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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
Wednesday, January 18, 2006
Sharekhan Trading Call - GE Shipping
New Trading Call
Date: 18/01/2006 | Company Name: GESHIP | Call Type: Go Short
Stop Loss/ Reversal: 254.0000
Buy/Sell Price Rs.: 243.00
Current Price Rs.: 243.80
Potential P/L%: 0.3200
Target: 223-210
Remark:
Investment Argument: The stock has formed a wedge like pattern. Go short with a stop loss at Rs254 for the targets of Rs223 and Rs 210.
Sharekhan Trading Call
Date: 18/01/2006 | Company Name: IFLEX | Call Type: Go Short
Stop Loss/ Reversal: 1150.0000
Buy/Sell Price Rs.: 1120.00
Current Price Rs.: 1124.70
Potential P/L%: 0.4100
Target: 1010-950
Remark:
Investment Argument: This call is to be initiated after the stock breaks the level of Rs1,100. The stop loss would be at Rs1,150. The targets are Rs1,010 and 950.
Sharekhan Investor's Eye
Sintex Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Rs192.5
Current market price: Rs162
Price target revised to Rs192.5
Result highlights
* Sintex Industries Ltd (SIL) reported a revenue growth of 14.4% year on year (yoy) in Q3FY2006 to Rs210.3 crore. The revenue growth was marginally lower than our expectation, mainly because the plastic business grew at a slower growth rate of 5.2% yoy.
* The operating profit margin (OPM) saw a phenomenal improvement of 140 basis points yoy and of 80 basis points quarter on quarter (qoq) to 18.6%. The growth in the OPM was above our expectation. Accordingly, the operating profit (OP) saw a strong growth of 31.8% yoy to Rs39.2 crore.
* The revenues of the textile division grew at a robust 28.5% yoy in Q3FY2006 to Rs72 crore on the back of a strong growth in the Canclini business. Even the profit before interest and tax (PBIT) margin saw an improvement of 460 basis points yoy to 20.3%.
* The plastic division saw a slower growth of 5.2% yoy to Rs140.4 crore, mainly on account of a 28.1% decline in the tank business. The robust growth in the businesses of pre-fabricated structures (Pre-Fab) and custom mouldings (CM) helped the PBIT margin to improve by 550 basis points yoy.
* The strong volume growth in the Pre-Fab and CM businesses coupled with a 406.4% year-on-year (y-o-y) jump in the sales to the Canclini joint venture (JV) caused the profit after tax (PAT) to grow by 31% to Rs20.3 crore in the quarter.
*The company's earnings per share (EPS) for Q3FY2006 stood at Rs2.2 per share, in line with our expectations.
*We have introduced the consolidated earnings estimates for the FY2006-08 period and arrived at EPS estimates of Rs11.1 and Rs13.7 for FY2007 and FY2008 respectively. We have rolled over our price target to FY2008E consolidated earnings and arrived at the price target of Rs192.5, valuing the company at 14x.
Jaiprakash Associates
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs458
Current market price: Rs376
Price target revised to Rs458
Result highlights
* Jaiprakash Associates Ltd's (JAL's) Q3FY2006 stand-alone net profit at Rs57 crore was below our expectations of a net profit of Rs66 crore. The primary reasons were higher interest costs and lower other income. The net sales for the quarter were up 19.7% to Rs797 crore driven by a sharp 30% growth in the company's cement revenues.
* The operating profit margin (OPM) jumped by 340 basis points to 21% due to a sharp jump in the margins of the construction business. The OPM for the cement business fell marginally by 40 basis points during the quarter due to higher fuel costs. Overall, the operating profit during the quarter jumped by 43% to Rs167 crore.
* As the company commissioned a new 1-million-tonne grinding unit at its Tanda plant and a captive power plant during the quarter, its depreciation charge jumped by19% and interest cost increased by 15.5% during the period. Overall, its net profit during the quarter jumped by 27% to Rs57 crore.
* At the current market price of Rs376, the stock is discounting its FY2007 consolidated earnings by 13.5x and its FY2007 consolidated earnings before interest, depreciation, tax and amortisation (EBIDTA) by 7.1x. We maintain our Buy recommendation on the stock with a revised price target of Rs458. Our price target is based on the sum-of-parts valuation of the company.
Pre-Market Watch
Market may remain weak
Although the market rebounded from its five straight losses in yesterday's trades, nervousness is likely to continue on concerns of FIIs turning net sellers in the last few sessions. Also the investors are waiting for a clear picture from the Reliance Industries demerger process that would commence in a short while in a special trading session arranged by the SEBI today.
The Nifty could test 2790 levels on the downside while it has a likely support at 2824 during intra-day trades. The Sensex has a likely support at 9240 and could test resistance at 9321.
After remaining closed on Monday, the US indices took a sharp beating on Tuesday as crude oil prices flared up nearly 4% on reports of further attacks on Nigeria's oil industry by the militants. As a result, the Dow Jones dropped 64 points at 10896 and the Nasdaq declined 14 points to close at 2303. The US market is likely to remain under pressure on Wednesday following a lower-than-expected quarterly numbers from IBM, Intel and Yahoo.
Indian ADRs, too, were hammered on the US bourses. Leading the slump Rediff tanked 10.51%, while VSNL, MTNL, ICICI Bank and Tata Motors dropped 3-4% each. Among other laggards HDFC Bank, Dr Reddy's, Infosys, Satyam, Wipro and Patni Computers were down 1-2% each.
Crude oil prices rose sharply, with the Nymex light crude oil for February delivery soaring by $2.39 to settle at $66.31 a barrel. The London Brent crude was down 43 cents at $65.33 per barrel. In the commodity segment, the Comex gold dropped $2.70 to close at $554.30 an ounce.
Bajaj Auto to buyout 27% stake in Maharashtra Scooters for Rs151.63 crore.
Tata Consultancy Services to invest Rs6.3 crore in a joint venture partnership with the Madhya Pradesh State Electronic Development Corporation.
Praj Industries is eyeing business in developed markets like the European Union and the US.
Andhra Bank - FPO
Better than the peers
Stands out on quality of assets, productivity and profitability
Andhra Bank (ANDB), established in 1923, was nationalised in April 1980. The bank made its maiden public issue of 15 crore equity shares of Rs 10 each for cash at par, aggregating Rs 150 crore, in March 2001. The government of India (GoI) currently holds 62.5% of the pre-issue paid-up equity share capital (Rs 400 crore), which will come down to 51.5% after the issue.
On September 2005, ANDB had 1,177 branches in India, serving 1.39 crore customers. However, 854 of its branches (72.5%) are in Andhra Pradesh (AP). Sixty-three per cent of the bank’s outstanding domestic loans are to corporate & commercial businesses (includes small and medium enterprises comprising 12%). The share of the housing & retail sector constitutes 19%, and agriculture the remaining 18%.
The main objectives of the second IPO include augmenting the capital base to meet the future capital requirements arising from the implementation of the Basel II standards. Funds are also required to sustain the growth in credit in tune with the expansion of the Indian economy. On September 2005, ANDB’s capital adequacy ratio (CAR) stood at 11.95% compared to the Reserve Bank of India (RBI)-stipulated 9%. The bank intends to grow by expanding geographically in India and internationally, by increasing its volume of retail business and cross-selling various fee-based financial products and services to its customers.
Strengths
*ANDB’s asset quality is the best in its peer group, with net NPA ratio at 0.26% and gross NPA ratio at 2.27% on September 05. The bank also has a well-diversified portfolio with maximum funded exposure to the power sector (20%), followed by the textile sector (9%).
*All branches are computerised, with 88% of the business on the core banking solution platform, which will help the bank to reduce its operating expenses in the long run and confront stiff competition from private banks.
*ANDB is fully prepared to meet the Basel II requirement.
* The credit growth is a healthy at above 30%, with incremental credit deposit ratio above 100% for FY 2005. In H1FY 2006, it was 80%. With the busy season ahead, numbers could be better than last year.
*The net interest margin (NIM) had improved from 3.79% in FY 2004 to 3.95% in FY 2005. However, with a fall in yield on earning assets, NIM end September 2005 stood at 3.62%, considered quite healthy in the banking sector.
Weaknesses
*Treasury contributed above 40% of the total revenue like most other PSU banks. In a rising interest rate scenario, banks have reduced the duration of their portfolio to minimise interest-rate risks by selling high yield, long-term securities, hitting the yield on investment and restricting the net interest-income growth. However, credit growth remains buoyant and the fall in yields will be made up after a time lag.
*Operating expenses, as a percentage of net total income (OE/NTI), end September 2005 was 51%, which is comparatively higher than its peer group. The OE/NTI ratio is expected to remain at the higher end with expansion plans on the horizon.
* 72.5% of ANDB’s branches in AP generated around 58% of the advances end September 2005. The bank needs to have a larger share of business in other parts of the country to maintain the growth momentum.
Valuation
In the first half ended September 2005, ANDB’s net interest income witnessed a growth of only 4% to Rs 563 crore due to a more than 10% fall to Rs 378 crore in its interest on investments. `Other income’ fell 57% to Rs 195 crore mainly due to a 90% fall in the treasury income to Rs 33 crore end September 2005, from Rs 300 crore a year ago. However, commission income showed a promising growth of 31% to Rs 80 crore, from Rs 61 crore. The 57% fall in `other income’ weighed heavily on the net profit, which registered a fall of 29% to Rs 203 crore.
The last one-year and six-month average price of the scrip is Rs 97, whereas for the last three months, it is Rs 94.
ANDB’s annualized EPS for H1FY06 on post-IPO equity works out to Rs 8.4/ Considering the higher price band, post-IPO book value (BV) is Rs 58 and adjusted book value (ABV) is Rs 57. At the price band of Rs 82 to Rs 90, P/E is 9.8 to 10.7, which is a bit higher compared to most of its peers. P/BV and P/ABV are both around 1.6, which is in line with its peers.
Besides quality of assets, ANDB scores higher on certain other grounds compared to its peers Allahabad Bank, Corporation Bank, Indian Overseas Bank, Syndicate Bank and Vijaya Bank. Its productivity and profitability are comparatively higher than most of to its peer group members, barring Corporation Bank.
Tuesday, January 17, 2006
Sharekhan Trading Call
Date: 17/01/2006 | Company Name: CRESCOMM | Call Type: Go Long
Stop Loss/ Reversal: 142.0000
Buy/Sell Price Rs.: 155.00
Current Price Rs.: 157.90
Potential P/L%: 0.1900
Target: 180-194
Remark:
Investment Argument: The stock has completed a complex correction wherein a break-out has taken place at Rs152. Buy the stock with a stop loss of Rs142 for targets of Rs180 and Rs194.
Monday, January 16, 2006
Trading Call - SBI
Date: 16/01/2006 | Company Name: SBI | Call Type: Go Short
Stop Loss/ Reversal: 942.0000
Buy/Sell Price Rs.: 924.00
Current Price Rs.: 916.90
Potential P/L%: -0.1400
Target: 893-872
Remark:
Investment Argument: The stock has been in a range forming a 3-3-3-3 pattern in an expanding triangle format wherein the d wave has been completed. Go short with a stop loss at Rs942 for targets of Rs893 and Rs872.
Saturday, January 14, 2006
Bank of Baroda - FPO
Attractive Price/Book Value
However, profitability ratios need to improve to help the scrip get the rightful P/BV multiples
Bank of Baroda (BoB) made its maiden Rs 850-crore public issue in 1996. The government of India (GoI) currently holds 66.8% of the pre-issue paid-up equity share capital (Rs 293.27 crore), which will come down to 53.8% after the issue. On September 2005, it had 2,694 branches in India and subsidiaries in 19 countries, serving over 2.5 crore customers. International operations account for 16% of its business (deposits + advances) and domestic operations the rest.
The main objects of the follow-on offer include augmenting the capital base. On September 2005, BoB’s capital adequacy ratio (CAR) stood at 12.8% as against the Reserve Bank of India (RBI)-stipulated 9%. The bank intends to take advantage of the domestic economic boom and expand its international presence. BOB plans to become a universal bank with foray into insurance, mutual funds and stock- brokering. But these are currently only under consideration and actual implementation would take time.
Strengths
BoB was the first among PSU banks to take the initiative of brand building and completely overhauling the PSU banking culture. It started the 8-to-8 banking, unheard of among PSU banks.
Though slow to implement technology in its operations, BoB has made significant advances in this area. It has implemented a single technology platform, which will aid in rolling out its core banking solution in all its domestic and foreign branches. The multi-currency and multi-regulator compliant system will provide seamless integration of operations across all its branches. The technology cost will continue to weigh heavy on the cost to income ratio (54% as on September 2005), which is at the higher end among its peer group. However, the system will provide compounding benefits in the bank’s business in the years to come.
Credit growth has remained healthy at 31% in H1 FY 2006 over H1 FY 2005, with the credit-deposit ratio (CDR) at 60%. The numbers are expected to improve in the busy season ahead. The net interest margin (NIM) of 3.37% in H1 FY 2006 is considered healthy in the banking sector. As on September 2005, 85% of the funds were deposits. Of this, 38% were low-cost deposits, resulting in one of the lowest cost of deposit, at 4.24%, in the banking industry.
Weaknesses
Treasury income made up over 50% of the `other income’ (OI) category, which has been languishing in the absence of treasury gains in a rising interest-rate scenario. The fall in treasury gains has been significant and it needs to be substituted by core lending income. But this will take some time.
Its return on net worth was low, at 12.7%, in FY 2005 and 14.46% in H1 FY 2006.
Valuation
In H1 FY 2006, BoB’s net interest income witnessed a growth of 12% to Rs 1540 crore. OI fell by 31% to Rs 518 crore on a 63% fall in treasury income to Rs 140 crore, from Rs 375 crore in H1 FY 2005. The 63% fall in OI weighed heavily on net profit, which registered a fall of 18% to Rs 416 crore.
The scrip currently trades around Rs 245. The last one-year, six- and three-month average price of the scrip stood at Rs 222, Rs 239 and Rs 233, respectively.
BOB’s annualized EPS for H1FY06 on post-IPO equity works out to Rs 22.8. Considering the higher price band, post-IPO book value (BV) is Rs 203 and adjusted book value (ABV) is Rs 188. At the price band of Rs 210 to Rs 230, P/E is 9.1 to 10.2, which is in line with the peers. P/BV is around 1.1 and P/ABV is around 1.2, which are very low compared to its peers. The lower P/BV and P/ABV can help faster appreciation of the scrip, provided it improves its profitability ratios as currently PE is acting as a cap to the rise in the scrip price.
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