Big order from BSNL to boost the telecom business:
Bhagyanagar India received an order to the tune of Rs 350 million from the telecom behemoth Bharat Sanchar Nigam Limited (BSNL), New Delhi for supply of telecom cables to various circles. As per the fresh order, the company has to supply 3.12 LCKM of jelly-filled telecom cables with an execution period of four months. Apart from this major order, we expect Rs 150 million orders from various circles in FY 2008, taking the topline of the telecom division to Rs 500 million which is approximately 3x FY2007 sales of this division. This will tremendously boost the telecom division of the company which was ailing due to the decline in demand for jelly-filled telecom cables. The telecom cables division recorded a YoY decline of 73% in its topline in FY 2007 (from Rs 698 million in FY2006 to Rs 187 million in FY2007).
De-merger on track:
Bhagyanagar India is considering a proposal for restructuring of the company. The restructuring will mainly involve demerging the different business activities namely real estate and infrastructure, manufacturing of copper & telecom products and non-conventional energy. The real estate and energy business will remain under "Bhagyanagar India Ltd." and rest will de-merge into "Bhagyanagar Metals Ltd". The company is well on course to complete the merger, which is expected to be completed in the next 5-6 months.
Preferential allotment of warrants:
The company recently allotted 7.2 million warrants at a price of Rs 44/- to Delhi based M/s Foster Capital Ventures, implying a 7.3% stake in the company upon conversion (on fully diluted equity). Another 4 million warrants were allotted to M/s Bhagyanagar Ventures Ltd and .3 million warrants to Trimurthi Advisory Services Pvt Ltd. The fully diluted equity of the company (after outstanding FCCBs and warrants conversion) stands at 97.5 million shares.
Stock in for re-rating:
We currently value the real estate assets at a 10% discount to the present sale value of the raw land bank, due to the conglomerate nature of the company. This is an upward revision from our previous valuation involving a 20% discount, due to the recent across the board upsurge in the realty stocks. In the event of a de-merger, the company will start getting valued on the Net Present Value of its developed land like other listed real estate companies. Therefore, we believe that this move will be value accretive for the company making Bhagyanagar India a pure real estate play.
At current levels it quotes at a price earnings multiple of 6.8x FY08 and 5x FY09 earnings. Hence there is a huge potential for value unlocking, considering the price earnings multiple real estate companies enjoy. We believe a substantial value unlocking can take place in the stock and intend to revise the target upwards as and when the management gives more clarification on the de-merger details. We reiterate a BUY at current levels with a price target of Rs 65 per share. This includes Rs 55 per share for Real Estate business and Rs 10 per share for other businesses.
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