Economic Times: Oberoi Realty fixes IPO price band at Rs 253-260 per share

http://economictimes.indiatimes.com/markets/ipos/Oberoi-Realty-fixes-IPO-price-band-at-Rs-253-260-per-share/articleshow/6677248.cms

NEW DELHI: Real estate firm has fixed a price band of Rs 253 to Rs 260 a share for its initial share sale offer, through which the company expects to garner up to Rs 1,000 crore. 

"The price band for the public issue has been fixed at Rs 253 to Rs 260 per equity share," an investment banking source, working on the issue, told PTI today. 

The IPO will hit the capital market on October 6 and will close on October 8. 

The Mumbai-based real estate developer is coming out with an offer size of 39,562,000 shares of face value of Rs 10 each. At the upper end of the price band, the realtor will be able to raise up to Rs 1,028.61 crore, while at the lower end the IPO is valued worth Rs 1,000 crore. 

The firm may consider participation of anchor investors. They can bid a day prior to the opening of the issue, sources said. 

Kotak Mahindra, , Morgan Stanley India and are book-running lead managers to the issue. 

With a sharp rise in the stock markets, many companies are now hitting the Dalal Street to cash in on the increased investor appetite for these issue. 

Good response to the recent IPOs has also encouraged firms to launch their planned issues.

Motilal Oswal: HERO HONDA: Sep-10 volumes below estimates

HERO HONDA: Sep-10 volumes below estimates; Up 8% YoY (2% MoM) to 433,461; Impacted by flooding in North India

-          Hero Honda reported Sep-10 volumes of 433,461 units (v/s est 470,000), a growth of 8% YoY (2.1% MoM).

-          Volumes were impacted due to floods in North India (including its plant at Uttarakhand), disrupting movement of goods. As a result it is carrying inventory of ~35,000 units across its plants.

-          Although short-term headwinds exist, the outlook seems buoyant, as indicated by Mr Anil Dua, Sr VP (Mktg) in his comments - “The record sale in H1 of FY11 is extremely encouraging as it has set the pace for the second half of this financial year. We have recently introduced two new bikes this month, the New Super Splendor and Splendor Pro. Splendor Pro has brought in the biggest-ever change in Splendor since its launch. Leading into the festive season, we have lined up a couple of more launches - including a Limited Edition bike. With these slew of launches, high-decibel communication and activation, we are confident of doubling our pace of growth during the festive season."

-          Hero Honda’s volume continues to disappoint over last few months, led by supply constraints and other issues. As a result, it is losing out on strong demand at retail level and might see impact on its festive sales.

-          Line 3 at its Haridwar plant is now operational, taking total capacity to 5.4m from 4.8m units. Further, it would be de-bottlenecking capacity at Haridwar taking total capacity at Haridwar to 2.1m and overall capacity to 5.7m.

-          We model volume growth of 15% for FY11 to 5.3m units (implying a residual monthly run rate of 461,724 units v/s 419,967 units in FY11YTD), higher contribution from Haridwar plant (~34% of volumes), and 220bp decline in margins to 14.7%.

-          The stock trades at 16.2x FY11E EPS of Rs114.2 and 13.8x FY12 EPS of Rs134.6. Maintain Buy.

Kotak Sec recommends: Sell Reliance Power: Target Rs 135

Execution to gain momentum. Reliance Power (RPWR) remains confident of
achieving its ambitious target of 5 GW by FY2012E, 25 GW by FY2015E and 35 GW by
FY2017E. We believe that these targets are ambitious given the inherent execution risk
involved along with high fuel risk for its proposed 10,000 MW of gas-based capacities.
We maintain our SELL rating with target price of Rs135/share, noting the 18%
downside and risk to earnings from delayed execution and non-availability of fuel.


Ambitious plans to scale up to 25 GW by FY2015, 35 GW by FY2017
RPWR remains confident of achieving its targeted capacity of 25 GW by FY2015E which in our
view is ambitious given the high degree of execution risks involved. Our skepticism stems from the
present status of projects which are significantly lagging their original execution schedule. The
sluggish pace of execution is evident from the slow capex run rate having incurred ~Rs35 bn in
FY2010 marginally lesser than Rs37 bn in FY2009. We note that as of end FY2010, RPWR had
utilized Rs55 bn of the total IPO proceeds of Rs116 bn while Rs61 bn still remains unutilized.
High fuel risk for gas-based capacities, coal-based plants better positioned
RPWR plans to set up ~10,000 MW of gas-based capacities with 7,480 MW in Dadri and 2,400
MW in Samalkot (expansion of existing 220 MW at Samalkot which will be transferred to RPWR
from Reliance Infrastructure). Management highlighted that location of gas based capacities
remains flexible owing to uncertainties involved with land at Dadri.
In our view gas-based capacities face a high degree of fuel availability risk given the present
demand supply scenario of gas in India. In our view, securing allocations for ~28mcm/d of gas (the
approximate amount required for RPWR’s gas-based capacities) will likely be an uphill task given
the ever-increasing mismatch between demand and supply of gas. Fuel risk for coal-based
capacities is relatively lesser, with RPWR largely dependent on captive coal blocks secured in India
and Indonesia, to meet the requirement of associated capacity additions.
High execution and fuel risk, expensive valuations – maintain SELL
RPWR is currently trading at a P/B of 2.3 X on FY2012E net worth which we believe is expensive as
the 18% downside to our fair value estimate of Rs135 along with high earnings risk stemming
from execution and fuel uncertainties. Moreover, we highlight that a large portion of capacity
would be UMPPs (12,000 MW) that are not value accretive given the competitive nature of their
bids. Our DCF-based valuation for Sasan and Krishnapatnam implies a P/B of 1X on the total equity
investment for these projects. Acceleration of the commissioning schedule across the various
projects being implemented by the company could be an upside risk to our estimates.

Business Line: MFs' assets under management up 4% in Sept

Redemptions continue to plague industry.

Our Bureau

Mumbai, Oct. 2

The average Assets Under Management (AUM) of the mutual fund industry saw a nearly 4 per cent increase in September due to the rally in the market but redemptions continue to plague the industry, say experts.

The monthly AUM data for September, posted on the Association of Mutual Funds of India's Web site, may have gone up due to an increase in the Net Asset Values and not necessarily because of an increase in investor numbers, they say.

The AUM of the industry for September stood at Rs 7.12 lakh crore, up from Rs 6.87 lakh crore in August.

“Overall, the markets have done really well and that is reflected in the data. The global markets are stabilising and there have been fresh inflows, which will continue to come. The investors are also getting confident.

“However, redemptions still continue to exist and there could be some reason for concern there. But going forward, we are expecting some positive trends in the industry,” said Mr Gopal Agrawal, Deputy C.I.O and Head – Equity, Mirae Asset Global Investments (India) Pvt Ltd.

Liquidity situation

Experts have noted an improvement in the liquidity situation in the markets which has led to better numbers in September.

“The reason for increase in AUM this month has been two-fold. Compared to August, September saw a rise in the money market funds and also an increase in the mark-to-market values in equity funds,” said Mr Akshay Gupta, Chief Executive Officer, Peerless Funds Management Company Ltd.

As far as redemptions are concerned, there will be no respite from it, say analysts. “But these redemptions are now market-led,” said Mr Gupta.

“Valuations in the market are very high. So, those who had invested in 2007-08 and had seen a massive drop of 50-80 per cent in 2008-09, will now want to get out of the market. These redemptions are more of opportunist selling and profit-booking,” he added.

SIP route

While high redemptions and net outflows on the equity side continue to be cause for anxiety, there has been good news from the Systematic Investment Plan (SIP) side.

“The retail participation is seen happening here. At our retail counters, we have experienced high investor interest in the SIP route,” said Mr K. Venkitesh, National Head – Distribution, Geojit Financial Services.

Looking forward, industry experts say that AUMs will continue to increase, albeit in small doses, and that there will not be in any dramatic increase, as was experienced earlier.

The credit off take, all-time high interest rates and high market valuations have ensured that there will be no dramatic increase either in the debt/fixed income or the equity side of the industry, they said.

IPO Gray Market Premium Price on Oct 3rd

Company Name	Offer Price	Premium
	(Rs.)	(Rs.)
Career PointInfosystems	310 (Upper Band)	160 to 165
Eros International	175 (Upper Band)	46 to 49
Microsec Fin	118 (Upper Band)	11 to 13
Ramky Infrastructure Ltd.	450 (middle)	24 to 27
Orient Green Power	47 (Lower Band)	DISCOUNT
Electro Steel	11 (Upper Band)	1 to 1.10
Gallantt Ispat	50 (Fixed Price)	1 to 2
VA TechWabag	1310 (Upper Band)	395 to 425
CantabilRetail	135 (Upper Band)	4 to 5
Tecpro Systems	355 (Upper Band)	40 to 45
AshokBuildcon	324 (Upper Band)	23 to 26
Sea TV Network	100 (Upper Band)	10 to 15
Bedmutha Ind	95 to 102	8 to 9
Commercial Engg	125 to 127	5 to 7
Coal India	225 to 250	10 to 12

Jaiprakash Associate Target Rs 156- Buy says ICICI Sec

Jaiprakash Associates (JPA) is a multi-year play on high-growth diversified
infrastructure, with track record of strong execution across varied businesses.
Over the next few years, the company would: i) be among the top three leading
cement groups, ii) enjoy >Rs381bn order backlog in EPC, predominantly in-house,
besides potential Rs200bn EPC orders from its own power portfolio, iii) have
13.5GW power portfolio, comprising a healthy mix of hydro and thermal with 40%
merchant, iv) build 1,212Kms expressway with tolling rights and v) have real
estate development rights of 408mn sqft. We expect consolidated revenues,
EBITDA and PAT CAGR to be 28%, 46% and 59% in FY10-12E. Till the time the
capacities are ramped-up and investments fructify fully, short-term profitability
will be under strain (due to higher depreciation and interest). However, long-term
growth prospects remain intact. Our revised sum-of-the-parts (SOTP) target price
for JPA is Rs330bn or Rs156/share. Maintain BUY.
􀁦 Aggressive cement capacity addition. We expect JPA to increase its capacity to
over 31mtpa by FY12E (33mnte as per the company) from 19.1mnte in FY10. Since
new capacities are being added across regions, JPA would become a pan-India
player from a regional one. We expect JPA’s market share to rise to 7.8% by FY12E
from 5.4% at present. We are factoring in 36% volume CAGR over FY10-12E with
EBITDA/te of Rs940-1,020 over FY11E-12E.
􀁦 Lumpiness in E&C margin. Unexecuted orderbook stood at Rs81bn as on March
31, ’10. Margins have historically remained lumpy, within 12-31% over the past eight
quarters, mainly due to the mix of projects and hence, an area of concern, especially
when the segment derives 80%+ from in-house projects. The management expects
EBIT margin to be in the range of 15-18% in FY11 (I-Sec: 16%).
􀁦 Emerging strong in real estate. JPA has recently launched Jaypee Green Sports
City, which has a planned area of 2,500 acres. In Q1FY11, JPA sold 0.6mn sqft
premium real estate at Noida (0.32mnsqft) and Greater Noida (0.28mnsqft) at an
average rate of Rs5,700/sqft. Besides, Jaypee Infratech (JIL) – 83% stake owned by
JPA – sold 3.8mn sqft at an average rate of Rs3,100/sqft.
􀁦 Power-packed portfolio. With 700MW operational assets and 2,820MW projects
under implementation (1,000MW transmission rights) in power, JPA is likely to
increase its power portfolio to ~8.8GW by December ’15.

ICICI Securities: Buy Grasim Target Rs 2,650

Post the merger of Grasim’s cement division and UltraTech Cement (UTCL),
Grasim would house India’s largest pure play cement company besides being a
leader in viscose stable fibre (VSF). This would result in better financing options to
fund the next phase of organic/inorganic expansion. Its VSF division is delivering
strong and consistent performance, both in terms of volume and realisations.
After factoring in a 20% holding company discount to current market price of
UTCL, our sum-of-the-parts (SOTP) target price is Rs2,650/share. We believe the
market is assigning significantly higher holding company discount of ~45%, which
seems unjustified as cement still contribute 75%+ to revenue and 70%+ to EBITDA
on a consolidated basis. Besides, VSF cashflows would continue to fund
expansion of the cement division. Grasim currently trades at an attractive FY11E
EV/E of 5.4x and FY12E EV/E 4.9x. Grasim is among our top picks in the sector.
􀁦 Cement – Higher volumes & cost efficiencies. The 4.5mnte Shambhupura
capacity in Rajasthan commenced commercial production in Q2FY10, while the
4.9mnte Kotputli capacity (in Rajasthan) started production in Q4FY10. We expect
UTCL to post industry-average volume growth over FY11-13. With diversified
presence resulting in better realisations, strong volume growth and increased cost
efficiencies & productivity, UTCL is better placed to contain margin erosion caused
by any pricing pressure. We raise our FY11-12E EBITDA by 6-8%.
􀁦 Next expansion phase announced for setting up a 9.2mnte grinding unit in the next
three years at a capex of Rs56bn via brownfield expansion. This also includes
setting up additional clinkerisation plants at Chhattisgarh and Karnataka and bulk
packaging terminals across states. Besides, Rs26bn would be spent on augmenting
grinding capacity in Gujarat and installing waste heat recovery systems. The
acquisition of 3mnte ETA Star Cement is likely to be completed soon.
􀁦 VSF – Momentum to continue. VSF demand is likely to continue both domestically
and internationally on revival in consumer offtake and fall in global cotton production.
But margin could come under pressure due to rise in raw material costs. Grasim has
announced setting up a Rs10bn VSF plant, which would increase capacity 25%.
Also, the Chinese JV would double capacity to 70,000te from 35,000te by March ’10.
􀁦 Robust cashflows. Grasim is expected to generate Rs16bn FCF standalone and
Rs55bn on a consolidated basis. Cashflows from Grasim’s VSF division (say, via
rights issue of equity shares to Grasim) can be utilised for expansion in cement.

Shree Cement : de-risked Business model: Target Rs 2,575 says ICICI Sec

Shree Cement (SCL) has de-risked its business from earnings cyclicality through
diversifying into power. SCL’s power capacity is expected to rise to 563MW
(including 43MW waste heat recovery) by FY12E from 120MW at present and the
company aims for 1,000MW power capacity by ’14. Hence, we believe that most of
the decline in EBITDA from the cement division in FY11E will largely be offset by
rise in EBITDA from power. Even in cement, SCL is a market leader in North India
with better cost efficiencies. SCL will likely generate Rs38bn operating cashflows
versus Rs25bn planned capex over FY11E-13E. Maintain BUY with a revised target
price of Rs2,575 based on 5x average FY12E-13E EV/E for cement, 2x P/B
ascribed to 143MW operational power plants and 1x P/B assigned to the balance
300MW thermal power plants.
􀁦 De-risking from earnings cyclicality. SCL’s power capacity is expected to rise to
563MW by FY12E, of which 110MW will be for captive purposes and 453MW
(including 43MW waste heat recovery) for merchant sale. We estimate SCL to
produce and sell 285mn, 970mn and 1.6bn units of power resulting in revenues of
Rs5.2bn, Rs8.1bn and Rs12.2bn and EBITDA of Rs2.5bn, Rs3.2bn and Rs4.1bn in
FY11E, FY12E and FY13E respectively. Thus, power is likely to form ~23% of
revenues and EBITDA by FY13E from 5% and 7% respectively in FY10.
􀁦 Ramping up cement capacity 50% by December ’10. SCL’s split grinding units of
1.5mnte capacity each at Suratgarh (Rajasthan) and Rourkee (Uttarakhand)
commenced production by February-March ’10 and another 1.5mnte at Jaipur is
expected by December ’10, thus increasing integrated cement capacities 50% to
13.5mnte by December ’10. Also, the company has recently acquired land (~90%
complete) in Karnataka, which would have 5mnte clinker capacity.
􀁦 EPS CAGR of 25% over FY11-13E. We estimate cement volumes to grow 5% to
9.7mnte and clinker volumes to decline 37% to 0.6mnte. We factor in 11% volume
CAGR over FY12E-13E with 11.5mnte and 12.7mnte volumes in FY12E and FY13E
respectively. We expect utilisation in North India to drop to ~81% in FY11E from
90%+ and hence, factor in a 2% realisation drop in FY11E.We have factored in a
Rs1,000 EBITDA/te from cement (EBITDA margin of 30%) in FY11E compared with
Rs1,350/te in FY10.
􀁦 Beawar Power plant with 300MW capacity likely to be complete by June ’11
versus the earlier estimate of December ’11. But no fuel arrangements seems to
have been made yet (SCL intends to import coal and/or participate in e-auctions).

Buy UltraTech Cement for Rs 1200 target says ICICI Sec

UltraTech Cement (UTCL), post the merger with Grasim’s cement division, has
emerged as India’s largest cement company with ~49mnte capacity and ~19%
market share. Its geographic mix, which was skewed towards the West and the
South (~84%), would be more diversified with South, West and North constituting
27%, 25% and 23% respectively. We believe the larger entity would aid fund
raising and inorganic plans. With high quality and better profitability assets in
white cement and wall care putty, overall profitability would likely improve. UTCL
is focussing on improving its operating efficiency via increasing blending,
increased use of CPPs to 80% from the current 70% and better logistic
infrastructure. With capacity addition ahead of peers, better cost efficiency and
larger diversified pan-India presence, discount versus peers will likely reduce.
Maintain BUY with a price target of Rs1,200 (7.2x EV/E of average FY12-13E).
􀁦 Setting up 2mnte grinding unit at its Gujarat plant. UTCL exports ~2.5mnte
clinker from its Gujarat plant as it does not have adequate grinding units. UTCL,
accordingly, is expanding its jetty and setting up a 2mnte grinding unit to convert
clinker exports into cement. This is expected to be operational by Q4FY12, which
would improve blended realisations.
􀁦 Next expansion phase announced for setting up a 9.2mnte grinding unit in the
next three years at a capex of Rs56bn via brownfield expansion. This also includes
setting up additional clinkerisation plants at Chhattisgarh and Karnataka and bulk
packaging terminals across various states. Besides, Rs26bn would be spent on
augmenting grinding capacity in Gujarat and installing waste heat recovery systems.
The acquisition of 3mnte ETA Star Cement is likely to be completed soon.
􀁦 Strong cashflows. We expect UTCL, post its merger with Samruddhi Cement, to
generate Rs33bn FCF over FY11E-13E, resulting in D/E declining to 0.4x. Also,
cashflows from Grasim’s VSF division (say, via rights issue of equity shares to
Grasim) can also be utilised for expansion in cement.
􀁦 Margin performance to improve. Post the merger with Samruddhi Cement,
UTCL’s geographic mix would become more diversified, resulting in better
realisations. Also, due to slowdown in clinker export, clinker sale would come down
which would lead to better blended realisations. Besides, white cement assets have
better profitability. Also, lower external clinker purchase would lead to savings of
Rs45/te in FY11E. We factor in ~24-25% EBITDA margin and EPS CAGR of 18%
over FY11E-13E.We raise FY11-12E EBITDA by 5-8%.

ICICI Securities: Buy ACC target rs 1200

ACC has been a laggard in terms of volume growth over the past two years and
its market share has declined to ~9.9% at present from 11.7% in ’08 due to
capacity constraint, wagon shortage and unavailability of key raw materials.
However, its 1mnte Bargarh plant (in the East) and 3mnte Wadi capacity (in the
South) would be ramped-up by December ’10. Besides, its 3mnte Chanda plant
(in the West) would be operational by Q1CY11. Hence, we expect ACC to post
volume growth in line with the industry after December ’10. ACC is focussing on
improving its operating efficiencies via increased use of CPPs and alternative
fuels, higher domestic coal linkages and SG&A rationalisation. Pan-India
presence, better market mix, strong brand equity (ACC is the oldest cement
brand) and higher rural penetration would boost realisations. Corporate action in
the form of special dividend / bonus share is a possibility as ’10-11 is being
marked as a Platinum Jubilee Year. Maintain BUY with revised target price of
Rs1,200 (7.7x average of CY11-12E EV/E). Increase in stake by Holcim and merger
with Ambuja Cements can provide additional triggers. ACC is our top pick.
􀁦 Next phase of expansion likely to be announced by end-CY10. ACC is likely to
announce ~7mnte new capacities in North / East (to maintain its market share),
which is expected to be operational post CY13E. ACC has a net cash of Rs8.5bn
and is expected to generate FCF of ~Rs22bn over CY10-12E.
􀁦 Better cost efficiencies to contain margin erosion. ACC is setting up 90MW
CPP, taking the total CPP to 351MW which would increase its CPP consumption to
~80% from 70%. ACC imports only 10% of its coal requirement, whereas it has
linkages for 60-65% – the biggest cost advantage among peers. Increased use of
alternative fuels and industrial wastes led to Rs408mn savings in ’09 versus
Rs228mn in ’08. Besides, EBIT losses from the RMC business have reduced to
Rs477mn in ’09 from Rs918mn in ’08; RMC will likely turn around by ’11. ACC is
expected to have significant coal cost advantage in the long term via insourcing of
coal from the mines (currently being developed through JVs with the state
Governments of Madhya Pradesh and West Bengal), which will be operational over
the next 3-4 years.
􀁦 EPS CAGR of 15% over CY11E-12E. We factor in a 10% volume growth over
CY11E-12E with average realisation inching up 1.5-3.5% over CY11E-12E. EBITDA
margin will likely remain in the band of 24.5-25.5% over CY10-12E. We raise our
CY10-11E EBITDA estimates ~3-5%.

ICICI Sec: Buy Ambuja Cements ; Target Rs 161

Post capacity expansion, Ambuja Cements (ACEM) is set to strengthen its
presence in the North and the East, which are likely less vulnerable to pricing
pressure. Volume growth would accelerate to ~10% as capacities are ramped up to
27mnte by end ’10E. ACEM is best placed among peers to contain margin erosion
led by better realisation, increased power from CPP, lower imported coal costs
and better logistic infrastructure. Capacity addition in the North and the East
(lower pricing pressure) and no presence in the South (high pricing pressure)
besides higher proportion of premium retail sales and increased rural penetration
will ensure better realisation. Hence, ACEM would continue to enjoy valuation
premium versus peers. ACEM outperformed the broad markets ~23% and peers
13-18% in the past year and is currently valued at CY11E EV/E of 8.6x and
US$161/te. Maintain BUY with Rs161 target price (8.5x average CY11-12E EV/E).
Increase in stake by Holcim and merger with ACC can provide additional triggers.
􀁦 Next expansion phase likely to be announced by end-CY10. ACEM is likely to
announce ~7mnte new capacity in its existing markets (to maintain its market share),
which is expected to be operational after CY13E. The current net cash is in excess of
Rs18bn and ACEM is expected to generate Rs17bn FCF over CY10E-12E. ACEM is
scouting for acquisitions, but valuations are the key hindrance. Thus, ACEM is best
placed to fund its next phase of expansion.
􀁦 Best placed among peers to contain margin erosion. ACEM commissioned
109MW CPP in CY09 and another 30MW in Q1CY10, the full benefit from which
would accrue in CY10E. The share of imported coal in fuel mix will likely reduce to
~25% from 30% and that of pet coke rise from 10%, leading to fuel cost savings.
Better logistic infrastructure and benefit of sea transport would contain freight costs.
􀁦 EPS CAGR of 14% in CY11E-12E. We factor in a 10% volume growth with average
realisation inching up 1.5-3.5% over CY11E-12E. With the North, the Central and the
East constituting 63% of revenues and no exposure in the South, ACEM’s
realisations would lead the industry. EBITDA margin is likely to be ~27-28% in ’10E-
12E. We raise our EBITDA estimates ~2-4% for CY10-11E.
􀁦 Valuation premium to sustain. Given better geographic presence, superior
realisations, consistent and industry leading margins, improving financial
performance and strong cashflow & balance sheet, we expect ACEM to continue
enjoying premium valuations versus peers.

ICICI Securities: maintain our positive stance on cement stocks

Despite the recent ~15% run-up, we maintain our positive stance on cement
stocks as we believe earnings could surprise and sector could re-rate with
utilisation increasing to 86% from 80% over next three years. We raise our FY11-
12E earnings 2-16% and target price 4-27% as we roll forward our valuations on
average of FY12-13E and increase our target multiple to a higher range of midcycle
valuation. We expect the pace of capacity additions to decelerate and
demand to surprise positively. We believe next 12 months would lay the
foundation for the next up-cycle. Recent ‘unreasonable and arguably
unsustainable’ price hikes in the South could lead to gradual pan-India price hike,
as busy construction season resumes post monsoon and festive season. We
factor in ~2-4% YoY increase in average price realisation for FY12-13E. We expect
EPS CAGR of 14-17% over FY11-13E for top three pure play cement companies.
􀁦 Demand could surprise positively in H2FY11E and FY12E given: i) in the last 18
months of XI Five Year Plan (FYP), the Government would accelerate infrastructure
spend; ii) higher rural housing demand on better monsoon this year; iii) forthcoming
elections in few large states; and iv) low base effect of H1FY11. We believe the
cement industry is at inflection point led by structural shift in demand drivers. Hence
the demand is expected to be in low double digits over the next three to five years.
􀁦 Pace of supply to decelerate. Capacities of ~52mnte were added in FY10;
however lesser 37mnte and 16mnte are expected to be added in FY11E and FY12E
respectively. Utilisation is expected to increase from 72% in Q2FY11E to 84% by
Q4FY11E. Hence, prices are unlikely to touch the recent lows of August ’10. Also,
unlike the last year, we expect prices in most regions to move in identical direction.
Prices in the South seem to have bottomed out; though would remain volatile.
􀁦 Higher concentration and cost escalations may result in better pricing
discipline. Top 10 cement groups constitute almost three-fourth of the industry;
whereas top five enjoy ~55% market share. Costs have spiked 10-12% YoY and we
believe that the companies would attempt to protect their margins by raising prices.
On the other hand, consensus (including us) is factoring in an average 3-7% decline
in realisation in FY11E owing to over-supply. Thus, any price hike to mitigate cost
rise would lead to an earnings surprise.
􀁦 Sector likely to get re-rated. We replace Ambuja Cement (strong outperformance
of 23% YoY) with ACC (volumes to pick up; cost efficient) as our top pick, followed
by Grasim Industries (strong VSF; higher unjustified holding company discount) and
Shree Cement (diversified).
􀁦 Key risks: Lower-than-expected demand; higher cost escalations.

Businss Line:CEBBCO — IPO: Avoid

Parvatha Vardhini C.

Business Line

Investors can skip the IPO of Commercial Engineers and Body Builders (CEBBCO). The company manufactures vehicle bodies for commercial vehicles, components for railway wagons, coaches and locomotives and also refurbishes railway wagons. It plans to raise Rs 150.5-153 crore through a fresh issue, predominantly for setting up a combined wagon and EMU (Electric Multiple Unit) coach manufacturing facility with a production capacity of about 1,200 wagons and 150 EMU coaches per annum. A small part of the issue proceeds will also be used for prepayment of loans.

The entry into the high-margin railway segment holds promise, but dependence on largely one client in its existing vehicle body-building business, relative inexperience in railways and demanding valuations imply that investors with a low to medium risk appetite need not subscribe to the offer.

At the upper end of the price band of Rs 125-127, the offer is priced at about 36 times FY10 earnings and 28 times expected FY11 earnings on a post-issue equity base. Titagarh Wagons, a company focussed on heavy equipment and railway wagon manufacture, trades at a forward PE of about 11 times.

Play on CVs

CEBBCO builds bodies for OEMs (Original Equipment Manufacturers) engaged in the production of fully built vehicles. Tippers and trailers used in mining, road construction and goods transportation form a major portion of its product offering. During 2006-10, the company has derived 50-85 per cent of its revenues from one client, Tata Motors. As is common in the industry, the company's business is conducted on purchase-order basis depending on the OEMs' requirement of vehicles and not on the basis of long-term contracts. Hence, to de-risk its revenues as well as to widen its product base, the company has included Volvo Eicher CVs, Man Force Trucks, Asian Motor Works and Ashok Leyland among its clients; but, contribution from these OEMs to the top-line is yet to gain traction.

Out of the order book of about Rs 525 crore in the CV segment as of July 2010, orders from Tata Motors are about Rs 475 crore. The shift to the production of fully built vehicles by OEMs, robust CV sales and improving road infrastructure bodes well for CEBBCO's growth in this segment.

But the industry itself is cyclical, is dependent on availability of finance and also gives only limited pricing power. So, the company has stepped into the railways segment which has promising prospects and higher margins.

The company made an entry into the railways segment in 2008, supplying components such as side-walls, end-walls, stainless steel fittings for wagons and long hood structures for locomotives. In 2009-10, about 27 per cent of revenues came from this division.

This contribution can be expected to increase as the forward integration into the manufacture of rolling stock (wagons, coaches, locomotives and EMUs) holds promise.

At the end of the Eleventh five-year Plan period (2007-12), Indian Railways is targeting freight loading of 1100 million tonnes and 700 billion freight tonne km, almost 50 per cent above the target of the Tenth Plan.

It is also setting up Dedicated Freight Corridors, initially in the western and eastern routes thus fuelling demand for wagons. In fact, the railways targets a procurement of about 3,00,000 wagons and about 5,000 diesel and electric locomotives by 2020.

Considering the growing demand and the supply shortages, the company will stand to benefit from the entry into the manufacturing of wagons. But, given that the company is a relatively new entrant to the railway business and does not have any orders in hand for rolling stock, investors would be better off buying the shares in the secondary market when earnings from this source become more visible.

Financials

For the year ended March 2010, the company's net sales stood at Rs 183 crore and net profits at Rs 19 crore, growing at a CAGR of 39 per cent and 66 per cent, respectively, during 2006-10. EBITDA margin for the year was at 15 per cent.

The offer is open till October 5. ICICI Securities and Edelweiss Capital are the book running lead managers.