Of Exchange Rates, Interest Rates and Inflation

The rupee has breached 41 against the dollar after many years now and the RBI is not doing what it is best at, which is going in the market and buying dollars to maintain a comfortable exchange rate.

What is stopping the central bank from doing this, is the inflation rate. Which is already quite perturbing for all politicians, some economists and quite certainly RBI.

The rupee to dollar rate is decided by the relative demand and supply between the two, so historically whenever the RBI wanted to push the price of the dollar higher, it used to go out in the market and buy dollars using rupees. This ensured that the relative demand of dollar became higher vis-a-vis the rupee.

What this would also imply is that the supply of rupees in the economy became greater. And greater money supply causes higher inflation in the economy. Simply put, if earlier there were a thousand rupees in the economy, and now the supply is equal to a couple of thousand rupees the value of a single rupee halves (ceteris paribus of course). In case you are wondering how the thousand became two thousand, unlike you and me, RBI can pretty much print money and circulate in the economy jacking up the monetary base of the economy or what is called in Economics text books as – too much money chasing too few goods.

The other major head-ache that RBI has is to control what is now started being referred as over-heating of the Indian economy. The most potent weapon for controlling the over-heating was to increase the interest rates and making borrowing costly and slowing down the investment and consumption in the economy.

However the central bank has avoided this measure as well because higher interest rates offered by domestic banks are enticing NRIs and other institutions to deposit the dollar holdings that they have in India. What that means is that there would be more dollars in the Indian economy weakening the dollar further and then the RBI would have to print more rupees to buy more dollars and in the process push the inflation higher as well.

It is a tricky situation that is being faced by RBI and one that is being dealt with using a different nature of solution this time around that of allowing more dollar investments by Indian companies and Indian individuals and other factors which look at pushing out dollars from the economy. However by its very nature this measure is more longer term than the previous short term measures and hence the current exchange rate.

Whether the new exchange rate is a temporary phenomenon or Indian exporters will have to adjust to lower realizations is anybodys guess. For now it seems that most of the Indian companies focusing on export revenues will bear this brunt in fiscal 2007 – 08.

Manshu Verma

Zylog Systems Limited

Zylog Systems Limited is entering Indian primary market with a Public issue of 3,600,000 equity shares of Rs.10 each. The issue is a 100% Book Built. Below are the salient features of this issue:
Business of the Company
 

Zylog Systems Limited is a Chennai based IT services and products Company. Established in 1995 and business commencement in 1997, is a 100% EOU registered with STPI (Software Technology Parks of India). By its onsite offshore model, it provides IT services to its clients as per their requirements. Telecom, Banking Financial Service and Retail companies are prime contributors to its top line.? It has products like Z*Connect, Z*Prism, insured Vehicle Accident Recovery Systems (iVARs), Claim Management System, RTGS PayManager, VISTEM and WAP Page.

 
Promoters

 
The company is promoted by Mr. Sudarshan Venkartaman and Mr. Ramanujam Sesharathnam.

 
Financials

 

 

Zylog Systems Ltd. is a consistent profit making company. For the FY ended March 31, 2006, the company clocked a turnover of Rs. 261.20 crores. The restated net profit for the same period was about Rs. 41 crores. For FY 2007, till Oct?2006, company had already clocked a turnover of Rs.209 crores and a net profit of Rs.30 crores. For both the above periods, corresponding Networth was Rs.104 and Rs. 135 crores respectively.

 
Particulars of the Issue

 

 

 

Zylog Systems Ltd. IPO is a fresh issue of 3,600,000 equity shares. After keeping aside 100,000 shares for its employees, the net issue for public is 3,500,000. The net Retail portion is upto 1,050,000 equity shares. Post IPO, the total outstanding equity will rise from 12,846,420 to 16,446,420 equity shares.

 
Basis for Issue price

 
Zylog Systems Ltd. claims that it has established a Global Delivery Model with office in USA, UK and Singapore. This set up has helped them do low cost delivery to clients. Further, it claims that is has ability to scale rapidly. It further banks on its quality delivery and long term client relationship to give it continuous business. For Fiscal 2006, it had an EPS (Earning per Share) of Rs.37.24. For the Seven months of FY 2007, the same stood at Rs.28.58.

 
Objects of the Issue

 

 

 

The primary purpose is expansion of current operations. Out of the total proceeds of the issue, about Rs.67 crores will be utilized for setting up 2 Offshore Delivery centers. A whopping Rs.81 crores will be kept aside for Working Capital requirements. The rest will be used for acquisitions and issue expenses.
Risks
 

Following are the key risks which can impact company?s performance:
a. Zylog Systems Ltd. has 3 Direct Taxes and 2 Indirect Taxes litigations pending against it. The combined claim is about 4.40 crores.
b. Except for working capital requirements, rests of objects of issue have not been appraised by any independent appraiser.
c. Failure to get contracts can result in a huge bench of workforce which would translate in significant spending without any significant return.
d. Heavy dependency on US clients is a typical risk factor found in Indian IT companies.
e. Dollar weakness can impact company.
f. Chinese IT industry is a big potential threat.

The following table shows the upcoming IPO that have been covered under this section and their status. You can click on any of these to read more about them.

S. No. IPO Name Status
1 Rathi Bars Limited Draft Offer Document with SEBI
2 Zylog Systems Limited Draft Offer Document with SEBI
3 Mundra Port and Special Economic Zones Limited Draft Offer Document with SEBI

Mundra Port and Special Economic Zone Limited

Mundra Port and Special Economic Zone Limited is entering Indian primary market with a Public issue of 40,250,000 equity shares of Rs.10 each. The issue is a 100% Book Built. Below are the salient features of this issue:
 

Business of the Company

Mundra Port and Special Economic Zone Limited is the developer and operator of Mundra Port, located in Kutch district of Gujarat. Company has exclusive rights to develop and operate the same for 30 years. Company has also received rights to develop a multi-product SEZ at Mundra and its surrounding areas. The port is primarily engaged in providing bulk cargo services, container cargo, crude oil cargo and value-added port services, including railway services. Partial commercial operations commenced in Oct, 2001.
 

Promoters

The company is promoted by the famous Adani group. The group is engaged in commodities trading, power trading & generation, coal mining, real estate development, agro processing & logistics and shipping.
 

Financials

For the FY ended March 31, 2006, the company clocked a turnover of Rs. 397 crores. The restated net profit for the same period was about Rs. 75 crores. For FY 2007, till September’2006, company had already clocked a turnover of Rs.246 crores and a net profit of Rs.126 crores. For the six months ended 30th Sept, 2006, Company’s P/L statement, as in the Red Herring prospectus, shows Tax credit of Rs.38 crores. For FY 2005 and FY 2004, the top line was Rs.277 and Rs.173 crores approximately. The net profit for FY 2005 was Rs.70 crores. In FY 2004, company had a net loss of about Rs.10 crores.
 

Particulars of the Issue

Mundra Port and Special Economic Zone Ltd. IPO is a fresh 100% Book Building issue of 40,250,000 equity shares. After keeping aside 150,000 shares for its employees, the net issue for public is 40,100,000. The net Retail portion is a minimum of 30% of total equity shares. For retailers, full bid amount needs to be paid while bidding.
 

Basis for Issue price

Mundra Port and Special Economic Zone Ltd. claims that its strategic location serving the landlocked Northern India and North Western India will give it huge amount of business. Land with port back-up area and infrastructure will help future expansion and SEZ advantages are other basis for issue price. The adjusted EPS for FY 2006 stands at Rs.1.98. There are no listed companies in India which can be compared with Mundra Port and SEZ.
 
Objects of the Issue

The primary purpose is construction and development of basic infrastructure and allied facilities in the proposed Mundra SEZ. Construction of a south basin terminal for coal and other cargo at Mundra Port is the other objective of issue. Company also intends to fund group companies like Adani Petronet (Dahej) Port Pvt. Ltd; Adani Logistics Ltd; and Inland Container Pvt. Ltd.
 

Risks

Following are the key risks which can impact company’s performance:
a.       Government’s volatile policies on SEZs remain the biggest risk.
b.       Company heavily depends on concessions and licenses from government and quasi-government organizations.
c.       Company has agreement with P&O Ports (Mundra) Pvt. Ltd. for container handling services. P&O Ports got acquired by Dubai Ports World. Hence, the agreement is reviewed again by Gujarat Maritime Board.
d.       Many contracts with its customers contain provisions which if exercised by the customers can adversely affect the company.
e.       Company relies on small number of customers for a large proportion of its revenues.
f.        Company in the past has entered into related party transactions and will continue to do so in future.
g.       Severe weather conditions can adversely impact its operations.

The following table shows the upcoming IPO that have been covered under this section and their status. You can click on any of these to read more about them.

S. No. IPO Name Status
1 Rathi Bars Limited Draft Offer Document with SEBI
2 Zylog Systems Limited Draft Offer Document with SEBI
3 Mundra Port and Special Economic Zones Limited Draft Offer Document with SEBI

Rathi Bars Limited

Business of Rathi Bars Limited

Rathi Bars Limited, a member of the famous Rathi group, is presently involved in manufacturing steel bars. Steel bars are used in construction of huge structures such as Dams, Multi storied building, Bridges, Flyovers as a basic reinforcement material. There a variety of steel bars. Rathi Bars manufactures Cold Twisted Deformed (CTD) and Thermo mechanically Treated (TMT) bars. These two varieties fall in the Long products group of the steel bar industry. Ms-Ingot is the main raw material.

Promoters

The company is promoted by the Rathi family. The key promoters are Kamlesh Kumar Rathi, Anurag Rathi, Anupam Rathi and other Rathi family members.


Particulars of the Issue

The issue is for 71,42,857 equity shares of Rs.10 each for cash at a price of Rs.35 per share aggregating to Rs.25 crores. The issue will constitute about 44% of fully diluted post paid up equity capital.
 

Basis for Issue price
 

Company claims that it is a manufacturer with high demand in Northern India. Plus, it has superior technology and quality certifications. “Rathi” is a well established brand in the market. Earning Per Share (EPS) for FY 2005-06 was Rs.10.90. Eight months EPS for the current financial year is Rs.6.83. Industry average P/E multiple is 8.60. As per the company’s prospectus, Kamdhenu Ispat Limited, Rajpur Alloys Limited, Vardhaman Industries Ltd and Zenith Birla (all having P/E above 10) are its peer companies.
 

Objects of the Issue
 

Company’s products are popular in Northern states like Haryana, Rajasthan and HP. Primary motive of this issue is to fund its expansion products. Company also intends to start production and sale of steel billets. Out of the total issue proceeds, Rathi Bars Ltd. intends to spend about Rs.20 crore on plants and machinery. About Rs.11 crore will be for working capital. The issue expenses are Rs.2 crore.

Risks
 

Following are the key risks which can impact company’s performance:
a.       There are 2 excise related and 16 sales tax (amounting to about Rs.9 crore) and one Service tax related cases pending against the company.
b.       Objective of the issue has not been appraised by any independent agency.
c.       Surprisingly, there are other companies in the Rathi group who are in the same line of business as Rathi Bars Ltd. Hence, there is competition within the group.
d.       Certain statutory approvals are yet to be received.
e.       Company has non-exclusive rights to use the brand name “Rathi”.
f.        Steel industry is cyclical in nature.
g.       Chinese steel industry is a big potential threat.

The following table shows the upcoming IPO that have been covered under this section and their status. You can click on any of these to read more about them.

S. No. IPO Name Status
1 Rathi Bars Limited Draft Offer Document with SEBI
2 Zylog Systems Limited Draft Offer Document with SEBI
3 Mundra Port and Special Economic Zones Limited Draft Offer Document with SEBI