Sunday, August 30, 2009

Oil India - Should you apply ?

Oil India is coming out with an IPO to raise up to Rs 2,777 offering 2.4 crore equity shares. The price band is Rs 950-1,050.- should you apply ?

The company is into E&P space and business model is similar to its bigger peer ONGC.
Company has primary assets in eastern India (assam, arunachal) and is more focused on being a onshore player rather than offshore. It has also selectively diversified across the oil and gas value chain by taking minority stakes in downstream businesses like refining, marketing and distribution. The oil gas mix is 60:40 compared to 90:10 for ONGC.

Financial and Valuation
Mcap = 20,333 crore to 22,470 crore
Mcap to sales =2.80 to 3.10
PE(based on FY09 EPS) = 9.13 to 10.07
PE (based on half yearly nos FY10) = 6.87 to 7.5
Cash on books = 6,100 crore
EV/2P = 3.6 to 4.1

Peer Comparison
OIL would trade at 3.6 to 4.1 x EV/2p which is at a discount to ONGC which is trading at 5.2x EV/2p. ONGC trades at 16 PE whereas OIL is at 10,the gap seems to be larger than justified.

1.E&P is the most risky business in the oil value chain however oil does not have a substitute till date and near future.
2. The price of crude is an unknown factor – if the price drops below $60 per barrel the business becomes nonviable (as told by ONGC chairman).
3. The subsidy policy of GOI is not yet clear and documented.Thus upside is capped until this policy continues.
4. Company is focused in one area – geographic risk.

Should you apply ?
Yes, I am convinced.The valuations are not cheap but not expensive either. Go for it at upper band, you may get modest listing gains but definitely it’s a business to be in for long term investors. We do not have many companies in this space and overtime GOI subsidy policy may be changed since oil bonds are not working out.The company is debt free and likely to have steady growth based on its reserves.

Thursday, August 13, 2009

Six common mistakes

Photo:Nikhil Khade

Two golden rule of investing as told by Warren Buffet –
1. Don’t make mistakes
2. Don’t forget rule no1.

Let’s see some of the common mistakes -

1.Ask the wrong guy: More than half the people who give you advice on CNBC or similar channels are technical analyst. He is a guy who cares nothing about the stock but its price.Would you go to a doctor who gives the same medicine regardless of your ailment?

2.Regret - I wish I bought when Sensex was 7000 it’s moved up so I can’t buy now. Sensex is a small sample of few stocks.why would you not buy something which will have much more value than what the stock price is reflecting?

3.Lack of Patience – My stock are “stuck in a range”, let me buy something that “moves”. Would you be more comfortable about owning a asset which dances to the tunes of the market by the minute, does liquidity guarantee returns?

4.Book profits and don’t book losses: Oh I am great, my stock moved up,let me sell and “book profits”. Money is the same, it may be better to book losses elsewhere, if things are not going as planned. Once it’s clear that you are fighting a loosing battle would you keep rolling downhill?

5.Flavor of the season: DLF and Unitech must be great companies, they talk about them all the time, let me buy. Always be logical, don’t do something because of any other reason besides your conviction. Lots of folks get their head shaven in Thirupati, would you do just because they did it?

6.Blame the world: Everybody is ganging against me; “they” are the reason for my losses. If you don’t take responsibility for your actions, stocks are not a great place for you.

Always remember – we have a market because people disagree.

Tuesday, August 11, 2009

Update on Godrej Industries

I have written earlier about Godrej Industries,it has delivered 100% returns. As expected, recent development is that the company is planning to come out with an IPO for Godrej Properties (GPL).Preliminary news indicate that GPL will be valued at 6000 crore. The current valuation of Godrej Industries is about 4700 crore, which holds over 80% of GPL and multiple other businesses.
Whats the Idea ?
If you see Godrej Industries trade anywhere around Rs 120 to 130 mark, it’s a great buy, even on current levels (at Rs 145) it’s a good buy if you want to factor in the growth of GPL in couple of years.

Thursday, August 6, 2009

Should you keep ridin'g the IT bus ?

photo:Nikhil Khade

Should you cash out ?
IT offshore companies have delivered about 50 to 80 % returns last couple of months. Particularly frontline IT stocks like TCS,Infosys have delivered good numbers and stocks have run up in a jiffy. The obvious question is -should you continue to ride or get off the IT bus?

Bullish case – IT is a play on global recovery as the markets are stabilizing the worst is behind us. As the economy improves more work will be offshored by companies looking to reduce cost. IT companies are zero or low debt and make for a good long term investment.

Bearish case – The recovery will be long and companies may not be able to deliver better results going forward. Customers will be demanding price reductions and volume pickup will be slow due to protracted global recovery. The stocks are already pricing in 20 to 30% growth so valuation look stretched.

So what’s the simple idea for you to make money?

The revenue growth delivered is in the range of 10 to 12% and profit growth is around 17 to 19%. Companies have delivered better majorly on basis of reducing expenses which if reduced beyond a threshold may have a negative impact.Althow i dont see that happening but the point is cost cannot be reduced beyond a limit.

At 20 to 22 times current year earnings the risk reward is in favor of bearish case, you may already be in final leg of the IT rally. The stocks may not sell off a lot but major part of stock price rise is over and done for 2009 I guess.Its prudent to look for better bargains rather than waiting for the stock to reach a particular price point.

You can use this rally to get out of these expensive frontline stocks into midcap trading at a discount. However the catch there is you need to be choosy here.( earnings are more volatile for these stocks). I would prefer to move into some financial or consumer oriented stocks at reasonable valuations.

What are your thoughts ? I would love to hear from you? !! lemme know

Saturday, August 1, 2009

3 points about NHPC IPO- should you apply ?

NHPC is coming out with an IPO of 15% of its share capital (167 crores) at a price band of Rs 30 to 36. One third of issue proceeds will go to the government (about 2000 core) and rest to the company (4000 core). ICRA has rated the issue as “average”, 3 marks out of 5.

You either have to play this for listing gains or for a long term horizon(at least 4 yrs).While the issue looks expensive but may have some listing gains for a couple of days due to trading interest– market conditions permitting. This issue is more expensive than recently concluded Adani power(coal based power generation)

#1 Company’s Business
NHPC has 13 hydroelectric power stations operational (making power from water) with total installed capacity of 5,175MW. The company is engaged in the construction of 11 projects with installed capacity of 4,622 megawatts. Thus if all goes well the company will have about 10,000 MW capacity by 2012. Seven projects have been identified to receive the benefits from this IPO.

While during the project planning itself the company gets into contracts with its customers these contracts are called Power purchase agreements (“PPA”).In the current year the company sold power at price of Rs 2.03 per unit and the company & its subsidiary generated about 17,000 MU in total..Being a PSU, i dont think they
can raise prices easily.

#2 Valuation
Market Cap basis
1. Market cap = 40,225 crore (upper band) to 33,546 (lower band)
Mcap/ mw (2009) = 7.77 to 6.48.
Mcap/ mw (2012) = 4.0 to 3.35 – if all goes as planned.
2. PE based on 2009 EPS = 36.7 to 30.61

I dont have enough info to do a "Sum of parts" valuation.However if the company is able to generate 17,000 mu from 5175 mw @ Rs 2. We can do guesstimation on the sales once 10,000 mw is achieved.

Peer group valuation

The only other major player in exactly the same space is JP Hydro which is trading at about 30 PE but they seem to operating a project of 300 MW.NTPC is at about 22 to 23 and Tata power about 30 PE( as on 01-aug-09). All these players have mcap/mw of about 3 or less. Having said that,the operating margins may be slightly better for NHPC and it is insulated from fluctuation in coal prices.

#3 Risks
1. The gestation period in hydro power projects is much longer since there is need to acquire land , get clearances and then construct the plant etc. Thus its may be more risky compared to coal based plants.

2. Unavailability of water and lack of rainfall may impact the output.

So whats the simple idea? - Should you apply ?
If you are risk averse investor avoid the issue at this price.Although the barrier to entry are high,the business is capital intensive and company may need to dilute equity periodically. If you want to play the trading bounce and have guts - go for it, but do exit once you get the bounce.