Asian Granito — IPO: Invest at cut-off

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The planned entry into the wall tiles segment appears well-timed as there are not too many established players in this space.

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Vitrified tiles are relatively low-cost substitutes for marble.

Vidya Bala

Investors can subscribe to the initial public offer of Asian Granito India, a maker of vitrified tiles. Invest with a two-year perspective to gain from earnings growth arising out of increased capacities.

Strong financials, a track record of quickly ramping up capacities, and presence in the fast growing vitrified tile business are the positives. The offer price of Rs 85-102 also appears attractive with a price earnings multiple of 5-6 times the company’s earnings for 2008-09, when all its planned capacities are likely to be fully operational.

The company’s market cap (at the offer price) is about Rs 200 crore; the small market cap may subject the stock to high volatility.

Business

Asian Granito manufactures a range of vitrified tiles at different price levels. Vitrified tile offers an ideal substitute for high-cost marble and granite. It is also superior to ceramic tiles in that it is less porous and therefore absorbs less water. The company has a fully-owned subsidiary — Asian Tiles —which makes ceramic tiles, relatively low-end.

Asian Granito plans to raise Rs 60-70 crore through this IPO that will expand its share capital by 40 per cent. The proceeds are to be used to increase its vitrified tile capacity by 2,000 sq.m per day to 16,000 sq. m. per day, to be operational by October 2007.

The company also plans to set up a new capacity for wall tile manufacturing using imported Italian machinery. This unit is expected to go on stream by January 2008.

Positives

Asian Granito enjoys 10.5 per cent of the organised vitrified tile capacity, according to the Indian Council of Ceramic Tiles and Sanitaryware. This share appears healthy, given that the vitrified tile market is fast growing and new players are entering the market, apart from Chinese imports.

The company’s range of products and its ability to offer tiles of various sizes are likely to provide it with a competitive edge in a market where the pricing pressure is likely to continue. The planned entry into the wall tiles segment also appears well-timed as there are not too many established players in this space.

This may provide the company an early mover advantage and derive superior realisation for a few years.

The company’s operating profit margins at about 24 per cent, though superior to a number of other tile companies, is less than leading players such as Murudeshwar Ceramics.

Superior realisation by the latter, as a result of better brand recognition and market share, appears to be the reason.

A smaller player such as Asian Granito may continue to face pressure on the realisation front; higher volumes in vitrified tiles post-expansion and possible superior realisation from wall tiles may provide some support to operating profit margins.

The company has enjoyed superior return on equity at over 30 per cent over the past three years. While the current equity expansion may dent this return in the short term, ramp-up in capacities is likely to get the returns back on track.

On the cost angle, the company’s facility is close to raw materials; it has moved to LNG (instead of LPG) over the past one year, thus reducing its power and fuel costs. Cost efficiency would also be key to buttressing margins.

Asian Granito appears to enjoy a pan-India presence as can be seen from the well-diversified geographical distribution of its revenues.

Increased competition from unorganised players and slump in real-estate leading to poor capacity utilisation are major risks for this tile maker.

Puravankara Projects — IPO: Invest at cut-off

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A strong track record in real-estate development,

low-cost land bank and higher transparency of operations are positives for the company.

Investors with at least a three-year perspective can consider subscribing to the initial public offer of Puravankara Projects. While the asking price of Rs 500-525 appears stiff now, the high earnings visibility from its current and planned projects may well provide an upside in the long term. Further, a strong track record of real-estate development, low-cost land bank, more transparent transactions and steady growth in revenue over the last five years are positives to this offer.

At the offer price, the price-earnings multiple is likely to be about 20 times the company’s expected earnings for FY-09. This is assuming there is no undue delay in its ongoing and planned projects. With a track record of having developed a sizeable area (without having to depend solely on the land bank to discover valuations), we believe the P/E multiple is an acceptable valuation metric in this case.

The company and offer

Puravankara is a real-estate developer with a majority of projects executed in Bangalore. The company’s core business lies in the residential segment with diversification into commercial projects. The company plans to raise about Rs 1,000 crore through this IPO. It plans to deploy the proceeds towards acquisition of land in Tamil Nadu and repayment of debt. Post-issue, Puravankara’s market capitalisation at the offer price would be over Rs 10,000 crore. While the company would be competing with bigger (in terms of turnover) players in this market-cap segment, there appears considerable scope for quickly ramping up revenue.

Comfortable past

Puravankara’s track record of executing 14 residential projects and a commercial one, spanning 3.93 million sq ft of developable area, is proof of its execution capability.

Further, it appears that the company has been benefiting from identifying low-cost land, ahead of the property market. That its land cost, as a proportion of total expenditure, has fallen from 24 per cent in 2004 to 6.4 per cent in 2007, reflects that the company has benefited from the boom in land prices over the last couple of years. Such a sharp decline in land cost also indicates that the company has been able to identify land at the right location and at the right time.

Going by its history and the current land holding, the company appears to prefer locations in cities and their peripheries. We believe that this strategy is relatively less risky as the demand for residential and commercial space is likely to remain robust in such areas. Corrections, if any, are also likely to be less sharp compared to smaller towns. Puravankara, therefore, appears to have a lower risk profile than similar-size peers which are aggressively moving to Tier-II and III cities.

Clean structure

Puravankara’s land holding appears to be structurally superior to a number of real-estate companies. The holding pattern also appears less complex and reflects better clarity in ownership. Of the developable area of 116 million sq ft, 14 million sq ft has ongoing projects in them.

Of the total land, 65 per cent is owned by the company; only 6 per cent of the land is on sole development rights where the title lies with the owner and the company gets only the development rights. The above proportion reduces the risk of any stalling of projects by landowners, who retain the title to the land. Even in the case of joint development projects, the company has stated that its economic interest in the same would be in the 60-77.5 per cent range. This percentage appears to be land owner-(who is typically the joint developer)friendly, striking mutual benefit.

The consideration for the above-mentioned land at Rs 795 crore is mostly paid, about 11 per cent remains outstanding.

Given that it has locked into land costs, the company may benefit from appreciation, as the land bank, going by its size, may last six-eight years.

Strength in joint venture

In 2005, Puravankara entered into a joint venture with a subsidiary of the Singapore-based Keppel Land, in which the Singapore Government’s investment arm, Temasek Holdings, has an indirect holding. Keppel Land has a presence across Singapore, China, Indonesia and Vietnam. While this joint venture is likely to improve the company’s execution capability, Puravankara has also been cautious in not exposing more than 7 per cent of its total developable area through this strategy. This venture may give Puravankara a presence in the overseas markets as well. Besides, the company has an ongoing project in Sri Lanka and an office in West Asia. Nevertheless, the venture has its risks, as the agreement does not preclude the venture partners from competing with each other.

The spread

With Bangalore being Puravankara’s strong point, the company continues to have 72 per cent of its developable area in this city. The company has also cautiously taken smaller exposure to land in Kochi and Chennai, Mysore and Hyderabad among other locations.

The demand from the middle- and upper middle-income group, to which Puravankara primarily caters to, is fairly robust in the above locations. Any correction in the now infrastructure constrained Bangalore is unlikely to dent the company’s profitability margins much, as the land is spread across the city and its outer limits. Further, the volume in the above income group segment is likely to provide some insulation to margins.

Strong financials

Puravankara’s revenue has grown at an annual rate of 75 per cent over the past three years, to Rs 417 crore in 2006-07. Operating profit margin at 32 per cent have remained stable over the past four years.

While there was scope for improvement in OPMs, with the land cost having reduced over the years, increasing construction costs appears to have prevented further growth. The margins are nevertheless above industry average.

The company is heavily geared and has a debt-equity ratio of over three. However, the proceeds of the issue are likely to bring this ratio to a comfortable level of less than 1.

DSP Merrill Lynch and Citigroup are the book running lead managers. The offer is open from July 31 to August 03.

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IPO BUZZ

Central Bank of India IPO opens Wednesday :The initial public offering of Central Bank of India opens on Wednesday. The bank is offering 8 crore shares of Rs 10 each in the price band Rs 85-102 per share. The issue closes Friday. The bank will raise Rs 680 crore at the lower price band of Rs 85 and Rs 816 crore at the upper price band of Rs 102. The issue proceeds will help augment the capital base of the bank to meet future capital requirements. The bank has reserved 60 per cent of the float for qualified institutional buyers and 30 per cent for retail investors. Post issue, government shareholding in the bank will come down to 80.20 per cent.
Central Bank of India has fixed the price band of its initial public offer (IPO) at Rs 85-102 per equity share. The issue is slated to open for subscription from June 24 to June 27 and will help the bank raise up to Rs 816 crore. Merchant bankers to the issue will announce the pricing on June 28. The bank is offering to sell eight crore equity shares, which will see the government stake’s falling to 80.2% from the current 100%. Announcing the details of the issue, HA Daruwalla, chairman and managing director of the bank, said, “Post-public issue, the bank’s capital adequacy ratio will improve by 100 basis points to 11.8%. Moreover, since we do not have an overseas office as of now, Basel II will be effective for us only from 2008-09.” Banks with overseas offices have to implement the Basel II norms from 2007-08. On interest rates, Ms Daruwalla said, “We expect interest rate to soften by October. But before that interest on deposits would come down parly because there is ample liquidity in the system and partly because interest rates are already very high.” Central Bank is among the last few government-owned banks, which have not offloaded their stake in the equities market. Other government-owned banks that have not entered the capital market include Punjab & Sind Bank and United Bank of India. The bank is India’s third largest in terms of branch network, which stands at 3,194. The bank, which currently has 525 branches under core banking solutions, will bring another 475 under it by the end of this fiscal, said bank official. Regarding the bank’s subsidiaries, Centbank Financial & Custodial Services and Cent Bank Home Finance, Ms Daruwalla said, “As of now, they are having a positive net worth. As long as they are profit making there is no reason for consolidation. But a time would come when we would have to take a real relook and decide whether to retain them as standalone subsidiaries or merge them with us.”
The third largest Bank in India in respect of number of branches, Central Bank is entering the capital market with an initial public offering (IPO) of 80,000,000 equity shares of Rs 10 each for cash at a price to be decided through a 100% book building process. The IPO opens for subscription on July 24, 2007, and closes on July 27, 2007. Price band has been fixed between Rs 85 per equity share and Rs 102 per equity share.The book running lead managers to the issue are: ICICI Securities Primary Dealership Limited, Citigroup Global Markets India Private Limited, Enam Financial Consultants Private Limited, IDBI Capital Market Services Limited and Kotak Mahindra Capital Company Limited. Intime Spectrum Registry Ltd is the registrar.The bank posted growth of 3.96% in net interest income at Rs 2,474.43 crore (Rs 24.74 billion) for FY07. Its net interest margin stood at 3.16%.Advances grew by 38.18% to Rs 51,795.48 crore and deposits rose by 24.51% to Rs 66,482.65 crore.

IPO BUZZ

Zylog Systems — IPO: Invest at cut-off Investors with a one/two-year perspective can subscribe to the initial public offer from Zylog Systems, considering its business prospects and reasonable asking price. Zylog is a Tier-2 software services and solutions provider to a predominantly US clientele. The company provides services such as application development and maintenance, enterprise infrastructure management and quality assurance and testing. It also has product platforms for seamless integration of various software applications for telecom, manufacturing and banking clientele. Additionally, Zylog derives significant revenues from partnering with system integrators/solution providers, independent software vendors (ISV) and value-added resellers (VAR).Business Outlook The company, which began operations in 1996, is different from the typical IT outfit, in that it generates 81.5 per cent of its revenues from services rendered onsite. While BFSI (Banking Financial Services and Insurance) and telecom are its key operational verticals (together contributing 56 per cent of revenues), Zylog generates significant revenues from retail, manufacturing and healthcare verticals. Zylog’s revenues have grown at a compounded annual growth rate of about 58 per cent the past four years, driven by certain key operational metrics and strategic moves.Zylog’s business is driven by the software solutions that it offers and a ‘collaborative sales model’. The latter means that it acts as a channel partner for some big international players such as Sun, Microsoft, and HP. Besides helping the company tap the business of these players, this model aids it to acquire clients independently through aggressive marketing. Zylog derives its revenues from servicing specific business units of large corporations rather than by providing enterprise-wide solution(s) that larger players offer. Apart from making the business less volume driven, this strategy enables greater focus, allowing Zylog to provide tailored IT, consulting services and product platforms to its clients. The association with the bigger players has also, over the years, given it greater scope for value-addition to the international players’ portfolio as well as its own.Second, the company derives 46 per cent of its revenues from fixed price billing, which is milestone-based. This indicates that the company may have robust means of estimating timelines and expertise required towards completion of projects. This could help in smoother revenue realisations. Third, the top 10 clients contribute 25.6 per cent of its revenues, indicating that client concentration risks are not high. MCI, its top client, a telecom company in the US, contributes about 4 per cent of its revenues. A healthy trend in client additions (the company has 16 million dollar clients) and a repeat business percentage of 88.9, are positive indicators. Valuation At the upper end of the price band, the offer values the company at about 11 times the current earnings, on the post-offer equity base. This is at a discount to other Tier-2 IT services companies such as i-Gate, Hexaware and Mastek. The EBITDA (earnings before interest depreciation and amortisation) margin at 17.1 per cent compares reasonably well with that of i-Gate and Mastek


The public issue of Zylog Systems Ltd. will hit the primary markets on July 20. The company has fixed the price band of its initial public offering at Rs 330-350, said an official from Motilal Oswal, book running lead manager to the issue. Zylog Systems will be issuing 36 lakh equity shares of face value Rs 10 each through 100% book building process. At the lower price band, the company will mop up Rs 118 crore and at the cap price it will raise Rs 126 crore. Zylog plans to utilise the proceeds for developing and expanding its business to set up two state-of-the-art offshore development centres, fund acquisition and strategic investments and to meet the increasing working. Zylog Systems is a global services provider delivering technology-driven business solutions. It is a 100% export oriented unit, registered with the Software Technology Parks of India and provides technology services to client specific requirements.

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