IPO Analysis - Kolte-Patil Developers

Objective of the issue

The fresh issue of 190 lakh equity shares is aimed at raising Rs 237 to Rs 275 crore (depending on the price band of Rs 125-145 per share) to fund the acquisition of development rights and the development and construction of the existing as well as forthcoming real estate projects. The remaining expenses including general expenses and general corporate expenses will be funded through internal accruals and debt.

 

After the issue, the total number of shares for the company will increase from 562.5 lakh shares to 752.5 lakh shares. This will bring down the promoters' stake to 74.8% of the diluted equity.

 

Company background

Incorporated in 1991, Kolte-Patil Developers Limited (KPDL) develops and constructs properties mainly in Pune city. The company has developed and constructed 25 projects spanning 4.0 million square feet (mn sq ft) as on September 30, 2007. Out of these 25 projects, 22 projects aggregating 3.6mn sq ft are in Pune city, whereas the remaining three projects spanning 0.4mn sq ft are in Bangalore. The company is in the process of developing 28 projects. Out of these 28 projects, 24 projects aggregating 16.5mn sq ft are to be developed in and around Pune city and the remaining four projects spanning 1.3mn sq ft are to be developed in Bangalore. These 28 projects are expected to be completed over the next five years. Moreover, the company is planning to acquire 32.9mn sq ft land through development rights

and Memorandum of Understanding (MoU) from initial public offer (IPO) proceeds. The 32.9mn sq ft of acquired land would be used to develop 21.6mn sq ft saleable area over the next ten years.

 

Key positives

• Extensive land bank in and around Pune

o        KPDL plans to develop almost all of its land bank in or around Pune city, the sixth largest metropolitan city in India. Out of the total 39.38mn sq ft, KPDL plans to develop 38.02mn sq ft (or 96.6%) of its land bank in or around Pune, which also happens to be the second largest city of Maharashtra.

• Joint venture with private equity fund to develop large projects

o        KPDL has entered into a joint venture (JV) with ICICI Venture, a real estate private equity fund in India to develop three large projects. These three projects include one residential project (Wagholi Lush County) spanning 2.8mn sq ft in Pune, one IT park (Teraspace IT Park at Kharadi) aggregating 1.1mn sq ft and one integrated township project (Jambhe township) spanning 7.5mn sq ft.

• Entering hospitality business

o        KPDL plans to enter the hospitality business. In line with this, the company is planning to develop Hinjewadi Service Apartment to cater to the needs of IT/ITES professionals. This project is to be developed under the entity Green Olive, a 60:40 JV between KPDL and Arista Developers Private Limited.

• KPDL may expand to other local markets

 

Key concerns

• Large portion of land acquisition through sole development rights and MoU
• Outstanding litigation

o        KPDL along with its promoter and directors is involved in various litigations aggregating around Rs50 crore. Any unfavourable court ruling against the company could affect its profitability.

• Execution risk

o        KPDL has developed 4mn sq ft since its foundation in 1991. However, the company plans to develop 17.8mn sq ft over the next five years and 39.4mn sq ft over the next ten years. This implies execution of around 4.0mn sq ft on an annual basis.

• High concentration of land bank in Pune city

 

Valuation

Using net asset value (NAV) methodology, I have estimated one year forward NAV per share of Rs 194 implying a 33.9% discount at the upper band of Rs 145 per share.

 

Peer comparison

I have done peer group comparison for KPDL with other real estate players who have considerable presence and land bank in Pune city. At Rs 145 per share, KPDL is broadly in line with its peer's valuation.

 

• Kolte-Patil @Rs145 / 1 year forward NAV = 194 / Discount to NAV (%) = -33.9
• Kolte-Patil @Rs125 / forward NAV = 189 / Discount (%) = -33.9
• DS Kulkarni Developers / forward NAV = 459 / Discount (%) = -36.8
• Sobha Developers / forward NAV = 1001 / Discount (%) = -13.0

 

Issue details

• Issue opens: November 19, 2007
• Issue closes: November 22, 2007
• Issue size: 190 lakh-equity shares
• Reservation for employees: 1.9 lakh shares
• Fresh issue to public: 188 lakh shares
• Face value: Rs 10 each
• Price band: Rs 125-145
• Recommendation: SUBSCRIBE

Stock Idea - Deepak Fertilisers & Petrochemicals Corporation

Recommendation: Buy

CMP = Rs 149 (as of Wednesday)

Price target: Rs 188

Result highlights:

• Net sales of Deepak Fertilisers & Petrochemicals Corporation (DFPCL) grew by 2% year on year (yoy) to Rs 216.9 crore. The chemical division and the fertiliser division contributed 69% and 31% respectively to the net sales.
• The revenue from the chemical division increased by 29% yoy to Rs 155.8 crore on the back of a strong contribution from isopropyl alcohol (IPA), while the sales from the fertiliser division dropped by 32% yoy to Rs 70.7 crore due to reduced availability of phosphoric acid in the international market and lower availability of material for trading.
• Operating profit during the quarter grew by 26% yoy to Rs 32.2 crore. A strong contribution from the chemical division expanded the overall operating profit margin (OPM) by 290 basis points to 14.9%. The increased raw material cost including that of the outsourced ammonia and propylene decreased the segmental PBIT margin for the chemical division, while the higher price realisation reduced the segmental loss for fertiliser division.
• The completion of Dahej-Uran pipeline would improve the natural gas supply to Taloja plant from December 2007, which would help in replacing naphtha with natural gas for steam generation, depending upon its supply. Natural gas at around $8.5 per Million British Thermal Units (MMBTU) would cost almost half the price of naphtha.
• The company is expected to complete land acquisition process for its ammonium nitrate project in Orissa by November 2007. The plant with a 300,000TPA capacity is expected to be operational by November 2009.
• The company's specialty mall Ishanya, for interiors and exteriors, is expected to commence operations from the third quarter, ahead of the festive season. The company has already leased out nearly 80% of the 550,000 square feet leasable area at an average rental price of Rs 46 per square foot.
• At the current market price of Rs 149, the stock is trading at 8.7x its FY2009E earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.5x.
• I maintain Buy recommendation on the stock with a price target of Rs 188 with 6 months time frame.

Stock Idea - Hindustan Unilever

Recommendation: Buy

CMP = Rs 200

Price target: Rs 280

Result highlights:

• Hindustan Unilever Ltd's (HUL) Q3FY2007 results were below our expectations. Net sales grew by 9.7% to Rs 3,364.6 crore on the back of a 9.5% year-on-year (y-o-y) growth in HPC sales and a 16.8% growth in the sales of foods business.
• The overall operating profit margin (OPM) expanded by 16 basis points year on year (yoy) to 13.3% despite one-off adverse impact of the seven-week closure of the Assam unit that manufactures ~30% of personal products.
• The operating profit grew by 11.1% to Rs 447.6 crore. However, the net profit rose by only 6.9% to Rs 409.3 crore due to the higher tax rate of 20% in Q3FY2008 against that of 17.5% in Q3FY2007.
• Sales of soaps and detergents grew by a robust 12.8% yoy to Rs 1,572 crore and the segment's profit before interest and tax (PBIT) margin improved by 440 basis points to 16.7%. The performance of the personal product segment was affected by the strike at the Assam factory that led the PBIT margin fall by 260 basis points yoy to 24.2%. 
• Sales of processed food segment grew by 32.5% yoy to Rs 128.9 crore. Modern Foods that was merged with the company contributed a major chunk to the sales growth with sales of Rs 23.8 crore. Thus the organic sales of the segment grew by 8% yoy. While the margins in the processed foods business improved, the profitability of ice cream business declined sharply on account of costs related to setting a new factory.
• The quarter witnessed the launch of water purifiers in Delhi and Uttar Pradesh thereby expanding the water purifier business to eight states. Pureit, HUL’s in-home water purifier now serves three million homes. The business is gaining ground but being in initial stages we expect it to continue its losses for the next few quarters.
• At the current market price of Rs 200 the stock is quoting at 24.9x its CY2007E earnings per share (EPS) of Rs 8.1 and 21.9x its CY2008E EPS of Rs 9.2.
• I maintain Buy recommendation on the stock with a price target of Rs 280.

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Stock Idea - Punjab National Bank

Recommendation: Buy

CMP = Rs 550

Price target: Rs 675

Result highlights:

• Punjab National Bank's (PNB) Q2FY2008 profit after tax (PAT) grew by 6.6% year on year (yoy) to Rs 538.5 crore. The PAT was higher than our expectations of Rs 510.5 crore and was mainly driven by the higher non-interest income.
• The net interest income (NII) adjusted for amortisation expenses was stagnant at Rs 1,368.5 crore as higher deposit costs put a significant pressure on the net interest margin (NIM). The NIM declined by 11 basis points (bps) on a year-on-year (y-o-y) basis to 3.75%.
• The non-interest income grew by 26.1% yoy to Rs 467.8 crore mainly driven by the higher treasury income that grew by 67.2% yoy to Rs 107 crore and a fee income that rose by 20.7% yoy to Rs 262 crore.
• The operating expenses grew by 19.3% yoy to Rs 855 crore mainly on the back of a 25.6% y-o-y increase in the staff expenses to Rs 641.8 crore. The sharp increase in the staff expenses was on account of Rs 200-crore additional provisions made by the bank to meet its shortfall in pension liabilities.
• The management has stated that the shortfall is likely to be around Rs 900 crore and is to be written over the next five years. Thus, the operating profit declined by 5% yoy, whereas the core operating profit was down by 10.3% yoy.
• Despite the dismal performance on the core operating side, PNB continues to enjoy a high level of current account and savings account (CASA) at 44% and margins at around 3.8%. The bank owns a 25% stake in the Unit Trust of India (UTI) mutual fund. UTI is likely to come out with an initial public offer (IPO) in early CY2008. The stake in the UTI mutual fund contributes around Rs 32 to each share of PNB.
• With its high return on equity (RoE) of around 17.8%, I feel the valuations are attractive at current levels. At the current market price of Rs 550, the stock is quoting at 7.8x its FY2009E earnings per share (EPS), 4x pre-provisioning profit (PPP) and 1.3x FY2009E book value (BV).
• I maintain Buy recommendation on the stock with a 12-month price target of Rs 675.

Stock Idea - Subros

Recommendation: Buy

CMP = Rs 200 (as of Monday)

Price target: Rs 340

Result highlights:

• Subros' Q2FY2008 results were slightly below our expectations due to a lower than expected topline. The net sales for the quarter declined by 5.3% to Rs 157.1 crore on the back of a 4.1% decline in the volumes due to a slower offtake by Tata Motors. 
• The operating profit margin (OPM) improved by 130 basis points to 12.3% in Q2FY2008 from 11% in Q2FY2007 due to higher efficiencies, savings in logistics costs and localisation benefits.
• Higher interest and depreciation charges led to a 17.4% decline in the net profits to Rs 6.4 crore. However, with majority of the capital expenditure (capex) incurred and with the low-cost debt recently raised by the company, we expect the interest costs to rationalise going forward.
• The sharp improvement in the OPM has been a positive surprise and we believe that the company would be able to maintain the OPM at these levels going forward. The company has already bagged an order from Suzuki to supply compressors for its new export vehicle, which would boost Subros' FY2009 volumes.
• At the current market price of Rs 200, the stock is available at very attractive valuations, discounting its FY2009E earnings by 4.9x and is available at enterprise value (EV)/earnings before interest, depreciation, tax, and amortisation (EBIDTA) of 2.6x.
• Hence, I maintain extremely positive stance on Subros with a price target of Rs 340.

Stock Idea - State Bank of India & ICICI Bank

State Bank of India

Recommendation: Buy

CMP = Rs 2, 209

Price target: Rs 2,625

Key Points:

• I have been mentioning that the banking sector would continue to remain an outperformer in the current market scenario and so it has, with the Sensex reporting a gain of 10% in the last one month and Bankex reporting a growth of 17% in the same period. 
• The public sector behemoth State Bank of India (SBI) remains one of the top picks in the banking space and I have stated below five reasons why I feel SBI should be a Buy at the current levels:

1. Upcoming rights issue—at a price far higher than envisaged earlier 
2. Guidelines on holding companies by the Reserve Bank of India (RBI) expected in November 2007
3. New business initiatives—general insurance, private equity
4. Launch of PSU Bank Benchmark Exchange Traded Scheme (Bank BEES)
5. Other positive news flows and developments that are expected going forward. 

 

ICICI Bank

Recommendation: Buy

CMP = Rs 1,241

Price target: Rs 1,528

Key points:

• During Q2FY2008, the core earnings of ICICI bank remained under pressure as retail loans grew at a slower rate and the pressure on spreads continued due to higher deposit costs. However, a large portion of corporate bulk deposits would get repriced in Q1FY2009, which would ease the pressure on spreads going forward.
• The branch network of the bank increased to 950 branches from 755 in the first six months of FY2008 (post Sangli bank's merger with ICICI bank). The bank also received licences for opening 425 new branches over the next 12 months.
• The bank reported a 317-basis-point improvement in its current and savings account (CASA) ratio to 25.3% driven by higher current account balances during Q2FY2008. The bank is doing all the right things by building more branches and increasing its CASA base to reduce its reliance on high-cost bulk deposits.
• The improvement in the cost of funds resulting from the higher CASA ratio is expected only in medium to long term with the increase in branch network. A large portion of high-cost bulk deposits are expected to get repriced in Q1FY2009, which along with the improvement in the CASA ratio should help in improving the spreads going forward. Till then the spreads are likely to remain at current levels.
• The bank's return on equity (RoE) is likely to remain depressed at 10.5% for FY2008E and FY2009E after the massive capital raising (Rs 20,000 crore raised from primary markets) undertaken by the bank. The low RoE has remained a concern for ICICI Bank, but I expect things to change going forward.
• With new preference share guidelines in place (more capital raising options available to banks in future resulting in lower equity dilution), a positive outcome on the holding company guidelines from the Reserve Bank of India (that would allow the subsidiaries to take care of their capital needs) and a change in its business model (more branch building expected going forward which should improve its spreads) will help ICICI bank in restoring RoE much faster and then improving the same.
• I maintain Buy call on this stock with a price target of Rs. 1,528 and time frame of 6-8 months.