RIL warrant conversion ups promoter stake to 49%

THE scrip of Reliance Industries (RIL), India’s largest company by market capitalisation, shed over 7.6% on Friday, just before the promoters converted their 12 crore warrants into an equal number of shares. Posttransaction, the promoter group holds 49% stake in the company, with 52% voting rights. This involves an infusion of around Rs 15,142 crore into the company. The shares have a lock-in period of three years.
Despite the warrant conversion, the promoter group’s stake is below the 51.37% it held in the company on June 30, 2008. A close inspection of RIL’s shareholding pattern reveals considerable changes in the promoter group’s holding during the July-September quarter.
Promoters’ stake had gone down from 51.37% to 44.8% — representing a decline of 9.54 crore equity shares — between July 1 and September 30, 2008. After the warrant conversion, this has gone up to 49%.
During the September quarter, nearly 9.42 crore shares were transferred from the promoter group to various RIL subsidiaries and are now classified as public shareholding, but with non-voting shares.
Replying to questions on these transactions, an RIL spokesperson said: “Eight body corporates holding 9.42 crore treasury shares of RIL for the benefit of its shareholders, have since become subsidiaries of RIL.” RIL market cap dips
“AS A RESULT,these shares do not enjoy voting rights and cannot be classified under promoter group. The promoter group companies have not sold any RIL shares for subscribing to warrants,” the RIL spokesperson added.
The spokesperson also said that loans from RIL to these companies were converted to equity share capital. However, he said that he can’t elaborate on the events that triggered the transfer of ownership in these eight body corporates or the price at which they were transferred. The latest shareholding pattern shows eight subsidiary companies holding 9.42 crore shares of RIL. Among these three private limited companies — Reliance Chemicals, Reliance Polyolefins and Reliance Universal Enterprises — hold 9.02 crore shares or 6.2% stake and five other companies together account for the rest 40 lakh shares.
Since the promoter group’s shareholding has fallen by 9.54 crore in the July-September quarter, there still remains some confusion about 12.55 lakh shares, which is the difference between these two figures. Commenting on the change in RIL’s promoter group shareholding, SP Tulsian, an independent investment advisor, said: “Under the earlier conditions, the conversion of warrants would have taken the promoters’ holding in RIL beyond 55% triggering an open offer under the Sebi guidelines.” It seems the promoters wanted to avoid such a situation.
In the past 10 trading sessions, RIL has lost nearly 15% of its market capitalisation wiping out nearly Rs 44,000 crore of investor wealth. The price-to-earnings ratio (P/E) of the scrip has come down to 12.8, a level last witnessed in June 2006.

Oilcos may slip on softening crude

Standalone & Private Sector Refiners Likely To Perform Better Than Oil Marketing Cos

CRUDE oil, which had of late become an asset, registered a major meltdown as the turmoil in the global financial markets hit a new peak. Within weeks, NYMEX crude oil futures fell below $93 on September 16, 2008. Although it recovered to $110 level after that, by Septemberend the prices are again back at $96. Considering the $147 peak in July 2008, crude prices have lost nearly 35% through the quarter ended September 2008.
While low petroleum prices in general are welcome for the Indian petroleum industry, which is reeling under huge under-recoveries, the sudden crash in oil prices actually means more losses. This happens because petroleum refiners purchase crude at a higher price and by the time they process and ready it, the refined products for sale command a substantially lower price in the market. There is usually a gap of 30 days between purchase of crude and sale of refined products. When Indian petroleum refiners publish their performances in September 2008 quarter later this month, the phenomenon is likely to lead to a heavy erosion in their gross refining margins (GRMs). This will be in sharp contrast to the preceding quarter, when the sustained rise in crude oil prices had enabled them post super-normal GRMs and a spurt in profits.
“The refinery margins, which are otherwise healthy at $6-7 per barrel, will get hit by the inventory losses in September quarter,” told Indian Oil finance director SV Narasimhan. The company had posted historically highest GRMs of $16.8 per barrel in the June 2008 quarter on hefty inventory gains.
MRPL finance director LK Gupta agreed, “The inventory losses could be so big this time that the entire GRMs might get wiped out. However, it will just average out the booster we got in the preceding quarter.” Like most other domestic refiners, MRPL too had posted its record high GRM of $18.1 in the June 2008 quarter.
An analysis of a similar oil price crash in August 2006 to January 2007 period — when crude oil prices tumbled one way from $77 to $50 — shows the huge pressure that domestic refiners faced on their GRMs. (See table). The only exception was RIL, which posted healthy GRMs — although lower than the year’s average — during September 2006 and December 2006 quarters.
RIL was an exception even in the June 2008 quarter, when it did not book inventory gains, allowing the public sector refineries to post GRMs higher than its own, perhaps for the first time in its history. It is, therefore, expected that even this time round, RIL would escape with a healthy doubledigit GRM as against the other domestic refiners, who will post low single digit or possibly even negative GRMs.
The general business environment has also deteriorated for petroleum refiners with a weakening in the buoyant GRMs witnessed in earlier months. “In July, we saw diesel cracks abnormally high above $40 per barrel, which have now come down to around $20 levels,” informed Narasimhan.
At the same time, marketing operations of the state-owned oil marketing companies — IOC, BPCL and HPCL — continue to lose money. “Our daily loss on marketing is still over Rs 200 crore. Weakening of rupee is adding to our woes. And considering the weak global investment outlook, there is little possibility that rupee will strengthen in the immediate future,” informed SV Narasimhan.
With a number of factors going wrong, domestic petroleum refiners are expected to come out with dismal results for the upcoming quarter. Standalone and private sector refiners including MRPL, Chennai Petroleum, RIL and Essar Oil will be somewhat better off compared to the marketing players like IOC, BPCL and HPCL. While RIL is likely to battle the odds to post a double-digit GRM, some of the others could even dip in the red.

Aban Offshore :Tapping The Riches

Aban Offshore looks promising, given its future growth prospects. But its highly leveraged status makes it a better fit for investors with a high risk appetite

Beta: 0.49
Institutional Holding: 21.2%
Dividend Yield: 0.2%
P/E: 51.3
M-Cap: Rs 7,938 cr
CMP: Rs 2,100

ABAN OFFSHORE is India’s largest company in the offshore drilling industry. Its market capitalisation (m-cap) trebled year-on-year to Rs 20,000 crore in January ’08 on expectations of a sharp jump in its revenues and profits. Ironically, just when these expectations are about to turn into reality, its m-cap has lost more than 60% of its value. Considering the attractive rates at which Aban’s fleet of offshore rigs is deployed and the strength in the global market for such equipment, its valuations look attractive in the long term.

BUSINESS:
Aban owns a fleet of 16 jack-up rigs, four drill ships and one floating production unit used in the offshore petroleum production industry. The company, which acquired Norway-based Sinvest in March ’07, is currently ranked 11th in the global offshore drilling industry. Aban added two new rigs in FY08 and will be adding four more in FY09. With these, the company will have nine brand new rigs in its total fleet of 21. It set up a subsidiary in Singapore in ’05 for tax benefits, which now owns most of the company’s vessels. Aban has also ventured into wind power generation, which contributed revenues worth Rs 12 crore in FY08. The company offers a number of its vessels on longterm charters, while offering others on short charters to benefit from trends in the spot market. At present, the company has seven vessels chartered for over three years or more, while nine vessels will complete their contracts in the next 12 months.

GROWTH DRIVERS:
With the spurt in global exploration and production (E&P) activities over the past few years, the demand for offshore drilling assets has gone up substantially. This has not only boosted the daily charter rates for such assets, but their utilisation rates have also increased. Aban Offshore is in a sweet spot to benefit from this boom. The company, which had consolidated revenues of just Rs 3,230 crore in the preceding 36 months, already has firm contracts worth Rs 7,400 crore for the next 36 months. At present, three of its vessels are yet to be deployed, while several others will complete their current contracts and get redeployed over these 36 months, further boosting the company’s revenues.
Global offshore drilling expenditure, which was $30 billion in ’07, is expected to rise to $55 billion by ’11, thanks to the sustained increase in oil prices. This is increasing pressure on oil companies globally to accrue new reserves, while the viability of marginal fields has increased.
The company plans to raise funds to retire its debt, while financing its plans to boost deepsea capabilities. It also plans to add more floating production units to support new oilfields, which can be chartered for long durations.

FINANCIALS:
At the time of the acquisition of Sinvest in FY07, Aban had to raise substantial finances, which the company managed to do without diluting equity capital. Instead, it issued preference shares and raised heavy debt. This led to a spurt in its debt-toequity ratio to 20 last year on a consolidated basis, which came down to 16 for the year ended March ’08. The interest coverage ratio has also improved marginally to 1.6 in FY08 from 1.1 in FY07. Aban’s strong cash flows and future visibility thereon are helping the company to sustain such high leveraging. During FY08, the company’s consolidated operating cash flows jumped 2.6 times to Rs 834 crore from Rs 319 crore last year. For the year ended March ’08, Aban posted a consolidated net profit of Rs 123 crore on revenues of Rs 2,021 crore.
Its profit was affected by a mark-to-market loss of Rs 194.4 crore on its outstanding loans. However, it is a net foreign exchange earner, which provides a natural hedge against repayments of foreign loans.

VALUATIONS:
At the current price of Rs 2,100, the company is trading at 51.3 times its consolidated profit for the year ended March ’08. However, it is expected to more than double its revenue to Rs 4,240 crore in FY09 on a consolidated basis, maintaining its operating margin above 60%. The consolidated net profit is expected to touch Rs 936 crore, translating into earnings per share (EPS) of Rs 248. The current market price is just 8.5 times the expected FY09 earnings. Given its growth prospects at one end and highly leveraged business strategy at the other end, the scrip can be considered by investors who have high risk appetite.

EVEREST KANTO Cylinders : Riding The Boom

Everest Kanto Cylinders will be a key beneficiary of the increasing popularity of CNG as a transport fuel both in India and abroad. Long-term investors can consider the stock

EVEREST KANTO Cylinders (EKC) is India’s largest producer of highpressure seamless cylinders for industrial and automotive applications. With increasing usage of compressed natural gas (CNG) globally as a transport fuel, the demand for seamless cylinders is rising rapidly. Considering EKC’s leading position in the industry and aggressive expansion plans, it is set to emerge as a key beneficiary of this boom. Long-term investors can consider this stock.

BUSINESS:
EKC has five manufacturing facilities located across India, Dubai and China, with a total installed capacity of 0.8 million cylinders per annum (cpa). The company caters to the demand for high-pressure cylinders and CNG cascades in India, as well as Iran, Pakistan, Bangladesh, Thailand, Malaysia, Egypt and CIS countries.
EKC’s Chinese unit commissioned production at its 2,00,000-cpa plant in March ’08. The company, which is expected to achieve 100% capacity utilisation by the year end, is likely to get the regulatory approval to sell its products in China by the end of October. In April ’08, EKC acquired US-based CP Industries for $66 million, which is a world leader in high-pressure jumbo cylinders for storing and transporting industrial gases. This acquisition supplemented EKC’s product portfolio, while providing it the necessary knowhow to produce similar cylinders for the Indian market.

GROWTH DRIVERS:
EKC is setting up a 2,00,000-cpa facility at Gandhidham in Gujarat to manufacture industrial cylinders from billets, as well as another plant to manufacture large-sized jumbo cylinders. Both these projects are expected to be commissioned by December ’08. The company is also setting up a 3,00,000-cpa plant in the Kandla SEZ in Gujarat, which will be commissioned by June ’09. EKC plans to increase its capacity in China five-fold to 1 million cpa in three years, taking its total cylinder capacity (industrial and CNG) to 2.3 million cpa by FY12 from 0.8 million cpa. Historically, the lack of infrastructure for storing, transporting and dispensing CNG has come in the way of its becoming a popular transport fuel. But the scene is changing rapidly, thanks to the spurt in crude oil prices. Globally, a number of countries are shifting to CNG as a transport fuel, which is cheaper and cleaner, compared to petrol and diesel. India, which has CNG available only in a few cities at present, has chalked out plans to launch city gas distribution (CGD) projects in over 230 cities.
Gail — India’s largest transporter of natural gas — now has a subsidiary to focus on its CGD business and has set up CNG stations along all major highways. At the same time, the availability of natural gas in India is set to double in the next three years. As more natural gas becomes available and CNG infrastructure improves across the country, the demand for CNG vehicles will also rise multifold, which, in turn, will boost demand for CNG cylinders. A similar scenario is unfolding across various other countries. As per the International Association of Natural Gas Vehicles, the number of natural gas vehicles (NGVs) globally has witnessed a CAGR of 30% in the past five years to reach 8.5 million vehicles at present, and is expected to see a CAGR of 20% till ’20 to 65 million vehicles.

FINANCIALS:
EKC’s net profit has seen a CAGR of 90% over the past five years to reach Rs 104 crore in FY08. In the same period, its net sales have recorded a CAGR of 43%. The company’s operating margins have risen consistently over the past five years to touch 30% in the 12-month period ended June ’08. Since EKC has been in an expansion mode, its return on capital employed (RoCE) has halved in the past three years to 18.5%. Operating cash flows have stayed negative in the past two years due to an increase in inventory and debtors. Inventory was high as EKC stocked up on raw materials, expecting their prices to rise. High debtors on balance sheet result from high sales during March due to depreciation benefits available to buyers.

VALUATIONS:
At CMP of Rs 290.6, the scrip is trading at 24.8 times EPS for trailing 12 months. Going forward, we expect the company to post a net profit of Rs 183 crore for FY09 on sales of Rs 872 crore. Thus, based on the estimated EPS for FY09 the P/E works out to 16.3.

SHATTERED

The Business Confidence Index has crashed to a five-year low of 125.8. The mood is strongly negative across sectors, companies and regions. With a full-fledged crisis playing out in the global arena, growth in domestic demand remains India Inc’s only hope

THE weakness in the global economy, rising inflation and India’s worsening fiscal deficit find a strong echo in the 65th round of the ETNCAER Business Expectations Survey (BES) conducted in July 2008. The survey reports an across-theboard sharp fall in the Business Confidence Index (BCI) to a five-year low and paints a rather sombre picture for the rest of 2008.
The July 2008 survey shows an increase in the number of respondents who have a negative outlook on all the four major parameters measuring BCI — overall economic conditions, financial position, investment climate and capacity utilisation level. There is a silver lining though — while the number of negative respondents has indeed risen, more than half of the total number of respondents continue to have a positive outlook. However, when it comes to perceptions about the investment climate, the number of positive respondents has fallen below 50%.
The BCI, which gives equal weightage to all the four criteria, has slipped by 23 points to 125.8 points from 148.7 recorded in the survey conducted in April 2008. The fall is pervasive — across parameters, sectors, regions and company size.

SECTOR VECTOR
While the BCI of the services industry has taken the biggest hit, the consumer durables sector — which had slumped the most in the April survey — has recorded the lowest fall across sectors in the current round. The BCI of the capital goods sector remains significantly higher than all the other sectors.

ZONAL CHECKPOST
The western region, which was languishing at the bottom in the previous survey, has taken the biggest hit vis-à-vis other regions in the current round. The region’s BCI fell to 99.3 — substantially below the average level, making it the most pessimistic of all the four regions in the country. Though the percentage of positive respondents in the eastern zone has fallen marginally in the current round, it still remains the most optimistic of all regions in the country.

SIZE MATTERS
The business confidence of the biggest corporates (with a turnover above Rs 500 crore) and the smallest companies (turnover below Rs 1 crore) recorded the sharpest fall. While a worsening of the overall economic conditions was the primary reason for the fall in BCI of large players, sub-optimal capacity utilisation levels hit the smaller players hard. Among companies, private sector firms witnessed a faster erosion of confidence vis-à-vis their public sector counterparts. In fact, public sector companies are now more confident about the overall economic conditions as well as their financial position in 2008, compared to the sentiment in the April BCI survey.

LABOUR PANGS
As a result of the worsening outlook, the labour market, too, is expected to remain subdued. A majority of the respondents predict no change in their workforce. The number of respondents expecting a wage hike in the next six months has increased markedly.

A RAW DEAL
With double-digit inflation and soaring commodity prices, the raw material costs of domestic manufacturers have also shot up. More than 55% of the respondents — substantially up from just 24.6% in the previous round — report an over 5% jump in raw material costs over the preceding quarter. Over 70% of the respondents feel that prices will continue to increase in the next six months. The intermediate goods sector is likely to be the worst hit by rising raw material costs.

RATE WOES
India Inc expects interest rates to keep pace with the high inflation rate. The number of respondents expecting interest rates to rise beyond 12% has grown substantially. However, high interest rates are not expected to strengthen the rupee.

HOPE FLOATS
Although the overall business confidence is down, expectations about sales and production growth have improved. While on the one side, the number of respondents expecting a fall in production and sales has increased, the proportion of respondents expecting more than a 10% growth has also gone up substantially. In fact, the percentage of respondents expecting a more than 10% growth in the consumer durables sector has gone up to 41.8% in the July survey against 11.7% in the previous survey. With the outlook for exports weakening, higher production and sales reflect confidence in the demand growth within the country.
However, this does not mean that India Inc is bullish on its profit growth. The services sector is the most pessimistic, as over 77% of the respondents see no growth in profits over the next six months. But, on the other hand, more than 50% of the respondents expect consumer durables and capital goods sectors to record higher profits. The sudden fall in the BCI, although not totally unexpected, is certainly worrisome. The survey reveals that India Inc is already grappling with slower production and sales growth, pressure on margins, weakness in the labour market, slowing exports and weakening rupee. The strength being shown by the consumer durables and capital goods sectors and a potential for healthy demand growth in the domestic market are the only silver linings on a darkening horizon.

SOLAR EXPLOSIVES: Big Bang For Your Buck

Given Solar Explosives’ leadership position, expansion plans and entry into the coal mining business, long-term investors can consider the stock

SOLAR EXPLOSIVES (SEL) is a Nagpur-based manufacturer of industrial explosives, which are mainly used for mining and infrastructure projects. SEL, which is the market leader in India, is likely to benefit from growth in the country’s mining sector and several new infrastructure projects. In light of SEL’s expansion plans and forward integration into the coal mining business, long-term investors can consider this stock.

BUSINESS:
Established in 1996 with a capacity of 6,000 tonnes cartridge explosives, SEL has become one of the leaders in the domestic explosives industry and a major exporter. Its current capacity stands at 80,000 tonnes cartridge explosives, 94,450 tonnes bulk explosives and 140 million detonators. SEL controls nearly 20% of India’s explosives market, currently valued at $400 million. The company has successfully commissioned 12 bulk plants at various locations supported by one plant each for manufacturing cartridges, detonators and detonator components. It has a bulk explosives plant in the vicinity of every subsidiary company of Coal India, as well as in Singareni Collieries. The company has now started operations with Tata Steel in Jharkhand. Last year, SEL acquired 74% stake in Navbharat Coalfields, which owns a mining lease on a coal block in Chhattisgarh with reserves of 36 million tonnes (mt). Recently, it obtained permission to pick up 24% stake in a joint venture with Chhattisgarh Mineral Development Corporation (CMDC) for development, mining and marketing of coal with estimated reserves of 80 mt at Shankarpur in Chhattisgarh. The commercial operations at these mining projects are expected to start in FY10.

GROWTH DRIVERS:
India’s mining and infrastructure industries are growing rapidly and the pace of growth is not likely to slacken in the near future. To meet the power generation targets set in the 11th Five-Year Plan, India will need huge amounts of additional coal. This will increase the country’s coal output to 684 mt per annum (mtpa) from around 450 mtpa currently. The Planning Commission estimates that 17,000 megawatts (mw) hydel power capacity will come up in the 11th Plan period, which will involve heavy excavation work, adding to the demand for explosives. During the same period, the domestic production of steel is expected to increase from around 55 mt currently to 80 mt. The same applies to most other metals and minerals. These initiatives will boost the demand for explosives, which is likely to grow at around 10% every year for the next 4-5 years. SEL has already expanded its capacities in India to cater to the growing domestic market and it also exports its products. It is now spending around Rs 23 crore to set up a bulk explosives plant in Nigeria to be commissioned by March ’09, supported by another plant in Africa by June ’09. These plants will cater to the African demand for explosives, which are currently imported at high prices. This will enable the company to earn higher margins.

FINANCIALS:
SEL’s sales have grown at a cumulative annual rate (CAGR) of 51.7% over the past five years to reach Rs 281 crore in FY08. Its PBDIT grew 61.2% to Rs 71 crore, while net profit expanded at an even higher pace of 64.2% to reach Rs 36 crore during the same period. The company’s return on capital employed (RoCE) improved to 22% in the year ended March ’08 after averaging around 16% in the past five years. SEL’s current debt-equity ratio is comfortably placed at 0.6 with no long-term debt. Since SEL is in a growth phase, it is a low dividendpaying company. Although it has consistently paid dividends in the past five years, the dividend payout has remained below 15% of its net profit. Considering the dividend for FY08, SEL’s dividend yield works out to around 0.7%.

VALUATIONS:
At the current market price of Rs 409, the scrip trades at 18 times its profit for the past 12 months. Going forward, we expect the company to report a profit of Rs 50 crore in FY09 and Rs 72 crore in FY10. Thus, the current price is 14.2 times its estimated FY09 earnings and 9.8 times its estimated FY10 earnings. Among its competitors, Keltech Energies and Premier Explosives, which are smaller companies, are trading at P/E multiples of around 7.5 each. Gulf Oil, which is trading at a P/E of around 16.5, and has an explosives business comparable to that of SEL, derives over 65% of its turnover from lubricants and other businesses. Although SEL appears to be fairly valued at present, its leadership position, expansion plans and entry into coal mining justify the same. The company is likely to generate healthy returns for longterm investors.

CHEMCEL BIOTECH: High & Dry

A long-lead project, risky nature of business and steep pricing make Chemcel Biotech’s IPO unattractive

COMPANY: CHEMCEL BIOTECH
ISSUE SIZE: Rs 24.64 CRORE
PRICE: Rs 16
DATE: SEPTEMBER 9-12, ’08

CHEMCEL BIOTECH (CBL) is a Hyderabad-based regional agrochemicals company focusing on five districts of Andhra Pradesh. The company is coming out with an IPO to raise Rs 24.64 crore, which will be used to set up a bio-diesel plant and repay loans. Considering the company’s weak financials and small size, unattractiveness of the industry in which it operates, and uncertainties over the successful implementation and future profitability of its proposed bio-diesel project, we find the IPO too expensive. Investors can give it a miss.

BUSINESS:
CBL is a pesticide formulator with 34 product registrations to manufacture pesticides for crops such as paddy, cotton and sugarcane. It plans to expand its reach to entire Andhra Pradesh over the next 12 months. The agrochemicals industry in India is seasonal, highly competitive and directly dependent on the vagaries of nature; hence, it is working capital intensive. The company’s products are in three formats — liquids, granules and dusts. CBL has 1,000 kilolitres of liquid capacity, 1,000 tonnes of granules and 300 tonnes of dusts capacity. During FY08, the average capacity utilisation was around 30%. Around 40% of the IPO proceeds will be invested to set up a small 6,000 tonne per annum bio-diesel plant in Andhra Pradesh, which will need to process 20,000 tonnes of jatropha oil seeds every year.
The company, through its 60% subsidiary Jetro Petro Biotech, has entered into long-term contracts with 179 farmers for growing jatropha plants in their land aggregating 2,000 acres.
Commercial production from this biodiesel plant is expected to commence by September ’09.
As the jatropha cultivation is just a year old in the areas contracted by the company, it may have to source feedstock from the open market for the first few months after it commissions the bio-diesel plant. This may depress the capacity utilisation levels and profitability. Another 40% of the IPO proceeds will be used to fund the company’s working capital needs and the remaining 20% will be used to repay part of its outstanding loans.

FINANCIALS:
For the year ended March ’08, the company’s sales grew 5% to Rs 24.6 crore. Though operating margins gained 220 basis points to 11.5%, a steep jump in interest costs pulled down profit before tax (PBT) growth to 13%. However, a fall in tax provisions helped the company to report 32% growth in net profit.
The company had negative cash flows for the past three years. This led CBL to raise funds via issue of equity capital and loans. In FY06 and FY07, its equity capital jumped nearly 10-fold, while outstanding loans doubled.

VALUATIONS:
The IPO price at Rs 16 is 33.8 times the company’s FY08 earnings based on post-issue equity of Rs 25.92 crore. Small and medium agrochemical companies such as Dhanuka Agritech, Insecticides India, Bhagiradha Chemicals and Bharat Rasayan are trading at P/E multiples of 3-9.
Till CBL’s bio-diesel plant commences production after one year, the company is not expected to report much growth.