Power Grid IPO

Power Grid Corporation of India Limited (PGCIL)

Name of the Company: PGCIL
Sector/Industry: Power Transmission
Issue Size: 57, 39, 32,895 (approx 57 crores for the convenience of people who have aversion against numbers) equity shares of Rs. 10 each. The issue would constitute 13.64% of the post issue paid up equity capital
Issue Price: Rs 44 - 52
Issue Opens: Monday, Sep 10, 2007
Issue Closes: Thursday, Sep 13, 2007
Promoter(s): President of India
Company Website: www.powergridindia.com
Book Running Lead Manager: Kotak, Citigroup and Enam.
Registrar: Karvy Computershare Private Ltd
Draft Red Herring Prospectus: http://capitalmarket.com/pub/dp/dp5455.pdf

About the Company: Power Grid operates most of India’s inter-state transmission assets and is the nodal agency for wheeling power across the country. It also operates 19000 km of fibre optic cable network. It also provides consultancy services to companies involved in power transmission in Africa and West Asia.

PGCIL has been designated a ‘Mini Ratna Category – 1’ public sector undertaking.

Objectives of the Issue:
The net proceed of the issue would be used for 15 identified transmission projects. These transmission projects would enhance the length of PGCIL’s transmission system by 13,022 circuit kilometers.

Strengths:

PGCIL is into core business of power transmission. It has monopoly over power transmission business in India. The recent Electricity Act which came into effect in June 2003, allows private players into transmission and distribution business. But till now there are only few private players, whose size is very small compared to PGCIL. As such, India is horrendously power starved country and can accommodate few players of the size of PGCIL.

Telecom infrastructure is huge growth story: PGCIL owns and operates a fibre-optic cable network that as on March 31, 2007 was over 19,000 kilometres long and connects over 60 Indian cities, including all major metropolitan areas. It leases this bandwidth to major telecom players. PGCIL’s bandwidth business posted revenue of Rs 160 crore for the FY 05 – 06. Revenues due to bandwidth business have huge profit margins because maintenance costs are negligible. With the arrival of digitized service like IPTV, VoIP etc the bandwidth business holds lot of potential.

Consultancy Business: It also provides consultancy services to companies involved in power transmission in Africa and West Asia. Most of the countries in this region are power as well as technologically starved. A company like PGCIL has huge growth potential in providing consultancy and technological support. PGCIL obtained revenue’s worth Rs 200 crore through consultancy business for the FY 05 – 06. Like bandwidth, this business too has huge profit margins. Like India, most of the African countries are also power starved

Weakness:

PGCIL provides credit to state utility companies whose financial health is not so credit worthy. Most of the state utility companies are bleeding because of the whims and fancies of netas and babus. Most of the utilities survive on government subsidies. One of the major reasons for loss is theft of power. Ask any babu of utility company about theft and he will reply, “No theft at all. It is just Transmission and Distribution (T &D) losses”. T&D is the euphemism used to hide theft of power. However with The Electricity (Amendment) Act - 2007, applicable from 15 June 2007, earnest efforts are made to reduce theft of power. GoI has reconciled to the fact that subsidies are no longer sustainable.

Financial Summary:

For nine months ending December 31, 2006, PGCIL achieved 2781 crores as revenues and 795 crores as profit after tax. On post issue equity, the full year earnings per share (EPS) would be approximately Rs 3. We can expect PGCIL to clock EPS of Rs 4 for the FY 07 -08.

Valuation:

At the upper end, the forward P|E ratio would be 13. The valuation look a bit stretched for a PSU undertaking but may be it is justified considering the monopoly and potential of the business. It also has ‘Mini-Ratna’ tag to boost of.

Recommendation:

It is one of the stocks which you must have in your portfolio. The Buffets and Jhunjhunwalas of the market would definitely endorse this issue without any second thoughts. I will be comfortable with this stock even if the stock markets were to close for next 10 years.

PGCIL is a core story which will definitely create long term wealth. You can expect listing gains of 15 -20% but selling it on listing day would be injustice to the process of creation of wealth. You can expect gains in excess of 100% in a year’s time and hence it would be prudent to hold it for at least one year.

Considering the fact that this is 980 (approx) crore issue in retail category, I think it will be oversubscribed by 5 -6 times.

Inputs from:
PGCIL’s DRHP.

MOFSL IPO Review

Motilal Oswal Financial Services Ltd (MOFSL)

Name of the Company: MOFSL
Sector/Industry: Share Broking/Investment Banking/PMS
Issue Size: 29, 82,710(Of Rs. 5/- Each Share)
Issue Price: Rs 725 - 825
Issue Opens: Monday, August 20, 2007
Issue Closes: Thursday, August 23, 2007
Promoter(s): Mr. Ramdev Agrawal and Mr. Motilal Oswal
Company Website: http://www.motilaloswal.com/
Book Running Lead Manager: Citigroup Global Markets India Private Limited
Registrar: Intime Spectrum Registry Ltd
Draft Red Herring Prospectus: www.sebi.gov.in/dp/motidraft.pdf

About the Company: Motilal Oswal Financial Services Limited is Mumbai based financial services provider. Motilal Oswal’s financial products and services include retail wealth management (including securities and commodities broking), portfolio management services, institutional broking, venture capital management and investment banking services.

With 1160 business locations and more than 2, 00, 000 investors in over 360 cities, Motilal Oswal is established player in wealth creation and wealth management business.

Motilal Oswal Financial Services Limited is the holding company and it operates through four subsidiaries:

1.Motilal Oswal Securities Limited (MOSL):
Incorporated in 1987, MOSL is a leading research and advisory based stock broking house. MOSL services include equities, derivatives, e-broking, portfolio management, mutual funds, commodities, IPOs and depository services.

2. Motilal Oswal Commodities Brokers Pvt Ltd (MOCB):
Incorporated in 2004, MOCB provides commodity trading facilities and related products.

3. Motilal Oswal Venture Capital Advisors Private Limited (MOVC):
MOVC manages India Business Excellence Fund (IBEF); a US$ 100 mn India focused Private Equity Fund.

4. Motilal Oswal Investment Advisors Private Limited (MOIA):
MOIA provides investment banking services such as M & A advice, lead managers for IPO etc.

Objectives of the Issue:

• To augment the working capital
• To infuse funds into subsidiaries
• To upgrade technology
• To invest in realty sector ( It is amazing, everyone wants to join realty bandwagon)

Strengths:

• Diversified financial house: MOFSL derives 10% of it revenues through PE management fees as well as advisory business. It is not entirely dependent on brokerage business which is heavily commoditized. Going ahead, investment banking and PE management can be huge growth drivers.
• Distribution Network: MOFSL has good distribution network in place. It is present in 360 odd cities.
• Promoters: Both Ramdev Agarwal as well as Motilal Oswal are old warhorses who have lot of experience. They are well networked in investment circles. MOFSL also enjoys good brand name.

Weakness:

• It is in a business which is completely dependent on bull run. During bearish time’s brokerage income, PE activity, M & A activity reduces drastically. During difficult times, these companies barely manage to survive or at the most grow modestly.

Financial Summary:

MOFSL earned revenue of Rs 370 crores and recorded profits of Rs 70 crores in FY-07.

MOFSL derives 90% of its revenues through brokerage. The brokerage is directly proportional to the volumes clocked. The volumes on the bourses are heavily dependent on the bull market. Any signs of bearishness would choke MOFSL’s revenues.

Valuation:

This issue is exorbitantly priced. On post issue equity capital of 15 crores (approximately), the EPS works out to be 23. This gives a PE of around 35.86 times at higher band where as peers are quoting at IL&FS Investsmart (47x), India Infoline (60x) and Indiabulls Finance (17x). Unfortunately MOFSL has not kept anything on the table for the retail investor. A price band of 625 – 675 would have been reasonable.

Should we apply?

The answer is ‘NO’. We are now at the peak of turbulent times. Bears have attacked and bulls are running out of steam. Bad news is flowing thick and fast.. sub prime crisis, yen carry trade issues and tantrums of the left are causing panic among investors. Money has started to flow out of India. We are heading for tough times. Hedge funds losing their entire net worth with the span of few days is definitely a bad precursor. I accept lot of hedge funds to start looking for cover from losses. You can accept more bad news on hedge funds. The days of easy money are over.

I think it does not make any sense to have contrarian views because the risk- reward ratio is heavily in favour of risk. Even if the markets were to move up from this point I think the premium would be max 100 – 150.

Ignore this issue and allow it to go the Purvankara style.

Inputs From:
DRHP
http://www.chittorgarh.com/newportal/IPO_detail.asp?a=114

Spice Telecom IPO

Name of the Company: Spice Telecom
Sector/Industry: Mobile Service Provider
Issue Size: 11.3 crore shares (Of Rs. 10/- Each Share)
Issue Price: Rs 42 - 46
Issue Opens: Monday, June 25, 2007
Issue Closes: Wednesday, June 27, 2007
Promoters: B.K.Modi and Telekom Malaysia (TM)
Company Website: www.spiceindia.com
Book Running Lead Manager: UBS Securities India and ENAM Financial Consultants Private Limited.
Registrar: Karvy Computershare Private Limited.
Draft Red Herring Prospectus: www.sebi.gov.in/dp/spicecom.pdf


About the Company: Incorporated in 1997, Spice Communications Limited (or Spice Telecom) is a cellular services provider in the states of Punjab and Karnataka in India. At present Spice Telecom has customer base of 0.3 crores.

Objectives of the issue:
Fees for NLD (National Long Distance) and ILD (International Long Distance) licenses (64 crores).
To purchase network equipment (178 crores).
Repayment of debt.

Strengths:

Strong Foreign Investor in TM: TM is a leading telecommunications company based in Malaysia, with a strong presence in the Asia-Pacific region, including strategic investments in Sri Lanka, Bangladesh, Indonesia, Cambodia, Singapore and Pakistan. TM’s experience and track record in expanding its business throughout the region will be helpful in the implementation of pan-India expansion strategy and that relationship with TM may also give access to additional technical and marketing expertise and economies of scale.

Value Added Services: Voice revenues are highly commoditized and it is crystal clear that voice tariffs are going to get cheaper day by day. Hence mobile service providers need to look for different revenue streams. Value added services (VAS) provide this opportunity. Convergence of technologies will open up lot of VAS opportunity. Already in Western countries, VAS accounts for 50% of the revenues. Spice is doing good at VAS. Cellebrum.com Private Limited, an affiliate company, creates value-added services for Spice, to help them stay ahead of competitors. Additionally TM, will also help Spice to develop innovative value-added services designed to appeal specifically to different market segments


Potential pan India presence: Currently Spice operates in two circles only. Spice
has applied for licenses to provide cellular services in an additional 20 circles throughout India. Spice has also applied to obtain NLD and ILD licenses.


Weakness:

Management: According to me, Modi management is not dynamic. Spice has not capitalized on the early mover advantage.

Size: At present, Spice is too small. Getting pan India licenses involves lot of regulatory hurdles and as such there is huge artificial shortage (India Army has occupied loads of bandwidth which it does not use) of spectrum in India.

Financial Information:

In the three years ended June 30, 2004, 2005 and 2006, total income was Rs. 554.4 crores, Rs. 643.0 crores and Rs. 680 crores, respectively, and earnings before income, tax, depreciation and amortization (“EBITDA”) was Rs. 168 crores, Rs. 202 crores and Rs. 164 crores, respectively. For the quarter ended September 30, 2006 total income was Rs. 184.33 crores and EBITDA was Rs. 42.2 crores.

Spice is loss making company. Spice Telecom’s accumulated losses are the tune of Rs 642.54 crore as on June 30, 2006. Also, it further continued to post negative net worth of Rs 684.35 crore as on December 31, 2006. This is the reason it has been denied listing at NSE. Making losses for few years is common among telecom companies because of long gestation period. Idea was also loss making company and has turned to black in this year.


Valuation:

Since Spice is loss making company, traditional method of ‘P/E’ does not work. As an alternative I have compared Spice with Airtel (which commands highest valuation), in terms of ratio of market capitalization to number of subscribers.

For Airtel, the ratio of market capitalization (1, 50,000 crores) to number of subscribers (4 crores) is 37500. Similarly for Spice, the ratio of market capitalization (3750 crores )
to number of subscribers (0.3 crores) is 12500. Other players like Idea and Hutch have the ratio 21500 and 30000 respectively. These figures gave an impression that Spice is damn cheap, but hang on and read the fine print.

We are comparing Spice with integrated telecom and national level players. Apart from mobile services, Airtel provides landlines, fixed wireless and bandwidth and the major point is Airtel, Idea and Hutch are all profit making companies. Hence we need to discount all these factors in Spice’s valuation.

Even if we value Spice at 50% discount to Airtel, then we still have approx 50% listing gains on the table. My call for Spice is ‘Apply’

Spice has done pre-IPO placement of 2.5 crore shares @ Rs 45 to Lehman Brothers and other investors.

One example how big money makes bigger money. In March 2006, Telekom Malaysia had picked 49 % stake in Spice for 1000 crores and today the same stake is 2000 crores on conservative. Seriously big money.

BEML and HDIL are the latest entrants on the IPO bandwagon…Watch out for reviews on this page..


Inputs From:
Spice DRHP

ICICI FPO Review

Name of the Company: ICICI Bank
Sector/Industry: Banking, Finance and Insurance
Issue Size: Equity Share of Aggregating Rs. 8750 Crores (Of Rs. 10/- Each Share)
Issue Price: Rs 885 - 950
Issue Opens: Tuesday, June 19, 2007
Issue Closes: Friday, June 22, 2007
Professional CEO: Mr. K.V Kamath
Company Website: www.icicibank.com
Book Running Lead Manager: Goldman Sachs, DSP Merrill Lynch, Enam Financial, JM Morgan Stanley Pvt. Limited
Registrar: Karvy Computershare Private Ltd


About the Company: Incorporated in 1994, ICICI Bank is part of the ICICI group. ICICI Bank is India's largest private sector commercial bank. ICICI Bank together with its subsidiaries, offer products and services in the areas of commercial banking to retail and corporate customers (both domestic and international), treasury, investment banking and other products like insurance and asset management.

Objectives of the Issue:

To meet the capital requirements arising out of growth in assets, primarily its loan and investment portfolio and compliance with regulatory requirements.

Strengths:

End-To-End Service Provider: ICICI provides complete financial services like bank services, loans, insurance, asset management, private equity and in each segment it has considerable size. It is fair to call ICICI as a ‘Complete Bank’.
Aggressive Performance: Even though ICICI was a late entrant, today its market capitalization is approx 85000 crores. SBI, which has 150 years of history, has market capitalization of 73000 crores and HDFC which was also incorporated in 1994 has market capitalization of 45000 crores.
Management: ICICI is led by K.V Kamath, a man who holds lot of clout in the corporate world. He was the man who played an important role in settling the Ambani feud. To assist Kamath, ICICI has troika of powerful women led by Chanda Kochar, Kalpana Morparia and Lalita Gupte.
Technological Advanced Bank: ICICI has laid state of art technological platform to serve its customers. It is aggressively pushing virtual banking and internet banking. These concepts will help ICICI to tap rural markets as well as people at the bottom of the pyramid. ICICI also has reduced dependency on physical branches and people because lot of its subscribers use internet banking facilities. Fewer branches and more subscribers, positively impact the bottom-line.


Weakness:

If there is severe downturn in global economy (on the scale of 9/11), then ICICI will end up with loads of bad loans in its portfolio.

Financial Summary:

For the year 2006 -07, ICICI bank achieved topline of 22,994 crores and bottomline of 3110 crores.

Valuation:

The pre-issue EPS is Rs 34.84 and the P/E ratio is 27.26. The valuations are comparable with other private sector banks such as HDFC (P/E = 30.5) and UTI (P/E = 26) but ICICI is better than these banks because it has powerful subsidiaries like ICICI Prudential Life Insurance, ICICI Lombard General Insurance and ICIC Prudential AMC in its portfolio. The price band of 885 – 950 seems to be reasonable. Retail investors are also eligible for Rs 50 discount (icing on the cake)

Go ahead and apply, but take care of these points:

a) Probably we will get firm allotment because the issue size is too large and already signs of liquidity crunch are visible. Hence invest according to our own sweet budget without having to worry about allotment. Lot of other good issues are also in pipeline.
b) This is a FPO (Follow on Public Offer) and not an IPO (Initial Public Offer), hence don’t expect any fireworks during listing. Subscribe to this offer as a pure long term investment call.
c) Go for payment option 2 (fully paid option) to avoid headache of partial payment mode.

Few other interesting points about ICICI and banking sector in India:

Value Unlocking: ICICI bank has set up a new subsidiary company called ICICI Holdings. The bank will transfer to the new entity its investments in ICICI Prudential Life Insurance Company, ICICI Lombard General Insurance Company, Prudential ICICI Asset Management Company and Prudential ICICI Trust Ltd. ICICI has put on block a stake of 5.9% in ICICI Holdings for mind boggling 2650 crores and FII are desperate to get as much share as possible from this pie. So ICICI Holdings, which will be the owner of loss making insurance and AMC business, is worth 44,600 crores. Remove this amount from ICICI’s market capitalization and valuation wise it looks damn cheap.

Come 2009( In 2009, banks have to be Basel –II compliant as well as Indian banking sector will be opened for foreign players) and may be even before that, an unprecedented game of mergers and acquisitions will unfold. You can expect ICICI to come out as leader in this game and grow inorganically.

One more interesting point before I end this comprehensive review. China’s largest bank, Industrial Commercial Bank of China has market capitalization of USD 200 billion. No bank in India is even one tenth of ICBC. Hence a fierce M & A game is inevitable.

Do visit this page on June 25 to get to know about Spice Telecom IPO…..

Inputs:
www.icicibank.com
http://www.chittorgarh.com/newportal/IPO_detail.asp?a=93

Vishal Retail

Vishal Retail

Name of the Company: Vishal Retail
Sector/Industry: Organised Retail
Issue Size: Equity Share of Aggregating Rs. 110.00 Crores (Of Rs. 10/- Each Share)
Issue Price: Rs 230 - 270
Issue Opens: Monday, June 11, 2007
Issue Closes: Wednesday, June 13, 2007
Promoter(s): Mr Ram Chandra Agarwal
Company Website: www.vishalmegamart.net
Book Running Lead Manager: Enam Financial Consultants
Registrar: Intime Spectrum Registry Ltd
Draft Red Herring Prospectus: www.sebi.gov.in/dp/vishalret.pdf


About the Company: Incorporated in 1986, Vishal Retail Limited is among the leading retail houses in India based in Delhi. Vishal Retail has around 46 outlets in 39 cities in India.
Vishal stores offer affordable family fashion at prices to suit every pocket. Vishal Retail also has apparel manufacturing plant at Gurgaon. It has seven distribution centers and a fleet of trucks for transportation.


Objectives of the Issue:

• To meet the expenses of establishing new retail stores.

The objective of this issue is crystal clear and will lot of value to shareholder’s money.

Strengths:

• Early Mover Advantage – Vishal is a player in organized retail since 2001. It is not one of the players who have joined the retail bandwagon recently.
• Retail Space: Vishal already has 11 lakh square feets of retail space under its control spread over 46 outlets. It has also finalized another 5 lakh square feets which will be operational in 2007 and 2008. Reliance and Bharti may talk a lot about thousands of crores of investment but in Vishal we already have a organized retail player of decent size.
• Expansion in Tier II and Tier III cities: I like Vishal’s expansion strategy which is contrarian in nature. Well known names like Pantaloon and Reliance are looking for retail space in Tier I cities but Vishal is concentrating on Tier II and Tier III cities. I think this strategy makes sense because of cheap real estate, less or completely no competition and high profit margins in Tier II and Tier III cities. I am quite sure that consumerism and purchasing power is good in cities like Mangalore, Mysore, Nasik, Ambala, Vijawada, Vadodara, Surat etc where Vishal is expanding.
• Private Labels: Vishal derives substantial revenues( about 20% from private apparel labels) which provide better profit margins and less dependency on others.
• High Profile Investors: Vishal has investors like Bennet Coleman & Co Ltd ,BCCL(11.21 % stake on pre issue equity capital), HDFC Limited (1.09 % stake on pre issue equity capital), Munjal’s of Hero group ( 1 % on pre issue equity capital) and Burman’s of Dabur group (0.4 % on pre issue equity capital). I made my investment decision as own as I saw such reputed names among investors. Vishal can be rest assured about favourable media coverage through BCCL (owner of Times of India and Economic Times).


Weakness:

I just can’t think of any weakness in this business model. This business model will go bust only, if there is severe catastrophe in India.


Financial Summary:

Vishal earned revenue of Rs 600 crores and recorded profits of Rs 25 crores in FY-07. For an organized retailer PAT margins of 4% is very good.


Valuation:

This issue is very reasonably priced. On post issue equity capital of 22.5 crores (approximately), the EPS works out to be 11.11. This gives a PE of around 24 times at higher band where as other peers like Pantaloon (55x) Provogue (46x) Trent (43x) Shoppers Stop (80x) are quoting at quite high PE.

The price band of Rs 230 -270 is very cheap for a company whose sales and PAT have grown at a compounded annual rate of 89.83% and 302.89%, respectively, during the period of FY04 and FY 07*.

Go ahead and apply in full strength. This is a multi bagger for sure.

Inputs From:
DRHP
http://www.chittorgarh.com/newportal/ipo_detail.asp?a=90
ET Finance dated Friday 8 June 2007.

DLF Limited

DLF Limited

Name of the Company: DLF Limited
Sector/Industry: Real Estate
Issue Size: 175,000,000 equity shares of Rs. 2 each. The issue would constitute 10.26% of the post issue paid up equity capital
Issue Price: Rs 500 - 550
Issue Opens: Monday, June 11, 2007
Issue Closes: Thursday, June 14, 2007
Promoter(s): K P Singh (Will he be the richest Indian, watch out Premji)
Company Website: www.dlf.in
Book Running Lead Manager: Citigroup, Deutsche Equities India, ICICI Securities, Lehman Brothers and UBS Securities.
Registrar: Karvy Computershare Private Ltd
Draft Red Herring Prospectus: www.sebi.gov.in/dp/dlfred.pdf


About the Company: Incorporated in 1946, DLF Limited is a real estate development company based in India. DLF is the largest Indian company in terms of the area of completed residential and commercial developments. DLF’s main area of operation is Delhi and surrounding areas.
DLF is in almost each and every area of real estate development including identification and acquisition of land, planning, execution, marketing and maintenance of the projects.

DLF's major line of business includes:

Residential business - DLF builds and sells a wide range of properties including houses, duplexes and apartments of varying sizes, with a focus on the higher end of the market.
Commercial business - DLF builds and sells or lease commercial office space, with a focus on properties attractive to large multinational tenants.
Retail business - DLF develop and manages leases based shopping malls, which in many cases include multiplex cinemas.
DLF is now focusing on more infrastructure, SEZs(special economic zones) and hotel projects.

Objectives of the Issue:

Finance expenditure for acquisition of land and development rights.
Finance the construction and development costs for some of our existing projects.
Repay certain loans of the Company.

Strengths:

Superior Land Bank – According to the prospectus DLF has land bank of 10,255 acres and is likely to last 10 years. This land bank is mostly concentrated around NCR region. The pace of infrastructure development around NCR region is high because of its proximity to national capital, common wealth games in 2010, up gradation of airport. Hence this land bank fetches good premium (but certainly not what K P Singh is asking for)
Size: In real estate business, size matters a lot. Right now, DLF is the largest real estate player of India.
DLF will get Rs 8750 – 9600 crores from this issue. This money will definitely reduce its interest burden and provide lot of flexibility in acquiring more land banks and may be other companies too.
Management Bandwidth and Track Record


Weakness:

Credibility of the land bank claimed: DLF does not own all of its 10,255-acre land bank. While it has title to 11.3 per cent of the bank, a good 35 per cent is still under `agreement to purchase' and for the rest of the land bank it has just ‘development rights’.

Hardening Interest Rates: Real estate valuation is very intricately linked with interest rates. When interest rates are low, people borrow money and buy real estate. With more buyers coming in, real estate prices start increasing to an extent of ‘asset bubble’ being created. In order to cool down the prices, central bankers increase interest rates. This whole process is a vicious circle and unfortunately we are in the latter half of this circle. The simple logic to make money is, buy low and sell high. So now it is the time to sell and not to buy.

Real Estate Bear Cycle: It has had a secular bull run from past 3 – 4 years. Anything that goes up has to come down. We have already seen drop in real estate prices in past 6 months across the country.

Financial Summary:

DLF posted strong numbers in FY07 when compared FY06. It registered revenues of Rs 4,034 crores in FY07 against Rs 1,246 crores in FY06. Net profit increased more than 10 times to Rs 1,941.3 crores


There is a huge debate over the net profit of 1941 crores. Is it artificial or real?

DLF earned an income of Rs 2210 crores and profit before tax of Rs 1570 crores from the sale of certain commercial properties to DLF Assets Pvt. Ltd., a company wholly owned by the promoters. I am not sure whether making profits through this kind of asset sale is sustainable in future.


Valuation:

This issue is very steeply priced. At the upper end of the issue price, the stock will discount its FY07 EPS of Rs 12.80 47.7x and 43.4x at the lower end. This kind of valuations are justified for Google and Apple but not for a brick and mortar company.

Let me get into K P Singh’s shoes and assume that PAT of 1941 crores is real and DLF has land bank of 10255 acres. Lets play with some numbers. If we assume a price of Rs 1500 (it should be fair price for a land bank which consist of prime as well as non prime land) per square feet, an acre of land costs Rs 6.6 crores (an acre of land consists 4400 square feet). According to this calculation, DLF should get valuation of 67683 crores. But K P Singh is asking for 87500 – 96000 crores which is exorbitantly high.

Please avoid this issue. Risk Reward Ratio is highly inclined towards risk. Don’t apply.

It would be interested to see whether this issue would get fully subscribed considering the fact that it is very huge issue as well as highly priced issue. Battery of investment bankers are working overnight to make retail investors poor and they are even resorting to certain unethical behaviour like providing Rs 500 per application to the broker. Don’t be surprised, if your broker calls you to tell that this is the best issue of the year.

Binani Cements IPO

Binani Cements


Name of the Company: Binani Cements Limited
Sector/Industry: Cement
Issue Size: 2, 05, 00,000. The offer constitutes 10.09% of post offer paid up capital of the company.
Issue Price: Rs 75 - 85
Issue Opens: Monday, May 07, 2007
Issue Closes: Thursday, May 10, 2007
Promoter(s): Binani Industries.
Company Website: http://binaniindustries.com/bil%20subsidiaries/bincement.html
Book Running Lead Manager: ICICI Securities.
Registrar: MCS Limited
IPO Rating: The Company is not proposing for IPO Rating.
Draft Red Herring Prospectus: www.sebi.gov.in/dp/binanidraft.pdf


About the Company: Binani Cements is the flagship company of the Binani Group and has facilities for the manufacture of 2.25 MTPA (million tones per annum) of cement along with 25 MW (Mega Watt) of coal/lignite based captive power plant at Sirohi, Rajasthan. (I have been to Sirohi and it is very close to my ancestor’s village)

The Sirohi facility was set up with the support of Denmark based F.L. Smidth and Larsen & Toubro Ltd., and was completed in 19 months. The Company has two limestone (important raw material for manufacturing cement) mines, namely Amli and Thandiberi, operated on long term lease bases which are at a distance of 2 and 7 Km from the plant respectively. These mines have proven reserves of 195 MnT (million tones) as on April, 2005.

The company’s primary markets are northern states of Rajasthan, Delhi, Harayana, Punjab and Gujarat.

Overview of the Industry in which Binani Cement operates:

India is the second largest cement producer in the world. Healthy CAGR (compounded annual growth rate) of over 8%.

Amongst the lowest per capita consumption in the world at 110 kg. So lot of scope for growth.

Future Demand Drivers
Expected GDP Growth level of > 7% (conservative guidance)
Initiatives for growth of Housing
Development of Roads/Other Infrastructure


Indian Cement Industry has a production capacity of 170 MTPA and running at almost 100% capacity utilization. Right now the situation is in favour of producers since demand is more than supply and till few months back cement producers used this situation to their benefit and had complete control over prices. But now cement industry is on PC’s (P.Chidambaram) inflation control radar and in my opinion cement industry would slowly lose its pricing power. Any opposition by cement players will be dealt with hawkish measures since election season will be beginning soon.

Always experts feel that, the recent capacity additions would be on block by next year and this might create supply glut.

I feel this industry excessively relies on government policies like infrastructure spending, interest rates and tax structure.


Objectives of the Issue:

The issue’s primary objective is to list company shares on the stock exchanges and provide JP Morgan an opportunity to unlock the value of its investment.

It is very clear that the money raised would not go to the company but will be going to JP Morgan who is selling a part of its 25% stake in Binani Cements. Hence for Binani cements this issue does not add much value.


Strengths:

Captive power plants – It has a power plant of 25 MW and another power plant of 40 MW is under construction. This power should be sufficient for the company to be self reliant in terms of
power requirements.

Lime stone reserves – It has limestone reserves of 195 MTPA and it is sufficient for 30 years of cement production at the rate of 5.25 MTPA.

The markets in which the company operates are likely to get an exclusive freight based railway corridor.

Weakness:

High debt to equity ratio of 2.2 and this is three times more than the industry standard. The company would be paying substantial part of profit as interests and most of the loans taken my company are long term.

Small Player – Even after all its planned capacity addition, Binani would have 2.5 – 3% share in the Indian Cement market. I think in commodity business the big you are the better it is. The size brings in lot of economies of scale.

All eggs in the same basket – The Company’s complete production facility is a single location. I think it is a substantial risk considering the fact that Rajasthan is particularly vulnerable to Indo-Pak conflict.



Valuation:

In FY 2007, the company achieved revenues of Rs 680 crores and net profit was 96 crores. This translates into an EPS of Rs 4.7 and the PE ratio for the band of Rs 75 -85 turns out to be 16 – 18.


Price comparison with peers:

Companies of almost the same size of Binani are currently trading at much lower valuation. You can get JK Cement at PE of 8, Madras Cement at PE of 12.9 and Shree Cement at PE of 11. Hence definitely over priced compared to its peers.


Final Verdict:

It is very simple .. DON’T APPLY to this issue. J P Morgan (the seller of these shares) is asking for too much. In Sep 2005, J P Morgan had picked up 25 % of Binani Cements paying 120 crores. With 18 months, it is expecting its 25 % stake to have a valuation in the range of 375 – 425 crores. I agree that in this span of time the fortunes of cement industry has improved but still this kind of ultra high valuations are unjustified. It is a clear case of exploitation of the current bull run.

Don’t apply for this issue and hope J P learns a lesson or two about India’s prudent retail investors.

Sources:

www.sebi.gov.in/dp/binanidraft.pdf

Financial figures copied from ET Investors Guide, May 8, 2007