India Equity Analysis, Reports, Recommendations, Stock Tips and more!
Search Now
Recommendations
Monday, December 29, 2008
BGR Energy Systems
BGR Energy Systems, an engineering procurement and construction (EPC) player in the power sector, has bagged some of its biggest orders in the last two quarters, assuaging concerns about slowing order flow suggested by key macro indicators.
If order flow is not a problem, has the company been able to fund its projects given the massive size of the projects and the still tight liquidity scenario? It appears so, given BGR’s recent announcement that it has tied up credit lines for the Rs 3,100-crore Tamil Nadu State Electricity Board project, one of its bigger orders.
Healthy growth in revenue and earnings, strong order-book and execution track record differentiate BGR Energy from a good number of mid-cap companies that have succumbed to the pressure of testing macro-economic times. For a sector that caters to the perennially deficit power industry, BGR’s earnings potential too remains unaltered.
The sharp de-rating that the stock has undergone, along with some mid-cap companies, therefore, appears overdone.
We reiterate a buy on the stock of BGR Energy Systems. At the current market price of Rs 141 BGR trades at about eight times its expected earnings for FY10.
No dearth of orders
From Rs 3,200 crore in early June, BGR’s order-book has grown to Rs 10,590 crore now (seven times FY-08 sales). Besides the fact that BGR is in an industry that holds tremendous potential, the fact that most of its recent orders are from the Government could be the reason for its steady order intake.
The last two quarters were significant as they marked the beginning of the company’s stride into large power projects of over 500 MW, as a full fledged EPC player — supplying equipment and undertaking the balance-of-plant works.
It is noteworthy that the company competed with BHEL and won the last two large EPC power projects awarded by the Tamil Nadu and Rajasthan State electricity boards. There is little doubt, given the superior qualification of BHEL, that this project would have been won on the back of aggressive pricing.
However, BGR can have an edge over other EPC players for the following reasons: For one, the company’s strength and qualification in the BoP space provide it with a techno-commercial edge.
Two, BGR’s capability to manufacture over 50 per cent of components (required for a project) in-house also adds economies arising from backward integration. BGR has been scouting for technology transfers for Boiler Turbine and Generator (BTG) — the key equipment in a power plant — and has so far only tied up with Chinese players for the supply of equipment for the recently won projects. Given the close scrutiny that Chinese equipment are subject to in recent times, this could pose some risk until BGR successfully ventures into acquiring technology for BTG.
The company has made progress in technology transfer in another area; it has recently tied up with an Italian company for condensate polisher plants that help high pressure steam generators in thermal power stations improve efficiency of the unit.
Steady credit line
BGR’s massive projects have managed to receive funding at a time when bankers have been exercising caution in funding new projects. The company’s Rs 2,105 crore of fund and non-fund based requirement for its Tamil Nadu power project received good response from over five banks.
At an interest rate of 12.25 per cent, funding costs may soon decline with the recent cuts in prime lending rates of banks. The company has stated that the funding of the Rajasthan project too is likely to be completed in a month’s time.
While comfortably meeting its working-capital requirements at an average borrowing cost of 11 per cent, the company has been discreet in its spending on new facilities. It has been going slow on new facilities in Mundra SEZ as well as assemblies in China.
BGR has managed to maintain its operating profit margins in the 10 per cent range despite steep hike in raw material costs and a high proportion of fixed price contracts. Locking into input prices through bulk buying appears to have helped.
However, the benefit of the current decline in commodities is likely to be reflected only in projects executed the next year. This could aid some margin expansion.
Risk
The lock-in period for shares held by institutional investors (such as Citigroup) in BGR is over. Should these investors exit, this could trigger some selling pressure in the stock. However, given the strong prospects, investors can view this as a buying opportunity.
PFC
Investors with low-risk appetite can consider the Power Finance Corporation (PFC) stock, as the stock is trading at attractive valuations after being beaten down in the stock market crash. With markets in a corrective phase, investors should buy in small lots to take advantage of price declines. Stable Net Interest Margin, high demand for credit, government guarantees for its loans and lower risk weights assigned to the company (20 per cent of capital) place it in a better position than other NBFCs and banks.
At the current market price of Rs 123, the stock is trading at 1.6 times its September-end book value and 11.3 times its trailing one-year earnings. That is at a substantial premium to the nearest competitor — Rural Electrification Corporation (seven times). PFC’s larger balance sheet with high quality advances and stronger focus on the power generation sector make it a better investment option.
Business overview
PFC is a leader in power financing, with a 20 per cent market share. To meet India’s growing energy demand, the government has ambitious plans of adding 92,000 MW by 2012. Current installed capacity is 147 GW (1 GW=1000MW). More than Rs 10,31,600 crore investments is estimated to be required in the power sector during the Eleventh Five Year plan. PFC as a chief financier, a nodal agency and consultant to power generators will be one of the key players to tap into this opportunity. PFC lends to central government PSUs such as NTPC, NHPC, PGCL, Neyveli Lignite, state electricity boards and to private sector power generators as well as transmission and distribution players.
Low operating costs (4 per cent of operating profits in first half of the year), diversified incremental disbursals, ability to source funds in a tough market at lower rates and minimal regulatory intervention in its business are some of key competitive advantages that PFC has over peers in the financial services business.
Financials
The advances book of the company has been growing at 19 per cent CAGR in the last five years. In the first half of 2008-09, profit growth was at a modest 6 per cent though net interest income grew at 23 per cent.
NII growth was driven by a 24 per cent growth in advances and a stable NIM. Profit growth would have been higher if not for the forex loss (Rs 97 crore against Rs 12 crore profit in 2008) on foreign borrowing, which constitutes 5 per cent (part of which is not hedged) of the total borrowing.
But a stable rupee may help reverse these losses. Going forward, PFC appears capable of sustaining its margins as interest rates decline, as disbursals gain pace.
In recent quarters, PFC managed to maintain Net Interest Margin and spreads above 3.7 and 2 per cent, respectively. Though the longer “reset” periods on PFC’s loans led to lower NIMs in a rising interest rate scenario, they may actually help retain the NIMs in a falling interest rate scenario.
Loan mix
The loans extended by PFC to the state government entities now constitute 75 per cent of the loan book, having come down from 77 per cent in FY08. Though the state electricity boards are making losses, the loans given by PFC are relatively insulated from these losses as separate government guarantees and escrow accounts are maintained to shield PFC from the risks in lending to SEBs. While Central government entities account for a good portion of PFC’s new funds sanctioned, it is the State entities that continue to get the major part of disbursals. In the first half of 2008-09, PFC’s outstanding disbursal/sanction ratio fell to 33 per cent. The asset quality of PFC’s book is very high with NPA being as low as 0.02 per cent, though 46 per cent of the advances book is unsecured.
Funding
In order to fund its lending activities, PFC borrows mainly through bond issues and from the banking system.
Though the company does not have access to a low-cost fund base such as banks, PFC’s high credit rating, equivalent to sovereign rating overseas, enables it to source funds at lower costs.
PFC’s NBFC status may help it benefit from any revision of bank limits for lending to NBFCs.
Growth prospects
Given the gap between sanctions and disbursals, PFC has substantial room to grow advances. Loans sanctioned and yet to be disbursed stand at Rs 1,13,467 crore as on September 30, in addition to the new funding requirements.
With many players wanting to enter power equipment, this sector too offers substantial potential, given the ongoing funds crunch.
Unlike banks and other NBFCs, PFC need not invest in low-yielding securities to meet regulatory requirements; this helps lift the overall yield on assets.
PFC has a 16.6 per cent stake in the newly set up Power Exchange, and this may also add to the other income of PFC. PFC has already exceeded its credit offtake target for the year.
Risks and concerns
The prospects for PFC hinge to a large extent on the pace of progress in capital projects in the power sector. Delays in capital spends in the sector or a postponement or scaling down of power projects may lead to slower growth for PFC. Project delays could also force defaults or delayed payments, which may lead to lower asset quality.
Delays in awarding bids under the Ultra Mega Power Projects, for which PFC acts as nodal agency, will deprive it of fees and also represent opportunity lost for funding.
Shoppers’ Stop
Shoppers’ Stop, a premium retailer with a pan-India presence, has seen a deteriorating financial performance in recent quarters. Currently priced at Rs. 174.7, this stock is unlikely to deliver in the coming quarters. While holding the stock for a period of two years may be considered, further exposure can be avoided.
On the basis of enterprise value, Shoppers’ Stop trades at 0.6 times its trailing 12 month sales, among the lowest in the retail space. Similarly, market capitalisation is 0.5 times its trailing sales, the ratio, again among the lowest peers.
Shopper’s Stop is present in 12 cities across product segments totalling a store area of more than 1.65 million square feet. It covers apparel, books, accessories, toddler care, food and beverage, airport retail, large format stores, family entertainment, e-tailing and cosmetics.
Slowing growth
Despite its diversified presence, Shoppers’ Stop has been grappling with a slowdown. Slowing footfalls in the existing stores with the possibility of a delayed turnaround in new segments may make the coming year a challenging one for this premium retailer.
Same-store sales growth slowed to 7 per cent for the first half of FY-09, from an annual 20 per cent across formats in FY-08. While transaction size moved up 9 per cent for H1FY-09, volumes actually declined 3 per cent, indicating that the improvement may have been on account of a higher contribution from the ‘luxury’ segment. Apparel sales, usually offering higher margins, have increased to about 62 per cent of sales for H1FY-09 over 59 per cent for the same period last year.
Customer entry
Customer entry, though up by a marginal 1 per cent in H1FY-09, dropped 6 per cent in Q2FY-09. On the bright side, conversion of footfalls into sales improved on a quarterly basis. More than 70 per cent of sales at Shoppers’ Stop come through its loyalty program, First Citizens Club. While being an important measure of customer loyalty and brand strength, it could be a signal that only serious shoppers are entering stores and the company could lose out on impulse shoppers.
Reduced footfalls is a problem most retailers are battling. In a scenario of caution in spending, value retailers score over premium retailers. Given the premium brand image created by Shoppers’ Stop, branching out into value brands may not be a feasible long-term strategy.
However, lack of adequate competition in the near future will continue to give an edge to Shoppers’ Stop. Luxury brands currently entering the market via joint ventures may still take time to get established.
Financials
In terms of financial performance, the past two quarters have been bad, with the company suffering losses due to surge in costs. For example, lease rentals have soared 60 per cent in a single year. A jump in interest cost on account of increased short-term borrowing is another cause for concern as there is low cover for interest.
Margins have, thus, taken quite a beating. Operating profit margins fell below two per cent in H1FY-09 from 5.5 per cent of the same period last year. However, there was a sizeable one-time expenditure relating to branding exercises and a logo change. Reassessment of depreciation resulted in higher charges, squeezing annual profits before tax (PBT) margins by 4 percentage points and turning quarterly profits negative. A prolonged discount sale period further depressed margins.
Compounding these woes, shrinkage (merchandise lost during transit or to pilferage) increased on a half-yearly basis from 0.24 to 0.56 per cent of retail sales. Consolidated, the company is on a loss even at the operating level due to new retailing forays. Only the apparel, cosmetic and toddler care segmentsare profitable.
Expenses are likely to remain high for the coming quarters. Softening of rentals may be seen only in the next financial year since some properties have location advantage where rentals may not be drastically negotiable.
Segments such as HyperCITY, airport retail, family entertainment centres, food and beverage outlets, will remain loss-making as they are recent endeavours. While the prospects for these businesses are bright, a sizeable scale of operations and expansion is required before they turn profitable. This is expected to take about three to four quarters yet. Additions to Shoppers’ Stop department stores too will generate profits after a few quarters of operations.
Funding
With the IPO capital exhausted, debt funded expansion. The debt-equity ratio is relatively healthy at 0.48 times, a position not enjoyed by most retailers. There may be a rights issue in the next quarter which will finance expansion. The scale of the issue has been reduced to Rs 300 crore from Rs 500 crore, with the time period scaled back to 2.5 years from three-four years.
However, with market conditions likely to remain hostile in 2009 and failure of large rights offer to attract sufficient subscription in recent months, pushing through the rights offer may prove a challenge. That suggests that financing costs may remain a drag on margins for a few more quarters.
Saturday, December 27, 2008
Weekly India News - Dec 27 2008
SEBI said it was probing allegation of price manipulation in the shares of Pyramid Saimira Theatre Ltd. (PSTL), which claimed that it received a fake letter from the capital market regulator asking it to make an open offer several times higher than the current market price. SEBI clarified that no order or letter has been issued by it to PSTL Chairman and MD, P.S Saminathan on Dec. 19. "It appears that the said letter is being circulated with ulterior motives," the market watchdog said. It was widely reported in the media that SEBI vide its order dated Dec. 19, directed Saminathan, to make an open offer for acquisition of shares of the company at a price of not less than Rs250. SEBI said that it is separately investigating into the matter, including the origin of the letter. The regulator is also separately inquiring into the dealing in the scrip following the press reports. The regulator earlier denied that it had issued a letter directing Saminathan to pay Rs250 a share to minority investors. The stock declined % in the week to Rs. Saminathan said that the letter which it had received from SEBI had been forged. The company has requested the BSE and NSE not to issue the pay out and to conduct a thorough enquiry. PSTL is also planning to launch a formal complaint with Central Bureau of Investigation (CBI) in this regard.
Cairn India makes another discovery in Rajasthan
Cairn India announced that it has made an oil and gas discovery adjacent to the Raageshwari oilfield in its Rajasthan block. Raageshwari East 1/1Z well encountered about 10 metres of net oil pay and 1.4 metres of gas pay. Cairn has made several oil and gas discoveries in its Rajasthan Block RJ-ON-90/1 and in the first phase is developing Mangala, Bhagyam and Aishwariya oil finds to produce 175,000 barrels per day of crude oil in the second half of 2009. The discovery is located about 1.5 km east of the Raageshwari 1 well in the southern part of the Mangala, Aishwariya, Raageshwari and Saraswati development areas, Cairn India said. The adjacent Raageshwari field is commercial and has an approved field development plan. "The success of this well on the eastern flank of the Raageshwari structure extends the productive reservoir in a new trapping style and proved a deeper oil column. The well also demonstrates the potential for the addition of incremental reserves from the areas around the discoveries already made," said Cairn India CEO Rahul Dhir.
Dr. Reddy's settles patent dispute on Clarinex
Dr. Reddy's Laboratories announced that it has entered into agreements with Schering and Sepracor which will allow the company to manufacture and market generic versions of the CLARINEX D-12 Hour and CLARINEX D-24 Hour products, with six months marketing exclusivity, and the CLARINEX REDITABS product, with six months marketing co-exclusivity, starting in 2012. Dr. Reddy's will also market a generic version of the CLARINEX 5 milligram tablet six months after the launch of the first generic version of that product. The agreements resolve all pending patent infringement actions filed by Schering and Sepracor against the company in the US District Court for the District of New Jersey, Dr. Reddy's said. The agreements are subject to review by the United States Federal Trade Commission and Department of Justice, Dr. Reddy's said. CLARINEX, a non-sedating anti-histamine, offers relief from seasonal allergic rhinitis and perennial allergic rhinitis, as well as chronic Idiopathic urticaria, or hives of unknown cause. CLARINEX D 24 Hour Extended Release Tablets is the only once-daily prescription antihistamine and decongestant combination treatment on the market to provide 24-hour relief of nasal and non-nasal allergy symptoms. Total US sales for all formulations of CLARINEX products were US$362mn in 2007.
Unitech-Telenor deal to close in January
Unitech announced that the telecom deal with Telenor is expected to close in January instead of December. The closing of the transaction is subject to certain conditions being fulfilled. Unitech and its partner, Telenor, anticipate that not all conditions for losing will be fulfilled before December. Both the parties thus expect to close the transaction during January. Unitech signed a binding agreement with Telenor on October 28, and was now completing all the formalities. Both the parties have made significant progress on the transaction. During this period, the companies have also made a lot of progress on various launch related activities, e.g. network order placement, tower sharing, recruiting and acquisition of offices / facilities in circles amongst many other things.
Jaypee Hotels announced that its Board has approved the amalgamation of the company with Jaiprakash Associates Ltd. with effect from April 1, 2008 being the Appointed Date. In terms of proposed Scheme of Amalgamation, the shareholders of Jaypee Hotels will be allotted one equity share of Rs2 in Jaiprakash Associates for every one share of Rs10 held in the company. Diversified group is also merging its cement, real estate and construction subsidiaries - Jaypee Cement (JCL), Gujarat Anjan Cement (GACL) and Jaiprakash Enterprises (JEL) with the flagship public-listed company. The share swap ratio for the merger will be 1:11 for GACL (one share of Jaiprakash Associates for 11 share of GACL), 1:10 for JCL and 3: 1 for JEL. The transaction, which will be cashless, will bring down promoters’ stake in Jaiprakash Associates from 45.28% to 37.65%. The cross-holding of the company shares will be transferred to the trusts being created by the respective companies. The benefit of the shares to be held with the trust shall accrue to Jaiprakash Associates.
Bajaj dispute close to settlement
Bajaj family members were in the final stages of negotiations to end a six year old family dispute. Rahul Bajaj is all set to sell a 29.6% stake in Bajaj Hindusthan to his brother Shishir Bajaj, thus giving full control over the sugar company. Reports stated that Rahul Bajaj will buy 29.2% of the company's equity capital from group investment firms and other Bajaj family members at the market price as on December 30. He will then sell it, along with his present stake (0.4%), to Shishir Bajaj for zero consideration in terms of a new family agreement signed between the brothers. The shares to be purchased by Rahul Bajaj is worth Rs2.58bn at Dec. 22 price. Rahul Bajaj said the shares will be bought from Bachhraj & Co. and Jamnalal in an inter-se transfer of shares amongst the promoters. This stake will be transferred to Shishir Bajaj through an off-market deal. Shishir's stake in Bajaj Hindustan will go up from 2.85% to 32.47% after the deal is concluded.
Tata Motors to inject cash into JLR
Tata Motors has reportedly agreed to inject "tens of millions" of pounds into the troubled - Jaguar Land Rover (JLR) - to help the British luxury marquees cope with rising cash crunch. According to The Finance Times (FT), the emergency aid to JLR was on top of hundreds of millions of working capital the Indian auto giant has provided since it bought the carmakers for US$2.3bn from Ford Motor Co. in March. Separately, London-based The Times newspaper reported that the prospect of British government assistance worth "tens of millions" of pounds to help keep JLR afloat had helped the company's owners to secure last-minute funding from the banks. British Prime Minister Gordon Brown, Chancellor Alastair Darling and Business Secretary Peter Mandelson have agreed that assistance for JLR would be necessary to prevent its collapse. Last week Mandelson confirmed that he had held talks with JLR.
NALCO to build aluminium smelter in Indonesia
National Aluminium Co. (NALCO) has reportedly signed a preliminary deal with United Arab Emirates (UAE) government-linked RAK Minerals and Metals Investment (RMMI) to build US$4bn worth of projects in Indonesia. According to reports, NALCO and RMMI will build a US$2.5bn aluminium smelter and a US$1.5bn 1,250 megawatts (MW) power plant in South Sumatra province to support the facility. The projects, which will have a capacity to produce 500,000 tons of aluminium metal per year and require one million tons of alumina for its feedstock, are expected to be completed in 2013. "The smelter requires a lot of electricity and we have a lot of energy in India...but still we find that it make senses to put the power plant near coal mining here in Indonesia," said, NALCO's director, B.L. Bagra. He said the power plant will help to keep the cost of production from the aluminium smelter competitive. NALCO has 76% stake in the projects, while RMMI has a 24% stake.
Govt lifts ban on cement exports
The Government lifted a ban on cement exports, as price pressures eased and domestic demand remains subdued due to a slowdown in construction activity. The Government had banned cement exports in May as part of efforts to increase local supplies and check rising prices. In the past few months, construction activity has slowed as high interest rates cut demand for new homes while companies deferred expansion plans due to a credit crunch. Cement output was 14.34mn tons in November versus 14.76mn tons in October. In December, the Government and the RBI announced a slew of steps, including interest rate cuts, a massive spending plan and duty cuts, to arrest the slowdown.
Govt introduces insurance bills in Rajya Sabha
The Government introduced two insurance bills in the Rajya Sabha to enable higher FDI into the sector, notwithstanding stiff opposition from the Left parties. The draft legislation was tabled in the upper house even as CPI(M) members tried to snatch the paper away from the Minister of State for Finance. The UPA government introduced the Insurance Laws (Amendment) Bill, 2008 in the Rajya Sabha after high drama. Through this bill, the foreign direct investment in the private sector can be raised to 49% from 26%. The Life Insurance Corporation (Amendment) Bill was introduced in the Lok Sabha after an unsuccessful attempt by the Left parties to stall it by division of votes. The Bill seeks to raise the capital of LIC from Rs50mn to Rs10bn.
Govt hopeful of strong bids in 3G auction
The Government is hopeful that the auction for third-generation (3G) frequencies next month will see much higher bids than the reserve price of Rs20bn (US$415mn), a top government official said. The global financial crisis will not affect the auction for 3G services, said R. Ashok, member (finance) in the Telecom Commission. The Centre will conduct a global auction for 3G wireless spectrum starting January 16 and has set the reserve price for spectrum in all the service areas. Foreign telecom firms who win 3G spectrum will also be eligible for second-generation (2G) frequencies, Ashok said. "For a new entrant in 3G who has obtained a licence...it will be in the queue for 2G spectrum," Ashok told operators at a pre-bid conference. Firms interested to participate in the 3G auction are required to submit applications between December 26 and January 5. The auctions for 3G spectrum are set to be delayed beyond its scheduled date of January 16 and may take place in February, a top official in the Telecom Ministry was quoted as saying.
ONGC and RIL sign contracts for new oil & gas blocks
The Government signed contracts with ONGC, RIL, and others for exploring 44 oil and gas blocks that were auctioned under the seventh round of the New Exploration Licensing Policy (NELP VII). A total of 57 blocks were offered in the auction but bids were received only for 45, with about US$1.5bn minimum investment committed towards exploration. Cairn Energy's bid for a Mumbai basin deepwater block was, however, rejected. Of the 57 areas offered in NELP VII, seven deep sea, two shallow water and three onland blocks did not receive any bid. ONGC and partners signed PSCs for the maximum number of 20 oil and gas blocks. RIL forged an alliance with British Petroleum (BP), but could manage only one Krishna-Godavari basin block. BHP Billiton and GVK Power inked agreements for seven deepsea blocks. The petroleum ministry is planning to auction over 100 prospective areas for oil and gas exploration by March 2009 under the eighth round of New Exploration Licensing Policy (NELP-VIII). "It would be our endeavour to launch NELP-VIII in first quarter of 2009," petroleum minister Murli Deora said.
WB ban hits Satyam's credibility further
The already tainted image of IT major Satyam took another beating with the World Bank confirming that it had banned the company from doing any business with it for eight years. India's fourth-largest exporter has been declared ineligible for direct contracts with the World Bank from September. The World Bank said its decision followed a temporary suspension in February. "Satyam was declared ineligible for contracts for providing improper benefits to Bank staff and for failing to maintain documentation to support fees charged for its subcontractors," it said. Since 2003, Satyam had been writing and maintaining all software for World Bank across all locations. This also included maintenance of software in back-end offices. According to US-based Fox News, in 2005, the World Bank's chief information officer, Mohamed Muhsin, was sacked after being accused of improperly buying preferential stock options from Satyam, even as he awarded the firm major contracts. After an internal investigation, Muhsin was banned permanently from the World Bank in January 2007. But Satyam was allowed to remain in control of the World Bank's information network till early October, Fox News website said.
Subscribe to:
Posts (Atom)