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Monday, September 07, 2009
Precious metals end lower
Gold and silver manage to register good weekly gains though
Precious metal prices ended lower on Friday, 04 September, 2009. Prices fell following Labor Department's job report. Nevertheless, precious metals managed to register healthy gains for the week.
Generally, a stronger dollar pressures demand for dollar-denominated commodities, such as crude oil and gold, which become more expensive for holders of other currencies and also vice versa.
On Friday, gold for December delivery ended at $996.7, lower by $1 (0.1%) an ounce on the New York Mercantile Exchange. For the week, gold ended higher by 4%. Year to date, gold prices are higher by 13.5%.
Gold ended August, 2009 higher by 0.2%. Before this, for the second quarter, gold ended higher by 0.5%. The metal had gained 4.3% in the first quarter of this year.
On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped somewhat (3%) since then.
On Friday, Comex silver futures for September delivery fell by 4 cents (0.04%) to $16.285 an ounce. For the week, silver ended higher by 9.9%.
Silver ended 7.1% higher for August, 2009. For second quarter, silver rose 4.5%. Year to date, silver has climbed 41.55% this year. For 2008, silver had lost 24%.
Among economic reports expected on Friday, The Labor Department reported on Friday, 04 September, 2009 that U.S. unemployment rate jumped to a 26-year high of 9.7% in August as nonfarm payrolls fell by 216,000, the 20th consecutive monthly decline. The report showed that U.S. payrolls have dropped by 6.9 million to a total of 131.2 million since the recession began in December 2007. Unemployment has increased by 7.4 million during the recession to stand at 14.9 million.
In 2008, gold prices ended higher by 5.5%. The dollar index had gained 12% that year.
Crude ends little higher
Prices register largest weekly loss in two months
Crude prices ended little higher on Friday, 04 September, 2009. Prices ended higher due to better than expected job report from Labor Department.
On Friday, crude-oil futures for light sweet crude for October delivery closed at $68.02/barrel (higher by 6 cents or 0.1%). During intra day trading, crude touched a high of $69.70 but also fell to a low of $67.12. For the week, crude ended lower by 6.5%. It was the biggest weekly loss for crude in two months.
For the month of August, 2009, crude ended higher by a marginal 0.7%. For the second quarter, crude ended higher by 40%. Crude prices had rallied 11.3% in the first quarter of 2009.
Oil prices had reached a high of $147 on 11 July, 2008 but have dropped almost 56% since then. Year to date, in 2009, crude prices are higher by 42%.
Among economic reports expected on Friday, The Labor Department reported on Friday, 04 September, 2009 that U.S. unemployment rate jumped to a 26-year high of 9.7% in August as nonfarm payrolls fell by 216,000, the 20th consecutive monthly decline. The report showed that U.S. payrolls have dropped by 6.9 million to a total of 131.2 million since the recession began in December 2007. Unemployment has increased by 7.4 million during the recession to stand at 14.9 million.
EIA reported earlier during the week that crude inventories fell by 400,000 barrels during last week. Market had expected a decline of 1.9 million barrels. At 343.4 million barrels, crude inventories stand at a level above the upper boundary of the average range for this time of year. Utilization rate rose to 87.2% of capacity. Rising input was partly offset by another jump in crude imports. The U.S. imported 9.58 million barrels a day of crude last week, up 3.8% from a week ago.
EIA had also reported that gasoline inventories fell by 3 million barrels last week. Distillates, however, rose by 1.2 million barrels.
Also at the Nymex on Friday, October reformulated gasoline fell 1.65 cents, or 0.9%, to $1.7763 a gallon. October heating oil fell 1.45 cents, or 0.8%, to $1.7205 a gallon.
Natural gas rallied 22 cents, or 8.8%, to $2.728 per million British thermal units. The contract tumbled more than 7% in the previous session. Natural gas ended the week down 10%. EIA reported on Thursay that U.S. natural gas inventories rose 65 billion cubic feet in the week ended 28 August, 2009. At 3,323 billion cubic feet, stocks were 489 billion cubic feet higher than last year at this time and 501 billion cubic feet above the five-year average.
Crude prices had ended FY 2008 lower by 54%, the largest yearly loss since trading began at Nymex.
Daily News Roundup - Sep 7 2009
ArcelorMittal plans to become co-promoter of Uttam Galva Steels. (ET)
L&T is in talks to buy a thermal coal mine in Australia for about US$300mn. (ET)
NTPC moves to Supreme Court challenging Bombay High Court’s decision that allowed Reliance Industries to amend its petition on the gas dispute citing government’s pricing policy. (BS)
Aban Offshore may get contracts for more offshore rigs.(BL)
JSW Steel has reported a 53% growth in crude steel production in August, its highest-ever monthly crude steel production.(BL)
Patni joins TCS, Infosys and IBM in competing for a share of the lucrative domestic IT market. (ET)
Wipro plans to soon start offering complete IT solutions to mining and natural resource companies. (ET)
Bayer, failed to get a court stay on Cipla from seeking permission to launch the cancer treating drug, Nexavar, in India. (ET)
The proposed health insurance JV between Religare Enterprises and Swiss Re has fallen through. (ET)
Wockhardt plans to sell its key marketing divisions in a bid to ease its debt burden of Rs34bn. (ET)
SBI has cut deposit rates by 25bps for 1,000-day deposits with effect from September 8.(BL)
Tata Power plans to bid for more ultra mega power projects but wanted complete transparency in bidding documents. (BS)
ONGC Videsh to seek CCEA nod for 27% more capex in Brazil. (BS)
Foreign investment regulator rejects a plea by Zenotech Laboratories seeking the withdrawal of its earlier ruling that allowed Daiichi Sankyo to acquire a 20% stake in the open offer. (ET)
L&T eyes orders of over Rs120bn in a month. (ET)
RCF plans to spin off the third phase of its Thal unit in Maharashtra into a separate company. (ET)
Aditya Birla Group plans to increase its investment in Egypt. (ET)
Bajaj Auto is looking at building a factory in Egypt. (ET)
Kaya, the skin care services venture of Marico is making foray into Bangladesh. (ET)
Virgin, Spice Keen On Bidding for MTNL’s 3G bid call. (ET)
Bhushan Steel arm acquires a 60% stake in Australian exploration company, Bowen Energy. (BS)
Aban Offshore is in talks with SBI and other public sector and private bank lenders for restructuring its Rs130bn loan. (BS)
Vijaya Bank expects to receive Rs7bn as recapitalisation from the government by the end of third quarter. (BS)
India Infrastructure Finance has set for the current fiscal a disbursement target of about Rs110bn.(BL)
ONGC Videsh and its partners Indian Oil Corp and Oil India would invest around $5 billion in developing a gas field discovered in offshore Iran.(FE)
Nagarjuna Construction Company to raise Rs3.7bn via QIBs.(BL)
Maruti Suzuki plans to shift car production from its Gurgaon plant to the new facility at Manesar in a phased manner. (BS)
ONGC Petro-additions Ltd plans an IPO by 2011 and plans to dilute 25% of equity for an overseas partner. (BS)
United Spirits to invest Rs1bn in capacity expansion over 3 years. (BS)
Patel Engineering forays into power, to set up plants in Arunachal, TN over the next three years. (BS)
The government is considering listing BSNL on bourses by issuing nominal fresh shares and may shelve plans of directly divesting its equity for the time being. (ET)
Tata Teleservices again approaches the government for airwaves to roll out its GSM service in Delhi immediately. (ET)
Crompton Greaves says its subsidiary has entered into an agreement with Saudi Arabia based-EIC Group to form a JV company to manufacture transformers.(FE)
Morgan Stanley may sell Indian back-office operations. (ET)
HDFC Property Ventures and Temasek are in talks to invest about Rs6.25bn in Prestige Estates Projects. (ET)
FDI beyond 24% in micro units to require FIPB nod. (BS)
A proposal to increase the price of natural gas produced from fields to be submitted to the Cabinet soon for its approval. (ET)
India agrees to lend up to US$10bn to the IMF. (ET)
The blanket ban on foreign companies and individuals from certain countries to undertake hydel projects in sensitive border areas may soon be lifted. (ET)
The government extended the implementation date for mobile number portability to December 31. (ET)
Road transport and highways ministry is seeking a loan of $2.96bn from the World Bank to develop 5,937 kms of highways. (ET)
New SEBI norms reduce public issue time to 10 days. (ET)
India’s total foreign exchange reserves rose US$4,405mn to touch US$276.4bn during the week ended August 28. (ET)
Sub-Brokers are likely to be exempted from the requirement of registering with the capital market regulator before starting their operations. (ET)
DTH industry opposes to hike foreign investment ceiling in direct-tohome distribution of telecast signals from the current 49% to 74%. (ET)
Pharma companies will require approval of central drug regulator Drug Controller General of India for exports
CERC has proposed a tariff cap of Rs11/unit for short-term power transactions on the two operational nationwide power exchanges and in the bilateral markets to rein in, what it called, runaway prices. (BL)
DoT is considering allowing telecom operators to exclude revenues from non-wireless services for the purpose of calculating spectrum charges.(BL)
General insurance industry grew at 14% in the month of July, riding mainly on sales of motor insurance policies.(BL)
SEBI cuts FII limit in gilts to Rs8bn.(BL)
Happy at start!
It is only possible to live happily ever after on a day-to-day basis.
A mildly happy opening is on the cards following Friday’s recovery and some firmness in global markets. US markets will remain closed on account of Labour Day. As a result, the world market may not witness any major action.
We are just a few days away from marking the first anniversary of the September crises. To say that the world has changed a lot since the earth-shattering event would be an understatement. Last week, policymakers from the G20 gathered in London in the run up to this month’s major summit in Pittsburg. The conclusion at the end of the two-day meeting was that the recession has eased considerably, but we cannot afford to be complacent. The group also concurred that the so-called ‘exit strategy’ should be put on hold till we are completely out of the woods.
In other words, there is optimism in the air, though a measured one. Aggression can wait for a while, as the recovery will be in fits and starts and not leaps and bounds. Any advance will be tempered by periodic burst of reversals or subdued activity. A major breakout can happen only if global markets resume their uptrend. Fund flows also need to improve considerably. Take each day as it comes.
The week is fairly light on economic reports as far as Wall Street is concerned, with readings on the trade gap, weekly jobless claims and consumer sentiment being the standouts. September historically has been a weak month on Wall Street. Much will hinge on incremental good news, either corporate or economic.
OPEC members will meet on Sept. 9 to review the policy on supplies. The cartel is unlikely to make any material changes in output quotas.
The China market also needs to be followed after the recent turbulence in that market and its fallout on world equities. Meanwhile, Chinese authorities plan to ease rules on foreign investment, including provisions to raise investment limits by 25% and to shorten the duration of 'lock-ups' on certain types of investments they make. The Chinese government has also said that the curbs on bank lending will be undertaken over a period of time.
The Oil India IPO opens today and will close on Sept. 10. ONGC could stay firm as investors tend to compare listed companies in similar line of business. Uttam Galva will be in focus after ArcelorMittal said that it will become a co-promoter. The steel titan has launched an open offer at Rs120 per share.
FIIs were net sellers at Rs4bn in the cash segment on Friday on a provisional basis while the local funds pulled out Rs53.5mn, according to figures published on the NSE's web site. In the F&O segment, the foreign funds were net sellers at Rs107mn. On Thursday, FIIs were net buyers of Rs589mn in the cash segment. Mutual Funds were net buyers of Rs267mn on the same day.
US stocks rose on Friday amid low volume ahead of the Labor Day weekend, as investors focused on the positives in a mixed report on the labor market. However, all the three major stock indexes ended the week lower.
The Dow Jones Industrial Average gained 96 points, or 1%, to 9,441.27. The S&P 500 index added 13 points, or 1.3%, to 1,016.40. The Nasdaq Composite index advanced 35 points, or 1.8%, to 2,018.78.
On the whole, the jobs report was okay, suggesting moderation in job losses. But the market is saturated with good news and is starting to show fatigue after a 50% rally in the S&P 500 since early March.
Stocks tumbled in the first three sessions of this week as investors worried about the health of the US economy. There was a late-session advance on Thursday as some of the bank and technology shares that slumped earlier in the week bounced back.
Employers cut 216,000 jobs from their payrolls in August, the Labor Department reported, after paring a revised 276,000 jobs in July. The month brought the smallest number of job cuts since August 2008. Economists had forecast 230,000 job cuts.
The unemployment rate, generated by a separate survey, rose to 9.7% from 9.4%, a 26-year high. Economists had expected unemployment to rise to 9.5%. Unemployment is expected to hit 10% by the end of the year or early 2010, even as the US economy is starting to recover.
Select financial shares rose. The KBW Bank index added 1.4%.
A number of truckers, airlines and railroad shares rose, now that oil prices have come down off 10-month highs set last week. Fuel prices are directly linked to the profitability of transportation companies. The Dow Jones Transportation average gained 2%.
Apple shares rose ahead of its media event next week where it is expected to introduce iPod Nano and Touch models that include digital cameras. Investors are also wondering if CEO Steve Jobs, now back at work after a six-month medical leave, will make an appearance. Apple shares have nearly doubled this year.
Other big tech gainers included Microsoft, IBM, Cisco Systems.
US light crude oil for October delivery rose 6 cents to settle at $68.02 a barrel on the New York Mercantile Exchange. Oil prices have been slipping since hitting a 10-month high just below $75 a barrel late last month.
COMEX gold for December delivery fell $1 to settle at $996.70 an ounce, after inching closer to the psychologically significant $1,000 level over the last few sessions.
Treasury prices slipped, raising the yield on the benchmark 10-year note to 3.44% from 3.34% late on Thursday.
In currency trading, the dollar fell versus the euro and the Japanese yen.
European shares climbed. The pan-European Dow Jones Stoxx 600 index rose 1.2% to 233.40, though it finished in negative territory for the week. The UK's FTSE 100 index rose 1.2% to 4,851.70, while Germany's DAX index climbed 1.6% to 5,384.43 and the French CAC-40 index advanced 1.3% to 3,598.76.Indian markets snapped a five day losing streak on Friday led by buying in the index heavyweights like Reliance Industries, L&T, HDFC, ITC and ONGC. Among the sectoral indices, the Auto, Metals and the Capital Goods stocks were among the major gainers even the Mid-Cap and the Small-Cap participated in the upswing.
The BSE Sensex gained 291 points or 1.9% at 15,689 after touching a high of 15,741 and a low of 15,358. The index opened at 15,425 against the previous close of 15,398. The NSE Nifty gained 86 points to shut shop at 4,679.
In Asia, the Nikkei in Japan slipped by 0.3% at 10,187 while Australia's S&P/ASX ended higher by 0.2% at 4,435. The Hang Seng index in Hong Kong surged 2.8% at 20,318. Shanghai index in China was up by 0.5% at 2,861.
In Europe, stocks were in the green. The FTSE in the UK was up 1%, The DAX in Germany was up 0.8% and the CAC 40 index in France was up 0.5%.
Coming back to India, among the BSE sectoral indices, the Auto index was the top gainer, surging 3%, followed by the Metal index that was up 2.8%. The BSE Capital Goods index up 2.2% and the BSE Oil & Gas index was up 2.1%.
The BSE Mid-Cap index gained 1% and the BSE Small-Cap index gained by 1%.
Among the 30-components of Sensex, 28 stocks ended in the green and only TCS and Tata Motors ended in the negative terrain. Among the major gainers were Reliance Industries, HDFC, L&T, ITC and ONGC.
Outside the frontline indices, the big gainers in the broader market were IFCI, Praj, Hind Zinc, IDBI Bank, GMDC and CESC. On the other hand, losers included Renuka, United Spirits, Sun TV, IRB and Glaxo.
The top gainers: The top gainers in the Sensex were Maruti Suzuki (up 8.8%), Hero Honda (up 6.9%), Hindustan Unilever (up 4.9%), Reliance Capital (up 3.7%) and Tata Motors (up 3.6%).
The Top Losers: The top losers in the Sensex were Bharti Airtel (down 6.9%), BHEL (down 5.1%), Reliance Industries (down 4.5%), Ranbaxy Labs (down 3.8%) and Tata Power (down 3.7%).
Sunday, September 06, 2009
Bartronics India
Investments with a two-three year perspective can be considered in the shares of Bartronics India, considering the company’s strong order book position, increasing Indian footprint on the back of large government deals and prospects of winningmore orders over the next few years.
At Rs 166, the stock trades at 5-6 times its likely 2009-10 per share earnings. As Bartronics is seeing high growth in revenues and profits and, despite being in a hardware-intensive business, has consistently managed an operating profit margin of over 25 per cent and net profit margin of close to 15 per cent, there may be scope for further capital appreciation.
Between 2006-07 and 2008-09, the company has seen its revenues and operating profits grow nine-fold. It has increased its revenues from India to nearly 65 per cent in recent times from about 30 per cent a couple of years ago. This was made possible by growing presence in government deals, where heavy technology spends are happening. The company also delivers smart cards (mostly SIM cards) to telecom operators, again a high-growth area.
A few quarters ago, Bartronics secured a Rs 5,000-crore deal from the “Aapke Dwar” project of the Municipal Corporation of Delhi spread over nine years. Revenues are set to kick in from October with the launch of 300 kiosks in the first phase. The deal also confers on Bartronics the right to advertising revenues from these kiosks. With the Commonwealth Games set to begin in Delhi in 2010, the scope for substantial advertising revenues makes this deal even more lucrative. The company has tied up with banks for the Rs 750 crore capital expenditure needed for this deal. This could step up interest costs and strain margins. But with interest coverage of over six times, the burden of servicing debt may not be too heavy.
Apart from this deal, the company has an order book worth Rs 600 crore as of June 2009, to be executed over the next year. A large part of this has come from its high-margin RFID solutions business. Armed with key technical certifications, Bartronics hopes to win deals from the Delhi Metro and Indian Railways, with both entities set to increase technology spends. The company has several deal wins from State governments and Government projects in Singapore. Another target area is animal tagging, where the company has the necessary certification.
via BL
Kalindee Rail Nirman Engineers
Long-term investments can be considered in the stock of Kalindee Rail Nirman Engineers, which operates in the field of railway signalling, telecommunication and track, including gauge conversion and laying of new rail lines. A direct beneficiary of the higher government spending on rail infrastructure, Kalindee stands to benefit significantly from initiatives such as setting up dedicated freight corridors, increased outlay for gauge conversion and the rollout of metro rail projects.
In this regard, the company’s long-standing relationships with Indian Railways, Delhi Metro Rail Corporation (DMRC) and Rail Vikas Nigam (RVNL) also lend confidence. That it has in the past executed several projects for these organisations is good reference for the company’s execution capabilities and delivery commitments. At the current market price of Rs 145, the stock trades at about 14 times its likely FY10 per share earnings.
Even though the valuations aren’t exactly cheap, it is perhaps a premium for the company’s ability to bag railways orders, given its experience and expertise. Investors may, nevertheless, consider accumulating the stock in lots, given its small-cap status.
The government’s focus on improving rail infrastructure in the country, what with an increased outlay in the latest Railway Budget towards laying new lines and gauge conversion, bodes well for Kalindee.
Promising potential
The Budget has set aside Rs 2,921 crore for new lines outlay, an increase over the Rs 1,100 crore allocated in the Interim Budget, while increasing the provision for gauge conversion by 24 per cent to Rs 1,750 crore.
Since Kalindee had earlier undertaken many gauge conversion projects for RVNL as well as some zonal railway authorities, it appears well placed to capitalise on the planned outlays. Its presence in the metro rail space may be yet another revenue spinner for the company.
The company has been involved in laying metro rail tracks for DMRC and has even won repeat orders from them, including a relatively difficult work order of laying tracks on partly elevated and partly underground link.
With many cities such as Mumbai and Chennai looking to establish Metro Rail links, the company’s business liaison with DMRC may also serve as a reference point for future orders.
The proposed setting up of dedicated freight corridors spanning over 2,762 km, entailing an overall investment of over Rs 40,000 crore, also holds business potential for the company.
Though no orders have so far been awarded in the track works, initial tendering is likely to begin by the end of this year.
Even so, it merits note that the work orders in these projects, despite their long gestation, may typically be of higher value that entails better margins.
Order book & challenges
The company’s current order book stands at about Rs 400 crore, over 1.4 times its FY-09 revenues.
Though this doesn’t provide Kalindee with a healthy revenue visibility for the year, the company expects to add significantly to its order-book by December 2009, by when there would be more clarity on orders pertaining to dedicated freight corridors as well as from Bangalore Metro Rail, for which it plans to bid in the meanwhile.
While that may subject the company’s order book and revenues to lumpiness, it also relatively shields its revenues from the slowing economic growth, as the investments in rail infrastructure — a must to bolster the economy — may be the last to see any downturn.
Over the last three years, the company managed a compounded growth of 46 per cent and 47 per cent in revenues and profits, respectively, albeit on a low base.
The company’s margins too have more or less remained stable at about 9-10 percentage points.
For the year ended March 2009, though the company grew its revenues by 14 per cent, net profits fell by 19 per cent, led by pressure due to high input costs and interest outgo. Even though railway orders do offer price escalation clauses, their ambit is limited, leaving the company’s profitability susceptible to significant rise in prices of commodities such as steel and cement.
Further, even as Kalindee’s associations with global players in the field of telecommunication, signalling, civil and track works lend confidence, a lot would also hinge on the company’s ability to scale up its operations, especially given the huge opportunity available.
via BL
IVRCL Infrastructures and Projects
Strong presence in the ever-green irrigation space, recent entry into power transmission and a renewed focus on road projects argue for investing in the stock of IVRCL Infrastructures and Projects (IVRCL). Investors with a two-three-year perspective can consider buying the stock.
The company’s earnings growth is likely to receive support from BOT projects that are nearing completion. Given the high FII holding in the stock, it may be subject to steep declines during market sell-offs. Investors can consider such opportunities to accumulate the stock. At the current market price of Rs 344, the stock trades at 14 times its expected per share earnings for FY-11.
Renewed focus on BOT
IVRCL, through a 100 per cent subsidiary, holds complete stake in four BOT projects — three road and one water desalination project. All these projects are in the advanced stages of completion and at least two of them are likely to start yielding revenue from the last quarter of FY-10.
This would not only mean higher revenue growth but good payback on significant equity sunk into these projects over the last two-three years.
IVRCL’s not-so-pleasant experience (in terms of delays) in a couple of the road projects resulted in the company toning down its enthusiasm for road BOT projects and instead concentrating on cash contract projects in this segment.
However, after the recent assurances by the Transport Minster to make road projects more ‘investor-friendly’ and to remove ‘irritant clauses’, IVRCL now appears more confident to renew its activity in this space. As the company is pre-qualified in this space, it is in the process of bidding for some projects.
It is, however, treading with caution, and does not want to sink too much equity; the management has stated that it would look at bidding for projects of Rs 500-800 crore instead of larger ones of, say, over Rs 2,000 crore.
We view this move as a favourable one for the following reasons: One, given the 7,000 km per year target in the road space, IVRCL’s non-participation would have meant missing out on the sheer volume growth that this space has to offer for players across the spectrum.
Two, with the various clauses in the bidding process and concession agreements recently sorted out, IVRCL’s may be timing its entry well. Three, the company’s cautious plan of bidding for smaller projects, would mean higher chances of qualifying in bids (as many of the larger players have stated their intention of concentrating on only large projects) and ploughing limited equity. This would leave the company to focus its resources on its crucial segment — irrigation and water.
Therefore, capitalising on the huge opportunity in roads, without diluting focus on its key area appears to be a good medium-term strategy.
IVRCL has continued to leverage on its strength in irrigation, what with this segment accounting for close to 70 per cent of the current order book of about Rs15,000 crore (3times FY-09 revenues). While Andhra Pradesh continues to account for 30 per cent of the total order book, the company has irrigation orders in the west and north as well. This segment is likely to buttress the profit margins of the segment.
Muted June quarter
Operating profit margins are nevertheless likely to remain muted in the less-than-10 per cent range in the medium-term, as a result of the company’s less-lucrative projects taken up in the power transmission space, more for pre-qualification purpose.
Higher up the learning curve, IVRCL may improve profitability in this segment.
Despite maintaining momentum in revenue growth through a difficult year (FY-09), IVRCL’ revenue for the first quarter of FY-10 expanded by only 17 per cent over a year ago numbers.
This is lesser than the growth in the previous four quarters.
During the Central and State Andhra Pradesh elections, the company is stated to have deliberately cut down on execution as it anticipated delays in payments, as a result of any change in government.
The management indicated that revenue would have been higher by another 20 per cent (from the June quarter revenue of Rs 1,104 crore) but for the slower pace of work.
While this may have been a prudent measure, given the company’s tight working-capital position, it is also a reflection of how political change is viewed by the corporate sector.
Nevertheless, the business opportunity for IVRCL is only heightened by the irrigation-friendly Andhra Pradesh Government once again coming to power.
Faster debtor recovery from this State government may, however, pose some concern, given the burgeoning state deficit.
via BL
Oil India
Oil India (OIL) may not be in the same league as Oil and Natural Gas Corporation (ONGC) in terms of its size of business, extent of reserves or scale of operations.
Where it scores over its big brother though is in its ability to show a growth trend in crude oil production and in adding to its reserves, more than what it produces every year.
OIL’s offer at Rs 950-1050, is at a fair valuation that compares favourably with its peers on most parameters. The offer band is at a price-earning multiple (PEM) of 9-10 times the 2008-09 earnings. ONGC has a valuation of 16. OIL also compares favourably on price-to-book value terms with a ratio of 2-2.2; ONGC’s is at 3.2.
Unlike other recent IPOs, OIL has left something on the table for investors. Investors can subscribe at the cut-off price and hold the stock for the medium-term.
Old oil
OIL owns and operates the first ever oil field discovered in India back in 1889 in Assam. All the oil that it now produces — 24.95 million barrels a year or about 68,000 barrels a day (10 per cent of domestic oil production) — comes from the Upper Assam oil field, parts of which are well into the decline phase.
In comparison, ONGC produces more than 5,50,000 barrels a day while Cairn India, which commenced production last week, will produce 1,75,000 barrels a day at its peak. OIL has ‘proved and probable’ reserves of 575 million barrels of oil, which will last 23 years at the current rate of production. The proven reserves alone will last 11 years at the current output level.
Besides this, OIL also has gas reserves of 63.41 billion cubic metres, more than 93 per cent of which is located in the Upper Assam Basin.
It produces 6.22 million cubic metres of gas a day, which was about 7 per cent of domestic gas output in 2008-09. In comparison, Reliance presently produces close to 40 million cubic metres of gas a day.
OIL has a small presence in Rajasthan where it produces about 0.56 million cubic metres of gas a day. It also owns reserves of heavy oil that it has yet to develop.
The company is also a 26 per cent shareholder in Numaligarh Refinery and holds 10 per cent in Brahmaputra Cracker and Polymer Ltd., which is planning to set up a petrochemical project in Assam.
Lagging in E&P
OIL has interests in 24 blocks that were acquired under various NELP (New Exploration Licensing Policy) rounds and it is the operator in 12 of them. The blocks where it holds majority interest are concentrated in the Upper Assam Basin and in Rajasthan.
Some of these date back to the first few rounds of NELP, which began in 1999. Yet, the activity is still in the initial stage of seismic studies in most of these blocks. In the last two years, it has managed to drill just 23 exploratory wells in all.
Despite this, the company has been regularly adding small discoveries to its reserves, mainly in the Assam region. A more aggressive pursuit of exploration is required if OIL is to scale up in terms of size.
The company has also acquired blocks for exploration abroad in consortium with partners such as Indian Oil, Reliance and GSPC.
What augurs well
Despite its only producing asset being a mature field, OIL has managed to grow its output in the last few years. In 2008-09, its production grew 11 per cent.
The company has effectively employed improved and enhanced oil recovery techniques to coax oil out of wells that are past their productive phase.
It may not have made big discoveries, but OIL has consistently managed to replace the oil that it produces every year through new, small discoveries. It boasts a reserve-replacement ratio of almost two thanks mainly to its conscious strategy of going in pursuit of small-sized reserves of up to 30 million barrels.
OIL is sitting on promising gas reserves in the Assam fields which it has been unable to monetise due to poor demand in the region.
A conscious attempt to link the region with the national grid will enable the company to exploit its gas reserves effectively.
The company discovered heavy oil in the Baghewala field in Rajasthan back in 1991 but it has not exploited the reserves due to technology constraints.
Pilot production has been started now and, hopefully, OIL, like Cairn, will be able to produce heavy oil from Rajasthan soon.
Adding a measure of comfort is the huge cash pile (Rs 6,568 crore) that the company is now sitting on. OIL is a zero-debt company and it can use the free cash and also leverage its equity to raise more funds to accelerate its exploration work.
The cash reserves could also come in handy if the company were to identify good acreages or discovered blocks for acquisition. Incidentally, the existing cash can comfortably cover the company’s exploration and production budget of Rs 4,560 crore for 2010 and 2011.
The risks
The biggest risk that OIL faces is government policy on sharing of subsidy on petroleum products. The company had paid a stiff price on this front in the last few years.
For instance, in 2007-08 and 2008-09, it provided discounts of $25.08 and $26.13 a barrel respectively. This was apart from the discount that it had to give on its LPG production.
The discount liability fell sharply in the first quarter of the current fiscal mainly because it has now been restricted to the subsidies provided on petrol and diesel only.
There is a risk that the government will revert to its old policy of sharing all subsidies, including on kerosene and LPG, with the upstream companies such as OIL bearing a third of the burden. This could have a significant impact on the earnings of OIL.
With almost all its productive assets, including the 1,157 km crude oil pipeline, located in Assam, there is a concentration risk because of the inherent political instability in the region.
The pipeline has been blasted by militants in the past severing a vital mode of reaching OIL’s crude to its buyers.
The company is viewed as not being an aggressive player on the E&P front. The large cash reserve that it has now parked in low-return government securities is proof of its inability to deploy funds for growth.
OIL will have to quickly find better uses in its business for the surplus cash that can be used to accelerate E&P activity in blocks outside Assam.
via BL
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