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Hindu Businessline Recommendations

BUY  >>  Shriram Transports and Shriram Investments
               Polyplex Corporation

HOLD >> Gokaldas Exports
               Nagarjuna Construction
               Abbot India

Avaya Globalconnect - Niru Mehta

'Trend of captive BPOs is leading to consolidation in third party BPOs'

Even as the Indian ITES (BPO) sector continues to grow from strength to strength, it is the emergence of the domestic industry which is making the sector vibrant, says Niru Mehta, vice-chairman and managing director of Avaya GlobalConnect Ltd (formerly known as Tata Telecom). "The growth of Indian call centre and BPO players focused on the domestic market will make us less vulnerable to international developments. Indian vendors continue to expand their service offerings and there is a distinct shift towards high-value services," Mr Mehta says. In an interview with Sudhir Chowdhary of FE, he analyses the drivers of Indian ITES growth. Excerpts:

Is your decision to revise accounting norms for income recognition part of a bigger evolution plan?

If you look at the way Tata Telecom evolved from 1999 to the last year, we have consciously made an attempt to reengineer every aspect of our business. The idea has been to emerge as a complete communications solutions provider. From a mere PABX company, we have transformed into a communications solutions firm, offering a comprehensive suite of converged solutions.

In doing so, it's not just about changing the product portfolio. We have changed every aspect of the business, whether it's about the service offerings, best practices, marketing campaigns, or the overall engagement we have with our customers.

When we started doing more complex work, it became imperative for us to consciously change our accounting method. It was challenging from an internal perspective because earlier, it was easier to do the billing and invoicing when you sell the product. Now, our accounting method is based on completion of the project. This has made the organisation strong because now we have processes which ensure that billing not only happens at the right time and in the right manner, but also project execution is taking place in line with the customer's requirements.

What are the recent trends you are witnessing in the contact centre industry?

I feel different trends are developing in the contact centre industry. A major trend we are witnessing is that more US and European companies are setting up their captive centres in the country as opposed to relying on third party outsourcers. So the growth for captive centres is stronger than those for third party outsourcers. The side effect of this trend is that there is some kind of consolidation happening among third party outsourcers.

Another trend is that BPOs are moving up the value chain in the kind of services they are offering. As a result, they are not only expanding their infrastructure, but are adding more value per seat both for themselves as well as the customer. Lastly, the domestic call centre and BPO market is growing at a healthier rate now. In 2003, size of the domestic market was 14-15% compared to the total market in India. This market has now grown to 18-19% last year. This is a healthy trend we have been witnessing for the growth of the domestic call centre industry. So, we will become less vulnerable to the global developments.

Have recent incidents of cyber crime slowed down the momentum in overall growth of the contact centre industry here?

Not really. On the contrary, we are beginning to attract some high-end BPO work from international customers.

What kind of increased investment in telecom equipment and solutions is required for offering high-end BPO services?

Various reports are available doing this kind of analysis. It would be inappropriate for me to comment. But, we see an emerging trend of BPOs moving up the value chain to provide specialised services.

Globally, there are organisations from varied sectors using IP (internet protocol) telephony services. Do you see this trend emerging in India, going beyond the IT and ITES companies?

I feel the telecom environment is changing very fast and it's getting very competitive from a service provider's perspective also. In the wake of these developments, I think the appeal of IP telephony as a cost reduction vehicle is not going to be very high. Customers might see the cost difference today in deploying IP telephony solutions but they are not sure whether this advantage will remain in future as service providers are constantly reducing telecom costs.

However, what is more important is how committed are organisations to change the way they run their businesses. It's not just about saving telecom costs. It's about business transformation. There's no better vehicle available than deploying IP as a way to communicate across the business processes with the right set of applications riding on top of the IP network, for business transformation and perform at a different level, as opposed to simply using IP as a cost reduction vehicle.

Who would go for such business transformation in India?

Businesses who are well engrained have an opportunity to deploy IP. Then, there are those which are fairly new and looking at global expansion of their operations. MNCs setting up operations in India or even Indian IT and ITES companies are potential customers as well. Overall, IP will benefit those who are looking to significantly transform their businesses.

Motilal Oswal - Birla Corporation

Motilal Oswal - Birla Corporation

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Holdings By Rakesh Jhunjhunwala

Praj Industries 12.33%
Agro tech foods 4.31%
Beml 2.81%
Crisil 14%
Geometric Software 6.54%
Jb chemicals and Pharma 1.06%
Kpit Info systems 2.94%
Lupin 1.42%
Pantaloon Retail 1.07%
Relaxo Footwear 2.5%
Schlafhost 1.03%
Titan Industries 6.52%
Transport Corporation Of India 3.36%
Matrix Labs 1.59%
Nagarjuna Constructions 8.51%
Hindistan Oil exploration Ltd 2.84%
Federal Bank 1.91%
Karur Vaysa 2.9%
Ramco Systems 2.23%
Futura Poly 3%
Mid day Multimedia 5.29%
Balaji Amines Ltd 3.33%
Geojit 13%
Bilcare 9.1%
Infomedia India 6.56%

Source : smallcaptracker

Equitymaster - TCS - StockSelect

Equitymaster  - TCS - Stockselect

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Nectar Lifesciences: Invest at cut-off

Source : Hindu Business Line

AN INVESTMENT in the initial public offer of the Chandigarh-based Nectar Lifesciences can be considered. Investors may subscribe to the issue at the cut-off price; this would entail paying Rs 240 per share on application (which represents the upper end of the price band).

Nectar is a Rs 230-crore bulk drug company with a presence in the anti-infective therapeutic category. Its product portfolio comprises semi-synthetic penicillin and cephalosporins in both the oral and sterile forms. Nectar is in the midst of an expansion programme that involves setting up another cephalosporin unit and one to make non-antibiotic active pharmaceutical ingredients.

Nectar also has a wholly-owned subsidiary, Chempharma, which is based in Sri Lanka. The unit enjoys Customs and income-tax benefits and its product (API intermediates) is consumed almost wholly by Nectar. The facility, which led to cost-savings for Nectar, also contributes significantly to the profitability of the consolidated entity.

The proceeds from this issue are to fund the construction of a formulations facility at Baddi in Himachal Pradesh, and to set up a sterile cephalosporin unit and an R&D centre near the company's existing facility at Derabassi in Punjab.

Business prospects

The therapeutic space in which Nectar operates has such established players as Aurobindo Pharma, Lupin and Orchid. Success in this business is a function of scale, a tight control over costs and an integrated business model. Pricing is driven by global trends and the market is highly competitive.

In the cephalosporin segment, a presence in new-generation products is preferred, as this is an area showing higher growth compared to older-generation products. Further, within this market, realisations for sterile forms tend to be generally higher as they call for a greater degree of expertise in manufacturing. Considering Nectar's long-standing presence in this therapy area, we believe that the company can capitalise on the emerging growth opportunities in this space.

To diversify, Nectar plans to focus on a portfolio of non-antibiotics that comprise cardiovasculars (statins and prils) and anti-histamines (fexofenadine). Though the effect of the expansion programme is likely to manifest only in FY-07, these categories still present opportunities for Nectar even if a few other players have a headstart.

The facility coming up at Baddi is for cephalosporin-based formulations. With Baddi enjoying a tax holiday, it opens the possibility of contract manufacturing in the domestic market. As Nectar intends to supply formulations to its customers from this facility, we believe it would impart an upward bias to margins compared to the supply of only APIs.

Nectar's Sri Lanka facility has led to considerable savings on costs and, as a result, pushed up operating margins to 17.5 per cent in FY-05 compared to 13.5 per cent in FY-04.

At the lower end of the price band of Rs 200, the stock would trade at a multiple of about 15 times its FY-05 per share earnings on an expanded equity base; at the upper end of the band, it would trade at price-earnings multiple of 18. This valuation is low compared to those commanded by its peers in the domestic market. The return on net worth has been on a steady climb since FY03; that figure stands at an attractive 31 per cent for FY05.

Risks

Weakening price trends in some of the key products manufactured by Nectar, a downward revision of product prices effected by the National Pharmaceutical Pricing Authority in the domestic market, and the political and currency risks of operating in Sri Lanka are the key downside possibilities to our recommendation.

Offer details

On offer are 38.7 lakh shares in the Rs 200-240 price band. The offer, which opened on June 22, closes on June 28. ICICI Securities is the lead manager

Hindu Businessline Recommendations

BUY     >> Sesa Goa
HOLD  >>  Century Textiles, Balrampur Chini,
                 Geometric Software, Reliance Capital

Aventis - Motilal Oswal Report

Aventis - Motilal Oswal

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Are you benchmarking the Sensex?

The 'Sensitive' index as it is very rightly called is currently at its palpable best. The economic buoyancy, growth potentials and positive upsides have all been emancipated to the hilt and the index is racing northwards at a scorching pace.

When we asked our investors whether they considered the Sensex as the lead indicator of their investment decisions a majority 50% opined in the positive, while the number of those who negated were a close 46%. While we do not deny the significance of strength in the indices as indicators of the rejuvenating India Inc, mishappenings like the Black Monday (11th May 2004) and tech bubble burst continue to linger in the memory.

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Rakesh Jhunjhunwala - The sage of Mumbai

Source : Asiamoney

India's answer to Warren Buffett is catching the eye of some of the region's biggest investor. Meet the renowned Indian investor Rakesh Jhunjhunwala.

Renowned Indian investor Rakesh Jhunjhunwala has been credited with single-handedly turning the fortunes of a company simply by buying its stock. Likened to Warren Buffett, the canny stock-picker with an eye on macroeconomics has profited handsomely in the country's market upswing. Only time will tell if his style is sustainable. Yassir A. Pitalwalla reports.

Rakesh Jhunjhunwala, stockbroker, punter, long-term investor and the latest darling of India's investing classes, is a reluctant hero. For any large foreign institutional investor making an exploratory trip to India, Jhunjhunwala is the man to see. Rumour has it that regional heavyweights such as the Government of Singapore Investment Corporation call him for his views on where the market is headed. "Rakesh's major strength in the last 15 years has been his ability to identify the turning point of the markets," says one hedge fund manager. "By leveraging his own capital he has made a packet of money. Correctly calling the major trends in the market enables him to reduce leverage as the market moves in his favour, rather than assume leverage once a move has begun."

For the son of a tax commissioner who claims to have started 20 years ago with just Rs6,000 (US$138) in borrowed money, Jhunjhunwala has done well for himself. According to data sourced from the Centre for Monitoring of the Indian Economy, his investment portfolio includes as many as 25 companies with an estimated value of Rs6.3 billion.

His friends describe him as a man who dreams big and turned bullish at the right time, making the right calls. "Everything that he has bought since the time that he has come into the limelight has doubled," says Abhay Aima, country head of equities and private banking at HDFC Bank.

Sitting at his desk on the top floor of a swanky building in Mumbai's prime commercial district in Nariman Point, the betelnut-chewing, cigarette-smoking Jhunjhunwala is focused on a slew of trading screens. He constantly calls his traders to direct them to buy index futures or stock futures in big Indian names such as Reliance Industries. While his style may seem that of a day trader, he says he only derives value from his investments over time, rather than overnight. And, typically, only 10% of his wealth is deployed in trading operations. "I want to ensure that if something like September 11 happens I will not lose more than 2-3% of my wealth," he claims.

Small beginnings

Jhunjhunwala's first investment, in Tata Tea, the world's largest producer of branded tea, tripled in just four months. Such immediate success explains why he has never worked for anyone—except during a compulsory period of articleship while studying chartered accounting.

"I wanted to make a career in stocks, which I have found fascinating since childhood, but everybody was apprehensive that I wouldn't make it," he says. That probably explains why his investing commandments include: 'Absolute returns – a passion; safety of capital – a religion; and never forget risk, the four-letter word.'

His strategy of taking large stakes in mid-cap stocks has paid off. A pick such as Bharat Earth Movers, which he first purchased at Rs20 a share, is now worth Rs602 a share; while software outsourcer KPIT, purchased at Rs60 per share, is now worth Rs323.95. Other investments include a stake of 1.4 million shares in medical packaging supplier Bilcare, first acquired at Rs108 apiece and now worth Rs380.6 each. Similarly his stake in Nagarjuna Construction, purchased at around Rs134 apiece, is worth almost Rs729 per share now. Hindustan Oil Exploration has almost doubled in the past two months, while the stock market index has fallen by almost 200 points "Rakesh is a hard worker who knows everything about a company he invests in," says the former head of a domestic mutual fund. "Combine that with the huge pile-on effect of others buying after his name gets associated with a company, and you can understand why his picks are doing quite well on the bourses." Analysts say that with his track record of identifying fundamental stories, Jhunjhunwala has developed a huge following of fans, who emulate his buying and selling habits in the hopes of riding his calls. Thanks to this bandwagon effect, Jhunjhunwala's picks soon begin to look overvalued, says one head of portfolio management at a leading domestic brokerage.

A close look at his investment style reveals a concentration of interest amongst mid-cap stocks that are typically under-researched and, usually, where there is the likelihood of some sort of a corporate action, such as a trade sale, a buy-out or a major turnaround in fortunes. "Rakesh is very good at identifying value stocks that have major event-driven possibilities like Standard & Poor's acquisition of a majority stake in India's leading credit rating firm, Crisil," says the head of a leading investment bank.

By catching companies early, Jhunjhunwala is not deterred by low liquidity. "We are very clear that liquidity follows quality; quality does not follow liquidity," he says. "When I bought into Bharat Earth Movers, the daily traded volume was 25,000 shares. Now it's 15 lakh ( 1.5 million) shares."

Jhunjhunwala's simple investment philosophies are based mainly around the beliefs of successful investors John Bogle and Warren Buffett—to buy stocks that afford a significant margin of safety. The difference is that he also looks to buy the stocks before the market discovers them—companies that are sitting at the cusp of a major opportunity. " India, with its under-penetrated markets for goods and services, is a good place to start most new businesses," says the head of a value investing fund manager in India. "Thus the chance of getting mid-cap companies which will do well is itself quite high. Now, if you can compare the business model of such companies with the performance of companies and sectors globally, you can increase your chances of success."

Another of Jhunjhunwala's quirks is that few of his stocks are institutional favourites. "Most of his stock picks are not investible for us to start with," says a leading mutual fund manager in India. "You need a private equity fund that doesn't have to proactively manage liquidity, rather than an open-end mutual fund, to invest in the kind of stocks he picks." Most of Jhunjhunwala's picks tend to have extremely low trading volumes and he acquires a stake. To ensure he doesn't get stuck with a dog, his team maintains close contact with the company concerned.

While he has earned the majority of his wealth from his investments, it's Jhunjhunwala's ability to make trading profits that provided the seed capital in the first place. "I look at trends and try to play them. I track micro and macro trends and follow corporate performance," he says. "My positions are built in consonance with market liquidity, in liquid stocks and derivatives, so that my transactions have the least effect on the market."

Midas touch or just plain lucky?

His exit strategy is earnings-based, rather than price-based. "We sell our investments dispassionately if we have made a wrong call. Otherwise we exit if we find a better opportunity elsewhere; or [if] earnings have peaked, markets' expectation of earnings from that stock peak or [if there is] a frenzy where valuations peak resulting in unsustainable price-earnings ratios," says Jhunjhunwala. That means instead of setting a price target for the company, Jhunjhunwala sells if earnings are lower than expectations or if the market valuation implies earnings that are far higher than what he expects the company to deliver. "We invest in the realm of possibilities and we have to be prepared to accept that, at times, an anticipated event or growth may not materialize," he says. " Opportunity cost of capital becomes a paramount consideration then."

Not everyone agrees that Jhunjhunwala can be compared with Warren Buffett. Chetan Sehgal, senior vice-president at Templeton Emerging Markets Group, says: "In 2001, 90% of Indian stocks were almost 90% from their all-time highs. So, in a sense, the tough game starts now."

This could explain the change in Jhunjhunwala's investment style, moving from passive investor to a more active investment role. For example, he acquired a 6% stake in Provogue India Ltd before it went public. The company is seeking to create an Indian fashion retail brand and retails through a combination of chain stores, multi-brand dealer outlets and its own exclusive studios. That move marked a clear change in his strategy from listed companies to investing in unlisted ones as well. While the underlying theme of a company poised for exponential growth is there in Provogue's case too, Jhunjhunwala has also been active as an investor influencing the company's strategic direction.

But his detractors say he lacks a cogent investment thesis; and the link between his macroeconomic outlook and how it feeds into his investment operations is tenuous. There are also suggestions that some of the stockbroking firms in which he has large stakes market his picks and sectors to fund managers and investment advisers looking for good ideas. Jhunjhunwala dismisses such claims. "Time will tell," is the curt reply he gives.

In the end, Jhunjhunwala's continued success may come from his ability to focus on one stock at a time, helping him to identify when the up-move has ended. Or it may be a function of the environment, which has seen a period of unprecedented change with commodity prices going from all-time lows to all-time highs. "My luck has changed," says Jhunjhunwala. He has also learned the hard way to not be easily lured by business plans and to challenge businesses' scalability. "I have learned the importance of size," he says. If he can sustain his success, Jhunjhunwala will have single-handedly broken the love-hate relationship cycle that the Indian stock market has habitually had with its heroes.

Expect some volatility

The Nifty continued its upmove. On the upside the index could test the 2200-2220 range, which is the upper end of its channel. Intra-day profit taking could be expected around the 2200-2220 range. On the downside the Nifty has a support at 2175. Intra-day volatility could take place on a break below 2175. Below 2175 the index has a support at 2140. Intra-day the Nifty has a crucial support at 2175 and the intra-day bias is up above 2175. TCS has a support at Rs1,300 and on the upside the stock could test Rs1,360. Union Bank has a support at Rs100 and on the upside the stock has a resistance at Rs112. IPCL has a support at Rs163 and on any intraday dips the stock should find support around Rs163. Satyam has a support at Rs500 and on the upside the stock could test Rs525.

Sharekhan

Reliance - Motilal Oswal Report

Reliance Research report - Motilal Oswal - Download here

Motilal Oswal - Reliance Industries - BUY

Motilal Oswal recommends BUY On Reliance Industries @ 630

Target >>  713

Motilal Oswal - Matrix Laboratories

Motilal Oswal recommends BUY on Matrix Laboratories.

Target >> 250