Nagarjuna Agrichem: On a Fertile Land

Higher Profit Growth, Capacity Expansion Plans To Decide Its Stock Movement Now

THE Hyderabad-based agrochemical manufacturer Nagarjuna Agrichem (NACL) has significantly outperformed the markets in 2009. In the past one year, the scrip has gained over four times, while the benchmark Sensex rose 1.8 times. Apart from the re-rating of the agrochemical industry, the company’s earnings growth also contributed to this upsurge. For the 12-month period ended September 2009, NACL’s profit jumped 90% against the year-ago period.
The company currently operates three plants in Andhra Pradesh — the largest at Srikakulam manufactures technical agrochemicals and undertakes contract manufacturing while the smaller ones at Ethakota and Shadnagar are engaged in formulations.
The company is currently expanding its existing capacities through a capex of Rs 16.5 crore. This envisages doubling its formulation capacity and 37% expansion to its technical capacity at its existing plants. Additionally, the company plans to set up a greenfield project in an SEZ in Vishakhapatanam at a capital cost of Rs 205 crore, which will double its current technical pesticides capacity. The company is expected to raise around Rs 125 crore of equity for the same with Rs 30 crore from internal accruals and Rs 50 crore through fresh issue of equity. At the current market price, this may entail nearly 13% dilution in equity.
The company has a bouquet of products in the retail market offered under 43 brands. The company distributes its products through a network of 8,850 dealers across the country. The proposed expansion will boost its exports going forward.
The western states of the country — Maharashtra, Haryana, Gujarat, Punjab and Karnataka — apart from Andhra Pradesh, constitute nearly 70% of the company’s domestic sales. Nearly half of the company’s annual revenues come from exports to over 15 countries, including the US, Europe and Japan. The company, which was traditionally managed by the promoter group, has recently brought in professional management by appointing a new chief operating officer in January 2009. The company has also set up a vision to expand its sales to $500 million by 2015. Considering Rs 605 crore turnover for FY09, this envisages a CAGR above 25%. The company, which paid Re 1 per share as interim dividend last year, has doubled it to Rs 2 per share this year. For FY09, it had paid further Rs 3 per share as final dividend.
The company, which is currently commanding a price-to-earnings multiple of 13.5, appears fully justified in view of the healthy growth outlook. The company’s future profit growth and proposed equity dilution will be the key issues that shareholders should watch out for.

Kemrock Industries: Dilution effect

The Vadodara-based manufacturer of composite plastics and products, Kemrock Industries, recently announced its board approval for Rs 400 crore of preferential issue of equity shares and issued 16 lakh equity warrants to a strategic investor. The warrants were issued at Rs 90 each at 25% of the issue price of the equity shares. The rest 75% will become payable over the next 18 months on conversion of the warrants.
Earlier in May ‘08, the company allotted 4.6 lakh shares and 3.93 lakh warrants to the same strategic investor, RPM International, at Rs 650 each on a preferential basis. RPM International, a US-based manufacturer of paints and sealants, currently holds 15.85 lakh equity shares or 14.4% of the equity of the company. Assuming a full conversion of the recently issued 16 lakh warrants, RPM will become the second largest shareholder in the company after the promoter and managing director Mr. Kalpesh Patel. However, crossing the 15% holding limit will trigger an automatic open offer for the company, which can make it the largest shareholder of the company.
Kemrock’s performance on the bourses has been spectacular in ‘09 so far despite a forgettable ‘08. In ‘08, the company suffered from weak earnings performance that impacted its valuations. The company, which was trading at over 45 times its profits at the start of ‘08, was being valued at just 5 times the profits by the year end.
During ‘09, Kemrock’s valuation improved swiftly despite a continuing stagnancy in its profit growth. Currently, the company’s market capitalisation is twoand-a-half times that at the start of the year. However, this is mainly due to doubling of the P/E multiple of 11, as its per share earnings grew merely 10%.
The company has also diluted its equity periodically, which has impacted the per share earnings. Between December ‘07 and December ‘09 the equity has expanded nearly 46% from Rs 7.55 crore to Rs 11.01 crore. This is just the paid-up equity without considering outstanding warrants that can be converted into equity shares at the option of the holder.
Considering the company’s successive equity dilutions, retail shareholders are unlikely to benefit from any future earnings growth by the company.

AGROCHEM: Good numbers, dividends key

START of the rabi sowing season has invigorated the performance of agrochemical companies on stock exchanges. India’s agrochemical manufacturers have done exceedingly well on the bourses gaining 15.8% in market capitalisation against a 1.8% fall in the Sensex over the last one month. This appreciation in the market value comes both from growing earnings as well as improved valuations. In the past six months, when the average price-to-earnings multiple of the Sensex’s 30 stocks gained around 13% to 21.4 at present, the valuation multiples of a number of agrochemical companies zoomed past swiftly, which marks a re-rating of the industry.
The industry leader United Phosphorous, which was trading around 13 times its profits for the past 12 months six months back, is now commanding a P/E multiple of around 17.3 — a gain of 33%. The biggest beneficiary of rerating of this industry was Sabero Organics and Nagarjuna Agrichem, both of which are on Wednesday trading at P/Es that are 70-80% higher than six months back. Not all the companies have benefited from rerating of the industry, though. Excel Crop Care and Insecticides India are still trading at almost similar valuation, as they were six months back and the change in their market capitalisation comes mainly from earnings growth. Excel Crop Care’s per share earnings are down 6%, while Insecticide India’s earnings have grown 16% in the past six months.
The main reason of this rerating of the industry has obviously been the earnings growth, with most players registering a steady growth despite monsoon related problems. During the September 2009 quarter, which is the most critical quarter for the Indian agrochemical players due to the kharif season, the agricultural production was down due to erratic rains and reduced acreages. However, overall, the agrochemical industry did well, mainly due to the increased liquidity in the hands of the farmers. Interestingly, Punjab Chemicals was one of the largest gainers. Although the company can report profit for the December quarter, it seems far from wiping its slate clean. Other main gainers were United Phosphorous, Sabero Organics and Nagarjuna Agrichem. Meghmani Organics, Excel Crop Care, Rallis India and Insecticides India proved to be the laggards over the past one month.
At present, the expectations of the future performance of the pesticides industry are indeed bright. However, the recent rerating of the industry means there are hardly any hidden gems now. Steady earnings growth prospects and dividends could be the prime considerations, rather than a jump in valuation multiples should be the investors’ aim henceforth.

OPEC: Oil cartel may fail to maintain balance in ’10

ORGANIZATION of Petroleum Exporting Countries (OPEC) members may have to cut production in 2010 as well, similar to what they did in 2009. Although oil prices have stabilised and there are signs of a recovery in the global economy, doubts about the sustainibility of the recovery linger. The picture is not yet clear on the demand outlook for oil in 2010, while the market continues to remain well-supplied with high inventory levels. This was the major concern with which the 12-member OPEC met on Tuesday in Angola.
In 2009, OPEC members cut back on their oil production sharply, following the economic turmoil and market crash in 2008. However, crude production from non-OPEC countries gained steadily. The International Energy Agency’s data show that OPEC’s oil production was lower by 2.7 million barrels per day (mbpd) in 2009 whereas non-OPEC production rose by 0.5 mbpd. The scene is unlikely to change even in 2010. The non-OPEC production is expected to rise further by another 0.8 mbpd to 51.9 mbpd in 2010, while the production of natural gas liquids (NGLs) will add another 0.8 mbpd to supply. These increases are expected to prove sufficient for taking care of whatever incremental demand comes up in 2010 from the ongoing recovery in the global economy. In other words, to support the prices by maintaining the demand-supply balance, OPEC will have to produce even lesser in 2010 than it was producing in 2009.
This phenomenon is ultimately resulting in the world’s reduced dependence on OPEC. Nearly 34.7% of the world’s oil was being produced by OPEC in 2004, which went up to 36.1% in 2008. However, this has come down to 33.7% in 2009 and is expected to reach 33.1% in 2010. Even as they are cutting back on production, OPEC members are also investing heavily in increasing their production capacities. It was not surprising, therefore, that in his opening remarks for the OPEC Conference, Angolan petroleum minister Josi Maria Botelho de Vasconcelos stressed the need for all petroleum producing countries — OPEC as well as non-OPEC — to come together to balance the market.
The final outcome of the OPEC Conference to leave the earlier decided quotas at 24.845 mbpd was in accordance with market expectations. However, the compliance with this quota has been steadily reducing. OPEC’s latest report puts the total production by 11-member countries at 26.6 mbpd or nearly 1.8 mbpd higher than the quota. The slippage, if continues unchecked in future, can add pressure on global oil prices.
Although OPEC countries are temporarily feeling the heat of the situation, they are going to rule the oil market in the years to come. Nothing makes it clearer than the fact that these 12 countries put together control over one trillion barrels of oil reserves, which is nearly threefourths of the world’s total proven oil reserves.

Financing growth opportunities

Asian Oilfields, which is one of the listed seismic data acquisition companies in India, recently announced a preferential allotment of 40.5 lakh equity shares to Samara Capital, which can raise around Rs 25 crore. Samara Capital is already the single largest shareholder in the company with over 13.3% stake and this preferential allotment will take its stake above 36.2%, triggering an open offer according to SEBI norms.
Asian Oilfields, which has emerged debtfree, is raising these funds to finance its growth opportunities. Firstly, it is planning to diversify into mineral exploration through core mining drilling. It has already obtained contracts worth nearly Rs 5 crore and an investment of Rs 15 crore is envisaged in buying two drilling rigs. This will also enable the company to utilise its assets during the monsoon season when seismic data acquisition is not possible.
At the same time, it is also moving up the value chain in petroleum exploration by undertaking a 3D data acquisition contract for the first time. The company may have to invest up to Rs 20 crore in equipment and infrastructure if it gets the contract.
At the moment, the company is executing a 2D data acquisition contract in Mizoram with the unexecuted portion worth of Rs 15 crore. There are several contracts in the pipeline, where the results will be known in the coming weeks.Other things remaining equal, if we consider the equity dilution from the proposed preferential allotment, the P/E ratio would rise to 23.3, which is on a higher side. Although the company appears to be on a growth path and the E&P industry continues to grow domestically, the company does not have a steady growth record. Only a strong order flow in the near future could justify such high valuations for the company.

Looking for a better tomorrow

THE Punjab-based IOL Chemicals commissioned its 6,600-tonne per annum plant to manufacture isobutyl benzene (IBB), which marks the near completion of its Rs 250-crore expansion plans launched last year. When this expansion plan is completed by March ‘10, the company will emerge as India’s largest producer of ibuprofen with full backward integration in terms of raw materials and power.
The company had earlier raised capacities of its chemical products such as acetic acid, acetic anhydride and added plants to manufacture acetyl chloride and monochloro acetic acid (MCA), which again are inputs for ibuprofen. By March ‘10, its ibuprofen capacity will reach 6,000 tonnes from the current 3,600 tonnes, making IOL India’s largest producer of this anti-inflammation drug. The company is also completing expansion of its captive power plant from 4 MW to 17 MW.
The company’s performance during the first half of FY10 was subdued mainly because of the global depression in the acetic acid and derivatives market, which together constitute nearly 70% of the company’s annual sales. The rising cost of alcohol, the company’s key raw material, also impacted profits. But with the new sugarcane crushing season starting in India, the raw material worries will subside.
The expansion project is likely to bring down the average cost of production for the company and improve its margins. At the same time, the company, which has already started marketing IBB, will continue to sell at least one-third of its production in the open market. The company, which recently obtained permission to export to Canada, is also awaiting US FDA approval for its ibuprofen. Exports to US can improve its realisation by nearly 10% compared to other export markets. All these factors will bring in additional revenues and profits to the company.
The company is currently carrying around Rs 210 crore of debt taken mainly for the expansion projects. In the next step, the company has plans to enter the market of anti-ulcer pharmaceutical ingredients by setting up a Rs 100-crore plant. R&D efforts and pilot testing are under way and the company may go for private equity placement to finance the unit. The company has also announced plans to make a preferential allotment of 15 lakh shares and 30 lakh warrants to the promoter group. The scrip, which is currently trading at 12.5 times its profit for the last 12 months, appears fully priced.

TATA CHEMICALS: Just The Right Chemistry

Tata Chemicals is not only expanding its core businesses, but is also diversifying into new areas. The stock is an excellent investment target for investors with a 12-month horizon

TATA CHEMICALS (TCL), one of the world’s largest manufacturers of soda ash, is benefitting from rising soda ash prices globally, while policy changes have boosted the profitability of its fertiliser business. It has embarked upon several capacity expansion projects and is diversifying into biofuels. TCL will reach new heights once these projects come on-stream in FY09. Consider investing in the company with a 12-month horizon. Incorporated in 1939, TCL is India’s leading manufacturer of inorganic chemicals, fertilisers and food additives. The company, which is currently valued at a little over Rs 8,000 crore, reported consolidated net sales of Rs 5,800 crore for FY07. TCL acquired UK-based soda ash maker Brunner Mond in December ’05, which owns plants in the UK, the Netherlands and Kenya. It also holds one-third equity stake in a phosphoric acid manufacturing Moroccan company IMACID.

BUSINESS:
TCL’s fertiliser manufacturing business contributes nearly 60% to its total revenues. It has a 0.87 million tonne per annum (mtpa) capacity of urea and 1.2 mtpa capacity of phosphatic fertilisers. TCL is also one of the world’s leading synthetic soda ash makers with a total combined capacity in excess of 3 mtpa and commands an 8% global market share. It has 50% share in the branded, iodised salt market in India. It is also aggressively optimising costs in a bid to sustain the competitive advantage in global markets. GROWTH DRIVERS:
Currently, TCL has gained, thanks to two favourable developments. The first of these is policyrelated: the quarterly system of calculating subsidy is now done on a monthly basis, and subsidy towards distribution cost has increased. This has resulted in higher and quicker receipts of subsidy payments from the government. TCL will also benefit from any further easing of the government’s fertiliser policy. The second factor is the global shortage of soda ash, which has boosted prices to new highs. Hence, soda ash prices, at $300 per tonne, are around 40% higher on a year-on-year (YoY) basis. TCL also has aggressive growth plans. Debottlenecking projects are under way at its urea as well as inorganic chemicals plants, which will be completed by September ’08. This will boost TCL’s domestic soda ash capacity by 30% and urea capacity by 60%. Even the cement and salt capacities will go up. These additional capacities, when fully functional, will add over Rs 1,100 crore in revenues annually. Besides India, TCL aims to expand its presence in the global soda ash business as well. It recently expanded its soda ash capacity in Kenya, which is one of the lowest cost producers of soda ash in the world. The company plans to set up another plant there. Besides its existing business, TCL is also diversifying into new areas. Biofuels is one such business it is bullish on.
The company is setting up a 30-kilolitres-per-day (klpd) sweet sorghum-based ethanol facility at Nanded in Maharasthra. This facility is being set up as a prototype, which, if works well, can be expanded to 100 klpd in future. It has also formed a company called ‘Khet-Se Agriproduce India’, in a 50:50 joint venture with Total Produce of Ireland, to foray into wholesaling agricultural commodities — one of the fast-growing business opportunities in India.

FINANCIALS:
TCL reported a healthy 26.1% growth in net profit in H1 FY08 on a consolidated basis, despite a mere 2% sales growth. It also expanded its operating margins, thanks to stringent cost management. The performance would have been even better, had it not been for exceptionally heavy rains in Gujarat, which affected the production at its plants. TCL posted 18.6% YoY growth in net profit and 43.9% YoY growth in sales for the year ended March ’07.

VALUATIONS:
At the current market price of Rs 360, the scrip is trading at around 13.8 times its consolidated EPS for trailing 12 months at Rs 26.1. Based on the estimated forward EPS of Rs 35.2 for FY09, the P/E will be 10.2. This is highly attractive, considering TCL’s current performance, as well as expansion plans. Being a Tata group company, TCL holds equity stakes in most of the group companies such as Tata Motors, Rallis India, TCS, Tata Tea and Tata Steel, among others. The current market value of these listed investments accounts for roughly one-fifth of TCL’s total market capitalisation. Considering all these aspects, we believe TCL is an excellent investment target for investors with a 12-month horizon.

RISKS:
The newly expanded soda ash capacity in Kenya is currently facing some technical problems and is running only at 30-40% capacity. Full benefits of this facility may not be available till the end of FY08. Any significant fall in global soda ash prices may have a negative impact on the company’s growth.

POTENT MIX
TCL is present in all three key agro-nutrient segments in the fertiliser business — nitrogen (N), phosphorous (P) and potassium (K)
Easing of government’s fertiliser subsidy payment policy has had a positive effect on TCL’s cash flows
It is diversifying into the biofuel business and wholesaling of agro-products Debottlenecking projects will add around Rs 1,100 crore to sales on completion
TCL has set up an innovation centre at Pune to explore new business areas in nano and biotech space
TCL operates ‘Tata Kisan Sansar’ network of 514 outlets in North and East India to provide agri-inputs to farmers
TCL’s ‘Khet-Se’ initiative involves setting up collection and processing centres, as well as a cold chain for the distribution of fresh vegetables and fruits Tata Salt controls over 50% market share in the branded salt segment in India TCL’s production at the Mithapur plant was affected during the quarter ended September ’07 due to heavy rains and technical problems

Refining Industry: Woes Are Not Over Yet

HIGH crude oil prices, low demand and burgeoning inventory levels continue to haunt the global refining industry, which is witnessing a steep fall in margins, forcing production cuts. The industry is going through a transformation, as new refineries in India and China are ramping up production, while their counterparts in the West are curtailing it. As the International Energy Agency — an energy advisory to the 28 industrialised OECD nations puts it — ‘the refining industry is grappling with the outlook of persistently weak profitability’.
The seasonal demand of fuel oil, which usually peaks in the winter months, is pretty low this year. The US department of energy expects the country’s fourth-quarter fuel demand to dip 7% against the year-ago period due to recession. High inventory, too, is a problem. The fuel oil stocks in the US typically peak close to 135 million barrels in November or December before being drawn down through the remaining winter months. However, by end-September ‘09, the stocks had crossed 170 million barrels — more than 25% higher than the typical peak. This spurt in crude oil prices, without a commensurate increase in refined products, has resulted in severe erosion in refining margins. According to the global indicative margins computed by British Petroleum (BP), the refining margins for the September-December 2009 quarter are likely to be the lowest-ever since 1990 when the computing began. Till date, the fourth quarter indicative margin stands at $1.12 per barrel against an average of $4.87 in the January to September 2009 period, or $5.19 for the fourth quarter of 2008.
No wonder that the refiners are now cutting down production as much as is economically feasible. According to the Organization of Petroleum Exporting Countries (OPEC), the refining capacity utilisation for October 2009 was 81.9% in the US, 81.2% in the Europe and 81.3% in Japan. Although the current low utilisation level could improve, the inventory pile-up will prevent any sharp spurt in the next few months. The current situation is turning out to be a good opportunity for growth-oriented Asian companies to expand their presence in target regions through acquisition of assets. Reliance Industries is currently negotiating with LyondellBasell in Europe, while Essar Oil is negotiating with Shell for its three European refineries. At the same time, companies such as Cals Refinery and Nagarjuna Oil are in the process of dismantling and relocating refinery units from Europe to India. The refining industry is currently going through a painful, though necessary, process of transformation. Although domestic refiners are operating at over 100% of their rated capacities, their refining margins are set to suffer. Unless crude prices ease, the next few months appear difficult for petroleum refiners.

DyStar buy a boon for Kiri Dyes

The 6-Fold Jump In M-Cap Since January ‘09 Is More Than Sensex’s Growth Of 1.7 Times

AHMEDABAD-BASED dyestuff manufacturer Kiri Dyes, which launched an IPO in early-2008, has widely outperformed the benchmark BSE Sensex in 2009. The six-fold jump in the market capitalisation of this company since January 2009 has been more than just 1.7 times growth in the Sensex. Apart from the successful implementation of its backward integration projects and improving profitability, its acquisition of DyStar boosted its stock market performance.
Although the full details are not yet available, the single location company from Gujarat with an annual turnover of close to Rs 300 crore has agreed to buy selective assets of the world’s leading dyestuff manufacturer DyStar. DyStar, which filed for a bankruptcy protection a couple of months ago, is a Rs 5,500 crore turnover company with 20 production units in eleven countries.
For quite some time, Kiri Dyes had been contemplating inorganic routes to propel its growth. In August 2009, its board had approved raising Rs 250 crore through qualified institutional placements (QIPs) or FCCB/GDR etc. Simultaneously, it increased the limit of FII investment to 49% from 24% earlier.
The company also raised its borrowing powers from Rs 300 crore to Rs 700 crore and also set up an overseas subsidiary.
Kiri Dyes had raised Rs 70.7 crore by way of an initial public offer of its equity shares in April 2008 to set up plants manufacturing its raw materials such as sulphuric acid, H-acid, olieum and chlorosulphonic acid. This backward integration has enabled the company to expand its operating margins, which stood at 21.2% for the half year ended September 2009 compared to 16.3% in the corresponding period of last year.
The company also entered into a joint venture with China’s Well Prospering Company to set up an export-oriented dyestuff manufacturing unit in Gujarat that commenced operations in July 2008. Well Prospering had acquired a 8.3% stake in the company through a pre-IPO placement.
During 2009, the promoters’ shareholding in the company increased to 69.8% as of end-September 2009 against 66.6% at end 2008, while FIIs raised their stake from 3.1% to 4.4%.
At the current market price of Rs 657, the scrip is trading 90 times the earnings for the trailing 12 months. The company’s future prospects do appear bright, with its imminent jump in the global dyestuff market through the acquisition of DyStar. However, the run-up during the past 12 months means that most of these positives have already been factored in.

OIL: Weak demand may pose risk to market

ALTHOUGH hopes of economic recovery and an upturn in demand drove crude oil prices to over $75 per barrel, a further rise appears doubtful. Serious concerns have emerged over the sustenance of the global economic growth and its impact on oil demand while supply continues to rise steadily and inventories are at a historic high. The International Energy Agency (IEA) expressed this concern in its latest monthly report. “If economic prognoses prove too optimistic, or the winter stays mild, market sentiment could easily weaken once again,” it said. Similar views were also expressed by Opec, which went a step ahead to warn of an impending correction in the crude oil market. “Given the fragile state of the global financial system, economic growth may remain subdued for some time to come. In contrast, commodity markets have rallied since March, factoring in strong economic growth ahead.”
Through much of October, positive economic data boosted oil prices. The technical end of the US recession pushed oil prices above $80. However, much of the recovery apparently was driven by special stimulus measures such as the cash-for-clunkers car purchasing programme, and a temporary homebuyer tax credit.
According to the IEA, the global oil demand stood at 85.1 million barrels per day (mbpd) in September 2009 quarter — 0.8 mbpd lower than the year ago period — but 1.7 mbpd higher since estimated six months back. Much of this growth has been contributed by the non-OECD countries, mainly China (0.96 mbpd). Just like in the US, the Chinese oil demand growth too shows a strong linkage to stimulus-induced infrastructure spending. With the country raising consumer fuel prices starting November, the demand may not be as strong as seen so far.
Indeed, global diesel demand – which powers the railways and trucks that support the global industrial activity and trade – remains subdued and is expected to register a 3.1% y-o-y decline in 2009, with the OECD featuring a particularly severe contraction (-5.7%).
The historically high petroleum inventories too could pressurise the commodity’s pricing. Oil inventories, as at end September 2009 in OECD countries, are at a historically high level of 4.34 billion barrels. The capacity addition and growth in crude oil supply is likely to keep prices low. The situation in the oil market may continue to look balanced for now. However, as we move towards the traditionally lower demand season in the second quarter of 2010, a weak oil demand will raise the risk of disturbing the already fragile fundamentals.