Friday, December 31, 2010

Crude Oil Unleashed.

Crude Oil has been steadily moving upwards from March 2009 lows of $33 to above $90 and is expected to touch three digits soon. Frankly I don’t know how high crude will be going but history shows that a gradual increase in Crude oil prices can be absorbed by the economy and things will be business as usual.

However a sudden spike in crude oil prices can falter an economy. So lets delve into why prices are touching the roof and how we can profit from it.

Supply And Demand:

Supply is controlled by OPEC to some extend. They produce around 40% of the world crude. They prefer the crude to be around $70.

Demand is increasing in Chindia (China and India). Consumption of US and Europe is not a major concern, but the increaseing demand in Chindia is growing rapidly with their flourishing economies. Improving fundamentals in US and Europe economic just adds to the demand for Crude.

Currency Fluctuations:

US dollar being the world’s reserve currency, Crude and other commodities are valued in US dollar in international markets. Any weakening of the US dollar increases the price of Crude. Currency fluctuation was not a major concern few years back. But with the Quantitative Easing (QE) programs adopted by US to bring itself out from the recession is weakening the dollar thus increasing the cost of crude.

War/Natural Disasters:

Whenever there is a war like situation or some natural disaster in or around oil producing nations, we have a spike in crude prices.

Severe Winter:

Due to global warming, climate across the world are getting extreme. Winter are becoming more severe and so the consumption of gas increases during the winter season.

Profitable Trading Opportunities:

We cannot control the Supply demand or the War/Natural Disasters. But we know that Demand will be increasing with flourishing world economy.

With QE2 program and a possible QE3 program we can expect the dollar to keep weakening for a sometime.

So the best way to create a profitable trade in crude will be to buy Crude in March-April (i.e. summer) and expect the crude to rise by December (i.e. winter). This will continue for a at least 2-3 years assuming that there wont be any recession in next 2-3 years.

Other way round ,we can expect crude price to go down in March/April and can short crude for now and cover our short positions in March-April and get long.

Wednesday, December 22, 2010

Tinplate - Target Rs 110

Tinplate is a Tata Steel company basically into tinning business, which is largely used for packaging into the agriculture segment. As we all know the growth in agriculture segment is happening very fast now and a company like Tinplate would definitely have an edge over the imported tin coming into the market today. They have already expanded their capacity to 380000 tones for the tinning and at the same time they have backward integrated themselves into the CR business where again I think the capacity has been expanded to 380000 tones and which is going live in this particular part of the financial year.

He further added, "From the prospective of seeing higher amount of growth in this particular company, the company is likely to see maximum amount of benefits going forward in the next financial year where the growth of backward integration, the integration will probable play its role in the coming year and there after. Most importantly with the Corus in, they are having access to the sophisticated technology, which is required in the European market, which would end up giving them higher amount of value addition in the business. The company is available at just 6x its price-earnings ratio and we believe that on an EPS of Rs 11-12 in the next financial year, the company should end up with a target of about Rs 110-120 levels. So current level onwards, I think there is a decent amount of appreciation in next 12-18 months."


S P Tulsian on Mahindra Satyam

Q: There are talks now that the Satyam shareholders are opposing the merger, they may hit the minority shareholders etc. What are you thoughts on the stock price, it had a bit surge yesterday?

A: If I take an independent view, it is always beneficial for the Mahindra Satyam shareholders and will be in profit if the company remains on a standalone basis and if it doesn’t merge with Tech-Mahindra. Right now everything is in place for Mahindra Satyam except for the margin front because you have your topline intact.

Maybe the employees are getting retained to the extent of about Rs 27,000-30,000 because you don’t have a cash flow problem. The company is cash rich having a balance of Rs 2,500 crore. What you need is a slight improvement in the margins which can take this share price to more than what it will show on an effective basis if it gets merged with Tech Mahindra or either way.

So it would be better that for the next couple of years, the company remains independent. The voice raised by the minority shareholders seems justified. Maybe for the Mahindra’s, it is in their interest to continue to cut the administrative cost or the controlling expenses as well as to have better ownership pattern of the merged entity. But for minority shareholders it is better if Mahindra Satyam remains as a standalone entity.


National Solar Mission.

Harness the power of the sun. That is the tall ambition of India. It wants to generate enough solar energy to take care of 12% of the total energy needs of India by 2022. Ambitions as lofty as the sun.

We tend to ridicule every target set by the Govt as it has the unbeatable, consistent track record of always missing it by huge gaps. And given the number of scams under probe in the country now, we cannot help but wonder whether the solar projects also reek of a new scam.

Last week, the Jawaharlal Nehru National Solar Mission, which aims to increase the country's solar capacity to 20GW by 2022, awarded 5MW solar projects each to 37 companies. The Govt received bids from 344 companies for solar projects spread across 14 states. Of this, 37 got selected – 7 are for solar thermal and 30 for photovoltaic.

Sounds good on paper, reads well too. But a little more digging reveals that this could largely remain merely on paper. The solar party risks getting crashed even before take off as those participating themselves could derail the whole cart. And the cost of the party being borne by the hosts, could very well jeopardize the entire partying.

The single biggest point of failure could be the bidding price for selling the power. To ensure that they get the bid, companies have quoted crazy and hence unviable prices. The lowest solar photovoltaic bid price is at Rs.10.95/kilowatt-hour v/s government's proposed rate of Rs.17.91. And the lowest solar thermal bid came at Rs.10.49/kilowatt-hour v/s government rate of Rs.15.31. At such huge discounts, how can the projects make money at all?

The cost of capital currently stands at Rs.14 crore per megawatt. And when these companies borrow funds for the solar projects, it would be at an average rate of 13% per annum. India’s target of 20GW by 2022 is same as that set by China but in terms of cost of borrowing, debt in China is as low as 3 to 4%. The rates at which these companies have bid to sell solar power is not enough to even recover their outgo on interest on the debt which they will need.

Camelot Enterprises, which has won a 5 MW solar photovoltaic in Maharashtra was the lowest bidder at Rs 10.95/ kilowatt-hour. And this is a handicraft company! And this is the company which was selected first, much ahead of the likes of IOC, Punj Lloyd, Lanco Infratech Ltd., KVK Energy.

Companies have justified this low bidding saying that more than making money, their bids were about getting a berth on the National Solar Mission. But is getting a berth alone enough? After winning the contract at auction, the developers have one month to sign power purchase agreements and a further 11 months to complete the project itself. To prevent irresponsible bidding, companies had to pay bid bonds on projects. They are liable to pay hefty fines for delays or failure to build. Well, we have fines for road building projects too but does that speed up the developers in any way?

Tata Power withdrew its name from this solar auction, citing it as unviable. It said that getting funding from banks at viable rates would be a problem and hence backed out. Azure Power, which has won the bid, is looking at funding from abroad. There is also confusion on how the electricity tariffs will go to developers.

What is also questionable is the quality of companies who have been awarded the projects. More than awarding projects on technical grounds, winners have been chosen merely on the lowest rates bid. There are the likes of (apart from Camelot Entp) Oswal Woollen Mills, Amrit Animation and Megha Engineering & Infrastructures (makes water-pumping equipment!). In the same breath, experienced developers like Abengoa SA, which has built plants in Spain and the U.S., and Acme Group, which is building a 10- megawatt solar thermal plant in India were chucked off. GAIL, Birla Corporation and Aban Goa have been outbid by Rajasthan Sun Techniques, Aurum Renewables, Megha Engineering, Corporate Ispat Alloy and Godavari Renewables. Almost 15 of the 30 lowest bidders are complete unknowns. Isn’t this how winners were chosen in the telecom bidding too?

The stink raised by the telecom scam is as such making breathing difficult and now, here too there wafts in the smell of another scam.

Two things can never be hidden – the sun and the truth. Hope the sun reveals the truth in this new scam.


Monday, December 20, 2010

Assam Co to demerge biz, focus on four verticals.

Q: A couple of days back it was reported that Canoro has stopped production at the Assam Oil field, in which you hold about 40% stake, is that true and what’s the kind of impact?

A: Yes, it is partly true. There were two well which were producing. One of the wells, which is well number 11, which was producing nearer to about 800-900 POE a day, I believe has been stopped because they are looking at the pressure and redoing the well, this is subject to what Directorate General of Hydrocarbons (DGH), what permissions would be given by the DGH. We still have a small production happening.

The production has only stopped as recent as December 3, 2010. So, there is not virtually going to be a major impact because most of the quarters have gone. We will have to see how we go about in the coming year.

Q: But how do you expect resolution of this?

A: We are looking at this favorably because there is some sort of legal dispute going on between us and Canoro and government has intervened in that. As you are aware that government has cancelled Canoro’s PI interest, which is participating interest, to the extent of 60% where Canoro has gone to the Court and has got some sort of stay. We expect a judgment coming out very soon. So, in all these things, this is a positive news and whatever this is being done would not really impact us this year on our balance sheet and hopefully next year we should do very well.

Q: Can you then just get to the acquisition of Duncan Macneill Power & Utilities, what exactly is this strategic fit and how much exactly did you spend on this acquisition?

A: This is not an acquisition as an acquisition, it was one of my earlier interviews with you all we had said the Assam company has now become a mixed bag. So, we are trying to make different verticals for different businesses and the board has approved that we should use different companies for different projects and this was one of the projects which we had.

We are putting up a 1200 megawatt of combined cycles, which is a gas based power plant, which we have acquired the land in Gujarat in a place called Vilayat and we have got necessary inprinciple permission of the gas from GSPC. We have also got the water permission. We have given to the environment for getting the environment clearances. So, that is how we are going forward with the project. Instead of doing it in Assam company where we have tea, oil and other utilities, so we thought of doing it in a separate company because at sometime we would be there in the market.

Q: So when do you expect this entire power project to crystallise?

A: It is on its way of crystallising. We are waiting for the environment clearance and we are waiting for the final clearance from the gas. Once the two is in position, nothing would stop us while starting the project. I think by month of February-March, we should have all those permission available with us subject to whatever government clearances are required.

Q: You made a point about making focused units, any plans of demerging all these various verticals and having them listed?

A: Yes, we are absolutely on this. We see that by having one individual unit the shareholder gets confused because there may be separate shareholders who may be interested in individual verticals, but may not be interested in the mixed bag.

Q: When will this happen, this restructuring?

A: The restructuring it’s already on its way as we have done through this, others are also on its way. We would be taking it to the board meeting. Those are valuation going on. It would happen between now and the next quarter that the company would have more definite plan of looking into more on focused activities. And that would also give us enhanced profitability on each individual sector.

Q: Can you just tell us about which are the demerged entities and which ones would you be looking to list?

A: The verticals at this moment is tea which we would now make it separate at some time. Oil and gas where we are going to do that. The third is SEZ, which is another subsidiary company of Assam Company, which is being delisted and the fourth is the power. So, we are putting it into four different verticals.


Sunday, December 19, 2010

Assam Company - Production Halted, Buys Duncan Macneill Power & Utilities Limited.

Canadian company Canoro Resources, involved in a legal dispute with the Union petroleum ministry for cancellation of its production sharing contract (PSC), has stopped production from its Assam oilfield, claiming an excess of water to oil ratio.

The Amguri field in Assam produces about 1,000 barrels of oil equivalent per day (boe). According to Sproule, an internationally recognised body engaged in making resource/reserve assessments, the reserve of oil condensate and gas at Amguri stood at 12.287 million Boe.

The company recently informed the ministry about stoppage of production, said a person familiar with the development. When asked, an official at CanoroĆ¢€™s office here refused to comment.

18 Dec 2010

Acquisition of shares of Duncan Macneill Power & Utilities Limited

Assam Company (India) Ltd has informed BSE that the Company has on December 17, 2010 acquired all the shares of Duncan Macneill Power & Utilities Limited, an unlisted Company, having its Registered Office at 52, Chowringhee Road, Kolkata- 700071, Consequently, Duncan Macneill Power & Utilities Limited had become a Wholly Owned Subsidiary of the Company.