UB: Reasonable valuation

UB investors have a good exit window

United Breweries, the country's top brewer, will soon see a change in ownership structure. Scottish & Newcastle, the UK's biggest brewer, and the Vijay Mallya group will each hold 37.5 per cent stake each in the company with the former getting in Rs 465 crore to buy into UB's equity.

The mandatory open offer (necessitated by this significant change in ownership) offers investors an unprecedented 'high'. The offer price of Rs 575 tops the current market price by just 15 per cent, but is at a level the stock has never reached before.

In fact, the stock has risen about 300 per cent in the past two months (presumably because the deal with S&N was already brewing), offering investors a good exit price.

Based on current earnings, the offer price results in a PE of around 100 times. But earnings, at around two per cent of sales, are unusually low in a tightly regulated Indian market.

Using sales or even book value as the benchmark, the valuation at which S&M is buying into UB seems more reasonable at 2.2 times and 2.5 times, respectively.

S&M cumulative investment in UB and in Millennium Alcobev (40:40 JV with UB) is around Rs 940 crore or $214 million. In return, it has got joint control of 50 per cent India's beer market, which is cheap by international standards, say analysts.

For non-strategic investors, however, this is a good opportunity to exit, especially since it will be while before synergies from the deal will translate into higher earnings - at least to an extent where the PE comes down from the current, absurd level of 100 times.

In some cases, it would make sense to sell in the market at current rates, given the concession in tax rates which are not applicable for off-market transactions.

Shipping rates

Shipping freight rates in both the tanker and dry bulk segment have been on a downward spiral over the last three weeks.

As a result, shipping stocks have been facing selling pressure during this period-Great Eastern Shipping's stock saw a decline of 8.5 per cent and the Shipping Corporation of India scrip fell 7.7 per cent over a period when the Sensex gained 2.8 per cent.

In the tanker segment, VLCC rates have declined by approximately 33 per cent since December 1 to currently around $106, 600 dollars per day and in the case of Suezmax, they have dropped by around 38 per cent to currently $68, 000 per day.

Why have rates fallen in this segment ? Global demand for oil had been weaker than previously forecast, OPEC has decided to cut production by a million barrels per day and has urged its members to stick to their production quotas. Hence the cooling off in global freight rates to transport oil and allied products.

Nevertheless, freight rates in the tanker segment are on average 85-90 per cent higher year-on-year. As a senior executive at a leading private sector shipping company pointed out, "At least the froth or excessively high freight rates has shown signs of easing and reason is returning to the market."

Freight rates in the dry bulk segment have also fallen since December 1 with the Baltic Dry Index dipping approximately 16 per cent to hover at 5003.

That's because with the Christmas holidays in sight, movement of goods has shown signs of easing. Nevertheless freight rates in this market are approximately 27 per cent higher year-on-year.

However, for large Indian players with capacity overwhelmingly focused on the transportation of oil and allied products, higher tanker rates are expected to translate in a strong growth in Q3 profit.

ING Vysya: not so right

ING Vysya's 3:1 rights issue at Rs 45, which gives the pre-split stock a value of Rs 180, is a steal what with the price hitting Rs 670 on Monday. Even the average price of the stock in the past was much higher at around Rs 420.

The management's caution with the pricing and the generous ratio is understandable given ING Vysya's recent uneven track record. The second quarter of FY05 saw steep losses in treasury of Rs 45.74 crore and a consequent loss at the operating level of Rs 38.83 crore.

However, the markets seem quite unperturbed with the losses on treasury investments especially since the bank has transferred securities to the held-to-maturity category and so the loss is a one-time affair.

More important, they expect the parent bank to increase its holding as soon as the government gives it the go-ahead. Also, the bank posted splendid numbers in Q1FY05, with the net interest margin hitting a five -year high of 2.91 per cent and a loan growth in that quarter at 21 per cent y-o-y exceeding the industry average.

Given the markets' optimism, the management could have asked for a higher premium. After all, the bank needs capital to grow and the stock market does not always present such an opportunity.

The capital adequacy is now 6.2 per cent and will go up to 9 per cent after the issue, taking care of about three years growth. The management could have been a bit more balanced keeping in mind the growth of the bank rather than the immediate reward to shareholders.

With contributions from Mobis Philipose, Amriteshwar Mathur & Shobhana Subramanian