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Friday, September 28, 2012


Some few months back Coal India Ltd. (CIL), the near-monopoly coal producer announced that it will seek shareholder approval at its upcoming Annual General Meeting to amend its Articles of Association in order to facilitate buyback as it was sitting on cash pile of around Rs. 58,202 Cr as on March 2012. As soon as this news was out, stock prices of CIL rose by more than 2%.  The reason for this price rise was primarily the expectation that the company will announce a share buyback.

Historically, share buybacks or even company announcements of a share buyback have had a similar effect on the respective stock prices. The market is usually quick to react positively to such news. But are share buybacks always beneficial to investors? Before we answer this, let’s understand what is a share buyback.

What is a Share Buyback ?
The repurchase of outstanding shares by a company in order to reduce the number of shares on the market either to increase the value of shares still available or reducing the supply. There are four basic options available to a company when it makes a profit: sit on the cash, re-invest it into profitable opportunities, pay a dividend or buyback shares.

Buyback is generally seen as a method of rewarding shareholders by returning excess cash to them, when a company doesn't see good growth avenues to deploy its resources. This can be done in two ways:
  • It can tender an offer to existing stockholders to buy up to a certain number of shares at a fixed price within a fixed period of time, or,
  • It could offer to buy the shares in the open market over a period.

What are the main intentions behind a Share Buyback? 
There are different motives that prompt the management to go in for a buyback of shares:

1. To reward shareholders: When a cash-rich company doesn't see good growth avenues to deploy its resources, it can choose to return cash to its shareholders via buyback of shares. Such an action can be viewed positively by the analyst community and reflect positively on the management.

2. To send out a confidence signal to the market: When a company announces a share buyback, investors see it as a positive sign in terms of the management’s belief in the company’s future growth & earnings. This could act as a confidence booster and leads to investor's buying into the company’s shares leading to a price rise.

Take for example, the Reliance Industries buyback scheme which was announced in February this year. After a series of quarterly results which were below expectations, the share price was languishing at INR 700. The share buyback announcement which was just 2 days before announcement of its quarterly results, led to a 5 % jump on the day of announcement. It was largely seen as an attempt to shore up the market sentiment in order to prevent a further fall in share prices after the announcement of another set of poor quarterly results.

3. To improve Financial Ratios: A buyback gives a temporary boost to some of the key financial ratios of the company that are based on the number of shares and cash as an asset. Suppose a company buys back 10 lakh shares at INR 15 per share for a total cash outlay of INR 1.5 crores. Below are the components of the Return on Assets (ROA) and Earnings per Share (EPS) calculations and how they change as a result of the buyback.

In the this grid, following a buyback, the company’s cash holding reduces from INR 2 crores to INR 0.5 crore, and the total assets of the company (cash being an asset) reduces from INR 5 crores to INR 3.5 crores. This leads to an increase in its ROA (Earnings/Assets) from 4 % to 5.71 %, even though earnings have not changed. A similar effect can be seen in the EPS number (Earnings/Shares Outstanding), which increases from INR 0.20 to INR 0.22.

4. To prevent dilution of control: A buyback helps to absorb the excess shares, which were caused due to dilution, may be due to the exercise of employee stock option programs or due to conversion of FCCBs or warrents. Thus, a buyback reduces the total number of shares outstanding in the market and helps to increase shareholders value.

5. To prevent unfriendly takeovers: By undertaking a buyback, the company makes it more difficult for a raider to take control by acquiring majority stake from the open market.

Now when we have clearly known about the prime intentions behind the Share buybacks, but are these buybacks always an good idea or can it decrease shareholder value. ?

When  are the Share Buybacks not good for Shareholders ?
1. Buyback of overvalued shares: a company buying overvalued shares from the market would lead to destroying shareholder value, and would be better off paying that cash out as dividends, so that shareholders can invest it more effectively.

2. To boost earnings per share: contrary to popular wisdom, increasing EPS doesn't increase fundamental value of the shares. Though the EPS derived from the P&L statements of the company may seem to rise, there is no net increase in the cash EPS. Since companies have to spend cash to purchase the shares, valuations are adjusted for reductions in both, cash and shares.. The result is a cancelling out of any impact in the cash EPS, as now lower cash earnings are divided between fewer shares to produce no net change in the earnings per share.

3. Using borrowed money to fund the buyback: Using debt to fund a buyback could have an adverse effect on the credit rating of the company, since in effect the company reduces its equity, increases its debt, with no net increase in cash to serve as a cushion for the increased leverage.

So, are Share Buybacks really beneficial for Shareholders ? 
Stock buybacks can be great for shareholders if the company cannot utilise the excess cash productively. As mentioned before, it could lead to a cash inflow for shareholders as also lead to appreciation in share price. However, the price at which the company buys back the shares should be right.

On the other hand, you should be careful and assess the reasons for the buyback. You must exercise a reasonable amount of caution in the following cases:
  • Where a stock grant to employees by way of employee stock options or a stock issuance for merger & acquisition is offsetting the shares taken out of circulation, thereby resulting in no net increase in share value.
  • Where the management aims to cover up weak ratios or improve the market price of the shares by playing with investor sentiments.
The new norms for Share Buybacks :
Market regulator SEBI on February 7th 2012 modified norms for share buyback through the tender offer route under which companies will have to reserve 15 per cent of the offer for small shareholders.

"15 per cent of the number of securities which the company proposes to buy back (through tender offer)... shall be reserved for small shareholders," the Securities and Exchange Board of India (Buyback of Securities) (Amendment) Regulations 2012 said. Small shareholder refers to a shareholder who holds shares not exceeding Rs. 2 lakh of a listed company. The buyback process through the tender offer route can be completed within 41 days of the board approval.

As per the guidelines, a company would have to publish advertisement in newspapers within 2 days after securing board approval for the buyback and after 5 days it has to file the offer document with the Sebi. The offer for buyback shall remain open for 10 working days & within 7 days the company would have to pay the buyback amount to the shareholders.

Before this amendment there were two ways by which a company can come out with a buyback - open market and tender offer. While in open market offer companies can buy back shares from shareholders without knowing the buyer, under tender offer the company has to write to every shareholder saying it is willing to buy back shares in proportion to the issue.

Under Section 77A(2) of the Companies Act, 1956, Buyback of Equity shares by a company shall be up to 25 % of the total paid- up Capital and the amount intended to use for buyback shall not exceed 25 % of total paid-up Capital and Free Reserve and requires the approval of members by way of Special Resolution. 
  • Promoters shall not participate in the buyback.
  • As per the Act, the ratio of the Debt owed by the company should not be more than Twice the Share Capital & Free Reserves after Buyback.
  • The Company will not be allowed to issue fresh equity shares within a period of 6 months after the completion of the Buyback except by way of Bonus issue or in the discharge of subsisting obligation such as conversions of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity.
  • The company should confirm that there are no defaults subsisting in the repayment of deposits, redemption of debentures or preference shares or repayment of term loans to any financial institution or Banks.
Example of calculation of the Buy Back - 
The Total number of Equity shares as on 31st March were 218,16,86,781 shares

Maximum Amount permissible for Buy-back i.e. 25 % of the Total paid up and free reserve of Rs. 2,551.26 Cr = Rs. 637.81 Cr.

Maximum Shares permissible for Buy-back i.e. equity bought back cannot exceed 25 % of 218,16,86,781 shares = 54,54,21,695 shares.
So, Company can buy back 54,54,21,695 shares & money to be used should not be more than Rs. 637.81 Cr.

Sunday, September 23, 2012


Scrip Code: 500092 CRISIL
CMP:  Rs. 917.45; Buy at current levels.
Short term Target – Rs. 1000; Medium to Long term Target - Rs.1250;
STOP LOSS – Rs. 844.00; Market Cap: Rs. 6,437.59 Cr; 52 Week High/Low: Rs. 1,150.30 / Rs. 731.75
Total Shares: 7,01,68,390 shares; Promoters : 3,72,09,480 shares –53.03 %; Total Public holding : 3,29,58,910 shares – 46.97 %; Book Value: Rs. 52.05; Face Value: Rs. 1.00; EPS: Rs. 28.30; Div: 1100 % ; P/E: 32.41 times; Ind P/E: 26.67; EV/EBITDA: 24.04.
Total Debt: ZERO ; Enterprise Value: Rs. 6,205.73 Cr.

CRISIL LTD: The Company was founded in 1987 and is headquartered in Mumbai, India. CRISIL Limited operates as a subsidiary of Standard & Poor's LLC. It was formerly known as The Credit Rating Information Services of India Limited and changed its name to CRISIL Limited in December 2003. CRISIL Limited, together with its subsidiaries, provides ratings, research, and risk and policy advisory services primarily in India, the United Kingdom, and the United States. It offers services for a range of debt instruments, in the areas of credit ratings; research on India's economy, industries, and companies; financial research and analytics outsourcing; fund services; risk management; and infrastructure advisory services. The company provides research and analytics services to commercial and investment banks, insurance companies, corporations, consulting firms, private equity players, and asset management firms. It offers ratings for long-term instruments, such as debentures/bonds and preference shares, fixed deposits, and loans, as well as pass through certificates and structured finance instruments; and short-term instruments comprising commercial papers, certificates of deposits, and short-term debts. The company also provides equity and corporate research, industry reports, customized research assignments, subscription to data services, and initial public offer grading services. In addition, it offers fund research, rankings, and ratings to mutual funds industry; infrastructure advisory services in the renewable energy, transportation and logistics, oil and gas, and minerals sectors; and risk management services to banks, financial institutions, and corporations. The company has a joint venture with the National Stock Exchange of India Limited to provide various indices and index-related services and products to the capital markets. CRISIL is compared with Nice Information Services Co. Ltd, Korea Ratings Corporation and Koryo Credit Information all of these are from South Korea.

Investment Rationale:
CRISIL’s rating businesses like outsourcing from S&P and SME rating have done well during the quarter and helped it to post 7 % growth in the overall rating business. However, with margins in those businesses are at fairly lower level than the bond/bank loan rating business, the growth in revenues in these businesses hasn’t helped the margins with rating business margins declining by 3.30 % YoY. While the debt market activity has been lackluster for quite some time, it slowed down considerably in the last quarter with fresh debt issuances falling to Rs. 48,320 Cr as against Rs. 1.1 trillion in Q4FY12. Rating revenues grew by just 7.2 % YoY (-3.2 % QoQ) to Rs. 90.7 Cr, lowest in more than five years. With no new projects coming up & with given poor investment climate, the debt issuance as well as credit demand are likely to remain low over the next couple of quarters, thereby keeping the ratings revenue under pressure. CRISIL Q2CY12 results were significantly below expectation with operating revenue growing by just 6.5 % YoY (-2.6 % QoQ) to Rs. 220 Cr. The sluggish growth was led by slowdown in all the three segments like Rating, Research and advisory with major disappointment coming from research business which grew by just 10.2 % YoY, lowest since Q3CY09. The other segments rating and advisory also reported dismal numbers with rating growing by just 7.2 % YoY and advisory revenue declining by 21.6 % YoY. The management has attributed the lower growth in research to slowdown in domestic piece which has reported negative growth. Domestic piece which is mainly CRISINFAC broadly constitute 18-20 % of the total research revenues

Outlook and Valuation:
CRISIL House - the 2,11,610 sq.ft
 Corporate Head Office
Powai, Mumbai 
CRISIL has assigned ratings to 31,000 SMEs over last six years which it believes will gradually migrate over next few years as Crisil’s bank loan rating and bond rating customers. Within Crisil’s research business, despite having weak financial conditions globally, IREVNA and Pipal have added significant number of customers over last 6-9 months. Over and above that, merger of CDL will result in further inorganic client additions into the kitty. It is believed that significant addition of clients in research (organically and inorganically through acquisition of coalition) will reflect in research revenues in H1CY13. The pace of growth for CRISIL in research has cooled off from high of 44 % in CY11 to 24 % in Q1CY12 and further to 10 % YoY in Q2CY12. The management has attributed lower growth in research due to the slowdown in domestic price. Moreover with a significant number of new clients addition in Coalition Development Ltd, which was acquired last quarter, will further give traction to the research revenues. CRISIL’s staff costs have gone up by 11% for H1CY12 while other operating expenses have remained flat. While operating expenses remained flat reflecting CRISIL’s ability to keep the costs under check, it is believed that the rise in staff costs reflects further strong additions to employee base. CRISIL has hedged almost 55 % of its revenues as against 40 % in CY10. Of the USD revenues, approximately 70 % of the revenues are hedged against 51 % in the previous year. The hedging of the revenues has capped the revenue as well as EBIDTA expansion despite INR depreciating significantly vis-à-vis USD as well as GBP.  It is expected that Crisil could have earnings cut by 16 % to 17 % for CY12/13E taking into the account the disappointing Q2CY12 numbers. However, CRISIL has gradually put building blocks for strong growth in revenues and profitability in its key businesses. CRISIL could be bought at a target price of Rs. 1000 and should be accumulated at every dip. In my view CRISIL could report FY13E EPS of Rs. 41.30/sh. The stock could be bought for the target price of Rs. 1250 and recommend Accumulate on the stock

SALES (Rs. Crs)628.40807.001018.301,273.30
NET PROFIT (Rs. Crs)164.50187.70226.10289.00
EPS (Rs.)23.2026.8032.3041.30
PE (x)37.1032.1026.7020.90
P/BV (x)19.6018.2013.009.60
EV/EBITDA (x)27.4022.3018.3013.50
ROE (%)48.6058.4057.0052.90
ROCE (%)64.7081.4082.5076.60

I would buy CRISIL LTD with a price target of Rs. 1000 for the short term and Rs. 1250 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 844.00 on every purchase.


Friday, September 14, 2012


Fed to Print $480 BILLION AGAIN!!!
Yesterday, Fed chief Ben Bernanke proved that what many have suspected all along is indeed true: The U.S. Federal Reserve will not patently stop printing money!
Mr. Ben Bernanke announced that the Fed is going to do the same old thing, it’s going to hold interest rates near zero as far as the eye can see... And it’s going to print a whopping $40 Billion (Rs.2,21,680 Cr $/Rs.55.42) new dollars per month in an attempt to stimulate the economy — a whopping $480 billion (Rs.26,60,160 Cr $/Rs.55.42) per year! In short, it’s doing the same things it has done since 2008, but expecting better results, In any way you look at this, that’s The Very Definition Of INSANITY!! The Fed has Already held interest rates near zero percent for four long years, now. Plus, it has already created $1.8 trillion out of thin air through QE I and QE II... And it has already bought hundreds of billions of dollars more worth of long-term Treasuries as part of Operation Twist 1 and 2. 

So what’s the result?
Sure — all that free, easy money will temporarily excite the stock markets around the world but despite everything the Fed has done ... the
** Unemployment has stayed over 8 % for 42 straight months ...
** The average family home is Still falling in value ...
** Profits of many major corporations in US are Still sinking ...
** The U.S. economic growth is Still grinding to a near standstill ...
** And now, as America approaches the precipice of its great fiscal cliff, the stock market looks for the entire world as if it’s a massive bubble about to burst!
** Worse is that, the middle class — the very backbone of the U.S. economy — is getting eaten alive:
HOUSEHOLD INCOME IS PLUNGING: The U.S. Census Bureau just reported that real median household income has now fallen for the fourth straight year. Income has fallen so low, in fact, that when you adjust for inflation, the median family has the same income today as it did in 1967 , now that was the 45 long years ago!
THE INCOME GAP IS WIDENING ALARMINGLY: The Census Bureau is also reporting that the movement of income away from the middle class has just hit a record high. That’s terrible as typically this kind of increasing disparity in income occurs just before economic calamities — and today, it’s more extreme even than before the 1929 stock-market crash and the Great Depression!
U.S. POVERTY IS AT ALL-TIME RECORD HIGH LEVELS: Finally, as if to add insult to injury, the Census Bureau also reports that a staggering 46.2 million Americans now live in poverty! And not only isn’t the Fed Helping ... its failed efforts to revive the economy is creating a second crisis: Thanks to the Fed’s past money-printing gambits, the Producer Price Index just jumped 1.7% in August — hands-down the biggest surge in producer price inflation going back to June of 2009!
Make no mistake:
The U.S. economy is broken.
Nothing the Fed can do will fix it.
To the contrary: The Fed’s easy money policies Created this crisis by inflating the housing bubble. Now, they’re only making matters worse — doing absolutely Nothing for the job market, while driving inflation higher! And as America’s great Fiscal Cliff approaches — the catastrophe that JPMorgan says will push America “head-first into the fiscal meat grinder” — the storm clouds are darker than ever.

The Gold has raised 111.58 % from QE1 to QE3 : Gold jumped after this QE3 by FED the third round of monetary stimulus called Quantitative Easing. QE has been a massive boon for gold, when FED flooded markets with nearly Zero money or free money, gold’s allure as a store of wealth & an inflation hedge is burnished. Loose monetary policy weakens the dollar boosting the GOLD. Fed’s nearly ZERO interest rate policy and bond purchasing under QE1 kicked off on 16th December 20008 and Gold was $837.50 an ounce, & today Gold is at $1772 an ounce this means Gold raised to 111.58 % on back of QE1 & QE2 which followed in Nov 2010. So QE & Gold has always been supporting each other..SO ALWAYS BUY GOLD

Impact of QE3 on India: As for India, off course in near term the pattern of QE has always been strong for emerging market like India and for their currencies and even stronger for commodities. The QE programme is good for India for a day or two as it will help the rupee a little bit and at a same time QE surges commodity prices, which is bad for India as it imports most of the commodities to meet its growing needs of the economy, Brent crude is at $115 and any raise in its prices will make inflation to climb again making life difficult for RBI, remember QE2 which was announced on Nov 04 2010 in which Indian Market made a high of 6338 on NOV 05 2010 and had a one way decline post that & so QE2 turned out to be disastrous for India as it stoked inflation. India is not a obvious QE play now, as Indian markets has its own set of problems like high inflation, policy paralysis and of course the scams and political unrest. The diesel price hike of Rs.5/liter is the positive step and so the FDI policy in aviation but these have a short term sentiments..

In short, US FED with the announcement of QE3 gives the clear message to the market that rates will remain this low till 2015 with a hope that this low rates will revive economic growth, but on India one should remain cautiously Bullish, one must look at classic defensive's like pharma, consumer stocks with a risk of breakdown between the investment cycle & the consumer cycle weighs heavily on them.  

Thursday, September 13, 2012

COAL INDIA : A ‘Maharatna’ company, a gem for your Portfolio !!!

Scrip Code: 533278 COALINDIA
CMP:  Rs. 376.65; Buy at Rs. 360 to 375 levels & Accumulate at Every Dips.
Medium to Long term Target – Rs. 395; 
STOP LOSS – Rs. 345.00; Market Cap: Rs. 2,37,905.86 Cr; 52 Week High/Low: Rs. 387.45 / Rs. 293.60
Total Shares: 631,63,64,400 shares; Promoters : 568,47,27,960 shares –90.00 %; Total Public holding : 63,16,36,440 shares – 10.00 %; Book Value: Rs. 30.97; Face Value: Rs. 10.00; EPS: Rs. 12.82; Div: 100 % ; P/E: 29.37 times; Ind P/E: 18.76; EV/EBITDA: 13.50.
Total Debt: Rs. 1173.54 Cr; Enterprise Value: Rs. 2,54,612.64 Cr.

COAL INDIA LIMITED: CIL was incorporated in 1973 in Kolkata, India. It was formerly known as Coal Mines Authority Limited. CIL is a leading public sector undertaking engaged in coal mining & selling coal fines in India and is working on establishing its footprint globally through acquisitions. The company provides Washed and Beneficiated coal for use in manufacturing of hard coke for steel making and power generation. Company operates 471 mines in 21 coalfields across 8 states in India, which includes 163 open cast mines, 273 underground mines & 35 mixed mines – open & underground mines. CIL operates through its 9 wholly owned subsidiaries, of which 1 subsidiary is engaged in exploration and feasibility study analysis. Its subsidiaries include Eastern Coalfields Ltd, Bharat Coking Coal India Ltd, Central Coalfields Ltd, Northern Coalfields Ltd, Western Coalfields Ltd and South Eastern Coalfields Ltd. CIL has total reserves of 64.3 billion tons and proved reserves of 52.4 billion tons, of which extractable reserves stands at 21.7 billion tons. The company offers coking coal primarily for use in steel making & metallurgical industries, and for hard coke manufacturing, semi coking coal for use as blend able coal steel making, merchant coke manufacturing, it also provides middlings used by fuel plants, brick manufacturing units, cement plants, industrial plants, as well as for power generation. CIL coal fines/coke fines are used in industrial furnaces, as well as for domestic purposes. It serves primarily power, steel, cement, and fertilizer industries. Coal India is compared with PT Sumber Energi Andalan Tbk of Indonesia, Siberian Mining Group Company Ltd & Mongolia Energy Corporation Ltd of Hong Kong.

Investment Rationale:
Coal India, a ‘Maharatna’ company & is the largest coal producing company in the world, based on its raw coal production (436 million tonne in FY2012). The company is also the largest coal reserve holder in the world, based on its reserve base. The company caters to large thermal power generation companies, steel and cement producers and other industrial companies in the public and private sector. CIL has access to 64.3 billion tons of reserves, the largest in the world. From this 52.4 billion tons are based on Indian Standard Procedure (ISP) guidelines, representing 6 % share of the global proven reserves. CIL is well positioned to capitalize the widening gap of demand & supply as it controls 80 % of the coal supply in India. CIL was been facing problems for its planned expansion, due to delays in requisite environment and forest clearances and land acquisition issues. During FY2012, CIL’s production has been affected by imposition of stringent environmental & pricing laws by regulatory authorities. However, looking ahead, given the rising demand-supply gap for coal in India, it is expected to see some ease from the government on the environmental side which will drive CIL’s production and sales growth. Gross Caloric Value -based pricing will offset high staff costs. CIL’s realizations were higher by 6.8 % YOY during 1QFY2013 on the back of change in pricing mechanism to GCV. Going forward, it is expected that the blended realizations to increase by 7.1 % in FY2013, which is expected to offset the increase in staff costs. Coal India plans to spend nearly Rs. 40,000 Cr over 5 years to 2017, plan includes development of more than 100 coal mine projects, setting up coal washeries & acquisition of coal blocks overseas. Currently, Coal India has lined up a capex of Rs. 25,400 Cr for the next 5 year period that ends on 31st March 2017, company also plans to spend additional Rs. 2,500 Cr to set up a 300  km railway infrastructure in Chhattisgarh, this line will  help to evacuate 120 million tonnes of additional coal. COAL INDIA is in talks with Railways & state to lay three new railway lines in Chhattisgarh, Jharkhand and Orissa to overcome evacuation problems. The company reported Cash and Bank Balances of Rs. 58,202 Cr as on 31st March 2012 from which COAL INDIA's massive capex will be easily met along with the Buy Back if it happens.    

Outlook and Valuation:
Coal India (CIL) reported lower Q1FY13 earnings on account of lower than expected realisations from the E-auction. Also, with the expansion in Fuel Supply Agreement realisations where further boosted by increase in the WCL prices and the low employee costs in the quarter reinforcing the positive outlook for earnings in coming quarters. The CIL's Board has cleared the cost plus model for Fuel Supply Agreement ( FSA - As per new Coal Distribution Policy, Coal supplies are governed by Legally enforced agreement between the coal companies & the consumer under specific terms & conditions) with the power companies but asked the coal major's management to come up with a business model for price pooling mechanism. The cost plus model provides imported coal at its actual cost & Price pooling is mechanism to implement FSA, suppose there is no price pooling, FSA will be like 65 % domestic coal & 15 % imported coal provided the power producers are willing to take it, suppose if pooling prices is approved, then the 15 % would be at pooled price and not at the cost price - this new business model would deal with the impact of taxation on coal imports, price of coal and legal implications of pooling mechanism. As per the presidential directive, CIL has to meet 80 % trigger level and CIL had agreed to pay penalty of 1.5 % to 40 % on failing to supply the committed quantity of coal to the power utilities, following protests from major companies over its decision to go for worthless penalty of o.01 %. Coal India if gets timely clearances and additional capex is spent then the company would surpass 2012-17 production target of 615 million tonnes. Coal India has achieved 98 % of its production target and 97 % of offtake target during the 5 months (April- August) of the current financial year. The monsoon effected the mining operations which prevented the company from achieving its target. The company mined 162.86 million tonnes during first 5 year v/s 152.49 million the same month in the previous year. Company's offtake has seen a rise of 5.4 % at 181.85 mt during April-August 2012 against 172.48 mt last year. However CIL met 91 % of the underground output target at 15.69 million tonnes during April-august, which is 0.3 % down from 15.74 million tonnes in same period previous year. Now, on Results - CIL’s Revenue grew by 14 % YoY at Rs. 16,500 Cr on the back of 6.4 % growth in volumes at 113m tonnes and 7 % rise in realisations at Rs. 1,465/tonne. The variance was primarily on account of lower-than-expected realisations in E-auction at Rs. 2,561/tonne, partially off-sated by better realisations in FSA at Rs. 1,267. CIL reported EBITDA at Rs. 4,810 Cr YoY. Coal India’s EBITDA/tonne for the quarter fell 6 % to Rs. 427. Profit after Tax grew by 8.3 % to Rs. 4,480 Cr on the back of 32 % rise in other income and 100bps fall in tax rate at 29.4 %. CIL’s 1QFY2013 results surprised positively due to lower-than-expected staff and other costs. Further, it remains well-poised to meet its FY2013 off take target with 6.5 % YOY increase reported in 1QFY2013. Moreover, an increase in blended realization due to shifting to GCV-based pricing is expected to offset the rise in staff costs in FY2013. In my view CIL could report FY13E EPS of Rs. 25.30/sh and for FY 14E of Rs. 29.10/sh. Valuing the stock at 8.0x FY2014 EV/EBITDA, the stock could be bought for the target price of Rs. 415 and recommend Accumulate on the stock. I maintain a positive view on the stock & believe that any further correction due to COAL GATE scam would be a good buying opportunity for long term holders, as for short term, stock could be bought with a price target of Rs. 395.

SALES (Rs. Crs)50,229.3062,415.4067,378.6073,021.90
NET PROFIT (Rs. Crs) 13,477.6015,638.7017,448.5019,649.10
EPS (Rs.)17.3023.3025.3029.10
PE (x)20.2014.9013.7011.90
P/BV (x)6.605.404.303.40
EV/EBITDA (x)13.0010.809.007.30
ROE (%)36.9039.9034.7031.70
ROCE (%)33.3036.7032.2029.70

I would buy COAL INDIA LTD with a price target of Rs. 395 for the short term and Rs. 435 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 345.00 on your purchase.


Monday, September 3, 2012

RELIANCE INFRASTRUCTURE : Accumulate at every Dip !!!

Scrip Code: 500390 RELINFRA
CMP:  Rs. 444.10; Buy at Rs. 435 - Rs. 440 levels.
Short term Target: Rs. 500; Medium to Longer term Target: Rs. 600; 
STOP LOSS – Rs. 404.00; Market Cap: Rs. 11,679.38 Cr; 52 Week High/Low: Rs. 679.75 / Rs. 328.30
Total Shares: 26,29,90,000 shares; Promoters : 12,76,26,990 shares –48.53 %; Total Public holding : 13,53,63,100 shares – 51.47 %; Book Value: Rs. 705.00; Face Value: Rs. 10.00; EPS: Rs. 72.12; Div: 73.00 % ; P/E: 6.23 times; Ind. P/E: 14.00; EV/EBITDA: 9.37
Total Debt: 9,147.73; Enterprise Value: Rs. 17,024.13 Cr.

RELIANCE INFRASTRUCTURE LTD: The Company was incorporated in 1929 and is based in Mumbai, India. The Company was formerly known as BSES which later was renamed as Reliance Energy Limited and changed its name to Reliance Infrastructure Limited in April 2008. Reliance Infrastructure is an Anil Dhirubhai Ambani Group (ADAG) company. Reliance Infrastructure Limited engages in the generation, transmission, distribution, and trading of power in India. The company also focuses on other key infrastructural areas, such as highways, roads, bridges, metro rail (Delhi and Mumbai), and other mass rapid transit systems, special economic zones, and real estate. The company distributes approximately 36 billion units of electricity to approximately 30 million consumers across an area that spans approximately 1,24,300 square kilometers and includes India's two primary cities, Mumbai and Delhi. It generates approximately 940 MW of electricity through its power stations located in Maharashtra, Andhra Pradesh, Kerala, Karnataka, and Goa. The Company operates in two business segments, Electrical Energy; and Engineering, Procurement, and Construction (EPC) and Contracts. In Electrical Energy, the company operates a 500 MW Thermal Power Station at Dahanu; a 220 MW combined cycle power plant at Samalkot; a 48 MW combined cycle power plant at Mormugao; and a 7.59 MW Wind farm at Chitradurga. It also purchases power from third parties and supplies the power through its own distribution grid. The company supplies power to residential, industrial, commercial, and other consumers. In the EPC and Contracts Segment it renders value-added services in construction, erection, and commissioning. It undertakes contracts of projects in various fields like power generation, transmission, and distribution. This division mainly focuses on the power sector projects. The company holds 38% in Reliance Power that plans to have a portfolio of 32 GW of generating asset. The company is compared with Torrent Power Ltd, TATA POWER, PTC INDIA, POWER GRID and CESC Limited.

Investment Rationale:
RELIANCE INFRASTRUCTURE LIMITED is developing various road and metro projects besides bidding for various infrastructure projects. The infrastructure space too, like power, is expanding in a big way with a potential market size of $49,400 Cr. The company, being a part of ADAG, plans to be a major player in the infrastructure segment by owning assets on a Built- Operate and Transfer (BOT) basis and leveraging its financial and technical strengths. The company’s Two road projects – Gurgaon ‐ Faridabad and Salem ‐ Ulundurpet has completed recently. With this, 7 out of 11 road projects are revenue operational. Of the balance, Rel Infra expects three more roads to be revenue operational in FY13 and the last one in FY14. From the Rs. 15,600 Cr EPC order book, half comes from Reliance Power’s projects (Sasan, Butibori and Samalkot) and the balance from external/BOT projects. The company has made considerable progress on its cement projects in Maharashtra & Madhya Pradesh, the grinding & blending unit at Butibori in Maharashtra is nearly completed. The company expects to start production very soon may be within a month, RELINFRA have already started trial runs & produced a sample bag of Cement. RELINFRA’s Delhi Airport metro operations have been suspended due to problems in the civil structures which were 92% of the bearings and 7% of pillars which were recognized as defective and lots of girders were impacted. Since the Special Purpose Vehicle (SPV) which owns the project is expected to incur losses on the project, the management has decided to park its stake in one of its associates and reverse the same once the issue is resolved. The company expects the Mumbai Metro to be completed by FY13 end. Reliance Infrastructure (RELI) reported a standalone PAT of Rs. 380 Cr, due to weakness in the EPC division numbers. The management expects the low EPC order book (Rs. 15,600 Cr order book is 1.3x TTM revenues) to improve over the next 12‐ 18 months through both internal and external projects; hence FY13 revenues are expected to be around Rs. 9,000‐10,000 Cr. Tariff revision in Delhi discom is a positive, and the completion of all infrastructure projects by FY14 should boost future cash flows. RELINFRA’s Other income is higher due to better yields on FMP maturity on cash surplus of Rs. 10,500 Cr. Considering that most of the equity infusion in the infrastructure business has already been done, the management expects other income to be better than previous year going forward. The company’s EPC division posted revenues of Rs. 1,770 Cr with margins of 10.3% (flat sequentially). The company hiked the power tariff in Mumbai by 16.48% from 1st August 2012 while in Delhi; tariffs were hiked by 21% from July 1, 2012 which should improve the cost recovery and profitability. In Delhi, regulatory assets worth Rs. 5,500 Cr have been approved. Of the balance, RELI expects Rs. 4000 Cr to be approved by the year end. Regulatory assets worth another Rs. 4000 Cr, already approved by the appellate tribunal, have been challenged by the regulator. 

Outlook and Valuation:
Reliance Infrastructure Ltd is believed to be emerged as a major power EPC player in the next few years, benefiting from the large addressable market to be created by the addition of 100,000 MW in the 12th Plan. Further, it holds a stake of 38% in Reliance Power and thus has the opportunity to invest in the entire power space, ranging from generating asset development to building transmission assets and power EPC. There have been changes in margins from the EPC business in the past one year due to the volatility in commodity prices and high interest rates. While it is understand that RELINFRA has entered into back‐to‐back contracts to minimize the margin erosion, the scale and timing of projects could expose the company to execution risks. The road traffic growth has been dented due to the depressed industrial growth and weak macro environment. This, in addition to any delay in execution of infrastructure projects, could impact valuations.  The company has parked a sizeable part of its investments in group entities and yield bearing instruments. Since other income contributes significantly to the total earnings of the company, any diminution in the value of the same could impact valuations. The Resolution of regulatory issues is a positive since it would improve earnings and cash flows. The declining competition for infra projects (due to funding issues) will benefit financially sound companies like RELINFRA. However, limited revenue visibility and clearance issues related to R Power’s projects are a dampener. The Maharashtra Electricity Regulatory Commission (MERC) has now ordered that any residential category consumer wishing to switch over from RELINFRA to TATA POWER should have minimum consumption of 300 units. Its a great relief for REL INFRA as its consumer base was reducing due to its consumer being switching over to TATA POWER for cheaper power. It is to be noted here that REL INFRA buys power from TATA POWER and supplies to its consumers around Mumbai. This order of a cap of 300 units will benefit REL INFRA. At the current market price of Rs. 444.10 the stock is trading at 9.11 x FY13E for which Earning Per Share (EPS) is seen at Rs. 48.70 and for FY14E it trades at 9.00 x FY14E for which EPS is seen at Rs. 49.30. One can buy REL INFRA with a short term target price of Rs. 500 for the Medium to Long term players it should be Rs. 600 with ultimate target of Rs. 936. 

Business FY13E
Value Per Share (in Rs.)
Reliance Power
Infrastructure Projects
Regulated Power Business
Net Cash

SALES (Rs. Crs)9,560.0017,906.7015,672.4015,747.20
NET PROFIT (Rs. Crs) 1,125.401,546.201,280.301,296.80
EPS (Rs.)42.1058.8048.7049.30
PE (x)12.509.0010.8010.70
P/BV (x)0.800.700.700.70
EV/EBITDA (x)4.903.703.103.00
ROE (%)6.6011.006.706.40
ROCE (%)7.9019.2012.0011.90

I would buy RELIANCE INFRASTRUCTURE LTD with a price target of Rs. 500 for the short term and Rs. 600 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 404.00 on every purchase. 

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