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Sunday, February 22, 2009
Bartronics India: Buy
Investors with a two-year perspective can buy the shares of Bartronics India, considering large multi-year deal wins that bolster its order-book, and strong position as a SIM card manufacturer for telecom companies in India.
At Rs 74, the stock trades at 3-4 times its likely 2008-09 per-share earnings. Considering the hardware-intensive nature of the company’s business, the net profit margin it has consistently managed over rapid growth in the last few years is quite healthy.
For the last three years, revenues have grown at a compounded annual rate of 146.8 per cent while net profits have grown by 170.3 per cent. In the nine months of FY09, the company has seen a 155.3 per cent (to Rs 417.2 crore) and a 132.6 per cent (to Rs 65.5 crore) growth in revenues and profits respectively.
Bartronics generates over 60 per cent of its revenues from India; this keeps its business relatively insulated from the slowing world economy.
Key deal
The company has recently won a deal estimated at Rs 5,000 crore from the Municipal Corporation of Delhi. This deal, spread over nine years, is to set up 2,000 kiosks to provide ‘Government to Citizen’ services. This deal also opens up opportunity for garnering advertising revenues for Bartronics. This is especially relevant as the Commonwealth Games is set to take place in Delhi in 2010, providing scope for booking advertising revenues upfront.This deal provides long-term revenue visibility for the company. The funding for capital expenditure (Rs 200 crore) has already been tied up with banks. Margins are likely to be healthy considering that costs involved may not be heavy and advertising revenues are likely to be steady.
Order book
Apart from this deal, Bartronics has an order-book of Rs 700 crore (1.4 times its likely 2008-09 revenues) to be executed over the next 12-18 months. About 25 per cent of this is from the Government, where spends are expected to increase over the next few years. These apart, the company also has strong deal wins from the Government of Singapore to provide RFID services.
The relatively high-margin solutions business now accounts for two-thirds of the company’s revenues, with the US being a key contributor.
Its Smart Cards division, which predominantly manufactures SIM cards for telecom companies, is also witnessing continuous order flows. With subscribers being added rapidly in the 9-10 million range every month, the demand for new SIM cards is on the rise. This division has reached 100 per cent capacity utilisation to manufacture nearly 80 million cards a year.
Sesa Goa
Investors with a three-year horizon can consider accumulating the stock of Sesa Goa, trading at Rs 82.10. The company’s market leadership in iron ore mining and exports, signs that Chinese demand for Indian ore may resume on the back of the stimulus package and the attractive valuation for the stock make it a reasonable long-term investment in the commodities pack.
The stock of Sesa Goa trades at a price-earning multiple of 4.6 times its trailing earnings. In the domestic context, National Mineral Development Corporation (NMDC) and Minerals and Metals Trading Corporation of India (MMTC) (not strictly comparable due to a wider product basket) trade at a P/E of about 15 times.
Global iron ore miners such as BHP Billiton, Rio Tinto and Vale currently trade at 9.7, 9.4 and 6.6 P/Es respectively.
Business Overview
The company’s revenues originate from three segments — iron ore, pig iron and metallurgical coke (Met coke).
The iron ore segment is the backbone for the business and its share in revenues has steady increased in the last four years, to contribute 84 per cent to sales in 2007-08.
Sesa Goa, with its mines in Goa, Karnataka and Orissa, produces lower and medium grade ore. Sixty-six per cent of the company’s iron ore production is exported to China and 20 per cent to other Asian countries such as Japan, Pakistan and South Korea and 7 per cent to Europe. Domestic sales are a miniscule 7 per cent.
Demand Outlook
By relying substantially on the export market, particularly on China, Sesa Goa’s earnings prospects hinge to a large extent on Chinese offtake of Indian iron ore. This being the case, post-Olympic stockpiles and the sharper-than-expected deceleration in the Chinese economy led to imports recording sharp year-on-year falls from October 2008.
Iron ore spot prices also corrected from $190 in May to $ 63 in October 2008. While China’s 4 trillion Yuan ($586 billion) bail-out package is expected to revive demand for steel and, thus, iron ore, the jury is still out on whether overall Chinese import volumes will be maintained at last year’s levels of about 400 million tonnes.
But the past two months have brought signs of a drawdown in Chinese stockpiles and better export offtake of iron ore, especially for Indian exporters. Export volumes of iron ore from India staged a sharp year-on-year increase of 38 per cent and 21 per cent respectively in December and January.
Expectations of higher Chinese demand have propped up spot prices for iron ore by about 30 per cent from $63 to $ 85 a tonne in recent months.
While Sesa Goa appears well-placed to benefit from the higher volumes and higher spot sales, ongoing negotiations on contract prices for 2009-10 between the large iron ore producers and Chinese steel mills, expected to be concluded by April, may be the deciding factor on the price outlook. Current expectations are for a 10-30 per cent cut in contract prices compared to last year.
Financial Overview
Offtake has not been a key problem for Sesa Goa in recent years, with the company managing a 25-30 per cent volume growth every year since 2004-05.
In the current fiscal, Sesa Goa witnessed a volume decline in the September quarter to the tune of 30 per cent on a complete cutback in Chinese demand, but volumes recovered, increasing by 37 per cent in the December quarter. Sales for the last quarter were up by 23 per cent on a Y-o-Y basis, despite the economic slowdown.
Volume growth from the iron ore segment was at 36 per cent year on year and 37 per cent . Sales are up by 76 per cent and net profits by 69 per cent in the nine months ended December 2008.
Steadily rising iron ore realisations have helped Sesa Goa steadily improve its operating profit margins over the years to nearly 48 per cent in the first nine months of 2008-09; though margins have moderated in the December quarter.
A low cost structure and zero financing costs, endows the company with a cost advantage amongst its competitors globally. Vedanta Resources Plc (the 51 per cent holding company) had earlier announced plans for an eight-fold increase in the iron ore production capacity at Sesa Goa.
While this expansion project will certainly add scale over the long term, whether it will be implemented in its entirety, given a softer demand scenario, needs to be seen. This plan has the potential to increase the debt on the balance-sheet. Strong operational performance in recent years has left Sesa Goa with high return ratios (return on capital employed of over a 100 per cent), a strong balance-sheet, with high free reserves and near zero debt. With commodity prices set to fall further, the company has hinted at more room for downsizing costs.
Recent export duty concessions extended by the Indian Government will also translate into better realisations in the coming quarters. The easing off of inflation may see lower policy intervention on ore exports; this has been a key source of risk to earnings last year.
Valuations
The key risks to Sesa Goa’s earnings arise from a sharper-than-expected cut in iron ore prices (contract as well as spot), slippage in Chinese demand and a spike in freight rates.
Volumes and defending its market share being the foremost priority, Sesa Goa may have to work with thinner margins than in the immediate past, for the near term.
A key trigger to the stock price would be the conclusion of iron ore negotiations with China, at the expected prices.
Container Corporation: Buy
Investments with a two-three year perspective can be considered in the stock of Container Corporation of India (Concor). While slackening demand and tightening of lending has taken a toll on most logistics players,
Concor, given its vast infrastructure network, market leadership and strong balance-sheet, appears best-placed to sail through the current crisis and to ride any future revival.
Our recommendation also draws strength from the fact that logistics as a sector is still in its nascent stage in the country and, hence, has a huge untapped growth potential, especially so for containerisation.
The position of strength that Concor enjoys among the handful of listed players in this place also underscores our view.
At the current market price of Rs 652, the stock trades at about 10 times its likely FY-09 per share earnings. This appears justified, as despite the slowdown in port volumes and container traffic, the company may be able to manage a ten per cent growth in earnings over the next two years. Investors should consider accumulating the stock on dips instead of buying at one go.
Competitive edge
The drying up of export-import volumes in the past few months, especially in December 08 and January 09, portend tough times for logistics players.
Companies may not only fall short of their revenue targets, the running of empties and increasing pressure on pricing may also overshadow earnings.
That said, it is these challenges that put Concor in better light. With zero debt on its books and sufficient cash in hand (Rs 1,700 crore as of December 08), Concor has a significant edge over its competitors.
While the new players may find it increasingly tough to sustain their presence in this highly capital-intensive business, especially if the economy were to take a turn for the worse, Concor, owing to its vast infrastructure network and market leadership, appears to have sufficient wherewithal to survive.
For one, a highly depreciated asset base as also a high return on incremental investment may give it sufficient leeway to lower its rates and take a cut in its margins, if the need arises. Two, its widely spread-out rail network, providing the best of hinterland connectivity, may also shield it in these challenging times.
Unlike some of its peers, whose presence is limited to specific ports, Concor’s well-diversified port portfolio may offer it some protection — relative to its competitors — from a drastic slowdown in volumes at specific ports. And, third, the company’s large wagon fleet, which supersedes that of its peers. Besides, Concor’s management only recently made it known that despite the drop in volumes, it is likely to continue with its expansion (capex of Rs 3,000 crore over a span of five years).
While the threat from competition may still persist and become worrisome only in the long run, private players eyeing the container rail business may till such time be forced to shell out huge investments for putting up adequate infrastructure. That said, it needs a mention that the entry of new players in the container rail business did take away some of the business away from Concor.
Earnings outlook
For the quarter-ended December 08, driven by a 10 per cent fall in volumes, the company’s revenues remained flat even though the quarter saw a 14 per cent increase in realisation.
However, the increase in realisation was mainly due to the increased dwell time of containers and not because of any hike in prices. This means, sustaining realisations at these levels may not be plausible.
Operating margins, however, improved by 1.6 percentage points to 28.9 per cent, helped by higher terminal and warehousing charges (partly due to high dwell times) and improved operating efficiencies. Profits grew by 7 per cent.
That said, the company’s performance in the coming two-three quarters may bear a close watch as any significant drop in volumes and earnings may call for a re-look at the investment argument.
Reliance Communications: Buy
Investors with a two-three year horizon can consider buying the share of Reliance Communications (RCom), going by its pan-India dual-technology mobile play and the strength in its enterprise division, both of which offer long-term growth prospects.
At Rs 155, the stock is available at a reasonable seven times its likely 2008-09 per share earnings.
RCom has been in a heavy capex phase for the last one year, leading to its pan-India GSM launch in December 2008. The company has indicated that capex for 2008-09 is roughly Rs 25,000 crore (much of it already capitalised), while for the next fiscal it could be around Rs 15,000 crore. Given the fact there is heavy foreign currency borrowings in RCom’s balance sheet, servicing this debt will mean that margins are likely to remain under pressure for the next 12-18 months. However, this is probably the last significant capex phase for the company.
In the meanwhile, with a burgeoning subscriber base aided by its GSM launch in 14 new circles, strength in its other divisions — broadband and enterprise data (domestic and international) — is gaining momentum to provide broad-based growth for the company.
SYNERGIES FROM GSM launch
RCom has a pan-India CDMA presence with about 50 million subscribers. In addition, in eight circles where it currently operates, there are 10 million subscribers. In late December last year, RCom launched GSM services in the other 14 circles as well. The total subscriber additions in January alone stood at 5 million, bulk of which is expected to have come from new GSM subscribers.
It remains to be seen if this success does not cannibalise its CDMA offering. Despite being a CDMA player, where ARPUs are lower, RCom’s realisations per minute are around 61 paise , which compares favourably with most GSM operators. This may improve a wee bit after the GSM launch, especially because there are no serious discounts in tariffs that is being offered to customers.
RCom has built a nationwide and international network to carry its own national and international traffic. This would also help it garner countrywide roaming revenues and incoming international roaming on both its networks which went to other GSM operators.
With its pan-India CDMA towers, the GSM arm also gains by co-locating tower facilities, resulting in lower capex and opex for RCom, apart from improving tenancy.
In a related development, new licence winner Swan Telecom has reportedly signed up for a tower sharing pact. This should provide an added source of revenue for the company.
Other Contributions
RCom derives over 33 per cent of its revenues from its global and enterprise data businesses.
In its global business, the company provides domestic long distance connectivity to operators such as Vodafone Essar, Idea Cellular, Tata Teleservices and Aircel and derives 40 per cent of its NLD revenues from these operators. This could grow as new operators step in to offer services, but there is competition from BSNL and Bharti Airtel as well. But as the market is largely dominated by these three players, RCom could still end up with a substantial pie.
The company’s international connectivity division is also seeing considerable growth both in organic (through Flag) and inorganic modes through acquisition of Vanco Group in Europe and Yipes in the US. This division has 1,400 customers for data connectivity as well as 750 carriers.
Through Vanco, the company has had large multi-year deal wins with several retail majors in Europe, such as the Oxylane Group and Illy Caffe. Being transaction-intensive, these are likely to provide revenue visibility over the long-term.
The Yipes division is also witnessing traction and has added 25 customers in the last quarter, including names such as Facebook, Troutman Sanders and NASDAQ OMX Europe.
In the domestic enterprise segment, the company is the second largest player, according to a recent study by Frost & Sullivan. This is an 18.7 percent share of a Rs 7,400 crore market, expected to go up to over Rs 13,000 crore by 2013. Client wins are happening here too. This segment serves 900 corporate customers across India and enjoys an EBITDA margin of 42.2 per cent.
The company has network connectivity to 8,92,000 buildings across the country that would allow it to deliver connectivity through a variety of wired and wireless modes.
With the global economy slowing down and with clamping down on travel budgets, corporates, it is expected, will transact and communicate more through communication modes such as virtual private network. This means greater business opportunity for companies such as RCom.
BSNL to launch 3G in 12 cities
By the 27th of this month, mobile telephony will enter its third generation (3G) in 12 cities in India, courtesy the state owned telecom
service provider BSNL.
Union minister for communication and IT A Raja launched BSNL's 3G services pan India, from Chennai, on Sunday, by making the first video call to TN chief minister M Karunanidhi.
The PSU was awarded one block of 2*5 MHz 3G spectrum in all telecom circles in the country, six months before, without participating in the auction, at a price equal to the winning bids in the respective circles, in the auctions to be held before March 31st.
"Considering the need for faster penetration of 3G, and the need for telecom access to rual areas, the Government policy will allow telecom infrastructure sharing between commercial telcos as well as infrastructure providers," Mr.Raja said. DoT also plans enable mobile number portability (MNP) in major cities by August, and in other towns by end of this year. Bids have been invited of providing MNP switches.
On the occasion, BSNL also launched its India Golden 50 tariff scheme, where, by increasing the pulse duration for all calls to 120 s, the tariffs have been have been reduced by 50-80%. Presently, a pulse is calculated at 90 s for national calls to other networks and 60 s within network.
"Besides upgrading mobile data speeds to 2 mbps from the present 144 kbps, we will also offer video screening of calls, video on demand, mobile surveillance, Live TV, movie downloads etc on our 3G platform," BSNL CMD Kuldeep Goyal said. For this, the company will scale up tie-ups with its existing content providers. However, the telco will not be providing its previously launched IPTV service, which has garnered 5000 subscribers, on 3G.
"We plan to operate 5 million lines spanning all district headquarters and important towns by end of this year at an investment of Rs.2700 crore," Mr Goyal said. "We expect 5% of our 2G subscribers to migrate to 3G." The company expects a revenue addition of Rs 500-1000 crore by this customer addition, and a 20% revenue augmentation by infrastructure sharing.
BSNL has tied up with Nokia, Sony and Samsung for handset bundling, the cheapest of which is priced at Rs.7000. Voice tariff schemes begin from a fixed monthly charge of Rs.350 for prepaid, and Rs 500 for postpaid. Data subscriptions are available starting Rs 250. The company has tied up with Micromax and Huawei for offering laptop data cards at prices ranging form Rs 3800 to 6000. "Trials are on to launch mobile banking on our 2G and 3G platforms," Mr Goyal said.
TARP Explained
TARP allows the United States Department of the Treasury to purchase or insure up to $700 billion of "troubled" assets. "Troubled assets" are defined as "(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and (B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.
In short, this allows the Treasury to purchase nonliquid, difficult-to-value assets from banks and other financial institutions. The targeted assets can be collateralized debt obligations, which were sold in a booming market until 2007 when they were hit by widespread foreclosures on the underlying loans. TARP is intended to improve the liquidity of these assets by purchasing them using secondary market mechanisms, thus allowing participating institutions to stabilize their balance sheets and avoid further losses.
TARP does not allow banks to recoup losses already incurred on troubled assets, but officials hope that once trading of these assets resumes, their prices will stabilize and ultimately increase in value, resulting in gains to both participating banks and the Treasury itself. The concept of future gains from troubled assets comes from opinion in the financial industry that these assets are oversold, as only a small percentage of all mortgages are in default, while the relative fall in prices represents losses from a much higher default rate.
The Act requires financial institutions selling assets to TARP to issue equity warrants (a type of security that entitles its holder to purchase shares in the company issuing the security for a specific price), or equity or senior debt securities (for non-publicly listed companies) to the Treasury. In the case of warrants, the Treasury will only receive warrants for non-voting shares, or will agree not to vote the stock. This measure is designed to protect taxpayers by giving the Treasury the possibility of profiting through its new ownership stakes in these institutions. Ideally, if the financial institutions benefit from government assistance and recover their former strength, the government will also be able to profit from their recovery.[2]
Another important goal of TARP is to encourage banks to resume lending again at levels seen before the crisis, both to each other and to consumers and businesses. If TARP can stabilize bank capital ratios, it should theoretically allow them to increase lending instead of hoarding cash to cushion against future, unforeseen losses from troubled assets. Increased lending equates to 'loosening' of credit, which the government hopes will restore order to the financial markets and improve investor confidence in financial institutions and the markets. As banks gain increased lending confidence, the interbank lending interest rates (the rates at which the banks lend to each other on a short term basis) should decrease, further facilitating lending.
More here
SBI more valuable than Citibank
"May you live in interesting times," goes an old Chinese curse. And these are interesting times for sure.
State Bank of India (SBI), the largest bank in India, is now worth more than Citigroup, one of the world's largest banks.
The market capitalisation (number of shares outstanding x the closing price of the share) of SBI on Friday closed at Rs66,285 crore. This is around 25 per cent more than the closing market capitalisation of Citigroup on the New York Stock Exchange on Friday. The market capitalisation of Citigroup was Rs52,931 crore.
The Citigroup stock fell by 22.3 per cent on Friday to close at $1.95 per share (around Rs97). This was primarily on account of fears of the US government nationalising the bank, which would wipe out the shareholders. Hence the mad rush to get out of the share. A day earlier, the market capitalisation of Citigroup stood at Rs67,944 crore, around Rs700 crore more than that of SBI.
Over the last four quarters, Citigroup has earned Rs230,485 crore as revenue, which almost eleven times more than the revenue earned by SBI.
But when it comes to profits Citigroup over the last four quarters has suffered total losses of Rs83,474 crore.
During the same time SBI has made profits of Rs8,262 crore.
And that precisely explains why SBI is now worth more than Citigroup. The market capitalisation of Citigroup has fallen by around 90 per cent in the last one year.
As the huge losses clearly tell us, the current financial crisis has hit Citigroup hard and experts now say it is a zombie bank, which is surviving primarily because of the billions of dollars of support that it has been receiving from the government.
"Citicorp is now a "zombie bank" -- its future is uncertain. I am not confident that they will be able restructure themselves and change their business model in a very challenging economic environment," saysSatyajit Das, an internationally renowned derivatives expert and the author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives.
Citi has received $45 billion (Rs2,25,000 crore) out of the troubled asset relief programme (better known as the $700billion financial bailout launched by George Bush and Henry Paulson). Other than this it has also received guarantees worth $301 billion (Rs15,05,000 crore) on its assets from the government.
Martin Hutchinson, an economic commentator, recently put out a list on the status of the 12 largest banks in the US. He categorised Citi as a zombie bank. "Citi has been a serial flirter with bankruptcy over the past 30 years and remains a basket case," he wrote.
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