UMCAPITALINDIA

2011-08-21T01:08:00.002+05:30

Muthoot Finance Non Convertible Debenture

Largest gold loans company in India, Muthoot Finance (Muthoot), is here to offer non-convertible debentures to retail investors. Here is our take on it:

Issuer: Muthoot Finance

Listed securities: Equity shares on Bombay Stock Exchange (BSE) National Stock Exchange (NSE)

About the business:

Muthoot is a force to reckon with when it comes to personal loans and business loans given against collateral of bullion gold, gold jewelery and any other form of gold. 99% of the asset portfolio (read loans given) by the company are loans against gold. On an average company has lent 72% of the value of gold, maintaining good margin of safety. Non Performing assets of this company stand at 0.33% as on March 31, 2011. That makes it an attractive bet.

The company mainly operates in South India and has been expanding in rest of India. The company tapped equity markets to raise additional funds and then there was a private placement of debentures. In the past, the company has been raising money from private placement of non-convertible debentures.

The financial health of the company is good. Capital adequacy ratio stands above stipulated 15. Credit rating agency CRISIL has rated this non-convertible debentures as AA- (AA minus). This 'investment grade rating' indicates that there is low credit default risk. The rating captures company's experience of 70 years in gold financing business. But the 'Minus' sign connotes that this is one of the lower quality paper in AA segment. ICRA has maintained similar view on credit rating for this NCD issuance of the company. A point to note that these credit rating are subject to periodic review and may change from time to time.

Returns

Company is offering 12% returns on two year NCD. It is a very good return, if we compare what an AA rated bond offers for two year maturity. The return on Muthoot two year NCD are at least 200 basis points higher than a AA rated paper with two year residual maturity. That makes this NCD an interesting bet.

But what about three and five year NCD. Many do not like these papers. They reason that these two NCD offer only 20 basis points more or 12.2% returns which is not attractive. One should look into these returns in light of where rates are expected to move. Bank fixed deposits will offer a better cue here. Go to any bank and ask for bank fixed deposit rates for one year and five year deposits. One year fixed deposits are offering at least 100 basis points more than the five year fixed deposits. Bankers are expecting rates to fall over next couple of years.

So what is our call on this?

We are not really enthused with 12% returns. It is a good enough reward not a great reward. As equity markets tank, many prefer to rush for bonds in 'risk off' mode. But we are of the opinion that equities offer better risk-adjusted returns than bonds. We have look at NCD from different angle.

If you are really keen, go for a five year NCD. If the rates fall in natural course of action over next couple of years, you still get to enjoy high coupon of 12.2% payable annually till maturity. But what if, there is a 'sudden' recession worldwide? Something that happened in calendar year 2008, if repeats now, and rates are cut over next couple of quarters, five year NCD may offer good capital appreciation over next 18 months itself. Take the risk, if you can stomach.

But what are the risks?

We have seen that with two year NCD will expose you to reinvestment risk, as rates are expected to fall. There are couple of more issues we cannot ignore

This is a gold financing business. It means everything depends on gold or rather gold prices. Gold prices have been showing good momentum upwards. The demand for safe haven, may keep pushing the prices up, making business viable and increasing margin of safety. But what will happen if gold prices show massive reversal in short term. In that case, company runs big risk of defaults and non performing assets taking the business down.

Company though has done very well in past, the business has been experiencing entry of new players – organised ones – banks, who have access to cheaper funds and can lend at a lower rates. If Muthoot cannot bring down the cost of funds and at the same time banks increase their offering in gold financing business at a lower rate, Muthoot will find it difficult. This risk may not materialise in short term, but a five year investor must give a serious thought to this risk.

Five year investors should ideally be in a liquid instrument. Listing on BSE and NSE does not help, if the instrument is thinly traded. Liquidity is a must if you are looking for capital appreciation or for an emergency exit. Unfortunately it is not guaranteed.

Issue details:

Issue opens: 23 August 2011

Issue closes: 5 September 2011

Minimum Investment: Rs 5000 (Minimum five NCD)

Issue Size: Rs 500 crore with an option to retain over subscription of Rs 500 crore

Allotment: First comes first served basis.

To sum up, if you are keen to invest, nothing stops you.

Disclosure: We have advised our clients to let go this issue of NCD.

Shriram Transport Finance NCD

2010-08-14T11:30:00.000+05:30

A typical question to all the wealth managers - “Where should I invest now?” As the equity markets have already moved ahead of reasonable valuations (this is rather an arguable statement we know) there are few takers for equities. Again the mid cap space is buzzing and most of our equity positions are in profit. The money making dumb fellow should have regularly taken some money off the table. But what should he do with that money? Should he invest it into the tax efficient open ended debt mutual funds or the ongoing fixed maturity plans (fixed deposits are absolute no-no).

What if you get something that is a long term instrument, issued by a decent corporate entity and offers you good enough liquidity. We are talking about the Non Convertible Debenture (NCD) issued by Shriram Transport Finance – a pre-owned commmercial vehicle financing company. We consider a specific NCD- double bond- an unsecured NCD offering to double money on December 1^st 2016. A 78 months duration instrument with AA credit rating company. (NSE listed as NF, ISIN: INE721A08984).

The same was issued a couple of months ago at the face value of Rs 1000. If we look at the yield on the date of issue it was at 11%, had you bought it at the face value on date of issuance. But even after two months the NCD is available at Rs 993. If you take into account the transaction cost the NCD price is still at face value – Rs 1000. This leads to yield to maturity of 11.6%, a rather attractive deal. Even if the new tax code takes away around 20%, we will be left with returns in excess of 9%.

Real deal is in the form of the liquidity it offers. When you buy into this security you know what you are buying which is not the case with the income funds with medium term investment horizon. Fund manager has his own view and may play with short term bonds when he should ideally be into long dated bonds. At a time when the interest rates at long end are said to be near the peak, it makes sense to buy this instrument. This instrument not only fetches you good yield but also provides an opportunity to ride on any dip in the interest rates. As the rates fall, you stand to gain with rising price on the exchange.

Tata Capital NCD are case in point. The same were issued at 12% coupon and as the interest rate turn benign, the NCD are now quoting at a premium of 15-26% of the face value. Shriram NCD can be a good option to invest at this moment of time. But a word of caution – the instrument is a non-secured instrument. The company though has an enviable track record, a massive slow down in economy can hamper this company that primarily works at the bottom of the pyramid. Other issues such as liquidity on the bourses are to be watched out for.

Those who made money in stocks should book part profit within the prescribed limit of asset rebalancing and put some money in fixed income and gold as the case be. Shriram NCD are up for grabs. Think, calculate and grab.

Disclosure: We have advised some of our clients to buy or hold these NCD earlier. We are building our position in this counter. Our view may change at any time and we may not update you. You bear the investment risk.

Zenotech Labs (CMP Rs 92)– Looks Attractive

2010-07-19T22:21:00.002+05:30

Honourable Supreme Court of India ruled in favour of Dai-Ichi- a Japanese pharmaceuticals major in the Zenotech Labs open offer case. The retail investors along with promoter of Zenotech lost the legal battle and the stock is in the corrective mode. Before getting into the future course of action, let us look backward and understand the game.

October 2007:Honourable Supreme Court of India ruled in favour of Dai-Ichi- a Japanese pharmaceuticals major in the Zenotech Labs open offer case. The retail investors along with promoter of Zenotech lost the legal battle and the stock is in the corrective mode. Before getting into the future course of action, let us look backward and understand the game.

October 2007:
Ranbaxy Laboratories (then controlled by Malvinder & Shivinder Singh) enters into an agreement to own a controlling stake in Zenotech Laboratories. Open offer is triggered.

January 2008:
Ranbaxy completes open offer and increases the stake in Zenotech Lab to 46.79%.

June 2008:
Predator becomes the prey. Dai-ichi a Japanese entity buys Singh brothers' stake in Ranbaxy. All Ranbaxy assets now go under Dai-ichi fold, of course stake in Zenotech Labs too. Open offer gets triggered.

Jan 2009:
Dai-ichi open offer at Zenotech at Rs 113.62 per share. Promoter of Zenotech – Dr. Jayaram Chigurupati – along with minority shareholders cry foul. They demand an open offer price of Rs 160. As Dai-ichi does not budge, they opt for legal remedy.

Feb 2009:
SEBI dismisses Dr. Chigurupati's case and open offer price of Rs 113.62 stays on course. Minority shareholders and Zenotech promoter move SAT.

Oct 2009:
SAT decides in favour of shareholders of Zenotech and Dai-ichi is advised to revise the price to Rs 160. Dai Ichi takes the case to Honourable Supreme Court of India.

July 2010:
After a long delay, Dai-ichi gets the dictate from Honourable Supreme Court of India. The open offer price remains Rs 113.62. Stock price falls to Rs 92 (as on July 16, 2010).

A special situation here for those who love to look at bigger picture.

Shareholding as of 31st March 2010.
Ranbaxy Laboratories (Dai-ichi owned): 46.85%
Promoter Group of Zenotech: 25.62%
Minority Shareholders: 27.53%

Dai-ichi is expected to come out with an open offer at Rs 113.62 per share for 20% of shares.

There are two groups from whom Dai-ichi will accept shares - the minority shareholders and the promoters. The future is totally dependent on one factor – will promoters tender their shares?

If the promoters tender the shares in the open offer and there are approximately 5% brain dead investors, the acceptance ratio stands at 42%. Not worth the effort.

But what if the promoters do not tender the shares? Yes – here is the opportunity. Keep aside promoter's holding of 25.62% and approximately 5% brain dead investors. This leaves 22.53% of the shares. Dai-Ichi is more than willing to accept 20%. This sounds rather interesting. Almost all shares will be accepted by Dai-ichi at the offer price of Rs. 113.62. Put simply, at Rs 92, if the transaction gets closed in 2 months, one can take home a before tax profit of Rs 21 per share – or 23% absolute return, keep aside transaction costs. Post tax (at 33%) this translates into Rs 13 per piece or approximately 14% returns.

So which way the promoters will go?

If the promoters opt for option one and tender their shares, they are paid Rs 113.62 a piece. Nothing compared to Rs 160 in January 2008. But the bigger problem for them, from the position of promoters (with a significant 25.62% stake) they stand reduced to minority shareholder with a 15% stake. At the other end of the deal, Dai-ichi is able to increase their stake to a comfortable 66.85%, if they get 20% shares. Put simply, promoters then are at the receiving end.

Now consider the second option. With 25.62% stake they can sit across the table with Dai-ichi and negotiate a deal for themselves. Let all the minority shareholders tender their shares and get out of the company, and then get into some serious business with Dai-ichi. Dai-ichi will be more than happy to consolidate their position in India. Maintaining listed subsidiaries in India is again a 'cost' for a large deep-pocketed multinational like Dai-ichi.

Can they think of giving exit route to Dr. Chigurupati by merging Zenotech post offer with Ranbaxy Laboratories? Yes. This on one hand brings down listed presence of Dai-ichi in India and reduces the 'compliance costs'. On the other hand it offers Chigurupati a tax-efficient exit possibly at a premium to current open offer price (even at Rs 160 and above).

It is clear that promoters of Zenotech would prefer to take option two. Provided, they are willing to wait and more important they have enough cash on them to survive may be a year or two. One cannot forget that the Chigurupati was a seller in Zenotech shares recently. Market price is seen factoring in the possibility of promoters tendering their shares.

If the promoters participate in the open offer, the only winner post open offer will be Dai-ichi. Since there is no futures market for Zenotech shares, the price post open offer may come down crashing. Promoters being the biggest non-Dai-ichi shareholders will be the biggest losers and in future they do not have any control over the company. So it is the time one bets big on promoters of Zenotech and go ahead for a low risk- high return opportunity in a already pricey market. Any takers?

PS: A small faction of speculators in market, is looking at DWS Mutual fund holding in the company. What role will they play? Though the fact sheets of the mutual fund as on June 30, 2010 show the portfolio comprising the shares of Zenotech, they may have sold out by now thinking that promoters will tender their shares. If not, looking at the investment objective of the schemes in which these shares are held, they are highly likely to tender in open offer.

Cat is out of the box...at last

2008-11-26T10:12:00.000+05:30

The announcement of bailout of Citi Bank in USA, has just hit the shores. And there is a lot of speculation about how the things will unfold in future. A behemoth such as Citi is not only expected to replace the people at the top, but also expected to do some rejig. In other words, many of its assets will be sold at whatever prices they may fetch irrespective of market conditions.

When these assets are sold in open market, the prices will fall, sheerly because lack of enough takers for the huge assets sale. As most of the institutions are still fighting liquidity crunch and retail investors are still to ascertain whether they are considering a non-cash asset, the prices of the assets to be sold are expected to crash, given the large size of investment book the global banker runs.

Put simply, there are many companies that may face erosion of market capitalisation. Though in the short run, there are little implications of market capitalisation, there is a remote possibility of firms being raided by 'the modern barbarians at the gate'. The fire sale by Citi can put some of the companies on the block where it holds huge chunk. There are companies where Citi subsidiaries hold significant amount of shares enabling them a seat in the board of directors, these are also susceptible to an 'interaction with new partners'.

The most vulnerable are those who followed Citigroup and made their investments. It has been reckoned in the past that following big boys need not guarantee success. But the enviable track record of picking stocks at the right prices, at least in the Indian market, made many buy the claims owned by Citi in the past. These also include many small investors. As the fire sale is expected to start any moment in emerging markets, and India being a part of the emerging markets lot, there are many looking at possible victims. The worse part is not just fall in stock prices, but also a change in control over management. Citi is known to considerably influence the management. As many investors are talking picking up gems at throwaway prices when Citi offloads, the investors should note that the gems with Citi as a shareholder and Citi not as a shareholder are two different things. So be careful, cat is out of the box... at last...time to choose right bets at right prices.

Disclosure: We are active market participants and hold many positions, both long and short, in various asset classes, in our personal and institutional capacity. We also advise many clients and manage their portfolios. We are an interested party to that extent.

Disclaimer: We are not liable, in any way, for any loss or profit, if the reader acts on the content in the above letter.

USA and gold mania

2008-09-27T18:09:00.000+05:30

USA is undergoing big trouble, not just in terms of credit crisis, but also an overall crash is in the offing. Do not get shocked if you come across a scenario of business crash-down. The worst times are still to come. Printing of currencies and overnight takeovers can save the financial systems from crash. However there is little that can be of some help in the long term.

Fiat money- paper money not backed by gold or any other real asset- is the route cause of the current bubble in the USA economy. Unfortunately the monetarists are not willing to accept this fact. When the money becomes ‘cheap’ it can be thrown after assets that claim prices that are not at all justified. Worse comes, when those who do not deserve to own the assets, aspire acquisition of assets by borrowing the ‘cheap money’. The bubble builds up. The worst comes when the non deserving borrowers – sub prime borrowers – are offered cheaper credit lines by the financial behemoths.

The argument of saving the falling financial institution to save the small man on the street of USA is total rubbish. An average citizen of USA does not have any savings. The financial institutions are owned by handful of wealthy guys, who can not afford if the institutions go down the drain. A man like Henry Paulson, when talks about saving US economy and quotes a number USD 700 billion out of the blue, it must be questioned. Some argue that the efforts by Paulson are aimed not at the betterment of US economy, but at saving his stake in the financial services provider. Whatever be the case, it is imperative that even the God cannot save the USA.

The chief reason behind this stance is the systemic issues that we talked earlier. Cheap money has ensured that there are quick bubbles built and it has further ensured that there will be devastating bursts. Take the case of last ten years. We have seen three major bursts, defying any logic and rationality. The ASEAN currency crisis in 1997 and dot com burst of 2000 were just the warning signals as both were fuelled by cheap money policies. The latest blood bath on Wall Street is expected to hit the world, thanks to rising global linkages of the cheap capital. In the modern world, the cheap capital- the chief facilitator – has become the monster that is going to eat into the entire economic growth and economic development visible all over the world, if any.

In such times of turbulence, it is the gold that we rely on to. We have been talking about gold for quite some time now. The bullish stance on gold is primarily for two reasons – protection of portfolio’s worth and wealth creation. As the USA sinks, the global economy would want a new currency to take the place of the dollar. Though there are some optimists who talk highly of Euro, as the currency of 21st century, we can’t subscribe to it, given the economic history of Europe which clearly negates this possibility. Though China and India are on the growth path, there is a long way to go for the currencies of these nations to become a global tender. Gold is the currency of this world by centuries and will again become the global tender making it climb higher levels on the price charts. So do hold on to that yellow metal – the ancient wisdom – for a tomorrow, if not a better tomorrow.

Happy investing.

Disclosure: We are long on gold.

Singur & Beyond

2008-09-03T23:47:00.000+05:30

The Indian corporate history has umpteen cases where a handful has benefited at the cost of masses. It was the 'Temples of Modern India' - the capital intensive plants that displaced many small farmers and artisans as villages lost their existence. But in the Nehruvian era socialism turned out to be the buzzword that killed all oppositions. Some of the private sector plants also attracted the wrath of the locals. But given the age old licence raj regime, there was little respite as the government used to back such industrials initiatives. However post Sardar Sarovar agitation things changed to a greater extent.

And now it is the time for Singur. This place appeared on the global map when Tata's announced their intention to manufacture a small car- Nano. The land acquisitions took place and the resistance from the local farmers and landowners started to surface in both peaceful and violent agitations against both Tata and West Bengal government. Unfortunately the issue was soon hijacked by the local politicians and the welfare of people took back seat. The battle went beyond the routine corporate against public and became a means of acquisition of power in the state. Hundreds of people were killed and many lost their homes and wealth. Singur turned out to be a place of killings, riots and agitations.

Till last week the picture was painted in colours which made Tatas appear villains. Though the decent faced corporate was backed by the state government and especially by the Chief Minister – Buddhadeb – the public at large was on the streets. When, one says public at large, it means public at large. It includes women, old people and even college and school students, making it a public movement. After trying to settle the issues with locals for more than one year, Ratan Tata gave up and gave an ultimatum last month to the government of West Bengal. But it did not help and today Trinamul Congress activists – the leaders in the Tata opponents, have already started celebrations as Ratan Tata is about to declare exit from West Bengal. It is not if Tata will exit Bengal, but now it is a case of when Tata will quit. Pricewaterhouse Coopers have already announced that exit is the best and only option in front of Tata and have estimated cost of this exit at Rs 350 crore.

If the things would have been only the facts as enlisted above, there was nothing that could have made it a success of people's movement. But as one can see Tatas moving out, there is another set of problems that is cropping up. Yes, what to do with the land acquired is one such problem. But this is the problem for the law makers. There is no provision in the law, that handles the implications of giving back the land to the original owners who have already received compensation for their land. In the first place, there is no provision in the land that allows such giving back of land.

But that is not the bigger problem, as both the judiciary and the legislature can always find out an amicable solution. The real issue cropped up, when a farmer committed suicide hearing Tata's exit. There are many who decided to take advantage of Tata Motor's entry in Singur and have already surrendered their land. This is not a small faction of the society. This segment of society have been fighting with the project opposition for a long time and now when they lose, it is worth watching how they handle the frustration. Social observers in the state are fearing many more such acts on the backdrop of depression. This is going to be a real challenge.

The image of Tatas is the next thing that the corporate house will have to work on. After success of Tata Steel managed Jamshedpur, the corporate house has many things to talk about. Acquisition of Corus has put it on the global map. But with Singur back out, Ratan Tata has to stand straight and explain things to the world, especially when the world is equally curious and suspicious about the small car Nano. The business prospect of the group will face some adverse surprises by their stakeholders, primarily from their suppliers who as of now are talking unconditional support to Tata group. But this picture may change dramatically as the small suppliers cant see the business, even after offering the best rates in an inflationary era.

The worse issue that made us write this piece here is the involvement of political outfits. Mamata led Trinamul Congress played a decisive role in this action. The party workers flooded the roads to Singur in the last fortnight. Though the paradox was seen as they used Tata vehicles to reach the ground zero. Mamata not only denied acceptance of any responsibility for the violence in the locality but also talked multiple things over the last six months. Unfortunately, there is no alternative plan she could offer to locals that would ensure the growth and development of the locality. Opposition for the sake of opposition yields nothing but power that corrupts the beholder of it. Here we do not intend talking about Amar Singh who went to Singur to share the stage with Mamata, as we cant forget the way he invited Tata to Uttar Pradesh two years back with a red carpet treatment.

Mamata initially opposed the corporate entry and later on changed the stance to capping the Nano plant to just 600 acres instead of 1000 acres of land. When told that the remaining 400 acres were required by the supplier entities, she could point to the land belt exactly facing the Nano plant on the other side of Durgapur Expressway. This has brought to surface some facts that the West Bengal government is not keen to talk about. An NDTV report brings out the fact that the hug land tract is owned by many industrialists and real estate players who bought the land at dirt cheap prices sensing the entry of Tata in the state. Some local groups are also underlining this fact and demanding action to that effect. There is a clear demand that says that instead of taking the land from the small farmers, the state government should take the land from the big land boys.

But again this is a classic case of protection of personal interests. It is alleged that many of the industrialists and real estate players owning the large tracts of land are the financiers of the CPI- the rulers of West Bengal. This makes us upset. The masses are made to sacrifice for the gains of classes. This is again a case of cruel face of capitalism. If there is a need of economic growth and economic development of the stare, all the factions of the society should pay for it equally. After all there cant be more equals among equals.

(Though the above post has little to do with the stock markets other than the stock price of Tata Motors, in our opinion Singur will have a long lasting impact on the economic future of India and the future of Corporate India as well. Future policy makers and investors will keep the incident at the back of their mind irrespective of future of Tata Motor's Singur plant.)

Disclosures: We do not have any position on Tata Motors stock. We do not have any monetary interest of any kind in Singur and West Bengal.

INVESTMENT UPDATE

2008-07-27T15:17:00.000+05:30

Most of our clients are not really happy with us. Not because we have lost their money but because we have not answered their questions earlier and asked them to have patience as most of them are sitting on good amount of cash. Sometimes it pays for doing nothing and keeping calm, today we are experiencing such a phase in the world of investments. However a point to note that when we say do nothing, we do not meant to say kill your time. We mean to say just have a look at yourself and your portfolio.

In the last month of the year 2007 we advised caution and got out of most of our short term trading bets. Though the first week of January made us rethink if we had made a mistake, it was the next few months that helped us with many pats and thanks from our valued investors.
Though the stocks have corrected in the range of 30% to 90%, many of our earlier recommendations still hold good. Those who missed these recommendations at that time, can now accumulate the same stocks at slightly above the originally recommended price, unless otherwise mentioned in the mean time.

The update is not aimed at giving which stocks to be picked, but at understanding some of the long term variables that may impact our financial goals. If we have stopped till the confidence vote of Manmohan government in India why not we should stop till the credit policy is out. For us it is matters less.

Most of us have come to know that the days have gone long back when sitting in 10, Janapath, you could manage the economic output of India. At the same time, we have seen how the reckless tightening of monetary policy could not cap inflation in India. The American counterpart of YV Reddy, the Helicopter Bernanke could not pull out the US economy out of inflation despite making the greenback virtually free. Like in India, in most parts of the world that matter, the real interest rates are negative. And most central bankers are still pushing their level best to boost their economies. However nothing is baring fruits. The money printing machines are operational in USA to the maximum possible capacity to make the money fall in American hands and encourage spending. But no way, it is working.

At this moment of time, there seems to be some positive signs in the Indian capital market as we see some political stability resulting into the nuclear pact going through. The crude is also falling and the rains coming back to MP, AP and Maharashtra. All this is kind of a cool environment in the Indian capital markets on the back of growing corporate earnings in line with expectations. But the picture is not that great.

The political stability and the nuclear pact wont change the things overnight. The fruits of the nuclear deal will take their own time to fall in India's laps. Also note that the deal may go through but the set of beneficiaries are still not identifiable. So no point making hurry taking bets in the air, if we keep aside obvious players such as Larsen & Toubro.

More so, the oil is also not really going down. Our economy is yet not seen the real impact of rise in oil prices. The administered price mechanism is yet in action and as it goes out at some time or the other the corporate earnings may not remain. Most of our friends are arguing that the Indian retail petrol and diesel prices wont go up as we are heading for inflation. But the impact is already very much visible with rising import bill. The worsening trade deficit is invariably not good for the economy as a whole. This certainly kills the domestic currency and the purchasing power of the nationals here.

Reforms as a whole wont catch up just because there is a stable government. The support from Samajvadi Party to the Congress government is a marriage based on temporary need and no agenda. The things wont go long as there are Parliamentary elections next year and no politicians wont take any bold step towards reforms. So those who are accumulating banking index hoping for a quick buck, may not yield anything. Though from the point of view of valuations and long term India growth story we are upbeat on banking sector. Now where to put the money. Some of our old recommendations still hold good. But for those who do not want to trouble their heads, consider Benchmark Banking Sector Exchange Traded Fund.

The famine conditions are yet not improved. Rains as of now in the regions such as AP, MP and Maharashtra can offer some solace in the short term. But a point to note that this need not necessarily improve crop output. Do not jump guns that the things are out of dark. We are still midst of a large desert and a site of water need not necessarily an oasis. Take a breath and just see for the details.

Commodity prices are still continuing their upward move. However no point blindly chasing commodity stocks. Thanks to the government intervention and other local factors such as lack of efficient and transparent markets along with inefficient management the game becomes tough. Some of our friends are recommending Mirae AMC's Global Commodity Companies Fund. But a word of caution, the things are not really that easy in the commodity business and makes more sense to buy commodities than the commodity manufacturing companies.

Here we come across two commodity ideas. Gold and Oil. Gold becomes a real game for us. Our investors have thanked us for our call on gold at Rs 8200 per 10 gram of gold last year. Most of our customers are still holding the Benchmark Gold ETF units. We maintain our bullish stance on gold. We expect gold to cross USD 1500 per ounce by 2010 translating into 40% returns over the next two years, thanks to global inflation and worsening US scenario resulting into global slowdown. Even at the current level a gold investment is good. But mind well, invest with a five year horizon.

Oil is not just a commodity. It is the engine of growth. At a time when China is aggressively bidding the global oil reserves and ensuring energy security, there is little done by Indian government. Barring few attempts by ONGC (which are always slow owing to red tape), we have little to talk about. It becomes imperative that individual Indians build a position on oil. The upcoming Benchmark ETF ( fund of fund) investing in oil is a good way of taking exposure to oil.
We still maintain bullish stance on Indian equities. The massive correction in valuations of Indian equities made us think of them rather seriously. However we restrict our stance to only two strategies. First, buying the Nifty index and leaving the rest for the market. Given the volatility in the market it makes more sense to be with the market as outperformance may not be a trick for all on the street. In the second strategy we prefer companies where there is a clear earning growth visible at a reasonable valuation and minimal debt. We prefer to lay hands on a large cap like Larsen & Toubro. In the other cases, we maintain our bullish stance on Micro Technologies, ICSA, Hikal, JRG Securities, Shri Lakshmi Cotsyn. This list is indicative and not exhaustive. We also welcome concept stocks such as Network 18 Fincap, Financial Technologies. An exposure to recently launched ING Latin America Fund can also be considered by those who are risk lovers. This offers you an exposure to the less correlated markets such as Brazil, Peru and Mexico among the other Latin American countries.

We are wary of real estate. Though we are positive on Century Textiles. Given the developments in the real estate sector, we have advised caution to our clients when it comes to real estate purchases and advocated selling the real estate exposures in May 2008 as summers are best to exit given the good demand scenario compared to other months of the year. Though a point to note, the price realised by our clients were lower than the prices in the month of February- April in most cases, connoting some kind of lethargy in the real estate market. New purchases can be postponed till November, if possible. An absolute no to new investment purchases, if you don't have a very long term in mind.

The times are tougher for the pensioner community. Fixed deposits are offering negative interest rates and hence an absolute no. Those who want assured returns can consider fixed maturity plans as the yields are better than the fixed deposits. Some of our clients came asking about the recent avatar of fixed maturity plans. We are advising caution on these products, as there are serious concerns when it comes to disclosures. The equity participating debenture issuers are not disclosing their investments which may actually lead to mass destruction of value. This is primarily because there has to be some element of leverage that is being employed using derivatives. Overseas, it is found that exotic options are tried out in the market. A point to note that the products though not have come out with large sized problems as of now, one cannot rule out the possibility of any such incidence in the future. And hence when in doubt remain out.
We are tracking an opportunity in the long term government securities as of now. Post the credit policy, on can consider a very small exposure to Birla Gilt Fund-long term option. If the interest rates decide to recede this is a place to be. Though this is a game of risk and patience both.
To sum up, the times have long gone when anybody and everybody would make money. It is the time when you buy something with conviction and sit tight on it. The old wisdom still prevails.

Kiri Dyes & Chemicals

2008-03-24T23:29:00.000+05:30

Price Band: Rs 125 to Rs 150
Issue Size: Rs 46 - 56 crore
Issue Opens: March 25, 2008
Issue Closes: April 2, 2008

Business

Ahmedabad based dyes manufacturer is in the business of manufacturing and marketing of reactive dyes and dye intermediates with production capacity of 10,800MTPA.

Financials
FY2002-2003 to FY2006-2007
Revenue CAGR 11%
Profit CAGR of 25%

FY2006-2007
Revenue: Rs 140 crore
Profit: Rs 8.63 crore

Objectives
Backward integration project which will produce sulphonic acid, oleum and chlorosulphonic acids
Setting up of a co-generation plant of 4 MW

Valuation

The stock on offer is valued at 10.53 to 12.64 times its annualized earning for first half of FY2007-2008 on fully diluted equity.

Our call
JV with Zhejiang Lonsen for setting up a reactive dyes manufacturing facility having initial capacity of 20,000 MTPA in India
Margins expansion is attributed to better pricing of products and introduction of value added products
Looking at valuations and growth opportunities available in other sectors and opportunities in this sectorlike Bodal Chemicals puts this initial public offering in the list of AVOID

Titagarh Wagons Limited

2008-03-24T22:23:00.000+05:30

Price Band: Rs 540 to Rs 610
Issue Size: Rs 128 - 145 crore
Issue Opens: March 24, 2008
Issue Closes: March 27, 2008

Business

Kolkata based Titagarh Wagons Limited (TWL) is a private sector wagon manufacturer in India. It is primarily in the business of manufacturing railway wagons, bailey bridges, heavy earth moving and minding equipments, steel and SG iron casting of moderate complex configuration. The company has four revenue centers. Wagon manufacturing division is the biggest revenue generator with 79% of the total revenue of the company. The company manufactures Indian Railway freight cars, special purpose freight cars, bogies and couplers. The company has many achievements in the areas such as RORO and WOW. The company has
shown good growth in wagon dispatch from 644 wagons in FY2002-2003 to 2073 wagons in FY2006-2007 which transalates into a CAGR of 34%. For the six months ended September 30, 2007 the company has recorded dispatch of 1394 wagons. The special projects division is catering to the defence requirements and bailey bridges with a manufacturing capacity of 72 bridges per annum. It is an approved source by DRDO for procurement of integrated field shelters, special purpose wagons and other engineering equipment and has got an order from Nuclear Power Corporation for manufacture of certain equipment. The company acquired mining equipment unit of Hyderabad Industries in 2005 and converted into a profit making
division involved in the manufacture and sale of heavy earth moving equipment. This division manufactures hydraulic excavators, crawler cranes and construction cranes. The company enjoys enviable clientele which includes NMDC, SAIL and Coal India. The fourth division of TWL caters to high growth segments like electric multiple unit (EMU) and metro coaches. It
has received a supply contract for manufacture and supply of nine car rakes.

Financials
Revenue
FY2002-2003: Rs 47.17 crore
FY 2006-2007: Rs 284.05 crore
CAGR of 56%

Profit
FY2002-2003: Rs 3.23 crore
FY 2006-2007: Rs 26.18 crore
CAGR of 68% Six months ended September 30, 2007
Revenue: Rs 211.56 crore
Profit: Rs 26.02 crore

Objective
Setting up an EMU manufacturing facility at Uttarpara unit for Rs 18.7 crore
Modernize and expand existing facilities at our Titagarh and Uttarpara units for Rs 18.84 crore

Setting up an axle manufacturing and wheelset assembly facility for Rs 12.93 crore
Building a corporate office and research center for Rs 7 crore
Strategic invetstment & brand building for Rs 14.5 crore

Key takeaways

Long term sourcing arrangements for components for its wagon businesses from RDSO approved vendors across the world
An arrangement with Komatsu Mining Germany for supply of components and spares for heavy earth moving and mining equipment.
Backward integration to ensure the supply of bogies and coupler sets for in-house consumption. Joint venture with FreightCar America in order to develop lighter and more efficient wagons that are in high demand especially in the metro transport systems.
An agreement with JP Morgan to rehabilitate Cimmco Birla, subject to approval from BIFR. Cimmco Birla is a Rajasthan based loss making wagon manufacturing company which is under BIFR and will trigger further growth for TWL.

Order book of Rs 753.1 crore offers good earnings visibility.
High entry barriers.

Already got the patronage of global investors.

Risk

Single customer (indian railways) dependence
Rising concerns over quality of business such as falling debtor turnover ratio

Dependence on few suppliers

Valuation

The stock on offer is valued at 19 to 22 times its annuliased earnings for the six months ended September 30, 2007 on its fully diluted equity capital. Texmaco, another wagon manufacturer is valued at 27 times its trailing 12 months and Blackstone recently valued TWL at Rs 675.

Our Call

The stock is a concept stock and hence subscribe for long term capital appreciation.

CY2008 -Path ahead...

2008-01-01T16:14:00.000+05:30

The year 2007, offered near 50% returns to the investors in Indian equity markets. End 2006, the brokers came out with their outlook for CY2007. Some of them having global parentage went out saying the year would be of negative returns. Some talked of moderate returns to the tune of 15-20%. However the market took every expert by surprise. For those who remained invested in the equities markets, it turned out to be a real bonanza.

Though the earnings CAGR remained in line with the expectations and in some sectors actually surpassed the estimates, there are factors that came to surface which made this run an outcome of more of the liquidity and less of the fundamentals. When most of the analysts agreed that the indices are more than fairly valued, the indices were moving on the back of liquidity.

The slowdown in US, quality of Chinese earnings and stretched valuations made a huge amount of money entering Indian capital markets from developed markets. A cool US $ 16 billion entered Indian markets. This money has primarily entered the front run counters of Indian bourses. In the last couple of months, especially after the participatory notes issue the money has started moving out of Indian markets.

Though the FII numbers are still looking great, the things are not really enticing any more for the guys who understand the game or selling at every high and booking profit. Forget technical and fundamentals, most of the investors would agree that the sensex is hovering around the same levels where it was just before the ban on participatory notes.

But the things are gone by. And one should be more focused on future than anything else. After all, the markets work on discounting of future. This year most of the brokers are estimating the sensex to be in the range of 22000-24000, implying an upward movement of 7% to 17%. This year, also most of the brokerages are talking moderate returns. Most of the outlooks talk about the corporate earnings to be the key driver of sensex and the corporate growth is estimated to be around 20% supporting the forward P/E multiple of 21.

The key risks that everybody is discounting include rising crude oil, rising rupee and the political scenario in India post Gujarat. The geo political tension in Indian subcontinent, to be precise in Pakistan can disturb the things in the times to come, especially if there is a weak government in center. Ahead of elections, one can expect a lot of freebies for many sectors and many weaker, to be precise, politically sensitive, sections of the society taking its toll on the government coffers and also slow down of reforms process.

The crude oil prices are expected to remain firm despite a slow down in USA, thanks to the booming demand in China and India. The commodity as an asset class is expected to post good performance in CY2008, and hence an exposure to this asset class is warranted.

Gold is one asset class which is expected to post good numbers this year again though on a larger base. However ferrous and non-metals metals are expected to remain the center of activity in the commodity space.

The interest rate in India is due for a downward journey. The obvious beneficiaries are the long term debt funds and the income funds. One can invest good amount of money in those funds which she has earned in the equity markets. A 12% CAGR over next couple of years over the next 18-24 months cannot be ruled out, though this can appear to be a contrarian bet.

Interest rates’ downward movement is expected to benefit to banking, real estate and auto sectors, popularly known as interest rate sensitives. However investors must be selective while investing. Blanket approach can fetch negative surprises.

Few strategies for those who are already invested big sums in the market. Big sums need not be multi crore portfolios. Big sums means a significant amount of your networth, it can be even a couple of lacs.

The market in the last two weeks is range bound when it comes to the frontline stocks. The mid and small caps have moved significantly. Here most of the investors are retail investors. Shenanigans are active in these counters, popularly known as operators. There are instances observed that the stock calls given on relatively small cap illiquid counter are attracting circuit filters. Even the MNC counters are hitting upper circuits just because the global CEO is visiting India. The small and unheard companies are bought as tomorrow Reliance and Infosys. The sanity is vanishing from the market and the investors are acting in heard mentality.

The 52 week high and low data published in most of the leading financial dailies clearly indicate that the number of stocks at the 52 week high are increasing and the number of stocks at 52 week low is bare minimum. Same is the case with stocks in upper and lower circuits. The euphoria is very much in. at such moment of time; it is apt to move out of speculative positions and leverages. The speculation coupled with leverage is a lethal combination and can take your portfolio both ways - upwards and downwards. Do check out if your portfolio is unduly skewed towards a particular sector, a particular promoter group or a particular company. Nobody here will keep winning till eternity.

If you are a ULIP investor and paying your premium on annual mode, change your mode to monthly mode. Most of the insurance purchase takes place between January and March. Hence it is the right time that you approach your advisor at the earliest possible and change premium paying mode to monthly. For those who intend to invest in mutual funds big sums, go for systematic investment plan. Also as per the recent announcement, direct investments in mutual funds will not earn entry loads. This is a great measure by SEBI and do consider opting for it.

Things may look too rosy now. But it is high time that you take a note of the thorns under cover.

Precision Pipes and Profiles Company Limited

2007-12-18T22:54:00.001+05:30

Price band: Rs 140-150.
Issue opens: December 17, 2007.
Issue closes: December 20, 2007.
IPO rating: 4 out of 5

Business

Original equipment manufacturer of various auto components.
Clientele: Maruti Udyog, Honda SIEL, General Motors, and Toyoto Kirloskar. Manufactures customised profiles used in refrigeration systems
Clientele: Godrej, Voltas, Videocon, and Carrier Refrigerators.

Automobile segments: 90% of its turnover
White goods: 5% of its turnover

Financials

Revenue:
FY 2002-2003 = Rs 41.11 cr
FY2006-2007 = Rs 109.73 cr
CAGR: 27%

Net profit:
FY 2002-2003 = Rs 4.27 cr
FY2006-2007 = Rs 13.87 cr
CAGR: 80%

Six months ended June 30, 2007:
Revenue: Rs 30.62 cr
Net profit: Rs 4.93 cr
NPM: 16%

Crisil rating of SME 1 for PPAP

Objective

Expansion plans at existing plan.
Completion date: June 2008.

Set up a new plant for manufacturing auto components at Surajpur.
Completion date: October 2008.

Facility for contact manufacturing of 'electrical outlet system' (EOS) - a patented product from PDC.
Completion date phase I: March 2008
Completion date phase II: December 2008

Outlook

PPAP is a leader in the segment it operates into.
All its customers are on the expansion mode.

Going forward, the business will become volume business and margins that are hefty at these levels, may not sustain. As far as growing input costs are concerned, the pressures from customers to cut down the costs, will eat into the margins.

The EOS business will contribute to bottomline.

P/E = 14 to 15

PPAP suffers from high customer dependence, both in automobile, white goods and EOS.

We recommend subscribe- HIGH RISK HIGH RETURN- with a medium term perspective.

Please note that the Directors have extended a loan to the company. The interest/loan ratio stands at a hefty 18% for FY2006-2007. On the other hand, ICICI Bank has extended loans at an average cost of 10%. So the call is all yours if you are comfortable with such activities, go ahead, but understand momentum.

Disclosure: We don’t intend to bid in this IPO.

Manaksia Limited

2007-12-15T19:01:00.000+05:30

Price band: Rs 140-Rs 160
Issue opens: December 17, 2007
Issue closes: December 19, 2007.

Business

Manufacturing of
Metal products: (aluminium alloy ingots, rolled sheets/coils, galvanised steel sheets/coils colour coated metal sheets and sponge iron) : 72.5%

Packaging products: (ROPP caps, crown closures, plastic caps and metal containers) : 13.3%

Mosquito coils : 9% and engineering.
The percentage connote percentage contribution to turnover.

Manaksia operates from 15 manufacturing units in India and 3 units in Nigeria and Ghana.

Financials
FY 2006-2007
Income: Rs 834 crore
Net profit: Rs 92.06 crore

Here CAGR is a meaningless number because the company has done a lot of restructuring of its business.

Six months ended September 30, 2007:
Income: Rs 453 crore
Net profit: Rs 50.82 crore

Objective

Purchase equipment for aluminium and steel business
Prepay high cost term loans to the tune of Rs 60 crore
A big chunk of money is raised for some undecided purpose.

Outlook

Highly competitive business
Rising input costs
Presence in business segment where unorganised players are making price under cutting.
P/E of 10.57 to 12.08

For us this is a ‘me too’ counter. Investing in this wont fetch you anything great and not investing wont make you lose anything great.

Now let’s understand few things well.
The company is already listed on Calcutta Stock Exchange. However it never planned to list on BSE or NSE to offer better trading platform for shareholders. Also note that the investment bankers are trying their level best to sell this public offer like an initial public offer. This is primarily due to the craze for IPOs among the investor, on which the investment banker wants to bank on.

But at the same time, the IPO grading is not done saying that this is not an IPO.
Corporate governance here may emerge as an issue. Better we avoid.

For those who understand momentum investing, there are some rumours that the company will come out with some announcement on the day of listing connoting some acquisition. The money raised for some undecided purpose will be used for this. However this is just for information purpose.

Disclosure: We don’t intend to invest in this counter.

Aries Agro Limited

2007-12-15T18:22:00.000+05:30

Price band: Rs 120-Rs 130
Issue opens: December 14, 2007
Issue closes: December 19, 2007.
IPO grade: No grading

Business
Manufacturing of micronutrients and other nutritional products for plants and animals at Mumbai, Kolkata, Hyderabad and Bangalore with installed capacity of 21,600 TPA. Manufacturers plant nutrients, insecticides and veterinary products.

Subsidiaries:
Aries Agro Care - trade in seeds for vegetables and field crops.
Aries Agro Equipment - trading of mini tractors.
Commencement date (proposed) – March 31, 2008.

Financials
Income
FY2002-2003: Rs 19.51 crore
FY 2006-2007: Rs 77.40 crore
CAGR = 41%

Net profit
FY2004-2005: Rs 1.06 crore
FY 2006-2007: Rs 8.44 crore
CAGR = 181%

Objectives

Increase manufacturing capacity by 79,200TPA
Install packaging capacity of 9,000TPA.
Buy new plant and machinery for Mumbai plant
Capital expenditure for mobile marketing – read buying some vehicles.
Renovation of office building.
Invest Rs 7.36 crore in Golden Harvest, which is setting up a project to manufacture chelated micronutrients and invest in another company MAPCO. Finance working capital requirements.

Outlook

Really big plans.
Capacities will grow five-fold by September 2008.
P/E = 18 to 20 times.
Mcap/Sales= 2.18

Simply put a costly affair.

Some observations:
FY2006-2007 revenues appear inflated. The Rs 70 crore topline comes with trading revenue of Rs 30.75 crore. The trading revenue in FY2005-2006 was just Rs 8.20 crore. Buying turnover is the easiest trick in the world of business. Though we don’t say that Aries is doing that, as we don’t have any evidence.

Company incurred losses in FY2002-2003 and FY2003-2004.
Also note that the company talks highly about its presence for last three decades and its high standards of corporate governance. But we fail to understand why all this translates into a meagre Rs 70 crore topline.
Company has already made the payment for one time settlement of its dues to IFCI arising out of lease finance transaction where Aries defaulted in 2002.
One must also note that company has defaulted on a lease finance obligation of just Rs 2.53 crore in 2001.

Simply put, Avoid and invest at later date. Do remember what happend with Insecticide India.

Disclosure: We do not intend to bid for this IPO.

Porwal Auto Components Limited

2007-12-15T17:58:00.000+05:30

Price band: Rs 68-Rs 75
Issue opens: December 17, 2007
Issue closes: December 20, 2007.
IPO grade: 3/5 Average fundamentals.

Avoid & buy on a later date

Business
Indore based auto component manufacturer is engaged into manufacturing and selling of SG and CI castings used in commercial vehicles segment.

Financials
Income
FY2002-2003: Rs 13.86 crore
FY 2006-2007: Rs 34.63 crore
CAGR = 25%

Net profit
FY2002-2003: Rs 0.06 crore
FY 2006-2007: Rs 0.75 crore
CAGR = 85%

Six months ended September 30, 2007:
Income: Rs 16.70 crore
Net profit: Rs 0.75 crore

Objectives

Expansion manufacturing capacities from 6,600MT per annum to 27, 600 MT per annum
Set up one windmill, of 1.5MW power generation capacity for captive consumption.

Outlook

Eicher is biggest customer and the company heavily depends on Eicher.
New customers like Man Trucks will take time to develop.

Preferential allotment took place to promoters at Rs 10 in January 2006 and now after two years they expect us to pay 7.5 times.

The cost of wind-mill quoted is at Rs 9.90 crore, which in our opinion is inflated. The max we think, taking into account the quotations in some previous IPOs, for a 1.5 MW wind mill one should pay is Rs 6-7 crore.

Chequered history: Company came out with a public offer in 1994. The projections at the time of IPO were never came on paper. The shares were listed only on OTCEI, which never worked smoothly. Company never tried to list itself on BSE or NSE. This is a counter where investor interest always placed on back seat. Even now the concerns on corporate governance remain. The company now is seeking listing on BSE only. Reason is easier compliance and nothing else.

P/E of 68 to 75 times its annualised earnings for H1 FY2006-2007 on fully diluted equity capital. Mind well the 6 months earnings are before any provision for tax. The six months earnings are equal to the 12 months earnings ended March 31, 2007. Investor hence should understand that the stock is almost 120 times it’s per share earnings, if we consider FY2006-2007 earnings.

Looking at the risks involved we recommend an avoid on this counter. Please note that the stock if falls below Rs 30, it becomes an attractive counter though risks on non-promoter investor interest prevail. The attractiveness grows, as Volvo is about to enter Eicher. Commercial vehicle market in India is expected to experience a glut in short term. However post FY09, the commercial vehicles may see a good growth. This may make the counter attractive in the long run as capacities are multiplied.

So for time being wait and watch. Avoid

Disclosure: We do not intend to bid in this public offer.

Transformers And Rectifiers (India)

2007-12-08T17:42:00.001+05:30

IPO opens: December 7, 2007.
IPO closes: December 12, 2007.
Price band: Rs 425 - 465
IPO rating: 4 out of 5, Above average

Business

Manufacturing of transformers upto 220 KV class, having an installed capacity of 7200 MVA transformers per annum at two facilities in Gujarat.

Capacity utilisation: FY2006-2007 80% of installed capacity.
Domestic sales: 96.86% of the total revenue.
Order book: As of November 15, 2007, Rs 360

Financials
Standalone
Revenues
FY 2002-2003: Rs 31.66 crore
FY 2006-2007: Rs 229.40 crore
CAGR of 64%.

Net profit
FY 2002-2003: Rs 1.18 crore
FY 2006-2007: Rs 16.71 crore
CAGR of 94%.

For the 6 months ended September 2007
Top line: Rs 137.50 crore
Bottom line: Rs 12.50 crore.

Objectives

Set up a greenfield manufacturing facility at Moraiya, near Ahmedabad, Gujarat for manufacturing transformers.
Part finance incremental working capital requirements

Outlook

P/E 21 to 23
The order book = 1.5 times its FY2006-2007 sales
Good revenue visibility in near term.

Risks
Execution risks
Dependence on power sector and the state electricity boards for business.

Call
Short term– A must apply. Good listing gains on cards.
Long term- Apply.

BGR Energy Systems

2007-12-08T17:22:00.000+05:30

IPO opens: December 5, 2007.
IPO closes: December 12, 2007.
Price band: Rs 425-480
IPO rating: 3 out of 5, average

Business

Turnkey contracts to supply the balance of plant (BOP) equipment, services and civil works for power generation projects, in which supply, from a single source, the balance of the plant, i.e. items other than the boiler, turbine and generator.

Design, engineer, manufacture, sell and service a range of systems and equipment for the power, oil & gas, refinery, petrochemicals and process industries.

Order book in excess of Rs 3300 crore.
More than 75% of the order book comes from power projects.

Financials

18 months ended March 31, 2007:

Topline: Rs 790.27 crore
Bottomline: Rs 39.96 crore

Three months ended June 30, 2007
Topline: Rs 24.52 crore
Bottomline: Rs 17.48 crore
NPM=7%.

Objectives

Financing the long-term working capital requirements
Finance investments in establishment of manufacturing and assembly facilities

Outlook

Ability to execute project on time without cost over runs is proved earlier.
One of the best return on networth despite having low net profit margin, primarily due to low fixed capital intensity of the business.
Banned by BHEL for three-year time and BHEL will not be doing any business with BGR.

The stock on offer is valued at 116 and 131 times fully diluted annualised earnings for FY2006-2007 on its fully diluted equity. Though this appears like a case of stretched valuation, the strong order book makes it a worthy proposition for the long-term investors.

Reliance Diversified Power Sector Fund, one of the best sector funds for the year has agreed to buy 14,40,000 shares of BGR at Rs 450.

If we decide to believe the rumours in the market, this counter becomes one of the cheapest counters and may emerge as a multibagger. Marketmen are talking that this company is about to get orders worth Rs 5000 crore. Reliance MF picking up stake in the counter is just an indication of the same.

However one should not rely on such speculation while investing.

Call
Invest if you understand momentum. Short-term traders are expected to get near 100% listing gains provided market remains strong.

For the investors the stock can be bought with a long-term horizon for multibagger returns over the next three years.

Brigade Enterprises

2007-12-08T16:41:00.000+05:30

IPO opens: December 10, 2007.
IPO closes: December 17, 2007.
Price band: Rs 351-390
IPO rating: 3 out of 5, average

Business

Bangalore based real estate developer focussed on residential, commercial and hospitality properties.
As on November 23, 2007
Completed: 67 properties, comprising 41 residential properties, 21 commercial properties and five hospitality properties,
Approximately 5.67 million square feet of saleable area and approximately 6.74 million square feet of developable area.

Ongoing: two integrated lifestyle enclaves, 12 residential properties and two hospitality properties
Approximately 12.53 million square feet of saleable area and approximately 13.84 million square feet of developable area.

Forthcoming: four integrated lifestyle enclave, 16 residential properties, nine commercial properties and five hospitality properties
Approximately 23.14 million square feet of saleable area and approximately 30.32 million square feet of developable area.

Business strategy:
Sell the residential properties
Offer the commercial properties on lease
Operate hospitality properties through arrangements with international hotel operators, such as Starwood, InterContinental, Banyan Tree and Accor.

Financials

Consolidated
FY2004-2005: Rs 160 crore
FY2006-2007: Rs 417 crore
CAGR of 61%.

FY2004-2005: Rs 19.87 crore
FY2006-2007: Rs 71.49 crore
CAGR of 89%.

Six months ended September 30, 2007

Revenues: Rs 230.74 crore
Net profit: Rs 44.37 crore.

Objective

Financing the costs associated with acquisition of land.
Part finance the construction costs of ongoing projects.

Outlook

P/E multiple of 45 to 50 taking into account annualised earnings for the six months ended September 30, 2007, on fully diluted equity, assuming exercise of green shoe option.

Good growth plans
Excellent project execution record
Asset light business model requiring less capital blocked.
Lease rentals ensure that there will be steady earnings and less of shocks.

Risks

Regional player mainly operating in Bangalore and faces high geographical concentration risk.
Delays and cost over runs can cost a lot.
Low land bank due to asset light business model compared to peers and brings forth the risk of company acquiring lands at higher costs leaving less scope for margins expansion.
Correction in real estate prices can press the margins. Especially Indian IT companies are facing tough times due to rising rupee and this can further reduce demand in the silicon valley of India- Bangalore.

Call
Subscribe with a long-term view. Not the best pick to back though one of the better counter when it comes to regional real estate player.

Note: We have avoided NPV method, as most of the times one can’t ascertain the real cashflows in cyclicals having regional exposure.

Disclosure: We are not bidding in this IPO.

eClerx Services Limited

2007-12-08T16:22:00.000+05:30

IPO opens: December 4, 2007.
IPO closes: December 7, 2007.
IPO rating: 3 out of 5, Above average
Price Band: Rs 270- 315.

Business

Provider of data analytics and customised process solutions to global clients from offshore delivery centres in India. It includes data analytics, operations management, data audits, metrics management and reporting services.

Simply put it is a KPO.

Exposure to financial services, retail and manufacturing industries
15 out of 22 are coming from “Fortune 500” companies.

Number of clients:
7 in FY2004-2005
22 in FY2006-2007
Top 5 clients account for 86.4% of the total income for 6 months ended as on September 30, 2007.

High client concentration risk. The company employs 1300 employees as on September 30, 2007.

Financials

Standalone
Revenues:
FY2002-2003: Rs 20.5 crore
FY2006-2007: Rs 86.23 crore
CAGR of 43%.

Net profit:
FY2002-2003: Rs 0.68 crore
FY2006-2007: Rs 40.5 crore,
CAGR of 177%.

6 months ended September 30, 2007
Revenues: Rs 51.44 crore
Net profits: Rs 16.47 crore
OPM and NPM have registered a fall from 50% and 46% in FY2006-2007 to 40% and 32% for 6 months ended September 30, 2007, respectively.

ECIL has given a bonus of 14 shares for each share held as on August 31, 2007.
The same is being sold to you as the promoters are offering their stakes through this initial public offer. J

Objectives
Inorganic growth : Rs 22 crore
No targets identified. This may never happen. Just for the sake of mention.
Hinjewadi facility in Pune: Rs 18 crore
Setting up of other facilities: Rs 10 crore

Outlook

The stock is valued at 15 to 17 times its annualised earnings for half year ended September 30, 2007 on the fully diluted equity.

Risks
Export Intensive business.
Strong rupee is eating into margins.
In the times of subprime woes, high client concentration indicates very high risk.

Call
Apply for listing gains-Risk high- return high.
Long-term investors are expected to make money, as the promoters sell out gradually to any of the global major. A game of patience.

Disclosure: We have not bid in this initial public offer

Burnpur Cement Limited (BCL)

2007-11-26T23:14:00.000+05:30

Business

Cement manufacturer based near Asansol in West Bengal.
Installed capacity: 1,000 TPD
Capacity utilisation: 28.77% as on June 30, 2007, due to non-availability of clinker.

Financials

Net sales
FY2003-04 = Rs 7.97 crore
FY2006-07 = Rs 23.66 crore
CAGR of 43%.

Net profit
FY2003-04 = Rs 0.15 crore
FY2006-07 = Rs 1.14 crore
CAGR of 65%.

RONW = 8%

Pathetic RONW and ‘healthy’ CAGR on a low base indicate poor fundamentals.

Objective

Setting up an integrated clinkerisation and cement grinding plant of 800 TPD capacity expandable to 1600 TPD in Jharkhand for manufacturing of clinker, ordinary portland cement (OPC) and portland pozzolona cement (PPC) and portland slag cement (PSC).

Project cost = Rs 120 crore
Promoters’ contribution = equity capital Rs 14.02 crore.
Rs 80.60 crore will be financed through term loan advanced by State Bank of India led consortium of 9 banks.
IPO = Rs 26 crore
The project is expected to go on stream in October 2008.

Outlook

PE = 45
Stretched valuations both on P/E front and EV/tone.
Highly leveraged balance sheet makes 9 banks to come together for a paltry sum of Rs 80 crore.

Investors should consider this risky nature of the business.
There are better options available in the market.

Disclosure: We are not bidding in this IPO

IPO Update - BVCL & EMPEE Distilleries

2007-11-26T22:11:00.000+05:30

Pursuant to our call on Barak Valley Cement we have shorted the counter in small counter on listing day at Rs 67. We covered the quantity at Rs 60. We think that the counter is grossly overvalued and advise investors keep away from the counter.

Today Empee Distilleries was listed in sync with our expectations. We however have advised our readers to book profits post listing pursuant to momentum investing. At the current levels the stock is an attractive counter for those who can buy and hold for long term.

Disclosure: We have not bid in Empee Distilleries IPO and do not hold any position in this counter.

Renaissance Jewellery

2007-11-18T14:10:00.000+05:30

Price band: Rs 125 – Rs 150
Issue size: Rs 66.55 – Rs 79.68 crore
Issue opens: November 19, 2007
Issue size: November 21, 2007

Business:
Mumbai based manufacturer and exporter of studded gold, platinum and silver jewellery. It has three manufacturing facilities, two in Mumbai-SEEPZ and one export oriented unit. 95% sales are from USA. The company has working facility in USD and it also procures raw materials in USD and hence a natural hedge on depreciating USD.

Financials:
Top 5 customers bring in 95% revenues in USA.
Sales
FY2006-2007 – Rs 388.33 crore
PAT
FY2006-2007 – Rs 20.42 crore

Three months ago the company lost the preferential status in USA leading to erosion in margins. The tax brakes will go away in next financial year. After words it will be game to be watched at with more care.

Objective:
Expansion of existing facilities, working capital requirements and investment in foreign marketing subsidiary.

Valuation:
The stock on offer is at 13 to 16 times trailing 12 months’ earnings. Taking into account the high RONW compared to other players the stock is fairly priced. However going forward the rules of the game will change and things look uncertain.

When in doubt remain out.
Subscribe if and only if you have high risk appetite for listing gains, as the issue is said to be already sold.

Disclosure: We are not bidding in this IPO.

Kaushalya Infrastructure Development Corporation

2007-11-18T14:08:00.000+05:30

Price band: Rs 42.5 crore – Rs 51 crore
Issue size: Rs 50 – Rs 60
Issue opens: November 20, 2007
Issue closes: November 23, 2007

Business:
Construction and maintenance of roads, bridges and highways. A small exposure in real estate.

Objectives:
Purchase of equipments, investments in BOT and BOOT projects.

Valuation:
p/e of around 25- 30 times makes it a costly affair though one may not rule out the possibility of high revenue growth in FY2008-2009.

Call:
We do not recommend this issue as the valuation is stretched in near term. Buy post listing at lower levels, if the market provides you with an opportunity.

Matter of fact, the company has land and many projects in pipeline. It can become a good money spinner. But the risks are high
Disclosure: We are not bidding in this ipo.

Jyothi Laboratories

2007-11-18T14:06:00.000+05:30

Price band: Rs 620-Rs 690
Issue size: Rs 274-305 crore
Issue opens: November 22, 2007
Issue closes: November 27, 2007

Business
Mumbai based Jyothi Laboratories (JLL) is FMCG manufacturer. Brands include Ujala (fabric care), Maxo (mosquito repellent), Exo (dish washing bar), Jeeva (soap) and Maya (agarbatti).

Strong distribution network is strength of the company. 21 manufacturing units at 14 locations.

Financials
Sales
FY2002-2003 - Rs 286.04 crore
FY2006-2007 – Rs 374.51 crore
CAGR – 7%

Profit after tax
FY2002-2003 - Rs 17.70 crore
FY2006-2007 – Rs 51.41 crore
CAGR – 30.5%

Offer objective:
Providing an exit route to existing investor

Valuation
The company is valued at 19 to 21 times its EPS of Rs 33.15 for FY2006-2007.

Outlook
For us one more FMCG company is entering the bourses. The distribution ventures with other players are an icing on the cake. We recommend subscribe on this issue with a view to bag listing gains.

Disclosure: We may bid in this IPO.

Edelweiss Capital Limited (ECL)

2007-11-15T23:55:00.000+05:30

Issue Details:
Price Band: Rs 725-Rs 825
Issue Opens: November 15, 2007.
Issue Closes: November 20, 2007.

Business:

Investment banking, institutional equities broking, private client broking, asset management, wealth management and wholesale financing services.

Focus on institutional clientele and high networth individuals.

Shareholders of the company include who is who in the world of financial industry world wide, that talks highly about the quality of the management.

Financials

ECL grew its consolidated revenues and net profit at a CAGR of 130% and 142% over FY2004-07, respectively. It has EBITDA margins and net profit margins at around 47% and 29% levels, respectively.

Objectives of the issue:
To enhance Margin maintenance with the Stock Exchanges – Rs300cr
Pre-payment of Loans – Rs105cr
To open new offices and acquisition of Office Infrastructure – Rs26.9cr
To enhance existing Technological capacity – Rs3.1cr
Other General Corporate purposes

Simply put the company intends to provide an exit route for the existing investor and for ESOP holders.

Outlook:

The offer values the company 35 times its annualized earnings for the 5 months of FY2008. One must note that this is not a low valuation, though compared to some of the players like India Infoline one can say that ECL is fairly valued.

The key concern is that almost 40% of revenues of the company come from arbitrage activities. This is a very volatile stream of earnings. Also most of the subsidiaries don’t have long enough operating history. The future may be uncertain.
The stock is quoting at Rs 1700 in gray market. This is a more a case of euphoric sentiment than any fundamental call. Just few months ago the management has got shares at a price less than the issue price.

We recommend subscribe with a possibility of 100% gains on listing.

Disclosure: We and our clients intend to bid in this IPO.

Muhurat Pics

2007-11-09T16:27:00.000+05:30

Samvat 2064 is starting on a cautious note. There are some global factors that are haunting the market. The worries are even more when we look at the markets near its all time high due to a rally in the stock prices fuelled by the foreign money. In the short term the markets are expected to experience some amount weakness offering good buying opportunities. However at what level to buy is another issue. There are no definite ‘low’ and no definite ‘high’ that we can pinpoint for you.

Last Diwali we came out with a low risk large cap portfolio made up of 4 stocks- Tata Steel, AB Nuvo, Indian Hotels and Rolta India. All four of them delivered above expectations. Three of them rewarded shareholders with attractive rights issue and the portfolio managed to beat the indices.

In the high-risk small cap portfolio we have come across book profits recommendations in the midst of the year. And those who followed us got good profits.

However all this is a history. For those who are still holding our last year recommendations we would suggest that they could continue hold all large caps with a long-term view. Though in case of cash crunch, you may book your long-term profits here.

For this year however we have two portfolios.
Large Cap:
Tata Consultancy Services
BPCL
HDFC
M&M
Marico
Network 18 Fincap.

Here on all stocks we have a rating of accumulate. For BPCL and TCS may experience weakness in the short term. However we still like them with a long-term view. For HDFC and M&M we expect a lot of value unlocking activity is on cards. Marico on the other hand is expected to post a 25% CAGR in earnings over next couple of years. Network 18 Fincap is a rights candidate.

Mid and Small cap:
Mazda: Engineering company at attractive valuations. New business venture in packaged soft drinks is expected to offer a boost to the bottomline. (Buy)

Micro Technologies: A security solutions company. Presence in high grows segments. Promoters and other institutional investors had opted for preferential placement at a price higher than the market price. (Buy)
Seamec: A debt free subsidiary of a French MNC operational in the business of supply services available at attractive valuations due to problems the company faced recently. (Buy)

Asian Electronics: A company in the high growth power allied business. (Accumulate)

Shri Lakshmi Cotsyn: A niche textile player. A diversified portfolio. Promoter and other institutional players have picked up stake at a price higher than the current market price. (Buy)

Ansal Housing: A player in the real estate sector and available at attractive valuations. (Buy)

ICSA: A player in the high growth segment of power sector. Buy with a two-year time frame.

Fundamentally sound stocks for long term:
Sangam India: Textiles major. Promoter placement at Rs 55 and CMP Rs 42. (Accumulate)
Jamna Auto: An auto ancillary company. The promoter group is considering restructuring. Good buy for long term.
Crew B O S: An export house in the business of leather articles. Available at good valuations (Accumulate)
Assam Company: An oil and gas exploration company in Assam. Buy and forget.

Satta scrips:
GTL Infrastructure
Punjab Woolcomber
(These companies are pure gamble. And investors should maintain strict

Exchange traded funds/indices
Benchmark bank ETF (Accumulate)
PSU Bank Index (Accumulate at sharp declines only)
Nifty Beas ETF (Accumulate at sharp declines only)

Gold Beas ETF (Book profits)

Disclosure: We are interested in all the stocks mentioned above.