Grey Market - Take Solutions, Motilal Oswal, Indowin Energy

Grey Market Premiums are coming down, think twice before applying in substandard IPOS

Take Solutions 730 310 to 320

Motilal Oswal 725 to 825 240 to 250

Magnum Venture 27 to 30 3 to 4

Indowind Energy 55 to 65 5 to 7

Puravankara Projects 400 Discount

KPR Mills 225 Discount

Refex 65 5 to 7

Central Bank 102 32 to 33

SEL Manufacture Ltd. 80 to 90 2 to 3

Asian Granito 97 5 to 7

Weekly Watch - Aug 18 2007

Weekly Watch - Aug 18 2007

Divi's Laboratories - Aug 17 2007

Divi's Laboratories - Aug 17 2007

Cement Sector

Cement Sector

Most expensive real estate in the world

The list of cities that top property price chart reads as follows: London, Monaco, New York, Hong Kong, Tokyo, Cannes, St. Tropez, Sydney, Paris and Rome.

As signified by the list, London has emerged as the most expensive real estate market of all with prime property registering a cost of 2,300 pounds per square foot. The increase in the region is believed to be more than 14% on an average in 2006 as compared to 9% rise for the mainstream properties in the market.

It is followed by Monaco with 2,190 pounds per square foot.

Rising property prices in London imply that many people can sell properties here, buy a bigger property overseas and still have a scope for change.

New York comes close to third position with an average rate of 1,600 pounds per square foot. Property prices in this city have soared at an unbelievable rapid pace over the past few years, surpassing many other foreign destinations.

The fourth position has been grabbed by Hong Kong with 1,230 pound square foot.

The data has been showcased by the ‘Wealth Report 2007’ compiled by estate agent Knight Frank and Citi Private Bank. Likewise, it shows similar trends in other 70 locations to come up with the list.

Such a rapid rise in real estate prices has been attributed to a large economic development. The ownership of immovable property is one of the best indicators of wealth. It also makes the space for a stiffer competition to own properties. This trend is estimated to grow over the next 4-5 years.

Signs of cooling down

“Hot money" is one of those phrases that can mean many things. Sometimes it's earnings from illegal activity. It could be counterfeit. Most of the time however, it means cash deployed by traders; heavily leveraged and liable to switch direction at moment's notice. Nobody quite knows how much of the cash in Indian markets is "hot". You cannot get a complete picture. All one can say with confidence is that there is lots of it.

One indicator could be the delivery ratio - that is, the volume of delivery as a percent of the total trading volume. This varies. Delivery ratios range from 5 per cent to over 50 per cent in different stocks.

Obviously all non-delivery trading is done with "hot money". But quite a lot of deliveries are "hot" as well. Some deliveries are on borrowed cash. At other times, delivery is offered by somebody who has borrowed stock. There is no means of checking.

Then again, there are the Foreign Institutional Investors (FIIs). All FIIs take delivery, including the hedge funds and participatory note (PN) players. But the hedge-funds and PNites will exit at a moment's notice. Their cash is borrowed overseas. Nobody has a break up of hot versus "cold" FII funding. The RBI and the Ministry of Finance steadfastly avoids calculating and releasing such details for fear of spooking PN players - not that it would be easy to make such calculations in any event.

Hot money is usually deployed in tandem with the prevailing trend,whatever that may be. It tends to emphasise and underscore directional movements. If the market or given scrip is up, it attracts momentum traders. When they book profits or losses and head for the next fashionable trade that too, lends emphasis to bearishness .

The hot money is obviously exiting Indian stocks at the moment. In fact, it's exiting every global stock market. That's because the hot money depends on leverage and leverage depends on willing lenders. Given a crisis of confidence in US mortgages, lenders are extremely conservative at the moment. They need to know the butchers' bill in US subprimes before they regain a measure of confidence. That means highly-leveraged hot money must cut its exposures.

We saw a similar scenario during the Asian Flu of 1997-98. Last year as well, the crash in the global metals market caused a stampede out of stocks. The good thing about hot money is that it moves fast. We won't know the dimensions of the FII selling until it's actually over but the bulk of exits may be complete by end-August.

We can have an inkling of FII mindsets by examining gross derivative exposures. FII derivative exposures have shot up. They have a vast number of open short positions in stock futures and a very large number of open short positions in index futures as well. In index options, they have bought a massive number of calls. The long calls are presumably hedges against the market jumping. The shorts are Texas Hedges whose positions shot on top of net sales in the spot market, under the assumption that prices will drop because of spot-selling. If that mix of FII exposure changes, either before the August settlement is through, or early into September, there will be reason to believe that all the hot FII money is out.

The stocks that will be hit hardest during this exit-phase will be the F&O group and top-ranked mid caps. These are the counters where FII positions are close to limits. The mid caps are high-beta counters where hedgers have pumped up the prices over the past two years and also neared the FII-limit.

Post-exits, only the "cold" money of non-leveraged, long-term investors will be left in the stock market. The rupee will probably soften quite a lot as FII flows reverse. There is also likely to be a large fall in liquidity across the entire spot and F&O markets. That will retard fast price recovery in most counters. However, there will be little downside left and that is a perfect situation for long-term players.

The stocks that get hit hardest by hot money exits are also some of the best businesses available. Valuations would be very attractive if the Nifty dropped to say, 3500. That would be roughly 25-30 per cent correction. It happened in 2006, it could likely happen again. If you start buying now for the long-term, stagger purchases to ensure averaging down. If you use "hot money" yourself, wait till the FII derivative exposure mix changes and the rupee drops before you go long.

It's time for a pull-back

Bang on target! The BSE index, Sensex, touched a low of 13,780 – the exact level mentioned in this column last week. The index, however, witnessed a sharp pull-back from the level, thanks to renewed buying interest in the market.

If the Sensex is able to hold the 13,780 support this week, the index may attempt to scale the 14,650-level, at least in the immediate future, though there may be some resistance around the gap-down level of 14,585.

On the downside, a break of 13,780-level can spell more trouble for the markets with the possibility of the Sensex crashing down to the 11,800-level in the coming months.

The 13,780-level is important for two reasons — other than being the yearly level, the mark is also the 38 per cent re-tracement of the June quarter index swing (of 2,258 points).

Last week, the index began on a positive note but could only manage to touch a high of 15,070 (22 per cent re-tracement of the previous week). Post-Independence Day holiday, the index opened with a huge negative gap (416 points) at 14,585, and just could not recover as the global markets went into a tailspin. The index tumbled to a low of 13,780, and eventually ended with a loss of almost 5 per cent (727 points) at 14,141.

The NSE index, Nifty, swung in a range of nearly 400 points. The index touched a high of 4394 and a low of 4002 before settling with a loss of 5.2 per cent (225 points) at 4108.

The Nifty may drop to 3950-odd levels in case of fresh selling. This week, the index may find support around 3960-3910-3865, while, on the upside, the index is likely to face resistance around 4255-4305-4350.

Another key factor to watch this week will be the Nifty’s trading close to its 200-DMA (daily moving average), which is placed at 4067. So far this year, the index has managed to bounce thrice from the 200-DMA — in the beginning of March, in mid-March and at the start of April. If the index remains below the 200-DMA for a long period (say more than three days), one may see more pain in the future.

Confident opening likely

The market is likely to open up on Monday, thanks to the positive global cues on Friday. The Dow Jones, Nasdaq and the FTSE were up on Friday when the US Federal Reserve cut its discount rate, or the rate at which it lends to member banks, by 50 basis points to 5.75 per cent.

There was a smart pull-back rally on Friday with the Nifty closing above the 4100 levels after testing the 200-day moving average level of 4050. The BSE Sensex also fell below the 14,000 levels at 13,780 before closing comfortably above the 14,000 levels.

On the upside, the Nifty would face resistance at 4,150 while the Sensex may face resistance at the 14,650 levels. The high implied volatility, which has been there for the last two sessions, indicate caution. The Nifty’s Friday close of 4,100 happens to be a 61.8 per cent retracement of the rally from 3,555 to 4,650.

On Friday, the Nifty settled, creating the Hammer pattern, indicating the possible bottoming out of markets in the short term.

The foreign institutional investors were net sellers in both the cash and index futures to the tune of Rs 12,035 crore. The FIIs were net sellers in the cash segment to the tune of Rs 8,278 crore, while the net selling in F&O was worth Rs 3,737 crore.

The market-wide open interest increased by Rs 5,000 crore to Rs 83,800 crore, with the FIIs’ share at 35.54 per cent. The rise in open interest indicates the creation of fresh short positions.

Indowind Energy : Avoid

Investors can avoid the initial public offer of Indowind Energy, which generates wind power and develops, operates and maintains windmill projects for others. A stiff valuation, absence of a focussed business strategy and governance issues, negate the bright prospects that the wind power business otherwise holds.

At the offer price of Rs 55-65, the price-earnings multiple is at 30-36 times the company’s earnings for the year ended June 2007. Even after considering the company’s 9 MW expansion plan, the valuation is at about 35-40 times on the post-offer equity base. The asking price appears ambitious when compared to the valuations of power generation companies.

The premium enjoyed by Suzlon Energy arises out of its size, more integrated business (manufacturing equipment and developing wind farms) and global presence. We believe that Indowind Energy, with a relatively small turnover (of Rs 24 crore may be unable to deliver earnings commensurate with the valuation it is asking for.
Business and objects of issue

Indowind Wind Energy company has 16.8 MW of installed capacity, the power generated from which is sold to the Tamil Nadu Electricity Board and to some corporates in Karnataka.

The company has also developed 17.9 MW of wind farms for others which it also operates and maintains. Indowind Energy now plans to raise Rs 70-80 crore through this IPO. The proceeds are to be used primarily to set up a 9 MW wind plant in Karnataka, acquire second-hand wind energy generators (WEGs) and foreclose windmill operating leases with Axis Bank and ICICI Bank.
Lacking focus

Indowind Energy appears to lack a focussed business strategy. In the power generation business, it has not had a profitable deal either with the TNEB or with third-parties. While the sale rate with TNEB is lower than that offered by a few other State governments, the sale to corporate clients in Karnataka also appears to be less attractive as the wheeling charges for sale to third parties is higher in the State. Hence, the returns from the power generation segment appear lack-lustre compared to the projects segment.

Despite this experience, the company had again initially planned to set up the new 9 MW plant in Tamil Nadu but later decided to shift the same to Karnataka and sell power to the Bangalore Electricity Supply Company (BESCOM)

This not only resulted in delaying the project but also in the company withdrawing its public offer document on an earlier occasion. That the company is yet to enter into a power purchase agreement with BESCOM (as stated in the offer document) further suggests lack of a planned business approach.

The company has earmarked close to Rs 40 crore for acquiring second-hand WEGs that banks recover from defaulting clients. Windmills, in general, are subject to higher repairs and breakdown. The efficiency of the mills, especially the second-hand ones, remains doubtful, given that they would not have been used after the banks recovered them. This may result in reducing the plant load factor for the company, now at about 23 per cent.

As for foreclosing the operating leases with a couple of banks — neither the company nor the banks have initiated steps for such foreclosure. In this initial stage, it is unclear whether it would be a profitable proposition. The company’s projects division (developing and running wind farms), however, appears to have returned well. If the company is able to focus on this segment, earnings visibility may be higher. However, it may require more skilled manpower than the present 95 (of which 64 are contract labourers).

The company’s corporate promoter, Subuthi Finance (listed in the stock market), has a track record of non-compliance with certain listing requirements. It has also received notices from the RBI for certain irregularities.

Indowind itself has in the past derived a chunk of income from ‘other sources’. While this has gradually declined, the company has stated that it deploys surplus funds for providing loans and earns interest income. This as a poor and risky business practice. The above governance issues do not inspire confidence.

Offer details: The IPO is open from August 21-24. UTI Securities is the book running lead manager. The market capitalisation (on the price band) post listing would be Rs 270-320 crore.

Motilal Oswal Financial Services: Invest at cut-off

Investors can subscribe to the book-built initial public offering from Motilal Oswal Financial Services being made in the price band of Rs 725-825. The company offers a quality exposure to the domestic equity broking and financial services market, which has impressive growth potential.

The asking price for the offer also appears reasonable in the light of the company’s growth prospects and valuations enjoyed by peers such as India Infoline and Geojit Financial Services. At an offer price of Rs 825, the company would be valued at a price-earnings multiple of about 30 times the trailing and 26 times the forward earnings (on a fully diluted equity base). The company’s market capitalisation at this price would be about Rs 2,300 crore.

However, this stock is suitable only for investors with a high-risk appetite. With a high dependence on equity broking, Motilal Oswal’s earnings are inherently cyclical and pegged to the fortunes of the equity markets. Recent global developments may lead to a contraction in valuations for financial services players, which will have a bearing on the response to and post-listing performance of this IPO.
Operations

Motilal Oswal Financial Services (MOFS) is a NBFC, deriving its revenues mainly from four subsidiaries that offer stock broking (retail and institutional), commodity broking, venture capital and investment banking services. MOFS’ consolidated operations generated a net profit of Rs.69.5 crore on revenues of Rs.379 crore in 2006-07.

The equity broking business is currently the key revenue driver, accounting for 89 per cent of consolidated revenues. Contributions from the investment banking and venture capital arms, which commenced operations in 2006, are as yet marginal. Proceeds from this offer are to be used mainly to offer margin financing facilities to retail clients, augment working capital needs and purchase office space.
Prospects

Earnings prospects for the wealth management/equity broking business hinge mainly on the level of trading activity in the stock markets and MOFS’ ability to garner a larger share of transaction volumes amidst competitive pressures. Due to its early mover advantage in the traditional broking business, Motilal Oswal has managed strong growth rates in the wealth management business over the past four years.

While transaction volumes routed through the company in the equities (cash) market have grown at an annualised 93 per cent between FY-03 and FY-07, volumes in the derivatives segment have grown at 235 per cent per annum. Assets managed by its portfolio management services have expanded at an annualised 114 per cent over this period.

Given the very low retail participation in equities in the Indian context, there exists significant potential for expansion in the size of the broking and wealth management pie.

However, the relentless pressure on brokerage commissions due to entry of competitors with deep pockets (read private banks and foreign firms) and the growing popularity of online trading, are key challenges to be managed by traditional brokerages. Motilal Oswal has made a relatively late start in the online trading business (with its www.mybroker.com initiative) and, today, has a smaller online presence than some of its peers.

However, a healthy ramp up in clients over the past year and a recent strategic alliance with SBI to offer online trading services to the bank’s clients hold promise for an expansion in its online presence. An expansion in margin funding, financed by this offer, could generate additional revenue streams by way of interest receipts.

MOFS’ research strengths (a 34-member equity/commodity analyst team) and its extensive geographical reach covering 1200 locations in 377 cities, which enables it to tap into under-serviced markets, are key advantages over some of the company’s peers in the listed space.

The potential for expansion in MOFS’ earnings from its non-broking businesses is also substantial. The company’s large retail (2.43 lakh clients as of March) and institutional (251) client base offer considerable opportunities for cross-selling of products and services.

Businesses such as portfolio management and advisory services and distribution of third-party mutual funds/insurance are highly scalable and offer scope for substantial earnings growth at relatively small additional investments in infrastructure.

Offer details: Motilal Oswal Financial Services is offering 29.8 lakh shares (face value of Rs 5) at a price band of Rs 725-825. Citigroup Global Markets is the lead manager to the offer.

Zen and the trader

We recently met a very successful trader. In his office hung a Zen Koan “Do not just do something. Sit there”. If you are unfamiliar with a Zen Koan, it is a paradoxical statement that is meant to push the Zen disciple beyond everyday reality and to open his or her mind. The trader, a Zen follower, attributed his success to the Koan that hung in his office. There is, indeed, a message in that Zen Koan for anybody wanting to become a successful trader. What is it?

We always continually trade in the market. If you are a confused trader, you may choose to buy shares for intra-day trading. Usually, the stock fails to move up on the day that you buy them! So, you decide to hold it for another day. And the process continues the next day and the day after. Everyday, you buy shares, hoping to sell them at a higher price sometime in the future. Soon, you are saddled with a 30-50 stock portfolio. Have you experienced such behaviour?
Breaking habit

If so, you are not alone in the market. Most of us tend to over-trade. The reason we do that is because we are continually chasing profits. Some of us do out of compulsive habit. If you are heavy smoker, you will know how difficult it is to break such habit. The Zen Koan is a remainder about our shortcoming. As Zen Koan states, not doing anything in the market is sometimes more profitable!

The trader we met adopts a simple approach to get over the urge to over-trade. He takes positions intra-day, 5-10 days and 1- 3 months. Since he is busy buying in one time-horizon and selling in another, he does not feel the urge to chase profits. Importantly, he does not take any position unless the upside is at least three times more than the stop-loss level.

Next time you have the urge to trade, think about the trader and the Zen Koan that hangs in his office.

Trader's Corner

The stock markets have an undeniable influence on the thoughts of the men/women related to it. Traders and full-time investors can think of little else in their waking moments, and in their sleep too. The fascination that the bourses hold for the observers who stand on the periphery, is no less.

They see the movement of the stocks emulated all around them. Elliott waxed eloquent about the similarity in the patterns of stock markets to the movement of the planets in the solar system. Benoit Mandelbrot, who is also known as the father of fractal geometry likened markets to oceans when he recently said that "markets, like oceans have turbulence’.

This opinion has already been voiced by Charles Dow almost a century ago. His famous article in the Wall Street Journal on 1901 in which he used the example of tides in the ocean to explain the trend reversal process in stock markets is truly unmatched to this day.

To the uninitiated, his words ran thus, “A person watching the tide coming in and who wishes to know the spot which marks the high tide, sets a stick in the sand at the points reached by the incoming waves until the stick reaches a position to where the waves do not come up to it, and finally recede enough to show that the tide has turned. This method holds good in watching and determining the flood tide of the stock market. The average (of stock prices) is the peg, which marks the height of the waves. The price-waves, like those of the sea, do not recede all at once from the top. The force, which moves them checks the inflow gradually, and time elapses before it can be told with certainty whether high tide has been seen or not.” Dow’s method of determining a market top should be used on front-line indices. As per this theory, the long-term bull market will stay intact as long as the indices keep making a new high every few months. But there will come a time when the indices will struggle to record a new high even though the level of optimism remains high. That should alert an analyst regarding an impending bull-market top.

CMC: Hold

Shareholders can continue to hold the CMC stock (Rs 1,020) considering the possible gains it may offer over a one-to-two-year period on the back of reasonable growth prospects. With significant fall in technology stocks recently, any weakness in CMC’s price can be used to consider fresh exposures.

The stock trades at 20 times its trailing 12 -month earnings on the current equity base. This is at a premium to its peer, HCL Infosystems, but CMC’s operating profit margin of 11 per cent is significantly higher than the former. This may indicate better cost-management and operating efficiency. It also shows that the company’s dependence on low-margin equipment sales is decreasing and the services contribution to revenues is on an uptrend.

CMC is an IT solutions company and manages turnkey projects by providing solutions and services across the entire gamut of infrastructure components — computers, servers, routers and systems and application software. Its customer services and system integration SBUs (strategic business units) handle most of these activities and are also the highest revenue contributors (85 per cent of revenues).

CMC also, has an ITES division, which handles back-office processes, call-centre services and an education and training division, which provides IT education services to college graduates and corporates.
Business Analysis

Solid Partnership: CMC has been able to partner with some of the finest names in the IT space — Microsoft, IBM, Cisco, HP, Sun Microsystems and Oracle. This has helped it gain expertise over a wide range of IT products and servic es enabling it to serve as a value-adding entity for clientele with diverse requirements. This association has also helped CMC secure more business, in addition to client mining from its US subsidiary.

Strong client base: The company has, over the years, been increasingly engaging itself in turnkey projects rather than in small projects. It has won large-sized deals, some on its own, others in partnership with Tata Consultancy Servi ces.

Providing the entire spectrum of IT services not only ensures revenues upon completion of a project, but also locks in future revenue streams by way of services such as maintenance and support. Another favourable factor for the company is that it has been able to tap big public sector undertakings (PSU) as clients, helped by its previous status as a PSU . Indian Railways, ONGC, GAIL, IOC are some of CMC’s clients. Increasing IT spends by the government is likely to translate into business opportunities for CMC. It has significant private sector clientele as well; thus ensuring a healthy mix of PSU and private sector clients.
broad-basing offerings

The company is increasing its focus on education and training business. CMC has been able to tailor its programs to corporate needs and has gained significant presence in the IT education space, partly due to its own expertise developed over the years and partly due to synergies created by the TCS association.

The company is working out an interesting business model with Reliance Money as a client, wherein the latter would be allowed to open outlets at CMC’s franchisee units. Here, CMC would handle the IT infrastructure and management and provide education and training services to Reliance Money’s personnel at these outlets.

This would provide it with twin revenue streams from IT infrastructure support and training services. CMC’s ITES revenues have also grown significantly with an increasing overseas client base. It appears well-placed to provide technical support services through its call-centre units. Both are relatively high-margin services and higher growth and contribution to revenues from these services could augur well for earnings.
Risks

With prominent PSUs in its client base, CMC’s debt recovery cycle tends to be long and may expand its working-capital requirements. The company’s increasing overseas client base also exposes it to currency appreciation risks.

These are key realisation risks. Wage increases, estimated to be about 10 per cent annually, may also affect margins. Finally, competition from other players such as Wipro Infotech, HCL Infosystems and Datacraft are also potential challenges.

Power Finance Corporation: Buy

Investors can consider buying the Power Finance Corporation (PFC) stock at the current price of Rs 175 with a two-three-year investment horizon.

PFC had an exceedingly good first quarter ended June and appears set for exciting times ahead with huge investments projected to be made in the power sector in the next five years.

A strong balance-sheet with almost nil non-performing assets (NPA), focussed business model and lean cost-structure, lend confidence in the company. The stock has more than doubled from its February IPO price of Rs 85 and has risen by 68 per cent from its listing price of Rs 104.
Unique player

PFC is a unique player in the finance sector that specialises in lending to power projects and also offers non-fund-based services. The company mainly lends to thermal and hydel power generation and transmission and distribution projects. It also has a minor exposure to renovation and modernisation projects of existing power stations.

Its borrowers are predominantly State electricity boards and public electricity utilities; it has a minor portfolio of private borrowers who account for 8.4 per cent of gross outstanding loans.

The company is also the lead agency promoting the government’s ambitious ultra mega power projects (UMPP) where it is responsible for securing appropriate clearances to enable the successful bidders to implement their projects.

The positive offshoot of this is a fee for the services that it renders and the possibility of securing business from the UMPP players.
Strong financials

Despite being a lender to some of the most problematic borrowers in the country — state electricity utilities — PFC boasts of a strong balance-sheet with NPAs almost non-existent. The company employs different methods to ensure prompt repayment from borrowers such as a rebate for on-time repayment and an escrow mechanism to protect itself from potential default.

PFC also directly pays the suppliers of its borrowers rather than route the money through the latter. This ensures that the loan is used for the stated purpose of asset creation and is not used by the borrower for other purposes.

The company also closely monitors the financial health of its state-sector borrowers and has the ultimate option of the State government guarantee to encash if the borrowing utility defaults.

All these have helped reduce NPAs to 0.6 per cent of gross outstanding loans of Rs 45,200 crore in the first quarter. This is lower than the 0.10 per cent recorded in 2006-07. PFC is not required to follow RBI norms in this respect and, as per its own prudential norms, any loan where instalment and/or interest remain due for over six months is classified as an NPA.

The company has done extremely well to beef up its net interest margin (a measure of profitability for those in the financing business) at a time of great volatility in interest rates during the first quarter of this fiscal. Net interest margin, at 3.67 per cent during the first quarter, was 0.36 percentage points higher than the same period last year.

Similarly, the spread between borrowing and lending costs has also been widening; it was 1.93 percentage points in the first quarter against 1.71 per cent in the same period last year.

A substantial quantum of PFC’s loan assets is scheduled to come up for interest rate reset in the next couple of quarters and this is likely to increase the spread as also the net interest margin.

Presently, 61 per cent of PFC’s loan assets are subject to reset clause while 34 per cent is on fixed rate basis and a very minor 1.3 per cent is on floating basis.

Net interest income rose by 38 per cent during the first quarter to Rs 414.7 crore while disbursements were higher by 13 per cent at Rs 3,215 crore.
Growth acceleration

The Eleventh Plan envisages a capacity addition of over 68,000 MW from the central, state and private sectors by 2012.

Given the past, this may appear an ambitious figure but it looks attainable because projects adding up to about 31,000 MW are under construction.

Funding for these projects under construction is already tied up but PFC can hope to garner a slice of the remaining 37,000 MW of projects that have been committed. These would require about Rs 1,45,000 crore and those implementing them need to tie up the funds in the next few months.

Even a small slice of this would cause a substantial addition in its loan assets; PFC though, is hoping to fund about 20-25 per cent of this huge fund requirement.

The challenge will be in accessing funds at cheap rates especially because of the new RBI norms that curb banks from lending to non-banking finance companies more than 15 per cent of their (the bank) capital.

Term loans from banks account for almost half of PFC’s rupee borrowings and the new guideline could force the company to borrow from higher-cost sources. In the medium-term, this could cause a compression of spreads, especially if PFC is unable to on-lend at higher rates. This apart, the dependence on a single sector for business causes a concentration risk for the company but what lends confidence is the huge investment that is projected to be made in the power sector and the opportunity arising for PFC from that.

Investors can buy the stock with a medium-term perspective.

Bharti Airtel: Buy

The sharp decline in the broad markets over the past week offers a good opportunity to take exposures to the stock of Bharti Airtel – the market leader in the Indian mobile telephony market. Strong subscriber additions, substantial investments in capex and possible new revenue streams from overseas forays and businesses such as broadband and IPTV, suggest strong earnings growth prospects for the company over the next few years. The stock trades at about 32 times twelve months earnings, after declines linked to broad market weakness and lower-than-expected first quarter results. Investors can accumulate the stock at current levels as well as at any further declines.

Bharti Airtel continues to dominate the mobile telephony space in the country, with 1.9 million subscribers a month, at least half a million ahead of its nearest competitor. Bharti’s average revenue per user (ARPU), at Rs 390, is much higher than the national average of Rs 298, indicating a continued ability to command a premium over other operators. There also appears to be scope for offsetting any decline in ARPUs through value added services. The recent tariff hike effected by the company for SMS and local calls, may also help realisations.

Over $3-billion worth of capex rollout over the next few years, including components like next generation networks (NGN) and 3G-ready networks, will enable Bharti to service a rapidly increasing subscriber base and start 3G services, as and when policy clarity emerges. International calling cards, a thrust area, may also open up revenue streams with relatively higher margins. With the company winning licenses to deliver 2G as well as 3G services in Sri Lanka and committing $200 million towards expansion, Bharti appears well placed to position itself strongly in the Sri Lankan market, which has reasonable untapped potential.

Mobile telephony apart, Bharti’s Broadband and Telephone (landline) division has also been making headway, and garnering an ARPU of Rs 1,120, much higher than the national average. The impending rollout of new services such as IPTV (Internet protocol television), DTH (direct to home) may help revenues and margins. Key risks to the earnings outlook arise from any inordinate delay in release of 2G spectrum. A delay in the 3G policy announcement could mean loss of potential opportunity. Regulatory intervention on tariff increases and heightened competition in national and international long distance services, are risks as well.