HOT - Shareholding Analysis

HOT - Shareholding Analysis

Volatility Analysis - Oct 15 2008

Volatility Analysis - Oct 15 2008

Bharat Earth Movers FPO Analysis

Bharat Earth Movers (BEML), a public sector undertaking under the ministry of defence, is a leading player in the construction and mining equipment industry in the country. The government of India (GoI) holds a 61% stake. This is slated to come down to 54% after the present issue. The company’s heavy earthmoving equipment is deployed in core sectors such as mining, road, and construction. Further, it has a captive steel-foundry subsidiary at Tarikere. Moreover, BEML also manufactures and supplies heavy-duty trucks and aggregates for defence, and rail and metro rail coaches for the railways.

The mining & construction equipment business is BEML’s largest business with a 63% share of the total revenue of the company in fiscal ended March 2006. Defence supplies and railway products account for 32% and 5% of its revenue, respectively. About 65% of the business stems from the government and government agencies such as the Indian Army through the Department of Defence Production of GoI, Coal India, and Indian Railways.

With a lion’s share of about 70% market share for earthmoving equipment in the domestic market, BEML has start augmenting its product basket with strategic technical tie-ups and getting into business such as contract mining through joint ventures. The company is also eyeing a bigger pie in the emerging markets for supplies to mass urban transportation and rail logistics. To garner a share in the international markets, the company has formed a joint venture (JV) with Companhia Comercio E Construcoes, a Brazilian company, to manufacture and supply rail wagons and bogies and mining and construction equipment in Brazil.

BEML is coming out with a follow-on public issue to raise Rs 499.80 crore to Rs 534.10 crore to part finance expansion, modernise existing plants and fund voluntary retirement scheme (VRS) expenditure. The company is currently expanding the capacity of its metro coach manufacturing facility at Bangalore from 150 coaches per annum to 190 coaches per annum at a cost of Rs 214.51 crore and setting up a 5-MW wind mill for captive consumption at a cost of Rs 27 crore. Moreover, the company also envisages a capital expenditure of Rs 90 crore for upgradation of current facilities. The VRS scheme aims at pruning the staff strength by 1,125 at an estimated cost of about Rs 90 crore. The fund proceeds are also expected to meet BEML’s contribution of Rs 9 crore for setting up a R&D centre of excellence for metro coaches and general corporate purposes.

Strengths

BEML has near 100% market share in the dozers and heavy-duty dumper trucks of above 85 tonnes in the country. On an overall basis, the company caters to about 70% of the construction and mining equipment demand of the country. The domestic market for construction and mining equipment is expected to grow at a faster pace on increased spending on infrastructure and mining. BEML is better positioned to garner a greater share of this growing pie. To achieve this end, the company is expanding its product base through in-house R & D and also through appropriate technological tie-ups with global majors. Incidentally, it is the only metro-rail coach manufacturer in the country.

Having supplied most of the construction and mining equipment under use in the country, BEML continues to get strong spares and service income. As a result, the share of spares and services in the revenue has increased from 24% in the year ending March 2006 to 28% in the nine months ended December 2006 and FY 2006.

BEML has lined up new initiatives such as e-engineering services, captive mining and setting up of a plant in Brazil. These initiatives are expected to expand product and services range as also help geographical expansion.

India’s coal demand is set to accelerate on massive capacity additions planned in the power, steel and cement. To cater to this demand, three coal PSUs --- Coal India, Singanerei Colleries and Neyveli Lignite --- have come together to draw up mining augmentation plans at a capex of Rs 23590 crore in the Eleventh Five-Year Plan beginning current fiscal. Meanwhile, the government is also opening up coal mining for captive purposes for power and steel. These initiatives, as and when they blossom out, would turn out to be a major trigger for acceleration in the pace of growth in demand for mining equipment.

In JV with Midwest Granites, BEML has formed a company, BEML Midwest, to undertake captive mining. The JV has tied up with NTPC, a licencee for carrying out mining on the blocks. As a result, BEML will not only get assured demand for its mining equipment, but will gain expertise and its share of profit from the mining JV as well.

Being under the ministry of defence, BEML continues to get assured support of defence orders. The company is able to maintain a 1.5-2% share of the ever-growing defence-capex pie.

Weaknesses

As a result of the Indian Railways’ inconsistent track record of placing orders and arbitrary fixing of prices, BEML does not even recover costs, hampering growth. This business continues to be in red. The segment posted a loss of Rs 17.68 crore in the nine months ended December 2006 and Rs 15.78 crore in FY 2006. The segment loss in FY 2005 and FY 2004 was Rs 24.71 crore and Rs 61.39 crore, respectively.

The profit earned by supplying metro coaches moderated losses in a small way in FY 2005 and FY 2006. But this cushion is likely to go off in the short-term with BEML completing its current order book of 40 metro coaches by June 2007. Further orders from Delhi Metro and new orders from metros in Mumbai and Bangalore are expected to take some time as the tendering process is still on. However, being the only manufacturer of metro coaches in India and expected tax advantages from Karnataka government, the company is confident of good order flow from these projects, though the financial benefits will flow only after FY 2008.

Though the railway business is bleeding, about 40 to 43% of the issue proceeds are to be invested in this business.

Demand for heavy-earth moving equipment, BEML’s forte, is still skewed towards/ dependent on orders from PSU coal-mining companies such as Coal India and its subsidiaries, Singaneri Colleries and Neyveli Lignite. Notwithstanding the massive expansion plans of these PSUs, the delay in order placement by these PSUs or uneven delivery schedule can affect the performance of the company. Order flow from Indian Railways is also uneven. Order book stood at Rs 1617 crore end March 2007 compared with Rs 2243 crore end March 2006.

Valuation

BEML reported an 18% growth in net sales to Rs 2423.87 crore and a 10% growth in net profit to 204.93 crore in FY 2007.

In the last three months, high/low and average price of BEML was Rs 1225, Rs 938 and Rs 1031, respectively. Against this, the offer price band is Rs 1020 to Rs 1090, discounting the FY 2007 EPS (on the post-issue equity) of Rs 49.2 by 20.7 to 22.2 times. For a company whose profit has grown at CAGR of just 8% in the last two years, the P/E looks high. However, the growth potential in construction and earthmoving division will be realised in future as investment in mining and infrastructure picks up. Nevertheless, the turnaround in the railway products division is crucial for the upside of the construction and earthmoving division to get fully reflected in the bottomline growth. And the turnaround in railway products division will depend on consistency and increased flow of orders by the Indian Railways, better pricing (decided by an independent advisor), and pick-up in implementation of various planned metro rail projects. With Railways becoming financially capable as well as serious about investing directly as well as through public-private partnership, railway products division is likely to complement growth from the construction and earthmoving division in the long-run, though short-term hick-ups can not be ruled out.

BEML FPO Analysis - June 27 2007

BEML FPO Analysis - June 27 2007

BEML FPO Analysis

BEML FPO Analysis

Real Estate Stocks to decline ?

Once real estate prices correct, stock prices of sectors that have benefited from the boom will also decline.

The housing and construction boom of the past four years has created a lot of wealth and spread it around more than any phenomenon of the past five decades. Ever since banks started to target retail clients in 2003-04, millions of middle-class citizens have leveraged future earnings to buy property.

At the same time, growth in IT/ITES has driven commercial property. If you'd bought real estate in 2004, you would have probably doubled your investment by now. What's interesting is that returns from other beneficiaries are even higher than returns from real estate itself.

The real estate developers were the stock market success story of 2006-07 with half a dozen multi-baggers. The cement and construction industries and the finance industry have also been major beneficiaries of the boom.

If you'd bought the few listed real estate companies in 2004, your percentage returns would be four-digit. Cement and construction companies have delivered high triple-digit returns. The top rung banking and housing finance stocks have tripled since 2004.

There has been an asset bubble – that is inevitable when real estate doubles in value and more, in three-four years. It now appears that real estate itself is cooling. Lower interest rates and smoother paperwork enabled the boom – higher interest rates have caused cooling.

The recent sale of sticky home loans to asset reconstruction companies is a signal that NPAs are hurting. Real estate prices have softened little but we've got classic signals that suggest further softening in metro markets, at least.

Demand for new home loans has eased substantially – quite apart from defaults. In new real estate, while the price line is officially steady, cash-down buyers are getting 10-15 per cent discounts. Inevitably that will lead to lower prices.

The real estate market itself may clear, given price correction (15-20 per cent) that adjusts for rate hikes and eliminates speculators. Now, does the upside price-sensitivity translate into similar downside sensitivity?

If a 100 per cent rise in real estate prices set off 300 per cent increases in listed companies that benefited from the real estate boom, will a 10-15 per cent fall or a zero-growth scenario lead to a crash in those listed companies?

That's a scary though but it is something a trader should consider. Price declines in these industries can be exploited. Most of the big boys are available in F&O, which means that you can hold short futures positions for months on end. Fundamental shorts are a distinct possibility.

We've already seen 30 per cent corrections in the developer industry in February-March 2007 on the basis of lower 2007-08 projections. Cement also took a hammering especially after the lunatic dual excise rate.

Perhaps the corrections in these two industries have already factored in softer real estate prices. However, I would be tempted to short both sectors given another rate hike.

Banks are doing well in terms of stock prices. In fundamental terms, they shouldn't be. The interest rate hikes of the previous year have already hit both volumes and bottom lines. The highest growth in credit disbursal between 2003 and 2007 was from home loans. That segment is clearly impaired.

But in game-theory terms, banks are likely to continue delivering a decent performance. Every bank of respectable size must recapitalise to meet Basel II norms. ICICI's FPO has just got the ball rolling. This creates a "you scratch my back, I'll scratch yours" situation.

Every financial institution has a vested interest in ensuring all FPOs are successful. Extending the logic, the RBI has an interest in ensuring that bank FPOs go through. Whether it can persuade the political establishment to enable this process is a different matter. But banks won't get a hammering – until the FPOs have gone through.

This implies that unless interest rates start travelling downwards, the entire banking sector will be significantly over-valued by the time FPO action tapers off.

This has implications for banks – the sooner they get their FPOs in, the better. It has implications for FPO investors – you should book profits quickly in FPO allotments because the money will skip onto the next FPO.

It has long-term trading implications. Traders should ignore higher rates and be long on banks in apparent defiance of fundamentals until the FPO action ends. After that, "double-minus" – close long positions and go short unless rates have dropped. If the logic is broadly correct, banking will be a focal point for two years. First, prices will go up, then down.

Spice IPO: Desperate for funds

Of all the companies that have hit the markets with IPOs this month, none could be as desperate for funds as Spice Communications Ltd. It is out to raise between Rs464 crore and Rs520 crore through an IPO that will be open between 25 June and 27 June 2007. The firm needs funds to expand operations so that it can gain economies of scale and turn from losses.

Spice Communications runs cellular services in Punjab and Karnataka, and hasn’t been able to invest enough in the latter circle because of a shortage of funds. Available lines of credit stood at just $50 million (Rs230 crore then) as on 31 December 2006. Those funds may not last for long. The company generated Rs81 crore in cash in the six-month period ended 31 December 2006, but spent Rs176 crore adding assets.

The company got some reprieve earlier this month, when it made a pre-IPO placement to investors, including Lehman Brothers, raising Rs111.9 crore in the process. But clearly, it’s the larger IPO issuance that would ease things on the financing front for Spice. As on December 2006, the company had negative reserves worth Rs684 crore, which wiped out its entire equity capital of Rs552 crore. Its net debt stood at Rs1,081 crore.

It wouldn’t be surprising if its lenders are jittery. The company’s interest cover (operating profit/interest cost) has been steadily declining—from 3.28 times in financial year 2002-03 (FY03) to 2.83 times in FY05 and just 1.46 times in the first six months of the current financial year.

Worse still, the first instalment of the repayment of Rs967 crore worth debt is due on the 21 July 2007. Raising funds is imperative.

Spice had been in a similar situation before. In fact, things were worse. It defaulted on repayments on equipment financing arrangements in 2001, as well as on dues to its debentureholders. It was finally able to settle the dues in 2006, after the entry of Telekom
Malaysia (TM) as a shareholder. TM not only bought out the 49% stake held by Deutsche Bank AG and Ashmore Investment Management Ltd for $179 million, but also arranged for a refinancing of debt worth $265 million. With the refinancing in place, Spice was able to pay equipment vendors, Siemens AG and Motorola Inc., and settle other dues. The company now needs more funds to start repaying the banks that arranged the refinancing.

But coming close on the heels of two large issues cumulatively worth Rs19,250 crore, getting investors to subscribe to the Spice issue could be a tall order. Thankfully for investors, IPO valuation is not expensive. Assuming a 50% growth in the year till June 2007 (in line with the growth in the company’s subscriber numbers), the company’s EV (enterprise value/Ebitda (earnings before interest, taxes, depreciation and amortization) valuation works out to between 16 and 17 times. The 50% growth projection is optimistic, considering that revenue growth typically tends to be lower because of lower Arpu (average revenue per user). In fact, even profit margins could be under pressure for the same reason. But one could argue that profit margins would pick up once the company infuses IPO funds in the business and gains scale, as well as due to the retirement of debt.

The 16-17 times EV/Ebitda valuation works out to a 20-25% discount to Bharti Airtel, which trades at around 21.5 times trailing Ebitda. This could act as the bait for investors, who would be otherwise cautious given the history of losses.

Spice Communications IPO Analysis

Small player trying to survive

Promoted by Dilip Modi of the B K Modi group, Spice Communications provides cellular services in Punjab and Karnataka. Telekom Malaysia will hold a 39.2% equity stake post-issue compared with 40.8% of the Modi group. The company was the second largest cellular services provider in Punjab and the fifth largest cellular services provider in Karnataka, measured by the total number of subscribers with a combined market share of 14.49% in these two states (Punjab: 23.9% and Karnataka: 7.5%) end March 2007. The subscriber base was 3 million (2.05 million in Punjab and 0.95 million in Karnataka) with network coverage of 537 towns in Punjab, covering approximately 55% of the state population, and 229 towns in Karnataka, covering 33% of the state population end May 2007.

Spice Communications has pending applications for licences to provide cellular services in additional 21 circles throughout India. The company was recently awarded a national long distance (NLD) licence and international long distance (ILD) licence by the Department of Telecommunications and it intends to initially set up base infrastructure for a capacity of 30 million minutes per month across 15 locations in India.

The current initial public offering (IPO) is to raise Rs 464 crore at the lower band (Rs 41) and Rs 520 crore at the upper band (Rs 46). The net proceeds from the issue are to be used for part repayment of long-term debt, for payment of NLD and ILD licence fee, for meeting related capital expenditures to set up base infrastructure for NLD/ILD amounting to Rs 63.60 crore, for paying vendor(s) for network equipment and other capital expenditure amounting to Rs 177.63 crore, and for general corporate purpose and public issue expenses. Spice Communications has issued 2.49 crore of equity shares at a price of Rs 45 to certain investors pre-IPO and raised Rs 111.93 crore.

Strengths

• Has received NLD and ILD licences and proposes to offer data transmission services and voice transmission for calls originating and terminating on most of India’s and global telecom networks. It will be basically taking capacity on lease rather than setting up its own network. This will improve the operating profit margin.
• One of the objects of the issue is to repay part of debt, which is likely to reduce the interest burden.
• The Indian telecom industry is one of the fastest growing in the world adding nearly six million subscribers a month. The mobile subscribers base is estimated to increase to approx. 210 million by the year ending March 2008 (FY 2008), from the current level of 167.44 million subscribers end April 2007. Factors like falling handset costs, attractive tariffs and extensive reach have reduced the entry barriers for new subscribers and, thus, expanded the markets available to telecommunication service providers. The presence in the country’s richest state, Punjab, is likely to translate into volume growth.

Weaknesses

• In the absence of pan-India presence like other integrated operators, unable to provide seamless roaming services and is forced to share its revenue with other operators with whom it has roaming arrangement for its subscribers. Though licences in other circles have been sought, the current state of financials will hamper expansion in other circles in a major way in foreseeable future.
• Of the last five completed financial years, there were net losses in three years on account of low operating profit margin compared with the industry, high interest and depreciation. Losses have been incurred even in FY 2007. On account of continuous losses, the net worth has eroded. Accumulated losses stand at Rs 684 core (higher than the current issue size of around Rs 500 crore).
• Being a regional service provider, there is significant competition from larger integrated players with pan-India presence and greater financial, technical and marketing resources. In the past, key corporate clients were lost, particularly in Karnataka, primarily due to lack of coverage in certain geographic areas. Not been able to sustain its first mover advantage in both the states it operates.
• The Modi group’s track record is not encouraging.

Valuation

Spice Communication has made net losses in the six months ended December 2006 and year ended June 2006. However, it has been making profit at the cash level. The company will not be listed on NSE as it does not meet the financial track record prescribed by NSE for new listings.

At the price band of Rs 41 - Rs 46, the EV/EBITDA works out to 20.9 – 22.8, respectively. While Bharti Airtel, the largest integrated player in the sector with a pan-India presence in GSM (in all 23 circles), trades at EV/EBITDA of 21.5, and Reliance Communication, with CDMA presence in 21 out of 23 circles and GSM presence in eight circles constituting a pan-India presence in all the 23 circles, is trading at EV/EBITDA of 18.4. Idea Cellular, with operations in 11 circles, trades at EV/EBITDA of 22.6.

On the basis of FY 2007 consolidated revenue, the market capitalisation to sales works out to 8.5 for Bharti Airtel, 7.3 for Reliance Communication, 7 for Idea Cellular, and 3.4 for Tata Teleservices (Maharashtra). It is 3.7-4.1 for Spice Communications. The EV per wireless subscriber for Bharti Airtel, Reliance Communication and Idea Cellular is about Rs 41102, Rs 35382 and Rs 23434, respectively. For Spice Communication, it is Rs 13887 – Rs 15113. But one should also factor in that Spice Communications is operating in only two circles and has a low subscriber base/market share.

The blended average revenue per user (ARPU) of Spice Communication stood at about Rs 370 in the six months ended December 2006 against Rs 427 for Bharti Airtel, Rs 338 for Idea cellular and Rs 328 for Reliance Communication in the quarter ended December 2006.

Spice Communication is one of the suitable candidates for takeover. Earlier attempts have reportedly failed due to pricing issues. The company is not a growth story as it is neither capable of growing organically nor inorganically in a significant way. Ultimately, it will have to get itself taken over by a strong player. That’s the only thing that can add spice to its share price.

Spice fixes IPO price band at Rs 41-46

Cellular operator Spice Communications Ltd said on 19 June it has fixed the price band of its proposed public issue between Rs41 and Rs46 an equity share of Rs10 each.

“We have recently concluded a pre-IPO placement of 24,837,889 shares at Rs45 per share, thereby raising about Rs112 crore. A clutch of investors led by Lehman Brothers and Sinnaker Investments have picked up a small stake in Spice Telecom,” company chairman and managing director Dilip Modi told reporters at a press conference here.

Following the IPO, the stakes of the both the promoters, B K Modi and Telekom Malaysia, would come down by 10% each.

At present, B K Modi holds 51% and Telekom Malaysia, the remaining 49%.
Post-IPO, Modi will hold 41% while Telekom Malaysia, 39%, with the public holding the remaining 20%.

“We are the second largest operator in Punjab with 1.91 million subscribers and the fifth largest operator in Karnataka, with 0.82 million subscribers,” Modi said.

The company intends to consolidate and boost its presence in both the markets by expanding its coverage with a view to increase its marketshare, he said.

“We also plan to work with our roaming partners to improve and expand our coverage and to provide consistent products and services to our subscribers,” he added.

Roman Tarmat: Avoid

Investors can avoid the initial public offer (IPO) made by construction company Roman Tarmat as the pricing appears steep in relation to the size and nature of its business. In the price band of Rs 150-175, the company is valued at a price-earnings multiple of 15-18 times its nine-month annualised earnings for FY-07 on a diluted basis. Small-cap companies such as PBA Infrastructure or Tantia Construction, which have a wider portfolio of business, now trade at a discount to Roman Tarmat.

Profile and offer details

Roman Tarmat is in the business of constructing highways and runways. The company plans to raise Rs 43-50 crore for procuring capital equipment and for long-term working-capital requirements.

No niche business

Roman Tarmat's business is concentrated in the road segment. Highways and roads now account for 83 per cent of the company's order backlog of Rs 337 crore. While this segment yields low profit margins, a good number of infrastructure players have nevertheless benefited from the volume flowing from the Government's spending on roads.

Roman Tarmat's completed projects and order-book reflect that the company has been undertaking maintenance works and small projects from Public Works Departments or corporates. It has not so far participated in any of the National Highways Authority of India (NHAI) projects — the prime means of order flow for most infrastructure companies that operate in the segment. Companies that spotted the opportunity early have not only benefited from volumes but also achieved forward integration by graduating to EPC (Engineer-Procure-Construct) projects, thus improving margins and gaining bidding qualification.

Roman Tarmat has, however, remained a regular `contractor' and not so far made any significant move to diversify its services. This might cap opportunities to garner EPC contracts. The company's revenue grew at a compounded annual rate of 27 per cent over the three years to Rs 87 crore in FY-06 (Rs 83 crore for the nine months ended December 2006). Roman Tarmat's size, in terms of revenues, does not, however, compare well even with those of other small-cap companies. This raises concerns over the company's ability to scale up operations.

Roman Tarmat has stated in the prospectus that it would look to bid for large-scale projects and contracts on a build-operate-transfer (BOT) or annuity basis. Even assuming that its expanded equity base would provide some financial qualification to bid, the company may have to compete with bigger players which are already established in the space. This would require the company to not only bid aggressively but showcase superior technical qualification.

Further, the company has entered into joint ventures for four of its road projects. While this strategy would help bid for projects, it would reduce profitability for Roman Tarmat, given the small size of the projects.

Roman Tarmat has managed to maintain its operating profit margin in the 12 per cent range for the past two years. This may have come about as a result of increased contribution from airside works, which accounted for 25 per cent and 18 per cent of the total contract receipts over 2006 and 2005 respectively. With runway projects down to 13 per cent of the order backlog, the company's ability to maintain its OPMs would determine whether it can manage superior margins in an otherwise low-margin segment such as roads.

Roman Tarmat has so far enjoyed income-tax benefits under Section 80 IA. However, post-Budget proposal, the company may lose this, as contractors are no longer eligible for the same.

Road contracts awarded by Special Economic Zones and success in bagging large projects may provide upside to the company and remain key risks to our recommendation.

The infrastructure-listed space now appears to be clearly making a distinction between large integrated players and small players, some with niche business. The disparity in valuations for these companies is proof of this. Hence, we believe that valuations may be a greater deciding factor for middle-of-the-road companies such as Roman Tarmat.

The Roman Tarmat IPO that opened on June 12 will close on June 19.

DLF Final Subscription Detals

Qualified Institutional Buyers (QIBs) - 5.1288 times

Non Institutional Investors - 1.1434 times

Retail Individual Investors (RIIs) - 0.9752 times

( 3347960 out of 50903990 are price bids)

Employee Reservation - 0.7862 times

(726280 of 786150 are price bids )

OVERALL -3.47 times

Price bids essentially mean that if DLF fixes the IPO price at 550, all those price bids will be rejected - so all the others will get more than what they bargained for.

Update

(pun intended ofcourse with the bargain statement) - Most of the retail guys apply for listing gains because they hope the issue is hugely oversubscribed, In this case, the FIIs will get the unallotted retail shares - so they might not even buy from the secondary market.

37 QUESTIONS FOR DLF LTD.

Via Unknown Source

Dear Investors,
We have raised certain questions to the management of DLF Ltd. and most of them have remained unanswered. We suggest you to read these questions before you invest in DLF LTD.

1. DLF Ltd. promoter Rajiv Singh, along with certain persons acting in
   concert, admitted to a violation of the provisions of Regulation 11 (2) of
   the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 by acquiring equity shares in excess of specified limits without making a prior public announcement as prescribed under the regulations. He agreed to pay a penalty of Rs. 500,000, which was accepted by the SEBI subject to certain conditions set forth in its letter dated February. Can you please tell us that how many shares were acquired by him at what price, in how much period, the modus operandi and the reasons for hiding this information?

2. DLF got its shares delisted from stock exchanges earlier. Was it an investor friendly move?

3. How much money has been given as advance to builders/partners in India with which your company has entered for joint development of property? Also what is the profit sharing ratio with the builders/partners?

4. What are the credentials of the builders/partners with whom your company has entered for joint development of property in the last one year?

5. How much worth of properties have been sold to NRI's in the last three years?

6. What is your accounting policy for treating any property sold? How much percentage of money received against any property is considered for property to be treated as sold?

7. What are your views on the prospects of real estate market and your capability to make good profits to serve shareholders?

8. What are the basis of valuation reports of Cushman & Wakefield and Jones Lang LaSalle, for estimating DLF properties?

9. There is a difference in the valuation of properties done by Cushman & Wakefield and Jones Lang LaSalle and this difference is Rs.81 billion which is a huge sum. What valuation you feel is the correct one and why?

10. How much partial payments have been made for the different pieces of land which you have planned to acquire?

11. What is the present floating rate of 40.0 billion debts (stated on page No. of prospectus) and how much it has increased in the last two years? Why did not you enter into choosing a fixed rate of interest for these debts?

12. Your company on April 30, 2006 had outstanding obligations to pay an amount of Rs. 28.7 billion towards the acquisition of lands. Can you please tell us that in how much time you have to make these payments? Are there any delays?

13. In valuations done by Cushman & Wakefield and Jones Lang LaSalle how much appreciation in land has been observed in the last three years?

14. Out of all the land bank mentioned in the prospectus, how many pieces of land you have as clear title and for how much clear titles are expected and by when?

15. How many of your agreements with third parties in relation to the purchase of land have expired or may be invalid and in money terms how much is the total amount?

16. In your prospectus you have said that "We may be forced to sell some or all of the assets in our portfolio if we do not have sufficient cash or credit facilities to make repayments" Can you please tell us that how many such assets have been sold so far? Also what is the criterion for maintaining these records?

17. What is the number of relationships with landowners and international joint venture partners; your company has at present?

18. Out of the public issue how much money you are raising for SEZ's, mega infrastructure projects and Hotels?

19. What is the 'specified formula' under which you have an option to require DLF assets to purchase your commercial and retail properties at a minimum price?

20. 20. How shareholders' investors will be taken care of when DLF Assets will be buying properties from DLF Ltd as in both the companies promoters have controlling interest?

21. How much on an average your sale prices have increased in last three years against the rise in major raw material - steel and cement?

22. How much part of your income has accrued from property management services to your completed residential, commercial and retail developments in the last three years?

23. How much land agreements restrict your ability to sell, transfer or assign the lands without the prior consent of the relevant authority; out of your total land bank?

24. DLF power has to recover Rs. 60 crores from its customers as of March 31,2006 and if this amount is not realized then how much the operations of DLF Ltd. will be affected? When this amount is expected to be realized?

25. Why some independent agency was not hired to prepare the acreage and square footage data presented in this Draft Red Herring Prospectus?

26. With which companies, one of directors, Mr. Ravindra Narain is mentioned in the defaulters list in respect of default committed by two companies (which are not part of our company, subsidiary, or promoter group) where he was a director?

27. Company claims to have 60 year history of service excellence. Can you show us the record of sales and profitability for last twenty years of excellence so that investors can decide on their own?

28. Company has acquired "to develop over 118 million square feet of saleable or lettable area. A significant portion of our land reserves under development was acquired at a relatively low cost." (as per prospectus). What is this lower cost? Why vague, ambiguous and confusing words are used in prospectus to misguide investors?

29. It has been said in the prospectus that "We believe that our land reserves provide us with a major competitive advantage as well as protection against land price, inflation, and allow us to respond more effectively to changes in market conditions." (as per prospectus) You are looking only one side of the coin. What will happen if prices fall? Shareholders are benefited only if the market goes up and that you are distorting the facts by calling it "changes in market conditions". Changes can be both up and down.

30. Company has paid as on April 30, 2006, partial payments to acquire 2,893 acres of land across the country. What is the segregation of amount paid, name of cities and to whom this amount has been paid?

31. What were the reasons for furnishing old data and hiding latest information from the investors?

32. Why power supply sales have fallen in last three years from Rs. 114.90 crores for Fiscal'2004 to Rs.108.70 crores for Fiscal'2006?

33. There is spurt in other income of Rs.16.70 crores (other than interest) for fiscal 2006. What is the source of this income?

34. Your income from investments has increased from zero for Fiscal'2004 to Rs.16.30 crore for Fiscal'2006. What is the source of this income and is it exception income or expected to continue in future and what are the possibilities of its moving up or down?

35. What were the reasons for almost more than 100% growth for fiscal'2006 in sales revenue at Rs.937.20 crores against Rs. 413 crore for fiscal 2005? How much growth was due to selling of more space and how much due to high profit margins?

36. Your sales for fiscal 2006 have increased by 298.40 crores against fiscal 2005 whereas your sundry debtors have increased by Rs.373.00 crore in the same period. What are the reasons for the same? Does it mean that more sales have been done on credit to increase sales without increasing the realization?

37. What is the basis of assessment of goodwill which has increased from Rs. 52.20 crore for fiscal 2005 to Rs.848.90 crore for fiscal 2006?

INTERVIEW OF T C GOYAL, DLF LTD.

What is your accounting policy for treating any property sold? How much percentage of money received against any property is considered for property to be treated as sold?

Income from sale of constructed properties is recognised using the "Percentage of Completion" method. For more details of the accounting policy, please see page 386 of the Red Herring Prospectus (RHP)

What are the basis of valuation reports of Cushman & Wakefield and Jones Lang LaSalle, for estimating DLF properties?

There is a difference in the valuation of properties done by Cushman & Wakefield and Jones Lang LaSalle and this difference is Rs.81 billion which is a huge sum. What valuation you feel is the correct one and why?

Valuation reports of Cushman and Wakefield and Jones Lang LaSalle are not included in the RHP

Out of the public issue how much money you are raising for SEZ's, mega infrastructure projects and Hotels?

The purpose for which the funds are being raised in the public issue have been described in the section "Objects of the Issue" on page 44-47 of the RHP

How shareholders' investors will be taken care of when DLF Assets will be buying properties from DLF Ltd as in both the companies promoters have controlling interest?

Please see disclosure of page 81 of the RHP : "In fiscal 2007, we recognized revenue of Rs. 2,207.1 crore in relation to the sale of certain commercial properties to DAL. These transactions were approved by our audit committee, following which the properties were transferred to DAL. In the future, we may sell additional commercial properties. Any such sales are expected to be conducted through a competitive bidding process which would require potential purchasers to establish capitalization rates at the time of bidding. DAL has agreed that it will not compete with us in our real estate project developments, but may act as a codeveloper with us in SEZ projects."

How much part of your income has accrued from property management services to your completed residential, commercial and retail developments in the last three years?

This is covered under "Maintenance Income". Please see page 388 of the RHP.

DLF IPO - Apply or Not?

Maybe these results should help you make the decision

Are you applying for DLF...

Over the last 6 months, real estate prices have...

Cheapest real estate stock or too many burnt fingers... ?

The stock that will give the best returns in 5 years will be ...

Our view ? Better be safe than sorry

Sucheta Dalal on DLF - Don't lose focus

A few months ago, 17 investor associations in one of their regular interactions with the Securities and Exchange Board of India (Sebi) passed a unanimous resolution appreciating the regulator’s tough stand on the DLF issue. That was when Sebi had refused to clear DLF’s earlier proposal to relist its shares and raise Rs 13,500 crore from the capital market.

Sebi had refused to clear the initial public offering (IPO) until the ministry of company affairs (MCA) resolved the issue of DLF’s minority shareholders. A little later, the regulator raised pertinent questions about the absurd disparity in the valuation of DLF’s land bank as well as the quality of its disclosures. In fact, Sebi told its board of directors that the runaway increase in realty valuations was triggered by DLF’s fund-raising plans and the manner in which DLF’s properties were valued. In that board meeting Sebi cleared the proposal of IPO ratings after accepting that investors do need expert help in understanding complex disclosures.

But only a part of the original investor concerns were addressed when Sebi finally cleared its revised prospectus (for the record, Sebi only offers comments on the offer document and does not specifically clear it). Investor associations which praised Sebi’s handling of DLF in the past, aren’t too happy with the regulator anymore. They are surprised that the new valuation norms applicable to DLF conveniently, do not apply to the issue nor did the IPO have to be rated.

In fact, Midas Touch Investors Association, a Sebi registered group, insists that disclosures in the DLF prospectus remain inadequate. It says that though Sebi had assured the association that the lead managers to the issue would be asked to respond to its concerns, the IPO was cleared without this happening. Specifically, it has questioned the lack of transparency about the big increase in profits through sales to group companies, it has not received any reply. If that happens to an investor association, how is an ordinary investor, whose awareness level is poor, assess a complex public offering?

One example of pitiable investor awareness is the story of DLF’s minority shareholders, who were slated to receive what can only be described as a jackpot deal after they fought for their rights. DLF’s plan to re-list its shares in 2006 was stymied after it attempted to deprive 1,100 minority shareholders (who had held on to their shares, when these were delisted approximately four years ago) the massive profits arising out of its capital restructuring. These shareholders moved court and also petitioned the regulator and the media, which forced the company to include them in the restructuring bonanza.

We now discover that barely 280 investors availed of the company’s massive debenture-to-bonus share offer that gave each minority shareholder a minimum of 31,328 share (face value Rs two) valued at a minimum of Rs 1.56 crore even before the IPO opens. If the issue trades at a premium on listing, the valuation could be significantly higher. Surely, a savvier or better-advised company would have done its homework and evaluated the cost of taking 280 minority investors along, or buying them out before the restructuring with a lucrative offer. That so many minority investors missed this bonanza again reflects poor investor awareness in India, it also shows that DLF could have avoided much of the damage to its reputation with smarter planning and an honest effort to contact its investors.

On the eve of DLF’s IPO, some of the same arrogance is on display again. It appears that DLF’s distributors and brokers are doling out as much as 3 per cent in cash kick backs to investors in their effort to lure them into subscribing. The commissions range from Rs 50 to Rs 225 per form. At the same time there is an attempt to whip up frenzy and create an active grey market in the scrip. In addition, DLF hopes to rope in more retail investors by permitting them to apply for partly paid up shares, but this too has a catch. Those who are lured by cash incentives on application forms and the option of paying only Rs 27,000 per application for shares worth Rs one lakh need to be aware that part-paid shares cannot be sold on listing.

This is important if they have funded the purchase with borrowed money. The remaining money has to be coughed up after allotment and there will be no opportunity to flip them on listing and cash in on any immediate price run up. Shouldn’t Sebi have looked closely at all these issues? Especially since it had made an example out of DLF to its own board and the company has a fairly patchy record of regulatory compliance (Sebi has penalised it for at least two other market violations besides its attempt to deprive minority investors of the benefits of capital restructuring).

Ironically enough, while DLF has a poor compliance record, it has built a fairly formidable record for the quality of its construction and its ability to deliver classy projects and modern townships, especially in and around Delhi. As the first of the mega IPOs, that are set to take away considerably liquidity from the Indian capital market, large institutional investors believe that the many sales gimmicks and incentives will indeed help the DLF IPO sail through despite what is clearly an aggressive pricing strategy.

The question is, how will retail investors, who follow the dictum of caveat emptor make up their minds? If they only go by fundamentals and also factor in the decisive slow down in the realty market, there is a good chance that they would have lost an investment opportunity. Equity investment is indeed a risky business.

Via Indian Express

Vishal Retail Product Note

Vishal Retail Product Note

Edelweiss - Vishal Retail IPO Analysis

Edelweiss - Vishal Retail IPO Analysis

Roman Tarmat IPO Analysis

Promoted by Jerry Varghese, Roman Tarmat provides engineering, procurement and construction services for highways and roads, airside works and other civil work. The company has also set up a ready-mix concrete (RMC) plant at Goregaon, Mumbai, with an installed capacity of 30 cubic meters per hour to cater to its captive requirement and four automatic stone crushing units to enhance its operational efficiency.

Roman Tarmat’s IPO is to fund long-term working capital requirement and invest in capital equipment. The price band has been fixed at Rs150-Rs175. The issue opens on 12 June and closes on 19 June 2007.

Strengths

• End April 2007, the order book was Rs 336.89 crore comprising un-commenced projects, unfinished and uncertified portions of commenced projects. The order book is to be executed over two years. Generally, 35% of the road projects are executed in the first year and balance 65% in the second year. The order book represents four times the reported March 2006 year ending revenue.

• End March 2007, about 9,456 km of roads were yet to be awarded under the National Highways Development Programme. As Roman Tarmat is one of the players operating in the road segment, it may see further increase in order book. Apart from this. the company is also likely to benefit from increase in investment in restructuring of existing airports and setting up green field airports.

Weaknesses

• Has claimed tax benefit of Rs 6.02 crore under Section 80IA in FY 2006, and Rs 6.3 crore in the nine months ended December 2006. The retrospective withdrawal of Section 80IA benefit may not only impact FY 2007 profit but also future profit until the orders bided taking into account 80 IA benefit are executed going forward. The Finance Bill 2007-08 has clarified that benefits of Section 80-IA (which provides for a ten-year tax benefit to an enterprise or an undertaking engaged in development of infrastructure facilities, Industrial Parks and Special Economic Zones) shall not be available to a person who executes a works contract. The company has also not included this benefit under ‘tax benefits available to the company’ in the prospectus.

• From FY 2003 to nine months ended December 2006, there was a gradual improvement in operating profit margin (OPM), from –0.8% to 12.4%. This was on account of increase in proportion of revenue from airside works. As a percentage of contract receipts, the proportion of airside works went up from 3% to 25%. However, in the pending order book end April 2007, the proportion of airside works declined to 13%. Thus, OPM may not sustain at current levels. OPM for road projects is 8%-10% and for airside works 14%-15%.

Valuation

Roman Tarmat’s net profit was Rs 8.15 crore in the nine months ended December 2006. Annualised EPS works out to 9.9. At the offer price band of Rs 150- Rs 175, P/E comes to between 15.1 and 17.7, respectively. Comparable and bigger players in terms of revenue --- Valecha Engineering and C&C Construction ---- are currently trading at nine months’ annualised recurring earning of around 15 times.

Sharekhan - Vishal Retail IPO

Sharekhan - Vishal Retail IPO

Vishal Retail IPO Analysis

Vishal Retail IPO Analysis

DLF IPO Analysis - the main event

DLF IPO Analysis - the main event