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Showing posts with label Multibagger. Show all posts
Showing posts with label Multibagger. Show all posts

Wednesday, 20 January 2010

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Friday, 28 March 2008

Multibagger - Celebrity Fashions Ltd

Ashish Chugh, Investment Advisor

Celebrity Fashions : BSE ID : NSE ID : Reco Price Rs. 32.70 CMP: Rs.35.95 (Gain 9.94%)

The recent initiatives undertaken by the management for sale of its unit and relocation of another unit will help the company reduce its debt and tide over the problems due to appreciating rupee. The company plans to focus on domestic market where its brand INDIAN TERRAIN is well established.

Celebrity Fashions Ltd. came out with its IPO in December 2005 offering shares at Rs.180.

The company has 9 factories covering about 8 lac sq ft of shop floor space employing over 10,000 people. The total installed capacity of these facilities is about 10 mn pieces of Bottoms and 4 mn pieces of Woven Tops in a year. With a capacity of 10 mn pieces per annum, the company is the leading manufacturer of bottoms in South Asia. All these units employ cutting edge technology across all major manufacturing processes like cutting, sewing, finishing and washing. With a full fledged design studio, the company is amongst the very few, who offer complete design to delivery packages for its customers. Celebrity Fashions makes garments for brands like GAP, Levis, Dockers, Banana Republic, Ann Taylor, Timberland, Eddie Bauer and Kohls in the US and Diesel, Marlboro Classics and Armani Jeans in Europe.

The company also operates in the domestic branded menswear market under the brand name 'Indian Terrain'. The brand has, in a short span of seven years, established itself and has earned an image of quality and style. The brand is available in 350 multi-brand outlets (MBOs) including Departmental Stores like Shoppers Stop, Lifestyle, Piramyds, Pantaloon, Central, Globus and other prominent Retail chains and also at Indian Terrain Exclusive Stores spread across the country.

Comparison With Peer Group:

Provogue Kewal Kiran Bombay Zodiac Gokaldas Celebrity
Clothing Rayon Clothing Exports Fashions
Sales FY 07 (Rs. Cr) 239 133 489 203 1034 333
Sales -9mts Dec 07 (Rs Cr) 245 124 664 165 793 255
OPM (FY07) 14% 24.60% 20.20% 13.70% 12.10% 5.60%
EPS -TTM (Rs.) 12.81 17.4 17.28 21.96 16.62 Loss
P/E Ratio 81 17.3 16.3 18.67 10.4 0
Book Value (Rs.) 133.24 102 77 120 118 84
Market Price (Rs.) 1041 301 282 410 173 32.7
Market Cap (Rs. cr) 1988 371 1777 344 594 58.3
Sales to Market Cap 0.12 0.36 0.28 0.59 1.74 5.71

Conclusion:

The appreciation of Rupee against the dollar and the high debt on the balance sheet took their toll on the financials of the company. The company which was deriving roughly 80% of its turnover from exports saw the export division making losses.

The company is initiating the following steps to tide over the difficult times by way of restructuring.

a) The company has finalized sale of its manufacturing unit located at Irrungattukottai, Jwala for a total consideration of Rs.42.50 crores.

b) The company is relocating its unit located at Valachery –Tambaram Road, Chennai and has plans to sell the land and building.

c) The Company has decided to focus significantly towards the domestic branded market as against the current focus of exports markets due to the challenging business environment on account of Rupee appreciation against USD and International competition

The management plans to use the sale proceeds from the sale of its unit at Irrungattukottai for reducing its term loans and working capital loans. The company intends greater penetration in the domestic market through leveraging the Indian Terrain brand. Indian Terrain today is a leading Men’s Wear brand in the premium segment. The company may leverage the Indian Terrain brand to launch Women Wear and Kids Wear. With a successful brand positioning, and passion for quality, the management intends a significant increase in the sales from the brand – this includes increasing the retail outlets and opening of more Indian Terrain stores. The company is also tying up with retail chains for manufacturing under private labels - the company is creating ‘Spirit’, and economy range exclusively for Reliance Retail.

The company suffers from low valuation on account of – a) Low Operating Margins vis-à-vis the Peer group b) losses being suffered by the export division and c) High Interest cost. The company however has a very high Sales to Market Cap ratio compared to the peer group. The stock is available at a substantial discount to its book value.

The company has a successful brand – Indian Terrain, whose brand value alone could be substantial. The recent initiatives taken by the management point towards the intent and willingness of the management to undertake steps in response to the changing business scenario. Successful turnaround would lead to improved valuations for the company, however the process may take a few quarters and has a high degree of uncertainty attached, the stock is therefore advised for investors with an appetite for HIGH RISK.

Ashish Chugh is an equity analyst and investment consultant based at New Delhi, INDIA. At the time of writing this article, he, his firm and dependent family members have a position in the stocks mentioned above. The author, his firm or any of his dependent family members may make purchases or sale of the securities mentioned in the report while the report is in circulation. The author invites readers to send him email and welcomes comments, feedback & queries at nexgenfin@yahoo.com.

This report has been prepared solely for information purposes and the information contained herein may not be deemed to be an investment advice. Such information is impersonal and not tailored to the investment needs of any specific person. The information contained herein is not a complete analysis of every material fact representing any company, industry or security. The views expressed may change. While the information contained herein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Investors are advised to satisfy themselves before making any investments and should consult with and rely upon their own advisors whether and how to use such information in making any investment decision. Neither the author nor his firm accepts any liability arising out of use of the above information/ article.

Monday, 17 March 2008

Multibaggers - Bharati Shipyard

Bharati Shipyard

At the CMP of Rs 555, BSL is trading at 13x FY08E, 10x FY09E earnings and EV/EBIDTA of 8.8x FY08E and 6.4x FY09E. Given the strong order book coupled with the expansion of Mangalore Shipyard, the stock is an attractive play at these levels.

Bharati Shipyard Ltd (BSL) is a leading ship builder in India with a capability of constructing vessels like Containers and Cargo vessels; Anchor Handling Tugs cum Supply vessels, Multipurpose Support Vessels and recently the company has ventured into rig manufacturing at its Dabhol facility. The company has a multilocational presence at Ghodbunder, Ratnagiri, Goa, Kolkatta and Mangalore. Given the strong expansion plans at new/existing yards, multilocational presence and strong expertise in building complex ships, BSL is well poised grab the opportunities in the growing shipbuilding sector.

Investment Rationale Strong order book to enhance topline growth:

The current order book of the company is Rs 4615 crore to be executable by 2010. The order book to sales ratio stands at 11x FY07 revenues giving a clear visibility of revenues in the years to come. 67% of the order book of BSL comprises of exports and the balance 33% is domestic. More than 70% of the orders are for offshore support vessels, multipurpose vessels, platform supply vessels etc. BSL is expected to grow at a CAGR of 57% in revenues and 58% in profits from FY08-10E.

New facility at Mangalore to account for more operating leverage:

BSL’s Mangalore yard will have a capacity to build vessels up to 60,000 DWT. The yard will focus more on specialized ships like tankers, bulk carriers, container ships, chemical carriers, product carriers etc. The machinery from the acquired Swan Hunter Shipyard would be transferred to Mangalore. The Mangalore yard is expected to commence shipbuilding operations by Sep 2008. With the initial focus on building rigs and dry bulk carriers, BSL can achieve faster capacity utilization and enhance the profitability in the upward shipbuilding boom.

Sustained Margins:

The company has margins of approximately 27 to 30% on a yearly basis. Going forward we expect BSL to sustain the margins. This is due to the company's policy of covering raw material purchases on a back to back basis (so as to hedge against any volatility in the prices of raw materials).

Valuations & Financials:

At the CMP of Rs 562.70, BSL is trading at around 13x FY08E, 10x FY09E earnings and EV/EBIDTA of 8.8x FY08E and 6.4x FY09E. Given the strong order book coupled with the expansion of Mangalore Shipyard, the stock is an attractive play at these levels. We recommend a ‘Strong Buy’ recommendation on the stock with a price target of Rs 940 based on our DCF methodology. At the target price, the stock is trading at 12x FY10E earnings.

Particulars FY06 FY07 FY08E FY09E FY10E
Net Sales 293.3 421.8 680.2 1108.8 1612.07
% chg 52.26% 44% 61% 63% 45%
EBITDA 89.4 129.9 187.2 300.2 421.71
% chg 93.65% 45% 44% 60% 40%
Net Profit 51.1 72.7 108.8 185.1 250.66
% chg 86.62% 42% 50% 70% 35%
EPS 22.7 32.3 41.2 57.8 78.3
EBITDA Margin (%) 30.50% 30.8% 27.5% 27.1% 26.2%
NPM (%) 17.4 17.2 16 16.7 15.5
P/E (x) 25.5 17.9 14.1 10 7.4

(Rs crore, E-Estimates)

Relative Valuation:

Particulars ABG Shipyard Bharti Shipyard
Price 604.2 555.05
P/E (x) 28.11 17.84
P/CEPS (x) 26.75 16.7
Price/BV (x) 6.1 5.26
Mcap/Sales (x) 3.85 3.19
EV/Sales (x) 3.42 3.38
EV/EBIDTA (x) 11.98 10.45

(Note: All fig. are on TTM basis)

Disclaimer: As per SEBI requirements it is stated that, Kisan Ratilal Choksey Shares & Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale thereof while this report is in circulation.

Monday, 3 March 2008

Multibaggers - Indian Hotel Company

With high land and commodity prices, the asset creation currently is happening at much higher prices, which will benefit existing players like Indian Hotels since it would make their business more competitive.

The Indian Hotels Company Ltd. (Indian Hotels) is the largest operator and manager of hotels, palaces and resorts primarily in India in the Luxury, Business, and Leisure segments and owns the ‘TAJ’ brand.

The Taj Group operates a total of 84 hotels with over 10,000 rooms. The Taj Group has a significant geographical spread of hotels in India, having properties in the major cities and large towns in India as well as in some of the key leisure destinations in South Asia. In the recent past the Company, through its wholly owned subsidiaries, has acquired hotels in New York, Sydney, Boston and San Francisco. The Company has majority ownership interests through subsidiaries in 16 hotels and resorts with 2,105 rooms and has minority interests in 29 hotels (amounting to 3,157 rooms). In addition, the Taj Group manages a total of 15 hotels, palaces and resorts in India and internationally pursuant to management contracts for third party owners (amounting to 1,481 rooms).

The Taj Group classifies its business divisions by the quality of the property, the range of services, and the guests it targets. Accordingly, the Taj Group has classified its hotel properties under various divisions as Luxury India, Luxury International, Business, Leisure and Ginger, which account for 27.16%, 13.62%, 29.97%, 20.35% and 8.90% of total rooms of the Taj Group, respectively. The Company derives the majority of its revenue from the Luxury India division. The Company is focused on the high end (five-star deluxe) Luxury India and Luxury International divisions of the hotel market while maintaining a significant presence in the Business and Leisure divisions.

In order to pursue opportunities in the “value-for-money” segment, the Company, through its wholly owned subsidiary, has launched “Ginger” brand of hotels catering to budget travelers. Currently, nine Ginger hotels are operational at various locations. The Company has also entered into a joint venture agreement with CC Africa and Cigen Corporation to promote wild life tourism in India and has two resorts, one each in Bandhavgarh and Pench in the state of Madhya Pradesh.


Key Risks

The major risks include a) Slowdown in economic activity leading to reduced demand for Hotel rooms b) Unrest or event risks and c) Oversupply of rooms in the future, which can adversely impact the operations of the company.

Conclusion

India has been witnessing an increase in International Tourist Arrivals as well as growth in domestic tourism. The various global campaigns launched by the government like “Incredible India”, “Atithi Devo Bhav”, “Colors of India” and “Wellness Campaign”, to promote inbound tourism is a pointer to the fact that the Indian Government realizes the tourism is not only a significant revenue earner but also a core employment generator.

The domestic tourism in India is also on a rise. India’s strong economic development and the growth in its services industry has led to increased corporate spending on business travel. Moreover, with higher disposable incomes, leisure travel is also on an upswing. There is a huge shortage of quality hotel rooms across the country as supply has not been able to keep pace with demand.

The potential of the sector is evident from the fact that many International Hotel chains and real estate developers want to be a part of the Indian Hotel sector. For instance - Hilton, Marriott, Starwood, Shangri-La, Carlson, InterContinental, Accor, Hyatt and Choice have all charted out extensive expansion plans in India. Some of these hotel chains such as Hilton and Marriott have formed alliances with large Indian real estate developers such as DLF and Unitech, respectively. However, with high land and commodity prices, the asset creation currently is happening at much higher prices, which will benefit existing players like Indian Hotels since it would make their business more competitive.

The company has a multi-pronged strategy for growth. This includes- a) Foray into budget segment with ‘Ginger’ to target economy and mid-market segment; b) Asset-Light strategy with focus on franchise arrangements and management contracts, rather than property owner and manager; and c) Other service offerings like Air Catering business, food and beverages outlets, SPAs and service apartments, by leveraging the “TAJ” brand.

The Hotel sector has been a laggard relative to the sensex, we believe the sector could see a Re-rating in view of the potential of the sector and earnings growth visibility.

We believe Indian Hotels is poised for rapid growth due to increasing business and leisure travel in India and the demand outpacing the supply of rooms. Moreover, a conducive macroeconomic environment, coupled with higher ARR and occupancy levels augur well for the company. With India attracting increasing foreign interest in terms of trade and investment, international business travel into India is also on a steady rise. We believe Indian Hotels is well poised to make the most of the demand explosion which the Hotel sector is set to witness in the coming years.

Ashish Chugh is an equity analyst and investment consultant based at New Delhi, INDIA. At the time of writing this article, he, his firm and dependent family members have a trading position in the stocks mentioned above. The author, his firm or any of his dependent family members may make purchases or sale of the securities mentioned in the report while the report is in circulation. The author invites readers to send him email and welcomes comments, feedback & queriesat nexgenfin@yahoo.com.

This report has been prepared solely for information purposes and the information contained herein may not be deemed to be an investment advice. Such information is impersonal and not tailored to the investment needs of any specific person. The information contained herein is not a complete analysis of every material fact representing any company, industry or security. The views expressed may change. While the information contained herein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Investors are advised to satisfy themselves before making any investments and should consult with and rely upon their own advisors whether and how to use such information in making any investment decision. Neither the author nor his firm accepts any liability arising out of use of the above information/ article.

Monday, 18 February 2008

Multibagger - Sesa Goa

Iron ore, the key raw material for steelmaking, has witnessed a surge in demand, leading to prices rising 2.5x over the past four years. Chinese spot prices are trading well above the $ 200/ton level, doubling over the year. With new contracts for CY08 supply due for negotiations during the month, Sesa Goa would be a major beneficiary with an expected revision of 50%.

Sesa Goa

Company description:

Sesa Goa Limited, the flagship company of Sesa Group is India's largest exporter of iron ore in the private sector. In September 2007, Vedanta Resources acquired an additional 20% stake in Sesa Goa, increasing its total shareholding in the Company to 71%. Iron ore business contributes to about 80% of the company's revenues. The company has access to over 200 million tons of iron ore reserves in Goa, Karnataka and Orissa. It has also developed an energy recovery technology to manufacture coke, compliant with advanced global emission norms.

Shareholding pattern:

As on 31st December, 2007 Holding % No of Shares (in Lacs)
Promoter 51.2 201.4
Non-promoter Corporate Holding 4.9 19.2
FII & Institutions 31.4 123.1
Public & Others 12.6 49.4

Major beneficiary from strong upswing in iron ore price cycle

Iron ore, the key raw material for steelmaking, has witnessed a surge in demand, leading to prices rising 2.5x over the past four years. Chinese spot prices are trading well above the $ 200/ton level, doubling over the year. With new contracts for CY08 supply due for negotiations during the month, Sesa Goa would be a major beneficiary with an expected revision of 50%. About 80% of revenues and 95% of profits of the company comes from the iron ore business.

20 years of iron ore reserves and more to come

Sesa Goa has 200 million tons of iron ore reserves, which is expected to last for about 20 years at current level of production. Its mines are located at Goa, Karnataka and Orissa. Management has indicated aggressive ramp up in production to 15mtpa by end-FY09 from 10.8mtpa at present on account of increased global demand and favourable demand dynamics in the iron ore industry leading to an improved pricing scenario in the near-to-medium term. Sesa Goa had obtained prospecting licenses for mining in Jharkhand, which could surprise positively as regards high-grade reserve content. Total reserves at Jharkhand may be more than earlier estimates of 50mn tons.

Ramp up in pig iron and coke making capacity

The company plans to increase its pig iron capacity from the current 0.2mtpa to about 1mtpa and met coke capacity from the current 0.28mtpa to about 1mtpa in the next 3 years. India is an importer of coke and with coke prices expected to rise in the next two years, the expansion is well timed. Sesa Goa will also benefit from the growing domestic demand for semi-finished products.

Valuations at discount to global peers

We expect Sesa Goa's profits to witness 55.5% CAGR over FY07-09 on the back of robust outlook for iron ore and met coke prices. Operating margins are expected to expand with decline in manufacturing cost. The company trades at 8.0x FY09E EPS of Rs 395.4 which is at 38% discount to global peers BHP Billion and Rio Tinto. We recommend BUY with a 12-month target price of Rs 4,350 implying an upside of 38%.

Financials:

March (Rs Cr) FY06 FY07 FY08E FY09E
Revenues 1,818 2176 2699 3939
Operating Profit 836 921 1330 2287
OPM (%) 46 42.3 49.3 58.1
Net Profit 575 651 904 1574
Equity 39.4 39.4 39.7 39.7
EPS 146 165.4 227.3 395.4

Monday, 11 February 2008

Multibaggers - Accurate Transformers

Accurate Transformers

Accurate Transformer has been operating at low capacities, primarily on account of working capital constraints; there is however a scope for substantial ramp up in the event of the company managing its working capital better and getting additional resources. The company is therefore in a position to take advantage of a boom in demand without incurring any further capital expenditure. Higher capacity utilization will eventually lead to higher revenues and increased profitability.

Accurate Transformers Ltd

Transformer is an integral part of the power sector irrespective of the fact whether it is Hydro Power, Thermal, Wind, Solar or Nuclear Power. Accurate Transformers, operating in a growth industry, currently trading at a PE of 6 and a market cap of Rs.43 crores with expected sales of Rs.200 crores for FY 08 is available at reasonable valuations compared to the peer group.

Accurate Transformers Ltd. is a Delhi based company and manufactures Power and Distribution Transformers. The company was previously delisted due to non compliance of the provisions of listing agreement. The stock got listed again in June 2007 after all compliances were met and is presently traded in ‘Z’ Group.

Business

Accurate Transformers has plants at 6 locations – Ghaziabad, Greater Noida, Sikandarabad, Dehradun and 2 in Haridwar. The plants at Haridwar and Dehradun have been recently set up and enjoy various benefits on account of Income Tax, Sales Tax and Excise.

Accurate Transformers manufactures Power Transformers and Distribution Transformers. A transformer is said to be one of the simplest and widely used electrical equipment. A transformer largely consists of three critical components – a) the copper winding wire. b) the transformer core, generally made of silicon steel or CRGO Silicon Plates and c) Insulators that prevent jumping of high voltages across connectors. The transformer core is made of CRGO steel plates that have a high proportion of silicon at around 3-4%. This high content of silicon helps in reducing ‘core losses’, or losses through resistance in the steel.

Transformers are used to step up and step down the voltage. Power Transformers are used to transform power voltage from Generation to the Distribution point. Power transformers are generally Step Up Transformers. These help in Stepping up voltage at the Power Generation points to ease transmission of power to the Distribution point Distribution Transformers are used to transform power voltage from Transmission point to distribution of power to the end user.

Generally, generation of power occurs at around 11KV. For ease of transmitting power to the load centres, the voltage is ramped up to 400 KV and then subsequently stepped down in stages to 220 KV, 132 KV, 66KV and 33 KV at the sub-transmission level. For consumption by the households and commercial establishments, the voltage is stepped down to 1.1 KV and subsequently to 440 V/220 V. Therefore, each stage requiring a change in voltage requires either a power or a distribution transformer.

The company manufactures Power Transformers upto 40 MVA capacity. The company is getting into higher capacity Power Transformers of 160 MVA capacity and has already developed prototypes for 160 MVA capacity transformers.

Concerns

Accurate Transformers has a high debtor receivable cycle. This is due to the fact that the biggest customers of the company are various State Electricity Boards and the collection period ranges between 120-180 days.

Accurate Transformers suffers from low Operating Margins when compared with the peer group. We believe that this may be on account of a number of factors like lower capacity utilization and High Debtor receivable cycle. The longer debtor cycle leads to working capital constraints which in turn results in lower capacity utilization and high interest costs, resulting in lower profitability. Infact, the company is consciously trying to better manage its financial resources because of which there has been a marked improvement in its operating margins which have gone up to 9.25% for the 9-months period ended December 07.

The other major concern is fluctuation in raw material prices since raw material constitutes around 85% of the total cost, however in most cases the contracts with the customers contain price fluctuation clauses, covering the company.

Conclusion

Until a few years back, the Indian Transformer Industry was in a mess. This was on account of outdated laws, lack of funds, poor distribution sector and the State Electricity Boards (SEBs) reeling under huge losses. The SEBs were facing a state of near bankruptcy on account of inefficiencies, huge AT&C losses due to poor grid management, inefficiencies in metering and billing mechanisms etc. The transformer industry, in turn, suffered as a result of lack luster demand and poor debt recovery.

India has one of the lowest electricity consumption levels in Asia, which is primarily on account of chronic and widespread electricity shortages in the country. Apart from inadequate investment in power generation, high T&D losses due to undermetering, under-collection and under-investment have also resulted in demand outpacing supply. While the SEBs were constrained in investing in the sector due to their poor financials, the private sector players stayed on the sidelines due to inadequate protections and escalating risks.

The enactment of the Electricity Act 2003 came as a big relief to the Indian Power Sector. The government thrust on power led to an upsurge in demand, the creation of the National Grid and programmes such as APDRP, restructuring of SEBs, as well as the entry of the private sector into the transmission and distribution (T&D) segment. All this has put Power Transmission and Distribution Equipment sector in a sweet spot. This also led to the growth of Transformer industry which logged healthy growth 2003 onwards. The scenario for the transformer industry is very promising; given the ongoing Government Power Program till 2012. Infact, Transformer is an integral part of the power sector irrespective of the fact whether it is Hydro Power, Thermal, Wind, Solar or Nuclear Power. Accurate Transformers being one of players in the transformer business with scope for substantial ramp up will definitely benefit from the huge growth potential in the segment.

Accurate Transformers has ventured into fast growing Rural Electrification Projects which involves providing electricity in remote areas and include the laying of lines, poles and setting up substations. It is currently implementing two such projects - one at Etah district of Uttar Pradesh and another at Nainital District of Uttaranchal.

Accurate Transformer has been operating at low capacities, primarily on account of working capital constraints; there is however a scope for substantial ramp up in the event of the company managing its working capital better and getting additional resources. The company is therefore in a position to take advantage of a boom in demand without incurring any further capital expenditure. Higher capacity utilization will eventually lead to higher revenues and increased profitability.

For Accurate Transformers, the major customers being State Electricity Boards, around 50% of the Sales Revenues come in the Jan-Mar quarter. For FY 07-08, we expect the company to report Sales Revenues of over Rs.200 crores and a PAT of around Rs.8 crores, which will result in an EPS of Rs.26. Accurate Transformers inspite of the concerns is available at reasonable valuations compared to the peer group and is operating in an industry which is expected to log healthy growth in the years to come.

Long Term Investors can accumulate the stock at its current price and add on declines.

Ashish Chugh is an equity analyst and investment consultant based at New Delhi, INDIA. At the time of writing this article, he, his firm and dependent family members have a position in the stocks mentioned above. The author, his firm or any of his dependent family members may make purchases or sale of the securities mentioned in the report while the report is in circulation. The author invites readers to send him email and welcomes comments, feedback & queries at nexgenfin@yahoo.com.

This report has been prepared solely for information purposes and the information contained herein may not be deemed to be an investment advice. Such information is impersonal and not tailored to the investment needs of any specific person. The information contained herein is not a complete analysis of every material fact representing any company, industry or security. The views expressed may change. While the information contained herein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Investors are advised to satisfy themselves before making any investments and should consult with and rely upon their own advisors whether and how to use such information in making any investment decision. Neither the author nor his firm accepts any liability arising out of use of the above information/ article.

Wednesday, 6 February 2008

Multibagger - HINDALCO

Hindalco is on a massive expansion plan in its aluminium business with capacities increasing 3x over the next 3-4 years. The company has announced expansion projects, both greenfield and brownfield increasing its aluminium capacity to 1.5 million tons. Most of the large projects are likely to go on stream only after FY09.

Hindalco Industries Ltd

Aluminium capacity to boost revenues

Hindalco is on a massive expansion plan in its aluminium business with capacities increasing 3x over the next 3-4 years. The company has announced expansion projects, both greenfield and brownfield increasing its aluminium capacity to 1.5 million tons. Most of the large projects are likely to go on stream only after FY09. These expansions provide high growth visibility over the longer run. Further, with captive access to coal reserves, Hindalco's cost competitiveness is expected to improve further. We expect aluminium prices to stay around the current levels of $ 2,300-2,600 in the near term.

Shareholding pattern:

As on 30th September 2007 Holding (%) No of Shares (in Lacs)
Promoter 31.4 3,856
Non Promoter Corporate Holding 10.4 1,258
FIIs & Institutions 39.9 4,902
Public & Others 18.3 2,254

Novelis acquisition leads to forward integration of aluminium division

Acquisition of Novelis gives Hindalco an instant access to world class technology for rolled products. Novelis follows a pure conversion model and operates in a segment that demands stringent customer qualification standards along with high capital outlay and longer lead time. With Novelis, Hindalco would have access to regular cash flows because Novelis business model is pass through business i.e. its sales realizations are not affected by volatility in LME prices. This acquisition would give Hindalco regularity in its cash flows.

Copper business to generate a steady cash flows

Hindalco's Birla copper unit at Dahej is the world's largest single location custom copper smelter with smelting capacity at 0.5mn tons. The plant is backed by captive power plants, oxygen plants as also by product facilities for fertilisers and precious metals. Though Tc/Rc margins are subdued currently, going forward we expect the company will be in a position to charge higher margins from the current levels.

Financials:

March (Rs Cr) FY06 FY07 FY08E FY09E
Revenues 12,120.00 19,316.00 64,214.00 61,264.00
Operating Profit 3,127.00 4,839.00 6,201.00 5,892.00
OPM (%) 25.80 25.10 9.60 9.60
Net Profit 1,588.00 2,702.00 2,156.00 1,895.00
Equity 98.60 104.40 130.70 130.70
EPS (Rs) 16.10 25.90 16.50 14.50

Valuation and recommendation:

We have valued Hindalco based on EV/EBITDA multiple on aluminium and copper business as also for Novelis. The stock is trading at a discount to its peers, i.e. NALCO and MALCO. We expect the stock to consolidate in the near term, and may gain as its capacities start production. On a sum of parts valuation method, we recommend a BUY with a target of Rs 220.

Company Background:

Hindalco Industries, a flagship company of the Aditya Birla Group is the largest aluminium producer in India, with a market share of 45% and is the only player that converts 67% of metal production into value-added products including high-end products like aluminium foils and packaging material. Copper smelting capacity of 500ktpa is the largest in Asia.

Disclaimer:

The information provided in the document is from publicly available data and other sources, which we believe are reliable. It also includes analysis and views expressed by our research team. The report is purely for information purposes and does not construe to be investment recommendation/advice. Investors should not solely rely on the information contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. Efforts are made to try and ensure accuracy of data however, India Infoline and/or any of its affiliates and/or employees shall not be liable for loss or damage that may arise from any error in this document. India Infoline and/or any of its affiliates and/or employees may or may not hold positions in any of the securities mentioned in the document. This document is not for public distribution and should not be reproduced or redistributed without prior permission.