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Sunday, April 3, 2011

Cairn India : The only beneficiary of raising Oil Prices !!

Scrip Code: 532792 / CAIRN
CMP:  Rs. 354.35; Buy at current levels
Target: Rs. 370.00
Market Cap: Rs. 67,352.59 Cr.
52 Week High/Low: Rs. 368.05 / Rs. 253.40
Total Shares: 190,07,36,406 shares; Promoters : 118,32,43,791 shares – 62.25 %; Total Public holding : 71,74,92,615 shares – 37.75 %
Book Value: Rs. 167.80; Face Value: Rs. 10.00;
Total Debt: Rs. 3,503.00 Cr; Enterprise Value: Rs. 68,732.59 Cr

Cairn India is an Exploration and Production company, a leading player in the Indian oil and gas industry. Cairn India has its interests in 15 blocks. The firm has made more than 30 oil and gas discoveries in India during the last 13 years, was listed in January 2007 through an IPO after it spun off from its parent Cairn Energy Plc (current stake: 65%). Cairn has working interest in 14 E&P blocks. Ravva and Cambay blocks produce 51.4k boepd (Cairn WI 14k bpd).
Vedanta along with its subsidiary SESAGOA has made an offer of $8.5 - $8.6 billion to acquire controlling stake (51-60%) in Cairn India at Rs405/share with Rs50/share as non-compete fee. The deal will be 20 % from SESAGOA at $3 bln & 31 % from Vedanta. The open offer will be at Rs.355/share. However, the roadblock in the deal due to government and ONGC stand would keep stock price under pressure. Cairn has commissioned three trains at MPT and pipeline section from MPT to Salaya, through which it is delivering crude to refiners.

Latest developments on Cairn-Vedanta deal
The Oil Ministry has imposed 11 pre-conditions on Cairn India and its prospective buyer Vedanta Resources, for approving the deal. ONGC and Vedanta have shown willingness to accept most of the conditions except the change in royalty obligations and surrender of their rights to take legal resource on disputes with the government or its technical advisor DGH.
Currently, Cairn India does not pay any royalty on the crude and has even contested the payment of Rs 2,500 per ton cess on its 70% share in Rajasthan block.
Some of the key pre-conditions are as follows:
Royalty costs recoverable. It means royalty costs should be recovered from the sale of crude oil from the field before profit is shared between the companies and the government. ONGC's royalty obligation is in excess to US$3 Bn (Rs.14500 Cr) for the approved crude oil production for the life-time of the field.
Withdraw arbitration proceedings for Cess: ONGC also wants Cairn to withdraw arbitration proceedings challenging its liability to pay cess for oil produced from the Rajasthan block. The Company is currently paying under protest its share of cess at Rs.2500/Ton.
Guarantees to be provided: Vedanta will have to give financial and performance guarantee same as given by Cairn Energy.
Retain Technical capabilities: Vedanta has to retain the Cairn India's existing technical capability.
Adhere to the approved field development plans: Vedanta has to adhere to the approved field development plans and work programmes of the oil and gas fields as per contracts.
If Cairn India accepts the first two conditions (though looks very unlikely) then the valuations will be very expensive for Vedanta and will not make commercial sense for it to acquire stake in it. ONGC's contention is that its returns from its investment in the field should at least be higher than the cost of capital which is about 13-14%. As per Sebi regulation, an open offer requires 55-60 days to complete. The shareholders approval taken by Cairn and Vedanta is valid up to 15th April'11.
Valuation Details - 
I have tried to value CAIRN India on DCF method of valuation with 12.04% WACC. With the rise in the international crude oil price, the realization for the Company is also expected to improve. However, the stock price has under-performed in spite of improving fundamentals mainly due to uncertainty over the Cairn-Vedanta deal and also on the royalty and cess payment. It is expected that in the next twelve days i.e by 15th April 201, final outcome of the deal should be declared. Based on the current valuations the stock is available very cheap and is recommended to BUY with a target of Rs.378/share.
Based on the Rajasthan exploratory portfolio upsides and advancing production from the MBA block the Fair Value for the stock comes at Rs.378/share. In the DCF model, it is assumed a long-term static average crude oil price of US$86/bbls; Cairn crude oil realization @ 10% discount; Cess at Rs.2575/MT; plateau production at 240kbopd.
Rajasthan production details
In Q3FY11, the average gross production from Rajasthan block was 124.9 Kbopd as compared to 15.43 kbopd in Q3 FY10 and 116 Kbopd in Q2FY11 registering a growth of 709% YoY and 7.6% QoQ basis.
Cash (Net debt) as on 31st Dec'10 was Rs. 870 Cr. The Company replaced its rupee facility of Rs.4,000 Cr with a lower financing of Rs. 2,250 Cr. My estimates is of FY11E EPS of Rs.33.9 and FY12E EPS of Rs.49.9.  Stock is cheaply valued at 4.89x EV/EBIDTA and 6.3x P/E based on FY12 earnings estimates . The Brent crude oil price is trading around USD$107/bbls which is the benchmark for Cairn's crude oil. With the rise in the international crude oil price, the realization for the Company is also expected to improve. However, the stock price had under-performed in spite of improving fundamentals mainly due to the uncertainty over the Cairn-Vedanta deal (royalty and cess payment). It is expected that in the next 3 months, final outcome of the deal should be declared so based on the current valuations the stock is available very cheap and recommended to BUY Cairn India with a price target of Rs.378/Share.
NOW only concern on price movement is  that Petronas, a Malaysian oil major holds 14.91 % of Cairn a 28,34,31,438 shares, the BUZZ is that it may sell its stake in open market in order to save Capital Gain Tax, at current price of Rs.354.35 , Petronas's stake in Cairn is worth Rs.10,043.39 Cr. For which Petronas has shelled out just above Rs.5,000 Cr to buy 28.34 Cr Shares. If sale happens it will cause the prices to fall but the question will be that Why would Petronas Sell? lets hope ....till then some key financials -

KEY FINANCIALS20102011E2012E
SALES (Rs. crs)1,62311,590.615,695.1
NET PROFIT (Rs. crs)1,0366,433.39,457.6
EPS (Rs.)5.533.949.9
PE (x)57.59.36.3
PRICE/BOOK (x)1.761.491.23
EV/EBITDA (x)58.687.054.89
RoNW (%)3.117.320.9
RoCE (%)2.217.824.4

I maintain my BUY status on CAIRN INDIA with the price target of Rs. 370 in short term. As I always say do respect the market and keep a strict stop loss of 8 % on your every purchase.

Wednesday, March 23, 2011

SESA GOA : Accumulate, Great business at great price !

Scrip Code: 500295 / SESAGOA
CMP:  Rs. 263.80; Buy at current levels ;Short term Target: Rs. 280.00 , LT – Rs. 350 ;
Market Cap: Rs. 22,678.95 Cr ;
52 Week High/Low: Rs. 495.00 / Rs. 254.75 ; Total Shares: 85,97,02,559 shares; Promoters : 47,91,13,619 shares – 55.73 %; Total Public holding : 9,95,10,958 shares – 11.58 %; Book Value: Rs. 86.75; Face Value: Rs. 1.00; EPS: Rs. 37.07; Div: 325 % ; P/E: 7.91 times; Ind P/E: 34.99; EV/EBITDA: 8.94 ; Total Debt: Rs. 1,992.80 Cr; Enterprise Value: Rs. 25,622.57 Cr.


Sesa Goa incorporated in 1954, is India's largest producer & exporter of iron ore in the private sector and it currently accounts for 1.5 % of world trade in iron ore & is amongst lowest cost iron ore mining company. Its mines are located in the Goa, Karnataka & Orissa. It exported approx. 5 mn tons of iron ore, fines and lumps to Japan, China, Europe.  In fiscal 2010, Sesa Goa produced 21.4 million tonnes and sold 20.5 million tonnes of iron ore. In April 2007, Anil Agarwal – Vedanta Resources acquired a controlling stake of 51 % in Sesa Goa from Mitsui & Co, Japan, for US$ 981 million.   As of 31 March 2010, SESAGOA own or have the rights to reserves & resources consisting of 275 million tonnes of iron ore.

Budget 2011-12 - Impact Analysis
Budget proposes higher export duty on iron ore: The Union Budget 2011-12 has proposed raising the export duty on iron ore to ad volerm 20% on lumps and fines. Currently, lumps are taxed at 15%, while fines are taxed at 5% on ad volerm basis. Higher export duty to impact Sesa Goa's profitability: Sesa Goa generates 90% of its net sales from iron ore exports. Hence, the Budget proposal would result in an increase in the company's export duty expenses. In line with this, I have estimated the export duty expenses for Sesa Goa to be Rs.1,903 Cr for FY2012. EBITDA estimate for FY2012 stands by 26.1% to Rs. 4,008 Cr.

Outlook and valuation:
 I expect Sesa Goa's iron ore sales volume growth to remain muted in FY2012. Nevertheless, the spot iron ore prices have risen steeply during the past three months on the back of improved demand from China. Hence, going forward, it is believed that rising expenses will be more than offset by the rising iron ore prices. However, lumpiness in iron ore demand, huge swings in the iron ore prices, logistical issues in Goa and stricter regulations imposed by the government are the key concerns for Sesa Goa in the near-to medium term. At current levels, the Sesa stock trades at 3.0x FY2011E and 2.7x FY2012E EV/EBITDA. On P/BV basis, the stock is available at 1.8x FY2011 and 1.5x FY2012 estimates. I continue to value Sesa Goa at 3.5x FY2012 EV/EBITDA, but at target price of Rs. 280. I recommend Accumulate on the stock.
Assumptions
ParticularsFY11EFY12E
Iron Ore
Sales volume (mn tonnes)20.330.4
Average realisation (US$/tonne)80.090.0
Coke
Sales volume (tonnes)2,60,0003,65,000
Average realisation (US$/tonne)400507
Pig Iron
Sales volume (tonnes)2,37,5004,06,250
Average realisation (US$/tonne)475578
US $ / Re45.645.0

KEY FINANCIALS20102011E2012E
SALES (Rs. crs)5,7987,9859,513
NET PROFIT (Rs. crs)2,6293,7933055
EPS (Rs.)29.642.634.3
PE (x)8.96.27.6
PRICE/BOOK (x)2.81.81.5
EV/EBITDA (x)5.53.02.7
RoNW (%)41.636.021.1
RoCE (%)41.735.826.7

UPDATE - SESA GOA announced on 22nd March  2011, that it has acquired the assets of upcoming Steel Plant Unit of BELLARY STEEL & ALLOYS LTD (BSAL) for an all Cash deal at Rs. 220 Crore.
BSAL was in process of setting up a 0.5 mtpa Steel plant at Bellary. The properties of the under construction plant has free hold land of 700 acres, buliding & structures, plant & machinery and other assets of steel plant. The asset is transfered on As is where is basis as of 22 March 2011.
Sesa Goa is currently assessing the best way for commissioning the steel plant at the earliest. The plant is located at Karnataka having close proximity of national high way, railway & source of water.
I maintain my accumulation status on SESAGOA with the price target of Rs. 280 in short term. For long term my target is of Rs.350. As I always say do respect the market and keep a strict stop loss of 8 % on your every purchase.

Wednesday, March 16, 2011

Renewable energy much better than Nuclear disaster

Japan's nuclear reactor blasts fearing melt down
JAPAN met with an unforeseen disaster making its nuclear reactors blast due to earth quakes, this has raised the question about dependency of countries like India on Nuclear power plants for the need of power supply's. Many environmentalist world wide are questioning on the safety of reactors/radiation and its effects on human life's. Even our D-street have concerns and there is a school of thought about India would never be able to complete its nuclear projects in next 15 - 20 years due to many political pressures and hence will not able to satisfy the power demands. 

  I gave a thought on it and here are some of the facts which somewhat we already know & some in my opinion I want to draw your attention to –
1    Maharashtra power demand is 16,000 Mw currently.
2    State owned Mahagenco provides 13,500 Mw, which includes 1,500 Mw purchased from outside.
3    Demand in maharashtra is expected to grow to 23,800 Mw.
4    Mahagenco to provide additional 5,000 Mw.

Now to meet these demands Jaitapur Nuclear Power Project was proposed & similar other nuclear power projects were proposed. As Japan met with a nuclear disaster, Indian govt. have started facing the political pressure to drop these nuclear projects concerning public safety. And the only option to meet the ever growing power demands is Renewable Energy which are cost effective & more environments friendly.

Let’s compare the Capital costs of these projects –
1    Jaitapur Nuclear Power Project is of 9,900 Mw in 938 hectares of total land, which will have 6 reactors of 1,650 Mw capacities each, to be built in collaboration of Nuclear Power Corporation of India Ltd and AREVA a French company. These European Pressurised Reactors (EPR’s) will cost Rs. 20 Cr/Mw or Rs. 8.00 – Rs.9.00 / Unit.

2    Pressurized heavy water reactor with indigenous technology costs Rs. 8 Cr/Mw. Needs about 1 to 4 Square Kilometers of land.

3    Jawaharlal Nehru National Solar Mission to generate 1,000 Mw by 2013 & 20 Gw by 2022 cost to be Rs. 15 Cr/Mw and needs 6.4 Acres of land. (1Gw = 1,000Mw)

4    Indian Wind Energy has installed capacity of 11,807 Mw.  As per Indian Wind Energy Association the potential of electricity generated by wind in India is about 65,000 Mw. Currently wind energy cost Rs. 5 Cr – Rs. 5.6 Cr/Mw and needs about 0.25 Acres of land for 1Mw.

5    Hydro projects cost Rs. 5.4 Cr – Rs. 6 Cr/Mw, Coal Projects cost Rs. 5 Cr/Mw, Bio mass Gas project cost Rs. 5.5 Cr – Rs. 6 Cr/Mw.

So its makes sense to go towards Renewable Energy, India produces 1.67 lakhs Mw against the demand of 3.70 lakhs Mw by 2017 - 18. The per capita power consumption in our country is at 700 units which is much lower than 11,000 in US & 2,800 units in China.
The Power Mix in India (2010) is - Thermal: 65 %; Hydro: 25 %; Nuclear: 3%; Renewable: 7 %.
The Installed capacity as on 30th November 2010 - Coal is at 89,778.38 Mw; Hydro is at 37,367.40 Mw; Gas is at 17,624.85 Mw; Diesel is at 1,199.75 Mw; Nuclear is at 4,560 Mw; Wind & Solar energy is at 16,786.98 Mw.
This shows that even if the nuclear power projects which contributes 4,560 Mw are not allowed due any reasons we still can manage to mop up our power demands. We can utilise this money by giving subsidies & financing to renewable energies. Looking at the current scenario I think that govt. will have no option rather than to promote alternative energy resources and companies like SUZLON ENERGY will gain from it. NUCLEAR PLANT OR NO NUCLEAR PLANT INDIA WILL SHINE AS IT WAS & AS IT IS……..
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Sunday, March 13, 2011

Reliance Industries : A great wealth being created.

Scrip Code: 500325 / RELIANCE
CMP:  Rs. 992.05; Buy at Rs. 930 - Rs.950 for LT.
Short term Target: Rs. 1030.00, LT – Rs. 1350
Market Cap: Rs. 3,24,659.03 cr.
52 Week High/Low: Rs. 1149.70 / Rs. 885.10
Total Shares: 327,26,07,533 shares; Promoters : 146,39,23,343 shares – 44.73 %; Total Public holding : 58,60,93,502 shares – 17.91 %; Book Value: Rs. 392.21; Face Value: Rs. 10.00; EPS: Rs. 59.95; Div: 70 % ; P/E: 16.54 times; Ind P/E: 17.80; EV/EBITDA: 11.72 .
Total Debt: Rs. 62536.25 cr; Enterprise Value: Rs. 3,87,195.28 cr

Reliance Industries out put is of 1.8 bn cubic feet of gas a day which is equal to 1,25,000 barrels of oil production per day a nearly 40 % of India’s total gas production, all comes from D6. RIL owns 2,7o,000 Sq Kilometers of exploration circles or 28 blocks.
British Petroleum (BP) global oil major has announced an historic deal with India’s largest private sector oil major Reliance Industries to buy RIL’s 30% stake in 23 oil and gas blocks on 21st February 2011. As per the partnership deal, BP will buy 30% stake in 23 oil & gas production sharing contracts that RIL operates in India, including the producing KG-D6 blocks at $7.2 billion (Rs.44.99/$) Rs. 32400 cr, and will also form 50:50 JV for sourcing and marketing gas in India. This JV is also an attempt to accelerate the creation of infrastructure for receiving, transporting and marketing natural gas in India. RIL will get $7.2bn in 3 trenches - $2 bn as upfront payment, further $2.3 bn on completion of deal & the final payment of $3 bn in October 2011. BP could invest US $20bn in RIL which would go to Reliance Gas Transportation Infrastructure Ltd. This deal is positive for RIL as the combined expertise of both the parties would result into optimisation of producing blocks and enhancing the resources in exploratory blocks. The transaction amount gives a value of Rs. 363/share to the east coast blocks, as BP is expected to incrementally incur its share of capital expenditure into the commercialisation and development of blocks, which have already been factored in for valuation.

Outlook and Valuation
The deal is an earnings & value accretive in the long term, considering the technical expertise BP brings on table. Once the deal goes through, dip in valuation on account of shedding 30% share in east coast blocks will be offset by cash consideration and re-rating of blocks on account of synergy arising out technical expertise of both the proficient parties. This deal will put RIL in a position to be “DEBT FREE”. My view on the stock is of BUY with a price target of Rs. 1,160 when the share price is at Rs. 957.00

Y/E March (Rs. Cr)200920102011E2012E
SALES (Rs. crs)1,51,2242,03,7402,43,8152,83,665
NET PROFIT (Rs. crs)14,96915,89719,83522,305
EPS (Rs.)50.353.466.674.9
PE (x)19.017.914.412.8
PRICE/BOOK (x)2.32.01.81.6
EV/EBITDA (x)15.611.89.38.1

Evaluation of RIL’s east coast blocks

Prospective BasinsEstimated 2P Reserves (mmboe)
KG - Basin2,413
MA - Oil150
NEC - 25793
D3884
D9512
Total4,751
Value given by British Petro.
Deal Value (Rs. Cr @ Rs. 45/$)1,08,000
EV/Share (Rs.)363


Union Budget 2011-12 -
In this budget finance minister proposed the Minimum Alternate Tax (MAT) on Special Economic Zones (SEZ) & Limited Liability Partnership (LLP) from 1st April 2012. LLPs will have to pay MAT at 18.5 % but will be exempted from Dividend Distribution Tax of 17 % on the dividend declared. In LLPs MAT will be known as Alternate Minimum Tax (AMT). AMT will be applicable to LLPs @ 18.5 % AMT will apply to the adjusted income & not on adjusted book profit. AMT credit is available to an LLP for 10 years. The LLPs was used by some promoters of cooperates to save tax on dividends declared by their companies. RIL promoters created 29 LLPs in August 2010 which will own 32.75 % of Reliance Industries. These 29 LLPs collectively earned Rs.750.77 cr as dividend last year saving both MAT & DDT.  But when the new AMT norm becomes affective these LLPs will have to pay tax of Rs.139 cr if the RIL maintains the same dividend rates.


Wednesday, March 2, 2011

UNION BUDGET 2011 - 12 : HIGHLIGHTS

GROSS DOMESTIC PRODUCT ESTIMATES IN FY12 ARE  Rs. 71,57,000 LAKH CR AND AT 2004-05 PRICES 48,86,000 LAKH CR.
TOTAL SUBSIDES AT Rs. 1.43 LAKH CR.
FERTILIZER SUBSIDIES AT  Rs. 50,000 CR,
FOOD SUBSIDIES AT  Rs. 60,500 CR
OIL & PETROL SUBSIDIES AT  Rs. 23,600 CR.
FISCAL DEFICIT AT Rs. 4,12,817 CR.
MARKET LOANS = Rs. 3,43,000 CR
STATE PF = Rs. 10,000 CR.
EXTERNAL AID = Rs.14,500 CR.
LESS OTHERS = Rs. 13,866 CR.
THE CENTER'S EXPENDITURE 2011 - 12 IS PROJECTED AT Rs. 12,57,729 Cr.





IN FLOW (Rs. in Cr)
TAX RECEIPTS6,64,457
CORPORATE TAX3,59,990
INCOME TAX1,72,026
CUSTOMS DUTY1,51,700
EXCISE DUTY1,64,116
SERVICE TAX82,000
TAX OF UNION TERRITORY1,973

NON TAX RECEIPTSAMOUNT
INTEREST RECEIPTS19,578
DIVIDENDS & PROFITS42,624
EXTERNAL GRANTS2,173
OTHER NON TAX RECEIPTS59,891
RECEIPTS OF UNION TERRITORY1,169
           TOTAL1,25,435

NON DEBT CAPITAL RECEIPTS55,020
RECOVERY OF LOANS & ADVANCES15,020
MISC. CAPITAL RECEIPTS40,000


* Out of the Tax Receipts the Centre has to keep aside States share of Rs. 2,63,458 cr & for Calamity & Contingency Fund of Rs. 4,525 crs.

OUT FLOW (Rs. in Cr)
PLAN EXPENDITURE4,41,547
NON PLAN EXPENDITURE8,16,182
OR
REVENUE EXPENDITURE10,97,162
CAPITAL EXPENDITURE1,60,567
DEFENCE1,64,415
SUBSIDIES1,43,570
GRANTS TO STATES & UTs66,311
PENSIONS54,521
INTEREST PAYMENTS2,67,986
LOANS TO PSUs496
OTHER GENERAL SERVICES19,105
LESS OTHERS368
CENTRAL PLAN3,35,521
POSTAL DEFICIT5,018
EXPENSES of UTs with out Legislature3,592
NON PLAN CAPITAL OUTLAY13,212
ECONOMIC SERVICES25,391
GRANTS TO FOREIGN GOVT.2,301
CENTRAL PLAN AID TO STATES1,06,026
SOCIAL SERVICES20,862
POLICE SERVICE29,685

SOME MORE POINTS FROM BUDGET

à    PSU Banks to get Rs. 20157 cr in FY12.
à    Priority Home Loans up from Rs. 20 lakhs to Rs. 25 lakhs.
à    1 % Interest subvention on Home Loans of Rs. 15 lakhs.
à    FY12 disinvestment target Rs. 40,000 crs.
à    Equity Fund of Rs. 100 cr for Micro finance companies.
à    Farm GDP was 5.4 % in FY11 in GDP growth of 8.6 %.
à    To give 3 % Interest subsidy to farmers on early payment of loans.
à    To allow Foreign Direct Investments in Mutual Funds.
à    Cold Storage Chains will be given Infrastructure status.
à    Exemption of Rs. 20,000 on investment in Infra bonds continued for 1 more year.
à    Tax free bonds of Rs. 30,000 cr for Infrastructure sectors to be declared.
à    Rural infra bonds of Rs. 18,000 cr to be declared.
à    Social Schemes allocate Rs. 58,000 crs.
à    Education sector allocated Rs. 52,057 cr up by 24 % in FY12.
à    Corporate surcharge reduced from 7.5 % to 5 %.
à    Dividend from foreign subsidiary to Indian companies down from 30 % to 15 %.
à    Minimum Alternate Tax raised from 18 % to 18.5 % of Book profit.
à    Developer of SEZ & SEZ operators, LLPs brought under MAT.
à    Ship owners allowed duty free import on spare parts.
à    Custom duty on imports of Micro irrigation systems down from 7.4 % to 5 %.
à    10 % Excise duty on Branded garments
à    20 % Ad volerm export duty on Iron ore.
à    NO Excise duty on Ultra Mega Power Projects equipments.
à    Air Conditioner restaurants serving liquor, hotels charging Rs.1000/day will attract Service Tax.
à    Service Tax on Domestic Air tickets Rs. 50, & on international tickets Rs.250
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