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Wednesday, March 29, 2006

Emkay Share and Stock Brokers - IPO

The small-sized company is dependent on stock-market-sensitive brokerage revenue

Emkay Shares and Stock Brokers (ESSB) was founded as a private limited company in January 1995. It converted into a public limited company in October 2005. The promoters and managing directors of the company, Krishna Kumar Karwa and Prakash Kacholia, are chartered accountants with more than 30 years of experience in the capital market operations between them. Kacholia leads Emkay's derivatives business and has served on BSE's governing board and on the advisory derivatives committee of Sebi when derivatives trading was launched in India.

ESSB's revenue predominantly comprises brokerage income from equities and derivatives on BSE and NSE. It also undertakes distribution of third-party products, portfolio management service (PMS) and demat services. However, their contribution to income is very small. The company now plans to become a full service brokerage outfit providing comprehensive advisory services to its clients.

The gross proceeds of Rs 75 crore from the higher price band of the fresh issue will be deployed for expansion of operations and branch network (both in India and overseas), from current 41 to 100, in the next two years. ESSB will upgrade its technology to support its increasing business volumes and scale up the online trading business. Investment in subsidiaries, involved in share financing (Rs 20 crore from IPO as long-term working capital for the subsidiary) and commodity trading (Rs 5 crore), are also on the cards. The company plans to augment its working capital base to meet the enhanced margin requirements after the increase in business volumes.


*The primary focus of ESSB is on institutional broking, which generates almost 55% of its income. This part of the business provides a good base for the company.

*The company is virtually debt-free.


*Almost 90% of the total income of ESSB is composed of equity brokerage income. Revenues from its depository, PMS and other segments are insignificant. The commodity broking business is yet to take off in a significant way. ESSB doesn't have a well-diversified revenue model and the risks of a pure stock market play are high

*Compared to its peers, the reach of ESSB is limited to 41 centers, mostly concentrated in the western and southern states of India. It has a few offices in the northern and eastern zones. Its peers are way ahead in the retail segment. We feel it would be quite a challenging task for the company to increase the retail business without any differentiation strategy from its peer group, as the product offerings are very homogenous in nature.

The company needs to optimally, and speedily utilize the IPO proceeds to overcome the above in a cut-throat competitive environment.


The industry composite PE is about 18x. At the offer price band of Rs 100 – Rs 120, consolidated annualised EPS of Rs 5.8 based on post-issue equity (Rs 24.15 crore) is discounted 17.3 to 20.8 times. Only IL&FS Investsmart commands a higher PE of 22.6 times. The other comparable and larger listed players such as Geojit Financial trades at a PE of 14.5x, India Infoline at a PE of 20x and India Bulls at 15.9x. .

At the same time, it is noteworthy that Emkay, like Geojit, is a debt-free company, while Infoline had Rs. 36 cr debt (equivalent to its networth), at the time of its IPO. Also, the considerable weightage of institutional business in its portfolio will stand it in good stead if and when the markets tank. In our opinion, at a lower decibel level, Emkay stands for greater stability.

R Systems International IPO

Focused on offshore product development services

Unnatural growth in profit in FY 2005 and unexciting acquisitions are disheartening

Promoted by Satinder Singh Rekhi in 1993, R Systems International is a New Delhi-based software product development company. It helps companies bring products and services to market quickly by using its different products and services comprising the pSuite framework, which is an execution framework for PLM (product lifecycle management) services. Other services include building and supporting software products in diverse areas like Internet security, Internet music delivery, Internet IP TV, banking applications, supply chain management, ERP solutions, and knowledge management. These software products and services find application across industry verticals such as banking and finance, government, health care, high technology and independent software vendors.

R Systems's marquee clientele includes a variety of Fortune 1000, government and mid-sized organizations like GE, Intel, and ABN Amro.

Of its five large centers for software excellence, R Systems has one center in El Dorado Hills, CA, one center in Singapore, and the other three in India (Pune, Chennai and Noida). It also has a significant presence in the ASEAN area with its local headquarters in Singapore and seven regional offices. Singapore is also its Center for Supply Chain Management (SCM) excellence.

Other than the two 100% subsidiaries, R Systems Inc California and R Systems in Singapore, it has acquired two companies, Indus and ECnet, to cater to the banking, finance and manufacturing and logistics verticals. Indus Lending Solutions Business products cater to the retail lending industry and the ECnet suite of products offer supply chain collaboration solutions.

In February 2002, R Systems acquired a 44.75% stake in Indus from GE. In the transaction, GE received 2,983,475 shares of R Systems for giving up its shares in Indus. As of December 2005, GE was entitled to receive 445,000 warrants under the shareholders' agreement. On January 2006, GE assigned its rights to such warrants to GE Strategic Investment India. On 30 January 2006, GE Strategic Investment India exercised the right of converting such warrants into equity shares and 445,000 equity shares of Rs 2 each in the company were subsequently issued to GE Strategic Investment India.

The objects of the issue is to raise finance for up-gradation and expansion of its existing infrastructure at an estimated cost of Rs 31.50 crore coupled with repayment of outstanding loans of Rs 3.65 crore and financing the general working capital requirements of Rs 17.95 crore. 


  • In the last few years, software products companies have seen an exponential growth. The year 2005 saw the rise of offshore product development (OPD) players due to the need for more specialised skills across the product development lifecycle. R System is well positioned to take advantage of these opportunities going forward, with its strong domain expertise in this area.
  • R Systems has a marquee clientele in its kitty including big names GE, Intel, ABN Amro, and Microsof. Around 34% of the company's revenue comes from its top 5 clients.


  • R Systems's acquisition of Indus Software and ECnet does not seem to be successful and has led to the diversion of attention from core focus area of OPD to developing and selling products, where it cannot scale up. On a consolidated basis, the company went into the red in FY 2003 because of these acquisitions. Even now, these acquisitions are not contributing any profit.
  • On standalone basis, R Systems's sales have grown consistently in the last four years. But the bottom line has been fluctuating between Rs 43 lakh to Rs 2.9 crore. It was only in FY 2005 that the company saw a massive rise in net profit to Rs 12.46 crore.


On an expanded equity of Rs 13.54 crore, FY 2005 EPS of R Systems works out to Rs 9.2. Based on this, PE stands at 23 and 27 at the price band of Rs 210 and Rs 250. Comparable companies like Aztec and Geometric are trading at a TTM PE of 28 and 25 times.

Just ahead of the IPO, R Systems dramatically improved its performance in the year ended December 2005. An overnight wonder, will it still keep shining at noon?

Godawari Power and Ispat - IPO

A small steel company using captive power

Godawari Power and Ispat (GPIL) is part of the Hira group, which manufactures steel long products in central India. GPIL produces sponge iron, steel billets and captive power generation.

GPIL's current sponge iron, steel billets and captive power capacity is 2,35,000 tonnes, 2,50,000 tonnes, and 28 MW, respectively. The company intends to set up another unit near its existing facility to manufacture 2,60,000 tonnes of sponge iron, 1,50,000 tonnes of steel billets, and generate 25 MW of power through waste heat flu gases. After expansion the total capacity of sponge iron, steel billets and captive power plant will be 4,95,000 tonnes, 4,00,000 tonnes, and 53 MW, respectively. The expanded capacity is likely to be commissioned in the last quarter of FY 2007.

The project cost (excluding general corporate and issue expenses) is Rs 173.32 crore, which is estimated to be financed through a term loan of Rs 113.5 crore, issue proceeds from the Initial Public Offering and internal accruals.


  • Along with a consortium of four other corporate bodies (including group companies), GPIL was allotted rights for captive coal mining in January 2006. GPIL's share is 106.5 million tonnes. In September 2005, the ministry of mines granted an iron-ore mining lease for 106.6 hectares in Ari Dongir and 110 hectares in the Boria Tibbu. Normally, a timeframe of 27 months is required for commencement of commercial exploration of captive coal and iron ore mines. The company has not allocated any funds for developing these mines.


  • The promoters have few more group companies in the steel business, which can lead to conflict of interest and diversion of attention.
  • Though highly dependent on its group companies for sale of its products, GPIL has not entered into any firm tie-up with group companies. The company supplies 40% of the billet requirement of some of its group companies, constituting about 75-80% of its current production.
  • GPIL has not yet placed orders for equipment to produce sponge iron and steel billets and generate power, which may delay the implementation of the project. The company has still to apply for registrations for the expansion project including excise and commercial tax.
  • Due to its cyclical nature, the dynamics of the steel industry keep changing, depending on factors such as demand-supply in China and cost of vital inputs including iron ore and coal. Currently, the steel industry is facing pressure on prices on a high base of last year, as China has become a net exporter. Also, on account of rising input costs, the margin of players has crumbled.


At a price band of Rs 70 – 81, GPIL's PE works out to 7.2 – 8.3 times FY 2005 earning and 12.3 – 14.2 times six-month FY 2006 annualised earning on post-diluted equity. Notably, the sponge iron industry fared badly in the first half of the current fiscal, and GPIL's performance was also affected. Jindal Steel and Power, which is an established player, commands a TTM P/E of 9.1, while Monnet Ispat is trading at a TTM P/E of 7.4. The sector TTM P/E is around 6.3.

Tantia Constructions - IPO

Established in 1964, the Tantia family promoted Tantia Constructions (TCL) caters to the Indian Railways. Its services include earthwork and ballast, rail track linking and welding, bridges and tunnels, electrification and signalling. It is among the five Indian companies capable of providing 'foundation to finish' for mega railway bridges spanning 2 km.

TCL has its own steel fabrication unit and is the only Indian company to have fabricated a 100-meter span steel girder on site, 400 metres above sea level. The company's other areas of construction services include roads, bridges, water sewerage, girders fabrication, jetties, tunnels and power transmission lines.

Apart from projects in India, TCL has also executed projects in Bangladesh, Bhutan and Nepal. The company's clientele includes almost all zonal railways, Central and state PWDs, Kolkotta metro rail, Hoogly River & Bridge Commission, NEEPC, Indian Oil Corporation, Ircon International, DSIDC, and PIDB. It had made an initial public offering of 1.44 lakh equity shares in 1982 (listed on the Calcutta Stock Exchange and the Delhi Stock Exchange).

TCL proposes to use the proceeds of the current issue for (a) investment in capital equipment; (b) enhancement of long-term working capital; (c) repayment of unsecured loan; (d) repayment of public deposit; (e) investment in BOT/BOOT projects and joint ventures.


* TCL's current order book (on 20 March 2006) is about Rs 880 crore with a backlog of about Rs 650 crore, i.e., 6.3 times FY 2005 revenue. Rail projects and urban development account for 56% of the current order book

* The government is giving a major thrust to improving the railway infrastructure. Plans for building rail freight corridor projects (connecting Delhi with other metros), port connectivity projects, and up-gradation of projects under the national rail Vikas Yojana are in the pipeline. The Railway Budget 2006-07 has emphasised major technological up-gradations; completion of up-gradation and repair of over-aged tracks, bridges and track circuiting work on all stations on A, B and C routes by March 2007; and public-private partnership in rail projects. Targets for 2006-07 include over 550 km of new lines, over 1,100 km of gauge conversion and 435 km of doubling; and 23 new lines, one gauge conversion, and eight doubling. As it has been associated with the Indian Railways for the last four decades, these new projects hold a major opportunity for the company.


* TCL has been generating a negative cash flow at the operating level: Rs 7.99 crore (FY 2003), Rs 7.90 crore (FY 2004), Rs 1.67 crore (FY 2005), Rs 5.32 crore (nine months of FY 2006). Debtors outstanding for more than six months stood at Rs 18.40 crore end December 2005.

* The debt-equity ratio of TCL on 31 March 2005 and 31 December 2005 (nine months) stood at an abnormally high level of 5.1 and 3.9, respectively.

* TCL's claim of Rs 16.86 crore for extra work from the Tamil Nadu Agricultural Development Project is disputed and unpaid.


At the offer price band of Rs 45 – Rs 50, TCL's PE works out to 37.6- 41.7 x FY 2005 EPS on a post-issue equity and 12.9 – 14.3 x 9-month FY 2006 annualised earning on the post-issue equity. TTM PE for the construction sector is abnormally high at 37.

BRICS - Reliance Industries - BUY

BRICS Recommends BUY

CMP      > 777
Target   > 868

Sharekhan - Investor's Eye

Hindustan Lever 
Cluster: Apple Green
Recommendation: Buy 
Price target: Rs300
Current market price: Rs268

It is just getting better
HLL has increased the prices of a few of its products in the soap and detergents segment like Surf Excel, Lifebuoy, Rin Advanced and also in the personal care products segment like shampoos. Besides this the company has also decreased the pack size of Vim Bar & Rin Shakti thus increasing its realisations.

This is the second time in the last five months that the company has increased the prices of Surf Excel (see our note HLL increases Surf Excel prices dated November 29, 2005). Unlike the last time, where the price increase was restricted to the premium segment, this time it is across the entire detergent segment.

Orchid Chemicals & Pharmaceuticals 
Cluster: Emerging Star
Recommendation: Buy 
Price target: Rs460
Current market price: Rs363

Price target revised upwards by 30% to Rs460

Key points

  • The entry into the generic non-antibiotic business in the USA by Orchid Chemicals & Pharmaceuticals is expected to result in a significant increase in the bottom line for FY2008.
  • The company is expected to benefit from the sale of non-antibiotic big molecules along with antibiotics like Cefdinir, Ceftiofur and Zosyn in FY2008. We expect the US generics business to provide a substantial upside as we expect the consolidated net profit to increase by 33% in FY2008 on a year-on-year basis.
  • We estimate the company's FY2008 earnings at Rs27.8 per share. At the current market price of Rs363, the stock is trading at 13.1x its FY2008 earnings estimate. We reiterate our Buy recommendation on Orchid Chemicals with the revised price target of Rs460

Sharekhan - Investor's Eye

Cluster: Apple Green
Recommendation: Buy 
Price target: Rs220
Current market price: Rs193

Price target revised to Rs220
We have been frequently mentioning that we like the way ITC has successfully channelised the strong cash flows generated from its cigarette business into new businesses of non-cigarette fast moving consumer goods (FMCG), hotels, paper and paperboard, and agri-products. Despite being capital intensive and having a long gestation period, all these businesses are highly profitable over a long period. We expect ITC's capital expenditure in these businesses to continue over the next couple of years. With timely investment in these businesses, we expect ITC's revenues to grow at a compounded annual growth rate (CAGR) of 17.3% over FY2006-08E. The company's net profit should grow at a CAGR of 22% over the same period. We are revising our price target to Rs220 based on the sum-of-parts valuation method, which discounts ITC's FY2008E earnings per share (EPS) by 25.6x. 

Infosys Technologies 
Cluster: Evergreen
Recommendation: Buy 
Price target: Rs3,325
Current market price: Rs2,882

Citigroup may divest stake in Progeon
According to a media report, Infosys Technologies could buy out Citigroup's stake in its business process outsourcing subsidiary, Progeon. The business is valued at around $600 million as per the news report. Thus, the Citigroup's stake of over 26% can fetch around $160 million. This amounts to astronomical returns for the Citigoup that had invested $20 million (or Rs93.8 crore) for 8,750,000 cumulative convertible preference shares (issued in two tranches of 4,375,000 each in June 2002 and March 2004). The preference shares were converted into 87.5 lakh equity shares in June 2005.