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Aditya Birla Nuvo - Beginning of a new era

Thu, 31 Jan 2008 09:21:56 EST

Aditya Birla Nuvo - Beginning of a new era - by prakash

Aditya Birla Nuvo Limited

Industry

Rayon

The long-term outlook of VFY is moderate, as demand is expected to grow at a modest rate. Taking this into account, the businesses have chalked out strategic plans towards sustaining volumes and improving realization. All companies have embarked on increasing its share of value-added yarns that give higher realization. Simultaneously, there is a focus on technological improvements to enhance quality. All these efforts will help provide superior customer value and fetch a premium on products. The long-term outlook for the chlor-alkali segment also remains moderate, though realizations may be impacted in the short term.

Carbon Black

Carbon black industry has been facing a rough time with the output of the product exceeding demand. The depressed demand for tyres, source of over 70% of the demand for carbon black, had landed the industry into difficulties. Along with natural rubber, carbon black accounts for more than 80% of the cost of a tyre. It imparts anti-abrasion quality and enhances the tensile strength of rubber. Carbon black is also used in industries such as automotive parts, construction and consumer products. It has applications in printing inks, coatings, electrical cables, plastic films, pipes and sealants. It is used to manufacture dry-cell batteries, electrodes and carbon brushes.

Textiles

India is rapidly becoming a preferred destination for several global brands for sourcing their requirements in the textiles and apparel segment. Thus, the outlook for the industry looks positive.

The outlook on Linen Fabric, in particular, seems to be quite good. Linen is in vogue in domestic as well as export markets. Plans are afoot for opening more exclusive showrooms of Linen Fabric. Thrust on optimum utilization of existing resources, product and design development and penetration in the niche Wool and Worsted segment has been planned.

Insulators

The outlook for the Insulators business is positive with huge investments lined up in the transmission and the distribution segment. The manufacturing business aims to further expand its capacity to capitalize on the strong demand in the sector. Focus on value added products; yield and process improvement would further strengthen the business performance.

Garments

The garment industry in India is betting on technology as one of the major growth factors for the industry. The Indian apparel industry, which took off in the mid 60s, is worth around $15 billion now. The growth over the years has been significant, and technology does have a role to play in that. In fact, the industry has evolved gradually in terms of technology adoption and has reached a critical mass today.

Telecom

The Indian Telecommunications network with 110.01 million connections is the fifth largest in the world and the second largest among the emerging economies of Asia. Today, it is the fastest growing market in the world and represents unique opportunities for companies in the stagnant global scenario. The total subscriber base, which has grown by 40% in 2005, is expected to reach 400 million in 2008.

According to Broadband Policy 2004, Government of India aims at 9 million broadband connections and 18 million Internet connections by 2008. The wireless subscriber base has jumped from 33.69 million in 2004 to 62.57 million in FY2004-2005. In the last 3 years, two out of every three new telephone subscribers were wireless subscribers. Consequently, wireless now accounts for 54.6% of the total telephone subscriber base, as compared to only 40% in 2003. Wireless subscriber growth is expected to bypass 2.5 million new subscribers per month in 2008. The wireless technologies currently in use are Global System for Mobile Communications (GSM) and Code Division Multiple Access (CDMA). There are primarily 9 GSM and 5 CDMA operators providing mobile services in 19 telecom circles and 4 metro cities, covering 2000 towns across the country.

ITeS

The market for domestic ITeS/BPO segment has been estimated at Rs. 3,800 crore in 2005 and is expected to grow at a 52% CAGR to touch Rs. 30,537 crore by 2010, according to a recent IDC-NASSCOM joint study. The domestic ITeS-BPO market is maturing and gaining increasing traction and visibility.The BPO industry, by its very nature is manpower intensive and manpower driven. Therefore, workflow management is a key issue, which faces ITeS-BPO companies. Information Technology solutions play a key role in streamlining workflow processes and workplace issues.In fact, the genesis and growth of the Indian outsourcing industry is largely dependent on the advent of cheap, high-speed voice and data communication telecom links, as well as enabling technologies in the workplace.

So, while the growth story of the Indian ITeS-BPO industry is well charted, what the industry needs to do on a priority basis is to put its best brains together and evolve a mechanism to address the key issues of - recruiting, retaining and nurturing the best talent, working with industry bodies like NASSCOM and the Ministry of Communications and IT (Govt. of India) to formulate and codify India’s IT security laws and best practices, and generate greater awareness on adoption and deployment of enabling technologies.

Financial Services

Market conditions are favouring the Asia/Pacific financial services industry. Financial Insights predicts significant growth in key financial sectors like wealth management, retail banking, private banking, and corporate banking. Sentiment is high, prospects look good, and there is a sense of optimism within the industry.

Software

According to National Association of software and Services Company (NASSCOM), the Indian IT software and services sector fetched revenues of US$29.6 billion in the year 2005 and will achieve the milestone of US$ 60 billion in exports by 2010.

According to a NASSCOM-McKinsey report, annual revenue projections for India’s IT industry in 2008 are US$ 87 billion and market openings are emerging across four broad sectors: IT services, software products, IT enabled services and e-businesses thus creating a number of opportunities for Indian companies. IT exports will account for 35 percent of the total exports from India. By 2008, there is a potential for 2.2 million jobs in IT. IT industry will also attract Foreign Direct Investment (FDI) of US$ 4-5 billion. Software and Services will contribute over 7.5 percent of the overall GDP growth of India Propelled by strong demand from Western clients; the Indian software services industry’s revenues expanded 30.7% in March’07 to US$39.6.

Company Background

Aditya Birla Nuvo Limited, through its subsidiaries and joint ventures, operates in the asset management, business processing outsourcing (BPO), carbon black, fertilizers, financial services, garments, insulators, information technology (IT) services, insurance, telecom, textiles, and viscose filament yarn sectors. The company designs, develops, and sells investment products; and offers investment management and customer services. Its BPO services include inbound and outbound, mail/chat, Web-based, transaction processing, financial accounting, and human resource services for the financial, telecom, technology, and hospitality sectors.

Aditya Birla Nuvo also provides carbon black, which is used in the manufacture of tyres, as well as in rubber auto components, printing inks, paints, plastics, and conveyor belting; manufactures urea, a nitrogenous fertilizer, as well as pesticides and Argon gas; and offers retail asset finance, corporate finance, capital market, and syndication services.

In addition, it provides various readymade men’s and women's wear, and accessories; manufactures high voltage porcelain insulators; and provides IT services, including application/product development, enhancement, maintenance, migration/re-engineering, and QA/testing to customers in the banking, insurance, retail, and software/high tech industries. Further, Aditya Birla Nuvo offers life insurance products and services; GSM mobile services; various types of flax yarns, worsted yarns, synthetic yarns, linen, flame retardant fabrics and other fabrics; and viscose filament yarn, a textile raw material used by the manufacturers of apparel, saris, upholstery, and suit linings.

The company was incorporated in 1956 as Indian Rayon Corporation, Ltd. and changed its name to Indian Rayon And Industries Limited in 1987. Further it changed its name to Aditya Birla Nuvo Limited in 2005. Aditya Birla Nuvo is based in Veraval, India.

Financials

Aditya Birla Nuvo Ltd posted a net profit of Rs 84 crore for the quarter ended December 31, 2007 where as the same was at Rs 52.71 crore for the quarter ended December 31, 2006. Total Income is Rs 1099.37 crore for the quarter ended December 31, 2007 where as the same was at Rs 883.18 crore for the quarter ended December 31, 2006.

The consolidated Results are as follows:

The group has posted a net profit (after minority interest) of Rs 30.17 crore for the quarter ended December 31, 2007 where as the same was at Rs 55.34 crore for the quarter ended December 31, 2006. Total income is Rs 3678.83 crore for the quarter ended December 31, 2007 where as the same was at Rs 2324.62 crore for the quarter ended December 31, 2006.a) On receipt of requisite approvals on August 08, 2007 the Scheme of Amalgamation of the wholly owned Subsidiary of the Company, Aditya Birla Insulators (ABIL), with the Company had become effective with effect from the Appointed Date i.e., April 01, 2007. Accordingly, as on the Appointed Date, the financials of ABIL have been incorporated in the books of the Company.b) AV TransWorks Ltd, Canada, a Subsidiary of the Company has completed the acquisition of Minacs Worldwide Inc., Canada on August 17, 2006.

Valuation

At the current market price, the stock trades at a price/ earnings ratio of 26.2x FY2009E consolidated earnings and enterprise value/EBIDTA of 12.8x FY2009E. Given the diverse businesses, the company is best valued using the sum-of-parts method. Based on the sum-of parts valuation, the fair value of ABN to be Rs 2200 per share. Out of the above telecom, insurance and BPO are the major contributors.

Outlook

Investors can consider taking fresh exposures in the Aditya Birla Nuvo stock at current price levels. The company is a solid proxy on the three high growth themes of telecom, insurance and IT/BPO.

Based on a sum-of-the-parts valuation, these three themes impound nearly 85 per cent of the overall value of Aditya Birla Nuvo, with Idea Cellular, the mobile venture of the group, cornering a sizeable chunk.The listing of Idea Cellular, in which Aditya Birla Nuvo holds a 31.8 per cent equity stake, has imparted greater clarity to the valuations of the latter. Idea Cellular accounts for over 70 per cent of the current market value of Aditya Birla Nuvo. With 14 million subscribers and 11 per cent market share, Idea is well positioned to capitalise on a multi-year mobile expansion story.As an original licensee in seven out of 11 circles that it operates in, it enjoys strong market presence in key circles such as Haryana, Maharashtra, Andhra Pradesh, Gujarat and Uttar Pradesh (West). This is likely to sustain its growth momentum in the coming quarters.

The recent three-year contract signed with Ericsson for GSM expansion and a 10-year pact signed with IBM to transform Idea's business processes and IT infrastructure are encouraging. While it is set to roll out services in Mumbai and Bihar, it has also applied for licences in the remaining 10 circles to become a Pan-India player. The availability of spectrum for new circles, timely project execution and high debt exposure remain the principal risks relating to the mobile venture.

Birla Sun Life Insurance, in which Aditya Birla Nuvo has a 74 per cent equity stake, accounts for about 10 per cent of the market value. Though insurance is a loss-making operation, it has already started making investments in opening new branches, enhancing the agency network and introducing new products to wean away market share from the incumbent.

Finally, TransWorks/Minacs, the BPO venture has the scale to yield good returns in the coming years.To sustain investments in these high growth businesses, Aditya Birla Nuvo has presence in fairly stable and mature businesses such as rayon, textiles, fertilisers, carbon black and insulators that can generate the requisite cash flows.

Grasim Industries - Future Forward

Wed, 30 Jan 2008 08:23:33 EST

Grasim Industries - Future Forward - by prakash

Grasim Industries Limited

Industry

Viscose Staplr Fibre

The long-term outlook for the VSF business remains positive. On the demand front, global VSF consumption has been growing over the past five years, fuelled by an increasing preference for comfort fabrics due to the changing climatic pattern coupled with rising income levels. The demand for VSF in India is also projected to be strong on account of opportunities thrown up by the Quota abolition.

Chemicals

The demand for caustic soda is expected to grow at a healthy rate, buoyed by the anticipated high growth in domestic Alumina production. However, as new capacity additions come in, prices are expected to remain subdued due to the supply pressures.

Cement

The Cement industry has demonstrated a healthy growth of 8.6% in the last five years. With the Indian economy continuing its growth path, cement consumption is expected to grow at 9-10%. The increase in industrial investment and expectations of higher spending on infrastructure portend well for the sector. The robust demand from residential and commercial construction will continue to be the major growth drivers. Capacity additions have been lower than the consumption growth in the last two years. Consequently, the cement industry increased the capacity utilisation levels to cater to the higher demand. Utilisations are expected to remain at higher level during FY08. Enthused by the industry performance during the last 15 months, additional capacities of around 90 million tonnes have been announced by different manufacturers. These capacities, as per such announcements, are expected to be commissioned over three-year period, creating an imbalance in demand and supply resulting in impact on realization. However, impact be partially mitigated by increased volumes and improved cost efficiencies.

Sponge Iron

Sponge iron will play a key role in the development of steel sector as per national steel policy. The industry is very well placed to meet the fast growing demand of metallics. Sponge iron is the substitute for steel melting scrap. Scrap availability is getting difficult and the coking coal reserves are limited. So steel industry has to depend heavily on sponge iron for the supply of metallics in future.

India has an installed capacity of 170 lakh tonne at present. And there are at least 160 more plants in various stages, from planning to implementation. The installed capacity will grow to 3 million tonne in the next five years. Existing sponge iron manufacturers are going in for expansion in addition to large number of Greenfield projects that are in the pipeline.

Textiles

Indian textiles industry is a well established with showing strong features and a bright future. In fact, the country is the second biggest textiles manufacturer worldwide, right after China. Similar force is demonstrated in the cotton production and consumption trend where India ranks just after China and USA. The textiles manufacturing business is a pioneer activity in the Indian manufacturing sector and it has a primordial importance in the economic life of the country, which is still predominantly based on the agro-alimentary sector. Employing around 35 million people, textiles industry stands as a major foreign currency revenue generator and further proves it in its 14% share of industrial production and the 16% of export revenues it generated.

The future of the textiles industry seems to be bright in all aspects. As such Government places all its trust and relies sector for its strong 'employment creation' capability, more precisely in the garments manufacturing side. Lowering tax burdens on companies will play an important part in cutting down production costs and boosting competitiveness, increasing ability to tap high-volume orders from the global market. Modernization would enable companies provide quality and volume solutions which is in constant demand by international buyers.

Company Background

Grasim Industries, a flagship of the Aditya Birla Group was originally incorporated asGwalior Rayon Silk Manufacturing (Weaving) Company in 1947. The company’s key businesses are viscose stable fibre (VSF) and cement. It also produces sponge iron, chemicals and textiles.

Grasim, which commenced operation in 1950 by manufacturing fabrics using imported rayon (a manmade cellulosic fibre) at Gwalior, has now turned into India’s top ten largest private sector companies in terms of assets and sales. The company’s foray into cement became a successful diversification and now it is the largest producer of cement in India with the acquisition of UltraTech Cemco (erstwhile L&T). Previously, it acquired Shree Digvijay Cement, cement division of Indian Rayon and Dharani Cement.

The company had successful joint ventures abroad that include viscose staple fibre plants in Thailand & Indonesia and carbon black plants in Thailand & Egypt and pulp plant in Canada. Joint ventures in India are Tanfac Industries, Bina Power Supply Company, Birla AT&T Co and Bihar Caustic & Chemicals. The company divested its stake in Mangalore Refinery and Petrochemicals. The company also acquired controlling stake in Bihar Caustic & Chemicals by an open offer made during 2002-03.

Grasim’s subsidiaries are Kerala Spinners, Sun God Trading and Investments and Samruddhi Swastik Trading and Investments. The company hived off its software business Birla Technologies Ltd (BTL) to PSI ata Systems, a group company for a consideration of Rs113mn during the year 2001-02.

Financials

Grasim Industries Limited posted good results for the 3rd quarter ended 31st December 2007. The improved performance was propelled by its core businesses, viz., Cement and Viscose Staple Fibre (VSF). The Company’s Chemical and Sponge Iron businesses too aided the performance. Revenues increased by 19% y-o-y to Rs.4, 358 crores (Rs.3, 668 crores). Gross Profit rose by 26% at Rs.1, 420 crores (Rs.1, 128 crores). Net Profit was higher by 29% at Rs.722 crores (Rs.559 crores).

VSF Business

VSF business recorded a positive performance during the quarter. The Company plans to expand its capacity by 94,875 tons, through capacity additions of 63,875 tons at Kharach (Gujarat) and 31,000 tons at Harihar (Karnataka), at an estimated outlay of Rs.606 crores. Upon completion, the Company’s VSF capacity will be 364,975 tons. Alongside, a Greenfield 88,000 tons plant is being set up at Vilayat (Gujarat) at an estimated capital cost of Rs.840 crores. The plant is expected to go on stream in about 2-3 years’ time. The Company plans to foray into the consumer product segment with a test launch of non-woven products.

Chemical Business

The Chemical plant’s performance improved during the quarter. Production of caustic soda was higher by 68% at 50,452 tons. During the corresponding quarter, production was lower owing to the shut down of a captive power plant. Sales volumes rose by 70% at 49,978 tons.

Cement Business

The performance of Cement business was good. Both production and sales volumes were a tad higher at 3.69 million tons and 3.76 million tons respectively. The share of blended cement increased from 61% to 66%. 13 RMC plants were commissioned during the current year. Higher realisation during the quarter, however, was set off by the steep hike in fuel cost and increased freight cost, which impacted margins. The White Cement unit reported a healthy performance. While production grew by 15% at 105,123 tons, sales volumes improved by 11% at 103,879 tons.

UltraTech Cement Limited (UltraTech), a subsidiary of Grasim, too reported improved performance. Sales of cement and clinker were at 3.66 million tons and 0.71 million tons respectively. Net Profit was higher at Rs.281 crores.

The capex plans of both Grasim and UltraTech are progressing satisfactorily. The Company’s aggregate cement capacity (including that of its subsidiaries) will stand augmented by 17 million tons at 47 million tons, upon completion of all expansions. Besides, both the Company and its subsidiary are setting up Ready Mix Concrete plants at various locations in the country. The additional capacity of around 90 million tons, as announced by the industry, over the 3-year period FY08 to FY10, could result in a surplus scenario, affecting realisation from end-FY09. Rising energy prices would lead to increased costs. However, the addition of captive power plants at various locations will help contain this impact. The strong growth in demand emanating from the housing and infrastructure sectors bode well for the Company’s Cement business.

Sponge Iron Business

The performance of Sponge Iron business improved during the quarter. Operating profits improved, despite a steep increase in iron ore prices, owing to higher realisation. The outlook for the business is expected to improve with adequate gas availability, likely by March’08. The pricing of gas, being uncertain, continues to be a concern.

Valuation

At the current market price Grasim Industries trades at a P/E of 10.9X FY08E earning and EV of 6.25xFY08E EBIDTA. Compared to other cement majors, Grasim is trading at an attractive valuation on all parameters.

Outlook

Grasim Industries is expected to post a 39% Y-o-Y growth in revenue and 134% Y-o-Y growth in EBIDTA with margins improving by 1290 basis point to 31.9% on a consolidated basis. On the back of 8% growth in despatches and 53% growth in realization, Grasim’s cement division is expected to post a 54% y-o-y growth in revenue. PBIDT is likely to be up by 1261 basis points to 34.3%.

VSF business is expected to show a 13% growth in revenues on the back of 1% de growth in volume sales and 19% higher realization. EBIDTA margins may improve by 1650 basis points to 40%.

Sponge Iron business is likely to show a slightly better result on improved realizations but overall performance to remain subdued due to lower volumes. Revenues will grow by 10% and PBIDT increasing to Rs.80 million as against Rs.33 million last year.

Backed by significant improvement in Ultratech performance, Grasim Industries is expected to report a 180% YoY growth in net profit at Rs.5459 million.The company is expected to post better set of numbers on the back of upturn in its major business of cement and VSF. Besides its Sponge iron business seems to have bottomed out as performance is expected to improve after FY07 end when the availability of natural gas is likely to improve.

DCW - The warrior!!

Tue, 29 Jan 2008 08:20:11 EST

DCW - The warrior!! - by prakash

DCW Ltd

Industry

Chemical industry is one of the oldest industries in India. It not only plays a crucial role in meeting the daily needs of the common man, but also contributes significantly towards industrial and economic growth of the nation.

The global chemical industry, estimated at US$ 2.4 trillion, is one of the fastest growing sectors of the manufacturing industry. Despite the challenges of escalating crude oil prices and demanding international environmental protection standards now adopted globally, the chemicals industry has still grown at a rate higher than the overall-manufacturing segment. As per industry reports the pharmaceutical segment contributes approximately 26% of the total industry output and the petrochemical segment dominates by 35-40%.

Commodity chemicals is the largest segment in the chemicals market with an approx. size of $ 750 billion while the specialty and fine chemicals segment accounts for $ 500 billion. Some of the major markets for chemicals are North America, Western Europe, Japan and emerging economies in Asia and Latin America. The US consumes approximately one-fifth of the global chemical consumption whereas Europe is the largest consumer with approx. half the consumption. The US is the largest consumer of commodity chemicals whereas Asia Pacific is the largest consumer of agrochemicals and fertilizers.

Chemical Industry is one of the oldest industries in India, which contributes significantly towards industrial and economic growth of the nation. It is highly science based and provides valuable chemicals for various end products such as textiles, paper, paints and varnishes, leather etc., which are required in almost all walks of life. The Indian Chemical Industry forms the backbone of the industrial and agricultural development of India and provides building blocks for downstream industries.

Chemical Industry is an important constituent of the Indian economy. Its size is estimated at around US$ 35 billion approx., which is equivalent to about 3% of India's GDP. The total investment in Indian Chemical Sector is approx. US$ 60 billion and total employment generated is about 1 million. The Indian Chemical sector accounts for 13-14% of total exports and 8-9% of total imports of the country. In terms of volume, it is 12th largest in the world and 3rd largest in Asia. Currently, per capita consumption of products of chemical industry in India is about 1/10th of the world average. Over the last decade, the Indian Chemical industry has evolved from being a basic chemical producer to becoming an innovative industry. With investments in R&D, the industry is registering significant growth in the knowledge sector comprising of specialty chemicals, fine chemicals and pharmaceuticals.

The Indian Chemicals Industry comprises both small and large-scale units. The fiscal concessions granted to small sector in mid-eighties led to establishment of large number of units in the Small Scale Industries (SSI) sector. Currently, the Indian Chemical industry is in the midst of a major restructuring and consolidation phase. With the shift in emphasis on product innovation, branch building and environmental friendliness, this industry is increasingly moving towards greater customer orientation. Even though India enjoys an abundant supply of basic raw materials, it will have to build upon technical services and marketing capabilities to face global competition and increase its share of exports.

As the Indian economy was a protected economy till the early nineties, very little large-scale R&D was undertaken by the Chemical industry to create intellectual property. The Industry would, therefore, have to make large investments in R&D to successfully counter competition from the international chemicals industry. India has a number of scientific institutions and the country’s strength lies in its large pool of highly trained scientific manpower.

India also produces a large number of fine and specialty chemicals, which have very specific uses and are essential for increasing industrial production. These find wide usage as food additives and pigments, polymer additives, anti-oxidants in the rubber industry, etc.

Company Background

Incorporated in 1939, DCW was taken over by the present promoters led by the late Sahu Shriyans Prasad Jain. The company manufactures soda ash, caustic soda, PVC resins, soda bicarbonates, trichloroethylene, synthetic rutile, titox, utox, bromine, bromide and a few other chemicals. The company had also introduced a range of home products like packaged spices, flour and iodised salt. However, later, it sold its Captain Cook brand of home products to International Bestfoods. The soda ash plant is at Dhrangadhra, whereas the chlor-alkali and PVC plants are located at Tuticorin in Tamil Nadu. The company was incorporated in 1939 as Dhrangadhra Chemical Works Ltd. In 1987, the name was changed to the present one. The company’s entire shareholding in DCW Home Products Ltd has been transferred to Crescent Finstock Pvt Ltd following a Gujarat High Court approval. After this, DCW Home Products` best-selling Captain Cook brand has been sold to Corn Products Company, a 74% subsidiary of the US-based Bestfoods Inc.

Financials

DCW Net profit rose 117.82% to Rs 13.81 crore in December quarter of 2007 as compared to Rs 6.34 crore in the QOQ of December 2006. Sales rose 71.80% to Rs 208.91 crore in December quarter of 2007 as compared to Rs 121.60 crore in the QOQ of December 2006.

Valuation

DCW Ltd has a well-diversified product portfolio with its divisions of Chlor alkali, PVC and Soda ash on growth trajectory. Firm prices across product categories will provide significant boost to revenues and margins in the coming quarters. At the current market price the stock trades at 6x PE of its FY09E. At the current level the stock is attractively valued.

Outlook

Production of caustic soda is highly power intensive - 2/3rd of total cost. On account of shortage of power in China and rise in demand (both domestic and international) for chlor-alkali products the prices have firmed up significantly compared to that in the previous year. DCW, which has 15% market share for caustic soda in southern India, is well placed to take the advantage of this price hike with its captive power plants, power efficient membrane cell technology and firm orders from Aluminium producers (its major customers). The prices will remain firm in the current fiscal and that would provide a boost to the revenues and margins in the coming quarters.

Various manufacturers in the country have announced plans to add capacity of 4 lakh tonnes (in next 4 years) to the existing production capacity of 8.8 lakh tons. It is expected that even after such a capex, India would remain net importer on back to increasing domestic demand. DCW’s PVC division mainly caters to pipe industry, cables and films and is venturing into supplies to construction industry. The company is in the process of replacing its existing glass lined reactors with that of Stainless steel. This would help to add 10000 tons to the existing production capacity of 80000 TPA.

By replacing the old carbonators with 3 carbonation towers the company has increased the production 7000 MT and the new capacity stands at 1.03 Lakh TPA. Salt, the major salt raw material is produced at the company’s own salt works - just 22 kms away from plant. The company’s detergent manufacturing capacity consumes the captive soda ash production (close 10% of soda ash produced). Prices of products in this division (soda ash, sodium bicarbonate) have been above the previous years average prices and are expected to remain firm in the coming quarters.

East India Hotels- The new blockbuster in the making...

Mon, 28 Jan 2008 08:58:11 EST

East India Hotels- The new blockbuster in the making... - by prakash

East India Hotels (EIH) Ltd

Industry

The travel and hospitality industry continues to be the sector, which has largely profited from the fast growing economy of India. This has largely been due to the 4.4 m tourist arrivals in FY07 (13% growth) over the previous period. The compounded growth in tourist inflow over the last ten years (FY97-FY07) has been 4.3%, while in the last five years; growth stands at 11.6% per annum. The hotel industry went through a rough patch between FY00 to FY04 owing to factors like the Asian financial crisis, Afghan war, Middle East unrest, September 11 attacks, SARS and domestic riots.

India occupies the forty-sixth position among the sixty tourist destinations in the world. The flourishing economy helped boost the demand for the industry. Globalisation and liberalisation gave it a new impetus. Also, to encourage the tourism sector, the government is planning to propose a conditional 10-year tax holiday for all tourism projects in the country. Companies will enjoy full tax exemption up to 50% of profits, but will qualify for tax benefits for the remaining amount only if they re-invest it in tourism projects. The Centre and States are also working out a PPP (Public-Private-Partnership) model to increase hotel capacity. Efforts to diversify tourist attractions by offering new products such as adventure tourism, wellness tourism, medical tourism and golf tourism are expected to have a positive effect on both foreign tourist arrivals and domestic tourism.

As per the 2006 findings, the total number of approved rooms by the Government of India stands at around 99,000 (estimated). These rooms are further classified into various segments out of which, Five star and Five star deluxe hotels account for around 27% of the total capacity, three star hotels (22%), four star (8%), two star (9%), one star and Heritage hotels (2% each) and the rest is divided between unclassified and unapproved hotels.

The five star hotel segments has grown the fastest during the last five years at a CAGR of 12%. Further this segment can be divided into 3 sub-segments namely Luxury, Business and Leisure. The growth in this segment indicates the genre of travelers coming into the country. Over the last few years the country has witnessed a large influx of business travelers in the country owing to relaxation of the government’s stand on Foreign Direct Investments (FDI) for most of the sectors in the country.

With the foreign traffic in the country touching 4.4 m mark, the hotel industry reached new heights this year. With disposable incomes having gone up, the leisure destinations have benefited and with the heightened industrial activities, business destinations have witnessed a healthy surge in the tourist traffic. Though both leisure and business travel was in upswing this year, it was the foreign business travel which grew the fastest.

Due to the favourable demand supply gap prevailing in the country, the average room rates (ARRs) and occupancy rates witnessed an increase for the third year in a row. The all-India occupancy mark touched the 70.8% mark for the first time and many cities were completely sold out on a number of weekday nights, resulting in hotels hiking their rates sharply.

India is no longer a city of metros with the growth having spread to newer regions. On the back of the service sector spreading its reach to smaller towns, clusters of manufacturing hubs emerging across the country and large SEZs being established across states, the demand for hotels in these regions have increased. Over the last 2 years, IT cities like Pune and Hyderabad, satellite towns of Faridabad, Gurgaon, Noida and Ghaziabad and tourist destinations like Jaipur and Goa are witnessing faster growth in room rates and occupancy than the metros.

Around 25,000 total rooms across different segment categories are present in Mumbai, Jaipur, NCR, Bangalore and Pune among other cities. Around 50,000 new rooms are expected to come up in these cities by the end of 2009. Each city will have different factors that will drive revenue growth for hotels. For instance, the Commonwealth games in Delhi, IT boom in Hyderabad and Pune would drive the demand for rooms going forward. Of the new rooms, while 53% will be added in the luxury and first class segment, 47% will come up in the mid market segment of which 16% will be budget hotels. Hotel majors have lined up expansion plans across segments to capitalise on the rising tourist inflow.

Company Background

M.S. Oberoi established East Indian Hotels (EIH) in 1949 and is the flagship company of Oberoi group. It owns the second largest chain of hotels in India. The company is in luxury hotels, restaurant, management contracts and travel and tours business.

The company’s various business activities are illustrated below:

Financials

EIH posted a net profit of Rs 427.50 million for the quarter ended September 30, 2007 as compared to Rs 273.90 million for the quarter ended September 30, 2006. Total Income has increased from Rs 2042.60 million for the quarter ended September 30, 2006 to Rs 2351.20 million for the quarter ended September 30, 2007.

Valuation

Given the robust growth in the tourist inflows to India, strong ARRs and firm occupancies, along with significant expansion plans, EIH is expected to maintain its margins and return ratios in the medium-term followed by a strong growth in FY10. The current business seems fairly valued. Upsides could be expected once its BKC project nears completion. At the current price the stock trades at 26.45x FY08E EPS of Rs5.37 and 25.58x FY09E EPS of Rs 5.55.

Concerns

Any delays in upcoming properties would impact revenue estimates, thereby affecting profitability negatively.
Tourist inflows into India have been growing at a robust rate of 18% from 2003 to 2006. In 2006, tourist arrivals touched record levels of 4.4 million. For the nine months in 2007, tourist arrivals have shown a healthy growth of 14% over corresponding period in 2006. Although tourist inflows is expected to grow, any slowdown would bring a deceleration to the Indian hospitality dream run.
Other South Asian countries have also been focusing on tourism, and are attracting visitors from India and other parts of the world. Many corporate groups have been booking group packages. These destinations pose competition for leisure hotels. But EIH does not face such competition, as its revenue drivers are properties located in areas where it focuses on the business travelers.
Travel and tourism industry is highly sensitive to risks arising from terrorist activities. In case a destination country being prone to terrorist strikes, the originator countries may pass a word of caution or on the extreme not allow their citizens to visit such countries, thereby impacting the hospitality business adversely for such period.
The demand-supply mismatch of quality rooms has increased in favour of the hospitality sector, so has the imbalance in availability of trained staff. The employee cost has increased to as much as 21%-24% in the hospitality sector. This is the single largest component of expenditure and a further crunch in workforce could drive costs even higher thus hitting the margins and bottom line.

Outlook

According to the 2002 estimates of the World Tourism Organisation (WTO), international tourist inflow in India by 2020 would be 10 m, which means the tourist influx has to grow at a CAGR of 6.5% for the next 12 years. This makes the country one of the fastest growing tourist destinations in the world second only to China. As of FY07, the increase in the tourist arrivals is well inline with the WTO estimates.

India accounts for 0.5% of world tourism, and the tourist inflow is expected to grow at the rate of 4% till 2010. Strong GDP growth, improving infrastructure, confidence on the country's economic prospects, open sky policy and the 'Incredible India' campaign has improved the outlook for India. This positive outlook would increase the tourist arrival in the country and the hotel industry is expected to be the major beneficiary. Even domestic tourism is gaining momentum. Rising disposable incomes, cheaper airfares and better connectivity would continue to increase the demand for rooms. The favourable demand supply gap is likely to continue till FY09 when major expansions would come in. With no new supply coming in the near future, average room rates are expected to surge higher. ARRs have grown at a compounded rate of 18% over the last three years.

Many international hotel chains either have or are on the look out for setting up shop in the country. Companies like the Hilton and Hyatt group have already tied up with local giants East India Hotels and Asian Hotels. Others like Four Seasons, are on the lookout for a partner or would be setting up their own hotels, government permitting. This clearly shows that India is on the international tourism radar.Although prospects are promising, as mentioned earlier, any change in the global geo-political situations can and have adversely affected the performance of this sector. Also, the heightened demand for land, especially from real estate players has led to a steep escalation in the prices. Also, shortage of manpower is going to be a huge challenge going forward. Hotel players with a diversified portfolio across different segments are likely to be the key beneficiaries. This should be one of the determining factors while investing in this sector.

Addition of rooms in the hospitality sector is a capital-intensive activity, which causes a constraint on the free cash flows of companies and thereby impacts return ratios negatively in the short run. EIH is expected to run through this cycle in its expansion period. In FY08 and FY09, a dip in return on net worth to 16.7% and 15.4% as against 17.9% in FY07 is expected. However, the return will rebound in FY10 to 17.7% once the new hotels get commissioned. With EIH’s ARRs firm at more than Rs 10,000 on standalone basis, increased room base and business outlook to be robust. It is foreseen that the return on capital employed to head northwards post FY09 to 14.4% in FY10 from 13.4% in FY07 post sliding to 12.2% in FY08 and 11.5% in FY09.

Bombay Dyeing - A new story

Sun, 27 Jan 2008 08:24:34 EST

Bombay Dyeing - A new story - by prakash

The Bombay Dyeing Mfg. Co. Ltd

Industry

The Indian Textile Industry is growing at 20% and accounts for 4% of India’s GDP. It contributes 14% to the Industrial Production and employs about 35 million people. It accounts for 21% of India Gross Export Earning. Foreign Direct Investments inflows worth €681.59 million have been received by the industry between Aug 91 and May 06, accounting for 1.29% of total FDI inflows in the country.

India contributes 20% to world spindleage capacity, the second highest spindleage in the world after China. It contributes 6% to the world rotorage and 62% to the world loomage. However in High-tech Shuttless Looms this industry’s contribution is only 4.1% to the world Shuttless loomage. 12% to the world production of textile fibres and yarns is from India and is the largest producer of Jute, second largest producer of silk and cellulose fibre / yarn, third largest producer of cotton and fifth largest producer of synthetic fibres / yarns.

India’s key assets include a large and low-cost labour force, sizable supply of fabric, sufficient raw material and spinning capacities. On the basis of these strengths, India will become a major outsourcing hub for foreign manufacturers and retailers, with composite mills and large integrated firms being their preferred partners. It will thus be essential for SMEs to align with these firms that can ensure a market for their products and new orders.

The Indian textile industry is as old as the world textile industry. In fact the first known cotton cultivation seems to be from India followed by UK. Bombay or Mumbai as it is known today is synonymous with the textile industry in India and also has the soubriquet “Manchester of the East”. However a lot of these activities has been established in Gujarat and Chennai which are increasingly gaining the attention of the world textile buyers. Mumbai due to its high urbanization is becoming more of realty market.

Lot of niche markets are opening up in India. One such market is Tirupur Textile Industry located near Chennai. The place has become synonymous with the exports of Indian Knit wear. The industry based here is truly thriving with all the modern equipments and technologies. It is estimated that around 35 countries of the world visit Tirupur every month. It is estimated that the place delivers samples of custom-made knit wear in about 12 hours and up to half a million pieces within a few days. All for the dedication and hard work of workers as well as exporters whose ultimate goal is to meet the international buyer’s requirement sometimes quite unreasonable. Today Tirupur can boast itself being in the elite list of towns with the largest foreign exchanges in India. Super quality brands like Wal-Mart’s, JC Penney, Marks and Spencers have shown a keen interest in the Tirupur textile industry consisting of around 7,000 garment units providing employment to more than a billion people.

The world is looking up to the Indian textile industry to deliver its goods using technologies used and developed elsewhere be it the USA or Japan or Hong Kong. India has an untapped potential to become in the top three list of producers as well as exporters.

Company Background

Bombay Dyeing is one of India's largest producers of textiles. The daily production at Bombay Dyeing exceeds 300,000 meters of fabrics and it has a distribution chain consisting of 600 plus exclusive shops spread all over the country. Bombay Dyeing, exports to advanced countries such as USA, countries in European Union, Australia and New Zealand, and its sales turnover is more or less equally divided between National and International markets. Apart from the textiles, Bombay Dyeing also deals in the chemicals.

Bombay Dyeing is part of the Wadia Group, which is more than 250 years old. Wadia Group initially ventured into the area of ship building, and more than 355 ships were designed and built by the Group. As the industrialization grew in the 19th century, so did the trading, and new opportunities for business. In the late 19th century, Bombay was one of the major cotton ports of the world. Nowrosjee Wadia sensed an opportunity in India's mushrooming textile industry and on August 23, 1879, Bombay Dyeing was founded in a humble redbrick shed. Since then, Bombay Dyeing has grown into one of India's largest producer of textiles. The company also diversified and pioneered the manufacturing of various chemicals.

Financials

Bombay Dyeing reported an increase of 33.5 per cent in its net profit at Rs 14.29 crore for the second quarter as compared to Rs 10.7 crore for the same period last year.

The total income increased by 32 per cent at Rs 173.75 crore (Rs 131.49 crore). The cost of real estate is net of revaluation reserve of Rs 7.66 crore of an earlier year and Rs 75.62 crore for the year ended March 31, 2007, according to a company release. The net sales of the company rose by 32.8 per cent to Rs 168.18 crore from Rs 126.61 crore of the same period last year.

The operations at the polyester staple fiber plant, which were suspended for modifications, re-commissioned during second week of September and commercial production commenced from October 1.

Valuation

The stock is currently trading at PE multiple of 16.92x and 16.40x on FY08 and FY09(E) earnings respectively.

There has been significant increase in expected value accretion in its real estate at Dadar and Lower Parel. Substantial changes in planned development (inclusion of hotels which would enjoy 100% higher FSI limits v/s residential and commercial development) have allowed the company to increase its developable area from 3.7m sq/ft at both its plants to 4.3m sq/ft, an increase of 16%.

Bombay Dyeing has reworked its property development plans aimed at unlocking hidden value from its prime properties at Dadar and Lower Parel. Contrary to earlier plans of selling a majority of its developable area outright, it now plans to sell only 0.4m sq ft at Dadar, while commercially leasing the remaining 3.9m sq/ft. This strategic shift would be more value accretive for the company, which would enjoy healthy yields from its leased properties and also capture any potential appreciation in its prime real estate.

Long-term strategic plans propose to turn around its traditional textile business comprising home textiles and DMT by FY08-09. DMT is already being forward integrated to PSF, which is expected to be fully functional from 4QFY07. Post relocation of the home textile plant, home textile capacity is expected to double and margins are expected to expand sharply.

Outlook

Investments in the textiles sector can be assessed on the basis of three factors:

• Plan schemes such as the Technology Upgradation Funds Scheme (TUFS)Under the TUFS scheme, a total of €15.9 billion has been disbursed for technology upgradation. There are around 26 Apparel Parks in eight states in India, with a total estimated investment of €2.3 billion

• Technology Mission on Cotton

• Apparel Parks, etc.

A competitive industry, Apparel has the potential of achieving export earnings of €25.46 billion by 2010. Specialized textile parks, apparel parks, EOUs and EPZs have been set up with Improved infrastructure. The apparel parks operate as Special Purpose Vehicle and are run independently by entrepreneurs.

Government support has ensured that key policy changes in the fiscal regime have been made in the past two years, which would ensure rapid increase of clothing consumption as well as the fibre consumption. A single rate will now be prevalent throughout the country.

Opportunities in the Textile Sector

• Global Textile and apparel trade is estimated to be €340 billion

• Indian industry estimated at €35 billion with exports of €12 billion and employs 35 million people

• India is the third largest producer of cotton, largest exporter of yarn (25% of world cotton yarn export)

• India is a major player in the home textile segment (61% of world loom capacity)Garment outsourcing

• Wal-Mart, Levis, Gap, JC Penny, Marks & Spencer, and other foreign labels are buying more and more garments and fabrics from India.

• Wal-Mart alone bought €1.6 million in the year 2005 and it intends to increase this to € 2.3 billion in the next year. European giant GAP is also outsourcing apparel from India.

• Singapore based Crocodile International has announced its plans to invest an additional €.39 million.

• India is also developing design skills that cover different fabrics and different markets.

• The Indian silk industry, which is known for its finery and masterly brocades, are also a great strength to the textile industry.

Bombay dyeing has been in this industry for decades and well positioned to exploit all opportunities arising from the global and domestic demand.

Oriental Hotels - The right way

Sat, 26 Jan 2008 13:43:27 EST

Oriental Hotels - The right way - by prakash

Oriental Hotels Limited

Industry

Hotel Industry in India has witnessed tremendous boom in recent years. Hotel Industry is inextricably linked to the tourism industry and the growth in the Indian tourism industry has fuelled the growth of Indian hotel industry. The thriving economy and increased business opportunities in India have acted as a boon for Indian hotel industry. The arrival of low cost airlines and the associated price wars have given domestic tourists a host of options. The 'Incredible India' destination campaign and the recently launched 'Atithi Devo Bhavah' (ADB) campaign have also helped in the growth of domestic and international tourism and consequently the hotel industry.

In recent years government has taken several steps to boost travel & tourism which have benefited hotel industry in India. These include the abolishment of the inland air travel tax of 15%; reduction in excise duty on aviation turbine fuel to 8%; and removal of a number of restrictions on outbound chartered flights, including those relating to frequency and size of aircraft. The government's recent decision to treat convention centers as part of core infrastructure, allowing the government to provide critical funding for the large capital investment that may be required has also fuelled the demand for hotel rooms.

The opening up of the aviation industry in India has exciting opportunities for hotel industry as it relies on airlines to transport 80% of international arrivals. The government's decision to substantially upgrade 28 regional airports in smaller towns and privatization & expansion of Delhi and Mumbai airport will improve the business prospects of hotel industry in India. Substantial investments in tourism infrastructure are essential for Indian hotel industry to achieve its potential. The upgrading of national highways connecting various parts of India has opened new avenues for the development of budget hotels in India. Taking advantage of this opportunity Tata group and another hotel chain called 'Homotel' have entered this business segment.According to a report, Hotel Industry in India currently has supply of 110,000 rooms and there is a shortage of 150,000 rooms fueling hotel room rates across India. According to estimates demand is going to exceed supply by at least 100% over the next 2 years. Five-star hotels in metro cities allot same room, more than once a day to different guests, receiving almost 24-hour rates from both guests against 6-8 hours usage. With demand-supply disparity, hotel rates in India are likely to rise by 25% annually and occupancy by 80%, over the next two years. This will affect the competitiveness of India as a cost-effective tourist destination.

To overcome, this shortage Indian hotel industry is adding about 60,000 quality rooms, currently in different stages of planning and development, which should be ready by 2012. Hotel Industry in India is also set to get a fillip with Delhi hosting 2010 Commonwealth Games. Government has approved 300 hotel projects, nearly half of which are in the luxury range. The future scenario of Indian hotel industry looks extremely rosy. It is expected that the budget and mid-market hotel segment will witness huge growth and expansion while the luxury segment will continue to perform extremely well over the next few years.

Company Background

Oriental hotels own and operate hotels and restaurants in India. The hotels include the Taj Coromandel Hotel and Fisherman's Cove located at Chennai, Taj Residency Hotel located at Visakhapatnam, Taj Garden Retreat located at Madurai and Coonoor, Hotel Manjarun located at Mangalore and the Taj Malabar Hotel located at Kochi.

Financials

The Total Income for the quarter ended September 30, 2007 increased by 13% over the corresponding period of the previous year. As a result, profit before tax and after tax increased by 28% and 27% respectively over the corresponding period of the previous year. This is despite major renovations in Taj Coromandel (64 Rooms and two major restaurants being closed for renovations).

Valuation

Oriental is trading at 12.6x FY08CL, a discount of 25% to Indian Hotels. During FY08 any decline in rates in a particular city would be cushioned by tariff increases in other cities. Further the Indian hotel industry has recently started the practice of single rupee tariff (earlier practice of a rupee and a USD tariff), which will help it to counteract the pressures from a strong rupee.

Outlook

The phenomenal growth of the service sector has had a direct impact on the real estate sector. According to Knight Frank estimates, close to 100 mn sq ft of office space will be developed in the country over the next two years, 80 per cent of which will be taken up by the IT/ITES sector. Besides this, approximately 120 mn sq ft of mall space will come up in the market by 2008. Another segment which is benefiting from the growth of the service sector is the hotel industry. Liberalisation of the Indian economy coupled with the growth in domestic business and a buoyant economic outlook has led to an enhancement in business travel in India.

According to Government of India estimates, the foreign arrivals in India increased by 11 per cent between 2004 and 2005 and by 15 per cent between 2005 and 2006. More than 50 per cent of this are foreign business travelers. Besides this, approximately 300 million domestic travelers traverse the country each year and this number is expected to witness a growth of 10-15 per cent over the next few years. Also, the efforts made by the ministry of tourism & culture in the last few years have had a salutary effect on India's tourism industry. As per a survey undertaken by an international travel magazine in 2006, India has been ranked as the 4th most favoured country for holidays, above South Africa and Switzerland. Coupled with this, availability of low cost medical facilities and the introduction of low cost airlines are all expected to generate increased demand for hotel rooms across many cities in India.

Oriental Hotels has the right association and the right strategy to cash in on the boom experienced in the Indian hospitality sector.

Ambuja Cements - Gearing up!

Fri, 25 Jan 2008 04:42:13 EST

Ambuja Cements - Gearing up! - by prakash

Ambuja Cements Limited

Industry

The Indian cement industry is on a growth path. Driven by a booming housing sector, global demand and increased activity in infrastructure development such as state and national highways, the cement industry has outpaced itself, ramping up production capacity, attracting the top cement companies in the world, and sparking off a spate of mergers and acquisitions to spur growth.

The increased demand has in turn led to a rise in the capacity utilization crossing the 100 per cent mark. In fact, according to Cement Manufacturers Association (CMA), the average monthly capacity utilisation during fiscal 2006-07 was 94 per cent. And due to the sustained demand levels, the growth in capacity utilization has continued in the current fiscal 2007-08, with 94 per cent capacity utilization for the period April-September as against 90 per cent during the corresponding period quarter last fiscal.

Simultaneously, cement despatches for the recently concluded fiscal was at an all-time high of 155 million tonnes (mt), up from 142 mt in the previous fiscal, thereby recording a growth of 10 per cent. During the first half of the current financial year, despatches (including exports) have also jumped by 8.19 per cent to reach 80.24 mt.

Globally, India is the second largest producer of cement. Cement production grew at the rate of 9.1 per cent during 2006-07 over the previous fiscal's total production of 147.8 mt. Of this, 9.3 mt of cement was exported. Continuing the growth momentum, cement production increased by 8.4 per cent to 80.85 mt during the period April-September from 74.58 mt during the corresponding period last year. Simultaneously, the industry has added 6.35-mt capacities in the first two quarters of the current financial year. With this, the country's total capacity has moved up from 166.73 mt to 173.08 mt, an addition of 3.80 per cent, according to the Cement Manufacturers Association.

The Indian cement industry comprises 130 large cement plants and 365 mini-cement plants, with installed capacities of 165 million tonnes per annum (mtpa). Large cement plants accounted for over 94 per cent of the total installed capacity. Despite the growth of the Indian cement industry, India's per capita production of 115 kilograms per year lags the world average of over 250 kilograms and China's production of more than 450 kilograms per person. Also, the per capita consumption of cement in India is estimated to be 150 kilogram per annum, which is less than one-third of China's per capita consumption. Clearly there remains room for growth in the industry in India.

Buoyed by the strong demand, increased capacity utilization and highly remunerative price levels many companies have been planning major capacity additions. According to the latest ICRA Industry Monitor report, installed capacity of the cement industry is expected to increase to 186 million tonnes per annum (mtpa) by end of 2007-08, 219 mtpa by end of 2008-09, and up to 241 mtpa by end of 2009-10.

Along with the investment in Greenfield projects, the Indian cement industry has also witnessed a flurry of mergers and acquisitions within the domestic players, bringing smaller players under the umbrella of larger companies, and larger companies coming under the umbrella of global players like Holcim and Heidelberg. For example, the top two groups in the industry, Aditya Birla Group and Holcim Group, now control more than 40 per cent of total capacity in the country.

The booming demand for cement, both in India and abroad, has attracted global majors to India. By 2005-06, four of the top-5 cement companies in the world had already entered India. These include France's Lafarge, Holcim from Switzerland, Italy's Italcementi and Germany's Heidelberg Cements. Currently, global majors are now controlling more than a quarter pie of total capacity.

Company Background

Ambuja Cements Limited was earlier known as Gujarat Ambuja Cements Limited (GACL). The company was set up in 1986. In this short span Ambuja Cements has achieved massive growth and presently, the total cement capacity of the company is 16 million tonnes. The company has three subsidiaries, viz, Ambuja Cement Rajasthan Limited (ACRL), Ambuja Cement Eastern Limited (ACEL) and Ambuja Cement India Limited (ACIL). Ambuja also has a strategic investment in ACC through its subsidiary (ACIL).

Ambuja Cements is the most profitable cement company in India, and the lowest cost producer of cement in the world. One of the major reasons that Ambuja Cements is the lowest cost producer of cement in the world is its emphasis on efficiency. Power consists over 40% of the production cost of cement. The company improved efficiency of its kilns to get more output for less power. Thereafter Ambuja Cements set up a captive power plant at a substantially lower cost than the national grid. The company sourced a cheaper and higher quality coal from South Africa, and better furnace oil from the Middle East. As a result, today, the company is in a position to sell its excess power to the local state government.

Ambuja cement is the first company to introduce the concept of bulk cement movement by sea in India. This resulted in speedier transportation and brought many coastal markets within easy reach. Ambuja Cements has a port terminal at Muldwarka, Gujarat. It is an all weather port that handles ships with 40,000 DWT. The port has a fleet of seven ships with a capacity of 20500 DWT to ferry bulk cement to the packaging units. The company has bulk cement terminals at Surat, Panvel, and Galle. The Surat terminal has a storage capacity of 15,000 tonnes and Panvel terminal has a storage capacity of 17,500 tonnes. Both the terminals have bulk cement unloading facility. The port at Galle, 120 km from Colombo, Sri Lanka, handles million tonnes of cement annually.

Financials

Ambuja Cements posted a 12 per cent rise in net profit for the quarter ended September 30 to Rs 292 crore, against Rs 262 crore logged in the same quarter last year. Total income increased to Rs 1,318 crore in the quarter, (Rs 1,160 crore). Net sales rose 15 per cent to Rs 1,300 crore (Rs 1,131 crore). Profit before tax increased 14 per cent to Rs 409 crore.

EBITDA (earning before interest, tax, depreciation, amortization) rose 6 per cent to Rs 452 crore for the September quarter. Operating costs in the period were impacted by higher raw material consumption for blending, higher energy and transportation costs, and an increase in employee compensation. In addition, operations at the Ambujanagar plant in Gujarat were disrupted during August and September as a result of severe flooding. The plant contributes about one-third of the company’s annual production of 18 million tonnes.

Freight and forwarding cost in the quarter jumped 24 per cent to Rs 267 crore (Rs 216 crore). Power and fuel costs were up 12 per cent to Rs 240 crore.

Valuation

Gujarat Ambuja group is set to increase its annual cement production in next three years. The proposed capacity increase would not require much capital expenditure, as it would be done through “cost-effective and efficiency-increasing measures”. Company has decided to install a new captive power plant based on multiple fuels with a total capacity of 60 MW at a cost about Rs 2,500 million. This power plant will be implemented in two phases that will be completed by December 2006. It is clear that, company wants to keep power costs to the minimum level in future. It is improving efficiency at kilns to get more output for less power. Company is also importing cheaper and higher quality coal from South Africa and better furnace oil from the Middle East. It has also made Ambuja India's largest exporter of cement consistently for the last five years. Due to Holcim’s interest, company will continue to deserve higher valuation as compared to others. The Stock currently trades at 14 P/E multiple & 182 EV/ton of its FY2008 Estimated Earnings.

Outlook

Given the sustained growth in the housing sector, the Government's emphasis on infrastructure (at both the national and the state level) and increased global demand, the outlook for India's cement industry is exceedingly bright. The demand growth for the current fiscal is expected to be in the region of 10 per cent, which will translate into a demand of 175 mt.

A similar projection by National Council of Applied Economic Research (NCAER) for cement consumption, on a conservative basis, has placed cement demand at 225 mt by the fiscal year 2011. If the Government goes ahead with infrastructure projects as planned, consumption is likely to be much higher at 291 mt. The World Bank's estimated invested requirement of US$ 475 billion would further translate in to at least 600 mt of demand for cement by 2015. Currently Investors hold Ambuja cements with a very long-term view on their investments.

GNFC - Stable outlook.

Thu, 24 Jan 2008 05:55:38 EST

GNFC - Stable outlook. - by prakash

Gujarat Narmada Valley Fertilizers Limited

Industry

Agriculture, which accounts for one fifth of GDP, provides sustenance to two-thirds of the population. Besides, it provides crucial backward and forward linkages to the rest of the economy. Successive five-year plans have laid stress on self-sufficiency and self-reliance in food grains production and concerted efforts in this direction have resulted in substantial increase in agriculture production and productivity. This is clear from the fact that from a very modest level of 52 million MT in 1951-52, food grains production rose to above 208.6 million MT in 2005-06. In India’s success in agriculture sector, not only in terms of meeting total requirement of food grains but also generating exportable surpluses, the significant role played by chemical fertilizers is well recognized and established.

Keeping in view the vital role played by chemical fertilizers in the success of India’s green revolution and consequent self-reliance in food grain production, the Government of India has been consistently pursuing policies conducive to increased availability and consumption of fertilizers in the country. As a result, the annual consumption of fertilizers, in nutrient terms (N, P & K), has increased from 0.7 LMT in 1951-52 to 203.40 LMT in 2005- 06, while per hectare consumption, which was less than 1 Kg in 1951-52 has risen to the level of 104.5 Kg (estimated) in 2005-06.

As of now, the country has achieved near self-sufficiency in production capacity of urea with the result that India could substantially manage its requirement of nitrogenous fertilizers through the indigenous industry. Similarly, adequate indigenous capacity has been developed in respect of phosphatic (P) fertilizers to meet domestic requirements. However the raw materials and intermediates for the same are largely imported. As for potash (K) since there are no viable sources/reserves in the country, its entire requirement is met through imports.

The industry made a very humble beginning in 1906, when the first manufacturing unit of Single Super Phosphate (SSP) was set up in Ranipet near Chennai with an annual capacity of 6000 MT. The Fertilizer & Chemicals Travancore of India Ltd. (FACT) at Cochin in Kerala and the Fertilizers Corporation of India (FCI) in Sindri in Bihar (now Jharkhand) were the first large sized fertilizer plants set up in the forties and fifties with a view to establish an industrial base to achieve self-sufficiency in food-grains. Subsequently, green revolution in the late sixties gave an impetus to the growth of fertilizer industry in India and the seventies and eighties then witnessed a significant addition to the fertilizer production capacity.

The installed capacity as on 31.01.2007 has reached a level of 120.61 LMT of nitrogen (inclusive of an installed capacity of 207.52 LMT of urea after reassessment of capacity of which the non functional capacity is estimated of 10.52 LMT) and 56.59 LMT of phosphatic nutrient, making India the 3rd largest fertilizer producer in the world. The rapid build-up of fertilizer production capacity in the country has been achieved as a result of a favourable policy environment facilitating large investments in the public, co-operative and private sectors. Presently, there are 56 large size fertilizer plants in the country manufacturing a wide range of nitrogenous, phosphatic and complex fertilizers. Out of these, 29 units produce urea, 20 units produce DAP and complex fertilizers, 7 units produce low analysis straight nitrogenous fertilizers. There are 9 plants that manufacture ammonium sulphate as by-product. Besides, there are about 72 medium and small-scale units in operation producing SSP.

Out of three main nutrients namely nitrogen, phosphate and potash (N, P & K), required for various crops; indigenous raw materials are available mainly for nitrogenous fertilizers. The Government’s policy has hence aimed at achieving the maximum possible degree of self-sufficiency in the production of nitrogenous fertilizers based on utilisation of indigenous feedstock. Prior to 1980, nitrogenous fertilizer plants were mainly based on naphtha as feedstock. A number of fuel oil/LSHS based ammonia-urea plants were also set up during 1978 to 1982. In 1980, two coal-based plants were set up for the first time in the country at Talcher (Orissa) and Ramagundam (Andhra Pradesh).

These coal based plants have, however, been closed by Government w.e.f. 1.4.2002 due to technical and financial non-viability. However, with natural gas becoming available from offshore Bombay High and South Basin, a number of gas based ammonia-urea plants have been set up since 1985. As the usage of gas increased and its available supply dwindled, a number of expansion projects came up in the last few years with duel feed facility using both naphtha and gas. Feasibility of making available Liquefied Natural Gas (LNG) to meet the demand of existing fertilizer plants and/or for their expansion projects, along with the possibility for utilising newly discovered gas reserves, is also being explored by various fertilizer companies in India.

In case of phosphates, the paucity of domestic raw material has been a constraint in the attainment of self-sufficiency in the country. Indigenous rock phosphate supplies meet only 5-10% of the total requirement of P2O5. A policy has therefore been adopted which involves a mix of three options, viz, domestic production based on indigenous/imported rock phosphate and imported sulphur; imported intermediates, viz. ammonia and phosphoric acid; and third, import of finished fertilizers. During 2005-06 roughly 88% of the requirement of phosphatic fertilizers was met through the first two options.

In the absence of commercially exploitable potash sources in the country, the entire demand of potassic fertilizers for direct application as well as for production of complex fertilizers is met through imports. Given the volatility in international market for fertilizers in general and urea in particular, marginal provision through imports could be used to the country’s strategic advantage. This is also desirable as the international market, especially in case of urea, is very sensitive to demand supply scenario. Under the new pricing regime for urea units applicable from 01.04.2003, for securing additional indigenous supply of urea, economically efficient units are being permitted to produce beyond their re-assessed capacity to substitute/minimise imports.

Company Background

Gujarat Narmada Valley Fertilizers Company Limited engages in the manufacture and sale of fertilizers and industrial chemicals in India. Its fertilizer products include urea, ammonium nitrophosphate, calcium ammonium nitrate, diammonium phosphate, muriate of potash, and single super phosphate; and industrial chemical products, such as ammonia, weak nitric acid, concentrated nitric acid, methanol, methyl formate, formic acid, acetic acid, calcium nitrate, and castol. The company also engages in trading fertilizers and imported industrial chemicals like methanol and acetic acid. In addition, it provides various information technology services, including the provision of V-SAT services through satellite systems, networking services, Web services, security services, Internet gateways, Internet service provider services, and geographic information system services, as well as provides information technology infrastructure and network facilities. Gujarat Narmada Valley Fertilizers Company was founded in 1976 and is based in Bharuch, India.

Financials

The company posted impressive results for the second quarter/ first half year of FY 2007-08 ended 30th September 2007.

In the half year under review, the company achieved

The Sales at Rs. 1,812.27 crore is 52% higher over the corresponding previous period. (Previous period sales Rs. 1, 188.65 crore)
The Profit Before Tax- PBT- is 66% higher at Rs. 299.54 crore as against Rs. 180.92 crore of corresponding period
Earning Per Share (EPS) is at Rs. 12.63 as against Rs. 8.26 of corresponding period.

In the quarter under review, the company achieved

The Sales at Rs. 1,192.19 crore is 64% higher over the corresponding previous quarter. (Previous period sales Rs. 727.80 crore)
The Profit Before Tax- PBT- is 67% higher at Rs. 183.33 crore as against Rs. 109.92 crore of corresponding quarter
Earning Per Share (EPS) is at Rs. 7.76 as against Rs. 5.05 of corresponding quarter

The quantum jump in turnover of the company during the period under review is on account of higher trading of imported fertilizers and reflection of erstwhile NPCL operations in the results compared to corresponding previous period.

The rise in the earnings of the company is similarly on account of inclusion of NPCL operations a subsidiary company, which is amalgamated with the company w.e.f. 15.2.2007 and profits in fertilizers segment including in the trading activities of the imported fertilizers.
Growth plan of the company - consideration and continuous thinking and follow-up of projects and schemes like WNA, CNA, conversion plants from feedstock of LSHS (Low Sulphur High Stock) to gas for production of Ammonia and setting-up of Windmill in Kutch, Co-Generation Unit for production of Steam and Power and revamp of Methanol and Acetic Acid Plants in a phased manner.

Valuation

Considering the excellent state of the chemicals business and merger synergies flowing through its former subsidiary NCPL, profit will grow by 14.9% in the next year to Rs 3.7 billion. Undemanding valuations at 5.7x FY08E, the upcoming policy and a sound investment book makes all analysts reiterate a positive bias on the stock.

Outlook

GNFC has drawn up plans to invest about Rs 23 billion over the next 2 years in chemicals & fertilizer businesses. Of this, work has already commenced on energy saving and revamp initiatives totaling up to Rs 3.1 billion. It is actively considering the conversion of its feedstock from LSHS to natural gas estimated cost of Rs 7.5 billion and setting up a 50,000 mt green field TDI plant at about Rs 13 billion. A debt free status and cash flows to the tune of Rs 7 billion pa, propels a great story.

Though the fertilizer to chemicals revenue mix has been fairly equal (against 60:40 earlier) since the merger of its subsidiary NCPL into itself, chemicals contribute 80% to profits. The conversion from LSHS to gas would depend on the final policy notification as it is still unclear whether the government would participate in it or not. Also, the draft policy is silent on how long the manufacturers can retain their savings from converting to cheaper feed gas from expensive LSHS. All in all GNFC has a bright future.

Jain Irrigation - Irrigating the world!!

Wed, 23 Jan 2008 05:17:19 EST

Jain Irrigation - Irrigating the world!! - by prakash

Jain Irrigation Systems Ltd.

Industry

Agriculture in India is one of the most important sectors of its economy. It is the means of livelihood of almost two thirds of the work force in the country and according to the economic data for the financial year 2006-07, agriculture accounts for 18% of India's GDP. About 43 % of India's geographical area is used for agricultural activity. Though the share of Indian agriculture in the GDP has steadily declined, it is still the single largest contributor to the GDP and plays a vital role in the overall socio-economic development of India.

One of the biggest success stories of independent India is the rapid strides made in the field of agriculture. From a nation dependent on food imports to feed its population, India today is not only self-sufficient in grain production but also has substantial reserves. Dependence of India on agricultural imports and the crises of food shortage encountered in 1960s convinced planners that India's growing population, as well as concerns about national independence, security, and political stability, required self-sufficiency in food production. This perception led to a program of agricultural improvement called the Green Revolution. It involved bringing additional area under cultivation, extension of irrigation facilities, the use of improved high-yielding variety of seeds, better techniques evolved through agricultural research, water management, and plant protection through judicious use of fertilisers, pesticides and cropping practices. All these measures had a salutary effect and the production of wheat and rice witnessed quantum leap.

To carry improved technologies to farmers and to replicate the success achieved in the production of wheat and rice, a National Pulse Development Programme, covering 13 states, was launched in 1986. Similarly, a Technology Mission on Oilseeds was launched in 1986 to increase production of oilseeds in the country and attain self-sufficiency. Pulses were brought under the Technology Mission in 1990. After the setting up of the Technology Mission, there has been consistent improvement in the production of oilseeds. A new seeds policy has been adopted to provide access to high-quality seeds and plant material for vegetables, fruit, flowers, oilseeds and pulses, without in any way compromising quarantine conditions. To give fillip to the agriculture and make it more profitable, Ministry of Food Processing Industries was set up in July 1988. Government has also taken initiatives to encourage private sector investment in the food processing industry.

However, there are still a host of issues that need to be addressed regarding Indian agriculture. Indian agriculture is heavily dependent on monsoons. The monsoons play a critical role in determining whether the harvest will be rich, average, or poor. The structural weaknesses of the agriculture sector are reflected in the low level of public investment, exhaustion of the yield potential of new high yielding varieties of wheat and rice, unbalanced fertilizer use, low seeds replacement rate, an inadequate incentive system and post harvest value addition.

Irrigation has acquired increasing importance in agriculture the world over. From just 8 million hectares (M Ha) in 1800, irrigated area across the world increased five fold to 40 Million Hectares (M Ha) (13.4 M Ha in India) in 1900, to 100 M Ha in 1950 and to just over 255 M Ha in 1995. With almost one fifth of that area (50.1 M Ha net irrigated area), India has the highest irrigated land in the world today. During the last two decades, irrigation’s steady boom has begun to wane. Between 1970 and 1982, global irrigated area grew at an average rate of 2% per year. But between 1982 and 1994, this rate dropped to an annual rate of 1.3%. Even by optimistic estimates, the global irrigation base is unlikely to grow faster than 0.6% a year over the next 25 years. Since 1980, per capita irrigated area has declined, leading to stagnation in per capita cereal production, and thus adding a new dimension to world food security.

Company Background

Jain Irrigation Systems is engaged in the manufacture and sale of irrigation systems, polyethylene pipes, and plastic products. The company offers products such as irrigation systems and components, pipes, processed foods and plastic sheets. The company primarily operates in India. It is headquartered in Jalgoan, India.

Financials

The company posted a net profit of Rs 30 crore, up 84.4 per cent for the second-quarter ended September 2007 compared to same period last year. Net sales for the quarter grew 45.5 per cent to Rs 329.26 crore (Rs 226.34 crore). Both revenues as well as profits from the Hi-tech Agri Input division grew more than the growth resulting from the industrial products segment. Revenues from the Hi-tech Agri division doubled to Rs 147.64 crore (Rs 98.76 crore). The profits from the hi-tech division reported a 114 per cent jump at Rs 43.18 crore (Rs 20.16 crore).

Valuation

Jain Irrigation has approved 8.6m-warrant issuance to promoters. The warrants would be convertible within 18 months of issuance at a price not over Rs485. This fund infusion (on conversion) of Rs4.2billion would result in the promoter stake increasing to 38%. While this would lead to equity dilution to the tune of 12% (number of shares post conversion at 82 million), JISL would redirect the funds towards debt repayment (currently at Rs10billion) thereby result in interest cost savings. The move also reinforces management’s confidence in the growth momentum as indeed the value creating potential in the business. Given the sustained growth momentum at over 35% (MIS and foods in particular), willingness to operate in global arena as indeed its ability to manage the three variables – rainfall, farmers and government makes JISL an attractive investment.

JISL in the last couple of years has aggressively taken inorganic route to growth and has invested approx USD160 million towards acquiring companies like NaanDan, Aquarius, Chapin Watermatics, etc. Jain Irrigation currently has debt on books of Rs10billion (consolidated) and Rs8.5 billion on standalone books. The proceeds of Rs4.17 billion on conversion would be substantially used towards repayment of debt. This fund infusion would reduce the debt equity from 1.3x now to below 1x. However, as the warrant conversion would happen only by end of FY09, the impact on interest cost savings would be visible in FY10.

Conversion of these warrants would result in promoter stake increasing from 31% now to 38%. This is the second round of warrant issuance to promoters in the last one year, the earlier (2.5 million warrants) issued at Rs401. This increase of stake in the company at incremental price levels reinforces management’s confidence in the business growth momentum as indeed the potential to create value even from current levels (market capitalization is up by 8x in the last three years and share price up by 7x).

Domestic MIS business is well poised to grow at approx 50% CAGR (FY07-09), driven by increasing allocation by various states – Gujarat, Maharashtra, Andhra Pradesh, Tamil Nadu and allocation to JISL is ahead of its current market share (Rs4.5-5 billion of annual order flow). Taking a step forward, JISL is eyeing three largest MIS markets globally – US (acquisition of Chapin and Aquarius), Israel (NaanDan) and Africa.

While PVC Sheets business faces the pressure of slow down in housing market in the US, pipes and foods business continue to grow at over 35%. JISL’s growth is expected at over 35% CAGR over the next three years.

Outlook

Continuing its acquisitions in the MIRS space, Jain Irrigation’s acquisition of NaanDan makes it the second largest player, next to Netafim of Israel (USD 325 million revenue size). NaanDan gives Jain access to 50 countries to which it supplies equipment, including Europe and Latin America apart from the US, Australia and Israel, through its seven manufacturing facilities across the globe. The size of micro irrigation systems market in the US is USD 400 million.

The addition of new states under MIRS including Tamil Nadu, Karnataka and Gujarat, over the existing ones like AP and Maharashtra will drive the revenue growth rate. EBITDA margins in this business are the highest among all SBUs at 24%. JISL’s order book is in the vicinity of Rs4.5-5bn from Gujarat, Maharasthra, TN and AP. An upside from its entry into Chattisgarh and Rajasthan needs to be factored. With domestic operations well on course to grow at over 50% CAGR, JISL is making its intent clear of covering the global markets. It is keen to operate in three other key markets of US, Israel and Africa through various acquisitions. On June 21, 2007, the AP government released Rs300 crores for micro irrigation projects. This will increase further the number of projects JISL has secured in AP. Apart from Maharashtra and AP, many other state governments are providing 50% subsidy for micro irrigation systems.