FOLLOWING the steep fall in the share price of Reliance Petroleum, what should retail investors do? The surge in the stock last month had many retail investors flocking to the counter, even as experts were crying hoarse that the shares were overvalued. After touching a peak of Rs 295 earlier this month, the stock price has been hurtling downhill.
The stock is yet to emerge out of the trading ban in the derivatives segment — it had done so for brief while on Monday — players expect some more volatility at the counter.
Investors should continue to tread cautiously, warn market watchers. “The current confusion regarding the stock’s movement would get cleared by the expiry of derivatives on Thursday and by then RPL is expected to come out of F&O curb,” said PINC Research headderivatives and strategy Sailav Kaji.
“What is needed to be looked at is whether in the derivatives expiry short positions are rolled over or get covered. In case of short positions getting rolled over, the stock will find support at Rs 180,” he said, adding that long-term investors can still buy the stock at current levels.
Sentiment has been undermined by the promoter, Reliance Industries’, decision to offload 4% stake in Reliance Petroleum through open market trades.
Market watchers said the next key trigger for the stock will be Chevron’s decision on its 5% stake in Reliance Petroleum. Chevron has an option to raise its stake to 29%, but analysts see a low possibility of that happening following RIL’s decision to sell shares in the open market.
”We believe that RPL’s rich valuation and the fact that RIL sold a 4% stake to the market, may imply a possible future Chevron exit unless there is meaningful pullback in the market,” broking house Goldman Sachs said in a note to clients.
Many analysts expect RPL to stabilise around Rs 180 near term. However, Religare Securities president-equities Amitabh Chakraborty said the stock could rally to Rs 215-220 by the end of the December derivative series.“Investors who are right now long on RPL futures should roll over their positions to the December series,” he said. The 29-million-tonne-per-annum refinery being built by Reliance Petroleum was originally scheduled to commission by December 2008. However, considering the fact that almost 70% overall progress has already been achieved, the management expects to complete the project ahead of schedule. By crunching the original timeline of three years, the company is poised to create a new world record for project implementation in the refining sector.
Wednesday, November 28, 2007
Monday, November 26, 2007
HPCL:For A Refined Taste
With the valuations of private sector petroleum companies soaring in the current rally, PSU oil stocks appear value buys. HPCL seems to be the most undervalued of the three PSU oil marketing companies
DESPITE THE strong rally on the bourses, one group of companies has strictly remained non-participative — the public sector oil marketing companies (OMCs) IndianOil (IOC), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL). Thanks to cheaper valuations, we believe an investment opportunity exists in this sector. Comparing these three companies on various parameters, HPCL appears to be the most undervalued. It is trading at around its book value and offers over 6% dividend yield at current price. Those looking for a value buy and dividend yield can consider investing in this scrip. HPCL is an integrated refining and marketing company operating two refineries (Mumbai and Visakhapatnam) with a total capacity of 16.2 million tonnes per annum (mtpa). It ranks below IOC and BPCL in retail market share, which is around 17%. HPCL, in a joint venture with Mittal Energy, is setting up a 9-mtpa refinery at Bhatinda in Punjab by ’10. Currently, HPCL sells four petroleum products — petrol, diesel, LPG for domestic consumption and kerosene through the public distribution system — at administered prices determined by the government, which leads to under-recoveries. The government shares a part of these under-recoveries by way of oil bonds, while public sector upstream companies such as ONGC and Gail share a part of the burden through discounts offered to OMCs.
BUSINESS:
HPCL owns or operates 8,000 retail outlets across the country, selling auto fuels, out of which over 3,500 supported with non-fuel offerings are branded ‘Club HP’. For rural India, HPCL has launched the ‘Hamara Pump’ format, wherein farm inputs such as seeds, pesticides and fertilisers are sold along with fuel. It also caters to the LPG requirements of over 25 million households. HPCL is one of the leading players in the domestic lubricants market and is also expanding its aviation turbine fuel (ATF) business. It has floated a number of JVs in the energy value chain to diversify risks and augment its cash flows. Prize Petroleum, in which HPCL holds a 50% stake, is into petroleum exploration and production. It has signed a service contract for an offshore field cluster comprising three oilfields and has also been awarded an onshore block under NELP VI. These initiatives are expected to aid future growth.
Bhagyanagar Gas has commenced CNG operations in Vijayavada and Hyderabad. Similarly, Aavantika Gas is in process of launching CNG operations in Indore, with plans to extend to other major cities in Madhya Pradesh. HPCL holds 22.5% stake in each of these JVs. HPCL has also established JVs for bitumen products, LPG storage and pipelines. It is investing in alternate energy sources and has entered into contract farming for cultivation of Jatropha in Chhattisgarh. It has set up a 10-mw windmill electricity generation capacity, which will be expanded to 100 mw in a phased manner.
VALUE DRIVERS:
HPCL is progressing well in its core business of refining and marketing of petroleum products and has lined up several projects. Its major projects include lube oil base stock upgradation at Mumbai refinery, upgradation for production of Euro IV-compliant fuels, facilities for mixed xylene and propylene production at Mumbai and Vizag refineries and delayed coker unit for bottoms upgradation at Visakhapatnam. These projects will improve product quality, resulting in better margins. It is also planning to develop a special economic zone (SEZ) near its Vizag refinery by setting up a petrochemical and petroleum investment region to produce petrochemicals and other high-value products.
FINANCIALS:
HPCL’s crude throughput witnessed a compounded annual growth rate (CAGR) of 6.6% over the past five years, thanks to capacity expansion and utilisation. This helped HPCL to produce 77% of the petroleum products that it sold during FY07, compared to 68% during FY03, thereby reducing dependence on traded goods. For H1 ended September ’07, sales grew 4% to Rs 43,761 crore, but the value of special oil bonds received from the government came down by 19% to Rs 2,356 crore. Its operating profit margins remained unchanged at last year’s level. A 155% jump in other income helped it register 25% PAT growth at Rs 766 crore.
VALUATIONS:
HPCL appears undervalued compared to its peers, IOC and BPCL, on three main counts. Firstly, HPCL’s price to book value ratio (P/BV) is the lowest at just 1.01. Secondly, its market capitalisation (m-cap) to refining capacity ratio is also the lowest at Rs 5,914 per tpa. And most importantly, its dividend yield is over 6.2%, which is substantially higher than that of its peers. At the same time, nearly onethird of its m-cap is represented by value of its quoted investments, which again, indicates its undervaluation. While high crude oil prices in the international market and excessive dependence on government policies remain the key risks, a softening of prices or the government’s decision to hike domestic fuel prices will lead to a dramatic improvement in HPCL’s finances and may trigger a sharp rise in its stock price.
SLICK MOVES
HPCL operates two refineries at Mumbai and Visakhapatnam with a total capacity of 16.2 mtpa
The company ranks below IOC and BPCL in retail market share, which stands at around 17%
HPCL has a highly attractive dividend yield of over 6.2%
One-third of its m-cap is represented by quoted investments
Its crude throughput has witnessed a 6.6% CAGR over the past five years
HPCL, in a JV with Mittal Energy, will set up a 9-mtpa refinery at Bhatinda by ’10
It also proposes to develop an SEZ near its Vizag refinery by setting up a petrochemical and petroleum investment region
HPCL is investing in alternate energy sources and has entered into contract farming for cultivation of Jatropha Upgradation projects are set to improve product quality, resulting in better margins
DESPITE THE strong rally on the bourses, one group of companies has strictly remained non-participative — the public sector oil marketing companies (OMCs) IndianOil (IOC), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL). Thanks to cheaper valuations, we believe an investment opportunity exists in this sector. Comparing these three companies on various parameters, HPCL appears to be the most undervalued. It is trading at around its book value and offers over 6% dividend yield at current price. Those looking for a value buy and dividend yield can consider investing in this scrip. HPCL is an integrated refining and marketing company operating two refineries (Mumbai and Visakhapatnam) with a total capacity of 16.2 million tonnes per annum (mtpa). It ranks below IOC and BPCL in retail market share, which is around 17%. HPCL, in a joint venture with Mittal Energy, is setting up a 9-mtpa refinery at Bhatinda in Punjab by ’10. Currently, HPCL sells four petroleum products — petrol, diesel, LPG for domestic consumption and kerosene through the public distribution system — at administered prices determined by the government, which leads to under-recoveries. The government shares a part of these under-recoveries by way of oil bonds, while public sector upstream companies such as ONGC and Gail share a part of the burden through discounts offered to OMCs.
BUSINESS:
HPCL owns or operates 8,000 retail outlets across the country, selling auto fuels, out of which over 3,500 supported with non-fuel offerings are branded ‘Club HP’. For rural India, HPCL has launched the ‘Hamara Pump’ format, wherein farm inputs such as seeds, pesticides and fertilisers are sold along with fuel. It also caters to the LPG requirements of over 25 million households. HPCL is one of the leading players in the domestic lubricants market and is also expanding its aviation turbine fuel (ATF) business. It has floated a number of JVs in the energy value chain to diversify risks and augment its cash flows. Prize Petroleum, in which HPCL holds a 50% stake, is into petroleum exploration and production. It has signed a service contract for an offshore field cluster comprising three oilfields and has also been awarded an onshore block under NELP VI. These initiatives are expected to aid future growth.
Bhagyanagar Gas has commenced CNG operations in Vijayavada and Hyderabad. Similarly, Aavantika Gas is in process of launching CNG operations in Indore, with plans to extend to other major cities in Madhya Pradesh. HPCL holds 22.5% stake in each of these JVs. HPCL has also established JVs for bitumen products, LPG storage and pipelines. It is investing in alternate energy sources and has entered into contract farming for cultivation of Jatropha in Chhattisgarh. It has set up a 10-mw windmill electricity generation capacity, which will be expanded to 100 mw in a phased manner.
VALUE DRIVERS:
HPCL is progressing well in its core business of refining and marketing of petroleum products and has lined up several projects. Its major projects include lube oil base stock upgradation at Mumbai refinery, upgradation for production of Euro IV-compliant fuels, facilities for mixed xylene and propylene production at Mumbai and Vizag refineries and delayed coker unit for bottoms upgradation at Visakhapatnam. These projects will improve product quality, resulting in better margins. It is also planning to develop a special economic zone (SEZ) near its Vizag refinery by setting up a petrochemical and petroleum investment region to produce petrochemicals and other high-value products.
FINANCIALS:
HPCL’s crude throughput witnessed a compounded annual growth rate (CAGR) of 6.6% over the past five years, thanks to capacity expansion and utilisation. This helped HPCL to produce 77% of the petroleum products that it sold during FY07, compared to 68% during FY03, thereby reducing dependence on traded goods. For H1 ended September ’07, sales grew 4% to Rs 43,761 crore, but the value of special oil bonds received from the government came down by 19% to Rs 2,356 crore. Its operating profit margins remained unchanged at last year’s level. A 155% jump in other income helped it register 25% PAT growth at Rs 766 crore.
VALUATIONS:
HPCL appears undervalued compared to its peers, IOC and BPCL, on three main counts. Firstly, HPCL’s price to book value ratio (P/BV) is the lowest at just 1.01. Secondly, its market capitalisation (m-cap) to refining capacity ratio is also the lowest at Rs 5,914 per tpa. And most importantly, its dividend yield is over 6.2%, which is substantially higher than that of its peers. At the same time, nearly onethird of its m-cap is represented by value of its quoted investments, which again, indicates its undervaluation. While high crude oil prices in the international market and excessive dependence on government policies remain the key risks, a softening of prices or the government’s decision to hike domestic fuel prices will lead to a dramatic improvement in HPCL’s finances and may trigger a sharp rise in its stock price.
SLICK MOVES
HPCL operates two refineries at Mumbai and Visakhapatnam with a total capacity of 16.2 mtpa
The company ranks below IOC and BPCL in retail market share, which stands at around 17%
HPCL has a highly attractive dividend yield of over 6.2%
One-third of its m-cap is represented by quoted investments
Its crude throughput has witnessed a 6.6% CAGR over the past five years
HPCL, in a JV with Mittal Energy, will set up a 9-mtpa refinery at Bhatinda by ’10
It also proposes to develop an SEZ near its Vizag refinery by setting up a petrochemical and petroleum investment region
HPCL is investing in alternate energy sources and has entered into contract farming for cultivation of Jatropha Upgradation projects are set to improve product quality, resulting in better margins
Wednesday, November 21, 2007
Q2 show belies fertiliser cos’run up on bourses
MOST fertiliser stocks are on a dream run on the bourses over the past one month, appreciating up to 50% during the period and 120% in case of National Fertilisers. This euphoria is mainly driven by expectations about a better future.
However, the optimism is not reflected in the September quarter results of these companies. If at the aggregate level the figures appear unattractive, that is mainly due to the two loss-making heavyweights — Southern Petrochemicals Industries (SPIC) and Fertilisers and Chemicals Travancore (FACT). Most of the other companies have reported healthy performances by improving upon their past.
The group of 21 listed fertiliser posted an aggregate net sales growth of just 6.4% during the quarter to Rs 11,248 crore. Operating margins improved marginally, thanks to reduction in raw materials, power and fuel expenditure while staff and other costs increased.
The loss-making fertiliser manufacturers, SPIC and FACT, witnessed significant fall in sales. Another important company to post a fall in net sales was Chambal Fertilisers. In contrast, GNFC, RCF, Godavari Fertilisers and Coromandel Fertilisers outperformed their peers in sales growth.
Gains on fluctuations in foreign exchange helped the industry report a 39% rise in other income. The resultant PBDIT was 12.7% higher, which translated into 17.3% growth at PBT level on account of slower growth in interest and depreciation. The bottomline growth at the aggregate level was a slower 13.6% at Rs 565 crore, as the tax provisions rose more than proportionately.
GNFC, National Fertilisers, Chambal Fertilisers and Godavari Fertilisers were the star performers during the quarter with PAT growth exceeding 45% on y-o-y basis. Smaller companies such as Asian Fertilisers, Liberty Phosphates and Shiva Fertilisers also put up an impressive show. On the other hand, the performance of companies such as Nagarjuna Fertilisers and RCF was disappointing with fall in profits. SPIC, FACT, Bharat Fertilisers and Rama Phosphates continued to incur net losses.
In the past, a number of fertiliser companies used to derive profit growth mainly from their non-fertiliser businesses. However, during September quarter, Tata Chemicals and GNFC — fertiliser firms which have strong presence in non-fertiliser chemicals — saw the fertiliser division outperforming that of chemicals.
FACT’s disastrous performance too, was on account of heavy losses in its petrochemicals business, while its fertiliser business partially curtailed losses during the quarter. On the contrary, the performance of Deepak Fertilisers improved only because it cut down on its fertiliser business.
The industry is waiting for a new lease of life once the supply of natural gas improves. The government has mandated urea manufacturing units based on fuel oil or naphtha to convert to natural gas by 2010 under the third stage of the new pricing scheme for urea. Considering the ever-rising subsidy burden along with the pending subsidies of earlier years, the government has decided to issue fertiliser subsidy bonds worth Rs 7,500 crore.
Tuesday, November 20, 2007
Oil field services in for good times
Soaring Crude Prices And Conducive Exploration, Production Scenario Boost Sector
AFTER languishing for over two decades, oil field services sector is getting ready for a high tide. The upturn has been largely due to an increase in crude oil prices and a likely move by the government to come out with the seventh round of New Exploration Licensing Policy (NELP), say analysts. The stock prices of most of the companies in the sector have seen a huge appreciation in the past month alone, outperforming the broader indices with a substantial margin in most cases.
Analysts further point out that the offshore support industry is witnessing strong demand due to the conducive global scenario for sustained exploration and production capex. The global petroleum explorations and production (E&P) majors are witnessing high earnings over the hurdle rates internally fixed by the companies. This has helped to sustain the capex. They add that the global offshore rig market is at its strongest point in the past decade and many companies in the sector continue to pose strong fundamentals and high earnings visibility with attractive valuations.
Even if the crude oil prices fall, the demand for offshore supply vessels (OSV) will not go down substantially. They cite various reasons like the global oil scenario, increase in offshore activities and supply factor. “Globally, oil majors are cash rich as the price of crude is high at this time. They are investing heavily in exploration. Further, exploration is moving from onshore to offshore. With the increase in offshore activities, demand for rigs has gone up.”
“Few years back the demand for OSVs was low, and thus supply remained stagnant. Now, the demand has outstripped supply. This has led to a spurt in the prices of even the second hand vessels,” says Chirag Dhaifule of Emkay Share and Stock Brokers. Further, they point out that the emerging Rs 8,000 crore seismic services market in India is driven by a combination of rising oil demand, under-penetrated oil geography and a bullish oil market. This is leading to a substantial growth in not only new exploration projects but the revival of abandoned fields. “About 50% of this business opportunity will be addressed by in house crews of ONGC and Oil India, the remaining business will be executed by merchant third party service providers like Asian Oilfields and Alphageo,” says Sushil Finance equity analyst Kapil Bagaria.
The stock prices of Asian Oilfield, Alphageo and Dolphin Offshore have given returns of about 50% in the past one month alone. The expansion projects of the companies are paying off — Aban Offshore acquired a Norwegian company previous year, its stock has appreciated about 35% in one month. Garware Offshore, which saw 20% appreciation, added some vessels recently. Great Offshore has added four vessels to its fleet in the past 12 months. Similarly, Seamec had acquired a fourth vessel last year, which is now set to commence commercial operations soon. Recently, Asian Oilfield received an order from Oil India worth Rs 72 crore.
AFTER languishing for over two decades, oil field services sector is getting ready for a high tide. The upturn has been largely due to an increase in crude oil prices and a likely move by the government to come out with the seventh round of New Exploration Licensing Policy (NELP), say analysts. The stock prices of most of the companies in the sector have seen a huge appreciation in the past month alone, outperforming the broader indices with a substantial margin in most cases.
Analysts further point out that the offshore support industry is witnessing strong demand due to the conducive global scenario for sustained exploration and production capex. The global petroleum explorations and production (E&P) majors are witnessing high earnings over the hurdle rates internally fixed by the companies. This has helped to sustain the capex. They add that the global offshore rig market is at its strongest point in the past decade and many companies in the sector continue to pose strong fundamentals and high earnings visibility with attractive valuations.
Even if the crude oil prices fall, the demand for offshore supply vessels (OSV) will not go down substantially. They cite various reasons like the global oil scenario, increase in offshore activities and supply factor. “Globally, oil majors are cash rich as the price of crude is high at this time. They are investing heavily in exploration. Further, exploration is moving from onshore to offshore. With the increase in offshore activities, demand for rigs has gone up.”
“Few years back the demand for OSVs was low, and thus supply remained stagnant. Now, the demand has outstripped supply. This has led to a spurt in the prices of even the second hand vessels,” says Chirag Dhaifule of Emkay Share and Stock Brokers. Further, they point out that the emerging Rs 8,000 crore seismic services market in India is driven by a combination of rising oil demand, under-penetrated oil geography and a bullish oil market. This is leading to a substantial growth in not only new exploration projects but the revival of abandoned fields. “About 50% of this business opportunity will be addressed by in house crews of ONGC and Oil India, the remaining business will be executed by merchant third party service providers like Asian Oilfields and Alphageo,” says Sushil Finance equity analyst Kapil Bagaria.
The stock prices of Asian Oilfield, Alphageo and Dolphin Offshore have given returns of about 50% in the past one month alone. The expansion projects of the companies are paying off — Aban Offshore acquired a Norwegian company previous year, its stock has appreciated about 35% in one month. Garware Offshore, which saw 20% appreciation, added some vessels recently. Great Offshore has added four vessels to its fleet in the past 12 months. Similarly, Seamec had acquired a fourth vessel last year, which is now set to commence commercial operations soon. Recently, Asian Oilfield received an order from Oil India worth Rs 72 crore.
Monday, November 19, 2007
ZUARI INDUSTRIES: On Fertile Ground
Zuari Industries’ business is worth Rs 2,750 crore, which is substantially higher than its current m-cap. It’s an ideal stock for those who prefer value investing
ZUARI INDUSTRIES (ZIL), the flagship company of KK Birla group appears grossly undervalued at its current market price. Besides being one of India’s leading fertiliser makers on a standalone basis, the company is also a promoter of Chambal Fertilisers and indirectly holds over 40% stake in Paradeep Phosphates, the country’s secondlargest manufacturer of phosphatic fertilisers. Besides, it has over half a dozen subsidiaries and joint ventures (JVs), most of which are doing well.
However, ZIL’s current market capitalisation (m-cap) doesn’t reflect the embedded value of these other assets. Considering the value of its investments and land bank, we estimate the embedded value of this company to be Rs 2,750 crore, against its current m-cap of just around Rs 930 crore. This makes ZIL an ideal stock for those who prefer value investing. BUSINESS:ZIL currently produces over 1.15 million tonnes per annum of nitrogenous, phosphatic and complex fertilisers at its plants in Goa. Besides these, the company trades in MOP, agrochemicals, biofertilisers and other specialty fertilisers. It has also set up a number of subsidiaries and JVs around its core business. The company currently uses naphtha at its urea plant and plans to convert this to natural gas feedstock by ’09 as per government policy. ZIL is currently in talks with Gail, which may extend its natural gas pipeline from Dabhol to Zuari’s fertiliser plants in Goa.
GROWTH DRIVERS:
Although subject to subsidies, the company’s core business of fertilisers is now profitable and growing steadily. The future outlook of the fertiliser industry seems encouraging. With rising domestic demand for fertilisers, the government has to allow more concessions to the industry, so as to encourage investments and capacity expansions.
The three group companies — Chambal Fertilisers, Paradeep Phosphate and ZIL — have a combined fertiliser production capacity of around four million tonnes. This makes the Zuari group India’s largest fertiliser group with three strategically located plants in west, east and central India. It also gives the Zuari group access to almost 80% of India’s cultivable area and puts it in an advantageous position compared to its peers.
FINANCIALS:The company was making losses till ’04-05 and has turned around subsequently. During FY06, it posted a net profit of Rs 44.4 crore on a consolidated basis, which jumped to Rs 420.9 crore in FY07. This included an extraordinary gain of Rs 350 crore on sale of its stake in its cement JV. The company registered a minor 8.5% growth in net profit to Rs 44 crore during the first half of FY08 against the corresponding period last year, excluding the impact of extraordinary income. Sales during this period fell 4% to Rs 1,235 crore.
VALUATIONS: The company’s core business generated net sales of around Rs 2,400 crore in FY07 and PAT of Rs 90 crore. At the industry P/E of 12, this should be valued at around Rs 1,000 crore, which in itself, is higher than its current mcap. Apart from its core business, ZIL also has a number of investments in subsidiaries and JVs, which are coming of age. The company has two wholly-owned subsidiaries, Indian Furniture Products and Simon India, while it owns 93.5% stake in Zuari Seeds. All these companies have established set-ups and have turned around. Zuari’s stake in all these subsidiaries is worth around Rs 100 crore.
The company also has three JVs — Zuari Maroc Phosphate (50% stake) that owns over 80% in Paradeep Phosphates, Zuari India Oiltanking (50% stake) and Zuari Investments (50% stake). Paradeep Phosphates posted a net profit of Rs 110 crore in FY07. At the industry P/E of 12, this company can be valued at Rs 1,320 crore. ZIL also has investments in some listed companies, such as Chambal Fertilisers (12.9% equity stake). The current market value of these quoted investments is around Rs 350 crore.
Moreover, the company owns land bank in excess of 50 acres in Goa, where it is planning to set up an IT special economic zone (SEZ). The value of this land bank is estimated at around Rs 700 crore. All these put together, ZIL’s current business is actually worth Rs 2,750 crore, which is substantially higher than its current m-cap. This provides an excellent opportunity for long-term investors to benefit from valueunlocking over a period of time.
ZUARI INDUSTRIES (ZIL), the flagship company of KK Birla group appears grossly undervalued at its current market price. Besides being one of India’s leading fertiliser makers on a standalone basis, the company is also a promoter of Chambal Fertilisers and indirectly holds over 40% stake in Paradeep Phosphates, the country’s secondlargest manufacturer of phosphatic fertilisers. Besides, it has over half a dozen subsidiaries and joint ventures (JVs), most of which are doing well.
However, ZIL’s current market capitalisation (m-cap) doesn’t reflect the embedded value of these other assets. Considering the value of its investments and land bank, we estimate the embedded value of this company to be Rs 2,750 crore, against its current m-cap of just around Rs 930 crore. This makes ZIL an ideal stock for those who prefer value investing. BUSINESS:ZIL currently produces over 1.15 million tonnes per annum of nitrogenous, phosphatic and complex fertilisers at its plants in Goa. Besides these, the company trades in MOP, agrochemicals, biofertilisers and other specialty fertilisers. It has also set up a number of subsidiaries and JVs around its core business. The company currently uses naphtha at its urea plant and plans to convert this to natural gas feedstock by ’09 as per government policy. ZIL is currently in talks with Gail, which may extend its natural gas pipeline from Dabhol to Zuari’s fertiliser plants in Goa.
GROWTH DRIVERS:
Although subject to subsidies, the company’s core business of fertilisers is now profitable and growing steadily. The future outlook of the fertiliser industry seems encouraging. With rising domestic demand for fertilisers, the government has to allow more concessions to the industry, so as to encourage investments and capacity expansions.
The three group companies — Chambal Fertilisers, Paradeep Phosphate and ZIL — have a combined fertiliser production capacity of around four million tonnes. This makes the Zuari group India’s largest fertiliser group with three strategically located plants in west, east and central India. It also gives the Zuari group access to almost 80% of India’s cultivable area and puts it in an advantageous position compared to its peers.
FINANCIALS:The company was making losses till ’04-05 and has turned around subsequently. During FY06, it posted a net profit of Rs 44.4 crore on a consolidated basis, which jumped to Rs 420.9 crore in FY07. This included an extraordinary gain of Rs 350 crore on sale of its stake in its cement JV. The company registered a minor 8.5% growth in net profit to Rs 44 crore during the first half of FY08 against the corresponding period last year, excluding the impact of extraordinary income. Sales during this period fell 4% to Rs 1,235 crore.
VALUATIONS: The company’s core business generated net sales of around Rs 2,400 crore in FY07 and PAT of Rs 90 crore. At the industry P/E of 12, this should be valued at around Rs 1,000 crore, which in itself, is higher than its current mcap. Apart from its core business, ZIL also has a number of investments in subsidiaries and JVs, which are coming of age. The company has two wholly-owned subsidiaries, Indian Furniture Products and Simon India, while it owns 93.5% stake in Zuari Seeds. All these companies have established set-ups and have turned around. Zuari’s stake in all these subsidiaries is worth around Rs 100 crore.
The company also has three JVs — Zuari Maroc Phosphate (50% stake) that owns over 80% in Paradeep Phosphates, Zuari India Oiltanking (50% stake) and Zuari Investments (50% stake). Paradeep Phosphates posted a net profit of Rs 110 crore in FY07. At the industry P/E of 12, this company can be valued at Rs 1,320 crore. ZIL also has investments in some listed companies, such as Chambal Fertilisers (12.9% equity stake). The current market value of these quoted investments is around Rs 350 crore.
Moreover, the company owns land bank in excess of 50 acres in Goa, where it is planning to set up an IT special economic zone (SEZ). The value of this land bank is estimated at around Rs 700 crore. All these put together, ZIL’s current business is actually worth Rs 2,750 crore, which is substantially higher than its current m-cap. This provides an excellent opportunity for long-term investors to benefit from valueunlocking over a period of time.
Dazzling Delight
Renaissance Jewellery’s IPO is fairly priced,with detachable share warrant being an additional sweetener.Investors with a 12-month horizon can subscribe to it
COMPANY: RENAISSANCE JEWELLERY
ISSUE SIZE: Rs 66.6-79.9 CRORE
PRICE BAND: Rs 125-150
DATE: NOVEMBER 19-21, ’07
MUMBAI-BASED Renaissance Jewellery is coming out with an IPO of 5.3 million equity shares of Rs 10 each. The company will also issue one detachable share warrant for every two equity shares allotted, convertible into equity shares after 16 months of the allotment at 125% of the issue price. Postissue, the promoters’ shareholding will come down to 71%, which will further fall to 62%, assuming full exercise of warrants. The company intends to raise around Rs 80 crore (at the upper price band) to fund its expansion plans. It plans to expand its manufacturing units in Mumbai and Bhavnagar and set up a subsidiary in the US to expand its marketing activities. Investors with a 12-month horizon can consider subscribing to the issue.
BUSINESS:
Renaissance Jewellery is a decade-old company promoted by Niranjan Shah. It manufactures studded gold, platinum and silver jewellery primarily for the US market.
The company has three manufacturing units — two in Santacruz Electronic Export Promotion Zone (SEEPZ) in Mumbai and a 100% export-oriented unit (EOU) in Bhavnagar — to cater to the exports market. Besides, its two wholly owned subsidiaries — Verigold Fine Jewellery and Renaissance Retail Ventures — have manufacturing facilities at SEEPZ and Andheri, respectively. The units in SEEPZ and the EOU enjoy income tax exemption till FY09.
The company boasts of a 40-member team of skilled designers, who are able to develop a large number of designs in line with the current fashion trends. In the domestic market, the company has set up around eight retail outlets through its subsidiary and sells jewellery products under the brand ‘Lucera’, which is being positioned as an affordable fashion accessory.
The company has three manufacturing units — two in Santacruz Electronic Export Promotion Zone (SEEPZ) in Mumbai and a 100% export-oriented unit (EOU) in Bhavnagar — to cater to the exports market. Besides, its two wholly owned subsidiaries — Verigold Fine Jewellery and Renaissance Retail Ventures — have manufacturing facilities at SEEPZ and Andheri, respectively. The units in SEEPZ and the EOU enjoy income tax exemption till FY09.
The company boasts of a 40-member team of skilled designers, who are able to develop a large number of designs in line with the current fashion trends. In the domestic market, the company has set up around eight retail outlets through its subsidiary and sells jewellery products under the brand ‘Lucera’, which is being positioned as an affordable fashion accessory.
GROWTH STRATEGY:
The company has recently forayed into new product categories such as bridal and solitaire jewellery, which are high-margin categories compared to fashion jewellery. It has decided to increase its market reach by targeting medium and small-sized retailers and is setting up a subsidiary in the US. A portion of the IPO funds will be utilised to expand its manufacturing capacities. The company also plans to expand its presence in other overseas markets such as the Middle East and Far East. It even intends to expand its domestic retail business through its subsidiary.
FINANCIALS:
The company’s sales have witnessed a compounded annual growth rate (CAGR) of 37.6% from FY03 to reach Rs 438.5 crore in FY07, while PAT saw a 61.7% CAGR to stand at Rs 25.4 crore in FY07. During the quarter ended June ’07, the company posted a net profit of Rs 7.2 crore on total income of Rs 122.8 crore. Its PAT margins have risen consistently during this period to reach 6.1% in the June ’07 quarter. During the latest quarter, the company derived nearly 96.7% of its revenues from the US. Sales from the domestic market contributed a mere 0.4% to its revenue, while exports to rest of the world stood at 2.9%.
VALUATIONS:
At the lower price band of Rs 125 per share, the P/E multiple works out to 7.9, considering annualised EPS of Rs 15.7 for the quarter ended June ’07 on post-IPO equity. P/E at the higher price band of Rs 150 is 9.5. The group of comparable listed companies is currently trading at an average P/E of 18.3. Comparatively, the IPO appears fairly priced, with the warrants being an additional sweetener. RISK FACTORS: Renaissance Jewellery is highly dependent on a small group of large customers in the US for its sales. The company wants to diversify its risk by reaching out to smaller players, but it has not conducted any market survey for its feasibility. Recently, global gold prices have shot up above $800/troy ounce.
Jewellery imports into the US used to enjoy preferential treatment earlier, but since July ’07, an import duty of 5% has been imposed on them. These factors are likely to affect demand for the company’s products negatively over a period of time. Moreover, depreciation in the US dollar may affect the company’s operating margins, going forward.
Jewellery imports into the US used to enjoy preferential treatment earlier, but since July ’07, an import duty of 5% has been imposed on them. These factors are likely to affect demand for the company’s products negatively over a period of time. Moreover, depreciation in the US dollar may affect the company’s operating margins, going forward.
Wednesday, November 14, 2007
Subsidy fossil turns fuel for promoting inefficient economy
THE government decision to stick to the easy solution of subsidising petroleum products to shield people from rising international crude oil prices has caused a perverse situation. While it has destroyed the wealth of shareholders of oil marketing companies (OMC), huge liabilities have been created for future. The oil bonds, which the government has issued and is planning to issue for 2007-08, will create a huge burden of over Rs 60,000 crore to be repaid in future. That’s not all. A policy of cheap oil means less incentive for consumers and industry to conserve energy.
Reeling under mounting losses, the OMCs have turned out to be losers on bourses, when other companies created enormous wealth for their shareholders. By October 2007, the Sensex had gained around 45% during previous 12 months and private oil major Reliance Industries had more than doubled its market capitalisation. In contrast, government-owned OMCs witnessed a fall in their market capitalisation. During the October 2006-October 2007 period Indian Oil’s market capitalisation fell 5.3%, BPCL’s by 16.8% and that of HPCL by 28.4%. However, the situation has marginally improved as IOC’s market capitalisation rose in last two weeks.
It is the government, which has emerged the biggest loser being the largest shareholder in these OMCs while the situation of the retail investors in these companies continues to remain miserable.
And who is responsible for this value destruction? Of course the subsidies of fuels by the government. The government feels it necessary to offer petrol and diesel at lower rates for retail consumption to shield Indian consumers from inflationary pressure of higher oil prices. But there was a better way to achieve this, lower the burden on indirect taxes, Custom duty, excise and sales tax, imposed on these products.
Besides the heavy spurt in international crude oil prices, huge indirect taxes imposed by central, state and local governments are all the same responsible for the over-inflated retail prices of petrol and diesel in India. Indian retail prices of petrol and diesel typically comprise of around 55% of taxes i.e. out of Rs 50 per litre of petrol that a consumer pays around Rs 27.50 goes in form of various taxes.
High level of indirect taxes in itself is not an evil and India consumers are certainly not the highest taxed citizens in this regard. European countries historically have even higher indirect taxes on these transport fuels, which has helped the governments to raise resources while inducing energy conservation. Despite the high level of economic growth, the consumption of petroleum products in the Europe has grown at a CAGR of 1.3% over last 15 years - substantially lower compared to 1.9% in the US, which favours cheap oil policy.
However, the current situation in India is comic where both - high taxes and subsidies - co-exist. While the political leadership wants to offer the fuels at subsidised rates, it is not ready to cut down on its handsome tax income. Oil sector contributes over one-third of Indian government’s gross tax revenues. The issue of oil bonds to the OMCs to finance these subsidies means the government is ‘eating the cake and having it too’ - only it is borrowing its cake from the future. Because, these oil bonds have created liabilities for future.
Except for the illusion of softening inflation thanks to cheaper fuel, the government has achieved little from this financial jugglery. The value destruction has been immense during the entire process. At the average Sensex growth of 45% the trio IOC, HPCL and BPCL could have added over Rs 38,000 crore to their market capitalisation during last 12 months. At the same time, the growth in ONGC’s market capitalisation could have been tremendous, had it not been forced to share the subsidies.
The issue of the oil bonds will have serious long-term ramifications apart from the more visible financial impact. Cheaper fuel will inevitably increase wasteful consumption of petroleum products within the country resulting in higher import bill. At the same time, availability of subsidised fuels will hamper growth of alternatives or better technologies towards conservation of petroleum resources. Lastly, lack of competition from the private sector may lead to higher inefficiencies within the OMCs.
Reeling under mounting losses, the OMCs have turned out to be losers on bourses, when other companies created enormous wealth for their shareholders. By October 2007, the Sensex had gained around 45% during previous 12 months and private oil major Reliance Industries had more than doubled its market capitalisation. In contrast, government-owned OMCs witnessed a fall in their market capitalisation. During the October 2006-October 2007 period Indian Oil’s market capitalisation fell 5.3%, BPCL’s by 16.8% and that of HPCL by 28.4%. However, the situation has marginally improved as IOC’s market capitalisation rose in last two weeks.
It is the government, which has emerged the biggest loser being the largest shareholder in these OMCs while the situation of the retail investors in these companies continues to remain miserable.
And who is responsible for this value destruction? Of course the subsidies of fuels by the government. The government feels it necessary to offer petrol and diesel at lower rates for retail consumption to shield Indian consumers from inflationary pressure of higher oil prices. But there was a better way to achieve this, lower the burden on indirect taxes, Custom duty, excise and sales tax, imposed on these products.
Besides the heavy spurt in international crude oil prices, huge indirect taxes imposed by central, state and local governments are all the same responsible for the over-inflated retail prices of petrol and diesel in India. Indian retail prices of petrol and diesel typically comprise of around 55% of taxes i.e. out of Rs 50 per litre of petrol that a consumer pays around Rs 27.50 goes in form of various taxes.
High level of indirect taxes in itself is not an evil and India consumers are certainly not the highest taxed citizens in this regard. European countries historically have even higher indirect taxes on these transport fuels, which has helped the governments to raise resources while inducing energy conservation. Despite the high level of economic growth, the consumption of petroleum products in the Europe has grown at a CAGR of 1.3% over last 15 years - substantially lower compared to 1.9% in the US, which favours cheap oil policy.
However, the current situation in India is comic where both - high taxes and subsidies - co-exist. While the political leadership wants to offer the fuels at subsidised rates, it is not ready to cut down on its handsome tax income. Oil sector contributes over one-third of Indian government’s gross tax revenues. The issue of oil bonds to the OMCs to finance these subsidies means the government is ‘eating the cake and having it too’ - only it is borrowing its cake from the future. Because, these oil bonds have created liabilities for future.
Except for the illusion of softening inflation thanks to cheaper fuel, the government has achieved little from this financial jugglery. The value destruction has been immense during the entire process. At the average Sensex growth of 45% the trio IOC, HPCL and BPCL could have added over Rs 38,000 crore to their market capitalisation during last 12 months. At the same time, the growth in ONGC’s market capitalisation could have been tremendous, had it not been forced to share the subsidies.
The issue of the oil bonds will have serious long-term ramifications apart from the more visible financial impact. Cheaper fuel will inevitably increase wasteful consumption of petroleum products within the country resulting in higher import bill. At the same time, availability of subsidised fuels will hamper growth of alternatives or better technologies towards conservation of petroleum resources. Lastly, lack of competition from the private sector may lead to higher inefficiencies within the OMCs.
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