Zuari Inds: proposed merger of Gobind Sugar & 1:1 share allotment will dilute earnings, value

KK BIRLA Group firm Zuari Industries has outperformed the market by a wide margin over the past one year. The scrip gained 397% in the past one year compared to the 184% jump in the benchmark Sensex.
This follows the overall buoyancy in the fertiliser sector since the first signs of deregulation since July 2008. The company has recently decided to merge its group company and Gobind Sugar Mills listed on the Kolkata Stock Exchange by issuing Zuari’s shares on a 1:1 ratio.
This will entail an issue of 32-lakh equity shares, which implies a dilution of 10.9%, taking ZIL’s outstanding equity to Rs 32.64 crore. Considering, the EPS of Gobind Sugar Mills’ for the year ended June ‘09 at Rs 24.7 against Rs 120.4 of ZIL, this amalgamation will bring down the EPS.
With low debt and a cash rich status, ZIL is increasing investments in its subsidiaries. Recently, the company created two subsidiaries — Globex and Zuari Fertilisers & Chemicals — for facilitating further investment-led growth. Based out of Dubai, Globex will carry on the commodities trading business, while ZFCL will manufacture fertilisers.
Similarly, ZIL plans to develop 73 acres of land near Mysore obtained way back in 2007 through acquisition of a real estate company. The company also subscribed to 62.4-lakh shares of Zuari Investments making it a subsidiary. The company already has interests in pesticides, furniture and financial and engineering services through its subsidiaries.
Zuari’s urea plant in Goa is yet to receive natural gas and is currently operating on liquid fuels. With Gail extending its pipeline till Dabhol on the western coast and planning to take it down till Bangalore, ZIL hopes to get gas by 2013. The company has already signed gas supply agreement with GAIL (India) for supply of RLNG. Simultaneously, the company has obtained government approval to revamp its plants to use gas instead of naphtha. The process will also increase the capacity of its 4-lakh tonne per annum urea plant, thanks to debottlenecking.
The government has recently approved nutrient-based subsidy policy with effect from April 1, 2010 and increased urea prices by 10%. These developments stand to benefit Zuari in the long run. Although there are multiple positives about the stock, the proposed merger of Gobind Sugar and the 1:1 share allotment will dilute earnings and value to the detriment of minority shareholders.

Mahanagar Gas: On a High Growth Path

An Interview with Mr. P.K. Gupta, CMD, Mahanagar Gas
What has changed for Mahanagar Gas in the last couple of years and how will it impact the company’s future?
In last couple of years a number of MGL’s constraints have thankfully vanished putting the company on an extremely high growth path. Gas availability, which was the biggest worry for us, has eased with RIL’s KG basin gas becoming available. Lack of regulatory framework was another problem, which was squarely addressed as the Petroleum and Natural Gas Regulatory Board framed rules for city gas distribution (CGD). The third key hurdle for us was setting up CNG stations in Mumbai where the real estate prices are so high. For this we have now tied up with BEST to set up CNG stations at their 24 depots. So far 8 such stations have commenced to be followed by another 12 by March 2011. All these things mean that MGL is ready to take a quantum jump in next 4-5 years. It took us 15 years to reach 2 MMSCMD, but we plan to go beyond 4 MMSCMD in next 4 years. This will make us one of the world’s largest metro-focused CGD business.
Which areas are you operating in? Where will you be in next few years?
We are now authorized to operate CGD business in entire Mumbai, entire Navi Mumbai, Thane upto Mira Road, Bhayandar and upto Dombivli, Kalyan, Ambarnath, Badlapur, Ulhasnagar and Bhivandi. This is an extremely highpotential area housing around 2 crore people.
With no constraint of gas or financing, we are growing as fast as we can by focusing on intensive as well extensive growth. We have already commenced operations in Navi Mumbai with 4 CNG stations and increasing number of piped gas households in Ghansoli, Airoli, Koparkhairane, Vashi areas in December 2009. In Thane we are available in more than 80% area including Meera Road, Bhayandar. In virgin areas such as Panvel, Taloja, Kharghar, Kalyan Dombivli, Ambarnath we have started rolling out infrastructure and the actual sales will start by March 2011.
Have you tied up for the gas required for these expansions?
Yes. Today we have contracted gas, which will suffice our next two years of growth. We have 2 MMSCMD of APM gas allocation. With RIL we have agreement for 0.37 MMSCMD of KG basin gas. We have also contracted 0.38 MMSCMD with Gail from ONGC’s C-series gas finds besides importing around 0.12 MMSCMD of spot LNG. Thus we have contracted nearly 2.85 MMSCMD gas as against our present sales of 1.85.
What are your capex plans for next five years?
In view of the high-speed growth that we are targeting for next few years, we will be investing close to Rs 300 crore annually in next five years funded through a mix of debt and internal accruals. CGD is actually a ramp-up business. You build the pipeline, the necessary infrastructure in a particular locality and continue to increase its utilization over years. Typically 10-12 years are needed to reach a saturation point in an area. However, not so in our case as our growth so far was severally constrained. We will be setting up 20 CNG stations and adding atleast 60,000 piped gas connections every year. Today we have laid 3000 km of pipelines in Mumbai and in next 5 years it will go on to 5500 km.

Texmo Pipes IPO: Unjustified Valuations

IPO details:

Price Band: Rs 85-90

Issue size: Rs 42.5 -45crore

Date: Feb 16 - 19 , 2010

TEXMO Pipes and Products (TPPL) is coming out with a public issue of 50 lakh shares in a price band of Rs 85 to Rs 90 each to raise over Rs 42.5 crore to fund its expansion and diversification plans. The company proposes to invest the proceeds to expand its PVC pipes capacity by 66%, start making pipefittings and diversify in woven sacks by October 2010. Post-IPO, the promoter group’s stake in the company will come down to 55.6% from the current 100%.

BUSINESS:The plastic pipe maker with 25,000 tonne of PVC and 11,000 tonne of HDPE pipes capacity commenced its operations in 1999 as a partnership firm, which was converted into a company only in July 2008. Further, it bought assets and liabilities of three promoter group firms in August’08 and commissioned a plant in September’08. It makes various types of pipes and accessories required in the irrigation, sewerage, construction and telecom industries. It is a regional player with a presence in six states such as MP, Maharashtra, UP, Gujarat, AP and Rajasthan with 169 exclusive dealers.

GROWTH DRIVERS:The plastic pipes industry is currently going through a boom with growing irrigation projects and increasing usage in telecom, construction and oil & gas transportation industries. However, the generic PVC pipes market for irrigation is crowded by a large number of small and medium scale manufacturers in the unorganised sector. The proposed facility to manufacture fittings will augment its existing product portfolio of pipes, enabling it to supply total solutions to its customers. The firm also wants to expand geographically by establishing dealership network in the other states, such as Tamil Nadu, Bihar, Jharkhand and West Bengal. FINANCIALS:Between FY05 and FY09, the company’s net sales grew at a CAGR of 46.5% while net profit grew at 94%. However, the growth in the past one year was muted despite a 157% jump in its production capacity from 14,000 TPA to 36,100 TPA by the end of FY09. The company was carrying a debt-to-equity ratio of 1.7 as on October 31, 09. Its investment in working capital was 3.5 times that in its fixed assets. Its average debtors and average inventory have steadily grown in the past three years to 61 days and 59 days, respectively.

VALUATIONS:At this price band, the shares are valued 16.6 to 17.6 times the annualised profit for FY10 on post issue equity. The price is around 1.6 times its post issue book value. Its peers, like Tulsi Extrusion, Precision Pipes, Kisan Mouldings and Astral Polytechnik, are trading in a P/E range of 3.3 to 12.8 and a price-to-book ratio of 0.5 to 2.2.

CONCERNS:The company is into high working capital industry and its operating cashflows were negative in three out of the past five years. Considering the proposed expansion plans, the scenario is unlikely to change. Its existing and proposed products are me-too products with a lot of competition in the market. The brand name and corporate logo used by the company ‘Texmo’ are not registered and are currently being contested.

IOL Chemicals: Expansion to change fortunes

THE stock of Punjab-based IOL Chemicals has grossly underperformed the market in the past one year, falling nearly 50% despite a 65% jump in the Sensex — the primary reason being its weak performance in the first half of FY10. However, going by the company’s December ‘09 quarter results, there could be a change in fortunes. For the past couple of years, IOL Chemicals was implementing expansion and backward integration projects with a capex of Rs 256 crore, which it completed only recently. The company set up a 6,600-tonne per annum (TPA) plant to manufacture isobutyl benzene (IBB), which is the key intermediate in manufacturing ibuprofen. With a capacity of 3,600 TPA of ibuprofen, the company is already the second largest in the world and plans to raise its capacity to 6,000 TPA by mid-FY11 to emerge as the world’s largest producer of this anti-inflammatory drug. Over the past nine months, the company has set up plants for mono-chloro acetic acid (MCA) and acetyl chloride, which are the other key raw materials in the manufacture of ibuprofen and use IOL’s other products — acetic acid and acetic anhydride — as inputs. In addition, it has also set up a 13-MW captive power plant, using coal or rice husk as fuel. IOL Chemicals, earlier known as Industrial Organics, is a turnaround story. In FY03, the company’s net worth had turned negative. But thanks to equity infusion, there was a turnaround. Since then, its net worth has grown at a cumulative annualised growth rate (CAGR) of 87%. The debt-to-equity (D/E) ratio, which was 6.1 at the end of FY04 came down to 1.6 by the end of FY08. It moved up to 2.2 by end of FY09 due to the expansion project. The company is repaying close to Rs 35 crore of debt annually, which can reduce the D/E ratio to one by the end of FY11. IOL Chemicals’ performance during the first half of FY10 was impacted by low acetic acid prices, which forced it to run its 50,000-TPA acetic acid plant below capacity. The company was using nearly 80% of its acetic acid production for captive consumption in FY09, which could go up to 100% in view of the new derivative capacities commissioned. However, its December ‘09 quarter showed a multi-fold profit growth that went unnoticed by the market due to the weak sentiment. The company’s capital investment programme for the past couple of years is expected to bring in additional revenues and profits in the coming quarters. The prospects for the company’s scrip, which is trading below its book value and at a price-to-earnings (P/E) multiple of 7.7, appear to be reasonably bright.

Dolphin Offshore: Staying Afloat

Addition of new assets, graduation to main turnkey contractor and healthy E&P outlook in India make Dolphin Offshore an attractive investment

Although the scrip has more than tripled since we last covered it in July 2008, the growth trajectory of Dolphin Offshore still remains strong making its valuation fair. With new assets joining its fleet, the company is expanding its capabilities that can generate healthy returns over the next two-three years. BUSINESS: Dolphin Offshore (DOL) is a marine engineering company supporting the offshore petroleum industry. The company currently owns 14 vessels and has two major vessels on order to be delivered later in 2010. The company, which started as a diving support company 30 years back, has now scaled up to undertaking turnkey contracts for fabrication, offshore engineering, inspection, maintenance, modification, repair works for the offshore E&P petroleum companies. Historically, ONGC has remained the principal client for the company. The company’s plans to set up a shipbuilding and ship repair unit in Gujarat have taken a backstage due to environmental concerns. Hence, the company is trying to tie up with a fabrication yard for its captive consumption. GROWTH DRIVERS: Although the global E&P industry has slowed down considerably in the past couple of years following the economic crisis, it continues to thrive in India. ONGC, particularly, is busy revamping its Mumbai High assets and has budgeted Rs 15,000 crore for the purpose. It will also spend Rs 7,000 crore for developing small and marginal fields in the western offshore. In the first quarter of 2010 itself, ONGC is expected to tender out contracts worth around Rs 3,300 crore. DOL has just taken the delivery of one workboat in December 2009 and is set to get its construction barge by March 2010 and another workboat by September 2010. DOL has established itself as an efficient EPC contractor by executing several ONGC turnkey contracts. This enables it to aspire for bigger and more complex jobs in the future with better margins. The outstanding order book, which is currently at Rs 257 crore, is expected to increase. FINANCIALS: For the 12-month period ended December 2009, the company posted an identical 52% growth in operating revenues as well as net profit with operating margins stable at 19%. Over the past five years, its net sales have increased at a CAGR of 31.7%, while the net profit grew at 56.4%. It is currently carrying a debt of around Rs 100 crore, three-fourth of which represents working capital. Payment delays by debtors are one of the greatest problems faced by the company as its average debtor velocity stood at six months during FY2009. VALUATIONS: At the current market price, the scrip is trading 9 times its consolidated net profit for the past 12 months. Other companies in the industry, such as Garware Offshore (11.1), Great Offshore (7.8), Aban Offshore (15.5), are trading at similar levels. DOL is expected to end FY11 with a net profit of Rs 78 crore. The current price discounts the estimated FY11 earnings 7.4 times. CONCERNS: Global economic recovery that can refuel the E&P binge of the global majors remains a key concern for the company’s growth. Due to the contractual nature of work, which again is dependent on monsoon and weather conditions, the company’s earnings could witness great swings from quarter to quarter.

Kiri Dyes: Dystar Takeover

AHMEDABAD-BASED Kiri Dyes & Chemicals’s (KDCL) successful acquisition of Dystar for an enterprise value of Rs 1,350 crore has catapulted the company in the global league. The acquisition gives Kiri Dyes an annual turnover of Rs 5,000 crore, with a 21% global market share in textile dyes. The deal was financed through e65 million of debt and e35 million of FCCBs issued by Kiri’s subsidiary in Singapore. The company also took over current trade payables worth around Rs 650 crore. With this, Kiri’s consolidated debt rose to Rs 600 crore with the annual interest burden working out to close to Rs 45 crore. The buyout entailed purchase of 17 manufacturing facilities out of Dystar’s 19 along with all brands, patents and intellectual property rights. KDCL’s balance sheet is set to expand more than 11 times, considering the addition of Rs 3,200 crore worth of assets as part of this deal. Dystar, earlier owned by BASF, Bayer and Hoechst in 30:35:35 proportion, was acquired by Los Angelesbased private equity firm Platinum Equity in August 2004. In September 2009, the company had to file for bankruptcy due to liquidity problems. While the acquisition expands Kiri Dyes’ horizon multi-fold, it now has the responsibility of turning it around while managing a heavy financial burden. The company has already rationalised manpower at the Dystar units and plans to optimise manufacturing and sourcing by exporting more from India. Kiri Dyes has been preparing for an acquisition for quite some time now. In August 2009, its board had approved raising Rs 250 crore through qualified institutional placements or FCCBs or GDRs. Simultaneously, it increased the limit of FII investment to 49% from earlier 24%. The company also raised its borrowing powers from Rs 300 crore to Rs 700 crore. Kiri Dyes’ scrip hit an all-time high of Rs 877 before closing at Rs 810 on BSE on Thursday. The current valuation is around 12 times its estimated FY11 profits, assuming a 2% net profit margin on a consolidated sales. However, considering the uncertainties involved, investors should wait for the actual numbers before taking an investment call.

Kirit Parikh Committee Report: Europe Shows Price Hike May Not Hit Growth

THE report submitted by the expert group headed by Mr Kirit Parikh on a viable and sustainable system of pricing of petroleum products if accepted by the government could boost the prospects of state-owned oil firms. This is because deregulation of petroleum prices at a time when energy prices are moving northwards globally will certainly translate into a secular rise in domestic fuel prices. However, the hike may not necessarily crimp growth, at least going by the experience of Europe. Several European countries, including the UK and Germany, have adopted a high fuel price policy which has actually resulted in curbing its unproductive usage. In fact, the UK and Germany now consume 12-15% less oil compared to what they were burning over four decades ago in the 1970s. In Europe, petrol today costs the equivalent of a little over Rs 85 per litre while diesel range between Rs 66 and Rs 87 a litre—substantially higher than the pump prices in India. The higher fuel prices are mainly due to higher taxes imposed on fuels. Nearly 65% of the petrol price in Europe represents taxes as against 48.5% in India. Similarly, taxes on diesel amount to around 55% in Europe as against 24.6% in India. No wonder these recommendations will dent the already fragile monthly budgets of households and may generate a huge outcry. However, the burden of under-recoveries that had grown out of proportion over last five years needs to be eased before it threatens India’s economic growth. This pain in the short term is actually a necessary evil to ensure that the country retains its ability to invest for future growth. The Kirit Parekh’s recommendations are not much different in spirit from what the Rangarajan committee had suggested way back in February 2006. "Decontrol prices" is the primary motto of both these recommendation reports. Considering the country’s fiscal deficit, the fiscal health of the oil companies and the keen interest that the Prime Minister’s Office has been taking in this report, most of the recommendations are likely to get adopted soon, perhaps with some moderation.

Kabra hopes to gain from rising demand

Shares Up 50% Since Mid-Dec Against 5.6% Fall In Sensex

DEFYING the overall weakness in the stock market in the past couple of weeks, the shares of Kabra Extrusiontechnik (KETL) traded near its all-time high to close at Rs 188.5 on February 2, 2010. Although the superb December 2009 quarter performance was one key element in the latest upsurge, the scrip has substantially outperformed markets in the past one month. KETL shares have gained 50.3% since mid-December as against a 5.6% fall in Sensex.
KETL recorded a handsome 572% jump in its December 2009 quarter profit at Rs 6.5 crore, although its sales grew only 42% to Rs 49.1 crore. The company was able to maintain prices of its plastic extrusion machinery although the raw material costs eased. KETL is a debt-free company with healthy operating cashflows. The company’s cash and equivalent investments have grown at a cumulative annual growth rate (CAGR) of 49.7% between FY05 and FY09.
After steadily growing profits at a CAGR of 34% for five years, the company had reported a fall in profit in FY09. Even in the first half of FY10, the company’s performance was only marginally better than the year-ago period. Against this background, the sharp jump in its third quarter profits hints at improvement in the future prospects of the company.
The plastic extrusion machinery industry is closely linked to the plastic consumption, which is growing fast in India. The demand for conventional PVC pipes is growing in double digits due to increasing irrigation activity as well as new applications in construction and infrastructure segments. Similarly, pipes manufactured from HDPE are gaining popularity in applications such as telecom ducting, water supply and natural gas distribution. Additionally, the consumption of packaging films is growing in industries such as food processing and healthcare. All these factors augur well for KETL, which had faced some sluggishness in net sales in the past three years.
To benefit from the increasing demand, KETL is planning an aggressive investment of Rs 85 crore over the next 24 months. This will not only expand its capacities, but also improve the efficiencies.

Kabra Extrusion: Hopes to gain from rising demand

Shares Up 50% Since Mid-Dec Against 5.6% Fall In Sensex

DEFYING the overall weakness in the stock market in the past couple of weeks, the shares of Kabra Extrusiontechnik (KETL) traded near its all-time high to close at Rs 188.5 on February 2, 2010. Although the superb December 2009 quarter performance was one key element in the latest upsurge, the scrip has substantially outperformed markets in the past one month. KETL shares have gained 50.3% since mid-December as against a 5.6% fall in Sensex. KETL recorded a handsome 572% jump in its December 2009 quarter profit at Rs 6.5 crore, although its sales grew only 42% to Rs 49.1 crore. The company was able to maintain prices of its plastic extrusion machinery although the raw material costs eased. KETL is a debt-free company with healthy operating cashflows. The company’s cash and equivalent investments have grown at a cumulative annual growth rate (CAGR) of 49.7% between FY05 and FY09. After steadily growing profits at a CAGR of 34% for five years, the company had reported a fall in profit in FY09. Even in the first half of FY10, the company’s performance was only marginally better than the year-ago period. Against this background, the sharp jump in its third quarter profits hints at improvement in the future prospects of the company. The plastic extrusion machinery industry is closely linked to the plastic consumption, which is growing fast in India. The demand for conventional PVC pipes is growing in double digits due to increasing irrigation activity as well as new applications in construction and infrastructure segments. Similarly, pipes manufactured from HDPE are gaining popularity in applications such as telecom ducting, water supply and natural gas distribution. Additionally, the consumption of packaging films is growing in industries such as food processing and healthcare. All these factors augur well for KETL, which had faced some sluggishness in net sales in the past three years. To benefit from the increasing demand, KETL is planning an aggressive investment of Rs 85 crore over the next 24 months. This will not only expand its capacities, but also improve the efficiencies.

Emmbi Polyarns IPO: Plastic Dream

Emmbi’s success depends upon how fast it can develop the market for its innovative products. Although risky, investors may consider the IPO

EMMBI Polyarns, a manufacturer of woven polymer products, is raising nearly Rs 40 crore through an initial public offer of equity shares. The funds will be used to increase its production capacity three-folds by the end of 2010. The company has developed some innovative products in the areas of geo-textiles and water conservation. Post issue, the stake of the promoter group would fall from 100% to 45%.
Long-term investors with risk appetite may consider subscribing to the issue. Risk-averse investors should wait another couple of quarters to check the company’s earnings growth before taking a call.

BUSINESS:
Set up in 1994, Emmbi Polyarns (EPL) is promoted by first generation entrepreneurs of Appalwar family. The company has set up a manufacturing facility in Silvassa for woven polymer packaging products such as, flexible intermediate bulk carriers (FIBC or Jumbo Bags), woven sacks primarily used in industrial packing and other similar products like container liners, canal liners, flexi tanks, car covers and protective irrigation system.
The company tripled its exports in three years to Rs 22.5 crore in FY09. The export growth helped EPL boost its topline and bottomline growth, while its domestic sales stagnated. Its domestic customers for packaging products include Hindustan Unilever, ITC, Godrej Industries and Tata Chemicals, besides others. The company typically works on monthly supply contracts with its industrial clients and takes 65 days on average to collect outstanding credit sales.

GROWTH DRIVERS:
The company’s products in water conservation including pond liners, canal liners, and flexi tanks are all lowcost alternatives for the farmers. These products may find great demand in the domestic market with rising concerns over water management. The company has also developed specialty packaging materials such as paper or aluminiumlined packaging or anti-corrosive packaging for specific uses in tea, cement or automobile industries. Usage of disposal bags for asbestos, nuclear or hospital waste is well accepted in overseas markets and is likely to find increasing demand domestically. The added capacities will come handy in catering to rising demand for the company’s packaging as well as innovative products.

FINANCIALS:
In the last four years the company’s net sales grew at a cumulative annual growth rate (CAGR) of 36.7%, while the net profit grew at 42%. The company has consistently expanded its operating profit margins from 8.5% in FY05 to 13% in FY09 and 14.1% in the first half of FY10. EPL’s reported profit in the first half of FY10 at Rs 1.2 crore is 89% of the profit for whole of FY09. EPL’s current debtequity ratio stands very high at 2.4 but will fall below 0.5 post the IPO. The company’s operating cash flows were negative in two out of last five years.

VALUATIONS:
The annualised earnings for FY10 will translate in an EPS of Rs 1.4 on post issue equity of Rs 17.4 crore. The issue price is 28.6 to 32.1 times the EPS on lower and upper bands, respectively. P/Es of companies in similar business such as Jumbo Bag, Karur KCP, and Jai Corp form a wide range of 5-95.

CONCERNS:
Although the company’s products are innovative the concept selling and brand building will take time. Being a familymanaged small company the project execution and managing increased complexities of the business have their own inherent risks.

IPO details:
Price Band: Rs 40-45 per share
Net issue size:
Rs 38.3-43.1 crore
Date: Feb 1 - 3