Stock Idea - PNC Infra

SECTOR BACKGROUND
Awarding activity in road sector has picked up pace in the past two years and is expected to remain firm in the next 2-3 years. In FY16, the government awarded 10000 km of road projects and in the current financial year, it targets to award over 25000 km or Rs 3 trillion of road projects. This trend is expected to continue in the coming years.

COMPANY BACKGROUND
•    PNC Infra Ltd (PNC) is a north-based EPC/BOT contractor
•    Strong order book visibility: PNC has an order book of ~ Rs 5100 crores (2.5x FY16 EPC revenues). Further, PNC has won Rs 1374 crores worth of orders won from April 2016 till date, financial closures of which are expected to be achieved by October 2016. 
•    Strong execution track record: PNC has a proven track record of early completion of projects in a sector marred by inordinate delays. It has the distinction of being among the
first few to receive an early completion bonus from NHAI.
•    Multiple operating efficiencies: PNC’s four pronged strategy:

    a.    conservative bidding
    b.    operating in a core geographic cluster
    c.    ‘No subcontracting’ policy in critical construction activity and
    d.    a large equipment bank, have enabled the company expand its EBITDA margin 500 bps during FY13-FY16 to ~17%.

•    In FY16, PNC enjoyed a 11% market share of the NHAI’s Rs 48,100 crore EPC order book, second only to the infrastructure behemoth, L&T (12% share).
•    PNC has executed ~75-80% of its road projects in UP, Jharkhand, Bihar and Rajasthan. These states have a robust pipeline of road EPC projects over 2016-17 – 4 states alone account for 36% of the 6631 kms of road projects that NHAI intends to award in FY16.
•    The govt is now acquiring 80-90% of the land before announcing the date for commencement for construction
•    Gathered enough qualification credentials to independently bid for a single project to a tune of over Rs. 3,000
•    Currently co is executing 16 projects in roads & airport runway sector
•    Currently we have 7 operational BOT projects of which 5 are Road BOT projects, 1 is Road OMT project and 1 is Industrial Development project
•    Our consolidated net worth as on June 30, 2016 is Rs. 1,364 crores whereas total debt is Rs. 1,722 crores. Net debt to equity comes at consolidated basis comes at 1.13 times.
•    There are 17 new EPC orders worth Rs 15,000 cr that will be up for bidding
•    Toll Revenues - Gwalior - Etawah MP Highway is Rs. 15.5 crores; Kanpur - Ayodhya is Rs. 69.8 crores; Kanpur Highway is Rs. 24.7 crores and Bareilly - Almora was Rs. 9.6 crores; Ghaziabad - Aligarh is 37 - 38 lakhs per day
 •    PNC has long history in the roads sector with over 15 years of experience in executing NHAI projects. PNC has track record of timely and before schedule completion of projects and received early completion bonus.
•    PNC is focused on the northern region and is expected to be a strong contender for grabbing future opportunity in road construction from poll bound states like UP and Punjab.
•    PNC has robust current order book of Rs 64.7 bn and further targets to add another ~Rs 40 bn of orders in the rest of the year based on robust pipeline of orders specifically in road space. This gives high revenue growth visibility for the next 2-3 years.



Understanding the Hybrid Model of Road Development
Funding - The government will contribute 40% of the project cost in the first five years through annual payments (annuity); developer to raise remaining 60% through debt or equity. Semi-annual annuity payments will be paid to the developer for the balance 60% of the project cost

Disbursement - Government's 40% contribution will be disbursed in accordance with the project completion milestones (24%, 40%, 60%, 75%, and 90%)

Revenue Collection -
i) Responsibility of NHAI
ii) The Government / NHAI will collect the toll and pay the developer annuity payments over 15 years along with interest thereon at bank rate + 3%. The developer will also receive O&M payments bi-annually along with annuity payments.
iii) All project payments will be inflation indexed.

RISKS & CONCERNS
•    Slowdown in road sector
•    Aggressive bidding of projects
•    Inflows of large size BOT projects





FINANCIALS
Nos are from www.screener.in













 


Disclosure: I am invested in the stock and my views are likely to be biased. Please do your own due diligence or consult a SEBI registered investment analyst.

Stock Update - Sagar Cements: October despatches

Despatches for October 2016 - Good traction in AP & Karnataka.

Hester Bio - Notes from the Annual Report - 2016

• Cumulative production capacity of 6 bn doses once the Nepal capacity goes online
• 2015-16 performance was achieved despite a 6-month trough in India's poultry sector that affected the sector for 3 quarters. The trough was the result of high feed cost and low realization of poultry output of meat and eggs. This resulted in a lower replacement of chicks.
• Started trial production of two batches in its Nepal plant and submitted these to regulatory authorities in 2 African countries
• HBS has decided to make a strategic shift to health products over dependence on poultry products
• Focus on exports to de-risk company from exclusively depending on domestic market
• Poultry Vaccines Segment: Introduced two Poultry Vaccines namely the Salmonella Live Vaccine and the Inclusion Body Hepatitis Vaccine
• Large Animal Vaccines: started manufacturing and marketing of large animal vaccines. Currently, manufactures PPR and goat pox vaccine. The Indian plant at Mehsana produces the PPR Live vaccine strain meant for India (sungri strain); the Nigerian strain will be made in the Nepal plant for export markets
• Brucella abortus S19 vaccine will be commercialized this year
• Large Animal health Products Segment: Comprises of medicinal products, feed additives & disinfectants. HBS does not manufacture products themselves. The outlook for growth is robust and can outperform the other divisions in the near future.

Notes from Annual Report 2016: Poly Medicure

• Revenue was 402.86 cr vs 381.9 cr in FY15
• Net profit was 47.30 cr vs 61.01 cr (including 19.57 cr of exceptional items) in FY15
• EPS was 10.72 vs 13.83 in FY15
  
• 
  PML is starting a new R&D center with an investment of 12.5cr which is to be operational by Q3 2016
• New green field project at IMT Faridabad which is to be operational by Q3 2017 on an investment of 60cr
• PML to focus on new market opportunities in Oncology, Nephrology & Respiratory Care segments
• Product expansion is in process for Infusion therapy and Blood Management
• PML is planning to launch 8-10 new products in FY17
• PML is now exporting products to 95 countries
• PML is now present in 3000 key hospitals in India and plans to expand to 5000 hospitals in next 2 years
• Expanded the sales and marketing team with 80 new team members
  
• The Indian medical device market is the top 20 in the world and 4th in Asia after Japan, China & South Korea
• The medical devide sector was valued at USD 6.3 in 2013 and is expected to grow to USD25-30 by 2025
• PML is the leading exporter of infusion therapy, blood management, gastroenterology, surgery and wound drainage,
  anesthesia and urology products
• Over 65% of revenues come from exports
• PML has 144 product and process patents globally; filed for additional 394 patents in India and worlwide

Notes fom Annual Report - Supreme industries

•    No of distributors have gone up from 2469 to 2699
•    Value added product share has gone up from 34.2% to 36.73%
•    Current average monthly borrowing is 401 cr. SIL expects to reduce it to 300 cr in FY17
•    Supreme Industries Sharjah is exporting products to 15 countries - GCC, Africa, Australia, UK, Germany & Indian sub-continent. It has made inroads into Maldives and re-entered Saudi Arabia. It has also penetrated Solvent Cement market in Australia
•    Statutory auditors M/s Choggmal & co have stepped down and has been replaced by M/s Lodha & Co.
•    Polymer consumption has increased by 14% in volume terms which is double of GDP, something which did not happen in the last decade.

PLASTIC PIPING SYSTEMS
•    New plant at Kharagpur has started production. Full capacity to be scaled up by June 2016.
•    Further expansion of pipe manufacturing is expected at Kharagpur plant
•    cPVC volume growth was 23.7%; cPVC manufacturing has stabilized at Kharagpur
•    Roto moulding plant is being commissioned at Kharagpur, to start by April end.
•    HDPE piping systems gorwth was at 24.09%
•    SIL has launched a variety of septic tanks in technology tie-up with a South African company. Many other varieties are expected to be launched for underground water storage
•    SIL has produced multilayer foam pipe of 200 mm diameter, BIS certification in process
•    SIL has developed a cheap & economic model of manhole cover
•    In process to setup a PVC plant at Jalgaon to produce 20,000 tons at full capacity and is expected to go on stream by Mar 2017
•    Submersible pipes are getting good traction. Monthly sales are expected to rise to 750 tons in FY17 from 270 tons.
•    Maharashtra Fire Department has issued a directive that makes installments of fire sprinklers mandatory in every room for residential building above 45 m and in common areas for buildings between 25m to 45m. SIL has tied up with FlameGuard of USA to manufacture and sell these sprinkler systems. SIL is planning to sell the same product in Sri Lanka as well.
•    The portfolio of bath fittings has reached 90 items. Chrome fittings are likely to be launched this year

FURNITURE
•    SIL has introduced 8 new models this year and plans to add 7 new models this year.
•    SIL is looking to expand into export market with their new line of furniture
•    New plant being put up at Kharagpur; to start in the Q1 of FY17
•    Increased distribution channel partners to 746 and have started selling online as well; partnering with flipkart, amazon, snapdeal, pepperfry etc

INDUSTRIAL PRODUCTS
•    SIL started manufacturing complete coolers for one company. Expects good growth in this segment.
•    BOSCH, a new customer, has setup a large manufacturing plant for home appliances. SIL expects good orders from them.
•    Working closely with Honda cars on multiple models

MATERIAL HANDLING
•    New facility setup and started in Malanpur (M.P) for roto moulded products
•    Two new plants being setup - at Kharagpur and Kanpur; to be operational in April/June 2016

PACKAGING PRODUCTS
•    A specialty product - high gloss film has been successfully developed
•    The PPD plant at Kharagpur is now fully operational and is expected to generate a revenue of Rs 50cr

COMPOSITE CYLINDERS
•    Received initial educational order from HPCL for 5 & 10 kg cylinders; dispatches expected in April 2016
•    SIL received orders for 7.5 & 15 kg cylinders as well
•    FY17 may be a transformational year for this division

Getting Back to Basics - Presentaion at Investment Meet

We had the third meeting of your investment forum today. The venue was at Hotel Lindsay, bang opposite New Market. Thanks to Raghav for being gracious enough to arrange for the venue.

HDFC Bank is the next HDFC Bank!!

FM, Arun Jaitley has earmarked Rs 700 billion (USD 10.5 billion) in bank capital injections in the four years to March 2019.

Ratings agency Fitch estimates, however, that USD90 billion in capital will be needed for Indian banks to meet Basel III banking rules due to be fully implemented by March 2019. Fitch says that 11 Indian banks may fail to meet those norms.

With the finance minister spelling out compulsions in providing additional capital for the PSU banks, it is a matter of time that we say consolidation and increased transition from  public sector to private sector banks and NBFCs.

This provides a very large opportunity for organizations which are well capitalized and are diversified into multiple lending lines. I continue to believe businesses like HDFC Bank, Kotak Mahindra Bank, ICICI Bank, Bajaj Finance and others would do well over an extended period of time.

Century Ply - Notes from Annual Report 2016

Centuryply is among India’s largest interior infrastructure product manufacturers. The Company offers plywood, laminates, veneers, MDF, blockboards, doors, fibre cement boards and particle boards. It is also engaged in the logistics business through the management of a container freight station (India’s first privately owned CFS at the Kolkata Port).

Another unit in Laos is being commissioned. 5000 retail outlets added in 2015-16.

Launched new age products– Zykron and Starke (Wood Polymer Composite and Cement Fibre Boards). CPL expects to carve a 10% market share of the country’s B1,000 cr fibre cement boards market by 2020

Set up a particle board unit at Chennai, commissioning in June 2016, to capitalise on the fact that there are no similar units in the city

Commenced the construction of MDF unit at Hoshiarpur (Punjab). Following the commissioning of this unit, prlanned for July 2017, CPL will possess a capacity to manufacture 198,000 cubic metres per annum, graduating it to one of the largest in the country.

Grew the laminates business by around 15% on the back of a strong catalogue and distribution network.

Plywood capacity continues at 210,000 cubic meters

Laminate capacity continues at 4.8 million sheets p.a. Conventionally, new laminates would be introduced every second year; Centuryply revolutionised the space with the introduction of four catalogues a year.

The co did not reduce prices even though the competition did amidst sluggish demand. CPL maintained EBIDTA margins at 17%.

Raw material costs as a proportion of revenues declined from 53% to 38% in the three years ending 2015-16.

Working capital cycle reduced from 88 days to 70 days.

Container Freight Station at the Kolkata Port contributed only 5% to revenues in 2015-16, the corresponding EBIDTA margin was 46%.

Industry structure and developments
Wood panel products - The Indian wood panel market is valued at 28,500 crore. Plywood has a share of 63% (18,000 crore).
Plywood - India’s plywood industry is likely to reach a market value of 479.7 billion by 2019. This growth in the plywood market is expected to be led by a surge in the growth of commercial and domestic developments.

The MDF market is estimated to be  worth ~35 billion in India and has grown at a CAGR of ~5-8% over the last five years. The Central Government’s decision to withhold fresh licenses for the manufacture of plywood has widened the gap between demand and supply. This is a positive development for the MDF industry and will increase the use of engineered panel products.

Segment-wise performance
Plywood: Revenues from plywood business reported a growth of 2.94% from 1,243.06 crore in 2014-15 to 1,279.59 crore in 2015-16.
Laminates: Laminates reported a growth of 14.20% from 321.27 crore in 2014-15 to 366.89 crore in 2015-16.
Logistics: Revenues from the logistics sector reported a 12.50% growth from 75.42 crore in 2014-15 to 84.85 crore

Sagar Cement - August Despatches

Second consecutive month of decent production and despatches, even during monsoon, augurs well for the demand scenario.

Weekend Musings

 

The last few days has been quite eventful. We had the first meeting of the ValuePickr Kolkata group last Sunday.

I had expected about 10 people when I first thought of this first. We ended up having over 40 participants sign up and 28 showing up on a rain-drenched Sunday morning and stayed on for over 3.5 hrs!! 


 


Some interesting stuff I read:

https://medium.com/@yegg/mental-models-i-find-repeatedly-useful-936f1cc405d#.vvs6mtaqa
Superb collection of mental models in one page

http://thenextweb.com/lifehacks/2016/08/01/989517/ 
7 mental models you should know for smarter decision making

http://awealthofcommonsense.com/2016/05/lessons-from-losing-big/
Notes from the book What I Learned Losing a Million Dollars.

https://hurricanecapital.wordpress.com/2016/08/02/peter-thiel-on-characteristics-of-monopoly/
Peter Thiel, the billionaire VC, who founded PayPal and now Palantir and also was an early investor in Facebook, has written a book Zero to One where he talks about the attributes of a monopoly. This article summarizes the book and throws in some interesting observations on monopolies.

Stock Update - JK Lakshmi Cement

JK Lakshmi cement is a strong player in North India with a dominant position in Rajasthan. Other states where the company has a presence include Haryana, Delhi, Punjab and Uttarakhand in north. In the west also, the company has a healthy presence in Gujarat and has made inroads in the Mumbai markets as well. Sales wise, Gujarat contributes highest at ~35% of sales while Rajasthan contributes 27%. The contribution from the rest of the north region is at ~31%. Maharashtra contributes ~7% to topline.

NOTES FROM AR2015-16
Integrated cement plant at Durg started commercial production in FY2016 and has reached almost full capacity utilization in less than a year.1.35 MTPA grinding unit at Surat has been commissioned at the end of FY16 and is in the stabilization phase Total capacity across locations is 13 MTPAThe company plans to deleverage its balance sheet before progressing on brown field expansionsTied up with Snapdeal and is the first company in India to foray into online sellingCo had a capacity utilization of 82% as against an industry average of 66%The co continues to be one of the lowest cost producersThe Durg Plant has performed satisfactorily in the very first full year of its operations and achieved 104% capacity utilization in the last quarter of FY 2015-16. Company has become a third largest player in Chhattisgarh market in a short span of time.

NOTES FROM Q1FY17 Concall
Durg plant: 
In the quarter, sales from the East plant was 0.5mt against 0.19mt in Q1FY16. EBITDA has turned positive for the plant in the quarter primarily led by cost reduction as realization remains weak. The company is buying power for the plant at Rs6.8/unit from the grid which is very expensive (CPP generat ion cost is Rs4/unit). In order to save energy costs, it is in process of commissioning WHRS of 7MW (to be operational by Sep - 17). However, it will be able to cater to only 30% of the power requirement of the unit. Hence, the company is also trying to source power from private source which will be relatively lower than the grid cost (but not as low as the CPP cost). This is expected result in cost savings of Rs150/tn. Also, construction of railway siding is under progress and is expected to be com missioned by the FY18 - end which may further lead to savings Rs300 - 350/tn. Through these initiatives, saving of at least Rs300 - 400/tn is expected in the opex of East plant.

Product and sales mix of East plant :
East plant is currently producing 75% PPC and 25% OPC+PSC. This plant is currently selling 60% in Chhattisgarh , 20 - 25% in Orissa and rest in other markets. Larger exposure to Chhattisgarh market has led to lower realization for this unit . Thus company’s focus is more on cost saving so that the profitability can be improved.

Capex update:
The coompany has planned capex for a) Rs150cr for the capacity expansion at Durg plant from 1.8mt to 2.7mt (expected to get commissioned by Jun - 17), b) Rs90cr for WHRS unit of 7MW (to be operational by Sep - 17, c) Rs 100cr for the grinding unit at Orissa (0.6mt), to be operational by Sep - 17, d) Rs150cr for railway siding at the Durg plant (expected to get commissioned by FY18 - end ) and e) Rs20-22 cr left capex for Surat plant (trial run has started). Additionally , remaining capex for Udaipur plant (1.6mt, expected to get commissioned by Dec - 16) is Rs200cr.

Sales mix:
Company sells 60% in Chhattisgarh and 20 - 25% in Orissa form the East plant. From North plant it caters to Gujarat (35%), Rajasthan (30%), Maharashtr a (5%) and rest to other parts of north region.

Clinker production:
The company produced 0.34mt clinker in Q1FY17 as compared to 0.20mt/0.3mt for Q1FY16/Q4FY16.

Lead distance:
Lead distance for North /East plants is 450kms /300kms . The company is planning to take initiatives to reduce the freight cost in the North region.

Petcoke:
The average petcoke cost for the company in Q1FY16 was Rs5000/tn, however it has increased to Rs6,500 - 6,600/tn (spot price) as of now . It uses 90 - 95% petcoke.

Debt and cash level:
As of 30 th June, 2016 , gross debt of the company stood at Rs1950cr and cash was at Rs450cr. Debt pertaining to the Udaipur Cement stands at Rs500cr. Cash level has increased from Rs250cr as of Mar’16 to Rs450cr as of Jun’16.

Growth outlook:
As per the management the North/Gujarat/East regions grew by 1.0%/2.5%/3.0% in Q1FY17. On account of monsoon season, the company is not expecting any revival in the demand in Q2FY17, however, going forward it remains positive on the demand outlook for 2HFY17 and expects demand growth of 7 - 8% growth in this period . This, as per management, is expected to be driven by government spending on infrastructure, smart cities, housing for all scheme and rural growth on the backdrop of good monsoon.

DISCLOSURE: I am invested in the company.

VP Chintan Baithak, Goa 2016

The VP Chintan Baithak at Goa 2016 was one more fantastic event. Building up on last year, we took up a few independent themes for each day. First day was more devoted to introductions of the new invitees and look back at the basics - inculcating VP process. Day 2 was spent on discussing top picks from all participants and discussion on the self-reinforcing business model. Day 3 was spent on business models, risks and corporate governance. Day 4 was a curtailed session but one in which we looked at trends in industry for the future. Interspersed during each day were comments and discussions from the two guest participants - Prof Bakshi and Vinay Parikh.

A few things that were discussed:

• Always ask yourself how does the company make money. Avoid companies that are not win-win for all stakeholders
• Look for companies which have a long term track record of prudent capital allocation
• You can average up in companies that have "fundamental momentum"
• Try to learn about similar business from other industries
• It is important to focus on reading - read annual reports when they are available, books, magazines, journals, industry reports at other times.
• Spend some time to read something not directly related to investments everyday to broaded your horizon and increase your ability to connect various dots

I thoroughly enjoyed the 4 days mainly because it was about the topic I am most passionate about and in the company of friends. I was amazed by the zeal of Prof Bakshi and Vinay Parikh. They spent the entire day with us right from 9am to 1:30-2:00am!!!

Thanks to all the participants who made this one more memorable experience.