India Equity Analysis, Reports, Recommendations, Stock Tips and more!
Search Now
Recommendations
Friday, July 08, 2005
Duncans Industries - Motilal Oswal
STRONG BUY
Duncan is story without merits. Its fertilizer plant has already started operations.
G P Goenka likely to call press conference shortly to announce the restructuring plans. As per all analyst, G P is likely to sell assets worth Rs 240 crs to meet up the debt of the company in a phased manner.
It has been also projected the fertilizer unit will do business of over Rs 800 crs in the current fiscal and tea around Rs 200 crs and EBITA on the same shall be not less than Rs 90 crs on an Equity of Rs 53 crs. Another Rs 60 crs is projected on account of interest saving on debt restructuring.
Before the closure of the plant, Duncan did business of Rs 1797 crs in 2001. It has got installed capacity of 6.75 lac tons of fertilizers and worked above installed capacity in 2001. It tea production is on an average of 17 mn kgs in last 4 years.
Promoter's stake is as high as 79% and free float as low as 8%. The Networth of the company is Rs 700 crs whereas its debt is Rs 1000 crs. G P is set to reduce the debt substantially by debt restructuring and also be repaying out of the sell of assets of Rs 240 crs.
In short, Duncan is set to return to its lost glory in next 12 to 18 months. It is a repeat of Triveni Sheet glass. Govt has frozen Rs 400 crs subsidy of Duncan which had brought the downfall of Duncan. With GP's fortune changing in right spirit, who knows he will get back his Rs 400 crs from Govt which could a real bonanza.
From tomorrow, almost all the analysts will start tracking this fertilizer cum tea stock which is riding high at the moment.
Mergers and machismo — Are takeover chiefs acting rationally?
Interesting Read from Hindu Business Line
WHY are some corporate heads so gung-ho about mergers and acquisitions (M&A) when the empirical evidence available strongly suggests that the value created by these exercises accrues almost completely to shareholders of the target company rather than to those of the acquiring firm?
If the popular assumption that corporate chiefs act rationally isvalid, why do so many mergers and acquisitions nevertheless take place? Does this mean that the assumption about the rationality of all corporate heads may, not be entirely valid?
These are some of the questions addressed in a recent study titled Who Makes Acquisitions? CEO Overconfidence and the Market's Reaction, by Ulrike M. Malmendier, assistant professor of finance at the Graduate School of Business, Stanford University, and Geoffrey A. Tate, assistant professor of finance at the Wharton School of the University of Pennsylvania.
In their study, which has been in circulation in the US as a National Bureau of Economic Research working paper, the authors argue that "overconfidence among acquiring CEOs is an important explanation of merger activity", which they describe as "among the most significant and disruptive activities undertaken by large corporations."
"The staggering economic magnitude of these deals has inspired a myriad of research on their causes and consequences. Most theories focus on the efficiency gains that motivate takeover activity, often for specific epochs. The empirical results on returns to mergers, however, are mixed, suggesting that mergers may not create value on average.
Moreover, even if there are gains from mergers, they do not appear to accrue to the shareholders of the acquiring company.
There is a significant positive gain in target value upon the announcement of a bid, and a significant loss to the acquirer. These findings suggest that mergers are often not in the interest of the shareholders of the acquiring company."
But how do we spot overconfidence in a CEO?
Overconfident CEOs, according to Malmendier and Tate, "over-estimate their ability to generate returns." Thus, on the margin, they undertake mergers that destroy value. They also perceive outside finance to be over-priced. "We classify CEOs as overconfident when, despite their under-diversification, they hold options on company stock until expiration (emphasis added). We find that these CEOs are more acquisitive on an average, particularly via diversifying deals." The effects are largest in firms with abundant cash and untapped debt capacity.
Using press coverage as "confident" or "optimistic" to measure overconfidence, confirms these results. We also find that the market reacts more negatively to takeover bids by overconfident managers.
The authors tested their thesis empirically on a sample of Forbes 500 firms from 1980 to 1994.
Their main empirical measure of overconfidence made use of time series data on the CEOs' holdings of company stock options in their private portfolios. "Previous literature in corporate finance shows that risk averse CEOs should exercise stock options well before expiration due to the sub-optimal concentration of their portfolio in company-specific risk.
As in Malmendier and Tate (2003), we classify CEOs as overconfident when they display the opposite behaviour, that is, if they hold company stock options until the last year before expiration.
This behaviour suggests that the CEO is persistently bullish about his company's future prospects. We find that overconfident CEOs are more likely to conduct mergers than rational CEOs at any point in time. The higher acquisitiveness of overconfident CEOs — even "on average" — suggests that overconfidence is an important determinant of merger activity."
"Moreover, the effect of overconfidence on merger activity comes primarily from an increased likelihood of conducting diversifying acquisitions. Previous literature suggests that diversifying mergers are unlikely to create value in the acquiring firm. Thus, it is consistent with our theory that overconfident managers are particularly likely to undertake them.
Second, we find that the relationship between overconfidence and the likelihood of doing a merger is strongest when CEOs can avoid equity-financing, that is, least equity dependent firms. Overconfident CEOs strongly prefer cash-or debt-financed mergers to stock deals, unless their firm appears to be overvalued by the market."
"Additional empirical tests corroborate our results. We show that the observed differences in option exercises and merger decisions are not due to inside information. Instead, the hypothetical returns, CEOs could have obtained by exercising their options earlier are positive on average. In addition, the acquisitions of overconfident managers are distributed uniformly over their tenures suggesting that the effect of overconfidence is a true managerial fixed effect."
To bolster their portfolio measure of overconfidence, Malmendier and Tate constructed an alternative measure based on how a CEO was characterised in the press. They analysed the difference in merger activity between CEOs who were portrayed in the business press as "confident" and "optimistic" and CEOs who were portrayed as "reliable," "cautious," "conservative," "practical," "frugal," or "steady."
Controlling the total number of press mentions, they performed the same empirical analysis as with the portfolio overconfidence measure. The results replicated. Furthermore, the two measures turned out to be "highly correlated."
Finally, they looked directly at the market's perception of the merger decisions made by overconfident CEOs. Using standard event study methodology, they demonstrated that outside investors reacted more negatively to the announcement of a bid if the CEO was overconfident.
This result also held for controlling relatedness of the target and acquirer, ownership stake of the acquiring CEO, corporate governance of the acquirer, and method of financing the merger. Their results suggested that, even if overconfident, CEOs created firm value along some dimensions — and mergers and acquisitions were not among them.
"Our theory of managerial overconfidence provides a natural complement to standard agency theory." Both "empire-building preferences" and overconfidence predict heightened managerial acquisitiveness — as given abundant internal resources — and, as shown in Malmendier and Tate (2003), a heightened sensitivity of corporate investment to cash flow.
Unlike empire-builders, overconfident CEOs believe that they are acting in the interest of the shareholders. Thus, overconfidence, cast as an agency problem, challenges the effectiveness of stock and option grants to top executives as an incentive mechanism. On the other hand, it provides additional underpinning for models of debt overhang.
High leverage may effectively counterbalance an overconfident CEO's eagerness to invest and acquire, given his reluctance to issue equity he perceives as undervalued. In addition, the failure of traditional incentives to mitigate overconfidence underscores the importance of an independent board of directors.
Wednesday, July 06, 2005
Tuesday, July 05, 2005
Sunday, July 03, 2005
Hindu Businessline Recommendations
BUY >> Shriram Transports and Shriram Investments
Polyplex Corporation
HOLD >> Gokaldas Exports
Nagarjuna Construction
Abbot India
Thursday, June 30, 2005
Avaya Globalconnect - Niru Mehta
'Trend of captive BPOs is leading to consolidation in third party BPOs'
Even as the Indian ITES (BPO) sector continues to grow from strength to strength, it is the emergence of the domestic industry which is making the sector vibrant, says Niru Mehta, vice-chairman and managing director of Avaya GlobalConnect Ltd (formerly known as Tata Telecom). "The growth of Indian call centre and BPO players focused on the domestic market will make us less vulnerable to international developments. Indian vendors continue to expand their service offerings and there is a distinct shift towards high-value services," Mr Mehta says. In an interview with Sudhir Chowdhary of FE, he analyses the drivers of Indian ITES growth. Excerpts:
Is your decision to revise accounting norms for income recognition part of a bigger evolution plan?
If you look at the way Tata Telecom evolved from 1999 to the last year, we have consciously made an attempt to reengineer every aspect of our business. The idea has been to emerge as a complete communications solutions provider. From a mere PABX company, we have transformed into a communications solutions firm, offering a comprehensive suite of converged solutions.
In doing so, it's not just about changing the product portfolio. We have changed every aspect of the business, whether it's about the service offerings, best practices, marketing campaigns, or the overall engagement we have with our customers.
When we started doing more complex work, it became imperative for us to consciously change our accounting method. It was challenging from an internal perspective because earlier, it was easier to do the billing and invoicing when you sell the product. Now, our accounting method is based on completion of the project. This has made the organisation strong because now we have processes which ensure that billing not only happens at the right time and in the right manner, but also project execution is taking place in line with the customer's requirements.
What are the recent trends you are witnessing in the contact centre industry?
I feel different trends are developing in the contact centre industry. A major trend we are witnessing is that more US and European companies are setting up their captive centres in the country as opposed to relying on third party outsourcers. So the growth for captive centres is stronger than those for third party outsourcers. The side effect of this trend is that there is some kind of consolidation happening among third party outsourcers.
Another trend is that BPOs are moving up the value chain in the kind of services they are offering. As a result, they are not only expanding their infrastructure, but are adding more value per seat both for themselves as well as the customer. Lastly, the domestic call centre and BPO market is growing at a healthier rate now. In 2003, size of the domestic market was 14-15% compared to the total market in India. This market has now grown to 18-19% last year. This is a healthy trend we have been witnessing for the growth of the domestic call centre industry. So, we will become less vulnerable to the global developments.
Have recent incidents of cyber crime slowed down the momentum in overall growth of the contact centre industry here?
Not really. On the contrary, we are beginning to attract some high-end BPO work from international customers.
What kind of increased investment in telecom equipment and solutions is required for offering high-end BPO services?
Various reports are available doing this kind of analysis. It would be inappropriate for me to comment. But, we see an emerging trend of BPOs moving up the value chain to provide specialised services.
Globally, there are organisations from varied sectors using IP (internet protocol) telephony services. Do you see this trend emerging in India, going beyond the IT and ITES companies?
I feel the telecom environment is changing very fast and it's getting very competitive from a service provider's perspective also. In the wake of these developments, I think the appeal of IP telephony as a cost reduction vehicle is not going to be very high. Customers might see the cost difference today in deploying IP telephony solutions but they are not sure whether this advantage will remain in future as service providers are constantly reducing telecom costs.
However, what is more important is how committed are organisations to change the way they run their businesses. It's not just about saving telecom costs. It's about business transformation. There's no better vehicle available than deploying IP as a way to communicate across the business processes with the right set of applications riding on top of the IP network, for business transformation and perform at a different level, as opposed to simply using IP as a cost reduction vehicle.
Who would go for such business transformation in India?
Businesses who are well engrained have an opportunity to deploy IP. Then, there are those which are fairly new and looking at global expansion of their operations. MNCs setting up operations in India or even Indian IT and ITES companies are potential customers as well. Overall, IP will benefit those who are looking to significantly transform their businesses.
Wednesday, June 29, 2005
Holdings By Rakesh Jhunjhunwala
Praj Industries 12.33%
Agro tech foods 4.31%
Beml 2.81%
Crisil 14%
Geometric Software 6.54%
Jb chemicals and Pharma 1.06%
Kpit Info systems 2.94%
Lupin 1.42%
Pantaloon Retail 1.07%
Relaxo Footwear 2.5%
Schlafhost 1.03%
Titan Industries 6.52%
Transport Corporation Of India 3.36%
Matrix Labs 1.59%
Nagarjuna Constructions 8.51%
Hindistan Oil exploration Ltd 2.84%
Federal Bank 1.91%
Karur Vaysa 2.9%
Ramco Systems 2.23%
Futura Poly 3%
Mid day Multimedia 5.29%
Balaji Amines Ltd 3.33%
Geojit 13%
Bilcare 9.1%
Infomedia India 6.56%
Source : smallcaptracker
Monday, June 27, 2005
Sunday, June 26, 2005
Nectar Lifesciences: Invest at cut-off
Source : Hindu Business Line
AN INVESTMENT in the initial public offer of the Chandigarh-based Nectar Lifesciences can be considered. Investors may subscribe to the issue at the cut-off price; this would entail paying Rs 240 per share on application (which represents the upper end of the price band).
Nectar is a Rs 230-crore bulk drug company with a presence in the anti-infective therapeutic category. Its product portfolio comprises semi-synthetic penicillin and cephalosporins in both the oral and sterile forms. Nectar is in the midst of an expansion programme that involves setting up another cephalosporin unit and one to make non-antibiotic active pharmaceutical ingredients.
Nectar also has a wholly-owned subsidiary, Chempharma, which is based in Sri Lanka. The unit enjoys Customs and income-tax benefits and its product (API intermediates) is consumed almost wholly by Nectar. The facility, which led to cost-savings for Nectar, also contributes significantly to the profitability of the consolidated entity.
The proceeds from this issue are to fund the construction of a formulations facility at Baddi in Himachal Pradesh, and to set up a sterile cephalosporin unit and an R&D centre near the company's existing facility at Derabassi in Punjab.
Business prospects
The therapeutic space in which Nectar operates has such established players as Aurobindo Pharma, Lupin and Orchid. Success in this business is a function of scale, a tight control over costs and an integrated business model. Pricing is driven by global trends and the market is highly competitive.
In the cephalosporin segment, a presence in new-generation products is preferred, as this is an area showing higher growth compared to older-generation products. Further, within this market, realisations for sterile forms tend to be generally higher as they call for a greater degree of expertise in manufacturing. Considering Nectar's long-standing presence in this therapy area, we believe that the company can capitalise on the emerging growth opportunities in this space.
To diversify, Nectar plans to focus on a portfolio of non-antibiotics that comprise cardiovasculars (statins and prils) and anti-histamines (fexofenadine). Though the effect of the expansion programme is likely to manifest only in FY-07, these categories still present opportunities for Nectar even if a few other players have a headstart.
The facility coming up at Baddi is for cephalosporin-based formulations. With Baddi enjoying a tax holiday, it opens the possibility of contract manufacturing in the domestic market. As Nectar intends to supply formulations to its customers from this facility, we believe it would impart an upward bias to margins compared to the supply of only APIs.
Nectar's Sri Lanka facility has led to considerable savings on costs and, as a result, pushed up operating margins to 17.5 per cent in FY-05 compared to 13.5 per cent in FY-04.
At the lower end of the price band of Rs 200, the stock would trade at a multiple of about 15 times its FY-05 per share earnings on an expanded equity base; at the upper end of the band, it would trade at price-earnings multiple of 18. This valuation is low compared to those commanded by its peers in the domestic market. The return on net worth has been on a steady climb since FY03; that figure stands at an attractive 31 per cent for FY05.
Risks
Weakening price trends in some of the key products manufactured by Nectar, a downward revision of product prices effected by the National Pharmaceutical Pricing Authority in the domestic market, and the political and currency risks of operating in Sri Lanka are the key downside possibilities to our recommendation.
Offer details
On offer are 38.7 lakh shares in the Rs 200-240 price band. The offer, which opened on June 22, closes on June 28. ICICI Securities is the lead manager
Hindu Businessline Recommendations
BUY >> Sesa Goa
HOLD >> Century Textiles, Balrampur Chini,
Geometric Software, Reliance Capital
Subscribe to:
Posts (Atom)