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Tuesday, July 10, 2007
Joyride over! choppy waters ahead
We're in the middle of some very choppy waters here, and we wanted everybody to grab an oar.
After an enjoyable ride so far, the markets are turning choppy. Put on your lifejackets (trade with stop loss) and be adventurous only if you have the ability for high risks. Renewed interest from FIIs has kept the momentum intact. After climbing atop mount 15k on Friday, the Sensex finished above that level yesterday, reinforcing a view that the undertone remains positive. Lower inflation and strong response to the recent public issues added to the positive sentiment. A generally healthy trend across global markets has also helped the local bulls' cause. As a result, both the key indices and other smaller indices are now trading at lifetime highs. This, despite the spike in crude oil prices, which have crossed the $76 per barrel mark in London. If oil prices continue to rise there could be an impact on equity markets amid nagging concern about inflation and interest rates.
The mega event - Infosys results - will be unraveled tomorrow. IT stocks have already taken a severe beating in the past 3-4 months because of the appreciation in the rupee vis-a-vis the dollar. But, any further bad news from the industry heavyweights will have a short-term impact on the sector and the market. Keep a close watch on what Infosys management has to say on the outlook going forward. A fresh round of selling in software shares will make them attractive from a long-term perspective. The broader market could also cool off a little bit after the recent advance. We see a cautious to positive start and a choppy day ahead.
Shares of Ankit Metal & Power will get listed today. Suzlon could come under pressure amid reports that the government is probing the accounts of its subsidiaries as part of a wider exercise to look into the use of IPO money since 2004. ONGC and SICAL Logistics might be in the limelight after an offshore supply vessel of the state-run oil & gas major, operated by the latter on contract sank off the Mumbai coast yesterday. TVS Motor could attract some buying after the company launched a new version of its premium bike, the Apache. The company also plans to launch two more bikes during the rest of the fiscal year.
Sun Pharma is planning to acquire 14% more stake in Israel's Taro Pharma by buying out the promoters. The move is aimed at thwarting any attempt by other shareholders of Taro Pharma to block the deal. GTL is another to keep an eye on, as it has sold its enterprise and managed services business to France Telecom for Rs2.5bn. HTMT Global is likely to be in action as the ITES arm of the Hinduja Group is looking to get into consulting through the inorganic route. Public sector aluminium major NALCO is planning to diversify into cement by using the fly ash generated at its captive power plant at Angul, Orissa.
RCF, the public sector fertilizer giant is planning to make alternative building materials from gypsum that could substitute the conventional bricks. Pharma major Wockhardt has received a tentative approval from USFDA to market a generic version of Pfizer's anti-convulsive drug Cerebyx (50 ml injection). Tata Motors could attract attention as chairman Ratan Tata said at the AGM that the company plans to launch a slew of new vehicles in the next few months to beat off competition. Development Credit Bank's (DCB) Board will meet today to consider raising an amount up to Rs3.1bn by way of a preferential issue.
US stocks posted modest gains, just missing new record highs, as jittery traders eyed the upcoming earnings, which began after the closing bell with Alcoa. Buyback plans by Johnson & Johnson and ConocoPhillips also boosted the sentiment.
The Dow Jones industrial average rose 38.29 points, or 0.28%, to end at 13,649.97. The Standard & Poor's 500 Index was up 1.41 points, or 0.09%, at 1,531.85. The Nasdaq Composite Index was up 3.51 points, or 0.13%, at 2,670.02.
Treasury prices rose, lowering the yield on the 10-year note to 5.14%, down from the 5.18% level reached late on Friday. The dollar fell slightly versus the euro and yen. US light crude down 76 cents to settle at $72.05 a barrel on the New York Mercantile Exchange.
European shares rallied, led by resource companies, while shares of Numico shot up more than 10% after Groupe Danone said it will pays $16.7 billion to acquire the Dutch baby-food group. The pan-European Dow Jones Stoxx 600 index increased 0.3% to 398.52. The German DAX Xetra 30 closed up 0.4% at 8,077.39, the UK's FTSE 100 added 0.3% to 6,712.70 and the French CAC-40 finished virtually flat at 6,104.66.
In the emerging markets, the Bovespa in Brazil gained 0.9% at 56,443 while the IPC index in Mexico was down 1% at 32,088 and the RTS index in Russia climbed 1.3% to 1999.
Asian markets were mixed this morning. The Nikkei in Tokyo was down 44 points at 18,217 while the Straits Times in Singapore gained 11 points to 3637 and the Kospi in Seoul was flat at 1883. The Hang Seng in Hong Kong was down 61 points at 22,756.
Markets are witnessing historical trading session almost everyday as bulls settle on new peaks. The benchmark Sensex closed above the 15kmark and Nifty closed above the 4400 mark for the first time ever. Yet again the index heavy weights like ONGC, L&T, Infosys and Bharti Airtel lifted the key indices to new highs. BSE IT, Metal, PSU and Banking index were among the major gainers. However, BSE Auto and FMCG index lost ground. Finally, the 30-share Sensex gained 81 points to close at 15,050 and NSE-50 Nifty added 34 points to close at 4419.
ICSA India jumped by over 7.5% to Rs1309 after the company announced that they have secured orders worth Rs300mn. The scrip touched intra-day high of Rs13620 and a low of Rs1184 and recorded volumes of over 52,000 shares on NSE.
Sadbhav Engineering gained by 0.6% to Rs598 after the company announced that they would raise FII limit to 49% from 24%. The scrip touched intra-day high of Rs617 and a low of Rs598 and recorded volumes of over 65,000 shares on NSE.
SAIL gained by 1.6% to Rs1133 after the company announced that their hot metal out put rises 6% to Rs3.8mn ton. The scrip touched intra-day high of Rs133 and a low of Rs130 and recorded volumes of over 30,00,000 shares on NSE.
Hikal surged by over 13% to Rs536 after the company announced that they have signed a mutually exclusive long-term agreement with Alpharma Inc., a US based global specialty pharmaceutical Company for manufacture and supply of an Active Pharmaceutical Ingredient (API) for the Veterinary sector. The scrip touched intra-day high of Rs544 and a low of Rs480 and recorded volumes of over 20,000 shares on BSE.
Lanco Infratech spurred by over 8% to Rs227 as the 500 MW Teesta VI Hydro Power Project being developed by Lanco Energy, a subsidiary of the company, in Sikkim has achieved Financial Closure. The scrip touched intra-day high of Rs229 and a low of Rs213 and recorded volumes of over 13,00,000 shares on NSE.
FMCG stocks were on the receiving end led by fall in the heavy weight HLL as the scrip slipped by 2.3% to Rs195, Colgate was down by 0.3% to Rs385 and Dabur declined by 1.9% to Rs101.
The Auto stocks also pared their intra-day gains as profit booking dragged the auto stocks lower. Bajaj Auto slipped by 0.3% to Rs2105, Maruti was down by 0.3% to Rs794, M&M declined by 1.2% to Rs779 and TVS Motors dropped 1.2% to Rs61.
Technology stocks also ended with firm gains. Infosys advanced by 1.2% to Rs1993, Wipro gained by 1.3% to Rs526 and Satyam Computer gained by 0.5% to Rs491. NIIT Ltd spurred by over 4% to Rs1167 and Rolta added 2.1% to Rs465.
Capital Good stocks ended with smart gains. L&T advanced by 2.1% to Rs2415, BHEL was up by 1.2% to Rs1575, Siemens gained by 1.2% to Rs1422 and BEL gained by 0.5% to Rs1866. However, ABB slipped 2% to Rs1114.
Results Today:
Eastern Silk, HDFC Bank, Radha Madhav, Sintex Industries, South Indian Bank and Zenith Birla.
Fund Activity:
FIIs were net buyers of Rs8.42bn (provisional) in the cash segment on Monday. On the other hand, local institutions were net sellers at Rs2.37bn. In the F&O segment, FIIs pumped in Rs10.07bn on the same day.
On Friday, FIIs poured in Rs31.79bn. However, a major chunk of this is towards the ICICI Bank follow-on public offering. Mutual Funds were net buyers of Rs258mn.
Major bulk Deals:
BNP Paribas Arbitrage has sold GV Films; Religare Securities has sold Madhav Marbles and Emerging Markets has sold Vimta Labs.
Insider Trades:
Ion Exchange: USB Securities Asia Ltd - A/C Swiss Finance Corporation (Mauritius) Ltd has purchased from open market 0.16% of the company on 28th June, 2007.
Lower Circuit:
Aviva Industries, Anant Raj industries and Swan Mills.
Upper Circuit:
Hindustan Oil Exploration, Hindustan Organic, prime Focus, Marksans, Aarti Industries, Deep Industries, Asian Electronics, Tanla, Radha Madhav, Tripex Overseas, Prime Securities, DS Kulkarni, Yashraj Containers, Vyapar Industries, Bilcare and Kothari products, Ruby Mills, Diamond Cables and Bank of Rajasthan.
Major News & Announcements:
ICSA India secures orders worth Rs300mn
Sadbhav Engineering to raise FII limit to 49% from 24%
IFC invests $67.2mn in Max Healthcare
SAIL hot metal output rises 6% to Rs3.8mn ton
Tata Motors to launch Rs1lakh car in Mid-2008 – Reports
EXCLUSIVE - Equibrain Report - July 10 2007
EXCLUSIVE - Equibrain Report - July 10 2007
Grey Market Premiums - HDIL, Allied Digital, Everonn, Celestial Labs, Spice Communications
HD Infra | 500 | 30 to 35 |
| Allied Digital | 170 to 190 | 135 to 140 |
| Everon Sys. | 125 to 140 | 420 to 430 |
| Celestial Labs | 60 | 8 to 10 |
| Ankit Metal & Power | 36 | 3 to 4 |
| Spice Comm. | 46 | 7 to 8 |
| Surychakra Power | 20 | 2.5 to 3 |
| Alpa Labo | 62 to 68 | 8 to 9 |
| Simplex Projects | 170 to 185 | 125 to 130 |
| Omaxe Ltd. | 260 to 310 | 55 to 60 |
Indian Rupee hits IT Companies
Ramesh Mahendroo is a worried man these days. CEO of a small software company in Noida, he billed his US client $700,000 (Rs 3.09 crore) in March, 2007. But at the end of the 60 day payment cycle, the US client sent only Rs 2.8 crore. Mr Mahendroo had lost almost Rs 29 lakh and he could not utter a word.
Mr Mahendroo is not alone. By the time, the payment arrives, its short by several lakhs or even a few crores leaving the IT and BPO companies cash strapped to pay employees and manage overheads. To avert it most BPOs and IT firms, are renegotiating contracts and putting in clauses according to which the billing rate per hour will go up by some basis points if the rupee falls below a certain threshold and vice versa. Some are also negotiating shorter payment cycles.
And the story is not limited to small IT companies and BPOs. Even large ones are facing the heat. According to Credit Suisse, Infosys Technologies may miss its rupee sales guidance this time due to a hit from the rising rupee. According to Merill Lynch there will be a decline of about 330 basis points (3.3%) in operating margins of IT companies, this quarter due to the rise in rupee and wage hikes this quarter.
“We have asked our sales people to go back to all dollar denominated contracts and look for ways of renegotiation. We expect the rupee to fall a bit in winter months when the demand for oil goes up especially as OPEC has refused to increase production. Nevertheless, we are not taking any chances,” said KS Ananthanarayanan, CFO of Birlasoft, a mid sized IT firm.
BPOs are also trying to minimise the loss. “Most BPOs are putting together clauses according to which the billing rate per hour will go up a certain basis points if the rupee falls below a certain threshold. Vice versa, the billing rate will go down if the rupee falls, though it’s an unlikely scenario,” says Manoj Malhotra, CEO of Thapar Group owned Salient BPO in Gurgaon.
“Nobody is working at older billing rates especially in this scenario of rupee rise. In most of our contracts, we are having the renegotiation clause built in,” says Zenta BPO country manager Jaswinder Ghumman. According to analysts, another way to negate the rupee rise is to spread to other geographies. “The Filipino peso has also appreciated against the dollar but not as much as the rupee. So, BPOs and IT firms having a play there can swiftly shift capacities and negate their forex impact,” says Gartner research director TJ Singh.
Most small IT and BPO companies with 100-200 seat operations don’t have a separate treasury department. Many, however, do hedge. Still, the rapid rise of the rupee against the greenback has left their finances in the disarray.
“A Re 1 change in the dollar, impacts our margins by about 0.3% but we have some natural hedges in terms of revenues and costs in dollars and pounds,” says Firstsource CEO Ananda Mukerji.
The rupee neared its nine year peak last week when it hit a peak of 40.39 on Thursday before closing at 40.52. The rupee has risen from 44.2 since January 1 this year to a 40.40 as of Monday. The rupee was trading at 46.06 in July of 2006. The hit due to rupee rise will be evident in the first quarter results to be announced this month by IT majors.
According to a study done by a BPO focused portal, 60% of small BPOs in India shut down within months of starting operations.
According to an analysis, the profit margins of about 22-25% in IT companies is almost being negated. The rupee has gained about 17%. MAT has been levied at 11.33%. FBT on ESOPs is being levied at 33.33%. Salaries are rising at a rate of 15%. And service tax on leases has been levied at 12.5%. Add to that the impending end of tax sops in 2009 and the woes of IT industry become even worse. Meanwhile, people like Mr Mahendroo have no recourse but to optimise processes and renegotiate contracts with clients to prevent foreclosure.
Sequoia Capital - too much money in the market
Bangalore-based Sequoia Capital India has always been ahead of the curve in the Indian venture capital market. In its earlier incarnation as WestBridge Capital Partners, it raised a $150 million (Rs600 crore) early-stage fund to back Indian technology start-ups in 2001 at a time when early-stage funding had all but deserted India. Last year, it raised its third India fund—the $400 million Sequoia India Growth Fund I—and became the first to focus on consumer-driven Indian companies. Around this time WestBridge also merged with Sequoia—another first in India. Today, the firm manages $750 million in India-dedicated capital. Sequoia India managing director and co-founder K.P. Balaraj spoke to Mint about the road ahead:
Has Sequoia India made a formal transition to private equity investing in India?
Early-stage is still very much a focus, and we continue to be the most active in this segment in India. Later-stage, IPO and PE deals are a growing focus for us and we have invested in a number of companies like Idea, Paras and KMC constructions. We like to position ourselves as a long-term VC investor focused on growth situations alongside strong management teams.
But in the US, isn’t sequoia primarily an early-stage investor?
Well, Sequoia in the US also plays in both segments. So, the India strategy is not different.
What’s the portfolio looking like in Funds II and III so far?
We’ve made about 20 investments from Fund II. More than half has gone into consumer and media companies. From Fund III, about six investments have been in the growth stage. The focus is clearly on consumer-driven opportunities in the domestic market. We are sector agnostic.
Post-merger with Sequoia, do you continue to pursue investments independently?
We tend to manage both businesses separately. It is not one pool of capital.
Any concerns about the current VC environment in India?
The main concern is about the quantum of money that’s already in the market. There are many new teams in the market but only a few are able to raise funds, given that limited partners (LPs) generally feel there is too much money in the Indian market. LPs have turned cautious. There’s likely to be a slowdown in fund raising both, on the VC and PE fronts.
So, you’re saying a bubble is not unlikely.
It is a valid concern. A lot of people will get funded in this phase, so while capital is easily available, the flip side is that most markets will get over-funded. How many will fetch a good return is a call investors have to take before they commit. It is not easy, but then risk is the essence of the VC business.
Monday, July 09, 2007
Simplex Projects IPO Analyis
Simplex Projects is under the control of Balkrishandas Mundhra, who has separated from his brother. (The brother runs the already listed Simplex Infrastructure.) Portfolio of completed and ongoing civil construction projects includes commercial and residential buildings, group housing projects and townships, industrial structures, hospitals, and universities and educational campuses. The infrastructure projects have been in the road, and irrigation and water supply segments.
Simpark Infrastructure, a wholly owned subsidiary of Simplex Projects, installs, develops, operates and maintains multi-level automated car parking systems in Kolkata. It has completed two multilevel, fully-automated car parking projects.
To fund the acquisition of plant and machinery, investment in subsidiary, and augment long-term working capital, Simplex Projects is coming out with an IPO.The price band has been fixed at Rs 170-185. The issue opens on 10 July and closes on 13 July 2007.
Strengths
- The order book of Rs 290 crore represents two times the reported financial year ending Mach 2007 (FY 2007) revenue. The schedule dates for completion of projects range from July 2007 to March 2009.
- Each of the verticals is witnessing significant investment.
Weaknesses
- Over-dependant on construction opportunities in and around Kolkata.
- Negative net operating cash flow in FY 2005, FY 2006 and FY 2007
- The pilling segment has the highest earning before interest, depreciation, tax and amortisation (EBIDTA) margin of about 22-23%. The execution period of pilling contracts, which are of small size, is low. Thus, the growing order book could make it difficult to maintain the proportion of pilling business, thereby impacting margin.
Valuation
Standalone FY 2007 EPS on post-issue equity works out to Rs 8.7. Simplex Projects has not given consolidated financials. If one simply adds the profit of the subsidiary to the standalone profit, the consolidated EPS works out to Rs 11.3. At the offer price band of Rs 170-Rs185, the P/E range on the basis of standalone EPS works out to 19.5 to RS 21.3 and on the basis of assumed consolidated earning it is 15.4-16. Unity Infraprojects, the nearest comparable company, is trading at P/E of around 21.
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