Apply to IPO of Ravi Kumar Distilleries? Keynote research update.

note of the IPO of Ravi Kumar Distilleries Ltd.

Issue Highlights

Price Band                                           : Rs 56-64 per share                                              

Minimum Bid Lot Size                         : 100 Equity Share

IPO open during                                  : December 08 – 10, 2010

Book Running Lead Manager               : Comfort Securities Pvt. Ltd.

To list on                                             : NSE & BSE

IPO Grading                                         : 2 / 5 (CARE)

PE                                                        : 35x (based on base price)*

                                                            : 40x (based on cap price)*

Market Cap post-listing                        : Rs153.6Cr or $34.17mn (based on the cap price)

Market Cap of Free Float                      : Rs73.6Cr or $16.37mn (based on the cap price)

* based on FY10 EPS.

IPO of 11.5mn equity shares of Rs10/- each, aggregating to Rs73.6Cr or $16.37mn (at the cap price).

Executive Summery

•     Ravi Kumar Distilleries Ltd. (RKDL) is engaged in the business of manufacturing and trade of Indian Made Foreign Liquor (IMFL) under its own brand portfolio as well as under tie-up arrangements with other companies.

•     RKDL started with initial capacity of 7,20,000 cases per annum and a bond capacity of 6300 cases of excise bonded warehouse. The company subsequently increased its installed capacity to presently at 14,25,000 cases per annum and 26000 cases of excise bonded warehouse.

•     RKDL has established several brands successfully across segments and flavors thereby enjoying brand recall from customers. IMFL products under its own brand portfolio as well as under various tie-up arrangements with other Companies include Capricorn, 2 Barrels, Chevalier, Konarak, and Green Magic amongst others.

•     Due to very existence in the Industry for past 10 years, RKDL has developed its brand on technical front. The company has developed state-of-the-art Quality Control and in-house R&D Department and has already developed technology in the field of manufacturing a wide range of IMFL products.

A2Z IPO -Subscribe or not? Keynote : A2Z Maintenance & Engineering Services Ltd Update

note of the IPO of A2Z Maintenance & Engineering Services Ltd.

Issue Highlights

Price Band                                                          : Rs400-410 per share                                        

IPO open during                                               : Dec. 8 - Dec. 10, 2010

Book Running Lead Manager                      : IDFC Capital, DSP Merrill Lynch, Enam, ICICI, SBI Cap

To list on                                                             : NSE & BSE

IPO Grading                                                       : 4 / 5 (CARE)

PE                                                                           : 23.4x (based on base price)*

                                                                                : 24.0x (based on cap price)*

Market Cap post-listing                                : Rs3,024Cr or $672mn (based on the cap price)

Market Cap of Free Float                             : Rs1,768Cr or $393mn (based on the cap price)

* Based on FY10 EPS

IPO of 21.02mn equity shares of Rs10 each, aggregating to Rs861Cr or $191mn (at the cap price) consisting of a fresh issue of 16.46mn shares (at the cap price) aggregating to Rs675Cr and an offer for sale of up to 4.56mn shares aggregating to Rs187Cr.

Executive Summery

•     Incorporated in 2002, A2Z Maintenance & Engineering Services Ltd. (AMEL) is an established EPC company provides services to the power transmission and distribution sector with a focus primarily on the distribution segment.

•     The company has diversified its EPC services to power generation companies and companies in other sectors such as road and telecommunications. In addition, the company is also in other businesses such as (i) power generation from renewable energy sources; (ii) municipal solid waste management services (iii) facility management services; and (iv) developing information technology solutions for power utilities.

•     The power sector in India is slowly moving from a regulated return framework to a market driven pricing mechanism. This has provided a major boost for private entrepreneurs to enter the power sector and set up projects.

•     Demand for engineering, procurement and construction services in the power transmission lines and power distribution businesses is largely dependent on development, demand and new investments in the power generation, transmission and distribution sectors.

•     The Planning Commission envisages a planned additional capacity of 78,700MW through investments of Rs4,951bn during the XIth five year plan period from 2007 to 2012. For solid waste management, the XIth five year plan has determined there should be 100% population coverage and it is estimated that the fund requirement for solid waste management during such plan period will be approximately Rs22,120mn.

•     AMEL has established a track record for efficient project management and execution of projects in EPC and FMS business, and recently, MSW business.

•     Risks include, a significant part of the business contracts is with government and public sector undertakings.

SUBSCRIBE to IPO of A2Z Maintenance & Engineering Services Ltd (A2Z) : Nirmal Bang

A2Z: An Engineering Marvel

A2Z is engineering its way to success in the FMS, EPC and waste management solutions business. High growth strategy and government support makes the company’s public o ffering quite attractive for investors with a long-term investment perspective






A2Z Maintenance & Engineering Services Ltd
(A2Z) operates in facility management
services (FMS) and engineering, procurement
and construction (EPC) projects.
FMS includes engineering maintenance (mechanical,
plumbing, electrical, HVAC, DG Set), energy-saving
solutions, janitorial services, parking management,
property lease management, telecommunication tower
maintenance and security services to public and private
sector clients.

Under EPC, the company provides services to the power
transmission and distribution sector, with primary focus
on the distribution segment. It is also diversifying into
providing EPC services to power generation companies
and companies in other sectors, including road and
telecommunication.

A2Z has been operating the EPC business since fiscal
2006 and has historically focused on the power distribution sector. EPC services include the installation of
distribution line infrastructure with capacities of up to 33
KV, the construction of substations of up to 33 KV and
participation in system-strengthening projects and rural
electrification projects.

In the power transmission sector, it has undertaken select
EPC projects like the construction of extra high voltage
(EHV) substations of up to 400 KV and EHV transmission lines of up to 765 KV. Its customers in EPC business
are state power utilities and central public sector utilities
such as PGCIL, NTPC and NHPC.

In addition to this, the company is diversifying its focus
on to other businesses that include the following:
1   Generating power from renewable energy sources
2   Providing municipal solid waste management services
(MSW)
3   Developing information technology (IT) solutions for
power utilities
The company’s business operations are geographically
spread across India.


The EPC segment revenue for FY10 was `1,123 crore
comprising 91.6% of total revenue of the company. The
Order Book for EPC business was  `1,292 crore as on
31st Jul ’10.


INVESTMENT RATIONALE
Successful Execution Capability In Distribution EPC
Business Is The Differentiator
A2Z derives over 90% of its revenue from the distribution EPC business. It has shown strong execution
capabilities by successfully completing various distribution EPC contracts, wherein its competitors have failed.
A2Z has been successful in managing and executing high
working, capital intensive and difficult-to-implement
ground-level distribution EPC contracts.
The direct implementation of projects instead of subcontracting has helped A2Z in completing projects on time
and managing the working capital cycle. Apart from this,
A2Z has also grown this business from  `35 crore in
FY06 to over `1,100 crore in FY10.
Integrated Approach To Municipal Solid Waste (MSW)
Management To Drive Profitability
A2Z started the municipal solid waste business in the
year 2008 and received initial success in its integrated
approach to the MSW business. The integrated contract
involves door-to-door collection, transportation to the
disposal site, processing the waste and capturing various
materials like plastic, metal, glass, etc for recycling; sand
for manufacturing bricks; producing composites (organic
fertilizer) for sale and Refuse Derived Fuel (RDF) to be
used as fuel for power plants.
It started its first processing plant in Kanpur in October
’10, which will capture the full benefit of the value chain
of municipal solid waste. A2Z is further integrating the
MSW business at Kanpur by setting up a 15 MW
biomass power plant to utilize RDF as fuel for the same.
Encouraged by its initial success in the municipal solid
waste business, A2Z has adopted an aggressive growth


strategy and has already taken up 20 contracts in different cities to manage 5,565 tonnes of municipal waste per
day. We feel that over the next two to three years, this
business will grow manifold and will be the key value
driver for the company.
Multi-fuel Biomass Power Plant Structure And Fuel
Security Through Integration Will Make The Biomass
Power Plant Highly Successful.
The basic problem of single fuel biomass power plant is
low availability of fuel, availability in part of the year,
rising cost of fuel, etc. By using multi-fuel plant structure
(used for the first time in India), the company can run this
power plant throughout the year. Further, by integrating
the biomass power plant with municipal solid waste or
rice processing mill, the company will secure fuel supply
at lower costs.
The company is setting up various small biomass power
plants of 10 MW to 15 MW capacities, aggregating to
285 MW. Of these, four power plants are expected to be
commissioned by March ’11, five by October ’11 and
one plant of 10 MW is expected to start in December ’11.
The successful implementation of these power plants will
help A2Z to diversify its revenue base.


The Company Is Growing Its Business In High-growth
Industries And Is Supported By The Government
Power distribution loss of over 30% - 40% is a big
concern for India and the government is aggressively
looking to bring down these losses. To achieve the same,
the government is consistently coming up with policy
measures like Restructured Accelerated Power Development and Reforms Programme (R-APDRP) to improve
the situation. In solid waste management, the government has come up with various incentive schemes under
programmes like National Urban Renewal Mission
(NURM) to encourage private sector participants in
waste management.
Likewise, the government has mandated all states to
generate 5% - 10% of power from renewable sources of
energy.  Government support and enough opportunity in
the target industry will keep the company’s growth
momentum intact.


RECOMMENDATION
A2Z is operating in an emerging and high-growth industry and has shown rapid growth capabilities in the past. Execution capability in the distribution EPC business, emerging opportunities in solid waste management and high growth
planned in the renewable energy business, supported by government policy, will drive growth for A2Z.
At the upper band of `410, though the shares seem to be offered at a higher PE multiple of 24 on historic earnings of
FY10, we feel the multiple on forward earnings will be attractive due to growth in all its businesses.
We recommend investors to subscribe to the company’s initial public offering with a long-term perspective. The issue
opens on 8th December ’10 and closes on 10th December ’10.

Economy & Corporate Front Page: IIFL; 12/07/10

Corporate Front Page:

- The government has agreed in principle to ensure a minimum 10% return on investment to ONGC in Cairn India’s Rajasthan blocks, boosting the firm’s valuation ahead of its follow-on public offering. (ET)

- JSW Steel has received shareholders’ nod to issue ~1mn shares on a preferential basis to Japanese steelmaker JFE Steel. (ET)

- Suzlon Energy to merge its infrastructure and tower business divisions with itself. (ET)

- Coal India Ltd (CIL) has officially expressed interest in Kenya's Mui Basin. (BS)

- ONGC Videsh Ltd (OVL) will sign a formal agreement for taking a 25% stake in Kazakhstan’s Satpayev oilfield by the end of February 2011. (BS)

- Religare Enterprises is close to buying 85% of the Ajay Piramal Group promoted real estate fund Indiareit Fund Advisors, valuing the entire fund at around Rs2.5bn. (ET)

- Areva is likely to sign a framework agreement with NPCIL to build the first two of the six planned nuclear power reactors in Maharashtra. (ET)

- Glenmark along with its US-based partner has received US health regulator's nod to manufacture and market two oxycodone products, used for treating moderate to severe pain, in the American market. (ET)

- BPCL will file an execution petition against Kingfisher Airlines (KFA) to claim jet fuel dues. (BS)

- Opto Circuits has completed the acquisition of US-based Cardiac Science Corporation. (FE)

- SBI has raised its deposit rates by up to 150 bps across various maturities, a move that will provide better returns to people with fixed deposits in the bank. (ET)

- Mahindra & Mahindra Financial Services plans to raise up to Rs5.7bn through institutional placement by mid-January. (ET)

- Bharat Forge plans to invest Rs19bn through a joint venture with NTPC. (ET)

- Toyota Motor Corporation (TMC) is looking at developing a small car to be positioned below its hatchback, Liva, to drive up volumes in emerging economies. (BS)

Economy Front Page:

- Mobile phone companies have rejected TRAI proposal to make cell phone tariffs more transparent. They have asked the regulator not to intervene on tariff, saying this should be left to market forces, and have also opposed the proposal to have at least one standard tariff plan across all operators. (ET)

- Aviation regulators DGCA has directed all Indian carriers to show route-wise and date-wise airfares on their websites and ensure transparency so that flyers do not feel cheated by high ticket prices. (ET)

- Introduction of a Goods and Services Tax (GST) could be delayed further with the Centre and the states failing to reach common ground at the meeting of the Empowered Committee of state finance ministers. (BS)

- France signed deals with India worth euro 13.3bn in the nuclear power, civil aviation and defense sectors. (BS)

Jubilant Foodworks: Fresh from the oven; initiating with Buy:: Deutsche Bank

Jubilant Foodworks
Reuters: JUBI.BO Bloomberg: JUBI IN Exchange: BSE Ticker: JUBI
Fresh from the oven; initiating
with Buy


Generating free cashflow
A 65% market share in the under-penetrated Indian Quick Service Restaurant
sector, an exclusive franchisee of a globally successful brand and solid execution
(in terms of both new store openings and robust supply chain) drive a 42%
revenue CAGR (FY11-13E), 70% gross margin, negative working capital (~11% of
revenue) and FY11-13E 60% FCF CAGR. While the near-term valuation factors in
aggressive growth, our FY12E EPS is higher than consensus by 18%. We see
material upside potential: initiating coverage with a Buy.




Exclusive franchisee of a globally successful brand
Jubilant Foodworks (JFL) operates its pizza stores pursuant to a Master Franchise
Agreement with Domino‘s International, which provides it with the exclusive right
to develop and operate Domino‘s pizza delivery stores in India, Nepal, Bangladesh
and Sri Lanka. It is this association with Domino‘s that provides JFL with the
technical, marketing and operational expertise to compete successfully with other
restaurants in the QSR industry in India. JFL has a dominant 65% market share in
the organised pizza home delivery segment in India.

Robust supply chain; ranked top among Domino’s franchisees worldwide
The cornerstone of JFL’s operational success is based on its efficient supply chain
that drives negative working capital. Its operations rank among the top three
within Domino’s global operations. JFL has centralised the sourcing, warehousing
and distribution of its raw materials, as well as the production of dough at its
commissaries. This reduces the storage space required at its stores, thereby
enabling JFL to minimise its store operating costs, without incurring significant
additional expenses at the commissary level. The effects of its efficient supply
chain are reflected in its relatively high gross margins and negative working capital.

Initiate with a Buy and a target price of INR810
Our DCF-based target price of INR810 is based on a cost of equity of 13.6% and
4.5% terminal growth. Downside risks include increase in royalty charge to
Domino’s International and execution risk in the opening up of new stores.



Investment thesis
Outlook
A 65% market share in the under-penetrated Indian Quick Service Restaurant sector, an
exclusive franchisee of a globally successful brand and solid execution (in terms of both new
store openings and robust supply chain) drive a 42% revenue CAGR (FY11-13E), 70% gross
margin, negative working capital (~11% of revenues) and 60% FCF CAGR over FY11-13E.
While the near-term valuation factors in aggressive growth, our FY12E EPS (the basis of our
DCF-derived target price) is 18% higher than consensus.
JFL operates its pizza stores pursuant to a Master Franchise Agreement with Domino‘s
International, which provides it with the exclusive right to develop and operate Domino‘s
pizza delivery stores and the associated trademarks in the operation of pizza stores in India,
Nepal, Bangladesh and Sri Lanka. This has provided JFL with the ability to use Domino’s
globally recognised brand name, as well as operational support for pizza and food technology
(such as recipes), commissary and logistics management support, global marketing and
vendor development know-how. It is this association with Domino‘s that provides JFL with
the technical, marketing and operational expertise to compete successfully with other
restaurants in the QSR industry in India. JFL has a dominant 65% market share in the
organised pizza home delivery segment in India.


Valuation
Our DCF-derived target price of INR810 per share is based on the following assumptions:
�� Risk-free rate of 6.4% (Deutsche Bank estimate), market risk premium of 7.2%
(Deutsche Bank estimate) and Beta of 1, implying a cost of equity of 13.6%.
�� Growth in the stable phase of 4.5% (which is the long-term growth rate in the number of
households in India). Our valuation for Jubilant Foodworks works out at INR810 per
share.
At our target price of INR810 per share, the shares would trade at 30x FY13E earnings.


Risks
Significant dependence on the master franchise agreement with Domino’s
International
The master franchise agreement between JFL and Domino’s International was renewed in
September 2009 for another term of 15 years, which will continue until 31 December 2024
and is further extendable for a period of ten years (subject to certain conditions). Should JFL
default on the provisions of the agreement, then Domino’s International would have the right
to terminate the agreement.
Royalty to Domino’s may increase
JFL paid a royalty of 3% on its revenues in FY10. While the agreement with Domino’s is valid
until 2024, it is possible that after that date the royalty may increase. The company also pays
USD5,000 per new store opened.




Key investment positives
Exclusive franchisee of a globally successful brand
JFL operates its pizza stores pursuant to a Master Franchise Agreement with Domino‘s
International, which provides it with the exclusive right to develop and operate Domino‘s
pizza delivery stores and the associated trademarks in the operation of pizza stores in India,
Nepal, Bangladesh and Sri Lanka. Over its 49-year history, the Domino‘s business has grown
into a global network of over 9,000 pizza stores in more than 60 countries, involving more
than 2,000 franchisees. This has provided the JFL with the ability to use Domino’s
International’s globally recognised brand name, as well as operational support for pizza and
food technology (such as recipes), commissary and logistics management support, global
marketing and vendor development know-how. It is this association with Domino‘s that
provides JFL with the technical, marketing and operational expertise to compete successfully
with other restaurants in the QSR industry in India. JFL has a dominant 65% market share in
the organised pizza home delivery segment in India.


Robust supply chain; ranked top among Domino’s franchisees
worldwide
The cornerstone of JFL’s operational success is based on its efficient supply chain that drives
a negative working capital. Its operations rank among the top three within Domino’s global
operations. JFL operates four regional supply chain centres, or commissaries, located in
Noida (Delhi NCR), Mumbai, Bangalore and Kolkata. These commissaries primarily
manufacture dough (pizza bases) and act as warehouses for most of the other ingredients.
The primary raw materials used in the preparation of the pizzas, such as cheese, vegetables
and meat, are sourced and supplied to the stores by their commissaries, except for a few
stores which procure vegetables locally from vendors within their geographic area. This helps
JFL to ensure consistent quality and also ensure timely delivery of raw materials to its stores.
Furthermore, as the purchase function is centralised and the company purchases large
volumes of ingredients and packaging such as cheese, sauce and pizza boxes, it allows JFL
to maximise leverage and negotiate better prices with its suppliers.
For most of its key ingredients, JFL follows a multi-vendor policy to minimise reliance on any
single vendor and has entered into annual agreements with certain key vendors to ensure the
steady supply of ingredients. In addition, JFL has a dedicated fleet of hired trucks at its
disposal to ensure timely delivery of raw materials to its stores. These trucks are refrigerated
to ensure that the ingredients are supplied in a temperature-controlled environment, which is
monitored during transit to ensure quality and minimise wastage. The effects of its efficient
supply chain are reflected in its relatively high gross margins and negative working capital


Effective site selection and project management focusing on ROI
One of the major factors behind JFL’s continued growth has been its ability to open and then
operate most of its new stores profitably. A robust store selection process that takes into
consideration various factors such as location visibility, presence of competition, household
count as well as presence of corporate and other institutions that would enable it to operate
these pizza stores in a profitable manner is a key differentiator between JFL and its QSR
competitors.


As of 30 September 2010, JFL operated 339 stores in India across 79 cities located in 22
states and union territories, and, through a sub-franchisee, DP Lanka Private Limited, five
stores in Sri Lanka. These included entry into 22 new cities in FY10. Domino’s has mentioned
a store target of 700 stores for its India operations. At present, its competitors include Pizza
Hut (~150 stores pan-India), KFC (~50 stores pan-India) and McDonalds (~170 stores).
JFL also conducts a return-on-investment analysis based on projected sales and profitability
to determine the financial feasibility of the store. The company’s internal project management
system is designed to ensure that they purchase standardised equipment from selected
vendors, plan in detail the procurement of the standard equipments prior to lease signing as
well as designing standardised processes for all functions related to store openings. This has
enabled JFL to reduce its store opening time to between 35 and 45 days on average from
the date of possession of the premises for a new store location.


New product introductions and innovative marketing drive
revenues
JFL utilises three distinct marketing platforms, (a) national marketing campaigns on television,
print and radio, (b) local store marketing and (c) customer relationship management. Its
innovative marketing strategy that emphasised delivery within 30 minutes of an order’s being
taken or no charge would be made has become a marketing case study whereby delayed
public services are being compared unfavourably to efficient pizza delivery.
JFL’s local store marketing is aimed at increasing customer penetration by targeting new
customers and increasing the frequency of repeat orders from existing customers. The
strategy includes address mapping of an entire delivery area to precisely identify key demand
areas for a store as well as intensive coverage of households and corporates within a store‘s
sales area using store-specific door hangers and fliers. JFL also utilises details of customers‘
past transactions from its point of sales software system to provide customised
communication including mobile text messages and offers, relevant to each consumer
thereby maximising returns from individual customer relationships by increasing the
frequency of orders.
JFL’s product innovation and value promotions are another driver for footfall frequency. For
example, the company began offering a limited number of pasta dishes at the stores and
launched its own low-cost pizza – Pizza Mania. JFL, on a continuous basis, keeps evaluating
increasing dine-in space at selected existing pizza stores. This is quite apart from periodically
refurbishing its stores, and it intends to continuously upgrade its facilities and general pizza
store ambience.


Expansion using new distribution channels
Traditionally, JFL’s pizza stores have generally been located in neighbourhood markets in
urban areas. As it seeks new ways to grow its business operations, it has sub-franchised two
stores into India’s expanding infrastructure network of airports. In addition, metro stations
offer a distinct new channel for growth. As the company anticipates that its revenues from
these stores would be driven by commuters at these locations, the intention is to use a menu
of off-the-shelf pizzas.
JFL has integrated other distribution channels with its pizza stores‘ operations, such as web
and mobile technology, to expand its sales. In August 2009, it launched – on a pilot basis – an
online ordering facility for residents in Bangalore and it intends to gradually extend this
service to other locations. JFL also opened pizza stores on certain corporate campuses and in
certain food courts.


Cost consciousness driven by employee compensation structure
In line with its philosophy that the store manager is the CEO of the store, the compensation
for its store managers is driven by the sales and profitability of their respective stores. Also,
all costs attributable to a store are charged at the store-level and the store manager has
discretion to take action in order to increase sales or reduce costs. The policy of centralised
sourcing from an optimal number of vendors further facilitates cost efficiencies, enabling the
company to reduce manufacturing costs.


Leveraging its market position to launch new food services
brands in India
JFL has mentioned that it intends to leverage its current market position and experience in
the food services industry to launch new international food services brands in India. These
could include QSR such as Burger King and Starbucks although no formal announcements are
expected until at least the next two quarters.


Negative working capital driven by centralised sourcing
JFL has centralised the sourcing, warehousing and distribution of its raw materials, as well as
the production of dough at its commissaries, this reduces the storage space required at its
stores, thereby enabling JFL to minimise its store operating costs, without incurring
significant additional expenses at the commissary level. The effects of its efficient supply
chain are reflected in its relatively high gross margins and negative working capital.


Efficiency in capex is a driver of FCF
JFL opened 60 stores in fiscal 2009 of which 44 stores were opened in cities where JFL
already had stores and of the 70 stores opened in fiscal 2010, 31 stores were in cities where
JFL already had stores. To minimise additional capital expenditure and ensure quality control,
JFL plans to open new stores in cities and towns that would be located within less than one
day’s travel distance of its existing commissaries. For new stores where JFL cannot serve
efficiently from its commissaries, the company has developed a back-end production facility
model which should enable the company to service two to three stores in a city. These backend
production facilities procure vegetables and other perishables locally. JFL believes that
its future growth will be driven by its new stores in Tier 2 and Tier 3 towns and, therefore, its
back-end production facilities will play a key role in its success in these cities.