Diversified infrastruture

Marg, an Andhra-based company incorporated in 1994, is into development of ports, airports, SEZ and commercial & real estate. It is present both in the realty and infrastructure segments. The company has a well diversified portfolio which includes infrastructure projects, industrial clusters, real estate- Commercial and Residential. The company is into Ports, Marine Infrastructure, Fishing Harbours, SEZs, Industrial Townships, IT Parks, Malls, Serviced Apartments, Integrated Townships, High end Premium and Budget Apartments. Broadly, the company operates in three segments, i.e. Infrastructure (BOT assets), EPC and Real estate. The company focuses not on standalone projects, but on those that provide opportunities to exploit the synergies of its infrastructure and real estate business capabilities. The parent company is largely into EPC contracts, a mix of internal and external projects, while infrastructure projects are under wholly owned subsidiaries as SPVs.

MARG is credited with the pioneering development of several residential and commercial complexes (including the first private IT park on the Old Mahabalipuram Road, Chennai’s arterial hub). It has also constructed some renewable as well as non-renewable power-generating infrastructure. The company was awarded the prestigious Karaikal Port project in January 2006 by Government of Puducherry (GOP). The Karaikal Port project is a BOT project expected to be completed by 2015-16 and will possess a handling capacity of an aggregate cargo in excess of 3 cr. tons annually. Located 280 km south of Chennai Port and 360 km north of Tuticorin Port, Karaikal Port has a strong and a growing hinterland which includes areas like Nagapattinam, Cuddalore, Thanjuvar, Trichy, and parts of southern AP and Karnataka having strong industrial clusters. This would give it an assured supply of orders from these areas. Recently, the company has signed term sheet with the PE firm Jacob Ballas for primary investment of Rs 100 cr. in the port. Jacob Ballas has also acquired ~8% stake for Rs 100 cr. from IDFC, who had invested Rs 150 cr. in September 2010. Marg’s stake in Karaikal Port post this transaction will reduce to ~62% from 70%. They have already commissioned first phase of Karaikal Port with capacity of 5.25 million ton of cargo. They have ship repair yard and two integrated SEZ in townships.

The market sentiment towards infrastructure & realty stock currently is quite negative and many infrastructure stocks including Marg have been battered out of shape. Marg has lost over 86% from its high of Rs.630 during the boom of pre-2008. The negative sentiment is more out of fear psychosis and lack of confidence than anything else. While it is a fact that the fundamentals of the economy have taken a turn for worse than what they used to be a few years back and the fact that many of the infra companies are facing a liquidity crunch, the stock prices have more than corrected for these deteriorated fundamentals and the behavior of the market is as irrational as was witnessed in January 2008, albeit on the downside now. Also, the government is expected to provide impetus to the sector through few policy measures. Liquidity position may ease off over the next few months. However stock prices generally respond much before the action takes place which may well happen in this case too. Infrastructure growth in India will continue to happen; the pace of growth is what could be debatable. The stock prices have more than adjusted to the changed scenario after having fallen over 90% in most cases.

Promoters (Reddy family) hold more than half the equity @54.4% while Reliance MF has about 6% stake. Other significant shareholders of note include Ashish Kacholia (co-founder of Hungama) and IL&FS Securities

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The company at its current market cap of Rs.319 cr. and a price of 83 is going at less than half of its book value of 190. Similar to what Adani did in the case of Mundra port (now called as Adani Ports and SEZ), Marg could also come out with an IPO of this port, unlocking value for its shareholders in times to come. Though there may be short term challenges, the long term potential certainly looks good.

Refined profits

Nagarjuna Oil Refinery (NOR) was formed by the Nagarjuna group (KVK Raju) thru its flagship company Nagarjuna Chemicals & Fertilizers in collaboration with other investors. Recently, NFCL demerged this business and allotted shares in the refinery to its existing shareholders thru a composite scheme of arrangement wherein shareholders of NFCL got shares of NOR as per the terms of the scheme. Now, NFCL holds 51% stake in the project while Tata Petrodyne, a unit of Tata Group, has 30%. Tamil Nadu government holds 5 per cent through TIDCO, Uhde of Germany has 4 per cent and Cuddalore Port has the remaining 10 per cent.

NOR is setting up a refinery over 1,600 acres, located 200-km south of Chennai between Cuddalore and Chidambaram on the east coast. This state-of-the-art project will refine 6 million tonnes of crude petroleum per year (MMTPA) in Phase-I. The refinery will have associated marine infrastructure including single point mooring (for crude oil handling in very large crude carriers) and jetty (for finished product handling). It will have capability of processing heavy and sour crude oil and will supply light and middle distillates.

Some time back, independent oil and commodities trader Trafigura Pte Ltd of Singapore, declared its intention of investing up to Rs 1,250 crore ($250 million) in the Nagarjuna refinery and in storage facilities. This will include buying a 24% stake in the company for Rs 650 crore ($130 million). In addition to acquiring an equity stake, Trafigura will invest a further $120 million into the construction of extensive storage facilities and associated infrastructure at the refinery's 2,500 acre site. This investment was the first of its kind for the company.

This appears to be a case similar to that of MRPL about 10 years back. MRPL was set up in 1988 as a JV between HPCL and Aditya Birla group, with both holding about 38% each and the rest with the public, with an initial processing capacity of 3.0 million tones/annum that was later expanded to the present capacity of 11.82 Million  tones/annum. It was into heavy losses during the late 90s and Aditya Birla group made up its mind to get out. As per the MoU between HPCL and the Aditya Birla group -- the promoters of MRPL -- HPCL had the first right to refuse the Birlas' stake. Once Birlas decided to get out, and HPCL was not too keen on buying their stake, the war for their stake heated up with many renowned bidders such as local major IOC as well as Kuwait Petroleum showing keen interest. Finally in March 2003, ONGC acquired the total shareholding of A.V. Birla Group and further infused equity capital of Rs.600 crores thus making MRPL a majority held subsidiary of ONGC. It also acquired further shares from the public in the following open offer as well as from the lenders who converted their loans into equity as a part of Debt Restructuring package. The current holding of ONGC in MRPL is thus around 71%.  Due to the heavy debt and lack of management attention (due to the tussle between Birlas and HPCL), MRPL stock was languishing close to Rs 8 in 2001. Post OGC coming in and improving not only its operational strength but financial as well, it is around 50 now, down from more than 70 a year or so back, still gaining around 6 times in 11 years, a return of nearly 50% p.a.

So a bad company with a good promoter running it usually has a good chance of turning around. This may well be true of NOR. If Nagarjuna group decides to opt out (as they well be since oil is not their core strength), or for that matter TN govt. as a part of divestment for raising funds since state governments are perennially in need of funds, there could be multiple suitors including international majors for their stake. However, it must be noted that the refinery is yet to be commissioned with the plan being for early 2013, barring unforeseen circumstances. This is a delay of almost six-nine months due to the damage caused by cyclone Thane, which hit Cuddalore last year. Meanwhile, Indian Oil Corporation has signed an agreement with NOR to sell their petroleum products of Nagarjuna Oil. Till then, nothing much may happen, but once it starts going and becomes commercially viable, there will be renewed interest in this.

Since it just got listed some time back, there are no financials to speak of. Also, since the refinery is not commissioned, there is hardly anything to look forward to at this point. But as has been seen in the case of Essar, once the refinery is commissioned, the financials will catch up fast. The Essar Oil grass roots refinery in Gujarat, started in 1996 was completed and commissioned in third quarter of 2006. The refinery project was delayed several times due to environmental concerns and financial problems, including initial cost overruns and a shortfall in equity contributions. According to company reports, the refinery was 60% complete in 1998 but had the misfortune to be struck by a cyclone that caused considerable damage. In 1995, Essar Oil came out with an IPO @45 which plummeted to 15 by Nov ’99 and further sank to 8 by 2000, when there was no sign of the refinery. Since then it rose to about nearly 300 by Dec ’07 when the refinery was going strong. In this year itself, it has again plummeted to about 55 currently. Even considering the worst case, if someone had bought into Essar at 8 in 2000, it would still have multiplied 7 times in 12 years, again a return of nearly 50% p.a.

Since its listing end of March ’12, NOR is currently quoting at the rock bottom price of Rs 6. It may be worthwhile to keep an eye on this one and buy even now as well as when it goes lower with the market and towards the time of its commissioning. There is very little to lose here with the current promoters, irrespective of delays and hurdles which may surely occur in times to come, as has been seen in the cases of Essar as well as MRPL. The only thing to be kept in mind is that this will be a long wait but will in all likelihood be worthwhile.

Colorful future

Kokuyo Camlin (formerly Camlin), owner of the well-known Camel and Camlin brands, is one of India's leading stationery companies with a wide product range and strong pan-India distribution network. Established in 1931 by D. P. Dandekar with a single product (ink powder), today it is a company manufacturing over 2000 products, including variants. Its wide distribution reach and quality products have made it household name in school and education stationery products. Camlin’s products have been used for generations and enjoy strong brand loyalty. It is a market leader in art materials product segment like crayons, sketch pens, water colors, oil pastels etc. besides school education products such as pencils, gel pens, erasers, sharpeners, maths sets/compass boxes and notebooks among others. It is also present in the office stationary segment (stamp pads, ink etc but primarily markers) as well as fine art and hobby products segment (glass colors, fabric colors etc). The company was the first to launch the Hobby Range of colors in India, and introduced color categories such as fine art colors, hobby colors and fashion colors. It has 4 manufacturing units, 3 in Maharashtra (Tarapur, Taloja & Vasai) and 1 in Jammu where the goods produced enjoy excise exemption leading to competitive pricing and higher profitability.

The company has ventured into pre-school business from the year 2009 and has commenced 3 pre-schools till date in and around Mumbai. The schools, branded as Alpha Kids, have received good response, in terms of number of enrolments. How they scale up this business remains to be seen.

Last year around this time of the year, Camlin promoters, the Dandekar family, sold a major part of their stake (20.3% out of the total 38%) crore to Kokuyo S & T Co Ltd., a leading company in Japan with over 100 years of experience in stationery and furniture products, design and construction of office and store interiors, mail order business, lifestyle retail and distribution having an annual turnover US$ 3.2 Billion. This was followed by an open offer to the other minority shareholders @110/share. Post the stake buy, the foreign promoter Kokuyo holds nearly 51% in the company and the erstwhile promoters the Dandekar family holds nearly 13%. So the promoter holding in the company is a robust 64% which gives a great comfort as an investor.

However, as in any business catering to a wide market, there are challenges. The company operates in an extremely competitive environment, wherein the size of the unorganized market is supposed to be about 40%-45%. The company faces tough competition from both the organized and the unorganized segments of the industry. The company’s business is also cyclical to a certain extent with Q1 (when the schools and colleges open) being the strongest and Q4 (when they close) being the weakest. However, as the company gets into the expansion mode with the financial and technology backing of its Japanese parent, it is poised to exploit several new opportunities and create & maintain its competitive edge in many of the new as well as existing products. Kokuyo may introduce own products such as Campus notebooks (where it is a strong player in Japan), Airofit scissors, Dotliner adhesive dispensers and its furniture line, as these will either be new products or brand diversifications. There are many high-growth areas such as schoolbags and notebooks where Camlin is not present and Kokuyo’s know-how is expected to help. At $2.2 billion or roughly Rs 10,000 crore, the Indian stationery market is big.  That the company has its task cut out is clear. The space has evolved over the last few years with the entry of new players like writing majors Cello, Reynolds, Linc and Luxor at one end and ITC with its Classmate brand of notebooks and allied products at the other. International brands, like Faber Castle and 3M, are also consolidating their presence here. Acquisitions of domestic companies by global brands are also on a rise: Societe BIC of France had acquired 40 per cent stake in Cello in 2009, the same year when Japan's Mitsubishi formed a joint venture with Linc Pens, and recently bought a stake in it. So it may not be a cakewalk for Camlin, its strong brand equity notwithstanding.

Rising disposable income, growth of the private sector and increasing government spending on primary education would increase the consumption of quality stationery products. The education and literacy drive of Government of India is creating the platform for growth in the stationery business. The biggest boost in the education sector has been the historic "Right of Children to Free and Compulsory Education Act, 2009". Camlin is all set to align its resources to gain advantage of various government initiatives on education such as 'Sarva Shiksha Abhiyaan'.

Camlin @38 is available right now at 33% (nearly 1/3^rd) of what the foreign promoter actually offered for the company. What the promoter bid for 54% odd levels of the total market-cap right now is available for 30%. M-cap/sales for the company is at a paltry 0.6x while most FMCG companies command it in excess of 2x+. So there is some catching up to do yet. Some time back, PE fund New Vernon is said to have picked up a small stake through open market deals. So here is a company with a strong Japanese promoter who brings in vast technological expertise to the table, and is looking to integrate its operational strength with the company's strength, where the balance-sheet clean up is already done. Things can only look up from here though short term challenges due to the deteriorating economic conditions remain. This provides an opportunity to accumulate the stock at attractive levels and wait for a turnaround.

Japanese firms appear to have finally learned their lessons in the Indian consumer market. After Sony and Panasonic were laid low by the Korean onslaught of LG and Samsung, they have quietly regrouped themselves and are now giving the Koreans a run. Similar is the case with Ranbaxy. A few years back, Dai Ichi Sankyo paid what then was thought to be an astronomical sum for buying out Singh brothers’ stake. However, they believed in the company’s core strength and did not mind the expensive buy. All was not rosy along the way, though. There were many regulatory issues faced by the company with the US drug authorities which affected them significantly resulting in the share price crashing from 600 levels to around 200. In the last year or so, it has slowly clawed back to around 500. A similar thing could happen with Camlin. It is in fact at the same level it was before the stake sale happened. From here on, an investor who has got patience and has a longer timeframe has hardly anything to lose because the insider himself is paying a very high premium valuation because they know what they will do with the company in the longer timeframe.

Retail brand potential

S. Kumars Nationwide (SKNL) is a play on 2 fronts – brands and retail. Though it is in a currently least favored category of textiles and hence shunned by markets, there are quite a few positives which can be looked at and which do not appear to have been adequately priced in.

On the brands front, they have major brands such as S. Kumars, Reid & Taylor, Stephens Brothers, Carmichael House and Belmonte. Out of these, 2 major brands which are doing quite well in the mid to premium segment are Reid & Taylor and Belmonte, and to a lesser extent Carmichael House. In fact, considering the celebrity endorsements that these brands have got (Shahrukh Khan for Belmonte and Big B for Reid & Taylor), they surely merit some consideration. After all Sharukh and Big B are not likely to lend their name to all and sundry and the fact that they have chosen to align with these brands does give them credibility. And both these brand ambassadors surely don’t come cheap. The fact that S Kumars has been able to afford them also shows the company in a positive light.

In July 2008, GIC (the investment arm of govt. of S'pore) bought 25% stake in Reid & Taylor (a 100% subsidiary of SKNL) for 900 crore valuing the company (Reid & Taylor) at 3600 crore. This was in 2008, and investors like GIC invest for keeps i.e. they are not like hedge funds out to make a quick buck but more like pension funds who are content to hang in there for the long term for their investment to grow amid boom and bust cycles.. Since then things would definitely have looked up. Current market cap of the whole company (SKNL) which holds a 75% stake in Reid & Taylor is about 1000 crore. This gives a measure of the value that still exists.

The major problem which is hindering the stock from a fundamental perspective is the huge debt of about 3400 crore on the balance sheet. The promoters were hoping to cash in on Reid & Taylor IPO in Sept ’10 to ease this burden, but the market condition over the last year or so has put paid to those hopes. Even if they go for PE funding or private placement, the buyers are unlikely to accept high valuations (rightly or wrongly) demanded by the promoters. An extreme step from the promoters could be to sell off Reid & Taylor completely and deleverage their balance sheet. This would be on lines similar to what Pantaloon Retail (who incidentally are saddled with the same problem of huge debt and are in a similar industry) did recently when they sold off their Pantaloons brand/format to Aditya Birla group.

In the results declared yesterday (31-May-12), they have posted an EPS of 13.85 for FY12 giving it a PE multiple of just about 2.5 at the current price of about 34. This is too low for such a company, irrespective of other factors such as a debt overhang. And the book value of the company is 48.

In March ‘11, promoters increased their stake in the company @43/share, a 30% discount to the current price. Around the same time, they also placed shares to Daiwa Capital Markets Singapore @57/share on conversion of FCCBs. Later in Dec ’11, they also converted their previously allotted warrants @64/share. Prior to that, in Sept ’10, they had made a private placement to institutional investors @80/share.

So the promoters have been able to place shares at 2-3 times of current price as well as bought shares themselves at prices significantly higher than the current. This shows the confidence not only of external investors, but also of the promoters in the company. Of course, all these transactions happened when times were far better than they are now, and things were just beginning to look up. Just last year at this time, the share price was quoting around 70. It has been a 50% drop from those levels in just a year.

All in all, assuming that things do turn around for the Indian economy in general and markets in particular, at some point in not too distant a future, S Kumars Nationwide should go places.