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Sunday, June 03, 2007
Sharekhan Investor's Eye dated June 01, 2007
Crompton Greaves
Cluster: Apple Green
Recommendation: Buy
Price target: Rs280
Current market price: Rs250
Price target revised to Rs280
Result highlights
- Crompton Greaves Ltd's (CGL) revenues grew by 25% year on year (yoy) in Q4FY2007 to Rs990.0 crore. The revenues were slightly below our expectations. The top line of the power system division grew by 37.1% to Rs560.1 crore. The revenues of the consumer product division grew by 9.3% to Rs276.7 crore while that of the industrial system division rose by 22.2% to Rs240.8 crore.
- The operating profit margin (OPM) of CGL improved by 80 basis points to 11.5% from 10.7% in Q4FY2006. The raw material cost/sales ratio rose by 40 basis points to 71.4 % in Q4FY2007 from 71.0% in Q4FY2006. However, lower employee and other expenses helped in the overall improvement in the OPM. The operating profit grew by 34.2% to Rs114.3 crore.
- The profit before interest and tax (PBIT) margin of the power system division improved by 450 basis points to 13.9%. The consumer product division's PBIT margin improved by 50 basis points and the industrial system division's PBIT margin improved by 450 basis points on a year-on-year (y-o-y) basis.
- Consequently, the profit before tax (PBT) increased by a strong 36.5% to Rs106.3 crore.
- CGL provided for full tax rate in Q4FY2007 as against the minimum alternate tax (MAT) rate in Q4FY2006. The increased tax provisioning led to a lower bottom line growth of 24.7% to Rs69.9 crore.
- The stand-alone order book grew by 40% to Rs2,300 crore. The consolidated order book stood at Rs4,400 crore out of which Rs2,100 crore came from Pauwels and Ganz Transelektro Villamossagi Zrt (GTV).
- In view of the robust top line growth, expansion in margins, continued good performance of Pauwels and the expected stabilisation in the operations of GTV in FY2008, we are maintaining our FY2008 estimates. At the current market price, the stock is trading at 23.9x its FY2008E consolidated earnings and 13.6x its FY2008 EV/earnings before interest, depreciation, tax and amortisation (EBIDTA). We believe that these valuations are attractive because of (a) the robust operating performance of the stand-alone company; (b) higher geographical reach and product depth of its subsidiaries; and (c) its management's expertise in turning around loss-making subsidiaries. We maintain our Buy recommendation on the stock with a revised price target of Rs280.
Madras Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Under review
Current market price: Rs2,800
Q4FY2007 results: First-cut analysis
Result highlights
- The cement volumes of Madras Cement grew at a slower rate of 13% to 1.48 million metric tonne (MMT) in Q4FY2007. The volume growth was lower because the company's plant at Alathiyur was shut down for 15 days on account of maintenance work. The realisation growth was strong at 27% year on year to Rs2,923 per tonne. This resulted in a robust top line growth of 45.1% year on year to Rs435 crore.
- The operating expenditure increased by 29.4% year on year to Rs301.8 crore as the power and fuel cost increased by 25% year on year to Rs85 crore on the back of higher international coal prices and increased freight cost. The freight cost increased by 35% year on year to Rs72.8 crore during the quarter. The employee cost too jumped substantially to Rs18 crore from Rs12 crore in the previous quarter on account of the bonuses given to employees.
- The operating profit doubled year on year to Rs133 crore whereas the operating profit margin improved by 800 basis points year on year to 30%. On a sequential basis, the operating profit margin dropped by 270 basis points.
- The interest cost reduced by Rs3 crore year on year to Rs6 crore, thanks to the repayment of debt in the quarter. The depreciation provision remained more or less flat sequentially at Rs18.2 crore.
- With the tax provision made at a marginal rate, the net profit jumped by 117% year on year to Rs71 crore.
- We will update you with a detailed report on the company's fourth quarter results as and when we get in touch with its management.
VIEWPOINT
SREI Infrastructure Finance
SREI, BNP Paribas arm in 50:50 JVSREI Infrastructure Finance (SREI) and BNP Paribas Lease Group (BPLG), the leasing arm of BNP Paribas, have reached an agreement regarding a strategic partnership in equipment finance in India.
Sharekhan Investor's Eye dated June 01, 2007
In trillion-dollar market, small guys get the crumbs
Via PTI
While Indian stock market is rejoicing in its newly achieved trillion-dollar status, the promoters and foreign investors are taking away nearly all the cake and the small domestic investors have been left with just the crumbs.
The promoters of all listed companies on the Bombay Stock Exchange together hold shares worth as much as $568 billion (Rs23,00,771 crore), while the combined holding of other institutions and corporates from India and abroad is worth over $350 billion.
The total investors’ wealth currently stands at $1,009 billion (Rs40,88,944 crore) in terms of cumulative market value of all the companies listed at the BSE.
An analysis of shareholdings of various classes of investors on the bourses and their value shows that promoters, foreign investors and other institutional as well as corporate investors together own close to $900 billion.
Others, including retail Indian investors, NRIs and high net worth people, hold just about 10% or $100 billion at the bourses.
The share of small investors — those who can invest up to a nominal amount of Rs1 lakh in a company — is even smaller at about $50 billion.
Justifying the influence of FIIs, other foreign investors and global markets, the foreigners are the second biggest player on the domestic bourses after promoters.
According to the latest shareholding data as of 31 March, and market capitalisation figures on Friday last week, the foreign holding on the Indian bourses is worth about $215 billion (Rs8,70,000 crore).
The non-promoter corporates hold shares worth about $48 billion, while institutions such as banks and mutual funds, have about $91 billion.
BSE’s market cap crossed the trillion-dollar mark for the first time on Monday last week, representing a sharp gain of about 60% in one year and a gain of close to $100 billion from about $902 billion a month ago.
However, the sharp rise in dollar terms has also been driven by a significant appreciation in the rupee value. In local currency, the market cap has gained just 42% in the same period from about Rs28,40,000 crore a year ago.
Among the top blue chips, market cap of Reliance Industries, the country’s most valued firm, has nearly doubled to over $60 billion (about Rs2,44,000 crore) in one year.
However, promoters hold 51% shares, worth $30.7 billion (Rs1,24,346 crore) in RIL.
The average promoter holding in Indian companies is about 46.3%, while foreign holding in BSE-listed companies is just 5%. However, foreign holdings are generally higher in high-value companies, which is responsible for the high value of their actual worth.
In comparison, small investors hold mostly nominal stakes in big companies, while their holdings are relatively larger in lesser-valued companies.
Small investors hold an average of 9.5% stake in the 30 Sensex companies and nearly 11.5% of the BSE 500 companies.
Their average holding across the market is close to 22%, but it does not translate into much of wealth creation as their larger shareholdings are mostly in the companies with nominal market values.
Interestingly, about $10 billion in the small investors’ kitty come from the five most valued companies — Reliance Industries, ONGC, Bharti Airtel, NTPC and TCS, while the 30 biggest blue chip firms on the benchmark Sensex index is about $35 billion.
HSBC India Watch
HSBC in their India Watch report have slightly raised GDP growth forecast,
At 9.4% in 2006/07, Indian GDP growth was the strongest since 1988/89 and the second biggest fiscal year expansion since the series began 1950/51. Not bad and not a million miles away from the 10.9% growth rate achieved by China over the same period. The January-March quarter saw year-on-year growth of 9.1%, down from a high of 10.2% in fiscal Q2 and lower than China’s 11.1%. But this is hardly cause for gloom. Excluding agriculture, GDP growth has softened from 11.6% to 10.3% over the same period.
As usual, we have created our own seasonally adjusted estimates of GDP and its
components in order to gain a better idea of what is happening in underlying terms. These suggest that GDP rose by 2.5% in the latest quarter (non-annualised), up from 1.8% in fiscal Q3. We estimate that the economy grew by an annualised 8.5% in the last six months compared with the previous six months, down from a high of 10.5% in the final two quarters of the previous fiscal year.
As such, while there is some suggestion that GDP growth has passed its cyclical peak it is hardly resounding as yet and the bottom line as far as we are concerned is that the economy continues to grow in excess of its sustainable rate. If this is right then it is likely to mean that evidence of overheating will persist, notwithstanding the on-going drop in wholesale price inflation. It is worth noting that the GDP deflator
jumped to 6.2% in the January-March quarter, up from 5.5% in fiscal Q3. It is the highest number for eight years.
Looking ahead, we expect growth to continue to soften modestly in underlying terms as the impact of the rate rises feeds through. It is important to bear in mind that the pace ofmonetary tightening was stepped up only over the last six months, while one would normally expect interest rate changes to take a year to 18 months be fully felt. Indeed, we have decided to revise up our 2007/08 GDP growth forecast, albeit slightly, to 8% from 7.8% previously
Monsoon grip on India's economy weakens
Via Reuters
The early arrival of India's annual monsoon promises good crops and incomes for millions of farmers but economists say the rains no longer hold such a sway over Asia's third-largest economy as they used to in the past.
The June-September rains are often defined as India's economic lifeline. The progress of the monsoon is keenly watched, for it used to hold the key to everything from crop output to inflation, consumer spending and economic growth.
But things are changing.
For years, India was largely a closed economy with agriculture and rural consumption the main drivers of supply and demand. A few decades ago, a bad monsoon could push the economy into recession.
Agriculture is still a large part of the economy and with two-thirds of India's population of more than one billion living off farming-related activities, rural incomes are a major source of demand for everything from soaps to compact cars.
Yet farming's contribution to economic growth is dwindling.
The sector's share of the trillion dollar economy has fallen steadily to about 22 percent from 38 percent in 1980 -- a trend that appears to be accelerating.
"The broader impact of a poor monsoon on growth is definitely coming off," said Rajeev Malik, Singapore-based economist with JP Morgan Chase.
"In case of a severe drought it will take a toll, but not as bad as it used to be as in the past," he said.
India's performance in the 2006/2007 fiscal year is a case in point.
The economy grew by a hefty 9.4 percent, propelled by double-digit expansion in manufacturing and services, even as the farm sector grew by a paltry 2.7 percent.
For the current financial year ending in March 2008 the central bank predicts growth of 8.5 percent.
SHRINKING FARMING
As India embraced free market reforms in 1991, the farm sector was eclipsed by services and manufacturing as production controls and tariff barriers were removed to open the economy to global supply and demand.
With vital industries such as software and pharmaceuticals powering India's growth now, investors don't have to worry as much as before whether a bad monsoon will hit village demand for motorcycles, shampoo or refrigerators.
"There is increasing de-linking happening between industry and farm sector," said Shubhada Rao, chief economist with Yes Bank.
Rao said companies have started moving their manufacturing away from overcrowded cities, creating new opportunities for the rural population.
The contrast between manufacturing and farm performance was particularly telling in 2004 when farm output stagnated because of erratic monsoon rains but manufacturing expanded almost 9 percent.
It was possible because many villagers who saw their farm incomes hit by bad weather found work on a massive government highway scheme, which allowed them to maintain normal levels of earnings and spending.
But for all its diminishing impact, the rural economy is still on investors' and economists' radar screens as poor rains can hit farmers' profits and hurt other sectors, analysts say.
With the majority of Indians still living in the countryside ups and downs in rural incomes still have a sizeable impact on consumption and growth, they say.
In fact, saturated urban markets mean that makers of consumer goods such as Hindustan Lever Ltd. increasingly rely on rural demand to boost their sales.
"The influence of farm sector on the economy has come down but rural demand still holds the key to overall growth and that is unlikely to change," said N.R. Bhanumurthy, economist the Institute of Economic Growth.
Possible Merger & Acquisition Companies
Credit Suisse believes the few Indian companies could be likely merger & acquisition candidates
They believe the stocks need over US$100 mn market cap for liquidity.
and should be from consumer-facing sectors (excluded technology, services, industrials, commodities and engineering related sectors). Should have sales growth of over 15% in last three years anda verage ROE of less than 10% despite good sales growth. They find that the media, cement and auto related sectors have potential to see more acquisitions, in addition to aviation and telecommunications
The following are the companies..
Centurion Bank of Punjab Ltd
Deccan Aviation
EIH
Entertainment Network Limited
Escorts Limited
Federal Mogul Goetze
Hotel Leelaventure
IOL Broadband
India Cements
Indiabulls Financial Services
Indian Hotels
J K Industries
Jet Airways (India) Ltd.
MRF
NDTV India Ltd.
Orchid Chemicals & Pharma
Oriental Hotels
PVR Limited
Punjab Tractors
Pyramid Saima Theatres Limited
Ruchi Soya Industries
Sahara One Media & Entertainment
Sanghi Industries
Suven Life Sciences
Tata Tele Services
Television 18
Trent Ltd.
UTV Software Communications
Zee Entertainment Enterprises
File your tax returns
Via ET
Come June and it’s time yet again to face the taxman. In fact, for millions of income tax assessees, this time every year begins an exercise to collect and compile whereabouts of their income. This year too the same drill has to be followed, but with a change. SundayET gives a lowdown on what you must know before you file your returns this year.
Get the right form
From assessment year 2007-08, the income tax department has introduced eight new forms, four of which are for individuals and Hindu Undivided Families. First, one should visit the portal, www.incometaxindia.gov.in to confirm which form one needs to fill up. “For instance, with Form 2D or ‘Saral’, available till last year, being withdrawn, salaried individuals having no other income will be required to submit details in the new form ITR1.
Similarly, for those having rental income, they will need to fill up ITR 2,” clarifies Vikas Vasal, director, KPMG India, a leading tax advisory firm worldwide. The latest forms can be downloaded from income tax department website mentioned above.
Count your income sources
An individual may get income from different sources such as salary, house property, profits and gains of business or profession, capital gains, and income from other sources (include earnings not falling under any of previous heads, that is, interest on securities, lottery winning and others). When you compute your total income, it is a mandatory requirement to calculate income from each of these sources separately since the tax treatment is accordingly.
Exemptions available
Exemptions are available under different heads of income and as well on total income. This is an important aspect of filing returns since it helps an individual reduce his net income and maximise savings. A deduction from gross total income is granted if investment is made in specified areas.
The investments eligible are — LIC premiums, contribution to Public Provident Fund scheme, Employee Provident Fund, certain pension funds, medical insurance premium, interest on loan taken for higher education and others. Deduction up to Rs 1,00,000 from gross income is available.
Clubbing of income
You should not forget to add income of a close relative like spouse or minor child, if any, while filing returns. This is an important rule of clubbing the income. It is a wrong perception that one can reduce tax liability by showing business income or expenses in name of a close relative. The only exception to this rule is if a close relative possesses technical or professional qualifications and the income is solely due to application of his/ her technical knowledge and experience.
Current tax slab rates
The slab rate you fall into depends on the particular case. For example, income up to Rs 1.35 lakh for women is exempt from tax, while in case of elderly above 65 years of age, earnings up to Rs 1.85 lakh is tax-free. For individuals not falling in these categories, no tax has to be paid on an income of up to Rs 1 lakh while 10% is paid on income ranging between Rs 1 lakh and Rs 1.5 lakh, 20% on Rs 1.5 lakh to Rs 2.5 lakh and 30% on Rs 2.5 lakh and above. Further, a 2% education cess will be applicable to all.
Calculation of TDS
Throughout the year, an individual pays advance tax or tax deducted at source. One must gather all the transactions where an individual paid advance tax before filing returns.
Annexure attachment
From this assessment year, an individual isn’t required to attach any document (including TDS certificate, i.e., Form 16 and 16A) with the form, regardless of whether a refund is claimed. “Now you need to write down the relevant details in the tax form itself,” explains Vinod Gupta, a renowned chartered accountant.
Scrutinise form
Go through the documents and details thoroughly to see that nothing is missing. For example, the PAN number should be quoted carefully. One must make sure that one is writing the same name that appears on one’s PAN card.
“Further, one must be very careful disclosing the transactions reported in the Annual Information Return (AIR) since the IT department will match banks, registrars, RBI, Mutual funds records with your return forms to find those who don’t declare such investments,” says Vasal.
Acknowledgement receipt
The new form is not required to be submitted in duplicate. After competing the form, acknowledgement slip attached with this form should be duly filled. The duplicate returned by the I-T department, duly acknowledged, serves as proof of the details of income submitted by assessee.
Don’t forget the due date
Individuals having only salary income and non-corporate assessees who don’t need to get their accounts audited need to file their returns before the due date that is July 31. Or else obligatory interest at 1.25% per month of tax due is payable beyond the due date.
Edelweiss - Thermax, Crompton Greaves
Edelweiss Research reports on Thermax:
"Thermax’s (TMX) Q4FY07 results were ahead of our expectations in terms of revenue growth and in line with our expectations in terms of profitability. At the consolidated level, while revenues grew by 65% YoY to Rs 8.6 billion, EBITDA grew by 55% YoY to Rs 1 billion in the quarter. Adjusted net profit grew by 74% YoY to Rs 668 million. EBITDA margins in Q4FY07, at 12.4%, were down by 70bps YoY due to higher proportion of low margin business. However, net margins expanded by 40bps YoY due to higher other income in Q4FY07."
"For FY07, while revenues grew by 43% YoY to Rs 23 billion, EBITDA grew by 63% YoY to Rs 2.9 billion and adjusted net profit grew by 94% YoY to Rs 1.9 billion. EBITDA margins, at 12.4%, expanded by 150bps YoY, in line with estimates. Net margins expanded by 230bps YoY basis to 8.6% for the year driven by a lower tax rate and higher other income. The energy segment continued to drive revenue growth, posting a growth of 46% YoY, while the environment segment grew by 32% YoY for the year. Operating margins (EBIT) for the energy segment expanded by 220bps YoY to 13.2% and by 140bps YoY to 12.0% for the environment segment in FY07."
"Order backlog at FY07 end was Rs 31 billion, up 80% YoY. With the boiler production facility in Gujarat likely to commence production by July 2007, we believe capacity constraints in the energy segment are likely to be addressed to a certain extent, thus paving the way for further growth in the order backlog of the energy segment."
"We are revising our consolidated revenue estimates upwards by 11% and 16% to Rs 32 billion and Rs 42 billion for FY08 and FY09, respectively, in the light of strong growth in the energy segment. We are upgrading our margins estimates on the consolidated level due sale of loss-making subsidiaries in FY07. Consequently, our EPS estimates stand revised by 15% and 22% to Rs 24 and Rs 32 for FY08 and FY09, respectively. We believe TMX has strong business fundamentals denoted by improving returns and growth profile. At our current estimates the stock trades at a P/E multiple of 21x and 16x. We continue to maintain our ‘buy’ recommendation."
Edelweiss Research reports on Crompton Greaves:
"Crompton Greaves (CRG) declared strong set of numbers for FY07 standalone and consolidated operations. Parent operations continue to benefit from multi-level demand drivers, overseas operations continue to chart anticipated performance trajectory. With end-to-end solutions portfolio, robust business model and impressive financial metrics, we continue to favour CRG as a prominent Indian MNC play."
"While FY07 standalone revenues were inline at INR 33.7 billion, net profits were 12% ahead of our expectations at INR 1.9 billion on account of cost rationalization through hedging and on staff costs. Higher-than-expected tax rate of 33% for Pauwels resulted in CRG reporting lower net profits of INR 690 million. Recently acquired Ganz, which posted operating losses, however, reported PBT of INR 200 million from one-time gains of INR 400 million."
"Incorporating strong growth for power systems thereby offsetting higher tax charge assumed for Pauwels and with Ganz likely to breakeven in FY08E, we do not foresee any risk to our consolidated EPS of INR 12 and INR 15 for FY08E and FY09E, respectively. At CMP, the stock trades at 21x and 16x FY08E and FY09E earnings, respectively, still at a relative discount to peers (ABB, Siemens). We believe such wide discount is uncalled for as CRG’s performance profile matches up to the best in business and it is now moving to be a total solutions provider with MHL acquisition. We maintain ‘buy’ recommendation."
China stock crash fails to shake the world
Via Mint
The most interesting event of the past week was something that didn’t happen. On 30 May, the Chinese authorities announced a hike in stamp duty on share trading, sending Chinese stocks spiralling downwards.
As the Shanghai index plummeted 6.5% and the Shenzhen Composite fell by 7.19%, investors around the world held their collective breath, wondering whether this would trigger a collapse on Wall Street. That’s exactly what had happened in February and it took over a month for markets to recover from the damage.
Thankfully, this time it’s different. After the initial knee-jerk selling in the futures market, the party on Wall Street continued. The upshot: Markets rebounded smartly across the globe a day later.
The big difference between 27 February and 30 May is that the US markets didn’t follow Shanghai’s lead. International investors seem to have realized that the Chinese stock market doesn’t really matter and the speculative frenzy there has been driven entirely by local punters.
Nor does the stock market have much of an impact on China’s economic growth, which is driven by state-directed bank lending and foreign investment. It’s very unlikely that a market crash in China will derail the economy. That’s why the crash in the stock market led to only a 1% decline in Shanghai copper prices.
Global investors seem to have learnt these lessons. In February, the crash on Wall Street was primarily about worries whether inflation was making a comeback in the US and disappointment that rate cuts would not happen. This time, there are no expectations of a rate cut.
But perhaps the key message from the blasé attitude to the Chinese shock is that it’s an indication of the strength of the current global rally.
The Shanghai crash could easily have been an excuse for speculators to take some money off the table. The fact that it didn’t happen is a pointer that risk appetite is alive and well. As EPFR Global, a research firm that tracks fund flows to emerging markets, said recently, “Risk aversion took a holiday during the fourth week of May as investors poured money into most emerging markets fund groups. Latin America and Global Emerging Markets (GEM) Equity Funds had their best week in over a year…the spread between US Treasuries and JPMorgan’s benchmark EMBI+ index narrowed to a new record low of 153 basis points.”
Of course, the action in China is far from over. If Chinese stocks shrug off the latest salvo from the government, there’s little doubt that there will be redoubled efforts to cool the market.
So far, the authorities have tried interest rate increases and increases in the proportion of deposits that banks have to keep with the central bank, but none of these measures have worked. The reason is pretty simple: While the central bank is trying to cool the market, it is at the same time flooding it with liquidity, thanks to its policy of pegging the yuan to the dollar. As Chairman Mao would probably have said, this is the principal contradiction in China today. How they resolve these conflicting objectives will be interesting.
Back home, the Reserve Bank of India has its own contradictions, having to worry about juggling the exchange rate, the interest rate and money supply. But the good news is that the latest GDP numbers show growth is now being driven by capital expenditure and not so much by consumption. That implies a resilience to higher interest rates. Corporate balance sheets are healthy, with large cash balances and not much debt, which makes them able to go in for capital expansion without being hurt badly by higher interest rates. They can also access relatively cheap debt abroad or tap the capital markets. In any case, capex is less sensitive to interest rate increases than retail credit.
The slowdown, therefore, will be primarily in the consumer discretionary and export sectors. The markets have already priced that in, de-rating sectors such as autos and IT services, while upgrading capital goods and infrastructure companies. With good global and domestic cues, the BSE 500 closed the month with a gain of 6.3%, not a bad return for investors who are traditionally supposed to “sell in May and go away”.
Yet the surge in May has also been accompanied by a bout of downward earnings revisions. Consensus earnings growth estimates for FY08 for the stocks comprising the MSCI India index have been revised downward from 16.9% to 15.7%. That makes current valuations look really pricey, especially with a lot of new issues hitting the market. The fact that stocks have continued to rally in spite of the revisions is another indication that liquidity, especially global liquidity, is driving this rally.
So what could change the outlook for liquidity? Instead of looking at China, investors may do well to concentrate on the US.
The yield on the 10-year Treasury note moved up to 4.9% on Thursday, its highest level this year. The worry is that whenever the US long-term rate goes up, as it did in May 2004, April 2005, October 2005 and May 2006, emerging markets have tottered.
During the crash in May last year, the yield on the US 10-year note went up to a high of 5.18%. In May 2004, it went up to 4.8%, sparking a huge sell-off in emerging markets. Given this track record, investors would do well to be wary of rising US bond yields.
Weekly Cherries
Alstom Projects CMP at 590.7, Support at 556-522, Resistance at 613-635 Up Trend.Buy
Guj Ind Power CMP at 68.3 , Support at 64-60 , Resistance at 71-74 Up Trend.Buy
Glaxo Pharma CMP at 1297.45, Support at 1233-1169 , Resistance at 1343-1389 Up Trend.Buy
HDFC Ltd CMP at 1861.7, Support at 1816-1770 , Resistance at 1902-1942 Up Trend.Buy
ONGC CMP at 910.15, Support at 901-893 , Resistance at 921-933 Up Trend.Buy
M&M CMP at 762.45, Support at 738-714 , Resistance at 779-795 Up Trend.Buy
Punj Lloyd: Buy
Punj Lloyd's inspiring financial performance for FY07, a strong order book buoyed by newly acquired subsidiaries and renewed focus on its core areas of oil and gas infrastructure solutions, are indicative of strong prospects for earnings growth. We recommend investors to buy the stock with a 2-3 year perspective to derive the full benefits of earnings arising from the present group order backlog of about Rs 16,000 crore. At the current market price, the stock trades at 13 times its expected consolidated earnings for FY09. Punj Lloyd's present order backlog is skewed towards oil and gas and petrochemicals (through subsidiary Sembawang). Civil and infrastructure works, as a source of orders, now receives less prominence. This changing revenue mix is likely to help the company's operating profit margins as the former yields relatively better margins.
The company's entry into the offshore platform segment (awarded by ONGC), which was earlier considered an exclusive domain of Larsen & Toubro, provides qualification to bid for lucrative marine oil and gas projects. This project has been bagged in alliance with its offshore engineering arm, which was part of the Sembawang acquisition.
The company has also won an order for construction of a wheat-based bio-ethanol plant in the UK, through its other subsidiary Simon Carves. If the European Union's mandate of at least a 10 per cent ethanol blending for transport fuels receives good response from its members, then this segment would translate into good business potential for Punj Lloyd. On the oil and gas side, spending by upstream and downstream oil companies is likely to remain robust, considering that firm trends in oil prices may continue. Punj Lloyd would be among the biggest beneficiaries of this trend in India, given that the area forms the nucleus of its operations.
Punj Lloyd's sales and net profits saw a three-fold expansion on a consolidated basis for FY07. Operating profit margins (OPMs), which remained healthy on a standalone basis, declined to about 9 per cent for the group. The company has stated that new orders booked by the ailing subsidiaries are likely to generate OPM of about 7.5 per cent. On the flip side, Punj Lloyd's increased focus on overseas projects can lead to currency fluctuation risks. Further, any increase in raw material costs can mute margins. However, price escalation clauses in road projects, supply of pipes by clients in some projects and planned procurement in anticipation of requirement may mitigate input cost increases. Increased working capital requirements for the huge order backlog may lead to higher interest costsCrompton Greaves: Integrating rapidly
With the acquisition of the Ireland-based Microsol Holding, through its subsidiary, Crompton Greaves (CG) has made further strides in its objective to expand globally in the power systems and solutions business. This leaves the company with three foreign acquisitions between 2005-07. While the first two companies, Pauwell and Ganz, helped CG move to higher-end transformers, the current acquisition may well aid the company move up the value chain in the power business. Microsol Group provides high-end automation services for new sub-stations and retrofitting services With this, CG has primary transformer solutions under one roof to compete with global majors such as ABB and Siemens in their respective product spaces.
The trend in Crompton Greaves' acquisitions is quite evident. Similar to the earlier two acquisitions, Microsol has also had operating losses in FY-2006 (reported to have made profits in FY 2007), badly in need of cash infusion but with strong expertise in its area of operations. CG has demonstrated its ability to turnaround the operations of Pauwel, its acquisition in 2005, wherein profits before interest and tax more than tripled and return on capital employed grew from 4 per cent to 20 per cent within a year. CG also expects the operating profit margins of the other acquisition — Ganz to move from negative territory to 8 per cent by the end of CY-07. Crompton Greaves had a healthy Rs 250-crore cash flows from operations in FY-06 and managed its earlier acquisitions through internal accruals. While it is not clear as to how it will fund the recent one at the enterprise value of euro 10.5 million (Rs 55 crore), there is not much concern on this front, given the company's low debt-equity ratio.
CG's acquisitions would equip the company with a competitive product portfolio, superior technology and ready manufacturing units that are likely to provide the company a smooth foray into the markets of Europe and North America. This would also enable de-risk the company from any slowdown in the Indian business.
NIIT Technologies: Strong wicket
For NIIT Technologies, FY-07 has been a good year with revenues growing by 46 per cent and profits almost doubling since last year. The operating profit margin has risen steadily to 20 per cent this year from 15 per cent in 2003- 04. Concentration on select verticals, inorganic growth, a turnaround in the BPO Solutions segment and increased utilisation rates have all contributed to the good financial performance.
The successful integration of Room Solutions, a UK-based insurance solutions provider, acquired in May 2006 has strengthened the BFSI vertical. Contribution to revenues from this segment has grown to 42 per cent from 33 per cent. The acquisition has also been EPS accretive. The company's geographically-diversified revenue model has seen Europe bringing in 50 per cent of the revenues in FY-07; this augurs well in an environment where a rising rupee-dollar exchange rate is seen as a risk to IT earnings. The company has also had a strong order intake of $72 million in Q4. The joint venture with Addeco SA, a Fortune 500 company to deliver application software development and maintenance solutions to its clients, will be operational by July 1, 2007. Increased offshoring arising from this JV and improved billing rates are expected to improve margins in the coming year.
Idea Cellular: Hold
Listed in March at Rs 85, the Idea Cellular stock has since appreciated 47 per cent, and now trades at around Rs 125. The sharp appreciation in the stock's price since listing has significantly narrowed the valuation gap between Idea Cellular and the telecom market leader, Bharti Airtel.
The stock now trades at an enterprise value to EBIDTA multiple that is quite close to that of Bharti, despite a less broad-based business profile. Investors can retain the stock, given the continuing strong subscriber additions and Idea's growing footprint.
However, given the relatively high valuations, the stock may offer opportunities for fresh entry at lower price levels.
Operations
Idea Cellular, which started out in 1997, is a pure-play GSM cellular services provider. It has over the last decade ramped up revenues both through organic growth as well as circle-level acquisitions of companies such as Escotel, RPG Cellular and the Andhra Pradesh operations of Tata Cellular.
These moves have helped Idea Cellular ramp up its geographic presence and acquire a national footprint, with operations now in 11 circles (geographic zones) and a subscriber base of 14.5 million. Idea appears well set in its eight established circles, where it is adding over 4.5 lakh subscribers a month and is the biggest or the No 2 player (based on total GSM subscribers).
In the 11 circles it operates in, eight are profitable, while in three where it started operations recently — Himachal Pradesh, Rajasthan and Uttar Pradesh (East) — the company has reported operating losses.
Operating profits in the eight established circles were at Rs 1,595 crore in the latest financial year, while losses in the three new circles were at Rs 85.7 crore. Idea has also been able to tap the Universal Service Obligation (USO) Fund and has won 27 clusters in the auction process.
This is likely to expand Idea's footprint and also result in savings on operational expenses such as rentals and cell-site maintenance.
Idea Cellular has managed its subscriber base well through such innovative schemes such as two-minute outgoing free, reduced tariff rates for loyal pre-paid subscribers, life-time recharge and so on.
The company has also been among the early movers in offering value added services (VAS) such as ringtone downloads, caller ring-back tone, services catering to more youthful audience .
As for the infrastructure, Idea was the first in India to launch GPRS and EDGE technology-ready mobile networks. These moves have resulted in a rising contribution of VAS to Idea's revenues.
The contribution stood at 9.2 per cent for Idea compared to 10.1 per cent for Bharti Airtel. Idea may be better placed to take advantage of any opportunity arising from third generation mobile services (3G) spectrum policy, which is expected in the next few months.
Taking a cue from Bharti Airtel, Idea has also taken the managed outsourcing route. It recently signed a $700-million agreement with IBM for all its IT infrastructure requirements and inked a $500-million deal with Nokia and Siemens for supply of network equipment.
As a rapidly growing mobile services provider, this move can help Idea reduce overheads and bring greater focus to its core functions. As these deals are recent, and benefits will begin to flow in from the current financial year.
Financials
On the operational metrics, Idea Cellular fares better than the national average for GSM telecom players on metrics such as ARPU (average revenue per user) and churn rate, and compares reasonably with Bharti Airtel on most.
Both Idea and Bharti have similar pre-paid subscriber percentages. Idea's churn rate (customers lost) is lower than the national average of 7 per cent.
Idea has a higher ARPU, of Rs.332, than the national average of about Rs 300, though this pales in comparison with Bharti's Rs 406.
Idea, however, realises more per minute usage revenue at Rs 0.91 compared to Bharti's Rs 0.85.
This is a reflection of Idea's current operations in relatively higher ARPU circles. Going forward, the ARPU is likely to continue to soften across players, but the impact on margins is expected to be made up by a better service mix (with higher VAS and initiatives such as 3G).
Idea's EBITDA (earnings before interest, tax, depreciation and amortisation) margin is relatively high at 34.2 per cent, though this may come down in the near term, in the event of pricing pressure, major network expansion and related operational expenditure.
While margins are on a par with industry average in the established eight circles, it is clear that the three new circles have been a drag on profitability.
But the healthy subscriber additions over the last quarter suggest scope for higher revenues and improved EBITDA in the new circles. This could result in an improvement in the overall profitability for Idea the next fiscal.
Apart from this, the foray into Mumbai could offer Idea the potential for an improvement in margins.
Mumbai is a high ARPU circle and is expected to generate higher revenues and lead to quicker recovery of the capex cost. Idea has indicated a Rs 647-crore spend on initial network building, from its IPO proceeds, for the Mumbai circle.
With increased ARPU in Metro and A category circles, and strong subscriber additions and consolidation elsewhere, Idea could emerge as a leading player in the mobile telephony space.
Possible risks
Though the company boasts of strong growth prospects, investors in the stock have to factor certain risks.
Given that the company is still in the process of ramping up its regional presence, execution risks to its operations are higher than those for Bharti.
Recent cuts in Access Deficit Charge (ADC) on outgoing international calls and roaming charges may also pressure realisations for Idea, if it reduces tariffs. While Bharti and Reliance immediately announced tariff cuts, Idea is yet to do so.
There is speculation on a possible acquisition of Spice Telecom by Idea. Spice has operations in Haryana and Karnataka and has about 2.8 million subscribers.
Though the outcome would depend on the pricing, such a deal can further expand Idea's geographic presence and subscriber base.
Another event that can prove a trigger to the stock price is the possible takeover of Idea Cellular by global telecom majors keen to strengthen their India presence. However, this remains in the realms of speculation.
Nelcast: Invest at cut-off
Investors with a two/three-year perspective can consider investing in the initial public offering (IPO) of Nelcast. In the Rs 195-219 band, the offer is priced at 11-13 times the likely FY-08 per-share earnings on the post-offer equity base. In the business of manufacturing casting components, Nelcast is likely to scale up its growth, given the increased demand for castings in both the domestic and foreign markets. It is also likely to benefit from its proposed increase in focus on exports and machined casts. This apart, its set of established clients such as Ashok Leyland, TAFE and TATA Cummins also lends confidence to its earnings growth prospects.
Investment rationale
Nelcast, which derives more than 50 per cent of its revenues the commercial vehicles segment, could witness increased demand on the back of an expected growth in freight traffic and the proposed introduction of emission and loading norms. However, any slump in the growth of the interest rate-sensitive commercial vehicles industry may mute Nelcast's earnings.
In this context, Nelcast's decision to widen its product base towards small castings to cater to passenger cars and light commercial vehicles is a positive. This apart, the proposed increase in the manufacture of machined casts, aimed at 20-25 per cent of total production by the next fiscal year, could give a further fillip to the bottomline, as these products enjoy better pricing and margins.
On the export front, outsourcing of casting components is likely to remain buoyant, given the strict environmental norms, rising labour costs and shortage of skilled labour in markets such as the US and Europe.
Encouraged by this rising demand scenario, Nelcast proposes to dedicate about 25 per cent of its capacity (post-expansion) for exports. While Nelcast already has a presence in US through its subsidiary and supplies to Volvo Sweden through its Tier-I supplier, Arvin Meritor, the increased thrust on exports is likely to help it strengthen its presence in the global arena. Further, as exports enjoy better realisation, revenues should rise.
For the financial year ended March 2007, the company reported a revenue growth of about 30 per cent to about Rs 350 crore. The earnings recorded a 182 per cent increase to about Rs 7 crore.
On the operational front, margins expanded by about 5 percentage points to 25 per cent on the back of increased sales realisation and pruning of costs.
The earnings per share on a fully diluted basis stood at about Rs 11 for FY-07.
Objects of the issue
The issue proceeds will be used to fund the expansion and modernisation of production facilities at both the units of Nelcast. The company plans to increase capacities from about 102,000 tonnes to about 120,000 tonnes by FY-08 and an additional 30,000 tonnes by FY-09.
Concerns
While Nelcast's decision to increase its focus on exports is a positive, its ability to source orders from global players could be crucial. Our concern stems from the increased competition in the export market from both the domestic and Chinese players. This apart, since most of the existing players in the domestic market are on an expansion mode, it could lead to an excess supply scenario, which could cap Nelcast's earnings.
The offer is open from June 4 to June 8. The company seeks to raise about Rs 95 crore through this offer. Karvy Investor Services and Bigshare Services Private Limited are the lead manager and registrar to the issue respectively.
Meghmani Organics: Invest at cut-off
Investors with an appetite for risk can subscribe to the initial public offering (IPO) from Meghmani Organics being made in the price band of Rs 17-19 per share (face value Re 1). A consistent track record of financial performance and a well-diversified client base for pigments and agrochemicals suggest that the company can deliver secular earnings growth over the next few years. At the higher end of the price band, the offer is priced at about 9 times the likely earnings for FY-08. Despite reasonable earnings prospects, the lack of market fancy for stocks in this sector may curtail the scope for listing gains on this offer.
Meghmani Organics is raising Rs 102 crore through this offer to fund its working capital requirements, set up new manufacturing units for High Performance Pigments and agrochemical formulations, and invest in a subsidiary to finance a 3MW wind power plant. The company's current revenues are derived mainly from domestic as well as export sales of pigments (green and blue) and generic agrochemicals. Exports accounted for about three-fourths of sales in the latest financial year. The key clients for the pigments business are ink, paint and plastic manufacturers both in India and abroad. The company counts global majors such as the Flint Group and Paramount Colors among its clients for pigments and Micro Flo, Valent and FMC Corp as its agrochem clients.
Diversified revenue base
Though Meghmani is only a mid-size player in the pigments and agrochemicals market, the company's revenue base appears well diversified both geographically as well as in terms of customers. The diversified client base ensures low reliance on individual customers (though some are large global players) and the geographic spread of sales reduces market- and currency-related risks.
The outlook for the pigments business appears strong in the light of the improving growth prospects for the paints and inks industry in the domestic as well as the global context.
Entry barriers to this business are relatively high by virtue of the company's specialisation and the customisation involved in the manufacturing process. The outlook for the generic agrochemicals business is less bright. Though the business offers scope for strong volume growth (India being a low-cost manufacturing base), it is subject to persistent pricing pressures. Generic products such as acephate, cypermethrin and imidachloprid, which are the key product lines for the company, have seen steady price declines in recent years.
Meghmani Organics on its part, has managed strong volume and sales growth over the past three years (sales have grown at a compounded annual rate of 23 per cent), despite the pricing pressures. The company's ability to sustain high revenue growth amidst rather sluggish market conditions and fairly intense competition in its businesses, suggests cost competitiveness. At the same time, operating profit margins have hovered at healthy 23-25 per cent levels. The profit growth has however lagged sales expansion, at 11 per cent annualised growth over three years. Though the company has managed strong volume growth, higher raw material costs (several inputs are linked to the crude oil basket) and declines in realisations in the agrochem business have tempered the profit rise.
From here, the company appears well-placed to deliver a 15 per cent earnings growth over the next couple of years, with the help of new manufacturing facilities, an improved product mix, a strong new product pipeline and reduced tax incidence. In the pigments business, it has 12 products at various stages of development. In the agrochemicals business, where the time and regulatory procedures involved in obtaining registrations are the key entry barrier, Meghmani already holds 90 registrations across 50 countries, with over 415 pending registrations. Expansion in the product portfolio would help the company sustain revenue growth and offset pricing pressures in its key businesses.
For the year ended March 2007, the company has managed net profits of Rs 40.7 crore (15 per cent growth) on net sales of Rs 470 crore (21 per cent). This translates into per share earnings of Rs 2.02 on the current equity base and Rs 1.60 on the fully diluted equity base (assuming pricing at the upper end of the band). The offer price, at Rs 19, dilutes trailing 12-month earnings by about 12 times. Despite the reasonable earnings prospects, the low valuation accorded to stocks of specialty chemical and agrochemical majors could be a constraint to significant price gains on this stock.
Nelcast : Dependent on the auto industry
Nelcast, promoted by P.Radhakrishna Reddy, is a TS 16949 accredited organisation. The product range includes around 200 items in SG (Spheroidal Graphite) Iron Castings and grey iron castings. Cylinder blocks, rear hubs, spring shackle, brackets, and exhaust manifolds manufactured by the company are used in heavy commercial vehicles (HCVs) and tractors.
The cost of expansion/ modernisation of the existing production facilities from 72,000 tpa to 1,50,000 tpa is estimated at Rs 61.46 crore, while incremental working capital requirement is projected at Rs 25 crore.
Part of the expansion has already been carried out: Installed capacity has increased to 1,02,000 tpa from 72,000 tpa end of the second half of the year ending March 2007. Further expansion is on the anvil at both the existing plants to achieve a total capacity of 1,50,000 tpa FY 2009. The expansion would be undertaken in a phased manner. Capacity would be increased from 1,02,000 tpa to 1,20,000 tpa by September 2007, and from 1,20,000 tpa to 1,50,000 tpa by September 2008.
Right now, Neelcast exports about 9% of its sales Globally, export of castings to developed nations is on the rise on account of rising costs, lack of skilled foundry people and environmental restrictions in these markets. The export target is 30% of sales by 2010.
Strengths
* The composition of machined castings is about 10% of production. This is to be increased to about 20%-25% over the next two years so as to improve margin.
Weaknesses
* More than 70% of revenue is derived from the HCV and tractor segments. Both these user industries are set to slow down significantly in FY 2008 even as the company is implementing substantial capacity expansion.
* Ancillaries to domestic auto and auto components sectors often have to maintain their prices despite rising raw material cost due to a limited number of clients. Margin is down from 11.9% in FY 2004 to 8.9% in FY 2006, though it jumped to 13.4% in FY 2007.
Valuation
At a price band of Rs 195–Rs 219, Nelcast’s P/E works out to 17.2–19.3 times FY 2007 earning on post-diluted equity. Industry peer Ennore Foundries is trading at a P/E of 19.0.
Meghmani Organics : Moving up the value chain
Meghmani Organics, promoted by Jayanti Patel, Ashish Soparkar and others, is a Gujarat-based pigments and agrochemical manufacturer with a strong focus on research and development. The company’s plants at Vatva and Panoli in Gujarat together have a capacity to manufacture 1,200 tonnes per annum of green pigment and 10,200 tonnes per annum of CPC blue crude. It also produces Alpha blue and Beta blue pigments on a smaller scale. The Charodi and Ankleshwar plants, again in Gujarat, churn out agrochemical formulations, intermediates and technicals.
CPC blue crude pigment is the major raw material for manufacturing other pigments like pigment blue and pigment green. These pigments have varied end-use application ranging from printing inks, plastics, rubber, paints, textiles, leather and paper.
The agrochemicals segment contributes slightly over 50% to the total sales, with the rest contributed by pigments. A large chunk of business comes through exports: 66% of the agrochemicals produced and 85% of pigments are exported. The pigments go to around 58 countries. The USA and the European Union together contribute around 45% of the revenue.
Meghmani Organics enjoys several cost advantage over its competitors because of its integrated multi-functional plants and its proximity to raw material sources. The major customers for pigment products include the Flint Group Frankfurt GMBH, Paramount Colors, and Sudarshan Chemicals. The major customers for agrochemicals products include Micro Flo LLC, Valent USA, and Hindustan Insecticides.
The Singapore Depository Shares (SDS) issued in August 2004, representing 38.17% of the existing equity share capital, are traded on the Singapore Stock Exchange (SGX).
Meghmani Organics plans to raise Rs 102 crore through its IPO in the Indian markets to fund its expansion. The company wants to set up a high-performance pigment facility (to be commissioned by October 2007) at Vatva in Ahmedabad and a multi-purpose agro-chemicals plant at its Panoli facility (to be commissioned by August 2008).
Strengths
* Has already commercialised two high performance pigments green 36 and blue 60, which can improve profitability once the new plant is in place to manufacture them. Development of yellow, red and orange pigments will augment the pigment product portfolio.
* Holds around 90 registrations worldwide for its agrochemical business and has 415 registrations pending in 56 countries worldwide.
* Rightly placed to benefit from the global outsourcing drive. A number of players in the US/EU prefer to source chemical products from countries such as India due to cost cutting and pollution problems.
* An established track record of stable growth with experienced management. Has also won Investor’s Choice Award for the Most Transparent Company from the Securities Investors’ Association of Singapore for two consecutive years since its listing on SGX in August 2004.
Weaknesses
* The agrochemicals industry is a highly crowded, with a low rate of growth
* A number of key raw materials are derivatives of crude oil, which may witness strong fluctuations, putting pressure on margin.
* The tax benefits available to the 100% EOU Panoli – 1 plant, which manufactures blue crude, alpha blue and beta blue pigments expired in the year ending March 2007. Other such tax benefits are likely to elapse by end March 2009.
Valuation
Currently, Meghmani Organics’ SDS is trading at SG$ 0.365, translatings into Rs 19.3 per equity share( 2 SDS= one equity share).
The price band is Rs 17-Rs 19 per equity share of Rs 1 face value. At the lower band of Rs 17 per share, the P/E would be 10.4 times the annualised EPS for the nine-month ended December 2006 on post-issue equity of Rs 26.06 crore.
At the upper price band of Rs 19 per share, the P/E would be 11.3 times the annualised EPS for the nine-month ended December 2006 on post- issue equity of Rs 25.43 crore.
In the dyes and pigments industry, comparable companies such as Atul and Sudarshan Chemicals are trading at P/E of around 9, while comparable agrochemical companies such as Excel Cropcare and Nagarjuna Agrochemicals are trading in the P/E range of 7 to 9.
DLF IPO Analysis: Skimming the large land bank
DLF, the largest real-estate developer in India, develops residential, commercial and retail properties. In the residential realty space, the company builds and sells a wide range of properties including houses, duplexes and apartments of varying sizes, with focus on the higher end of the market. In the commercial segment, it develops and sells/leases commercial office space, with a focus on properties attractive to large multinational tenants. And, in the retail segment, it focuses on developing, managing and mainly leasing shopping malls, which include multiplex cinemas.
Of late, DLF has diversified into the hospitality sector, infrastructure project construction and development of special economic zones (SEZs) through joint ventures with eminent overseas and domestic players. The company has also picked up strategic stake or ramped up stake in companies offering crucial services relating to property development.
The proceeds of the issue will be used to fund acquisition of land and development rights, to meet construction and development cost, and prepayment of loans.
Strengths
* Reputed and established player in the Indian realty industry, specially in the north, with long successful track record since 1946. Has developed approximately 224 million square feet (sq ft) including 195 million sq ft of plots, 19 million sq ft of residential properties, seven million sq ft of commercial properties, and three million sq ft of retail properties. Final approval has been received for four IT- pecific SEZ in the country: two in Gurgaon and one each in Pune and Chennai.
* End April 2007, had a land bank of 10,255 acres across various regions of India with an aggregate estimated developable area of approximately 574 million sq ft including four million sq ft of completed development. Residential projects comprised saleable area of approximately seven million sq ft and let-table and saleable are of commercial and retail properties of 27 million sq ft and 10 million sq ft, respectively. In addition, has entered into arrangement for acquisition of development rights for about 554 acres.
* About 171 million of the 574-million sq ft developable area is located in or near developed urban areas, and a significant proportion of the balance is in or near areas that will be developed as urban areas under the draft master plans of relevant urban bodies.
* Enjoys strong margin upward of Rs 1800 per sq feet due to strong focus on luxury and premium segment and low average cost of land of around Rs 270-300 per sq ft in the National Capital Region (NCR), comprising 51% of its land bank.
* The specialised joint ventures (JVs) for engineering design, construction and project management with renowned players imply better control on completion of project as work can be outsourced to owned JV companies managed by global players unlike earlier third-party contractors. This will also help command premium rates and attract premium clients.
Weaknesses
* Yet to get certificate of change of land use for 60% of the land bank from competent authorities.
* Debt-equity ratio was 2.5:1 end March 2007, and 4.35:1 end March 2006. Moreover, subsidiaries had preference share capital of Rs. 949.8 crore. In addition, there are guarantees outstanding of Rs 8.6 crore on a consolidated basis, and Rs 462.9 crore of put option against the preference shares issued by an associate company end March 2007. Outstanding end April 2007 included Rs. 4395.6 crore as payment for acquisition of land reserves and Rs 1054.0 crore for acquisition of 554 acres for which development plans are at a preliminary stage. These payments may have to be funded by the incurrence of additional debt. The hospitality, infrastructure development and SEZ plans will also involve substantial capital outlay.
* Certain commercial properties have been sold to DLF Assets Pvt Ltd (DAL), a promoter group company, for Rs 2401.5 crore in the fiscal ended March 20‘07. Due to this transaction, the total income and profit before tax was boosted by Rs 2207.1 crore and Rs 1564 crore (which along with other one-time sales of assets and investments have been treated as extraordinary by us). Net profit after minority interest was just Rs 43 crore on sales of Rs 434 crore in the fourth quarter ended March 2007. Besides artificially boosting financials, this transaction raises many doubts.
* Commercial and retail-property development and the upmarket segment of the residential property, where the focus is, are sensitive to economic conditions.
* Operations have historically been in and around Delhi and Gurgaon. The ability to manage projects across various regions in the country is yet to be proved.
* Corporate governance record is not encouraging.
Valuation
DLF reported consolidated sales of Rs 2615.20 crore in the year ended March 2007. This includes one-time income of Rs 880.5 crore. Excluding this sales are up 50% to Rs 1734.7 crore. Net profit before minority interest, inflated by an extraordinary (EO) profit on account of sale of commercial properties and divestment of shares in subsidiaries amounting Rs 1817.10 crore stood at Rs 1943.70 crore. Profit before tax (PBT) before EO shows a rise of 110% to Rs 732.40 crore.
EPS (excluding EO) on post-issue equity capital of Rs 340.88 crore works out Rs 3.3. On a lower price band of Rs 500, P/E stands at 152 times, and on the upper price band of Rs 550 P/E is 167 times.
Parsvnath Developers trades around Rs 320.25 giving P/E of 19 times FY 2007 consolidated earning. Unitech, quoting around Rs 604.40, trades at P/E of 37.5 of its FY 2007 consolidated earning. Notably, Unitech’s land-bank size is comparable to DLF.
While P/E is not the only criterion to compare real-estate stocks, the very high P/E shows that lot of cream has already been skimmed from this cake, specially when there are chances of the sector turning sour.
Investment in DLF is investment in its land bank. Hence, the valuation of DLF will depend on how much and how fast revenue and profit will be generated from this land bank and how fast and at what rate and locations it is adding to its land bank. This in turn depends on growth in real- estate rates, prevailing interest rates, economic growth, expansion in organised retail and flow of foreign liquidity to this sector.
Currently real-estate rates in many Indian centres are very high by global standards. This makes them commercially unattractive and beyond the average home-buyers’ capacity to pay. In spite of the government’s attempts to control bank as well as foreign fund flows to this sector, limited supply of developed real estate has been the main culprit for keeping the rates high.
Even if there is a temporary mismatch in demand-supply, which is possible as most real-estate companies led by DLF are planning massive additional supply over the next few years, there could be fall in real-estate prices, specially when investor demand has been one of the major drivers of real-estate rates in the past couple of years.
In a way real-estate stocks are like commodity stocks which go up when commodity (real-estate) prices go up and fall when they come down, irrespective of the volume growth or the current financial performance. How the interest rates will behave going forward is very crucial. Even if the current rates prevail for an extended period, it will be negative for the real-estate sector, while a fall in interest rates will be a big positive. Overall, this sector is for high risk-high-return, professional long-term investors and not for weak-hearted small investors.
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