Construction Cos with 40K Crore Orders

THE wheels of the domestic construction industry are spinning at a frenetic pace.

With the Government sharpening its focus on infrastructure development, the top 15-odd construction companies are today sitting on bulging order books that have projects, under various stages of implementation, worth an estimated Rs 40,000 crore.

And with the flow of orders expected to increase by at least 30 per cent in the next two-three years, the message is loud and clear — India is going through a significant makeover in the infrastructure sector.

"We have to now literally choose the projects we want to take up," says Mr E. Sudhir Reddy, Managing Director of the Hyderabad-based IVRCL Infrastructure & Projects Ltd.

The meaty order books of these companies found an echo on the bourses. Top gainers in this sector include Madhucon with 84 per cent, Patel Engineering 73 per cent, Gammon India 64 per cent (after adjustment for stock split) and Simplex Concrete Piles India Ltd 30 per cent in the last one month.

The top 10 construction firms among themselves have orders worth in the neighbourhood of Rs 30,000 crore, which will be executed in the course of the next two to three years.

Leading the band is L&T, which has an order book for over Rs 9,000 crore, with about 40 per cent coming from the infrastructure sector and 12 per cent from the power sector.

While Gammon is sitting pretty on orders worth Rs 4,500 crore, Hindustan Construction Co (HCC), Simplex, Nagarjuna Construction Co (NCC) and Patel Engineering are having orders aggregating Rs 4,000 crore, Rs 3,500 crore, Rs 3,400 crore and Rs 3,171 crore respectively.

Other companies such as ICRCL and Madhucon are executing orders worth between Rs 2,000 crore and Rs 2,500 crore each.

"Clearly our concern is now not on getting new orders, but enhancing our capabilities and expertise to execute them," points out Mr Amitabh Mundhra, Director of Simplex Concrete Piles.

The new orders indicate the broadening range of sectors that these companies are getting into. Consider some of the recent orders: Patel Engineering bagged irrigation projects worth Rs 878 crore in Andhra Pradesh, HCC secured a Rs 404-crore contract for construction of the Chennai by-pass phase II, IVRCL mopped up orders worth Rs 311 crore in water transmission and buildings sector and Simplex is implementing a Rs 107-crore order involving wharf/approach bridge construction and causeway reclamation.

Says Mr Y.D. Murthy, Vice-President of NCC: "This is only the tip of the iceberg. The sector to be watched is the BOT segment in road construction, which is estimated to generate orders worth Rs 60,000 crore in the next five years. Just to give you an idea, only 50 per cent of 58,000 km of national highway is now under proposed development, including the 5,800 km under the Golden Quardilateral and 7,300 km under the North-South-East-West corridor projects."

Literally struggling to keep pace with the flow of orders, these companies are on an expansion drive, raising money from the equity market to fund the new projects that are cropping up their way.

While IVRCL will be raising Rs 145 crore from the primary market and HCC Rs 130 crore through preferential allotment this month, others such as NCC and Gammon had earlier gone in for dilution of equity. Gammon's wholly owned subsidiary, Gammon Infrastructure Project Ltd, is planning an IPO of at least Rs 250 crore later this year.

Mphasis - Acquisitions

MphasiS acquisition: Our view

Recently, MphasiS BFL has acquired two companies Princeton Consulting in the UK, and Eldorado Computing Inc in the US. In this article, we analyse the impact of the same on the company.

What is the company's business?
MphasiS BFL is a mid-sized player in the Indian technology marketplace. It is a sort of a niche player in the sense that it is the only Indian technology company that obtains a major portion of its revenues from the BPO business. MphasiS has a broad range of service offerings, which includes IT consulting, architecting solution, development & maintenance of applications, transformation of legacy systems, application life cycle maintenance (ALCM), enterprise application integration (EAI) and testing. The foray into new businesses/verticals will help MphasiS to derisk its business model and grow in size.

Inorganic growth initiatives to fuel growth
The recent acquisitions are in line with the company¿s strategy to derisk its business model. This will enable it to reap the benefits of increased work being outsourced to India, a fair part of which is expected to come to Indian shores.

Princeton Consulting
MphasiS acquired Princeton Consulting in the UK in February 2005 for a consideration of GBP 7.73 m and after adjusting for the surplus cash of GBP 3.23 m in Princeton, the net consideration comes to GBP 4.5 m. Princeton Consulting is a profitable company with annual revenue in excess of GBP 6 m. Princeton Consulting has about 100 employees and its list of clients includes British Telecom, Marks & Spencer, Deutsche Telekom, Belgacom, Volvo, and Ford.

Benefits for MphasiS
The acquisition provides MphasiS access to high-level business process management consultancy skills, as well as an established list of globally renowned clients, thus, giving the company greater visibility. In terms of revenues, as mentioned above, Princeton Consulting has revenues in excess of GBP 6 m, which is approximately Rs 500 m. This will add around 6.9% to MphasiS¿ estimated FY05 revenues of Rs 7,232 m.

Eldorado Computing Inc
MphasiS acquired Eldorado Computing Inc in the US for a consideration of US $ 16.5 m in an all-cash deal. Eldorado Computing, a profitable entity with revenues of over $10 million, specializes in claims processing and benefit management solutions for the health insurance industry. With 128 clients representing 2.5 million members, the company is a leader in technology administration solutions for healthcare payers.

Benefits for MphasiS
The acquisition will enable MphasiS to strengthen its footprint in the US market and enable it to enter the healthcare insurance and payment market. The company will also be able to offer these services to a larger client base in the US through its global delivery capabilities. In terms of revenues, as mentioned above, Eldorado Computing has revenues of over US$ 10 m, which is around Rs 435 m. This will add another 6% to MphasiS estimated FY05 earnings of Rs 7,232 m.

Our view
Both the acquired entities will together account for Rs 935 m in revenues, adding almost 13% to estimated FY05 revenues for MphasiS. Both the acquisitions will be immediately EPS-accretive, hence, there will be an addition to the topline and bottomline from this quarter itself. We had recommended MphasiS BFL in our StockSelect section in February 2005 as a buy with a target price of Rs 360. Given the positive effects of these acquisitions on MphasiS, we maintain our BUY recommendation on the stock with a two to three year perspective.

Over-hyped stocks: Too good to be true

COMPANIES extolling their achievements in print is not news. But prominent advertisements of lesser-known listed companies appearing repeatedly on the front pages of leading, nationally circulated business dailies? That does seem a bit of an overkill. What do they wish to highlight for the benefit of the readers? Typically, they claim that their turnover and profits have grown by 40-50 per cent.

One company claimed to be servicing an impressive list of clients. Another claimed that it has bagged large orders from the Gulf region. A third claimed what appeared to be a leading Indian telecom player picking up a strategic stake in the company. Only that the telecom company in question turns out to be an entity incorporated in Nigeria!

For added effect, many of them claim that they have planned huge investments and bonus shares. On the face of it, these advertisements appear to be the quarterly financial statements of smaller listed companies as per the guidelines of the Securities and Exchange Board of India (SEBI).

But somewhere in small print, there would be an innocuous line: Not a statutory release. That is because the "statutory" release carrying all the information as per the SEBI-prescribed format would have appeared in some small newspaper that nobody gets to read. Only the rosy figures would make it to the front pages of leading business dailies.

Incidentally, SEBI guidelines also mandate that the company has to publish its results within 48 hours. For such companies, the non-statutory advertisements appear several days after the board takes on record the quarterly results.

Statutory or not, these advertising claims have not hurt their stock prices. A study of the price movements of the scrips of half-a-dozen highly advertised companies reveals upward movement to the tune of a 400-600 per cent in the last one month when the ads started appearing.

In the case of one particular stock, the price had climbed to Rs 148 from a yearly low of Rs 1.46. It has since fallen to Rs 45. But quite a handsome gain in stock price, nevertheless. What explains this seeming extravagance? Market players that this correspondent spoke to claimed that there is a cartel of brokers with promoters staying in the background that is out to snare unsuspecting small investors.

The cartel first takes a position in these stocks. Then, as the scrip price rises, pushed by a relentless advertising and media campaign, the unscrupulous operators suddenly dump the stocks and get away with their booty. The small investor is left with worthless paper.

The booming stock market has only made the task of these operators easier. The recent rally in the Sensex has tempted even the fence-sitting investors to try their luck in the market. Lack of awareness about investing, coupled with the hesitation to invest high-value stocks attracts the small investors to such companies. Of course, the brokers who are part of the cartel are always around to pass on "hot tips" and highlight how both, the company in question and its scrip, have been doing exceedingly well.

The media is not complaining though. When asked, the advertising manager of a leading media house said that there was no way a newspaper could check such advertisements.

"They rarely ask for a discount. They are willing to pay us the rack rate and that too in advance. We cannot be held responsible for the advertisements appearing in our paper as they break no rules. It is for the investors to exercise caution," the marketing executive said.

So, if some broker passes a "real hot tip" to you and shows you a newspaper or television advertisement about a company you have not even heard of, don't fall for it !

The Healthscare Sector

The healthcare sector has been growing at a frenetic pace in the past few years. The windfall began ever since the developed world discovered that it could get quality service for less than half the price.

• In the last five years, the number of patients visiting India for medical treatment has risen from 10,000 to about 100,000. According to Apollo group chairman Pratap Reddy, one out of every ten patients treated at his hospitals is from abroad.
• With an annual growth rate of 30 percent, India is already inching closer to Singapore, an established medicare hub that attracts 150,000 medical tourists a year.
• Hospitals in India boast of conducting the latest surgeries at a very low cost.

Comparative Price List
Surgery	US ($)	India ($)
Bone Marrow Transplant	400,000	30,000
Liver Transplant	500,000	40,000
Open Heart Surgery (CABG)	50,000	4,400
Neuro surgery	$29,000	8000
Knee Surgery	16,000	4,500

Source:IBEF Research

The healthcare industry employs over four million people, which makes it one of the largest service sectors in the economy. A joint study by the Confederation of Indian Industry and McKinsey shows:

• At the current pace of growth, healthcare tourism alone can rake in over $2 billion as additional revenue by 2012.
• Healthcare spending in the country will double over the next 10 years. Private healthcare will form a large chunk of this spending, rising from Rs 690 billion ($14.8 billion) to Rs 1,560 billion ($33.6 billion) in 2012. This figure could rise by an additional Rs 390 billion ($8.4 billion) if health insurance cover is available to the rich and the middle class.
• Voluntary health insurance market is estimated at Rs 4 billion ($86.3 million) currently but is growing fast. Industry estimates put the figure at Rs 130 billion ($2.8 billion) by 2005.
• With the expected increase in the pharmaceutical market, the total healthcare market could rise from Rs 1,030 billion ($22.2 billion) currently (5.2 percent of GDP) to Rs 2,320 billion ($50 billion)-Rs 3,200 billion ($69 billion) (6.2-8.5 percent of GDP) by 2012.

Government support

Last year, the finance minister announced a list of incentives for private hospitals to create and upgrade infrastructure, as well as reduce their operational costs:

• Tax sops to financial institutions lending to private groups setting up hospitals with 100 or more beds.
• Increase in the rate of depreciation from 25 percent to 40 percent for life-saving medical equipment.

Now, state governments, private hospital groups and even travel agencies have joined the fray.

• Leading travel houses like Sita and Kuoni have tied up with overseas players that focus on medical tourism.
• The Karnataka government is setting up Bangalore International Health City Corporation, which will cater to international patients for a wide variety of health care products and treatments.
• The Asian Heart Institute at Mumbai's Bandra-Kurla Complex, offers state-of-the art facilities for all types of heart complications. It has been set up in collaboration with the Cleveland Institute, US, and offers quality service at a reasonable cost.

However, it is not only the cost advantage that keeps the sector ticking. It has a high success rate and a growing credibility.

• Indian specialists have performed over 500,000 major surgeries and over a million other surgical procedures including cardio-thoracic, neurological and cancer surgeries, with success rates at par with international standards.
• The success rate in the 43,000 cardiac surgeries till 2002 was 98.5 percent.
• India's success in 110 bone marrow transplants is 80 percent.
• The success rate in 6,000 renal transplants is 95 percent.

Ratings

• India's independent credit rating agency CRISIL has assigned a grade A rating to super specialty hospitals like Escorts and multi specialty hospitals like Apollo.
• NHS of the UK has indicated that India is a favoured destination for surgeries.
• The British Standards Institute has now accredited the Delhi-based Escorts Hospital.
• Apollo Group - India's largest private hospital chain and Escorts Hospital are now seeking certification from the US-based Joint Commission on Accreditation of Healthcare Organisations.

Deadpresident's Valuepicks

Buy Karur Vysya Bank. This stock moves in spurts, this has been in consolidation phase for quite some time and has good potential to move up as it trades cheaply at p/e of 5 where as peers trade at much richer valuations. Buy at current levels of 435.


Disclosure: I own few shares of Karur Vysya Bank

StockSelect - Pidilite Industries

Download it here

Are we near the end?

Emerging markets will get a jolt in the next six months, which will affect India.

As the markets, both globally and more specifically in India, keep rising, the inevitable doubts begin to resurface. Are we at a stage of euphoria creeping in? Aren’t the markets too hot, isn’t the flow of capital towards India unsustainable?

All these doubts inevitably come to the fore with markets having effectively doubled over the past 24 months, and given India’s historical propensity to disappoint just when every thing looks extremely rosy.

The genesis behind my thinking is driven by an article I read recently written by Jonathan Wilmot of CSFB. Mr Wilmot is the global strategist of CSFB and tracks a global risk appetite indicator on a weekly basis. This indicator tracks the level of complacency among investors and their ability and desire to take risk driven by interest rates and liquidity.

The article was fascinating as the risk appetite indicator tracked by Mr Wilmot moved into the euphoria zone just last week(indicating high complacency among global investors).

Prior to last week, this was only the 7th time since 1981 that the indicator had moved into this rarefied zone.

Interestingly, if one looks at the performance of global financial markets post a move into the euphoria zone, in six out of the past seven episodes global markets posted a new high for the cycle within three months, and in the other case the return was basically flattish.

But 6-12 months after the risk appetite indicator entered the euphoria zone, global equity markets suffered a major correction or bear market four times out of seven, traded sideways twice and rallied strongly only once.

The record for emerging markets is even worse. After the risk appetite indicator enters the euphoria zone, within six months of this in every single case emerging market equity returns have been negative.

Returns have varied from -1 per cent to -27 per cent with the average being -10 per cent. The greater vulnerability of emerging markets reflects their greater susceptibility to global monetary tightening and their inherently greater cyclicality and volatility.

In that sense the countdown has begun. If past financial market history is any guide, then we should brace ourselves for a significant emerging markets equity correction within six months.

Tie in the above with all the emerging signs of euphoria one can see in India. Over the past six months, more than 20 India dedicated hedge funds have been set up, more than the number that existed prior to these six months.

India dedicated country funds have raised over $1.5 billion from Japan (of all places) and all the NYSE listed India country funds have now gone to a premium. If one looks at the list of new 52-week highs(of stock prices), I would wager that most professional money managers have heard of less than 50 per cent of the companies on that list.

There have been three India investor conferences arranged by leading international brokerages over the past 45 days, each attracting more than 125 investors, of which atleast 30-40 per cent are first-time visitors to the country.

Imagine that, prior to 2003 if an India conference was able to attract even 40-50 investors it would be considered a great success.

Today over the past 45 days at least 450 investors have visited the country! Another indicatoris when one gets off an international flight, the line for Indian passport holders is dramatically shorter than the foreigners’ line, again very different from even 12-18 months ago.

Invariably hotel rooms are unavailable and the whole place has the look and feel of 1994(prior episode of India phobia).

The whole country seems to want to raise money, meet any company today, and besides its vision for 2010, everyone talks of fundraising and that too in multiples of hundred million dollars. Atleast 10 one billion dollar plus ADRs are lined up for launch over the coming 12 months.

There was a time when if the entire country could raise a billion dollars in international equity markets, it would be considered a great achievement. Today, single issues of a billion dollars attract little notice.

Even in terms of FII fund inflows, last year India attracted almost as much foreign flows as Korea and atleast 60 per cent of the number for Taiwan, despite both of these markets having much higher weightings than India in all emerging market indices (atleast 3-4 times).

For most international brokerages, India is now the second-highest profit pool in Asia and growing much more rapidly.

India has clearly been discovered, and is now enjoying its day in the sun, but are things going over the top?

If one forgets the anecdotal type of signs indicated above, one would argue that there is still a long way to go. The market has not entered a zone of irrational valuation, trading at 13-14 times 03/06 earnings.

Also, if one looks at other countries like Taiwan or Thailand which have gone through a similar period of investor discovery in the past, these moves tend to be multi-year and secular, with the market eventually going up 3-4 times from its pre move bottom.

Also, there is absolutely no sign of any weakening of the fundamentals from any quarter. Volume growth seems universally strong across all sectors and types of companies.

In addition, retail investor interest, while strong, is still nowhere near the levels of 1994 or 2000. We are yet to see hordes of people lining up in the hot sun to get an application form for the latest mutual fund launch, or IPOs of dubious quality trading at grey market premiums of 100-200 per cent.

If I were to hazard a guess I think we are very likely to get a significant correction within the next six months, but it will be driven by external factors. Emerging markets will get a jolt sometime in the next six months, and given the quantum and type of money present in India, this will invariably hit our markets as well.

Given the outperformance of global emerging markets over the past three years and the record low EMBI+(Emerging markets bond index) spread over treasuries, there is clearly a lot of money in the emerging markets world which does not need to be here.

At the first signs of trouble, it will bolt. This will invariably have an impact on India as well.

As for India-specific issues, politics comes top of mind. The situation in Bihar is currently being ignored but has clearly weakened the ruling coalition.

Thus, while the long-term picture still looks very good for all the reasons stated many times before, investors should be aware that a significant correction is probably lurking out there waiting for total complacency to set in.

Business Standard

Deadpresident's Valuepicks

You can buy into Container Corporation of India - currently trading at 870. Its almost a monopoly and operates on very high profit margins. For more visit the website

Exide Industries - EquityMaster StockSelect

Access it here

Emami - Equitymaster report

Access it here

Budget 2005

Two links that you can look at

India Budget
Crisil Budget Analysis

A Cure For Cloning

Subash Menon, the 37-year-old President and CEO of Subex Systems is thrilled at the coverage mobile phone cloning has been getting. That's because his company sells Ranger, a fraud prevention software (companies such as Agilent and Ushacomm do too, but Subex is a leader in the business). Indian telcos, claims Menon, lose between 8 per cent and 10 per cent of their revenues to fraud and his software can prevent that. How? By identifying whether multiple calls are emanating from the same phone at the same point in time (the technical term for this is call collision event). And by identifying whether the same phone has made one call from Delhi at 8.12 a.m. and another from Bangalore at 8.16 a.m. (geographically infeasible event). The solution still involves a new phone or a new SIM, or both. Still, that's better than knowing there's someone out there with your phone's twin.

Cellphone Cloning

Recent reports of people cloning both GSM and CDMA phones with the objective of getting legit subscribers to foot airtime bills for illegitimate clones should not surprise anyone. After all, if India is a power to reckon with in the cloning business, isn't it logical that it should have expertise in the cellphone cloning one too? For the benefit of the interested, here's a set of FAQs.

What is the objective of cloning mobile phones?

Getting someone else to pay for your usage or, even more insidious, cloaking activities such as extortion, even terrorism.

Can both GSM and CDMA phones be cloned?

Yes.

How are phones cloned?

With GSM phones that require a SIM (subscriber identity module) card, one can buy a SIM-card cloning device for as little as $100 (Rs 4,400). Pop in the genuine SIM card and a blank and out comes a perfect replica. In case the criminals do not wish to go through the process of acquiring a SIM card, they can literally scan the airwaves for signals. Every time one makes a call from a GSM phone, the phone transmits the phone number assigned to it, the SIM card mobile identification number (min) and its (the phone's) own electronic serial number (ESN); both numbers are also referred to as unique identification number (UIN). Older analogue phones do not encrypt this data and anyone with a $250 (Rs 11,000) scanner can pick it up and transfer the data to a blank SIM card.

With CDMA phones that do not use SIM cards, cloning requires stealing and plugging in the phone to a device that is available fairly freely (starts at $350, Rs 15,400) and copying its ESN and min to another phone, maybe 5,000 miles away. Scanning the airwaves works too.

Oil Prices and Dollars

This Article is a week old

Crude futures jumped back over the US$50 mark today. And as you might guess, stocks and the US dollar went lower. There are rumblings that oil exporters and Russia are converting dollars into euros and that's pressuring the dollar. But should that have an effect on crude?

Actually, yes.

It seems that anytime oil rises, the dollar falls. If you superimpose a US dollar chart over a crude chart, you'll clearly see the relationship. But it's important to understand that the relationship is not casual. Like gold, oil should rise when the dollar drops.

That's because crude oil is denominated in US dollars. Forget supply and demand dynamics for a minute. Forget China's insatiable appetite for crude. Ignore the financial media's fixation on weather reports for the Northeastern United States and what that means for heating oil.

The single biggest force on the price of oil is the US dollar. And that's because the price of oil represents the real buying power of the dollar.
It's not a fixed peg that implies a benefit, such as can be found with the US trade deficit.

Since 2000, the US dollar has lost around half its value. Crude oil consistently traded below US$20 a barrel during the late 1990's. And it wasn't until OPEC adopted the US$22-to-US$28 price band on March 28, 2000, that crude prices got above US$20 a barrel for good.

Stocks are down today because of the appearance of that US$50-a-barrel price on the tape. But if the stock market was going to crash because of high oil prices, it would have done so already. The fact is, US GDP growth is largely immune to higher oil prices, as we've seen.

The US economy grew at a 3.1% rate in the fourth quarter. Crude prices ran between US$45 and US$55 during that same period. Low interest rates and rising income will keep US consumers spending enough to maintain US GDP growth at 3% to 3.5% - regardless of whether crude futures are trading for
US$40 or US$50 a barrel.

Most oil analysts expect flat to lower prices for the remainder of the year. And yet nobody is willing to go on record and predict a rally for the US dollar. But, interestingly, one of the biggest dollar bears in the world over the last few years, George Soros, isn't forecasting more declines for the US dollar. Rather, he's linked its fate to crude prices.

Now, a guy like Soros can always be expected to talk his position. If he wants to cover a dollar short, he'll say publicly that the dollar is going down. So in light of his apparent candor, I can only assume that Soros currently has no position in the US dollar. Maybe he's long the euro.

There's one thing that all the hand wringing about the dollar and oil proves - there is an abundance of fear in the market right now. This despite the fact that the economy is on pace for 3% to 3.5% growth, the forward P/E for the S&P 500 is moderate at around 20, fourth-quarter earnings were above expectations, and economic data is coming in mostly as expected.

Cheers,

Briton L. Ryle
Chief Trading Strategist
Money-Flow Matrix

Navneet Publications

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Stock Picks for the Budget Day !

Here are some of the valuepicks to mop up in case there is panic selling on the Budget day !

In the order of favourites..

• Avaya Globalconnect
• ONGC
• Geometric Software
• ITC
• ICICI Bank
• State Bank Of India
• Essel Propack
• Exide Industries
  
• Tata Consultancy Services
• Asian Paints/Goodlass Nerolac
• Ashok Leyland
• Hero Honda/Bajaj Auto
• Sundram Fasteners