Aban Offshore :Tapping The Riches

Aban Offshore looks promising, given its future growth prospects. But its highly leveraged status makes it a better fit for investors with a high risk appetite

Beta: 0.49
Institutional Holding: 21.2%
Dividend Yield: 0.2%
P/E: 51.3
M-Cap: Rs 7,938 cr
CMP: Rs 2,100

ABAN OFFSHORE is India’s largest company in the offshore drilling industry. Its market capitalisation (m-cap) trebled year-on-year to Rs 20,000 crore in January ’08 on expectations of a sharp jump in its revenues and profits. Ironically, just when these expectations are about to turn into reality, its m-cap has lost more than 60% of its value. Considering the attractive rates at which Aban’s fleet of offshore rigs is deployed and the strength in the global market for such equipment, its valuations look attractive in the long term.

BUSINESS:
Aban owns a fleet of 16 jack-up rigs, four drill ships and one floating production unit used in the offshore petroleum production industry. The company, which acquired Norway-based Sinvest in March ’07, is currently ranked 11th in the global offshore drilling industry. Aban added two new rigs in FY08 and will be adding four more in FY09. With these, the company will have nine brand new rigs in its total fleet of 21. It set up a subsidiary in Singapore in ’05 for tax benefits, which now owns most of the company’s vessels. Aban has also ventured into wind power generation, which contributed revenues worth Rs 12 crore in FY08. The company offers a number of its vessels on longterm charters, while offering others on short charters to benefit from trends in the spot market. At present, the company has seven vessels chartered for over three years or more, while nine vessels will complete their contracts in the next 12 months.

GROWTH DRIVERS:
With the spurt in global exploration and production (E&P) activities over the past few years, the demand for offshore drilling assets has gone up substantially. This has not only boosted the daily charter rates for such assets, but their utilisation rates have also increased. Aban Offshore is in a sweet spot to benefit from this boom. The company, which had consolidated revenues of just Rs 3,230 crore in the preceding 36 months, already has firm contracts worth Rs 7,400 crore for the next 36 months. At present, three of its vessels are yet to be deployed, while several others will complete their current contracts and get redeployed over these 36 months, further boosting the company’s revenues.
Global offshore drilling expenditure, which was $30 billion in ’07, is expected to rise to $55 billion by ’11, thanks to the sustained increase in oil prices. This is increasing pressure on oil companies globally to accrue new reserves, while the viability of marginal fields has increased.
The company plans to raise funds to retire its debt, while financing its plans to boost deepsea capabilities. It also plans to add more floating production units to support new oilfields, which can be chartered for long durations.

FINANCIALS:
At the time of the acquisition of Sinvest in FY07, Aban had to raise substantial finances, which the company managed to do without diluting equity capital. Instead, it issued preference shares and raised heavy debt. This led to a spurt in its debt-toequity ratio to 20 last year on a consolidated basis, which came down to 16 for the year ended March ’08. The interest coverage ratio has also improved marginally to 1.6 in FY08 from 1.1 in FY07. Aban’s strong cash flows and future visibility thereon are helping the company to sustain such high leveraging. During FY08, the company’s consolidated operating cash flows jumped 2.6 times to Rs 834 crore from Rs 319 crore last year. For the year ended March ’08, Aban posted a consolidated net profit of Rs 123 crore on revenues of Rs 2,021 crore.
Its profit was affected by a mark-to-market loss of Rs 194.4 crore on its outstanding loans. However, it is a net foreign exchange earner, which provides a natural hedge against repayments of foreign loans.

VALUATIONS:
At the current price of Rs 2,100, the company is trading at 51.3 times its consolidated profit for the year ended March ’08. However, it is expected to more than double its revenue to Rs 4,240 crore in FY09 on a consolidated basis, maintaining its operating margin above 60%. The consolidated net profit is expected to touch Rs 936 crore, translating into earnings per share (EPS) of Rs 248. The current market price is just 8.5 times the expected FY09 earnings. Given its growth prospects at one end and highly leveraged business strategy at the other end, the scrip can be considered by investors who have high risk appetite.

EVEREST KANTO Cylinders : Riding The Boom

Everest Kanto Cylinders will be a key beneficiary of the increasing popularity of CNG as a transport fuel both in India and abroad. Long-term investors can consider the stock

EVEREST KANTO Cylinders (EKC) is India’s largest producer of highpressure seamless cylinders for industrial and automotive applications. With increasing usage of compressed natural gas (CNG) globally as a transport fuel, the demand for seamless cylinders is rising rapidly. Considering EKC’s leading position in the industry and aggressive expansion plans, it is set to emerge as a key beneficiary of this boom. Long-term investors can consider this stock.

BUSINESS:
EKC has five manufacturing facilities located across India, Dubai and China, with a total installed capacity of 0.8 million cylinders per annum (cpa). The company caters to the demand for high-pressure cylinders and CNG cascades in India, as well as Iran, Pakistan, Bangladesh, Thailand, Malaysia, Egypt and CIS countries.
EKC’s Chinese unit commissioned production at its 2,00,000-cpa plant in March ’08. The company, which is expected to achieve 100% capacity utilisation by the year end, is likely to get the regulatory approval to sell its products in China by the end of October. In April ’08, EKC acquired US-based CP Industries for $66 million, which is a world leader in high-pressure jumbo cylinders for storing and transporting industrial gases. This acquisition supplemented EKC’s product portfolio, while providing it the necessary knowhow to produce similar cylinders for the Indian market.

GROWTH DRIVERS:
EKC is setting up a 2,00,000-cpa facility at Gandhidham in Gujarat to manufacture industrial cylinders from billets, as well as another plant to manufacture large-sized jumbo cylinders. Both these projects are expected to be commissioned by December ’08. The company is also setting up a 3,00,000-cpa plant in the Kandla SEZ in Gujarat, which will be commissioned by June ’09. EKC plans to increase its capacity in China five-fold to 1 million cpa in three years, taking its total cylinder capacity (industrial and CNG) to 2.3 million cpa by FY12 from 0.8 million cpa. Historically, the lack of infrastructure for storing, transporting and dispensing CNG has come in the way of its becoming a popular transport fuel. But the scene is changing rapidly, thanks to the spurt in crude oil prices. Globally, a number of countries are shifting to CNG as a transport fuel, which is cheaper and cleaner, compared to petrol and diesel. India, which has CNG available only in a few cities at present, has chalked out plans to launch city gas distribution (CGD) projects in over 230 cities.
Gail — India’s largest transporter of natural gas — now has a subsidiary to focus on its CGD business and has set up CNG stations along all major highways. At the same time, the availability of natural gas in India is set to double in the next three years. As more natural gas becomes available and CNG infrastructure improves across the country, the demand for CNG vehicles will also rise multifold, which, in turn, will boost demand for CNG cylinders. A similar scenario is unfolding across various other countries. As per the International Association of Natural Gas Vehicles, the number of natural gas vehicles (NGVs) globally has witnessed a CAGR of 30% in the past five years to reach 8.5 million vehicles at present, and is expected to see a CAGR of 20% till ’20 to 65 million vehicles.

FINANCIALS:
EKC’s net profit has seen a CAGR of 90% over the past five years to reach Rs 104 crore in FY08. In the same period, its net sales have recorded a CAGR of 43%. The company’s operating margins have risen consistently over the past five years to touch 30% in the 12-month period ended June ’08. Since EKC has been in an expansion mode, its return on capital employed (RoCE) has halved in the past three years to 18.5%. Operating cash flows have stayed negative in the past two years due to an increase in inventory and debtors. Inventory was high as EKC stocked up on raw materials, expecting their prices to rise. High debtors on balance sheet result from high sales during March due to depreciation benefits available to buyers.

VALUATIONS:
At CMP of Rs 290.6, the scrip is trading at 24.8 times EPS for trailing 12 months. Going forward, we expect the company to post a net profit of Rs 183 crore for FY09 on sales of Rs 872 crore. Thus, based on the estimated EPS for FY09 the P/E works out to 16.3.

SHATTERED

The Business Confidence Index has crashed to a five-year low of 125.8. The mood is strongly negative across sectors, companies and regions. With a full-fledged crisis playing out in the global arena, growth in domestic demand remains India Inc’s only hope

THE weakness in the global economy, rising inflation and India’s worsening fiscal deficit find a strong echo in the 65th round of the ETNCAER Business Expectations Survey (BES) conducted in July 2008. The survey reports an across-theboard sharp fall in the Business Confidence Index (BCI) to a five-year low and paints a rather sombre picture for the rest of 2008.
The July 2008 survey shows an increase in the number of respondents who have a negative outlook on all the four major parameters measuring BCI — overall economic conditions, financial position, investment climate and capacity utilisation level. There is a silver lining though — while the number of negative respondents has indeed risen, more than half of the total number of respondents continue to have a positive outlook. However, when it comes to perceptions about the investment climate, the number of positive respondents has fallen below 50%.
The BCI, which gives equal weightage to all the four criteria, has slipped by 23 points to 125.8 points from 148.7 recorded in the survey conducted in April 2008. The fall is pervasive — across parameters, sectors, regions and company size.

SECTOR VECTOR
While the BCI of the services industry has taken the biggest hit, the consumer durables sector — which had slumped the most in the April survey — has recorded the lowest fall across sectors in the current round. The BCI of the capital goods sector remains significantly higher than all the other sectors.

ZONAL CHECKPOST
The western region, which was languishing at the bottom in the previous survey, has taken the biggest hit vis-à-vis other regions in the current round. The region’s BCI fell to 99.3 — substantially below the average level, making it the most pessimistic of all the four regions in the country. Though the percentage of positive respondents in the eastern zone has fallen marginally in the current round, it still remains the most optimistic of all regions in the country.

SIZE MATTERS
The business confidence of the biggest corporates (with a turnover above Rs 500 crore) and the smallest companies (turnover below Rs 1 crore) recorded the sharpest fall. While a worsening of the overall economic conditions was the primary reason for the fall in BCI of large players, sub-optimal capacity utilisation levels hit the smaller players hard. Among companies, private sector firms witnessed a faster erosion of confidence vis-à-vis their public sector counterparts. In fact, public sector companies are now more confident about the overall economic conditions as well as their financial position in 2008, compared to the sentiment in the April BCI survey.

LABOUR PANGS
As a result of the worsening outlook, the labour market, too, is expected to remain subdued. A majority of the respondents predict no change in their workforce. The number of respondents expecting a wage hike in the next six months has increased markedly.

A RAW DEAL
With double-digit inflation and soaring commodity prices, the raw material costs of domestic manufacturers have also shot up. More than 55% of the respondents — substantially up from just 24.6% in the previous round — report an over 5% jump in raw material costs over the preceding quarter. Over 70% of the respondents feel that prices will continue to increase in the next six months. The intermediate goods sector is likely to be the worst hit by rising raw material costs.

RATE WOES
India Inc expects interest rates to keep pace with the high inflation rate. The number of respondents expecting interest rates to rise beyond 12% has grown substantially. However, high interest rates are not expected to strengthen the rupee.

HOPE FLOATS
Although the overall business confidence is down, expectations about sales and production growth have improved. While on the one side, the number of respondents expecting a fall in production and sales has increased, the proportion of respondents expecting more than a 10% growth has also gone up substantially. In fact, the percentage of respondents expecting a more than 10% growth in the consumer durables sector has gone up to 41.8% in the July survey against 11.7% in the previous survey. With the outlook for exports weakening, higher production and sales reflect confidence in the demand growth within the country.
However, this does not mean that India Inc is bullish on its profit growth. The services sector is the most pessimistic, as over 77% of the respondents see no growth in profits over the next six months. But, on the other hand, more than 50% of the respondents expect consumer durables and capital goods sectors to record higher profits. The sudden fall in the BCI, although not totally unexpected, is certainly worrisome. The survey reveals that India Inc is already grappling with slower production and sales growth, pressure on margins, weakness in the labour market, slowing exports and weakening rupee. The strength being shown by the consumer durables and capital goods sectors and a potential for healthy demand growth in the domestic market are the only silver linings on a darkening horizon.

SOLAR EXPLOSIVES: Big Bang For Your Buck

Given Solar Explosives’ leadership position, expansion plans and entry into the coal mining business, long-term investors can consider the stock

SOLAR EXPLOSIVES (SEL) is a Nagpur-based manufacturer of industrial explosives, which are mainly used for mining and infrastructure projects. SEL, which is the market leader in India, is likely to benefit from growth in the country’s mining sector and several new infrastructure projects. In light of SEL’s expansion plans and forward integration into the coal mining business, long-term investors can consider this stock.

BUSINESS:
Established in 1996 with a capacity of 6,000 tonnes cartridge explosives, SEL has become one of the leaders in the domestic explosives industry and a major exporter. Its current capacity stands at 80,000 tonnes cartridge explosives, 94,450 tonnes bulk explosives and 140 million detonators. SEL controls nearly 20% of India’s explosives market, currently valued at $400 million. The company has successfully commissioned 12 bulk plants at various locations supported by one plant each for manufacturing cartridges, detonators and detonator components. It has a bulk explosives plant in the vicinity of every subsidiary company of Coal India, as well as in Singareni Collieries. The company has now started operations with Tata Steel in Jharkhand. Last year, SEL acquired 74% stake in Navbharat Coalfields, which owns a mining lease on a coal block in Chhattisgarh with reserves of 36 million tonnes (mt). Recently, it obtained permission to pick up 24% stake in a joint venture with Chhattisgarh Mineral Development Corporation (CMDC) for development, mining and marketing of coal with estimated reserves of 80 mt at Shankarpur in Chhattisgarh. The commercial operations at these mining projects are expected to start in FY10.

GROWTH DRIVERS:
India’s mining and infrastructure industries are growing rapidly and the pace of growth is not likely to slacken in the near future. To meet the power generation targets set in the 11th Five-Year Plan, India will need huge amounts of additional coal. This will increase the country’s coal output to 684 mt per annum (mtpa) from around 450 mtpa currently. The Planning Commission estimates that 17,000 megawatts (mw) hydel power capacity will come up in the 11th Plan period, which will involve heavy excavation work, adding to the demand for explosives. During the same period, the domestic production of steel is expected to increase from around 55 mt currently to 80 mt. The same applies to most other metals and minerals. These initiatives will boost the demand for explosives, which is likely to grow at around 10% every year for the next 4-5 years. SEL has already expanded its capacities in India to cater to the growing domestic market and it also exports its products. It is now spending around Rs 23 crore to set up a bulk explosives plant in Nigeria to be commissioned by March ’09, supported by another plant in Africa by June ’09. These plants will cater to the African demand for explosives, which are currently imported at high prices. This will enable the company to earn higher margins.

FINANCIALS:
SEL’s sales have grown at a cumulative annual rate (CAGR) of 51.7% over the past five years to reach Rs 281 crore in FY08. Its PBDIT grew 61.2% to Rs 71 crore, while net profit expanded at an even higher pace of 64.2% to reach Rs 36 crore during the same period. The company’s return on capital employed (RoCE) improved to 22% in the year ended March ’08 after averaging around 16% in the past five years. SEL’s current debt-equity ratio is comfortably placed at 0.6 with no long-term debt. Since SEL is in a growth phase, it is a low dividendpaying company. Although it has consistently paid dividends in the past five years, the dividend payout has remained below 15% of its net profit. Considering the dividend for FY08, SEL’s dividend yield works out to around 0.7%.

VALUATIONS:
At the current market price of Rs 409, the scrip trades at 18 times its profit for the past 12 months. Going forward, we expect the company to report a profit of Rs 50 crore in FY09 and Rs 72 crore in FY10. Thus, the current price is 14.2 times its estimated FY09 earnings and 9.8 times its estimated FY10 earnings. Among its competitors, Keltech Energies and Premier Explosives, which are smaller companies, are trading at P/E multiples of around 7.5 each. Gulf Oil, which is trading at a P/E of around 16.5, and has an explosives business comparable to that of SEL, derives over 65% of its turnover from lubricants and other businesses. Although SEL appears to be fairly valued at present, its leadership position, expansion plans and entry into coal mining justify the same. The company is likely to generate healthy returns for longterm investors.

CHEMCEL BIOTECH: High & Dry

A long-lead project, risky nature of business and steep pricing make Chemcel Biotech’s IPO unattractive

COMPANY: CHEMCEL BIOTECH
ISSUE SIZE: Rs 24.64 CRORE
PRICE: Rs 16
DATE: SEPTEMBER 9-12, ’08

CHEMCEL BIOTECH (CBL) is a Hyderabad-based regional agrochemicals company focusing on five districts of Andhra Pradesh. The company is coming out with an IPO to raise Rs 24.64 crore, which will be used to set up a bio-diesel plant and repay loans. Considering the company’s weak financials and small size, unattractiveness of the industry in which it operates, and uncertainties over the successful implementation and future profitability of its proposed bio-diesel project, we find the IPO too expensive. Investors can give it a miss.

BUSINESS:
CBL is a pesticide formulator with 34 product registrations to manufacture pesticides for crops such as paddy, cotton and sugarcane. It plans to expand its reach to entire Andhra Pradesh over the next 12 months. The agrochemicals industry in India is seasonal, highly competitive and directly dependent on the vagaries of nature; hence, it is working capital intensive. The company’s products are in three formats — liquids, granules and dusts. CBL has 1,000 kilolitres of liquid capacity, 1,000 tonnes of granules and 300 tonnes of dusts capacity. During FY08, the average capacity utilisation was around 30%. Around 40% of the IPO proceeds will be invested to set up a small 6,000 tonne per annum bio-diesel plant in Andhra Pradesh, which will need to process 20,000 tonnes of jatropha oil seeds every year.
The company, through its 60% subsidiary Jetro Petro Biotech, has entered into long-term contracts with 179 farmers for growing jatropha plants in their land aggregating 2,000 acres.
Commercial production from this biodiesel plant is expected to commence by September ’09.
As the jatropha cultivation is just a year old in the areas contracted by the company, it may have to source feedstock from the open market for the first few months after it commissions the bio-diesel plant. This may depress the capacity utilisation levels and profitability. Another 40% of the IPO proceeds will be used to fund the company’s working capital needs and the remaining 20% will be used to repay part of its outstanding loans.

FINANCIALS:
For the year ended March ’08, the company’s sales grew 5% to Rs 24.6 crore. Though operating margins gained 220 basis points to 11.5%, a steep jump in interest costs pulled down profit before tax (PBT) growth to 13%. However, a fall in tax provisions helped the company to report 32% growth in net profit.
The company had negative cash flows for the past three years. This led CBL to raise funds via issue of equity capital and loans. In FY06 and FY07, its equity capital jumped nearly 10-fold, while outstanding loans doubled.

VALUATIONS:
The IPO price at Rs 16 is 33.8 times the company’s FY08 earnings based on post-issue equity of Rs 25.92 crore. Small and medium agrochemical companies such as Dhanuka Agritech, Insecticides India, Bhagiradha Chemicals and Bharat Rasayan are trading at P/E multiples of 3-9.
Till CBL’s bio-diesel plant commences production after one year, the company is not expected to report much growth.

20 MICRONS: Mining For More

Given 20 Microns’ expansion plans and likely boost in profitability, investors can subscribe to the IPO with a long-term outlook

COMPANY: 20 MICRONS
ISSUE SIZE: Rs 21.8-23.9 CRORE
PRICE BAND: Rs 50-55
DATE: SEPTEMBER 8-11, ’08

20 MICRONS is a Gujarat-based producer of micronised industrial minerals that are used in a variety of industries . Through this IPO, the company plans to raise around Rs 9 crore to fund its expansion. Meanwhile, Gujarat Venture Capital Fund (GVCF), which currently holds 43% stake in the company, will offload a part of its holding, reducing it to 19% of the post-issue equity. Since the company’s products enjoy wide acceptance among industry leaders, a successful implementation of the proposed projects can boost its future profitability. Long-term investors can consider this IPO.

BUSINESS:
20 Microns is one of the pioneers in micronised and ultrafine minerals from 20 to 2 microns particle size. The company has set up eight plants supported by four mines in the western, northern and southern parts of India. It currently produces finer grades of minerals such as calcium carbonate, talc, kaolin, dolomite, barites and mica, which are used in industries like paper, paints, plastics, pharmaceuticals, cosmetics, rubber, ceramics and construction materials. The company’s clientele includes all paint companies, including Asian Paints and Kansai Nerolac; plastic processors such as Supreme Industries and Finolex Industries; as well as ceramics producers like Euro Ceramics and H&R Johnson.
During ’03-04, the company was adversely affected by the Bhuj earthquake and was referred to the corporate debt restructuring (CDR) cell. Subsequently, it turned around in FY07 and was allowed an exit from CDR. The company has set up a well-equipped R&D centre in Vadodara for product and process innovation.
20 Microns has embarked upon an expansion plan under which it will set up a 7,000 tpa talc processing unit in Haldwani. Similarly, a 12,000 tpa capacity will be added at its existing 5,000 tpa Udaipur facility. The specialty chemicals capacity at Vadadla will be doubled to 4,800 tpa and a separate 4,600 tpa wet grinding unit will be set up. Similarly, an addition of 12,000 tpa will be made to the existing 26,400 tpa calcined clay plant in Bhuj and 3,000 tpa will be added at Tirunelveli. Apart from the proceeds of the current IPO, the company will avail of a loan of Rs 10 crore to finance these projects to be completed by March ’09.

GROWTH STRATEGY:
The company wants to focus on high-value specialty minerals, which will improve its margins. The current capacity expansion project will add 42% to 20 Microns’ existing capacity of 96,400 tpa. The company, which currently operates just 72 hectares of mines, has applied for nearly 1,000 hectares of mining area. These initiatives should help the company to boost its revenues and profit margins.

FINANCIALS:As on March 31, ’08, the company was carrying a gross block of Rs 76 crore, with shareholders’ funds of Rs 28.4 crore. With outstanding loan at Rs 46.5 crore, its debt-equity ratio stood at 1.6. Over the past three years, 20 Microns has witnessed an improvement in its operating margins, which currently stand at 14.1%. The company posted sales growth of 23% to Rs 107.4 crore in FY08, of which, 36% represented traded goods. Depreciation and interest costs together accounted for nearly 9% of the sales. The resulting pre-tax profit was 34% higher at Rs 6.2 crore and PAT rose by 29% to Rs 4.6 crore. VALUATIONS: At the higher end of the IPO price band, the scrip is priced 16.9 times its FY08 earnings. We expect the company to post 30% revenue growth in FY09 with operating margin of 16%. It is likely to post EPS of Rs 4.7 for FY09. The higher price band of Rs 55 works out to 11.7 times the company’s expected earnings of FY09. This is comparable to the current valuations enjoyed by its listed peers. Ashapura Minechem is trading at a P/E of 7.2, Gujarat Mineral Development at 12.1, while NMDC and recently listed Resurgere Mines & Minerals are trading at substantially higher P/E multiples of 34.3 and 22.1, respectively.

INDIA GLYCOLS:The Right Chemistry

India Glycols is set to benefit from its aggressive expansion and diversification plans. The stock appears attractive for investors with a horizon of 2-3 years

Beta: 0.39
Institutional Holding: 9.1%
Dividend Yield: 2.0%
P/E: 3.7
M-Cap: Rs 567.1 cr
CMP: Rs 203.40

INDIA GLYCOLS (IGL) is Delhibased company which manufactures industrial chemicals — particularly derivatives of ethylene oxide and mono ethylene glycol (MEG) — from molasses. The company is aggressively expanding its manufacturing capacity and diversifying its product portfolio. Since the benefits of these investment projects will start accruing in the current financial year, investors with a horizon of 2-3 years can consider this stock.

BUSINESS:
IGL has over 1.2 lakh tonne per annum (tpa) capacity of ethylene glycol and 73,000 tpa of ethylene oxide derivatives. It is the only company globally to produce these chemicals entirely from molasses. It has also set up capacities for potable alcohol, industrial gases and guar gum derivatives. These are intermediate industrial chemicals that find usage in various industries, particularly textiles.
IGL has established itself as a producer of specialty grade ethoxylates and focuses on the export market. Last year, it derived nearly 20% of its revenues from exports. It has set up a subsidiary in Singapore to assist in its exports. The company has set up production facilities in Kashipur (Uttarakhand) and Gorakhpur (Uttar Pradesh). Recently, it acquired Shakumbari sugar mill in Saharanpur for Rs 47 crore, which has 3,200 tpd crushing capacity with 40 kilo litres per day (klpd) distillery for making ethanol from molasses or sugar juice.
The company has set up a state-ofthe-art R&D centre to develop innovative products for special customer requirements. Recently, it diversified into the field of herbal extraction through a 100% export-oriented unit (EOU) at Dehradun, Uttarakhand. The unit will feed the growing international market for high-value nutraceutical herbal extracts used as pharmaceuticals, food and food supplements. The company’s main raw material — molasses — is a waste product generated by sugar mills. IGL has created huge storage for the feedstock, which can be procured in large quantities during the crushing season. Besides, it has set up an additional distillery in Gorakhpur to improve availability of feedstock.

GROWTH DRIVERS:
IGL has charted ambitious expansion plans to invest nearly Rs 500 crore in various projects in the next two years. It expanded its production capacity by around 20% in the quarter ended June ’08 through debottlenecking. A plant to produce 80 tonne per day (tpd) of carbon dioxide was commissioned recently at its Kashipur facility. A similar plant is being set up at its Gorakhpur unit.
At Shakumbari, IGL plans to enhance its crushing capacity to 5,500 tpd by December ’08 and distillery capacity to 240 klpd by March ’09. Ultimately, the crushing capacity will be raised to 10,000 tpd and distillery capacity to 300 klpd. At the same time, the company will add to its own power generation capacity from the current 11 mw to 55 mw across all of its three units.
In Noida, IGL has built nearly 2,70,000 sq ft of commercial space and plans to lease out 200,000 sq ft of the same. The average monthly rental is likely to be around Rs 75 per sq ft, which will generate revenues of around Rs 1.5 crore every month.

FINANCIALS:
IGL was growing at a compound annual rate (CAGR) of 17% till ’02, but has witnessed a CAGR of nearly 42% since then. Its operating margins have fluctuated during this period and stood at 22.4% for the year ended March ’08. The company has been carrying a debt-equity ratio in excess of 1 for the past several years. However, in FY08, this figure reduced marginally to 1.4. The return on capital employed has remained healthy in the past five years, peaking to 30% in FY08. During the quarter ended June ’08, IGL had to shut down its plants for 21 days for debottlenecking and change of catalyst, which resulted in heavy erosion in profits.

VALUATIONS:
Based on the company’s expansion plans — which are being commissioned in phases throughout FY09 — we expect IGL’s profit to grow 25% to Rs 70 crore during FY09. At the current market price of Rs 203.40, the scrip is trading at 2.9 times its estimated FY09 earnings. The full benefits of the expansion in the current year will be available to the company only in FY10. Hence, the scrip appears attractive for long-term investors. MEASURED DOSE
India Glycols manufactures industrial chemicals — particularly derivatives of ethylene oxide and mono ethylene glycol (MEG) — from molasses It is the only company globally to produce these chemicals entirely from molasses It has also set up capacities for potable alcohol, industrial gases and guar gum derivatives IGL has established itself as a producer of specialty grade ethoxylates and focuses on the export market
It has set up a state-of-the-art R&D centre to develop innovative products for special customer requirements
It has also diversified into herbal extraction through a 100% EOU at Dehradun The company has charted ambitious expansion plans to invest Rs 500 crore in various projects in the next two years
It expanded its production capacity by around 20% in the quarter ended June ’08 through debottlenecking

It’s Twice As Nice

India Inc went on a shopping spree in the UK last week.While OVL agreed to buy Imperial Energy, Infosys gobbled up Axon. ETIG ploughed through the numbers to see how the deals stack up for Corporate India

IN ITS bid to expand its exploration asset base and secure future growth in production, ONGC agreed to acquire UK-based Imperial Energy (IEC) through its wholly-owned subsidiary, ONGC Videsh (OVL). The $2.58-billion deal has been accepted by the IEC management and is likely to be finalised over the next couple of months. Although the deal appears to be fairly valued, it will take another couple of years for the company to fully benefit from it.
IEC is currently a loss-making company, but its hydrocarbon reserves made it an acquisition target. It had reported a net loss of $43 million in ’07 on sales of just $20 million. And considering its heavy capital expenditure on exploration activities over the next couple of years, it is not likely to earn positive cash flows till ’10.
By end ’07, IEC held proven and probable (2P) hydrocarbon reserves estimated at 920 million barrels of oil equivalent in 17 oil blocks in Russia and one block in Kazakhstan.
Nearly 95% of these reserves are in the form of crude oil with just 5% of natural gas, which will favour OVL due to higher crude prices.
IEC has drawn up ambitious exploration plans to boost its production. It will spend over $600 million over the next two years to raise production to 25,000 bpd by end-’08 and 35,000 bpd by end-’09. Just to put things in perspective, a 25,000-bpd production level will generate Rs 4,500 crore of annual revenues at the current crude price of $115 per barrel. The company has set a production target of 80,000 bpd by the end of ’11.
With this buy, ONGC will gain a second foothold in Russia — particularly in the resource-rich Siberian region — after its 20% stake in Sakhalin project through OVL.
Considering ONGC’s current production at around 983,000 bpd of oil equivalent, this acquisition amounts to an addition of around 2.5% to its next year’s production.
Financing the acquisition won’t be much of a concern, considering the fact that ONGC is carrying over Rs 16,000 crore in cash.
At present, there is no clarity on various important matters that will affect ONGC’s net realisation on sale of crude oil from these fields. However, in ’07, IEC’s net average realisation stood at $33.35, which is nearly half of the global prices at $66 and is a definite cause of concern.
Similarly, among its various oil fields, IEC holds nine exploration licences, while only four licences allow it production rights. Thus, the exploration successes do not mean automatic right to production.
All these exploration licences will expire within the next 18 months and ONGC will have to secure the production licences separately if the exploration results in new discoveries.

RELIANCE INDUSTRIES: So Far, So Good

Long-term investors can buy Reliance Industries’ stock when it falls, but they should not expect much upside in the near term from the commissioning of the company’s two mega projects

RELIANCE INDUSTRIES (RIL) ranks among the country’s largest companies in the private sector on various parameters. It is on the verge of commissioning two of its biggest projects in September ’08. At full utilisation levels, these projects are expected to add nearly Rs 80,000 crore to RIL’s consolidated revenues, further strengthening its numero uno position in India Inc. Its current market valuation appears to have taken into account the immediate gains from these two projects.
However, going forward, the stock may witness stagnation as its future outlook is getting cloudy due to the buildup of several negative factors. Nevertheless, there remains a possibility that given its strong cash flows, presence across industries and forward and backward linkages, RIL can spring positive surprises. Long-term investors can accumulate the stock at dips.
RIL has invested nearly $8.8 billion in its Krishna-Godavari (KG) basin gas fields since their discovery in ’02. Production from these fields is expected to start by the end of September at the rate of 25 million cubic metres a day (mcmd), which will be gradually scaled up to 80 mcmd. The second megaproject, which will commence operations this month, is Reliance Petroleum’s 29 million tonne per annum (mtpa) high-complexity petroleum refinery in Jamnagar special economic zone (SEZ). Latest media reports and comments from government quarters suggest that RIL will be able to stick to its initial schedule of completion by September ’08 and commence commercial production by December ’08. This Jamnagar plant will make RIL not just India’s largest petroleum refiner, but also the world’s largest single location refiner.
However, RIL is facing some imminent woes. The natural gas project is embroiled in two major lawsuits with Reliance Natural Resources (RNRL) and NTPC, both of which are claiming a huge chunk of gas supply at low prices. This has disabled the company from selling gas to any third party. Any adverse outcome of these court cases can have a major impact on RIL’s future profitability, as well as its return on capital. Similarly, the RPL refinery project, which was conceived when globally refinery margins were on the rise, is getting commissioned just when the rally has waned. The benchmark Singapore refining margins have fallen sharply to around $4 per barrel as of end August ’08 from $12 at the start of July ’08. In view of several other refineries coming up in West Asia and China, the refining industry is expected to remain in a downward trend for the next 3-4 years.
Over the past couple of years, RIL has aggressively entered the organised retail sector, opening around 735 stores across 13 states. This is another industry which is witnessing the entry of too many players, putting a big question mark on its profitability. Initially, RIL’s valuation had got a boost from the potential growth prospects of its two mega projects. However, as the problems became more apparent, valuations plummeted. The scrip’s price-to-earnings (P/E) multiple, which had crossed 31 in January ’08, has halved to around 15.5 now, as the stock price fell from Rs 3,200 to Rs 2,150. Still, the company commands one of the highest valuations among global peers such as Exxon Mobil, Royal Dutch Shell or PetroChina. And since current valuations have already factored in higher profitability of the new businesses, there is every reason that the valuations can weaken further.
Despite all these negatives, there are a few positive factors, which will help add some shine to the company’s performance. Being fully integrated in the petroleum value chain, the lower profitability of its refining business can be compensated to a certain extent by future improvement in profits of its petrochemicals business. Secondly, the recent weakening of the rupee bodes well for RIL, which is increasingly focusing on exports, while its domestic revenues are also linked to the rupeedollar exchange rate. RIL operates in a capital-intensive commodity business, which is subject to business cycles. Against this background, it is creditable for the company to have maintained a return on capital above 18% over the past five years. But this has necessitated the company to plough back most of its profits into the business and pay just around 10% as dividends. This will continue in future too and RIL’s dividend payouts, as well as dividend yields will remain very low.
In the long term, several other projects that RIL is pursuing should help boost its growth momentum. The company is developing special economic zones in Haryana, Gujarat and Maharashtra. It is also investing in exploration blocks in India, as well as abroad, and has bagged coal-bed methane (CBM) blocks. The potential hydrocarbon reserves from these blocks will also add value to the company. Hence, long-term investors can buy into the scrip when it falls, but they should not expect much upside in the near term from the commissioning of RIL’s two mega projects.

SLICK SHOW
RIL is entitled to nearly 20 crore of its own shares, currently valued at Rs 41,500 crore. Together with its stake in RPL, valued at Rs 50,000 crore, along with direct financial resources, RIL enjoys a huge financial clout After the new Jamnagar refinery is commissioned, RIL will represent nearly 2% of the global refining capacity with a daily output of 1.24 million barrels The supply from RPL’s new refinery will represent almost 50% of the estimated global oil demand growth in ’09 RIL’s global gross reserves and contingent resource base have reached 5 billion barrels of oil, propelling the company among the top 15 private upstream companies in the world RIL holds exploration interest in 33 Indian blocks and 11 blocks abroad The company made nine hydrocarbon discoveries in FY08, mainly in offshore fields, with two additional discoveries in FY09 so far To expedite its exploration and production efforts, RIL has deployed six rigs and six more will be added next year

Fail Safe

There’s more to defensive stocks than meets the eye, literally. Karan Sehgal, Kiran Kabtta and Ramkrishna Kashelkar bring you some new-age defensive stocks which go much beyond the old and faithful FMCG and pharma sectors

THE STOCK market is one place which never tires of spouting clichés. In the past three years, India’s growth story had become an omnipresent cliché to such an extent that no analyst missed reminding his/her clients about how lucky they were to be a part of that great growth story.
But in January ’08, the Indian stock market lost nearly a quarter of its value (in intra-day trades) in just two trading sessions. Suddenly, there was a scramble to dig out a new growth trigger to replace the tired cliché of the India growth story. The marketmen suddenly rediscovered sectors like FMCG and pharma, which are considered to be less risky than sectors like capital goods, banking and auto. And a new mantra was coined: Invest in defensive stocks.
The market is abuzz with defensive sectors, as their sensitivity to economic turbulence is lower than that of other sectors. For instance, Hindustan Unilever (HUL)’s product line includes toothpastes, soaps and similar products, which are of daily use. It is interesting to note that the stock prices of these companies fall as much as the stock market, despite the defensive nature of their business. This is typical of bearish markets when the index starts falling; all the constituents bear the brunt, irrespective of the nature of their businesses. However, when sanity returns, these stocks outperform the market. To ascertain this, we created an index of stock prices of defensive companies from FMCG, pharma, packaging, utilities and other such defensive industries. We observed that from January to May ’08, the defensive index mirrored the Nifty. However, the defensive index started outperforming the Nifty from the beginning of June ’08 (see chart above). In the past seven months, enough has been written about how investments in companies like HUL, Nestle and Ranbaxy Laboratories are safer than that in other stocks. We, at ET Intelligence Group, have tried to find out companies whose business is defensive, but not as hyped as that of HUL, Nestle and Ranbaxy. The performance of these companies in the first quarter of FY09 was in line with their historical performance, which clearly establishes their resilience to the slowdown to a certain extent (refer table above). Take the case of Noida Toll Bridge Company (NTBC). Its stock price more than doubled in ’07 due to speculation over the value of 200 acres of land in Delhi and another 30 acres the company has in Noida. Speculation was that once the company gets the development rights from the government for that land, it would bring enormous value to the company. The stock has shed almost half its value since January and at current prices, it reflects only the company’s operations and not the expected windfalls from its land bank. NTBC operates the Delhi-Noida toll bridge, and such a business is slowdownproof as motorists are not likely to cut down commuting because of an economic slowdown. Besides, NTBC’s assets are now highly depreciated and there’s hardly any recurring cost in the business except a small maintenance cost. The average daily traffic (ADT) increased by more than 30% in FY08. As per the estimates of Halcrow Consulting India, the ADT is expected to witness a compound annual growth rate (CAGR) of 12% till FY11, while toll rates are estimated to increase by 6% year-on-year (y-o-y) during the period. So, going forward, the earnings will easily grow in excess of 20% and the current price-to-earnings (P/E) multiple of 27.5 only reflects the expected earnings growth. If the going is expected to be smoother for FMCG companies in tough times like these, then obviously, the suppliers of such companies should also be enjoying the smoother run. Cosmo Films is one such company. This Delhi-based company is the country’s second-largest manufacturer of biaxially oriented polypropylene (BOPP) films used as packaging material by manufacturers of food, toiletries, confectionaries and cigarettes. The company plans to more than double its BOPP capacity by FY10. The expansion plans have a sound financial basis, as the company’s return on capital employed (RoCE) stands at 23.2% and it has an interest coverage ratio at 5.1 in FY08, which is much higher than that of Jindal Poly Films, the leader in that industry. The stock is trading at a P/E of just 3.7 times, completely discounting the defensive business and expansion plans of Cosmo Films.
Like Cosmo Films, Bilcare is one of the leading players in the packaging industry. With its core business of manufacturing pharma packaging and research, the company has grown to become an integrated service provider to global pharmaceutical industry. It also offers global clinical trial supplies services, design laboratories and anti-counterfeit technology. As a leading resource for healthcare companies, Bilcare provides solutions on counterfeit drugs, compliance, costs, communication and convenience. The company has manufacturing and research facilities in India, Singapore, the US and UK and has regional offices in Brazil, Germany, China and Australia. Operating in the recession-proof healthcare segment, Bilcare has grown by leaps and bounds in recent years. Over the past five years, its revenues have increased at a CAGR of 37%, while earnings have grown at a faster rate of 48%.
Much like spending on food and toiletries, medical expenditure is non-discretionary in nature. Worsening of the macro-economic conditions has little impact on companies providing drugs and medical services to the population.
Bet On These Hidden Gems
THE HEALTHCARE business is considered to be defensive, despite the fact that it is capital-intensive in nature. Apollo Hospitals is one of largest and oldest players in the private sector. The company has maintained consistent growth in the past decade irrespective of business cycles, which is proof of the sector’s defensive nature. The hospital chain has over 8,000 beds spread across 41 hospitals, as well as a string of nursing and hospital management colleges. It also runs pharmacies and diagnostic clinics, making it the country’s largest private hospital group. Its income from services has increased at a CAGR of 21.3% and profits have witnessed a CAGR of 32% over the past five financial years. The company has maintained its growth momentum in the June ’08 quarter, despite the general slowdown in earnings across India Inc. Like healthcare, insurance, too, has defensive streaks. For an insurance company, the initial years involve incurring costs on penetrating the market, selling costs and agent commissions. However, as years goes by, costs decline and recurring premiums turn it into a cash flow business. With more than 80% of its revenues contributed by the insurance business, Max India is a strong contender among the listed players in the insurance segment. Besides insurance, the company is into plastic packaging, hospitals, clinical research services and healthcare staffing services. While still being a loss-making venture, the insurance segment is its fastest growing business after the company forayed into the sector in FY04.
Though we may face an economic slowdown, buses, cars and autos won’t stop plying and people will still cook meals, which shows that demand for fuel for basic necessities will not go down beyond an extent. Such is the business of Indraprastha Gas — the Delhi-based supplier of natural gas to 1.25 lakh households and 2.25 lakh automobiles — which is sure to result in growth, despite adverse economic conditions. After establishing a strong foothold in Delhi, it is now expanding into nearby geographies such as Noida, Ghaziabad and parts of Haryana. The company still has some 20% extra allocation of gas than what it currently sells; so gas supply will not become a constraint for its growth prospects. Over the past five years, it has always generated around 45% RoCE and paid out a third of its profits by way of dividends. In view of its sound financials and nature of business, Indraprastha Gas can be considered a safe bet in difficult times. It is an irony that there were numerous takers for these stocks when the market was at its peak. Today, these same stocks find few takers, despite the fact that the market downturn has taken away the froth from valuations. We sign off with another cliché which, despite its nature, happens to be time-tested: You should buy when others sell…