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Sunday, June 01, 2008
Most Popular Pages - June 1 2008
See the most expensive home in the World
Reliance Power went ex-bonus
Banking Sector woes
What is India Strategy now ?
Is Suzlon the next big thing ?
Does our Stock Picks for 2008 still hold good ?
Warren Buffet blames Banks - find out why
ITC reported decent results - See why you should buy!
IPL ka funda
Sensex extends loss
India`s benchmark index, Sensex extended its losses for the week, due to heavy selling by overseas investors and discouraging global markets. The 30-share index fell on concern the soaring inflation may force the central bank to tighten monetary policy, while the soaring oil prices weighing down auto makers. Jaiprakash Associates, Tata Motors, and ICICI Bank led the fall.
The 30-share index lost 234.07 points, or 1.40%, to 16,415.57 in the week ended May 30, whereas the broad based NSE Nifty declined 76.45 points, or 1.54%, to 4,870.10 in the same period.
However, Sensex has shown some signs of recovery on Friday by gaining 99.31 points, or 0.61% to settle at 16,415.57, while the broad-based Nifty 34.80 points, or 0.72% to end at 4,870.10.
Broad-based rally in the market was led by metal, consumer durable, and IT shares.
BSE mid-caps and small-caps declined 2.54% and 4.51% respectively over the week.
The whole price index, inflation climbed to 8.1% for the week ended May 17, as compared with 7.82% in the previous week, fuelled by high prices of all essential commodities.
Tata Motors fell 9.56% over the week after the India`s largest automobile company announced it will raise Rs 72 billion via Rights issues to fund the acquisition of Jaguar.
Leading utility vehicles maker, Mahindra & Mahindra slipped 9.11% during the week after the company posted lower than forecasted fourth quarter earnings which missed analysts estimate.
However, Larsen & Toubro rallied 4.80% after the engineering and construction giant pleased investors by announcing bonus issue of shares, dividend and excellent financial performance, which beaten analysts forecast.
Indian Oil Corporation, the nation`s biggest oil marketing company, posted net loss of Rs 4.14 billion due to soaring crude oil prices and its inability to pass on the same to the end users.
The government is likely to announce the fuel price hike in next couple of days to rescue oil marketing companies.
Company Background - Reliance Power
The company was incorporated on 17th January 1995 as Bawana Power Pvt Ltd and Subsequently; the company name was changed to Reliance Delhi Power Pvt Ltd. In January 2004, the company name was changed to Reliance EGen Pvt Ltd and further company name was changed to Reliance Energy Generation Pvt Ltd. In July 2007, the company name was changed to Reliance Power Ltd.
The company was part of the Reliance ADA group and established to develop, construct and operate power projects domestically and internationally. The prevailing and expected electricity demand and supply imbalance in India presents significant opportunities in the power generation sector. To capitalize on this opportunity, the company has currently developing 13 medium and large sized power projects with a combined planned installed capacity of 28,200 MW, one of the largest portfolios of power generation assets under development in India.
The companies 13 power projects are planned to be diverse in geographic location, fuel type, fuel source and off-take, and each project is planned to be strategically located near an available fuel supply or load center. The identified project sites are located in western India (12,220 MW), northern India (9,080 MW) northeastern India (2,900 MW) and southern India (4,000 MW). They include seven coal-fired projects (14,620 MW) to be fueled by reserves from captive mines and supplies from India and abroad, two gas-fired projects (10,280 MW) to be fueled primarily by reserves from the Krishna Godavari Basin (the "KG Basin") off the east coast of India, and four hydroelectric projects (3,300 MW), three of them in Arunachal Pradesh and one in Uttarakhand. The company has intend to sell the power generated by these projects under a combination of long-term and short-term Power Purchase Agreements to state-owned and private distribution companies and industrial consumers.
More Company Backgrounds?
Reliance Power - dumped post bonus
Reliance Power Ltd shares tumbled below market expectations on Friday when these started trading ex-bonus, touching an intra-day low of Rs231.70 while analysts had expected the stock to settle at Rs270-280 post bonus.
“This was a really disappointing performance, we were actually expecting the stock to close between Rs330-360,” Anurag Purohit, research analyst with Religare Securities Ltd, said.
Reliance Power had announced in February it would give three bonus shares for every five held.
“Certain selling was expected, especially because of the run up the stock had witnessed post the announcement of the bonus issue, but it was certainly not expected that the stock will fall to the levels it did. Even in a worst-case scenario, we were expecting a closing of about the Rs280 mark,” Purohit added.
“This will certainly trigger a panic among retail investors, and going forward, we can expect profit booking at every rise.”
The stock closed at Rs235.85 on Bombay Stock Exchange (BSE), below the post-bonus cost of shares.
The bonus issue of three shares for every five held had brought down the cost of each Reliance Power share held to Rs269 for retail investors and Rs281 for institutions. The company had offered the shares at a discount of Rs20 to retail investors at Rs230 a share, as against a price of Rs250 for institutional investors.
The founder-promoters of the company, including Reliance Anil Dhirubhai Ambani Group (R-Adag) chairman Anil Ambani and Reliance Energy Ltd, who together held 90% of Reliance Power’s equity, were not issued any bonus shares. The promoters, however, had acquired shares in Reliance Power at Rs17 each.
The company had set 30 May as the ex-date. Investors holding Reliance Power stock at the end of trading on 2 June will be given the bonus shares, the company said in a statement to BSE on 5 May.
The share sale of Reliance Power, India’s biggest domestic initial public offering (IPO) thus far raising Rs11,700 crore, was sold out in less than a minute. But on the listing day, 11 February, the shares plunged and closed at 17.22% below the issue price of Rs450.
Meanwhile, R-Adag has another initial public offering in the pipeline. The group plans to offload a 10.05% stake in Reliance Infratel to raise Rs5,000-6,000 crore through the IPO.
“Raising money in the Reliance Infratel IPO, given the current market price of the Reliance Power share, is going to be challenging for the group as it has lost a lot of investor confidence since the listing of Reliance Power,” said Arun Kejriwal, director, Kejriwal Research and Investment Services, a Mumbai-based advisory firm.
“He (Anil Ambani) has tried everything possible to regain investor confidence since. He will have to pull another rabbit out of the hat to make the Reliance Infratel offering successful.”
Reliance Power plans to set up 13 plants with 28,200MW of generating capacity. Seven of these will start operating in the first five years, with the first plant in the line-up starting production in 2009.
“There are no fundamentals to judge the performance of the company as of now, so it is very difficult to know how the stock will react going forward,” said an analyst with a domestic brokerage, who did not wish to be identified.
Lehman Brothers - Inflation in India to be strong
Anti-inflationary measures are unlikely to turn India into a slow growing economy, while other Asian nations could face the situation of rising prices and economic stagnation, a latest report says.
"We do not believe that India would be affected significantly in a stagflation scenario and growth would remain strong in relative terms...," global research firm Lehman Brothers said in a recent research report.
However, even as the economic growth is projected to remain strong, interest-rate sensitive stocks could be adversely impacted during stagflation situation in Asia.
Stagflation refers to a situation when inflation is rising and the economic growth is simultaneously slowing down.
The negative impact is likely to be felt by interest rate-sensitive stocks or by companies that are not in a position to pass on cost pressures to consumers, Lehman said.
Further, investment spending is unlikely to witness a substantial slowdown primarily on account of significant shortages in key sectors such as steel and power.
The report pointed out that risks out of a stagflation scenario would be high for the banking sector, infrastructure, automobile and cement firms.
"The risks are significant for part of the banking sector, companies with a high proportion of fixed-price contracts and companies with high energy usage without the ability to pass on increased costs," it said.
Lehman noted that in India inflation would remain on the higher side for some more time due to the base effect -- which relates to the inflation data of the corresponding week in the previous year.
Given particular prices in the current week, inflation would turn out to be higher, if it was a small number in the previous year, but would be less, if it was high a year ago.
In addition, the report said that inflationary headwinds would lead to increased fiscal deficit and negatively impact the country`s expansion plans.
"One of the major reasons for India`s premium expansion has been the reduction in fiscal deficit, a process which could be derailed in the short term due to inflationary headwinds," it added.
The government has initiated fiscal and monetary measures to lessen the effects of inflation on consumers. However, according to the report, some of these measures do not reflect the "true market economics."
"If the inflation period is prolonged, we expect the government to start passing on some of the suppressed price increases (especially those relating to crude oil and fertilisers) in small doses.”
However, we do not expect this anytime soon, given the proximity of the elections, the report pointed out.
Grey Market - Bafna, Anus, Niraj Cement, Gokul Refoils
Gokul Refoils 195 8 to 10
Anus Laboratories 210 40 to 45
Niraj Cement 175 to 190 5 to 7
Bafna Pharmaceutical 40 10 to 12
Weekly Newsletter - June 1 2008
Govt partially withdraws export ban on cement
The Ministry of Commerce & Industry partially withdrew the ban imposed on the export of cement. Cement exports have now been allowed from the ports situated in Gujarat. Similarly, cement exports have also been allowed to the units in SEZ and to Nepal. "The existing ban on export of cement and cement clinker shall not be applicable to export from ports of Gujarat," the Directorate General of Foreign Trade (DGFT) said in a notification. The Government had banned export of cement on April 11 to increase availability of the construction material in the domestic market and keep a lid on spiraling prices. "As much as two million tons of cement would be exported annually from the Gujarat ports," Commerce Secretary Gopal Pillai said.
SBI hikes rates on select deposits
Tight liquidity conditions forced State Bank of India (SBI) to revise interest rates on domestic term deposit rates by 25-50 basis points with effect from June 1. The country's biggest bank raised the interest rate on 3-5 year deposits by 35 basis points to 8.85%, while on 5-10 year deposits the rate was hiked by 50 basis points to 9%. On 2-3 year deposits, the interest rate was increased by 25 bps to 8.75%. For senior citizens, SBI carved out two new deposit schemes. Instead of the 2-10 year deposit, the bank announced two new schemes i.e. 3-5 years and 5-10 years. The interest rate on these two schemes will be 9.35% and 9.5%. "We have a fair size of long-term loan portfolio in housing and infrastructure projects. We need funds for these projects. This marginal hike is to enable us to raise funds for such projects," said Ashok Mukand, Deputy MD and CFO, SBI. But other public sector players ruled out an immediate hike, saying margins will come under pressure.
Monsoon yet to reach Kerala
India's June-September monsoon is expected to reach Kerala in the next 3-4 days, missing the previous forecast of May 29, the India Meteorological Department (IMD) said. "There is no indication that it has hit the Kerala coast," R.C. Bhatia, director general of IMD was quoted as saying. "The onset forecast model suggests that the monsoon onset over Kerala in is likely to be on May 29 with a model error of ± 4 days," the IMD says on its web site. In 2007, IMD predicted May 24 as the date of monsoon onset over Kerala. Actual monsoon onset took place 4 days later. The mean monsoon onset date over Kerala is 1 June, according to the weather bureau. With strengthening and deepening of monsoon winds and widespread rainfall activity, southwest monsoon advanced into southeast Bay of Bengal, Andaman and Nicobar Islands , and north Andaman Sea on 12 May, almost 8 days in advance, the IMD says.
RCOM to acquire UK's Vanco
Reliance Globalcom, subsidiary of Reliance Communications (RCOM), announced signing of an agreement to acquire the London-headquartered Global Managed Network Services, VANCO Group through one of its wholly-owned subsidiary. The acquisition of VANCO would add US$365mn (Rs15.50bn) to the annual revenue of Reliance Globalcom through secure Long-term contracts with largest enterprise customers. Among the most valuable companies in Managed Network Services Vanco's peak market capitalisation was over US$750mn (Rs30bn). Under the acquisition agreement, Reliance Globalcom would pay US$76.9mn (Rs3.27bn) to acquire 100% equity of VANCO Group free of debt. VANCO Managed Network services are currently available in over 40,000 locations across 163 countries. 90% of VANCO's revenue is from developed markets of UK, US, France and Germany.
Tata Motors to raise Rs72bn via 3 Rights Issues
Tata Motors said it would raise about Rs72bn through three simultaneous but unlinked Rights Issues. The company will raise up to Rs22bn from the first Rights Issue of equity shares. It will mop up a further Rs20bn from the second Rights Issue of 'A' shares carrying differential voting rights (1 vote for every 10 'A' shares). The third Rights Issue will raise up to Rs30bn from 5-year 0.5% Convertible Preference Shares (CCPs), optionally convertible into 'A' shares after three years but before five years from the date of allotment. The precise terms of the issues will be decided when they are ready to be made. On completion of the Rights Issues, Tata Motors will also, as already announced earlier, raise about US$500-600mn through an appropriate issue of securities in the foreign markets. The fund raising will be mainly used for financing the Jaguar-Land Rover acquisition which is expected to be completed shortly at an acquisition price of US$2.3bn. Though the initial acquisition cost will be financed through bridge loans provided by a syndicate of banks, these banks would be fully repaid through the above mentioned capital raising schemes.
Israel's Taro Pharma said it was terminating a merger agreement with Sun Pharma, saying that the deal is no longer in the best interests of the company. The Indian company responded by saying that Taro is not entitled to terminate the merger as per the original agreement. In a letter addressed to Barrie Levitt, Chairman of Taro, Sun Pharma chief Dilip Shanghvi said the proposed merger is in the best interests of all Taro shareholders. "We remain skeptical of Taro’s turnaround. Taro has only US$47mn in cash as of March 31, 2008. This means that, if not for Sun’s cash injections of about US$60mn last year, Taro would have virtually negative cash - hardly the dramatic improvement of which Taro has boasted," Shanghvi said. He also said that while Sun has made every effort to fulfill its obligations under the merger agreement, Taro has failed to honor its side of the bargain and take all necessary action to consummate the merger. "Further, Taro has ignored Sun's attempts to discuss, and put forward to it's shareholders, an increase in the merger consideration in order to complete the transaction," Shanghvi said. Shanghvi also noted that in light of Taro’s actions, Sun will now consider all of its options, including legal proceedings.
Oil India, IOC to acquire 4 blocks in Libya
Oil India signed Exploration and Production Sharing Agreement with the National Oil Corporation of Libya, along with its consortium partners - Sonatrach (the national oil company of Algeria) and Indian Oil Corp. (IOC). The consortium will acquire four exploration blocks in Libya. These blocks have a total area of 6,934 sq kms in the south western part of Libya, around 700 kms from Tripoli, adjoining the Algeria border. Estimated reserves from the identified prospects indicated more than 2.0 TCF gas and 95 mmbbl condensate with possible oil considered as an upside. The consortium is committed to a minimum work program of 2000 km of 2D, 2600 km of 3D and 8 exploration wells, at an estimate cost of US$152mn.
IBull Realty arm may raise up to US$286mn in Singapore
Indiabulls Properties Investment Trust could raise up to S$388.3mn (US$286mn) selling units in a real estate investment trust (REIT) in Singapore, according to reports. The trust, part of Indiabulls Real Estate Ltd., plans to sell 353mn units of Indiabulls Properties Investment Trust at between S$1 and S$1.10. This will be the first such sale by an Indian real estate company. Lakshmi Mittal, the world's fourth-richest man, has reportedly agreed to buy 91mn units. Mittal was among the initial investors in Indiabulls Financial Services Ltd., which last year spun off Indiabulls Real Estate as a separate company. The projected yield for the trust is 4.66-5.12% based on forecast income for the year ending March 2009. Deutsche Bank and Merrill Lynch are handling the issue, which will see Indiabulls inject into the trust two projects with a total of 3.4mn square feet of space.
Bajaj Auto, Bajaj Finserve cool off on listing
Auto major Bajaj Auto got listed on the bourses after the company's demerger into three separate companies. The stock started trading at Rs784. The stock ended the week at Rs574 after hitting a high of Rs945 on listing day and a low of Rs543. Bajaj Finserve, the group's financial services arm, also got listed. The stock got listed at Rs530 and ended the week at Rs645 after touching a high of Rs999 on listing day and a low of Rs490. Bajaj Finserve comprises financial services and wind farm businesses of Bajaj Auto and has major presence in insurance, consumer finance and distribution space. Apart for this, Bajaj Finserve is considering a foray into the MF business. Bajaj Auto was de-merged into three new entities - Bajaj Holdings & Investments, Bajaj Auto and Bajaj Finserv. Bajaj Holdings, formerly Bajaj Auto, now functions as an investment company and focuses on new business opportunities. The new Bajaj Auto focuses on the auto business, while Bajaj Finserv is engaged in wind energy generation, insurance and finance.
Thermax
Higher input costs , firming interest rates and a slowdown in order-book accretion due to postponement of orders by clients, appear to have taken their toll on Thermax’s stock valuation.
At the current market price of Rs 427, the stock trades at a modest valuation of about 15 times its likely FY-09 per share earnings.
While concerns over slowdown in growth may continue to mar Thermax’s prospects over the next one year, its entry into utility boilers space and the expected commissioning of new capacities this year are likely to provide the much-needed growth momentum over the long-term. Investors with a two-year perspective can buy this stock.
Financials
For the financial year-ended March 2008, Thermax reported a 50 per cent growth in both revenues and profits, on a consolidated basis. Operating margins also expanded marginally to about 12.3 per cent.
Segment-wise, energy (constituting process heat, boilers and heater, absorption cooling and power businesses) continued to be the largest contributor.
The division, whose revenues grew by over 56 per cent during the year, contributed 81 per cent of the total revenues, up from last year’s 77 per cent. With the likely addition of utility boilers business by next year, this division is likely to remain Thermax’s leading revenue contributor.
The company’s environment division, which comprises waste water solutions, air pollution controls and chemicals businesses, contributed to about 18 per cent of the total revenues.
However, the division clocked a modest growth of about 24 per cent during the year.
Tempered growth ahead
Notwithstanding the strong growth numbers, the management has guided a moderate growth rate for the current year. This restrained guidance comes on the back of slowing accretion to order book.
On a consolidated basis, the company’s order backlog was down 15 per cent on a year-on-year basis. The group’s order book stood at Rs 2,637 crore as on March 31, 2008 compared to Rs 3,100 crore in the previous year. Hardening interest rates, besides high coal prices and capital equipment cost, which led to postponement of order finalisation by some of Thermax’s clients, could have limited the order inflows.
Also, margin pressures loom large for Thermax. Despite the management working towards maintaining operating margins at the current levels, any further rise in input prices may hurt Thermax’s margins considerably. This is so because most of Thermax’s orders are contracted on a fixed price basis only.
Although the management has said that it tries to include price escalation at the project costing stage itself or insists on a higher advance in projects where steel intensity is high, these efforts may not be sufficient to protect its margins. Given the current input price inflation scenario, the company’s margins could come under pressure.
The silver lining
However, there is hope for Thermax. The company’s entry into utility boilers space and the expected commissioning of its new capacities hold significant earnings potential over the long-term. Thermax had recently signed a 15-year technical transfer licence agreement with the US-based Babcock and Wilcox (B&W) for manufacturing and selling sub-critical B&W utility boilers (up to 800MW capacity) in India. This marks Thermax’s entry into both sub-critical utility power projects and the high capacity captive power plants in India, a segment now dominated by BHEL. While the entry into utility boilers space will definitely expand Thermax’s addressable market, it will also pit the company directly against the market leader.
However, Thermax’s plans to target small independent power producers (250 MW) initially and BHEL’s shift in focus to super critical boilers may provide the company an opportunity to gain foothold in this market.
Given the significant demand expected for power equipment, Thermax may well be able to build on its presence without cutting into BHEL’s market share.
The utility boilers will be manufactured in the company’s Vadodara facility. The facility, which is currently under expansion, is expected to become operational by January 2009.
This means, any meaningful contribution from this initiative can be expected from the next financial year only. While this is subject to Thermax receiving the relevant pre-qualifications on time, the management has indicated that it has already completed prospecting with a few large Indian power producers. And, given Thermax’s track record, we do not foresee any hiccups in it getting the pre-qualifications on time.
Future growth triggers
The management has indicated at a strengthening of order flow in the fourth quarter. On a sequential basis, the company saw a healthy uptick in both order inflows and enquiries. The quarter saw more firm enquiries as against the mere budgetary enquiries earlier.
Order inflows may also be helped by the inclusion of the smaller captive power projects under the new coal distribution policy. Besides power sector, tender enquiries from companies in the steel and cement sector also firmed up last quarter.
Further, Thermax’s presence in the environment business also holds tremendous growth potential. Unlike the energy division, revenues from this division are less prone to a cyclical slowdown and are driven primarily by government’s mandatory environment-related guidelines.
Thermax’s presence in air pollution control projects in West Asia and the Middle-East, combined with the home-grown need for water treatment projects in both commercial (SEZs) and municipal space are likely to help this division scale growth.
Moreover, since Thermax is slowly increasing focus on its waste water solutions segment (has set up a separate office to deal with municipal corporations), the potential growth opportunities from this space, to some extent, may also compensate for a slowdown in the energy division.
Gemini Communications
Investors can continue to hold the shares of Gemini Communication, considering its good business prospects on the back of deal wins and rising governmental IT spends.
At Rs 209 (pre-split), the stock trades at 15 times its FY-08 earnings and 13 times its likely current year earnings, based on conservative growth estimates. At this level, though not exactly comparable, the stock commands valuation of the more integrated players such as CMC. But the momentum in deal wins, such as in e-governance and those from BSNL, hold promise for Gemini. The company is a system integrator and provides networking solutions to clients in the telecom wireless, wireline and IT infrastructure segments.
Gemini also has acquired two companies which are now its subsidiaries — Point Red Telecom and Traze RFID — players which have managed to help the company cater to WiMax and RFiD requirements of clients. Though IT infrastructure-related deals have gathered considerable momentum, the telecom and wireless vertical (contributing 35 per cent of the revenues) also holds potential.
Government IT deals hold the key
Gemini has been able to win many key deals over the past year and has been able to sustain the momentum in recent times. These are deals won from IT-enabling initiatives of various State governments. Two key deals that need to be highlighted are those from the Tamil Nadu Electricity Board and BSNL.
The TNEB deal envisages computerising and connecting all collection centres. The Rs 260-crore worth BSNL deal was won in partnership with Midas Communication and entails Gemini providing broadband connectivity to Tamil Nadu, Karnataka and Haryana.
The nature of these deals is such that there may be one-time receipts followed by annuity and upgrade/update related revenues, providing reasonably long-term revenue visibility. There are other deals too, won from government clients. These include computerisation of schools in many States. Such deals have seen Gemini partner with players such as Everonn Systems and, thus, enhance its client base as well.
With the Budget indicating sizeable outlays on e-governance and computerisation of citizen services, Gemini, with its existing clientele, appears well-placed to tap opportunities.
Wireless and Telecom Vertical shines
The company also provides solutions in the telecom and wireless space with a greater focus on ‘last-mile’ connectivity. This aspect being critical for voice and data communication, especially for Internet service providers, Gemini may tap impending opportunities. The company, after the acquisition of Point Red, was able to tap newer opportunities in technologies such as WiMax. The government’s impending announcement of WiMax policy may hold positives for Gemini.
Through Point Red, Gemini has been able to win deals from international clients such as China Mobile and Botswana internet. It also has domestic clients such as Sify and Bharti.
The company also offers solutions relating to network planning, site surveys and infrastructure rollout and has inked deals with strong players such as Ericsson and Huawei. The number of cell-sites is set to expand sharply due to existing operators’ expansion plans and newly-licensed players and the requirement of a rural reach. This suggests considerable potential in this segment. Gemini, even if it taps a small part of this market, could see a scaling up of revenues.
Other services foray
The company, through the acquisition of Traze RFID, has been able to tap into opportunities in this area. The company hopes to benefit by tapping retail majors in the US. Gemini also hopes to explore opportunities in the RFID space by providing ‘smart tags’ for tracking vehicles and goods for manufacturing, retail and logistics companies. The benefits from such forays remain to be seen.
Risks
With the increase in government clientele, the receivable days could increase, creating pressure on working-capital requirements. The company’s interest costs have been increasing steadily on the back of outlays to implement deals.
Competition from integrated IT infrastructure players such as CMC, HCL Infosystems, Tulip Telecom and Wipro Infotech is a threat. Segments such as RFiD feature competitors such as Bartronics.
Indraprastha Gas
Rising global oil prices are not necessarily a threat to all companies. To some, they are an opportunity. Like, Indraprastha Gas (IGL), for instance. The prospect of a steep rise in the prices of transportation fuels and cooking gas presents IGL with a tremendous opportunity to grow its business — that of selling an alternative fuel, compressed natural gas (CNG) for automobiles and piped natural gas (PNG) for households. IGL is the monopoly supplier of CNG and PNG in Delhi.
The IGL stock, since our last recommendation at Rs 113 almost a year ago, shot up to a high of Rs 178 last January before retracing its steps. It now trades at Rs 123 and looks attractive for acquisition with a medium-term perspective. The stock has been range-bound at Rs 120-130 in the last two months and investors can use weakness in the broad market to accumulate the stock at lower levels.
Robust model
IGL has a strong business wherein it supplies CNG for vehicles in Delhi, backed by a Supreme Court order aimed at reducing pollution in the capital city. CNG is an environmentally-friendly fuel that controls vehicle emission to manageable levels. IGL, a joint venture of Bharat Petroleum and GAIL India, has gradually expanded its network of CNG stations and is now spread all over the city.
With conversion of commercial vehicles in the capital slowing down as it nears saturation point, IGL has turned its focus on private vehicles where it has tasted big success. In the first nine months of 2007-08, the number of private vehicles shifting to CNG grew by 48 per cent even as new additions in buses and autorickshaws slowed down.
An increase in the price of petrol/diesel, which seems inevitable now, could drive more private car owners to CNG, which retails at around Rs 20/kg in Delhi compared to petrol at Rs 45.52 and diesel at Rs 31.76 a litre each. Even assuming a small increase in CNG prices, the gap between it and the other transportation fuels will be attractive enough to convert existing car owners.
Meanwhile, IGL is also aggressively expanding its PNG network to deliver cooking gas by pipelines at homes. The number of PNG connections increased by 41 per cent in the first nine months of 2007-08 to 1.10 lakh households. This is yet a small number given the size of Delhi and there is tremendous scope for IGL to increase this customer base.
An increase in cooking gas cylinder prices by the government will probably push more households into the PNG net. IGL prices its gas lower than LPG cylinders to make conversion attractive.
Gas sourcing
Presently, IGL gets two million metric standard cubic metres a day (mmscmd) of gas from its parent, GAIL India, at subsidised prices. Its sales in 2007-08 must have been close to this mark as in the first nine months ended December 2007, it had touched 1.47 mmscmd. IGL also has another 0.2 mmscmd allocated for its foray into the Noida market, which is now held up due to legal issues and the entry of a competitor.
The company has a monopoly in the Delhi region for three years till end-2010 as per the recent regulations of the Petroleum and Natural Gas Regulatory Board.
Given the capital intensive nature of the business, IGL, which is well spread across the city, presents a huge entry barrier to competition. Therefore, it is unlikely that there could be a serious competitive threat to its business at the end of the monopoly period.
Strong financials
The company boasts of a debt-free balance-sheet and a steady growth in revenues and profits. In the first nine months of 2007-08 (the company has yet to declare its 2007-08 full year results), IGL’s revenues grew 15 per cent to Rs 596 crore but post-tax earnings by an impressive 29 per cent to Rs 126 crore. The current market price discounts the annualised EPS of Rs 12 by 10 times, which appears low, given the promise in IGL’s business.
Sun Pharma
Investors with a 3-5 year perspective can buy the stock of Sun Pharmaceutical Industries (Sun), an integrated speciality pharmaceutical company that manufactures and markets generic medicines in India, US and several other markets.
Though competition and pricing remain concerns for generic companies with a US exposure, Sun Pharma’s strength lies in its product basket and superior cost management in testing times.
That explains Sun’s better profitability as well as performance against competitors.
At the current price of Rs 1,403, the stock trades at a valuation of 20 times its estimated 2008-09 earnings per share.
The valuation is justified, given its superior fundamentals and growth prospects.
In India, Sun Pharma currently has a 3.3 per cent share in a highly fragmented market and enjoys a position of strength in brands catering to therapy areas of psychiatry (Repace), neurology (Oxetol), cardiology (Aztor) and gastroenterology (Pantocid) amongst others.
As it continues to build on marketing initiatives to strengthen customer relationships, Sun’s domestic formulation business will continue to grow faster than the industry growth of 13 per cent.
Sun Pharma’s consolidated net revenues increased by 58 per cent and net profit zoomed by 225 per cent, on the back of significant non-recurring income booked in the fourth quarter due to exclusive product launches in the US.
After adjusting for one-off gains, core sales are likely to have grown by more than 20 per cent on a year-on-year basis, according to our estimates.
The challenge for Sun, however, remains in skilfully parrying the expectations of growth — that too, on a higher base — even as the exclusivity period in products comes to an end.
While sales from one exclusive product generic, Ethyol, will provide cushion in the near-term, Sun Pharma and its US subsidiary, Caraco, have applications for US generic drug approvals catering to 89 products awaiting USFDA nod, making this one of the strongest product pipelines among generic companies.
Promising pipeline
Sun’s niche product pipeline with exclusive (or shared exclusive) opportunities also shows promise.
Interestingly, it has also started settling patent lawsuits — a positive strategy — with innovator companies for products (such as Exelon and Effexor) which save significant litigation costs and provide assured revenue visibility in future.
Near-term risks could be in the form of uncertainty surrounding Sun’s Taro Pharma acquisition, heightened competition in key therapy areas of the domestic market, and greater vulnerability to currency fluctuations, with international business now accounting for over 50 per cent sales.
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