Andhra Bank - FPO

Better than the peers

Stands out on quality of assets, productivity and profitability

Andhra Bank (ANDB), established in 1923, was nationalised in April 1980. The bank made its maiden public issue of 15 crore equity shares of Rs 10 each for cash at par, aggregating Rs 150 crore, in March 2001. The government of India (GoI) currently holds 62.5% of the pre-issue paid-up equity share capital (Rs 400 crore), which will come down to 51.5% after the issue.

On September 2005, ANDB had 1,177 branches in India, serving 1.39 crore customers. However, 854 of its branches (72.5%) are in Andhra Pradesh (AP). Sixty-three per cent of the bank’s outstanding domestic loans are to corporate & commercial businesses (includes small and medium enterprises comprising 12%). The share of the housing & retail sector constitutes 19%, and agriculture the remaining 18%.

The main objectives of the second IPO include augmenting the capital base to meet the future capital requirements arising from the implementation of the Basel II standards. Funds are also required to sustain the growth in credit in tune with the expansion of the Indian economy. On September 2005, ANDB’s capital adequacy ratio (CAR) stood at 11.95% compared to the Reserve Bank of India (RBI)-stipulated 9%. The bank intends to grow by expanding geographically in India and internationally, by increasing its volume of retail business and cross-selling various fee-based financial products and services to its customers.

Strengths

*ANDB’s asset quality is the best in its peer group, with net NPA ratio at 0.26% and gross NPA ratio at 2.27% on September 05. The bank also has a well-diversified portfolio with maximum funded exposure to the power sector (20%), followed by the textile sector (9%).

*All branches are computerised, with 88% of the business on the core banking solution platform, which will help the bank to reduce its operating expenses in the long run and confront stiff competition from private banks.

*ANDB is fully prepared to meet the Basel II requirement.

* The credit growth is a healthy at above 30%, with incremental credit deposit ratio above 100% for FY 2005. In H1FY 2006, it was 80%. With the busy season ahead, numbers could be better than last year.

*The net interest margin (NIM) had improved from 3.79% in FY 2004 to 3.95% in FY 2005. However, with a fall in yield on earning assets, NIM end September 2005 stood at 3.62%, considered quite healthy in the banking sector.

Weaknesses

*Treasury contributed above 40% of the total revenue like most other PSU banks. In a rising interest rate scenario, banks have reduced the duration of their portfolio to minimise interest-rate risks by selling high yield, long-term securities, hitting the yield on investment and restricting the net interest-income growth. However, credit growth remains buoyant and the fall in yields will be made up after a time lag.

*Operating expenses, as a percentage of net total income (OE/NTI), end September 2005 was 51%, which is comparatively higher than its peer group. The OE/NTI ratio is expected to remain at the higher end with expansion plans on the horizon.

* 72.5% of ANDB’s branches in AP generated around 58% of the advances end September 2005. The bank needs to have a larger share of business in other parts of the country to maintain the growth momentum.

Valuation

In the first half ended September 2005, ANDB’s net interest income witnessed a growth of only 4% to Rs 563 crore due to a more than 10% fall to Rs 378 crore in its interest on investments. `Other income’ fell 57% to Rs 195 crore mainly due to a 90% fall in the treasury income to Rs 33 crore end September 2005, from Rs 300 crore a year ago. However, commission income showed a promising growth of 31% to Rs 80 crore, from Rs 61 crore. The 57% fall in `other income’ weighed heavily on the net profit, which registered a fall of 29% to Rs 203 crore.

The last one-year and six-month average price of the scrip is Rs 97, whereas for the last three months, it is Rs 94.

ANDB’s annualized EPS for H1FY06 on post-IPO equity works out to Rs 8.4/ Considering the higher price band, post-IPO book value (BV) is Rs 58 and adjusted book value (ABV) is Rs 57. At the price band of Rs 82 to Rs 90, P/E is 9.8 to 10.7, which is a bit higher compared to most of its peers. P/BV and P/ABV are both around 1.6, which is in line with its peers.

Besides quality of assets, ANDB scores higher on certain other grounds compared to its peers Allahabad Bank, Corporation Bank, Indian Overseas Bank, Syndicate Bank and Vijaya Bank. Its productivity and profitability are comparatively higher than most of to its peer group members, barring Corporation Bank.

Sharekhan Trading Call

Date: 17/01/2006 | Company Name: CRESCOMM | Call Type: Go Long
Stop Loss/ Reversal: 142.0000
Buy/Sell Price Rs.: 155.00
Current Price Rs.: 157.90
Potential P/L%: 0.1900
Target: 180-194
Remark:
Investment Argument: The stock has completed a complex correction wherein a break-out has taken place at Rs152. Buy the stock with a stop loss of Rs142 for targets of Rs180 and Rs194.

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Trading Call - SBI

Date: 16/01/2006 | Company Name: SBI | Call Type: Go Short
Stop Loss/ Reversal: 942.0000
Buy/Sell Price Rs.: 924.00
Current Price Rs.: 916.90
Potential P/L%: -0.1400
Target: 893-872
Remark:
Investment Argument: The stock has been in a range forming a 3-3-3-3 pattern in an expanding triangle format wherein the d wave has been completed. Go short with a stop loss at Rs942 for targets of Rs893 and Rs872.

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Bank of Baroda - FPO

Attractive Price/Book Value

However, profitability ratios need to improve to help the scrip get the rightful P/BV multiples

Bank of Baroda (BoB) made its maiden Rs 850-crore public issue in 1996. The government of India (GoI) currently holds 66.8% of the pre-issue paid-up equity share capital (Rs 293.27 crore), which will come down to 53.8% after the issue. On September 2005, it had 2,694 branches in India and subsidiaries in 19 countries, serving over 2.5 crore customers. International operations account for 16% of its business (deposits + advances) and domestic operations the rest.

The main objects of the follow-on offer include augmenting the capital base. On September 2005, BoB’s capital adequacy ratio (CAR) stood at 12.8% as against the Reserve Bank of India (RBI)-stipulated 9%. The bank intends to take advantage of the domestic economic boom and expand its international presence. BOB plans to become a universal bank with foray into insurance, mutual funds and stock- brokering. But these are currently only under consideration and actual implementation would take time.

Strengths

BoB was the first among PSU banks to take the initiative of brand building and completely overhauling the PSU banking culture. It started the 8-to-8 banking, unheard of among PSU banks.

Though slow to implement technology in its operations, BoB has made significant advances in this area. It has implemented a single technology platform, which will aid in rolling out its core banking solution in all its domestic and foreign branches. The multi-currency and multi-regulator compliant system will provide seamless integration of operations across all its branches. The technology cost will continue to weigh heavy on the cost to income ratio (54% as on September 2005), which is at the higher end among its peer group. However, the system will provide compounding benefits in the bank’s business in the years to come.

Credit growth has remained healthy at 31% in H1 FY 2006 over H1 FY 2005, with the credit-deposit ratio (CDR) at 60%. The numbers are expected to improve in the busy season ahead. The net interest margin (NIM) of 3.37% in H1 FY 2006 is considered healthy in the banking sector. As on September 2005, 85% of the funds were deposits. Of this, 38% were low-cost deposits, resulting in one of the lowest cost of deposit, at 4.24%, in the banking industry.

Weaknesses

Treasury income made up over 50% of the `other income’ (OI) category, which has been languishing in the absence of treasury gains in a rising interest-rate scenario. The fall in treasury gains has been significant and it needs to be substituted by core lending income. But this will take some time.

Its return on net worth was low, at 12.7%, in FY 2005 and 14.46% in H1 FY 2006.

Valuation

In H1 FY 2006, BoB’s net interest income witnessed a growth of 12% to Rs 1540 crore. OI fell by 31% to Rs 518 crore on a 63% fall in treasury income to Rs 140 crore, from Rs 375 crore in H1 FY 2005. The 63% fall in OI weighed heavily on net profit, which registered a fall of 18% to Rs 416 crore.

The scrip currently trades around Rs 245. The last one-year, six- and three-month average price of the scrip stood at Rs 222, Rs 239 and Rs 233, respectively.

BOB’s annualized EPS for H1FY06 on post-IPO equity works out to Rs 22.8. Considering the higher price band, post-IPO book value (BV) is Rs 203 and adjusted book value (ABV) is Rs 188. At the price band of Rs 210 to Rs 230, P/E is 9.1 to 10.2, which is in line with the peers. P/BV is around 1.1 and P/ABV is around 1.2, which are very low compared to its peers. The lower P/BV and P/ABV can help faster appreciation of the scrip, provided it improves its profitability ratios as currently PE is acting as a cap to the rise in the scrip price.

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Indiainfoline - Royal Orchid Hotels

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Kernex Microsystems

Kernex Microsystems :- Rs.315.

An excellent engineering stock.

Introduction :-

Kernex Microsystems though established in 1991 was initially into developing, installing and maintaining software products upto 2003 have developed Anti Collision services (ACD) for Konkan Railways (KRC) . This product was developed by the company after five years of R & D, testing , field trials, and is the only technology company in India manufacturing and supplying net worked ACD's to KRC, who are the agency deploying the same for Indian Railways.The ACD system developed correspond to the functional and operational requirement of Indian Railways. The Company is the sole licensee of KRCL for manufacturing , installation, commissioning and providing maintainence support etc. of all types of ACD's excluding the auto braking unit. This exclusivity also gives scope to the company to work as technology partner for value addition by developing and providing Moving Block System , Satdham Safety System which are also based on ACD technology. The company also has exclusive international marketing rights of ACD's with a royalty payment to KRC as mutually agreed upon . The ACD's made by the company are suitable and cost effective on medium to low density route both for passenger and freight trains.

What is ACD's :-

ACD's are basically electro-mechanical products which has hardware, software and mechanical devices working together and are installed in engine, guard-wagon , and at Railway platform in station Master cabin with repeater installation every kilometer. These prevent head on collisions , rear end collisions, collisions due to derailment or at level crossing or due to inactive crew or due to train parting , or accidents due to landslides and falling boulders. The company also plans to add new features for detecting overflowing, rivers and bridges, detecting displayed tracks and detecting accidents in tunnels.

Scope of work :-

The Company has already installed ACD's on 736 km. on Konkan Railway and 1,730 km. from Katihar in Bihar to Dibrugarh in Assam. As per Corporate Safety Plan, submitted to the Parliament, Indian Railways have to cover 56,000 km. of tracks with ACD's in next seven years. This will cost about Rs. 1,875 crores which is about 6.5 % of the total corpus of Rs.31, 835 crores allocated as special Railway Safety Fund. Apart from this, the company will have regular business of maintainence of these systems and equipments, at about 15% as AMC, which also would give excellent Margin.
Apart from ACD's, the company has carried out a trial of 1.5 kms. Of Sky Bus Metro project built by KRC by providing Auto Driving Devices and Driver Control Console and trial run was successful in Auto Driving Mode. Hence, Sky Bus Metro project will be a new area, as such projects are at an advanced stages for implementation for cities like Goa, Mumbai, Hyderabad, etc.
Also, international markets has over 8 lakh km of track of medium to low density traffic requiring ACD type of equipments. Taking 30 % as an acceptable factor approx 2.40 lakh km. of rail track in the world need to have ACD's. Hence, about 10,000 to 12,000 ACD's will be required every year on conservative estimates. Also, as per agreement with KRC on 29-10-04, the company need to increase production capacity of ACD's from 4,200 ACD's to 9,000 ACD's.

Public Issue: -

The Company went public on 28-11-05 with an issue of about 40 lakh equity shares of Rs. 10 each at Rs.250 per share for Rs.99.01 crores . Due to this, the equity increased to Rs. 11.40 crores of which, about 59 % is held by the promoters . The issue was to finance project of Rs.99 crores for expanding facility to manufacture ACD from 4,200 ACD's to 10,000 ACD's per annum, and create facilities for manufacturing 1,000 Auto Driving Devices (ADD's) and 500 Advanced Railway Signal Systems per annum. The Company is also establishing an Intelligent Transportation Technology Centre in Nalgonda District of A.P. on 1,035 acres of land for simulation and testing of advanced transportation control systems. The company shall be opening four international market offices in North America (for North and South American countries) Italy (European countries) Mauritius (Africa) and Bangkok (South and South East Asia ) .
The issue evoked very good response and now the share is ruling at around 315 per share.

Financial Performance:-

For FY 05 the total sales was at Rs.53.28 crores while PBT was Rs.14.57 crores and PAT was Rs.8.96 crores giving an EPS of Rs.7.86 for 5 months ended 31-8-05 of FY 06 total income was Rs.19.42 crores with PBT of Rs.8.50 crores and PAT of Rs.6.25 crores. However, FY06 is likely to give an income of Rs.60 crores and PBT of Rs.18 crores and PAT of Rs. 12 crores giving an EPS of Rs.10.50 . Since the expansion shall be completed by May'07 the real jump in the performance will come from FY08 . For FY 07 a sales of Rs.100 crores PBT of Rs.36 crores and PAT of Rs.24 crores can be expected. This increase will come mainly from maintainence contract of over Rs.20 crores, on total value of contracts of Rs.150 crores having executed till FY06.
Considering demand scenario, the company may be able to cover 2,500 km. of track in 05-06, 4,000 km. in 06-07 and 7,500 km. in 07-08. Orders for ADD's for Sky-bus can also come in from FY 08. On top of these, maintainence contract will be of sizeable value, adding substaintially to the bottomline from FY07 and onwards.
Comparable Peers: - Though the Company is termed as a technology company, it will be treated more as an Engineering company in due course of time having exclusive, monopolistic and highly sensitive technological product profile. Similar companies are BEML, and Kalindee Rail Nirman. Hence, the company should command a P/E of 25 or above. Considering an EPS of above Rs.20 for FY 07, the share should rule atleast Rs.500 by September 06.

Conclusion :-

Due to recent listing, the share is changing hands and are being acquired by the informed and techno-savy investors. Once, the churning of Stock gets over , we would see a sharp jump in the share price on the lines of Everest Kanto Cylinder and A/A Engineering . Hence it is advised to buy the share at present level of around Rs.315 for a safe and consistent gain.


Disclaimer: Hold positions in the stock.

Royal Orchid Hotel - IPO analysis

Background :

• Royal Orchid was incorporated as Universal Resorts Ltd on January 1986. Its name was changed to Royal Orchid Hotels Ltd (ROHL)in April 1997.
• ROHL is engaged in business and management of hotels, holiday resorts and related services.
• The Company currently operates four hotel properties- Hotel Royal Orchid, Royal Orchid Harsha, Royal Orchid Central in Bangalore and Royal Orchid Metropole, a heritage property in Mysore.
• ROHL has two subsidiary companies, Icon Hospitality Private Limited and Royal Orchid Hyderabad Private Limited. Shareholding in the subsidiaries is 51.22% and 51% respectively.

Object Of The Issue :

• Capital expenditure for operating hotel in Pune under lease for Rs.17.3 crore
• Investing in its subsidiary Royal Orchid Hyderabad Private Limited which would operate a hotel in Hyderabad for Rs.11.86 crore
• Purchase of 51% equity capital in Maruti Comforts and Inn Private Limited and further investments for renovation of the hotel property in Bangalore for Rs.16.34 crore
• Capital expenditure for modernization and renovation of existing hotel properties in Bangalore for Rs.29.68 crore.
• Future acquisitions and general corporate purposes.
• Meeting Issue expenses.

Strengths :

• The company operates four hotels in Bangalore and Mysore. Hotel Industry has been doing well especially in the city like Bangalore, which happens to be IT capital of India. The plan to extend its services to IT booming cities like Hyderabad and Pune will be an added advantage.
• The company has purchased 26% stake of Maruti Comforts and Inn Private Ltd., which runs Dominion Club, located near proposed Bangalore airport for Rs.3 crore. ROHL had retained its right to buy further 25% of the share capital in Maruti Comforts and Inn Private Ltd. from the shareholders within 3 years from the date of the agreement.
• ROHL has been continuously expanding its capacity to cater to the growing demand. It has increased its capacity by 9% from 349 rooms in FY2004 to 380 in FY2005. The same have been increased to 435 rooms as on 30th September 2005.
• The operating income of the company has increased at a CAGR of 78.67% from Rs.5.6 crore in FY2002 to Rs.57 crore in FY2005.
• West Bridge Ventures II Investment Holdings, a foreign venture capital investor from Mauritius, has infused a cash of Rs.15 crore for 8% stake in ROHL.

Weaknesses :

• Revenue from food and beverages has increased at a CAGR of 46.38% from Rs.2.56 crore to Rs.11.75 crore during FY2002 to FY2005. However, expenses under this head have grown at a CAGR of 57.26% during the same period.
• ROHL has acquired 26% stake in Maruti Comforts and Inn Private Ltd., which has accumulated loses of Rs.4 crore at the end of FY2005.
• All the hotels are operated on leased premises excepting one.
• Sales of ROHL as on 31st March 05 is Rs.57 crore. The company's most of the properties are un-rated and competing with renowned and multi star establishment in these cities are of great challenge ahead.

Valuation :

• Book Value per share as on 31st March 2005 is Rs.29.09. Net-worth of the company was Rs.28.2 crore. The issue is priced at Rs.150 to Rs.165, much higher than the book value.
• The EPS of the company as on 30th September 2005 is Rs.6.15. Post issue PE is in the range of 24.4 and 26.8. Industry PE is 34.2.
• Return on Net worth is 46.05% based on FY 05 results.

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