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Tuesday, January 24, 2006
Monday, January 23, 2006
Jagran Prakashan IPO
Leadership not backed by financials
The financial track record does not justify the high asking price. But strategic expansion in a favourable economic environment can produce strong growth
The financial track record does not justify the high asking price. But strategic expansion in a favourable economic environment can produce strong growth
Jagran Prakashan publishes Dainik Jagran, the leading Hindi daily with the highest circulation and readership in any newspaper category worldwide. The newspaper has a readership of approximately 21.2 million readers per day as per NRS 2005 survey and had net paid sales of approximately 2.4 million copies per day in January-June 2005 as per ABC certified figures.
Promoted by the Gupta family, Dainik Jagran was first published in 1942. It is now published in 28 editions in 10 states.
Jagran Prakashan also publishes Sakhi, a monthly magazine targeted at women, Jagran Varshiki, an annual general knowledge digest, and various national and state statistical compilations. The company has 25 printing facilities in India with an installed capacity of approximately 1.32 million copies per hour.
Ireland-based Independent News and Media (INM) PLC, through its wholly owned subsidiary INMIL, acquired 3,212,486 equity Shares in Jagran Prakashan for Rs 150 crore in June 2005. Of this, Rs 110 crore was paid for 2,355,716 newly issued equity shares and Rs 40 crore to the promoter’s family shareholders to acquire 856,770 equity shares from them.
The objective of the issue is to raise finances for a capital expenditure of Rs 274.33 crore required to enhance its printing and publishing capabilities, to consolidate its infrastructure including printing facility and the editorial, marketing and administrative departments and launch a second brand. In addition to this, Jagran Prakashan also intends to use around Rs 43.39 crore from the public offer for acquisitions and investments in order to build a strong competitive force in its area of operation. Besides, there are plans to spend Rs 40 crore to expand its outdoor advertising business.
Strengths
Despite a number of broad-page English and Hindi dailies such as the Times of India, Hindustan Times, Dainik Bhaskar and Navbharat Times. Dainik Jagran has maintained its leadership, commanding a readership of 21.2 million per day. Readership of Dainik Jagran increased by 120.8%, from 9.6 million as per NRS 2000 to 21.2 million as per NRS 2005. This increase in readership was more than the combined growth of readership in the next four of the top five newspapers and was more than three times the growth in readership of the top six English daily newspapers. The growth in the readership and circulation reflected in the top line of the company, which shows a CAGR of 19% in the last five years to Rs 371.46 crore in FY 2005.
More than 60% of the revenue in FY 2005 and six months ended September 2005 comes from advertising, which is the mainstream of revenue for any company in the print media industry. Ad-spends in India, as a percentage of GDP, is only 0.34%, which is very low compared to countries like Thailand (1.43%), China (0.54%), and Mexico (0.52%). Along with the fast growing GDP, India’s ad-spend as percentage to GDP is also expected to increase to 0.54% of GDP by 2015. Print media accounts for around 46% of the total advertisement spend. As Dainik Jagran has a pan-India presence and its expansion initiatives on various fronts are likely to strengthen its position, it can expect to grasp a larger share of ad-spend in India.
Expanding printing capacity, particularly colour capacity, and modernising and upgrading existing printing centres in Noida are in addition to installing computer to plate (CTP) printing at some printing centres. The new modern printing facility will increase the ability to print color copies by fourfold. With this, ad rates are expected to go up. As colour advertisement is at a 70% premium to black-and-white ads, margin will be higher.
Weaknesses
On its strong foothold in the vernacular segment, Dainik Jagran’s revenue has shown a robust CAGR of around 19% in the last five years to Rs 371.46 crore in FY 2005. However, in the same period, Jagran Prakashan’s bottom line has shown a negative CAGR of around 31% to Rs 1.54 crore mainly on high prices of newsprint, which is the main raw material for the company. The operating margin has kept fluctuating in the last five years, witnessing a low of 1.6% in FY 2002. According to BMO Financial Group Commodity Price Index, the international newsprint prices are forecast to move up to $645 per tonne by 2007, from $609 per tonne in 2005.
The capital expenditure plans are likely to be commissioned only between March 2007 and March 2008 and yield benefits from FY 2008 onwards.
Jagran Prakashan intends to venture into outdoor advertising and also launch a second brand, a Hindi tabloid in line with the Times of India's recent English tabloid, Mumbai Mirror. Around Rs 43 crore and Rs 40 crore from the issue proceeds will be invested in launching the tabloid and expanding the outdoor advertising business, respectively. Looking at the existing players in these businesses, Jagran Prakashan will have to face tough weather, at least in the initial years of operation, till the time the new businesses find acceptability in the market.
Valuation
FY 2005 was one of worst years for Jagran Prakashan as its operating profit margin (OPM) crashed by 720 basis points (bps) to 5.6%. Net profit was just measly Rs 1.54 crore on sales of Rs 371.54 crore. However, financial performance has improved, with the six months ended September 2005 OPM up by around 600 bps to 11.5%, leading to improved net profit of Rs 11.97 crore. Annualised six-month EPS on post-issue equity works out to Rs 4.6.The offer price band of Rs 270-324 discounts this 58 to 70 times. On the other hand, HT Media, which has revenue almost double the revenue of Jagran Prakashan, with better profitability margin, trades at a PE of around 62 times its annualised half-yearly EPS of Rs 7.6. Another listed player, Deccan Chronicle, trades at a PE of 27 times the first-half annualised EPS.
Notably, INM had acquired a pre-issue 26% equity stake at Rs 144 per share (adjusted for bonus) in June 2005, which is at a 50% discount to the current offer price band. Post-issue, INM will hold a 20% stake, leaving scope for only another 6% foreign stake as the cap for foreign stake in the print media is 26%.
Entertainment Network (India)
Radio Mirchi going public
Well positioned to capitalise on the growth prospects of the FM business in the new licensing regime
Entertainment Network (India) (ENIL), operating FM channel Radio Mirchi, is issuing 120 lakh equity shares with a greenshoe option of an additional 12 lakh shares. The funds will be utilised to participate in the bidding for FM channels in new cities (seven bagged by January 2006) and finance the migration fee to shift to the new licensing regime in the seven cities (Mumbai, Delhi, Chennai, Kolkata, Ahmedabad, Pune and Indore),where it already operates FM channels. About Rs 10 crore will be invested in its 100% subsidiary in the business of event management and out-of-home media business. The ascertained project cost of Rs 230 crore will have a debt component of Rs 100 crore.
Due to the stiff licence fee, ENIL could not make profit since the past five years. After a new liberal policy, effective in the current year, the company’s licence fee obligation has come down drastically. It made a turnaround in the first half of FY 2006. Accumulated losses of over Rs 100 crore have been written off against equity and share premium account.
Before coming to the public, ENIL incorporated a 100% subsidiary, Times Innovative Media Private Limited (TIMPL), to take over the event management and out-of-home media business from the promoter company, Time Infotainment Media Company Limited (TIML). Bennett and Coleman Company (BCCL), the other promoter, had a 97% stake in TIML.
Strengths
*As compared to other developed and developing countries, advertising on radio has not been popular in our country. However, as consumerism in the country is on the rise, this medium can increase its advertisement share faster than other media as it is the cheapest mode of advertising and has a low base.
*As opposed to the old licensing policy, which had a provision of a flat 15% escalation of license fee per annum, the new policy provides for performance-based revenue sharing. This provides good opportunity for ENIL to expand rapidly to capitalise on its first mover advantage.
*ENIL has the largest radio network in the country: seven major cities including four metropolitan cities. The company operates in the same 93.5 MHz frequency band in all the four metros, giving it an advantageous position among frequently traveling listeners. Also, by having a pan-India presence, ENIL enjoys the advantage of providing greater advertising coverage to its clients. The brand, Radio Mirchi, is well recognized in the market, with 95% and 100% brand awareness in Mumbai and Delhi, respectively.
*The Times group enjoys rich patronage from advertisers due to its deep presence in the media and publication business, giving ENIL an edge compared to its competitors.
Weaknesses
*The entertainment and media industry is very much people-centric. Attrition rate will increase with the entry of many players after the new liberal licensing policy. This may put tremendous uncertainty on the listener-hold of existing channels.
*A substantial portion of the issue proceeds will go to bid for new stations. The revenue and profit from such new ventures is subject to uncertainty and gestation periods of varying degrees.
*ENIL is involved in a host of litigations relating to the sources of its contents. Any ruling against the company can have material financial implications.
*The 100% subsidiary of ENIL is engaged in event management and out-of-home business, where many unorganised players have a good presence, raising uncertainty on growth and profitability.
Valuation
In the half-year ended September 2005, ENIL reported sales of Rs 48.37 crore and net profit of Rs 11.05 crore. The company earns higher revenue and profit in the second half of the financial year due to the festive season. However, in the half year, it has not provided for around Rs 4 crore of amortisation charges related to one-time fee payable to shift to the new licensing regime. Its debtors amount to Rs 37 crore. As ENIL will be spending above Rs 70 crore for acquiring new licenses, it will have to take further hit on amortising these charges, as the new cities will take time to bring revenue. So one can not expect big EPS numbers in the short to medium term and P/Es will be high. Being the only listed player (at least for some time) in this field will stand it in good stead post-listing.
Sharekhan Pre-Market Watch
Rising crude prices could dent market
Following gains of over 250 points in the last two sessions, the mood is likely to remain optimistic on expectations of good quarterly numbers going further. However, rising crude oil prices in the international market could make investors jittery from taking any fresh positions. The market may open weak as major Asian indices have fallen over 1% each.
The benchmark indices, the Nifty could test its recent high of 2927 on the upside while it has likely supports at 2867 and 2848 on the downside. The Sensex has a likely support at 9466 and could test resistance at 9556.
Disappointing numbers from General Electric and Citigroup followed with a 2% surge in the crude oil prices due to prevailing tensions over Iran's nuclear plans had a telling effect on the US indices. On Friday, the Dow Jones tanked 1.96% or 213 points at 10667 while the Nasdaq tumbled 2.35% or 54 points to close at 2248.
Except Dr Reddy's and VSNL, other Indian floats took a sharp hammering on the US bourses. Rediff led the slump with a loss of 6%. Among other major losers Satyam dropped nearly 6%, Wipro shed 3% and Infosys declined 2%. Tata Motors, ICICI Bank, HDFC Bank, Patni Computers and MTNL were down around 1-2% each.
Crude oil prices continued moving upwards over Iran's nuclear issue and Nigeria's oil facilities facing militant attacks. As a result, the Nymex light crude oil for February delivery rose $1.29 to settle at $68.48 a barrel, while the London Brent crude moved up by $1.20 at $66.43 per barrel. In the commodity segment, the Comex gold dropped $5 to close at $554 an ounce.
ITC declared its Q3 numbers after market hours on Friday. The company reported a 15% rise in its net profit at Rs536.83 crore for the third quarter ended December 31, 2005 as against Rs466.70 crore recorded during the same period last fiscal. The total income rose 36% to Rs2,604.92 crore in Q3FY2006 from Rs1,911.12 crore reported during Q3FY2005.
Reliance Industries is planning a capex of Rs5,000 crore for starting commercial gas production from coal bed methane blocks by mid-2008.
Bajaj Hindusthan is planning an investment of Rs700 crore and will raise funds through GDRs and FCCBs comprising Rs299.65 lakh shares.
Micro Inks may witness action on reports of signing a supply agreement with Hannanprint NSW for Australian $39 million.
Friday, January 20, 2006
Reliance Industrial Infrastructure - SP Tulsian
One can safely buy this share for over 100 % gain in next one year. The share is presently available at forwarding earning multiple of about 17 while peers command an average P/E of above 40 and Industry P/E of above 30.
Gujarat State Petronet
Get Set Go
Gujarat State Petronet (GSPL), promoted by Gujarat State Petroleum Corporation (GSPC), transmits natural gas. The company currently owns and operates 433 km of natural gas pipeline, from Hazira to Kalol, catering seven of the 25 districts in Gujarat, This is the second largest natural gas transmission network in India. GSPL is the first company in India to transport natural gas on an ‘open access’ basis: the company makes its gas transmission capacity available to any shipper on a non-discriminatory basis. It does not trade in natural gas and is not directly affected due to its fluctuating prices.
GSPL will establish another 742 km of natural gas pipeline, covering seven more districts of Gujarat, with an estimated capital expenditure of Rs. 1400 crore. The company hopes to mobilise around Rs. 370 crore from the present IPO. It has tied up with a consortium of banks/FIs for loans of Rs. 758 crore. The balance is to be financed by internal accruals. This expansion, which is expected to complete by July 2007, will enable GSPL to reach new customers in Vapi, Saurashtra, Mehsana and Himmatnagar among other markets.
The 18 customers of GSPL are mainly from the fertilizer and power sectors, including GPEC, Essar Steel, Essar Power, Iffco, AEC, GNFC, GSFC, and Arvind Mills. The expansion will allow the company to service even medium-sized companies and varied industries such as ceramics and chemicals. Currently, its pipeline transport 13 million metric standard cubic meters per day (mmscmd)) of natural gas of various suppliers, including Cairn Energy, GSPC – Niko, Hazira LNG, Petronet LNG, and PMT Gas. The existing pipeline is capable of transporting around 40 mmscmd of natural gas. The utilisation is expected to double to 26 mmscmd in three years.
The tariff structure is based on the distance as against fixed tariff of Gail (India). Nearly 90% of these charges are based on capacity booked. GSPL operates on a 15-day billing cycle. The next two billing cycles are insured.
Strengths
- GSPL enjoys the first-mover advantage in the new pipeline that it is establishing and is expected to enjoy near-monopoly for an extended period of time in future.
- Global demand for natural gas is expected to grow at an average rate of 2.3% in the next 20 years, while the Indian demand for natural gas is expected to go up at around 5.4% per annum to 400 mmscmd, from the present 150 mmscmd in the same period. The weightage of natural gas in the energy basket of India is expected to increase from the present 8% to 20% by 2025. In fact, supply, and not demand, is a constraint.
- Gujarat, where GSPL is located, produces nearly 65% of the total natural gas production of India. The state hosts the only two LNG terminals in India. Also, of the 55 oil and gas exploration blocks offered under the upcoming sixth round of New Exploration Policy. majority are expected to be in the Krishna Godavari (KG) basin. So supply of gas will increase significantly, though timing and quantity is not ascertainable.
- Bulk buyers favour the "open access" system adopted by GSPL as it allows them the flexibility to choose the supplier for natural gas.
Weaknesses
- Impending government policies on regulating natural gas production and transmission may affect prospects. However, since GSPL is already operating on "open access" basis, which is one of the major motives behind the policy regulations, it is not expected to suffer heavily. These policies may put a cap on the maximum tariff chargeable.
- GSPL is establishing a pipeline infrastructure in anticipation of increasing availability of natural gas at reasonable prices in the future. Major contracts for import of LNG in India are expected to be functional from 2008/09 onwards, until then the natural gas supplies will depend mainly on existing contracts and domestic production. Thus, a shortage of natural gas may hamper the company’s growth targets in the short term.
- The process of acquiring land, rights of use (RoU) and rights of ways (RoW) for laying pipeline is prone to litigation and, therefore, highly time consuming.
Valuation:
*GSPL has set a price band of Rs. 23 to Rs. 27, which translates into a PE of 24 x to 28.2x annualised EPS in the half-year ended September 2005 on post-issue equity
*Gail (India) and Gujarat Gas (GGCL) are the only two companies operating in a business similar to that of GSPL. These companies are presently trading at PE multiples of 9.1 and 16.7, respectively, on their half-year annualised EPS. However, growth rates for GSPL are likely to be higher.
*GSPL is considering reducing the depreciation rate on pipelines from 8.33% to 3.17% in line with the new depreciation policy recognised by the Ministry of Company Affairs. Gail has adopted the new rate from the current year. The new rate will significantly boost net profit.
Thursday, January 19, 2006
Why track down Rooplaben?
A few months ago, when Manjunath was murdered, at first there was an uproarabout bad law and order. While concerns about bad law and order arecertainly well placed, in this case, the incentive for criminal activitiesclearly came from government-induced pricing distortions in petroleumproducts. Just as the problem of smuggling was caused by India's tradebarriers, which went on to corrode the police, the problem of Manjunath'smurder was caused by India's oil pricing policies, which went on to corrodethe police.
A similar situation has shaped up on the IPO market. The root of the rot isa pricing policy which gives supernormal returns to "individual investors".In the IPO market, a "small investor" is defined as someone applying forshares of less than Rs 50,000. In the Yes Bank IPO, the oversubscriptionfor such "small investors" was 9.96 times, while the oversubscription forthe remainder was 43.68 times. This gave "small investors" an allotment ofshares bigger by four times.
If you got shares of Yes Bank at the IPO and sold at first listing, thisgave you an instant profit of 36%. How do you think people will respond tosuch a situation? By tossing in more applications! A family of five willput in five different applications, each at Rs 49,999. A family of fivewill create five fake identities each, and thus have 25 applications. Andso on it will go, to a point where some people will muster thousands ofapplications. It is hypocritical to pour invective upon someone who puts in5,000 applications, while ignoring the ordinary household that puts in 25applications.
When the IPO market is structured in this fashion, there is endemicfalsfication, and ordinary citizens engage in fraudulent behaviour. When acertain activity endemically takes place amongst ordinary, middle-classhouseholds, no police force in the world can stop it. In a democracy, whenthere is a collision between law and mass behaviour, ultimately it is thelaw that has to budge.
In some countries, there are strong notions of citizen's identity, whichuniquely identifies each person. An enormous enforcement infrastructure hasbeen developed in those countries, to enforce stringent penalties againstpeople who have multiple identities. If such identity infrastructureexists, it becomes feasible to enforce rules such as "no more than oneapplication per citizen". But even there, it is unfair that a family of sixcan toss in six applications while a family of two can only put in twoapplications. In the Indian case, given the absence of identityinfrastructure, enforcement against multiple applications is justinfeasible.
The finance minister has promised a crackdown on the "IPO scam". Hundredsof staffpersons at the ministry of finance, the RBI, Sebi, NSDL, etc. arenow expending their energies in hunting down multiple applications inrecent IPOs. Is this an efficient use of scarce regulatory and governancecapacity?
The core problem lies elsewhere. It lies in a pricing distortion that hasbeen created by Sebi. The solution that is required is to eliminate thisdistortion.
There is no case for special allocations for "individual investors". Theultimate aim of a good IPO mechanism is that the price discovered in theIPO auction should be practically the same as the price at first listing.If an IPO takes place on Friday, and trading starts next Monday, onaverage, the Monday closing price should be the same as the IPO price.
Once this is done, there is no "special profit" in buying at the IPO, whichcan be politically allocated to "individual investors". Individualinvestors who didn't obtain shares in the auction would be able to buy themon the secondary market on Monday at essentially the same price.
The way forward, thus, consists of removing the frictions that are in ourIPO process, which are generating a gap between the IPO price and the firstlisting price. Our the IPO mechanism has made enormous progress compared tothe bad old days, when people filled out forms and sent them out with acheque attached, by post. We have started using computer technology toreduce the frictions. But partly owing to the business interests ofinvestment bankers, we have stopped short of the logical destination: IPOby pure auction through the NSE and BSE.
Here is how it would work. The investment banker would help the company towrite the prospectus, and do roadshows across India, but have no other rolein the IPO. On a Friday, the auction would take place from 9:55 to 3:30. Aswith secondary market trading, there is no need for a "price band", whichonly limits price discovery. Investors would go to a broker to place ordersin the auction. All brokers in India would be able to accept orders for theIPO, exactly as is the case with the secondary market today. Exactly aswith the secondary market, the broker would be held financially responsiblefor the orders placed by investors.
The screen would continually display the market-clearing price and demandschedule. Investors would have the ability to revise their bids if theychange their minds based on looking at the demand curve. At 3:30 PM, thecomputer would calculate the cut-off price, and apply it to all successfulbidders. By definition, there would be no oversubscription.
The greatness of India's secondary market for equity has been that allinvestors_retail or institutional_participate in a single unified pricediscovery. The success of unification of all orders in the secondary marketshows that this is feasible in the IPO auction also. A financial market isabout prices, where the highest bidder gets the securities sold in theauction, and not about the identity of the participant.
The ultimate cause of smuggling was our trade barriers. The ultimate causeof Manjunath's death is our pricing distortions on petroleum products. Theultimate cause of the "IPO scam" is mistakes in the design of the IPOmarket. Instead of expending thousands of man-hours of staff time in hotpursuit of Roopalben, we should solve the problem at the source. Thisrequires moving up to the next level: an IPO market based on pure auction.Everyone benefits in such a scheme, except for the investment banker whomakes less in fees.
Stock Ideas
| 526899 | Himalaya International | 21.90 | 3 Month | 35 |
These are not my calls .. If you lose money, dont blame me
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