Trading Calls - Feb 25 2008

Nifty (5111) Sup 5020 Res 5250

Buy HPCL (293) SL 288 tgt 301, 304

Buy Educomp (4043) SL 4020 Tgt 4095, 4105

Buy Neyveli Lignite (152) SL 148 Tgt 160, 162

Sell Allahabad Bank (106) SL 110 tgt 99, 98

Sell Zee Ent (245) SL 250 Tgt 236, 234

Bonus for Power, gift for Energy!

To take revenge is often to sacrifice oneself

Reliance Power shareholders should be somewhat relieved that a bonus of 3:5 has been announced. Reliance Energy may have nothing to lose because Anil Ambani has decided to let his personal holding in Reliance Power fall to 40%from 45% to enable Reliance Energy's stake in Reliance Power to be maintained at 45%. While many will cheer this gift or sacrifice, there are others who feel the promoters invested just Rs2,000 crore and post-listing the value moved to around Rs75,000 crore. So giving away Rs5000 crore need not be cheered.

Whatever anyone may say, the ADAG group of stocks look set for a decent run at least at start. Then we have HDFC Bank all set to Centurion Bank of Punjab in an all-stock deal. The swap ratio is 1 share of HDFC Bank to every 29 shares of CBoP.

Given the global cues, we can expect a better opening. But the recent trading sessions have shown that there is tremendous resistance at higher levels. A rescue plan for bond guarantors has kept global markets positive. Reports state that New York-based Ambac Financial Group Inc. will get new capital to salvage its AAA credit rating, averting further writedowns for global financial companies.

Infrastructure Developers Ltd, which raised about Rs9.44bn through its IPO last month, will list on the bourses today. The company has fixed the issue price at the lower end of price band of Rs185-220. IRB Infrastructure offered 51mn equity shares through the IPO, constituting 15.36%of its fully diluted post issue paid-up capital. The issue got subscribed by over four times

Japan's Nikkei 225 Stock Average climbed 2.4 percent to 13,827.16. Indexes also gained in South Korea, Australia and New Zealand. The Philippines is closed for a holiday.

U.S. stocks rallied in the final 30 minutes of trading on Feb. 22, helping the Standard & Poor's 500 Index climb 0.8 percent.

Kishore Biyani promoted PE fund Indivision India Partners withdraws from Dish TV deal.

Future Ventures India, the VC arm of Future Group, likely to come with an initial public offer of around Rs38bn.

M&M plans to launch a premium SUV codenamed ‘W201’ by 2009 and the Ingenio MUV by end August of this year.

DoT draws up priority list for new telecom license holders; Datacom Solutions, in which Videocon’s Venugopal Dhoot holds a stake, has topped the list of companies in terms of precedence in converting its LoI into a license

Indian Oil Corp is on the look out to acquire stakes in oil sand blocks in Canada.

GSK Pharmaceuticals plans to launch four drugs in India within the next three months.

Reliance Retail is in talks with UK’s Mark & Spencer to float an equal JV.

Markets erase gains

Markets erased all its previous session gains as traders and investors preferred to book profits and enjoy the weekend. After a negative start, key indices struggled for any clear direction throughout the day. Unless selling intensified towards the end of the days, which was seen in the Banking, IT and the Oil & Gas stocks. Finally, the 30-share Sensex closed at 17,349 losing 385 points. The NSE Nifty closed at 5,110 dropping 81 points.

Overall about 962 stocks advanced, 1,762 stocks declined while 71 stocks remained unchanged. Among the BSE 30 index 27 stocks declined while only 3 stocks advanced.

Among the 30-scrips of Sensex, RIL, ICICI Bank, Infosys and HDFC Bank were among the major laggards. However, Cipla, Hindalco and Maruti bucked the trend being among the only gainers in the index.

Garware Offshore was up by 3% to Rs214. The company announced that it entered into a Memorandum of Understanding (MoU) for the acquisition of one Anchor Handling Tug Cum Supply Vessel (AHTSV) of 60 Tons Bollard Pull fitted with Fire Fighting Equipment (FIFI 1) and Dynamic Position System (DP1). The scrip touched an intra-day high of Rs230 and a low of Rs201 and recorded volumes of over 14,000 shares on NSE.

ICSA India was up by 1% to Rs457 after the company announced that it won Rs439.7mn order. The scrip touched an intra-day high of Rs469 and a low of Rs436 and recorded volumes of over 22,000 shares on NSE.

Suzlon slipped 1.5% to Rs303. The company announced that it would t spend $1bn on India expansion over three years. The scrip touched an intra-day high of Rs307 and a low of Rs300 and recorded volumes of over 18,00,000 shares on NSE.

Glaxo Pharma gained over 2.3% to Rs953 after the company announced its fourth quarter results with a net profit of Rs809mn for the quarter ended December 31, 2007 where as the same was at Rs677.90mn for the quarter ended December 31, 2006. Total Income is Rs3679.40mn for the quarter ended December 31, 2007 where as the same was at Rs3424.30mn for the quarter ended December 31, 2006. The scrip touched an intra-day high of Rs965 and a low of Rs920 and recorded volumes of over 73,000 shares on NSE.

Rain Commodities gained by 1% to Rs191 after the company is considering starting plant in China. The scrip touched an intra-day high of Rs193 and a low of Rs187 and recorded volumes of over 44,000 shares on NSE.

Sakthi Sugar lost 1.8% to Rs81. The company announced that its European unit has acquired Arvika Gjuteri. The scrip touched an intra-day high of Rs86 and a low of Rs81 and recorded volumes of over 11,00,000 shares on NSE.

News Snippets:

SAIL forms a JV company with Jaiprakash Associates to set up a 2.1mn ton cement plant in Bokaro, with an investment of Rs4.1bn.(BL)

- NHAI awards five projects worth Rs109bn for six-laning of highways under NHDP-V to infrastructure developers, including L&T, IRB among others.(DNA)

- BPCL, HPCL and IOC will jointly invest Rs24bn to buy/lease plantations to produce ethanol in Brazil. (TOI)

- BHEL and Nuclear Power Corporation of India are planning to float a JV to take up construction activities for nuclear power plant. (DNA)

- Shree Cement upcoming Rs20bn cement project in MP is getting delayed due to land procurement hassles. (DNA)

- Nalco’s 1.5mn ton aluminum refinery and a 257,000 ton smelter gets approval from Andhra Pradesh government.(BS)

- Deccan Aviation plans to raise Rs16bn by way of domestic or overseas offerings to institutional investors.(BL)

- National Aviation Company to invite bids for the country’s largest aviation insurance policy with a cover of US$7bn.(Mint)

- Hindustan Aeronautics in talks with Honeywell International to manufacture 1,000 small plane engines locally for global market.(Mint)

- Sakthi Sugars European subsidiary has bought a Swedish auto –part maker. (TOI)

- Ambuja Cements to buy three cargo ships for investment of Rs1.5bn, taking total fleet size to ten ships.(BS)

- Reliance Energy has approached the Haryana government for an extension of deadline for commissioning a 600-MW power project. (DNA)

- Asset Reconstruction Company India plans to acquire Rs20bn worth of bad loans by March.(BL)

- Kalyani group plans to set up a 1mn ton steel plant and a 500MW power plant at an investment of Rs65bn in WB. (ET)

- State run fertilizer firm RCF to form a JV for phosphoric acid and granulation unit, in collaboration with Industrial Development Corporation of South Africa and Foskor.(FE)

- ICSA India secures order worth Rs 440mn from Northern Power Distribution Company of AP Ltd, Warangal.(DNA)

- Renault and Nissan to invest Rs45bn for their 50:50 JV planned near Chennai; first car expected to roll out in 2010.(BL)

Bullion metals end mixed

Silver rises but gold drops as traders go for profit booking

Bullion metals ended mixed on Friday, 22 February, 2008 due to some profit taking issues. Silver rose but gold dropped. But at the end, gold registered good gains for the week. Gold generally moves in the opposite direction of the U.S. currency. Gold, as a dollar-denominated commodity, suffers from dollar strength.

Comex Gold for April delivery fell $1.4 (0.12%) to close at $947.8 an ounce on the New York Mercantile Exchange. On Thursday, 21 February, prices hit a high of $958.4. This year, prices have gained 13.5% till date. In January, prices gained 11%, the highest monthly gain since April 2006.

For the week ending on Friday, gold gained $41.5 (4.6%). Prices increased due to the slumping dollar and supply issues at South Africa. Gold prices rise with falling dollar as inflationary concerns boosts the metal's appeal as an inflation hedge.

Comex Silver futures for March rose by 9 cents (0.5%) to $18.04 an ounce. Silver has gained 18.8% in 2008. The metal had climbed 16% in FY 2007. The metal also has gained for seven straight years. In January this year itself, prices climbed 14%.

Gold has traditionally been used as a safe-haven asset against rising inflation. Investor sentiments are boosted by the fact that gold and silver are alternate sources of good investment in the face of declining dollar and rising energy prices. Rising crude increases inflationary pressures and vice versa. On the other hand strong dollar reduces the appeal of the metal as alternate source of investment.

Gold witnessed the greatest annual gain in twenty eight years by gaining $200/ounce (31%) in FY 2007. In 2006, silver had jumped 46% while gold gained 23%.

At the MCX, gold prices for April delivery closed higher by Rs 9 (0.07%) at Rs 12,084 per 10 grams. Prices rose to a high of Rs 12,134 per 10 grams and fell to a low of Rs 11,970 per 10 grams during the day’s trading.

At the MCX, silver prices for March delivery closed Rs 146 (0.6%) higher at Rs 22,951/Kg. Prices opened at Rs 22,870/kg and went to a high of Rs 23,150/Kg during the day’s trading.

Crude ends week 3% higher

Prices are back at the $100 level

Crude prices ended higher for the week that ended on Friday, 22 February, 2008. Prices ended higher by $3(3.1%) near $99/barrel. Price ended twice more than $100/barrel during the week.

Initially during the week, prices rose after comments from Organization of Petroleum Exporting Countries (OPEC) officials hinted a production cut in the near term. But then, in the later part, prices fell after an Energy Department report showed that U.S. inventories rose almost twice as much as forecast in the last week, as refineries slowed processing to perform seasonal maintenance.

For the day ending Friday, 22 February, crude-oil futures for light sweet crude for February delivery closed at $98.81/barrel (higher by $0.58 or 0.56%) on the New York Mercantile Exchange for the day. Prices fell to $97.6 and rose to $100.01 during intra day trading. Earlier in February, prices had slipped to $87/barrel.

On Friday, 22 February, prices increased due to cold conditions prevailing in the North East of US. But market pared gains due to bleak economic condition of the country.

As per the weekly inventory report by EIA on Wednesday, crude inventories rose 4.2 million barrels in the week ended 15 February outstripping the increase of 3.2 million barrels that market expected. On the demand side, EIA reported motor gasoline demand has averaged 9.0 million barrels per day, or 0.5% above the same period last year. Distillate fuel demand has averaged 4.3 million barrels per day over the last four weeks, down 1.9% compared to the same period last year.

EIA also reported that Gasoline supplies rose by 1.1 million barrels in the latest week, while distillate stocks fell by 4.5 million barrels. Total petroleum inventories, including crude oil, gasoline, and diesel, decreased by 3.7 million barrels last week, but they are still in the upper half of the average range for this time of year.

Last weekend, Iranian oil minister said that reducing production is very normal for OPEC in March. Iran is OPEC’s second largest oil producer.

Prior to that, two ministers of OPEC hinted that the cartel might go for a production cut in its next meeting at March, 2008. At its 1 February meeting at Vienna, OPEC members decided to keep current output levels unchanged.

In a monthly report released earlier this month, EIA said the world oil market is poised to ease over the next two years with production increases offsetting moderate growth in oil demand.

Pre Budget Expectations 2008

Pre Budget Expectations 2008

India Strategy - Feb 19 2008

India Strategy - Feb 19 2008

How much will Reliance Power gain ?

Assuming market perception of Reliance Power Ltd’s firm value hasn’t changed from the pre-bonus announcement levels of Rs86,897 crore, the company’s shares could jump as much as 39% on Monday from last week’s close of Rs417.
What the 3:5 selective bonus issue essentially means is that non-promoter or minority shareholding would increase from 10.09% to 15.22%. Their stake is now worth Rs13,226 crore and since the shares trading in the market currently are cum-bonus, each share would be worth Rs580 (minority shares stand at 228 million). As a result, retail investors who have held on to their share will gain about 35%, while other investors will gain 29%.

Bridging the Gap

High net-worth investors who borrowed funds to buy shares in the initial public offering would manage to break even since their cost of acquisition was about Rs560 per share. But most of them tend to book losses on listing.
While arbitrageurs will rush in to bridge the gap between Friday’s close and the sudden change in the cum-bonus share value, they would also be mindful of the short-term capital gains tax of 10%, due to which Reliance Power shares may trade slightly lower. Once the bonus issue becomes effective, 136.8 million new shares will be issued to minority shareholders, which means the ex-bonus share price should be around Rs362.

As pointed out right at the outset, these calculations depend on the assumption that Reliance Power deserves a value of Rs86,897 crore, the level it traded at before the bonus issue was mooted. This may not necessarily be the case, especially after reports late last week that the government of Haryana has imposed damages on Reliance Energy Ltd for its failure to meet a deadline for a 600MW thermal power plant. Reliance Power, which is involved in ­larger projects, gets a large part of its value because of assumptions of timely ­execution.

Leave alone penalties from authorities, if projects are not completed on time, estimates of cash flow will go awry and firm value will deteriorate. Those waiting to jump in and gain from the lucrative bonus issue should be mindful of this risk.
Reliance Energy shareholders, too, have some reason for cheer. It was first assumed that its stake would reduce owing to the bonus issue to only minority shareholders, but it now turns out that its stake will be maintained at 44.96%. In that case, the 9% erosion in its value last week seems overdone, and its shares should also rebound, unless reports about the penalty in Haryana continue to weigh down valuations.

While public shareholders in Reliance Power have reason to rejoice because of the liberal bonus issue, the attached table shows that it hardly cost promoters anything. Anil Ambani’s investment in the firm has been all of Rs1,720 crore. Even after the dilution in his stake owing to the selective bonus issue, his shares are still worth Rs34,600 crore

Via Mint

Weekly Technical Analysis - Feb 25 2008

The Sensex ended the week on a weak note after exhibiting range-bound movement with a negative bias.

The bulls could hardly bank on the preceding’s week’s profits as the Sensex gave up its gains after touching a high of 18,314, up 199 points from the previous week’s close.

The index, thereafter, drifted to a low of 17,295, down 1,019 points from the week’s high. It finally ended at the lower end of the week’s range at 17,349, down 766 points (4.2 per cent).

Among the index stocks, HDFC (down almost 12 per cent), SBI and ICICI Bank (lower by 8 per cent each) and Reliance (6 per cent weak) were the major draggers. On the other hand, Cipla was the major gainer (up nearly 9 per cent). Hindalco and Bajaj Auto also settled with smart gains.

The trend this week will depend on the derivatives expiry and the budget. While the market sentiment remains subdued, the Sensex has a near-term support at 16,950.

The index is likely to move in a range of 16,200 and 19,000 in the short term until a breakout happens in either direction. It is likely to find support around 16,960-16,840-16,71 and may encounter resistance around 17,740-17,850-17,980 this week.

The Nifty moved in a range of 276 points, from a high of 5,368 and a low of 5,093, before finishing with a loss of 192 points (3.6 per cent) at 5,111.

The index may face resistance around 5,215-5,250-5,280, while support on the downside is likely to be around 5,005-4,970-4,940.

The Nifty will continue to move in a broad range of 4,800 to 5,700, before a fresh trend emerges. The index is below its short-term and medium-term daily moving averages (DMA), which are 5,192 and 5,617 respectively. It is also close to its 200-day DMA of 5,026. One may therefore expect some support around these levels.

Via BS

Reliance Power Bonus - 3 shares for every 5 shares held

Anil Ambani-promoted Reliance Power shareholders, who were battered on the listing day of the scrip, effectively reduced their losses by as much as 40% over the IPO price after the company announced the bonus issue on Sunday.

The board of directors at its meeting considered and approved a bonus issue, excluding promoters, wherein three shares would be allotted for every five held by the non-promoter shareholders.

"This move would effectively reduce the cost of Reliance Power shares from the IPO price," Reliance Power Chairman Anil Ambani said. Retail investors were allotted the shares at Rs 430 while institutional investors got it at Rs 450.

ursuant to this bonus issue, retail shareholders would receive the shares at Rs 269 each while for institutional shareholders, it would be Rs 281 per share.

"Compared to the IPO price, for the retail investors it represents a reduction of 40 per cent and for institutional 37 per cent," Ambani added.

The bonus issue follows the dismal opening of Reliance Power at the stock exchanges. The scrip, after listing at Rs 547.8, slid within a minute and closed at Rs 372.5, a level much below the issue price.

Reliance Power scrip closed at Rs 416.85, down 1.21 per cent on Friday at the BSE.

On February 20, the company said it had asked its shareholders to make balance payment by February 26 on shares allotted to them in the IPO to be eligible for bonus shares.

Reliance Power's IPO had offered a discount to retail investors, and an option of staggered payment to all segments.

The record date for the bonus shares would be fixed in consultation with stock exchanges and in compliance with provisions of the listing agreement, the firm added.

India Real Estate

India Real Estate

AllCargo Logistics, Hotel Leela, Indian Hotels

AllCargo Logistics, Hotel Leela, Indian Hotels

Aban Offshore: Buy

Investment with a two-three year perspective can be considered in the stock of Aban Offshore, a leading provider of offshore drilling services. Spurt in global exploration activities on the back of a rising oil price scenario points to good prospects for Aban.

Given the large fleet size and presence in global markets through its foreign subsidiaries, Aban could emerge as one of the leading beneficiaries of this demand uptrend.

Aban’s well-timed fleet expansion moves are backed by good operating efficiency and re-pricing of old contracts at higher rates. At the current market price of Rs 3,887, the stock trades at 11 times its likely FY-09 per share earnings.

This appears reasonable considering Aban’s historical earnings growth and the ongoing cyclical uptrend in the offshore drilling industry. Investors can utilise the recent correction in the stock market to accumulate the stock.
Expansion in fleet size

Aban’s strategy of expanding its fleet size has helped given the rising demand for rigs on the back of a relative stagnation in availability. After the acquisition of Norway-based Sinvest ASA, Aban’s fleet size has increased to over twenty offshore assets, which includes 15 jack-up offshore drilling rigs, two drill ships, one floating production platform and a jack-up and drill ship each on bareboat charter. This fleet size is huge vis-À-vis other domestic players and compares well with some of the bigger global players as well.

Equipped with such a large rig bank, we expect Aban to enjoy a fast track growth in revenues, given the tight supply of rigs worldwide.

This apart, the proposed addition of a few more rigs to the company’s fleet in a couple of years may also lower the average age of its fleet considerably. This is likely to improve the marketability of Aban’s rigs, even as day rates might begin to taper-off by 2010. Further, Aban also stands to benefit by way of expansion in margins given the relatively lower refurbishment cost of new rigs.
Strengthening day rates

With a dearth in availability of oil rigs, day rates over the past couple of years have soared significantly. In this context, the re-pricing of most of the existing contracts of Aban Offshore (the standalone entity) at attractive prices lends confidence on the demand scenario. It also provides earnings visibility for Aban over the medium-term since most of these contracts have been committed for a medium-term horizon.

The most recent renewal of its three-year contract for Frontier Ice with ONGC at a day rate of about Rs 62 lakh (a significant premium to market expectations) reiterates the strong demand prospects.

Notably, this contract also (previously Aban II and Aban VI) has been billed in non-USD currency. This might offer some respite to Aban’s earnings from any likely depreciation in the US currency.
Financials

On a standalone basis, the company clocked an earnings growth of over 130 per cent for the quarter ended December 2007. This was achieved on the back of a 34 per cent increase in revenues, thanks to the re-pricing of two of its assets during the quarter.

Operating profit margin was marginally lower at about 53.08 per cent. The company, however, has a high gearing, given the aggressive capex incurred for the construction of new assets and the funding of its Sinvest acquisition. While this could weigh on Aban’s earnings over the medium-term, it may begin to ease-off once the new assets become operational. Till such time, Aban’s cash flows may help it service its debt efficiently.
Near-term triggers






The company is expected to announce the contract for its newly built jack-up Aban VIII in the next couple of months. This, if struck at higher than expected rates, may offer a short-term upside trigger.

Besides, the proposed listing of its Singapore subsidiary, aimed at refinancing its existing debt structure, may also provide an earnings upside.

While the company expects to retire a chunk of its debt through the potential listing, a lot might hinge on the revival of the IPO market and the perceived valuation of the subsidiary. That apart, a fall in oil prices and excess supply of oil rigs, resulting in a lower day rates, may pose a downside risk to our recommendation.

Ultra Tech Cement: Buy

The Ultra Tech Cement stock seems a reasonable investment option for investors with a medium-term investment horizon. The company has ambitious plans for capacity addition that could support volume growth, cost-saving measures that may improve margins and solid financials.

The company’s 4.9-million-tonne capacity in Andhra Pradesh will be fully operational by this March. Ultra Tech has also planned an additional Rs 3,300-crore capex on de-bottlenecking exercises and setting up captive power plants that would further improve operating margins. At the current market price of Rs 889, the stock trades at 13 times its FY-08 earnings which, compared to peers — ACC and Ambuja Cements — is at a discount. Investors with a one-two year perspective can consider exposure in the stock.

The company has reported a 19.5 per cent growth in net sales in the nine months between April and December 2007, with a 36 per cent increase in operating profits and a 3.80 percentage point expansion in margin. The southern and western regions, the main target markets for the company may witness stronger demand growth for cement in the year ahead on account of an expected increase in demand from the infrastructure sector.
Business Overview

Earlier the cement division of L&T, Ultra Tech Cement demerged from it in 2004 and was acquired by the Aditya Birla group with a 30 per cent stake taken by Grasim Industries. The company is a major player in the West with plants located in West Bengal, Maharashtra and Gujarat and one plant each in Tamil Nadu and Andhra Pradesh.

Ultra Tech has a capacity of 17 million tonnes to which it is adding 4.9-million tonne by commissioning a unit in March this year. With this, the company’s total capacity would go up to 21.9 million tonnes by the end of this quarter. The said 4.9-million tonne would be an addition to its Tadipatri unit in Andhra Pradesh, strengthening the company’s presence in the South.

The southern region has seen relatively firm trends in cement prices due to strong demand growth. The market appears capable of absorbing the incremental supply generated by the company; demand in this region recorded a 12.6 per cent increase between April and December 2007. The outlook for FY-09 also looks quite promising with several government-funded infrastructure projects taking off in Tamil Nadu and Andhra Pradesh.

The company has also announced a Rs 3,300-crore capex plan for de-bottlenecking exercises and to build captive power plants over the next three years. A new captive power plant at Gujarat is set to be operational by end-March. Of the total capex of Rs 3,300 crore, Rs 1,700 crore may be funded by debt and Rs 1,600 crore through internal accruals. Strong volume growth may, thus, make up at least partially for any moderation in cement prices expected on account of fresh capacities going onstream over the next year.
Financials

Ultra Tech Cement has reported an impressive performance in the recent December quarter, helped by higher realisation and improved operational efficiency. While net sales inched up by 10 per cent, operating margins too expanded strongly by 3.86 percentage points.

Volumes for the quarter ending December 2007 registered a 6 per cent growth from 3.21 million tonnes in Q3FY-07 to 3.40 million tonnes. Net sales for the quarter grew 10 per cent, from Rs 1,260 crore to Rs 1,382 crore. The company’s plants are now running at 102 per cent utilisation levels.

Despite a 11.9 per cent increase in fuel cost due to rising coal prices, the company was able to record an expansion in operating margin primarily because of improved production efficiency.

The operating profit mounted to Rs 488.62 crore, up 23 per cent from Rs 396.9 crore in the corresponding previous quarter.
Risks

The huge capacity additions that would be coming on stream towards the end of FY-09 could bring down the utilisation rates across players. Lower-than-expected demand or further policy measures to curtail cement prices could pose risk to realisations and, thus, earnings

3i Infotech: Buy

Investors with a one-two year perspective can consider buying the shares of 3i Infotech in the light of its good business prospects and reasonable valuations.

At Rs 126, the stock trades at 13 times its current year earnings and 10 times its estimated FY-09 earnings. This is a discount to MindTree Consulting and Polaris Software, but a slight premium to Zylog Systems and Hexaware Technologies, all of which have substantial banking and financial services industry (BFSI) exposure. But a niche BFSI focus and superior earnings before tax, depreciation and amortisation (EBITDA) margin (25 per cent) make the stock an attractive ‘buy’ among Tier-2 IT players.

3i Infotech has a robust business model because of a high-margin product-driven business, a healthy geographic spread that includes a significant domestic focus and selective acquisitions to tap new clientele.

A lower dependence on the US and a presence in the critical aspects of the BFSI industry will lead to 3i Infotech being minimally affected, certainly less than its Tier-2 peers, due to the sub-prime crisis.
Business drivers

Products expand margins: 3i Infotech has a near-equal products-services mix in its IT offerings. Product software generates higher margins than traditional volume-based services such as application development and maintenance.

The company also offers products and services spanning the entire gamut of IT requirements for financial services companies to cater to banks, insurance companies, mutual funds and capital markets. It also has offerings in the enterprise resource-planning segment.

This 50-50 mix (between products and services) and end-to-end offering for the BFSI segment gives 3i Infotech an edge over other Tier-2 IT services companies in terms of service offerings and margin profile.

Increasing presence in domestic e-governance and telecom: In domestic markets, 3i Infotech has been able to increase its presence in Government-initiated projects, going by the large-scale deals that it has managed to win recently. The company has won a Haryana Government project for the establishment of e-Disha Ekal Seva Kendra Project.

As a part of the project, the company will set up over 322 citizen service centres. Single-window delivery of services such as issue of land record certificates and ration cards, pension schemes, public grievance redress and payment of telephone and electricity bills, among other services, are envisaged to be provided. 3i Infotech will provide the IT infrastructure and a Web interface to enable these services.

This deal follows a similar one from the Goa Government that entails the setting up of 208 citizen service centres by the company.

The nature and scale of these projects mean that 3i Infotech can be expected to generate a stable revenue stream over a multi-year period. Considering that government spend on providing IT and IT-enabled services is on the rise, scaling up of operations in these service centres can provide the company with additional revenues.

Also, the company has won deals in the telecom space in India. These include provision of IT and BPO services. Although this segment is a small contributor to revenues, a presence in the fastest growing mobile services market in the world makes it well-placed to scale up operations and become a key revenue driver.

Geographic spread: The company has a wide geographic spread in its revenue mix. It generates as much as 56 per cent of its revenues from India, Asia-Pacific and West Asia. The US contributes to about 25 per cent of its revenues, which is significantly lower than other peers in this space.

The company claims that its exposure to banking clientele in the US accounts for only 5 per cent of its global revenues and, even here, its presence is in the cheque and payment processing areas, which are essential operations for banks.

Overall, this spread may help 3i Infotech to be minimally impacted by the appreciation of the rupee against the dollar. West Asia and the Asia Pacific regions are also fast growing ones in terms of IT infrastructure spending and offer opportunities that 3i Infotech may be well-placed to tap.

Acquisitions to enhance growth: 3i Infotech’s acquisition of the US-based J&B Software (J&B) Inc signals its move to expand inorganically and augment its software products offering.

The deal is valued at $25.25 million and 3i has indicated that the acquisition would be immediately EPS-accretive.

J&B is a product software company for functions such as processing and managing automated electronic payment transactions of banks, insurance companies, mutual fund providers, credit-card processors and even telecom companies.

This acquisition creates several advantages for 3i Infotech. First, it would enable the company to expand its North American footprint by tapping J&B’s clientele.

Second, J&B’s product software would be a significant addition to 3i Infotech’s product portfolio in the BFSI segment.

Third, with J&B’s offering, which is mainly on open architecture platforms, 3i would be better placed to tap other high-potential markets such as Asia-Pacific.

3i had earlier entered the European markets through the acquisition of Rhyme Systems in late 2006. This appears to have worked for the company as Europe now contributes significantly to 3i Infotech’s revenues.
Risks

Though the company’s direct exposure to the US loan market is limited, vulnerability to the sub-prime crisis could arise from an indirect exposure, what with investment banking players across the US and Europe announcing huge write-offs.

Operating in the Asian region, especially India, could lead to deal sizes and margins being lower compared to other geographies such as the US. An increasing governmental client base could extend the receivables cycle.

NTPC: Buy

Investors seeking a defensive play in the run-up to the Budget can consider putting their money into the NTPC stock. The stock is now trading at more reasonable valuations compared to the peak of the market euphoria over power stocks barely a month ago. At the current market price of Rs 197, the stock trades at 20 times the projected earnings for 2007-08; down from over 26 at its height.

While the pace of appreciation from current levels could be slower compared to the recent past, the downside appears minimal. There’s likely to be little in the Budget to affect the stock adversely; if anything, it could make things brighter for the company through a sharper focus on the power sector accompanied by higher allocations.

NTPC plans to scale up its present capacity of around 27,000 MW to over 50,000 MW in the next five years. The company will also be commissioning by early-2009 its first hydro power plant at Kol Dam in Himachal Pradesh.

NTPC is an efficient generator when it comes to coal-based stations where its plant load factor is around 93 per cent, but the story is different when it comes to gas-based stations.

Here, the company is plagued by domestic gas shortage and the choice is to either idle the plants or run them on costly imported liquefied natural gas.

The high operating efficiencies translate into a healthy financial position for NTPC. Profit after tax fell 15 per cent in the third quarter ended December 2007 largely due to a higher provision for tax and increased staff costs.

Healthy profitability

Profitability continues to be healthy; the company has maintained a return on net worth in excess of 14 per cent in the last three years.

At an average cost of Rs 1.77 per unit, NTPC’s power is very competitive but the cost could increase as newer capacities kick in over the next year.

The company has also begun to address the equipment shortage issue by forging joint ventures with BHEL and Bharat Forge to produce power generation and other equipment.

In the medium to long term, these joint ventures will ensure that NTPC’s expansion plans do not suffer for want of equipment.