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Wednesday, July 04, 2007
Larsen Tourbo Restructuring
India’s largest publicly traded engineering and construction company, Larsen & Toubro Ltd, is planning a significant restructuring of its businesses—some 62 units under six divisions and three subsidiaries.
L&T’s power, shipbuilding and hydrocarbon businesses are being spun off as subsidiaries, while railways, defence and nuclear power businesses will remain under L&T’s fold.
“Each of our businesses that has the potential to bring in $1 billion in revenue and $100 million in profits before tax and interest will be spun off into separate businesses,” said Anil Manibhai Naik, chairman and managing director.
Naik said L&T, which is considering a foray into several new fields such as shipbuilding, defence equipment manufacturing, railway coach building and power, is in the process of finalizing the blueprint for the overall restructuring.
The company’s existing divisions are being reorganized into 12 verticals.
“We have not yet finalized the structure of L&T,” said Naik. “We do not know whether it will be made into a holding company and subsidiaries will do all businesses. Our focus is to divide various busineses into verticals to get operational efficiency.”
Admitting that the company has become complex, Naik said: “Adding to the existing complex structure will not bring talent or corporate governance to the company. We need to bring in certain focus on individual businesses.” The exercise will also unlock shareholder value, he noted.
L&T shares are trading at Rs2,258.95 a share on the Bombay Stock Exchange, well off their 52-week high of Rs2,728 in September, giving the company a market capitalization of Rs64,100 crore.
L&T posted annual revenues of Rs20,700 crore through March and has a healthy order book of around Rs37,000 crore.
The engineering and construction division of L&T accounted for 75% of its revenue last year, while the electricals and electronics division accounted for 11%, and machinery and industrial products 10%, leaving 4% for three other divisions.
The company has already set in motion the recast plan by forming L&T Power Projects Ltd and L&T Power Development Co. While L&T Power Projects will be the investment arm for all power projects, the other subsidiary will execute coal-fired and multi-fuel power plants. L&T already has a small presence in hydropower with 70MW under construction in Himachal Pradesh.
“The hydropower business will be under the construction division, as it is a construction-oriented business,” Naik said. He also said the company is actively considering managing nuclear power plants once the sector opens up for private participation. That division will continue to operate under the heavy engineering division.
“L&T Power Projects will remain a common vehicle for investing in hydro, nuclear and thermal power projects,” Naik said.
The firm’s foray into shipbuilding will be spearheaded by a new company to be announced by April 2008. While Naik would only say that the shipbuilding yard is likely to be located in one of three states—Tamil Nadu, Andhra Pradesh or Gujarat—Mint has learnt that L&T has picked Kattupalli port, in Tamil Nadu, for the Rs2,000 crore shipyard. L&T will own between 95-100% of the stake in the company.
The firm is also considering a foray into equipment manufacturing for the hydrocarbon sector—from drilling rigs to laying pipelines. The business will be spun off into a separate company that will look at opportunities in refineries, drilling rigs, petrochemical plants and pipelines as well as the gas business in India.
The firm’s defence manufacturing division will operate under the heavy engineering division, after the government grants it Raksha Udyog Ratna status, putting L&T on a par with public sector defence eq-uipment manufacturers and defence ordnance factories.
Naik said the firm was looking at developing products for hi-tech field weapons, such as 150mm and 175mm field guns, missile launchers, signalling systems and naval equipment.
The rail equipment manufacturing business, according to Naik, will operate as a division of the company that is considering entering coach manufacturing, signalling systems and developing the Delhi-Mumbai freight corridor. “In railways we are picking up small pieces that exist in the company like light signaling, railway electrification and civil work... and will combine all these to form one integrated railway group,” he said.
“Our idea is to create private sector mix of Indian Railway Construction Co. and Rail India Technical and Economic Services.”
DLF debut gains seen limited at 7-12 pct
Shares in real estate firm DLF Ltd., which raised $2.25 billion in India's biggest IPO, are expected to rise by up to 12 percent on their debut on Thursday, with the gains limited by concerns over falling property prices.
Analysts said a limited floating stock should help the company shrug off a sluggish near-term outlook for developers, amid high interest rates and property prices that have eased about 10 percent in the last four months.
DLF, which received subscriptions for about three times the shares on offer, could open at 560-590 rupees ($13.8-$14.6), analysts said, compared with an IPO priced at 525 rupees, near the middle of an indicated 500-550 rupee band.
Bangalore-based Sobha Developers Ltd. soared 75 percent on its debut in December, while Akruti Nirman rose by more than a third on its first trading day in February.
"Ideally, the stock should begin weak, but given the restricted supply scene, the shares can jump on the first day," said V. Suresh Babu, director and head of securities business at Spark Capital.
DLF last month sold 10.27 percent of the company, or 175 million shares, in an offering heavily bid by large funds, but which just managed full subscription for the 52.2 million shares reserved for small retail investors.
To sweeten the offering, retail investors were given an option to pay part of the full price, with the remainder in one or more calls. A banker associated with the offering said the part-paid shares would not be listed on Thursday.
DLF, India's most valuable developer at $22 billion, has strong long-term potential as demand for office space, shopping malls and apartment blocks will only rise in the coming years in India's fast-growth economy, Asia's third biggest, analysts said.
Rival Unitech Ltd. is valued at $11 billion.
"There's a concern that real estate prices could come down, but I'm convinced about the long-term potential given DLF's land bank and expansion potential," said Manish Balwani, analyst at Emkay Share and Stock Brokers.
Analysts are concerned about the near-term outlook for DLF, whose IPO was sold with some unprecedented marketing commissions by bankers Kotak Mahindra and DSP Merrill Lynch. It had abandoned an IPO last year after a market slide.
"We believe the stock is currently overvalued and initiate coverage with a 'sector underperformer' rating and a price target of 404 rupees," Enam Securities wrote in a report.
Spark's Babu added: "The sector itself does not have much to offer investors at this point of time. If one wants to play for 4-5 years, then DLF could be a choice."
Other bankers to the issue were Lehman Brothers, UBS, ICICI Securities, Citigroup, Deutsche Bank and SBI Capital Markets.
Sensex 15K just 120 points away...
After opening with a positive gap of 62 points at 14,868, the Sensex rallied to a new, all-time intra-day high of 14,907. Profit-taking at higher levels saw the index pare gains and slip to a low of 14,791 - down 116 points from the day's high.
The index, thereafter, rebounded into positive zone and displayed range-bound movement for the major part of the session. Aggressive buying in cement stocks, coupled with smart gains in select heavyweights, saw the index rally towards the closing bell. The index finally finished with a gain of 74 points at 14,880.
The Nifty rallied to a fresh high of 4386 in opening trades. However, unlike the Sensex, the index, after slipping into negative zone, exhibited range-bound movement with a negative bias for most of the day. The index eventually ended the day on a flat note at 4359 - up two points.
The breadth was negative on the BSE - out of 2,676 stocks traded, 1,434 declined, 1,190 advanced and 52 were unchanged today.
MOVERS & SHAKERS
ACC zoomed 9% to Rs 1,023. Ambuja Cements surged 4.5% to Rs 130, and Grasim added over 1% to Rs 2,739.
Tata Steel soared 2.6% to Rs 616. Cipla, Hindustan Unilever, NTPC and ICICI Bank rallied over 2% each to Rs 218, Rs 199, Rs 155 and Rs 985, respectively.
Tata Motors and Larsen & Toubro gained 1.5% each at Rs 698 and Rs 2,291, respectively.
ITC, Reliance Communications and Maruti were up around 1% each at Rs 158, Rs 542 and Rs 791, respectively.
ONGC shed 1.6% to Rs 874. Wipro and SBI slipped over 1% each to Rs 509 and Rs 1,563, respectively.
DAZZLING DEBUT
Vishal Retail made a big-bang debut on the bourses today. The stock listed at a 75% premium at Rs 472 on the BSE as against the issue price of Rs 270. The stock touched a low of Rs 423, and then zoomed to a high of Rs 809 before settling at Rs 752 (a premium of 178%).
VALUE & VOLUME TOPPERS
Debutant Vishal Retail topped the value chart with a turnover of Rs 854 crore followed by ACC (Rs 145 crore), Indiabulls Real Estate (Rs 135.70 crore), Reliance (Rs 106.70 crore) and SBI (Rs 103.70 crore).
IFCI led the volume chart with trades of around 1.22 crore shares followed by Vishal Retail (1.14 crore), Reliance Natural Resources (71 lakh), Silverline (63.65 lakh) and Bellary Steel (51 lakh).
SSKI - Provogue
SSKI Research report on Provogue:
HIGHLIGHTS OF FY07 RESULTS
Piggy riding the retail boom
Provogue has reported revenue surge of 50% in FY07 at Rs 2.4 billion on the back of retail ramp up (94 Provogue Studios and 6 Provogue Mega Stores) and addition of new categories like footwear, women’s wear, fashion accessories, besides ramp up of national chain of stores like Shopper’s Stop, Globus, Pantaloons, etc. Provogue has also started a value retailing format – ProMart (store size of 50,000sq. ft.), which would be similar to factory outlets for various fashion brands. As Provogue grows its same store growth and adds higher realization productlines, margins have improved by 30bp and PAT has grown at 52% to Rs 196 million. On the consolidated basis, Provogue has reported PAT of Rs 192 million, as Prozone is yet to contribute to the bottomline.
Provogue – a fashion statement
Having built a strong equity, Provogue is extending its reach as also add product categories - women's wear, innerwear, footwear and fashion accessories. Provogue is ramping up its retail presence through Provogue Studios (1200-1500 sq. ft.) and Provogue Mega Stores (6,000-10,000 sq. ft.) from 100 stores now to 150 by FY08. Provogue is well developing on the lines of GAP and GUESS and making a style statement. With a view to foray into value retailing for branded products, Provogue has set up - Promart. Each of the Promart stores would be ranging from 50,000-100,000 sq. ft. Provogue also intends to introduce global fashion brands into India to extend its own equity in the fashion space. Provogue may look at tie ups with global brands and would handle the marketing and distribution in India for these brands.
Prozone – the big value creator
Prozone - the proxy retail play: Provogue has forayed into retail development and mall management business through its subsidiary Prozone. Having roped in Liberty International UK, one of the largest retail developer and mall manager in the world (AUM of GBP 7.5 billion) for 25% stake (for Rs 2 billion), Prozone has lined up 7 properties across 7m sq. ft. of retail space in cities like Mysore, Aurangabad, Thane, Surat, Indore, Nagpur and Chandigarh, first of which would be operational by end of FY08. With Provogue understanding of the domestic retail operations and Liberty’s expertise in mall development and access to international brands, we are confident of Prozone emerging as a successful player in the space. Currently valued at Rs 8 billion, we see immense value creation potential in this business. Globally, real estate funds enjoy the highest earnings multiple after exchanges and trade at 30-50x multiples. Players like Simon, Westfield, etc, have traded at 30-40x multiples. We believe that Provogue would also look at getting the Prozone entity demerged and potentially list the company. Provogue would potentially also look at foraying into REIT or real estate VC funding, as done by Pantaloon Retail (Kshitij).
The 'real'ty value lies here: Reiterate Outperformer
As Provogue scales up its retail operations, we are confident of revenues growing at 30% CAGR over FY07-09. We believe that Provogue is attractively valued and offers substantial upside from the current levels. Excluding Rs 6 billion of residual value of Prozone from Provogue’s current valuations of USD 225 million, the branded operations is trading at attractive valuations of 11x FY08E earnings. Provogue is one of our top picks in the sector. Reiterate Outperformer.
Valuation
Provogue has reported revenue growth of 50% in FY07 at Rs 2.4 billion on the back of rapid store expansion and extension of Provogue brand to new categories. Improving throughput from continuing retail space has resulted in operating margin expansion of 30bp. PAT has risen by 52% at Rs 196 million. Provogue is emerging into an attractive retail as also proxy retail play. Provogue continues to extend its brand equity on the fashion platform through rapid retail ramp up (150 Provogue Studios / Provogue Mega Stores by 2008) as also portfolio expansion to women's wear, footwear, fashion accessories, etc. To leverage Provogue’s strong presence in fashion space, it would also look at introducing international fashion brands into India. While Provogue continues to piggy ride the retail growth, the biggest opportunity and where we see big value getting created is in its subsidiary - Prozone, the retail development and mall management business. Prozone currently has 7 properties under various stages of development (over 7m sq. ft.). Having roped in Liberty International, UK (infused Rs 2 billion for 25% stake in Prozone), one of the largest retail developer and mall manager in the world, Prozone emerges as one of the best proxy retail play. Excluding Rs 6 billion of residual value of Prozone in Provogue’s current valuations, the branded operations is trading at an attractive valuation of 11x FY08E earnings. Provogue remains one of our top picks in the retail space. Reiterate Outperformer.
Edelweiss - Engineers India
Edelweiss Research report on Engineers India:
Engineers India’s (EIL) Q4FY07 profits were lower than our expectations due to higher employee expenses and other operating costs. Revenues were marginally higher than estimates due to lumpiness of revenues in Q4FY07.
EIL ended this quarter with an order book of Rs 21.3 billion; order book includes an Rs 9.2 billion LSTK contract from IOC. Q4FY07 order intake was Rs 0.7 billion compared to Q4FY07 revenues of Rs 1.6 billion.
Revenues were lower by 11.2% Y-o-Y and higher by 24.0% Q-o-Q due to lower share of LSTK (lump sum turn key) business. EBIT margins improved on Y-o-Y basis from 21.2% to 25.1%, but fell from 33.0% in Q3FY07. EIL factored in increase in employee costs w.e.f. January 1, 2007; this has dented EBIT margins. EIL expects the salary hikes to be 50%. We have provided for increase in salaries which resulted in increase in the company’s employee expenses and hence, we are lowering our earning projections for the company.
We have reduced our FY08E EBITDA and EPS from Rs 2.0 billion and Rs 35.3 to Rs 1.3 billion and Rs 27.0, respectively. We have also reduced FY09 EPS estimates from Rs 41.8 to Rs 35.9. EIL is highly levered to increase in salaries; every 1.0% increase in salaries reduces the company’s FY08E profits by 1.0% (Rs 0.3/share).
EIL’s order book at 3.7x FY07 revenues provides comfort over sustainability and growth of revenue over the next four-five years. However, EIL’s earnings are not expected to grow significantly as higher employee costs may not be passed on Till FY08.
At Rs 506, EIL trades at 18.7x and 14.1x on FY08E and FY09E EPS, respectively. On an EV/EBITDA basis the stock trades at 14.2x and 8.5x, our FY08 and FY09 earnings. Global firms— Technip, Jacobs, Flour, McDermott—in similar business trade at one-year forward EV/EBITDA and P/E of 11-12x and 23-24x, respectively. We are downgrading the stock
to ‘ACCUMULATE’.
Strong order book; ends Q4FY07 with highest-ever order book of Rs 21.3 billion
EIL’s Q4FY07 order intake of Rs 0.7 billion resulted in the company maintaining high order book for FY07 year end. We estimate the current order book at Rs 21.3 billion. Current order backlog stands at 3.7 years of FY07 revenues. FY07 LSTK order stands at Rs 9.2 billion, with the remaining Rs 12.1 billion from conventional engineering business. Most of the LSTK order is expected to accrue in FY09. In FY08, we expect EIL to bag orders from CPCL’s modernization project (Rs 1.5 billion revenues for EIL) and HPCL’s Bhatinda refinery (Rs 6.0 billion). IOCL’s Paradip refinery project (Rs 10 billion) is another large project on the horizon.
Q4FY07 and FY07 revenues dip due to lower LSTK contribution
EIL’s Q4FY07 revenues of Rs 1.63 billion were lower by 11.2% Y-o-Y due to lower LSTK revenues booked in the quarter. LSTK revenues, which constituted 34.0% of total revenues in Q4FY06, fell to 5.2% in the reporting quarter. Similarly, FY07 revenues fell by 27.8% as LSTK’s share fell from 46.2% to 14.4%. We expect LSTK revenue share in FY08 to remain around same levels as IOC’s LSTK project will have a significant impact on EIL’s revenues from FY09 onwards.
Employee costs to drag future earnings; valuations full; reduce to ‘ACCUMULATE’
EIL’s Q4FY07 employee expenses increased by 28.2% Y-o-Y, which resulted in lower-thanexpected earnings. Salaries for all public sector undertakings (PSUs) are due for a hike from January 1, 2007 onwards. EIL has taken steps for the same and has provided for the increases in salaries from Q4FY07 onwards. The company expects the salary hikes to be 50%. We have provided for increase in salaries, which resulted in increase in the company’s employee expenses and hence, we are lowering our earning projections for the company. We have reduced our FY08E EBITDA and EPS from Rs 2.0 billion and Rs 35.3 to Rs 1.3 billion and Rs 27.0, respectively. We have also reduced FY09 EPS estimates from Rs 41.8 to Rs 35.9. EIL is highly levered to increase in salaries; every 1.0% increase in salaries reduces the company’s FY08 profits by 1.0% (Rs 0.3 per share). EIL’s order book at 3.7x FY07 revenues provides comfort over sustainability and growth in revenue over the next four-five years. However, EIL’s earnings are not likely to grow significantly as higher employee costs may not be passed on till FY08. At Rs 506, EIL trades at 18.7x and 14.1x on FY08E and FY09E EPS, respectively. On an EV/EBITDA basis the stock trades at 14.2x and 8.5x, our FY08 and FY09 earnings. Global firms— Technip, Jacobs, Flour, McDermott—in similar business trade at one-year forward EV/EBITDA and P/E of 11-12x and 23-24x, respectively. We are downgrading the stock to ‘ACCUMULATE’.
SSKI - Radico Khaitan
SSKI Research report on Radico Khaitan:
High Volumes - Low Margins
With the IMFL industry in India growing at 10% per annum, owing to an uptake in product portfolio, Radico Khaitan, present mostly in the regular segment (consisting of 70% of the market), has shown a volume growth of 12.4%. While its established brands in the regular segment, 8PM whisky and Old Admiral Brandy, have both shown volume growth of only 7% and 10%, its main growth came from its Magic Moments vodka and its acquired brands of Brihans. Radico Khaitan launched Magic Moments vodka in the end of FY06 and in its first complete year of launch has sold 0.35mn cases to acquire 15% of the Indian vodka market, growing at 45% per annum. While Magic Moments has shown a good growth over the year, there has been a huge amount of brand building expenditure that the company has incurred over the period. With the company expected to continue the brand building expenses in FY08, we do not expect much margin expansion. Radico Khaitan in order to enter the international markets has decided to choose the organic route rather than the inorganic way (United Spirits acquired Whyte & Mackay and Bouvet Ladubey and Champagne Indage acquired Vontelnella Tandou). Through its 100% subsidiary, Radico Khaitan Global, in the Middle East, Radico has been beefing up its exports. Apart from the Middle East, Radico has also been exporting into Africa and entering into a JV in UK to export its products there.
Radico- Diageo JV
In December 2006, Radico Khaitan (India’s second largest spirits manufacturer) and Diageo (world leader) entered into a 50:50 JV to jointly exploit the large and developing IMFL market in India. Diageo’s business in India prior to the JV was limited only to the locally produced Smirnoff (the largest premium vodka brand in India) and its Johnny Walker brand in the duty free market. It has now recognized that India, the largest whisky market in the world, is an important market for its further expansion and cannot be ignored. While duties and taxes might be an issue for international players entering the Indian markets in a huge way, the biggest hurdle that we see is of the distribution of their alcoholic beverages. With alcohol under the preview of the state, each state has its own distribution structure that has been in place for a very long period of time. Diageo recognized that in order for it to make a serious impact on the Indian alcoholic beverages industry it needs to gain access to a strong pan – India distribution network. Radico Khaitan owing to its pan-India presence provides Diageo with a distribution network covering 29 states in India. While Diageo has entered into a JV with Radico Khaitan, we believe that the long term agenda behind the JV could change. Diageo needs to roll out its own products into India and the JV would not be the viable route for it. Additionally, Radico Khaitan provides Diageo with the distribution structure required for a player to enter India.
Radico Khaitan- Strategically Placed
Emerging markets have been the growth drivers behind the robust performance shown by international players in the alcoholic beverages space over the past 5 years. With the Indian market becoming the largest market for whisky in the world and a noticeable uptrend in product intake, international players need to enter into India quickly. India is a 350mn cases spirits market of which only 1/3rd is IMFL, with the rest being country liquor. With an evident shift from country liquor to IMFL, the Indian spirits market is expected to grow at 10% over the next 3-4yr period with premium and prestige segments leading the way with 20%+ growth. Radico Khaitan, in the alcoholic beverages space, is a logistically strong but a distant second player in the Indian market. With international players vying to enter the Indian market, Radico Khaitan with a strong plethora of brands and a pan-India presence becomes the best positioned player for global majors looking at a strong India centric presence. We expect that Radico will continue to show growth under the favorable domestic market conditions as well as its new avenues (exports). We are also excited about the potential strategic value of Radico Khaitan.
Valuation
Aided by a 12.4% volume growth and a 22.6% growth in net sales, Radico Khaitan, has reported consolidated net sales of Rs 452.5 million. While volumes have grown to 13.5 million cases from 12 million cases, Radico Khaitan has shown an 8-9% realization growth in the year from its semi-premium brands (Magic Moments vodka). However, high expenditures on brand building, especially for Magic Moments vodka (Rs 100 million in Q4FY07 alone) have resulted in a flat net profit for the year. A 12% volume growth for the year is a clear indication of high growth in the Indian alcohol space, owing to change in demographics and higher consumer spending. Radico Khaitan at 13.5 million cases per annum is India’s second largest spirit manufacturer with a distribution network amassing 29 states in the country. Growing on the back of increased exports in the international markets of Africa and Europe, Radico Khaitan Global has reported a net profit of Rs134 million for the year ended FY07. While we believe that Radico Khaitan will continue to grow on the back of changing demographics of the Indian economy and an entry into the international markets, we expect to see margin remaining muted owing to high spends on brand building. Radico Khaitan (India’s second largest spirits manufacturer) and Diageo (world leader) launched the first whisky, Masterstroke, under the JV Diageo Radico Ltd. We believe that Diageo needs to enter India (the world’s largest whisky market), in a big way soon and the JV might not be the most appropriate route to launch its international brands in the country. With Radico Khaitan distribution network spanning the entire nation, the JV with Radico Khaitan might just be the stepping stone for a much larger agenda. Though positive on the space under which Radico Khaitan operates, it is the strategic value hidden in the distribution networks and manufacturing as well as the bottling units of Radico Khaitan that will provide maximum upscale potential. The stock is currently trading at 20xFY09E and has an EV/EBITDA of 14xFY09E. Reiterate Outperformer.
PSEC - Maruti Udyog
P-Sec report on Maruti Udyog:
Maruti reported robust volume growth of 23% y-o-y during June’08 aided by healthy growth in A2 segment of 38% y-o-y and good response to the new launch SX4 in A3 segment. The company sold 2500 units of SX4 and 7500units of Swift. The A3 segment grew by 46% y-o-y. Presently operating at over 100% capacity at Manesar plant a strong jump in volume in these segments is unlikely as new capacity with come on stream only in FY09. Impact from hardening interest rates were no seen in volumes growth however, we expect realizations to remain subdued. The stock trades at 13x its FY0 8P earnings, we maintain BUY.
Prabhudas Lilladher - Pfizer
Prabhudas Lilladher report on Pfizer:
Sluggish sales growth
For Q2 FY07 (ending May ’07), Pfizer has reported a 1% yoy dip in net sales -from Rs 1.67 billion to Rs 1.65 billion. The dip is attributed to supply-related issues regarding its major product, Corex. Moreover, the company is in the process of divesting its consumer healthcare (CHC) business in favor of Johnson & Johnson (J&J) in line with the global transfer of its CHC business to J&J, and hence the uncertainty about the divestment. The pharmaceutical business slipped 4% yoy whereas the animal healthcare (AHC) segment has reported a 21% sales growth. The clinical development services grew a marginal 1%.
Margins under pressure
During the quarter the operating margin slipped 60bp—from 22% to 21.4%—due to the rise in ‘other expenses’. ‘Other expenses’ climbed 130bp—from 25% to 26.3% of net sales—due to lower sales growth. Material cost rose by 50bp—from 37.8% to 38.3% of net sales—with the change in product mix and higher sales of AHC products. Personnel expenses declined by 120bp—from 15.2% to 14%—due to the ongoing VRS.
Higher ‘other income’
The company has reported a 60% rise in ‘other income’—from Rs 109 million to Rs 174million—due to the rise in treasury income (Rs 90 million during the quarter). Pfizer has completed the sale of the Chandigarh property, and profited by Rs 2.74 billion. With this higher ‘other income’, the EBIDTA margin has improved, by 340bp—from 28.5% to 31.9%.
Capital gain
The company paid Rs 462 million as capital gains tax from the sale of the Chandigarh property and therefore the net inflow is Rs 2.28 billion. With this inflow, the company’s treasury income is likely to rise by over Rs 50 million per quarter.
Net profit improved
Net profit before extraordinary items grew 10%—from Rs 298 million to Rs 329 million—due to higher ‘other income’. Net profit after EO items also went up—from Rs 238 million to Rs 2,578 million—from the high inflow due to the sale of the Chandigarh property.
Investment positives
Pfizer has employed a contract field force of 100 people in three states to promote its mature products. It is widening its geographical reach to cover class II and class III cities. This is likely to generate additional sales and improve top-line growth.
To raise top line growth, it is focusing on the institution and hospital segments and the retail segment.
To improve sales and profitability as well to expand therapeutic coverage, the company is looking at domestic acquisitions.
Its new launch, Lyrica, is doing well in the domestic market. It is likely to be a future growth driver for the company.
Financials and Valuations
We expect Rs 3 billion from the sale of CHC business to J & J in FY07. Net inflow after capital gains tax is likely to be Rs 2.66 billion. With this, Pfizer can look at acquisitions aggressively. We expect a 13% reduction in net sales in FY07—from Rs 6.89 billion to Rs 6.04 billion, due to it’s divesting its CHC business, which accounts for about 22% of the company’s revenue. We expect an 11% rise in sales in FY08—from Rs 6.04 billion to Rs 6.73 billion. We expect the operating margin to inch up from 24% in FY06 to 24.4% in FY07 due to the reduced material cost as well as from operational efficiencies. We expect net profit (after EO items) to shoot up—from Rs 1.06 billion in FY06 to Rs 5.91 billion in FY07—and then slip to Rs 1.35 billion in FY08. Management has guided to double-digit sales growth and the maintaining of the EBIDTA margin after the transfer of the CHC business. The CMP of Rs 804 discounts the FY07E EPS of Rs 38.4 by 21x and the FY08E EPS of Rs 48.6 by 16.5x. We are positive on the long-term prospects of the company.
Prabhudas Lilladher - Bhagwati Banquets
Prabhudas Lilladher report on Bhagwati Banquets:
Investment Highlights
Just now, it monopolises premium catering in Ahmedabad and Surat and commands a high (about 35%) operating margin from this business. The company wants to expand catering business to other major cities.
It plans to branch out to other cities like Mumbai, Jaipur, Jodhpur, etc., to become a national player. From October ’07, it will commence catering services in Mumbai. The entry into other cities is likely to improve the sales and profitability of the company.
BBHL has plans to enter into tie-ups with clubs for providing F & B services, resulting in additional revenue and profits.
In FY07, it has undertaken the F&B management of the revolving restaurant, Patang, in Ahmedabad. The company is exploring similar F & B management opportunities.
It plans to serve companies and MNCs, BPO centres, shopping malls, theatres, etc. catering for them and providing food packs. This business is likely to generate additional revenues and profits.
BBHL expects a good response for the Surat hotel as well as for club membership at its Surat Club, adjoining the hotel. It expects Rs 500 million in revenue and Rs 150 million in operating profit from the Surat hotel in the first year of operation.
The catering business generates free cash, as it receives payments in cash and obtains credit from its suppliers. Hence, the working capital required is low.
Major risks
The company had a negative cash flow in FY04 and FY06 due to continuous expansion of the business.
Delay in implementing the Surat project might affect profitability.
Revenue arises from catering contracts at various hotels/ clubs and party plots. On expiry, these contracts might not be renewed; or might even be terminated before expiry, resulting in loss of revenue and profits.
BBHL’s business is seasonal, with greater revenue arising in the October-March period. Any disturbances/ disruptions during this period might result in loss of revenue and profits.
Management Vision
In the long run, BBHL plans to set up 5-star hotels in Ahmedabad (2nd hotel in 2008), Jaipur (2011), Hyderabad (2014), Lucknow (2017) and Mumbai (2020). It is evaluating several proposals to acquire property for its new hotel at Ahmedabad.
Business Development
BBHL expects a good response to the 5-star hotel now being set up at Surat. This hotel will have 100 rooms (deluxe, suites and a presidential suite). It will have two large banquet halls, which can be partitioned as required. The hotel will also have a business center, with a boardroom, conference rooms, a world-class spa, a pub, a discotheque, etc. The company plans to develop a separate club adjoining the hotel. BBHL is likely to enroll members for the club and expects a good response for membership. The company has 1,000 people, consisting of 10 master chefs and a catering staff of 650 for Ahmedabad and 45 for Surat.
Competitive Environment
At present, there is no organized player in the catering business in Ahmedabad and Surat and hence the company enjoys a “healthy” market share (a monopoly) in the premium segment. There are other cooks in the unorganized sector who undertake contracts for wedding and other functions. However, unorganized players do not have a centralized kitchen; hence, the cooking is done at the wedding site, resulting in hindrances and disturbances. Since the business of catering is unorganized, most transactions are conducted in cash. Hence, the unorganized players are at an advantage, as they do not pay tax. The company pays 6.4% service tax and 4% VAT. This renders it less competitive than those in the unorganized sector. With the rise in corporate clients, it does not envisage a problem on this front.
Financials and Valuations
In April ’07, Bhagwati came out with a public issue of 23 million shares at Rs 40 each, aggregating Rs 920 million. Its equity capital then rose–-from Rs 62.9 million to Rs 292.9 million. The catering service has done well in the past five years. The number of meals supplied per day has jumped from 200/300 in FY03 to 1,500/2,000 in FY07. The company derives over 66% of its revenue from F&B and the other 34% from its hotels business. It charges from Rs 350 to Rs 900 a meal and provides personalized service. A minimum order has to be for 300 people (off-season) and 500 in season, resulting in revenue ranging from Rs 0.1million--0.45million on each order. The typical room rate in Ahmedabad is Rs 5,000 per day and average occupancy is 75-80%. BBHL is likely to commence catering services in Mumbai and is likely to generate sales of Rs 29 million-35 million in FY08 and Rs 135 million-150 million in FY09, with an EBIDTA margin of about 35%.
Valuations
At the CMP of Rs 37,the stock trades at 9.7x FY08E EPS of Rs 3.8 and at 7.3x FY09E EPS of Rs 5.1. With its unique business model of catering services as well as monopoly in premium catering, we are upbeat about the company’s long-term prospects.
Edelweiss - Spentex Industries
Edelweiss Research report on Spentex Industries:
Spentex Industries’ (Spentex) Q4FY07 results were below our expectations. Net revenues grew 18% Q-o-Q to Rs 3.13 billion. Pressure on realisations and higher power expenses caused EBITDA margin to decline 160bps Q-o-Q to 11.3%. Higher depreciation costs, on account of revaluation of assets, caused PBT to decline 186% Q-o-Q, bringing about a loss of Rs 67 million. PAT decreased 124% Q-o-Q, causing a loss of Rs 31 million. There was a deferred tax write-back of Rs 50 million.
For the full year FY07, Spentex (consolidated) reported revenues of Rs 9.41 billion. Its EBITDA margin was at 11.9% (12.3% in 9MFY07) versus our estimate of 12.4% for FY07.
Spentex also announced the acquisition of Schoeller Textil (Schoeller) headquartered in Germany, with manufacturing plant in the Czech Republic. Schoeller is the European market leader in ‘corner markets’ in the yarn industry and manufactures special sewing thread yarns, carpet warp yarns, and core yarns for weaving mills. Schoeller was valued at Euro 25 million for the transaction (FY06 revenues of Euro 54.5 million, EBITDA of Euro 5.8 million).
We expect earnings downsides in FY08 from our earlier estimates, primarily on the back of Rupee appreciation and decline in yarn prices. However, scale-up of all the capacities acquired in FY07 and the company’s continued inorganic growth at inexpensive valuations imply strong growth in EBITDA and profitability, going forward. We have revised our FY08 earnings downward to factor in the appreciated rupee and lower yarn prices. We maintain ‘BUY’ on Spentex owing to its strong business model that enables it to earn superior RoCEs. At CMP, the stock is trading at a PE of 4.8x and EV/EBITDA of 4.6x on our FY08E consolidated earnings.
Result highlights and outlook
Topline growth muted, power, and depreciation costs create further bottomline pressures Net revenues grew 18% Q-o-Q to Rs 3.13 billion. Pressure on realisations and higher power expenses (power costs in Maharashtra units peaked at Rs 5.2/ unit in February as against Rs 4.25 now) caused EBITDA margin to decline 160bps Q-o-Q to 11.3%. Higher depreciation costs of Rs 247 million as against Rs 152 million in Q3 FY07 (due to revaluation of assets) caused PBT to decline 186% Q-o-Q bringing about a loss of INR 67 mn. PAT decreased 124% Q-o-Q, causing a loss of Rs 31 million. There was a deferred tax write-back of Rs 50 million.
Yarn prices to keep earnings subdued in FY08; acquisitions to compensate
An appreciated Rupee, coupled with pressure on yarn prices, is likely to keep topline and margins under pressure in FY08. However, Spentex will be able to derive full utilization of the capacities it acquired in FY07 in FY08. Also, the company continues to pursue its strategy of inorganic growth at inexpensive valuations, which implies strong growth in EBITDA and profitability.
Revised proforma numbers
We have revised our FY08 and FY09 estimates to factor in lower yarn realizations and a full year average Re/USD conversion rate of 43 as against 45 earlier. We have also factored in estimates for the Czech acquisition in the proforma consolidated estimates.
Schoeller Textile acquisition to be value accretive
Spentex also announced the acquisition of Schoeller Textil (Schoeller) headquartered in Germany, with manufacturing plant in the Czech Republic. Schoeller is the European market leader in ‘corner markets’ in the yarn industry and manufactures special sewing thread yarns, carpet warp yarns, and core yarns for weaving mills. Schoeller was valued at Euro 25 million for the transaction (FY06 revenues of Euro 54.5 million, EBITDA of Euro 5.8 million). The deal involves share purchase of 100% of Schoeller Litvinov k.s., the Czech Republic company along with 11 employees in Germany based front end operations from Leopold Schoeller.. This will be financed completely though the books of Spentex’s Netherlands based subsidiary (SNPV) which will raise a debt of Euro 17 million to infuse equity and debt into Schoeller and to cater to other costs.
Valuations- Inexpensive, upsides to come from future acquisitions
We believe, Spentex will continue to pursue inorganic growth opportunities, which will drive its asset base growth at low costs. We maintain ‘BUY’ on Spentex owing to its strong business model, which enables it to earn superior RoCEs on the spinning operations. At CMP, the stock is trading at a PE of 4.8x and EV/EBITDA of 4.6x on our FY08E consolidated earnings.
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