project
Surya Roshni's board at the meeting held on 27 January 2007, has given approval of expansion of CFL project at a total cost of Rs 20 crore.Further, the board has also approved the incorporation of separate segment and investment upto Rs 10 crore in the real estate business.
30/01/2007
Assam Co inks MoU for Rs 2k-cr SEZ in Gujarat
Amid the countrywide furore over special economic zones (SEZs), Assam Company has signed an MoU with Gujarat State Petroleum Corporation (GSPC) to set up a Rs 2,000-crore hydrocarbon SEZ in Gujarat.Abhay Chawdhry, director (finance) and chief financial officer at Assam Co told ET, We had signed the MoU with GSPC only a week ago. Assam Co is already present in the oil sector and has the expertise to develop the hydrocarbon SEZ.Even though Prime Minister Manmohan Singh has categorically said all SEZs in the country have been put on hold, Assam Co does not foresee any problems cropping up with its proposed SEZ. There may be some delay but we do not think our SEZ will face problems regarding land acquisition. There's plenty of land in Gujarat which is not strictly farmland, he added.The project cost has been pegged at Rs 2,000 crore. We expect to make the SEZ operational by 2010, Mr Chawdhry added. The MoU has been signed at a time when GSPC has drawn up plans to actively participate in the upstream hydrocarbon industry both in Gujarat and outside. It is an aggressive participant in the New Exploration Licensing Policy (NELP) rounds of bidding.It also has plans to diversify into downstream petroleum projects, including handling and distribution of LNG and pursuing coal-bed methane projects.We will float a special purpose vehicle for setting up this SEZ. Both GSPC and Assam Co have decided to form a joint working group to structure the SPV and prepare a roadmap for setting up the SEZ. The land requirement for the SEZ is yet to be decided, he said.It has been decided that both companies will nominate two members each to the joint working group that will structure the SPV. The committee will be formed within a fortnight. According to the MoU, GSPC shall be entitled to nominate the chairman of the board of the proposed SPV. Mr Chawdhry said GSPC-Assam Co combine would invite the likes of Geosis, Schlumberger and BJ to participate in the proposed hydrocarbon SEZ.
30/01/2007
Dr Agarwals Eye Hospital to allot preferential equity shares
Dr Agarwals Eye Hospital's members, at the extraordinary general meeting (EGM) held on 27 January 2007, have authorised the board to allot 12,50,000 fully paid equity shares of Rs 10 each at Rs 42.88 (inclusive of premium of Rs 32.68 per share) on preferential basis by private placements to the promoters.
31/01/2007
MSK Projects beats REL, Gammon for Rs 480-cr MP project
Infrastructure big-shots including Reliance Energy, Gammon India, Punj Lloyd and Shapoorji Pallonji have lost out to a lesser known consortium of MSK Projects, Chetak Enterprise and BSBK for the Rs 480- crore Bhopal-Dewas road project in Madhya Pradesh. The Madhya Pradesh Road Development Corporation (MPRDC), which opened the bids for the road project last week, came in for surprise as all the probable winners sought higher grant for the project compared to the consortium. Reliance Energy emerged second-lowest bidder for the project.The Rs 480-crore Bhopal-Dewas road project has a subsidy component of Rs 81 crore. The entire subsidy amount demanded by the developers will be met by the Centre,MPRDC deputy general manager Neeraj Vijay said. The proposed state highway, comprising 143 km, would take 30 months to be completed.The four-laning of the Bhopal-Dewas state highway, once completed, will ease the heavy traffic congestion on the route. It will also reduce time taken between Bhopal and Indore from around five hours at present to just three hours. The Indore-Dewas stretch is already four-laned. Dewas lies mid-way between Indore and Bhopal.MPRDC will also be receiving a negative grant of Rs 1,438 crore for the 126-km long stretch of Jawra-Nayagaon. The project, to be developed at a minimum cost of Rs 500 crore, is soon to be awarded to a consortium of Ashoka Buildcon and IDFC. The negative grant would be paid over a period of 22 years, increasing at 5% per annum.Reliance Energy is also in the race to bid for the Rs 500-crore Lebad-Jawra 126 km stretch. The last date for pre-qualification proposals is January 31,Mr Vijay said.Slated to be the state's largest road sector projects, the projects will be developed through the BOT toll model. The km-based toll rates, ranging from Rs 0.33 per km for a car to Rs 3.93 per km for multi-axle vehicles, would be upwardly revised at 7% per annum.
31/01/2007
Sangam India to issue FCCBs worth $ 22 million
At the EGM held on 27 January 2007, Sangam India's board had decided to issue FCCBs worth $ 22 millions, proceeds of which will be utilised for part funding of ongoing expansion and diversification projects of the company.
31/01/2007
Uco Bank to sell Rs 50-cr NPAs by end-March
KOLKATA: UCO Bank plans to sell about Rs 50 crore of bad loans to asset reconstruction companies (ARCs) by March 31. This exercise will help the bank shrink its non-performing assets (NPA) book.We are in talks with some asset reconstruction companies. This exercise will be carried out before the end of 2006-07,Uco chairman and managing director V Sridar said. During 2005-06, the bank sold Rs 20 crore of bad loans to the Kotak Bank-promoted asset reconstruction company.Uco's NPA is still on the higher side compared to average industry level. It had gross NPAs of Rs 1,386 crore as on December 2006, which increased from Rs 1,306 crore from March 2006 level. Its net NPA has also increased to Rs 921 crore. We also plan to recover close to Rs 425 crore of bad loans, Mr Sridar said. It has already recovered Rs 279 crore during April-December 2006 period.In ratio terms, its net NPA was at 2.15% as on December 31, 2006, which has increased from 2.02% on September 30, 2006. Gross NPA stood at 3.23%. There were slippages of Rs 589 crore during the first nine months of 2006-07. For the quarter ended December 2006, slippages were to the tune of Rs 212 crore,Mr Sridar noted.The bank intends to reduce our gross NPA to 2.58% and net NPA to 1.59% by March 2007. This is an aggressive target and we plan to use all options available to reduce NPAs,said Mr Sridar.
31/01/2007
Zenith Birla to foray into construction industry
Zenith Birla India's board at the meeting held on 30 January 2007, has approved setting up of 50:50 joint venture company with Aluma Systems, Canada for entering into the business of providing technical consultancy and project management services to the construction industry.Further, the company will be initially investing $1.5 million (Rs 675 lakh) towards its share in the capital of the proposed company.
01/02/2007
Varun Shipping acquires new 2001 built vessel
Varun Shipping Company has acquired one 2001 built anchor handling and towing supply vessel (AHTS vessel). It has 16,000 T bhp and bollard pull of 180 tonnes.This vessel will be used for deep sea oil exploration going on in North Sea, Bay of Bengal and Atlantic Ocean off the coasts of Nigeria, Brazil and Mexico.
02/02/2007
Essar refinery fire kills four
Four workers were killed and at least 18 others were injured after a fire broke out at the oil terminal at Essar Oil's Vadinar refinery on Thursday. Most of the victims hail from Orissa and Bihar. The fire was quickly brought under control and the refinery is functioning normally, the company said in a statement. Essar as well as the district administration are now investigating the cause of fire.About 100 labourers were working at the station when the fire broke out and a few of them were engaged in the maintenance of the pipeline. According to sources, sparks from welding and grinding work on an adjacent dry pipeline triggered fire in a naphtha pipeline.Prima facie, the fire was not due to breach of any safety norms or any sabotage. However, we have appointed a committee headed by the head of safety at Essar Steel in Hazira to look into the cause of fire, AN Sinha, managing director, Essar Oil told ET. The oil terminal, where the fire broke, out is connected with the company's recently commissioned 10.5 million tonne per annum capacity refinery.The refinery was commissioned in December 2005 and is currently in the process of achieving its targeted capacity of 10.5 mtpa by March.There was a fire in the pig launching station of Essar's Vadinar Oil Terminal leading to casualty of four workers while few workers were injured. Within minutes of the occurrence, the fire was put out by refinery team. The refinery, however, is functioning normally,the company said in a statement. The injured workers belonged to the contractors working for the Essar Oil.There are norms based on which we give out compensation and we have ensured adequate and prompt compensation for the affected workmen,Mr Sinha said.The district administration has simultaneously sent its team to investigate the extent and cause of fire. We have sent officials to the site to assess the cause and extent of fire. More details on this could be ascertained on Friday,VP Patel, collector, Jamnagar told ET.This is second incident of fire at a refinery in last three months in Gujarat. In October fire broke at VGO unit of Reliance's refinery at Jamnagar complex led to a shut-down of some of its units and seriously injured one of its employees.
02/02/2007
Gangotri Iron & Steel's Patna project to be funded by SBI
Gangotri Iron & Steel Company has acquired an approval from State Bank of India for a total fund based loan of Rs 457.10 lakhs and non fund based loan of Rs 45.2 lakhs, for it's new project being put up at Bihata near Patna in Bihar.
6. MUTUAL FUND'S SCHEME :-
S.No. Scheme NAV Details
1. SBI Magnum Midcap Fund (G) 23.92 SBI
Investment Nuggets
In the course of a remarkable professional career in investment management, Peter Bernstein has worn several hats. After starting his career as an economics professor, he became the Chief Executive of an investment counsel firm, managing billions of dollars for individual and institutional portfolios. In 1973, he resigned to launch Peter L Bernstein Inc. and in the following year became the first editor of The Journal of Portfolio Management, one of the most widely read investment journals. Author of Capital Ideas — The Improbable Origins of Modern Wall Street, Against the Gods — The Remarkable Story of Risk, and Power of Gold — The History of an obsession, his passion for the investment discipline remains undiminished.
"Financial markets are a kind of time machine that allows selling investors to compress the future into the present, and buying investors to stretch the present into the future."
"Investors refuse to believe that shock lies in wait... Investors do better where risk management is a conscious part of the process... survival is the only road to riches. You should try to maximise return only if losses would not threaten your survival...You don't want to blow it, because you don't get a second chance. When you invest, it's not your wealth today, but it's your future that you're really managing."
"The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk: The notion that the future is more than a whim of the gods and that men and women are not passive before nature. Until human beings discovered a way across that boundary, the future was the mirror of the past or the murky domain of oracles and soothsayers who held a monopoly over knowledge of anticipated events."
"Games of chance must be distinguished from games in which skill makes a difference. The principles that work in roulette, dice, and slot machines are identical, but they explain only part of what is involved in poker, betting on the horses, and backgammon. With one group of games the outcome is determined by fate; with the other group, choice comes into play. The odds — the probability of winning — are all you need to know for betting in a game of chance, but you need far more information to predict who will win and who will lose when the outcome depends on skill as well as luck. There are cardplayers and racetrack bettors who are genuine professionals, but no one makes a successful profession out of Craps. Many observers consider the stock market itself little more than a gambling casino... Cards, coins, dice, and roulette wheels have no memory."
C&C Constructions: Invest at cut-off
The initial public offer of C&C Constructions is suitable for investors with a high risk appetite. A comfortable order-book, high-profit margins and consistent financial track record are positives for this construction company that operates mainly in the road and urban infrastructure segments.
Lack of business diversification and dependence on Afghanistan for higher margins are the major risk factors. A two-year investment perspective is necessary for conversion of orders on hand into revenues.
At the price band Rs 270-291, the offer is priced at 12-13 times its earnings for the year-ended June 2006 on the existing equity base. If the current order-book is converted into revenues, as per schedule, the price-earnings multiple would be 9-10 times its likely earnings for the year-ended June 2008 on a post-issue equity base.
Profile
A Delhi-based infrastructure company, C&C Constructions has operations in India and Afghanistan. It plans to raise about Rs 120 crore through this offer. Much of the proceeds are to be used for investment in Build Operate Transfer (BOT) projects in India, towards procurement of capital equipment and for meeting further working-capital requirements.
Comfortable order book
As of December 2006, C&C Constructions had unfinished and new orders adding up to Rs 825 crore. The order book, mainly consisting of road construction (62.5 per cent of orders) and a BOT road project (22.5 per cent), lends visibility to the earnings growth over the next two/two-and-half years.
Until 2005, C&C Constructions had much of its operations in Afghanistan. For instance, for the year-ended June 2005, projects in Afghanistan accounted for 92 per cent of the order-book.
Concentration of business in an area of high political and economic uncertainty raises to the company's business risk profile. However, the company appears to have now shifted its focus, with India accounting for 92 per cent of the order-book as of December 2006. This should mitigate the concentration risk.
Risky, but lucrative
While the company is likely to be focussed on India, we expect it to continue its business in Afghanistan for three reasons — one, the margins are extremely lucrative.
Two, the company has an edge in Afghanistan, having successfully implemented projects in tough terrains with its own logistics and support services, and competed with international players.
Three, the Joint State — USAID (United States Agency For International Development) Plan for 2005-2010 for development of Afghanistan has ensured smooth funding by agencies such as USAID, World Bank and the Asian Development Bank.
A bulk of this funding has been earmarked for roads. Having established its presence in Afghanistan, the company is likely to capitalise on the development work being implemented in the country.
Given Afghanistan's significant contribution to revenues and profits, the risk of order loss remains high. Execution of projects in Afghanistan has technically qualified the company (and its joint venture partner) to bid for projects in India.
This is reflected in the company bagging road and BOT projects (in road and power transmission) locally in quick succession.
The company has implemented most of the projects with its joint venture partner, B. Seenaiah and Company (Projects), a leading contractor for the National Highways Authority of India.
Any move by the latter (B. Seenaiah) to become a competitor may prove detrimental to C&C. Despite being in the road segment, which typically yields low margins, C&C Constructions has managed to maintain operating profit margins (OPMs) which are far superior to margins for players in the road segment. Valecha Engineering, a typical road sector contractor, has OPMs of about 7 per cent.
As against this, C&C Constructions enjoyed 23 per cent for the year-ended June 2006.
However, given the order-book shift, towards India, the margins are unlikely to be sustained. They may, however, remain superior to peers for the next couple of years.
SMS Pharma: Invest at cut-off
An investment may be considered in the initial public offering of Hyderabad-based bulk drug player SMS Pharma. The offer, Rs 360-380 band, will be valued at 12-13 times the expected consolidated per-share earnings for FY-08 on the expanded equity base, on the back of conservative growth estimates. This is reasonable, in our view, in the light of prospects in the contract manufacturing space and a fairly strong patent expiration pipeline over the next few years. Investments may be made at the cut-off price.
Background
SMS operates four manufacturing facilities, apart from a research and development centre, in and around Hyderabad. The primary purpose of the public offer is to fund the setting up of another facility at Vizianagaram in Andhra Pradesh, apart from meeting working capital expenses.
Investment rationale
As outsourcing becomes an integral part of the pharma landscape, outfits focused on a specific activity of the manufacturing chain (such as bulk drugs, as is the case with SMS) will be better placed to reap benefits. Given SMS' sphere of operation, we believe that the comfort level of the formulations players will be higher when they deal with players unlikely to morph into competitors. SMS already has leading names such as Ranbaxy, Dr Reddy's, Cadila, Sun and Torrent as its clients. We expect the business profile to improve further, as SMS pursues supply deals with players based abroad.
SMS is among the world's top producers of bulk Ranitidine (an anti-ulcerant), and revenues from this product accounted for almost half the revenues in H1FY07. While this exposes the company to pricing vagaries of this particular product, we believe that as the benefits of the new facility kick in and contributions from other products such as sumatriptan and gemcitibine scale up, the concentration risk will diminish considerably.
While cost competitiveness is at the very core of outsourcing, we note that in the SMS case, it is not at the expense of profitability. Margins, for example, in FY-05 and FY-06 have been in the high teens; for the half-year ended September 2006, margins breached the 20-per cent mark — a healthy number for an outfit with presence only in the bulk space.
Over the past five years, SMS also has a record of paying out a consistent dividend of 20 per cent — a feature conspicuous by its absence in the several pharma outfits that have hit the market in recent times.
Offer details
SMS intends raising about Rs 100 crore through the public issue, by offering about 26 lakh shares in the price band of Rs 360-380. UTI Securities and Aarthi Consultants are the book running lead manager and registrar to the issue respectively. The offer opens on February 5 and closes on February 8.
Vijayeswari Textiles: Avoid
Investors can avoid subscribing to the offer of Vijayeswari Textiles (VTL). At the upper end of the price band, the offer values the company at about 12 times its likely FY-08 per share earnings, on an expanded equity base. While the export prospects for home textiles remain bright, intense competition has kept margins on a tight leash. Earnings growth is unlikely to keep pace with revenue growth in the medium term. The stocks of peers such as Welspun India and Alok Indutries, which enjoy scale advantage, are available at better valuations in the secondary market.
Vijayeswari Textiles (VTL) started out as a producer of high-quality yarns but gradually shifted its thrust to the lucrative home-textiles segment where margins are superior. It is now an integrated player with a focus on luxury bed linen. The strategy has worked well, with the home textiles business growing at an annualised rate of close to 30 per cent between FY-02 and FY-06. The latter accounts for 85 per cent of its revenues, which stood at Rs 100 crore as of FY-06. Margins also moved up significantly in FY-06 to 18 per cent from low single-digit. VTL has a narrow customer base with international retailers such as Macy's, Kohl's, Laura Ashley, T. J. Maxx and H Goods accounting for 90 per cent of its sales.
Background to offer
VTL hopes to raise Rs 90 crore through this public issue, which will help fund its Rs 260-crore expansion project. The company will be doubling its made-ups' capacity to 50 lakh pieces a year. This would also require VTL to significantly scale-up spinning, weaving and processing facilities.
The expansion will allow it to extend its product line to include quilts, coverlets and, eventually, living room furnishings and curtains. The capacities will become operational in a staggered manner through FY-08 and the revenues from fresh capacities are likely to kick-in only in the subsequent year of FY-09.
Scaling up challenges
The company's capacities, post-expansion, will still be smaller than the current size of Alok Industries and Welspun India. These players are also on an expansion mode and, despite their heavy investments, have faced challenges in scaling up utilisation in their new facilities to optimum levels. They have, however, managed to grab a foothold in the market through overseas acquisitions of facilities and branded retail stores. This makes them better-placed to capture the robust export market for home furnishings. VTL will be hard-placed to make similar moves in the global market without a strain on its balance-sheet.
Its yarn segment, where it appears to have carved a niche, is also likely to be diverted increasingly towards captive consumption and is unlikely to be a major revenue contributor. With increasing competition in the bed linen segment from Pakistan and Bangladesh, pricing pressures continue to persist. In this context, VTL's focus on the higher end of the market is a positive. However, its margins are unlikely to move past the current levels in the near-term.
Offer details: About 69 lakh shares are on offer at a price band of Rs 115-130. The offer will raise Rs 90 crore at the upper end of the price band. The proceeds will fund part of a Rs 260-crore expansion project. Rest of the project costs will be funded through debt. The offer opens on February 8 and closes on February 13. The lead manager is IDBI Capital.
Euro Ceramics: Invest at cut-off
Euro Ceramics is a high-risk option for those looking for businesses that capitalise on the real-estate boom. High profit margins, plans to expand into the sanitary ware business and reasonable valuations augur well for the growth prospects of this tile manufacturer. However, garnering market share in a highly unorganised sector and the threat from cheap imports are major industry risks. The company is also a relatively new player (incorporated in 2002) and faces tough competition from well-established branded players.
Investors can consider exposure with a two-year perspective. At the price band of Rs 150-180, the share is being offered at eight-ten times its earnings for FY-06. On an expanded equity base and after commencement of commercial production, the price-earnings multiple for FY-08 is likely to remain in the above range. While this valuation appears to be at a slight premium to Murudeshwar Ceramics, Euro Ceramics' business mix will undergo a change with its entry into the sanitary ware business, which commands higher valuations.
Business: Euro Ceramics is a maker of vitrified ceramic tiles and aluminium extrusion sections used in construction. It was in the jewellery business for a short while in 2005 and exited the same due to poor margins. The business now appears more focussed on building materials. For the half-year ended September 2006, vitrified tiles accounted for 88 per cent of the revenues. The company plans to raise Rs 85-100 crore through this offer.
It plans to deploy the funds for setting up manufacturing facilities in Gujarat for sanitary ware. This will mark the company's entry into this line of business.
Quick expansion
Euro Ceramics has more than doubled its vitrified tile capacity to the current 79,971 tonnes per annum over 2003-2005, which is clearly reflected in the topline.
The operating profit margin, which was in line with the industry average, rose to a high 32 per cent in the half-year ended September 2006, driven mostly by higher capacity utilisation, post-December 2005 expansion. Given the current real-estate boom and about 60 per cent of the company's clients being institutions, Euro Ceramics is likely to witness robust demand for its product over the next couple of years. We view Euro Ceramics' entry into the sanitary ware segment as an extension of its existing business. The new facility, with an installed capacity of 11,000 tonnes is likely to be operational by October 2007. While the sanitary ware business is unlikely to command OPMs enjoyed by the vitrified tile segment, it carries potential to bring in robust volumes. That peers such as Hindustan Sanitaryware and Cera Sanitaryware are operating at near-full capacity indicates the robust demand for the product. However, being a new entrant, Euro Ceramics' success may well depend on its competitiveness in pricing to capture markets initially.
The company is also in the process of setting up a calcareous tile manufacturing facility, which is a substitute for marble and natural granite and caters to the upper end of the tile market. Local players have so far largely imported this kind of tile. This unit is expected to be operational in June 2007. We have, however, not considered revenues from this stream given the uncertainty in demand for this premium product.
This product, however, holds potential to prop the profit margins.
Further, the company is now enjoying certain tax and duty exemptions available for its factory in the Kutch district. This is likely to support the bottomline for the next couple of years and is likely to be extended to its new businesses, which is also located in the same region.
Risks
The quick expansion and new facility for calcarious tile has increased the debt component of the company's capital. The post-offer debt equity ratio of about 1.5:1 however appears comfortable.
The adequate interest coverage also adds comfort. The company is awaiting conversion certificate (from agriculture to industrial use) of a part of procured and registered land for the proposed project. Any delay in the same can affect earnings growth. However, the company has already received approval for a part of the land in the same area and has not so far witnessed any delays.
Euro Ceramics now has a captive lignite-based power plant. Although the cost per unit is lower than procuring from the State electricity board, lignite is not as efficient a source as natural gas, the latter being used by some of the peers.
Any steep increase in lignite could dent the operating profits. Investors averse to the above risks can consider setting a moderate target return for the stock and exit if the target is met shortly after listing.
Offer details: The IPO is open from February 07-13. UTI Securities is the book running lead manager.
Indian Bank: Invest at cut-off
An investment can be considered in the initial public offering of Indian Bank at the cut-off price. We would, however, be more comfortable with the valuations at the lower end of the price band. Strong brand value, high business concentration in the South, good scope for loan growth and its shaking off the demons of the past, strong capital adequacy, besides a fairly priced offer, are good reasons to subscribe.
Chequered past
For a bank that had the embarrassment of having made the largest losses in banking history just a decade ago, its return to profitability and standing now at the threshold of the capital market, are noteworthy. The history in the prospectus glosses over it rather euphemistically — "the bank experienced some financial setbacks in the 1990s consequent upon the introduction of prudential norms by the RBI and other factors and incurred losses in 1994 and during the period between1996 to 2001."
To term the bank's performance as a turnaround would be a slight exaggeration, considering that the government has pumped in capital (through re-capitalisation bonds) in several tranches of Rs 4,565 crore. Further, the government has also allowed the bank to write-off losses of about Rs 3,830 crore against its contribution. Other circumstances too helped — lower interest rates that helped the bank make treasury profits, a successful voluntary retirement scheme, a boom in housing loans that saw the loan book grow after the disaster in mid-1990s, and a determined upgrading of technology infrastructure. All these factors staved off what might have been a possible closure or merger with another bank. Of course, sovereign backing saved the bank despite being classified as a "weak bank" by some committees — which ought to be allowed only to perform narrow banking; just receive deposits and lend the money to the government.
Restructured capital base
The bank has restructured its capital base recently. It split its paid-up capital of about Rs 743 crore (after the write-off of losses) into Rs 400 crore of preference share capital and Rs 343 crore of equity capital. The bank is now making an offer of 8.59 crore shares that will see the government holding come down to 80 per cent from 100 per cent currently. The quantum of dilution is still moderate and leaves room for further capital issues as and when the bank's expansion plans requires them. In the current context of many banks being forced to go for hybrid capital instruments to ensure that government stake does not go below 51 per cent, Indian Bank's cushion for further expansion is to be seen as a huge positive.
Valuation
The offer is to be priced in a band of Rs 77-91 per share. At the lower end of the band, the price earnings multiple is about six times, while it is about 7.3 times at the higher end of the band. Those banks in the peer set of comparable size public sector banks, such as Andhra Bank, Allahabad Bank, Oriental Bank, IOB, Corporation Bank, etc., are traded at a P-E multiple of between six and 10. Again, the price-to-book value ratio of 1.2 at the lower end of the price band is competitive.
Performance indicators
Although the bank has posted some impressive numbers during the last two years, (it registered a profit of Rs 334 crore in the six months ended September 2006), some factors need to be taken into account.
A bulk of the profits in the preceding four years before 2005-06 has come from treasury gains, made from selling off government securities. Most banks benefited from the fall in interest rates and consequent inflation of the value of their government portfolio. Indian Bank was no exception. Its true mettle and ability to withstand competition in lending profitably will be seen now, as interest rates start moving up.
The cloud of a huge bad loan portfolio that hung on the bank for some years has lifted. As on September 30, 2006, the bank's gross non-performing assets were Rs 625 crore (2.34 per cent of its loans) and net non-performing assets were about Rs 176 crore (0.45 per cent). An improved climate for debt recovery and institutional changes in the system (SARFAESI Act, asset reconstruction companies, credit information bureau), besides the fast pace of economic growth, has helped public sector banks face up to the challenges posed by recalcitrant borrowers. Most banks have brought their net non-performing assets ratio to 1 per cent or below.
The level of computerisation and business covered by its core banking solutions (85 per cent) is on a par with industry standards. Its regional concentration, with bulk of branches and business in south, is currently rated as a positive attribute.
The bank's net interest margin at about 3.6 per cent compares favourably with industry. However, the bank's current accounts and savings bank accounts (CASA) ratio at 35 per cent leaves scope for improvement. Its dependence on term deposits will put a strain in the near-to-medium term, when interest rates are on the rise.
Recently, the bank entered into a strategic alliance with Oriental Bank of Commerce and Corporation Bank. While the stated aims of this alliance — achieving synergies, economies of scale, geographical spread, cross-selling and cost savings — have to be still seen in practice, there has been speculation that this is a prelude to the eventual merger between the three banks. Although consolidation among public sector banks is the eventual goal, the absence of industry-wide consensus will keep the idea on the boil for some more time. Weak banks (those with less capital) will be forced to merge with those with extra capital — and here Indian Bank seems relatively well-placed.
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