Tuesday, April 04, 2006
Reliance Petroleum Ltd (RPL), the wholly owned subsidiary of RelianceIndustries, is likely to unveil its initial public issue (IPO) on April 10.
RPL, which is raising funds to part-fund its Rs 27,000 crore refinery atJamnagar in Gujarat, plans to begin its international roadshows during theweek beginning April 3. The entirely book-built IPO is expected to beintroduced within a price band of Rs 57 to Rs 62.50.
Sources in the investment banking industry said roadshows were beingplanned in cities including Hong Kong, Singapore, London, Boston, New Yorkand San Fransisco. Reliance Industries Chairman Mukesh Ambani is expectedto attend a couple of roadshows, they added.
Stock market sources said going by the huge response of the pre-IPO privateplacement, RPL's IPO might break the previous record of investors'participation in a public float. National Thermal Power Corporation had seta record by attracting 15 lakh applications for its public issue inOctober, 2004.
A clutch of investors including Blackstone, Citigroup, UBS, Deutsche Bank,UTI Bank, SBI, ICICI and IDBI and Mukesh Ambani, were learnt to havescooped up 450 million shares in the pre-IPO private placement. Theinstitutions were believed to have purchased shares at Rs 60 apiece,totalling an investment of Rs 2,700 crore. A formal announcement of this isexpected shortly.
Incidentally, Reliance Industies had invested Rs 2,700 in RPL as its equitycontribution in three tranches in December, January and February.
The IPO will offer 1,800 million shares. Reliance would again acquire 900million shares through the IPO, exactly the same amount to be offered tothe public. As the pre-IPO placement consumed 450 million shares, thepublic would be entitled to apply for 450 million shares.
TVS Motor Company
Cluster: Emerging Star
Price target: Rs210
Current market price: Rs140
The Apache war cry
- TVS Motor Company, one of the largest players in the two-wheeler segment in India, is a perfect play on the boom in the country's two-wheeler industry. The company has indigenously developed a number of products across the two-wheeler segment. It now has a strong presence in all the product categories: motorcycles, scooters and mopeds. The proposed foray into the three-wheeler market should further fuel the company's growth.
- Its recently launched motorcycle, Apache, has won huge accolades and is expected to capture a 13% share of the premium segment in FY2007. Apache has been launched in only select cities and the initial response to the model has been encouraging. A national roll-out is expected by April 2006.
- With a rise in its volumes, the cost-cutting measures undertaken, an improved product mix with more higher-end products and an entry into the three-wheeler segment, the margins of the company are set to improve. We expect the same to expand by 380 basis points to 11.2% by FY2008.
- The exports of the company are expected to rise with the setting up of a new plant in Indonesia. The new plant should also help TVS Motor to cater to the demand from the fast growing Asean and African markets.
- At the current market price of Rs140 the stock discounts its FY2008E earnings by 10.2x and FY2008E earnings before interest, depreciation, tax and amortisation (EBIDTA) by 5.5x. Considering the company's growth prospects, we believe that the stock's valuations are very attractive. Hence, we are initiating a Buy recommendation on the stock with a price target of Rs210.
Bharat Heavy Electricals
Cluster: Apple Green
Price target: Rs2,650
Current market price: Rs2,298
BHEL came out with its full year's provisional numbers (PNs), and the same are above our expectations. The PNs indicate the following.
- The net profit for FY2006 rose 68% to Rs1,620 crore because of a higher order intake, which in turn brought the operating leverage into play.
- The revenue stood at Rs14,410 crore, up 51% year on year (yoy).
- The outstanding order backlog jumped to Rs37,500 crore, up 17% from Rs32,000 crore last year.
Strong growth continues
We had mentioned in our note Potential threat from rising interest rates dated March 23, 2006 that the tightening liquidity and the rising interest rates could act as a dampener, thereby affecting the growth in the passenger vehicles segment. However, over the last couple of days the liquidity has improved substantially with the Reserve Bank of India infusing liquidity through the reverse repo window. We believe that the high sales in the passenger vehicles segment for the month of March 2006 were driven primarily by two reasons. Firstly the year ending effect, as the dealers go aggressive during this month on selling and secondly the discounts offered by the manufacturers. However, we would like to closely monitor the interest rates and liquidity going forward for a couple of months.
Sun TV is likely to emerge as the most preferred play in the entertainment business space, at least till the Star group decides to list its Indian operations. The former's strength in the language business has few parallels in the media industry.
Dominance in Tamil
A bouquet of four channels — Sun TV, K-TV, Sun Music and Sun News — has enabled the company to comprehensively wire up the Tamil space. Competition is hard to spot despite Star group's efforts to rejuvenate Star Vijay. Efforts at cloning successful programmes on Star Plus have led to a higher visibility. Yet, in terms of audience share, Star Vijay has some catching up to do..
Rich on prime time
Several of the serials on Sun TV may strain credulity with the twists and turns; a few may also exasperate the discerning viewer, divorced as they are from reality. But there is no doubt that Sun has hit upon what the audience wants and has been dishing out serials that have viewers hooked on to its flagship channel in prime time bands in the afternoon and evening. Over the past five years, even as popular serials have concluded, newer ones have grabbed and retained eye-balls. The channel's hold on prime time is unchallenged on weekdays and weekends — a grip that even Star Plus does not enjoy.
Lock on content
Between Sun TV and K-TV, viewers are fed a staple of movies that ensure that film-oriented audience remains hooked on to the network. A library of over 2,600 films, an ability to sew up rights to movies that click at the box office and a growing presence in dubbed English movies will ensure that competitors trail the Sun Network for several years.
Winner in waiting
In Sun Music, the company has another value proposition. A channel that was essentially perceived as a filler has been revamped over the past year. Spin-offs in terms of viewership and ad revenues are already evident. The new interactive format, a change from the songs-only experience, has proved a good draw. We expect this channel to increase its market share and also make a bigger contribution to revenues over the next two to three years.
With its bouquet of offerings straddling the four southern markets , the Sun network has a distinct edge over competition when it comes to cutting deals with advertisers. It is the first port of call for advertisers across categories and sectors.
In God's own country
An aggressive strategy akin to what was in Tamil Nadu has enabled Sun network become the leader in Kerala too. Within a couple of years of its launch, Surya TV managed to dislodge the veteran Asianet, and also shake up the face of small screen programming in Malayalam. Kiran TV — Sun's second offering in Malayalam — is creating a niche similar to Sun Music's in Tamil.
This was not an easy market to crack and the manner in which Sun TV has broken ground gives us confidence that it will maintain and enhance its edge over Asianet. It has now moved to a position where ad rates discounting on Surya TV have begun to diminish.
Markets with promise
Sun TV, with its sister concerns, has a presence in the four southern States that offer superior growth prospects. Be it services or manufacturing, this region has the edge and this is likely to be reflected in healthy growth rates in ad spends. As the premier play, Sun TV is well-placed to reap the maximum benefits from this macro trend.
No to distribution
The Sun network has a strong presence in distribution through Sumangali Cable Vision. This business has, however, landed the group in controversies. In an extreme policy initiative, the Tamil Nadu Government recently legislated the takeover of the cable distribution business. It is yet to take effect, but is a classic example of the risks. In this backdrop, the divestment of the cable distribution business to a privately-owned company is a positive factor.
Opportunity in FM radio
A substantial part of the offer proceeds is to be invested in the FM radio business through two subsidiaries. In the several territories it has bagged in the south, we expect Sun TV to make a mark, though they may make a contribution to revenues and earnings only over a three/five-year period. Sun TV has also bagged rights to 23 properties in the north, west and north-east. We are not confident about the prospects in these geographies, as the likes of Entertainment Network, Star City and Adlabs may have an edge. There is the distinct possibility that these operations will turn out to be a millstone. Investments in the FM radio business bear a close watch.
Robust growth of the television channels is likely to compensate for the lack of commensurate revenue flows from the FM radio business in the initial years. The marginal expansion in equity will also ensure that dilution in per-share earnings remains modest. This should provide adequate support to the stock valuation.
Revenue in pipeline
Sun TV has operated as a free-to-air channel. There is the possibility that it will become pay. If it does, even at a moderate price, the upside to earnings will be significant. As a bouquet, it will remain a preferred pick in Tamil Nadu and Kerala; this should provide leeway to take free-to-air channels the pay way and also gradually increase the rates. Improved declaration from cable operators and the imminent expansion in DTH services could also provide a boost to the subscription revenues.
What is on offer is only a truncated version of the Sun Network. Sun TV will own only the television channels in Tamil and Malayalam; the group's strong franchise in Telugu and Kannada under the Gemini/Teja and Udaya/Ushe banners respectively will remain privately-owned businesses.
Sun TV will have ownership of the FM radio business in which it has a strong presence in Chennai, Coimbatore and Tirunelveli, and has also bagged licences to operate in 41 new territories. We take a positive view of the offer, as the growth prospects appear bright.
The principal risks to our recommendation are the possibility of Sun TV's hefty investments in FM radio acting as a drag on profitability beyond the expected period of two-three years and the perceived political affiliations of the promoter group that could create difficult situations, the most recent one being the planned takeover by the Tamil Nadu government of private cable networks including that owned by the Sun TV group.
Though this stock is likely to attract institutional investor interest, FIIs can buy only up to 20 per cent of the equity. This cap does not matter at this stage, as the floating stock will be only 10 per cent.
This low floating stock may not, however, hamper liquidity, as a similar situation has prevailed in the case of TCS and Wipro, to name a couple of prominent players. Yet, any move by the promoter group to offload a part of its stake at a later date will be a positive.
So, too, will be any plan to bring the Telugu and Kannada operations under the Sun TV fold, to present investors with a single banner to play the entertainment sector in South India.
The offer is stiffly priced. A tendency to capitalise on the bullish undertone in the equity market is evident in the pricing.
Sun TV has also a fixed a wide band of Rs 730-875 for the offer.
At the lower end of the band, the price-earnings multiple is about 30 times the likely FY-07 per-share earnings. We would have been comfortable with this pricing, but for the risks from the planned big-ticket investments in the FM radio business.
In this backdrop, we will be more comfortable if the final price is fixed at the lower end of the price band. It will provide a greater degree of cushion for investors, lead to a robust aftermarket for the stock and also compensate for the enhanced risk profile due to the FM radio business.
Despite our comfort with the lower end of the band, it may be appropriate to bid at the cut off price. This will give investors a good chance of securing allotment.
Our `invest' call does not take into account the likely price patterns on listing and is a long-term view. The factors that underpin the recommendations are detailed in the accompanying story.
Offer details: Sun TV is offering 6.9 million shares. It will mobilise Rs 500-600 crore, depending on the final pricing. Lead managers to the offer are Kotak Mahindra Capital Company and DSP Merrill Lynch. The book-built offer opens on April 3 and closes on April 7.
Opto Circuits (India) (OCIL) is the sole manufacturer of opto-electronic based medical equipment in the country. The company is issuing 40 lakh equity shares through a follow-on public offering to finance its recent acquisition of cardiac stent manufacturer EuroCor and tone up its R&D, manufacturing and marketing activities.
Out of the total issue proceeds, Rs 27.21 crore has been allocated for the acquisition of EuroCor. OCIL has paid 22.71 crore to acquire the equity of EuroCor and its debts. Further payment of euro 0.5 million will be made in two equal installments on 31 March 2006 and 30 June 2006. Besides, Rs 19.38 crore has been allocated for upgrading the R&D facility, Rs 16.35 crore for upgrading manufacturing facility, Rs 22.5 crore for additional working capital requirement, and Rs 7.5 crore for investing in marketing offices of 100% US subsidiary Mediaid.
On a standalone basis, OCIL manufactures non-invasive electronic patient care products and markets them through its business associates in Europe and the US and subsidiaries in India and the US. The company has been operating as a 100% EOU since its incorporation in 1992.
Since its initial public offering in 2000, OCIL has adopted an inorganic business model for gaining better market access for its products and increasing its product lines in the growing health care segment. It acquired a majority stake in the listed Advance Micronic Devices (AMDL) in 2001 for marketing its products in the country. In 2002, the company acquired the patient monitoring system of US-based Palco Labs, later renamed Mediaid and now a 100% subsidiary of the company in US. Currently Mediaid is responsible for selling OCIL's products in the US and other parts of the world.
In 2004, OCIL acquired a 100% stake in Altron, an electronic manufacturing concern in Bangalore. The company recently diversified into invasive healthcare products by purchasing the Germany-based stent manufacturing company EuroCor. The company intends to continue the inorganic business strategy in future as well.
*On a consolidated basis, OCIL has a focused presence in the growing healthcare market and has a global marketing presence through its associate companies.
* The recent competitive acquisition of EuroCor will provide incentive for better sales performance by EuroCor in the next two years.
* Due to its EOU status (valid till 2009) and manufacturing presence in India, OCIL enjoys better-cost advantages compared with its global competitors. This ensures growing manufacturing outsourcing by global peers as well. In this context, the R&D expansion to supply products as per the needs of the original equipment manufacturers, is a positive step.
*OCIL books its sales by selling its products to group companies and 100% subsidiaries. They sell the products to end-users. This entails not only a greater credit period but also a credit default risk for the company.
*Due to the typical characteristic of its products and the batch manufacturing process, the company has to maintain high inventory level.
*In FY 2005, standalone net profit jumped 48% to Rs 19.20 crore, but cash flow from operating activities was up only 11% to Rs 10.78 crore. In the first six months of the current year, the cash flow is negative Rs 6.02 crore. The cash flow record of all its subsidiaries is also poor.
*None of the products of the companies or subsidiaries acquired are patented and will have to fight it out on cost and service.
*OCIL's strategy of inorganic growth increases its risk profile.
* Though it has got a good marketing set up all over the world, EuroCor's stent marketing needs a specialised marketing force and product promotion. Also, OCIL derives 74% of its turnover from the US, where EuroCor is yet to get approval for selling its products. Moreover, EuroCor is a loss-making company and its cash flow has been negative since the past five years.
OCIL made small bonus issues (2:10 in 2003, 3:10 in 2004 and 5:10 in 2005) consecutively over the last three years. However, such pattern does not instill confidence.
On a standalone basis, OCIL reported sales of Rs 80.59 crore in the nine months ended December 2005. This is 60% higher than the sales of the corresponding period last year. The standalone net profit went up by 97% to Rs 23.63 crore compared with the corresponding quarter last year. However, the company has provided a cash flow statement for six months only. In these six months, the cash flow from operating activities was negative Rs 6.02 crore.
On a consolidated basis OCIL had reported sales of Rs 122.84 crore in FY 2005. The net profit was Rs 17.48 crore. In the six months ended September 2005, the consolidated sales and net profit were Rs 63.3 crore and Rs 9.77 crore, respectively.OCIL is trading at Rs 276 on the bourses, which is 15% and 2% higher than the lower and upper band offer price of the issue. The six-month average share price is Rs 250. The business of the company is not comparable with any other listed electronics component company. The lower and upper price bands discount the annualised FY06 consolidated EPS of Rs 6.3 (on post-IPO equity) by 38 and 43 times, respectively, which is high