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Market to extend rally

Market is likely to extend its rally in the coming week, on the back of high liquidity in the market. Strong buying support from FIIs and impressive Q2 results has boosted the market sentiment. Also stable crude oil prices will provide momentum. Nymex crude is hovering at $58 a barrel, off sharply from a record high of above $78 a barrel it had it in mid-July 2006.

FIIs have been the key drivers of the recent rally. FIIs inflow in October 2006 totaled Rs 8013 crore, compared to their inflow of Rs 5425 crore in September and Rs 4643 crore in August 2006.

However, high volatility may take place at a time when the Sensex at all time high.

Meanwhile, a large mop up from IPOs is expected in the next two months. Two large IPOs in the pipeline are Cairn India and DLF.

Housing finance: Boom or bust?

The rapid growth of the mortgage industry in India in the recent years has raised concerns about its sustainability and implications on the country's financial and macroeconomic stability. The IMF, in its World Economic Outlook, 2003 indicated that output losses after real estate crashes in developed countries have, on an average, been twice as large as those after stock market crashes, usually resulting in lasting recessions.

The fact that the surge in demand for mortgage credit has been trailed by an equally strong upturn in prices has led to apprehensions as to whether the boom is sustainable or is merely a financial bubble ready to burst. Further, the surge in housing prices globally has gone hand-in-hand with a much larger jump in household debt than in previous booms.

The magnitude of mortgage credit...
The pace of housing sector growth can be gauged from the fact that the total value of residential property in developed economies increased by an estimated US$ 20 trillion to over US$ 60 trillion in the last three years - which is higher than the increase in market capitalisation of global capital markets (Source: IMF). Housing market in India, as evidenced by the growth in bank exposures to the sector, took off mainly since FY01. Credit to the retail mortgage sector grew at a CAGR of 48% between FY01 to FY06 and comprised 12.3% of non-food credit against 3.5% in FY01. Also, as per the RBI's annual statement for FY07, the incremental growth in loans to commercial real estate and housing sectors clocked rates of 84% YoY and 29% YoY respectively in FY06.

\n

Reasons for the surge...
The rapid growth in housing loan \nmarket has been jointly supported by the growth in middle class population, \nfavourable demographic structure, relatively lower real estate prices, and more \nimportantly, rise in disposable incomes. Furthermore, attractive fiscal \nincentives for housing loans make them ideal vehicles for tax planning for the \nsalaried class. For banks and housing finance institutions, the regulatory \nframework facilitated the higher exposure by prescribing risk weights for \nhousing loans and giving it the benefit of compliance with the targets mandated \nfor priority sector lending. Besides, the loans were backed by the relative \nsafety of such assets given the tangible nature of the primary security and the \ncomfort obtained from the SARFAESI Act, 2002.

\n

Versus the US...
In the United States, which is at present \nexperiencing a strong cycle in the housing market, prices in certain regions \nhave risen sharply if measured against the yardstick of affordability - \ncalculated as the ratio of housing prices to annual income, reflecting a build \nup of the asset bubble. In fact, at present, the median price of new house in \nthe US is more than 5 times the median household income.

\n

Contrasting this, the scenario is India is still comfortable. At present, \nthe median price of new house in India is 4 times the median household income as \nagainst 22 times in 1995. Also, thanks to fiscal incentives, the effective rate \nof home loan has come down to 4.5% in 2006 against 11.7% in 2000. \n

\n

It\'s here to stay!
The mortgage to GDP ratio of 6% in India as \nagainst 54% in the US underscores the latent demand for the same. More so, with \nIndia being the second fastest growing economy in the world. Another interesting \npoint to note is that while the home loan demand in the developed economies is \nlargely for investment purposes (thus having a speculative component), 70% of \nthe demand in India is for habitation purpose (thus making it less risky). Thus, \nthe housing sector given its core importance in the developmental goals of the \neconomy and in sustaining financial stability - is set to remain on the \nregulator\'s radar. However, investors need to judge their stance on the sector \nbased on the fact that even if the current robust rate of growth may not be \nsustainable, the buoyancy in the sector may linger in the medium \nterm.

Reasons for the surge...
The rapid growth in housing loan market has been jointly supported by the growth in middle class population, favourable demographic structure, relatively lower real estate prices, and more importantly, rise in disposable incomes. Furthermore, attractive fiscal incentives for housing loans make them ideal vehicles for tax planning for the salaried class. For banks and housing finance institutions, the regulatory framework facilitated the higher exposure by prescribing risk weights for housing loans and giving it the benefit of compliance with the targets mandated for priority sector lending. Besides, the loans were backed by the relative safety of such assets given the tangible nature of the primary security and the comfort obtained from the SARFAESI Act, 2002.

Versus the US...
In the United States, which is at present experiencing a strong cycle in the housing market, prices in certain regions have risen sharply if measured against the yardstick of affordability - calculated as the ratio of housing prices to annual income, reflecting a build up of the asset bubble. In fact, at present, the median price of new house in the US is more than 5 times the median household income.

Contrasting this, the scenario is India is still comfortable. At present, the median price of new house in India is 4 times the median household income as against 22 times in 1995. Also, thanks to fiscal incentives, the effective rate of home loan has come down to 4.5% in 2006 against 11.7% in 2000.

It's here to stay!
The mortgage to GDP ratio of 6% in India as against 54% in the US underscores the latent demand for the same. More so, with India being the second fastest growing economy in the world. Another interesting point to note is that while the home loan demand in the developed economies is largely for investment purposes (thus having a speculative component), 70% of the demand in India is for habitation purpose (thus making it less risky). Thus, the housing sector given its core importance in the developmental goals of the economy and in sustaining financial stability - is set to remain on the regulator's radar. However, investors need to judge their stance on the sector based on the fact that even if the current robust rate of growth may not be sustainable, the buoyancy in the sector may linger in the medium term.

Indiainfoline - India Under Construction

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Indiainfoline Reports

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AIA Engineering

AllSec Tech

Alok Textiles

Andhra Bank

Asian Paints

Bank of India

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BPCL

Cadilla Health Care

Colgate

Corporation Bank

Divis Lab

Gail

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Hindustan Lever

HPCL

Hindustan Zinc

Hotel Leela

IGL

Indoco Remedies

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Indo Tech Transformers

Inox Limited

IOC

Nalco

Opto Circuits

PNB

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SBI

Tata Chemicals

Tulip IT

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Indiainfoline - Dr. YV Reddy once again springs a surprise

Once again, Dr. Y.V. Reddy, the Governor of the Reserve Bank of India (RBI) surprised the market by hiking only the repo rate, its key lending rate, and leaving the reverse repo rate, at which it borrows from banks, unchanged. The central bank increased the repo rate by 25 basis points to 7.25%, but kept the reverse repo rate at 6%. The bank rate and CRR were also left unchanged at 6% and 5%, respectively. The bond market had not anticipated any rate hike at all. Bond prices, which had been volatile prior to the policy announcement fell amid hawkish statements from the RBI Governor. Prices remained under pressure amid concerns that the RBI could go for another rate hike before its scheduled January meeting. Those fears got compounded with Friday's release of Government report on inflation, which accelerated to a new four-month high. Finance Minister P. Chidambaram said inflation control was the most important goal for the Government. He also said that the Centre would take necessary steps to check spiraling prices. Reacting to the latest inflation data, Dr. Reddy said that the central bank would not revisit its monetary stance. "This is included in the basic premises of the policy," he said.

Clearly, the RBI and the Government are worried about the run-away growth in credit amid a fast expanding economy. Of particular concern to them is the surging demand for loans from sectors such as real estate, housing loans and consumer loans. Non-food credit grew by 30.5% as at Oct 13, 2006 on top of an increase of 31.8% a year ago. Year on year growth in money supply (M3) was higher at 19% versus 16.8% a year ago. So, to arrest the soaring demand for credit, especially in sectors that are appearing to be showing signs of overheating, the central bank has made borrowing more costly for banks. What the RBI and the Government want is that banks should rebalance their portfolio by leaning less towards real estate and retail loans. The central bank is indicating that loans from it would be much more expensive compared to the market rate. Dr. Reddy has also hinted that if the loan growth continues at the current pace, there could even be some liquidity crunch as the economy enters the busy season. In a nutshell, the RBI is telling banks to pull up their socks and be more prudent in lending. Otherwise, they will have to resort to the central bank for borrowings, which will come at a higher rate.

Govt gets serious about infrastructure

The Government seems to be bent on removing the biggest bugbear of the Indian economy, the infrastructure. This week, it approved a slew of projects in the power and road sector that underlines its commitment to improving the tardy infrastructure. The Cabinet Committee on Economic Affairs (CCEA) approved the waiving of the Rs10bn ceiling for equity investment by NTPC Ltd. to establish Joint Ventures and wholly owned subsidiaries in India or abroad for participating in the ultra mega projects. This will be subject to the implementation of maximum two projects. However, the CCEA retained the ceiling of 15% of the net worth of NTPC in one project and the overall ceiling of 30% of the net worth of NTPC in all such projects put together. This will facilitate participation of Joint Venture of NTPC and BHEL in the bidding for ultra mega power projects and result in technically and commercially optimum bid as well as facilitate tying up with world class mining operators, Finance Minister P. Chidambaram told reporters after a CCEA meeting.

The Government also cleared the proposal by AES Corp. of USA to set up a coal-based power plant in Chhattisgarh at an investment of US$1.22bn. The CCEA gave its approval to AES OPGC Holding Mauritius for setting up a wholly owned subsidiary to undertake a green field coal based power generation plant and to undertake coal mining for captive consumption. AES expects to bring in US$ 370mn as FDI while the balance US$ 852mn would be raised through loan from domestic and/or International banks and Financial Institutions. The CCEA approved a plan to undertake construction of 1000 km of expressways under Phase VI of the National Highway Development Programme (NHDP). The projects would cost Rs166.8bn. While the private sector will contribute Rs90bn the balance Rs76.8bn will be provided by the Government as viability gap funding. The expressways would be built through Public Private Partnership (PPP) on Build, Operate and Transfer (BOT) basis. The projects are likely to be completed by December 2015.

Thanks Dhruv

ET - Reliance Money brokerage fees

Brokerage rates for stock market transactions are yet to bottom out. Reliance Money, the financial services division of the Anil Dhirubhai Ambani Group-promoted Reliance Capital, is set to unleash yet another round of price war in this segment.

According to an email sent by a Reliance Money franchisee to a prospective client, the company is offering a brokerage charge of 7.4 paise on every Rs 100 worth of delivery-based trades, and 2 paise on non-delivery trades, which some rival brokers admit is the lowest in the industry so far.

"We would not like to comment on this at this point in time. The details of the offering are still being worked out," a Reliance spokesperson said.

Reliance Money is to offer a common platform for investors to invest in all equity products, commodities, forex, IPOs, insurance and other financial products.

While the company has not formally announced the launch of its operations, many traders said they have been approached by Reliance Money franchisees . Retail brokerage houses fear that Reliance Money may rewrite the rules of the broking business, distorting business dynamics in the short term, the way the Reliance group had done when it forayed into the telecom sector some four years ago.

"Broking has completely become a balance-sheet game as there is very little to distinguish between the services offered by various firms," said the head of a retail brokerage house. "A large player like Reliance has the capacity to absorb losses for a couple of years, making life difficult for rivals," he added.

DELIVERY TRADES

In a Rs 500 card, an investor gets a maximum delivery limit of Rs 10 lakh; so, the initial fixed cost is 5 paise. The investor will be charged Rs 12 per trade if he purchases through a series of trades. If he buys shares worth Rs 10 lakh in 20 trades, at an average of Rs 50,000 per transaction, the total brokerage charge will be Rs 740 (500+240), which works out to 7.4 paise per Rs 100 worth of transaction

INTRA-DAY TRADES

For non-delivery trades, an investor can take exposure up to Rs 90 lakh on a Rs 500 card. Suppose the investor uses up his limit in 90 trades of Rs 1 lakh each, at Rs 12 per trade, his total charge will be Rs 1,580 (1,080+500)

Businessline - Investment Nuggets

If you cannot afford to ignore the advice of the Oracle of Omaha, Warren Buffet, the man who taught the Sage the core investing tenets must obviously be someone very special. Meet the legendary Benjamin Graham, christened the "Father of Value Investing" and sometimes called the "Dean of Wall Street". He has also immortalised himself by penning two investment classics: Security Analysis (with David Dodd) and Intelligent Investor — must reads for anybody entering and staying wedded to the investment profession. Enjoy the wonderful wit and wisdom through these quotable quotes:

Short- vs long-term investing

"In the short term, the market is a `voting' machine whereon countless individuals register choices that are product partly of reason and partly of emotion. However, in the long term, the market is a `weighing' machine on which the value of each issue (business) is recorded by an exact and impersonal mechanism."

On market fluctuations

"Since common stocks, even if investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings. There are two possibilities of profiting from these pendulum swings: The way of timing and the way of pricing. By timing we mean the endeavour to anticipate the action of the stock market — to buy and hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downward. By pricing we mean the endeavour to buy stocks when they are quoted below their fair value and to sell them when they rise above such."

The madness of `crowds'

A story that was passed down from Ben Graham illustrates the lemming-like behaviour of the crowd:

"Let me tell you the story of the oil prospector who met St. Peter at the Pearly Gates. When told his occupation, St. Peter said, "Oh, I'm really sorry. You seem to meet all the tests to get into heaven. But we've got a terrible problem. See that pen over there? That's where we keep the oil prospectors waiting to get into heaven. And it's filled, we haven't got room for even one more." The oil prospector thought for a minute and said, "Would you mind if I just said four words to those folks?" "I can't see any harm in that," said St. Peter. So the old-timer cupped his hands and yelled out, "Oil discovered in hell!" Immediately, the oil prospectors wrenched the lock off the door of the pen and out they flew, flapping their wings as hard as they could for the lower regions. "You know, that's a pretty good trick," St. Peter said. "Move in. The place is yours. You've got plenty of room." The old fellow scratched his head and said, "No. If you don't mind, I think I'll go along with the rest of 'em. There may be some truth to that rumour after all."

Warren Buffet, relating a story by Benjamin Graham

Capital Market Telefolio Plus - Indian Hume Pipe

The company will benefit from large investments being made in improving the country's water infrastructure

In FY 2007, we expect the company to register sales and net profit 362.66 crore and Rs 18.96 crore respectively. On a tiny equity of Rs 4.84 crore (70% held by promoters) and face value of Rs 10 per share, EPS works out to Rs 39.2. Book Value will cross Rs 265. The share price trades at Rs 375. P/E works out to just 9.6.

Parsvnath Developers: Invest at cut-off

A sound track record of profitability, geographical and business diversification, and strong demand scenario in the real-estate sector lend optimism to the earnings growth of Parsvnath Developers. An established player in residential projects, Parsvnath recently entered the integrated township segment and is ramping up activity in the malls and commercial space segment. The company is entering new business segments, such as hotels and special economic zones (SEZs), across the country. Uncertainties involved in entering new business segments do add to the risk profile of the company.

Investors willing to take the risk that come with an early entry in this fast emerging space may invest in Parsvnath with a three-four year perspective. With improved industry practices, the interest evinced by private equity funds and the clearance given for real-estate mutual funds, the stage is set for big unlisted players in the sector to make an entry.

At the price band of Rs 250-300 the price earnings multiple (P/E) will be 16-20 times the likely earnings for FY-08 (subject to projects being completed on schedule) on a diluted basis. The valuation is expected to become more attractive by 2009-10 as a number of the current projects are likely to be completed and sold/occupied by then.

At the offer price, the P/E multiple based on FY-06 earnings is at a discount to peers such as Unitech and Mahindra Gesco Developers but at a premium to smaller players such as Ansal Properties and Infrastructure, and D. S. Kulkarni Developers. The premium appears justified given the diversified business model and size.

Object of the issue

Parsvnath develops residential buildings, commercial complexes, including malls and multiplexes, and integrated townships. The company also plans to develop hotels, SEZs and information technology parks. It is seeking to raise Rs 830-1000 crore through this initial public offer and planning to use the funds towards development and construction of some of the projects on hand.

Healthy project mix

Parsvnath has completed 17 projects and acquired land or development rights for 72 projects spanning segments such as residential buildings, townships and commercial properties. The company has already deployed some funds in most of these projects, revenues from which are likely to start flowing from FY-08. The company has also got in-principle approval for the development of nine SEZs.

Further, the company is involved in ventures with the Delhi Metro Rail Corporation (DMRC) for the development of properties around railway stations and depots. The lease from DMRC for varying periods, of 12-30 years, allows Parsvnath to let out the premises for retail shops, offices and exhibitions. Of the 11 projects, two are complete and fully let-out. The initial earnings from this segments point to a high-margin business, providing regular revenue flows. This also differentiates the company's business model from its peers.

Parsvnath's FY-06 revenues came equally from residential projects and integrated townships. Going forward, we expect increasing activity of the company in the commercial space and lease with DMRC to contribute to revenues.

Early mover to non-metro cities

Parsvnath appear to have a planned strategy of entering early the smaller cities. Eighty eight per cent of the revenue for the quarter-ended June 2006 was derived from non-metro cities. This is reflected in its completed projects being spread over Greater Noida, Ghaziabad, Noida and Gurgaon among others. The current projects are also located in cities such as Chandigarh, Mysore, Pune and Indore.

In their search for more office space and their bid to save costs, a number of IT companies have been shifting work to Tier III cities. With a well-diversified geographical presence and relatively low-cost land in non-metro cities, Parsvnath appears well placed to capitalise on this expansion in office-space demand and consequent residential space requirement. Further, very few players in the listed category, except for Unitech, have projects with a pan-India presence. This gives Parsvanth the advantage of early brand recognition.

Strong financials

Parsvnath's revenue and profits have grown at a scorching 131 per cent and 141 per cent annually over the past five years, largely due to increased activity since 2003. The projects on hand are likely to keep the momentum going although the growth over the next one year may be subdued due to work-in-progress. The company's return on equity (ROE) at 53 per cent is superior to similar-size peers. This may, however, see a dent in the near term as a result of increased equity through the offer and lack of commensurate near-term earnings accretion. The ROE is, however, likely to remain at par with the listed peers. Although it operates in a working capital-intensive industry, the company's ability to comfortably cover interest costs lends confidence on its leveraging capability.

Risks

While Parsvnath's presence in non-metro cities is an advantage, the ability of Tier III cities to offer increased scalability in terms of physical infrastructure, intellectual capital and quality real- estate will determine the company's success in these cities. On this account, Parsvnath will remain a risky option to companies with presence only in Tier I cities.

Parsvnath's venture into SEZs may require dealing with a lot of policy related issues. The SEZ policy is evolving still. There have nevertheless been concerns raised on the revenue loss to the Government through tax exemptions and other concessions.

Further, SEZs have long gestation periods, with possible negative cash flows in the first couple of years. The funding process for these projects and the lag in earnings are risks that an investor should watch out for. Revenues from SEZs, hotels and forthcoming townships in Bangalore and Hyderabad have not been considered in our estimation.

The mounting number of projects adds to the risk of company's ability to execute them. The ramp-up in the asset base over the last couple of years, however, indicates that the company has been equipping itself to face the mounting number of projects.

Offer details: The offer is open from November 6 to 10. Enam, Financial, JM Morgan Stanley and DSP Merrill Lynch are book-running lead managers. At the lower end of the price band the market capitalisation on listing will be Rs 4600 crore.

Lanco Infratech: Invest at cut-off

Investors can consider subscribing to the initial public offering (IPO) of Lanco Infratech (LITL) at the cut-off price with a medium/-long-term holding perspective. LITL is in the growth phase and earnings from the investments being made now will begin to kick in gradually from 2008-09.

The various power projects that LITL is now investing in appear well sewn-up and the company's construction business is likely to bring in revenues till the power projects go on stream.

Our recommendation factors in the positives; the risks associated with this offer are elaborated in the accompanying box.

The challenge, however, arises from the lack of experience in simultaneously managing projects of such a scale based on different fuels, but the comforting factor is that the finances and power purchase agreements have been tied up for a major part of the expansion.

Simultaneously, LITL will also be investing in the business of property development where it has no experience. The positive here is that the company owns valuable land in Hyderabad, which has appreciated significantly and where it proposes to implement an integrated information technology park and residential campus.

Holding SPVs

LITL is a holding company that invests in the equity of subsidiaries created for specific projects. It owns 34 per cent of Lanco Kondapalli Power, which owns and operates the group's biggest power asset to date — the 360 MW gas-based combined cycle power plant in Andhra Pradesh.

LITL's stake in this company will rise to 59 per cent once it completes the acquisition of 25 per cent equity from one of the existing partners.

The company will also be buying 15 per cent equity from the Aban group, taking its total stake to 51 per cent in Aban Power Company, which operates a 120 MW gas-based plant in Tamil Nadu.

The planned investment for the two purchases accounts for a little more than 15 per cent of the IPO proceeds of Rs 1,067 crore at the upper end of the price band.

The rest of the funds will be invested in the various power projects being implemented by different subsidiary companies and in the property development project in Hyderabad.

The company is now implementing a 600 MW project based on coal at Amarkantak, Chattisgarh, the first phase of which (300 MW) is scheduled to go on stream 16 months from now, followed by the second phase in October 2008.

LITL recently tied up the finances for its 1,015 MW imported coal-based power plant in association with the Nagarjuna group in Mangalore where it plans to hold 74-per cent equity.

Apart from this, the company is on the verge of reaching financial closure for a 500 MW hydro power plant in Sikkim. It has also been shortlisted as the successful bidder for the 1,000 MW coal-based project in Anpara, Uttar Pradesh. In addition to these, LITL is investing in some small hydro power plants in Himachal Pradesh and Uttaranchal.

While these smaller hydro plants will go on stream by April 08, the Nagarjuna and Sikkim projects are scheduled to start operations only by December 09 with Anpara to follow after that.

In short, the full benefit of the investments planned now will not be felt in LITL's financials before 2010-11.

Revenue streams

LITL's revenues will flow in from three streams — dividends from equity investment in the various subsidiaries implementing projects; engineering, procurement and construction (EPC) of these projects (power and property) and property development.

The construction business of the company now derives 90 per cent of its revenues from contracts with group outfits. While the use of its own construction division to implement group company projects helps in capturing value across the chain, it could also be a disadvantage if any of these projects land in distress.

The dividend income stream will depend on the policy of the various subsidiaries.

The property development income is probably subject to the highest risk among the three streams, given the company's lack of experience in this field and also the inherent volatile nature of the property market.

The key risks

The principal risk to our recommendation stems from the implementation aspect; LITL will grow from a company managing 509 MW of primarily gas-based power plants to one managing more than 3,700 MW of gas, coal, hydro and bio-mass based power plants in the next three years.

The two operating projects — Lanco Kondapalli and Aban Power — are supplied gas by Gail India. Gas supply in the Andhra Pradesh region is significantly short of demand.

While the Kondapalli project has a firm allocation, Gail's supplies in the last three years have shown a marginal declining trend.

A significant shortfall in gas supply could lead to some uncertainty as the company will have to decide between switching to liquid fuel, which is more expensive, or generating at lower capacities and take cover under the standby charges payable by the buyer.

Significantly, the gas supply agreement with Gail will come up for renewal in 2010 when some hard bargaining can be expected for both price and quantum of gas.

Any delay in the implementation of the various projects could set back the expected earnings stream of LITL; not only will the earnings and cash flows from the new projects be delayed, the revenues from construction activity would also be affected.

A steady generation of cash flows is crucial for LITL as it will be on the investment mode for the next three-four years.

The Anpara project has just been bagged by the company and the PPA is yet to be signed for offtake of power from the project.

Offer details: LITL is offering 4.44 crore shares in the price band of Rs 200-240.

The issue, which will open on November 6 and close on November 10, is lead-managed by JM Morgan Stanley, Enam Financial, ICICI Securties and Kotak Mahindra.

Business Today - Money Column

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The Best Companies to work for in India

You know, till sometime back-actually, until a few weeks ago when BT pulled me out of retirement and asked me to look at the findings of its Best Companies to Work for in India 2006 survey-I was ruing my retirement. Not anymore. I don't think I could be an HR manager today; not if the stories coming out of the top 10 companies are anything to go by. It's a mad world out there: HR managers are scrambling for workers and spending sleepless nights, worrying over compensation, recruitment and retention. Worse, almost no employee at the top 10 companies says that she is happy with the money she's making or the career counselling she's getting at her company. It includes Infosys employees, who have been promised Rs 126 crore in bonuses this year.

Read more

Lanco Infratech Ltd. IPO

Background:

• Lanco Infra Tech Ltd. (LITL) was originally incorporated on March 26, 1993 as “Lanco Constructions Limited” in Andhra Pradesh. On November 24, 2000 the company’s name was changed to present. LITL is an infrastructure development company in India with interests in power, construction and property development.
• It has experience in the execution of several power projects, transportation networks, water supply works, and commercial and residential building complexes. The power business is expected to contribute significantly to the income and profits in the near future. The property development business is still in the early stages of growth.
• It owns 11 power projects (of which five are in operation and six are under development) with current operating capacity of 149.75 MW in operation and 1,260.0 MW under development. Company’s power assets consist of gas, bio-mass, hydro, coal (indigenous and imported) and wind-based power plants. It also commenced power-trading operations in January 2006.
• Various projects executed by the company are the coffer dam for the Tehri Dam project, the Veeranam water supply project, modernisation of an 825-bed hospital for the Indian Navy in Mumbai, a cable-stayed flyover in Navi Mumbai, and construction of the Kondapalli Power Plant and the Aban Power Plant.
• In the property business, company owns or have won bids to develop approximately 19.5 mn square feet of saleable area, including a 100-acre integrated IT park and township and a 21.8-acre residential development, both located in Hyderabad.
• LITL is coming up with the issue for the purpose of the reorganization and consolidation (started in May 2006) of the power and property development businesses into one company to derive synergies from operating across various businesses in infrastructure development. Currently, it has 19 subsidiaries. Also as part of the reorganization, Lanco Kondapalli Power Private Ltd. (LKPPL) is expected to become a consolidated subsidiary of LITL by the quarter ending December 31, 2006.
• Upon completion of the issue, promoter’s holding will get reduced to 75% of the post issue equity share capital from current 93.75%.

Objects of Issue:

• Investment in various subsidiaries
• Investment in Nagarjuna Power Project
• Payment for acquisition of 13.3% equity stake in Aban Power to Aban Ventures
• Payment for acquisition of 25.1% equity stake in Lanco Kondapalli to Globeleq

Strengths:

• LITL has strong order book of Rs. 16,118.3 mn as of September 30, 2006, of which Rs. 12,299.5 mn (76.3%) represents contracts with affiliates of the company.
• LITL’s OPM & NPM have improved substantially in FY06 at 12.2% & 6.2% from 6.9% & 1.8% in FY05 respectively.
• Company’s FY06 revenue & net profit was Rs.1471 mn & Rs.91.5 mn where as in Q1FY07 LITL’s revenue stood at Rs.1102 mn & PAT Rs.93 mn (more than full year FY06 PAT).
• LITL has entered into strategic and financial partnerships with leading international firms and have strong relationships with leading Indian financial institutions, which help in easy access of funds. In the power sector, it has worked, or are currently working, with Genting Group (Malaysia), Doosan Engineering (Korea) and General Electric Company. For construction projects, it had strategic partnerships with Hyosung – Ebara Company, Voist-Alpine Tech Wabagh (India) and Punchak Niaga Holdings (Malaysia).
• Benefits from the use of the Lanco brand. LITL is the flagship company of the Lanco Group. Due to the long-standing history of the Lanco group of companies in India (over 40 years), the Lanco brand enjoys brand recognition in India. Company uses the Lanco brand in each of its power, construction and property development businesses.
• Company is present in the construction industry which is witnessing high growth fueled by the large spends on the ongoing infrastructure development projects by the Government of India. Over Rs.60,000 crores of investment is expected to be made in key infrastructure sectors like road, ports, railway and power plants in the next five years.

Weakness:

• LITL’s has been witnessing inconsistent revenue since past five years starting FY02. Also, revenues have declined at a CAGR of 4.2% since FY02.
• LITL’s had witnessed decline in net profits from Rs.107mn in FY02 to Rs.32.7 mn in FY05, however FY06 witnessed a whooping 180% rise in net profit.
• LITL’s debtors/sales ratio has increased from 10% in FY05 to 26% in FY06.
• The company has been generating negative operating cash flow for last two years. Cash from operations as on 31st Mar 2005 & 2006 was –Rs.372.59 mn & -Rs.99.65 mn respectively.
• Company’s RONW & ROCE has shown declining trend since FY02, from 16.1% &16.4% to 4.2% & 5.6% in FY05 respectively. However, both ratios showed some improvement in FY06 with RONW at 9.6% & ROCE at 6.9%.
• Construction companies are highly dependent on timely supply of the requisite raw materials. Also, prices of key raw material like cement are firming up which can have an adverse effect on company’s profit margins.

Valuation:

• The company’s net worth as on 31st March 2006 is Rs.954.28mn and book value per share at Rs.15.5 per share (pre equity issue) and Rs.4.3 post equity issue. However in Q1FY07, company’s net worth has increased substantially to Rs.3000.92 mn. On Q1FY07 post issue book value per share is Rs.13.5.Hence, company’s post issue price to book value band is14.8-17.8 times.
• Post issue annualized EPS based on 30th June 2006 earnings is Rs.1.67 per share. The shares are being offered in the price band of Rs.200-240. At P/E range of 119-143. The average industry P/E is 39 for construction industry & 11.4 for power industry.

Parsvnath Developers Ltd. IPO

Background:

• Parsvnath Developers Ltd. (PDL) was incorporated in July 1990. Its core business is real estate development. PDL has operations in 41 cities of 14 states in India. As of October 15, 2006 it directly owned or held development rights for an estimated 108.64 million square feet of saleable area of land.
• Presently PDL have acquired land or development rights in connection with the development of 20 integrated townships, 27 commercial complexes including shopping malls, multiplexes, office space and a complete metro station and 25 residential projects. Also, the company intends to construct 14 hotels and 4 information technology parks. In addition, it has completed 17 projects including 9 housing projects and 8 commercial complexes. Further, PDL has obtained in principle approvals from GoI for the development of 9 SEZ projects.
• PDL’s scale of operation has expanded and total revenue has increased from Rs.27.3 crore in fiscal 2002 to Rs.6,53.77 crore in fiscal 2006, at a CAGR of 121.23%. During the same period, profit after tax has increased from Rs.3.3 crore to Rs.106.9 crore, at a CAGR of 138.67%.
• Post issue promoter’s shareholding would reduce from 100% to 81.7%, if Green shoe option is exercised, else it would be 80.33%

Object of the issue:

• To meet cost of development and construction of projects.
• General corporate purposes and expenses of issue.

Strength:

• For the first quarter ending June 30, 2006 and fiscal 2006, 88.09% and 99.65% of revenue came from projects undertaken in non-Metro cities within India. PDL intends to continue to be a real estate developer with a pan-India presence. This strategy is also instrumental in providing it the early mover advantage in these cities and towns.
• PDL has a strong order book of Rs.1,428.5 crore. Around 65% of the projects are scheduled to be completed by FY2008.
• PDL derives tax benefits as per the provisions of Section-80 IC. The company can claim exemption on payment of income tax on residential projects approved before March 31, 2007.
• The company has strong financial record with income increasing @ 113% in FY2006 (Rs.653.76 crore) over FY2005 (Rs.306.85 crore). Net profits have also been increasing consistently. The same surged 62.93% in FY2006 (Rs.107 crore) over FY2005 (Rs.65.67 crore).
• The tenth five-year plan estimated a shortage of 22.4 million dwelling units. Thus, in the coming 15-20 years, 80-90 million housing units will have to be constructed with a majority catering to the low-income group. The investment required for constructing these and related infrastructure in these period would, be of the order of USD 666 billion to USD 888 billion at roughly USD 33 billion to USD 44 billion per year. This gives immense growth potential to PDL.

Weakness:

• PDL has negative cash flows from operations for FY2006 and first quarter ending June 30, 2006 of Rs.102.27 crore and Rs.48.28 crore respectively.
• PDL is highly dependent on timely supply of the requisite raw materials. The construction cost is range of 70% of total income. Prices of key raw material like cement are firming up which can have an adverse effect on company’s profit margins.
• The company is exposed to risk of fluctuation in market prices of land and constructed inventory. Real estate boom in the country has seen a surge in prices. Any correction in it would hamper the revenues of the company.
• Real Estate industry is highly fragmented and competitive. PDL faces competition from the unorganized sector of local constructors, who cater to the local demands at reduced costs.

Valuation:

• Total income increased from Rs.149.76 crore in the three month period ended June 30, 2005 to Rs.249.02 crore in the three month period ended June 30, 2006, which represents an increase of 66.27%.
• Net profit increased from Rs.16.12 crore in Q1 FY2006, to Rs.36.55 crore in the Q1 FY2007, which represents an increase of 126.75%. Net margins for the same period increased from 10.76% to 14.67% respectively.
• Post issue EPS is Rs.8.05 if the Green Shoe option is not exercised, else it would be 7.91. Post issue P/E will be in the range of 31-38 for a price band of Rs.250/- to Rs.300/-. Industry average P/E is 40.6.
• Net worth for FY2006 is Rs.201.15 crore.