Uni Abex Alloy Products

1.) Uni Abex Alloy Products is a Naterwala group co. 

2.) Co. manufactures centrifugally cast alloy steel tubes and heat resistant alloy steel castings. 

 

3.) 65% of cos. sales come from Decanter segment. Decanter is a solid liquid separation equipment used in food processing, alcohol, sewage etc. Alfa Laval is the biggest customer contributing to 33% of total sales. 

4.) Around 30% of revenues are coming from exports.

5.) The co started supplying to the decanter industry in the early part of last decade which caused sales to jump 4x during FY03-07 but as the co. reached saturation in the decanter segment, the revenues have been stagnant at around Rs.60Cr. since FY07-12.

6.) The co. is the only major Indian supplier of centrifugal alloy steel castings to the decanter industry.

7.) Iron & Steel and Petrochem sectors contribute to the remaining 35% sales. Going forward, the co. hopes to increase revenues from these segments.

8.) Although sales have remained constant since the last 5 years, the OPM has increased from single digits till FY08 to around 20% thereafter. The management claims that the increase in margins is due to cost control, process efficiencies & technical improvements. Moreover, the RoE has averaged over 25% during FY07-12.

9.) The co. owns & operates a 10 acre plant in Thane which is around 35 - 40 years old & the plant & machinery is ageing. Hence the co. has acquired a 30 acre plot in Dharwad, Karnataka & is setting up a greenfield factory with a capital outlay of Rs.44Cr.

10.) Out of the total capex of Rs.44Cr., the co. has already spent Rs.10Cr. & the remaining Rs.33Cr. will be funded through a debt of around Rs.20Cr. & the rest through internal accruals. The plant is expected to commence operations by mid 2013.

11.) The 10 acre Thane plant land is expected to fetch over Rs.100Cr. at current market prices. There is a strong chance that after 3 - 5 years, the co. might shift its manufacturing operations completely from Thane to Dharwad once the greenfield plant stabilizes.

12.) The management is not experiencing any slowdown in business due to slack  domestic & global economies. 

13.) VALUATIONS : TTM

CMP = Rs.139Cr.

MCap. = Rs.27.5Cr.

Net Sales = 64.4Cr.

EBITDA = Rs.12.45Cr.

PAT = Rs.8.2Cr.

Networth = Rs.43.8Cr.

Debt = 0

PE = 3.35x

P/B = 0.6x

EV / EBITDA = 2.2x

14.) PORTFOLIO WEIGHTAGE = 1%

AVANTI FEEDS LTD.

1.) Till 1999, 99% of Thailand's shrimp production was Blacktiger. Today 99% of shrimp output is Vennamei. Thailand is the largest shrimp exporting nation in the world.

2.) Vennamei was permitted in India by the govt. in August 2009. Today Vennamei constitutes around 50% of the domestic shrimp production & is expected to go over 90% in the next few years.

3.) Cost of production of Vennamei is far less than Black Tiger & the yield is higher.

4.) Today, India is the lowest cost producer of shrimps. During FY12, shrimp exports constituted 50% of the total seafood exports from India. In rupee terms the value of shrimp exports was Rs.8144Cr. vs Rs.5566Cr. in FY11 & Rs.4167Cr. in FY10.

Due to India's long coast lines, India has a natural advantage in shrimp production.

5.) AFL has 2 main divisions :

i.) Shrimp Feed

ii.) Processed Shrimp (Exports)

i.) Shrimp Feed - The co. manufactures & sells shrimp feed to shrimp farmers. This division contributes around 70% of the sales of the co. 

There are around 15 shrimp feed manufacturing plants in India. CP is the largest shrimp co. in the world. In India, CP & AFL control 90% of the shrimp feed  market. Shrimp feed market is obviously directly proportional to shrimp production. According to the management, there is some 'stickiness' in the shrimp feed business as the farmers dont shift to other feed manufacturers.

Cost of shrimp feed as % of total cost of production of shrimp is low.

During FY12, the co. sold around 60,000MT of shrimp feed for Rs.271Cr. AFL has also increased its installed capacity from 52,000MTPA to 1.1L MTPA and plans to increase it further. 

FY13E Shrimp Feed Volumes = 90,000MT or 50% volume growth yoy.

The Shrimp feed prices have increased this year so the realizations would also be higher.

Therefore, the co. should do sales of around Rs.400-450Cr. from this division in FY13.

  

ii.) Processed Shrimp - AFL buys grown up shrimps from the farmers, processes & exports shrimps in frozen form. Around 1/3 of the revenues come from this division. If the cost of production of shrimps in India is competitive as it is now, then this division should do well. Also rupee depreciation is hugely beneficial to this division. Around 75% of the exports were to USA.

During FY12, this division achieved sales of Rs. 120Cr. (exports = 108Cr.) on volumes of 2102MT. The company has recently increased capacity of shrimp processing from 2720 MTPA to 8000 MTPA. 

The exports from this division were down to 10.7Cr. vs 28Cr. yoy in Q1FY13 due to plant closure for increasing capacity.

AFL earned Export Incentives (DEPB) of Rs.11.6Cr. on Exports of Rs.108Cr. during FY12. Hence, export incentives constitute around 11% of export sales. These export incentives are expected to come down in future possibly leading to erosion of margins.

Shrimp prices have recently declined which might also put the margins under pressure. 

The management believes that the threat of anti dumping duty by USA, as happened in mid 2000's is now behind us. 

6.) Shrimp business is seasonal. H1 > H2. 

7.) HATCHERY - AFL is setting up a Vennamei Hatchery for producing vennamei seeds near Chennai. This plant will be set up with an investment of around 15Cr. & will be commissioned by mid 2013. Thereafter AFL will become an integrated shrimp co.  

8.) The biggest threat to the shrimp industry is Disease. Vennamei is far more disease resistant than the conventional Black Tiger variety. Moreover, the GoI is taking bio-security measures to prevent such diseases.

9.) AFFORDABILITY - Shrimps were once considered an expensive food but now Mutton, Fish & Shrimp all cost Rs.400/- per kg. Hence, the affordability of shrimps has increased in the domestic market but the lack of cold storage is a big impediment. 

China is the largest shrimp producer in the world & was once a net  exporter but has now become a net importer due to the rise of domestic demand.

Western markets are also shifting to sea food from red meat due to health considerations. 

10.) TUF - Thai Union Frozen Products is the second largest shrimp co. in Thailand after CP. TUF now holds 25% stake in AFL & has 2 members in the board of the latter. AFL also paid Rs.1.5Cr. Royalty to TUF during FY12 for imparting technical expertise. 

The association with TUF has clearly helped AFL in shifting from Black Tiger to Vennamei. TUF is also assisting AFL in setting up the Hatchery project.

11.) CAPEX - The total Capex for FY13 & FY14 is ~ Rs.40Cr.

12.) SALES :

FY13E ~ Rs.500 - 550Cr.

FY14E ~ Rs.750Cr. 

13.) THREATS :

i.) Disease Outbreak. 

ii.) Crash in Shrimp prices leading to fall in shrimp production & consequently lower shrimp feed demand.

iii.) Oversupply in Shrimp Feed market.

 

14.) VALUATIONS :

CMP = 145/-

MCap = 130Cr.

TTM :

Sales = 440Cr.

EBITDA = 50Cr.

PAT = 30Cr. (including extraordinary items worth Rs.6Cr.) 

Net Debt = 15Cr.

Networth = 104Cr.

EV = 145Cr.

EV / EBITDA = 2.9x

PE = 4.33x

P/BV = 1.25x

RoE = 27%

15.) GROWTH : FEED

                           Volumes                 Revenues

FY09                14,050MT                Rs.38Cr.

FY10                16,000MT                Rs.53Cr.

FY11                36,700MT                Rs.133Cr.

FY12                60,000MT                Rs.271Cr.

FY13E              90,000MT                Rs.400 – 450Cr.

CAGR              59%                          80-85%

GROWTH : PROCESSED SHRIMP

                           Volumes                 Revenues

FY09                746MT                      Rs.28Cr.

FY10                936MT                      Rs.36.5Cr.

FY11                1327MT                    Rs.64.5Cr.

FY12               2102MT                    Rs.120Cr.

CAGR              41%                          62%

BFIL

                                                BF INVESTMENTS LTD.

BFIL is the erstwhile investment division of BF Utilities Ltd. that was demerged in FY10.

CMP = 42/-

MCap. = 160Cr.

Networth = 618/-

Debt = 0

1.)   CASH :

Intercorporate Deposit = Rs.170Cr. (Hence a net-net stock)

Interest receivable = Rs.30.5Cr.

Investment in Liquid MF = Rs.19.5Cr.

Total Cash & Cash Equivalents = Rs.220Cr.

EV = ( - Rs.60Cr.)

Hence, BFIL is a net-net stock.

2.)   QUOTED INVESTMENTS :

Company Name : No. of shares held x CMP = Value of Holding

Automotive Axles – 53.67 lakh shares x Rs.360/- = Rs.236Cr.

Bharat Forge - 58 lakh shares x Rs.300/- = Rs.174Cr

Kalyani Steels Ltd. – 1.7Cr. shares x Rs.60/- = Rs.102Cr.

Kalyani Investment Company Ltd. – 17 lakh shares x Rs.380/- = Rs.65Cr.

HIKAL - 4.36 lakh shares x Rs.320/- = Rs.14Cr

Kalyani Forge – 5.69 lakh shares x Rs.180/- = Rs.10Cr.

Total Market Value of Quoted Investments = Rs.601Cr.

Book Value of Quoted Investments = Rs.220Cr.

Hence the stock is trading at 73.37% discount to the market value of its quoted investments.

3.)   UNQUOTED INVESTMENTS :

Book Value of Unquoted Investments = Rs.168Cr.

4.)   GRAND TOTAL = CASH + QUOTED INVESTMENTS + UNQUOTED INVESTMENTS = Rs.990Cr. or 84% discount to intrinsic value.

    5.) CASH FLOW :

Interest Income = Rs.23.3Cr.

Dividend Income = Rs.25Cr.

Reoccurring PAT = 43.5Cr. (Dividend Income + Interest Income)

PE = 3.67x

All Holding cos. derive value from the underlying value of their holdings but the ones who also make profits through Dividend & Interest Incomes (which are comparable to their MCap) can be valued like any other routine company which earns a profit from its operating business (a cash flow based valuation can be applied as opposed to an asset based valuation).     

Hence, BFIL is not a typical holding company as even apart from the asset value, it has got sustainable & reoccurring operating cash flows in the form of Dividends & Interest Income to the tune of Rs.43.5Cr.per annum. The dividend income of BFIL is a function of the payout & performance of BFL, KSL & Auto Axles.

There is no reason why BFIL should trade at a cash flow yield of 27% at CMP.

6.)   Share Holding Pattern – INSTITUTIONAL EXODUS :

Institutions                                           Promoters

31/12/10 -                      10.89%                                                 66.09%

31/03/11 –                     10.08%                                                 66.12%

Jun-2012 Mar-2012 Dec-2011 Sep-2011 Jun-2011 Promoter and Promoter Group 70.91 % 70.91 % 70.91 % 68.11 % 66.92 % Indian 70.91 % 70.91 % 70.91 % 68.11 % 66.92 % Foreign -- -- -- -- -- Public 29.09 % 29.09 % 29.09 % 31.89 % 33.08 % Institutions 2.83 % 2.83 % 5.58 % 6.64 % 9.49 % FII 2.38 % 2.38 % 5.13 % 6.19 % 9.04 % DII 0.45 % 0.45 % 0.45 % 0.45 % 0.45 % Non Institutions 26.26 % 26.26 % 23.51 % 25.25 % 23.59 % Bodies Corporate 8.37 % 8.50 % 8.36 % 10.29 % 9.40 % Custodians -- -- -- -- -- Total 3,76,67,628 3,76,67,628 3,76,67,628 3,76,67,628 3,76,67,628

As is clear from the table above, Institutional Investors exodus has caused this irrational & faulty price.   

BFIL has been unfairly been valued like holding co.

7.)    TRIGGERS :

I.)                 BFL, KSL & Auto Axles increase their dividends.

II.)              BFIL declares dividend.    

8.)   PORTFOLIO WEITAGE = 1%

KICL

                                    KALYANI INVESTMENT COMPANY LTD.

KICL is a “Holding Company” of Bharat Forge group & is classified as a Core Investment Company.

KICL constituted the investment business of Kalyani Steels Ltd. (KSL) & was demerged from KSL in FY10.

CMP = Rs.380/-

MCap = Rs.165Cr.

Share Capital = Rs.61.96Cr. (this includes, 14% Non – Cumulative Redeemable Preference Shares having book value of Rs.57.6Cr. issued to Kalyani Steel Ltd. as per scheme of demerger )

Total Assets = Networth = Rs.342Cr. (out of this Rs.338Cr. are “Non-Current Investments”)

EV = Rs.222Cr. (treating Preference Share Capital of Rs.57.6Cr. as ‘debt’)

QUOTED INVESTMENTS :

Company Name : No. of shares held x CMP = Value of Holding

BHARAT FORGE : 3.16 Cr. shares x Rs.300/- = Rs.948Cr

BF UTILITIES : 60.6 lakh shares x Rs.410/- = Rs.448Cr

HIKAL : 51.55 lakh shares x Rs.320/- = Rs.165Cr

Total Market Value of Quoted Investments = Rs.1561Cr.

Book Value of Quoted Investments = Rs.182Cr.

Therefore, KICL is trading at a discount of 89.5% from the market value of its underlying holdings.

UNQUOTED INVESTMENTS :

Book Value of Unquoted Investments = Rs.156Cr. (this includes Rs.56Cr. investment in share capital & Rs.84.5Cr. investment in 0.1% Non – Cumulative Redeemable Preference Shares of Kalyani Gerdau Steels Ltd.)

Kalyani Gerdau Steels Ltd. (KGSL) is a JV between Kalyani group & Gerdau. Gerdau is the world’s 14th largest steelmaker and the largest producer of long steel in the American continent. Kalyani Group is a junior partner in this JV. KGSL is in deep losses. KICL is trying to exit this JV. The management is in negotiations with Gerdau to sell their stake and expects to recoup the full investment of Rs.140Cr. (Rs.56Cr. + Rs.84Cr.) in FY13 itself. It remains to be seen when & how much value the co. is actually able to salvage from its investment in this troubled venture.

KICL has issued 14% Non – Cumulative Redeemable Preference Shares worth Rs.57.6Cr. to Kalyani Steels Ltd. (KSL). The co. had to pay Rs.9.3Cr. as preference dividend to KSL during FY12 which constituted 56% of the PAT. Due to this burden, KICL is not able to pay dividend to its equity shareholders.  

If KICL is able to divest its Rs.140Cr. shareholding in KGSL & redeem the Rs.57.6Cr worth of preference shares from KSL, then that will be a big trigger for the stock as the Enterprise Value (EV) of KICL will decrease from Rs.222Cr. to Rs.82Cr.

During FY12, KICL earned Rs.18.96Cr. in dividends from its holdings.

Post Deal (sale of holding in KGSL to Gerdau) :

EV = Rs.82Cr.

EV / Market Value of Holdings = Rs.82Cr. / Rs.1561Cr. = 5.25%

EV / Cash Flow  = 4.3x (Cash Flow ~ Dividend Received)

A company holding quoted investments (in Kalyani Group) worth Rs.1561Cr. & trading at an EV of Rs.82Cr. (or 5.25% of underlying holding) makes no sense.    

PORTFOLIO WEITAGE = 1%

      

PREMIER EXPLOSIVES LTD.

The Indian Explosives Industry is amongst the top 5 in the world. Around 70% of the entire output of the industry is consumed by the coal mining industry which primarily consists of Coal India Ltd. & its subsidiaries. The Indian explosives industry is fragmented with around 45 units and around 15 major manufacturers. Premier Explosives is the 6^th largest manufacturer of explosives with around 5% market share. PEL caters to all mining sectors like Iron Ore, Limestone, etc.

Premier Explosives Ltd. was incorporated in 1980 and started off with manufacturing Slurry Explosives and during the 90’s started manufacturing the complete range of explosives & accessories like detonators, bulk explosives, detonating cords and blasting accessories. The company diversified into Mushroom Farming in 1997. In FY07, the company ventured into Space & Defence. The co. divested its Mushroom Division in FY08 for a consideration of around 20Cr. Since then the company is focussing & expanding into the Space & Defence sectors. PEL is the only private sector entity manufacturing solid propellants & other specialized products for the defence sector.  

Presently, PEL has 4 main divisions :

i.       Bulk Explosives

ii.     Detonators & Accessories

iii.    Special Products Division – Solid Propellants

iv.    Service Contracts – ‘Operation & Maintenance’ Contracts.

1.)         BULK EXPLOSIVES :

The explosive industry is fragmented while the main customer is a monolithic (Coal India). This has created over supply situation and price undercutting whereby CIL extracts the best prices through reverse auctions.

   

The other listed players from this space are Keltech Energies Ltd. & Solar Industries India Ltd.

The ‘Industrial Explosive’ division of PEL did sales of Rs.42Cr. in FY12 on volumes of around 15,000 tonnes. The Installed Capacity of this division is 38,000 TPA. Hence, the Capacity Utilization is barely 40%. Coal India, Singareni Collieries & Neyveli Lignite, NMDC are the main customers.  

Recently, the co. has bagged an order to supply 12,000 tonnes to CIL. Therefore, during FY13, the co. should achieve volumes of 25,000 tonnes translating into sales of approx. Rs.70Cr. from this division. This alone can increase the total sales of the co. by 25% in FY13 vs Rs.110Cr in FY12. At peak capacity this division alone can do sales of around Rs.100Cr. That can only happen if the coal mining output of the country increases.   


The co. should be able to maintain 15% operating margins as the management refuses to bid for those tenders where a threshold margin of 15% is not assured.

The co. has 3 plants & 2 silos under this division. PEL is setting up a new silo to cater to the cement industry in Nalgonda which is expected to be commissioned by September 2012.

PEL is also setting up a cartridge explosive plant with an Investment of Rs.5Cr. which is expected to come on stream by August end. This plant is expected to generate additional revenues of Rs.12Cr. in FY13 & Rs.25Cr. in FY14.                                                                                                                                         

2.) DETONATORS – The detonator industry is also facing an oversupply situation. PEL sells Detonators through its Dealers to industrial customers. The Installed Capacity of PEL in this segment is 100 million numbers where as it produced only 65 million nos. during FY12, earning revenues of Rs. 37.5Cr. At peak capacity the Detonators division can generate revenues of more than Rs.55Cr.

3.) SERVICES DIVISION : O&M – A major breakthrough was achieved in FY07 when PEL entered into an ‘Operation & Maintenance’ contract with ISRO. ISRO also manufacturers propellants for captive use. Under an ‘O&M’ contract, PEL operates ISRO's facilities. ISRO provides the Raw Material & purchases the output. PEL's employees operate the factories under the supervision of ISRO employees. More than margins, O&M is a significant technology transfer as PEL is learning to run complex facilities and than setting up such units on its own. Such contacts are called GOCO (Government Owned, Company Operated). These contacts have annual price escalation clause which leads to steady increase in revenues.

Presently, PEL is doing O&M work for ISRO at Sriharikota and DRDO at Jagdalpur & Pune. PEL has deployed 550 of its employees to man these locations.

The “Services” Division generated revenues of Rs.14Cr. in FY12.  

The company is constantly looking out to expand this division and any announcement in this regard can be a major catalyst for rerating.    

4.) SPECIAL PRODUCTS DIVISION – Since FY07, PEL is also manufacturing solid propellants & other specialized parts for DRDO. PEL is the only private sector entity in India manufacturing solid propellants & other specialized products for the defence sector. On 13^th March 2012, the co. commissioned its expanded capacity of Solid Propellants by investing close to Rs.9Cr.

Solid Propellant manufacturing is a Sunrise Industry in India.

PEL has done work for Agni 3 & Akash missile projects.

Defence Off sets is also a big opportunity for PEL.

PEL had purchased 200 acre land some 10 kms from its existing SPD plant at Peddakandukur (PKD) for around Rs.3.5Cr. The total envisaged capex in this project is around Rs. 20Cr.

The management believes that the defence & space business will exceed the Bulk Explosive & Detonator business within the next 5 years.

CONCERNS :

1.)The company wrote off investments worth around Rs.13Cr. during FY09 & FY10. These investments were made in FY07 in JV’s in Turkey & Georgia. The management claims that’s the foreign partner duped it. It is possible that the management duped the shareholders as this a very convenient way of siphoning off funds by Indian promoters. After all who is going to Georgia to check out the details! PEL is fighting a case against its Turkish partner & is expecting a write back.  

2.)Stagnating Mining Output growth due to regulatory roadblocks like land acquisition & forest & environment clearance issues.

3.)Deferment of govt. orders (DRDO & ISRO) due to freeze in bureaucratic decision making.

4.)PEL has given corporate guarantee to an associate co., “Premier Wire Products Ltd.” worth Rs.1.72Cr.  

PROMOTER :

Dr. Amar Nath Gupta (ANG) is the CMD of PEL. He is a first generation entrepreneur. He is a Gold Medallist from Mining Geological and Metallurgical Institute of India. He is a Member of Society of Explosives Engineers, U.S.A. and was Chairman of Explosives Development Council constituted by Government of India and Chairman of Explosives Manufacturers Association of India.

Dr. ANG believes in profitable growth. The co. could have achieved sales of around Rs.300 - 400Cr. had it been ready to sacrifice margins at the altar of sales growth. The co. only considers projects where it expects to recoup its investment in 4 years.

PEL has not diluted equity since 1997.

Promoter Shareholding :

FY08 – 35.81%

FY09 – 38.29%

FY10 – 39.06%

FY11 – 41.05%

FY12 – 41.88%

June 2012 – 42.81%

VALUATION :

CMP = Rs.69/-

MCap = Rs.56Cr.

Debt = 0

EV = Rs.56Cr.

TTM :

Net Sales = Rs.110Cr.

EBITDA = Rs.18.5Cr.

PAT = Rs.12.5Cr.

Networth = Rs.48Cr.

P/BV = 1.16x

PE = 4.48x

RoE = 29%

DPS = Rs.2.5/-

Dividend Yield = 3.62%

CAGR : FY08-12 :

Sales – 17.32%

EBITDA – 32.5%

PAT - 56.5%

Networth – 19.5%

Debt = ( - 52%)

Total Assets – 3.93%

FY13E :

Sales = Rs.140Cr.

EBITDA = Rs.22Cr.

PAT = Rs.15Cr.

PE = 3.73x

P/BV = 0.9x

RoE = 28%

DPS = Rs.3/-

DIv. Yield = 4.35%

PORTFOLIO WEIGHTAGE = 3%