Feeling bullish

Mutual fund data show that people are increasingly investing in equities

Equity mutual funds raised Rs 958 crore in February through new scheme launches, according to data collated by the Association of Mutual Funds in India (Amfi). This is the largest amount the industry has raised through new scheme launches since March 2000.

Including sales of existing schemes, equity funds raised Rs 3180 crore last month.

But interestingly, after accounting for redemptions worth Rs 3407 crore, equity funds reported a net outflow of Rs 227 crore. That follows record net inflows of Rs 2127 crore in the previous two months.

The data supports the theory that mutual fund investors have been selling units of existing schemes in order to invest in mutual fund IPOs.

However, it's important to note that Amfi's data does not include sales of Templeton's Flexi Cap fund, which had raised almost Rs 2000 crore in its February IPO.

Templeton's new scheme wasn't included simply because the allotment procedure wasn't complete by end-February. Needless to say, March numbers would show a big jump in net inflows.

That would mean that the net outflow reported by Amfi in February is just an aberration - sales continue to be getting better.

This is also reflected in mutual fund activity in the equity markets. Domestic funds had been net sellers for seven consecutive months between June and December 2004.

This has changed, and since January this year mutual funds have been net buyers to the tune of Rs 1200 crore. All this could very well mean that the elusive small investor is finally returning to the market.

Jaiprakash Hydro-Power

Jaiprakash Hydro - Power Limited (JHPL) is leveraging investor interest for the power sector with its forthcoming issue. The promoter of this Himachal power company, Jaiprakash Associates, is offering 18 crore shares held by it.

However, after taking into account the allocation reserved for their group employees, the portion for the public would amount to 14.4 crore. JHPL would not receive any proceeds from the forthcoming offering.

The company is offering its stock in the price band of Rs 27-32 a share, resulting in the component for the public aggregating Rs 460.8 crore (assuming the higher price band). JHPL is offering its stock at a P/E of 12.3 (assuming higher band and annualising its H1 FY05 EPS).

In contrast, Nevyeli Lignite Corporation trades at a P/E of 10 ( trailing 12-months earnings) and Gujarat Industrial Power at a much lower 5.8.

The company commenced commercial operations on May 24, 2003 and in FY04, its total income was Rs 296.6 crore and profit after tax was Rs 57.9 crore. The EPS in FY04 was 1.24 per cent (on an annualised basis).

JHPL's key advantage is that it does not face the problem of surging input costs such as coal. The company would source water from a nearby river.

In case there is non-availability of water in its catchment area leading to no power generation, the company has put in place adequate safeguards to prevent financial losses.

As per its PPA, if that happens, the company would be reimbursed from HPSEB and this condition is valid for seven years, starting from June 8, 2003. Meanwhile, JHPL is entitled to 16 per cent return on equity capital.

While SEBs have been improving their payment track record over the last few years, the underlying concern for JHPL is that it is exposed to a single client, HPSEB. This electricity board has incurred financial losses between 1999 and 2004.

Also, the company still has to get final clearance for its tariff policy from the state regulator, and as a result it received only Rs 2.09 per unit in FY04 from HPSEB compared

Contract manufacturing in pharma

The recent report about Dr Reddy's Laboratories' (DRL) deal with Biosignal to develop mass manufacturing processes for Furanone, an anti-bacterial drug, is indicative that the pharma major is taking a look at the newest pot of gold for Indian pharma "" contract research manufacturing and services. And why not?

Contract research manufacturing outsourcing includes clinical research outsourcing, drug discovery research outsourcing and custom manufacturing.

Global R&D outsourcing is on the rise, growing at an estimated CAGR of 16 per cent against 10 per cent for overall R&D expenditure over the last seven years.

With rising costs and compulsions to reduce time-to-market, this market will be a big chunk of the overall global outsourcing opportunity in pharmaceuticals, estimated at $65 billion for 2005 alone, up from $40 billion in 2000.

Clearly indicative of the new thrust is the fact that Dr Reddys' custom pharmaceutical services revenues were Rs 11.3 crore for third quarter FY05 against Rs 90 lakh in Q3 FY04, with a sharp rise in customer base and product offerings.

This, apart from the fact that it is a stable long-term revenue stream, might also help the company diversify from its traditional streams of API and generics export.

The fall in these segments in the third quarter of FY05 resulted in a 9 per cent fall in the company's revenues, with international API sales falling 27 per cent against third quater FY04.

The new revenue stream would also be important given that the company's R&D expenditure is rising. In Q3 FY05, R&D expenses grew by 41 per cent to 15 per cent of the company's revenues, impacting operating margins.

Several other Indian companies are taking this route given its promise of steady revenue streams and profit levels from long-term contracts, but what is interesting is that few in India have the across-the-board capability that DRL has to offer.

While this does give DRL an early mover advantage in India, others will ramp up fairly quickly with its entitlement of Rs 2.95 per unit (net of rebate).

With contributions from Mobis Philipos, Amriteshwar Mathur and Vivek Y Kelkar