Kabra hopes to gain from rising demand

Shares Up 50% Since Mid-Dec Against 5.6% Fall In Sensex

DEFYING the overall weakness in the stock market in the past couple of weeks, the shares of Kabra Extrusiontechnik (KETL) traded near its all-time high to close at Rs 188.5 on February 2, 2010. Although the superb December 2009 quarter performance was one key element in the latest upsurge, the scrip has substantially outperformed markets in the past one month. KETL shares have gained 50.3% since mid-December as against a 5.6% fall in Sensex.
KETL recorded a handsome 572% jump in its December 2009 quarter profit at Rs 6.5 crore, although its sales grew only 42% to Rs 49.1 crore. The company was able to maintain prices of its plastic extrusion machinery although the raw material costs eased. KETL is a debt-free company with healthy operating cashflows. The company’s cash and equivalent investments have grown at a cumulative annual growth rate (CAGR) of 49.7% between FY05 and FY09.
After steadily growing profits at a CAGR of 34% for five years, the company had reported a fall in profit in FY09. Even in the first half of FY10, the company’s performance was only marginally better than the year-ago period. Against this background, the sharp jump in its third quarter profits hints at improvement in the future prospects of the company.
The plastic extrusion machinery industry is closely linked to the plastic consumption, which is growing fast in India. The demand for conventional PVC pipes is growing in double digits due to increasing irrigation activity as well as new applications in construction and infrastructure segments. Similarly, pipes manufactured from HDPE are gaining popularity in applications such as telecom ducting, water supply and natural gas distribution. Additionally, the consumption of packaging films is growing in industries such as food processing and healthcare. All these factors augur well for KETL, which had faced some sluggishness in net sales in the past three years.
To benefit from the increasing demand, KETL is planning an aggressive investment of Rs 85 crore over the next 24 months. This will not only expand its capacities, but also improve the efficiencies.

Kabra Extrusion: Hopes to gain from rising demand

Shares Up 50% Since Mid-Dec Against 5.6% Fall In Sensex

DEFYING the overall weakness in the stock market in the past couple of weeks, the shares of Kabra Extrusiontechnik (KETL) traded near its all-time high to close at Rs 188.5 on February 2, 2010. Although the superb December 2009 quarter performance was one key element in the latest upsurge, the scrip has substantially outperformed markets in the past one month. KETL shares have gained 50.3% since mid-December as against a 5.6% fall in Sensex. KETL recorded a handsome 572% jump in its December 2009 quarter profit at Rs 6.5 crore, although its sales grew only 42% to Rs 49.1 crore. The company was able to maintain prices of its plastic extrusion machinery although the raw material costs eased. KETL is a debt-free company with healthy operating cashflows. The company’s cash and equivalent investments have grown at a cumulative annual growth rate (CAGR) of 49.7% between FY05 and FY09. After steadily growing profits at a CAGR of 34% for five years, the company had reported a fall in profit in FY09. Even in the first half of FY10, the company’s performance was only marginally better than the year-ago period. Against this background, the sharp jump in its third quarter profits hints at improvement in the future prospects of the company. The plastic extrusion machinery industry is closely linked to the plastic consumption, which is growing fast in India. The demand for conventional PVC pipes is growing in double digits due to increasing irrigation activity as well as new applications in construction and infrastructure segments. Similarly, pipes manufactured from HDPE are gaining popularity in applications such as telecom ducting, water supply and natural gas distribution. Additionally, the consumption of packaging films is growing in industries such as food processing and healthcare. All these factors augur well for KETL, which had faced some sluggishness in net sales in the past three years. To benefit from the increasing demand, KETL is planning an aggressive investment of Rs 85 crore over the next 24 months. This will not only expand its capacities, but also improve the efficiencies.

Emmbi Polyarns IPO: Plastic Dream

Emmbi’s success depends upon how fast it can develop the market for its innovative products. Although risky, investors may consider the IPO

EMMBI Polyarns, a manufacturer of woven polymer products, is raising nearly Rs 40 crore through an initial public offer of equity shares. The funds will be used to increase its production capacity three-folds by the end of 2010. The company has developed some innovative products in the areas of geo-textiles and water conservation. Post issue, the stake of the promoter group would fall from 100% to 45%.
Long-term investors with risk appetite may consider subscribing to the issue. Risk-averse investors should wait another couple of quarters to check the company’s earnings growth before taking a call.

BUSINESS:
Set up in 1994, Emmbi Polyarns (EPL) is promoted by first generation entrepreneurs of Appalwar family. The company has set up a manufacturing facility in Silvassa for woven polymer packaging products such as, flexible intermediate bulk carriers (FIBC or Jumbo Bags), woven sacks primarily used in industrial packing and other similar products like container liners, canal liners, flexi tanks, car covers and protective irrigation system.
The company tripled its exports in three years to Rs 22.5 crore in FY09. The export growth helped EPL boost its topline and bottomline growth, while its domestic sales stagnated. Its domestic customers for packaging products include Hindustan Unilever, ITC, Godrej Industries and Tata Chemicals, besides others. The company typically works on monthly supply contracts with its industrial clients and takes 65 days on average to collect outstanding credit sales.

GROWTH DRIVERS:
The company’s products in water conservation including pond liners, canal liners, and flexi tanks are all lowcost alternatives for the farmers. These products may find great demand in the domestic market with rising concerns over water management. The company has also developed specialty packaging materials such as paper or aluminiumlined packaging or anti-corrosive packaging for specific uses in tea, cement or automobile industries. Usage of disposal bags for asbestos, nuclear or hospital waste is well accepted in overseas markets and is likely to find increasing demand domestically. The added capacities will come handy in catering to rising demand for the company’s packaging as well as innovative products.

FINANCIALS:
In the last four years the company’s net sales grew at a cumulative annual growth rate (CAGR) of 36.7%, while the net profit grew at 42%. The company has consistently expanded its operating profit margins from 8.5% in FY05 to 13% in FY09 and 14.1% in the first half of FY10. EPL’s reported profit in the first half of FY10 at Rs 1.2 crore is 89% of the profit for whole of FY09. EPL’s current debtequity ratio stands very high at 2.4 but will fall below 0.5 post the IPO. The company’s operating cash flows were negative in two out of last five years.

VALUATIONS:
The annualised earnings for FY10 will translate in an EPS of Rs 1.4 on post issue equity of Rs 17.4 crore. The issue price is 28.6 to 32.1 times the EPS on lower and upper bands, respectively. P/Es of companies in similar business such as Jumbo Bag, Karur KCP, and Jai Corp form a wide range of 5-95.

CONCERNS:
Although the company’s products are innovative the concept selling and brand building will take time. Being a familymanaged small company the project execution and managing increased complexities of the business have their own inherent risks.

IPO details:
Price Band: Rs 40-45 per share
Net issue size:
Rs 38.3-43.1 crore
Date: Feb 1 - 3

Indian Oil & BPCL: Under-recoveries seen a big drag on oilcos’numbers

UPSTREAM discounts and the government’s promise for aid enabled India’s top two oil marketing companies — Indian Oil and BPCL — to post profits for the December 2009 quarter. But they fell short of their year-ago numbers. With the players losing control over their profitability, the future does not hold much promise either. Both the companies are expected to report significant fall in their March 2010 quarter profits against the year-ago period. Although the duo had several things going right in the December 2009 quarter such as forex gains, higher other income, reduction in staff costs and interest burden, their profits were lower compared to the year-ago period. This was mainly due to substantially lower upstream and government support, which reduced 30% and 53%, respectively, on a year-on-year basis. Another reason for Indian Oil’s profit fall was Rs 1,723-crore loss booked on sale of oil bonds. The oil marketing companies were fully compensated during FY09 for their under-recoveries. However, in FY10, the burden of a third of under-recoveries remains on the OMCs. Indian Oil, the industry leader, has absorbed net under-realisation of Rs 7,936 crore for the first three quarters of FY2010 — higher than Rs 7,539 crore suffered in corresponding period of last year. In physical terms, both the companies posted excellent performance with rising refinery throughput and domestic as well as export sales. However, due to artificially low prices and higher sales meant higher losses. Their refining operations, too, made a fewer profits due to global weakness in refining margins. Indian Oil shares have stagnated for over a month and closed at Rs 301.3 on Friday, before the results were announced. The scrip is now trading at a price-to-earnings ratio (P/E) of 6.5. The BPCL scrip has lost over 14.4% in the past one month to Rs 541.6 and is commanding a P/E of 4.4. The Kirit Parikh committee is long overdue to come up with its recommendations for the oil sector. Unless some pricing reforms are introduced, the oil marketing companies will continue to incur heavy under-recoveries in the coming quarters and will remain totally dependent on the government support for survival. As a result, the companies don’t appear attractive for investment despite the low P/E valuations.

HPCL: Tough refining biz, limited govt aid may dent Q4 profit

GOVERNMENT’s support, a jump in other income and a reduced interest burden helped Hindustan Petroleum (HPCL) post a tiny profit for the December 2009 quarter. Economic difficulties eroded margins in its refining business, while its marketing operations continued to incur losses.
The government’s promised aid of Rs 1,899 crore for the nine months ended December 2009 was entirely booked as revenues in the December quarter. Still the company’s operating profit was 33% lower compared with the year-ago period.
Other income saw a three-fold rise to Rs 225 crore due to a jump in interest on oil bonds. The company is currently carrying nearly Rs 9,600 crore worth of oil bonds, which is substantially higher against the year-ago period. A 72% fall in interest burden to Rs 220 crore also helped. As a result, the company posted a tiny profit at the pretax and post-tax level compared with losses in the yearago period.
For the second quarter in a row, the company reported lower refinery throughput, although the company’s sales continued to swell. Higher sales helped the company increase its trading activities. In fact, during the December 2009 quarter, nearly 44% of HPCL’s sales came
from products sourced from other refiners, and just 56% from its own refineries.
In a weak market, its shares ended 2% lower at Rs 344.25 on BSE before the results were announced. This is just around 2.1 times its per share earnings for the past 12 months and 1.1 times its book value for FY09. Such low valuations are a result of the company’s inability to control its profitability.
The outlook for the March 2010 quarter is not encouraging, given the weakness in the refining sector and limited support by the government for marketing losses. HPCL had posted a net profit of Rs 5,104 crore for the March 2009 quarter, and is expected record a significant fall in March 2010. Unless some oil sector reforms are implemented, no clarity can emerge on the company’s future prospects.

Gail: Stuck in the Pipeline

ALTHOUGH Gail India continues to remain a fundamentally strong company, its rich valuations are now indicating a limited upside in the short term. The company is entering a heavy investment phase in its core business to quadruple its gross block in five years. At the same time, the subsidies and E&P (exploration and production) expenditure have raised uncertainties over its earnings. Fresh investments should be avoided at the current valuation.

BUSINESS:

Gail operates India’s largest natural gas pipeline network with a current length of 7,200 km and a transmission capacity of 150 million metric standard cubic metres per day (MMSCMD). It also produces over 1.3 million tonnes of liquid hydrocarbons including LPG and 4.1 lakh tonnes of polyethylene per annum.
In a bid to secure its raw materials, the company has also invested in 30 exploration blocks including operatorship in two. The company is investing in the entire value chain of the natural gas business and owns promoter’s stakes in Petronet LNG and seven city gas distribution companies including Indraprastha Gas. The company has also floated a subsidiary, Gail Gas, for CNG stations along highways. Its 70% subsidiary, Brahmaputra Cracker, recently obtained financial closure for its 280,000-tpa polymer unit in Assam with an investment of Rs 5,460 crore.
The Petroleum and Natural Gas Regulatory Board (PNGRB), constituted in October ‘07, has laid out rules for determining tariffs for existing and new pipelines with effect from November ‘08. When the change takes place, Gail will have to account for its impact on profits with retrospective effect.

FUTURE PLANS:

The company is expanding its pipeline network substantially to add another 6,600 km of pipelines within the next three years. In addition, it is investing in its E&P blocks besides investing in its joint venture projects such as Brahmaputra Cracker and ONGC Petro Additions. The projected capital expenditure for the next five years is Rs 49,155 crore - almost thrice its current gross block.
In the near term, the rising production from Reliance Industries’ KG basin fields will bring in additional transmission revenues for the company, while any E&P success could add to future growth visibility. But rest of its projects will take long to generate returns.

FINANCIALS:

Over the last three years, the company has spent an average of Rs 270 crore annually on the E&P business towards survey and dry well expenditure. So far, in the first nine months of FY10, it has written off Rs 108 crore. As a result, the company is likely to write-off another Rs 150 crore in the March ‘10 quarter. The company has been cash rich with over Rs 3,000 crore of annual operating cash flows. However, its ambitious investment plans for the next five years will necessitate it to raise debt of Rs 28,700 crore in the next five years. Since FY04, Gail is sharing subsidy on LPG and has so far contributed Rs 8,200 crore on a cumulative basis. Subsidy sharing has always remained the most influential factor for Gail’s profits and which will remain equally uncertain in future as in the past. A reduction in subsidy burden was the key driver of Gail’s good performance in the December ‘09 quarter. Over the last five years, the company’s net sales have grown at a cumulative annual growth rate (CAGR) of 15% and net profit at a CAGR of 10%. In the nine months ended December ‘09, the company’s profits are only marginally higher than that of the year-ago period.

VALUATIONS:

At the current market price, the scrip is trading at a price-to-earnings multiple (P/E) of 17.7. This is comparable with its smaller peers such as Gujarat Gas, Gujarat State Petronet and Indraprastha Gas. Based on the estimated earnings for FY11, the scrip is trading at a P/E of 14.1. Considering the uncertainties attached to the earnings, this valuation is not attractive for fresh exposure in the scrip.

Reliance Industries: Better than Expected

THE refining business of Reliance Industries (RIL) took a third position in the pecking order for the first time in the company’s history, when profits from both petrochemicals and oil & gas businesses exceeded the refining profit. Incidentally, RIL’s both the refineries, which represent the world’s largest single-location petroleum refining complex with 1.44 million barrels per day, operated significantly above their rated capacities during the quarter.
Overall, the numbers are in line with market estimates, with the rising profit from the oil & gas segment offsetting the falling profit of the refining business. Globally, the refining business was severally under pressure in the December quarter with significantly lower margins due to high product inventories. RIL’s gross refining margin at $5.9 per barrel, although lower compared to $6 of September ‘09 and $10 of December 2008, was substantially better compared to the regional benchmarks.
During the quarter, the company ramped up its KG basin gas production to 60 MMSCMD and is ready to take it to the first plateau of 80 MMSCMD on signing offtake contracts. The first three quarters of FY10 have turned out extremely well for the company on all operational parameters with production of refineries, petrochemicals and oil & gas growing consistently. The cyclical downturn in the petroleum refining has been made up by higher volumes and the oil & gas business. The RIL scrip gained nearly 3% immediately after the results were announced to reach an intra-day high of Rs 1,070 on BSE, but closed slightly lower at Rs 1,050.70. For the trailing 12-month period, the company now has per-share earnings of Rs 46, which result in a P/E multiple of 22.8.
The benchmark gross refining margin has revived in January 2010 and is expected to improve further with global economic growth. This could bring about a major revival in the company’s refining profits in the coming quarters. Growing gas production will also augment revenues. At the same time, the large cash pile through sale of treasury shares could be an indicator of a likely acquisition in the near term. Although growth prospects are high, the current rich valuations appear to factor in most of it.