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Saturday, June 09, 2007

How K V Kamath built ICICI

In 1955, seven years since India had become independent, it was also the time to rebuild the nation and industrialisation was the only way forward.

It was at this time that with the initiative of the World Bank and the Indian government, that the Industrial Credit and Investment Corporation of India, ICICI, was formed.

Sixteen years later in 1971, to give a new lease of life to its rather nondescript existence, the corporation hired a batch of young business graduates. Among them, was 24-year-old Kundapur Vaman Kamath; fresh out of management school in Ahmedabad. In time, Kamath would redefine banking in India and become a legend in his own right.

Mangalore-born Kamath joined the Project Finance Division of ICICI as a management trainee in 1971. A quick learner, Kamath demonstrated his entrepreneurial skills early in his career and his sheer talent caught the attention of the then chairman of ICICI, N Vaghul.

Kamath set-up new businesses in leasing, venture capital, credit rating as well as handling general management position. Taking his responsibilities a step further, he implemented ICICI's computerisation programme, which in later years would give ICICI a huge competitive advantage.

For 17 years, KV Kamath looked beyond the obvious to create value for ICICI. In 1988, an opportunity came calling that would take him beyond the shores of India.

Managing Editior of The Smart Manager, Gita Piramal, told CNBC-TV18, "Kamath was with ICICI for 17 years before he decided he needed a change. He went to Manila to the Asian Development Bank [Get Quote], and this was an absolutely critical turning point in his career. He learnt about new processes, how emerging markets work, he learnt to deal on a global international scale and this was absolutely important when he came back to India. He was with the Asian Development Bank for about eight years before he got a call from his mentor."

Chairman at ICICI Bank [Get Quote], N Vaghul, recalls, "Within a few months of my joining I had interacted with Kamath. Kamath was at that time in the leasing department and I had more or less made up my mind that he would be my successor."

By 1994, the impact of the economic reforms initiated by the Narasimha Rao government were beginning to show, albeit rather slowly. The same year, ICICI Limited had set up its subsidiary -- ICICI Bank. Two years later, in 1996, Vaghul's protege KV Kamath rejoined ICICI as its new Managing Director and CEO.

Kamath immediately initiated strategic initiatives and structural changes across the ICICI Group that helped redraw its boundaries and take it to the next level. MD & CEO, ICICI Bank, KV Kamath says, "An organisation, which is 40 years old, you need to move some people into some positions, in which you think they would be better of and that's what was on top of my mind."

Kamath's immediate priority after his return was to create new operations in the organisation and more importantly, to tap new markets. He introduced flexibility in the bank's functions and shaped them to respond to new market reactions.

The company was now laying the foundation to become a financial powerhouse, but Kamath had a mammoth task ahead.

Piramal explains, "Kamath had a daunting assignment to get a banking license. This was a very important moment because the Indian government had not issued licenses since Indira Gandhi had nationalised banks. But at this juncture, the government did issue licenses and there was a mad scramble for them. Amongst those who managed to get it -- the Times Group, the Hindujas, Kotak and of course ICICI. But this was just the beginning - he had far bigger dreams."

The visionary banker saw an encashable opportunity in the retail banking space. ICICI's strategy and product offering recognised the changing demands of a growing middle-class.

Deputy MD, ICICI Bank, Chanda Kochhar, says, "When we rolled out the retail strategy in a big way -- that was again a huge change and therefore a hugely enriching experience because at that time, the entire consumer finance business was very nascent for the country as a whole. So, we really had to create a vision of what this business is going to be like for the country and of course it was absolutely new for ICICI. One was really moving in uncharted territories and taking decisions, taking a call as one moved along and learning alongside."

Retail financing in the mid-1990s was an open field, with no major players and Kamath recruited a young bunch of strikers who would score winners for him. In 1997, ICICI became the first Indian financial institution to go online. At a time when word was experiencing the dotcom boom, Kamath was quick to sense the shift in customer demands.

Fighting skeptics, Kamath went ahead with a plan to offer a multi-channel delivery system to its customers. Starting with just 5,000 online customers, ICICI today serves over 2.5 million people online. It opened the floodgates of a unique success story.

By the end of the 1990s, Kamath had chalked out ambitious plans to spruce up ICICI from within. Supported by an able group of young aspirants who believed ICICI had places to go.

Impatient by the dream and brimming with confidence to make ICICI a market leader, Kamath would soon take crucial steps that would influence the fortunes of this financial institution.

In September 1999, within three years of taking over as the Managing Director and CEO of ICICI, KV Kamath drew up aggressive plans for growth. That year, ICICI Ltd got listed on the New York Stock Exchange, NYSE, the first ever Indian financial institution to go the American Depositary Receipts, ADR route.

The next year, ICICI Bank followed suit and its ADRs made a debut at $14 on the NYSE, at a premium of over 27% over its issue price of $11.

Post the listing with the NYSE; ICICI had ambitious expansion plans and this time, it was through inorganic growth. The process had begun way back in 1997 and between 1997 and 2001; Kamath engineered a string of acquisitions like SCICI Ltd, ITC Classic Finance, which had a strong retail base in Eastern India and a strong base in the West.

Most significantly, it acquired Bank of Madhura at a time when its own revenues stood at Rs 2,500 crore (Rs 25 billion) and that of the bank at Rs 100 crore (Rs 1 billion), it was time for the next courageous move.

The year 2002 was the landmark year for ICICI, the board of directors of ICICI and ICICI Bank approved the merger of the parent company ICICI and subsidiaries like ICICI Personal Financial Services Ltd and ICICI Capital Services Ltd, with yet another subsidiary ICICI Bank.

The entire banking and financial operations of the group was bought under one roof. It was a reverse merger and quite rare in corporate India, where a parent company merged with its subsidiary and adopted the later's identity.

KV Kamath explains, "The bank was the entity into which ICICI Ltd went backwards into. You did not then have to address the issues of regulatory clearance to do a whole lot of things because the bank already had those approvals and that facilitated the whole process and that was the critical reason. The other reason to use this route, was to clean up ICICI Ltd at the time of the merger and the only way we could do it was, if ICICI Bank was the entity into which ICICI Ltd merged."

Soon after the merger, it was time for ICICI now in its new avatar ICICI Bank to takeoff and win new markets as well as look for horizons beyond the Indian seas. In 2002, ICICI set up offices in New York and London.

The very next year it established subsidiaries in Canada and also joined hands with Lloyds [Get Quote] TSB in the UK. Offshore banking units were set up in Singapore and representative offices in Dubai and Shanghai.

Kamath's passion for growth was fanning ICICI Bank's burning ambition to grow beyond its dreams and to achieve it, he added a new weapon to his armoury -- technology.

He introduced ATMs across the country using current technology as an enabler. ICICI Bank had experienced a growth rate of more then 180% in its very first year and a separate majority owned company called ICICI Infotech supported the IT operations of the banking section. But it was the innovative idea of introducing ATMs, that tips the scales in their favour.

Kamath says, "To set up an ATM, you need three-four levels of redundancies. You set up recycling, you have to have a lease line, a dial-up line and you are still not sure the ATM would work 94-95% of the time. Today, you have ATMs available 99.99% of the time. So, there were these risks but we bet on technology."

Piramal adds, "Kamath found himself sandwiched between State Bank of India [Get Quote] and the foreign banks who had an excellent retail presence. One of the ways is to meet the shortfall of being able to offer branch facilities, and at that time ICICI had just 50 branches. To meet that shortfall, Kamath hit upon an absolutely winning strategy and that was to install ATMs across the country."

There are many who dream big and let their dreams fade. . . to die forgotten deaths. But there are still a few who nurture their dreams, give them wings and then turn them into realities. These are the people who make a difference and that's precisely what KV Kamath did.

With the turn of the millennium, ICICI emerged as the largest private bank in India and fueling its growth was the untiring efforts of one man -- KV Kamath. He rightsized the organisation, expanded internationally and gave a fillip to its technology driven expansion plans, and then Kamath set his eyes on making ICICI a universal bank.

He had a vision and it was to create an international banking experience in the country, which would provide complete financial services to different classes of customers.

For the first time ever, the rural community was included. With the use of technology, the bank started tapping into the micro- banking space in rural India, utilizing partnerships with multinational and local agricultural institutions.

Kamath repeated his earlier success with ATMs, when he introduced cross-selling in ICICIs banking system. He recognized the inconvenience faced by busy customers and brought in direct selling agents, who would reach customers easily, identify prospects and initiate dialogue. This not only helped ICICI deliver personalized banking facilities, but also changed the banking experience in India forever.

Joint Managing Director at ICICI Bank, Lalita Gupte, says, "When I look at the vision for ICICI Bank in the next 10 years, I think major changes will take place. I see a very bright future ahead and I see the aspiration has been to move into the top league in the world - in top 25-50. This in a way reflects the place India will actually find in the global economy."

"Several Indian corporates are going overseas in acquiring businesses and expanding into the global marketplace. Mr Kamath is a visionary and I do see that this will definitely have an impact on the bank, as we go forward."

Piramal says, "In all the different directions that it was growing, Kamath also had to look after the legacy of the past. He had to streamline and rightsize the organisation. It had 33 subsidiaries, he gradually brought them down step by step from 33 to 24 and then 12 and he prepared the company for an IPO. This was an absolutely critical testing time for Kamath."

In December 2005, ICICI Bank announced its initial public offer to the Indian market and amassed over Rs 80 billion. With a very well defined roadmap, ICICI Bank soon put in place, a formidable plan for its future. With its current asset over Rs 250,000 crore (Rs 2,500) billion and a net profit of over Rs 2,500 crore (Rs 25 billion), with a network of 614 branches and over 2,000 ATMs, ICICI Bank has left its competition years behind.

Kamath's contribution to cutting edge innovations in the banking sector will soon recommence, and as if to acknowledge the years of dedication he has put in to making sure that ICICI Bank stands at the apex -- in 2001, he was named the Asian Business Leader of the Year. A fitting finale one would say. . . but there just might be more coming from him.

Via Rediff

Keynote Capitals- Subscribe DLF with medium term view

Keynote Capitals has a “subscribe with medium term” view on the DLF Ltd. initial offer. The offer opens for subscription Monday and closes Thursday.

The IPO of 175 million equity shares of Rs 2 each, in the price band of Rs 500-550 per share, is expected to garner of Rs 937.7 billion.

In its recommendation, Keynote Capitals states that DLF is the largest real estate development company in the country in terms of area of completed residential and commercial developments, with a land bank of 10,255 acres.

They believe DLF will continue to have a strong order book in the foreseeable future, given the sheer size of its huge land bank and the company’s interests in developing SEZs, multiplex theaters and hotels.

The proceeds of the IPO will be used in acquiring new land and funding existing projects.

On the flip side, the scenario of hardening interest rates is the main concern from the industry point of view. Around 50% of its projects are to be completed only beyond 2009-10.

DLF is expected to continue to generate negative cash flows during the next three years. Also, the presence of 58 subsidiary companies makes it a complex corporate structure. That being the case, the IPO can be subscribed to with a medium term view, Keynote Capitals said.

Compared with Unitech, its closest competitor in terms of land bank, DLF’s IPO is priced at 1.1 times price to net present value, which is at a small discount to Unitech which trades at 1.2 times, though the quality of Unitech's bank is not as good as that of DLF's.

The high EV/square feet in case of DLF reflects its better quality land reserves and its high leverage.

First Global - DLF IPO Analysis

First Global - DLF IPO Analysis

Rakesh Jhunjhunwala - Consolidation healthy for mkts

Via Moneycontrol

t’s been an amazing three-four months for the market. Global markets are in the midst of a spellbinding run. Since the Budget, the markets have seen one big fall after which, the Nifty went on to achieve new highs

Rakesh Jhunjhunwala shares his perspective on what has happened over last four months and what the road looks like from here for the next three-four quarters and the next three-four years. He says that it would be healthy for the markets to consolidate at this range, which will prepare the ground for a dramatic rise.

He also thinks interest rates have peaked off and he doesn't see a further rise in rates.

Excerpts from an exclusive interview with Rakesh Jhunjhunwala:

Q: We will talk about the fundamentals, but you spent a lot of time watching the screen. What is the screen telling you for the moment?

A: Surely in the last two-three days, the market has exhibited weakness, but I am not sure that we are going to see a major movement, either way. Maybe in the next one-two months we are going to see range bound markets with some amount of consolidation rather than a major move, either way.

Q: How would you classify that - a major move? You are saying that more then a 10% Index move is unlikely over the next one-two months?

A: I would think so.

Q: Either way?

A: Either way.

Q: So essentially are we going through a consolidation phase?

A: I would think so.

Q: But are you a bit surprised that the Sensex has not gone on to make new highs or the Nifty did not stick at new highs for a very long time?

A: I am not surprised, because in the last four years, we have had a path-breaking rise from 3,000 to nearly 15,000. As a long-term investor, I would be happier if the market consolidates at this range and makes the ground for real dramatic rise. We have had fantastic returns over the last four years. As long as the market doesn’t lose much, I am not concerned at all.

Q: But you think this consolidation phase will be short-lived or could it be an extended one?

A: I think it could extend to six to nine months to a year and I would think that’s healthy for the market.

Q: But what are global markets telling you now, because almost every market has rallied so significantly?

A: Economic growth in Europe has surprised positively, there is a lot of positive news out of Japan, economies in Asia are doing well. Not only is economy doing well, but the percentage of profits that corporates are getting out of GDP, are at all time highs. Now the worry could be that these percentages may not be maintained, but the fact remains that today the percentage of corporate profit of GDPs is that it stays high. Interest rates worldwide are not at very high levels, but inflation is surely a matter of concern, which is why markets are doing what they are doing. But to my mind, the uniform increase in asset value of all classes is something that could be troubling.

Q: What troubles you the most about the extent of the breadth of the rallies that you have seen in commodities, bond, stocks, gold, oil, everything?

A: Sometimes I feel that too much wealth has been made very easily. But maybe out of prejudice, I have all my assets in Indian equity. I feel India equity, as an asset class, will standout.

Q: Do interest rates bother you, because that’s been the fear for the last few days globally that they might start inching up and denting the case for equities?

A: The markets are not discounting the fact that interest rates will inch up. There were expectations that interest rates in America will come down and in the last four-five days, after the economic news and Mr. Bernanke’s statement. The feeling now is that interest rates may not decline in America. As far as India goes, liquidity is abundant; inflation is below 5%, it's not expected to go above the 5% figure. You have seen some slowdown in the auto industry, so the monetary authorities can feel that they have achieved partly what they set out to do by easing interest rates. I see no reason why in India interest rate should not come down.

Q: Do you think they will go up before they come down?

A: I do not think so.

Q: It's completely peaked off you think?

A: I think so, absolutely.

Q: You do not think because of the ample liquidity right now the Reserve Bank may make another tightening move?

A: I do not think the government is necessarily interested in hurting growth. Government is interested that you have growth with controled inflation and I think, it's very difficult for inflation to go above 5% in the next five-six months. In India, we don't have more then 2% owned houses, we are at an initial stage of consumption; why should any government want to limit consumption?

I personally feel interest rates should come down and industry will be lobbying now that inflation is under control. If you do not have elevated inflation, next four-five weeks, we can expect some softening in the July policy.

Q: As early as that?

A: Why not? Whether the Reserve Bank softens or not, if liquidity is what it is now, it will soften by itself.

Q: So you wouldn’t be terribly pessimistic about some of the rate sensitive sectors any more?

A: Not at all.

Q: That would include public sector banks?

A: Yes, I would think so.

Q: Did you get bearish on public sector banks when rates were going up?

A: I have no investment in public sector banks and as far as my investment in the banking sector goes, I do not go by quarters because they don’t affect my investment over a period of time. Especially, State Bank of India is 30% of Indian banking; I think if State Bank can get its act together, it can be a really fine investment.

Q: Why do you steer clear of public sector banks? You do not like their business morals?

A: I get a secular return in my investments on a multiple return if there is a secular profit growth, but no public sector bank in India produces secular profit growth. There are fundamental problems like ratio of cost to income. These banks income can explode, if the ratio of cost does not increase in proportion to income and I think that could happen in State Bank now.

Q: You are more optimistic on some of the private sector banking space?

A: Yes because I think, there is going to be consolidation in Indian banking, it's not more then three-four years away. Most old private sector banks today quote between 1-1.5 times book and I think, consolidation will not take place at less than 2.5-3 times book and their profits are growing at about 20-25%. In fact, I have an investment in Karur Vysya Bank which I made in around 1993. I never sold that investment until today and if I am not wrong, Rs 150 investment today - one share became 10, 10 became 30, 30 became 90, 90 became 270 - so Rs 150 investment is Rs 80,000 today. I have never sold that investment and there is a natural growth in banking.

Q: Do you think these are the banks, which will go first. The Karur Vysya Bank, the regional older private sector bank or the new ones like Yes Bank and DCB?

A: I don't know. I think, you are already pricing in into DCB and Yes Bank the prices at they will be consolidated. So whether they will go or not, nothing's left on the investor’s plate. I don't think there the return can exceed profit growth, while in the other banks, there is going to be a valuation kicker plus there is a profit growth.

Q: You said three-four years - you don't think it will happen as soon as the doors are open in 2009?

A: The doors may open in 2009 or it may take two to five years.

Q: What’s your call on how the rupee has been moving? How do you see the technology space panning out?

A: I have very little exposure to technology.

Q: Aptech must be one of your significant investments?

A: Aptech is in the training space. I don't think, it’s as much a rupee appreciation as it's a dollar depreciation. I do not know much about the currencies, but I am not of the view that rupee can gain more than 2-3% a year. We might have seen the best of the software industry, as far as investors are concerned. At least for the next two-three years, because surely there is going to be wage inflation and if the currency doesn’t appreciate, it will be a double whammy to the balance sheets.

Historically, margins of 30-32% have not been maintained. If there is a slowdown in the US, the first sector which will have a hit in India is the software industry. Now there is a double opinion about that; lot of people say more work will come in, but in the slowdown in 2000-2001 not only work was a challenge, but also the rates were a challenge.

Q: You have not taken any contrarian position in technology after the rupee’s recent rise?

A: No and I don't think you should also, because their PEs today are well priced. So there maybe growth, but if their margins don't expand, then PEs could contract.

Q: The other sector I remember you telling me a few Diwalis back, which you were circumspect about, was telecom. Another sector that has done extremely well. How do you look at valuations and growth in that sector now?

A: Growth will be good and valuations are also good. In a bull market you can always be wrong as long as you don’t go short. So if you don’t buy, everything goes off. So what’s important is you should remain committed.

Q: In the last few weeks since that February fall happened, at any point, where were you significantly short because we have this phenomenon people going short and then the market moving up foreseeing them to cover up. Have you had any such experiences in the last 4-5 months?

A: I don’t think I have made any short positions significant in the last 4 years. I don’t get the feeling internally that markets are going to dip in a big way or markets are valued at such levels that just sell-sell-sell and sell.

Q: Even when the market fell to about 12,000 odd levels, you didn’t consider, because that was a sharp fall?

A: I was caught on the wrong foot in the Budget, I was long on the Budget day and I exited and I did not short anything. I hope I had, but I did not.

Q: How do you read the global cues right now and do you subscribe to that view that the shape of the Indian market in the near term is very tight to what’s happening globally or not quite so?

A: It’s difficult to say. But I don’t think it’s so much tight as people are apprehending because lot of domestic money is going to come. The Indian economy has got one of the lowest international exposures because I don’t think that any international slowdown is really going to affect any exposure of India, other than software. Also, if there is also going to be an international slowdown, commodity prices will come down which for a net importer of commodities like India, it’s going to be a very good factor; interest rates worldwide will come down.

We have a very large domestic economy, which is largely going to remain unaffected by what happens internationally. So even if things internationally slow down in the first leg, India is surely going to be hit both in terms of sentiment and maybe economically. But over a period of time, we will find that India is the economy that will be the most resilient and may therefore attract the largest investments.

Q: How much of this rally in the last few months is being fuelled by pure liquidity because that’s what people keep talking about?

A: I don’t understand what is liquidity/ what’s not liquidity, because I don’t know who is to decide what is value. I think it’s the most transitive word in the English language. History has never been a guide really because history has always been made afresh. So I look upon PE and valuation as an economic performance and the amount of money, which is available to buy that performance. I don’t agree with all that there is liquidity chasing. Do you think analysts know what value and valuations are? They would be the richest people in the world.

Q: You don’t agree that valuations are expensive in India right now?

A: We can’t generalize. Surely there could be pockets of valuations where I won’t buy as an investor or I would exit as an investor, if I have a holding. There are pockets where there is opportunity.

But in general, I don’t think; one of my biggest learning as an investor is that good stocks always remain expensive. So if India is going to perform as a market, we are always going to feel it’s expensive. They (stocks) are not expensive, because expensive, I don’t I think it’s not going to be expressed in terms of valuations until and unless valuations are way-whack out of any reality.

Again ’92, you had SBI Magnum - it was a closed-ended equity fund. At the NSE, it was Rs 50 and the quoted price was Rs 150. Valuations are really expensive when people just want to participate, leverage and markets are rising 10% everyday, and everybody is participating. So it’s more a psychological manner and matter rather than the absolute number.

Q: You don’t sense that euphoria at all right now?

A: I don’t know what you were doing in ’92 - you have not seen ’92. I think we are going to have another ’92 in India and we are going to have in next 3-5 years. That will be the time to sell stocks; like 2001-02 was the time to buy stocks.

Q: Do you see any extreme over-valuation pockets right now in the market like we saw in the hay days of the technology boom, some speak about real estate being one of those examples: do you agree with that?

A: I won’t equate it with the technology bubble. That was not a boom - that was a bubble. I don’t think real estate is valued as the technology stocks were valued. So I don’t see that kind of extreme overvaluation.

Q: Have you invested in the real estate sector at all?

A: I don’t have any investments in real estate.

Q: How is that possible, last one-one and half years they have been some of the biggest multi-baggers? You must have had reasons to look at those opportunities and let them pass?

A: It’s a very dicey subject. None of the real estate companies pay tax. I don’t know how they get their profits. Second thing I also feel that anything, which can be valued as one plus one is equal to eleven; is not what ultimately gives you returns in markets. I don’t know, I have never been into real estate bull in my life and wrongly so.

Q: But you have bought a lot of real estate yourself; how come you don’t buy those stocks?

A: I have not bought any real estate. I bought a house and office.

Q: Commercial real estate you have dabbled in the past, haven’t you?

A: Not at all. That’s not my cup of tea.

Q: So you would not be queuing to buy DLF, would you?

A: No I wouldn’t.

Q: Why - valuations or innate distrust of the business?

A: I would say valuations, more than anything else.

Q: So you have had a look at it?

A: Yes.

Q: You don’t agree with those - slight premium to land bank - those kinds of valuation models at all?

A: Why should I go and buy DLF, I will buy the land only.

Q: Do you think this will have any kind of material impact on the market - the fact that some serious amount of paper is hitting the market over the next 2-3 months?

A: Lot of that paper will be bought by the strategic buyers. ICICI Bank's 10% will be bought by the Government of Singapore. In the international context, this kind of paper is not much, in the Indian context surely, it will have some effect on the market. It's not coming at a valuation, which is very cheap. So nobody is going to today dump markets and buy those issues. There maybe a new class of investors, there are a lot of first time investors. I foresee, by 2010-11, we should have USD 45-50 billion of domestic money coming in. If you have that kind of money coming in, surely USD 15-20 billion of local issues will be easily absorbed.

Q: Why is that money still not coming in? We've had a fantastic run, everybody can see that equities is the place to be, but aside of some mutual funds, NFOs, we are not seeing great participation coming in locally.

A: I beg to differ. Lot of this money is coming into the insurance sector. I am told, last year the investment made by the insurance sector in Indian equities was higher than the investment made by the Indian mutual fund industry.

Q: You are talking about unit-linked plans?

A: Mainly unit-linked plans. In India, pension fund money is not allowed. Only 13% of the Indian labour today has pension and out of that pension, not one paisa comes into equity. All that has to be allowed ultimately. As time passes, market should not lose. If markets gain and don’t lose much, then I think money will flow in. If there is going to earnings growth in India, even if you get 15% return, a lot of money will flow into Indian equity. I am confident that we have ssen nothing yet, as far as domestic flow goes.

Q: Why not directly? Why are we not seeing direct equity participation?

A: The general participation is through insurance and through mutual funds. Maybe we require more penetration into smaller towns and now I am told, lot of money in the mutual funds, insurance companies is coming from smaller towns. Also there is a distrust in equity, because people lost money in ’92, people lost money in 2000. But I am confident that lot of money is going to flow from the domestic side.

Q: You made an interesting point that volatility and sharp falls drive people away. You don’t see the prospect of that later in 2007, because when the market falls 20% in a small period, people don’t come in for 6-7 months?

A: You have to see corrections from not only what value it corrects, but what time period it corrects. If we do not have earnings damage, which we cannot rule out, I don’t see any way by which we should go below 11,500-12,000. But if the index is to earn Rs 840-850 next year, at 12,000 you are 13-14 times earnings. The index has historically never traded below those levels even in bear markets.

Q: That to your mind, is the flow for valuation?

A: If the earnings are 850, I think 11,500-12,000 would be the flow.

Q: You are reasonably certain of delivering Rs 840-850 this year?

A: It should come through; I don’t see any reasons why it should not, at least not of now.

Weekly Cherries

Aurobindo Pharma - Support @ 717-676 Resistance @ 782-806, BUY

Sterlite Opticals - Support @ 207-194, Resistance @ 231-241, BUY

Infotech Enterprises - Support @ 365-339, Resistance @ 411-431, BUY

Punjab Tractors - Support @ 313-304, Resistance @ 329-336, BUY

Satyam - Support @ 464-433, Resistance @ 518-540, BUY

Wipro - Support @ 534-520, Resistance @ 558-568, Accumulation, BUY

Hindalco - Support @ 147-135, Resistance @ 164-171, BUY

Edelweiss - Pharma Fact Sheet

Edelweiss - Pharma Fact Sheet

Sharekhan Investor's Eye dated June 08, 2007

ORG Informatics
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs184
Current market price: Rs105

Price target revised to Rs184

Result highlights

  • ORG Informatics' performance was below expectations in Q4FY2007. Its revenues grew by 17% to Rs70.4 crore, below our expectations. The revenue growth was dented partly by the slippage of some revenues to Q1FY2008.
  • The operating profit margin (OPM) declined sharply to 1.3% (as against 9.5% in the nine months ended December 2006) due to the cumulative impact of the higher contribution from low-margin hardware supply part of the MTNL order, expenses related to integration and restructuring of the recently acquired entities (United Technologies and DGIT) and a one-time write-off (around Rs1.3 crore related to provision for bad debts and stock adjustments).
  • However, the steep jump in the other income and the write-back of tax provisions enabled the company to post a relatively higher growth of 24.7% in its consolidated earnings to Rs5.3 crore.
  • On the full year basis, the consolidated revenues and earnings grew by 97.6% to Rs306.6 crore and 113.7% to Rs17.3 crore. The OPM declined by 110 basis points to 7.6% in FY2007.
  • In terms of the outlook, the management expects to maintain the growth momentum on the back of a healthy order pipeline and the expected improvement in its margins as the high-margin maintenance revenues kick in from the MTNL contract. Moreover, the company would continue to actively scout for inorganic opportunities and has got the board approval to raise up to $30 million for the same.
  • We have revised downwards the earnings estimate of FY2008 by 2.6% to factor in a higher tax rate. We maintain our Buy call on the stock with a price target of Rs184.

Transport Corporation of India
Cluster: Cannonball
Recommendation: Buy
Price target: Rs100
Current market price: Rs88

Price target revised to Rs100

Result highlights

  • In Q4FY2007 the overall revenues of Transport Corporation of India (TCI) grew by 18.9% year on year (yoy) to Rs292.6 crore on the back of the better performance of both the XPS and the SCM division.
  • The earnings before interest and tax (EBIT) of the company grew by 61% to Rs15.7 crore yoy whereas the margin improved by 300 basis points to 10% in the quarter, driven by the SCM division's margin of 12%.
  • The interest cost doubled to Rs3.12 crore from Rs1.7 crore last year whereas the depreciation provision stood flat on a sequential basis at Rs5.45 crore but increased by 41% yoy, as the company added assets in the form of warehouses and trucks.
  • On the back of a better performance at the operating level, the net profit more than doubled to Rs9.42 crore.
  • As we have mentioned in our earlier update, TCI has drawn up a capital expenditure (capex) plan of Rs440 crore for the next two to three years. The funds would be utilised for buying ships, expanding the warehouses and augmenting its truck fleet.
  • The company is also in the process of forming a 50:50 joint venture with Scan Trans Holding, Denmark to conduct shipping business. It is in the initial stages of forming the joint venture and we will update you on the same once we get more information.
  • The company has identified four properties covering a total area of 12.5 acre for development. The value of these properties taken together translates into Rs26 per share on diluted equity. We believe this provides significant cushion to the company's stock price.
  • At the current price of Rs88 per share, the stock is trading at 14.7x its FY2009 earnings estimate. Considering the bullish outlook for the company, we are upgrading our target price to Rs100 per share.

Sharekhan Investor's Eye dated June 08, 2007



Weekend Industry Trends

Weekend Industry Trends

Indian IT Sector - Time to buy ?

Indian IT Sector - Time to buy ?

Rakesh Jhunjhunwala at India Investment Show 2007

Well known investor, Rakesh Jhunjhunwala, speaking at `The Nadkarni Lecture`, in India Investment Show 2007, organized by, in association with ICICI Direct, said that his decision to remain more than 100% invested in Indian equity, against a background of unprecedented growth prospects for the India economy, and the vast under-exposure to stocks of various investor classes, was the key determinant to his success.

Speaking about his investment approach, Jhunjhunwala said his investment goal is to earn absolute returns, that factor in inflation and risk-adjusted post-tax returns, as against relative returns. According to him, the five elements constituting good investments are: efficient asset allocation, correct stock selection, exit horizon, disciplined leveraging and consistent review.

Jhunjhunwala illustrated the importance of asset allocation with the example of an investor, who bought gold in 1970, bought Nikkei stock in 1981, and then bought Nasdaq stock in 1991, raking in returns in excess of 25% per annum, compounded for three decades.

Jhunjhunwala said that while selecting stock, he looks at the business model, understands the reasons and circumstances that will give rise to profits rather than forecasting profits. He gave the example of Praj Industries, which identified opportunities in the ethanol space early, indicating a future growth in value, making it a profitable investment.

It is not only enough to make a good investment, but also crucial to exit the investment at the favorable time and price, he added.

Jhunjhunwala said he believes in the magic of emotionless and disciplined leveraging. While most large equity investors are averse to taking debt for investing, the truth is, leverage allows the investor to magnify the investments and earn meaningful returns.

Jhunjhunwala himself always ensures leverage only to the extent of his ability to service interest cost and principal repayment. He emphasized the need of consistent review to make necessary changes in the portfolio at appropriate time.

Amongst the attributes of the successful investor that Jhunjhunwala listed, are optimism, realism, avoidance of a herd mentality, assessment of risk, an open mind and understanding of the larger picture.


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Will the Sun keep shining on his TV

Via ET

Scene I: Mid-July 2006: Boisterous DMK cadres were swarming over the Anna Arivalayam complex, the party headquarters, as results clearly indicated that M Karunanidhi was all set to become the chief minister once again.

Suddenly, there was a big cry, ‘Kalanithi Maran vaazhga’ (Long live Kalanithi Maran), amid slogans praising Mr Karunanidhi and the party, and hailing the victory. A blushing Kalanithi Maran, CMD, Sun TV, was besieged by enthusiastic cadres, many of whom sought his autograph. After obliging a few of them, the shy media baron rushed back to his office, located within the complex.

Scene II: Mid-May 2007: A well-maintained BMW is parked there at its usual place inside Arivalayam. It is moved closer, just minutes before Kalanithi Maran is about to come down and get into the car. The driver, in his white uniform, is busy cleaning the exteriors of the vehicle.

A DMK party worker, who has just emerged from inside the office, walks close to the car and asks the driver, ‘Whose car is this?’ Finding out that it belonged to Kalanithi, he was amused — and surprised. “Oh, haven’t they (Sun) moved out yet,” he said aloud.

What a difference a year can make. For the Marans, one the undisputed media baron of the South and the other a go-getting communications and IT minister, the reversal of fortune couldn’t be more complete. First, there was the fracas over a controversial survey that a Tamil daily Dinakaran published which led to an attack on that publication and Sun TV offices. A week later, Dayanidhi Maran quit as the minister.

This was initially seen as a mere political move by the chief minister and his immediate family to ostracise the Marans. The subsequent developments easing out Sun TV from covering major political events concerning Mr Karunanidhi, and replacing it with Raj TV, DMK announcement of the launch of a channel ‘Kalaignar TV’ (as Mr Karunanidhi is popularly known among his partymen and followers), the aggressive buying of new film rights including that of ‘Sivaji’ — have since taken business connotations.

Maran’s Sun Network today controls close to 20 channels in the four south Indian states, which account for an annual television ad-spend of anywhere between Rs 1,000-1,400 crore. That’s not a bad business to fight for. While the media frenzy over the rift between DMK chief M Karunanidhi’s first family and his grand nephews, the Marans, may have died down, there is no wishing away the tension between the two parties.

And this has also led detractors of Kalanithi Maran to forecast a partial eclipse of Sun’s business empire. After all, the DMK chief has lent the party weight to a rival media channel, Raj TV. Raj TV, which had merely existed in the market plagued by lack of financial muscle for almost a dozen of years now, is seeing this as a golden opportunity to fish in troubled waters.

The promoters of the channel, four brothers — Raajhendhran, M Rajaratnam, M Ravindran and M Regunathan — not only moved in to fill the vacuum created by the rift between Mr Karunanidhi’s family and the Marans, they also made a political statement by joining the DMK.

The DMK’s first family has also roped in Sharad Kumar, who was earlier a stakeholder in Gemini TV and Udaya TV, the Telugu and Kannada channels which are part of Sun Network, and who subsequently sold his stake to Maran some time ago to spearhead Kalaignar TV. Hectic parleys are on with content providers to fill up slots for the channel, slated to go on air on August 15 this year.

The industry, including the advertising fraternity, is watching quietly. Will Sun withstand the onslaught, especially from the very own political party it has been accused of banking on for its growth in the past? While it is tempting to think that Kalanithi’s empire will be under threat, the reality is different. Sun is built on foresight, great content, and clever distribution. It has also bested many rivals like Star Vijay in the past.

During its 14 years of operation, Sun TV has seen the AIADMK rule the state for eight years, as against six years by the DMK, including the past one year. The only difference this time around is the fact that the opposition is now coming from within. And if political support alone would ensure business success, then JJTV and Super Duper cable network would have never folded. And Jaya TV must have grown larger than what it is.

Current ‘competitor’ Raj TV’s services for Kalaignar TV will only be to the extent of offering its teleport to uplink the new channel and nothing more. There is likely to be no room for sharing prospective revenues from Kalaignar TV, other than the fee to be paid for uplinking. So that’s that.

Now consider the strength of Maran’s team (all his college mates): his ability to gauge the audience’s pulse and great content. Kalanithi knows his customer. He has always known that the women and children control the remote at home. “You and me don’t count for watching television,” he had told ET a while ago.

The titles of mega soaps on Sun TV too are mostly feminine, in tune with the channel’s philosophy. Media planners and advertisers agree. “Great content, constant innovation and ground distribution have been the hallmark of Sun’s success. And its ability to leverage on its strengths has only helped it further,” says Punitha Arumugham, group CEO, Madison Media, on the growth of Sun TV.

Maran has also been a shrewd strategist. A few years ago, Zee TV and Star, which took over Vijay TV, launched in the South. In fact, the entry of Star into Tamil regional television market was seen as ‘an investing competitor’ entering the domain of Sun TV for the first time. “Let us see how many investments they (Star) bring in and what kind of a growth strategy they have,” Kalanithi Maran had said then.

Soon, he launched KTV, his second channel in Tamil. And Star Vijay ended up fighting with KTV, while Sun TV continued to grow by leaps and bounds. Sun TV not only withstood such pressure and established a 70-75% marketshare in Tamil Nadu, but also outgrew competition by expanding its base across the South. And the secret sauce for this growth recipe is believed to be SCV, the cable distribution network.

This is not the first time that someone will try to steal the secret sauce. The AIADMK government twice tried to unsuccessfully take over the cable operations of multi-system operator, SCV, a group entity of Sun, fully knowing that the cable network comes under the central list and not on the state list. The bill was subsequently withdrawn by the present DMK government soon after it came to power.

In today’s scenario, it is this distribution business that is attracting attention once again. If the rival Raj TV says it plans to start a parallel cable network, there are quite a few who are hoping against hope that the government may take over the ground distribution network. But it is easier said than done. SCV is operational only in six major cities in the state and it does not own the last mile anywhere.

That is owned by thousands of individual cable operators and they have been on Sun’s side partly because of politics but largely because of consumer demand for Sun. In fact, the previous AIADMK government itself, while moving the Cable Bill, had listed over half a dozen large MSOs with varied political backings across the state. But Sun was still available statewide. So, unless Kalaignar TV builds up traction, it will be difficult to upstage Sun.

To their credit, Kalaignar is trying hard. Until recently, it was Sun TV that was buying most of the new film content, with very little going the way of Raj, Jaya and Vijay due to their limited resources. Film-makers and content providers are happy that they have another strong channel to choose from. Even so, Sun Network is sitting pretty on a huge film library, relentlessly built for more than a decade, and running to over 12,000 hours

The TRPs of its prime time programmes continue to hold steady. “It is a kind of market where people are obsessed with television and their programmes. And it shows in TRPs,” says Ms Arumugham. “Political influence in any business is advantageous only where regulation plays a role. Otherwise, it depends more on how a business is run,” points out Prashanth Kumar, national trading director, Group M.

Maran was caught off-guard with the aggression of Kalaignar TV, which picked the satellite rights of a slew of movies, including the much-awaited ‘Sivaji’ and the successful ‘Mozhi’, among others, but it has responded quickly. It picked up leading star Vijay’s two movies - the super hit ‘Pokkiri’ and the under-production, ‘Azhagiya Thamizh Magan’.

Furthermore, Sun Network’s Kalanithi Maran is also busy giving the final touches to the group’s ambitious DTH venture through a separate company, Sun Direct. Tony D’Silva, formerly with Star India, has taken charge as the COO for Sun Direct.

While industry watchers say that Maran will be able to weather the storm because he has built a great business that exists even without political patronage, he himself is in stealth mode. “My results will prove my performance,” is all he is willing to say at this juncture. Not wanting to stoke the fire further, maybe. A shrewd businessman, he knows when to hold his breath and wait for the stars (and the sun) to fall in a favourable pattern again.


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Indian Real Estate: Investors Are Shopping, but Are They Buying Hype?

Via Wharton

Drive through any of India's major cities and it will be impossible to go a mile without running into brightly colored cranes, construction rubble and men in yellow helmets scurrying up and down skyscrapers. Commercial high rises, residential townships, industrial parks and shopping malls are exploding into existence, encouraged by both long-term and speculative investors. Oversized private equity commitments by a growing number of foreign investors and home-grown financial institutions are helping to feed the frenzy.

But several astute industry watchers have begun poking big holes in that picture. For one, they say that many foreign investors have actually brought in only a small portion of their promised investments. Second, soaring land prices and price resistance from buyers are narrowing investors' margins significantly. Finally, they note that concerns continue to run high about the regulatory opaqueness for real estate ventures, bureaucratic red tape and the absence of title insurance, in addition to a host of other issues. India Knowledge@Wharton spoke with prominent private investors, property developers and brokerage firms to understand how these factors are tempering investors' appetites for Indian real estate.

With yields between 30% and 40% during the past two years, India's real estate industry has been the toast of global investment funds. But expectations for future returns have been sharply reduced to between 12% and 20% over the next few years. For many foreign investors, this means having to weigh Indian real estate opportunities against deals that offer comparable returns in other emerging markets like Eastern Europe or Latin America.

Fears of a real estate bubble and an overheated economy have led India's central bank to require a lender cutback on real estate loans. That move has pushed up interest rates, lowering consumers' appetites for home financing and simultaneously raising rents for apartments and offices. Most Indian real estate companies are privately held and their financial information is not readily available. The absence of comprehensive market data across product types like office, retail, industrial and residential properties further hurts the ability of investors to read the right signals, and the occasional rumor of a large deal going bust or a property developer resorting to a distress sale can damage investment sentiments far more than warranted.

More Hype than Actual Investments

Clearly, local investors understand the terrain far better than foreign investors. Much of the foreign capital committed to Indian real estate ventures has yet to be invested, says Aashish Kalra, co-founder and managing director of Trikona Capital, a private equity firm with offices in New York City, London and Mumbai. "Last year, less than $1 billion [was actually invested in] Indian real estate. That's less than the value of half a building in Times Square," he says. That compares with market estimates of between $15 billion and $20 billion in foreign capital headed for Indian real estate.

Kalra cited these figures during a panel discussion on real estate investing at a recent New York City event organized by The Indus Entrepreneurs (TiE), a network of entrepreneurs founded 15 years ago in Silicon Valley. "A negligible amount of foreign capital will get invested in Indian real estate in the next 24 months," he told the panel.

Sameer Nayar, managing director and head of real estate finance-Asia Pacific at Credit Suisse, offers a similar assessment. "There is a lot of hype about capital going into Indian real estate ... [but] not a lot of money is actually going in," he says. Extracting good returns from those investments calls for significant local market expertise in dealing with regulatory and other obstacles. "You make money because you can deal with the problems, and that's why your returns could be 50%," he adds. "If it were an easy market to work in, you would make only 15%."

Short-term Disenchantment

In April 2006, Trikona Capital group firm Trinity Capital raised 250 million pounds ($500 million) for Indian real estate investment in a public offering through London's Alternative Investment Market (AIM). Kalra says his company has deployed about $400 million in Indian real estate projects over the past year.

Including Trinity, about a dozen real estate funds targeting India have raised a combined $2 billion in the past year through listings on the AIM. Most of them are currently trading at levels significantly below their offer prices, revealing investor disenchantment. Trinity's share made its debut in April 2006 at one pound; it now trades at about 86 pence. Hirco, an Isle of Man-domiciled company promoted by the Mumbai-based Hiranandani Constructions group, raised about 382 million pounds ($755 million) from its IPO last December; since then, its shares have lost considerable sheen, down from 5 pounds to about 390 pence in the second week of May. Exceptions include Unitech Corporate Parks, which listed on the AIM last December at 93 pence and now trades at 96.25 pence.

"We see the opportunity [in Indian real estate], but we also see the risks and challenges involved," says Chanakya Chakravarti, managing director of real estate at Actis, a London-based private equity fund that manages assets of about $3.4 billion. Actis plans to set up a $300 million India real estate fund. It already has two other existing funds with an estimated equity of $475 million that have invested in Indian real estate, auto ancillaries and other industries. "Each fund has a unique risk-return profile, and we work with these. For us, India is a long-term story," he adds.

Chakravarti lists three main risks or challenges that real estate investors in India will be up against in the short term. The first, he says, is an oversupply of office space in the major and second-tier cities. A hazy regulatory framework fostering indecision and delayed investments is another concern. Finally, he notes, opaque deal-making processes that narrow the exit routes will deter serious investors.

"The property market today is rife with uncertainties. Prices as well as interest rates have been rising," says Anuj Puri, managing director of real estate services firm Trammell Crow Meghraj, the Indian joint venture of Dallas, Tex.-based real estate services firm Trammell Crow and the Meghraj Group, a financial services firm in London. "It is not advisable to expect any short-term gains; but of course, for long-term investors, India's strong fundamentals are still intact. A long-term investor can expect average returns of 15% to 20% per year."

Vikas Oberoi, managing director of Oberoi Constructions in Mumbai, says the risk-return profile for real estate investments is far brighter for those who have accumulated land inventory at prices much lower than prevailing levels. "The average net margin in today's market is 20% to 25%; we can easily do 15% better than the market," he says. Oberoi claims his company can achieve those higher returns because, among other reasons, "most of the land has been bought earlier."

Oberoi Constructions has an inventory of 15 million square feet of mostly prime land in Mumbai. At today's prices, Oberoi expects it to generate gross revenues of $2.2 billion. The company is focused mostly on for-sale residential apartments, although it dabbles in shopping malls, hotels and other commercial property lines. Oberoi expects his company to post $200 million in revenue this year, rising to $300 million in 2008.

This past January, Morgan Stanley's Special Situations Fund invested $152 million for a 10.75% stake in Oberoi Constructions, effectively valuing the company at about $1.4 billion. Oberoi says the untapped upside in his company's land bank was a major attraction for the institutional suitors it attracted. For instance, five years ago it bought a land lot with 8 million square feet in Mumbai's northwestern suburb of Goregaon for Rs. 100 crore ($24 million). Oberoi says the property would be worth 20 times more today.

"Where is the supply? There is only demand," says Oberoi. "In fact, I want the market to stabilize or [prices to] come down because then we would get land at cheaper prices. It is absolutely a seller's market."

Second-tier Migration

The most visible changes in the Indian real estate sector include the emergence of well defined product categories, the division of the market into tiered cities and a widening of financing options.

In the past, real estate was sold either as residential or as commercial property. With the maturing of the market and globalization of the investor base, the categories have been sharpened and new ones established. "Investors in the residential market are very different from the office and retail space investor," says Sanjeev Dasgupta, CFO and head of investments at Kshitij Investment Advisory Services, part of the Future Group, a large Mumbai-based owner of shopping malls across the country. In the residential sector, investors are in for high returns and are willing to take high risks, he says. This also allows for easy exit, although the risk of a mismatch between potential and real returns is high, he adds.

According to Poonam Mahtani, a national director of retail services firm Colliers International in India, "The investment risk is lower in the metros, but prices there are much higher than those in tier II cities." Several equity funds have consciously focused on tier II cities, because they believe that this offers the most potential. "Land prices are skyrocketing. Buying to sell is a very risky strategy. Land prices are way beyond levels that will generate a decent return. It doesn't make sense to invest any more unless you go to second- or third-tier markets."

Kalra, too, sees the markets outside of India's major cities as the most attractive, simply because they are not the low-hanging fruit sought by the early crop of investors with relatively lower risk appetites. "There are lots of opportunities outside the main metros. India has 30 cities with a population of a million people each," he says. Adds Dasgupta, "The returns are huge in tier II cities, where there is a large untapped potential." He believes that this sector will see a rental yield of 12% to 14% in the next few years.

In office space, experts see a migration towards second-tier cities. A recent report by Deutsche Bank on real estate trends notes, "As the demand for modern space has continually increased, new office locations have had to be developed in the south and east of the urban area (Mumbai and Delhi)." In Mumbai, secondary business districts have emerged in recent years, including the Bandra-Kurla complex in the central suburbs, 25 miles from the old commercial hubs in the southern end of the city.

Much-needed Transparency

For foreign investors, one troubling fact is a pan-India phenomenon: inadequate transparency in land valuations they use to price their investments. In an interview last month, M. Damodaran, chairman of the Securities and Exchange Board of India, discussed the lack of clarity in real estate companies' disclosures, especially with respect to their land banks. "We sought clarity ... on matters like, 'What does your land bank comprise, [and] what are the valuation aspects you have indicated?'" he told the India news wire service. "Where there is only an agreement to develop land, there must be complete disclosure. All such agreements are to be made available for inspection," he said, adding that he preferred land valuations to be made at current prices and not on the basis of future projections.

Trammell Crow Meghraj's Puri agrees. "There is a marked lack of transparency, corporate governance and accountability among India's real estate developers. There also continues to be a serious lack of quality infrastructure. In addition, India scores low in terms of congenial political environment in terms of the real estate sector. This means that there is a lack of clarity in pertinent policies."

But Puri also believes those issues will soon fade away as India's real estate markets mature. "Although real estate is a regional and highly location-specific industry, India will replicate the events that occurred in emerging markets like Mexico and Central Eastern Europe [including Russia, Bulgaria and Poland]," he says. "In these countries, too, foreign investments were the primary drivers for transparency, accountability and higher capital appreciation in the real estate sector."

Stocks you can pick up this week

CMP: RS 294

ASK Securities has rated Gail a ‘buy’ with a one-year price target of Rs 379. The recommendation is based on factors like doubling of pipeline capacity and a favourable supply environment. “Domestic natural gas supply scenario is expected to show a marked improvement over next 3-5 years as gas discoveries at KG basin by exploration majors Reliance Industries (RIL), GSPC and ONGC are likely to go on stream.

Gail has already entered into MoUs with RIL and ONGC for marketing and supply of natural gas,” notes the report. Further, the company has also announced a capex of Rs 180 billion to more than double its pipeline capacity.

According to the report, the new pipeline will lead to a cash flow of Rs 65/share to Gail's fair value, “making it an attractive long-term bet on the buoyant domestic gas sector”. However, on a different note, the report adds that there are some areas of concern in the form of subsidies, tariff regulation, delayed gas production and competition.

Amtek Auto
CMP: RS 422

Emkay Share and Stock Brokers has rated Amtek Auto a ‘buy’ after the company's acquisition of JL French Witham's assets for $35 million. The report notes that Amtek has acquired the foreign company at attractive valuations of 0.6 times sales and 5 times operating profit, and that “(JL French's) good existing customer base like Land Rover, Jaguar, Trellborg, Ford and PSA (Peugeot) in Europe would be served by AAL in near future”.

“JLF's assets would give AAL an incremental capacity of 20,000 MT to its existing aluminium foundry in Pune and the total installed capacity after addition of these lines would go up to 40,000 MT. Further, the company is sitting on a cash chest of Rs 13.5 billion (Rs 97 per share) that can be utilised for further inorganic growth and expansion opportunities,” the report added.

CMP: RS 94.50

ICICI Direct has assigned an ‘outperformer’ rating to Tamil Nadu Newsprint and Paper (TNPL) after the company improved its operational efficiencies moderately during FY07. Despite raw material prices remaining firm, the company was able to improve its operating margins by 100 basis points. “Post the mill development programme, which is slated to come on stream by August 2007, we expect significant improvement in the margins in FY08,” says the report.

Meanwhile, the company has been shifting its revenue mix from lower-value products like newsprint to higher realisation products like copiers. “This strategy has benefited the company through increase in its average realisation by Rs 2,795 per tonne of paper,” the report adds. The company is also planning to foray into cement production and set up an IT park.

Welspun Gujarat
CMP: RS 178.60

Prabhudas Lilladher has rated Welspun Gujarat Stahl Rohren an ‘outperformer’ based on the company's growing order book and volume expansion. According to the brokerage, the company is gearing to meet the growing order book by capacity expansion at its Anjar plant coupled with backward integration by commissioning of 1 million tonnes per annum plate mill sometime in December 2007.

The company has an order book of Rs 4,000 crore as on April 1, 2007, to be executed over the next 12 months. “Almost 80% of orders are export orders, largely from the Middle East and USA. Domestic orders include those from Reliance Industries,” notes the report. The company has also entered into a 60:40 joint venture with the US-based Lone Star Technologies to set up 3,00,000 tonnes per annum saw pipe plant.

“This is a very good move, as it will give the foothold in highly lucrative US market,” says the report. Meanwhile, the plant is expected to start production by April 2008. However, the brokerage has also pointed out the fact that since about 80% of revenue comes from exports, rupee appreciation can have an adverse impact on the financials.