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Sunday, December 02, 2007

eClerx Services IPO Analysis

The age of information has not just flooded us with a vast amount data but also brought along a number of ways in which one could use data meaningfully to one’s advantage. While large corporations realised the importance of data, the outsourcing and consulting players caught hold of the idea to turn it into profitable business models.
eClerx Services is one such knowledge process outsourcing (KPO) business from India, which jumped on to the bandwagon early on, to provide data analytics and customised process solutions to global enterprises. eClerx was established in 2000, and has grown by leaps and bounds to have over 15 Fortune 500 clients and achieve a critical mass in the industry.
eClerx now plans to raise Rs 101 crore via an initial public offering, which constitutes an offer for sale from its promoters P D Mundhra, Anjan Malik and Burwood Ventures of 8.9 lakh shares, as well as a fresh issue of shares priced between Rs 270-315 a share. The company aims to use the issue proceeds to carry out acquisitions, make infrastructure investments and set up additional facilities.
Analyse it
eClerx’s service portfolio comprises of data analytics, operations management, data audits, metrics management and reporting services. It analyses competitive data from the day-to-day operations of large corporations by mining clients’ transactions and designing process solutions for clients’ specific business needs.
These processes lead to increased revenues and reduced operating costs for its clients across a variety of business functions, which include marketing, pricing, manufacturing and supply chain management. Its clientele is largely derived from industries such as financial services, manufacturing, retail, travel and hospitality.
The nature of its operations requires eClerx to have a high level of management involvement across all the functions of its clients’ businesses over a multi-year time frame. The result is strong client relationships which are ongoing in nature.
However, there are two important implications of this. The company depends heavily on its few clients for a significantly large proportion of its revenues – over 86 per cent of its revenues come from the top five clients.
On the flipside, the deep involvement of eClerx across various functions of its clients’ businesses makes it difficult for its clients to exit the relationship, “That’s because the nature of services provided is ‘business as usual’ and non-discretionary,” claims Anjan Malik, promoter and director of eClerx Services.
Growth concern
As the services provided by eClerx are more complex than mere transaction processing, the company is required to employ a workforce with specialised skill-sets. On the one hand, such workforce is scarce and on the other, attrition is steep.
This is probably the reason behind the company’s rising wage bill as a percentage to sales, which has gone up from 26 per cent in FY06 to over 33 per cent in H1 FY08. Selling and administrative expenses too are on a rise, as the company dabbles its feet into new industry verticals in order to expand its footprint.
This coupled with a steep appreciation in rupee against the dollar has eroded the company’s operating profit margin by almost 1500 basis points from 54 per cent in FY06 to 40 per cent in H1 FY08.
The net profit margin too has narrowed consistently from 50 per cent in FY06 to 32 per cent in H1 FY08. This is likely to go down further with the introduction of minimum applicable tax of 12.5 per cent from FY09 onwards. Again, eClerx is at a higher risk from the depreciating dollar as over 70 per cent of its revenues come from the US, while about 25 per cent from the UK and Europe.
The company has, however, not disclosed information about the onsite and offshore proportion of its work. Further, other operating metrics such as utilisation and attrition rates too are not available.
eClerx will be the first pure KPO outfit to list on the bourses, and hence, there are no strictly comparable peers. However, from the broader IT enabled services spectrum, it could be pitted against BPO companies such as Firstsource Solutions. At about 16-19 times its estimated FY08 earnings, eClerx appears to be reasonably priced, compared to its BPO peers. Crisil has rated this IPO three on five indicating average fundamentals.
However, the relatively new business model and the lack of information on a number of operating metrics make it difficult for analysts to estimate the company’s cash flows. While high dependence on the US leaves the company vulnerable to a slower top line and bottom line growth in the event of a slowdown in the US and IT budget cuts, the rising rupee too is not likely to spare the company’s margins. The key to the prosperity of eClerx remains in sustaining its profitability. Investors with a slight appetite for risk may want to place their bets.
Issue opens: December 4, 2007
Issue closes: December 7, 2007

Analysts corner

JSW Steel
Broking firm: India Infoline
Reco Price: Rs 961
Target Price: Rs 1240
CMP: Rs 1009
Upside: 22.9%
JSW’s expansion plans are ahead of schedule and strong demand is likely to lead to higher capacity utilisation. India Infoline expects the company’s steel output to register a compounded average growth rate (CAGR) of 28.3 per cent over FY07-FY10 from 2.6 tonne per annum to 5.6 tonne per annum.
JSW’s crude steel making capacity is expected to be 10 tonne per annum by 2010 from current 3.8 tonne per annum. The company is also increasing its upstream capacities, cushioning it from any downturn in the industry.
Also, its operating margins are expected to expand in FY09 led by higher realisations from value-added products and increased usage of captive resources. JSW’s consistent focus on value-added products would lead to higher price realisations for the company in the next three years.
Besides, JSW’s captive coke and power plants are expected to be fully operational in FY09 leading to better margins. At Rs 961, the stock trades at 10.1 times and 7.1 times on consolidated EPS of Rs 94.8 in FY08 and Rs 136.1 in FY09, respectively.
Godawari Power & Ispat
Broking firm: Motilal Oswal
Reco Price: RS 263
Target Price: Rs 380
CMP: Rs 290.5
Upside: 31%
Godawari Power and Ispat Ltd. (GPIL) has nearly doubled capacity of sponge iron to 495,000 tpa and that of steel billets to 400,000 tpa. Captive power capacity too has increased from 28MW to 53MW. They are likely to benefit from current strong prices of steel products and sponge iron.
GPIL is also setting up a 0.6 mtpa pelletisation plant to utilise iron ore fines, required for sponge iron production. This will bring down raw material costs substantially and improve the margins. GPIL has been allotted both iron ore (reserves of 15m tons) and non-coking coal mines (reserves of 63m tons) to meet its requirement of raw materials which will bring down costs and insulate earnings from input price risk.
Besides this, the benefit of carbon credits (Rs 10.8 crore) and sales tax benefit (Rs 240 crore) will prop up the bottomline. At recommoneded price the stock trades at a PE multiple of 5.5 times FY09E.
Broking firm: Networth Stock Broking
Reco Price: Rs 70
Target Price: Rs 100
CMP: Rs 69.6
Upside: 43%
Aftek, a seasoned player in software product engineering has more than 100 active intellectual properties to its credit. It commands a premium in its billing rates and has increased its revenue per employee. The non-linear model of the company and its subsidiaries enable it to beat the rising rupee.
The company’s investments into its subsidiaries, Arexera, Seekport and Digihome will transform the company into the league of royalty-bearing product companies. At the recommonded price of Rs 70, the stock is trading at a PE multiple of 6.7 times and 4.9 times its FY08E and FY09E earnings.
The broking firm believes that despite strong fundamentals, Aftek is valued at 50 per cent discount to its nearest competitor. Besides, Aftek’s cash reserves is a huge strength for expansions in future. The company’s cash on its books stands at Rs 33 per share. At a P/BV of 1.0, the stock is undervalued. Valuing the company at 7-times its FY09 likely EPS of Rs 14.4, gives it a price target of Rs 100.
Salora International
Broking firm: Parag Parikh Financial Advisory
Reco Price: Rs 218
Target Price: Rs 312
CMP: Rs 234
Upside: 33%
Salora International has transformed itself from a manufacturer of colour television parts to a distributor of telecom and infocom products deriving 85 per cent of revenues and 90 per cent of earnings before interest and tax from the latter. The company enjoys excellent relationships with its vendors such as Sony Ericssion, BenQ and Acer and has managed to build a strong distribution network of 30 offices touching over 25,000 retailers.
As a result, it is mulling the idea of retailing the products. The company’s turnover, which grew 50 per cent in FY07 to Rs 887 crore, is poised to cross Rs 1,000 crore and jump by another 40 per cent in FY08. However, the stock is still valued in terms of its legacy business. Moreover, the stock’s valuation of 7.2 times for estimated earnings for FY09 is much less than its peers- Redington India (13.7 times) & HCL Infosystems (9.4 times).
NCL Industries
Broking firm: IL&FS Investsmart
Reco Price: RS 55
Target Price: Rs 120
CMP: Rs 59
Upside: 103%
South India-based NCL Industries (NCL) is well-poised to capitalise on the emerging opportunities in the southern cement market. Cement demand in south India is likely to grow at a CAGR of over 10 per cent between FY07-11.
During FY08, NCL, one of the leading cement manufacturers in the region, augmented its cement capacities from 0.297 million tonnes per anum to 0. 63 million tonnes per anum. It is expected to further expand its capacity by 1.32 million within a year. Thus it is likely to emerge as a key beneficiary.
Further its pre-fab business is expected to grow at over 30 per cent annually for the next three years. As a result, the company’s revenues and profits are expected to grow at an annual rate of 36 per cent and 31 per cent between FY07-10. The stock trades at 4.5 times and 4 times its estimated earnings for FY08 and FY09 estimated earnings respectively.
Vishal Retail
Broking firm: Religare Securities
Reco Price: Rs 697
Target Price: Rs 1018
CMP: Rs 695
Upside: 46%
Vishal Retail has 70 stores, out of which 80 per cent are located in Tier-II and Tier-III cities and is a strong player in high margin apparel space with focus on private labels. This has been partly responsible in improving margins and profitability. It has aggressive plans to add 200 more stores and five million square feet between FY07-11 taking the total area to 6.2 million square feet.
Indian organised retail is expected to grow 25-30 per cent between FY07-11 to $60 billion. However, Vishal’s revenues and profits are expected to grow at 77 per cent and 81 per cent between FY07-11 respectively. Though not directly comparable, Vishal trades at 15 times its estimated earnings for FY09, which is at a significant discount to Pantaloon (44 times) and Shoppers’ Stop (41 times)

BGR Energy Systems IPO

The growth in the power sector has created plenty of opportunities across the value chain. From the point of generation to the consumer, it has laid down a solid foundation for companies, which are directly and indirectly related with the power sector, to grow.
BGR Energy Systems is one such player generating about 80 per cent of its revenues from the power sector. Generally, power generation companies and the large EPC (engineering, procurement and construction) contractors outsource several smaller activities related to the construction of the power plant, which includes components, structures and services to third parties known as BOP (balance of plant) work.
BGR, is one such player, executing five such projects worth Rs 2,500 crore. BGR provides BOP services and equipment required for the construction of power plants, mainly gas and coal based power plants.
In addition to this, the company also undertakes industrial and oil and gas projects supplying products and services in the domestic and international markets. The company manufactures about 40-50 per cent of its equipment requirement.
Power proxy
Along with the opening up of opportunities in the power, BGR has been able to grow rapidly. Its power project division earned revenues of Rs 150.9 crore in FY04, while its Q1 FY08 revenue was Rs 115 crore. The company had a consolidated current order book of Rs 3312 crore as on September 30, 2007, which is significantly high compared with about Rs 950 crore in the corresponding period last year. About 80 per cent of this is accounted by the power projects.
During the Eleventh Five Year Plan, the government is estimated to add another 80,000 MW of new capacity, which will further require huge investment for the EPC and BOP work. According to industry estimates, for every investment in new power generation capacity, about 60-80 per cent of the total project cost is spent over equipment and EPC work, while BOP is the rest.
In India, generally the EPC contractor takes care of the BOP work for power generation companies and there are bigger companies in this segment such as Reliance Energy, Tata Projects and L&T. However, most of these bigger companies are fully booked as a result of the huge capex in the power industry.
The power generation companies are now allocating BOP work separately. BGR which is leading player in this segment catering smaller projects ranging 25-500 MW should be able to stand out in the competition and benefit from the ongoing investment.
Further, the company is also making efforts for developing expertise and skills for setting up of projects in the range of 600 MW to 800 MW, so that it can participate for larger projects.
EPC dreams
Besides, BGR also intends to scale up its EPC business. The company is commissioning two EPC projects worth Rs 432 crore at present. EPC projects require proven capability and experience, thus this segment is currently dominated by the large domestic and international players. BGR will scale up this business gradually and may also seek strategic alliances in the form of joint ventures or sub-contracting for specific projects.
“We also intend to partner with global manufacturers of boilers, turbines and generators to establish a more visible presence throughout India. This will enable us to capitalise on our past experience and bid for larger contracts,” says B G Raghupathy, chairman and managing director, BGR Energy Systems. The successful entry into the EPC area will help the company increase its top line significantly.
However, as EPC is generally a lower margin business, BGR’s overall margins may fall a bit. Besides, demand from captive power generation plants entails additional opportunities for the company. The revenues from the captive power division was just Rs 63.2 crore in FY07 (18 months), which has gone up to Rs 93.5 crore in Q1 FY08.
Exports growth
BGR is also present in some of the overseas markets mainly servicing clients in the field of oil and gas and power equipment. Oil and gas, which generated about Rs 71 crore of revenues in FY07, now accounts 13 per cent of its current order book at Rs 431 crore.
The company will set up manufacturing and assembly facilities in Bahrain and China at a cost of Rs 55.5 crore. These new facilities will target opportunities in the oil and gas and power sectors around the world. At present, exports account for 18 per cent of the total order book. With these expansions the proportion of exports is likely to go up.
At the offer price of Rs 425-480, the issue is priced 32 times its estimated FY08 earnings. Considering BGR is expected to grow on a fast pace on the back of strong order book and better industry outlook, the valuations seems justified to an extent. Its order book, which is almost 6.4 times its FY07 annualised revenues, if executed over the next two-three years will provide significant top line and bottom line growth.
According to the management, 30 per cent or about Rs 1000 crore of the current order book of Rs 3321 crore will be executed by March 2008, which will add another Rs 550 crore for H2 FY08, taking the total FY08 revenue to Rs 1,550 crore. Assuming a 7 per cent net profit margin, it can give a net profit of about Rs 108 crore and an EPS of Rs 15. Nevertheless, to add more confidence, ICRA has graded the IPO at three on a scale of five indicating average fundamentals of the company.
Issue opens: December 5
Issue closes: December 12

The Big IPO boom

The booming IPO market which has given stellar returns this year could prove even more lucrative for the retail investor. Sebi has allowed companies to issues shares to retail investors with a discount of up to 10 per cent on the issue price. For investors who have been sitting on smart gains on the back of a rising market, this move will only increase their appetite for primary paper.

Of the 85 issues listed till date in 2007, 64 ended in positive territory on day one while 54 have managed that even on current market price. While this might not seem such a major achievement with the Sensex closing in on the 20K mark, a volatile period marked by the credit crisis meltdown is not the easiest to pilot an IPO.

Unlike its performance last year when it returned 47 per cent, the Sensex has managed 38 per cent so far in 2007. The difference is largely because the benchmark index was down 9 per cent in February and 3 per cent in November.

The lower returns of the secondary market have also cast a shadow on the returns from new issues. Of the 46 and 77 IPOs that have hit the market in 2006 and 2005, nearly 80 per cent are trading above their issue price. However, this year about 62 per cent are trading above their IPO price.

“The premium on these stocks,” believes Srinivasan Subramanian, head - investment banking, Enam Securities, “is a combination of bullish market conditions and the quality of issues.” Given the gains on listing, and the huge appetite for primary market paper, are merchant bankers getting the pricing aspects wrong?

Low cut-offs

Merchant bankers don’t think so. Says Atul Mehra, Co-CEO and MD, JM Financial Consultants and head - capital markets, “IPOs are not underpriced, the key factor driving the significant returns post-listing is the overwhelming demand for good quality paper. There is an excess of financial resources chasing fewer value-added opportunities.”

Lead managers and analysts say that there is pressure at the pre-IPO marketing stage to see the listing through. Companies prefer to leave something on the table for investor rather that face the prospect of under-subscriptions. Says Prithvi Haldea, managing director of Prime Database, “A failed issue is not only expensive but is also a reflection of the reputation of the company, especially with the participation of large number of institutions.”

Excess subscriptions, then, are the norm and this is largely due to the presence of qualified institutional buyers, which have at least 50 per cent of the issue reserved for them. With oversubscription comes the bane of grey markets, where issues start trading before the IPO allotment takes place. With oversubscriptions in the order of 100 times and large allocations to institutional investors, the retail investor seems to be the loser.

Missing out

While not less than 35 per cent of an issue is reserved for retail investors, high oversubscriptions mean that most investors either do not get any shares or receive tiny allotments. One alternative is the increase in the proportion of shares allotted to retail investors.

Says Haldea, “About 60 per cent of the issue should be reserved for the retail investor. A 25 per cent share of the IPO is enough for qualified institutional buyers (QIBs).” The other option, believes Subramanian, is to allow companies the flexibility to fix the cap on the size of retail participation.

The 50 per cent quota for QIBs, analysts say, has been fixed by the regulator as this acts as a safety barrier for the retail investor who does not know enough about these companies. Unlike retail investors QIBs are able to seek and get detailed information about the company they are investing in.

Retail investors too, seemed to have caught the trend and QIB oversubscription acts as an important barometer for investment. Says Haldea, “The retail investor is smart. It is noticed that investor participation is high in issues where QIB participation is high.” However, should investors only depend on the institutional exposure to a stock before committing funds or are their other mechanisms that will help them grade a stock?

Rating stocks

While rating institutions have introduced a grading mechanism to help investors segregate good stocks from bad, its effectiveness is still to be proven. Says Arun Panicker, senior director, research, Crisil, “It is going to take some time before ratings are accepted. It will happen when valuations are linked with the process of grading that reviews management quality, financial strength, sector dynamics and corporate governance.”

The conventional belief is that ratings are useful in judging debt instruments but are not suited to measure the risk elements of equities. However, some analysts opine that the sudden stock market corrections and volatility will force the investor to be more careful about investing in IPOs.

Says Mehra, “In the prevalent euphoric times, investors are overlooking the importance of ratings. But this will soon become a crucial criterion for decision-making and would help them make more informed decisions.”

While investors are better served by going through the brief recommendations of a rating agency instead of poring through a lengthy prospectus, as of now they are ignoring the advice. Says Haldea, “Ratings have absolutely no use. Investors have voted with their feet for issues that are rated at 1 or 2 out of 5 and all these are trading at a premium.” While a majority of the listings are trading above issue price what were the favourite sectors of investors this year?

A mixed bag

Real estate as an investment theme has been a hit with investors and the sector accounted for 33 per cent of money raised so far this year. Of the Rs 13,000 crore raised from seven issues, nearly Rs 10,000 crore was accounted for by one big issue–DLF. While India’s biggest real estate player was oversubscribed three times, oversubscriptions were highest in the case of Akruti Nirman at 88 times.

The oversubscriptions were not on account of retail segment (12 times), but were driven by high net worth individuals (63x) and QIBs (118x). The story is similar for issues across the realty and construction space.

As on date, Orbit Corporation has delivered the best returns to investors across sectors multiplying their money by five times. However, the stock was listed 18 per cent below its issue price. With the exception of IVR Prime which has given negative returns of 30 per cent, all other realty stocks are trading in positive territory.

Textile, apparel manufacturers and garment retailers raised about Rs 1,300 crore. The retailers–-Koutons and Vishal Retail—got the highest subscriptions while the largest issue in this space was House of Pearl Fashion which raised Rs 329 crore. In line with the fortunes of fabric makers, a majority of the companies have given negative returns. The retail players have generated returns above 70 per cent.

Eleven IT companies raised Rs 1,700 crore with the largest issue being that of Mindtree Consulting which mopped up Rs 240 crore. Though the sector is going through a bad patch only three listed IT companies this year–Mindtree, Zylog and Dhanus Technologies–are trading below issue price. Mic Electronics, Everonn Systems and Allied Computers have given investors returns of over 200 per cent.

Financial services companies—Motilal Oswal, Religare Enterprises and ICRA—raised about Rs 500 crore from the markets. Religare’s issue was oversubscribed 159 times–the highest for all listed companies this year. Whereas broking outfits have doubled investors’ money, ICRA has given returns in excess of 50 per cent.

While the IPO market has been a successful hunting ground for investors, what can they expect in 2008?

IPOs in 2008

Investors can look forward to more construction, energy and PSU listings. In addition to a pipeline of real estate and infrastructure companies, issues in excess of Rs 1,000 crore are likely to come from Reliance Power and PSU majors–National Hydroelectric Power Corporation, Oil India and Rural Electrification Corporation.

The trend of high QIB participation, especially FIIs, is likely to continue as these institutions have raised over $2 billion in India-specific funds in October. Funded high net worth investor participation, which has taken off in a big way due to listing gains that are higher than interest costs is also likely to continue.

Merchant bankers say that issues will continue to attract oversubscription in the near future as well. So for retail investors, getting allotment is likely to remain as elusive.

Name Issue Size
Rs Crore
HNI Retail QIB Total
DLF 9187.50 525.00 943.90 79.79 0.84 0.85 4.93 3.30
Power Grid Corpor 2984.45 52.00 147.90 184.42 39.28 6.55 115.47 64.50
Idea Cellular 2125.00 75.00 122.40 63.20 21.90 3.66 78.59 49.56
Mundra Port 1771.00 440.00 923.00 109.77 153.95 15.87 159.95 115.00
HDIL 1485.00 500.00 821.25 64.25 1.33 1.24 8.57 5.58
Power Finance 997.19 85.00 243.55 186.53 48.18 8.21 137.14 77.16
Puravankara 858.70 400.00 402.90 0.72 0.53 0.50 2.87 1.92
Central Bank 816.00 102.00 135.40 32.75 0.81 15.20 89.01 61.49
IVR Prime 778.25 550.00 391.90 -28.75 1.05 1.32 8.36 5.49
Omaxe 551.69 310.00 434.80 40.26 71.64 12.14 86.69 62.00
Spice Comm. 520.31 46.00 48.50 5.43 18.09 3.83 58.60 37.57
Fortis Escorts 494.14 108.00 79.85 -26.06 1.06 2.94 2.97 2.79
Firstsource 443.52 64.00 65.55 2.42 40.06 11.04 71.18 49.32
Akruti Nirman 361.80 540.00 1149.35 112.84 63.63 12.02 118.28 80.88
House of Pearl 329.17 550.00 235.85 -57.12 0.18 1.03 6.67 3.67
Maytas Infra 327.45 370.00 891.70 141.00 48.46 15.02 96.64 67.33
Motilal Oswal Fin 246.07 825.00 1718.95 108.36 9.04 4.18 43.78 27.18
Mindtree 237.72 425.00 417.50 -1.76 126.93 28.55 157.37 102.75
Advanta India 216.32 640.00 1041.00 62.66 0.05 0.17 5.66 3.45
Empee Distilleries 192.00 400.00 291.70 -27.08 1.30 5.48 8.75 6.54
Consolidated Cons 188.70 510.00 963.75 88.97 57.87 12.28 118.78 80.79
Binani Cement 153.75 75.00 121.55 62.07 0.28 1.41 1.33 1.25
Take Solutions 153.30 730.00 1062.70 45.58 82.87 22.12 75.14 57.57
Redington India 149.51 113.00 410.45 263.23 41.12 11.40 59.65 43.46
Koutons Retail 146.26 415.00 726.75 75.12 16.39 14.22 66.38 45.10
Religare Ent 140.16 185.00 506.45 173.76 209.21 89.14 185.09 159.40
Cinemax India 138.26 155.00 130.40 -15.87 42.19 15.22 60.62 41.86
KPR Mill 133.02 225.00 157.50 -30.00 2.06 0.03 1.44 1.17
Zylog System 126.00 350.00 317.45 -9.30 137.86 33.84 0.00 75.52
C & C Const 124.24 291.00 209.55 -27.99 3.76 4.54 29.98 19.73
Time Technoplast 123.53 315.00 730.40 131.87 68.79 12.50 69.83 49.14
Dhanus Tech. 113.13 295.00 276.05 -6.42 24.04 14.54 13.96 28.29
Vishal Retail 110.00 270.00 695.25 157.50 316.47 58.03 54.15 76.12
Global Broadcast 105.00 250.00 923.85 269.54 159.25 45.72 37.64 49.75
Broadcast Initiatives 102.60 120.00 47.65 -60.29 3.23 2.68 1.48 2.36

Mundra Port and Sez Analysis

The Indian bourses have amazed the world by attaining new highs, but now the thrill has trickled down to the performance of companies who have made a historical debut at the bourses, staunchly vindicating the unpredictable moves of the equity markets.

Gone are the days, wherein an investor would be apprehensive about investing in a new sector based company, especially in the equity markets which are popular for its ups and downs. The change in investor behavior was witnessed in the phenomenal listing of the Ahmedabad-based Mundra Port and Special Economic Zone (MPSEZL). The company had offered its shares at Rs 440 per share during the IPO period and got listed on bourses at Rs 770; this works out to be a remarkable 75% gain and has left the investors smiling all the way to the trading accounts.

The kind of response, that was received by Mundra IPO was noteworthy taking into account that no other port in the country has ever sailed into the capital market, thus Mundra was the first one to tap the capital market via the IPO route and later get listed. The fact that the IPO of MPSEZL was over subscribed almost 116 times underlines the potential offered by the company and by the sector as a whole.

Let`s take a sneak preview at the business profile of the company.

MPSEZL is the developer and operator of the Mundra Port, one of the leading non-captive private sector ports in India based on volume of cargo during fiscal 2007. It is principally engaged in providing port services for bulk cargo, container cargo, crude oil cargo, and value added port services, including railway services. The company also got approval to develop multi-product SEZ on 2,658.2 hectares (approximately 6,568 acres) of land.

The company plans to use the IPO issue funds to construct and develop basic infrastructure and allied facilities in the proposed SEZ at Mundra; construct and develop a terminal for coal and other cargo at Mundra Port; contribute towards investment in Adani Petronet (Dahej) Port; contribute towards investment in Adani Logistics; and contribute towards investment in Inland Conware.

Strategically, the company is in a very competitive position. Mundra port is strategically placed with proximity to the northern inland regions of India which contribute around 55% of the India`s commodity trade. The port` s depth is deeper than other ports in the country to the extent that a 30-32 meter large vessel can easily come in. It also possess 15,000 acre in SEZ and is likely to increase it to another 15,000 acre. Keeping in mind the current demand for the port capacity and the above factors, the future looks optimistic.

Moreover, with the government looking at spending about USD 500 billion on infrastructure in India over the next five years and nearly double the rate of investment in the sector to 9% of gross domestic product, Mundra had all the reason to receive the witnessed response from investors.

Overall Port Sector

Indian port`s play a pivotal role in the country`s export-import. Nearly 90% of trade volume is routed through sea ports. While the 12 major ports which are regulated by the centre handle 70% of this volume, limitations in proper berthing, cargo handling and storage facilities have led to the emergence of privately owned ports.

The fact that unlike a number of public ports that were originally developed as need-based ports, these private ports have the benefit of being planned ports built with future commercial traffic in mind.

The government decision to privatize the ports is the hope that commercialization may improve the levels of efficiency, productivity and reduce the cost of maintaining a port.


Mundra Port and Special Economic Zone have opened the gates to a new untapped sector. Investors have expressed their confidence in the company with the shares of the company gaining 118%, with an intraday high of Rs 1150.00 on the bourses in the first day itself. It won`t be surprising to figure out that a lot of port players will be tapping the capital market on the heels of MPSEZL.

Weekly Watch - Dec 1 2007

Weekly Watch - Dec 1 2007

Weekly Track Report - Dec 3 2007

Weekly Track Report - Dec 3 2007

Monthly Technicals - Dec 3 2007

Monthly Technicals - Dec 3 2007

India Telecom Subscriber Forecast

See here

Weekly Technical Analysis

The Nifty ended the week with a gain of 2.8 per cent (154 points) at 5763. The index moved in a range of 187 points, from a high of 5783 to a low of 5595. It was, however, was down 2.3 per cent (138 points) last month.

The Nifty ended above its short-term (20 days) moving average. The short-term moving average is currently above the mid-term (50 days) moving average, which is a positive sign. The index is likely to find significant support around 5735 (short-term) and 5525 (mid-term) levels in case of any weakness.

On the upside, the index may rally upto 6000.

The index is likely to face resistance around 5835-5855-5880 this week, while the support would be around 5690-5670-5645.

The Sensex consolidated in a narrow range of 541 points last week,compared with a swing of 1,700 points in each of the previous two weeks. The index touched a low of 18,884 and then rallied to a high of 19,425, before settling with a gain of 2.7 per cent (510 points) at 19,363. However, the index ended the month (November) with a loss of 2.4 per cent (475 points) at 19,363.

Unlike Nifty, the Sensex continues to have a negative bias as long as it stays below the 19,500 - 19,800 band. Only if the index is able to cross 19,800 convincingly shall we may see it rally to record levels.

On the downside, the 18,600 level continues to be crucial as sustained weakness below this level could see the index dip to 17,000 - 17,300 levels.

Traders Corner

Certain candlestick patterns do not explicitly signal a trend reversal but only give an indication of whether the prevalent trend could halt or reverse. The bullish and bearish engulfing candlestick patterns belong to the former category while dark cloud cover (DCC) and piercing patterns fall in the later.

A DCC pattern is formed with two candles. The first candle is white and the second candle is black forming the ‘dark cloud’ that hovers ominously threatening the prevalent up-trend. Needless to add, the DCC pattern occurs near the top of an up trend.

The second candle in the DCC pattern gaps upward and then moves down, some way within the body of the first white candle but it does not cover the first candle entirely. If it did so, it would then get labelled as a bearish engulfing candle. The extent of penetration within the body of the first candle determines the strength of the pattern. When the second candle moves more that half-way within the body of the first candle, it implies that a trend reversal is imminent. Dark clouds (second black candle) that move less that half-way within the first candle can turn out to be a false alarm or minor halts within an up trend.

The piercing pattern is the inverse of the DCC pattern. While dark cloud covers occur towards the end of an up-trend, piercing patterns occur towards the end of a down trend and signal the possibility of a trend reversal from that juncture.

This pattern is made up of two candles as well. The first candle should be a long black candle as it would be part of the down trend. The second candle would gap downward and then move higher well within the body of the second candle. Again, the extent of the penetration determines the strength of the pattern.

A penetration that exceeds 50 per cent of the first candle’s body should be a more reliable signal of a trend reversal

Via BL

eClerx Services: Avoid

Investors can give the initial public offering of eClerx Services a miss, considering uncertainties surrounding the macro environment for this business and key business risks. eClerx is a knowledge process outsourcing (KPO) company that provides services to clients in the manufacturing, retail and financial services space. At Rs 315 (upper end of price band) the offer price values the company at over 18 times its annualised current year earnings on the post-offer equity base. This appears a bit stiff, especially in the IT/ITES space, where most players command low double-digit valuations.
Client and service spread

For retail and manufacturing clients, eClerx offers product price benchmarking, analysis of customer feedback on products and catalogue analysis under the data analytics services umbrella. It also develops technical content for clients’ Web sites, Web stores and product brochures.

For financial services clients, eClerx has a more elaborate portfolio of services catering to the investment banking, capital markets and asset management divisions of financial companies.

sThis includes portfolio matching, reconciliation of financial data, analysis of price fluctuation of asset classes, and so on.

In terms of service offerings, the major portion of the company’s offerings (except certain data analytics services) cannot be termed as high-end back-office services. But the company works predominantly on multi-year deals which may provide more stable long-term revenue streams.

Not being a voice-based player has been a plus for the company and it has managed to capitalise on a strong wave of outsourcing from the US over the last five years. The company’s revenues have grown at a compounded annual growth rate of 58 per cent between 2004 and 2007 and its profits after tax at 131 per cent during the same period.

But operating profit and net profit margins have been falling steadily over the past couple of years, with an actual decline in net profit in the first six months of this fiscal. This decline may be explained by steep increases in employee costs and a spike in general administrative expenses for its US and UK subsidiaries.
Risks and Concerns

Competition risks: Increasingly, outsourcing deals from the US and elsewhere are awarded on a multi-service basis which includes a KPO/BPO component. Top-tier and even some second-tier players are able to cater to multiple requirements.

This takes away a chunk of business from pure KPO or BPO players. This apart, in the segments where eClerx operates, players such as Office Tiger, Genpact, WNS and Firstsource are more integrated, with strong parental backing and deep pockets. This may not be the case with eClerx.

US slowdown concerns: eClerx has significant presence in the financial services apace. Also, it derives over 73 per cent of its revenues from clients in the US. With the sub-prime lending issue affecting top financial services players such as Citibank, Merrill Lynch, and HSBC, a clear picture on the enormity or otherwise of the sub-prime problem is awaited. Concerns about whether outsourcing contracts to IT/ITES will continue, and at what levels, may be clear only over the next several months.

The possibility of a US slowdown, which has been reinforced by recent economic data, is also a concern. The company is trying to diversify geographically, but may take time to broad-base its revenues from the current levels. The appreciating rupee may also affect margins.

The company derives over 85 per cent of its revenues from its top five clients, making for a fairly concentrated profile. The employee expenses are going up steadily and, if sustained, could hurt margins in the long run. Employee costs stood at 34 per cent of the revenues for the half year. Attrition at 37 per cent, though not unusual for ITES players, is also an execution risk.

Offer details: The company plans to raise Rs 101 crore from this issue, in the price band Rs 270-315.

Aegis Logistics: Buy

Investment with a two-three year perspective can be considered in the stock of Aegis Logistics, a leading player in oil and gas logistics. Established in the business of handling, storage and distribution of oil, chemicals and petroleum products, Aegis appears well-placed to benefit from the expanding business opportunities in the oil and gas space. Its presence in autogas retail also holds promise, given the rising oil price scenario.

An expansion in the liquid logistics capacity, a strong presence in Mumbai and the company’s foray into service contracts with oil marketing companies suggest potential for ramping up revenues. At the current market price of Rs 228, the stock trades at a PE of about 12 times its trailing 12-month earnings. Investors, however, can buy the stock in lots given the broad market volatility.
Liquid logistics

Aegisprovides supply chain services to importers and exporters of petroleum products and chemicals. With a strong presence in Mumbai and plans to expand base across other ports, Aegis could gain considerably from the increasing demand for liquid logistics. Its three-pronged strategy of expanding across both existing and new capacity appears promising.

One, Aegis’ plan to strengthen presence in Mumbai (with the acquisition of new facilities) holds potential given the port’s location. Two, expansion to other locations is likely to help Aegis establish a pan-India presence. Notably, Aegis has acquired land in Haldia and Mangalore for setting up facilities in future and plans to extend its presence to Chennai and Kandla also. Besides, the company’s Kochi facility (slated to commence operations by March 2008) also holds potential. Three, its foray into service contracts with oil marketing companies such as Mangalore Refinery and Petrochemicals and Bharat Petroleum Corporation, although insignificant in terms of revenue contribution now, could turn significant in five-six years.
Autogas foray to drive growth

The gas-trading segment of Aegis, which involves import and distribution of liquefied petroleum gas (LPG) from Saudi Arabia appears to offer good potential given the firming oil-price scenario. Further, the favourable cost economics of autogas over petrol and the increasing availability of LPG variants of cars in the market offer opportunities, given Aegis’ presence in autogas retailing. Notably, it intends to scale up the number of autogas dispensing stations from the current 22 to over a 100 in the next two years.

This expansion with a focus on Tier- II cities will be predominantly franchise-based, thus helping the company expand presence without significant incremental investment. Further, gas storage capacity could also expand with the acquisition of Hindustan Aegis LPG unit, pending court approval (expected by March 2008).

For the quarter ended September 2007, Aegis reported a 62 per cent growth in earnings on the back of a 43 per cent growth in revenues. Operating profit margins dipped marginally to about 13 per cent. On a segmental basis, the gas terminal division contributed to about 85 per cent of revenues while the liquid terminal division made up for the rest. However, the latter, owing to higher operating margins, contributed about 54 per cent of the bottomline.

Aegis’ earnings stand exposed to any volatility in gas prices. Any fade out in the market appeal for LPG could pose a risk to the company’s revenue stream. Further, given the high gestation period of its expansion plans, the full benefits of expanded capacity (Mangalore and Haldia) are likely by FY-11 only. Besides, any delay in expansion plans could affect the company.

Pratibha Industries: Buy

Diversification into new segments within infrastructure, backward integration and strategic tie-ups make Pratibha Industries a good investment option among the mid-sized infrastructure players. These moves have improved the earnings visibility of the company compared to what was prevailing at the time of its IPO in February 2006. At the current market price of Rs 324, the stock trades at nine times its expected earnings for FY-09. Investors with a two-three year horizon can consider exposure to the stock.
De-risking without losing focus

Pratibha derived 70 per cent of its revenues from water management projects when it made its IPO; but it has rapidly diversified its area of operations. Of the Rs 2,300-crore order book now, about 52 per cent comes from water projects, while urban infrastructure accounts for about 40 per cent.

Going by the nature of its bids, it is evident that the company would continue to play to its strengths in managing water projects. Its long-term contracts such as the one which involves public private partnership with a local municipality for water projects, not only indicates its focus on the segment, but also its early initiative in the PPP model for such projects.

While Pratibha has a minor presence in road projects (intra-city), it has stayed away from inter-city road projects that have been the major revenue driver for similar sized peers. As the National Highways Authority of India (NHAI)-awarded road projects require a chunk of capital to be locked in, Pratibha appears to have consciously avoided bidding for such projects and instead has focused on relatively high-margin segments such as water and urban infrastructure.
Strategic tie-ups

Pratibha has entered into urban infrastructure through long-term tie-ups with global players. In the tunnel segment, for instance, it has partnered OSTU STETTIN of Austria, one of the leading players in tunnels. It has similar tie-ups with other global players for urban projects such as car park facilities and airports. The ramp up in urban infrastructure orders procured over the last one year indicates that Pratibha has chosen the right partners to qualify technically.

To pay more attention to this sector without losing focus on the water segment, the company has incorporated Pratibha Infrastructure, a wholly-owned subsidiary that would explore opportunities in the urban space.
Dual benefit

At the time of raising IPO funds, one of Pratibha’s objectives was to have its own SAW pipe division. The facility, which has a capacity of 92,000 tonnes of spiral welded pipes, commenced production last quarter. It is also planning a coating plant to be commissioned before the close of FY-08.

Apart from supplying pipes for its own water-related projects, the above facility would be able to cater to the oil and gas industry. As a move towards this, the company has sought certification from the American Petroleum Institute (API); this would enable the company’s pipes to be eligible for supplies to oil and gas EPC contracts. Thus, while the backward integration is likely to provide cost benefits, successful foray into pipes business may add to revenues. Profit margins could also improve as pipes offer lucrative margins.

Pratibha has so far managed a healthy operating profit margin in the 12 per cent range. The last quarter however saw a sudden spike perhaps attributable to a change in business mix. Interest cost has increased over the last quarter on the back of an expanding order-book. Volume growth has however, ensured that interest coverage is adequate.

The company’s planned capacities for saw pipes have undergone an increase since its original plan during the IPO. In this context, the company has approved plans for raising further funds through foreign currency convertible bonds (FCCBs).

Should this materialise, one may see debt levels increase or an expansion in the equity base, at a later stage. However, if the company sustains its current earnings growth (58 per cent CAGR over the last two years), earnings should grow at a reasonable pace despite higher interest obligations or a larger equity base.