Brokerages Prabhudas Lilladher and Anagram Stock Broking have recommended 'subscribe' to the follow-on issue of Bharat Earth Movers Ltd. At the price band of Rs 1,020-1,090, the stock is available at a discount of 8.2%-15.7% against the closing price on Tuesday.

The issue is attractively priced trading at 19.6 times 2006-07 (Apr-Mar) earnings based on the upper band, Prabhudas Lilladher says in a report dated June 26.

"There is strong investment taking place in infrastructure building. Moreover, there is huge capacity addition coming up in mining industry in the country. We believe that the company has a significant opportunity to cater to and recommend 'subscribe' to the issue," the report says.

Bharat Earth Movers is one of the major manufacturers of mining and construction equipment in the country. It deals in three segments, namely mining & construction equipment, defence products and railway & metro products.

It caters to various sectors such as mining, steel, cement, power, irrigation, construction, road building, defence, railway and metro transit system. The company recently crystallised its offshore plans by entering into a memorandum of understanding with Companhia Comercio E Construcoes of Brazil to manufacture and supply rail wagons and bogies, mining and construction equipment and spares for the Brazilian market.

Bharat Earth also has plans to enter the contract mining business and have tied up with a mining company for the same.

The company reported net sales of Rs 24.2 billion in FY07, an increase of 18% over the previous year. Operating profit margin was up 20 basis points to 11.5%. However, other income for the year has been lower by 17.6% leading to an 11.7% growth in profit after tax to Rs 2.04 billion, the report says.

Anagram Stock Broking expects Bharat Earth Movers to grow 18-20% CAGR for the next two years.

"Considering the huge capital expenditure in the next 3-4 years in railways, mining and defence sector, we recommend subscribe to the issue," it says in a report dated June 28.

"At upper price band of Rs 1,090, the issue is priced at 22.2 times and on the lower band of Rs 1,020, it is trading at 20.8 times its trailing 2007-08 (Apr-Mar) earnings of Rs 49.2 on post-FPO equity base."

According to industry estimates, total investment in mining will be worth Rs 14,500 crore in the next five years. The brokerage sees huge investment opportunities for BEML in the mining and construction industry, where the company currently commands 20% market share.

BEML has also tied up with two Indian tyre manufacturing companies to invest in production facilities to manufacture off-the-road tyres.

Railway Minister Lalu Prasad Yadav proposed the largest-ever annual capital expenditure of Rs 31,000 crore in the Rail Budget 2007-08. This will translate into an opportunity of about Rs 9,000 crore for BEML.

But the brokerage has certain investment concerns. Change in government policies and rising raw material prices could hamper revenue flow, it feels. The government accounts for 40% of its sales. Delay in payment and implementation could hurt the company's financials.

ISSUE DETAILS

Through the FPO, Bharat Earth Movers is offering 4.9 million shares of which 2.2 million (45%) are reserved for qualified institutional buyers, 1.54 million (13.5%) for retail, 0.66 million (31.5%) for retail and rest for employees. At the upper end, the company would be raising Rs 5.3 billion and at the lower end would raise Rs 5 billion.

 

Among the housing and construction companies making a bee line for the capital market, Housing Development and Infrastructure Ltd made a splash on Thursday. It is the biggest among three IPOs that opened this week.

HDIL has priced its shares in the range Rs 430-Rs 500, against DLF's recent offering at Rs 500-Rs 550 per share. The 2.97 crore-share 100% book build offer closes Tuesday.

The issue was subscribed 0.26 times on the first day of the offer. The issue received bids for 76.91 lakh shares against total issue size of 2.97 crore shares. Qualified institutional investors bid for 65.81 lakh shares, subscribing 0.37 times, while the non-institutional investors subscribed their portion 0.32 times by bidding for 9.33 lakh shares. Retail investors bid for 1.7 lakh shares.

Networth Stock Broking has 'subscribe' on HDIL, saying the stock would be valued at profit to earnings ratio of 14.1-16.4 times the earnings per share of 2007-08 (Apr-Mar).

"The company has an enterprise value of Rs 823-Rs 954 per square foot of developable area of 112.1 million square foot, which is at substantial discount to DLF's valuation of Rs 1,680 per sq ft and Unitech's valuation of Rs 680 per sq ft," says the Networth report.

Keynote Capitals, too, has 'subscribe' on HDIL with a medium term view (over 6-8 months after listing).

As per the brokerage's estimates, the IPO valuation comes to 11.7 times the current financial year and 6.4 times 2008-09 earnings.

"However, our net present valuation is Rs 443 per share. The IPO pricing, thus, translates into a discount of 2.9% to NPV (based on the floor price) and premium of 12.8% to NPV (based on the cap price)," the report says.

In view of the projects to be completed over next 2-3 years, the brokerage expects HDIL's sales and net profit to grow at compounded annual growth rate of 55.5% and 57.5% respectively, during FY07-10.

However, Keynote is concerned about the volatility in revenue, as HDIL recognises revenue on the basis of completed projects method.

"Also, with 40% of land reserves being utilised in ongoing projects, HDIL is exposed to the risk of price declines in the balance 60% of land reserves," says the Keynote report.

HDIL is a real estate development company with significant operations in Mumbai, focusing on residential, commercial and retail projects.

More recently, the company forayed into slum rehabilitation and development. The company is also into land development.

 

Jet Airways (Jet) has registered a 25% growth in revenues for FY07 at Rs70.5bn. EBITDAR for the year stood at Rs3.6bn and net profit at Rs280m. While domestic operations grew at 15% to Rs57bn, international operations grew by a remarkable 100% at Rs13.5bn. Furthermore, the contribution from international operations grew to 20% in FY07 as against 12% in FY06.

In a year where the industry has lost close to $400mn, Jet has managed to turnaround its operations starting in Q3FY07. Even in a traditionally slow fourth quarter, Jet has reported a 21% growth in revenues in Q4FY07 at Rs19.8bn and an EBITDAR of Rs2.8bn, which is notable considering the losses in the industry. Jet has also registered a strong net profit in the quarter of Rs880m as against losses in the first 2 quarters of the year. The turnaround came on the back of a 120% growth in international operations and a 9% growth in domestic operations in the quarter. Further in Q4FY07, international operations are starting to turn profitable at the EBITDA level at Rs31mn.

 

ONGC reported Q4FY07 numbers that were marginally below our expectation. Net profits at Rs22.1bn were down 9.7% yoy, led by higher under recovery contribution (up 37% yoy to Rs 46.7bn). For FY07, consolidated profits were up 15.4% yoy to Rs 177.7bn, driven by higher crude / gas realization as well as higher production. The stock trades at a steep discount to global / domestic earnings as well as reserve valuations, which reflects highly pessimistic estimates on loss sharing, APM deregulation and growth. However, with a 21-32% increase expected in ultimate (recoverable) reserves over the next 18-24 months, low earnings sensitivity to international crude prices and falling proportion of APM gas, we see the valuation gap narrowing significantly. Reiterate Outperformer, with a revised target price of Rs1337, upside of 43% from current levels.

 

SSKI in their report on Dish TV

Dish TV has reported revenues of Rs1916m (against our estimates of Rs1823m) on a subscriber base of 1.9m in FY07. As anticipated of heavy losses in initial years, Dish TV has reported operating loss of Rs1825m and net loss of Rs2523m, much wider than our estimates of a net loss of Rs2070m. Significant part of the bleed comes due to higher pay channel costs, ASP expenses and subsidization of Set Top Boxes. Given the interoperability of content, the only differentiator lies in service standards and subsidies (or Balance Sheet). On both counts, given the emerging competitive environment, Dish TV is unlikely to find the going smooth.

We believe that Indian television distribution is set for digitization. With DTH being less regulated and more organized, we expect DTH to outpace digital cable in near term and become a 16m home market by 2010. While we are positive over the space as also Dish TV's first mover advantage, our concern pertains to intensifying competition. Competition from deeper pocketed players like Reliance ADAG, Bharti, Tatas and Sun would only make it difficult for Dish TV to sustain its share of incremental market (from over 75% now to 32% by 2010E) as also extend the bleed period. Increasing subsidies and customer acquisition cost, besides impending dilution to fund Rs7bn of capex, leave no value for investors. Reiterate Neutral.

 

The other day I got a call from a friend. He wanted to know my opinion on 'Stock A', which was proposed to him by an old hand in the stock market. He was told that the stock would double in a few months and the person who had recommended the stock also had bought some. I told him that this stock was crap and unless an operator was running the stock, I did not see strong reasons on why this stock would double.

I said this not because I have the ability to spot stocks that will double in very short periods of time, but because I am yet to come across people or experts who can do this feat every time.

So in a nutshell I told him to stay away from this stock. Nevertheless he went ahead and took some exposure in the stock, as the seduction of making quick bucks was very high. Exactly 3 days down the line this stock is 18% down with 10% being knocked off in 1 day.

He was now skeptical about making equity investments with the losses suffered in a couple of days. He blamed the stock markets as well as others for his misfortune, but at the same time wanted to participate in the growth of the Capital Markets and our economy.

However, never ever did this friend ponder over the mistake he had committed. I bet there are plenty of people who are guilty of committing the same mistake or others, but never get down to really understand what went wrong and try to learn from their mistakes.

So what are the important lessons for people wanting to create wealth through equities? The cardinal rule is to make as few big mistakes as possible.

Though the list can be pretty long, here are seven common mistakes people make when investing in equities and that you should stay away from.

Mistake No 1: The first and biggest mistake is not to admit making a mistake

People stubbornly hold on to stocks where they are making sizeable losses in the belief that they can exit when the price reaches their buying price. Most of the minds are not trained to acknowledge the fact that they have made a mistake and probably the best thing is to move on.

There was this gentleman who had bought a "penny stock" at Rs 9 following a tip and hoping that it would double in a few months. The stock first rose by 20% and then declined by almost 40%. He was unwilling to let go of the position with the belief that he will do so only when the price reaches his buy price and it will happen sometime soon.

The gentleman is still holding on to the stock and the stock has lost a further 40%. He could have exited the stock with a loss of just 28% initially (considering the appreciation of 20%). Now his losses are around 56% and he is still holding the stock. This happened in October 2005. Even several blue chip stocks have actually doubled or tripled since then.

Mistake No 2: Buy on tips and khabars and wanting to make a quick buck

Technology has made our lives much easier but at the same time has caused a lot of overload as well. We are subject to SMSes , emails and flyers with lucrative offers for "buy and sell tips" , commodities trading etc. that at the end of the day leave you confused.

In this state only two things can happen, (a) One is that you procrastinate and not take any action with the fear of screwing it up and (b) Succumb to these offers for making you rich quickly.

The point that I am trying to make is that how people who are conservative or sane can take dangerous calls and sabotage their own well being. I remember having met this conservative gentleman who was targeting only 12% returns but still could not resist the stock market temptation when the broker called and showed him some tantalizing figures.

Mistake No 3: Buying a loser on its way down thinking you are averaging your costs

Mistake No 4: Ignoring Risk in the investment and looking only at the returns

Risk is an integral part of every equity investment and some equity investments are more risky than others. People however look at the returns without giving due importance to risk.

Stock Futures can give you great returns but at the same time they can wipe out your capital as well. In the mutual fund context, people look at returns when investing in the fund, but do not consider the kind of risks the fund manager has taken whether it be concentration in stocks or sectors etc. At the same time betting heavily in Futures & Options, Commodities without understanding the nuances of the same is fraught with risk.

Understand the risk, i.e, the downside inherent in every investment and volatility associated with it.

Mistake No 5: Buying penny stocks thinking they are cheaper and ignoring stocks, which are priced above a certain number like Rs 1000 thinking, they are expensive.

Mistake No 6: Exiting Winners early and sticking to Losers

Ask yourself: Suppose I have a choice of 2 boats. Boat A is strong, consistent and has traveled the sea through many rough weathers as well. Boat B is showing some cracks and leaks in certain places. Water seeped in through this boat sometime back. Which boat will I choose to safely get me from this shore to the next?

I bet all would opt for Boat A and no person in his right mind would opt for Boat B. Yet when this same logic is applied to stocks, people will stick to losers (Boat B) but exit winning stocks (Boat A) to make a small profit.

Mistake No 7: Just thinking but not doing anything

Finally doing makes all the difference. There is no substitute for action. Just knowing that exercise is good will not keep you fit. In the same vein, just knowing this stock is good is of no use unless you buy it.

I come across so many intelligent people who know many things but are simply unable to implement because of lack of time and busy schedules.

"I knew this stock would do well, wish I had put in money here" or "I missed a good time to enter this stock" are some common responses you hear. Whatever the reason be, in the end what matters is whether you did what you knew was right. A better option for people here is to put their investments on Autopilot (Automatically investing fixed amounts every month in stocks and mutual funds).

To be a successful investor and create wealth through equities, you should shun the costly mistakes outlined. And yes if you have made any one of the above mistakes, admit it and correct it. More importantly "Stop Hoping".

At the end of the day 'Hope is not a strategy in the equities market.'

 

 IDFC
CMP: Rs 131.80
Target price: Rs 162
Morgan Stanley has maintained its 'overweight' rating on IDFC, but increased its price target for the stock from Rs 130 to Rs 162. "

Strong infrastructure spending should enable IDFC to book healthy revenues across businesses – lending, syndication, investment banking products, private equity and proprietary trading," the Morgan Stanley note to clients said.

"While valuations appear full – 25.3 times F2008(estimated) earnings and 3.1 times book – in line with private banks, private equity (PE) and proprietary investments are not contributing significantly to earnings but provide almost 40% of value. Hence, core valuations are lower and could rise, given strong earnings growth expectations," the note added.

TVS Motor
CMP: Rs 60.90
Target price: na
Motilal Oswal Securities has maintained its 'neutral' rating on TVS Motor, saying its performance for the latest quarter has been below expectations. "In the motorcycles segment, in particular, sales have been impacted by higher interest costs and stringent norms being followed by retail financiers," the Motilal note to clients said.

"TVS is working on putting a strong product portfolio in place, which is likely to drive growth going forward. However, pressure on margins remains a concern," the note added. Motilal has forecast an earnings per share of Rs 7.3 and Rs 8.7 for the company for FY08 and FY09, respectively.


Nava Bharat
CMP: Rs 180.80
Target price: Rs 268
Religare has initiated coverage on Nava Bharat Ventures with a 'buy' rating and a price target of Rs 268. Nava Bharat Ventures has realigned its business strategy towards the rapidly growing power sector. Power generation capacity is being ramped up from 125 MW to 237 MW by FY09. Also, a 1,050 MW power plant is to be set up by 2010-11, with power purchase agreements secured for 75% of the power generated.

According to Religare, the highly volatile ferro alloy business has been derisked by power sales since the company can close down its ferro alloy operations in times of fluctuating prices and sell power instead. Religare has forecast an earnings per share of Rs 21.1 and Rs 27.8 for the company for FY08 and FY09, respectively.

Deepak Fertilisers
CMP: Rs 90.55
Target price: Rs 123
Emkay Share and Stock Brokers has maintained its 'buy' recommendation on Deepak Fertilisers & Petrochemicals with a price target of Rs 123. "Deepak Fertilisers & Petrochemicals is expected to be one of the key beneficiaries from the commissioning of Dahej Uran Pipeline (DUPL), a gas pipeline which will increase the availability of LNG for the DFPCL along with other players in the region," the Emkay note to clients said.

"DFPCL at present suffers from lower operating levels at its DNA plant (capacity utilisation 71%), methanol plant (64% capacity utilisation) and ANP plant (24% capacity utilisation) due to inadequate gas availability," the note added.


LIC HsG Finance
CMP: Rs 206.40
Target price: Rs 246
SBI Cap Securities has initiated coverage on LIC Housing Finance with a 'buy' rating and a 12-month price target of Rs 246.

"The (mortgage) industry offers a great potential for growth given Indian demographics and LIC housing finance would be able to reap benefits with its marketing network and enhanced operational set-up," the SBI Cap Securities note to clients said. SBI Cap has forecast an earnings per share of Rs 33.7 and Rs 39.8 for the company for FY08 and FY09, respectively.

 

Spice Communication Report By RELIGARE

Download your free copy from here.

 

 Bhel
Research: ASK Securities (June 18, '07)
Rating: Hold
CMP: Rs 1,440.2 (Face Value Rs 10)

Bhel had a strong outstanding order book of Rs 55,000 crore by the end of FY07, resulting in strong earnings visibility until FY09E. ASK Securities expects the order inflow and backlog to grow further on orders worth 31,000 mw, which are yet to be placed in FY08-09 for the 11th Plan period.

This is likely to help Bhel bag more orders worth Rs 50,000 crore in the power sector alone (Rs 29,000 crore in FY08E and Rs 21,000 crore in FY09E). Further, Bhel will continue to enjoy the legacy of 10% purchase preference up to March '08. Bhel's equipment are technologically superior to those supplied by its Chinese counterparts in the 100/110/125 mw segment. This keeps Bhel ahead of competition.

Also, capacity constraints have been alleviated due to swing capacities/enhancement from 6,000 mw/year to 10,000 mw/year in FY08E and 15,000 mw/year by FY10E. This positions Bhel to exploit impending growth opportunities. The stock trades at 22.9x FY08E EPS and 17.4x FY09E EPS. ASK Securities has advised investors to accumulate the stock below Rs 1,300.

ONGC
Research: Kotak Securities (June 18, '07)
Rating: Buy
CMP: Rs 908.7 (Face Value Rs 10)

ONGC has made several oil and gas discoveries in the domestic market, as well as abroad, over FY07. It added proven reserves of 65.6 million tonnes oil equivalents (MTOE) in contrast to production of 48.28 MTOE during FY07, resulting in a reserve replenishment ratio of 1.36:1.

The new discoveries of 18 MTOE at 5x EV/BOE (enterprise value/barrel oil equivalent) add $0.6 billion to the EV. The company's gas in-place reserves of 5-10 trillion cubic feet (tcf) in the Mahanadi basin will add $1.2 billion to the EV, once it's approved by the Director General of Hydrocarbons (DGH). With new discoveries in FY07, ONGC's proven reserves are expected to be close to 1,000 MTOE.

For FY08, ONGC is expected to clock higher production and realisation for oil and gas. However, ONGC's discount compared to its global peers has risen, due to increased subsidy burden in FY07 to 33% from 28% in FY06. At 30% gross under-recoveries, FY08 subsidy losses are expected to be $11.9/bl compared to $17.2/bl in FY07.

Hindustan Construction
Research: Motilal Oswal (June 11, '07)
Rating: Buy
CMP: Rs 114.6 (Face Value Rs 1)

HCC's FY07 performance was impacted by lower-than-expected revenues (Rs 2,360 crore versus expectations of Rs 2,500 crore), loss of Rs 71 crore on the Bandra-Worli Sealink, mismatch in terms of revenues and costs, and projects not crossing the margin recognition threshold.

As several hydro-power projects were awarded during FY06, they required quick mobilisation in terms of equipment and manpower, which in turn, increased operational, depreciation and interest costs. HCC's order book as in March '07 stood at Rs 9,310 crore, v/s Rs 9,670 crore during March '06.

It has submitted tenders for nine bids, valued at Rs 4,510 crore and plans to bid for 24 new projects worth Rs 17,900 crore in the near future. It has submitted pre-qualification bids for nine projects worth Rs 3,800 crore. Motilal Oswal expects HCC to report a net profit of Rs 100 crore for FY08 (up 77.3% YoY) and Rs 180 crore for FY09 (up 74.8% YoY).
Inox Leisure
Research: Edelweiss (June 18, '07)
Rating: Accumulate
CMP: Rs 131.7 (Face Value Rs 10)

Inox posted a 29.3% YoY growth in net revenues to Rs 33.2 crore in Q407. The growth was driven by an increase in the number of seats under operations. EBITDA margins declined on account of higher entertainment tax and lease rentals.

But, the decline in PAT margins was lower due to higher other income and lower interest expense. For FY07, net revenues grew 38.2% to Rs 140 crore, while PAT grew 41.3% to Rs 24.8 crore. During the quarter, Inox opened one multiplex each in Chennai and Jaipur. At the end of FY07, Inox had a total of 58 screens, including seven screens from the CCPL acquisition.

However, like other players in the multiplex and retail space, Inox is also facing considerable delays in setting up new multiplexes due to delay in handover of properties by developers. Against the expectation of 103 screens by the end of March '08, Inox is likely to set up 92 screens.

This figure is expected to rise to 127 screens by March '09. To factor in this delay, Edelweiss has revised the FY08 PAT estimates downwards to Rs 31.3 crore. It estimates that Inox will have EPS of Rs 5.1 and Rs 6.7 in FY08 and FY09, respectively. The stock trades at a P/E of 19.1x FY09E.

Ambuja Cement
Research: Enam Securities (June 19, '07)
Rating: Outperformer
CMP: Rs 113.4 (Face Value Rs 2)

Enam Securities has covered Ambuja Cements with an outperformer rating, stating Holcim's consolidation as a trigger for a further upswing in the share price. A 20% reduction in minority holdings of Ambuja boosts Holcim's earnings by 3%. Enam expects Ambuja to become a key element in the overall business growth of Holcim.

Ambuja Cements is cash-rich. This will support volume growth in future through brownfield expansion. It is also highly profitable on account of cost competitiveness and retail market focus. Enam expects Ambuja's cement volumes to rise from 16 million tonnes in FY06 to 20 million tonnes in FY08. Realisations are expected to increase from Rs 2,878 per tonne to Rs 3,021 per tonne.

Reliance Communications
Research: Citigroup (June 20, '07)
Rating: Buy
CMP: Rs 513.1 (Face Value Rs 5)

Reliance Communications is an integrated player and the second-largest player in the mobile segment. The company has an 80,000-km-long India-wide optic fibre network and owns the FLAG submarine cable network. It plans to launch IPTV and retail broadband in FY08. Citigroup recommends the scrip as it believes the company will be able to capture its due market share and profitability, which will be a recurring theme.

Despite lower revenue yields, the wireless business has maintained its returns. Most regulatory approvals are also in place and the company is yet to realise the benefit of full utilisation of its network infrastructure.

Reliance Communications' accelerated tower roll-out target (20,000 in FY08) — despite lack of clarity on GSM spectrum — could be due to growing realisation of the 'first mover' advantage in a nascent industry likely to be dominated by 1-2 mega tower companies. Hence, Citigroup has undertaken tower company valuation for Reliance Communications, estimated at $6 billion (Rs 60/share). The scrip trades at a P/E of 21.8x and 17x its FY08 and FY09 earnings, respectively.

Jet Airways
Research: ICICI Securities (June 19, '07)
Rating: Buy
CMP: Rs 810 (Face Value Rs 5)

ICICI Securities has revised Jet Airways' earnings upwards on the back of emerging clarity on the cost structure for US routes and alignment of aviation turbine fuel (ATF) price assumption with current price (corresponding to crude price of $68-70/bbl).

Also, the improving load factor trend is likely to boost international earnings on the back of increasing product acceptance. Jet will be the only private domestic operator to fly the Gulf route beginning CY08, when routes are opened to private airlines.

Further, with the culmination of two mega consolidations in the domestic circuit, ICICI Securities believes the sector will witness the return of pricing power. On EV/sales multiple and greater chances of an early turnaround, it finds that Jet's acquisition of Air Sahara (now JetLite) is relatively cheaper compared to Kingfisher's valuation of Air Deccan.

 

Investors can refrain from subscribing to the IPO of Spice Communications being made in the price band of Rs 41-46. The company is a pure-play mobile services provider in Punjab and Karnataka, with a combined subscriber base of about three million. Faced with high debt and vendor dues, Spice hopes to raise funds for the twin purposes of part-repayment of debt and future expansion. Though the asking price values Spice at a discount to competitors, such as Bharti and Idea, the company's track record, cost-structure and trends in business growth in recent years suggest that it may not be well-placed to capitalise on the growth opportunities in mobile services, amidst intensifying competition.

Of the IPO proceeds of about Rs 520 crore (at the higher end) and the pre-IPO placement of Rs 112 crore, half is to go towards part-repayment of debt (which stands at about Rs 1,200 crore), and the rest to pay licence fees for starting NLD (national long-distance) and ILD (international long distance) services and repayment of vendor dues (Rs 63.6 crore and Rs 177.6 crore respectively).

Business overview

Spice has been in operation for over 10 years now (inception 1997) and is yet to turn PAT (profit after tax)-positive. The balance-sheet shows accumulated losses of over Rs 684 crore as of December 2006. Other regional players such as Aircel and Idea fare better on the above parameters. Aircel, Bharti Airtel, and Idea, which also commenced mobile services in 1997-98, turned profitable within six-seven years and acquired a national footprint.

Spice appears to have lagged its peers in optimising its network operating costs, possibly signalling that it may not be getting the best deals from its network equipment vendors. At 40 per cent of revenues, the proportion of network operating cost for Spice is a clear 15-20 percentage points higher than that for Idea and Bharti. An increasing trend in these costs over the last three years is also of concern, for future profitability.

Second, trends in Spice's subscriber additions over the last year do not compare favourably to competition. It has only managed to add about 82,000 subscribers a month in Punjab and Karnataka, while Airtel has managed to add nearly 2.5 lakh subscribers per month. BSNL and Hutch have added more than a lakh subscribers a month over the past year in these two circles. Spice ranks fifth among the six mobile service operators in Karnataka, but is better-placed in Punjab, where it is second in terms of subscriber numbers. Aircel, which added 1.5 lakh subscribers a month in the last year, despite being a regional player, has managed to retain its leadership position in terms of subscriber base in both the Chennai and Tamil Nadu Circles. For Spice, the modest subscriber additions and a rapidly-falling ARPU (average revenue per user) over the last couple of years are threats to revenue growth.

Third, a substantial portion of this IPO is to go towards part-debt repayment, vendor payment and licence fees to commence NLD and ILD services. Though this would reduce interest costs, the company may be left with little to be deployed in a national rollout of mobile services. In any case, with only part repayment of debt, interest costs will remain at relatively high levels.

Expansion plans

The company has applied for licences for mobile services in 21 new circles. This signals a move to try and move from a two-circle operation to a 23-circle operator, which appears quite ambitious. Apart from the constraints imposed by Spice's financial position, it is also important to note that getting spectrum allocation is a difficult proposition, given the existing competition for spectrum. That apart, some circles (such as West Bengal and Haryana) already have five GSM cellular (most others have four) and two CDMA (Code Division Multiple Access) operators and, hence, the prospects of Spice acquiring fresh licence(s) and entering new circles appears difficult.

Second, the company's foray into providing NLD services would make far better sense if it were a national player — to carry its own traffic to other circles. Regional players usually lease bandwidth from other national GSM (Global System for Mobile Communications) players for roaming and inter-circle traffic carriage.

Spice plans to have NLD infrastructure in 15 locations, whereas it has operations in only two circles. This might help reduce roaming tariff for its customers in the long run, but would involve periodic capex spending on upgrade and expansion of network to accommodate the increased traffic. Considering the paucity of funds that the company already faces, it could find it difficult to bankroll expansion over the long run.

Third, it will face stiff competition in existing as well as any new circles from national players. In the light of the multi-billion dollar nation-wide network expansion announced by each of these players, aggressive subscriber additions, and falling ARPUs, Spice may not have the wherewithal to withstand the competition. These factors indicate the possible high execution risks.

Valuation

At the upper end of the price band, the offer values Spice at a substantial discount (40-45 per cent) to Idea Cellular on an Enterprise Value/subscriber basis. On other metrics such as EV/EBITDA and EV/Sales, the offer does not build in a significant discount to Idea or Airtel, despite the latters' much larger scale of operations and superior cost structure. Spice's EBITDA (earnings before interest, depreciation and amortisation) margin, at 24 per cent, is lower than the others players (the industry average is around 34 per cent). Recent reports also indicate that the Idea-Spice merger has been called off on account of disagreement over higher valuations.

Offer details: The company proposes to offer 131,111,111 shares amounting to a 16.39 per cent stake in the price band of Rs 41-46 per share. Enam Financial Consultants and UBS Securities India are the book-running lead managers, and Karvy Computershare Private Limited is the registrar to the issue.

 

Sharekhan - Spice Telecom IPO

Sharekhan Report - Spice Telecom IPO

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Sharekhan Investor's Eye dated June 22, 2007

Tata Motors
Cluster: Apple Green
Recommendation: Buy
Price target: Rs792
Current market price: Rs685

Annual report review

We have analysed the recently released annual report of Tata Motors (TAMO) and present the highlights below.

Key points

• TAMO had a good FY2007, registering a 32.3% growth in its top line and a 37.5% growth in its bottom line. The medium and heavy commercial vehicle (M&HCV) sales volumes picked up splendidly during the year, led by a strong growth in the freight availability and the Supreme Court's ban on the overloading of trucks. The light commercial vehicle (LCV) volumes sustained their growth momentum as Ace continued to do well while passenger car volumes remained strong on the back of good Indica sales.
• The company continued to make progress towards improving its operational efficiencies as its turnover per employee rose to Rs73 lakh against Rs68 lakh in FY2006. The return ratios remained stable with the return on capital employed (RoCE) at 29.9% and return on net worth (RoNW) at 27.1%. The debtor days reduced to 10.5 days while the inventory days too reduced to 33.7 days from 35.8 days.
• The company has a capital expenditure (capex) plan of Rs12,000 crore for the next four years. The funds shall be spent towards new product development and capacity expansion. To part finance the activities, the company has recently announced the issue of five-year foreign currency convertible alternative reference securities (CARS) aggregating to $490 million, including a green-shoe option of $40 million. The same will be convertible at the option of the company into depository receipts or ordinary shares at a price of Rs960.96 per share. At that price, it would lead to a dilution of 5% over its current diluted equity.
• The company maintains its optimism towards the automobile sector, considering the strong macro factors. However the growth during the current year is expected to be lower in comparison to that in the previous year as the same shall be affected due to the higher interest rates and tightening liquidity. As a strategy going forward, the company plans to focus on new product launches and has lined up a number of launches in the next couple of years.
• We maintain our cautious view on the commercial vehicle (CV) industry and believe that the lacklustre trend in sales would continue in the coming months. We expect a revival at the end of the monsoons and with the commencement of the festive season. At the current market price of Rs685, the stock quotes at 10.4x its consolidated FY2009E earnings and at 5.2x its earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation with a price target of Rs792.

Ratnamani Metals & Tubes
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Under review
Current market price: Rs880

Q4FY2007 results: First-cut analysis

Result highlights

• The Q4FY2007 results of Ratnamani Metals & Tubes are above our expectations.
• The company reported strong quarterly results. The revenues for the quarter grew by 95.3% to Rs172.6 crore.
• The operating profit for the quarter grew by 77.6% to Rs34 crore and the operating profit margin (OPM) for the same period declined by 240 basis points to 22.3% from 24.8% in Q4FY2006. The OPM declined due to a higher raw material cost as a percentage of sales. The raw material cost went up by almost 310 basis points to 62.9% from 59.8% in Q4FY2006. Other expenses as a percentage of sales also went up by 110 basis points during the quarter.
• The interest expense for the quarter increased by 111.4% to Rs4.9 crore while the depreciation cost for the quarter increased by 310.1% to Rs6.2 crore.
• The profit before tax grew by 80% to Rs27.6 crore. The net profit for the quarter grew by 38.4% to Rs17.5 crore due to a higher tax rate of 36.7% in this quarter compared with 17.8% in Q4FY2006.
• For the full year, the net sales grew by 79% to Rs571 crore and the net profit grew by 91% to Rs64.2 crore.
• The order book at the end of this quarter stood at Rs500 crore.
• Driven by a strong order book and the increasing demand for its products from its key user industries, which are in capital expansion phase, we believe there is strong visibility of its earnings. At the current market price, the stock is trading at 12.4x its FY2007 earnings per share and 6.9x its FY2007 enterprise value/earnings before interest, depreciation, tax and amortisation. We shall be upgrading our earnings estimates for FY2008 as well as the price target and would be coming out shortly with a detailed update on the company.

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