Sizzling crude prices to hurt oil retailers most

WHEN Indian oil companies post their Q3 numbers later this month, the biggest gainers would be those which are not involved in retail marketing of their products in India. These include public sector companies like Mangalore Refinery (MRPL), Chennai Petroleum (CPCL) and Bongaigaon Refinery (BRPL) as well as private sector ones like Reliance Industries (RIL) and Essar Oil. Exploration and production companies, too, will benefit from the higher crude oil prices, which a v e r a g e d above $90 per barrel during the quarter. The public sector marketing companies will end up as losers if oil bonds do not arrive in time to compensate their loss.

The growth in gross refining margins (GRMs) — the margin available to a refinery for processing a barrel of crude oil — was higher during the past quarter, which was driven by sharp rise in product prices. The prices of petro products such as petrol, diesel and naphtha have risen faster than crude oil. The benchmark Singapore refining margins have almost doubled in the quarter to around $8 compared to December 2006 quarter. This means a bonanza for domestic standalone r e f i n e r s such as RIL, M R P L , CPCL and BRPL as they get international prices for their final product. A part of their gains could be eroded by appreciation in rupee. In the private sector, refiners such as RIL and Essar Oil are likely to report strong bottomline growth during the December 2007 quarter, against the same quarter last year. Higher GRMs are likely to compen-sate the negative effect of around 5% fall in RIL’s refinery throughput. After spending several quarters making losses, Essar Oil could finally start reporting net profits on a consistent basis from December quarter onwards. Essar commissioned its refinery in December 2006 and is still operating below its rated capacity of 10.5 million tonne pa.

With the spurt in crude oil prices, the global crude oil producers are witnessing substantial growth in their profits. However, this doesn’t hold true for ONGC. The company is mandated by the government to share a part of under-recoveries suffered by downstream oil marketing companies by selling the crude oil at a discount. ONGC’s discounts are expected to cross $25 per barrel, while the appreciated rupee, too, will reduce company’s realisations. Despite these odds, ONGC is likely to put up a marginal growth in its profits when it publishes its results next week. Other crude oil producing companies such as Cairn India, Hindustan Oil Exploration (HOEC) and Selan Exploration, among others, will also benefit from the rising crude. Of these, HOEC is likely to report a fall in the production volume during the quarter. The spotlight is, however, likely to be on oil marketing companies (OMCs) Indian Oil, BPCL and HPCL, which will depend on issue of oil bonds for maintain-ing profits. The losses in their retail operations will be higher com-pared to the gains in their refining business. The group of ministers meeting on January 17 is likely to suggest measures to ease the pressure. Out of these, BPCL is likely to post around 10% growth in its refinery production, which will help its performance.

ASSAM COMPANY: All Set To Turn Over A New Leaf

Assam Company’s fortunes may undergo a sea change as new oil discoveries generate substantial revenues and profits this year onwards.The stock has upside potential for investors with a 12-month horizon

ASSAM COMPANY (ACL) is a tea plantation company which operates mainly in North-East India. It had an annual turnover of around Rs 150 crore in FY07 with a current market capitalisation (mcap) of Rs 1,350 crore. The company has invested in a few oil & gas blocks in the North-East. Its fortunes are set to undergo a sea change as new oil discoveries generate substantial revenues and profits this year onwards.

The company holds stakes in two highly prospective oil blocks in Assam operated by Canada-based Canoro Resources. According to estimates by independent experts, these fields together hold proven and probable (2P) reserves of around 460 million barrels of oil and around 1.3 trillion cubic feet (tcf) of natural gas. Canoro has drawn up plans to monetise these reserves in a phased manner starting ’08.

GROWTH DRIVERS:
As the support infrastructure gets ready, the production of nearly 4,190 barrels of oil equivalent per day (boepd) will commence from one field within next the three months. With this additional production, the total output will cross 4,500 boepd; ACL’s 40% share stands at 1,800 boepd.

It is expected that over one-third of the total production will be crude oil, while the rest will be natural gas. Even at an average realisation of $80 per barrel of crude oil and $2.3 per mmbtu of natural gas, this single field will generate revenues of nearly Rs 100 crore annually for the company.

Apart from the blocks shared with Canoro, ACL independently holds three small proven oil fields on a contract basis from ONGC for development, with estimated oil reserves of 30 million barrels. According to the contract, ACL will hold 35% and 70% participating interest in oil and gas, respectively.
These proven fields are on a high-speed development path with new wells being drilled at more locations. At the same time, several existing producing wells are being refurbished. This provides potential for a further upside in petroleum production for ACL. To expand its geographical reach, ACL has formed a joint venture (JV) company with Texasbased DMG Exploration. This JV, named Austin Exploration, currently holds stakes in eight exploration blocks in Australia and the US, and is eyeing four exploration blocks in Mongolia. The company has floated a special economic zone (SEZ) with Gujarat State Petroleum (GSPC), which has received inprinciple approval from the central government. This SEZ aims to provide various engineering products and services to hydrocarbon and energy industries. Out of the required 450 hectares (approx 1,110 acres), the company has already received possession of 317 hectares. It plans to invest around Rs 2,000 crore in this project over the next two years.

FINANCIALS:
The company currently depends on the tea plantation business for 95% of its revenues. It reported just 5% growth in net sales during the nine-month period ended September ’07. The net profit during the period declined by 25% on a year-on-year basis to Rs 4.8 crore. However, in future, ACL’s revenue growth will be driven by the success in its petroleum exploration and production (E&P) business.

VALUATIONS:
Considering its growth plans, ACL is expected to post a PAT of around Rs 75 crore on turnover of Rs 230 crore during CY08. On a fully diluted equity capital of Rs 36 crore, its forward EPS works out to Rs 2.1. Based on this, the scrip, which is currently trading at Rs 44.30, is commanding a forward P/E of 21.3. Considering the potential in the E&P business, we believe there is substantial upside for investors with a 12-month horizon. One of the accepted ways of valuing a petroleum E&P company is based on its proven reserves. On a conservative basis, if we value every barrel of proven oil reserve at $4, the value of ACL’s share of proven reserves comes to around Rs 2,900 crore. The valuation of the E&P business is substantially higher than its current m-cap.

RISK FACTORS:
Petroleum E&P is a long-term and capital-intensive business. Any delay in execution of the proposed development plans, or any substantial and sustained fall in international crude oil prices, will have a substantial impact on the company’s financial performance.

ARIES AGRO: Blooming Glory

Aries Agro’s prospects look promising. Investors with a long-term view can retain their holding in the company

COMPANY: ARIES AGRO
ISSUE PRICE: Rs 130
LISTING PRICE: Rs 150
CURRENT PRICE: Rs 251.6
CURRENT P/E: 32.3

ARIES AGRO, which raised Rs 58.5 crore through its IPO in December ’07, listed on January 11, ’08 at a 15% premium. The scrip rose to an intra-day high of Rs 261 and ended slightly lower at Rs 251.6, up 94% on the offer price. According to the latest available figures for the four-month period ended July ’07, its current market price is at 32.3x annualised EPS. Considering the company’s high growth prospects and expanding operating margins, investors with a 12-month horizon can remain invested in the stock.

Aries Agro, which manufactures and sells specialised micro-nutrients to the agriculture industry, is increasing its capacity nearly five-fold to 100,000 tonnes per annum by September ’08. Its plans to expand into the Middle East and acquire a strategic stake in a water soluble fertiliser manufacturer will help it to expand operating margins. At the same time, higher volumes will boost the topline.

Talking about future prospects, Aries Agro’s executive director, Rahul Mirchandan, said, “We are targeting a turnover of Rs 105 crore for FY08 with an EBIDTA margin of 23-24%. As the additional capacities become available, FY09 revenues will touch Rs 150 crore. By FY10, we should achieve Rs 200 crore in turnover.” The management expects to keep margins stable as economies of scale will come into play with increased capacities.
The company has opted for mobile marketing to boost sales in the next kharif season. It plans to deploy 100 vans by July ’08 to market its products in the unserviced areas. According to Mr Mirchandani, “Our mobile marketing infrastructure will help the dealers achieve higher throughput by liquidating their inventories faster. In return, we will try to bring down the trade margins, thereby reducing the cost to farmers. Thus, it is a win-win situation for everybody.”

The company will also offer advisory services through these marketing vans to local farmers. The company will roll out new products over the next 12 months to enrich its product portfolio.
Given all these factors, Aries Agro’s prospects look promising. Investors with a longterm view can retain their holding in the company.

Supreme Industries

SUPREME Industries showed a moderate growth in its sales and operating profit during the December 2007 quarter led by higher volumes. The momentum is expected to continue in the coming quarters given the commencement of the company’s additional production capacities. Supreme’s net sales rose 8% to Rs 288.1 crore.

Despite higher sales, the company could curb cost on account of efficient raw material management. To keep costs low, the company procures its raw materials in large size cargos and sells the excess quantity to smaller players. Thus, polymer trading has emerged as a complementary business for the company.

A weak dollar has also helped in bringing down the cost of imported inputs. As a result, operating profit grew 10.2% — faster than the growth in sales — to Rs 30.3 crore. Net profit jumped 37% to Rs 13.1 crore, aided by a Rs 2.2 crore extraordinary profit from sale of land in Haryana.

The company is investing over Rs 300 crore in setting up a mega plastic products plant at Gadegaon in Maharashtra. Spanning over 140 acres, the plant would become the largest plastic processing unit in the country once fully commissioned. Production under the first phase has begun this month. Currently, it manufactures predominantly PVC pipes and the production of other products will start gradually from February.

Over the next couple of years, the plant will be scaled up to its full capacity of 1,50,000 tonnes of polymers every year. The company plans to expand PVC fittings capacity at its Jalgaon facility within the next two to three months. Its new plant near Pune to manufacture protective packaging products is likely to commence by end January 2008.

The company has been investing in capacity additions, which are now coming on stream. In the coming quarters, the additional volumes from new capacities may drive sales growth.

BGR ENERGY: Powering Ahead

BGR Energy has high growth potential. Investors with a 12-month horizon can continue to hold the scrip

COMPANY: BGR ENERGY
OFFER PRICE: Rs 480
LISTING PRICE: Rs 801
CURRENT PRICE: Rs 903.95
CURRENT P/E: 93.1

BGR Energy, which raised Rs 207 crore through its IPO in December ’07, made its debut on the bourses with a 67% premium over the offer price on January 3, ’08. The current market price of Rs 904 is 93.1 times its annualised EPS for the quarter ended June ’07. According to the latest figures, during the June ’07 quarter, the company had logged a net profit of Rs 17.5 crore on a turnover of Rs 239.6 crore.

BGR Energy, which earlier used to undertake small-value balance of plant (BOP) contracts, is a relatively new player in the turnkey engineering, procurement and construction (EPC) contracts segment for power plants. The successful completion of a couple of EPC contracts in the past few years has enabled the company to change its business model. At a time when India is planning to add huge power generation capacities, BGR suddenly finds itself in the company of giants like Bharat Heavy Electrical (Bhel) and Larsen & Toubro (L&T). BGR, which recorded a turnover of Rs 786.8 crore during the 18-month period ended March ’07 claims to have an order book of Rs 3,000 crore.

GROWTH DRIVERS:
Says BGR CMD BG Raghupathy, “If we just consider the government’s targets for power generation capacities for the 11th Plan period, contracts worth Rs 80,000 crore will come up for bidding over the next six months or so. We are confident of winning a significant chunk of this.” He, however, adds, “We are very choosy about the contracts that we bid for. We have had a very high success rate in the earlier bidding processes, so getting new orders is not a concern today. We have to be very sure regarding the timely completion of the contract.”
The company’s future growth is not dependent only on the power sector. “We are also targeting the oil and gas industry. Today, nearly Rs 490 crore of our outstanding orders are from that industry. Natural gas processing complexes and gas compressor packages make up the bulk of these orders. Going forward, the share of petroleum industry in our revenues will go up,” Mr Raghupati told ETIG.

BGR’s plans to set up manufacturing units in the Middle East, China and Mundra SEZ in Gujarat will take another 12 months to fructify. These units will help it to manufacture and supply equipment to its overseas customers. VALUATIONS: Looking at BGR’s historical performance, the current valuations appear stretched. However, considering the high growth potential, we advise investors with a 12-month investment horizon to remain invested in the scrip.

DREAMS UNLIMITED

From roads and railways to ports and airports, and from power plants to hydrocarbon infrastructure, India ranks among the lowest in the world in terms of infrastructure availability. The catching up, which has just begun, will go on for years to come and is set to drive India Inc’s future growth. ETIGgives you a snapshot view of what’s in store for various infrastructure sectors…

INDIA IS set to emerge as one of the world’s largest economies. This is not achievable unless infrastructure improves, and the process has already begun. From power and oil & gas, to roads, ports and airports, huge investments are taking place in the infrastructure space. But how big is this opportunity for India Inc and its investors? ETIGhas benchmarked India’s infrastructure growth against other countries to highlight the gaps and identify the investment opportunities.

ELECTRICITY
A growing economy needs power, both for domestic and industrial use. India is highly energy-deficient. The power consumed by an average US citizen per day is equal to that consumed by an Indian in more than 20 days. This, coupled with the fact that the affluent Indian middle class is spending a lot on domestic appliances, and a growing manufacturing industry needs more power to meet its energy needs, provides tremendous growth potential for companies in the power sector. Even China has a per capita electricity usage rate of 1,684 KwH — almost thrice that of India. This means that if Indians aspire to achieve the same standard of living as that of an average Chinese, power generation in India should triple from its current level. Assuming an average capital cost of Rs 4 crore to generate one mw of power, the estimated investment works out to over $250 billion over the next few years. Around 30% of this will go to EPC contractors (such as L&T, HCC and IVRCL). The bulk of the balance $165 billion will be spent on buying equipment from suppliers (such as Bhel, Siemens and Alstom). This amount is over10 times the current turnover of the industry.

As metal (especially steel) is a major raw material for equipment manufacturers, 50% of the capital expenditure in the power sector is likely to be captured by metal producers such as SAIL, Tata Steel, Sterlite Industries and Hindalco. This translates into a revenue upside of $80 billion. This amount is more than one-and-a-half times the metal industry’s turnover last year. The additional generating capacity will translate into an equally huge upside for power generators like NTPC and Tata Power. Assuming a plant load factor of 80%, they are likely to generate additional annual revenues of over $75 billion, assuming an average sales realisation of Rs 2 per unit. In comparison, India’s largest power generator, NTPC, clocked revenues of $8 billion in FY07. More power will require additional transmission and distribution infrastructure. It will also lead to more power trading, as merchant power plants may become the norm. This will give greater upside to companies such as Power Grid Corp, which is building a national power grid, and PTC, the largest player in the power trading business.

OIL & GAS
An economy energy matrix is incomplete without hydrocarbons. Carbonbased fuels such as crude oil, natural gas and coal are the original sources of energy used to run power plants, transport networks and industries. In the past 10 years, India’s crude oil consumption has witnessed a CAGR of 4.9%, making it the world’s fifth-largest energy consumer. Despite this, the per capita consumption of petroleum products in India is among the lowest in the world. In ’06-07, an average Indian consumed 108 kg of crude oil — almost one-third that of an average Chinese and less than one-twentieth that of an average American.

So, even if we assume that India catches up with China in terms of per capita energy consumption, the domestic demand for petro-products will more than triple from its current level in a few years. Out of India’s current annual need of crude oil of 120 mt, a little under 30% is met through domestic production, while the remaining has to be imported. So, it has become imperative for India to invest in exploration projects, to boost production and reduce dependency on imports. Most of India’s oil & gas reserves remain untapped, mainly due to lack of E&P infrastructure. Billions of dollars of investment will be required to identify and monetise India’s oil reserves. An investment of $33 billion is expected over the next five years in this sector, according to the Planning Commission of India. Downstream refining and marketing infrastructure is also witnessing an investment boom. India is increasing its refining capacities, aiming to become an international petroleum refining hub. In the next three years, domestic refining capacity is slated to cross 190 mt with an investment of $15 billion. In the near future, the availability of natural gas is expected to grow faster than oil in India. As a result, a number of companies, including Gail, RIL and Gujarat State Petronet are investing in pipeline networks. Cross-country pipelines are being laid to connect the natural gas production centres with consumption centres. These initiatives will create a national gas grid and will also support a number of city gas distribution projects. Around $8 billion will be invested in creating the pipeline infrastructure during the 11th Plan period. Increasing spend on petroleum E&P will benefit companies which provide support to E&P majors. This includes Shiv-Vani Oil, Aban Offshore, Jindal Drilling, Maharashtra Seamless and Deep Industries. Creation of refinery infrastructure will boost the outputs of refining companies such as Reliance Petroleum and Essar Oil. Companies such as L&T and Punj Lloyd build and supply some of the equipment to refineries and hence, stand to benefit as well.

ROADS & RAILWAYS
Why should the industry use more energy if it finds it difficult to bring in raw materials and evacuate the finished goods to the market? India is deficient in land-based transport infrastructure, be it roads or railways. A global comparison reveals that the per capital availability of road and railway infrastructure in India is one-third that of a large developing country like Brazil. But the future looks bright. To improve road conditions, the government has launched an ambitious highway project in partnership with the private sector. The first phase of this project — Golden Quadrilateral — is nearly complete and its scope is getting bigger by the day. This has opened up new avenues of growth for construction majors, equipment suppliers and building material suppliers. So, how big is the opportunity for India Inc in the roads sector? Even if we catch up with China — which has built over 34,000 km of expressways, compared to less than 8,000 km in India — we will require an additional capital expenditure of nearly $40 billion. The bulk of the expenses will be captured by construction majors such as L&T, IVRCL and Gammon India in the form of topline. Indian roads are predominantly pitch roads, but the new concrete roads and flyovers will generate revenue for cement and steel companies. If 30% of the said investment amount is spent on concrete — of which, steel will have a share of 40% and cement 60% — it will create a demand potential of over Rs 18,734 crore for the steel sector and Rs 28,100 crore for the cement sector. This will benefit SAIL, Tata Steel and ACC. Similarly, the expansion of railways and modernisation plans like freight corridor and metro rail will boost India’s infrastructure. If India has to catch up with developed countries, its rail network will have to at least double in the next decade. This will require additional investment of $200 billion. Out of this, around 40% will go to EPC and equipment suppliers like Bhel, Kalindee Rail Nirman Engineers and BEML. The balance $120 billion will be used for rail tracks, which will benefit SAIL and Jindal Steel.

PORTS
Ports are required to carry out international trade, as 95% of the global trade by volume is conducted by sea. Development of ports and their cargo-handling capacities influence foreign trade. Thanks to its coastline of over 7,500 km, India has nearly 200 ports. But their capacities are way below global standards. The average per capita cargo handled at Chinese ports stood at 4,265 kg in ’06, while the average in the US was even higher at 7,953 kg. But the average per capita cargo handled at Indian ports was less than one-seventh that of China, at 572 kg. If India has to reach the half-way mark of China’s current level, heavy investments are required in this sector. According to the Planning Commission, the domestic port sector needs investments of $18 billion by ’12. Of these, $13.5 billion will be invested to boost the infrastructure at major ports under the National Maritime Development Programme (NMDP), while the remaining will be needed to improve minor ports. Mundra Port and SEZ, which is developing a port in Gujarat, has already tapped the capital market. More such beneficiaries will emerge over the next few years, as and when more port development projects are commissioned.

AIRPORTS
Air travel has made the world shorter, but it’s still beyond the reach of most Indians. As the economy grows, the number of people travelling by air will explode, which will require expansion of the existing airports and building new ones. Currently, India has 125 airports in total, of which, 12 are international ones. But there is huge scope for improvement in passenger traffic. Currently, only 71 persons out of every 1,000 individuals travel by air every year in India. This ratio is 151 in China and as high as 4,780 in the US. If India is to reach even China’s current standard in the next couple of years, the annual passenger traffic will have to double. This will require huge investments in airport infrastructure. The movement has already begun with the privatisation of Mumbai and Delhi airports and construction of greenfield airports at Bangalore and Hyderabad. Next in line are Kolkata and Chennai airports. The government has also begun the groundwork for second airports at Mumbai and Delhi. Capacity expansion and upgradation of 35 smaller airports are also on the anvil. The Investment Commission estimates an investment of $10 billion will be required in this sector over the next five years. The biggest gainers due to the aviation boom will be GMR Infrastructure, GVK Power & Industries and L&T.

STEEL
In a fast-growing economy, the spend on infrastructure, capital goods and white goods keeps surging. In India, where per capita steel consumption is around 34 kg, against a world average of 139 kg, the growth opportunity for this sector is huge. Even if steel consumption increases three times to 100 kg per capita by ’15 — which is 40% of China’s current consumption — it will provide an upside potential to steel companies. This is visible from capacity expansion plans announced by almost all firms. Companies which have backward integration will benefit the most because iron ore and coking coal (two major raw materials for steel) prices are growing rapidly. So, it is better to invest in SAIL, Tata Steel and Jindal Steel.

Start of oil & gas flow fuels Assam Co stock

THE wait for the patient investors in Assam Company is finally over. Oil and gas have finally begun to flow from the company’s oilfield in Assam. This stock has been on the radar screen of investors for a long time due to expected bumper profit from the company’s oilfield. The company’s joint venture partner and operator of the field, Canoro Resources of Canada, on Monday announced the commencement of oil and gas production from two wells — Amguri 10B and Amguri 11. Assam Company holds 40% stake in the Amguri oilfield with the Canadian company holding the operator’s stake of 60%.
Investors greeted the news by bidding up Assam Company’s stock price. The shares were locked in 5% upper circuit on Monday to close at Rs 35.1 on BSE. Currently, the level of production from these two wells is 1,370 barrels of oil equivalent per day (boepd), which is nearly one-third of their full potential of 4,200 boepd. At the present level of production, Assam Company’s share would bring in incremental net profit of Rs 25 crore per annum at current international price of crude oil. The profits will go up as the full production level is achieved. The production from these fields is right now
restricted due to lack of transportation and storage facilities. Canoro is constructing a new 10-inch gas pipeline and plans to raise the capacity of oil transfer by the end of March station 2008 to enable the full level of production.
In October 2007, Canoro Resources had discovered three distinct hydrocarbon deposits in Amguri 11 well with a total potential to produce 3,190 boepd. At present, out of these three payzones discovered, production from only one has started.
Assam Company reported a substantial jump in its net profits for the quarter ended December 2007 to Rs 5.66 crore as compared to just Rs 0.52 crore in December 2006. The company is also in the business of tea plantation, which is a seasonal business. The company is also planning to set up an SEZ in Gujarat along with Gujarat State Petroleum Corporation (GSPC).