Ranbaxy Laboratories - Uncertainty prevails

The FDA's moves against Ranbaxy may mean physicians and patients opt for other, 'non-controversial' generics in a highly commoditised market. Though we cut our estimates, the risks may not be fully priced in and more pain cannot be ruled out. Sell.

FDA ban - cascading effect possible
The US FDA first issued a warning to Ranbaxy, regarding its Paonta Sahib plant, in June 2006. In July 2008, the US Justice Department (independent of the FDA) filed a motion alleging fraudulent conduct and improper record-keeping by Ranbaxy. So while the FDA has stated it doesn't believe Ranbaxy's products are harmful, patients and physicians may still move to 'less controversial' generics in what is a highly commoditised market, affecting the sales of Ranbaxy's other products in the US.

Estimates cut, but risks may not be fully priced in; more pain possible
With existing inventories and the weak rupee limiting damage to the top line in 2008, we expect the full impact of the FDA measures will be felt from 2009. We have cut our operating margin estimate (SGA expenses unlikely to fall as much as sales), which knocks 40% off our 2009F EPS. Our estimates do not capture all the risks - there could be more pain if the FDA places more of Ranbaxy's drugs or plants on its banned list or raises safety issues (currently only manufacturing issues) or if more countries place similar curbs on Ranbaxy's products.

FTF accounts for a third of target price; we downgrade to Sell from Hold
Our revised estimates and target price are based on the scenario post the completion of the Daiichi open offer. Due to the uncertain environment, the worst may not be over for Ranbaxy. We believe Ranbaxy may be a victim of political pressure on the FDA to be 'proactive', and a resolution may take some time, especially as the Paonta Sahib issue has not been resolved for over two years. The FTF one-off pipeline represents 33% of our target price, which is also fraught with uncertainties. For instance, valcyclovir HCL (generic Valtrex), one of the agreements Ranbaxy has had with GSK and which is due to launch in 2009, is also on the list of banned drugs. Similarly, patients could prefer Dr Reddy's version of generic Imitrex to Ranbaxy's (both to be launched at end-2008; Dr Reddy's is the AG of GSK, while Ranbaxy is the FTF holder). The stock trades at 25.4x core 2009F EPS and seems expensive, especially in the current environment

NIIT Technologies - Management meeting highlights

NTL remains cautious about the impact of global macro issues on its clients. However, most clients, which were in a 'wait-and-watch' mode earlier in the year, have now assessed spending priorities, with increased preference for offshore-led engagements. Management believes none of its clients are in bankruptcy or takeover situations. The new ROOM solutions version looks on track for an early October launch; order intake should pick up in the March 2009 quarter after one or two implementations are completed. The BPO practice has been fully restructured and is now aligned to IT Services. Management expects to hold margins in FY09 through operational efficiency and scale-up of the non-linear business, mitigating the impact of potential revenue loss from its US$222m hedge position. Overall, we retain our view of NTL reporting a top-line recovery in 2H09 and holding margins in FY09. The stock appears to be pricing in perpetually negative earnings growth, which we believe is pessimistic. The stock offers 7% trailing dividend yield at current prices. 

Key highlights 

.. Overall, NTL remains cautious about the macro challenges facing clients, but is confident about growing in line with the IT services sector. None of its clients are facing bankruptcy/consolidation situations, so far. Management believes that clients have now re-assessed their spending priorities, with several travel and transportation clients looking to invest in offshore-led engagements. 

.. NTL expects to maintain FY09 operating margins around FY08 levels though improved operational efficiency, building in potential hedging losses to be accounted in revenues in FY09 (hedge position of US$222m at end-1Q09, at Rs40.11/US$). Management expects to achieve this by raising utilisation to 80%+ levels by end-FY09 (78% in 1Q09), raising the share of non-linear service revenues and improving offshore effort mix by 1% per quarter in FY09. 

.. The next version of the ROOM solutions platform looks on track for an early October launch. While initial uptake in 3Q08 will likely be limited to one to two clients,management expects order intake to start gathering pace in 4Q09, once a successful implementation is completed. 

ICICI Bank - Mark-to-market vs default risk

ICICI Bank's exposure to global financial risk through its international subsidiaries does not appear material. A scenario analysis indicates that potential losses in the international assets portfolio (largely comprising global banks and financial institutions) are less than 2% of the bank's FY09F net worth, even in a worst-case scenario. In the past, the cumulative default rate of banks globally over a five-year period has been less than 1%, according to Fitch. We see value in ICICI Bank's stock and reiterate our Buy rating. 

International subsidiaries - exposure to global financial risk exists, but does not appear material 

We believe the market’s reaction to ICICI Bank’s exposure to global financial risk is overdone. In our base case scenario of a 2% default rate, we estimate that the risk is 1.2% of FY09F net worth. Even in our worst case scenario of a 3.0% default rate, losses in the international asset portfolio (largely comprising exposure to global banks and financial instituions) would not exceed 1.8% of FY09F net worth. However, the risk is that near-term earnings could surprise negatively due to mark-to-market losses arising from the decline in value of securities held. 

Note that our scenario analysis is based on cumulative failure rates of all banks as per Fitch ratings (1990-2006). According to Fitch, the probability of a bank failing is significantly greater than it defaulting. For instance, the cumulative default rate for all banks over a fiveyear period is less than 1.0%, compared with a failure rate of 5.94%. 

ICICI Bank has investment paper that is generally rated ‘A’ and above in the international subsidiaries. According to Fitch, the failure rate is lower for banks with higher ratings. For instance, for banks rated A, the failure rate is 0.0%. 

We believe ICICI Bank offers value at this price and we reiterate our Buy rating. The stock trades at 14.2x FY09F earnings and at 1.4x FY09F adjusted book value after writing off 100% pre-tax net NPLs. 

Aban Offshore - Re-pricing is key

Aban Singapore's jack-up fleet is up for contract re-pricing between now and 1H09. We believe this is the key to stock price performance. That said, Aban is heading into peak earnings, which should maintain earnings momentum. Revised TP, Rs2,740. 

Re-pricing holds the key 

We believe most deepwater assets are booked into 2010 with charterers willing to book 2011 newbuild deliveries on long-term contracts. The order backlog with deepwater operators clearly shows the strength in this market. That said, the jack-up market is scheduled to see deliveries of 59 newbuilds (16.3% of global fleet) between 2H08 and end-2009 (not adjusting for delays and contracted rigs). Consequently, jack-up rates are likely to see some pressure in 2009, in our view. Aban Singapore's jack-up fleet is up for contract re-pricing between now and 1H09. This holds the key to stock performance, in our view. We have lowered our day rate assumption on Aban Singapore's jack-up fleet by 12.5% and reduced utilisation from 95% to 90%, which Aban should be able to achieve, in our view. 

Heading into peak earnings 

With all assets operational in FY10, we expect Aban's earnings to more than double, which should maintain the earnings momentum. On peak earnings, we expect Aban to generate net operating cash flows of US$530m, which is likely to be used to pay down the consolidated debt of US$3bn. With a leveraged balance sheet, Aban will find it hard to grow assets without equity dilution. Further, the jack-up day rates of US$175,000 that we expect in FY09 are unlikely to increase. 

Valued at 3.9x FY10 P/B 

While we have lowered our FY09-10F earnings by 55% and 15% respectively, we think that is factored into the stock price, which has corrected by 55% from its peak last January. The reasons for our earnings cuts are: 1) reduced utilisation on Aban S'pore assets, 2) reduction in Aban S'pore jack-up day rates, 3) higher opex estimates. Based on three-year forward average RoE of 62.7% and CoE of 16.5%, we value Aban Offshore at 3.9x FY10F P/B (vs 3.6x FY10F P/B earlier), which we discount back to FY09F. This results in our revised target price of Rs2,740 (down from Rs3,980). At our target price, Aban would trade at 6.3x PER and 5.4x EV/EBITDA on three-year forward earnings. Our global offshore rig universe trades at 6.2x PER and 4.8x EV/EBITDA on three-year forward earnings. 

Engineers India

Strong order flow over the last two years ensures fast growth for this cash- and skill-rich PSU

The energy sector in India is at a take-off stage. Huge investments are planned in almost all areas of energy. With a history of being involved in consultancy and engineering services for almost all key projects in the oil and gas sector, Engineers India (EIL) is now well-poised to take advantage of the considerable investments in the hydrocarbon and energy sectors, particularly in refining, transportation, storage and marketing.

EIL, a government undertaking (90.40% stake owned by the Union government), renders project consultancy and engineering services and also undertakes lumpsum turnkey (LSTK) projects.

An all-time high business totaling Rs 3202 crore was secured by EIL in the year ending March 2008 (FY 2008) as against Rs 1916 crore booked in FY 2007. This is a growth of 67%, and is on top of a 140% rise in orders in FY 2007. The broad breakup of new orders is: Domestic consultancy Rs 1827 crore (Rs 930 crore in FY 2007), domestic LSTK Rs 1111 crore (Rs 918 crore), and overseas Rs 264 crore (Rs 68 crore).

The new business includes a Rs 1111-crore LSTK contract, which was secured from Chennai Petroleum for turnkey execution of the diesel hydrotreater (DHT) and related units as part of the Euro IV quality upgradation project under implementation.

In the domestic consultancy business, EIL bagged the largest-ever single consultancy assignment from HPCL-Mittal Energy for engineering, procurement and construction management (EPCM) services for the nine-million-tonne grassroots Guru Gobind Singh Refinery at Bothinda in Punjab against stiff competition from major international companies.

In the petrochemicals sector, EIL bagged an EPCM contract for setting up from the grassroots a dual-feed (gas/naphtha) petrochemicals complex of Brahmaputra Cracker and Polymers (BCPL) at Lepetkata in Assam. A petrochemicals assignment of this magnitude has come after a long gap of about nine years, when the company was involved in the setting up of a gas cracker for IPCL at Gandhar in Gujarat.

Another major breakthrough has been in the infrastructure sector, where a major assignment was awarded by the Delhi Jal Board for development of interceptor sewers. This is being implemented for the first time in India. The project will help in the reduction of pollution of the Yamuna river.

In the metallurgical sector, EIL secured a major alumina refinery project in Viziangaram, Andhra Pradesh, from JSW Aluminium.

EIL sustained the growth momentum of FY 2008 well into the first quarter of FY 2009. Sales rose a strong 68% to Rs 252.44 crore in the quarter ended June 2008. The strong topline growth was powered by the resurgence of LSTK segment, which posted a revenue expansion of 596% to Rs 89.45 crore and a 272% spurt to Rs 4.39 crore in profit before interest and tax (PBIT). The consultancy & engineering projects (C&EP) division spurted 18% to Rs 162.99 crore on a higher base, with its PBIT jumping 37% to Rs 44.16 crore. Due to lower margin in LSTK, the net profit growth was 32% to Rs 50.31 crore.

The Union cabinet has approved the proposed joint venture (JV) between EIL and Tecnimont of Italy. The JV will undertake execution of engineering, procurement and construction (EPC) jobs, mostly in the Middle East, in the first week of June 2008. EIL would employ its expertise in engineering and project management, while Tecnimont would be responsible for construction and day-to-day management. Earlier to this, EIL had received the nod of the Union government for formation of a JV company with Tata Projects to take up EPC projects in the oil and gas, fertilser, power and infrastructure sectors in India as well as abroad.

We expect EIL to register net sales and net profit of Rs 1276.80 crore and Rs 253.37 crore in FY 2009. This gives an EPS of 48.7. At the current market price of Rs 568, the scrip is available at a P/E of 11.7 times its expected FY 2009 earning. With around Rs 1250 crore of liquid funds (Rs 223 per share), the company is cash-rich.

CESC

Power capacity expansion to be commissioned every year from FY 2010 for the next few years

CESC is an RPG group company. It has an integrated utility business model with a presence in generation, mining and distribution. The company was commissioned in 1899. Since then, it has been offering power to consumers in its Kolkata licence area, which has expanded from 5.64 sq miles to 567 sq km over the years. The number of consumers has grown from 6,000 to 2.1 million over time. At 6.4 billion units, its own generation accounts for about 89% of the energy input in its distribution network. Also, Integrated Coal Mines (26% owned by CESC), produces 2.2 million tonnes of coal (50% of its coal requirement).

With a total installed capacity of 975 MW from the four generating units at Budge Budge (500 MW), Southern (135 MW), Titagarh (240 MW), and New Cossipore (100 MW), CESC has been improving its operating efficiency parameters on a consistent basis to emerge as a competitive electric utility. This has been done through a mix of increasing the plant load factor (PLF), and reducing auxiliary consumption, transmission and distribution (T&D) losses, and power pilferage, which have led to greater control over the number of units purchased from the West Bengal State Electricity Board (WBSEB).

CESC is working on a 250-MW Budge Budge expansion (expected completion September 2009) and the 600-MW Haldia power project. The company has acquired around 75% land for the Haldia project and has also obtained coal linkage. It is in the process of complying with the terms of reference for getting the final environmental clearance. Various other clearances — water consumption and erection of chimney — have been obtained. The project is likely to be completed by the year ending March 2011 (FY 2011).

The current capacity addition is entirely for distribution in its licensed area in Kolkata, Further, coal mine allocation (110 million tonnes of reserves) can support 1,000 MW in Jharkhand, to be commissioned by FY 2012. Opportunities are also being explored both in and outside West Bengal for merchant power plants. Thus, CESC’s effective power capacity should stand at 2,825 MW by end FY 2012 compared with the current 975 MW.

CESC Properties, CESC’s 100% subsidiary, is developing a retail mall on three acres of land (constructed area of 0.7 million square feet). This is expected to be completed by FY 2010. The cost of development of the mall is estimated to be Rs 125 crore-Rs 150 crore. The West Bengal Electricity Regulatory Commission (WBERC) norms permits the company to retain two-third of the non-tariff income.

Besides this, CESC has sizeable real estate at its plants at Mulajore (43 acres) and New Cossipore (23 acres). The company has recently acquired another 5.5 acres, comprising 3.5 acres at Haldia and two acres at Howrah, for commercial and residential development.

Spencer’s Retail (SRL), a well established company in the business of operating and managing a large chain of retail stores across India with ambitious growth plans for the future, became CESC’s subsidiary from 1 April 2007. CESC holds a 94.7% stake. SRL currently operates 383 stores under the Spencer’s brand in 59 cities with retail space of approximately 1.2 million square feet. In addition, there are also around 90 stores in 28 cities under the Music World and Books & Beyond brands for music, home video and related products.

Sales grew 8% to Rs 783.00 crore in the quarter ended June 2008. Other income increased 111% to Rs 59 crore, which saw profit before interest, depreciation and tax spurting 13% to Rs 181 crore. The rise in other income was mainly on account of cash and investments in the books. Cash and bank balances jumped from around Rs 750 crore end June 2007 to about Rs 1050 crore end June 2008, while investments were up 135% to Rs 570 crore.

Interest cost declined 18% to Rs 32 crore and depreciation went up 2% to Rs 42 crore. Thus, profit before tax (PBT) went up an impressive 34% to Rs 107 crore. Extraordinary (EO) income was nil against Rs 13 crore. PBT after EO fell 15% to Rs 107 crore. After providing for tax (up 18% to Rs 13 crore), net profit advanced 15% to Rs 94 crore.

We expect CESC to register sales and net profit of Rs 3028.98 crore and Rs 372.54 crore, respectively, in FY 2009. On an equity of Rs 126 crore and face value of Rs 10 per share, EPS works out to Rs 29.6. The share price trades at Rs 285. P/E works out to 9.6.

Attitude

Harvard and Stanford Universities have reported that 85% the reason a person gets a job and gets ahead in that job is due to attitude; and only 15% is because of technical or specific skills.
Interesting, isn’t it? How much money you spent on your education? And how much you spent on building your positive attitude?
That hurts.

Now here is an interesting thought.
With the "right" attitude, you can and will develop the necessary skills.
So where is your emphasis? Skill building? Attitude building? Unfortunately, "Neither" is the real answer. Perhaps if more people knew how simple it is to develop and maintain a positive attitude they would invest more time doing so.

So here we go.

Five steps to staying positive in a negative world:

*Understand that failure is an event, it is not a person. Yesterday ended last night; today is a brand new day, and it is yours. You were born to win, but to be a winner you must plan to win, prepare to win, and then you can expect to win.

*Become a lifetime student. Learn just one new word every day and in five years you will be able to talk with just about anybody about anything. When your vocabulary improves, your I.Q. goes up 100% of the time, according to Georgetown Medical School .

*Read something informational or inspirational every day. Reading for 20 minutes at just 240 words per minute will enable you to read 20 (200-page) books each year. That is 18 more than the average person reads! What an enormous competitive advantage . . . if you will just read for 20 minutes a day.

*The University of Southern California reveals that you can acquire the equivalent of two years of a college education in three years just by listening to motivational and educational cassettes on the way to your job and again on the way home. What could be easier?

*Start the day and end the day with positive inputs in your mind. Inspirational messages cause the brain to flood with dopamine and nor epinephrine, the energizing neurotransmitters; with endorphins, the endurance neurotransmitters; and with serotonin, the feel-good-about-yourself neurotransmitter. Begin and end the day by reading or doing something positive!

Remember: Success is a process, not an event. Invest the time in your attitude and it will pay off in your skills as well as in your career..

Who Benefits from buy backs?

Despite recent buyback issues’ offer price at a premium, the shares did not witness any major uptrend

Though most of the recent buyback issues’ offer price was at a premium to the prevailing market prices, the shares did not witness any major uptrend during the buyback period, thus clearly showing that the buyback benefited the companies and not investors. Following are the companies whose buyback programmes were open as on end August 2008.

Leading Indian player in technical textiles, refrigerant gases with operating interests in packaging and pharma intermediates SRF approved open market share buyback on 25 April 2008. The offer, at a price not exceeding Rs 160, is slated to remain open up to 24 April 2009. At this maximum price, the company would spend Rs 70 crore, which represents 9.6% of the aggregate of the company’s paid-up equity capital and eligible free reserves end March 2008. Promoters held a 42.11% stake end June 2008.

The maximum buyback price stood at a premium of 15.07% over the closing price of Rs 139.05 on the BSE prevailing on the date of the board meeting. From 2 July 2008 till end August 2008, 21.11 lakh shares were bought back. The SRF stock had hit a 52-week high of Rs 207.40 on 4 January 2008, but had fallen 4.42% to Rs 132.90 end August 2008.

At its board meet held on 25 July 2008, small-cap container handling business firm Gateway Distriparks approved buyback of shares at a price not exceeding Rs 110 per share payable in cash for an aggregate amount not exceeding Rs 64 crore. The offer size represents 10% of the aggregate of the company’s paid-up equity capital and free reserves end March 2008.

The maximum buyback price stood at a premium of 23% over the closing price of Rs 84.70 on 24 July 2008. Since the buyback opening date of 4 August 2008 Gateway Distriparks had bought back 3.24 lakh shares end August 2008. Since the approval of buyback by the company’s board, the stock had moved up 6.63% to Rs 90.80 on 29 August 2008. It was, however, below the buyback price of Rs 110.

Mid-cap manufacturer and seller of refrigerant gases Gujarat Fluorochemicals approved its buyback on 23 March 2008 at a price not exceeding Rs 300 per equity share and total amount not exceeding Rs 61.43 crore, representing approximately 10% of the aggregate of the paid-up equity capital and free reserves eligible end March 2007. Promoters held a 66.45% stake in the company end June 2008.

Since the buyback opened on 21 August 2008, Gujarat Fluorochemicals had bought back 37,643 shares end August 2008. Since the approval of the buyback, the stock had risen 14.6% to Rs 205.25 on 29 August 2008. This was, however, below the buyback price of Rs 300.

Manufacturer and exporter of diamond and gold jewellery products Goldiam International had announced on 25 February 2008 its intention to buy back up to 5.5% of the equity share capital of the company at a price not exceeding Rs 85 from the open market at a cumulative output up to Rs 9.3 crore. Promoters held a 51.24% stake in the company end June 2008.

The buyback of shares was at a maximum price of Rs 85, representing a premium of 52.34% to the closing price on the BSE on the date of the passing of the special resolution through postal ballot, i.e., 21 April 2008. Initiated on 7 May 2008, the company bought back 10.05 lakh shares end August 2008. The stock had hit a 52-week high of Rs 102.80 on 7 January 2008. Since the announcement of the buyback, the scrip had lost 38.9% to Rs 39.65 on 29 August 2008.

On 6 February 2008, mid-cap IT firm Patni Computer Systems’ board approved buyback of shares at a maximum price of Rs 325 and a minimum of 72.92 lakh shares, representing 5.25% of the paid-up equity capital end December 2007 and totaling Rs 237 crore. Indian promoters held 29.2%, stake end June 2008.

The maximum buyback price offered was at a premium of 20% over the closing price on 5 February 2008 — a day prior to the board meeting. Since the buyback opened on 10 July 2008, Patni Computer Systems had bought back 44.71 lakh shares. Since the board’s approval of the buyback, the stock had lost 17.7% to Rs 230.50 on 29 August 2008.

Integrated offshore oilfield services provider Great Offshore announced on 31 March 2008 buyback of equity shares at a price not exceeding Rs 750 per equity share. The aggregate amount of Rs 55.24 crore did not exceed 10% of the total paid-up capital and free reserves, as per the audited balance sheet, end March 2007. Promoters held a 20.3% stake end June 2008.

The maximum price was at a premium of 17% over the closing price of the company’s share end March 2008. The buyback opened on 7 May 2008. Till 22 July 2008, Great Offshore had bought back 8.81 lakh shares. Since the date of the buyback announcement, the stock had fallen 16.63% to Rs 531.60 on 29 August 2008.

Reliance Infrastructure (previously Reliance Energy) said on 5 March 2008 it would buy back shares up to a maximum price of Rs 1600 at a premium of approximately 10% to the closing share price on the date of the board meeting.

An amount of Rs 800 crore ($200 million) was expended in the first phase on the share buyback. This amount represented 10% of the paid-up equity share capital and its free reserves. A further Rs 1200 crore ($300 million) was to be expended in the second phase. This represented an additional 15% of the paid-up equity share capital of the company and its free reserves. Promoters held 36.65% stake end June 2008.

The buyback opened on 17 March 2008. Reliance Infrastructure had bought back 61.6 lakh shares end August 2008. Since the commencement of the buyback program on 17 March 2008, the stock had shed 16.7% to Rs 991.15 on 29 August 2008.

Mid-cap auto ancillary company ANG Auto approved buyback of shares on 12 November 2007 at a price not exceeding Rs 215 per share for an aggregate amount not exceeding Rs 16.12 crore. The buyback size at the maximum level represented 24.30% of the aggregate paid-up equity share capital and free reserves end March 2007.

At the maximum buyback price of Rs 215 per share and for the buyback size not exceeding Rs 16.12 crore, the maximum number of shares that could be bought back was 7.5 lakh shares, representing 6.62% of the outstanding fully paid-up equity shares end March 2007.

The maximum buyback price of Rs 215 per share offered a premium of approximately 29.40% over the closing price prevailing at the date of board meeting held on 12 November 2007 for approving the buyback. As on 27 August 2008, ANG Auto had bought back 46,460 shares. Since the board’s approval of the buyback, the stock had plunged 58.8% to Rs 68.35 on 29 August 2008.

Buy Back of Shares

Buyback is increasingly resorted to boost the stock price. But it also means that the company does not have any growth plans

Buyback is a reverse of issue of shares by a company. The company offers to take back its shares owned by the investors at a specified price. The price can be binding or optional to the investors. Buybacks have increased this year due to the decline in markets from all-time high. A depressed market is a ripe time for promoters to mop up shares at low prices without using personal funds.

There are many reasons why companies choose to buy back shares. Investors should study the reasons behind the company’s buyback strategy before tendering their shares. If companies have huge cash reserves with not many new profitable projects to invest, buyback is a way to reward investors. However, companies in emerging markets like India have growth opportunities. So this logic does not apply.

Many companies use buyback to show better financial ratios. Thus, return on assets (ROA) actually increases with the reduction in assets, and return on equity (ROE) rises as there is less outstanding equity. The earning per share (EPS) and the P/E ratio looks better after the buyback on reduced capital even though the earning may not improve. As investors scrutinise EPS and P/E before investing, the favorable ratios could boost the stock.

Some companies buy back stock to contain the dilution in promoter holding and EPS from the employee stock option plans (ESOPs). Any such exercise leads to increase in outstanding shares and drop in prices. This also gives scope for takeover bids as the share of promoters reduces.

Buyback is another strategy to maintain the share price in a bear run. By buying shares at a price higher than the prevailing market price, the company signals that its share valuation should be higher, thus stemming the fall. The stock repurchase program reaffirms the confidence the company has in its long-term growth and profitability, and demonstrates its commitment to enhance shareholder value by rewarding investors.

Buyback also has certain negative implications. Buyback sends signals that the market capitalisation of the shares has scope to improve and, thus, leads to speculative activities.

Second, the promoters’ holding increases subsequent to the capital reduction with the use of company funds. This is a setback for investors who stay put in the company, particularly in the growth sectors. A reduced capital decreases the borrowing power. If buyback is resorted to by incremental borrowings, the increased cost of capital proves to be detrimental to the company’s health. The financial flexibility of the company is curbed, consequently restricting the developmental process and may even prove fatal in contingencies, which cannot be ruled out in a business.

Buyback also prevents the company from raising equity capital for the next two years. This could impact the company’s growth process as it may not be able to use opportunities that may arise in the following two years for diversification, modernisation or expansion.

There are certain checks and balances investors must apply before participating in a buyback. Companies generally tend to buy back shares at a higher premium over the market price if they feel that their shares are under-priced. This decision to buy back often leads to increase in the share price. Investors should look at the share price movement immediately before the buyback. If there has been a significant rise, the assumption is that the promoters have been up to some manipulations.

Companies with huge debts are unlikely to have free cash. So investors should check the debt-to-equity ratio of the company. Companies that have just come to the capital markets to raise money are unlikely to be good candidates for buyback. When the management has passed special resolutions, with a lot of publicity, empowering the board to decide on the buyback date, there is scope for suspicion.

If investors feel the share price is undervalued, refrain from tendering the shares, as the company buying back the shares is indirectly conveying that its shares are undervalued. Despite strong fundamentals, the shares of a few companies are highly volatile and exhibit wild oscillation in prices. If investors want to play it safe and avoid volatility, selling out would be a better option. Decide to sell the scrip when the market price is equivalent to the highest in the offer band.

When a company announces a buyback, it is usually perceived by the market as a positive, which often causes the share price to shoot up. In one sense, this is good for shareholders because the dividend payout per share rises. On the other hand, it is an acknowledgement that the management can think of nothing better to do with company’s money than buy back its own shares. If a stock is undervalued and a buyback truly represents the best possible investment for a company, the buyback — and its effects — can be viewed as a positive sign for shareholders.

Watch out if a company is merely using buyback to prop up ratios to provide short-term relief to an ailing stock price or to get out from excessive dilution. The reward to the shareholders should be equitable and without discrimination and there should be no protection to one class or group of shareholders at the cost of other.

Buyback has provided MNCs the option to convert their Indian ventures into whollyowned subsidiaries, delist their shares and take complete control over their Indian ventures, and make decisions that could be detrimental to the interest of minority investors.

TATA CHEMICALS

After establishing itself as the world’s second-largest player in soda ash, the focus now is on growing the fertiliser business

Tata Chemicals (TCL) operates the largest and most integrated inorganic chemicals complex in India at Mithapur in Gujarat. It is among the largest producers of synthetic soda ash in the world. The company’s state-of-the-art fertiliser complex at Babrala in Uttar Pradesh has a remarkable record in energy efficiency. The phosphatic fertiliser complex at Haldia in West Bengal is currently the only manufacturing unit for diammonium phosphates/ nitrogen-phosphorus-potassium (DAP/NPK) complexes in West Bengal. The Haldia plant has production volumes exceeding 1.2 million tonnes per annum. The fertilisers, sold under the brand name, Paras, leads the market in West Bengal, Bihar and Jharkhand. TCL continues to enjoy leadership position in the salt market in India, with a total market share of 53.1%.

Improved market condition for soda ash in Europe and other Western markets, the improving macro scenario for the fertiliser sector, and the enhanced performance by the overseas subsidiary helped TCL to post a consolidated topline growth of 94% to Rs 2192.35 crore in the quarter ended June 2008 over the June 2007 quarter. Consolidated performance includes the numbers of its overseas subsidiaries as well as for the first time the numbers of General Chemicals Industrial Products Inc. (GCIP), US, which was acquired recently. GCIP’s natural soda ash plant is helping TCL to sustain its margin from rising energy and raw material prices.

The profit before tax (PBT) before extraordinary items (EO) increased 110% to Rs 351.64 crore. Provision of Rs 128.87 crore was made in the June 2008 quarter due to unrealised exchange loss or marked-to-market restatement (under AS-11) of foreign currency borrowing including ECBs raised to fund the purchase of GCIP. Thus, PBT after EO grew just 13% to
Rs 222.77 crore.

Going forward, soda ash prices are expected to remain firm over the medium term on demand from emerging economies in Latin America, the Middle East and parts of Asia. With TCL’s soda ash plants spread across four continents and contributing to about 20% of its international trade, TCL is best positioned to leverage the demand/supply gap in the key consumption regions.

TCL has a unique asset mix in the fertiliser segment with a presence in both urea and nitro-phosphates, mainly DAP. The company is going to be a beneficiary of the recent favorable Indian regulatory reforms that allow companies realisations partly aligned with international prices. TCL’s planned urea capacity expansion of about 20% at its Babrala plant is currently underway. Its overall margin is expected to improve in the year ending March 2009 (FY 2009) and FY 2010 once this new capacity, that could earn substantially better margin, comes on board. TCL has the requisite balance sheet strength to undertake further expansionary projects to leverage any tight urea supply/demand scenario in the international markets.

DAP is made from phosphoric acid, which can either be imported or manufactured from other raw materials such as rock phosphate and sulphur. Producers which have an assured supply of raw materials will be able to maintain optimal capacity utilisation. TCL primarily obtains phosphoric acid for its 670,000-tonne per annum nitro-phosphate plant in Haldia from its joint venture with OCP Group and Chambal Fertilizers. The new DAP policy provides incentives for efficient DAP producers by allowing them to retain 65% of the cost savings that arise from raw materials procurement if the procurement cost is less than 5% of the industry average or US$ 30 per tonne — whichever is lower.

We expect TCL to register consolidated adjusted EPS of Rs 27.3 in FY 2009. The share price trades at Rs 330. P/E works out to 12.

South Indian Bank

The old private sector bank with decent track record holds good upside potential in a deregulated banking environment

South Indian Bank (SIB), a private sector bank, was incorporated at Thrissur in Kerala, south India. The bank has a pan-India presence with a network of over 500 branches and over 210 ATMs across 23 states, and two Union Territories. Approximately 56% of the branches are in Kerala. The bank has no identifiable promoter and is managed by a team of professionals. Dr V.A Joseph is the chairman and has been at the helm of affairs since 2005. He was a career banker with Syndicate Bank before taking up responsibilities at SIB.

SIB came out with an initial public offering in 1998, followed it up with a 1:3 rights issue at a premium of Rs 30 in 2004, and launched a follow-on public issue at Rs 66 in 2006. The bank raised an equity capital of Rs 326 crore (two crore shares at Rs163 a share) through qualified institutional placement in September 2007. It has a 100% float. Among the largest shareholders are foreign institutional investors (FIIS) India Capital Fund, with a 7.7% holding; India Fund (4.5%); and Goldman Sachs Investments (3.7%). India’s another old private sector bank Federal Bank owns a 3.5% stake.

SIB’s interest earned grew a healthy 27% to Rs 371.61 crore in the first quarter ended June 2008 over the June 2007 quarter. With interest expended increasing 34% to Rs 268.83 crore, net interest income (NII) advanced 11% to Rs 102.78 crore. Other income was up 19% to Rs 34.28 crore, leading to net total income rising 13% to Rs 137.06 crore. Operating expense were steady at Rs 67.68 crore against Rs 67.72 crore. As such operating profit jumped 29% to Rs 69.38 crore. However, provisions & contingencies spurted by a notable 42% to Rs 10.68 crore. Thus, profit before tax rose 27% to Rs 58.70 crore. After providing for tax (up 26% to Rs 20.08 crore), profit after tax was up 27% to Rs 38.62 crore.

Around 44% of SIB’s deposits comprise low-cost current account and savings account (CASA) deposits and non-residential external (NRE) deposits. Of this, around 24% are CASA deposits and around 20% NRE term deposits, which collectively enable the bank to contain its deposit costs. Recently, due to a widening differential between interest rates of NRE deposits and domestic deposits, a slowdown in this deposit base has emerged, leading to slight pressure on margin. However, this is expected to be a temporary blip and the NRE proportion in total deposit base is likely to be maintained at around 20%. Going forward, it will sustain its margin due to its strong deposit franchise, despite upward pressures on cost of term deposits. SIB is working to add five lakh new savings accounts in the year ended March 2009 (FY 2009). This would mark a 3% increase in CASA.

Going forward, there is a scope of improvement in fee business. SIB’s fee income, as a percentage of assets (of 0.7%), is low compared with its peers (0.8-1%) and, thus, does not contribute significantly to its return on assets (RoA). The fee income is expected to grow strongly in future on growing remittances and increasing revenue from distribution of third-party products (insurance and mutual funds). With a 100% core banking solution (CBS) platform, bundling of various banking products will help the bank improve its fee revenues.

Capital adequacy ratio (CAR) of SIB stood at 13.93%. SIB has been able to manage its asset quality better over the past few years through higher recoveries and low delinquencies. Currently, gross NPAs stand at 1.99% and net NPAs just 0.49%.

SIB has a technology-enabled network of 500 branches, with a predominant presence in Kerala, Tamil Nadu, and Karnataka. The bank’s widely held shareholding, technology enabled network and private ownership structure makes it a prime acquisition candidate.

We expect SIB to register NII and net profit of Rs 423.50 crore and Rs 173.19 crore, respectively, in FY 2009. On current equity of Rs 90.4 crore and face value of Rs 10 per share, EPS works out to Rs 19.2. The share price trades at Rs 113 and P/E is just 5.9.

SIB’s current book value (BV) stands at Rs 126.3. Price to BV (P/BV) is 0.89. BV is expected to rise to Rs 142 (without considering bonus) in FY 2009. P/BV on FY 2009 estimated BV falls further to 0.80. SIB’s board and AGM have approved a bonus in the ratio one share for every four shares of face value of Rs 10 each.

HCL Tech

HCLI's 4Q08 results were a mixed bag. The telecom/office automation segment grew 4.3% qoq, as the business transition to Nokia was completed last quarter. System Integration order wins of Rs1.2bn in the last five months were a positive surprise and came to more than our orderbook estimates for the whole of FY09. While modest topline growth in the PC business was on the lines we expected, given the slowdown in industry PC shipments and weak consumer sentiment, the 70bp qoq margin slippage was a negative. Management attributed this to increased price competition. A forex loss of Rs71m also impacted reported earnings. We believe the stock could remain rangebound in the near term with these mixed results and potentially weak profitability numbers in the September 2008 quarter, due to further rupee depreciation.However, the SI order wins and qoq growth in the telecom segment are directional positives and underline our forecast of recovering revenue growth. Current valuations and a dividend yield of about 7% provide a good medium-term entry point. 

Consolidated revenues grew 4.4% qoq (1.6% yoy) to Rs31.1bn, 6.1% ahead of our estimates. The surprise came mainly from the telecom/office automation segment, where revenues grew by 4.3% qoq (5.9% ahead of our estimates). The PC segment grew modestly 4.5% yoy (3.4% qoq), due to the recent slowdown in industry PC shipments and the highbaseeffect of the system integration business from the previous year. 

EBITDA margins, at 3.4%, declined 71bp qoq (36bp below our estimates). The PC segment’s EBIT margins (ex-forex) slipped from 6.2% last quarter to 5.5%, mainly due to higher price competition, according to management. The telecom segment’s margins, at 3.1%, were in line with expectations. 

Reported PAT was down 23.2% yoy (-20.1% qoq) at Rs651m (13.3% below our estimates),mainly due to forex losses of Rs71m during the quarter. Excluding FX, normalised PBT was down 12.2% yoy (-11.9% qoq), 3.6% below our estimates. 

Great Offshore

Building on balance sheet strength 

In the last week, Great Offshore has made acquisitions worth about US$100m (GOFF's market cap, US$475m). The acquisitions may not be as big as the market expected,but they should not put the balance sheet at material risk, are still earnings accretive,in our view, and, in the current economic environment, seem prudent. 

Forays into port management services 

Great Offshore has signed definitive agreements to acquire 100% of two companies, KEI Ltd & RSOS Ltd, in all-cash deals worth a total of Rs1.6bn (US$36m). The company expects to complete the deals in two months. KEI & RSOS provide offshore support and port management services (including single-buoy mooring) based largely on east coast India. KEI 

has been awarded a comprehensive marine operation services contract for Gangavaram Port (15km south of Vishakapatnam) for 12 years from July’08. 

The two companies have a combined fleet of nine offshore support vessels (OSVs) and 10 harbour tugs with four vessels on order and due to be delivered in FY09. According to Great Offshore, aggregate expected revenues for the two companies are Rs1bn (US$23m) in FY09 with profit after tax margin of 30%. Great Offshore expects new-build deliveries and full-year operations at Gangavaram Port to generate growth in FY10. 

We have not studied the asset profile of KEI & RSOS. Given their existing profitable operations and long-term contracts in port management services (annuity characteristics),we believe the acquisitions are is reasonably priced at 5.3x FY09F earnings. 

NIIT Technologies - Strategic and Competitive Overview

NTL's revenue growth has faltered in recent quarters. We expect growth to pick up in 2H09, even as NTL tries to address growth challenges. We reiterate Buy despite significant earnings downgrades as current valuations appear unduly pessimistic.

Growth momentum derailed by several factors
We estimate NTL's revenue growth for the last 12 months at 13% yoy (US$ terms), which compares poorly with the 41% growth reported in the previous 12 months. This was led by a sharp decline in the BFSI vertical, even as business in the non-focus verticals continued to shrink. While the BPO business faced client-specific issues, revenues from ROOM solutions remained subdued,ahead of the new version release. In addition, the restructuring at Adecco has placed a question mark on the JV's growth prospects. With many of NTL's key clients facing profitability pressures,we expect their ability to spend to remain constrained in FY09. We project 11.7% top-line growth for NTL in FY09, below our 25% average growth estimate for the Top 5 players.

Signs of life in 2H09; management trying to address growth issues
While overall growth expectations for FY09 remain subdued, we expect a meaningful recovery to start in 2H09. The new version release of ROOM solutions, scheduled for September 2008, should result in higher order bookings in 3Q09. Management has indicated that the scale-down in BPO and the exit from non-focus areas are largely complete. A seasonally strong 2H for the domestic business should also provide a tailwind. We believe NTL's investment in building non-linear and differentiated services offerings is a step in the right direction. However, given the current concentration of ADM services (we estimate 70-75% of revenues), we believe it could take longerthan management expects for these initiatives to achieve the required critical mass.

Current valuations appear unduly pessimistic to us - Buy
NTL's valuations have compressed to 2006 levels, when the top line was depressed due to the company's focus-vertical strategy. We believe current valuations, at 4.8x our FY09F EPS (5% below consensus), price in perpetually negative earnings growth, even at a WACC of 16.2%. As valuations and dividend yield look compelling on both an absolute and relative basis, we reiterate Buy despite our significant earnings downgrades. We move from a DCF to PE-based valuation methodology, in line with our sectoral shift. Our target price suggests 28.7% total return (including 5.6% dividend yield) from current levels. We expect investor interest to return in 2H09, given the likely recovery in growth prospects.

Cipla - Key financial data.

At Cipla's annual general meeting (AGM), management guided for FY09 revenue growth of 12-15% and PAT growth in line with 1Q (ie 17%), but cautioned on rising costs. The guidance is largely in line with our FY09 forecasts, but strong export API business and the 400bp improvement in EBITDA margin recorded in 1Q, if sustainable, could positively surprise us. However, we highlight that technical knowhow income of Rs370m ytd still has a long way to go to reach the Rs1,534m we expect (our forecast implies a flat FY09) and could have an offsetting negative effect. We maintain our current forecasts. The stock trades at 22.4x for 2009F and appears expensive relative to its peers.

Management’s outlook – no surprises here Cipla’s management has guided for 12-15% FY09 revenue growth, in line with our 15.7% growth estimate. Management has cautioned on rising costs, which might depress operating margins. Our FY09 forecasts already factor in the expected rising costs and therefore our EBITDA margin forecast (excluding technical know-how income) is 18.1%, lower than the 20% reported in 1Q. Management expects 1Q net income growth of 17% to continue, which is marginally lower than our growth expectation of 18.6%.