Long term Ideas

Here are some of my long term stock ideas across sectors which I feel should reward investors with a decent returns.

Banking & Financial Services: Axis Bank, Yes Bank and HDFC

Axis Bank and Yes Bank are mainly focussed on the SME space though the retail share will increase going forward. The management of both the banks are excellent. ROE of above 20% and ROA above 1.3%.  HDFC is a play on mortgages along with brokerage, AMC, Life insurance, General Insurance. The value unlocking process should start by the end of this financial year.

Retail : Pantaloon Retail

Pantaloon is a consumer play. It operates Big Bazaar, Central, Pantaloon, Food Bazaar, Brand Factory, EZone,   Electronics Bazaar , Collection , Furniture Bazaar , Home Town. Its subsidiaries include Future Capital, Future Bazaar, Future Media, Future Generalli (Life & General Insurance), Future Brands, Future Logistics and Future Knowledge Services.  It has entered into JV with Staples for Future Staples, Liberty, Blue Foods, Talwalkars. It is targetting a turnover of Rs.30,000 crs by FY11. Many of its subsidiaries will be listed through IPO in the next 2 years.

Engineering & Infrastructure: Voltas and Punj Llyod

Voltas, a Tata group company, is a leading player in India’s Heating, Ventilation and Air Conditioning (HVAC) market, having a ~28% market share in electromechanical projects. The company offers engineering solutions for a wide spectrum of industries in areas such as HVAC, refrigeration, electromechanical projects, textile machinery, machine tools, mining and construction equipment, materials-handling vehicles, water management, building management systems, indoor air quality and chemicals. Voltas have a strong presence in Middle-East and 17% market share in the retail AC market next to LG. Company has given a guidance of Rs10,000 crore turnover and NPM at 10% by FY11.

Punj Lloyd is one of the largest engineering and construction (E&C) companies in India offering integrated design, engineering, procurement, construction and project management services, mainly to the energy and infrastructure segment. The hydrocarbon sector is the thrust area for the company, which provides a whole gamut of product offerings like E&C services for onshore and offshore pipelines, gas gathering systems, oil & gas tanks and terminals and process facilities for refineries. The company operates in numerous geographies and has strong presence in West Asia, Asia Pacific, Africa and South Asia. Overseas business contributed almost 65-70 per cent of FY 2007 consolidated revenues.Punj Lloyd appears poised to ride on the strong growth in the hydrocarbon sector where proposed capex is pegged at Rs 2,49,800 crore over the next four years.

Media : Zee News

Zee News is a play on regional channels. Zee News operates news channels, regional GECs and regional movie channels (Zee Talkies and plan to launch Bengali movie channel). Zee Marathi is a leader in the Marathi regional GEC segment with a 51% market share. Zee Talkies has a complete monopoly. Company aims to grow at twice the industry rate.

Beverages: Champagne Indage

Champagne Indage is a leader in the Indian wine market with over 65% market share. Indian wine market would continue to grow at 30-35% for the next few years. Company plans to open 1000 outlets in the next three years. Its subsidiary Seabuckthorn Indage operates the “Leh Berry” juices. Company has completed a string of acquisitions which includes Australian Vintage’s Loxton winery for 60 million Australian dollars, VineCrest and UK’s Darlington Wine for distribution. It is looking to acquire wineries in South Africa. With these acquisitions, capacity will increase to 200 million litres.

Pharmaceuticals: Glenmark and Divi’s Labs

Glenmark is a research driven company. It’s vision is to be a Global end-to-end specialty company. Company projects a revenues of $504mn (CAGR of 29%) and profit of $157mn (CAGR of 30%) by FY10 through organic growth only assuming exchange rate of ~40.28 INR/USD for FY08 and ~ 40 INR/USD for FY09 and FY10. Company plans to enter US through acquisition. This acquisition are excluded from projections. Glenmark has usually exceeded its projections. I wouldn’t be surprised with Net Profit CAGR of 35% or more.

Divi’s Labs is basically a play on Contract research and manufacturing services (CRAMS). It is a leader in this space. A recent KPMG-CII report on the Indian pharma industry identifies CRAMS as the industry’s key growth driver. Outsourced manufacturing activities are currently estimated at $20 billion and are projected to increase to $31 billion by 2010. The Indian CRAMS market is expected to grow at 25-30% over the next few years, and domestic companies could gain 35-40% of the global CRAMS market. Divi’s EPS is expected to grow at a CAGR of 40% with EBIDTA margin and ROE around 40%.

Textiles: Bombay Rayon Fashions Ltd (BRFL)

BRFL operates in two segments i.e. fabrics and garments. During Q3FY08, Garments share was 45% which is expected to increase to over 50% in FY09 with the increase in garment capacities. Company is setting up a new facility, which will increase its fabric manufacturing capacity by 4.3 times to 235 million metres per annum and double its garment manufacturing capacity to 200,000 pieces per day by Q3FY09. BRFL is well positioned in the high end premium apparel segment versus peers given its in-house designing capabilities, superior margins and higher earnings visibility (EPS CAGR of 65% through FY08-10E). US contribution to the total sales is just 15% thus impact of rising rupee is insignificant and slightly affected if US goes into recession. ROE and ROCE’s will improve going forward.

Technology: Tanla Solution and 3i Infotech

Tanla operates in a niche space of telecom aggregation. 3i Infotech has a unique business model. It is a one stop shop for BFSI products and services. 3i Infotech EPS is expected to grow at a CAGR of 35+ for the next few years. 3i provides growth with visibility.

 As for Oil & Gas and other commodities, I would refrain from any Ideas as it is outside my competencies. Better stay invested in RIL is all i can say !!

 

Coal: The New Black Gold

Sasol is not a household name, but maybe it should be, as India and other countries increasingly look at alternative sources to quench their thirst for oil. Every day, this South African company churns out 160,000 barrels of gasoline, diesel fuel and jet fuel without using a single drop of crude oil—the pricey raw material that is getting pricier by the day. Instead of crude, Sasol uses coal as the raw material to meet about 30% of South Africa’s energy needs.

Sasol has been converting coal to oil since 1956. When it started doing so, the only company and country in the world to do so at any scale, it didn’t have a choice. An economic embargo on South Africa, brought on by apartheid, meant it couldn’t import crude. So, it looked elsewhere, and found coal and a technology called the Fischer-Tropsch process, perfected by the Germans in the Second World War, to convert it into oil.

The cost-benefit wasn’t favourable back then, but it is today. So much so, that even the US, China and India—three of the world’s top four coal producers and massive oil importers—think this could be their breakthrough for increasing oil self-sufficiency. All three countries are working on mainstreaming this alternative method of oil production, even courting Sasol.

Tata Power has tied up with Sasol for a $8 billion coal-to-oil project. Apparently, the company has sought access to 30 million tonnes (MT) of coal per year to produce 21 MT of oil per year and 1,500 MW of power. Elsewhere, Reliance Industries has asked the Centre for coal mines to synthesise about 30 MT of oil a year. As has the Anil Dhirubhai Ambani Group and IOC, and a few more. The potential of those numbers is mind-boggling. An output of 51 MT per year —what Tata and Reliance are said to be looking at—is 33% of India’s total oil production of 151 MT in 2006-07.

The economics

It’s simple economics. The capital cost of a coal-based refinery—it first converts the coal to gas (synthetic gas, or syngas), which is then converted to oil—is about three times the cost of a conventional, crude-based one. That’s obviously unfavourable. But it becomes favourable if the coal-based refinery can earn a greater margin on sales on a sustained basis. It couldn’t till 2003. It can now.

If crude is above $50 a barrel, the coal-based producer is in business. Today, when crude is above $100 a barrel, Sasol is making an insane margin, prompting some South African policymakers to call for a windfall tax on it! Oil-based refineries, on the other hand, will always buy crude at market rates, unless they are also crude producers.

Even for crude producers, it’s getting difficult. A recent CLSA report says that the age of “peak oil” is over. Oil on the surface is drying up, and companies have to dig deeper, which means higher drilling costs. “Only if crude is above $55 to $65 a barrel does it make sense for them to drill.” When this is read along with the ever-increasing demand for oil, one thing is clear: oil will stay on the boil. The longer it stays so, the greater will be the urgency to look for alternatives. And today, the input with the maximum output potential is coal.

In China, the Shenhua Group will start producing oil from coal in August 2008 in inner Mongolia using Sasol technology, with production projected to increase to 4 MT by 2010 and 50 MT by 2020. China has several more such projects in the works. In the US, coal-rich Pennsylvania has started a pilot project worth $625 million to make diesel from waste coal using Sasol and Shell technology.

The issues

At present, only two companies in the world, Sasol and Shell, have mastered the technology to convert coal to oil. Fischer-Tropsch synthesis is restrictive, and not given on third-party licence. That means companies have little choice but to enter into a joint venture either with Sasol or Shell.

Compared to crude refining, the production range of the Fischer-Tropsch method is limited—75-80% high quality diesel, 15-20% naphtha and 2-3% liquefied petroleum only. That’s obviously a limitation, but not that much with such high crude prices.

It takes about five years to set up a coal-to-oil refinery (three years for conventional projects). Says BM Bansal, Director (Planning and Business Development), IOC: “A coal-to-fuel project aiming to produce two million metric tons of diesel per annum will require an investment of $6-8 billion and around 4 million metric tonnes of coal per annum.

That’s a lot of coal. While the Planning Commission estimates that India’s coal reserves can last 100 years, others are not so sure. Leena Srivastava, Executive Director, The Energy and Resources Institute (TERI) puts it at 40 years. “Coal should be used to produce electricity for the masses, not fuel,” she says. There is an environmental issue also, as coal is polluting. However, Sasol and Shell have shown that the waste can be dealt with. The ash can be used in cement production and the carbon dioxide can be captured and pumped into offshore and onshore oil and gas fields.

Another advantage for Indian companies is the flexibility to use gas. In the coal-to-oil process, the first step is conversion of coal to gas. Given our increasing gas reserves, they can even bypass the coal stage. In the emerging energy scenario, India has the raw materials to increase its energy self-sufficiency—and reduce its dependence on an unstable world.

Source: Outlook Business