A fair call

A good deal for Indian Rayon

Indian Rayon has picked up 16.45 per cent of Cingular Wireless' 33 per cent stake in Idea Cellular for $150 million.

With this, Indian Rayon now has a share of 20.74 per cent, while the Tatas will pick up the balance 16.45 per cent. As at end of August, Idea, which operates in the GSM space across eight circles, had a 9.2 per cent market share with 5.88 million subscribers.

The company has actually lost market share because last August its share was 10.6 per cent.

At Rs 660 crore for the 16.45 per cent stake, the equity value per subscriber works out to around Rs 6,829. Compare this with Bharti: at the current price of Rs 350, the equity value per subscriber would be around Rs 29,000. So that is more than four times the valuation for Idea.

Idea's average revenue per user (ARPU) is believed to be lower than the industry average which was Rs 394 for the quarter ended March 2005.

Bharti's ARPU, on the other hand, is above the industry average at around Rs 460.

With a pan-India presence, Bharti's subscriber base of 13.41 million is 2.3 times that of Idea's. Moreover, with a 21 per cent market share it is clearly the leader and, therefore, deserves a premium.

So given this, Indian Rayon has picked up the stake at a fair valuation. Perhaps Idea Cellular has suffered in the past because of too many stakeholders. That number is now down to two, the Tatas and the Birlas, which is good. It would be even better if it goes down to one.

Fortis' acquisition of Escorts Institute

The key takeaway from Ranbaxy-controlled Fortis Healthcare's acquisition of Escorts Heart Institute and Research Centre (EHIRC) is its emphasis on grabbing a larger market share in the booming medical tourism business and on expanding an income stream that is not subject to intense margin pressure.

The medical tourism market is expected to grow almost six-fold by the end of the decade to $2 billion (approximately Rs 9,000 crore).

And Fortis with its existing facilities in orthopaedics, neuro-sciences and heart care in northern India would be able to leverage the strong brand loyalty enjoyed by its acquiree in cardiac services in several cities across the country.

Also, this acquisition is expected to help the parent in the medium term shore up its OPMs "" for instance, rival hospitals in the south saw their hospital divisions providing segment margins that were almost steady at 15.4 per cent in the June quarter.

In contrast, the well-documented pricing pressure in the generic business led Ranbaxy's EBIDA margins to almost halve to 11.12 per cent in the last quarter.

This acquisition is not too expensive from the point of view of Fortis Healthcare "" it is at almost 3.14 times EHIRC's turnover for FY04. In contrast, rival Apollo Hospitals has a market capitalisation to FY04 turnover of almost 3.8 times. Nevertheless, the Ranbaxy stock declined about 2.5 per cent on Thursday.

Jet Airways: Yet to take wings

Jet Airways, whose plans to start services to the US in August had earlier hit an air pocket, is expected to launch services in the December quarter.

The delay, coupled with the fact that a large number of its flights were grounded in July owing to the floods in Mumbai, led to a 15 per cent drop in Jet's share price since end-July.

But the possibility of the US skies opening hasn't really cheered the markets. The Jet stock fell nearly 2 per cent on Thursday to Rs 1,115 on the NSE, barely Rs 15 more than its IPO price of Rs 1,100. The 15-odd per cent discount investors are now getting compared with two months ago doesn't make the stock cheap, but it is certainly less expensive.

Based on FY06 estimates, the stock now trades at less than 19 times forward earnings, compared with over 22 times towards the end of July. While Jet does enjoy leadership in the aviation space, its high market share is under threat from new entrants.

Although the company has maintained that the business model of low-cost carriers could be unviable in the long-run, there would clearly be an impact in the short and medium term.

Besides, higher fuel costs are expected to eat into profits made through efficiencies eked out by the company. Earlier this year, the company was able to raise fares and pass on a portion of increased cost to customers.

Analysts feel this may not be possible again, as this could hurt demand. Jet's international operations, launched this year, would also pull down overall yields.

Given these concerns which could affect Jet's financials in the near term, coupled with allegations from a US company that the company has terrorist links, it's understandable why Jet has underperformed the market since end-July.

With contributions from Shobhana Subramanian, Amriteshwar Mathur and Mobis Philipose