Investment Philosophy

It's a bitterly cold day. You have lost all feeling in your nose. Your ears are hurting. You hunch your shoulders together to bury your head under the raised lapels of your greatcoat. You turn a corner and you see a frozen pond. Can you risk taking a short cut across? Or would it be safer to walk to the bridge half a mile down the road? You notice a man on the other side of the pond. He gingerly steps on to it. It holds the weight of one foot. He carefully places the other foot on the ice. A young woman behind follows his lead. As you watch, some children arrive with skates, and more adults follow them. Soon, the whole village is having a party on the ice. Each person has given the next person the confidence to join the party. The more people clambering on to the ice, the safer it feels. It's logical, isn't it? Or is it? Something makes you stop. You turn around. You walk away. Behind you, you bear the crack and the first scream.

Yes, you could say it is a dark vision, but it does the opposite of what most sunglasses do. Instead of increasing obscurity, it introduces clarity. As an increasing number of heavy bodies add themselves to the ice, human nature makes them feel the safety factor is increasing. But the clear-thinking observer realizes that their added weight means that the opposite is true. Each fresh body on the ice makes it more - not less - likely that the ice will crack. The global investment business today is a business in exactly the same way as the street market in Camden Town or Bangkok is. It is manned by salespeople who all have products they want you to buy. They make sure that what they sell is attractive. They tell you uplifting stories of how buyers of their services have generated wealth for themselves. They attract you to the ice ...

This is what has happened in the international financial markets right from the days of great depression to the 1987 crisis in US (Black Monday) to the 1997 East Asian Crisis to the latest subprime meltdown…the gullible investors who have followed the greater fool theory in the right earnest in the greed for short term money.

The lesson and the moral.. be greedy but be long term greedy!!!

Raja's Rare Rumble Regarding Rama Sethu, Religion. ra ra ra..Wow I too came up with a contrived alliteration!!!

Readers of this blog might have doubts as to why a site dedicated to corporate finance should now focus its thoughts on "religion"...Well I think this is the most opportune time when we need to have a sneak peek into our religious faiths, especially at a point in time when the basic fundamentals and the foundation of the majority community of this country (can we still call ourselves the majority..im not sure) is being put to a litmus test by the so called intelligentsia who consider it their patrimony to question anything associated with "hinduism". On top of the anti hindu pecking order is our grand old man MK who has asked the most ludicrous questions of this century "Which college did Lord Rama go and study engineering..does he have a degree certificate..Can the Sangh Parivar and other Hindu organisations show a copy of Lord rama's degree certificate".. Well lets now pay him back by flipping the same question at him. During 96-2001 (the previous tenure of the DMK government..most readers would be aware that in Tamilnadu its always an alternating game for power between the DMK and ADMK..we have no choice u see!!!), a lot of bridges, subways and flyovers were constructed at all inappropriate places in Chennai. Now wont i sound featherbrained if i ask MK "Thatha ..Thatha..Which college did u study engineering...Did u graduate at IIT Madras or Anna University as u have constructed so many unwanted flyovers within the city...Where did u gain all this engineering prowess??". Mankind has evolved at its own steady pace and each stage of evolution has had its own scientific and technological advancements at that given point in time. Therefore, when Lord Rama had existed he must have had his own group of architects and technocrats who had the requisite skills to construct Rama Sethu. Mere logical reasoning on how our temples all across the country would have been built ages ago with tremendous designs and eye catching splendor that cant even be replicated by the L&T engineers of today stands testimony enough to prove that Rama Sethu could have also been man made or to rather summate, build under the guidance and supervision of Lord Rama.

The interests of our religion are quite safe in the hands of the Lord in spite of the several attacks that are being made on it from both within and without. But as adherents to a particular religion, we must atleast perform the basic functions and practices that our faith entrusts and endows upon us. A religion can thrive only if it regulates the activities of its followers by channelising their free will into fruitful, productive activities. It is here that our scriptures have a major role to play. There is absolutely no need to find fault with our scriptures or seek to alter them. We keep searching for evidence on certain beliefs and customs and in the absence of such corroborating evidence we are only too happy to dismiss them as myths or embellishment of glorified faith. For eg: If a stranger standing by the road directs you, at ur request, to a house you are searching for, do u ask him for evidence or proof that he's right in his directions. Dont u place implicit reliance on him and proceed as directed by him. Its only when u reach the wrong house that you start finding fault with that person. Similarly we should have faith in the proclamations of our ancient sages (the guru parampara) and firmly believe that their dictates are leading us in the right direction. In today's materialistic world, none of us(me included) follow any of the rigours prescribed by the vedas and other scriptures. So speaking for myself, atleast i can definitely say that i dont have any right to question or blame the scriptures for the writings enshrined therein unless and until i reach a point when i feel misled or wronged having followed the vedas and its teachings. Guess thats never gonna happen!!

BRITANNIA RESEARCH REPORT

BRITANNIA INDUSTRIES: A FAST FOOTED FMCG: Healthy investment to better your wealth….

Britannia Industries (Britannia) is one of the leading producers of biscuits and other bakery products in India. The company’s major brands in biscuits include Tiger, Good Day, Mari Gold, 50-50, Treat, Milk Bikis and Nutrichoice Sugar Out. Each of these power brands are estimated to be valued at around 250-300 crore constituting around 92% of the topline of the company for the year ended FY 07. The company is the market leader in the biscuits segment with a market share of 40% followed by the Parle group at 33% in value terms. Surya Food Agro, ITC and the vast league of unorganized players make up the rest of the market.

Group Ownership Pattern:France’s leading cookies and dairy products firm “Group Danone” and India’s Wadia group (with interests in textiles, aviation and agro processing) control a majority stake in Britannia Ltd. through a holding company Associated Biscuits International Ltd. (ABI) which owns 51% stake in Britannia. Group Danone and the Wadia’s hold equal stakes in ABI. Relations between the two stakeholders have turned sour over the recent months, the details of which are discussed separately in this article. The way this ownership tussle pans out can have a telling impact on the valuations of Britannia Ltd and assumes paramount significance to investors and traders alike. LIC, HDFC, and HSBC mutual funds have also been accumulating positions in Britannia over the last few quarters.

Business Profile:
The primary business segment of the company is bakery, which consists of Biscuits, cakes, bread and rusk. Overall sales of the company has grown at a brisk pace of 20% and above in the last one year due to greater buoyancy in the biscuit market reflected from growing consumerism in India and increased market penetration efforts by the company into rural areas. The company has identified each brand as a profit center and the role of these brands are clearly delineated. The company has also been working on new variants, product innovations and in line with its strategy a slew of new launches have been made to widen the product profile in a highly competitive business environment. The company has been rated the No.1 most trusted food brand in India as per a recent survey conducted across all metros (Source: AC Nielsen ORG – Marg) and has a tremendous brand recall among the general public at large. The company is the market leader in all biscuit categories except the glucose segment where Parle has its nose slightly ahead. All the categories and brands of Britannia are growing at double-digit rate. The key to unlock business potential and opportunities in this industry lies in keeping a tab on the changing consumer tastes and preferences and addressing multiple taste preferences of various sections of consumers. Food business being a fickle category, adequate branding and advertising for all its products, pioneering efforts to migrate consumption patterns from unbranded to branded products, addressing nutritional, health and wellness issues and establishing an emotional connect with the customer is of utmost necessity to stay ahead of competition and take a larger share of the consumer’s wallet.

Business Risk Profile:
Britannia until FY 2006 can be best described as a sleeping giant of the packaged food segment. The company had lost its sales growth momentum from FY 02-06 and its operating margins had almost halved during this period due to the unprecedented rise in input commodity prices, under investment in core brands and weak product innovation. The company did not embark on major capacity expansion plans during this period inspite of robust internal accruals. The company had to take on competition from aggressive players like ITC (Sunfeast) and Surya Agro (Priya Gold), which resulted in pricing pressures across product categories, and led to substantial erosion in its market share coupled with a downward spiral in it’s profitability margins. The company was also affected by frequent changes in the top management and high attrition levels among the top level executives leading to a lack of clarity on policy matters. But ever since 2005 when Ms.Vinita Bali took over the reins, the company has been clawing back to retain its pre-eminent position in the market through a spate of multiple launches under the six umbrella brands, various brand restructuring initiatives and improved sales promotion and distribution efforts in rural areas.

The company has launched new packaging formats with reduced weights at attractive price points. The company has also effected marginal price hikes in certain power brands which have shown robust sales growth on a sequential basis QoQ (quarter on quarter). The government in its recent budget has also reduced the excise duty on biscuits from 8% to Nil on products where the MRP (Maximum retail price) is less than Rs.50 per kg. The company has also commissioned its manufacturing plants at Uttranchal towards the end of 2005 and this being a tax free facility will definitely have a positive impact on the margins of the entity over the medium to long term horizon. However a rationalization of the VAT structure for the biscuits industry may be required as the sector pays a higher rate of 12.5% compared to other food segments. The cumulative tax incidence for the industry including the import duties on wheat and fats works out to 25% and a decrease in VAT rates can go a long way in reducing prices and increasing consumption trends among the rural masses and low income groups of our country.

During the current financial year, the company has embarked on an Rs.100 crore expansion plan to develop new products for the rural markets where the penetration levels are pretty low. This should trigger the earnings growth rate at a faster clip going forward. Capex plans have been steady over the last few years.

Increased and intense competition both at the national and regional level has stimulated the biscuits market growth. Most of the organized industry players are bunching up their capacities following it up with an aggressive pricing and sales promotion policy thereby depressing the industry margins overall. Managing profitable growth in such a scenario will be contingent upon continuous brand investment, improving supply chain efficiencies and effective cost management.

Financial Risk profile:

The company has a fairly strong financial profile characterized by its leadership in the biscuits business, substantially free cash flows, high liquidity cushion and comfortable debt protection ratios. Sales growth and profit growth has witnessed lumpiness over a five-year period (FY 02-07) with the topline growing at a moderate CAGR of 11.3% and bottomline at a meagre 3%. But the financial metrics have shown a remarkable improvement since FY 06-07 as a result of the restructuring of the business model with sales showing a robust increment of 28% YoY and margins indicating a recovery from the fourth quarter. Margins have sustained the rising trend well into the June Quarter (Q1’08).

Over the years, the major dampener for the financials of the company has been high input costs of edible oil, sugar, Wheat flour and baking fuel. However the fall in headline inflation in primary products and the global meltdown in sugar prices due to supply glut augurs well for the company. The recent rise in crude oil prices is a major concern that can have a spill over effect on the price of baking fuels and logistics costs. The prices of these input commodities are forecasted to be stable and firm for the rest of the year. The company also has also resorted to hedging in the commodities market to mitigate the impact of spikes in input prices to protect its margins.

Export revenues for the company form a very minuscule portion of the total turnover at less than 10% for FY07 albeit growing at more than 50% in the last couple of years. The interest expressed by Kraft foods Inc of the US to pick up Group Danone’s stake in the company assumes high significance. If the deal materializes, the company can ramp up its exports and set foot into the global arena leveraging on Kraft foods multiple distribution networks all across UK and US.

Britannia has huge surplus cash reserves that are currently invested in Mutual funds and marketable securities and can be drawn upon for pursuing inorganic growth opportunities. The company has also been buying back shares from open market until 2005 using its idle cash and has been doling out liberal dividends at 150% over the last three years. However the dividend yield has much scope to improve going forward. The balance sheet of the company is lowly geared with a modest short-term debt and zero long-term debt.

Dispute with Group Danone:
As discussed above, Group Danone and Wadia’s together hold controlling stake in Britannia through a holding company Associated Biscuit International (ABI). The dispute between the two stakeholders arose over the alleged misuse of “Tiger” Brand By Danone in several countries. Group Danone has registered the tiger brand as its own brand in several countries without obtaining the consent of the Britannia board. The standoff has now resulted in Britannia initiating legal action against Group Danone and demanding compensation to the tune of 15 crore. In certain circles, this act is also being seen as a form of takeover defence to prevent Danone from selling its stake in Britannia to Kraft Foods albeit the Wadia’s have the first right of refusal on Danone’s stake sale in Britannia.

Share Performance: The stalemate between the two stakeholders over solving their differences has been a major constraint on the growth prospects of the company and is also one of the main reasons for the underperformance of the scrip on the bourses. The scrip has moved up by 22% ever since the market crash witnessed in May –June 06 as compared to the BSE sensex up move by more than 80%. The scrip has clearly been a laggard on the bourses despite strong fundamentals

Recent developments and implications for Britannia
The management of Group Danone has made a policy decision to exit its global biscuit and cereals business to focus on its core business of dairy products and beverages. Group Danone is in exclusive talks with American Kraft Foods Inc, the worlds largest cookie maker, to sell its global biscuits business though the deal doesn’t include the company’s stake in Britannia. But the management of the company has recently made its intentions clear to exit Britannia too and is waiting for the no objection certificate from Wadias for selling its stake to Kraft foods Inc. Danone wants to set up its dairy products and beverages business in India separately and unlocking its investment in Britannia will provide the necessary funds for setting up its shop in India.
This complex situation throws up interesting scenarios for traders and Investors. Lets have an insight into the various possible scenarios:
Scenario 1:
Danone selling its stake to Wadias:
This event, if it materializes will prove to be favourable to the Wadias who are negotiating with Danone for a possible acquisition of their 25.5% stake at a discount to the current market valuations. This will give the Wadias a majority control over Britannia.
Scenario 2:
Danone and Wadia both selling their stake in Britannai to Kraft Foods Inc:
This scenario though a possibility in the long term seems highly unlikely at the moment. American Kraft Foods Inc has expressed its interest to pick up Danone’s stake in Britannia. The advantage to Kraft Foods Inc will lie in tapping the huge consumption market and reaping the benefits of the country’s diverse demographic profile. Wadias have however remained tight lipped on selling their stake to Kraft foods Inc. They would not prefer to exit a cash rich company and lose out on the long-term growth story that this sector offers.
Scenario 3:
Three-way agreement between Kraft foods, Danone and Britannia
A three-way workable agreement between the Wadias, Danone and Kraft may not only mean an end to litigation but could also add synergy and firepower to Britannia’s portfolio of brands. Kraft’s arsenal boasts of brands such as Toblerone (chocolates), Tang (fresh drink concentrate), Fresh (beverage) and Oreo, the world’s largest selling cookie brand. For Danone, such an agreement along with annulment of the Wadia joint venture could mean freedom to enter the dairy and beverages business in the country independently, which it is keen on. This scenario seems a highly likely possibility in the next few months, as Danone does not prefer to sell its stake to the Wadias at a discount to the fair value for Britannia.


Valuation:
Now coming to the most important aspect that has high implications for shareholders and investors - At what price will Danone possibly exit Britannia?As discussed above already, Group Danone is in exclusive talks with Kraft Foods Inc to sell its global biscuits business (excluding its stake in Britannia). The global biscuits business of Danone has generated sales of 2.2 Billion euros last year and the business has been valued by Kraft foods at 5.3 billion euros. The offer price is almost 2.4 times the annual sales generated last year. The valuation has been arrived at taking into account the fact that the European markets where Group Danone has a major presence are growing at less than 3%. With the Indian biscuits market registering double-digit growth rates and with Britannia outperforming the market by growing at 28% last year, the valuation multiple should be much higher than 2.4 times. Even on a conservative estimate applying the proxy valuation to Britannia, the valuation per share comes to Rs.2200.

But since the Indian market has high growth rates, Danone will demand a much higher valuation than the enterprise value arrived above. Britannia’s high Cash EPS and cash reserves also pushes up its valuation parameters. In all the three scenarios discussed above there has to be a compulsory open offer by the purchaser (whether Kraft foods or Wadia group) at a much higher rate than the price paid for acquisition of Danone’s stake as per SEBI guidelines. This is to protect the interest of minority shareholders in Britannia, as it would help them unlock their investments at fair valuations.
Whichever way the control flows, Britannia would do well to have a single promoter or two friendly promoters who can concentrate their efforts in growing the business and capitalizing on the opportunities in the food processing industry rather than engage in mud slinging matches and long drawn legal battles with one another to the detriment of the hapless investor.
Britannia is expected to post an EPS of 72 for the year ended FY 08. The share price is currently trading at 1470 which discounts its forward EPS by a PE of 20 times. The share price looks attractive at current levels given the fact that most FMCG players are trading at much higher valuations and Britannia is on a fast track growth trajectory. Also adding pepper to the undervalued story is the possibility of the changes in ownership and shareholding pattern that can throw up many positive surprises in the near term.

Last but not the least, as the old adage goes “One must buy when everyone is selling and sell when everyone is buying.” Biscuits are a small part of people’s lives and Britannia is one such brand that has found its way into every Indian household over the past few decades. So what’s stopping u from allocating a small portion for this scrip in your portfolio? Take a calculated bet on this stock at current levels and wait for these interesting developments to pan out in a positive manner.

Safe Harbor Statement: This report should not be construed as a recommendation to invest in the scrip/company discussed above. Investments are subject to market risk. Informed judgment and discretion of the individual investor is of utmost importance while taking positions in any stock.

Is Education a service or an industry

Education sector should be declared an “Industry” and should be opened up to attract venture capital funding with the government providing the right sops and benefits. At the current rate of budgetary allocations being made by the government which can best be termed a “pittance” the country will never be able to make the grade of a developed nation. Nobody in India bothers about the utilization of funds collected in the form of “education cess” by the government. There has been no transparency or disclosure as to how the funds have been utilized for providing higher education. Last year alone as per the budgetary documents, funds to the tune of Rs.8000 crore have been collected as “higher and secondary” education cess. Only the finance minister can answer the question as to what has been done with the corpus accumulated so far to improve the quality of education within the country.

With India already facing a talent crunch with more and more graduates produced by the current system being increasingly found unemployable in the IT &ITES sector, the time has arisen to conduct a reality check. We face the risk of a downturn in the outsourcing space as no amount of tub-thumping or projecting our country as a low cost destination will help if the quality of work rendered takes a backseat. China and South East Asian economies are not far behind to replace us in the services industry, which has contributed to 67% of the GDP growth and has been the backbone of our economy in recent times.

The reason why the skill levels of graduates churned out by our education system are below par is due to of the lack of adequate investment in infrastructure by our educational institutions. Though the private institutions have been doing their bit to ramp up their infrastructure by creating a huge corpus of funds supported by high fee structures and capitation fees, the government has been subsidizing the cost of education with a service motto and is under a social obligation to do so. But the flipside of this policy is that most government colleges have dilapidated infrastructure and poor faculty due to lack of adequate funding support.

The solution to this conundrum lies in the government continuing to support primary education in the country through subsidies and low fee structures whilst opening up higher education to private players and venture capitalists who shall all the more be eager and naturally disposed to provide adequate funding to these institutions given the demographic dividend that our country has in store. The government can decide on policy matters and frame the necessary regulations in this regard. For the higher portals of learning like IIT’s, IIM’s and various government supported institutions like Anna University, they must be given a free hand to approach the capital markets for funding support. Given the tremendous goodwill and popularity enjoyed by these institutions, they would no longer need to depend on the government for annual grants. Already a number of educational institutions have been getting themselves graded by rating agencies under “Maritime Grading” policy of the government. This grading which acts a quality certification for the institution can be an added advantage to secure access to funds from various investors both within the country and abroad.
Moves like these can unlock significant capital for the government that can be more gainfully employed to strengthen elementary education within the country and bring more tiny tots under the wings of education. The government must also speedup the implementation of technology driven education, infrastructure support and teachers training programs across all primary and secondary schools with the help of
educational software companies like Educomp Solutions and Everonn systems.

To sum up, education is the most potent force for radical thinking and social change and must be made more effective using better infrastructure and technology. Vision 2020 may not seem a distant dream if the government carries out educational reforms in a phased manner.

Can Television Advertisements get sensible ?? Are the Ad makers listening

Consumerism in India is being taken for granted. Ad makers and companies have the belief that anything and everything they manufacture and distribute can be sold. TV Ads are mostly being used as a medium to create awareness of the product existence. Ads no more communicate the value of a brand to its target audience. We are being subject to meaningless ads that we are forced to view painstakingly amidst our favourite television programmes. Today i was watching an ad on AVT premium tea..there was no mention about the product or its quality..its lineaments or how it satisfies the sense buds of an individual consuming tea. The couple buy a few sachets of the product just lured by the prospects of finding a gold coin in the satchet, a sales promotion offer the company has recently brought out. We all know that AVT is not a big brand in India. Many people up north dont even know the existence of such a company.

In such a scenario shouldnt the company focus on building its brand value rather than resorting to cheap sales gimmicks like these to fool the already gullible indian consumer. "Once u build a brand, u do not need ads"..The visionary JRD Tata's oft repeated talisman to corporate india..almost everyone seems to have forgotten this proverb.
The average indian consumer of today, to me, resembles an "Onyx dustbin" (this garbage collector is very famous in chennai) that gracefully accepts all that is thrown into it.

However there are a few rays of hope in the advertising field ..lets take the Bank of India ad..it has such a simple format but conveys such a huge meaning on customer service to the audience. AD managers like these are the crème de la crème of this industry, who should continue to be the bellweathers who can act as the change or catalyst in making ads more sensible and appealing to the target audience/ultimate customers of corporate India.

In the author's humble opinion, even marketing research agencies like AC nielsen can play a major role in reforming the institutional AD space given the fully integrated operation of the research agency. They have the pulse of the audience as well as consumers and keep a continuos tab on the changing tastes and fashions of consumerism in India.

Corporate India spends thousands of crore on selling and distribution expenses of which Media Ads form a significant proportion. In an era where Indian companies are doling out billions, making major large outbound deals in the M&A space at the click of a mouse through numerous power point presentations(PPT's sounds better), they cant even buy themselves a good script locally to promote their business models.

Listing Price for Motilal Oswal

The company is fundamentally strong and its fortunes are linked to the performance of the stock markets and continuation of the bullish phase of corporate india earnings. Probable listing price would be in the range of 900-950 in a supportive market condition. Investors can follow a simple strategy of comparing the peer performance of India infoline to profit from this stock

My article in hindu business line...it fetched me a book on "Information technology"

check out my article in Business line on "Investors biggest challenge in stock markets in six yrs" at the link below
http://www.thehindubusinessline.com/mentor/2007/08/20/stories/2007082050151200.htm

Clinical trials

Clinical trials by biotech companies are the next catalyst for growth of the pharma sector in India. With margins from generic drugs getting lower by the day, the pharma sector is all set to become an outcast as far as the stock markets are concerned. Only those companies which do high end CRAMS work (Contract research and manufacturing) will survive the profitability conundrum. Under these circumstances, clinical study, research and trials in the bio pharma and life sciences space has come as a blessing in disguise for Indian companies which are nowscaling up rapidly to meet the outsourcing demand. Yes outsourcing of clinical trials is here to stay in India. IT companies have become so synonymous and addicted with the term "outsourcing" that they too are jumping into the fray. Companies like Infosys, IGATE global have opened up separate verticals in clinical research to work in areas of bioservices and bio informatics. India with its vast demographic profile in terms of its population provides a large pool of samples for clinical trials apart from the low cost advantage. Clinical trials can fetch anywhere between Rs.10 lakh to Rs.25 lakh per volunteer tested depending on the nature of the product tested on human body. Research and development costs for clinical trials alone cost 70% of the total cost of bringing a product to the market. With most pharma companies both within India and outside facing pricing pressures, the emphasis will be on cost management and control which is facilitated by outsourcing to low cost destinations with the requisite talent pool and resources.

Biocon and many other MNC pharma companies have already started outsourcing work to niche small bio pharma companies to undertake clinical research and study. Biocon derives 10% of its total revenue from clinical research work being a fully integrated bio technology player.

The potential for clinical trials are huge in segments like cardiovascular therapy, nutritional therapy, anti cholestrol, diabetes and cancer therapy etc. Niche small players in bio pharma/ bio services/ bio informatics space should focus on client retention, timely delivery and better turnaround time for clinical studies, widening the product and services profile, effective cost management to offset negatives like lack of earnings visibility in this space, thereby attracting investor attention in future. Atleast one or two interesting players are expected to emerge in the next decade or so on the Indian bourses in the biotechnology space apart from biocon. Celestial Labs is one such stock with an interesting story which gives it the potential to come on top. We will have to wait for the story to pan out positively.

The SIVAJI - MATRIX compilation

Check this one out http://ishare.rediff.com/filevideo.php?trans_id=1&id=15459

Simply ISsssshtyleeeeeeeeeeee!!!!!

Everonn IPO : Expect Huge Listing gains

Everonn Systems: Capitalizing on the Government’s initiative in IT education

Amount to be raised: Rs.50 crore

Price band : Rs.125-140

Post Issue Equity : Rs.13.85 crore

Oversubscription : 130 times

Major Competitors : Educomp Solutions, NIIT Ltd and Aptech Ltd.

Objects of the issue

Particulars	Amount (Rs in crore)
Institutional Education and IT Infrastructure Service	30.00
Virtual & Tech Enabled Learning Solutions including content development setting up 3 new studios in India, 1 in studio in Singapore and 2 overseas offices in Dubai and Singapore	17.25
Working Capital	5.00
Mergers & Acquisitions	8.00
Investment in Subsidiary	1.00
Bland Building	1.00
Issue Expenses	3.81
Total	66.06

About the company:

Everonn Systems incorporated in 2001, is a Chennai based company engaged in institutional education IT infrastructure and Virtual technology enabled learning solutions. The company is a fully integrated knowledge management, education and training company offering a range of services across the education spectrum as follows:

Ø Creating educational and training content that is globally relevant

Ø Designing and executing large learning initiatives

Ø Setting up the needed infrastructure for learning and training

Ø Partnering with various state governments to bridge the digital divide

The company currently has a point of presence in 1900 schools across 8 states in the country. The company has more than 2000 people on its roll as on date.

The company has two strategic business units (SBU) namely

SBU I: Institutional Education and Infrastructure Services enabled learning

· Setting up IT education infrastructure in schools and colleges

· Delivering IT education in schools and colleges

through the BOOT (Build, Own, Operate and Transfer) Model.

The list of responsibilities to be fulfilled under the BOOT model involves offering turnkey solutions with a complete range of services that include

ü Setting up state of the art computer labs

ü Designing the course curriculum and study material

ü Providing teacher services

ü Automation of the school administration system

The Company works closely with schools to implement innovative models to create and deliver content to enhance student learning and bridge the digital divide.

SBU II: Virtual and technology enabled learning solutions (VITELS)

VITELS focuses on providing specialized content through an interactive remote delivery mechanism:

• Offers turnkey education and software solutions to Schools and colleges, working professionals, corporates and the retail segment
• Management Education from Premier Institutes on Direcway Platform.
• Virtual learning through Zebra Kross and Direcway extended to 197 colleges, schools and Retail Centres

Education Sector in India:

The Indian education sector is the one of the largest markets for school education in the world. India has around 12 Lakh schools both in the government and private segment put together providing education from KG – 12 (K-12) to over 20crore students. Of this around 80% are government funded and the balance 20% are private sector funded. There are over 5 million teachers across the country who need training in IT and other subjects. The IT training market is growing at 14% p.a compared to 4.4 % global growth. The education in this country is funded through a 2% education cess charged on direct and indirect tax collections and through other budgetary allocations under various “Shiksha” schemes. The government has allocated Rs.30000 crore through the 10^th plan for Elementary education and Rs.13825 crore for secondary and higher education which can still be termed as “pittances” given the need of the hour. Around 40% of the country’s population is in the age group of 6-24 yrs, which is the target population for formal education and out of which less than 60% have enrolled for formal education as per Ministry of HRD reports. Public expenditure as a % of GDP is still at a poor 4% and has scope to improve by leaps and bounds in a knowledge economy. Though the country has been having a vast network of academic infrastructure right from the days of the British colonization and their legacy resulting in a vast English speaking population which is being leveraged currently by companies in the IT and ITES sector, concerns do exist over the availability of a strong employable talent pool. The country’s demographic profile is an inherent advantage and associations like Nasscom are addressing such issues through certification tests on skill assessments to and increased industry institution interface to produce employable candidates. After all education is the most potent force that can bring about a social change and if such education is provided with innovative use of technology, it shall turn out to be a paradigm shift in the learning curve of the current generation and adds value to the pedagogy by making education simpler and better for one and all. All these factors put together showcase the immense potential and opportunities waiting to be tapped by companies operating in the education sector. The outlook for these companies over the next decade appears to be quite robust.

Strengths:

Ý The promoters have a strong track record in providing IT education services and have more than 19 years of experience in the education industry.

Ý The company is lead partner of Hughes Communications for providing management courses from reputed national institutions through remote learning facility.

Ý The company’s foray into areas like online web tutoring, animation, graphic design and multimedia will be revenue accretive in future

Ý The company has a presence in 13 states and has MOU’s wit more than 2000 schools/ institutions to provide IT education and infrastructure services. These contracts are generally for a five to six year period and hence offers earnings visibility in the long run

Ý Major contracts secured from West Bengal and Karnataka governments during the year to automate more than 800 schools across the states. The company has also secured a Rs.30 crore contract from the Gujarat government for providing IT infrastructure services across 1256 schools in the state. The present order book position of the company stands at Rs.110 crore to be exceuted over a two to three years period.

Ý Aggressive expansion plans to add around 1000 schools per annum under the BOOT model.

Ý Is targeting the overseas markets like Dubai and Singapore which should bring in sizeable export earnings from 2008 onwards.

Ý The Virtual learning model given its increased geographical penetration will lend greater brand visibility and recall to the Everonn and Zebra kross brands.

Ý Education testing services for GRE, TOEFEL to be offered through virtual class rooms

Ý The company is also setting up a unique teacher’s recruitment portal called http://www.teachersofindia.com/ which will be an exclusive placement forum for teachers and other potential candidates looking for career opportunities in the field of education. The revenue model for this website will be through yearly subscriptions from educational institutions and ads from service providers. The domain name has already been registered and the company expects this new initiative to be a significant revenue driver.

Ý The company is in the process of setting up a subsidiary for its retail venture whereby the company plans to set up retail outlets across its network of schools, colleges and institutions to sell educational content.

Ý The business is closely linked to the education sector and the maximum growth is registered in the second and fourth quarter of the financial year. To deseasonalise/negate the impact on the financial performance during the balance quarters , the company is entering into corporate and professional development programs as well as summer coaching assignments during its off-peak seasons

Weakness:

ß The company derives almost 95% of its revenues from State governments for its school/institutional education services. The payments from Government projects are exposed to systemic delays and results in tight working capital position for the company. The receivable days for the year ended FY 07 alone amount to 7.8 months and amount to 65% of total sales. An age wise analysis of debtors reveals that almost 20% of the dues are pending for greater than 6 months. Most of the receivables represent dues from the Karnataka and West Bengal governments. Even much larger companies with similar business models like Educomp Solutions and NIIT have their debtor days at 4-5 months. The company would do well to reduce its dependence on government projects in future as huge amount of capital is getting locked up in receivables, whose cost of financing will bear its brunt on the margins of the company.

ß Direct competition from Educomp Solutions and NIIT Ltd. (in certain verticals) though the latter is a much larger and diversified player with international presence in IT training and development. Quality, competitive pricing and efficiency will be the key to sustenance in future against such bigger players as Educomp has an established presence in most of the business verticals of this company.

ß The company had diversified into an unrelated business of tourism in 2001 and after some minor losses over the years has decided to wind up the activities of the subsidiary.

ß The company has been utilizing its internal accruals for meeting working capital requirements rather than for its expansion plans. Even a pre IPO placement for Rs.5 crore to India China pre IPO (Mauritius) fund has been utilized for funding the ballooning working capital requirements of the entity. The company will have to resort to more short term borrowings in future to meet its working needs if it doesn’t improve its collection mechanism in the days ahead. As a result of high receivables the company is also facing an Asset liability mismatch (ALM).Its debtor days are at a near 8 months whereas its payables days are at 5 months, reflecting the increased liquidity crunch the company continues to face.

ß Delays in statutory remittances of ESI and PF albeit no defaults till date

ß The business model is exposed to the risk of piracy and misuse of content developed by the company. The content is distributed through VSAT (Very Small Aperture Terminals) and has the risk of being exposed to piracy if customers resort to infringement of copyrights. The brands of the company “Zebra Cross” and “Everonn” have not yet been registered with the trademark registry.

ß Cash Flows negative at the investment and financing levels, though positive at the operational level.

ß Upfront investments in School projects are quite high. The company had to amortize its entire infrastructure costs incurred upfront on its educational initiatives in Karnataka government aided schools, which had resulted in a negative impact on the operating margins by atleast 500 basis points for FY 07.

ß The Virtual class room concept is still at a nascent stage in the country. Many students still prefer the campus education mode. The company derives only 3% of its annual revenue from VITELS in the absence of major tie ups in the private sectors at the moment. Educomp’s Virtual class room initiative “Smart Class” is a major competitor given the significant strides it has made through its long running tie ups with a number of premier educational institutions in the private sector like DPS, PSBB, Caramel, St.Johns etc... to name a few.

ß All the products of the company are closely related to the education curriculum in force at the moment. Any changes in the curriculum may make the products of the company obsolete.

ß Highly dependant on government policies on education and the budget allocation to the sector as a whole.

Comparative table between Educomp and Everonn systems:

	Educomp Solutions	Everonn Systems
No. of educational institutions covered	Over 5000 institutions in 30 states	Over 2000 institutions in 13 states
Geographical Presence	International Presence with projects in US, India and Singapore	Major presence in India alone at the moment, setting up operations in Singapore and Dubai post IPO
Virtual Class Rooms	Smart Class	Zebra Kross
Scope of operations	Larger and diversified	Smaller player when compared to Educomp
Dependence on Government	Has a diversified revenue stream with increased shift in product mix towards private institutions and reducing the dependence on state governments	Highly dependant on government allocations, policies and government aided schools for revenues
Debtor days	Varies between 4 to 5 months	Varies between 7- 8 months
Content Library	Has more than 12000 modules of educational content that are globally relevant	The company is in the process of developing a content library and is looking for an acquisition in this space with a planned budget of Rs.8 crore
Financial comparison	The company has superior margins both at the operating level as well as the profitability level and has a huge war chest for Rs.110 crore to meet future expansion plans	The company's margins have come down during the current financial year due to increased IT infrastructure costs, education and training expenses. The company is plagued by liquidity constraints due to a strained working capital position

Financials

Financial Summary -Everonn Systems Limited
		31-Mar-07	31-Mar-06	31-Mar-05
Net Sales	Rs. Million	430.4	309.3	194.3
Operating Income	Rs. Million	430.4	309.3	194.3
OPBDIT	Rs. Million	176.3	143.7	99.6
PAT	Rs. Million	48.6	49.1	15.1
Net Cash Accruals	Rs. Million	132.9	95.6	73.5
Equity Share Capital	Rs. Million	138.5	17.1	17.1
Cash Flow from Operations	Rs. Million	36.3	65.6	34.5
Tangible Networth	Rs. Million	401.7	178.1	128.1
Total Debt	Rs. Million	235.4	268.9	104.6
OPBDIT Margins	%	41.0	46.5	51.3
Net Profit Margins	%	11.3	15.9	7.8
ROCE	%	15.9	26.4	17.5
PBDIT / Int. & Finance Charges	Times	7.54	9.24	6.92
Net Cash Accruals / Total Debt	Times	0.56	0.36	0.70
Total Debt / Tangible Networth	Times	0.59	1.51	0.82
Total Debt / PBDIT	Times	1.34	1.87	1.05
Current Ratio	Times	2.32	1.71	3.84

Notes to financials:

· The sales have grown at a CAGR of 30.35% over a three year period from FY 05 to FY 07 and the bottomline has grown at a CAGR of 47.65% over the same period.

· The drop in operating margins over the last two years has been on account of increased infrastructure costs, education, training expenses and increased manpower costs.

· The interest expenses are expected to move up over the next few years on account of increased borrowings for expansion and working capital related funding arrangements. The impact of the increased debt levels will be felt acutely in the next couple of years on the bottomline unless certain high cost debt is retired out of the IPO proceeds.

· The company has had a substantial equity dilution during the current year and no dividends have been declared for FY 07. The company will have to meet the increased return expectations of shareholders from the current year onwards, given the wider base it has to address. The internal accruals have been used in the past to meet working capital needs. The company must ameliorate its operating cycle and utilize the accruals for strategic purposes.

Inter Firm Comparison -FY 07
		Everonn	Educomp	NIIT
Net Sales	Rs. Million	430.4	1065.7	3902.7
Operating Income	Rs. Million	430.4	1121.7	4051.5
OPBDIT	Rs. Million	176.3	556.3	717.6
PAT	Rs. Million	48.6	285.8	316.2
Net Cash Accruals	Rs. Million	132.9	379.8	630.0
Equity Share Capital	Rs. Million	138.5	159.9	197.6
Cash Flow from Operations	Rs. Million	36.3	165.1	680.3
Tangible Networth	Rs. Million	401.7	1088.9	3094.0
Total Debt	Rs. Million	235.4	1383.8	1390.0
OPBDIT Margins	%	41.0	52.2	18.4
Net Profit Margins	%	11.3	26.8	8.1
ROCE	%	15.9	23.7	16.0
PBDIT / Int. & Finance Charges	Times	7.54	38.63	14.35
Net Cash Accruals / Total Debt	Times	0.56	0.27	0.45
Total Debt / Tangible Networth	Times	0.59	1.27	0.45
Total Debt / PBDIT	Times	1.34	2.49	1.94
Current Ratio	Times	2.32	7.27	2.11

Note:

· The financial summary of Everonn Systems and Educomp Solutions cannot be strictly compared with NIIT Ltd. given the scale of operations in the form of diversified business and geographical segments of the latter.

· Educomp Solutions hold sizeable cash reserves at 110 crore and hence the higher current ratio.

· The financials of Educomp hold the edge over Everonn systems on most parameters and have witnessed triple digit growth rates and hence the latter can be expected to trade at a substantial discount to Educomp Solutions in the secondary market.

Valuation

Particulars		Educomp	NIIT	Everonn
Market Cap	Rs.Crore	3,708.2	2,618.1	193.9
Market Price	Rs.per share	2,265.3	1,193.3	140.0
Sales	Rs.Crore	106.6	390.3	43.0
Operating Margins	%	52.2	18.4	41.0
Net Profit	Rs.Crore	28.6	31.6	4.9
Net Profit Margins	%	26.8	8.1	11.3
Market Cap/ Sales	Times	34.8	6.7	4.5
EPS	Times	17.7	16.7	3.5
Book Value		75.4	163.1	62.5
Price to Book Value	Times	30.0	7.3	2.2
Equity Capital	Rs.Crore	16.4	21.9	13.9
No. of Equity Shares	Quantity in crore	1.6	2.2	1.4
Enterprise Value	Rs.Crore	3,710.2	2,752.0	220.6
EV/EBITDA	Times	66.7	38.4	12.5
Face Value per share	Rs.per share	10	10	10
PE ratio	Times	129	71.45	40

EV represents Enterprise Value which represents Market capitalization + Debt

Notes:

· It has been assumed that the pricing of the issue will be done at the upper band of the issue at Rs.140 per share, as the issue has received an overwhelming response in the primary market by getting oversubscribed 130 times.

· Educomp and NIIT trade at expensive valuations due to the high growth rates prevailing in the sector and the premium the investors are willing to accord for the promise the sector as a whole displays going forward. The growth rates in India have outperformed the global growth rates for technology led education given our favorable demographic profile and the increased awareness on Information technology

Therefore the following factors make the stock an attractive investment opportunity upon listing:

ü Everonn’s reasonable growth trajectory in the past

ü The fast growth rates in the education sector

ü The fancy valuations for Educomp Solutions trading at a huge PE of 129 times its trailing FY 07 earnings.

ü The huge untapped market in the IT/ IT-aided education segment and increased government thrust on education through budgetary allocations.

Listing forecast: For companies with unique business models like Everonn Systems, the listing will definitely result in huge gains for the investors who have subscribed to the issue. The best method for valuing such companies would be on the basis of EV/EBIDTA basis whereby the EV/EBIDTA of similar/comparable companies will be taken into account. In the above case, Educomp is the only peer company with exactly the same business models. Educomp’s current Enterprise Value quotes at 66.7 times its EBIDTA. This figure cannot be taken as a benchmark prima facie for valuing Everonn systems as the latter is a much smaller and evolving player with less attractive financials when compared to its bigger competitor. So the best option under such circumstances will be to accord certain discounts to Educomp’s EV to arrive at a fair valuation for Everonn Systems.

EV/EBIDTA ratio for Educomp: 66.7 times

Less: Discount for Operating margins @ 11% 7.34

(Representing the difference between Educomp and Everonn’s Operating Margins)

Less: Discount for Net Profit Margins@15% 10

Adjusted EV/EBIDTA for Everonn Systems 49.36 times

EBIDTA for Everonn for FY 07 Rs.17.63 Crore

Adjusted Enterprise Value for Everonn Rs.857 Crore (49.36 *17.63)

Debt on the books of Everonn System Rs.23.5 crore

Adjusted Market capitalization Rs. 833.5 crore

No. of equity shares Post issue 1.385 crore

Expected Market Price upon listing Rs. 602 (833.5/1.385)

The target listing price of Rs.602 represents a premium of 330% over the issue price of Rs.140. The scrip should scale this level comfortably given the positive scenario surrounding this issue.

Safe Harbor: All Equity investments are subject to market risks. This analytical review should be construed as an opinion and not as a recommendation. Investors are advised to exercise adequate caution and make informed decisions on their personal investments.