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Thursday, May 04, 2006

Trading Call

Date: 04/05/2006 | Company Name: INVRCONS | Call Type: Go Long
Stop Loss/ Reversal: 292.0000
Buy/Sell Price Rs.: 305.00
Current Price Rs.: 309.60
Potential P/L%: 0.5500
Target: 330
Investment Argument: Go long in the stock with a stop loss of Rs292 (intra-day) for a target of Rs330.

Hype over, IPOs now trade at a discount

Reality check is sinking in after the honeymoon. One in three initial public offers (IPOs) and follow on public offers (FPOs), which have got listed in the past four months, are trading at a discount to their issue price.

Call it the fundamentals playing out after the initial euphoria if you may, but the market has shown a thumbs down to 14 out of the 42 scrips that have got listed after the issue over the past four months.

What's interesting is that the listing fever is as strong as ever — over the period only three out of the 42 public offers listed at a discount to the issue price. These three were Birla Power Solutions, South India Bank and Raj Rayon.

In the recent past, only a handful of the IPOs used to trade at a discount to their issue price. But the past few months have seen a whole pack of underperformers even as the sensex is still riding on the back of strong inflows and good corporate numbers.

The rerating of the stocks by the investors are being reported after the initial hype of the public offers wanes out. Market players say in some cases this reflects the aggressive pricing of the public issue to take advantage of the bullish market scenario.

So in some cases the stocks are listed at a premium to the offer price but later drops down. The stocks which are currently trading at a discount to their offer price include names like Birla Power Solutions, Visa Steel, K Sera Sera Productions, GVK Power Infrastructure, Andhra Bank, Jagran Prakashan, Nitin Spinners, Sakuma Exports, Malu Paper, Raj Rayon, Sri Sakthi Paper, Dynemic Products, Powersoft GSL and R Systems International.

However, the appetite for fresh public offers is far from over. This can be gauged by the other side of the story where a number of stocks have shot up after their IPOs. In some cases the current price is already in multiples of their issue price.

The list of companies, which have given 100% plus returns after the issue, include names like Tantia Constructions, BL Kashyap & Sons, Pratibha Industries, Sadbhav Engineering. Some of the other big gainers include Sun TV, Opto Circuits, Kewal Kiran Clothing, Rohit Ferro Tech, Gallantt Metal, Indo Tech, Inox Leisure and Entertainment Network India.

Sharekhan - Investor's Eye

Ranbaxy Laboratories  
Cluster: Apple Green
Recommendation: Buy 
Price target: Rs600
Current market price: Rs519

Zocor 80mg—a key upside for Ranbaxy
A US District Court has found the decision of the US Food and Drug Administration (FDA) to deny Ranbaxy Laboratories' petition relating to generic Zocor 80mg exclusivity "unlawful" and remanded the matter back to the FDA. 

WS Industries  
Cluster: Vulture's Pick
Recommendation: Buy 
Price target: Rs112
Current market price: Rs60

Result in line with expectations

Result highlights

  • WS Industries' (WSI) Q4FY2006 net profit at Rs1.04 crore is in line with our expectations.
  • The top line of WSI for Q4FY2006 stood at Rs38.6 crore registering a growth of merely 3%. The top line growth was muted, as the company was unable to execute some orders, which were under negotiation for higher prices on account of a rise in the power and fuel costs. The company expects the revision in the prices to be in its favour and this coupled with the strong order backlog that is in excess of Rs120 crore shall see the momentum return in the top line growth. 
  • The operating profit margins (OPMs) for the quarter stood at 10% registering an improvement of 140 basis points. The OPMs improved because of a reduction in the raw material cost and the stable employee and other expenditure. Consequently the operating profit for the quarter grew by 20% to Rs3.9 crore. 
  • The OPM improvement could have been higher but for the huge 29% increase in the power and fuel costs. 
  • The net profit for the quarter stood at Rs1.4 crore (excluding the one-time provision for tax for capital gains on the transfer of the land to its subsidiary), registering a growth of 113%. 
  • The company has recently got the clearance from the Chennai metropolitan authority, and consequently the construction work for the proposed development of the first phase of the IT park has gained pace. 

Sintex Industries  
Cluster: Apple Green
Recommendation: Hold 
Price target: Under review
Current market price: Rs210

Sintex is reasonably valued

Result highlights

  • The revenue of Sintex Industries Ltd (SIL) grew by a sharp 31.5% year on year (yoy) in Q4FY2006 to Rs318.0 crore. The growth was in line with our expectation. 
  • The plastic division's revenue grew by 39.4% yoy to Rs244.8 crore. Its profit before interest and tax (PBIT) rose by 16.7% yoy to Rs26.0 crore but margin slipped by 210 basis points yoy to 10.6%. 
  • The textile division's revenue increased by 12.3% yoy to Rs73.1 crore. The growth was driven by a 68.9% year-on-year (y-o-y) jump in the realisation to Rs277 per meter. Reeling under severe margin pressure the PBIT grew by only 3.3% to Rs13.6 crore.
  • The operating profit margin of the company fell by 280 basis points yoy to 15.1%. The fall was triggered mainly by a rise in the raw material cost, power cost and advertising spend. Consequently, the operating profit growth was lower at 11.0% yoy to Rs48.0 crore.
  • SIL is close to announcing another Canclini type tie-up for its textile division. Apart from improving the profitability and the overall return ratios, such a tie-up would help SIL to gain a foothold in the high-end European structured fabric market. We view this development as a big positive for the company.
  • The profit after tax (PAT) growth was robust at 92.2%, driven by a higher other income of Rs16.0 crore in the quarter and a lower tax outgo. Although the PAT was above expectations, yet the quality of the earnings was below the mark. 
  • We believe the stock is reasonably valued at a price/earnings ratio (PER) of 19.4x FY2008E and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 10.9x FY2008E, with all the possible organic growth triggers factored in our earnings estimate for FY2008. Though we have achieved our price target of Rs192.5 with all the organic growth triggers factored in the stock's current price, we believe the company's management has the potential to pull out a inorganic growth trigger. However we shall review our recommendation upon gaining clarity on the matter. 

Aditya Birla Nuvo
Cluster: Apple Green
Recommendation: Buy 
Price target: Rs1,031
Current market price: Rs875

Young guns firing

Result highlights

  • The consolidated revenue of Aditya Birla Nuvo (ABN) grew by a strong 68.1% year on year (yoy) to Rs1,674.2 crore in Q4FY2006. The growth was powered by the growth in the businesses of garments (45.4% yoy), carbon black (25.6% yoy), textiles (21.0% yoy), insurance (61.4% yoy) and telecom (15.3% yoy). The Q4FY2006 results are not comparable with the Q4FY2005 results due to the merger of Indo Gulf Fertilizers with ABN and a rise in ABN's stake in Idea Cellular to 20.7%.
  • The share of high-growth businesses (garments, life insurance, business process outsourcing, software and telecom) improved to 56.0% of sales in Q4FY2006 as compared with 54.0% in the same period of the previous year.
  • A sharp margin expansion was witnessed in all the businesses except insurance: margin expansion in garments (290 basis points yoy), rayon (470 basis points yoy), software (810 basis points yoy), insulators (330 basis points yoy), textiles (160 basis points yoy) and telecom (350 basis points yoy on a like-to-like basis).
  • Driven by the good performance of the key business segments, the operating profit margin (OPM) saw an expansion of 310 basis points yoy to 10.6%. The net profit growth was strong at 86.9% yoy to Rs67.1 crore. 
  • On a like-to-like basis (normalising for the telecom and fertiliser businesses), ABN registered a strong growth of 30.2% in the revenue and a robust growth of 38.9% in the profit before interest and tax (PBIT) yoy in Q4FY2006. Had the interest cost not been higher in the quarter, the PAT would have grown at 42.6% yoy.
  • Given the diverse businesses of ABN, the company is best valued using the sum-of-parts method. Based on the sum-of-parts valuation of the merged entity, we estimate the fair value of ABN to be Rs1,031 per share. The stock is available at 19% discount to its fair value and we maintain a Buy recommendation on ABN with a 12-month price target of Rs1,031.

ORG Informatics  
Cluster: Emerging Star
Recommendation: Buy 
Price target: Rs222
Current market price: Rs188

Growing exponentially

Result highlights

  • ORG Informatics reported a 172.2% growth in its net sales to Rs60.2 crore during the fourth quarter ended March 2006.
  • However, the operating profit margin (OPM) declined to 12% from around 15.4% reported in the corresponding quarter last fiscal. The overall profitability was dented by the steep decline in the margins of the telecom business segment. The low margin revenues from the supply part of the MTNL order and a huge jump in the travel cost (related to an order win in Africa) severely affected the margins in the telecom segment in Q4FY2006.
  • The net profit grew at 122.1% to Rs4.2 crore as compared to Rs1.9 crore in Q4FY2005. The net profit is ahead of our expectations of a profit of Rs2.5-3 crore.
  • On the full year basis, the net sales and earning have grown at 83.5% to Rs157 crore and 243% to Rs8.6 crore respectively. The operating margins improved by 180 basis points to 8.8% over the year.
  • The management has announced that the board has approved the raising of up to $15 million through a global depository receipt (GDR)/American depository receipt (ADR)/foreign currency convertible bond (FCCB) issue to fund the organic and inorganic growth of the company. This is likely to result in around 15-20% dilution in the company's equity capital. 
  • At the current market price the scrip trades at 7.1x its FY2008 enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) and 1.9x its order book to market capitalisation. We maintain our Buy call on the stock with a revised target price of Rs222.

JK Cements  
Cluster: Cannonball
Recommendation: Buy 
Price target: Rs295
Current market price: Rs195

Price target revised to Rs295

Result highlights

  • JK Cements' (JKL) Q4FY2006 net profit at Rs16.4 crore is ahead of our expectations, primarily because of the higher-than-expected growth in the cement realisations and a lower-than-expected increase in the other expenditure.
  • The net sales for the quarter registered a growth of 14.4% driven by a very impressive 22% growth in the cement realisations. The revenue growth could have been higher, but for the 6.2% drop in the cement volumes because of a planned maintenance shutdown. 
  • As the cement realisations improved by 22%, the operating profit margins (OPMs) for the quarter registered an improvement of 520 basis points to 18.5% and as a result, the operating profit for the quarter grew by 59% to Rs45.6 crore. 
  • The improvement in the OPMs was restricted by a 38% increase in the freight cost per tonne, and a 17.3% increase in the power and fuel costs. 
  • With the stable depreciation and higher other income (on account of the interest earned on the funds mobilsed in the recently concluded public issue), the net profit for the quarter grew by a whopping 165% to Rs16.4 crore.