Expectations and Thoughts on a New India – Post Elections Note

Date: 1st June 2019

Recent Events – Elections

  • Last week we had an election result day and the 2019 central election came to a dramatic end. We welcome the second term of BJP and the National Democratic Alliance at the center.
  • The 6 week long 7 phase election was an emotional, high decibel multimedia war among the parties and participants. I am so glad we fight this way. People argue, they criticize, they pull up history, they express themselves, and they get angry. They decide whom to vote for. Then they stand peacefully in a line to vote, and accept the outcome.
  • This is far better than a civil war or an agitation or a set of bandhs and protests. Thank you India. :-)

THE Economic Environment

  • Growth is slowing in the Indian economy to 7% and below. This is weak as we have a low per capita GDP. To absorb the population growth in jobs, we have to target 8% plus growth.
  • The slowdown is a culmination of multiple events – high interest rates relative to inflation; weakness in sectors like real estate, automobiles, consumption and low rural demand. BFSI sector has issues like a liquidity challenge affecting NBFCs, NPA issues in PSBs and the IL&FS crisis. Exports have slowed down as global demand is down due to weak growth and a tariff war between USA and China. The private sector is not investing.
  • Even though the above laundry list of issues is depressing, the economy also has a number of positives. Our IT and ITES sector continues to bloom. Sectors like pharma, automobiles, telecom and retail have achieved impressive scale. The large corporates have in general improved balance sheets and are low on debt. Private sector does have investment firepower in place if they see good opportunities. We are past several difficult structural reforms like GST, RERA, demonetization, shell company crackdown and Bank NPAs, and with this election result market uncertainties are much lower. We have rich human resources and need to tap this well.
  • Corporate India has to grip the large opportunities up for grabs – housing, infrastructure push from govt. including roads, railway, airlines and airports, gas distribution and water supply, mobile and telecom based opportunities, consumption by a large population, eCommerce, digital and Aadhar validation based business models.

A Wish List for Modi 2.0

As an investor, I have many hopes and expectations from this new government. Extending from governance to education to the corporate sector, this is my list:

  • How can justice be delivered faster? The numbers of pending cases in lower courts to SC are scary. The main issues are – slow resolution, and cases in lower court routinely reopened in higher courts. Our suggestion is to – have no vacancies for judges, courts open all year long, push for mediated solution rather than court battle, time bound cases (no tareek pe tareek) and low acceptance in higher courts. Digital solutions can speed access and enable common judgements for similar cases. The NCLT driven IBC code has also proven its usefulness. However this needs to be tightened based on the experience so far, to be faster and with higher success rates.
  • Do we have the right education systems today? The problems extend from low penetration and presence of schools, high dropout rates, poor learning and skill building outcomes, overlaps between state and central boards, many languages and high study load for students. Our suggestions are – more and better govt. schools, coordination between central and state boards on content and timetables, free and compulsory (penalty parents punishable) govt. education till 10th, digital tracking of schools, teachers and students, better curriculum of less rote and more experiential, discovery and project based learning, emphasis on sports with good facilities, and zero homework. Competition is always good, so all education should be freed from govt. license shackles. The best universities will naturally thrive.
  • Is the right way Garibi Hatao or Amiri Badhao? Both are important. On the former side, the excellent work on toilets, housing for all, LPG, ration card based subsidies, farmer schemes, cooperatives, good supply chain to agriculture needs to continue. Electricity for all, better quality electricity, lower leakages, pension for 60+ age, unemployment measurement and schemes (MGNREGA) needs to be bolstered. All subsidies and subsidized product distribution needs to go through Aadhar verification to plug leakages. On the latter side, corporates need to be encouraged as they generate employment, good salaries and taxable profits. Real Estate and Textiles need revival. Exports and a good startup environment is important.
  • Need for Infrastructure: This is obvious, and a crying need. While some progress has been made on Roads and Electricity, much more needs to be done here; and in Railways, Airways, Ports, Water supply, Healthcare and Education, Municipal reforms and Town planning, local transportation and Police reforms.
    1. Suggestions – funding is as important here as detailed planning. Pension and Insurance funds should be allowed and enabled to invest in Infra.
    2. Projects have to be reasonably profitable for private sector operators, with lower risks and permit challenges.
    3. Development of 1-2 new metros in every state. The current 6-7 metros are overcrowded and infra is stretched. The next 20-30 cities need to develop systematically to take pressure off these metros. The Smart Cities Mission needs to be accelerated.
  • Public Sector Enterprises: The Govt. should not be in any operational firm that has no national Interests. Firms like SAIL, NTPC, HPCL, BPCL, many parts of Indian Railways, BSNL, MTNL, Coal India, etc. should be freed from the chains of PSU restrictions, allowed to operate freely and generate reasonable returns. The PSUs and govt. ministries have assets worth lakhs of crores that are generating low single digit returns. GoI should monetize firms, assets and lands and sell to investors – foreign, Indian or even their own employees, through IPOs, auctions and management takeovers. And fund Infrastructure, Education and social needs.
  • The role of Regulators: The right way to encourage growth in a sector is to have a Regulatory authority that ensures a level playing field and meet national and business objectives to develop the sector. It has to include a think tank and sector experts. Regulators for every sector should be much more dynamic, open to discussion and forward looking, with minimum regulatory and legal overlaps. They must enable minimum ROI for new sector entrants. The success of SEBI, IRDAI, TRAI, etc. has to be extended to Hospitals, Education, Pharma, automobiles, chemicals, etc. to roll out required standards & compliance, and encourage growth and penetration.
  • Taxes, Interest Rates and more on Corporate Sector: The laundry list of urgent needs is
    1. Corporate taxes need to be lowered. This was a Modi 1.0 promise – lower taxes and fewer tax concessions.
    2. The current interest rates in India are very high in the global context, as well as given the low domestic inflation. Rates need to lowered – through RBI intervention and easing up of foreign borrowing.
    3. Simplification of GST to 2-3 levels. Inclusion of liquor, petro products and cigarettes
    4. SEZ model revival and encouragement of exports
    5. Labor reforms. Firms should be able to hire (and fire) more easily and with lower overheads.
    6. We need to officially and robustly measure & track Unemployment. This is a key economic measure.
    7. Auditors have an important role in prevention of financial crimes. Perhaps a regulator is needed for Statutory Auditors to keep up standards and prevent problems early.
  • Do we need to export more or import less? Both. Many high tech products like auto steels, specialty chemicals, commodities, oil, gold, machinery, chocolates and consumer products are imported for factories and consumers here. Local manufacturing needs to step up to fill these needs. Also exports is still not happening on a good scale. We are running a trade deficit. This has to be filled up by IT & ITES, pharma, automobiles, engineered products, steel, aluminum, petro products, gem & jewellery, tourism, airport /aviation and seaports /shipping.
  • Environmental protection: As the globe gets hotter, the oceans dirtier and forests thinner, it’s sad to see USA dropping environmental concerns and reneging on commitments. In the war on air, water and plastic pollution, India has a secret weapon – low cost of operations. It’s possible to recycle old ships (Alang), electronics /ewaste, newspaper and most dry waste, and generate a wage for workers and a profit for the business. However we need to protect our borders from waste dumping. And the Ministry of Environment, Forest and Climate Change needs to proactively reach out to industry, municipal corporations and volunteers to enable and scale these activities.
  • Thoughts on Ministerial Changes:
    1. In Singapore, the minister appointed for an Industry is often a very respected senior business executive from the sector, who transitions from a CEO role, to developing the sector for the nation. Knowledge of individuals gets institutionalized. This has allowed Singapore to progress very fast, it is now a Developed economy. India must adopt this model as in many ministries leadership requires a lot of industry knowledge.
    2. In India, we saw the Railways and Coal ministries work together innovatively due to a common Minister. Such strong coordination is needed to solve challenges such as Kashmir (Home and Defense), Transportation (Ports, Road, Rail, Air) and Energy (Electricity, Petroleum, Solar, Wind, Coal, Hydro,) etc.

Conclusion

  • Execution, administrative reform and good governance have been key observations in Modi 1.0. National pride, Industrial progress and social capital are coming together well.
  • We need to do even better in this new regime to take Indian GDP to 8-10% growth range and lift standards of 130 crore / 1.3 billion Indians.
  • Also see A Vision for the Indian Economy‘ 

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

The Roads Sector – Is it a Revival?

Thought for the Day:

Roads a very important sector for modern India. But India’s road sector had been stagnating since 2012, hit by both an economic slowdown and private sector disinterest. The famed PPP model had yielded poor results. A number of projects were delayed or in financial distress.

Cut to 2015, and the story may have changed. Of about 77 road projects that were languishing with the roads ministry, 34 have been shut down and rebid; 18 have been revived using govt. money, and the remaining 25 are under revival discussions. A number of decisions were taken:

  1. The govt. will award 10,000 kms of roads for construction this year by Mar 2016. That’s a far cry from 2013 when the central government could only award 1,300 kms.
  2. The govt. has also gone back to the basics and instead of a complex Public Private Partner-ship (PPP) model, has reverted to the simpler EPC model. Here the construction of the road is executed by the private firm, but funded by the govt.
  3. The govt is infusing Rs 4,000 crore to complete projects stalled due to lack of funds. In Feb this year, the govt. had decided to invest Rs 80,000 cr. in the road sector in the annual budget.
  4. The govt. will allow private developers to exit projects two years after tolling starts. After exiting, they can also apply for 80 public private partnership (PPP) projects.
Roads (JainMatrix Investments)

Roads (JainMatrix Investments)

These decisions are expected to rapidly stimulate this sector. Road transport and highways minister Nitin Gadkari is upbeat about the “transformation” of India’s road network. The NHAI too is undergoing reforms, for faster approvals and project revivals.

Watch out for shares of infrastructure companies into the roads and construction space like KNR Constructions, RPP Infra, Sadbhav Engineering, IRB Infrastructure, Ashoka Buildcon, Jaypee Infra, IL&FS Transportation, GMR Infra, Lanco Infra, IVRCL, Ashoka Buildcon, etc. which are likely to benefit due to these new initiatives.

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Navkar Corp IPO – Location Challenges – Avoid

  • Date Aug 25th, 2015
  • IPO Period:  24-26 Aug 2015
  • Industry – Logistics
  • Mid Cap share – 2210 cr market capitalization
  • Advice: Avoid

Summary

Navkar Corporation is logistics firm that provides container handling and storage services. It is established in the JNPT port region and has expansion plans locally and in Vapi Gujarat. The Income, EBITDA and Profits have grown at 7.2%, 10.2% and 15.9% CAGR over last 3 years. While current operations and margins are excellent, we are concerned about slow JNPT port traffic growth. Gujarat operations are also at least 2 years away from profitability. Free Cash flows are negative, and logistics businesses require large and early investments. Based on this, we advise investors to avoid the NKC IPO.

IPO highlights

  • IPO Share Price range: Rs. 147-155 and Period: 24-26 Aug 2015
  • Number of Shares: 3.9-4.1 cr. shares of face value 10, which are 28.3% of equity post issue.
  • Retail quota is 35%, qualified institutions get 50% and 15% is for HNI. See Fig 1a for pattern.
  • The IPO will raise Rs. 600 cr. to be used for:
    • Capacity enhancement of the Somathane CFS at a cost of 114 crores.
    • Development of the non-notified areas of their CFSs at a cost of 54 cr.
    • Establishment of a logistics park at Valsad (near Vapi) at a cost of 314 cr.
    • Encashing of stake by a promoter group company Siddhartha Corp of 90 cr.
  • The P/E of NKC is 28.7 – 30.2 times at lower /upper price band, based on the FY15 financials.
  • Post IPO, the market cap of the firm will be 2210 cr. (upper).

Read or Download the IPO Report

JainMatrix Investments_Navkar Corp IPO_Aug2015

Click the above link to open the PDF report.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in Navkar Corporation Ltd or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. JM has been publishing equity research reports since Nov 2012. JM has applied for certification under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

 

L&T: At the Business Crossroads

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  • Date: 22-Jan-13               
  • CMP: 1033 (adjusted for July 2013 bonus)
  • Large Cap – Mkt Cap 96,000 crores
  • Advice: Invest for the long term

JainMatrix Investments presents investors the complete report on Larsen & Toubro Ltd as part of the Investor Rewards Fortnight. 

Summary

L&T is a buy at these levels. The key positives are:

  • Diversified across a business verticals like Construction, Roads, Oil & Gas, Power, Fertilizer, Ship Building, Water, Railways, IT and Finance, & a big international presence.
  • Management has a reputation for excellence and professionalism.
  • Good growth with Revenues, EBITDA and PAT gaining 22%, 31% and 20% CAGR over 5 years.
  • Valuation is below historical averages. The share is 32% below highs from 5 years ago.

The negatives are

  • Expected share performance is dependent on domestic economic and investment recovery.
  • Early signs of stress in the balance sheet due to high debt and cash flow challenges. 

L&T, JainMatrix Investments

Business Snapshot:

  • L&T is a professionally run Indian conglomerate with focus on Engineering & Construction.
  • The consolidated turnover is Rs. 65,000 crores and Profits 4,700 cr (FY12). Institutions like Mutual Funds, Banks, FIIs and Insurance companies hold 53% stake, with no promoter in sight.
  • The business areas are Engineering & Construction Projects, Infrastructure, Manufacturing, IT and Financial Services. The leader is AM Naik who is the Exec. Chairman. It has about 45,000 employees.
  • International business may be contributing over 25% of revenues.

The main revenue segments are:

L&T Segment Revenues FY11, FY12, JainMatrix Investments

Fig 1 – L&T Segment Revenues, JainMatrix Investments 

Pricing Snapshot

The 10-year view of the share price of L&T shows us:

  • The share reached its all time high of 2163 in Nov’07, and even today 5 years later is 32% below this. It also fell to a low of 379 in Mar’09, before recovering. See Fig 2.
  • The share price has appreciated 42% CAGR over 10 years, making it a top wealth generator.
  • The share is a volatile large cap, and Reuters estimates the Beta as 1.48.
Price History, Jainmatrix Investments

Fig 2 – Price History, Jainmatrix Investments 

Financial Snapshot 

L&T Financials, JainMatrix Investments

Fig 3 – L&T Financials, JainMatrix Investments  

  • The Consolidated Revenues, EBITDA and PAT have gained by 22%, 31% and 20% CAGR over 5 years.
  • EBITDA margin is near the peak of 20%, but PAT margin at 7.2% is below the 12.2% peak.
  • P/E has thus moved in a wide range of 15-30 times, and today is at 22 times. Fig 4. At this level, L&T looks cheap and just below historical average PE level of 22.5 times.
  • Dividend has continually increased, and today’s 825% at FV Rs 2 gives a dividend yield of 1.1%.
Price and PE chart, JainMatrix Investments

Fig 4 – Price and PE chart, JainMatrix Investments 

  • Consolidated Total Debt and Cash Flow data are analyzed in Fig 5.
Price and EPS chart, JainMatrix Investments

Fig 5 – Price and EPS chart, JainMatrix Investments 

  • The total debt of L&T has grown faster than Revenues in the last 5 years. While there are a number of new projects, and revenues have grown, but these are soaking up cash, due to Public-Private type projects, or longer payment cycles, or higher working capital requirements.
  • While Free Cash Flow is negative in FY12, when seen in proportion to Revenues, it is not too high. The DE ratio is at 1.74, below the danger level of 2.0 for such companies.
  • The standalone firm has an order book of 1,45,723 cr. in FY12, so L&T has a Booked to Billing ratio of 2.7 times. This is a healthy ratio among EPC firms.

Opportunities and Concerns

Opportunities

  • L&T has a very wide portfolio extending from Building Construction, Roads, Oil and Gas, Power, Infrastructure, Switchgear, Defense, Fertilizer, Ship Building, Water and Railways. In addition it has operations in India and abroad. In India, the growth areas have been Metro construction in cities, the new dedicated Freight corridor, Oil and Gas projects, Roads, Power Gen. and transmission, etc.
  • L&T is able to react to growth opportunities and sectors and focus on these. The FY13 focus has been on international business, which has grown better than domestic. This is in the form of new regional teams. There have also been a number of new technical partnerships.
  • L&T enjoys an excellent reputation as a professional and technically strong team.
  • L&T has also worked on internal improvements like streamlining the structure, Vertical focus, spin-off of noncore businesses and investment into growth areas. These are bearing fruit.
  • L&T sees value in listing arms and selling JV stakes, as part of its strategic plan, called Lakshya. L&T Finance was listed in 2011, and is today a fast growing diversified NBFC with a 15,000 crore mkt cap that is 83% owned by L&T. Another listing prospect is L&T Infotech.

Concerns

  • L&T with its EPC capabilities is a play on the Industrial growth and capacity expansion in India. But the GDP growth has been falling to lows of 6.5% (FY12) and 5.5% (FY13). In terms of infrastructure, there have been problems like high interest rates, govt. clearances, SEB solvency, etc. However, the government is focused on easing the process of infra creation by removing bottlenecks. In terms of GDP, it is expected that the worst is behind us, and there should be a rebound in the future.
  • Interest rates in India are among the highest in the world. While the govt. fights inflation, the rates have affected growth and new projects. But expectations are the rates will reduce in a few quarters.
  • Competition for L&T across businesses is intense, from domestic, MNC firms and Chinese suppliers.  

Opinion, Outlook and Recommendation

  • The Indian economy is today on a recovery path. There is an urgency in the government reforms, a thrust on infrastructure and an attempt to boost Investments, foreign and Indian. Growth imperatives will push down interest rates, and the capex Investment cycle may sputter back to life.
  • Globally, the Middle East retains its attractiveness, the only worry being social and war tensions.
  • Management quality, integrity and stability are big positives. Strategic, structural and financial directions from management have helped L&T ride through the bad phases in the Indian economy. A turn for the positive in the economy will see the L&T share making big gains.
  • L&T stock is a buy today based on a conviction that the firm has the scale, the diversity and the vertical and geographical width to respond fast to growth opportunities.
  • Advice: Invest for the long term.

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Disclaimer and Disclosure:

It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it. Punit Jain has owned (long only) L&T since Dec 2007. This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent Financial Expert/Advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Adani Port – The Great Australian Adventure

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  • Date: 20-Sep-12.        CMP: Rs 115           Large Cap – Market Cap 23,450 crores
  • Firm is valued at Rs 136 (18% over CMP)    
  • Price Target is Rs 215 by Apr 2014, an 84% appreciation.                         
  • Advice:  Medium Risk, High Gain stock. BUY with a 2 yr perspective

Executive Summary

Key Reasons to Invest:

  • Adani Port’s Mundra Port & Indian operations are excellent infra assets with Sales, Profits and EPS up by 36, 42 and 44% CAGR over 5 years.
  • Govt dominated Indian Port sector is overall constrained on capacity, speed and pricing.
  • The large Australian Abbot Point acquisition comes from a conviction that the next phase of Port services growth will come from Australian Coal and Mining exports.

Risks:

  • Additional debt of 9000 cr on the books, Australian currency and interest rates risk
  • Full success of the Australian investment needs many things to fall in place – Coal mining by Adani Enterprises to start by 2014, PPA negotiations in Gujarat and capacity additions at Abbott Port.
  • Environmental and Security clearances by Govt. of India

This report is an update of the May 30th 2012 report called Adani Port: Infra play at good valuations V2 by JainMatrix Investments.  

Adani Port – Description and Profile

  • Adani Port and SEZ – (APSEZ) is Gujarat based with FY12 revenues 3269 cr and PAT 1093 cr (consolidated).
  • APSEZ businesses include Mundra, the largest private port (64 MT in FY12), several Port-operating contracts, an SEZ area adjacent to Mundra port (6,500-hectare) and Abbot Point Port, Australia.
  • Market share in India grew in FY12 to 11% from 10% in one year. It is #2 among all Indian ports, and #1 in terms of private ports in India. Promoted by Adani Group, APSEZ trades in a broad range of products, implying lower business risks. See Fig 1.
Fig 1 - Business Segments in FY12, JainMatrix Investments

Fig 1 – Business Segments, JainMatrix Investments (Click any chart to expand)

  • It is also developing/operating terminals at Hazira, Mormugao and Vizag in India and Abbot Point in Australia. APSEZ as an operator now has a presence in six ports in India. Through these facilities APSEZ has increased its domestic market share in container handling to 18%, up by 3% in FY12.
  • Being a private port, APSEZ is free to price its services, unlike PSU ports in India. It has ‘take or pay’ arrangements with many of the customers. This protects APSEZ from sudden drops in demand.
  • Connectivity and logistical facilities connect the Port, berthing and storage facilities to Roads, Rail, Airstrip and Pipelines for goods transportation. Growth in Cargo was 49% in FY12. Table 2.
Table 2 - Port Operations Growth, JainMatrix Investments

Table 2 – Port Operations Growth, JainMatrix Investments

  • The port has in place a dedicated automobile terminal for exports, currently being used by Maruti.
  • The SEZ area is organized into a number of clusters to cater to different needs of Industrial groups.
  • APSEZ enjoys Indirect and Direct Tax benefits designed to encourage infrastructure growth.
  • The Shareholding pattern is Promoter group 77.5%, MFs/ DII 4.9%, FIIs 10.2%, Individuals retail/ HNI 3.7% and Bodies Corporate etc 3.7%. As per delisting norms, Promoter holding needs to reduce to 75% in a year.
  • Adani Enterprises is the holding company with cross-holdings in Adani Power and APSEZ. The group has ambitions across Coal, Logistics and Power generation, and these 3 firms execute on this plan.

Events, News and Strategies

  • Abbot Point coal terminal, Australia: APSEZ bought the Abbot Point Port in May 2011 in cash for A$1.8 billion (9000 cr). This coal terminal, of capacity 50 MMT with capacity increase provisions, will help transport coal from Australian mines to India. This purchase is expensive, but funded by lower cost Australian finance (6.5%). Refinancing of the loan was done with long-term loans of an AUD1.1bn and US$0.8bn loan. At the same time, a massive loan has been taken, that changes the financials and balance sheet of this company.
    • There is synergy with Adani Enterprise’s purchase of Linc Energy’s Galilee coal project, close to Abbot Point in Australia for $2.7bn in August 2010. This is expected to start producing coal by 2014. Also there is ample growth opportunity in the region, as the local government is mapping out a decade long plan to grow port terminals capacity to 385 MMT from the current 50.
  • Coal demand in India is due to Power capacity increase. Domestic supply has not been able to keep up. So Coal imports have increased rapidly, projected at 185 MT by 2017 (99MT today), by the Planning Commission.
  • APSEZ recently won a project for development of a dry bulk terminal at Kandla Port, Gujarat. With an investment of Rs 1200 cr., the terminal will have capacity 20 MMT and take 24 months construct.
  • The 9MT HPCL‐Mittal Energy refinery in Bhatinda, was fully operationalized in Mar’12. Crude will be imported through Mundra and transported through the 1,017 km pipeline to the refinery.
  • Mundra also expects higher coal volumes on account of the commissioning of additional phases at Tata UMPP and Adani’sMundra Power plants.
  • Adani Group is exploring a listing of holding company Adani Enterprise on an overseas bourse, to raise cash and help reduce debt at a group level. If this succeeds, it will trigger a price appreciation.
  • APSEZ vision is to have an annual cargo handling capacity of 200 MMT by 2020 (current 78MMT).

Industry Note:

  • 95% of India’s international trade is done through the Sea Ports. Traffic projections for next 8 years are 11% growth CAGR (Shipping Ministry). As Imports and Exports grow rapidly, the constraint will be Port capacities.
  • Mundra is able to provide port access to industries in Gujarat, Maharashtra and North Indian regions. Local competition to APSEZ is from Kandla, JNPT and Pipavav on the Western shores. But Kandla, JNPT and other govt. ports have not invested sufficiently in infrastructure due to government constraints.
  • Pipavav Port is at an early stage of development. Also it is in South Gujarat and logistically more remote. Pipavav Port in Gujarat 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.

Stock Valuation, Performance and Returns

  • The IPO in Nov 2007 was very successful. It was oversubscribed 115 times, and provided listing gains. However it was aggressively priced, at 88 (Rs, adjusted). See Fig 3
Fig 3 – Share Price and Dividend, JainMatrix Investments

Fig 3 – Share Price and Dividend, JainMatrix Investments

  • Volatile Prices – Share price rose post IPO to 264, fell to 50 in Nov’08, rose again to a high of 185 in Oct’10, before dropping to today’s 115. This last fall of 38% over 2 years was painful for investors.
Fig 4 – Mundra Port Sales, Margins, JainMatrix Investments

Fig 4 – Mundra Port Sales, Margins, JainMatrix Investments

  • The port has rapidly increased business throughput over the last 5 years, venturing into new categories of goods, and working closely with importers and exporters to improve infrastructure.
  • Over the last 5 years growth has been rapid, with Sales, Profits and EPS  up by 36, 42 and 44% CAGR. However, we notice a slowing down of these numbers in the last 4 quarters. However the margins have been steady, with Operating Margins at 70% and PAT Margins at 50%, for APSEZ standalone, Fig 4.
  • IPO investors have seen a 4.5% CAGR return in price in five years since listing, see Fig 5. The Dividend has increased steadily, till the current 50%, i.e. Re 1 on FV Rs 2.
Fig 5 – Share Price and Dividend, JainMatrix Investments

Fig 5 – Share Price and Dividend, JainMatrix Investments

Fig 6 – Cash Flow, EPS and DE, JainMatrix Investments

Fig 6 – Cash Flow, EPS and DE, JainMatrix Investments

  •  Debt-equity is 3.41 (sharply up due to Abbot Point purchase). This is high for an infra company, Fig 6.
  • For infra sector, cash is critical. APSEZ has a poor free Cash flow due to high investments in operations and the Abbot Point purchase. EPS (adjusted) is up 48% CAGR in recent years.
  • The PE has been in a range of 20-50 over 4 years. But current PE of 19.8 is at low end of this range. Fig 7.
Fig 7 – Price and PE Chart, JainMatrix Investments

Fig 7 – Price and PE Chart, JainMatrix Investments

Fig 8 – Price and EPS Chart, JainMatrix Investments

Fig 8 – Price and EPS Chart, JainMatrix Investments

  • The chart (Fig 8) plots the market price against the adjusted EPS over a 5-year period.  EPS shows us a steady quarterly increase indicating stable business performance, but flattening after Dec 2011.
  • Return Ratios are deteriorating – ROCE is 7.8% (14% in FY11) while RONW has stayed at 22%.
  • With EPS growth slowing, the PEG (3Yr) is now at 0.55, indicates undervalued status.

Peer Benchmarking and Financial Projections

We have compared APSEZ with leading listed Peers, Chart 9:

Chart 9 – Peer Benchmarking, JainMatrix Investments

Chart 9 – Peer Benchmarking, JainMatrix Investments

APSEZ has high valuations. It has good ROE, but a high DE ratio, and does not stand out on any other parameters.

The Financial forecasts, Chart 10, are now inclusive of Abbot Point Port operations.

Chart 10 – APSEZ Financial forecasts, JainMatrix Investments

Chart 10 – APSEZ Financial forecasts, JainMatrix Investments

The Abbot Point projections embedded above indicate that by 2014, the project will start contributing to the bottomline. Repayment of loans will certainly take longer.

Risks

  • The purchase of Abbot Point Australia is a massive bet on an Australian Port, and mining related exports from the region. A debt of Rs 9000 cr has been added to the balance sheet through the new subsidiary. The Coal mines by Adani Enterprises need to start producing coal by 2014. And Adani Power and Mega power plants in Gujarat need to import coal (involving renegotiation of their PPA agreements price with the Gujarat Government, as imported coal is costlier). Further there is Australian currency risk for the loan. Recently global coal prices fell, so some of the demand at Abbot Point may have fallen.
    • India is facing a massive power supply shortage, and Adani’s Coal and Port assets address fuel linkages needed for Power generation. In 2-3 years, the Abbot Point port should be working at full capacity (80-100MMT), feeding coal to Indian power plants. In the process, all these investments will bear fruit. In effect, Adani has set out on The Great Australian Adventure.
  • EX-IM slowdown: With a global slowdown, the exports-imports from India have slowed over the last few quarters. This has been aggravated by events such as ban on Iron ore exports and USD appreciation resulting in some fall in Imports.
    • APSEZ will be able to grow domestic market share of exports, but depends on economic conditions to sustain volume growth. Energy imports may be resilient, e.g. Coal, crude.
  • Gujarat High court in a May 2012 court order has stayed development work at APSEZ due to unauthorized construction over a 1,840-hectare enclave that was not vacant, and had no Central environmental clearance – this may delay additional construction for the SEZ area. It is also possible that Adani has been very aggressive in the growth and development execution.
    • Central environmental clearances are notoriously difficult to get in time. This is an unknown.
  • In Aug’12 it was reported that India’s home ministry has barred APSEZ from participating in two major port project bids because of security concerns. This report has yet to be confirmed.

Opinion, Outlook and Recommendation

  • Seaports are critical to India’s growth, as over 95% of imports and exports have to be transported by this route. The 6-9% GDP growth in India is now testing the capacities of Indian Ports. Also Govt. ports so far have been constrained in terms of capacity, speed of execution and pricing.
  • APSEZ’s Mundra Port and Indian operations are excellent. APSEZ will capture market share due to spare capacity, good connectivity, excellent facilities and proximity to demand centers.
  • It’s almost become routine in India that well established Corporates shake up the status quo and take up a large international acquisition. This invariably has a 3-5 year gestation period. Quarterly profits dry up and Investors see a drop in share prices. But Enterprises see this as part of a larger global strategy. (eg Tata Motors, Bharti Airtel, Hindalco, Suzlon, Renuka Sugar, Tata Steel, etc, etc). Some succeed and some fail.
  • Similarly the Abbott Point acquisition is a large investment, which will soak cash for the next 2 years in terms of additional investments and interest. There are also associated business risks. But the plan appears to be well thought out, and investors with a Medium Risk appetite should BUY this stock with a minimum 2-year perspective. Investors with expectations of a quicker and steeper appreciation may be disappointed.
  • EPS growth may slow to ~ 40% in the next 3 years.
  • PE has fallen to new lows. The premium valuations commanded by APSEZ due to its pioneer status may only be regained over this Medium term.
  • Price Projections:
    • Our valuation prices the share at 136. Thus today it is available at a 18% discount to CMP.
    • By Apr ’14, the price projection is 215, a 84% appreciation from CMP 

JainMatrix Knowledge Base:

Additional related research reports from JainMatrix Investments:

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Adani Port: Infra play at good valuations V2

See the Sept 2012 update called ‘Adani Port – The Great Australian Adventure’ at LINK

  •  Date: May 30, 2012. Price: Rs 118, Large Cap with market cap of 23,600 crores
  • Advice: Medium Risk, High Gain stock at attractive entry point. Buy systematically.
  • JainMatrix valuation for Adani Port is 147, a 25% discount to CMP. Target: 181 by 04/13, and 231 by 04/14

Adani’s Mundra Port is the #1 private and #4 overall port in India. Growth has been rapid, with Sales up by 32%, Profits 53% and EPS 49% CAGR over 5 years. Debt Equity is 1.18 times. The recent $2b acquisition of Abbot Point Port Australia will double the scope of operations. While uncertainty exists about the viability and returns from this, it facilitates coal imports into India, demand for which is expected to soar. A recent dip in price makes valuations attractive. Investors can hold on and even look at this fall as an opportunity to invest.  

Adani Port – Description and Profile

  • Adani Port and SEZ (APSEZ), formerly Mundra, is a Gujarat based firm with FY12 revenues of 2500cr and PAT 1177cr (standalone).  Consolidated revenue is 3209cr.
  • Promoted by Adani Group, its businesses include Mundra, India’s largest private port with volumes of 64 MT (FY12), several Ports operating contracts, Australian operations and an SEZ area adjacent to the port, which is being developed on an area around 18,000 acres. Market share of APSEZ increased to 16.4% (FY12) from 14%.
  • APSEZ trades in a broad range of products, implying lower business risks. Fig 1.
  • It is # 4 among all Indian ports, and #1 in terms of private ports in India.
Adani Port Product Profile - JainMatrix Investments

Fig 1 – Adani Port Product Profile – JainMatrix Investments – Click to enlarge

  • Being a private port, APSEZ is free to price its services, unlike PSU ports in India.
  • It has ‘take or pay’ arrangements with many of the customers. This protects APSEZ from sudden drops in demand.
  • Connectivity and logistical facilities connect the Port, berthing and storage facilities to Roads, Rail, Airstrip and Pipelines for goods transportation.
APSEZ Port Cargo Volumes - JainMatrix Investments

Fig 2 – Cargo Volumes – JainMatrix Investments

  • The port has added a specialized passenger car exporting facility. A Power plant being set up by Adani group will cater to internal demand.
  • The SEZ facility enjoys a series of Indirect and Direct Tax benefits designed to encourage industrialization by the Gujarat Government.
  • The Shareholding pattern is Promoter group 77.5%, MFs/ DII 4.9%, FIIs 10.2%, Individuals retail & HNI 3.7% and Bodies Corporate + others 3.7%.
  • It’s good that Promoter holding is high. But as per delisting norms, they may need to reduce to 75% in the next year or so.
  • Adani group has cross-holdings in Adani Power, Adani Enterprises and APSEZ.
  • The SEZ area is organized into clusters to cater to different Industrial groups.

Events, News and Strategies executed

  • The port has rapidly increased business throughput over the last 5 years, venturing into new categories of goods, and working closely with importers and exporters to improve infrastructure.
APSEZ - Sales and Profits - JainMatrix Investments

Fig 3 – APSEZ – Sales and Profits – JainMatrix Investments – Click to enlarge

  • Over the last 5 years growth has been rapid, with Sales by 32%, Profits 53% and EPS 49% CAGR.
  • The margins have been steady, see Fig 3 – Operating Margins (70%) and PAT Margins (50%).
  • APSEZ and Adani group bought the Abbot Point coal terminal in May last year for $2 billion. It is synergistic with Adani’s purchase of Linc Energy’s Galilee coal project for $2.7bn in August 2010. The coal terminal, of capacity 50 MT a year, will facilitate the transport of coal from Australian mines to India.
  • It is also developing ports at Hazira, Mormugao, Visakhapatnam and Kandla in India and Dudgeon Point in Australia, in terms of terminal creation or port operator.
  • Vision – to increase the annual cargo handling capacity to 200 MMT by 2020.

Industry Note:

  • Seaports are critical to India’s growth and development, as over 80% of imports/ exports have to take this route. The 6-9% GDP growth in India is now testing the capacities of Indian ports. Also govt. ports so far have been unable to scale up and expand much, due to vision and execution constraints.
  • Major competition to APSEZ is from Kandla, JNPT and Pipavav on the Western shores. Mundra is able to provide port access to Gujarat, Maharashtra and North India based industry.
  • Kandla, JNPT and other govt. ports 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 and SEZ

Chart 4 – Map of Mundra, Kandla and Pipavav Ports

  • Pipavav Port in Gujarat 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.

Stock Valuation, Performance and Returns

  • The IPO in Nov 2007 was very successful. It was oversubscribed 115 times, and provided listing gains. However it was aggressively priced.
APSEZ - Investment and Dividends - JainMatrix Investments

Fig 5 – APSEZ – Investment and Dividends – JainMatrix Investments

  • The share price has fallen from a post IPO high of 264 to a low of 50 in Nov 2008, a recent high of 185 in Oct 2010, to today’s 118.
  • IPO investors have seen a 5% CAGR return in price in 5 years, see Fig 5.
  • The Dividend too has increased steadily, till the current 50% – Re 1 on FV Rs 2.
  • Debt-equity is 1.18 on Mar’12 (down from 2.7 at IPO time). This is good, for an infra company.
  • For an infra company, cash is critical. APSEZ has improved Cash flow from operations at 44% and EPS (adjusted) 48% CAGR in recent years, see Fig 6.
APSEZ - Cash Flow, EPS, DE - JainMatrix Investments

Fig 6 – APSEZ – Cash Flow, EPS, D/E – JainMatrix Investments – Click to enlarge

  • The PE range has been 20-50 times over the last 5 years. Current PE of 21 is at the low end of this range.
APSEZ - Price and PE Chart - JainMatrix Investments

Fig 7 – APSEZ – Price and PE Chart – JainMatrix Investments – Click to enlarge

  • Fig 8 plots the market price against the adjusted EPS over a 5-year period.
  • EPS shows us a steady quarterly increase indicating stable business performance.
APSEZ - Price and EPS Chart - JainMatrix Investments

Fig 8 – APSEZ – Price and EPS Chart – JainMatrix Investments

  • Healthy return Ratios – Return on Capital employed, ROCE is 14.6%; Return on Equity, ROE is 23%
  • PEG is in the range of 0.43, indicating indicates safety and undervalued status

Peer Benchmarking and Financial Projections

We have compared APSEZ with leading listed Peers:

APSEZ - Benchmarking - JainMatrix Investments

Chart 8 – APSEZ – Benchmarking – JainMatrix Investments

APSEZ leads on Profitability, and Debt parameters. It also commands a premium Pricing.

The Financial projections for APSEZ below are not inclusive of new acquisition of Abbot Point Port, about which we do not have sufficient detail.

APSEZ - Financial Projections - JainMatrix Investments

Chart 9 – APSEZ – Financial Projections – JainMatrix Investments

Risks

  • Falling exports: The Indian exports have been affected by the ban on Iron ore exports, changes in govt stance on agri exports and falling demand in Europe.
    • APSEZ will be able to grow market share of exports, but depends on economic conditions to sustain volume growth. Imports are expected to be quite resilient, e.g. Coal.
  • Gujarat High court in May 2012  has stayed development work at APSEZ due to no environmental clearance
    • This may delay additional construction for the SEZ area. Central environmental clearances are notoriously difficult and get delayed. This is an unknown.
  • The Abbot Point Port in Australia was acquired for $2 billion. While this has a good synergy with current operations, there is insufficient clarity on returns and funding /repayment schedule of loans.
  • International business uncertainties, such as: 1) new taxes by Australian govt. on the profits of international companies engaged in mining operations in Australia and 2) and a fall in international Coal Prices that have fallen 21% since 1stJan 2012.
    • These may not directly affect APSEZ. However the returns from Australian investments may be affected.
  • 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 APSEZ in the future. However APSEZ is a different business, and the possibilities of this are remote.

Opinion, Outlook and Recommendation

  • APSEZ will capture market share due to good connectivity, spare capacity, better access and good facilities. The spare capacities with APSEZ will be rapidly commissioned in next few years.
  • EPS may slow to 40-50% growth range over the next 3 years due to higher base effect. But this is also high.
  • PE has fallen to very low and attractive levels, and combined with robust business performance makes this an attractive entry point.
  • SEZ revenues are lumpy, driven by sale of land to industries. However the infrastructure provided and industrialization will drive this business.
  • It is the nature of markets that sentiment makes share prices fall far below or appreciate far above the fundamental value. APSEZ is underpriced at these levels. In a falling interest rate scenario, APSEZ will continue to outperform as it lowers its cost of debt and delivers on projects.
  • APSEZ is a Medium Risk, High Gain stock. At these levels and in this trajectory, it is a BUY.
  • Price Projections:
    • Our valuation prices the share at 147. Thus today it is available at a 25% discount.
    • By Apr ’13, the price projection is 181, a 53% appreciation from CMP
    • By Apr ’14, the price projection is 231, a 96% appreciation from CMP

JainMatrix Knowledge Base:

Additional Infrastructure sector reports from JainMatrix Investments:

  • KEC InternationalLINK
  • BGR Energy SystemsLINK
  • IRB Infrastructure Developers – LINK

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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BGR Energy Systems – Time to Re-energize

  • Date: December 2, 2011
  • CMP: Rs 269; Small Cap – Market Cap 1952 crores
  • Advice:  Invest at lower levels. Target – Rs 800 in 24 months.

BGR Energy is a leader in the Power Plant EPC space. However the industry headwinds have pulled down the business performance. BGR shares have fallen sharply to current under priced levels, and may stay around these level for 2 quarters. Thereafter the stock is expected to rise and recover lost ground.

Warning – Extreme volatility – this stock is not for the faint hearted.

BGR Energy – Description and Profile

  • ‘Water water everywhere, but not a drop to drink’. For BGR, the line needs to be – electricity shortages everywhere, but no orders for generation :-)
  • BGR Energy is primarily a Power Sector focused Engineering- Procurement- Construction (EPC) company. It builds Power plants for Utility companies and commissions and hands over the plant. It is Chennai based, with 2010-11 revenues of 4747 crores; market cap 1894 crores and 2200 employees.
  • Power Plant work can be in a Turnkey EPC mode, responsible for entire plant, or BoP (Balance of Plant) other than the BTG (Boiler Turbine Generator), or only BTG.
  • BGR has domain capabilities in power, and the ability to plan, design, procure/ build, execute and commission projects. Thus experienced personnel are the main resource of this firm.
  • Shareholding pattern is: Promoters – Individual and Corporate: 81.1%, DII 5.1%; Bodies Corporate 1.9%; Individuals – retail plus others 11.9%. Thus Promoters hold significant stake – a good sign.
  • By nature, the firm is paid in terms of milestones achieved in the project execution, so revenues tend to be lumpy. Also the Orders booked for this firm as a proportion of current revenues indicates the safety and visibility of the current business.

Strategies executed by BGR

  • BGR has extended its offerings to other verticals like Oil & Gas, Electrical projects (substations), environmental engineering projects and air fin coolers.
  • In recent years, it has diversified into manufacture of BTG as well as key technology components with partners/ JVs, thus capturing a larger share of the Turnkey project budget. This also gives it an edge in terms of cost and timely execution of projects.   It has set up a number of collaborations, subsidiaries and JVs to assemble the Plants and machinery:
  1. With Hitachi, it has Turbine and Boiler JVs. These two firms are setting up manufacturing facilities in Tamil Nadu, near Chennai
  2. Group companies with GEA Energietechnik of Germany give access to Cooling systems technologies and specialized tube cleaning systems
  3. Other group companies – Progen Systems – focuses on Design and manufacture capability for Process equipments. Also Cuddalore Powergen Corp Ltd is setting up a Power Plant.
  • It can be seen that BGR is over time going to straddle the entire Power Generation lifecycle, from BoP to EPC to BTG/ key components manufacture, to the Plant Operator (Generation) and the Utility play.

Industry Note:

Classification of Indian Industry players

  • Power Industry is at a high level divided into Generation, Transmission and Distribution. 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 Private investments
  • The key players in the Power Plant EPC market are NTPC, BHEL, L&T, and AIA Engineering. But it is a crowded market. The competition also includes Reliance Infra and Tatas.
  • Sub-segments are BoP and BTG manufacturers. Chinese manufacturers of BTG have a price advantage in India compared to locals. This anomaly should soon be corrected by the government.
  • The government has just come out with an order compelling open access, in line with the Electricity Act, 2003. This will allow all consumers of >1 MW freedom to choose the supplier, and only inform their current distributor. This will be a game changer for the Power industry if correctly implemented.

Stock valuation, performance and returns

  • BGR Energy had its IPO in Dec 2007. In a blockbuster offering, it was oversubscribed 119 times. Hoping to generate 438 crores, they attracted 52,000 crores.
  • However, from its IPO price of 480, it has now fallen to 269 a fall of 14% per year. See Fig 1.
BGR Energy, JainMatrix Investments

Fig 1 – Investment and Returns

  • As compared to share price, we can see that in the last 4 years, sales have grown at an average of 57% CAGR. See Fig 2 – Quarterly Sales and Profits.
  • Both EBITDA (53%) and Net Profits (69%) are growing rapidly.
BGR Energy, JainMatrix Investments

Fig 2 – Quarterly Sales and Profits

  • We can see from EPS and Cash Flow – Fig 3, the unevenness of the business model of BGR. Cash flow is unpredictable and lumpy.
  • EPS however is growing fast at 57% CAGR. Again this is a good data, but from a low base.
BGR Energy, JainMatrix Investments

Fig 3 – EPS and Cash Flow

BGR Energy, JainMatrix Investments

Fig 4 – Gross Debt

  • Debt is the big issue with BGR. It has increased significantly in the recent past. Gross Debt also stems from two sources – Net working capital and Debtors.
  • Working capital increased from 103 days (end FY11) to 206 days (end 2QFY12). This could be due to execution delays across the ongoing projects.
  • Debtors went up from 243 days (end FY11) to 341 days (end 2QFY12). This was due to a sharp rise in Retention Money, which was 1300 crores (end 2QFY12). Of this 900 crores is due to projects under execution and 400 crores against completed projects v/s 1100 crores (end FY11).
  • Retention Money is generally Bank deposits/guarantees for performance on projects. The completed project Debtors is certainly payment issues faced from some customers, possibly State Electricity Boards that are themselves in financial stress.
  • BGR expects debt to fall from 2300 crore (see Fig 4) to 2000 crores by the end of FY12 as the retention money is realized. And Debt equity is expected to increase from 1.4 (FY11) to 2.0 (FY12 Estd).
  • An important ratio for BGR analysis is the Orders booked to Revenues ratio (BTB). This has shown a cyclical nature, and by indications, is on an upswing now.
BGR Energy, JainMatrix Investments

Fig 5 – Orders Booked and Billings

Financial Projections, with FY14 estimates

The financials and PE of BGR has been projected for the next 3 years. See Exhibit 6.

JainMatrix Investments

Exhibit 6 – Key Financials and Projections

  • The current PE of BGR Energy is 6.7, below the industry average of 9.9. The average PE in the last 4 years has been 17.5. Certainly today BGR is at the lower end of the pricing range.
  • The Price and PE chart Fig 7 – shows that the successful IPO gave big valuations, but this fell rapidly in the 2008-09 global financial crisis. The view of the EPS chart – Fig 8 shows that EPS continued its rise thereafter, and the share price smartly recovered, only to fall again in this current situation. Certainly the fall in share price is very steep compared to EPS, so the share is today underpriced.
BGR Energy, JainMatrix Investments

Fig 7 – Price and PE trends

  • The EPS of BGR is on a growth path, and is expected to stay in the defined Trend line range.
BGR Energy, JainMatrix Investments

Fig 8 – Price and EPS trend

Risks:

  • Industry: 3-4 years ago the Electricity sector was the darling of Entrepreneurs and Investors. The yawning gap between demand and supply gave a demand assurance. Investors believed that they will be able to sell power at Merchant rates, and planned for large generation addition. Government too encouraged this with the Electricity Act, 2003 that threw open the sector to Private investors.
  1. Today systemic flaws are appearing in the sector. There is financial stress among Utilities, particularly State Electricity Boards that are facing Tariff inflexibility and Collection issues.
  2. Power Plants in India are facing an issue with fuel linkages and a shortage of Coal/ Natural Gas. This has affected the investment climate in this sector. The projects under execution by BGR may also be affected, and execution/commissioning may be delayed. See Notes on Petronet LNG and Bharat Forge.
  3. Project execution delays due to government clearances like environmental, land acquisition, etc.
  • Interest rates increases in the Indian economy are certainly impacting the balance Sheet of BGR
  • BGR: BGR is certainly facing a shortfall in Order Bookings due to this environment.  However, as seen in Fig 5 this is reversing, and we expect recovery in the next 6-12 months.
  • Vertical focus Risk, as revenues are essentially from the Power Gen. vertical. However, this is being addressed by BGR extending its EPC, manufacturing and technology strengths to other verticals.
  • BGR share has fallen by 67% from 843 in Sept 2010 to today’s 270. This is massive value destruction. It is partly because BGR has also been in the news for all the wrong reasons in the last 12 months:
  1. In Nov10, BGR was in the news for a Finance bribery scam. The company clarified that it has no dealings with LICHF and Money Matters, and cooperated with the authorities.
  2. In Oct 2011, BGR received a notice from the Central Excise Department, for tax evasion of Rs 107 crore. The company is confident that it has not evaded taxes, and will clear these charges.

Opinion, Outlook and Recommendation

  • India has a surging growth in electricity demand, and there is a 9-13% power deficit today. This will widen in the next few years.
  • As a leading EPC company, BGR’s fortunes are closely linked to the improvements in the regulatory environment and overall industrial climate of the Indian power sector. In a stable environment, BGR should perform excellently based on current skill sets and manufacturing and execution capacities.
  • The core undeniable strengths of BGR will take around 2 quarters to emerge in the form of business metrics like Orders booked, billings, profitability and EPS, as the government addresses industry systemic issues.  BGR also needs to repair the Balance Sheet and manage the debt levels. A good sign is that Merchant power rates are now on the upswing in India.
  • FY2011 was an excellent year, and BGR will not be able to show any significant improvements in FY12. However the demand gap will catch up, and FY13 will be a good year for BGR.
  • BGR is a High Risk, High Gain stock. Share may even fall from current levels. Investors with a risk appetite and a 2-3 year time horizon can accumulate BGR at 220-270 levels over next 6 months.
  • The 24-month projection (Sept 2013), for BGR is Rs 800, a 310% appreciation from CMP.
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Disclaimer:

These reports and documents are 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/