MphasiS BFL - Initiating Coverage - Outperformer

Worst over, Q2FY06 results signal an uptrend
Significant improvement in operating matrices in Q2FY06 results
§ The share of revenues from fixed price contracts has increased.
§ Higher utilisation levels.
§ Improvement in offshore billing rates
§ Improvement in client profile in IT Services and BPO – Reduced
dependence on top clients (IT and BPO), increase in million dollar clients
(IT services).
§ Improving geographic profile - The share of revenues in both IT
services and BPO from Europe has increased reducing the dependence on the US.
§ New clients (acquired in the last one year) have matured and ramped up.

IT services contribute 69% of revenues and a higher75% in profitability.
Visible traction in IT services. However, the fall in BPO revenues seems to
be bottoming out.
Turnaround in the profitability of both IT services (since Q3FY05) and BPO
(since Q2FY06)
Recent domestic BPO orders (Airtel, leading nationalised bank) leads to
stability in BPO business
Even though Airtel and a domestic business' profitability (14% PBIT) is on
par with international BPO, but due to domestic BPO being taxed, effective
margins are expected to fall to 10%.

Ownership issues
The uncertainties regarding Barings stake sale issue are over - Clients visits and orders were deferred due to the ownership uncertainties. However, Mr Jerry Rao stake sale has again raised other issues regarding ownership of the company. With Mr Rao's stake reducing, it is possible that Mphasis may be acquired. The acquisition will most possibly be at a higher price, with an open offer and will thus benefit the shareholders.

Buy back
The company has passed a resolution to buy back Mphasis stock (up to 10% amounting to Rs 2300 mn.) at the prevailing market price (effective from 1 April 2006). This buy back will be financed partly by debt. The buyback will help reduce floating stock and also put a floor on the downside in the stock price.
Valuations
The stock trades at P/E of 14.1x FY06E and 11.1x FY07E, lower than other mid-sized technology companies. The stock also has the potential to re-rate and we recommend an Outperformer with a price target of Rs. 185 in 12 months.

RIL's talks with BG & Exxon

RELIANCE'S reported talks with Exxon-Mobil and British Gas for partnering in the KG Basin are understood to have hit a rough patch with the global oil majors questioning the valuation of RIL's offshore assets. This is because Reliance has already committed substantial quantities of gas to NTPC at very low prices over the long term. It has also committed supplies to Anil Ambani's proposed power plants on similar terms.
Investment bankers say, "RIL has locked up a significant proportion of its gas at less than $3 per mmbtu at a time when prices are well above $10 per mmbtu. This brings down the value of the asset." This probably explains RIL's reluctance to sign the gas supply agreement with NTPC under existing terms. RIL is estimated to have established gas reserves of around 12 TCF in the KG Basin.
Sources in investment banking circles say the major point of difference is the actual valuation of assets. They say, "RIL's proposed gas supply contracts with NTPC and Anil Ambani's power plants have impacted the valuation of the assets. RIL is committed to supplying almost 40 mmscmd of gas at such low prices over a long period. This would impact the returns on investment."
Other issues such as operatorship of the block and marketing of gas have also cropped up. Industry sources confirm that the deal was "unable to make the expected progress" as Reliance and its potential partners were unable to reach a consensus. Although "informal presentations" have been made by these companies expressing interest in picking up a stake, there are huge differences on what should be the actual price of this asset.
This, sources say, has resulted in RIL's reluctance to sign the gas supply agreement with NTPC on current terms. They also say it now makes sense for RIL to walk out of the NTPC deal by paying a penalty as this could help the company seek a revaluation of its assets. What's more, RIL has to commit supplies to Anil Ambani's power plants on the same terms as with NTPC. Scuttling the deal with the state-owned power giant would also free Reliance to negotiate fresh terms with Anil Ambani. When contacted a Reliance spokesman said, "No comments."
The NTPC deal apart, the foreign oil majors have also been reportedly insisting on joint operatorship of the KG basin fields. RIL may not be agreeable to this. The operatorship issue often becomes sticky as most foreign oil companies want to have a say in managing oil assets in which they partner. British Petroleum, for instance, was keen to take up equity in ONGC's blocks only if it was given their operatorship. "Operatorship of the assets is important as it gives them a say over the development of the block. Decisions on whether to frontload drilling activities linked to price expectations could determine the returns to investments," sources in the know said.

Gujarat Heavy Chemicals - A Report

Gujarat Heavy Chemicals (GHCL) was established in 1987 jointly by GIIC and the Dalmias, through their companies - GTC Industries and Dalmia Dairy Corporation. Over the years, it has diversified into the manufacture of Industrial Chemicals and Textiles, with products catering to both the domestic and international markets. In the soda ash business, the company is expanding its horizon with acquisitions in Romania and charting new growth in the home textiles segment.

Textiles quota removal, an opportunity for GHCL

The dismantling of the quota regime has come as a breather for the US$ 342 bn global textile trade, resulting in aggressive realignment of production and outsourcing facilities globally. In home textiles, we anticipate Indian exports to surge 4 times to US$ 8 bn in FY2010 from US$ 2 bn currently, entailing a capex of US$ 15 bn. To capitalize on this burgeoning opportunity, GHCL has charted out a well thought strategy, both in India and abroad, through massive expansion plans.

Capex to cater to the swelling market demand

GHCL has envisaged capex of Rs 6343 mn over the next 18 months. This would include a brownfield expansion of soda ash capacity by 200,000 tonnes by March 2007 at a cost of Rs 3,100 mn. With the phasing out of the textiles quotas, the company has planned a capex of Rs 3243 mn; firstly to increase its production of yarn by 55,000 spindles to 140,000 spindles in a two-phased expansion, expected to be fully completed by March 2007 and secondly for setting up a state-of-the-art home textile manufacturing facility for bed-linen, curtains, duvet covers and other Top-Of-the-Bed products at Vapi in Gujarat, to be operational by April 2006.

Spate of acquisitions abroad to expand geographical reach

GHCL has recently signed an agreement to acquire over 90 per cent stake in US textiles major Dan River Inc. With this, we expect GHCL to amass tremendous benefits of expanded market reach and branding power and to eventually shift the production base of the acquired company to India on account of the domestic cost competitive advantage. In soda ash, it has already acquired a majority stake in SC Bega Upsom in Romania and has entered into an MoU with another player there.

Valuations

At the current market price, the stock discounts its FY07E earnings of Rs11.6 by 9.9x and FY08E earnings of Rs14.4 by 7.9x. In view of the earnings visibility in FY07E and FY08E and attractive valuations, we would recommend an Outperformer with price target of Rs173 discounting FY08E earnings by 12x, within 12-months time. However, we have not factored the acquisition made recently in Romania for soda ash and of textiles major Dan River in US, which could give an upside to our earnings.

ICICI Bank sells 4.8% Federal stake for Rs 51 crore

ICICI Bank on Tuesday sold 4.80 per cent stake in Federal Bank for slightly over Rs 51 crore (Rs 510 million). According to data available from the Bombay Stock Exchange, ICICI Bank sold 31.5 lakh (3.1 million) shares of Federal Bank, representing a 4.80 per cent stake, in two tranches.
Of these, Kuroto Fund LP and Goldman Sachs purchased 980,000 and 20 lakh (2 million) shares, respectively. Post the sale, ICICI Bank's holding came down to 15.96 per cent from 20.76 per cent on September 30.
Kuroto Fund LP acquired 980,000 shares, which represents 1.49 per cent stake while Goldman Sachs purchased 20 lakh shares, representing 3.05 per cent stake.
The combined shareholding of the foreign institutional investors stood at 15.51 per cent on September 30. Leading investor Rakesh Jhunjhunwala held 1.68 per cent stake while the public holding was 38.67 per cent.
The ICICI Bank's move is in line the Reserve Bank of India guidelines, which do not permit any entity to hold more than 10 per cent stake in a private sector bank. ICICI Bank has also communicated to the apex bank that it would reduce its stake in Federal Bank to 5 per cent.
The association of ICICI Bank with Federal Bank began more than a decade ago when the erstwhile financial institution ICICI acquired 20.76 per cent stake in the bank.
ICICI Bank also has a 11.25 per cent stake in South Indian Bank. In both these banks, it is the single largest shareholder. The government had asked the financial institution to pick up the stake as there was a takeover threat at that time.ICICI Bank had reportedly sounded out private equity investors and foreign banks to sell its stake in Federal Bank. However, it could not be pursued due to changes in ownership guidelines in private banks.

IOC to sell part stake in ONGC, GAIL

The board of directors of Indian Oil Corporation on Wednesday decided to sell up to 50 per cent and 20 per cent of its take in Gas Authority of India Ltd and Oil and Natural Gas Corporation respectively subject to approval by the Union government.The board, which met on Wednesday, approved the decision, IOC informed the Bombay Stock Exchange.
All the three companies are state-owned.