Nitesh Estates IPO Note
Sunday, April 25, 2010
Investors can subscribe to the Initial Public Offer of textile player Mandhana Industries. At the upper end of its price band (Rs 120-130), the offer values the company at 11 times the annualised FY-10 earnings per share, at a slight discount to peer Bombay Rayon Fashions.
The offer holds merit on grounds of sustained growth in domestic and export sales in a taxing year for most textile players, strong relationships with clients, capacity expansion on the cards and in-house design capability.
Mandhana makes readymade garments and fabric. The former is slated for exports while the latter is sold in the domestic market. The mix between the two in total revenues is rather fluid, but domestic sales make up the chunk. Mandhana has an integrated manufacturing process, with capacities for dyeing and weaving of fabrics, and garments.
Sales recorded a 37 per cent compounded annual growth while net profits grew 44 per cent over a three-year period. Operating margins are on the healthy side at 19 per cent in FY-09, up from the 10 per cent three years earlier due to controls in manufacturing and administration costs.
Manufacturing expenses dropped from eating 14 per cent into revenues to 8 per cent in FY-09, primarily a result of its garment manufacturing plant kicking off production. Administration costs dropped to 3.5 per cent of sales in FY09 from the 7.3 per cent three years earlier. On the same grounds, margins further improved to 21 per cent for the nine months ended December 09. The company has no plans of moving into the retail sector, unlike a good many of its textile peers, which could help sustain margins at higher levels.
Clients include those in the retail and apparel segment such as Tommy Hilfiger, Pepe Jeans, Valentino, and so on in the international market and Pantaloon, Aditya Birla Nuvo, Raymonds and so on in the domestic space. Repeat orders from such clients and their established presence provide a stable base.
Catering to the premium and the mid-priced segment in domestic and international markets provides a degree of diversification and risk mitigation besides flexibility to capitalise on opportunities in both segments. With clients numbering over 700, client concentration is not a risk. Mandhana plans to achieve a nominated supplier status with more clients, making it an exclusive supplier to them . It currently holds this status with a couple of suppliers. Direct relationships with most clients, both domestic and international, allows it to respond quickly to changes in requirements. Besides direct supplies, large-scale distributors and agents are also used to route sales. Mandhana has in-house design capacities; it works with clients to create designs, besides selling its own.
European markets constitute 77 per cent of exports — a risk addressed to an extent by virtue of stable clientele which hold brand presence, direct and strong client relationships built and diversified segment presence.
With global retailers aiming at consolidating suppliers in cost control efforts , manufacturers with ability to scale up production fared well. Mandhana benefited from this trend, growing exports by little over a third in 2008-09, a period when overall textile exports were sliding and consumer spending waned.
Mandhana plans to use most of the funds raised to increase garment manufacturing capacity to 83 lakh pieces a year from its existing 47 lakh pieces and to double weaving production capacity to 360 lakh meters a year. The plants will be functional towards end-FY11, and revenues from the same will flow in from FY-12 onwards. Land for both has already been acquired.
Besides capacity expansion, funds raised will be used for working capital. Turnover of working capital stands at 2.8 times for FY-09, down from the 3 times a year earlier but still above industry peers.
Debt-equity ratio, post-issue, stands at 1.7 times, but most debt is under the Technology Upgradation Fund Scheme, which carry lower interest rates and longer repayment periods. Interest cover is at a good five times.
Net margins slid to 8 per cent in FY-09 and further to 6.5 per cent in the nine months ending December 09, primarily on account of forex losses and depreciation. Margins are likely to remain subdued, given that capacity-addition will increase depreciation. Forex fluctuations are likely to persist.
Rising prices of cotton is also of concern. While Mandhana may have bargaining power by virtue of its size with its suppliers, it may eventually have to take on increase in prices. Its ability to pass on such price rise to its clients will have to be gauged.
The offer is open from April 27-29. The lead managers are Edelweiss and Axis Bank. Given its small-cap status , investors are advised to limit exposure to the stock.
Investors can refrain from subscribing to the initial public offer of Tarapur Transformers which manufactures and refurbishes power and distribution transformers. Steep asking price, relatively late entry into the manufacture of power transformers and the highly competitive scenario in the lower range transformer market are factors that do not lend themselves well for an investment in the offer.
The offer price of Rs 65-75 discounts the annualised earnings for FY-10 by 34-39 times on the pre-issue equity base. A massive 77 per cent expansion in equity through this issue is likely to result in depressed earnings despite expansion plans, pushing price earnings ratio to over 40 times for estimated FY-11 earnings.
company and offer
Tarapur is a subsidiary of the electrical lamination maker, Bilpower, a listed company. Tarapur was predominantly into refurbishment and repair of transformers, besides manufacturing instrument and distribution transformers.
Post its acquisition by Bilpower in 2006-07, the company started a unit for power transformers. Tarapur plans to raise Rs 55-64 crore through this offer, the proceeds of which would be used towards plant expansion, especially for power transformers, to fund acquisitions and working-capital requirements.
No details of the proposed acquisition or the extent of capacity expansion are available. At the higher end of the price band, the company's market capitalisation on listing would be Rs 146 crore. The offer is open from April 26-28.
Tarapur Transformers started off with a transformer repair unit with current capacity of 1,800 MVA per annum. In 2007, the company acquired a small plant that manufactures distribution and instrument transformers (also called CTPT or current transformers potential transformers used for measurement of power supplied through high voltage cables).
Both these businesses, while they provide decent volumes, do not promise lucrative margins. The company, therefore, more recently, entered the power transformer business with capacity to manufacture transformers of up to 220KV class. This segment, which is the low end of the transformer range, is characterised by high competition and pricing pressure. Bigger players such as Emco, Transformers & Rectifiers, Bharat Bijlee, Voltamp Transformers and Indo Tech Transformers are already present in the space and have also expanded capacities significantly.
High pricing pressure and raw material cost hikes, especially copper, have resulted in most of the players trading at a more modest price earnings multiple of 10-14 times.
Tarapur may suffer from being a late entrant into his space. While the company has stated that it would start manufacturing medium and high-range transformers, the well-entrenched presence of large players such as Crompton Greaves, apart from the above-mentioned players, does not provide sufficient ground for Tarapur to gain market share giving its lack of experience. Volumes, too, may come at the cost of denting profit margins.
Tarapur Transformers has stated that it sources most of its cold-rolled grain oriented silicon coated sheets from its parent, Bilpower. According to the offer document, such sourcing results in lower transport costs (being located near the plant) and reduces the cost of transformers by 10-15 per cent compared with other players. This is not, however, reflected in the company's operating profit margins.
While OPMs were 20 per cent in FY-08, they slid to 15 per cent and 13 per cent for FY-09 and nine-months ended December respectively. While this is the average in which the industry operates, few players such as Voltamp and Indo Tech enjoy over 20 per cent OPMs. Cost-pressures from other key inputs such as copper, apart from lower realisations could be the reasons for the slide.
Expansion and modernisation of the plant is one of the primary objectives of this offer. With the company recently setting up its manufacturing unit for power transformers, the capacity utilisation has so far has not been very high.
Except for its Vadodara plant, which manufactures instrument transformers, the rest, including the repairing units (20 per cent utilisation in 2008-09), have been under-utilised. While moving to higher range transformers through the modernisation could improve utilisation, securing orders from State electricity boards in the new range of transformers would be a challenge.
Tarapur' sales for FY-09 and nine-months ending December 2009 were Rs 22.8 crore and Rs 24 crore respectively. Sales in FY-09 jumped eight times compared with FY-07, primarily on account of acquisition. Power transformers have now started contributing to the revenues. Net profits for the above periods were Rs 1.5 core and Rs 2.2 crore respectively. The company has managed to keep its debt equity level at less than one.
Investors with a high-risk appetite and medium-term perspective can consider investing in Gujarat Gas Company Ltd (Gujarat Gas), which primarily distributes natural gas in the South Gujarat regions of Surat, Bharuch and Ankleshwar.
The company, a British Gas-controlled entity, caters to around 280,000 customers across the industrial, domestic, commercial and bulk segments, through a pipeline network of around 3,300 km. It also supplies compressed natural gas to around 115,000 vehicles through 33 retail outlets.
Strong demand dynamics in its areas of operation, high-margin tilted sales mix and good pricing power are the company's strengths. The company's success in tying up LNG supplies has enabled it tide over challenges posed by domestic gas supply constraints.
At the current market price of Rs 282, the stock discounts the trailing 12-month earnings by around 18 times. (The company closes its accounting year in December). Given the strong results posted by the company in the recent March 2010 quarter and favourable demand-supply dynamics, the stock's prospects appear good , despite its sharp run-up (up 180 per cent from 2009 lows).
Supply constraints mitigated
Despite growing demand for natural gas due to increasing industrialisation and urbanisation in its areas of operation, Gujarat Gas' performance was subdued over the past two years. This was primarily due to gas supply constraints arising from the transfer of marketing rights of the Panna-Mukta, Tapti gas from the British Gas-operated consortium to GAIL in April 2008. This is the company's main gas source accounting for 76 per cent in FY 2008 and 65 per cent in FY 2009. Consequently, Gujarat Gas' distribution volumes declined from 1,196 million metric standard cubic meters (mmscm) in 2007 to 1,089 mmscm in 2008 and further to 1,035 mmscm in 2009.
However, with the company entering into spot contracts for sourcing LNG in 2009, the supply bottleneck eased in the latter part of 2009. LNG purchases accounted for 13 per cent of gas sourcing in 2009 compared with nil in 2008. Going forward, the company in addition to entering into spot contracts, also plans to secure gas on long-term contracts.
The company's attempts to tie up firm LNG, if it is fructifies, will bolster supply security and be a positive trigger for the stock. Besides, the company has been allotted 0.60 million metric standard cubic meters per day (mmscmd) of KG-D6 gas on a fallback basis, which it is in talks to bring into system. In the past, Gujarat Gas has managed growth in both sales and profits, despite facing challenges such as the decline in distribution volumes and sourcing at higher prices (LNG being costlier than domestic gas). This is primarily due to improvement of its sales mix by focusing more on the high-margin industrial retail segment, and away from the low-margin bulk segment.
Industrial retail accounted for 81 per cent of the volumes in 2009 compared with 65 per cent in 2007.
The share of the bulk segment declined progressively from 24 per cent in 2007 to a negligible 1 per cent in 2009. Also, the company enjoys good pricing power and has been able to pass on cost hikes to customers at regular intervals, the latest price hike being effected in December 2009.
Sales which grew at 29 per cent annually on average during 2005-2007 rose by a tepid 2 per cent in 2008 and improved somewhat to a 9 per cent in 2009 (to Rs 1,387 crore), due to the aforementioned supply issues.
Also, profit which grew 25 per cent annually on an average during 2005-2007 registered low growth of 5 per cent in 2008 and 8.5 per cent in 2009 (to Rs 174 crore).
However, recent quarters have seen a marked improvement in performance, with sales and profits growing 18 per cent and 43 per cent in the December 2009 quarter over the previous year.
In the recent March 2010 quarter, the company has posted strong results with sales up 35 per cent over the previous year to Rs 401 crore and profits growing 69 per cent to Rs 62 crore. This was driven primarily by increased gas supplies, which expanded 25 per cent over the previous year to 291 mmscm.
While low base helped, a combination of spot LNG purchases and improved domestic supplies were the major drivers. We expect growth momentum to continue.
Gujarat Gas has been able to maintain operating margins around 22 per cent and net margins around 13 per cent. Return on equity (around 24 per cent) and on capital employed (around 30 per cent) is also quite healthy.
An almost zero-debt capital structure buttresses the financials. The company had declared a 1:1 bonus in the third quarter of 2009.
Gujarat Gas continues with its capital expansion plans in its markets, even as it awaits authorisation from the downstream regulator. A setback on this front, though quite unlikely, remains a risk.
Expansion plans to other areas in Gujarat such as Bhavnagar and Kutch, if the company's succeeds in future bids, is also contingent on timely regulatory approvals.
Sharp spike in the price of LNG may impact margins, if the company is not able to pass on high costs to customers.
Fresh investments with a two/three-year horizon can be considered in PTC India, promoted by NHPC, NTPC, PowerGrid and PFC.
The company has transformed from a pure trading company into a integrated power producer with presence across the value chain including funding, generation, fuel intermediation, power tolling, power exchange and advisory.
At current market price of Rs 113, the stock trades at a multiple of 28 times its estimated FY10 earnings. The price to estimated FY10 book value works out to 1.55. The company raised Rs 500 crore through qualified institutional placement last fiscal. Returns may improve as the excess cash is deployed in subsidiaries and integration projects.
PTC India will continue to benefit from higher trading volumes over the next couple of years as demand-supply mismatches in the energy sector persist. Beyond that period, long-term agreements to buy and sell power and new investments made by PTC would aid revenue growth.
Cross-border trading, for which PTC is a nodal agency, too will result in stable trading volumes. PTC has 48 per cent market share in the overall power trading market and a 30 per cent share in the short-term trading market.
In addition to steadily rising volumes (20 per cent CAGR over five years), PTC is likely to receive a boost to its profits from the higher trading margins of 7 paise per unit on power sold at tariffs higher than Rs 3/unit, which took effect in January.
The company has already signed long-term agreements to purchase 35,000 MW. With un-regulated tariffs, these offer better margins.
PTC will also benefit from listing of its subsidiary, PTC Financial Services (PFS), a project financing company that is planning an IPO shortly. This company holds 26 per cent stake in India Energy Exchange and also holds equity investment in other projects.
As of December 2009, PFS had completed total equity funding of Rs. 454 crore and debt of Rs. 795 crore in various projects. By investing in the power exchange, it has shielded itself against competition. It also holds investments in Athena Power, Teesta Urja Power, Barak Power and other projects.
In addition, PTC is also entering such innovative businesses as power tolling, which allows the company to supply fuel to plants and sell the power generated to other users. This obviates the need to commit funds for the power projects.
PTC Energy Services procures fuel and sells it to power projects thereby earning margins. Execution delays in the power projects would be a key risk for the company as it would curtail margins from merchant tariffs. New entrants to power trading too may dent market share, though the market offers sufficient room for expansion.
Robust market fundamentals, including evidence of both stronger jewellery demand in India, growth in Chinese jewellery demand and sustained investor inflows, continued to support gold price performance during the first three months of 2010, according to the World Gold Council’s (WGC) latest Gold Investment Digest.
The report, which was published today, showed:
The gold price rose modestly during Q1 2010, ending the quarter at US$1,115.50/oz, on the London PM fix, compared with US$1,087.50/oz at the end of Q4 2009, as evidence of seasonally strong jewellery demand in India and China combined with continued global investment flows, provided a robust fundamental support to the gold price.
On a risk-adjusted basis, gold outperformed compared with the broader commodity complex and international equities, but slightly underperformed against US and emerging market equities in the first quarter of 2010.
Gold remained, on average, the least volatile of the commodities monitored by WGC1, with the exception of the S&P GS Livestock Index, with annualised average volatility falling to 17.6% from 20.0% in the previous quarter. By the end of Q1 2010, price volatility fell further to 14.8% on a 22-day rolling basis, below its historical average.
Investors bought 5.6 net tonnes of gold via exchange traded funds in Q1 2010, bringing the total amount of gold in the major physically-backed ETFs that WGC monitors to a new record of 1,768 tonnes, worth US$63.4 billion, at the quarter-end gold price2. Similarly, anecdotal evidence suggests that the over-the-counter market experienced net inflows while generally maintaining existing long positions
The future of pay-TV in India will be driven by media owners and distributors expanding market share with an eye on profits, rather than at the expense of profits, according to a new report published by Media Partners Asia (MPA).
The Indian pay-TV sector generated sales of US$6.5 bn for FYE March 2010, says MPA, while EBITDA profits for the sector reached US$800 million, implying a modest profit margin of 13%. MPA sees industry sales growing to US$12.1 bn by 2014 and US$18.5 bn by 2020; margins will improve to 15% and 23% over the same period, with EBITDA profits reaching US$2.3 bn and US$4.4 bn. In terms of volume, broadcasters and local cable operators (LCOs) will lead long-term, while LCOs and cable multi system operators (MSOs) will lead in margins. Most direct-to-home (DTH) satellite pay-TV operators will start making money after 2013.
MPA executive director Vivek Couto said: "Cable MSOs probably face the most challenging future as capital intensity and competitive dynamics are such that the premium placed on funding and execution skills is growing at an alarming rate. Nonetheless, most national MSOs will be able to forge stronger last-mile links with the consumer long-term, with positive implications for future funding as well as large-scale deployment of digital pay-TV and broadband. We are more positive on India’s DTH opportunity than previously, especially when anchored to consolidation and improved pricing power with continued growth. We suspect the DTH market will consolidate from six to four platforms within three to five years, and estimate four will be making money at the EBITDA level by FYE March 2013. Finally, the combination of a strong economy, a larger pay-TV audience and digitization will also boost the market for broadcast groups. Competition will remain intense, as the main theater of war shifts to regional markets. The major risk to all our growth assumptions is regulation, which continues to commoditize and destroy industry value."
Projections from Media Partners Asia (MPA) suggest that Indian pay-TV subscribers will grow from 105 mn in 2009 to 149 mn by 2014, and 173 million by 2020. This means pay-TV penetration will grow from 78% in 2009 to more than 90% long-term. Cable will retain 70% market share by 2014, falling to 64% by 2020, while DTH will scale up to almost 35% share long-term
Bidding process for the 3G airwaves continued into the 11th day on Thursday. Bids for the third-generation (3G) wireless spectrum nearly doubled from the base price fixed by the Department of Telecommunications (DoT). A provisional winning bid for pan-India 3G spectrum licence rose to Rs69.68bn on Thursday, the DoT said on its web site. The DoT has fixed a base price of Rs35bn for a pan-India 3G licence. As per the details given by the DoT, six more Clock Rounds were completed on Thursday. With this, the total number of Clock Rounds completed to date has come to 64.
Delhi continues to be the most lucrative of the 22 service areas, attracting top bid of Rs8.5bn. Mumbai is at the second spot with a bid of Rs7.5bn and Tamil Nadu is in the third spot with a bid of Rs7.1bn followed by Maharashtra at Rs6.97bn and Karnataka at Rs6.38bn. The bid for Andhra Pradesh stood at Rs6.26bn while that for Gujarat was at Rs5.83bn. In almost 50% of the country, spread across 16 states, the demand for 3G airwaves has been negative. Jammu & Kashmir, all seven North East states, Orissa and Himachal Pradesh have witnessed negative bids. The 3G bid prices have not seen any material rise in these places after 11 days of bidding. Other regions that are witnessing negative bids, include Haryana, UP (West), MP, Punjab , Kerala and West Bengal.
The 3G auction was kicked off on April 9. The 3G auction resumed on April 15, as April 14 was a public holiday. The Government is auctioning three slots of 3G airwaves in 17 telecom service areas. Only two slots are up for sale across the country for broadband wireless access (BWA) airwaves, which would start two days after the closing of 3G auction. Six existing major telecom service providers - Bharti Airtel, Vodafone Essar, Reliance Communications, Idea Cellular, Tata Teleservices and Aircel - are vying with each other for spectrum in all the 22 telecom circles.
The Telecom Ministry raised its estimates of windfall from the 3G and BWA auction. The Government now expects its 3G and BWA auctions to raise Rs500bn (US$11.2bn), much higher than the Government's budget estimates of Rs350bn, Union Telecom Minister A. Raja said on April 23. Earlier in the week, Raja had said he expected the auctions to raise Rs450bn. "Everyday it is going up," he told reporters outside the parliament, referring to the bids for 3G spectrum, for which the auction is currently underway. Telecom PSUs BSNL and MTNL have already been allotted 3G spectrum. The two have also launched their 3G mobile services. However, they would have to match the highest bids.
A normal monsoon, Greek taking EU-IMF loan package and strong earnings momentum - both locally as well as globally - should stand the bulls in good stead next week. However, F&O expiry could lead to some swings in the domestic market. The RBI's decision to hike interest rates in a gradual manner rather than go for a big-bang approach is another positive, at least till inflation spirals out of control. The central bank has hinted at inter-meeting revision in rates so the market is already prepared if such a move does come about. Results of course will continue to hog the limelight for a while as the annual results are generally a well spread out affair. If global markets don't throw up any further nasty surprise(s) there is a likelihood of some more upside. FII inflows should be closely followed as well. We continue to urge caution as there will be pressure at every rise. A guarded, stock centric strategy should be adopted to ride out the volatile consolidation phase. Technically, the NSE Nifty might touch 5400 provided there is positive, overall momentum. On the downside, support should kick in at around 5200.
The Reserve Bank of India (RBI) raised the Repo Rate and the Reverse Repo rate by 25 basis points each to 5.25% and 3.75%, respectively. The Cash Reserve Ratio (CRR) has been hiked by 25bps to 6% from 5.75%; it will be effective from April 24. The CRR hike will absorb Rs125bn from the banking system. The Bank Rate remains unchanged at 6%.
The central bank expects the Indian economy to grow by 8% with upward bias in the fiscal year ending March 2011. Inflation is forecast to touch 5.5% by the end of March next year. Bank credit is expected to expand by 20% in FY11. It may be recalled that the RBI surprised the markets on March 19, 2010 by raising the repo rate and the reverse repo rate by 25 basis points each to 5% and 3.5%, respectively.
According to the RBI, the expected outcomes of the actions are:
(i) Inflation will be contained and inflationary expectations will be anchored.
(ii) The recovery process will be sustained.
(iii) Government borrowing requirements and the private credit demand will be met.
(iv) Policy instruments will be further aligned in a manner consistent with the evolving state of the economy.