KLG Systel has announced that on Aug 27, 2007 the Company has acquired 51% stake in Atlantis Lab Pvt Ltd, a dedicated engineering solutions Company. Atlantis will become a subsidiary of the Company post acquisition. The company valued Atlantis for Rs.24 crores and 51% stake would cost KLG about Rs. 12.4 crores. Atlantis is a dedicated engineering services company having presence at Chennai, Bangalore and Pune. Atlantis was incorporated in 2001 and within short time-span of operations it has good marquee clientele. The company provides mechanical design solutions to worldwide manufacturers such as GE, Whirlpool, Atlas Copco, TATA Motors, John Deere, Schneider Electric and Cummins, etc. Atlantis Lab's current service offerings include product design, design automation, design simulation tool, design data migration, and PDM/PLM solutions for the growing automobile, aerospace, Industrial machinery and Heavy Engineering markets.

Rationale for the acquisition:

Worldwide the Engineering Services market is making great strides. The recent NASSCOM BOOZ Allen Hamilton study of international trends in Engineering Services Outsourcing markets, predicts that by 2020, 25 to 30 percent of the projected $225 billion global offshore engineering services market could belong to India. This acquisition will enhance the company’s service offerings, geographical presence which would increase its’ addressable pie in the growing offshore engineering service market. The company derives its revenues from domestic markets with this acquisition the company will have access to North America and European market. The company is planning to expand its infrastructure capacity for 1000 at its head quarters in Gurgaon.

Future Plan:

The relationship will provide KLG Systel an opportunity to go to the ESO (Engineering Service Outsourcing) markets faster and widen its reach to the 3 design hubs at Chennai, Pune and Bangalore. Atlantis Lab already has a strong base in these cities. KLG plans to increase capacity at the newly acquired subsidiary to 1000 design & analysis seats by the end of year 2008 from existing 150 seats. The new subsidiary plans to focus on Automotive, Aerospace, Industrial Machinery. Heavy Engineering, Ship Building, Power and Process verticals where there is a strong demand for Product Design and Product Life Cycle solutions and services. The new subsidiary plans to offer a state of the art design solution and services like FEA (finite element analysis) / FEM in static, vibration, crash, impact, CFD (computational fluid dynamics), NVH (noise vibration harshness), BIW weld fixtures, Mold Flow analysis, Reverse Engineering, Electronics & Navigation systems, Technical Documentation, NC path generation, Plant Design, Plant stress analysis etc. This design centre will have an ultra modern RPD (rapid prototyping) and testing facilities for the industry, providing Company's clients to carry out live prototyping and testing of the designs being delivered. Currently there are very few design centers in the world, which offer a complete solution from design to prototyping and testing. The company is also planning to set up ODC (Offshore Design Centers) for its global and Indian clients, which will help the company to deliver value in terms of improvement in productivity with cost efficiency to its clients.

Business Overview:

KLG has been engaged in life cycle solutions and power system solutions. It offers knowledge solutions to oil & gas, process, power, metal, manufacturing and infrastructure sectors by providing a unique mix of domain expertise, software solutions, consultancy and training. Its technology partners are AutoDesk, COADE, IBM, Invensys, Microsoft, Oracle, Primavera, SAP and Unigraphics. Building on the deep power domain expertise and its relentless R&D, KLG has developed a solution that empowers consumers to manage their electricity consumption. This unique web based solution has been named as www.connectgaia.com which makes it possible for users to View, Visualize, Measure, Optimise and Manage the Energy Consumption in their Domestic, Commercial, Industrial, Government and Semi-Government establishments.

Valuation:

The outlook is distinctly positive especially with India’s booming economy and development of new markets for Company’s products. The Central Govt. is targeting to add a generation capacity of up to 70,000 MW in the 11th Plan, while it has also asked the states to bring down transmission and distribution losses to 15 per cent by 2010 from about 40 per cent now. KLG proposes to tie up with state electricity Companies to provide software solutions developed by it. The company’s patented software solutions - Vidushi & SG61 will certainly help the electricity generating and distribution utilities to control transmission and distribution losses. Company’s focus on brand building will enhance its presence in critical markets and add value to the Company’s fundamentals. There is a vast scope of automation for mass production and Power System Solutions to control distribution and transmission losses in our country. We believe that there is a vast scope for improvement in its earnings and price appreciation as a result of increase in profitability. We expect revenue and profit to grow at 61.5% and 81% CAGR respectively over FY2007-10 period. The stock is currently traded at ~22x FY2007 earnings. We maintain BUY on the stock with target price of Rs. 810 for the stock, at 20x FY2008E earnings.

Result Highlights

Consolidated Results for the quarter ended June 30, 2007

* Revenue was Rs 18,302 million; a Y-o-Y increase of 26.8% and a sequential increase of 2.9%.
* Net Profit after Tax was Rs 3,783 million; a Y-o-Y increase of 6.9% and a sequential decrease of 3.9%.
* EPS was Rs 5.7, a Y-o-Y increase of 4.4% and a sequential decrease of 3.9%.

Growth across the service offerings:

Engineering services, Consulting and Enterprise business solution and Infrastructure management services grew by 14%, 15% and 36.4% respectively.

Billing Rate:

Offshore billing rates were up by 1.46% and onsite rates increased by 1.31% in this quarter, resulted into 1.1% improvement in blended rates. Management expects positive pricing momentum to continue in FY2008 also.

Margin:

During the quarter margin is declined by ~64 basis point sequentially. The management has guided 125 bps decline in the operating margins for FY08 from FY07 levels. The management indicated positive margin levers would be better price realization, improving offshore-onsite mix, improved subsidiary performance, operational efficiency, SG&A leverage and employee pyramid. Company had net forex loss of Rs 60 million - hedging gains of Rs 900 million and translation losses of Rs 960 million. The company has USD 750 million hedging position at the end of quarter.

Wage Hike:

16% offshore salary hike & 5% Onsite salary hike is expected in Q2 FY2008

Employee Details:

The number of associates including the subsidiaries and joint ventures increased by 2,795 to 42,347. The management is targeting to add 15,000 – 16,000 employees (gross) in FY2008, upgraded from the earlier guidance of 14,000-15,000 employees.

Attrition:

Attrition on a trailing twelve months basis fell to 14.9% from 15.7% in Q4 FY2007. Annualized quarterly attrition stood at 13.6% (marginally up from last quarter’s 13.21%) compared to 21.9% at the beginning of FY 2007.

CAPEX:

Satyam will invest about USD 80-100 million in FY2008.

Nipuna Performance:

Nipuna recorded revenue of USD 11.93 million and a net loss of USD 2.02 million in Q1 FY2008. The company guided revenue of USD 61 million for FY 2008, a growth of 60% over last year. The management expects Nipuna to report positive EBIDTA for FY08, however it is expected to report loss at net level.

Valuation:

We observe a greater portion of discretionary spending on technology being directed towards GDM approach. The management has indicated robust demand environment, which is also visible from upgrade in USD revenue guidance to 34-35.5%. The company announced couple of large engagements in past few months and suggested they are looking actively for few more engagements, which would improve business growth visibility. The company has announced salary hike from 1st July which would impact margin by ~350bps in Q2FY2008. The rising rupee, wage hike in Q2 and lower EPS guidance for the FY2008 (Indian GAAP) could have dragging effect on the stock in short term. We expect 2HFY08 to be better than H1FY08 in terms of growth in revenues and profitability. The stock is currently traded at ~19x FY2008E earnings. We maintain ACCUMULATE on the stock.

Glaxo SmithKline Consumer Healthcare (GSK Consumer) is an Indian associate of Glaxo SmithKline Plc. UK, (holds 43% equity stake). GSK Consumer is the largest player in health food drinks industry in India. Its brand portfolio includes super brands like Horlicks, Boosts and Maltova. The company enjoys market leadership in 90,000 Tonnes Indian malted milk food market.

Investment Positive:

Brand portfolio consists of ingrained brands:

Company’s brand portfolio includes ingrained brands like Horlicks (existing since 1930), Boost and Maltova. Horlicks enjoys more than 50% of Health Food Drink market. Boost has a market share of ~13% across the nation, while it commands a market share of 24% in southern part.

Ban on export of Skimmed Milk Powder (SMP) -Margin erosion may arrest

On 1st February 2007, the government announced ban on SMP exports till September 30, 2007 as part of its effort to curtail inflationary pressures in primary articles. The SMP price has increased by more than 30% as compared to last year. SMP is a key raw material and the closing of the export window may bring down domestic SMP prices and will help to arrest the margin erosion.

Rich Cash Flows:

For the year ended 2006 the company had cash & cash equivalents along with liquid investments stood at INR 2,676 million (i.e. INR 64/- per share). Besides this, its rich cash flow gives free cash flow yield of ~7%. Healthy cash position could help management to grow inorganically.

Attractive Valuation:

GSK Consumer currently trades at a PE multiple of 15X on CY2007E and at 12.4X on CY2008E, which looks attractive in consumer goods space. We initiate our coverage on GSK Consumer with BUY recommendation at target price of Rs 630 per share, based on 15x 2008(E) earnings. Our target price gives 23% upside and ~2.5% of dividend yield, resulting in total return of ~26%.

Result Highlights:

Strong Balance Sheet Growth leading to rising Net Interest Income:

UTI Bank has registered a 48% yoy growth in its net interest income to Rs 4,643 mn during Q4FY07. For FY2007 net interest income grew by 45% on a yoy basis. This was on account of strong growth in advances by 65% yoy to reach Rs 369 bn as on March 2007 & improvement of interest margin by 6 bps. Total deposits have also grown fantastically by 47% to Rs 588 bn. Incremental credit deposit ratio is at 78%. Bank’s CASA ratio remained constant at 40%.

Strong growth in Fee Income:

Lower provision on NPA:

Although the Net NPAs as a proportion to Net Customer Assets has decreased from 0.75% in FY06 to 0.61% in FY07, Net NPA has increased by 21% in absolute terms. This is on account of lower provision for NPA by 42% on a yearly basis. As a result provision coverage ratio has decreased from 42% last year to 37% for FY07. Total provision & Contingencies including provision for NPA, standard assets & depreciation on investments has increased by 40% for FY07.

Growth in PAT above expectation:

UTI Bank has registered a growth in PAT for the quarter by 40% yoy to Rs 2119 mn. The growth in PAT for Q4FY07 has outpaced our expectation by ~5%. It is on account of exceptional growth in balance sheet, along with improvement in interest margins, strong growth in core fee income and lower provision on NPA. Net profit for FY07 has grown by 36% to Rs 6,590 mn compared to Rs 4,852 mn last year. It has declared a dividend of Rs 4.5 per share.

Concerns:

The Banks Tier I ratio has decreased from 7.26% last year to 6.42% as on March 2007, as a result the bank intends to issue fresh equity during FY08 which will dilute the earnings.

Uncertainty about change in CMD position which is currently held by Mr. PJ Nayak

Further rise in interest rates would make it difficult for the bank to continue the high credit growth.

Valuation:

We expect UTI Bank to continue its growth streak and net profit to grow at a healthy rate over next two years. At the CMP of Rs. 470, stock trades at 15.6x its earnings and 3.5x it’s adjusted book value for FY08E. Our target price of Rs.535 is at a 3.3x its adjusted book value for FY09E. In view of this, we retain our call on UTI Bank to “BUY”, with target price of Rs. 535. The Target represents ~14% upside from the current level.

Khandwala Securities Limited view on Indian Market

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