Sunday, January 31, 2010
The IPO of Emmbi Polyarns appears unsuitable for conservative investors. Despite the company's relatively healthy margins and reasonable potential for growth in the flexible packaging business, the asking price for the offer appears high. The company's relatively small size and the scale of the proposed capacity expansion also peg up execution risks.
At the offer price of Rs 40-45 per share, the price would discount its annualised six-month 2009-10 earnings by 12-14 times on the pre-offer equity and by 29-32 times, on post-offer equity base.The expansion project would, thus, be crucial to justify the offer price. The stock's status as a small-cap and its limited scale of operations may make premium valuations difficult to attain.
Emmbi Polyarns' business revolves around the plastic packaging solutions. The company makes flexible intermediate bulk containers or jumbo bags, technical textiles, flexible tanks, woven sacks, container liner, anti-corrosive packaging and car covers. The user industries include chemicals, agri-processors and consumer products.
Barring a few products, the business of Emmbi Polyarns is mainly volume-driven. The company is in the process of entering new technical textile applications, which hold potential for higher margins, based on demand potential in the overseas markets.
The company has been supplying to established consumer and industrial companies such as Tata Chemicals, Godrej Industries and ITC. It has historically enjoyed operating margins in the 12-14 per cent range, while margins earned by competitors are around 8-10 per cent, claiming that it is able to price in raw material cost increases to its clients. However, whether it will be able to maintain margins with an over four-fold expansion in capacity planned now, is open to question.
Niche products such as flexible tanks, woven sacks and liners compensate for the wafer-thin margins earned by the jumbo bag business. The wide range of applications for flexible packaging make for reasonable growth potential. However, the sector is quite fragmented and features considerable competition. Plans to foray overseas would expose the company to global competition.
Emmbi Polyarns is raising money to expand its facilities for flexible packaging from 5,000 tonnes per annum to 17,800 mtpa. The first phase, of expanding to 8,600 mtpa is due for completion in May 2010, while second phase (the bulk of expansion) due by December 2010 is in the initial stages of implementation. The project is to be fully funded by equity.
The company has managed sales growth CAGR of 38 per cent in the last three years. From no exposure to the overseas markets in 2006, the share of exports to total revenues now stands at 58 per cent. However, despite the growth rates, the company's revenue base remains relatively small, even in the context of the fragmented packaging industry. For the six months ended September 2009, the company clocked net profits of Rs.1.21 crore on net sales of Rs. 23.2 crore.
As the company attempts to drive larger volumes, margins may be sensitive to sharp swings in raw material prices .
Prices of inputs closely follow crude oil and appear to be upward bound currently. The spot prices of LDPE and HDPE, for instance, have appreciated by over 50 per cent from their November 2009 lows, though prices are still below the 2007-08 levels.
Investors with a medium-to-long term horizon can buy the stock of V-Guard Industries (V-Guard) due to the high potential of the consumer durables business and the discounted valuation of the stock. At Rs 84, the stock trades at 12 times its trailing one-year earnings. Comparable peers in both cables and consumer durables trade at 13-20 times.
From manufacturing voltage stabilisers, V-Guard has diversified into agricultural pumps, water heaters, UPS, fans, domestic wiring cables and low-tension (LT) power cables. Increasing presence in the semi-urban and rural markets has helped it record a robust 24 per cent five-year compounded annual sales growth. With rising copper prices, the company is considering price hikes to maintain margins.
Last April, the company commenced commercial production at two new power cable facilities, one of which is in Uttaranchal. It plans to expand capacity by setting up a factory in the South, land for which has already been acquired.
Strong revenue growth
For the nine months ended December 2009, the company reported a 35 per cent growth in sales, buttressed by a 41 per cent growth in the electro-mechanical division (PVC insulated and low-tension power cables, water heaters and fans) .
About 30 per cent of the company's revenues (domestic wires: LT power cables- 5:1) are from the cables division. V-Guard now concentrates only on the retail segment (domestic wiring for individual houses and small and mid-sized projects) for its power cable sales; hence, there is no need to worry about the slow pick-up in capex activities in the core infra sectors.
The company's commissioning of the cable factory in Kashipur, Uttaranchal, is expected to give it a presence in the northern market. This factory makes building wire cables (two lakh coils per month at optimum capacity). V-Guard has also begun work in the newly set up LT cable factory at Coimbatore last year. The company had by December-end spent close to Rs 40 crore on these two projects (a total of Rs 44.78 crore was the estimated outlay on these projects at the time of the initial public offer).
V-Guard brand fans and water heaters are well recognised in the consumer markets of the South. The company's stabiliser sales come mainly from the semi-urban regions where the demand for voltage stabilisers is still high due to frequent power outage and voltage fluctuations. Though there is a risk of the new-age electronic items with in-built stabilisers slowly eating into the market, the company's focus on the Tier-II and Tier-III cities and diversified product lines will help sustain sales growth over the long term. The company has a network of 170 distributors and over 200 service centres pan-India.
An eye on margins
Copper is the main raw material . Sharp price corrections in copper in 2008 impacted the company's operating profit margins and in the December '08 quarter, the company's OPM dipped to a low of 5 per cent (on inventory devaluation and fall in realisation). However, the company booked all copper-related inventory losses in that quarter and has been seeing margins improving ever since.
For the nine-months ended December '09, operating margins stood at 12 per cent, up from the 9 per cent reported in the same period last year. From its lows of $2810/tonne on the London Metal Exchange in December '08, copper's price has risen to $7367/tonne now, a 162 per cent rally (still 17 per cent below its July '08 peak). Prices look likely to remain firm on tight supply conditions and rising Chinese imports.
The company's margins are susceptible to sharp price shifts in copper. Over the short term, however, margins may be held around the prevailing levels or may rise, with the company considering price hikes following similar moves by the competitors.
Net profits (before considering taxes and exceptional items) fell 16 per cent in FY-09 over the previous year. This was mainly on copper prices peaking in the mid-year and bottoming out in December. Sharp price shifts over a short period saw margins crumble as realisations could not match up with costs. However, for the nine months ending December '09, the company's net profit grew close to 70 per cent at Rs 19.38 crore on a sales growth of 35 per cent. The debt-to-equity ratio stands at a low 0.2, giving the company leeway to leverage for expansion plans.
NTPC is one of the better bets among power stocks. Though it has grown at a sedate pace over the last five years, NTPC is likely to deliver better earnings growth over the next decade.
Our valuations, on an estimated fair price-to-book-value of 3, support a price of Rs 204 a share with a built-in upside of 20 per cent.
Investors can consider subscribing to the follow-on public offer (FPO) if it is priced at Rs 204 or below. At current market price of Rs 214, the stock is trading a 17 times its estimated FY11 earnings. NTPC may increase its capacity by a third by the end of 2012 after we account for possible delays in execution. The Central Electricity Authority estimates that NTPC may add 10,020 MW to its current capacity of 31,144 MW in the same period.
On current reckoning, the company may end the current Plan period achieving 62 per cent (13,940 MW) of its targeted capacity. This would be higher than its previous Plan period addition of 7155 MW, allowing for higher topline expansion over the next three years.
Equipment delays and execution risks continue to be major hindrances, though. Delays in ongoing projects and the high proportion of cash in the book (Rs 20/share) continue to weigh on its Return on Equity (ROE). Delays in some of the upcoming projects would also entail a loss of the 0.5 per cent additional ROE incentive on tariffs proposed by the Central Electricity Regulatory Commission (CERC) to encourage timely execution.
However, NTPC may still manage some improvement in ROE over the next few years, given the recent increase in regulated tariffs proposed by the CERC. New merchant capacities expected to be commissioned at Korba (500 MW) and Farakka (500 MW) may also aid higher ROEs.
Upside due to regulatory changes such as sale of unallocated power through the merchant route also holds potential for better returns over the short-to-medium term.
NTPC, a public sector utility, is the largest player in the power sector with around 31,144 MW of capacity under its belt, including 2294 MW owned through JVs.
The company is amongst the better operating utilities, given that it contributed 28.5 per cent of the total electricity generated in the country last year, with only 19 per cent of the total capacity.
It has been consistently maintaining its plant load factor (91.4 per cent as of March 09) and plant availability factor (92 per cent as of March 09) at higher than normative levels and thereby earning incentives.
A comfortable funding position is the biggest strength for the company, even as private players grapple with financial closure.
The company has a debt: equity ratio of 0.64 per cent for the year ended March 2009, thanks to a high equity contribution in the earlier projects.
However, with the normative debt-equity fixed currently at 70:30, the company may witness increase in leverage and large proportions of cash (equity) may continue to lie unutilised, waiting to be invested.
The increase in debt is not a threat as the interest component will be passed through to customers. For the year ended March, 2009, the average borrowing costs stood at a moderate 7.2 per cent for the company.
NTPC had Rs 17,431 crore in free cash as of Septmber 2009, enough to comfortably fund the equity for more than 15,000 MW of the planned 25,000 MW capacity (in addition to 17,900 MW which are in various stages of commissioning). Given that internal accruals continue to be high, the free cash will only grow further. This may come in handy for the company to finance its backward integration into coal mining and to fund acquisition of mining assets.
The company also has Rs 11, 400 crore of One Time Settlement Scheme bonds issued against receivables.
NTPC intends to invest more than Rs 40,000 crore in the next two years, in addition to the current Rs 30,613 crore deployed in capital work-in-progress. Stable cash flows
NTPC's profit grew at a rate of 9.6 per cent compounded annually over the period 2004-09. During the same period, power output grew at a modest annual rate of 6.7 per cent.
However, with newer capacities coming up over the last 18 months and existing plants operating at higher levels, NTPC's profit after tax growth has improved — for the nine months ended December 31, 2009, improved by 11 per cent year-on-year. Unlike private power producers, NTPC is largely dependent on domestic sources of coal from Coal India and its projects carry negligible fuel risk.
The company has signed a new coal supply agreement with Coal India in May, 2009 for the next 20 years for 12 out of the existing 15 power plants with a penalty clause if there is short delivery (trigger level at 90 per cent).
NTPC also has captive mines which are expected to be operational by FY12. Overseas acquisitions of coal mines, along with committed coal linkages may also reduce the dependence on imports.
In FY09, imports made up a little over 4 per cent of the company's coal consumption. Availability of gas from the KG basin would improve the load factors for the company.
Enhancing the value chain
The power trading arm of NTPC is the second largest in terms of market share in short-term trading. It also holds a minor stake in Power Trading Corporation, the largest power trader.
The company is already a seasoned player in operation and maintenance of power projects and is taking up projects for renovation and modernisation and life extension for third parties.
While the company is planning to diversify its fuel mix, most of its hydro projects are delayed and may be commissioned only in the Twelfth Plan. It has formed a JV with NPCIL for 2,000 MW of nuclear power and is also diversifying into renewable sources.
The company has recently formed a JV with BHEL for engineering and a forgings and casting JV with Bharat Forge to reduce equipment delays.
While the stricter operational norms mandated by CERC augur well for an efficient utility such as NTPC, CERC has discontinued advances against depreciation and disallowed the pass through of tax on income , which could pose a downside to tariffs.
Investors with a two-year horizon can buy the shares of Educomp Solutions, an education solutions provider, considering a revenue model that ensures sustainable revenue streams and the rapid addition in schools that adopt its products and services.
At Rs 704, the share trades at 19 times its likely 2010-11 per share earnings. At these levels, the valuations seem attractive due to the superior growth and margin expansion that the company has been able to achieve in its key school learning solutions business. These valuations are also at a substantial discount to historic valuations enjoyed by the stock. Between 2006 and 2009, the company's revenues grew at a compounded annual rate of 125.6 per cent to Rs 637 crore, while net profits grew by 112.2 per cent to Rs 132.9 crore.
In the recent December quarter, Educomp's revenues grew by 37.2 per cent over the same period last year to Rs 260.1 crore, while net profits grew by over 92 per cent (including other income of Rs 15.8 crore) to Rs 61.2 crore.
Smart learning solutions, a business that generates over 75 per cent of revenues for Educomp, comprise two segments — smart class and ICT solutions. Smart class segment, which enjoys over 60 per cent operating (EBIT) margin, has increased contribution over the last couple of years.
This segment involves delivering interactive and innovative multi-media content based on curriculum of various boards and across classes in schools. About 2,574 schools and around 2.9 million students currently use the services of Educomp's smart class offering.
Contracts are usually signed with schools for a five-year period, which creates a sustainable revenue stream for the company. There is an ever increasing focus across private schools on developing newer and interactive pedagogical tools to deliver content to students; this is further reinforced by the fact that Educomp is increasingly getting orders from tier-II and -III cities.
In the three quarters of FY10, this segment alone has grown by over 75 per cent for the company. The ICT solutions division, which caters to computerisation efforts of state government schools, has also been getting robust order inflows.
This is a low margin business as it is hardware-intensive. There is also competition from players such as NIIT and Everonn Education. But it has still managed to win orders from state governments, the most recent ones being from Andhra Pradesh, Tripura and Haryana.
The other divisions such as online learning, catering to overseas students, joint ventures with overseas print and educational institutions are all generating revenues, but are still in the capex phase and would turn profitable only over the next two-three years.
Investors can avoid the initial public offer of the Mumbai-based real-estate developer, DB Realty, for now. Presence in the Mumbai market, which is perennially in short supply of usable land, besides the company's participation in lucrative Transferable Development Right (TDR) projects, no doubt provide scope for ramping up earnings.
However, lack of an operational track record and a high asking price act as dampeners to this offer. The company's annualised earnings for FY-10, on a post issue equity base, works out to about Rs 5. At the offer price of Rs 468-486, the price earnings multiple is way above larger peers such as Ackruti City, HDIL and Orbit Corporation.
If the company is able to complete its ongoing projects for the next couple of years and generate TDRs from some of these projects, the offer price (at the higher end) would work out to about 15 times its expected consolidated per share earnings for FY-12.
Investors may bide their time and consider picking the stock after the company demonstrates its execution capabilities. Paying a marginal premium, then, may still be worth it for a Mumbai play.
The company and offer
DB Realty develops residential, commercial and retail properties besides undertaking mass housing and cluster redevelopment projects, in and around Mumbai. The last-mentioned category provides alternative land to developers; called TDRs, such land can either be developed or sold as such to third-parties.
The company plans to raise Rs 1500 crore through this offer primarily for construction and development of projects. At the offer price, the company's full market-cap would be about Rs 11,000 crore.
DB Realty is now developing 19.5 million sq. ft of projects. Apart from ongoing projects, 19.3 million sq. ft of projects are in the pipeline and another 22.2 million sq. ft of forthcoming projects for which the company is yet to seek approvals for development.
Though the promoters have a background in real estate, DB Realty, as a company, is yet to make a mark in the property development business and does not have any completed projects to its credit since its inception in 2007.
While it incurred losses in the first two years, it turned in profits of Rs 146 crore (sales Rs 464 crore) by FY-09. However, close to half the revenues in FY-09 and the first half of FY-10 came from sale of TDRs, while the rest from partly booking revenues on ongoing projects.
While a quick ramp up by a company at a nascent stage of operation may appear impressive, it is not unusual for Mumbai realty players to quickly convert the lucrative TDRs in to cash.
Given its less-established operational background, the above project pipeline would warrant a close look on the execution and marketing front.
From the 11 ongoing projects of 19.5 million sq. ft, the company would generate TDRs of 10.9 million sq.ft. from mass housing projects. TDRs on forthcoming projects are negligible. While the market for TDRs has traditionally been lucrative, this market too nose-dived on changed regulations in September 2008 (which qualified more buildings for redevelopment), which ensured higher supply of TDRs.
This stream of revenue could, therefore, witness volatility, the reason why stocks of TDR-focussed players such as HDIL trade at a discount to peers such as DLF and Unitech.
Of the 11 ongoing projects with saleable area of 19.5 million sq. ft, only 50 per cent (coming from 3 projects) would be completed by FY-12. Ramp-up in revenues on timely sale of residential projects, could nevertheless be significant with about Rs 2000 crore of estimated revenues accruing over the next two years.
The high operating profit margins of over 50 per cent in FY-09 could, however, taper down to more normal 30-35 per cent, similar to peers, as the company's generation of TDRs decline.
Some of DB Realty's related party transactions also add other grey areas to the IPO. The company, for instance, has over Rs 200 crore of interest-free loans and advances granted to group and associate companies, including the group's hospitality ventures.
This amount was around Rs 400 crore as of March 2009, as much as 50 per cent of the company's net worth then.
Similarly, significant corporate guarantees for credit facilities extended to other companies under the same managements and in unrelated businesses such as telecom are risks for a sector that is working-capital intensive and in the early stages of growth.
The offer is open from January 29 to February 02.
The unfinished agenda of reversing the slide in the job market and pending healthcare reforms were the highlights of US President Barack Obama's maiden State of the Union Address. He vowed to press ahead with his plan to overhaul the nation’s healthcare system and called on Congress to pass a package of tax cuts and spending to stimulate the world's largest economy and create millions of new jobs. "Jobs must be our No. 1 focus in 2010, and that is why I am calling for a new jobs bill tonight," Obama told lawmakers from the podium in the chamber of the House of Representatives. Obama appealed to US lawmakers to take another look at his administration's healthcare reform proposal, while acknowledging that the plan is in a bit of a limbo at the moment. He also touched upon the ballooning budget deficit, saying that the government must tackle it. The deficit will hit US$1.35 trillion in 2010, the Congressional Budget Office has predicted. Obama’s speech before a joint session of Congress was devoted mostly to economic concerns, particularly the loss of more than 7 million jobs since the start of the recession in December 2007. Many of the steps he outlined on Wednesday have also been proposed previously. Support for Obama has weakened since he took office and a new Wall Street Journal/NBC poll has found that Americans think that he has focused too much attention on the now-stalled health-care overhaul and not enough on the economy.
The recent reversal in the stock market forced Mumbai-based supply chain company Aqua Logistics Ltd. to extend its issue subscription period to February 2. Aqua Logistics also trimmed its price band to Rs200 to Rs225 per share from Rs220 to Rs230 a share, following insufficient demand. The company was planning to raise around Rs1.5bn. Aqua Logistics had opened for subscription on January 25, and was supposed to close its book on January 28. As of 5 pm on that day, only 55% of the book had been subscribed. According to reports, qualified institutional buyers (QIBs) subscribed to only around 10% of the book, while high net worth individuals (HNIs) reportedly subscribed to around 72%. Saffron Capital Advisors and Centrum Capital are the book-running lead managers to the issue.
The development is reminiscent of the days in January 2008 when a slew of companies had to defer their issues in the face of investor apathy after extending their subscription period and slashing the price band. Emaar MGF and Wockhardt hospitals were among the prominent ones. There are a few concerns about the fate of some of the other primary market issues, which are either open for subscription, or will open for bidding shortly. Thangamayil Jewellery, Syncom Healthcare and DB Realty are open for subscription, while Vascon Engineers IPO is fully subscribed. DB Realty has already received commitments from anchor investors for over Rs2.7bn.
Power Grid Corporation of India Ltd. announced that its Board of Directors, at its meeting held on January 25, granted an in-principle approval to the Follow on Public Offering (FPO). The issue will be equivalent to 10% of the paid up equity share capital from domestic / external market for augmenting resources of Company to fund its investment programme. This will be subject to approvals by Government of India and approvals as required for FPO. The issue will happen sometime in September and will be of around Rs35bn. The Government of India currently holds 86.36% stake in the company, while the remaining 13.64% is held by public. The company's Board also considered the investment approval for 'Immediate evacuation System for Nabinagar TPS' (1000 MW) at an estimated cost of Rs2.15bn, with commissioning schedule of within 28 months from the date of investment approval. Last week, NTPC and REC received Board approvals and plan to mobilise around Rs140bn via FPOs. Both these FPOs will hit the market in early next month. The Cabinet had earlier asked all listed profitable PSUs to have public shareholding of at least 10% in each of them. There are 17 listed PSUs which have public holding less than 10%
The UPA government’s proposed comprehensive indirect tax reform, goods and services tax (GST), will miss its scheduled rollout from April 1, 2010, a temporary setback to creation of a unified national market for goods and services in the country. "Because of the difficulties in passing the required constitutional amendment bill in the budget session , it will not be practical to introduce GST on April 1, 2010 . New dates for GST implementation will be decided in April," Chairman of the Empowered Committee of State Finance Ministers and West Bengal finance minister Asim Dasgupta said after an hour-long meeting of the panel with the union Finance Minister Pranab Mukherjee. Dasgupta’s admission is a clear indication that the implementation of the new regime may be postponed by an year to April 1, 2011, as a number of states may not be willing for even a mid-year roll-out.
With most earnings and the much-awaited RBI policy out of the way, the market could attempt to claw its way back gradually after the recent slump. So, there is a fair chance that Friday's late rebound could spill over into Monday's session, at least early on. A reversal in FII selling and improvement in the global sentiment will be crucial to sustain any meaningful advance from here on. The market will also focus on the primary market as the NTPC FPO opens next week. A slew of other issues - IPOs, FPOs and QIPs - are also lined up over the next few weeks. One will have to examine their fate as well.
The release of Q4 US GDP data - which is expected to be strong - and its impact on world equity markets could sway the mood early next week. Also eagerly awaited will be the monthly US jobs data and other key economic reports from other parts of the world. Meanwhile, US President Obama is due to unveil a US$33bn package of tax credits on Friday. The plan is part of his promise to boost job creation. Concerns over possible sovereign debt default in Europe and the overhang of Chinese monetary tightening will however continue to cast a shadow on world markets.
Back home, monthly sales numbers will be announced by auto and cement companies. On the whole, things might not get worse from here in the run up to the Union Budget. Volatility is expected to prevail though as policymakers consider exit from emergency crisis-fighting measures amid growing threat of inflation and high fiscal deficit. The main indices could continue to be rangebound and choppy. Technically, the Nifty is likely to trade in a range of 4800-5000 in the near term. The broader market might also make a comeback after losing the momentum in the recent drubbing. But, one has to be very careful of what one is buying in this space.
India's food prices at the wholesale level climbed in the second week of January but is still much lower than the near 20% it touched in the initial days of December, data released by the Government showed. The index for Food Articles group rose by 0.4% to 286.7 in the week ended January 16, 2010 compared to 285.6 in the previous week. The annual, point-to-point inflation in Food Articles inched up to 17.40% from 16.81% in the previous week, the Commerce & Industry Ministry said in a statement.
The WPI for the Primary Articles group rose by 0.3% to 285.5 from 284.6 in the previous week. Inflation in the Primary Articles group stood at 14.66% in the week under review versus 13.93% in the preceding week. Inflation in the Primary Articles group was at 10.96% during the week ended January 17, 2009. The index for Non-Food Articles group rose by 0.1% to 258.2 from 257.9 for the previous week. Inflation in the Non-food Articles space rose to 11.53% from 10.40%, while that in Minerals group remained static at -5.18%.
Meanwhile, the index for the Fuel & Power group rose by 0.1% to 350.6 from 350.4 in the previous week. Inflation in the Fuel & Power group declined to 5.70% in the week ended January 16 from 6.34% in the week ended January 9, the Commerce Ministry data showed.
Inflation for the Fuel & Power group was at (-) 0.93% during the corresponding week of the previous year. Inflation in Mineral Oils group increased to 8.66% in the middle of January from 9.78% in the previous week. At the same time, inflation in the Electricity group stood unchanged at 1.95%, the Commerce Ministry data revealed.
The benchmark monthly inflation, as measured by the Wholesale Price Index (WPI), was 7.31% in December, compared with 4.78% rise in November and 6.15% a year ago. In September it stood as low as 0.5%.
The Reserve Bank of India (RBI) never ceases to surprise the markets. It did it again on Friday. As against the consensus expectations of a 50 basis points (bps) hike in the cash reserve ratio (CRR), the RBI hiked it by a wider than anticipated 75 bps to 5.75%. At the same time, the RBI left all other policy rates unchanged. So, the reverse repo has been kept static at 3.25%, as is the repo rate, which remains at 4.75%. The bank rate also stays steady at 6%. The central bank also raised the FY10 GDP forecast, to a much stronger 7.5% from 6% earlier. Inflation target for the current fiscal year has also been hiked to a substantially higher 8.5%, from 6.5% earlier.
The RBI has scaled down the annual non-food credit growth target to 16% from 18% earlier. Money supply (M3) estimate has also been pared to 16.5% from 17% earlier. The projection for deposit growth has been scaled down to 17% from 18% earlier. The 75bps hike in the CRR will suck out Rs360bn from the banking system. The central bank has been receiving about Rs1 lakh crores in excess liquidity from banks over the past several months. The CRR increase will be executed in two stages, the RBI said. The first 50bps hike will be done with effect from Feb. 13 while the balance 25bps will come into effect from Feb. 27.