Sunday, April 11, 2010
Investors can consider buying shares in pipe-maker Jindal SAW, whose stock trades at Rs.219 which is 11 times its CY-09 earnings. The company's positives include a complete product portfolio of welded, seamless and ductile iron (DI) pipes that may enable bidding for a wide range of projects. The integrated DI production also gives an edge to the operating margins, which are higher than most peers.
Jindal SAW produces over 1.5 million tonnes of welded pipes, 250,000 tonnes of seamless pipes and 300,000 tonnes of ductile iron pipes across four locations in India. The company has worked to expand its Indian production capacity and pay back debt since selling its US' pipe and slab operations in November 2007. Production capacities across product lines are up by 50 percent since then.
The company saw its stand-alone top line grow by 13 per cent between FY-08 and FY-09, while net profits soared by 60 per cent aided by lower raw material and interest costs.
The company has aggressively moved to pare debt on its books with gross debt for the consolidated operations moving from over Rs 1,800 crore in FY-08 to Rs 1,200 crore in FY-09. The current debt-equity ratio is estimated at 0.45:1 which should provide additional scope for borrowing to operationalise iron ore mines in Rajasthan and expand the DI pipe production facility. The standalone interest coverage ratio stands at 7.3 times.
DI pipes are likely to be huge beneficiaries of Rs 80,000 crore urban renewal spending on water and waste management over the next five years. The company plans to add 200,000 tonnes to its current capacity of 300,000 tonnes of DI pipe capacity by June 2011. The integrated DI production facility also boasts of superior margins than its welded pipes. These margins may receive a boost with further integration using iron ore from its Rajasthan mines, which the company estimates could save it Rs 300 crore annually from the second half of 2011.
The company's order-book stands at Rs 3,500 crore, which is about 60 per cent of FY-09 sales. Since the order-book is a source of concern, the company will have to focus on volumes instead of attempting to cherry-pick high-margin projects. This will enable it to capitalise on welded pipe capacity, which is currently running at less than 50 per cent utilisation levels. Exports-to-domestic sales ratio stood at 65:35 but with a strengthening domestic market, the scales are tipping in favour of domestic sales as demand for water and sewer pipelines drive growth.
Another major driver of domestic growth is gas pipeline projects lined up by GAIL and Reliance. These projects are expected to generate demand for roughly 2.5-3 million tonnes of pipeline. A higher domestic order-book may imply lower operating profit margins.
Globally, Simdex estimates point to demand for 65 million tonnes of pipeline over the next five years. Jindal SAW, with its presence in welded and seamless tubes, is well positioned to bid for domestic and global projects in OCTG (Oil-Country Tubular Goods) segment.
While domestic factors may drive immediate demand, in the long run, pipe replacement demand from the US market and global oil and gas projects incentivised by higher oil prices will be significant for volume growth, considering the strong competition for domestic projects.
Jindal SAW's raw material requirements include slabs for LSAW production and coils for HSAW production. Suppliers for both include Posco of Korea, Essar of India, besides others from Ukraine and China.
Considering that global steel capacity utilisation levels remain below 80 per cent, timely supply may not be a constraint, but volatile prices most certainly are. Steel prices have been on the rise since the start of the year due to soaring raw material costs and rising demand. This poses a threat to the 17 per cent operating margin the company enjoyed in CY-09.
Operating margins went as high as 21 per cent for the quarter ended December, thanks to low raw material costs.
Operating in oil and gas industry also requires quality accreditation which the company does have thanks to a roster of clients which include GAIL, ONGC and L&T, Brechtel, Saudi Arabian Oil company and Sinopec.
The company's investments in other O. P. Jindal group companies and cash holdings are a sweetener to this stock.
Investors can retain the shares of Info Edge (India), which owns the job portal naukri.com among others, considering the revival in the recruitment scenario across sectors in the country. The company's fortunes are closely linked to the prevailing state of the economy.
Even as India continues to clock healthy GDP growth rates, with FY-11 expansion likely to be 8.5 per cent (as per the National Economic Survey) job opportunities and employee turnover could increase, benefitting players such as Info Edge.
Some surveys suggest that close to a million jobs are likely to be added in 2010-11 with sectors such as IT/ITES, real-estate, hospitality and healthcare leading the way. Apart from its job portal, the company's matrimonial portal, Jeevansathi, and real-estate Web site, 99 acres, also hold potential to drive growth.
At Rs 870, the share discounts its likely FY-11 per-share earnings by about 28 times. Info Edge does not have any listed peers and, therefore, offers no comparables. The stock trades at a premium to the broader market. But given the growth that is likely from a depressed base on account of increased recruitment by companies, the stock may offer scope for capital appreciation over a two-year period.
Over 2006-09, the company tripled its revenues to Rs 245.1 crore, while net-profits jumped 4.5 times to Rs 59.7 crore. With the global slowdown and its lag effect being felt in India with lay-offs and recruitment-freeze being the norm for much of 2009, the financials did take a knock.
For the nine months of FY-10, the company's revenues fell by 10.9 per cent to Rs 167 crore, while net profits fell by 4.8 per cent to Rs 43.7 crore, compared to the corresponding previous period. That the revival is on its way is evident from the fact that the December quarter was flat compared to 2008 after two successive quarters of double-digit fall in revenues.
As a macro environment indicator for online business, Internet penetration is still low in India. But the impending broadband wireless access (BWA) spectrum auction this month and the expected commencement of operations in the next one year by several operators are likely to drive subscriber growth by doing away with wired last-mile dependence
REVIVAL IN Recruitments
Info Edge's flagship job portal, n aukri.com, contributes around 85 per cent to the overall revenues. It derives revenues from the fee that companies pay for job listing, employer brand-building advertisements and the fee for giving access to the database of resumes of job-seekers.
There are a few other minor revenue streams such as those from providing job-seeker services and mobile services. The company has a 60 per cent ‘traffic-share' according to Comscore and has remained consistently at this level, scoring over peers such as monster.com and timesjobs.com. This is important as it would enable Info Edge increase advertisement rates going forward.
Naukri.com is likely to benefit substantially from the job market bounce-back. The number of resumes in the portal has jumped 24 per cent over the last one year to 19.7 million and corporate customers by 7 per cent in the December quarter to 18400. From a broader economic perspective, IT/ITES and infrastructure (including real-estate, engineering, cement etc) clients who contribute close to 48 per cent to the portal's revenues are set to recruit more. The attrition in the IT sector has already increased, suggesting that movement in the job market is well underway. The naukri new job index that covers hiring across sectors has reached its highest level of 947 in the last one year. The index has grown by 14 per cent in this period.With an EBITDA margin of over 40 per cent, this division holds the key for overall margin expansion.
Apart from naukri, Jeevansathi and 99 acres are the two other portals that the company runs. It is not the market leader in these segments as it is with respect to the job Web site.
But Jeevansathi, being the matrimonial portal, did not witness any serious dent in growth as the marriages by themselves are not that cyclical. In fact, for the nine months of FY-10, the portal has seen a revenue growth of 18.6 per cent. This may not grow substantially, but is likely to be a steady revenue contributor. Jeevansathi is likely to breakeven in 2009-10.
99 acres, the real-estate Web site, was the worst hit in the slowdown. Thanks to attractive interest rates and relatively lower home prices, this segment is witnessing a revival. In the December quarter, the company had an 8.6 per cent sequential growth in revenues.
A recent report from FICCI-KPMG predicts Internet advertising to grow at a compounded annual rate of 29.6 per cent over the next four years to Rs 2 850 crore in India. This would mean more advertising revenues for some of Info Edge's portals.
Videocon Industries is making a 2:9 rights offer at Rs 225 a share, raising Rs 1,156.3 crore. At the offer price, the company discounts its FY-09 earnings by 15 times (fiscal year ends September '09).
Shareholders can avoid the offer given the company's tight cash position, high debt, declining production at the Ravva oil & gas field and uncertainties prevailing in the telecom and power business.
Though the company's asking price for the offer is Rs 20 per share lower than the market price, we don't see it as a lucrative investment option at this juncture.
Videocon Industries' new ventures — power and telecom — are highly cash-intensive in nature. But, cash generated at the operating level from the consumer electronics and oil businesses was not enough to meet even the interest and finance charges last year.
The company's consolidated debt outstanding as of September 2009 was Rs 12,067 crore. Of this, Rs 1345.4 crore of debt will mature before September this year. The amount raised through the offer will go largely towards repaying debt (of Rs 898 crore). However, the proceeds deployed will not make a significant dent in the company's outstanding liability.
Contributions to earnings from either power or the telecom services business are unlikely to materialise in the near future, with these forays in their initial stages.
Additionally, the initial oil finds in the Brazil and Mozambique oil and gas fields, although encouraging, will take time to become earnings-accretive for the company.
The consumer electronic and home appliances (television, television components, VCD/DVD players, refrigerators, washing machines, air-conditioners, water purifiers and microwave ovens) business contributes nearly 90 per cent (almost Rs 9,600 crore in FY-09) of Videocon's current revenues. Margins at the operating level of the consumer business have been at par with the industry at around 10-11 per cent.
With a brand well established, the company's consumer business is doing well; after a slowdown in 2008-09 (the segment's revenues were down 7 per cent, Y-O-Y, in FY-09), there has been a strong recovery. The consumer division's sales were up 41 per cent, Y-O-Y in the December quarter. However, the company's growth at the consolidated level has been constrained by its non-consumer business. While other consumer durable majors managed growth in the June and September quarters, Videocon's recovery was delayed till the latest December quarter.
Crude oil & natural gas
The company's oil and gas segment accounted for around 10 per cent of consolidated revenue in FY 2009. The business comprises participating interests in the Ravva oil and gas field in India (the company's only field under production currently) and in international fields across Brazil, Mozambique, Oman, East Timor, Australia, and Indonesia (all in the exploration phase).
The Ravva field (25 per cent participating interest) has seen declining revenues in FY-09 (44 per cent Y-O-Y) due to a combination of declining volumes and weak oil prices.
The uptick in oil prices in the December quarter has stemmed revenue decline to 3 per cent, but prospects for volume growth appear modest as output from here on may remain stable or even decline further. Discovery of oil reserves in the Wahoo and Wahoo-North wells in the Campos Basin in Brazil, in which the Videocon-Bharat PetroResources joint venture holds 25 per cent interest, bodes well for the company.
Initial tests indicate a high-potential reserve in the basin, which when it fructifies into production, could give a shot-in-the-arm to Videocon's oil and gas business. Encouraging initial discoveries have also been made in the Rovuma block in Mozambique, in which Videocon has 10 per cent interest.
However, given that oil and gas exploration and production is a long-gestation business subject to uncertainties, the conversion of potential to results and its eventual timing is something to watch out for.
Telecom and Power
Telecom and power, Videocon's latest ventures, are highly capital-intensive too. The company intends to build a 1,200 MW thermal power plant in Gujarat. But the project is in its initial stages with land acquisition not yet fully completed.
In the telecom business, the company has been allotted spectrum in 20 of the 21 local service areas in which it has license to operate.
Going by the experience of recent entrants in the telecom market, adding subscribers may not be tough. But it will take time for the company to see subscriber base translating into earnings good enough to help it break-even.
While the company's debt outstanding stood at around Rs 12,000 crore at end-September 2009, its cash outstanding was only around Rs 936 crore.
The debt-to-equity, post the offer, will stand at 1.3 (at 1.6 pre-offer) and net-debt-to-equity not much better (1.2).
While this may not appear too high, the company does operate on rather thin interest coverage ratios. Interest expenses in FY-09 increased by 40 per cent, bringing down interest coverage ratio to 1.8 times.
This is in part due to the high borrowings and no revenues so far on the power and telecom business front. The offer closes on April 12.
Investors with a long-term perspective can consider adding the stock of Dishman Pharmaceuticals and Chemicals to their portfolio.
An established player in the contract research and manufacturing services space, the stock has underperformed the market in recent times led by a poor financial performance. While the company may report lacklustre numbers for the March 2010 quarter also, growth prospects appear good over a two- to three-year time frame.
With many of its new facilities becoming operational and improving demand from the global pharma space, the company could get back on the growth track. Valuations do not fully capture the improving prospects. At the current market price of Rs 224, the stock trades at about 11 times its FY11 per share earnings, at a discount to many of its peers.
In the current year, the management expects to post a sales growth of 20-25 per cent. This appears quite chievable given the improving order pipeline and the low base of last year.
Besides, with better demand for contract research, the outlook for its Swiss subsidiary, Carbogen Amcis (CA), also holds promise. CA's poor performance in the December 2009 quarter had forced the company to cut down the overall sales guidance from flat to a negative 10 per cent (about Rs 950-1,000 crore) for FY10.
Dishman may also see benefits accruing from its newly operational facilities. Apart from the Bavla expansion, it has commenced operations at its high-potent API (active pharmaceutical ingredient) facility. This facility will cater to orders from its Swiss subsidiary as well as manufacture generic anti-cancer products for other clients. While order flows may take some time, the margins enjoyed on such orders are likely to be higher.
Dishman's soon-to-be-operational China facility too holds potential, considering that many global pharma companies have announced incremental investments in the Chinese market. The facility is likely to begin contributing to revenues from this fiscal; global companies such as Johnson & Johnson, Novartis and AstraZeneca have already evinced interest in sourcing APIs from the facility.
Likely improvement in order flow from Solvay-Abbott is the other potential revenue trigger. With the Abbott-Solvay acquisition now complete, Solvay revenues may soon be back on track. That the company has expanded its client base to include companies such as AstraZeneca, Roche, Sanofi Aventis and Novartis is also a positive.