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Sunday, December 09, 2007

Indus Towers - JV of Bharti Airtel, Vodafone and Idea

The Bharti Group, Vodafone Essar and Idea Cellular on Saturday agreed to form Indus Towers Ltd to provide passive infrastructure to other mobile operators.

The new company will go for an initial public offering later. The independent company, which starts off with about 70,000 towers, is expected to roll out another 50,000 towers over two to three years.

Speaking to Business Line, Mr Akhil Gupta, Joint Managing Director, Bharti Group, said: “Our aim is to get the new company listed over a period of time. We want it to be a totally independent venture with its own management and that is the reason why none of the partners has been given a majority stake.”

While Bharti and Vodafone Essar will each own 42 per cent stake in the tower company, Idea Cellular will hold the balance.

Indus Towers will be operational across 16 circles including Andhra Pradesh, Delhi, Gujarat, Haryana, Karnataka, Kerala, Maharashtra, Mumbai, Punjab, Rajasthan and Tamil Nadu.

Apart from leveraging on operational efficiency, the merger is aimed at getting a bigger valuation for their countrywide mobile infrastructure.

“Merging their tower business would naturally push up the valuation. It will also bring down the cost of operation drastically for the operators, as they will be able to ride on each other’s network,” said a market analyst.

It will also result in additional revenues for the three companies as the infrastructure can also be offered to other mobile operators.

Outside the 16 circles, Bharti will continue to have its own independent tower company— Bharti Infratel.

The mobile subscriber base is expected to touch 500 million by 2010 for which at least 3 lakh more towers are required.

Other pan-Indian telecom players such as Reliance Communication have already hived off their infrastructure into separate tower business.

Exclusive mobile infrastructure companies such as American Tower Corporation and GTL have also jumped into the fray.

Aban Offshore, Sun Pharma

Aban Offshore, Sun Pharma

Futures and Options Outlook

The transactions in the derivatives market will be much cheaper in the new year as the National Stock Exchange (NSE) has proposed to revise the contract sizes of 105 futures from December 28. The NSE will reduce the contract sizes of 15 futures to one fourth, 74 futures to half and double the contract sizes for 14 futures.

The revised lot sizes would be applicable for all contracts initiated after December 28. The existing contracts with maturities of January 2008 and February 2008 would continue to have the same lot sizes. However, the new contract sizes for 23 futures will be revised only from the far month contract, i.e. March 2008, as there are issues that need to be sorted out.

The reduction in contract sizes will enable the small investors to buy blue chip futures with a three months horizon, by paying 25 per cent margins (and mark-to-market in case of a price reduction), rather than taking delivery and paying the entire amount.

The derivatives players could thus calls on scrips such as Larsen & Toubro, Aban Lloyd, BHEL, Educomp, Reliance Industries and even Bank Nifty by paying margins of around Rs 50,000. The contract value of these blue chips, which is over Rs 5 lakh currently, will come down to around Rs 2 lakh from December 28.

The NSE has reduced the contract sizes as most of these futures have exceeded the stipulated contracts value of Rs 2 lakh each. After the reduction, the contracts value will come down from Rs 609 crore to Rs 297 crore.

The total margin money will thus come down from Rs 152.2 crore to Rs 74.3 crore, assuming that upfront margins of 25 per cent will be applicable to all contracts.

Outlook 2008

Outlook 2008

Home loan strategy

Buying a house, by itself, is a big decision. And after that deciding on the bank, whether to take a fixed or floating rate and all the documentation is definitely going to exhaust you completely. But this is just the beginning.

Now comes the painful part of constantly monitoring the rates, whether they are rising or falling. This is because there could be opportunities where the rate of interest that you are paying to the bank could be higher than the rate that is being offered to the new borrowers.

A typical case of wives versus girlfriends where a girlfriend (read a new borrower) is treated with extra caution and wife (read an old borrower) is taken for granted. So, when the rates go up, a new borrower is subsidised by hiking the spread for the old borrower. And when they go down, banks are often reluctant to cut it for the existing customers. The advantage always goes to the new ones.

Confused? Here is how it works. Most banks have a mortgage specific rate. Popularly known as the rack rate, banks use this as the benchmark, based on which, your home loan rate is calculated. They charge you something known as a "spread" which is 3 per cent to 4 per cent below the rack rate.

While for the new customer, this "spread" is 4 per cent, the old customers have to pay a lower spread, say 3 per cent. But a lower spread means a higher rate of interest. How this works is as follows. If the rack rate is 15 per cent, new loan seekers pay an interest of say, 11 per cent (4 per cent below the rack rate) and old customers continue to pay at 12 per cent (3 per cent below the rack rate).

Obviously, this can put the existing customer at a disadvantage because his interest payout is higher. And despite being a customer on floating rate, you do not get the benefit of lower rates.

However, the existing customer has an option. He can always ask for adjustment of his rate to a new level if the interest rates have come down. This is called re-adjustment of rate or spread that he is currently paying. For example, you were offered a spread of 3 per cent when you took the loan, and later, the rate falls, you can go ahead and negotiate a better spread of 3.5 per cent or 4 per cent depending on the market reality at that time.

For example, if you have taken a home loan of Rs 50 lakh for 20 years at 12 per cent interest rate, the numbers work out something like this. If in the first year, the rate gets reduced for the new customer at 11 per cent, then it makes sense to align it. And you get a benefit of Rs 2,81,270 (See Benefits of realignment). The same goes for changing it after five years as well.

However, if the rate difference is below 1 per cent in any case, it does not make sense to align. The table shows that aligning it after five years to 11.75 per cent that is, a 25 basis point fall makes you lose money because of the 2 per cent charge. Similar exercises for changing after five years when there is a 50 basis point drop gives you a small benefit of Rs 9,067. In other words, realignment is important but is not always beneficial.

Financial experts are of the view that the rate difference should be at least 1 to 2 per cent for you to get some advantage of readjustment. Says Harsh Roongta, CEO,, “It is important to review the rates every six months.”

Accordingly, one can take a call whether to adjust the rates or not. However, it is important that in the initial years, you keep a careful watch on the rates. This is because a rate differential of one per cent does make a big difference in your interest pay out. Of course, it is also dependent on the fee that the bank is charging to shift your existing rate. A lower fee would encourage home loan seekers to adjust it more often.

It is important to remember that buying a home is one of the largest expenses that you will ever make. And, to reduce the interest payout, it is important to constantly monitor where the rates are heading.

Via Business Standard

Unusual number of bulk deals on Friday by FIIs

07-DEC-2007,GANESHHOUC,Ganesh Housing Corp Ltd,ABN CLASS B,BUY,200000,615.00,-
07-DEC-2007,MCDHOLDING,McDowell Holdings Limited,RUANNE CUNNIFF A/C ACACIA PARTNERS LT,BUY,335000,288.87,-
07-DEC-2007,KEI,KEI Industries Limited,MACQUARIE BANK LIMITED,SELL,468000,101.40,-
07-DEC-2007,MCDHOLDING,McDowell Holdings Limited,PLATINUM ASIA FUND,SELL,337727,289.28,-

Weekly Technicals - Dec 10 2007

Weekly Technicals - Dec 10 2007

25000 in 2 years - very bearish isn't it ?

The Bombay Stock Exchange's (BSE) benchmark index Sensex, which attained new milestones this year, is expected to cross the landmark 25,000-level in the next two years, industry body FICCI has said.

According to a majority of respondents in a survey conducted by FICCI, the BSE barometer's new achievement is likely despite the overall business confidence dipping to a five-year low and GDP growth slowing down to 8.9 per cent in the second quarter of this fiscal from 10.2 per cent in same period last year.

The Sensex has been fluctuating, of late, on account of various reasons such as rupee appreciation, turmoil over Participatory Notes, US Federal Reserve rate cuts, increasing crude oil prices and sub-prime crisis. But the market sentiments have not been dampened by these factors, the survey 'Indian Capital Markets Ahead of Curve' said.

The mood of the market players is overtly optimistic, with 58 per cent respondents believing that the market in one year would achieve 20,000-23,000 levels and another 23 per cent feel that it would move beyond 23,000.

While, 55 per cent of the respondents predict the market level to reach 25,000 and above at the end of two years, about 26 per cent feel that Sensex would remain between 23,000-25,000.

A majority of respondents has identified banking and engineering as well-performing sectors, while IT, pharma and auto are the few sectors that are likely to under-perform, FICCI said.

With bank credit becoming more expensive and external commercial borrowings (ECBs) tighter, the capital market is the only other option for raising funds, the report said.

Fed meet to determine market direction

The Sensex has been moving in the range of 18,300-19,900 since the third week of October and is now trading at the higher end of the range. Both the Sensex and the Nifty have failed to close above their psychological levels of 20,000 and 6,000 ,respectively.

The benchmark indices are likely to see new highs, after a period of consolidation, if the large caps perform better. But a Fed rate cut and industrial growth figures, which are to be announced on December 11, will have an important bearing on the market sentiment.

An opinion is gaining ground that the nervous ninety syndrome has lasted too long, with the markets being in a consolidation mode since the last two months. The Sensex has been encountering a strong resistance at 19,900 and Nifty has been finding it tough to cross 5,900. The selling by FIIs, despite the buying by domestic funds, has acted as a dampener.

The FIIs have, however, turned net buyers this month, as the Fed is expected to reduce the interest rates at its meeting scheduled next week. A rate cut in US will make arbitrage attractive for the FIIs as interest rates in India are expected to remain stable. The FIIs are big arbitragers on the NSE derivative segment.

The employment data released by the US on Friday has shown a bias towards growth. This will translate into lesser pressure on the US Fed to cut the rates. The interest rates are being reduced in the US to prevent a recession. Higher employment would mean less chances of a recession.

The industrial production data for the month of October would be closely watched. The September IIP figures were a mere 6.4 per cent. It will be bad news if the slowdown continues in October.

Recent employment data suggests that the fear of recession is not rampant. “Most problems are in housing sectors. The remaining sectors are not doing that bad,” said Subir Gokarn, Chief Economist, Standard & Poor’s Asia-Pacific. “Countries such as India need not worry much.”

Moreover, the fact remains that India is growing on the strength of domestic demand.” he emphasized. S&P is neutral on the Indian equity markets in 2008.

The small and mid caps performed better than the Sensex last week, as has been the case over the last month.

The Sensex provided weekly returns of 3.11 per cent and monthly gains of 4.76 per cent. The BSE small cap index rose by 7.75 per cent on a weekly basis and 18.01 per cent over the month. The mid cap index gave returns of 5.48 per cent for the week and 13.54 per cent through the month.

India Strategy - Dec 7 2007

India Strategy - Dec 7 2007

CRISIL IPO grade 4/5 for OnMobile Global

Proposed public issue of 10,900,545 equity shares of face value Rs 10 targeted at an issue size in the range of Rs 3,500-4,500 million

CRISIL has assigned a CRISIL IPO Grade "4/5" (pronounced "four on five") to the proposed initial public offer of OnMobile Global Ltd. (OGL). This grade indicates that the fundamentals of the issue are above average relative to other listed equity securities in India.

The grading reflects OGL's position as the largest player in the mobile value-added services (VAS) market in India, and its strong presence in the voice portal and ring back tone (RBT) segments of the VAS market. The grading also reflects OGL's ability to leverage on the unique voice recognition capability of its platform as telecom operators in India expand coverage into rural areas, and its ability to offer customer contact products to goods and services companies by virtue of having a voice channel relationship with almost all telecom operators. The grading also factors the management's strong understanding of market dynamics, as reflected in OGL's consistent track record in product innovation, and pro-activeness in setting up a corporate governance system in the company, as indicated by the appointment of independent directors over a year ago. The grading is tempered by the fact that OGL has low bargaining power with its customers i.e. telecom operators, as it does not brand its products and depends on the operators to take its products to the market. The grading also reflects the anticipated change in OGL's revenue profile, as it opens up its proprietary platform to third parties for applications development. This will cause the business mix to move from the current content cum platform mix to more of the latter.

About the company
OGL is the largest mobile VAS provider in the Indian market. The company was promoted by two first generation entrepreneurs - Mr Arvind Rao, and Mr Chandramouli Janakiraman. The company was originally incorporated as Onscan Technologies India Pvt Ltd in September 2000 by its promoter OnMobile Systems Inc (OMSI). OMSI itself was an incubated start-up of Infosys Technologies Ltd, incorporated under the Delaware General Corporation Law in December 1999.

At the core of OGL's offering to telecom operators is a platform named MMP 2500 - a combination of standard hardware and OGL software - which is technology and handset neutral. Leveraging on this platform, OGL provides a range of services such as ringtones, information, RBT, and m-commerce to telecom subscribers. Currently, the only way to develop applications on the MMP 2500 platform is proprietary with OGL. The company, over the next few months, proposes to throw open the platform to third parties for putting their own applications.

CRISIL IPO grade 4/5 for Persistent Systems Ltd

Proposed public issue of 4,974,836 equity shares of face value Rs 10 at a targeted price of Rs 375 per share

CRISIL has assigned a CRISIL IPO Grade '4/5' (pronounced 'four on five') to the proposed public offer of Persistent Systems Ltd (PSL). This grade indicates that the fundamentals of the issue are above average, in relation to other listed equity securities in India.

The grading reflects the company's strong position in the outsourced product development (OPD) space by virtue of its ability to provide large scale services in specific parts of the software product development life cycle, such as software development, testing and support, and provide end-to-end product development services on a relatively smaller scale. The former is used by global software companies like Microsoft, Agilent, Covad, etc, while the latter is used by small and medium-sized software product companies who do not have the scale to set up captive operations in India. This has given the company a diverse customer base. The grading also reflects the strong corporate governance architecture in the company, in part due to the presence of eminent independent directors on the company's board for the past six years. The grading is tempered by the fact that the margin compression that the company has seen over the last three years is likely to continue in view of currency movements and wage inflation, as well as increased competition from IT Services companies such as Wipro and TCS, as a consequence of a likely slowdown in their traditional revenue streams. The possible withdrawal of tax concessions would also adversely impact the company's return on equity after 2008-09.

About the company
PSL, promoted by first generation entrepreneurs - Dr. Anand Deshpande and his father Mr. S. P. Deshpande, was incorporated in 1990. The company provides offshore software product development services to its customers, majority of whom are independent software vendors (ISVs). It provides services at all stages of the product development life cycle - product conceptualisation, design, development, testing and support. The company has around 190 customers, of which the top 10 customers account for around 47 per cent of its revenues. As of October 5, 2007, PSL employed around 3,700 people.

PSL focuses exclusively on the OPD market. By providing services to mid-sized and small ISVs, the company has been able to get access to the venture capital community. The company continues to use the venture capital community to garner business within the small ISVs space.

The company's offshore development centres are located in Pune, Nagpur, Bangalore, Goa and Hyderabad. The company owns most of its development centres. It currently owns over 5 lakh square feet of office space with a capacity to seat approximately 3,800 people. PSL plans to use its IPO proceeds to construct two new development centres - one in Pune and the other in Nagpur, with a capacity to seat 3,000 and 1,200 employees, respectively at an estimated cost of Rs 1,516 million.

CRISIL IPO grade 3/5 for KNR Constructions

Public issue of 7,874,570 equity shares of face value Rs 10 targeting an issue size in the range of Rs 1,500-Rs 1,750 million.

CRISIL has assigned a CRISIL IPO Grade '3/5' (pronounced 'three on five') to the proposed initial public offer of KNR Constructions Ltd (KNRCL). This grade indicates that the fundamentals of the issue are average, in relation to other listed equity securities in India.

The grading reflects KNRCL's strong track record of project execution in both roads construction and operations and maintenance (O&M). The company has executed many projects as part of the NHAI's NHDP program and has had a 7-year relationship with Patel Engineering as a joint venture partner. The KNR-Patel JV has won 10 road construction projects so far. These include two BOT annuity projects as a part of NHDP Phase II, the combined value of which is Rs 9.6 billion. As of September 2007, KNRCL's order book stood at Rs 16.25 billion, of which the roads sector constituted 89 per cent. The grading is constrained by the relatively underdeveloped state of the company's operating system, which in turn, could constrain its ability to augment the size of its operations. The grading also reflects the uncertainties associated with company's plans to diversify into the power generation and real estate sectors.

About the company
KNRCL is engaged in the business of providing engineering, procurement and construction services in the transportation sector, namely, roads and highways, irrigation and urban water infrastructure management. Roads and highways is the key business of operation, forming 89 per cent of the company's order book as on September 30, 2007. The company has been awarded various projects by both NHAI and state governments.

KNR Constructions Ltd (KNRCL) was incorporated as a public limited company on July 11, 1995. It was promoted by Mr K N Reddy who started as a contractor for small works. KNRCL was primarily a road operation and maintenance company that ventured into road construction 8 years ago and is now diversifying into irrigation and urban sanitation projects. In 2000, KNRCL formed a 50:50 joint venture with Patel Engineering. Since then, the joint venture has bagged several large projects, including two BOT Annuity projects awarded by the NHAI in 2006 and 2007. Projects bagged through joint ventures currently form 74 per cent of the company's total order book.

For the year ended March 31, 2007, KNRCL reported net profits of Rs 198.8 million and turnover of Rs 2,591 million, as compared with net profits of Rs 153.7 million and turnover of Rs 1,261 million in 2005-06.

Sectors to invest

The domestic markets have been in a bull run since the last few years. The main drivers of this bull run include inflows from the foreign funds, consistent growth in the economy and positive sentiments of investors and traders here. There has been a lot of volatility in this bull run, especially in the last couple of years. We have seen many phases of short term rallies and consolidation in this long bull run. These shorter rallies were always dominated by some sector stocks or the other, based on market conditions and investor sentiments.

Historically, it has been proven that investments in equity give better results than any other investments over the long term. These are some of the sectors that are looking good for a long-term investment perspective. Investors can build their portfolios by picking good stocks from some of these sectors.

Infrastructure and real estate

Domestic consumption and investments in infrastructure are the prime drivers of growth for the domestic economy. That is why infrastructure is one of the most focused on sectors. There is a huge demand of infrastructure development in the hotel and hospitality industry, airports, housing, development of malls, special economic zones (SEZ) and rail/road infrastructure. Many new schemes are coming under the public-private partnership (PPP) scheme. The Government is also promoting the housing sector by providing tax sops to home loan borrowers. Investors can hold on their investments in real estate companies and can accumulate at dips.

Power and energy

The domestic economy is growing at around nine percent per annum. India's per capita consumption of energy is growing quite fast. Companies are going in for capacity addition to fulfill the growing demand of energy. As a result, we are seeing a lot of optimism in the power and energy sector stocks. Investors can hold on to their investments in power companies and can accumulate at dips. Sectors like power generation, power distribution, and oil and gas companies are quite attractive from a long term perspective.


Banking is another sector which is expected to be on the investors' radar in the long term. Private and foreign banks increased competition in the banking sector by introducing new services. The profitability of private sector banks is quite high due to the usage of technology and innovative ways to serve the customers better. Also, it is expected that a lot of value will get unlocked by integration of smaller PSU banks and there is a good opportunity to make good returns in the long term.

This sector is one of the hottest sectors in India. The share of the organised retail sector is less than five percent of the total retail market in India. However, the share of the organised retail sector is growing at a healthy pace year after year. Many big players have already jumped into the fray and many others are showing active interest in this sector.


Traditionally, FMCG is considered a defensive sector. Growth in the economy has resulted in better earnings for the middle income segment which in turn translated to more consumption of FMCG goods. This sector started performing well from the latter part of 2005 and consolidated in 2006. FMCG companies could find new markets in rural areas as well. FMCG companies also hiked the prices of their products. The momentum in the retail sector is expected to increase their penetration levels. Investors can invest in FMCG stocks to diversify their long-term portfolio.


India is one of the fastest-growing mobile markets in the world. Mobile companies are seeing their market growing month after month. Telecom penetration in India is less than 25 percent which is quite less in comparison to near 100 percent in developed economies. There is a huge potential for growth of telecom companies in India. Investors should hold on to their investments in telecom companies and can accumulate at dips.

These are the sectors that look attractive in the long term. However, it is advisable that investors in equities should keep a regular track of their investments and shuffle (book profit/loss once target is achieved, revise target etc) their portfolio from time to time. Tracking of news, results and price movements of your stocks is as important as investing in them. Investors who cannot afford to track their investments regularly will be better off investing in a mix of equity mutual funds.

Via ET

Essar Steel buzz

Essar Steel surged 44 per cent last week after the Securities Appellate Tribunal (SAT) kept the company’s delisting proposal in abeyance. The weekly trading volumes were brisk at 66.88 million shares, compared with 6.53 million shares in the week ended November 30.

The SAT issued an interim order on Wednesday after an investor moved the authority alleging that the discovered price of the share for delisting was below the intrinsic value of the company. SAT has directed Essar Steel to file its response in this regard. The matter will come up for hearing on December 12.

Trading in the company’s equity shares was supposed to be suspended from December 6 on account of voluntary delisting as per Guidelines, 2003. The company had fixed the exit price at Rs 48 a share.

The promoters’ shareholding had gone up from 87.08 per cent to 90.7 per cent at the closure of the reverse book building (RBB) process recently.

Essar Steel has plants in India, Indonesia and Canada. The company is planning to set up another 4 million tonne plant at Hazira in Gujarat.

Biofuels - the next big thing ?

It is common knowledge that farm subsidies and technology infusion combined to boost global agricultural production in recent years. Rapidly increasing output unmatched by demand growth resulted in farm goods prices staying depressed for a large part of the period between 1995 and 2005. Inventories of major commodities expanded. Existing high consumption levels and issues such as obesity resulted in consumption growth stagnating in developed countries, even as the Asian economic crisis and frequent outbreak of diseases added to demand-side problems.
In rebound mode

A major transformation has taken place in the world agricultural markets in the last two years — 2006 and 2007. Global growth has rebounded. Asia is contributing to this growth substantially. Buoyed by strong GDP growth and demographic pressure, China, and more recently India, are now major consumer markets for a range of commodities including energy, metals and agriculture.

Corn, soyabean, wheat and vegetable oil markets have registered extraordinary performance, prices having reached multi-year highs in recent months.
Minor Alternative

Why did the market suddenly shift gear and begin to move northward? One dominant reason is the sudden emergence of biofuels as a minor alternative or addition to fossil fuel. Stung by the sharp rise in crude oil prices, major economies such as the US and European Union have announced policies to support production and use of biofuels, which are renewable sources of energy (unlike fossil fuel) and largely eco-friendly.

Technology to convert cane, corn and wheat into ethanol is available. Ethanol is blended with gasoline (petrol). Similarly, biodiesel is produced out of vegetable oil (rapeseed oil, soyabean oil, palm oil) through a process known as trans-esterification. Biodiesel is blended with fossil diesel.

In fact, production of ethanol from cane and mixing with gasoline has been going on in Brazil for over 30 years now.

Gasoline is blended with ethanol to the extent of 20-24 per cent.Similarly, Europe has been using biodiesel in notable quantities since the beginning of the current decade. In the last four years, demand for biodiesel has been growing by 30-40 per cent a year in the EU.

The announcement of a major policy initiative by the US to promote biofuels and mandatory blending has converted what was once a non-conventional source of energy into ‘green fuel’ to fight carbon emission and global warming.

Since 2005, huge investments have flowed into setting up humungous capacities for production of biofuels — ethanol and biodiesel. While Brazil produces ethanol from cane, the US produces it from corn (maize).

Wheat is also used as feedstock. Rapeseed oil is the major feedstock for biodiesel in Europe and soyabean oil in the US. Of late, Malaysia and Indonesia have also pitched in. A considerable quantity of palm oil is now diverted for biodiesel purposes.
Boost to prices

Buoyed by the sudden emergence of a new use for traditional food/feed products, prices of corn, wheat and vegetable oils have doubled in the last 12-15 months.

Among crops, there is now competition for acreage, especially in the US, the world’s largest producer of corn and soyabean. For instance, in 2006, a major expansion of acreage for corn resulted in soyabean acreage reduction, which, in turn, led to a sharp decline in the US soyabean output, with adverse impact on world oilseed and oil prices.

Policymakers across the world have advanced all the classical arguments in favour of biofuels. These include energy security through self-reliance, lower dependence on overseas energy products, encouragement to environment-friendly renewable fuels, support to growers through more remunerative prices and employment generation in rural areas.

Brigade Enterprises: Invest at cut-off

Investors with moderate return expectations can consider an exposure in the initial public offering of the real-estate developer, Brigade Enterprises, with a two-year perspective.

A reasonable track record of property development, steady growth in revenues and execution of projects through reputed contractors are positives for the company.

Companies with a strong track record, huge land bank and a pan-India presence are those that have recently enjoyed a re-rating by the market. Smaller players with good fundamentals, such as Brigade, have not been able to attract similar valuations. The asking price of Rs 351-390 for the company does appear stiff at this juncture, given that it is a relatively small player with geographic concentration and a business model that is not too differentiated from some of the recently-listed players in the region.

However, the ongoing projects, if completed and sold on time, may help the company command better valuations. Based on this earnings assumption, the offer price values the company at 16-18 times its expected earnings for FY-09.

Brigade is a real-estate developer with a majority of its projects executed in Bangalore.

The company is primarily focussed on residential properties with experience in commercial and hospitality projects as well. It has so far executed 5.67 million sq. feet of saleable area. The issue proceeds are to be used for constructing ongoing projects and acquiring land.
Comfortable track record

Brigade has in the past executed projects across real-estate domains and has not narrowed its operations to specific segments.

While, broadly, it has presence in residential, commercial and hospitality segments, it has further diversified its activities within these domains. For instance, in the residential segment, the company is among the earlier players to venture into integrated enclaves, together with apartment buildings for the middle and high-income group.

Integrated enclaves, which are self-contained gated communities, have enabled the company attain development qualification in residential, commercial, retail, hospitality and other basic infrastructure projects simultaneously.

That 75 per cent and 66 per cent of two on-going projects have been pre-sold also reflects the increasing demand for such gated communities in metropolitan cities such as Bangalore.

In the commercial space, the company has a mix of lease and sell models. In the hospitality segment, it is now managing two serviced residence properties with more such ongoing projects and has also tied-up with brands such as Accor and Sheraton for running hotels and resorts.

We believe that the enclave projects and hospitality segments have the potential to aid profit margins.

These relatively recent ventures appear to have contributed to a jump in operating profit margins from 20 per cent in FY-05 to 31 per cent in FY-07.

The half-year ended September has further taken the OPMs to about 40 per cent. That the enclaves have also brought in high volume is evident from revenues jumping from Rs 162 crore to Rs 402 crore over FY-05 to FY-07.

With its past record, Brigade’s ongoing projects of 12.53 million sq. ft (about twice the projects executed so far) do not appear too challenging to execute.

That the company has in the past tied-up with Simplex infrastructures and B. E. Billimoria and Company also provides confidence to the timely execution of construction contracts.

With a number of developers having huge developable area, sub-contracting to qualified contractors may be the more prudent way for them to ensure timely and quality execution.

Of the total land reserves of 44 million sq. ft of developable area, about 35 per cent are yet to be registered in the company’s books and are still in the agreement stage.

The forthcoming projects of the company (about 30 million sq ft. of developable area) may face the risk of delays in take-off if such land is not transferred soon.

Further, a portion of the reserve, which is agriculture land, will be held in the name of some individuals on behalf of the company until it is converted.

Any roadblocks in such conversion could also disrupt future projects. We have, therefore, considered only ongoing projects for our valuations.

That the company has a relatively low-land bank also implies that future parcels would be purchased at higher cost, posing risk of spiking operating costs.

Cost of land has gone up from 15 per cent to 31 per cent of the total project expenses between 2004 and 2007.

BGR Energy Systems: Invest at cut-off

Investors looking for a proxy to the energy sector can consider subscribing to the initial public offering of BGR Energy Systems with a two-three year perspective. The steep asking price may, however, not provide quick exit opportunities for short-term investors.

This solutions provider for the power and oil and gas sectors offers exposure to a business which has unique positioning, strong potential and dearth of quality EPC (engineering, procurement and construction) contractors.

BGR’s ability to serve as a one-stop-shop for the user industries in the oil and power solutions segment, appears to be the company’s unique selling proposition.

The offer price of Rs 425-480 values the company at about 20-23 times its expected earnings for FY-09 on the post-issue equity base. This does not factor in any earnings upside from the success in bids that the company is now attempting.

Though not strictly comparable, BGR’s valuation, at offer price, is at a marginal discount to large listed power equipment players.
offer details

BGR’s operations can be broadly classified into two segments — supply of systems and equipment and undertaking turnkey engineering project contracts.

The company’s clients are from the power, infrastructure and oil and gas sectors and industries, which require environment engineering solutions and captive power plants.

The offer consists of fresh issue of shares and an offer for sale by the promoters; the proceeds of the latter will not accrue to the company. At the offer price band, Rs 184-207 crore would be raised through the fresh issue. The company seeks to deploy the same for working-capital requirements and expand manufacturing facilities in India as well as establish units in China and West Asia. The company’s market cap at the offer price would be Rs 3,000-3,500 crore.

The business segments of BGR are complementary in nature, enabling it to offer a basket of wide-ranging solutions to sectors mentioned by us earlier. For instance, in the case of a power plant, the company started with offering balance of plant (BOP) solutions, which usually accounts for about 50 per cent of the total plant cost. This involves providing a range of facilities (electrical, mechanical, control, instrumentation systems and civil buildings) other than the core equipment of boiler, turbine and generators.

BOP does not only involve providing services but also supplying materials. Of the products required to execute a BOP, BGR typically manufactures 40-50 per cent in-house and sources the rest from suppliers. The company’s manufacturing facilities, therefore, support the services division. This in-house production also provides cost advantages.

In a BOP project, direct bids to power generation companies offer better returns than subcontracts with EPC players. The company, therefore, does only direct bidding to maintain its margins.

The four BOP projects that it is now handling in the power space involve dealing directly with the generation company.

Apart from capability to undertake contracts for projects that use different types of fuels (such as coal or gas), BGR has moved to servicing higher MW power plants as well.

Three of the four BOP contracts are in the 500 MW range and a recent letter of intent is for a gas-based power project of 820 MW. This is a positive, as future projects of power plants are expected to be larger.
Going the EPC way

The BOP experience has provided a platform for BGR to move to EPC contracts for power plants, which essentially involves completely building the power plant including supply of power equipment. The company has executed its first 120 MW gas based plant on EPC basis for Aban Power.

As BGR does not manufacture the key components such as boilers and turbines, it has tied up with international power equipment suppliers for EPC projects.

Such tie-ups may enable the company to bid competitively for EPC contracts as international equipment players, particularly the Chinese, are known to adopt aggressive pricing.
Oil and gas equipment

BGR has also established itself in providing products (such as separators, gathering and metering systems, storage tanks and pipeline equipment) and solutions ranging from transporting the oil/gas from the wellhead to the end user.

This involves manufacture of various components and offering services to industries focused on oil and gas fields, cross-country pipelines, refineries and petrochemicals. Its business is, thus, much more extensive than that of companies offering pipeline EPC services.

The manufacturing activity for this division is carried out through a subsidiary. The company is well-entrenched in the local market and in West Asia in this segment, retaining an edge to capitalise on the oil and gas boom.

That it has managed to compete with international players such as the Kar Group from Kurdistan, also provides confidence as to its ability to bid internationally.

While this division accounts for only 13 per cent of the current order back log, we expect it to improve margins, given that the segment is more lucrative.

Present projects are titled towards foreign orders, which are likely to offer good returns.
Rough roads

BGR has not had a pleasant experience in the road infrastructure space as two projects in Kochi and Tuticorin have faced hurdles, leading to their termination. The company has now taken a decision to avoid cash contracts and instead focus on BOT projects and technology-intensive projects such as tunnelling, multi-level cark parking and such other urban infrastructure projects.

It may not be difficult for the company to foray into these areas with the technology and project management skills that it possesses. Success in these could provide a significant boost to earnings. However, given the working capital-intensive nature of the current projects, funding these new segments with internal accruals could pose a challenge.

BGR’s sales and net profits have grown at 43 per cent annually over the last four years. We expect the profit growth to accelerate now, given the company’s transition to a high-end solutions provider and its proposed low-cost facilities in China and Bahrain to cater to the East and West Asian demand.

BGR’s current order-book of Rs 3,300 crore is about six times its annualised 12-month revenues (March 2007 was an 18-month period due to change in accounting year) of Rs 525 crore.

The company’s ability to manage its working-capital requirements is of concern, given that a good number of its clients are public sector/state companies, where delays in payment are not uncommon.

The company is a key beneficiary of the expected ramp up in activity in the E&P space; any slowdown in these sectors could affect revenue flow. However, its divisions of air fin coolers, electrical projects and environment engineering have steady clients and may provide some cushion against any slowdown in projects in the power/oil and gas divisions. The offer is open from December 5-12. SBI Capital Markets, Kotak Mahindra Capital, UBS and CLSA are the lead managers.

Transformers and Rectifiers: Invest at cut-off

Investors with a high-risk appetite and a two-three year perspective can consider subscribing to the initial public offer of Transformers and Rectifiers (T&R). Established in the business of manufacturing transformers, T&R appears well-placed to benefit from the expanding business opportunities in the power transmission and distribution (T&D) space. Robust growth in sales and bottomline, diverse revenue mix and the proposed entry into the high voltage transformer segment suggest good prospects.

In the price band of Rs 425-465, the offer is priced at about 22-24 times annualised per-share earnings for the current year, on a diluted equity base. The valuations, while at a marginal premium to its peer, Indo Tech Transformers, appears attractive considering the healthy order-book and a likely move up the T&D value chain.
Investment argument

The demand for transformers is likely to remain buoyant given the increased government spending on power infrastructure. Government initiatives such as APDRP (Accelerated Power Development and Reforms Program) and RGGVY (Rajiv Gandhi Gramin Vidyuthikaran Yojna) also point to improving prospects for companies in the power T&D space.

With such structural growth drivers in place, fortunes of companies could hinge on their execution capabilities and ability to move up the value chain. T&R scores positively on both these aspects. T&R witnessed a compounded earnings growth of about 96 per cent annually during the last four years. Besides, the company’s order book pegged at about Rs 360 crore (1.7 times its FY07 consolidated sales) also lends visibility to revenues.

Further, T&R’s proposed move up the T&D value chain with the manufacture of high voltage transformers holds potential to expand margins and reduce competitive pressures, as this segment has fewer players.

Profit margins may also get a boost from T&R’s proposed expansion in product portfolio and optimisation of its existing plant capacities. Backward integration by way of the recent acquisitions of two companies may also help control costs.
Business and revenue model

T&R makes a wide range of transformers, including power generation transformers, T&D transformers, industrial transformers and speciality transformers.

The company’s product portfolio is set to expand further with the setting up of a greenfield facility in Moraiya (near Ahmedabad). This facility is expected to initially manufacture transformers of 220 KV and 400 KV, with the ability to move up to 765 KV. Part of the proceeds from the issue will be used for setting up this plant. The facility, likely to be commissioned in FY09, will increase T&R’s installed capacity to 23,200 MVA (one of the largest in the industry).

T&R’s presence in the furnace transformers, while not significant now (about 13 per cent of FY07 revenues), could gain importance given the increasing capex in the steel industry and preference for the EAF (electric arc furnace) route. Notably, the company is one of largest manufacturers of furnace transformers in the country.

On the revenue front, T&R has a good mix between SEBs (State electricity boards) and corporates as clients. For the financial year 2007, utilities contributed to about 51 per cent of the revenues with the industrial segment making up for the rest. T&R has also forayed abroad, supplying to countries such as England, Canada, South Africa and UAE.

Concerns on T&R’s dependence on SEBs cannot be ignored, though the company’s ability to recover dues on time in the past infuses confidence. Further, the exposure to SEBs also makes T&R’s earnings susceptible to any change in policy by power utilities and possible lengthening of the receivables cycle.

The company has reported negative cash flows in recent years. However, with part of the proceeds proposed to part-finance incremental working-capital requirements, this pressure on cash flows may be alleviated to some extent. Moreover, T&R’s move up the value chain and the resultant expansion in client base may also help it reduce its dependence on SEBs.
Offer details

The offer is open from December 7 to December 12. Enam Securities is the book running lead manager.

Geodesic Information: Buy

Investments with a 12-18 month horizon may be considered in the stock of Geodesic Information Systems, considering its moderate valuations and reasonable growth prospects. At Rs 227, the stock trades at 16 times and 11 times the estimated current and next year earnings respectively.

Geodesic operates in a niche segment within the technology space. The company derives a bulk of its revenues from developing instant messaging platforms/services and licensing them under the ‘Mundu’ brand. Instant messaging is a rapidly expanding mode of communication across the world and is a dynamic field.

Geodesic’s product (Mundu ICE stack) caters to clients ranging from portals and publishers to telecom operators, mobile handset manufacturers, system integrators and even end-consumers. The company has managed a compounded annual revenue growth of 62 per cent and profit growth of 74 per cent over the past 3 years.

Geodesic licenses its instant messaging platform to mobile handset manufacturers and telecom operators, thus providing it with sustainable revenue streams, with scope for expanding margins. The inter-operability with public messaging services such as Google Talk, Yahoo and MSN has been a major selling point to drive sales.

A recently won deal from Nordisk Mobiltelefon, a European telecom and ISP operator, for providing messaging and Internet radio on the mobile phone, is a typical example of its engagements. The company has already launched its messaging services in Nokia and Sony Ericsson smartphone handsets and has an agreement with players like BenQ.

As these companies increase their smartphone presence in rapidly growing markets such as India and rest of Asia, Geodesic stands to gain from their expanding presence. The company has launched an instant messaging platform for the hugely successful iPhone and may be well placed to capture a share as and when Apple allows third party software platforms on its phones.

This apart, the company has also developed VoIP products to work with Windows mobile and Symbian-based phones and desktops, for PC-to-PC calls. VoIP is also an ever expanding market providing for cheap communications. The launch of Amida Simputer, a wireless data processing and communication device, is seeing trial runs with the government and e-learning clients.

The company has recently forayed into publishing by acquiring the Chandamama brand; subscriptions have witnessed an increase after the acquisition. The risks to this recommendation are rupee appreciation against the dollar (though the company has withstood appreciation well in recent quarters), scalability challenges in executing any multi-million dollar deals, and technological obsolescence.

Weekly Technical Analysis

The Sensex regained the 20,000-mark after a month on the back of renewed buying in technology and realty stocks. The index swung in a range of 648 points during the week, from a low of 19,447 to a high of 20,095, before settling with a gain of 603 points at 19,966.

However, the upmove lacked momentum and the index was unable to sustain gains on most occasions owing to profit-taking at higher levels.

The indices are near record levels and may challenge them this week with some help from the overseas markets. Technically, the bias remains positive and will continue to remain so as long as the index stays above the 18,660 mark.

Global factors, such as the outcome of US Fed meet scheduled on Tuesday, are likely to have a significant impact on the market direction. The Sensex may face resistance around 20,215-20,290-20,365 during the week, while it is likely to find support around 19,720-19,640-19,565 on the downside.

The Nifty moved in a range of 288 points last week. It surged from a low of 5,755 to a fresh all-time intra-day high of 6,042 before settling at a record 5,974, up 212 points.

If the Nifty manages to close above the 6,000 mark, the rally may stretch to 6,150 where stiff resistance is likely to emerge. The short-term (20-days moving average) is at 5,774 and the mid-term (50-days moving average) is at 5,623. The Nifty is likely to face resistance around 6,085-6,115-6,150 this week, while on the downside it may find support around 5,865-5,830-5,795.