Three public issues for quick gains

IPO WATCH

IPCL
Discount offer makes issue attractive
The IPCL public offer opened on February 20, 2004, and will close on February 27. The issue was oversubscribed by about 1.2 times on the first day itself.

The government has set a floor price of Rs 170 per share for the sale of its 33.9 per cent residual stake in the company. Nearly 7.20 crore of IPCL shares are on offer.

The offer would constitute 24.945 per cent of the paid-up capital of the company. Retail investors will get a 5 per cent discount on the final offer price, which will be determined by a book-building process. There will be no lock-in period.

Analysts say the floor price of Rs 170 is attractive for retail investors. Reliance Industries, which holds 46 per cent in IPCL, has been offered another 5 per cent stake at a minimum price of Rs 195 per share.

The government expects to mop up at least Rs 1,250 crore through the offer. The government will continue to own upto 5 per cent of the company's issued and paid-up equity share capital after the completion of the offer. The lead managers of the issue are Kotak Mahindra Capital Company, SBI Capital Markets and JM Morgan Stanley.

IPCL is currently the second largest petrochemicals company in India, next only to Reliance Industries. The company primarily produces polymers, fibres and fibre intermediates and chemicals, which accounted for 70 per cent, 14 per cent and 14 per cent of its net sales respectively in FY03.

With the petrochemicals industry expected to witness a boom this year, analysts are optimistic about the prospects of the company.

Petrochemical prices began to rise during the second half of 2003 as a result of rising oil and feed-stock prices post-Gulf war and analysts expect the prices to be firm in the near term.

However, on the downside, additional capacities that are likely to come up in the future may impact the company's earnings.

The company itself expects to incur approximately Rs 350 crore in capital expenditure in the next four years to expand capacity. The reduction in import duty on polymers and MEG (mono ethylene glycol) to 20 per cent is also likely to impact the company adversely.

IPCL posted a net profit of Rs 174.40 crore for the nine-month period ended December, 31, 2003, compared to Rs 114.60 core for the same period in FY03.

Sales for the period amounted to Rs 4274.70 crore against Rs 3634.10 crore for the corresponding period in the previous year. The interest expense decreased by 16 per cent to Rs 249.10 crore during the period, mainly due to the reduction in the company's outstanding debt, a significant portion of which was high interest debt.

Analysts expect the interest expense to come down further going forward. IPCL's raw material consumption during the nine-month period in FY04 increased by 17 per cent to Rs 178 crore primarily due to a 13 per cent increase in overall production as well as a rise in raw material prices.

Nearly 90 per cent of the company's revenues come from sale within India, with Finolex Industries, Gail, Haldia Petrochemicals, Nirma and Tamil Nadu Petro Products offering competition.

IPCL's Nagothane complex was shut down from February 4, 2004 to February 21, 2004, as a result of which the company's production levels in the last quarter of FY04 will be adversely affected.

The scrip trades at a P/E of 17x and has the potential to move upto Rs 220-230 post-public offer, say analysts. In short, considering the discount for retail investors, the issue looks attractive.

CMC
Price may be stiff
The government plans to sell its residual 26.25 per cent stake in CMC through a public offer in the domestic market. The 100 per cent book-built offer for the sale of 39.7 lakh shares would open on February 23 and will close on February 28.

The price band for the CMC issue will be announced a day before the bid opens. The offer is for the sale of 39,76,374 equity shares of a face value of Rs 10 each, which represents 26.25 per cent of the fully-diluted post-offer paid-up capital of the company.

The offer is being made through a 100 per cent book-building process wherein upto 50 per cent of the offer shall be allocated to qualified institutional buyers on a discretionary basis.

Further, not less than 25 per cent will be available for allocation on a proportionate basis to non-institutional bidders and the remaining 25 per cent will be available to retail investors.

The book-running lead managers to the issue include HSBC Securities, Capital Markets (India) and Enam Financial Consultants.

CMC is an IT solutions provider, having presence in businesses like systems consultancy, design and engineering, systems integration, software development, networking, information technology enabled services (ITES) and IT education and training.

Though the company is a solutions provider, its revenues are centred around its projects and solutions. Turnkey projects like the online securities trading system for stock exchanges developed for the BSE and the online integrated multi-passenger reservation system developed for the railways are cases in point.

Analysts say the company typically installs the solution and gets licence fees for one year. From the second year onwards, it collects the annual maintenance fees.

However, analysts opine that the company may start providing newer services around the existing solutions, paving the way for licence fees year on year on a regular basis.

The positive, according to analysts, is that CMC is looking to replicate the solutions internationally and has already bagged a project from the Kuwait Stock Exchange.

However, the company has been plagued by problems like low operating margins due to its domestic focus so far. In fact, it gets 80 per cent of its revenues from the low-margin and low-growth domestic IT market.

Analysts also express concern on the slow pace at which the company has been getting orders in the last two years after the TCS acquisition.

Besides, analysts point out that sales of purchased equipment now account for 51.7 per cent of operating revenues in the company's results for the nine-month period ended December 31, 2003.

In FY02, when the Tatas had acquired CMC, this activity accounted for a much lower 40.4 per cent of operating revenues.

This business has an operating margin of just 2.25 per cent, which means overall margins have also been under pressure (operating margin fell 170 basis points in the first nine months of this fiscal).

However, they are positive on the company's efforts to address problems on the cost side by rationalising workforce and salaries.

On the earnings front, the company has shown revenue growth of 15.7 per cent CAGR over the last five years while its net income has grown at a CAGR of 39.8 per cent in the same period.

Analysts expect the earnings growth to continue at around 30 per cent CAGR in the next three years, despite certain quarterly performances which would be below par due to the nature of the company's business and the licence-fee factor.

Although the company's subsidiary, CMC Americas Inc has been making losses, analysts expect the arm to turn around by FY05.

"CMC should show a 19 per cent growth in net profit this year at an EPS of 30. For the next year, the net profit growth should be around 20 per cent and I would peg an EPS estimate of 36 for FY05," says R Ravi, analyst at IDBI Caps.

On the valuations front, analysts are of the opinion that the offer price is likely to be around the current levels of Rs 541.90.

"The current share price translates into an FY04 P/E of over 23 times, which is quite expensive compared to peers in the sector," says Amod Gore, IT analyst at Sushil Finance.

"The offer price is expected to be at a small discount to the current market price," he adds. However, Gore says it may make sense for retail participants to look at a long-time frame of around two-three years given the growth potential in the future, along with the fact that the stock is not expected to see much gains in the short term.

However, according to Ravi, the TCS factor will keep CMC in good stead by bringing projects going forward and it would gain from the marketing efforts of TCS.

Analysts are of the opinion that the company's role in TCS would grow in prominence and expect its margins to improve going forward. Although they feel that selling the issue could be tricky, holding on to the stock may bear fruit over a two-three year time horizon.

BANK OF MAHARASHTRA
Valuation remains cheaper than peers
Bank of Maharashtra announced its initial public offering (IPO) on February 19 for 10 crore shares of Rs 10 each at a premium of Rs 13 per share amounting to Rs 230 crore.

The offer is scheduled to open on February 25 and will close on March 4. The current paid-up capital of the bank is pegged at Rs 330.52 crore and, post-IPO, the government holding will come down by 24 per cent to 76 per cent and the equity base will grow to Rs 430.52 crore.

Investment banking outfits like SBI Capital Markets, Enam Financial Consultants and Kotak Mahindra Capital are among the lead managers to the issue.

Analysts express a host of concerns for the bank going forward apart from existing problems. One major issue is its non-performing assets (NPAs).

"The bank has not been able to do much regarding its NPA level and with the implementation of the 90-day norm, things may worsen," says an analyst with a leading domestic brokerage and research house.

Though the NPA level declined in the past three years, it has mounted again this year. The NPA level as on September 30, 2003, was Rs 494.08 crore - higher than that for the full years ended March 31, 2003 (Rs 459.14 crore) and March 31, 2002 (Rs 479.71 crore).

"The bank has a lot of cleaning up to do going forward," he adds. According to him, higher provisioning needs to be made with regards to NPAs.

Another cause of concern is the possibility of an asset-liability mismatch. Over 84 per cent of the bank's term deposits are due to mature within three years which may cause the bank to suffer from an asset-liability mismatch in case of redemptions.

The bank, however, is confident that a large portion of deposits will be rolled over. It also expects that fresh accretion of deposits will mitigate such mismatches.

Now a look at the financials. Though the bank's net profit has shown a consistent increase, margins remain under pressure.

"The company has not been able to reduce its cost of funds even under a low interest rate scenario," says a banking analyst with a foreign brokerage.

Margins have been shaky over the last three years, hardly registering a notable increase - net interest margins were 32.49 per cent for the year ended March 31, 2003; 29.37 per cent for 2002 and 32.73 per cent for 2001.

Analysts are also concerned about the growing share of other income in the bank's total income. "The bank has seen impressive portfolio gains but their sustainability remains a concern," an analyst adds.

Other income as a percentage of total income has been steadily increasing - 11.53 per cent in 2001, 13.34 per cent in 2002 and 14.76 per cent in 2003.

Capital adequacy as on March 31, 2003, was 12.05 per cent, higher than the 9 per cent prescribed by the RBI. This puts the bank in a comfortable position.

On the valuations front, the bank seems to be going a little cheaper than its peers. Based on 2003 earnings, the bank's P/E currently stands at 3.4 (P/E of 4.4 on post-issue fully diluted equity).

"The price is the only comforting factor for the bank," says the analyst with the foreign brokerage (peer group valuations based on 2003 earnings: Allahabad Bank - 6.2, Andhra Bank - 5.4, Indian Overseas Bank - 5.2 and Syndicate Bank - 5.10).

Analysts expect a profit of around Rs 300 crore for the year ending March 31, 2004, a growth of 35 per cent over the previous year. With this, the stock trades at a P/E of 3.3 on 2004 earnings.

"Though the stock does not look good from a long-term investment point of view, it is a good bet in the short-term," says the analyst from the domestic research house.

If the post-issue P/E is maintained with the above-mentioned earnings, the bank's scrip should settle around Rs 31. This gives investors an opportunity to make a quick buck.