Tuesday, April 21, 2009
Nse to exclude 50 stocks from F&O after expiry of existing contracts..
Tuesday, April 7, 2009
Gas Authority of India Ltd. (CMP:Rs.260, FY10E - PE : 11x)
Huge expansion ahead, pipeline network to nearly double in next
3-4 years
During the management meet, GAIL has indicated that the company is very bullish on
the growth of natural gas market in India, and to capture the full benefit, GAIL is
continuing the huge capex plan planned earlier. The company is in the process of
expanding the gas pipeline network from 7000 km currently to 12500 km in next 3-4
years at a capex of around Rs 200 bn. As far as financing is concerned, the company
has already tied up for Rs 120 bn and we don’t expect any difficulty in financing the rest
considering comfortable debt/equity ration and huge investments in ONGC and other
listed companies.
Three of the major pipelines are being completed in phase 1, which will be ending in
2010. In addition, GAIL has planned 3 more pipelines in phase 2, which will be completed by
2012.
Post the expansion total transmission capacity will increase from 150 mmscmd to 300
mmscmd, which will be sufficient to transport all the available gas which includes RIL
gas as well as gas expected from new LNG capacities. Combined with revenue from
petrochemicals, the company has ambitious plan to increase the topline to Rs 50,000-
Rs 60,000 crore by the end of 11th five year plan from current levels of around Rs
23,000 crore.
Sufficient spare capacity available, expect at least 2/3rd of RIL gas
to flow through GAIL network
Management also clarified the market’s doubts regarding lack of spare capacity in HBJ
pipeline, and clarified that sufficient spare capacity is available and the company expects
at least 2/3rd of KG D6 gas to flow through its network. In addition, the company is also
mapping the progress of laying pipelines with incremental gas supply coming in to
ensure that whenever incremental gas supply comes in, the company is ready with the
gas transmission infrastructure to transport it to end customers. GAIL also indicated
that there is sufficient spare capacity for the first 40 mmscmd coming out from RIL , and stated that HBJ and DVPL pipelines together have 15 mmscmd spare capacity,
which will be enhanced by another 10 mmscmd by end of FY10. With 8 mmscmd
expected to flow through GAIL’s AP pipelines and another 8 mmscmd through DUPL
pipeline in Maharashtra, GAIL aims to transmit at least 30 mmscmd of KG gas once
production ramps up to 40 mmscmd.
Tariff charges for existing pipelines expected to remain at current
levels
GAIL management is confident on the issue of regulatory risk to pipeline tariffs, and
stated that they see no reduction in tariffs of the core HBJ/DVPL network following
introduction of regulation on the ground that these were decided in the past by the
government itself. This is in-line with our estimate of flat transmission tariffs gong forward.
Company focusing on increasing petrochemical capacity
In addition to gas transmission, another segment on which the company is betting big
is petrochemical segment, which contributes nearly 50% to the bottom line. Currently
GAIL has a total petrochemical capacity of 440000 MT in Pata, which will increase to
500000 MT with the commissioning of 6th furnace. The company is looking to double
the
Capacity of Pata plant in next 4-5 years. Also, the company ahs plans to set up one
petrochemical plant outside India, which according to our view will take a long time to
materialize.
CGD and E&P the next growth driver
Going forward, Gail is also focusing on city gas distribution front. The company already
operates CGD networks in several key cities via nine JVs, and plans to
expand this further to more cities. E&P is another area where GAIL is seeking
diversification and is actively bidding for NELP blocks. Currently the company has stake
in 30 blocks, and in future if there is any success in exploration efforts, we expect
significant re-rating of the stock.
No plans to list Gail gas
GAIL has spun off gas marketing business into a new company, which was on the
expected lines as the company was already keeping separate books for both the
businesses. GAIL will focus only on transmission and petrochemical business, and the
new company GAIL Gas (GGL) will run the marketing and city gas distribution
businesses from the next fiscal year. GGL will take over GAIL India’s marketing activities
like the city gas projects. The new entity will also distribute and market CNG for vehicles,
piped natural gas for domestic or industrial use and and auto LPG both in India as well
as abroad. It also plans to set up retail CNG and LNG outlets across the country
We do not see any impact on financials of the company as it is simply an accounting
exercise, and moreover the company has denied any plans to list the company on the
bourses. We see this move as purely a move to meet the policy guidelines as according
to the policy guidelines issued by the Petroleum and Natural Gas Regulatory Board,
GAIL had to split its gas transportation business from the marketing and the trading
business. The policy was drawn to prevent unfair competition that resulted from the
ability of integrated companies like GAIL to cross-subsidise its activities.
Valuations
After the recent run up, the stock is trading at 12.5x and 11x FY09E and FY10E earnings
respectively. Although we are bullish over the long term prospects of the company keeping
in view the huge upside in transmission volumes, over the near term in next 1-2 years,
we expect growth to remain muted mainly on account of poor performance of
petrochemical and LPG business. Petrochemical and LPG business, which currently
contributes around 50% to its profits are still in the downturn, and expected to remain
under pressure till global situation improves. Going forward, from FY08-FY11, we expect
earnings of the company to grow at a muted CAGR of 6.6% in spite of assuming 15.4%
CAGR in gas transmission volumes from 85 mmscmd in FY08 to 130 mmscmd in FY11.
In view of muted growth expected in next 2 years, s. Keeping in mind the decent gains posted by the stock
in the recent market rally. ------L.KANNAN
Dishman Pharmaceuticals & Chemicals Ltd (CMP:Rs.97, FY10E - PE : 4x, )
New drug unit to improve CRAMS operations
Dishman Pharmaceuticals & Chemicals Ltd (Dishman), is setting up a Rs.350mn US
FDA and MHRA approvable drug formulation unit at the Bavla plant in Gujarat. In fact,
this facility will be designed to provide complete package of CRAM services, right from
Contract research to Dosage forms, satisfying the entire drug life cycle. The company
plans to finance this investment through internal cash accruals.
Following this arrangement, Dishman is in the process of finalizing a deal with a client
for orders which will account for 30% of the unit’s capacity from its inception. This unit
will however make drugs on a contract basis for its clients. The company has no plans
to enter the generic formulations market.
Multiple expansions to power earnings
Dishman, during FY09 commissioned 4 new plants at its Bavla facility, of which one
has been exclusively apportioned to manufacture Eprosartan API for Solvay that has
increased the Eprosartan capacity from 60tpa to 200tpa. On the similar lines, the
company has assigned one of its other plants to meet the requirements of AstraZeneca’s
14 API supply agreement. Another, two plants have been visited by large MNC pharma
companies like GSK, Pfizer, Novartis and have expressed their interest in entering into
manufacturing contracts going forward.
Alongside, the new Bavla Hi-Potency facility (which is under construction and will
manufacture cancer products for Carbogen-Amcis) is expected to start its operations
from June 2009 ensuring robust earning visibility. Further, additional traction is expected
out of the China facility which is likely to be commissioned from July 2009.
On top of the recent facility expansions (which is the prime indicator growth in CRAMS
business model), the new set up of Rs.350mn drug formulation unit at Bavla indicates
huge potential awaiting in the CRAMs segment for the company. Likewise the recent
agreement with Europe based - Polpharma for co-operative & joint API development
ensures additional contract research & manufacturing business flow for Dishmans’
new facilities.--- L.KANNAN
Wednesday, April 1, 2009
Kirloskar Oil Engines Ltd
(Rs.56, FY10E - P/E 9x)
Demerger of engines and auto component business from the
Company
Kirloskar Oil Engines Ltd (KOEL) has announced the demerger of Engine and Auto
Component business of the Company into Kirloskar Engines India Ltd (KEIL). After
the demerger KOEL would continue to hold investments in its books while KEIL would
represent core engines and auto component business. KOEL after Q3FY09 results
informed that it’s Board of Directors had constituted a Committee of Independent
Directors to examine merits of reorganizing the various businesses and investments
of the company, including by way of restructuring and /or demerger of the Company.
The effective date of demerger has been decided as 1st April 2009.
Existing shareholders to get 3 shares of KEIL for 4 shares in KOEL
KOEL has fixed demerger ratio at 3:4 which means existing shareholders of KOEL to
get 3 shares of KEIL for every 4 shares held in KOEL. The company has not disclosed
the method of valuation for demerger. But we believe it to be mainly based on book
value and potential value of unlisted investments. We believe the valuation has given
due consideration to potential of unlisted companies (Toyota Kirloskar, Toyota Kirloskar
Auto Parts, T G Kirloskar Automotive etc) which is reflected in demerger ratio.
KEIL ‘s equity capital after the demerger would be ~146mn equity shares of Rs.2 each
(~Rs.291mn). KOEL as on 31st March 2008 held book value investments of ~Rs.4.76bn
which includes strategic investments and investments in mutual funds. The current
market value of these investments is ~Rs.1.9bn and including the book value
investments of non-quoted investments and mutual fund investments, the investment
on the books are at Rs.4.93bn.
KOEL’s valuation has not been reflecting the value of investments it holds in the balance
sheet and because of which we believe the company has taken the decision to demerge
core business into separate company, KEIL.
KOEL has emerged as the flagship holding company for all the auto related businesses
of the Kirloskar group. KOEL also holds strategic investment in Kirloskar Brothers,
Kirloskar Ferrous, Swaraj Engines, Toyota Kirloskar Motors and Toyota Kirloskar Auto
Parts. Apart from strategic investments KOEL has invested in certain unquoted group
companies and mutual funds. KOEL’s listed companies and book value of unlisted
valued at Rs.4.93bn.
Further companies like Kirloskar Brothers, Toyota Kirloskar Motors and Toyota Kirloskar
Auto Parts have been registering impressive growth and would command higher
valuation in long term and would be beneficial to KOEL. We believe after the demerger
of engines and auto component business into KEIL, KOEL would reflect true value of
its investments.
Company Background
KOEL incorporated in 1946 is a part of the Pune based Kirloskar group and is headed
by Mr. Atul Kirloskar. KOEL is one of the leaders in manufacturing of Diesel Engines,
Engine Bearings, Engine Valves & Diesel Generating Sets. These engines find
application in agriculture, material handling, mining machinery, construction equipments
and marine and defence applications. KOEL has manufacturing facilities at six locations
- Pune, Ahmednagar, Nasik, Solapur, Kagal and Hospet( with a proposed facility at
Silvassa coming up). During FY08 KOEL earned 93% of its total revenues from engines
(5HP-11000HP), 5% from auto components (Bearings and Valves) and 2% from other
strategic business unit (Fuel Oil Trading). KOEL also exports its engines and auto
components.----L.Kannan