Is India's most expensive stock...really expensive?

Not many may have heard of Orissa Minerals Development Corporation or OMDC, oddly enough, considering it is India’s most expensive stock in absolute terms at Rs 29,000 a piece. But here’s the real leap-out-of-your-seat fact: OMDC’s life high is Rs 92,220 a share, which it scaled on November 15, 2010. While it’s all-time low is Rs 20,475, which it made on August 4, 2010.

And strangely not many of the major brokerages are tracking OMDC.

Let’s start with the basics. The company's trailing 12 month EPS is Rs 257.49 on a low equity base of 6 lakh shares. This translates into P/E of 106 compared to industry average of 5, way too expensive. The face value per share is Rs 10. The book value of the stock is Rs 13,325, converting it into P/BV of more than 2.

Rashtriya Ispat Nigam, is the parent company with 50% stake, followed by LIC, second largest shareholder with 15% stake. A major trigger for RINL could be its listing once the cloud of uncertainty over the sector fades away. RINL is likely to top the list of government’s divestment to-dos. 

Major concerns

All six mines of the OMDC are shut owing to lease expiry. It also needs further clearances from the government for the same. Its sponge iron plant production, a joint venture with East India Minerals Ltd, is at a standstill due to non-availability of iron ore.

But the main concern, going forward, could be the draft mining bill that is likely to erode profits, if becomes a reality in its current form. 

The board of OMDC deferred stock-split proposal twice in last one month. Earlier, the board at a meeting held on November 9, 2011 deferred stock-split proposal, citing absence of government nominee director at the board meeting. Liquidity is a key issue, so stock split/bonus will be an ideal option for the company to increase liquidity and affordability for investors.

OMDC shining?

If one had to go by the management say its latest annual report, then OMDC share can reach mind-blogging valuations ahead.

“All the six mines are currently inoperative and it is expected that one mine, namely Kolha Roida, may come in operation in third quarter of the current financial year 2012 and all remaining five mines may be operative by the end of the financial year, so main benefit will accrue in next financial year, 2013,” the report said adding, “These achievements will lead to expected productions of 10 MTPA of iron ore and 1 MTPA of manganese ore in near future. It is also planned to set up 2 MTPA iron ore beneficiation plant and 2 MTPA pelletisation plant.”

Based on the management talk, the cash EPS for FY13 works out close to a staggering Rs 24,000. 

FY13E	Iron Ore	Manganese
Production	10 MTPA	1 MTPA
Realisation (in Rs per tonne)	Rs 4000/tonne	Rs 8000/tonne
Sales (Rs in Cr)	4000	800
OPM (%)	50%	50%
Gross Profit (Rs in Cr)	2000	400
Interest (Debt-free)	-	-
Tax rate @ 40%	-800	-200
Net Profit (incl Depreciation)	1200	200
Shares	0.06	0.06
Cash EPS (Rs)	20000	3333
Other Income (Rs in Cr)	50
EPS on other income	833
Total Cash EPS (Rs)	24000

 

OMDC is a debt free company. Also, it has reserves of close to Rs 800 crore of which Rs 700 crore are in fixed deposits. The other income is the interest earned on fixed deposits assuming an annual interest return of 8%. The realisation figures are based on polls of various analysts.

Adding two and two- reserves of Rs 800 crore and FY13 expected profit of Rs 1400 crore, the total reserves comes to be Rs 2200 crore. Considering the current market-cap is Rs 1800 crore, the stock is trading at a mind-boggling discount to future estimates. 

In simple terms, the company is up for grabs at almost no cost as returns are going to be far greater in the future.Again, the whole valuation parameter is based on the management comments. Therefore, one should not jump the gun and start buying in lots.

An investor should wait for further clarity on news of mining license clearance and then take a call.

The company clocked an EPS of Rs 3030 in FY09. Assuming conservative industry P/E of 5 on FY13 expected EPS of Rs 24000, one can do the math on the target price. However, in the present gloom and doom scenario, shareholders of the company can just hope for the best. 

-Riken Mehta, Sagar Salvi

Chart Check: Hindalco Vs Aluminium prices over last 11 yrs

As seen in the charts, Aditya Birla Group's flagship company, Hindalco has a very positive correlation with LME Aluminium prices. An investor both long-term or short-term should check trend of LME aluminium prices going forward before buying Hindalco.

Hindalco is Asia's largest integrated primary producer of aluminium. Bauxite and power cost are two key components for aluminium producers. Hindalco has an advantage over its peers with captive power plant and smelter production plant situated in Orissa, one of the largest states with bauxite reserves.

Note: Data Period: Jan 2000 to Dec 2011. Monthly Average Prices of LME Aluminium (in USD)and Hindalco

-Riken Mehta

Looking to build a portfolio? Check out holding companies

In a volatile market scenario like the present one, everyone is looking for an investment which holds the promise of decent returns without being too risky.

Holding companies are a good bet for investors with a medium-risk-medium-returns approach. A holding company is one that owns sizeable stake in companies within same group, to the extent that it has influence over the policies and management of that company.

The benefit of investing in a holding company is that you indirectly own the shares of the group companies. For example, if you buy into Bajaj Holdings, you get the advantage of investing in Bajaj Auto, Bajaj Electrical and Bajaj Finserv as well. This is because Bajaj Holdings owns close to 9 crore shares or 31.49% in Bajaj Auto. So when the share price of Bajaj Auto moves higher, so will Bajaj Holdings, in theory at least.

Another positive is that the share price of a holding company is less volatile. Due to the nature of the auto sector, Bajaj Auto may see adverse moves. While this will affect Bajaj Holdings, the price change will not be as sharp.

However, it is the same on the flip side also. Even if the fundamentals of the holding company are good, it may not be a good investment if it owns majority stake in a sick businesses. For example, debt-laden Kingfisher affected the prices of other stocks under the UB group.

How to check it?

Investors should check out the latest annual reports available on the company’s website. One should go to Balance Sheet section and hunt for Investments. A detailed schedule of investments made by the company in equities, fixed deposits, mutual funds, government bonds will be available.

The Schedule will further classify Investments into Quoted and Unquoted. Quoted means the companies which are listed on the bourses and vice versa, so an investor should only consider quoted investments value. Also one should subtract debt value from the current market value. Reason is if the company borrows money and invests in another company, then it makes that investment non-viable.

Below is a list of 10 prominent business groups who hold substantial stake in other companies listed on the exchange.

- B K Birla, Aditya Birla: Pilani Investment
- Adani: Adani Enterprises
- Bajaj: Bajaj Holdings
- Aditya Birla: AB Nuvo
- United Breweries: UB Holdings
- Tata: Tata Investment
- Binani: Binani Industries
- Jindal: JSW Holdings
- Baba Kalyani: Kalyani Investment
- Kirloskar: Kirloskar Brothers Investment
- Godrej: Godrej Industries

Penned by Anisha Mappat, Riken Mehta

Corporate fixed deposits: Friend or foe in volatile market?

Investing in the stock market is not for the weak hearted, more so in today’s volatile scenario.

A year back, investor X—who prefers risky bets for high return—had invested Rs 1 lakh in JP Associates. Investor Y, cautious by nature, invested Rs 1 lakh in JP Associates’ fixed deposits scheme offering a fixed annual interest return of 10.50%.

Now, assuming the FD matures today, Mr Y would have made Rs 10,500 (pre-tax) on his investment, while Mr X, who had bought the share at Rs 112 apiece, will be staring at a 40% loss on his investment.

How do corporate fixed deposits work?

Corporate fixed deposits are unsecured loans that do not guarantee anything to an investor in case of a default. When you invest in a bank fixed deposit, the Deposit Insurance and Credit Guarantee Corporation ensures that Rs 1 lakh per bank is repaid to you in case of a default. But there is no guarantee for deposits with companies and NBFCs.

Popular instruments of investment

Corporate fixed deposits (FDs) have gained a fancy among investors because of high fixed returns that these products offer. Typically a corporate fixed deposit offers much higher return than a bank FD; however it comes with a high risk tag.

Why does a company raise money through fixed deposit schemes?

This is usually done when other modes of funding dry up. The stock price may be too low for the promoter to offer shares to new investors. Or it is possible that banks may not be willing to lend money, and if they are, the interest rates would be very high.

In the past, there have been instances wherein companies like Panjon Pharma, CRB Capital, Morpan Laboratories offered high returns but defaulted. Even today there is a noise that one of the real estate companies is not making timely repayment to its fixed deposit investors. However, that does not make corporate fixed deposits a bad destination to park your funds. Just like any other investment, you need to study the company, its credit rating and other parameters, before investing in the FD.

Speaking to Moneycontrol.com, Umesh Rathi, CFP, Arihant Capital has listed some of the key parameters to review the corporate fixed deposit before making your investment.

1. The issuing company should have a strong goodwill and track record in the market and should be running its business for at least 15- 20 years.

2. Only invest in FDs of profit making companies that have a constant dividend paying track record for last 5 consecutive years.

3. Credit rating is one of the important parameters while selecting corporate fixed deposit. The NBFCs that offer corporate fixed deposit has to get themselves rated by the rating agencies such as CARE, CRISIL, ICRA etc., but manufacturing firms have no such compulsion. Assuming a company is rated then invests only in a company having AAA or AA rating and if company is not rated then one should deeply study financial statements of the company. If you are not able to understand financial statement then you can take help of financial advisor or avoid investment in unrated companies.

4. The sector outlook in which the company runs its business should be positive. Avoid troubled or high risk sectors like real estate or microfinance.

5. One should avoid company which is offering unusually high interest rates because generally companies offer higher interest rate to compensate high risk.

6. Check the history of the company, how they have paid the principal and interest to the investors.

Credit rating is your most important deciding factor while selecting a fixed deposit. Understanding different ratings can be difficult for a layman as they may not be well-versed with various jargons and rating numbers. The ratings will be in the descending order, where AAA is the best rating while D is the worst.

-Riken Mehta

Interest Cover: What you need to know about leveraged cos

Given the high interest rate environment, investors will be keenly watching companies’ ability to meet their interest payments. This is one data point that investors should analyze while looking at the fundamentals of a company, and the interest coverage multiple does exactly this.

The interest coverage multiple or the interest coverage ratio is calculated by dividing a company's earnings before interest and taxes for a particular period by the company's interest expenses for the same period.

The higher the multiple is, the better the financial position of a company.

Interest coverage multiple less than one indicates the company is not generating sufficient revenues to meet its cost of debt. A ratio above 1.5 is considered to be good. However, a good or bad multiple depends on the industry the company operates in. For instance, infrastructure and realty companies have a lot of debt on their books. But debt in itself is not a bad thing, as long as the company is able to service it

Speaking to Moneycontrol.com, fundamental analyst at Kotak Securities, Dipen Shah, said “We do consider the interest coverage ratio to be an important parameter. A ratio of almost 1 or below 1 is not preferable.”

-Anisha Mappat, Riken Mehta

2 non-Tata stocks that may react to Mistry's appointment

Cyrus Mistry currently Managing Director of Shapoorji Pallonji Group is the name and face we all will be hearing and looking in the media for the next few days atleast. That’s because, he is all set to take over mantle of leadership from Ratan Tata as the Chairman of India's largest conglomerate, the Tata Group.

The Board of Directors of Tata Sons has appointed Cyrus Pallonji Mistry as Deputy Chairman. Mistry will work with Ratan Tata over the next one year and take over from him when Tata retires in December 2012.

Who is Cyrus Mistry?

Cyrus Mistry, has been a Director of Tata Sons since August 2006. He is a graduate of Civil Engineering from Imperial College, London, and has a Master of Science in Management from the London Business School.

How will stocks react to his appointment?

It’s a no brainer that Tata group stocks will react to the news of a new chairman. There are around 100 companies, listed or unlisted, of the Tata group.

Below we have attached the entire list of Tata Group companies. However, there are two stocks which may also react to Cyrus Mistry’s appointment. The two unheard names are Gokak Textiles and Forbes Gokak .

Why so?
As per latest BSE Shareholding data, Shapoorji Pallonji & Company Ltd holds 73.56% and 72.06% stake in Gokak Textiles and Forbes Gokak respectively. The stake is valued at Rs 23 crore and Rs 371 crore respectively.

Cyrus Mistry is the younger son of Shapoorji Pallonji Group. The group's business interest covers construction (including residential, commercial, industrial and infrastructure), real estate, infrastructure (comprising coal mining, power, ports and roads), biofuels and agriculture, consumer products, electro-mechanical and MEP services, facades and interiors, engineering, textiles, business automation and shipping and logistics.

With over 23,000 employees and a group turn over of USD 2.5 billion, it is a name quite familiar in the India Inc.

Gokak Mills is engaged in yarn spinners, dyed yarns, canvas, terry towels, knitted garments and other downstream products.

For the quarter ending September 2011, Forbes Gokak reported net profit of Rs 0.02 crore on turnover of Rs 66.37 crore. Gokak Textiles bottomline was deep in red. The company posted net loss of Rs 11.02 crore.

-Riken Mehta

Jet, Kingfisher margins likely to crash on falling rupee

A falling rupee against the dollar has proved to be a double edged sword for ailing airlines struggling to fly in the black.

The aviation sector has already seen its operating cost go up significantly for the three months to September quarter as airline companies incur 30% expenses in dollar denomination. Secondly, the weak rupee could compress EBITDA margins to 3% from 12.3% Y-o-Y due to the weak rupee, say analysts

After falling to Rs 50 to a greenback few days back, the rupee is now at Rs 48.86 sending shockwaves to airline operators who are already reeling under losses for the past two quarters. While country’s largest private carrier Jet Airways had posted a net loss of Rs 123 crore for Q1, Kingfisher too posted a net loss of RS 263 crore on high fuel bills.

Jet Airways and Kingfisher Airlines officials with whom moneycontrol.com talked to have said that their Q2 topline has been dented as the rupee started to depreciate against the greenback by almost 12% when compared with the three months to June quarter.

"A sharp fall in the value of the rupee pushed up our external borrowing cost, lease rentals and salaries to expat staff. A falling rupee has bloated out operational cost by around 10% for the September quarter," says an official from a full service carrier.

Sample this:

Jet incurred Rs 361 crore towards employee salaries, Rs 207 crore on lease rentals and Rs 214 crore on interest payments on loans taken domestically and in dollar denominations when the rupee stood at Rs 45 against the greenback during Q1 of FY12. Now, with the rupee inching towards Rs 50 against the dollar, airlines will have a tough time maintaining costs, say analysts.

Also, while Jet has dollar denominated loans of around Rs 9,000 crore, its rival Kingfisher has a debt of around Rs 6,000 crore of which a significant amount is in dollar denomination. Fall in rupee will also increase the principal amount of loans for these companies.

Sharan Lilaney from Angel Broking explains, “Airlines are already making losses for the past two quarters and with lower purchasing value of the rupee, airlines are likely to report more losses this quarter.” He further adds that though Jet Airways and Kingfisher Airlines receive revenues from international operations in dollar terms, the impact will be offset by other larger expenses which they incur in dollar currency.

Though crude prices have slipped to $109.45  from $113 a barrel Q-o-Q, the weakening rupee has toned down the impact, say experts.

-Riken Mehta & Shaheen Mansuri

Setco Auto aims to triple revenues to Rs 1000 cr by 2015

Ranked among the world's top five clutch makers, Setco Auto , has set its sight on becoming Rs 1,000 crore turnover company by 2015.

"In about four year’s time, we see exports contributing 15% to total sales from the current 8%," Senior Finance Officer, Mohsin Virani told moneycontrol.com.

Setco Auto reported a jump of 39% in revenues at Rs 73 crore for the quarter-ended June 2011, YoY. During the period, company's bottomline almost jumped by 35% to Rs 7.07 crore.

"We were able to pass on the rise in commodity prices with a time lag of 3-4 months. This helped us combat high raw material prices effectively," Virani said.

The company gets around 47% of its revenues from Original Equipments Manufacturer (OEM) segment, while 42% comes from the replacement market.

"The replacement market garners 10% margins higher than OEM," Virani explained. 

The remaining 8% comes from exports, he said adding, "…nearly 60% of revenue is generated from Tata Motors alone. Top three clients from India contribute 85-87% of total revenues."

The company's current inventory turnover ratio is three times. "The outstanding loan book was Rs 90 crore, which includes term loan plus working capital. The average interest cost is 12.5%." Virani said.

The company expects to post Rs 70 crore topline and Rs 1.5 crore as bottomline from its two international subsidiaries. It is also planning to set up a clutch assembly facility in Africa to take advantage of the lack of organized players in that continent.

"We will start exporting to African countries by end of Q4FY12," Virani informed.

The favourable policy changes late last year helped Setco to add 10-12% realisations this year.    

"The company will be able to maintain OPM of 18-20% and NPM of 10-12% going forward despite slowdown," Virani said.

Shares of auto component maker were trading marginally higher at Rs 175.45, up 0.46%.

And you thought falling crude was good for Indian equities?

The widely held belief is that falling crude oil prices is good for India. That may hold true for the economy. But for the stock market? The chart below shows that lower crude oil prices need not necessarily trigger an upswing in stock prices.

Since 2005, Indian equities and global crude oil prices have more or less moved in the same direction. Indian shares did well even as crude prices were soaring to new highs, and declined when oil prices cooled off. Will the same pattern be repeated this time too? Only time will tell.

Riken Mehta