Investor Rewards Fortnight July2014

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Dear Investors,

JainMatrix Investments has been created to build the Equity culture, to create high quality investment reports and help investors in their decision process.

In the past 2 years, we have gone commercial, and have restricted some of the valuable reports to paid subscribers.

However, on popular demand, in a special promotion, we are now publishing and revealing all these older reports, so that all visitors can understand better these companies and take their investment decisions.

  • Needless to say, many of my picks over the last 2 years have done very well. See Track Record.
  • Another important point – even though the report may be old, many of the fundamentals captured are relevant even today. The share price may certainly have changed, but the rest of the report should be quite useful.

The reports that I have published this fortnight are:

  1. KEC International – A Power Utilization Play. See updated report on LINK 
  2. Bajaj Finance – a Firm you can Bank on – REPORT 
  3. Titan Industries – The Jewel in the Crown – read LINK 
  4. Adani Port and SEZ – An Indian Port Dominator
  5. Larsen & Toubro – L&T: At the Business Crossroads 
  6. Just Dial Ltd – A Googol Possibilities 
  7. Mahindra Holidays: Take this break !!

Watch this space over the next fortnight for more valuable reports, in public for the first time.

Happy Investing

Punit Jain, JainMatrix Investments

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KEC International – A Power Utilization Play

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June 2014 Promotion – this share has appreciated 112% to today’s CMP 117.

This is the 2013 update of the report called KEC International is a Modern Powerhouse, published in Feb 2012. Available on LINK.

  • Date: March 11, 2013
  • CMP: Rs 55.0
  • Small Cap: Market Cap 1394 crores
  • Advice:  Firm is valued at Rs 82; available today at 49% discount
  • Target:   March 2014 target of 179.  Medium Risk.

KEC International is a Power transmission EPC firm with operations in 48 countries. The synergistic diversifications into Power Systems, Telecom, Water and Railways are stabilizing. The Order Book has grown by 10.3% in a challenging FY13 year. The KEC share is available at a 49% discount to valuations. Invest for long term in this ‘Power Utilization Play’.  

High_voltage_transmission_towers_and_lines

High Voltage Transmission Towers and Lines

KEC International – Description and Profile

  • KEC International (KEC) is a global Engineering Procurement and Construction (EPC) firm with a focus on Power Transmission. It is the largest transmission tower manufacturing company in the world.
  • It is the 5,900 crores (FY12) flagship company of the RP Goenka group. Current Market Cap is 1238 cr. Employees number over 4800; Order Book is Rs.10,150 cr, giving about 1.5 years of visibility.
  • From a core of Power transmission, it has diversified into EPC related areas like Power Systems, Cables, Railways, Telecom and Water. Fig 1. About 90% of KEC customers are Government firms.

KEC Business Portfolio, JainMatrix Investments

Fig 1 – KEC is diversifying its business portfolio 

  • Beyond India, it has operations in 48 countries. The 2010 takeover of SAE Towers, a US based lattice transmission towers manufacturer has given it a good North & Latin America footprint.
  • Manufacturing plants are in India – Nagpur, Jabalpur and Jaipur; in Americas at Monterrey (Mexico) and Belo Horizonte (Brazil). Total tower manufacturing capacity is 274,000 MTs.
  • Shareholding pattern is Promoter 44.5%, MFs/DII 36.5%, FIIs 2.2%, Individuals 11.1% and Others 5.7%. The wide ownership with Indian Institutions is good and medium Promoter ownership is fair.

Business Model and Strategy

  • The core capability of KEC is its ability to deliver power transmission lines to Utilities, including design, materials procurement, execution and Project Management.
  • KEC also provides EPC services to Telecom, Railways and Water, see Fig 1. KEC has expanded into Power related areas – Cables, manufacture and cabling solution and – Power Systems, designing and constructing substations and Electrical Balance of Plant (E- BOP) delivery services.
  • KEC is successfully diversifying its business, thus de-risking the overall business portfolio. See Fig 2.
Order Book Breakup_Feb2013, JainMatrix Investments

Fig 2 – Order Book Breakup, Feb 2013, JainMatrix Investments

Industry Note:

  • Power Industry is broadly classified into Generation, Transmission and Distribution. The Indian power sector faces huge demand growth. But the government’s power generation capacity Plan v Achievement was 68% in the 11th Plan. (We are in 12th Plan now). Peak power shortfall has been 8-12% in 10 years. 40% of people have no access to electricity, and others access poor quality power.
  • The Public sector dominates the industry, owning 70-80% of current assets. However with the opening up to the Private sector, upto 50% of new investments are expected to be Private sector.
  • The key Power sector constraints are Fuel Linkages, State Elec. Board financial conditions and T&D losses. Most of the SEBs did not raise tariffs due to political and state govt pressures. This is being corrected now by the Central Govt. Power Generation has grabbed a lot of interest, but with Fuel Linkages still an issue, and restructuring of SEBs a slow process, the focus will now shifting to T&D.
  • T&D losses are 32% of generating capacity compared to the global average of 10%. The T&D projects help with better grid connectivity, reduction in losses and upgradation of Transmission equipment. T&D losses are due to power theft, poorly T&D equipment, low T&D capacity and bad metering. Thus KEC International is a Power Utilization Play, a critical need of the day in India.
  • The Transmission industry bidding norms have changed recently to ‘Tarriff Based Competitive bidding’. Here 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.
  • Key players in the Power Transmission EPC are Areva T&D, Kalpatru Power, Jyoti Structures, Alstom Projects, and infra diversifieds like L&T, GMR and Reliance. A quick analysis shows among the listed focused firms, KEC has a 10-15% mkt share.
  • After a period of intense competition, we are now witnessing a consolidation favoring larger established players. The no. of players qualified for Power Grid’s new orders has come down to only three compared to at least 10 two years ago.

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 27% of Orders Booked.
  • KEC has good presence beyond India, with 51% of current Orders Booked from other regions. In the last one year, KEC has also seen a resurgence of T&D demand from within India.
  • 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 SAE towers M&A, KEC is now looking at additional acquisitions to accelerate growth.
  • Unlike many other Infra majors, KEC is very well managed financially with low leverage and good FCF

Stock Valuation, Performance and Returns

  • The share price has been volatile, moving from the all time high of 184 in Nov’07 to a low of 22 in Dec’08. Thereafter, the price has been affected by the overall low sentiment for infrastructure. Fig 3
Fig 3 – KEC Share Price History, JainMatrix Investments

Fig 3 – KEC Share Price History, JainMatrix Investments

  • KEC has shown a fine growth pattern (Fig 4) with revenues, but not with margins.
  • Sales have grown 19% CAGR over the last 5 years; EBITDA by 12% and Net Profit by 7% resp.
  • Operating margins had been around 10% previously. The recent high competition and entry into new sectors pushed it to around 6%. We expect this to steady at this level and slowly recover.
  • Typically the highest revenues are in the March quarter, due to the year-end of Govt. clients. Fig 4.
Fig 4 - Quarterly Sales and Profits, JainMatrix Investments

Fig 4 – Quarterly Sales and Profits, JainMatrix Investments

  • The dividend is Rs 1.2 for a FV of 2, giving a high Dividend Yield of 2.2%. Fig 5.
Fig 5 – KEC Share Price and Dividends, JainMatrix Investments

Fig 5 – KEC Share Price and Dividends, JainMatrix Investments

  • EPS has been growing at 7% CAGR.  Current PE at 9.2 is lower than Industry average of 15 times.
  • Free Cash Flow (FCF) however has been good.  It fell in FY11 primarily due to the SAE Tower acquisition. It’s been zero to positive for 4 out of last 5 years, and the highest in FY12. This is a very big positive for KEC, as unlike other infra companies, this is well managed financially. Fig 6.
Fig 6 – KEC, EPS and Cash Flow, JainMatrix Investments

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

  • The Price and PE chart is Fig 7. The PE ratio has a historical average of 17.5. It has moved in the range of 5-30 times across bear and bull phases of the market.
  • The current PE is 9.2 times. Current valuations are in the bottom quarter of a 6-year period. Definitely indicates undervalued status.
Fig 7 – Price and PE Chart, JainMatrix Investments

Fig 7 – Price and PE Chart, JainMatrix Investments

  • Price and EPS graph, Fig 8, shows that EPS accelerated till ‘08, then has been in the 5.5 – 7 range for the last 3 years. The recent fall was due to the investments in new sectors. My expectation is that EPS will grow in the sector drawn in this chart. Fig 8.
Fig 8 – Price and EPS Chart, JainMatrix Investments

Fig 8 – Price and EPS Chart, JainMatrix Investments

  • Consolidated Debt Equity at 1.01 (FY12) is low for an infrastructure firm. This is a positive.
  • Orders Booked to Billings, Fig 9, has been steady at 1.5 times.
Fig 9 – Orders Booked to Billings Ratio, JainMatrix Investments

Fig 9 – Orders Booked to Billings Ratio, JainMatrix Investments

  • Return on Capital Employed, ROCE, has been in a 22-36% range for the last 6 years.
  • Return On Net Worth, RoNW, also has been at 19-24% range. These are good numbers.
  • The Beta of KEC is 2.14 (Reuters) indicating high volatility compared to the Indices.

Peer Benchmarking

We have compared KEC with leading listed Peers, Chart 10:

Fig10 – Peer Benchmarking, JainMatrix Investments

Fig 10 – Peer Benchmarking, JainMatrix Investments

  • Relative to the peers, KEC has good ROCE and RoE numbers reflecting good financials.
  • D/E is good relative to peers. Valuations are not excessive. Price/ Book is low.
  • KEC comes out able to hold its own compared to Infra peers.

Risks

  • Domestic interest rates are expected to fall. A change there will affect our costs projections.
  • High competition in Power Transmission and Entry into new segments. Orders booked in the last 12-18 months in India have been at lower margins, but our projections assume an easing up of this.
  • 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 – unrest and riots in this region can affect ongoing projects.
  • 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.

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 one rupee invested in generation must match an equal investment in T&D (1:1); however, in India it has been 1:0.5. There is now a huge opportunity for T&D players.
  • KEC should perform excellently based on the current strategy and execution capacities.
  • In 6 years, share price (adjusted) has fallen 12%, while the EPS growth is 7% (both CAGR). Other metrics like Sales, Orders Booked, Debt, etc too are favorable. The share is under-priced.
  • Current price is low due to poor sentiment/ pessimism in the Indian markets around the Power sector. However KEC is well placed to be a beneficiary of a sentiment revival.
  • In the next few quarters, a lot of pending Power transmission projects are to be bid out, and KEC should win a fair share of new business.
  • JainMatrix Investments values the company at Rs 82, so the share is available at a 49% discount
  • March 2014 target of 179, giving a 225% appreciation.

JainMatrix Knowledge Base

See other useful reports

  • Mahindra Holidays: Take this break !! – LINK
  • There’s nothing wrong with Apple Inc – LINK
  • Make Equity Investing less tricky: the JainMatrix Eleven – Link to Report
  • Yes Bank: The Brave Warrior of Indian Banks – Link to Report
  • Bharti Airtel: This is a year of consolidation – Link to Report
  • Arshiya International: A Collapsing Star – LINK
  • Adani Port – The Great Australian Adventure – Link to Report

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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/

Final review of Portfolio, ‘Bottom fishing in 2012’

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Date: 28-Nov-12

JainMatrix Investments launched this portfolio in Jan 2012, when we published the report ‘Bottom fishing in 2012’. To read this now, click on LINK. This is the final review of this portfolio.

In Jan, we said, ‘A bottom is in place, and the price reversal has started‘; there is ‘a change in sentiment‘ and ‘a coordinated rise ’in the share prices. We suggested a portfolio of nine stocks for preferably SIP investment.

Today, Ten months later, lets check this portfolio for investor gains – how has it performed?

Performance

 Company

Report  Jan 17th

Review Feb 20th Gain/ Loss % Review  27th Nov Gain/ Loss % Sector Mkt Cap k Crores

Find out more?

Titan Industries

185

232 25 303 64 Consumer L – 27

LINK

Yes Bank

285

364 28 434 52 Bank L – 16

LINK

KEC International

49.1

61 24 63 28 Power M – 1.6

LINK

Hanung Toys & Textiles

128

140.6 10 164 28 Consumer S – 0.4

LINK

BGR Energy Systems

229

339 48 268 17 Power M – 1.9

LINK

Binani Industries

121

124.1 2.5 129 7 Cement+ S – 0.4
Diamond Power Infra

111

138 24 109 -2 Power S – 0.4
Adani Port & SEZ

135

150.5 12 130 -4 Ports, SEZ L – 26

LINK

IRB Infrastructures

153

208 36 126 -17 Infra M – 4.2

LINK

Average

 

  23.2   19.2  

 

 
NIFTY

4,967

5,564 12 5,727 15
Sensex

16,466

18,289 11 18,842

14

CNX Midcap

6,764

7,925 17.2 7,948 17

k – ‘000

BSE Small Cap

6,290

7,116 13.1 7,183 14

M-midcap

Observations & Learnings:

  • The portfolio’s absolute appreciation since Jan is an avg. gain of 19.2%!! It has outperformed all indices!!
  • Investment by SIP fashion from Jan’12, gives absolute gains of 11.1% so far, annualized to 13.3%.
  • Supporting this portfolio are research reports with Links included in above table.
  • Consumer and Banking sectors have emerged as better performers, while Power and Infra are weaker.

Suggestions and Risks:

  • This portfolio will appreciate, but invest in each stock with a minimum one year perspective.
  • This is an aggressive portfolio, so do not invest in only 1-2 stocks. Invest monthly in a SIP form.
  • Past performance is no indication of future results. In fact leadership in this portfolio has changed often.

New Model Portfolio (Mid Cap)

  • While we continue to be optimistic of the prospects of this portfolio, this will be the final such report.
  • A new Model Portfolio (Mid-Cap) is being created that will reflect the changing trends in this market. To access this, and other valuable research, readers need to sign up with JainMatrix Investments as a Paid Subscriber, see LINK.

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 permissions; for any questions contact the director of JainMatrix Investments at punit.jain@jainmatrix.com. Also see: https://jainmatrix.wordpress.com/disclaimer/

October report on ‘Bottom fishing in 2012’

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Date: 3-Oct-12

In Jan 2012, JainMatrix Investments published the report ‘Bottom fishing in 2012’. To read this now, click on LINK

The report indicated that: ‘A bottom is in place, and the price reversal has started‘; there is ‘a change in sentiment‘ and ‘a coordinated rise ’in the share prices. It suggested a portfolio of nine stocks for preferably SIP investment. They are Mid/ Small Caps with potential.

Nine months later, we will review this portfolio for investor gains – how has it performed?

Company

Report

Jan 17th

Review Feb 20th Gain/ Loss % Review

3rd Oct

Abs. Gain/ Loss % Sector Mkt Cap k Crores Find out more?
KEC International 49.1 61 24 72 47 Power M – 1.8 LINK
Yes Bank 285 364 28 398 40 Bank L – 14 LINK
Titan Industries 185 232 25 258 40 Consumer L – 23 LINK
BGR Energy Systems 229 339 48 279 22 Power M – 2.0 LINK
Binani Industries 121 124.1 2.5 132 9 Cement+ S – 0.4
Diamond Power Infra 111 138 24 119 7 Power S – 0.4
IRB Infrastructures 153 208 36 156 2 Infra M – 5.2 LINK
Hanung Toys & Textiles 128 140.6 10 124 -3 Consumer S – 0.3 LINK
Adani Port & SEZ 135 150.5 12 128 -5 Ports, SEZ L – 26 LINK
Average 23.2 17.5
NIFTY 4,967 5,564 12 5,722 15
Sensex 16,466 18,289 11 18,858 14
CNX Midcap 6,764 7,925 17.2 7,952 17.5 k – ‘000
BSE Small Cap 6,290 7,116 13.1 7,161 14 M-midcap

Observations:

  • Definitely the portfolio is up since Jan, and on average the shares have gained 17.5%!! It has outperformed all indices except the CNX Midcap, and is on par with this.
  • Investment in a SIP fashion from Jan’12, would give absolute gains of 10.4% so far, annualized to 16%.
  • Supporting this portfolio are new research reports for Adani Port and Yes Bank, included in above table.
  • The recent upturn in indices has helped as we bought earlier at lower levels. We continue to be optimistic of the prospects of this portfolio.

Suggestions and Risks:

  • This portfolio will appreciate, but invest with a minimum one year perspective.
  • This is an aggressive portfolio. Do not put all your eggs in one basket. Invest monthly in a SIP form.
  • Past performance is no indication of future results.

Additionally:

  • Some research reports are only available to Subscribers. Join up to receive actionable, high quality insights and recommendation for Equity investments. Boost your returns.
  • Spread the cheer. Share this letter with friends and fellow investors; invite them to also subscribe.
  • To subscribe, use this Signup Form CLICK or enter your email on the top right of this page.

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 permissions; for any questions contact the director of JainMatrix Investments at punit.jain@jainmatrix.com. Also see: https://jainmatrix.wordpress.com/disclaimer/

‘Bottom Fishing in 2012’ Review of Portfolio – April’12

Date: April 18, 2012

In Jan this year, JainMatrix Investments published a report, ‘Bottom fishing in 2012’ …… To read this now, click on LINK

  • The report indicated that: ‘A bottom is in place, and the price reversal has started‘; there is ‘a change in sentiment‘, and ‘a coordinated rise’ in the share prices.
  • A lot has happened since then, including a crude oil price rise, a Union Budget, and even a lowering of Interest Rates by RBI !!

Lets review the suggested portfolio at the three months milestone – how has it performed?

 Company

Reported 

Jan 17th

Review Feb 20th

Gain/ Loss %

Review

Apr 18th

Gain/ Loss %

Sector

Mkt Cap k Crores

Find out more?

BGR Energy Systems

229

339

48

358

42

Power

M – 2.6

LINK

KEC International

49.1

61

24

63.8

30

Power

S – 1.6

LINK

IRB Infrastructures

153

208

36

198

30

Infra

M – 6.6

Yes Bank

285

364

28

370

30

Bank

L – 13

LINK

Titan Industries

185

232

25

240

27

Consumer

L – 21.3

LINK

Hanung Toys & Textiles

128

140.6

10

147

15

Consumer

S – 0.4

LINK

Binani Industries

121

124.1

2.5

122

1

Cement +

S – 0.4

Diamond Power Infra

111

138

24

110

-1

Power

S – 0.4

Adani Port & SEZ (Mundra)

135

150.5

12

130

-4

Ports, SEZ

L – 26

LINK

Average

 

 

23.2

 

20.6

 

 

 

NIFTY

4,967

5,564

12

5,300

7

Sensex

16,466

18,289

11

17,392

6

CNX Midcap

6,764

7,925

17.2

7,700

14

k – ‘000

BSE Small Cap

6,290

7,116

13.1

6,914

10

M-midcap

Observations:

  • Definitely the portfolio is down compared to Feb evaluation. Even so, since Jan, it has gained 20.6%!!
  • It has outperformed even the best of these Indices, CNX Midcap by over 6%!!
  • There are several changes in the ranking of individual stocks.
  • Note the added Link to the Report on IRB Infrastructure, added in this period.

Based on the above, we strongly suggest:

  • This portfolio will appreciate. Invest but with a minimum one year perspective.
  • Subscribe to reports from JainMatrix Investments. Receive actionable, high quality insights and recommendation for Equity investments. Boost your returns.
  • This is an aggressive portfolio. Do not put all your eggs in one basket. Invest monthly in a SIP form.

Note:

  • Past performance is no indication of future results.
  • Spread the cheer. Share this letter with friends and fellow investors; invite them to also subscribe.
  • To Subscribe, use this Signup Form CLICK
  • Check back on the website www.jainmatrix.com for updates.

Do you find this site useful? You can:

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Disclaimers:

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

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

  • 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’.

Subscribers have received this report around 16th Feb or later on subscribing

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)
JainMatrix Investments

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.
JainMatrix Investments

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.
JainMatrix Investments

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).
JainMatrix Investments

Fig 4 – Price and dividends at KEC

  • EPS has been growing rapidly at 30% CAGR. Cash Flow however has been uneven.
JainMatrix Investments

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.
JainMatrix Investments

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.
JainMatrix Investments

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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Also see: https://jainmatrix.wordpress.com/disclaimer/

Bottom fishing in 2012 ……

————————————————————————————————————————————

JainMatrix Investments has published a review of this portfolio, please click  on the link  October Review

Article Published  January 17th 2012

A Happy New Year to you!                                                             January 17th 2012

In my first post of 2012, I’d like to mull over a very basic question. There are a number of fundamentally good companies, firms in good sectors that are showing QoQ growth and profits, with upside potential and great order booked numbers. I’d like to invest in such firms.

But my worry has been that along with the Sensex, these firms have seen their share price falling week after week. The question is:  How much can a good company fall? More importantly, when can we be sure that the share price fall is complete, a bottom is in place, and the reversal has started?

If we can answer this for a few companies, it can be a great investing opportunity. I suggest the following 9 firms as turnaround candidates.

1.      Hanung Toys & Textiles: CMP 128.

  • This mid sized consumer products firm has 75% revenues from exports. Its share has jumped by 67% in the last 1 month, on high volumes.
  • My fundamental analysis indicates it’s a buy. In my report called Hanung – Look for the rebound, I had predicted such a reversal. Here’s a link to the report
  • Here is a one month view of this stock:
JainMatrix Investments, Hanung Toys

Hanung Toys – One month view (click to enlarge)

  • But the two-year view of the stock shows the extent of fall. The converse of this is that this share has a long climb before it, to even reach past highs.
JainMatrix Investments, Hanung Toys

Hanung Toys – Two year view. Click to Enlarge

2.      KEC International. CMP 49.1

Background:

  • KEC is a power transmission EPC firm owned by the RP Goenka group
  • It has increased EPS 30% CAGR for 5 years, and over 50% of the revenues from international projects.
  • A recent US acquisition in the transmission towers – SAE Towers – gives it 30% growth in balance sheet and a foothold in the America geography
  • Overall margins have been steady at 10% for the last 4 years
  • Recent small but synergistic diversifications in India give it an entry into Power Systems and Cables, and new verticals like Railways, Telecom and Water.

Situation:

  • In the last 4 weeks, the share has gained 53%, again on good volumes.
  • Here are the details, in a one month view:
JainMatrix Investments, KEC International

KEC International – One month view

  • Here is a two-year view of the stock that shows the extent of the fall. One of the issues is poor sentiments in the Power sector. However, for KEC, the fall is overdone.
JainMatrix Investing, KEC International

KEC International – Two year view

3.      BGR Energy Systems CMP 229

  • It is a leading power generation EPC firm. A detailed analysis is available on the link
  • The stock is up 35% in the last 2 weeks
JainMatrix Investments, BGR Energy Systems

BGR Energy Systems – One month view

The fall in the last two years has been massive, as we can see:

JainMatrix Investing, BGR Energy Systems

BGR Energy Systems – Two year view

4.      Diamond Power Infrastructure – CMP 111

  • This Gujarat based small cap is an integrated power sector player into Cables, transmission towers, transformers and conductors
  • It has aggressively expanded capacities, and maintains a higher proportion of in house manufacture in its EPC projects.
  • In the last month, the share has risen 51% from its low.
JainMatrix Investments, Diamond Power Infrastructure

Diamond Power Infrastructure – One month view

  • If you see the two-year chart, the extent of the fall is obvious. Again this is partly due to a poor perception of the Power sector combined with the fall of the Sensex. The fall is overdone, and the stock should bounce back.
JainMatrix Investments, Diamond Power Infrastructure

Diamond Power Infrastructure – Two year view

5.      Titan Industries, CMP 185

  • It is the Tata group company that owns the Titan and Tanishq brands
  • It is a large Cap, consumer-oriented firm with a big retail presence. A detailed analysis is available at link
  • The share is up 21% in the last one month, as we can see:
JainMatrix Investing, Titan Industries

Titan – One month view

  • The one-year view of Titan shows that it has fallen sharply in this period. It surely has some catching up to do.
JainMatrix Investments, Titan Industries

Titan – One year view

6.      Mundra / Adani Port and SEZ, CMP 135

  •  This Port and SEZ major is part of Adani group. It is an infrastructure stock.
  • A detailed report is available on Link
  • A recent development in this stock was the acquisition of Abbot Point Port in Australia. This was seen as an expensive acquisition, and this was one reason for the recent fall
  • This share is up by 25% from a recent one month low, as we can see:
JainMatrix Investing, Mundra / Adani Port and SEZ

Mundra Port – One month view

  • The high for Mundra/ Adani was 184.5 in mid 2009 and the share is now 36% lower than this in spite of the recent rise:
JainMatrix Investments, Mundra / Adani Port and SEZ

Mundra Port – Two year view

7.      IRB Infrastructure – CMP 153

  • This is a leading Roads Developer and Operator in India.
  • It is on a rapid growth path even in the current slow environment. It has a very good portfolio of projects, many of which are operational / toll roads, giving it a predictable and visible cash flow. It has restricted new business bids to larger and more lucrative road projects, where it has competitive advantages. Order Booked are around 10,000 crores.
  • In the medium term, the IRB stock has been suffering from a sentiment driven fall. In the last few weeks, however, it has recovered 24% from a low of 123.5 to the current 152 level
JainMatrix Investments, IRB Infrastructure

IRB Infrastructure Developers – One month view

Over a 2-year period, we can see that the stock has fallen significantly, and this should reverse in a falling interest rate scenario.

JainMatrix Investments, IRB Infrastructure

IRB Infrastructure – Two year view

8.      Binani Industries – Cement and metals manufacturer. CMP 121

  • It is a holding company with interests in Cement, Zinc, Glass Fiber, composites, etc.
  • However, the significant valuable asset is Binani Cement, which was recently merged into the holding company. This itself has a turnover of 2000 crores, and had a market cap of 1600 crores (before merger).
  • Other assets are not significant loss making entities. As of now, Binani Industries has a market cap of just 360 crores. The stock is under valued.
  • The share price has rebounded by 39% from recent lows.
JainMatrix Investments, Binani Industries

Binani Industries – One month view

The 2-year picture of Binani Industries shows the spike in 2011 around the time of the merger with Binani Cement, and a subsequent fall.

JainMatrix Investments, Binani Industries

Binani Industries – Two year view

9.      Yes Bank, CMP 285

  • It is a leading private sector bankA detailed analysis of this stock is available on the link
  • The share has shot up in the last month by 24% from a recent low.
JainMatrix Investments, Yes Bank

Yes Bank – One month view

  • The two-year view of the stock indicates that the current price is significantly below the highs, even though business performance is steady.
JainMatrix Investments, Yes Bank

Yes Bank – Two year view

Risks:

  • A close look at any of the 2-year charts of these shares indicates that there are several 20-40% bounces on the way down. There is a small probability that this too is just a bounce. However, several factors build my confidence that this is more than just a small reversal.
  1. We have indications (see article) that the interest rate cycle has peaked in India; that the Inflation too has peaked. So this could be a sign of economic improvements.
  2. The INR has weakened considerably. This can be a booster to export oriented firms.
  3. The coordinated fashion in which above nine firms (and others in the market) have risen indicates a change in sentiment, and perhaps lowering of investment negativity.
  4. At the beginning of the New Year, many investors, especially foreign, open their books and make fresh investments.
  • Investment in turnaround companies is inherently a higher risk approach, but with potentially higher returns. Take this approach only if you have a high-risk appetite.
  • One view of the above stocks can be that the best is already past, and the resurgence in the last month is unlikely to be repeated. My view is that at this stage fresh investments in these stocks are less risky than a month ago; the reversal is more likely to be sustained, and most of these stocks have a long way to rise before they are back at their highs, even though on valuation parameters, many should be near their all time highs.
  • It is possible that an external negative event takes place that makes share prices fall below these recent lows. However at this juncture, this looks like a small probability event.
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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/