Thursday, January 20, 2011

Tinplate - Analysis


Tin plate in packaged foods is still at a nascent stage. The per capita tin consumption in India is only 0.3 kg compared to 1 kg in China and 8-12 kg in developed nations.

Tinplate, being the market leader, is likely to benefit from the rising demand for packaged foods from urban population and increasing use of tin plates in packaged foods. The gradual rise in confidence about the growth of Indian economy has been clearly reflected in stock price of Tinplate Company for the past several months.

Also, the company gets 25-30 per cent of its revenue from exports and the recent signs of a recovery in global economies have improved investors’ confidence about the company’s future earnings.

While there are signs of a demand uptick for its products, the company is on track to expand its production capacity by 2 lakh tonnes, a rise of more than 50% in production capacity of its finished products.

In October, the company announced installation of equipment for this proposed expansion plan. All these events have fuelled the stock price movement.

Before the 27 per cent rise in stock price this week, the stock was trading at a forward price-earning multiple of close to 6. This appears to be lower, considering its historical P/E multiple of 8-12.

However, this week’s rise in stock price has raised its P/E multiple close to 8. But if the economy continues to grow at this pace, it is bound to reach higher P/E multiples and will offer good return.
Tata Steel's holding in Tinplate would rise to 60 per cent from April next year following the conversion of fully convertible debentures. Tinplate will then become a subsidiary of Tata Steel.
The full benefit of the company's expansion plan due for completion in the middle of next year would be seen from the 2011-12 fiscal.

On completion, the company will become one of the largest self sufficient tinplate producing facilities across South East Asia and West Asia.

The bulk of the Rs 627-crore expansion programme currently in progress was being financed by equity and internal generation. Earlier debt was three times the equity, and now the ratio has been brought down to less than 0.5.


Tuesday, January 18, 2011

2011: Indian Banking Sector Outlook.

Q: You have seen many of these phases in the past, given how sharply deposit rates have moved in the last few weeks, is it conceivable that banks margins might come under pressure?

Purwar: Temporarily yes. Right now, for example the credit interest rates revision for obvious reasons cannot be pushed beyond a point. Banks would like to take a little time before doing that. For the present, the margins will be under pressure in the short run, but in the medium to long-term, banks will see to it that margins are protected and maintained. If the deposit rates go up, naturally, the credit rates, the interest rates will go up as well.

Q: Having gone through these kinds of rising interest rates, rising inflation scenarios in the past, how do banks particularly public sector banks do in such environments?

Narang: When the interest rates go up, fact is profits of the banks go up because the interest rates in advances also go up. There might be a little time lag but at the end of the day the bank is a gainer. Where the bank loses is higher risk therefore, higher provisions on account of increased NPAs. An interest rate hike is not going to have a deep impact on the NIMs. Interest rate hikes will have deep impact on the ultimate profit of the bank.

Q: When you say you expect to see some kind of temporary hit on margins for banks, how long would that period be in your experience? When this interest rate cycle moves and you see deposit rates moving higher how many quarters does it take before things stabilise?

Purwar: No. It won’t take a quarter. Maybe bankers would like to see how things progress for maybe a month or two and they would then announce a hike in the interest rates. One other implication of this rise in interest rate which we should take note of is that whenever the interest rates are going high then the treasury portfolio of the bank, normally, the larger profits are required to be made on the investment portfolio of the bank. There the bankers get hit.

In the medium-term and in the long run, sometimes, the hike in the interest rates has some sort of adverse impact on profits maybe for a year.

Q: Along with the trend of rising rates, there is tremendous liquidity shortage as well right now in the system. That is pushing short-term rates up quite a bit. How tough is that for a bank to deal with?

Narang: As of date, there are two serious issues which the banks are facing. Inflation rates going up that means interest rates have to go up. When the State Bank raised their rates of interest to 9.5% for 10-year bond, it was a clear message to the market that interest rates in India are understated. There is a potential for them to go up.

The second part is liquidity. As on date, banks are borrowing anything between Rs 80,000 to 100,000 crore from the RBI on a daily basis. The RBI has to address these two issues. One is addressing inflation and the other is addressing liquidity. The policy proclamation on these two fronts will be very clear and will be very firm otherwise markets can go out of hand.

Q: If you could come in on that point Narang mentioned about slipping asset quality and higher provisioning because of NPA concerns in this environment. Do you see that as a legitimate concern?

Purwar: Absolutely. When such high inflation rates are there, interest rates start going up. A very normal impact is as far as the good customers are concerned that is fine with them, they are able to bear the burden of higher cost of interest. But as far as the marginal customers are concerned, a hike in the interest rates means a deeper dent on their pockets.

That is where these marginal accounts start slipping into the non-performing categories. That is where the problem starts. The assets start becoming bad, substandard and doubtful. Progressively higher and higher provisioning is warranted. That is one important challenge which the banking system will have in this year and more particularly next year.

Q: In a scenario where credit growth is very robust, do you fear given this kind of a inflation interest rate scenario, growth could slip and therefore, credit growth is not a strong as bankers expected to which will enable them?

Narang: I have absolutely no such fear. Rather I expect, this year the growth of deposits to be very robust, for the simple reason that there is a terrible amount of redemptions in the mutual fund market. Wealth management is as it is in disarray and interest rates are going to be very high. So fixed income securities are going to be the flavour of the season. I do not see any problem in the growth as far as the deposit is concerned.

In India, there is a normal growth of about 10-12% from the existing businesses. Garnering another 10%, in such a beautiful investment climate is not going to be an issue. Growth of the banks is not going to be an issue at all. On the contrary, I see a robust growth coming next year.

Q: One issue specific to public sector banks that have not been talked about that much is the change in pension norms and the kind of provisioning banks will now have to make because of the SPO and what happens to the increased gratuity limits. Is that a very real problem for public sector banks this year? How much do they need to detail for employee cost and pension liabilities?

Purwar: For pension liability, the current norms which have been put in place would require a very substantial provisioning on the part of the banking system. The exact amount is very difficult to estimate but with the way things are, it should be a pretty hefty sum. Those provisions would be required to be made out of profits of the current year. So that is a very important expenditure item.

Q: I am just running estimates that people are talking about which range between 15-20% in terms of a hit on earnings. Would you say that the potential impact for public sector banks?
Purwar: Yes. It could be a little more also.


Mahindra Satyam - Recap.

Two years after the scam broke, Satyam is almost back on track. Bhupesh Bhandari tells the story of the turnaround

When Ramalinga Raju confessed his monumental fraud on January 7, 2009, he not only brought Satyam Computer Services, India’s fourth-largest information technology company, perilously close to implosion but also turned topsy-turvy the lives of his 50,000 or so employees. Till that day, being a Satyam employee in Hyderabad, the company’s headquarters, was a matter of pride. Satyam had put the city on the world map. In return, Hyderabad pampered the people of its favourite company — traffic cops let them off for minor violations, marriage proposals seldom got rejected, and banks fell over each other to give loans.

The confession changed everything, almost overnight. Landlords refused to give houses on rent to Satyam employees; they were blacklisted by banks for credit cards and personal loans. As banks froze all credit lines, employees had no option but to settle airline and travel bills with their personal credit cards. When Tech Mahindra formally took over Satyam (it has since been renamed Mahindra Satyam) in mid-2009, it was not just a financial turnaround that needed to be done or an irregularity that had to be set right — the pride of a people had to be restored. On June 20, 2009, Mahindra Satyam CEO C P Gurnani had presented a three-year turnaround plan to the directors. “Midway into it, I am ahead of the milestones I had submitted,” says he.

After losses of Rs 8,174 crore in 2008-09 (because of provisioning of Rs 7,992 crore for Raju’s misdemeanors) and Rs 124 crore in 2009-10, Mahindra Satyam reported a profit of Rs 120 crore in the first six months of 2010-11. Income for the first six months of the current financial year stands at Rs 2,490 crore, which could give an annual income not too different from 2009-10’s Rs 5,481 crore, keeping in mind the appreciation in the rupee. Revenues in the last two quarters have been similar. This indicates the business has stabilised. Customer attrition has stopped; in fact, the company has added 44 new customers. And employees, the company’s top functionaries insist, are no longer an anxious lot. “Floor walks show that the anxiety over stability and security has given way to engagement and innovation,” says Chief Marketing Officer & Chief People Officer T Hari. Adds CFO S Durgashankar: “The stigma of the scam is gone. Banks are more than willing to give loans to our people.”

The first task, of course, was to close the book on the scam. The company was being investigated by Andhra Pradesh’s Crime Investigation Department as well as the Central Bureau of Investigation, Serious Frauds Investigation Office and Enforcement Directorate. Also sniffing around were the Securities & Exchange Board of India, Securities Exchange Commission of the US, the income tax department, registrar of companies and Software Technology Parks of India. All files were in the possession of these agencies. About 100 forensic experts drawn from KPMG and Deloitte would go to these agencies, largely CBI, copy the files during the day and pore over them at night.

All told, 30 terabytes of information was assessed. Kept in hard copies, the information was enough to fill 270,000 file cabinets of 5 ft by 5 ft. Over 2 million emails were reviewed, 300 hard disk drives imaged, and 1 billion lines of transaction data put under the lens. More than 200 bank accounts were analysed and 7,000 consumer contracts reviewed. At the end of the day, 7,500 inflated invoices were found (all such invoices were marked “S”, which helped the experts string them together), which had caused income and profit to be overstated by Rs 6,500 crore. This resulted in over 6,000 reconciliations in bank accounts and over 200,000 adjustments in the books because over 300 different income heads were impacted.

The second challenge was to hold on to customers. When the scam broke out, Satyam had about 650 customers; the tally now stands at around 350, including the 44 new ones. Thus, almost 350 customers have left the company. CTO A S Murty, who served as the interim CEO of the company before Tech Mahindra came on board, discloses that most of these desertions happened within three months of Raju’s confession. The government-appointed directors, to begin with, called up most large customers to say things would be all right soon. The company’s core strength, its delivery capabilities, was intact, they told nervous CTOs. Had it not been for them, the run on Mahindra Satyam could have been worse.

Mahindra Group Vice-Chairman Anand Mahindra and Gurnani took over from where these directors had left off. Between the two, they met all the large customers to convince them to stay with the company. In the first six months, Gurnani met over 150 customers across the globe. Customer meets were organised in London and Chicago to answer their queries. Analyst conferences were held in Hyderabad, London and Boston to apprise them of what the company was doing. This is also when the employees rose to the occasion. Their well-being, reputation and career were at stake. There was a perceptible improvement in service. In November 2009, the company conducted a customers’ delight survey; its score was 4 out of 5. This, claims Hari, was better than the industry average of 3.5-4. More recently, a “consumer as promoter” study was carried out by IMRB; it showed that there were more customers who wanted to be promoters than detractors of Mahindra Satyam.

The other piece was cost-cutting. With inflated income taken out and almost 350 customers walking out, the workforce of 50,000 was too large for Mahindra Satyam. So, when companies moved projects away from Satyam, they were requested to take the teams along. According to Murty, over 80 per cent of the departing customers agreed to this request. About 6,000 people left of their own accord. A separation scheme was also put in place, which was accepted by 9,000 people. As a result, Mahindra Satyam has 24,000 people on its rolls now (27,000 if subsidiaries are included).

But the roll call is still way too long. Manpower shouldn’t account for more than 55 per cent of an efficient software company’s revenues. (Rent, travel and communication adds up to another 15 per cent; the rest is operating profit.) For Mahindra Satyam, it is still 70 per cent. Coupled with rent, travel and communication expenditure of 20 per cent and more, it explains why the company’s EBITDA margin was 8.3 per cent in 2009-10 and 5.7 per cent in the first half of 2010-11. That the company stopped fresh recruitment from campuses didn’t help either — the average salary was higher than peers who pick up freshers in large numbers. It is only in the last six months that Mahindra Satyam has returned to campuses and mopped up 3,000 people. This year could see 4,500 campus recruitments.

The company exited all the nine rented offices in downtown Hyderabad and moved onto its campus in Hitech City. “Several of these contracts were long-term and onerous,” says Durgashankar. All told, Mahindra Satyam vacated 32 offices and saved Rs 184 crore on rent. The axe also fell on lawyers’ fees. “Their bills were crazy,” says Gurnani. “I started capping their fees and linked it to outcomes.” Legal expenses, as a result, have come down from Rs 107 crore in 2009-10 to Rs 16 crore in the first half of 2010-11.

Now that the company’s out of the woods, plans have been set in motion to grow the business. The focus is to mine existing customers for more business and woo back those who had left after the scam. Why? “All our rivals are much bigger in size. For new projects, we won’t even make it to the shortlist,” says Murty. According to Gurnani, only two of the 350-odd customers use all the five services Mahindra Satyam offers (consulting, enterprise business solutions, infrastructure management solutions, integrated engineering services and business platform and operations). “The upside is huge,” he says. The average revenue per salesman is a little less than $4 million; Gurnani wants to ramp it up to $5 million by the end of the year, though it will still be below the industry best practice of $7-8 million. Some headway, Gurnani says, has also been made with customers who had left. An announcement or two could come soon.

The 44 new customers, says Murty, came on board when the company had not restated its accounts for 2008-09 and 2009-10; with the numbers out, getting customers, he feels, will not be so difficult. Mahindra Satyam is also investing in futuristic capabilities like cloud computing, green technologies and open-source tools. It also wants to leverage Tech Mahindra’s expertise in telecommunications and Mahindra & Mahindra’s in engineering and manufacturing.

Still, what is the guarantee that another financial irregularity will not happen? To begin with, the accounting system is being overhauled. During the probe into the scam, it came to light that the company had been using non-integrated accounting practices; as a result, nobody save a select few knew the full picture. The software was so archaic that the developer had nobody left to service it! Engineers who had worked on the software were searched for across the country and brought to Hyderabad to help navigate the maze. It is now being upgraded.

A docket on ethical practices has been given to all employees. They are required to write a test on it; they must score at least 90 per cent to clear it. “The idea is that people should read it carefully,” says Murty. “Every single employee has cleared the test.” A corporate ombudsman has been appointed. Walls between sales and delivery teams have been brought down. “They work in tandem now. We have a two-people-in-the-box approach now,” adds Murty.

Sooner rather than later, Mahindra Satyam will merge with Tech Mahindra. Satyam, the brand, has a limited shelf life. Some people are nostalgic about it and hope the name will survive into the future. “It’s not yet known what the name of the merged entity will be,” says Murty. Of course, there is nothing left in the Satyam offices that could remind a visitor of Raju.


Thursday, January 6, 2011

Its Relative!!

Story Highlights:

All too often, an absolute view of the world tips the scales toward an unrealistic assessment of events.

But market forecasting is all about relative thinking—successful long-term portfolio management doesn’t happen without it.

Every time you fret 2011, ask yourself, “Compared to what?” Your portfolio might thank you for it.

The ability to think relatively is one of humanity’s great strengths—especially in investing. Macro market forecasting is one never-ending balancing act. The endless stream of events is chopped up, each piece labeled positive or negative and assigned a weight. You take the aggregate positives in one hand and the negatives in the other—whichever one is heavier wins the day.

Example: Greece might default on its debt and take down the eurozone [very bad]. Framed relatively: Greece might default on its debt and take down the eurozone, but the huge eurozone can easily afford to support tiny Greece and likely will [not so bad]. You get the picture. Forecasting is all about relative thinking—and successful long-term portfolio management doesn’t happen without it.

Yet, all too often, we’re influenced by the absolute, not the relative. The mere existence of financial crisis, recession, lower than usual income growth, infant mortality rates, rampant poverty, and war convinces us the world is in terrible shape.

There’s no question sorrow exists—in an absolute sense, it’s as old as humanity. But try framing the problem like a market forecaster. Is there more or less badness now compared to the halcyon days of yore? What’s the trend? Making that comparison actually yields some surprising results. Here’s a great article highlighting just a few facts about the world today.

Absolute: 25,000 newborns won’t make their fifth birthday.
Relative: That’s 4,000 fewer infant deaths than in 2000.

Absolute: 920 million people will fall below the poverty line in 2015.
Relative: Twice as many people lived in poverty in 1990—with a population 1.5 billion less than today’s.

Absolute: Five wars rage across the planet.
Relative: That’s the fewest conflicts since before 1960.

A classic line goes, “Capitalism is the worst system, except for all the others that have been tried.” What an insightful and completely relative concept that is. None of this is to say we should ignore the bad stuff—but don’t let it run you over. In an absolute sense, 2011 will have plenty of problems. But there will be good news out there too. Before you reach a conclusion, break out the scales and ask yourself, “Compared to what?” There’s no time like the present to abandon the absolute for the relative. Your portfolio might just thank you for it.


Tuesday, January 4, 2011

Lanco Infra

A key coal asset acquisition is likely to help alleviate fuel requirement concerns over power projects.

A large engineering, procurement and construction (EPC) contract, acquisition of high-quality mines and improvement in business prospects are positives for Lanco Infratech, believe analysts.

The Rs 4,100-crore EPC contract for setting up a 1,320-Mw power plant for a Moser Baer subsidiary and the A$750-million (Rs 3,375 crore) acquisition of coal assets of Australian company Griffin Coal provide revenue visibility and secure supply of coal requirements for Lanco’s power plants. Post the two events, analysts have turned bullish on the stock and expect decent returns from the current levels.


In Rs crore FY10 FY11E FY12E

Revenue 8,032 11,255 17,357

Interest 355.41 815 1,684.60

PAT 450 671 646

RoNW (%) 13.50 12.40 9.70

NPM (%) 5.60 6.00 3.70

Ebitda (%) 17.00 27.30 30.70

RoCE (%) 12.70 8.50 10.90

PE (X) 33.30 22.40 23.20

Debt/equity 2.50 3.70 3.70

Ebit/Interest 3.10 2.40 1.80

E: Estimates Source: Analyst report

Fuel needs secured

The Australian mines have proven reserves of 310 million tonnes and total estimated resources of 1.1 billion tonnes. The new mines will reduce dependence on external sellers, which at times could be very costly due to the vagaries of international coal prices. The company currently has an operational power generation capacity of 2,700 Mw, which it wants to take to 15,000 Mw by 2015.


Sum of parts

valuation In % Rs/share

Power 77.11 64

Construction 18.07 15

Real estate 3.61 3

Road projects 1.20 1

Total 100 83

If it is assumed that the company will need 30 per cent of imported coal, the new mines could easily meet those requirements. Along with the ramp-up in the domestic power generation capacity, the company will enhance the output from its Australian mining to 20 million tonnes over the next five-six years from the current output of four million tonnes annually. This will secure the long-term supply of coal needed for its power generation capacity in India. Also, analysts believe at a landed cost of $85 per tonne, the landed cost of coal will be very competitive compared with the $120 a tonne from non-captive sources.

In-house orders

The company has an integrated business model with interests in power, construction and real estate. The EPC division hitherto used to get a large chunk of its order book from internal projects. Apart from power projects, the EPC segment also caters to internal and external infrastructure projects in real estate and roads.

More importantly, the trend is changing as the company has bagged a few large external client projects in the power EPC, including the EPC contract worth Rs 4,100 crore. The increasing proportion of external clients has shown the company’s ability and competitiveness, which is good considering there are large opportunities in the power EPC business itself.

Meanwhile, the company has a strong order book of Rs 25,000 crore (including Rs 5,000 crore of orders coming from external clients), which is almost three times its 2009-10 revenue and provides very good visibility. On the back of this, analysts expect the EPC revenue could grow 20-22 per cent annually over the next two years.


On a sum-of-parts basis, analysts value the company at Rs 80 a share (at a current market price of Rs 62.3), which also includes the valuations of its real estate project and two BoT road projects. The power generation and EPC businesses — both major revenue contributors —are the key growth drivers. This is also a reason that these two segments form 80 per cent of the company’s valuations. In the realty segment, the company plans to develop 4.5 million square feet of commercial and residential space on its 100-acre real estate project, Lanco Hill.

However, in terms of valuations, the project is valued at just Rs 3 a share (of the total Rs 80 for the company), which is largely due to the analysts’ concern over the clarity of its development plans.

Selan Exploration - Multibagger

 This has been recommended by us on earlier occasions also on your channel and it has gone up few times from those levels but we believe that even at the current price this stock may turnout to be a potential multi-bagger.
The financials of Selan Exploration for the past two years have been almost flat. There was not much increase in either production or whatever has been happening is mainly because of the fluctuating oil prices. The revenues and profits are inline with the oil prices but there has not been any substantial increase in production in the last two years. But what is happening behind the scenes is that for the past two years, this company is doing 3D contour mapping of not just the Bakrol field, which is giving them major production as of now but for the other fields also. The new technologies which are available enables the company to identify the reservoirs where if drilling is done will give them about 10-15 times more oil than what the current wells are producing.
To give a rough calculation, the company is doing about 2.5 lakh barrels every year from about 20 wells, which means that each well is giving them close to 12,000-13,000 barrels, and the new wells are capable of producing 1-1.5 lakh barrels per year which means that if the company starts drilling now two new wells will help them double their production. For the past two years this company has been doing just 3D seismic surveys and contour mapping.
I believe that time is now right that maybe in the next three-six months the company may start drilling wells and 10 wells will almost quadruple there production now. So, the bad part maybe coming to and end and this thing may get start reflected in the company’s topline and the bottomline in probably year 2011-12. If you see the valuations at which the recent deals have taken place, if you talk about Cairn-Vedanta deal, if you apply just 50% of that valuation to only the Bakrol field where we have the data for 2P reserves you get a mind boggling figure.
At the current valuation it may just be a fraction of the valuation for the Bakrol field and leave aside the other fields which are still virgin where no data has been declared and I believe this is a stock where institutional investors will find value even when the stock goes to four figure mark because by that time the production would have got ramped up significantly—probably the 2P reserves data for the other fields might also get announced by the company and the financial numbers would start looking a lot better than what they are now. This is a company where the drilling is happening or the production is happening just in one field, which is a Bakrol field—operating margins are anywhere between 80-85%.
Once the ramp-up happens and with oil prices being steady and at higher numbers, I think this maybe a stock to watch out for in the years to come. The only thing is that as of now there are a few unknowns; the first is that when they start drilling is something, which nobody knows about but I believe that since they have already spent about two years in data acquisition drilling can happen in the next probably three to six-months. Oil exploration by nature is a risky business but I think the risk is getting mitigated because of the fact that all the fields are proven fields. So, in the years to come, we may see a massive scale up in the production of the company and this maybe a stock to watch out for, for the future.