Citigroup - Welspun

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DLF files for Rs 13,600 cr IPO

DLF Universal Ltd, which filed a draft red herring prospectus for itsinitial public offer with the Securities and Exchange Board of India today,aims to raise Rs 13,600 crore by issuing 202 million equity shares, eachhaving a face value of Rs 2. The shares will be offered at a premium to bedecided through a 100 per cent book building process.
 
 This will be the biggest IPO ever in India, comfortably overtaking the TCSfloat of Rs 5,000 crore in August 2004.
 
 The issue, if the green shoe option is exercised, will constitute 12.77 percent of the fully diluted post-issue capital of the company. That willleave about 87 per cent equity under the control of DLF Chairman KP Singhand his son, DLF Vice-Chairman Rajiv Singh.
 
 If the company is able to raise the money from the market, its total valuewill be pegged at Rs 106,499 crore. The notional value of the holding inthe hands of the father and the son will be Rs 92,899 crore, or about $20billion, placing them second in the list of the richest Indians, justbehind Mittal Steel Chairman LN Mittal.
 
 "Notional is a good word. We are looking to create an institution, one thatwill take its rightful place not only in India but internationally," saidRajiv Singh. The company's balance sheet includes Rs 848.9 crore of"goodwill" in 2006, up from Rs 52.2 crore in 2005.
 
 Of the targeted amount, the company intends to spend Rs 6,500 crore on landacquisition, Rs 3,100 crore on development and construction of existingprojects, and Rs 4,000 crore on prepayment of loans.
 
 Of the amount intended for land purchases, Singh said only a "smallportion" would flow into special economic zones. "Most of it will be onhomes, offices and retail," he said.
 
 The company has said in the prospectus that its has identified 62 citiesfor development of various projects. Until April 30, 2006, DLF Universalmade partial payments to acquire 2,893 acres of land across the country.All told, the company is evaluating residential, commercial and retailspace projects of over 118 million sq feet in the country. Real estateconsultants have valued DLF's land bank at Rs 100,000 crore.
 
 The company has said in the prospectus that it is adopting a new businessmodel, based on the development and sale of commercial and retailproperties. Earlier, it developed and leased properties. It believes thenew model will protect it from steep declines in asset values as a resultof market conditions.
 
 In the IPO, the company proposes to reserve 200,000 equity shares forallotment to employees. Of the rest, at least 60 per cent will be allottedto qualified institutional buyers, not less than 10 per cent tonon-institutional investors and not less than 30 per cent to retailinvestors.
 
 Kotak Mahindra Capital Company and DSP Merrill Lynch are the globalcoordinators and book running lead managers to the issue.

The turbulences

While the strengths and opportunities of the Deccan aviation offer are encouraging, investors will have to keep track of the following risk factors:

Possibility of price wars

The growth of the low-cost carrier market has attracted several new entrants into the market. Since the entry barriers are low, players such as SpiceJet, GoAir, IndiGO (from Interglobe), Yamuna Air or Kerala Airways, have filed flight plans. If they all do take off, the low-cost airline market may be heading into a price war. In effect, if the seat capacity grows faster than demand, the airfares generally weaken leading to lower revenues per customer. Similar trends are also in evidence when new carriers operate new routes.

Jet Airways set off the consolidation in the airline space recently with the acquisition of Air Sahara. Once complete, the integration process is likely to offer Jet Airways greater clout over operations.

ATF prices

Aircraft fuel expenses accounted for nearly 34 per cent of Deccan Aviation's total expenditure in the first eight months of 2005-06, up from 27 per cent for 2004-05. The surge in aviation turbine fuel prices over the past year is expected to have an adverse impact on the company's bottomline. Since November 2005, the ATF prices have appreciated 11 per cent, after marching up 17 per cent between April and November. The inability of the company to enter into price hedging arrangements for fuel supply owing to government regulations is likely to affect its financial performance.

This is likely to get compounded in the near term by congestion in airports, lack of landing facilities and parking slots as Deccan Aviation scales up capacity.

As the industry is also staring at a paucity of trained resources such as pilots and cabin crew the company may find it difficult to control staff costs.

Managing growth

For Deccan Aviation, a big challenge will be in terms of managing the new fleet growth. Unless the company is able to maintain high utilisation of aircraft and keep operating costs low, the financials will take a hit. For the eight months ended November 30, 2005, on total revenues of Rs 518.28 crore, the company incurred operating losses, with a net loss of Rs 123.68 crore.

External variables

The airline industry is impacted to a large extent by economic fundamentals, geopolitical variables and external events such as the SARS or the bird flu. Events such as an economic downturn, India-Pakistan political standoff or SARS have in the past led to a slump in passenger traffic and directly impacted the financial performance of airline companies.

Similarly, accidents or extensive government regulation can influence operational performance.

Deccan Aviation — Flying high at low cost

The initial public offering of Deccan Aviation, operating Air Deccan, is appropriate only for investors with a penchant for risk and a medium-term investment horizon. This low-cost, no-frills passenger airline is offering shares in the Rs 150-175 price band.

Exposure can be taken at cut-off, as that will make investors eligible for the offer even if the final price is fixed at a lower level in the book-building process.

We will be comfortable, however, if the final price is fixed at the lower end as that will provide greater scope for capital appreciation, especially given the highly capital intensive and volatile nature of the airline business and the risks associated with managing brisk growth.

First-mover edge

As the leading low-cost player, with a first mover advantage, Deccan Aviation is well-positioned to use the low-fare concept to stimulate demand in new and established routes alike. The upbeat economic environment, a growing leisure-spending class, a young affluent yet cost-conscious air traveller are all likely to sustain the buoyant growth rate of this sector.

The low-cost concept promoted by Deccan Aviation through Internet booking and cheap fares, paid in-flight services and single-class aircraft (such as Airbus 320 for trunk routes and ATR 42/72 for short-hauls) has caught the fancy of the air traveller in India.

The cheap fares are turning out to be competitive alternatives to premium class railway fares for the middle-class and the cost-conscious businessman.

The total aviation market that grew by 20 per cent in 2005 is expected to maintain the momentum in the 15-20 per cent range for the next few years.

On the flip side, however, the competitive pressures from a growing number of low-cost carriers, the operating losses in the core business as of November 30, 2005, the mounting unhedged fuel costs and the regulatory/infrastructure bottlenecks are challenges to contend with in the medium term.

Consolidating the core

Deccan Aviation has a fleet of 29 aircraft, operating 226 flights daily as of March 3s1. It had a market share of 14.2 per cent as of February. Operating out of six major cities — Mumbai, Delhi, Chennai, Bangalore, Kolkata and Hyderabad — the company services 52 locations. It plans to spread wings with the addition to the fleet size.

According to the offer document, in March, Delhi was the company's largest base measured by the number of passengers served. Apart from the six urban centres, it is establishing a base at Thiruvananthapuram. Outside this, it operates in 46 regional business, leisure and religious destinations.

To build scale and take on competition from other low-cost airlines such as SpiceJet and GoAir, as of March 31, 2006 Deccan Aviation had placed orders for 96 aircraft, which are to be delivered in a phased manner by December 2012.

Fifteen-nineteen aircraft are to be added in 2006-07. As part of its route strategy, Deccan plans to judiciously mix trunk and regional destinations, depending on the demand assessment and the availability of takeoff and landing slots.

Besides this, Deccan Aviation also operates as a chartered aircraft service provider with a fleet of ten helicopters and two fixed-wing aircraft.

Helicopter charter and other services contributed about Rs 30 crore out of the total revenues of Rs 518 crore for the eight months ended November 30, 2005.

Strengths

First mover advantage: As the economic outlook for the economy remains buoyant, the demand for leisure travel and tourism will be substantial.

As airfares will drop further with competition intensifying in the low-cost carrier space, the scope for keeping the load factor above 70 per cent will be fairly high.

The first mover advantage and scale of operations will help the company wrest significant market share from low-cost competitors is well-proven in many high growth sectors, such as telecom, retailing or hotels.

Removal of regulatory bottlenecks: With the proposed moves to modernise the Mumbai and Delhi airports and the work on Bangalore, the infrastructure bottlenecks such as airport congestion, landing rights, or parking slots that have hampered the growth of aviation sector should be a thing of the past in a couple of years.

Companies such as Deccan Aviation, that proactively invest in building scale can benefit significantly from their growing fleet strength.

In the telecom sector, early investors such as Bharti, gained immensely from their focussed capital investment strategy.

Enhancing ancillary revenues: By allowing advertising on storage space, headrests, tray tables, baggage and outside surfaces of aircraft, the company aims to notch up 3-5 per cent of revenues from these ancillary sources. This will also provide greater leeway in improving the operating performance.

Valuation yardstick

Assuming the aviation market grows at 15-20 per cent annually, revenues earned per passenger at Rs 3,000 and keeping the load factor (level of filled seats in a flight) at 70 per cent, the implied value per share of the company works out to Rs 165-170 for 2006-07. This value will be pushed up.

If the company is able to either increase the revenues on a yearly basis or control its operating costs.

The market capitalisation based on the price band will be Rs 1,500-1,700 crore, working out to a price by revenues about two times.

Offer details

Deccan Aviation is offering 2.45 crore equity shares through this book-built offering at a price band of Rs 150-175 per share. The promoters are expected to hold 75 per cent of the post-offer equity of Rs 98 crore.

The offer size works out between Rs 370 crore and Rs 430 crore. The offer proceeds are to be used for setting up a training centre, a hangar in Chennai, infrastructure at airports, market development and debt repayment.

About 40 per cent of the offer proceeds will be used towards debt repayment to reduce the aircraft financing costs.

The lead managers to the offer are Enam Financial and ICICI Securities. The offer opens on May 18 and closes on May 23.

Citigroup - Tata Motors

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Asian Paints & KSB Pumps

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Midcaps.in & 10Paisa.com

S.No.   Scrips                  Code    Rate    Target
1.      WPIL Ltd.               505872  33.55   42.00
2.      Valiant Communications  526775  47.00   59.00
3.      Linc Pen & Plastics     531241  47.60   60.00
4.      Ricoh India Ltd.        517496  49.70   63.00
5.      Apcotex Industries      523694  54.95   69.00

S.No.   Scrips                         Code     Rate    Target
1.      Rishabh Digha Steel     531539   16.10   21.00
2.      Oil Country Tubular     500313  17.00   22.00
3.      Sunflag Iron & Steel    500404  18.45   24.00
4.      Conart Engineers        522231  27.45   35.00
5.      Reliance Capital Vent   532703   28.80   36.00

Mahindra Financial - SSKI

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Motilal Oswal - Prathiba Industries

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IDFC Equitymaster

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Sharekhan Investor's Eye

Jaiprakash Associates
Cluster: Ugly Duckling
Recommendation: Buy 
Price target: Rs650
Current market price: Rs544

No change in view

Result highlights

• At Rs70 crore the Q4FY2006 net profit (stand-alone) of Jaiprakash Associates Ltd (JAL) is less than our expectation of Rs81 crore net profit. The net profit is lower than expected primarily due to a drop in the margins of the construction division. 
• The cement revenues grew strongly by 23% year on year (yoy) to Rs413 crore, driven by a volume growth of 17% during the quarter. The earnings before interest and tax (EBIT) margin of the cement division improved by 740 basis points to 18.4% during the quarter, driven by a 5% improvement in the cement realisations. Consequently the earnings before interest, depreciation, tax and amortisation (EBIDTA) per tonne for the cement division surged by 31% to Rs545. 
• In Q4FY2006 the margins of the construction division fell by 920 basis points to 19.5% as it executed lower-margin orders during the quarter. 
• With the drop in the margins of the construction business, the overall operating profit margin (OPM) of JAL dipped by 556 basis points to 18%. As a result the operating profit for the quarter declined by 9% to Rs154 crore. 
• During the quarter the other income of the company grew by 20% on account of the funds recently mobilised by the company through a 165-million-euro foreign currency convertible bond (FCCB) issue. As a result, the pre-exceptional net profit for the quarter grew by 21%. The reported net jumped by 150%, as last year there was an extraordinary expense because of a one-time guarantee money paid to raise non-convertible debentures (NCDs) and term loans.

Bull's Eye

Bharat Electronics

Research: Enam Securities
Recommendation: Outperformer
CMP: Rs 1,428 (Face Value Rs 10)
12-Month Price Target: Rs 1700

Bharat Electronics (BEL's) FY06 results were largely in line with the expectations, with net sales up 10.8% to Rs 3,560 crore. EBIDTA rose 19% to Rs 840 crore, on the back of 170bps improvement in EBIDTA margin, reflecting the company's sustained efforts at increasing indigenisation. Net profit rose 19.7% to Rs 580 crore in FY06. BEL's order book at a robust Rs 660 crore (1.5x FY07E sales), as at end FY06, reversed the declining trend of the last two years. Increased contribution of indigenously manufactured products coupled with a reduction in wage costs resulted in a 170bps improvement in EBIDTA margins. The company expects margins to remain stable, despite 10-15% expected upward revision in wages, which is due in January '07. In its civilian business, BEL bagged a major order (Rs 500 crore) from MTNL. BEL is exploring CDMA and GSM opportunities in telecom though consortium approach with OEM's. It has created a separate SBU to improve its market share and expects its civil business to revert to 20% of sales in FY07. Exports stood at Rs 61.1 crore and the company has set an ambitious target of Rs 110 crore in exports for FY07. During the year, the company has been granted patent rights for Electronic Voting Machines (EVMs) and Solar Traffic signaling systems. BEL foresees export potential for EVMs. BEL's management has guided for Rs 4,200 crore, Rs 5,000 crore and Rs 10,000 crore revenues for FY07, FY08 and FY12 respectively. Execution of orders from the army for upgraded versions of its existing radars coupled with anticipated orders for army guns will be a major revenue driver going forward. At the current market price the stock trades at an EV/EBIDTA of 8.5 times FY07E and 6.8 times FY08E, which is at a significant discount to industry average EV/EBIDTA of 16.5 times FY07E.

UltraTech Cement

Research: CLSA
Recommendation: Buy
CMP: Rs 772 (Face Value Rs 10)
12-Month Price Target: Rs 1020

UltraTech is the most favoured pick in the cement sector as it has the maximum leverage to cement prices. Additionally, it trades at 25% discount to other cement players on asset valuations. The company's efficiency improvement initiatives coupled will reduce the gap between UltraTech's Ebitda/MT and peers from nearly US$6/MT (33%) now to nearly US$2/MT (7%) by FY09. This improvement in asset efficiencies will drive a steady stock re-rating in asset valuation terms. Potentially, a sharp improvement in cement prices in south, post state elections, will be the nearterm trigger for the sector/stock. Significant potential for low cost capacity expansion UltraTech's current 17m MT of cement capacity can be ramped up quickly and at incremental cost of nearly $25/MT. UltraTech's current clinker capacity is 15.5m MT of clinker produce 19.5m MT of cement assuming the average industry conversion factor of 1.25x. To scale up to that, UltraTech needs to add grinding capacities which can be a potential quick and low cost capacity expansion, assuming that the company secures a source of fly ash. In the meanwhile, i.e., before FY09 - the cost saving initiatives will have a limited impact and the benefits will be restricted to conversion from clinker exports to cement sales. During FY06, the company has already reduced the clinker exports by half down to 9% of total volume. Also, potential increase in conversion factor to 1.25x as explained above will bring down per MT production cost by an estimated Rs3/bag. The stock currently trades at FY07 EV/MT of $136/MT or 25% discount to asset valuations to the other large cap cement stocks. The discount will be even larger if compared on the basis of clinker capacity as against cement capacity. CLSA believe that this discount will keep on narrowing as the company's EBITDA/MT improves from less than Rs400/MT now to more than Rs600/MT by FY08.

Coromandel Fertilisers

Research: Angel Broking
Recommendation: Buy
CMP: Rs 95 (Face Value Rs 2)
12-Month Price Target: Rs 125

Coromandel Fertilisers (CFL) is the second largest phosphatic fertiliser player in India and markets approximately 2m tonnes of phosphatic fertilisers. CFL also holds a 45.07% stake in Godavari Fertilisers & Chemicals (GFCL), which is a leading player of phosphatic fertilisers in Andhra Pradesh. CFL has been able to achieve one of the highest operating efficiencies with containment of costs and a raw material to sales ratio of 69.5% in the fertiliser industry where the raw material and fuel costs account for up to 80% of cost of production. CFL has entered into a strategic alliance with South African major Foskor. This would lead to improved availability of phosphoric acid to CFL, a major raw material highly in demand; and help the company to further consolidate its market position in South East coast of India. CFL has an excellent financial track record backed by an improvement in margins; with more than 20% CAGR in earnings during FY03-'06. Besides, CFL has one of the most favourable debt equity ratios of 1.9 amongst its peers. It operates in the phosphatic and complex fertilisers segments, which do not fall under the purview of controlled distribution, initiated by the Government, unlike nitrogenous fertilisers, thus benefiting the company. Considering the various initiatives taken to contain costs together with the ramped up volumes and improved customer focus coupled with bright industry prospects, CFL is expected to maintain the growth momentum. At the current market price, CFL is trading at 8.1 times FY2008E Earnings. Considering the combination of market potential and CFL's growth initiatives, Angel Broking recommends a BUY with a 12-month price target of Rs 125.

Glenmark Pharma

Research: ICICI Securities
Recommendation: Buy
CMP: Rs 340 (Face Value Rs 10)
12-Month Price Target: Rs 483

Glenmark Pharma unveiled two new chemical entities (NCE) last week at the Annual Investor Meet and exuded confidence of closing two out-licensing deals in FY07. Due to the delay in receipt of $34m R&D income, the company has not been able to meet its guidance in FY06; as a result, ICICI Securities revised the earnings forecast downwards by 7% for FY07E. Besides, the management has guided for net profit of $55-60m in FY07 and $70-75m in FY08, implying a CAGR of 85%. The company could earn potential R&D income of $34-54m over the next 12 months. Glenmark remains the best Indian play on drug discovery research and one of the top buys among midcaps in the sector. Glenmark unveiled two more promising NCEs: i) GRC6211 - a Vanilloid receptor (TRP V1) antagonist useful in the treatment of pain, migraine, incontinence and asthma, and ii) GRC10622 - a Cannabinoid (CB-2) receptor against useful in pain treatment. Currently, these compounds are at an advanced stage of pre-clinical studies and Glenmark expects to start Phase-I clinical trials for both NCEs by FY07. The company targets to have six NCEs in human trials by end of FY07. Over the next one-year, we expect the company to: i) outlicense GRC3886 (for the EU market) and GRC8200 (for the US, EU and Japan markets) ii) earn R&D income of $34-54m, and iii) make acquisitions in the EU and LatAm. The stock is trading at FY07E P/E of 17.4x on a consolidated basis.

Motilal Oswal Reports

Union Bank Of India

Shree Cement

PTC India

Thanks Ramesh

Grapevine

FUND buying was seen in ONGC, Reliance Industries, Tata Steel, Mahindra & Mahindra, TVS Motors, India Cement and Bank of Baroda, while Union Bank of India, VSNL, Dr Reddy's, BPCL and GE Shipping witnessed fund selling.

Sharekhan - Investor's Eye

NIIT Technologies  
Cluster: Ugly duckling
Recommendation: Buy 
Price target: Rs296
Current market price: Rs228

NIIT Tech's UK acquisition
NIIT Technologies has acquired a 51% stake in the UK-based ROOM Solutions (RS), which is a niche player in the insurance space. RS clocked annual revenues of $25 million in the last fiscal and is profitable on the net level. It has an employee base of 120 professionals. 

RS offers software solutions in the policy administration, risk management and business intelligence areas to a host of insurance companies in the UK and the other developed markets. Some of the reputed names on its client list are Atrium, Ace Global, AIG, Munich Re, Zurich and Excel.