Strategist - July 17 2007
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Tuesday, July 17, 2007
TCS Brokerage Views
Merrill Lynch retains TCS as TOP pick in IT
Credit Suisse neutral - 1275 Target
HSBC overweight - Target 1450
Omaxe IPO Analysis
Omaxe (OL) is a real-estate development and construction company promoted and founded by Rohtas Goel. Commencing operation as a construction and contracting company, it has completed 120 construction projects. Now, its focus is fully on development of residential and commercial real-estate projects ranging from integrated townships, group housing and retail and other commercial properties, hotels, information technology and bio-tech parks to special economic zones.
After entering the real-estate business in 2001, OL has completed eight residential projects consisting of seven group-housing and one integrated township projects, and two commercial projects including retail and office space, covering an aggregate built-up/ developed area of approximately 5.13 million sq. ft.
End March 2007, OL had 52 residential and commercial projects, consisting of 21 group-housing projects, 16 integrated townships, 14 shopping malls and commercial complexes and one hotel, either under development or under various stages of approvals for development. Of these 52 projects, 38 are under development and 14 in various stages of approvals for development. The company expects to commence development of these 14 projects in the current year ending March 2008 (FY 2008). The 16 integrated townships are essentially ‘mixed-use’ areas consisting of residential and commercial projects and are expected to include 10 group-housing projects, 16 commercial developments, one biotech park and one information technology park. It is also developing projects in the hospitality sector. Its hotels at Amritsar, Greater Noida and Patiala are part of commercial malls under construction. OL has applied for change of land use for its hotel project in Faridabad.
Most of OL’s residential developable space is in non-NCR locations of northern India. Just 19% of the space from the current group-housing projects that can be developed is either under development or in various stages of approval in the national capital region (NCR). All the township projects are in Tier II and III cities/ towns in north India. However, the share of NCR region in the total commercial space that can be developed is 49%.
On November 21, 2006, OL entered into a joint venture with Azorim International Holdings, a part of a leading Israeli real-estate development group. The joint venture is for the construction and development of Omaxe Forest, an ultra-luxury group-housing development in Faridabad. Under the terms of the agreement, of the total area of approximately 36.22 acres, the company will transfer approximately 20.58 acres representing approximately 1.8 million sq. ft. of saleable area to the joint venture entity in which Omaxe and Azorim International will hold an equal stake of 50%.
End July 2007, OL expects an outstanding of Rs 88.97 crore against land purchased. Part of the proceeds will be used for payment of that outstanding along with funding of about Rs 236.03 crore for future land acquisitions. Apart from land acquisition and project development cost, the company is also expected to retire in FY 2008 Rs 200-crore high-cost debts raised from financial institutions.
Strengths
*Access to land reserve of approximately 3,255 acres end March 2007. Total land reserve includes about 571 acres belonging to joint ventures and collaborations in which OL has an economic interest of approximately 74% calculated on a weighted average basis. It owns 31% of the land reserve directly or through its subsidiaries and has sole development rights on 46% of the land bank. About 6% of the land has been allotted by the government and its agencies on a long-term lease of about 90/99 years.
*Of the total land reserves, around 3096 acres (including approximately 451 acres belonging to joint ventures and collaborations) relate to projects that are currently under development or in various stages of approval for development, representing approximately 150 million sq. ft. of saleable area. Of the 150-million sq ft saleable area, about 66.6 million sq ft will be for group housing and 77.3 million sq ft developed into township and 4.89 million sq ft reserved for commercial purpose.
*One of the first developers to conceptualise and develop theme malls in north India. OL conceptualised wedding mall: the one-stop shop for wedding arrangements. Given the strong supply glut in the retail space in the NCR region, this ability to differentiate its property will hold good in attracting tenants and retaining them.
*Adoption of percentage completion method means revenue recognition starts only if the actual cost already incurred on the date of financial statement is at least 30% of the total project cost as estimated by the management. In FY 2008, OL is likely to recognise revenue for more projects out of the current 38 projects as against 23 projects in the previous year.
Weaknesses
* Ventured into realty business only in 2001 and has completed just eight projects since then. Was only a construction contractor since 1989. Despite longer track record as a construction contractor, OL decided not to take up any more construction contracts since March 2006 as the margin in the realty business is higher. As a company with limited track record in this business, it is more prone to cyclical ups and downs of the business.
* The strong rise in real-estate prices and rising interest rates are likely to impact the affordability of housing. Real-estate prices are already showing signs of softening in certain locations
* Effective tax rate stood at 20.18% in FY 2007 largely on account of benefits availed under Section 80-IB of the Income-Tax Act, 1961. For projects approved on or before March 2007 and completed within four years, OL is eligible for this benefit, subject to conditions. New projects approved after this date will not be eligible for this benefit. Hence, the company’s tax incidence is set to increase.
* Operating cash flows in recent fiscals are negative. Operating cash flow for FY 2007 is negative Rs 713.13 crore. The comparative figure is Rs 131.06 crore in FY 2006. Strong negative operating cash flow is primarily on account of a sharp rise in projects in progress. This was Rs 839.75 crore end March 2007 compared with Rs 544.30 crore end March 2006. The inventory, too, has increased to Rs 192.08 crore end March 2007, from Rs 111.52 crore end March 2006.
*Ol does not own the ‘Omaxe’ brand. It is owned by its Chairman and Managing Director. Rohtas Goel. Under a license agreement dated October 1, 2005, the company had to pay a lumpsum amount of Rs 1.2 crore and a royalty fee at the rate of 2% of its annual real-estate turnover. Accordingly it paid Rs 13.2 crore on this account in FY 2006. But from FY 2007, Goel has exercising his rights of renunciation, and has agreed to receive fixed payment of Rs 10 lakh per annum as royalty. Further, the license agreement expires end March 2008.
Valuation
Total income posted a CAGR of 77.34% to Rs 1439.67 crore in FY 2007 to Rs 145.56 crore in FY 2003. CAGR in profit after tax and minority interest was 171.04% to Rs 257.26 crore in FY 2007, from Rs 4.77 crore in FY 2003.
Consolidated FY 2007 EPS on post-issue equity, assuming the green-shoe option is fully exercised, works out to Rs 14.7. At the offer price band of Rs 265 - Rs 310, the P/E range is 18 –21.1, respectively. Parsvnath Developers, the nearest comparable listed player, trades at P/E of 24.
US markets continue to advance
The US markets rallied further on Friday, 13 July 1007, as investors digested news that retail sales fell 0.9% last month, the largest decline in nearly two years, due to weak demand for durable goods and falling gas prices. The decline was much larger than the 0.3% drop estimated by economists, but the the expectations of strong global growth, helped by a weaker dollar, continue to fuel strong gains for the markets.
US stocks rose further into record territory and posted strong weekly gains that saw the Dow Jones Industrial Average close in on the 14,000 level, as investors continued the previous session's record rally after in-line earnings from General Electric Co.
On Thursday, 12 July 2007, the Dow Jones Industrial Average surged more than 280 points to new record highs, posting its best one-day performance in nearly four years. The blue-chip average continued to advance in record territory on Friday, 13 July 2007.
The Dow Jones Industrial Average gained 45 points to close at 13,907, a new record closing level. It earlier reached a new intraday high of 13,932. For the week, the Dow gained 1.8%.
A lower US dollar, following the Bank of Japan's decision to leave rates unchanged at 0.50%, reinforced the liquidity of the carry trade and helped boost those large-cap, multinational companies that benefited the Dow.
The S&P 500 rose 4.8 points to close at 1,552, also a record closing high, on Friday. The broad index gained 1.3% for the week. The Nasdaq Composite gained 5.3 points to 2,707 and gained 1.4% on the week. Fifteen of the 30 blue-chip components advanced over the week.
On companies news, General Electric was in focus after releasing second quarter figures and stating it will increase its 2007 share buy back programme to $14 bilion.The company said second-quarter earnings rose on the back of record orders and earnings from continuing operations rose 12% to US$5.4 billion, or US$0.52 per share, which was up 13% on the same time last year.Total orders jumped 32% to a record US$25 billion, with the total backlog increasing US$18 billion, or 42%, year-on-year.
General Electric said it expects third-quarter EPS from continuing operations in a range of US$0.54-0.56, up 15-19% compared with the year before, and reaffirmed its full-year guidance.
Meanwhile, Alcoa was in the spotlight after the company withdrew its hostile takeover bid for Alcan, making Alcoa itself a prime takeover target, according to analysts. The company’s stock rose by 4.4% to end at $47.35.
In the financial sector, Bank of America was also in for some positive news, after the Dutch Supreme Court ruled that ABN Amro does not need to hold a shareholder vote to proceed with the sale if its US unit LaSalle.
However, Airline shares ended the week with a loss as the sector pulled back amid a steep rise in oil prices ahead of next week's earnings reporting season. The Amex Airline index fell 0.9% to 50.79 points Friday, 13 July 2007, pushing it down 2.6% for the week. Seven of the 11 stocks in the index ended lower Friday, led by roughly 2% losses in the shares of American Airlines parent AMR Corp.
Crude oil prices skyrocketed on Friday, continuing a rally that primarily started on the back of below average gasoline inventories in the US exacerbating the demand – supply mismatch for the commodity in the peak summer driving season. NYMEX crude futures jumped $1.43 to $73.93, topping an intraday high of $74 a barrel- its highest level in 11 months after the International Energy Agency said global oil demand growth in 2008 will be the strongest in years.
Daily Technical Analysis
Nifty — The index opened on a positive note and gyrated in a narrow range of 4522-4496 for the day’s trading. It ended the session with gains of 10 points.
Narrow Range — The index was confined in a narrow range of 4522 on the upside and 4496 on the downside during the day’s trading. Intra-day, a break above the 4522 level could see a rise towards 4548 whereas if the index breaches 4496 it could decline towards the 4470 levels. Lower support for the index is around the 5dma at 4452.
Conclusion — Intra-day, trade a breakout of the 4522-4496 range.
Income Tax Returns Confusion
For assessment year 2007-08, income-tax (I-T) returns have to be filed by 31 July in most cases. And it is compulsory to file the returns on the new I-T return form. There are eight types of forms prescribed by the Central Board of Direct Taxes (CBDT) for different categories of taxpayers. The following is the list of some of the important items on which the board should come out with clarifications so that taxpayers have no problem filing their returns in the new forms.
1. Return Form No. 1 is for salaried employees having salary and interest income. If a person has salary income and he makes payments for house loan interest, which return form should he use?
2. Payment of residential house interest enjoys a tax deduction of up to Rs1.5 lakh. The I-T return form envisages no enclosure with the return form. Whereas Section 24 clearly states that this deduction would not be permissible unless the assessee furnishes a certificate from the person to whom any interest is payable on the capital borrowed, specifying the amount of interest payable by the assessee. What should be done in this situation?
3. During the year, if the assessee has more than one item of short-term or long-term capital gains, then how should the details be mentioned in Form No. 2 or 3 or 4, particularly when no enclosure is to be made with the I-T return form?
4. In case of tax deducted at source, what is the procedure if the deductor has not provided the employee’s tax deduction account number (TAN) despite repeated
reminders? How should the employee fill up schedule TDS–1 and schedule TDS-2?
5. Is the facility of electronic filing of I-T return available at the I-T office? If yes, what are the charges for using the facility? If no, the CBDT should issue a list of places where I-T returns can be filed electronically.
6. Schedule AIR requires taxpayers to give information of transactions reported through an annual information return. The table appearing in rule 114E contains a list of items with class of persons and the nature and value of transactions which are to be reported in AIR. For example, mutual fund exceeding Rs2 lakh and purchase and sale of properties exceeding Rs30 lakh is to be reported for AIR. How should the return form be filled, especially when, say, a person has invested Rs1.9 lakh in one mutual fund, redeemed it after two months and further invested Rs1.9 lakh in another mutual fund? The total investments in a year in mutual funds by this taxpayer is Rs3.8 lakh, but the transactions will not figure in the AIR returns to be submitted by the mutual funds because the amount invested on each occasion was less than Rs2 lakh.
7. In schedule AIR, details have to be given of each code of transaction reported in AIR. Again, enclosures cannot be made with the return.
FIIs pump more money than entire 2006!
After a tepid start this calendar year, foreign institutional investors (FIIs) are investing with a vengeance in the Indian market. Net FII cash inflows in just a little over six months this year have already surpassed the total inflows in the whole of 2006. And half of that has come in July, which still has some way to go!
Data collated by SEBI show that FIIs invested $8.45 billion till the week ended July 13 compared to $7.99 billion invested by them in the whole of 2006. The four-year average for FII investment in the Indian market is $8 billion.
The first fortnight of July saw an inflow of $4 billion mainly due to the mega public offers of DLF and ICICI Bank which sailed through largely on FII support.
Early concerns
FII investment started on a sluggish note early this year on concerns over inflation and higher interest rates pegging back the growth in corporate earnings. The downward trend in inflation and the more benign stance adopted by Reserve Bank of India post-March led to stock prices moving up and in turn attracting greater FII investment.
In comparison, calendar 2006 witnessed tepid inflows in the first seven months — the net FII inflow in January-July 2006 was just $2.8 billion. However, they picked up in the second half to reach almost $8 billion for the whole year.
A quick study of 33 stocks of the Nifty 50, for which latest data on shareholding pattern are available, shows that Tata Steel saw a 4.54 percentage point increase in FII holdings since January; the FIIs now hold 22.65 per cent of the steel major’s equity.
Interestingly, FIIs pared their holdings in Ambuja Cements (formerly Gujarat Ambuja Cement) by a significant 6.65 percentage points between January and now; their stake in the company is now down to 27.66 per cent.
Incidentally, it is not the Indian market alone that seems to have received favourable treatment from the FIIs. The Taiwanese market received $11 billion till date this calendar while Thailand has got $4 billion.
Grey Market Premiums - Omnitech, Zylog, Central Bank, HDIL, Omaxe
Allied Digital 190 135 to 140
Everonn Systems 125 to 140 390 to 400
Alpa Labs. 62 to 68 No premium - trading at discount
Simplex Projects 170 to 185 155 to 160
Spice Communication 46 9.50 to 10
Surychakra Power 20 2 to 3
HDIL 500 31 to 32
Celestial Labs 60 11 to 12
Omaxe Ltd. 265 to 310 55 to 60
Omnitech Info 90 to 105 160 to 165
Zylog System Ltd. 330 to 350 200 to 210
Central Bank 85 to 102 15 to 20
BSNL partially destroyed - Raja 1 BSNL 0
The deal will be limited to 2G lines only.
The board of state-owned Bharat Sanchar Nigam Ltd (BSNL) is learnt to have halved its 45.5 million line GSM order and decided to renegotiate the price with Ericsson and Nokia — the two equipment manufacturers who had earlier qualified for the order based on their price bids.
The marathon meeting of the BSNL board on Monday in Delhi, which lasted over three hours, is also believed to have come to a consensus that the order will be limited to second-generation (2G) lines and a separate tender for third-generation (3G) lines, which offer high-speed Internet access, will be floated later.
The decision to overturn the earlier order, which was a combination of 2G and 3G lines, falls in line with Communications Minister A Raja’s letter to the board that the current tender be restricted to only 2G lines, considering that the 3G policy has not been finalised.
“Keeping in mind the minister’s suggestions and BSNL’s interests, we have taken some decisions that will be conveyed to Raja,” BSNL Chairman and Managing Director AK Sinha said after the meeting, refusing to discuss details.
However, sources said at least one senior BSNL official was of the view that the order should be divided with 17.5 million 2G lines and 5.5 3G lines.
But that was overruled as the two representatives from the department of telecommunications contended that the new order should be limited to 2G lines.
Sources said the board, which decided against any financial rebidding, hoped to complete the award in the next few days.
A three-member committee, set up by the board to find ways to resolve the controversial awarding of the contract, submitted its report to the board today.
The controversial BSNL equipment order came under a cloud after Raja questioned the deal, saying the price of $108 per line quoted by Ericsson was too high and that he wanted an investigation into why Motorola and Zte were disqualified from the tender (they were disqualified on technical grounds).
Motorola had gone to court opposing its rejection but had withdrawn the case later.
BSNL could have gone for a rebid of the equipment deal but that would have attracted the ire of the company’s powerful staff association, which had threatened an indefinite strike if the government delayed the award of the contract.
Last week, the staff association struck work for a day, protesting the delay. BSNL employees have been complaining that the company will lose market share to private competitors if the contract was delayed any further.
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