Rallying ahead - 20th July 2009

Rallying ahead

Unaffected by the delayed and deficient monsoon, Rallis India came out with substantially better results for the June ‘09 quarter. The net profit for the quarter more than doubled to Rs 9.4 crore despite a 5% fall in its net sales to Rs 166.45 crore. The company improved its operating margins to 11.8% from 9.7% in the corresponding period of last year. This, apart from a spurt in other income and fall in interest and depreciation costs helped it record 30% growth at the PBT level excluding extraordinary items. However, the accelerated depreciation written off during the June ‘08 quarter meant that the current quarter’s financial performance was twice as good of last year. However, the first quarter is not the best indicator of the company’s annual performance, as the agrochemicals business is seasonal. The company is setting up a new plant at Dahej and will be investing around Rs 150 crore over next twelve months. At the same time, it is also expanding capacities at its Ankleshwar facility with an investment of around Rs 50 crore. After a couple of years as a debt-free company, Rallis has borrowed Rs 50 crore from banks in FY09 to fund these expansion plans. The company has increased its net sales at a cumulative annual growth rate of 11% over the last five years, while its net profit has grown 27.5%. The financial strength of the company is also visible in the improving return on capital employed, debtequity and interest coverage ratios. With a spurt in the June ‘09 quarter profit, the company’s EPS for the trailing 12 months now stands at Rs 63.8, which discounts its current market price of Rs 730 by 11.4 times. Based on last year’s dividend of Rs 16 per share, the dividend yield works out to 2.2%. The scrip has gained 117% since the start of ‘09, more than twice that of the benchmark Sensex, which has risen 53%.

FACING A HOST OF WOES - 20th July, 2009

20th July, 2009

FACING A HOST OF WOES

After commissioning two mega-projects, Reliance Industries has hit a few roadblocks which could affect its profitability
RAMKRISHNA KASHELKAR ET INTELLIGENCE GROUP

Although Reliance Industries (RIL) finally succeeded in commissioning its megaprojects — natural gas production from KG basin and Reliance Petroleum refinery — they both seem to have run into a stormy weather. A large chunk of the KG basin gas continues to remain embroiled in legal hassles, while the RIL-RPL merger may get delayed due to shareholder objections. The recent Union Budget carried some bad news for the company, the global outlook for its business remains weak and its other businesses — Retail and SEZ — are going nowhere. The scrip has already lost a sixth of its value over last one month, but in view of these recent developments the valuations still appear rich and long-term investors should consider buying it only on dips.

RECENT EVENTS
Over last three months, RIL has commissioned his two mega projects – RPL refinery and KG basin gas – involving investments of around $18 billion. However, since then the things have progressed adversely for the energy giant. The Mumbai High Court granted an unfavourable verdict to RIL in its row against RNRL over the supply of 28 million cubic meters per day (MCMD) of natural gas at a price 44% lower to its current price. The matter is now being debated in the Supreme Court. The company is also fighting a similar court battle against the power major NTPC over another 12 MCMD of gas. At the same time, the company’s proposed merger with Reliance Petroleum is getting delayed following objections raised by some shareholders. The Union Budget for FY2010 introduced income tax exemption on production of natural gas, however, restricted it to blocks awarded under the 8th round of NELP. This deprived all earlier blocks — including RIL’s KG-D6 block — of tax exemption. To add to the woes, the Budget also proposed an increase in the Minimum Alternative Tax (MAT) to 15% from earlier 10%. And while the company is battling these odds, the business environment for refining as well as petchem continues to weaken. RIL’s only solace is thatRNRL’s power plants are not yet ready, which would allow it to sell natural gas at current prices for next 2-3 years.

BUSINESS
The company currently operates 33 million tonne per annum (MTPA) refinery at Jamnagar and has recently commissioned another 29 MTPA refinery under Reliance Petroleum. With both the refineries running concurrently, they now represent world’s largest single location petroleum refining complex. As the new refinery is set up in SEZ, the company has surrendered its status as an Export Oriented Unit (EOU) from April 2009. Over last few years RIL has entered aggressively in organized retail opening around 900 stores across 80 cities - an industry, which is witnessing entry of too many players and low profitability. The company is developing special economic zones in Haryana and Gujarat –another line of business, which has fallen out of favour.

GROWTH DRIVERS
The only hope for incremental growth comes from the company’s portfolio of E&P blocks. It is investing in exploration blocks in India as well as abroad and has also bagged a coal-bed methane (CBM) block. The potential hydrocarbon discoveries from these blocks will add value to the company. The newly constructed refinery, being more complex compared to the first refinery, will help command a better margin for the company. The company’s full integration from petrochemicals to refining to E&P will allow it to perform better in the times of uncertainty.

FINANCIALS
For the year ended Mar 09, the company reported a net profit of Rs 15607 crore marginally better than previous year afte.r removing the extraordinary items. The company’s operating profit margins weakened reflecting the weak economic conditions. The capacity utilisation at the company’s refinery too came down in the second half of the year with weakening gross refining margins. The company, which reported $15 a barrel GRM in FY08, could post only $12.2 in FY09. Similarly, the production of polymers too was 9% lower in FY09 at 3.07 million tonne.

VALUATION
At the current market price of Rs 1934, the scrip is trading at 19.4 times its earnings for the year ended March 2009. However, its per share earnings (EPS) is set to jump to Rs 130 for FY10, which discounts the current market price by 14.9 times.
ramkrishna.kashelkar@timesgroup.com

Oil cos may slip on subsidies, high refining costs in Q1 - 13th July 2009

13th July 2009

Oil cos may slip on subsidies, high refining costs in Q1

Ramkrishna Kashelkar ET INTELLIGENCE GROUP

PETROLEUM companies, particularly oil marketers, are expected to report a fall in sales and profits when they come out with their results for the June quarter later this month in a sharp contrast to an impressive performance in the last quarter of 2008-09. Oil marketers have been selling auto fuels below cost for most part of the quarter, while refiners too are facing pressure on margins with fuel consumption falling globally. The 16% y-o-y depreciation in the value of rupee may not have made much of an advantage for domestic companies as the average crude prices during the quarter at $60 per barrel was half of the year-ago figure.

Oil marketing companies: State-run oil marketing companies, including Indian Oil, Bharat Petroleum and Hindustan Petroleum, had suffered heavily in the first quarter of 2008-09 by selling petro-products below their cost when the oil prices soared to new highs. The June 2009 quarter would be somewhat better due to substantially-lower crude prices. However, in the absence of special oil bonds from the government and a fall in the refining margins globally, the performance of these three oil majors will be subdued, but better compared to last year.

Standalone refiners: With the global demand for petro-products weakening, the refining margins have come under pressure. According to the International Energy Agency, the average benchmark Singapore gross refining margins had dipped into the negative territory in the quarter compared to $5.4 per barrel in the yearago period. Although the actual GRMs will be better than the benchmarks, this indicates weakness in the profitability of standalone refiners such as Essar Oil, Mangalore Refinery & Petrochemicals and Chennai Petroleum. Reliance Industries, which derives two-third of its revenues from petroleum refining, will, however, be able to prop up its profits due to a jump in its income from production of oil & gas. The company is expected to maintain its June 2009 quarter profits at the year-ago levels.

Petroleum producers: ONGC’s 5% lower production in the June 2009 quarter and substantially-lower crude oil prices are likely to take the country’s largest oil and gas producer’s profits down. The state-run company’s subsidy burden is estimated at around Rs 2,600 crore during the quarter, down from Rs 9,811 crore in the yearago quarter. The troubles for Cairn India’s oil production in Rajasthan are not yet over, with the company failing to commence production in the June 2009 quarter despite being ready. Natural gas companies: The natural gas transmission companies such as Gail, Gujarat Gas, Gujarat State Petronet (GSPL) and Indraprastha Gas are all expected to continue with their stable performances. They are expected to show a rise in volumes, thanks to the additional gas from RIL, starting April 2009. Petronet LNG has commissioned a project to double its LNG import capacity to 10 million tonne per annum towards the end of the quarter.

Better tomorrow: The second quarter of FY10 is expected to be better for the industry in comparison to the June quarter. The hike in petrol and diesel prices starting July will cut down the marketing losses of oil marketers and will perhaps help them report profits for the September quarter. If under-recoveries come down, the subsidy burden on ONGC too would ease a little. In the private sector, RIL-RPL merger and commissioning of Cairn’s oil production from Rajasthan will boost their earnings.

ramkrishna.kashelkar@timesgroup.com

Petronet set to take control of Dahej unit - 9th July 2009

9th July 2009

Petronet set to take control of Dahej unit

Ramkrishna Kashelkar ETIG

PETRONET LNG expects to take possession of its expanded LNG import terminal in Dahej from contractors next week, saying that the technical problems that arose during the commissioning have been solved.
The company had expected that the expanded terminal would be able to operate at its full capacity by May 2009, but technical problems forced it to reschedule several cargoes.
“Despite those issues, the EPC contractors are within their contractual time limit, which is some time next week,” said Petronet finance director Amitabh Sengupta.
Japan’s IHI Corporation was awarded a contract in 2006 to double capacity at the Dahej terminal to 10 million tonne. With the additional capacity becoming available, the company has scaled up volumes.
“We are already operating at a level of 30 million cubic meters a day,” explained Mr Sengupta. For the year ended March 2009, Petronet LNG regassified 6.4 million tonne of LNG, equivalent to around 25.6 million standard cubic metres per day (MMSCMD).
Petronet LNG imports 5 million tonne per annum of LNG from Qatar’s RasGas under a 25-year contract, which started in 2004. This will be scaled up to 7.5 MTPA from the fourth quarter of 2009. Taking spot cargoes into account, the company’s supply of natural gas is expected to touch 38 MMSCMD towards the end of FY10. However, there are still some problems in scaling up the gas supply.
“The demand for natural gas remains high in India. However, the constraints on pipeline capacity may limit how much we can supply,” said Mr Sengupta.
Petronet LNG is also setting up a 2.5 MTPA LNG import terminal at Kochi by end 2011.

Stable and Able - 29th June 2009

Stable and Able

A cash-rich business with strong growth record makes Balmer Lawrie an interesting long-term investment idea

RAMKRISHNA KASHELKAR ET I NTELLIGENCE GROUP

Beta 0.89
Institutional holding 18.65%
Dividend Yield 4.5%
P/E 6.7
M-Cap Rs 728.5 cr
CMP Rs 447.2

THE Rs 730-crore Balmer Lawrie (BLL), a staterun unit with mini-ratna status, is a mid-cap with long-term promise. Headquartered in Kolkata, BLL is a debt-free company with rising dividends every year. It has a healthy record of sales and profits growth, which makes it an ideal investment candidate for long-term investors.

Business:
BLL operates in eight distinct strategic business units including industrial packaging, greases & lubricants, logistics services, engineering & technology, logistics infrastructure, travels & tours, leather chemicals and tea. The company is India’s largest producer of metal drums used in packaging chemicals and lubricants. Travel & tours services bring in the major share of revenues, while the logistics services account for the highest profits. The company has a wholly-owned subsidiary in the UK carrying out logistics business. Balmer Lawrie Investments (BLIL), which is 59.67% owned by the government of India, holds a 65.7% stake in the company. It was created in 2001 with a view to divest the government’s stake in Balmer Lawrie. The new UPA government, which is considering selling stakes in profitmaking PSUs, may look at BLL as a divestment candidate as it is a non-core, but profitable, public sector firm.

Growth Drivers:
Balmer Lawrie is a debt-free, steadily growing company with strong presence in all the industries in which it operates. The company has plans to grow inorganically by acquisitions in the areas of travels & tours and logistics and has a budget of Rs 100 crore for this. During the past five years, the company has grown at a cumulative annual growth rate of 12.6% at topline to Rs 2,007 crore for the year ended March 2009, with the PAT growing at a CAGR of 28.8%. BLL has a strong track record of paying dividends, and during the period its dividend payout has increased at a CAGR of 41.7%

Financials:
The global financial slowdown hasn’t left Balmer Lawrie untouched. Its operating performance stagnated in FY09 and the net profit was propped up by a spurt in nonoperative income. Revenues went up 13.7% in FY09 at Rs 2,007 crore and profits grew by 9.3% to bring in Rs 109 crore. The services sector did well during the year with travels and tours posting 19% growth and logistics services growing at 21%. Both these businesses posted healthy improvement in profits as against a fall in profit for manufacturing businesses such as industrial packaging and lubricants. With established businesses and very low annual capex, the company has maintained its return on employed capital to beyond 40% for last four years.

Valuations:
The company’s current market capitalization of Rs 728.5 crore is just 6.7 times its annual profit of the year ended March 2009, out of which Rs 150 crore is represented by cash equivalent. The dividend yield works out to 4.5%. We expect the company to post an EPS of Rs 77 in FY10, which discounts the current market price by 5.7 times.
ramkrishna.kashelkar@timesgroup.com

Lead Story - 29th June 2009

29th June 2009

Green SHOOTS In a bid to improve farm yield, the investment in agriculture has been on a steady rise globally reviving the fortunes of farm-input companies. ETIG’s Ramkrishna Kashelkar and Kiran Kabtta Somvanshi advise the long-term investors to add a few such stocks to their portfolio

“AGRICULTURE is the best, enterprise is acceptable, but being on a fixed wage is a strict no-no,” thus goes an old Indian proverb. odern India has turned that adage on its head, and in an economy that’s set to overtake China as the world’s fastest growing, a high fixed wage is acceptable, enterprise is preferred, and agriculture, well, seems eminently avoidable. However, a grain crisis that erupted in the last few years has reinforced how central food security is to an economy, developed or emerging. The reality has dawned on policy makers that high food prices will cripple every other sectors of the economy, as consumers, struggling to put food on the table, tighten their purse strings on every other non-essential product. The world is today consuming more than what it makes, and massive farm-to-fuel programmes are limiting the available farmland for foodgrains. This practice is now under review in many countries ranging from the corn belt of the US to the sugar cane farms of Brazil. Back home, the government’s investment in agriculture has grown steadily over the years and a boom in agri-commodity prices in the last couple of years means that the farmers are in a better position today to make long-term investments. For a long-term investor this is a good sign to invest in companies that supply key inputs to the agriculture industry. In view of this, ET Intelligence Group has cherry picked firms that could benefit from the rising demand for farm inputs and agricultural infrastructure. While the valuation of these stocks provides scope for appreciation, they could prove defensive bets in times of turmoil due to strong demand from agriculture segment. Food, after all, is a recession-proof business.

GROWING GOVERNMENT INVESTMENT

The direct government expenditure in agriculture has seen a sharp rise over last five years enabling better farm credit and creation of support infrastructure like irrigation (See chart). As a result, over last few years India has seen a spurt in the capital formation in the agriculture sector including initiatives such as irrigation projects, rural roads and communication infrastructure, sales and marketing infrastructure, production of fertilizers and pesticides, agricultural education, research and development of agricultural technology. Schemes like National Rural Employment Guarantee Scheme (NREGS) are also instrumental in improving the infrastructure in the rural areas.

THE GLOBAL SCENARIO IS CHANGING

Under the Renewable Energy Directive (RED) passed by the EU Parliament in January 2009, bio-fuel blending of 5.75% is envisaged by 2010 to be scaled up to 10% by 2020. In the US the ethanol consumption is set to quadruple to 36 billion gallons by 2022. In India also, the government has mandated a 5% ethanol blending to be raised to 10% next year. All this is necessitating the world to invest more in improving farm yields. This needs optimum usage of pesticides, farm nutrients including fertilizers, creation of infrastructure such as irrigation, warehousing and transportation and usage of automated processes from tilling to harvesting. Over the last few years, consumption of food grains has risen faster than the growth in supply. Although the higher foodgrain production in 2009 has assuaged the fears about immediate food scarcity, long-term worries remain. Most of the agrocommodities witnessed a sustained rise in prices in the last couple of years, which are currently at nearly double their 2001 prices. These factors reinforce a sustained rise in the demand for the farm inputs in the years to come. In fact, after a sluggish spell of five years, for the first time in FY09 the agrochemicals industry worldwide witnessed a robust double-digit growth. Similarly, India’s fertilizer industry, which was stagnating till FY04, has picked up growth in the last five years. India’s fertilizer consumption, which rose at a CAGR of just 0.6% from FY98 till FY04, jumped to a CAGR of 5.6% subsequently. For FY08, the country consumed over 20.9 million tonne of three major farm nutrients viz. nitrogen, phosphorous and potassium. Five years back, the corresponding figure was 17 million tonnes. The Potential Winners THESE visible trends are expected to benefit the following companies. Most of those in these industries viz. agrochemicals and fertilizers are trading at price-to-book-value multiple of around 2 and price-to-earnings multiple in a single digit figure. United Phosphorous is India’s largest pesticides manufacturer with over half its revenues coming from overseas markets. Over the last few years, the company has expanded its geographical footprint through a series of acquisitions, thereby safeguarding itself from the monsoon-led seasonal fluctuations in Indian market. Rallis India, which is part of the Tata Group, is another strong contender from the pesticide sector. It is one of the leading players in the domestic market and has seen turned around in the last 5 years and is now on a strong growth footing. The company is making targeted efforts to grow its exports, expand capacities and introduce new products periodically to sustain future growth. Tata Chemicals is one of India’s leading manufacturers of urea and di-ammonium phosphate (DAP), with nearly half of its revenues coming from fertilisers. The company has recently expanded its urea capacity by 25% through debottlenecking, which is fuelled by natural gas. Chambal Fertilisers is India’s largest urea producer in the private sector with a capacity of 1.73 million tonnes per annum. The company, which saw its profits wilt between FY05 and FY07, has recovered subsequently. Coromandel Fertilisers, which is part of the Murugappa group, is India’s leading manufacturer of phosphatic fertilisers. RCF, the government-owned fertiliser company, was stagnating between FY99 and FY04, but has picked up steam over last few years. The supply of natural gas is expected to keep it firmly on the growth path in the years to come. Although all the fertiliser companies in India today market micronutrients and water soluble fertilisers to the domestic farmers, Aries Agro is the only listed company fully focussed on this niche business. The demand for these essential soil-enriching products is expected to rise at a double-digit rate in India in coming years. Companies in the production of seeds, one of the key agri inputs, also have good prospects. Advanta India, which shares its parentage with United Phosphorous is India’s leading seeds producer, with global operations in seeds and leadership position in crops like sunflower, sorghum and sweet corn. This company, too, has been on an acquisition spree, acquiring Hyderabad based Unicorn Seeds and US based Garrison and Townsend in 2008 to expand product portfolio and geographical reach. One of the largest areas of public expenditure in agriculture is on irrigation projects. Companies like Patel Engineering and IVRCL Infrastructures and Projects have bagged some of the largest irrigation projects in the country. Any incremental spending in this area is likely to be positive for such companies. Companies like Jain Irrigation, the manufacturer of pipes, irrigation systems and such other farm equipment; Kirloskar Brothers, the manufacturers of pumps and pumping systems and Mahindra & Mahindra, one of the world’s largest tractor manufacturer are the obvious contenders to benefit once a boom sets in in the farm sector. DCM Shriram Consolidated with business interests in sugar, fertilizers & chemicals, seeds and rural retailing (through Hariyali kisan retail stores) is also a good bet due to its varied businesses being closely associated with the farm sector.

CONCLUSION

A widening demand-supply gap and consequent high prices are helping the agriculture industry the world over to hike its ability to investment in the future. In India, the government-lead efforts have provided the necessary impetus to the domestic agriculture industry. These trends are likely to strengthen in the years to come as the food demand continues to grow in line with the global economic growth. The struggle to extract more out of the same piece of land year after year is set to generate more demand for various types of farm inputs, which augurs well for the producing companies. Long-term investors must include these stocks in their portfolios.

Ramkrishna Kashelkar & Kiran Kabtta Somvanshi With inputs from Pallavi Mulay

Aiming higher - 22nd June, 2009

Aiming higher

Although freed from the subsidy-sharing burden, Gail’s last quarter profits took a hit from a sudden spurt in exploration costs. India’s largest natural gas transporter reported a 13% reduction in its fourth quarter profit to Rs 630 crore after a 24% improvement in net sales to Rs 6,104 crore. The company wrote off Rs 126 crore during the quarter towards expenditure on dry wells in its exploration efforts. Although the drilling activity began at eight of its E&P (exploration and production) blocks during the year, only one discovery was made. For the whole year FY09, the company reported an 8% increase in its PAT to Rs 2,804 crore, on the back of a 32% increase in net sales at Rs 23,776 crore. The healthy performance was despite a 36% higher LPG subsidy of Rs 1,781 crore. The company has proposed a final dividend of Rs 3 per share for FY09 in addition to the interim dividend of Rs 4 per share already paid. In FY09, the company sold 14% more natural gas at 79.1 mmscmd (million metric standard cubic metres per day). The higher volumes as well as increased price helped it post a 45% jump in its revenues from the segment to Rs 18,308 crore. The segment’s profits jumped 70% to Rs 348 crore. Gail plans to improve its natural gas sales volumes by 5% to 83.2 mmscmd in FY10. The natural gas transmission business, which is the largest contributor to the company’s profits, grew 10% to Rs 2,482 crore in FY09 as the volumes transmitted rose 1.5% to 83.3 mmscmd. The profits from the segment were 8% higher at Rs 1,598 crore. The company plans a 14% jump in the natural gas volumes transported in FY10 to 94.8 mmscmd. Gail plans to invest Rs. 5,558 crore during FY10 with over 70% to be invested in pipeline projects. The company’s E&P projects would need around Rs 650 crore, Rs 285 crore will be invested in petrochemicals, Rs 130 crore in business development, Rs 250 crore in city gas projects, Rs 200 crore in Ratnagiri Power Company and the rest in telecom. Although the prospects appear bright for the company, the regulations issued by the Petroleum and Natural Gas Regulatory Board (PNGRB) could become a cause for concern. As per these regulations, the natural gas pipeline tariff being charged by the company for its pipeline networks in operation is subject to revision with retrospective effect. In case of a substantial revision, the company’s future profits could suffer.