Infra-focussed growth

The Adani Group, a renowned name in Infrastructure and related area, is an Indian business conglomerate with a worldwide presence in areas like Power, Infrastructure, Logistics, Global Trading, Port & Special Economic Zone, Energy, Oil and Gas, Mining, FMCG products, Agribusiness, Bunkering, Real Estate Development, and others. Its flagship company is Adani Enterprises, which has had a long journey since its listing in 1994, when it entered into agriculture business in 2001 and mining in 2006.

Previously called as Adani Exports Ltd., the corporation registered revenue of Rs. 260 billion in the last financial year. Towards early 2010, the company changed its focus from Trading to Infrastructure. Now consider the high growth businesses it operates in:

• Ports (Adani Ports & SEZ, formerly Mundra)

o   Providers of port based end-to-end logistics services for diversified Cargos and vessels, including dry, liquid, bulk and container cargo.

o   Developers of port based SEZ by providing infrastructure for industrial commercial and residential purposes

• Power (Adani Power) - Involved in power generation, trading, transmission. In July ’11, the company became the largest pvt thermal power producer  in India, with the commissioning of the second supercritical unit of 660 megawatt (Mw) at its Mundra (Kutch) plant.

• Mining (Coal, Iron ore being the major ones) - The Company is currently operating one coal mine in Indonesia and two others in India will start production from FY11 and FY12 respectively

• Residential properties in major cities like Mumbai, Ahemdabad, Mundra etc.

• Active players in the Oil & Gas exploration both onshore and offshore in India and abroad.

The first 2 businesses are in the form of listed companies where it has a significant stake (70% in Adani Power and 55% in Adani Ports & SEZ). It has recently stated its intention to exit from the residential properties business.

In the middle of last year, around July ‘11, Karnataka’s Lokayukta, Santosh Hegde, indicted Adani Enterprises by stating that they shipped out iron ore beyond permitted limits, as much as 7.7 MT of illegal export of iron ore. It was one of the four port service providers to whom the government had leased out certain areas at Belekeri‘s fair weather port in the South of Karwar in Dakshin Kannada district. The Lokayukta charged the company for forging permits to transport illegal iron ore. That day the stock tumbled more than 20% from nearly 740 to 586. Even today, it is yet to recover from that pasting and is down nearly 44%, in early 400s. This seems unwarranted as the company’s business/revenue model remains unscathed. Some of the factors that lead to this belief are:

Ø  A predicted high growth rate of the Indian economy in the coming years, in turn leading to a higher demand for coal, will have a substantial positive impact on company’s presence in this segment.

Ø  AEL also bought the Australia-based Linc Energy's coal assets for about Rs 12,600 crore in

a cash and royalty deal. This ensures a stable supply of coal for its future power generation

plans.

Ø  Adani Power’s future plans for getting more power on stream in the coming years, which seems to be on track

Ø  APSEZ last year acquired Abbot Point Coal Terminal in Australia for a 99-year lease, thus securing handling of coal cargos from Adani's own mines as well as from other parties. This will create ample opportunity for business going forward.

Ø  Government’s recent initiatives to ensure infrastructure boost thru various mechanisms directly and indirectly.

As per an article in ET on 24-Feb-12, Adani group manages assets worth $7 billion in annual revenues. The scrappy entrepreneurial group from Gujarat, has a history of run-ins with the regulators, law-enforcement authorities and environmentalists, but has hired Wolff Olins, a marquee international brand consultancy firm, that has helped burnish the image of staid industrial stalwarts such as the Tatas and the Munjals, for an image make-over. How it changes the public perception of Adanis, only time will tell.

All in all, Adani Enterprises looks all set to generate returns from the assets it has acquired over the last few years, and become a diversified Infrastructure conglomerate in times to come. It has recently indicated its intention to bid for BG Group Plc's 65% stake in Gujarat Gas for gas distribution.

In 2010, the company gave a bonus of 1:1, followed by a rights issue in 2011. In spite of all this, its share capital is just around 50 crores. The more than 40% plunge in Adani Enterprises (AEL) stock over the lst few months seems unwarranted. With a 52 wk H/L for the company @261/766, at the beaten down current price of 385, it surely has a long way to go.

Low price, High Potential?

After reading about and following the stupendous trajectory of Page Industries and Lovable Lingerie, what jogged my memory was a company called Maxwell Ind. (makers of VIP inner-wear and related accessories). Considering how its peers have left it far behind (in spite of its head start) and the steps it has taken to change the situation, it may be worthwhile to track it and see how it develops.
The point to be noted is that their earnings are pretty low at this point (0.32 on TTM basis giving a PE of around 73 at the current price of 23.50 as of Feb 20 '12), but this could change going forward for following reasons:
1. They have recently sold their spinning business and going by management’s publicly stated intention, they plan to focus on brands. If this really happens, this could boost their earnings and margins significantly and it may go the Lovable or Page way, both enjoy premium valuations > 20 (Page @34 and Lovable about 28).
2. They have got a lot of brands already though I suspect that they haven’t been able to market them well, maybe because of the overhang of their spinning business or sheer incapability.
VIP is one of the major brands which is almost 40 years old, Frenchie for the youth, Feelings for the ladies, and soon to be launched brand for kids called Brat. Last year, they launched a French lingerie brand called Eminence (though not much was heard of it – another marketing failure perhaps). Besides this, they also plan to tie up with another international brand soon.
3. They plan to launch retail stores for their brands in Tier 2/3 cities by next year or so. This would be a good strategy for keeping the costs in check and testing the waters before the big bang in metros.
4. They plan to diversify into other accessories such as lounge-wear (like Page has done with Jockey) and sportswear.

So if all things go according to the above script, this may yet start bouncing the way Bata did after hibernating for a few years about 3 years ago. Again nothing can be expected in the near future as they have a lot of clean-up to do and the business environment is not exactly healthy.

Clearly Hospitable

Sayaji Hotels, India's leading premium three star hotels and food chain, operates a chain of restaurants and hospitality properties in India. Sayaji currently operates three properties in Vadodara, Indore and Pune. In fact, Indore property enjoys dominant position in Indore city with its central location and enjoys very little competition. It also has two subsidiaries - Barbeque-Nation Hospitality Ltd. and Malwa Hospitality Pvt Ltd.

The 6-year old Barbeque Nation, with the concept of Live Grill allowing customers to make food on their personal grills, is fast gaining reputation as a fine dining restaurant especially for non-vegetarians. It is growing at a rate of 25% on the same store basis and is present in 14 cities, including 7 top cities, already. Sayaji plans to concentrate on the same for its growth.

In May 2006, Clearwater Capital bought 14.92% stake for Rs.11.81 Cr by purchasing 17.9 lakh shares at a price of Rs. 66 per share. It had also invested in FCCBs worth $7.5 million which were converted into equity at Rs 75 per share last year, giving it 32.87 per cent stake with the promoter stake at 38.1%. It also came up with an open offer last year at a price of Rs 115.73 (including interest payment for delay in the offer), but could not find many takers.

In June ’11, Clearwater sold 4.85 % stake which has brought down its stake to about 28%. Promoters hold close to 40% and the US-based foreign FII Acacia Partners holds 7.54% in Sayaji Hotels

About 3 years ago it was @40 and currently @135 – more than 3 times in 3 years is certainly not a bad return by any standard.

There could be 2 scenarios (or a combination of both) which could play out here:

1. They spin off Barbeque Nation into a separate company/subsidiary (former will be a shareholder friendly move) so that everyone can participate in the growth of both the hotels as well as restaurants business. My feeling is that the restaurant business will surely grow well compared to the hotels business. Also note that there is no specialty restaurant company in India, so that will command a premium valuation in itself (you don’t have to look far; just look at how Jubilant, Dominos, is faring, and you will know what I mean). Following the spinoff, they can sell a partial stake or the whole business itself at premium valuations for reasons just mentioned. That there will be enough takers is a given.

2.   Clearwater Capital decides to sell its stake in Sayaji to another entity again at a decent profit (remember it paid 75 last year, so you can make your own calculations as to how much it will command). Or it may decide to execute step 1 and buy out one of the 2 businesses.

Post the de-merger, the sum of parts will surely be greater than the whole. Look at how things have panned out at Reliance and others where such actions have happened. At least one of the parts gives enough returns to cover the other and the investor may take a call on which part is to be retained.

The only variable is when the above can happen. Looking at the turbulence in the market currently, nothing may happen in the short term. But the future certainly looks fairly bright if not shining already.

Profitable bonding

Some of the Non-convertible debentures (NCDs in short) which were floated not too long ago are still quoting at really good yields if held till maturity which I guess most people, not in need of immediate money, would think of doing.

In the scenario of falling interest rates, NCDs protect the investor from the falling returns on the fixed income instruments. The Cumulative Option protects the investor from the Reinvestment Risk as the returns (interest) are reinvested at the pre-fixed rate for the entire duration. Interest rates on five-year bank deposits now range between 9.25-10.75 per cent which is set to fall in future. Note that most of these NCDs are secured by way of the company’s long terms assets and hence though slightly risky do not usually bounce if from well rated corporate/NBFCs.

For e.g. consider Tata Capital NCD Option IV (Cum.) is currently available on the BSE @1389 (including 1% brokerage, slightly on the higher side). It matures on/has a buyback option on 5^th Mar. 14 @1762.35 giving a yield of 12.65%.

Similarly India Infoline NCD Option II is available @1023 (excl. brokerage) but matures on 18-Dec-14 @1446.18 giving a yield of 12.22%.

Long term capital gains on listed securities are taxed at the rate of 10% without indexation or 20% with indexation whichever is lower. However, as the benefit of cost indexation is not available in case of bonds and debentures, long term capital gains from NCDs are always taxable @ 10.30 per cent (including education cess of 3%) without indexation.

So it might make a lot of sense to buy these currently. If you sell these on the exchange, u pay only 10.3% as above, and if you hold them to maturity, you pay your normal rate i.e. 30.3% (assuming the highest tax bracket) but since these are about a couple of %age points higher than a bank FD, the net gain is still quite good. 

A  comparison between the two instruments is as follows:

	Bank FD	NCD
Amount (Rs)	10000.00	1389.00
Duration (Years)	3	2
Coupon (Rate)%	10
Amount on maturity (Rs.)	13449.00	1762.35
Pre-tax annualized yield (%)	10.38	12.65
Post-tax annualized yield (%)	7.39	8.90

Still better, if you were to sell this NCD on the exchange, you will only have to pay 10% without indexation or 20% with indexation whichever is lower, increasing the yield further.

This is just an illustrative example and the actual values may vary slightly depending upon the exact date , compounding frequency etc. (for e.g. I have taken the period in calculation of the NCD yield as 2 years while it should actually be a tad higher from Feb ’12 to Mar ’14).

Thus it makes a win-win situation for the investor if here were to take advantage of the NCDs listed on the exchanges – you get higher returns either way - hold them to maturity or sell them on the exchanges. Going by the general expectation of softening of interest rates by RBI going forward, these NCDs would appreciate in value on the exchange making the latter also a very much viable option. 

The other NCDs which I checked on were from IIFL and L&T Finance which are available for purchase on the exchanges. There may be more of these such as those from SBI, Shriram Transport etc who have all launched them in last couple of years.