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Monday, December 25, 2006

10paisa.com & Midcaps.in Newsletter


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JP Morgan - Nalco


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Macquarie - ICICI Bank


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The 'stock' stops here


Circa 2007 could be a bumper year for capital markets in India. If all goes well, as much as $12.38 billion is expected to be raised from the primary markets.

The pipeline of IPOs and follow-on public issues (FPO) is, if anything, even bigger. Currently, over 450 companies are looking to raise around $39 billion over the next two-three years, according to figures compiled by Prime Database. Compared to this, only $5.35 billion was raised through the primary markets in 2006.

Whether all the issues in the pipeline see the light of day will depend on the secondary market. “There is clearly no dearth of issuers. Likewise, there is no dearth of investors. What is critical is a stable secondary market. The fate of the primary market now rests substantially on the state of the secondary market,” said Prime Database MD Prithvi Haldea.

Of the proposed IPOs and FPOs, real estate companies, including the much-talked-about DLF offer, account for nearly $4 billion. Utility companies such as Power Finance Corporation, Power Grid Corporation and National Hydroelectric Power Corporation are expected to raise $1-1.5 billion. Add another $1 billion for telecom companies — Idea Cellular and Spice Telecom.

Even though the proposed figure for 2007 is much higher compared to this year’s fund raising through IPOs, experts say the Indian capital markets can absorb these funds. “Institutional investors contribute about 70% to the total funds that are raised. Of this, a major share comes from foreign investors. Foreign investors are currently interested in having a larger bite of the Indian growth story. They have deep pockets and can make large investments in Indian issues,” said ICICI Securities senior VP Ravi Sardana.

Besides power and real estate companies, a number of banks are also planning to raise money at the capital markets. SBI has a follow-on public issue of Rs 12,000 crore in the pipeline, Canara Bank also has a Rs 4,000-crore FPO. Central Bank of India, United Bank of India, Indian Bank, Uco bank and Vijaya Bank are some of the other banks that will raise money at the capital market. Banks are raising money to shore up their capital bases to meet the capital adequacy ratios, besides funding their expansion plans.

Most expect the momentum to continue for some time. “The bulk of the money that will be raised at the capital market will come from real estate, infrastructure and telecom. This momentum will continue for the next few years,” said an investment banker.

Stocks you can pick up this week


Marico
Research: India Infoline
Ratings: Outperformer
CMP: Rs 552 (Face Value Rs 10)
12-Month Price Target: NA

Marico has acquired a hair cream and hair gel brand – HairCode from Egypt’s Pyramids Group for an undisclosed consideration. The Pyramids group has agreed for a non-compete agreement in hair creams and hair gels segments with Marico. The brand enjoys ~23% market share of the pre- and post-wash hair care market in Egypt. In September ‘06, Marico had acquired a hair care brand called Fiancee, owned by the Ready Group of Egypt.

With both these acquisitions, Marico has now achieved a dominant market share of ~50% in the Rs1.7-bn pre- and post-wash hair care market in Egypt. Both these acquisitions are expected to contribute ~Rs 95 crore plus to Marico’s consolidated turnover in FY08.

Omax Auto
Research: Angel Broking
Ratings: Buy
CMP: Rs 86 (Face Value Rs 10)
12-Month Price Target: Rs 105

OMAX has been transforming itself from a strong player in the Indian auto component industry to a global manufacturer of sheet metal component. OMAX is aggressively targeting overseas market and has export orders of Rs 150 crore, which is to be executed in the next three years. The company secured orders from Tenneco, Supersporx, Lkea, Delphi, Cummins and Piaggio for supply of various components. OMAX’s export revenue is to grow at a CAGR of around 45% between FY06-FY09 from Rs 26.6 crore to Rs 80 crore.

It’s OPM was under pressure largely due to increase in raw material, power and staff costs. The margin is expected to expand further in the medium term on account of various cost control measures initiated by the company. At the current market price, the stock is trading at a P/E of 8.3x FY07E earning and 6.8x FY08E earnings. The stock has corrected very sharply in the recent past and appears very attractive at EV/EBIDTA of 4.4x and PEG ratio of 0.8 on FY07E earnings (less than 1 PEG ratio indicates that the stock is trading at a discount) and has potential upside of around 20%.

Asian Paints

Research: Edelweiss
Ratings: Buy
CMP: Rs 715 (Face Value Rs 10)
12-Month Price Target: NA

Asian Paints’ EBITDA margins to increase from 13.0% in FY06 to 14.7% in FY09 due to shift towards higher margin products, favourable raw material outlook, and operational leverage advantages. The recent decline in crude oil prices is likely to result in improved gross margins, as the impact of inflation has been already passed on through price hikes. The international operations, in which Asian Paints lacks pricing power, are expected to benefit more.

The product mix is expected to shift in favour of higher margin products such as emulsions and exterior paints, as they will grow at a higher rate. Operational leverage advantage from scaling up is expected to boost margins further. At the current market price, Asian Paints trades at 25.1 times FY07E earnings and 20.1 times FY08E earnings. EV/EBITDA for the stock is 14.8 and 11.9 times on FY07E and FY08E, respectively. An EPS growth of ~25% accompanied by ROE of ~30% makes it an attractive stock.

Deepak Fertilisers
Research: Anand Rathi
Ratings: Buy
CMP: Rs 87 (Face Value Rs 10)
12-Month Price Target: Rs 120

DFPL is the only domestic producer of isopropyl alcohol (IPA), which until recently was fully imported to cater to domestic demand. IPA will significantly add to the revenues and is likely to contribute around 20% of FY09 revenues. Real estate unlocking further de-risks the revenue model. DFPL has been fractionally unlocking large land bank it has at prime locations in Pune.

Ishanya, a specialty mall, is a unique venture by the company and will add some stability to its revenue base. Availability of gas is to ease raw-material pressures from FY08. Margins have been under pressure due to non availability of natural gas in required quantities, which is likely to ease post the completion of Dahej-Uran gas pipeline by H2FY08, leading to resurrection of margins enjoyed earlier. At the current market price, stock is trading at a P/E of 8.1x and 6.1x and EV/EBITDA of 3.8x and 2.8x FY07 and FY08 earnings respectively. Anand Rathi feels the fruits of the capex underway currently will be realised from FY08 onwards.

Raipur Alloys & Steel
Research: Networth Stock Broking
Ratings: Buy
CMP: Rs 133 (Face Value Rs 10)
12-Month Price Target: Rs 200

Raipur Alloys and Steel manufactures 2,10,000 MT of sponge iron and 1,40,000 MT of steel ingots with captive iron ore and power. It is undergoing a structural change with a merger of group companies. Moreover, aggressive plans for backward and forward integration will enhance operating margins going forward. At the current market price, the stock is trading at a P/E of 9.3x FY07E and 5.6x FY08E and EV/ EBITDA of 7.4x FY07E and 5.1x FY08E on a consolidated basis. Networth Stock Broking recommends a ‘Buy’ with a one-year price target of Rs.200, considering P/E of 8x and EV/EBITDA of 6.5x.


Omax Auto
Research: Angel Broking
Ratings: Buy
CMP: Rs 86 (Face Value Rs 10)
12-Month Price Target: Rs 105

OMAX has been transforming itself from a strong player in the Indian auto component industry to a global manufacturer of sheet metal component. OMAX is aggressively targeting overseas market and has export orders of Rs 150 crore, which is to be executed in the next three years. The company secured orders from Tenneco, Supersporx, Lkea, Delphi, Cummins and Piaggio for supply of various components. OMAX’s export revenue is to grow at a CAGR of around 45% between FY06-FY09 from Rs 26.6 crore to Rs 80 crore.

It’s OPM was under pressure largely due to increase in raw material, power and staff costs. The margin is expected to expand further in the medium term on account of various cost control measures initiated by the company. At the current market price, the stock is trading at a P/E of 8.3x FY07E earning and 6.8x FY08E earnings. The stock has corrected very sharply in the recent past and appears very attractive at EV/EBIDTA of 4.4x and PEG ratio of 0.8 on FY07E earnings (less than 1 PEG ratio indicates that the stock is trading at a discount) and has potential upside of around 20%.

NRB Bearings
Research: Buy
Ratings: ULJK Securities
CMP: Rs 493 (Face Value Rs 10)
12-Month Price Target: Rs 551

NRB Bearings with an 80% market share, growing at a CAGR of 18.15% in the last five years, is expected to grow further more on account of surging demand from OEMs and increase in exports. It is undertaking an expansion programme of Rs 100 crore, which is to be completed by end-‘07. It’s expanding its roller bearing segment from 2.045 crore to 2.615 crore, and needle roller from 272.9 crore to 350 crore.

NRB is also setting up a subsidiary company at Thailand for manufacturing activities, and to cater to the growing south-east Asian markets, which will all together help NRB to strenghthen its overseas presence. NRB also enjoys highest margins in the industry despite huge competition and price pressure, from peer companies and OEMs. The stock has a strong potential and to be an outperformer.

Asian Paints
Research: Edelweiss
Ratings: Buy
CMP: Rs 715 (Face Value Rs 10)
12-Month Price Target: NA

Asian Paints’ EBITDA margins to increase from 13.0% in FY06 to 14.7% in FY09 due to shift towards higher margin products, favourable raw material outlook, and operational leverage advantages. The recent decline in crude oil prices is likely to result in improved gross margins, as the impact of inflation has been already passed on through price hikes. The international operations, in which Asian Paints lacks pricing power, are expected to benefit more.

The product mix is expected to shift in favour of higher margin products such as emulsions and exterior paints, as they will grow at a higher rate. Operational leverage advantage from scaling up is expected to boost margins further. At the current market price, Asian Paints trades at 25.1 times FY07E earnings and 20.1 times FY08E earnings. EV/EBITDA for the stock is 14.8 and 11.9 times on FY07E and FY08E, respectively. An EPS growth of ~25% accompanied by ROE of ~30% makes it an attractive stock.

Techno - Triveni Engineering


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Techno - Polaris


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Ultra-low bids for ultra-mega power projects


The "ultra low" price bids of Lanco Infratech and Tata Power for the two ultra-mega power projects (UMPP) at Sasan (MP) and Mundra (Gujarat) have surprised, even shocked, many within and outside the industry. The sceptics, who always doubted the viability of the UMPP concept, are now saying the bids are unrealistic and are speculating on likely problems for the winners in achieving financial closure.

Yet, if anything, the two bids probably show what good project planning can do and how, historically, tariffs in the power sector have been artificially high due to various reasons, not the least of which is government policy. That the first competitively bid power projects of this scale and size should project such interesting and low tariffs is a statement in itself and proves that the existing system of "awarding" projects on a two-part tariff structure is inefficient.

What is different now for Lanco and Tata Power to be able to bid such low prices? Two factors can be identified straightaway. First, the size of the projects and, second, the captive coal-mine in the case of the Sasan project. This will be the first time that 800 mega-watt super-critical boilers will be employed in the country for power generation — 660 MW is the highest output till now. This enables better fuel combustion and higher energy efficiency in the power generation process.

Second, Sasan will be a pithead project with a captive coal-mine. There have been other pit-head projects in the country, most notably NTPC's 3,000 MW Talcher super-thermal power project, but this is the first time the power generator will own the coal mine. This will help the company lock in value across the chain, from mining to generation.

Efficient bidding

Indeed, the fuel cost will be cheaper as it will come without the margins of the mining company. Lanco has estimated a fuel cost of just 30 paise in its tariff of Rs 1.196 per unit quoted for the Sasan project, which clearly reveals the benefits of captive coal mining.

Of course, in Lanco's case, an added advantage is that it is experienced in the infrastructure business and has its own construction division, which can build the project. In other words, Lanco has control over the entire value chain, beginning with mining and construction and ending with power generation. This has, without doubt, defined the difference between it and the next lowest bidder, Reliance Energy (Rs 1.29 per unit).

On a broader level, the UMPP bids show how the competitive bidding process is more efficient and enables better tariff discovery compared to the current method of fixing tariffs in two parts — fixed and variable — plus an agreed return on capital. A prime reason for the high tariffs across the sector today is this two-part tariff structure, which does not offer much incentive to the generator to control costs.

Having said that, it should also be said that it is early days yet for the two UMPP projects. While the government should be pleased with the outcome of the bids, it will be a challenge for the winners from Day One.

The hurdles

Financial closure will be the first hurdle to cross, as bankers have to be convinced of the project economics. The UMPP model is one that lenders, used to fixed returns and secure power purchase agreements, are not accustomed to. Securing their confidence as well as the best rates possible is vital for the winners because more than three-fourths of the project cost will be funded by debt.

The second hurdle will be on equipment supply. BHEL may be prepared to produce and supply super-critical boilers and turbines but it is quite possible that imports would be more economical, especially if they are from China. Indeed, one other factor behind Lanco's low price bid could be that it plans to import its equipment from China. But the challenge here will be quality parameters and delivery schedules. On the latter, there may not be much worry because China is now reported to have huge idle capacity (as much as 75,000 MW, say some reports) with power equipment manufacturers. The former, however, is an unknown quantity because this is the first time Chinese equipment will be used for power generation on such a big scale.

Finally, the clearances — environmental and others — and the power evacuation system need to be addressed. While Power Finance Corporation, as the lead agency, is supposed to address the clearance issues, the latter will not be under the control of either Lanco or Tata Power and, given the scale of the project, will need to be implemented simultaneously.

The stock market, for its part, appears to have given the thumbs-up, if its reaction to the bids is any indication. The stocks of both Lanco Infratech and Tata Power surged 7 per cent and 6 per cent respectively the day the bids were announced. It is now up to the winners to justify the market's enthusiasm.

Why global cos are keen on Hutch Essar


No other acquisition in the Indian telecom space has managed to get so much interest as Hutchison Essar has. And one does not have to go too far to know the reason for at least three large telecom majors lining up to pick up Hutchison's Indian mobile operations.

As per the number available with the Cellular Operators Association of India (COAI), Hutchison Essar's ARPU (average revenue per user) is among the highest in the Indian industry at Rs 373, compared to Rs 348 for Bharti.

It also has the highest revenues per minute, beating rivals Bharti and Reliance Communications.

The minutes of usage per subscriber per month for Hutch are also higher compared to other operators.

No wonder that Vodafone, the world's second largest mobile company in terms of subscribers, is willing to bet nearly 10 per cent of its market capitalisation in acquiring Hutch Essar.

At $15 billion, which is what industry sources believe that Vodafone is willing to fork out to acquire 74 per cent stake in Hutch Essar, the British telecom company would pay about $682 for each of 22 million Hutch Essar subscribers.

In contrast, Cingular bought AT&T Wireless for $41 billion, acquiring 21.98 million subscribers at $1,891 a subscriber.

If Vodafone gets the deal, it will get a direct foothold into the largest growing market in the world at a lower price.

The company has had to face severe losses in the recent past and this may be its last chance to get into a rapidly growing market.

On the other hand, for Reliance Communications, acquiring Hutch Essar would fast-forward its plans to foray into the GSM cellular space.

The company is already the largest CDMA operator in the country with 25 million users and adding 20 million more subscribers would catapult it to the largest telecom operator in the country.

For Malaysia-based Maxis, Hutch Essar would give it a pan-Indian presence, which it has been looking to do ever since it acquired Chennai-based Aircel.

While Aircel has cellular services in the North-East and Tamil Nadu, Hutch Essar covers the other circles in the country.

Though Maxis has applied for fresh licences, it will have to wait for spectrum before it can roll out a network. Acquiring Hutch Essar would save the company a lot of time in investing in a new network.

Parekh Aluminex Ltd


Broking House - ABN Amro
Recommendation - Buy
Low Cost producer in India and an attractive valuation
In its Report Dated 18th December,2006 ABN Amro (ABN) has recommend a Buy on Parekh Aluminex Ltd with CMP Rs 110 and a Target price of Rs 161 .

ABN Amro (ABN) throws light that Parekh Aluminex Ltd (PAL) is the largest aluminum foil container manufacturer in India, with over 70% market share in the domestic market. Almost half of its revenues come from sales to Airlines, Railways and Flight Kitchens. PAL supplies 70-90% of the foil container requirement of Indian Railways, Indian Airlines, Air India and Jet Airways. PAL has also gained entry into international airlines like Emirates, Thai and Singapore Airlines through an acquisition. ABN Quotes that with the rapid pace of rising air travel expected to continue, demand outlook for PAL''s products remains strong. Emergence of modern retailing and growth of processed food sector would also drive demand for new varieties of foil packaging and containers.

ABN states that PAL has expanded capacity by 2.6x over the last two years. It has acquired new moulds and machinery that would enable it to produce 1250 million containers, 470 million lids and 15 million foil rolls pa. A large part of the expansion has come on-stream in H1 FY07 and the full impact of the expanded capacities will be witnessed in H2 FY07 and FY08 earnings. ABN expects PAL to record a 47% revenue CAGR and a 50% net profit CAGR during the next two years.

ABN mentions that PAL has traditionally commanded low valuations due to the perception of being a metal (aluminum) company. However, unlike commodity companies which face volatility in earnings in line with commodity fluctuations, PAL has demonstrated stability in margins. ABN highlights that PAL has consistently improved EBIDTA margins in the last three years, even though aluminum prices have risen sharply during the period. PAL''s policy of contracting raw material supplies as soon as contracts are finalized enables it to protect margins from raw material price fluctuations. Its rerating as a niche packaging player, rather than a commodity play, as the company gains size and scale, could provide further upside to the target, says ABN.

Finally, ABN Makes us aware that PAL trades at undemanding valuations of 6.3x FY07E and 4.1x FY08E. Given the strong earnings growth visibility, ABN value''s PAL at 6x FY08E earnings of Rs26.9, which gives ABN a target price of Rs161, a 52% upside from current levels.

Thanks HK

BHEL - UBS Warburg


Broking House - UBS Warburg
Recommendation - Buy
Chinese competition a hurdle but Orders to boost growth.

In its report dated 18th December 2006 UBS Investment Research (UBS) initiates a Buy coverage on Bharat Heavy Electrical Limited (BHEL) with CMP of Rs2496.25 and a target price of Rs 2,950.

UBS throws light that BHEL focuses on the Indian power equipment business, which accounted for 65% of revenue and 79% of PBIT for FY04. Its main customer is National Thermal Power Corporation (NTPC), accounting for over 50% of revenue. BHEL also services the power transmission, captive power plant, industrial equipment, and the transportation segments. Actual/deemed exports accounted for 24% of revenue in FY04, and the company has added several new markets to its portfolio. It is 68%-owned by the Government of India.

UBS mentions that Lanco Infratech won the Sasan ultra mega project (UMPP) by quoting a levelised tariff of Rs1.19/Kwh. NTPC''s bid was at Rs2.1/Kwh. Of Lanco''s bid, Rs0.9/Kwh are fixed (NTPC at Rs1.2 /Kwh) and Rs0.3/Kwh is fuel cost (Rs0.9/Kwh). UBS further points out that fixed cost is a total of E&C (coal and power), interest, returns, and depreciation. BHEL is NTPC''s equipment supplier and Dongfeng, for Lanco.

UBS mentions that Dongfeng''s equipment costs are Rs1.7-1.8cr/MW whereas for BHEL, costs are higher by 25-30% at Rs2.2-2.4cr/MW, which is expected given the issue of reliability of Chinese equipment raised by few customers. Although the event could call for lower prices, and lower BHEL''s long term (LT) margins, UBS thinks there is a case for higher prices by BHEL, if not by 25%.

UBS highlights that lowering LT margin by 200bps lowers fair value by 11%. Near term, UBS retains that FY06-09E EPS CAGR of 30% given visibility and since UBS does not have UMPP in our estimates. UBS also retains their view on BHEL given expected visibility on orders, and profits. UBS will take a more objective view after management meetings.

Finally, UBS makes us aware that BHEL is its top pick in the engineering space. The key assumptions of DCF according to UBS are WACC of 12.1%, revenue growth of 20% over FY09-14E, and terminal g of 5%.

Thanks HK