Annual Report - Binani Industries - 2009-2010

BINANI INDUSTRIES LIMITED

ANNUAL REPORT 2009-2010

DIRECTOR'S REPORT

TO
THE SHAREHOLDERS

Your Directors present the Forty Seventh Annual Report of the Company
together with the Audited Statement of the Accounts for the year ended 31st
March, 2010.

Annual Report - Binani Cement - 2009-2010

BINANI CEMENT LIMITED

ANNUAL REPORT 2009-2010

DIRECTOR'S REPORT

Dear Shareholders,

Your Directors have pleasure in presenting the Fourteenth Annual Report of
the Company along with the Audited Financial Statements for the financial
year ended 31st March, 2010.

Binani Cement

Binani Cement

Bank of India, Binani Cement, HDFC Bank, EMCO, ICICI Bank, Sasken Communications

Bank of India, Binani Cement, HDFC Bank, EMCO, ICICI Bank, Sasken Communications

GMR Infrastructure, Binani Cement

GMR Infrastructure, Binani Cement

Opto Circuits, UBI, Binani Cement, Shringar Cinema, Dishman Pharma - BUY; Cipla - SELL

Opto Circuits, UBI, Binani Cement, Shringar Cinema, Dishman Pharma - BUY; Cipla - SELL

Stocks you can pick up this week

Motherson Sumi System
Research: Merrill Lynch
Rating: Buy
CMP: Rs 96

Merrill Lynch initiates coverage on Motherson Sumi Systems (MSSL) with a ‘buy’ rating due to the following reasons: (1) 23%+ compounded annual growth rate (CAGR) in EPS during FY07-FY10E and sustainability of 20%+ earnings growth over a longer period; (2) 560 bps expansion in return on equity capital (RoCE); and (3) new business ventures.

Expansion of the rubber components business following the recent acquisition of Empire Rubber in Australia and beginning of commercial production of mobile phone plastics parts business in H2 FY08 are the key growth drivers, apart from the 22% CAGR in wiring harness revenues. There is significant possibility of earnings surprise on account of: (1) management guidance of 43% CAGR in earnings being significantly higher than expectations; and (2) likely benefit of 18% fall in copper prices in the next six quarters, compared to Merrill Lynch’s assumption of flat prices. The stock is trading at 11.97x FY09E EV/EBITDA — a discount of 15% and 31%, respectively, compared to Mico and Cummins India, despite better growth prospects and good track record. At management-guided EPS of Rs 9.8 in FY10E, the stock trades at 9.7x earnings.

Sesa Goa
Research: Buy
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GOLDMAN Sachs initiates coverage on Sesa Goa with a ‘buy’ rating. Sesa Goa is India’s largest exporter of iron ore in the private sector and is a direct play on iron ore price negotiations. With sustained tightness in the iron ore market, it will be a direct beneficiary of higher iron ore prices. High margins, attractive returns, debt-free balance sheet, strong free cash flow generation and cash pile of Rs 220 per share are added positives. The non-iron ore businesses will benefit due to a robust outlook on pig iron and met coke prices. Reining in logistics costs will remain a key focus area. Additionally, after the completion of the ongoing open offer, the new promoters, Vedanta Resources, may deploy surplus cash reserves. Sesa Goa is likely to deliver 40% earnings CAGR over FY07-FY09E on the back of a bullish iron ore price outlook and modest volume growth. Potential announcements on strategic use of the cash pile or expansion plans, post completion of the open offer by Vedanta Resources, can provide upside triggers. At 2.8x one-year forward EV/EBITDA — which is at a 50% discount to global mining companies — the stock is attractively valued.

Tata Motors
Research: Citigroup
Rating: Buy
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Citigroup has put a ‘buy’ recommended on Tata Motors. The management guidance points to a modest revival in truck sales in H2 FY08E, which implies that overall sales for FY08 will be flat or may register modest growth. Truck operators’ profitability remains healthy, despite rise in interest rates. Freight rates continue to remain stable. The company will deploy Rs 8,000 crore over the next three years to launch new platforms in passenger cars and trucks.

The small car remains on schedule and will be launched in mid-CY08 (H1 FY09E). The management has said Tata Motors will start the process of demerging its subsidiaries by end FY08E, but this is still at a nascent stage. Brand, technology and markets are the key decision variables. Cost pressures (steel accounts for 45% of input costs) will continue to affect margins. Cost reduction exercise is nearly complete — the company has achieved Rs 970 crore of its stated Rs 1,000-crore cost-cutting exercise. Hikes in CV prices (~1-1.5%) undertaken in early FY08 will mitigate (but not offset) the impact of cost pressures.
Binani Cement
Research: JP Morgan
Rating: Overweight
CMP: Rs 79

JP Morgan initiates coverage on Binani Cement (BCL) with an ‘overweight’ rating. BCL appears to be at the cusp of aggressive volume growth. Cement production is likely to witness a CAGR of 44% over FY07-09. Increasing volumes, coupled with robust prices (in the current year) should drive 44% EBITDA growth and 40% EPS growth in FY08, as per JP Morgan’s estimates. In FY09, aggressive volume growth is likely to help offset the negative impact of an estimated 6% YoY decline in cement prices. A near 10% CAGR in domestic demand and benefits of consolidation should provide a higher floor to domestic prices, relative to previous cycles. BCL’s valuation looks compelling — the stock is trading at a near 40% valuation discount to mainstream cement players.

IDBI Bank
Research: ICICI Direct
Rating: Outperformer
CMP: Rs 131

ICICI Direct initiates coverage on IDBI Bank with an outperformer rating. IDBI Bank has transformed itself from a development financial institution (DFI) to an active participant in the booming banking and financial services space.

The amalgamation of United Western Bank with IDBI Bank has given the latter the much-needed branch network to enhance its retail presence. This, coupled with unlocking of value in its investments, is expected to lead to a surge in earnings. ICICI Direct expects earnings to witness a CAGR of 19% over FY07-09E to Rs 885 crore. IDBI Bank has a huge investment portfolio of quoted and unquoted equity stocks. It can unlock the value from these stocks and boost its profitability.

The value of the quoted and unquoted equity book is Rs 52 per share of IDBI Bank. The bank is expected to improve its core business gradually with net interest margins (NIMs) expanding from 0.48% in FY06 to 0.74% in FY07 and further to 1.07% by FY09E. At the current price around of Rs 130, the stock is trading at 1.3 its FY09E adjusted book value (ABV) and 10.6x its FY09E EPS of Rs 12.2. Based on a theoretical book value multiple of 0.9x its FY09E ABV, the value of its core banking business comes to Rs 87 per share. Its huge investment portfolio is valued at Rs 52 per share and subsidiaries at Rs 17 per share.

Godavari Chemicals & Fert
Research: IDBI Capital
Rating: Buy
CMP: Rs 129

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During FY07, it increased the sale of traded products like water-soluble fertilisers, micronutrients and G-Sulphur. It has an approximate capacity of 1.2 million metric tones (mt), with a proximity to seaport and good infrastructure. Production during FY07 was highest at 11.35 lakh tonnes, when the average output increased to 72 mt per hour against 65 mt per hour. However, production was hit due to constraints of phosphoric acid supply. The company will expand its capacity by 4.25 lakh mt by June ’09. It has also completed construction of 10,000 mt atmospheric ammonia at Kakinada. Godavari Chemicals has put up a good show for Q1 FY08 with regard to operating and net profits. Its revenue, at Rs 17.3 crore, was down by 35% YoY. PAT was Rs 1.3 crore, against a loss of Rs 40 lakh in the year-ago period. The stock is currently trading at 6x its trailing 12 months EPS of Rs 20.65.

Binani Cement IPO Analysis

Binani Cement, a subsidiary of Binani Industries, was promoted by Braj Binani. The company currently operates a 2.25 million-tonne per annum (mtpa) cement plant along with a 25-MW coal/lignite-based captive power plant (CPP) at Sirohi, Rajasthan. End June 2006, the company had a market share of 13% in Rajasthan and 7% in Gujarat. Around 45% of its dispatches are to the Rajasthan market.

One of the current shareholders of Binani Cement, JP Morgan Special Situations (Mauritius), is coming out with an offer for sale for its 10.09% stake (20,500,000 equity shares of Rs. 10 each) in company. Post-IPO, it will hold a 14.91% stake. J P Morgan Special Situations (Mauritius) had invested Rs 120 crore (at around Rs 24 per share) to purchase of equity shares in September 2005 and has extended a term loan of Rs 130 crore for the expansion of cement capacity.

Strengths

• 3.05 mtpa of cement capacity is likely to come on stream in May 2007. This will increase cement capacity to 5.3 mtpa, from 2.25 mtpa. The company has already begun trial runs. The capacity is likely to fully stabilise by Q2 (September 2007) of FY 2008.

• The captive power capacity (CPP) will be increased by 44.6 MW in two phases: 22.3 MW each by June 2007 and October 2007. CPP will be sufficient to meet the power requirement of Binani Cement, which is buying 25%-30% of its power requirement from the grid at Rs 4.55 per unit. The variable cost of power was Rs 2.1 per unit in the nine months ended December 2006. After considering fixed cost such as depreciation, the company is likely to save Re 1 per unit. At 100% capacity utilisation, the total power requirement is 170 million kwh. Thus, the saving would be about Rs 4.25 crore – Rs 5.1 crore.

• The Ministry of Coal has allocated the Nimbri Chandavan lignite block to Binani Cement for captive mining for the captive power plant in Sirohi. The lignite block is likely to have reserves to meet 35 years of the company’s requirement. It is expecting a saving of 30% when the lignite mine becomes operational.

• Binani Cement had a blending ratio of 48% in FY 2007 (compared with 77% in the northern region in April 2006-February 2007). It is targeting to increase this to 60%. Higher proportion of blended cement will result in better margin as cost of production of blended cement is lower.

Weaknesses

• The northern region where the company operates is likely to witness the highest amount of capacity additions. Apart from Binani Cement’s capacity addition, another nine mtpa (Mangalam cement 0.5 mtpa, Shree Cement three mtpa, JP Associate 4.5 mtpa, Ambuja Cements 0.5 mtpa, JK Lakshmi 0.5 mtpa) of capacity is scheduled to come on stream in FY 2008 and another 13 million tonnes (Grasim eight mtpa, JP Associate two mtpa, Ambuja Cements three mtpa) in FY 2009. In Q4 (March ending) FY 2007, Shree Cement’s 1.5-mtpa capacity and JK Lakshmi’s 0.5-mtpa capacity have come on stream. ACC has commenced the trial run for its 0.9-mtpa capacity at Lakheri. The current size of the northern market is about 32.06 mtpa (FY 2008 dispatches). Delay in capacity addition and time requirement for capacity addition to stabilise and intra-region movement in cement is likely to extend the current cement cycle up to end of FY 2008. However, supply is likely to exceed demand, putting pressure on price realisation from FY 2009.

• On account of pressure from the Union government, the cement industry agreed that it will not hike prices for a year. Thus, Binani Cement may not be able to pass on any increase in cost to customers. As the company is increasing its installed cement capacity by about 136%, the lead distance to the market may increase. This may increase freight cost. Besides, the proportion of sales to institutional clients may increase, reducing net realisation and blocking the company’s funds on account of credit given to them. Currently, institutional sales form negligible proportion of its total sales.

• Binani Cement is currently selling cement in Gujarat. Indian cement is mainly exported from Gujarat. Prices of cement in Gujarat may come under pressure if the government decide to ban exports.

• The Binani group’s financial track record has not been good.

Valuation

As per a share-swap scheme, shareholders of Binani Industries are expected to get shares of Binani Cement from the shares held by Binani Industries in Binani Cement. This will release additional 9% equity to the floating stock of the company.

At the price band of Rs 75 – Rs 85, the P/E range works out to 15.9 – 18.1, respectively, on FY 2007 EPS on post-issue equity, enterprise value (EV)/tonne (on expanded capacity) US$ 95 and US$ 104, and EV/earning before interest, depreciation, tax and amortisation (EBIDTA) of 9.2 and 10.1. JK Lakshmi with a cement plant at Sirohi is currently trading at P/E of only 3.9 times annualised nine months earnings, EV/tonne US$ 77 (on expanded capacity) and EV/EBIDTA (annualised) 5.6. The TTM P/E of Cement- North India is about 12.1 after sharp corrections in cement companies’ share prices due to number of negative developments for the industry in recent months.

Binani Cement: Invest at cut-off

Investors can consider taking exposure in the book-built initial public offering of Binani Cement. The offer is being made in the price band of Rs 75-85 per share. The proposed expansion in production capacity, prudent shift in the product mix, and the prospect of consolidation in a fragmented cement space are positives linked to this offer.

However, the downside stems from the highly competitive Northern and Western markets, with established players calling the shot in terms of pricing and brand power, indifferent past record of governance in the Binani group and the recent cap imposed by the government on cement prices for a year.

Binani Cement is a well-established player, with 2.25 million tonnes of cement capacity along with 25 MW coal/lignite based captive power plant at Sirohi, Rajasthan. It is in the process of expanding its capacity of cement to 5.3 million tonnes. Since it is servicing the high growth States of Rajasthan, Delhi, Punjab, and Haryana, in the North and Gujarat in the West, the step-up in capacity should be easily absorbed by buoyant demand in these markets.

The policy environment for the cement sector has turned somewhat murky in the past few months, with government intervention. Despite a disturbing policy environment, our invest recommendation is predicated on three key variables:

Expansion in capacity: The enhanced capacity of 3.1 million tonnes likely to be commissioned by mid-2007 will be absorbed in the high-growth Northern and Western markets. Since the cement demand-supply gap is likely to widen over the next two years, even without any significant pricing upside, volume growth and strong operating margins can keep the company's performance and, in turn, its stock on a stable footing.

As a part of its expansion in capacity, Binani Cement has increased its clinker capacity by 2.3 million tonnes and is also expected to add another 44.6 MW plant over the next few months. The entire expansion programme is expected to cost Rs 575-600 crore and, post-expansion, the debt-equity will be 1.47:1.

Shift in product mix: In tune with the overall demand, Binani Cement has consistently shifted its product mix away for OPC (Ordinary Portland Cement) used for construction purposes towards PPC (Pozzolona Portland Cement) suitable for infrastructure requirements such as building dams and barrages. PPC basically mixes fly-ash from thermal power stations with clinker in producing this cement. Between 2004-05 and 2006-07, the PPC:OPC mix has shifted from 29:71 to 51:49. Post-expansion, it is expected that this proportion will shift to 60:40 in favour of PPC.

Valuation: Based on the 2006-07 per share earnings, the price-earnings multiple of Binani Cement works out to 15-18 times at the lower and upper end of the price band. We will be comfortable if the offer price is fixed at the lower end of the band.

While this valuation is significantly higher than established peers such as ACC, Gujarat Ambuja Cement, Grasim or Shree Cement, which vary between 10 and 14 times, two key elements have to be borne in mind.

One, its operating profit margin is in line with its established peers. In 2006-07, the operating margin improved to 34.2 per cent from 27.7 per cent the previous year. With its proposed expansion, it will be able to keep its margins in this band. Two, considering the fragmented state of the cement industry, there is scope for further consolidation within the cement industry. Though the top five players command a market share of over 45 per cent in 2006, there are over 20 cement players with capacities less than two million tonnes.

With multinational players such as Lafarge, Holcim, Italcementi and Heidelberg establishing a base in the country, relatively smaller cement players may enjoy a consolidation premium.

Offer details: The listing of Binani Cement will be through an offer for sale by JP Morgan Special Situations (Mauritius) of 2.05 crore shares in a price band of Rs 75-85 per share.

The offer constitutes 10.09 per cent of the post offer equity stake of the company. The book-running lead manager is ICICI Securities. The offer opens on May 7 and closes on May 10.