The Tatas are paying Rs140 per share for acquiring Mount Everest Mineral Water, which values the company at around Rs460 crore. For a company with an annual turnover of Rs25 crore, it’s a very steep price. Mount Everest’s net profit in the quarter ending December 2006 was a mere Rs33 lakh. Earnings per share added up for the four quarters ending December 2006 amounted to only 53 paise. True, revenues in the December quarter were up 47% compared with the year ago period, but profits fell from Rs55 lakh during October-December 2005 to Rs33 lakh during October-December 2006. The Mount Everest stock went up from around Rs28 last July to Rs63 by March this year, before moving up to its current level on takeover speculation.
So what’s the reason for this extraordinary valuation? Mount Everest produces natural mineral water from its source in the foothills of the Himalayas and, given the paucity of such natural sources, there’s a big premium attached to such assets. Consider, by way of example, Evian and Perrier.
Mount Everest has 75% market share in the domestic natural mineral water segment and is present predominantly in the institutional segment, with supplies to top hotels and restaurants. But there’s a huge demand for natural mineral water in Europe and the US and Tetley group chief operating officer Peter Unsworth says they could easily distribute it through Tetley’s channels. Unsworth says it’s the potential in the segment that should be looked at, rather than the scale of Mount Everest’s current operations.
For Tata Tea, the acquisition is imperative, given the stagnation in the black tea markets in Europe and the US. The Glaceau deal was supposed to address that problem, steering the company into high growth non-black tea businesses. The Mount Everest deal is the first small step towards recouping some of the ground lost by the Glaceau stake sale to Coca-Cola Co.
New futures indices
NSE has launched what it calls “The next big thing” for the derivatives market. Starting 1 June, futures and options are available on two new indices, the Nifty Junior and CNX 100.
Both indices are made up of highly liquid stocks. But while the Nifty is a popular index among market professionals and the business media, the other two indices are hardly ever referred to. It’s not surprising that on the first day of trade, futures on the two new contracts accounted for 3.5% of total index futures turnover. But NSE is leaving no stone unturned to push volumes—it will waive trading fees for certain trades in the new segments till end-September.
The need for these products cannot be overstated. The Nifty Junior gives access to a mid-cap portfolio that is distinct from the Nifty, which is full of large-cap stocks. Currently, there’s no other mid-cap index on which futures and options are available, and the Nifty Junior fits in well. The CNX 100, which is basically the summation of the Nifty and the Nifty Junior, can be seen as a better portfolio for hedging and for trading the market as a whole. This is simply because it’s a larger portfolio (representing 65.4% of the market) and better diversified. In sum, the new products have the potential to break the Nifty’s near monopoly of the index derivatives market.
Yet the launch of these products is a small step. Market participants have been asking for new products and innovation in the derivatives market for some time now. Serious moves in this direction can be made only when Sebi allows exchanges to launch products such as long-dated options that are available in overseas markets.
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