Orient Cement: Long term Defensive Bet

Every New Long term Investor, Please look at this Link
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The new policies on works and allocation of additional Rs70,000 Cr to infrastructure provides the cement industry with an advantage. Out of all the midcaps in the cement sector, Orient cement backed by strong fundamentals, high capacity utilization, and new expansion plans becomes an attractive buy at the current levels.



Orient Cement was incorporated in 1979 by the CK Birla Group and is among the most respected cement makers in India. The company is engaged in production and marketing of PPC (Portland Pozzolana cement) and OPC (Ordinary Portland cement). Its principal operating unit is located at Devapur (Telangana) and its grinding unit is located at Jalgaon (Maharashtra). Currently, the company runs with a capacity of 5MTPA supported by a captive power plant of 50 MW.

Expansion plans to raise volumes

After five years, Orient cement has brought its expansion plants on track. Once operational in early FY16, the Greenfield cement plant in Chittapur, Gulbarga district in Karnataka would add 3MTPA to the capacity, taking cumulative cement making capacity to 8MTPA. The new 45MW captive power plant along with a 7MW heat recovery system would support the fuel requirements of the plant in Gulbarga. The presence of an arterial highway linking Bangalore with most centers in Karnataka, Tamil Nadu, Kerala, and Andhra Pradesh close to the plant, supportive captive railway slidings, ready availability of fly ash from captive power plant, and perennial water supply from Kagina River are some of the major advantages of this plant. The project cost of Rs. 1,718 Cr is proposed to be part financed through rupee term loans of Rs. 1,200 Cr and the rest would be financed by cash reserves. The commissioning of plant in Karnataka would strengthen the market access of Orient in its core markets and increase its market share. On the back of steady government policies and infrastructure developments, we expect the tremendous growth in demand. This would ensure a robust volume growth with a consensus estimate of 14% CAGR. With improving demand, we expect the prices to move higher, increasing the levels of realization per tonne. Over the years, despite the economic downturn, orient has managed to increase its capacity utilization to 85%.

Unique positioning to benefit sales and capture a larger market share

Orient cement has its manufacturing facilities located in Devapur (integrated clinker and grinding plant) and Jalgaon (split cement grinding unit) catering to two key markets – Andhra Pradesh and Maharashtra. Despite having a capacity of 3 MTPA (60%) in Telangana and 2 MTPA (40%) in Maharashtra, the sales in Maharashtra contribute to about 65% of its output since its Devapur plant in Adilabad district enjoys proximity to eastern Maharashtra. The Company expect infrastructure development, stable government at the centre, the resolution of the Telangana-Seemandhra dispute, and strong development initiatives in both the states to boost the demand in Maharashtra and Telangana. The Currently, the Devapur

plant in Telangana caters to markets in Andhra Pradesh, Maharashtra, Tamil Nadu, and Karnataka while the plant in Jalgaon caters to Maharashtra, Gujarat, MP, and Chattisgarh. The plant in Gulbarga is expected to cater to a wider market in Karnataka and Tamil Nadu.

Cost efficiency a major growth driver

Orient has historically been the lowest cost producer of cement. Despite higher volumes and increased diesel costs Orient has not seen much of freight costs. The well-placed Devapur plant with its coal resources from Singareni at a distance of 40 Km, fly ash from NTPC Ramagundam at a distance of 40 KM, and thermal power plant at distance of 20Kms constantly optimize the market mix for both the plants reducing their freight expenses. In FY14, Orient has initiated consumption of Pet coke in one of the four lines. The consumption of pet coke has enhanced the use of alternative fuels in the power plant boiler and reduced its coal intake and costs. Petroleum coke presents a viable alternative because of its lower cost since it is a by-product of the refining process. It has a high heat value and low ash content, which favor its use in cement kilns. As a result of the measures undertaken by Orient, the company has placed itself in a cost efficient mode compared with peers in south with attractive margins.

Low procurement cost compared with peers

Orient has meticulously placed its Devapur plant in close vicinity of the limestone reserves, crushing plant, and the grinding units. Hence, the procurement of limestone is done through the conveyor belt present between the reserve and their grinding unit, reducing freight cost.

Softer coal and crude oil prices to reduce expenditure further

Crude oil prices have plunged 60% from the 2014 peaks that they hit in June. Currently, crude oil is trading 40-50$ per barrel. With expectations of crude prices to sustain in the near term, freight cost of cement makers is expected to moderate further. Fuel and freight costs of Orient account for around 42% of the expenditure incurred. The moderation of their prices should further improve the company’s margin.

Financials

Orient cement reported nearly 36% rise in the third quarter net profit at Rs.31 Cr compared with Rs.23 Cr for Q3FY14 due to higher cement sales. Revenue rose to Rs 384 Cr during the quarter from Rs 341 Cr in the year-ago period. However, the prices realized in the third quarter were less than the prices realized in the previous quarter. Consequently, profits saw a marginal decrease. The company expects the demand to pick-up in the coming quarter on the back of increased spending in rural and semi-urban housing and improvement in orders from infrastructure projects.

Buy it in SIP 

Budget Highlights

Budget Highlights 

1. Overall deduction benefits to individual taxpayers hiked to Rs 4.5 lakh

 2. Rs 50,000 additional exemption for contributions to NPS

3. Tax ease on serious diseases for seniors raised to Rs 80,000:FM

 4. Exemption on health insurance premium hiked from Rs 15,000 to Rs 25,000. For senior citizens it is hiked to Rs 30,000

 5. Service tax rate hiked to 14% from 12.36% 6. All contributions, except CSR, to Swachh Bharat Abhiyan and Clean Ganga project to enjoy 100% deduction allowed

 7. Transfer pricing threshhold hiked to Rs 20 crore from Rs 5 crore

 8. Wealth tax abolished. To be replaced by surcharge of 2% on income of Rs 1 crore and above. Move to fetch govt Rs 9,000 cr against Rs 1,008 currently mobilised under wealth tax

 9. Corporate tax rate reduced from 30% to 25% over four years; exemptions removed for companies

 10. Proposes to exempt special additional duty on all items

11. Basic custom duty to be reduced for 22 items

12. GAAR deferred by two years would apply prospectively on or after April 1, 2017 13. Total expenditure estimated at crore Rs 17.70 lakh crore: FM

 14. A new benami transaction bill to be introduced to tackle domestic black money; enforcement agencies empowered to attach assets held abroad illegally; Undisclosed income to be taxed at maximum marginal rate, deductions and exemptions for such income won't be allowed; 10 years RI for concealing foreign assets.

 15. Plan spend at Rs 4.65 lakh cr for FY16; non-plan spend at Rs 13.12 lakh cr; Total expenditure 17,77,477 lakh crore

Sanghi Industries - High Potential Multibagger

After researching on Saurashtra Cement, I found another Interesting company in the same sector.


Sanghi Industries Limited is the flagship company of The Ravi Sanghi Group dealing in the production and distribution of Cement under the Brand Name "Sanghi Cement". Sanghi Cement, is produced at one of the world's largest single stream Cement Plant located at Sanghipuram in the Abdasa Taluka of Kutch District of Gujarat State. This plant is completely programmed with cutting edge innovation from Fuller International, USA and having limit of 3.0 MTPA. The organization produces prevalent quality 53 Grade OPC and PPC Cement and have altered the way concrete is created and sold in India.The organization likewise surprisingly has its hostage warm plant of 63MW.Sanghi brand is exceptionally remarkable in the locale of Gujarat and Rajasthan.It generally concentrates on four businesses in the country:Gujarat, Rajasthan, Maharashtra and Kerala.Currently piece of the overall industry remains at 10-12% in Gujarat upheld by a hearty deals system of around 1500 dealers.Company fares to the Middle East, Africa and Sri Lanka.Cement request has been really predictable in the western and focal regions.With the bond business entering a stage where interest is enhancing crosswise over regions,Sanghi Industries will be one to profit the most.



Enhancing business blend and cargo cost savings:Religare report focuses at, "SNGI has its own wharf and jetty port, other than as of late setting up two terminals - Navlakhi (Rajkot, Gujarat) and Dharamtar (Mumbai) - for less expensive hostage transportation of mass concrete load. With the new limit extension, SNGI is relied upon to offer higher volumes in Mumbai, which is a mass bond business, empowering effective utilization of ocean courses for conveyance at a lower cargo cost.With expanded commitment from Mumbai,the business blend is required to change as takes after Gujarat:73% by FY17(vs. 80% in FY14), Maharashtra:2o% (i2%) and Others:7% (8%). With the full increase of waterfront terminals, the degree of street to-ocean transport is relied upon to decrease to 80:20 versus 95:5 now, getting expense funds".


( Navlakhi port in Kutch owned by sanghi industries )

Lessening of debts+High money flows+Dividends:Company in the course of the last few years have effectively pared its obligation from around wooers to pretty much 500crs.It found the middle value of working money streams of more than 1.70cr throughout the last five years.What is the greatest edge of security in a company?Obviously the dividends.Management has implied of a profit next financial which can again prompted a rerating."Do you know the main thing that provides for me delight? It's to see my profits coming in." - John D. Rockefeller.

Increase in promoter stake:Promoters over the last four years have swallowed 20% stake through market purchases.Every single year for the last few years,they exhausted the maximum permisable limit of 5%.Present stake stands at 71%(already acquired 5% for the present fiscal),Its of an easy assumption that the remaining 4% stake too would be acquired in the next fiscal.When you own the company(insider) and you are on buying spree it only hints at the things to come.Hiking of promoters stake gives tremendous amount of confidence and conviction.

Entry of reputed MF:Reliance Mutual Fund A/C Long Term Equity Fund recently has bought 32.65 lakh shares in the company for an average price of Rs 44.50.With the performance expected to better in near future as just a matter of time before other similar biggies plunge in to have a bite of the counter.

Wanbury ( Turn Around Company ) High Potential Multibagger

India is now among the top five pharmaceutical emerging markets. The Indian pharma industry has been growing at a compounded annual growth rate (CAGR) of more than 15 per cent over the last five years and has significant growth opportunities. The domestic pharmaceutical market is expected to register a strong double-digit growth.

The cumulative drugs and pharmaceuticals sector has attracted foreign direct investments (FDI) worth US$  13 Bn during April 2000 to February 201 and to reach US$ 90 Billion, according to the latest data published by Department of Industrial Policy and Promotion (DIPP)
The Indian pharmaceutical industry accounts for over 8% of global pharmaceutical production. The industry has over 60,000 generic brands across 60 therapeutic categories and manufactures more than 400 different active pharmaceutical ingredients (APIs). The manufacturing cost of the Indian Pharma companies is up to 65% lower than that of US firms and almost half of that of European manufacturers, due to which India has been emerging as the Drugs manufacturing hub of the world. The industry registered exports of US$ 13 billion at a growth rate of 30%, as per Dr P V Appaji, Director-General, Pharmaceutical Exports Council of India (Pharmexcil). The Ministry of Commerce has targeted Indian pharma sector exports at US$ 25 billion by 2014 at an annual growth rate of 25%.




Wanbury was incorporated in 1990 as a private limited company under the name of Pearl Distributors Private Limited. The name of the company was changed to 'Pearl Organics Private Limited on January 17, 1991 and the company was converted into a public limited company on August 6, 1991. Wanbury Limited, one of India’s fastest growing pharmaceutical companies amongst the ‘Top 50 Companies’ in India (as per ORG-IMS), has a strong presence in API global market and domestic branded Formulation. Wanbury’s major thrust area lies in Active Pharmaceutical Ingredient (API) sale in over 70 countries and Pan-India Formulation presence.

In 2007,Pharmaceutical Products India Ltd was amalgamated with the company pursuant to the BIFR order.In the same year, Doctor's Organics and Chemicals Ltd also came into the fold of Wanbury as this also merged with Wanbury.The company has entered into a strategic association with Bravo Healthcare Ltd and also incorporated Ningxia Wanbury Fine Chemicals Co Ltd to source raw materials from China.The company has opened its office in Zurich,Switzerland for its CRAMS business and incorporated Wanbury Global FZE in Middle East for carrying out its trading activities in the year 2008.



The Company was doing extremely well and was making esteem by assuming control focused on resources and turning them around, until it committed a disaster error of purchasing a Spanish organization Cantabria, which demonstrated an exorbitant resource purchased at a wrong time. The advantage was purchased totally in 2007, equitable before the 2008 emergency and shockingly, what was required to be the most prized resource, ended up being its close demise warrant. Wanbury's timing went terribly wrong, as after 2008 emergency the Spanish economy could never recoup and went into profound budgetary emergency and melancholy and on an awfully wrong direction of unemployment chart (at present around 27% on the off chance that I am not off-base).

Wanbury operates in a highly competitive environment with pricing being one of the key determining factors of success. In the API business, Wanbury  has been able to overcome this risk by influencing the prices as it is the largest manufacturer of Metformin in the world with over 30% market share. Another product Tramadol has also been in high demand especially in American markets. In the Formulations Business the Company has mitigated this risk to a very large extent by diversifying its product portfolio and launching new value-added products. The continuous rise in crude oil and other commodities prices impact the prices of raw material and intermediates and in turn increase the cost of APIs. Wanbury has a dedicated Research and Development team that continuously innovates and remains competitive by developing / acquiring ability to sort out simple and effective solutions to practical problems. The Company has a team of highly competitive scientists supported by excellent instrumentation



The last couple of years have been truly memorable: with new operations administration coming set up and on once more of CDR bundle getting sanction, the turnaround expert began turning around itself. Since the new presidents (API and Formulations) assumed control over, the organization has strikingly begun restoring itself. The loses began contracting and gradually it got to be EBITA positive and now positive even at the Net level. The organization has two US FDA endorsed plants and different plants for unregulated markets. The organization's details and API business both are turning upward and indicating great development in last couple of years.

 Wanbury is as of now creating positive money stream. Wanbury has demonstrated net benefits, inspite of adjusting their whole obligation's advantage and foremost and is likewise paying charges. This is huge in light of the fact that organization had ban for reimbursements till oct 12, and now since they are creating benefits inspite of adjusting their whole obligation (which is exceptionally critical at around 310cr), it implies the recuperation is for genuine and maintainable and they have demonstrated EBITA benefits un-hindered for last 6 quarters and this quarter benefits even at net level. The formula for achievement looks right this time around. The organization has incredible piece buster brands, has estimating force, expanding promoter holding, effectively began producing benefits while adjusting its whole obligation, has two US FDA affirmed plants, furthermore began creating positive money streams.

Cmp - 26

Kalpataru Power - A defensive Long term bet.

Kalpataru Power Transmission Ltd (KPTL) is part of the Kalpataru group and is a leading turnkey player in power, infrastructure and asset creation (transmission systems / roads / logistics & warehouse). It exports to 38 countries. It has 67.2% stake in JMC Projects (JMC) which is in the business of civil construction of residential/commercial buildings and road projects. It also has 70% stake in Shree Shubham Logistics (SSL) which is in agro-logistics business.



KPTL has a strong presence in domestic as well as international power transmission and distribution (T&D) markets. T&D contributes 90% to the standalone revenues of KPTL. The share of international business is at 65% of the standalone order book which, at the end of Q2FY14-15, stood at Rs5,500 crore. The current government is focused on boosting investment in the power sector. A pick-up in domestic T&D market is expected which will boost KPTL’s revenues and profits.



JMC has four road projects under BOOT (build, own, operate and transfer) model which are at various stages of completion. JMC’s revenues grew by 50.5% and 22.1% in FY11-12 and FY12-13. The order book of JMC stood at Rs490 crore in Q2FY14-15.

SSL is into agro-logistics services and is one of the largest private warehousing and agro-logistics players in India. Its revenues have increased by a compound annual growth rate (CAGR) of 39% in FY11-14 with an operating margin of 12%-15%. The current capacity of SSL is 1.7 million tonnes (mt); it is planning to add 0.15-0.2mt in the next financial year which will further boost its top-line growth.



For the quarter ended September 2014, its revenues were Rs1,140.77 crore (Rs962.20 crore) and the net profit was Rs42.70 crore (Rs30.99 crore). For the year ended March 2014, revenues were Rs4,055.25 crore (Rs3,335.40 crore) and net profit was Rs146.38 crore (Rs137.65 crore).
The shareholding pattern of KPTL includes 59.45% with promoters, 9.70% with foreign institutional investors, 21.61% with domestic institutional investors and 9.24% with retail investors and the general public.



Over the past five quarters, KPTL’s average sales growth was 21% and its average operating profit growth was 18%. Its average operating margin is 9%. The market-capitalisation is 0.81 times sales and 8.65 times operating profit. The return on net worth is 7%. The debt-equity ratio is 0.40 and the return on capital employed is 12%. The cash earnings per share of KPTL were Rs14.07.
The dividend distributed by KPTL for FY13-14 was 75%. It has maintained the same rate of dividend distribution for every financial year since FY06-07. The face value of KPTL’s share is Rs2 and the book value is Rs127.14. KPTL’s share rose from a 52-week low of Rs70.50 on 13 February 2014 to a 52-week high of Rs248.90 on 9 January 2015. 

Prozone Intu Properties: Potential Multibagger

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PROZONE INTU PROPERTIES (PIP), formerly known as Prozone Capital Shopping Centres Limited (PCSC)  was demerged from Provogue on 10th Feb, 2012, and was listed on stock exchange on 12th Sept, 2012, is a joint venture between Provogue (India) and Intu Properties (UK), formerly known as Capital Shopping Centres (UK) in which Intu Properties holds 32.38% stake. Intu Properties invested Rs 202 crore for 25% stake (via FDI Account) in FY07 valuing this company at Rs 808 cr then (Current Market cap of entire company is just 250 odd crore)

Intu Properties (UK) is one of the largest real estate company of UK which is owning & managing close to 8 billion Pounds of assets, Its strategy is to focus on large mixed development (Built-Lease & Built-Sell model) thus facilitates creation of debt-free assets and generating annuity income.

 They are set up to create, develop and manage regional shopping centres and associated mixed-use developments Pan-India. The company currently has shopping centres in operation and under construction, residential projects and commercial units for sale



Business Strategy –

 To develop large scale Land Parcels for Mixed Use development.
 75% of the Land to be developed as Residential & Commercial – Build & Sell model
 25% of the Land to be developed as Retail – Build & Lease Model
 The Company follows this model so as the Cash Flows from Build & Sell portfolio facilitate the Build & lease model, Thus resulting into Debt Free Annuity Assets.

Residential Projects ‐ Strategy

 The Company invests and develops the entire Clubhouse and Site Infrastructure for the project upfront before the Launch of the Project.The Clubhouse features all the Modern amenities and is spread across 4‐5 acres of Land. It provides credibility to the business as all the Amenities are developed Upfront and also all the project permissions are in place, thus accelerates the sale of the project, resulting into better cash flows.

The company spends around Rs. 14 ‐15 cr on this upfront Infrastructure as it is cash rich and not levered. Also since it has economies of scale the cost is apportioned across large no of units resulting into cost effective way.  Due to this, the Company emerges as the strongest and the most credible player in the region. Eg, In Nagpur, Company has received an over whelming response is compared to the best players in the region such as Tata Realty, Mahindra & Godrej Properties.



As per the company, it owns six land banks located in Aurangabad, Nagpur, Indore, Coimbatore, Jaipur and Mysore  comprising of a total of atleast 169.55 acres . As can be seen from the list of cities, these are mostly Tier-II and Tier-3 cities and the plans of the company is to develop regional shopping centres along with residential and commercial properties surrounding the retail properties. The company’s flagship retail property “Prozone Mall” at Aurangabad has been operating since October 2010 and the rest of the projects are getting implemented.

 

PIP a turnaround story. 

PIP has 17.79 million Sq Ft of land bank (entire land bank is paid up) with only 1.2 million developed till dateand more than 16.5 mn sq ft yet to be monetized.

Out of total 17.79 mn sq ft, 2 mn would be used for Retail, 7.6 mn sq ft for residential and 0.4 mn sq ft for commercial with the balance 8 mn sq ft for future expansion.

Company is almost debt free and will be able to monetize its huge saleable land bank over the next few years to come, which gives vision for long term investments.

 The company has strong balance sheet with net debt at less than 15 cr on a consolidated basis. The total debt for the company is around 152.2 cr, of which PIPs share is 93.6 cr (61.5% share). The company has cash and cash equivalent to the tune of 80 Cr at the parent level making the company relatively debt free.

The company intends to utilize the cash flow from the residential projects to facilitate the construction of the retail malls.

The company will have strong free cash flows this year as the company has delivered the commercial PTC Phase 1 and Saral Bazaar in FY14. Also, strong annuity income by FY16-17, as the company will have 3 operational malls in Aurangabad, Coimbatore and Nagpur with an estimated total annuity income of more than Rs 100 Cr.

The company is estimated to have more than Rs 1000 Cr of cash & Cash Receivables by FY16 due to the launch of 4 residential projects (Nagpur, Indore, Coimbatore and Jaipur) and commencement of 3 retail Malls. (Aurangabad, Nagpur & Coimbatore)

If we take conservative value of entire land bank, which is fully paid up and nowadays such land parcels are difficult to acquire as these are huge single land parcel, which comes close to 2000 cr, out of which stake of PIP is 61.5% that comes to around Rs 1250 Cr, which is 5 times its current market cap, plus annuity income from retail space which will increase every year, the stock is trading at Market cap of JUST 250 CR and is a screaming buy for the conservative target of RS 84 in next 24 months, adding scarcity premium as its one of the listed company which is partly held by foreign partner, which is into high growth consumption theme of tier 2 and tier 3 cities with retail malls business alongwith Commercial complexes, which has high demand from IT/BPO space as cheap availability of manpower, plus company is into Affordability Housing residential project, where company first creates the infrastructure and ameneties before opening of bookings.

Some Back of the envelop calculation :

Company plans to develop 17 million sq ft in next 6 years, imagine if the company earns most conservative profit of just Rs 1500 per sq ft as it is fully paid land bank, (only construction cost of 1200 per sq ft and other cost + taxes another 800 rs expense per sq ft, where as selling price is between 3500 to 4000 per sq ft super built up this is conservative estimate as total current value of land bank is Rs 2000 cr, so company must earn atleast 3000 crore after developing it, else company is better off selling entire land bank at current price of Rs 2000 cr), than total Profit in the next 6 years could be Rs 1500 x 1.7 Cr sq ft = 2550 Crore of profit, which is 10 times of current market cap. Just imagine the potential this company has to earn.

We are yet to calculate lease income which will accrue year after year on 4.5 million sq ft of retail space, If Rs 50 / sq ft lease rental is received per month, than 50 x 12 x 45 lakh sq ft = 270 cr per year, yes its mind boggling lease rental income of Rs 270 cr per year, which alone will give EPS of Rs 18 per year, add that with Profit earned over Rs 2500 cr in next six year, that will give EPS of close to 30 per year.

That means company has potential to earn EPS of Rs 50 per year, and is available at Rs 20 only? Just because it is small cap, under researched and hidden gem.

 India is close to finalising rules on REITs. As the new government fast tracks this project, it is likely that Prozone Capital can form a REIT for its commercial properties. This will be a source of additional value unlocking. I must mention here that there is no indication from the company on this. We just believe that this is one possibility.

Once the company’s lease model shopping complexes are operational, there will be a steady cash inflow. Besides this, sale of residential and commercial projects will result in bulk cash inflows. The company is just setting up for bigger things to come in the future.

I believe that this is the best time to buy Prozone Capital as the company’s management expects to be in profits in this financial year and the management has a positive tone when they say – “We are on the right track and we are turning green in coming financial year we look forward to surprise you on the positive side.”

Saurashtra Cemenet: A Turnaround Story & High Potential Multibagger

New Long term Investors, Please read think Link

Most of the economic sectors are deeply awaiting a cut in the interest rates and some policy amendments in the near future. Infrastructure and Real estate is among them. Any positive development in this sector should surely help the Cement Industry. With the Cement Industry being in focus in this bull run, Saurashtra Cement Ltd is a turnaround story.

                                                               

Saurashtra Cement Limited (SCL) is the flag ship company of The Mehta Group, formed in 1956. SCL is one of the leading players in the Indian cement industry, manufacturing Portland Pozzolana Cement (PPC), Ordinary Portland Cement (OPC) and Sulphate Resisting Portland Cement (SRPC). 

SCL markets cement under the brand name "HATHI CEMENT".

SCL's plant at Ranavav, located in Gujarat state has a capacity of 1.5 MTPA. The plant is a modern energy efficient dry process plant comparable to international standards and makes use of latest machinery sourced from reputed international companies. The plant offers locational advantages because of its proximity to the Porbandar and Veraval/Okha ports, rail net work and is close to highways. SCL thus has competitive access to the domestic markets and also to the large export markets in the Africa, Middle East countries, Sri Lanka etc. by the economical sea route.

SCL's modernization implemented in the recent years has paid results. State-of-the-art equipment and control systems installed have led to capacity enhancement. The new captive power plant which can be operated with different fuels like coal, pet coke & lignite has improved the overall performance by way improved reliability, consistency, better cost control and improvement in quality and lower emission levels.




What Went wrong ?

​The earthquake in Gujarat (April 2006), high power costs, setting up of additional capacities by Sanghi Inds and the consequent price war to capture market share resulted in SCL and most Gujarat cement players going into red in 2007-2008. While setting up of Thermal power plant of 25 MW helped control power costs, competitive scenario has eased a bit over the last few quarters. In the process the debt situation of SCL worsened, and the interest payments shot up. Further SCL also could not pay sales tax, electricity duty etc to the state Govt in time. As part of one time settlement with the Gujarat Govt, SCL was asked to deposit Rs70 cr with Gujarat State Financial Services Ltd in 2008. In the interim SCL had two accounting years stretching into 18 months and 15 months respectively (June 2007 to Dec 2008 and Jan 2009 to Mar 2010). To come over these difficulties and fund the thermal power plant (costing Rs125 cr) SCL had raised Rs26 cr by way of convertible debentures from Mauritius Debt Management Ltd (converted into equity shares in Aug 2007 @ Rs35 each – resulting in a stake of 14.55% held by them). In addition an amount of Rs5.12 cr was raised from International Debt Management (IDM) by way of 13% optionally convertible cumulative preference shares (which are now not convertible) and Rs 208 cr loans from IDM.

Why the turnaround Story:
The company had been consecutively posting losses in the preceding years and was declared a Sick Industrial Company by the BIFR due to which the stock was beaten down but consequently the net worth of the company became positive again, it is no more a Sick Industrial Company as can be inferred from the latest annual report of the company. If we have a look at the performance of the company in the past one year, there is a drastic improvement.



As we all know, Q'2 and begining of Q3 is the weakest quarters for any cement company due to the rainy season. The cement prices fall due to low demand from the construction industry as generally no one prefers to contruct during the rains.
Hence, QoQ, the Sales and earnings dipped, mainly due to the monsoon season during which demand was subdued.

The company delivered extraordinary results for Q'1 2014-15 generating an EPS of Rs. 3.02 which is about 80% of the EPS of Rs. 3.86 which it delivered for the entire financial year 2013-14.

After talking to the Management, the management said that this expansion project which started with high hopes had to be stopped in between in the year 2005 due to inadequate funding. It was kept on hold in hopes of receiving finance from various sources but due to the poor performance of the company, the project was finally abandoned. The company has since then been writing off the amount in parts from Capital WIP, the cost of the project as Impairment.

The management further said that no further impairment will be done in Q'2, Q'3 or Q'4 2014-15 and depreciation expense will now normalize to 3-5 crores per quarter as it has always been. This can be seen in Q'2 2014-15 below where it came down to 3.31 crore





99.3% of promoter’s stake has been pledged to IDM as collateral for loans obtained from them. Most of these loans have been repaid by the company as we can see from the amount of reduction in long term borrowings of the company and the company shall become debt free very soon. Hence, these pledged shares do not pose any risk as the company is easily able to cater to the interest payments and repayment of principal amount as evident from the huge cash reserves of the company

If we analyse the Q'2 Balance Sheet, we find that:

• Debt has reduced significantly from Rs 38 crores to Rs 11 crores.
• Cash balance has increased from Rs 40 crores to Rs 43 crores. 
• The debt equity ratio has improved to 0.21:1 from 1.03:1 which is very favorable.
• The debt service coverage ratio has improved drastically from 0.33 to 1.31 ensuring the company is easily fulfilling it's commitments.
• The interest service coverage ratio has improved from 1.58 to 12.86 which is very positive.

Key Points

1. The company has been constantly reducing its debt. During the year 2013-14, the company reduced it's debt by Rs 76 crores from 114 crores to Rs 38 crores. The company in 2014-15 has already reduced it further by Rs 27 crores to just Rs. 11 crores. The management also said that the company will become debt free by 31st March, 2015.
2.  The company's vision is to increase it's capacity from 1.5 MTPA to atleast 2 MTPA in the coming years. This reflects the optimism and the growth vision of the company. 
3. The company operates its own captive Thermal Power Plant of 25 MW with multiple fuel options which caters to all of the electricity needs of the company. The company operates it's own Captive jetty at Porbandar Port which can berth ships up to 37,000 DWT; with a loading capability of 20,000 Ts, equipped with two cement silos and fully mechanized loading facilities. This helps the company in tapping the states of Maharashtra, Kerela etc. in the domestic market as well as Sri Lanka and Middle East Countries in the overseas market as is visible in the Annual report of the company.
4. The promoter holding is 64.46% which is highly positive. The management is highly optimistic about the performance in the company in the coming quarters.
5. The price range i.e. Rs 40-45 at which the stock is currently trading makes it highly undervalued and thus a value buy at this level. 

Clients:

The Management also said there are in talks to cater to upcoming smart cities in the state of Gujrat.

With the stable political scenario and the sustained development strategies the need of infrastructure facilities and the housing needs ofthe population will enhance the consumption of cement further in the country. The long-term future of the cement industry is optimistic and positive.

After discussion with the management in the AGM, the management informed that the bad times are over for the company and the company has recovered completely which can be reflected in the latest financials of the company and in the time to come, the company is likely to do exceedingly well. 

On this estimation, the stock is currently available at P/E levels of 4.2 whereas companies in this sector are generally quoting at P/E levels of 20-30. Hence, as can be inferred, at these levels the stock has the capacity to become a multibagger in the coming months.