eClerx Services – A Profitable Process

November 18, 2011October 16, 2012Leave a comment

Date: November 16, 2011
CMP: Rs 740; Small Cap – Market Cap 2196 crores
Advice: Invest in SIP mode. Target – Rs 1572 in 18 months.

eClerx is a niche Knowledge Process Outsourcing firm based in Mumbai. Their focus is on Financial Services and eCommerce, Sales and Marketing customers for process management and analytics. Rapid growth, 4000+ employees, steady 33% EBITDA margins and scale up by customers makes this an attractive firm. Invest for the long term in this soon to be Mid Cap.

eClerx Services – Description and Profile

eClerx is a KPO firm focused on Financial Services and Sales & Marketing organizations.
It is a 341 crore revenues, 2155 crore market cap firm with around 4000 employees, and offices in Mumbai, Navi Mumbai and Pune. It is India’s first and only publicly‐listed KPO.
They have deep domain knowledge in the defined verticals. The services provided include process outsourcing and process consulting. Key customers are top Investment Banks, Commercial Banks, manufacturing, retail, travel and media companies.
North America provides 61% of revenues, Europe 32% and 7% ROW. This is a typical revenue profile consistent in the IT and BPO industry in India.
M&A: eClerx acquired Ingentica Group in 2007 for US$3m. This acquisition was assimilated well. Some clients were dropped as the accounts were found unprofitable. eClerx is currently open to M&A in identified niche areas.
Shareholding pattern is: Promoters Indian 27.5% and Foreign 27.4%; FIIs 24.5%; DII 9.5%; Bodies Corporate 1.6 %; Individuals – retail and Other 9.6%. Promoters are strong and stable.
Five new clients were added in this quarter. Total number of active clients increased to 50.

Business Model:

eClerx engages with customers by

Partnering for routine processing tasks, where execution is in remote locations and these are monitored through SLAs. Undertake process consulting and reviews to improve performance
Provide business and data analytics that can measure, benchmark and report process performance.

The offerings are Knowledge based services with a focus on the defined few verticals.
They have a linear business model – billings are proportional to the number of dedicated employees. However the range of services is wide enough that customers can be mined for adding to the service bouquet and increasing revenues per customer.
Once a routine but important process is handed over to a partner like eClerx, customers are unlikely to take it back unless the partner messes up. Thus eClerx has Long term contracts (2-3 years) with recurring revenues. This gives a stable and predictable revenue flow.
It started with essentially Financial Services domain, but has successfully diversified its business, thus de-risking the overall business portfolio.

Industry Note:

Classification of Indian Industry players

Integrated IT and BPO firms. These are IT firms that have extended their service offerings to BPO and KPO. They are doing well. However their focus remains on higher end IT services.
Focused BPO firms have offerings across verticals and service areas, and have expanded rapidly.
Captive BPOs. Many US and European firms set up captives in India to take advantage of Indian talent. However after a period of time they are not able to sustain due to high attrition and stagnant growth prospects. Some like Genpact (GE Capital) have been spun off, while others have been acquired by Integrated IT firms.
Niche KPO/ BPO are able to sustain and even get higher billings due to better domain skills.

The IT and BPO industry from India is well established and accepted worldwide. The availability of bright young talent is high here; Internet and telecom networks enable global distribution of work; Salary levels in India remain a fraction of those in the developed markets; English as the language of communication is the glue that holds these partners together.
The industry expectations are that for the next 8-10 years, these factors will remain positive, and will not be significantly challenged by countries like China, Philippines, Turkey or Eastern Europe.
The key strength of Indian IT and BPO in this competitive scenario will be Managerial and process maturity and ability to handle larger and more complex engagements with global customers. This will be tested in the form of global tenders to handle large outsourcing deals.

Stock valuation, performance and returns

eClerx had its IPO in Dec 2007. It was oversubscribed 26.3 times.
From its bonus adjusted IPO price of 210, it has appreciated to 740, giving the initial IPO investors a gain of 38% CAGR. See Fig 1.

Fig 1 – eClerx Equity performance (click to expand)

Sales have grown at an average of 33.4% over the last 4 years, see Fig 2. Not bad for a firm initially focused on Investment Banking vertical at a time when banks were going bust :-)
EBITDA and Net Profits are growing in the 30-33% range CAGR

Fig2 – Quarterly Sales and Profits (click to expand)

The firm is debt free, and with a 30% CAGR growth in Cash from Operations, Cash Flow is excellent
EPS has also grown at 29% CAGR over the last 4 years, see Fig 3.

Fig 3 – EPS and Cash Flow (click to expand)

Financial Projections, with FY14 estimates

The financials and PE of eClerx has been projected for the next 3 years.

Key Financials and Projections – eClerx (Click to enlarge)

The current PE of eClerx stock is 15.2 right now, above the industry average of 12.
The Price and PE chart Fig 4 – shows that the 2008-09 period of US financial weakness had a price impact on eClerx stock.
The view of the EPS chart – Fig 5 shows that this fall in prices was unwarranted. The EPS continued its rise thereafter, and the share price smartly recovered.

Fig 4 – Price and PE Trends (click to expand)

Fig 5 – Price and EPS Trends

Cash and Cash equivalents are at 179 crores. This is a healthy war chest with which eClerx can look at new acquisitions or invest in organic growth.
PEG is at 0.52 – indicates it is underpriced, and a good investment opportunity

Risks:

Client concentration. The top 5 clients contribute 87% of the revenues. This is an asset – current clients are ramping up (this was 82% last year). However, it is a risk, since any relationship gone sour can affect revenues to the tune of 10-25%.
Attrition is high in eClerx at 35%. However their processes are such that within one week, a replacement resource is found and he starts getting billed by the client. This minimizes the impact of high attrition. Also attrition is expected to plateau in the next few quarters due to general slowdown.
Financial sector headwinds. The European countries debt, Eurozone crisis and USA’s debt issues are threats to the financial services sector in the USA. However the investment banks are better prepared for this in 2011 compared to 2008, and should be able to weather this storm. For eClerx business is not affected unless a customer ceases operations, as many of the processes they run are critical day to day tasks, part of the core normal functioning of the firm, and not a discretionary expenditure.

Opinion, Outlook and Recommendation

The eClerx stock reached a 52 week high of 874 on 8^th July this year, and is currently at 16% below this. This is good point to start accumulating this share.
At current levels, eClerx share is above the 50 and 200 DMA levels. This indicates the share is likely to continue to move up.
Over the past 4 years, the average PE of the stock has been 12. However the business is stable and growing, and should be able to command higher PE levels going forward as the business scales up and the market cap moves into the Mid-Cap range.
Near term positives include the weakening of the INR against the USD that should boost eClerx revenues and profitability. It is an exporter of services, but most of its costs are in INR.
In the Indian IT/ KPO industry, eClerx is a small player with a good niche. The operating margins at 33-35% are excellent. The real potential for eClerx is to mine their roster of current customers for additional business. This executed will itself provide 30-40% revenue growth in the next few years.
Strong business leadership – cofounder / promoters are experienced in banking, investment banking and consulting industries in the US.
High Dividend Payout ratio at 60% plus, indicates good management attitude towards shareholders.
The 18 month projection – for March 2013 – for eClerx is Rs 1572, a 110% appreciation from CMP.

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Bharti Airtel – Take the call

November 12, 2011October 16, 2014Leave a comment

Date: November12, 2011
CMP: Rs 396; Large Cap
Advice: Safe long term investment
Target: 18 month – 800

There is an update on this report called Bharti Airtel – This is a year of consolidation (Aug 2012) available for readers.

Bharti Airtel is a large telecom player. The market leading India business is seeing high competition, but going forward the profitability will stabilize and improve. The next growth engines are Indian 3G and the 16 country African acquisition. Invest for the long term in this Indian – going – MNC Blue Chip.

Bharti Airtel – Description and Profile

Bharti Airtel is the market leader in the Indian telecom sector. Incorporated as recently as 1995, it is a global telecom operator ranked #5 today in terms of customers.
Standalone turnover is Rs 38,000 crores (FY’11), and the Market Cap at Rs 1,50,000 crores ranks it #7 in India. Consolidated revenues in Q2FY12 was Rs 17,200 crore (annualized Rs 61,000 crore)
Other than India, Operations are spread over 18+ countries including Bangladesh, Sri Lanka and the African continent. Airtel has an aggregate of 237 million customers as of September 2011.

Businesses are classified as B2C and B2B

B2C operations include Mobile, Telemedia (broadband, IPTV and fixed line), and Digital TV (DTH)
B2B operations are Enterprise services (end to end telecom services) and Passive Infrastructure Services (Telecom towers)
Africa for Airtel is essentially a market for mobile services and Passive Infrastructure Services (Telecom towers)

Fig 1 – The revenue proportions from business segments (click graphic to enlarge)

Strategic Partner – Singapore Telecom is a key Partner and investor in Bharti Airtel.
Equipment and Technology Partners – excellence from specialists

For network and telecom equipment, the partners are Ericsson, Nokia Siemens Networks (NSN), Huawei, Alcatel Lucent, ECI, Tejas Networks and Cisco
IBM is the partner for all business and enterprise IT systems, across geographies
The Call Center expertise is from partners like IBM Daksh, Mphasis, Firstsource, Aegis, Tech Mahindra Teleperformance, and HGSL

Shareholding pattern is: Promoters 45.5%, Foreign Strategic Partner 22.8%; FIIs 17.1%; DII 8.7%; Bodies Corporate 4.1 %; Individuals – retail and Other 1.8%

Industry Snapshot

The total number of Indian subscribers of telecom services– wireless & wire line – is 88.6 crores. The tele-density is 73.97% (on 30/06/11), an increase of 4.69% over the previous quarter
Gross Revenue during the quarter was 46,891 crores, an increase of 3.03% over the previous quarter
The policy environment for Telecom is driven by TRAI, DoT and the Ministry of Communication & IT
There are 15 players in the telecom operator space, including PSUs. Here is a comparison of the larger players

Company	Subscribers millions	ARPU Rs/ month	MoU minutes	ARPM Rs/minute	Market Share %	3G licenses won	3G Bid Rs Billion
Bharti Airtel	172.51	192	454	0.42	19.91	13 circles	122.95
RCom	144.51	105.8	240	0.44	16.77	13 circles	85.85
Idea	95.11	165.2	413	0.40	11.12	11 circles	57.68
Industry	885.99	93.44	329		100	7 private firms have won 71 circles among them	506

Above telecom data is from April and June 2011 quarters, from TRAI and public reports

Key challenges for Bharti Airtel and strategies being followed:

Focus on network improvements, customer support and new service launches, so Airtel is seen as a stable, technically superior and quality service provider

2. The draft National Telecom Policy 2011 attempts to ease conditions for M&A in the telecom sector, promote the ‘One Nation-One License’, and possibly infrastructure status for the industry

These policies are seen as boosts for the sector, particularly the larger players like Airtel
It will hasten the end of the intense competition phase and, through alliances and M&A, lower the number of players to 6-8. This can permit profitable telecom operations for most players.

3. Airtel won a number of 3G licenses in important circles, but at a high price

3G is the next big thing for Indian telecom players. Driven by a growth in smartphone sales, enabled by the telecom operators, a whole new ecosystem of content, services and functionality is being set up. This includes internet browsing, entertainment services, application stores, video calling, enterprise services, m-Heath, m-Education, m-Commerce, e-governance, etc. These will drive usage, 3G penetration, subscriptions and ARPU, and help monetize the 3G license assets.

4. Regulatory uncertainties on issues like Excess spectrum charge, license renewal fees, formation of 3G roaming alliances

By working with the industry bodies such as COAI, Bharti Airtel is defending its position on these issues. Many of these new conditions impose additional costs on the Telecom operators, which are unplanned for.

5. Airtel acquired the African telecom assets of Zain in 2010, for USD $9 billion in cash.

This purchase is of a high growth franchise. As per Airtel estimates, Africa will eventually overtake India and China as a telecom market – as population of Africa will peak at 1.8 – 2.0 billion. By leveraging the balance sheet and sound financial engineering, Airtel was able to service this loan for only $200m per year in 2010.

6. Mobile Number Portability was perceived as a threat for Airtel. However, the first year of experience of this consumer facility shows that it has not materially reduced market shares.

Stock valuation, performance and returns

CMP is 395. In the last 7 years, the market price has appreciated at 21% per annum CAGR. It is below the all time high of 565 in Oct 2007. See Fig 3.
However, prices are on an uptrend in the last year or so. PE at 21.5 is still well below the 7 year range of 27.5

EPS growth in the last 7 years has been 35% CAGR. Even so, we can see the trends – EPS had a rapid expansion from 2005 to 2009, but has fallen off in the last 2 years.

The Good News? Expectations now are that the period of falling consumer prices in telecom are over. The hyper competition phase has played out, and EPS will stabilize and start their climb once again for Airtel.

Fig 4 – Price and EPS Trends

Sales have grown steadily at 23.4% over the past 7 years. Net profits have also appreciated at 21.3%. We can see however, that profits which were rising rapidly till 2009, have tapered down recently. This is due to industry hyper competition.

Fig 5 – Sales and Profits Trends (click to enlarge)

Telecom is a very resource intensive business. Airtel has managed this well, and has grown the Cash generated from operations at 28% CAGR over the last 7 years. EPS growth has been higher at 35%.

Fig 6 – Cash Flow and EPS Trends

RoCE is at 16% – healthy statistic; RoNW is 17.6%; Price/Book is 3.42
Debt / Equity is 0.7 for the consolidated entity. This is a comfortable level for a telecom player.
PEG is at 0.61 – indicates it is underpriced, and a good investment opportunity, especially given it’s Blue Chip status

Risks:

Poor regulatory conditions in India. The telecom sector continues to be buffeted by ad-hoc ism in policy matters, and overlapping jurisdictions of TRAI, DoT and the Ministry. The revenue short government may exert additional pressure to raise receipts, sacrificing industry growth.
The current policy directive is to allow M&As and reduce competition intensity in the sector. If this is not implemented, or even reversed in some way, the hyper competition environment may continue to haunt this sector, affecting profitability and margins.
The interest rate has risen in India. This increases debt servicing costs. Expectations are that rates have peaked in India, and should fall going forward.
Revenue and capital leakage into unrelated diversifications of Bharti group like Retail, Insurance, foods, etc. However this risk is fading as Bharti Airtel corporate governance standards are high, and investments are being made independently by the holding company, Bharti Enterprises.

Opinion, Outlook and Recommendation

Airtel essentially has two large businesses, India (mature asset) and Africa (growth).

In India, the major investments have been made; the revenues are large and growing, and the high competition is expected to ease up. Over the next few quarters, all metrics will point up – Cash flow, operating margins and net profits, in addition to revenues which has held up well.
In Africa, we will see Airtel slowly establish itself, move from #3, 4 or 5 in the market to #1 or 2. In country after country, it is engaging with the government, trade and consumers, to roll out its ‘minutes factory’, ‘network infrastructure sharing’ and ‘partner with the best vendors’ approach. The 2013 target for Airtel Africa is $5 billion of revenues.

The recent bottom of the Airtel share was Rs 255 in June 2010. The share has been moving up thereafter and has appreciated 55% to today’s 396. The stock will continue its upward march, as it continues to deliver on stated corporate goals.
At current levels, Airtel share is above 20, 50 and 200 DMA levels. See Fig 7. This indicates the share is likely to continue to move up.

Fig 7 – Airtel stock is above 20, 50 and 200 DMAs

I recommended the Airtel stock in my report in December 2010. See Link.
I reiterate my recommendation to Buy. My 18 month target for this stock is 800.

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Hanung Toys and Textiles – Look for the rebound

October 25, 2011February 9, 20121 Comment

Date: October 24, 2011
CMP: Rs 109; Small Cap
Advice: High Risk, High Gain stock at attractive entry point
Target: 9 month – 200; 24 month – 290

Hanung Toys and Textiles is a small but fast growing manufacturer of textile furnishings and toys. The business performance has been robust. A series of news disappointments has depressed prices. But today it is an attractive contrarian pick.

Hanung – Description and Profile

HANUNG Toys & Textiles Ltd is a niche player in Soft Toys, Decorative Cushions & Children’s Room Furnishings. Turnover is Rs 1160 crores (last 4 quarters). The Market Cap is Rs 274 crores.
The revenue breakup by category is 65% textile furnishing and 35% soft toys.
The CMD of HTTL, Mr. Ashok Kumar Bansal, is a Chartered Accountant who started this company in the 80s.
The financial management of this company appears to be conservative and understated; while the business plans are aggressive.
HTTL had exports of 75% of sales. See Sales break-up by geography in Fig 1.

Hanung Toys Textiles, JainMatrix Investments

Fig 1 - Hanung - Sales by Geo (click to enlarge)

The key facilities consist of toys manufacturing facility, home furnishing production facility and textile processing facility, 3 located in Noida and one in Uttaranchal. The toys manufacturing unit is established in the Noida SEZ wherein the benefits of duty free imports and single window clearance for imports/exports are available.
Internationally, products made by HTTL are available on the shelves of Bloomingdales, William-Sonoma Group, Macy’s, JC Penney, Target Stores, Home Depot, Wal-Mart, Anna’s Linens, Ikea, Homebase, Argos, etc
In India, HTTL owns ‘Play-n-Pets’ and ‘Muskan’ brands in stuffed toys and ‘Splash’ in Home Furnishings. They have more than 100 distributors for the stuffed toys across the country, including multi-brand outlets like Lifestyle, Shopper’s Stop, Westside, Big Bazar (Pantaloon group), Pyramid, Globus, Landmark, etc. Its ‘Splash’ range of home furnishings is available at 600 stores across the country.
The current order book is estimated at Rs 1500-1900 crore, which is about 1.5 years of Sales.
Shareholding pattern is: Promoters 65%; FIIs 1%; Bodies Corporate 12 %; Individuals – retail 19%; Other 3%
HTTL exports are positioned in the Mid-Market range, making the business less sensitive to Chinese exports.
Business potential is very high. In toys, the demand is large in current markets. Quality and price matter here. Competition is mostly from China. In home furnishings, the demand, particularly abroad is very high.
In effect, the addressable market for HTTL is 100s of times its current Sales.

Stock evaluation, performance and returns

The IPO in Sept 2005 was 8.6 times oversubscribed. Pricing was at Rs 95
HTTL has been paying Dividend for last 4 years, which increased from 15% to 20% of late.
The price has fallen from Nov 2010 highs of 410, to a CMP today of 109. The volatility is high, see fig 2.

Fig 2 – HTTL stock price – shows high volatility

Sales and Profit have however grown very steadily (Fig 3)
Sales have grown at 42% CAGR over the last 5 years
Profits have grown faster at 44% in this period

Fig 3 - Quarterly income and profits have, however grown steadily. (click to enlarge)

Price Action and Events

Price of HTTL peaked in Oct 2010, and then dropped sharply. There was some negative news and bad publicity:

The high interest rates regime has taken a toll on HTTL. Costs have risen, as there is debt on the books of Rs 1000 crores. Debt equity ratio currently is 1.74
Overall the Sensex fell sharply. The Small Cap shares fell faster than large cap shares. HTTL due to it’s volatile nature suffered even more.
A GDR plan – to raise capital and fund growth plans – was dropped due to low share prices.
Textiles sector has not done very well in the last year. Cotton prices have risen sharply.

However, HTTL has made several smart moves that are improving prospects

In March 2011, HTTL acquired a controlling stake in the US-based Cody Direct Corp. This firm deals in marketing and distribution of home furnishings. This acquisition will not contribute to topline, but to profitability and operating margins, as some of the middlemen will be removed from the sales cycle.
Plans are on to ramp up capacity, and also a backward integration by setting up spinning plants. A capex plan for the next 2-3 years is in place of Rs 720 crores. This will be raised from cash from operations as well as loans from banks.
The firm is rationalizing interest costs by switching over from the existing Indian Rupee loans to ECB (European Central Bank) or similar, where they can save 3-4% of interest.

Another near term trigger is the recent appreciation in the US$ – INR rates. This will boost USD earnings for HTTL, and should reflect in quarterly earnings for Q3 and Q4.

Graphics:

The Price and PE graph Fig 4 – shows that valuations are bottoming out and are near all time lows of 2008.
The Price and EPS graph Fig 5 – shows that EPS is at all time highs.
Put together, we can see that this is a very attractive time to enter the stock as a long-term investor.

Fig 4 - Price and PE Graph (click to enlarge)

Valuations and Financial metrics

EPS (adjusted) growth has been 44% CAGR over the last 5 years. The EPS quarterly graph (fig 4) shows a steady rise. This is a small but stable company in a good market that is establishing base and will achieve critical mass of size, brand and reach over the next 5 years.
PEG is at 0.05 – indicates underpriced status, a very good investment opportunity
RoE is at around 17-20% – healthy statistic.
Price/Book is 0.54, this is very attractive.
Management has projected 20% revenue growth for the next 2 years.

Fig 5 - Price and EPS Graph (click to enlarge)

Opinion, Outlook and Recommendation

This is a volatile small cap stock. There has been a large fall in share price since Oct 2010, by 75%. There is of course a possibility that this falling trend will continue.
However, business performance has been excellent. After this recent fall, HTTL now has a PE of 2.26. This is an opportunity for investors to average down their cost of holdings, or enter afresh.
The stock may be waiting for a trigger to reverse the price downtrend. Once this happens, the upside is high.
Our projection is a Rs 200 price level in 9 months (Aug 2012) and a Rs 290 price level in 24 months (Nov 2013).
Retail investors with a risk appetite can start a systematic investment (monthly) at current levels.

Fig 6 - Price Projections (click to enlarge)

Risks:

Small size; it is a volatile stock. It falls hard in poor sentiment periods and rises rapidly in good.
Current price fall may continue for an unpredictable period, till investor sentiment recovers.
Being a small firm, can be affected badly by a single accident, strike or untoward incident
Recent GDR was cancelled due to unfavorable market conditions, causing a further fall in price
Debt equity is rising, and is at 1.74 as of now.

Notes

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Mundra Port: Infra play at good valuations

September 4, 2011February 19, 20143 Comments

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There is an update to this report. Read this latest Sept 2012 update called ‘Adani Port – The Great Australian Adventure’. Click this LINK

Introduction

Mundra Port and SEZ (MPSEZ) is a Gujarat based infrastructure and exports play. Promoted by Adani Group, it includes the following businesses –
India’s largest private port, with volumes having recently crossed 50 MT (FY11) and 15.08 MT in Q1 FY12
An SEZ area adjacent to the port, which is being developed on an area exceeding 100 sq km
The port has got ranked 5^th in India among all ports, major, public and private. The port deals in a number of container and bulk products.

Fig 1 – Mundra Port – Cargo details

Fig 1 – Business Segments in Q1 2011. MPSEZ handles a broad range of products. A broad-based customer group means lower business risks.

Connectivity and logistical facilities extend the Port, berthing and storage to Roads, Rail connection, Air strip and Pipelines based evacuation
Port has also recently added specialized car exporting facility
The SEZ facility enjoys a series of Indirect and Direct Tax benefits designed to encourage industrialization by the Gujarat Government
Power supply will be by a plant being set up by Adani group, that will meet all the SEZ needs
The SEZ area is organized into Industrial clusters that include – Engineering, Auto & Auto Ancillaries, Textile & Apparel, Chemicals & Pharma, Plastic Processing, Stone & Minerals, Food & Agro, Global Trading Hub, Timber & Furniture and Metals and minerals

Current Business Outlook

The port has rapidly increased business throughput over the last 5 years, venturing into new categories of goods, and working closely with manufacturers and exporters to improve infrastructure
Capacity building is ongoing including ICDs under development

Fig 2 – Mundra Port – Quarterly Sales and Net Profits

Fig 2 – Mundra has shown steady revenue and profit growth.

Sales have grown by 32% over the last 5 years
Profits have grown an astonishing 128% CAGR over this period
Major competition to MPSEZ is from Kandla, JNPT and Pipavav on the Western shores. Mundra is able to provide port access to North India based industry. Additionally

Kandla and JNPT have not invested sufficiently in infrastructure due to government constraints.
Pipavav is at an early stage of development. Also it is in South Gujarat and logistically more remote.

Mundra Port in Gujarat Map

Additional Developments include:

MPSEZ is also developing Dahej Port and Mormugao Port in terms of terminal creation or port operator.
Acquisition of Australia Queensland based Abbot Point Coal Terminal (APCT). The coal terminal, has capacity of 50 MT a year, will facilitate the transport of coal from Australian mines to India.

Overview of Share IPO and Stock performance

The IPO in Nov 2007 was amazingly successful. It was oversubscribed 115 times, and eventually provided huge listing gains. However it was aggressively priced.
Business performance over the last 4 years has justified investor confidence in this stock

Fig 3 – Mundra Port Valuations and stock performance

Fig 3 – IPO investors have received a 12% CAGR return over the four years since listing

Debt-equity is 0.94 as of Mar’11 (down from 1.7 at IPO time). This is good, for an infra company.
Healthy return Ratios. Return on Capital employed – ROCE is 15.4%; Return on Equity – ROE is 23.4%
PEG is in the range of 0.84, indicating indicates safety and undervalued status

Fig 4 – Mundra Port – EPS and Cash Flow

For an infrastructure company, cash is critical. MPSEZ comes out excellent on this count as it has improved Cash flow from operations and EPS (Adjusted for stock split) rapidly in recent years

Fig 5 – Mundra Port – Price and PE chart

Fig 5 – PE has fallen to attractive levels, and combined with robust business performance gives us a very good entry point for long term investments

Fig 6 – Mundra Port – Price and EPS chart

The chart – Fig 6 plots the adjusted market price against the EPS over a 4-year period.
EPS shows us a steady quarterly increase indicating stable business improvement

Projections and Investment Advice

EPS may slow a little to 40-50% growth range over the next 3 years as competition intensifies and an interest rate driven domestic slowdown takes shape.
Even this is very high. Also, MPSEZ is well placed to capture market share from the increase in Indian exports (oil, containers, manufactured goods and minerals) as well as imports (Coal, oil, commodities).
SEZ revenues are lumpy, driven by sale of land to industries. However the infrastructure provided and industrialization will drive this business.
The recent fall in prices has not affected MPSEZ, and it is expected to ride out this slowdown
As long as it stays over 150, MPSEZ share price is in positive territory. Invest

Risks

Adani group is a complex group of interconnected firms with cross holdings in group companies like Adani Power, the holding company Adani Group, Adani Enterprises Ltd. and MPSEZ.
Recent shareholding reports for MPSEZ indicate the Promoter group has 77%, Institutional is 15% and Public Retail has 7%. Thus unless the Promoters sell more holding soon, it is possible that the promoters may try to buy-back from others and de-list this firm.
Intensifying competition. It is possible that Indian government may finally able to grow capacities at Kandla and JNPT (they have both been running close to 100%), overcoming the current lethargy.
Pipavav Port is owned by A.P. Moller-Maersk Group, is one of the largest container terminal operators in the world. Over the next few years, APM Terminals will transfer a lot of India business from other ports to Pipavav, and also build good infrastructure here.
Recent rumours against Adani Group were that it has powerful political linkages, and interests in illegal mining in Karnataka/ Andhra Pradesh. These rumors affected investor sentiment in Adani Industries. This could also affect MPSEZ in the future. However MPSEZ is a different business, and the possibilities of this are remote.

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Bharat Forge – the Forging Giant Returns

August 15, 2011February 9, 2012Leave a comment