IDFC (Rs 88.80): Sell

We recommend a ‘sell’ in Infrastructure Development Finance Company (IDFC) from a short-term perspective. It is evident from the charts of IDFC that the stock has been on an intermediate-term downtrend from its January 2008 peak of Rs 235, forming lower peaks and lower troughs.

In May, the stock declined below the 200 and 50-day moving averages. The downtrend has continued and the stock conclusively breached the key support level Rs 110 recently. On July 29, the stock tumbled almost 9 per cent, reinforcing the downtrend. With this, the daily relative strength index (RSI) has entered the bearish zone from the neutral region and the weekly RSI is featuring in this zone. The moving average convergence and divergence is featuring in the negative territory. The stock is trading well below its 21 and 50-day moving averages.

Considering that the medium-term down trendline is intact, we are bearish on the stock in the short-term. We expect the stock’s decline to continue until it hits our price target of Rs 78 in the forthcoming trading sessions. Traders with short-term perspective can sell the stock while maintaining a stop-loss at Rs 94.

Yoganand D.
Source : the businessline dt.30 7 2008

Aggregating profits Tanla Solutions

Tanla Solutions is poised for strong growth on Openbit acquisition, foray into new geographies and improved penetration in existing markets.

Even as the number of mobile users globally continue to rise at a rapid rate, the mobile service operators are feeling the heat in the voice-based segment with their average revenue per user (ARPU) heading southward.

The trend points towards operators needing to constantly launch greater number of value added services (VAS) to drive aggregate ARPUs. This augurs well for aggregators like Hyderabad-based Tanla Solutions (Tanla), specialising in developing mobile applications and platforms, primarily for the mobile telecom industry.

Business
Over the last eight years, Tanla has evolved from a mere telecom product licensing company to providing integrated telecom products and services on a revenue / pay for use revenue model.

The company offers aggregation services (by acting as a single point interface between content developers like ESPN, Disney and mobile network operators like Airtel, Idea), telecom-signalling products to mobile operators and offshore services in the area of application hosting and infrastructure management.

With its focus on the sophisticated mobile VAS markets of UK and Ireland (estimated size $1.5 billion) that generate more than 95 per cent of the company’s revenues, the company has cornered a market share of about 5 per cent in these markets.

The company intends to increase its market share to about 8 per cent in FY09 by bundling solutions in billing and applications, and increasing its presence in the rich content arena.

In the aggregation business, relationships with global telecom operators are crucial and Tanla scores favourably on this front. The company has strong business ties with Vodafone, O2, T-Mobile, Virgin, Orange and 3 (Hutchison); encompassing relationships with all the mobile operators in UK, which gives it a strong lever to gain market share.

Growth strategies
Tanla recently acquired 85 per cent of Finland-based Openbit, a provider of global on-device payments for mobile applications for $18.6 million. Openbit is used as a payment gateway, which facilitates payment through mobile phones with support from credit card companies. Openbit’s clients include Nokia and some of the largest independent software vendors like Symantec, F-Secure and Quickoffice, and gaming companies like 3D Arts and Gamelion.

Openbit was installed in 1.4 million handsets during June 2008, which is typically a lean period for the company. This enabled Openbit to register revenues of Rs 7.4 crore and PAT of Rs 1.6 crore (revenue recognised for the month of June 2008 only).

The company plans to scale up the number of installations to 50 million by end-2008 and 190 million by 2009. The Openbit acquisition will help Tanla move higher up the value chain and provide rich media and business applications.

Tanla not only gets access to Openbit's proprietary technology and applications, but also its customer-base of 90 operator networks across 30 countries. The acquisition is expected to be 10-11 per cent EPS accretive in the first year of operations.

Tanla entered India in Q4FY08 and signed billing and messaging agreements with service providers such as Airtel, BSNL, Idea, Reliance, and Vodafone.

Apart from this, Tanla also entered into tie-ups with operators like Airtel and BSNL for FM radio service on the move and setting up voice portals across India, respectively.

The company is already live with all major operators for premium SMS, which would be further aided by its tie up with five TV channels for Interactive TV (ITV) services. As the name suggests, ITV helps media channels to run interactive services with their viewers.

Connectivity agreements were also signed with operators in South Africa, Dubai, Spain and Singapore.

Notably, revenues for all these engagements are expected to accrue from Q2 FY09 onwards. Tanla has an ambitious plan to expand geographically by expanding it footprints from nine countries currently to 40 countries with direct connectivity in 28 countries in FY09.

Financials
Tanla has consistently reported robust performance, with CAGR of 170 per cent in revenues and 132 per cent in net profit over FY06-08.

The company’s growth continues to be driven by both increased penetration into existing markets as well as expansion into newer markets, with the aggregator business remaining the key growth driver and focus area.

All the three businesses have high margins, upwards of 35 per cent.

ROBUST GROWTH
Rs crore FY08 FY09E FY10E
Net sales 459.8 689.0 938.0
Net profit 163.1 229.3 281.0
OPM (%) 46.8 46.0 45.6
NPM (%) 35.5 33.3 30.0
P/E (x) 13.1 9.3 7.6
E: Analysts estimates

The company is a debt-free company and a total cash on books stands at about Rs 200 crore, which gives the company fuel for further acquisitions.

Investment rationale
As per industry estimates, the global market for VAS stands at $25 billion in FY08, and is growing at 25-30 per cent annually.

With its suite of end-to-end solutions, Tanla appears well-poised to tap the opportunity going forward. Its key competitive advantages are its lower costs vis-à-vis competition in the overseas markets, wide product and service offerings and long experience.

One of Tanla’s key strategies to drive revenue growth going ahead is geographic expansion, which will not only provide momentum to its growth but also de-risk its business model.

Visibility for Tanla’s aggregator business appears strong with its entry into newer markets like Singapore, Dubai, Spain, South Africa and the US.

Going forward, Tanla’s revenues and profits are expected to grow at a CAGR of 42 per cent and 31 per cent over FY08-10, respectively. The lower profit growth is a result of contribution from the low margin business of Openbit, change in the revenue mix with increasing share of aggregation business and higher costs due to international expansion.

However, EBITDA margins above 45 per cent and net profit margins of 30 per cent still characterise the strong business model of Tanla. With the recent fall in the equity market, at Rs 213.45, the stock is attractive and can deliver over 30 per cent in a year.
Source : The Business Standard dt. 28 7 2008

Nu Tek's primary offer looks attractive

COMPANY: NU TEK INDIA
ISSUE SIZE: Rs 76.5-86.4 CRORE
PRICE: Rs 170-192
ISSUE DATE: JULY 29 - AUGUST 1, ’08

Telecom infrastructure services provider Nu Tek is coming out with an initial public offer (IPO) of 4.5 million shares. The IPO funds will be utilised for capital expenditure, working capital requirements and acquisition purposes. Post-listing, the promoters’ stake in the company will come down to 42.4% from the current 53.2%. The stock seems to be reasonably priced and investors can consider it for subscription.

Business:

The company provides telecom infrastructure services, including execution of turnkey projects, telecom implementation solutions, operation maintenance and resources. It carries out all civil and electrical work, such as installing passive and active infrastructure at the tower site. It also undertakes maintenance of this infrastructure on an ongoing basis.

Nu Tek gets its business from service providers, original equipment manufacturers (OEMs) and third-party telecom infrastructure leasing companies. It has executed projects for various service providers in the country and for major OEMs like Ericsson, Motorola and Nokia, among others.

Financials:

The company has reported robust growth over the past five years. Its net sales have more than tripled in the past three years to Rs 95 crore. It has managed to improve its operating margin significantly from 9% in FY03 to more than 30% in FY08. The reason for this is higher utilisation of human resources. As the company serves more and more customers in the same circle, this utilisation rate will increase further. Its three-year average return on equity is close to 24%, which is higher than that of its peers in the industry.

Growth drivers:

Though India is the secondlargest in terms of total number of subscribers, there is still substantial room for growth, as its tele-density (the number of telecom service users in the total population) is just over 26%. So, going forward, service providers will have to set up more towers and other operating assets to serve the rising subscriber base. The total number of towers in the country is expected to double by ’10.
This augurs well for Nu Tek, given its area of operations. Further, as and when its scale of operations increases on account of more opportunities, the company can provide the same service at a relatively lower price in those regions where it already has its presence.

Valuations:

The company’s net profit recorded a compound annual growth rate (CAGR) of more than 50% in the past three years. Even after assuming a conservative growth rate of 30% for the next two years, its earnings per share (EPS) works out to Rs 15.9 and Rs 20.7 for FY09 and FY10, respectively. This means that at the current offer price, the stock offers a P/E multiple of 12.1 and 9.3 at the upper price band for FY09 and FY10, respectively. This is relatively lower compared to its peers in the telecom industry. Considering these attractive valuations, investors can consider subscribing to this issue.

Risk factor:

The company has high working capital requirements due to the inherent nature of its business, which may have an adverse effect on debt repayment or distribution of cash to its shareholders.
Source : The Economic times dt 28 7 2008

Bull's Eye,

Aban offshore
RESEARCH: GOLDMAN SACHS
RATING: BUY
CMP: RS 2,695.15

GOLDMAN Sachs reiterates ‘buy’ rating on Aban Offshore with a P/E-based 12-month target price of Rs 4,375, implying potential upside of 64%. Discounted cash flow value is Rs 4,500/share. Aban’s FY08 pre-exceptional consolidated net profit stood at Rs 310 crore, beating the estimate of Rs 250 crore by 22%. Aban’s reported FY08 profit of Rs 120 crore had a one-time translation loss of Rs 180 crore due to adverse movement of NOK-USD exchange rates since March ’07. Strong operating results were offset by higherthan-expected interest cost.

Better-than-expected operating results and persistent market fears of large derivatives loss proving to be untrue will lead to re-rating of the stock. Goldman expects Aban to announce contracts for five assets - jack-up rigs Deep Driller III, VI, VII and VIII and semi-submersible rig Aban Pearl - over the next 1-6 months. Goldman estimates the jack-up day rates to be $180-185K for short-term contracts and at a 10% discount for long-term contracts. For Aban Pearl, Goldman has assumed a day rate of $275K. So far, Aban’s last nine contracts have been at rates higher than estimates.

Aban’s stock is trading at 5.8x FY10E EPS, which implies a discount of 23% to the global average for offshore drilling companies. Aban still has the best earnings growth profile in the medium term in its peer group, with EPS CAGR of 162% between FY08 and FY10E, even after cutting FY09E EPS by 3.5% to reflect delay in deployment of Frontier Ice at higher day rates.
Source : The Economic times dt. 28 7 2008

Geodesic Info finds favour

Some institutional players are said to be accumulating shares of software solution provider Geodesic Information Systems. According to analysts, the company’s strong presence in the low-cost solutions is an effective antidote to the cost cutting efforts by the industry due to signs of economic slowdown.

For example, it has products like mundu messaging system, VOIP solution and internet radio accessible through mobile. Besides, the company also has high-profile clients like Apple, Motorola and Idea. Further, it is looking for an acquisition in the US and European markets and has recently raised funds for this purpose.

Analysts expect the company to post a topline of about Rs 120 crore and a bottomline of Rs 58-60 crore for the quarter ended June 2008. The stock closed at Rs 171, up 2% on Friday, defying the overall the downtrend in the market.

(Contributed by Apurv Gupta & Ashish Rukhaiyar

Source : The Economic times dt. 26 7 2008

Investment strategy: Accumulating large-caps, timing momentums

The sharp decline in stock prices since January 2008 has left many wondering as to whether the market will ever climb up. Such gloom and doom is part of human nature. We always swing from bouts of optimism to spells of extreme pessimism. As the saying goes, greed and fear drive asset prices. And it is fear that is currently gripping the market. Several investors asked us the optimal strategy that they should adopt in current market conditions.

This article attempts to answer this question. It acknowledges the fact that not all investors and analysts are competent to find the market bottom. Small investors should, hence, consider accumulating large-cap stocks in their core portfolio. The satellite portfolio could primarily carry cash and some momentum stocks to moderate and adapt to investors’ emotional biases.
Accumulating inside core

The core portfolio contains large-caps and represents the long-term component of the total portfolio. Investors could now consider buying large-caps for their core portfolio. It is important to remember that the core portfolio is about value-investing, not market timing.

Suppose an investor with Rs 20 lakh wants to construct a portfolio that has two constraints. One, the portfolio cannot have more than 2 per cent risk exposure to a single stock. And two, the portfolio will have a sector cap of 20 per cent.

Now, suppose the investor decides to buy Tata Motors at Rs 400 but does not want to hold the stock if it closes below Rs 300. The capital-at-risk is Rs 100 per share and Rs 40,000 for the stock (2 per cent of Rs 20 lakh). This means that the investor can only buy 400 shares (Rs 40,000/Rs 100). The investor may, of course, overweight or underweight a stock in the portfolio.

The optimal strategy is to accumulate stocks (buy in tranches) at the current level. This strategy acknowledges the fact that the objective is not to engage in tactical asset allocation (or market timing). Rather, it is to simply buy value stocks at various price points.

This strategy allows generously for downside risk — the risk that any stock could decline after it has been included in the portfolio!

It is important to understand the difference between accumulation and downside averaging. Accumulation is buying the budgeted 400 shares of Tata Motors at prices ranging from, say, Rs 425 to Rs 350. The investor will not buy Tata Motors thereafter, even if the stock were to decline further. Downside averaging is about sinking more money into the stock even after buying the budgeted 400 shares. Such a strategy is harmful for the portfolio.
Cash is king?

The satellite portfolio carries short-term exposure to momentum stocks. Such stocks are easy to pick in a trending market. The current market is hardly one. So, generating higher returns from this portfolio may not be possible for now.

Investors should, therefore, consider holding cash equivalents in this portfolio till there is a confirmation of an uptrend in individual stocks. But all of investors suffer from emotional biases. One such bias is the need to trade regularly in the market and to expect cash-flows into the trading account.

To moderate and adapt to this bias, investor may allocate not more than 25 per cent of their satellite portfolio to take active bets in the current market. It is best to take such bets with strict risk management rules.

Sophisticated investors can also trade on shares “borrowed” from their core portfolio. Suppose an investor has a view that Tata Motors will find near-term resistance at Rs 500 and near-term support at Rs 370. She can let her satellite portfolio “borrow” half the number of shares of the stock held in her core portfolio and trade on them. The profit/loss on the trade will go to the satellite portfolio and the stock, back to the core portfolio.

Care should be taken not to indulge in this strategy. The reason is that portfolio will be exposed to risk if the stock does not decline and instead moves up.

Often, investors will be reluctant to buy back the shares at a higher level. This will lead to sub-optimal allocation of the core portfolio.
Conclusion

The core-portfolio should not hold more than 10-12 stocks. It is preferable to hold not more than five stocks in the satellite portfolio at any point in time. It is important to buy sector leaders in the core portfolio as such stocks provide good upside potential when the market turns after a corrective phase.

Finally, investors should remember this if nothing else. It is sometimes optimal not to trade at all in the satellite portfolio. And most of the times, it is better to ride the trend than move against it. Taoists call it Wu Wei.
Source : The Businessline dt. 20 7 2008

Trust won or not, market to remain shaky

MUMBAI: The trust vote in Parliament on July 22, which will decide whether the UPA government will stay in office, will also determine the fate of the market in the near term.

The first two days of the forthcoming week will see a decent amount of volatility. "I don't see too much of a rally from here at least till Tuesday. So basically, the market would be volatile but at lower levels," said Arun Kejriwal, strategist at KRIS Research.

If the Congress manages to prove its majority with new allies in tow, it will open up a Pandora's box of reforms, which had been kept on the backburner on account of resistance from the Left parties.

While there's hope for India Inc that the slow-moving economic reforms programme will be put on the fast track, there are views that even if it survives, the period for a major policy shift is too less with elections around the corner.

But the market largely seems to have accepted the fact that the government will sail through, which is why there has been a sense of euphoria that has set in over the last few days, say market experts.
Market already seems excited. If the trust vote tilts in favour of the Congress, we can expect a sustained rally," said Shahina Mukadam, head of research at IDBI Capital Markets.

On the other hand, if the government loses the vote, the country will face early elections and it would mean the probable demise of the landmark US-India nuclear deal. The market will be on tenterhooks again as political uncertainty will prevail, especially at a time of high inflation, high interest rates, signs of fiscal strain and slowing growth.

Shifting focus, the sharp drop in oil prices has offered some solace to the ailing equity market. Crude oil has plummeted after striking record highs above $147 per barrel last week. But experts are still unsure whether crude will stabilise at current levels but suggest that the speculation on oil prices is easing off.

On the data front, the rise in inflation in the week to July 5 to 11.91 per cent came as a surprise against expectations of 12.05 percent though up from previous week's 11.89 percent.

However, IDBI Cap's Mukadam feels we are yet to see worse inflation figures and that Reserve Bank of India, in its July 29 monetary review, will maintain a hawkish stance.

Last month, the RBI increased its key lending rate by 75 basis points to 8.5 per cent, it's highest in six years, and hiked banks' reserve requirements by 50 basis points in an aggressive effort to combat inflation. On July 29, it is widely expected to tighten monetary policy again.

For the week, Bombay Stock Exchange's Sensex ended 1.23 per cent higher at 13,635.40, after over 1200 points rally in the last two days.

National Stock Exchange's Nifty gained 1.08 per cent to 4092.25 from the earlier week.

Source : The Economic Times dt. 19 7 2008