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Friday, September 08, 2006
Thursday, September 07, 2006
Wednesday, September 06, 2006
Monday, September 04, 2006
Sunday, September 03, 2006
Action Construction Equipment: Invest
Investment in the initial public offer of Action Construction Equipment (Ace) can be considered at the cut-off price. In the price band of Rs 110-130, the offer is priced at 12-14 times its expected March 2007 per share earnings on post-offer equity. The offer is attractively priced compared to its peers such as TIL and BEML. Expanding product portfolio, marketing alliances with international players and solid fundamentals lend support to our recommendation.
Ace is one of the prominent players in the construction equipment space and a leading player in the hydraulic tower and mobile cranes segment. Much of the proceeds will be used to expand manufacturing facilities and set up units for new products.
Expanding product portfolio
Ace holds 50 per cent market share of the mobile and tower cranes segment. Escorts Construction is the primary competitor in this segment. Ace's broader product offering in terms of capacity and better margins give it an edge over its competitors.
The company plans to launch higher capacity tower cranes that could give it a better share in the construction equipment market.
The company also plans to foray into forklift trucks where Godrej and Boyce is the leader. It has already entered the Backhoe loader segment, where several players such as BEML, L&T and JCB operate. Ace's product offering in this segment is now restricted to lower end capacities.
Ace has forged marketing alliances with international companies such as Maber, Tigieffe and Autoguru of Italy for products such as aerial access platform and mast climbing platforms, which are used extensively in the construction of high-rise buildings.
These products are not manufactured in the country and, hence, imported. As clients prefer a one-stop shop, a broad product offering enhances the chances of cross-selling different products to the same client.
Immense opportunity
Given the scale of infrastructure investments planned in the country, there is immense scope for growth of the construction machinery sector.
Construction machinery accounts for 20-24 per cent of the total construction costs in high growth areas such as power, roads and bridges.
Availability of easy finance too has encouraged construction companies to own equipment. Ace's tie-up with financiers such as Citicorp and Srei Finance for infrastructure finance could help it improve volumes.
Financials
Ace is one of the fastest growing companies in the construction segment with a compounded annual sales growth of 96 per cent over the last five years. Even in 2005, when most equipment manufacturers suffered a slow down in sales due to delay in awarding road contracts, Ace managed decent growth.
Strong fundamentals indicated by the low debt-to-equity, high interest coverage and return on net worth in excess of 30 per cent lend support to our view.
We feel the offer is attractively priced, considering the immense growth opportunities in the sector, Ace's positioning in the construction machinery space and its strong fundamentals.
The offer that closes on September 7 is lead-managed by Karvy Investor Services.
Businessline - HOV Services: Invest at cut-off
Investors with a penchant for high risk and seeking to diversify their IT services portfolio can consider participating in the book-built offer by HOV Services. This business process outsourcing (BPO) company is making the offer in the price band of Rs 200-240 per share.
At the lower and upper end of the price band, the price-earnings multiple works out to 15-18 times the consolidated per share earnings for 2005-06 on the existing equity base. Bidding at the cut-off price will be appropriate in this offer, as investors will remain eligible to participate, even if the final offer price is fixed at a lower level.
Considering the risks and the overall financials, the pricing is quite stiff at the upper-end of the price band. We would be more comfortable if the final price is fixed at the lower end of the price band, which may leave adequate room for capital appreciation. HOV Services is a focussed player in the F&A (Finance and Accounting) BPO market, with good client relationships and domain focus created through a string of acquisitions.
On the flip side, however, it remains exposed to the risks of high client concentration, intense competition and pricing pressures in the voice-related lower end of the BPO value chain. Of the nearly Rs 90 crore to be raised through this offer, as much as Rs 65.5 crore is to be infused as capital into HOV's subsidiary, HOV Services LLC, for redemption of non-interest-bearing Class B units issued. Only the balance is to be used towards capital expenditure.
The positive signals
As part of the F&A market, HOV Services and its six subsidiaries operate across three business lines: Accounts Receivable Management (ARM), Enterprise Management Tools and Services (EMTS), and Insurance and Tax Services (ITS). Of the total revenues of Rs 163.8 crore for 2005-06, ARM accounted for 45.2 per cent, with ITS and EMTS contributing 42.3 per cent and 12.5 per cent respectively. In ARM, the company caters to a part of the low-end voice services.
However, since it also handles the entire gamut of third-party debt collection, the stickiness of its clients is likely to be fairly high. The other key segment — ITS — provides services to the surety insurance industry. HOV Services has clients that span the Fortune 1000 category across the four key verticals — telecom, insurance, healthcare and financial services.
According to the offer document, most of its clients have been with it for over five years. For the year-ended March 31, 2006, customers from the telecom, insurance and healthcare verticals contributed about 25 per cent each of the revenues, which opens up cross-selling opportunities from its clients across its three business lines.
Risks and challenges
The client concentration levels have been relatively high. For the year-ended March 31, 2006, HOV Services' top ten clients accounted for 70 per cent of its revenues, with the top five clients from the ARM segment contributing about 43 per cent. While the client concentration level may be similar across companies of HOV Services' size, this aspect exposes the company to growth risks arising from any loss or reduction of business from these top clients.
As a BPO outfit, HOV Services faces the challenge of managing high attrition. The offer document states that the attrition rate in the ARM business (including voice calls) has averaged 45 per cent. This along with rising salaries and relatively low operating margins, in the 12-13 per cent band, vis-à-vis its established peers can pose a major challenge.
The competition in the IT-enabled services business has also escalated sharply in the past couple of years. Multinationals such as Accenture or IBM are scaling-up their operations in India. Domestic software service companies such as Wipro, HCL Technologies, Infosys, MphasiS BFL (under the EDS umbrella), and NIIT Technologies are also positioning themselves in the voice-cum-transaction processing BPO business. Finally, pure-play BPO companies such as Genpact, WNS or ICICI OneSource with established operations have also enhanced the competition levels within the industry. If consolidation also takes off in some form, it has the potential to exert influence on the pricing front at the lower end of the BPO value chain.
The offer opens on September 4 and closes on 7.
Atlanta: Invest at cut-off
Source: Businessline
Investors can consider taking exposure in the initial public offering of Atlanta at the cut-off price. At the price band of Rs 130-150, the offer is priced at 13-15 times its per share earnings for March 2006 on a diluted post-issue equity. Valuations are comparable to players such as Valecha Engineering and Era Constructions. Reasonable valuations, good operating margins and a good order-book lend optimism to our view from a near-term perspective.
Business
Atlanta is primarily an EPC (Engineering Procurement and Construction) contractor in the road segment with a presence in the mining and realty space too. Much of the IPO proceeds will be invested in a special purpose vehicle to execute the Nagpur-Kondhali section of the highway on a BOT (Build-Operate-Transfer) basis. The rest will be used for initial investment in a housing project in Mumbai, to repay debt and buy machinery.
Atlanta is one of the smaller players in the construction business trying to transform itself from a pure EPC contractor to an operator of BOT projects. The company has gained experience by executing its first BOT project ahead of time. This could help the company qualify for more such projects in future. Currently, Atlanta has one BOT project under execution and has bagged another for which it is raising funds.
The revenues from both will start accruing in the next two years. BOT projects are lucrative and offer good opportunities for growth as the government encourages more public-private partnerships. The equity expansion will also enable the company bid for large projects. The ability to forge project-specific partnerships with bigger players such as Gammon India could also improve its chances of qualifying for bigger orders.
Near-term visibility
The company has an order book of over Rs 600 crore, of which the unexecuted portion, as of June 2006, is close to Rs 300 crore, approximately three times its 2006 revenues. These orders are only for the EPC contracts on hand and not for the BOT projects. Though the order book-to-sales ratio is lower than most other players in the construction sector (four-five times FY-06 revenues), the execution timeframe, at about a year, gives it near-term earnings visibility.
Financial performance
Over the last five years, the company's sales have grown at a compounded annual rate of 24 per cent and earnings at 47 per cent. Operating profit margins at over 30 per cent is high compared to its peers. Over the last two years, income from the high-margin mining segment has risen substantially to contribute 11 per cent of revenues from 2 per cent in 2004. The company also owns its own range of equipment, which gives it better margins as volumes increase.
The offer opened on September 1 and closes on 7. The lead manager is Karvy Investor Services.
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