Analysis of L&T Finance IPO

L&T Finance has generated quite a bit of hype for its IPO. Due to lack of time, I have not been able to make a better study of the same and hence valuation. Hence, I will restrict myself to a relative valuation this time around.

For this purpose, I shall use the companies that they have mentioned in the RHP. The various figures for them is mentioned below.

	EPS	Price (as on 27/07/11)	P/E	RONW	Book Value(BV) Per Share	P/BV
Shriram Trans. Fin.	53.92	665.90	12.35	24.87%	216.37	3.08
M&M Financial Serv.	50.92	689.95	13.55	19.36%	244.70	2.82
IDFC	8.77	133.70	15.25	11.39%	76.97	1.74
Rural Elect. Co	26.18	213.60	8.16	20.15%	129.90	1.64
PFC	23.06	192.50	8.35	17.37%	132.79	1.45
Sundaram Finance	70.01	570.05	8.14	21.53%	325.22	1.75
L&T Finance	2.87	59	20.56	13.58%	20.4	2.89

Analysis of Great Offshore Ltd Results

I was pleasantly surprised when Great Offshore came out with the results today stating their net profit was up from Rs 26.73 Cr to Rs 54.90 Cr, a whopping 105% growth Y-o-Y. Amidst the relatively poor showing by the industry in the recent past, this seemed a silver lining. But on closer inspection, these clouds of delight evaporated.

Their income from operations was down from Rs 235.9 Cr to Rs 218.59 Cr. But the contributor to their bottom line was not their operations, but profit from sales of vessels, which amounted to Rs 47.85 Cr before tax. Now if we remove this figure from the PBT, the amount goes down from Rs 92.9 Cr to Rs 45.05 Cr. And this is excluding the taxes. If we consider 40% corporate tax (the amount by which they deducted their tax), the PAT comes down to Rs 27.03 Cr.

Thus, the actual growth of the company was by a marginal 1.12%. Considering this, their EPS for Q1 was 7.26. The stock of the company was down by 1.05% at 211.85, trading at a current PE multiple of 7.29, which considering the lack of significant operational growth can be justified.

For the moment, I would rather stay away from this stock.

Analysis of Opto Circuits India Ltd Results

Opto Circuits India Ltd is a medical equipment manufacturer with presence in India and Abroad. The Q1 results for the same were exceedingly good. On a Y-o-Y standalone basis, net profit increased marginally from Rs 56.95 Cr to Rs 57.13 Cr. But the more attractive figures come from the consolidated results. The net profit has increased from Rs 83.09 Cr to Rs 116.38 Cr (Y-o-Y). This has led to an EPS increase from Rs 4.46 to Rs 6.24.

Opto Circuits India Ltd, in itself has not grown much and is itself purely in healthcare segment. But the subsidiaries are more attractive with interests in IT as well. The most important information out of the results is the exceedingly good performance by the subsidiaries. The profit from the subsidiaries has increased from Rs 26.14 Cr to Rs 59.25 Cr, indicating a whopping growth of 126%. The International Health care business has reported a significant gain in revenues by almost 51%. 

The most significant concern for the company could be exchange rate risk, as the majority of the sales as well as the profits come from the international business. Profits from domestic segment as well as the margins here are very small.

The current EPS (I assume it to be 4 times latest EPS) is 24.96. This means that the stock is currently trading at a PE multiple of around 11, which is very low as compared to the industry (20.8). Moreover, for such a growth rate that they are experiencing, Opto Circuits may be considered a value buy.

I will post a better analysis as soon as I get their annual report for FY2010-11 and have a look at their balance sheet.

Analysis of Biocon Ltd Results

When I first saw the FY11 Q1 results of Biocon, I was really disappointed. But on taking a closer look, there were some positives as well. Although the standalone net profit was down from Rs 72.3 crores to Rs 60.4 crores, their consolidated net profit from continuing operations (their subsidiary had sold its subsidiary) was marginally up by 7% from Rs 65.22 crore to Rs 70.05 crore. These figures indicate two important things:

1)    The domestic profitability has taken a hit
2)    The subsidiaries, many of whom are foreign, have turned profitable

Analysis of Piramal Healthcare Ltd

When I decided to value Piramal Healthcare (PHL), a question came to my mind: "How do you value a company that is sitting on a cash pile of Rs 596 per share, when it is trading at Rs 403 per share?"

With such a strong cash position and the current EPS (of the business remaining after the Abbott sale) being 39.2 (4xEPS of Q4), the current P/E ratio of the company is 10.3. Such a P/E ratio for a company, with a proven track record is significantly lower than its peers (with equivalent track record). Such a low P/E multiple indicates that the 'market' does not expect the company to grow significantly in the future, which is unlikely considering their management track record.

Valuation of Biocon Ltd

Valuation of a company is not a straightforward task. There is no particular formula that will give a fixed value for the share of the company. I have tried using DCF (Discounted Cash Flow) method for valuing Biocon Ltd.

In the process of arriving at a particular value, several assumptions are required to be taken. I have tried to keep those assumptions as conservative as possible. The assumption for the same are as follows:

1) CAGR of Sales for the next 5 yrs: 25% (The past 5 yr average for Biocon is 28%, with growth touching 40% in the yr before last)

2) Target Operating Profit Margin of 20% (Past 5 yr avg for Biocon is over 25%. Most of the global players have the same closer to 30%)

3) Sales to capital ratio: 1.16 (Past 5 yr average for Biocon)

4) As the debt ratio of Biocon is very low (less than 0.1), for simplicity, I have taken the cost of capital as the cost of equity, which I obtained using the CAPM model.

5) The terminal value of the return on capital is assumed to be 15.5%. This is much lower than current ROIC of Biocon which is 22%

6) I have considered tax rate as 34% [as Biocon is a domestic company. This rate is supposed to further go down after implementation of the Direct Tax Code]

Considering the above mentioned assumptions, the final value I obtained for Biocon Share was Rs 435. The valuation depends a lot on the assumptions, but I believe the assumption that I have considered for the valuation of Biocon are conservative.

Excel sheet containing the calculation:  Biocon Valuation

If you have any comments, please shoot :)

Analysis of Compact Disc India Ltd

The uncertainty in the delisting of Compact Disc Ensues. Last month, HSBC Bank, bankers to the firm brought a stay order to the proposed voluntary delisting. This may mean several things, the first of which comes to my mind (i am speculating here) is the fact that the bankers may have lost faith in ability of the company to pay back and they feel that the money is being unnecessarily used to buy-back shares instead of doing something productive.

It is always tough for a company, if their banker, a reputed name in the industry shows such signs. This may hinder further raising of finances for the company. On a long run this may harm the growth of the company.

Moreover the resignation of key personnel from the board sends the wrong message. As mentioned in my previous post, the target of 60 (based upon the past 26 week avg) had been passed. Now if the delisting does not come about, any appreciation of price may not come up.

Despite of the good figures in the book of the company i shall recommend not to go in for the shares of the company.