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Sunday, August 31, 2008

Straight From The Heart

Opto Circuits offers the right mix of high growth and dividends. Though the company seems fairly valued, investors can accumulate the stock on dips

KI R AN K ABT TA ET INTELLIGENCE GROU P


ALTHOUGH SMALLER than the mainstream drug segment, the medical devices business is an emerging segment in the healthcare sector. Bangalore-based Opto Circuits is a fastgrowing export-oriented company in this segment. The stock offers the right mix of high growth and dividends in the mid-cap space. Though the company seems fairly valued, investors can accumulate the stock on dips.
BUSINESS:Opto started its operations as a private limited company, and has now become a Rs 468-crore company engaged in manufacture and export of invasive and non-invasive medical equipment like sensors, pulse oximeters, monitoring systems and stents, among others. The noninvasive products business contributes 75% to the company's topline, while invasive products contribute 22%. Being a major supplier of sensors to large original equipment manufacturers (OEMs), the company generated over Rs 100 crore (22% of its revenues) from contract manufacturing during FY08.

In '02, the company acquired US-based Mediaid, which is engaged in the business of sensors and monitors. This was followed by another international acquisition of Germany-based Eurocor, specialising in manufacture of cardiac stents and catheters. In April '08, the company acquired US-based Criticare Systems, which manufactures and markets patient monitoring devices. Along with these and other key acquisitions in the domestic market, the company has developed a good distribution network globally.
GROWTH STRATEGY:Opto has used the inorganic route, especially overseas acquisitions, to grow at a rapid pace in the past few
years. The acquisitions have enabled the company to expand its product portfolio, as well as enter new geographies. It intends to have a comprehensive product profile covering all segments, from bedside equipment to those used in operation theatres. Opto's noninvasive products business is growing at 40%, while its invasive products basket is growing at 80-100% annually. Cardiac stents is a major growth driver for the company. With Eurochor launching drug-eluting balloon dilation catheters, Opto's product profile will be enhanced further.
The company is likely to boost its margins
by reducing costs at Criticare Systems. Transferring Criticare's manufacturing from Taiwan to its Bangalore facility, and reducing the design cycle time from three years to nine months are measures to this effect, which Opto has already implemented. The company's EOU status is set to expire in March '10. In view of this, the company is setting up an SEZ in Karnataka to manufacture electronic hardware. Opto is likely to shift its manufacturing to the SEZ in order to enjoy uninterrupted tax benefits. Outsourcing in the medical equipment industry is growing by 10-15% every year. The company, as a supplier of medical equipment, is likely to benefit from this growth.
FINANCIALS:Over the past five fiscal years, Opto's revenues have witnessed a CAGR of 65% to touch Rs 468.2 crore in FY08. Net profit during the period posted a CAGR of 78% to reach Rs 133.3 crore in FY08. While the company has charted ro
bust and aggressive growth over the past three fiscal years, the past three quarters have seen a deceleration in earnings growth. Costs associated with launch of new products dragged down its profitability in the last two quarters of FY08. In Q1 FY09, profitability was further hit by higher interest burden following the acquisition of Criticare Systems.
The company intends to incur a capex of around Rs 80 crore in FY09, against Rs 35 crore in FY08. It is a dividend-paying company with an average 40% of net profit (average of past five years) being distributed as equity dividends. With growth in its business, the company expects to maintain similar dividend payouts in coming years as well. However, at 67%, the CAGR of dividends has been slower than that of profit over the past five years.
VALUATIONS:The stock currently trades at a consolidated P/E of around 20. With post-acquisition expansion in its product portfolio and widened global footprint, the company intends to grow by over 60% y-o-y to achieve a turnover of Rs 780 crore in FY09, maintaining a net profit margin of 28%. Considering its estimated earnings for FY09, the company is currently trading at a forward P/E of 14. This offers good upside potential for investors.
kiran.kabtta@timesgroup.com

Casey Stengel - "All right everyone, line up alphabetically according to your height."

BULLS'S EYE

LARSEN & TOUBRO
RESEARCH: MORGAN STANLEY
RATING: OVERWEIGHT
CMP: RS 2,590
MORGAN Stanley believes that fears of the impact of a slowdown in the capex cycle in India on Larsen & Toubro (L&T) are exaggerated. It expects L&T to gain market share during the slowdown, so the risk-to-growth estimates will remain low. Morgan Stanley believes L&T is the lowest risk play in the sector and strongly recommends buying into any weakness. However, despite the upgrade, Morgan Stanley estimates a CAGR of 25% for L&T's standalone earnings over FY08-10E against 57% over FY06-08E. L&T will be cushioned from the slowdown due to its propensity to gain market share in slowdowns, its entry into newer verticals and its exposure to the Middle East. On a bottom-up basis, healthy capex trends in verticals (E&P and metals) further increase the company's ability to weather the slowdown.
CONTAINER CORP OF INDIA
RESEARCH: JP MORGAN
RATING: OVERWEIGHT
CMP: RS 877
JP Morgan has assigned an 'overweight' rating on Container Corporation of India (Concor) with a March '09 price target of Rs 1,010. The price target implies a 16% potential share price upside from current levels. Concor is India's largest railway container freight operator with an over 90% market share. By that estimate, Concor will have an earnings CAGR of 16% over FY08-10 driven by growth in containerised cargo traffic. Given sustained growth in India's foreign trade, JP Morgan expects container traffic to grow at 14% over FY08-10E. It expects Concor to be a key beneficiary of this growth, given its unparalleled infrastructure network with 58 inland container depots (ICDs) and over 150 rakes and established customer relationship. The company's revenue growth is likely to accelerate to 18% CAGR over FY08-10E (versus 10% in FY08), given a sharp increase in customer tariffs. The March '09 price target is based on discounted cash flows (DCF) and implies 13x oneyear forward P/E on FY10E EPS (which is at a 10% discount to its average historical three-year multiple). The multiple looks justified, given rising competition and moderation in earnings growth. Downside risks to the price target and view are a challenging macro environment, given high crude oil prices and rising inflation, which can slow down India's foreign trade; and a sharper-than-expected increase in competitive intensity.
AREVA T&D
RESEARCH: CITIGROUP
RATING: HOLD
CMP: RS 1,526
CITIGROUP has initiated a 'hold' recommendation on Areva T&D India with a target price of Rs 1,809. Areva T&D's EPS has witnessed a CAGR of 117% over CY04-07 and expanded return on equity (RoE) from 11.4% to 46.5%, aided by a focus on higher-margin national grid/selected orders for the Accelerated Power Development and Reform Programme (APDRP) and growth off a lower base. Further, the company's EPS is expected to witness a CAGR of 32% over CY07-10E, versus that of ABB at 25%, with higher RoEs of ~40% versus ABB at ~30%. Discussions with the management suggest that any foray into the nuclear power equipment business in India will be through a separate entity. Globally, Areva is at No 3 after ABB and Siemens in power T&D. ABB has historically been the market leader in India. However, Areva T&D India has edged past ABB in H1 CY08 with a market share of 22.4% vs 19% for ABB and 12% for Siemens. These are strong end markets and low-cost manufacturing centres. Areva T&D Global has a clear strategy of making these two countries global sourcing hubs. Currently, exports contribute 14% to Areva T&D India's sales and are expected to jump to 25% by CY12E. The stock trades at a P/E of 19.7x CY09E and provides limited upside to the target price of Rs 1,809. The target price is based on a P/E of 23x December '09 set at a 9.5% premium to historical average P/Es and is in line with that of ABB's. Order inflow momentum, execution and commodity price movements can drive share price movements.

HCL TECHNOLOGIES
RESEARCH: INDIABULLS SECURITIES
RATING: BUY
CMP: RS 234
INDIABULLS Securities has maintained its 'buy' rating on the stock because the company witnessed a strong deal inflow during Q4 '08 ($310 million) and signed a total contract worth $1 billion during the year. HCL Technologies reported strong results for the quarter and the year ended June '08. Its topline recorded a sequential growth of 11.5% to Rs 2,170 crore, driven by an appreciating dollar and a modest volume growth. EBITDA margin increased by 117 bps q-o-q to 23.4%, led by an improved operational efficiency and a decrease in the cost of revenue, which helped offset the increase in SG&A expenses. Although in a weak macro-economic environment, pricing will continue to remain under pressure, Indiabulls expects the company's revenues to grow at ~21.4% in dollar terms for FY09, driven by volumes. Besides, gain from the appreciating dollar against the rupee will also help improve revenues to grow at 27.2% in rupee terms for FY09E. Despite a slowdown, the US remained the highest revenue contributor and showed a decent growth throughout the year. Besides, the company steadily improved its utilisation rate from 69.2% in Q1 '08 to 73.9% in Q4 '08, which helped improve margins. Despite having stable fundamentals, the stock is trading at a discount of 29% to the average industry multiple. Moreover, valuation gives a fair value of Rs 316. The stock has an upside of around 37%.
ANSAL PROPERTIES
RESEARCH: MACQUARIE
RATING: NEUTRAL
CMP: RS 101
ANSAL Property and Infrastructure (APIL)'s leverage ratios are stretched. Its net debt-to-equity ratio (incorporating the impact of outstanding land payments) stands at 165%. This does not include any impact of off-balance sheet financing. APIL's stretched balance sheet and the general scenario of tight liquidity are primary concerns. Macquarie has a limited visibility on sources of capital which will be used to generate profits from this land bank. Investors are unlikely to (and should not) attribute any value to profits earned over and above the replacement cost of the land bank. Macquarie has cut its NAV estimates to reflect this change in opinion. Its ~240 million sq ft of land in North India provides APIL the scale to enjoy preferred supplier relationships. Margins are likely to be supported by the low average cost of land acquisition (Rs 121/sq ft). Projects in North India account for 100% of APIL's NAV and land bank. This concentrated land bank limits its ability to focus elsewhere if this market experiences a slowdown. North India has seen rapid price rises and even more rapid project launches in the past 2-3 years. Incrementally, this scenario is likely to be exacerbated by a surge in secondary market supply, as speculators try to exit properties bought in the past two years. The target price of Rs 100 based on a 25% discount on NAV remains unchanged. APIL is trading at a 24% discount to liquidation value and below its book value. This provides downside support. Nevertheless, Macquarie has downgraded the stock to 'neutral' from 'outperform' as the stock lacks triggers, which may keep the share price at depressed levels.


India Inc went on a shopping spree in the UK last week

It's Twice As Nice

India Inc went on a shopping spree in the UK last week.While OVL agreed to buy Imperial Energy, Infosys gobbled up Axon. ETIG ploughed through the numbers to see how the deals stack up for Corporate India


IN ITS bid to expand its exploration asset base and secure future growth in production, ONGC agreed to acquire UK-based Imperial Energy (IEC) through its wholly-owned subsidiary, ONGC Videsh (OVL). The $2.58-billion deal has been accepted by the IEC management and is likely to be finalised over the next couple of months. Although the deal appears to be fairly valued, it will take another couple of years for the company to fully benefit from it.
IEC is currently a loss-making company, but its hydrocarbon reserves
made it an acquisition target. It had reported a net loss of $43 million in '07 on sales of just $20 million. And considering its heavy capital expenditure on exploration activities over the next couple of years, it is not likely to earn positive cash flows till '10.
By end '07, IEC held proven and probable (2P) hydrocarbon reserves estimated at 920 million barrels of oil equivalent in 17 oil blocks in Russia and one block in Kazakhstan.
Nearly 95% of these reserves are in the form of crude oil with just 5% of natural gas, which will favour OVL due to higher crude prices.
IEC has drawn up ambitious exploration plans to boost its production. It will spend over $600 million over the next two years to raise production to 25,000 bpd by end-'08 and 35,000 bpd by end-'09. Just to put things in perspective,
a 25,000-bpd production level will generate Rs 4,500 crore of annual revenues at the current crude price of $115 per barrel. The company has set a production target of 80,000 bpd by the end of '11.
With this buy, ONGC will gain a second foothold in Russia — particularly in the resource-rich Siberian region — after its 20% stake in Sakhalin project through OVL.
Considering ONGC's current production at around 983,000 bpd of oil equivalent, this acquisition amounts to an addition of around 2.5% to its next year's production.
Financing the acquisition won't be
much of a concern, considering the fact that ONGC is carrying over Rs 16,000 crore in cash.
At present, there is no clarity on various important matters that will affect ONGC's net realisation on sale of crude oil from these fields. However, in '07, IEC's net average realisation stood at $33.35, which is nearly half of the global prices at $66 and is a definite cause of concern.
Similarly, among its various oil fields, IEC holds nine exploration licences, while only four licences allow it production rights. Thus, the exploration successes do not mean automatic right to production.
All these exploration licences will expire within the next 18 months and ONGC will have to secure the production licences separately if the exploration results in new discoveries.
ramkrishna kashelkar
LAST WEEK, Infosys Technologies acquired the UK-based SAP consulting and implementation company, Axon, for $753 million. Though this is the biggest acquisition by a domestic IT company, the effect on Infosys's stock price was not significant. The scrip lost 0.35% the following day (Tuesday), compared to a gain of 0.22% for the Sensex.
The deal is expected to be completed by November '08. Hence, the impact of the deal on Infosys' financials in the current fiscal year will be limited. Assuming a growth rate of 25% in topline for Axon and no change in its operating margin, the company will contribute just over 1% towards the consolidated net profit of Infosys for FY09. Obviously, the impact on earnings per share (EPS) is negligible. But the full impact will be visible from FY10 onwards.
However, if Infosys is able to raise Axon's net profit margin by 500 basis points (bps) through offshoring and better deals, the acquisition will add nearly Rs 382 crore to Infosys' consolidated net profit in FY10. This will
boost Infosys' bottomline by 5-6%, which is quite significant. However, this estimate is based on the assumption that Infosys continues to grow its topline at 22% and maintains its operating margin at the current level. As this is an all-cash deal, there will be a pro-rata change in Infosys' consolidated EPS.
In the short term, however, the deal will reduce Infosys' overall operating margin. Axon currently has 15% operating margin, compared to over 31% enjoyed by Infosys. This is likely to reduce the consolidated margin of Infosys by around 200 bps in FY10. In the long term, Infosys will try to improve its operating margin by increasing the offshoring component of Axon's operations.
Overall, the deal is part of the long-term strategy of Infosys to enter the consulting space. Infosys currently derives around 24% of its revenue from the consulting and package implementation business. And after this acquisition, the share of the same will grow by 1,000 bps to 34%.
Infosys will get access to a number of global customers spread across verticals like auto, telecom and pharma, among others. Infosys has a small presence in the business consulting space in Europe. Hence, this acquisition will help Infosys to expand its presence in that continent.
santanu mishra


George Carlin - "In comic strips, the person on the right always speaks first."

some new-age defensive stocks

There's more to defensive stocks than meets the eye, literally. Karan Sehgal, Kiran Kabtta and Ramkrishna Kashelkar bring you some new-age defensive stocks which go much beyond the old and faithful FMCG and pharma sectors


THE STOCK market is one place which never tires of spouting clichés. In the past three years, India's growth story had become an omnipresent cliché to such an extent that no analyst missed reminding his/her clients about how lucky they were to be a part of that great growth story.
But in January '08, the Indian stock market lost nearly a quarter of its value (in intra-day trades) in just two trading sessions. Suddenly, there was a scramble to dig out a new growth trigger to replace the tired cliché of the India growth story. The marketmen suddenly rediscovered sectors like FMCG and pharma, which are considered to be less risky than sectors like capital goods, banking and auto. And a new mantra was coined: Invest in defensive stocks.
The market is abuzz with defensive sectors, as their sensitivity to economic turbulence is lower than that of other sectors. For instance, Hindustan Unilever (HUL)'s product line includes toothpastes, soaps and similar products, which are of daily use.
It is interesting to note that the stock prices of these companies fall as much as the stock market, despite the defensive nature of their business. This is typical of bearish markets when the index starts falling; all the constituents bear the brunt, irrespective of the nature of their businesses. However, when sanity returns, these stocks outperform the market. To ascertain this, we created an index of stock prices of defensive companies from FMCG, pharma, packaging, utilities and other such defensive industries. We observed that from January to May '08, the defensive index mirrored the Nifty. However, the defensive index started outperforming the Nifty from the beginning of June '08 (see chart above).
In the past seven months, enough has been written about how investments in companies like HUL, Nestle and Ranbaxy Laboratories are safer than that in other stocks. We, at ET Intelligence Group, have
tried to find out companies whose business is defensive, but not as hyped as that of HUL, Nestle and Ranbaxy. The performance of these companies in the first quarter of FY09 was in line with their historical performance, which clearly establishes their resilience to the slowdown to a certain extent (refer table above).
Take the case of Noida Toll Bridge
Company (NTBC). Its stock price more than doubled in '07 due to speculation over the value of 200 acres of land in Delhi and another 30 acres the company has in Noida. Speculation was that once the company gets the development rights from the government for that land, it would bring enormous value to the company. The stock has shed almost half its value since January and at current prices, it reflects only the company's operations and not the expected windfalls from its land bank. NTBC operates the Delhi-Noida toll bridge, and such a business is slowdownproof as motorists are not likely to cut down commuting because of an economic slowdown.
Besides, NTBC's assets are now highly depreciated and there's hardly any recurring cost in the business except a small maintenance cost. The average daily traffic (ADT) increased by more than 30% in FY08. As per the estimates of Halcrow
Consulting India, the ADT is expected to witness a compound annual growth rate (CAGR) of 12% till FY11, while toll rates are estimated to increase by 6% year-on-year (y-o-y) during the period. So, going forward, the earnings will easily grow in excess of 20% and the current price-to-earnings (P/E) multiple of 27.5 only reflects the expected earnings growth.
If the going is expected to be smoother for FMCG companies in tough times like these, then obviously, the suppliers of such companies should also be enjoying the smoother run. Cosmo Films is one such company. This Delhi-based company is the country's second-largest manufacturer of biaxially oriented polypropylene (BOPP) films
used as packaging material by manufacturers
of food, toiletries, confectionaries and cigarettes. The company plans to more than double its BOPP capacity by FY10. The expansion plans have a sound financial basis, as the company's return on capital employed (RoCE) stands at 23.2% and it has an interest coverage ratio at 5.1 in FY08, which is much higher than that of Jindal Poly Films, the leader in that industry. The stock is trading at a P/E of just 3.7 times, completely discounting the defensive business and expansion plans of
Cosmo Films.
Like Cosmo Films, Bilcare is one of the leading players in the packaging industry. With its core business of manufacturing pharma packaging and research, the company has grown to become an integrated service provider to global pharmaceutical industry. It also offers global clinical trial supplies services, design laboratories and anti-counterfeit technology. As a leading resource for healthcare companies, Bilcare provides solutions on counterfeit drugs, compliance, costs, communication and convenience. The company has manufacturing and
research facilities in India, Singapore, the US and UK and has regional offices in Brazil, Germany, China and Australia. Operating in the recession-proof healthcare segment, Bilcare has grown by leaps and bounds in recent years. Over the past five years, its revenues have increased at a CAGR of 37%, while earnings have grown at a faster rate of 48%.
Much like spending on food and toiletries, medical expenditure is non-discretionary in nature. Worsening of the macro-economic conditions has little impact on companies providing drugs and medical services to the population.
Bet On These Hidden Gems THE HEALTHCARE business is considered to be defensive, despite the fact that it is capital-intensive in nature. Apollo Hospitals is one of largest and oldest players in the private sector. The company has maintained consistent growth in the past decade irrespective of business cycles, which is proof of the sector's defensive nature. The hospital chain has over 8,000 beds spread across 41 hospitals, as well as a string of nursing and hospital management colleges. It also runs pharmacies and diagnostic clinics, making it the country's largest private hospital group. Its income from services has increased at a CAGR of 21.3% and profits have witnessed a CAGR of 32% over the past five financial years. The company has maintained its growth momentum in the June '08 quarter, despite the general slowdown in earnings across India Inc.
Like healthcare, insurance, too, has defensive streaks. For an insurance company, the initial years involve incurring costs on penetrating the market, selling costs and agent commissions. However, as years goes by, costs decline and recurring premiums turn it into a cash flow business. With more than 80% of its revenues contributed by the insurance business, Max India is a strong contender among the listed players in the insurance segment. Besides insurance, the company is into plastic packaging, hospitals, clinical research services and healthcare staffing services. While still being a loss-making venture, the insurance segment is its fastest growing business after the company forayed into the sector in FY04.
Though we may face an economic slowdown, buses, cars and autos won't stop plying and people will still cook meals, which shows that demand for fuel for basic necessities will not go down beyond an extent. Such is the business of Indraprastha Gas — the Delhi-based supplier of natural gas to 1.25 lakh households and 2.25 lakh automobiles — which is sure to result in growth, despite adverse economic conditions. After establishing a strong foothold in Delhi, it is now expanding into nearby geographies such as Noida, Ghaziabad and parts of Haryana. The company still has some 20% extra allocation of gas than what it currently sells; so gas supply will not
become a constraint for its growth prospects. Over the past five years, it has always generated around 45% RoCE and paid out a third of its profits by way of dividends. In view of its sound financials and nature of business, Indraprastha Gas can be considered a safe bet in difficult times.
It is an irony that there were numerous takers for these stocks when the market was at its peak. Today, these same stocks find few takers, despite the fact that the market downturn has taken away the froth from valuations. We sign off with another cliché which, despite its nature, happens to be time-tested: You should buy when others sell…


Vince Lombardi - "We didn't lose the game; we just ran out of time."

Now, get NSC details in your demat account

Mumbai: National Savings Certificates and Kisan Vikas Patras are two of the commonest investment instruments in India. If you, too, have invested in these, then there's some good news for you.
The postal department has been running a pilot project in Mumbai to electronically credit NSC and KVP details in an investor's demat account instead of issuing physical certificates. The department may soon extend this facility to other metros. When that happens, the pain of visiting post offices will be over as NSCs and KVPs will be then credited in demat accounts just like shares.

Thirty-five major post offices in the region (Mumbai, Thane and Navi Mumbai) are authorised to offer NSCs and KVPs in this manner.
The post offices, however, have not pushed through the online option with investors as a demat account itself has been a relatively new concept till some time ago. But, thanks to the keen interest of small investors in the stock market, demat accounts have become almost as common as savings bank accounts. So, post offices in Mumbai are now urging investors to opt for NSCs and KVPs to be delivered to the demat accounts.
Senior officials at the GPO, Mumbai, said they had given a detailed
presentation on the scheme to the
ministry in Delhi. "The ministry officials are keen on expanding the
scheme in other big cities where demat accounts are common. Hopefully, customers will prefer the electronic credit in demat,'' a senior GPO official said.
There are several advantages of getting NSCs and KVPs credited in the demat form. It ensures that in
vestors do not lose sleep over protecting the paper certificates from inclement weather, theft or mutilation; the post office only needs to convey the NSC or KVP details to the National Securities Depository Limited, which creates a demat account and displays the investment amount, the maturity value and date online.
The demat form, needless to say, makes visits to post offices totally redundant. The time that you save is also crucial, say GPO officials; it now takes at least 10 days to issue NSCs and KVPs if the investor has paid by cheque (the usual mode of payment).

COURIER SERVICE
Post offices in the Mumbai region are pushing for doorstep pick-up of letters and documents that you want to courier. "But this facility is being extended to big housing societies or customers who send letters by courier routinely,'' a GPO official said. TNN

Saturday, August 30, 2008

Securing a safe future calls for financial planning

DEBT TRAP

Securing a safe future calls for financial planning with a good debt strategy.
Sanjeev Sinha
checks out how to avoid getting into the vicious circle



PRUDENT saving and smart investing may be important for building your portfolio and creating a huge-nest egg, but assuming them to be the only keys to accumulating wealth is akin to financial hara-kiri. For, in the absence of a good debt strategy, the financial planning for your secured future can not only get topsy-turvy but awfully wobbly as well.
Debt management, in fact, assumes more importance in the light of the fact that today debt has become a way of our lives, with consumer finance schemes and credit cards becoming big drivers of this devil. Rising disposable incomes, soaring aspirations and convenience in availing credit have increased the amount of debt that an average individual is carrying. In the US, for instance, the household debt-toincome ratio is said to have reached an all-time high, topping 19%, with Americans collectively spending more than what they have earned for the past two years in a row. Likewise, the latest Grant Thornton research shows that personal debt in the UK has forged ahead of its GDP for the second year running. And, in all probability, India is also heading for a similar mess — sooner or later.
"In such a scenario where delinquency rates are also increasing due to high interest rates, debt management becomes imperative," says Ashish Kapur, CEO, Invest Shoppe India Ltd. Also, because every year lakhs of people spend thousands of rupees only as interest on various loans taken by them. "Therefore, following a prudent approach in managing one's debt can go a long way in saving this money and thereby helping one lead a life free of debt," says Rajiv Deep Bajaj, VC & MD, Bajaj Capital Ltd.
The problem, however, is that while being debtfree at some point in life is a pipe dream of a majority of people, very few are actually seen doing anything in this regard. Worse, they still keep looking for cheap and easy debt for further indulgence, notwithstanding its after-effects on their lives.
Actually, getting into debt is always not bad. Sometimes, particularly in times of crisis and emergency, you just can't avoid it. But if managed well, this can even have a positive affect on your finances in both short as well as long run. However, the problem starts when people start taking debt for self-indulgence as well as keeping their friends and neighbours jealous.
In a sure sign of debt getting out of control, people start using their plastic money even for recurring expenses like getting the gas filled in the car, buying groceries and clothes, among others. Young men and women, pressed between small salaries and spiralling financial responsibilities, find it very easy to get tempted to go towards credit cards to help them get through the month. "One never knows when one re
ally gets caught in the debt trap, until one has to start borrowing to make pressing interest payments and outstanding loans. This eventually leads to spiral from which it becomes difficult to get out of," says Bajaj.
Debt management, therefore, should be one of the integral parts of your personal finance. Managing your debt means reshuffling and seeing what you
should do to pay back the debts. This also means choosing the best loan option whenever one needs to borrow. Here's what you should take not of:
Avoid Getting Into New Debt: As a first step towards debt management, you should avoid getting into new debt till the time the old dues are cleared in full. You'll also need to be disciplined about paying down the debt.
Prioritise Your Dues: You need to prioritise your dues and begin clearing them. You should know the costliest loan you have taken and this is the one you should clear first. For instance, clearing your relatively cheap housing loan won't pay much if you are having huge credit card dues or
other costly loans.
Refinance: Refinancing your debts to a cheaper deal is one of the most effective ways of freeing money up and making loans more palatable. But as a precautionary step, you should avoid extending the tenure of the loan as in that case you may end up paying more in interest.
Debt Consolidation: You can also resort to debt
consolidation. It basically means replacement of multiple loans with a single loan, often with a lower monthly payment and a longer repayment period. Rather than paying off several separate bills each month, a consumer consolidates his/her debts with a financial institution that will arrange for one lower monthly payment extending over a period of time. "But this method too is not without its fair share of problems," warns Bajaj.
Zero-Interest Balance Transfer: These days credit card companies are giving the option of zero-interest balance transfer under which no interest is charged for the first three months if you transfer the outstandings of your other cards to their card. Only if you are unable to pay off the debt entirely during this period, you will be charged interest, that too at a bit lower rate. However, this scheme is also not without problems, but if used smartly, you can slash the cost of your debt.
Loan On Phone: You can also convert some of your credit card

purchases into relatively low-interest EMIs if you inform the card issuer within the specified period of making the purchase. This way you can save some money on interest.
Speeding Up Payments: This is the most effective way of clearing your debt early as well as putting more money in your pocket over a lifetime. According to a rough estimate, for instance, if your are
having Rs 1 lakh as credit card dues on which you are paying, say, 40% interest, then it will take close to 15 years to clear your dues if you continue paying 5% of the outstanding amount each month. The total payout and interest in this case would be Rs 265,950 and Rs 165,950, respectively. However, if you decide to pay 10% instead, you won't only be able to clear the dues in just 7 years-and-a-half, but the total payout would be Rs 142,780, with only Rs 42,780 being the interest component. The Rs 123,170 saved in interest can be further invested. The gain, however, would be bigger as, for the sake of simplicity, we have not included other charges like service tax and annual fees, among others, which will make the repayment period even longer, and the payout bigger.
Thus, if you're in the habit of making relatively small payments, stretching beyond your comfort zone could pay off big in the long run. And applying the same trick with your housing and other loan repayment can give you far better results.
It is clear, thus, that you should always avoid accumulating more debt as that is easy to slip into and very hard to get out of. However, if that is difficult to resist, then exercising some precautions will help. "Ensure you take loans for building assets like home and not for instant gratification. Also, ensure that the loans you have taken are based on your current earnings and not future estimations. Restrict the loan tenure, amount and EMI which suit your lifestyle. And invest in better-return giving assets which can then be used to pay off the loans," says Lovaii Navlakhi, MD & chief financial planner, International Money Matters.
Remember: The less debt you have, the happier and wealthier you'll be!

PITFALLS
Getting into debt is always not bad
If managed well, this can even have a positive affect on your finances in both short as well as long run
The problem starts when people start taking debt for self-indulgence or start indiscriminate use of plastic money for recurring expenses
Debt management should be an integral part of personal finance
Managing your debt means reshuffling and seeing what you should do to pay back the debts

Vince Lombardi - "We didn't lose the game; we just ran out of time."

Reliance scraps KG basin stake transfer to arms

Manages to raise finances, sends letter to petro min withdrawing transfer of 80% participatory interest

Piyush Pandey & Kausik Datta MUMBAI


RELIANCE Industries (RIL) has scrapped its plan to transfer 80% of its participatory interest in the D-6 block of the Krishna Godavari basin gas field, perhaps the company's most valued asset, to four of its subsidiaries. The company had sent a letter to the petroleum ministry on Thursday withdrawing its earlier application, which sought permission to transfer the stake to the subsidiaries. Under the production sharing contract, any contractor (here RIL) is supposed to get the government's nod for transferring stake in any asset.
In the letter, RIL says that it has organised funds required for the exploration and production of the block, officially known as KG-DWN-98/3, and therefore wants to abandon its plan to transfer its participatory interest to the subsidiaries. In its application to the ministry for the proposed transfer three months ago, it had said the move was aimed at increasing flexibility in organising finances for the development of the project. RIL's investment in the KG basin blocks is expected to be around $8 billion. Interestingly, RIL had got the go-ahead from the Directorate General of Hydrocarbon on this
on August 21. The proposal has then been forwarded to the petroleum ministry.
When contacted, a RIL spokesperson confirmed the development. "RIL has raised the requisite financial resources and is no longer pursuing the application for assignment of participating interest (PI) to the subsidiaries. Implementation of the project has not been hindered," the spokesperson said.
"However, in view of non-receipt of such approval/confirmation, we have successfully firmed up alternate means of financing and have met the cash requirements of the project... We are entitled to
assign the PI as envisaged in the... PSC but having raised the requisite finance as aforesaid, there is no need at this time for us to pursue the means of financing that would envisage assignment of PI and for the record hereby formally withdraw the... application and request that no further action need be taken thereon," RIL said in its letter addressed to the joint secretary (exploration) in the ministry of petroleum. ET has a copy of the letter.
Industry experts said RIL's move could have been partly driven by the criticism of its big shareholders. A few major shareholders, especially the foreign institutional share
holders, had questioned the logic of the proposed move in the past few days after the development came to the fore on Tuesday. ET was the first to write about the proposed move in its edition dated August 26.
RIL clarified the next day that these four companies — Reliance KG Exploration and Development, Reliance KG D6 E&P, Reliance KG Basin and Reliance E&P KG — are wholly-owned arms. But there were reports saying at least one of these companies could be part-owned by two top-level RIL executives.
Timing significant THEtiming of RIL's withdrawal from the proposed move assumes significance. RIL has withdrawn the transfer of the participatory interest on Thursday, four days before the hearing of the legal case between the company and Anil Ambani's Reliance Natural Resources (RNRL) in the Bombay High Court.
Industry observers said had the move not be abandoned, it would have presented a target from RNRL's lawyers, led by Ram Jethmalani on Monday.
In the course of his arguments in the High Court last week, Mr Jethmalani had asked for the transfer of RIL's participating interest in the KG basin to RNRL so that the latter can sell the gas till its proposed 7,800 mega watts
(MW) power plant at Dadri comes up. On this, the government counsel TS Doabia had said in the High Court that RIL cannot transfer or assign its participating interest in favour of any other company without government approval, under the provisions of the production sharing contract.
RIL holds 90% equity in the KG basin while the remaining 10% is held by Niko Resources.
RIL shares on BSE gained 3% or Rs 63 to closed at Rs 2137 on Friday over the previous day close. The stock has lost 5% in the last one week but gained 2% in the last one month.
piyush.pandey@timesgroup.com

Thursday, August 28, 2008

Jai Corp likely to foray into city gas, LPG distribution

ANAND Jain-promoted Jai Corp steps on gas. The company plans to get into distribution and supply of city gas and liquefied petroleum gas (LPG), hitherto an area primarily dominated by the government-owned oil marketing companies (OMCs).
Confirming this move, Anand Jain, chairman Jai Corp told ET, "We have passed an enabling resolution to get into the distribution of city gas." The company intends to start supply of city gas and LPG to its SEZs in Mumbai and Navi Mumbai. Later, it will expand its operations in other cities. Jai Corp plans to supply gas through three subsidiaries namely Urban Gas, Urban Gas Distribution and Urban Gas Suppliers. It will shortly seek the government's approval for the same.
Although the company will supply gas to its twin SEZs in Mumbai to begin with, it will later extend the operations in other parts of Maharashtra. "We will take out gas supply business to the cities where we will set up townships," he said. Reliance Industries (RIL), it may be mentioned, is barred from getting into supply business in Mumbai as per the no-compete agreement it signed with the Anil Ambani group. Mr Jain is a close confidante of RIL's chairman Mukesh Ambani.
The family agreement, which divided the Reliance empire between the Ambani brothers three years ago, kept the distribution of city gas in Mumbai and New Delhi exclusively reserved for the Anil Ambani Group. Therefore, RIL has sought the government's approval for the gas projects in 52 cities except New
Delhi and Mumbai.
LPG is the most popular fuel in Indian households. So, creation of an LPG distribution network is a logical extension for the infrastructure company
which has been setting up three SEZs. "Going forward, the company will also cater to the LPG requirements of other small cities," said Jai Corp in its latest annual report. Mr Jain is chairman of Navi Mumbai SEZ (NMSEZ) and Maha Mumbai (MMSEZ), where Jai Corp has a 10% stake.
Interestingly, two associate companies of Jai Corp have received the support of Maharashtra government to set up two 2,000 MW power plants in Raigad and Thane districts of Maharashtra, near the proposed SEZs. The 2005 family settlement prohibits Reliance Industries from getting into power business. Jai Corp has got the government approval to acquire agricultural land over 250 hectares for setting up two township projects in Maharashtra. These townships will house the people working within the two SEZs.
piyush.pandey@timesgroup.com

Bharti Airtel plans simultaneous rollout of IPTV, DTH services

BHARTI Airtel is looking at simultaneous rollout of Internet Protocol Television (IPTV) and direct-to-home (DTH) services following the Cabinet approval on downlinking norms for IPTV last week. Expected to be launched before this year-end, the two services will have differential pricing, with DTH targeted at the mass market and IPTV for broadband (high-speed internet) users.
IPTV refers to TV delivered through broadband. While Bharti was ready with the launch plan for IPTV long back, it was awaiting policy clarity on downlinking norms. The government has now given the go-ahead to broadcasters to share their channels with IPTV providers also. Earlier, only cable and DTH players were allowed to do so.
"We are now putting our launch (for IPTV) together. Right now, we are examining different options internally. Both the launches could be simultaneous or we could have them in phases. What is certain is that IPTV will be first launched in Delhi while DTH will be rolled out on a much larger scale," Bharti Airtel president for Telemedia services Atul Bindal told ET.
Telemedia is Airtel's business division that provides broadband and fixedline services to over 2.5 million customers in 95 cities. "Over the next few weeks, we will firm up our plans. IPTV will be an integral part of Airtel's media business because DTH allows us to go wide and IPTV allows us to go deep in 6-8 top cities," he said. On the pricing, Mr Bindal said: "IPTV sits on top of broadband. It gives me an opportunity to cross-sell and deepen my relationship with existing customers using local loop or broadband or both. My pricing for IPTV will be triple play (voice, data and video). For DTH, we'll explore single play, double play as well as triple play and introduce it in around 5,000 towns and villages."

DTH services are currently being offered by TataSky, Dish TV, Sun Direct and Reliance Communications' Big TV. Asked about profitability, as none of the DTH players is currently making money, Mr Bindal said: "We don't believe new businesses are a drag, if chosen correctly. We are uniquely positioned to leverage the existing technological knowhow and are exploring ways and means for crossleveraging our relationship with Airtel customers."
Globally, IPTV is considered a niche segment as broadband access is not uniform. Industry estimates suggest that India will have around a million IPTV users by 2011 and for DTH, the number would be over 23 million.
For IPTV, Airtel has partnered with Cisco Systems. In Delhi, networking services provider UTStarcom is working with Airtel with its IPTV solutions.


Wednesday, August 27, 2008

Shareholders want NSE to go public

Institutional Investors See Public Offer Giving Them Better Returns While Diluting Their Holdings In Excess Of 5%

INSTITUTIONAL investors, which hold more than a 5% stake in the National Stock Exchange (NSE), are said to be keen on a public issue by the bourse. This would help them get better valuation for their stake in excess of 5%, which they have to offload in line with present regulation that no single entity can hold more than 5% in a stock exchange.
It is learnt that some investment banks have been approaching NSE on this issue. However, the exchange may not take this route soon as market conditions are not conducive for an initial public offer (IPO).
"It is unlikely that NSE would do this in the near future. It may well be looking at the next financial year," said an industry source.
Investment banking sources estimate that a 10% dilution could
fetch at least $500 million, valuing the bourse roughly $5 billion. This is more than double the price at which bourse had been valued last year when NYSE and a clutch of foreign institutional investors each bought 5% stakes.
However, a highly-placed NSE official denied any plans of a public issue. "No such proposal is under consideration," he said. But, industry sources say that a public issue makes sense.
"A listing would help institutional investors to pare their holding at better valuations and at the same time broaden the investor base for the exchange," said an institutional investor with a large holding.
If the proposal is approved, foreign investors, who have acquired shares in Indian stock exchanges, can raise it further.
While the overall limit is pegged at 49%, the limit for foreign direct in
vestment is 26% and for foreign institutional investors it is 23%. However, soon after the foreign investment guidelines were issued, both domestic and foreign investors sought an increase in the individual holding limit of 5%.
Sebi is currently reviewing the 5% cap on single entity holdings. This has been prompted by the fact that the current cap on equity holdings could act as a deterrent to potential promoters of new exchanges. Both the capital market regulator and the government want to foster competition among bourses to prevent a monopoly. A final view is to be taken after seeking wider comments.
NSE's m-cap on August 27 is Rs 44,01,671 crore and its daily average turnover year to date stands at Rs 14,000 crore. The exchange has a 66% market share in the cash segment and is a virtual monopoly in the derivatives segment.

Recently, SBI's merchant banking wing SBI Capital Markets, too, has reduced its stake in NSE from 5.6% to 4.3%. Hero Honda and Srei Infrastructure Finance have acquired stakes from IFCI and Stock Holding Corp of India (SHCIL) at Rs 3,500 per share. SBI itself is looking to bring down its stake from the current 8.5% and has indicated a reserve price of Rs 315, which is benchmarked to the deals that have taken place so far this year.
Institutional investors like LIC, IDFC and SHCIL still have more than 5% stake in the exchange and have been given a deadline of September to bring it down.
"We would like to pare it down. But unfortunately, in the current scenario there are no buyers. A listing would enable us to arrive at a price point," said an institutional investor.
deeptha.rajkumar@timesgroup.com

When equities hurt investors turn to FMPs

Season's favourite fixed maturity plans mop up an unprecedented Rs 1 lakh crore

THE promise of steady returns amid an overall climate of uncertainty is drawing hordes of investors towards fixed maturity plans (FMPs) offered by mutual fund houses. With rising interest rates, FMPs are clearly the flavour of the season. These schemes have made an unprecedented collections this season, which according to some fund managers, is in excess of over a lakh crore rupees.
"This could easily be a record year with respect to FMP mobilisation. With most schemes indicating high yields (higher than most other debt products), there is huge interest from institutions and HNIs," said Principal PNB AMC business head-asset management Sudipto Roy.
In the past few years, fixed maturity plans have become a hot favourite with investors looking for investments in fixed income. This is not so hard to explain considering the advantages they offer on the tax, liquidity window and the diversification fronts, compared to fixed deposits. Even retail investors have been taking to FMPs in recent times, considering the prospects of good returns from the stock market looking bleak.
Fixed maturity plans are close-ended schemes of a specific duration, which mean that an investor can only withdraw his money after paying a penalty. Fund houses give an indicative yield as to how much an FMP will offer. For instance, FMPs of 13-month duration (after adjusting the inflation numbers) are currently returning anywhere between 11% and 11.5%.
Ramkumar K of Sundaram Mutual estimates that the outstanding investments with FMPs must be over Rs 1 lakh crore. According to Value Research, a portal that tracks mutual funds, the first six months of 2008 have witnessed investments worth over Rs 64,000 crore, but about 130 schemes yet to disclose their first phase collection.
Mr Ramkumar feels that FMPs will retain their attractiveness over other debt instruments considering the high interest scenario, implying that money will keep flowing into them. Investors typically rush for FMPs when interest rates look upwards and the stock market looks dicey. High net worth investors, retail investors and corporates that have a comfortable liquidity situation, usually invest in a longer duration of over a year. But, shorter duration FMPs have a larger share in the total mobilisation and corporates who are cautious on the liquidity front dominate this segment.
However, fund managers warn that FMPs are not absolutely risk free, especially when interests rates are rising, as they are now. A portion of the FMP portfolio of some funds could face default, thanks to tighter liquidity situation and deteriorating condition of many companies in sectors like infrastructure and real estate. This can lead to lower-than-indicative yield, no return or even capital loss.
While a fixed deposit attracts tax as per an investor's tax slab (over 33% for last slab), a 13-month FMP only invites tax of about 22% (after adjusting for inflation, which is called indexation). One can exit an FMP before its a tenure at a much lesser penalty than a FD. To achieve the kind of diversity available in an FMP, one would have to invest in FDs of several banks.
shailesh.menon@timesgroup.com

Sunday, August 24, 2008

Popping The Growth Pill

Piramal Healthcare's stock has outperformed the Sensex since the start of this year. There's still significant upside left in the stock and long-term investors can accumulate it at the current price

FROM MANUFACTURING generic drug formulations, active pharma ingredients (APIs) and diagnostic equipment, to inlicensing products, providing contract research and manufacturing services
(CRAMS) and conducting innovationbased research, domestic pharma companies have various business models to choose from. Piramal Healthcare has successfully explored all these areas. It's now betting on CRAMS and domestic branded generic business, and this strategy has paid off. Its stock has outperformed the Sensex since the start of this year. There's still significant upside left in the stock and long-term investors can accumulate it at the current price. BUSINESS:Formerly known as Nicholas Piramal, the company is engaged in CRAMS, manufacture of generic drugs, APIs, diagnostic services and equipment.
It recently spun off its research division into a separate listed company called Piramal Life Sciences. The company's CRAMS business accounts for over 50% of its total revenue. With assets spread
across North America, the UK and India, it offers development and commercial scale manufacture services in both API and formulations.
    The domestic drug formulations business accounts for 40% of the company's total revenue, while diagnostic services, instruments and other ancillary
businesses contribute the remaining. Piramal Healthcare is a dominant player in the domestic branded formulations market with a 65:35 mix of acute and chronic therapeutic products. It manufactures and markets 250 major branded formulations in diverse therapeutic areas like respiratory, antiinfectives, cardio-vascular, diabetes, central nervous system, dermatology, nutrition and pain management. The domestic branded generic business also gains from the company's alliances with foreign innovator firms to sell the latter's products in India. Marketing and distribution is a key competitive strength of the company. It has a field force of over 3,800 employees, one of the largest in the country. While the company has an India-centric approach, exports contribute 44% to its total revenues earned from CRAMS. The company owns Wellspring, the chain of pathology labs and diagnostic centres, which has a presence in over 40 cities. It also manufactures diagnostic devices for hospitals, labs, as well as doit-yourself devices.
GROWTH STRATEGY:Piramal Healthcare's branded formulations business grew 12% in FY08, while revenues from CRAMS rose 19% and revenues from path labs shot up by 72%, though on a smaller base. In the past three quarters, the company's branded formulations business has grown by 15%, higher than the 12% growth registered by the domestic pharma industry. While its international CRAMS business continues to remain under focus, the company is bullish on its domestic CRAMS business. It is shifting manufac
turing from its overseas facilities to domestic units. It expects its CRAMS business to witness a CAGR of 20% over the next three years. In the domestic market, chronic therapeutic is a faster-growing segment and the company plans to further increase the number of chronic therapeutic products. It launches 30 new products every year in the domestic market. The company is also working on penetrating tier-2 and tier-3 towns. It uses the inorganic route to fill gaps in its domestic formulation business and buy niche assets. It also intends to use M&As to scale up its CRAMS business. Another possibility is to forge more alliances with innovator companies to launch their products in the domestic market. It plans to incur capex of Rs 150 crore in FY09, against Rs 110 crore in FY08.
FINANCIALS:In the past five years, the company has posted a CAGR of 16% in revenue, which stood at Rs 2,872.8 crore in FY08. Its earnings have witnessed a CAGR of 17.2% during the same period to reach Rs 364.8 crore in FY08. Over past three fiscals, its revenues have posted an average CAGR of 29%, while its profits have grown at a faster pace of 53%. Its profit margins have improved rapidly over the past four quarters due to growth in custom manufacturing from India, demerger of its R&D division and growth of branded drug formulations. It is a dividend-paying company with an average dividend payout of 36% (average of the past five years). The company expects to maintain its dividend payout at a similar rate in the near future.
VALUATIONS:The company trades at an EPS of Rs 16. With the demerger of its R&D division, improvement in product mix and expansion in its global market footprint, it plans to maintain its YoY turnover growth at 16% and hike operating margin to 20.5% for its existing business. Considering the company's estimated earnings for FY09, it is trading at a forward P/E of 14.4x. While the company's stock has outperformed the Sensex since the start of this year, it has underperformed the ET Pharma index during this period. The Sensex has lost 30% YTD, while the company's stock fell 15%. But the ET Pharma index lost only 1.5%.

Beta: 0.1 Institutional Holding: 32.4% Dividend Yield: 1.3% P/E: 18.5 M-Cap: Rs 6,648 cr CMP: Rs 318.10






Grab The Best Bargain

Bank of India's cheap valuations belie its strong performance across key parameters. The stock is an interesting bet for long-term investors

BANK OF India (BoI) is one of the best performing banks in the public sector. It compares favourably with peers on all key parameters. In fact, in many aspects, it is closer to top performing private sector banks. However, the stock market seems to have overlooked this fact. As a result, the BoI stock is one of the cheapest among its peers. And this is exactly what makes it an interesting bet for long-term investors.
BUSINESS:BoI is the thirdlargest public sector bank in the country, both in terms of its
market capitalisation and balance sheet size. The bank's recent initiatives — expanding its international presence, increasing participation in fee-based activities, expanding traditional businesses like retail banking and SME (small and medium enterprises) banking, along with strong financials — make it one of the best-run banks in India. BoI has implemented a new business model in FY08, wherein its branches have been categorised as resource centre, profit centre, priority sector centre and general banking centre-based on the nature of businesses in their command area.
    The bank is targeting each segment in a unique way. For instance, it has created retail hubs at 20 centres across India. This will help the bank to gain a strong foothold in retail banking. The bank has devised strategies to target SMEs. This is because with growth in the economy, development has now spread to semi-urban and rural areas, making SME banking an interesting growth area. The bank has set up 50 specialised SME branches across the country to focus on this segment.
    BoI has a diversified loan portfolio, wherein corporate advances constitute approximately 40% of advances, SME comprises 17%, retail makes up 16% and the balance is accounted for by priority sector advances.

The growth in corporate advances is expected to slow down this year owing to high interest rates. However, the growth in agricultural loans is expected to be better than last year's, which will moderate the extent of the slowdown.
    BoI is now rapidly growing its presence in non-fund-based activities. Due to this, its noninterest income, comprising fee, commissions and brokerage is growing at the fastest pace among
its peers. BoI has arrangements with other banks to distribute their financial products. For instance, BoI refers its customers to ICICI Prudential Life for life insurance products. It also distributes mutual fund products of UTI Mutual Fund, HDFC Mutual Fund, Kotak Mutual Fund, ING Investment Management and Franklin Templeton Investments.
FINANCIALS: The bank's profit grew 78.3% in the June '08 quarter, which was the highest among PSU banks. The growth was fuelled by more than 30% growth in business and improvement in cost-to-income ratio. Most of the other PSU banks managed to grow their business by only around 20%. This clearly shows that BoI is on a far higher growth trajectory than its peers. The cost-to-income ratio fell to 39% in the June '08 quarter,
compared to 49% a year ago. This puts the bank in an advantageous position, as cost spiral has become a key concern for the banking sector. BoI's net interest margin (NIM) stood at 2.96%, which is a minor deterioration from a year ago mainly due to general economic conditions. Only HDFC Bank, State Bank of India and Punjab National Bank have better NIMs than BoI.
    BoI has de-risked its investments in government securities, which has been a concern since interest rates started rising. As of June '08 end, only 17% of its government securities portfolio fell under the available
for-sale category and therefore, vis-à-vis other banks, BoI has to worry the least on this account.
    In the past few years, the bank's performance has got a boost from the low interest rate environment, much like other banks. Its loan book has expanded at a rate of more than 30% a year in the past two fiscal years. The credit-deposit ratio improved from a low of 64% in FY04 to 75.6% in FY08. This clearly shows that the bank did not need to borrow more to lend more. However, further improvement in the credit-deposit ratio will not be easy. This indicates that the growth in advances will go hand-in-hand with the growth in deposits. This
may lead to some deterioration in NIM. We think that the expected slowdown fears and deterioration in margins are already factored into the bank's valuation.
VALUATIONS: The stock trades at a price-to-earnings (P/E) multiple of 6. The average P/E of other PSU banks is 7.3, which shows that the stock is reasonably valued. Moreover, BoI has performed better than its peers in terms of NIM, cost-to-income ratio and business growth. This makes BoI a deserving candidate for riskaverse investors, as the valuations are low compared to past and expected business growth.

Beta: 1.5 Institutional Holding: 27.9% Dividend Yield: 1.6% P/E: 6.0 M-Cap: Rs 13,515.2 cr CMP: Rs 257.40





BULL'S EYE

TATA STEEL
RESEARCH: CLSA
RATING: OUTPERFORM
CMP: Rs 594
CLSA maintains 'outperform' rating on Tata Steel, but lowers its target price to Rs 745. Steel prices have recently corrected by $30-40/tonne across regions, with parallel declines in spot iron ore and scrap prices. A correction in steel prices in H2 CY08 was imminent, as the price hike had overshot the rise in costs. Prices have also weakened due to the seasonally weak period and rise in Chinese exports. Moreover, steel prices have remained strong, despite weak global macroeconomic indicators. While CLSA expects steel prices to decline against the backdrop of a weakening global economy, prices are unlikely to fall below $900/tonne, as marginal producers are currently operating at $850-950/tonne. CLSA's regional steel team believes that the recent spike in Chinese exports was due to exploitation of export regulation loopholes by smaller mills. CLSA remains confident that the Chinese government will soon clamp down on exports, either by hiking export taxes, or by implementing a quota system, which should support steel prices. With 70% of its sales on a spot basis, Corus' earnings are highly geared to spot European steel prices. Though Q1 FY09 results will benefit from the lag in re-pricing of raw material contracts, Q2 EBITDA/tonne faces a risk due to weakening steel prices, higher raw material costs and appreciation of the US dollar versus the pound and euro. While CLSA sees higher predictability for standalone earnings, Corus adds volatility in the near term for consolidated earnings, which will be reflected in the multiples. Global steel majors' multiples have corrected since their May-June peaks.
IDEA CELLULAR

RESEARCH: MERRILL LYNCH
RATING: BUY
CMP: Rs 82
IDEA launched its mobile services in Mumbai last week. At its launch event, the company underscored Idea's market leadership in Maharashtra and emphasised its brand values. There were no major references to pricing differentiation; the company said Idea is not a discount brand. Idea's tariffs on launch seem broadly comparable with prevailing tariffs of other operators, barring some product innovations like unlimited on-net night speak, postpaid-cum-prepaid service etc. Potential delivery of strongerthan-consensus subscriber market share in a relatively mature market like Mumbai can boost investors' sentiment on Idea, even though profits from its Mumbai operations can take longer to filter through. Idea aims to have ~0.8 million subscribers in Mumbai over the next 12 months and expects around 20% share of net additions in the circle. The company expects the Mumbai operations to break even in about four years and the capital expenditure (capex) for Mumbai is expected to total Rs 800 crore by March '09. Idea's Mumbai network encompasses 1,000 cell sites and has the capacity to accommodate 1.5 million subscribers (roughly 10% of Mumbai's current wireless subscriber base). The company said its core network is 3Gready and has scalable IP-based transport. Ericsson is Idea's equipment vendor for Mumbai. Merrill Lynch has a 'buy' rating on Idea due to the company's improving competitive position in the domestic market and it feels Idea's strategic efforts are in the right direction.

TATA CHEMICALS

RESEARCH: GOLDMAN SACHS
RATING: BUY
CMP: Rs 311
GOLDMAN Sachs initiates a 'buy' recommendation on Tata Chemicals with a target price of Rs 435, implying 29% potential upside. With its soda ash assets spread across geographies serving key consumption regions and an improving regulatory environment in the fertiliser industry, the market has not yet fully factored in Tata Chemicals' earnings capability. Goldman Sachs expects 49% EBITDA CAGR over FY08-FY10E, on the back of earnings accretion from its US soda ash facility and improving margins in the soda ash and fertiliser segments. Tata Chemicals is trading at 4.9x FY10E EV/EBITDA, against its historical trading band of 6-8x forward EV/EBITDA. The company's key catalysts include: 1) Q2 FY09 results, which should provide insight into Tata Chemicals' soda ash realisations across geographies; 2) Sustained strength in global urea and di-ammonium phosphate (DAP) prices that lead to improvement in fertiliser margins; and 3) Potential greenfield expansion plans in the urea segment. Goldman Sachs' values Tata Chemicals' core business using EV/EBITDA methodology and the investments in its group companies at 25% holding company discount to market value. Goldman Sachs values the fertiliser/soda ash/other chemical segments at 6x/5.5x/6x FY10E EV/EBITDA, respectively. The 12-month target price of Rs 435 implies FY10E EV/EBITDA of 6x.
LUPIN

RESEARCH: CITIGROUP
RATING: BUY
CMP: Rs 738
LUPIN'S deal to market Forest Labs' AeroChamber Plus line of products to US paediatricians will allow it to leverage its branded field force and strengthen its franchise in the paediatrics segment. While the upside may not be on the same scale as Suprax, this will be accretive, given the lack of incremental spend on development or at the front end. Lupin has entered into a multiyear agreement with Forest to promote the latter's value holding chamber (VHC) product AeroChamber Plus to paediatricians. AeroChamber Plus is the most prescribed holding chamber for use with inhaled asthma medications in the US. As per IMS '07 data, two-thirds of all prescriptions for the product are written by paediatricians. Lupin's 50-strong sales force in the US currently promotes only Suprax and has room to add two more products, thus implying no incremental spend for this deal. Lupin will make an undisclosed marketing margin up to a certain threshold level of sales, beyond which, the upside will increase. Citigroup expects margins to be in the range of 10-15% — while this is lower than Lupin's core business margins, the lack of incremental regulatory, development or front-end spend makes this an accretive deal. Citigroup believes this deal — besides being a small step towards offsetting the impact of a potential generic threat to Suprax — highlights the scope for multiple growth drivers within Lupin's business model.
ONGC

RESEARCH: MOTILAL OSWAL
RATING: BUY
CMP: Rs 1,016
THE government had indicated that subsidy-sharing in FY09 will be fixed at Rs 45,000 crore for upstream companies (ONGC shares ~86%), Rs 20,000 crore for OMCs and oil bonds issuance at Rs 94,600 crore. Motilal Oswal estimates the net shortfall in under-recovery sharing (post upstream, OMC and oil bonds sharing) for FY09 to be below average Brent price of $118/bbl (Rs 42 per dollar). If oil prices remain below $118/bbl, the announced subsidy-sharing will sufficiently cover under-recoveries and thus, reduce the risk of higher sharing by ONGC. Brent price has fallen by 23% from its peak in July and if the trend continues, ONGC (with fixed subsidy burden) will be adversely affected. Assuming the subsidy burden at Rs 38,700 crore for FY09, ONGC's EPS can reduce by 21% to Rs 98.2 if average FY09 Brent price declines from $110/bbl to $100/bbl. However, at fixed subsidy burden, ONGC's EPS will rise by 21% to Rs 150 at Brent price of $120/bbl. The Chaturvedi committee has recommended capping ONGC's realisation at $75/bbl (100% special oil tax on realisation above $75/bbl). The recommendations are unlikely to be fully implemented, given other harsh measures like frequent hike in retail fuel prices. Motilal Oswal remains positive on ONGC with a long-term perspective, as the bulk of its NELP acreage is yet to be explored, and thus, has huge potential for oil & gas discoveries. But in the near term, the stock performance will reflect movement in oil prices. At current oil prices, a movement either ways will pose a risk to earnings. The stock trades at 8.6x FY09E consolidated EPS of Rs 124.


LIC, the big daddy of the Indian equity market, is on a shopping spree

Not Everybody Is Selling

While it's demoralising for investors to hear about the exodus of deep-pocketed FIIs, they can take heart from the fact that LIC, the big daddy of the Indian equity market, is on a shopping spree. Krishna Kant tells you why


THE WAY the Indian equity market has moved during the year so far, it seems a big sale is going on at the bourses. The biggest party poopers have been foreign institutional investors (FIIs).
    They have reportedly sold nearly Rs 50,000 crore worth of equity in the first seven months of the current calendar year, or an estimated 6% of their cumulative portfolio at the end of '07. This has created an impression that all large long-term investors have lost faith in Indian equities.
    Nothing can be further from the truth. While it's demoralising for retail investors to hear about the exodus of deep-pocketed FIIs, they can take heart from the fact that the big daddy of the Indian equity market — Life Insurance Corporation (LIC) — is on a shopping spree.
    Taking advantage of the fall in stock prices of India's top companies, the insurance behemoth is meticulously preparing for the next bull run by accumulating additional stakes worth Rs 11,000 crore in India's top 21 companies across sectors.
    LIC now owns an average of 6% of the equity capital of these companies, compared to around 5% by the end of the June '07 quarter.
    In many top-rung companies including Tata Motors, Siemens, Grasim Industries, Cipla and Kesoram Industries, LIC's holding has now crossed or is approaching the technically important mark of 10%.
    Combined with its already large stake in companies such as Larsen & Toubro (L&T), ACC and ITC, the life insurance major is truly emerging as a force to reckon with on Dalal Street.
    Interestingly, a bulk of the incremental investment came during the bear phase. Nearly three-fourths (73%) of LIC's total incremental investment was done in the past two quarters of the current calendar year. And in quite a few companies, LIC's net buy ratio in the first two quarters was in excess of 100%.
    This means that LIC was booking profits when the market was at its peak during the December '08 quarter and used the profits to raise its stake in these companies when their stock prices subsequently fell in '08.
    And that's where the lesson lies for retail investors: Make long-term bets, but don't lock in your entire investment in any stock, and don't exit completely unless you have lost faith in the company or its management.
    Divide your investment in two parts — core and floating. Keep your core portfolio untouched across the ups and
down, but churn the floating part to take advantage of market movements. Say you own 500 shares in ACC, then you can define 250 shares as core and keep churning the other half (the floating part) to take advantage of a rally. The profits so booked will raise your purchasing power when ACC is in a bear phase, as it is right now.
    This is exactly what LIC has been doing over the past year. It used last year's rally to book partial profits in some of its oldest equity investments. For instance, it was continuously shedding its stake in L&T and Tata Steel during June-December '07, when their stock price was rising.
    As the tide reversed in January this year, LIC become a net buyer on both these counters. In the past two quarters, it picked up an additional stake worth Rs 1,500 crore in these two companies, overwhelmingly financed by nearly Rs 1,100 crore raised by selling them at their highs.
    In all, LIC raised nearly Rs 4,000 crore by diluting its stake in the 21 companies during the latter half of the last calendar year. This cash came in handy when the market turned bearish in the new year.
The bull run profits financed nearly 40% of LIC's bottom-fishing during the January-June '08 meltdown. And in quite a few counters such as Tata Steel, LIC is cash positive even after hiking its stake, thanks to its right timing.
    LIC's moves during the past 12 months also demonstrate that it pays to go against the market mood if the company has a compelling growth story in the long term. The insurance major has been accumulating Tata Motors, Kesoram Industries, Indian Hotels and Bharat Heavy Electricals (Bhel), among others, for more than a year now, even as these stocks continue to underperform the market.
    While bottom-fishing in these counters is yet to pay off, LIC has made a small fortune on its incremental investment in ITC and Cipla during '07. Till last year, both these counters had underperformed the market, but have since then become two of the top performing large-cap stocks.
    Who knows what lies ahead for the current underperformers in LIC's portfolio. However resourceful you may as an investor, predicting the future course of the market with full certainty is impossible.
    But it is very much within your means to minimise the downside in a meltdown and increase your chances and quantum of gains when good times arrive. And this is exactly what the bigdaddy of D-Street is doing.
    LIC has ensured that when the tide in the currently unpopular sectors such as auto, capital goods, cement and hospitality reverses, it will be sitting on fat profits, which will more than make up for the losses it has endured so far. Nothing stops you from following in LIC's footsteps. So, go ahead and be brave...
    krishna.kant@timesgroup.com 




There are still some value picks for investors

The IT sector is grappling with problems, but all's not over yet. There are still some value picks for investors who are willing to be patient. Santanu Mishra and Ranjit Shinde tell you more…



    THE INFORMATION technology (IT) sector has been trudging across a tough and tiring terrain over the past four quarters. Once the blue-eyed favourite of investors, the sector is now trying to grapple with a fluctuating rupee and the crisis in the global financial markets. These factors have adversely affected the performance of IT companies and the stock market's reaction has been along predictable lines. Barring a few stocks, most IT scrips have grossly underperfomed the benchmark indices.
    And the sector's first quarter performance hardly offers any relief. To find out what lies ahead, ETIG brings you a round-up of the IT sector, based on its latest quarterly performance. We believe that the current turmoil will be shortterm in nature and investors need to place their bets on companies which have strategies to survive the downturn.
    After underperforming the benchmark indices in '07, IT indices fell further in the first seven months of '08. However, this time, the slump in the broader market has been sharper than the fall in IT indices. Between January 1,'08 and August 21,'08, the 20- stock ET IT index lost over 19%. During the same period, ET 100 shed 30% of its market value, while the benchmark Sensex lost one
third of its value. After a rather painful year, the first quarter of FY09 brought some good news for the sector. Thanks to soaring crude prices and India's burgeoning trade deficit, the resurgent rupee made way for a stronger dollar. This was welcome news for IT exporters, as it boosted their dollar revenues in rupee terms. The aggregate sales (for a sample of 158 IT companies) in the June '08 quarter witnessed a modest growth of 1% over the previous quarter, compared to a fall of nearly 1% in the June '07 quarter.
    Though the growth in the June '08 quarter was the slowest in the four quarters, robust quarterly growth in other income (q-o-q growth of 143%) pulled up total reven
ue by 2.5%, compared to the previous quarter. Tata Consultancy Services (TCS) and Financial Technologies recorded a huge jump in other income during the period. For a better understanding of the factors which have impacted the sector during the June '08 quarter, we grouped IT companies under three categories — large-sized (net sales of Rs 2,000 crore or more during the 12 months ended June '08), mid-sized (net sales of Rs 400-2,000 crore) and small-sized (net sales less than Rs 400 crore). The categorisation threw up six large-sized, 20 mid-sized and 132 small-sized companies.
    While a weaker rupee aided companies' topline to a certain extent, it also gave rise to losses arising out of mark-tomarket accounting of foreign exchange (forex) hedging positions. Though the impact was moderate on large companies, medium and smaller players took a more severe hit. For instance, MindTree's quarterly net profit took a hit of Rs 54
crore due to losses on forex hedging. Bigger players like Infosys and TCS were net gainers, as gains in rupee-denominated revenues exceeded losses from forex hedging. Core operating margin (excluding other income) also
    tumbled compared to the
    previous quarter and year-ago levels.
    Though the slowdown is visible across all these segments, the pace differs from segment to segment. The large- and midsized companies have fared better than their peers in the small-sized segment. For instance, the quarterly net sales of small companies fell by 6.8%, whereas both large- and mid-sized segments managed a growth of around 2% each. This is because many small companies in India
carry out projects which are discretionary in nature. In a financial crunch, these services are among the first to face the axe. Smaller companies have lesser bargaining power and find it tough to get more business in difficult situations. But there are exceptions too. Some of the smaller players offer niche services and are thus, better-placed than their peers. For instance, Tanla Solutions, which provides platforms for mobile value-added services, registered a q-o-q growth of around 8% in net sales. Other niche players that did well were Logix Microsystems, Geometric and Geodesic Information Systems.
    Looking at the past trend in growth rates, we believe if the slowdown continues, the small-sized segment will continue to underperform the other two segments. Though the toplines of large and mid-sized companies were pretty good, they failed to retain their operating margins. The story was no different for small players. Operating margins of IT companies across the three categories fell by 220-300 bps compared to the previous quarter. Though salary hikes and visa costs have been cited as the obvious culprits, the fact that operating margins have been the lowest in the past 12 quarters indicates that the problem lies elsewhere.
Feeling The Pinch
    MOREOVER, IT companies are facing resistance in increasing their billing rates, which is another sign that the sector is under pressure. Lower operating margins can also be attributed to fixed costs like sales and marketing expenses, which cannot be brought down in the short run. Going forward, many companies, including biggies like TCS and Satyam Computer, are planning to improve operating margins by reducing their selling, general and administration (SGA) expenses.
    These are indeed tough times for the IT sector, and companies, irrespective of size, will need to continue with their attempts to curb expenses and improve efficiency. While the factors that have affected the sector's performance so far continue to persist, their impact may not be the same. For instance, the fluctuation in the rupee has taken a toll on the profitability of the sector, as there is still no clarity about the direction of the rupee's movement vis-à-vis the dollar. However, if the performance in the past few quarters is any indication, then the sector has, more or less, managed to put its act together to reduce the overall impact of currency fluctuations.
    The global crisis in the banking, financial services and insurance (BFSI) space is another major factor which has impacted the IT sector. BFSI clients, who contribute more than onethird to the total revenue of domestic IT exporters, are going slow on their decisions on discretionary spend. But things may not get too bad, as a slowing US economy is expected to push more and more American companies to scout for outsourcing. Even as the prophets of gloom gloat over the sinking fortunes of the IT sector, we at ETIGbelieve that investors can lap up stocks of companies that have the mettle it in them to not only survive the current downtrend, but also push ahead, once things change for the better. We found that
such stocks exist across all the three categories.
    In the large-sized segment, Infosys (current P/E of 20) and TCS (P/E of 17) are better placed, given their mature business models and global reach. Further, Infosys has the highest quarterly growth guidance, good operating margins and relatively lower forex hedges. TCS is gradually increasing its presence in the domestic market, which is a good strategy, given the growing demand for automation in the country.
    Among mid-sized companies, Rolta (P/E of 20) and Mastek (P/E of 10) look promising. Mastek is an established player in the insurance solutions space. The company has made an acquisition in the US to strengthen its foothold in that market. It has also taken steps to enter the domestic market for such solutions. Exposure to the engineering sector in India helps Rolta to take advantage of the rapid expansion in the domestic economy. It
has a strong foothold in the domestic geospatial information systems (GIS) and engineering design space. Apart from organic growth, it has also set its sights on global acquisitions and tie-ups.
    Among small-sized players, our picks are Tanla Solutions (P/E of 23) and Bartronics India (P/E of 11). Hyderabad-based Tanla Solutions provides content aggregation and
product solutions to the telecom sector. The company, which started off as a telecom signalling solutions provider seven years ago, has transformed itself into a content aggregator in the mobile communications space. Bartronics is a niche player in automatic identification. It recently bagged orders worth Rs 400 crore to supply smart cards to Employees State Insurance Corporation. The company has been reporting cash outflow from operations until FY07. This is expected to change soon, since its smart card business has now become operational.
    santanu.mishra@timesgroup.com 








 

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