Prathibha Industries IPO

But unexciting diversification and undisclosed incomes are disconcerting

Pratibha Industries (PIL), promoted by Ajit Kulkarni and his relatives, has developed expertise in building and developing infrastructure projects in core areas of water supply and distribution system, environmental engineering, pre-cast design & construction. It also undertakes projects in road construction, housing (mass and real estate development).

PIL proposes to enter the lucrative engineering, procurement and construction (EPC) business for executing oil and gas transmission contracts. The company, through its subsidiary Pratibha Infrastructure, plans to diversify through backward integration by installing a manufacturing and coating facility to produce spirally-welded steel pipes used in the transmission of water, oil and gas.

The proceeds from the current issue are to be invested in: (a) BOT/BOOT projects; (b) the capex for the spiral pipes project through investment in Pratibha Infrastructure, which does not carry on any business at the moment; (c) the long- term working capital; and (d) repaying part of existing high-cost debt.

Strengths

1. The thrust by the Central and state governments on infrastructure development including water, environmental engineering, roads and other infrastructure sectors augurs well for PIL.
2. Consolidated sales have grown at a CAGR of 51% between FY 2002 to FY 2005 to Rs 121.39 crore and the net profit at a CAGR of 88% to Rs 8.09 crore.
3. PIL has been awarded more than 50 projects in last seven years by various government and semi-government authorities. Its order book on 31 December 2005 was Rs 516 crore, with a backlog of Rs 316 crore (75% water-based and environmental engineering projects), i.e., 2.6x FY 2005 consolidated revenue.

Weaknesses

1. Income-tax searches resulted in the promoters and group companies to admit undisclosed income of Rs 3 crore. Thus, the returns for the past many years will have to be re-filed and penalty may be levied.
2. The logic behind investing Rs 14 crore to diversify into spirally welded pipes is not convincing.
3. The cash flows at the operating levels were negative Rs 10.19 crore, Rs 8.19 crore and Rs 10.35 crore in FY 2004, FY 2005 and nine months ended December 2005. This indicates very high working capital requirement due to government projects.

Valuation

In the nine months ended December 2005, PIL reported consolidated sales of Rs 105.19 crore, a net profit of Rs 6.99 crore. The annualised EPS is Rs 6.5 on post-issue equity. The offer price band of Rs 100 to Rs 120 gives a PE range of 15.4 to 18.5. Due to the mad frenzy for construction scrips, the sector TTM P/E stands at 32.3. However companies engaged in making pipes and related projects trade at TTM P/E of 20.

PIL’s financial track record and reasonably large order book in this scenario are comforting.

South Indian Bank

Marching northwards

The South Indian Bank (SIB), by its name, reveals its strong presence in south India. Of its 432 branches in 17 states, 220 are in Kerala and 93 in Tamilnadu. As of December 2005, nearly 87% of its business was networked under the core banking solution.

SIB has started its network in north Indian cities like Amritsar, Ludhiana and Bhopal. Approvals for more than 20 other branches are pending with the Reserve Bank of India (RBI).

An old private sector bank with no identifiable promoters. ICICI Bank, which holds 10.73% of SIB’s pre-issue equity capital, has to bring its shareholding down to 5%, as per RBI guidelines.

SIB had come out with a rights issue (1:3 at Rs 40) in July 2004. The main objectives of the current offer include augmenting the capital base to meet the future capital requirement arising out of the implementation of the Basel II standards. On September 2005, SIB’s capital adequacy ratio (CAR) stood at 10.28% as against the RBI-stipulated 9%.

Strengths

• Good progress has been made in de-risking the investment portfolio from future rise in interest rate.

• SIB has signed a memorandum of undertaking with Hadi Express Exchange Company to provide management services to its NRI clients in Gulf countries. It is a pure fee-based revenue mechanism to provide a single-window facility to NRIs.

Weaknesses

• The net NPA ratio of 2.4% as on December 2005 leaves scope for improvement. Moreover, SIB has a high concentration of its loan and NPA portfolio among certain customers and sectors. As per prospectus, the single largest borrower accounted for approximately 14.32% of its capital funds, while the largest borrower group accounted for 13.09% on September 2005,

Valuation

In nine months ended FY 2006, SIB’s net interest income witnessed a growth of 18% to Rs 230.37 crore. The other income fell by 38% to Rs 43.13 crore. The provisions and contingencies were down by 48% to Rs 58 crore. After providing for tax, at Rs 11.60 crore, the profit after tax was Rs 34.59 crore, up by 243%.

The last two years were extremely bad for SIB’s profit. Hence, this year’s recovery is on low base.

The last one-year, six- and three-month average price of the stock was around Rs 68.

The offer price band is Rs 60-66. At Rs 60, PE on nine-month annualised EPS of Rs 6.3 (on post-issue equity capital of Rs 72.68 crore) works out to 9.5. At Rs 66, PE on its nine-month annualised EPS of Rs 6.5 (on post-issue equity capital of Rs 70.41 crore) works out to 10.1.

Considering the price of Rs 66, post-IPO book value (BV) is Rs 86.0 and adjusted book value (ABV) Rs 61.0. P/BV is around 0.8 and P/ABV around 1.1. In a normal market, SIB will trade around a P/ABV of 1.

The banking sector needs consolidation and small regional banks without strong promoters, such as SIB, will have to ultimately merge with stronger and larger players once the government policy supports such moves. Till then they will have to survive and try hard to keep their presence felt in a highly competitive scenario.

Indo Tech Transformers

Indo Tech Transformers (ITT) manufactures distribution transformers and power transformers. The company currently has three plants. Two are located in Chennai, Tamil Nadu, and one in Palakkad, Kerala. These three plants manufacture 500 –600 transformers of assorted sizes every month. They have an overall annual capacity of 2,450 MVA.

The key customers of ITT include state electricity boards (SEBs), engineering, procurement and construction (EPC) contractors, and the corporate sector. The company has also exported transformers to Nigeria, Srilanka, UK, US, Ghana, and Canada.

The net proceeds from the issue, after meeting issue expenses, will be utilised to:

*Relocate and modernise the Saidapet plant into a new distribution transformer plant of 750 MVA / annum at Thirumazhisai.

*Set up a new power transformer plant with a capacity of 2,400 MVA per annum including 220 KV class of transformers.

*Put up a 120-unit per annum dry-type transformer plant at Thirumazhisai.

*Meet the working capital requirements of the company.

The expected date of commencement of production of the distribution transformer plant, power transformer plant and dry-type transformer plant are 15 August 2006, 1 April 2007 and 20 June 2006, respectively.

Strengths

• The Union government’s emphasis on providing power for all by 2012 and reform initiatives including the accelerated power development and reforms programme (APDRP) is likely to benefit all organised electrical equipment manufacturers as there will be a thrust on quality products. About 1,00,000 MW of power generation capacity is likely to be added by 2012. For every 1MW of new capacity that comes up, 7-MVA transformers are used across generation, transmission and distribution segments. This implies a demand of 700,000 MVA of transformers unfolding over the next five years. This will result in an annual demand of about 1,40,000 MVA.
• Transformers usually have a life of 20-30 years. Hence, transformers installed in the 1970s and 1980s are likely to be replaced in the next few years. On an average, about 67,517-MVA transformer capacity has been added annually in the sixth five-year plan(1980-85). Since the life of these transformers exceeds 20 years, they are likely to be replaced.

• The commissioning of the proposed 2,400-MVA transformer plant will enable ITT to manufacture power transformers of higher range: 132 KV and 220 KV class of transformers. The margin in the higher end of transformers is better and competition is less as more technical knowledge is required.

Weaknesses

• ITT will lose the benefits it enjoys as a small-scale unit when the proposed projects are implemented. Once it loses this status, the company will not be entitled to the price preference that is available to small-scale manufacturing units for supply of equipment to the Tamil Nadu Electricity Board (TNEB). This is likely to shave off 100 basis points from its margin.
• TNEB accounts for almost half of its revenues, making it over-dependant on it.

Valuation

EPS for the FY 2005 is Rs 7.3 on post-issue equity. At an offer price of Rs 130, PE works out to 17.8. Annualised half-year EPS is Rs 9.2 and PE 14.1. TTM PE for the power sector is around 20.

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Link Courtesy: BSE_Gems

Disclosure: Hold positions

Indo Tech Transformers

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Tax Planning 2006

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Rico Auto - Sharekhan

Rico Auto
Cluster: Emerging Star
Recommendation: Book profit
Current market price: Rs95

Book profit

Result highlights

• The Q3FY2006 results of Rico Auto are much below our expectations on both stand-alone and consolidated bases.
• The stand-alone net sales grew by 10.8% year on year (yoy) to Rs169.4 crore. The revenue growth in the domestic market was affected by the lower offtake from Tata Cummins, Hero Honda Motors and Honda Motorcycles & Scooters India Ltd (HMSI). The export revenues grew by 180% in M9FY2006.
• Despite a fall in the raw material cost the operating profit margin (OPM) declined by 160 basis points yoy to 11.5% due to an increase in the other expenses and staff cost. The growth in the stand-alone net profit was flat at Rs6.89 crore.
• Adjusting for the payment to Ford USA for the discontinuation of a Rs1.1-crore agreement with the American company, the net profit has reported a growth of 10% yoy.
• The consolidated net sales increased by 12.4% yoy to Rs195 crore during the quarter. The consolidated OPM is stable at 14.7%. The consolidated net profit increased by 8.7% yoy to Rs11.3 crore.
• We have downgraded the consolidated earnings per share (EPS) estimates for FY2006 by 20% from Rs4.7 to Rs3.7 and that for FY2007 from Rs6.2 to Rs5.0. At the current market price of Rs95, the stock is trading at 26x its FY2006E EPS and 19x its FY2007E EPS. We recommend booking profit at the current levels.

Chamatkar Multibaggers

DATE	SCRIP CODE	SCRIP	EQUITY PRICE Rs.	APPROX. Holding Period	Target PRICE Rs.
8 Feb 2006	513228	Pennar Ind	12.51	12 Month	50
7 Feb 2006		Century Textiles	330	12 Month	600
6 Feb 2006	506991	Noble Explochem	53	12 Month	125
6 Feb 2006	530059	Mah Sh Ummed Mills	380	12 Month	2000
6 Feb 2006	521180	Super Spinning	405	12 Month	700
6 Feb 2006		MRF	2820	6 Month	5000

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Sensex Journey

Bombay Stock Exchange, the oldest stock exchange in Asia, was established in 1875 as the Native Share and Stock Brokers Association at Dalal Street in Mumbai. A lot has changed since then when 318 persons became members upon paying Re 1.

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The BSE Sensex comprises these 30 stocks: ACC, Bajaj Auto, Bharti Tele, BHEL, Cipla, Dr Reddy's, Gujarat Ambuja, Grasim, HDFC, HDFC Bank, Hero Honda, Hindalco, HLL, ICICI Bank, Infosys, ITC, L&T, Maruti, NTPC, ONGC, Ranbaxy, Reliance, Reliance Energy, Satyam, SBI, Tata Motors, Tata Power, TCS, Tata Motors and Wipro.

The Sensex on Monday scaled a new high as it breached the