Sunday, July 26, 2009
Investors with a long-term horizon can consider subscribing to the initial public offering of Adani Power (APL), the power generation arm of Adani Enterprises that is engaged in power project development and operations.
Given that the company’s operations are at a nascent stage and the offer is not cheap, investors should not expect listing gains on this offer.
At the price band of Rs 90-100 for this book-built offer, the company is expected to raise around Rs 2,700-3,000 crore. Of this, Rs 2,200 crore would be used to fund the equity portion of two power generation plants — Mundra Phase 4 and Thiroda of 1980 MW each. Balance funds will be deployed for Dahej (in Gujarat) and Kawai (in Maharashtra) power units, totalling 3,300 MW; these are in the nascent stages.
Though Adani’s projects lack operational history, the growth opportunities in the power sector are bright due to the huge demand-supply imbalance. Adani Power also enjoys reasonable earnings visibility owing to Power Purchase Agreements (PPA) signed for most of its Mundra and Thiroda projects and assured fuel linkages owing to the parent’s vertical integration.
Its unique advantages lie in dedicated transmission lines to evacuate power, the opportunity for higher realisations from merchant power agreements and tax benefits due to its SEZ status. However, before investing, investors have to bear in mind the risks to fuel supplies from the proposed new mining policy in Indonesia and operational issues cited by users of Chinese power equipment.
At the offer price, the company’s business appears fairly valued. As the company has limited operational history, we have evaluated the offer based on market capitalisation per MW and price-to-book value, post offer.
At the lower end of the price band, Adani Power is valued at a P/BV of 3.4 times, a slight premium to its industry peers (average of 2.9 times).
However, at Rs 90, the market cap per MW (Rs 3 crore/ MW) is in line with the industry peers (in case of market cap/MW valuation, only projects that have attained financial closure are considered).
That suggests that at the lower end of the price band, the offer is fairly valued vis-a-vis its peers. However, as we expect higher earnings growth and ROEs in the initial years, Adani Power may be able to command premium valuations.
The company plans to add 9,900 MW of generating capacity by 2013 with an ambitious 20,000 MW targeted by 2020. Most of the capacity is expected to come up in the Western region, which now has a energy deficit of 16 per cent and peak deficit of 19 per cent.
These projects are also strategically located for easy transportation of coal and water. The Mundra (Gujarat) and Thiroda (Maharashtra) projects, totalling 6,600 MW, have attained financial closure and are in various stages of execution. The remaining 3,300 MW is in the planning stages with projects at Dahej and Kawai.
Adani Power plans to invest Rs 28,369 crore to set up the entire 6,600 MW of capacity; the remaining equity portion being funded by infusion from the promoter.
While Mundra Phase I and II are expected to be fully commissioned by February 2010, Mundra Phase III and Phase IV are expected be set up by July 2011 and April 2012. The Thiroda project is expected to be commissioned by April 2012.
The company recently started commercial operations for the Mundra Unit-1 (330 MW) and reported accumulated losses of Rs 9.7 crore for the year-ended March 2009.
Given that the company has the opportunity to sell merchant power till February 2010 (when the PPA comes to effect), the company may turn cash flow positive by this year.
Dedicated transmission lines to evacuate power allow the advantage of open access. This may result in lower costs compared to other merchant and captive power plants that have to depend on state grid. The distance transmission lines covering a total of 1,596 km can be used to wheel merchant power to various purchasers.
At a time when execution delays owing to equipment and funding delays and fuel shortages have affected the capacity addition targets of various peers, Adani Power has established much of it as backward linkages.
It has tied up fuel linkages for the next 15 years and has also tied up PPAs with the Gujarat, Maharashtra, and Haryana electricity boards for the next 25 years.
Revenues, attributable to 72 per cent of the 6,600 MW capacity, which is expected by April 2012, have been secured through PPAs.
Adani has the flexibility to enter into merchant power agreements and short-term PPAs with companies and state utilities for the remaining 28 per cent, which may allow higher realisations and easier pass through of costs.
Recent reports, in fact, suggest that the merchant tariffs have risen to more than Rs 7 per unit in the peak season and Rs 4.5- 5 per unit for the rest of the year in the Western region due to a wider peak deficit. However, the realisations from merchant power sales may fall as State utilities manage to increase the generation capacity and reduce the cross subsidies.
According to the management, the company’s agreements to procure coal at a competitive cost of $36 per tonne will reduce the cost of power generation. The company estimates the cost of generating at Rs 1.5-1.7 per unit while the PPA realisations are expected at Rs 2.62-2.94 per unit and merchant power realisations at Rs 4.5 per unit. This could lead to higher ROEs for the projects in the initial years.
Though location in a SEZ and section 80IA status allows tax benefits, these benefits are pass-through and will allow Adani Power to quote lower tariffs going forward.
As 80 per cent of the capacity to be added will run on super-critical technology it may get carbon credit benefits as the technology is more efficient (burns less fuel).
The company has decided to rely mainly on Chinese equipment for setting up the power plants, taking the view that the waiting periods involved in sourcing indigenous equipment tend to escalate costs. There have been instances in India of power generation players facing intermittent problems with Chinese equipment.
One such instance is collapse of turbine blades in the Sagardighi thermal station in West Bengal, which caused a shutdown for over 80 days.
While these will usually be compensated by the contractor, they may create unscheduled shutdowns.
Policy changes pertaining to Indonesian mining rights poses a risk to uninterrupted fuel supply for the Mundra plant. However, this may be partly compensated by provisional supply from domestic sources which was approved for Mundra IV and Thiroda projects.
The ongoing intellectual property rights litigation between Alstom and supercritical boiler supplier- Shanghai Electricals, also bears watching as the verdict may have implications for equipment supplies to the Thiroda project.
The Tata Group’s retail business, Trent, straddles several key segments of the Indian retail landscape. It operates apparel, accessories and home furnishings store — Westside; books, music and gifting chain — Landmark; hypermarket — Star Bazaar, and value apparel store — Fashion Yatra.
At Rs 501, the stock trades at 36.6 times its trailing four quarter earnings on a standalone basis. The consolidated EPS for FY-09 is just 0.53. This valuation places Trent at a premium to its retail peers.
Trent’s reliance on the premium segment, even as its value forays are yet to deliver, and a slow rollout of expansion plans, with a cutback in discretionary spends hurting sales, may impose limitations on its growth over the near term. That suggests that Trent’s premium valuation may not be sustainable. Investors can, therefore, make the most of the current stock price run-up and book profits on their holdings in Trent.
Value biz yet to pick up
Trent’s flagship Westside and Landmark stores have a premium positioning and this segment of retailing has been hit harder by the recent slowdown than value retail. Though Trent has a foothold in the value retail segment through its hypermarket business, this format has not picked up as yet, and will still require a few quarters to contribute meaningfully to Trent’s business.
Also, for value retail to deliver, footprint has to be larger than the three stores it is operating under Star Bazaar now. With only one store till date, the same holds true for its other value foray, Fashion Yatra, which operates as a family store, offering fashion apparel, footwear and accessories.
Trent’s partnership, Tesco, inked last August too is likely to contribute only later this financial year.
With flat same-store sales in both Westside and Landmark, Trent will have to rely mainly on its value retail stores for growth.
Numbers from Trent’s retail peers suggest that the recent pick up in consumer spending too has been witnessed mainly in the value and not the premium segment.
Trent may hold some edge over its peers when it comes to financing expansion with Rs 89 crore remaining from its July ’07 rights issue, a low leverage of 0.13 times, a positive operating cash flow where its peers are burdened by debt as a result of rapid expansion.
However, funding ability does not necessarily translate into store expansion. The company has fallen short of expansion targets, citing delays in delivery of premises by developers.
A planned store count of 28 for flagship outlet Westside for FY07 fell short by two. The succeeding year’s target of 37 has not been met even in FY-09 with the number of Westside outlets at 36. Landmark has met expansion targets, but Star Bazaar’s reach remains minimal.
In addition, Trent’s presence is restricted to Tier-I cities, which may leave it unable to capitalise on increased spending by the rural consumer.
Given the downturn faced across the industry, Trent posted flat sales for FY-09 over the previous year. A comparative increase in expenditure, though slight, brought operating profits down 18 per cent. However, Trent transferred its hypermarket division into a wholly-owned subsidiary in the year.
On a consolidated basis, therefore, a sales growth of 18 per cent was wiped out with a 24 per cent increase in expenditure driven by higher employee and selling expenses. Increase in depreciation cut deeper into net profits, bringing it down 97 per cent in FY-09 compared to FY-08. Returns on net worth and capital have also been on the decline from 2006.
Presence in the Central Indian market which has high demand potential, low debt on the balance-sheet that supports the company’s various capex initiatives, including power (60 MW) and cement capacity (3.4 million tonne) and other cost-cutting initiatives lend confidence to investing in the stock of Birla Corporation.
At the current price of Rs 301, the stock trades at price-to-earnings ratio of seven times trailing earnings at discount compared to peers of the same size. The company’s enterprise value per tonne is Rs 3,842, placing its valuation among the lowest in the industry.
Birla Corporation, an M.P. Birla group company engaged in the production of cement, jute goods, PVC goods, auto trim parts (car interiors) and iron and steel castings derives close to 90 per cent of its revenues from the cement division. Birla Corporation operates almost similar capacities in Central, North and Eastern India with cement units in Madhya Pradesh, Uttar Pradesh, Rajasthan, and one also in West Bengal. Central India looks a promising market for cement with year-to-date (till June) despatches growth in the region of 10 per cent and year-on-year growth in June at a strong 17 per cent. It is the one region that saw units operate at over 100 per cent capacity utilisation in June. Compared to the South, the Central region is also likely to see lower new capacity additions for the year, suggesting lower risk to prices.
Birla Corp is present in some Northern markets too and the demand growth is promising in this region with many government-led infrastructure activities. The Northern region witnessed despatches growth of over 19 per cent in April and May. As a market, East is rewarding its players with good price; a 50 kg cement bag quoted at Rs 275 in May, the highest in the country next to South (Rs 277/bag in May). Central India’s low supply build-up, Eastern India’s strong price and Northern pocket’s strong demand growth, all give Birla Corporation an edge over players that are centric to a specific region.
Birla Corporation’s current capacity stands at 5.29 million tonnes. This will increase to 7.5 million tonnes by end-FY10 as the capacity enhancement at the Satna plant, Madhya Pradesh, completes. The first phase of expansion work is over at Satna and the second phase work has commenced. The company is also planning a 1.2-million tonne brownfield expansion at Chanderia, Rajasthan, and a 0.6 million tonne grinding capacity expansion at the Durgapur unit, West Bengal.
Plans for setting up a waste heat recovery system and a 30 MW power plant, one each at Satna and Chanderia, are also on the anvil. These projects are likely to be completed in two years. The company also has captive power units which meet power requirements partially.
In FY-09, the company was allotted coal blocks in Madhya Pradesh for captive coal mining. Work is on for getting the necessary approvals and clearances to begin mining in this block. Further, Birla Corporation’s subsidiary, Talavadi Cements Ltd, has been recommended allotment of 2,130 hectare of land for mining limestone by the Madhya Pradesh government. But this approval has been challenged by some parties in the court. The company is mulling a three-million tonne plant in the Satna district, as this issue gets sorted out, at an investment of Rs 1,200 crore. The company enjoys a comfortable debt-to-equity ratio of 0.2. Cash balance in the company’s book as on end-March 31, 2009 was Rs 319.7 crore, up from Rs 31.5 crore at end last fiscal year. Higher cash balance appears buttressed by lower investment activities during the year.
Birla Corporation’s March 2009 quarter sales were 17 per cent higher than the previous year’s. However, the mounting raw material cost and employee expenses and losses in jute and other non-cement businesses (excluding power) ate into profits. Raw material cost, as a percentage of sales, was up from 10 per cent last year to 15 per cent in the March quarter. The company’s employee expenses were up 47 per cent to Rs 45 crore on higher provisioning. Power and fuel expenses stood reduced by 6 per cent on the several cost-cutting initiatives.
Birla Corporation’s power business reported a 11 per cent fall in revenues and 29 per cent fall in operating profits in the March quarter of 2009. Revenues from the cement segment were up 19 per cent for the quarter and operating profits of the division were up 20.6 per cent. The company’s overall profit after tax was Rs 90.6 crore, up 5 per cent. Higher expenses, however, saw profit margins squeezed by 2 percentage points.
However, the waste heat recovery system, captive power plants and blocks allotted for captive mining of coal, all are to bring in cost savings for the company in the coming quarters. However, unavailability of linkages (to meet the entire requirement) for quality coal might force the company to source coal from the market, increasing fuel costs.
Investors with medium-term perspective can consider buying Tantia Constructions. The stock found significant support around Rs 30 in March 2009 and commenced an uptrend. Though it encountered a major resistance at Rs 70 in early June, it was able to conclusively break out of this resistance in mid July.
The momentum indicators in the weekly chart are bullish.
We believe that Tantia Constructions has the potential to trend upward to Rs 128 in the medium-term. Investors can accumulate the stock in dips with stop-loss at Rs 70. Short-term traders can enter with a target of Rs 97 and tight stop at Rs 83.5.
Investors with a two-three-year horizon can hold the stock of IBN18 Broadcast, given the strong positioning of the channels that it operates, bright prospects for channels such as Colors, Nick and MTV where it holds an indirect stake through Viacom 18 and the improving outlook for subscription revenues that the company could garner.
IBN 18 operates two channels of its own — CNN IBN and IBN7. Apart from this, the company recently completed a 50 per cent stake acquisition in Viacom 18, which owns properties such as Colors, MTV, Nick and VH1. This apart, it is also a 50 per cent partner in IBN Lokmat, a Marathi news channel.
At Rs 112, the stock of IBN18 trades at a fairly stiff EV/Sales (enterprise value to sales) multiple of about eight times, which is at a premium to peers such as NDTV.
But given the fact that its standalone business has become EBITDA positive in the June quarter buoyed by advertisement revenues through election spends by parties, and the fact that Colors is on course for breakeven in the next couple of years, as a group IBN18 may report improving performance over the medium term.
CNN IBN, the English News channel, has managed to retain its viewership among the top two in the category along with Times Now.
But it is gains from its stake in Viacom’s properties that are likely to be material drivers for the future.
Colors, a Hindi general entertainment channel that was launched just a year ago, has managed a strong increase in viewership and has overtaken Zee TV to become the second most viewed channel, marginally behind Star Plus, going by TRPs generated by agencies such as TAM.
Several of its shows, such as Balika Vadhu and Jai Shri Krishna have topped the charts in their category.
New shows, such as the second season of Khatron Ke Khiladi, starring Akshay Kumar, and Big Boss are expected to keep up viewership ratings.
The Hindi general entertainment category is the most viewed and most lucrative advertisement market among all electronic media categories in India.
The top three players mentioned above account for a lion’s share of all viewership. Others such as Sony and NDTV Imagine are far behind the top ones in terms of the TRPs garnered.
Colors hopes to garner Rs 500 crore in advertising in FY10, which would compare favourably with peers such as Zee TV with its bouquet of channels.
This apart, MTV, is also among the top two in the ‘music’ category which has shows such as MTV Kickass Mornings which are popularly viewed. Another that is among the top few in the cartoons category is the channel Nick.
These factors suggest that IBN18 is well positioned to garner and grow advertising revenues significantly.
IBN 7, the Hindi news channel, a relatively newer launch, has not had the same level of success, with the channel nowhere near the top three in that group.
IBN Lokmat did well during the general elections by garnering TRPs, but does face stiff competition from entrenched players such as Zee 24 Taas and Star Majha.
The other revenue driver, subscriptions, is also set to go up aided by key factors — growth of platforms such as DTH which may reach 16 million subscribers by the year end, conditional access being mandated in 55 cities by 2011 by the telecom regulator and the group’s decision to start telecast of its channels in countries such as the US, the UK, and some West Asian countries that could bring in international revenues.
The stock of UltraTech Cement is a good investment option for investors with a one/two-year perspective. A focus on the promising Western region, a first-mover advantage in capacity additions and substantial captive power capacities make UltraTech a preferred exposure within the cement sector.
At its current market price of Rs 775, the stock trades at nine times its estimated 2009-10 earnings, at a discount to peers such as ACC and Ambuja Cement (12-13 times their estimated FY10 earnings).
UltraTech’s sales and profits have grown at a compounded annual rate of 25 per cent and 44 per cent respectively in the last four years. The company has benefited from the Western region’s strong demand for cement, reporting an 18 per cent surge in domestic volumes and 91 per cent jump in export volumes in the June quarter. UltraTech also has a smaller presence in Southern and Central markets.
The Rs 3.5-lakh-crore of industrial investments slated for Gujarat and the revival of cement exports from the region point to good demand prospects in the region. Though surplus capacity is a key concern for cement companies over the medium term, UltraTech is less vulnerable to this risk as only 9 per cent of the new capacities for this year are coming up in the West. Cement prices in the region have climbed from Rs 245/bag in January to Rs 260/bag in June.
One of UltraTech’s key advantages is that much of its capacity expansion has already been commissioned. With the recent 1.2-million-tonne expansion in the South, its capacity stands at 23.1 million tonne. UltraTech’s thermal power capacity meets almost 80 per cent of its power requirements. While these factors insulate the company from power shortages and a spike in power costs, further proposals to set up waste heat recovery systems which can save costs, are also on the anvil.
The company managed to keep a tight rein on its costs in the June quarter, with power-fuel costs registering a 1 per cent decline over last year; operating margins expanded 7 percentage points to 39 per cent. The company’s profits after tax during the same period rose 58 per cent. With realisations expected to remain firm even as regional demand drivers are strong, the earnings outlook remains positive for the next 12 months.