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Sunday, February 11, 2007

Big-gest deal: Vodafone bags Hutch for $19.3 bn

UK telecom major has finally bagged the big telecom battle. In an intense battle Vodafone is understood to have emerged as the winner for majority stake in India's fourth largest mobile player Hutch-Essar, pipping Anil Ambani group's Reliance Communications, Essar and Hinduja Group.

Vodafone’s winning bid stood at $19.3 bn.

The fate of suitors, who submitted their bids on Friday, was decided at a meeting of the Board of Hutchison Telecom which had put its 67 per cent stake on the block a few months ago, on Sunday.

Officials of either HTIL or any other suitor could not be contacted for comments on the details of their respective bids.

As per sources, Vodafone has offered to make Essar partner which is being evaluated by Essar. & Newsletter

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What Will Chidambaram Do?

Palaniappan Chidambaram, 61, is going to be the envy of most finance ministers when he rises to present the Union Budget for 2007-08. After all, it is not every day that the treasury manages to exceed even its most optimistic revenue targets, and, that too, by a comfortable margin. The finance ministry is expected to close 2006-07 with at least Rs 20,000 crore more than the Rs 4,42,200 crore that Chidambaram had estimated he would collect in taxes. And mind you, this wasn't an easy target by any stretch of imagination; it was as aggressive as it gets. Finance ministry officials point out that the target of Rs 2,10,000 crore for direct taxes was exactly double the actual direct tax collections in 2003-04-a 100 per cent growth in three years-and even that is likely to be exceeded. This has given rise to optimism that the Finance Minister may play Santa Claus on February 28. "If tax compliance improves, there is scope for moderation," he reiterated recently in a television interview. That's the positive part. On the flip side: Chidambaram will be under tremendous pressure from his own party, coalition partners and allies to allocate resources to populist schemes in a year when several states go to the polls.

For economy watchers, this abundance doesn't come as a surprise. It has been in the works for a long time, as the government, over the years, rationalised and simplified the country's complex tax structure. But the more immediate trigger for this bounty is the stupendous economic growth that India has been experiencing over the last few years. "Public finances are improving partly because growth is feeding revenues and partly because of improved tax systems," says Sanjeev Sanyal, Director, Global Markets Research, Deutsche Bank.

The economy has been galloping quarter after quarter. So have corporate profits (See In Step With Each Other). Gross Domestic Product (GDP) growth in the first-half of the current financial year topped the 9 per cent mark-close to the aspirational double-digit growth figure. If the services sector was the lone sprinter earlier, then industry has now joined the race, clocking 14.4 per cent year-on-year growth-nearly 3-4 percentage points over consensus estimates-in November, 2006. The rest is a no-brainer: rapid industrial growth naturally leads to higher excise collections (though they are still lower than what the fm would want) while higher imports swell the customs duty kitty. And corporate tax? This rose over 50 per cent during the first three quarters of the current financial year. It's a virtuous cycle-corporate expansion is fuelling a secular rise in salary levels that has fuelled an over 27 per cent growth in personal tax collections during the same period (See The Coffers Brimmeth Over).

The boom in the services sector, which accounts for 55 per cent of India's GDP, is also being reflected in the tax collections. Though the service tax to GDP ratio is still a low 1 per cent, it is growing rapidly on its still small base and helping sustain the over 20 per cent growth in indirect tax collections. New levies introduced over the last three years, such as the securities transaction tax (STT) and the fringe benefit tax (FBT), also help sustain the momentum. "These new taxes are easing the pressure on traditional contributors such as customs and excise," says Gaurav Taneja, Partner, Ernst & Young.

Improved Tax Systems

Across the economy, the emphasis has shifted from tax avoidance to wealth creation, says Rahul Garg, ED, PricewaterhouseCoopers. "Given the economic buoyancy, there is an increased ability and willingness to pay taxes," he says, adding that the tax department's systematic approach to investigations and scrutiny is also helping create a credible deterrent against non-compliance. "The department has become more aggressive; the intensity of the action is very high," says E&Y's Taneja. The numbers bear this out: tax demands made after scrutiny of a mere 2 per cent of returns typically yield around 10-12 per cent of the gross direct tax collections.

If this aggressive approach is working for the corporate sector, then it is also working in the personal income tax domain. The government is now tapping third party sources such as banks (see Big Brother is Watching) to collect data on "high value" transactions. "Unaccounted for income has to be either spent or invested. We are tracking both routes," says a senior finance ministry official.

Another associated factor, though not directly linked to Central government finances, is the switchover in most states to value added tax (VAT) from central sales tax. This has created, what economists call, a "self-generating, complex paper trail" for unaccounted wealth. And the effect on state government finances has been dramatic. During 2005-06, tax revenues of the 25 states that have implemented VAT grew 13.8 per cent year-on-year-higher than the compounded annual growth in sales tax collections in the previous five years up to 2004-05. As the tax regime gets streamlined, more such advantages will accrue.

Room for Manoeuvre

The government's coffers are overflowing. The big question is: what will Chidambaram do with his bounty? Will he use the available headroom to undertake some much-needed but politically unpopular reformist measures or will he go down the populist path?

"The underlying momentum in the economy, coupled with the new-found efficiencies in the tax collection system, will definitely give the Finance Minister more leeway to invest in areas like infrastructure and education," says V. Balakrishnan, CFO, Infosys Technologies. Also, in the wake of widespread prosperity, there is greater acceptance of the government's "common man" agenda. "Demands for spending large amounts on social sector schemes should not be seen to be at cross-purposes with policies that spur economic growth. These will actually play a complementary role," says E&Y's Taneja. But Rajan Varma, CFO, Dabur India, adds a word of caution. "Higher allocations for the social sector will certainly be welcome if they are targeted," he says, highlighting widespread concerns about the leaky delivery channels for such spends.

However, the Finance Minister will be under tremendous pressure to deliver a populist budget. Elections are due this year in four states, including in the politically crucial Uttar Pradesh; and for the political class the Budget is still a great instrument to make its point. A sneak preview of this pressure was in evidence when excise duty concessions for hilly states, which were due to expire in March this year, were extended by three years. Uttaranchal, a beneficiary of this move, is one of the states going to polls. The same pressures seem to be driving the proposal for priority lending to minorities by banks.

Finance Ministry mandarins are tightlipped about the direction of the Budget, but the heartening point is that the government is making all the right (and responsible) noises about it. The indications are that Chidambaram will use this opportunity to initiate changes that are critical for long-term revenue buoyancy. And political backing for such changes was provided by none other than Prime Minister Manmohan Singh himself. "In the long run, our tax regime should not have too many exemptions which make tax administration an unnecessarily complex exercise vulnerable to misuse," he told an industry forum recently.

The focus on removal of exemptions comes with the need for lower taxes. And there is quite a clamour at least for lower rates on the direct taxes front. Recently, in an open letter to the Finance Minister, investment bank CLSA Asia Pacific Markets argued for a 3-4 per cent reduction in effective tax rates on income for corporates and individuals. His department's bulging coffers gives him sufficient room to grant this wish, and still spare some for correcting the fiscal imbalance. Though the Budget target for fiscal deficit will be easily attained this year, more clearly needs to be done on this score. Standard & Poor's Credit Analyst Sani Hamid points out that India's fiscal position, including its deficits, debt and interest payment liabilities, is still among the weakest of all the countries rated by the global credit rating agency. "India's average general government deficit, of 8 per cent over financial years 2003-2007, is well above the deficit of 2.2 per cent and 2.9 per cent for the bb and B medians, respectively, for the same period." S&P rates India bb+, just a notch below investment grade. Higher tax collections will give the Finance Minister space to begin fixing this problem as well.

"It is imperative that this (buoyant) trajectory be held. All that India needs to do is just stay the course," says Deutsche Bank's Sanyal. And the best part is that this time, Chidambaram can afford to please both the populists and the pragmatists.


Remove the 10 per cent surcharge on corporate and personal income taxes

Reduce income tax rates on personal income

Reduce peak customs duty rate by 2.5 per cent to 10 per cent

Increase the service tax rate to 14 per cent and bring more services into the tax net

Announce a clearer roadmap for transition to the Goods and Services Tax by April 2010

Reduce myriad exemptions across the tax system

Make visible and probably enhanced allocations for education and healthcare

Make a visible effort to spur growth in the lagging farm sector. He may set up a farmer infrastructure investment fund as proposed by National Commission for Farmers

Announce a special package for unorganised sector workers and for minorities

Reduce the excise duty on large cars from 24 per cent to 16 per cent. He could push this to the next year as well

Take small steps on financial sector reforms, including capital account convertibility

Geojit Result Updates

Beck India Ltd (BIL)

Beck India, 88.5% subsidiary of Atlanta AG, has reported good performance for Q4 CY2006. Net Sales grew @29.9% to Rs.38.88 crore led by 17.4% rise in Wire Enamel & Varnishes sales (55.7% of turnover) and 47.7% rise in resins sales (44.3% of turnover). However OPM% declined marginally to 16.1% (16.4%) as rise in other heads of expenditure offset savings in raw material cost. PBIT of Wire Enamels & Varnishes declined to 12.6% (14.1%) while PBIT% of Resins business declined to 20.9% (21.9%). PBT increased by 24.5% to Rs.6.88 crore. A lower rate of tax of 28.9% (37.2%) led to 40.9% increase in PAT to Rs.4.89 crore.

BIL produces widest range of electrical insulating materials as well as construction chemicals. In order to cater to power requirements of growing Indian economy, government aims to increase power generation from present 124,000 MW to 200,000 MW and looking downstream country plans to add 600,000 ckm to transmission network by 2012. This major initiative and expenditure outlay will augur well for sustained growth in electrical equipment industry benefiting company’s electrical insulating business. In addition, migration of production capacities to India is creating new business opportunities for BIL in India as well as export markets. Through Atlanta association company has forayed into Sri Lanka and South Africa and is working on supplying intermediates to group companies.

Construction chemicals is also a rapidly growing sector in India and Beck India is concentrating on certain niche protective coatings and floorings for high end light engineering, pharma, food processing and nuclear institutions. Though Atlanta is not in construction chemicals, Beck India has been able to hold against global competitors active in India through its in-house product development and application skills.

Electrical and Construction industry, which constitutes BIL’s customer base, are on an uptrend. Beck India with its R&D capabilities, access to global technologies and innovation skills in technical and application areas, is all set to explore emerging opportunities.

At CMP of Rs.380/- share is trading at 17.8 times CY 2006 EPS of Rs.21.3 and 13.7 times CY 2007 expected EPS of Rs.27.7 We recommend to “BUY” the share at CMP in view of excellent business prospects.

Essel Propack (EPL)

EPL, manufacturer of laminated tubes, plastic tubes, medical devices and speciality packaging materials with state-of-the-art manufacturing facilities in 13 countries with 24 plants across globe, has declared good numbers for Q4 CY 2006 and CY 2006 (December year-end). Consolidated Net Sales grew @ 31.7% to Rs 289.3 crore (Rs 219.7 crore) led by steady growth in tubes business. PAT increased by 13.6% to Rs 30.1 crore (Rs 26.5 crore).

Factors like retail boom and India’s increasing positioning as the world manufacturing hub for prescription drugs has increased the need for convenience packaging. This can be easily tapped by leveraging on Company’s strong capabilities and market leadership position.

In laminated tubes, Company has widened product range by introducing mini tubes (for pharma & FMCG industry) and inviseam tubes and thus has become fully integrated laminated tubes company in the world. However, as the growth opportunities were limited in laminated tubes, Company diversified into plastic tubes business by acquiring Arista in 2004. This acquisition gave EPL entry in new markets of UK and Europe. Company also set up a green field plant in USA which became operational from December 2006 to cater growing demand and expanded existing capacity at UK.

Recent 100% acquisition Packaging India Pvt. Ltd. which is present in Medical Devices and Speciality Packaging business has de-risked its business model. In Medical devices, Company manufactures cardiac catheters based on polymer processing which is EPL’s core competency. In Speciality Packaging, Company is currently focusing into food packaging for FMCG sector. It is also looking to enter high margin pharma packaging business in near future. Speciality Packaging will be one of the major growth drives and to cater to higher demand, Company is setting up a plant at Uttranchal at a cost of Rs 45 crore. This plant will start contributing to top-line and bottom-line from middle of CY 2007. Company targets revenues of ~ $ 100 mn (Rs 450 crore) each from Medical Devices and Speciality Packaging by CY 2010.

Turnaround plans of Company have also started paying off. Company was successful in turning around laminated tube business in UK and Mexico. Plastic tube business in UK has reached the breakeven levels by year-end and Russian business is evolving and has good potential. On a consolidated basis, Company targets revenue of $ 500 mn (Rs 2,250 crore) by CY 2009 for which catalysts are put in place.

At CMP of Rs 76.55, share is trading at 9.2 times CY 2007 expected EPS of Rs 8.4 and 5.9 times CY 2008 expected EPS of Rs 12.9. We recommend “BUY” at CMP in view of excellent future outlook.

ICI India

ICI, 51% subsidiary of ICI Plc., U.K., has reported cheerful set of numbers for quarter ending Dec. 2006.

It should be noted that company has divested couple of businesses (viz. rubber chemical in FY 2006 and Uniqema in FY 2007) in recent past. To have meaningful comparison, one has to adjust for such exclusions.

Reported Net sales declined by 12.8% to Rs. 224.2 crore (Rs. 257.2 crore). However, continued businesses registered 12% sales growth. Paint turnover was up by 11.7% to Rs. 192.37 crore (Rs. 172.23 crore), while continued chemical business grew @ 14.7% to Rs. 31.86 crore (Rs. 27.78 crore). Overall OPM% improved noticeably to 15.6% (14.4%) led by sharp improvement in PBIT% of paint business to 14.8% (11.7%) because of price hikes across all product categories & control on fixed costs. After accounting for more than doubled other income of Rs. 7.67 crore, PBT (before extra ordinary items) inched up by 7.7% to Rs. 36.34 crore (Rs. 33.74 crore). After accounting for large exceptional income of Rs. 253.61 crore (expenses of Rs. 10.62 crore) from sale of Uniqema business, PAT zoomed to Rs. 225.3 crore (Rs. 8.27 crore).

Company has hived off Uniqema business to Croda Chemicals for Rs. 280 crore. It has also agreed to sell its 100% stake in Quest International (engaged in the business of flavours & fragrances) to Givaudan Group in line with global sale for Rs. 390 crore. After hiving off these businesses, ICI is now emerging to be a major player in decorative paints and chemicals (mainly starch).

Demand for paints continues to be buoyant owing to construction boom, new product launches, etc. Consequently, industry is expected to grow at double the GDP growth rate i.e. @ ~ 15-16% and company will be able to achieve 20-25% value growth due to aggressive play and premium products. It is also looking for M&A opportunities in paint business preferably in India.

Starch business is also expected to grow @ 15-20% p.a., being customer specific technical segment. To further strengthen this business, ICI has recently acquired controlling interest (67%) in Polyinks, existing player in Hotmelt Adhesives market for Rs. 9 crore.

At CMP of Rs. 452.55, share (Rs. 10/- paid up) is trading at 21.1 times FY 2007 expected EPS of Rs. 21.4 and 16.1 times FY 2008 expected EPS of Rs. 28.2. Company is sitting on huge pile of cash which will further swell on receipt of proceeds from sale of businesses. In view of robust business prospects, we recommend to “BUY” the share at CMP.

Mahindra & Mahindra (M&M)

M&M is flagship company of the $3 billion Mahindra Group and largest manufacturer of MUVs in India. Company has reported excellent performance on consolidated basis for Q3 FY2007. Consolidated Gross revenues & Other income grew @ 30.7% to Rs. 4757.4 crore (Rs. 3639.8 crore) following good performance by both parent company as well as group companies. PBT before exceptional items was up by 40.6% to Rs.548.4 crore (Rs.390.1 crore), while PAT after minority interests doubled to Rs.530.6 crore (Rs.262.5 crore).

However, M&M’s standalone performance for Q3 FY2007 was subdued. Standalone Net sales grew @ 16.7% to Rs.2576.06 crore led by 9.7% growth in automotive sector (57% of sales) and 27% growth in farm equipment sector (38.3% of sales). However, OPM% declined to 12% (12.9%) due to decline in PBIT % of automotive segment to 10% (15.2%) due to deterioration in sales mix and inability to pass on higher input costs. However, PBIT% of farm equipment business improved to 14.9% (12.3%) on back of strong operating leverage and higher realizations. PBT (before extra ordinary items) increased by 16.5% to Rs.315.42 crore. After accounting for extraordinary expense of Rs.0.63 crore (Rs.1.49 crore –VRS and Rs.0.86 crore – Tech Mahindra IPO profit) as against extraordinary income of Rs.46.91 crore on account of sale of LCV division and octroi refund, growth in PAT got restricted to 3.5% at Rs.241.69 crore.

Going forward, newly launched pick-ups like MaXX MAXI truck and Bolero Pik up are expected to boost volumes of automotive division. Another growth driver will be M&M’s much-awaited entry into passenger vehicle segment by start of FY08 with launch of Logan. Also planned in FY08 is launch of new UV platform Ingenio. In tractor segment, latest launch of Shaan - a multi-utility tractor is expected to boost growth. Over next 3 years, M&M expects to incur capex Rs.2,000 to Rs.2,400 crore. This will not only include investment in JV but also investment in manufacturing capacity.

Company’s major subsidiaries (into realty, infrastructure, finance, IT) have performed well & will continue to give it consistent revenue growth. Tech Mahindra and Mahindra Finance posted a growth in PAT of 122% and 59% respectively in Q3 FY07. As subsidiaries grow in scale there will be significant value unlocking.

In view of strong growth expected in tractor segment on back of robust growth in economy, company’s entry into passenger car segment and strong performance of subsidiaries, company’s future appears buoyant.

At 906.90, share is trading at 13 times FY 2007 expected consolidated EPS of Rs. 70/- and 10.4 times FY 2008 expected consolidated EPS of Rs. 87.50. Considering above mentioned factors, we recommend to “BUY” the share.

Madras Cements (MCL)

MCL, 3rd largest cement producer in southern India with Ramco brand & having capacity of 6 mn tonnes, has reported excellent performance for Q3 FY 2007. Net Sales grew @ 61.1% to Rs 391 crore (Rs 242.7 crore) led by 25% volume growth in cement despatches to 13.88 lakh mt (11.1 lakh mt) and 29% increase in realization of Rs 2,818/- per tonne (Rs 2,185/-). OPM% enhanced to 32.71% (17.15%) primarily due to higher realization and reduction in Power & Fuel cost to 20.78% (24.6%) and in Transportation & Handling cost to 14.11% (17.97%). Consequently, PBT zoomed to Rs 103.1 crore (Rs 14.4 crore) and PAT shoot up by 609.4% to Rs 68.1 crore (Rs 9.6 crore).

Company is implementing a green-field cement unit of 2 mn tonnes, at Ariyalur in Tamil Nadu at a cost of Rs 613 crore and a clinker manufacturing unit (effective cement capacity 2 mn tonnes) at a cost of Rs 439 crore at existing location at Jaivanthipuram in Andhra Pradesh. Thus, total capacity will expand from 6 mn tonnes currently to 10 mn tonnes, an increase of 67%. Moreover, it is doubling captive power plant capacity at a cost of Rs 112 crore. First unit of 18 mw captive power plant is expected to commission by March 2007. This will further lower its Power & Fuel cost, thereby boosting profitability margins.

Huge investments announced in infrastructure projects in various parts of the country and booming housing sector provide good visibility for strong cement demand in coming years. Such positive outlook is expected to sustain cement prices at current level at least in medium term leading to higher profitability for MCL.

At CMP of Rs 3,430.75, share is trading at 12.3 times FY 2007 expected EPS of Rs 279.3 and 11.6 times FY 2008 expected EPS of Rs 295.6. Considering strong future outlook, we recommend “BUY” at CMP.

Usha Martin Limited (UML)

UML, an integrated specialty steel and global wire rope company, has reported fantabulous results for Quarter ended December 2006 (Q3 FY 2007).

Standalone net sales (excl. excise and inter-divisional transfer / sale) grew 11.3% to Rs. 351.4 crore (Rs. 315.8 crore) as sales (gross) from value added Wire & Wire Ropes rose by 18% to Rs. 197.4 crore. Steel sales (gross) went up to Rs. 252.3 crore (Rs. 232.2 crore) [Specialty steel production grew by 12% during the quarter]. Despite increase in overall costs, OPM% improved to 21.49% (19.79%) as raw material costs declined substantially to 35.9% (42.9%) as % of sale on back of benefits from backward integration of iron ore. Consequently PBT increased 62.9% to Rs. 39.1 crore (Rs. 24.0 crore). Lower average tax rate further propelled PAT up by 72.2% to Rs. 28.4 crore (Rs. 16.5 crore).

Consolidated net sales (excl. excise and inter-divisional transfer / sale) stood at Rs. 480.4 crore for the quarter while PAT was at Rs. 39.9 crore.

With effect from December 1, 2006, UML has acquired rolling mill unit of U-Tor Construction Steel Ltd. located at Agra for consideration of Rs. 7.53 crore.

UML is on line to expand its steel capacities from present 4 lakh tones p.a. (tpa) to 10 lakh tpa and then divert up to 50% (5 lakh tpa) towards specialty steel. It is also increasing value added steel (Wire & Wire Ropes) capacities from 1.7 lakh tonnes to 4 lakh tonnes by FY 2010. For this purpose it is investing Rs. 1,300 crore to be financed by mix of GDR, debt and internal accruals (without further equity dilution); post which it aims to achieve turnover of ~ Rs. 5,000 crore.

Company is also focusing on enhancing its competitive edge through a string of cost saving measures to significantly improve profitability (by ~ 10%):

Ø Complete captive iron ore mining (already operational and expected to achieve 100% efficiency in Q4 FY 2007).

Ø Captive coal mining (expected to start benefiting company from Q2 FY 2008). Both above backward integration measures would help in saving Rs. 800-1000/- per tonne as well as shield company from trend of rising raw material prices.

Ø Setting up 400,000 tpa sintering plant by December 2007.

At current market price of Rs. 211/- share is trading at 7.8 times FY 2007 expected consolidated EPS of Rs.27 and 5 times FY 2008 expected consolidated earnings of Rs. 42; further company’s earnings will receive a major boost with progress / completion of above expansion plans. In view of excellent prospects, we recommend to ‘BUY’ the share at CMP.

Tata Elxsi (TEL)

TEL, a niche IT Company with core focus on Product Designing Services and Industrial / Engineering Designing Services space, has posted strong set of numbers for Q3 FY 2007. Net Sales grew @ 39.1% to Rs 80.46 crore (Rs 57.83 crore). OPM% enhanced to 22.7% (18.5%) due to higher PBIT% margin of 24.3% (19.6%) from Software Integration & Support Services. PBT jumped to Rs 15.97 crore (Rs 9.04 crore) and consequently PAT shoot up by 83.1% to Rs 13.96 crore (Rs 7.63 crore).

Global spending for engineering and designing services is currently estimated at $ 750 bn p.a. By 2020, worldwide spending on engineering services is expected to increase to more than $ 1 trillion. Of the $ 750 bn spent today, only $ 10-15 bn is currently being outsourced of which India’s share is 12%. With its strong presence and proven execution skills, strong brand name of Tata and huge & experienced talent pool, the Company is all set to reap the benefits of engineering outsourcing story.

TEL offers wide variety of specialized technologies ranging from Automotive Systems, VLSI design, Embedded Systems, Networking, Digital Signal Processing. Customers (major ones CISCO, Motorola, Hitachi, Canon etc.) rely on Company’s R & D that shapes futuristic products in the market segments from Automobiles, Consumer products, Semiconductors, Media, Storage and Scientific Application. Going forward, Company expects Industrial Designing, Animation, Telecommunication and Embedded Software to be the major growth drivers.

At CMP of Rs 300.80, share is trading at 16.33 times FY 2007 expected EPS of Rs 18.42 and 10.03 times FY 2008 expected EPS of Rs 30/-. We recommend “BUY” at CMP considering excellent growth prospects.

Sundaram Finance (SF)

Sundaram Finance (SF) has come out with very good numbers for Quarter Ended December 2006 (Q3 FY 2007). Standalone net interest income (income from operations less financial expenses) sales have increased by a handsome 35% to Rs. 68.71 crore (Rs. 50.92 crore) despite a higher rise in financial expenses of 46.4% to Rs. 98.96 crore against that of income from operations @ 41.4% to Rs. 167.67 crore. Strong income growth coupled with lower operating costs (as % of total income) saw PBT spurt 50% to Rs. 32.74 crore (Rs. 21.83 crore) despite higher provisioning and write offs. Lower average tax rate further boosted PAT to Rs. 22.65 crore (Rs. 14.66 crore).

SF is the only NBFC (non banking financial company) in India that is in the business of commercial vehicle (CV) financing (car and CV financing segments constituted over 85% of disbursements in 2005-06) for over 5 decades wherein it has developed strong brand equity and robust customer relationships. This has helped it to face stiff competition from banks and other NBFCs. Adequate capital position (Tier I capital adequacy of 13.75% as on March 31, 2006) coupled with robust asset quality (gross NPA stood at 1.58% of total assets as on March 31, 2006) due to effective credit evaluation norms and efficient collection mechanisms will provide good buffer to SF in growing its business as well as maintaining profitability in an increasingly competitive era.

Recently released draft guidelines by RBI have increased provisioning requirement (from 0.4% to 2%) and risk weights (from 100 to 125%) for banks’ exposures to NBFC. These guidelines are not applicable to Asset financing companies (AFC) like SF. Hence, SF will enjoy twin benefits:-

1) Reallocation of bank funding to AFCs will make borrowing easier for SF (bank borrowings accounts for ~ 50% of its financial requirements)

2) Increase the borrowing costs for NBFCs enhancing SF’s pricing competitiveness vis-à-vis other NBFCs.

However, SF’s ability to manage steadily rising deposit costs, interest rate hikes by RBI and intensifying competition from banks will be key going forward.

At CMP of Rs. 431/-, the share (Rs. 10/- paid up) is trading at 5.3 times FY 2007 expected consolidated EPS of Rs. 82/- and 4.6 times FY 2008 expected consolidated EPS of Rs. 94/-. In view of bright business prospects, we recommend to “BUY” the share at CMP.

Precot Meridian Limited (PML)

Precot Meridian, coimbatore based textile company poised to venture into high margin garmenting segment, reported excellent results for Q3FY2007.

Net Sales grew by 40.4% to Rs 83.53 crore (Rs 59.48 crore) driven mainly by increase in spindlage capacity and value addition in yarn – gassed yarn & dyed yarn which yield better realization. OPM increased to 16.8% (14.5%) due to stable cotton prices and value addition in yarn resulting in better realization in yarn dyed shirting fabric. Operating profits increased to Rs 15.92 crore (Rs 11.40 crore) – growth of 39.6% which increased PBT by 50.4% to Rs 8.39 crore (Rs 5.58 crore) despite increase in interest & depreciation cost. PAT grew by whopping 75.3% to Rs 6.17 crore (Rs 3.52 crore) due to lower charging of average income tax rate.

Company is moving up value chain by venturing into manufacturing of Shirting fabric and garmenting to become an integrated textile player which would enhance its profitability in future. For this purpose, PML plan to invest Rs 30 crore to create garment making facility in a phased manner. In the phase-I, company will have 400 sewing machines with a capacity to produce 4 million pieces annually which will be doubled in 2007-08.

During FY 2007, Precot acquired spinning assets of Philippines based Litton Mills at Rs 40 crore having installed capacity of 32,256 spindles. IT has also merged Meridian Industries (MIL) – Group Company (swap ratio – one share of PML for every 2 shares of MIL) is also on expansion mode, which will raise its spindle capacity to 51000 spindles (34,000) at Rs 70 crore. Merged entity will have total spinning capacity of 200,000 spindles (post expansion).

At CMP of Rs.253, share is trading at 8 times FY 2007 expected EPS of Rs. 31.7 and 5.5 times FY 2008 expected EPS of Rs.46/-. Going ahead, company has good growth potential in view of its becoming integrated textile player – presence in spinning, weaving, processing and garmenting – entire value chain will significantly drive its profitability in future. We recommend to “BUY” the share at CMP.

Valecha Engineering Ltd. (VEL)

Valecha Engineering Ltd. (VEL), leading infrastructure and developing company, has come out with superb results for Quarter Ended December 2006 (Q3 FY 2007).

Net income from operations surged 69.1% to Rs. 68.86 crore (Rs. 40.73 crore). OPM% improved to 8.7% (7.5%). Consequently PBT doubled to Rs. 5.36 crore (Rs. 2.60 crore). After accounting for one-off item of Rs. 18.11 crore, PAT shot up over 10 times to Rs. 22.11 crore (Rs. 1.79 crore).

Future prospects –

© From being a pure contractor in civil construction, VEL wants to expand its role and become a developer in road & hydel power sector. Company is planning to venture into BOT projects as long-term strategy for growth and stability. This is important, as most of new roads and hydel projects will be operated on Build, Operate and Transfer (BOT) basis, where margins are better.

© Company is looking to diversify into real estate (townships and malls), through special purpose vehicles. It is looking to earmark investment of ~ Rs. 100 crore for this venture.

© It is also planning to enter international markets to further boost revenues. It has already formed a JV (VEL – 49%) in Dubai to exploit business opportunities in Middle East. It will make capital infusion of Rs 15 crore p.a. for next 2 years. This JV (commenced operations in Q3 FY 2007) is expected to achieve turnover of Rs. 80 crore in FY 2008.

© Company has also entered into 50:50 joint venture (JV) with Malaysian-based infrastructure company “Persys” for the bidding of Bangalore Metro Rail Project.

© Company has a low debt equity ratio (of below 0.5) enabling it to leverage its strong balance sheet for bagging large orders. It also holds 686,280 shares of Jyoti Structures (current market value – Rs. 12.15 crore). This holding was earlier bought down from 10,86,280 shares (400,000 shares being transferred to 100% subsidiary Valecha Infrastructure Ltd.) to increase net worth and make the company eligible to bid for BOT projects.

At CMP of Rs. 222/-, the share (Rs. 10/- paid up) is trading at 15 times FY 2007 expected EPS of Rs. 14.86 (excl. one time gain of Rs. 18 crore) and 10 times FY 2008 expected EPS of Rs. 22.28. Company is a direct beneficiary of rising importance of infrastructure sector in India’s growth. In view of robust order book and bright business prospects, we recommend to “BUY” the share at CMP.

Yuken India Ltd. (YIL)

Yuken India Ltd. (YIL) has come out with fabulous results for Quarter Ended December 2006 Net sales grew 36.8% to Rs. 22.87 crore (Rs. 16.72 crore). OPM% shot up to 16.7% (9.8%) due to better operating efficiencies and savings on all heads of expenditure. Good sales growth coupled with improved margins led to jump in PBT to Rs. 2.75 crore (Rs. 0.80 crore). Lower average tax rate further drove PAT to Rs. 1.75 crore (Rs. 0.36 crore).

YIL one of leading manufacturers of power saving Oil Hydraulics and provides a comprehensive range of hydraulic products – pumps, valves and power units. It is also entering gear pumps segment, which caters to automobile industry. YIL has technical collaboration with Yuken Kogyo, Japan, which also holds 40% stake in the company. Hydraulic devices find application in heavy engineering industry as effective means of automation. To make an economy more globally competitive, lot of automation and hydraulic tools would be required to improve quality, consistency, lower fatigue, and improve safety and productivity. Thus company’s products are best suited to capitalize on economic growth. It is also making new product introductions.

In addition to strengthening its position in domestic market, company is penetrating export market through process improvements.

Going forward, YIL will be able to cater to increased demand for its products without any substantial capex. Company will outsource more and will invest more in CNC machines, which will improve OPM%.

At Rs.146.60 the share is trading at 9.6 times FY 2007 expected EPS of Rs.15.3 and 7.3 times FY2008 expected EPS of Rs.20. In view of good business prospects, we recommend to “BUY” the share at CMP.

AIA Engineering

AIA Engineering, a niche player in high value added high chrome metallurgy segment commanding 90% market share in India, has reported outstanding performance for Q3 FY 2007.

Consolidated Sales grew @ 30.8% to Rs. 123.5 crore (Rs. 94.5 crore) led by 66.7% jump in export sales of Rs. 55 crore (Rs. 35 crore). Domestic turnover rose by 11.5% to Rs. 69 crore (Rs. 61 crore). OPM% improved to 25.55% (23.10%) due to better product mix with improved focus on value added high chrome mill internals, and increased production volumes resulting into better operational efficiencies. More than doubled other income of Rs. 5.18 crore (Rs. 2.31 crore) further boosted PBT (before extra ordinary items) by 65.5% to Rs. 34.05 crore (Rs. 20.58 crore). Sharp reduction in average tax rate of 26% (30.6%) lifted PAT (after minority interest) by 83.4% to Rs. 24.89 crore (Rs. 13.57 crore).

Company manufactures milling internals used in grinding operations of cement (73.4% of sales), mining (7.8% of sales) and utilities (18.9% of sales). All these user industries are witnessing tremendous boom in India. In global markets, it has supply contracts with most global cement manufacturers and is all set to further consolidate its position in cement sector and also foray into global mining sector.

For this purpose, company is expanding capacities from current level of 65,000 tpa à 165,000 (50,000 tpa each in 2 phases) in by October 2007 à 265,000 tpa in FY 2008 (by setting up either green field / brown field 100,000 tpa plant) à 315,000 tpa in FY 2009 (additional 50,000 tpa). Thus, capacity would go up by almost 5 times by FY 2009. Company is also planning to integrate backward by acquiring ferrochrome plant in India or outside India. All these capex plans are to be financed thru equity issue to QIP (Qualified Institutional Placements – raised Rs. 125 crore by issuing 10.20 lakh shares @ Rs. 1225/- during the quarter under review) / ADR / GDR / other routes.

At CMP of Rs 1379.25, share (Rs 10/-) is trading at 25.2 times estimated FY 2007 consolidated EPS of Rs 54.7 and 16.2 times estimated FY 2008 consolidated EPS of Rs 85.2. We recommend a strong BUY as the company is going for aggressive capacity expansion over next 2-3 years to further fortify its market leadership and emerge as a major global player.

Areva T&D

Areva T&D, 66.65% subsidiary of Areva T&D France, has reported sterling performance for quarter Q4 CY 2006 (Year-end December).

It should be noted that company has divested its non-T&D business w.e.f. January 1, 2006. To give meaningful comparison, company has provided figures for quarter ending December 2005 for only T&D business.

Net Sales (excl. excise) has soared up by 35.5% to Rs. 400.7 crore (Rs. 295.75 crore). OPM% improved significantly to 14.4% (10.5%). Further aided by higher other income of Rs. 3.1 croer (Rs. 0.6 crore), PBT (before extra ordinary items) skyrocketed to Rs. 56.1 crore (Rs. 28.5 crore).

Areva T&D, one of the few large players in the transmission and distribution of electricity, will be big beneficiary of capital spending on power and also civil nuclear power plants becoming a reality. The massive upgradation of T&D network is multi-billion dollar opportunity for company in coming years.

Parent company is consolidating its closely held T&D operations in India by amalgamating Areva T&D Systems India, Areva T&D Instrument Transformers, and Areva T&D Lightening Arresters w.e.f. January 1, 2006. For this purpose, company will be issuing 79 lakh shares of Rs. 10/- each to parent company. Consequently, Areva – France’s stake in Indian outfit would stand enhanced to 72.16% (66.65%). With consolidation happening in Areva T&D, India’s power story will be captured entirely in this listed company as there won’t be any other subsidiary of the parent.

Besides, parent company also views Indian operations as sourcing base for supply of components & products to other units worldwide. With Indo-USA nuclear deal going through, parent company may make India hub for manufacturing components for EPR (European Pressurized Reactors). This move would help to bring down costs and make India one of its “first priorities” market. Parent company plans to invest > Rs. 250 crore in next 3 years in Indian unit.

At CMP of Rs. 1,101/-, share (Rs. 10/- paid up) is trading at 25 times CY 2007 expected EPS of Rs. 44.32 and 17. times CY 2008 expected EPS of Rs. 62.6 on existing equity of Rs. 40 crore without considering addition from proposed amalgamation. In view of excellent future prospects, we recommend to “BUY” the share at CMP.

More Geojit REPORTS



De-mystifying technical analysis

There are some profound questions asked from time to time in the history of men such as, which came first, the chicken or the egg? One such question that investors in the stock market often encounter is, Which is more relevant, fundamental analysis or technical analysis?

Most investors would be familiar with the basics of fundamental analysis as it is one of the subjects in college (if, that is, they happen to be students of commerce). Wikipedia defines fundamental analysis of a business as the study of its financial statements and health, its management and competitive advantages, and its competitors and markets. The analysis is performed on historical and current financials, though the objective is to predict the future stock or business performance.

The picture that technical analysis conjures up for most of us is one of weird graphs blinking on the screen and tense faces staring at them as if their lives depended on it. The mystery is compounded by noted technical analysts such as W. D. Gann using astronomical notations in the charts or R. N. Elliott talking about nature's laws.

What are technicals about

Technical analysis, as we know it today, was developed towards the turn of the 20th century. Before the discovery of computers, technical analysts would go around with thick files containing graphs of various securities. These graphs would be updated manually at the end of each trading day. This laborious process intimidated those who ventured to learn the method. With the advent of computers and the Internet, creating graphs is just a matter of clicking the mouse. That would account for the increasing interest in this kind of analysis in recent times.

What technical analysts actually do is to study the past market action and use this information to predict where the prices will head. Market action is studied mainly with the help of graphs. It is represented through price, volume and open interest. Technical analysts believe that market action (captured through graphs) reflects all the factors affecting the price — fundamental, political, psychological, and even manipulative action. They go to the extent of claiming that `Technicals are what people think the fundamentals are'.

Scenting news

This statement is reinforced in situations where the charts give early indication of a major event that is about to happen in a company. It is often perceived that the stock price starts moving up much before the news affecting the company is announced to the public. The adage "buy on rumour, sell on news" owes its genesis to this anomaly that exists in most markets. Many a time, even the rumour may not reach the lay investor. The only way to scent out a major event is by perusing the charts. A sudden break-out in price or a steady increase in trading volumes, denoting accumulation by insiders, could be a precursor to some major announcement by the company. To illustrate, the chart of Sesa Goa made a sharp breakout on December 21, 2006 and has gained 70 per cent since then. The rumour of Mitsui selling its 51 per cent stake in the company was published on December 26. The buzz regarding Arcelor-Mittal eyeing Mitsui's stake hit the market much later, on January 24, 2007.

Yet, there is little doubt that fundamental analysis should serve as basic guidepost to investors. Fundamental analysis drills down a company's financials to identify under- or over-valued stocks and may help investors stay away from the emotional excesses triggered by a sustained bull or a bear phase.

Fundamentals help maintain sanity during periods of irrational exuberance. The investors who chased the Internet stocks trading at an average price-earning multiple of 100 during 1999 and 2000 would be ruing their folly to this day. And yet, `glamour stocks' or `idea stocks' exist in every market and tempt investors. Using technical analysis to buy into such stocks can take the investor speeding up a road that ends in a steep drop.

For the long-term too

There is a popular misconception that technical analysis is for short-term traders and fundamental analysis is for the long-term investors. The message seems to be that if you are a long-term investor, technical analysis has little role to play in your investments. In reality, that is far from the truth.

With the Indian market moving up continuously since 2003, with short corrective phases, the `long-term investor' now has reason to be sanguine. But there was a 10-year period between 1992 and 2002, when the Sensex oscillated between 2500 and 5000. Long-term investors, who followed a buy-and-hold strategy would have had a taxing time in this period unless they timed their entry and exit with the help of technical analysis.

They can co-exist

In fact, long-term investors can profit by meshing both fundamental and technical analysis into their investment decisions. Such investors can make the scrip selection based on fundamentals and time the entry and exit with the help of technicals. It is a common for an investor to buy in to the right stock at the wrong time.

A long-term investor, who bought, say, Rolta at Rs 450 in 1999 would be staring at a loss of 33 per cent today. Had he used technical analysis, he could have exited with a 100 per cent profit in March 2000.

Conversely, it is widely believed that traders rely on technicals alone and ignore fundamental analysis. While this may be true of some traders, the more professional and successful traders track the fundamentals closely. The larger traders go to the extent of hobnobbing with the management of the companies that they trade in, on a regular basis. After all trading is all about anticipating the market's next move. Fundamentals are indispensable in this game.

As mentioned above, the debate can be endless and fruitless. Fundamental and technical analysis can co-exist and complement each other. The weightage given to each of these forms of analysis by an investor can vary according on the frequency with which he churns his portfolio and the secular trend in the market. Every savvy investor knows that ignoring either of these would only peg down the performance of his portfolio.

India Inc in Q3 — Few dark spots in bright picture

India Inc has yet again pleasantly surprised investors with commendable results for the quarter ended December 2006, leading to renewed buying interest. Buoyed by the healthy earnings scorecard, the bellwether indices Sensex and Nifty have scaled new highs. Corporate India's sales for Q3 grew about 27 per cent while net profits increased about 67 per cent on a year-on-year basis (including the "other income" component, which was up 28 per cent). On a sustainable basis, however, the operating profit for the quarter increased by about 48 per cent. Rising interest costs (31 per cent higher) are a source of concern. A total of 2,140 companies have announced their earnings so far.

Impressive numbers from cement companies, private banks, infrastructure, steel and non-ferrous metals, apart from the usual high-performers, such as information technology and telecom service providers, underpinned strong profit growth. Sugar and automobiles, on the contrary, posted lacklustre numbers.

Here is a brief overview of the results of various companies, on a sectoral basis:

Cement companies firm up: Cement companies once again came up with impressive numbers, registering a 270 per cent increase in net profits over the quarter. Robust sales volumes and better realisations have driven an overall increase in the operating profit margins for the majors. Helped by a consolidation of ACEL (Ambuja Cement Eastern) as well as healthy realisations and despatches, Gujarat Ambuja Cements reported earnings of Rs 337 crore, 284 per cent higher, while India Cements outperformed expectations by posting a sharp turnaround in profitability. Higher prices and better operating margins, in general, pushed up earnings' growth for Ultra Tech Cement, Prism Cements and Shree Cements.

Banks, a mixed bag: Continuing the previous quarter's trend, private banks outperformed their public sector counterparts in profit growth. While the average net profits of public sector banks increased 16 per cent over the previous year, private banks notched up about 37 per cent growth. A bigger deposits base and higher fee-based income helped sustain the growth rates of private sector banks.

ICICI Bank reported a 42 per cent rise in net profit for the third quarter on the back of higher interest income, coupled with a rise in fee-based income. A robust rise in net interest income (the interest earned on loans minus that paid for funds) bodes well for HDFC Bank, which recorded 32 per cent higher net profits for the third quarter. Bank of Rajasthan, ING Vysya Bank and Dhanalakshmi Bank doubled their earnings. State Bank of India, however, saw its net profits fall about 4.5 per cent as a result of higher provisioning and rising costs.

Infrastructure/realty grows: Infrastructure/realty companies sustained their stellar earnings growth with 56 per cent higher revenues and a 257 per cent increase in net profit.

Leading the pack, Unitech registered a staggering 3,190 per cent increase in earnings as several of its ongoing residential projects were completed and booked over the quarter. Its operating margins stood at 69 per cent, against 13 per cent the previous year.

Other companies that scored high were Valecha Engineering, Prajay Engineers and Noida Toll Bridge. Higher volumes and, hence, better operating margins, could have contributed to the sector's strong showing.

Metals strike: While the growth in volumes for players in non-ferrous metals was healthy, better realisations contributed to their earnings' growth. Hindalco reported a 91 per cent increase in earnings on the back of a 62 per cent volume growth. Its operating margins grew about 216 percentage points during the period. Madras Aluminium recorded a 300 per cent increase in net profits on the back of robust revenue growth and 1,612 percentage points increase in operating margins.

Buoyed by higher metal prices, steel companies too put up a decent performance last quarter. SAIL reported a 54 per cent increase in earnings on a yearly basis. Higher volume growth and an 800-percentage point increase in operating margins boosted performance. Tata Steel, helped by a 21 per cent sales growth, reported a 35 per cent increase in earnings. Usha Martin, Jindal Stainless and Man Industries recorded over 130 per cent increase in net profits.

Software — surprises from smaller firms: Results of software companies were mixed, as the quarter is seasonally a quiet one for the sector, with a lower number of billing days. An appreciation in the rupee also had an impact on overall earnings.

Software majors Infosys Technologies, Wipro, TCS and Satyam Computers turned in numbers that ranged from `in-line with expectations' to `better-than-expected'. It was the mid-sized firms that turned up most of the surprises this quarter. Polaris Software, reporting a sharp turnaround in profitability, caught the market by surprise.

Some of the small- to medium-sized companies, such as KLG Systel, Silverline Technologies, Four Soft and Tele Data Informatics, more than doubled earnings during the quarter. IOL Broadband and Ramco Systems, bucking the trend, registered losses during the period.

Telecom buzzes with action: Continuous growth in the subscriber base provided the necessary impetus for telecom service providers, which turned in a solid performance during the third quarter.

Bharti Airtel reported an increase of 61 per cent in net revenues YoY on the back of a 41 per cent operating profit margin (a 550 percentage point increase). VSNL recorded a 5 per cent decrease in net profit for the quarter on a YoY basis because of lacklustre sales and operating margins. Tata Tele-Services (Maharashtra) reported losses for the quarter.

Autos in neutral gear: Despite strong growth in the top-line, the third-quarter results of auto companies are a mixed bag, as players became vulnerable to margin pressures from rising input costs. Two-wheeler companies Hero Honda and TVS Motors reported a decline in profits on the back of a rise in raw material costs. Ashok Leyland, thanks to a significant growth in volumes, reported a 93 per cent increase in earnings. Tata Motors and Maruti Udyog registered a near 11 per cent increase in net profit during the quarter.

However, Maruti's operating margins dipped by 119 percentage points during the period.

Sugar turns bitter: The December quarter usually captures the start of the crushing season for sugar companies. However, lower sugar prices, on expectations of a bumper output this year, resulted in sharp profit declines for most companies, marking a reversal of the past two years' trend.

While the revenues of Thiru Arooran Sugars, Dwarikesh Sugar and Rajshree Sugar rose more than 50 per cent, the earnings were lacklustre. Though volume growth for sugar companies remained healthy given higher cane availability, lower realisations weighed heavily on the profitability.

Divergence in numbers

Though the big picture showing the earnings performance of India Inc in the third quarter is impressive, a sectoral breakdown of the numbers reveals a significant divergence.

Better-than-expected earnings growth in sectors such as infrastructure/realty, telecom and cement made up for the lacklustre performance in the auto, sugar and certain other heavyweight sectors.

Strong topline growth across sectors suggests that demand and consumption drivers are still in place, amid margin pressures in select businesses.

The stock market rally of the past six months has been quite narrow, focussing on a few sectors and stocks seen to have impressive growth prospects; if the earnings scorecard is anything to go by, these trends will only continue.

Mudra Lifestyle: Invest at cut-off

Investors with an appetite for risk can consider subscribing to the initial public offer of Mudra Lifestyle. The price band of Rs 75-90 values the offer at 20-24 times its annualised FY-07 per- share earnings, on a fully expanded equity base. The pricing would be 10-12 times its likely FY-08 earnings, assuming that the capex plans proceed on schedule. Our estimates factor in a strong growth in revenues on the back of significant capacity expansion and robust demand from domestic garment retailers over a two/three-year period.

Growth prospects would hinge on Mudra Lifestyle's ability to transition from a fabric manufacturer to a garments supplier (for which it has ambitious expansion plans). This is a major risk to our recommendation. Investments can be considered with at least a two-year perspective, as the full benefits of the expansion are likely to flow in only in FY-09.


Mudra Lifestyle is a manufacturer of fabrics and garments, with a predominant focus — unlike most textile players that hit the market recently — on the domestic market. Till now, the fabrics business has been the major driver of revenues, accounting for close to 90 per cent of its Rs 100-crore income in FY-06. The garments business, which caters to the demands of domestic branded players, has begun to make a stronger contribution. In the first half of thisfiscal, the segment recorded an income of Rs 16 crore or about 25 per cent of the overall revenue against Rs 9 crore in FY-06. The growth has come on the back of some capacity expansion, but indicates that orders are beginning to flow into this segment.

Mudra is slowly increasing its thrust on the garments business. It is embarking on a Rs 180-crore project that would substantially expand its weaving, processing and garments capacity and help set up a new yarn dyeing facility. Its garment capacity alone will more than triple to 10 million pieces a year. The weaving and garment capacities will go on stream by May, while processing capacities will become operational in October. The Rs 80-crore raised from the offer will help to partly fund this project; debt of Rs 100 crore has also been raised under the TUFS scheme, which offers an interest subsidy.

Investment rationale

We view Mudra's presence in the domestic market as a positive. Realisations are likely to be stable relative to the export market where competition would exert considerable pricing pressure. More significant is the strong demand that is likely to flow in from branded apparel outfits and retailers. Branded players such as Raymond and Madura Garments are rapidly expanding their retail presence through their own outlets and multi-brand stores. As they commit more funds towards retail expansion, they are likely to outsource more of their production to players such as Mudra. The likes of Reliance Retail and Bharti too are likely to be on the lookout for units that can produce private labels. Against such a backdrop, Mudra's scale and integrated facilities would be seen as an advantage.

Second, a growing contribution from garments could lead to better margins (currently at 17 per cent) and a higher return on capital. Mudra hopes to achieve a revenue mix of 50:50 for fabrics and garments by FY-08.


Mudra's garments business is still at a nascent stage and could encounter challenges of scaling up, including managing a larger workforce and contracting orders from branded players, most of which have their own manufacturing units.

There are not too many listed players that cater to the demand from domestic brand manufacturers. However, there could be new entrants that would want to capitalise on the opportunity; Gokaldas Exports recently announced plans to cater to the needs of domestic branded players and retailers.

As retailers would want to diversify their sourcing base, this may not be a constraint in the medium term. Mudra might, however, have to carve a niche for itself as it begins to compete with players with a presence in the export market.

Offer details: About 96 lakh shares are on offer, which will raise Rs 80 crore at the upper end of the price band.

A pre-IPO placement has been made to SIDBI Venture Capital and SBI at Rs 75 a share. The lead manager is SBI Capital Markets. The offer closes on February 8.

Broadcast Initiatives: Avoid

Investors can avoid the initial public offer of Broadcast Initiatives (BI), given that the company's plans are at a nascent stage and the success of its channels is yet to be demonstrated. The company operates the Janmat channel and plans to air a Marathi entertainment channel — Mi Marathi. Janmat.

While attempting to be different from others in the Hindi news channels space, it has in the short span since launch not made a significant mark amidst the clutter in that space. Mi Marathi is to be launched shortly and may provide some scope for revenue growth.

However, it may take more than a year before the broadcaster establishes a brand presence and ramps up market share. Given the poor earnings visibility at this stage and the presence of several listed options in the media sector at similar valuations, investors can wait for the channels to gain traction before considering exposure to the stock.


The Sri Adhikari Brothers-promoted BI launched the Janmat channel officially in April 2006. The channel has a presence in the Hindi-speaking regions. Financials are available only for a five-month period and extrapolating this for the future can be misleading.

The company is likely to continue to register losses until it ramps up market share. It will operate its Marathi entertainment channel, Mi Marathi, through its subsidiary Sri Adhikari Brothers Media. The channel will be launched by the end of the month.

As both the channels are currently free-to-air, BI depends mainly on advertising income for revenues. Unlike other pay channels in the news space, the company may not benefit from a monetisation of viewership, because of the implementation of CAS. The company has tied up with NDTV media to manage its airtime sales.

BI will raise about Rs 100 crore at the upper end of the price band of Rs 100-120. About Rs 50 crore would go towards construction of a studio and investment in production and broadcasting equipment. Currently all its equipment are hired and even the uplinking is outsourced to Essel Shyam Communications. BI will also prepay loans worth Rs 25 crore from the offer proceeds.

Niche within a niche

The Hindi news genre has been a fast-growing market as it combines the distinctive target audience of news channels with the reach of regional channels. However, this has attracted several players, with Aaj Tak, Star News and NDTV India being the dominant ones while Zee News, IBN 7, Sahara Samay, India TV and DD News battling for market share.

Amidst the clutter, Janmat has been positioned as a "views" channel that focuses on discussing current affairs and on being a forum that would encourage greater viewer participation. Panel discussions and talk shows hosted by popular anchors such as Vir Sanghvi and Sekhar Suman on subjects that range from current affairs to social problems to lifestyle issues are likely to dominate the programming mix.

While the focus on "views" is likely to demand fewer resources than what would be required to break news, delivering programmes with strong content on a sustainable basis would be a challenge.

Also, given its analyses thrust, the channel may not enjoy the frequency of viewership that is typical of news channels. It may take time for such a channel to gain acceptance with viewers and to garner recognition from advertisers.

The company has just announced that it would be tieing-up with Jump TV, an IPTV (Internet Protocol Television) broadcaster, to take its channel online, after the IPO. This may provide an additional stream of subscription revenue. BI's promoters have experience in Marathi entertainment and the new channel may enjoy brighter prospects in the less competitive language space. However, it is early days and a wait-and-watch approach might be appropriate for now.

Offer details: About 85 lakh shares are on offer. The promoter's stake would fall to 55 per cent, post-offer, on the back of an 80 per cent expansion in the equity base. The lead manager is Allianz Securities. The offer closes on February 14.

Indus Fila: Invest at cut-off

An investment can be considered in the initial public offer of Indus Fila (IFL). At Rs 185, the upper end of the price band, the offer values the company at close to 17 times its annualised FY 07 per share earnings, on an expanded equity base. The valuations are in line with that of the largest garment exporter, Gokaldas Exports. The offer is a bit stiffly priced, considering the risks of undertaking an ambitious expansion project at an early stage of its garment business, especially with the export market as a target. As the expansion is likely to happen intwo phases spanning the next two years, exposure needs to be considered from a long-term perspective.

Indus Fila is a manufacturer of fabrics and ventured into apparel about two years ago. Export of garments now account for about 25 per cent of sales. IFL's track record over the past three years has been impressive. Revenues have grown from Rs 7 crore in FY-03 to Rs 90 crore in FY-06 on the back of expansion in capacities. Changes in product mix towards garments have also improved profitability. In the first half of FY-07, IFL recorded a profit of Rs 10 crore, double of what it recorded in FY-06. The company recently acquired a processing unit near Mysore, which has completed its integration from yarn dyeing to apparel.

Ramp up in garments

IFL will raise about Rs 90 crore from the offer, which, along with Rs 75-crore debt, will fund its 170 crore-expansion project. The company will be expanding its yarn dyeing facilities six-fold. The facility would be used mainly for captive consumption and would go on stream by June 2007. Expansion in weaving, processing and garments would take place in two phases, with the bulk of the capacity becoming operational in April 2008. Its garment capacity, for instance, will double to 18,000 pieces a day by June 2007 and further expand to 30,000 pieces by the first quarter of FY-09. At 10 million pieces a year, post-expansion, going by current capacities of players, it would be a mid-sized player.

IFL produces men's shirts and women's tops. It counts as its customers, names such as Arrow, Levi Strauss and Armani Exchange and plans to diversify its product portfolio by including bottomwear, sportswear and swimsuits.


If the expansion project is commissioned on schedule and IFL manages to ramp up its production correspondingly, there is scope for substantial revenue and earnings growth. Its track record so far in putting through expansions has been good. However, the scale of expansion this time around is substantially higher.

Given the nascent presence in the garments business, it might take longer than expected to secure large orders. This is a risk to our recommendation. IFL is counting on its focus in design and its relatively lower turnaround time to work to its advantage. The company also intends to focus on the mid-high end of the market, which is likely to encounter less pricing pressure.

Offer details: About 49 lakh shares are on offer at a price band of Rs 170- Rs 185. The lead manager is Anand Rathi. The offer opens on February 12 and closes on February 14.

Idea Cellular: Invest at cut-off

Investors can consider subscribing to the Idea Cellular initial public offering, being made in the price band of Rs 65-75 per share.

Considering the huge untapped demand for mobile telephony in India and the robust subscriber addition of six million per month, the mobile expansion story is expected to sustain over the next few years.

Idea Cellular does not enjoy a pan-India footprint, such as its peers — Bharti Airtel and Reliance Communications — but its strong growth in the four established circles (of the 11 it operates in) of Andhra Pradesh, Delhi, Gujarat and Madhya Pradesh will continue to contribute a substantial part of its revenues.

On the flip side, however, intense competition from established peers and consolidation arising from the Hutchison Essar stake sale would impact standalone players such as Idea Cellular.

Valuation yardstick

Since mobile players are engaged in a major capital investment drive with negative cash flows from operations, conventional valuation yardsticks such as price-earnings multiple may not portray the full picture. Instead, we compared Idea Cellular with its key GSM peer, Bharti Airtel, across three performance metrics: EV (enterprise value; market capitalisation plus debt) to revenues; EV to EBITDA (earnings before interest, tax, depreciation and amortisation) and EV per subscriber.

Based on the annualised third quarter performance of Bharti Airtel, the EV/revenues for its mobile business is 8.1 times. For Idea Cellular, it works out to a much lower multiple of 5.8 times.

Similarly, EV/EBITDA (which reflects the operational cash flows that can be deployed for growth) for Bharti's mobile business works out 22 times vis-a-vs 17 times for Idea. Based on these two metrics, Idea's valuation is at a 20-28 per cent discount to Bharti Airtel. In terms of EV/subscriber (which reflects the potential for future cash flows) it is Rs 19,080 for Idea, over 40 per cent lower than that of Bharti Airtel.

From an investment perspective, this valuation discount of Idea vis-à-vis Bharti makes this offer attractive and leaves potential for capital appreciation. We recommend an investment at the cut-off price.

Key features

The company has operations in 11 circles, which cover 58 per cent of India's population and current subscriber base. Its coverage area includes one metro (Delhi), 3 category A circles (Andhra Pradesh, Gujarat and Maharashtra) and 6 category B circles (Harayana, Kerala, Madhya Pradesh, Rajasthan, UP-East and UP-West) and one category C circle (Himachal Pradesh).

As of December 31, 2006, Idea Cellular had 12.44 million subscribers, enjoying an 8.5 per cent market share. The company is expected to roll out its services in Mumbai and Bihar and has applied for licences in the remaining 10 circles. The category B and C circles are likely to drive subscriber growth in future.

As an original licensee in seven established circles, the company is a market leader in three circles of Haryana, Maharashtra and UP (West). At the same time, it is also substantially dependent on four circles - Andhra Pradesh, Delhi, Gujarat and Maharashtra, which accounted for 63 per cent of its subscriber base, for its overall revenues and growth. And these circles are likely to remain a significant contributor to its revenues and operating profits in the coming years.

Idea Cellular's IPO is to build, strengthen and expand its network in new circles, roll out services in the Mumbai circle, pay the entry fee and capital expenditure for NLD (national long distance) operations and redeem preference shares. Out of Rs 2,125 crore (excluding the greenshoe option of Rs 319 crore), Rs 970 crore is to be utilised towards expansion and strengthening of the networks in Himachal Pradesh, Rajasthan and Uttar Pradesh (East) by March 2008.

From the remaining IPO proceeds, Rs 647 crore is to be utilised for rolling out services in Mumbai, Rs 757 crore towards redeeming preference shares, and Rs 81 crore for payment of entry fee and capital expenditure for NLD. The NLD licence that the company has applied for is expected to facilitate carriage between the 13 circles and reduce the company's operating costs.

Risks and challenges

Idea Cellular is expected to face intense competition from its peers such as Bharti Airtel, Reliance Communications, BSNL and Tata Teleservices, which enjoy a pan-India footprint. Since the mobile market is still a play on subscriber additions, any slowdown in net additions can affect profitability.

For instance, since it is the eighth player to enter the Mumbai mobile market, its ability to penetrate this market will be a tough challenge.

This is despite being a strong player in the Maharashtra circle. In the long run, any slowdown in subscriber growth can lead to a decline in average revenue per user (ARPU), increase its churn and selling and promotional expenses.

The scope for differentiation and new schemes that players such as Reliance Communications have exploited to the hilt in widening and deepening the mobile marketplace may not be fully available to Idea.

Consolidation issues

Being a player operating out of only one metro and three category A circles, Idea has an ARPU that is lower than the leader, Bharti Airtel. For instance, Idea's blended (prepaid and postpaid) ARPU at Rs 338 was lower than Bharti's at Rs 427 for the period ended December 31, 2006. The minutes of usage also was lower at 353 vis-à-vis 467 minutes for Bharti. Though the prepaid customer base was in line with Bharti, the churn was higher.

Second, the outcome of the bidding war for Hutchison Essar's equity stake will be crucial in assessing the changing mobile market dynamics.

If Reliance Communications succeeds in snapping Hutchison, it will not only comfortably march past Bharti in market share, it will be able to use its scale economies to grow its subscriber base at a much faster clip.

If the winner turns out to be Vodafone, it may prove to be an equally aggressive player in the value-added segment of the mobile sweepstakes. Either way, Idea Cellular is likely to face the heat of consolidation.

Offer details: JM Morgan Stanley and DSP Merill Lynch are the lead managers to the offer, with Citigroup and UBS Securities as the co-book running lead managers. The offer opens on February 12 and closes on February 15.

MindTree Consulting: Invest at cut-off

Investors can consider an exposure in MindTree Consulting, which is making an initial public offering in the price band of Rs 365-425 per share. The company's hybrid business model focusing on information technology and Research and Development services, a good geographic mix, and established relationships with clients inspire confidence. However, the competitive intensity in IT services, the high client concentration and the risks associated with attrition and acquisitions represent the downside.

At the announced price band, the price-earnings multiple works out to 15-18 times the annualised 2006-07 per share earnings on an expanded equity base. At the upper end of the price band, the pricing is relatively high vis-à-vis some of its listed mid-size peers. The scope for capital appreciation will be higher if the offer is finally priced at the lower end of the price band.

The positives linked to this offer are:

Hybrid Business Model: MindTree is organised into two key divisions — IT and R&D services. For the company, the focus on IT services has principally been on the manufacturing vertical, with travel and transportation and BFSI (banking, financial services and insurance) being the other key contributors. IT services contributed over 76 per cent of the total revenues in 2005-06, with R&D services coming up with the balance.

Though the revenues from R&D services are flowing in primarily from engineering, the scope for research may be the kicker that will lead to non-linear growth in the long run. The company has been creating a set of licensable IPs (intellectual property) in the area of Ultra Wide Band and Bluetooth that can have good revenue potential and can be leveraged across other areas such as storage networking, data networking or multimedia.

Good client relationships: The company has forged fairly strong relationships with Fortune 500 clients and worked with some of them for several years. In 2005-06, its key clients included AIG, United Technologies, Avis, LSI Logic, Symantec, Unilever and Volvo. As MindTree plans to deepen its relationships with existing customers through cross-selling opportunities, its long association with some of these clients should work to its advantage. Quite a few of these clients have consciously chosen mid-size firms such as MindTree for greater attention and flexibility that they can offer.

Fair geographic spread: Two key geographies, the US and Europe, account for more than 85 per cent of the revenues of MindTree. For 2005-06, the US accounted for 61 per cent and Europe 22.6 per cent of revenues, with Asia-Pacific (including India) contributing the balance. With sales offices in locations across the globe, MindTree may be well positioned to pursue growth opportunities as they emerge.

Sound financials: Crossing the $100-million mark in revenues in 2005-06, with revenues at Rs 448 crore and post-tax earnings of Rs 54 crore, MindTree stands on a fairly strong financial footing. The steady uptick in operating margins over the past three years is an encouraging trend. The operating margins of 18.3 per cent for the nine months ended December 2006 are in line with comparable mid-size peers. With return on shareholders funds in the 30-40 per cent range, the company appears to be on a good growth platform.

The risks and challenges that the company remains exposed to are:

Scalability and competition: With multinationals such as IBM and Accenture establishing a firm footprint in India and frontline players using their scale and size to good advantage in mid-to-large-size deals, of $50-200 million, mid-size players such as MindTree will find the going challenging.

Client concentration: For 2005-06, the top five and top ten clients accounted for 38 per cent and 52 per cent of revenues respectively. The contribution of its top five clients has been coming down over the years.

In relative terms, the contribution of top five clients is lower than some of its mid-size peers that are anchored to a key client. However, the company remains vulnerable to vendor consolidation in some of its mature relationships with Fortune 1000 customers and also to billing rate pressures in commoditised application maintenance relationships.

Attrition and acquisition risks: Mid-size players such as MindTree are far more vulnerable to risks surrounding high attrition and wage inflation. With frontline IT companies hiring aggressively, retention of employees is proving to be a huge challenge. Though MindTree has grown its employee strength from 441 in 2000-01 to 3,128 in 2005-06, the next phase of growth could prove to be the most challenging.

Though well placed to make acquisitions for growth, the risks of integration are quite high. It has put through two acquisitions — of ASAP Solutions and Linc Software — over the past couple of years. In the case of ASAP Solutions, it is facing a dispute that has been referred for arbitration.

Objects of the offer: The offer proceeds of Rs 205-230 crore are to be used to fund a new development centre in Chennai for Rs 120.7 crore, prepay loans of Rs 18.77 crore and general corporate purposes, the balance.

The book running lead managers are Kotak Mahindra Capital and JM Morgan Stanley. The offer opened on February 9 and closes on February 14.

WOW - GACL - Birla Sun Life

Broking House - Birla Sun Life
Recommendation - Sell
Prices to remain stable at the current levels..
In its Report Dated 5th February 2007, Birla Sun Life (BRICS) downgrades Gujarat Ambuja Cements Ltd (GACL) to Sell with a Target of Rs 155 from CMP of Rs 143.

Birla Sun Life (BRICS) states Gujarat Ambuja Cements Ltd (GACL) reported its first quarter results on consolidated basis with Ambuja Cements Eastern Ltd (ACEL). The quarter''s result is better than BRICS estimates, which was based on standalone financials. However, adjusted for ACEL''s volume, GACL''s Q4CY06 earnings are Rs 16 cr below BRICS''s consolidated estimates. Core EBITDA, at Rs 470 cr, is much lower than BRICS consolidated estimates of Rs 546 cr. The negative surprise in PAT is lower, primarily because the tax rate, at 26%, is lower than BRICS''s assumption of 33.6%.

BRICS mentions that the cement prices are not likely to fall much from current level in the next two years but then, the upside is also capped by the recent cut in import duty on cement. Hence, BRICS has not taken any significant rise in realisation the years ahead. BRICS maintains realisation assumption at Rs 163/bag for CY07 and CY08. After consolidation with ACEL, BRICS projecting consolidated P&L for CY07 and CY08. In view of cost pressures, BRICS is cutting consolidated EPS estimate (with ACC) for CY07 from Rs 12 to Rs 11.2, and for CY08 from Rs 12.7 to Rs 11.9.

BRICS highlights that Cement prices have gone up by 5% in past nine months but GACL''s core EBIDTA/tonne has remained more or less stable at Rs 1160-1170. This trend is more or less same for other cement companies as well indicating that cost pressures are being passed on by manufacturers.

BRICS mentions that the recent cut in import duty on cement is an indication of the Government''s intend to curb a runway rise in prices. If cement prices still continue to increase, the Government might even ban exports. As BRICS pointed out earlier, almost all cement companies EBIDTA/tonne has either remained constant or declined in the last three quarters. Mean while, costs have risen along with prices. This means that cement companies have been able to pass on their additional costs to consumers, and BRICS expect the same situation to continue to in years to come.

Finally, BRICS makes us aware that DCF based on mid cycle prices give March 2008 fair value of Rs 161(13.5x CY08E EPS). Taking CY08 being the peak cycle year, it seems highly unlikely that GACL can trade an EV/EBIDTA of more than 13x on CY08 consolidated estimates. Accordingly, BRICS recommended to Sell with a March 2008 target price of Rs 155.

Thanks HK

Prabhudas Lilladher - Hero Honda

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Citigroup - Zee Telefilms

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Prabhudas Lilladher - Idea Cellular IPO

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