2007 | Dalal Street

Bear Hugs Dalal Street

February 13, 20071 min read

The sensex has fallen close to 600 points in 3 trading sessions. Infrastructure & Real Estate stocks are the worst hit. Brokers attribute the correction due to the rise in interest rates and also their is a widespread speculation that some of the concessions given to Infrastructure sector linked to lands banks will be withdrawn in the current budget.

Capital Goods and Cement stocks are also amongst the top losers. Auto stock is driving in the reveres gear as well. FII interest in the market has been lackluster but they have been selectively picking stocks.

The IPO market is also expected to cool down and markets are expected to be volatile until the budget.

India IPO Reviews and Updates

Idea Cellular – Analysis and Recommendation

February 12, 2007July 18, 20203 min read

India’s sixth largest cellular phone company, Idea Cellular is going public this week. Here is our Analysis and Recommendation for retail investors.

Background:
Idea Cellular was originally a partnership between Tata, Birla and AT&T in 1995. After the exit of AT&T and Tata’s A V Birla group was the sole holder. Aditya Birla Nuvo along with other Birla group companies give management control to Kumarmangalam Birla.

Idea currently operates in 8 cellular circles. By just comparing the marketshare in these 8 circles of Idea with peers, Idea ranks at third place with 17.7% behind Bharti Airtel at 20.5% and Reliance Communications at 19.1%. It has launched services in 3 more circles recently and is all set to be a PAN India operator. The company has also applied for a NLD license.

Idea has the lowest ARPU / Month at Rs 335 compared to Rs 438 for Bharti and Rs 354 for RCom. However, RCom has the highest minutes of usage / month / subscriber while Idea lags behind in this as well at 344 minutes. The Indian Telecom industry is expected to witness good growth over the next 4 years and the opportunity lies in areas of low penetration which grew by whopping 81% in the last one year. Idea has a good infrastructure sharing arrangement for cell sites.

Venture Capital & Private Equity Placements:
Idea has done several rounds of VC and PE placements. Telecom India has an excellent coverage of the same.

Financial Ratios:
Idea Cellular has a very high debt to equity at 5.7 at the end of 2006 and is likely to go up further this year. EBDITA margin is at par with peers – 35.10%. EV/Revenues of Airtel’s mobile business is at 8.1 while that for Idea it is much lower at 5.8 – A yardstick on how you can major capital intensive businesses like the Telecom.

IPO Offer:
IPO Price Range – Rs 65 to Rs 75 [Don’t go by the fact that management did some pre-IPO placement at Rs 75 for directors and Birla family, You all have seen what happened in Cairn Energy IPO]
Issue Size for Retail Investors ~ Rs 750 crore [Inbetween 750 and 800 crore depending on green shoe option]
Fully Diluted Equity Post-IPO ~ Rs 2,600 crore or 260 crore shares of rs 10 each

Idea trades at 15.9x its FY2007E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation and at $423 EV/subscriber compared to $920 for Hutch. Ideas discount is mainly due to its absence of Pan-India presence. CLSA analyst writes that Idea expects to earn a PAT of Rs 419, Rs 805 and Rs 1,000 crore for 2007, 2008 and 2009.

Recommendation:
I expressed my apprehensions about family managed companies which lack transparency due to cross holding and other vested interests but he said that the Indian public loves Birla group and they have full confidence in the management. We recommend investors to subscribe with long-term goals as you never know when the current blood bath will stop.

India IPO Reviews and Updates

Mindtree Consulting – IPO Recommendation

February 11, 20072 min read

Background:
MindTree founders are former Sr Executives @ Wipro Ltd who reported to Azim Premji. They founded the company in 1999 and since then it has grown at a very healthy CAGR of 46.9%. Revenue mix of MindTree is similar to that of HCL-Tech, 75% IT related and 25% from R&D engineering. US accounts for 61% of its revenue followed by Europe at 22.6% and the balance from Asia Pacific including India. Like any other IT consulting company from the Indian valley, MidTree also has a lot of fortune 500 companies.

Top 5 clients accounted for 37% of its revenues while the top 10 clients contributed 51% of its revenues. Attrition rate is a key challenge for mid sized companies such as MindTree.

Financials:
The company’s bottomline growth has been very healthy and if Mr Ashok Soota and his team are ambitious, then they might make it to the league of Tech Mahindra the fastest growing Midcap IT company in India.

For Year ending March 2005 Income and PAT are – Rs 215 crore and Rs 16.88 crore
For Year ending March 2006 Income and PAT are – Rs 455 crore and Rs 54.2 crore
For Year ending March 2007* Income and PAT are – Rs 600 crore and Rs 104 crore
* [DalalStreet.Biz estimates ]

The IPO Offer:
Offer Price – Rs 365 and Rs 425
Fully Diluted Equity Post IPO – Rs 37.288 crore
IPO Size – 55.93 Lakh shares * Rs 425 = Rs 237.7 crore
Retail IPO Size – Rs 71 crore.
Expected EPS for Year ending March31st 2007 on fully diluted equity Rs 27.89.

At Rs 425, the IPO is moderately priced at 15 times its earnings. Since the size of retail portion is mere 71 crore, it will be heavily oversubscribed. Allotment of retail application of Rs1 Lakh will also go in lottery. Investors can blindly subscribe to the issue.

Post IPO Scenario:
I normally don’t write future, but I am extremely positive about this company. MindTree will deliver higher growth rates but may not be as High as Tech Mahindra. So investors who don’t get allotted may also BUY the stock on listing upto Rs 600.

Economy, Markets and Macro Views

End of Real Estate Stock Boom ?

February 11, 20072 min read

With the Indian inflation at a record high, 6.58% and interest rates at a four year high, it maybe the right time to exit Indian Real Estate Stocks as the correction has already begun warned Analysts with several brokerage houses.

That’s good news for wealth and job creators who were complaining about unrealistic real estate prices. Late December-2006, Bangalore was the first city to witness correction in Real Estate prices.

Three Stocks, Mahindra Gesco Developers Ltd, Parsvnath Developers Ltd and Peninsula Land Ltd are among the 10 worst.

A six-bedroom duplex apartment in the Malabar Hill area in South Mumbai, where Bollywood actor Vinod Khanna and Citigroup Inc.’s India head Sanjay Nayar reside, sold for about Rs25 crore ($5.7 million), according to the buyer, Rakesh Jhunjhunwala.

Mahesh Nandurkar of CLSA Asia Pacific Markets said,

While a decline in housing affordability and potential oversupply could weaken prices in the near term, the long term outlook remains attractive on strong demand.

Parameswara Krishnan of DNB Nor Asset Management said,

Property-stock valuations are approaching bubble territory. We should see some correction. He said he is avoiding real-estate shares. As more supply of paper hits the market, valuations and returns will come down to more stable levels.

Purvankara Projects, Omaxe, DLF, Kolt Patil and others are waiting for an IPO.

Economy, Markets and Macro Views

Citi Maintains BUY on TCS, Infosys, Wipro, HCL

February 9, 20072 min read

Citigroup in its latest research report has maintained a BUY on all the front line IT stocks.

TCS is expected to report an EPS of Rs 54.26 and Rs 65.67 for Fy2008 and FY2009. Price target for TCS is Rs 1560.

Infosys is expected to report an EPS of Rs 84.74 and Rs 105.9 for FY08 and 09 respectively. Price target for Infosys is Rs 2660. 21% upside from current levels.

Slowdown in Telecom sector is unlikely and Wipro is all set to cash in. Wipro’s BPO is also doing extremely well. It is expected to report an EPS of Rs 25.05 and Rs 31.1 for FY08 and FY09 respectively. Price target for Wipro is Rs 730. I am wondering if Wipro will spin off its BPO as a separate business to unlock shareholder value ? Maybe not as the management is much more ethical and has long term road map and blueprint of the company rather than short term stock market profits.

Citi continues to be bullish on HCL Technologies. HCL Tech is expected to report an EPS of Rs 36.5 and Rs 44.05 for FY08 and FY 09 respectively. Conservative price target for HCL Tech is Rs 770 [Cum Bonus]

Detailed review of Satyam’s stock recommendation is available here.

Citi has recommended a SELL on iFlex solution with a price target of Rs 1850 as the company’s stock is currently overvalued compared to its peers.

Equity Research

Citigroup revises Satyam target upwards

February 9, 20072 min read

In a research report released minutes ago by Citigroup equity research, they have maintained a BUY recommendation on Satyam Computers Ltd and revised the price target upwards to Rs 582 from Rs 510, 20% appreciation available from current levels.

3Q07 reported numbers were in-line with consensus expectations – however, considering that restricted stock unit (RSU) charge was deferred until next quarter, the results were below expectations.

3Q margins were boosted by seasonal/one-off items like lower leave encashment charges (down from Rs350m to Rs100m QoQ) and lower gratuity (down from Rs110m to Rs30m QoQ). All these seasonal factors reverting to normal levels and introduction of RSU charges will restrict any margin improvement in 4Q.

Satyam’s top-line growth story remains intact with good client wins and strong hiring of ~47% LTM, we believe that revenue outlook for FY08 remains strong. Margin pressures are likely to
continue. Despite factoring in a 150bp improvement in pricing in FY08, the full impact of RSU and wage hikes will result in a margin decline of ~100bps in FY08.

M&A story buried: Satyam has clearly stated in the investor release that it is not looking to get acquired [Speculators bought rumors of CapGemini BUYING out Satyam due to low promoters stake in the company], the M&A story gets buried.

Satyam is expected to report an EPS of Rs 25.18 and Rs 30.23 for FY08 and FY09. After the below-expectation quarterly performance, Satyam is back to a 28% discount to Infosys (vs. 22% before Satyam’s 3Q results). Our target price builds in a 25% discount to Infosys.

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