Date: July 6, 2012 CMP: 444 Mkt Cap: 1,674 crore
P/E: 488 times Advice: A high risk high gain Investment with 3 year horizon
BF Utilities, a part of the Bharat Forge group, is engaged in developing the Bangalore – Mysore Infrastructure Corridor. The high potential project has been stuck for over a decade due to land handover issues, and the firm is making losses.
However recent reports indicate that it may be close to resolving legal disputes, and is raising a second round of PE funds for project execution. The share has recently crossed its 200 DMA. Investment in BF Utilities is an act of faith in the management, an understanding of how badly this project is needed, and a confidence that the risk return balance is tilted in favor of investors at this price. Investors with a High Risk, High Gain appetite may look to invest now for a 3-year horizon.
BF Utilities (BU) is part of the Pune based Bharat Forge Group, and is focused on Roads and Power projects. Lets analyse this stock to see where it’s heading.
- Turnover in year ending March ‘12 was Rs 131 crores, and losses Rs 206 cr.
- The key asset of BU is the Bangalore Mysore Infrastructure Corridor (BMIC) also called NICE, a 164 km tolled expressway to connect the cities, that includes a peripheral road in Bangalore, 5 New Townships along the Expressway (the first Section A involves 7,290 acres land), a Town Planning Authority status, and a Concession period for the toll of 40 years. The BMIC is 75% owned by BU.
- The Hubli Dharwar bypass in Karnataka is a 30 km road on NH4 that lets highway traffic bypass the two cities, speeding up traffic. NH4 connects Mumbai/ Pune with Bangalore/ Chennai. Traffic has grown at 14% CAGR over 5+ years. Operational since 2000, this is 70% owned by BU.
- A windmill farm of 18.33 MW power over 300 acres in Satara, Mah. is 100% owned
- Shareholding pattern of BU is: Promoters 66.1%, MFs/ DII 0.5%; FIIs 2.7%, Bodies Corporate plus others 12.2%, Individuals retail & HNI 18.5%. So promoters hold majority stake – a good sign. Also, almost no shares have been pledged for loans.
- Ashok Kheny, the MD of NICE is an expert on engineering, design and construction of projects for transportation and infrastructure.
- The BMIC project is divided into Sections A, B and C. While the toll road in Section A is 95% complete, handover of land is pending. Fig 1.
Fig 1 – The BMIC project Sections, JainMatrix Investments, click image to expand
Details and Updates of the BMIC project
- BU has invested 2,000 cr. in building the BMIC, which will cut travel time between the two cities by half. The project involves construction of the main highway, 5 new townships and mega infra and entertainment projects like the largest Cricket Stadium in India, a Sports Academy, the tallest residential building (88 floors), a racecourse, residential complexes, and utilities like power & water.
- A 56-km peripheral road project is conceived as a Bangalore bypass for the busy NH 4 and NH 7 traffic between Mumbai/ Pune and Chennai.
- The project is partly operational, with rest held up due to pending handover of land by the Government of Karnataka (GoK). Of Section A, a total 4,188 acres out of 7,290 acres of total land has been and transferred by GoK, Fig 1. The BMIC project has been stuck for the last 7 years with snail like progress due to political opposition from the GoK for this project.
- The recent update is that 574 cases that were filed against the BMIC project mostly related to land acquisition issues have been together dismissed by the HC and SC. In one of the cases the complainant’s case was adjudged frivolous, and a penalty of Rs 10 lakhs was imposed on him.
- The specific orders by the courts to handover land to BMIC were ignored, and a Contempt of Court hearing is due in July 2012. The PWD and Commerce/ Industries Secretary of GoK have been asked to hand over the land to BU.
- After a delay of nearly a year, the second round of PE fund raising by BU is close to being finalized, where a number of PE companies will invest in development of the townships and specific assets.
- BU has had talks with Prestige Developers, a Bangalore based Real Estate construction firm for joint development of properties.
- Anil Ambani in his personal capacity had invested in NICE several years ago. He recently exited and sold his 8% stake at a price that valued the project at 4000 crore. He exited with a 4-5 fold profit :-)
Ownership and structure:
Fig 2 – BF Utilities Assets – Ownership, JainMatrix Investments, click image to expand
BU Price 5-year view.
- The share has fallen from a peak of 2,977 in July ’07 to a low of 259 in Dec ’11, Fig 3
- The previous high price was based on success of all aspects of the project – an excellent peripheral road in Bangalore, and a world-class highway to Mysore, plus very lucrative land assets on the way, all completed on time. Plus a positive sentiment on infra.
- The disappointment at the political and government/ legal hurdles sent the share price in a spiral, falling 85% in 5 years.
Fig 3 – BF Utilities – Five year Price Chart, JainMatrix Investments
BF Utilities Price 6-month view
- From this recent low, the share has recovered 71% to CMP of 444, see Fig 4.
- The 200 DMA was crossed last week with volumes, after 1.5 years, a bullish indication.
Fig 4 – BF Utilities – Six month Price Chart, JainMatrix Investments
- The company has been running into losses for the last 3 years.
Fig 5 – BF Utilities – Financials, JainMatrix Investments
Opinion about BF Utilities
- The two cities are developing economically on the lines of Mumbai-Pune, with excellent growth and synergies. The Mumbai Pune corridor is a highly industrialised affluent region, powered by an excellent Expressway. The 143 km BMIC distance is part of State Highway 17, and is a key connection from Bangalore to West Karnataka, North Kerala and north and west Tamil Nadu.
- The Bangalore Mysore corridor has tremendous development potential. It is also badly required, for the necessary growth of South Bangalore and Mysore, as well as potentially the entire corridor.
- Even though the BU financials are in negative, the business is well managed, and the expectation is that if the pending land is handed over to BF Utilities in the next quarter, it may be possible for the management to complete the highway and a fair proportion of the townships by end 2013.
- On legal issues, it is likely that the GoK authorities have, under SC duress, no option but to handover the promised lands, and allow the BMIC executives to proceed on the infrastructure project. The current BJP government have not opposed it, unlike recent governments.
- The current State highway has just two lanes each way and is quite congested with travel taking around 3-4 hours. Current data is about 1,00,000 vehicles take this route every day. This indicates that good demand/ potential exists for this new highway by itself. A ballpark estimate of 50% of this traffic attracted to the BMIC, paying a conservative 100 Rs each way indicates Rs 182 cr annual revenue.
- Most good infra projects attract and stimulate growth. In addition the new townships as well as a new constructions planned will by themselves attract customers from Bangalore, and generate independent revenues and profits.
- This project has been in construction for almost 16 years, and its possible that social and political pressures may still delay or stall this project.
- However these fears appear to be receding based upon impending Supreme Court action, as well as the company’s own speeding up of raising of funds for development works.
- Valuation of the share is difficult. The traditional issue with land bank owners is the wide range between the cost of acquisition, the current market price and the possible value once access and infra development takes place. This is an unknown.
Advice and Recommendation for BF Utilities
- Valuation of Real estate firms is difficult. The project has been valued in the past in a wide range, from as low as 4000 – 15,000 cr. But even this range is higher than current market cap of 1600 cr.
- Much of the value is dependant upon a successful handover of committed lands, followed by execution, commissioning, launch and success of sub-projects.
- But from a risk return perspective, we can see that at current market price, the share has been lower than this value for just 18% of the time in the last 5 years. This includes the ’08-09 fall. On the up side, the peak has been at 6.7 times the CMP, so there is a significant upside potential.
- The fall in price of this stock appears complete, and it has risen 71% from this bottom.
- Additionally, the project is showing signs of overcoming teething hurdles and progressing on legal, land acquisition and financial closure aspects.
- The management believes in investing in roads assets as soon as they have clear titles, as construction costs today are lesser than those in the future. So many sections are already operational and revenue generating.
- For the High Risk, High Gain investor, this investment can be looked at from a 3-year perspective for a gain of 200 – 300%.
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