Edelweiss Research report on Engineers India:

Engineers India’s (EIL) Q4FY07 profits were lower than our expectations due to higher employee expenses and other operating costs. Revenues were marginally higher than estimates due to lumpiness of revenues in Q4FY07.

EIL ended this quarter with an order book of Rs 21.3 billion; order book includes an Rs 9.2 billion LSTK contract from IOC. Q4FY07 order intake was Rs 0.7 billion compared to Q4FY07 revenues of Rs 1.6 billion.

Revenues were lower by 11.2% Y-o-Y and higher by 24.0% Q-o-Q due to lower share of LSTK (lump sum turn key) business. EBIT margins improved on Y-o-Y basis from 21.2% to 25.1%, but fell from 33.0% in Q3FY07. EIL factored in increase in employee costs w.e.f. January 1, 2007; this has dented EBIT margins. EIL expects the salary hikes to be 50%. We have provided for increase in salaries which resulted in increase in the company’s employee expenses and hence, we are lowering our earning projections for the company.

We have reduced our FY08E EBITDA and EPS from Rs 2.0 billion and Rs 35.3 to Rs 1.3 billion and Rs 27.0, respectively. We have also reduced FY09 EPS estimates from Rs 41.8 to Rs 35.9. EIL is highly levered to increase in salaries; every 1.0% increase in salaries reduces the company’s FY08E profits by 1.0% (Rs 0.3/share).

EIL’s order book at 3.7x FY07 revenues provides comfort over sustainability and growth of revenue over the next four-five years. However, EIL’s earnings are not expected to grow significantly as higher employee costs may not be passed on Till FY08.

At Rs 506, EIL trades at 18.7x and 14.1x on FY08E and FY09E EPS, respectively. On an EV/EBITDA basis the stock trades at 14.2x and 8.5x, our FY08 and FY09 earnings. Global firms— Technip, Jacobs, Flour, McDermott—in similar business trade at one-year forward EV/EBITDA and P/E of 11-12x and 23-24x, respectively. We are downgrading the stock
to ‘ACCUMULATE’.

Strong order book; ends Q4FY07 with highest-ever order book of Rs 21.3 billion

EIL’s Q4FY07 order intake of Rs 0.7 billion resulted in the company maintaining high order book for FY07 year end. We estimate the current order book at Rs 21.3 billion. Current order backlog stands at 3.7 years of FY07 revenues. FY07 LSTK order stands at Rs 9.2 billion, with the remaining Rs 12.1 billion from conventional engineering business. Most of the LSTK order is expected to accrue in FY09. In FY08, we expect EIL to bag orders from CPCL’s modernization project (Rs 1.5 billion revenues for EIL) and HPCL’s Bhatinda refinery (Rs 6.0 billion). IOCL’s Paradip refinery project (Rs 10 billion) is another large project on the horizon.

Q4FY07 and FY07 revenues dip due to lower LSTK contribution

EIL’s Q4FY07 revenues of Rs 1.63 billion were lower by 11.2% Y-o-Y due to lower LSTK revenues booked in the quarter. LSTK revenues, which constituted 34.0% of total revenues in Q4FY06, fell to 5.2% in the reporting quarter. Similarly, FY07 revenues fell by 27.8% as LSTK’s share fell from 46.2% to 14.4%. We expect LSTK revenue share in FY08 to remain around same levels as IOC’s LSTK project will have a significant impact on EIL’s revenues from FY09 onwards.

Employee costs to drag future earnings; valuations full; reduce to ‘ACCUMULATE’

EIL’s Q4FY07 employee expenses increased by 28.2% Y-o-Y, which resulted in lower-thanexpected earnings. Salaries for all public sector undertakings (PSUs) are due for a hike from January 1, 2007 onwards. EIL has taken steps for the same and has provided for the increases in salaries from Q4FY07 onwards. The company expects the salary hikes to be 50%. We have provided for increase in salaries, which resulted in increase in the company’s employee expenses and hence, we are lowering our earning projections for the company. We have reduced our FY08E EBITDA and EPS from Rs 2.0 billion and Rs 35.3 to Rs 1.3 billion and Rs 27.0, respectively. We have also reduced FY09 EPS estimates from Rs 41.8 to Rs 35.9. EIL is highly levered to increase in salaries; every 1.0% increase in salaries reduces the company’s FY08 profits by 1.0% (Rs 0.3 per share). EIL’s order book at 3.7x FY07 revenues provides comfort over sustainability and growth in revenue over the next four-five years. However, EIL’s earnings are not likely to grow significantly as higher employee costs may not be passed on till FY08. At Rs 506, EIL trades at 18.7x and 14.1x on FY08E and FY09E EPS, respectively. On an EV/EBITDA basis the stock trades at 14.2x and 8.5x, our FY08 and FY09 earnings. Global firms— Technip, Jacobs, Flour, McDermott—in similar business trade at one-year forward EV/EBITDA and P/E of 11-12x and 23-24x, respectively. We are downgrading the stock to ‘ACCUMULATE’.








Buy Himatsingka Siede; target Rs 158: EmkayBuy Himatsingka Siede; target Rs 158: Emkay

Himatsingka Siede (HSL) has acquired 80% stake in Divatex home Fashions Inc. New york (DHF). This acquisition is done through HSL’s 100% subsidiary Himatsingka America Inc. The EV for the transaction is USD 75 million and HSL will pay USD 53 million. DHF is among top 3 distributors of bed linen in USA, which will facilitate HSL in the distribution of bed linen products from its new bed linen facility in Hassan SEZ, Karnataka having capacity of 60,000mtrs/day of wider width cotton fabrics and 8,000 sets/day of exquisite made-up products. The total capex of bed linen facility is Rs 4 billion. DHF is headquartered in New York and operates a large warehousing and distribution facility out of South California. This acquisition is in line with HSL’s strategy to forward integrate into branding, retailing in its export markets and to acquire large distribution networks in the home textile space. This acquisition follows the acquisition of Giuseppe Bellora Spa, Italy in Feb.07. Bellora owns the home textile brand ‘La Casa Italiana’ through its subsidiary BP Venture. Bellora has a strong presence through exclusive stores, departmental stores and multi brand outlets across Europe. For FY07, HSL reported net sales of Rs 1742 million (yoy up 15%), PAT of Rs 546 million (yoy up 13%) and EPS of Rs 5.60. For CY06, DHF reported revenues of USD151mn and EBITDA of USD14mn. For CY06, Bellora reported consolidated revenues of Euro 29.8 million.

Topline to increase significantly

For CY06, Divatex reported revenues of USD 151 million (Rs 6191 million). HSL has acquired 80% stake in DHF, which is expected to increase HSL’s topline, which for FY07 was Rs 1742 million, significantly (80% of Rs 6191 million, comes to Rs 4953 million). HSL also acquired 70% stake in the Italian based company, Bellora, which has reported consolidated revenues of Euro 29.8 million for CY06. Moreover, HSL expects to generate revenue of Rs 4000 million from its new bed linen facility. All these are expected to significantly increase HSL’s topline.

Funding requirement fully tied up

The cash outflow of acquiring 80% stake in Divatex is USD 53 million which will be funded through the proceeds of USD 58 million raised from GDR issue in Dec.05. Hence, all the funding requirements are fully tied up.

Greenfield Expansion at Karnataka completed

The greenfield expansion of setting up a bed linen facility having capacity of 60,000mtrs/day or 20 million mtrs P.A. of wider width cotton fabrics and 8,000mtrs/day of exquisite made up products is complete and trial run production has been done. The plant is expected to commence its commercial production by end of this month. Second phase of weaving capacity is expected to be completed by 4QFY08. We expect the company to receive full benefits of this project from FY09 onwards. Once fully stabilised, HSL expects to generate a revenue of Rs 4000 million from this project.

Valuations

At the CMP of Rs 121 the stock trades at 21.6x its FY07 EPS. We maintain buy on the stock with a target price of Rs 158.






Buy Tata Steel; target Rs 816: Khandwala Securities

Investment Arguments:

Tata Steel Limited, the flagship company of Tata Group, is the largest manufacturer of steel in India with 25.6 million tonne of steel capacity. The company produce HR and CR coils and sheets, galvanized sheets, tubes, wire rods, construction rebars, rings and bearings.

The company recently acquired Corus Plc Limited, which is nearly 5 times bigger than Tata Steel. This is the biggest acquisition by an Indian company domestically as well as globally. This acquisition has helped Tata Steel to achieve 6th position (erstwhile 56th position) in the world in terms of production with 84,000 employees spread across four continents.

The combine entity is expected to have turnover of USD 32 billion with 40 million tonne of steel production by 2011-12. The EBITDA margin will improve to 25% from 13% in the same period. The company intends to increase its capacity to 100 million tonne by 2015 through organic and inorganic route.

Corus EBITDA margin improved to 9.4% from 6.2% in the first quarter of 2007. The company reported 7.2% EBITDA margin for 2006 as compared to 10.1% in previous year. We expect EBITDA margin of Corus to remain around 10% as it has increased price of all its products by 8%-10% in 2007.

The company has announced gigantic investment plan of almost Rs 1 trillion to increase its capacity from 25 million tonne to 50 million tonne by 2015 through organic route.

The company is expanding its domestic capacity from 5 million tonne to 6.8 million tonne by June 2008 and 10 million tonne by December 2010. Besides this, it would setup five greenfield projects in Jharkhand, Orissa, Chhattisgarh, Vietnam and Iran with the capacity of 12 million tonne, 6 million tonne, 5 million tonne, 4.5 million tonne and 3 million tonne respectively.

Tata Steel has strong presence in South Asian market through NatSteel and Tata Steel Thailand (formerly Millennium Steel). The company recently consolidated its position in South Asian market by acquiring five companies through NatSteel.

The company has taken various initiatives on raw material front like JV with Tata Power and L&T, equity interest in Carborough Downs Coal Project. Apart from these, it has formed JV with BlueScope Steel in India for specialize products, Ferro chrome project in South Africa and titania project in Tamil Nadu.

Valuation:

The company’s standalone EPS is expected to take a hit on account of equity dilution for Corus funding but we expect Corus to add significant value to the profitability of Tata Steel. This acquisition would result in substantial synergies in long term. We have arrived at a target price of Rs 816 (March 2009) on EV/EBITDA model and P/E model. This represents 19.2% annualize return for the investors from current level. Steel prices are expected to remain firm on account of strong demand from emerging countries. Even some of the developed countries like Japan and EU are showing signs of strength. The consolidation in the industry will also help steel prices to remain firm (specially in Europe). We expect Corus profitability to improve significantly on account of firm prices and restructuring programme. The company expects to achieve synergies to the tune of USD 450 million over a period of 3 years. The phased capacity addition and the consequent increase in volumes would drive the revenue growth for Tata Steel. Moreover, the synergies benefit emerging from integration of companies like Corus, NatSteel and Millennium Steel would drive the profitability of Tata Steel. At the current price of Rs. 600, Tata Steel is trading at a P/E multiple of 8.3x and EV/EBITDA multiple of 5.4x for FY2007. Our target price of Rs. 816 (March 2009) is based on average of EV/EBITDA model and P/E model. We have valued major subsidiaries independently on both the models. We have taken 4.5x EV/EBITDA and 6.0x P/E for all companies except Tata Steel (7.5x). Investments and other listed subsidiaries are valued at 15% discount to current market price, while unlisted subsidiaries are valued at book value.





Aban Offshore; target of Rs 3355: Emkay

Aban Offshore bags contract from Cairn Energy for USD36.4 million - day rate in line with expectations

Aban Offshore has bagged contract from Cairn Energy Sangu Field Limited for deployment of its new built jack-up Rig Deep Driller 5, at offshore Bangladesh location. The duration of the contract with Cairn Energy is estimated to be 180 days and the estimated revenues is USD 36.28 million. The day rate for the above contract works out to USD 201555, in line with our estimates of USD 200000. The Rig is likely to start mobilizing to the location by September 2007.

Timely delivery of Deep Driller 5 allays concern on rig deliveries

Deep Driller 5 is a 350 ft independent cantilever Jack up rig. The rig has been built at Singapore by Keppel FELS and is on course to get delivered on time (June 2007). The timely delivery of deep driller 5 allays concern on rig deliveries. For example in our assumption we had assumed a 2-3 months delay for all of Sinvest's new built jack ups. However with recent timely delivery of Deep Driller 5 as well as timely finalisation of contract allay some of our and street's concern on rig deliveries.

Drill ship Deep Venture (Valentine Shashin) Commences operations

Venture Drilling, (a company in which Aban offshore through Sinvest AS owns 50% stake), has commenced drilling operations on June 30, 2007 under the drilling contract with Exxon-Mobil for deployment of the drillship Valentine Shashin (to be renamed Deep Venture) Offshore West Africa. The estimated revenues from the contract are USD 220 million during the contract period of 18 months. This works out to a day rate of approximately USD 410000 which is in line with our estimates. The drillship Deep Venture is on bare boat charter with Sinvest for a firm period of 5 year plus 6 options of two year each. The estimated opex (Operating cost) on the contract (inclusive of bareboat charter) is approximately USD 110000 per day.

Deep Driller 4 due for delivery in September 2007

Out of the total 8 new built jack up rig that Sinvest had on order this will be the fourth rig getting delivered. Hence Sinvest still has four new built rigs under construction. Out of the four, one more rig, Deep Driller 4, a 375 ft independent cantilever Jack up, is being built PPL shipyard Singapore is due for delivery in September 2007. We expect Aban to finalise the contract for this rig in next couple of months at a day rate of USD200000. However there are strong possibilities that the day rate for Deep Driller 4 would be higher than our expectation.

Maintain Buy with a price target of Rs 3355

With strong demand for offshore rigs and limited supply, all the rig categories today are operating at utilisation of more than 90% plus. This coupled with supply constraints in view of long gestation period for new builds, means that the global offshore rig market is currently at one of its strongest points in the past decade. We believe that offshore oilfield service's industry fundamentals remain compelling and valuations attractive. Aban is currently trading at 9.6 X its FY2009 earnings and 6.9X its FY2010 earnings. On price to cash flow basis the stock is trading at 6.5X for FY2009 and 4.9X for FY2010. We maintain our Buy recommendation on the stock with a price target of Rs 3355.





SSKI Research report on Radico Khaitan:

High Volumes - Low Margins

With the IMFL industry in India growing at 10% per annum, owing to an uptake in product portfolio, Radico Khaitan, present mostly in the regular segment (consisting of 70% of the market), has shown a volume growth of 12.4%. While its established brands in the regular segment, 8PM whisky and Old Admiral Brandy, have both shown volume growth of only 7% and 10%, its main growth came from its Magic Moments vodka and its acquired brands of Brihans. Radico Khaitan launched Magic Moments vodka in the end of FY06 and in its first complete year of launch has sold 0.35mn cases to acquire 15% of the Indian vodka market, growing at 45% per annum. While Magic Moments has shown a good growth over the year, there has been a huge amount of brand building expenditure that the company has incurred over the period. With the company expected to continue the brand building expenses in FY08, we do not expect much margin expansion. Radico Khaitan in order to enter the international markets has decided to choose the organic route rather than the inorganic way (United Spirits acquired Whyte & Mackay and Bouvet Ladubey and Champagne Indage acquired Vontelnella Tandou). Through its 100% subsidiary, Radico Khaitan Global, in the Middle East, Radico has been beefing up its exports. Apart from the Middle East, Radico has also been exporting into Africa and entering into a JV in UK to export its products there.

Radico- Diageo JV

In December 2006, Radico Khaitan (India’s second largest spirits manufacturer) and Diageo (world leader) entered into a 50:50 JV to jointly exploit the large and developing IMFL market in India. Diageo’s business in India prior to the JV was limited only to the locally produced Smirnoff (the largest premium vodka brand in India) and its Johnny Walker brand in the duty free market. It has now recognized that India, the largest whisky market in the world, is an important market for its further expansion and cannot be ignored. While duties and taxes might be an issue for international players entering the Indian markets in a huge way, the biggest hurdle that we see is of the distribution of their alcoholic beverages. With alcohol under the preview of the state, each state has its own distribution structure that has been in place for a very long period of time. Diageo recognized that in order for it to make a serious impact on the Indian alcoholic beverages industry it needs to gain access to a strong pan – India distribution network. Radico Khaitan owing to its pan-India presence provides Diageo with a distribution network covering 29 states in India. While Diageo has entered into a JV with Radico Khaitan, we believe that the long term agenda behind the JV could change. Diageo needs to roll out its own products into India and the JV would not be the viable route for it. Additionally, Radico Khaitan provides Diageo with the distribution structure required for a player to enter India.

Radico Khaitan- Strategically Placed

Emerging markets have been the growth drivers behind the robust performance shown by international players in the alcoholic beverages space over the past 5 years. With the Indian market becoming the largest market for whisky in the world and a noticeable uptrend in product intake, international players need to enter into India quickly. India is a 350mn cases spirits market of which only 1/3rd is IMFL, with the rest being country liquor. With an evident shift from country liquor to IMFL, the Indian spirits market is expected to grow at 10% over the next 3-4yr period with premium and prestige segments leading the way with 20%+ growth. Radico Khaitan, in the alcoholic beverages space, is a logistically strong but a distant second player in the Indian market. With international players vying to enter the Indian market, Radico Khaitan with a strong plethora of brands and a pan-India presence becomes the best positioned player for global majors looking at a strong India centric presence. We expect that Radico will continue to show growth under the favorable domestic market conditions as well as its new avenues (exports). We are also excited about the potential strategic value of Radico Khaitan.

Valuation

Aided by a 12.4% volume growth and a 22.6% growth in net sales, Radico Khaitan, has reported consolidated net sales of Rs 452.5 million. While volumes have grown to 13.5 million cases from 12 million cases, Radico Khaitan has shown an 8-9% realization growth in the year from its semi-premium brands (Magic Moments vodka). However, high expenditures on brand building, especially for Magic Moments vodka (Rs 100 million in Q4FY07 alone) have resulted in a flat net profit for the year. A 12% volume growth for the year is a clear indication of high growth in the Indian alcohol space, owing to change in demographics and higher consumer spending. Radico Khaitan at 13.5 million cases per annum is India’s second largest spirit manufacturer with a distribution network amassing 29 states in the country. Growing on the back of increased exports in the international markets of Africa and Europe, Radico Khaitan Global has reported a net profit of Rs134 million for the year ended FY07. While we believe that Radico Khaitan will continue to grow on the back of changing demographics of the Indian economy and an entry into the international markets, we expect to see margin remaining muted owing to high spends on brand building. Radico Khaitan (India’s second largest spirits manufacturer) and Diageo (world leader) launched the first whisky, Masterstroke, under the JV Diageo Radico Ltd. We believe that Diageo needs to enter India (the world’s largest whisky market), in a big way soon and the JV might not be the most appropriate route to launch its international brands in the country. With Radico Khaitan distribution network spanning the entire nation, the JV with Radico Khaitan might just be the stepping stone for a much larger agenda. Though positive on the space under which Radico Khaitan operates, it is the strategic value hidden in the distribution networks and manufacturing as well as the bottling units of Radico Khaitan that will provide maximum upscale potential. The stock is currently trading at 20xFY09E and has an EV/EBITDA of 14xFY09E. Reiterate Outperformer.




Prabhudas Lilladher on Pfizer:

Sluggish sales growth

For Q2 FY07 (ending May ’07), Pfizer has reported a 1% yoy dip in net sales -from Rs 1.67 billion to Rs 1.65 billion. The dip is attributed to supply-related issues regarding its major product, Corex. Moreover, the company is in the process of divesting its consumer healthcare (CHC) business in favor of Johnson & Johnson (J&J) in line with the global transfer of its CHC business to J&J, and hence the uncertainty about the divestment. The pharmaceutical business slipped 4% yoy whereas the animal healthcare (AHC) segment has reported a 21% sales growth. The clinical development services grew a marginal 1%.

Margins under pressure

During the quarter the operating margin slipped 60bp—from 22% to 21.4%—due to the rise in ‘other expenses’. ‘Other expenses’ climbed 130bp—from 25% to 26.3% of net sales—due to lower sales growth. Material cost rose by 50bp—from 37.8% to 38.3% of net sales—with the change in product mix and higher sales of AHC products. Personnel expenses declined by 120bp—from 15.2% to 14%—due to the ongoing VRS.

Higher ‘other income’

The company has reported a 60% rise in ‘other income’—from Rs 109 million to Rs 174million—due to the rise in treasury income (Rs 90 million during the quarter). Pfizer has completed the sale of the Chandigarh property, and profited by Rs 2.74 billion. With this higher ‘other income’, the EBIDTA margin has improved, by 340bp—from 28.5% to 31.9%.

Capital gain

The company paid Rs 462 million as capital gains tax from the sale of the Chandigarh property and therefore the net inflow is Rs 2.28 billion. With this inflow, the company’s treasury income is likely to rise by over Rs 50 million per quarter.

Net profit improved

Net profit before extraordinary items grew 10%—from Rs 298 million to Rs 329 million—due to higher ‘other income’. Net profit after EO items also went up—from Rs 238 million to Rs 2,578 million—from the high inflow due to the sale of the Chandigarh property.

Investment positives

Pfizer has employed a contract field force of 100 people in three states to promote its mature products. It is widening its geographical reach to cover class II and class III cities. This is likely to generate additional sales and improve top-line growth.

To raise top line growth, it is focusing on the institution and hospital segments and the retail segment.

To improve sales and profitability as well to expand therapeutic coverage, the company is looking at domestic acquisitions.

Its new launch, Lyrica, is doing well in the domestic market. It is likely to be a future growth driver for the company.

Financials and Valuations

We expect Rs 3 billion from the sale of CHC business to J & J in FY07. Net inflow after capital gains tax is likely to be Rs 2.66 billion. With this, Pfizer can look at acquisitions aggressively. We expect a 13% reduction in net sales in FY07—from Rs 6.89 billion to Rs 6.04 billion, due to it’s divesting its CHC business, which accounts for about 22% of the company’s revenue. We expect an 11% rise in sales in FY08—from Rs 6.04 billion to Rs 6.73 billion. We expect the operating margin to inch up from 24% in FY06 to 24.4% in FY07 due to the reduced material cost as well as from operational efficiencies. We expect net profit (after EO items) to shoot up—from Rs 1.06 billion in FY06 to Rs 5.91 billion in FY07—and then slip to Rs 1.35 billion in FY08. Management has guided to double-digit sales growth and the maintaining of the EBIDTA margin after the transfer of the CHC business. The CMP of Rs 804 discounts the FY07E EPS of Rs 38.4 by 21x and the FY08E EPS of Rs 48.6 by 16.5x. We are positive on the long-term prospects of the company.





Prabhudas Lilladher report on Bhagwati Banquets:

Investment Highlights

Just now, it monopolises premium catering in Ahmedabad and Surat and commands a high (about 35%) operating margin from this business. The company wants to expand catering business to other major cities.

It plans to branch out to other cities like Mumbai, Jaipur, Jodhpur, etc., to become a national player. From October ’07, it will commence catering services in Mumbai. The entry into other cities is likely to improve the sales and profitability of the company.

BBHL has plans to enter into tie-ups with clubs for providing F & B services, resulting in additional revenue and profits.

In FY07, it has undertaken the F&B management of the revolving restaurant, Patang, in Ahmedabad. The company is exploring similar F & B management opportunities.

It plans to serve companies and MNCs, BPO centres, shopping malls, theatres, etc. catering for them and providing food packs. This business is likely to generate additional revenues and profits.

BBHL expects a good response for the Surat hotel as well as for club membership at its Surat Club, adjoining the hotel. It expects Rs 500 million in revenue and Rs 150 million in operating profit from the Surat hotel in the first year of operation.

The catering business generates free cash, as it receives payments in cash and obtains credit from its suppliers. Hence, the working capital required is low.

Major risks

The company had a negative cash flow in FY04 and FY06 due to continuous expansion of the business.

Delay in implementing the Surat project might affect profitability.

Revenue arises from catering contracts at various hotels/ clubs and party plots. On expiry, these contracts might not be renewed; or might even be terminated before expiry, resulting in loss of revenue and profits.

BBHL’s business is seasonal, with greater revenue arising in the October-March period. Any disturbances/ disruptions during this period might result in loss of revenue and profits.

Management Vision

In the long run, BBHL plans to set up 5-star hotels in Ahmedabad (2nd hotel in 2008), Jaipur (2011), Hyderabad (2014), Lucknow (2017) and Mumbai (2020). It is evaluating several proposals to acquire property for its new hotel at Ahmedabad.

Business Development

BBHL expects a good response to the 5-star hotel now being set up at Surat. This hotel will have 100 rooms (deluxe, suites and a presidential suite). It will have two large banquet halls, which can be partitioned as required. The hotel will also have a business center, with a boardroom, conference rooms, a world-class spa, a pub, a discotheque, etc. The company plans to develop a separate club adjoining the hotel. BBHL is likely to enroll members for the club and expects a good response for membership. The company has 1,000 people, consisting of 10 master chefs and a catering staff of 650 for Ahmedabad and 45 for Surat.

Competitive Environment

At present, there is no organized player in the catering business in Ahmedabad and Surat and hence the company enjoys a “healthy” market share (a monopoly) in the premium segment. There are other cooks in the unorganized sector who undertake contracts for wedding and other functions. However, unorganized players do not have a centralized kitchen; hence, the cooking is done at the wedding site, resulting in hindrances and disturbances. Since the business of catering is unorganized, most transactions are conducted in cash. Hence, the unorganized players are at an advantage, as they do not pay tax. The company pays 6.4% service tax and 4% VAT. This renders it less competitive than those in the unorganized sector. With the rise in corporate clients, it does not envisage a problem on this front.

Financials and Valuations

In April ’07, Bhagwati came out with a public issue of 23 million shares at Rs 40 each, aggregating Rs 920 million. Its equity capital then rose–-from Rs 62.9 million to Rs 292.9 million. The catering service has done well in the past five years. The number of meals supplied per day has jumped from 200/300 in FY03 to 1,500/2,000 in FY07. The company derives over 66% of its revenue from F&B and the other 34% from its hotels business. It charges from Rs 350 to Rs 900 a meal and provides personalized service. A minimum order has to be for 300 people (off-season) and 500 in season, resulting in revenue ranging from Rs 0.1million--0.45million on each order. The typical room rate in Ahmedabad is Rs 5,000 per day and average occupancy is 75-80%. BBHL is likely to commence catering services in Mumbai and is likely to generate sales of Rs 29 million-35 million in FY08 and Rs 135 million-150 million in FY09, with an EBIDTA margin of about 35%.

Valuations

At the CMP of Rs 37,the stock trades at 9.7x FY08E EPS of Rs 3.8 and at 7.3x FY09E EPS of Rs 5.1. With its unique business model of catering services as well as monopoly in premium catering, we are upbeat about the company’s long-term prospects.





Edelweiss Research report on Spentex Industries:

Spentex Industries’ (Spentex) Q4FY07 results were below our expectations. Net revenues grew 18% Q-o-Q to Rs 3.13 billion. Pressure on realisations and higher power expenses caused EBITDA margin to decline 160bps Q-o-Q to 11.3%. Higher depreciation costs, on account of revaluation of assets, caused PBT to decline 186% Q-o-Q, bringing about a loss of Rs 67 million. PAT decreased 124% Q-o-Q, causing a loss of Rs 31 million. There was a deferred tax write-back of Rs 50 million.

For the full year FY07, Spentex (consolidated) reported revenues of Rs 9.41 billion. Its EBITDA margin was at 11.9% (12.3% in 9MFY07) versus our estimate of 12.4% for FY07.

Spentex also announced the acquisition of Schoeller Textil (Schoeller) headquartered in Germany, with manufacturing plant in the Czech Republic. Schoeller is the European market leader in ‘corner markets’ in the yarn industry and manufactures special sewing thread yarns, carpet warp yarns, and core yarns for weaving mills. Schoeller was valued at Euro 25 million for the transaction (FY06 revenues of Euro 54.5 million, EBITDA of Euro 5.8 million).

We expect earnings downsides in FY08 from our earlier estimates, primarily on the back of Rupee appreciation and decline in yarn prices. However, scale-up of all the capacities acquired in FY07 and the company’s continued inorganic growth at inexpensive valuations imply strong growth in EBITDA and profitability, going forward. We have revised our FY08 earnings downward to factor in the appreciated rupee and lower yarn prices. We maintain ‘BUY’ on Spentex owing to its strong business model that enables it to earn superior RoCEs. At CMP, the stock is trading at a PE of 4.8x and EV/EBITDA of 4.6x on our FY08E consolidated earnings.

Result highlights and outlook

Topline growth muted, power, and depreciation costs create further bottomline pressures Net revenues grew 18% Q-o-Q to Rs 3.13 billion. Pressure on realisations and higher power expenses (power costs in Maharashtra units peaked at Rs 5.2/ unit in February as against Rs 4.25 now) caused EBITDA margin to decline 160bps Q-o-Q to 11.3%. Higher depreciation costs of Rs 247 million as against Rs 152 million in Q3 FY07 (due to revaluation of assets) caused PBT to decline 186% Q-o-Q bringing about a loss of INR 67 mn. PAT decreased 124% Q-o-Q, causing a loss of Rs 31 million. There was a deferred tax write-back of Rs 50 million.

Yarn prices to keep earnings subdued in FY08; acquisitions to compensate

An appreciated Rupee, coupled with pressure on yarn prices, is likely to keep topline and margins under pressure in FY08. However, Spentex will be able to derive full utilization of the capacities it acquired in FY07 in FY08. Also, the company continues to pursue its strategy of inorganic growth at inexpensive valuations, which implies strong growth in EBITDA and profitability.

Revised proforma numbers

We have revised our FY08 and FY09 estimates to factor in lower yarn realizations and a full year average Re/USD conversion rate of 43 as against 45 earlier. We have also factored in estimates for the Czech acquisition in the proforma consolidated estimates.

Schoeller Textile acquisition to be value accretive

Spentex also announced the acquisition of Schoeller Textil (Schoeller) headquartered in Germany, with manufacturing plant in the Czech Republic. Schoeller is the European market leader in ‘corner markets’ in the yarn industry and manufactures special sewing thread yarns, carpet warp yarns, and core yarns for weaving mills. Schoeller was valued at Euro 25 million for the transaction (FY06 revenues of Euro 54.5 million, EBITDA of Euro 5.8 million). The deal involves share purchase of 100% of Schoeller Litvinov k.s., the Czech Republic company along with 11 employees in Germany based front end operations from Leopold Schoeller.. This will be financed completely though the books of Spentex’s Netherlands based subsidiary (SNPV) which will raise a debt of Euro 17 million to infuse equity and debt into Schoeller and to cater to other costs.

Valuations- Inexpensive, upsides to come from future acquisitions

We believe, Spentex will continue to pursue inorganic growth opportunities, which will drive its asset base growth at low costs. We maintain ‘BUY’ on Spentex owing to its strong business model, which enables it to earn superior RoCEs on the spinning operations. At CMP, the stock is trading at a PE of 4.8x and EV/EBITDA of 4.6x on our FY08E consolidated earnings.




Prabhudas Lilladher upbeat on Bhagwati Banquets

Investment Highlights

Just now, it monopolises premium catering in Ahmedabad and Surat and commands a high (about 35%) operating margin from this business. The company wants to expand catering business to other major cities.

It plans to branch out to other cities like Mumbai, Jaipur, Jodhpur, etc., to become a national player. From October ’07, it will commence catering services in Mumbai. The entry into other cities is likely to improve the sales and profitability of the company.

BBHL has plans to enter into tie-ups with clubs for providing F & B services, resulting in additional revenue and profits.

In FY07, it has undertaken the F&B management of the revolving restaurant, Patang, in Ahmedabad. The company is exploring similar F & B management opportunities.

It plans to serve companies and MNCs, BPO centres, shopping malls, theatres, etc. catering for them and providing food packs. This business is likely to generate additional revenues and profits.

BBHL expects a good response for the Surat hotel as well as for club membership at its Surat Club, adjoining the hotel. It expects Rs 500 million in revenue and Rs 150 million in operating profit from the Surat hotel in the first year of operation.

The catering business generates free cash, as it receives payments in cash and obtains credit from its suppliers. Hence, the working capital required is low.

Major risks

The company had a negative cash flow in FY04 and FY06 due to continuous expansion of the business.

Delay in implementing the Surat project might affect profitability.

Revenue arises from catering contracts at various hotels/ clubs and party plots. On expiry, these contracts might not be renewed; or might even be terminated before expiry, resulting in loss of revenue and profits.

BBHL’s business is seasonal, with greater revenue arising in the October-March period. Any disturbances/ disruptions during this period might result in loss of revenue and profits.

Management Vision

In the long run, BBHL plans to set up 5-star hotels in Ahmedabad (2nd hotel in 2008), Jaipur (2011), Hyderabad (2014), Lucknow (2017) and Mumbai (2020). It is evaluating several proposals to acquire property for its new hotel at Ahmedabad.

Business Development

BBHL expects a good response to the 5-star hotel now being set up at Surat. This hotel will have 100 rooms (deluxe, suites and a presidential suite). It will have two large banquet halls, which can be partitioned as required. The hotel will also have a business center, with a boardroom, conference rooms, a world-class spa, a pub, a discotheque, etc. The company plans to develop a separate club adjoining the hotel. BBHL is likely to enroll members for the club and expects a good response for membership. The company has 1,000 people, consisting of 10 master chefs and a catering staff of 650 for Ahmedabad and 45 for Surat.

Competitive Environment

At present, there is no organized player in the catering business in Ahmedabad and Surat and hence the company enjoys a “healthy” market share (a monopoly) in the premium segment. There are other cooks in the unorganized sector who undertake contracts for wedding and other functions. However, unorganized players do not have a centralized kitchen; hence, the cooking is done at the wedding site, resulting in hindrances and disturbances. Since the business of catering is unorganized, most transactions are conducted in cash. Hence, the unorganized players are at an advantage, as they do not pay tax. The company pays 6.4% service tax and 4% VAT. This renders it less competitive than those in the unorganized sector. With the rise in corporate clients, it does not envisage a problem on this front.

Financials and Valuations

In April ’07, Bhagwati came out with a public issue of 23 million shares at Rs 40 each, aggregating Rs 920 million. Its equity capital then rose–-from Rs 62.9 million to Rs 292.9 million. The catering service has done well in the past five years. The number of meals supplied per day has jumped from 200/300 in FY03 to 1,500/2,000 in FY07. The company derives over 66% of its revenue from F&B and the other 34% from its hotels business. It charges from Rs 350 to Rs 900 a meal and provides personalized service. A minimum order has to be for 300 people (off-season) and 500 in season, resulting in revenue ranging from Rs 0.1million--0.45million on each order. The typical room rate in Ahmedabad is Rs 5,000 per day and average occupancy is 75-80%. BBHL is likely to commence catering services in Mumbai and is likely to generate sales of Rs 29 million-35 million in FY08 and Rs 135 million-150 million in FY09, with an EBIDTA margin of about 35%.

Valuations

At the CMP of Rs 37,the stock trades at 9.7x FY08E EPS of Rs 3.8 and at 7.3x FY09E EPS of Rs 5.1. With its unique business model of catering services as well as monopoly in premium catering, we are upbeat about the company’s long-term prospects.