Power Grid IPO Analysis
Saturday, September 08, 2007
Here’s some good news for all those people who dream of buying their own house but have been deterred from doing so by soaring interest rates. Home loan rates are finally showing a downward trend after nearly three years, thanks to banks suddenly finding themselves flush with funds.
Three lenders have already kicked off rate cuts. HDFC Ltd had cut its floating rate by a quarter of a percentage point (0.25%) to 11% under its special monsoon offer, in addition to lowering the processing fee. Last week, Bank of Baroda pruned rates by 50 basis points to 11% for loans up to Rs 20 lakh and 11.25% on loans above Rs 20 lakh.
Allahabad Bank too joined the party, cutting its rate by 1 percentage point to 12% for 25-year loans. But there’s a catch: the offers have so far been confined to new borrowers. Existing home loan customers will have to wait for a while to enjoy a reduction.
Several other lenders, including the likes of SBI, are expected to follow in the coming weeks. Initially, it will be pitched as a festival bonanza, but bankers say the reduction will continue even later as they plan to pass on the decline in the cost of funds — with deposit rates having already been slashed — to borrowers.
Interestingly, several lenders have already cut rates without making any announcements . The reduction — for new borrowers — is in the form of a discount on the benchmark rate by 50 basis points.
The interest on floating rate is pegged to a benchmark reference rate, known as prime lending rate or floating reference rate. None of the banks have decreased their benchmark reference rate. But many have increased the discount they offer on the reference rate, effectively lowering the home loan rate for fresh borrowers.
Existing borrowers will only benefit once the reference rate is lowered. But bankers suggest that people who have already borrowed should not lose hope as continued high liquidity in the system will lead to lowering of benchmark rates over the next couple of months.
Bankers said there was abundant liquidity , forcing them to scout for good customers . With bad loans accounting for less than 1% of the home loan portfolio, the segment is once again emerging as a lucrative option for bankers and prompting them to offer lower rates.
The current round of rate reduction will be the first since November 2004. Between then and March 2007, home loan rates were revised eight times, with interest rates rising from 7% to 12% during the period. As a result, EMIs have increased nearly 40% since 2004-end.
Power Grid Corporation 44 to 52 13 to 14
Allied Computer 12 2 to 3
Kaveri Seeds 150 to 170 34 to 36
Motilal Oswal 825 130 135 (Premium has increased again)
Dhanus Tech. 280 to 295 125 to 130
Indowind Energy 55 to 65 Discount (Issue might be withdrawn)
Magnum Venture 27 to 30 2 to 3
Koutons Retail 370 to 415 NA
Consolidated Construction 460 to 510 NA
This was a positive week for the market. No political issues and markets ignored global cues from the US mid week indicating that we were set to decouple Sensex almost challenged to make new highs. Reliance and SBI stood as the pillars holding out. Mid cap and small caps were the stars for the week and quite a few them are covered by us in our research. Bush came in support US market saying that he would stand by the consumer. Markets cheered that but this we believe would only delaying the pain. Indian Markets had a smart run with 8 consecutive sessions of gains with dark clouds of the internal political crises delayed by about a month. However given the silence, the markets seem to be assuming that the worst is over. We believe that this may be the Lull before the storm.
There are many who believe that a recession may be on cards in the US. In fact, by the time we write this the US unemployment data seems to be pointing to a worsening situation. There was an interesting article from Gavekal which gives reasons to the otherwise mentioned in our note "Economy : Taking stock today." The argument is that the US consumer is extremely dependable and companies have lot of cash and also making profits. The firing of people seems less likely and hence lesser chance of a recession.
Market performance this week was positive: Sensex closed up 1.7% up; Nifty 1% up; Mid caps 2.5% up; Small caps 4.5% up; FMCG & Health care 3.8% up.
Auto sector is heavily banking on festive season. But this is what TVS CEO Mr Srinivasan had to say "We have been reducing our stocks in the market place specifically on Star because of the new launch planned in September. To that extent we have been reducing the stock in the market place that was rolled out on 30th of August. This quarter would be again flat but we expect the market to pick up from the festive season once the credit availability is also there in the market place. We expect that from October onwards sales will start picking up and have 7-8% growth in the next half." Interestingly Honda Motors will increase capacity to 12 lac 2 wheelers and also intends to launch 3-4 models including a 100 cc bike. Bajaj is in the news the Maharashtra Government is worried about its plant closure in Akurdi. Bajaj will be paying the 2700 odd workers in any case. Another statement by Mr Ravi Kant, CEO of Tata Motors says that they do not expect a pick up in demand this season because of higher interest rates. Maruti has extended its price discounts to ensure higher off take. Really, all in all, the news are not encouraging. Lower interest rates are what could be the catalyst. With inflation lower, may be we could hope for that.
This week Eveready reported that it would issue 45 lac warrants for Rs 58. Interesting to note that in Nov 2005 the company had issued 67 lac warrants to the Promoters with an execution price of Rs 95. The Management had paid up 10% of that amount upfront. Also interesting to note that around 9 lac warrants were converted at Rs 95. With the Zinc rallying, profitability was hit and the stock crashed to 45 levels leaving losses on the table for the Promoters and useless warrants in hand. This set of warrants will lower the price of the acquisition and makes more sense. The other set of warrants will not be exercised till the stock hits 85.50 (9.5 is already paid up). We need to know With Zinc at $2850 per tonne, certainly near term would be a buoyant. The warrants at 58 indicate the management?s bullishness. So probably the worst is behind us. The average six month price is Rs 55 so that?'s the reason for the pricing at Rs 58. They would have to pay 10% of this upfront to get the warrants. We are positive about the
In our discussion with Navneet we learnt more about its E-learning initiative. There are some exciting changes happening in the company. The product has been launched in Gujarat already with some initial successes. The Management is certainly more aggressive than it used to be. That's a big change. We like this one. However some negative for Educomp is that there are other players making an entry as well. Edurite (edurite.com) is a company which provides the educational content and that really would be creating some competition for Educomp. Valuations of Educomp seem to have gone through the roof and here are some reason for it to cool off and may be rub off at bit on Navneet. Await a research note on this.
Conflicting articles continue in papers about the subsidy for the shipbuilders. This issue is in debate between the Finance Ministry and the Shipping Ministry. There possibility that the subsidy may not be extended is less but there is a good chance that the subsidy limit may be reduced. Ships Manufactured in India carry a 30% government subsidy. The Industry has been pleading for the subsidy to be extended. In our discussion with the Management of ABG Shipyard, we are informed that all orders signed till August 14th is eligible for the subsidy. However this topic will take at least a couple of months to be cleared. The Parliament has to pass this. We think this will take its time unless the industry is able to lobby hard to get this off the ground quickly. An ordinance could bring in some positives. But the stocks are seeing strength as if extension is a foregone conclusion. This makes us less comfortable.
Technically Speaking: Sensex closed just above the key weekly support of 15560 levels. The uptrend seems to be buoyant and there is a good chance that we may challenge new highs as long as 15270 as a level is not breached. Volumes traded were good at over Rs 4864 cr for the day.
About a decade back, I left a leading finance company to join a large manufacturing corporate that had just bankrupted itself trying to digest what was then India's largest acquisition ever. The company was already defaulting on loans, even though its business was then generating decent ROCE. Manmohan Singh's “liquidity crunch” (of 1996) had left a huge hole in the company's means of finance, which had to be covered by asset sales and inter-corporate deposits (ICDs).
In one of my first discussions with the CEO, I was struck by how the company refused to see where it stood, and retained a false optimism that “something would change”. With operating margins at a comfortable 22 per cent on sales, the company was still defaulting on loans because at the margin, it was paying up to 27-32 per cent on its ICD portfolio. Yet, top management believed they would pull through.
I once said rhetorically, that if this company was a mutual fund, the top management would be sacked. A mutual fund manager cannot argue when stock prices fall, that the fund will pull through. He is not allowed to carry losses on his portfolio, arguing that they are long term investments and hence these losses are temporary in nature. When he takes a decision to invest, he has to 'mark-to-market' his portfolio and value his portfolio net of his losses.
Why are we so forgiving of corporate India? Is it simply because the CA institute does not want to (or have the intellectual wherewithal to) revalue corporate balance sheets, that CEOs are able to ignore the markets, pretend that they have made long term investments and get away with bad asset investments, a luxury denied to our mutual fund managers.
But finally all this money ends up in the hands of corporate India. Shouldn't good companies at least voluntarily disclose their estimate of net asset value based on estimated cash flows discounted at the cost of capital? Put it on your website even if you can't carry it in your annual report. It will sensitise CEOs to a whole range of issues that they tend to ignore. I will mention just a few.
When interest rates go up, the value of any cash flow will fall, so as we all know, bond prices fall. All that has changed is the 'discount factor'. I hope everyone understands why, otherwise don't bother with the rest of my article. When short-term interest rates are higher than long-term rates (as happened recently with call rates at 20 per cent and bank lending rates at 9.5 per cent), it is a signal that long rates too will harden. This process is triggered by central banks (like our RBI) to signal tighter money, so please slow down capex, especially long-term capex.
The knee-jerk corporate reaction is to rush further money into long-term assets. They divert working capital into long-term assets, further squeezing themselves dry. Then they go around desperately looking for short-term money, any money, paying through their nose to tide over a self-made liquidity crisis.
If only CEOs were a little more market-sensitive…what is the market trying to tell you under such situations? If short-term rates are high, then the cost of working capital will rise above the cost of long-term debt. At such times, the company should be liquidating long-term assets to stay liquid. Just now, which company do you see around you, that is doing anything remotely resembling this?
We are at the peak of the capex cycle. One by one, corporate India tries to wriggle out to find some arbitrage, like ECBs. And a good regulator like the RBI will follow through and plug each of these loopholes as they find them. Why won't CEOs listen?
Moreover, working capital financing gets renegotiated with every rollover. All the more reason to reduce your requirements but the majority of companies are doing the exact opposite. The typical argument given is the old one: growth is more important than cost.
My counter-question is: In a mad rush (also called bull market, a.k.a. boom cycle) the survivors are going to be those who know when (and how) to hold back. Retail investors know this feeling fully well…in a bull market, the surviving bulls are those who know when not to buy. At one point in a general bull market, the bull who says "growth at any cost" is the person who will be dead.
Across corporate India, you now have companies faced with the same predicament as retail investors. During the boom cycle, they have gone and committed capex. Now the debt market (and in some cases, commodity prices) is telling them that they cannot invest. The companies that don't listen are the ones who will be dead. If you aren't watching, you (as an investor in those companies) will be dead yourself.
I have often berated the media for triggering market volatility for the wrong reasons. The answer I get from editors is that the media is as much a part of society as investors or any other community, and hence prone to the same irrationalities. But this time, I was surprised to see wide publicity given to the ECB capping by the RBI, yet not a whisper on the markets. I cannot think of a more direct cause of general market bearishness than this announcement, yet nobody seemed to get it.
We seem to understand housing collapses, dollar movements, carry trades and whatnot, but nobody went through the list of pending ECBs and the pipeline to bring out a list of short-sells. Sectorally speaking, you would have found the entire list being made up of long-cycle sectors, which includes the current investor favourite, infrastructure.
Isn't it common-sensical to invest where the return (or opportunity cost) is higher? Then why do corporates invest in long-term assets when short-term rates are higher than long-term rates?
Ah, this very rational question above made you stop, didn't it? Let me explain why…..the word you are looking for is momentum. Humans will keep doing what got them success in the past, long after it stops getting them any further success any more. Like that coyote in the comics, who keeps running long after the ground has disappeared from under him, corporate India will suddenly look down from where they are and find that they are running on air, i.e., without working capital. Then the slide will start…! CEOs will go into denial and CFOs will go around whispering "but I told you so…". The ones who raise their voices will of course, no longer be CFO. CEOs will go into denial looking for hope (and their next CFO). They will look for ways to "pull through". Choose your sector/ companies and look for these clear behavioural cues to pick out the 10- baggers of the next boom cycle.
In fact, if you are intelligent and know any sector well, pick out 3-5 companies of any sector and ask the questions above. Put down your answers at both stages: the first stage is the start of the down cycle, which is just now, I think. At the bottom, look for the companies that are doing nothing, versus those that are in action mode, investing their limited cash at a time when the crowd has gone home.
For the last year and a half, I have been sitting with a quarter of my net worth in the bank. Yes, I have chosen to feel foolish, not buying real estate while it was trebling, or (not) buying DLF/ Omaxe while it was fashionable to do so.
For the last laugh, watch this space……!!!
CMP: Rs 101.05
Target Price: Rs 120
Merrill Lynch has initiated coverage on Motherson Sumi Systems with a buy rating and price target of Rs 120 citing sustainable strength in earnings growth and new business ventures as among the key reasons. “We expect a 23%+ CAGR (compounded annual growth rate) in EPS (earnings per share) during FY07-FY10E (estimated) driven by 25% CAGR in revenue,” the investment bank said in a note to clients.
“Expansion of rubber component business with the recent acquisition of Empire Rubber in Australia and beginning of commercial production of mobile phone plastics parts business in H2FY08 are the key growth drivers apart from the 22% CAGR in wiring harness revenue, in our view,” the note said.
CMP: Rs 115.25
Target Price: Rs 140
SSKI Securities has initiated coverage on Transport Corporation of India (TCI) with a buy rating and price target of Rs 140. “TCI is currently trading at 12.8 times FY09 earnings and 7.4 times FY09 EV/EBITDA (enterprise value/earnings before interest, taxation, depreciation and amortisation), which we believe is attractive, considering the sharp earnings growth trajectory and steep discount to peers,” the institutional brokerage said. “Further, to emerge as one of the largest SCS (supply chain solutions) providers, TCI is also investing heavily into warehouses and trucks, which will enable TCI’s SCS revenues to grow at 55% CAGR over FY07-09E,” it said.
CMP: Rs 919
Target Price: Rs 1,050
While maintaining its buy rating on ICICI Bank, with a price target of Rs 1,050, CLSA said concerns about the private bank’s asset-quality were exaggerated. “Concerns about the bank’s rising gross non-performing loans (NPLs) are exaggerated given that most of the increase is due to the bank’s higher proportion of unsecured loans, which are priced for higher defaults and have ROE (adjusted for the high risk) of about 25%,” the French investment bank said. After factoring in the rise in provisions for NPLs, CLSA expects ICICI Bank’s net profit to grow 30% on an annual compounded basis till 2010.
CMP: Rs 44.75
Target Price: Rs 42
ICICI Direct has initiated coverage on Hotel Leela with a hold rating and expects the stock to underperform its peers in the sector due to expensive valuation. “Given the delayed expansion plans and absence in major markets till 2010, we feel Leela’s current valuations have factored in the business growth till FY09,” the retail brokering house said.
“Although Hotel Leela has undertaken expansion plans to New Delhi, Pune, Chennai and Hyderabad, the company is not expecting any of the fresh capacities to be operational before FY11. By 2010, the hotel sector should witness huge supplies coming in at major cities resulting in rationalisation of average room rates (ARRs) and cooling down of the occupancies,” it said.
CMP: Rs 168.75
Target Price: Rs 213
Angel Broking has initiated coverage on Phillips Carbon Black with a buy recommendation and 12-month price target of Rs 213. “We expect PCBL to grow at a CAGR of 9.8% in topline (net sales) and 78.8% in bottomline (net profit) over FY2007-09E. Growth in bottomline will primarily be aided by contribution from the power division as it will reduce costs as
well as provide additional source of revenue with 85-90% EBITDA margin (operating margins),” the broking house said in a note to clients. Angel estimates Phillips’ EPS in 2007-08 at Rs 21.7, as against Rs 9.4 in 2006-07. In 2008-09, the company’s EPS is expected to be Rs 26.6.
Though the market has recouped much of the losses suffered in the wake of the turbulence in global markets last month, there are a handful sectors which have lagged the recovery process.
Investors in high-retail exposure sectors like IT, construction, automobiles and banks will have to stay invested long-term, if they want to exit without logging losses.
ET conducted a sample study on various sectors over the past three months to analyse the impact of subprime crisis on Indian stock markets. As predicted by market mandarins, the crisis has not impacted the market in toto; only stocks in sectors that previously attracted huge foreign institutional investors (FII) interest have been hit , owing to pull-outs and redemption by foreign investors.
“Subprime fears have been factored in by Indian investors. There is nothing that can link India to the US subprime zone. The market witnessed some downtrend during the subprime days; but that was just because of prevailing negative sentiments in global markets. Now is the time to buy good stocks. They should, however, be cautious in their approach,” Indiabulls Securities CEO Divyesh Shah said.
According to market watchers, sugar is one sector that has not been hit by the subprime at all. As a matter of fact, the sector has not been doing well over the past six months. Sugar stocks are taking a beating on fears that the sugar market is in for a surplus for next two seasons.
Secondly, sugar being a commodity is expected to have peaked in its upward trajectory in 2007. Locked-up investors should exit sugar stocks on the upside. If they are entering sugar stocks now, they should be ready to hold them for at least 3-4 years.
The only positive trigger that can propel the sector is a surge in crude prices to around $85 per barrel. This will ease global sugar prices and increase demand as most big producers would then get back to ethanol production, sugar analysts said.
Construction & realty sector has fallen nearly 7% over the past 33 trading sessions. Construction, analysts said, was one sector that was badly pounded as a result of the subprime worries.
Though indirect ripples could not be ruled out, subprime should not affect Indian real estate sector as much as it impacts European countries and the US. There may be some blips or dips in real estate sector as it is closely related to mortgage loans; infrastructure sector looks perfectly fine.
As far as India is concerned, the construction sector would continue to do well in the long term. The sector should do well once inflows start strengthening, experts said. “To be on the safer side, investors can overlook real estate stocks for some time; infrastructure companies look good even in these market conditions,” said a fund manager of a domestic mutual fund house.
IT shares are still not very encouraging as the sector continues to be linked to the irregular currency movements. Though, most analysts believe, IT companies would come out with decent earnings figures in the third quarter, there is still an air of apprehension among investors.
Broking houses are advising investors to value-buy frontline IT stocks. Sectors like hospitality, logistics, banks and automobile, too have not really managed to participate in the post-sub prime rally. All these sectors are down in the range of 3% to 6% since July 24.
Indian information technology (IT) firms have started asking employees who are being chosen for onsite work (at the client’s location abroad) to sign bonds ranging from six months to a year to ensure that they do not immediately quit the company when they return to India.
Techies consider onsite posting rewarding because the difference between offshore and onsite packages is more than three times. Besides, onsite employees are given special allowances for working late hours, transport, medical costs and insurance.
However, “many are not showing much interest in it due to the recent guidance (bond),” said a Wipro employee on condition of anonymity.
Wipro Technologies, for instance, asks its employees going on onsite assignments to execute an agreement on stamp paper, committing to stay with the company for a minimum period of one year following his/her return.
The bond will be applicable for employees being sent on onsite assignments after August 1, 2007. The company in a circular issued to its employees internally has defined the long-term assignment as anything that is more than three months (90 days).
Wipro Executive Vice-President Pratik Kumar told Business Standard that the policy was not new. He, however, added that the minimum period of stay was much less than one year.
However, sources in the company said the circular said an employee quitting the organisation before completing a year after his return from an onsite assignment would have to pay a penalty on a pro rata basis, subject to a maximum of Rs 4.2 lakh for a full year.
Tata Consultancy Services (TCS) and iGATE Global Solutions have similar policies that ask employees to sign a bond committing to stay with the company for a minimum of six months on their return.
“This is done to protect the interests of our customers since most projects at TCS work on an onsite and offshore model,” said a TCS spokesperson.
Pavan Duggal, advocate, Supreme Court, says short-term bonds hold good in law. “Bonds were earlier considered to be a violation of fundamental rights. However, with regard to knowledge industries like IT, the courts have started accepting short-term bonds as ‘reasonable restrictions’ since the sectors deal with confidential data of clients,” he said.
Analysts opine that most of the new clauses in the HR policies of domestic IT firms are an offshoot of the increasing price pressure and competitive environment that require them to deliver projects on time.
So it is critical to retain the employees who have honed the right technical expertise and exposure by working at clients’ locations across the globe.
Said Nikhil Rajpal, vice president, Global Sourcing Practice, Everest Research Institute, “It’s all about attrition. IT companies spend a lot of money and energy on training their employees. When they quit, sometimes it becomes a difficult to get a replacement and train them so as to join the project immediately. This hampers the clients’ works. I know many European companies who have similar policies.”
# Short-term bonds hold good in law
# They ensure smooth transition of work if the employee quits
# They help retain employees who have honed their skills on onsite projects
# Employees do not like onsite bonds, saying it makes the proposition less attractive since they have to pay penalties if they break the bonds
Via Business Standard
Dharavi, Asia’s largest slum spread across 535 acres in the heart of Mumbai, is more than just an urban shanty town that is home to around 500,000 people in India’s commercial capital. People in the area say that Dharavi, with its thriving leather, jewellery and pottery industries, is an industrial centre that generates business worth $1 billion a year.
That business is now under threat, as reported in a two-part series which appeared earlier this week in Mint. The Maharashtra government has embarked on a Rs9,260 crore plan to redevelop the slum. The 57,000 families living in the area are to be relocated to multi-storey buildings, where each will get 225sq. ft of space. The developers will provide 30 million sq. ft of space, including housing, schools, parks and roads for these families.
In return, they will get to build 40 million sq. ft of homes and offices for sale. The redevelopment project has attracted the interest of local and foreign companies, including Reliance Industries Ltd, Dubai’s Emaar Properties PJSC, DLF Ltd, Mahindra Gesco Developers and K Raheja Corp.
Residents are up in arms against what they see as a project on which they have
not been consulted. The state government has promised the residents that it will conduct a socio-economic survey of the area before embarking on the development.
Residents are up in arms against what they see as a project on which they have
not been consulted. The state government has promised the residents that it will conduct a socio-economic survey of the area before embarking on the development.
Most residents are opposed to the redevelopment because it does not appear to account for their businesses. And there is no clarity on whether they can continue to run their businesses in the new space that will be allocated to them.“What happens to my factory under the Dharavi redevelopment plan? Will I get the same area my unit occupies?” asked Sanjay Khandare, a 30-year-old leather goods entrepreneur