Expansion to Help Kajaria Win With a Big Margin

Current score is around 10 times its earnings for trailing 12 months

The spectacular earnings growth seen in the past couple of years is set to sustain for India’s leading ceramic tile manufacturer Kajaria Ceramics in FY12 as well. The company has aggressively added capacities and taken steps to improve margins that will maintain its growth momentum.
After recording three years of stagnating profits between FY07 and FY09, the company moved on to a strong growth path in FY10 with a four-fold profit jump over FY09. The growth momentum has continued in FY11, with the company posting a 83% profit growth in the first nine months to . 42.2 crore. The company now appears set to cross . 1,000 crore of turnover and . 60 crore of net profit in FY11.
Due to rising demand and capacity constraints, the company currently depends significantly on trading, which constitutes 45% of total revenues. The manufacturing business typically earns higher operating profit margins around 20% while the trading business has 8-10% margins. The company’s combined operating profit margin stood at 15.8% in the first nine months of FY11.
The company recently completed expansion at its Rajasthan facility to add 6-million square meters (MSM) of vitrified tiles at a cost of . 130 crore. At the same time, it also completed conversion of 2.6 MSM ceramic tiles capacity to vitrified. Earlier in February 2011, it had acquired a 51% stake in Soriso Ceramics with around 2 MSM capacity of ceramic tiles.
All these steps are expected to add another . 300 crore to total revenues in FY12 while improving margins as the share of manufactured products in its overall sales goes up.
Expansions were mainly funded from the company’s internal accruals, which means its debtto-equity ratio has, in fact, improved, of late. From 1.67 at the end of FY10, the debt-to-equity ratio improved to 1.3 by end-September 2010 and is expected at 1.2 for end-FY11.
In January, the company also tied up with a Turkish manufacturer of ‘VitrA’ brand of sanitaryware and bathroom fittings. Kajaria will be its exclusive importer and sole distributor for India. Trading in these valueadded products will also help the company improve its operating margins.
Kajaria’s scrip has widely outperformed broader markets consistently over the past one year. The scrip gained 34% in past one year against around 8% gain in the BSE Sensex. Its current market price, which is just 10% below its 52-week high, is around 10 times its earnings for trailing twelve months.

GUJARAT GAS: Monopoly Helps, But Uncertainties Galore

Gujarat-based city gas distribution (CGD) company Gujarat Gas is set to enter an uncharted territory in terms of frequent price revisions as its reliance on imported LNG grows. Although the basic economics of natural gas versus liquid fuels remain favourable, the company needs to prove viability and sustainability of its new business model. The scrip is expected to face headwinds on bourses till these uncertainties subside.
Gujarat Gas, which operates India’s largest CGD network in terms of gas volumes in Surat and Bharuch districts, supplies 83% of its volumes to industrial retail customers. Due to its relatively small volumes — one-sixth of the total or 0.55 million cubic meters daily — to CNG and domestic customers it gets a lower priority in the government’s gas allocation policy. As a result, the company has always sourced nearly 95% of its gas at marketdriven prices.
Still, till a couple of years ago, the company’s gas sourcing was entirely domestic and prices were fixed for longterm. However, in early 2008, the government granted GAIL marketing rights of gas produced by Panna-Mukta-Tapti fields, which have been the largest supplier for Gujarat Gas. With no gas being available in local markets, Gujarat Gas started experimenting with imported LNG in 2009. During 2010, almost 26% of its volumes — 37% if just the December 2010 quarter is considered — came from imported LNG against 13% last year. This is set to go up in future, considering that it has now tied up for three years of LNG with a parent group company. The LNG imports have no doubt given the company a volume-led growth impetus. However, they are on a spot basis, where prices fluctuate widely. As LNG accords higher and higher importance in its gas sourcing mix, the company will face a tough task of passing on higher costs to its customers to maintain margins. As gas prices go up, the immediate challenge for the company will be to maintain its sales volumes since more than onefifth of its current volume competes with cheaper coal as alternate fuel. The company will have to focus mainly on replacing liquid fuels and may go for differential pricing for different consumers. This puts the company in an unprecedented situation where its ability to maintain margins or sale volumes remains uncertain. The monopolistic position and inherent benefits of natural gas usage are the two key factors in favour of Gujarat Gas, which will ensure its future growth. However, the increased uncertainty compared with other natural gas players such as Indraprastha Gas means the company is unlikely to carry on with its premium valuations.

CAIRN INDIA: Royalty Cloud Caps Stock’s Ascent with Oil

At a time when the episode of Cairn’s acquisition by Vedanta is unfolding, the shareholders of the petroleum explorer are facing a confusing predicament. With crude oil prices soaring above $100, a number of broking houses are valuing Cairn’s shares at . 420 or higher apiece. This is higher than the . 405 per share at which Cairn’s promoters are trying to sell it off. However, ONGC has refused making a counter offer, saying even . 405 is on a higher side. Whom should a Cairn’s investor believe?
Cairn’s scrip, which had maintained a close relationship with global crude oil prices until July 2010, has stagnated since then although oil prices gained 35-40%. The key factor has, of course, been the Cairn Energy’s decision to sell its controlling stake in the company at . 405 per share to Vedanta, setting . 355 as the open offer price for retail shareholders.
Just as the RIL-BP deal last month established a benchmark for valuing RIL’s exploration assets, the Cairn-Vedanta deal created a benchmark for Cairn’s assets, which didn’t exist earlier. This effectively snapped the link between Cairn’s share price and crude oil prices. Capital in its research report in February 2011 called the deal “a value destroyer one for Cairn India shareholders,” arguing that without the deal the scrip would have run up to . 450 levels along with crude oil prices.
Some foreign broking firms have in recent past recommended the company to retail shareholders giving price targets 4-10% higher than what Vedanta would end up paying for the controlling stake. Morgan Stanley, for example, had set a price target of . 429 in its January report, while Singapore-based Mirae Asset and Hong Kong-based Kim Eng Research estimated the worth of Cairn’s share price between . 420 and . 448 in February.
The key to understand this mess is actually the point at the heart of the standoff between Cairn India and ONGC — royalty payments. As per the arrangement, ONGC is paying the entire royalty for Rajasthan project, but claims — giving reference of the production sharing contract (PSC) — that it is ‘cost recoverable’ or recoverable from the project’s revenues. However, Cairn doesn’t accept this and even the abovementioned foreign broking firms appear convinced that Cairn will not be made to bear the royalty payment burden in any way. On the other hand, if ONGC were to acquire Cairn, it would still have to continue paying the royalty at 100%. Thus, ONGC’s valuation view on Cairn implicitly discounts for the royalty payments as well. Considering the royalty rate at 20%, it is no wonder that ONGC doesn’t find Cairn attractive at . 405.
This basically means that the government’s decision on royalty payment is the biggest uncertainty for Cairn’s share price. If ONGC’s view is upheld, Cairn India could see a substantial derating on bourses.

NATURAL GAS: Widening Oil-Gas Price Gap Positive for Gas Cos

At a time when global crude oil prices continue to stay high above $100 per barrel, the price of its hydrocarbon sibling natural gas is actually coming down steadily. US Henry Hub prices, which are considered the benchmark prices the world over, have fallen to below $4 per million British thermal units (MMBTU).
In the past one year, crude oil prices have gained more than 25% on NYMEX to $100 per barrel level. However, natural gas prices are down 28% to $3.93 per MMBTU. This is mainly as a result of natural gas production rising faster than consumption, thanks to the advent of shale gas. In fact, the US is also likely to slow down its gas imports. The country, which was importing around 8.9 trillion BTU of natural gas every day from Canada in 2010, is expected to import only 8.4 trillion BTU in 2011. Even the LNG imports, which are relatively small at around 1.2 trillion BTU per day, are likely to stagnate.
Natural gas prices are likely to remain benign even for the entire cur-rent year, according to Energy Information Administration (EIA) of the US Department of Energy. The EIA projects natural gas spot prices to average $4.1 per MMBTU in 2011, down 6.6% from last year, and anticipate some recovery only next year. “The EIA expects the natural gas market to begin to tighten in 2012, with the Henry Hub spot price increasing to an average of $4.58 per MMBTU,” its latest short-term energy outlook mentioned.
A barrel of crude oil is equivalent to 5.8 MMBTU, meaning the ratio of oil price to natural gas price should be around 1:6. However, the ratio today has come down to somewhere around 1:25. Unfortunately, this trend doesn’t apply to the liquefied natural gas industry, which is full of several long-term bipartite contracts that link gas prices to oil. Considering that oil prices are expected to stay around $100 in 2011, the wide gap between these competing fuels is unlikely to narrow down in near future. It will, however, provide an impetus for a fast shift towards cheaper natural gas. Domestic natural gas players will stand to benefit from this trend.

Nitin Fire Bets on Strong Order Book to Boost Margin Growth

At . 75.35, stock trades at a price-to-earnings multiple of around 9.8 times

Mumbai-based fire protection services provider Nitin Fire has witnessed a declining profitability trend in the first nine months of FY11, as raw material and staff costs rose. This also reflected in its volatile stock performance. However, the company is upbeat about the coming quarters with a strong orderbook position and oil likely to flow from the NELP block it had invested in.
Nitin Fire Protection (NFPCL) offers turnkey fire protection services to commercial and industrial clients and has an annual consolidated turn-over of around . 450 crore and a market cap of . 475 crore. The company has diversified by setting up the facility to manufacture high-pressure CNG cylinders in Vizag Special Economic Zone (SEZ).
Since the beginning of FY11, the company has been facing margin pressures, due to rising raw material and staff costs. The operating profit margin, which averaged at around 18.7% during the four quarters of FY10, came down to an average of 13.1% in FY11 so far. However, owing to the strong topline growth, the company reported a 48.5% net profit growth during the nine months compared with the year-ago period.
The company’s December quarter numbers were boosted mainly due to sale of a 60% stake in its subsidiary Nitin Cylinders to US-based Worthington Industries. The profit of . 14 crore from the stake sale enabled the company report its highest-ever quarterly net profit of . 19.3 crore. However, it was just 38% higher on a YoY basis. The company is carrying an order book of nearly. 175 crore for its fire protection business to be executed over the next four months. The company is taking extra efforts to improve its visibility in global markets, which has resulted in international orders representing 80% of its cur-rent order book.
The company holds a 10% stake in a NELP-VI oil exploration block in Rajasthan with GAIL and GSPC as operators. The four exploratory wells drilled in the block have discovered a total resource base of 32 million barrels. The production of oil is likely to start in the second half of FY12.
The company’s scrip, which had surged in December 2010 on reports of the stake sale in Nitin Cylinders, came down due to weak results. However, in the past few days it has again climbed back. At the current market price of . 75.35, the scrip trades at a price-to-earnings multiple (P/E) of around 9.8 times, excluding the impact of stake sale. The company needs to manage its operating margins well in the coming quarters to benefit from exciting sales growth.

Japan Tsunami may Shore up Indian Refiners’ Margins

The earthquake and subsequent tsunami have crippled Japan’s energy infrastructure and that may lead to the country importing more LNG and petroleum products to meet its immediate energy needs. This will be a positive for petroleum refiners but a negative for importdependent natural gas consumers, although it is too early to know the extent.
At least three nuclear power plants and two petroleum refineries were directly impacted and shut down due to the tsunami, resulting in three northern prefectures, or states, in Japan being left without power and heating. However, media reports said a total of 10-12 nuclear power plants with a combined capacity of 8.8 gigawatts and five refineries with a capacity of 1.2 million barrels per day were shut down as a precautionary measure.
The situation resembles the shutdown of one-third of the nuclear power generation capacity in Japan after an earthquake in 2007. It had necessitated a substantial jump in imports of liquefied natural gas (LNG) in Japan, which is the world’s largest importer of LNG.
This ensured a jump in spot LNG cargo prices, which sustained for more than a year. A similar scenario is likely to occur in the coming months. In fact, Platts, the world’s leading global energy information provider, reported a 5% jump in spot LNG prices to $9.9 per unit immediately on news of tsunami.
The refinery outages at home and a cut in the availability of nuclear power mean Japan will have to increase imports of refined petroleum products as well. In particular, the country is expected to import a lot more oil to run its power plants. A report from Platts said Japanese tsunami is ‘bullish’ to the global fuel oil market in the coming months although there was no immediate reaction seen.
On the other hand, imports of crude oil in Japan are likely to fall, which could create a glut-like situation in the global markets considering it is the world’s third-largest crude oil consumer at around 4.4 million barrels per day and imports its entire requirement. As an immediate reaction to the tsunami, crude oil prices dropped nearly 1.5% on Friday on concerns of likely fall in Japan’s industrial activity.
However, things such as the extent of damage, how long the domestic capacities stay offline and the country’s rebuilding efforts will determine how much the energy markets get affected.
The petroleum refinery industry, which is seeing a buoyancy in margins, thanks to improved demand for diesel globally, is likely to benefit further from the current situation in Japan. OPEC’s latest monthly update on oil industry explains the industry’s good fortunes, “the sustained momentum in the middle distillates market has received further support from improved diesel demand due to the rise in industrial activity across the globe and continued strong demand for diesel from China on the back of increased trucking activity in response of the current drought affecting the north of the country.”
From the point of view of domestic markets, the independent petroleum refiners, such as Mangalore Refinery, Reliance Industries or Essar Oil are the key beneficiaries of the trend. Whereas, consumers of LNG, particularly spot LNG, such as Gujarat Gas could see their margins under pressure in the coming months.

An EXIT To Wealth

Open offers and buybacks give a lot of scope for investors to make healthy profits if they are alert and aware of the pitfalls. But investors need to carry out their own research on the company before taking the right call. ET Intelligence Group’s Ramkrishna Kashelkar tells you how to go about it

IT will be impossible to find an investor on Dalal Street who hasn’t heard of the terms ‘open offer’ and ‘buyback’. For many, these corporate actions mean a surge in share prices and quick profits. In fact, stocks do tend to go up in most cases when an ‘open offer’ or ‘buyback’ programme is announced offering a lucrative exit opportunity to the shareholders. However, when deciding on how best to respond to them, many investors are often confused. Companies, in need of funds, raise money through qualified institutional placements (QIPs), rights issues and preferential allotments. On the other hand, cash-rich companies, utilise excess cash to consolidate their holding through open offers, buyback and delisting. These special situations offer a lot of scope for making healthy profits if an investor is alert and aware of the pitfalls.

OPEN OFFER:
Open offers have always been a preferred option for promoters and corporate acquirers and raiders to increase their stake in their firms. The Securities and Exchange Board of India’s (Sebi) ‘Substantial Acquisitions and Takeover Code’ also mandates a stakeholder to launch an open offer in certain cases. (See box: Codes Decoded)

BUYBACK:
Like dividends, buybacks are also regarded as an important mechanism through which a company rewards its shareholders. Unlike open offers, which are most often triggered by the Sebi’s guidelines, buybacks are voluntary decision by the company. Hence, it becomes necessary to check out the trigger for the company to go for a buyback.

WHY A BUYBACK?
Reasons to go for a share buyback are varied. Not all of them are published, though. A smart investor will go beyond the printed words and figures to find out if there is much more to material developments than what the company has disclosed.

Best use of capital:

A company management’s goal is to maximise shareholders’ value. If the management is unable to find lucrative enough options to deploy its funds, it is better to return the cash to shareholders. Huge unutilised cash balances tend to dampen the ratios of return on capital employed (ROCE), thereby indicating an inefficient use of capital.

Tax efficient way of returning wealth to shareholders:

Due to differential tax rates on dividend distribution and capital gains, buyback offers can be used as a tax efficient way of returning wealth to shareholders. For instance, Piramal Healthcare chose the buyback route to reward its shareholders after it sold a part of its business to Abbott Laboratories in May 2010. The company has agreed to buyback 20% of its equity at 600 each, which was at a 16% premium to the market price on the day of the announcement.

To support the share price:

An overall weak market outlook can bring down the stock price substantially.

Reaping A Rare Harvest
In such a scenario, a management may decide to support the share price with a buyback to boost investor confidence. For example, after its three buyback programmes during FY09 and FY10, Anil Ambani controlled Reliance Infrastructure has again come out with a buyback offer in February 2011 citing ‘Send a strong signal to the capital markets on the perceived under-valuation of the Company’s share price’, as one of the objectives.

To fight the impact of equity dilution:

A share buyback reduces the number of shares in circulation and hence is a great measure to fight equity dilution caused by events such as employee stock ownership plans (ESOPs) or bond conversion.

Increase promoters’ stake:

A buyback offer could be unveiled with a view to enable the promoter group to increase their stake in the company. Since the shares bought back are extinguished, those who are not participating in the offer will see their stake in the company’s overall equity going up.

The Price Detector
When it comes to open offers, the Sebi has issued guidelines to determine the minimum price at which the open offer can be made. However, there is no upper limit. According to the Sebi rules, the highest between the average prices of the past 26 weeks and the past two weeks should be considered as the minimum price for an open offer.
Buybacks are generally voluntary on the part of the company and, hence, there is no mandate on its minimum or maximum price. However, only when the company plans to delist its shares, a ‘floor price’ has to be discovered in line with the Sebi’s guidelines.
A reverse book-building process follows where retail shareholders can tender shares at any price higher than the floor price. The price at which maximum number of equity shares are tendered becomes the ‘Discovered Price’. For example, in case of a recent delisting offer by Nirma the floor price was 218, however, the final ‘discovered price’ for delisting was 19% higher at 260.
However, when it comes to how high an open offer or buyback price should go, it is the acquirer’s need and financial ability that play a key role.
For example, when JSW Steel acquired controlling stake in Ispat Industries for 2157 crore, the open offer on 23rd December 2010 came at a price which was at 13% discount to the prevailing price of Ispat. However, during February 2010 when the takeover battle for Fame India was in full swing, the open offer by Reliance MediaWorks came at a premium of nearly 64% to the then prevailing offer by Inox.
This is also true even in the case of buybacks. For instance, after the failed delisting offers by MNC subsidiaries such as Goodyear and BOC India, the delisting offer by another MNC subsidiary Atlas Copco has launched an attractive offer. The promoters indicated their willingness to buy shares at 58% premium to the discovered price of 1426. This enabled the company attract the required number of shares for delisting.

The Action Plan
An open offer or a buyback can be an exciting but temporary opportunity to make profit for investors. However, investors need to take an informed decision based on the intentions of the acquirer, the offer price and the company’s future prospects.
At the same time, keep in mind the fact that once the window of opportunity closes, the share price is likely to go back to its pre-offer levels. For example, the shares of BOC India or Goodyear fell 30-40% from their peaks on failure of their delisting offers. Similarly, the shares of Pioneer Distilleries plummeted over 50% after the open offer by United Spirits at 101 per share ended.
It is, therefore, important for investors to carry out a fundamental research on the company to identify its current fair value and expected fair value a year down the line. If the fair value in near future is likely to cross the offer price, one should hold onto his investments. It shouldn’t, therefore, come as a surprise that in four out of six open offers, which are currently on, ET Intelligence Group is recommending investors to hold onto their investments.
Another alternative for investors is to sell in the open market when the stock prices surge on news. An avid investor can actually fare much better by selling out in the market before the offer closes and covering back once the prices fall after the offer closes.

A Pitfall To Avoid
Investors must resist temptation to play the arbitrage game by buying in the open market after an open offer announcement and selling in the offer. This is risky since investors may get stuck up with a portion of their holdings, which will be worth much less in the market post-offer.
Even after an open offer is announced, the market price of the scrip tends to remain somewhat below the offer price, which one may regard as arbitrage opportunity. However, since the offer is for a limited number of shares, after the offer closes investors are likely to find themselves with a portion of their holding not accepted by the acquirer. If the market price crashes post-offer, the gains made in the offer are likely to get diluted or even negated.
For example, in case of the 2008 Ranbaxy’s acquisition by Japanese Dai-ichi Sankyo, the market price on the date of open offer didn’t reappear for nearly 28 months. If an investor had tried to buy in the open market on open offer news, she would be stuck up for long with a part of her holdings below cost. .

Conclusion
The special opportunities offered by the ‘open offers’ and ‘buybacks’ are too attractive to miss. Investors need to do their homework, resist the temptation to trade and try to estimate how things will pan out a year later to take the best call. Often, holding onto his investment, rather than taking a quick exit, could turn out to be the best strategy for an investor.

THE DISTINCTIVE FEATURES

BUYBACK
• DONE BY the company itself
• GENERALLY, the number of shares reduce after a buyback
• BUYBACK can be through open market operations or through the tender route
• BUYBACKS, are voluntary on the part of the company
• THERE is a maximum limit or ceiling up to which a company can raise its equity through buybacks during a year

OPEN OFFER
• DONE BY promoters or any other third party other than the company
• OPEN OFFERS, don't result in change in the number of outstanding shares
• OPEN OFFERS are typically through the tender route only
• IN MOST instances, open offers are mandatory rather than voluntary
• THERE is a minimum limit of 20% with no maximum limit in case of open offers

Chennai Petroleum: The Fairest Of Them All

Chennai Petroleum’s current valuations and future prospects make it a promising investment opportunity in the domestic refining sector
PUBLIC SECTOR refinery companies are witnessing a revival in investor interest following a global trend of rising refining margins. During the recent rally, most of these companies touched their 52-week peaks. Among these, standalone refineries look more attractive than integrated companies.
Standalone refiners have petroleum-refining facilities and rely on the integrated players to market and sell their products in the domestic retail market. Integrated refiners such as IndianOil (IOC), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) have refining, as well as retail marketing channels.
Due to government regulation on retail prices of major petroleum products, integrated refiners suffer from under-recoveries arising out of sales of these products. On the other hand, standalone refiners no longer need to share these under-recoveries with their integrated counterparts and this makes them more attractive in the oil refining sector.
Mangalore Refinery and Petrochemicals (MRPL), Chennai Petroleum (CPCL) and Bongaigaon Refinery and Petrochemicals (BRPL) are the listed players in the standalone refining space. To help readers find the right pick in this segment, IG did a comparative analysis of the three companies.
MRPL:Located on the western coast, MRPL, an ONGC subsidiary, is the largest among the three with a refining capacity of 12 million tonnes per annum (mtpa). The MRPL scrip has gained nearly 70% in the past one month alone. At the current stock price, MRPL’s enterprise value as a multiple of its operating profit (EV/EBIDTA) is much higher than that of the other two refiners. Also, its refining capacity is valued way higher (m-cap/refining capacity). The refinery is operating at high utilisation rates, recording nearly 106% throughput during the first half of FY08. For future growth, MRPL is expanding its capacity to 15 mtpa by ’10. Given a healthy operating performance and promising future ahead, the MRPL scrip has already run up substantially and the current valuations appear to be on the higher side compared to its peers.
BRPL: BRPL, the smallest in the lot, is IOC’s subsidiary. It has gained over 40% on the bourses during the past one month. At the current price, its stock attracts the lowest P/E compared to the P/Es of other two refineries.
As BRPL operates in the North-East, it enjoys excise duty exemption, which has enabled it to report consistently higher operating margins compared to the others. BRPL’s return on capital employed (RoCE) has also been substantially higher and it enjoys a de-leveraged balance sheet. Considering the last dividend of Rs 3.5 per share, the dividend yield works out to a neat 3.5% — the highest among its peers.
However, BRPL faces problems regarding sourcing crude oil and it has not been able to utilise its capacities fully. Another problem — and a major one — is that, BRPL is set to merge with IOC at an exchange ratio of four IOC shares for every 37 BRPL shares. This limits the upside in the scrip. In fact, at the current price of IOC shares, BRPL shareholders stand to lose around Rs 30 per share.
CPCL: CPCL has so far been a laggard on the bourses, gaining just around 24% during the past one month. Its fundamentals are healthy and its expansion plans will drive future growth. The company’s low equity base means that any profitability growth brings in a more than proportionate jump in its share price.
CPCL’s current valuations appear cheap on various parameters. Both the key valuation multiples — m-cap/net sales and EV/EBIDTA — are at the lower end compared to the other two refineries. Similarly, its refining capacity is valued very cheap.
The company’s performance has been robust historically and it has drawn up plans for future profit growth. Recently, the company commissioned a 17.6-mw capacity wind power project, which is eligible for carbon credits. CPCL is also expanding its refining capacity to 12 mtpa from the current 10.5 mtpa. The company has been continuously investing in improving its energy efficiency, as well as its product mix, which will help it to improve its margins, going forward. Relatively cheap valuations make this company an ideal choice of investment. Investors with a 12-month horizon can consider investing in it.

Jain Irrigation Systems: NURTURING HOPES

The recent dip in Jain Irrigation’s valuations appears temporary, offering long-term investors a good entry opportunity

A dampened December 2010 quarter, doubts over its new initiatives and removal from the MSCI index have brought down Jain Irrigation’s valuations recently. Globally, high food prices and the government’s focus on improving farm productivity mean the company’s future growth prospects remain intact. Long-term investors should seize the opportunity to buy into this scrip, particularly when it is available cum-bonus.

BUSINESS: From being a PVC pipes maker, Jalgaon, Maharashtra-based Jain Irrigation Systems (JISL) has come a long way to emerge as India’s leader in micro-irrigation equipment with around 50% market share.
Today, the company is totally focused on Indian farmers and produces tissue culture plants, hybrid seeds, greenhouses, solar water heaters and lanterns, among others. It has also emerged a leading processor of mangoes and onions.
In FY10, nearly 48% of its revenues came from micro-irrigation systems, 38% from PVC pipes and sheets and 14% from fruit pulps and dehydrated onions. The company’s micro-irrigation business is dependent on the government’s subsidy scheme under which more than 50% of the cost for setting up a micro-irrigation system is borne by the government. However, delays in government disbursals have resulted in bloating the company’s working capital and higher interest burden over the past few years.

GROWTH DRIVERS: The 4% annual growth target for agriculture in the Eleventh Plan period as well as high food prices have driven the government’s focus on various financial assistance schemes towards boosting productivity of the Indian agriculture. Even today, nearly half of arable land in India is rainfed. In June 2010, the government upgraded its erstwhile micro-irrigation scheme (MIS) to a National Mission on Micro Irrigation, which is expected to boost the convergence of micro irrigation activities under various other government programmes such as National Food Security Mission (NFSM), Integrated Scheme of Oilseeds, Pulses, Oil Palm & Maize (ISOPOM) etc for increasing water use efficiency, crop productivity and farmers income.
The Union Budget for FY12 also increased allocation for Rashtriya Krishi Vikas Yojana (RKVY) by 16%, which included a 15% rise in allocation for micro-irrigation to 1,150 crore. Similarly, the Budget has planned for 27% jump in farm credit at 4,75,000 crore during FY12. It also increased the interest subvention to 3% reducing the farmers’ effective cost of debt to just 4%. All these schemes are set to maintain robust demand for micro-irrigation projects in the country in the coming years.
The company is trying hard to bring down its debt burden and lower the impact of interest costs, which ate away nearly 28% of its gross profit in 12-month period ended December 2010. It is planning a $150-million preferential equity issue and setting up an NBFC, which can finance farmers for buying micro irrigation equipment in future. Apart from repaying debt and funding NBFC, a part of the amount raised will also be invested in boosting its solar equipment business. The company’s success in bringing down its debt will boost its profits in future.

FINANCIALS: The company’s net sales have grown at a cumulative annualised growth rate (CAGR) of 24.6% in the past five years, while the profit grew at 37.5%. In the December 2010 quarter, the company’s operating performance weakened due to delayed rains. The company booked 38.9 crore of VAT refunds during the quarter, in accordance with an Industrial Promotion Scheme of the state government.
The company’s debt stood at 2,200 crore as at the end December 2010 or a debt-equity ratio of 1.5. The company has a history of healthy cashflows. Its board has proposed a bonus issue of shares with differential voting rights in 1:20 proportion.

VALUATION: The scrip is currently trading at a price-toearnings multiple of 23.5, which is lower on a historical perspective. The scrip traded at an average P/E of 34.6 during 2010, at 31.9 during 2009 and at 25.6, 29.1 and 24.7 in the preceding three years. In view of the company’s continued bright growth prospects, the valuations appear attractive.

Rich Valuation May Limit Guj Gas Flare-up

The stock is now trading at 19.8 times its earnings for 12-month period in 2010

The scrip of Gujarat Gas gained 17.8% in just three trading sessions, after announcing excellent numbers for the December quarter and a hefty . 12 per share dividend. The inspiring performance was fuelled by higher gas volumes as well as increased sales price that boosted margins. However, rich valuations are expected to limit further upside in the scrip in near term.
The company’s gas volumes grew 13% to 309 million metric standard cubic meters (MMSCM) in the December 2010 quarter from 274 mmscm in year-ago period. Nearly 83% of these sales were to industrial large consumers while CNG and domestic users of natural gas made up the rest 17%.
The company, which had to resort to expensive imported LNG in the September quarter, saw its cost of raw material dropping substantially in December as the disrupted supply from the Panna Mukta Tapti (PMT) fields was restored. The cost per cubic meter in the September quarter stood at . 12.1, which dropped to . 10.9 in December 2010.
The selling price, however, was higher in December at . 16.5 per SCM compared with . 15.8 in September and . 13.8 in year-ago period. This substantially boosted the company’s operating margins, which stood at 25.1% against 19.9% in the year-ago period. The company posted a 77% jump in net profit to . 82 crore with 33% higher net sales during the December quarter to . 504.3 crore.
The company’s growth strategy is, however, mainly focused on intensive growth in its existing area of operation and extending only to immediately adjacent areas. For example, in the recent round of bidding conducted by PNGRB for seven cities, Gujarat Gas bid only for the Bhavnagar region.
It has signed a 39-month supply contract with a parent group company for sourcing 0.5 million tone of LNG per annum to meet the growing demand of natural gas in the areas it operates. As the incremental growth starts coming from the regassified LNG, the company is expected to face margin pressure.
The company remains a cash-rich debtfree company, which ended the year 2010 with . 540 crore of cash. The . 12 per share dividend that the company announced for the year will mean an outflow of around . 180 crore, which will leave the company with resources worth . 360 crore for investing in future growth. Thanks to the run-up in the past three sessions, the scrip is now trading at 19.8 times its earnings for the 12 months of 2010. The dividend yield works out to 3%. In spite of the excellent performance, the valuations appear rich, limiting further upside in the stock.