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Friday, May 11, 2007
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.
Sharekhan Investor's Eye dated May 10, 2007
Lupin
Cluster: Apple Green
Recommendation: Buy
Price target: Under review
Current market price: Rs714
Q4FY2007 results: first-cut analysis
Result highlights
- Lupin's net sales increased by 22.8% year on year (yoy) to Rs518.1 crore in Q4FY2007. The growth in the top line is above our expectations. The sales growth was driven by a 12% rise in the domestic formulation business to Rs144.3 crore and a 53.4% increase in the formulation exports to Rs165.9 crore.
- Having launched six new products in the USA in FY2007, Lupin continues to maintain a healthy double-digit market share for most of its products. It has managed to grab a market share of 33% for Lisinopril and that of 25% for Cefprozil tablets and suspension. Further, Lupin's branded product in the US market, Suprax, continues to do well. The product has seen a strong volume growth with prescriptions exceeding 8,500 a week during the peak season.
- Lupin's operating profit margin (OPM) expanded by 460 basis points yoy to 14.5% in Q4FY2007; the same was lower than our expectation of 15.7%. The OPM was below expectations on account of a higher than anticipated rise in the company's raw material cost and higher research and development (R&D) expenses. Consequently, the company's operating profit grew by 80.0% yoy to Rs75.0 crore in Q4FY2007.
- The profit before tax stood at Rs66.6 crore, a growth of 7.9% yoy. The same was below our expectation of Rs74.2 crore. However, on including the one-time income of Rs114.32 crore (euro 20 million) in relation to the sale of the Perindopril patent to Laboratories Servier of France, the reported net profit stood at Rs137.1 crore, a growth of 173.1% yoy.
- The company's reported net profit stood at Rs137.1 crore, up by 173.1% yoy. However, this includes the one-time income related to the sale of the Perindopril patent. Based on our estimates, the net profit excluding the post-tax consideration received from the sale of the Perindopril patent stood at Rs61.3 crore, a jump of 22% yoy. The same was above our estimate of Rs57.5 crore.
- For FY2007, the company's net sales increased by 22.7% to Rs1,970.9 crore, which was above our estimates. The OPM expanded by 70 basis points to 14.9% as against our estimate of 15.7%, driven largely by higher R&D expenses. The company's reported net profit stood at Rs302.1 crore, up by 65.3% yoy. However, this includes the one-time income related to the sale of the Perindopril patent. Based on our estimates, the net profit excluding the post-tax consideration received from the sale of the Perindopril patent stood at Rs226.2 crore, a jump of 23.8% yoy, and was in line with our estimate of Rs228.4 crore.
- The management aims to increase its turnover from the current level of Rs2,000 crore to Rs3,000 crore in FY2008 (a 50% growth) through various initiatives in the USA, Europe and semi-regulated markets. In FY2009, the company plans for an additional 40% growth to $4,200 crore. This growth will largely come from organic initiatives, with a small component of inorganic growth as well. Further, Lupin's lead anti-migraine new chemical entity is currently in Phase III trials; the management aims to monetise this molecule in FY2008 and any news on this front will come as a positive earnings surprise for the company.
- Based on the FY2007 performance and the outlook provided by the management at the recently held analyst meet, we are in the process of upgrading our numbers and will come out with an update shortly. At the current market price of Rs714, Lupin is quoting at 18.9 its FY2008 fully diluted earnings.
Gateway Distriparks
Cluster: Cannonball
Recommendation: Buy
Price target: Rs250
Current market price: Rs182
Results in line with expectations
Result highlights
- Gateway Distriparks Ltd's (GDL) revenues from the container business grew by 24% year on year (yoy) to Rs41 crore in Q4FY2007. With Snowman Frozen Foods, the cold chain subsidiary, contributing Rs6.65 crore for the quarter, the total revenues for the quarter stood at Rs47 crore.
- The operating profit grew by 22% yoy to Rs22.6 crore whereas the operating profit margin (OPM) declined by 840 basis points to 47.4%. Snowman Frozen Foods continued to remain unprofitable at the earnings before interest, tax, depreciation and amortisation (EBITDA) level, registering a loss of Rs0.17 crore for the quarter.
- The interest cost decreased by 66% yoy to Rs0.20 crore, thanks to the repayment of debt whereas the depreciation provision increased by 62.6% yoy to Rs4.57 crore on account of higher capital expenditure (capex) during the quarter.
- The tax provision stood at 17% as the company continued to enjoy the 80 IA benefit for investment in inland container depots (ICDs). The net profit increased by 8.5% yoy to Rs19.27 crore.
- Last month, GDL through its subsidiary GatewayRail had formed a 51:49 joint venture with Container Corporation of India (Concor) to construct and operate a rail-linked double-stack container terminal at Garhi-Harsaru, 7 kilometre from Gurgaon in Haryana.
- We are in the process of revising our numbers and will update you soon on the revised numbers. Meanwhile we maintain our Buy recommendation on the stock with a price target of Rs250 per share.
VIEWPOINT
Patel Engineering
Unlocking value of land bank
We attended the analyst meet of Patel Engineering Ltd (PEL) held on May 09, 2007 in Mumbai. Following are the key takeaways from the meet.
Real estate plans
- For the first time, the company unveiled its real estate plans and strategy for its land bank.
- The current land bank stands at around 500 acre, located in four places.
- The important thing about the company's land bank is that the entire land bank is situated in urban areas and hence commands higher realisation.
- The company has floated a wholly owned subsidiary called Patel Realty India Ltd (PRIL) under which all its real estate activities will take place.
MUTUAL FUNDS: WHAT'S IN WHAT'S OUT
Fund Analysis: May 2007
An analysis has been undertaken on equity and mid-cap funds' portfolios, indicating the favourite picks of fund managers for the month of April 2007. Equity funds comprise all diversified, index, sector and tax planning funds, whereas mid-cap funds include a universe of 18 funds such as Reliance Growth, Franklin India Prima Fund, HDFC Capital Builder, Birla Mid-cap Fund etc
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Thursday, May 10, 2007
Race to Beat the Market - Sanjeev Pandiya
I had argued earlier how risk is defined wrongly and that Beta is a flawed measure and “outperforming stocks don't really (outperform)”. What I implied is that Classical Finance takes these high-sounding, laudable objectives and produces good-looking, 'logical' (therefore rational) models that are supposed to achieve these objectives.
But long after the Nobel Prizes have been given away and people have gone home, it often turns out that the model sold to an unsuspecting public was a lemon. Last time, we talked about CAPM, but other big models like Dividend Irrelevance or Efficient Markets Hypothesis do not stand up to scrutiny either. This time, we will talk about “market outperformance”, a common measure by which money managers (particularly the Mutual Fund industry) measures and sells itself. Since I got almost no mail last time, I presume that either everybody agrees with me or more likely, nobody understood what I said. Which is just as well, because the strategy I laid out last time is delivering returns that no mutual fund manager can even dream of.
“Market underperformance' is seen by ordinary investors as a measure of risk. The other side of the coin, “market outperformance” is not seen as risk, but is clubbed as return. No money manager will treat 'statistical variance' of his performance as part of risk/ uncertainty. Tracking error measures the variability of a fund manager's performance with that of the major stock Index, say, the Sensex.
Beta here has no meaning. The Sensex return is like the cost of capital in the investor's mind. Both investor and money manager treat Beta as a measure of risk, when actually, it is merely an indicator of variability. Like I mentioned last time, risk is not the same as variability, which in turn, is not the same as volatility. You cannot be a good trader unless you understand the nuances of the difference between these terms.
Yet, investors routinely input Beta in calculating their cost of capital, allocating a higher cost of capital to stocks/ portfolios with higher variability, with strange results. No wonder DCF models fail to predict stock prices. Like Warren Buffet pointed out sarcastically, a stock cannot be 'riskier' at $40 than it was at $80. Classical Finance, which measures historical volatility and then equates it with risk, would tend to classify a stock as riskier at $40, just when it is cheaper. Value investors know that a cheaper stock gives higher returns, not necessarily with higher risk. Actually, the risk is lower.
However, the risk, as calculated by Classical Finance is higher, because it confuses risk with volatility/variability. But as I pointed out, this risk is different from real risk, which, as Buffet points out, is actually lower.
The resulting situation is almost comical. “Higher the risk, higher the return” is an old aphorism going around the markets. It seems logical, almost intuitively true………yet good value investors know that it is not so. The risk referred to here is actually not risk, but variability/ volatility. Value investors know that the highest returns actually come from 'low-risk' stocks. At this point, both variability and volatility are usually at historic lows. This is a typical aberration found commonly in markets…the Indian markets are no exception. Maybe the regular occurrence of such phenomena ensures that the “efficient markets hypothesis” is a failure.
Which investor, who manages his own money, ever compares his 'performance' against the Sensex? The actual cost of capital to an investor is his opportunity return, usually bank deposits. In other words, his real cost is inflation, not the pulls and pushes of the Sensex. This brings me back to the old argument in favour of absolute returns, rather than market outperformance.
Why is this subterfuge perpetuated? Because the mutual fund industry gets its fees from the size of funds managed, not from the returns generated. So they compete within the asset class, i.e. after the investor has put a certain share of his wallet into mutual funds, he diversifies his portfolio mindlessly, hoping that such diversification will somehow give him a better risk-adjusted return.
Regulators support this with flawed regulations. Fees based on returns are for hedge funds who need to focus on absolute return strategies in order to keep body and soul together. But the flawed logic of classical finance sees this as 'risky' and hence not for the small investor. So the poor guy lives with genuine risk, producing sub-inflationary returns on a mutual fund investment, while the smart, rich guys hire absolute return managers to take care of their portfolios.
Measurement of portfolio performance was a very good idea in its objective. It just went awry in its implementation. The application of various measurement techniques has vitiated the very purpose it was meant to achieve… the achievement of a proper, risk-adjusted return on the investor's capital.
It has perpetuated the idea that a money manager can be evaluated by a finite set of measurable, mathematically sound metrics that are standard across the entire set of managers. It assumes that the rules used to allocate your funds are repeatable, standardized and independent of their environment.
It tries to reduce to a logical evaluation, the study of process (of investment) that succeeds because of a very subjective skill. Just consider this: Your real cost in an investment is inflation and risk (i.e. variability of return and volatility of principal, not the Beta). Measuring investment performance against inflation ensures that you remain focused on absolute returns, while measuring risk ensures that you achieve genuine diversification, not the artificial, meaningless diversification achieved by trusting a larger number of strange 'mutually distrustful' faces.
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