JainMatrix Mid Cap Model Portfolio 2013

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JainMatrix Investments has analyzed over 52 shares over the last year and a half. In depth studies were done on 24 or so, and the performance of recommendations has been excellent. The top 10 recommendations of JainMatrix Investment Advisory Service gave an annual return of 78%, see LINK.

However, good stocks oscillate about their fair value like pendulums, even as their fair value appreciates over time. It’s valuable to investors to buy shares available at the lower end of this oscillation and sell after a period, profiting from both oscillation and fair value appreciation.

JainMatrix Investments presents a Midcap Model portfolio for Investors, chosen on this basis. 

  • This portfolio is recommended for a minimum holding period of 1 year.
  • The investment mechanism recommended is Systematic Investment Plan (SIP) where available investible funds are deployed in these shares in equated monthly purchases. Salaried Investors can align purchases with their salary receipts every month as per a plan. For more inputs on this, see this Report

Seven (7) stocks are recommended, and will be tracked with updates on a monthly basis.

  • The portfolio has Mid to Small cap, highly rated, quality firms that are expected to outperform over the next 1-3 years. Investors can buy this aggressive portfolio for medium term gains.
  • Try to use only spare cash for this, and be ready for some occasional surprises both ways.

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See other useful reports

  • CARE IPO – LINK 
  • Arshiya International: A Collapsing Star – LINK
  • Bharti Airtel – This is a year of consolidation – LINK
  • Yes Bank – LINK
  • L&T: At the Business Crossroads – LINK
  • JainMatrix Large Cap Model Portfolio 2013 –LINK

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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

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Hindalco – a Freshly Wrapped Opportunity

Date: June 12, 2012      CMP: 121      Mkt Cap: 23,300 crore      P/E: 8.44 times

Hindalco has built a substantial integrated global business in Aluminium and Copper. Consolidated Revenues, EBITDA and PAT have gained by 38%, 22% and 14.4% CAGR over 7 years. Debt has been reduced; the share price is reversing now from a 15-month fall. The P/E is at the lower end of a 7-year range. Copper business is profitable and Aluminium is on a recovery. Advice: Invest for the long term

Hindalco (HC), the flagship of the Aditya Birla group, makes Aluminium (Al) & Copper (Cu).

Business Snapshot:

  • The consolidated turnover is 71k cr, profits 2,900 cr (FY11). Promoters hold 41.8%.
  • Subsidiaries are Novelis Inc., USA, Birla Copper and Aditya Birla Minerals; just 33% revenues are from standalone HC. It has 19,000 employees, and a global footprint in 13 countries.
  • Most products are B2B, and the brands include Freshwrapp aluminium foil, Everlast aluminium roofing sheets, Freshpakk semi-rigid containers
  • Al operations extend across bauxite mining, metal production (alumina refining, Al smelting) rolling, extrusions, foils (value added products), recycling, plus captive power plants and coal mines. The Cu unit produces copper cathodes, rods and by-products such as gold, silver and DAP fertilizers.

Lets do a quick analysis of this stock to see where it’s heading.

Pricing Snapshot

Hindalco Share Price, JainMatrix Investments

Fig1 – Hindalco Share Price, JainMatrix Investments

A 7-year view of the share price of HC shows us:

  • Share price has risen by 1% CAGR over the last 7 years – so it is mostly flat.
  • The share has been very volatile, as from a high of 221 in May ‘06; it fell to 38 in March ’09 to an all time high of 251 in Jan 2011. Today’s price is 121. HC has a Beta of 1.59 (per BSE), so on average a fall in Sensex results in a 60% greater fall in HC; conversely a rise will see HC rise more.

Commodities Pricing

  • Al and Cu are global commodities, and prices are set by LME. See prices range in Table. Al and Cu businesses are cyclical in nature, so the industries go through periods of booms and busts.
  • For HC, the Al business is dependant on LME price while Cu is quite independent, as it is a ‘pass through LME’ business. So, the businesses complement each other and reduce overall volatility.
  • The Al market expert opinion is that at $2000/tonne, the LME price matches the global average cost of production. If price falls below this, many units will stop production, squeezing supply and soon raising prices. So this may be a floor on the price.
Copper Prices, JainMatrix Investments

Fig 2 – Copper prices, 2005-12 Aluminium prices, JainMatrix InvestmentsFig3 – Aluminium prices, 2005-12

Opportunities and Concerns

Opportunities

  • The ’07 acquisition of Novelis involved substantial debt. However good cash flow and prudent debt handling means that DE has fallen from 1.9 in ’08 to 0.95 in ’11.
  • Al consumption in India is 1/10 the global average, and is expected to grow rapidly.
  • In Jan‘12, Novelis renewed an agreement with Coca-Cola Bottlers’ Company for supply of aluminium can sheet for the latter’s beverage can producers in North America. This is very positive as previous litigations are resolved, the pricing is linked to LME and substantial revenues are visible.
Concerns
  • Rising Coal prices, particularly due to price increases from Coal India.
    • To some extent, the coal prices in India will rise, as they are broadly lower than global prices
  • The share price of HC has fallen in 15 months from a high in Jan ’11, by 52%.
    • However the share price fell to 105 by May 23 ‘12. From this level price has recovered by 15% till today, and risen past the 20 and 50 DMA. (200 DMA is at 131).
Hindalco Consolidated Financials, JainMatrix Investments

Fig4 – Hindalco Consolidated Financials, JainMatrix Investments

Financial Snapshot

  • Consolidated Revenues, EBITDA and EPS have gained by 38%, 22% and 14.4% CAGR over 7 years. See Fig 4.
  • P/E has moved in a range of 8-29 times in this period, and is currently at 8.4 times, near lower end.
  • Dividend has been steady at 150% or Rs 1.5, indicating a dividend yields of 1.24%.
  • PEG is at 0.59 – indicates an undervalued stock.

Conclusions

  • HC is a buy at these levels, as:
    • There is substantial growth in revenue and profits. Cu business is profitable. Al business appears to have bottomed out.
    • The Price appears to be recovering from an excessive fall over 15 months.
  • Cautious Investors can watch out for June 27 HC Consolidated FY12 results to confirm bullish expectations. Also watch for a price rise above 131 to move to bullish territory.

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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

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Mundra Port: Infra play at good valuations

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

Introduction

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

Fig 1 – Mundra Port – Cargo details

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

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

Current Business Outlook

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

Fig 2 – Mundra Port – Quarterly Sales and Net Profits

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

  • Sales have grown by 32% over the last 5 years
  • Profits have grown an astonishing 128% CAGR over this period
  • Major competition to MPSEZ is from Kandla, JNPT and Pipavav on the Western shores. Mundra is able to provide port access to North India based industry. Additionally
  • Kandla and JNPT have not invested sufficiently in infrastructure due to government constraints.
  • Pipavav is at an early stage of development. Also it is in South Gujarat and logistically more remote.
Mundra Port and SEZ

Mundra Port in Gujarat Map

Additional Developments include:

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

Overview of Share IPO and Stock performance

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

Fig 3 – Mundra Port Valuations and stock performance

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

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

Fig 4 – Mundra Port – EPS and Cash Flow

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

Fig 5 – Mundra Port – Price and PE chart

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

Fig 6 – Mundra Port – Price and EPS chart

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

Projections and Investment Advice

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

Risks

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