STT-TM: Good Idea

The STT-TM combine has struck a good deal

Singapore Technologies Telemedia (STT) and Telekom Malaysia's (TM) strategic investment in Idea Cellular seems to have come cheap. STT and TM International, Telekom Malaysia's investment arm, investment for a 47.7 per cent stake values Idea's equity at $818 million.

Including analyst estimates of a debt of over $1 billion on Idea's books by the end of FY05, this gives the fourth largest GSM operator in the country an enterprise value of around $1.9 billion.

Idea had 4.51 million subscribers at the end of November 2004, which gives it a valuation of $421 per subscriber. Valuations have come off quite a bit from mid-2001 levels when the Idea (then Batata)-BPL combine was valued at over $1800 a subscriber.

But more importantly, and in the current context, Idea's valuation is about 40 per cent lower than Bharti's GSM business. Analysts estimate the enterprise value of Bharti's GSM business at close to $6.6 billion (FY05 estimates), which works out to $700 per subscriber.

Idea's revenues in FY05 are estimated to be well over $500 million, resulting in an enterprise value/sales ratio of around 3.75. Bharti's GSM business, on the other hand, enjoys a valuation of around 5.5 times estimated FY05 revenues.

The fact that Idea was valued much lower (relative to Bharti) for the deal is surprising especially since the investment is strategic in nature. One would have expected a premium for buying a stake as high as 47.7 per cent.

Another way to look at the valuation differential is that Bharti, having risen around 580 per cent since last April and trading close to 30 times FY05 earnings, may be overpriced. Yet, even if that's the case, the STT-TM combine have got a good deal for their Idea investment.

Inflation: is the worst over?

The Finance Minister has a point when he says that the worst may be behind us so far as inflation rate is concerned. One reason for the optimism, of course, is the reduction in the price of crude oil.

The second is the fact that the wholesale price index (WPI) rose sharply in January 2004, which means that the base effect will start kicking in from January 2005.

Thereafter, although prices were stable till March, they started rising again after April, with a huge push upwards coming in June. Next fiscal, the base effect should ensure that inflation is moderated.

But that's a long way off. Where should inflation be by the end of the current fiscal year? The Reserve Bank of India has said that it would be 6.5 per cent, which would mean a WPI index level of 191.7 by end-March 2005, or a rise of 2.1 points in the four months from end-November's 189.6.

That target should be easily achieved, given the fact that the index rose by 2.3 points in the four months from end-July to end-November, at a time when oil prices shot through the roof.

Interestingly, on a year-on-year basis, the index for food articles is up 6.2 per cent, nearly equal to the rise in the index for manufactured products, which was 6.3 per cent.

The index for non-food primary articles declined, while the rise in the fuel sub-group has been 13.5 per cent. With inflationary pressures easing, the RBI will be in a better position to supply additional liquidity if needed, thus taking some of the pressure off interest rates.

Greaves Cotton: on a roll

Greaves Cotton is planning to leverage the current strong demand conditions by hiking its capacity to 2,50,000 engines a year from approximately 1,50,000 currently.

Thanks to its dominant market share in the light diesel engine market and its recent restructuring efforts, the Greaves Cotton stock has jumped nine-and-a-half times since April 2003 and now trades close to a 12-year high of Rs 106.

The company caters to user industries such as auto, power and the farm sector, which themselves are growing at a fast pace. The company has also been exiting from unrelated businesses such as the loss-making RPRL unit (polymer operations).

Besides, operational efficiencies have been derived through lower interest and manpower costs, as well as improving its marketing efficiencies. At the end of FY04, the company's debt had shrunk by 47 per cent year-on-year to Rs 127.2 crore.

Coupled with strong demand for its engines, this led to a 200 per cent jump in its profit before exceptional items to Rs 18.8 crore last quarter.

Segment profit of the key engines division grew 59 per cent to Rs 24.71 crore in the same period.

Greaves recently expanded the finance options available to farmers for purchasing its engines. Going forward, these measures should help revenue growth.

Yet, having risen by over 850 per cent already since the rally began last year, further upside may only be a distinct possibility.

With contributions from Mobis Philipose and Amriteshwar Mathur