IPO - Shree Renuka Sugars

Not so sweet

 

Financials boosted by acquisition of unit on lease and processing of imported raw sugar

Shri Renuka Sugars, promoted by Narendra Murukumbi and his family members, is a fully integrated sugar company. Co-products like power generation and ethanol are additional sources of revenue, besides sugar. The company has currently two units, one in Munoli (Karnatka) and another in Ajara (Maharashtra). The Munoli unit, equipped with a 2,500-tonne crushing per day (TCD) capacity, also processes raw sugar. The Ajara unit, too, has a 2,500-TCD capacity. It was acquired on lease for two years, starting from FY 2004.

Shri Renuka Sugars has a track record of acquiring units, either on ownership or on lease. It claims to be the largest raw sugar refiner in India (with a capacity of 1,000 TPD). The company has leased a co-operative sugar mill at Sangli (Mahrashtra) for six year, starting from FY 2006.

The debut issue is proposed to finance the expansion of the cane-crushing capacity at Munoli, from the existing 2,500 TCD to 7,500 TCD; increasing the distilling capacity to 120 kilo litres per day (KLPD), from 60 KLPD, at Munoli; setting up a new 120-KLPD unit at Sangli, taking the distilling capacity to 240 KLPD; putting up a 15-MW co-generation power plant at Sangli; increasing the co-generation capacity to 35.5 MW; and repayment of existing debt of Rs 9.86 crore.

The total project costs is estimated at Rs 138.36 crore, of which Rs 38.36 crore will be financed through internal accruals and the remaining through the present issue.

The commercial production at the Munoli expansion is expected to start from December 2006. Commercial production of the ethanol expansion is scheduled to start from October 2006. The 120-KLPD distillery at Sangli will run from December 2006 and co-gen power at the same location is scheduled to start from November 2006.

Strengths

Shri Renuka Sugars has a fully integrated sugar plant at Munoli, which gives value addition to the bottom line. The company has been able to secure 10.2% and 11.4% recovery at its Muloni and Ajara units in the current season as compared to the industry average of around 10.1%.

In the recent past, the company has been aggressively acquiring existing units and, in a short span, it has enhanced its capacities substantially. The acquisition strategy may result in an accelerated growth in revenue — specially when sugar prices are high.

Most of the sales of the company are institutional and, therefore, insulated from temporary fluctuations in domestic prices.

The company consumes around 50% of its co-generated power at its plants and, therefore, has considerable exportable surplus. This also provides an opportunity to earn carbon credits. (It has got approval for the same, and can get maximum 22,000 CER/year.)

Weaknesses

Shri Renuka Sugars owns only one unit at Munoli. The another unit at Ajara was acquired on lease in 2004 for two years. The unit at Sangli will be operated on lease for six years.

The company is dependent on refining raw sugar imported under advance licence. International raw sugar prices have been firm this year and can adversely affect the margin. Moreover, next year, the company will have to export large quantity under export obligation (in return for the import of raw sugar effected last year) and international conditions will play a major role in its performance.

The company has not entered into contract with plant/machinery providers for most of its expansion program, delaying the schedule of implementation.

The Uttar Pradesh government has been encouraging substantial capacity expansion in the state by large units by giving various subsidies. This will put units in other states at a disadvantage.

Sugar is a politically-sensitive commodity and subject to whimsical changes in government policies.

The sugar price upcycle has already run most of its course. Though no major fall is expected, no major rise is also expected.

Valuation

Shri Renuka Sugars earned Rs 442.78 crore of sales revenue in the nine months ended June 2005 as compared to Rs 198.01 crore in the corresponding previous period, representing an impressive growth of 125%. The profit before tax and the profit after tax zoomed by 190% and 225% to Rs 37.1 crore and Rs 32.11 crore, respectively, in this period. The growth was mainly powered by the operations of the leasehold sugar unit at Ajara and increased processing of imported raw sugar.

On post-issue equity, EPS on an annualised basis for FY ending September 2005 works out to Rs 17.5 and Rs 18.1 depending on the final issue price and assuming that the green-shoe option is exercised. At the lower price band of Rs 250, the P/E ratio works out to 14.3, and at the higher band of Rs 300, it comes to 16.6. The industry average P/E stands around 13.9. Shri Renuka Sugars's acquisition-led growth model is riskier and its relatively high export obligation on account of raw sugar import is also an irritant

Banks: Lost the 'Midas' touch!

As the indices continued to defy the laws of gravity until a couple of days back, certain select sectors made hay. Banking stocks were amongst those that stole significant limelight, as they remained the least affected by rising crude prices. Benign inflation, surplus liquidity and relatively softer interest rates also kept sentiments buoyant towards the sector. Not to mention, the government and the RBI's renewed focus on reforms for the financial (read banking) sector, also aided the momentum. Resultantly, the sector that was under performing the Sensex over the past few quarters, caught up to the investor fancy.

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Sharekhan Valueline - Oct 2005

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Motilal Oswal Midcaps

Midcap Quarterly Review

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Motilal Oswal - Most Value

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Sharekhan - Aban Loyd

Aban Loyd Chiles Offshore 
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs740
Current market price: Rs580

The Rita effect
Aban Loyd Chiles Offshore has recently entered into a contract with Hindustan Oil Exploration Ltd (HOEL) for its newly acquired rig Rowan Texas (Aban VII). Rig Rowan Texas is a cantilever jack-up, and has been sent for some upgradation and refurbishment, following which it would be able to drill deeper. The rig would commence its eight-month drilling operations by January 2006 on the Pondicherry East coast. We believe that the day rates for this contract could be at a premium to the spot rates, which are hovering around the US$65,000-70,000 range. This is much higher than what the company got for Aban VI.

Motilal Oswal - Geometric Software

Motilal Oswal recommends Neutral On Geometric Software @ 100 With Target Price 105

 

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Aarvee Denim and Exports

Aarvee Denim and Exports 
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs206
Current market price: Rs135

Dressed to kill

Key points

• Globally denim capacities are shifting from the high-cost areas like the USA to the low-cost areas like India. Second, as a result of the removal of quotas garment manufacturing capacities are also coming up in the country. 
• With its population of one billion India is a big market for Aarvee Denim and Exports as most of it is still untapped. What's more this market is growing at 10% per year with denim finding more uses (ladieswear, children wear, accessories like bags, belts, etc) and becoming a rage even in towns and villages due to its affordability. 
• We expect Aarvee to benefit from these developments, as it is one of the lowest-cost manufacturers in the country and would consolidate its No 2 position by expanding its capacity by more than 50% from 47 million metre to 72 million metre per year. 
• As a result of the softening of cotton prices due to a bumper cotton harvest and savings in power & fuel costs the company's earnings before interest, depreciation, tax and amortisation (EBIDTA) margin is expected to improve by 300 basis points from 21.7% in FY2005 to 24.7% in FY2007. 
• At the current market price of Rs135 Aarvee is available at a price/earnings ratio (PER) of 8x FY2006E (5x FY2007E) and enterprise value (EV)/EBIDTA of 4.82x FY2006E (3.41x FY2007E). We believe the valuations are cheap and recommend a Buy on Aarvee with a price target of Rs206.

KSB Pumps

KSB Pumps
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs550
Current market price: Rs399

A profit pump

Key points

• KSB Pumps, a leading manufacturer of pumps and valves, is all set to reap the benefits of the huge investments being planned in the fluid-handling sectors, such as oil & gas production, oil & gas refining and marketing, petrochemicals, etc.
• KSB's boiler-feed water pumps are extensively used in the power sector and we expect the company to be the prime beneficiary of a four-fold increase in the investments (Rs500,000 crore in the 11th Plan as against Rs112,000 crore in the 9th Plan) being made in the sector.
• After the turn-around of the valve division the company's earnings before interest and tax (EBIT) margin jumped by a whopping 1,080 basis points to 21.1% in H1CY2005. The division would be a key driver of KSB's growth in future as it is doubling its manufacturing capacity to capitalise on the opportunities resulting from the buoyancy in the fluid-handling sectors. 
• Driven by the sterling performance of the pump division and the expansion of the valve capacity, we expect KSB's earnings to grow at a compounded annual growth rate (CAGR) of 40% from Rs17.2 in CY2004 per share to Rs33.9 per share in CY2006.
• KSB has the strongest financials in the industry, as it is virtually a debt-free company with a very low debt/equity ratio of 0.06. Its return ratios are also impressive: return on capital employed (RoCE) of 42.1% and return on net worth (RoNW) of 22.5%.
• At the current market price of Rs399 the stock is discounting its CY2006E earnings by 11.8x. The average price/earnings ratio (PER) for the pump manufacturing companies is close to 29x while KSB is trading at 23x (both on a historical basis). We initiate coverage on KSB with a Buy recommendation and a twelve-month price target of Rs550.
  

Motilal Oswal - Balaji Amines

Motilal Oswal Recommends Buy On Balaji Amines @ 402 With The Target Price 698

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Navneet Publications (India)

Navneet Publications (India)
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs405
Current market price: Rs286

Don't miss the bus
Recently we met the management of Navneet Publications to get an update on the progress of the programme of changing the syllabus in Maharashtra and here are the key takeaways from our meeting.

Macro, valuations make India unattractive

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Yes Bank - Angel Stock Broking

Recommends Buy with Target of 100 (18 months)

 

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AurionPro Solutions IPO - BusinessLine

aurionPro Solutions: Avoid

Krishnan Thiagarajan

INVESTORS could avoid the book-built public offer of aurionPro Solutions made at a price band of Rs 81-90 per share. Even at a lower end of the price band, the IPO is stiffly priced at a price -earnings multiple of 23 times its FY 05 earnings. The pricing may not leave adequate scope for capital appreciation in the medium term. Since aurionPro is expected to focus primarily on the products market for the banking segment, the flight to scale and intense competition in this space will be the principal challenges to growth. Over the past year, scale, size and reach have emerged as the key variables dictating growth in the banking products segment. The services business of aurionPro is aimed at complementing its product portfolio.

The recent acquisition of the Citigroup's equity stake by Oracle in i-flex solutions has raised the competitive bar and heralds the consolidation phase in the banking products space. Some of the mid /small-sized product players that are focussed on niches and competing with the likes of aurion have broad-based their products portfolio to focus on insurance, mutual funds and even ERP solutions to bring in greater predictability to their revenue stream. Moreover, the longer sales cycle (from the start to the closure of a product deal) and higher selling and marketing expenses, especially in penetrating the developed markets, such as the US, leave smaller - sized players more vulnerable to fluctuations in revenue and earnings stream.

aurionPro is coming out with this public offer to raise Rs 24-27 crores primarily to expand its facilities at a cost of Rs 7.8 crores, establish overseas offices at Rs 3.5 crore and finance an incremental working capital of Rs 4.2 crore. The remaining proceeds after public issue expenses are met will be retained for acquisitions. To part finance the project, the company has made a private placement of shares at Rs 150 per share with certain investors to the tune of Rs 3.14 crore.

On the products side, aurionPro is focussed on developing products in the area of cash management, treasury and risk management space for the domestic and overseas markets. It is also engaged in providing customised IT services and support to its clients in the banking arena. The consolidated revenues as of March 31, 2005 stood at Rs. 10.4 crore, with post-tax earnings of Rs 2.7 crore, with a significant jump in revenues in the latest financial year. It has 190 employees as of August 30, 2005.

Given the small revenue base, the scope for growth will be fairly high over the next year or so. However, considering the relative size of the company and its nascent presence in the developed markets, the ability of aurionPro to scale and establish its presence in these markets will present a serious challenge over the medium term. Besides, aurionPro's relatively niche focus on banking products may also pose a challenge as this market is moving away from the best-of-breed solutions towards an integrated solutions market with established global players. This is poised to increase the scope for vendor consolidation and open up greater opportunities for large product vendors to scale-up within banking clients in a modular fashion. Finally, the competition among niche vendors focussed on key areas such as cash management, treasury and risk management has also been growing in the past few years. This is likely to place pressure on margins in the coming years.

The book-built IPO opened on September 27 and closes on October 4. The stock is to be listed at NSE and BSE. The lead managers to this offer are Centrum Capital and Karvy Investor Services.

Paradyne Infotech - BusinessLine

Paradyne Infotech: Avoid

Suresh Krishnamurthy

AN INVESTMENT in the initial public offer of Paradyne Infotech need not be considered. The company's financial performance the past two years has been impressive. The valuation of the stock is also attractive.

Paradyne's market capitalisation, based on the offer price, works out to Rs 42 crore and the price-earnings multiple would be about 9. However, factors such as the lack of well-articulated strategy, excessive dependence on the domestic market for revenues, and the small size of the company increase the risks involved.

Paradyne does not appear to possess any distinct competitive advantage, which is essential for a software services company to sustain itself and grow.

Impressive growth

Paradyne's revenues increased from Rs 35 crore at the end of March 2003 to Rs 68.52 crore at the end of March 2005.

During the same period, profits rose from Rs 31 lakh to Rs 5 crore. The average return on net worth over the past three years is a healthy 35 per cent.

Annand Sarnaaik, a management graduate with no experience in software services, set up Paradyne Infotech in 1997.

The company is into systems integration, software services, managed services and recently entered BPO. Systems integration contributes a sizeable 75 per cent of the firm's revenues. Exports accounted for less than 10 per cent of total revenues. Growth in export sales has, however, been unimpressive.

The bulk of revenue may be generated from hardware sales. Though the company does not indicate the hardware component in the total sales, of the total 102 technical staff employed by Paradyne, 34 are hardware engineers.

Risky prospects

Nothing in the offer document suggests that Paradyne has a competitive edge over its competitors in the domestic software arena. The revenues from the latter are set to grow rapidly given that the Indian industry is expected to grow at 12 to15 per cent per annum in the next several years.

Without competitive advantage or size, Paradyne may find it difficult to take advantage of the growth prospects for domestic software services. Its management strategy is also not well articulated.

Paradyne sees itself as an integrated IT solutions provider. The company's size, however, makes such claims look lofty and suggests that it lacks a focussed strategy.

The offer document also does not clearly indicate what proportion of the profits is accounted for by systems integration, which is hardware intensive and the competition is quite intense in India.

There is also no mention of the company's performance in the quarter ended June. Paradyne has indicated that it has orders for Rs 12 crore as of end-September. This works out to a substantially small proportion of the total revenues for the year ended March. These risk factors considerably dilute the attractiveness of the offer.