Despite an incredible operating margin of 31% and RoE of 42%, Birla Corp is cheaper than its peers
Birla Corporation makes cement, jute goods, auto-trim parts (car interiors) and iron & steel castings. Cement, its main business, contributed 85% of the total revenue in the December 2009 quarter. Power is the second-largest contributor to the total revenue; jute and other businesses reported losses in this quarter. Birla Corp is rationalising some of the products for which demand has dropped over the years. It has cement units in Madhya Pradesh, Uttar Pradesh, Rajasthan and West Bengal with a total capacity of seven million tonnes. It has been allotted coal blocks in Madhya Pradesh for captive coal mining in FY08-09. Its subsidiary, Talavadi Cements, has been recommended allotment of 2,130 hectares of land for mining limestone by the Madhya Pradesh government. But this approval has been challenged in court. The company, controlled by Harsh and Aditya Lodha (sons of the late RS Lodha who inherited the MP Birla group companies from Priyamvada Birla), has been quietly expanding. It plans to invest Rs2,350 crore to enhance its annual cement manufacturing capacity to 11.5 million tonnes over the next four years which includes setting up a 1.2-million-tonnes plant along with power generation from waste heat recovery and a 35MW captive power plant at Chanderia, Rajasthan. Additionally, it will increase the grinding capacity by 600,000 tonnes and install a 17.5MW captive power plant at Durgapur; and replace its cement ball mills and set up a coal washery and a 35MW captive power plant at Satna. After a brief lull late last year, cement demand is rising again. In January 2010, cement despatch registered a new high. The company sold 18.19 million tonnes (mt) in January, surpassing its earlier high of 18.1mt in March 2009. Demand is expected to be on the higher side in the January-March 2010 quarter on increasing infrastructure activity. The industry has added around 22mt of new capacities this fiscal which has increased its overall capacity to around 245mt. Buoyed by strong demand, large cement companies have increased prices by Rs3-Rs5 per 50kg bag from 1st February which has pushed up the average national price to Rs235 per bag from Rs210-Rs215 per bag in November 2009. Having a strong presence in central and eastern India, and a fairly good presence in north India, has been advantageous. The recent pick-up in demand has come from those parts of the country. Rising expenditure is another concern but it is expected to decrease once the captive power plants, waste recovery systems and blocks allotted for captive coal mining come on stream. The five-quarter average sales and operating profit growth are 22% and 47%, respectively. For a commodity company, Birla Corporation has an incredible operating margin of 31%. Return on equity in FY09-10 is expected to be 42%. The stock is not expensive. Its market-cap is 1.32 and 4.32 times its sales and operating profit, respectively. The average of these two measures for the cement companies in the Moneylife sample is 1.5 and 5.18, respectively. Buy the stock at the current price.
In a bid to create a level playing field between all investor participants, all investors, including QIBs, will now be required to make full payment during new share applications.
Market regulator Securities and Exchange Board of India (SEBI) has mandated all types of investors to bring in 100% of the application money as margin along with the application for securities in public issues. This would avoid inflated demand in public issues and provide level playing field to all investors subscribing for securities, SEBI said.
“Qualified institutional buyers (QIBs) will have to make 100% payment in line with what other investors are required to do on all issues that open on or after 1st May,” SEBI chairman CB Bhave said after a Board meeting.
Separately the Finance Minister (FM) Pranab Mukherjee also held a meeting with SEBI Board members. While refusing to divulge more details about the meeting, Mr Bhave said,” The meeting with the FM focussed largely on issues like investor protection and investor education and the FM is the right person to give more details regarding the meeting.”
In an unrelated matter, the SEBI board has also decided (in principle) to allow the stock exchanges to introduce physical delivery in equity derivatives. Mr Bhave said the regulator is in discussions with the stock exchanges and hope to start the physical delivery as soon as possible. At only physical delivery in cash settlement is allowed.
The market regulator also allowed (in principle) stock exchanges to introduce equity derivatives contracts with a tenures of up to 5 years from the current 3 years. The SEBI chairman said, subject to proper risk mechanisms in place, the exchanges can also introduce derivative contracts on volatility indexes which have suitable track record.
The SEBI Board also decided that the reservation for employees in public or rights issues would be available to employees of subsidiaries and material associates of the issuer whose financial statements are consolidated with the issuer’s financial statements.
SEBI’s decision regarding 100% application money would largely affect large investors like QIBs who until now used to pay just 10% of the value of shares they subscribe during the public offerings including initial public offering (IPO) or follow-on public offering (FPO). This has now been raised to 100% of the share value, to bring in parity with the other investors. It would also help avoid inflated demand during public issues, as QIBs used to take advantage of the low margin requirement and subscribe heavily into the public issues.
Mr Bhave also indicated that the regulator is working on reducing the time gap between the closing of an IPO and its listing on the stock exchanges to one week from the current waiting time of 20 days.
Jyoti Structures will reap rich dividends from the booming power sector
Jyoti Structures Limited (JSL) is among the top three players in the engineering, procurement and construction (EPC) space for the power sector in the country.
These companies provide turnkey solutions that involve the setting up of transmission lines (up to 800kV) and substations (up to 400kV). JSL does designing, engineering consultancy, tower testing, manufacturing, construction and project management. Its plants are located in Mehsana and Vadodara in Gujarat where it develops prototypes and undertakes fabrication and galvanising of transmission towers & structures, microwave towers, windmill towers and railway electrification structures. It has four subsidiaries and also a 30% stake in Gulf Jyoti International LLC, a joint venture with Gulf Investment Corporation.
Investments in the power sector are booming as the government has taken initiatives to bridge the deficit in generation, transmission and distribution. During the 11th Five-Year Plan (FYP) period, the government plans to invest Rs1,40,000 crore in the transmission segment—double the investment it made during the 10th FYP. The national grid capacity has been envisaged to increase to over 38,000MW during the 11th FYP—from 14,100MW at the end of the 10th FYP—followed by an increase to around 75,750MW in the 12th FYP period. Besides, the restructured accelerated power development and reform programme (APDRP), which aims to reduce the aggregate transmission & distribution loss to below 15%, envisages an investment of Rs51,577 crore by the end of the 11th FYP. Also, there has been an increase in the investment for the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) which plans to provide electricity to all rural households over a period of four years.
The investment in transmission is equally distributed between the two segments, namely, transmission lines and substations. However, 30% of the spending on transmission lines and 65% of the spending on substations constitute bought-out items, such as conductors, insulators, transformers and other electrical equipment.
This indicates that 50% of the total investment in transmission will provide the opportunity for JSL and its competitors. The company had a strong order book of over Rs4,030 crore at the end of Q3FY09-10, of which transmission contributes 68% and substation and rural electrification contribute 12% and 20%, respectively. Power Grid Corporation, which is likely to invest Rs55,000 crore in the 11th FYP, would release 30%-35% of the orders. The rest would come from state electricity boards (SEBs) and private-sector players. Some of the key contracts in the company’s fold include Reliance Power’s BOOT (build, own, operate and transfer) project to strengthen the western system and the
Rs833-crore order from the Maharashtra State Electricity Distribution Company (MSEDCL) won jointly with Areva T&D. It has bid for a BOOT project floated by RRVPNL (Rajasthan Rajya Vidyut Prasaran Nigam), along with SREI Finance, and is also bidding for a similar project in Haryana. It is also increasingly taking up BOOM (build, own, operate and maintain) projects.
While business volumes and topline growth would not be a problem, the business is capital-intensive. The problem with businesses like these is the modest return on equity (RoE). JSL’s RoE is 19%. Its operating margin is also low, at 11%. The market-cap to sales and operating profit are 0.72 and 6.3, respectively. So, timing the stock purchase is the key. Buying it around Rs150 may be safe.
Chromatic India Limited (Rs75)
Chromatic India is in the business of manufacturing and trading of SO (spirooxazine) dyes and chemicals. The company’s product line includes eco-friendly reactive dyes for cotton, viscose, polynosic and other cellulosic fabrics. The company’s financials are shady. In the March and June 2009 quarters, it posted sales of Rs1.35 crore and Rs1.55 crore and an operating loss of Rs30 lakh and Rs6 lakh, respectively. Surprisingly, in the September and December 2009 quarters, the company posted sharply higher sales of Rs4.28 crore and Rs5.80 crore and operating profit of Rs28 lakh and Rs33 lakh, respectively. What about the stock? Between 19 November 2009 and 15 February 2010, the stock has shot up 497%. What’s cooking?