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Sunday, September 17, 2006
IDBI-United Western Bank merger
The amalgamation of United Western Bank (UWB) with IndustrialDevelopment Bank of India is likely to change the rules of the game inthe banking space on the issue of valuation of shares.
The merger is markedly different from takeover of GlobalTrust Bank and Nedungadi Bank by healthier rivals. In both the cases,shareholders went away without any consideration for the sharessurrendered.
Apart from synergies to the participating banks, the IDBI-UWB merger is likely to be a positive for old private sector banks.
As the wave of consolidation is likely to gather momentum overthe next year or so, old private sector banks may see their valuationsimprove.
Investment in the IDBI stock can be considered with a long-term perspective.
The stock is available at a price-to-book multiple of 0.8 and aprice-to-earnings multiple of about eight times its trailing 12 monthsearnings.
Accepting the offer at Rs 28 per share appears an appropriate strategy for the UWB shareholders.
A good fit for IDBI
The amalgamation of UWB with IDBI is likely to add value to thelatter over the long term. The merger is likely to help IDBI expand itsretail presence, though its size may not increase substantially.
Of the several benefits the deal brings, we believe access tothe branch network is most significant. IDBI, with a balance-sheet sizeof Rs 81,700 crore, has a network of 181 branches now. It scores poorlyon this parameter compared to like-size peers. The merger would giveIDBI immediate access to the 230-branch network of UWB, therebywidening its deposit franchise.
For IDBI, growing at 25 per cent over the past two years, additionof branches would help sustain the momentum. Deposits may expand byover 20 per cent and the asset base by about 10 per cent. The ReserveBank of India's (RBI) strict licensing norms that restrains opening newbranches has placed a scarcity value on branches. The merger would,therefore, give IDBI access to a ready physical infrastructure,enabling it to mobilise low-cost funds.
Second, the merger with UWB is likely to help IDBI diversifyits credit profile. Dominant in industrial financing, IDBI should getexposure to agriculture credit through UWB;nearly half the number ofUWB its branches is in semi-urban and rural areas, and shouldcomplement IDBI's loan book.
The third aspect relates to the benefit of an improved depositmix for IDBI. As it manages its transformation from a financialinstitution to a commercial bank, it finds about 60 per cent of theliabilities in the form of long-term borrowings. Low-cost deposits arejust about 9 per cent of the total. This perhaps explains IDBI's lownet interest margins (0.5 per cent versus industry average of three)and the high cost of funds (6.5 per cent versus the industry average offive). In this backdrop, the access to UWB's low-cost deposit baseshould prove advantageous for IDBI in the long run.
Inexpensive acquisition?
IDBI has offered to pay Rs 28 per share to the UWBshareholders. The purchase consideration, at this price, works out toabout Rs 150 crore. The price-to-book multiple for the acquisitionworks out to about 1.9. Although this appears slightly high, we believethe price factors in the takeover premium attached to UWB's business.Further, UWB has a positive net worth (about Rs 115 crore). Its capitaladequacy ratio had turned negative mainly because of technicalprovisions such as for depreciation in the value of investments.
Even with a mere 10 per cent recovery rate and no furtherslippage in the asset quality, the acquisition would be a valueproposition for IDBI. Being a big bank with a high capital adequacy(14.8 per cent), it is likely to see larger volumes per branch.
Key challenges
On the face of it, an outflow of Rs 150 crore may appearinexpensive. But if one were to consider the hidden costs in the formof bad loans and the likely slippages in the quality of existingassets, the effective cost is likely to go up by another Rs 100 crore.
Considering IDBI's size, this may still be a small sum.Post-merger, its level of net non-performing assets is likely toincrease to 1.4 per cent from about one per cent now. As such, managingand containing the level of bad loans remain a challenge for IDBI.
In the short term, the IDBI stock is unlikely to deliversignificant value. Its management has said that UWB would be kept as astrategic business unit in the near term.
While this may make the balance-sheet look attractive in theshort term, the impact of the synergies that will flow from the mergerwill be visible only over the long term.
Integration of UWB with itself is likely to be a key challengefor IDBI. UWB has an employee base of over 3,200, which is about 70 percent of IDBI's.
Going by the draft amalgamation scheme, IDBI is required toabsorb the entire workforce, a move that is likely to push up its wagecost and make integration a tricky exercise.
The boards of the two banks have been given time tillSeptember 27 by the RBI to discuss the amalgamation scheme and placetheir objections/suggestions before the central bank.
As such, the possibility of another bank/institutionpresenting a better offer to take over UWB cannot be ruled out, thoughthe chances appear slim at the moment.
Despite the concerns, the downside risks associated with themerger appear minimum, making the IDBI stock attractive as a long termproposition.
Attractive bailout for UWB
The UWB shareholders can accept the offer, priced at Rs 28 pershare. That the shareholders of the transferor bank are beingcompensated is in itself a big improvement over the previous suchcases.
Poor asset quality and deteriorating financials had cast agloomy picture of UWB's future. IDBI, with enough capital at itsdisposal to absorb the business of UWB, is confident enough to lendsuccour to the ailing bank.
Saturday, September 16, 2006
Banks, cement-construction cos lead fortnightly rally
The market rallied last fortnight breaching the 12,000 mark for the first time since 18 May on consistent FII inflows and falling crude oil prices, which dipped to a five-month low.
The Sensex rose 231.57 points (or 1.96%), to end at 12,009.59 in the fortnight ended 15 September 2006 from a closing of 11,778.02 on 1 September 2006. However, the BSE Sensex plunged 368 points on Monday (11 September), due to heavy selling by FIIs in the derivatives segment.
For the period between 1 September and 15 September 2006, banks, cement and construction companies were the biggest gainers in the A group on expectations that interest rates may not rise in the near term and that the cement prices will go up due to an increase in construction activity post monsoon.
The BSE's banking sector index, the BSE Bankex, rose 251.57 points, (4.67%), to close at 5,635.43 on 15 September from 5,383.86 on 1 September. The major gainers among the banks in the A group were Oriental Bank of Commerce (up 16.69% to Rs 226.5), Canara Bank (up 14.35% to Rs 260.05), Corporation Bank (spurted 14.12% to Rs 358.25), Indian Overseas Bank (soared 10.24% to Rs 105.5), Vijaya Bank (advanced 9.95% to Rs 51.90), and Union Bank of India (rose 9.57% to Rs 127.65).
Among banks in the A group that lost during the last fortnight, include Jammu and Kashmir Bank (less 7.76% to Rs 405.15), Kotak Mahindra Bank (dipped 2.25% to Rs 304.10), and ING Vysya Bank (lost 1.99% to Rs 95.50).
The other major sector to post gains in the fortnight was cement and construction. Birla Corporation spurted 17.75% to Rs 333.95, Jaiprakash Associates gained 10.64% to Rs 472.55, and Grasim Industries added 10.34% to Rs 2,486.05. Hope that cement prices will be hiked due to an increase in construction activity post monsoon aided the rally.
Watch maker HMT topped the list of gainers with a 33.72% jump to Rs 85.85, followed by Escorts at Rs 108.75, which sprung 26.23%. Other major gainers in the A group were battery maker Exide Industries, which spurted 26.18% to Rs 44.05, Jet Airways (India), climbed 25.19% to Rs 673.8, TVS Motor Company that surged 19.35% to Rs 114.70, Chennai Petroleum Corporation spurted 16.38% to Rs 231.20, Asahi India Glass increased 15.90% to Rs 102, and EIH, which was boosted 13.79%, to Rs 111.25.
Meanwhile, the top losers in the A group was IT company HCL Infosystems, falling 11.73% to Rs 151.60, followed by Godrej Consumer Products that dropped 8.29% to Rs 162.05. The other major losers in the A group were Nicholas Piramal India (dropped 6.98% to Rs 213.80), Tata Tea (slipped 6.74% to Rs 764.05), VisualSoft Technologies (lost 6.36% to Rs 86.05), GAIL (India) (decreased 6.11% to Rs 254.70), and Bharat Earth Movers (lost 6.11% to Rs 904.15).
Are Indians the Model Immigrants?
They have funny accents, occasionally dress in strange outfits, and some wear turbans and grow beards, yet Indians have been able to overcome stereotypes to become the U.S.'s most successful immigrant group. Not only are they leaving their mark in the field of technology, but also in real estate, journalism, literature, and entertainment. They run some of the most successful small businesses and lead a few of the largest corporations. Valuable lessons can be learned from their various successes.
According to the 2000 Census, the median household income of Indians was $70,708—far above the national median of $50,046. An Asian-American hospitality industry advocacy group says that Indians own 50% of all economy lodging and 37% of all hotels in the U.S. AnnaLee Saxenian, a dean and professor at University of California, Berkeley, estimates that in the late 1990s, close to 10% of technology startups in Silicon Valley were headed by Indians.
You'll find Indian physicians working in almost every hospital as well as running small-town practices. Indian journalists hold senior positions at major publications, and Indian faculty have gained senior appointments at most universities. Last month, Indra Nooyi, an Indian woman, was named CEO of PepsiCo (PEP)
A MODEST EXPLANATION. Census data show that 81.8% of Indian immigrants arrived in the U.S. after 1980. They received no special treatment or support and faced the same discrimination and hardship that any immigrant group does. Yet, they learned to thrive in American society. Why are Indians such a model immigrant group?
In the absence of scientific research, I'll present my own reasons for why this group has achieved so much. As an Indian immigrant myself, I have had the chance to live the American dream. I started two successful technology companies and served on the boards of several others. To give back, I co-founded the Carolinas chapter of a networking group called The Indus Entrepreneurs and mentored dozens of entrepreneurs.
Last year, I joined Duke University as an executive-in-residence to share my business experience with students (see BusinessWeek.com, 9/14/05, "Degrees of Achievement") and research how the U.S. can maintain its global competitive advantage
1. Education. The Census Bureau says that 63.9% of Indians over 25 hold at least a bachelor's degree, compared with the national average of 24.4%. Media reports routinely profile graduates from one Indian college—the Indian Institute of Technology (IIT). This is a great school, but most successful Indians I know aren't IIT graduates. Neither are the doctors, journalists, motel owners, or the majority of technology executives. Their education comes from a broad range of colleges in India and the U.S. They believe that education is the best way to rise above poverty and hardship.
2. Upbringing. For my generation, what was most socially acceptable was to become a doctor, engineer, or businessperson. Therefore, the emphasis was on either learning science or math or becoming an entrepreneur.
3. Hard work. With India's competitive and rote-based education system, children are forced to spend the majority of their time on their schooling. For better or for worse, it's work, work, and more work for anyone with access to education.
4. Determination to overcome obstacles. In a land of over a billion people with a corrupt government, weak infrastructure, and limited opportunities, it takes a lot to simply survive, let alone get ahead. Indians learn to be resilient, battle endless obstacles, and make the most of what they have. In India, you're on your own and learn to work around the problems that the state and society create for you.
5. Entrepreneurial spirit. As corporate strategist C.K. Prahalad notes in his interview with BusinessWeek's Pete Engardio (see BusinessWeek.com, 1/23/06, "Business Prophet"), amidst the poverty, hustle, and bustle of overcrowded India is a "beehive of entrepreneurialism and creativity." After observing street markets, Prahalad says that "every individual is engaged in a business of some kind—whether it is selling single cloves of garlic, squeezing sugar cane juice for pennies a glass, or hauling TVs." This entrepreneurial sprit is something that most Indians grow up with.
6. Recognizing diversity. Indians hold many ethnic, racial, gender, and caste biases. But to succeed, they learn to overlook or adapt these biases when necessary. There are six major religions in India, and the Indian constitution recognizes 22 regional languages. Every region in the country has its own customs and character.
7. Humility. Talk to almost any immigrant, regardless of origin, and he will share stories about leaving social status behind in his home country and working his way up from the bottom of the ladder in his adopted land. It's a humbling process, but humility is an asset in entrepreneurship. You learn many valuable lessons when you start from scratch and work your way to success.
8. Family support/values. In the absence of a social safety net, the family takes on a very important role in Indian culture. Family members provide all kinds of support and guidance to those in need.
9. Financial management. Indians generally pride themselves on being fiscally conservative. Their businesses usually watch every penny and spend within their means.
10. Forming and leveraging networks. Indians immigrants found that one of the secrets to success was to learn from those who had paved the trails (see BusinessWeek.com, 6/6/05, "Ask for Help and Offer It").
Some examples: Successful Indian technologists in Silicon Valley formed an organization called The Indus Entrepreneurs to mentor other entrepreneurs and provide a forum for networking. TiE is reputed to have helped launch hundreds of startups, some of which achieved billions in market capitalization. This was a group I turned to when I needed help.
Top Indian journalists and academics created the South Asian Journalists Association (SAJA) to provide networking and assistance to newcomers. SAJA runs journalism conferences and workshops, and provides scholarships to aspiring South-Asian student journalists.
In the entertainment industry, fledgling filmmakers formed the South Asian American Films and Arts Association (SAAFA). Their mission is the promotion of South Asian cinematic and artistic endeavors, and mentoring newcomers.
11. Giving back. The most successful entrepreneurs I know believe in giving back to the community and society that has given them so much opportunity. TiE founders invested great effort to ensure that their organization was open, inclusive, and integrated with mainstream American society. Their No. 1 rule was that their charter members would give without taking. SAJA officers work for top publications and universities, yet they volunteer their evenings and weekends to run an organization to assist newcomers.
12. Integration and acceptance. The Pew Global Attitudes Project, which conducts worldwide public opinion surveys, has shown that Indians predominantly hold favorable opinions of the U.S. When Indians immigrate to the U.S, they usually come to share the American dream and work hard to integrate.
Indians have achieved more overall business success in less time in the U.S. than any other recent immigrant group. They have shown what can be achieved by integrating themselves into U.S. society and taking advantage of all the opportunities the country offers.
Let's Offshore The Lawyers
DuPont is farming out legal services to Asia—and saving a bundle
Mention offshore outsourcing, and Americans fume. But who would cry if we outsourced the work of lawyers, with their fat fees and endless strategies for adding years to litigation? Sounds like a great idea, but many might say it can't be done anyway. Legal work is too sensitive and technical to risk farming out to Asia.
Try telling that to DuPont, the giant chemical company. On the seventh floor of an old office building on the outskirts of Manila, 30 Filipino attorneys, including three who have passed U.S. bar exams, are seated elbow-to-elbow with 50 other staff at long tables crammed with PCs. Working in three shifts seven days a week, they read, analyze, and annotate digital images of memos, payroll and medical records, old engineering specs, and other documents that might be used as evidence in DuPont legal cases.
The operation is part of a tieup between DuPont and offshoring shop OfficeTiger that is testing the limits of how far legal services outsourcing can go. Attorneys and others in OfficeTiger's Philippines and India offices are helping out on more than a dozen projects, from monitoring old contracts and licensing agreements to managing documentary evidence for product-liability cases. "We want to be the center of excellence for this whole area of offshore document management," says DuPont assistant general counsel Thomas L. Sager.
The most important project is processing 2 million pages of documents vital to a DuPont case against 10 insurers. DuPont aims to recover more than $100 million in payouts to thousands of former pipefitters, insulators, mechanics, and other workers who claimed their illnesses came from exposure to asbestos in DuPont facilities. Much of the work is tedious: digitizing and indexing decades-old paperwork. But some requires judgment normally provided by U.S. lawyers, such as determining whether documents are relevant to a case or violate confidentiality.
COST-CUTTING PIONEERS
By going offshore, DuPont aims to save 40% to 60% on document work and cut up to $6 million from its annual $200 million-plus in legal spending. It also hopes to shave months off the discovery process in court cases. But the move is risky. In industries from software to customer support, corporations have run into myriad logistical and quality problems with offshore outsourcing. If OfficeTiger stumbles and doesn't have the evidence ready by December, when the asbestos case could go to trial, it could cost DuPont millions.
But if OfficeTiger delivers, it could mean big changes for the $225 billion U.S. legal services industry. DuPont's legal department has been a pioneer in cost-cutting since the early 1990s, saving more than $100 million over that time through automation, outsourcing, and reducing the number of outside law firms it uses. Offshoring is the logical next step. While firms in India, the Philippines, and elsewhere have been processing legal documents for years on a small scale, the size and complexity of DuPont's deal with OfficeTiger pushes it to a higher level. "If DuPont does well with this, you will find other companies taking a good look," says Bradford W. Hildebrandt, chairman of the legal consulting firm Hildebrandt International Inc., which estimates U.S. firms can save 25% to 35% by farming legal work to Asia. "Ultimately, there may be little limit to what can go offshore."
That doesn't mean U.S. lawyers will be getting pink slips, or even lowering their hourly fees. They're still needed for developing arguments, writing briefs, and other trial work. But DuPont figures 70% of the labor in a typical insurance or liability case can be outsourced. U.S. law firms often bill around $150 an hour for document-processing by paralegals. "Law firms historically have made much of their revenue on administrative and paralegal work you don't really need a lawyer to do," says OfficeTiger Co-CEO Joseph Sigelman. Offshore providers such as OfficeTiger, bought in April by R. R. Donnelley & Sons Co., charge around $30 an hour. That's possible because an attorney with five years of experience can be hired for around $30,000, including benefits, in the Philippines, whose legal system is similar to America's. That's half what a veteran U.S. corporate paralegal earns, and one-fifth what a first-year attorney can fetch in New York.
Few industries seem more ripe for radical restructuring than legal services. For starters, they remain remarkably mired in paper. At its Wilmington (Del.) warehouse alone, DuPont has more than 200,000 boxes, each typically stuffed with 2,500 pieces of paper. Analyzing those documents involves photocopying the pages and shipping them to lawyers, who then pore over them.
Now, OfficeTiger staffers take portable scanners to sites where documents are stashed and zap images of scanned pages to a secure database. In minutes, Filipino attorneys can retrieve the material on their PCs. One of them is Eric Himan, a thirtysomething former corporate lawyer and Manila law school grad. "I want to work on really big, meaningful cases so that my market value can go up, rather than litigate some minor local dispute," Himan says as he reads through old e-mails relating to an asbestos case. He enjoys conference calls with top U.S. lawyers, who often ask his opinion on evidence and strategy. "Our input is valued," he says. "Not many lawyers in the Philippines get to do what we do."
VAST TIME SAVINGS
By the time the documents get back to Wilmington, they are attached to electronic files about each asbestos litigant, along with data on how damages paid by DuPont were calculated. DuPont lawyers then review the work. By delivering neatly organized and reliable digital evidence to opposing attorneys, DuPont hopes it can slash the discovery process in insurance cases to three months from an average of 18 months. So far, the work has been accurate and on schedule, says DuPont's Sager. He says the move might also send the message that DuPont can afford to fight cases more aggressively, rather than settle due to the expense. "Corporations are looking for alternative ways to buy legal services so that cost does not become an issue in deciding whether or not to defend a case," says Sager.
For OfficeTiger, success could mean a surge in business. By the end of 2007, Sigelman predicts his Asian legal team could reach 1,000 with several hundred lawyers. He also believes U.S. clients will become more willing to hand over sensitive work such as research for briefs. Is the U.S. legal industry ready for such a leap? "The proof will be in the pudding," says DuPont counsel Silvio J. DeCarli, who manages the asbestos litigation. "If this case implodes because of what OfficeTiger did or did not do, whether we save money won't be important."
Insurance business continues to create value
According to the latest report released bythe Insurance Regulatory and Development Authority, the first yearpremium collection of the life insurance companies grew by a whopping 177% year on year (yoy) from Rs6,524 crore to Rs18,096 crore for theperiod April-July 2006.
In the private sector, ICICI Prudential LifeInsurance (IPLI) as well as Bajaj Allianz Life Insurance (BALI)continued to be the growth leaders with a 206% and a 149% year-on-yeargrowth respectively.
We estimate the value of IPLI to be Rs66 pershare of ICICI Bank and that of BALI at Rs700 per share of Bajaj Auto.We believe that as the robust growth in the sector continues on theback of the changing demographics and investment patterns of the Indianpeople, the insurance joint ventures of these companies would keepcreating higher value for their shareholders.
Premium collections show robust growth
During July 2006, the private life insurancecompanies saw a growth of 161% yoy in the first premium collection toRs4,068 crore. Public sector insurer Life Insurance Corporation's (LIC)first premium collection increased by a mammoth 182% yoy to Rs14,027crore during the same period. The launch of a new single premiumproduct called "Jeevan Tarang" (which is eligible for tax deductions)helped LIC to achieve this commendable growth.
In the private sector, IPLI witnessed thehighest first premium collection of Rs1,157 crore, achieving a growthof 149% over the same period last year. It was followed by BALI whosefirst premium collection grew by 206% yoy to Rs833 crore.
Private players continue the robust show
Source: IRDA, Sharekhan research
IPLI takes lead in private sector
Over the last couple of years, IPLI and BALIhave contested a tough fight to maintain their market leadershipamongst the private players. In the current year up to July, IPLI hasmaintained its market leadership with a share of 28.5% followed by BALIwith a 21% market share. Both the companies recorded a significantgrowth in their premium collections driven by a larger number ofpolicies and higher ticket size.
Market shares in YTD first year premium collection (%)
Source: IRDA, Sharekhan research
Friday, September 15, 2006
Edelweiss - Tulip IT
We believe that the shift in revenue mix towards IP VPN will drive revenue growth and positively
impact margins. At INR 283, the stock trades at 8.8x FY07E and 4.7x FY08E, and EV/
EBITDA of 7x FY07E and 3.6x FY08E. We believe that current valuations are extremely
attractive in light of the exponential growth expected over the next two years and hold significant
upside potential. We believe that Tulip could be a potential acquisition target by larger integrated telecom players given swift traction in IP VPN operations and a likely free cash flow positive status by FY08E. We initiate coverage with a ‘BUY’ recommendation
impact margins. At INR 283, the stock trades at 8.8x FY07E and 4.7x FY08E, and EV/
EBITDA of 7x FY07E and 3.6x FY08E. We believe that current valuations are extremely
attractive in light of the exponential growth expected over the next two years and hold significant
upside potential. We believe that Tulip could be a potential acquisition target by larger integrated telecom players given swift traction in IP VPN operations and a likely free cash flow positive status by FY08E. We initiate coverage with a ‘BUY’ recommendation
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Thursday, September 14, 2006
Trading Calls
Buy Mercator Line Delivery at Rs 43.30-42.30-40.20. Stop Loss at Rs 37. Target of Rs 50 and Rs 64.
Buy Essel Propack Delivery at Rs 90-88-87. Stop Loss at Rs 80. Target of Rs 97 and Rs 111.
Buy Essel Propack Delivery at Rs 90-88-87. Stop Loss at Rs 80. Target of Rs 97 and Rs 111.
Sell Reliance Communication at Rs 317. Stop Loss at Rs 323.10
Trade at your own risk
These calls are from a popular portal - not mine!
Trading Calls
Buy Reliance Capital with a stop loss of Rs 480 for a target of Rs 640
Buy ZeeTelefilms on declines with a stop loss of Rs 298, for a short-termtarget of Rs 332.
Buy Dena Bank with a stop loss of Rs 26.90 for a short-term target of 33
Buy Jet Airways (684.95) with a stop loss below Rs 647 for a target of Rs 765
Trade at your own Risk - Don't blame me later!
Buy ZeeTelefilms on declines with a stop loss of Rs 298, for a short-termtarget of Rs 332.
Buy Dena Bank with a stop loss of Rs 26.90 for a short-term target of 33
Buy Jet Airways (684.95) with a stop loss below Rs 647 for a target of Rs 765
Trade at your own Risk - Don't blame me later!
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