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Monday, July 31, 2006

GMR Infrastructure: Avoid

nvestors can avoid the initial public offer of GMR Infrastructure (GMR) for now. The offer is stiffly priced; lack of visibility in earnings growth from the current revenue model, which is dominated by power, and the risks involved in relatively new ventures such as airport and road projects, outweigh the positives of being a unique infrastructure developer.

GMR develops, owns and operates infrastructure projects through a number of special purpose vehicles, some wholly-owned and others joint-ventures. The company's primary business segments are power, road and airport. The IPO proceeds of Rs 800-950 crore are to be used to fund road and airport projects and pay a promoter group company towards acquisition of GVL Investments, which holds a 9 per cent stake in Delhi International Airport Ltd (DIAL). The offer price band of Rs 210-250 is at a price earnings multiple (PEM) of 75-89 times the consolidated, fully-diluted, FY-06 earnings.

While international players in the concession business such as Cintra of Spain command a PEM of close to 150, their business model cannot be directly equated to that of GMR, as the latter, even after considering the road projects on hand, would remain mainly a power generation company.

Challenged by power

The power and road construction businesses accounted for 83 per cent and 14 per cent respectively of sales for the year-ended March 2006. In the power segment, all the revenues are now generated by two projects — the 220-MW Chennai power plant and the 200-MW Mangalore unit — both of which are suffering from low utilisation because of the high tariff brought about by oil-based fuels.

The current power purchase agreements (PPA) ensure that the fixed costs along with a fixed return on equity are recovered from the respective State electricity boards. However, the PPA for the Mangalore project expires in 2008 and the terms of its renewal are clouded in uncertainty.Further, the company's third power project at Vemagiri, Andhra Pradesh, based on natural gas, is unlikely to generate power in the near term for want of adequate gas supply. GAIL, the gas supplier, will supply only on "best efforts" basis as enough gas is not available in the region now to service the needs of all the customers.The picture may not improve until gas discovered in the Krishna-Godavari basin is brought to shore in the next three-four years.

Given the uncertainty over the Vemagiri plant's commercial operation, the company is re-negotiating the terms of the present PPA. GMR has also planned some hydropower projects but they are long gestation ones and, hence, do not add any immediate revenue visibility. The growth prospects for the power business are, therefore, likely to remain stunted.

Paving the way

GMR has quickly strengthened its position in the road segment with two annuity projects and four more, which will commence operation by 2008-09.

The road segment is likely to attain balance with 50 per cent of its revenues coming as they would from annuity projects. The rest would accrue from high-risk, high-return toll-based projects. GMR is, however, not a construction player and will be outsourcing much of the building work. It may, thus, lose the edge in terms of margins compared to the engineering procurement and construction (EPC) players in the field.

GMR has agreed to transfer the right to receive 73 per cent and 68 per cent of the receivables from its current two annuity roads projects to a consortium of banks and financial institutions for 15 years from May 2005 against secured loans received.

This means the present revenues from the road segment would not directly fill the company's coffers. The road segment is, nevertheless, likely to drive volumes on the back of the huge investment plans of the Centre and the States.

Take-off yes, but...

The success of the concession for the Hyderabad Airport, which is likely to be operational by August 2008, would depend on the actual traffic that the airport is able to attract. As of now, Mumbai and New Delhi remain the primary transit hubs in the country. The lease for this project, however, provides the right to develop hotels, resorts, and so on, in conjunction with the airport within the 5,500 acres of total land provided.

This leaves considerable scope for commercial revenue generation, if the Hyderabad airport consortium is able to plan and develop such area.

While the operation management and development agreement of the Delhi airport has commenced, the agreement is still under legal contention from one of the unsuccessful bidders.

Further, about 46 per cent of the gross revenues from the Delhi airport (unlike a 4 per cent concession fee and annual lease rent on a deferred basis in the case of Hyderabad airport) would be shared with the Airport Authority of India for the entire duration of the concession. This takes the sheen away from the seemingly lucrative project.

The key to ramping up revenues in airports may lie in increasing the proportion of non-aero revenues which, in turn, depend on passenger traffic.

The current mix of aero-to-non-aero revenues of 70:30 in Indian airports may have to undergo a drastic change. Singapore's Changi Airport started with a 60:40 mix in 1981, but that ratio has now reversed in favour of commercial revenues.

While we are positive about the potential from the airport infrastructure segment, the above issue appears to cloud the medium-term earnings visibility.

The structuring of the group that involves complex cross-holdings among group companies and promoter outfits does not add to the comfort levels on the offer.

Offer details: The offer will be open from July 31 to August 4. Enam and JM Morgan Stanley are among the book running lead managers. Retails investors will get a discount of 5 per cent on the issue price.

Tech Mahindra: Invest at cut-off

Investors with an appetite for risk can participate in the book-built public offering from Tech Mahindra. Bidding at the cut-off price,which has been fixed between Rs 315 and Rs 365 per share, would be appropriate. While this will involve an upfront payment of Rs 365 per share, investors will be eligible to invest even if the final price is fixed lower.

As a software services company focussed on the telecom vertical, Tech Mahindra represents a good choice for investors seeking to diversify their IT portfolio. At the proposed price band, the price-earnings multiple works out to 15.5-18 times the consolidated 2005-06 earnings on an expanded equity base. At these levels, the stock is reasonably priced relative to its domestic frontline software peers.

However, investors will have to moderate their returns expectations from this offer, as a plethora of choices are available (practically all companies in the Nasscom Top 20 are listed entities).


Slowly but steadily, global companies in the telecom space are investing in `next generation' converged networks, which carry both voice and data to replace legacy voice networks.

While fixed-line telecom service providers are investing in convergent IP networks to offer services such as Voice over Internet Protocol, mobile companies are deploying data intensive 3G (third generation) mobile services to make up for the slowing revenues from voice.

Global telecom companies are investing enormous resources in developing innovative value-added services to stay competitive in a mobile market where the Average Revenue Per User will remain under pressure, or in fixed-line telephony where volumes will continue to shrink.

As the telecom industry enters this new phase, companies with specialised focus on select verticals will be better placed to grab a bigger slice of business volumes and will be preferred over generic second rung players. Tech Mahindra, with its exclusive focus on the telecom sector, will stand to gain from this trend in the medium term. With its expertise in the Telecom Service Provider (TSP) segment, the company can either offer a range of high value data and content services or use business intelligence/billing optimisation tools to reduce overall costs.

From being a player predominantly focussed on the TSP segment, the company has expanded its presence to the Telecom Equipment Manufacturers (TEM) segment with its acquisition of Axes Technologies in November 2005. The Axes acquisition has brought in Alcatel, North America, as its key client, with significant business in the area of product engineering services. This acquisition is also expected to help open doors in the highly competitive TEM space consisting of players such as Siemens, Motorola, Nokia, Cisco Systems and Ericsson.

Its established client relationships, especially the likes of British Telecom or Alcatel are expected to help widen its base and expand its geographic footprint. At the same time, the company is also well placed to deepen its existing client relationships by offering a much wider range of services.

After a highly turbulent phase in 2003-04, the financials of Tech Mahindra has improved significantly. In the latest year ended March 31, 2006, the company clocked a revenue growth of 31 per cent to Rs 1,242.6 crore and a two-fold rise in post-tax earnings to Rs 235.4 crore.

The operating profit margin, which had touched a low of 10 per cent in 2003-04, has jumped to 21.5 per cent in 2005-06. The company has sustained the OPM in the first quarter ended June 30.This, however, is considerably lower than the 31-35 per cent OPM logged between 2001 and 2003.

Risks and challenges

British Telecom (BT), one of the controlling shareholders of Tech Mahindra, holding about 36.2 per cent of its equity, is also its key client. As its top client, BT accounted for 69 per cent of Tech Mahindra's revenues for the year ended March 31, 2006. This engagement with BT, recently renewed for three years, is expected to lend stability to Tech Mahindra's overall earnings stream. On the flip side, it also leaves the company vulnerable to any delay or freeze in spending (say, in 21st Century Network, BT's large transformation initiative involving the development of a converged network to carry voice and data) or downturn in overall IT spending on telecom projects.

The proportion of revenues accruing from the top five clients at 85 per cent is also quite high. Tech Mahindra has indicated that BT, Alcatel and AT&T are its three key clients, with whom it has entered into long-term agreements.

The offer document states that Alcatel recently announced a merger agreement with Lucent Technologies. The impact of this acquisition on Tech Mahindra's relationship with Alcatel is not clear at the time of the offer. Tech Mahindra is likely to face heightened competition from domestic frontline peers such as TCS, Infosys and Wipro, or global players such as Accenture, HP and IBM. For these players, telecom happens to be one of the segments in a de-risked portfolio of verticals ranging from financial services to manufacturing.

Unlike these players, since Tech Mahindra derives all its revenues from telecom, it remains exposed to a potential downturn in business, greater billing rate pressure from select clients, and volatile quarterly performance.

Finally, the principal risk remains an unanticipated downturn or slowdown in the telecom sector. Since telecom growth is linked strongly to the spending plans of Fortune 500/Global 1000 customers, any economic/sectoral slowdown can impact the company adversely.

Offer details: Tech Mahindra is coming out with a book-built public offer of 1.27 crore equity shares in the price band of Rs 315 to Rs 365 per share. The offer consists of a fresh issue of 31.8 lakh shares and an offer for sale of 95.5 lakh shares by Mahindra and Mahindra, and British Telecom.

Part of the fresh issue proceeds is to be used for enhancing the delivery infrastructure in Pune. The book running lead managers are Kotak Mahindra Capital and ABN Amro Securities. The stock will be listed on the NSE and the BSE. The offer opens on August 1, and closes on August 4.

India Tech Play - S&P Roundup

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Businessweek Top 100 Global Brands

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Friday, July 21, 2006

Wednesday, July 19, 2006

Tuesday, July 18, 2006

Saturday, July 15, 2006

Wednesday, July 12, 2006

Tuesday, July 11, 2006

Sharekhan Eagle Eye - Jul 12

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Movers & Shakers

  • Tata Power moved up on reports that the company has signed an agreement with Siemens for participating in the tariff-based bidding process for the Sasan and Mundra projects under the Ultra Mega Power Projects initiative.
  • Sadbhav Engineering hit the upper limit of 5% on securing an order worth Rs293.42 crore from Punj Lloyd.
  • Panacea Biotech gained ground on signing an agreement with Indonesia's PT Bio Farma for manufacturing and marketing the measles vaccine.
  • IVRCL Infrastructures & Projects inched lower despite bagging orders to the tune of Rs290.29 crore.
  • Parsoli Corporation, which announced that the company would hive off its travel business into a separate company, declined sharply.

Sharekhan Commodities Buzz - July 11

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Citibank Phish Spoofs 2-Factor Authentication

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Sharekhan Valueline July 2006

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Sharekhan Investor's Eye - Jul 10

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Sharekhan Eagle Eye

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Edelweiss - India Infrastructure

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Saturday, July 08, 2006

Equitymaster - Tata Power

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Sharekhan Top Picks

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Sharekhan Special : Q1FY2007 earnings preview:

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Sharekhan Investor's Eye

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Sharekhan Cement Earnings Preview

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Sugar: Major exporters

Global sugar consumption in 2006 is estimated to rise to 148 million tones (MT) due to expected growth in consumption in the developing countries of the Far-East and Latin America. Sugar consumption in developing countries is estimated to reach 100 MT in 2006, in line with rising income and population growth. Among developed countries, where demand had been relatively stable, consumption has been forecasted to remain relatively unchanged in the EU, South Korea, and the US. With the WTO ruling, the subsidised export of 5 MT of white sugar by the European Union is also nearing an end. In the current situation, beyond the month of May 2006, no such subsidised sugar would be sold. The price reduction has been to the tune of 36%. With this situation continuing, the international sugar prices are expected to harden.

The top seven producing countries account for 60% of total world production. The top three producers, Brazil, India, and the EU account for over 40% of total world production. Two of the top four producers, India and China are not among the top exporting countries. In this article we give an insight into the dynamics of the large sugar exporters.

Brazil: Brazil is by far the world's largest producer and exporter of sugar. The country accounts for 20% of the world production and nearly 38% of total world exports in 2005. More than half of Brazil's sugarcane production is devoted to the production of alcohol. The increase in the domestic demand for fuel alcohol is due to the increase in flex–fuel autos. Total sales of these vehicles, which can run on any mixture of hydrous, anhydrous alcohol or gasoline rose to 3.8 m units in 2004. In 2005, production of sugar and ethanol in Brazil totaled 28.7 m metric tons and 4.8 bn gallons respectively, continuing the record trend witnessed over the past couple of years. The record production has resulted in sugar exports of 18.2 m metric tons and 0.6 bn gallons of ethanol in 2005. In Brazil, a large number of plants are dual plants and can switch easily between the production of sugar and ethanol based on relative prices. Thus, sugar and ethanol prices tend to move closely together. If both ethanol and sugar prices remain competitive in the near future, Brazil is expected to continue to increase sugarcane production for both ethanol and sugar. The country has enough land to easily double sugarcane area harvested. Sugar production is expected to increase by 21.5 % between 2005 and 2015 (Source: Centre for agriculture and rural development).

European Union: The EU is in the unusual position of being both a leading exporter and importer of sugar. The Customs Union manages this feat by extending its production and export subsidies to developing countries that were former British, French and Portuguese colonies. Under this program the EU imports raw sugar, which it refines and re-exports. The EU is the world's only major producer, exporter, and importer. Due to favorable weather conditions, which produced higher sugar beet production than expected and an above average sugar content in the beets, the EU's total production for 2005 was 21.8 MT.

Sugar production within the EU was limited by quota. Since sugar that could be sold in the EU was limited by quota, the excess production was exported, effectively cross-subsidized by high domestic prices. While the EU had high import tariff barriers, it allowed preferential imports of raw sugar from African, Caribbean and Pacific countries, which was generally processed into white sugar and re-exported.

New EU regime: The change in the EU regime includes cuts in EU subsidies. These include cumulative cuts in intervention pricing by 36%. This is likely to cause a cut in sugar production within the EU and also cause a reduction in EU exports.

Others: With the exception of China, the second tier of producers such as Thailand and Australia are significant exporters. China is a significant importer. Australia exports more than 4 MT, the largest percentage of domestic production of all major world exporters and producers. The third group of significant producers and exporters consists of South Africa, Guatemala, Columbia, and Cuba. Together these countries produce between 8 and 9 MT of sugar and export between 4 and 6 MT.

Conclusion: Though India is not only one of the world's leading producer it does not export, because to be self-sufficient, India must produce about 20 MT of sugar each year. However, total production is forecast at 18.4 MT, which led to the inventories filling the gap for the third year in a row. Being deficient, the government is still not very keen on exports. However with increased production in coming years, this is likely to be allowed.

Friday, July 07, 2006

Motilal India Strategy

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Morgan Stanley - Indian Pharma

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Sharekhan Eagle's Eye - Jul 10

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Kotak India Strategy

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Sharekhan Commodities - Jul 7

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Movers and Shakers

  • Alembic flared up on reports that its board would meet on July 18, 2006 to consider sub-division of its equity shares.
  • Suzlon Energy slipped despite announcing plans to invest $1 billion in new production units.
  • ONGC, which announced that it would supply natural gas to GAIL for 15 years and may consider picking up a 5% stake in Rosneft, ended at lower levels.
  • Karnataka Bank inched marginally lower despite declaring a dividend of 30% and proposing to raise the FII limit to 49%

Monday, July 03, 2006

Sharekhan Commodities Buzz - Jul 3

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Kotak Reports - Weekly + Daily - Jul 03

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ET - Stocks you can pick up this week

Research: HSBC Global
Recommendation: Overweight
CMP: Rs 1,130 (Face Value Rs 10)
12-Month Price Target: Rs 1,351

HDFC is among the rare Indian lenders that succeeded in preserving its spread in FY06. Lending rates were raised four times in the past six quarters. They will need to rise more if HDFC is to preserve its spread. Net interest margin (NIM) expanded for seven years while rates were falling to reach an estimated 296 bps for FY06.

HSBC forecasts assume that NIM could decline by 10 bps in the next three years. The fair value range is lowered to Rs 1,267-1,436 following revisions in the forecasts for growth, profitability and value of the associate businesses. The notional target price of Rs 1,351 includes Rs 336 per share for the associate businesses.

HSBC has upgraded the rating to 'overweight' from 'neutral' to reflect the 21% potential upside. Near-term triggers could arise from upward revision of lending rates and the passage of a resolution to increase the authorised capital to accommodate the possible conversion of convertible bonds, starting late August. Key risks are a larger rise in funding cost relative to loan yield and lower growth in capital gains.

Research: JM Morgan Stanley
Recommendation: Overweight
CMP: Rs 1,108 (Face Value Rs 10)
12-Month Price Target: Rs 1,405

Apart from concerns regarding the subsidy burden and gas price decontrols, both of which are not in ONGC's hands, JM Moran Stanley believes the management is focusing on growth in an effort to enhance shareholders' value. It has also maintained its estimates and assigned 'overweight' rating to the stock.

The positive view on the stock is based on: (i) the expected growth rate of 8.7% per year of ONGC's production over FY06-8E; (ii) option value on gas, which is controlled by the government; (iii) ONGC's international acquisition strategy seems to be paying rich dividends; and (iv) attractive valuations.

ONGC has underperformed the market by 16.3% YTD, 3.89% in the last month and is the cheapest E&P stock in JM Morgan Stanley's Asian universe, trading at FY07E P/E of 8.1 times, dividend yield of 4.5%, EV/EBITDA of 3.5 times, an implied crude oil price of 29/bbl,and current EV/BOE of $4.73, which make valuations look attractive.

Research: Kotak Securities
Recommendation: Buy
CMP: Rs 122 (Face Value Rs 10)
12-Month Price Target: Rs 170

GHCL is one of the leading producers, as well as largest exporters of soda ash in India. The company is strengthening its position by adding capacity and has made overseas acquisitions. GHCL also has a presence in the textiles business and is expanding capacities in spinning, processing and weaving.

It has also set up a home textiles manufacturing unit at Vapi, Gujarat, and has acquired US textile major Dan River to gain access to the US home textiles market. Kotak Securities is positive on the growth prospects of GHCL and has recommended a 'buy' on the stock, with a 12-month price target of Rs 170, implying 60% upside from current level.

Research: Edelweiss
Recommendation: Buy
CMP: Rs 239 (Face Value Rs 10)
12-Month Price Target: NA

PSL revenues and profits for Q4FY06 were lower than expectations due to lower revenues from the pipe sales and lower margins due to higher proportion of pipe business booked during the quarter. Yearly revenues were higher by 4.3% due to higher volumes and realisation.

Going forward, Edelweiss is positive on order flows to pipe companies as the deadline for the companies to start production approaches. PSL will benefit from its low-cost and multi-location facility. Edelweiss believes that gas-producing companies like Reliance will have to take a decision on gas pipeline infrastructure before the end of FY07.

Moreover, increase in the recent gas reserves by Reliance will require more capacities in pipelines. Hence, Edelweiss maintains its FY07E and FY08E EPS numbers at Rs 20.7 and Rs 28.2 respectively. At the current market price, PSL trades at 11.1 times FY07E and 8.2 times FY08E EPS estimates.

Mangalam Cement
Research: Religare Securities
Recommendation: Outperformer
CMP: Rs 153 (Face Value Rs 10)
12-Month Price Target: Rs 249

Mangalam Cement is expected to benefit from higher realisations and lower power cost due to commissioning of its power plant by June '07. This will result in expansion of margins. The cement industry grew at 11% during April '05-March '06. Religare expects demand to grow at 8-9% over the next couple of years, which will be in sync with the GDP growth of the country.

In the short term, stock inventory levels and pace of construction activities will drive prices. However, in the medium term, prices will be firm due to lack of fresh capacities and sustained demand growth.

At the current market price, the stock is trading at a P/E of 6.5 times FY06E, 5.6 times FY07E and 4.8 times FY08E earnings and EV/EBITDA of 5.5x FY06E, 4.7 times FY07E and 3.4 times FY08E.

EV/ton at $72 FY06E, $75 FY07E and $63 FY08E is below the industry average of $80. Factoring robust Q2 FY06 results, Religare has raised its profit estimates and consequently, raised the price target.

Andhra Pradesh Paper Mills
Research: Emkay
Recommendation: Buy
CMP: Rs 117 (Face Value Rs 10)
12-Month Price Target: Rs 224

Andhra Pradesh Paper Mills (APPM) posted 19.4% decline in net sales to Rs 96.5 crore, as expected. Revenues suffered on account of production loss (approx 12,000 mt) at the company's CP unit due to workers' strike, which lasted for 70 days during the quarter.

Nevertheless, EBITDA margins at 11.8% were higher by 140 bps (y-o-y) and lower by 230 bps (q-o-q). Due to higher other income, the company ended the quarter with 18.6% (y-o-y) growth in PAT to Rs 7.5 crore. For FY06, net sales remained flat at Rs 450 crore, while EBITDA margins improved by 60 bps to 14.1%, leading to 6% growth in PBT.

Due to higher share of other income, APPM's PAT increased by 38% to Rs 35 crore, resulting in EPS of Rs 14.7 for FY06. The company also recommended a dividend of Rs 2 per share. Emkay expects the company's net sales to grow at a CAGR of 23.3% and PAT at 38% by F08E. It has positive view on the company and recommends a 'buy' on the stock

Sunday, July 02, 2006