THIRUMALAI CHEM: Cost-efficiency, Profitability Push to Give an Edge

Management changes and operational improvements can make Thirumalai Chemicals a turnaround candidate. The company, which had suffered long under sharp commodity cycles, is taking efforts to become more cost-efficient and move up the value chain. The results are already visible. Long-term investors can buy into the scrip. 

BUSINESS Thirumalai Chemicals is a Mumbaibased manufacturer of petrochemical phthalic anhydride that is used in paints and plastics. The company also has a 40,000-TPA maleic anhydride plant in Malaysia. Being dependent on commodity chemicals, the company's profitability in the past suffered from sharp commodity cycles. 

GROWTH DRIVERS The company has taken a number of transformational steps in the past one year that have started paying off. After running since inception under family management, the company in the past year hired a professional as CEO, which helped it review the business thoroughly and take steps for improvement.
Over the past one year, the company has worked on reducing costs and energy consumption, improving operating cycles, better fund management and higher capacity utilisation resulting in improved competitiveness and profitability. The company is focusing on growing its specialty chemicals business, catering to food processing and cosmetics industries, which today represents around 15% of total revenues and enjoy better margins.
Its Malaysian subsidiary has turned around in the current financial year and is now profitable.
The company also benefited by the 10% safeguard duty imposed on import of phthalic anhydride in Jan ’12, subject to review after one year. 

FINANCIALS In the past five years, Thirumalai’s net sales grew at a cumulative annualised growth rate (CAGR) of 14.2% to Rs 1,051 crore in FY12. The profits kept fluctuating and dropped to just Rs 0.9 crore for FY12 on a consolidated basis. For the Jun ’12 quarter, the company, however, displayed the results of its turnaround process and posted Rs 16.8 crore in net profit on a turnover of Rs 297.5 crore. Although fluctuating from quarter to quarter, FY13 profits will be much better than FY12. 

VALUATIONS The company is currently trading at a price-to-earnings multiple (P/E) of 4.4 based on earnings for trailing 12 months and over 20% discount to its book value.

CAIRN INDIA: Swift Govt Approvals Key to Cairn Growth

Cairn India posted a 40% jump in net profit for the June quarter, beating market expectations as its production rose and rupee depreciation aided earnings. In the coming quarters, the its performance will depend on government approval for raising output, and also on oil prices and rupee-dollar parity.
Cairn India’s net profit was . 3825.7 crore and net sales were up 20% at . 4,440 crore due to an increase in production from Rajasthan, which stood at 1,75,000 bpd. The company reported a fall in operating profit margins on higher cess and exploration costs. Its bottomline was mainly boosted by the . 866-crore forex gain on rupee depreciation. 
The company continues to work on debottlenecking the pipeline as well as the Bhagyam field to increase the production from the field to 40,000 bpd. The development work on the Aishwariya field is underway. Crude oil production is expected to commence towards the end of FY13, subject to government approvals. The company also completed the polymer phase of the Enhanced Oil Recovery (EOR) pilot at the Mangala field and submitted the field development plan for full field polymer flood implementation. Once approved and implemented, additional 70 million barrels of oil can be expected from Mangala.
Cairn India continues to face challenges on 80-km portion of the pipeline connecting its Rajasthan oil fields to the Arabian Sea off Gujarat coast. The company expects the pipeline to be completed only by the first half of 2013, which will make the Rajasthan crude truly international crude oil. Higher oil prices and rupee depreciation benefit the company, but it needs government approvals to increase its domestic production, which will be key to drive its future growth. 

SINTEX INDUSTRIES: Slowdown in Key Biz to Weigh Heavy

Time is not yet ripe for investors to start buying the Sintex stock. However, existing investors may continue to hold on to it

Sintex Industries’ sequential improvement in the June 2012 quarter has been lauded by some, but one must not forget the challenges the company faces. While there is a growing optimism in overcoming these challenges during the course of FY13, time isn't yet ripe for investors to start buying the scrip. Existing investors may, however, continue to hold and wait. 

BUSINESS Ahmedabad-based Sintex Industries is India’s leading plastic goods manufacturer. The company mainly operates in three business verticals viz. building products, custommoulding and textiles. The building products business, which is a relatively new segment, represents monolithic and pre-fabricated structures. The custom-moulding business caters to industries such as automobiles, pharmaceuticals and packaging, among others. In textiles, the company is focused on niche offerings in men's structured shirting in the premium fashion category.
The company has 16 units spread across India with manufacturing presence in the US, France, eastern Europe and North Africa, thanks to its acquisitions.
In the recently-concluded quarter, the company showed a healthy improvement in prefabricated and moulded products, but monolithic and textiles segments were stagnated. The company’s operating performance has been improving for the past 2-3 quarters now. 

KEY CHALLENGES The company faces redemption of FCCBs worth $291 in FY13. It plans to repay the same using internal accruals, existing cash balance and external commercial borrowings (ECBs) to the tune of $110 million. This would increase its interest burden, going forward.
The company is facing a slowdown in its key monolithic business, which contributed less than 20% of its revenues in the June 2012 quarter from 29.8% in FY11 and 24.4% in FY12. No significant revival is expected in this segment till the end of FY13. 

FINANCIALS Between FY07 and FY11, Sintex reported a 40% cumulative annualised growth rate (CAGR) in sales while net profit grew at a healthy 36%. However, the company faced problems in FY12, as interest costs rose on its large debt pile while rupee depreciation led to heavy forex losses. By the end of FY12, the company had brought down its debt burden to 1,272.5 crore, which was less than half its equity. 

VALUATIONS The company is currently trading at a price-to-earnings multiple of 6.9 for the trailing 12-months, which is significantly below its historical valuation. This is expected to remain under pressure until the end of FY13, when further clarity would emerge on its concerns.

Future Still Looks Hazy for RIL

The June ’12 quarter results of Reliance Industries were slightly better than market expectations. More surprising was the healthy performance of its refining division and poor performance of the petrochemicals division, when the street was expecting the opposite. But, the results don’t provide any positive cues for its future, which will depend on the global economic conditions.
Against expectation of gross refining margins around $7 per barrel, RIL reported a GRM of $7.6 per barrel for the quarter, mainly due to better margins in the US and Europe for gasoline than in the Asian markets.
Its petrochemicals business came under pressure from weakening demand. Its E&P revenues and profits continued to dwindle in line with the falling production.
In the quarter, the company lost its debt-free status it had enjoyed briefly in the March ’12 quarter, mainly due to its share buyback scheme for which it spent over . 2,000 crore to buy and extinguish nearly 2.86 crore shares. It also spent . 2,398 crore on capex for the petrochemical projects at Dahej and Silvassa. The net debt to equity ratio stood at 1.3% as on June 30. The results offered no clear indication of RIL’s future performance. With the company selling off or relinquishing its E&P assets in international and domestic markets, any surprise can only come from its producing or discovered fields in India.
Meanwhile, agency reports said LIC and Government of Singapore have hiked their stakes in RIL with the purchase of shares worth over . 1,550 crore during the last quarter

Margins-hit RIL likely to Put Up a Modest Q1 Show

June quarter net profit seen between . 4,300 crore and . 4,400 crore, down 22-24% year-on year

    Reliance Industries, which has been underperforming the markets for long, is expected to report a subdued performance on Friday when it unveils its June ’12 quarter numbers. The company’s net profit is expected to fall annually on dwindling margins in all its business segments — refining, petrochemicals and oil & gas production. The overall environment has not been conducive for RIL’s businesses in the quarter to June ’12, thanks to the ongoing global economic uncertainties. RIL’s refining business, which is the largest revenue and profit generating segment, is set to face eroding margins.
“The Singapore complex margins have averaged $6.7 per barrel in the June ’12 quarter, while we estimate RIL’s GRMs to be around $7 per barrel. This should mean a sequential decline from $7.6 in March ’12 quarter,” according to a preview report of Elara Securities. Other brokerage estimates for RIL’s GRMs are in the $6.7-$7 per barrel range.
The oil & gas business will continue its slide with natural gas production estimated to average 32-32.5 mmmscmd in the June ’12 quarter against 35 mmscmd in March ’12 quarter. Petrochemical margins are expected to improve from March ’12 quarter, which could provide support for the company’s earnings in the quarter. “Petchem EBIT margins are likely to improve q-o-q on account of better margins in the polymer segment; polyester, however, continues to be muted. We expect the petrochem segment to contribute around . 2,400 crore at the EBIT level,” said Religare’s result preview report. RIL’s petchem EBIT was . . 2,215 crore in the June ’11 quarter.
Overall, RIL’s June quarter net profit is likely to be between . 4,300 crore and . 4,400 crore, which will be 22-24% below its year-ago profits.
This will be a third consecutive quarter of y-o-y fall in RIL’s profits. Whether and when RIL’s difficult phase is set to get over is an ongoing debate, especially as the company has underperformed the BSE Sensex for the past four consecutive years. In its latest report Nomura has raised the issue as to whether the era of under-performance is behind the company. It points out that RIL’s earnings are US-dollar linked.
“Every 5% rupee depreciation raises RIL’s earnings by 5.5%-6% on our estimates. The rupee has depreciated 26% over the last 12 months,” it says before terming RIL’s valuations ‘undemanding’. However, the company’s outlook may worsen before it gets better, according to a Bank of America-Merrill Lynch report.

CASTROL INDIA : Volume Growth, Fall in Input Costs to Boost Co

High raw material and sales promotion costs weighed on Castrol India’s results for the June 2012 quarter, but strong growth in volumes and market share has kept the company in good stead. The share price was supported by the bonus issue announcement. The company should benefit from the recent fall in raw material costs in the coming quarter, but it remains cautious due to the rupee’s fall. Castrol’s net profit for the quarter dipped 15% to . 120.9 crore despite an 8% growth in revenues to . 851.3 crore. This was mainly due to higher costs. Raw material costs rose 13.6% to . 497.4 crore and were 58.4% of net sales during the quarter, compared with 55.4% a year ago. In the December quarter raw material costs were 60.5% of sales.
Advertisement and sales promotion spending was up 23.4% at . 65.9 crore. Other manufacturing expenses and carriage and insurance costs were up 15.2% at . 84.7 crore. On the positive side, the company saw a 5% growth in volumes during the quarter, a healthy achievement in the lubricants industry. Castrol’s market share in the retail automotive segment has now risen to above 20%.
It introduced the ‘Durashield boosters’ technology in its flagship brands, Castrol CRB Plus and Castrol CRB Turbo, during the quarter and marketed it through an extensive campaign. “We hope to improve our market share in the next couple of quarters,” said Ravi Kirpalani, COO, Castrol India.
Although crude oil prices had weakened in the June quarter, Castrol didn’t benefit much due to the 3-month lag in prices of base oil and crude. The company’s base oil cost was $1,317 per tonne in the first half of 2012, which is 2.6% higher than last year. This should come down; but the rupee’s depreciation could play spoilsport.
The scrip is currently trading around 30.5 times its trailing 12-month earnings. Its performance should improve in the second half of 2012. 

Small But Bountiful

They may be off the radar of analysts and media, but a clutch of small companies are enjoying unwavering attention of some big investors. There is certainly something about these lesser-known cos to captivate their attention for so long. ET Intelligence Group’s Ramkrishna Kashelkar highlights a dozen of these small wonders for retail investors

Aesop's fables teach the principle that one is judged based on the company one keeps. Although the word 'company' here doesn't refer to those listed and unlisted entities an investor continues to hear about, the principle is applicable even to the world of equities. A company, which can count large, well-known investors among its shareholders, is generally considered well off.
That this alone may not be good for retail investors has been made clear by spectacular fiascos, like SKS Microfinance, Suzlon and Kingfisher. Still, as they say 'exceptions prove the principle', these instances don't diminish the overall importance of big investors. The endorsement of such shareholders always carries its weight, particularly if it remains unwavering even through the times of turbulence.
At ET Intelligence Group, we mined data on all such companies where mutual funds have either maintained or increased their stakes in the past couple of years, when the Indian market was underperforming global peers. The list threw a number of small and relatively unknown companies, where a sizeable chunk of equity is bought and held by MFs. Some of these companies may be underperforming currently, but there are others that have spectacularly beaten the market. Though being small, these companies have shown their ability to generate substantially better returns in a short span of time - something that tempted us to turn the spotlight on them for retail investors.
However, investors should bear in mind that all these companies may not be investment ideas, at present. But it will be a good idea to keep them on the watch list for possible revival signs. After all, a few large investors are betting on their brighter future ahead. 

Aarti Industries A leading manufacturer of benzene-based speciality chemicals & pharmaceuticals, Aarti Industries caters to diversified end-user industries such as pharmaceuticals, agrochemicals, polymer, additives, surfactants, pigments and dyes. Most global chemical majors such as DuPont, BASF, Clariant, Huntsman, Unilever, Pfizer etc are among its clients. The company is taking steps to expand production capacity. In FY12, it doubled hydrogenation capacity to 1,500 tonne per month. It is setting up its own captive hydrogen-generation plant, to take its output of hydrogenated compounds to 3,000 TPM, which will improve overall margins.
Aarti's pharma business is also set to grow rapidly, which is contributing 10% to its revenues at present and achieved a break-even for the first time in FY12. The company has two USFDA-approved facilities and exports four APIs to the US and 16 to Europe. Aarti Industries' valuation multiples are lower compared to other specialty chemical companies. 

Ador Welding Ador Welding is engaged in manufacture of welding and related products. The company caters to shipbuilding, defence, power, automobile, engineering and general fabrication industries. Given its diversified industrial clientele, the company, for 2011-12, had clocked in over 15% growth in turnover, notwithstanding the deep slump in the industrial sector. However, with higher operating costs and overheads eating into its profitability, its operating margins have taken a hit by over 400 basis points year-on-year.
However, domestic fund managers appear to have taken note of a consistent impressive growth in its turnover over the past three years and a relatively strong balance sheet not to forget a diversified number of industries that this company caters to. Ador Welding has clocked in over 12% growth in net sales consistently since FY09 and is insulated to high incidence of interest costs, given its near-zero debt status. The stock has also declined by nearly 50% in value over the past one year, making it an attractive buy at current levels. A major concern for the company, however, is its consistently declining operating margins, which has gradually shrunk from over 19% in FY10 to 12% by FY12. 

Ambika Cotton Mills Ambika Cotton Mills manufactures high-end cotton yarn used for hosiery and weaving. In spite of being from the textile industry, operating profit margins have remained high in the range of 27-31% in the past five years, except FY12, when it dipped to 20% due to various temporary reasons. Of late, the yard demand has been growing in domestic as well international markets as China increased cotton yarn consumption to augment its domestic raw material capacity while the cotton prices softened.
At present, the company already has an installed capacity of 109,872 spindles and has invested 73.2 crore for the expansion of its captive windmills to generate 27.4-MW power. On the valuation front, the company may appear slightly expensive than its peer Vardhman Textile. However, considering its better margins and strong balance sheet, the premium is justified. 

APL Apollo APL, erstwhile Bihar Tubes, is one of the largest ERW pipe manufacturers in India. It has, over the years, expanded its product profile to cater to sectors, including infrastructure, agriculture, engineering, oil & gas, automobiles and construction, with a production capacity of 490,000 tonnes per annum. Though sales have been growing above 40% over the past four quarters, rising raw material costs have resulted in a contraction of operating profit margins. During the March 2012 quarter, sales grew 56% to 422 crore, whereas profit increased by 7% to 17.6 crore.
Since the company earns a significant amount of its revenue through exports, the depreciation of the rupee benefits the company. The stock has run up 17% year to date. Despite the rise, it trades at a PE and EV/EBITDA of 7.1 times and 5 times which is fairly valued compared with its peers. 

CCL Products Guntur-based CCL Products is one of the leading export-oriented private label manufacturers of soluble coffee in the world. Its key markets in Europe, CIS and Far East have posted a good recovery after the financial downturn. The company has completed its coffee manufacturing plant in Vietnam with a capacity of 10,000 metric tonnes per annum. This unit, formed in one of the largest coffee-producer countries in the world, is expected to explore and expand in new markets. For the four quarters ended March 2012, the company's net sales were up 38% while its net profit rose 40% over the previous year. CCL's average operating margins for the past eight years have been 15%, with the company earning aboveaverage margins of 19.4% and 17.9%, respectively, in the past two consecutive years. Raw material costs constitute 60% of the company's revenues. Any short-term volatility in the raw material cost may impact the company's margins. The International Coffee Organisation has a positive outlook on the coffee sector. This augurs well for the company.
While the company's stock price is still 30% lower than its alltime high level, it has doubled since the beginning of this fiscal. Considering this run-up, most of the potential of the company's business seems to have been factored in. 

Indian Metals and Ferro Alloys Indian Metals and Ferro Alloys is India's largest integrated ferro alloy manufacturer with an annual capacity of 275,000 tonnes. Ferro chrome is used in the manufacturing of stainless steel, thereby making the company largely dependant on the stainless steel industry. Over the past four quarters, operating profit margins have been under pressure as ferro chrome prices declined sharply during the second half of 2011 whereas input costs kept increasing. But the recent rupee depreciation has worked to its advantage since the company earns about 85% of its revenue through exports.
During the March 2012 quarter, the company registered a sales growth of 10.4% to 304.7 crore whereas net profit declined 9.97% to 22 crore. Going forward, the company will benefit from the rise in ferro chrome prices and also the commissioning of its 2x60-MW captive power plant which is expected in the July-September 2012 quarter. The stock has gone up 31% year to date. With a P/E of 12.6 times and an EV/EBITDA of 6.17 times, the stock trades at a premium to its peers Jindal Stainless and Facor Alloys which trade at a P/E of 9.3 times and 4.88 times, respectively, and an EV/EBITDA of 2.33 times and 9.74 times, respectively. 

JBF Industries JBF Industries is a polyester chipmaker with a forward integration in polyester-oriented yarn (POY) and BOPET films. The company's FY12 numbers came under pressure due to forex as well as derivative losses. The company is currently setting up a 1.25-million-tonne-per-annum PTA plant, which is a key raw material for manufacturing PET at a cost of $600 million in the Mangalore SEZ. The project to be financed in the 70:30 debt-equity ratio has achieved financial closure and is expected to come up by 2015. This backward integration will enable it to save costs, improve margins and ensure better capacity utilisation levels critical in commodity businesses. The company also plans to set up a 390,000-TPA PET plant in Belgium and a 90,000-TPA BOPET film plant in Bahrain. The company's valuation multiples are higher than its peers. But that's justified in view of better financials. The company's return on capital is the highest among peers. Investors can accumulate the scrip in view of gains from expansion and backward integration projects. 

MBL Infrastructure MBL Infrastructure is a small-sized construction firm catering to rail, roads and industrial segments. As a company strategy, the firm intends to maintain its debt-minimum levels. Its current debt-to-equity ratio of 1.2 is one of the lowest in the industry. In the current high interest-rate scenario, this strategy has worked in favour of the company. Another interesting aspect is its project selection. The company only bids projects that follow FIDIC practices, which are an international standard for construction contracts. An international standard contract enables the company to receive payments on time, thereby maintaining the working capital at comfortable levels. It is one of the few construction companies, which has shown a net profit growth of more than 15% in FY12. At present, the company has an order book of 3,000 crore, which is nearly 2.5 times its FY12 revenues. 

Royal Orchid Hotels In the mid-sized hotels category, Bangalore-based Royal Orchid Hotels is currently suffering from subdued demand and oversupply situation in the hotels industry, particularly in its key markets of Bangalore and Ahmedabad. In FY12, the company reported a loss of 4.9 crore against a profit of 11.4 crore in FY11. In the past five years, margins have shrunk as the company grew from four to 16 properties. Its net profits have been on a downward trend. Its debt-to-equity ratio rose to 1 from 0.1 in the same period. The company recently sold its Ahmedabad property for 67 crore to bring down its debt, which currently stands at 216 crore at the consolidated level. Considering the lingering downtrend, the company doesn't appear a good buy at present. However, any recovery in the Bangalore market could prove crucial in its revival. 

SML ISUZU SML ISUZU, erstwhile Swaraj Mazda, is the well-known manufacturer of light commercial vehicles (LCV) in India. The company has collaborated with Mazda Motor Corporation of Japan for technical know-how and assistance.
Taking in the impact of the overall slowdown in the industrial sector, which has impacted sales of commercial vehicles across the automobile industry, SML reported a marginal increase of 6% in its sales volume for 2011-12. However, the fact that the company has clocked a growth of over 25% in sales volume in the previous two years justifies the popularity that its products enjoy with customers. 
SML also boasts of a strong balance sheet with a low debt on books and a consistently improving cash position. The company has also reported positive operating cash flows consistently since FY10. On the valuation front too, the stock currently commands a 12-month trailing P/E of 13, which is at a discount to its peers like Ashok Leyland and Eicher Motors. 

Texmaco Rail & Engineering Texmaco Rail & Engineering (TRE) is one of India's leading freight car manufacturers with a diversified engineering profile. The company designs and manufactures special purpose wagons for core sectors such as cement, coal, aluminium, steel, container freight cars, oil, chemicals, fertilisers, thermal power projects and the defence sector, among others. As TRE caters largely to the Indian Railways, the competition is pretty limited. This, in addition to a greater visibility for future earnings, stable balance sheet and decent financial performance, is also what appears to have lured domestic fund managers to this stock.
TRE has a near-zero debt and has maintained operating margins above 20% consistently for the past two years despite an 18% drop in turnover. The company's RoCE at 27% is better than its peers. This justifies the premium valuation it enjoys. 

Vesuvius India Vesuvius India makes refractory products, systems and services for steel, glass, cement and capital goods companies and is, therefore, dependant on these industries for demand. Its clientele includes companies such as SAIL, JSW Steel, Rashtriya Ispat Nigam, ESSAR and L&T. Though sales have been growing at 15-24% over the past four quarters, its operating profit margins have been under pressure due to higher raw material prices. During the March 2012 quarter, it posted a 15% growth in sales to 138 crore, but profit declined 11% to 11.6 crore.
Currently, about 30% of India's refractory requirement is imported. The fall in the rupee will force companies to increase their sourcing from domestic suppliers. Vesuvius has recently doubled the capacity at its Kolkata plant from 400 pieces a day to 800 pieces and is expected to be operational later this year. The stock has run up 20% year to date and is trading at a premium valuation compared to its domestic peers, which is justified in view of its leading status. 

JAIN IRRIGATION NBFC: Nod a Positive, but No Immediate Gains

Jain Irrigation’s proposal to form a non-banking financial company, or NBFC, has been approved by the Reserve Bank of India and the company’s stock has gained 23.5% in the last fortnight. While this may be a course correction for the company, investors should not expect any gains in the near term.
The company had been trying to secure an NBFC licence since FY11 after its working capital rose because of delayed recoveries of government dues. Micro-irrigation systems enjoy a capital subsidy of close to 50%, which it needs to obtain from various state governments. Delays on this front had led to itsdebt-equity ratio rising to 1.5 and net working capital swelling to 1.3 times its investment in fixed assets by end of September ’11. The non-deposit taking NBFC, to be named ‘Sustainable Agro-commercial Finance Ltd or SAFL,’ is expected to finance the company’s customers and help the company grow without adding to its debt burden. The company’s interest cost had ballooned to . 408 crore, or more than half its operating profit during FY12. SAFL will be set up with equity funding from JISL, its promoters and the International Finance Corporation (IFC). More investors are set to join later.
In June ’12, Fitch Ratings had downgraded Jain Irrigation’s long-term rating to ‘Fitch BBB (ind)’ from ‘Fitch A(ind)’ with a negative outlook. “The downgrade reflects JISL’s stretched liquidity position as reflected in its almost full utilisation (100%) of its fund-based limits in FY12 (end-March 2012),” according to the Fitch report. It attributed the problem to the delayed receipt of subsidy from Maharashtra, AP, Karnataka and TN.
JISL’s plight worsened as RBI’s guidelines in August ’11 classified the segment as non-priority banking, which prevented it from securitising its micro-irrigation segment receivables. Fitch mentions its negative outlook reflects potential refinancing risks stemming from JISL’s huge repayments lined up —. 460 crore in FY13 and . 370 crore in FY14.
The setting up of the NBFC is key to deleveraging the company's balance sheet without impacting growth. 
Last few quarters have seen a slide in institutional holding in the company, but the promoter group holding has inched up. FII holding fell from 55.37% in Dec '11 to 50.51% at the end of Jun '12. Similarly, local institutions have trimmed their stake from 1.02% to 0.74%. But the promoter group holding rose from 30.35% to 31%.
The NBFC will become operational only after the end of the monsoon season and will initially focus on Maharashtra. The management will have to be mindful of the fact that it does not lead to any corporate governance issues. It will be quite a while before this strategy pays off.

CASTROL INDIA: Superior Tech and Strong Brand Drive a Well-Oiled Show

The fall in crude oil prices and the subsequent decline in base oil prices will boost Castrol's margins. A rise in the rupee will also help. The improvement in profitability is expected to boost the company’s share price

    Castrol India is a natural beneficiary of the recent fall in crude oil prices. The company's raw material — base oil — is priced on crude oil, but its lubricants are branded and sold at MRP. As a result, the fall in crude oil prices and the subsequent fall in base oil prices will improve the company's margins. Any future appreciation in the rupee will make the proposition even more attractive. 

BUSINESS Castrol India is a subsidiary of British Petroleum operating in India's lubricants industry with a 20-22% market share in automotive lubricants. The company has invested heavily in its brand Castrol, which commands a premium in the industry. In spite of being a non-integrated lubricant maker, the company has maintained its market share even after price hikes thanks to superior technology, product differentiation, wider reach and a strong brand. Auto lubricants make up nearly 85% of the company's revenues while industrial products account for the rest.
The company has a wide network of around 270 distributors and around 70,000 retail outlets. This is supplemented with Castrol's own customer outreach initiatives such as Pit Stops, Safe2GO, Bike Zones and Sanjeevani. The company's major competitors include the state-run oil marketing companies IndianOil, BPCL and HPCL, apart from domestic players like Tide Water Oil, Gulf Oil and MNCs such as Shell, Mobil, Idemitsu and Total. 

GROWTH DRIVERS The fall in crude oil prices in the June 2012 quarter is likely to bring down Castrol's raw material costs helping improve margins and profitability in the coming quarters. Raw materials form the major portion of Castrol's costs, which rose from 48.5% of net sales in 2009 to 56.8% in 2011 and stood at 58.7% of net sales in the March 2012 quarter.
Other things remaining same, one percentage point drop in raw material cost in relation to net sales improves Castrol's pretax profits by over 4%.
However, there is always a lag effect between the price of crude oil and that of base oil. Due to this, the full benefit of a fall in raw material prices is likely to be seen in the July-September quarter. 

FINANCIALS Castrol's operating profit margins that remained around 24-25% levels in 2009 and 2010 weakened in the second half of 2011 to around 20%. The March quarter margins stood at 20.3%. Castrol is a debt-free company with nearly 550 crore of cash on its books at the end December 2011. It has a consistent dividend- paying record with a current yield of 2.8%. The company's return on capital employed (RoCE) has been above 100% for the last three years. 

VALUATIONS The company is currently valued at 28.3 times its earnings for the last 12 months and 21.8 times its book value. This may appear expensive when compared to other lubricant makers in India. However, Castrol's superior margins and return ratios are all due to its strong brand in the consumer segment. Other companies with similarly strong consumer brands such as Asian Paints, Jubilant Foodworks, TTK Prestige, Titan Industries and Page Industries enjoy even higher valuation multiples. An improvement in profitability, therefore, should boost Castrol's share price.

PETROLEUM SECTOR: Crude Fall Offers Comfort, but Re Remains a Worry

India’s petroleum industry is expected to see weak numbers for the June ’12 quarter as industry’s under-recoveries remain high while refinery margins are under pressure due to economic weakness in major consumer economies. Crude oil prices, which had peaked at $125 a barrel in March, cooled off through the June ’12 quarter, touching a bottom of around $90. However, the rupee depreciation through these months to a record low below 57 against the US dollar has limited the benefit of this fall. As domestic diesel prices, LPG and kerosene remain unchanged, the under-recoveries for the quarter will surpass . 40,000 crore. ONGC’s performance could get a booster since historically the upstream share of its under-recovery burden is calculated at 33% in initial quarters. This could restrict ONGC’s burden to around . 10,500 crore for the quarter. BRICS Securities estimates the oil major’s net oil price realisation at $56 a barrel, which will boost its net profit 61% YoY to . 6,600 crore.
“These numbers, which correspond to around 33% upstream share in under-recoveries, are unlikely to prevail throughout the financial year since the government may increase the upstream subsidy share later,” said the sectoral earnings preview report by BRICS Securities.
Production ramp-up to 175,000 bpd is set to help Cairn India’s numbers. The performance of OMCs will depend on upstream discounts and government support. 
Standalone refiners may face pressures on refining margins since differential between crude oil and final product prices remained narrow. “RIL’s gross refinery margins should fall 32% YoY and 10% QoQ to $7 a barrel on lower product spread,” said the BRICS report.
The natural gas industry is likely to face stagnation with the domestic production slipping steadily. Gas transmission companies such as GAIL, Gujarat State Petronet and Gujarat Gas should find it difficult to show revenues and profit growth on stagnant volumes. The industry also continues to suffer from regulatory uncertainties over marketing tariffs.
India’s oil & gas sector’s problems are far from over since the government feels obliged to sell fuels at discounted prices. The gas industry’s woes over dwindling availability will continue. The decision-making at the government level remains slow and uncertain. In fact, some MNCs are already seen exiting their Indian ventures. This underlines the unattractiveness of the entire industry for retail investors.

Leveraging Monopoly a Key Catalyst to Future Valuations of Modison

Although a small company, Modison Metals has outperformed the BSE Sensex by a wide margin in 2012 so far. The company’s specialised skills and client relationships have bestowed it with a monopolistic status in its niche business. Whether it can leverage the same and take the next jump is what needs to be seen.
Modison Metals is India’s leading manufacturer of electrical contacts, which are specially made tipping points that make and break electrical current in switches that are used in households as well as industries. It is the only company in the world to manufacture contact components for low-, medium- and high-voltage switchgears.
Electrical contacts are the most critical part in switchgear and are exposed to very high levels of temperature every time connecting or disconnecting the electrical current. That’s the reason the contacts have to be made of specialised silver and copper alloys for low voltage and copper and tungsten for high voltage. Modison Metals’ key strength lies in making these specialised alloys as well as machining them in line with clients’ designs. The company counts all the leading switchgear manufacturers such as Crompton Greaves, ABB, Alstom, L&T, Schneider, Siemens and Anchor as its clients.
With a view to maintain quality in its finished product, the company has backward-integrated in silver refining. Silver constitutes nearly 80% of its annual raw material bill while the rest is made up by copper and tungsten. Typically, the company consumes 1.2-1.5 tonne of silver every month.
High voltage contacts make around 30-35% of total turnover while the remaining 70% is the low-and-medium-voltage segment. Nearly half of the high-voltage contacts business is derived from exports while just 6-7% of low-value contacts are exported.
Being the leader in its segment, it enjoys a partner-like treatment from its big-sized clients, particularly when it comes to developing new products. Similarly, some of its clients book silver costs upfront, thereby reducing the working capital cycle. The company is able to pass on fluctuations in raw material prices to its customers, periodically enabling it to sustain margins.
MML’s net profit has more than doubled in the past three years to . 16 crore in FY12 from . 7.4 crore in FY09, which was in line with its topline growth. The operating profit margin in the period has remained around 20%, with 10% of the net profit margin. The company is almost debt-free and has consistently paid dividends for the past eight years.
The company is a natural beneficiary of India’s growing investments in the power sector — be it generation or transmission and distribution. It is now planning to tap export markets more aggressively, particularly for the high-voltage segment. The company plans to spend nearly . 30 crore in FY13 to expand and modernise its existing facilities. Its ability to scale up the business from hereon will prove a key catalyst in its future valuations.