Mahindra Satyam - Getting new lease of life

GE has extended its multi-million dollar contract with Mahindra Satyam, by three years from January 2010. It will cater to application development and engineering services. The contract will contain ERP implementation, application support and development and they have added engineering services and BPO services.

Target for Satyam is Rs. 150.

IPO Insight - Pipavav Shipyard

Pipavav Shipyard is coming out with an initial public offering (IPO) of 8,54,50,225 equity shares of Rs 10 each. It will raise nearly Rs 513 Cr at higher end of the price band Rs 55-60 per equity share. The issue will open for subscription on September 16 and close on September 18, 2009.

Up to 600,000 equity shares will be reserved for employees and rest of the shares for the public. The net issue will constitute 12.74% of the post-issue equity share capital of the company. Promoters (SKIL, Grevek Investments and Punj Lloyd) will hold 39.56% stake post issue.
Apart from general corporate expenses, the company intends to utilise proceeds for construction of facilities for shipbuilding, ship repair and the Offshore Business (Rs 179.27 Cr) and as a margin for working capital (Rs 244.04 Cr).
Credit Analysis and Research Limited (CARE) has assigned an IPO Grade 3 to the issue, indicating average fundamentals. Book running lead managers to the issue are Citigroup Global Markets India Pvt Ltd, Enam Securities Pvt Ltd, JM Financial Consultants Pvt Ltd, SBI Capital Markets Ltd, Kotak Mahindra Capital Company Ltd and Motilal Oswal Investment Advisors Pvt Ltd. Karvy Computershare Pvt Ltd is the registrar.

The company has second largest dock in the world, after Hyundai, with the company having 782 acres of land, of which 498 acres have been developed, with 662 meters in length and 65 meters in the width of dry dock, with waterfront length of 4.2 kms.

Presently, 85% of the country’s Defence needs are met from countries like Russia, France, Germany, UK and Italy, as world class facilities are not available, with Mazgaon Dock, Goa Shipyard and Kolkatta Dock, presently catering to Indian Navy and Ministry of Defence. So, the company would be focusing on Navy, ONGC and global jobs, which has much higher margins, then the conventional ones.

The total facilities and cost of the project is estimated at Rs 2,995 Cr, which is being financed by the term loan of Rs 1,312 Cr, present net worth of Rs 1,260 Cr and proposed IPO of Rs 500 Cr. This results in a debt equity ratio of 0.75:1 which can be considered quite reasonable and within the comfort levels. To replicate the similar facilities, it would take at least 5 years, including obtaining all permissions, which would give a first mover advantage to the company.

In comparison to Bharati and ABG Shipyard, all the operating ratios are little bit scaled up (high). But that doesn’t take away the merit of this company because this company appears to be a good company over a period of time.

Angel Broking View:
Notwithstanding good Industry growth prospects, the IPO ALREADY factors in the company’s strong Order inflow, potential extension of the government subsidy and timely execution. Global market leader, Hyundai Heavy Industries, is trading at 1.5x CY2010E P/BV, while in case of Pipavav, even at the lower price band, it would trade at 1.8x FY2011E P/BV, which is expensive. The IPO is also expensive compared to the company’s domestic peers, ABG and Bharati Shipyard, which have a diversified Order Book with strong Revenue and Operating visibility over the next two-three years and higher Return Ratios. Thus, considering that the IPO is at premium valuations.

SPA Securities View:
The company has a strong order book, but majority of its revenue will be received in FY 11. The estimated revenue in FY 11 is to be around Rs 35,000 million. PSL is available at a P/E of 8.6x and 9.3x at lower band & upper band respectively of its FY 11 estimated EPS of Rs. Rs.6.43. Looking at the FY 11 P/E multiple, there is not much upside potential in the short term. However, the revenues from the defence sector is not factored in since the company is yet to win orders which can generate substantial revenue.

Chairman Nikhil Gandhi, in an interview to CNBC-TV18, said the company’s valuations were justified and said the company was eyeing opportunities to build assets for the defence sector. He added that It is on the contrary because we have kept the price much lower. We have done the pre-IPO at Rs 80 and company has become operational since April 2009 and for an operational company this is a very good price because we are quite conscious of the issue that this is the first IPO of the group and we want to make sure that unless investors make lots of money, like the private equity investors who are making tonnes of money – the financial institutions 600% return – if the IPO price was high, they would have sold and gone. But they have not sold. This demonstrates that the price is very attractive and there is a lot of confidence in the management and the company’s potential.

Godrej Properties

Adi Godrej, Godrej group Chairman said Godrej Properties' (GPL) initial public offering (IPO) would be launched in 3 months. The market regulator SEBI (Securities & Exchange Board of India) has cleared GPL's draft red herring prospectus (DRHP).

The company will offer 3.5% stake in pre-IPO placement and to offer 10% stake via IPO. As per the DRHP filed in 2008, IPO proceeds will be used for acquisition of land development rights for forthcoming projects, construction of forthcoming projects and repayment of loans.ICICI Securities and Kotak Mahindra are bankers to the issue. Godrej Industries currently holds 80.3% in GPL.

Real estate developers are optimistic about a turnaround in the downturn. While the listed companies were the first to raise funds through QIPs, it's time for the unlisted ones. Godrej Properties IPO will come out within the next three months while Oberoi Constructions IPO will be here by early next year. And the main reason for fund raising is future growth plans. For Godrej, affordable housing is one of the focus areas.

Said Adi Godrej, Chairman, Godrej Group, “We have announced projects in Ahmedabad, Calcutta, suburbs of Mumbai and we will announce more. To my mind all the conditions for affordable housing to succeed in India have come into place for the first time.”

The share of the Real estate in the total revenues of Godrej Ind was to the tune of Rs. 7 Cr & profits of Rs. 5 Cr for Q1FY10. For the entire year FY08-09, revenue contribution was Rs. 31 Cr & profit was Rs. 21 Cr.

Godrej Ind. Holds around 83% stake in Godrej property. Godrej Property has landbank of around 450 acres (around 20 million sq ft) in various parts of the country. Interestingly, major portion of the land is in city area. So even if you take an average of Rs. 2000 per sq ft rate, the valuation comes to around whopping Rs. 4000 Crore. Whereas market cap of Godrej Ind is Rs. 4100 Crore. Apart from real estate business, the company is having interest in many other businesses & group companies. Also promoter of the company, Mr. Adi Godrej (who holds 78% in Godrej Ind) has announced buyback upto Rs. 275 per share, aggregating around Rs. 100 Cr. This shows the confidence of the promoter in the company.

All these factors taken into account, I see Godrej Ind as a multibagger & recommend to buy on every dip.

Group holding companies hold promising future

While the Stock markets are soaring and the investors are wondering at the pricey valuations of leading companies, one will be surprised to know that there are some companies trading substantially below their fair value. These companies are known as holding companies which are created to promote or control other operating group companies. You don't need to indulge into deep valuation models, profitability analysis or scenario building for finding their real worth. The Investment made by these companies in the shares of listed companies alone is many times more valuable than their current market capitalization.

One excellent example is Tata Sons, which is the controlling entity or the promoter for majority of the leading Tata Group companies such as Tata Steel, Tata Motors, Tata Power and TCS among others. Unfortunately, although a number of Tata Group entities are listed on stock exchanges, Tata Sons is unlisted. Apart from the Tatas, several other business houses, too, have their holding companies. The other types of companies that figure in our list are Investment Companies.

Long term investing in other companies is their business — an example could be Tata Investment Corporation, while a few others carry on their own distinct businesses apart from the Investment Portfolios. For example, more than half the market capitalisation of Murugappa Group's EID Parry is represented by the market value of its investment (i.e. shareholding) in Coromandel Fertilisers. In other words, the company's core business is valued much cheaper compared to its peers.

The market capitalisation of these companies does reflect the ups and downs in the value of their investment, although they are not in perfect sync. This offers attractive arbitrage opportunities. For example, Vardhman Holdings gained only 35% during last one year, as against 64% jump in the share price of Vardhman Textiles, in which it holds 26.7% stake.

Similarly, Uniphos Enterprises lost over a quarter of its value last year, substantially higher than United Phosphorous that lost just 3%.

In the same period, Binani Industries lost nearly 10% of its market capitalisation, even as the share price of its 65% subsidiary Binani Cements is up 16%.

Last six months have seen an excellent run-up in these companies, most of which have jumped two to four times since then, outperforming the 85% gain in Sensex.

Valuation Problems:

Despite being somewhat similar to close-ended mutual funds that also invest in listed equities, the holding companies' always trade at a discount to the net asset value of their investments. The price movements in the investee companies rarely reflect in the share prices of the investor company.

The reason being that the shareholders of the investor company, unlike in case of a mutual funds, can't force the management to liquidate the investment and distribute the profits to shareholders. Their direct gain is restricted to the cash flows that the investor companies get from its Investment in the form of dividends and other such non-operating incomes. At the same time, the holding company concept is still in its infancy in India and is not fully appreciated by the stock market, unlike in the developed world where a vast majority of large corporations are nothing but holding companies with business operations housed in scores of listed or unlisted subsidiaries. The most famous example, perhaps, is Warren Buffett's Berkshire Hathaway, which holds stakes in a vast number of diverse corporates. In India, however, the holding companies have never gained market favour, probably due to the lack of comfort felt by Indian investors. As a rule of thumb, 50% discount to the asset value of their portfolios is considered fair.
One such reason for discomfort is that the promoters hold large stake in the holding companies. The management power is with them so they are the decision makers. The other reason is that holding companies have very low floating stock so it doesn’t catch traders fancy. Very little information about such holding companies is available so investors also stay away from them.

One of the examples is Oscar Investments, holding company of the Ranbaxy group. The company owned 1.77 Cr shares of Ranbaxy (no. of outstanding shares of Oscar are 1.73 Cr), & they sold major stake to Japan’s Dai-ichi for Rs. 737 per share & have received Rs. 1100 Cr or so. If we calculate, the valuations from this only comes to around Rs. 1300 Cr (in addition to its core business activities) whereas its market cap is just Rs. 740 Cr & is available at P/E of less than at Rs. 425 or so. Here promoters hold 69.11% stake & the general public holding is just 7.19%. The company has given the dividend of meager 20% or Rs. 2 per share. Apart from this, Oscar also holds the shares of other group companies, both listed & unlisted. One can safely assume that Oscar has received almost Rs. 635 per share of Oscar from the Ranbaxy stake sale (excluding tax litigations).

But their valuations do dip below this threshold from time to time, which creates opportunities for value pickers. For example, RPG Group's CHI Investments, which was demerged from Ceat Limited in 2007 is currently valued at Rs 63 crore on the stock markets. This is just one-sixth of its Investment Portfolios worth nearly Rs 390 crore, which includes 8.4% stake in KEC International, 1.7% stake in CESC and 9.3% stake in Zensar Technologies. The company is currently seeking shareholder approval for amalgamating itself into RPG Itochu along with three other entities.

Maharashtra Scooters, a Bajaj group company, which was earlier manufacturing scooters, is now reduced to the production of dies, jigs and fixtures for the auto industry. The company's investments in Bajaj group companies are valued over Rs 710 crore, which is four-times its current market capitalisation. Some companies do have their independent business, apart from the investments.

Munjal Group's Majestic Auto manufactures two-wheeler components and spare parts and holds a 0.81% stake in Hero Honda valued at over Rs 250 crore. Still its market value is just Rs 70 Cr — 15 time its earnings for trailing 12 months.

Seed manufacturing company J K Agri Genetics underperformed the markets due to losses in FY09. However, its holdings in other group companies including JK Lakshmi Cement, JK Tyre and JK Paper are valued three times its current market capitalisation. It does not feature in our list due to the outstanding net debt of Rs 44 crore. After three quarters of losses, the company posted 44% growth in net profit for the June 2009 quarter to Rs 15 crore. The company has long been trying to separate its seed and investment businesses.

A few of these companies have decided to focus solely on their Investment Business and grow there. For example, Bajaj Holdings & KK Birla group's SIL Investments have applied for licenses from the Reserve Bank of India to operate as non-banking finance companies (NBFCs). The promoter group of Bajaj Holdings recently subscribed to 1 million warrants pumping in additional cash and emphasizing their intent to grow in the finance industry.

Conclusion:

This goes on to show that a lot of value remains locked in these holding or Investment Companies, which is not fully reflected in their share price right now. And, one cannot hope to unlock the entire value in such companies in a short while. A retail investor should, however, keep looking for chronically undervalued firms or arbitrage opportunities that can generate healthy returns in the long run.

OIL India IPO - Subscribe

Oil India Ltd. (OIL), the second largest oil and gas company in India, opened its initial public offering (IPO) of 26.45 lakh equity shares of face value Rs 10 each for subscription today. Its issue price has been fixed at Rs 950-1050 per equity share and it will raise around Rs 2,512 - Rs 2,777 crore.

One can subscribe to the issue for the listing gains of 10-15%. Also I would recommend to buy ONGC from secondary market as there are chances of appreciation. On the longer term, OIL is a very good stock to be in the portfolio.

OIL would trade at 3.6x EV/boe (Enterprise Value/Barrel of equivalent), a significant discount to ONGC which is trading at 5.2x EV/boe. Given OIL's superior production profile, similar exposure to Policy risks and better prospects of Reserve accretion, we could see the valuation catch up in line with the ONGC.

At the upper band of Rs 1050, OIL will be available at 10x its earnings and EV/EBITDA at 4.94x which is in line with ONGC.

OIL India is the second largest oil and gas company in India as measured by total proved plus probable oil and natural gas reserves and production. It is primarily engaged in the exploration, development, production and transportation of crude oil and natural gas onshore in India. It is also present internationally through the exploration of crude oil and natural gas in Gabon, Iran, Libya and Nigeria and was recently awarded exploration blocks in Yemen as part of a consortium. OIL primarily conducts its activities with respect to its domestic producing blocks and exploration activities in its nomination blocks independently. OIL conducts exploration activity, both in India and overseas, through joint venture arrangements and PSCs (production sharing contract) with other oil companies.

Company has 24 NELP Blocks out of which it is the operator in 12 Blocks and these include 4 blocks acquired under NELP-VII round bidding during the year. These blocks are located across the nation and your Company has initiated action to undertake all activities for timely completion of the Minimum Work Programme. Today, OIL has a total acreage of 1,60,959 Sq Km and most of these are in Category I basin.

Unitech - Multibagger in the long run

Technically, Unitech could move back to 96-90-85 levels. Upside potential is up to 130 in the short term. For the long term investors this stock could prove to be a multibagger.

No. of shares – 2044439935
Promoters - 51.2%
FIIs - 22.8%
Domestic MFs/Insurance cos - 4.8%
Others - 21.2%
Market cap (US$ m) - 4,490
Diluted o/s shares – 238.9 Cr
Daily volume (US$ m) - 170.3

52 week high/low – Rs. 930/Rs. 21
CMP – Rs. 103.25

Unitech is the second largest real estate developer with landbank of around 450 m sq ft. Last year there were lot of concerns about the sector as a whole & as a company Unitech faced the problems with huge debts on its books. However, the mangement has executed the strategies immaculately, & completed various projects & were successful in raising the money from the markets & brought the company on track.

Unitech reported revenue growth of 33.5% QoQ in Q1FY10 to Rs. 5.1bn. PAT came in at Rs1.6 billion, after operating losses in Q4FY09. Unitech has sold 6.9m sq ft since March for a total consideration of Rs27 billion. Even more creditable is the mix of its sales—Rs18 billion from residential (5,000 apartments) and Rs9bn from commercial verticals. It has cut debt by Rs 20 billion from the proceeds of the two QIPs, asset sales and promoter warrants. It has tripled the execution staff in its pre-sold projects to accelerate deliveries. It is also rolling back prices for existing buyers in Grande in Noida and Nirvana Floors in Gurgaon; this will boost customer goodwill. Revenue and PAT estimates for FY10 are 13% and 12% respectively, to account for better-than-anticipated ramp-up in execution. Price of Rs103.25/share, at 5% discount to 1-year forward NAV is fair.

Q1FY10 better than estimates: Revenues and PAT surprised on the upside, driven by recognition of sale of the premium office space at Saket in South Delhi.
Unitech sold 5,000 apartments since March. It also sold 1m sq ft of commercial projects. As at end-July, it had sold 6.9m sq ft of its targeted 20m sq ft for FY10, for a total contribution of Rs27bn. These sales should result in Rs9bn-12bn of cash inflows in FY10ii.

On Debt Front:

Unitech had total debt of Rs.100bn debt on its book including Rs. 20bn investments in telecom venture.

Unitech has received about Rs55bn from the two rounds of QIP, asset sales, advances on sales in the current year and promoters’ 25% commitment for the warrants. It has utilised Rs20bn to reduce debt, Rs10bn to pay dues to various suppliers, and another Rs10bn in project mobilisation.

Besides this, it has also received Rs. 35bn from Telenor after the stake sale in Unitech Wireless.

It has debt of Rs70bn on its balance sheet and cash balance of Rs15bn as at end-July 2009. Unitech intends to reduce borrowing to about Rs50bn by end-FY10 through a combination of asset sales and proceeds from new launches. Its net debt-to-equity ratio is at 0.57x (outstanding debt of Rs70bn). The company has guided to further debt reduction to the tune of Rs20bn during the course of the current financial year.

Acting Swiftly & Decisively:
Unitech has to deliver 26m sq ft of pre-sold apartments across NCR and Kolkata over FY10 and FY11. It has spent Rs20bn in clearing past dues and mobilising contract staff and raw materials to deliver these projects as scheduled.

Unitech launched a series of projects across NCR, Chennai, Kolkata, Mumbai, Lucknow and Mohali, among which the ones at NCR and Chennai were particularly successful. It has sold ~6.5m sq ft since April for a total sale consideration of Rs26bn. It had earlier sold 0.3m sq ft for Rs1bn in March.
About 30-40% of the amount, ~Rs9-12bn, will accrue in the current fiscal, with the balance accruing over the next 2-3 years as the company constructs these projects (project cash flows beyond the initial 30% are linked to progress in construction).

Rs9.3bn of asset sales in Q1FY10 is expected out of which Rs5bn is in pipeline.
Unitech recently sold an office in South Delhi and two hotels in Gurgaon to high-networth individuals for a total consideration of Rs9.3bn. It has received Rs6.5bn on these sales till date. It plans to sell some land parcels earmarked for hospitality projects to raise an additional Rs5bn in current financial year.

Unitech has mobilised about Rs20bn in accelerating execution of about 26m sq ft of pre-sold projects that have to be delivered by end-FY10. It has tripled deployment of construction labourers from 3,500 in March to 10,600 currently. These projects are self-financing, with Unitech likely to receive the outstanding Rs10bn as it completes construction of these projects.

Unitech is passing on the benefits of revised lower prices to existing buyers of Grande in Noida and Nirvana floors in Gurgaon respectively. This will result in a write-off of Rs2bn of receivables according to company estimates, but it will create customer goodwill. Its current execution pipeline intends to fetch gross realisation of Rs3,000 per sq ft, with most projects in the affordable-housing segment. It has not revised prices upwards in any of its projects (except The Residences in Gurgaon) in order to ensure adequate demand. It intends to take a cautious approach towards pricing over the next few months.

The estimated earnings for FY10 & FY11:

Revenues of Rs. 2467.9 Cr & Rs. 3,242.2 Cr are expected. Whereas Net profits of Rs. 643.2 Cr & Rs. 895.2 Cr. This will result in an EPS of Rs. 2.5 & Rs. 3.4. The fall in EPS is attributed to the dilution of equity capital from around Rs. 362 Cr to Rs. 478 Cr. The prospects for FY12 are very bright. As per the analysis, global economy will revive by then & it will prop up India growth story. We need to check out for any fall-outs from the current estimations of the financials.

The embedded value of Unitech Wireless would be around Rs. 10 per share. If it comes out with IPO, then the value unlocking will take place for Unitech shareholders. Also management is investor-friendly, so one can expect the allotment also. The company's focus on low-mid housing segment could affect the profit margins.
Operating volumes have been impressive and balance-sheet-related concerns have abated on debt repayments. The company is focused on executing the backlog of sold projects and cash flows from new sales will help ramp-up in execution.

So, now worst is over for the company. One can accumulate the stock on every dip with the horizon of 3-5 years to reap great benefits.