Tag: equity research

Cairn India – A Formula for Success

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  • 05 July 2013
  • CMP: Rs 294
  • Large Cap – Mkt Cap 56,100 crores
  • Advice:  Buy

Executive Summary

  • Formula for success: rise early, work hard, strike oil – (a quote by J. Paul Getty)
  • Cairn India is a large cap and the top Indian private sector Oil E&P firm.
  • It has excellent Oil exploration and producing assets. At current Revenue of 17,524 cr, Profits are 11,606 cr and the Cash Flow is 11,000 cr. The business is lucrative in terms of high cash flow, and low operating costs and investments, and debt free status.
  • For last 4 years, Operating and Profit margins are excellent at 69%, and 65% on average.
  • The demand outlook for oil in India is good, with 70% from imports, and annual growth at 6-8%. Cairn Profits get boosted with a weak rupee and increase in international oil prices.
  • The Valuations at a P/E of 4.6 times are very attractive making it a Value play.
  • Risks to this investment are: ability to sustain and grow oil production from current fields, make new discoveries from exploration assets, and ability to utilize or share the firm’s cash reserves

Business Snapshot:

  • Cairn India is the top Indian private sector Oil Exploration and Production firm.
  • The consolidated Revenue is 17,524 cr with Profits 11,606 cr (FY13) and cash balance of 16,713 cr.
  • Promoters are the UK listed Vedanta Resources/ Anil Agarwal group, that holds 58%. Vedanta Resources took over Cairn India Ltd (Cairn) from Cairn Energy UK in end 2011.
  • It’s a pioneering firm that has opened up the Indian Oil & Gas sector to private sector discoveries. From its first Oil discovery in Jan 2004, Cairn has come a long way to deliver on it’s potential and emerge as the second largest producer of Oil & Gas in India. Cairn’s oil production data are in Fig 1:
Fig 1 – Oil Production at Cairn, Source: Cairn corporate reports, JainMatrix Investments

Fig 1 – Oil Production at Cairn, Source: Cairn corporate reports

(kboepd – Kilo Barrels Of Oil Equivalent Per Day)

  • Current shareholdings are Promoters/Vedanta 58.8%, Cairn Energy UK 10.3%, MF/ DII/ FII 25.7%, Individuals 2.7% and Others 2.5%.
  • Cairn has about 1450 employees. It has the exploration assets portfolio in India (7), Sri Lanka (1) and South Africa (1). Commercial production is from Rajasthan, Cambay and Ravva fields in India.
  • In addition it owns the Mangala Processing Terminal, the Mangala development pipeline – a 590 km heated insulated pipeline for crude evacuation, and oil infrastructure at Ravva and Cambay.
  • The current 205 kboepd oil production includes 175 kboepd from Rajasthan. There is significant upside potential here, with the internal target as 215 kboepd by Mar2014. (Of 95% oil and 5% gas).
  • In the longer term there is (the asset evaluations show that the total resource base now provides) a basin potential to produce 300 kboepd, subject to further investments and regulatory approvals.
Fig 2 – Cairn Profit and Cost Metrics, JainMatrix Investments

Fig 2 – Cairn Profit and Cost Metrics, JainMatrix Investments

  • Cairn is among the lowest cost producers of Oil, and has among the highest net profit per barrel oil.

Business Model:

  • Cairn is paid for oil delivered to refineries. The Cairn business model is sensitive to the international oil prices, with the Rajasthan oil output priced at a 8-13% discount to Brent, in USD.
  • The rupee weakening against USD is also beneficial to Cairn, as it earns higher INR for the oil.
  • The recent decision to double natural gas prices to $8.4 per mBtu will also be beneficial to Cairn.

Pricing Snapshot 

Fig 3 Price History, JainMatrix Investments

Fig 3 Price History, JainMatrix Investments

The available 6-year view of the share price of Cairn Fig 3 shows us:

  • The IPO of Cairn was in Dec 2006; it was subscribed 1.14 times and got a listing price of Rs 160.
  • Since then, Cairn has given investors 10.5% returns CAGR to date.
  • Given its pioneering status, Cairn has seen a high level of interest. The pricing low was 88 in 2008, and the high 401 in Mar 2012, post the Vedanta takeover. Its fallen by 27% since then.

Financial Snapshot

Fig 4 – Consolidated Financials Snapshot, JainMatrix Investments

Fig 4 – Consolidated Financials Snapshot, JainMatrix Investments

  • Significant Oil revenues at Cairn actually only began in FY10. It has ramped up in the last 3 years, with the resolution of issues with State Governments, ONGC and Petroleum Ministry.
  • In line with this, the P/E (ttm) has rapidly fallen from 53 times (FY10) to 4.6 times currently. Fig 4.
  • At current levels of Revenue 17,524 cr, Cash Flow is 11,000 cr. The business is very lucrative in terms of cash flow, with low operating costs and investments. Current cash on the books at 16,713 cr is at Rs 87 per share. The firm is debt free.
  • For last 4 years, Operating and Profit margins are excellent at 69%, and 65% on average.
  • Dividend declared for FY13 is 115% or Rs 11.5 per share, giving a current dividend yield of 4%.
  • PEG based on 1 year projection is at 0.2 – indicates very undervalued stock.

Opportunities and Concerns

Strengths and Opportunities

  • India is oil deficit, and imports 70% of its oil, priced in US dollars. This has caused stress in India’s Current Account Deficit CAD. In these circumstances, Cairn is a very valuable firm, as it helps save import costs. It has had very good success rates at oil exploration.
  • The Rajasthan oil fields are expected to have a 23% growth in 1 year, and up to 71% in the next 3-4 years. In addition, the other Indian, Sri Lankan and South African oil fields have potential.
  • The Mangala development pipeline is being extended by 80 km up to a sea terminal at Bhogat in Gujarat. This will allow Cairn to sell to any of the coastal refiners for better margins.
  • The Promoter is Vedanta Resources plc is a diversified natural resources group with US$ 11 billion revenues. This provides stability and strength to business operations.
  • In India, Oil & Gas exploration, discovery and production has had a very poor record. ONGC has a poor record, and the private sector so far has not had a very free hand in terms of opportunities and incentives. In this scenario, if Cairn is able to expand its operations and continue on the current path, it can taste great success.
  • The major concern is how to use the large cash balance well. The firm has announced a USD 3 billion (Rs 16,500 crore) investment plan for the next 3 years to drill more than 450 wells in Rajasthan block, (increased from 25 wells drilled in FY2013). The wells planned include 100 exploration and appraisal wells, while balance will be development wells to sustain / enhance production volumes.

Risks and Concerns

  • Oil exploration and production is an inherently risky and unpredictable business. The BP /Gulf of Mexico oil spill of 2010 shows that disaster can strike suddenly, causing business losses.
  • Risk is also high in terms of the oil discovery to production cycle, which can take years of evaluation and studies. Oil Reserves can be ‘Proved’, ‘Probable’ and ‘Possible’.
  • Unpredictable govt. regulations and unclear subsidy/ revenue sharing with govt. can be a risk with this firm.
  • It has to be seen if Vedanta can continue on the pioneering path established by Cairn UK of successful exploration to oil production. A different skill set is needed at this stage for Cairn to negotiate effectively with government agencies, establish production infrastructure and compete effectively with rivals like Reliance.
  • New Promoter: Today Cairn is a high revenue, profitable, ‘Cash Cow’ type of firm. We need to see if the new Promoters respect the firm’s independence, reward shareholders for business performance and continue on the path of good corporate governance.

Opinion, Outlook and Recommendation

  • Oil consumption in India is in a very steady growth path, of 6-8% for the foreseeable future. The demand flows from transportation – vehicles, railways, airlines, shipping, and oil as fuel for factories, gensets, motors, tractors and infrastructure/ equipments/ agriculture.
  • With significant oil production, visible growth potential, many new discoveries moving into production, as well as production and exploration agreements in place with the regulator, Cairn is a valuable, cash rich oil stock.
  • At 4.6 times, the current P/E of Cairn puts it at a significant discount to most other Oil and Gas sector firms in India. It is a underpriced Value Stock. Valuations are attractive at these levels.
  • The maiden dividend awarded this year is 115%. With cash flow and profitability high, and production likely to grow, investors can expect to gain in terms of shareholder rewards.
  • Investors can buy Cairn at these price levels.

JainMatrix Knowledge Base

See other useful reports

  • Mindtree – A Possible Star – LINK
  • JainMatrix Mid Cap Model Portfolio 2013 – LINK
  • Apple Inc. – LINK
  • Arshiya International: A Collapsing Star – LINK
  • Bharti Airtel – This is a year of consolidation – LINK
  • Yes Bank – LINK

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/

There’s nothing wrong with Apple Inc.

1 Comment
  • Feb 21st 2013 
  • CMP: $446
  • Global #1 Cap – Mkt Cap $ 421 billion. 
  • Advice:  Buy

Note our more recent Feb 2015 note on Apple

Apple Inc and the Happiest Moment 

This week, a subscriber asked me a simple sounding question … What do you think of Apple at this point?

Let me try to answer this ….

About Apple

This iconic American firm is an innovation powerhouse. It has created new products with so much originality, usability and technology finesse that it has created new markets for itself.

jainmatrix investments, apple

  • The Macintosh showed that Apple had the streak of innovation decades ago (launch in 1984).
  • Tens of manufacturers struggled with Tablets for years, with no success. Apple launched iPad, and showed them how (launch 2010).  Ditto a bit earlier for iPods (launch 2001).
  • In mobiles, the success is even more amazing. In a crowded market, with many success stories, and tens of fierce competitors, Apple launched iPhone (in 2007), a single model, with 2-3 variants, a premium pricing, and a limited network alliance (in the USA). And the top end of the market exploded.
  • Its iTunes that binds these products together beautifully with the application ecosystem, music, video and payment systems.
  • Steve Jobs, the Chairman and Founder of Apple Inc is a legend for his leadership and focus, which has pretty much taken Apple on this pioneering path. We lost him in 2011, and Tim Cook took over as CEO of Apple.
  • In Sept 2012, Apple Inc shares were $700, and market cap at $656 billion, making it by far the most valuable company in the world.

Cut to today

  • The Apple innovation machine continues relentlessly. The new iPhone 5 is better and selling well. The iPad mini expands the market with premium features at a lower price point.
  • See Apple financials in Fig 1 with revenue in USD m (LHS) and Margins in %, EPS in USD and P/E on RHS
Apple Financials, JainMatrix Investments

Fig 1 – Apple Financials, JainMatrix Investments (click to expand)

  • Revenues, EBITDA and EPS have grown at 54%, 68% and 72% CAGR respectively over the last 4 years.
  • Markets like India are summarily dismissed as ‘not big enough’ to warrant corporate attention :-)
  • However, the Apple share price is $449, down 36% in 5 months, and market cap is $421 billion.
  • The cash and cash equivalents on hand at Apple is $137 billion (about $146 per share). Last year profits were $42 billion.
  • PE of Apple is at a 5 year low, of about 10 times, see Fig 2.
Apple PE, JainMatrix Investments

Fig 2: Apple PE, JainMatrix Investments (click to expand)

So, what’s gone wrong?

  • Apple it seemed did not know what to do with its massive profits. And profits, unless shared with shareholders, or used in good capital investments, earn very little in a bank account.
  • Things are now changing a bit …. Shareholders started receiving a quarterly dividend of $2.65 a share from July 1, 2012. Share buybacks  began in the fiscal year starting Sept. 30 2012 and happen over three years. So now, Apple plans to return $45 billion to its shareholders through dividends and stock repurchases over the next three years.

And what’s the outlook for Apple at this point?

  • Excited by consumer euphoria, massive profits and a seemingly unstoppable share price rise, the investor is now rattled by the big fall and uncertainty.
  • Looks like the recent announcements have not sunk into the investor psyche yet.
  • At a PE of 10 times, the valuation is at a 5 year low. With revenues and profits growing by 54% and 72% a year, the outlook is rosy. The forward dividend yield is 2.3%.
  • With these new announcements, and the Apple management working in the right direction, Apple today is a buy.

 JainMatrix Knowledge Base:

See other useful reports

Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it, if he can (Apple isn’t listed in India) .

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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/

IT sector stocks – The Elephant can Dance V2

1 Comment

Date: 24th May 2012

This update of the April 19 article by JainMatrix Investments includes FY12 results of all three firms.

A comparison of top Indian IT stocks, Infosys, TCS and Wipro throws up some interesting insights. Infosys, the long time leader and IT bellwether, is losing its pace of growth. It is still ahead in terms of Valuations and Margins. However, TCS has handled the difficult business environment the better, and has accelerated EPS in the last 3 years.  The Elephant can Dance – Hail the new leader – TCS

Query

One of the Subscribers on JainMatrix Investments raised a query – here it is:

Hi Punit, I have a question about the IT sector stocks. I own Infy, TCS and Wipro. How can I evaluate which one is better? From the share price trend over few years, TCS has performed the best. What are the other parameters to check and which is best according to you? I would ideally want to sell two of them and have only one, so not sure which is the best. Regards, S.

I would like to dedicate this post to answering this question.

Introduction

Of these three, Infosys is of course the bellwether – the traditional indicator of the health of the sector. TCS in the 8 years since the Aug 2004 IPO has shown healthy growth, and finally Wipro, the soaps to software conglomerate is also a top player. Today’s Market Prices of these are: Infosys 2380, TCS 1221 and Wipro 392

1.     Five year snapshot of key financials

Let us first look at a 5-year snapshot of financials of the three. This can give us good visual feel of the relative and absolute financials of the three.

Infosys: 

Infosys Financials - JainMatrix Investments

Infosys Financials – JainMatrix Investments – Click to enlarge

TCS:

TCS Financials - JainMatrix Investments

TCS Financials – JainMatrix Investments

Wipro:

Wipro Financials - JainMatrix Investments

Wipro Financials – JainMatrix Investments

2.    Detailed Comparison

Next we will look at a detailed comparison of the firms in terms of valuation, growth characteristics, debt, shareholding pattern, etc.

See LINK (thanks to Edelweiss Financials for the excellent data). We can see from this analysis that on 5 important parameters:

  • Valuation – Wipro is now the cheapest, TCS most expensive
  • Growth – TCS is better of our three
  • Management effectiveness – TCS clearly leads
  • Solvency and Margins – Infosys clearly leads
  • Market performance – TCS clearly leads of our three

A copy of this data is available below – dated 24th May ’12.

IT Sector Performance Snapshot - JainMatrix Investments

IT Sector Performance Snapshot – JainMatrix Investments

3.     Key Trends in Price and Earnings 

Finally, let us look at a 5-year snapshot of Price, P/E and EPS of the three stocks, from my charts.

The Infy Price and PE Chart indicates that the PE has averaged 21 in the last 5 years. After the recent results, it has fallen sharply. Currently it is at a discount to this average.

Infosys:

Infosys Price and PE Chart - JainMatrix Investments

Infosys Price and PE Chart – JainMatrix Investments

Infosys Price and EPS - JainMatrix Investments

Infosys Price and EPS – JainMatrix Investments

TCS:

TCS Price and PE - JainMatrix Investments

TCS Price and PE – JainMatrix Investments

TCS Price and EPS - JainMatrix Investments

TCS Price and EPS – JainMatrix Investments

Wipro:

Wipro Price and PE Chart - JainMatrix Investments

Wipro Price and PE Chart – JainMatrix Investments

Wipro Price and EPS Chart - JainMatrix Investments

Wipro Price and EPS Chart – JainMatrix Investments

The Decision Table:

Finally, the decision is made by comparing the 5-year CAGR growth on key parameters:

IT Sector Decision Table - JainMatrix Investments

IT Sector Decision Table – JainMatrix Investments

Notes: PE is as on 24th May

Conclusions:

1.      The Elephant can Dance – Hail the new leader – TCS

  • The largest player, TCS, leads on Growth, Management Effectiveness and Market Performance. In the Decision Table, it leads on EPS, Revenues, EBITDA and PAT. Market Price and Valuations reflect this leadership.
  • Valuations wise TCS is more expensive than Infosys, but note that the consistent leader will always command premium valuations, as Infosys had till 3 years ago.
  • The past 3 years have not been the best of times for the IT industry, but the performance from TCS should get better as the developed economies recover
  • Clarity in leadership plan and strong leaders helps in many softer aspects such as Acquisitions, new business lines and corporate aggression. TCS also scores here.

2.      Infosys remains a defensive play

  • Infosys leads on parameters like Valuations and Solvency & Margins. In the Decision Table on Valuations, it is the cheapest of the three.
  • Perhaps the superior margins that Infosys commands has clashed with poor market conditions in the developed economies.
  • It does not help that there seems to be a lack of top-notch leaders in the firm. This is a legacy issue, with the old promoters team calling the shots, rather than proven professionals.
  • Infosys does not have a good record in acquisitions.

3.      Wipro is recovering from a couple of top management changes

Wipro has not yet shown clear directions and results. It is neither a growth not a margins leader. This may change soon, but until then, it will be rated third of these three.

Dear S,

Based on the analysis done, I would put my money on TCS.

My recommendation is to transition smoothly, so try to switch from others to TCS over a period of 3-6 months, selling others monthly and simultaneously buying TCS.

Warm regards and profitable investing,

Punit Jain

JainMatrix Knowledge Base:

See other useful reports in related sectors

eClerx Services, A Profitable Process – Click LINK

………………………………………………………………………………………………………..

Disclosure and Notes: 1) It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it. 2) The above financial investigation is not comprehensive, but a short and sufficient study.

Do you find this site useful?

Visit the SUBSCRIBE  page to find how you can get more. Click LINK

Add your comments/ queries below

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/

Hindustan Unilever – Too much euphoria?

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Date: May 22, ’12                  CMP: 424      Mkt Cap 91,900 cr.      PE 33.4

HUL is the bellwether in fast moving consumer goods (FMCG), and its performance indictes the directions for the industry. The current market cap of 91,900 crore ranks it #13 in India.

HUL declared FY12 revenues of 23,247 crores in May, a 21% rise in net profits for the March quarter YoY and strong momentum in sales. Nitin Paranjpe, widely perceived as a strong leader, has been reappointed MD & CEO for another five years.

Lets do a quick analysis of this stock to see where its heading.

Pricing Snapshot

A 5-year view of the share price of HUL shows us:

HUL Price History, JainMatrix Investments

HUL Price History, JainMatrix Investments – Click to enlarge

  • Share price has risen 16% CAGR over the last 5 years.
  • The all time high of 439 occurred recently in May 2012. Today it is within 4% of this peak.

Financial Snapshot

  • Revenues, EBITDA and PAT have gained by 10.2%, 22% and 8% CAGR over 5 years.
  • P/E has moved in a range of 17-33 times. Currently P/E is near its peak.
  • Operating margins are excellent at 27%. Profit margins are flat at 12%.
  • Dividend has increased to 750%, or Rs 7.5, giving a dividend yield of 1.77%.
  • PEG is at 4.18 – indicates overvalued status.
HUL Financials - JainMatrix Investments

HUL Financials – JainMatrix Investments – Click to enlarge

Conclusion

  • HUL share has shot up from 240 to current 424 levels in the last 2 years. Reasons for this:
    • HUL has rebounded from poor results in FY10.
    • After posting good results for FY12, HUL has appreciated a lot this month.
    • HUL is considered a defensive stock, and is popular in the current bearish markets.
  • Today it is at its upper end of the valuation range. However the profit growth rates cannot support this valuation for long.
  • The fundamentals indicate that HUL is today an overpriced stock. Investors need to exit at these levels.

JainMatrix Knowledge Base:

See other useful reports

Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it.

Do you find this site useful? You can:

  1. Check back on this website www.jainmatrix.com for updates.
  2. Subscribe to be the first to receive new posts. Enter your email on the ‘Subscribe’ box at the top right of this page
  3. Or Click on this Signup Form CLICK
  4. Socialize with us – Like on Facebook or Follow on Twitter
  5. Be sure to add punit.jain@jainmatrix.com to your address book or safe sender list so our emails get to your inbox.
  6. Add your comments/ queries below

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/

IT sector stocks – The Elephant can Dance

2 Comments

Viewers may prefer to see the latest May 2012 version of this report at LINK

Date: 19th April 2012

One of the Subscribers on JainMatrix Investments raised a query – here it is:

Hi Punit, I have a question about the IT sector stocks. I own Infy, TCS and Wipro. How can I evaluate which one is better? From the share price trend over few years, TCS has performed the best. What are the other parameters to check and which is best according to you? I would ideally want to sell two of them and have only one, so not sure which is the best. Regards, S.

I would like to dedicate this post to answering this question.

Introduction

Of these three, Infosys is of course the bellwether – the traditional indicator of the health of the sector. TCS in the 8 years since the Aug 2004 IPO has shown healthy growth, and finally Wipro, the soaps to software conglomerate is also a top player. Today’s Market Prices of these are: Infosys 2380, TCS 1091 and Wipro 421

1.     5-year snapshot of key financials

Let us first look at a 5-year snapshot of financials of the three. This can give us good visual feel of the relative and absolute financials of the three. (Note that as of today we do not have Q4 FY12 data for TCS and Wipro, so I have only included the data till Q3 FY12 for all shares, for the comparison)

Infosys: 

Infosys Financials, JainMatrix Investments

Fig1 – Infosys Financials, Click on image to enlarge

TCS:

TCS Financials, JainMatrix Investments

Fig 2 – TCS Financials, Click on image to enlarge

Wipro:

Wipro Financials, JainMatrix Investments

Fig 3 – Wipro Financials, Click on image to enlarge

2. Detailed Comparison

Next we will look at a detailed comparison of the firms in terms of valuation, growth characteristics, debt, shareholding pattern, etc.

See LINK (thanks to Edelweiss Financials for the excellent data). We can see from this analysis that on 5 important parameters:

  • Valuation – Infosys clearly leads
  • Growth – TCS is better of our three
  • Management effectiveness – TCS clearly leads
  • Solvency and Margins – Infosys clearly leads
  • Market performance – TCS clearly leads of our three

A copy of this data is available below – dated 20 April ’12.

Performance snapshot, JainMatrix Investments

Fig 4 – Performance snapshot, (Edelweiss), Click on image to enlarge

3.     Key Trends in Price, P/E and EPS

Finally, let us look at a 5-year snapshot of Price, P/E and EPS of the 3 stocks, in my charts.  (As of today, we do not have the Q4 FY12 data for TCS and Wipro, so I have projected approximately the EPS for Q4 ’12. This data may change in a few weeks).

Infosys:

Infosys Price and PE, JainMatrix Investments

Fig 5 – Infosys Price and PE, JainMatrix Investments

Infosys Price and EPS, JainMatrix Investments

Fig 6 – Infosys Price and EPS, Click on image to enlarge

TCS:

TCS Price and PE, JainMatrix Investments

Fig 7 – TCS Price and PE

TCS Price and EPS, JainMatrix Investments

Fig 8 – TCS Price and EPS

Wipro:

Wipro Price and PE, JainMatrix Investments

Fig 9 – Wipro Price and PE

Wipro Price and EPS, JainMatrix Investments

Fig 10 – Wipro Price and EPS

The Decision Table:

Finally, the decision is made by comparing the 5-year CAGR growth on key parameters:

IT Sector Decision Table, JainMatrix Investments

Fig 11 – IT Sector Decision Table, JainMatrix Investments

Notes: PE is as on 17th April

Conclusions:

1.      The Elephant can Dance – Hail the new leader – TCS

  • The largest player, TCS, leads on Growth, Management Effectiveness and Market Performance. In the Decision Table, it leads on EPS, Revenues, EBITDA and PAT. Market Price and Valuations reflect this leadership.
  • Valuations wise TCS is more expensive than Infosys, but note that the consistent leader will always command premium valuations, as Infosys had till 3 years ago.
  • The past 3 years have not been the best of times for the IT industry, but the performance from TCS should get better as the developed economies recover
  • Clarity in leadership and strong leaders helps in many softer aspects such as Acquisitions, new business lines and corporate aggression. TCS also scores here.

2.      Infosys remains a defensive play

  • Infosys leads on parameters like Valuations and Solvency & Margins. In the Decision Table on Valuations, it is cheaper than TCS.
  • Perhaps the superior margins that Infosys commands has clashed with poor market conditions in the developed economies.
  • It does not help that there seems to be a lack of top-notch leaders in the firm. This is a legacy issue, with the old promoters team calling the shots, rather than proven professionals.
  • Infosys does not have a good record in acquisitions.

3.      Wipro is recovering from a couple of top management changes

Wipro has not yet shown clear directions and results. It is neither a growth not a margins leader. This may change soon, but until then, it will be rated third of these three.

Dear S,

Based on the analysis done, I would put my money on TCS.

My recommendation is to transition smoothly, so try to switch from others to TCS over a period of 3-6 months, selling others monthly and simultaneously buying TCS.

Warm regards and profitable investing,

Punit Jain

………………………………………………………………………………………………………..

Disclosure and Notes: 1) It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it. 2) The above financial investigation is not comprehensive, but a short and sufficient study.

Do you find this site useful? You can:

  1. Check back on this website www.jainmatrix.com for updates.
  2. Subscribe to be the first to receive new posts. Enter your email on the ‘Subscribe’ box at the top right of this page
  3. Or Click on this Signup Form CLICK
  4. Socialize with us – Like on Facebook or Follow on Twitter
  5. Be sure to add punit.jain@jainmatrix.com to your address book or safe sender list so our emails get to your inbox.
  6. Add your comments/ queries below

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/

KEC International is a Modern Powerhouse

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  • Date: February 16, 2012
  • CMP: Rs 60.6
  • Advice:  Firm is valued at Rs 82; available today at 37% discount
  • Target:   March 2014 target of 245

KEC International is the second largest transmission tower manufacturer in the world. It delivers such projects in 45 countries. Synergistic diversifications into Power Systems, Telecom, Water and Railways have de-risked the business. The SAE Towers acquisition (USA) in 2010 was also successful. The Order Book is at 2.2 times FY11 sales. In the last 6 years, Price has barely increased by 1% while the EPS growth is 30% CAGR. The steep price fall of 2011 is done with, and the recovery has started. The KEC share is available at a 37% discount to valuations. Invest for long term in this ‘modern powerhouse’.

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KEC International – Description and Profile

  • KEC International is an Engineering Procurement and Construction (EPC) company focused on Power Transmission. It is the largest transmission tower manufacturing company in the world.
  • It is the 3,900 crores (FY11) flagship company of the RPG group. Current Market Cap is 1609 crores.
  • In addition to Power transmission, it has diversified into related areas like Power Systems, Cables, and new verticals like Railways, Telecom and Water. 90% of customers are Government firms.
  • Beyond India, it has supplied power infrastructure to 45 countries globally. In addition, in Sept ‘10, KEC took over SAE Towers, a US based lattice transmission towers manufacturer, for $95m giving it a strong North & Latin American footprint. The acquisition / integration has been successful.
  • Manufacturing plants are in India – Nagpur (Mah.), Jabalpur (MP) and Jaipur (Rajasthan); Americas – Monterrey (Mexico), Belo Horizonte (Brazil). Total tower manufacturing capacity is 251,000 MTs.
  • The shareholding pattern, indicates wide ownership with Indian Institutions (good) and medium Promoter ownership (fair)
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Fig 1 – Shareholding Pattern of KEC – Click to expand

  • Employees number over 4200; Order Book is Rs.9,200 cr, giving about 2.2 years of visibility (@FY11).

Business Model and Strategy:

  • The core capability of KEC is its ability to deliver power transmission lines to Utilities, from design, to materials procurement, to execution, involving Project Management, Design & Engineering skills.
  • In a form of evolution and growth in related areas, KEC has expanded by:
  1. Backward integrated into Cables – manufacture and implementing cabling solution
  2. Forward integration – into Power Systems, designing and constructing substations (range of 220 to 1150 kV substations) and Electrical Balance of Plant (E- BOP) delivery services.
  • Looking beyond the Power industry, KEC has been able to reposition its EPC and manufacturing for:
  1. Telecom industry – telecom towers, cabling, installation and commissioning
  2. Railways EPC work (an acquisition, Jay Railway Signaling undertakes the railway infra projects)
  • Civil infrastructure – bridges, tunnels, workshop modernization, building of stations
  • Tracks related – new track laying/ improve old tracks, electrification /power systems.
  • Signaling and telecommunication network.

3. Water – this includes Irrigation and Hydroelectric construction, Embankment and Flood Control, Sewage and industrial effluent treatment and Potable water treatment and distribution

  • KEC is successfully diversifying its business, thus de-risking the overall business portfolio. See Fig 2.
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Fig 2 – Order Book Breakup of KEC – Click to expand

Industry Note:

  • Classification: Power Industry is broadly classified into Generation, Transmission and Distribution.
  • The Indian power sector faces huge demand growth. But the government’s power capacity Plan v Achievement has been as low as 51.5% in the 10th Plan. (We are in 11th Plan now). The shortfall of peak power has been 8-12% in the last decade. Over 40% of Indian population still doesn’t have access to electricity. Many have access to poor quality power.
  • The Public sector dominates the industry, owning 70-80% of current assets. However the government is opening up to the Private sector. In future, 50% of investments are expected to be from the Private sector.
  • Power Generation has grabbed a lot of interest, but focus in India is now shifting to Transmission, as in 2-3 projects, even after generation and fuel linkages were in place, the Power Evacuation facilities were not ready and all stakeholders are suffering due to the delay.
  • Key players in the Power Transmission EPC are Areva T&D, Kalpatru Power, Jyoti Structures, Alstom Projects, etc. It’s a crowded market, and competition includes infra diversifieds like L&T, GMR and Reliance. A quick analysis shows among the listed focused firms, KEC has a 10-15% mkt share.
  • The Transmission industry bidding norms have changed recently to ‘Tarriff Based Competitive bidding’, where the Service Providers like KEC are responsible for Build, Own, Operate and Transfer of power lines. TSPs earn in the form of Transmission Charges payable by long-term customers.
  • Also see reports on other related firms – BGR Energy Systems; Bottom Fishing and Winds of Change

Unique strengths of KEC

  • Diversification of KEC beyond the Transmission EPC sector is good, as diverse businesses follow different cyclical patterns. Businesses set up in the last 3 years account for 30% of Orders Booked.
  • KEC has good presence beyond India, with 55% of current Orders Booked from other regions. In the present power cyclical down phase in India, KEC is focusing on business in other geographies.
  • As the flagship RPG Group firm, KEC enjoys good management focus for its initiatives. Established in 1945 as Kamani Engineering Company, the firm has a rich past, and has again reinvented itself into a modern powerhouse. Ramesh Chandak, the MD & CEO is a CA and has lead KEC for the last 10 years.
  • Following the ‘10 SAE towers deal, KEC is now looking at additional acquisitions to accelerate growth

Stock valuation, performance and returns

  • KEC has shown a fine growth pattern (Fig 3) with Sales growing 18% CAGR over the last 6 years.
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Fig 3 – Quarterly Sales and Profits at KEC

  • Net profit has grown very well at 24% CAGR.
  • Share price however has been volatile, moving to an all time high (in 2008) and low (in 2009).
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Fig 4 – Price and dividends at KEC

  • EPS has been growing rapidly at 30% CAGR. Cash Flow however has been uneven.
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Fig 5 – KEC – EPS and Cash Flow

  • Current PE at 9.3 is lower than current Industry average of 17.
  • The Price and PE chart – Fig 6 – indicates that current valuations are in the bottom quarter of 6-year historical charts. Definitely indicates undervalued status. This is in spite of the 90% surge from 20th Dec ’11 low of 32.
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Fig 6 – Price and PE Chart of KEC

  • Price and EPS graph, Fig 7, shows that EPS accelerated till ‘08, then has been in the 5.5 – 7 range for next 3 years. The EPS should see an upside breakout from this range in the next few quarters. My expectation is that EPS will grow in the sector drawn in this chart.
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Fig 7 – Price and EPS Chart

  • Debt equity at 1.51 (FY11) is very comfortable for an infrastructure firm.
  • Orders Booked to Billings, Fig 8, shows an improvement over the last two years.
Orders Booked to Billings Ratio for KEC International, JainMatrix Investments

Fig 8 – Orders Booked to Billings Ratio for KEC

  • Return on Capital Employed, ROCE, has been in a 22-40% range for the last 6 years.
  • Return On Net Worth, RoNW, also has been at 17-38% range. These are good numbers.
  • Operating margins have been hovering around 10% for last 3-4 years. This year’s high competition and entry into new sectors pushed it to around 8%. We expect this to revert to 10+ levels from FY13.
  • Cash and Cash equivalents are at 800 crores. Plus with a low DE ratio, KEC has access to a healthy war chest of internal cash plus debt with which they can look at new acquisitions.
  • PEG is at 0.4 – indicates safety and undervalued status

Financial Projections, with FY14 estimates

The consolidated financials and PE of KEC have been projected for the next 3 years.

Key Financials and Projections (Source: JainMatrix Investments)

Fig 9 – Key Financials and Projections (Source: JainMatrix Investments)

Risks:

  • Domestic interest rates unpredictability. This will affect the growth projections.
  • Hyper competition. Orders booked in the last 12-18 months in India have been at lower margins due to high competition. The projections assume an easing up of this in India.
  • Indian Power sector challenges. The key current issues are (1) financial stress among Utilities, particularly State Electricity Boards that are facing Tariff inflexibility and Collection issues, (2) Power Plants facing issues with fuel linkages and a shortage of Coal & Natural Gas, and (3) project execution delays due to government clearances like environmental, land acquisition, etc. This has affected the investment climate in this sector. The projects under execution by KEC are also affected, and execution/commissioning may be delayed.
  • Business uncertainty in MENA region – already a part of the order book is affected due to unrest.
  • Unpredictable events like a European sovereign default, some new media issue/ bad publicity or any governmental charge sheet, etc. can occur that can mar equity performance for short periods.
  • Past performance is no indication of future results

Opinion, Outlook and Recommendation

  • India has a surging growth in electricity demand, yet there is a 9-13% power deficit today. This will widen in the next few years.
  • Globally the thumb rule is that every rupee invested in generation must match an equal investment in T&D; however, in India it has been 1:0.5. There is now a huge opportunity for T&D players.
  • As a leading transmission EPC Company, KEC’s fortunes are linked to the regulatory environment and overall industrial climate of the Indian power sector. In a stable / improving environment, KEC should perform excellently based on the current manufacturing and execution capacities.
  • In 6 years, share price (adjusted) has increased by 1% while the EPS growth is 30% (CAGR). Other metrics like Sales, Orders Booked, Debt, etc too are favorable. The share is definitely under-priced.
  • Current price is low due to poor sentiment/ pessimism in the Indian markets around the Power sector. However KEC is well diversified across geographies as well as business segments.
  • From the steep fall of 2011, the share has bottomed out and risen rapidly of late, and is now at the key 200 DMA levels. Price should rise above this key level, and stay above for a fair period of time.
  • Near term positives include the weakening of the INR against the USD that should boost KEC revenues and profitability. It is an exporter of services, but most of its costs are in INR.
  • In FY12 end, and next few quarters, a lot of pending Power transmission projects are to be bid out, and KEC will win a fair share of new business.
  • The JainMatrix Investments valuation study prices the company at Rs 82, and so the share is today available at a 37% discount to this valuation 
  • March 2014 target of 245, giving a 300% appreciation.


For a pdf copy of this report, mail punit.jain@jainmatrix.com

…………………….

Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it.

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India’s Investment Rockstars

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Poll Results on 22nd March

Thank you readers for your enthusiastic participation in this Poll.

The Winner of the Poll on India’s Investment Rockstars is – Madhusudan Kela.

Here is a graphic of the candidates – with one additional name from Reader suggestions.

Investment Rockstars Poll - JainMatrix Investments

India’s Investment Rockstars – Poll Results (Click to enlarge image)

Poll Article on March 7

I recently saw the Hindi movie, Rockstar. Its an interesting story of an unknown, young but talented singer. He dreams big, wants to become like the famous singing heros of the past. He does eventually :-), but the journey is interesting, including pain, penury and a rocky love life along the way.

A singing Rockstar is a somewhat new concept in India. Maybe A R Rehman and Remo Fernandes are two who are almost there. In the US there is a developed musical touring culture, and many budding artistes develop into very successful Rockstars.

What does this have to do with Investing, you may ask. Give me a few more minutes…..

What does a Rockstar do for listeners? He performs on stage, providing spectators an emotional connect and excitement. This effect even lasts after the live performance, on replaying the music.

Actor Rockstars: In India we do have a few Actor Rockstars, with Shah Rukh Khan, Hrithik Roshan, Aamir Khan and Katrina Kaif coming to mind.

They play roles on screen that entertain and amuse; they dance, sing and depict characters and actions that we like. If the movie has a strong message, then it can even inspire us, like Gandhi or maybe even a Rang De Basanti.

Do we have any Investment Rockstars in India?

Who is an Investment Rockstar? I would say he is one who is very good at investment, and has made many successful decisions. He should be a visible, high profile, believable expert. Importantly, he has to have shared his investment decisions with the public, so they have gained from his expertise. His advice should help viewers make decisions that guide them in their lifelong wealth building process.

Poll on Investment Rockstars

Please take part in this Poll on who would you rate as Investment Rockstars in India. This list can include foreigners, if they have invested / commented on Indian firms. You can choose upto 10 from this list, and also add some names. In alphabetical order here are 12 candidates (apologies for missing anyone :-)).

This Poll is open till 15/03. Please fill this only once. Check back on this website www.jainmatrix.com for results.

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  3. Socialize with us – Like on Facebook or Follow on Twitter
  4. Be sure to add punit.jain@jainmatrix.com to your address book or safe sender list so our emails get to your inbox.
  5. Add your comments/ queries below

Disclaimer:

These reports and documents have been prepared by JainMatrix Investments. 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/