Reliance Power Ltd. - Q4 FY'15 update.

Reliance Power had another steady quarter with Total Income growing by 20% Y-o-Y during Q4. EBITDA was higher by 33.6%, thanks to higher margins from lower fuel cost. But the Cash Profit was higher only by 15.5% mainly because of 57.5% increase in Interest Cost. 62% higher Depreciation provisioning and 70% higher Tax outgo meant that the Net Profit was nearly flat with less than 3% growth.

( Click here of Reliance Power's Easy Results Summary page. )

Remember that Reliance Power has not started consolidating revenue & profit numbers from 3960 MW Sasan UMPP and the new 100 MW Concentrated Solar Power plant in Rajasthan. Most probably this will start from Q1 on this fiscal. During FY'15, Reliance Power generated & sold a total of 1239 crore units of electricity from it's 4 active projects: 1200 MW Rosa plant in UP, 600 MW Butibori plant in Maharashtra, 40 MW Solar plant again in Rajasthan and 45 MW Wind project in Maharashtra. Total Revenues for the year stood at Rs.7202 crores, translating into an average rate of Rs.5.80 per unit of electricity sold by Reliance Power. This average rate number will drop sharply as soon as the numbers from Sasan UMPP start getting consolidated because the selling rate for units from that project is just about Rs.1.20-1.30 per unit.

Have a look at the Trailing-Twelve-Months charts alongside. The Total Income & EBITDA was quite stable between March'13 to March'14. Then the Butibori project numbers started getting consolidated from June'14 and hence the Total Income & EBITDA started going up noticeably. The Cash Profit grew at a slower rate mainly because of the sharp increase in the Interest Cost from June'14 quarter onwards. IF no new project was to get commissioned now, the charts would again have stabilised. But we are expecting Sansan UMPP and the 100 MW CSP in Rajasthan to start adding to RPower's numbers from June'15 quarter onwards. So the upswing in the charts is expected to continue. Infact the upmove in Total Income chart could be stronger than last year. EBITDA & Cash Profit growth might be moderate, depending on the profitability of the Sasan project.

Since the selling price of power produced at Sasan UMPP is very low, the impact of RPower's Topline is not going to be as big as the Project's generation capacity suggests. This one project is tripling RPower's active Generation capacity from little under 2000 MW to little under 6000 MW. But Revenue growth is not going to be 200%. It will be around 50%. If Sasan project runs around the 85-90% PLF levels, then the Income from this project for the year could be in the region of Rs.2800 to 3200 crores. Since the Coal mine is linked to the project, the Fuel purchase cost will be zero. Only the cost of mining the coal & other operating costs will be included. I am expecting all the operating & non-operating costs for this project to be around Rs.700-800 crores, which will translate into very high EBITDA margins. Interest Cost is expected to increase by around Rs.1500-1800 crores. That means the Cash Profit should grow by about Rs.300 to 500 crores over the year. But the Net Profit of RPower could drop from current levels, because the Depreciation provisioning for Sasan UMPP is expected to be high at about Rs.900-1000 crores every year.

The number above are just rough estimates that I had in my mind. In terms of quarterly numbers, we could see RPower report a Total Income figure of around Rs.2300 to 2500 crores, once Sasan numbers are added. EBITDA could jump to about Rs.1275 to 1300 crores. Cash Profit could be around Rs.500 to 550 crores. Net Profit could drop to about Rs.100 crores. If there is no major further CAPEX immediately, the company can use the Cash Profits to start repaying the loans, which will bring down the Interest Costs and improve the Net Profits. But if the company has further projects to spend on, then the Cash Profits will get utilised there. Let's see. RPower's numbers are expected to grow and the growth is Cash Flow positive. That's the important thing.

Over the recent couple of months, Reliance Power's stock has got further corrected to levels under Rs.55/-, translating into a Market Cap of just about Rs.15,000 crores. This is very very cheap valuations. The company is expected to generate Cash Profits of over Rs.2000 crores in FY'16. That means it is trading at just about 7 times it's expected Cash Profit, which is very low. There is substantial scope for the stock to get re-rated higher in the coming months, unless there is some ugly surprise in the numbers in the coming quarter or two. But I don't think that's going to happen. I am positive on Reliance Power and expect the stock to a range of Rs.75 to 90 anytime over the next 12 months.

Zicom Electronic Security Systems Ltd. - Excellent time to Buy.

I have been recommending a (Purely) Long Term Investment in Zicom Electronic Security Systems Ltd. since November'2013, when the share price was trading in the under Rs.70 range. Following are the links to the posts I have made on this company in the last 18 months:

1. Platinum available at the price of Silver - 8th November'2013.

2. Zicom Electronic Security Systems Ltd - Steady progress continues - 15th Aug'2014.
3. Zicom Electronic Security Systems Ltd. - Valuations have finally started moving !!! - 14th November'2014.

( Click here for Zicom's Easy Results Summary page. )

In each of these previous reports, I have been highlighting that Zicom is best suited only for patient Long Term Investors. On the business front it has been growing at a steady but healthy pace. At the end of Dec'14, it's T-T-M Total Income stood at Rs.1085 crores, EBITDA at Rs.135 crores and Net Profit at Rs.46.3 crores. It's EPS stood at Rs.26.30/-. During the March'2015 quarter, Zicom has issued a total of 26 lakh warrants to Promoters & Dubash family (related to Godrej family), which carry a conversion price of Rs.160/- per share. Once these warrants get converted into normal Equity shares, the corresponsing EPS will get diluted by about 15-16%, but it will also boost the company's Book Value substantially. And the extra capital will help reduce the company's dependence on Borrowed money for Working Capital or CAPEX needs. Banks too will be more co-operative as Dubash family is now part of the large shareholders of Zicom.

After spending a few months in the Rs.100-120/- zone, Zicom's stock had rallied to hit a new high of around Rs.190/- in Jan-Feb'15 period. But the stock has now seen a healthy correction to levels of around Rs.140/- and I think is again an excellent opportunity for Long Term Investors to buy shares of this company, with atleast a 2-3 years view. I am expecting Zicom to grow at over 15% Y-o-Y comfortably over the next 2-3 years and hence I strongly believe that the stock can continue to get re-rated upwards towards a P/E ratio of closer to 10 during this period. At the current price of Rs.140/-, it trades at just about 5-6 times it's T-T-M EPS. Over the next 2-3 years, the stock can easily double or more. The only problem being the stock does have the tendency to test it's investor's patience for considerable amounts of time. Ideally one should buy the stock & not watch the prices on weekly or monthly basis. Just monitor it's Quarterly results to ensure that the performance is decent and sit tight. The returns will come. Just remember to buy in small quantities at a time. The trading volumes in this scrip are generally very low.

Eveready Industries Ltd. - Charging up over recent quarters.

Most of us have heard the Brand 'Eveready' and it's tag line 'Give me Red'. It has been the dominant player in the dry-cell batteries business for many many years now. It sells over 100 crore batteries every year. But not many have heard of Eveready Industries Ltd in the Stock Market world. The company was not doing much well on the Profit front until about 2 years ago. A couple of years ago, the younger generation of the Khaitan family took over the reigns of Eveready Industries Ltd. Since then the company has started expanding it's product portfolio & reducing it's dependence on the gradually-depleting batteries business.

( Click here for Eveready's Easy Results Summary page. )

Over the last 2-3 years, Eveready Industries Ltd has launched many new products like Torch-lights, Rechargeable Flash-Lights and CFL bulbs. These newer products have helped the company expand it's Top-line by about 10-12% every year over the last 2-3 years to touch a figure of Rs.1283 crores for FY'15, despite the fact that the batteries business has been stagnating over the recent years. The Top-line growth has been quite moderate, but the bigger development has been the huge improvement in the Profitability. Have a look at the Trailing-Twelve-Month charts below to get a better idea:

Look at the T-T-M EBITDA & Net Profit charts. Eveready Industries Ltd has seen a sharp increase on these two parameters over the last 2 years and this is the highlight of the company's remarkable turnaround. Over the last 2 years, the company's EBITDA margins have improved by about 280 basis points to reach almost 10% now. Between FY'13 and FY'15, Eveready Industries' Total Income jumped by about 23%, but it's EBITDA grew by just over 70%, thanks to the expanded margin performance. Net Profit during the same period has multiplied nearly 10 times to just over Rs.49 crores. The Net Profit margin improved sharply from just 0.50% to 3.82% in the last 2 years. Apart from improvement in EBITDA, the company has managed to reduce it's Interest Cost by about 18% and Depreciation provisioning by about 25% in the last one year, which helped it improve margins sharply. This sharp improvement in profitability has clearly attracted investors attention and the stock has rallied more than 15 times from levels of about Rs.17-18 to a range of about Rs.260-280 currently. At these prices, the stock trades at about 40 times it's 12-months EPS, which is in-line with what other FMCG peers trade at, or even slightly higher.

What's in store in the future? A few months ago Eveready Industries Ltd has aggressively entered the fast-growing business of LED bulbs. It is sourcing it's supplies from China under contract manufacturing currently. For FY'15, 20% of the company's revenues came from the Lighting products business, including CFLs, LEDs, Torchlights and Flashlights. Riding in the fast acceptance of LED bulbs from Urban consumers and expected surge in demand from rural areas with prices expected to fall sharply in the coming months, Eveready Industries expects to see a huge surge in demand for LEDs in the coming quarters & years. The expects to triple it's revenues from the Lighting products business over the next 2-3 years. The company is even planning to launch some new products like Rechargeable Fans, etc. in the coming months. This expected surge in revenues from Lighting products and other non-battery business is expected to enable the company to post a decent growth of 12-15% Y-o-Y for the next 2-3 years. The Profit growth could be better than the revenue growth as there is still some scope for margin improvement that the company can manage with increasing scale of operations of these newer products.

Valuations are already on the expensive side and are so only because of the huge improvement the company has reported in it's profitability. If the company does disappoint on this front in the coming quarters, then we could see some sharp fall in it's stock price. So please be warned on this point. But if the company does continue with it's improved margins and push it little more higher, then the stock can comfortably command the P/E multiple in excess of 35.

Indiabulls Housing Finance vs LIC Housing Finance comparison

LIC Housing Finance has been amongst the largest Housing Finance NBFC in India after Housing Development Finance Corporation Ltd. or HDFC. HDFC did annual revenues of about Rs.48,000 crores and a Net Profit of close to Rs.7000 crores for FY'15. LIC Housing Finance's Total Income at Rs.10,800 crores is a fraction of HDFC's number. But on one hand where HDFC's annual income is less than 5 times LICHFL's, the former's Market Cap is nearly 9 times that of the latter!! HDFC's Market Cap stands at over Rs.1,80,000 crores compared to less than Rs.21,000 crores for LICHFL!! There are various factors behind this. Some of them being Quality of Assets, Consistency of Growth, much longer track record, Large unlisted investments of HDFC, etc.

( Click here for Indiabulls Housing Finance's Easy Results Summary page. )

So we cannot directly compare HDFC with any other Housing Finance company. But we can certainly compare LIC Housing Finance with another fast rising NBFC in the same business, i.e. Indiabulls Housing Finance Ltd. The flagship company of the Indiabulls Group, earlier known as Indiabulls Financial Services Ltd, was originally involved in providing finance for Used Commercial vehicles, Business Loans, Personal Loans, alongwith Loans for purchase of Property/Real Estate. This company has been in the Financing business for over 10 years now and has a good track record of strong growth over the years. Even though Home Loans formed over 50% of it's business right from FY'06, it decided to purely focus on this part of the business after it took some hit during the FY'2008-09 economic upheaval. In the next few years, it did not expand the Non-Home Loans business and gradually brought it down to less than 5% of it's business composition. During FY'2012-13, the company decided to register itself as a Housing Finance Company and change it's name accordingly, as there were cost advantages for being a Housing Finance company. We can safely say that whatever growth the company has seen from FY'10 onwards is purely because of expansion of it's Housing Finance Loan Book.

In the following charts, I have compared to Annual numbers of Indiabulls Housing Finance Ltd. with that of LIC Housing Finance Ltd. for 5 years from FY'11 to FY'15.

Now let's look at the first chart. In FY'11, Indiabulls' Total Income stood at Rs.2500 crores, just half of LIC HFL's Rs.5000 crores. The latter's Total Income has now grown to Rs.10,800 crores in FY'15, i.e. a growth of 116% in four years time. During the same period Indiabulls HFL's Total Income has posted a growth of 190% to post Rs.7270 crores. In FY'15, LIC HFL's Revenues grew by 15% Y-o-Y, whereas Indiabulls HFL's growth was 23%. From FY'16, I am expecting the gap between the two companies' topline to start reducing as Indiabulls HFL is expected to continue posting a growth which is atleast 5% more than that of LIC HFL.

Coming to the 2nd chart of Interest Cost, which is the biggest cost for any Financing company or a Bank. Indiabulls HFL's Interest Cost has grown from Rs.899 crores in FY'11 to Rs.3944 crores in FY'15, an increase of almost 340%. On the other hand, LIC HFL's Interest Cost has gone up from Rs.3098 crores in FY'11 to Rs.8310 crores in FY'15, an increase of almost 170%. Purely in terms of % increase in Interest Cost, LIC HFL has done better. But here it will be more important to see how much % of the company's Total Income is consumed by the Interest Cost, because this is what will impact the company's Profit margins. Here again Indiabulls HFL has done much better because over the last 3 years, it's Interest Cost has been around 55% of it's Total Income, whereas the same for LIC HFL is close to 76%. From these numbers it becomes obvious that Indiabulls HFL has been managing it's Borrowings much much better than LIC HFL, which ultimately results in way superior Profit margins for the former.

Thanks to the superior management of it's borrowing costs, Indiabulls HFL has done stupendously better than LIC HFL on the Net Profit front. Between FY'11 and FY'15, Indiabulls HFL's Net Profit grew from Rs.743 crores to Rs.1901 crores, an increase of 156% in 4 years. During the same period, LIC HFL's Net Profit grew from Rs.974 crores to Rs.1386 crores, a disappointing growth of just 42%. This is extremely disappointing from LIC HFL because even though it's Total Income is 50% higher than that of Indiabulls HFL, the latter's Net Profit is 37% higher than the former!! In such a scenario, how on earth does LIC HFL deserve a Market Cap of Rs.21,000 crores while Indiabulls HFL is commanding a value of Rs.20,000 crores!! Going by the stronger growth in Total Income, better management of borrowing cost, much stronger profit margins, isn't it plain simple Logic that Indiabulls HFL should trade at a premium to the valuation enjoyed by LIC HFL??

At the current price of Rs.415/- LIC HFL enjoys a P/E ratio of 15, whereas at Rs.565/- Indiabulls HFL enjoys a P/E ratio of just over 10!! This is really funny and does not make any sense. Hence I think this is an excellent opportunity for Investors to take advantage of a potential re-rating in the stock of  Indiabulls Housing Finance Ltd. With an expected growth of about 20% in FY'16 and a potential P/E of 15, I think Indiabulls HFL's 12-18 months fair value comes to over Rs.900/-. All this before even mentioning the Trump Card for Indiabulls HFL, which is it's Dividend Payouts, which have risen sharply over the years. Indiabulls HFL has been paying between 50% to 70% of it's Quarterly Profit as Dividend on a consistent basis. In FY'15 it paid Rs.35 per share in total dividends, which translates into a Dividend Yield of over 6%. And we can safely assume that the dividends will be increasing in line with the increase in Profits. So the Potential Dividend Yield in coming Years at the current price of Rs.565/- in actually much much higher. And remember that Dividends are Completely Tax-Free for the Investors. A point to note is: The huge Dividend payouts is hugely positive for Shareholders, but Cash is like Raw Material for any Financing company. Indiabulls HFL could conserve some of it's Capital by distributing lower amount as dividend and use that Capital to enhance it's business further. But the Indiabulls Group seems to believe in distributing most of it's profits amongst it's shareholders.

Adani Ports & SEZ Ltd. - Q4 FY'15 Update

( You can find my report on Adani Ports & SEZ Ltd written a couple of months ago, at this link )

Adani Ports & SEZ Ltd. (APSEZ) has posted another strong set of numbers for Q4-FY'15. It has posted a very healthy Y-o-Y growth of 42% in it's Total Income for the Quarter gone by. And this comes on the back of 32% posted in Q2 and 38% posted in Q3 for this fiscal. This is an excellent momentum of growth that the company has managed to build up in the recent quarters. Remember that APSEZ is amongst the largest Logistics companies in India, primarily involved in Port operations & associated SEZ. A strong growth in this company's business means that there has been significant growth in Import-Export activities in India, which in turn indicates that the economic activities in the country are on the up swing.

( Click here for Adani Ports' Easy Results Summary page. )

The charts alongside show the progress in Trailing-Twelve-Months numbers. The Total Income has now grown to a little over Rs.6800 crores, EBITDA is very close to Rs.4600 crores and Net Profit is over Rs.2300 crores. The FY'15 EPS stands at Rs.11.2/-. For FY'15 APSEZ has posted a growth of 24% in it's Total Income and a Net Profit growth of 33%. I am expecting APSEZ to continue growing at a rate of over 20% Y-o-Y for the next 2-3 years. Part of this growth will be Organic in nature, while some part will be because of Inorganic reasons. APSEZ has done some recent acquisitions and is looking to expand capacities at the newly acquired Ports. This is where the inorganic growth will come from.

It's been just 1 year of the Modi Govt and things are being put in place to ensure that the country's growth rate picks up to 8%+ levels. The Make-in-India push will start showing on the ground in the couple of years time. This could boost India's participation in Global trade, in turn resulting in increased volumes of Import-Export of goods. All this will benefit companies operating in the Ports Logistics business. APSEZ is clearly preparing itself to grab a good chunck of this increased volumes of goods being shipped into or out of India. I won't be surprised to see APSEZ doubling it's Total Income in 3 years time or tripling in 5 years time, from the current levels.

In the recent few weeks we have seen the Nifty index moving from levels closer to 9000 to levels closer to 8000 now. Many of the stocks, even of Bluechip companies, have corrected in the region of 10% to 25% during this time. But look at APSEZ's stock price chart above. This stock has remained more or less steady in the Rs.300 to 330 range, despite the massive correction happening with most other stocks. This shows the strength in APSEZ's stock price. I think there are good chances of APSEZ's stock getting re-rated to a higher P/E ratio in the next 6-12 months. Currently it trades at a P/E ratio of about 29-30. I think we could see this being increased to about 35 in the coming months. It may not happen immediately. The current correction in markets should first come to an end. Only after that we will see the stocks of good performing companies getting re-rated. APSEZ is one possible candidate, alongwith many others.

Crude Price movement & Subsidy related developments.

We saw the Crude Oil Price collapse from $100+ per barrel levels by about 50% during the last few months of 2014. Then the prices stabilized and spend most of the period between Jan to March of 2015 in the range of $50 to $60 range. This Crude price collapse helped the Indian Govt to get rid of the Subsidy being given to Diesel and now both Petrol & Diesel prices are market driven. Even the LPG prices have come down to some extent which has further reduced the overall fuel-related subsidy burden. This coupled with the implementation of the Direct Benefit Transfer scheme, which has helped plug subsidy leakages to the extent of nearly 20%.  All this has led to the Govt going ahead and bravely announcing that henceforth the Govt will be footing the entire fuel-subsidy and the Oil Marketing companies as well as the Oil & Gas producers will not have to shell out anything towards the subsidy.

No More Subsidy sharing means that the Public Sector OMCs like Indian Oil Corporation, BPCL & HPCL as well as Oil & Gas Producers like ONGC and Oil India will get full price of the products they sell and hence will be able to report true Profit & Loss Accounts after many many years. It goes without saying that it is Huge Huge Positive development for all these companies. Consider the business models of IOC, HPCL & BPCL. Majority of their revenues comes from retailing of Petrol & Diesel and bulk supplies. Since these fuels are now completely deregulated, it is assumed that these companies are now earning profit on these revenues. The Profits though will depend on their refining margins, which are not so great for either of the PSU Refiners. Still the volumes are large and hence any margin earned will be good. These companies are into distribution of LPG cylinders to homes as well as commercial users and supply of Kerosene to PDS outlets. Until the DBTL was implemented, these companies used to procure LPG at market rates, sell them at regulated rates and then claim the difference from the Govt. as subsidy. Similar was the case with Kerosene supplies. This used to put pressure on the Cash Flows of the PSU OMCs. With the introduction of DBTL, these OMCs are charging market rates on every LPG cylinder they supply and the customer is paid the subsidy amount directly in their Bank account by the Govt. So here too the OMCs are now earning profits. Hopefully DBTL will be introduced for Kerosene supplies as well very soon and once that happens, these PSU OMCs will be completely responsible for improving or destroying their profitability.

Coming to Crude Price movements, have a look at the chart alongside. After rapidly falling & dipping below the $50 per barrel mark, the crude price have been showing signs of gradual upmove. In the recent days we have seen the Brent Crude prices moving above the $65 level and getting closer to the $70 level now. For every dollar that the Crude price moves up, it is slight bit of negative for the Indian Economy in general, but it is substantially positive for all the companies that produce Oil. I am talking about ONGC and Oil India from the PSU basket. When ONGC was sharing subsidy, the company claimed that it was effectively getting only about $60-65 per barrel for it's Oil even when the market price ruled in triple digits. Now that these companies have been spared by the NDA Govt from sharing of fuel subsidies, every extra dollar that they get for their Oil will go straight to profits. This is because the Cost of producing Oil remains more or less constant. So the changes in price realisation has a very big impact on the profitability of Oil producing companies. If ONGC manages to realise an average rate of $70 per barrel during the current fiscal, then it's profits should be certainly higher than previous years.

Probably the Biggest beneficiary of Crude Price rise in India will be Reliance Industries Ltd. When Crude was closer to $50 per barrel, RIL's Shale JVs were struggling to cover their costs. But with Crude now above $60 and closer to $70 per barrel, the JVs will be much more comfortable on the profitability front. This will definitely boost RIL's consolidated profits. There will be benefits for RIL even in it's core business of Refining & Petrochemicals. Firstly the Topline will improve in line with increase in Crude prices. And the Bottomline too could be moving higher as the company is currently enjoying the best margins in it's history. In Percentage terms, the margins will most probably drop, but in absolute per barrel terms it should not be much lower and coupled with higher turnover, it should add to the company's profits. Another factor benefiting the company is that with every passing month, the volumes it sells from it's Fuel Retail outlets is moving higher. As a strategy, RIL is pricing both Petrol & Diesel about 15 to 25 paise per litre lower than the prices at outlets of PSU OMCs in every region. This will help the company gradually increase it's volumes & market share which is probably less than 1% currently. Even though RIL is pricing the fuels slightly lower than that of PSU OMCs, the profits it earns per litre is expected to be much more because of it's way superior Refining Margins compared to that of the PSU OMCs. It will take some time for the Fuel Retailing business to start having any significant impact on RIL's numbers, but it's significance will keep increasing with every passing month.