Weekly Track - Feb 11 2008
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Sunday, February 10, 2008
Acme Tele Power gets highest IPO grading
Proposed public issue of 17,283,580 equity shares of face value Rs 2 targeted at an issue price in the range of Rs 800 to Rs 950 per share
CRISIL has assigned a CRISIL IPO Grade "5/5" (pronounced "five on five") to the proposed initial public offer of Acme Tele Power Ltd. (ATPL). This grade indicates that the fundamentals of the issue are strong relative to other listed equity securities in India.
CRISIL expects ATPL to report strong future growth while maintaining its track record of exceptional operating and financial performance. This reflects the company's solid market position, and its customers' focus on rapid expansion: ATPL's unique products are used by mobile operators to manage power consumption at cell sites in areas where the supply and quality of power is unreliable. With a market share of around 25 per cent across all cell site installations, ATPL enjoys leadership position in its segment. The company is thus well placed to benefit from the large investments planned by mobile operators in India, who propose to add almost half a million cell sites over the next five years.
ATPL has grown at remarkable pace over its relatively short history. CRISIL expects the company to continue its impressive growth in revenues and profits over the medium term, given its strong market position and the expected growth in mobile networks.
ATPL will also continue to benefit from the ongoing involvement of its promoter, Mr. Manoj Upadhyay, in new product research and development. The company's strong product development capability is a significant plus in a market that is highly competitive. To maintain its growth momentum, however, ATPL will also need to ensure that it retains its key employees: it has faced a fair amount of employee turnover in the past.
About the company
ATPL, incorporated in January 2003, was promoted by Mr. Manoj Upadhyay. The proposed IPO is in the form of an offer for sale of 17.3 million shares by the promoters. Subsequent to the IPO, the promoters' stake in the company will reduce to 84.6 per cent from 94.7 per cent.
ATPL manufactures shelters, power regulation equipment, and air conditioners, which are used at mobile operators' cell sites. It has manufacturing facilities at Pantnagar in Uttaranchal and Parawanoo in Himachal Pradesh. Until March 2005, the company had an exclusive agreement with Bharti Airtel, the market leader in mobile telephony, under which it could not sell its products to other operators until it had satisfied Bharti Airtel's requirements; the business relationship between the two companies continues to be strong, long after the agreement has expired.
At the core of ATPL's offering to customers is a packaged solution, 'Green Shelter', consisting of:
- A fibreglass reinforced plastic or a nano-cooled enclosure that houses the BTS and other electronic equipment at cell sites
- A power management system called the power interface unit
- A thermal management system with phase change material, and
- Two air conditioners.
The utility of each of these products is distinct, and therefore the company also sells them individually.
ATPL also plans to launch a new gas-free compressor-less AC, and fuel cells, which produce energy more efficiently compared to diesel. Besides, the company intends to undertake geographical expansion into international markets.
For the year ended March 31, 2007, ATPL reported a net profit of Rs.2.30 billion on a turnover of Rs.6.43 billion, as compared with a net profit of Rs.1.16 billion and revenues of Rs.3.85 billion in the previous year.
About CRISIL IPO Grading
CRISIL IPO (Initial Public Offering) Grading is an opinion on the fundamentals of the graded issue that reflects CRISIL's independence and expertise. This opinion is expressed as a relative assessment in relation to other listed equity securities in India. The assessment is based on a grading exercise carried out by industry specialists from CRISIL Research. A CRISIL IPO Grade 5/5 indicates strong fundamentals and a CRISIL IPO Grade 1/5 indicates poor fundamentals. CRISIL IPO Grading reflects its assessment of the graded company's equity fundamentals as distinct from an assessment of debt fundamentals. A CRISIL IPO Grade should not be construed to mean a comment on the price of the graded security nor is it a recommendation to invest or not to invest in the graded security.
IPO Grading - Rural Electrification
CRISIL has assigned a CRISIL IPO Grade "3/5" (pronounced "three on five") to the proposed initial public offer of Rural Electrification Corporation Limited (REC). This grade indicates that the fundamentals of the issue are average in relation to the other listed equity securities in India. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy / sell or hold the graded instrument, the graded instrument's future market price or its suitability for a particular investor.
The grading reflects the Indian government's majority stake in REC and its developmental role in the government's plans for the power sector in India, especially the non-urban centres. REC's continuing role as an instrument of government policy and the consequent government support translates into significant advantages for REC as a borrower of funds viz the ability to raise bonds with tax benefits to the investors. CRISIL believes that REC will continue to discharge its developmental role over the medium term and shall display moderately strong business performance.
Notwithstanding the advantages on the liability side, REC's mandate requires it be one of the key lenders to state government power utilities, which have had a troubled credit history. Though REC is planning to increase its lending to the private sector, CRISIL believes that lending to state government utilities would continue to constitute a majority of REC's asset book over the medium term.
The company's profitability could come under pressure in the future as the share of market borrowings in REC's funding mix increases and the company begins to follow the RBI's prudential norms for NPA provisioning. REC will also need to considerably strengthen its internal control systems and loan pricing mechanisms to support the significant increase in business planned by the company. REC's business operations are susceptible to the effects of frequent top management changes as is the case with many other government run entities. REC's shareholders remain vulnerable to the possibility of REC's business operations being used by the government more as a tool for public policy than an engine for profit maximization.
About the company and the issue
REC is a public sector non-banking finance company (NBFC). REC operates under the administrative control of the Ministry of Power (MoP) and is wholly-owned by the Government of India (GoI). Established in 1969 with the sole objective of financing rural electrification schemes in the country, it services its clients -through a network of 17 project offices spread across India.
The company's schemes are primarily aimed at extending and improving the supply of electricity by providing adequate funds for transmission and distribution projects, especially in rural areas. However, over a period of time REC's mandate evolved, permitting it to finance all segments of the power sector in the country. In line with its overall objective of assisting the government's rural electrification strategy, REC also acts as the nodal agency for disbursing grants provided under the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY). The company enters into a Memorandum of Understanding with MoP, which outlines its yearly performance targets and the commitments from the government.
For 2006-07, the company's fund-based income and net profits were Rs 28.3 billion and Rs 7.7 billion, respectively. The operating income of the company has grown at a CAGR of 11.4 per cent over the past 5 years, while PAT has grown at a CAGR of 14.5 per cent in the same period.
REC aims to raise Rs 14 billion to Rs 16 billion by this proposed public issue of 156,120,000 equity shares.
About CRISIL IPO Grading
CRISIL IPO (Initial Public Offering) Grading is an opinion on the fundamentals of the graded issue that reflects CRISIL's independence and expertise. This opinion is expressed as a relative assessment in relation to other listed equity securities in India. The assessment is based on a grading exercise carried out by industry specialists from CRISIL Research. A CRISIL IPO Grade 5/5 indicates strong fundamentals and a CRISIL IPO Grade 1/5 indicates poor fundamentals. CRISIL IPO Grading reflects its assessment of the graded company's equity fundamentals as distinct from an assessment of debt fundamentals. A CRISIL IPO Grade should not be construed to mean a comment on the price of the graded security nor is it a recommendation to invest or not to invest in the graded security.
Subprime Losses - Figures
Subprime losses till date | |
Bank | Losses |
Citigroup | $18.0 billion |
UBS | $13.5 billion |
Morgan Stanley | $9.4 billion |
Merrill Lynch | $8.0 billion |
HSBC | $3.4 billion |
Bear Stearns | $3.2 billion |
Deutsche Bank | $3.2 billion |
Bank of America | $3.0 billion |
Barclays | $2.6 billion |
Royal Bank of Scotland | $2.6 billion |
IKB | $2.6 billion |
Societe Generale | $2.0 billion |
Freddie Mac | $2.0 billion |
Wachovia | $1.1 billion |
Credit Suisse | $1.0 billion |
Via Rediff
Reliance Power - Grand Listing on Monday
Billionaire businessman Anil Ambani will be the centre of attention on Monday morning, not just for India but perhaps for the stock markets worldwide, when he rings the opening bell here to mark the listing of his group company Reliance Power at BSE and NSE.
The company created many records with its initial public offer just last month. With the market conditions having changed dramatically since then, its listing is being keenly awaited -- not only as a test of the investors' confidence in Ambani but also to help decide the future course of action in a highly volatile market.
This is the first IPO by the Anil Ambani group after the family settlement between him and elder brother Mukesh Ambani in June 2005. His another firm Reliance Communication which got listed at Rs 290 is currently quoted at Rs 646.10 on BSE.
As far as the IPO is considered, Anil Ambani is the last man standing in the stock market arena, with Reliance Power being the last successful major public issue across the world.
Having raised about three billion dollars though its public issue, the company has helped India become the biggest IPO market so far in 2008, with a total tally of $3.3 billion.
This account for nearly half of the total global IPO proceeds since the beginning of 2008, which has seen close to 25 IPOs being shelved globally, including two in India last week. Since January this year, about a dozen of IPOs have been shelved in America.
Besides, turbulent market conditions have already seen India Inc lose over 100 billion dollars in terms of market value in 2008 and the bulls are now betting on a premium listing of Reliance Power to restore investors' sentiments.
The first sixty seconds would again be crucial for the company as Ambani gives the opening bell and sees his company's share list on bourses on Monday.
But the challenge would be to sustain the share price above the offer price of Rs 450 and offer a reasonable profit to people who have invested in the IPO. Considering that the landscape of Indian financial market has changed dramatically since his IPO, it could be a tough call, said a broker.
"Every strength of the group will be tested on Monday, considering that the sentiments are down, markets are volatile, grey markets premiums are practically absent and there are enough forces that will make every effort to push the issue price down," said another broker.
It would be interesting to note the strategy of bears in the market who would want to cash in on the downward trend and hammer the stock on the first day.
Reliance Power IPO had witnessed a grey market premium of Rs 450 at the time of launch with market speculating that the issue would open around Rs 900-950 and close around Rs 750-800.
However, with markets correcting sharply, these premiums now eroded to Rs 50-100 with practically no trades. There are even guesses, though remote, that the issue may go below the offer price.
"Its time to test Anil Ambani's stamina, not on his jogging track, but on bourses. He has been a master of this game and lately practising hard, lets see the outcome" said an investor.
Via Economic Times
Sona Koyo Steering
Investors with moderate return expectations and a perspective of three years or more can consider exposure to Sona Koyo Steering, which produces steering systems and other driveline products for the passenger cars industry.
Its major customer, Maruti, brings in more than 50 per cent of the revenues. Mahindra and Mahindra, Hyundai, Toyota and Tata Motors chip in with the rest.
The company’s market leadership position, healthy order flows, superior product-mix and localisation efforts indicate that earnings can gain traction over three-five years. Considering that the stock has been on a steady move upwards in the last few months, the sharp fall in market price in the recent correction presents a good opportunity to buy. At the current market price of Rs 54, the stock trades at a PE of around 15 times the trailing 12-month earnings.
Financials
For the quarter December 2007, sales stood at Rs 172 crore, growing by 14 per cent on a year-on-year basis. Net profits have increased by 10 per cent for the same period to reach Rs 7.3 crore.
A better product mix, aided by the sale of C-EPS (column-type electronic power steering) introduced in FY-07 has been the key driver of growth.
On the operating front, margins, which remained subdued in the last few quarters due to high import content in the manufacture of electronic steering systems and columns, showed an improvement in the latest quarter.
On a year-on-year basis, margins improved by 1.5 percentage points to reach 10.6 per cent. While this can be partly attributed to lower cost of imports due to the appreciation of the rupee, the rest could be on account of the ongoing localisation efforts.
Going forward, the company expects to achieve localisation of electronic power steering in phases, with a target of 70 per cent localisation by FY-11.
Economies of scale due to capacity expansion and complete localisation of hydraulic power steering expected by June ‘08 could help margins.
Net margins for the quarter have been impacted by higher interest and depreciation costs due to ramp up of capacity and lower gain on account of foreign currency loan translation.
However, higher volumes from recent order flows should aid profitability over the next few quarters.
Major boost to volumes
The sustained growth in domestic passenger car sales augurs well for the company. Because of its market leadership position, the company is favourably placed to tap this growing market.
Sona Koyo will benefit from Maruti’s robust growth and its planned launches such as the Splash, A-Star and the Swift sedan in the current year. Plans of global auto majors such as Toyota, Honda and Bajaj to launch a small car in India will also open up possible additional revenue streams.
Besides, its business with Tata Motors (which brings in only 5 per cent of the revenues) will receive a fillip, given the slew of new orders it has got in the last few quarters.
During the quarter, Sona Koyo has received additional orders from Tata Fiat worth Rs 30 crore per annum and from Tata Motors for steering gears and columns for the Ace.
The company has entered into an agreement to form a joint venture with the US-based AAM International Holdings (American Axles) for the manufacture and supply of rear beam axles of 0.75 and 1 tonne capacity to Tata Motors. It is also setting up a plant at Singur to supply 1,50,000 steering columns and 3,00,000 differentiated assemblies initially for the Nano. With the Nano expected to sell one million vehicles by 2011, this will serve as a huge volume and revenue booster for the company.
Also, the installation of the second-line of production of C-EPS at Dharuhera, (doubling capacity to 3,50,000 units) bodes well for higher volumes as well as improved realisations due to the high value, high margin nature of the product.
Focus on exports
Exports contribute 10 per cent of the revenues. The company is focussing more on Europe than the US. Its joint venture with Fuji Kiko Group, the market leader of steering columns in Europe, will enable Sona Koyo gain considerable foothold in European markets.
However, the company has revised downward its 2010 export target from 45 per cent of revenues to 35 per cent due to the greater potential that the domestic market offers.
Elecon Engineering
Investments with a two-three year perspective can be considered in the stock of Elecon Engineering, a leading manufacturer of bulk material-handling equipment and industrial gears.
At current market price of Rs 222, the stock trades at about 18 times its likely FY-09 per share earnings on a fully diluted basis. This appears reasonable, given Elecon’s expanding order-book, healthy return ratios and foray into the high-end windmill gearbox business. Elecon’s higher reliance on the domestic capex cycle also offers comfort in the midst of a possible global slowdown.
While the stock price has declined significantly after a disappointing third-quarter performance, we feel this slowdown in Elecon’s revenue growth may only be an aberration, given its strong order-book and good execution skills. Investors can use dips in the share price to accumulate the stock.
Presence in high-growth sectors
With a presence straddling high capex sectors such as power, mining and cement, Elecon appears well-positioned to reap the benefits of the increasing infrastructure spends in the country. The company’s order-book is nowtilted towards the power sector.
Segment-wise, while power (59 per cent) and mining (18 per cent) industries made a significant revenue contribution to the material-handling division, revenue inflows in the industrial gears division was relatively fragmented leaning towards industries such as material handling, cement and sugar.
Going forward, Elecon plans to extend its presence across industries such as steel and ports also. This holds potential given the investment planned in these industries.
The company’s strong mooring in the domestic capex cycle also merits attention. Elecon’s limited exposure to overseas market (about 4 per cent of revenues in FY-07) may make its revenue stream relatively resilient to the global economic uncertainties.
While the company does plan to increase focus on exports over the long term, the domestic focus reduces the impact of any global slowdown on the company’s order flows or revenue growth.
Rising order-book position
Driven by investments in the infrastructure sector, the company’s order-book has also seen significant growth over the years. It stands at Rs 1,091 crore (about 1.5 times its FY-07 revenues).
On a year-on-year basis, the company’s order-book has grown by 57 per cent, with about 80 per cent contributed by the material-handling division and the rest by the industrial gears division. For nine-months ended December 2007, the order intake for the material-handling division grew by a whopping 157 per cent as opposed to a negative 8 per cent in the industrial gears division.
New initiatives
Elecon’s foray into manufacturing windmill gearboxes holds potential, given the supply constraints for gearboxes. Addressing a target market of over Rs 2,000 crore, the management expects to achieve an asset turnover of up to three-four times in the long run, once the facility begins commercial production in April 2008.
Regarding technological know-how for the manufacture of gearboxes, the management has indicated that it is in the negotiation stage to acquire the necessary technology for high-class gearboxes of between 1-2 MW.
However, since the company is yet to forge a formal tie-up, it may fall short of its guidance of Rs 110-120 crore revenues (for this business) in FY-09. The windmill business too may suffer from the delay. However, these delays may only result in slowdown over the short term, even as medium-term prospects continue to be bright.
Capex plans
The company plans to invest about Rs 100-120 crore to fund its expansion drive. Out of this, about Rs 80 crore will be for its windmill gearbox business and Rs 8-10 crore for the windmill business. The remaining would be distributed evenly between its two divisions — material-handling and industrial gears. This would be funded through a mixture of debt and internal accruals. While 25-30 per cent of the capex spend will come from Elecon’s internal accruals, the rest would be through term loans.
Future growth drivers
Elecon’s dominance in the material-handling space on the back of high investments in infrastructure development is the key growth driver for the company. While the tilt in the order-book towards this division augurs well for revenues, on the earnings front, however, the higher-margin industrial gears division may drive growth.
With the share of customised gears expected to gain prominence as opposed to the standard ones, earnings contribution from this division may scale up. Elecon’s technical collaborations with Germany-based RenkAG and Haisung Industrial Systems Company Ltd of South Korea for technology for manufacturing vertical roller mill gearbox (used in cement and coal mills) and high capacity gearbox (to be used in lift/elevators) respectively, also hold potential.
Financial performance
The company’s performance for the quarter ended December 2007, however was disappointing. Despite a promising order-book position, Elecon’s revenue grew by only about 10 per cent as compared to last year. This was due to lower invoicing of the material handling division’s orders, which grew by only about 6 per cent.
The industrial gears division also disappointed on the revenue front with almost flat numbers. Despite the perceptible lag in the execution of orders this quarter, the company’s swelling order position suggests a likely acceleration in growth.
The quarter, however, saw Elecon expand its operating margins by 1.7 percentage points to 18.8 per cent. Margins may see further expansion given the company’s foray into high-margin businesses. Growth in earnings however may not be commensurate given the company’s higher dependence on debt.
Any slowdown or delay in the capex plans of user industries or delays in the roll out of windmill and gearbox businesses may affect Elecon negatively.
Punj LLoyd
An investment can be considered in the stock of infrastructure company Punj Lloyd. A healthy order-book, qualification to bid for larger and complex orders, and steady profit margins excluding one-off expenses suggest strong earnings prospect for the company. The stock is trading at 20 times its expected consolidated earnings for FY 2009. Investors can consider holding the stock with a 2-3 year perspective to benefit from the extended capabilities arising from the acquisition of Sembawang Engineering & Constructions (Semb E&C). Consider buying in lots to take advantage of any weakness linked to the broad markets.
Punj Lloyd’s consolidated earnings for the quarter ended December 2007 disappointed and led to a sharp reversal in the stock. The company’s subsidiary had executed some low-margin legacy orders that resulted in losses of Rs 68 crore being booked due to delays and design changes. The management has stated that the provisions have been made for the entire sum on a conservative basis, although some of this amount may be recovered. Barring this expense, the profitability of the company has been maintained. With nearly 75 per cent of the legacy orders completed this quarter, the remaining orders may at the most keep the profit margins sedate over the next couple of quarters.
However, on the positive side, Semb E&C’s order backlog at Rs 6,200 crore is up 35 per cent over the year, indicating healthy momentum in order flows. Once the legacy orders are completed fresh orders are expected to carry improved margins, given the nature of recent orders bagged. The acquisition of Semb E&C has also enhanced Punj Lloyd’s project capabilities in areas such as upstream oil and gas, airports and tunnelling. Punj Lloyd’s consolidated order-book at Rs 16,000 crore is about three times its consolidated FY07 revenues. While the order inflows for the parent company have been subdued this quarter, capex spending in the oil and gas and process industries, especially in the West Asian region, can be expected to translate into strong order flow. Punj Lloyd’s established presence in geographies outside India provides comfort in the above aspect.
The company has also made aggressive strides in getting a foothold in new segments of infrastructure that hold potential. Its strategic stake in Pipavav Shipyard, which is currently expanding capacities and plans to raise IPO funds, could not only provide investment upside but also allow utilisation of fabrication facilities at the shipyard for Punj Lloyd’s offshore platforms and rigs. Its plans to foray into defence equipment manufacturing also have the potential to add substantially to revenues
Grey Market - Rural Electrification and more..
Rural Electrification 90 to 105 25 to 28
J. Kumar Infraprojects 10 Discount
Cords Cable Ind. 135 3 to 5
KNR Construction 170 Discount
On Mobile Global 440 10 to 15
Bang Overseas 207 7 to 10
Shriram EPC 300 Discount
IRB Infra 185 15 to 20
Manjushree Extrusion 45 Discount
Tulsi Extrusions 85 12 to 15
SVEC Construction 80 to 90 Discount
Globus Spirit 135 to 148 --
GSS America InfoTech 400 to 440 45 to 50
Reliance Power - Latest Grey Market Premium
One day to go
And
the Grey Market Premium is between 110 to 120
Market Outlook
Banking and IT are the two sectors where you can make money by reverse trades. That is, buy one, sell the other and profit from the widening differential.
The Central Statistical Organisation’s latest update confirms what anecdotal evidence and Q3 corporate results strongly suggested – that the Indian economy was slowing down. Of course, GDP growth rates of 8.5 per cent or more would be wonderful by most standards.
However, it is slower than corporate honchos or the FM would like. It is also likely that the slowdown will continue for the next six months at least, due to a combination of several factors. One, consumer demand is slow due to rising rates. Two, industry is in the middle of building new capacity and it will need time for that capacity expansion to feed into the system. Three, uncertain global factors will retard both export growth as well as more investments into India. Four, domestic investors have seen an erosion of confidence.
The failure of Wockhardt Hospital’s IPO is a signal that indicates the latter while the mass-withdrawal of portfolio investors signals the third factor is in operation. The danger here is that the growth projections of the next five years are all built around assumptions of massive investment. If that investment isn’t available, those projections will fail. FDI and domestic household savings are all crucial sources of capital for those investments.
The consumption-investment mix of India’s GDP is changing. Consumption demand was responsible for about 65 per cent of GDP, five years ago. Two or three years hence, it will be responsible for about 50 per cent.
Now, the ratio of FDI to FII may change but FDI and FII trends run in tandem. There has never been an extended period where FDI flows have been strongly positive while FII flows were strongly negative. The foreign investor is more likely to make primary investments when he is also making (profitable) secondary investments.
Similarly, the tendency to consume and the tendency to invest are strongly linked in the domestic psyche. Indians are consuming more because they are saving more. They have also been more willing to invest in primary instruments because they have made money from investments in secondary investments. If they are consuming less and they are suffering losses in the secondary market, they are less likely to make primary investments.
There is little or nothing that the government can do to reverse this. It would have to cut interest rates drastically just to offset the wider spreads between dollar and rupee after the Fed’s cuts. It would have to cut rates even more to put the Viagra back into Indian consumption. It doesn’t want to do that for fear of letting inflation spike.
Nor can it speed up reforms. The low-hanging fruit in terms of easing the License Raj and cutting tax rates have already been consumed. What it now needs to do involves downsizing its own roles and dramatically improving its efficiency as a facilitator. Both are politically impossible with elections looming.
Without either reform or rate cuts, it is difficult to put confidence back into the economy and confidence is at the heart of attracting both fresh investments or ensuring higher consumption. Luckily the political consensus seems to be grasping this in a dim sort of way and rate cuts are relatively easier than reforms. So, there is now some political pressure for rate cuts – especially, in the key home loans market.
I think the government and the RBI will try to arm-twist banks into making commercial rate cuts while continuing to hold policy rates. If that is not forthcoming or if the Fed cuts another 50-75 basis points as is now expected in some circles, the RBI will cut policy rates – though it will do so reluctantly.
The impact of rate volatility will obviously be felt most keenly in the banking system. Banks will lose some more ground before cuts happen but they will also bounce more when cut do occur.
The IT sector (and other dollar-denominated exporters) could also see a sharp recovery if the rupee could be induced to correct say, 5 per cent. More efficient banks and IT companies will outperform peers.
This is a classic case for “couple trading”. Pick a pair of banks or a pair of IT stocks and buy one and sell the other to profit from widening differentials during the downturn. Then, reverse the trades to profit again when the differential reduces. That’s likely to be the most successful risk-adjusted trading strategy in much of calendar 2008.
Analysts’ picks
Ambuja Cement
CMP: Rs 116
Target Price: Rs 85
Morgan Stanley has maintained ‘underweight’ on Ambuja Cement (ACL) largely on concerns of a slowdown in revenues and increasing margin pressures.
“We reiterate our underweight rating on Ambuja and expect the company to continue to post disappointing numbers in the coming quarters as pricing would be under pressure and costs will escalate,” said the brokerage in a note to its clients.
The company has reported another quarter of disappointing numbers with revenues growing only by 16.5% year-on-year at Rs 1,700 crore. While the stock has underperformed, it continues to trade significantly above replacement cost.
“We continue to believe that the slowdown in margins over the next couple of quarters will worsen as the Y-o-Y pricing growth remains too small to cover the rising costs, before pricing growth itself turns negative in financial year 2009,” it adds.
Cairn India
CMP: Rs 193
Target Price: Rs 245-247
Merrill Lynch has recommended a ‘buy’ on Cairn India (CIL), post-release of the operational update of CIL’s assets. “The operational update read together with earlier guidance suggests 17-27% upgrade in plateau production rate and a commensurate rise in reserves in its main Rajasthan block. Development cost is also likely to rise and production delayed. CIL’s base case fair value (Rs 232 share earlier), which is now also its price objective (earlier Rs 245 share), is upgraded to Rs 247 a share,” says the brokerage.
It adds that as per the operational update, plateau production from the three main fields at Rajasthan could be 175k bpd. This could mean plateau production of 180-190k bpd, including output from two other fields. This could mean 20-27% upside to plateau production vis-Ã -vis earlier estimate of 150k bpd.
Cadila Healthcare
CMP: Rs 248
Target Price: Rs 450
Domestic brokerage Angel Broking has initiated a ‘buy’ on pharma major Cadila Healthcare. It says that the company is trading at significant discount to its peers. During the third quarter of 2008, Cadila posted a 22% growth in net sales mainly on the back of a robust 47% growth in formulation exports.
The company’s domestic branded formulation business, on the other hand, posted a 10% growth to Rs 262 crore. “At the CMP of Rs 263 (at the time when report was released), the stock is trading at 10.5 times financial year (FY) 2009 expected and 8.6 times FY2010 expected earnings, which is at a significant discount to its peers.” The report, however, expressed concern on its overdependence on Altana.
Yet says that new client additions in the segment would aid de-risking and reduce the company’s dependence on the same. Along with this, the stock has also corrected significantly to discount the same.
Reliance Comm
CMP: Rs 646
Target Price: Rs 873
Goldman Sachs has maintained its ‘buy‘ rating on Reliance Communication (RCOM) based on the proposed listing of its tower subsidiary which could unlock value. Reliance Infratel, the tower subsidiary of RCOM, has filed a DRHP with Sebi for an IPO.
“We view the potential listing of Reliance Infratel as a positive catalyst for RCOM – one which we have highlighted in our investment thesis for the stock. Our Rs 873 per share target price for RCOM includes a valuation of $ 4.6 billion for the tower company.”
It has, however, listed some key risks that include delay in nationwide rollout of GSM services beyond the second half of financial year 2009, poor external tenancy on towers and lower-than-expected traffic elasticity yields sub-par wireless operating metrics.
Bhushan Steel
CMP: Rs 997
Target Price: Hold
PINC Research has maintained ‘hold’ on largest auto grade steel manufacturers Bhushan Steel (BSL). It expects the company to further strengthen its position upon completion of the envisaged expansion.
“We have slightly downgraded our financial year (FY) 2008 estimates considering the staid performance in nine months of FY 2008. However, post completion of hot strip mill (HSM), we expect BSL to report a marked improvement in margins and profitability as any outside dependence for HR coil would be nullified,” the brokerage says.
GSS America Infotech IPO Analysis
Investors can avoid the initial public offering of GSS America Infotech, considering the risks associated with its US-centric business model and general negative perception in the markets about the prospects of IT services companies.
At the upper end of the price band — Rs 440 — the offer values the stock at 10 times its estimated current year earnings on a fully diluted equity base. This is close to the valuation commanded by Tier-2 IT players. GSS operates on a smaller scale than most Tier-2 players; but the valuation is not at any serious discount to its larger sized peers. The company has grown its revenues manifold over the last three- four years, from a smaller base. This period coincided with the fastest phase of growth for Tier-1 and Tier-2 IT companies.
However, together with fears of a slowdown in the US and concerns over the sub-prime crisis and lowered consumer spending, the IT services sector is experiencing greater business uncertainty. Weathering the slowdown may require wherewithal that, at this point, only Tier-1 and select Tier-2 players, possess. GSS with its limited track record and complete dependence on US-based clientele may find it challenging to face a double whammy of an appreciating rupee vis-À-vis the dollar and an uncertain macro scenario.
The current volatile market scenario where even better known names are facing challenges in garnering investor interest is another reason for investors to adopt a wait-and-watch approach to this IPO.
Heavy US dependence
The company derives all its revenues from the US, making for a concentrated geographic mix. This subjects GSS to all the vagaries of macro scenario in the US — the possibility of lowered IT spend by clientele, loss of business in the BFSI segment and a possible slowdown in consumer spends.
Geographical diversification may be the key for any company in the IT services space to mitigate these risks. A wider spread may also have aided an expanding footprint and client mining in other geographies.
Vertical Mix
Although the company’s vertical mix has not been disclosed, the list of clients indicates a good number from the retailing segment. This is a segment that is quite vulnerable to a US slowdown, with recent data on consumer spending suggesting moderating consumer spends. The top ten client list, which has many retail, financial services and insurance players, may again be a cause of concern for the company in the context of tightened/ postponed IT budgets.
Less Focus
The company operates in as many as nine verticals, indicating that there may be no specific niche or focus in operations for GSS.
Tier-2 IT services companies usually operate in a limited number of verticals (3-4) and gradually broaden their scope of operations. In a competitive environment where larger players are looking aggressively at client wins, the lack of a niche area as a differentiator, may work against the company.
The revenue concentration creates another problem for GSS, that of a possible appreciation in the rupee against the dollar. Realisations could be under pressure if the extent of appreciation continues to be pronounced. In the event of tightening IT budgets, some vendors may be forced to lower billing rates. With a relatively small scale of operations, the company may not be best placed to work with lowered realisations.
Overall, the company’s fundamentals are reasonable, as indicated by a 21.4 per cent net profit margin over a Rs 204.6 crore revenue base for nine months of this year, but at this point in time, the macro environmental risks may blunt the possibility of gains.
Issue details
The company plans to issue 3.5-million shares in the price band of Rs 400-440. The proceeds are to be used for building a global delivery centre, building offices overseas and working capital requirements. Religare Securities is the book running lead manager to the issue. The issue is open from February 11-15, 2008.
Rules of IPOs
How swiftly the mood of the markets can swing from sunny optimism to extreme scepticism! The withdrawal of two big-ticket initial public offers (IPOs) by Wockhardt Hospitals and Emaar MGF this week underline how fragile the all-important factor called ‘investor sentiment’ really is. Barely three weeks ago, IPOs from Reliance Power and Future Capital Holdings sported record subscription figures, having garnered runaway response from every class of investor. The n, those rushing to hop on to the IPO bandwagon were hardly deterred by the stiff asking price or ‘execution’ challenges that faced these companies, both of whom rolled out their IPO at a rather nascent stage of their business. Yet, it is precisely these reasons that are now being cited for the unenthusiastic response to the Wockhardt and Emaar offerings.
Institutional appetite waning
It is not merely individual investors, bruised by the recent blows to their net worth, who seem to have lost their appetite for IPOs in three short weeks.
Retail investors, in any case, tend to take their cues from the larger institutions; which is why IPO subscriptions tend to bunch up on the last days of the offer period.
The larger worry for Indian investors, and the markets in general, should be the extremely tepid response from QIBs (qualified institutional bidders).
That institutional investors cold-shouldered a globally recognised name such as Emaar in the hot real-estate sector, after lavishing their attention on a slew of lesser-known names in 2007, is disturbing.
This suggests a genuine waning of liquidity and appetite for risk, at the global level. A recent report from Thomson Financial states that globally a total of 21 IPOs, worth $6.3 billion, were withdrawn in January. India, until recently, was an exception to this trend; but no longer.
‘Superior’ growth prospects or not, liquidity remains the engine that powers stock markets. When it comes to liquidity, India’s primary market, much like its secondary market, depends heavily on the favour of global investors.
A good number of retail investors, in any case, were in the game mainly for listing gains. With present secondary market conditions making huge listings difficult, those on the speculative fringe may remain on the sidelines until the frenzy starts all over again.
Structural shift
This being the case, the failed IPOs may flag off two key trends for the stock markets in the months ahead. One, the flow in the IPO pipeline may dwindle as those with a limited track record rethink IPO plans.
Two, with global investors in a risk-averse mood, markets may no longer be willing to pay any price for a new business idea. Valuations, whether for new offers or already listed companies, may moderate. In the buoyant markets of the past few months, businesses and stocks that captured the imagination were able to justify sky-high values, on the strength of fancy “valuations” assigned to nascent businesses that were still on the drawing board.
These developments may also require retail investors in IPOs to make some changes in their investment strategy for the months ahead. The key takeaways for them from the turbulence of the last week are:
Listing gains are no longer a certainty. This means that investors cannot bank on flipping a stock on listing to recoup high funding costs incurred to bid for the IPO. Investors may be better off avoiding leveraged bets on IPOs, no matter how attractive the business or the “grey market” buzz on the stock is.
Investors should go back to evaluating every IPO much as they would a stock in the secondary market. Businesses that have alternatives in the listed space may no longer be able to command huge valuation premia, just because they are garnering funds through an IPO. Newly listed stocks may no longer remain islands of high valuation, with large trading volumes, in current market conditions.
Finally, while making their decision, investors should factor in the opportunity loss involved in taking the IPO route. Quite a few retail applicants to the Reliance Power IPO probably sacrificed attractive opportunities to buy into blue-chips of their choice when they were available at rock-bottom prices in the recent market correction.
A significant part of their funds was locked into the offer. Allocating only a portion of your overall equity portfolio to IPOs and participating only in high conviction ones may be the best way forward.
Via Businlessline
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