Grey Market - Reliance Power, BGR energy, Brigade Enterprises

 Reliance Power (estimated) 450 to 500 260 to 270


eClerx Services 315 30 to 40


BGR Energy 480 380 to 400


Transformers & Rectifiers 465 330 to 340


Brigade Enterprises 390 8 to 10


Burnpur Cement Ltd. 12 5 to 7


SVPCL 42 DISCOUNT


Aries Agro 130 20 to 25


Manaksia Ltd. 160 10 to 15


Porwal Autocomponents 75 DISCOUNT


Precision Pipes & Profiles 150 20 to 25

Precision Pipes and Profiles Subscription Details

Qualified Institutional Buyers (QIBs) - 5.0343 times

Non Institutional Investors - 8.5824 times

Retail Individual Investors (RIIs) - 18.7003 times

OVERALL - 10.35 times

IPOs make a lot of money for investors in 2007

Three out of every 10 stocks that were listed on Indian bourses this year returned more than 100% to investors. And three lost money for investors. Five returned more than the benchmark index of the Bombay Stock Exchange, which gained 36.9%, an indication, according to one analyst, of the hype-induced demand for these stocks.

 

Overall, 102 firms made their debut on the bourses this year between January and 20 December, raising Rs32,816.50 crore through initial public offerings, or IPOs.
"This year saw too much of foreign funds coming into India and artificial demand was also created in the market by the hype during the book-building process of new issues," said Deven Choksey, managing director, KR Choksey Shares and Securities Ltd, a domestic brokerage.

 

Under the book-building process, investors bid for the price they are willing to pay for a stock, within a prescribed band. The offer price is fixed based on the response of investors. With the exception of a few issues, almost all IPOs were subscribed many times over, and the offer price fixed at the upper end of the band.
Foreign institutional investors (FIIs) have so far invested $16.4 billion in Indian equities this year, after investing $7.9 billion last year.
Mumbai-based Orbit Corp. Ltd tops the list of stocks that listed in 2007 in terms of performance, with returns of 645%. Shares of the construction firm, which listed at Rs90 in April, around a 18% discount to the issue price of Rs110, closed at Rs819.60 on Wednesday. Three stocks this year have returned more than 400% returns: Allied Computers International (Asia) Ltd (489.5%), Everonn Systems India Ltd (443.4%) and MIC Electronics Ltd (429.9%).
All returns were calculated on the basis of the offer price and the closing price of shares of the firms on Wednesday. For some stocks, this means the returns were calculated over a period of several months; for others, it means over a period of a few weeks. Two stocks returned between 300% and 400%, four between 200% and 300% and 20 between 100% and less than 200%.
An investment banker, who did not wish to be identified, said bankers managing IPOs were being extra cautious while pricing issues and discovering the real worth of the stocks in the secondary market after their listing. "While deciding on the offer price, lead managers are giving discounts to ensure the issues are sold. After they are listed, the stock finds its own price."
The response to IPOs bears this out. While Orbit's IPO was subscribed only 3.85 times, the Allied Computers issue was subscribed more than 30 times, and the Everonn Computers issue more than 131 times.
"At present, IPOs are a lottery and it's all about getting allotment. These stocks are giving high returns since they were under-priced," said Prithvi Haldea, chairman and managing director, Praxis Consulting & Information Services Pvt. Ltd, which puts out Prime Database, a primary market tracker. According to him, large institutional buying—between 50% and 60% of any public issue—also contributes to the rise in prices of freshly listed stocks. "In the past, the issues were sold mostly to retail investors. Institutional investors can easily exert pressure on the pricing," Haldea said.
When a firm offers 10% of its equity to the public, 30% of the offer is reserved for retail investors, 10% for high net worth individuals and the rest for institutional investors. For lar-ger public floats, where a firm offers 25% of its equity, the po-rtion reserved for retail investors goes up to 35% and that reserved for high net worth individuals and institutions is 15% and 50%, respectively. In both cases, institutions are allowed to buy leftover shares in the other categories.
The Sensex returned around 46% last year, but corresponding returns from IPOs were muted. Only 23 stocks, out of the 95 that listed in 2006, returned more than the benchmark index. And only one in every nine stocks returned more than 100%. More than 45% of the stocks that listed in 2006 lost money for investors.
In contrast, fewer stocks have disappointed investors this year. Thirty-one of the 102 IPOs this year have given negative returns. The worst of the lot is House of Pearl Fashions Ltd. Priced at Rs550, it listed on bourses in February at a 10% discount and closed on Wednesday at Rs262.05, down more than 52% from its offer price. Broadcast Initiatives Ltd, that started trading in March, has also seen its value erode by more than 50% from its offer price.
While some investors buy IPOs with the sole intention of selling the stock on the day it lists, there are a few who invest in IPOs for the long term.
"Any IPO is great news for small investors like me but the problem is getting allotment of shares in a primary issue. Since there is always oversubscription, it is becoming increasingly difficult to get shares. As we get very few shares, the funds get locked till the listing date and I cannot invest in other stocks," said Vishal Thakkar, an accountant in a multinational firm, who has been investing in IPOs for years now.
Analysts are bullish on the prospect for firms that plan to list in 2008, but with a few caveats. "The primary market will boom as long as there is a stable and buoyant secondary market," Haldea said.
Krishna Kumar Karwa, managing director, Emkay Share & Stockbrokers Ltd, said newly listed firms would continue to give good returns as long as FIIs continued to invest in the country.

 

Via Mint

Porwal Autocomponents Allotment Status

 

Porwal Autocomponents Allotment Status

Porwal Autocomponents - Oversubscription Details

Qualified Institutional Buyers (QIBs) - 0.2124 times

Non Institutional Investors - 0.4790 times

Retail Individual Investors (RIIs) - 2.4435 times

OVERALL - 1.03 times

GREY MARKET PREMIUM @ 2-3

Porwal, Brigade, Transformers, Burnpur, Aries, Manaksia

 eClerx Services 270 to 315 20 to 25


BGR Energy Systems 425 to 480 340 to 350


Transformers & Rectifiers 425 to 465 300 to 310


Brigade Enterprises 351 to 390 10 to 15


Burnpur Cement Ltd. 12 3 to 5


SVPCL 42 Discount to Issue Price


Aries Agro 120 to 130 10 to 15


Manaksia Ltd. 140 to 160 20 to 25


Porwal Auto Components 68 to 75 8 to 10


Precision Pipes & Profiles 140 to 150 25 to 28

Latest IPO Grey Market Premiums

 eClerx Services 270 to 315 25 to 30


BGR Energy 425 to 480 370 to 380


Transformers & Rectifiers 425 to 465 320 to 325


Brigade Enterprises 351 to 390 15 to 20


Jyothy Lab. 690 130 to 150


Burnpur Cement Ltd. 12 4 to 5


Aries Agro 120 to 130 12 to 15


Manaksia Ltd. 140 to 160 40 to 45


Porwal Auto Components 68 to 75 10 to 12


Precision Pipes & Profiles 140 to 150 25 to 30

Porwal Auto Components - IPO Avoid

Investors can avoid subscribing to the initial public offering of Porwal Auto Components which is in the business of manufacturing castings. The fragmented nature of the foundry industry with a number of small players, competition from larger companies , unattractive margins and heavy dependence on one client, make the offer uninviting.

 

At the price band of Rs 68-75, the offer is priced at 15-17 times its likely FY-09 earnings on the post-issue equity. At the upper end of the price band, the company will raise around Rs 37.5 crore to fund its capacity expansion and set up a windmill for captive power consumption.
Business and plans

 

Porwal Auto manufactures ductile iron and grey iron castings and components primarily for the automobile industry. To cater to the growing demand, the company has expanded capacity up to 7400 tonnes in 2006-07.

 

The company plans to further increase installed capacity to 27,600 tonnes in FY 2008. 80 per cent of this installed capacity is to be utilized by 2009-10. With increase in capacity, the company expects to benefit from higher domestic demand for automobiles as well as the trend of overseas OEMs (Original Equipment Manufacturers) sourcing components from India.

 

But in a fragmented industry such as this, small companies will find it tough to compete with bigger players. The latter score over the smaller ones in terms of ability to execute larger orders, offer value added products such as machined castings and forgings and sub-assemblies and assemblies. These value additions also bring in better margins. Moreover, export growth for Indian component makers has come from high-end cast products and higher technology castings rather than from raw castings or forgings.

 

While the company too has plans to increase the supply of finished castings and scale-up its machined castings production, it will face stiff competition from established players. The company also needs to diversify its risks by supplying to other segments of the auto industry such as passenger cars and two-wheelers (to combat any slowdown in one particular segment ).

 

Currently, nearly 90 per cent of its revenues come from supplies to Eicher Motors for its commercial vehicles. L&T case equipment, Shakthi Pumps, Man Force trucks and a few others chip in with the rest. Eicher's new joint venture with Volvo for the commercial vehicles business, may also create some uncertainty if the latter reviews the supply chain.
Financials

 

For the year ended 31 March 2007, the company recorded sales of Rs 34 crore, which grew by about 32 per cent from the previous year. This was primarily due to capacity increase. Net profits decreased by about 8 per cent to Rs 75 lakhs. Margins may also be under pressure in the short-term due to finance charges

Aries Agro IPO Avoid

Investors can stay away from the initial public offer of Aries Agro, a manufacturer and marketer of plant micronutrients.

 

Though micronutrients have good demand prospects in the Indian context and are not subject to the regulatory constraints that fertilisers face, the business is characterised by high competition.

 

The offer price also appears high in relation to the multiples enjoyed by companies in the fertiliser and agricultural inputs business.

 

At the price band of Rs 120-130, the offer price values the company at between 18 and 20 times its FY-07 earnings per share, on a fully diluted equity base.

 

Much larger players in the agri-inputs space such as Rallis India (11 times), which have a presence in this segment, trade at cheaper multiples.

 

The offer proceeds are to fund working capital, towards the acquisition of an overseas material supplier, purchase of mobile vans for marketing products as well as capacity expansion.

 

The substantial scaling up of capacities over the next year could provide justification for the offer price over the medium term.

 

However, the intense competition in this business poses significant execution risks to the scaling up of operations.
Micronutrients business

 

Aries Agro derives the bulk of its turnover from the marketing of micronutrients under the names — Agromin and Chelamin, which are its leading brands.

 

Aries also has a small presence in the crop protection and veterinary products business. Micronutrients, which are required in relatively smaller dosages to supplement macro-nutrients (nitrogen, phosphate and potassium — usually delivered through mainstream fertilisers), help improve the yield and output of agricultural and horticultural crops.

 

The company focusses on chelated micronutrients (combinations of metallic nutrients such as zinc, iron and copper with certain chemicals) that have higher efficacy and allow better absorption by the plant.

 

The micronutrients business has considerable potential in the Indian context. Factors such as low yields of major foodgrains and horticultural crops, high soil alkalinity and intensive cultivation are the key demand drivers for micronutrients.
Wide network

 

Aries has built an extensive distribution network which reaches 375 districts across 20 states, through a network of 4700 distributors. This is backed by a portfolio of 37 products consisting of micronutrients, chelated nutrients and insecticides.

 

From being a small player, Aries has substantially ramped up its manufacturing capacities in FY-07, with capacities rising from 12,000 tonnes to 21,600 tonnes in FY-07.

 

Net sales have climbed from Rs 26 crore to Rs 73 crore between FY-04 and FY-07 while net profits have risen from a minuscule Rs 0.09 crore to Rs 8.69 crore over the same period.

 

Both numbers have been helped by a substantial trading component to sales.

 

The company has now lined up an ambitious expansion, with 79,200 tonnes of additional micronutrients capacity proposed to be added to the existing facilities across locations.
Limited pricing power

 

The market for micronutrients such as zinc, iron and copper in India, is expected to double over the next two decades. This suggests sustained single-digit growth in demand over the next few years.

 

Unlike fertilisers, micronutrients are not subject to any price controls by the government and, thus, allow greater operational freedom to producers.

 

However, players such as Aries Agro would still be constrained by limited pricing power, due to competition from imports as well as the host of local/regional brands, as the product offers limited differentiation possibilities.

 

The business has low entry barriers, involves small capital investments to put up capacities, limiting the company's ability to withstand pricing pressures and scale up sales.

 

The relatively high pricing of the offer also may not leave room for disappointments on this score.

Precision Pipes IPO Avoid

Investors can avoid the initial public offering of Precision Pipes and Profiles (PPAP), which manufactures automotive sealing systems.

While the company appears to have grown impressively over the years, future growth prospects may not be as bright, given the ongoing slowdown in the automobile industry.

The volume-driven nature of its business and the negligible potential for after-market sales, also peg up uncertainty. In the price band of Rs 140-150, the offer is priced at about 15-16 times its likely FY-09 per share earnings on a diluted equity base.

This appears pricey given PPAP's presence at the lower end of the value chain in the automobile industry.

At a time when established auto component manufacturers are finding the going tough despite their presence in niche and high-value products, PPAP's business, restricted to lower end automotive sealing products appears not so attractive.

The company is highly reliant on domestic sales, with a marginal exposure to the overseas market. While the company intends to increase its exports share, it could take a couple of years for significant revenues to come by.

Investors can adopt a wait-and-watch approach to the IPO and consider investments after listing.
Business

PPAP makes automotive sealing systems and exterior products for the automobile industry. Its products range from weather strips, windshield moulding to skirt air damper and body-side moulding.

Catering to clients such as Maruti Udyog, Honda SIEL, General Motors and Toyota Kirloskar, the fortunes of PPAP have grown in tandem with its clients. It witnessed a compounded earnings growth of about 34 per cent annually, backed by a 28 per cent growth in sales during the last four years.

PPAP also caters to the white goods industry, manufacturing PVC-based customised profiles to companies such as Godrej, Voltas and Videocon; the segment contributed to about 5 per cent of revenues.

PPAP does not enjoy a significant exposure to the export market (less than 4 per cent of its revenues). However, the company proposes to increase its exports and has entered into a manufacturing agreement with the Australia-based Power Data Corporation for exporting the company's 'Electrical Outlet System'. On the operational front, the company has expanded its margins by improving utilisations.

For the year ended March 2007, the operating margins expanded by three-percentage points to about 25 per cent.
Expansion initiatives

The company proposes to use the proceeds from the issue towards setting up two new manufacturing plants for auto components and electrical outlet system products for Power and Data Corporation of Australia. It also plans to use the proceeds to expand capacity (to about 30 lakh kilos) in its existing plant from the current 12 lakh-levels.
Offer details

The offer is open from December 17-20. The company seeks to raise Rs 75 crore through this offer. UTI Securities and Nexgen Capitals are the lead managers to the issue and Intime Spectrum Registry is the registrar.

Manaksia IPO Analysis

Manaksia manufactures value-added metal products and metal packaging products. The company, promoted by Basant Kumar Agrawal and other family members in 1984 as Hindusthan Seals to manufacture metal closures, later diversified into metal products and mosquito coils. It has 18 manufacturing facilities: 15 in India and three abroad (two in Nigeria and one in Ghana).

 

The business of the Manaksia can be categorised into metal products, packaging products, mosquito coils, and engineering and other goods. The metal products include aluminium alloy ingots, rolled sheets/coils, galvanised steel sheets/coils, color coated metal sheets and sponge iron, while packaging products comprise roll-on pilfer proof (ROPP) caps, crown closures, plastic caps and metal containers. Manaksia also undertakes contract manufacturing of mosquito coils for reputable brands.

 

Metal products comprised 72.5% of the product mix, packaging products 14.4% and mosquito coils 8.6%. The balance (4.5%) was engineering and other goods. Metal products contribute the highest margin. The total capacity for aluminium products is 55,900 tonnes, value-added steel products 58,000 tonnes, sponge iron 60,000 tonnes, and MS ingots 53,760 tonnes. The aggregate capacity to produce mosquito coils is 3,000 million coils at the five units in India. Capacity utilization of 66% was achieved for aluminium products, 62.9% for value-added steel products, 45.4% for sponge iron, and 32% for MS ingots in the year ending March 2007 (FY 2007).

 

With an outlay of Rs 115.50 crore, Manaksia proposed to de-bottleneck aluminium rolling mill, and invest in certain equipment for speciality alloy plant and additional machinery for the steel cold rolling plant at its Haldia, West Bengal, unit. The company also intends to repay Rs 60 crore of the Rs 285 –crore debt used largely to finance net current assets. For funding these plans and general corporate purposes, it has lined up a follow-on public offer (FPO) of Rs 217 crore to Rs 248 crore, comprising fresh issue of 155 lakh shares in the price band of Rs 140 to Rs 160 per share.

 

Strengths

 

    * Has undertaken various new projects, at different stages of completion, in FY 2007. Benefits of these projects will accrue in the coming years. These projects include a 12,000-tonne each aluminium colour-coating lines in Kutch in Gujarat and Nigeria, respectively (commercial production started in May 2006 and November 2006, respectively). Other projects consist of lead and copper alloy ingot plant in Nigeria (commercial production started in November 2006); 50,000-tonne cold-rolled Coils plan at Haldia (scheduled date of commercial production is December 20'07), and 24,000-tonne steel galvanising plant in Nigeria (scheduled date of commercial production is December 2007).

 

    * Vertically integrated across a number of products, resulting in reduction in manufacturing cost. For aluminium rolled products, for instance, backward integrated was undertaken by setting up an increasing the aluminium products capacity at Haldia in FY 2005 to overcome dependence on Pennar Aluminium's production facility, which was being used to manufacture aluminium. For the sponge-iron capacity, MS ingot facility was set up at Haldia to consume a significant portion of the sponge-iron production. Is setting up a steel cold-rolling plant at Haldia to meet the raw materials requirement for galvanising operation at Bankura near Durgapur and Nigeria.

 

    * Its metal-management skills and innovations in manufacturing and product enhancement have enabled it to manufacture advanced metal packaging products and retain and add customers like Hindusthan Coca Cola Beverages (Coke), Reckitt Benckiser, Dabur India, Jyothy Laboratories, Eveready Industries and McDowell Group and other major beer and liquor manufacturers. The aluminium division has attracted reputed alloy ingot users like TVS Motor, Orient Fans and Toyota Tsusho Corporation as customers.

 

Weaknesses

 

    * Does not have long-term contracts with customers of the metal and packaging divisions. Typically services purchase orders without any commitment to future work orders. Derives a significant portion of the revenue in the packaging and mosquito-coil segments from a few clients. Supplies about 60% of its crown and cap production to Hindusthan Coca-Cola Beverages. Loss of any customer will adversely impact business. For instance, one of the customers for mosquito coils (Jyothi Laboratories) intends to start in-house production. This may impact the financial performance, though not significantly.

 

    * Faces substantial competition from producers of cheaper alternative packaging products. The demand for metal packaging products has also been impacted due to increasing preference for plastic packaging products and containers. The market share for plastic beverage containers has grown substantially over the past several years. The metal packaging industry has also witnessed intense price competition since the past few years.

 

Valuation

 

Over the four years ended March 2007, revenue grew at CAGR of 15.3% and net profit 36%. Enjoys decent operating profit margin (OPM). The top line was Rs 453.28 crore, OPM 19.5% and net profit Rs 50.82 crore in the five months ended August 2007. Though OPM has slipped in comparison with FY 2007, it is expected to improve as exports benefits from the Nigerian operations will be taken into account at the end of the current fiscal.

 

There is policy in place to hedge for metals against orders from customers to insulate from significant risk due to fluctuation in metal prices. Further, the aluminium alloy business uses about 60% raw material requirement as scrap, which is not much related with price movement at the London Metal Exchange and trades at discount to LME prices depending on the demand-supply matrix. The cost of raw material consumed is just about 53.1% of the sale of manufactured products.

 

On annualised EPS of Rs 17.5 in the five months ended August 2007 on post-issue equity capital of Rs 13.91 crore, the P/E works out to 8.0 – 9.1 at the price band of Rs 140–Rs 160. There are no other listed comparables.

 

The shares are listed on the Calcutta Stock Exchange (CSE). However, there has been no trading since the last three years.

Brigade Enterprises IPO Oversubscription Details

Qualified Institutional Buyers (QIBs) - 18.2861 times

Non Institutional Investors - 4.8861 times

Retail Individual Investors (RIIs) - 5.5945 times

OVERALL - 13.07 times

Aries Agro IPO Analysis

Aries Agro (AAL), promoted by Dr T B Mirchandani and his two sons, is a major manufacturer of micronutrient and other nutritional products for plants and animals. Its range of products comprise five categories: multi-micro nutrient fertilisers, chelated micro nutrient fertilisers, specialty soluble fertilisers, anti-bacterial products for agricultural use, and nutritional products for animals.

A pioneer in introducing chelated micronutrients and chelated zinc in the country, under the brands Agromin and Chelamin, respectively, AAL has developed in house bactericides for agriculture.

Besides primary macronutrients, secondary micronutrients are required for high yield of the agriculture crop. Though essential for growth, micronutrients are required in small quantities. AAL is a leader in the production of micronutrients, with hardly any competitors in the organised sector in the country.

With four manufacturing facilities in Bangalore, Mumbai, Hyderabad and Kolkata, AAL's total production capacity is 21,600 tonnes per annum. It has 41 products under its umbrella. Strong trademarks protect these brands. These products are sold across 375 fertilizer-consuming districts in the country. The company has 25 branches with a distribution network comprising about 4,700 distributors and 65,000 dealers across the country.

New manufacturing units at Ahmedabad, Lucknow, Medak (Andhra Pradesh), and an additional one in Maharashtra will bring on stream 79,200 tonnes per annum of new capacity by October 2008.

With an aim to expand its global footprint, specially the Middle East, AAL is investing Rs 7.37 crore in one of its group companies Golden Harvest Middle East (FZC), incorporated in the UAE, to convert it into a subsidiary. Golden Harvest is setting up a facility in Sharjah to manufacture chelated micronutrients with a capacity of 10,800 tonnes per annum. It is also investing Rs 2.46 crore in another company, MAPCO Fertilizer Industries Free Trade Zone Company (MAPCO). MAPCO's distribution reach in the Middle East will be used to sell the company's micronutrients in those markets.

To distribute its products to the far-flung corners of the country, where it does not have a distribution network, AAL is planning to buy around 100 mobile vans at a cost of Rs 5.79 crore.

Strengths

• Has been in the business of manufacturing and marketing plant nutrients since over three decades. During this period, acquired strong domain expertise, which is difficult for a new entrant to replicate.
• Is a dominant player in the plant-nutrient space with minimal competition from the organised players.
• Has an in-house R&D facility, equipped with infrastructure required to develop new products targeted at specific crop requirement.
• Has an established distribution network spanning 375 fertilizer-consuming districts of the country. Has 4,700 distributors and more than 65,000 dealers.
• Products are not subject to price control as other fertilisers.
• Indian farmlands have one of the lowest yield rates in the world. Hence, there is good scope for improvement in yields by using micronutrients. Spread of organised retail and development of farm-to-consumer supply chain will encourage better yields through use of micronutrients.

Weaknesses

• Being a feedstock industry for the agricultural sector, the business depends on the monsoons. Abnormal rainfall could have an adverse effect on the performance.
• Increase in imported raw material cost could squeeze margin, as it would not be able to pass on the increase in prices to the final consumer.
• Due to high working capital requirement, there was negative cash flow from operations in four of the last five years. Of the total debtors of Rs 26.71 crore, 46% were due for more than six months end March 207.
• Defaulted in payment of dues to IFCI in the past and entered into a one-time settlement.

Valuation

AAL has set a price band of Rs. 120 to Rs 130 per equity share of Rs 10 each, translating into a PE of 17.9x at the lower price band and 19.4x at the higher price band on the year ending March 2007 (FY 2007) EPS of Rs 6.7 on post-IPO equity. There is no comparable listed company. Overall, the fertiliser-nitro sector enjoys P/E of 16 times, fertiliser-SSP (single super phosphate) sector trades at P/E of 13, and pesticides-medium/small industry trades at P/E of 7. Being the only listed focused player on the high growth segment of micronutrients, with massive capacity expansion plans, the scrip will get above

BGR Energy Systems Allotment Status

 BGR Energy Systems Allotment status can be checked at Intime Spectrum (in 2 weeks)

Transformers and Rectifiers Allotment Status

 Transformers and Rectifiers Allotment status can be checked at Intime Spectrum in 2 weeks

Transformers and Rectifiers Subscription/Allotment

Qualified Institutional Buyers (QIBs) - 110.5296 times

 

Non Institutional Investors - 121.6963 times

 

Retail Individual Investors (RIIs) - 58.6145 times

 

OVERALL - 91.31 times

BGR Energy Systems Subscription/Allotment

Qualified Institutional Buyers (QIBs) - 161.6744 times

Non Institutional Investors - 153.0816 times

Retail Individual Investors (RIIs) - 46.8934 times

OVERALL - 119.54 times

Grey Market Premium Updates

 eClerx Services 270 to 315 0 to 45


BGR Energy 425 to 480 340 to 350


Transformers & Rectifiers 425 to 465 360 to 370


Brigade Enterprises 351 to 390 50 to 60


Jyothy Lab. 690 230 to 240


Burnpur Cement Ltd. 12 6 to 7


Edelweiss 825 720 to 740


Renaissance Jewellery 150 40 to 45


Kolte Patil 145 80 to 85


Kaushalya Infra 60 11 to 12


SVPCL 42 - 5 to -7


Aries Agro 120 to 130 40 to 45


Manaksia Ltd. 140 to 160 50 to 55


Porwal Autocompotents 68 to 75 22 to 25


Precision Pipes & Profiles 140 to 150


40 to 50

Reliance Power IPO Postponed!

Reliance Power may be forced to push its initial public offering (IPO) to early next year, as the Securities and Exchange Board of India (Sebi) is still grappling with the fine print of the red herring prospectus.

 

Billed to become one of the biggest IPOs in recent times, the Reliance Power issue has evinced interest among investors in the power sector, even as it triggered apprehensions in some quarters on the pricing.

 

Sources in the group were emphatic that the Rs 8,000 crore issue will hit the primary markets, but it's the timing they are not sure of, as Sebi is going through the details with a fine-tooth comb.

 

"Even if we obtain all the approvals now, we'll avoid doing road shows in the fag end of December. It's a wrong time to approach foreign institutional investors, as their fund managers normally go on Christmas holidays during that time," a source said.

 

For the Reliance Power IPO to be a success, the response from foreign investors will be critical.

 

Reliance Power is owned a little over 50% by Reliance Energy, with the balance by R- ADA group's investment firms.

 

A clue to the postponement of the issue came when Reliance Energy promoters decided to infuse about Rs 8,000 crore in the company, through a preferential issue to the promoters and major institutional shareholders.

 

The infusion, to be done through warrants within a span of two years, will see the balance sheet of Reliance Energy "increase substantially," a recent report by broking firm Tower Capital & Securities said.

 

As REL's net worth reaches Rs 20,000 crore, post the 2009 dilution, Tower Capital said the company can give Reliance Energy "appropriate cushion" to manage an order book of Rs 1,00,000 crore.

 

However, analysts say that the Rs 8,000 crore infusion will only facilitate its infrastructure businesses that include metro rail, road projects, townships etc.

 

All the power-generating businesses have been shuffled into Reliance Power.

CRISIL IPO grade 4/5 for OnMobile Global

Proposed public issue of 10,900,545 equity shares of face value Rs 10 targeted at an issue size in the range of Rs 3,500-4,500 million

 

CRISIL has assigned a CRISIL IPO Grade "4/5" (pronounced "four on five") to the proposed initial public offer of OnMobile Global Ltd. (OGL). This grade indicates that the fundamentals of the issue are above average relative to other listed equity securities in India.

 

The grading reflects OGL's position as the largest player in the mobile value-added services (VAS) market in India, and its strong presence in the voice portal and ring back tone (RBT) segments of the VAS market. The grading also reflects OGL's ability to leverage on the unique voice recognition capability of its platform as telecom operators in India expand coverage into rural areas, and its ability to offer customer contact products to goods and services companies by virtue of having a voice channel relationship with almost all telecom operators. The grading also factors the management's strong understanding of market dynamics, as reflected in OGL's consistent track record in product innovation, and pro-activeness in setting up a corporate governance system in the company, as indicated by the appointment of independent directors over a year ago. The grading is tempered by the fact that OGL has low bargaining power with its customers i.e. telecom operators, as it does not brand its products and depends on the operators to take its products to the market. The grading also reflects the anticipated change in OGL's revenue profile, as it opens up its proprietary platform to third parties for applications development. This will cause the business mix to move from the current content cum platform mix to more of the latter.

 

About the company
OGL is the largest mobile VAS provider in the Indian market. The company was promoted by two first generation entrepreneurs - Mr Arvind Rao, and Mr Chandramouli Janakiraman. The company was originally incorporated as Onscan Technologies India Pvt Ltd in September 2000 by its promoter OnMobile Systems Inc (OMSI). OMSI itself was an incubated start-up of Infosys Technologies Ltd, incorporated under the Delaware General Corporation Law in December 1999.

 

At the core of OGL's offering to telecom operators is a platform named MMP 2500 - a combination of standard hardware and OGL software - which is technology and handset neutral. Leveraging on this platform, OGL provides a range of services such as ringtones, information, RBT, and m-commerce to telecom subscribers. Currently, the only way to develop applications on the MMP 2500 platform is proprietary with OGL. The company, over the next few months, proposes to throw open the platform to third parties for putting their own applications.

CRISIL IPO grade 4/5 for Persistent Systems Ltd

Proposed public issue of 4,974,836 equity shares of face value Rs 10 at a targeted price of Rs 375 per share

 

CRISIL has assigned a CRISIL IPO Grade '4/5' (pronounced 'four on five') to the proposed public offer of Persistent Systems Ltd (PSL). This grade indicates that the fundamentals of the issue are above average, in relation to other listed equity securities in India.

 

The grading reflects the company's strong position in the outsourced product development (OPD) space by virtue of its ability to provide large scale services in specific parts of the software product development life cycle, such as software development, testing and support, and provide end-to-end product development services on a relatively smaller scale. The former is used by global software companies like Microsoft, Agilent, Covad, etc, while the latter is used by small and medium-sized software product companies who do not have the scale to set up captive operations in India. This has given the company a diverse customer base. The grading also reflects the strong corporate governance architecture in the company, in part due to the presence of eminent independent directors on the company's board for the past six years. The grading is tempered by the fact that the margin compression that the company has seen over the last three years is likely to continue in view of currency movements and wage inflation, as well as increased competition from IT Services companies such as Wipro and TCS, as a consequence of a likely slowdown in their traditional revenue streams. The possible withdrawal of tax concessions would also adversely impact the company's return on equity after 2008-09.

 

About the company
PSL, promoted by first generation entrepreneurs - Dr. Anand Deshpande and his father Mr. S. P. Deshpande, was incorporated in 1990. The company provides offshore software product development services to its customers, majority of whom are independent software vendors (ISVs). It provides services at all stages of the product development life cycle - product conceptualisation, design, development, testing and support. The company has around 190 customers, of which the top 10 customers account for around 47 per cent of its revenues. As of October 5, 2007, PSL employed around 3,700 people.

 

PSL focuses exclusively on the OPD market. By providing services to mid-sized and small ISVs, the company has been able to get access to the venture capital community. The company continues to use the venture capital community to garner business within the small ISVs space.

 

The company's offshore development centres are located in Pune, Nagpur, Bangalore, Goa and Hyderabad. The company owns most of its development centres. It currently owns over 5 lakh square feet of office space with a capacity to seat approximately 3,800 people. PSL plans to use its IPO proceeds to construct two new development centres - one in Pune and the other in Nagpur, with a capacity to seat 3,000 and 1,200 employees, respectively at an estimated cost of Rs 1,516 million.

CRISIL IPO grade 3/5 for KNR Constructions

Public issue of 7,874,570 equity shares of face value Rs 10 targeting an issue size in the range of Rs 1,500-Rs 1,750 million.

 

CRISIL has assigned a CRISIL IPO Grade '3/5' (pronounced 'three on five') to the proposed initial public offer of KNR Constructions Ltd (KNRCL). This grade indicates that the fundamentals of the issue are average, in relation to other listed equity securities in India.

 

The grading reflects KNRCL's strong track record of project execution in both roads construction and operations and maintenance (O&M). The company has executed many projects as part of the NHAI's NHDP program and has had a 7-year relationship with Patel Engineering as a joint venture partner. The KNR-Patel JV has won 10 road construction projects so far. These include two BOT annuity projects as a part of NHDP Phase II, the combined value of which is Rs 9.6 billion. As of September 2007, KNRCL's order book stood at Rs 16.25 billion, of which the roads sector constituted 89 per cent. The grading is constrained by the relatively underdeveloped state of the company's operating system, which in turn, could constrain its ability to augment the size of its operations. The grading also reflects the uncertainties associated with company's plans to diversify into the power generation and real estate sectors.

 

About the company
KNRCL is engaged in the business of providing engineering, procurement and construction services in the transportation sector, namely, roads and highways, irrigation and urban water infrastructure management. Roads and highways is the key business of operation, forming 89 per cent of the company's order book as on September 30, 2007. The company has been awarded various projects by both NHAI and state governments.

 

KNR Constructions Ltd (KNRCL) was incorporated as a public limited company on July 11, 1995. It was promoted by Mr K N Reddy who started as a contractor for small works. KNRCL was primarily a road operation and maintenance company that ventured into road construction 8 years ago and is now diversifying into irrigation and urban sanitation projects. In 2000, KNRCL formed a 50:50 joint venture with Patel Engineering. Since then, the joint venture has bagged several large projects, including two BOT Annuity projects awarded by the NHAI in 2006 and 2007. Projects bagged through joint ventures currently form 74 per cent of the company's total order book.

 

For the year ended March 31, 2007, KNRCL reported net profits of Rs 198.8 million and turnover of Rs 2,591 million, as compared with net profits of Rs 153.7 million and turnover of Rs 1,261 million in 2005-06.

Brigade Enterprises: Invest at cut-off

Investors with moderate return expectations can consider an exposure in the initial public offering of the real-estate developer, Brigade Enterprises, with a two-year perspective.

 

A reasonable track record of property development, steady growth in revenues and execution of projects through reputed contractors are positives for the company.

 

Companies with a strong track record, huge land bank and a pan-India presence are those that have recently enjoyed a re-rating by the market. Smaller players with good fundamentals, such as Brigade, have not been able to attract similar valuations. The asking price of Rs 351-390 for the company does appear stiff at this juncture, given that it is a relatively small player with geographic concentration and a business model that is not too differentiated from some of the recently-listed players in the region.

 

However, the ongoing projects, if completed and sold on time, may help the company command better valuations. Based on this earnings assumption, the offer price values the company at 16-18 times its expected earnings for FY-09.

 

Brigade is a real-estate developer with a majority of its projects executed in Bangalore.

 

The company is primarily focussed on residential properties with experience in commercial and hospitality projects as well. It has so far executed 5.67 million sq. feet of saleable area. The issue proceeds are to be used for constructing ongoing projects and acquiring land.
Comfortable track record

 

Brigade has in the past executed projects across real-estate domains and has not narrowed its operations to specific segments.

 

While, broadly, it has presence in residential, commercial and hospitality segments, it has further diversified its activities within these domains. For instance, in the residential segment, the company is among the earlier players to venture into integrated enclaves, together with apartment buildings for the middle and high-income group.

 

Integrated enclaves, which are self-contained gated communities, have enabled the company attain development qualification in residential, commercial, retail, hospitality and other basic infrastructure projects simultaneously.

 

That 75 per cent and 66 per cent of two on-going projects have been pre-sold also reflects the increasing demand for such gated communities in metropolitan cities such as Bangalore.

 

In the commercial space, the company has a mix of lease and sell models. In the hospitality segment, it is now managing two serviced residence properties with more such ongoing projects and has also tied-up with brands such as Accor and Sheraton for running hotels and resorts.

 

We believe that the enclave projects and hospitality segments have the potential to aid profit margins.

 

These relatively recent ventures appear to have contributed to a jump in operating profit margins from 20 per cent in FY-05 to 31 per cent in FY-07.

 

The half-year ended September has further taken the OPMs to about 40 per cent. That the enclaves have also brought in high volume is evident from revenues jumping from Rs 162 crore to Rs 402 crore over FY-05 to FY-07.

 

With its past record, Brigade's ongoing projects of 12.53 million sq. ft (about twice the projects executed so far) do not appear too challenging to execute.

 

That the company has in the past tied-up with Simplex infrastructures and B. E. Billimoria and Company also provides confidence to the timely execution of construction contracts.

 

With a number of developers having huge developable area, sub-contracting to qualified contractors may be the more prudent way for them to ensure timely and quality execution.
Risks

 

Of the total land reserves of 44 million sq. ft of developable area, about 35 per cent are yet to be registered in the company's books and are still in the agreement stage.

 

The forthcoming projects of the company (about 30 million sq ft. of developable area) may face the risk of delays in take-off if such land is not transferred soon.

 

Further, a portion of the reserve, which is agriculture land, will be held in the name of some individuals on behalf of the company until it is converted.

 

Any roadblocks in such conversion could also disrupt future projects. We have, therefore, considered only ongoing projects for our valuations.

 

That the company has a relatively low-land bank also implies that future parcels would be purchased at higher cost, posing risk of spiking operating costs.

 

Cost of land has gone up from 15 per cent to 31 per cent of the total project expenses between 2004 and 2007.

BGR Energy Systems: Invest at cut-off

Investors looking for a proxy to the energy sector can consider subscribing to the initial public offering of BGR Energy Systems with a two-three year perspective. The steep asking price may, however, not provide quick exit opportunities for short-term investors.

 

This solutions provider for the power and oil and gas sectors offers exposure to a business which has unique positioning, strong potential and dearth of quality EPC (engineering, procurement and construction) contractors.

 

BGR's ability to serve as a one-stop-shop for the user industries in the oil and power solutions segment, appears to be the company's unique selling proposition.

 

The offer price of Rs 425-480 values the company at about 20-23 times its expected earnings for FY-09 on the post-issue equity base. This does not factor in any earnings upside from the success in bids that the company is now attempting.

 

Though not strictly comparable, BGR's valuation, at offer price, is at a marginal discount to large listed power equipment players.
offer details

 

BGR's operations can be broadly classified into two segments — supply of systems and equipment and undertaking turnkey engineering project contracts.

 

The company's clients are from the power, infrastructure and oil and gas sectors and industries, which require environment engineering solutions and captive power plants.

 

The offer consists of fresh issue of shares and an offer for sale by the promoters; the proceeds of the latter will not accrue to the company. At the offer price band, Rs 184-207 crore would be raised through the fresh issue. The company seeks to deploy the same for working-capital requirements and expand manufacturing facilities in India as well as establish units in China and West Asia. The company's market cap at the offer price would be Rs 3,000-3,500 crore.
Complementary

 

The business segments of BGR are complementary in nature, enabling it to offer a basket of wide-ranging solutions to sectors mentioned by us earlier. For instance, in the case of a power plant, the company started with offering balance of plant (BOP) solutions, which usually accounts for about 50 per cent of the total plant cost. This involves providing a range of facilities (electrical, mechanical, control, instrumentation systems and civil buildings) other than the core equipment of boiler, turbine and generators.

 

BOP does not only involve providing services but also supplying materials. Of the products required to execute a BOP, BGR typically manufactures 40-50 per cent in-house and sources the rest from suppliers. The company's manufacturing facilities, therefore, support the services division. This in-house production also provides cost advantages.

 

In a BOP project, direct bids to power generation companies offer better returns than subcontracts with EPC players. The company, therefore, does only direct bidding to maintain its margins.

 

The four BOP projects that it is now handling in the power space involve dealing directly with the generation company.

 

Apart from capability to undertake contracts for projects that use different types of fuels (such as coal or gas), BGR has moved to servicing higher MW power plants as well.

 

Three of the four BOP contracts are in the 500 MW range and a recent letter of intent is for a gas-based power project of 820 MW. This is a positive, as future projects of power plants are expected to be larger.
Going the EPC way

 

The BOP experience has provided a platform for BGR to move to EPC contracts for power plants, which essentially involves completely building the power plant including supply of power equipment. The company has executed its first 120 MW gas based plant on EPC basis for Aban Power.

 

As BGR does not manufacture the key components such as boilers and turbines, it has tied up with international power equipment suppliers for EPC projects.

 

Such tie-ups may enable the company to bid competitively for EPC contracts as international equipment players, particularly the Chinese, are known to adopt aggressive pricing.
Oil and gas equipment

 

BGR has also established itself in providing products (such as separators, gathering and metering systems, storage tanks and pipeline equipment) and solutions ranging from transporting the oil/gas from the wellhead to the end user.

 

This involves manufacture of various components and offering services to industries focused on oil and gas fields, cross-country pipelines, refineries and petrochemicals. Its business is, thus, much more extensive than that of companies offering pipeline EPC services.

 

The manufacturing activity for this division is carried out through a subsidiary. The company is well-entrenched in the local market and in West Asia in this segment, retaining an edge to capitalise on the oil and gas boom.

 

That it has managed to compete with international players such as the Kar Group from Kurdistan, also provides confidence as to its ability to bid internationally.

 

While this division accounts for only 13 per cent of the current order back log, we expect it to improve margins, given that the segment is more lucrative.

 

Present projects are titled towards foreign orders, which are likely to offer good returns.
Rough roads

 

BGR has not had a pleasant experience in the road infrastructure space as two projects in Kochi and Tuticorin have faced hurdles, leading to their termination. The company has now taken a decision to avoid cash contracts and instead focus on BOT projects and technology-intensive projects such as tunnelling, multi-level cark parking and such other urban infrastructure projects.

 

It may not be difficult for the company to foray into these areas with the technology and project management skills that it possesses. Success in these could provide a significant boost to earnings. However, given the working capital-intensive nature of the current projects, funding these new segments with internal accruals could pose a challenge.
Financials

 

BGR's sales and net profits have grown at 43 per cent annually over the last four years. We expect the profit growth to accelerate now, given the company's transition to a high-end solutions provider and its proposed low-cost facilities in China and Bahrain to cater to the East and West Asian demand.

 

BGR's current order-book of Rs 3,300 crore is about six times its annualised 12-month revenues (March 2007 was an 18-month period due to change in accounting year) of Rs 525 crore.

 

The company's ability to manage its working-capital requirements is of concern, given that a good number of its clients are public sector/state companies, where delays in payment are not uncommon.

 

The company is a key beneficiary of the expected ramp up in activity in the E&P space; any slowdown in these sectors could affect revenue flow. However, its divisions of air fin coolers, electrical projects and environment engineering have steady clients and may provide some cushion against any slowdown in projects in the power/oil and gas divisions. The offer is open from December 5-12. SBI Capital Markets, Kotak Mahindra Capital, UBS and CLSA are the lead managers.

Transformers and Rectifiers: Invest at cut-off

Investors with a high-risk appetite and a two-three year perspective can consider subscribing to the initial public offer of Transformers and Rectifiers (T&R). Established in the business of manufacturing transformers, T&R appears well-placed to benefit from the expanding business opportunities in the power transmission and distribution (T&D) space. Robust growth in sales and bottomline, diverse revenue mix and the proposed entry into the high voltage transformer segment suggest good prospects.

 

In the price band of Rs 425-465, the offer is priced at about 22-24 times annualised per-share earnings for the current year, on a diluted equity base. The valuations, while at a marginal premium to its peer, Indo Tech Transformers, appears attractive considering the healthy order-book and a likely move up the T&D value chain.
Investment argument

 

The demand for transformers is likely to remain buoyant given the increased government spending on power infrastructure. Government initiatives such as APDRP (Accelerated Power Development and Reforms Program) and RGGVY (Rajiv Gandhi Gramin Vidyuthikaran Yojna) also point to improving prospects for companies in the power T&D space.

 

With such structural growth drivers in place, fortunes of companies could hinge on their execution capabilities and ability to move up the value chain. T&R scores positively on both these aspects. T&R witnessed a compounded earnings growth of about 96 per cent annually during the last four years. Besides, the company's order book pegged at about Rs 360 crore (1.7 times its FY07 consolidated sales) also lends visibility to revenues.

 

Further, T&R's proposed move up the T&D value chain with the manufacture of high voltage transformers holds potential to expand margins and reduce competitive pressures, as this segment has fewer players.

 

Profit margins may also get a boost from T&R's proposed expansion in product portfolio and optimisation of its existing plant capacities. Backward integration by way of the recent acquisitions of two companies may also help control costs.
Business and revenue model

 

T&R makes a wide range of transformers, including power generation transformers, T&D transformers, industrial transformers and speciality transformers.

 

The company's product portfolio is set to expand further with the setting up of a greenfield facility in Moraiya (near Ahmedabad). This facility is expected to initially manufacture transformers of 220 KV and 400 KV, with the ability to move up to 765 KV. Part of the proceeds from the issue will be used for setting up this plant. The facility, likely to be commissioned in FY09, will increase T&R's installed capacity to 23,200 MVA (one of the largest in the industry).

 

T&R's presence in the furnace transformers, while not significant now (about 13 per cent of FY07 revenues), could gain importance given the increasing capex in the steel industry and preference for the EAF (electric arc furnace) route. Notably, the company is one of largest manufacturers of furnace transformers in the country.

 

On the revenue front, T&R has a good mix between SEBs (State electricity boards) and corporates as clients. For the financial year 2007, utilities contributed to about 51 per cent of the revenues with the industrial segment making up for the rest. T&R has also forayed abroad, supplying to countries such as England, Canada, South Africa and UAE.
Concerns

 

Concerns on T&R's dependence on SEBs cannot be ignored, though the company's ability to recover dues on time in the past infuses confidence. Further, the exposure to SEBs also makes T&R's earnings susceptible to any change in policy by power utilities and possible lengthening of the receivables cycle.

 

The company has reported negative cash flows in recent years. However, with part of the proceeds proposed to part-finance incremental working-capital requirements, this pressure on cash flows may be alleviated to some extent. Moreover, T&R's move up the value chain and the resultant expansion in client base may also help it reduce its dependence on SEBs.
Offer details

 

The offer is open from December 7 to December 12. Enam Securities is the book running lead manager.

Brigade Enterprises IPO Analysis

Originally set up as a partnership firm (Brigade Enterprises) between M R Jaishankar and Gita Shankar in 1990, Brigade Enterprises (BEL) was converted into a private company in 1995 and a public company in July 2007. It develops residential, commercial and retail properties primarily in Bangalore and Mysore, and has also developed and is managing around 115 serviced apartments under the brand, Brigade Homestead.

 

Since 1990 BEL has completed and delivered around 67 projects aggregating about 6.7 million square feet (sq ft) of space comprising residential (71% of the total developed area), commercial (IT parks/office buildings constituting 26% of the total developed area), and hospitality ventures (3%).

 

Land reserves stood at 403.45 acres with an estimated developable area of 44.16 million square feet on 23 November 2007. The reserves consist of land owned directly/indirectly: 112.13 acres (27.8% of the total land reserves)/14.2 million sq ft (32.2% of the developable area), land with sole development rights: 102.91 acres (25.5%)/4.83 million sq ft, land for which memoranda of understanding (MoU) for acquisition has been inked: 133.10 acres (33%)/ 16.38 million sq ft (37.1%), and land under joint development: 55.31 acre (13.7%)/8.75 million sq ft (19.8%). Of the total land reserves, about 56.5% is in Bangalore, 18.7% in Mangalore, 12.2% in Chickmagalur, and the balance in Mangalore, Chennai, Hyderabad and Kottayam.

 

On the land reserves, BEL is developing two integrated lifestyle enclaves (Brigade Gateway and Brigade Millennium), 12 residential properties, and two hospitality properties aggregating 13.84 million sq ft of developable area with a saleable area of 12.53 million sq ft on 23 November 2007. Brigade Gateway Hospital, the hospital project, is part of the integrated lifestyle enclave of Brigade Gateway and will become operational in another two-three months (interior, electrical and hospital equipment installation work is pending). The 200-bed hospital will be managed by Columbia Asia Hospitals and bring diversity to the revenue stream. Moreover, 18 projects are in the initial stage of development and necessary regulatory approvals are being obtained.

 

BEL engages external professionals for designing and construction of the projects in addition to its in-house competency developed over the years at every stage of the property lifecycle: land identification, project conceptualisation, and construction management, marketing and delivery. Leveraging the external expertise to specific tasks allows the company to focus on identifying appropriate land, project conceptualisation and marketing. Currently, majority of aggregate developable area is subcontracted to BE Billimoria & Company, Simplex Infrastructure, and Ahluwalia Contracts India.

 

Currently, BEL is constructing five hospitality properties in Bangalore including two service apartments and one hotel. In addition, the company is also about to start work on two hotels: one each at Mysore and Devanahalli (Bangalore), and two resorts: one each at Kottayam and Chickmagalur. The operation and management of these hospitality properties will be through arrangement with international hotel operators such as Starwood, Intercontinental, Banyan Tree and Accor. The company has signed agreement/ letter of intent (LoI) with these international hotel chains. Subsequent to the completion of these projects, BEL is expected to directly/ indirectly own or manage over 1,500 keys. The income from hospitality was just 2.2% of the income from operation in the financial year ending March 2007 (FY 2007) and 2.6% in the first half year ended September 2007. The rental income from commercial and retail properties was 3% and 3.2%, respectively.

 

Besides Bangalore, BEL has taken up a few projects in Mysore and recently initiated some development activities in other parts of south India including Mangalore, Hyderabad, Chennai.

 

BEL is tapping the capital markets to fund the Rs 47.97-crore acquisition of 41.85 acres of land in Bangalore and Kottayam, the Rs 512.04-crore construction and development cost of ongoing and forthcoming projects, and gemeral corporate expenses.

 

Strengths

 

An established player in the Bangalore realty market. Has successfully executed and delivered around 67 projects aggregating around 6.7 million sq ft of space comprising residential, commercial and hospitality properties.

 

Though revenue from management of serviced apartments is minimal currently, the development of five hospitality properties will significantly diversify the revenue base in the medium term.

 

The integrated lifestyle projects will fetch the company a 5%-10% premium over normal residential properties.

 

Weakness

 

The two integrated lifestyle projects, Brigade Gateway at Malleshwaram and Brigade Millennium at Whitefield in Bangalore, account for about 10.84 million sq ft of saleable area of the 12.53 million sq ft under construction and spread over 6 projects. Of late prices at Whitefield are stagnating due to glut in available properties. Also, just about 67% of the total space at the Whitefield property has been sold and hence vulnerable to fall in realty prices in these micro markets.

 

Interest cost has spiked from 6.9% in FY 2007 (on loans end March 2007) to 11.2% (annualised on loans end September 2007) in the six months ended September 2007. In the process, the interest cost has zoomed to Rs 17.25 crore in the six months ended September 2007. This is even higher than Rs 16.56 crore incurred in the entire FY 2007. The spike in interest cost can hurt, specially during a downtrend.

 

Current land reserves of 403 acres comprise acquisitions in the last one or two years, which was a period of hot realty prices. Thus, profitability is at risk if property prices cool down.

 

About 100.69 acres amounting to 24.96% of the total reserves is agriculture land. Realty development here is subject to conversion of that land.

 

Valuation

 

Consolidated revenue excluding other income recorded a growth of 103% to Rs 409.99 crore and net profit after accounting for share of profit from associates 70% to Rs 71.50 crore in FY 2007. EPS after adjusting for EO works out to Rs 6.3 on post-IPO equity. On the offer price band of Rs 351-Rs 390, the P/E is 56.7-61.9 times. Comparatively, Sobha Developers quotes at a P/E of 40.5 times and Puravankara Projects at 83.4 times.

 

Spike in interest cost, relatively low land bank compared with peers, relatively high cost of existing land bank, high concentration on a couple of projects, more of a regional play with focus on Bangalore seeing a glut of late are key concerns.

IPO Grey Market Premiums

 eClerx Services 270 to 315 40 to 45


BGR Energy 425 to 480 380 to 390


Transformers & Rectifiers 425 to 465 370 to 380


Brigade Enterprise 351 to 390 80 to 90


Jyothy Lab. 690 220 to 230


Burnpur Cement Ltd. 12 6 to 7


Edelweiss 825 680 to 700


Renaissance Jewellery 150 20 to 25


Kolte Patil 145 85 to 90


Kaushalya Infra 60 12 to 14

Transformers and Rectifiers IPO Analysis

One of the largest manufacturers of furnace transformers in India

 

Transformers & Rectifiers India (TRIL) manufactures electrical transformers for the power sector and industrial applications. Promoted by Jitendra U Mamtora and his family, the company was originally incorporated in 1994 as Triveni Electric Company. It subsequently changed its name to the present in 1995.

 

The two manufacturing units of TRIL are located at Changodar and Odhav near Ahmedabad in Gujarat. They had an aggregate installed capacity of 7,200 MVA end of the financial year ending March 2007 ( FY 2007). The company is in the midst of setting up a Rs 66.68-crore greenfield transformer manufacturing facility at Moraiya near Ahmedabad. The installed capacity of the new plant will be around 16,000 MVA per annum.

 

With an installed capacity of 6,000 MVA, the Changodar plant manufactures power transformers from 66 KV up to 220 KV. With an installed capacity of 1,200 MVA, the Odhav plant manufactured distribution and industrial transformers up to 33 KV class. The new plant at Moraiya will have the capacity to manufacture transformers up to 765 KV. But TRIL initially plans to manufacture 220-KV and 400-KV transformers at this facility. The Odhav plant came into the fold on the acquisition of the business of the sole proprietary concern of the promoters of the company, from August 20'06.

 

The average capacity utilisation over the last three years stood at 68%. Capacity utilisation peaked to 80% in FY 2007. Power transformers constituted 77% of the total sales in FY 2007, followed by furnace transformers, accounting for 13% of the sales, and distribution transformers 10%. Sales to state electricity utilities constituted about 51% of the total sales, and the remaining contributed by industrial and other sectors.

 

TRIL has two subsidiaries: Transweld Mechanical Engineering Works (TMEW) and Tanspares. While the wholly owned subsidiary TMEW manufactures tanks and core channels, Transpares (with 51% stake held by TRIL) produces pressed steel radiators. Aart from meeting captive requirement of its parent, TMEW also caters to a range of third-party public- and private-sector clients.

 

TRIL also proposes to undertake turnkey projects for setting up substations that form part of the power transmission and distribution (T&D) network, leveraging its established relationship with utilities, power T&D companies and in-house engineering capabilities. Once the new plant at Moraiya becomes operational (expected in FY 2009), the aggregate capacity of the company is expected to touch 23,200 MVA end March 2009.

 

To part fund the Rs 60.75-crore project and to meet incremental working capital requirement, TRIL is tapping the capital market with an initial public offering.

 

Strengths

 

Has wide product portfolio comprising power transformers, distribution transformers and industrial transformers such as furnace transformers and special transformers including mobile substation, rectifiers, and testing transformers. The wide product range is backed by strong longstanding relationship with customers, specially state electricity utilities. Is one of the largest manufacturers of furnace transformers in India.

 

The standalone order book was Rs 360 crore on 15 November 2007, with the order for power transformers amounting to Rs 325 crore and balance for distribution transformers.

 

The acquisition of 100% stake in TMEW and 51% in Transpares in FY 2007 has resulted in backward integration to critical components for manufacturing of transformers such as tanks, core channels, and pressed steel radiatiors.

 

Strong investment envisaged in the power sector, translating into strong demand growth for electrical equipment such as transformers.

 

Cushion of price-variation clause for supply to state and central power utilities to insulate margin from highly fluctuating inputs costs such as CRGO and copper. Derives around 50% of standalone sales from state utilities. But the share of sales to utilities has eased from 51% in FY 20'07, 51% to 47% in the six months ended September 2007.

 

Weaknesses

 

Still to pre-qualify for the supply of 400-KV and 765-KV transformers. Lacks strong technology in this class of transformers and will also face strong competition from MNC players with proven technology with domestic manufacturing facility in this category.

 

The Gujarat Pollution Control Board (GPCB) has rejected the application for no-objection-certificate for the Changodar unit, citing its operation without consent. The GPCB has stopped any expansion of the Changodar unit without prior permission and to obtain necessary approval for the existing production capacity. Application for Consolidated Consent and Authorisation (CC&A) for the unit is processing. However, if consent is not received in time, operations will be hampered.

 

Valuation

 

Consolidated revenue was Rs 221.20 crore and net profit after minority interest Rs 17.62 crore in FY 2007. On standalone basis, sales grew 67% to Rs 218 crore and net profit 118% to Rs 16.66 crore. The EPS on consolidated earning of FY 2007 on post-IPO equity is Rs 14.9 and the PE 28.5 times at the lower price band of Rs 425 and 31.2 times the upper price band of 465. Peers EMCO quotes at a PE of 37.1 times, Bharat Bijlee at a PE of 34.7 times and Indo Tech at a PE of 28.5 times.

Transformers and Rectifiers, Brigade Enterprises, eClerx

 eClerx Services 270 to 315 60 to 65


BGR Energy 425 to 480 375 to 380


Transformers & Rectifiers 425 to 465 280 to 290


Brigade Enterprises 351 to 390 100 to 110


Jyothy Lab. 690 215 to 220


Burnpur Cement Ltd. 12 5 to 6


Edelweiss 825 675 to 700


Renaissance Jewellery 150 18 to 20


Kolte Patil 145 75 to 80


Kaushalya Infra 60 10 to 12

eClerx, BGR Energy, Transformers, Brigade Enterprises, Jyothy Lab

 eClerx Services 270 to 315 95 to 100


BGR Energy 425 to 480 380 to 400


Transformers & Rectifiers 425 to 465 180 to 200


Brigade Enterprises 351 to 390 110 to 120


Jyothy Lab. 690 230 to 240


Burnpur Cement Ltd. 12 2 to 3


Edelweiss 825 780 to 800


Renaissance Jewellery 150 20 to 25


Kolte Patil 145 75 to 80


Kaushalya Infra 60 13 to 14


SVPCL 42 - 3 to -4

eClerx Services IPO Analysis

Promoted by P D Mundhra and Anjan Malik, both with master's degree in business administration from Wharton School, University of Pennsylvania, in 2002, eClerx Services provides data analytics and customised process solutions to global enterprise clients from its offshore delivery centers in India. Data analytics, operations management, data audits, metrics management and reporting services are offered to clients in the financial services, retail and manufacturing industries. This process is also termed as knowledge process outsourcing (KPO).

Employing about 1,300 people with operations in India, the UK, the US and Ireland, eClerx Services has three delivery centers in Mumbai: one at Sewri and two at Ghatkopar. The three have an aggregate capacity of about 1,035 workstations. Clients include more than 15 `Fortune 500' companies including leading personal-computer (PC) component manufacturers, one of America's largest cable companies, a number of global investment banks and some of the world's largest commercial banks.

The present public issue of Rs 101 crore in the price band of Rs 270 to Rs 315 per share comprises 8.90 lakh equity shares of Rs 10 each offered for sale and fresh issue of 23 lakh (at the higher price band) to 28.5 lakh shares (at the lower price band), depending on price discovery. Expansion and acquisitions will require Rs 50 crore and the balance will be used for the general expenditure.

Strengths

• Has been enjoying multi-year partnership with the some of its largest clients including leading global corporations. Gets a high percentage of new work through reverse enquiry from existing clients. Has shown strong growth in its revenue and net profit over the last few years. Over the period beginning from financial year ending March 2004 (FY 2004) to FY 2007, revenue grew at CAGR of 58% and profit after tax (PAT) at CAGR of 113%. The Indian business process outsourcing (BPO) / KPO industry has also shown an annual growth of more than 50% over the last five years.

• Has three delivery centers in Mumbai with aggregate capacity of about 1,035 workstations. Entered into a memorandum of understanding with DLF Akruti Info Parks (Pune) for 75,000 square feet and a seating facility of 900 workstations as part of expansion. The first phase is expected to be operational in the March 2008 quarter (Q4) of FY 2008, with the remaining capacity to be made available in FY 2009. Intends to set up additional facilities in Chennai, National Captial Region (NCR), Pune and Mumbai. Explores options for acquisitions and strategic investment opportunities in companies with specific domain expertise operating in the US and Western Europe to expand the scope of existing services and add new clients/ geographic markets.

Weaknesses

• A substantial portion of the revenue comes from a small number of clients. The five largest clients accounted for more than 86% of the total income in the six months ended September 2007.

• Operates in an industry with very high attrition rate. The attrition rate was 37% in FY 2007. As a customised solution provider with high complexity of programs, has to incur high cost on specialised and critical training of employees.

Valuation

The rupee appreciation has impacted performance in recent past. Financial performance was good in FY 2007: revenue was up Rs 86.12 crore over FY 2006, with operating profit margin (OPM) 400 basis points (bps) down to 50.2% over FY 2006) and profit after tax (PAT) 69% higher to Rs 40.52 crore . However, the top line increased 16% on an annualised basis to Rs 50.15 crore, OPM dipped 1,100 bps to 39.2% and PAT down about 19% to Rs 16.47 crore in the six months ended September 2007 (H1) over the same period in 2006. The main reasons for such adverse performance was the significant appreciation of the rupee against the US dollar and increase in employee and personnel cost to 34.4% of revenue in H1 of FY 2008 from 28.50% of revenue in FY 2007.

At the lower band of Rs 270 per share, P/E works out to 15.9 times the annualised EPS of Rs 17.0 for the six months ended September 2007 on post-issue equity of Rs 19.40 crore. At the upper band of Rs 315 per share, P/E would be 18 times the annualised EPS of Rs 17.5 on post-issue equity of Rs 18.87 crore for the six months ended September 2007. There is no listed comparable peer KPO company. However, Firstsource Solutions, a major player (almost 10 times the size of eClerx Services and growing at a face pace) in the BPO industry, is trading at P/E of 15 times its annualised consolidated EPS.

BGR Energy Systems IPO Analysis

BGR Energy Systems (BGR) was formerly known as GEA Energy Systems India. The company, promoted by B G Raghupathy and his family, is one of the leading engineering companies supplying balance of plant (BoP) equipment and systems to the power sector. It also caters to process industries such as oil and gas, refinery petrochemicals and the process industries.

Starting off with production and sale of on-line condenser tube leaning systems, debris filters and rubber cleaning balls used in thermal and nuclear power plants in joint venture (JV) with GEA Energietechnik GmbH of Germany, BGR set up its first manufacturing facility for energy products at Pannamgadu, Andhra Pradesh, in February 1987 and supplied these products in India and overseas between 1987 and 1993. In 1993, the promoter and members of his family became the sole shareholders of the company with the JV partner exiting the business of energy products globally. BGR then entered into a series of technical collaborations and sourcing arrangements with foreign licensors to expand its portfolio of products. These included GEA BTT (France) for design and manufacture of air-cooled heat exchangers, Crane Environmental Inc. (US) for design and manufacture of deareators; and Ariel Corporation (US) for selling of packaged gas compressors.

In 1997, BGR established its power projects business and, subsequently, pioneered the concept of BOP contracts for power projects. It won its first BOP contract in 2001 as a subcontractor to Bharat Heavy Electricals (Bhel) for a project offered by the Tamil Nadu Electricity Board. The company executed its first engineering, procurement, construction (EPC) contract for the 120-mega watt (MW) power plant (excluding one gas turbine) of Aban Power Company, a private independent power producer (IPP), in the year ending March 2006 (FY 2006). Since then, BGR has been able to secure BOP contracts of large value directly from state power-generating companies of Andhra Pradesh, Rajasthan and Maharahstra. Besides, it has started focusing on EPC contracts for captive power plants with a capacity up to 100 MW since 2006.

BGR is primarily into two business segments: turnkey EPC contracts for either BOP or entire power plants; and industrial products comprising supply of systems and equipment such as heat exchangers, pressure vessels, condensers, high frequency resistance welded finned tubes, deaerators, and pipeline equipment used in the power, oil and gas, refinery, petrochemicals, and process industries. The industrial products and turnkey contracts division accounted for 29.5% and 70.3% of revenue in FY 2007. The company has a manufacturing facility at Panjetty near Chennai for air-fin coolers; and production of heat exchangers, pressure vessels, reactors, columns, surface condensers and finned tubes manufactured by its subsidiary Progen Systems and Technologies (Progen).

End June 2007, BGR sold its energy products division as a business undertaking to GEA BGR Energy System India for Rs 25 crore. The energy product business sells on-line condenser tube cleaning systems, debris filters and sponge (rubber) cleaning balls to a range of EPCs, original equipment manufacturers and power plant companies. This business contributed about 8% to the standalone revenue of the company in FY 2007.

The air-fin cooler division sells finned tubes to GEA Cooling Tower Technologies (India) (GEAT) and procures cooling towers from the latter for its power and captive power contracts. Incidentally, the BGR owns only 1% stake in GEAT, while GEA, Germany, has a 51% stake and BGR's promoters 48%.

BGR also owns 41% shares in Cuddalore Power Company. But the majority stake in this power company is with BGR's promoter Raghupathy. It is an IPP developing a 2 x 660 coal-based power project, still in the development stage. The company signed a power purchase agreement with Tamil Nadu Electricity Board (TNEB) on 28 September 200, to sell all of its power on a take-or-pay basis.

To strengthen its position among competitors, BGR has entered into alliances for its different business segments. For instance, it has formed global marketing agreements with Samsung (air-fin coolers); Termomeccanica Ecologia, Italy, for environmental engineering; SK Engineering & Construction, Korea, to jointly explore opportunities in the domestic market for infrastructure projects; and Ariel Corporation for oil and gas equipment.

The objects of the issue are to augment long-term working capital requirement, expand the production capacity by establishing additional manufacturing facilities in the Mundra special economic zone in Gujarat, China and Bahrain in the Middle East, and to fund corporate expenditure. The plants to manufacture finned tubes in China and Bahrain will offer proximity to customers in that region.

Strengths

In the Indian power equipment space, BOP is the weakest link as there are limited players. Proven track record in project management backed by design and engineering capabilities augur well. Typically, the BOP package accounts for 40% of the power plant cost and power producer manufactures about 40% of the BOP equipment inhouse, giving BOP suppliers an edge. The extension of service to include EPC for the entire power plant and captive power plants has widened the canvas.

Has diverse complimentary products, services and project management capability. The only business group (including subsidiary Progen) in India capable of producing all three variation of finned tubes (extruded finned, embedded finned and welded finned tubes) for different applications. The welded finned tubes, however, are manufactured by Progen.

Consolidated order backlog was Rs. 3321.2 crore with about Rs 2507 crore of orders in the power sector and Rs 427 crore of orders in the oil & gas industry end September 2007. This offers revenue visibility.

Weaknesses

Alleging cartelisation to obtain a higher price, Bhel has banned business dealings for three years, as per its letter dated 1 March 2006.

Has relatively limited track record in the EPC segment for complete power plant, its thrust area going forward. Not backwardly integrated to manufacture critical boiler, turbine and generator (BTG) equipment. Hence, complex projects could pose a challenge.

Most of the products and services, largely catering to the power sector, are sold at a fixed price. There is no cushion of price variation available to insulate margin from the vagaries of fluctuation in metal and other input prices. About 89.80%, 79.10% and 94.05% of the total income in FY 2007 (18 months) and FY ended September 2005 and 2004 are fixed-price contracts.

Owns only 1% stake in technology-oriented GEAT, while promoter own a sizeable 48%. Both a vendor for and buyer from GEAT. Conflict of interest with promoters is, therefore, not ruled out. Though the Cuddalore Power Company has a lucrative take-or-pay clause with TNEB for power supply, there is just a minority stake in this company.

Valuation

BGR clocked consolidated net revenue of Rs 786.80 crore in FY 2007 (18 months), translating into an annualised growth of 77%. Net profit posted an annualised growth of 102% to Rs 40.81 crore. On post- issue equity of Rs 72 crore, EPS works out to Rs 3.70.

At the offer price band of Rs 425 – Rs 480 and on FY 2007 earning, P/E works out to 114.86 (on the lower band) and 129.73 (on the upper band). Sunil Hitech and Techno Electric are trading at P/E of around 36 times. However, BGR is relatively larger and has a more diversified profile. On the first quarter (ended June 2007) annualised EPS of Rs 9.7, BGR's P/E stands at 43.8 and 49.5 times.

eClerx Services: Avoid

Investors can give the initial public offering of eClerx Services a miss, considering uncertainties surrounding the macro environment for this business and key business risks. eClerx is a knowledge process outsourcing (KPO) company that provides services to clients in the manufacturing, retail and financial services space. At Rs 315 (upper end of price band) the offer price values the company at over 18 times its annualised current year earnings on the post-offer equity base. This appears a bit stiff, especially in the IT/ITES space, where most players command low double-digit valuations.
Client and service spread

 

For retail and manufacturing clients, eClerx offers product price benchmarking, analysis of customer feedback on products and catalogue analysis under the data analytics services umbrella. It also develops technical content for clients' Web sites, Web stores and product brochures.

 

For financial services clients, eClerx has a more elaborate portfolio of services catering to the investment banking, capital markets and asset management divisions of financial companies.

 

sThis includes portfolio matching, reconciliation of financial data, analysis of price fluctuation of asset classes, and so on.

 

In terms of service offerings, the major portion of the company's offerings (except certain data analytics services) cannot be termed as high-end back-office services. But the company works predominantly on multi-year deals which may provide more stable long-term revenue streams.
Financials

 

Not being a voice-based player has been a plus for the company and it has managed to capitalise on a strong wave of outsourcing from the US over the last five years. The company's revenues have grown at a compounded annual growth rate of 58 per cent between 2004 and 2007 and its profits after tax at 131 per cent during the same period.

 

But operating profit and net profit margins have been falling steadily over the past couple of years, with an actual decline in net profit in the first six months of this fiscal. This decline may be explained by steep increases in employee costs and a spike in general administrative expenses for its US and UK subsidiaries.
Risks and Concerns

 

Competition risks: Increasingly, outsourcing deals from the US and elsewhere are awarded on a multi-service basis which includes a KPO/BPO component. Top-tier and even some second-tier players are able to cater to multiple requirements.

 

This takes away a chunk of business from pure KPO or BPO players. This apart, in the segments where eClerx operates, players such as Office Tiger, Genpact, WNS and Firstsource are more integrated, with strong parental backing and deep pockets. This may not be the case with eClerx.

 

US slowdown concerns: eClerx has significant presence in the financial services apace. Also, it derives over 73 per cent of its revenues from clients in the US. With the sub-prime lending issue affecting top financial services players such as Citibank, Merrill Lynch, and HSBC, a clear picture on the enormity or otherwise of the sub-prime problem is awaited. Concerns about whether outsourcing contracts to IT/ITES will continue, and at what levels, may be clear only over the next several months.

 

The possibility of a US slowdown, which has been reinforced by recent economic data, is also a concern. The company is trying to diversify geographically, but may take time to broad-base its revenues from the current levels. The appreciating rupee may also affect margins.

 

The company derives over 85 per cent of its revenues from its top five clients, making for a fairly concentrated profile. The employee expenses are going up steadily and, if sustained, could hurt margins in the long run. Employee costs stood at 34 per cent of the revenues for the half year. Attrition at 37 per cent, though not unusual for ITES players, is also an execution risk.

 

Offer details: The company plans to raise Rs 101 crore from this issue, in the price band Rs 270-315.

Latest IPO premiums in Grey Market

Jyothy Lab. 620 to 690 220 to 225


Burnpur Cement Ltd. 12 8 to 9


eClerx Services 270 to 315 80 to 90


BGR Energy 425 to 480 240 to 250


Edelweiss 725 to 825 750 to 775

Renaissance Jewellery 125 to 150 20 to 25


Kolte Patil 125 to 145 75 to 80


Kaushalya Infra 50 to 60 12 to 15


SVPCL 42 - 3 to -5

Jyothy Laboratories Subscription Details

Qualified Institutional Buyers (QIBs) - 66.4123 times

Non Institutional Investors - 49.8987 times

Retail Individual Investors (RIIs) - 14.6718 times

OVERALL - 45.83 times

eClerx Services IPO is coming on December 4

Some Information :

 

eClerx Services is eyeing a mop-up of Rs 101 crore from its initial public offering which opens on December 4. The company has priced its Rs 10 share at Rs 270-315 per share in the 100 per cent book building offering. The issue closes on December 7.

 

eClerx Services proposes to utilise the net proceeds to fund acquisitions, infrastructure investments and for setting up additional facilities.

 

CRISIL has rated eClerx Services "IPO Grade 3/5", indicating average fundamentals.

 

The issue comprises fresh issue of equity shares and an offer for sale by PD Mundhra, Anjan Malik and Burwood Ventures of 890,000 equity shares.

 

Book running lead managers to the issue are JM Financial Consultants and Edelweiss Capital.

 

The shares will be listed on the National Stock Exchange and Bombay Stock Exchange.

 

eClerx Services' portfolio of services comprises data analytics, operations management, data audits, metrics management and reporting services. It provides service solutions using a mix of custom designed data processes with the assistance of delivery teams comprising generalists and domain specialists, and in-house software to automate processes.

 

The company's unconsolidated revenues grew to Rs 86.23 crore in 2006-07 (Apr-Mar) from Rs 47.75 crore in FY06 and Rs 26.64 crore in FY05 at compound annual growth rate of 79.9 per cent. Profit after tax grew to Rs 40.52 crore in FY07 from Rs 24.04 crore in FY06 and Rs 11.22 crore FY05.

 

For the six months ended September 30, 2007, eClerx's unconsolidated revenues were Rs 51.44 crore while net profit was Rs 16.47 crore.