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Sunday, July 08, 2007
ICICI Bank - Shareholding Details after FPO
Post its Rs 17,500-crore follow on issue, Temasek has maintained its stake in ICICI Bank while a host of existing investors, including Government of Singapore Investment Corporation (GIC), have seen their percentage shareholding fall. ICICI Bank, which will further raise Rs 2,625 crore as a green shoe option, is planning a $1.5-billion debt mop-up from the international loan market this year.
Institutions like Temasek and LIC, which had put in around $2 billion bids each, were among the biggest investors in the bank’s recent domestic issue. However, Temasek had put in an application in the ADR issue too. Before the fresh issue, Temasek, through Allamanda Investments, had a 7.37% stake.
Post-the fresh issue, Temasek’s stake continues to remain the same while that of GIC has fallen to below 2% from 2.18%. Temasek can now increase its stake up to 10% while GIC can, in the short term, increase its stake to 5%. GIC will have to get the ICICI Bank board approval, as also RBI approval, to increase the stake from 5% to 10%.
The stake of government-controlled institutions in the bank has fallen to below 10% from 12.11%. LIC’s stake, which was at 7.63%, has fallen to around 6.5%. The stake of General Insurance Corporation and other government owned insurance companies has fallen to around 2-2.5% from 3.86% now.
Even though many of the institutions had put in large bids, none of them were able to get any substantial stake because of oversubscription. The local issue was subscribed 11.5 times, with the qualified institutional buyers category subscribed 21.6 times, non institutional investors subscribed 6.1 times and retail individual investors subscribed 1 time. Another major shareholder, Bajaj Auto, which had a 4.06% stake, has seen a dilution to around 3.5%.
The new foreign stakeholders in ICICI Bank — investment arms of the Government of Dubai and Qatar — will now have stakes of less than 1%. This is the first time that these Middle East government arms are picking up stakes in the banking sector in the country.
A host of other foreign players like Warburg Pincus have also picked up stake. Out of the Rs 8,750 crore local issuance, around 40% was in partly paid shares. Many retail and some HNI customers have used the partly paid shares option. The 5.8 crore fully paid shares were permitted to be traded in the exchanges on Friday.
ICICI Bank is also in the process of raising $1.5 billion through the loan market. Banks are allowed to raise 25% of Tier I capital from the overseas loan market.
Last year, it had raised $1.7 billion from the loan market and $3.7 billion from the bonds market. The bank is likely to largely raise the loans from the yen market. According to Sudhir Dole, SGM, ICICI Bank, “We have used the options of MTN, 144 A (for the US markets) and loans. We will raise money depending on the requirement of our overseas branches.”
The bank had priced its FPO at Rs 940 per share and for retail shareholders, there was a Rs 50 discount. The bank’s American Depositary Share (ADS) offering was priced at $49.25 per ADS.
Sensex to cross 50,000 mark by 2020
Sensex hitting 50,000 is right now only a serious prediction for Morgan Stanley and a laughable target for others but believe it or not Brazil's 50 share benchmark index 'Bovespa' went past 50,000 mark in May this year.
Sensex crossing 15,000 was also unimaginable two years back but today it is a reality and very close to what former Sebi whole time member Madhukar uttered, predicting that Sensex will cross 16,000 mark also.
After acheiving this record landmark analyst feel that Sensex will cross 25,000 mark by 2010, which big bull Rakesh Jhunjhunwala predicted in 2005 only.
Another brave statement from world's leading investment bank Morgan Stanley predicts Sensex to cross 50,000 mark 12 years from now in 2020. Morgan Stanley's prediction came in February only and they still hold on to what they predicted earlier.
"You just need to factor in India's GDP growth of 8 per cent along with an inflation of 5-6 per cent and the cost of manufacturing and assuming Sensex stocks will grow by 17-18 per cent till 2020, then it will work out to more than what Morgan Stanley has predicted," Angel Broking's CMD, Dinesh Thakkar said.
Also, the Sensex crossing 50,000 mark is in the realm of possibility with Brazil's Sao Paulo Stock Exchange's benchmark index Bovespa hitting 50,000 mark first time ever on May 3 and closing around 55,000 mark last week.
The landmark on the Indian bourses that will now be keenly awaited is NSE Nifty's 5,000 mark which is just 614 points from yesterday's close at 4,384 points.
Sensex with yesterday's close at 14,964 is yet to record its first ever close above 15,000 mark, and when it does it will join an exclusive club of world bourses that currently trade above 15,000.
Besides Bovespa, on Friday Japanese index Nikkei closed at 18,140 and Hong Kong's index Hang Seng closed at 22,000 level.
There are 50 companies listed in the blue-chip Bovespa stock index as compared to 30 companies on the Sensex.
Brazil is a mirror image of India in terms of natural resources and also it has largest number of people living in poverty in all of Latin America.
Still, Brazil's arrival as a global economic power is linked to its vast natural resources like iron ore, offshore oil fields and the country's extensive use of ethanol.
Brazil has also become self-sufficient in energy, ending decades of foreign oil imports.
Like India, Brazil's economy is linked to agriculture, and it's the world's largest exporter of coffee, sugar, cattle, orange juice, and has surpassed the US as the biggest exporter of soybeans in January 2006.
"Sensex is in exuberance right now and it will continue for next few months," Thakkar says.
Meanwhile analysts believe that Bovespa may hit 60,000 mark by end of 2007.
Wild Picks - Kamat Hotels
Wild Picks observes, a popular investment advisor who is known to move stocks by circuits is known to have recommended Kamat Hotels, people looking to trade could do so and have strict stop losses.
Disclaimer: Don't blame us if things go wildly wrong :)
Commodity street faces tough times
Trading volumes in commodity exchanges have declined in Q1FY08
The commodity futures market has started losing its sheen after a stupendous growth rate of 96.05 per cent in the last financial year. Trading volumes in the new-age commodity exchanges have declined in the first quarter of the current financial year.
Commodity experts blame the government for the poor show. The trading ban on certain commodities and the delay in moving the Bill to give more powers to the regulator – the Forward Markets Commission – are the main hurdles, they said.
In April-June 2007, the total turnover of the three exchanges – the Multi Commodity Exchange of India (MCX), the National Commodities and Derivatives Exchange (NCDX) and the National Multi Commodity Exchange (NMCE) - has fallen by 11.12 per cent compared with the first quarter of the previous year. (See table).
The situation could have been worse but for the better growth shown by the non-agri commodities on the MCX. While the other two exchanges showed a steep decline in both agro as well as non-agro commodities, the MCX rode high on its non-agri performance. As a result, the share of the exchange increased to 71.67 per cent compared with 54.53 per cent in the first quarter last year. Experts said this was due to the MCX’s preference for commodities such as metals and energy that have global references. The NCDEX’s market share dipped to 26.80 per cent (39.03 per cent) and the NMCE’s to 1.53 per cent compared with 6.44 per cent in the same period.
Market players said the delay in amending the Forward Contract Regulation Act has stalled the introduction of new products such as options trading and index-based trading. The entry of new players – banks and mutual funds – is also awaiting the passage of the Bill, which was expected to give more powers to the market regulator – the Forward Markets Commission.
The turnover started falling after the government delisted for futures trading some commodities like tur, urad in January and wheat and rice in February-end. “These measures have dampened the sentiment and affected the interest of traders and hedgers in the agriculture commodity futures,” said Chintan Modi. Head commodities, India Info line Commodities. The agri commodities turnover has come down by 36.35 per cent in the first quarter of the current financial year. He said that the good performance of the equity market in the last few months has also resulted in traders moving out from commodities.
Many stock brokers, who entered commodities, are facing attrition and even genuine players are afraid of hedging in agri commodities.
Mohan Natarajan, director, Kotak commodities, said that the RBI’s decision to ban individuals from trading in leveraged products has affected the market turnover in that arbitrageurs can no longer take advantage of price differences between international exchanges and domestic exchanges.
Explaining the scenario, another broker whose volumes have fallen by a fourth, said that excessive speculation in some commodities such as pepper and jeera also kept genuine traders away from the market. The buzz in the market is that Ketan Parekh is active in some of these commodities.
Mutual Funds outperform Sensex
Marketmen may be jubilant about the Sensex touching the 15,000-point milestone, but mutual fund investors are laughing all the way to the bank, thanks to many funds outperforming the key index in the last 12 months.
While the 30-share Sensex has grown about 40% since July 2006, when it was quoting around 10,600 points, 106 funds have given higher returns than the bellwether.
Among the best performing equity funds are Standard Chartered Equity with 79% returns over a year, JM Basic (76%), ICICI Prudential Services (75%), ICICI Infrastructure (63%) and DBS Chola (61%), according to data complied by ValueResearchOnline.
The assets under management of the 32 fund houses in the country have grown 25% to over Rs4 trillion in the first 6 months of the year, the latest data of Association of Mutual Funds in India (Amfi) shows.
“The new levels of the benchmark index show more demand for equities and is a sign of recognition for the strength and potential of Indian economy,” Amfi head A.P. Kurien said.
While a bullish market does not affect the mutual fund industry directly, Kurien said the funds “are pleased that it implies a strong growth potential for the markets.” The Sensex on Friday crossed the historic 15,000 mark to touch an intra-day high of 15,007.22. It, however, ended the day at 14,964.12—which is still a new closing high.
“Investors are happy with the milestone... Some of the funds have performed better than the Sensex of late as growth in the mid-cap has led the rise in blue chips,” ValueResearch CEO Dhirendra Kumar said. Dismissing concerns of a correction after every milestone, Kumar said a slight correction should not bother MF investors as long as the funds remain in the black.
India Market Capitalization Moves up
The share of the Indian stock market in world market capitalization went up to 1.54% on Friday as the benchmark Sensex scaled the 15,000 mark in intra-day trading.
Three-and-half years ago, before the beginning of the current bull run, on 31 December 2003, this proportion was 0.92%. India’s stock markets have since outperformed most of the world’s markets, generating more than $786.5 billion (Rs31.46 trillion) in shareholder wealth since 1 January, 2004
Over the past three years, the Morgan Stanley Capital International (MSCI) index for India has risen by an annualized 49.9%, compared with 36.7% for the MSCI Emerging Markets Index. It has hugely outperformed the MSCI World Index, which has gone up at an annualized rate of 15.6% during the period. As a result, India’s share of global market capitalization has been rising steadily. Ajit Surana, stockbroker and managing director, Dimensional Securities, says, “I’m not surprised by the result. A combination of good performance in the secondary market and the large number of new listings in the last three years is responsible for the improvement in the ratio.”
Nevertheless, despite the Sensex reaching new highs, the pace of growth has slowed. This is evident from the fact that India’s market capitalization as a percentage of total global market capitalization fell from 1.63% in December 2006 to 1.54% now.
Part of the reason for the market’s outperformance has been the spurt in economic growth, with India’s gross domestic product (GDP) growing above 8% per annum over the past three years. India’s share in world GDP has also risen, from 1.34% in 2003 to 1.54% in 2005-06.
However, India’s market capitalization has been increasing much faster than the rate of growth of GDP.
“That’s entirely on expected lines,” says Madan Sabnavis, chief economist, NCDEX, “since the growth of the equity markets is often unrelated to conditions in the underlying real economy.”
The ratio of India’s market capitalization to GDP has also been rising steadily. One reason, say analysts, is the rising tide of global liquidity that has made its way to Indian markets in the last few years.
But it’s not just liquidity that’s contributing to this,says Sabnavis. “As an economy develops, the proportion of financial services rises since people can afford to save and invest more,” he says.
These factors have led to India’s market capitalization to GDP ratio rising from 57% in 2003 to 123.80% currently.
Indranil Pan, chief economist with Kotak Mahindra Bank, says that it makes more sense to compare the rise in India’s market capitalization with those of other emerging markets. By that yardstick, China’s growth in market capitalization has been 321% between 31 December 2003 and 6 June 2007 compared with a rise of 281% for India and 215% for Indonesia. A slew of big-ticket Chinese initial public offerings have contributed to the huge rise in China’s market capitalization.
Can the trend of a rising market cap to GDP ratio be sustained? Analysts believe it can. According to Ajay Parmar, head of research at Emkay Securities, “Indian investors put a minuscule proportion of their wealth into equities. As this proportion rises, so will the ratio of market cap to GDP.”
Index Outlook
The ovation that greeted Sensex on recording a new high and scaling 15000 last week proves beyond doubt that it reigns supreme over the rest of the indices of the Indian stock markets. How else can one account for the rather incongruous festivities that greeted the event despite the fact that Nifty and a host of other broad market indices such as BSE 500, BSE 200 and the BSE Midcap Index have recorded new highs more than a month ago.
The pile-up in the derivatives segment is increasing every day. The open interest is near Rs 70,000 crore and we are just a week in to the July series. We can, however, draw solace from the fact that institutional players account for a chunk of this open interest.
There are traces that the Sensex is beginning to tire now. Despite, the Sensex recording new highs, the rate of change oscillator in the weekly chart is in the sell mode. The negative divergence in the same oscillator in the daily chart, too, points towards the need for greater momentum if the index has to go higher in the short-term.
If we consider the move from 12617, the Sensex has the targets of 14645 and then 15320. If we move down one degree and extrapolate the targets of the move from 13554, they are 14643 and then 15075. Since the first targets have already been achieved, the Sensex could halt in the region between 15075 and 15320. The 50-day moving average at 14295 should be the support that investors should watch.
For the week ahead, the Sensex can move higher to 15023, 15075 and then to 15219. There are a cluster of resistances between 15000 and 15100, which might not be easy to surmount this week. Short term investors and traders can, however, buy in dips as long as the index stays above 14617. The next support would be 14357.
Since we are again gearing to face the once-in-a-quarter, trend-defining event for the Indian stock markets, the Infy earnings announcement and guidance, next week; long-term investors are advised to stay off the markets for a week until the event has been assimilated.
Nifty (4384.8)
Nifty made a record high at 4411 last week. But the three dojis in the daily chart of the Nifty last week suitably reflect the tussle between the bulls and bears at this point. As explained last week, the zone between 4350 and 4400 is a potent resistance that can cause a medium term reversal. Though the Nifty can move higher to 4434 or even 4480 next week, we continue to advocate caution with long positions. However, fresh shorts are also not advised until there is a close below 4211. Supports for the week would be at 4293 and then at 4220. Global Cues
The Asian markets such as South Korea, Hong Kong, Indonesia, Taiwan, Thailand etc. surged to record highs. The only exception was the Shanghai Composite Index that recorded negative returns for the week.
Cotton futures on New York cotton exchange rising above a two year range to close at $62.73 should be a cause for concern for manufacturers of cotton textiles. Crude continues to go from strength to strength. It is confirmed that the current move is the third leg of the rally that commenced from the low of $49.9. The targets of this move are $70 and then $77. Nymex crude prices are now headed towards the second target.
Wild Picks - Birla Power
Wild Picks says, Birla Power is headed for new heights - maybe into 3 figure mark too in long term.
Disclaimer: We are not responsible if you lose your pants. Keep appropriate stop losses
Qualcomm, Reliance Communications agree to expand
US-based Qualcomm, the dominant supplier of the chips that drive code division multiple access (CDMA) mobile phones, and Reliance Communications have agreed to expand the use of the technology in India.
RCom, which is the largest provider of CDMA-based mobile telephony in the country and also operates GSM-based services in some areas, will expand its CDMA 2000 network to 20,000 more towns.
Today’s announcement, which came after Qualcomm chief executive Paul E Jacobs met RCom chairman Anil Ambani in Mumbai, scotches the widespread buzz that the two had been haggling for more than a year over the amount of royalty to be paid.
Jacobs is also slated to meet Ratan Tata, whose Tata Teleservices is another sizeable CDMA operator, and S Ramadorai, the chief executive of Tata Consultancy Services, the software arm of the group.
It had been alleged that Qualcomm was charging higher royalty in India than in other countries. However, neither party confirmed it and it is Qualcomm’s policy not to reveal the royalty structure.
Put-Call ratio dip indicates bullish sentiment
At a time when oil and gas sector stocks, along with banking and information technology companies, continue to hog the limelight on the 30-share BSE Sensitive Index, buyers on the National Stock Exchange (NSE) are outnumbering sellers and positively impacting the market.
In fact, the put-call ratio of the stock options market on the NSE decreased to 0.14 in June, from 0.15 in the first month of the year after reaching a highest level of 0.20 in March.
This plunge reflects a bullish sentiment, as the put-call ratio is one of the best gauges to judge oversold (too bearish) or overbought (too bullish) zones.
Utpal Chaudhary, V-P, IDBI Capital said, “Sentiment has been positive over the period and that resulting into lower put-call ratio.” Here buyers have the right but not the obligation to sell the underlying security at a pre-determined price (called the strike or exercise price) on or before a particular date (expiry date).
The volume of call options have decreased from 98.86 crore in January, to 64.53 crore in March.
The volume reached a higher level of 109.00 crore in June. Call option is an agreement that gives an investor the right—not the obligation—to buy a stock, bond, commodity, or other instrument at a specified price within a particular time period.
As far as volume of put options is concerned, it decreased from 15.16 crore in January, to 13.16 crore in March. It went northward to 15.46 crore in June.
Similarly, in terms of value, call options showed a steady decline from Rs 16,704 crore in January, to Rs 9,530 crore in March. It increased to Rs 18,359 crore in June.
On the other hand, the value of put options showed a different trend. The total value decreased from Rs 2,697 crore in January, to Rs 2,576 crore in March and thereafter increased to Rs 3,569 crore in June. Top five companies in terms of call options in June 2007 are RIL (Rs 2,364 crore), SBI (Rs 1,538 crore), Reliance Petroleum (Rs 1,457 crore), Tata Steel (Rs 1,111 crore) and IDBI ( Rs 1,090 crore).
Similarly in terms of value of put options, the same companies made it to the top-five list—RIL (Rs 661 crore), SBI (Rs 642 crore), Tata Steel (Rs 361 crore), Reliance Petroleum (Rs 211 crore) and IDBI ( Rs 163 crore).
Realty stocks — Sifting hype from reality
Hold tight, for you may soon be swept away by a torrent of initial public offers (IPOs) and the theme for the next couple of months may well be real estate. If you missed the bus, don’t worry, there will soon be more options to choose from. While you may have to leave the contentious part of valuation of the land bank and projects to the analysts, it is important for investors to know if the company’s business model deserves the valuation it asks for. We discus s a few business models of listed and soon-to-be-listed companies to get an idea of their impact on profitability and risk profile.
Euphoria toned down
A price-earnings multiple of 80 or 100 seemed a perfectly acceptable valuation for real estate stocks in 2005 and part of 2006. And these are stocks that are even today, yet to touch a market capitalisation of Rs 3,000 crore. The euphoria appeared well placed. The real estate sector had long been neglected by the investing community; despite the increased real demand for residential and commercial space that was there for all to see.
Further, with most companies in a nascent stage of business — having executed a few projects, but possessing large land banks and ambitious plans — the PE was not considered an appropriate tool to evaluate players. Above all, the stocks enjoyed a scarcity premium — there were not too many listed companies in the realty segment. But this incredible northward journey did not last long, as a broadbased market correction and a series of curbs on financing to the sector by the RBI served as effective speed-breakers.
The general market euphoria ensured that the interest rate hikes of October 2005 and January 2006, did not affect sentiment towards realty stocks. The market correction in May 2006, followed by a series of interest rate hikes, however served as a trigger for a crash-landing of almost all the realty stocks; most plunged to their 52-week low in July 2006.
By December, two interesting developments took place. Relatively larger companies, such as Parsvnath Developers and Sobha Developers, were listed. The existing stocks also recovered; only, this time, the valuations were more modest, as earnings rose and prices did not recover to their previous highs. Not only did the IPO candidates provide a better understanding of the business, listed companies began to disclose more about their land reserves and plans.
Are land banks for real?
Realty companies do hold large tracts of land, but investors have to ask several questions before they assign a value to the land bank on a company’s books. The first question is whether the ownership is for real. Valuation of the land bank is no longer just about ‘location’, it is also about ‘title’. A company such as Ansal Properties & Infrastructure, with prime land in the NCR, would no doubt command a premium to Arihant Foundations with land in Chennai and nearby areas. The premium would however, be justified only if much of the land is owned by the company or if it has obtained title for the same.
A company that secures development rights for the land (while the landowner continues to hold the title) should not be treated on par with a company which actually owns the land. Similarly, land for which the company has entered into an agreement, but is yet to receive title, also need to be viewed with caution, as the acquisition process can get stalled, resulting in delayed projects.
In this context, joint development, where the landowner is also entitled to a share of profits from the project, appears to be a good model. This has worked for DLF, which has developed the DLF city partly using this model. This method appears a better option as the landowner is also equally interested in completion of the project.
Diversified or regional?
It is commonly believed that a diversified land bank is better than a concentrated one, as it can mitigate the risk of slowdown or price correction in one region. However, diversification is not a prerequisite to identify a good real estate play. Companies such as D.S Kulkarni Developers or Prajay Engineers, primarily focused in Pune and Hyderabad respectively, have recorded superior returns on equity, thanks to their early entry and understanding of the local market.
In fact aggressive geographical diversification by a small or mid-sized company may need to be viewed with caution, as it carries the risk of locking capital in unknown territory. Among the present listed companies, those with turnover of less than Rs 300 crore have remained largely regional players, with a few cautiously diversifying to other locations.
Revenue models
Investors also have to make a distinction between contractors and developers. Real estate companies in India can be broadly classified as contractors or developers, or a combination. Contractors do not buy and develop land; rather they just execute projects for corporate or residential purposes, or for municipalities. Until 2006 Sobha Developers derived a major proportion of its revenue through contracting work, mainly for corporates. BSEL Infrastructure too did a lot of contracting work for local municipalities as well as civil work in West Asia. These companies have, however, graduated to becoming developers.
On the other hand, developers typically buy/enter into agreements to buy land, build or sub-contract the work and then sell or lease the buildings to third parties. While a few companies are pure developers, others follow a mix of contracting and developing. However, contracting may yield lower operating profit margins than developing, as gains from land price appreciation are absent in the former.
For instance, the OPM of Sobha Developers in FY07 stood at 22 per cent, against 56 per cent for Unitech. For a number of companies (see Table), higher OPM have come about from super-normal gains on low-cost land, though this may not be sustainable in the long term given that land prices are running ahead of property prices in some locations. However, if companies replenish their land reserves with a sufficient lead-time of, say, three to five years between purchase of land and execution of projects, their margins may remain superior.
Such a strategy not only helps lock into the land cost, cushioning against inflation, but also allows the land price to appreciate, after providing time for any intermittent correction. We believe that for developers, land replenishment at the right place and time is the key to sustaining margins.
Sell versus lease
Most realty players in India have had a build and sell (rather than lease) model for two reasons. One, they have traditionally focused on the residential segment, catering to home-buyers.
Two, most of them prefer to have cash flows to meet capital requirements for the next project. But this strategy provides little room for capital appreciation of the property.
Now, with companies diversifying into commercial and retail projects, the leasing model is slowly gaining ground.
While selling ensures periodic unlocking of capital, the lease model offers regular cash-flows in the form of rental yields, and protection during a downturn. This is because rentals have traditionally been stickier and tend to fall less sharply (relative to property and land prices) during a downturn, thus providing some cash-flow to the asset-holder during corrective phases.
Anant Raj Industries is one of the few companies that at present relies on the rental model (focused on commercial projects) as the prime strategy. The robustness of this model is reflected in its OPM and net margins — 84 per cent and 64 per cent respectively in FY07, amongst the highest in the industry.
However, the capital-intensive nature of the model has resulted in the company resorting to periodic equity infusion through private placements to fund expansion plans.
With the merger of its group/associate companies, the company will soon have other business segments such as residential, that will ensure phased capital unlocking.
The above examples capture how the Indian realty space has evolved and how investors need to use different yardsticks to evaluate real estate companies based on their business models. However, with Indian realty still at a nascent stage, domestic companies are still in the experimentation phase. Execution risks, therefore, remain high.
Key success factors
Based on the above, investors may need to put real estate stocks through the following filters before arriving at an investment decision:
Apart from land location and ownership, does the company earmark each piece of land for a specific project? If it does, it indicates that the company has well-defined business plans.
Does the company have a track record of developing sizeable areas or does it have a huge land bank and ambitious plans but little experience in executing projects? Then, the risks of execution may be high.
Margins in the realty business can vary substantially based on the business model and kind of projects undertaken. If a company is transitioning from one model to another, are current operating margins likely to be sustained?
The business is capital-intensive. Does the company enjoy access to funds and what are the funding options for new projects?
If the company is diversifying to new geographies, what is its approach (such as small exposure in various locations or through joint ventures with local players)?
If the company is experimenting with new strategies or new businesses (see related story “Experimenting with success”), is it a small proportion of its total business to start with?
If it is a regional player, how differentiated is the company’s business from others in the sector?
What is the average turnaround time taken to convert land into building? Longer gestation periods carry the risks of a downturn and change in client/consumer preferences, which could impact demand.
Does the company have a history of executing projects on time?
Is the project subject to a number of legal/regulatory hurdles (such as procedures involved in SEZs, slum rehab or redevelopment of dilapidated buildings) that may delay project execution?
Jagran Prakashan: Hold
Improving advertising yields, tight management of newsprint costs, maturing editions that have begun to contribute to profits and strides in new initiatives such as event management and outdoor advertising, are factors behind the strong FY-07 performance of Jagran Prakashan, publisher of the leading Hindi daily, Dainik Jagran. The Rs 622-crore company has more than doubled its profits to about Rs 75 crore.
Prospects remain bright for the newspaper, which now runs 31 editions across 11 States in North India and has a stronghold in Uttar Pradesh. At the current market price of Rs 472, however, valuations are a tad on the high side at 37 times the FY-07 per-share earnings, offering modest scope for appreciation.
The stock is at a modest premium to Deccan Chronicle Holdings and at a 20 per cent discount to HT Media.
The company, however, offers a good exposure to the language print market in a manner akin to Sun TV in television, and is suitable for investors with a two/three-year perspective.
Investors can consider picking up the stock on declines linked to broad-market weakness.
Improving ad yields
Dainik Jagran derives about 65 per cent of its revenues from advertising, that take up about 40 per cent of the total space. Advertising yields for language newspapers tend to be at a steep discount to that enjoyed by English newspaper s, which cater to a more premium target group. However, the realisations are set to improve as marketers increasingly use language papers to reach the under-penetrated small towns and rural markets.
We believe that Jagran is well-placed to capitalise on this trend given its penetration in the northern States. According to a recent NRS survey, it has a readership of 21 million, making it the most widely read daily in India, but is closely followed by Dainik Bhaskar. While the market is competitive, we expect yields to improve for Jagran over the next year.
A key driver in the immediate term will be the increasing share of colour advertisements in the total advertisements space, a function of both increasing demand and Jagran’s newly expanded colour printing capacities. Colour ad vertisements now take up 35 per cent of its ad space; the management sees the share going up to 50 per cent over the next two years. Jagran’s colour advertisement tariffs are at an average 50-70 per cent higher than its black and white advertisements, although the costs of printing colour pages are not commensurately higher.
Jagran has initiated another advertisement-rate hike this year, which will also boost revenue growth. If the trend in language newspapers advertising does continue, there will be sufficient room to sustain an increase in tariffs.
Third, Jagran has a high share of local advertisers in its overall clientele, which bodes well for profitability since the yield per copy on all-edition advertisements are typically lower. We also see an accelerating trend in local advertising on the back of higher penetration of Tier-II and Tier-III cities by retailers who tend to localise their advertising and promotional activities.
Stable to higher marginsJagran’s operating margins are at about 20 per cent, a sharp improvement from 15 per cent a year earlier. A combination of improving advertisement yields, lower newsprint prices and maturing editions have driven margin growth. Wi th newsprint prices cooling off from their highs and a stronger rupee, there is likely to be less pressure on operating margins on the raw material front.
Jagran’s expansion into newer markets between 2000 and 2006, when it launched about 15 editions, had depressed profitability. Some of these editions, now in the third or fourth year of operations, have begun to mature and contrib ute to profits. Eight-nine editions continue to make losses, which include those recently launched at Indore and Amritsar. Jagran’s aggressive entry into Punjab, where it has taken on Dainik Bhaskar, has also dented profitability. Over the next couple of years, these editions could begin to contribute to profits. However, a significant jump in operating margins is unlikely in the near future as Jagran embarks on some new initiatives.
Testing new waters
A significant part of the proceeds of its Initial Public Offering last year went towards funding its initiatives in event management and outdoor advertising. The new forays have managed to record revenues of Rs 30 crore in 2006-07 and the businesses are expected to break even over the next year.
Jagran has forayed into these businesses as a way of reducing its dependence on circulation revenues, and its associated demand for newsprint, and also sees them as providing comprehensive advertising solutions to its vast client base. It, however, does not see this business contributing more than 10 per cent to its overall revenues, which limits the impact on profitability.
On the other hand, poor acceptance of its new bi-lingual daily newspaper, I-Next, and English infotainment weekly, City Plus, could be a strain on margins. Targeting English readers in its existing markets does se em to be high on the agenda for Jagran, as it aims to attract premium advertising. I-Next, which carries a mix of articles written in English and Hindi, has been launched in Jagran’s home markets of Kanpur and Lucknow; about five more are expected to be launched in mini-metros this year.
Jagran has also launched six editions of City Plus, which is a free newspaper that gets all of its revenues from advertising. It plans to launch eight more editions this year and has come out with the English version of its annual ge neral knowledge publication Jagran Varshiki.
Upside triggers to watch out for would be the approval to publish the facsimilie edition of The Independent, the success of the new Internet portal to be launched in association with Yahoo! and any acquisition of smaller regional players.
Investment Basics - Reading an annual report
The thought of poring over annual reports to glean information about a company or its growth prospects may seem terribly dull to most new investors. At a time when there is an overflow of information across media channels and scores of analysts churn out stock calls on a daily basis, you may be excused for taking the short cut and just looking up financial snapshots on the Internet.
Nevertheless, the annual report remains the most authentic source of information about a company and contains important facts about its financial condition, growth strategy and current challenges that are not readily available upon an Internet search. A well-written report can give you a rare glimpse into the management’s outlook for the industry or its views on new trends in the market. So for those who do not know (or remember) what an annual report looks like, here is a quick guide to reading this document.
The manner of presentation differs from one annual report to the other; some are mini opuses that promise to be a one-stop guide to the industry and company, others barely make the cut when it comes to providing crucial information. Most reports, though, will have the following important components:
The director’s report, which will detail the company’s operational performance in the year gone by.
Management Discussion and Analysis, where the management provides an outlook on the industry, competitive scenario, new challenges and risk factors and outlines its future strategy.
Detailed financial statements of the company and its subsidiaries, as well as consolidated financials, along with the auditor’s report.
The basics, for starters
You may also find pictures of happy employees participating in corporate events. Heart warming, but we suggest that you skim through all that gloss and start with the director’s report. This will give you an overview of the co mpany’s performance across various segments and an idea of the factors that drove performance.
If you are unfamiliar with the industry the company operates in, then the Management Discussion and Analysis (MDA) is the best place to begin. Clueless about the pig iron industry? Read the Tata Metaliks report for data on the globa l pig iron and foundry market and pig iron price trends. The report also includes an interview with Tata Metaliks’ management, which discusses some of the key events that took place during the previous year and its perception about the competitive scenario.
Companies put forth their views on a variety of topics that concern their industry, be it Government regulation, consumer or user industry trends or changes in the global picture in the MDA. They then articulate their own plans to capitalise on unfolding opportunities.
Between the director’s report and MDA, you will get a fairly good idea of the businesses the company operates in, its key focus areas, the challenges ahead and the measures it has in place to improve financial performance in the year ahead.
For number-crunchers
For those who believe that it is numbers that do all the talking, the financial statements in the annual report provide you with details that you are unlikely to find on the BSE or NSE Web sites. For instance, you can figure out the extent to which a company is able to fund its expansion plans on the strength of its current operations by looking at its cash flow statements.
The schedules to accounts provide break-ups of income, expenditure and other items. For instance, you may want to know what components constitute “other income”, particularly if it has been a significant contributor to profits that year. The item-wise split-up of the components classified under other income will help you decipher how much of the non-operational income is recurring in nature. You are also provided with segmental information — both geographic and business.
Similarly, schedules elaborate on balance sheet items such as long-term and short-term loans. For retailing companies, for instance, inventory management is crucial and you may have to compare the inventory positions over a three-year period to understand how efficiently the retailer manages its stores. Or for cash-rich companies, the quality of their investment book may well play a role in valuations.
The annual report also discloses the financial information of the company’s subsidiaries, besides providing financials on a consolidated basis.
As new, high-growth ventures are typically routed through subsidiaries, companies are beginning to command valuations based on their consolidated numbers.
Be sure to look at the notes to accounts to understand the accounting treatment of various revenue and expenditure items. Those who are unfamiliar with accounting practices can make-do with looking for changes in accounting policies . This might tip you off on the impact of one-time earnings or expenses.
Also look for the auditor’s qualifications to accounts for any assumptions that have been made while preparing or auditing accounts.
Nooks and corners
The annual report also contains little nuggets of information that could provide you with additional insight into the company.
Management background: For instance, you can find brief profiles about the directors on the board of the company. The presence of directors with strong industry standing lends credibility to the management of the company.
The shareholding pattern of the company will reveal the extent of promoter holding and the extent of institutional interest in the company.
Production and utilisation figures: For manufacturing concerns, the production figures assume significance. The production as a proportion of installed capacity (utilisation) could give you an idea of the efficiency at which the compan y is operating and the headroom for further volume growth. This information is particularly pertinent if the company is planning further expansion.
IPO proceeds utilisation: For newly listed companies, the progress on the expansion plans that had been outlined in the offer document and the utilisation of the IPO proceeds are also disclosed in the annual report.
Notices to resolutions: Some special resolutions passed at the annual board meeting also merit attention. For instance, resolutions passed to increase borrowing limits are cues to the company’s desire to leverage its balance shee t.
Explanations are also available on why the resolution has been mooted. For example, Colgate Palmolive India’s latest annual report explains the reasons for its declaration of a special dividend and a capital reduction.
This list is far from exhaustive. Going through all this might mean a lot of time and work. But it does make your information more authentic than the tip from your broker friend or the analyst on TV.
Sensex stocks aren’t more expensive
Current PE multiple of Sensex at 21.5 times (it was over 22 times in May 2006).
Lower PE means investors are not paying more than they did then.
Despite 15000 level, earnings growth has mostly outpaced stock price gains.
Cement, pharma stocks see sharp decline in PE; select IT, banking stocks see expansion.
With the BSE Sensex at the 15000-mark, should you be wary of entering the stock markets at this juncture? No more than you were last May. Two-thirds of the Sensex stocks are today available at price-earnings multiples (PE multiples) that are cheaper than their May 2006 levels.
The current price-earnings multiple of the BSE Sensex is at 21.5 times, lower than the multiple of over 22 times in May 2006 (both based on trailing earnings). Though the Sensex has zoomed by 18 per cent from 12600 to 15000 levels, earnings growth has mostly outpaced stock price gains.
The lower PE multiple indicates that investors buying Sensex stocks today are, in effect, not paying more (in relation to the company’s earnings) than they did in May last year.
Sharp declines
Stocks in the cement, pharmaceutical and FMCG sectors are key ones that have seen a sharp decline in their PE multiples between last May and now. Cement companies such as ACC, Grasim and Ambuja Cements suffered a sharp decline in their PEs, despite a scorching pace of earnings growth in 2006-07.
Expectations of an erosion in the pricing power of cement companies following policy intervention contributed to this trend. Pharma stocks Ranbaxy Labs and Dr Reddy’s Laboratories have also seen a decline in their multiples as stock prices have not kept pace with their strong earnings growth.
The same can be said for stocks such as Hindustan Unilever (HUL) and ITC. HUL now trades at 28 times its FY 07 earnings, down from a multiple of 43 times, a year ago. Market players feel that the already rich valuations for these stocks contributed to their recent underperformance.
Auto stocks
Concerns about a possible slowdown in automobile sales after the series of interest rate hikes seem to have impacted automobile stocks, with stocks such as Tata Motors or Bajaj Auto now trading at lower PE multiples.
While stocks from the cement, FMCG and pharma sectors have turned less expensive, select stocks from the IT and banking space have seen an expansion in their PE multiples over this period.
Wipro, ICICI Bank and Satyam Computer are some of the stocks that are trading at higher valuations than last year.
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