The balancing act

In value terms, the Centurion BOP-LKB merger will benefit Centurion BOP shareholders more than those of LKB.

At Centurion, inorganic growth seems to be an important strategy. In a little over a year, Centurion BOP will have merged two banks with itself. Centurion Bank and Bank of Punjab had announced their merger in June 2005, which was completed in October.

Now, Lord Krishna Bank (LKB) will merge with Centurion BOP. Through LKB, Centurion BOP will increase its branch network from 249 to 361 and also gain a significant footprint in Kerala, where LKB has a strong presence.

LKB shareholders will receive seven shares in Centurion BOP for every five shares they hold. The extent of dilution won't be much for Centurion BOP "� the equity capital will increase by only around 9 per cent.

Based on today's price, LKB shareholders will get about 1.9 times its FY06 book value. Compared with Centurion's FY06 book value of around Rs 6.5, its share at Rs 26 trades at about four times.

So, in terms of valuation, the deal seems to be working out better for Centurion BOP shareholders. Considering that LKB had made a loss of Rs 24.4 crore in FY05 and a small profit of Rs 3.69 crore in FY06, LKB shareholders will also benefit from better growth opportunities and the listing after the merger.

In the June quarter, Centurion BOP had a net interest margin of 4.7 per cent, 10 basis points (bps) lower than that in the previous two quarters as cost of deposits went up by 50 bps q-o-q.

The preferential issue to Bank Muscat and ICICI Venture will improve the bank's tier-1 capital adequacy ratio, which was 11.4 per cent in Q1FY07.

Rubber: Boon for tyre makers

There is good news for tyre manufacturers as rubber prices have corrected in the past few months. The prices, as high as Rs 106-107 in June, have eased by about 9 per cent over the past month to the Rs 87 a kg level.

Analysts say global rubber prices have also shown a downward trend largely owing to improved supplies from key producing countries in east Asia like Malaysia and Indonesia.

For a tyre company, rubber "� as a percentage of net sales "� typically constitutes about 65 per cent of sales. Tyre companies had last hiked prices by 4-6 per cent in late June in response to surging input costs.

However, these hikes were not enough and tyre firms were adversely affected. For example, Apollo Tyres' operating profit margin declined by 185 bps y-o-y to 7.5 per cent in the June quarter.

The fall in rubber prices has not gone unnoticed by the street. Apollo Tyres, for one, has gained about 16 per cent in the past month vis-a-vis 9.5 per cent gain in the Sensex. MRF has risen 19.2 per cent during the same period.

Cement: Despatches flat in August

Cement companies reported more or less flat despatches on a y-o-y basis in August, given the fact that there is a slowdown in construction activity during the monsoon period.

Also, several parts of the country were grappling with flood-like conditions, which further constrained demand.

As a result, the top four cement players have seen their despatches grow a mere 0.3 per cent y-o-y to 4.65 million tonne in August. Earlier, in July, these four companies had seen their despatches improve 7.8 per cent y-o-y to 4.55 million tonne.

However, analysts say there was a low base effect in July 2005, as many areas across the country were then flooded.

Overall, cement stocks have outperformed the market over the past two months on investors' expectations of a strong pick-up in demand after the monsoon.

Grasim, for instance, has gained 13.7 per cent over the last two months against 8.5 per cent gain clocked by the Sensex. ACC has risen 13.9 per cent during the same period.

Cement prices have been strong on a y-o-y basis, given the earlier Supreme Court judgement banning overloading of trucks. In the Mumbai market, cement prices are currently pegged at Rs 230 a bag vis-a-vis Rs 185 a year earlier, analysts say.

In Delhi, prices are at Rs 205 a bag compared with Rs 160 a year ago. Other costs for cement companies such as imported coal have been more or less stable on a y-o-y basis, they add.

The current run-up in cement stocks has made them quite expensive. While ACC trades at about 21 times its estimated CY06 earnings, Grasim gets a discounting of about 14-15 times its estimated FY07 earnings.