Sunday, September 06, 2009
Investments with a two-three year perspective can be considered in the shares of Bartronics India, considering the company’s strong order book position, increasing Indian footprint on the back of large government deals and prospects of winningmore orders over the next few years.
At Rs 166, the stock trades at 5-6 times its likely 2009-10 per share earnings. As Bartronics is seeing high growth in revenues and profits and, despite being in a hardware-intensive business, has consistently managed an operating profit margin of over 25 per cent and net profit margin of close to 15 per cent, there may be scope for further capital appreciation.
Between 2006-07 and 2008-09, the company has seen its revenues and operating profits grow nine-fold. It has increased its revenues from India to nearly 65 per cent in recent times from about 30 per cent a couple of years ago. This was made possible by growing presence in government deals, where heavy technology spends are happening. The company also delivers smart cards (mostly SIM cards) to telecom operators, again a high-growth area.
A few quarters ago, Bartronics secured a Rs 5,000-crore deal from the “Aapke Dwar” project of the Municipal Corporation of Delhi spread over nine years. Revenues are set to kick in from October with the launch of 300 kiosks in the first phase. The deal also confers on Bartronics the right to advertising revenues from these kiosks. With the Commonwealth Games set to begin in Delhi in 2010, the scope for substantial advertising revenues makes this deal even more lucrative. The company has tied up with banks for the Rs 750 crore capital expenditure needed for this deal. This could step up interest costs and strain margins. But with interest coverage of over six times, the burden of servicing debt may not be too heavy.
Apart from this deal, the company has an order book worth Rs 600 crore as of June 2009, to be executed over the next year. A large part of this has come from its high-margin RFID solutions business. Armed with key technical certifications, Bartronics hopes to win deals from the Delhi Metro and Indian Railways, with both entities set to increase technology spends. The company has several deal wins from State governments and Government projects in Singapore. Another target area is animal tagging, where the company has the necessary certification.
Long-term investments can be considered in the stock of Kalindee Rail Nirman Engineers, which operates in the field of railway signalling, telecommunication and track, including gauge conversion and laying of new rail lines. A direct beneficiary of the higher government spending on rail infrastructure, Kalindee stands to benefit significantly from initiatives such as setting up dedicated freight corridors, increased outlay for gauge conversion and the rollout of metro rail projects.
In this regard, the company’s long-standing relationships with Indian Railways, Delhi Metro Rail Corporation (DMRC) and Rail Vikas Nigam (RVNL) also lend confidence. That it has in the past executed several projects for these organisations is good reference for the company’s execution capabilities and delivery commitments. At the current market price of Rs 145, the stock trades at about 14 times its likely FY10 per share earnings.
Even though the valuations aren’t exactly cheap, it is perhaps a premium for the company’s ability to bag railways orders, given its experience and expertise. Investors may, nevertheless, consider accumulating the stock in lots, given its small-cap status.
The government’s focus on improving rail infrastructure in the country, what with an increased outlay in the latest Railway Budget towards laying new lines and gauge conversion, bodes well for Kalindee.
The Budget has set aside Rs 2,921 crore for new lines outlay, an increase over the Rs 1,100 crore allocated in the Interim Budget, while increasing the provision for gauge conversion by 24 per cent to Rs 1,750 crore.
Since Kalindee had earlier undertaken many gauge conversion projects for RVNL as well as some zonal railway authorities, it appears well placed to capitalise on the planned outlays. Its presence in the metro rail space may be yet another revenue spinner for the company.
The company has been involved in laying metro rail tracks for DMRC and has even won repeat orders from them, including a relatively difficult work order of laying tracks on partly elevated and partly underground link.
With many cities such as Mumbai and Chennai looking to establish Metro Rail links, the company’s business liaison with DMRC may also serve as a reference point for future orders.
The proposed setting up of dedicated freight corridors spanning over 2,762 km, entailing an overall investment of over Rs 40,000 crore, also holds business potential for the company.
Though no orders have so far been awarded in the track works, initial tendering is likely to begin by the end of this year.
Even so, it merits note that the work orders in these projects, despite their long gestation, may typically be of higher value that entails better margins.
Order book & challenges
The company’s current order book stands at about Rs 400 crore, over 1.4 times its FY-09 revenues.
Though this doesn’t provide Kalindee with a healthy revenue visibility for the year, the company expects to add significantly to its order-book by December 2009, by when there would be more clarity on orders pertaining to dedicated freight corridors as well as from Bangalore Metro Rail, for which it plans to bid in the meanwhile.
While that may subject the company’s order book and revenues to lumpiness, it also relatively shields its revenues from the slowing economic growth, as the investments in rail infrastructure — a must to bolster the economy — may be the last to see any downturn.
Over the last three years, the company managed a compounded growth of 46 per cent and 47 per cent in revenues and profits, respectively, albeit on a low base.
The company’s margins too have more or less remained stable at about 9-10 percentage points.
For the year ended March 2009, though the company grew its revenues by 14 per cent, net profits fell by 19 per cent, led by pressure due to high input costs and interest outgo. Even though railway orders do offer price escalation clauses, their ambit is limited, leaving the company’s profitability susceptible to significant rise in prices of commodities such as steel and cement.
Further, even as Kalindee’s associations with global players in the field of telecommunication, signalling, civil and track works lend confidence, a lot would also hinge on the company’s ability to scale up its operations, especially given the huge opportunity available.
Strong presence in the ever-green irrigation space, recent entry into power transmission and a renewed focus on road projects argue for investing in the stock of IVRCL Infrastructures and Projects (IVRCL). Investors with a two-three-year perspective can consider buying the stock.
The company’s earnings growth is likely to receive support from BOT projects that are nearing completion. Given the high FII holding in the stock, it may be subject to steep declines during market sell-offs. Investors can consider such opportunities to accumulate the stock. At the current market price of Rs 344, the stock trades at 14 times its expected per share earnings for FY-11.
Renewed focus on BOT
IVRCL, through a 100 per cent subsidiary, holds complete stake in four BOT projects — three road and one water desalination project. All these projects are in the advanced stages of completion and at least two of them are likely to start yielding revenue from the last quarter of FY-10.
This would not only mean higher revenue growth but good payback on significant equity sunk into these projects over the last two-three years.
IVRCL’s not-so-pleasant experience (in terms of delays) in a couple of the road projects resulted in the company toning down its enthusiasm for road BOT projects and instead concentrating on cash contract projects in this segment.
However, after the recent assurances by the Transport Minster to make road projects more ‘investor-friendly’ and to remove ‘irritant clauses’, IVRCL now appears more confident to renew its activity in this space. As the company is pre-qualified in this space, it is in the process of bidding for some projects.
It is, however, treading with caution, and does not want to sink too much equity; the management has stated that it would look at bidding for projects of Rs 500-800 crore instead of larger ones of, say, over Rs 2,000 crore.
We view this move as a favourable one for the following reasons: One, given the 7,000 km per year target in the road space, IVRCL’s non-participation would have meant missing out on the sheer volume growth that this space has to offer for players across the spectrum.
Two, with the various clauses in the bidding process and concession agreements recently sorted out, IVRCL’s may be timing its entry well. Three, the company’s cautious plan of bidding for smaller projects, would mean higher chances of qualifying in bids (as many of the larger players have stated their intention of concentrating on only large projects) and ploughing limited equity. This would leave the company to focus its resources on its crucial segment — irrigation and water.
Therefore, capitalising on the huge opportunity in roads, without diluting focus on its key area appears to be a good medium-term strategy.
IVRCL has continued to leverage on its strength in irrigation, what with this segment accounting for close to 70 per cent of the current order book of about Rs15,000 crore (3times FY-09 revenues). While Andhra Pradesh continues to account for 30 per cent of the total order book, the company has irrigation orders in the west and north as well. This segment is likely to buttress the profit margins of the segment.
Muted June quarter
Operating profit margins are nevertheless likely to remain muted in the less-than-10 per cent range in the medium-term, as a result of the company’s less-lucrative projects taken up in the power transmission space, more for pre-qualification purpose.
Higher up the learning curve, IVRCL may improve profitability in this segment.
Despite maintaining momentum in revenue growth through a difficult year (FY-09), IVRCL’ revenue for the first quarter of FY-10 expanded by only 17 per cent over a year ago numbers.
This is lesser than the growth in the previous four quarters.
During the Central and State Andhra Pradesh elections, the company is stated to have deliberately cut down on execution as it anticipated delays in payments, as a result of any change in government.
The management indicated that revenue would have been higher by another 20 per cent (from the June quarter revenue of Rs 1,104 crore) but for the slower pace of work.
While this may have been a prudent measure, given the company’s tight working-capital position, it is also a reflection of how political change is viewed by the corporate sector.
Nevertheless, the business opportunity for IVRCL is only heightened by the irrigation-friendly Andhra Pradesh Government once again coming to power.
Faster debtor recovery from this State government may, however, pose some concern, given the burgeoning state deficit.
Oil India (OIL) may not be in the same league as Oil and Natural Gas Corporation (ONGC) in terms of its size of business, extent of reserves or scale of operations.
Where it scores over its big brother though is in its ability to show a growth trend in crude oil production and in adding to its reserves, more than what it produces every year.
OIL’s offer at Rs 950-1050, is at a fair valuation that compares favourably with its peers on most parameters. The offer band is at a price-earning multiple (PEM) of 9-10 times the 2008-09 earnings. ONGC has a valuation of 16. OIL also compares favourably on price-to-book value terms with a ratio of 2-2.2; ONGC’s is at 3.2.
Unlike other recent IPOs, OIL has left something on the table for investors. Investors can subscribe at the cut-off price and hold the stock for the medium-term.
OIL owns and operates the first ever oil field discovered in India back in 1889 in Assam. All the oil that it now produces — 24.95 million barrels a year or about 68,000 barrels a day (10 per cent of domestic oil production) — comes from the Upper Assam oil field, parts of which are well into the decline phase.
In comparison, ONGC produces more than 5,50,000 barrels a day while Cairn India, which commenced production last week, will produce 1,75,000 barrels a day at its peak. OIL has ‘proved and probable’ reserves of 575 million barrels of oil, which will last 23 years at the current rate of production. The proven reserves alone will last 11 years at the current output level.
Besides this, OIL also has gas reserves of 63.41 billion cubic metres, more than 93 per cent of which is located in the Upper Assam Basin.
It produces 6.22 million cubic metres of gas a day, which was about 7 per cent of domestic gas output in 2008-09. In comparison, Reliance presently produces close to 40 million cubic metres of gas a day.
OIL has a small presence in Rajasthan where it produces about 0.56 million cubic metres of gas a day. It also owns reserves of heavy oil that it has yet to develop.
The company is also a 26 per cent shareholder in Numaligarh Refinery and holds 10 per cent in Brahmaputra Cracker and Polymer Ltd., which is planning to set up a petrochemical project in Assam.
Lagging in E&P
OIL has interests in 24 blocks that were acquired under various NELP (New Exploration Licensing Policy) rounds and it is the operator in 12 of them. The blocks where it holds majority interest are concentrated in the Upper Assam Basin and in Rajasthan.
Some of these date back to the first few rounds of NELP, which began in 1999. Yet, the activity is still in the initial stage of seismic studies in most of these blocks. In the last two years, it has managed to drill just 23 exploratory wells in all.
Despite this, the company has been regularly adding small discoveries to its reserves, mainly in the Assam region. A more aggressive pursuit of exploration is required if OIL is to scale up in terms of size.
The company has also acquired blocks for exploration abroad in consortium with partners such as Indian Oil, Reliance and GSPC.
What augurs well
Despite its only producing asset being a mature field, OIL has managed to grow its output in the last few years. In 2008-09, its production grew 11 per cent.
The company has effectively employed improved and enhanced oil recovery techniques to coax oil out of wells that are past their productive phase.
It may not have made big discoveries, but OIL has consistently managed to replace the oil that it produces every year through new, small discoveries. It boasts a reserve-replacement ratio of almost two thanks mainly to its conscious strategy of going in pursuit of small-sized reserves of up to 30 million barrels.
OIL is sitting on promising gas reserves in the Assam fields which it has been unable to monetise due to poor demand in the region.
A conscious attempt to link the region with the national grid will enable the company to exploit its gas reserves effectively.
The company discovered heavy oil in the Baghewala field in Rajasthan back in 1991 but it has not exploited the reserves due to technology constraints.
Pilot production has been started now and, hopefully, OIL, like Cairn, will be able to produce heavy oil from Rajasthan soon.
Adding a measure of comfort is the huge cash pile (Rs 6,568 crore) that the company is now sitting on. OIL is a zero-debt company and it can use the free cash and also leverage its equity to raise more funds to accelerate its exploration work.
The cash reserves could also come in handy if the company were to identify good acreages or discovered blocks for acquisition. Incidentally, the existing cash can comfortably cover the company’s exploration and production budget of Rs 4,560 crore for 2010 and 2011.
The biggest risk that OIL faces is government policy on sharing of subsidy on petroleum products. The company had paid a stiff price on this front in the last few years.
For instance, in 2007-08 and 2008-09, it provided discounts of $25.08 and $26.13 a barrel respectively. This was apart from the discount that it had to give on its LPG production.
The discount liability fell sharply in the first quarter of the current fiscal mainly because it has now been restricted to the subsidies provided on petrol and diesel only.
There is a risk that the government will revert to its old policy of sharing all subsidies, including on kerosene and LPG, with the upstream companies such as OIL bearing a third of the burden. This could have a significant impact on the earnings of OIL.
With almost all its productive assets, including the 1,157 km crude oil pipeline, located in Assam, there is a concentration risk because of the inherent political instability in the region.
The pipeline has been blasted by militants in the past severing a vital mode of reaching OIL’s crude to its buyers.
The company is viewed as not being an aggressive player on the E&P front. The large cash reserve that it has now parked in low-return government securities is proof of its inability to deploy funds for growth.
OIL will have to quickly find better uses in its business for the surplus cash that can be used to accelerate E&P activity in blocks outside Assam.