Category: Economy, Markets and Macro Views

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.

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.

In a landmark judgement handing over victory to anil Ambani, the High Court of Mumbai said, Reliance Industries (RIL) cannot sell the gas to any third party other than Anil Ambani’s Reliance Natural Resources (RNRL) and NTPC. In an interim order on a petition filed by RNRL, the high court has said that the 81.6 million cubic metres of gas per day (mmscmd) is to be earmarked for RNRL, NTPC or for RIL’s captive use for the next eight years to be pumped from Krishna Godavari basin.

Reports had suggested recently that RNRL had sent a legal notice to the petroleum ministry against the bids invited by Reliance Industries (RIL) for sale of gas and its proposal to enter into gas sales agreements. RNRL has claimed that this violates the interim stay order of the Bombay High Court. Rumors also say that Murli Deora, Petroleum Minister who was close to Sr. Ambani has sided with Mukesh Ambani.

RNRL is the gas trading company of the Anil Dhirubhai Ambani Group and the scrip is up 4.7% on NSE at Rs 35.60. Mukesh’s RIL is down 1.2% at Rs 1,712.

We at Dalal Street had presented the graph of BSE Sensex historical data since its inception in 1979. Today we are presenting a Historical forward P/E Chart of Sensex since 1990 through 2007. [Above Chart]

The BSE Sensex which was quoting at a forward P/E of 11 in 2003 is at historic high of 18 in 2007. Is the Sensex overvalued ? Will BSE Sensex reach 18,000 or 25,000 as some speculators and investors like Rakesh Jhunjunwala predict ? Sorry we differ from their opinion.

Courtesy: Graph is obtained from Citigroup,Bloomberg Research Report June-19th-2007.

The board of Geodesic Information Systems has recommended issue of bonus shares in the ratio of 1:2 to the shareholders.

The board also recommended increase of authorised capital by Rs 35 crore. The board also recommended raising funds through international offerings in one or more foreign markets upto US$ 150 million.

Citigroup Research which had a SELL recommendation on Suzlon Energy with a price target of Rs 1,137 has upgraded it to BUY with a price target of Rs 1,700. The new price target is based on P/E multiple of 23x Suzlon’e FY09 estimated earnings which is well supported by EPS CAGR of 44% and RoEs in the 30-40% range over FY07-10E.

The fact that Suzlon will stagger the payment of 1.2bn punds for REPower over three years implies that it would be EPS accretive from CY08E/FY09E onwards. REPower is a good strategic fit for Suzlon as it provides: (1) Immediate access to Europe, the largest WTG market over the next 5 years; (2) REPower’s low margins (as it is basically an assembler) imply there is plenty of room for volume and margin growth; (3) REPower’s product portfolio is complementary to Suzlon and would be helpful to make inroads into Europe.