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Thursday, May 3, 2012

TATA STEEL: CREATING A VALUE FOR NATION !!!

Scrip Code: 500470 TATASTEEL
CMP:  Rs. 461.85; Buy at Rs.445 - Rs.455 levels.
6 month Target – Rs. 495; 
STOP LOSS – Rs. 418.60; Market Cap: Rs. 44,855.53 Cr; 52 Week High/Low: Rs. 619.00 / Rs. 332.10
Total Shares: 97,12,14,450 shares; Promoters : 30,45,14,362 shares –31.35 %; Total Public holding : 66,67,00,088 shares – 68.64 %; Book Value: Rs. 497.09; Face Value: Rs. 10.00; EPS: Rs. 70.46; Div: 120 % ; P/E: 6.55 times; Ind. P/E: 7.30; EV/EBITDA: 5.82.
Total Debt: 28,301.14 Cr; Enterprise Value: Rs. 80,273.78 Cr.

TATA STEEL LTD:  Tata Steel Limited was established by Mr. Jamsetji Nusserwanji Tata in 1907. It was formerly known as The Tata Iron and Steel Company Limited and changed its name to Tata Steel Limited in 2005. Tata Steel Limited is a diversified steel producer. It has a global presence in 50 markets and manufacturing operations in 26 countries. Tata Steel’s principals products include flat rolled products of Non-Alloy Steel of a width of 600 millimeter and hot rolled coils of thickness 1.66 millimeter; tubes/pipes of circular section with outer diameter up to 114.3 millimeter, not cold rolled & flat rolled products of iron or non alloy steel of width of 600 millimeter or more, cold rolled (cold-reduced), not clad, plated or coated of a thickness of 0.5 millimeter or more but less than 3 millimeter. Company also provides steel for different industries, which include construction, automotive, aerospace, consumer goods, materials handling, energy and power, rail, engineering, ship-building, packaging, and security and defense. Tata Steel manufactures and processes steel, which includes hot-rolled coil through to high-gloss, pre-painted perforated blanks, wire rod and wire, sections, plate, bearings and tubes.  Its major branded products are Tata Steelium, Tata Shaktee, Tata Tiscon, Tata Pipes, Tata Bearing and Tata Agrico. In 20 October 2009, TATA STEEL won bid to acquire Anglo – Dutch steelmaker CORUS at $7.6 billion. On January 30, 2007, Tata Steel purchased a 100 % stake in the Corus Group at 608 pence per share in an all cash deal, totally valued at USD 12.04 Billion. The deal is the largest Indian takeover of a foreign company and made Tata Steel the world's fifth-largest steel group. In September 27th 2011, Tata Steel merged Centennial Steel Company Ltd with itself.  TATA STEEL’s production facilities include those in India, UK, Netherlands, Thailand, Singapore, China and Australia. TATA STEEL is compared with SAIL locally and with JFE Holdings Incorporated (Japan) & Angang Steel Company Ltd (Hong Kong) globally.

Investment Rationale:
Over the years, Tata Steel’s domestic operations have exhibited robust performance on the back of high raw material integration and superior product mix. Domestic steel product prices have increased by Rs. 1,500- Rs. 2,000/ton over the last three months, coupled with a decline in coking coal costs and higher volumes which would lead to margin expansion in Q4 FY12. The 2.9 metric ton per annum expansion is likely to be commissioned in April 2012 and would require some time to stabilize and integrate the whole complex. It is expected that the new capacity will contribute additional 1million tons of saleable steel each over the next two years. Stable steel prices, superior product mix coupled with lower coking coal prices YOY would lead to higher EBIDTA/ton in FY13. The standalone operation is expected to witness an EBIDTA CAGR of 20.6 % over FY12-14. This would generate nearly Rs. 16,200 Cr of operating cash flow over the same period and would fund major part of the capex for its Odisha steel project. The spot prices in Europe have recovered to US$70 - $80/ton since January. However, this would impact Tata Steel’s realisations only from March 2012, as any change in spot prices will impact Tata Steel’s realisation with a lag. It is expected that the realisations to increase by US$25/ton QoQ in Q4 FY12. And with an uptick in steel prices and a decline in raw material costs (both iron ore and coking coal), the company would post positive EBIDTA in Q4 FY12. However, the performance would be restricted by one-offs like impairment charges and restructuring costs. On the back of various restructuring process, revival in European demand and higher steel prices YoY, an EBIDTA/ton of US$50/ton in FY14 is accepted. After the stabilization in FY13, it is expected that the plant will add a further 1mtpa in FY14, leading to a volume CAGR of 15.8 % over the period FY12-14. Tata Steel India can deliver 1.73mn tons in Q4 FY12, 7.7mn tons in FY13 and 8.8mn tons in FY14. Besides exporting to few countries, the company targets to sell incremental steel in the domestic market. This would be in the niche market of value added products, where it is already among the leaders. Out of the total outlay of Rs. 16,000 Cr, the company has already spent Rs. 2,500 Cr of capex till date and is expected to spend Rs. 5,000 Cr in FY13E. The company has reduced its manpower from 7,223 to 6,683 at the end of December 2011 and is expected to reduce it further to 5,750 by FY12-end. It is expected that the EBIDTA/ton to be US$30/ton in Q4 FY12 and remain around this level for FY13. On the back of various restructuring processes initiated by the company in FY12 & revival in European demand and higher steel prices YOY, an EBIDTA/ton of US$50/ton in FY14 is accepted. Tata Steel recently reported its 4QFY2012 production and sales numbers; Company's 4QFY2012 crude steel production grew by 2.6 % YoY to 1.8mn tonnes and its sales volume grew by 3.3 % YoY to 1.7mn tonnes. For FY2012, the company's crude steel production and sales volume increased by 3.9 % and 3.4 % YoY to 7.1mn tonnes and 6.6mn tonnes, respectively. These numbers are broadly in-line with the market’s expectations. 

Outlook and Valuation:
Steel players in India had hiked flat steel product prices by Rs. 1,000/ton each since Jan 2012. However, due to subdued market conditions and some resistance from the consumers, the steel players have reduced prices over the last one month. In the case of long product category, the increase in steel prices has been steady and has been accepted by the market. Indian long steel prices has raised by Rs. 1,500 - 2,000/ton in Q4 FY12 due to improving demand from the infrastructure space and production cuts taken by the smaller players. On account of the high iron ore and coal costs, small steel players have taken production cuts as it has become unviable to them to operate. This would help the larger producers like Tata Steel in gaining market share and maintain prices at current levels. Steel prices will decline marginally during the year on the back of lower raw material costs and subdued demand. The impact of lower steel prices globally would be reduced due to the increase in import duty on HRC and the depreciation of the rupee against the dollar. The commissioning of new capacities during the year would also add to the pressure on steel prices in the domestic market. On an average, blended steel realization to decline 2 % YoY is expected in FY13 and then strengthens to 3 % YoY in FY14. The domestic operations would continue to be the earnings driver for Tata Steel over the next two years. Even though near term earnings in Corus would remain under pressure due to one-off items, it is expected that the Corus will deliver steady EBIDTA/ton over FY13-14. Tata Steel is expected to report strong earnings over the next two years due to the factors like the impact of new 2.9mtpa capacity, impact of restructuring exercise in Europe, like the benefits from overseas raw material projects. After the recent correction in the stock over the last six months, Tata Steel is trading at a discount to its peers. The Indian business of Tata Steel at a 6.5 x EV/EBITDA multiple and the European business at 4.5 x, is justified as the Indian operation is self-sufficient in terms of raw materials (100 % iron ore and 50 % coking) and deserves a decent premium vis-à-vis Corus, which is not self sufficient. Stock continues to offer an attractive opportunity given the distress valuations of European operations at EV/tone of US$200 & the strong domestic operations and increased raw material self-sufficiency from current 33  % to 50 % in iron ore and 18 % to 23 % in coking coal (by FY13 end). At the current market price of Rs. 461.85, the stock is trading at a PE of 17.83 x FY12E and 10.71 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 25.90 in FY12E and Rs. 43.10 in FY13E. One can buy TATA STEEL with a target price of Rs. 495.00 for Medium to Long term investment.

KEY FINANCIALS FY11 FY12E FY13E FY14E
SALES (Rs. Crs) 1,18,753.10 1,28,344.10 1,23,146.60 1,32,914.20
NET PROFIT (Rs. Crs) 5,933.70 2,512.60 4,185.50 6,710.50
EPS (Rs.) 61.90 25.90 43.10 69.10
PE (x) 7.40 17.80 10.70 6.70
P/BV (x) 1.20 1.10 1.10 1.00
EV/EBITDA (x) 5.80 7.20 6.00 5.10
ROE (%) 20.30 6.60 10.10 15.10
ROCE (%) 8.70 4.40 6.40 9.00

I would buy TATA STEEL LIMITED with a price target of Rs. 495 for Medium to Long. 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. 418.60 on every purchase.
READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

Monday, April 23, 2012

IL&FS TRANSPORTATION NETWORKS LIMITED:CREATING INFRA BY HEART !!!

Scrip Code: 533177 IL&FSTRANS
CMP:  Rs. 190.85; Buy at Rs.185-190.
Short term Target: Rs. 200, 6 month Target – Rs. 232; 
STOP LOSS – Rs. 175.58; Market Cap: Rs. 3,707.59 cr; 52 Week High/Low: Rs. 233.95 / Rs. 142.55
Total Shares: 19,42,67,732 shares; Promoters : 14,58,67,769 shares –75.09 %; Total Public holding : 4,83,99,963 shares – 10.00 %; Book Value: Rs. 91.87; Face Value: Rs. 10.00; EPS: Rs. 12.34; Div: 35 % ; P/E: 15.46 times; Ind. P/E: 14.14; EV/EBITDA: 8.99.
Total Debt: 1,894.09; Enterprise Value: Rs. 5,588.11 cr.

IL&FS TRANSPORTATION NETWORKS LIMITED: ITNL was incorporated in 2000 and is based in Mumbai, India. It was formerly known as Consolidated Transportation Networks Limited and changed its name to IL&FS Transportation Networks Limited in September 2005. IL&FS Transportation Networks Limited operates in the Highway and street construction sector. IL&FS Transportation Networks (ITNL) is a surface transportation infrastructure company. ITNL is the builder, operator and transfer (BOT) road operators engaged in developing, designing, operating, maintaining and facilitating surface transportation infrastructure projects. ITNL’s services include advisory and management services, supervisory services, operation and maintenance services, toll collection services for toll road projects. ITNL provides maintenance services primarily for highways and roads in Spain, Portugal and Latin America, and advisory and project management for BOT road projects, trades in materials used in the maintenance of roads & undertakes construction contracts. On May 31,2010, it acquired Area De Servicio Coiros S.L.U. On September 1, 2010, it acquired Conservacion De Infraestructuras De Mexico S.A. De C.V. On December 17, 2010, it acquired Alcantarilla Fotovoltaica, S.L.U. and Area De Servicio Punta Umbria, S.L.U. IL&FS Transportation Networks Limited is a subsidiary of Infrastructure Leasing & Financial Services Limited. The company is compared to NRW Holdings Limited globally & locally with Cummins India Limited and Walchandnagar Industries Limited.

Investment Rationale:
IL&FS Transportation Network limited is India’s largest road developer (7,621 lane kms) and is poised for 18 % CAGR (FY08-14E) in operational portfolio with fair mix of toll & annuity projects and BOT stake adjusted with average daily toll collection of Rs. 70 lakhs per day in FY11 and is expected to clock around 49 % CAGR (FY11-16E). Company has order backlog at Rs. 8,900 Cr at 3.3X FY11 revenue excluding Rs. 2,500 Cr order inflow in Q4FY12 and the recent wins of Rs. 2,500 Cr could restrict ITNL’s participation in next round of bidding at NHAI. ITNL is already sitting on 2 projects which are yet to achieve its financial closure and its SOTP value comes at Rs. 222 it implies a 13 % upside, but ITNL is highly sensitive to interest rates so a cut of 100 bps (1 %) in interest rate (0.50% is cut already and 0.50% more is expected) will lead to 26 % increase in SOTP value. ITNL is the largest private sector Built Operate Transfer road operator from IL&FS Group , with a portfolio of 22 domestic road projects and 1 international projects aggregating to 7,621 stake adjusted lane in km (SALK) in its portfolio. ITNL has 11 operational projects with 3,281 SALK and remaining 12 projects or 4341 SALK under development.  After a long dry patch ITNL has won two projects over the last couple of months. Recently ITNL acquired 49 % stake in Yu He Expressway in China through its 100 % subsidiary International Pte Ltd (IIPL) based in Singapore. The balance 51 % stake is retained by Chinese state owned enterprise CEG. The total cost of acquiring 49 % stake is USD 160 million which is funded through mix of borrowing of USD 140 mn at cost of debt of 5 % and Equity of US$ 20 mn. The acquisition is priced at 1x the Book Value. The length of the expressway is 58.72 km of 4 lanes with 30 years of concession period. The residual period of concession agreement is 20.5 years. The company expects 16 % equity Internal Rate of Return in the project. The benefits for ITNL from the acquisition include sustained revenue from toll/annuity, improvement in EBITDA margin, enhancement in ITNL’s experience and qualification, etc.

Outlook and Valuation:
Recent wins could restrict ITNL’s participation in new projects, Although ITNL can win further projects but it is believed that with ITNL already sitting on two projects which are yet to achieve financial closure they would be extremely selective in bidding for the third project. Structurally ITNL would digest the two wins the Kiratpur Ner chowk & Kharagpur Baleshwar worth Rs. 2,500 Cr. Unlike past where ITNL use to recognize significant chunk of margins upfront as consulting fee, a larger proportion of 75 % is now recognized more rationally over the entire construction phase which also means lower internal surplus to fund new projects. Highly sensitive to interest rate, 100 basis points correction in the risk free interest rate (0.50% is cut already and 0.50% more is expected) will leads to 26 % increase in fair value of ITNL which remains a key beneficiary of reduction in risk free rate of project financing. ITNL has the highest leverage in the road sectors making it highly interest rate sensitive. High financial leverage as suggested by consolidated debt: equity of 3.5 x makes ITNL the prime beneficiary in the correcting interest rate scenario. The valuation of ITNL’s road BOT portfolio comes at Rs. 185/share with Cost of Equity of 12 % ; operational projects at 13 %, 14 % for under construction project & 15 % for under development projects, the valuation of E&C business comes at Rs. 140/share with 6 x FY13E EBITDA and valuation of other subsidiaries comes at Rs. 30/share. Net debt works out to Rs-123/share at parent level. At the current market price of Rs. 190.85, the stock is trading at a PE of 9.26 x FY12E and 9.68 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 20.60 in FY12E and Rs. 19.70 in FY13E. One can buy ITNL with a target price of Rs. 232.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 200.00

KEY FINANCIALS FY10 FY11 FY12E FY13E
SALES (Rs. Crs) 2,407.90 4,048.20 5,308.40 6,930.50
NET PROFIT (Rs. Crs) 353.60 457.90 400.20 382.10
EPS (Rs.) 18.20 23.60 20.60 19.70
PE (x) 11.70 9.00 10.30 10.80
P/BV (x) 2.50 1.80 1.80 1.50
EV/EBITDA (x) 8.60 7.80 9.80 9.80
ROE (%) 27.70 23.40 16.80 14.40

I would buy IL&FS TRANSPORTATION NETWORKS INDIA LTD with a price target of Rs. 232 for Medium to Long term and Rs. 200 for the Short term players. 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. 175.58 on every purchase.
READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

Sunday, April 22, 2012

IS THE EVOLUTION OF MONEY HURTING US !!!

It all started with “BARTER TRADE SYSTEM”: Long time ago the first trade was conducted via Barter. All goods were directly exchanged for all other goods. But this method had its own problems. If you want to swap your chicken for a loaf of bread, but the baker happened to want firewood, you had a task to find someone with firewood who wanted to have chicken.

        Then came the medium of gold exchange, under which everyone agreed to accept gold in return for whatever they were selling. This transition allowed the swapping of chickens for gold and then gold for anything else. The thing with gold was that it was indestructible and could be stored for the future. As gold also become the “Store Of Value” – if you had lots of chickens you could swap all of chickens for gold, spend only part of the gold on bread and keep a few gold for a rainy day.

                Gold as a mode of money, created its own set of problems – Governments in financial troubles, would call back their gold coins, then melt it down and reform the same metal into more coins with lower gold content in it or mixing any other metal in it. For government, it generated a nice new stock of gold for conversion into coins. This is what called “Debasement of Currency”.

                       But debasement of currency became a huge problem and led to the development of certificates of gold deposits. Debasement & the larger monetary transaction required that the coins to be counted weighed and checked for its purity & authenticity. In addition to which there was constant problem of security, so this led to the development of the Gold Depository Banks whereby a group of merchants come together and formed Merchant Banks that would hold their gold securely at a central location. The quality of coin was checked, the depositor was issued with paper certificate of deposit. The certificate of deposit represented his holding of gold within the banks & the holder of this certificate was entitled to present the certificate back to the bank, who would on demand, exchange it for the same amount of gold coin originally deposited.

                       These banks soon realized that the owners of the gold rarely come back to collect it. As a result gold was lying idle with them most of the time. So, these bankers come up with a money making scheme of their own. These banker’s started issuing their own certificates of gold deposit and would lend those certificates to merchants. These merchants would use these new certificates to buy goods, which they would then sell on at a profit provided everything went well, the merchant could borrow the certificate, buy & sell the goods to make profit and repay the bank before anyone realized that the gold had left the vault which of course it never had.

                 Now, what this did was there were always more certificates of deposits in circulation than the gold in the vaults of banks. This in turn led to crisis situation during which individuals with these certificates landed up at the bank asking for their gold back. The trouble was that the bank did not have enough gold to make good against all the certificates it had issued. As this news spread, more people landed up leading to bank running, this soon led to a situation whereby a central bank was created which would fight financial instability. In return for the backing of the central bank, the commercial banks gave up their rights to issue their own gold depository certificates. From now on there would only be one type of depository certificates and these would be printed by the government, and be distributed through the central bank to the commercial banks. In addition, gold reserves of the commercial banks would be collected together at the central bank.

                This created the concept of Currency Notes issued by the government. But what this also did was that it gave the government a monopoly on printing money. And unlike the kings of the earlier age, who had to call their gold coin back to debase them, now government could simply print more and more paper money as & when they deemed fit. And this right as we know has more or less been responsible for the current financial crisis.

IMPACT OF THE EVOLUTION OF MONEY: Let’s say US government prints $1 trillion and keeps it in its vaults, so then what would be the impact of this printing of money will be on the Inflation? The answer would be ZERO impact? Correct, simply because all the printed money is in the vault and does not enter into the economic systems…It is when the money enters the economic system which leads to a situation wherein more money chase the same or even fewer goods leading to price rise. At same time it is important how fast does money changes hands, meaning how fast people receive and then go out and spend this money. The faster they spend this money, more velocity money has and that in turn leads to a faster increase in prices & thus an increase in inflation. 

SAFEGUARD FROM THE FINANCIAL CRISIS : When markets are erratic & at times unpredictable, then the wise thing to do is to step up exposure to an asset that would infuse a semblance of stability and strength to the portfolio. And the cleanest, simplest & most efficient way to do is to invest in GOLD ETF. Not to mention the fact that the rampant way in which countries are debasing their currencies, one cannot help feel that at the end of the day, bullion will be more valuable than billions.
                             
BUY GOLD ETF's: There are new alternatives to invest in GOLD ETF’s - CLICK HERE , ETF’s – known as Exchange traded Funds which are listed on NSE. ETF just like any other mutual funds collects money and invest into the market. GOLD ETF’s collects funds and invests in GOLD. They buy gold physically – so the units are backed by 0.995 finesse gold. When you invest in GOLD ETF you are allotted a unit same as in mutual fund, here 1 unit of GOLD ETF can be 1 gm or 1/2 gm of gold depending on the funds – So Gold ETF are affordable. GOLD ETF’s trades like normal equity share on exchanges whose prices are in tandem with domestic gold price. If you dint have Demat account you still can invest in GOLD FUNDS like SBI GOLD FUND, Quantum Gold Saving Fund. You can also invest in these ETF in a Systematic Investment way (SIP) with as low as Rs. 500. JUST call your broker to buy GOLD ETF’s (List of listed ETF are mentioned below) or just visit your nearest bank and ask for GOLD FUND (if you don’t have trading account)

READ MY POST ON ALWAYS BUY GOLD 

Friday, April 13, 2012

CAIRN INDIA: STRIDING AHEAD !!!

Scrip Code: 532792 CAIRN
CMP:  Rs. 339.15; Buy at current levels.
Short term Target: Rs. 370, 6 month Target – Rs. 415; 
STOP LOSS – Rs. 312.00; Market Cap: Rs. 64,539.18 cr; 52 Week High/Low: Rs. 401.10 / Rs. 249.30
Total Shares: 190,29,68,633 shares; Promoters : 112,27,13,999 shares –59.00 %; Total Public holding : 78,02,54,634 shares – 41.00 %; Book Value: Rs. 167.12; Face Value: Rs. 10.00; EPS: Rs. 0.11; Div: 30.00 % ; P/E: 00.00 times; Ind. P/E: 11.77; EV/EBITDA: 00.00.
Total Debt: 1,350.00 Cr; Enterprise Value: Rs. 67,730.45 Cr.

CAIRN INDIA LTD: CAIRN INDIA LTD was incorporated in 2006 and is based in Gurgaon, India. The company was former subsidiary of Cairn UK Holdings Limited. Cairn India is an exploration and production company, a leading player in the oil and gas industry in India. Cairn India has been focusing on south Asia, especially India where it has interests in 15 blocks. The firm made more than 30 oil and gas discoveries in India and was listed in January 2007 through an IPO after it spun off from its parent Cairn Energy Plc. Vedanta Resources Plc along with its subsidiary SESAGOA acquired the controlling stake of 51 % at $8.6 billion in Cairn India at Rs.405/sh. SESAGOA brought in $3 billion for 20 % and the rest 31 % was by Vedanta. Cairn holds interest in 9 oil and gas block/fields located in the Baremer basin, the Mumbai offshore basin, the Kerala – Konkan basin, the Palar-Pennar basin, and the Cambay basin in India, as well as 1 block in the Mannar basin off the coast of northwestern Sri Lanka.The company also operates a pipeline and storage terminal. Cairn has working interest in 14 Exploration & Production blocks in Ravva and Cambay blocks which produces 51.4k boepd (Cairn WI 14k bpd). Cairn India sells its oil to refineries; and gas to public sector undertakings and private buyers. Cairn has commissioned three trains at MPT and pipeline section from MPT to Salaya, through which it is delivering crude to refiners. Government of India had granted Cairn India some oil & gas fields through Production Sharing Contract. The company had interest in oil & gas blocks/fields which include PR-OSN-2004/1, KG-ONN-2003/1, KG-OSNsn-2009/3 & MB-DWN-2009/1. CAIRN INDIA is compared with Oil India ltd and ONGC locally and with Japan Petroleum Exploration Company Ltd internationally. 

Investment Rationale:
In Jan'12, Cairn has commenced production from the Bhagyam oilfield in Rajasthan on approval granted by GOI. The benefit of the same will be reflected in Q4FY12. Further, Cairn expects to ramp-up the crude oil production from Bhagyam field to approved plateau rate of 40 Kbopd. According to the Company's management Mangala field, the biggest of the 18 discoveries in Rajasthan block, can produce 150 kbopd as against 125 Kbopd. Bhagyam, the second biggest field in the Rajasthan block, can produce 60 Kbopd as opposed to current approved peak output of 40 Kbopd (50 %), while Aishwariya oilfield can contribute 25 Kbopd as compared to earlier 10 Kbopd (150 %) and other fields can produce 65 Kbopd, subject to required approvals. As on 31st Dec'11, gross cumulative Rajasthan development capital expenditure was at US$ 3,323 Mn. Management has stated that further investments are planned to augment processing capacity and pipeline infrastructure. Recently, Mr. Jaipal Reddy (India's oil minister) has suggested that he will take actions to boost investment and raise oil & gas production. It is believed that this will speed up the process of approvals for production ramp up from Rajasthan fields, this should be significantly positive for Cairn India. Also, India has cut down its crude oil sourcing from Iran. This also demands for higher domestic oil production along with other diversified sources. Cairn's higher crude oil production at elevated international crude oil price along with weakening rupee will partly mitigate the negative impact of increased oil cess announced in the 2012-13 budgets. Cairn India has approached the petroleum minister, seeking support in making a case for a rollback of cess hike to the finance ministry, as per media reports. Any immediate rollback of cess looks unlikely. Also, the recent correction in the stock price discounts most of the negatives. In FY13, it is expected that refineries like RIL, Essar Oil and IOC will increase their crude oil off take from Cairn India (Rajasthan oil fields). With the commissioning of Essar Oil's expanded capacity the demand of Cairn's crude oil will increase. Further, Cairn has been pursuing with the Directorate- General of Foreign Trade (DGFT) for permission to sell crude oil to RIL's second 29-mt refinery at Jamnagar, which is a SEZ refinery. Cairn India’s dividend policy announcement will be a key trigger & will abate concerns regarding the utilization of cash. The Company's management has indicated to announce a sound dividend policy, they may announce special dividend in the coming result declaration. It is also believed that there is a possibility of upward revision in the company's Rajasthan crude oil reserves potential which the market has not discounted yet. Further, any significant reserves declaration from Sri Lankan block can add major value to the Company. Currently, the block is in E&D phase so the same is yet not been priced in. However, experts are bullish on the growth prospects of Sri Lankan block.

Outlook and Valuation:
The recent correction in stock price of Cairn India is mainly due to hike in cess rate by GOI and this will impact earnings. However, Cairn's higher crude oil production from Rajasthan block at elevated international crude oil price along with weakening rupee will partly mitigate the negative impact of increased oil cess. The Company has approached the petroleum minister, seeking support in making a case for a rollback of cess hike & any immediate rollback of cess looks unlikely. In the Union Budget 2012-13, GOI increased the cess on crude oil production to Rs. 4,500/mt from Rs. 2,500/mt earlier. The earlier revision in cess happened during the Budget 2006-07. This increase in cess is attributed to indexation by the government. Although, cess is cost recoverable while calculating the profit petroleum for the upstream companies, the absolute impact in earnings would be still substantial. CAIRN INDIA has announced its production figures for the JAN - MAR quarter, the average daily gross operated production was of 1,80,293 Barrels of Oil Equivalent (BOE) for the quater, with working interest production at 1,07,292 Barrels of Oil Equivalent Per Day (BOEPD). Cairn India announced an oil discovery in the Nagyalanka - SE-1 well, which is is the second discovery in the onshore KG-ONN-2003/1 block in the Krishna - Godavari basin. Testing is underway and the discovery will be appraised further for establishing commerciality. At the current market price of Rs. 339.15, the stock is fairly valued at 5.3 x EV/EBIDTA and trading at a PE of 6.00 x FY13E. The company can post Earnings per share (EPS) of Rs. 44.40 in FY12E and Rs. 56.70 in FY13E. One can buy CAIRN INDIA Ltd with a target price of Rs. 370.00 for Medium to Long term investment. CAIRN INDIA to declare its results on April 20th 2012.

SOTP valuation (FY2013E)
BUSINESS SUBSIDIARY (FY13E) Value per Share (Rs.)
MBA (DCF) 286.00
Ravva and Cambay basin (EV/BOE 11x) 9.00
Barmer Hills (EV/BOE 8x - 50% disc. to MBA) 11.00
Other exploratory (EV/BOE 4x-75% disc. to MBA) 36.00
TOTAL EV 342.00
NET DEBT(25.00)
EQUITY VALUE (Rs.) 367.00


KEY FINANCIALS FY11 FY12E FY13E FY14E
SALES (Rs. Crs) 10,277.90 13,013.50 16,429.90 16,399.90
NET PROFIT (Rs. Crs) 6,334.40 8,693.50 11,095.20 9,415.70
EPS (Rs.) 32.40 44.40 56.70 48.10
PE (x) 10.90 7.90 6.20 7.30
P/BV (x) 1.70 1.50 1.20 1.20
EV/EBITDA (x) 8.00 5.50 3.80 3.90
ROE (%) 17.10 19.80 21.20 16.50
ROCE (%) 16.30 19.10 20.50 16.20

I would buy CAIRN INDIA Ltd with a price target of Rs. 370 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. 312.00 on every purchase.
READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

Tuesday, April 3, 2012

COAL INDIA : A HOT FAVORITE STOCK OF INVESTORS !!!

Scrip Code: 533278 COALINDIA
CMP:  Rs. 341.20; Buy at Rs.320 - Rs. 330.
Short term Target: Rs. 370, 6 month Target – Rs. 410; 
STOP LOSS – Rs. 313.90; Market Cap: Rs. 2,15,514.35 Cr; 52 Week High/Low: Rs. 422.35 / Rs. 293.60
Total Shares: 631,63,64,400 shares; Promoters : 568,47,27,960 shares –90.00 %; Total Public holding : 63,16,36,440 shares – 10.00 %; Book Value: Rs. 30.77; Face Value: Rs. 10.00; EPS: Rs. 13.03; Div: 39 % ; P/E: 23.14 times; Ind. P/E: 19.08; EV/EBITDA: 42.21.
Total Debt: 1,370.43; Enterprise Value: Rs. 2,16,884.78 cr.

COAL INDIA LIMITED: CIL was incorporated in 1973 in Kolkata, India. It was formerly known as Coal Mines Authority Limited. CIL is a leading public sector undertaking engaged in coal mining & selling coal fines in India and is working on establishing its footprint globally through acquisitions. Company operates 471 mines in 21 coalfields across 8 states in India, which includes 163 open cast mines, 273 underground mines & 35 mixed mines – open & underground mines. CIL operates through its 9 wholly owned subsidiaries, of which 1 subsidiary is engaged in exploration and feasibility study analysis. Its subsidiaries include Eastern Coalfields Ltd (ECL), Bharat Coking Coal India Ltd (BCCL), Central Coalfields Ltd (CCL), Northern Coalfields Ltd (NCL), Western Coalfields Ltd (WCL) and South Eastern Coalfields Ltd (SECL). CIL has total reserves of 64.3 billion tons and proved reserves of 52.4 billion tons, of which extractable reserves stands at 21.7 billion tons. The company also provides middlings used by fuel plants, brick manufacturing units, cement plants, industrial plants, as well as for power generation. CIL coal fines/coke fines are used in industrial furnaces, as well as for domestic purposes. It serves primarily power, steel, cement, and fertilizer industries.

Investment Rationale:
Coal India signed an agreement with the five recognized union to hike 25 % wages till 2016 which is expected to add about Rs. 4,000 Cr to the company’s annual wage bill. The company has already made provision on wage for Rs. 333 Cr in Q3 FY12 which will take total employee cost to Rs. 5,622 Cr during the quarter. It accounted Rs. 750 Cr during Q2FY12 for the wage hike. CIL has shifted from Ultra Heat Value mechanism to Gross Calorific based value pricing mechanism which will be based on international pricing system. The company does not expects increase in price through the shift in price mechanism. However the application is in process and the company is likely to review on its pricing this April, this will likely to improve the profitability of the company. Investors are keenly watching the production data of CIL in the last quarter Q4. The company has target of 430mn ton for FY12 lower from its earlier target of 460mn tons due to bad weather condition and delay in land clearance. If the company will achieve this target it would be still lower than previous year’s output of 431.32mn tons. However, given the current rate, it seems difficult for the company to meet its target. In the first nine months of the current year the company’s production output was only 291.24mn ton as compared to 299.45mn tons in nine months of previous year. Prime minister office’s (PMO’s) recent announcement to increase the fuel supply agreement (FSA) trigger level from the earlier 50 % to 80 % for power sector this would warrant substantial expansion in CIL’s volumes. Subsequent to PMO’s announcement, it is expected that there will be speedy clearances for the projects (117 projects with capacity of 200mtpa) stuck due to hazy policies of MoEF like ‘Go, No-Go’ attitude. It is expected that the existing 5- 6 % CAGR growth trajectory of COAL INDIA to accelerate to 7 % - 8 % during the 12th Five year plan. Management at various forums guided that increased supplies to power sector would lessen its e-auction quantity from the existing 12 % to 8 % of the total quantity by the end of FY17. Given the highly profitable profile of e-auction, it would require CIL to take an increase of 4 % in realisation of its (excl. e-auction) volumes. The increase seems marginal in the light of the fact that CIL has not increased prices for the power sector (consumes 75 % of the volumes) during the last two and a half years. An increase in prices by 10 % - 12 % during Q4FY12 is expected from CIL which is enough to drive the EBITDA growth by 10 % - 12 % in FY13.

Outlook and Valuation:
During the quarter the company’s production grew marginally by 0.7 % Y-o-Y to 114.6mn ton compared to 113.7mn ton in Q3FY11 due to a day’s strike on account of bonus negotiation. Further, off take also declined by 0.1 % to 110.3mn ton compared to 110.4mn ton in previous year. This led revenue to grow only by 21 %Y-o-Y to Rs. 15,349.20 Cr in Q3FY12 v/s R. 12,686.70 Cr in Q3FY11 despite the volume growth and price hike in February last year. EBITDA grew by 33.6 % Y-o-Y to Rs. 4,542.10 Cr in Q3FY12 v/s Rs. 3,399 Cr in Q3FY’11. Despite steady off take, the company managed to improve its margins with low operational cost and price hike. Profitability grew by 54 % Y-o-Y to Rs. 4,037.70 Cr in Q3FY12. Coal India plans to pay Rs. 5,684.70 Cr as dividend to the government in 2011- 12 more than double the amount paid last fiscal. Backed by the 6 % growth in volumes and 5 % increase in blended realisations, CIL’s earnings are expected to grow at a CAGR of 15 % during FY12-14, despite sharp increase in the wage cost. On the basis of  DCF, assuming risk free rate of 9%, beta of 0.58 and assuming cost of equity at 12.7 % and terminal growth rate of 5.2 % on the future cash flows, I arrive at an intrinsic value of Rs. 360/share.

KEY FINANCIALS FY11 FY12E FY1E FY14E
SALES (Rs. Crs) 50,233.60 59,420.20 65,569.40 71,237.50
NET PROFIT (Rs. Crs) 10,867.40 14,614.50 16,175.60 19,012.90
EPS (Rs.) 17.20 23.10 25.60 30.10
PE (x) 18.80 14.00 12.60 10.70
P/BV (x) 6.10 4.70 3.70 3.00
EV/EBITDA (x) 11.90 9.10 7.60 6.00
ROE (%) 36.80 38.00 32.90 30.90
ROCE (%) 33.20 35.10 30.70 29.10

I would buy COAL INDIA LTD with a price target of Rs. 370 for Medium to Long term and Rs. 410 for the Short term players. 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. 313.90 on every purchase.
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