Sunday, October 04, 2009
ADITYA BIRLA NUVO LIMITED
ANNUAL REPORT 2008-2009
We are pleased to present the 52nd Annual Report together with the audited
accounts of your Company for the financial year ended 31st March, 2009.
Financial year 2008-09 proved to be a challenging one for the corporate
world. The economies across the globe experienced demand slowdown and
liquidity crunch which led to sharp volatility in the financial markets as
well as commodity prices. The impact on Indian industry was visible in the
second half of the financial year.
Even under this testing scenario, 'Value' businesses of your Company,
combined together, have maintained their operating profits despite the
Carbon Black business being impacted severely by unprecedented volatility
in crude oil prices. The Fertilisers business achieved its highest ever
profitability. The Rayon, Insulators and Textiles businesses posted
satisfactory results despite higher input and fuel costs prevailing during
the major part of the year and the slowdown in the textiles industry.
The Telecom and Financial Services, the key 'Growth' Businesses have
outperformed industry and enhanced market share supported by strategic
initiatives taken. These businesses together account for over 50% of your
Company's consolidated revenues.
The Telecom business doubled its operating service areas from 8 to 16 in
just three years span. In last one year itself, Idea Cellular Limited
('Idea') added five new service areas with a clear focus to become a Pan
* As a result, subscribers' base increased from 24 million to 43.02 million
with an improved all India market share at 11% compared to 9.2% one year
* Cash inflows from TMI and Providence deals made Idea an almost debt free
company, which will cushion financing of its expansion plans going forward.
In the Financial Services businesses, the thrust on expanding customer
reach and launching innovative products has helped gain significant market
share amidst slowdown woes.
* Birla Sun Life Insurance Company Limited improved its market share from
6.6% to 9% supported by 44% growth in new business premium while industry
de-grew by 3%.
* Birla Sun Life Asset Management Company Limited enhanced its market share
from 6.8% to 9.5%, growing by 31% in terms of average domestic AUM while
industry de-grew by 7%.
* Your Company has entered new business segments in the financial services
space with a vision to become a leader and role model in the financial
services sector with a broad-based and integrated business.
* Your Company acquired 76% stake in Apollo Sindhoori Capital Investments
Ltd. ('ASCIL') - a retail broking company and bought balance 50.01%
shareholding in Birla Sun Life Distribution Company Limited ('BSDL'). The
large customer base of ASCIL offers a huge opportunity to derive synergies
through cross selling. Besides, nation-wide network of ASCIL and BSDL will
be leveraged as a common distribution platform offering a bouquet of
financial products and services.
In the BPO business, revenues growth in the 'North America' region was
impaired in the second half of the year due to global slowdown.The business
initiated site rationalisation and cost control measures to reduce the
impact. As a result, the business remained positive at EBITDA level despite
site closure costs, forex loss and higher manpower costs.
In the Garments business, while expansion of retail space supported growth
in revenues, bottom-line was impacted due to new store openings and launch
of new concepts The Collective'and 'Peter England People'. Garments exports
business suffered lower capacity utilisation and forex loss due to weak
order flow and cancellation of few orders led by global slowdown.
Substantial restructuring and cost control measures are being pursued to
curtail losses and bring back profitability.
RPG CABLES LIMITED
ANNUAL REPORT 2008-2009
Your Directors hereby present the twenty-seventh Annual Report together
with Statement of Audited Accounts of the Company for the year ended March
Investors with a two/three-year perspective can consider adding the stock of Mundra Port & SEZ, a private port developer and operator, to their portfolio. Improvement in container traffic and railway freight, besides an up-tick in the Index of Industrial Production suggest fresh triggers to the company’s earnings growth over the next few months. Earlier-than-expected operation of the Adani Power plant could also improve the coal traffic for the port.
The Mundra stock has also not participated in the rally post-June. At the current market price of Rs 523, the stock trades at about 20 times its expected per share earnings for FY-11.
Even as the economic downturn depressed the domestic port traffic for 2008-09 (it grew 2.1 per cent), cargo handled by Mundra expanded by 24 per cent, which sustained in the June quarter as well. The company’s unique revenue mix of stable income from long-term contracts as well as traffic growth (from handling diversified cargo) thanks to its locational advantage and given the capacity shortage in other major ports were the key drivers of sales (up 34 per cent Rs 1,095 crore) in 2008-09.
Even as the Indian port traffic continues to remain muted, July container traffic, which rose 3.8 per cent year-on-year, hints at revival and is the highest since August 2008. An increase is also visible in the railway freight in the June quarter. This statistics, if sustained, can provide much impetus to Mundra’s container business.
We view the above economic developments as factors that can accelerate Mundra’s traffic growth. Even as some share of revenues is dependent on the macro-economic environment, the company’s long-term agreements with oil refineries, two large power companies as well as with an auto company for usage of port services is likely to ensure steady stream of revenues.
The operating profit margins at 68 per cent now have been consistently expanding over the last three years, aided by volumes as well as superior port services and logistics connectivity. The Marmugao port development project awarded to Mundra, although at a nascent stage, is suggestive of its success in qualifying as a port developer.
Mundra Port’s ability to clinch deals for its SEZ space may be threatened if the SEZ tax benefits for the occupants are withdrawn as proposed by the draft Direct Taxes Code. The SEZ contribution is not factored into the above earnings estimates.
The Sensex ended the holiday-shortened week by gaining 442 points due to the prevailing positive sentiment. While the index touched a fresh 16-month high of 17,196, it also reclaimed the 17,000-mark for two consecutive days on a closing basis. It finally ended the three-day week at 17,135.
Among the index stocks — ICICI Bank jumped over 10 per cent to Rs 924. TCS, Wipro, Sun Pharma, Reliance Communications, Bharti Airtel, Mahindra & Mahindra and BHEL soared 5-8 per cent each. On the other hand, Grasim shed nearly 5 per cent at Rs 2,701. Tata Motors and HDFC declined 2 per cent each.
Although, the rise lacked momentum, it has been steady showing some sector rotation. Rally laggards IT and pharma stocks are now seen posting smart gains, while auto and select banking stocks are taking some breather. As a word of caution, some profit taking around these levels are expected. However, the real action would start once the earnings season kicks in.
Charts reveal, that the Sensex is very much on course to hit the 18,000 level, either in October or by the end of this calendar year. The 16,250-16,450 level is likely to remain a base support zone in the short term. A breach of this support zone could see the index slipping down to 14,800. The NSE Nifty moved in a range of 151 points during the week. From a low of 4,959, the index moved up to a high of 5,111, before settling at 5,083, up 2.5 per cent.
The Nifty seems on course to 5,500, although there could be some stoppage around 5,280-5,350. On the downside, the rising trendline support has now moved higher to 4,880 from 4,825 last week. The bollinger bands suggest that the index may face some resistance around 5,160 on the upside, while a sharp correction could see the index tumble to 4,600.
Over the past year, stocks of agri-business companies have seen their valuations soar, with rising farm product prices contributing to strong demand for these companies, amid recessionary times.
The stock of Meghmani Organics, a mid-sized player , is a good investment option in this context.
At the current market price of Rs 17.4 (face value Re 1), the stock offers good value, trading at just over eight times its trailing 12-month consolidated earnings.
This is at a steep discount to agrochemical majors such as United Phosphorus (16 times) and Rallis India (14 times). Meghmani Organics’ current valuation does not reflect its solid growth record, its large roster of product registrations and diversified client and geographical base that moderates risk.
Originally listed in the Singapore Stock Exchange, the company made its India debut through an Initial Public Offer (IPO) at Rs 19 in May 2007.
Though the stock now trades almost at offer price, the company’s earnings have expanded strongly in the three years since, with net sales more than doubling to Rs 795 crore between 2005-06 and 2008-09 and net profits (consolidated) growing at 24 per cent annually, excluding forex losses.
Between March 2006 and 2009, the company scaled up its pigment capacities by 70 per cent to 25,520 tonnes and agrochem (technical) capacities nearly three-fold to 12,040 tonnes.
Meghmani Organics makes a wide spectrum of generic agrochemicals and intermediates for use in crop protection as well as public health and foodgrain storage.
It also manufactures green and blue pigments which find application in printing, plastics, paints and textile businesses.
Exports account for about 76 per cent of the total sales, with the agrochemicals business contributing about 55 per cent of revenues in 2008-09.
India’s rising reputation as a low-cost manufacturing base for specialty chemicals has led to more global majors looking to outsource manufacture of intermediates to players such as Meghmani.
In the pigments business, the company’s large roster of clients (over 300), backward integration and its ability to customise help it hold its own against other global suppliers.
Upbeat trends in global farm product prices, pressure to lift farm yields and increasing offtake from the growing Asian economies have spurred stronger global demand for agrochemicals with double-digit growth rates forecast over the next five years.
Players such as Meghmani appear well-placed to capitalise on this expansion. The company’s established presence in 56 countries and the fact that it holds registrations for over 140 products across these markets present formidable entry barriers against competition.
Both the agrochem and pigments business are subject to pricing pressures as the pace of new formulation/product launches is quite high; reflected in the moderation in the company’s operating profit margins over the past three years.
Over the next year or so, Meghmani can expect some relief on this front, due to declining costs of packaging materials and freight, the two key items of cost. Margins could also benefit from the company’s substantial backward integration measures to manufacture intermediates along with end-products.
Another of Meghmani’s key advantages lies in its diversified revenue streams, which help reduce agri-related as well as client related risks to its business. For one, the company’s presence in the Indian and overseas markets has helped it offset weakness in one market with more aggressive sales in another.
In 2008-09, a lacklustre year for global pigment sales, the company managed a 24 per cent growth in the Indian market to compensate for the sluggish 5 per cent growth in exports. In the June quarter of 2009-10, a 68 per cent expansion in exports of agrochemicals made up for weak domestic sales owing to the poor monsoon.
Two, with the company’s revenues well-spread-out over geographies, poor offtake in one region can often be offset by better performance in the others.
From the time of the IPO, Meghmani has more than doubled the revenue contribution from promising markets such as Asia (from 8 to 18 per cent) and South America (from 6.5 to 15 per cent), even while managing impressive growth in traditional markets such as North America.
The number of product registrations it holds has increased to 140, with over 400 more in the pipeline.
Peninsula Land’s strong presence in the Mumbai realty market and increasing evidence of a revival in real-estate demand in this metro improves the earnings visibility for the company.
Its projects in centrally-located areas for which it acquired land/development rights from loss-making textile mills also provide the company with a lucrative portfolio. Timely fund-raising strategies made before the downturn, also ensured that the company manoeuvred its way through the liquidity crunch of 2008.
Investors with a two-year perspective can consider buying the stock of Peninsula Land. At the current market price of Rs 83 the stock trades at eight times its expected per share earnings for FY11. Its capital can expand after the planned qualified institutional placement. The earnings growth is however, likely to keep pace.
Peninsula Land nevertheless remains a risky bet given its regional concentration and distressed land deals with respect to mill land. For this reason, it may not be the right stock for a long-term portfolio of, say, five years or more.
Investors may, therefore, consider setting target returns and exit the stock if it meets their return expectations in the next couple of years.
Early mover into mills
Peninsula Land is a real-estate developer, part of the Ashok Piramal group, with exposure to commercial, residential and retail projects located predominantly in Mumbai.
The company, although mid-sized with revenue of about Rs 540 crore for FY-09, stands out in the realty listed space for some of its unique business strategies. Peninsula Land was among the earliest players to commercialise the textile mill lands in Mumbai.
While mill lands are often embroiled in litigation, Peninsula Land has been successful in either buying out stakes in such mills and consolidating them (Dawn Mills being a case in point), or purchasing development right of such land and entering into revenue sharing agreements (Swan Mills).
Being an early bird in the strategy to monetise mill land, Peninsula Land could procure land at low cost. It, therefore, managed to buy out land parcels through internal accruals or by raising equity and avoided excessive leveraging.
We view this as a discreet strategy as the recent downturn in real estate was a standing example of developers suffering from mounting debt as a result of borrowing for land purchase rather than for execution.
The company has also tapped effectively into its group companies’ land resources and developed them.
This strategy has left the company with two key residential projects in Parel, of which 95 per cent has been sold, although project completion is slotted for December 2009. Its commercial project, Techno Park, in Kurla, which has reached about 50 per cent completion, is already fully sold out.
These are indicators that the company has largely been managing its working capital through these sales; it does not appear to have faced the problem of sitting on built inventory.
However, massive space sold to a single customer is not always free of risk. In its Dawn Mills land, for instance, Peninsula would receive 50 per cent of its tower 1 (of 2 towers) revenue from a single customer, Alok Industries, over a three-year time frame ending December 2010.
While Alok Industries has made some payments, it has been trying to rope in private equity players to meet this commitment.
Such long-drawn large deals may distress Peninsula’s cash flows. Sales made on the above projects aided a 57 per cent growth in revenue in FY-09, at a time when most realty players witnessed a decline in sales.
Net profits, however, expanded by 13 per cent to Rs 163 crore, as a result of higher cost of development and higher staff expenses arising out compensation for voluntary retirement.
While the June quarter sales has remained flat compared to a year ago, operating profit margins have improved by over 2 percentage points to 32 per cent, perhaps as a result of a good part of the revenue coming from the residential space.
Going forward, 4.1 million square of projects under execution are expected to be completed over FY 10 and FY11, while 11.4 million sq ft of projects planned are expected to yield revenues over the next six years.
The projects in the pipeline are interestingly more diversified across other cities such as Nasik, Goa, Pune, Nagpur and Hyderabad.
As most of these are not too away from its primary market, Mumbai, the company may not suffer the risk of treading into unchartered territory.
Investors can buy the Tata Power stock with a long-term horizon. Though historic valuations appear stretched, the stock holds value in the medium-to-long term with generation capacity expected to double in the next three years.
The company enjoys high earnings visibility on new capacities, for which the power purchase agreements (PPAs) have already been signed. At the current market price of Rs 1,290, the stock trades at 16 times its estimated 2010-11 consolidated earnings which is at a discount to NTPC. Investors should note that appreciation in the stock from hereon could be at a slower pace than in the past.
Merchant power capacities commissioned during the last fiscal at Haldia (100 MW) and Trombay Unit 8 (100 MW out of 250 MW) have potential for higher return on equity as they get fully operational. Given the demand-supply gap in Western and Eastern Regions, off-take for these capacities is practically certain. Steady earnings from licence business, coupled with higher return on investments in projects, will fetch optimal returns to the shareholders.
Tata Power is present across the energy value chain starting from fuel supply to logistics (recently ventured) to the retail distribution of power. By 2013, Tata Power is expected to commission all its ongoing projects including five units of 800 MW each under the Mundra Ultra Mega Power Project (UMPP), taking the total capacity to 8242 MW. The two projects that will add to a bulk of the future capacity — Mundra UMPP and the 1,050 MW Maithon project in joint venture with Damodar Valley Corporation — are currently on schedule with a 25 per cent completion status for Mundra project and 54 per cent in the case of Maithon.
Tata Power also plans for generation stations at the Mandakini and Tubed coal blocks in which it has acquired stakes. The coal mining is expected to start by 2012 and the company will set up two stations that will generate a total of 1,500 MW. Including these, and the 525 MW captive plant that it will set up for Corus in the Netherlands, Tata Power plans to add 6,200 MW in the period after 2012 .
The company has already tied up fuel for most of these projects. It has also sought to de-risk its power business from fluctuating fuel costs by investing in leading Indonesian coal mining companies, KPC and Arutmin.
The capacity expansion plans will require a capital expenditure of Rs 23,600 crore. Of this, a significant part of debt (Rs 14,000 crore) and equity (Rs 2,800 crore) has been arranged. Tata Power raised $335 million in July 2009 through a GDR issue which will help it fund the capex for the Mundra, Maithon and other projects. This will take care of Rs 1,600 crore of the Rs 2,800-crore equity required for the next three years.
Some of these funds will be utilised to repay short-term debt (Rs 700 crore) raised to fund the equity portion in Mundra and Maithon, thus reducing interest costs. The company could also offload a part of its investments to fund the expansion.
Tata Power’s profits grew by a modest 14 per cent annualised over the period 2005-09 due to the company’s reliance on Mumbai licence area . Despite increase of 8 per cent in generation, Tata Power’s revenues fell by 12 per cent (excluding Rs 232.4 crore pertaining to previous years, due to MERC tariff orders received during this financial year) in the first quarter of this fiscal.
Revenues fell due to decrease in fuel cost which, in turn, brought down the price of power per unit sold as the fuel cost is passed through. Operating margin for the standalone company improved to 26 per cent in the first quarter of this fiscal compared to 15 per cent in the quarter ended June 2008. The exceptional income received due to the MERC tariff order and ‘other income’ helped net profits to zoom by 97 per cent; standalone profits were flat if we exclude these two items. The consolidated profit showed a growth of 123 per cent.
The distribution business in Delhi (North Delhi Power Limited) and Powerlinks Transmission may earn steady revenues, while among the new businesses, Tata BP Solar (Solar panels) and the Indonesian coal companies may help scale up revenues.
Tata Power’s non-generation subsidiaries have begun contributing to profits. For the June quarter, the coal subsidiary reported profit before interest and tax (PBIT) of Rs 373 crore.Tata Power Trading Company, its power trading arm, is the third largest power trading company through which Tata Power sells its surplus power from merchant and captive power plants.
With the Central Electricity Regulatory Commission (CERC) recently notifying higher tariffs for central power generation companies, the MERC is likely to take cues from these tariffs to increase the ROE on the capital investments to 15.5 per cent. This may provide an additional push to Tata Power’s earnings. With the litigation with Reliance Energy (REL) resolved, Tata Power may also be in a position to sell about 500 MW of power from its Trombay project through open access. The lower tariffs of Tata Power Company may give it an advantage over REL.
Tata Power may also benefit from the favourable CERC norms for non-conventional energy as it already operates wind power plants of 193 MW, with 98 MW is to be added in future. Tata Power has tied up PPAs for the capacities that will come on stream in the next three years.
However, projects that will be commissioned post-2012 (about 3,900 MW) will fall under competitive tariff bidding norms. This may exert pressure on returns as the sector sees more competition from the private players.
High interest costs and depreciation pertaining to the UMPP may also put pressure on the profits of the company in the initial years.