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Thursday, October 13, 2005
Sunday, October 09, 2005
Saturday, October 08, 2005
IPO - Shree Renuka Sugars
Not so sweet
Financials boosted by acquisition of unit on lease and processing of imported raw sugar
Shri Renuka Sugars, promoted by Narendra Murukumbi and his family members, is a fully integrated sugar company. Co-products like power generation and ethanol are additional sources of revenue, besides sugar. The company has currently two units, one in Munoli (Karnatka) and another in Ajara (Maharashtra). The Munoli unit, equipped with a 2,500-tonne crushing per day (TCD) capacity, also processes raw sugar. The Ajara unit, too, has a 2,500-TCD capacity. It was acquired on lease for two years, starting from FY 2004.
Shri Renuka Sugars has a track record of acquiring units, either on ownership or on lease. It claims to be the largest raw sugar refiner in India (with a capacity of 1,000 TPD). The company has leased a co-operative sugar mill at Sangli (Mahrashtra) for six year, starting from FY 2006.
The debut issue is proposed to finance the expansion of the cane-crushing capacity at Munoli, from the existing 2,500 TCD to 7,500 TCD; increasing the distilling capacity to 120 kilo litres per day (KLPD), from 60 KLPD, at Munoli; setting up a new 120-KLPD unit at Sangli, taking the distilling capacity to 240 KLPD; putting up a 15-MW co-generation power plant at Sangli; increasing the co-generation capacity to 35.5 MW; and repayment of existing debt of Rs 9.86 crore.
The total project costs is estimated at Rs 138.36 crore, of which Rs 38.36 crore will be financed through internal accruals and the remaining through the present issue.
The commercial production at the Munoli expansion is expected to start from December 2006. Commercial production of the ethanol expansion is scheduled to start from October 2006. The 120-KLPD distillery at Sangli will run from December 2006 and co-gen power at the same location is scheduled to start from November 2006.
Strengths
Shri Renuka Sugars has a fully integrated sugar plant at Munoli, which gives value addition to the bottom line. The company has been able to secure 10.2% and 11.4% recovery at its Muloni and Ajara units in the current season as compared to the industry average of around 10.1%.
In the recent past, the company has been aggressively acquiring existing units and, in a short span, it has enhanced its capacities substantially. The acquisition strategy may result in an accelerated growth in revenue — specially when sugar prices are high.
Most of the sales of the company are institutional and, therefore, insulated from temporary fluctuations in domestic prices.
The company consumes around 50% of its co-generated power at its plants and, therefore, has considerable exportable surplus. This also provides an opportunity to earn carbon credits. (It has got approval for the same, and can get maximum 22,000 CER/year.)
Weaknesses
Shri Renuka Sugars owns only one unit at Munoli. The another unit at Ajara was acquired on lease in 2004 for two years. The unit at Sangli will be operated on lease for six years.
The company is dependent on refining raw sugar imported under advance licence. International raw sugar prices have been firm this year and can adversely affect the margin. Moreover, next year, the company will have to export large quantity under export obligation (in return for the import of raw sugar effected last year) and international conditions will play a major role in its performance.
The company has not entered into contract with plant/machinery providers for most of its expansion program, delaying the schedule of implementation.
The Uttar Pradesh government has been encouraging substantial capacity expansion in the state by large units by giving various subsidies. This will put units in other states at a disadvantage.
Sugar is a politically-sensitive commodity and subject to whimsical changes in government policies.
The sugar price upcycle has already run most of its course. Though no major fall is expected, no major rise is also expected.
Valuation
Shri Renuka Sugars earned Rs 442.78 crore of sales revenue in the nine months ended June 2005 as compared to Rs 198.01 crore in the corresponding previous period, representing an impressive growth of 125%. The profit before tax and the profit after tax zoomed by 190% and 225% to Rs 37.1 crore and Rs 32.11 crore, respectively, in this period. The growth was mainly powered by the operations of the leasehold sugar unit at Ajara and increased processing of imported raw sugar.
On post-issue equity, EPS on an annualised basis for FY ending September 2005 works out to Rs 17.5 and Rs 18.1 depending on the final issue price and assuming that the green-shoe option is exercised. At the lower price band of Rs 250, the P/E ratio works out to 14.3, and at the higher band of Rs 300, it comes to 16.6. The industry average P/E stands around 13.9. Shri Renuka Sugars's acquisition-led growth model is riskier and its relatively high export obligation on account of raw sugar import is also an irritant
Friday, October 07, 2005
Banks: Lost the 'Midas' touch!
As the indices continued to defy the laws of gravity until a couple of days back, certain select sectors made hay. Banking stocks were amongst those that stole significant limelight, as they remained the least affected by rising crude prices. Benign inflation, surplus liquidity and relatively softer interest rates also kept sentiments buoyant towards the sector. Not to mention, the government and the RBI's renewed focus on reforms for the financial (read banking) sector, also aided the momentum. Resultantly, the sector that was under performing the Sensex over the past few quarters, caught up to the investor fancy.
More here
Thursday, October 06, 2005
Sharekhan - Aban Loyd
Aban Loyd Chiles Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs740
Current market price: Rs580
The Rita effect
Aban Loyd Chiles Offshore has recently entered into a contract with Hindustan Oil Exploration Ltd (HOEL) for its newly acquired rig Rowan Texas (Aban VII). Rig Rowan Texas is a cantilever jack-up, and has been sent for some upgradation and refurbishment, following which it would be able to drill deeper. The rig would commence its eight-month drilling operations by January 2006 on the Pondicherry East coast. We believe that the day rates for this contract could be at a premium to the spot rates, which are hovering around the US$65,000-70,000 range. This is much higher than what the company got for Aban VI.
Wednesday, October 05, 2005
Aarvee Denim and Exports
Aarvee Denim and Exports
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs206
Current market price: Rs135
Dressed to kill
Key points
- Globally denim capacities are shifting from the high-cost areas like the USA to the low-cost areas like India. Second, as a result of the removal of quotas garment manufacturing capacities are also coming up in the country.
- With its population of one billion India is a big market for Aarvee Denim and Exports as most of it is still untapped. What's more this market is growing at 10% per year with denim finding more uses (ladieswear, children wear, accessories like bags, belts, etc) and becoming a rage even in towns and villages due to its affordability.
- We expect Aarvee to benefit from these developments, as it is one of the lowest-cost manufacturers in the country and would consolidate its No 2 position by expanding its capacity by more than 50% from 47 million metre to 72 million metre per year.
- As a result of the softening of cotton prices due to a bumper cotton harvest and savings in power & fuel costs the company's earnings before interest, depreciation, tax and amortisation (EBIDTA) margin is expected to improve by 300 basis points from 21.7% in FY2005 to 24.7% in FY2007.
- At the current market price of Rs135 Aarvee is available at a price/earnings ratio (PER) of 8x FY2006E (5x FY2007E) and enterprise value (EV)/EBIDTA of 4.82x FY2006E (3.41x FY2007E). We believe the valuations are cheap and recommend a Buy on Aarvee with a price target of Rs206.
Tuesday, October 04, 2005
KSB Pumps
KSB Pumps
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs550
Current market price: Rs399
A profit pump
Key points
- KSB Pumps, a leading manufacturer of pumps and valves, is all set to reap the benefits of the huge investments being planned in the fluid-handling sectors, such as oil & gas production, oil & gas refining and marketing, petrochemicals, etc.
- KSB's boiler-feed water pumps are extensively used in the power sector and we expect the company to be the prime beneficiary of a four-fold increase in the investments (Rs500,000 crore in the 11th Plan as against Rs112,000 crore in the 9th Plan) being made in the sector.
- After the turn-around of the valve division the company's earnings before interest and tax (EBIT) margin jumped by a whopping 1,080 basis points to 21.1% in H1CY2005. The division would be a key driver of KSB's growth in future as it is doubling its manufacturing capacity to capitalise on the opportunities resulting from the buoyancy in the fluid-handling sectors.
- Driven by the sterling performance of the pump division and the expansion of the valve capacity, we expect KSB's earnings to grow at a compounded annual growth rate (CAGR) of 40% from Rs17.2 in CY2004 per share to Rs33.9 per share in CY2006.
- KSB has the strongest financials in the industry, as it is virtually a debt-free company with a very low debt/equity ratio of 0.06. Its return ratios are also impressive: return on capital employed (RoCE) of 42.1% and return on net worth (RoNW) of 22.5%.
- At the current market price of Rs399 the stock is discounting its CY2006E earnings by 11.8x. The average price/earnings ratio (PER) for the pump manufacturing companies is close to 29x while KSB is trading at 23x (both on a historical basis). We initiate coverage on KSB with a Buy recommendation and a twelve-month price target of Rs550.
Monday, October 03, 2005
Navneet Publications (India)
Navneet Publications (India)
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs405
Current market price: Rs286
Don't miss the bus
Recently we met the management of Navneet Publications to get an update on the progress of the programme of changing the syllabus in Maharashtra and here are the key takeaways from our meeting.
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