2007 | Dalal Street

Equity Research

Citigroup Bullish on Vardhaman and ICICI Bank

March 9, 20072 min read

Citigroup research is bullish on the prospects of Vardhaman Textiles [VART.BO] and ICICI Bank.

Vardhaman Textiles announced plans to de-merge the sewing thread business (14% of FY07E revenues) to its 100% subsidiary Vardhaman Yarns and Threads (VYTL). Additionally, the threads business of another 100% subsidiary, Vardhman Threads, will also be transferred to VYTL. Vardhaman Textiles’ sewing thread division will be transferred as a going concern on a slump-sale basis for Rs.2.6bn; For every 2 shares held in Vardhman Threads, equity holders would get one equity share of VYTL and one share of Vardhaman Threads.

Vardhaman textiles is expected to report a fully diluted EPS of Rs 38.64 for FY08 and Rs 51.54 for FY09. Citi recommends BUY on the stock with a target of Rs 350.

ICICI Bank is in the news after it proposed to demerge and unlock the value of its subsidiaries – mainly Insurance. Citi has recommended a BUY on ICICI Bank with a target price of Rs 1,125.

ICICI Bank will be spinning off its holdings in Life Insurance, General Insurance and Asset Management businesses into a 100%-owned holding company. The transfer – Rs19.5b (9% of capital) of its investment will be at book value. Management suggests a listing time frame of 6-9 months. ICICI is expected to report an EPS of Rs 39 for FY07 and Rs 45 for FY08. However, the re-rating in stock is only due to the listing of its insurance business. BUY on decline.

Economy, Markets and Macro Views

Bajaj, ICICI, HDFC – Insurance Subsidiaries Adding Value

March 6, 20072 min read

Many Indian companies like ICICI, Bajaj Auto, HDFC, Aditya Birla Nuvo etc ventured into Life and General insurance business incorporating a wholly owned subsidiary to grow beyond their core business. Withn 3-5 years of operations, subsidiaries are now ready to be hived off as individual business entities. The insurance industry is expected to grow at 21% CAGR between 2007 and 2011 and private operators are all set to grab a big slice.

1. ICICI Ltd
ICICI Prudential is the market leader amongst the private life insurers with a market
share of 9.5% the second largest life insurer after LIC. It is the largest private operator with a market share of 30% amongst private companies. It has PAN India presence with 472 branches and 176,000 advisors. Per share value of life insurance for ICICI Bank, INR 219.

2.Bajaj Auto Ltd
Bajaj Allianz is the second largest private insurance company in India with a total market share of 5.3% and 17% amongst private operators. It has 900 offices in India and derives 70% of its business from agents while the other 30% from alternative channels like GE Money, Syndicate Bank etc. Valuation of Bajaj Allianz is pegged at Rs143 billion. This amounts to an estimated Rs686 per share or 25% of Bajaj Auto’s current market value.

3.HDFC
HDFC has tied up with Standard Life and has conservatively operated till now. It is the third largest operator amongst private players. It has around 500 offices for sales leads and 52,000 financial advisors to promote various insurance products. HDFC Standard Life Insurance Co. is valued at Rs83bn or US$1.9bn on a 12-months forward basis implying Rs149 per share of its parent HDFC.

Economy, Markets and Macro Views

Blood on the Street

March 5, 20072 min read

With a thumbs down to the infrastructure sector and unthoughtful measures of taxation trigerred the post-budget sell off into a blood bath on Dalal Street.

At 11:00AM, the Sensex is down 500 points at 12,385. Indian markets were overheated. Adding to its woes, Slow dose of Interest Rate hike, Thumbs down to infrastructure companies and the broken promise about tax holiday for IT companies trigerred the massive sell off in Indian markets.

FIIs have pressed substantial sales over the past few days in contrast to an intermittent surge in inflow in February 2007. As per provisional data, FIIs were net sellers to the tune of Rs 613 crore on Friday (2 March 2007), the day when the Sensex had lost 273 points. Their net outflow was worth Rs 3080.80 crore in four trading sessions, from 26 February 2007 to 1 March 2007.

What Fund Managers are Saying ?
From a life closing high of 14,652.09 on 8 February 2007, the Sensex has lost 14.8%. Deutsche Bank in a post-Budget report states that BHEL, Infosys Technologies, Punjab National Bank and Grasim (a high-risk, high-return play) are its top picks.

UBS shares a similar view. ‘Post the recent correction, relative valuations don’t appear as expensive as they used to be. India is now the fourth most-expensive market in Asia compared to the most expensive status tag it had about a month back.

India IPO Reviews and Updates

IT People files for IPO

March 3, 20073 min read

IT People, a company which recruits and trades people to IT/ITeS oriented company has filed draft Red Herring Prospectus for an IPO of Rs 45.25 crore to invest in technology infrastructure, and business expansion.

IT People (India), is a company providing Human Capital Solutions focused on the IT-ITES industry on a global basis. The company is BS7799 certified organization and has offices in India and Middle East.

Earlier Balwas ecom India was acquired by the present promoters IT People in 2003.

The company has eRecruitment portal ITPeople.in, a global recruitment exchange portal exclusively catering to the requirement of IT Professionals in the field of Information Technology & ITES. The portal is a platform for employers, jobseekers and consultants in the IT industry to post, search, advertise and use researched information.

From the recruiters prospective the company provides a platform to post its requirements, receive applications, schedule interviews and manage the hiring life cycle.

For the job seekers it provides a platform to search for the best career opportunities available in IT companies across the globe.

The company through its portal provides a database search product in the IT domain for the recruiters of job seekers with multiple search facilities, unique IT skill and certification based parameters. The revenue from this service line is mainly through subscription, which could be quarterly, half-yearly or yearly as per the requirement. The company only provides the database and will not receive any revenues either from the job seeker or recruiters on recruitment.

On the portal other than database subscription revenues the company also earns revenues on account of visibility i.e. advertising or branding on the portal. Currently of the e-Recruitment services, which account for 50% of the total revenues, database constitutes 50% of the revenues, and 30-40% revenues are from visibility or branding solutions.

The second line of service is consulting wherein the company provides placement, contract and project based sourcing services and special projects like Build, Operate and Transfer. The line of business contributes 50% of the revenues.

Currently the company has total employee strength of 150 people with 75 people on contract staffing.

IT People has been appointed as exclusive partner for India by Dubai Outsource Zone (DOZ), the world’s first free zone dedicated to the outsourcing industry. Meaning any Indian company wanting to set up office in the DOZ would have to apply through IT People.

IT People is also the Preferred Business Partner of DOZ on a global basis for providing recruitment and human resource consultancy services, facility management services and BOT services.

For the quarter ended December 2006, revenues stood at Rs 5.18 crore up 115% over corresponding quarter previous year with operating profits up by 521% to Rs 1.01 crore and PAT zooming to Rs 1.08 crore against Rs 9.10 lakh in the corresponding quarter previous year.

For the nine months ended December 2006, IT People reported 95% growth in revenues to Rs 11.26 crore with operating profits up at Rs 1.91 crore against Rs 5.60 lakh in corresponding previous period and the PAT at Rs 1.58 crore against loss of Rs 16.25 lakh in the corresponding previous period.

Equity Research

Houseview – ITC, TCS and Cosntruction Stocks

March 2, 20072 min read

The impact of budget on the bottomline of many companies is getting more clear now.

Merill Lynch is bullish on ITC and TCS and is bearish on the prospects of ACC. Merill added ITC to its top buys list in India and increasing its weight in their model portfolio. Fears of VAT had driven a de-rating of the stock. Post the budget these fears are behind us and look for the
stock to deliver a strong return over the next year.

Merill expects profit growth of 20% over next 2 years: ITC earnings remain insulated from rising interest rates, slowing global economy and worries on inflation. Key assumptions are cigarette volume growth of 7-8% and EBIT margin expansion of 150bp. Merill has set a price target of Rs200 which is based FY08 P/E of 22.5x. A one-year forward multiple of 22.5x would also put ITC in line with Indian consumer sector average.

MAT will impact the bottomlines of Infosys and HCL Technologies more than TCS and Wipro. However, FBT on ESOP is likely to have a deeper impact on Infosys, Medium impact on Wipro and no impact on TCS. Merill is bullish on TCS with a price target of Rs1,600 – at 23x 1-yr rolling forward EPS. This is at a 5% discount to our target multiple for Infosys at 24x and lower than TCS’ current 1yr forward PE of 26x.

Citigroup published a report on the impact of withdrawal of Tax benefits for construction companies. Recall my last night posting on the cost of doing business in India because you never know when tax laws will nail your company. Citi says that the tax impact may also lead to liquidity crunch. Gammon India will have an one time impact of Rs 35 crore, Nagarjuna Constructions of Rs 26 crore and IVRCL of Rs 58 crore. I had already told you yesterday that this will have no impact on Punj Lloyd and L&T and Citi report confirms the same 🙂

Citi maintains a BUY with Low Risk rating on Gammon India with a Price Target of Rs 461. Nagarjuna Constructions BUY with Medium Risk for a price target of Rs 272 based on sum of parts evaluation. Citi downgraded Hindustan Construction to SELL Low Risk with a price target of Rs 105.

India IPO Reviews and Updates

MindTree Consulting & Idea Cellular IPO Status

March 2, 20071 min read

You can now check the status of your application for MindTree Consulting IPO here. Due to heavy over subscription in the retail category, all the applicants fate has been decided by lottery. The ratio of allotment is 1:2 in Rs 1.0 Lakh application.

The IPO status of Idea Cellular will be made available here by tomorrow evening. Just choose Idea Cellular from the drop down menu.

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