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Sunday, February 26, 2012

VEDANTA RESTRUCTURING: Sterlite & SesaGoa to merge !!!

As per the plan, the Sterlite Industries will merge into SESA GOA, which will be form as combined entity named to be SESA STERLITE. Sterlite shares holders will be given 3 Shares of SESA GOA for every 5 Shares of Sterlite held.

Vedenta Aluminium (VAL) and Madras Aluminium will be 100 % consolidated into SESA STERLITE. Vedanta’s direct holding of 38.8 % in Cairn India will be transferred to SESA GOA, together with the associated debt of $5.9 billion (Rs. 29,500 Cr) at cost. After the transfer, SESA STERLITE will have 58.9 % shareholding in Cairn India. The new entity SESA STERLITE will be seventh largest global diversified natural resources major by Earnings Before Interest , Tax and Depreciation. According to the chairman of VEDANTA Mr. Anil Aggarwal, SESA STERLITE will be the principle operating company in the group and with its high quality assets, growth projects and strong management; it is well placed to create value for all shareholders. This merger would be cost saving of around Rs. 1,000 Cr a year.

After consolidation, Vedanta will own 58.3 % in SESA STERLITE. The group’s 79.4 % shareholding in Konkola Copper Mines will continue to be directly held by Vedanta. Post consolidation VEDANTA will own 58.3 % stake in SESA STERLITE with VEDANTA PLC’s debt service liability will reduce by 61 % from $9.65 billion (Rs.48,250 Cr) to $3.8 billion (Rs.19,000 Cr). Post consolidation SESA STERLITE will have market capitalization of $20 billion (Rs. 1 lakhs crore) and will join the elite league of resources firms like BHP Billiton, Vale and Rio Tinto. Post consolidation the new entity SESA STERLITE will have net debt of $7.38 billion (Rs.36,936 Cr) with 8 % of interest cost.  

For SESA GOA – it will issue 3 Shares for every  5 shares of Sterlite; will issue 7.2 Crores shares to VEDANTA for its 70.5 % stake in Vedanta Aluminum; will issue 7.9 crores shares to Vedanta for its 94.8 % stake in MALCO

What VEDANTA will do – It will transfer its 38.8 % stake in Cairn India to Sesa Goa along with $5.9 billion debt. However, Hindustan Zinc and Bharat Aluminum Company in which government has stake will not be a part of merger.
SESA STERLITE will be listed in India and on New York Stock Exchange as American Depository Shares (ADS).        

YEAR ENDED DEC 2011 Rs. Crore $ Million
REVENUE 66,431 14.23
GROSS DEBT 66,717 13.55

Thursday, February 23, 2012


Scrip Code: 533269 WABAG
CMP:  Rs. 440.25; Buy at Rs. 410 - 425 levels.
Short term Target: Rs. 450, 6 month Target – Rs. 550; 
STOP LOSS – Rs. 391; Market Cap: Rs. 1,164.30 cr; 52 Week High/Low: Rs. 285. / Rs. 576
Total Shares: 2,64,46,460 shares; Promoters : 81,97,915 shares –31 %; Total Public holding : 1,82,48,545 shares – 69 %; Book Value: Rs. 154.77; Face Value: Rs. 2.00; EPS: Rs. 24.25; Div: 200 % ; P/E: 18.15 times; Ind. P/E: 11.76; EV/EBITDA: 6.80.
Total Debt: ZERO; Enterprise Value: Rs. 1,100.30 Cr.

VA TECH WABAG LTD: VA Tech Wabag Limited was incorporated in 1995 and is headquartered in Chennai, India. The company was formerly known as Balcke Durr and Wabag Technologies Limited and changed its name to VA Tech Wabag Limited in April 2000. Va Tech Wabag Limited provides solutions in the water treatment industry. The company offers life cycle solutions, including conceptualization, design, engineering, procurement, supply, installation, construction, and operations and maintenance (O&M) services. The Company has four business units: Municipal Business Group, Industrial Water Business Group, International Business Group and Operation and Maintenance Business. It provides a range of engineering, procurement and construction, and operation & maintenance (O&M) solutions for sewage treatment; drinking and industrial process water treatment; effluents treatment; and sludge treatment, desalination, and reuse for institutional clients, including municipal corporations, and companies in the infrastructure sector. The company operates primarily in India, Middle East and North Africa, central and eastern Europe, China, and south East Asia. It has overseas subsidiaries in Austria, Switzerland, Germany, Czech Republic, Romania, Macao, Algeria, Tunisia, Egypt and Turkey.  It has a joint venture agreement with Zawawi Trading Company LLC in Oman. The company came with an Initial Public Offer in September 2010 with 9.5 lakhs shares at the issue price of Rs. 1310/ share raising Rs. 475 Cr. On August 2011 the company declared the sub division of shares from the face value of Rs. 5 to the face value of Rs. 2.00   

Investment Rationale: 
The global water market is estimated to be around US$ 400 billion. The water and waste-water sector continues to be an attractive investment portfolio due to various factors such as urbanization, industrialization and population explosion. The growth of the water market in the Asia Pacific region is driven by growing population densities. In the Middle East, the driver is scarcity, while massive government spending will boost the Chinese market. Sea water desalination will attract investments to augment the installed capacity from 66 million cubic metres (m3) per day to 120 million m3 per day by 2016. WABAG is a global technological leader in the entire water treatment field managed by professionals and technocrats. The company has a unique business model with strong in-house research. The company has an excellent system for efficient equipment procurement, better engineering & designs. The company also enjoys higher margin due to close monitoring and cost control. In financial terms Wabag is a zero debt company with significant cash balance of Rs 324 Cr and is constantly evaluating various opportunities for inorganic growth. The company has a diversified revenue source and more focused on high margin segments. VA Tech WABAG Ltd has an Order book of Rs. 3,530 Cr and healthy order inflow worth Rs. 900 Cr for 9MFY12, VA Tech Wabag is expected to achieve financial closure of its three BOOT framework contracts worth Rs. 530 Cr by end of 4QFY12. For 9MFY12, VTW has reported consolidated revenues of Rs. 770 Cr and expects to book 40 % - 50 % of its annual revenue for FY12 in 4QFY12, mainly due to higher revenue booking from the Dambulla (Srilanka) project in which 15 % of the jobs are already completed, but no revenues have been booked as yet. Key projects which would be revenue contributors are Chennai Desalination project would contribute around Rs. 45.80 Cr to the revenue; A total water management project from IOCL Paradip will contribute around Rs. 35.79 Cr; Project from Delhi JAL Board to contribute Rs. 11.58 Cr; Projects from ESSAR Group will contribute around Rs. 11.41 Cr; A project from Majjis, Oman to give Rs. 9.6 Cr and Projects from Tehran and Shiraz to contribute Rs. 26 Cr and Rs. 25 Cr respectively.  

Outlook and Valuation:
With a strong Order book & an order inflow for Q3FY12, the management remains confident of achieving a closing order book of around Rs. 4,000 Cr for next year. 3 BOOT Orders worth Rs. 530 Cr from Aurangabad, Ulhasnagar & Namibia have already moved from framework to firm order book on its financial closure. Further, more repeated orders worth Rs. 300 Cr are expected from the oil, gas & steel sector & an international framework order worth Rs. 200 Cr is expected to get booked in Q4FY12.While order inflow in past 9M has remained subdued from the municipal sector, the new JNNURM scheme planned by the government and other state/central projects is expected to boost investments from the municipal segment. The company have seen revenue de-growth of around 7 % for Q3FY12, on account of of delays in revenue recognition from the Sri Lankan project and a high base yoy execution of Libya project in 3QFY11. The Chennai Desal project & the Srilankan project are expected to contribute majorly, which will help VTW to achieve its growth guidance of close to Rs. 1400 Cr- Rs. 1500 Cr. Company's Operating margins were at 7.14 % due to the impacted of rupee depreciation combined with lower pace of execution in a few projects. With normalcy expected in the Libyan continent & revival in execution as well as revenue bookings in Q4FY12, VTW is poised to show strong growth going ahead. At its CMP of Rs. 440.25, the stock trades at 12.57 x FY13E earnings. The company can post Earnings per share (EPS) of Rs. 35 in FY13E and Rs. 42.80 in FY14E. One can buy VA TECH EABAG Ltd with a target price of Rs. 450.00 for Medium to Long term investment.

SALES (Rs. Crs) 1,233.00 1,428.80 1,668.60 1,952.70
NET PROFIT (Rs. Crs) 51.80 68.00 92.40 113.10
EPS (Rs.) 19.60 25.80 35.00 42.80
PE (x) 21.30 16.20 11.90 9.80
P/BV (x) 1.93 1.76 1.55 1.37
EV/EBITDA (x) 6.80 6.00 4.60 3.50
ROE (%) 9.10 10.90 13.10 14.00
ROCE (%) 15.00 16.40 17.40 18.40

I would buy VA TECH WABAG Ltd with a price target of Rs. 450 for Medium to Long term. 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. 391.00 on every purchase.

Thursday, February 16, 2012

MCX (Multi Commodity Exchange) : IPO SUBSCRIBE !!!

Price Band: Rs. 860 - Rs. 1032, Face Value: Rs.10.
Minimum Lot Size: 6 Shares.
Issue opens on: 22nd February 2012, Wednesday.
Issue closes on: 24th February 2012, Friday.
Listing on: 9th March 2012.
Total No. of Shares offered: 64,27,378 shares or 12.60 %
Employee Reservation: 2,50,000 shares.
Net Public Offer: 61,77,378 shares.
QIB Book: 3,088,689 shares.
Non – Institutional Bidders: 9,26,607 shares.
Retail Book: 21,62,082 shares.
Equity Shares outstanding prior Issue: 5,09,98,369 shares.
Equity Shares outstanding post Issue: 5,09,98,369 shares.
Total Size of the Issue: Rs. 552.75 Crs - Rs. 663.30 Crs.
IPO GRADING: 5/5 - CRISIL – Strong Fundamentals.
FAIR VALUE RANGE - Rs. 1200 - Rs. 1400.

KEY FINANCIALS (Consolidated) 31 Mar 2010 31 Mar 2011 31 Dec 2011
Total Income (Rs. in Cr) 493.70 447.56 474.50
Net Profit (Rs. in Cr) 220.80 176.27 217.95
Net Profit margin (%) 35.70 39.40 47.00
EPS (Rs.) 43.29 34.56 42.74
Net Asset Value (Rs.) 136.63 166.45 210.58
Return on Equity (%) 21.40 22.80 32.20
Return on Capital Employed (%) 31.30 31.80 45.10

MULTI COMMODITY EXCHANGE OF INDIA LIMITED : MCX Stock Exchange Limited was originally incorporated as a private limited company on April 19, 2002 as Multi Commodity Exchange of India Private Limited and subsequently converted into public limited company on May 16, 2002 in 2008 and is based in Mumbai, India. MCX Stock Exchange Limited provides a trading platform in currency derivatives in India. The company offers trading in currency futures contracts in four currencies consisting of the U.S. Dollar-Indian Rupee (USDINR), Euro-Indian Rupee (EURINR), Pound Sterling-Indian Rupee (GBPINR), and Japanese Yen-Indian Rupee (JPYINR). The company, through its subsidiary, MCX-SX Clearing Corporation Limited, offers clearing and settlement services in multi asset classes.  MCX enjoys the leadership position in the commodity futures industry, the market shares in terms of total value of commodities futures contracts traded on MCX in Fiscal 2011 was 82.4 % of the Indian commodity futures industry. There are over 30 commodity futures and options exchanges worldwide that trade commodities ranging from energy, metals, agriculture to livestock in many countries including the United States, China, Japan, Malaysia and the United Kingdom. In 2011, MCX stood at 5th place among the global commodity bourses in terms of futures contracts traded, during the period between January and June 2011 about 127.8 million futures contract were traded on MCX. MCX ranks no.1 in silver, no.2 in natural gas, no.3 in crude oil and gold futures trading. The company reaches out to about 800 cities and towns in India with the help of about 1,26,000 trading terminals. MCX COMDEX was the first and only composite commodity futures price index. MCX has main competitor is National Commodity & Derivative Exchange Ltd (NCDEX) – Mumbai; National Multi Commodity Exchange Ltd  (NMCEX)- Ahmedabad; Indian Commodity Exchange Ltd (ICEX) – Gurgaon; Ace Derivates and Commodity Exchange (ACE) – Ahmedabad.

MCX holds 5 % in Dubai Gold and Commodity Exchange and the book value of this investment was Rs. 2.185 Cr as of December 31, 2011; 100 % in MCX Clearing Corporation Ltd; 5 % in MCX SX; 26 % in MCX-SX Clearing Corporation Ltd; 51 % in SME Exchange of India Ltd with initial investment of Rs. 5,10,000

MCX derives its income primarily from transaction fees with respect to the trades executed on MCX Exchange, annual subscription fees, member admission fees, terminal charges, proceeds of sale and dividends from investments and interest from bank deposits. Commodities play an important role in India‘s economy. India has over 7,000 regulated agricultural markets, or mandis, and the majority of the nation‘s agricultural production is consumed domestically, according to the Agricultural Marketing Information Network. India is the world‘s leading producer of several agricultural commodities. The agriculture sector accounted for approximately 14.2 % of India‘s gross domestic product (GDP) at a constant price (2004-05) for the fiscal 2011. India‘s GDP at current market prices for the fiscal 2011 was estimated to be Rs. 78,779.47 billion (Source: Economic Survey 2010-11). There are currently 21 commodity exchanges recognised by FMC in India offering trading in over 60 commodity futures with the approval of FMC. In the fiscals 2009, 2010 and 2011, the total value of commodities traded on commodity futures exchanges in India was Rs. 52,489.57 billion, Rs. 77,647.54 billion and Rs. 119,489.42 billion, respectively. The total value of commodities traded on commodity futures exchanges in India for the first nine months ended December 31, 2011 was Rs. 137,228.55 billion.  

Out of the Offer of a total of 64,27,378 Equity Shares, 26,43,916 Equity Shares are being offered by FTIL, 21,12,025 Equity Shares are being offered by SBI (Equity), 7,81,508 Equity Shares are being offered by GLG, 3,90,754 Equity Shares are being offered by Alexandra, 2,46,175 Equity Shares are being offered by Corporation Bank, 1,48,000 Equity Shares are being offered by ICICI Lombard and 1,05,000 Equity Shares are being offered by Bank of Baroda. The Equity Shares being offered by the Selling Shareholders under the Offer have been held by such Selling Shareholders for a period of more than one year prior to filing of the Draft Red Herring Prospectus with SEBI.

Comparisons with Industry as on 31st March 2011

Exchange Currency Share Price Shares O/S (mn) Market Cap (mnUS$) EPS Estimate FY13 P/E FY13e EV/Sales FY13e EV/EBITDA FY13e
CME US$ 291 67 19295 17.90 16.20 0.90 8.50
ICE US$ 133 73 9644 8.00 16.50 2.30 8.80
MCX INR 1032 51 1053* NA NA NA NA

According to me one should definitely look for subscribing Multi Commodity Exchange India Ltd IPO as it will be the first listed exchange on Indian bourses taking the country at par with other markets like US, UK, Japan, Australia, Singapore & Hong Kong. Globally , Exchanges trends to trade at average of 5 times their book value and 18 - 20 times their earnings. Long term investors should look into subscribing the IPO for good opportunity. Short term investor can subscribe for listing gains.

Monday, February 13, 2012

SESA GOA LTD : Getting out from storm !!!

Scrip Code: 500295 SESAGOA
CMP:  Rs. 234.90; Buy at current levels.
Short term Target: Rs. 270, 6 month Target – Rs. 350; 
STOP LOSS – Rs. 216.10; Market Cap: Rs. 20,415.19 cr; 52 Week High/Low: Rs. 333.40 / Rs. 148.30
Total Shares: 86,91,01,423 shares; Promoters : 47,91,13,619 shares –55.13 %; Total Public holding : 38,99,87,804 shares – 44.87 %; Book Value: Rs. 133.34; Face Value: Rs. 1.00; EPS: Rs. 25.80; Div: 350.00 % ; P/E: 9.10 times; Ind. P/E: 19.44; EV/EBITDA: 4.70.
Total Debt: 1015.97 Cr; Enterprise Value: Rs. 22,127.32 Cr.

SESA GOA LTD:  SESA GOA Ltd was incorporated in 1954 and is based in Panji, Goa, India. SESAGOA is engaged in exploration, mining and processing of iron-ore. The Company operates in three business segments namely iron ore, metallurgical coke and pig iron. The pig iron business focuses on the domestic Indian market, especially to foundries and steel mills in western and southern India. It also exports to the Middle-East and South East Asia. SESA GOA is India's largest producer & exporter of iron ore in the private sector which currently accounts for 1.5 % of world trade in iron ore & is amongst lowest cost iron ore mining company in the world. Its mines are mainly located in the Goa, Karnataka & Orissa. It exported approx. 5 mn tons of iron ore, fines and lumps to Japan, China, Europe.  It also has mining interests in Western Cluster Iron Ore project, Liberia. The company sells its iron ore primarily in China, Japan, Korea, India, and Europe. In April 2007, Anil Agarwal – Vedanta Resources acquired a controlling stake of 51 % in Sesa Goa from Mitsui & Co, Japan, for US$ 981 million. SESAGOA owns or have the rights of reserves & resources consisting of 306 million tonnes of iron ore. In April 2011, the Company acquired 10.4 % stake in Cairn India Ltd (CIL) from Petronas International Corporation Ltd (Petronas). In March 2011, Sesa Goa acquired the assets of steel plant unit of Bellary Steel and Alloys Limited (BSAL). SESA GOA is compared with NMDC Limited, Godawari Power & Ispat Limited in India and with Ferrexpo Plc globally.

Investment Rationale:
Iron ore prices have recently fell sharply from US$180/ tonne and now are recovering to US$145/ tonne. Also Iron ore imports earlier dipped in China due to fall in steel production till November, 2011; however, imports again rebounded in December 2011 supported by higher steel production which boosts the prices. The exports from India continued to remain lower. Inventory of iron ore at Chinese ports have been steady at 95 mt. During the quarter 0.64 mt of iron ore was sold from Karnataka through e-auction. Sesa Goa expects that the Karnataka issue to get resolved by Q4FY12 and to contribute about 6 mt in FY13 taking overall volumes to around 20 mt. The Shah Commission continues its verification in Goa and report is expected by March 2012. Goan ores being Haematite in nature is not suitable for pelletization which may cost SESA by little bit. Also the Western Cluster (Liberia project) is on track with encouraging R&R findings the first shipment is expected in FY14 which will bost Sesa Goa’s revenue substantially. Also SESAGOA’s total debt including forex debt constitutes of US$ 400 mn (FCCB of US$ 215 mn) which is low as compared to its industry peers which gives one a comfort to invest in the stock. There are some likely events due in FY13, which could have significant bearing on the company’s operational performance in FY13, Such as If the Supreme Court lifts ban on mining in Karnataka and SESAGOA is allowed to restart mining activities in Karnataka would boost FY13 sales volume tremendously which is POSITIVE for Sesa – the Supreme Court hearing is due by Q4FY12; Under the National Mineral policy the royalty rates are revised once in every 3 years and this time it is due in August 2012, and considering the recent regulatory environment it is highly possible that there may be a rate hike as the rate revision which is exected that it will not impact much negatively for Sesa Goa. Of course there could be 12 % negative impact in FY13 EPS of Sesa if the MMDR bill is passed in its same form and fashion, which is expected to be tabled in Budget session of the Parliament, which will be from March 14 to March 17th 2012. But I believe that the markets have already factored in these negatives in the stock prices. Also the Carin will contribute upto 20 % in the bottom line as profit from associates. On SOTP basis the valuation of the iron ore business comes at Rs. 87/share which is 3.5 x the FY13E EV/EBITDA and is in discount to upto 15 % from its global peers. The stake in CAIRN INDIA is been valued at 30 % discount to current market cap which comes to Rs. 107/share. Taking this into consideration the target price of SESAGOA comes at Rs. 250           

Outlook and Valuation:
The Ministry of Commerce has hiked export duty on iron ore from 20 % to 30 % for both lumps and fines. Sesa Goa exports close to 90 % of its total sales, and hence an export duty hike could lead to EBITDA estimates coming down by close to 20 % in FY13F-FY14F and earnings estimates coming down by close to 25 %. Indian exports of iron ore have come down by 40 % - 45 % during the past two years on account of earlier export duty hike of 20 % from 10 % and an also by export ban/mining ban in Karnataka. With such restrictions on transportation of ore in Goa, the local state Goa government has also suffered. All these factors together resulted in significant downturn in iron ore exports from India. It is believed that the above increase in export duty won’t impact exports significantly as - firstly the majority of iron ore being exported is from Goa, which produces low-grade iron ore and doesn’t have major demand in India. At the same time, transportation of ore from Goa will be very costly for domestic steelmakers due to logistic issues; and secondly even after export duty hike, companies such as Sesa Goa will have a decent margin (25- 30 %) and hence exports should continue. At the current market price of Rs. 234.00, the stock is trading at a PE of 5.20 x FY12E and 4.25 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 27.10 in FY12E and Rs. 42.60 in FY13E. One can buy SESA GOA Ltd with a target price of Rs. 250.00 for Medium to Long term investment.

SALES (Rs. Crs) 5,858.30 9,205.10 7,776.10 8,462.10
NET PROFIT (Rs. Crs) 2,629.10 4,209.10 2,351.10 3,706.00
EPS (Rs.) 31.60 48.40 27.10 42.60
PE (x) 6.40 4.20 7.40 4.70
P/BV (x) 2.10 1.40 1.20 1.00
EV/EBITDA (x) 5.20 3.40 7.40 7.10
ROE (%) 41.60 40.60 17.00 22.30
ROCE (%) 47.20 47.00 18.50 14.80

I would buy SESAGOA Ltd with a price target of Rs. 350 for Medium to Long term. 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. 216.10 on every purchase.


Sunday, February 5, 2012

An Awesome reply from the CEO of JP MORGAN !!!

 A young and pretty lady posted this on a popular forum:
Title: What should I do to marry a rich guy?
I’m going to be honest of what I’m going to say here. I’m 25 this year. I’m very pretty, have style and good taste. I wish to marry a guy with $500k annual salary or above.
You might say that I’m greedy, but an annual salary of $1M is considered only as middle class in New York.
My requirement is not high. Is there anyone in this forum who has an income of $500k annual salary? Are you all married?
I wanted to ask: what should I do to marry rich persons like you?
Among those I’ve dated, the richest is $250k annual income, and it seems that this is my upper limit.
If someone is going to move into high cost residential area on the west of New York City Garden (?), $250k annual income is not enough.
I’m here humbly to ask a few questions:
1) Where do most rich bachelors hang out? (Please list down the names and addresses of bars, restaurant, and gym)
2) Which age group should I target?
3) Why most wives of the riches are only average-looking? I’ve met a few girls who don’t have looks and are not interesting, but they are able to marry rich guys.
4) How do you decide who can be your wife, and who can only be your girlfriend? (My target now is to get married)
Ms. Pretty
A philosophical reply from CEO of J.P. Morgan:
Dear Ms. Pretty,
I have read your post with great interest. Guess there are lots of girls out there who have similar questions like yours. Please allow me to analyse your situation as a professional investor.
My annual income is more than $500k, which meets your requirement, so I hope everyone believes that I’m not wasting time here.
From the standpoint of a business person, it is a bad decision to marry you. The answer is very simple, so let me explain.
Put the details aside, what you’re trying to do is an exchange of “beauty” and “money”: Person A provides beauty, and Person B pays for it, fair and square.
However, there’s a deadly problem here, your beauty will fade, but my money will not be gone without any good reason. The fact is, my income might increase from year to year, but you can’t be prettier year after year.
Hence from the viewpoint of economics, I am an appreciation asset, and you are a depreciation asset. It’s not just normal depreciation, but exponential depreciation. If that is your only asset, your value will be much worse 10 years later.
By the terms we use in Wall Street, every trading has a position, dating with you is also a “trading position”.
If the trade value dropped we will sell it and it is not a good idea to keep it for long term – same goes with the marriage that you wanted. It might be cruel to say this, but in order to make a wiser decision any assets with great depreciation value will be sold or “leased”.
Anyone with over $500k annual income is not a fool; we would only date you, but will not marry you. I would advice that you forget looking for any clues to marry a rich guy. And by the way, you could make yourself to become a rich person with $500k annual income. This has better chance than finding a rich fool.
Hope this reply helps. If you are interested in “leasing” services, do contact me.
J.P. Morgan CEO


Friday, February 3, 2012

GITANJALI GEMS LTD : Add Glitter to your Portfolio !!!

Scrip Code: 532715 GITANJALI
CMP:  Rs. 311.05; Buy at Rs.305 & on dips.
Short term Target: Rs. 350, 6 month Target – Rs. 415; 
STOP LOSS – Rs. 280.60; Market Cap: Rs. 2,834.35 cr; 52 Week High/Low: Rs. 386.90 / Rs. 171.40
Total Shares: 9,11,22,095 shares; Promoters : 4,95,35,019 shares –54.37 %; Total Public holding : 4,15,87,076 shares – 45.63 %; Book Value: Rs. 246.98; Face Value: Rs. 10.00; EPS: Rs. 29.62; Div: 30.00 % ; P/E: 10.50 times; Ind. P/E: 10.11; EV/EBITDA: 13.26.
Total Debt: 1881.91 Cr; Enterprise Value: Rs. 5,080.05 Cr.

GITANJALI GEMS LTD:  Gitanjali Gems Ltd was incorporated in 1966 and is based in Mumbai, India. The company was started as a partnership. It came with an IPO in the year 2006 with 1.70 cr shares at the price band of Rs. 170 – Rs. 195. Gitanjali Gems has got two-diamond manufacturing facilities located at Borivali in Mumbai and at the Special Economic Zone in Surat. It has also got a 100 % export oriented unit in SEEPZ Mumbai, which produces gold and platinum studded jewellery. There are also jewellery-manufacturing facilities at MIDC, Andheri, which produces branded jewellery for the retail operations in India. The company has a workforce of over 2300 employees. Company sells its jewellery under the brand - Asmi - Premium work wear collection & has 104 outlets, 2 exclusive stores; Sangini - Entire product range including bridal jewelry; Nakshatra - Entire product range including bridal jewelry available with 374 retailers and 1 franchisee. More franchisees are being added; Gilli - Diamond jewelry at reasonable prices having 256 outlets of which 3 are exclusive stores; Vivvaha - Wedding jewelry; Maya - Gold jewelry for wedding and other similar events; D’Damas - International quality designs combined with Indian values sells through 380 retailers, 2 exclusive outlets, 3 shop-in-malls and 21 franchisees; Hoop - Fashion Silver Jewelry. The Gitanjali Group has acquired Lucera for Rs 25 crores in 2008. In October 2009, the UK-based Brand Finance, valued the four leading brands of the company at Rs.514 crores (Nakshatra), Rs.468 crores (Gili), Rs.309 cr. (D'Damas) and Rs.210 cr. (Asmi), respectively. GGL is not only gearing towards improving sales but is also looking at multiplying the value of these brands by 1.5 to 2 times year on year. With a manufacturing presence in India, its operations span the globe from the U.S., the U.K., Belgium, Italy, the Middle East, Thailand, South East Asia, and Japan. The company’s retail and distribution network comprised approximately 2,000 outlets, including 200 distributors, 94 exclusive stores, and 63 franchised stores. In December 2010, it acquired 90 % interest in Glantti Italia S.R.L. On March 17, 2011, it acquired 100% stake in N & J Finstocks Private Limited. In July 2011, it incorporated a wholly owned subsidiary Italian Jewels S.r. In August 2011, it incorporated a subsidiary Aston Luxury Group Limited. On December 2, 2011, its subsidiary Aston Luxury Group Ltd., acquired Crown Aim Limited. Gitanjali Gems Ltd is globally compared to Lao Feng Xiang Company Limited, Bulgari Societa per Azioni and Surana Corporation Limited in India.

Investment Rationale:
Gitanjali Gems is one of the largest integrated diamond and jewellery manufacturer and retailer in India. The demand for diamond and jewellery products are largely depends on higher employment and economic levels, which leave higher disposable income in the hands of the consumers. In downturn consumers can quite easily scale down their consumption of jewellery and diamonds. During the quarter ended the robust growth of Net Profit increased by 65.25 % Rs. 132.24 Cr. The value of four leading diamond jewellary brands of Gitanjali Gems - Gili, Nakshatra, Asmi and D’Damas rose 84 % i.e. Rs. 2,769 cr in the last two years. Net Sales and PAT of the company are expected to grow at a CAGR of 30 % and 46 % over 2010 to 2013E respectively. Gitanjali Gems Ltd has acquired 100 % stake of 'Crown Aim Limited' ('Crown Aim') and so has become step down subsidiary of the Company. Crown Aim is a Hong Kong based Company engaged in the business of distribution of Jewellery to China, Japan, USA, Middle East and Europe. In Addition, Crown Aim has a Jewellery manufacturing unit in China and plans to setup retailing of Jewellery in China. Crown Aim also has a 100 % subsidiary with the name Alfred Terry Holding Limited and a step down subsidiary named Alfred Terry Limited in London, for distribution of Jewellery in UK. Gitanjali Gems Ltd has incorporated a Wholly Owned Subsidiary in the name of Leading Italian Jewels S.r.l in Italy with a view to expand its business in Italy and adjoining region. The main activity of the newly incorporated wholly owned subsidiary is trading in precious stones, diamonds jewellery, pearls, etc. Gitanjali Gems Ltd has incorporated GGL Diamond, LLC in United States of America, through its wholly owned subsidiary Gitanjali USA, Inc. The main object of GGL Diamond LLC is to source and distribute diamond and jewellery. Gitanjali Gems Ltd has also incorporated a Wholly Owned Subsidiary in the name of 'Aston Luxury Group Limited' in Hong Kong with a view to explore and expand the International business of the Company in Asia Pacific.

Outlook and Valuation:
Gitanjali has increasingly undertaken retail expansion through the organic, inorganic and partnership routes. The retail space is around 1 million sq ft from 65,000 sq ft a year ago. The company has over 3000 Point of sales (POS). Gitanjali occupies nearly 60 % of the India’s entire organized mall space belonging to the jewellery category; it has aggressive retail expansion plans. Gitanjali expects to increase its retail presence to 2 million square feet, primarily in the domestic outlets in the next three years. All this features helps one to get that extra comfort in the stock. The enormous growth of the Indian gems and jewellery industry has seen the arrival of many new branded jewellery shops in various metros of this country. Brands such as, Damas Jewellery, Reliance Retail, Swarovski, and Joy Alukkas are either opening or have already opened their new branches. The availability of cheap labour and presence of well skilled people in various states of India is helping in the growth of diamond polishing and gold jewellery markets. According to experts in the jewellery industry the growing demand for expensive jewellery in India is a result of the strengthening Indian economy. India will soon overtake the US in the not so distant future, as per a statement given by Rapaport Group, the well known keeper of global diamond related data. India is the largest market for gold jewellery in the world, representing an amazingly 746 tonnes of gold in 2010. The net exports of gem and jewellery grew from US$ 22,616.35 in April-October 2010 to US$ 26,160.04 in April-October 2011. At the current market price of Rs. 310.00, the stock is trading at a PE of 5.20 x FY12E and 4.25 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 59.61 in FY12E and Rs. 73.03 in FY13E. One can buy Gitanjali Gems Ltd with a target price of Rs. 350.00 for Medium to Long term investment. Also one should add on Gitanjali Gems on dips !!!

SALES (Rs. Crs) 6,527.63 9,456.40 12,198.75 14,394.53
NET PROFIT (Rs. Crs) 200.17 354.81 505.88 619.78
EPS (Rs.) 23.75 41.81 59.61 73.03
PE (x) 13.05 7.42 5.20 4.25
P/BV (x) 1.20 1.05 0.87 0.72
EV/EBITDA (x) 5.91 4.17 3.16 2.67
ROE (%) 9.23 14.16 16.79 17.06
ROCE (%) 10.17 12.34 13.84 14.50

I would buy Gitanjali Gems Ltd with a price target of Rs. 350 for Medium to Long term. 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. 280.06 on every purchase.


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