Tata Steel FPO Analysis

Fortunes tied to European recovery

Domestically the company is on a strong footing. But European operations remain vulnerable to fluctuations in raw material prices and volatile European economies

Tata Steel is one of the world's largest steel companies with a steel production capacity of approximately 27.2 million tonnes per annum (mtpa). According to World Steel Association (WSA), the company was the seventh largest steel company in the world in terms of crude steel production volume in 2009. The company has operations in 26 countries and a commercial presence in more than 50 countries. As of March 31, 2010, the company had approximately 81,000 employees.

SCI FPO

SCI FPO

SCI FPO

Investors with a long-term perspective of at least two-three years can consider applying at cut off in the follow-on public offer (FPO) of The Shipping Corporation of India (SCI), the country's largest shipper (35 per cent share) in terms of Indian flagged tonnage.

Power Grid FPO Listing Date

Power Grid FPO Shares would be listing on Nov 25 2010

Power Grid Corporation of India FPO Analysis

Powering India

Due to jump in commissioning of projects, there will be accelerated growth in the short term and steady growth thereafter

Power Grid Corporation of India (PGCIL), a mini ratna public sector undertaking under the ministry of Power, is the country's central transmission utility (CTU). The company owns and operates more than 95% of India's interstate and interregional electric power transmission systems (ISTS). As principal electric power transmission company of the country, it owns and operates 79,556 circuit kilometers of electrical transmission lines and 132 electrical substations as end of Sep 30, 2010.

Power Grid FPO priced at 85-90

The government today fixed price band at Rs 85-90 per share for about Rs 7,600 crore follow-on public offer (FPO) of state-run transmission company Power Grid Corporation of India.

Power Grid FPO

PowerGrid is the only transmission player that may enjoy a scarcity premium in this business. However, returns may be moderate, given the defensive nature of the stock.

Investors with a three-four year horizon can consider subscribing to the follow-on public offer of Power Grid Corporation. PowerGrid, the central transmission utility, wheels more than half the total power generated by power utilities in India.

Engineers India FPO Analysis

Engineers India (EIL), the public sector undertaking under the ministry of petroleum and natural gas, is engaged in the business of project implementation and engineering consultancy services primarily for the hydrocarbon sector in India and overseas. Of late, the company has also extended its consultancy and turnkey service to other sectors including non-ferrous mining & metallurgy and infrastructure sector. It offers a complete range of project services including design, engineering, procurement, construction, and project management.

NMDC FPO Analysis

A pricey commodity stock

The company's high P/E already captures substantial rise in iron ore prices over the next few years and EV /tonne of iron ore reserves is at significant premium to global peers

NMDC (National Mineral Development Corporation), incorporated in 1958, is a public sector company controlled by the Government of India (GoI). The company has been conferred "Navaratna" status. It has access to significant reserves of high grade iron ore, predominantly greater than 64% Fe content and iron ore production accounted for approximately 13% of India's total iron ore production (according to the Indian Bureau of Mines). The company is also one of the lowest cost producers of iron ore, resulting in strong margins.

NMDC was the largest iron ore producer by volume in India during the last three fiscals (according to a certificate of the Federation of Indian Mineral Industries, dated February 8, 2010) and produced 28.5 million tonnes of iron ore in FY 2009. The company's principal operations include its three iron ore mining complexes at Kirandul and Bacheli in Chhattisgarh and Donimalai in Karnataka, each of which consists of several iron ore mines. Core operation is iron ore mining and iron ore sales, representing approximately 99% of its consolidated income from operations for FY 2009 and for the nine months ended December 31, 2009.

As on 1 January 2010, as per the assessment of Behre Dolbear (in accordance with the Joint Ore Reserves Committee (JORC) code), total reserve stood at 1360.6 million tonnes (proven reserve 977.5 million tonnes, probable reserve 182.2 million tonnes and mineral resources 201.0 million tonnes), predominantly greater than 64% Fe content. The company's producing mines are open cast and primarily fully mechanized. It is planning a number of projects to meet demand by enhancing the production capabilities of its existing mines and also by opening new mines.

Going forward, NMDC has guided for a volume guidance of around 50 million tonnes p. a. by 2014. However, most of the volume growth will be back-ended. The management also expects the actual reserves to be higher than the reported reserves. The company also has a healthy balance sheet with cash of Rs 12078.25 crore and is actively exploring options of acquiring iron mines in countries like Brazil, Australia and Senegal.

NMDC sells most of its high-grade iron ore production to the Indian domestic steel market on long-term sales contracts. In FY 2009, exports constituted approximately 15% of consolidated total sales volume, primarily to Japan and South Korea. The company sells its core products, iron ore fines, lump and slimes, through the sales and marketing function. In FY 2009, approximately 92% of the iron ore domestic and export sales volumes were on long-term contracts. The remaining 8% was sold in the spot market at negotiated prices.

Most long-term contracts are for five years. Around 96% of the current agreements for domestic sales are due to expire in 2010 and all current agreements for exports are due to expire in 2011 Till now, NMDC was varying the price in line with changes in global benchmark rates. In view of the crumbling benchmark system, it has appointed a consultant to re-look its pricing structure on long-term contracts and develop a new pricing mechanism. NMDC expects to receive the report soon.

As NMDC is one of the lowest cost producers of iron ore globally, it enjoys very high OPM, which has been consistently above 75% from FY 2007 to FY 2009). As per the company, domestic margins are higher than export margins. For exports, the company has to bear additional costs of export duties, royalty rates, and transportation cost from mine to the port (export sales are on a FOB basis). For domestic sales, royalty charges and transportation costs are borne by customers.

In addition to iron ore operations, NMDC also operates a diamond mine at Panna in Madhya Pradesh, one of the largest diamond mines in Asia, and owns a wind power facility with seven towers with a total capacity of 10.5 MW in Karnataka. The company has the clearance for producing 1,00,000 carats of gem and industrial diamonds per annum. Further more, it expects to complete its acquisition of Sponge Iron India, a company primarily involved in the production of sponge iron, early 2010.

NMDC's key expansion plans include development of steel mill, beneficiation pellet plants, etc. Over the next five years, the company has chalked out a capex plan of Rs 26500 crore. A major part of the capex is to be back ended. Of this, a bulk of the capex (around Rs 15500 crore) would be for steel expansion. The rest would be spent on the pellet plant, development of mines, etc. The company plans to start value-added projects such as steel production and has signed an MOU with the government of Chhattisgarh to develop a steel plant with a capacity of three mtpa at Jagdalpur. It also has plans to develop a steel plant in Karnataka. MMDC is planning to diversify and has been allotted two coal blocks. It is also looking overseas to acquire rock phosphate/potash mines and has secured a prospecting license for gold in Tanzania

NMDC is coming out with a follow-on issue, which is an offer for sale of 332243200 equity shares by the GoI, representing 8.38% of the outstanding equity share capital of the company as part of the decision of GoI to divest part of its shareholding in the company. Being an offer for sale, the company will not receive any proceeds of this offer. All the proceeds will be received by the seller of shares.

Strengths

Iron ore is a key input required in steel making. During the recent global financial market turmoil, India and China were the only two bright spots. In calendar year 2009, among the major steel producers in the world, India and China experienced a growth in steel output, while most others reported a fall. This indicates that the demand for iron ore has remained relatively firm. Furthermore, NMDC caters mainly to the domestic market, which augurs well. The National Steel Policy (NSP) has set a steel production goal of 110 million tonnes by 2019-20. This requires an availability of 190 million tonnes of iron ore for domestic consumption. Currently, domestic iron ore consumption is estimated at around 90 million tones in FY 2009.

NMDC is one of the lowest cost producers of iron ore across the globe and has been able to keep the operating expenses in check, giving the company a competitive edge. While the EBIDTA has increased sharply from US$ 13.4 per tonne in FY 2005 to around US$ 51.3 per tonne in FY 2009, the operating expenses (based on consolidated audited financial statements excluding selling expenses) have increased from US$ 6.1 per tonne in FY 2005 to around US$ 7.6 per tonne in FY 2009.

NMDC's 92% of iron-ore sales are on long-term contract and the balance 8% on spot basis. As a result, the current performance is reflective of the long-term contractual iron ore pricing, which is at a steep discount to spot price. However, going forward, there are proposals to move the contract prices near to the spot rates next year. This would have a positive impact on its iron ore realization. Strong spot prices coupled with indication by global majors to seek settlement close to the spot rates augur well for the company. NMDC has appointed a consultant to look at various possible pricing mechanisms available to realise higher iron ore price once the benchmark system is changed.

Weaknesses

Most major domestic steel companies have applied for captive iron ore mines and their application is in different stages of approval. Allocation of mines to steel companies may affect the demand prospects of NMDC over a longer time frame.

The mining operations are located in geographically remote areas, some of which are at risk of attacks by rebel groups. Such attacks have had and may continue to have a material adverse effect on NMDC's operations. For example, the slurry pipeline owned and operated by Essar Steel, used to transport NMDC's iron ore from the Kirandul complex to Essar's facility in Vizag, was damaged by Naxalite rebels in May 2009, adversely impacting the revenue and profitability of NMDC. In addition to disruptions in state-owned railway lines, the company's supplies through rail (KK Line) from the Kirandul and Bacheli complexes to the Vizag port have been restricted from time to time due to security concerns of terrorist activities of Naxalite rebels operating in the area. Further more, time overruns have been experienced at the Bailadila Iron Ore Project Deposit 11B due to Naxalite activity in Chhattisgarh.

NMDC generates a significant portion of its revenue from certain key customers. Rashtriya Ispat Nigam and Essar Steel together accounted for 37% and 37% of iron ore sales revenue in FY 2009 and in the nine months ended December 2009, respectively.

For the next few years, the primary driver of NMDC's earnings will be the increase in iron prices as no significant volume growth is expected (except for the recovery from the temporary dip in the current year).

The company's capacity to execute and operate large steel projects planned is untested.

Valuation

Operationally as well financially, NMDC is on a strong footing. However, its FPO represents an exceptional case whose current share price does not give a true picture of its value because the pre-issue floating stock is just 1.62% (64054620 equity shares). Total Institutional holding is 1.38%, leaving very little float for public holding. The stock also has been very volatile. After recently hitting a closing high of Rs 556.05 (closing price as on 19 January 2010), it has corrected by 28% (closing price of Rs 400.60 as on 8 March 2010). Due to low floating stock, the scrip was enjoying high valuation. But with the increase in floating stock after the current issue, valuation will come down.

In FY 2008, NMDC's total iron ore production stood at 30 million tonnes, while in FY 2009, it was around 28.5 million tonnes. In the nine months ended December 2009, iron ore production stood at 17.2 million tonnes. The nine months ended December 2009 were relatively lower partly due to damage to the Essar Steel slurry pipeline, which was not operational since May 2009 and was restored recently.

The stock is offered at a price band of Rs 300 – Rs 350 (without considering the 5% discount being offered to retail individual bidders and eligible employees), which is in a range of 13%-25% discount to the closing price of Rs 400.60 on 08 March 2010. P/E at the offer price band is at 27.3x- 31.9x times consolidated FY 2009 EPS of Rs 11.0 and 37.3x - 43.6x times the consolidated annualised nine months ended December 2009 EPS of Rs 8.0. So even the lower price band already factors in the substantial rise in iron ore prices in the near term as only the rise in iron ore prices will be the key earnings driver over the next few years,

At the price band of Rs 300 – Rs 350, the EV (Enterprise Value) per tonne of iron ore reserve works out to be in the range of US$ 20.2 per tonne to US$ 23.9 per tonne. The EV/tonne of iron ore reserve of comparable player in the sector, Sesa Goa, is around US$ 22.7 per tonne (based on the closing price on 8 March 2010). Notably in last one month, the Sesa Goa scrip is up 23%. However, on the basis of EV/tonne of iron ore reserves both the Indian players are trading at significant premium to the global peers.

Commodity stocks like NMDC track actual and expected changes in commodity (iron ore for NMDC) prices, which are very sensitive to global economic and liquidity factors and are likely to continue to be highly volatile.

NMDC

Investors should consider bidding in the follow-on public offering from National Minerals Development Corporation (NMDC) only if it is priced at a steep discount to the current market price.

NMDC has a good exposure to the iron ore mining sector with large reserves of high-grade ore, assured demand from the expanding Indian steel industry, production costs that are far below the global average and large cash in its coffers to pump into diversification and expansion projects.

The company's impressive operating profit margins of 70-80 per cent, its zero debt status and cash of over Rs 12,000 crore on its books (as of December 2009), make the stock a preferred exposure in the listed mining space.

However, it is the stiff valuation that the stock is trading at which is a cause for concern for investors. At the current market price of Rs 416, the stock discounts its trailing 12-month earnings by about 48 times. While NMDC's Indian peer Sesa Goa trades at 19 times, much larger global competitors such as Rio Tinto, Vale and BHP Billion trade at 18-23 times.

Even if one looks at other relevant valuation metrics such as Enterprise Value (EV)/EBITDA, NMDC's stock appears very expensive. While its EV/EBITDA stands at over 40 times, that of diversified global mining majors (much larger in size) such as Rio Tinto, Vale and BHP Billion are around 13-16 times.

Apart from the one-off factors which depressed NMDC's earnings in the latest nine months, the valuations for the stock have run up to unrealistic levels due to the buzz surrounding divestment and the limited floating stock that has been available for trading. Given this backdrop, in our view, the FPO would be worth considering if priced at Rs 300 per share or lower. That would capture a price-earnings multiple of about 32 times on its normalised earnings (average of three years to current fiscal) and an EV/EBIDTA multiple of about 19 times on the same basis.

The company's cash balances of about Rs 12,077 crore (as of December 2009) alone translate into a value of about Rs 30 per share.

Domestic strength

NMDC enjoys a near monopoly status in the Indian iron ore mining sector, with iron ore making up nearly all of its revenues.

The company has a wide customer profile. Supplies to domestic steel companies which are on an expansion spree assure it volume growth. Operating mainly through long-term contracts lends it high revenue visibility.

It has a total proven reserves of 977.5 million tonnes, with an average mine life of about 30 years. More than half of this is currently put to use. Spread across Chhattisgarh and Karnataka, the reserves are predominantly of high quality (64 per cent and greater iron ore content).

The company produced 28.8 million tonnes of iron ore in FY09, of which, about 22.6 tonnes was sold in the domestic markets while the rest was exported to Japan, South Korea and China. Exports are done through MMTC and the company shares foreign currency risk with the former.

NMDC's Indian market focus lends high stability to its revenue, given the strong steel demand in the domestic market and the expansion plans of domestic steel majors.

Key customers in the domestic market are Rashtriya Ispat Nigam (Vizag Steel Plant), Essar Steel, Ispat Industries, JSW Steel and Welspun Maxsteel. These clients account for over 60 per cent of its total sales. A good portion of sales is done through long-term contracts.

Though contracts are usually long term, NMDC has traditionally enjoyed strong pricing power even during the tenure of the contracts.

In this context, global iron ore prices which were depressed through last year, appear to be showing signs of resuming their uptrend, with recent forecasts indicating that prices may trend up by 50-60 per cent over the next one year as global contracts get renegotiated in a stronger economic environment.

Global spot prices of high grade iron ore are up by over 40 per cent since September 2009.

At present, NMDC charges around Rs 2,600 per tonne of iron ore. If its clients resort to importing the same quality ore from Australia or Brazil, costs may range between Rs 3,200 and Rs 4,000 a tonne.

With the ongoing expansion in the steel industry and a bulk of customer contracts soon due for renewal, NMDC may witness strong revenue growth of 25-30 per cent in the next couple of years.

Revenue growth may go directly to bolster the operating profit margins, given that NMDC's costs of production are among the lowest in the peer group. That could mean operating profit margins reverting to the historical range of over 80 per cent.

Diversification bid

To keep pace with the growth in the steel industry, NMDC plans to expand its iron ore production capacities to 50 million tonnes by 2014-15.

Additionally, to move up the value chain, NMDC, in collaboration with the Government of Chhattisgarh, will develop a steel plant at a cost of Rs 14,000 crore and a capacity of 3 mtpa in Jagdalpur. It also plans to set up a steel plant in Karnataka.

The steel projects may improve its revenues but can also expose it to debt and steel price cycles. NMDC also proposes to diversify as a mineral producer.

The company's diamond mine at Panna is one of the largest diamond mines in Asia. That apart, it has exposure to other minerals such as limestone, dolomite and manganese which are captively used to produce iron ore.

Sound financials

NMDC has seen a compounded annual production and sales growth of 20-25 per cent between FY05 and FY09.

Operating profit margins have improved from 57 per cent to 88 per cent between 2004-05 and 2008-09, as costs remained steady even as realisations shot up. NMDC's performance however suffered a setback in the recently concluded nine months ended December 2009 as its operations were disrupted by Naxalite attacks.

Sales revenues declined by 32 per cent year-on-year in the December 2009 quarter and by 25 per cent for the nine-month period. Operating margins fell from 80 per cent in December 2008 to 60 per cent in December 2009.

Nevertheless, these margins are still above the industry average of 40-50 per cent. Net profits for the December 2009 quarter also fell to Rs 859.99 crore from Rs 1,424.95 crore in December 2008.

Though the situation is now under control, NMDC is still vulnerable to such attacks. Normalised production, an improvement in sales off-take and a revision in selling prices will boost NMDC's earnings in the coming quarters.

Issue details: NMDC plans to offer for sale 33.2 crore shares of face value of Re 1, at a price band to be announced a day prior to the offer opening. This represents 8.38 per cent of the outstanding shares of the company.

via BL

REC FPO Review

Investors can subscribe to the follow-on offer from Rural Electrification Corporation (REC), as the valuation at which the offer is made is reasonable in the light of the strong earnings visibility and growth expectations. REC, which specialises in financing power projects, is witnessing a huge and sustainable demand for funds, which would drive loan book growth for the next few years.

Superior net interest margins (NIM) of 4.54 per cent, despite secured lending, continue to aid profit growth. High return on net worth (21 per cent estimated for the fiscal ended March, 2010 despite equity expansion), low operating costs, high levels of capital to support the loan growth and near-zero non-performing assets are the key positives. At the offer price of Rs 203, the stock trades at nine times its estimated FY-11 EPS and 1.8 times its expected FY-11 adjusted book value. In book value terms, it is at a slight premium to its peer, Power Finance Corporation. A valuation of nine times earnings is cheap as the company may post an earnings growth of more than 30 per cent annually for the next three years.

Capital augmentation

REC, a navaratna PSU, is tapping the primary markets to augment its capital base to support future loan growth; this in addition to disinvestment of the government's stake. REC is expected to realise more than Rs 2,600 crore from the issue and, as a result, the company's net worth would increase by at least 38 per cent.

However, the dilution in equity base is only 17.39 per cent. We expect no earnings dilution for the current shareholders despite equity expansion, as the company may grow at a higher rate. Assuming a 70:30 debt-equity mix in funding for the upcoming power projects, around Rs 14 lakh crore of debt investment is required for the power sector over the 11th (2007-12) and 12th Plans (20012-17).

This offers immense scope for REC to grow. According to working group report of power projects, REC was to fund 16 per cent of the debt component in the 11th plan.

The company's loan book grew at an annual rate of 24 per cent during the period 2004-09. Even as the loan book expands, we expect the company to grow at a healthy rate (greater than 25 per cent) as the sanctions get converted into disbursements. As new projects get awarded, the sanctions may only increase. REC also plans to diversify into other power-allied activities such as coal mining and equipment financing, which would open up new funding opportunities for the company.

Business

Loans to the power generation segment, as a proportion of total loans, increased to 38 per cent, as of September 30, 2009, from 23 per cent in 2007. Majority of incremental sanctions are arising out of this segment.

Private sector now constitutes only 6 per cent of total loan book. However, this proportion would increase as bulk of capacity additions in 12th plan are being added by private players. This may have a beneficial impact on margins as private sector loans have higher yields compared to loans extended to state owned companies. The company's borrowing profile is pretty much diversified, with 19 per cent raised through 54EC bonds, 20 per cent from bank borrowings and 51 per cent from taxable bonds.

Net profit grew by 29 per cent compounded annually over 2005-09, driven by strong disbursements and improved NIM. For the nine months ended December 31, 2009, net profits grew by 62 per cent.

NIMs may moderate as rates harden, as majority of loans disbursed are fixed in nature. However, REC would continue to maintain superior margins within the financial services space thanks to its access to low cost funds..

Few risks

Delays in power projects could lead to rescheduling of loans; REC has 3.31 per cent of its total loan book as rescheduled loans which would delay the cash flows.

The cost of fund advantageis falling by the quarter as the 54EC proportion bonds, as a share of funding, is declining. The key upside risk is the allowance of government to raise tax-free bonds to bridge the funding gap in the power sector.

REC FPO Analysis

REC FPO Analysis

Rural Electrification Corporation FPO

Rural Electrification Corporation (REC) is a public financial institution in the Indian power infrastructure sector engaged in the financing and promotion of transmission, distribution and generation projects throughout India. REC's clients primarily include Indian public sector power utilities at the central and state levels and private sector power utilities.

REC's primary financial product is project-based long-term loans. It funds its business with market borrowings of various maturities, including bonds and term loans.

Besides financing all segments of the power sector, including generation, throughout the country, its mandate was further extended in September 2009 to include financing other activities with linkages to power projects, such as coal and other mining activities, fuel supply arrangements for the power sector and other power-related infrastructure.

As of September 30, 2009, REC's loans outstanding by sector included 54.7% relating to transmission and distribution, 37.7% relating to generation, and 7.5% relating to other types of financing.

The company is coming out with a follow-on issue of 17.17-crore equity shares which comprises fresh issue of 12.88-crore equity shares and offer for sale of 4.29-crore equity shares to carry out disinvestment of government of India's stake.

The company intends to utilize the funds being raised through the fresh issue to augment its capital base to meet future capital requirements arising out of growth in its business.

Strengths

The Eleventh Plan, which came into effect from fiscal 2008, was then estimated to require funds in excess of Rs 1000000 crore for investment in transmission, distribution and generation. For the Twelfth Plan, which will come into effect from Fiscal 2013, it is estimated that funds in excess of Rs 1100000 crore will be required.

REC's loan sanctions and loan disbursements have grown at a CAGR of 25.71% and 23.23%, respectively, between fiscal 2005 and fiscal 2009.

REC compares better with PFC in almost all financial parameters: lower cost of funds, better net interest margin, higher spreads and almost same yield on investments

REC's net NPA is virtually nil in the half year ended September 2009.

Weaknesses

REC is a power sector-specific public financial institution. This sector has a limited number of borrowers and future exposure is anticipated to be large with respect to these borrowers. In addition, many of these borrowers are public sector utilities that are loss making and, therefore, may have liquidity concerns while repaying their borrowings

The GoI, since January 2007, has limited the amount of Section 54EC long-term tax exemption bonds that an individual investor can utilise to offset capital gains to Rs. 50 lakh, which has reduced the amount of bonds REC have been able to offer for subsequent periods. As a result, the share of Section 54EC long-term tax exemption bonds in the total rupee borrowings stood reduced to 21.7% as on 30 September 2009 from 46.03% as on 31 March 2007. Compared to this, taxable bonds' share has increased to 51.63% from 23.01% in the same period. The weighted annual average interest rate on all of outstanding Section 54EC long-term tax exemption bonds, as on September 30, 2009, was 5.56% compared to 8.95% for taxable bonds.

Valuation

The floor price of Rs 203 discounts the annualized nine months ended December 2009 EPS of Rs 19.4 on post-issue equity of Rs 987.49 crore by 10.4 times. PFC is currently trading (around Rs 242) at P/E of 11.9 times its nine-month annualized EPS of Rs 20.4.

While the current price is Rs 220, the 50-day average, 100-day average and 200-day average works out to Rs 244, Rs 229, Rs 199. The scrip's beta is 0.8, indicating below average market-related risk.

Pre-FPO book value (BV) is Rs 95.6 including earnings of nine month ended December 2009. P/BV is 2.1 compared to 2.2 of PFC. Post-FPO BV of REC will be Rs 109.6 (assuming Rs 203 as issue price), which translates into P/BV of 1.9.

NTPC FPO Analysis - Review

Sound and stable

Solid long-term growth potential, but lackluster track record

NTPC, a public sector undertaking under the Ministry of Power, is the largest power generating company in India with an installed power generation capacity (including joint venture capacity) of about 30,644 MW end September 30, 2009. Of the owned power generation capacity of 28,350 MW, the share of coal-based thermal power plants is 86%, operated through 15 coal-based power stations. The balance 14% is gas-based, operated through seven gas-based power stations (including one naphtha-fired station). In fiscal ended March 2009 (FY 2009), the company contributed 28.6% of the total power generation of India.

Presently, NTPC is engaged in construction of projects representing 17,930 MW (including 4,000 MW undertaken by JV companies). It is also pursuing a basket of projects of approximately 33,000-MW capacity in various stages, including projects for which tenders have been invited, feasibility report (FR) prepared, or a FR is under preparation and approval, to achieve its stated goal of 75,000 MW capacity by FY 2017.

NTPC has embarked on diversifying its fuel mix. The company had 1,920-MW hydroelectric power projects under construction end September 30, 2009. About 552 MW is under bidding. It is also preparing FRs and detailed project reports for hydroelectric power projects to achieve hydroelectric capacity of approximately 9,000 MW by FY 2017. Similarly it is also seeking other renewable energy projects such as wind and solar to have 1,000-MW generating capacity from other renewable sources by FY 2017.

NTPC continues to diversify into areas such as coal mining, power trading and distribution to become an integrated power company. It has been awarded eight coal-mining blocks by the government of India including two blocks awarded for development under a JV with Coal India. In 2002, it incorporated NTPC Vidyut Vyapar Nigam, a power-trading subsidiary, which has grown to become the second largest power trader in the country. By leveraging its technical, operational skills and knowledge base, NTPC has developed a consulting business offering consulting services relating to capacity addition, operation, maintenance, renovation & modernization and performance improvement both in India and overseas. Total revenues from consulting business stood at Rs132.5 crore in FY 2009 compared with just Rs 34.1 crore in FY 2004. The company proposes and has initiated work for equipment manufacturing to ensure supply of critical equipment and spare parts, and an electricity distribution business.

To capitalize on the opportunity from sale of merchant power, NTPC is implementing 2,120-MW power projects as merchant power plants for selling power outside long-term power purchase agreements (PPAs) at market-based prices. As provided by the National Electricity Policy, 2005, up to 15% of new generating capacity may be sold outside long-term PPAs. However, some of the power generation from the company's merchant capacity may also be sold under PPAs.

The government of India, which owns 89.5% of the paid-up capital of the company, is divesting 5% of its stake through this follow-on offer.

Strengths

Has operational power generation capacity of over 30,644 MW. Is targeting a diversified power generation capacity 75,000 MW by FY 2017 at a CAGR of 13%. Has close to 17,930-MW capacity under construction including 4,000 MW by JV companies. Has projects with an aggregate capacity of another 10,000 MW is under bidding and about 25,000 MW for which sites have been identified and studies are under progress.

Has a strong track record in operating its plants at higher efficiency. In terms of availability factor, a measure of how often a station is available to generate power, and average plant load factor (PLF), a measure of how much of its capacity a plant actually uses to generate electricity, the power stations of NTPC are efficiently operated. Out of 15 coal-based power stations, five stations have operated at a PLF of greater than 95% and one among the five even operated at a PLF of 99.4% in FY 2009. Considering all 15 coal-based power stations, the average PLF works out to 91.1% with an average availability factor of 92.5% in FY 2009 compared with the all-India average PLF for coal-based stations of 77.2%. The gas-based stations of the company operated at an average availability of 86.7% in FY 2009 and an average PLF of 67.0% compared with the all-India average PLF for gas-based stations of 57.6%. Moreover, the PLF of gas-based stations improved to 78.4% in the first half of FY 2010 due to increased gas availability.

All owned installed capacity of 28,350 MW is contracted for sale through long-term PPAs with state electricity boards (SEBs) and distribution companies. More than 90% of its sales of electricity is to SEBs and state owned distribution companies for which payments are secured through letter of credit and the tripartite agreements. This assures steady cash flow. Moreover, will be able to cash on the higher unscheduled interchange charges if able to operate the plant at higher scheduled capacity or the client fails to take the generated capacity in view of the strong demand-supply gap in the country. Moreover, the new generation units are eligible for 15% merchant sales component. This would allow exploitation of the current strong merchant power tariff market in the country.

Has ensured fuel supply with long-term supply agreements. Had signed long-term coal supply agreements covering 12 of its 15 coal-based stations with Coal India and its subsidiaries in September 2009. Also executed gas supply agreements with Gail India for gas-based power stations. These are valid up to 2021.

The balance sheet is strong to leverage for future investment commitments. Cash on hand in consolidated books was about Rs 17341.20 crore and net worth Rs 61846.20 crore end September 2009. The current cash position is more than enough for its equity commitments in JVs and special purpose vehicles.

Is set to become a Maharatna company, which will bestow more operational flexibility.

Weaknesses

Has little experience in setting up hydel power capacity as well as in coal mining. Despite having allotted six captive coal blocks, proposes to develop these blocks through a mine developer-cum-operator (MDO). Is yet to appoint a MDO. This might delay the coal development projects as well as the three power plants linked to it. Also, is yet to get the full land for the development of the mines.

Requires 168 tonnes of coal at 85% PLF and 16.4 Million Metric Standard Cubic Meter Per Day (mmscmd) of gas at 85% PLF by 2012. Despite long fuel supply agreement, India's mine development is not keeping pace with addition of generation capacity. This might lead to short supply of fuel and compel to tap overseas market. Though the fuel cost is a pass-through item, might be forced to operate at lower PLF if adequate coal is not available at right time.

In the first two-and-a-half years of the Eleventh Five-Year Plan, has added only 3,240 MW. Given the engineering, procurement and construction (EPC) and equipment constraint in the country for commissioning of power plants, the target of an installed commercially operational capacity of 50,000 MW by March 2012 from the current 30,644 MW will be a Herculean task.

Valuation

NTPC's net profit growth in the last few years has been lackluster. The floor price of Rs 201 discounts the annualized nine-months ended December 2009 consolidated EPS of Rs 10.7 by 18.8 times.

While the current price is Rs 207, the 50-day average, 100-day average and 200-day average works out to Rs 219, Rs 215, Rs 210. The scrip's beta is very low at 0.6, ensuring low market-related risk. Given the long-term growth prospects of the power sector and its dominant position and sound growth strategy, NTPC will continue to be fancied by institutional investors for taking low-risk long-term exposure to India's power sector.

NTPC FPO Analysis

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.

Business

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.

Funding: Comfortable

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.

Other concerns

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.

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ICICI Bank FPO Listing

Only the fully paid up shares listed today. Partly paid shares aren't listed yet and might get listed very soon. Hold on tight !

BEML: Invest

Investors with a three/four-year investment horizon can subscribe to the follow-on public offer of Bharat Earth Movers (BEML), being made in the price band of Rs 1,020-1,090 per share. At the price band, the offer is priced at 21-22 times its FY-07 per share earnings on a post-issue equity base. The rise in industrial capex, increasing Defence outlay, and proposals to introduce metro rail projects in major cities, lend visibility to BEML’s future earnings. This apart, BEML’s well-diversified product portfolio, established presence in the domestic market, strategic tie-ups with global players and a planned approach towards marking a global presence, are positives. However, short-term investors, despite these positives, can stay away, given the possibility of better entry points to the stock in the short term after the issue closes.

Business

Operating in three segments — construction and mining equipment division, Defence products division and railway and metro division — BEML’s strength stems from its business straddling a variety of user industries. In the construction and mining equipment space, BEML enjoys market leadership, thanks to its well-diversified product portfolio. The division’s performance can also be attributed to BEML’s competitive pricing and on-time availability of spare components. While this trend is likely to continue given the ongoing industrial capex boom, the revenues are likely to get a boost from BEML’s upcoming contract mining operations.

To leverage on opportunities in contract mining, BEML has formed a joint venture with Midwest Granites and the Indonesia-based Sumber Mitra Jaya. This venture, apart from giving BEML a 45 per share in earnings, will also serve as an alternative source of revenue; BEML is expected to provide for about 40 per cent of the mining equipment needs. However, effective contributions from this venture are likely to be derived from FY-09 only. While the construction and mining equipment division is likely to enjoy a robust revenue growth, increase in outsourcing of components and rising competition in this space could curtail pricing power.

Having established itself as the country’s leading metro coach manufacturer, BEML is well-placed to benefit from the upcoming metro rail projects in major Indian cities. While concerns on the delay in the execution of such projects cannot be ignored, the inevitability of the roll-out of such projects, given the increasing congestion in major cities, points to sound long-term prospects for the business. Further, the Railways’ proposal to introduce enhanced passenger capacity coaches, increase the production of electric motor units (EMU) and introduce air-conditioned EMU coaches in suburban trains in Mumbai, Chennai and Kolkata, are also opportunities.

BEML has planned an investment of about Rs 210 crore from the offer proceeds towards expanding its capacity to 190 coaches per annum from the present 150 coaches. Given the cost-advantage BEML enjoys over international players (partly because of a five-year sales-tax exemption), it is likely to garner a chunk of the metro project business. Nevertheless, the possibility of BEML losing out a few orders to other players cannot be completely ruled out.

BEML’s Defence products division, which supplies Tatra Vehicles, armoured vehicles and ammunition loader vehicles to the Government, is likely to sustain its revenue growth. Given the 11.6 per cent increase in Defence budget for FY-08 over the previous year, the division is likely to sustain its growth levels. Also, the new Defence procurement procedure, which stipulates a 30 per cent offset for contracts exceeding Rs 300 crore, augurs well for domestic Defence contractors such as BEML.

Brazilian foray

BEML has proposed to form a joint venture with Companhia Comercio E Construcoes, a Brazil-based railroad equipment provider. It plans to utilise about Rs 100 crore from the offer proceeds towards this venture and has proposed to acquire a local manufacturing unit. Given the growing demand for coal mining in Brazil and other South American countries, the joint venture, when it takes off, is likely to help BEML consolidate its position in these new markets. While it is certain to face stiff competition from the already established international players in the region such as Caterpillar, Terex and Komatsu, there is enough room for growth for BEML. Nevertheless, the first couple of years could be crucial.

BEML’s tie-up with Apollo Tyres and MRF Tyres for the manufacture of Off The Road (OTR) tyres, apart from meeting the increasing demand for such tyres from earth moving equipment companies, is also likely to help it reduce the delay in orders and production cycles.

Financials

For the year-ended FY-07, the earnings grew 10 per cent on the back of an 18 per cent increase in revenues. Operating profits grew 17 per cent, while the margins remained flat. However, with the introduction of the voluntary retirement schemes and setting up of windmill for captive power consumption, the pressure on margins is likely to reduce. For the year, while the mining and construction equipment division and the Defence products division contributed to about 63 per cent and 32 per cent of the total turnover respectively, the Railways division made only a 5 per cent contribution. The metro coaches division is loss-making, but with the roll out of metro rail projects in the light of BEML’s increase in capacities, the division is likely to see better contributions.

Concerns

Given that the Government contributes to a major share of BEML’s revenues, any unfavourable changes in policy with regard to Defence or the Railways procurement and any constraints in their budget could affect its earnings negatively. This apart, any unprecedented changes in the price of steel could also dent its earnings.

Offer details

The offer is open from June 27-July 3. The company seeks to raise Rs 534 crore through this offer. ICICI Securities is the book running lead manager and Karvy is the registrar to the issue. The offer would constitute about 11.7 per cent of the fully diluted post-issue paid-up equity capital of the company.

Bharat Earth Movers FPO Analysis

Bharat Earth Movers (BEML), a public sector undertaking under the ministry of defence, is a leading player in the construction and mining equipment industry in the country. The government of India (GoI) holds a 61% stake. This is slated to come down to 54% after the present issue. The company’s heavy earthmoving equipment is deployed in core sectors such as mining, road, and construction. Further, it has a captive steel-foundry subsidiary at Tarikere. Moreover, BEML also manufactures and supplies heavy-duty trucks and aggregates for defence, and rail and metro rail coaches for the railways.

The mining & construction equipment business is BEML’s largest business with a 63% share of the total revenue of the company in fiscal ended March 2006. Defence supplies and railway products account for 32% and 5% of its revenue, respectively. About 65% of the business stems from the government and government agencies such as the Indian Army through the Department of Defence Production of GoI, Coal India, and Indian Railways.

With a lion’s share of about 70% market share for earthmoving equipment in the domestic market, BEML has start augmenting its product basket with strategic technical tie-ups and getting into business such as contract mining through joint ventures. The company is also eyeing a bigger pie in the emerging markets for supplies to mass urban transportation and rail logistics. To garner a share in the international markets, the company has formed a joint venture (JV) with Companhia Comercio E Construcoes, a Brazilian company, to manufacture and supply rail wagons and bogies and mining and construction equipment in Brazil.

BEML is coming out with a follow-on public issue to raise Rs 499.80 crore to Rs 534.10 crore to part finance expansion, modernise existing plants and fund voluntary retirement scheme (VRS) expenditure. The company is currently expanding the capacity of its metro coach manufacturing facility at Bangalore from 150 coaches per annum to 190 coaches per annum at a cost of Rs 214.51 crore and setting up a 5-MW wind mill for captive consumption at a cost of Rs 27 crore. Moreover, the company also envisages a capital expenditure of Rs 90 crore for upgradation of current facilities. The VRS scheme aims at pruning the staff strength by 1,125 at an estimated cost of about Rs 90 crore. The fund proceeds are also expected to meet BEML’s contribution of Rs 9 crore for setting up a R&D centre of excellence for metro coaches and general corporate purposes.

Strengths

BEML has near 100% market share in the dozers and heavy-duty dumper trucks of above 85 tonnes in the country. On an overall basis, the company caters to about 70% of the construction and mining equipment demand of the country. The domestic market for construction and mining equipment is expected to grow at a faster pace on increased spending on infrastructure and mining. BEML is better positioned to garner a greater share of this growing pie. To achieve this end, the company is expanding its product base through in-house R & D and also through appropriate technological tie-ups with global majors. Incidentally, it is the only metro-rail coach manufacturer in the country.

Having supplied most of the construction and mining equipment under use in the country, BEML continues to get strong spares and service income. As a result, the share of spares and services in the revenue has increased from 24% in the year ending March 2006 to 28% in the nine months ended December 2006 and FY 2006.

BEML has lined up new initiatives such as e-engineering services, captive mining and setting up of a plant in Brazil. These initiatives are expected to expand product and services range as also help geographical expansion.

India’s coal demand is set to accelerate on massive capacity additions planned in the power, steel and cement. To cater to this demand, three coal PSUs --- Coal India, Singanerei Colleries and Neyveli Lignite --- have come together to draw up mining augmentation plans at a capex of Rs 23590 crore in the Eleventh Five-Year Plan beginning current fiscal. Meanwhile, the government is also opening up coal mining for captive purposes for power and steel. These initiatives, as and when they blossom out, would turn out to be a major trigger for acceleration in the pace of growth in demand for mining equipment.

In JV with Midwest Granites, BEML has formed a company, BEML Midwest, to undertake captive mining. The JV has tied up with NTPC, a licencee for carrying out mining on the blocks. As a result, BEML will not only get assured demand for its mining equipment, but will gain expertise and its share of profit from the mining JV as well.

Being under the ministry of defence, BEML continues to get assured support of defence orders. The company is able to maintain a 1.5-2% share of the ever-growing defence-capex pie.

Weaknesses

As a result of the Indian Railways’ inconsistent track record of placing orders and arbitrary fixing of prices, BEML does not even recover costs, hampering growth. This business continues to be in red. The segment posted a loss of Rs 17.68 crore in the nine months ended December 2006 and Rs 15.78 crore in FY 2006. The segment loss in FY 2005 and FY 2004 was Rs 24.71 crore and Rs 61.39 crore, respectively.

The profit earned by supplying metro coaches moderated losses in a small way in FY 2005 and FY 2006. But this cushion is likely to go off in the short-term with BEML completing its current order book of 40 metro coaches by June 2007. Further orders from Delhi Metro and new orders from metros in Mumbai and Bangalore are expected to take some time as the tendering process is still on. However, being the only manufacturer of metro coaches in India and expected tax advantages from Karnataka government, the company is confident of good order flow from these projects, though the financial benefits will flow only after FY 2008.

Though the railway business is bleeding, about 40 to 43% of the issue proceeds are to be invested in this business.

Demand for heavy-earth moving equipment, BEML’s forte, is still skewed towards/ dependent on orders from PSU coal-mining companies such as Coal India and its subsidiaries, Singaneri Colleries and Neyveli Lignite. Notwithstanding the massive expansion plans of these PSUs, the delay in order placement by these PSUs or uneven delivery schedule can affect the performance of the company. Order flow from Indian Railways is also uneven. Order book stood at Rs 1617 crore end March 2007 compared with Rs 2243 crore end March 2006.

Valuation

BEML reported an 18% growth in net sales to Rs 2423.87 crore and a 10% growth in net profit to 204.93 crore in FY 2007.

In the last three months, high/low and average price of BEML was Rs 1225, Rs 938 and Rs 1031, respectively. Against this, the offer price band is Rs 1020 to Rs 1090, discounting the FY 2007 EPS (on the post-issue equity) of Rs 49.2 by 20.7 to 22.2 times. For a company whose profit has grown at CAGR of just 8% in the last two years, the P/E looks high. However, the growth potential in construction and earthmoving division will be realised in future as investment in mining and infrastructure picks up. Nevertheless, the turnaround in the railway products division is crucial for the upside of the construction and earthmoving division to get fully reflected in the bottomline growth. And the turnaround in railway products division will depend on consistency and increased flow of orders by the Indian Railways, better pricing (decided by an independent advisor), and pick-up in implementation of various planned metro rail projects. With Railways becoming financially capable as well as serious about investing directly as well as through public-private partnership, railway products division is likely to complement growth from the construction and earthmoving division in the long-run, though short-term hick-ups can not be ruled out.

BEML FPO Analysis - June 27 2007

BEML FPO Analysis - June 27 2007

BEML FPO Analysis

BEML FPO Analysis