Suzlon Energy Ltd. - Supremely Over-valued at current levels!!

There have been many HUGE developments for Suzlon Energy Ltd in the last month or two. First there was the news about Suzlon selling it's German subsidiary Senvion SE to a Private Equity Fund for Cash of approx. Rs.7200 crores. The market probably saw some bit of positivity in this developments, with Suzlon's share price moving up from Rs.12-13 levels to about Rs.15-17 levels. Then there were rumours about Dilip Sanghvi's family buying substantial stake in Suzlon, which got everyone excited. The reason was Dilip Sanghvi's credibility in the market, especially with the way he has brought up Sun Pharma to become India's biggest Pharma company.

Surprisingly, the rumours got converted into actual development in very quick time and we read announcements about fresh issue of 100 crores shares of Suzlon to Dilip Sanghvi & Associates (DSA) at a price of Rs.18 per share. Every since this development was confirmed, Suzlon's share price has zoomed and is currently hovering in the price range of Rs.25 to 28. Everyone seems to be expecting things to improve for Suzlon like a Magic Wand. But let me caution everyone that it's gonna take time, lots of time. Yes....all these developments, especially the entry of DSA as a large Investor in Suzlon, is a very Big Positive development. But the ground reality remains that Suzlon still has to do a lot of work to kick-start it's Non-Senvion operations, scale it up to a level where it becomes operationally positive, and then start generating enough Cash to be able to service it's Interest Cost. Even after repaying Rs.6000 crores from Senvion sale proceeds, Suzlon still has a debt of over Rs.8000 crores. Suzlon now has enough Working Capital available with it, so we can expect Suzlon's annual Interest Cost to drop by about 50% from levels of over Rs.2000 crores to something in the region of Rs.1000 to 1200 crores.

On the revenue side, my estimate is that Suzlon's Annual Revenues consolidated with non-Senvion subsidiaries must be in the region of Rs.4000 to 6000 crores. Currently the EBITDA margins must be very very low or even negative. But Suzlon will now focus on ramping up operations and improving profitability. We can expect Suzlon to ramp up it's Annual Revenues to about Rs.8,000 to 10,000 crores level in the next 12-18 months. EBITDA margins can improve to something like 10%, translating into an EBITDA of about Rs.800 to 1000 crores, just about enough to cover it's Interest Cost or marginally short of it. That means we could see Suzlon breaking-even at Cash Operating level in about 18 months time. Any further growth in Revenues & improvement in profitability will lead to Cash Profits. Maybe by FY'18 or FY'19, Suzlon could be posting Annual Revenues of over Rs.12,000 crores. Historically, Suzlon has enjoyed EBITDA margins of over 15%. Assuming the company manages to get to an EBITDA margin of 15% by FY'18 or FY'19, we could see the company reporting an EBITDA of over Rs.1800 crores. By then the Interest Cost might have reduced a bit and the company could be posting a Cash Profit of around Rs.1000 crores then.

Coming to the valuations part, the most important question is how much will Suzlon's Equity get diluted to? At the end of December'14, Suzlon's Equity Capital comprised of about 322 crores shares. The company has issued 100 crores shares to DSA. And it's FCCB holders are constantly converting their Bonds into Shares, bit by bit. In total I am expecting Suzlon's Equity Capital to comprise of over 550 crores shares when all these issues get completed and the FCCB's get fully converted. Remember that the FCCBs are getting converted at a fixed price of Rs.15.46 per share and a fixed USD rate of around Rs.60.50 per USD. Taking the Equity base number as 550 crores shares, Suzlon's current Market Cap at the share price of Rs.27, stands at close to Rs.15,000 crores. Remember Suzlon is not expected to generate a Cash Profit of Rs.1000 crores before FY'18, which is a good 3 years away. That means at the current price of Rs.27 per share, Suzlon's share price is already factoring in the numbers expected 2-3 years in future. Those numbers too are very optimistic estimates. I think from an Investor's point of view, it's best to exit Suzlon at current prices and wait patiently. I am sure we will see Suzlon at much lower levels in the next 12-18 months. One can re-enter Suzlon when the price corrects to levels of about Rs.20 or lower. 

Happy Investing !!!

(P.S.: Compared to 7-8 years ago, there is a lot more competition in the Indian Wind Energy space as well as in the Global Wind market. It's not going to be easy for Suzlon to improve profitability to historically high levels of over 15% in EBITDA margins.)

Reliance Communications Ltd. - Very Very dull performance, but one Glimmer of Hope is there!!

Reliance Communications Ltd. (RCom) used to be the flagship company of Reliance ADAG. At one time in late 2007, RCom used to enjoy a Market Cap of over Rs. 1,50,000 crores and was the 2nd or the 3rd largest Telecom company in India. But the last 7-8 years have been terrible for the company. RCom's current Market Cap stands at just about Rs.17,000 crores, that means nearly 90% below it's peak levels. In FY'09, RCom had posted a Total Income of Rs.22,948 crores and a Net Profit of Rs.6045 crores. While RCom posted a Total Income of Rs.22,321 crores and a Net Profit of Rs.1047 crores in FY'14. That means RCom's financial performance has degraded in these 5 years. Let's compare that with Idea Cellular's performance. During the same 5 years Idea's Total Income jumped from Rs.10,149 crores to Rs.26,518 crores, while Net Profit jumped from Rs.901 crores to Rs.1968 crores.

What happened to RCom during these 5-6 years??!! The Indian Mobile Service Industry went through a lot a turmoil during these years. First the entry of many new service providers in 2009, thanks to the ill-famous 2G Scam, which led to hyper competition in the market for a couple of years until SC stepped in & cancelled those new licences. Then the Auction of 3G spectrum in early 2010, where RCom managed to bag spectrum in 13 circles, including the crucial circles of Mumbai & Delhi. Probably RCom stretched it's Balancesheet a bit too much for the 3G auction & the subsequent network rollout. RCom can be said to be the biggest victim of the hyper-competition & the Debt trap created by it's ambitious bidding during 3G Auctions. And despite having one of the highest number of 3G circles in it's fold, RCom did not manage to capture a good amount of market share. It holds spectrum in 800 MHz CDMA band (across India), 1800 MHz 2G band (in 15-16 circles), 900 MHz 2G spectrum (in 6-7 circles) and 2100 MHz 3G spectrum (in 13 circles).

Look at RCom T-T-M Financial performance over the last 8 quarters. It has gone nowhere. All numbers are almost flat. During these 8 quarters, most other telecom operators have seen a huge surge in Data traffic & revenues from the same. With RCom having Nationwide CDMA spectrum & 3G spectrum in 13 important circles, there hasn't been much growth for RCom. Or atleast the growth from Data revenues has been equally negated by drop in Voice revenues. Over the recent quarters the company is working towards reducing it's Debt burden, which should lead to drop in Interest Costs & hence improvement in Cash Profits. The company has recently issued fresh shares to the Promoter Group at a price of Rs.150 per share. Few months back it raised funds abroad at low interest rate to retire some old high-cost debt. Plus RCom is expecting improved Cash Flows from it's Tower Assets & Optic Fibre Cable network once RelJio launches it's 4G service and starts paying Rent/usage fees to RCom. RCom has not done any significant CAPEX in the last 2 years. The improved Cash Flows should enable the company to work towards improving it's 3G coverage.

But all this is not going to help RCom survive the competition onslaught which is expected to intensify once RelJio launches it's services. RCom, which has not managed to grow it's revenues when all it's existing competitors are growing pretty well, will start losing revenues once RelJio starts and even other operators like Airtel, Vodafone & Idea start launching their 4G services. So, what is the Glimmer of Hope that I was talking about? It is the possibility of having a much larger partnership with RelJio. RelJio has already signed agreements with RCom to rent it's Towers and use the OFC network, wherever possible. But there is a possibility of RelJio using RCom's 2G & 3G network as a fall-back network for it's subscribers in regions where it will find it unviable to setup it's own 4G network, atleast in the initial years. This kind of arrangement can help RCom improve it's network utilisation levels & also add to increased Cash Flows. Another possibility is that RelJio could allow RCom to piggy-back on it's 4G network and allow RCom subscribers to experience 4G speeds without being charged any Roaming fees. If they do manage to have such an arrangement, then RCom will be able to protect it's existing Data subscribers & revenues from being churned. This kind of arrangement will be a win-win situation for both. RelJio will need quite a lot of time to build usage of it's brand new network on it's own. If it allows RCom subscribers to use it, revenues & utilisation levels will get a good boost. And if things improve between the two brothers, then they could even think of merging the two companies a few years down the line.

All these are just POSSIBILITIES and nobody knows as of now, on how things will pan out in the coming quarters. But at the current price of less than Rs.70/-, RCom is trading at very cheap valuations, though it's past performance doesn't deserve much higher valuations either. But if RCom does manage to tie-up an operating partnership with RelJio, it can change RCom's fortunes & it's financial health.

Reliance Industries Ltd. - Newer businesses are contributing to Growth!!

Traditionally Reliance Industries Ltd. (RIL) has always been known as the Indian behemoth with Global scale operations in Crude Refining & Petrochemicals businesses. Over the years RIL has expanded capacities in these businesses every 2-3 years and has now reached such a scale of operations that can be counted amongst the biggest across the world. Between FY'05 and FY'14, RIL's Total Income has expanded over 6 times to touch a level close to Rs. 4.50 lakh crores with 70% of it coming from the Refining business & 20% from Petrochemicals business.

But RIL has seen it's profit margins decline over the recent 3-4 years. In FY'11, RIL's consolidated EBIT margins were a little over 10%, while in FY'14 it had dropped to just over 7%. This was one example where the economies of scale theory did not work well. But a lot of it was because of substantial volatility in prices of products that RIL deals in, both on the raw material side as well as the end product side.

RIL has drawn a huge CAPEX plan for it's Refining & Petrochemicals businesses mainly aimed at improving efficiencies & ultimately improving margins. All these projects are expected to start showing impact on it's numbers from the second half of FY'16 and will be fully visible by FY'17. In December'14 quarter, RIL's EBIT margins in Petrochemicals business was almost 9%, the best figure in over 2 years, while that for Refining business was 4%, substantially lower than the best number it has seen in last 2 years. The new CAPEX plan is expected to boost it's EBIT margins by atleast 1.5% to 2%.

Enough of discussing RIL's primary businesses. Now let's completely focus on RIL's newer businesses, which it has entered and scaling up over the last few years. These business segments are: Oil & Gas production, Modern Retail and then the 'Others' segment, which comprises of Textile, Media, Broadband & other investments in Associate companies. In the June'13 quarter, these 3 business segments contributed Rs.7763 in Revenues & Rs.674 crores in EBIT. In December'14 quarter, i.e. in 6 quarters from then, the total contribution to Revenues jumped to Rs. 10,974 crores and Rs.1213 crores in EBIT, a jump of 41% and 80% respectively in just one & half years.

Out of the Total Revenues & EBIT from the 3 business segments, the Oil & Gas business alone contributed about 26% of the Revenues & 68% of EBIT in December'14 quarter. This is despite the fact that the Oil & Gas business suffered a huge drop in Crude Prices during the December'14 quarter. RIL's investments in Shale assets in US are paying healthy dividends currently. The Oil & Gas assets in India are not doing so well with flat to negative growth in production numbers in most assets. The revenues & profits from Oil & Gas business would have been much higher in December'14 quarter if Crude prices had not collapsed so much. Crude prices tumbled from $110 per barrel levels to $45 per barrel during that quarter. Since January'15, the crude prices have improved and are now hovering around the $55 to $60 levels. This business enjoyed EBIT margins of about 29% at a time when the prices were tumbling fast. So we can safely assume that profits will be decent even when Crude prices hover in the $50 to $70 per barrel range.

RIL's Retail business has continued to post healthy Q-o-Q & Y-o-Y growth over the last 3 quarters. The company has got aggressive on it's Retail footprint expansion & marketing. Even consumers seem to be shopping more in the recent months. And the best news is that RIL's Retail business has seen improving profitability in the last 3 quarters. From an EBIT of Rs.24 crores on a Turnover of Rs.3653 crores in March'14 quarter, the business has seen an EBIT of Rs.133 crores on a Turnover of Rs.4686 crores in December'14 quarter. With the Indian economy picking up pace, Inflation going down, we can expect the overall consumption demand to continue growing in the coming quarters & years. Apart from Retail stores, RIL will start e-Retail in a big way sooner or later. It has already started testing it via www.RelianceFreshDirect.com where consumers in Mumbai can make online purchases of Grocery & other Daily need items. With a vast nationwide presence, RIL can easily spread this business in many more cities over the next 1-2 years. There is immense scope for growth in almost all of RIL's Retail formats, once they get integrated with an e-commerce platform. Going by the recent growth rates, this business is expected to cross the Rs.20,000 crores in Annual Revenues mark before December'15.

Coming to the other businesses, I don't have the exact details of the performance of RIL's Textile business or investments in other Associate companies, which have been counted in the 'Others' segment. But it is more important to see 2 other important parts of this segment, i.e. Media & Telecom. We all know RIL is preparing for a mega launch of it's 4G-based telecom services, with a big push towards offering high-speed Internet services across 5000 cities & towns and lakhs of villages across the country. In order to be able to offer other complimentary services, RIL acquired majority stake in Network 18 Media & Investments Ltd. in June'2014. With this acquisition RIL is now the owner of a host of digital properties & TV Channels. Some of the popular constituents are TV Channels like Colors, CNBC TV18, CNN-IBN, IBN7, CNBC Awaaz & digital properties like HomeShop18.com, BookMyShow.com, Moneycontrol.com, etc. Revenues from this business probably started getting consolidated into RIL's 'Others' segment from Sept'14 quarter, i.e. Q2. This business reported revenues of about Rs.745 crores in Q2 and Rs.830 crores in Q3. So the jump we see in revenues of this 'Others' segment from Rs.1700 crores level to about Rs.2500 crores level in Sept'14 quarter is because of addition of Network 18 revenues.

The interesting part is that the 'Others' segment saw another big jump in revenues in December'14 quarter to over Rs.3400 crores level. I am speculating that this jump is because of RIL's Telecom & Broadband business. We have read that RIL has already done soft launch of it's Jionet WiFi services in nearly a dozen large cities, mostly in busy business areas of those cities. Each user logging on to Jionet WiFi service during this soft launch period is entitled to receive initial Free Usage limit, after which they will have to pay for usage. Reliance Jio Infocom (RelJio) had launched it's WiFi service in some parts of Ahmedabad, Surat & Baroda about a year ago. Apart from that there have been reports that RelJio has softlaunched it's WiFi service under the Jionet brand in several cities like Indore, Bhopal, Varanasi, Kolkata, etc. Apart from these WiFi Hotspots, RelJio has been showcasing it's WiFi service at several popular Trade Fairs and large College Festivals. There was one recent report which said that the Average Data Usage per customer at it's WiFi Hotspots is over 100 MB per day. Another report said that RelJio has applied to BEST in Mumbai for usage of it's Street Light poles to install it's WiFi equipment, which will enable the company to launch it's WiFi service over a much larger coverage area. I am sure RelJio will be using many such innovative techniques to ensure maximum WiFi coverage so that it's service becomes the primary medium of Internet access for maximum number of people. Reports suggest that the Commercial launch of RelJio's 4G and WiFi service should happen in April'2015.

The above chart shows the Capital Employed at the end of each quarter in each of the 3 business segments of RIL which I have discussed in this report. The Capital Employed in the Oil & Gas business has gone up from about Rs.53,000 crores in June'13 to about Rs.70,000 crores in December'14, majority of this extra Capital has gone into the company's Shale assets in US & Canada. These investments will reflect in substantial revenue additions in the coming quarters, provided the Crude prices remain above $50 or $55 per barrel level. The Retail business has negligible Capital Employed at around the Rs.6000 crores level, which suggests that the business is being run in a very Capital efficient manner. Despite strong growth in the number of stores and the stocking up of related Inventory of Goods at all these stores, the Capital Employed number has not gone up much. Now look at the Yellow bar in the chart. The Capital Employed in the 'Others' segment has gone up sharply from about Rs.28,000 crores in June'13 to over Rs.60,000 crores by December'14. That means a massive amount of about Rs.32,000 crores has been Invested in these businesses. As per information available & my estimates, about Rs.4000 crores of this has gone into acquiring majority stake in Network 18 business and most of the remaining Capital has gone into acquisition of spectrum in 1800 MHz band, laying of Optical Fibre Cable Network and setting up of 4G Wireless network on tens of thousands of towers. As per reports, RelJio will be using over 1,00,000 existing towers from companies like Bharti Infratel, Reliance Communications, VIOM, etc. to set up it's 4G-LTE network. I think the CAPEX in this business will continue at a rate of about Rs.3,000 to 4,000 crores per quarter on an average, atleast for another 4 to 6 quarters as the company keeps expanding coverage of it's 4G services. It will be interesting to see how the revenues from this business build up once the services are commercially launched in the coming months. I have posted my guesstimates of potential revenues & it's impact on RIL's overall numbers in an earlier article.

Happy Investing!!!

Gujarat Fluorochemicals Ltd - Strong Winds, Strong Growth & Equally Strong Rewards

I have been a big fan of Gujarat Fluorochemicals Ltd's (GFL) management since the last 6-7 years. The way they have used the Cash generated from sale of Carbon Credits, which they got for using eco-friendly technology in their Refrigerant Gas business. Over the years the price of Carbon Credits has keept fluctuating wildly, leading to wild swings in Revenue & Profit numbers for companies like GFL. Smart managements like that of  GFL have used that surplus capital earned from sale of Carbon credits & invested into other businesses which could offer a good balance of growth, stability, diversification & profitability.

Revenues & EBITDA are on Trailing-Twelve-Months basis

GFL is the promoter of INOX Multiplex chain, which has consistently expanded capacity & is amongst the Top-3 Multiplex companies in India. As of December'14, INOX multiplexes are contributing close to Rs.1000 crores to GFL's Topline on a Trailing-Twelve-Months basis. But the profitability of this business is not that strong at an EBITDA margin of just over 6%. With increasing scale, the profitability could increase, but only upto a certain extent. To further diversify it's revenues source, GFL invested in setting up Wind Power Generation Capacity. With the initial few Wind farms, GFL tested their operating performance & profitability. To set up a Wind Farm, the CAPEX is high at about Rs.6-7 crores per MW, but the Operating Costs are very low, resulting in high Profit Margins. Few years back GFL decided to hike their Wind Power generation capacity from just about 100 MW to 2000 MW spread over a few years. This huge expansion would have entailed Huge CAPEX too at about Rs.10,000 to 12,000 crores. To make it more competitive, GFL decided to tie-up with a global technology partner and assemble it's own Wind Turbines, which was expected to bring down the CAPEX by about 20-30%. GFL setup a separate subsidiary called INOX Wind about five years ago specifically for assembling the different components required for building a Wind Turbine. They were open to outside orders as well, but initially most of the orders were in-house to the extent of over 70% in the first couple of years. But when the Govt granted the accelerated Depreciation benefit again to Wind Farm investors, the orders from outside started flowing in. By March'13, in-house orders constituted about 40% of Revenues of Inox Wind, which dropped to 15% by March'14 and further down to 2% by December'14. This is a very good strategy to give higher priority to outside orders at a time when they are flowing in real strong.

Look at the charts above, T-T-M Revenues from the Wind Turbine business have jumped from about Rs.1000 crores at the end of March'13 to over Rs.2500 crores by December'14, with most of the jump happening in the last 2-3 quarters. On the profitability front too, EBITDA margins were about 8% at the end of March'14, but has sharply increased to about 13% at December'14. The increased scale has clearly benefited the margins of INOX Wind business. INOX Wind now contributes about 50% of GFL's Consolidated TTM Revenues and about 45% of Consolidated EBITDA. Over the last 1 year, the contribution from GFL's original Chemicals business to Consolidated Revenues has dropped from 33% to 25%, while EBITDA contribution has dropped from 35% to about 21%. GFL's Wind Power Generation business, which hasn't seen much expansion in the last year or so, contributes less than 4% to the company's consolidated Revenues, but it's contribution to consolidated EBITDA is at over 20%, thanks mainly to the high Operating Profit margins in that business. The INOX Multiplex business contributes about 19% of GFL's Revenues, but less than 10% of EBITDA, again mainly because of the low margins in that business.

Look at the Consolidated TTM charts above. The clear upswing in business performance has been handsomely rewarded by the stock market with GFL's share price rallying from under Rs.300 level in March'14 to over Rs.750 level currently. On the valuation front, GFL's share trades at about 28 times it's TTM EPS, but with strong growth, the 1-year forward P/E ratio is probably well under 20 times. The Promoter of GFL owns about 70% of the company and coupled with low Equity Capital, the total floating stock of this company is very limited. Another positive development is that GFL has filed a DRHP for an IPO of INOX Wind, which could happen anytime in the next 2-3 quarters. As and when that happens, the stock of GFL could rally further depending on the kind of valuations they get for INOX Wind and the quantity of shareholding they sell. Overall GFL is a good stock to have in one's portfolio if one wants exposure to 3 or 4 different businesses with a single stock. But remember that GFL's stock does have a tendency to remain in a narrow price range for long periods, mainly because of limited floating stock and very very low trading activity. The share price moves only when some large investor thinks that this share deserves some valuation re-rating. 

Reliance Power - Solid & Steady performance deserves higher Valuation

When Anil D. Ambani Group (ADAG) launched the IPO for Reliance Power in early 2008, it was marketed as if it is one of India's biggest Power Companies. But in reality the company had absolutely no project on the ground, only plans on papers. At the IPO price, the company was valued at over Rs. 1 lakh crores, which was way absurd and only Stupids jumped in to apply for the IPO. And Indians proved that there are millions of Stupids who don't need any financial logic when it comes to trying their luck in the Stock Market. I had tried my best to discourage as many people as possible from applying for the RPower IPO, but most people just ignored me.

It's been 7 years since the IPO and now the company trades at a Market Cap of just around Rs.18,000 crores, i.e. just about 1/6th of the IPO valuation. But the other major difference is that RPower now has atleast a few projects operational and few other in different stages of development. The projects implementation has not happened as per RPower initial projections with several projects getting delayed due to various reasons. As of now RPower has operational capacity of around 6000 MW, comprising of 5800 MW from Coal-fired Thermal plants and 200 MW from renewable sources. Currently RPower is recognising revenue from it's 1200 MW Rosa power plant, 600 MW Butibori power plant, 40 MW Solar PV plant in Rajasthan and 45 MW Wind generation capacity in Maharashtra. Very soon RPower will start recognising revenues from it's Sasan UMPP of 3960 MW, which will give a big booster to the company's topline. RPower's Total revenues for the last 3 quarters are hovering around the Rs.1800 crores mark. This could easily jump to over Rs.2500 crores mark once revenues from Sasan UMPP start getting added. The interesting part is going to be the profitability of that project. Sasan UMPP is linked to it's own Coal mine & hence raw material cost isn't a big problem. But the selling price per unit is very very competitive at just about Rs.1.20 per unit. RPower is trying to negotiate a slightly higher price claiming that the substantial change in Rupee-Dollar rate & huge jump in Diesel prices impacted the company's CAPEX plans for the project substantially.

Apart from Sasan UMPP, RPower has another UMPP linked to a coal mine, where the development work is currently progressing. That project could get commissioned in another 18-24 months. Apart from that RPower has several Hydro Power projects in it's fold amounting to a total of about 5200 MW and the project construction work is progressing on some of them. Few of those capacities are expected to be commissioned in FY'16. RPower recently commissioned a 100 MW Concentrated Solar Power project in Rajasthan, which too will add some revenues going forward. The company also signed another MOU with Rajasthan Govt to contruct another large Solar project. Going by the stream of projects that are under construction/development, RPower will see capacity & revenue boost every 2-3 quarters going forward over the next 3 years.

RPower's T-T-M Cash Profit stands at about Rs.1500 crores on a Total Revenue of about Rs.7000 crores. That means the company is currently enjoying a Cash Profit margin of 21%. I am expecting this to get diluted gradually to about 18% over the next 12 months as some new projects get on stream, which will lead to a substantial hike in the Interest Cost. But the increase in Topline should ensure that Cash Profit continues to grow, though at a slower rate initially. Once the operating projects mature, the margins will gradually improve. At the current Market Cap of just under Rs.18,000 crores, RPower trades at about 12 times it's T-T-M Cash Profit and under 18 times it's T-T-M Net Profit. This kind of valuation is neither cheap nor expensive, but I think it is not considering the potential growth over the next 2-3 years. I think RPower deserves to trade at 12 times it's 1-year forward Cash Profit or atleast 15 times it's T-T-M Cash Profit number. I think RPower is currently trading at a discount of about 20% to it's Fair Value and the Fair Value is expected to increase with every passing quarter. Not just that, RPower is even trading below it's Book Value, at about 5% discount. Compare these valuations to the public sector company NTPC, which is India's biggest Power Generation company, and one will find that RPower's valuations are really cheap on many counts. NTPC trades at 1.5 times it's Book Value and about 9 times it's T-T-M Cash Profit. But remember that NTPC has not reported any growth for the last 3 years and it's Cash Profit margins are lower than RPower's margins despite the fact that NTPC's projects are much much older than RPower's. Consider this.... NTPC's quarterly revenues are currently about 10 times that of RPower's revenues, but it's Interest Cost is less than 3 times. Remember that Interest Cost is a substantial thing for any Capital Intensive business like Power Generation and any change in Interest Cost impacts the company's margins to a great degree.

In short RPower's current valuations at a price of about Rs.60 per share are quite attractive and offer a good scope of appreciation in the coming quarters as well as over the long term.

Educomp Solutions - Views post Q3-FY'15 result

First lets discuss Educomp's upfront Q3 numbers, then we will go to finer details. Educomp's Q3 results are mixed upfront. Sales revenue is down from Rs.130 crores to Rs.124 crores Q-o-Q, but Total Income has increased from Rs.151 crores to Rs.154 crores, mainly because of higher Other Income at Rs.30 crores compared to Rs.21 crores in Q2. The Sales revenue is lower mainly because of School Learning segment's contribution dropping from Rs.56 crores to Rs.42 crores, partially compensated by higher contribution from Online Supplemental segment where revenues increased from Rs.54 crores to Rs.62 crores, despite absence of Gateforum from Educomp's fold. That means Online Supplemental business has pleasantly surprised me, while School Learning segment has disappointed.

My guess is that Educomp has started billing most of it's SmartClass customers only for the Content, while the hardware is being paid for by the Schools upfront. What makes my guess stronger is the sharp drop in Educomp's Total Expenses (excluding Interest & Depreciation) from Rs.161 crores to Rs.128 crores. This is fabulous and I hope going forward Educomp moves towards 100% additions on this model of billing only for Content and Schools pay for hardware upfront, possibly through a third-party vendor. This will boost profitability going forward. Earlier Educomp used to charge around Rs.5000-5500 per classroom per month under a 5-year contract for Hardware+Content deal. I am estimating that under Only Content contract, Educomp could be charging about Rs.3000-3500 per classroom per month for a Contract of same duration, valuing each contract at about Rs. 2 lakhs per classroom over a 5-year term. That means an addition of every 1000 classrooms adds about Rs.20 crores to Educomp's Topline, but it is currently recognised in 20 quarterly installments.

Coming to the Other Income part, it generally comprises of Income from investments or Profit from sale of assets, etc. But incase of Educomp, some portion of the Other Income is possibly coming from recoveries of receivables which the company had previously written-off. This will get confirmed if the trend of healthy Other Income figure continues in the coming quarters. Educomp has written-off around Rs.1200 crores worth of receivables or assets in the last 3 quarters. Even if Educomp manages to recover 20% to 30% of this amount over the next 2 years will be very good for the company's results in future quarters. As at March'2014, Educomp's Capital Reserves figure stood at around Rs.2200 crores. In the first 3 quarters of this fiscal, Educomp's Total Net Loss is close to Rs.1500 crores. If we see another good chunck of write-offs in Q4 as well (hopefully the last one), then Educomp will end this fiscal with negligible Capital Reserves figure. So as and when the write-offs are over and the company starts moving towards Net Profit, the various analytical ratios like RoCE will start looking very very strong. Watch out for this sometime in the second half of next fiscal.

Coming to the most important part of my analysis. I have been studying the Capital Employed figure, which the company declares in the Segmentwise data every quarter, and co-relating it with the Write-offs that the company is doing every quarter. In the chart above I have compared Educomp's Cash Loss against the change in Educomp's Consolidated Capital Employed figure. Cash Loss comprises of company's Net Loss reduced to the extent of Depreciation, but including the Write-off amounts. This Analysis clearly shows that Educomp has got Net Cash Inflow over the last 7 quarters. The Cash Inflow amount are not very big, but positive nevertheless. The inflows clearly suggest that Educomp is managing to cover all it's Operating and Other expenses & Interest payments. Some credit for the Net Cash Inflow goes to the company's efforts in aggressively going after receivables. There has been consistent positive development on this front. Hopefully it will continue in the coming quarters. 

Data Revenues going very Strong for Telecom operators, their Only Hope.

The Telecom Industry in India is experiencing a paradigm shift in it's priorities over the last 4-6 quarters. From a voice-led business model, all operators are now shifting to Data-led business model with most of the incremental CAPEX being used to augmenting capacity to handle higher & higher Data traffic. Operators have invested heavily in expanding their 3G coverage across Cities & even Small Towns and have multiplied their Server capacities over the last 18 months and they are continuing to do so. Internet usage via Mobiles as well as on Desktops/Laptops over Wireless networks is shooting through the roof. Not just the number of consumers using Internet is going up, even the average usage per customer is also increasing rapidly. And with rates remaining more or less stable in the recent months, the increased usage volumes are directly impacting the revenues of all Wireless telecom operators. With this the contribution of Data Revenues in each operators Total Revenues is increasing rapidly.

I have analysed results of Bharti Airtel & Idea Cellular, 2 of the Top-3 operators in India. Bharti Airtel had reported Mobile Service Revenues from India operations of about Rs.43,000 crores in the 12-months ending March'14. Data Revenues contributed Rs.4362 crores, i.e. about 10% of Total Revenues. At the end of December'14, Airtel's Total India Mobile Service revenues have jumped to about Rs.47,500 crores, while contribution of Data Revenues have jumped to Rs.6803 crores, i.e. over 14% of Total Revenues. That means nearly 60% of incremental growth in the company's revenues is coming from Data services. I think this proportion will increase further in the coming quarters. The story is similar in case of Idea Cellular. Data services contributed less than 9% of Idea's 12-months revenues at the end of March'14. The same has increased to 13% by the end of December'14. Both Bharti Airtel & Idea Cellular have seen their Data Revenues grow at a rate of 16-18% Q-o-Q over the recent quarters.

Look at the above chart. The Average Data Revenue per User (ADRPU) per month is increasing strongly over the recent quarters, clearly indicating that the average Data Consumption per user is increasing rapidly. At this rate the ADRPU will soon shoot past the Voice RPU of most operators. And I am sure this will boost Profitability of almost all operators in the coming quarters. In case of both Airtel & Idea, only about a fifth of their total customer base is using Data service currently. In the coming years, even this percentage will grow. And there will be a time when the total Voice usage might start dropping gradually once a substantial chunck of the user base shifts to using High-speed Data services on 3G & 4G networks.

Bharti Airtel's T-T-M Data Revenues have hit Rs.6800 crores mark by December'14. Assuming Airtel to hold about 20% market share, we can safely assume that combined Annual Data Revenues of the entire Industry must be close to Rs.35,000 crores, which is a very healthy number. Even if we assume the growth to slow down to an average Y-o-Y level of 50% for the next 2 years, the Annual Data Revenues size should be around the Rs.80,000 crores mark by December'16. By then Data Revenues should be over 30% of the combined Industry's revenues.

It will be very interesting to see who takes what percentage of the market share in the next 2 years. In the recent quarters, the trio of Airtel-Vodafone-Idea have been gaining market share mainly because they offer the widest 3G coverage across all states thanks to their Roaming agreements. But the threat of big competition looms large on all operators. Once RelJio starts offering it's 4G services, which should happen anytime in the next 2-3 months, most existing operators will start losing market share in the Data service business. But the question is at what rate? I am expecting RelJio to capture about 8-10% market share in the first 12 months of commercial launch of it's services across the country. And in 3 years time it could be around the 25% mark. The fight between the trio of Airtel-Vodafone-Idea and RelJio will be very very interesting. We should see Data tariffs fall considerably once RelJio starts it's 4G services. Let's wait & watch & have fun!!