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Punj Lloyd

Pricey but Solid

Punj Lloyd is one of the largest engineering construction companies in India. It provides integrated design, engineering, procurement, construction and project management services for (a) energy industry (onshore and offshore pipelines, gas gathering systems, oil and gas tanks and terminals including cryogenic LNG and LPG storage terminals, process facilities in the oil and gas industry including refineries for power plant projects); and (b) infrastructure sector projects (highways, flyovers, bridges and elevated rail roads). Other services include comprehensive plant and facility maintenance and management.

Punj Lloyd has also executed small orders for laying optic fibers for the telecom sector. The company's operations are spread across the Middle East, the Caspian, Asia Pacific, Africa and South Asia with 12 project and marketing offices and 13 subsidiaries. With over 20 years of experience in construction projects Punj Lloyd has erected more than 5,300 kilometers of pipelines and four million cubic meters of tanks and terminal capacity and has executed 11 refinery modernisation and quality improvement projects. In FY 2005, it sold its equity in an annuity-based NHAI project and also earned bonus for early completion of the project. The current order book (November 2005) stands at Rs 7000 crore with an unexecuted order backlog of Rs 3700 crore (of which 47% is from NHAI).

The net proceeds from the issue of new equity shares will be utilised for investment in capital equipment (Rs 150 crore), prepayment of debt (Rs 300 crore) and investment in infrastructure projects (Rs 50 crore) besides for general corporate purpose.

Strengths:

1. Punj Lloyd is one of the few Indian construction players to own a large fleet of sophisticated construction equipment.
2. Projects under the higher-margin driven energy segment (40% of the order book), its area of specialisation, have relatively shorter completion period of 8-15 months as compared to two-three years of road projects (60% of the order book), where the margin is lower. In FY 2005, about 80% of the total revenue came from the energy sector
3. More than 180 projects executed in over 12 countries. In FY 2005, approximately 58% of consolidated sales and contract revenue generated from projects executed outside India. This is the highest in the Indian construction industry.
4. Worked on projects for leaders in the energy industry in India and abroad and has got repeat orders despite increased competition with 58% of the order book (FY 2005) comprising export orders. Moreover, has presence in all areas of oil and gas project management. Thus, the geographical spread has no concentration in a single region or country and non-dependence on single project is a major positive.
5. Successful execution of projects in different parts of the world adds to knowledge of working in different terrain and cultures. Additionally, its experience in the segment gives it a better chance at the pre-qualification stage. It is one of the few companies to have laid pipelines, including those with a 48-inch diameter, in shallow water and swampy or marshy terrain.
6. The recent discovery of large oil and gas reserves in the world (including India) is expected to increase the demand for pipelines, storage tanks, terminals and process facilities in the oil and gas industry. The national pipeline grid by Gail, the east-west pipeline by Reliance Industries and the increasing capital investment by major players in the energy industry in India are expected to further fuel this growth. Moreover, the increased thrust by the Indian government on increased and better infrastructure involving speedy procedures and new public-private partnership models augur well.

Weaknesses:

1. Punj Lloyd has performed substantial projects on a lump sum or fixed price. In FY 2005 and six months ended September 2005, approximately 41.61% and 35.48% of the consolidated revenue was derived from fixed price/ lump sum contracts. The actual expense for executing a lump sum or a fixed-price contract (mainly in the infrastructure projects) may increase substantially on account of unanticipated increases in input cost and delays in execution of projects. In FY 2005, the operating profit margin (OPM) slipped sharply due to the lower margin in annuity-based NHAI projects due to increased steel and cement costs.
2. Since 58% of the consolidated sales comes from projects outside India (FY 2005), there is risk arising from foreign exchange fluctuation as well as normal legal and political risks associated with operating in foreign countries.

Valuation:

With a price band of Rs 600- Rs 700, Punj Lloyd has an abnormally high PE of 113 to 131.8 times FY 2005 earning of Rs 5.3 (excluding extraordinary items) on a post-issue equity of Rs 52.22 crore. The fixed-price NHAI project has hit OPM severely in FY 2005 due to increased steel and cement prices. Moreover, the order inflow got delayed due to elections in India and Indonesia. Thus, the operating profit in FY 2005 had almost halved. However, it is expected that OPM will bounce back and growth in sales will accelerate in FY 2006. Thus, EPS in FY 2006 can cross Rs 20.4 achieved in FY 2004. This will bring down PE to around 25 to 35.

Larsen & Toubro (L&T), which is India’s largest engineering and construction company and more than 6.5 times the size of Punj Lloyd, trades at PE of 27.5 times expected FY 2006 EPS. L&T’s market cap to sales ratio is 1.57 compared to Punj Lloyd's 1.79-2.10 (at the upper and lower price band). The order backlog to sales ratio of L&T's Engineering & Construction division on September'05 stands at 1.7 against Punj Lloyd's 2.1 on November 2005. Overall the issue is costly (from short-to-medium term angle) even at Rs 600 and only long-term investors should consider the offer.

Unichem Laboratories

Cluster: Apple Green
Recommendation: Buy
Price target: Rs328
Current market price: Rs248

Unique(em)

Key points

• Unichem Laboratories (Unichem) is focusing on lifestyle drugs, like cardio vascular, neurology and diabetology drugs, which yield higher margins. With the help of new product launches it is building an excellent product portfolio, which is expected to result in higher margins.
• The new formulation plants being set up at Baddi shall increase its capacity by over 70%. The other upgradation programmes being carried out by the company shall improve its efficiency.
• The export market is expected to be the key growth driver of its formulation business. Unichem has shown a growth of 57% year on year (yoy) in FY2005 and a compounded annual growth of 118% over FY2000-05 in the formulation export market. We expect this strong growth to continue backed by the new product launches.
• The backward integration due to increasing captive use of bulk drugs by the company will lead to margin improvement. Unichem has strategically set up plants in Baddi where it can avail of tax benefits. The cumulative effect of the improved product portfolio, backward integration and tax savings will cause its net profit margins to rise from 11% in FY2005 to 15.3% in FY2007.
• The improvement in the margins due to the increased exports, a better portfolio and backward integration will lead to net profits of Rs80.8 crore in FY2007. At the current market price of Rs248 the stock is trading at 10.4x FY2007E earnings. Keeping in mind the company's growth prospects and efficiency improvements, we believe that a price of Rs328 with a price/earnings ratio (PER) of 13.8x FY2007E is a fair estimate for the stock. Hence we initiate coverage on Unichem with a Buy recommendation and a price target of Rs328.

Ramsarup Industries Limited IPO Analysis

Background :

• The company was incorporated in the year 1979 as Karunanidhi Investments & Trading Company Limited. In the year 2002 it changed its name to Ramsarup Engineering Industries Limited and subsequently to Ramsarup Industries Limited (Ramsarup) on March 30, 2005.
• Ramsarup manufactures Steel Wires, TMT Bars and Rods. These products are primarily used in the power, housing and infrastructure sector. The main customers for its steel wires include Power Grid Corporation of India Ltd., L & T, Kalpataru Transmission & Power Ltd, KEC Ltd. and Apar Industries. For TMT bars, leading customers are L & T, Gammon India, Reliance Energy and HCC. The Company is a large supplier to various State Electricity Boards.
• Ramsarup is having three operating units viz. Ramsarup Industrial Corporation (RIC) at Nadia in West Bengal, Ramsarup Bars & Rods (RBR) at Shyamnagar in West Bengal and Ramsarup Vidyut (RV) at Dhule in Maharashtra.
• RIC is one of the leading manufacturers of black and galvanized steel wires in the country with an annual production capacity of 1,73,000 tonnes. RBR, engaged in manufacturing wire rods, steel wires and TMT bars, has an installed capacity of 87,000 tonnes of TMT bars and 24,000 tonnes of steel wires. While RV has been set up, in March 2005, to generate 3.57 MW of power through windmill.

Objects of the Issue :

• Modernization cum expansion of the existing manufacturing facility of TMT Bars at Shyamnagar.
• Setting up of a Structural Mill with an installed capacity of 135000 TPA at Shyamnagar.
• Enhancing the Long Term Working Capital requirements of the Company.
• General Corporate Purposes including strategic initiatives and acquisitions.
• Repayment of Unsecured Loan.
• Meeting the Expenses of the issue.

Strengths :

• The Company is a leading and a broad based producer of steel wires and TMT Bars in the country. The Company has been producing steel wires for over three decades following stringent quality norms. The industry being capital intensive by nature is an inherent entry barrier for new entrants.
• Ramsarup has risen from a start up to amongst the leading brands and is now an established player. Ramsarup has one of the largest capacities in India and is the only manufacturer to provide the whole range of TMT products under Thermax technology. Further the company is one of the largest steel wire producers in India after TISCO. This gives the company a competitive edge over its competitors.
• The customers of the company are in the power, housing and infrastructure sector. These are the sectors that are gaining currency in the present scenario and getting an impetus from the government. Measuring the importance of these sectors, it is apparent that Ramsarup has immense growth prospects.
• Return on net worth of the company is 17.5% for March 2005, which is higher than the industry return on net worth i.e. 12.5%. This indicates that company has earned high profits during the year.

Weakness :

• State Electricity Boards (SEBs) constitute a significant part of the outstanding debt of the company. SEB's are known to have a bad fiscal condition and any default may cause serious damage to the financial well being of the company.
• Operating Profit Margin (OPM) of the company is 4.96% for March 2005, which is lower than the industry OPM i.e. 7.14%. This indicates that company has high operating expenses during the year.
• Companies of Promoter group of Ramsarup have incurred losses in the last three years. This could hamper the organic growth of the company.
• Ramsarup has taken loan from banks for the expansion project. There are restrictive covenants in the loan agreement. These covenants can confine the company from declaration and payment of dividend, expenditure in new projects, transfer/change in the key managerial personnel, change in the constitutional documents etc. Failure of the company to comply with any loan conditions may hamper progress of the expansion project.

Valuation :

• Revenue of the company increased at the CAGR of 56% in the four years. In the year 2002 the value of revenue was Rs.230.91 crore and in the year 2005 it is Rs. 877.54 crore. Total expenditure of the company increased at the CAGR of 55% from Rs. 221.00 crore in 2002 to Rs. 837.25 crore in 2005.
• Interest expenditure of the company increased at the CAGR of 37% from Rs. 5.11 crore in 2002 to Rs. 13.20 crore in 2005. Profit After Tax of the company has increased at the CAGR of 75% from Rs. 2.54 crore in 2002 to Rs. 13.67 crore in 2005. The net profit margin of the company has improved in the last four years from 1.10 % to 1.56%.
• Return on Net Worth of the company, for the year 2005, is 17.5% where as in the year 2004 it was 15.6%. NAV of the company stands at Rs.73.06 as on September 2005.
• Annualized post issue EPS is Rs.15. The shares are offered at the price of Rs.60. PE Multiple of the company is 4.04 where as the PE Multiple of the Industry is 8.58.

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Punj LLoyd - IPO

Source: opendb.net
Author: Mint

Business of Punj Lloyd

Punj Lloyd is an engineering and constructions company, which provides integrated design, engineering, procurement, construction and project management services for energy and infrastructure sector projects. The operations are spread across the regions of the Middle East, the Caspian, The Asia Pacific, Africa and South Asia. Punj Lloyd has got 13 subsidiaries and has executed upwards of 170 projects in 12 countries.
Punj Lloyd has over 20 years of experience in construction projects and in that time it has executed 11 refinery modernization and up gradation projects and engaged in 14 highway projects.

Financial Information

The topline of Punj Lloyd has grown consistently over the last few years. From revenues of around Rs. 500 crores in fiscal 2001, last year the company clocked in revenues of Rs.1492 crores. Although this was not significantly greater than the revenues it clocked in the year prior to that (Rs.14149 crores), when seen in the context of the growth overall in the last five years one can see that the growth enjoyed by the company is good.
While the topline has grown consistently the fluctuations in the bottomline and even the case of adjustments in the reported Net Profits is a cause for concern. From a profit of Rs.275 million in the year 2001 the profit was down to as low as Rs.6.25 million in the last fiscal.
Consequently the EPS last fiscal was just Rs.0.12 while it was Rs.12.58 the year before and Rs.4.52 the year before that and the Book Value per share last fiscal was Rs.209.80.

Objects of the Issue

The main reasons for the issue are to raise money for capital expenditure, to prepay debt and equity investments in infrastructure projects. Out of these three the company intends to spend Rs.1500 million on acquiring equipment like dozers, hydraulic excavators boring machines etc.
The company also intends to pay off debt to the tune of Rs.3500 million which it has taken from various financial institutions. Punj Lloyd has debt aggregating to Rs.11168 million both long term and short term as well as working capital.
Another Rs.500 million is to be raised to be invested in fully owned subsidiaries and bid in certain kind of projects both in India and abroad which required creation of Special Purpose Vehicles to execute projects of such nature.

Conclusion

The company has done well in its growth of revenues in the last few years and has been in existence for over 20 years and has expertise in the area of operations. The pricing of the IPO however must reflect the inconsistency in the profits over the past years and it should be at a considerable discount to its other peers like L & T.

PVR IPO - Way2Wealth

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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.

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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.