Buy Rohit Ferro For Medium Term

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Rohit Ferro-Tech Ltd.:
CMP:82
TARGET:177.88
TIME HORIZON 12 MONTHS

Rohit ferro-tech is one of the leading player in Ferro alloys industry. Wile timely expansion , this company has become one of the largest Ferro alloys producer in India, with presence in mineral-rich states of orissa and west Bengal. company’ s recent 60% stake in coal mines in Indonesia would take RTFL closer to becoming integrated Ferro alloys producer.

Targets production volume of 165000 tonnes for FY’09 Rohit Ferro Tech (RFT) held a conference call to discuss their recent mine acquisition in Indonesia and future plans.

Highlights.
• Total long term debt as on 31st December is about 70 crore. Short term (with a working capital) is about 75 - 80 crore. The cost of borrowings is at an average of 11%.
• For the FY’09 the target in terms of production is 165000 tonnes. Out of 165000 tonnes, approx. 130000 would be Ferro Chrome, approx. 20000 tonnes would be Silico Manganese and approx.15000 tonnes would be Ferro Manganese.
• The consumption of Chrome ore is approximately 2.5 tonnes per ton of Ferro Chrome manufactured, that of Manganese ore is approximately 2.2 tonnes per ton of Ferro Manganese manufactured.
• The total Capex over the next 2 years (FY’09 and FY’10) is expected to be around Rs 600 crore (excluding the Haldia project). Around Rs 525 crore would be for setting up a 110-megawatt coal based power plant.
Furthermore the capacity in Jajpur is being enhanced to 1,60,000 tonnes per annum by addition of 33 MVA furnace at a CAPEX of 75 crore
• Both the power plant as well as the capacity expansion at Jajpur is expected to be operational by third quarter of FY’10.

RFT has entered into an MOU with PSP Group (PT Pacific Samudra Perkasa) to acquire 60% economic interest in two coal mining companies in Indonesia through its newly incorporated wholly owned subsidiary in Singapore named SKP Overseas Pte (SKP).

The details of these 2 companies are as follows –
PT Palopo Indah Raya
Mining Concession – Thermal Coal (5400 – 5600/Kcal)
Location – Central Kallmantan
Coverage Area – 3843 hectares
Reserves – 20 Million MT approx
Production estimated – from July’2008 onwards.

PT Bara Prima Mandiri
Mining Concession – Coking Coal (7800 – 8300/Kcal)
Location – Central Kallmantan
Coverage Area – 3851 hectares
Reserves – 5 Million MT approx
Production estimated – from June’2009 onwards.

SKP will have long-term off take agreement at preferential rate with PT Palopo Indah Raya and PT Bara Prima Mandiri for purchasing 60% of their output for sale to RFT and third parties.

Besides meeting RFT's current coking coal requirements (for manufacturing ferro alloys) and future requirements of thermal coal (for RFT’s proposed captive 110MW power plant which is expected to be commissioned by June’09) the output of these mines will also be used for external sales. RFT currently uses over 125000 tonnes per annum of coking coal and will need about 300000-400000 tonnes per annum of thermal coal when the power plant is up and running.

Valuations

We have valued company ’s core Ferro alloys business at Rs131/sh using avg multiplies of FY10E EPS AND EBIDTA. we remained valued at 100% subsidiary SKP overseas using DCF to arrive at ADCF-BASED fair value at 100/sh. We initiative coverage on the company with a buy recommendation and a price target of RS/178 over one year. current ly the stocks is trading at Rs82, an upside of 50 %from current levels.

MARKETTREND766
dD TEAM

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BGR Energy's prospects appear bright due to the large orders it has bagged, foray into EPC space and huge opportunities in its businesses.

BGR Energy Systems has been in the news on account of a few developments, and for the better. The company’s order book, which was about Rs 3,000 crore a couple of months ago, has now gone up significantly to Rs 11,000 crore.

This improvement is mainly on account of the order worth Rs 3,100 crore the company received from Tamil Nadu Electricity Board. And, very recently, the company bagged its biggest order ever, for EPC works, worth Rs 4,900 crore from Rajasthan Rajya Vidyut Utpadan Nigam.

Importantly, these orders, in a way, highlight the company’s capabilities, as both of them were won amid stiff competition, including from the likes of BHEL. Little wonder, the company’s share price, which had declined almost 67 per cent during the recent market correction, is now up from its low of Rs 220 to the current levels of Rs 306.

Notably, these recent order wins have not set the company resting on its laurels. BGR is now eying a significant share of the upcoming opportunities in the form of orders worth Rs 20,000 crore, which should further improve its order book in the next six to eight months.

Sizable opportunity
The growing investments in the power sector have translated into huge opportunities for many companies, directly and indirectly catering to the needs of the sector.

BGR Energy Systems is one such player generating about 90 per cent of its total revenues from the BOP (balance of plant) and EPC (engineering, procurement and construction) works undertaken for the power sector.

Typically, power generation companies and large EPC contractors outsource the ancillary systems (excluding key equipment like boilers, turbines), components, structures and services required for the completion of the power plant to the third parties, which is popularly known as BOP (balance of plant) work.

BGR provides BOP services and equipment required for the construction of power plants; mainly gas and coal based power plants. Notably, the BOP opportunity is quite significant. According to industry estimates, a major part of the total power project cost or about 40 per cent is earmarked towards BOP equipment and services.

In India, work contracts for about 16,000 mw is yet to be announced for the eleventh five year plan. Also, for the twelfth five year plan, which targets a capacity addition of about 85,000 mw, orders will start flowing from the FY10 onwards.

Considering this, the industry estimates about 50,000 mw of capacity addition over the next five years, including 35,000 mw in coal and gas based power plants. This would translate into significant opportunity in the BOP space, which is estimated at Rs 55,000 crore over the next five years. BGR, which is among the leading players in BOP segment, which contributes about 60 per cent to its total revenues, should emerge as a key beneficiary of the unfolding opportunity.

New growth avenues
In addition to this, there are equal opportunities in the EPC (excluding BOP, which forms a part of the total EPC) segment as well.

The value of EPC works (excluding BOP) as a percentage of total power project cost works out to about 40-50 per cent. Industry experts estimate this opportunity to be worth Rs 71,000 crore over the next five years based on the proposed capacity addition.

However, EPC projects require proven capability and experience, thus this segment is currently dominated by the large domestic and international players. BGR is scaling up its capabilities in this business gradually. And despite the competition from the large EPC companies such as BHEL, it has been successful in procuring large EPC projects recently.

Earlier, the company bagged a 600 mw project Tamil Nadu Electricity Board worth Rs 3,000 crore, and now, it bagged two projects of 600 mw each from the Rajasthan Rajya Vidyut Utpadan Nigam with a combined value of Rs 4,900 crore. Consequently, EPC’s share in total revenues will rise to roughly 50 per cent in FY10 as against 20 per cent in FY08.

But, despite the rising share of EPC (which typically enjoys lower margins of 9 per cent as against 11 per cent in BOP), economies of scale in the business is expected to help improve operating margins, albeit marginally, from 10.5 in FY08 to about 11 per cent. With these developments, the company is expecting its net profit margins to improve from 5.8 per cent in FY08 to about 6.5 per cent in the next two years.Investment rationale
Even as there is competition in the segments that the company operates in, there are equally large opportunities, including in the BOP space where the company is among the leading players. The benefits from its foray into the EPC business and further success in winning large projects will drive BGR’s future growth.

Given the current order book, which stands at over 7.2 times its FY08 revenues, there is good earnings visibility for the next three to four years. With faster execution of these projects, the company’s revenues and earnings are expected to grow at a CAGR of 60 per cent over the next two years.

At Rs 288, the stock is trading at 17 and 10 times its estimated FY09 and FY10 earnings, respectively. The faster growth, vast opportunity in the power sector and reasonable valuations make BGR a good investment. Investors can expect returns of 45-50 per cent over the next 18 months.

BUY BGR ENERGY FOR 500+ THREE MONTH TARGET


CHEERS
MARKETTREND766

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Significant developments since our earlier ‘buy’ recommendation on Mahindra and Mahindra (M&M) in March this year prompts us to take a re-look at the stock. While the amalgamation of Punjab Tractors and the recent joint venture in China bodes well for volume growth (tractors) in both the domestic and export market, the timing of the entry into the two-wheeler segment strikes a note of caution.

However, improved performance in the farm equipment division, capacity expansions and planned launches in the utility and commercial vehicles segment, present good earnings prospects over a three-four year time-frame, notwithstanding the pressure on margins due to increased input, interest and depreciation costs in the near-term.

At the current market price of Rs 554, the stock trades at an attractive price-earnings multiple of about 12.5 times its trailing 12-month standalone earnings. For investors with a long-term perspective and an appetite for risk, the current price provides an attractive entry point.
Tractors lend promise

On the farm equipment front, unlike the first quarter of FY-2007, the sector has opened the year on a high note, with a ten per cent year-on-year growth in tractor sales in the April-June quarter. While a part of this growth may have been triggered by advance purchases in expectation of a price increase, agricultural loan waivers announced in the Budget and normal monsoons do lend a positive outlook for this segment’s growth.

Two, the company has entered into a joint venture with the Yangcheng Tractor Company in China last month. M&M already has a footprint in China through its JV with the Jiangling Tractor Company (Mahindra China Tractors). Unlike Jiangling, which has a presence only in the 18-25 HP (horse power) segment, Yangcheng has a presence across all capacities — from 16 HP-125 HP, thus supplementing products and providing scope for consolidating the Chinese operations and improving market share.

Besides, exports to the US and Europe will also receive a fillip as this JV will give M&M a second low-cost export base. Using the well-established distribution network of Yangcheng, M&M can also find new markets for exports.

For tractors manufactured in India too, this acquisition will help save costs as M&M now has a broader vendor base in China to source components from, thus providing greater negotiating power. This comes in handy especially when the company has announced plans to produce ultra-low cost tractors in India (in the Rs 2 lakh range) to delve deeper into the rural markets.

Three, M&M picked up a majority stake in Punjab Tractors (PTL) last year and subsequently amalgamated the company with itself. Though this move will dilute equity by about 7 per cent, synergies from the deal such as a cost-effective vendor base for raw material procurement, a foothold in the northern markets where PTL’s ‘Swaraj’ brand has a strong presence and the use of excess production capacities of PTL for M&M will provide an impetus to earnings.
Two-wheeler foray

Another development that warrants attention is the acquisition of Kinetic Motors and the consequent entry into the two-wheelers segment. The company had earlier in the year acquired an Italian design company, Engines Engineering, which specialises in two-wheeler design and develops motorcycle prototypes.

The company plans to cater to the demand for two-wheelers in the rural and semi-urban areas using its tractor distribution network. At the other end, the company is also gearing up to meet the shift in urban preferences towards high-end, premium bikes. For this, the company is in talks (for a possible takeover) with the Italy-based Malaguti Moto, which has products in the ‘250cc and above’ category.

At a time when there is stiff competition in the industry and existing players themselves are faced with unfavourable market conditions due to tightening credit availability and rising input costs, questions remain on the prospects for this venture.

This may create additional burden on the resources as Kinetic Motors itself has a small market share and is cash-negative. But, given the small size of the company (turnover of Rs 102 crore in 2007-08) this is unlikely to impact M&M’s earnings significantly in the next few years.
Sustained demand

For the quarter-ended June 2008, the automotive division recorded a healthy 28 per cent growth in volumes, led by the Scorpio and Bolero models. Exports too grew 31 per cent in the same period, backed by vehicle launches in Turkey and Paraguay.

Being a player in the UV and LCV segment, the company has been shielded from the slowdown in the medium and heavy commercial vehicle and two-wheeler segments in the last one year.

Going forward, M&M has planned few other launches to sustain its growth momentum. The Ingenio, a multi-purpose vehicle (MPV), will hit the roads in the last quarter of 2009.

Priced attractively between the Scorpio and the Bolero, the MPV will take on Toyota’s Innova. The company is also launching a mass-market platform, similar to the Tata Ace in 2010 as well as a successor to the Scorpio over the next two years.
Financials

In the first quarter, net sales grew by 26 per cent Y-o-Y to Rs 3,293 crore. Profits fell by 16 per cent to Rs 160 crore, primarily due to a mark-to-market loss on FCCBs. Operating margins too declined by about 1 percentage point to 9.5 per cent due to hike in commodity prices.

To compensate for the increased raw material costs, the company had effected a price increase of about Rs 10,000 on tractors and Rs 8,500 on utility vehicles during the quarter.

Although this does not fully cover the rise in input costs, any further price increase may be difficult as the government has already slapped an additional excise duty of Rs 15,000-20,000 on MUVs and SUVs in mid-June.

What can give respite to the pressure on the operating margins is the fact commodity prices are on the downtrend. But this might show up only in the medium-term as the lag effect of higher prices may remain in the next one or two quarters.