Avoid – Spice Telecom

Value investors should avoid investing in the IPO of Spice Communications. I am a subscriber of Spice in Karantaka and it is the worst Telecom company in the History of India.

They were the first one to introduce Telecom services in Karnataka. Today Karnataka is the largest Telecom Circle and Spice is Last in the race. What have they done in the past 10 years ? They are promising they will do a lot in the next 10-12 months is a straight forward lie.

Spice is backed by non-investor friendly promoters, Modis, who are like fly by night operators.
National Stock exchange refused to list the shares of Spice because they have acumulated losses more than their net worth.

Blindly Avoid the IPO of Spice. Instead look at RCom or Bharti Airtel.

Vishal Retail Allotment Status is now available online and can be checked here.

Centre’s helping hand heats up Cairn India

As per reports, the Central government has agreed to Cairn India’s proposal to lay a pre-heated 580-kilometre (km) pipeline at a cost of $600 million (Rs 2,400 crore) to transport the crude oil from its Barmer oil fields in Rajasthan to Virangam in Gujarat. The cost of laying the pipeline is to be shared between Cairn and Oil and Natural Gas Corporation (ONGC) in a 70:30 ratio, the same as the shareholding in the oil field, laying to rest a contentious issue between the government and Cairn.

Petroleum Minister Murli Deora is expected to announce the decision shortly, reports suggest. With this, a solution will be in place to evacuate the waxy crude oil from Cairn’s Rajasthan oil find, the largest in the country since ONGC’s Bombay High in 1974.

Crude oil from the field will reach a peak production of 1.5 lakh barrels per day (bpd) of oil, which will boost the country’s output by 20% from 6.8 lakh bpd. The area is estimated to have 1 billion barrels of oil. Cairn is confident of delivering 1,50,000 bpd as has been agreed by the government. Cairn had applied to the government to get the pipeline included in the overall field development cost, which will enable it to recover the cost from the revenue earned from selling crude oil. The field is expected to run at peak production for 10 years.

On 10 May 2007, Cairn India said it had made two new discoveries in the Rajasthan block in northern India. The company received a six-month extension from the government for further exploration in the block.

Cairn India reported net loss of Rs 8.54 crore in Q1 March 2007. Sales were Rs 0.50 crore in Q1 March 2007.

Ansal Properties + ONGC + TVS Electronics

Net profit of Ansal Properties & Infrastructure rose 254.01% to Rs 41.49 crore in the quarter ended March 2007 as against Rs 11.72 crore during the previous quarter ended March 2006. Sales rose 106.88% to Rs 253.90 crore in the quarter ended March 2007 as against Rs 122.73 crore during the previous quarter ended March 2006.

For the full year, net profit rose 225.22% to Rs 131.91 crore in the year ended March 2007 as against Rs 40.56 crore during the previous year ended March 2006. Sales rose 118.74% to Rs 753.70 crore in the year ended March 2007 as against Rs 344.56 crore during the previous year ended March 2006.

Net profit of Oil & Natural Gas Corpn declined 13.10% to Rs 2681.64 crore in the quarter ended March 2007 as against Rs 3085.89 crore during the previous quarter ended March 2006. Sales rose 4.19% to Rs 12396.97 crore in the quarter ended March 2007 as against Rs 11898.37 crore during the previous quarter ended March 2006.

For the full year, net profit rose 8.40% to Rs 15642.92 crore in the year ended March 2007 as against Rs 14430.78 crore during the previous year ended March 2006. Sales rose 18.17% to Rs 56632.81 crore in the year ended March 2007 as against Rs 47922.87 crore during the previous year ended March 2006.

Net profit of TVS Electronics declined 25.99% to Rs 2.25 crore in the quarter ended March 2007 as against Rs 3.04 crore during the previous quarter ended March 2006. Sales rose 19.26% to Rs 77.47 crore in the quarter ended March 2007 as against Rs 64.96 crore during the previous quarter ended March 2006.

For the full year, net profit declined 41.27% to Rs 1.85 crore in the year ended March 2007 as against Rs 3.15 crore during the previous year ended March 2006. Sales rose 4.98% to Rs 272.42 crore in the year ended March 2007 as against Rs 259.50 crore during the previous year ended March 2006.

Mphasis to Outperform

Ahead of the merger with EDS India, Mphasis posted a 10% growth in its consolidated revenue to Rs 337.25 crore in the quarter ended March 2007 over the December 2006 quarter. The growth in revenue was on a 24% rise in revenue from BPO services and 5% gain in IT services.

Operating profit margin (OPM) improved 30 basis points (bps) to 14.3% due to improvement in margin in the BPO operations (320 bps to 27.8%) on increase in offshore billing rate to US$ 10, from US$ 9 in the December 2006 quarter. The contribution of the non-voice revenue rose to 39% from 31% in the sequential quarter. Thus, operating profit (OP) advanced 13% to Rs 48.34 crore. Profit before tax (PBT) was up 26% to Rs 47.75 crore and net profit 27% to Rs 45.56 crore.

As a group, Mphasis follows the strategy of hedging its entire balance sheet. Also, many of its long-term contracts have built-in clauses for re-negotiation of billing rates to factor in the change in the value of the rupee.

Consolidated revenue of Mphasis was 27% higher to Rs 1195.82 crore in the year ended March 2007 over FY 2006 on a strong 30% growth in the IT services to Rs 836.11 crore, with a healthy expansion in the financial services business. On the other hand, the BPO business spurted 21% to Rs 359.71 crore with the increase primarily contributed by telecom clients in India. Net profit was down 20% to Rs 119.88 crore due to poor performance in the initial quarters ahead of the EDS merger talks. As per unaudited numbers, EDS India reported revenue of Rs 570 crore with net profit of Rs 59 crore in FY 2007.

In July 2006, Mphasis approved the merger of EDS India, a wholly-owned subsidiary of Electronic Data Systems Corporation (EDS), US, with itself. The swap ratio of the merger will be 5:4 (5 shares of Mphasis for every four shares of EDS India) and would entail the issue of 44,104,065 shares of the company. Though the legal merger has been delayed and will happen by July 2007, operational integration is already over. Post-merger EDS, US, will hold around 62% stake in Mphasis.

The in-house business from EDS Global is doubling, quarter-on-quarter. There was no business from EDS in Q1 June 2006 of FY 2007. In Q2 September 2006, it was US$ 2 million; Q3 December 2006 US$ 4 million; and in Q4 March 2007 US$ 9 million. The revenue from EDS Global will have a continuous momentum.

The manpower strength including that of EDS India stood at 20,249 employees end March 2007. For calendar year (CY) 2007, Mphasis including EDS has planned to add 8,000-10,000 people. Currently, about 550 employees are doing EDS work.

The Mphasis management had earlier identified four growth drivers: growth in existing Mphasis business, shared services work from EDS, offshore engagements within the existing accounts of EDS, and joint pursuit of large deals. Most of these growth drivers have started kicking in: internal finance & accounting (F&A)- and human resources (HR)-shared services work (employee ramp-up in BPO space in March 2007) as well as a large deal won from a European telecom company by the Mphasis-EDS combine. The management has also indicated the possibility of another large-deal-win from a retail major in the near future. The combine is also pursuing many multi-million multi-year deals.

EDS is playing catch-up with IBM and Accenture – the first in expanding their India headcount aggressively. For EDS’s revitalisation, it is necessary that it expands its offshoring to India fast. Mphasis will be the vehicle through which this will happen. EDS has indicated its intention to take its India headcount to 45,000 by CY 2008 and has set a US $ 1-billion revenue target for Mphasis.

Including EDS India, the FY 2007 EPS of the merged entity works out to Rs 8.6, which is expected to rise to Rs 13.4 in FY 2008. The share trades at Rs 310, giving a P/E of 23 times. With the EDS tag and expected earning growth of 50% for a couple of years, the scrip will outperform the market.

Kotak on BHEL

Sorry the BHEL coverage was left out in the earlier post. Kotak is bullish on the prospects of BHEL and has set a price target of Rs 1,550 on the stock.

While there are likely to be strong order inflows in the next two years Kotak believes that XIIth plan with skew towards private sector and supercritical configuration would pose challenges for BHEL. BHEL may lose market share as well as face pressure on margins because of (a) heightened competition, (b) change in project profile and (c) shift of power generation sector to a competitive tariff based bidding regime. With a market share (57% overall market share) and operating margins (18-19%), Kotak arrives at a value of Rs1,550/share, on DCF based target price to Rs1,550 (from Rs1,350 earlier) as we rollover to March 09 basis.

Buy Wipro and BHEL – Kotak Securities

Kotak Securities has maintained an Outperform rating on Wipro and recommended a BUY with a March 2009 DCF price target of Rs 655. [Not March 2008, its 2009 earnings on Discount Cash Flow Model]

  • FY2008 organic revenue growth will likely be higher than FY2007
  • Jun’ 07 quarter guidance may be conservative, expect further acceleration from Sep’ 07 quarter
  • SEZ ramp ups progressing well, FY2010 tax impact would be the least on Wipro
  • Kotak forecasts an EBIT margin decline of 60bps for Wipro’s Global IT business in FY2008 to 23.8%.

Kotak maintains Outperform rating with an end-March 2009 DCF based target price of Rs655/ share. Kotak assume Re/US$ rate of 42 for FY2008, 42 for FY2009 and 41 for FY2010. Wipro is expected to report an EPS of Rs 24.3, Rs 30.4 and Rs 33.4 for Fy2008, 2009 and 2010

Dalal Street Research Analyst Update:
Indian Rupee is expected to average Rs 41 for FY2008 though Citigroup has pegged it at Rs 40.