Category: India IPO Reviews and Updates

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.

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.

The allotment of Cinemax India IPO is out on Intime. The retail portion of the issue was subscribed by 15.22 times. All applications including the ones who have applied for maximum number of shares in retail category were allotted on the basis of lottery.

The shares are issued at a price of Rs 155 / share.

Indian Bank was the worst bank during the mid 90s through 2000, when the Government of India decided to infuse capital into the bank which operates mostly in Southern India. With the economic boom and support from the Government, the bank has successfully turned around and growing strongly.

Background:
Since restructuring, Indian Bank has done extremely well. It has 1408 branches and 500 other points of presence for banking. It has 1.5 crore customers mostly in the rural and under-privileged urban areas, which is one of the largest market to bank on these days.

Strengths:
Current Account and Savings Account customers account for mere 35% of Bank’s income. Their is more headroom in this segment for Indian Bank to cash on. Almost all the branches are now computerized and 84% of its business is already under Core Banking Solutions platform. The bank has six asset recovery branches and they have been doing well. Any recoveries will directly add to the bank’s bottomline. Gross and Net NPAs of the bank have declined from 5.1% and 1.9% to 3.4% and 1.3% over the last one year.

Concerns:
37% of its income comes from Trasury operations. However, this has decliend from 50% over the past couple of years. It also has large portion of its securities on Available for Sale block and the bank may have to bear mark to market loss as interest rates rise.

Financials:
Indian Bank reporetd a PAT of Rs 333.9 crore for the Half year ending FY2007 an increase of 42% over the corresponding half in the past FY. The Bank has been profitable since 2002. Annualizing the same, Indian Bank conservatively will report a PAT of Rs 670 crores for FY 2007.

IPO Details:
Price Range – Rs 77 to Rs 91
Retail Quota: 23, 206, 500 * 91 = Rs 211 crore. [Expected to subscribe 10 times]
Fully Diluted Equity – Post IPO = Rs 429.77 crore
We expect an EPS of Rs 15 for FY2007. Indian Bank can be compared to Allahabad Bank, OBC, Corporation Bank which are trading at P/E of 8 and 10.

Recommendation:
Indian Bank is also in tie up with other regional banks to cross sell products. The long term road map set by wizards in the Finance Ministry is to merge and consolidate smaller PSU banks where they find synergy and strengthen the financial system of India. We recommend investors to apply and not to SELL immediately on listing as the gains in the next few years will be much higher.

You can now check the application status of Akruti Nirman IPO. All retail applications for over 144 shares have been firmly allotted atleast 12 shares. The issue price is Rs 540 and the stock will list for Trading on the 7th of Feburary-2007.

Power is the most essential element to run any industry. The situation of Power is pathetic in India. Their is acute shortage of power and with Central Government’s aim to provide Power for all by 2012, their is a lot of investment needed on this front.

Background:
Power Finance Corporation [PFC] is a PSU undertaking promoted by Govt of India to finance mega power projects. PFC offers a range of financial products and fee-based advisory services to infrastructure projects in the power sector. PFC intends to diversify its borrowers profile by including companies from different sectors such as – coal, lignite, oil and gas, wind power and non-conventional energy.

PFC – Silver Lining:
PFC has less than 1 percent non-performing loans. Most of its borrowers are PSUs NTPC, NHPC and state boards. All of its loans are secured by various guarantees and the company has been profitable for the past 5 years. PFC is highly under leveraged with a long term debt-equity of 4-5 times as against an industry average of 10 times which leaves with lot of headroom for improving return on equity.

PFC – Risks:
Top 10 borrowers account for more than 50% of PFCs business. Net interest margins are under pressure and have been declining, from 4.5% [2006] to 3.4% [2007]. Since all of its lending is restricted to power & energy sector, poses some risk.

Power Finance Corp – The IPO:
Fully Diluted Equity – 114.79 crore equity shares of Rs 10 each.
Share available for Retailers: 40,185,845 = Rs 341 Crore
Price Range – Rs73 to Rs 85

PFC Financials:
PFC reported a PAT of Rs 401 crore for the first half of FY2006-07. Annualising the same, PFC would report a PAT of Rs 800 crore a decline by Rs175 crore over its previous year. However on fully diluted Equity, PFC is expected to report an EPS of Rs 7.0 for FY2006-07 and growth in EPS is uncertain until more details about the company are made available. At EPS of 7, the IPO is priced at P/E of 10.4 and 12 for Fy2006-07.

Recommendation:
I would be comfortable if the IPO is priced at Rs 73 leaving something for short-term investors. It may list around Rs 100 but is a good long term bet when global financial institutions come fishing for financial companies with good loan portfolio.