Sharekhan Commodities Buzz dated March 19, 2007

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Fed actions will be trigger for Sensex

Market sentiments continued to remain on edge at the close of last week, as worries over rising inflation are leading investors to fear more monetary tightening by the central bank.
Moreover, worries over recessionary pressure in the US and fears of continued spillover from the troubled US subprime mortgage lending sector have added to the woes of the market. The market is clearly looking for positive triggers to try and get rid of the bear hug.
This week, very critical from the data point of view, and may indeed give the market some positive triggers. On Tuesday, The first such data is expected, whenthe US will report its housing starts and building permits. This will be followed by the Federal Reserve’s policy-setting meeting on Tuesday and Wednesday.
The two-day meeting is critical from the stock market’s point of view, as global markets will be looking closely for clues to the future of US rate action.
While no rate move is expected in this meeting, it is by and large expected that the Federal Reserve may hint at cutting interest rates some time later in the second quarter or early in the third quarter.
The outcome of this meeting could give a direction to the global equities markets especially to the emerging markets and more particularly in India.
Investors should wait for the outcome of this meeting to ascertain their future courses of action. Any positive outcome of the Federal Open Market Commitee (FOMC) meeting would be greeted by gains, but weekly inflation data scheduled for Friday would keep big investors at bay, with the market eagerly watching for these numbers. As the harvest season is drawing near, inflationary pressure is likely to ease, but as long as such pressures remain high, inflation is a cause for concern.
Looking forward, the charts show choppiness ahead, with selective buying in some stocks. This means that any further slide on the bourses is not likely to be sharp and that value-buying has started emerging.
An analysis of Nifty futures suggests the building up of fresh short positions, as the discount to Nifty futures increased further on Friday and its open interest rose 1.31% to 37.47 million units. But long positions were built in telecom stocks, which suggest that these stocks could bounce back if the market gets any positive triggers.
Technically also, the market is still in a downward consolidation phase and though it is trading near its short-term support, there is risk even at this level. The only comfort factor for the market was the closing of Sensex above its 200 day simple moving average.
Had the Sensex closed below this level, then the support at 12,288 points would have weakened.
This week, on its way down, the Sensex is likely to test support at 12,288 points. If this support is breached, the next support level is placed at 12,026 points, which is a key support level. Below this, the market may witness a knee-jerk movement, which could see the Sensex briefly touching 11,819 points.
On its way up, the Sensex would test resistance at 12,636 points; but being a minor resistance, this is not likely to pose any threat to the rising Sensex and the next resistance is expected to come up at 12,788 points, which if broken could take the Sensex to 13,059 points. This is a critical resistance level and if this is also breached then it would trigger more buying on bourses.
This week, Hindalco Industries, Reliance Energyand Jet Airways look good on charts.
Hindalco Industries has a strong resistance at Rs132.45. If this resistance is broken, then there could be upward move of over 6%, which can take it upto Rs141 in the short term.However on the downside, the short-term strong support is placed at Rs123.
Reliance Energy, is trading near its strong short-term support level and has the potential to move up to Rs490, if the support level of Rs446 is maintained.
The stock has a strong resistance at Rs493, which, if crossed with rising volumes, could mean that investors can expect even higher levels such as Rs525. The stock is also a good medium-term buy, with the caveat that one needs to watch for the support levels.
Another interesting stock from a technical perspective is Jet Airways. This stock is in a consolidation phase and is signalling breakout on the upper side. On its way up, the stock will have resistance at Rs583 and then at Rs618. Investors can treat the second resistance level as a short-term target also. Jet Airways on its way down may find a rock-bottom support at Rs530.

Sharekhan Investor's Eye dated March 19, 2007

Cadila Healthcare
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs425
Current market price: Rs326

Liva acquisition, US approvals strengthen Cadila

Key points

• Zydus Cadila (Cadila) has acquired a 97.5% stake in Mumbai-based Liva Healthcare (Liva), a mid-sized Indian pharma company, in an all-cash deal. The all-cash transaction will be funded through cash accruals and debt. The size of the deal has not been disclosed.
• The acquisition of Liva will enable Cadila to foray into the Rs1,500-crore dermatology segment in India and thus strengthen its domestic product portfolio, allowing it to offer a more comprehensive product range. With Liva's 325-people sales force, which already has established relationships and strong brand equity amongst the dermatologists, cosmetologists and beauticians, Cadila will be able to make fast in-roads into this rapidly growing segment.
• Cadila has received three product approvals from the US Food and Drug Authority (US FDA) in quick succession. The company has received the final approval to market Azathioprine tablets of 50mg strength and has received tentative approvals for Divalproex Sodium Extended Release tablets in strengths of 250mg and 500mg, and Venlafaxine Hydrochloride tablets in strengths of 25mg, 37.5mg, 50mg, 75mg and 100mg.
• We estimate the above three products would together contribute $13.1 million (approximately Rs40.5 crore) in FY2008E and $15.4 million (approximately Rs69 crore) in FY2009E to Cadila's total revenues. The same three products are likely to contribute approximately Rs0.90 to Cadila's FY2008E earnings and Rs1.10 to its FY2009E earnings.
• At the current market price of Rs326, Cadila is trading at 14.8x its estimated FY2008 earnings and at 12.2x its estimated FY2009 earnings. The stock has underperformed the market in recent times, but we believe that as Cadila's international efforts start translating into gains and growth in the domestic market rebounds, the stock's performance would improve. Considering the strong growth momentum of the company, we maintain our Buy recommendation on the stock with a price target of Rs425.

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VIEWPOINT

DS Kulkarni Developers

Strong project pipeline
At present, the company has residential and commercial projects at various locations in Pune (94%), Mumbai (4%) and Bangalore (2%). These cumulatively amount to 17.5 million sf of saleable area that is targeted for development over the next five to seven years. It includes the planned special economic zone (SEZ) project across 250 acre located at the outskirts of Pune on the Pune-Solhapur highway. The company is also planning a 130-acre township project close to its SEZ site

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Merrill Lynch - Gujarat Gas

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Close: A bounce from supports.. Can it sustain ?

Indian indices made a recovery today. It was a shaky start. Markets took off from where they ended a week ago. Index made gains in the early session but then saw profit taking with Indices briefly dipping into red. However post a ranged session ended the day in strong positive terrain. Asian and European cues supported the Indices equally to trade in the positive territory. Value buying interest was not just restricted to frontline stocks like Telecom, Energy, Engineering and Software led the advances. Asian indices ended in strong while European indices currently trading in green.

Sensex was up by 215 points at 12644.99. It was helped up by gains in BHEL (2079.25,+6 percent), RCVL (397.1,+5 percent), ONGC (793.05,+4 percent), Guj Ambuja (107.3,+4 percent) and Tata Motors (770.85,+3 percent). Restricting the gains were ITC (142,-2 percent), Hero Honda (640.25,-2 percent), Hindalco (128.6,-1 percent), Dr Reddys (677.65,-1 percent) and TISCO (429.75, 0 percent).

However, the important point was that volumes were muted and hence not much confidence can be taken from the current bounce. The confidence still is shaky.

MTNL showed signs of revival. This was despite negative news. The Telecom tribunal TDSAT directed the state-run MTNL to reduce infrastructure charges collected from private operators and asked sector regulator TRAI to frame guidelines for fixation of such charges. The tribunal also directed MTNL to return the extra amount charged from Reliance Infocom within 30 days. This is clearly negative. There could be something more which seems to have been missed. We would recommend to avoid this one on the long side.

The Energy sector traded mixed. The country's largest private entity Reliance Industries Ltd will invest more than $9 billion in developing a gas field off the east coast of India and building pipelines to sell the fuel to consumers. The company is expected to spend $5.2 billion in bringing to production Dhirubhai-1 and Dhirubhai-3 fields in block KG-D6 in Krishna Godavari basin by June 2008. It will invest another $4 billion in laying a 1,386-km pipeline from this city in Andhra Pradesh to Bharuch in Gujarat to transport the fuel. It will begin producing about 40 million standard cubic meters per day in June 2008 and raise it to peak output of 80 mmscmd in next five months. Reliance has so far drilled 22 exploratory wells in block KG-D6 (KG-DWN-98/3), off which 17 have resulted in discoveries. Stock traded up 1% marginally.

The Lok Sabha approved the bill to phase out Central Sales Tax. A new bill will also be passed which will empower states to levy over 4% VAT on Tobacco products. ITC remains the worst hit here. Around 60% of the company?s revenue comes from cigarette and over 80% of the profits. The stock has been hit badly for last few days on back of this VAT news. The impact on volumes needs to be seen. Expect a note on this ..

Technically Speaking: It was a smart recovery by Sensex today. Sensex is on its recovery path and is looking for 12725 as a near target. Index touched intraday high of 12655 and low of 12426. Resistance at 12724, 12803 levels and Support lies at 12495, 12347 levels. Market turnover stood low at Rs 2385 Cr. Overall breadth was in favor of Advancers where the Advancers were 1402 against Decliners of 1124.

Sensex ends buoyant above 12600

The market sentiment remained upbeat for the entire session. Firm Asian indices saw the Sensex open with a positive gap of 55 points at 12485. However the market witnessed a bout of selling and the Sensex touched the day's low of 12427 in early trades. Steady to firm buying in communication, energy and technology stocks once again lifted the Sensex past the 12600 mark to an intra-day high of 12655. The Sensex ended the trading session at 12645, up 215 points. The Nifty gained 70 points and closed at 3679.

The breadth of the market was positive. Of the 2,606 stocks traded on the BSE, 1,418 stocks advanced, 1,111 stocks declined and 77 stocks ended unchanged. Among the sectoral indices the BSE PSU Index notched up gains of 2.62% at 5586 followed by the BSE Teck Index (up 2.23% at 3508), the BSE CG Index (up 2.09% at 8509) and the BSE CD Index (up 2% at 4546).

Barring a few counters, most of the heavyweights ended at higher levels. In the technology space i-flex Solutions soared 6% at Rs1,983, Reliance Communications rose 5.36% at Rs397 and Mphasis was up 1.07% at Rs292. Among the Sensex gainers BHEL surged 6.31% at Rs2,079, ONGC jumped 4.05% at Rs793, Gujarat Ambuja Cements added 3.52% at Rs107, Tata Motors gained 2.86% at Rs771, NTPC advanced 2.71% at Rs144 and HDFC Bank was up 2.48% at Rs927. ACC, Wipro, Bharti Airtel and HDFC gained over 2% each. However, ITC at Rs142, Hero Honda at Rs640, Hindalco at Rs129, Dr Reddy's at Rs678 and Tata Steel at Rs430 inched marginally lower.

PSU stocks notched up significant gains during the day. Gail India surged 4.68% at Rs272, Bank of India added 4.34% at Rs143, Balmar Lawrie rose 4.28% at Rs430, MTNL jumped 3.90% at Rs148, Bharat Electricals advanced 3.45% at Rs1,460, HMT gained 2.68% at Rs73 and RCF was up 2.46% at Rs35.

Over 44.97 lakh Idea Cellular shares changed hands on the BSE followed by Reliance Communications (25.88 lakh shares), ITC (24.87 lakh shares), Orchid Chemicals (10.83 lakh shares) and Parsvanath Developers (10.53 lakh shares).

Value-wise Reliance Communications registered a turnover of Rs100 crore on the BSE followed by Reliance Industries (Rs53 crore), Idea Cellular (Rs42 crore), SBI (Rs40 crore) and Infosys (Rs35 crore)

Sensex jumps over 200 points

The Sensex kept on strengthening as the day progressed, barring that odd blip in the early-afternoon session, as buying continued unabated during the session. That markets around the globe were firm, also boosted sentiment. Some short-covering in the derivatives segment provided the much-needed shot of adrenaline to the market.

The 30-shares BSE Sensex settled 214.37 points (1.72%) higher, at 12,644.77, as per a provisional closing. It had opened higher in the morning, at 12,484.64, and surged to 12,655, at the fag end of trading. The Sensex's low for the day has been 12,426.66.

Trading was halted in between, at 11:45 IST, for sun outage. It resumed at 12:30 IST. The trading time was extended till 16:15 IST. Today was the last session with a staggered schedule. From Tuesday (20 March 2007), the market will close as usual (15:30 IST).

The turnover on BSE aggregated Rs 2385 crore, and was very much below the turnover on a regular day. The lacklustre turnover is because of a bank holiday on account of Gudhi Padva today. As a result, the settlement for trading done on Friday (16 March 2007) and today’s was clubbed for 21 March 2007. Brokerages have advised clients that shares purchased on Friday (16 March) should not be sold on 19 March 2007.

The market-breadth, which indicates the overall health of the market, looked strong on BSE. Against 1,402 shares advancing, 1,124 declined. A total of 72 scrips remained unchanged.

Among the 30-Sensex pack, 24 advanced while the rest declined.

State-run Bharat Heavy Electricals (Bhel) surged 6.46% to Rs 2082, and was the top gainer, on reports that the company was in talks with two overseas firms for nuclear technology deals. Bhel also informed BSE that the tentative performance for FY 2007 will be announced on 3 April 2007, at a press conference to be addressed by the chairman & managing director.

Reliance Communications (up 5.56% to Rs 397.85), ONGC (up 3.90% to Rs 791.90) and Gujarat Ambuja Cements (up 3.71% to Rs 107.50) were the other gainers.

Tata Motors edged up 3%, to Rs 772, for the second day in a row today. Managing Director, Tata Motors, Ravi Kant said on Thursday its small car project coming up at Singur, Kolkata, was on track and would be completed by the middle of next year.

Hindustan Lever rose 1.84% to Rs 180.05, on news that the company had hiked prices of its detergent brands, Surf Excel Blue and Surf Excel Quick Wash.

Car maker Maruti Udyog (MUL) rose 1.40% to Rs 790.35, after the Indian government said it will sell its remaining 10.27% stake in the former PSU in the next financial year, beginning 1 April 2007. The cabinet has approved the plan for a stake sale in the firm, which is restricted to participation from banks, financial institutions and Indian mutual funds. MUL is 54.2% owned by Japan's Suzuki Motor Corp. It was an equal joint venture between the Indian government and Suzuki, when the previous NDA-led regime at the Centre began selling the holding as part of efforts to exit non-core sectors of the economy.

Index heavyweight Reliance Industries (RIL) was up 0.96% to Rs 1312.25, on a volume of 3.94 lakh shares.

Cigarette maker ITC declined 2.21% to Rs 141.80, on high volumes of 24.84 lakh shares. It was the top loser. Two block deals of 5 lakh shares each were struck in the counter for an average Rs 142.25 per share by 10:47 IST.

Bike maker Hero Honda down 1.87% to Rs 640, and drug maker Dr Reddy’s Labs was down 1.04% to Rs 675, were the other losers in the Sensex pack.

IFCI surged 8.35% to Rs 26.60, on high volumes of 2.01 crore shares, on BSE.

Among Asian benchmarks, Japanese Nikkei 225 Index surged 265.40 points (1.59%) to 17,009.55, the Hang Seng rose 313.24 points (1.65%), to 19,266.74, the Straits Times gained 44.64 points (1.45%) at 3,113.39, the Seoul Composite rose 15.51 points (1.09%), to 1,443.39 and the Taiwan Weighted was up 17.66 points (0.23%), to 7,737.46.

European markets were also trading positive, with gains ranging between 0.28 - 1.50%.

Over the last few weeks, local bourses had slipped due to weakness in global markets.

Meanwhile Finance Minister P Chidambaram said on Monday that India is confident it can moderate inflation, and the aim was to do so without hurting growth.

The next major trigger for the bourses is Q4 March 2007 earnings, reports of which by corporates will start next month. Market men will closely watch what company managements have to say about the outlook for FY 2008. Global liquidity still remains strong, and may provide the trigger for a recovery.

An important event being keenly awaited are the meetings this week of the central banks in Japan and the US, to decide on interest rates. The Bank of Japan’s two-day meeting ends on Tuesday (20 March 2007), while the US Federal Reserve’s two-day meeting ends on Wednesday (21 March 2007). The Fed is expected to keep interest rates unchanged. Analysts will eagerly hunt for cues for the US economic outlook in the Fed’s accompanying statement.

Although FIIs resumed buying on Thursday (15 March 2007), their daily volume as reflected in daily gross sales and purchase figures for the day was low. They were net buyers to the tune of Rs 18.50 crore on Thursday (15 March 2007) compared to their outflow of a huge Rs 861.40 crore on 14 March 2007.

An intermittent surge in funds and withdrawal of funds by FIIs has been observed this month. As per provisional data released by the National Stock Exchange (NSE), FIIs were net sellers to the tune of Rs 202 crore on Friday (16 March 2007), the day when the Sensex had lost 113 points.

FIIs were net sellers to the tune of Rs 563 crore in index-based futures on Friday. They were net buyers to the tune of Rs 104 crore in individual stock futures on the same day. Nifty March 2007 futures settled at 3,582.30 on Friday, a discount of 26.25 over the spot Nifty closing of 3,608.55.

US crude oil rose 19 cents to $57.30 a barrel, after falling as far as $56.17 last week on worries of an economic slowdown in top consumer, the United States.

US stocks fell on Friday, as data showing strong consumer price inflation dented hopes for an interest-rate cut any time soon, while fears about the subprime mortgage crisis kept investors on the edge. A government report showed February consumer prices rose faster than analysts estimated, while core CPI, which strips out volatile food and energy costs, matched forecasts.

The Dow Jones industrial average fell 49.27 points, or 0.41%, to end at 12,110.41. The Standard & Poor's 500 Index dropped 5.33 points, or 0.38%, to 1,386.95. The Nasdaq Composite Index slipped 6.04 points, or 0.25%, to 2,372.66.

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ICRA Ltd. IPO

Moody’s to be in full control

ICRA, incorporated as Investment Information and Credit Rating Agency of India Ltd in 1991, is one of the recognised credit rating agencies in India with a wide portfolio of products and services. In close association with the Moody’s group of the US, the company is engaged in the business of providing rating and grading services, research-based information services and also outsourcing services.

ICRA has three wholly owned subsidiaries: ICRA Management Consultancy Services (IMaCS), ICRA Techno Analytics Ltd (ICTEAS), and ICRA Online Ltd (ICRA Online). IMaCS provides management consulting services to clients based in India and abroad. ICTEAS provides business solutions and computer-aided engineering services.

The objectives of the offer are to achieve the benefits of the listing on stock exchanges and to provide exit route for existing shareholders: IFCI, Administrator of the Specified Undertaking of the Unit Trust of India, and State Bank of India (SBI). Thus, the company will not receive any proceeds from the offer. However, with the exit of other promoters, Moody’s will be in full control. This will not only help ICRA garner business from SBI (which was not possible earlier due to regulations), but also help it enjoy the full benefits of Moody’s association.

Strengths

• ICRA is the No. 2 credit rating agency in the country with 399 outstanding public issues under its belt. It enjoys a strong market position, brand recognition and creditability.

• Moody’s Group, one of the global credit rating majors, holds a 29% equity stake. This will help ICRA to leverage the US company’s expertise in newer products. Also, ICRA provides certain outsourcing services to Moody’s Investors Service.

• Due to diversification of its revenue stream, the share of the rating fee income in the consolidated revenue has scaled down from as high as 85% in FY 2002 to 58% in FY 2006. This will insulate it from the risk of change in volume of debt securities issued in the domestic market, interest rate volatility and economic slowdown.

Weaknesses

• Personnel cost as a proportion to sales is on the higher side compared with the listed market leader. Higher expense is also partly on account of higher attrition rate of 23%.
• ICRA has arranged for short-term loan facility of Rs 50 crore from banks to fund the ESOS Welfare Trust (ESOSWT) for subscription to the preferential allotment made to it under the employee stock option plan (ESOP). Under the arrangement between the company and ESOSWT, the latter will repay the loan as and when funds become available through the exercise of options by employees. This will involve higher interest burden as well as ESOP amortisation charge.

Valuation

Annualised EPS for the nine months ended December 2006 on the post-issue equity works to Rs 15.9. On the price band of Rs 275-Rs 330, PE is 17.3-20.8. The only listed comparable player is Crisil, currently traded around Rs 2100, giving PE of 23 times FY 2006 consolidated EPS. Crisil deserves higher PE as it is: over four times larger than ICRA, growing at a faster rate than ICRA, perceived to be more aggressive, and has made much more headway in non-rating and international business. Besides, S&P controls a 56.5% stake in Crisil compared with 29% by Moody’s in ICRA.

Orbit Corporation

Promoted by Ravi Kiran Aggarwal and Pujit Aggarwal, Orbit Corporation primarily redevelops projects in Mumbai. The company was initially incorporated to carry out e-commerce business and was called Orbit Cybertech.

Orbit Corporation is currently implementing 16 up-market projects at premium locations. The estimated free sale area for these projects is 6,85,327 sq. ft. Besides, it has successfully bid, at Rs 333 crore, for Gujarat Ambuja Cements’s approximately 8,763.7 square meters of land at Kalina, Santacruz in Mumbai.

The IPO is to finance advances for acquisition of new projects and development of existing projects as well as to invest in wholly owned subsidiaries. The public issue is of 91 lakh shares with one detachable warrant per equity share. The price band has been fixed at Rs 108 to Rs 117. The issue opens on 20 March and closes on 23 March 2007. Warrants are convertible into shares (between 18 to 30 months from the date of allotment at 10% or 30% discount to the average market price depending on whether the market price is higher or lower than the current IPO price).

Orbit Corporation has voluntarily opted for IPO grading from Credit Rating Information Services of India Limited (CARE). It has received IPO Grade 1, indicating poor fundamentals. The low grade was primarily due to the short track record and low corporate governance

Strengths

• Out of 16 projects, Orbit Corporation’s sales process commenced from 31 December 2006 for five projects involving an area of 5,26,200 sq. ft. Of this, 3,84,706 sq. ft. have been sold for Rs 624.37 crore, and Rs 70.1 crore recognised. The balance 1,41,494 sq. ft. remains unsold.
• According to available estimates, the current potential for redevelopment in Mumbai is about 60 million sq ft. The company is likely to be a key beneficiary as one of the major players in redevelopment of properties.

Weaknesses

• Gestation period for redevelopment projects is long, and involves higher scope for delays and litigation.
• Development Control Regulations for redeveloping properties are being reviewed under court orders.

• The Income-Tax department had conducted a search and seizure on the company, its subsidiaries and its promoters. The company has undertaken to pay an advance tax of Rs 10 crore. For the nine months ended December 2006, the company had made a tax provision of Rs 2.54 core on profit before tax (PBT) of Rs 15.37 crore. Also, a promoter of the company, Pujit Aggarwal, has declared an additional personal income of Rs 15 crore (an amount higher than the net profit of Orbit Corporation!) including cash seized of Rs. 3.07 crore.

• The aggressive bidding for Gujarat Ambuja Cements’s plot is likely to make the company vulnerable to softening of real-estate prices as compared with companies with bank of land. It had put in a bid of Rs 333 crore, whereas its consolidated net worth was Rs 162.98 crore end 31 December 2006. However, the second highest bid was for Rs 331 crore.

• Since the beginning of 2006, banks have increased the lending rates on housing loans by about 300-500 basis points. This is bound to slow down the growth in housing demand.

Valuation

Between FY 2004 – FY 2006, net profit shot up from Rs 1.23 crore to Rs 5.95 crore. In the nine months ended December 2006, net profit further increased to Rs 12.83 crore. Interestingly, Orbit Corporation changed its revenue recognition policy since 1 April 2006, from Completion of Project Method to Percentage Completion Method. This has led to increase in cumulative profit by 11.19 crore.

On the basis of annualised nine months earnings, EPS works out to Rs 3.8 (post-issue and post-warrant exercise). At the price band of Rs 108-Rs117, PE works out to 28.7 and 31, respectively. Comparable companies are currently traded at half these PEs.

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ICRA Ltd.

Background:

• ICRA Ltd. was incorporated in year 1991 as a credit rating agency by a consortium of financial/investment institutions, commercial banks and financial services companies. Moody’s India, a part of Moody’s Group is the promoter of the ICRA Ltd.
• The company is engaged in the business of providing rating and grading services. The company also provides consulting, information technology based and outsourcing services.
• The Company has three subsidiaries, namely, IMaCS, ICTEAS and ICRA Online. ICTEAS provides business solutions and computer aided engineering services. ICRA Online provides mutual fund based information and outsourcing services while IMACS provides management consulting services.
• Rating services, consulting services and information technology based services contributed 55.97%, 21.70% and 14.00% of total revenues respectively in FY06 and 55.64%, 17.08% and 15.84% respectively for the 9 months ended December 2006.
• In fiscal 2006, volume of debt rated by the company was Rs. 1,389.49 billion and the number of published issuers outstanding as on March 31, 2006 were 398. For the nine months period ended December 31, 2006, the volume of debt rated by the company was Rs. 988.64 billion and the number of published issuers rated outstanding as on December 31, 2006 was 399.
• The company has entered into an agreement with ICRA Online for ranking of mutual funds. For this purpose, ICRA Ltd pays ICRA Online a sum of Rs. 70, 000 per month and revenues from these services are shared in ratio of 85:15 by ICRA Ltd and ICRA Online.

Objects of the issue:

• To achieve the benefits of listing
• To carry out the sale of equity shares upto 2581100 shares.

Strengths:

• The company has developed in depth knowledge in several sectors supplemented by knowledge management system. This has enabled company to develop a comprehensive range of products and thus enabling company to obtain additional business from existing clients as well as address a larger base of potential clients.
• The net sales of the company has increased at a CAGR of 28.55% to Rs. 543.21 million in FY06 from Rs. 328.69 million in FY04. The net profit has increased at a CAGR of 13.35% to Rs. 142.08 million from Rs. 110.58 million for the same period. For the nine months ended net sales stood at Rs. 495.41 million and net profit was Rs. 135.87 million.
• The company has consistently high EBITDA margin. Its EBITDA margin improved marginally from 33.79% in FY04 to 33.93% in FY06. For the nine months ended December’06 it has EBITDA margin of 35.70%.
• Since 97% of the debt offers in India are rated, expected increase in corporate take off and the potential for new businesses from a variety of issuers and debt instruments, prospects for its rating business is expected to increase.

Weakness:

• The company has high debtors turnover ratio. The same has increased from 77 days in 2004 to 86 days in 2006. Further, it has increased to 144 days for the 9 months ended December 2006.
• The company operates in an industry where retaining skilled personnel with particular industry domain knowledge for performing credit and financial analysis is essential. The company has high attrition rate of 23% and 22% for FY06 and for the nine months ended respectively. This can have a negative impact on company’s margin.
• The company had declining operating profit from FY02 to FY05. It has declined from Rs. 121.63 million in FY02 to Rs. 87.03 million in FY05. However, its operating profit increased to Rs. 164.87 million for FY06.

Valuations:

• The results of FY06 are not comparable with FY05 as ICRA Online and ICTEAS both become its subsidiary during FY06 and data is given on consolidated basis.
• Return on net worth (RONW) has increased from 9.66% in FY05 to 15.23% in FY06. For the nine months ended RONW stood at 12.75%.
• Book value per share as on December 31, 2006 is Rs. 120.98/-.
• Post issue annualised EPS based on December 2006 earning is Rs. 18.16. The shared are being offered in a price band of Rs. 275/- to Rs. 330/-. POST issue PE ranges from 15.17 to 18.21. Industry average PE is 43.8.

Edelweiss - Spanco Telesystems and Solutions Limited.

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