Tag: business

Petronet LNG – This stock beats an FD anyday !!

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This report on Petronet LNG was published in Feb 2011. An update is available at Link

Petronet LNG is a gem of a stock that has given equity investors safe and high returns for the last 7 years.

Description and Profile

  • Petronet LNG is a PSU created to import, process and sell LNG in the country
  • It is a JV between GAIL, ONGC, Indian Oil and BPCL. This helps in all inter company coordination issues
  • It owns and operates a LNG terminal at Dahej, Gujarat that imports 10.0 MMTPA (Million Metric Tonne Per Annum) of LNG. It also owns sea vessels that help transport LNG from sources
  • The capital/ investment plans of PLNG include:
    • Capacity expansion at Dahej
    • A new LNG terminal at Kochi, Kerala.
    • Plan for forward integration into power plant construction at Dahej, which will use the imported LNG as fuel
    • A longer term plan is for a power plant at Kochi, using LNG
  • Imported LNG is regassified and supplied to customers in pipelines – generally operated by GAIL
  • The varied customer base includes Power plants, household and commercial piped gas, fertilizer plants, Industrial boiler fuel, etc.
  • Turnover in 2010 was Rs 10,600 crores with PAT at 404 crores.
  • Sourcing of LNG is in the form of long term agreements with Australia and Qatar. In addition Petronet sources spot cargo of Natural Gas, to boost volumes and utilize capacity

Stock evaluation, performance and returns

  • This stock had it’s IPO in March 2004 priced at Rs 15.
  • Maiden dividend was paid in 2007. Thereafter dividend has shown a steady to increasing trend
  • At CMP of Rs 126 today, the stock has shown a 44% annualized return over the last 7 years!

Petronet LNG performancePetronet LNG stock performance (click to enlarge)

  • Revenues have grown steadily.

Petronet LNG Quarterly Revenue chartQuarterly revenues have grown steadily over the last 6 years

  • Cash flow and EPS are showing a robust growth rate – see graph. Dip of EPS in 2010 is expected to recover substantially in 2011.

Cash Flow and EPS have grown substantially

  • Price and PE chart shows that PE is at upper end of 5 year range. Some expectations are priced in of capacity additions and likely revenue growth.

Petronet LNG Price and PEPrice and PE graph

  • Price and EPS quarterly graph shows recent spike in price, rising to all time highs

Petronet LNG Price and EPS quarterlyPrice and EPS graph

  • ROCE is between 15 – 25%
  • PEG is at 0.93 – indicates safety and undervalued status

Opinion, Outlook and Recommendation

  • India is an energy hungry country, and will remain so for decades
  • Gas is cleaner and preferred as fuel compared to coal and oil (polluting).
  • Petronet LNG will continue to dominate the gas infrastructure and imports sector due to its PSU and JV status and strong partnerships
  • Reliance Industries gas is at a physically distant source, and of insufficient quantity to challenge Petronet LNG as a supplier. In fact the two firms may work together in the future to service customers in respective regions
  • By investing in further capacities and downstream businesses, Petronet will be able to leverage it’s cash flows for growth and profitability in the future
  • My opinion is that Petronet will continue down the path of solid stock performance and dividends over the next decade
  • Invest now and systematically for long term outperformance

Risks:

  • A spike in Natural gas prices will be passed on to customers as most are on long term purchase contracts. Spot cargo volumes may be affected, though, and customers may not purchase these incremental volumes
  • Pipeline infrastructure from Dahej to customers is a constraint. However this is being aggressively addressed by GAIL
  • Current market weakness may take PLNG down temporarily, but expect recovery and solid performance

Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com Also see: https://jainmatrix.wordpress.com/disclaimer/
Performancing Metrics

For Long term investments start a direct market SIP

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This article has been updated. Click on this link to see the latest version.

March 2016 – A Superior Investing Process – Do a DIP SIP

 

Jan 2011

  • The market indices have fallen, and it seems like a good time to invest?
  • But you’re not sure what to invest in? Should you choose just one or two stocks with good prospects, and invest a large sum?
  • Or should you just choose a Mutual Fund, and invest in a lump sum, or even a SIP?

I have another idea for you. Invest in a direct market SIP !!

By this I mean, use your current Online Trading & Demat account to buy 5-6 shares yourself in a systematic manner every month.

Comparisons of direct market SIP with a Mutual Fund:

  • Only initial charges of 0.5 to 0.75% which are the brokerage commissions + taxes, compared to 2.5% per annum, which are the normal Mutual Fund charges. This really adds up over the years.
  • A quick look at equity MFs performance over 3 years (from Value Research) shows that only 15/57 MFs outperformed the Nifty’s 5% gains over the last 3 years.
  • Instead of a decision on which MF, you have to only make an initial decision on the bunch of 5-6 stocks. I will help you through this also :-)
  • Utilize your online trading account better, and gain control over your investments !!

Comparison of direct market SIP with a lump sum in 1-2 direct stocks:

  • The market indices can fall further. A systematic investment every month will help you gain more from falls in the market
  • Do not try to time the market. Instead by investing systematically, you can beat the Sensex in terms of returns !!
  • Just one or two stocks for investing heavily – this may be too concentrated a portfolio. Even the largest and most stable stocks (think Reliance or DLF) can be victims of pockets of non performance, or worse, large unpredictable swings.

Comparison of direct market SIP and Brokerage Equity SIP:

  • Several brokerages  – ICICI direct and ShareKhan for sure – have introduced Equity SIP facility for customers.
  • They can specify the stocks and purchase monthly of a specified Value (of portfolio) or specified quantity (of shares)
  • Initial and recurring charges are identical
  • There have been doubts expressed about the brokerage’s transaction –  Bad Trade Execution/ buying into morning spike, etc. as expressed in this article – http://shabbir.in/why-no-stock-sip/
  • My feel is a Do-It-Yourself approach removes these doubts and gives some satisfaction (while taking just 10 minutes a month).
  • See fig 1 for a tabular comparison of above options
Comparison of SIP Options, JainMatrix Investments

Fig 1 – Comparison of SIP purchase options  (click image to enlarge)

Checklist for a direct market SIP:

  1. You will use your current Online Trading account/ broker relationship for this SIP. If you have to choose among your options, choose the one with lower brokerage.  Could be ICICI securities, or Kotak securities, or whatever.
  2. Decide on the 5-6 stocks you will invest in.  My help here – see next section – Choose your stocks.
  3. Decide on the amount you will invest every month – here I would suggest you fix an amount such as Rs 10,000 or 20,000 and keep up this amount every month.
  4. Create a small calculation excel for helping you decide the actual number of shares to be bought. See section – Here’s an example.
  5. Decide on a date for investing. If you are salaried, perhaps 2nd or 3rd every month is a good date as it is right after you have received your salary. Or any other convenient date. Keep a self reminder for this date.

Choose your stocks

This is an important first step. My key principles in choosing the stocks are:

  • Choose large liquid blue chips.  They should be Nifty/ Sensex stocks. You do not want too much volatility in your mutual fund.
  • The 5-6 stocks should be from different sectors. Bad news in one stock / sector should not affect the other.
  • These stocks should be solid businesses that are going strong even 10-15 years from now, as your SIP and asset building is for long term

My recommended stocks – choose only one per sector:

  • Banking – HDFC Bank or SBI
  • Automobiles – Tata Motors or Bajaj Auto
  • Capital Goods & Engineering – L&T
  • Information Technology – TCS or HCL Technologies
  • Oil & Gas – ONGC or Petronet LNG
  • Telecom – Bharti Airtel 
  • FMCG/ Food – Hindustan Lever or ITC

Returns from this approach.

  • Lets say you chose 5 stocks for your SIP – HDFC Bank, Infosys, L&T, ONGC and Bharti Airtel.
  • If you invested in these five on a monthly basis over the last 30 months, following above approach, you will get returns per fig 2
Portfolio vs Sensex, Jainmatrix Investments

Figure 2 – Comparison of  SIP Portfolio with Sensex

Here’s an example

  • Choose your MF portfolio from above recommended stocks
  • Next you have chosen Rs. 20,000 per month for your SIP.
  • Create a small excel  – which can help you calculate the number of shares to be bought every month. See fig 3. This will help do this easily in a few minutes
SIP calculation tool

Fig 3 – Tool for SIP purchase

  • Decide the date of the month you want to invest every month – say 2nd. Very important – stick to your monthly investing routine as far as possible.
  • There you go – you are all ready.
  • Happy Investing :-)

Performancing Metrics

Bharat Forge – CMP: 361 – Invest with an 18 month target of 700

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Introduction

  • Bharat Forge is a Pune based manufacturer of forged and machined – engine & chassis components. It is the largest exporter of automotive forgings and chassis components from India. It is the second largest in the world, after ThyssenKrupp of Germany.
  • Manufacturing facilities are spread across 11 locations and 5 countries – four in India, three in Germany, one each in Sweden, USA and two in China.
  • The company manufactures a wide range of safety and critical components for passenger cars, SUV’s, light, medium & heavy commercial vehicles, tractors and diesel engines. The company also manufactures specialized components for the aerospace, power, energy, oil & gas, rail & marine, mining & construction equipment, and other industries. Parts are made of steel and aluminium.
  • Business growth has been steady over the last 7 years. The fall from end 2008 to end 2009 due to a global slowdown, and this has been followed by a rapid recovery thereafter.
  • Pre- 2004, Bharat Forge was focused on increasing capacity and the Pune facility became the largest single forging and casting plant.

Fig 1 – In Sept 2010, Bharat Forge achieved all time high revenues of Rs 719 crores, signaling full recovery.

Fig 2 – Business Segments in 2009

M&A

  • A number of mergers and acquisitions in the 2004-2007 period saw Bharat Forge expand to new geographies. In the process it added a number of prestigious customers and was able to supply products to almost all the major automotive firms worldwide as OEM

Diversification

  • Till 2006 Bharat Forge was primarily an auto components firm. The auto demand collapse and forward looking corporate de-risking plans saw the firm fast track entry into other verticals in the period from 2006 to date.
  • Internal targets are to double non-automotive business from 20% in 2008 to 40% by 2012.
  • For Bharat Forge the focus in the Non-Auto business is on fast growing sectors like Power Plants, Marine, Construction & Mining, Oil & Gas, Energy, Aerospace and Railways. Also on Import substitution for BHEL which itself is a big opportunity. Diversification into these sectors is through a series of JVs with respected partners (eg NTPC for power and Alsthom for Thermal/ Nuclear turbine/ generation sets

Current Business Outlook

  • The fall in auto demand in 2007-09 saw cost cutting measures rolled out to ensure a lower break even for these facilities. Capacity utilization was 53% in 2009. This has improved to 70% for the standalone entity and 45% for international entities in 2010. From here all improved utilization will contribute significantly to profitability. We do not anticipate a need for auto capacity increase for several years.
  • As a result of these business initiatives, when the market began to revive in 2009 for auto industry, Bharat Forge has been best placed to take advantage of this trend.
  • Demand is increasing from both domestic business – Commercial Vehicles and Passenger cars, as well as international – UK and USA. Demand growth is led by India and China, and developed economies have stabilized and are expected to slowly recover in terms of business volumes.
  • The Society of Indian Automobile Manufacturers (SIAM) releasing the 2010 sales growth data of 14.82 million units as against 11.32 million units registered in 2009. Sales of passenger vehicles segment grew by 31.34 percent, commercial vehicles segment by 45.24 percent, three-wheelers by 22.03 percent and two-wheelers by 30.51 percent. They said that the growth was due to increasing dispensable incomes, low interest rates and increase in sales base at par with the pre-recession era.
  • The firm has seen all of its overseas subsidiaries, including its joint venture in China, FAW Bharat Forge, turn around and start contributing to the bottom line, a year ahead of the 2012 target
  • India is emerging as a small car-manufacturing hub, with a number of new entrants and a slew of product launches. The luxury market too has grown rapidly. As the market matures, mid sized sedan volumes too will grow. Bharat Forge is a supplier to virtually all the auto manufacturers in India as OEM.
  • Demand for Bharat Forge’s auto components is a derived demand – dependant upon the Auto manufacturers for sales. The India domestic auto market is doing well with many auto models having a ‘waiting period’ of 2-4 months for delivery after booking by the consumer.

Conclusions, projections and Investment advise

Valuations and conclusions

  • The chart (Fig 3) plots the market price (adjusted) against EPS (adjusted) over a 7-year period.
  • The stock price peaked in 2006 and has not touched those levels since. But we can see the dramatic business recovery of Bharat Forge in the last one year in terms of EPS
  • The PE of Bharat Forge (Fig 4) has been at high levels of late – rising to as high as 80 times. However if you see this in the light of the short-term squeeze in business environment, this is a passing phase.
  • The Business environment and demand situation has now become very positive. Bharat Forge is well placed to take advantage of surging demand due to sufficient spare capacities, low cost production facilities, global presence and nimble design and manufacturing capabilities. Also a series of well timed entries into new non-automotive markets.
  • We expect EPS to continue recovery and move to all time highs. This will be followed by stock price also moving into new highs territory.
  • Net Cash From Operating Activities has shown a positive trend, barring FY 2009.
  • Debt equity is 1.21 as of March 2010. This is not too high and is 3.5 times the Net Cash From Operating Activities

Fig 3 – Current PE looks high but seen in the context of a rapidly increasing EPS, improving capacity utilization and positive business outlook, it will soon settle to lower levels.

Fig 4  – Adjusted EPS has retraced rapidly and is nearing the 2008 peak.

Projection

  • We expect the stock to appreciate to Market Price of 700 in 18 months.
  • This is an excellent entry point for this stock as it is currently underpriced and ‘out of favour’. The the next 2-3 quarterly results will be positive and the share price may start to reflect it’s true worth.

Risks

  • Higher raw-material costs like steel and power  may restrict margin expansion and EPS growth.
  • Low cost domestic capacity may get exhausted, requiring additional capital investments.
  • Business complexity has increased due to addition of a number of new verticals. Management bandwidth and Vertical/ Technical skill-sets need to be upgraded to meet the business challenges.
  • New subsidiaries and JVs need to rapidly add capacity and win deals – early stage of new businesses are uncertain and need management attention before business stabilizes.
  • External factors like stock market sentiments. However our current view is that this will be positive over the next 12 months at least

Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com Also see: https://jainmatrix.wordpress.com/disclaimer/

P&S Bank IPO – Post review on 20th Dec

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  • Punjab & Sind Bank IPO closed on Dec 16th with amazing strength – overall over-subscription 51 times with QIB 50 times, HNI 86 times and Retail 44 times !!
  • It exceeded all my expectations – looks like everyone has bet on the winning horse :-)
  • It will be a bit of a lottery if you get any shares. Also with minimum lot size at 50, retail cannot expect any more than this.
  • If they stick to the usual processing times, allotment may be around 26th and listing around 30th.
  • I feel the listing pop thereafter could beat CIL and MOIL as in banking stocks we are in familiar territory. Barring market abnormalities, it could be 60-80%.
  • Good luck with your investments !!

Also see IPO note – click link

Bharti Airtel – CMP:331 – 2 years target 800 – Invest

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Bharti Airtel is a bit of an enigmatic company. Emerging from humble origins, it has risen rapidly in the last decade to be today the largest telecom company in India by subscribers, revenues and profitability.

Leaving in its wake the famed business houses of India. It is #7 in India in market cap.

I first entered this stock in 2004; at this time, the stock was trading at a P/E of about 100. The market price was about Rs 161, and had risen from about 22 a few years before. Pretty soon, the price fell 15%.  I held on, thought about it, and then bought some more shares.

Here’s why.

Profile and the growth path

Bharti Airtel Fig 1 – In the last 1.5 years Airtel has under performed. This will change in the next two quarters.

  • Like many new industries, the mobile Telecom industry has emerged from chaos. Even today, the DoT, TRAI and Ministry of Telecom have brought to this sector little clarity, poor governance and transparency. Even so, today at least it is better regulated than 7-8 years ago.
  • In these circumstances, the story of Bharti Airtel is impressive.
  • They follow an outsourcing model and have brought on the best vendors in the world – IBM for software, and Ericsson, Nokia, and Siemens for telecom network – equipment. Today Airtel has the widest all India telecom network
  • More than good vendors, what was commendable was the engagement model with these vendors. All were hired on a SLA based revenue model, where earnings were proportional to number of subscribers and performance against SLAs. At one stroke the Enterprise – Vendor relationship changed from a tug-of war based on negotiation to one of win-win with aligned objectives. These deals in the early 2000s were admired worldwide for their superior structure.
  • Airtel thereafter was free to concentrate on the things that are core to the company – the Airtel brand, the customer experience, customer service and new business avenues
  • Airtel has added several business to its portfolio and now provides Mobile, Telemedia (broadband, IPTV and fixed line), Enterprise (end to end telecom services) and Digital TV (DTH) services – all high growth businesses related to mobile phone services.
  • When the next technology was introduced – 3G, Airtel was ready and won the largest number of circles in the very expensive auction.
  • In the 2007 – 10 period Airtel executed on a strategy to grow overseas. It has successfully launched operations in Bangladesh, Sri Lanka, (through the Zain acquisition), in Africa, totally 19 countries.

Common criticisms of Bharti Airtel, and my take on them:

Criticisms of Airtel My response
1. Airtel paid too much for the Zain acquisition in 2010, and this debt will dampen profits in the years to come They paid $9 billion, in the form of cash. However, by applying fair leverage of balance sheet and good financial engineering, they claim that debt servicing will only cost $200m per year.In fact 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
2. Airtel paid too much for 3G in the auction, and this will also hit performance Airtel paid Rs 15,609 crores to get 3G licenses in 13 circles. However, this gives Airtel access to lucrative markets such as Delhi, Mumbai, Andhra Pradesh, Karnataka and Tamil Nadu. This covers 5 of the top 6 cities of India.
3. Airtel has spread itself thin outside India in Africa and 3-4 Asian countries, this is a recipe for disasterFig 2 – Net Cash from operations has shown a steady and substantial growth In India, the penetration is crossed 50% and growth in subscribers will slow. Investments required in networks too have been made. This market is expected to grow now in terms of ARPU as consumers become affluent. Cash flow from operations is expected to increase rapidly, see Fig 2belowAirtel realized that it can now look at new markets, and roll out it’s successful Indian model elsewhere. The most logical market is Africa where mobile penetration is far less than India, and characteristics show that Airtel can develop this market and reap long-term dividends.Bangladesh and Sri Lanka are small markets, but similar to India, and Airtel found entry opportunities here also.

In fact the management of Airtel has found new challenges in these new markets after stabilizing the Indian operations.
4.       There is too high competition in India, and telecom companies here including Airtel are doomed to subpar performance for many years While there are 12-14 players in the current Indian telecom market, it is expected that this number will reduce over the next 1-2 years. This is due to a combination of heavy initial investment required for network rollout and severe pricing pressure due to competition. Inevitably the viability of the market has reduced and newer players have been unable to justify additional investments.This will be positive for Airtel also as it may snap up some of these players, and certainly will soon face less competition in this market.
5.       Just when people were getting convinced about Airtel, the share price plummeted in 2008-9 and it is now a poor stock The stock market recognized the high competition scenario and slowing growth characteristics. Hence the high P/E that players got earlier were reduced sharply and the market prices fell – for all telecom. However, see Fig 3, the EPS growth of Airtel has remained stable.
6. The Telecom sector in India is under a cloud due to regulatory problems, scams, etc. This is expected to clear up soon due to high visibility from media and political parties. In fact with valuations low and uncertainty high, it is a good time to look at an investment in Airtel.

Fig 2: Cash Flow from Operations

Fig 3: Steady increase in Airtel EPS over last 5 years.  EPS is Expected to stabilize now in 2 quarters and grow again.      

Fig 4: Development of Indian Telecom – Source TRAI

Conclusions, projections and Investment advise:

Conclusions

  • Today as the seventh largest Indian firm by market cap, Airtel is poised to show huge multi year growth, profitability and cash flow from Indian and International operations
  • As the 5th largest telecom company globally, Airtel is poised in the next 5 years to explode in terms of revenue, profits and subscriber numbers, eventually encircling the current global leaders.
  • My opinion of Bharti is that it is a fantastic company, run by some of the best and experienced telecom businessmen. They have succeeded in the Indian environment, and will not just continue on this path here, but will also translate this experience to new geographies – of Asia and Africa.
  • Hyper-competition in India has resulted in a temporary blip in performance of the industry. This is created by poor regulation and governmental interference.
  • In spite of these circumstances, Airtel has maintained a good revenue and profit performance, keeping an efficient organization, investing in required capital equipment and riding though this rough patch.
  • MNC telecoms with deep pockets have not been able to overtake Airtel, which is staying ahead.
  • Rapid yet steady increase in cash flow will be used to both lower debt levels and invest in African markets, which will increase profits. Also Airtel is the only telecom firm in India paying dividends.

Fig 5 – Airtel’s PE is far lower than the average over the last 5 years. It will return to 25-30 levels.

Projections

  • As an investor, I would say, this 1-2 year period is the opportunity to buy, for outsized returns over the next decade. In 2 years the telecom sector will recapture investor interest and Airtel will reach my price target of 800.
  • Basis for projection:  (1) stabilization of African operations (2) consolidation in number of Indian telecom players from current 14 to 8-10 leading to reduction in pricing pressures (3) successful 3G launch in 5 of India’s top 6 cities plus partnerships in others; and (4) Launch of number portability will see customers gains for Airtel (5) These will result in growth in market share for Airtel (6) Likely clarity in Indian telecom industry governance and regulation in 8-12 months, with Airtel generally benefiting.