BUSINESS:
Simplex Infrastructure is an eighty-four-year-old company which started off with piling (ground engineering) operations in 1924. It has added various businesses and successfully diversified into industrial construction, building and housing, urban infrastructure, power, marine and transport (roads, railways and bridges).
The company was also planning to venture into oil rigs and real estate business in a big way. It entered into a two-year contract in mid 2007 with Oil India for leasing a 1,500 HP rig at $16,000 per day for on-shore exploration. However, with the fall in crude oil prices and consequent decline in the day rates and also the downturn in the real estate market, the company has held back the plans.
STRONG ORDER BASE:
The company provides strong revenue visibility with an order backlog of Rs 10,600 crore; nearly three times its trailing four quarter revenues. Going forward, the company plans to focus on highgrowth segments like power, marine, railways, bridges and urban infrastructure.
According to the company, it is pre-qualified for projects worth Rs 28,000 crore while Rs 7,000 worth of orders are in the L1 stage (short-listing pending after bidding). The company's strike rate is around 20%.
FINANCIALS:
In the trailing four quarters, net sales leaped by 70%, while growth in operating profit and net profit trailed at 61% and 65%, respectively. In the December '08 quarter, we expect the company to report 45% growth in revenues to Rs 1019.2 crore. Operating profit margins are expected to decline marginally by about 40 basis points to 9.6%.
About 92% of its contracts are on a variable basis and any savings in costs are likely to be passed on to customers. Net profit is expected to grow at a slower 30% to Rs 28.5 crore due to higher fixed costs (read interest and depreciation) and taxes.
KEY CONCERNS:
Investors need to keep a watch on future order inflows, which could get affected due to the economic slowdown and credit crunch. Also, the buildings and housing segment that constitute 28% of the total order book, could witness some pressure.
Another concern is the relatively high debt to equity ratio of over 1 in FY '08, which is expected to rise further to 1.5 by the end of FY '09. The company has raised Rs 220 crore through issue of 5.5 million warrants in FY ‘08, which are convertible into equity at Rs 401 per share by end of FY '09. With the stock currently trading at Rs 172, cancellation of conversion cannot be ruled out, in which case debt and interest costs could rise further.
The company also has a poor interest coverage ratio of around two in FY '08 as compared to over 3-3 .5 times for IVRCL and Nagarjuna Construction.
The company's operating cash flow has been negative for three financial years prior to FY '08. Cash flow may come under pressure due to the economic slowdown, delays in the projects/payments and higher interest costs.
VALUATION:
At its current price, the stock is trading at around 6.4 times its earning for trailing four quarters ending September ‘08. This is much lower than the valuations of its nearest peers namely Nagarjuna Construction (7.9 times). It trades at 5.6 times and 3.8 times its estimated earnings for FY '09 and FY '10 (diluted) respectively. This provides an attractive opportunity for investors to accumulate stocks at dips.
Source: ET Investor's Guide
Jan 13, 2009
Jan 12, 2009
Real metal Game - Sterlite ind
STERLITE INDUSTRIES
Beta: 1.21
Institutional Holding: 13.6%
Dividend Yield: 1.4%
P/E: 14.3
M Cap: Rs 19,355 cr.
CMP: 273
Sterlite Industries is the most diversified non-ferrous conglomerate in India. Its subsidiary, Hindustan Zinc, which is also a listed entity, is the largest domestic integrated zinc producer. It has an annual zinc production capacity of more than half million tonnes. In fact, it is one of the lowest cost producers of zinc in the world. Besides zinc, the company also has other lines of business, which includes aluminium , copper and energy among others.
In aluminium, it is partially integrated and has a production capacity of 0.36 million tonnes per annum. The company has taken a number of steps to increase its aluminium production and make it more integrated. In copper, it makes most of the profit from treatment and refining (TC/RC) margins. This is why copper contributes only 10-15 % towards the operating profit even if its contribution towards the top line is more than 50%.
FINANCIALS:
The company's net sales more than tripled over last three years to Rs 26,400 crore. The net profit increased by seven times during the same period. Like its other peers, including Hindalco, it has not made a loss during the last fourteen years. Zinc & lead is the most profitable business segment of the company and accounts for around half of the operating profit. Even after the sharp fall in zinc prices (it has more than halved to year-ago levels), the operating margin in zinc & lead business is still a whopping 50-55 %.
Aluminium is the second-most profitable business and contributes around 20% to the company's net sales. It has an operating margin of around 25% in aluminium business. This would further go up once the company starts getting its raw material (bauxite) from the newly allotted mines. Copper is the least profitable of all the three and has an operating margin of around 15%.
The company's overall operating margin stands at around 25%, slightly better than its peers. The company has adopted both inorganic and organic route for its growth. However, the company has not leveraged itself so much for such growth plans. Its consolidated debt-equity ratio stands at a comfortable level of 0.23.
RISK:
The company's diversified product portfolio within non-ferrous metals space reduces its business risk. However, it is subject to the overall risk related to commodity cycle. Further, its lower debt-equity ratio and high liquid investments (of around Rs 7,000 crore) relatively insulates it from the current credit crisis.
GROWTH POTENTIAL:
The company is planning to increase its zinc and aluminium production capacity significantly. In zinc, its capacity would increase to one million tonne by 2010. In aluminium, smelting capacity in Korba will expand by 0.32 million tonnes, almost doubling the current capacity. Post expansion, the aluminium production capacity at Jharsuguda and Lanjigarh, which falls under Vedanta Alumina (VAL) would also increase by 1.25 million tonnes.
Sterlite Industries hold 29.5% in VAL and would benefit to that extent. Its parent company, Vedanta Resources has recently got the clearance for mining the bauxite reserve in Orissa and that would help it lower the cost of aluminium production. Another growth driver for the company would come from commercial power generation business. The first phase of a 2,400-MW power plant is expected to get commissioned by the end of calendar year 2009-10 .
To Sum It Up:
Sterlite Industries has a diversified portfolio and two of its business segments (zinc and aluminium) are extremely profitable. It has successfully acquired and managed some of the government owned companies. Its lower debt position , higher liquid investment, integrated expansion plan and diversified portfolio makes it an attractive bet for the riskaverse investors.
Source: ET Investor Guide
Beta: 1.21
Institutional Holding: 13.6%
Dividend Yield: 1.4%
P/E: 14.3
M Cap: Rs 19,355 cr.
CMP: 273
Sterlite Industries is the most diversified non-ferrous conglomerate in India. Its subsidiary, Hindustan Zinc, which is also a listed entity, is the largest domestic integrated zinc producer. It has an annual zinc production capacity of more than half million tonnes. In fact, it is one of the lowest cost producers of zinc in the world. Besides zinc, the company also has other lines of business, which includes aluminium , copper and energy among others.
In aluminium, it is partially integrated and has a production capacity of 0.36 million tonnes per annum. The company has taken a number of steps to increase its aluminium production and make it more integrated. In copper, it makes most of the profit from treatment and refining (TC/RC) margins. This is why copper contributes only 10-15 % towards the operating profit even if its contribution towards the top line is more than 50%.
FINANCIALS:
The company's net sales more than tripled over last three years to Rs 26,400 crore. The net profit increased by seven times during the same period. Like its other peers, including Hindalco, it has not made a loss during the last fourteen years. Zinc & lead is the most profitable business segment of the company and accounts for around half of the operating profit. Even after the sharp fall in zinc prices (it has more than halved to year-ago levels), the operating margin in zinc & lead business is still a whopping 50-55 %.
Aluminium is the second-most profitable business and contributes around 20% to the company's net sales. It has an operating margin of around 25% in aluminium business. This would further go up once the company starts getting its raw material (bauxite) from the newly allotted mines. Copper is the least profitable of all the three and has an operating margin of around 15%.
The company's overall operating margin stands at around 25%, slightly better than its peers. The company has adopted both inorganic and organic route for its growth. However, the company has not leveraged itself so much for such growth plans. Its consolidated debt-equity ratio stands at a comfortable level of 0.23.
RISK:
The company's diversified product portfolio within non-ferrous metals space reduces its business risk. However, it is subject to the overall risk related to commodity cycle. Further, its lower debt-equity ratio and high liquid investments (of around Rs 7,000 crore) relatively insulates it from the current credit crisis.
GROWTH POTENTIAL:
The company is planning to increase its zinc and aluminium production capacity significantly. In zinc, its capacity would increase to one million tonne by 2010. In aluminium, smelting capacity in Korba will expand by 0.32 million tonnes, almost doubling the current capacity. Post expansion, the aluminium production capacity at Jharsuguda and Lanjigarh, which falls under Vedanta Alumina (VAL) would also increase by 1.25 million tonnes.
Sterlite Industries hold 29.5% in VAL and would benefit to that extent. Its parent company, Vedanta Resources has recently got the clearance for mining the bauxite reserve in Orissa and that would help it lower the cost of aluminium production. Another growth driver for the company would come from commercial power generation business. The first phase of a 2,400-MW power plant is expected to get commissioned by the end of calendar year 2009-10 .
To Sum It Up:
Sterlite Industries has a diversified portfolio and two of its business segments (zinc and aluminium) are extremely profitable. It has successfully acquired and managed some of the government owned companies. Its lower debt position , higher liquid investment, integrated expansion plan and diversified portfolio makes it an attractive bet for the riskaverse investors.
Source: ET Investor Guide
Real shining metal - HINDALCO
HINDALCO - Accumulate at every decline
Beta: 1.15
Institutional Holding: 28.2%
Dividend Yield: 3.4%
P/E: 3
M Cap: Rs 8,945 cr.
CMP: 53
Hindalco, after the acquisition of Novelis has become the largest value-added aluminium producer in the country. Its Indian operation has two main line of business — aluminium and copper. It owns bauxite mines and is fully integrated as far as production of aluminium is concerned. The company also produces other value added aluminium products, like, wheels, foils, extruded and rolled products among others in India.
Its production capacity currently stands at around 4.5 lakh tonnes per annum of aluminium. Novelis is mainly an aluminium recycler and produces flat rolled products. In copper, the company makes profit from treatment and refining, and produces copper cathodes and rods mostly. Around 10% of the copper revenue comes from other by-products like gold, silver and sulphuric acid among others.
FINANCIAL:
Hindalco's Novelis acquisition has strained its balance sheet and its profitability at least in the short term. The company recently restructured its debt through rights issue of Rs 5,000 crore, internal accruals and refinancing of old debt. After this restructuring, the net debt raised for Novelis acquisition has come down to $1 billion from the earlier $3 billion. However, the process leads to equity dilution and has thus dented its earning per share. Further, the performance of Novelis has been very dismal in recent times.
Except for Jun '08 quarter, it has been making losses for most of the past quarters. For instance, it reported a loss of $78 million for the six months ended September '08 quarter. However, Hindalco’s Indian operation is doing well. Its cost of aluminium production is one of the lowest in the country. The company enjoys an overall operating margin of around 16-18 % and 34% in aluminium business, which is the highest among its peers. The company has reduced its dividend payment ratio over last several years to around 8% of net profit, which is a concern for many investors.
GROWTH POTENTIAL:
The company has a number of expansion plans especially in aluminium business. Its alumina plant in Muri was recently commissioned and this would almost double its capacity to two lakh tonnes. Similarly, the aluminium smelting capacity at Hirakud was increased 43% to 1.43 lakh tonnes. These capacity expansions would contribute to the top line in the nearterm.
The company has also lined up longterm projects, which are at different stages of execution. For instance, environmental clearance for a three-million tonne mining capacity and detailed engineering plan has already been done for the Utkal Alumina projects. Other long-term projects that would drive the future growth include Aditya Aluminium, Mahan and Jharakhand Aluminium among others. Further, the recent fall in aluminium prices would have some positive impacts on the Novelis numbers, which has entered into fixed price contracts with some customers.
RISKS:
The main source of risk comes from its Novelis acquisition, which has been making losses for last several quarters. It would take a while before the company reaps from the money
spent in acquiring Novelis. And in the current down-turn this would be even more difficult. The leveraged balance sheet where interest has to be paid irrespective of sales would only add salt to the injury.
TO SUM IT UP:
The current scenario seems to be very challenging for the company. The economic slowdown would definitely result in lower sales volume. In addition to it, the sharp decline in LME aluminium prices would drastically affect its top line growth in short-term . Further, the slowdown in developed countries would drastically affect the sales of its overseas subsidiary, Novelis.
Last fiscal year, interest accounted for more than twothirds of the net profit on a consolidated basis. Even though the company has paid back some part of the longterm debt, we believe interest would significantly pull down the net profit considering the decline in top line growth and falling operating margin. It can be a good bet for patient and risk-loving investors.
Source: ET Investor's Guide
Beta: 1.15
Institutional Holding: 28.2%
Dividend Yield: 3.4%
P/E: 3
M Cap: Rs 8,945 cr.
CMP: 53
Hindalco, after the acquisition of Novelis has become the largest value-added aluminium producer in the country. Its Indian operation has two main line of business — aluminium and copper. It owns bauxite mines and is fully integrated as far as production of aluminium is concerned. The company also produces other value added aluminium products, like, wheels, foils, extruded and rolled products among others in India.
Its production capacity currently stands at around 4.5 lakh tonnes per annum of aluminium. Novelis is mainly an aluminium recycler and produces flat rolled products. In copper, the company makes profit from treatment and refining, and produces copper cathodes and rods mostly. Around 10% of the copper revenue comes from other by-products like gold, silver and sulphuric acid among others.
FINANCIAL:
Hindalco's Novelis acquisition has strained its balance sheet and its profitability at least in the short term. The company recently restructured its debt through rights issue of Rs 5,000 crore, internal accruals and refinancing of old debt. After this restructuring, the net debt raised for Novelis acquisition has come down to $1 billion from the earlier $3 billion. However, the process leads to equity dilution and has thus dented its earning per share. Further, the performance of Novelis has been very dismal in recent times.
Except for Jun '08 quarter, it has been making losses for most of the past quarters. For instance, it reported a loss of $78 million for the six months ended September '08 quarter. However, Hindalco’s Indian operation is doing well. Its cost of aluminium production is one of the lowest in the country. The company enjoys an overall operating margin of around 16-18 % and 34% in aluminium business, which is the highest among its peers. The company has reduced its dividend payment ratio over last several years to around 8% of net profit, which is a concern for many investors.
GROWTH POTENTIAL:
The company has a number of expansion plans especially in aluminium business. Its alumina plant in Muri was recently commissioned and this would almost double its capacity to two lakh tonnes. Similarly, the aluminium smelting capacity at Hirakud was increased 43% to 1.43 lakh tonnes. These capacity expansions would contribute to the top line in the nearterm.
The company has also lined up longterm projects, which are at different stages of execution. For instance, environmental clearance for a three-million tonne mining capacity and detailed engineering plan has already been done for the Utkal Alumina projects. Other long-term projects that would drive the future growth include Aditya Aluminium, Mahan and Jharakhand Aluminium among others. Further, the recent fall in aluminium prices would have some positive impacts on the Novelis numbers, which has entered into fixed price contracts with some customers.
RISKS:
The main source of risk comes from its Novelis acquisition, which has been making losses for last several quarters. It would take a while before the company reaps from the money
spent in acquiring Novelis. And in the current down-turn this would be even more difficult. The leveraged balance sheet where interest has to be paid irrespective of sales would only add salt to the injury.
TO SUM IT UP:
The current scenario seems to be very challenging for the company. The economic slowdown would definitely result in lower sales volume. In addition to it, the sharp decline in LME aluminium prices would drastically affect its top line growth in short-term . Further, the slowdown in developed countries would drastically affect the sales of its overseas subsidiary, Novelis.
Last fiscal year, interest accounted for more than twothirds of the net profit on a consolidated basis. Even though the company has paid back some part of the longterm debt, we believe interest would significantly pull down the net profit considering the decline in top line growth and falling operating margin. It can be a good bet for patient and risk-loving investors.
Source: ET Investor's Guide
Multibagger - GSPL
Gujarat state Petronet (GSPL) is India's only company that transmits natural gas for its clients without trading in it.
The company's longterm contracts with Torrent Power and Reliance Industries (RIL) for transmission of natural gas are likely to become effective in the March 2009 quarter, which will boost its profits substantially.
BUSINESS:
GSPL's 1,130-km pipeline network is spread across the state of Gujarat and connects natural gas producers on the west coast of Gujarat to their clients in nearly 33 districts of Gujarat. Some of GSPL's prominent clients are Gujarat Power, Essar Steel, Essar Power, Arvind Mills, GNFC and GSFC. The company operates its pipeline network on an open access basis and is not involved in buying and selling gas.
GROWTH FACTORS:
Presently, GSPL transports about 17 million metric standard cubic metres of gas a day (MMSCMD), which will double once its contracts with RIL and Torrent Power become effective. GSPL has signed a 15-year agreement with RIL to transport 11 MMSCMD and another contract with Torrent Power to transport 4.5 MMSCMD for 20 years. Torrent Power's 1,147.5 MW Sugen power plant is scheduled to commence operations in the quarter ending March 2009.
In the same quarter, RIL is also slated to start production of natural gas from the KG basin. The company is extending its pipeline network to 2,000 km by 2010 at a capex of Rs 1,900 crore. With the Petroleum and Natural Gas Regulation Board (PNGRB ) now in place, the company will get competitive advantage while bidding for new projects in the adjacent areas. GSPL's return on capital is low at present.
So, there is little risk that GSPL will have to reduce transport tariffs in future. GSPL also holds strategic stakes in gas distribution companies in three cities-two in Gujarat and one in Andhra Pradesh. Over the next two years, the availability of natural gas in India is expected to double. Apart from RIL's gas, Petronet LNG's project to double its regassification capacity to 10 million tonnes per annum is likely to be completed in January 2009.
FINANCIALS:
The natural gas transported by the company grew 17% from 14.6 MMSCMD in FY '07 to 17.1 MMSCMD in FY '08 but has stagnated since then. This is mainly due to the stagnation in the availability of natural gas and situation is likely to improve in the near future. The company has consistently increased its revenues per unit of gas transported. The company is currently carrying a debt of around Rs 1,200 crore at an average cost of 9.5%. The company has been consistently generating healthy cash flows from operating activities.
Being capital intensive, interest and depreciation are the most important costs for the company, which grew at a CAGR of 33.7% and 42.3%, respectively, in the last five years. During the same period its net sales grew at a CAGR of 31.4% and pre-tax profit grew at 70.3%.
India's two top non-ferrous metal producers-Hindalco and Sterlite Industries-have different business strategies. The former is highly leveraged and has grown inorganically and the latter is cash rich, less leveraged and has grown organically, mostly. Santanu Mishra analyses the two companies whose stocks have lost more than two-thirds of their values in a year.
This company has great potential to be the multibagger.
Source: ET Investor's Guide
The company's longterm contracts with Torrent Power and Reliance Industries (RIL) for transmission of natural gas are likely to become effective in the March 2009 quarter, which will boost its profits substantially.
BUSINESS:
GSPL's 1,130-km pipeline network is spread across the state of Gujarat and connects natural gas producers on the west coast of Gujarat to their clients in nearly 33 districts of Gujarat. Some of GSPL's prominent clients are Gujarat Power, Essar Steel, Essar Power, Arvind Mills, GNFC and GSFC. The company operates its pipeline network on an open access basis and is not involved in buying and selling gas.
GROWTH FACTORS:
Presently, GSPL transports about 17 million metric standard cubic metres of gas a day (MMSCMD), which will double once its contracts with RIL and Torrent Power become effective. GSPL has signed a 15-year agreement with RIL to transport 11 MMSCMD and another contract with Torrent Power to transport 4.5 MMSCMD for 20 years. Torrent Power's 1,147.5 MW Sugen power plant is scheduled to commence operations in the quarter ending March 2009.
In the same quarter, RIL is also slated to start production of natural gas from the KG basin. The company is extending its pipeline network to 2,000 km by 2010 at a capex of Rs 1,900 crore. With the Petroleum and Natural Gas Regulation Board (PNGRB ) now in place, the company will get competitive advantage while bidding for new projects in the adjacent areas. GSPL's return on capital is low at present.
So, there is little risk that GSPL will have to reduce transport tariffs in future. GSPL also holds strategic stakes in gas distribution companies in three cities-two in Gujarat and one in Andhra Pradesh. Over the next two years, the availability of natural gas in India is expected to double. Apart from RIL's gas, Petronet LNG's project to double its regassification capacity to 10 million tonnes per annum is likely to be completed in January 2009.
FINANCIALS:
The natural gas transported by the company grew 17% from 14.6 MMSCMD in FY '07 to 17.1 MMSCMD in FY '08 but has stagnated since then. This is mainly due to the stagnation in the availability of natural gas and situation is likely to improve in the near future. The company has consistently increased its revenues per unit of gas transported. The company is currently carrying a debt of around Rs 1,200 crore at an average cost of 9.5%. The company has been consistently generating healthy cash flows from operating activities.
Being capital intensive, interest and depreciation are the most important costs for the company, which grew at a CAGR of 33.7% and 42.3%, respectively, in the last five years. During the same period its net sales grew at a CAGR of 31.4% and pre-tax profit grew at 70.3%.
India's two top non-ferrous metal producers-Hindalco and Sterlite Industries-have different business strategies. The former is highly leveraged and has grown inorganically and the latter is cash rich, less leveraged and has grown organically, mostly. Santanu Mishra analyses the two companies whose stocks have lost more than two-thirds of their values in a year.
This company has great potential to be the multibagger.
Source: ET Investor's Guide
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