Petronet LNG: STEPPING ON THE GAS

Though Petronet LNG’s facing challenges in generating earnings at present,given its future outlook,it looks to be a good bet for the long term

Petronet LNG’s difficulties in generating earnings from its expanded capacity have weighed down on its valuations. However, in a gas-starved country like India, it won’t be long before the supporting infrastructure comes up that enables PLNG’s assets to generate incremental earnings. In view of the solid asset base that the company has created and its de-risked earnings model, the temporary problems that the company is facing provides an opportunity for long-term investors to enter the stock.

BUSINESS
Petronet LNG (PLNG), 50% owned by four PSU petroleum companies in equal proportions —Gail, BPCL, Indian Oil and ONGC —is India’s largest importer of liquefied natural gas with a 10 million tonne plant at Dahej in Gujarat. For this, the company has tied up with Qatar’s Ras-Gas to supply 5 mtpa of LNG, which was raised by 50% to 7.5 mtpa with effect from January 2010.
Thanks to back-to-back sales agreements with its promoter group, it bears no marketing risk. The conversion charges it imposes on regassification of LNG remains its source of earnings. The conversion charges that currently stand at Rs 31.7 per million units are revised up 5% every year. This arrangement typically results in a low operating margin but ensures adequate return on capital.
The company is currently setting up another 2.5 mtpa greenfield LNG import plant at Kochi at a capital cost of Rs 2,500 crore. It also has a joint venture with Adani Group for a solid cargo port at Dahej.

GROWTH DRIVERS
The company doubled its regassification capacity to 10 million tonne per annum in July 2009. The company has also added another vessel to transport additional LNG in November 2009. Qatar’s RasGas has increased LNG supply by 50% to 7.5 mtpa from January 2010.
The availability of shale gas in the US has reduced its dependence on imported LNG. As a result, the LNG exporters from the Middle East and African countries are looking at Asian region to market their product. A part of this additional LNG is expected to come to India. With PLNG enjoying a significant spare capacity it will be the natural beneficiary of higher LNG volumes. PLNG’s Kochi terminal is expected to commission by March 2012, where the capacity utilisation is likely to remain high.

FINANCIALS
PLNG’s business is capital intensive — it has spent nearly Rs 3,800 crore in building the 10 MTPA capacity at Dahej over the past seven years. In the past three years, the average return on capital employed remained at 24.9%, which could weaken marginally for FY10, as its additional capacity hasn’t earned any income. In the past five years, the company has grown its net sales at a cumulative annualised growth of 40.5%, while the net profit grew at 20%. The company has a history of generating healthy cashflows from operations. Its FY10 numbers were particularly affected by the additional burden of interest and depreciation on the doubled capacity, which hasn’t started generating revenues yet. The company reported a 22% fall in net profit after the interest cost jumped 82% and depreciation was up 57% during the year.
During the March ‘10 quarter, when the additional volumes started coming in, the company faced challenges in evacuating the regassified gas to its customers — firstly due to the congestion in Gail’s pipeline and secondly due to availability of RIL’s cheap gas. Although a number of industrial consumers still finds RLNG cheaper to the liquid fuels, the existing pipelines getting choked up with cheaper RIL gas is leaving little scope for PLNG’s additional volumes.

VALUATIONS
PLNG’s current price is 15.2 times its earnings for FY10. It is currently valued at par with its peers in the natural gas industry. However, this fails to capture the earnings potential of its expanded capacity, which is currently facing challenges due to lack of evacuation infrastructure. Gail’s new pipeline capacity in the North India will be the key trigger for the company as it will be able to push more RLNG through it for its consumers. The company is expected to end FY11 with EPS of 7.4. The current price is 11 times its one-year forward earnings. For a company with steady earnings flow, this appears attractive

Don't swing to music...

The stock market has become more volatile and it’s quite difficult for retail investors to take a smart investment decision. During such times, switching to scrips of companies with smaller FII exposure could be a smart move for investors, say Krishna Kant and Ramkrishna Kashelkar

RETAIL investors should have learned their lessons from the market crash of 2008-09 as they gear up to face the economic turmoil in the European countries. While we prescribed a list of companies expected to help investors weather the storm last week, we highlight another investing pitfall, that investors should do well to avoid. It is a common mentality of retail investors to ‘follow the biggies’. Invest in shares that foreign investors are buying. After all, with all their financial acumen, research prowess and ability to catch long-term trends, following their trail in investment decisions should bring good returns, right? The strategy might be useful when the going is good, but not so in a volatile market. Empirical evidence suggests that the scrips with higher FII exposure tend to underperform in a falling market. This is logical. Most FIIs follow strict exposure limits to emerging markets and have to liquidate their holdings in India if the value of their global portfolio starts shrinking. As a result, we see the Indian markets tanking in response to a fall in European or American markets. It is for this reason that investments in companies where FIIs hold a large stake becomes risky during the uncertain times. We had witnessed all this during the period of January 2008 – March 2009 when over Rs 60,000 crore of FII money flew out of the country on the back of the sub-prime crisis in the US. One can legitimately suspect if a similar thing is going to happen in the coming months, particularly after FIIs took out more than Rs 9,000 crore in May 2010 alone. Investing along with FIIs can be beneficial when the going is good. Firstly because FIIs mostly invest in financially and operationally sound companies, Second, their exposure is mostly in liquid counters where entry and is easy and cost-efficient. A high FII holding brings visibility to the company and valuations tend to go up. But when it comes to the current volatile times, the opposite stands true. A sudden exit by FIIs can bring down the valuation of such companies faster than the overall market.

An analysis of the stock performance and FII activity in the Nifty and the Nifty Junior companies during the January 2008 – March 2009 period supports our assumptions. The companies with higher FII stakes indeed underperformed grossly.

METHODOLOGY
We skimmed through the FII holding patterns from the December 2007 quarter, which was the peak of the bull-run, to March 2009 when the markets hit the bottom and a turn around began. To understand the real impact of FII moves on the stock prices, we calculated the FII’s stake as a proportion to the floating stock of the companies. Thus, a 5% FII holding in a company where promoters hold 80% equity gives it control over 25% of the floating stock. Here the FII’s moves are likely to have more impact on the stock price than in a company with a 50% promoter holding. Since insurance companies, including LIC, also invest with a long time horizon, we also excluded them while calculating the floating stock.
Then we checked the stock market performance of these companies during the December 2007 to March 2009 period, juxtaposing it with the FII activity. The findings clearly highlight the risk associated with high FII holdings in a downturn. Where the FIIs controlled more than half of a company’s floating stock, there was 87% chance that it would underperform the market in the downturn. Just four companies — Bharti Airtel, Container Corporation, Hero Honda and NTPC — could beat the market between December 2007 and March 2009 despite FIIs controlling the majority of floating stock.
If FIIs controlled more than 40% of floating stock of a company in December 2007, there was a 62% chance that the scrip would have underperformed in the downturn. Where the FIIs sold more than half of their holding in any company during this period, the crash in market capitalisation was over 70% as against around 55% fall in the BSE Sensex.
In 46 companies, where FIIs sold less than one-fifth of their initial stake or increased their stake during the December 2007-March 2009 period, the average fall was muted at around 42%.
All these findings point towards one important thing. While a retail investor looks at the financial and valuation parameters apart from the industry outlook etc in making an investment decision, a closer look at the shareholding pattern is also necessary. It will be a smart move in the present volatile times to shift investments to companies where FIIs outflows cannot affect the valuations.
To provide a point of reference, we have given lists of companies where the FII holdings as a proportion of the floating stock was highest and the lowest as on March 31, 2010. While the companies, such as Indiabulls Real Estate, DLF, HCL Tech and PNB, figure in the first list, Syndicate Bank, ITC, NTPC and L&T are in the second list. The average performance of the companies with higher FII exposure is already below that of the Sensex in FY11 so far. While those with less FII exposure are doing well.
While it will be audacious to claim that such shares won’t fall in a weak market, one can surely conclude that the likelihood of them outperforming the downturn is quite high.

Picking winners to beat the downturn

27th May 2010

Picking winners to beat the downturn

Some Stocks That Can Help You Outperform A Volatile Market

Ramkrishna Kashlekar ET INTELLIGENCE GROUP

DURING a downturn in the market, there is often a set of stocks which stand out. These are firms which have a proven track record, huge cash generating capacity and a strong balance sheet. Top companies from the fast-moving consumer companies (FMCG) segment are natural candidates in this group. There are stocks in other sectors, too, which are resilient.

Take, bring in additional revenues. Recently-listed JSW Energy, which is still trading around its IPO price, also fits into this category, as it is set to double its total power generation capacity in FY11.

Companies that dominate the market place almost like monopolies can be reasonably sure of protecting revenues as well as margins even in an economic downcycle. This makes companies such as Gail, Asian Paints and Crisil less susceptible to a fall in a weak market. Stocks, which are out of favour and are languishing at rock-bottom valuations, could also be considered as shock absorbers, since their downside risk remains low. JK Laksmi Cement and Reliance Communications are two such examples.

At the same time, mature companies that have evolved their business model after years of work and are poised for a fast-paced growth in future may also provide good downside protection in a volatile market. Shoppers Stop’s efforts to derisk its business model and cost optimisation have started paying off as visible in its numbers during the past couple of quarters. Similarly, textiles major Alok Industries has emerged as a vertically-integrated company with large production capacities and presence across most of the sub-segments of the textiles industry. The resilience built in their business model can be expected to help them weather the storm with little damage. For an investor, it’s always more important to outperform the market in a downturn than outperforming in a bull market. In fact, many experts are of the view that the way an investor reacts to a market crash has the biggest impact on his or her long-term market returns.

If your portfolio is built up of fundamentally sound companies and its value has come down just because the sentiment is bearish, you can be reasonably certain of a bounceback once the next bull run sets in.

ramkrishna.kashelkar@timesgroup.com

CAIRN INDIA : Well-oiled for another round of exploratory work

CAIRN India, which had recently raised its estimate of available petroleum reserves in its Rajasthan fields posted better-than-expected profits for the March 2010 quarter at Rs 258 crore. Its pipeline from Barmer to Salaya has become operational, which marks a key inflexion point in Cairn’s revenues and profits growth in the near future. While the company’s Mangala oil field commenced operations in August 2009, production could not be increased due to the lack of transportation infrastructure. The 590-km pipeline will now enable the company to sell its crude to private and PSU refiners in India. The company has already contracted to sell 1.43 lakh barrels of oil per day (bopd) to four domestic refiners. The company, which was producing 17,500 bopd during the quarter ended March 2010, has scaled it up to 63,000 bopd. But this could go up to 125,000 bopd by 2010-end once it commissions third production line. The approved plateau production rate of 175,000 bopd is likely to be achieved by next year. The company is hoping to push the plateau level further up to 240,000 bopd. The scaling up of Rajasthan fields enabled the company to raise its production on a working interest basis to 24,957 barrels of oil equivalent per day (boepd) this year from 17,264 boepd in FY09. The company generated over Rs 800 crore of cash from operations — almost same as last year — mainly due to a 22% fall in average realization of crude oil to $68.2 per barrel.

While the cashflows remain strong, the company is well-funded to carry on its exploration work. It had over Rs 2,600 crore of cash balance as at the end of March 2010. The company also has $850 million of unutilised loan from the $1.6 billion loan facility it had tied-up last year.

The company has been using innovative methods to optimise its production, while gathering more information about the geological formations in its Rajasthan fields. Improved knowledge has enabled it to raise the reservoir estimates to 1 billion barrels of recoverable reserves from Mangala, Bhagyam and Aishwarya fields apart from 125 million barrels from 20 small fields. The company continues to explore further in the area, while developing the discovered fields. This has enabled it to discover another resource potential in the Barmer basin, which it termed as ‘significant and as yet untested’. Investors can expect further augmentation to the company’s existing resource base in the years to come.

Cash is king and RIL has loads of it

24th May 2010

Cash is king and RIL has loads of it

THE LATEST TRUCE INITIATIVE MAY GIVE A LEG-UP TO CASH-RICH RELIANCE

Ramkrishna Kashelkar ET INTELLIGENCE GROUP

THE scrapping of the non-compete agreement between the Ambani brothers could well mark an inflexion point for the two groups that have been engaged in a bitter battle for some time.

The truce may be favourable to the country’s most profitable company, the Mukesh Ambani led-Reliance Industries, which has formidable investible resources, than Anil Ambani’s ADA Group, which is already working on several longterm projects. This is because the ADAG’s portfolio includes several businesses that can be attractive for RIL to enter — particularly financial services and infrastructure — but the same may not be true for ADAG. For, RIL’s businesses of petroleum and petrochemicals are highly capital intensive.

RIL ended FY10 with close to $5 billion of cash on its books and debt aggregating to $13.5 billion on a standalone basis. Yet, its debt-to-equity ratio was less than 0.5. Add to this, its subsidiary, which holds RIL shares as treasury stock, had raised over $2 billion from part sale of such stock while the remaining treasury shares are valued at over $2.6 billion.

RIL’s businesses have emerged as a huge cash generating machine, substantially in excess of its existing capex plans. During FY10 alone, the company had earned $6.2 billion in cash profit, while its net capex towards projects during the year was just $2.1 billion. According to Goldman Sachs, RIL is set to generate around $25 billion of excess cash over and above its committed capex in four years from FY11 to FY14. If not reinvested, these cashflows could make RIL debtfree by FY13.

RIL, which has been attempting acquisitions in the petroleum business globally, may now look at targets in the local market. The company may find it more lucrative to acquire an existing company in the new frontier areas it wants to enter than to build from scratch.

On the other hand, the main benefit to ADAG from the scrapping is the removal of ‘right of first refusal’, which had stalled RCOM’s merger with South Africa’s MTN in 2008. However, considering the changed outlook in the telecom industry over the past couple of years marked by a bruising tariff war, the prospects of such a deal taking place in the near term appears bleak. RCOM has much more debt today on its books than in 2008, which will now go up further with investment in 3G licences. RCOM’s net debt stood at Rs 19,889 crore at the end of March 2010 almost double that of Rs 9,974 crore in March 2008. Also, after the Bharti-Zain deal, the market is no longer enthused about such crossborder deals.

The development is unlikely to have an im pact on the ongoing RIL-RNRL gas supply negotiations, which will happen in accordance with the Supreme Court order.

Although the deal clears the way for both groups to chart out their independent paths in their chosen lines of businesses, there is little likelihood that they will join hands. For RIL, which can choose to enter financial services, telecom or infrastructure businesses, the options are many. However, given the stiff competition, it is unclear as to the value that the company can create for its shareholders by foraying into the new businesses. For ADAG, it may well be business as usual, unless it can pull off an ambitious M&A deal. RIL investors may look forward to further value addition as and when the company decides to enter new businesses. ramkrishna.kashelkar@timesgroup.com

Tata Chemicals sees growth spurts

26th May 2010

Tata Chemicals sees growth spurts

Higher Margins & Better Volumes Help Co Improve Show, But Challenges Remain

Ramkrishna Kashelkar ET INTELLIGENCE GROUP

TATA Chemical’s stock crashed 6.5% after posting disappointing results for the quarter and year ended March 2010 on Monday. The scrip has marginally outperformed the market, gaining around 31% in the past one year as against a 15% growth in benchmark Sensex.

Tata Chemicals profit for the fourth quarter fell by more than a quarter to Rs 128 crore on a consolidated basis, despite a 24% improvement in net sales. Although net sales also fell against last year, the main positive was the 360-basis point improvement in its operating margins to 19.3%.

TCL’s inorganic chemical segment saw a fall of 8% and 4% in its revenue and PBIT, respectively. This was mainly due to the demand and pricing decline during the initial quarters of FY09-10. Similarly, the fertiliser segment also saw a huge fall of 36% and 25% in its revenue and PBIT, respectively, as the prices came down.

During FY10, the company saw better local and overseas demand for soda ash against previous year. Also, the debottlencking of its plant helped increase urea production by 20% y-o-y basis. Its new water purifier ‘Tata Swach’ launched in October 2009 sold nearly 50,000 units in Maharashtra and Karnataka, even as the company aims to sell a million units in FY11 as it pans out nationwide.

It paid off Rs 440 crore of debt during the June ’09 quarter followed by selling part of its stake in Titan to raise Rs 88 crore during the September ’09 quarter. It has reduced its debt-equity ratio to 0.81 for FY10 as against 0.95 for FY09. The company is still spending nearly Rs 400 crore on interest costs annually.

The company has lined up a capex of around Rs 300 crore for FY11, when it will be completing its first customised fertiliser facility and embark upon doubling its urea capacity at Babrala. To shore up its capital base before going for this next round of capex the company is planning to raise over Rs 400 crore through a preferential allotment to its promoters.

Doubling of urea capacity to 2.4 million tonne per annum will take up three years with an estimated capex of Rs 3,500 crore. It has already carried out pre-feasibility and basic engineering studies and is awaiting clarity on gas supply to move ahead.

During the year, the company acquired shares in Rallis India — another Tata Group company focusing on agrochemicals — to take its shareholding beyond 50%.

Thanks to higher margins and better volumes, Tata Chemicals’s performance during FY10 was much better than in FY09. There is still some more restructuring lying ahead for this soda ash major.

(With inputs from Parul Bhatnagar)

RIGHT PICKS

Picking winners to beat the downturn
Some Stocks That Can Help You Outperform A Volatile Market

DURING a downturn in the market, there is often a set of stocks which stand out. These are firms which have a proven track record, huge cash generating capacity and a strong balance sheet. Top companies from the fast-moving consumer companies (FMCG) segment are natural candidates in this group. There are stocks in other sectors, too, which are resilient.
Take, for instance, a company like Petronet LNG, which has recently completed a major capex cycle and doubled its regassification capacity. It’s a stock, which has weathered the downturn and appears promising, especially because FY11 will mark the first full year when the expanded capacity will bring in additional revenues. Recently-listed JSW Energy, which is still trading around its IPO price, also fits into this category, as it is set to double its total power generation capacity in FY11.
Companies that dominate the market place almost like monopolies can be reasonably sure of protecting revenues as well as margins even in an economic downcycle. This makes companies such as Gail, Asian Paints and Crisil less susceptible to a fall in a weak market. Stocks, which are out of favour and are languishing at rock-bottom valuations, could also be considered as shock absorbers, since their downside risk remains low. JK Laksmi Cement and Reliance Communications are two such examples.
At the same time, mature companies that have evolved their business model after years of work and are poised for a fast-paced growth in future may also provide good downside protection in a volatile market. Shoppers Stop’s efforts to derisk its business model and cost optimisation have started paying off as visible in its numbers during the past couple of quarters.
Similarly, textiles major Alok Industries has emerged as a vertically-integrated company with large production capacities and presence across most of the sub-segments of the textiles industry. The resilience built in their business model can be expected to help them weather the storm with little damage. For an investor, it’s always more important to outperform the market in a downturn than outperforming in a bull market. In fact, many experts are of the view that the way an investor reacts to a market crash has the biggest impact on his or her long-term market returns.
If your portfolio is built up of fundamentally sound companies and its value has come down just because the sentiment is bearish, you can be reasonably certain of a bounceback once the next bull run sets in.

Tata Chemical: Tata Chemicals sees growth spurts

Higher Margins & Better Volumes Help Co Improve Show, But Challenges Remain

TATA Chemical’s stock crashed 6.5% after posting disappointing results for the quarter and year ended March 2010 on Monday. The scrip has marginally outperformed the market, gaining around 31% in the past one year as against a 15% growth in benchmark Sensex.

Tata Chemicals profit for the fourth quarter fell by more than a quarter to Rs 128 crore on a consolidated basis, despite a 24% improvement in net sales. Although net sales also fell against last year, the main positive was the 360-basis point improvement in its operating margins to 19.3%.

TCL’s inorganic chemical segment saw a fall of 8% and 4% in its revenue and PBIT, respectively. This was mainly due to the demand and pricing decline during the initial quarters of FY09-10. Similarly, the fertiliser segment also saw a huge fall of 36% and 25% in its revenue and PBIT, respectively, as the prices came down.
During FY10, the company saw better local and overseas demand for soda ash against previous year. Also, the debottlencking of its plant helped increase urea production by 20% y-o-y basis. Its new water purifier ‘Tata Swach’ launched in October 2009 sold nearly 50,000 units in Maharashtra and Karnataka, even as the company aims to sell a million units in FY11 as it pans out nationwide.

It paid off Rs 440 crore of debt during the June ’09 quarter followed by selling part of its stake in Titan to raise Rs 88 crore during the September ’09 quarter. It has reduced its debt-equity ratio to 0.81 for FY10 as against 0.95 for FY09. The company is still spending nearly Rs 400 crore on interest costs annually.

The company has lined up a capex of around Rs 300 crore for FY11, when it will be completing its first customised fertiliser facility and embark upon doubling its urea capacity at Babrala. To shore up its capital base before going for this next round of capex the company is planning to raise over Rs 400 crore through a preferential allotment to its promoters.

Doubling of urea capacity to 2.4 million tonne per annum will take up three years with an estimated capex of Rs 3,500 crore. It has already carried out pre-feasibility and basic engineering studies and is awaiting clarity on gas supply to move ahead.

During the year, the company acquired shares in Rallis India — another Tata Group company focusing on agrochemicals — to take its shareholding beyond 50%.

Thanks to higher margins and better volumes, Tata Chemicals’s performance during FY10 was much better than in FY09. There is still some more restructuring lying ahead for this soda ash major.

Cash is king and RIL has loads of it

THE LATEST TRUCE INITIATIVE MAY GIVE A LEG-UP TO CASH-RICH RELIANCE

THE scrapping of the non-compete agreement between the Ambani brothers could well mark an inflexion point for the two groups that have been engaged in a bitter battle for some time.
The truce may be favourable to the country’s most profitable company, the Mukesh Ambani led-Reliance Industries, which has formidable investible resources, than Anil Ambani’s ADA Group, which is already working on several longterm projects. This is because the ADAG’s portfolio includes several businesses that can be attractive for RIL to enter — particularly financial services and infrastructure — but the same may not be true for ADAG. For, RIL’s businesses of petroleum and petrochemicals are highly capital intensive.
RIL ended FY10 with close to $5 billion of cash on its books and debt aggregating to $13.5 billion on a standalone basis. Yet, its debt-to-equity ratio was less than 0.5. Add to this, its subsidiary, which holds RIL shares as treasury stock, had raised over $2 billion from part sale of such stock while the remaining treasury shares are valued at over $2.6 billion.
RIL’s businesses have emerged as a huge cash generating machine, substantially in excess of its existing capex plans. During FY10 alone, the company had earned $6.2 billion in cash profit, while its net capex towards projects during the year was just $2.1 billion. According to Goldman Sachs, RIL is set to generate around $25 billion of excess cash over and above its committed capex in four years from FY11 to FY14. If not reinvested, these cashflows could make RIL debtfree by FY13.
RIL, which has been attempting acquisitions in the petroleum business globally, may now look at targets in the local market. The company may find it more lucrative to acquire an existing company in the new frontier areas it wants to enter than to build from scratch.
On the other hand, the main benefit to ADAG from the scrapping is the removal of ‘right of first refusal’, which had stalled RCOM’s merger with South Africa’s MTN in 2008. However, considering the changed outlook in the telecom industry over the past couple of years marked by a bruising tariff war, the prospects of such a deal taking place in the near term appears bleak.
RCOM has much more debt today on its books than in 2008, which will now go up further with investment in 3G licences. RCOM’s net debt stood at Rs 19,889 crore at the end of March 2010 almost double that of Rs 9,974 crore in March 2008. Also, after the Bharti-Zain deal, the market is no longer enthused about such crossborder deals.
The development is unlikely to have an im pact on the ongoing RIL-RNRL gas supply negotiations, which will happen in accordance with the Supreme Court order.
Although the deal clears the way for both groups to chart out their independent paths in their chosen lines of businesses, there is little likelihood that they will join hands. For RIL, which can choose to enter financial services, telecom or infrastructure businesses, the options are many. However, given the stiff competition, it is unclear as to the value that the company can create for its shareholders by foraying into the new businesses. For ADAG, it may well be business as usual, unless it can pull off an ambitious M&A deal. RIL investors may look forward to further value addition as and when the company decides to enter new businesses.

Nagarjuna Agrichem: Finding Solid Ground

Expected normal monsoon, attractive valuations and an expansion drive make Nagarjuna Agrichem an attractive bet

INVESTORS willing to bet on a normal Indian monsoon should take a look at Nagarjuna Agrichem. While the scrip appears attractively priced at present, its future earnings growth appears sustainable, thanks to its major expansion drive.

BUSINESS: Hyderbad-based NACL was established in 1994 for producing monocrotophos and has progressed to manufacture various technical as well as formulation agrochemicals. The company has a technical plant at Srikakulam with a capacity of 8,800 TPA and has formulation plants at Ethakota and Shadnagar with combined capacity of 32,000 TPA.
Nearly 70% of the company’s sales come from insecticides, 17% from fungicides and 13% from herbicides at present. In FY10, nearly two-thirds of NACL’s revenues came from domestic sales and the rest from exports. Half of its domestic revenues came from southern India and from paddy-specific products. The company has total diversified portfolio of 54 pesticide brands with 26 insecticides, 15 fungicides, 11 herbicides and two plant growth regulators. It has extensive distribution infrastructure through 33 warehouses, 9,250 dealers in 370 sales territories.
Besides, the company also has toll manufacturing arrangements with various global MNCs for agrochemicals as well as fine chemicals.

GROWTH DRIVERS: The company, which was traditionally focused on rice, is zeroing in on expanding its product offering. It had launched nine products in FY10 and has recently launched seven new products further strengthening its product portfolio. It also plans to expand its retail business geographically by increasing the number of registrations in other countries.
NACL is planning a capex of Rs 350 crore to set up technicals plant in Vizag SEZ and an R& D centre in Hyderabad. The new plant that will involve capex of Rs 250 crore will have capacity of 8,000 tonne in phase I. While Rs 25 crore will go for the R&D centre and Rs 75 crore will be invested to debottleneck its existing plants. The SEZ plant is expected to come up in FY12.

FINANCIALS: In the five year period ended March 2010, the company has grown its net sales at a cumulative annualised growth rate (CAGR) of 17.6%, while the profits grew at 19.5%. In fact, the profit figure was stagnant till FY08, which more than doubled in the past two years.
The company has maintained operating profit margins above 15% for the past five years, which averaged 18.8% in the past two years.
The company has healthy operating cash flow. Its debt-equity ratio has risen to 0.5 from around 0.3 in the past three years. The company is planning to raise funds through equity and debt for its expansion projects and expects to achieve the financial closure by end of June 2010.

VALUATIONS: At the current market price of Rs 300, the stock trades at a price-to-earnings multiple (P/E) of 7.5 and 2.2 times its FY09 book value. Its peers Rallis India, Insecticides India, Sabero Organics and Excel Cropcare are trading in a P/E range of 6.1 and 17.9 and a P/BV range of 1.6 to 4.6.

BATTLING THE ODDS

In today’s volatile market, wouldn’t it be wonderful to have stocks that won’t fall in a market meltdown? But they will surely rise if stability returns. ET Intelligence Group offers a few investment ideas that can help you ring fence your equity investments

AFTER the skeletons popped out of the closets of the world’s largest economy in 2008, it’s the time for the weak members of Europe to put their soft belly on display. The fiscal problems that surfaced in some of the Euro zone countries as much capable of disrupting the global economy as the US’s financial system fiasco in 2008. As the international economist Nouriel Roubini puts it, first came rescue of private firms, and now comes the rescue of the rescuers — i.e., the governments. Rumours abound that problems are much worse than what meets the eye. There is no doubt that what investors have seen in the US sub-prime mortgage crisis makes them more susceptible to such rumours. And as a result the volatility continues. At a time when the markets are gloomy and the media is abuzz with talks on things like fiscal crises, double-dip recession, overheating, debt burdens et al one just can’t be overcautious. Retail investors, in particular, are cursed to fail in such markets. Firstly they are always late to react — be it a rally or a fall. And secondly, the doubts ‘what if I sell out today and markets rebound orrow?’ or vice-versa never leave em at peace. It, therefore, pays to build a portfolio that has inherent shock absorbers. However, if you haven’t installed these shock absorbers already, it is not too late to act. But the end to the current volatility is nowhere in sight and investors can rightly be scared of making fresh investments. Wouldn’t it, therefore, be just wonderful, if we had a handful of companies that won’t buckle, if the markets were to fall further, but will bounce back, if the stability were to return? Do such stocks exist?

Yes, they do. In fact, ET Intelligence Group has unearthed a few such investment ideas, which fit the bill — they are available at attractive valuations and hold the potential to reward investors once the market sentiment turns positive. And the list contains companies from various industries apart from just FMCG and Pharmaceuticals — the traditional friends in the times of volatility.

We have mainly five types of companies here. Firstly there are large brand driven FMCG businesses with large cash generating capacities. Then we have companies commanding almost monopolistic leadership in their respective industries. There are companies that have recently completed major capex and are going to reap its benefits in FY11. A couple of companies that have seen their business models evolve into becoming more robust also figure in the list. At the end, we have chosen two companies that have taken a disproportionately bigger hit in the weak market and are now available at attractive valuation compared to their peers.

BRAND DRIVEN BUSINESSES
FMCG and pharma industries have always been well regarded as recession-busters. So much so that in market rallies, when these sectors start picking pace, market observers start predicting a correction. Most of these stocks are slow gainers, but they hold the capacity to make a new all-time high in every bull-run. One main problem, however, is that owing to their market credibility and a long-history of superior performance, they don’t come in cheap.
Despite rising food inflation pressuring the profit margins of the company, Nestle India remains one of the priciest FMCG company on the Dalal Street with a price-to-earning (P/E) multiple of 42. Its market leadership in the niche product category of ready-toeat food and dairy product has enabled its revenues and profits to grow at a strong pace. Despite the stretched valuations, it remains a classic defensive stock.
The diversified nature of ITC makes its business model de-risked. A stronger growth in its non-cigarette businesses is reducing its dependence on tobacco business for forging its future growth. Valued at little over six times its annual revenues and a (P/E) ratio of 26, the scrip appears reasonably valued with limited downside risk. Its ability to raise dividends year-afteryear adds to its attractiveness.
Similarly, Dabur India’s non-cyclical product-mix in consumer care, healthcare, food and retail with strong brand recall and international presence makes it an attractive consumer business. The company has outperformed its peers in the past several quarters justifying its premium valuations at P/E of 32.
GSK Consumer Healthcare (GSKCH) is a market leader in niche category of malt based health drinks with a portfolio of OTC drugs. Although its margins were affected by rising food prices, it has successfully kept competition at bay. Despite trading at high valuations, this company has limited downside risk given its niche product category and non-cyclical nature of its business.

GlaxoSmithKline Pharma is the third largest player in the domestic pharma market. Its established international lineage, consistent growth, market leadership in many therapeutic areas and strong brand equity work in its favour. The company is aggressively increasing its presence in various therapeutic areas and expanding its field force. Its stock is trading at a P/E of 33. While these are relatively high valuations, the company is a promising long-term buy — offering limited down side.

MONOPOLISTIC BUSINESS MODEL
The country’s largest paints company, Asian Paints, has enjoyed almost a monopolistic
leadership in the decorative paints segment. The company has greatly benefited from increasing consumer spending in the domestic market over the past few years. While the domestic market is the key driver for the company’s growth, Asian Paints has been consolidating its portfolio in the international market. The company has divested its four loss making units in the South Asian region in order to mitigate the erosion of profitability in its international operations. Unless there is a significant drop in the consumer demand, the company’s business has limited downside risk. Trading at a consolidated P/E of 27, the company offers a good defensive bet to the long-term investors. Another company, which is assured of its revenues by nature of its monopolistic business, is Gail — India’s largest transporter of natural gas. In the years to come, a vast majority of gas consumers will continue to depend on Gail’s pipeline for a seamless supply of natural gas, which will be a preferred fuel for the coming generations.

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Gail is a cash-rich company, with very low debt and plans to invest nearly Rs 50,000 crore in the next four years to expand capacity. Defying the market weakness, Gail gained 5.6% last week.
Crisil enjoys a similarly dominating position in oligopolistic business of rating and business advisory services. Its not a fund-based business like lending and thus carry little risk. Secondly, even in a case of stock market downturn, the demand for research and advisory services remains robust. Crisil has always been a zero-debt company with strong dividend paying record. Its currently trading at 28 times its trailing earnings and is cheaper compared to its historic valuations.
Container Corporation of India (Concor) is indispensable when it comes to transporting goods across the country by rail. It has always enjoyed a dominant position in the container rail freight segment. The company is debt-free and cash-rich, which has enabled it to fund its expansion plans of the past few years entirely from internal accruals. (Look at the Take Two on Page-2)
The country’s largest auto component maker Bosch enjoys a similar position in its industry. Its product range is such that every vehicle on the road carry some of the Bosch component right from fuel injection systems to spark plugs to wipers to batteries. Besides, it also a market leader in non-automotive segments such as power tools, compact packaging equipment and automotive audio systems. Its German parent, Robert Bosch is the largest auto component maker and an technology leader. Bosch is debt-free and has a history of strong operating cash with ever rising dividend payments.

COMPLETED CAPEX
In the second category we have companies that have completed major capex plans, like Petronet LNG. Petronet doubled its LNG capacity in the second half of last year. Its Mar ‘10 numbers failed to show its benefits as RIL’s cheaper gas flooded the markets. Completion of Gail’s pipelines in the North India will allow it to increase sales volumes as more customers. Considering the company’s secured income source by way of regassification charges and its expanded capacities, a P/E of 15 appears attractive.
The pharma major Cipla may not have done well on the bourses in recent past, but it has been busy building up capacities. In the past three years it has spent nearly Rs 1,700 crore on capacity expansion. It is now set to launch its new product lines in overseas markets including asthma inhalers. The company’s current valuations do not fully reflect these upsides.
JSW Energy is another such example, where the market has failed to reward capacity addition due to the weak sentiments. The company had a very impressive growth in the fourth quarter of FY10, with sales and profit going up almost three times over last year, aided by commissioning of 600 MW of generation capacity. The company will be nearly doubling its total generation capacity in FY11, which will give a significant boost to its financials. The stock currently trades at a P/E of 22x and looks reasonable.
The buoyancy in real estate industry is set to do good for Mahindra Lifespaces, which currently has almost 8 million square feet of properties at various stages of launch or under construction. The company predominantly operates in the mid and high-end residential segment in Mumbai, Pune, Nashik, NCR, Chennai and Nagpur. It launched its mass housing project in Gurgaon. It currently has two SEZ’s in Chennai and Jaipur, both of which are seeing a strong traction in the recent past. The company is debt light, which is the main differentiating factor between other players.It is trading at a price to earnings multiple of 18 and appears attractive.
Anant Raj Industries continues to monetise assets where it is able to get lucrative prices. In Dec ‘09 quarter, it sold 0.11 million sq ft of commercial space for Rs 6 crore. The company has been increasing its rental income on sequential basis and booked rental income of Rs 13.6 crore in Dec ‘09 qtr. Going ahead, it will launch two residential projects at premium locations, an IT Park, and also rentals will start coming from its malls. The stock is trading at 16 times its trailing 12 months earnings, leaving enough scope to gain in the coming months.

CHANGING BUSINESS MODEL:
A focused management can gradually change the business model of a company to bring in better efficiencies or integration that can take it to its inflexion point —a point beyond which the growth will speed up. The first departmental store retailer Shoppers Stop and textile major Alok Industries appear to have reached such inflexion points.
Shoppers Stop has evolved its business model over a period of last decade that will enable it now to scale up faster in the coming years. It has been derisking its merchandise model with a higher share of consignment as against the bought-out share, while its cost-cutting exercise has started paying off as visible in better margins in the two quarters. Most of its subsidiaries have already turned profitable with a turnaround in the home solutions and international airport retail venture expected in near future. Its footfalls to sales conversion ratio came down in the March 2010 quarter, but a significant increase in average transaction size and average sales price have kept the like-to-like store growth up.
Going ahead, the company has aggressive growth plans to open 8 stores in FY11, and another 10-12 stores in the next financial year. This will cumulatively add about 1 million sq ft to the existing 20.4 million sq ft of space. These factors enable the company to justify its P/E above 27 and P/BV above 4.7, which are unlikely to weaken in market turmoil.
Alok Industries has emerged as a vertically integrated textile company with five core business divisions viz. cotton spinning, polyester yarn, garments, apparel fabric and home textiles. Its subsidiary, Alok Retail operates its branded stores ‘H&A’ having 216 stores across the country. It plans to expand to 450 shops by 2011. Over the past 4-5 years, it has invested heavily to create large production capacities. These capacities plus its integrated business model put it in a unique position to control the input costs while producing high-value-added products. This has enabled it to expand its operating profits at a CAGR of 38% in the past five years, against a 22% growth in the topline. Rising interest costs has so far eroded its profits, but its plans to monetise its properties in near future can address the problem squarely. Considering the huge entry, the company has erected against its integrated business model, the downside appears limited at a P/E multiple of 6x.

CHANGED VALUATIONS
Going out of market’s favour can bring down the valuations significantly. However, if the business model is robust, it doesn’t take long to win back the favour. Pursuing the tariff wars and stringent regulatory recommendations, the telecom industry has been facing a lot of heat and has fallen out of market’s favour. A steeper fall compared to its peers has made the valuations of Reliance Communications highly attractive, where a further weakness appears unlikely. RCom lost over 50% since last October as a sharp drop in telecom fares lowered its profitability. The future, however, appears bright. The company has domestic and global assets in the form of telecom infrastructure in India and under-sea fibre optic network overseas. Its telecom towers are fast gaining tenancy from other operators, which is likely to support its revenue in future. It’s 3G licences win in 13 circles including Mumbai and Delhi gives a better balance between the initial capex fees and revenue prospects. Given its low valuations and asset base, the stock looks attractive at the current levels.
The cement industry also has been worrying over the price realisations and the dampened demand in the monsoon season could keep it unattractive for a while. However, there is no reason a company like JK Lakshmi Cement should trade at half its book value and a P/E of 3.3x. The company is focusing on northern markets where demand is strong and provides the necessary growth momentum over the medium term. Its cement capacity will grow to 5.3 MT from current 4.7 MT during FY11.
One of the key assumptions that have gone in preparing this list is that the current debt crisis in the Europe can be contained and tackled reasonably within the next few weeks. No stock market investments will remain safe if the crisis blows out of proportions into what we saw in 2008.

GAIL : Co’s earnings multiple looks reasonable

GAIL India surprised the market with substantially higher profit numbers, much beyond the analyst estimates. Gail’s net profit for the March 2010 quarter jumped 45% to Rs 911 crore against the analyst expectations of 12-27%. This proved to be the second-highest quarterly profits recorded by the company in its history of over 25 years.

For Gail, it was an all-round performance, as most of its major segments increased revenues as well as margins, thereby boosting profits. The impressive performance came despite a Rs 338-crore subsidy burden and a 10% increase in drywell expenditure against the year-ago period.

Natural gas trading, which accounts for the majority of the company’s revenues, proved to be the only major segment showing some stagnation. Revenues as well as profits from this segment were lower than the year-ago period, while its margins eroded, despite an 8% growth in volumes to 83.6 MMSCMD. LPG and hydrocarbons business — the segment directly affected by the subsidy sharing — reported a growth of 81.6% in profits to Rs 406.7 crore despite subsidy burden, which stood at nil in the March 2009 quarter.

The petrochemicals segment reported its historically highest profit of Rs 447 crore, as the segment’s revenues grew 17% to Rs 822 crore. This was despite a 4% Y-o-Y fall in polymer sales to 109,000 tonne during the quarter.

Gail’s last quarter numbers were also helped by an improvement in other income and a fall in interest and depreciation costs. The company also reported a substantially lower effective tax rate of 30.3% for the March 2010 quarter against 37.2% in the year-ago period.

The company has lined up aggressive investment plans worth $10 billions for the next four years, of which 70% will go in laying pipelines. For this, the company will be raising debt worth $4.5 billion in the next three years — through issue of bonds (35%), term loans (33%), external commercial borrowings (24%) and others (8%).
Surprisingly, Gail’s better results boosted its scrip, which gained nearly 3% in the past two trading sessions to Rs 440.50 on BSE, when the Sensex lost 0.7% at 16876 points. Considering the per-share earnings of Rs 26.2 for FY10, the price-to-earnings multiple (P/E) now works out to 16.8, which appears reasonable for the gas behemoth.

Chennai Petroleum (CPCL):Chennai Petro seen well-oiled

Attractive Dividend Yield, Low Valuations Expected To Restrict Downside On Street

THE fourth-quarter results of Chennai Petroleum (CPCL) affected its share price on Tuesday which lost over 1%, while the overall market ended in black. The scrip has outperformed the market, generating nearly 80% returns over the past one year against an 18% gain in the benchmark Sensex.

CPCL’s results for the March ’10 quarter were substantially below market expectations, as the company posted a net loss of Rs 61 crore against a profit of Rs 418 crore in the year-ago period. In line with the market expectations, gross-refining margins increased to $4.27 per barrel during the quarter from $3.44 in the December ’09 quarter, but were lower against $6.6 in the year-ago period. The company also made a forex gain of Rs 51.6 crore against a loss of Rs 47.6 crore in the yearago period.

It was the sharp jump in CPCL’s staff cost that hurt it the most. The company reported a rise of more than eight-folds in its staff cost to Rs 118 crore, which included Rs 64 crore towards prior periods, as the pay revisions were implemented. CPCL’s other expenditure, too, registered a hefty 25.9% jump to Rs 183.6 crore.

The silver lining to the gloom of the results was the dividend declared by the company. CPCL had discontinued its dividend-paying last year, after steadily raising it over a decade due to its first annual loss. For FY10, the company announced a dividend of Rs 12 per share that translates into a dividend yield of 4.8%.

The company has undertaken several capex projects, including 17.5-MW wind power, 20-MW gas-based power plant and seawater desalination, and a revamp of catalytic reforming unit for converting naphtha into petrol.
Besides, it is debottlenecking its refining capacity by 10% to 10.5 MTPA while upgrading refineries to meet the Euro III & IV norms. It also has plans to set up a single-point mooring (SPM) and upgrade refineries to improve product yield by 7-8% by 2012.

Lower profits in the past year while implementing the capex programme have resulted in a quantum jump in CPCL’s outstanding debt. As on March 31, 2010, CPCL had an outstanding debt of Rs 4,078 crore, which was 2.6 times that of last year. The debt-to-equity ratio, too, stood skewed at 1.2 compared to 0.5 last year.
While the scrip has always been a laggard in the oil industry, attractive dividend yield and very low valuations (price-to-book value stands below 1.1) are expected to restrict downside.

Beckons Industries: Aiming Big

PUNJAB-BASED Beckons Industries, an erstwhile manufacturer of continuous printing stationery, is aiming it big in the energy sector by developing a novel technology to produce oil from algae. The company is in the process of setting up its first pilot plant in Goa for measurement, modification and validation of its technology before commercialising it in the next couple of years. The oil extracted from the algae could be converted to bio-diesel, while the residue can be used as animal feedstock.The company, which is trading at a market capitalisation of Rs 25 crore, posted a net profit of Rs 10.9 crore for FY10, which translates in a price-to-earnings multiple of 2.3. However, majority of the company’s revenues and profits came from trading activities that are likely to get discontinued in near future once the algae based oil production gets commercialised.

The book value of its equity for FY09 was higher than its current market capitalisation at Rs 28.4 crore. The company, which launched a GDR issue in July 2008 to raise Rs 20.5 crore, was carrying cash balance in excess of Rs 21 crore as on March 31, 2009. It is likely to deploy around Rs 10 crore for the pilot plant in FY11.The company has already developed and successfully operationalised the prototype of algae plant and is now planning to put up a pilot plant using flue gases emitted from coal burning. Eventually a commercial plant could be set up alone or jointly with some company emitting flue gases.Once successful, the company will also explore opportunities to licence out its technology to companies generating huge carbon dioxide such as thermal power industry. Such arrangement could also earn it carbon credits.

For investors with risk appetite this company holds the potential of becoming a multi-bagger if it succeeds in commercialising its technology. Although the valuations appear cheap at present, the first revenues from the novel technology remain months away and profits in its current trading business will remain unpredictable.

Aban Offshore: ABAN RIG LOSS

Insurance cover a relief, but EPS may take a hit

THE Aban Offshore scrip crashed 19% on Friday after news broke out that its drillship, Aban Pearl, had sunk in Venezuelan waters.

The drillship, its most lucrative asset, was contracted till January 2015 and earned $358,000 per day. While the loss of this revenue flow can put a great pressure on Aban Offshore’s profitability and cashflows, there may be a possibility of the company resuming the contract with one of its idle assets. The 32-year old vessel was recently refurbished and was working on its maiden contract, post refurbishment.

The market is, however, assuming a worst-case scenario, where the company loses out on the contract and may take a big hit on its annual profits. The loss of profit from this single contract is estimated to shave off between Rs 49 and Rs 67 per share from the company’s EPS estimated for FY11, according to various analysts. Considering the average analyst consensus, which has pegged the company’s FY11 EPS around Rs 210, the fall could be as high as 30%.

Aban Offshore is likely to recover the full cost of the sunken vessel from insurance companies, which is estimated around $235 million — although the process may take a long time. This may enable the company to repay a part of its outstanding debt, which stood at $3.2 billion as on March 31, 2009.

The company has two idle vessels — Aban Abraham and Deep Venture — that could resume the contract on which Pearl was working. Such an arrangement can enable the company to plug the hole in its earnings created by this accident. However, with no details forthcoming from the company, this possibility remains speculative.
The unfortunate incident is a major blow for Aban Offshore as it had recently undertaken a major debt restructuring exercise and increased cash flows through new contracts. The company had recently infused nearly Rs 700 crore of equity and recast its debt obligations to spread out over 10 years, prompting industry analysts to take a favourable view on it.

Despite the accident and a possible negative impact on the company, most of the leading brokerage houses are awaiting clarity from the management and have kept their recommendations under review.

MRPL: Refinery expansion to boost margins

INDIA’S largest public sector standalone refinery MRPL reported a 58% fall in net profit to Rs 253 crore for the March 2010 quarter on weaker gross refining margins (GRM), stronger rupee and lower refinery throughput. MRPL’s gross refining margin — the differential between sale proceeds of refined products and the cost of crude oil required to produce it — narrowed by 30% to $5.25 per barrel from $7.54 in March ’09 quarter.

A stronger rupee trading at 45.6 against the US dollar meant that the GRM in rupee terms was even lower. For the March ’10 quarter the GRM stood at Rs 240 per barrel — 38% lower as against Rs 390 year ago, when a US dollar was worth Rs 51.45.

MRPL also had to take a partial shutdown for over 45 days to revamp gasoil desulpherisation unit to meet Euro III and IV norms for the diesel production. This brought down the refinery’s throughput 10.5% to 3.06 million tonne during the quarter. The refinery can now produce 5200 tonne of diesel per day of these higher specifications. These three factors greatly eroded the company’s profitability. However, forex gains worth Rs 166.7 crore during the quarter as against forex loss of Rs 188.53 crore in the March ’09 quarter supported the profits. Other income for the quarter also rose by 36%, while staff costs came down 35.7% as the finalised salary revisions were adjusted against provisions made earlier. The company continues with its refinery expansion project that will take its rated capacity to 15 mtpa from present 9.69. This Rs 12,400-crore project is scheduled to complete by October 2011. The refinery’s operating level remained beyond 12.5 MTPA for last four years, which will go up even further post this expansion. The project will also enhance its ability to produce better quality fuels even from worse quality crude oil.

As part of this expansion, the company is also setting up a 450,000 TPA polypropylene unit at a capital cost of Rs 1800 crore. The company has received Rs 5,000 crore of loan from ONGC and Rs 200 crore from Oil Industry Development Board at discounted interest rate. While in the near future the recent Euro III/IV upgradation is set to earn it slightly better margins, MRPL’s profitability will largely depend on the trends in the GRMs globally. The ongoing refinery expansion project, which is still 18 months away from completion, will provide it a great booster as volumes as well as margins widen.

RALLIS India: Rallis may maintain growth tempo

A Normal Monsoon & Co’s New Dahej Plant May Serve As Key Triggers For Uptick

RALLIS India has become the second-most expensive agrochemical company following a strong run-up in its share price over the past one year. With a price-to-earnings multiple (P/E) of above 18, it’s next only to Bayer Cropscience. The Rallis scrip has nearly tripled in the past 12 months as against the 47% gain in the benchmark Sensex.
In each of the four quarters of FY10, the company’s results showed robust growth in net profit. Even in the fourth quarter ended March 2010, net profit jumped 121% to Rs 21.8 crore, despite an 11% growth in its net sales.
Apart from an improvement in the operating profit margin, Rallis also benefited from a rise in other income followed by fall in interest and depreciation costs. On a whole-year basis, the company’s net profit from operations crossed the milestone of Rs 100 crore.
The company has proposed to offer one bonus share for every two shares held. It has paid a dividend of Rs 18 per share during FY10, which gives a dividend yield of 1.2%.
Rallis has been successful in implementing most of its growth strategies with a focus on better working capital management, export growth, new product launches and expanding capacities. As a result, its operating margin has expanded by 330 basis points to 18.5% in FY10, from the year-ago level. Moreover, 31% of the company’s revenue came from products introduced in past three years.
The company is setting up an agrochemical plant in the Dahej Special Economic Zone with a capital expenditure of Rs 150 crore. The plant is set to commence operations by June 2010 with annual production capacity of 5,000 tonne that can generate cumulative revenues over Rs 500 crore in its first three years of operations.
An expectation of evenly spread-out, normal monsoon this year and commissioning of the new Dahej plant may serve as key triggers for the company’s growth, going forward. Stability in raw material prices and its ability to introduce new products at regular intervals will improve the company’s performance. Rallis’ growth momentum is expected to continue in the coming year, justifying its rich valuations.

SRF firmly on the growth track

Rising Profits, Healthy Dividend Yield & Capex Plans Ramp Up Attraction Quotient

GURGAON-BASED diversified company SRF came out with substantially superior results for the March 2010 quarter as its net profit jumped more than five-fold to Rs 110.6 crore, while its revenues jumped 65.6%. All its segments made a strong recovery in revenues as well as profitability, making it an all-round performance.
SRF’s technical textiles business continued its strong growth momentum from preceding quarters to post a major turnaround in the March 2010 quarter. The segment’s profits stood at Rs 48.4 crore as a
Rs 9.5 crore in the March 2009 quarter. Doubling of BOPET film capacity by December 2009 benefited the packaging film business, which doubled
its revenues and grew profits by 75%. The chemicals and polymers business benefited from improved realisations as well as introduction of a few new products. This segment grew 22% to Rs 219.2 crore with profit jumping 71% y-o-y to Rs 117.5 crore.
The profits for the quarter were also boosted by a forex gain of Rs 11 crore as a Rs 11.75 crore in the corresponding quarter of previous year. SRF has taken deliberate measures over the
past few years to shift its focus away from the nylon tyre cord fabric (NTCF) business and is expanding its technical textiles as well as fluoro-specialities businesses. The company recently commissioned its 48 million square meters per annum production capacity of laminated fabric at Kashipur. It has also approved investment of Rs 143 crore to set up a lacquered tarpaulin unit that can produce fabric suitable for tensile structures such as tents or polyurethane-coated fabrics for niche industrial applications. The company is also setting up a fluoro-specialities chemical plant at Dahej with initial capacity of 12500 TPA.
The company paid a total dividend of Rs 14 per share during the year, which at the current market price translates in a dividend yield of 6.25%. After accounting for the fourth quarter profits, the company’s per share earnings stand at Rs 53.6. As a result, the price-toearnings multiple (P/E) stands at 4.2.
SRF’s capacity expansion programmes ensure that its growth will continue in coming quarters — although not at the same pace as seen in the March 2010 quarter. Its valuations on the Street appear attractive with healthy dividend yield and growing profits.

RNRL: SC ruling shakes up foundation; co needs a new business model

THE loss of one-fourth of the market value of Reliance Natural Resources (RNRL) on Friday may not be the end yet, after an adverse Supreme Court ruling on its gas dispute with Reliance Industries (RIL).
The stock may be headed towards a bottomless pit given that it has no assured revenue stream and that whatever value it derived was on expectation of gas from RIL at a price lesser than what others were paying. The Anil Ambani-controlled company had always said that gas from RIL’s Krishna-Godavari basin will be the primary source of its value. RNRL’s market capitalisation, which never had any linkage with its earnings or asset base, is set to take a further hit.
“The gas supply contract with Reliance Industries is our company’s primary asset and contributes most of its value, affecting the very basis for its creation,” Anil Ambani had said. The Supreme Court on Friday said that RNRL cannot claim gas at a price lower than the government-set price, based on a secret MoU between Mukesh Ambani and Anil Ambani in 2005. Hence, in a way, the judgement has denied RNRL its mainstay. So, the current market capitalisation of Rs 8,370 crore is hard to justify even after a 25% fall in its market value. The current price-to-earnings multiple, or P/E, works out to 114.6 and price-to-book-value nearly five times. It is, therefore, no wonder that despite the stock being traded on the derivatives segment with high volumes, most brokerages don’t cover it.
RNRL was floated to source and supply fuels — natural gas or coal —to the power plants of the Anil Ambani Group companies, Reliance Power and Reliance Infrastructure. The company’s net profit for the 12 months ended December 2009 rose 3% to Rs 73 crore. Out of that, Rs 31.6 crore came from sale offtake in Reliance Cementation — a subsidiary, that is set up to build cement plants. RNRL has obtained four coal-bed-methane blocks and holds stake in an onshore oil block. It is conducting research on the three petroleum exploration licences it obtained in 2007. A wholly-owned subsidiary plans to lay a gas pipeline between Kakinada and Dadri and distribute gas in cities. All these projects are still in a nascent stage and it won’t be prudent to attach any value to them.
Another growing concern for the company, if it does not make meaningful progress in establishing its businesses, are its $300-million FCCBs due for conversion in around 18 months from now. In the absence of a business, the holders may not be eager to convert them. Even if it happens for some unknown reason, the equity dilution will be as high as 32% which will dilute whatever little earnings the company has. The conversion scheduled for October 2011 may lead to an issue of 52.6 crore shares. RNRL will not struggle to pay as it has Rs 1,550 crore of cash balance with another Rs 570 crore in mutual fund investments, some from the funds raised by issuing 12 crore equity shares and 29 crore warrants to promoters.
With the cornerstone pulled, it may not be long before the edifice collapses, unless a new one comes in place at the earliest, something which appears rather difficult in the near future.

Reliance Industries (RIL): Profits in sight,RIL will step on the gas

Reliance hopes to improve gross refining margins for FY11 as the global industry shapes up. This, coupled with gas profits & a mature petrochem business, could make it debt-free in a few years

AS A RESULT OF THE SUPREME Court ruling that sovereign interest cannot be overridden by private agreements, Reliance Industries (RIL) gets to keep an estimated Rs 3,000 crore a year that might have gone to Anil Ambani and the 2.5 million shareholders of Reliance Natural Resources (RNRL). The end of the five-year dispute translates into a market value of Rs 35 a share for RIL, which had revenues of $45 billion last year. But for RNRL, set up to mainly deal in gas, it has to begin afresh. Buy recommendations on RIL shares are just not ending while there is no analyst coverage for RNRL. Some 14,000 megawatt of power to be produced by Anil Ambani group firm Reliance Power with fuel from RIL is under peril. RIL shares rose 2.3%, while RNRL collapsed 22.8%. Reliance Power ended 9% down at Rs 140.1.
The under-performance of the RIL stock over the past six months in anticipation of an adverse ruling will lead to a re-rating of the stock given that analysts factor in the total Krishna Godavari basin gas business to be worth between Rs 99 and 120 a share.
Now, RIL gets to sell the likely peak production of 80 million metric standard cubic metre at the KG basin D-6 block gas at $4.2 million metric british thermal unit (mmBtu). This is against the claim of RNRL at $2.34 mmBtu as per the memorandum of understanding signed between the brothers at the time of split in 2005.
It is a windfall for RIL that holds 56,000 square km of acreage in the KG basin, which is 42% of the total in the basin. Its most prolific block has estimated reserves of close to 35 trillion cubic feet of gas.
“Overall the company is moving into a trajectory of generating close to $10 billion operating cash flow per annum,” said India Infoline in a note to clients. Fiscal 2011 earnings per share growth will be close to 50% on gas production, and two-year EPS compounded annual growth rate is 35%. It recommends a buy on the stock. It values the KG basin at Rs 295 a share.
Since the market was expecting the Supreme Court to uphold the Bombay High Court ruling that ordered supply of gas as per the family MoU, the ruling came in as a surprise. The underperformance of RIL shares over the past six months compared to the benchmark Sensex was because the markets had factored in the worst-case scenario in its valuations. While RIL rose 6.9%, the index gained 10.5% during the period.
“Recent stock movements suggest the Street is largely pricing in a repeat of the previous court judgment, in which RIL was asked to start selling gas immediately at $2.34/mmBtu,” said a recent report from Goldman Sachs.
RIL may be experiencing tailwinds at this point. The refining industry is gradually seeing an uptrend globally and the company hopes to post better gross refining margin for FY11 compared to $6.5 in FY10.
This, coupled with gas profits and a mature petrochemicals business, could render it debt-free in a few years and open up more acquisition opportunities. The recently-concluded Atlas Energy stake buy for shale gas acreages in the US will contribute revenues in three years.But for some analysts it is a time to exit the stock given the prospects of renewed painstaking negotiations and the potential double-dip in the global economy. Broking house CLSA said in a note that the sum of the parts value for RIL rises to Rs 1,093 in the best case scenario, from Rs 1015. “I would be a seller of RIL into this,” it wrote.