Promoted by promoters of Ranbaxy Laboratories, financial services and products company Religare Enterprises (REL) has 11 subsidiaries. The principal subsidiaries are Religare Securities.(RSL), Religare Finvest., Religare Commodities and Religare Insurance Broking. The financial services offered range from equities, commodities, insurance broking, to wealth advisory, portfolio management services, personal finance services, investment banking and institutional broking services. It has also promoted subsidiaries to enter venture capital, private equity, arts and real-estate infrastructure management of group companies.

REL has a majority stake in the special purpose vehicle (SPV) Religare Insurance Holding Company (RIHCL). The 50:50 joint venture (JV) with leading global life insurance and pension company Aegon International NV is to foray into mutual funds. REL has infused about Rs 18.96 crore in RIHCL for a 75.39% stake in this start-up subsidiary.

A JV with Macquarie Bank to expand its wealth management business is set to start subject to necessary approvals. Macquarie will be a 50% shareholder of Religare Wealth Management Services (RWMSL), expected to be renamed Religare Macquarie Wealth. Both the partners have committed to contribute their pro-rata share of the equity capital: 20 lakh shares worth of Rs 20 million. Also, they have agreed not to transfer their shares or any right, title or interest in it for five years.

The objective of the issue is to fuel future growth including expansion of branches of two of its subsidiaries: Religare Securities and Religare Insurance Broking. REL plans to fund the retail finance business as well as expand its financing business through its subsidiaries Religare Finvest and Religare Finance.

Strengths

• A wide geographic reach, growing clients, and a diversified portfolio of products and services. End September 2007, had six regional offices and 40 sub-regional offices across 392 cities and towns controlling 1,217 business locations (managed with business associates) all over India as well as a representative office in London. Also, has a region-focused entrepreneurial management team leading 6,500 employees.

• Products and service offered under three broad client-interface categories: Retail Spectrum, Wealth Spectrum and Institutional Spectrum. Retail Spectrum offers equity and commodity brokerage, personal financial services, internet trading and personal loans. Wealth Spectrum offers portfolio services (PMS), wealth advisory services and private client services. Institutional Spectrum offers institutional distribution and investment banking services.

• Increasing clients in both equity and commodity trading. Equity clients (including institutional clients) increased from 1,49,000 clients end March 2007 to 2,37,000 clients end September 2007, an increase of 59% over the six months. Also, clients in the commodity service jumped 54%, from 14,955 to 23,000. Online investment accounts surged 189%, from 11,600 to 33,500. Also, market share of trading volume on NSE imoved up from 4.76% to 8.67%.

Weaknesses:

• The Securities and Exchange Board of India (Sebi) has taken actions (subject to final orders) against Religare Securities for price manipulation in certain scrips.
• The track record of listed group companies Fortis Financial Services and Fortis Healthcare has been far from encouraging.
• Proper execution and supportive economic environment will be necessary to implement the aggressive growth plans across the financial spectrum..

Valuation

At the offer price band of Rs 160-Rs 185, P/E based on the year ending March 2007 (FY 2007) EPS of Rs 3.3 works to 48.7 (on lower band) to 56.4 (on upper price band) times. P/E of other comparable listed players is: India Bulls Financial Services (27.4 times), Emkay Shares (47 times), India Infoline Financial Services (66.8 times), IL&FS Investsmart (31.2 times) and Geojit Financial Services (35.8 times).

While valuations appear steep based on FY 2007 numbers, they appear cheaper based on the performance for the six months ended September 2007. During this period, the company reported net profit of Rs 36.19 crore on a consolidated basis, which was 46% higher than the profit reported in FY 2007. The annualised EPS on post-IPO equity works out to Rs 9.6. This is discounted 19.4 times by the upper band of issue price of Rs 185 and 16.7 times by the lower band of Rs 160.

Promoted by B.Teja Raju (son of chairman of Satyam Computer Services), Maytas Infra (formerly Satyam Construction private limited) is a Hyderabad-based construction and infrastructure development company. Its business is divided into two parts: Construction contractor undertaking projects on a contract basis and infrastructure development involving identifying, sourcing, developing, and operating projects in infrastructure sectors.

In the construction business, the focus is on irrigation, roads and bridges, and buildings infrastructure sectors. Recently, the construction portfolio has been diversified to include civil construction in the power, industrial structures, oil and gas infrastructure, and railway sectors.

Maytas Infra is identifying suitable partners and positioning to exploit the expected opportunities in water and waste-water management, special economic zones, urban infrastructure, ports and airport sectors.

The current IPO is to fund purchase of construction equipment, invest in associate companies and meet other project-related investment commitment.

Strengths

• End June 2007, the order book was Rs 3589.32 crore. This is about 4.6 times consolidated revenue in the year ending March 2007 (FY 2007). The execution period for the order book is 18-36 months. The pending orders are for constructing roads (31%), buildings (13%), railways (5%), high-margin projects comprising irrigation (37%), power (5%) and oil and gas (9%).

• Of the pending orders, about 70%-80% of the contracts provide for price escalation. Thus, margin is to a great extent cushioned against variations in input costs.

• Infrastructure development business has equity interest in 11 projects ranging from 19.5% to 50%. Of these projects, six are road, four power and one port.

Weaknesses

• Although the first stage of the Gautami power station project in Andhra Pradesh with equity interest of 19.5%, has been completed substantially in September 2006, it has not commenced commercial operations due to the unavailability of natural gas.

• Maytas Holdings, a promoter group company, has applied for the registration of the Maytas trademark and service mark. Has not permitted the use of the trademark for real-estate development. One of the related companies has exclusive rights to use the Maytas trademark for real-estate development. The promoter group has about 41 companies.

• For the KVK Nilachal power station project in Orissa, with equity interest of 50%, the current coal supply is not sufficient to operate the plant at its contracted capacity. The project consists of 2 x 300 MW coal-based thermal power plant. KVK Nilachal Power currently estimates that a 300-MW power station will require 1.59 million tonnes of low grade thermal coal to maintain 80% plant-load factor (PLF). Till date, coal linkage of only 1.2 million tonnes has been obtained.

Valuation

Between FY 2003 – FY 2007, unconsolidated revenue has shot up from Rs 118.13 crore to Rs 601.01 crore. In the same period, operating profit margin OPM has improved from 5.1% to 16.1% due to increase in investment in equipment and manpower, leading to reduction in subcontracting of jobs. Thus, unconsolidated net profit has increased at much faster pace: from Rs 0.32 crore to Rs 55.01 crore. This growth has also been boosted due to increase in profit from participation in unincorporated joint ventures undertaking larger contracts.

There are two sets of consolidated financial statements: one as per tow accounting standards (AS). As per AS-23 (which is intended to be followed), consolidated profit is lower and debt/equity ratio is 1.9:1. As per AS-27 (which the auditors want to adopt), consolidated profit is higher and so also the debt/equity ratio. As per AS-27, consolidated net profit is Rs 52.9 crore and EPS Rs 9. According to AS- 23, consolidated net profit works out to Rs 48.77 crore and EPS Rs 8.3. However, since the intention is to follow AS-23, we have used EPS of Rs 8.3 for valuation. At the offer price band of Rs 320-Rs 370, the P/E range is 38.6-44.6, respectively. The TTM P/E of Construction - Civil / Turnkey – Large is 44.2.

Promoted by Bhawanishankar Sharma and his two sons Vikram and Vikas, Supreme Infrastructure is a Mumbai-based small construction company with primary focus on road construction. Traditionally, road construction is a low-margin business. But with presence in quarrying, crushing, wet batch mixing, asphalt and ready-mix concrete (RMC), the company is well integrated to earn healthy margin in constructing roads.

The RMC plants, one at Powai in Mumbai and another at Bhiwandi outside Mumbaiwith, have an aggregate capacity to produce 90 cubic meters of RMC per hour. Another RMC plant, with a capacity of 60 cubic meters of RMC per hour, is being installed at Powai. There is a proposal to set up an RMC unit at Citradurga in Karnataka. This will add another 30 cubic meters of RMC per hour.

The wet mix plant and the asphalt plant are located at Powai. The quarrying and crushing unit is in Bhiwandi. Their current capacity is 80 tonnes an hour of wet mix macadam and 85 tonnes per hour of asphalt, respectively. After meeting inhouse requirement, RMC, wet mix and asphalt are sold to other users.

Apart from setting up an RMC plant to cater to the needs of the National Highway (NH) 4 Western Transport Corridor project in Karnataka, Supreme Infrastructure is constructing a new crushing plant. A Rs 90-crore order for construction of an IT park from Supreme Housing & Hospitality (SHHL), a company set up by promoters, marks Supreme Infrastructure’s foray into construction of office blocks.

To meet the funding requirement for these projects, augment plant and machinery (P&M), and meet long-term working capital requirement, Supreme Infrastructure is tapping the capital market. The company has budgeted Rs 14.33 crore for purchase and upgrade of P&M, and Rs 6.88 crore for buying P&M required for road construction, and Rs 17.90 crore for long-term working capital requirement.

Strengths

The unexecuted portion of the order book was Rs 299.84 crore on 1 August 2007. The current order book stands at Rs 330 crore including RS 30-crore orders for supply of RMC. Excluding the supply order for RMC and Rs 90-crore order for building the IT park, the remaining the orders of Rs 210 crore are for road projects.

Enjoys higher margin compared with peers operating in the same segment despite the construction business largely skewed towards the thin-margin and highly competitive road segment. Has been historically earning a net profit margin of 10%-12% in road projects. The integration into quarrying, crushing, wet maccadam and RMC allows for better margin in road projects compared with peers.

Is registered as class ‘I’ by the public and works department (PWD) of the Maharashtra government and as ‘A’ class contractor by the Bombay Municipal Corporation. Entitled to bid for and accept works and orders as per its bidding capacity.

Weaknesses

Prospects largely skewed on single segment: road construction. About 89% of the current order book (as of August 2007) accounted by three projects: two road projects and another construction of IT park of the promoter group company. Has little experience in executing building construction, specially IT parks.

May have to suffer bad publicity and financial losses due to litigations by environmentalists against its RMC, asphalt and quarrying /crushing activities (which form its backward integration and provide competitive strength) in and around Mumbai.

Till year ending March 2007 (FY 2007) had claimed Section 80IA benefit for Rs 15-crore projects cumulatively. But has stopped claiming the benefit from FY 2008. Has not provided / charged / reversed the Section 80IA benefit claimed subsequent to the withdrawal of this benefit in the Union Budget for 2007-08.

Cash flow from operations has increased to a negative Rs 2.77 crore in FY 2007 from a negative Rs 46 lakh in FY 2006 on account of higher sundry debtors and inventories. Sundry debtors rose to Rs 16.43 crore in FY 2007 compared with Rs 3.79 crore in FY 2006. Inventories were up to Rs 14.05 crore in FY 2007 from Rs 1.82 crore in FY 2006.

Valuation

Sales revenue clocked a CAGR of 67.78% to touch Rs 81.66 crore in FY 2007 from Rs 6.14 crore in FY 2003. EPS on post-issue expanded equity of Rs 13.87 works out Rs 9.2 in FY 2007. The offer price discounts this by 10.3x & 11.7x on the lower and upper price band of Rs 95 and Rs 108, respectively. As comparable peers such as PBA Infrastructure, MSK Projects and Roman Tarmat are available at a P/E of 11.6, 15.7 and 23 times, the issue is reasonably priced.

Founded by four former Larsen & Toubro (L&T) professionals, Consolidated Construction Consortium (CCC) is a Chennai-based turnkey construction services provider of integrated turnkey construction in the industrial, commercial, infrastructure and residential sectors of the construction industry.

CCC has executed 334 projects comprising of 104 industrial, 172 commercial, 14 infrastructure, and 44 residential projects across 14 states and Union territories in India. The built-up area of the projects aggregates approximately 19 million square feet (sq ft) comprise 3.84 million sq ft in the industrial sector, 12.68 million sq ft in the commercial sector, and 2.48 million sq ft in the residential sector. The projects include factories, residential and commercial buildings, hospitals, hotels, power plants and structures in the infrastructure sector such as water tanks, water supply schemes and bridges.

The private and public sector clients of CCC include Infosys Technologies, Ascendas IT Park (Chennai), Khivraj Technology Park, Manipal University, Airport Authority of India, and Hi-Tech Carbon (a unit of Aditya Birla Nuvo).

The IPO of CCC is to fund acquisition of construction infrastructure, investment in subsidiaries, expenditure on skill and management development centres and repayment of loans. The issue will open on 18 September and will close on 21 September. The issue has been graded by ICRA as IPO Grade 3 indicating average fundamentals.

Strengths

• End July 2007, the pending order book stood at Rs 2049.57 crore. This is about 2.4 times reported FY 2007 revenue. The execution period for the order book is 12-15 months. Since July 2007, received 10 more orders aggregating a contract value of Rs 182.1 crore. Of the 14 top contracts aggregating Rs 1291.5 crore for which the expected date of completion has been given, about five contracts aggregating about Rs 389 crore are scheduled to be completed in the year ending March 2008 (FY 2008).

• Of the pending order book end July 2007, only 15.49% of the orders were fixed-price contracts. Thus, the margin is to a great extent cushioned against variations in input costs.

• More than 95% of the orders have been completed on time. Of the total order inflow in FY 2007, about 50% of the orders by value were by previous clients, indicating customer satisfaction.

• A subsidiary Noble Consolidated was incorporated in May 2007 for carrying out glazing and aluminium fabrication services. Ideally this business has a higher margin and accounts for about 25-28% of the total project work.

• In the recent past, many real-estate companies have tapped the capital market to fund the development of their land bank. This includes south-based players and some players with land bank higher than the cumulative development in the past. Thus good scope for outsourcing of the construction exits. Has construction capabilities of three million sq ft per month.

Weaknesses

• About 92.5% of the pending order book end July 2007 and 92.2% of FY 2007 revenue are from south. Besides, about 38% of FY 2007 revenue was from the IT/IT enabled services (ITES) sector. Thus, a slowdown in construction activities is south or in the IT/ITES sector could have an adverse impact.

• Does not own its trademark. The use of the trademark and logo has been licensed by Samruddhi Holdings, a promoter group entity. Has to pay 4% of audited profit before tax (PBT) at the end of every year subjected to a maximum of Rs 2 crore to Samruddhi Holdings as a consideration for the trademark.

Valuation

Between FY 2004 – FY 2007, net profit has shot up from Rs 4.12 crore to Rs 47.68 crore. The improvement in financials has been much sharper in the last two years due to increase in construction activity in south resulting into improvement in volumes and change in revenue mix. The share of low margin residential projects has declined in total revenue from 18.26% to 3.21%, while high-margin industrial projects have increased from 19.25% to 33.48% in the same period.

FY 2007 consolidated EPS on post-issue equity works out to Rs 12.9. At the offer price band of Rs 460-Rs 510, the P/E range is 35.7-39.5, respectively. The nearest comparable listed company is B. L. Kashyap & Sons, trading at a P/E 34.2 times its FY 2007 consolidated earning.

Bhushan Steel

Larsen & Toubro

Crompton Greaves

Grasim Industries

POWER GRID CORPORATION OF INDIA

Power Grid Corporation (PGCIL) is India’s principal power transmission company. It has been designated a Mini-Ratna Category-I public sector undertaking since October 1998. This provides it with powers to undertake new projects without government of India (GoI) approval, subject to an investment ceiling set by the government. The company has received the highest annual performance rating from the Gol in each year since the year ending March 1994 (FY 1994).

PGCIL owns and operates most of India's interstate and inter-regional electric power transmission system. In that capacity, the company owned and operated 61,875 circuit kilometres (ckm) of electrical transmission lines and 106 electrical substations. In FY 2007, the company transmitted approximately 298 billion units of electricity, representing approximately 45% of all the power generated in India. Since its inception, it has completed 101 transmission projects and schemes.

The average system availability maintained by PGCIL was over 99% since FY 2002. The transmission losses were in the range of 3%-4%, representing mainly technical losses. As the power is transmitted over high voltage, it generally does not involve commercial losses. Nevertheless, transmission losses are factored in the tariff. As a result, it does not impact PGCIL

By creating a telecommunications network principally using its overhead transmission infrastructure, PGCIL has also diversified into the consultancy and telecommunications business, It owns and operates a fibre-optic cable network of over 19,000 kilometres. The company has been leasing out bandwidth on this network to more than 60 customers, including major telecom operators such as BSNL, VSNL, Tata Teleservices, Reliance Communications and Bharti Airtel. In July 2006, it also received a license to provide telecommunication services to end-users and is currently exploring options for providing these services.

The current initial public offering (IPO) by PGCIL is primarily to fund its transmission projects and to partly disinvest the government stake.

Strengths

• Subject to government approvals, PGCIL has plans to invest Rs 55000 crore on transmission infrastructure during the eleventh five-year plan. With this investment PGCIL has plan to increase its inter regional capacity from 14600 MW to about 37000 MW in the eleventh five-year plan. This includes 45 projects that are currently being implemented by PGCIL, which would increase its transmission lines by 30536-ckm and transformer capacity by 29420 MVA.

• With a debt-equity ratio of 70:30, the equity contribution is likely to be Rs 16500 crore. As PGCIL earns a regulated return on equity (ROE) of 14% (excluding north-eastern region), it will lead to additional profit of Rs 2310 crore. The company had earned ROE of 10.16% in FY 2007 as it had huge funds blocked in capital work-in-progress (WIP) and had incurred loss in the telecom business. PGCIL had a capital WIP of Rs 6083.89 crore end March 2007. However, it is earning ROE of 15% on its operational power projects.

• In Q1 (June quarter) of FY 2008, PGCIL commissioned transmission assets worth Rs 2490.49 crore. Apart from this, four more projects (for which the company is raising fund and has spent Rs 704 crore till end July 2007) are to be commissioned in FY 2008. These projects are likely to drive PGCIL’s near term earning.

• Working capital management has improved over a period of time. The average receivable collection period has declined from 76 days in FY 2005 to 47 days in FY 2007. The improvement in working capital management is also visible in the growth in net operating cash flows, which have increased to 1.6 times from Rs 2795.22 crore to Rs 4345.85 crore in this period. Presently, PGCIL has been able to collect nearly 100% of its receivables from state power utilities on time.

• The transmission network of PGCIL increased from 50,745 ckm in FY 2005 to 59,461ckm in FY 2007 and to 61,875 ckm end Q1 of FY 2008. The ratio of ckm to employees has increased from 7.4 ckm in FY 2005 to 8 ckm in FY 2007 and to 8.3 ckm in Q1 of FY 2008. Revenue per employee has increased from Rs 37 lakh in FY 2005 to Rs 48 lakh in FY 2007.

• Unlike power generation utilities, PGCIL was able to achieve its Tenth Five-Year Plan physical target with lower outlay.

• The power transmission industry is capital and technology intensive. This acts as an entry barrier, giving a monopoly to existing players. Roughly it takes about Rs 1 crore of investment to set up 1 ckm of transmission line.

• While starting the telecom business, PGCIL had targeted to make profit from FY 2009. However, the company has managed to post profit in Q1 of FY 2008. As against a loss of Rs 21.96 crore in FY 2006 and Rs 3.73 crore in FY 2007, it posted profit of Rs 9.09 crore in Q1 of FY 2008. For the full year, PGCIL expects to post handsome profit.

Weaknesses

• PGCIL operates in a highly regulated industry. Its current tariff structure is likely to remain in place till FY 2009. Any change in the current tariff policy by the Central Electricity Regulatory Commission (CERC) could adversely impact the company. In the past, CERC has reduced the company’s ROE from 16% to 14% from FY 2005 and had capped the maximum incentive to 2% from 4% earlier. Thus, PGCIL’s net profit had declined from Rs 1023.16 crore in FY 2004 to Rs 829.78 crore in FY 2005. Subsequently with more projects coming on stream and increase in absolute contribution from other businesses, the company’s net profit recovered to Rs 1087.66 crore in FY 2007. At present, however, it appears unlikely that CERC will further reduce ROE as the earlier cut was in a scenario of declining interest rate.

• Typically, PGICL undertakes projects to extend its transmission infrastructure. New electricity generators are connected to its transmission system. As PGCIL is paid ROE only after the commencement of service of a transmission project, delay in its transmission project or the related electricity generation project could block the company’s equity. PGCIL may, thus, go without any returns on that equity during the course of the delay.

Valuation

FY 2007 EPS on post-issue equity works out to Rs 2.6 and Q1 of FY 2008 annualised EPS Rs 4.3. However, translation gain of Rs 198.34 crore has led to decline in reported interest cost and has inflated Q1 of FY 2008 earning. So actual EPS for FY 2008 is likely to be lower than the annualised EPS of Rs 4.3

At the offer price band of Rs 44-Rs 52 and on the basis of FY 2007 earning, the P/E range works out to 17-20.1, respectively. There is no exactly comparable listed entity. PSU power generation major NTPC trades around P/E of 20 times FY 2007 EPS. Generation/transmission utility companies generally do not get such premium valuations. But the encouraging growth prospects in the power sector in India in the next five years have pushed up P/Es. Moreover, PGCIL is the only company through which investors will be able to get direct exposure to the power transmission sector. This will stand them in good stead.

Kaveri Seeds produces, processes and markets high quality hybrid seeds for crops like corn, sunflower, cotton, paddy, and grain sorghum. Located in Andhra Pradesh, the company is one of the few recognised agri-input companies in India. The company has production, processing and R & D facilities in Andhra Pradesh and Karnataka. Its R&D mainly focuses on developing superior hybrids in different crops like corn, cotton, sunflower, paddy, and bajra. All the seed varieties developed are marketed under the brand, Kaveri Seeds.

Kaveri Agriteck, a partnership, was acquired by Kaveri Seeds for Rs 50 lakh in September 2006. Kaveri Agriteck was a venture floated to manufacture micronutrients and bio-products.

Kaveri Seeds has four seed processing plants with 11 processing lines in Andhra Pradesh and Karnataka. The company has a combined processing capacity of 18,000 tonnes per annum. It also has a cob drying plant (to improve the germination, vigour and viability of the corn seed and, in turn, improve the yield of the crop) at two different locations in Andhra Pradesh.

The R&D facilities of Kaveri Seeds are at six different locations in Andhra Pradesh. The one in the Ranga Reddy district of Andhra Pradesh is recognised by the Department of Science & Technology, government of India. The R&D infrastructure includes 273 acres of farmland and state-of-the-art lab facility. About 187 acres of it are owned by the company. The rest are on lease. This protects its germplasm and related operations against any misuse and biopiracy. Fifty-five employees including 13 scientists are engaged in full-fledged research.

The extensive network of loyal and committed distributors and dealers in Karnataka, Tamilnadu, Maharashtra and Andhra Pradesh include 736 distributors and 3,500 dealers across southern India.

Kaveri Seeds intends to aggressively expand its operation to other states to have a pan-India presence. The company intends to finance its Rs 63-crore expansion plan from the proceeds of the public issue. The expansion includes acquiring farmland for R&D, setting up a marketing network in north India, establishing corn-cob drying and seed-processing plants apart from a biotechnology laboratory. The expansion is scheduled to begin in October 2007 and complete by May 2008 in a phased manner. Besides, it also wants to upgrade its existing facilities by November 2008.

Strengths

1. Geographical expansion plans in north and east will result in volume-led growth.
2. Moving up the value chain by introducing better quality products yielding high margin. Reduced dependence on outsourced production of foundation seed has resulted in substantial expansion of operating margin in the year ending March 2007 (FY 2007).

Weaknesses

1. Mainly dependent on two crops – corn and sunflower – which contributed over 68% of the revenue in FY 2007. Similarly, has strong presence only in four states:. Andhra Pradesh, Karnataka, Tamil Nadu and Maharashtra.
2. Operates in the agri-inputs industry, which faces risks related to weather, pests and diseases.
3. The Indian seeds industry is highly competitive with a number of Indian as well as MNC players.
4. Has witnessed continuous reduction in debtors’ turnover due to rising credit periods. The debtors’ turnover has come down from 5.1 times in FY 2003 to 3.67 in FY 2007.

Valuation

Kaveri Seeds has set a price band of Rs 150 to Rs 170 per equity share of Rs 10 each, translating into a PE of 19.5x on the lower price band and 22.1x on the higher side of the price band, according to EPS for FY 2007 on post-issue equity of Rs. 13.70 crore.

Monsanto India, the listed Indian subsidiary of Monsanto, US, which also sells hybrid seeds and genetically modified seeds to Indian farmers is presently trading at PE of 22x based on FY 2007 EPS.

Another hybrid seeds player J.K Agro Genetics is currently trading at PE multiple of 13x based on FY 2007 EPS.

The seeds industry is not a high-growth industry as its operations are sensitive to agro-climatic factors and unpredictable fluctuations. Moreover, Kaveri Seeds has shown substantial profit only in FY 2007 and its plans to enter the northern markets will take time to bear fruits.

In view of these factors, the asking P/E of around 20 looks high.

Chennai-based Dhanus Technologies (Dhanus), promoted by A.D. Sudhindra,V. Narayanaswamy, Capt. D.S. Srinivasan, offers telecommunication services and unified messaging and enhanced logistics services. The company gets outsourcing (BPO) contracts for telemarketing services from the US, UK and Australia markets.

Dhanus operates in three segments: Telecards: World’s Calling Cards; Teleservices/ITES/BPO Services; and Telematics: FleeTrac service.

Telecards, i.e., V-Tel World’s Calling Cards is offered to Indians traveling abroad. The card is valid in more than 210 countries and allows web-based viewing of call data records (CDRs), and recharge by credit card. It includes web-based calling, SMS-based call back (wherever legal) and web-based call back (wherever legal). Dhanus launched its global prepaid calling cards in June 2004 and since then been very successful in building up an extensive network of dealers, agencies and direct marketing associates across India, South-East Asia and West Asia. The company has also become Airtel’s distributor for its SIM cards for the whole world excluding India and Dubai.

The BPO services were started in 2006 by acquiring business along with assets and liabilities. The BPO operations have 85 seats working three shifts and are to be expanded in stages to 500 by end 2007. The software development revolves around Internet protocol (IP) telephony, Interactive Voice Response (IVR) applications, Customer Relationship Management (CRM) applications and web-based business process applications.

FleeTrac is an integrated tracking, communication, monitoring and enterprise management product for vehicle owners. FleeTrac uses the GPS system for vehicle location. The location information along with other data are conveyed to Dhanus’ central data centre in Chennai through Internet via General Packet Radio Service (GPRS) service.

Dhanus has two subsidiaries. The loss-making Dhanus Technologies Inc., US, has acquired Mpingi Inc., US, which launched voice-over-Internet-protocol (VoIP) service in the US. The second is the profitable Dhanus Global Medicare engaged in the provision and sales of medical equipments and services.

The net proceeds of the issue will be utilised for acquiring and setting up corporate office, network operating centre and infrastructure for the BPO and FleeTrac services.

Strengths

• There has been a dramatic growth in Indians travelling abroad, and their number is estimated to reach around 35 million passengers by 2010. Has sold over 1.68 lakh global calling cards in the year ending March 2005 (FY 2005), 2.25 lakh cards in FY 2006 and, 4.68 lakh cards in FY 2007, and 8.62 lakh cards in all till end June 2007. Has a VoIP-based phone service targeting Indians in the US. The market for this service is also growing.

Has received registration for setting up a vehicle tracking system using vehicle mounted unit (VMU) with an in-built SIM card with GPRS capability to work on global positioning satellites (GPS) from the Department of Telecommunications, Ministry of Communications & Information Technology, government of India. Has also tied up with Airtel to provide GPRS service, which is operational. The Delhi office has started marketing the service.

Weaknesses

• Is yet to receive no-objection certificate (NOC)/license from the Department of Telecommunications for selling international calling cards in India. Also, the track record of the companies with which the directors have been associated is not encouraging. One of the independent directors has a criminal proceeding against him. Apart from this, there are a number of legal proceedings against the company.

• Does not have its own telecom infrastructure in countries where its global calling cards are operational. Thus, it is totally reliant on the infrastructure of the telecom operators in those countries.

• Calling card is not a high-tech business and is highly competitive.

• Although, FleeTrac services has growth potential in India given its usage in transportation, courier, security, police, defense, logistics and supply chain management; the concept of vehicle tracking service is in the introduction stage in the country. Its acceptability and success are yet to be tested. Moreover, the technology used for FleeTrac service is universally available. Thus, there is possibility of new entrants and increasing competition.

• Profit margin is falling. On a standalone basis, telecom service’s profit before interest and tax (PBIT) margin dipped 580 basis points (bps) to 19% in the year ending March 2007 (FY 2007) with sales contributing 56% of revenue. Software service had a PBIT margin of 47.4% in FY 2007, down from 66.1% in FY 2006. Contribution to total revenue was 35%. The BPO services contributed 9% to the total revenue in FY 2007, with PBIT margin down from 71.1% in FY 2006 to 61.8% in FY 2007.

Valuation

At the price band of Rs 280-Rs 295, FY2007 consolidated EPS on post-issue equity works out to Rs 12.4 and P/E o 22.7-23.9. On a standalone basis, EPS on post-issue equity is Rs 13.7 and P/E 20.4-21.5. There is no comparable listed player. The company’s track record of fast growth is a plus for the company.

Promoted by K.V.Bala and Subuthi Finance, Indowind Energy generates wind power, undertakes turnkey operations for windmill projects and operates and maintains (O&M) wind electric generators (WEGs). The company currently owns 16.825-MW windmill capacities in Karnataka and Tamil Nadu, and operates and maintains 17.915-MW capacity. It currently supplies power to a state utility and a few companies in Karnataka. Tamil Nadu Electricity Board (TNEB) is its major client.

Currently, Indowind Energy sells power to TNEB at Rs 2.70 per unit. It sells power to corporate clients in Karnataka at Rs. 4.05 per unit (however, the company has to pay wheeling charges at 10%).

Strengths

• Is setting up a wind farm of 9-MW capacity in Karnataka at an investment of Rs 49.5 crore. Intends to sell this project for an appropriate price. The project division’s profit before tax (PBT) margin was 23.5% in the year ended March 2007 (FY 2007).

• As per the National Tariff Policy, state commissions have to fix a minimum percentage of energy from non-conventional sources. The Union government has also introduced a package of incentives, some of which include tax concessions such as 80% accelerated depreciation and tax holidays for power income under Section 80IA. Also, the gestation period for the wind power project is just six-nine months as compared with thermal power project’s 36 months. It has low variable cost, too. Thus, in near future, there is likely to be significant capacity additions. The wind power potential, based on data collected from 10 states and only 1% of land availability, has been estimated at around 45,195 MW. Thus, the overall scenario for companies with presence in wind power generation, project and O&M segments are favorable. Indowind Energy normally gets 10-15% of power generated from its O&M projects.

• From the issue proceeds, Rs 18.26 crore will be used for foreclosure of lease with ICICI Bank and Axis Bank. The company had entered into an operating lease with Axis Bank and ICICI Bank for windmills. The banks own the windmills and these have been given on operating lease to Indowind Energy. The company operates 10.75-MW capacity windmills under O&M contract for these two banks. The lease period is ending in 2012 and 2014, respectively, for the two banks. By foreclosing the lease transaction, Indowind Energy will be saving lease payments to these banks (saving of around Rs 4 crore). The impact of the power generated will be reflected in income generated from power.

• Rs 20 crore from the issue proceeds will be used to take over second-hand wind-energy-related assets of defaulting companies put up for sale by banks. This way, Indowind Energy plans to expand its capacity at a cheaper rate using its expertise in this field

• Claims to be the first company in India in the wind energy sector to get carbon credit certification from the United Nations Framework Convention for Climatic Change for its 12.3-MW projects. Indowind Energy expects income from carbon credit of Rs 0.7-0.75 crore from its balance capacity.

Weaknesses

• Wind-power generation is seasonal in nature. Thus, there is likely to significantly variation in income from power generation, quarter on quarter. Year on year, the variation will depend on the quantum of wind received by the company’s wind farm.

• Group company Subuthi Finance has received a notice from the Reserve Bank of India (RBI) for irregularities/ violations of certain provisions of the RBI Act. It also had failed to meet certain listing requirement.

• Given a bank guarantee of Rs 5.3 crore to its group company Indonet Global. Other group company SGM Windfarms is in the same business.

Valuation

Between FY 2003-FY 2007, revenue shot up from Rs 5.68 crore to Rs 24.12 crore. However, during the same period, operating profit margin (OPM) declined from 69.7% to 32.9%. This is likely to have happened on account of the fact that the share of the revenue from wind-power generation has declined from 100% to 32%. Wind-power generation has a low operating variable cost and a high fixed cost (depreciation /interest). Thus, net profit during the period has grown at almost half the pace as compared to revenue: from Rs 2.4 crore to Rs 6.58 crore.

FY 2007 EPS on post-issue equity works out to Rs 1.3. At the offer price band of Rs 55-Rs 65, the P/E range is 40.9-48.4, respectively. TTM P/E of Power Generation and General Electric Equipment Medium / Small is 13.6,14.5, respectively. There is no comparable listed entity. Suzlon Energy, one of the global leaders and the most integrated player in this filed, is trading at 43.9 times its consolidated TTM earning.

Highlights

Strong brand image in South India

Puravankara is recognized as one of the most prestigious name in the residential real estate in South India. Incorporated in 1986, the company has so far completed 14 residential and one commercial project, covering ~3.77 mn sq. ft. of saleable area.

Project portfolio tilted towards residential, but diversification expected shortly

So far ~95% of the total saleable area of ~3.77 million sq ft is residential real estate such as apartment complexes, villas and townhouses. The company is however increasingly diversifying its portfolio to commercial complexes, office space, malls. Going forward, we expect the percentage of commercial projects in the company’s total sales to increase to 22% from 5% currently, leading to higher realisations and reduced revenue concentration.

High quality land bank

As on July 2, 2007, Puravankara has land bank comprising of 106.8 mn sq. ft. of saleable area. Out of this, 65% of the land is directly owned by the company; for the rest, it holds development rights either solely or through joint ventures (JVs). Puravankara has acquired land at a consideration of INR 7.9 billion (~INR 75 per sq ft. of saleable area), out of which, it has already paid for 88%. The company’s land bank, located across all major cities of South India (Bangalore 73%, Kochi 13%, and Chennai 9%), has been witnessing robust economic development over the years and is expected to maintain their growth momentum, going forward. Further, since a majority of the company’s land bank is within city limits, it is relatively less exposed to correction in property prices and command low capitalization rates as compared with Tier-2 and Tier-3 city land.

JVs, MOUs, and strategic partnerships to drive growth

Puravankara has entered into a JV (49:51) with Keppel Investment Mauritius Private Limited (Keppel), subsidiary of Singapore-based Keppel Land Limited, to develop 2.71 mn sq. ft. of land in Bangalore. This JV will provide the company an opportunity to leverage Keppel’s expertise and experience in developing world-class integrated township projects to scale up its operations. Puravankara has also entered into MOUs with certain strategic partners for the purchase/execution of joint development agreements aggregating to ~43.56 mn sq. ft. of land in and around Chennai, which does not form part of current land bank. This will give the company an opportunity to scale up its operations.

Valuations

Our current NAV estimate range is INR 440 - 445 per share, representing a discount of 10% and a premium of 1% from the IPO price of INR 400-450. We have discounted the cash flows at a WACC of 15% over a period of four years. We expect Puravankara’s MOU with strategic partner, for the joint development of ~43.56 mn sq. ft. of land, to provide an upside to the current valuation. We have valued the MOU at INR 46 per share considering a saleable area of MOU as 21.78 million sq ft (estimated as 50% of the MOU area of 43.56 million sq ft due to lack of clarity on MOU). The valuation of current land bank in combination with the MOU valuation represents a discount of 21% - 9% from the IPO price of INR 400-450. We are comfortable with the valuation at lower band of INR 400 considering successful execution of MOU.

Key Risks

Execution challenge

Till FY07 end, Puravankara has delivered 3.77 mn sq. ft. of land and aims to develop another ~106.8 mn sq. ft. over next 7-8 years. We believe that the company has the execution capabilities and will be able to deliver the same, but the timely completion of these projects is a strong execution challenge for the company. Any delay in the execution of projects will strain its cash flows and valuation, hampering the company’s growth prospects.

Regional concentration

Historically, Bangalore has contributed majorly to Puravankara’s total revenues and is expected to continue to do so. We expect ~76% of the company’s total revenues to come from this region, going forward. This poses a significant regional risk. Any significant correction in property prices in Bangalore or any sort of adverse change in government policies in that region will hurt the profitability and valuation of Puravankara.

Interest rate risk

The interest rates have seen an uptrend during the last year. Given that a bulk of sales are likely in the middle income salaried class, any further hike in housing interest rates will lead to a slowdown in real estate demand and will adversely affect the sales, profitability, and valuation of the company.

Investors with a high risk appetite can subscribe to the Initial Public Offer from Take Solutions, a business solutions provider. At a price band of Rs 675-730 per share, the price-earnings multiple works out to 25.5-27.5 times trailing 12-month earnings, based on fully diluted equity. At this valuation, given the company’s relatively small size, the asking price is stiff. However, Take Solutions’ products business in the supply-chain management and life sciences segments faces few direct competitors. The company’s focus on niche sectors and good management strengthen the case for investment.
Business

Take Solutions is a business technology company with products focussed on the Supply Chain Management (SCM) and Life Sciences verticals. The company now has 16 products in the former and six products in the latter. To aid a foray into new verticals and geographies, the company has relied mainly on acquisition-led growth. The company has seen a substantial ramp-up in its revenues and profits in FY-07, from a relatively small base in the preceding years, making for a limited track record to evaluate its sustainable prospects. Consolidated revenues have seen a jump from Rs 48 crore in FY-06 to Rs 182 crore in FY-07 due to integration of a US-based life sciences business acquired earlier.

Profit margins have been consistently higher than similar-sized peers; but have witnessed moderation to 26 per cent in FY-07, from 33 per cent the previous year. This can probably be attributed to the change in business mix, due to the integration of acquired businesses. Net profits have scaled up to Rs 33 crore from Rs 10.8 crore the previous year.

The share of product licence revenues to the total has grown to 43.21 per cent in FY-07 from 28 per cent two years ago, indicating expansion of product base and market acceptance of products. Increased new product installations as compared to customisation, has seen the share of service revenues decline from 67 per cent to 42 per cent of the total over the same period.
Prospects

Take Solutions scores high on the two factors that would give any company a competitive advantage — business platform strength and domain knowledge. Take’s products are developed on an emerging Service Oriented Architecture (SOA) platform which will support seamless collaboration of the company’s processes with those of external stakeholders. The company’s strength also lies in its domain centricity which could serve as an entry barrier.

In today’s environment where manufacturing and consumption have become highly dispersed, the demand for supply chain execution and collaboration solutions is on the rise.

Take’s product suite in this vertical is well placed to meet this demand. Besides, the recent acquisition of Clear Orbit, USA in June this year, may also strengthen the company’s presence in this vertical. In the life sciences segment, the company offers cost-effective solutions catering to clinical trial planning and management process where 40-50 per cent of the R&D spends occur. Products for regulatory compliance, to aid risk management and governance in this vertical are also being developed.
Risks

A limited track record of operations on the current scale and execution risks associated with the company’s acquisition-led strategy are the key risks associated with this offer.

The aggressive acquisition strategy may lead to difficulties in integrating personnel and operations. Though the company’s intention is to remain strongly product-centric, services still bring in substantial revenues and new product launches were limited in FY-07. Any future shortening of the product life-cycle will also require greater efforts on product development.

Offer details: The company is issuing 21,00,000 equity shares of Rs 10 each to the public out of which 1,00,000 shares is reserved for subscription by eligible employees.

The issue is open from August 1 – August 7, 2007. The company plans to raise Rs 141.7 crore – Rs 153.3 crore through the issue, out of which Rs 83.5 crore is for repayment of debt utilised for acquisitions.

The rest is to be used towards further acquisitions, product development, for developing infrastructure and for prepayment of term loan.

KPR Mills, formerly KPR Cotton Mills, was originally incorporated on 19 March 2003. To further rationalise operations and better leverage capacities, KPR Cotton Mills purchased on 1 April 2005 KPR Knits as a going concern. Subsequently KPR Mills and K P R Spinning Mill were consolidated into KPR Cotton Mills through merger approved by the Madras High Court. On 5 October 2006, KPR Cotton Mills was renamed KPR Mills.

KPR Mills is now a vertically integrated apparel company. Operations span various aspects of apparel production chain: from producing carded and combed cotton yarn and knitted fabric to managing the design, delivery and quality assurance processes involved in producing readymade knitted apparel. The company exported 99.86% of its readymade knitted apparel directly to international clients in the year ended March 2007 (FY 2007). It has 1,000 regular domestic clients for yarn and fabric. Production facilities are located in Coimbatore, Sathyamangalam and Tirupur in the southern state of Tamil Nadu in India.

Current capacity

KPR Mills produced 10.16 million and 11.55 million pieces of readymade knitted apparel in FY 2006 and FY 2007, respectively. The company has a cumulative capacity of 128,064 spindles in four mills and manufactured approximately 26,232 and 28,346 tonnes of yarn in FY 2006 and FY 2007, respectively. This represented capacity utilisation of approximately 98% and 98.2% in these periods. Fabric produced was 6,147 and 6,734 tonnes in FY 2006 and FY 2007, respectively, representing capacity utilisation of about 90% and 80% in these years.

Expansion plans

To further expand its production capabilities, KPR Mills will spend Rs 472 crore. Of this, Rs 349 crore will be raised through term loans and Rs 52.5 crore through private equity. To fund the remaining expansion cost, the company has come out with an issue of 5912100 shares of Rs 10 each at a price band of Rs 225 - Rs 265 per share. The issue proceeds will be Rs 133 crore at the lower band and Rs 156 crore at the upper band.

The expansion plans of KPR are as follows:

* Expansion of existing garment facility at Arasur, near Coimbatore: Rs 10.59 crore.

* Setting up a design studio at Arasur: Rs .56 crore.

* Construction of an additional hostel facility: Rs 7.13 crore.

* Expansion of the processing facility at SIPCOT, Perundurai: Rs 39.70 crore.

* Investment in knitting facility at Arasur: Rs 25.96 crore.

* Addition of balancing equipments for existing facility at Sathyamangalam: Rs 13.81 crore.

In addition, KPR Mills has installed printing and embroidery machines at the Arasur facility. This became fully operational in March 2007. It will enable the company to meet most of its printing and embroidery requirements in-house.

Has advantage of lower power cost

To become self-sufficient, and reduce dependence on the state electrical grid, windmill facilities were installed at the Tirunelveli, Thenkasi and Coimbatore facilities. Through these facilities, KPR Mills has the capacity to produce 39.07 mega watts (MW) of power, required to met the company’s entire energy needs end April 2007. Going forward, it is expected to support approximately 75% of the energy needs once the Arasur mill is fully operational. As a result, the power cost per unit was Rs.0.53 in FY 2007, which was approximately 84.9% lower than the per unit cost charged by the Tamil Nadu Electricity Board.

Strengths

*KPR Mills is a vertically integrated player and well placed to realise efficiencies of scale and quality control at each stage of the manufacturing process.

*On account of the 38-MW installed capacity of its windmills, power cost is one of the lowest in the industry at Rs 0.53 per unit. This is 85% cheaper compared with the cost of power from the state grid. Power cost as a percentage to sales stands at 3% against the industry average of 7.8%.

*Labour cost is one of the lowest at 2.75% (as a percentage of sales) as against the industry average of 7.9%.

*Operating profit margin was quite healthy at 25% in FY 2007, and has been increasing in the past two years.

*Subsequent to the expansions in capacities, there are plans to gradually increase apparel operations, where margin is higher.

*Net interest rate of existing term loans after considering the benefits available on loans covered under the Textile Upgradation Fund (TUF) scheme is around 3.5%.

*Has a diversified customer base. The largest customer contributes only 4% to the revenue, indicating that the dependence on a single customer is minimal.

Weakness

*Does not own intellectual property rights on the KPR trademark, logo and slogan. Has to share the use of the KPR name with other promoter group entities.

*The principal activities of certain entities that are part of the promoter group include, among others, manufacturing cotton yarn, dyeing fabrics and generation of power. As a result, there may be conflicts of interest between KPR Mills and the members of the promoter group in addressing business opportunities and strategies.

*Exports of the Indian apparel industry are currently facing pricing pressures on account of removal of restrictions on the quantity of textile and apparel imports in accordance with the Agreement on Textiles and Clothing (ATC) signed by certain member countries of the World Trade Organisation. Moreover, restrictions on imports from China imposed by the US and the European Union in various apparel categories may be revoked after December 2008. This may result in a further decline in prices in the apparel industry. Besides this, India is not presently part of any free trade agreement. Those that are part of such agreements with major importing countries enjoy lower import tariff. Therefore, KPR Mills may have to lower its prices at regular intervals to sustain in such challenging business scenario. If such price reductions are not supported by corresponding fall in cost of production, profitability may be adversely affected.

*Apparel sales are highly dependent on customers located in Europe and other countries outside India. Moreover, the post-expansion target is the US market. As a result, economic slowdown or factors that affect the economic health of these countries could adversely affect business.

*Rupee appreciation is a negative for the industry as well as the company.

Valuation

KPR Mills reported a 14% rise in net sales to Rs 481.62 crore but a 7% fall in (restated) net profit to Rs 58.42 crore in FY 2007. Fall in other income by 27% to Rs 17.21 crore and absence of extraordinary (EO) income, which was Rs 12.41 crore in FY 2007, impacted net profit. The fall in other income was primarily due to the scrapping of the export incentive under target plus scheme (Rs 8 crore) from 1 April 2007.

EPS was 15.5 in FY 2007 (on post-issue equity). This is discounted 14.5 times by the lower price band of Rs 225 and 17.1 times by the upper price band of Rs 265. The sector is out of market fancy for a long time and there are no signs of the market taking a second look at it positively in the foreseeable future. Hence, many well-established and reasonably good performing companies are trading around or even less than P/E of 10 times.

Started in 2001, Take Solutions (TSL) was formed by a group of professionals, with an entrepreneurial drive, extensive knowledge and experience in the area of supply chain management (SCM). TSL has since grown both organically and through acquisitions. Its products are focused on the SCM and life sciences (LS) verticals and are complimentary to the legacy or enterprise resource planning software, which its clients currently use.

Currently, TSL has 16 active products in the SCM vertical, which are housed under the One SCM™ suite, and six products in the LS vertical under the One Clinical™ suite. The foundation of all its product offerings in both the segments is domain knowledge and the Take RTE (Real Time Enterprise) framework. End March 2007, TSL had completed more than 2,500 software installations for over 250 customers ranging from multinational enterprises to medium- and small-sized companies.

The SCM vertical contributed 48% of the revenue in the year ending March 2007 (FY 2007), down from 60% in FY 2006. The LS vertical contributed 45% of the revenue, up from 40% in FY 206. Contribution of `Others’ went up to 7% in FY 2007. Geographically, Asia Pacific contributed 52% of the revenue in FY 2007, down from 60% in FY 2006; and US 48%, up from 40%..

Among the segments, product licenses and related activities contributed 43% of the revenue in FY 2007, up from 43% in FY 2006; maintenance fees 11%, up from 10%; and services 42%, down from 47%.

The net proceeds of the issue would be utilised for further acquisition, prepayment of debt (Rs 83.50 crore), for acquisition of ClearOrbit Inc. US, product development (Rs 15 crore), enhancement of domestic infrastructure (Rs 23.20 crore), and prepayment of term loan of Rs 20 crore. TSL has already acquired ClearOrbit Inc., which extends enterprise systems with proven supply chain execution (SCE) and collaborative supply management (CSM) software solutions. The company is also in advanced stage of acquiring at least one potential target, specialising in delivering a unique combination of supply chain information services and analytic applications in the food-service industry.

Strengths

* Over the last three years, backed by acquisitions, operating revenue has grown at a CAGR of 138% and net profit at a CAGR of 310%. The product portfolio has increased from four in FY 2004 to 11 in FY 2007, with six products added in the LS vertical in FY 2006 with the acquisition of Take Inc.

* Acquisitions would allow expansion of clients and geography, enabling cross-selling of services and solutions.

Weaknesses

* Product business is associated with higher volatility in revenue and profits. This can be seen with the operating profit margin (OPM) dipping to 25.3%, from 32.6% in FY 2006.

* Majority of the revenue is earned in foreign currency. Rupee appreciation has been affecting medium- and small-scale companies more than the larger ones.

Valuation

At the price band of Rs 675 – Rs 730, FY 2007 EPS on post-issue equity of Rs 26.4 is discounted 25.5 – 27.6. Product-oriented companies such as Subex Azure, Sasken Communications and Nucleus Software are currently trading around P/E of 27-29.

Promoted by Ravi Puravankar, Puravankara Projects focuses on developing residential and commercial properties, primarily in south India (specially Bangalore). The company has completed 14 residential projects and one commercial project covering approximately 3.77 million square feet (sq ft) of saleable area.

Puravankara Projects had entered into a joint venture with Keppel Investment Mauritius Pvt, a subsidiary of the Singapore-based Keppel Land. The company holds 49% of the shares of Keppel Puravankara Development, which owns 0.86 million sq ft of land in Bangalore. In addition, it has executed a joint venture agreement with 36.26% economic interest for residential projects in Kolkata, aggregating approximately 1.08 million sq ft of land.

Strengths

* On 2 July 2007, had a land bank of 38.07 million sq ft, representing a 106.8 million sq ft of saleable area. Has plans to develop land bank over eight years. The land bank was acquired at Rs 98 per floor space index (FSI).

* Of the land bank, 11.42% (i.e., 12.2 million sq ft) is represented by ongoing projects. Has already sold 55% of its projects. Plans to complete ongoing projects in 2.5 years. Has booked revenue for 1.43 million sq ft (assuming an average realisations of Rs 2900 sq ft) in the year ending March 2007 (FY 2007). As the area under development represents 8.5 times the amounts booked and 55% of its projects have been sold, revenue visibility is high. The realisation target is Rs 3200 per sq. ft. The average cost of construction is Rs 1200-1500 per sq. ft. Moreover, of the saleable area, only 11% (i.e.1.31 million sq. ft) are new projects started in calendar year (CY) 2007.

* In addition to the land bank, has entered into memoranda of understanding (MOUs) for the purchase of lands or for execution of joint developments agreements on parcels of land located in and around Chennai, aggregating approximately 43.56 million sq ft.

Weaknesses

* The Union government recently banned real-estate players and township developers from accessing external commercial borrowings (ECBs) to fund projects. The Reserve Bank of India (RBI) also earlier raised the risk weights on housing loan, followed by an increase in interest rate to curb the demand for real estate. Thus, real-estate companies are likely to face difficulties in funding projects (particularly for buying land). Their interest burden is also likely to increase.
* Over the past couple of years, there has been a significant increase in interest rate and prices of real estate. This has increased the equated monthly instalment (EMI) on housing loans. The increase in EMI as a proportion to disposable income of household has raised concern regarding affordability of properties. Real-estate prices are already showing signs of softening in some regions. A drop in prices could also result in customers adopting a wait-and-watch approach before booking new properties and existing customers deferring payments or cancelling bookings made earlier when prices were high. This would impact cash flows and could lead to a cash crunch. This could significantly impact ability to complete existing/start new projects.
* 1.57 million sq ft of land area is under dispute for claim of Rs 15.27 crore.

Valuation

Consolidated FY 2007 EPS on post-issue equity works out to Rs 6.1. At the offer price band of Rs 500 – Rs 525, the P/E range is 81.9-85.9, respectively. Comparable listed player according to size is HDIL, currently trading at 24.6 times its consolidated recurring FY 2007 earning. Nearest location-wise comparable company Sobha Developers is trading at 41.1 times its FY 2007 earning.

Investors with at least a three-year perspective can consider subscribing to the initial public offer of Puravankara Projects. While the asking price of Rs 500-525 appears stiff now, the high earnings visibility from its current and planned projects may well provide an upside in the long term. Further, a strong track record of real-estate development, low-cost land bank, more transparent transactions and steady growth in revenue over the last five years are positives to this offer.

At the offer price, the price-earnings multiple is likely to be about 20 times the company’s expected earnings for FY-09. This is assuming there is no undue delay in its ongoing and planned projects. With a track record of having developed a sizeable area (without having to depend solely on the land bank to discover valuations), we believe the P/E multiple is an acceptable valuation metric in this case.

The company and offer

Puravankara is a real-estate developer with a majority of projects executed in Bangalore. The company’s core business lies in the residential segment with diversification into commercial projects. The company plans to raise about Rs 1,000 crore through this IPO. It plans to deploy the proceeds towards acquisition of land in Tamil Nadu and repayment of debt. Post-issue, Puravankara’s market capitalisation at the offer price would be over Rs 10,000 crore. While the company would be competing with bigger (in terms of turnover) players in this market-cap segment, there appears considerable scope for quickly ramping up revenue.

Comfortable past

Puravankara’s track record of executing 14 residential projects and a commercial one, spanning 3.93 million sq ft of developable area, is proof of its execution capability.

Further, it appears that the company has been benefiting from identifying low-cost land, ahead of the property market. That its land cost, as a proportion of total expenditure, has fallen from 24 per cent in 2004 to 6.4 per cent in 2007, reflects that the company has benefited from the boom in land prices over the last couple of years. Such a sharp decline in land cost also indicates that the company has been able to identify land at the right location and at the right time.

Going by its history and the current land holding, the company appears to prefer locations in cities and their peripheries. We believe that this strategy is relatively less risky as the demand for residential and commercial space is likely to remain robust in such areas. Corrections, if any, are also likely to be less sharp compared to smaller towns. Puravankara, therefore, appears to have a lower risk profile than similar-size peers which are aggressively moving to Tier-II and III cities.

Clean structure

Puravankara’s land holding appears to be structurally superior to a number of real-estate companies. The holding pattern also appears less complex and reflects better clarity in ownership. Of the developable area of 116 million sq ft, 14 million sq ft has ongoing projects in them.

Of the total land, 65 per cent is owned by the company; only 6 per cent of the land is on sole development rights where the title lies with the owner and the company gets only the development rights. The above proportion reduces the risk of any stalling of projects by landowners, who retain the title to the land. Even in the case of joint development projects, the company has stated that its economic interest in the same would be in the 60-77.5 per cent range. This percentage appears to be land owner-(who is typically the joint developer)friendly, striking mutual benefit.

The consideration for the above-mentioned land at Rs 795 crore is mostly paid, about 11 per cent remains outstanding.

Given that it has locked into land costs, the company may benefit from appreciation, as the land bank, going by its size, may last six-eight years.

Strength in joint venture

In 2005, Puravankara entered into a joint venture with a subsidiary of the Singapore-based Keppel Land, in which the Singapore Government’s investment arm, Temasek Holdings, has an indirect holding. Keppel Land has a presence across Singapore, China, Indonesia and Vietnam. While this joint venture is likely to improve the company’s execution capability, Puravankara has also been cautious in not exposing more than 7 per cent of its total developable area through this strategy. This venture may give Puravankara a presence in the overseas markets as well. Besides, the company has an ongoing project in Sri Lanka and an office in West Asia. Nevertheless, the venture has its risks, as the agreement does not preclude the venture partners from competing with each other.

The spread

With Bangalore being Puravankara’s strong point, the company continues to have 72 per cent of its developable area in this city. The company has also cautiously taken smaller exposure to land in Kochi and Chennai, Mysore and Hyderabad among other locations.

The demand from the middle- and upper middle-income group, to which Puravankara primarily caters to, is fairly robust in the above locations. Any correction in the now infrastructure constrained Bangalore is unlikely to dent the company’s profitability margins much, as the land is spread across the city and its outer limits. Further, the volume in the above income group segment is likely to provide some insulation to margins.

Strong financials

Puravankara’s revenue has grown at an annual rate of 75 per cent over the past three years, to Rs 417 crore in 2006-07. Operating profit margin at 32 per cent have remained stable over the past four years.

While there was scope for improvement in OPMs, with the land cost having reduced over the years, increasing construction costs appears to have prevented further growth. The margins are nevertheless above industry average.

The company is heavily geared and has a debt-equity ratio of over three. However, the proceeds of the issue are likely to bring this ratio to a comfortable level of less than 1.

DSP Merrill Lynch and Citigroup are the book running lead managers. The offer is open from July 31 to August 03.

Promoted by Kamleshbhai Patel, Mukeshbhai Pate and Vinodbhai Patel, Asian Granito India manufactures vitrified tiles. The company currently has an installed capacity of 14,000 square meters(sq mt) per day and is second largest domestic producer of vitrified tiles controlling 10.57% of the installed capacity to produce domestic vitrified tiles. Asian Granito’s subsidiary, Asian Tiles, manufactures ceramic floor tiles. It has a capacity of 7,000 sq mt per day.

To modernise and expand its existing vitrified plant and set up a wall tile unit, Asian Granito is coming out with an initial public offering (IPO). For the proposed wall-tile plant and for future expansion requirement, the company has purchased 167,565 sq mt of agricultural land (at total cost of Rs 1.07 crore), of which 99,780 sq mt have been acquired from promoters. The average cost of acquisition of land from outsiders works out to Rs 35 per sq mt, while from promoters Rs 83 per sq mt, higher by 141%.

Strengths

• 2,000 sq mt per day of vitrified-tile capacity is likely to come on stream from October 2007.This will increase the vitrified-tile capacity to 16,000 sq mt per day. Production of vitrified tiles will be 4.51 million sq mt in the year ending March 2007 (FY 2007) and projected to be 5.2 million sq mt in FY 2008.

• The wall-tile unit is likely to come on stream in January 2008. Production is projected to be 0.68 million sq mt in FY 2008, 2.89 million sq mt in FY 2009 and 3.06 million sq mt in FY 2010. Realisation of wall tiles is currently about Rs 183 per sq mt.

• From 1 July 2007, China has reduced the export subsidy for producer of vitrified tiles to 3%, from 8% earlier. This is likely to improve competitiveness of domestic vitrified manufacturers compared with importers of vitrified tiles who have received antidumping exemption: Nitco and Kajaria. Imports of vitrified tiles have increased from Rs 11.66 crore in FY 2004 to Rs 66.95 crore in FY 2006.

Weaknesses

• Entering into the less attractive wall-tile segment. The realisation in wall tile is less than vitrified tiles on account of presence of many large unorganised players. Also the market size of wall tiles is much smaller than vitrified tiles.

• Over the past few years, realisation in tiles has not shown any significant improvement.

• About 50% of the revenue is from institutional clients compared with 70% earlier. Increase in proportion of retail sale is likely to increase marketing cost and reduce average realisation as institutional clients generally buy high-end products.

Valuation

Consolidated FY 2007 EPS on post-issue equity workout to Rs 10.9. At the offer price band of Rs 85 – Rs 102, the P/E range works out to 7.8-9.3, respectively. Even after the 58% rise in price in the last nine trading session, Murudesh Ceramic (larger player compared with Asian Granito) is trading at 8.9 times its FY 2007 earning. TTM P/E of the ceramics tiles industry is 9.23.

IVR Prime Urban Developers (IVR) is a subsidiary of IVRCL Infrastructure (IVRCL). The company began its operations in 2001 and has developed residential apartments and villas as part of the Gachibowli Village Project, aggregating 1.95 million square feet (sq ft). Parent company IVRCL has constructed 15.4 million sq ft of residential and commercial projects. IVRCL holds 80% stake in IVR Prime and its holding will come down to 62.35% after the IPO.

Strengths

• On 21 June 2007, the land reserves measured approximately 2,478.85 acres, representing 75.45 million sq ft of saleable area in Hyderabad, Visakhapatnam, Chennai, Bangalore, Pune and Nodia. Of these reserves, 54.57% of land is in and around Chennai. The company plans to develop this land bank over the next five years.

• As the focus is on construction of small houses, gestation period of about six-eight months is quite low.

• Currently developing about 0.87 million sq-ft retail mall with multiplex cinema. This would include apparel store, restaurant outlets and entrainment centres as well as an IT park consisting of around 0.7 million sq-ft office tower above the retail mall. Plans include development of a business hotel of approximately 0.5 million sq ft.

• Acquired land bank at an average cost of Rs 65 lakh- Rs 75 lakh per acre.

Weaknesses

• As the focus is on mass housing, the demand for the company’s houses are likely to be more vulnerable to increase in EMI on housing loans on account of rise in interest rates and real-state prices. Also, non-extension Section 80-IB (10) benefit beyond 31 March 2007 will indirectly result in hike in prices of mass housing, impacting its demand.

• End March 2007, advances from customers amounted to Rs 16.09 crore compared with Rs 18.48 crore (including advances from contract clients), down by 13%. Advances represent just 11% of revenue in year ending March 2007 (FY 2007). The company’s inventories have also declined 39% to just Rs 59.41 crore. Lower inventories and advances reduce the near-term visibility of revenues.

• Of the total land reserves (saleable area), 27.71% is under memoranda of understanding (MoU).

Valuation

On 23 January 2007, Cushman & Wakefield had valued projects using net present value of the projects in the range of Rs 4998.4 crore and Rs 5524.6 crore after deducting the developer’s margin, the net present value of the land reserves was between Rs 2889.8 crore and Rs 3194 crore. The per share value after deducting the developer’s margin works out to Rs 450-Rs 498 per share. However, land reserves (saleable area) have increased 32% after the valuation report.

Consolidated FY 2007 EPS on post-issue equity works out to Rs 3.3. At the offer price band of Rs 510 - 600, the P/E range is 155-182.4, respectively. Comparable listed player according to size Ansal Properties is currently trading at 24.7 times its consolidated recurring FY 2007 earning. Nearest location-wise comparable company Sobha Developers is trading at 41.6 times its FY 2007 earning.

Given that it will take five years to develop the entire land bank and low near-term visibility of revenue due to low inventory and advance received, P/E is likely to come down to decent levels only in the long run.

Central Bank of India (CBI) is entering the capital market with an initial public offering of eight-crore equity share of Rs 10 each at a price to be decided through a 100% book-building process. After the issue, the shareholding of the Union government in the bank will come down to 80.20%.

The main objective of the issue is to augment its capital base to meet Basel II standards. End March 2007, CBI’s capital adequacy ratio (CAR) stood at 10.4% (Tier I CAR: 6.32%) as against Reserve Bank of India (RBI) stipulation of 9%. The bank also intends to grow its assets in sync with the growth of the Indian economy, primarily the loan and investment portfolio.

CBI plans to expand significantly the number of branches to 1,000 under central banking solution(CBS) so as to cover approximately 80% of the business by the close of financial year ending March 2008 (FY 2008). Also, the bank has set a target to increase its ATMs to 500 from 261 (end March 2007) by end of this fiscal.

Strengths

• Has pan-India presence with branches in 27 states and three Union Territories. End March 2007, the bank operates with 3,194 branches and has the third largest network of branches in India: 1,341 rural branches, 759 semi-urban, 575 urban and 519 metropolitan branches.
• The low-cost deposit current and savings accounts (CASA) constitute almost 42.09% of the total deposits end March 2007. The bank stands next only to SBI in maintaining a high CASA in its books. Going forward, it aims to further increase the low-cost deposits by leveraging the branch network and customer base, particularly in the rural and semi-urban areas.

Weaknesses

• The gross NPA to gross advances stand at 4.81% and the net NPA at 1.70% of the net advances end March 2007. These are relatively higher compared with industry peers.
• Huge exposure to priority-sector lending, historically carrying high NPAs compared with non-priority sectors. This is evident from the fact that gross NPAs comprised 7.99% of priority sector advances, End March 2007, priority sector lending stood at 43.55% of the net credit. Of this, loans to agriculture and small-scale industry borrowers stood at around 17.91% and 6.58% of the net credit.
• Business per employee stood at Rs 3.76 crore in FY 2007. This is one of the lowest among comparable PSU banks. This indicates excess staff or low productivity of staff.
• End March 2007, central banking solution had been implemented in 324 branches and 29 extension counters covering only 35% of the business. This is far below many other banks.
• The financial track record is not encouraging. Profit fell between FY 2004 to FY 2006. Even in FY 2007, net profit jumped only because of fall in provisions.
• Current paid-up capital stood at Rs 324.14 crore. This is after restructuring its capital base on March 2002, by netting off accumulated unabsorbed losses of Rs 681.31 crore against paid-up capital. End March 2007, the balance capital of Rs 1124.14 crore was restructured to convert Rs 800 crore in perpetual non-cumulative preference share capital and Rs 324.14 crore in equity share capital. So, the current book value of around Rs 77 is earned not because of good operational performance in the past, but largely because of the restructuring of equity.

Valuation

EPS for the year ended March 2007 on post-issue equity works out to Rs 12.3.
Nevertheless, profit for FY 2007 includes recovery / writeback of provisions of Rs 163.33 crore, and a repeat of such recovery every year seems difficult.

The price band of Rs 85- Rs 102 gives P/E band of 6.9 to 8.3 times FY 2007 EPS on post-IPO equity Among the comparable banks, Allahabad Bank and Syndicate Bank trade at P/E lower than the lower band. Other comparable banks like UCO Bank and Indian Overseas Bank trade within this band. Only recently-listed Indian Bank and Oriental Bank of Commerce are trading above the upper band P/E. The price band gives price (P) / book value (BV) band of 1.1 to 1.2 times post-issue BV and 1.5-1.7 times P/adjusted BV (after deducting NPAs). Currently, Allahabad Bank, UCO Bank and OBC are trading around P/BV of around 1.1. Allahabad Bank and OBC are also trading at lower than P/adjusted BV of 1.5 though other comparable banks are trading around or above 1.7 times P/adjusted BV. Overall pricing has been done to keep the offer interesting, though the valuation is not as low as it appears.

Even though IVR Prime appears way too expensive going by the price-earnings multiple, it is reasonably priced for its net asset value.

The stellar performance of recent real estate public offerings like DLF and HDIL has prompted several others in the sector waiting behind the curtain to come on stage. A few months ago, real estate stocks took a beating as nervousness about rising interest rates, regulatory scrutiny and drying up of liquidity gripped the sector.

However, they have made a smart comeback after institutional buyers reaffirmed their faith in the sector by showing great interest in new issues. The QIB (qualified institutional buyers) portion of DLF and HDIL were oversubscribed 5.13 times and 10 times respectively while that of Omaxe which closed for subscription last week was oversubscribed 92 times.

As the number of real estate companies on the bourses increase, there is also more choice for investors in terms of the different business propositions.

South-based IVR Prime Urban Developers has a business centred on affordable housing and the buying power of the vast middle-income group. The issue comprises of 14.2 million equity shares in the price band of Rs 510-600, amounting to 22.06 per cent public share, aiming to mop up Rs 722-849 crore.

A large part of the issue proceeds will be used to repay loans from IVRCL (Rs 147 crore) and Karnataka Bank (Rs 42 crore). The rest of the proceeds will go towards construction and development of IVR Prime’s Jigani project and construction of an IT park and a mall at Gachibowli, Hyderabad.

Perfect parentage

IVR Prime came into being in 1996 and became the real estate development arm of IVRCL Infrastructure in 2001. The infrastructure construction company made a foray into building group housing townships and has constructed and delivered 15.4 million sq ft of completed residential and commercial properties at various locations such as Bangalore, Chennai, Hyderabad, Pune and Noida so far.

It also has a track record of completing projects for Karnataka Housing Board, CIDCO, BHEL and the armed forces. IVR Prime now has a pipeline of 5.2 million sq ft of residential and 4.86 million sq ft of commercial projects, which is expected to be delivered in the coming two years.

“We are targeting the masses, by providing affordable housing with apartments costing about Rs 18 lakh in new upcoming locations which are being created near manufacturing hubs, for example at Sriperumbudur,” says E Sudhir Reddy, chairman and joint managing director, IVR Prime.

“For this, we first build row-houses near these commercial hubs, on a part of our land to attract middle and senior management from various companies established in that location, and then build high-rise apartments to attract others,” he adds.

IVR Prime is leveraging on the capabilities of its parent IVRCL to execute its projects. The management claims that the dealings are on arm’s length basis and would help avoid cost and time overruns. It has a land reserve of about 2,479 acres (approximately 75 million sq ft), at present.

In January 2007, property consultant Cushman and Wakefield valued IVR Prime’s land reserves of 56 million sq ft at that time, between approximately Rs 4,998-5,525 crore. “We have further identified about 1,000 acres of land at various places,” claims Reddy.

Flat financials?

IVR Prime’s top line has remained constant over the past two years of its operation. This is mainly because it recognises revenue on projects only after they are completed while cost is recognised on the basis of the percentage of work completed. Profitability has however improved significantly.

“We sold about 0.93 million sq ft in FY06, and about 0.39 million sq ft in FY07, and both fetched us almost a similar amount in revenues, which reflects both, appreciation potential of the properties, as well as improvement in our own profitability,” says SV Ramkumar, executive assistant to chairman and managing director.

Both, the operating and net profit margins have expanded significantly in FY07 compared to the previous fiscal. Going further, profitability is expected to improve as a large part of debt will be retired with the issue proceeds, and projects in the pipeline get executed.

PRIME NUMBERS
Rs crore	FY06	FY07	FY08E
Revenue	136.40	133.90	180.00
Operating profit	13.60	37.60	54.30
OPM (%)	10.20	28.10	30.20
Net profit	11.70	20.70	31.00
NPM (%)	8.80	15.50	17.20
EPS (Rs)*	1.80	3.20	4.80
P/E @ Rs 510	-	160.00	106.30
P/E @ Rs 600	-	188.00	125.00
* EPS estimates based on post-issue capital

Valuation
Considering the FY06 and FY07 earning per share of just about Rs 3-5, the issue appears extremely expensive on the price-earnings (P/E) multiple criteria, which ranges from 160-188 times at the two ends of the price band.

This places the company in comparison with players such as Mahindra Gesco, which has positioned itself among the premium residential developers’ bracket in the western part of the country.

However, going by the net asset value of the company’s land reserve, the issue appears to be priced at a discount to the present value of its reserve, as IVR Prime would have a market capitalisation of Rs 3,264-3,840 crore post-issue.

Further, in places like Gachibowli, Noida and Sriperumbudur, the potential of appreciation of property prices appears to be huge. “Our average cost of acquisition of land is approximately Rs 150 per sq ft while, our average cost of construction is about Rs 650 per sq ft,” says Ramkumar.

As a result, even with lower realisations per sq ft as compared to its peers, IVR Prime should be able to report decent margins and earnings in the forthcoming years.

While the long term performance of all realty players will depend on their ability to accumulate land at lower prices and their execution capability, IVR Prime’s project mix and execution capabilities make this issue an attractive proposition in spite of a high P/E pricing of the issue.