MUNDRA PORT & SEZ : A Value Pick !!!

Scrip Code: 532921 / MUNDRAPORT

CMP:  Rs. 129.00; Buy at Rs. 120 - 125 levels. Short term Target: Rs. 140, Medium term Target – Rs. 181; STOP LOSS – Rs. 118.70; Market Cap: Rs. 25,843.78 Cr; 52 Week High/Low: Rs. 170.45 / Rs. 110.00
Total Shares: 200,33,94,100 shares; Promoters : 155,25,38,715 shares –77.50 %; Total Public holding : 45,08,55,385 shares – 22.50 %; Book Value: Rs. 21.42; Face Value: Rs. 2.00; EPS: Rs. 5.45; Div: 45.00 % ; P/E: 23.66 times; Ind. P/E: 19.43; EV/EBITDA: 19.95.

Total Debt: Rs. 3303.01 cr; Enterprise Value: Rs. 29,146.79 Cr.

Mundra Port and Special Economic Zone LTD: The Company was incorporated in 1998 as Gujarat Adani Port Limited and renamed as Mundra Port and Special Economic Zone Ltd in July 2006, based in Ahmedabad, India. Mundra Port & SEZ Ltd engages in the development, operations and maintenance of Mundra port & port based related infrastructure facilities – including multi product special economic zone in India. The company’s port related services include cargo handling and other value added port services. It handles bulk, liquid and containerized cargo, single point mooring, storage, and transportation of cargo by road, rail and pipeline. MPSEZL is in process of setting up coal cargo terminals at Murmugao Port, Goa. The company is also developing a non- LNG multi-user, multi-cargo port facilities at Hazira under the sub-concession route The company also operates container trains on specific railways routes; and provides multi-model cargo storage and logistics services through the development of inland container depots at various locations. It operates a fleet of approximately 2517 vessels. Mundra Port and SEZ ltd is compared with Rizhao Port Co. ltd; Shenzhen Chiwan Wharf Holdings Ltd. Mundra Port and Special Economic Zone Ltd is a subsidiary of Adani Enterprises Limited from September 2010.    

Investment Rationale:

MPSEZ has approved the change in name of the Company from 'Mundra Port and Special Economic Zone Limited' to 'Adani Port and Special Economic Zone Limited' which would be changed at some later date subject to approval by the Registrar of Companies -Gujarat and subject to the approval of Shareholders of the company. India's port capacity lags behind from rapidly rising demand. This comes at a time when traffic for coal, crude oil/POL, and container is set for a sustained period of high growth. It is expected that MPSEZ to benefit from the supply shortage due to its surplus capacity and advantageous location. Mundra Port is among the largest beneficiaries of an increasing demand-supply mismatch in India’s port capacity. MPSEZ’s competitive advantages and attractive location plus connectivity provides a strong visibility of traffic for MPSEZ. It is noted that 90 % of MPSEZ’s estimated traffic comprises of coal, crude oil, and container. Of this, coal and crude oil are not likely to see any impact from global macro concerns, while container traffic should continue to benefit from the shortage of capacity on India’s west coast. Adani Group has ambitious plans for its three key business verticals – power, coal and logistics and with the inter-linkages between them will drive MPSEZ’s future investment and growth plan. MPSEZ has started handling coal for Tata power’s Ultra Mega Power Project in Q2FY12 (2 million tonnes handled in the current quarter). This has led to the coal volumes surging to 5.13 million tonnes growing more than 60 % YoY. MPSEZ has entered into port service agreements with Adani Power (for 4,620 MW) and Tata Power (for 4,000 MW) for transporting imported coal from Indonesia and Australia to their respective power plants. These power plants, when fully operational would require about 30 metric per annum of coal cargo to be handled at Mundra port (peak estimated by FY15E of 35 million tonnes). It is estimate that MPSEZ to handle 11 million tonnes of coal in FY12 at the new coal terminal for both Adani Power and Tata Power. While coal is already used as a firing fuel at more than 100GW of all power plants in India, the cumulative capacity of all-India’s power plants is set to rise by another 125GW+ over FY11 to FY17, such demand for power has led to rapid reforms in the power sector, the coal industry has not had equally big reforms, it is expected that the demand for coal will rise rapidly, though the supply will not rise as fast as demand will lead to demand for imported coal. Levy of MAT in the beginning of FY12 will lead to additional cash outflow in tax. However, the company is claiming MAT credit for the same such that the P&L impact will be neutralised. Mundra port currently has a theoretical cargo handling capacity of 165mn tonnes, though the actual usage might be limited to 135mn tonnes. Theoretically, the two single point mooring systems (SPMs) at Mundra can handle 50mn tonnes in total, but the respective refinery capacity itself limits overall requirement to 20mn tonnes pa. Hence, whenever the IOC and HP-Mittal refineries at Panipat and Bhatinda, respectively, are expanded, the SPM capacity should be able to handle the incremental volumes up to a maximum of 50mn tonnes in total. It is learned that the port’s capacity is set to expand to >200mn tonnes by FY15. Mundra port would be generating more than enough free cash flow from FY12F, which it could deploy for green field port opportunities both in and out of India. MPSEZ has already ventured for a few projects within India as well as acquired a coal-handling terminal in Australia. The slowdown in global trade has already hit container traffic throughout ports sharply. It is expected that EXIM container traffic across all ports to rebound at a CAGR of around 12.4% over FY10-12F and look for container traffic to reach 10.4mn TEU by FY12F. Given the limited options available elsewhere on India’s west coast, a 25 % - 30 % CAGR in container traffic at Mundra over the next 3-4 years is expected.

Outlook and Valuation:

Despite been in a capital intensive business, the debt situation for MPSEZ is very comfortable. The stable cash flows from assured cargo and minimum working capital investment would be very important for the company to make more capex in the future for growth. It is believed that MPSEZ to generate around Rs. 1360 Cr of Free Cash Flow p.a. from FY12F, and MPSEZ is one of the few infrastructure companies in the country to do so. This allows MPSEZ to benefit from rising port opportunities both in and outside of India without too much of balance-sheet risk. While newer opportunities will likely to be ROE-dilutive. Mundra Port and SEZ has fallen by 21 % in last one month versus the fall of 8 % in the broader market Nifty, despite of strong operational performance of the company. Now the stock trades at attractive valuation of Price to Earnings of 16.29 x FY13E and RoE of over 20 %. Three year average historical one year forward P/E for MPSEZ is 22. In case of EV/EBIDTA multiple, it trades at 11.90 times FY13E, which seems to me undervalued in context of the healthy operating margin of 65 % with strong operational & free cash flows. Average historical one year forward EV/EBIDTA for MPSEZ for the last 3 years is 15. The valuation of the stock on SOTP (sum‐of‐the‐parts) basis, with the Mundra Port business comes at Rs. 181. In my view Mundra Port could report EPS in FY13E of Rs. 7.70 / sh. I would buy Mundra Port & SEZ LTD for the medium term with a price target of Rs. 181 and for the SHORT TERM PLAYERS it could be Rs. 140.00

Business Subsidiary FY13E	Value Per Share (in Rs.)
Mundra Port	136.00
Value of SEZ	19.00
Adani Petronet Dahej Pvt Ltd	7.10
Mormugao Port	1.20
Abbot Point Coal Terminal	4.00
Hazira Port	6.60
Vizag Port	2.00
Adani Logistics Ltd	5.00
TOTAL	180.90

KEY FINANCIALS	FY11	FY12E	FY13E
SALES (Rs. Crs)	2,000.10	2,581.80	3,391.60
NET PROFIT (Rs. Crs)	893.00	1,083.30	1,549.30
EPS (Rs.)	4.50	5.40	7.70
PE (x)	26.90	22.20	15.50
P/BV (x)	5.50	4.60	3.70
EV/EBITDA (x)	19.40	15.50	11.90
ROCE (%)	13.90	16.30	20.20
RONW (%)	22.30	22.50	26.60

I would buy MUNDRA PORT AND SEZ LTD with a price target of Rs. 140 for the Short term and Rs. 181 for the medium term 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. 118.70 on every purchase.

 *As the author of this blog I disclose that I do hold MUNDRA PORT AND SEZ LTD in my investment portfolio.

Mundra Port and Special Economic Zone

Market Details as on 31st October, 2009.

Total Shares Issued – 400678820 shs of Rs. 10 each.

Shares Issued at IPO- 40250000 shs at Rs. 440 Nov 2007.

Promoters Holdings- 324719561 shs -81.03%.

Market Capitalization- Rs. 20047.96 cr.

Current Market Price – Rs. 500.35.

Book Value per Share- Rs. 73.44, Earning per Share- Rs. 14.91, Dividend- Rs.3/sh.

Price to Earning Ratio – 33.56, Industry P/E- 42.20, Price to Book- 6.81 times.

52 Week – High- Rs. 705, Low- Rs. 253.65.

200 Daily Moving Average- Rs. 478.25.

Total Debt – Rs. 2313 cr, Total Reserve- Rs. 2541.78 cr

FINANCIALS:-As on 30th September 2009

Total Income Rs.337.33 cr v/s Rs. 303.78 cr (YOY), Net profit increased 56 % to Rs. 174.78 cr v/s 112.28 cr (YOY), half yearly Net Sales of Rs. 634.13 cr, and Net Profit of Rs. 345.54 cr posting an EPS of Rs. 8.32.

Mundra port is India’s largest private sector port promoted by Adani group.

Mundra port has notified multi-product SEZ area of 5920 hectares, from which it is currently developing the area of 130 sq km. the Co. has its own railways which handled close to 4500 rakes in yr 2008-09; has Dry Cargo Port - has handled largest container vessel- MV BAUDELAIRE (300.40 mtrs), the port now handles 6500-7000 vessels; Co. has container terminal with highest gross crane productivity of 55.24 Moves Per Hour (MPH) , highest average crane productivity of 33 MPH in country; Company has signed an agreement with Maruti Suzuki to export cars from the Auto terminal- total car exported in last 3 months of 2008-09 is 18911 cars; Co. has handled 2.2 lacs Metric Tonnes of liquid cargo.

For the financial yr 2008-09 Mundra port has handled 2171 vessels v/s 1624 in yr 2007-08. Its cargo handling capacity increased by 33.68 % to 3.60 cr tonnes.As per the records, India’s 95 % of external trade by volume & 70 % by value comes by Sea. Cargo handling volume in 12 major ports in India was at 53 cr Tonnes, while non-major ports contributed 21 cr Tonnes during 2008-09, aggregating to 74 cr Tonnes. Mundra port, the largest private sector non-major port, with a cargo capacity of around 3.6 cr Tonnes in FY09 is among the Top 10 ports in India. India needs to double its port capacity to 150 cr Tonnes by 2011-12 & would require investments worth Rs.55000 cr in that period indicating significant potential for the sector.

SOLAR INDUSTRIES INDIA LTD: READY TO EXPLODE !!!

Scrip Code: 532725 / SOLARINDS

CMP:  Rs. 681.10; Market Cap: Rs. 6,163.28 Cr; 52 Week High/Low: Rs. 759.45 / Rs. 567.06

Total Shares: 1,80,98,011 shares; Promoters : 1,32,08,207 shares – 72.98 %; Total Public holding : 48,89,804 shares – 27.02 %; Book Value: Rs. 95.87; Face Value: Rs. 2.00; EPS: Rs. 18.99; Dividend: 225.00 % ; P/E: 35.70 times; Ind. P/E: 53.69; EV/EBITDA: 20.09 times. Total Debt: Rs. 400.34 Cr; Enterprise Value: Rs. 6,526.58 Cr.

   

SOLAR INDUSTRIES INDIA LTD: The Company was founded in 1983 and is headquartered in Nagpur, Maharashtra, India. The company was earlier known as Solar Explosives Limited and changed its name to Solar Industries India Ltd in 2009. Solar Industries India Limited is an explosives manufacturing company. The Company manufactures, supplies and exports industrial explosives and initiating systems. It manufactures various explosives products, such as Slurry and emulsion base explosives, bulk explosives, detonators, pentaerythritol tetranitrate (PETN) and accessories. The Company's products include Large Dia slurry Explosives, Small Dia Emulsion, Small Dia Slurry Explosives, Solar Detonators, Supreme Detonators, Supreme Electric Detonators, Economic Sod, Eco Det, Cord Relay, Cast Booster and Detonating Fuse. Its products are used across mining and infrastructure sectors. It also offers high melting explosive (HMX) and HMX Compounded products to the defense sector. The Company has 25 manufacturing plants eight states in India and three in overseas locations. The Company offers its products to 42 countries across the globe. The Company has manufacturing facilities at Zambia, Nigeria and Turkey. The company came with an IPO in 1980 with an offer of 4,41,000 equity shares of Rs. 10 each at par. The company has not declared any bonus. Company has declared Split in face value of its shares from Face value of Rs. 10 to Rs. 2.00 on May 16, 2016. SOLAR INDUSTRIES INDIA LTD is locally compared with Premier Explosive Ltd, Indo Gulf Industries, GOCL Corp Ltd, Hardcastle & Waud Manufacturing Co Ltd, UPL Ltd, CDET Explosive Industries Private Ltd, Salvo Explosive & Chemicals Pvt Ltd, Thangavel Match Ind, Vetrivel Explosives Pvt Ltd, Dai-Ichi Karkaria Ltd globally compared with Saudi Explosive manufacturer of UAE, African Explosives (Tanzania) Ltd of Tanzania, Austin Powder Company of USA, Maxam Brasilia LTDA of Brazil, Maxam Corporation of Spain, African Explosives (Ghana) Ltd of Ghana, Davey Bickford of France, Elviemak Sa of Greece, European Federation of Explosives Engineers of UK, Fabchem China Ltd of china, Biafo Industries Ltd of Pakistan, Hyflux Ltd of Singapore.

Investment Rationale:  

Solar Industries India Ltd (SIIL) founded in 1995, is one of the largest comprehensive explosives & initiating devices manufacturing company in India. Solar Industries India Limited has grown to become India’s largest manufacturer of Industrial explosives and explosives initiating systems and spreading its presence to global markets with manufacturing plant at Zambia, Nigeria and Turkey. Solar Industries India Ltd manufacturing facilities span in 19 Locations across India with 3 manufacturing units in Overseas with distributors network in more than 40 countries. The company offers high quality and services that are backed by stringent safety standards, a robust infrastructure companies including the recognized names like Coal India Ltd, Singareni Collieries company Ltd, Vedenta, Tata, Sasan Power, L&T, and many more. Solar Industries products includes Cartridge explosives, Detonators, Detonating cord, Cast booster, Multi-layer Shock Tubes, Underground Bulk, Explosives for military Application, Pyros, Propellants, Ammunitions. Industrial explosives comprises of cartridge explosives, bulk explosives, ANFO based explosives, which includes boosters and PETN as well as accessories for explosives such as safety fuses, detonating fuses and detonators. The global explosives market is largely driven by bulk explosives. The mining industry is the largest consumer of industrial explosives, with coal mining demand dominating over others, due to increasing demand for coal. Other segments that utilises explosives include limestone and metal mines besides infrastructure segments like roads, dams, canals and tunnels. Despite India’s huge reserves of various natural minerals, the share of the mining and quarrying sector as a percentage of Gross Domestic Product (GDP) has declined from 2.8 % in FY 2010-11 to 2.1% in FY 2013-14 (Provisional Estimates). This decline came against the backdrop of various judicial pronouncements and the Justice Shah Commission Report, which led to the suspension of several mining leases or closure of mines. The revival of the mining sector is now linked to providing a level playing field between domestic and foreign investors. The proposal is aimed not only at remedying the problems in the sector but also at creating an enabling environment based on sound principles of transparency and efficiency. Once the mining sector is back on track, the explosives industry is set to witness a new phase of growth. Also the Government has set an excavation target of 1.35 Billion Tonnes of coal by FY 2020. According to the plans firmed up by Coal India along with the Union Coal Ministry, total output envisaged for Coal India’s subsidiaries is about 900 Million Tonnes and other proposed New Projects for is about 100 Million Tonnes. Its plans for each of the subsidiaries are in place, though, and it also envisages opening up 70-100 mines to achieve the FY 2020 target. Iron Ore mining industry is currently facing some hurdles in securing approvals to restart mines, especially in the three states of Odisha, Karnataka and Goa. Nevertheless, once these mines begin production, iron ore output is set to grow at a robust pace of 10 % during FY 2015. Against an output of 140 Million Tonnes in FY 2014, domestic production is set to reach 155 Million Tonnes in FY 2015. Some positive developments that are imminent include the renewal of leases for mines in Goa, the formation of a new government in Jharkhand, issuance of clearances and permits in Odisha and revival of mines in Karnataka. India was the world’s largest arms importer, largely due to lack of domestically produced arms. To reduce significant outflows of valuable foreign currency as well as to promote domestic growth of the industry, the Government presented the Defence Procurement Policy in FY 2013, under which all Government procurements would need to have a minimum 30 % of such purchases with indigenous content. This has opened up new business opportunities for the explosives sector in India. Budget 2015-16 has also provided an outlay of Rs. 2,46,727 Cr for defence. The Government’s ‘Make in India’ initiative, seeking to promote self-reliance, indigenisation, technology upgradation and achieving economies of scale and developing capabilities for exports in the defence sector, will also open up a large window of opportunity for the explosives sector. These developments will cumulatively facilitate the emergence of a more efficient and productive coal sector. This will, in turn, trigger greater demand for the explosives which is good for this industry. SOLAR INDUSTRIES LTD commands a dominant volume market share of 25 % among more than 40 players in 1 mt Indian explosive market in which large 6 player’s accounts for 75 % market share and tedious licencing procedures act as high entry barriers. Explosives industry clocked a combined volume CAGR bulk & cartridge explosives of 9 % while Solar Industries Ltd’s combined volume CAGR bulk & cartridge explosives was 16 % over FY09-FY16. Solar Industries will continue to outperform the industry, given the various triggers in domestic and overseas markets. Unlike capital goods, explosives are industrial consumables and to a large extent immune to the vagaries of intense cyclicality faced by its main user industry i.e. mining. This can be witnessed from the fact that SIL’s combined volume CAGR for bulk and cartridge explosives has been 16 % over FY09-FY16 as against coal production CAGR of 3.8 %, iron ore production CAGR of -5.8 %, and lignite/limestone production CAGR of 2.9 % /4.0 %, respectively, over the same period. SIL is well placed with its recent addition in licensed capacities due strategic acquisitions of M/s Blastec (India) Private Ltd & M/s Emul Tek Private Ltd. The current licensed capacity in this segment stands at 3, 00,000 MT. As per the management, volumes from tender business are also expected to improve significantly, with increased focus of government on Coal India and Singareni Collieries to increase their mining volumes. SIL’s newly commissioned facility at kothagudam (Andhra Pradesh) along with two new facilities at Barbil (Odisha) & Kota (Rajasthan) will also contribute significantly to the volume growth. SIL has achieved superior volume growth compared to the industry. The same trend is expected to continue and SIL’s bulk volumes can grow at a CAGR of 24 % to 2,82,014 MT in FY16-18E, Cartridge volumes are expected to grow at 12 % CAGR over FY16-18E. With the improvement in the realisations is mostly due to increase in exports as cartridge fetches higher realisations in the export market. As per management, both cartridge volumes and realisations are expected to improve from here, on account of higher demand from domestic private infrastructure players, private miners and continued up-tick in exports. SIL has witnessed improved demand from the defence segment from Q4FY16. The current order book of the company in this segment is now Rs. 80 crore. The same is executable by H1FY18E. SIL had already executed Capex of Rs. 200 crore in this segment for setting up a production capacity of 50 tonne per annum (TPA) of HMX and 10,000 propellants. The same was utilised to set up a capacity of 2500 propellant and 50 TPA of HMX. Going ahead, the company has capex plans of Rs. 50 crore in FY17E and FY18E to increase the propellant capacity from 2,500 units to 10,000 units and HMX capacity from 50 TPA to 100 TPA. The integrated pinaka rocket launcher facility is likely to come up in the next four or five months. The management is confident of winning orders in this segment as it believes that the upcoming facility addresses an area where there are capacity constraints, especially the ordnance factory board (OFB) end. SIL is also planning to foray into manufacturing of bi-modular-charge systems (BMCS) for artillery guns. BMCS is a crucial component required to propel the shell out of the barrel, this was so far imported, mainly from France. In last one year around 10 lakh modules were imported. BMCS can increase the rate of firing, especially for a gun like Bofors. Ordnance Factory Board's (OFB) plans to have a dedicated factory for making BMCS Could not take off after being conceived 15 years ago. The government now plans to open this area to private players. SIL has already applied for necessary licenses in this segment and is waiting for the approval. SOLAR INDUSTRIES LTD being one of the leaders in the industry has very strong footing and has strong cash flow which thrusts the growth for the company, and strong financials with sustained cash flow makes it attractive for long term investment.

Outlook and Valuation: 

Solar Industries India (SIL) is the largest manufacturer of industrial explosives and explosive initiating systems in India. The Nagpur-based company has licensed capacity of 4,02,000 tn with its plants across the country. The company’s offerings include bulk and packaged (cartridge) explosives, apart from a wide array of initiating systems comprising detonators, detonating fuses and cast boosters. SIL currently owns and operates the world’s largest single-location manufacturing capacity for cartridge explosives besides India’s largest manufacturing capacity for bulk explosives. Over the past three decades, SIL has gradually expanded its product offerings from cartridge to bulk explosives and from detonators to detonating cord and cast boosters. The recent addition to its vast bouquet of products were multi-layer shock tubes, underground bulk explosives, explosives for military application, pyrotechnics, propellants and ammunition developed through intensified efforts of state-of-the-art R&D centre. Hence, SIL has significantly widened its bouquet of products and is today a one-stop-shop for industrial explosives. Currently, SIL has 25 manufacturing facilities, spanning 10 states across India and 3 overseas units - in Zambia, Nigeria and Turkey. It also supplies to corporate giants such as Steel Authority of India, Oil and Natural Gas Corporation, Tata group, Adani group, Jindal group, Vedanta, Reliance Power, NHPC, Aditya Birla Group, etc. SIL is the largest exporter of explosives from India, supplying to more than 22 countries. The company has also taken a strategic leap into the defence sector recently through the execution of some early orders in this space. Looking forward, the defence foray offers immense scope for growth. Solar Industries is the India’s largest manufacturer of industrial explosives and initiating systems. Having complete explosives range with a presence across product value chain. It has the World’s largest single-location cartridge manufacturing facility at Chakdoh near Nagpur. It is the India’s first private sector company to obtain the licence for setting up manufacturing facilities for HMX (a warhead explosive) and HMX compounded products. SIL has displayed similar attributes in the past decade since its listing on the bourses. SIL became the largest player in 1 mt domestic industrial explosives market over a period of past 10 years with its volume market share at 2.5 x from 10 % in FY06 to 25 % in FY16. SIL has grown at higher-than-industry rate over the same period. SIL’s average volume CAGR across bulk and cartridge explosive, detonator and detonator fuse was 13 % over FY09-FY16 against Indian explosives industry’s average volume CAGR of 7 % over the same period. The company successfully managed to keep competition at bay on account of its ability and intention to keep investing in the business, rationalise the cost structure to remain cost-competitive in fact it achieved the leadership position by going for backward integration, widening its product portfolio and maintaining strong client relationship. SIL offers the widest portfolio of products with end-to-end solutions and maintains its numero uno position as an industrial explosives and initiating systems supplier to largest consumer of explosives in the country, Coal India, for the past few years. SIL satisfies nearly 30 % of the explosives requirement of Coal India. Moreover, after opening up of India’s defence sector for private players, the company is eyeing multibillion dollar Indian defence space which is being catered to by either government owned defence establishments or through imports. After consolidating its position in India, the company successfully moved to other big explosive-consuming markets by setting up plants in Zambia, Nigeria and Turkey over the past five years. It is now in the process of setting up a plant in South Africa. The company has realised the importance of global opportunity (more than US$10bn) and taken steps to grab the share through overseas expansion and focus on exports. SIL possesses wide moats in the form of industry leadership, significant entry barriers, optimal product mix and carefully pre-planned capacity additions to benefit the most from the revival in mining & infrastructure activity. Even in the export & overseas business, SIL has just scratched the surface of growth, with many more un-penetrated markets yet to be explored. New business segments like defence business will further solidify SIL’s business model at a time when government’s prerogative is to indigenise defence manufacturing, which will allow SIL to scale the defence business at a faster pace. Even during times of moderate business environment, SIL had witnessed robust revenue CAGR of 40 %, over FY12-16, backed by a strong 15 % volume CAGR (bulk + cartridge) coupled with capacity expansion and market share gains. This speaks for the pedigree of the management and business model that has evolved over time and reiterates our confidence on the company to capture onto the upcoming opportunity with the revival in industrial activity. Hence, SIL is a rare combination of excellent growth track record, proactive management, conservative leverage approach, expanding margins & return ratios and a 20 %+ growth guidance from the management for the next three years. The company is expected to generate better cash flows with cash flow from operations (CFO) improving from Rs. 157.3 crore in FY15 to Rs. 210 crore in FY18E. CFO is likely to remain subdued in FY17E due to higher capex of Rs. 135 crore in FY16-17E. The same is likely to continue as the management has guided for higher capex of Rs. 200 crore for FY17E-18E. The FCF is also expected to grow to Rs. 50 crore in FY18E. The CFO/EBITDA, a measure of quality of earnings, is also expected to stabilise at 0.5 x in FY18E. With the robust performance, the company looks forward to a future full of promise. All the sectors which form company’s consumer caucus - mining, infrastructure and construction - are witnessing policy changes that are expected to result in structural strengthening and phenomenal growth. This gives plenty of reason to be optimistic. The defence sector too, which is moving strategically from imports to domestic sourcing of its requirements, has opened up colossal opportunities for company. At the current market price of Rs. 681.10, the stock is trading at a PE of 32.74 x FY17E and 25.22 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 20.80 in FY17E and Rs. 27.00 in FY17E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also. 

KEY FINANCIALS	FY15	FY16	FY17E	FY18E
SALES (₹ Crs)	1,344.70	1,532.80	1,757.40	2,149.80
NET PROFIT (₹ Cr)	147.40	166.10	188.30	244.80
EPS (₹)	16.30	18.40	20.80	27.00
PE (x)	39.70	35.20	31.10	23.90
P/BV (x)	7.50	6.70	5.80	5.00
EV/EBITDA (x)	24.20	20.70	17.90	11.20
ROE (%)	20.50	20.20	20.10	22.50
ROCE (%)	16.20	18.00	18.50	20.60

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 % on every purchase. (Why Strict stop loss of 8 % ?) -  Click Here

*As the author of this blog I disclose that I do not hold  SOLAR INDUSTRIES LTD in my of the portfolios.

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Disclaimer: 

This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible. 

As a Disclosures I Confirm that : 
I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article. 

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RETURN ON CAPITAL

GAIL INDIA LTD : GAS & BEYOND !!!

Scrip Code: 532155 / GAIL

CMP:  Rs. 345.80; Buy at current levels.

Medium to Long term Target: Rs. 398.50; STOP LOSS – Rs. 318.00; Market Cap: Rs. 43,863.95 Cr; 52 Week High/Low: Rs. 395.85 / Rs. 272.20

Total Shares: 126,84,77,400 shares; Promoters: 72,74,05,675 shares – 57.35 %; Total Public holding: 54,10,71,725 shares – 42.65 %; Book Value: Rs. 191.00; Face Value: Rs. 10.00; EPS: Rs. 28.59; Div: 96%; P/E: 12.09 times; Ind. P/E: 8.86; EV/EBITDA: 7.50

Total Debt: Rs. 8,364.52 Cr; Enterprise Value: Rs. 57,918.79 Cr.

GAIL INDIA LTD: The Company was incorporated on 16 August of 1984 and is based in New Delhi, India. The Gas Authority of India Ltd. (GAIL) is one of India's leading Public Sector Enterprises, initially established as a wholly owned Company of the Government of India with 100 % equity held by the Government of India and is the largest gas transmission and marketing company in the Country. It is now one of the 'Navratna' enterprises and is ranked among the top ten companies in India. The equity pattern in the Company has also changed and the Government today holds about 67 % of the equity in the Company. GAIL (India) Limited is a gas utility company in India. The Company’s products include natural gas, liquid hydrocarbons, liquid petroleum gas transmission, petrochemicals, city gas distribution and power. The Company serves the retail sector of natural as by supplying green and clean fuel (CNG) and PNG to domestic and commercial sector. The Company has a joint venture with Vododara Mahanagar Sewa Sadan (VMSS). The Company’s operating segments include Natural Gas Transmission, natural gas trading, petrochemicals, LPG and other liquid hydrocarbons and other segments. Its supplies of natural gas include fuel t power plants and feedstock for gas fertilizer plants. The company produces LPG through fractionation, known as Straight Run (SR). It manufactures and markets downstream HDPE & LLDPE from natural gas cracking at its Pata (Uttar Pradesh state, India) unit. In addition, it operates approximately 400 compressed natural gas retail outlets; and provides piped natural gas to domestic, commercial, and industrial applications, as well as has participating interests in 31 exploration blocks in Mahanadi, Mumbai, Cambay, Assam-Arakan, Tripura Fold Belt, Gujarat Kutch, Krishna Godavari, Cauvery, and Cauvery Palar basins. Further, the company leases bandwidth as a carriers' carrier through its optic-fiber network of approximately 13,000 kilometers; and generates electric power through a joint venture. It owns approximately 9,500 kilometers of natural gas pipelines; 2 LPG pipelines covering 2040 kilometers; 7 gas processing plants for production of LPG and other liquid hydrocarbons; and a gas based integrated petrochemical plant for producing polymer. The Company’s segments include Transmission services, Natural Gas Trading, Petrochemicals, LPG and other Liquid Hydrocarbons, City Gas Distribution and Un-allocable. The Company is marketing Gas Processing Unit’s (GPU’s) products namely Liquefied Petroleum Gases (LPG), Propane, Pentane, Naphtha and by-products of polymer plant namely MFO, Propylene & Hydrogenated C4 Mix. The Company’s subsidiaries include GAIL Gas Limited, Brahmaputra Cracker and Polymer Limited, GAIL Global (Singapore) Pte. and GAIL Global (USA) Inc. In September 2011, the Company incorporated a wholly owned subsidiary GAIL Global (USA) Inc. The company is locally compared with Petronet LNG, Indraprastha Gas ltd, Gujarat Gas Company, NTPC Ltd, GVK Power & Infra ltd, KSK Ebergy Ventures Ltd, Adani Power Ltd, Gujarat Industries Power Company Ltd and globally compared with Hokkaido Gas Co Ltd of Japan, China Gas Ltd of Hong Kong, Nippon Gas Co Ltd of Japan, Agl Resources Inc of New York, Wgl Holdings Inc of New York, Delta Natural Gas Co Inc of USA, New Jersey Resources Corp of USA.

Investment Rationale:

GAIL (India), a natural gas company is into exploration, production, processing, transmission, distribution and marketing of natural gas. It now has a turnover of more than Rs. 47,300 crore. The state-owned gas major has a market share of 78 % in natural gas transmission and 70 % in marketing with plans to double up the existing transportation capacity in the next two to three years. It has 27 oil and gas exploration blocks and 3 coal bed methane blocks. GAIL (India) Limited, is India's flagship Natural Gas company, integrating all aspects of the Natural Gas value chain (including Exploration & Production, Processing, Transmission, Distribution and Marketing) and its related services. In a rapidly changing scenario, the company spearheading the move to a new era of clean fuel industrialization, creating a quadrilateral of green energy corridors that connects major consumption centres in India with major gas fields, LNG terminals and other cross border gas sourcing points. GAIL is also expanding its business to become a player in the International Market. GAIL produces million tonnes of LPG. Its 1,922 km LPG transmission pipeline connects the western, northern, and southern part of India and has capacity to transport 3.8 million metric tonnes per annum (MMTPA) of LPG. It also produces propane, pentane and naphtha. It has a joint venture with Gujarat State Petroleum Corporation and Gujarat State Energy Generation where it has an installed capacity of 156 MW. GAIL also has a joint venture with NTPC, Indian financial institutions (IFIs) and MSEB Holding Company, Ratnagiri Gas and Power (RGPPL), which has power generation capacity of 2,150 MW. It has optic fibre network extending over 13,000 km across 200 cities. It leases this network for SCADA, ERP and ISP services to telecom operators including Hutch, Tata Communications, Airtel, Idea Cellular, Tata Teleservices, and Reliance Communications and others. GAIL has a total of 31 exploration blocks in basins such as Mahanadi, Mumbai, Cambay, Assam - Akaran, Tripura Fold Belt and Cauvery. In these blocks it has partnered with companies like ONGC, GSPC, OIL India, Hardy Exploration & Production, Petrogas, JOGPL, Daewoo, OVL, IOC, Korea Gas Corporation, Hallworthy, BPCL, HPCL and Silverwave. The Company also has 70 % equity share in Brahmaputra Cracker and Polymer Limited (BCPL) which is setting up a 2,80,000 TPA polymer plant in Assam. GAIL is a co-promoter with 17 % equity stake in ONGC Petro-additions Limited (OPaL) which is implementing a green field petrochemical complex of 1.1 MMTPA Ethylene capacities at Dahej in the State of Gujarat. GAIL has 31.52 % stake along with NTPC as equal partner in JV Company, RGPPL at Dabhol which operates largest gas based power generation facility in the country and is also setting up 5 MMTPA LNG terminals. GAIL has achieved an overall physical progress of 91 % and financial progress of 73 % till end-FY13. Company has an equity investment of Rs. 1,270 Cr and the project enjoys capital subsidy of 52 %.  

Outlook and Valuation:

GAIL (India) Ltd is India's flagship Natural Gas Company, engages in the exploration and production and also in processing, transmission, distribution, and marketing of natural gas. The Indian Oil and Gas (O&G) sector is one of the six core industries of India and contributes over 15 % to the Gross Domestic Product (GDP). The country is the sixth largest consumer of oil in the world and the ninth largest crude oil importer. The sector is of immense importance to the economy because of its significant forward integration with many other sectors. India is committed to boosting its growth in the years to come and this progress would translate into the country’s energy needs growing many times. The need of the hour, therefore, is to channelise all efforts on exploration of new blocks effectively as well as efficiently. The growing demand for crude oil and gas in the country coupled with policy initiatation is a key. Going forwards GAIL is currently doubling its petchem capacity from 450ktpa to 900ktpa at an estimated capex of Rs. 8,100 Cr. The capacity is expected to be mechanically complete by December 2013 and assuming six months of stabilization period, it is expected that its capacity can be commercially operational by 1QFY15E. GAIL is a gas-based petchem producer and its gas cost is fixed unlike fluctuating costs for naphtha-based producers. However, the Indian government’s decision to increase domestic gas price from April 2014 would adversely impact GAIL’s Petchem business profitability.  As company’s internal gas consumption comprises of both PMT and APM, and as a price hike is expected only in APM gas, it is seen that the gas could cost around USD6.7/mmbtu from FY15E as against $5 as of now and APM gas price to increase to $8.4/mmbtu. It is expected that GAIL’s earnings to remain subdued in the medium term as headwinds on incremental gas availability continue. GAIL’s 1QFY14 subsidy burden is seen at Rs. 700 Cr. In the wake of scheduled increase in domestic gas price from Aril 2014, if the Government were to remove GAIL from subsidy sharing, then based on assumptions the estimated net advantage for Gail comes at Rs. 6/share. Adjusted for investments, the stock trades at 9.41x FY15E EPS of Rs. 38.25. On SOTP-based fair value estimate is Rs. 398.50 per share. In my view GAIL could post EPS of Rs. 38.25 for FY14E & Rs. 44.67 for FY15E and one can ACCUMULATE the stock and would advise investors to use declines in the stock to buy with a long term view, I would buy GAIL INDIA LTD with a Medium to Long term investment for an price target of Rs. 398.50 and off course with a strict stoploss of 8 % on every purchases.

SOTP VALUATIONS 

Business Subsidiary	Value Per Share (₹)
Gas Transmission	160.00
Gas Trading	67.00
Petrochemicals	113.00
LPG & Liquid HC	46.00
E&P Upside	21.00
Other Investments	46.00
Enterprise Value	453.00
Less: Net Debt	54.50
Equity value	398.50
TARGET PRICE	398.50

KEY FINANCIALS	FY13	FY14E	FY15E	FY16E
SALES (₹ Crs)	47,300.00	58,100.00	88,400.00	1,00,100.00
NET PROFIT (₹ Cr)	4,000.00	4,500.00	4,900.00	5,700.00
EPS (₹)	31.71	35.49	38.25	44.67
PE (x)	10.50	9.30	8.70	7.40
P/BV (x)	1.70	1.50	1.40	1.20
EV/EBITDA (x)	7.50	6.60	5.90	4.80
ROE (%)	17.50	18.90	16.90	17.60
ROCE (%)	13.90	14.10	13.30	14.80

I would buy GAIL INDIA LTD for Medium to Long term target of Rs. 398.50. 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 ₹ 318.00 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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