PVR Ltd - Indiainfoline

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Tulip IT Services - Indiainfoline

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Ratnamani Metals and Tubes

Ratnamani Metals and Tubes
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs375
Current market price: Rs270

Stainless growth

Key points

• Ratnamani Metals and Tubes Limited (RMTL) is the largest player in the stainless steel (SS) tubes and pipes segment in the organised sector, with a market share of 35%. The company has an impressive list of clients including L&T, BHEL, IOC, HPCL and Reliance Industries.
• Given the buoyant demand for SS tubes and pipes and carbon steel (CS) pipes the company is increasing its capacity in both the segments. In SS tubes and pipes, the company is expanding its capacity from 6,960 metric tonne per annum (MTPA) to 14,460MTPA. The CS pipes capacity is being enhanced from 120,000MTPA to 220,000MTPA. This capacity expansion is being done through a greenfield expansion at Kutch, Gujarat.
• RMTL has a strong order book of Rs200 crore, to be executed over the next 6 months. We believe that the strong industrial activity and the solid order book position of its key clients will lead to a huge demand for its products. Moreover, RMTL's thrust in the export market has also led to strong export orders. The company is targeting an export turnover of Rs70 crore in FY2006 as compared to exports of Rs22 crore in FY2005.
• We expect RMTL's revenue to grow at a compounded annual growth rate (CAGR) of 45.9% over FY2005-07. We expect the net profit to grow at a CAGR of 63% during the same period due to the expansion in its operating profit margin (OPM). We expect RMTL to report an earning per share (EPS) of Rs27.2 in FY2006 and of Rs39.1 in FY2007. The stock trades at 9.7x its FY2006E and 6.7x its FY2007E earnings. Given the strong order book position and the company being a market leader in a growing industry, we believe the stock is grossly undervalued. We initiate coverage with a Buy in the stock with a target price of Rs375, which is 9.5x its FY2007E earnings.

Motilal Oswal - PVR IPO - Subscribe

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Tulip IT Services

Exciting track record

Tulip IT Services is into network integration and management services and Internet protocol (IP)/virtual private network(VPN) wireless connectivity. IP/VPN is a relatively new business, where the company provides inter-city and intra-city data connectivity to corporate clients. Inter-city connectivity is provided through leased lines and fibre optic cables from multiple service providers. Intra-city connectivity is provided wirelessly through owned network.

With the proceeds of the current IPO, Tulip IT Services proposes to expand its IP/VPN wireless business with a network coverage in 130 cities and to fund incremental working capital requirements.

Strengths

• Tulip IT Services’s track record is exciting, with a four-year CAGR of 69% to Rs 342.21 crore in sales in FY 2005 and an almost 100% CAGR to Rs 13.92 crore in net profit. However, the profit margin is very low due to the large hardware-trading portion.

• According to an analysis of IP VPN services by IDC, the Indian market was around Rs 230 crore in 2003 and is expected to reach Rs1100 crore by 2008. In this market, Tulip IT Services, which has created a wide area network in the country, has the first-mover advantage.

• Wireless network clients include Bank of Punjab, ABN Amro Bank, HDFC Bank, Bank of India, Indian Overseas Bank, Dupont, and Hindustan Times. The expertise in the market will attract new corporate clients.

• The in-house unit at Jammu to assemble networking equipment will provide various tax benefits including excise, sales tax and income tax exemptions

Weaknesses

• Low entry barriers for providing IP/VPN wireless services will attract more players. Also, dependency on basic service providers for inter-circle connectivity can lower bargaining power.

• Wipro Infotech, Sify, CMC, and the HCL group are the major players in network integration. They have deep pockets and expertise, and can offer stiff competition. Even Bharati Tele-Services, Reliance Infocomm and Tata Teleservices/VSNL can enter this business in a big way, with competitive advantage.

• Introduction of cost-efficient new technologies cannot be ruled out in this market. Also, changes in regulatory environment affect the sector.

Valuation

There is no listed company with a similar business model. The nearest comparable company is Ayava GlobalConnect (59% subsidiary of Avaya, US, and a major player in converged communication space) which commands a PE of 24.0 x FY05 earning of Rs 17.5. Tulip IT Services is offering shares in a price band of Rs 100- Rs 120, which gives a PE of 21.7 to 26.1 times FY05 earning of Rs 4.8 on a post issue equity of Rs 29.00 crore. Company’s track record and short-term prospects are encouraging. That’s why it is probably coming pricey. If growth continues at the same rate, investors will not repent.

PVR IPO Analysis

Pioneer in multiplexes

PVR is India's largest multiplex cinema operator by number of screens. The company established PVR Anupam, India’s first multiplex, in Delhi in 1997. It also owns, PVR Bangalore, the largest multiplex in the country.

Besides the public issue of 57 lakh shares, there is offer for sale of 20 lakh equity shares by The Western India Trustee and Executor Company (WITEC), a trust acting through its investment manager, ICICI Venture Funds Management Company. Notably, WITEC got the shares, now offered in the range of Rs 200-Rs 250, at just Rs 47.5 in March 2005.

Besides the public issue to meet the envisaged project cost, PVR also issued in September 200 lakh 5% redeemable preference shares to the promoter and WITEC at Rs 10 each.

The proceeds from the Issue will mainly be utilised to finance new cinema projects in Mumbai, Hyderabad, Delhi, Indore, Gurgaon, Lucknow, Chennai, Ludhiana, Aurangabad and Latur at an estimated cost of Rs 138 crore. PVR will also invest Rs 30 crore in the equity of CR Retail, a wholly-owned subsidiary for setting up a seven-screen multiplex at Lower Parel, Mumbai. It will also put in Rs 7 crore in the equity of PVR Pictures, another wholly-owned subsidiary distributing English and Hindi language films in India.

From 10 cinemas with 39 screens currently, PVR will have 28 cinemas with 121 screens by end of FY 2008.

Strengths

*The entertainment industry is currently on a high growth path owing to the rise in disposable income and favourable economic environment.

* As it is the largest multiplex operator in the country with property located in prime locations, PVR enjoys economy of scale in operation compared to other multiplex operators.

* The strong brand equity enables PVR to attract higher patrons with competitive ticket pricing and higher advertisement and royalty revenue compared to other competitors. It also gets the advantages of being a preferred anchor tenant in malls.

Weaknesses

*The multiplex business enjoy relatively low breakeven due to higher ticket rates and entertainment tax benefits. However, tax benefits are for a limited period and the ticket rates can be regulated by the states.

*In the short term, PVR can face pressure on profit due to the fast capacity ramp-up.

*Due to the rapid development of digital technology and the massive advancement in the broadband and networking space, the home entertainment sector may witness a fast growth in future. This can adversely affect multiplex business prospects.

*Ultimately, the film exhibition business’s fortunes depend on the success of the films they are showing. Hindi films, which dominate the business, do not have good success rates.

*PVR does not have presence in the lucrative area of Mumbai and the rest of Maharashtra. Other multiplex operators like Adlabs and Shringar Cinema have developed a good presence in these areas. So the proposed expansion here will face stiff competition from these players.

Valuation

In FY 2005, PVR reported sales of Rs 68.64 crore on a standalone basis. The reported net profit was Rs 3.65 crore. On an expanded equity of Rs 22.88 crore, FY 2005 EPS works out to Rs 1.6. Based on this, PE stand at 125 and 150 at the price band of Rs 200 and Rs 240.

In the half year ended September 2005, the company reported sales of Rs 54.32 crore and net profit of Rs 3.87 crore. However, the first half is the best for the industry and the figures cannot be annualised.

Also, there will be an annual dividend of Rs 1 crore on the preference capital, which will have to be deducted from net profit to calculate EPS.

The nearest comparable company is Shringar Cinemas, which, in spite of continued losses, is traded around Rs 80-85 (its IPO was priced at Rs 53 in April 2005). Another listed player Adlabs, which has a better business model and the backing of Anil Ambani, trades at a PE of 48. After all, multiplex is a sunrise industry and that too within the show biz. So there will be many investors – strategic as well as non-strategic -- and the demand-supply gap can continue to favour a high valuation.

IPOs on a record run

The number of companies wanting to cash in on the stock market boom is at afive-year high. A total of 128 companies had filed offer documents forequity issues with the Securities and Exchange Board of India (Sebi) tillDecember 2.

Of this, 63 companies have already mobilised Rs 18,904 crore from thecapital market this year. Five issues are in the market to collect Rs 4,500crore, taking the total amount to Rs 23,404 crore. In the pipeline are 63issues that plan to mobilise Rs 8,500 crore.

During the information, communication and entertainment boom of 2000, 126 issues had hit the market, but most of them were small in size and could mobilise only Rs 3,254 crore. The markets had seen over 1,000 issues inthree consecutive years -- 1994, 1995 and 1996. Collectively, 3,492companies mobilised Rs 16,939 crore through public offerings in those threeyears.

Of the offer documents filed by 128 companies with Sebi this year, only 13public offers (eight of them from banks) are by existing listed firms and 115 are initial public offerings (IPOs). In November alone, the promotersof 16 companies filed drafts of offer documents. According to data sourcedfrom the Sebi website, the number of companies that filed draft offerdocuments for public offers in November has been the highest in the lasttwo years.

Entertainment Network, Celebrity Fashions, Inox Leisure, Royal OrchidHotels, Shirt Company, Space Computer and Systems, Shivalik Global and Rohit Ferro-Tech had filed drafts of offer documents with Sebi last month.The sectoral classification shows five companies are from the informationtechnology sector, four each from entertainment, steel alloys, textiles andretail business, and three each from the engineering and power sectors. Thelist also includes three listed banks_ICICI Bank, Andhra Bank and Bank ofBaroda. However, Andhra Bank and Bank of Baroda have not yet decided theprice band for raising money through book-building.

Aditya Birla Nuvo

Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,031
Current market price: Rs714

Master of all trades

Key points

• Aditya Birla Nuvo (ABN) is a unique play on four of India's most exciting sectors: garments, insurance, telecom and information technology (IT)/IT enabled services (ITES). The Stock Idea is also a play on the strong Indian growth story, especially the strong consumer demand, the evolving outsourcing trends and the strengthening financial system.
• ABN has adopted the perfect recipe for growth: mint money from the cash-rich businesses of rayon, carbon black and fertiliser, and focus on the high-growth business of garments, telecom, insurance and IT/ITES. Consequently, the company expects the share of revenues from its high-growth businesses to rise from 53% in FY2005 to 75% in FY2008E.
• Owing to the diversified nature of its businesses, the company is valued using the sum-of-parts method. Using this method we have arrived at a fair value of Rs1,031 per share. The stock is available at a 44% discount to this fair value and we initiate a Buy on it with a 12-month price target of Rs1,031.

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Motilal Oswal - MOST Value Dec 2005

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Sharekhan - Godrej Consumer

Godrej Consumer Products
Cluster: Apple Green
Recommendation: Buy
Price target: Rs674
Current market price: Rs506

Rich lather and colour

Key points

• Godrej Consumer Products Ltd (GCPL) is a play on the expected consumption boom in India. A huge migration of households towards the above Rs90,000 annual income category and the rising proportion of middle-income families will translate into a strong demand for products like soaps, hair colour and toiletries. With its dominant position, GCPL is one of the best plays on the consumption boom in India.
• The gains in the market share in the soap segment through the consolidation of brands (Godrej No 1) and the launch of new products will see robust growth. Although the soap market is expected to grow in a single-digit number, we expect GCPL to grow at a compounded annual growth rate (CAGR) of 15% in FY2005-08 on the back of its prudent strategy.
• The hair dye market is expected to grow at 16% and the cream colour segment to grow at 25% annually (average growth in the hair colour segment at 19%). With a 30% market share, a quality products basket and an unexplored market, GCPL should post robust growth (around 19% CAGR in FY2005-08) and reap handsome gains.
• Cash flows are expected to grow at a CAGR of 22% in the FY2005-08 period; the same will be deployed in purchasing growth (shift from the earlier stance) through augmenting capacities and inorganic growth aspirations (attractive acquisitions like Keyline Brands Limited will be a positive surprise).
• GCPL should command premium valuation considering its inorganic growth triggers and shareholder value maximising strategy. We have valued the company at 20x its FY2008E consolidated earnings and recommend a BUY with a price target of Rs674, an upside of 33.2% from the current price.

ICICI Bank - Public Offer

Second IPO in as many years

Capitalising on the strong FII interest in the India growth story

ICICI Bank (ICICIBK), India's largest private sector bank and the second largest bank in India in terms of assets, is coming out with a second public offer 19 months after its first. The bank’s previous issue raised Rs 3500 crore including a green-shoe option of Rs 450 crore in April 2004. It now expects to raise up to Rs 5750 crore including a green-shoe option Rs 750 crore from the domestic market. Additionally, Rs 2300 crore including a green-shoe option of Rs 300 crore will be raised via an ADS issue.

In March 2002, ICICI, the company’s parent and a leading financial institution, along with two of its subsidiaries were merged with ICICI Bank, which pioneered the era of universal banking. ICICIBK and its subsidiaries offer a wide range of products and services to retail and corporate customers, both in the domestic and international market. Over the years, the bank has emerged as a one-stop shop for almost all the financial services. It has demonstrated its ability to spot and enter new market segments and establish the size and market leadership in a short span of time. Leveraging technology has been a key element of the bank’s strategy.

The main object of the issue is to augment long-term resources in line with the estimated growth in assets and maintain a comfortable capital adequacy ratio (CAR) taking into consideration the stringent Basel II requirement. The capital adequacy ratio (CAR) on September 2005 stood at 11.52% (including Tier-1 capital adequacy of 7.24%), well above RBI’s requirement of 9%.

Strengths

*Technology, leadership in retail finance (fastest growing segment with relatively better margin), one of the best network among private banks, and experience and balance sheet strength to finance infrastructure growth (emerging segment with tremendous potential) are ICICIBK’s key strengths. Rural finance and international banking are the two new growth drivers identified by the bank.

*The group companies involved in businesses like securities trading, insurance (life and general), mutual funds and venture capital provide tremendous growth opportunities in the coming years and ICICIBK will be a significant gainer in terms of synergy as well as their increasing valuations.

*Among the peer group, ICICIBK has one of the best productivity ratios in the industry with business per employee at Rs 880 lakh and profit per employee at Rs 11 lakhs. The return on average assets at 1.5% in FY 2005 is at par with the best in the industry considering its large asset base.

Weaknesses

*The net interest margin (NIM) has stayed stable at 2.4% in the past few quarters, which is lower than the peer group margin. Its long-term high cost borrowings and strategy to acquire market share by lowering interest rates on the lending side and offering aggressive rates on bulk deposits have restricted the NIM growth.

*The burden of relatively high provisions coupled with aggressive expansion-lead growth in operating expenses are not allowing one of the fastest growths in the business to get reflected in the bottomline growth.

*Due to frequent equity dilutions, the bank’s EPS growth is lower than its peers. Between FY 2003 and FY 2005, ICICIBK's year-end EPS had grown at CAGR of 17.5% compared to UTI Bank's 20.8% and HDFC Bank's 24.9%. This year again, ICICIBK’s equity will expand by around 20% due to the current issue, while net profit is likely to grow around 21% as per analysts’ consensus estimates. Thus, there will be insignificant growth in EPS.

H1FY06 results

In the six months ended September 2005, ICICIBK recorded a healthy growth of 37% to Rs 1805 crore in net interest income, driven by a 37% rise to Rs 4320 crore in interest on advances. The fee income advanced 43% to Rs 1362 crore and treasury profit increased 96% to Rs 423 crore. The operating profit was up 54% to Rs 2015 crore, but provision rose by a staggering 150% to Rs 602 crore mainly on account of an amortization premium of Rs 339 crore on government securities. The net profit has improved by 27% to Rs 1110 crore. The total business of the bank increased by 62% to Rs 227523 crore on September 2005, of which deposits grew 68% to Rs 120452 crore, while advances were up 56% to Rs 107071 crore.

On September 2005, its net NPA (NNPA) ratio stood at 0.97% (Rs 1080 crore). However, in June 2005 it stood at 1.96% (Rs 2030 crore). This improvement is attributed to the resolution of the Dabhol imbroglio.

Valuation

At the offer price band of Rs 505-545, PE, P/Book Value and P/Adjusted BV (based on pre-issue figures) work out to 18.6-20.1, 2.7-2.9, 2.9-3.1. Retail investors will get 5% discount on the issue price. The market price of Rs 536 crossed the upper limit on the announcement of the price band. The scrip was outperforming the BSE Sensex till the announcement of the IPO. After that it has underperformed the Sensex from the last issue closing date to the current issue opening date.

In FY 2006, the bottomline growth may not be significantly higher than the growth in equity, restricting the EPS growth to single digit. BV will improve about 30% due to the premium collected in the issue. The valuation ratios are high compared to the unexciting growth rate in EPS in the past as well as in the current year. However, in view of the growth potential in retail and infrastructure finance, foreign investors (who already own 72.4% and will get more buying scope after the IPO) will continue to get attracted to the stock, ensuring that the scrip tracks the broad market.

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Sharekhan - Stock Idea

Bajaj Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,380
Current market price: Rs1,873

Free-wheeling on auto and insurance

Key points

• The growing affordability of two-wheelers due to the rising per capita income of Indians as well as the low cost and easy means of obtaining finances have resulted in a high double-digit growth in two-wheeler sales over the last four years.
• A stronger demand from the rural areas owing to a good monsoon and the resulting good kharif and rabi crops would further boost the underlying growth trend mentioned above.
  w With its recently launched two-wheeler models Bajaj Auto Ltd (BAL) is best placed to meet the growing demand for two-wheelers. We expect its revenues to grow at a compounded growth rate (CAGR) of 21.6% over FY2005-07E.
• The gaining acceptance of the higher-end models and the softening of the raw material prices are expected to expand BAL's operating profit margin by 60 basis points, leading to a compounded annual growth of 25% in its operating profit over FY2005-07E.
• Bajaj Allianz Life Insurance (BALI), BAL's life insurance subsidiary, is the largest private sector insurance company in India and should add significantly to BAL's value. We estimate the value of BALI to be Rs482 per share of BAL.
• At the current market price of Rs1,873, the stock is quoting at 9.7x its FY2007E core earnings per share (EPS) and 10.0x its FY2007E EV/EBIDTA. Taking into account BALI's value (Rs482 per share) and that of its investments (Rs615 per share) we recommend a Buy on BAL with a price target of Rs2,380 based on the sum-of-parts valuation method.