Question
How would you like to make a quick 8.5% in a month or so?
Answer
Look no further than CIC Energy listed in Toronto (http://finance.yahoo.com/q?s=ELC.TO&ql=0). Currently trading at $ 6.84, shareholders as of Dec 8 are slated to vote on the acceptance of a buy out offer from JSW (Jindal group of India) in a special shareholder meeting on Jan 21, 2011.
The Discount
The buy out offer from JSW is at $ 7.42 per share. CIC shares trading at $ 6.84 represent a decent potential return of 8.5% for a months worth of lock in. Buy outs from Indian companies on the Toronto Stock Exchange are not that common and that could perhaps explain the lack of investor confidence in the closing of the deal. That lack of confidence of course is why there is an arbitrage opportunity.
Tau Capital
Once CIC Energy has been acquired, I hope Tau Capital http://www.taucapital.com), the folks that developed and monetized CIC Energy, will focus on taking Talon Metals Corp. to the next level. Talon seems like a good play on multiple commodities in Brazil.
Friday, December 31, 2010
Wednesday, December 29, 2010
Feeding India
Here is a great slideshow on why India will be an increasingly large consumer of Potash - http://www.potashcorp.com/industry_overview/2010/markets/india/1/
Once you factor in the growing population, need to eat, need to eat more protien, it becomes obvious how Potash (required for crops as well as animal feed) is a commodity that will look to re-scale its 2008 peak soon.
With Potash Corp out of the take over limelight - http://www.bhpbilliton.com/bb/investorsMedia/news/2010/bhpBillitonWithdrawsItsOfferToAcquirePotashcorpAndReactivatesItsBuybackProgram.jsp, the focus is back on the juniors (http://www.reuters.com/article/idUSTRE6BI0MN20101219)
So far no Indian firm has made a play for a Potash resource. They have made plays for coal, iron ore and oil deposits across the globe.
Of all the juniors, I like Western Potash, the most - http://ca.finance.yahoo.com/q?s=WPX.V
Playing the Potash juniors is suited for the patient at heart as some ofthe majors have capacity expansion plans but as we have seen with the Baffin Island and New Millenium Capital story - every one wants their own captive supplies.
Once you factor in the growing population, need to eat, need to eat more protien, it becomes obvious how Potash (required for crops as well as animal feed) is a commodity that will look to re-scale its 2008 peak soon.
With Potash Corp out of the take over limelight - http://www.bhpbilliton.com/bb/investorsMedia/news/2010/bhpBillitonWithdrawsItsOfferToAcquirePotashcorpAndReactivatesItsBuybackProgram.jsp, the focus is back on the juniors (http://www.reuters.com/article/idUSTRE6BI0MN20101219)
So far no Indian firm has made a play for a Potash resource. They have made plays for coal, iron ore and oil deposits across the globe.
Of all the juniors, I like Western Potash, the most - http://ca.finance.yahoo.com/q?s=WPX.V
Playing the Potash juniors is suited for the patient at heart as some ofthe majors have capacity expansion plans but as we have seen with the Baffin Island and New Millenium Capital story - every one wants their own captive supplies.
Thursday, September 16, 2010
New Millennium Capital Corporation
For resource hungry enterprises in Asia, Australian, Indonesian and natural resource assets from the Western Coast of North America have made the most sense.
Corus Steel, in the UK, part of the Tata Group has had to elsewhere to secure its supply of Iron Ore. The Tata group collectively with Corus is the 8th largest producer of steel in the world in large part due to the volume numbers of Corus.
The Tatas have exercised their option to fund and the development of the (Direct Shipping Ore) DSO mine owned by the listed New Millennium Capital Corporation. In return for bearing 80% of the cost of developing the mine, the Corus arm of the Tata Empire will buy all of the iron ore produced by the DSO mine near Schefferville, Quebec.
The Captive Mine
The mine is supposed to start in 2012 and produce 4 million tones of order over the course of its life of 10 years.
At a conservative $ 50 per ton of iron ore, New Millennium is looking at a top line of $ 2 billion from this project alone.
Market Pricing
I like the fact that there is no talk of preferential pricing and Tatas will be paying market price for the ore that they buy. Sure, there may be volatility along the way, but over the course of 10 years, the volatility should be mostly trending upwards.
Tata Ownership
The Tatas own 27.4% of New Millennium and have a stake in seeing the mine built and operate efficiently.
Potential Upside
This brings us to the Taconite project (with the LabMag and KeMag mines). The deposits in these mines are manifold than the DSO levels. The Tatas have until Dec 31, 2010 to signify their interest in this project.
Patient Capital
My personal style of investment is to invest in projects which have a gestation period. That allows an investor to come in while the project plant is being set up and the stock is out of the news for some time.
This also allows for investors to maximize the upside as they see the stock break out once production is imminent.
Sources
http://www.nmlresources.com/pdfs/FactSheet.pdf
http://www.business-standard.com/india/news/tata-steel-securing-growth/408208/
http://www.livemint.com/2010/09/15232736/Tata-Steel-hedges-against-ore.html
Corus Steel, in the UK, part of the Tata Group has had to elsewhere to secure its supply of Iron Ore. The Tata group collectively with Corus is the 8th largest producer of steel in the world in large part due to the volume numbers of Corus.
The Tatas have exercised their option to fund and the development of the (Direct Shipping Ore) DSO mine owned by the listed New Millennium Capital Corporation. In return for bearing 80% of the cost of developing the mine, the Corus arm of the Tata Empire will buy all of the iron ore produced by the DSO mine near Schefferville, Quebec.
The Captive Mine
The mine is supposed to start in 2012 and produce 4 million tones of order over the course of its life of 10 years.
At a conservative $ 50 per ton of iron ore, New Millennium is looking at a top line of $ 2 billion from this project alone.
Market Pricing
I like the fact that there is no talk of preferential pricing and Tatas will be paying market price for the ore that they buy. Sure, there may be volatility along the way, but over the course of 10 years, the volatility should be mostly trending upwards.
Tata Ownership
The Tatas own 27.4% of New Millennium and have a stake in seeing the mine built and operate efficiently.
Potential Upside
This brings us to the Taconite project (with the LabMag and KeMag mines). The deposits in these mines are manifold than the DSO levels. The Tatas have until Dec 31, 2010 to signify their interest in this project.
Patient Capital
My personal style of investment is to invest in projects which have a gestation period. That allows an investor to come in while the project plant is being set up and the stock is out of the news for some time.
This also allows for investors to maximize the upside as they see the stock break out once production is imminent.
Sources
http://www.nmlresources.com/pdfs/FactSheet.pdf
http://www.business-standard.com/india/news/tata-steel-securing-growth/408208/
http://www.livemint.com/2010/09/15232736/Tata-Steel-hedges-against-ore.html
Wednesday, August 25, 2010
GeoGlobal Resources:Another Play on the Krishna Godavari (KG) Basin in India
If you have been following the changes in policy and the recent success in oil and gas exploration in some non traditional regions, then India may have shown up on your radar.
The KG basin off India’s western coast, is home to the D6 mega gas fields owned by Reliance Industries (http://finance.yahoo.com/q?s=RELIANCE.NS) and Niko Resouces (http://finance.yahoo.com/q?s=NKO.TO).
Cairn India (http://finance.yahoo.com/q?s=CAIRN.BO) meanwhile is in the middle of buy out/merger talks with Vedanta (http://finance.yahoo.com/q?s=VED.L). Cairn India’s crown jewels are in the onshore eastern state of Rajasthan.
For an energy deficient nation like India, growing at a rapid pace, both finds are a heavenly gift.
So where might be the next Niko Resources?
I would like to point to GeoGlobal (http://finance.yahoo.com/q?s=GGR) resources as a company that could be the next NIKO if it manages to overcome a couple of hurdles.
What I like about GGR:
1. Its listed on the Amex in the US and hence overseas (non Indian residents can buy in). Most Indian stocks are off limits to non Indians as only a handful of Indian companies have ADRs and GDRs.
2. GGR has a 5% stake in the DeenDayal block in the KG basin. I do not know much about oil & gas exploration, but know that you are likely to find some where other folks have discovered hydrocarbon deposits.
3. GSPC as a partner (Gujarat State Petroleum Corporation Ltd.) a state run oil firm (owned by the state of Gujarat in India) owns 80% of the Deendayal block. GSPC is not public yet but they have tried to go public in the past and are at it again. Their draft prospectus can be found at http://www.sebi.gov.in/dp/gspcdraft.pdf
Having a strong Indian partner is a double edged sword (more about that later).
4. The DeenDayal Asset
A few years ago, the Deendayal deposit was touted as holding 20 tcf (trillion cucbic feet) of natural gas. However, the DGH (Directorate General Hydrocarbons in India) has only notified 2 tcf and has recently approved a field development plan of $ 1.8 billion - http://www.istockanalyst.com/article/viewiStockNews/articleid/4387656
5. Other Blocks
GGR has exploration blocks in 4 key basins in India – KG basin, Cambay Basin (in Gujarat), Deccan Basin (Southern India) and Rajasthan Basin (where Cairn India found oil). More details can be found at http://www.geoglobal.com/default.aspx?id=39
GSPC has reportedly found gas in large quantities in the Cambay Basin too http://economictimes.indiatimes.com/news/news-by-industry/energy/oil--gas/GSPC-strikes-huge-gas-reserve-in-Cambay-basin/articleshow/6230713.cms but extracting the gas will be a different story.
Things to Watch Out For:
1. The GSPC and GGR dispute
Page 19 of the GSPC draft prospectus http://www.sebi.gov.in/dp/gspcdraft.pdf has information on the dispute with GGR. The draft prospectus does not mention that GSPC may have not shared some updates about the fields in question since the dispute took a serious turn. http://economictimes.indiatimes.com/news/news-by-industry/energy/oil--gas/GSPC-GeoGlobal-may-attempt-to-settle-gas-dispute/articleshow/6021669.cms
Efforts have been made to resolve the dispute but so far, nothing has been reported.
2. Long Gestation Period
Assuming that GSPC gets going peak output from Deendayal is expected around 2015-2016.
If everything works out, only a patient investor will be rewarded handsomely.
Recommendation:
If you believe that India’s initial success in the E&P can be replicated then you could consider a small, long term investment in GGR.
The KG basin off India’s western coast, is home to the D6 mega gas fields owned by Reliance Industries (http://finance.yahoo.com/q?s=RELIANCE.NS) and Niko Resouces (http://finance.yahoo.com/q?s=NKO.TO).
Cairn India (http://finance.yahoo.com/q?s=CAIRN.BO) meanwhile is in the middle of buy out/merger talks with Vedanta (http://finance.yahoo.com/q?s=VED.L). Cairn India’s crown jewels are in the onshore eastern state of Rajasthan.
For an energy deficient nation like India, growing at a rapid pace, both finds are a heavenly gift.
So where might be the next Niko Resources?
I would like to point to GeoGlobal (http://finance.yahoo.com/q?s=GGR) resources as a company that could be the next NIKO if it manages to overcome a couple of hurdles.
What I like about GGR:
1. Its listed on the Amex in the US and hence overseas (non Indian residents can buy in). Most Indian stocks are off limits to non Indians as only a handful of Indian companies have ADRs and GDRs.
2. GGR has a 5% stake in the DeenDayal block in the KG basin. I do not know much about oil & gas exploration, but know that you are likely to find some where other folks have discovered hydrocarbon deposits.
3. GSPC as a partner (Gujarat State Petroleum Corporation Ltd.) a state run oil firm (owned by the state of Gujarat in India) owns 80% of the Deendayal block. GSPC is not public yet but they have tried to go public in the past and are at it again. Their draft prospectus can be found at http://www.sebi.gov.in/dp/gspcdraft.pdf
Having a strong Indian partner is a double edged sword (more about that later).
4. The DeenDayal Asset
A few years ago, the Deendayal deposit was touted as holding 20 tcf (trillion cucbic feet) of natural gas. However, the DGH (Directorate General Hydrocarbons in India) has only notified 2 tcf and has recently approved a field development plan of $ 1.8 billion - http://www.istockanalyst.com/article/viewiStockNews/articleid/4387656
5. Other Blocks
GGR has exploration blocks in 4 key basins in India – KG basin, Cambay Basin (in Gujarat), Deccan Basin (Southern India) and Rajasthan Basin (where Cairn India found oil). More details can be found at http://www.geoglobal.com/default.aspx?id=39
GSPC has reportedly found gas in large quantities in the Cambay Basin too http://economictimes.indiatimes.com/news/news-by-industry/energy/oil--gas/GSPC-strikes-huge-gas-reserve-in-Cambay-basin/articleshow/6230713.cms but extracting the gas will be a different story.
Things to Watch Out For:
1. The GSPC and GGR dispute
Page 19 of the GSPC draft prospectus http://www.sebi.gov.in/dp/gspcdraft.pdf has information on the dispute with GGR. The draft prospectus does not mention that GSPC may have not shared some updates about the fields in question since the dispute took a serious turn. http://economictimes.indiatimes.com/news/news-by-industry/energy/oil--gas/GSPC-GeoGlobal-may-attempt-to-settle-gas-dispute/articleshow/6021669.cms
Efforts have been made to resolve the dispute but so far, nothing has been reported.
2. Long Gestation Period
Assuming that GSPC gets going peak output from Deendayal is expected around 2015-2016.
If everything works out, only a patient investor will be rewarded handsomely.
Recommendation:
If you believe that India’s initial success in the E&P can be replicated then you could consider a small, long term investment in GGR.
Friday, June 25, 2010
Reliance Industries: An Indian Conglomerate Awakens
As much of the mayhem is over, the markets remain fearful that the next show to drop would be some states/countries going belly up. Perhaps they are right. Either way, what is clear is that if you invest for the long haul and focus on a part of your portfolio on growth opportunities in the developing world, you will likely do well.
India’s largest corporation, Reliance Industries Limited (RIL) represents a great opportunity for a diversified play on one of the larger BRIC opportunities. And for non Indian investors, RIL stock is available as a GDR in London, UK.
Core Business:
RIL, started off in the polyester space and has undergone a massive backward integration. They own the worlds largest petro-chemical complex in the Western state of Gujarat in India. The immediate growth are for Reliance is the monetization of the D6 natural gas deposits in the Krishna Godavari (KG) basin off India’s eastern coast.
RIL is a bit pricey at a PE of 21 http://www.business-standard.com/stockpage/stock_details.php?bs_code=1331 so if may want to wait for the right opportunity. However, this is a business that has a net margin in the high teens (fluctuating with refining margins for now, until the gas production from D6 is ramped up) and has many things on the go for it - http://www.business-standard.com/india/markets/dataresult.php?leftnm=0&subLeft=7&selcat=1&subCnt=1&selsubcat=Quarterly%20Results&txtSearch=&topsub=&ToShow=Data&BSCODE=1331&Type=61
What does the future hold for Reliance:
1. More Upstream & Downstream activities in the energy exploration sector in India
Upstream
The D6 find, the petroleum finds by Cairn India, additional finds by reliance on the West cost of India in Gujarat all show signs that many of the under explored blocks in India hold reasonable potential of additional oil and gas finds.
The D6 oil find as an example, is just 1 of many blocks that Reliance owns amongst others in the vicinity http://www.energy-pedia.com/article.aspx?articleid=138085 and even D6 has not been fully explored.
Downstream
RIL had a chain of gas stations (900 company owned and 500 franchise owned http://in.reuters.com/article/idINIndia-44200920091124?feedType=RSSfeedName=businessNewsutmsource=feedburnerutmmedium=feedutmcampaign=Feed3Areuters2FINbusinessNews28News2FIN2FBusinessNews29) across India that were shut some time ago as gasoline (petrol) was sold at subsidized rates in India. Many of them re-opened late 2009.
The government of India on June 24, 2010 however has decided to end those subsidies and move to a market driven mechanism for the pricing of gasoline - http://online.wsj.com/article/SB10001424052748703615104575328281829586188.html
This along with eventual decontrol of diesel prices at an undetermined date should allow RIL owed gas stations to make a comeback across the country at retail level.
2. A clean break in the Ambani versus Ambani dispute
For a few years now, the two sons of the late founder Mukesh Ambani (RIL) and Anil Ambani (non RIL assets and businesses) had been sparring in India’s courts about allocation of natural gas at a preferential rate for the younger brother. As part of a non-compete the elder brother Mukesh was restricted from having RIL enter some key areas of business like telecom, power etc. These are business areas where the younger brother Anil operates in.
The non compete was scrapped in May and RIL is now free to operate in any business sphere it wishes to. http://www.reuters.com/article/idUSTRE64M13D20100523
3. Reliance Infotel
India recently concluded its auction for 3 spectrum and RIL has come in and bought 95% of Infotel. Infotel was the only company win spectrum in all 22 service areas in India - http://news.bbc.co.uk/2/hi/business/10296831.stm
The billion dollar price tag is easily affordable given that the D6 natrual gas find is projected to spin off billions each year - http://www.thehindubusinessline.com/2009/04/03/stories/2009040351930200.htm
India has been adding 20 million or so cell phone subscribers each year and the cell phone towers can barely keep pace. RIL executives were part of setting up Reliance Infocom, the wireless company owned by the younger brother Anil so this is not an alien space for them. Moodys however, does rate this venture a bit risky, so you should do your own homework - http://www.businessweek.com/news/2010-06-21/reliance-industries-risk-rises-on-telecom-unit-says-moody-s.html
4. Reliance Retail
For those of you who have not lived or been to India, it may come as a surprise that the retail distribution in India is massively fragmented. Inefficient, mom and pop stores are encouraged and efficient chains are constrained as they are seen as evil corporations devouring the livelihood of the self employed.
Despite that Walmart has made a play for India through a joint venture with another Indian company (unlisted) and as middle class aspirations change, it is natural the people wish to shop in a better ambience.
Reliance Retail, India’s largest grocery chain (1,150 stores and 5.5 million loyalty members) is closing in on $1 billion in sales and the company hopes to grow 10 fold over the next 5 years - http://www.theaustralian.com.au/business/in-depth/ambani-flags-bigger-retail-role-at-reliance/story-e6frgaho-1225882724159
Reliance has multiple formats of organized retail being tested in India for a variety of verticals apart from groceries.
5. Reliance & Shale gas play in the US
If you believe in the future of shale gas in the US, then that’s another reason why you should think of Reliance. Reliance has closed two shale gas deals in the US this year - 45% stake in Texas, US-based Pioneer Natural Resources Co. for $1.32 billion in June and In April, RIL took a 40% stake in Atlas Energy Inc.’s core Marcellus shale acreage position in the US for $1.7billion.
Apart from just access to the promising acreage RIL is also intent on learning new gas extraction technologies - http://www.livemint.com/2010/06/24103938/RIL-acquires-Pioneer-stake-for.html
6. Reliance & SEZs
Reliance has two very big SEZ (Special Economic Zone) projects that have been hanging fire for some time. The two projects (MahaMumbai and Haryana SEZ). With the real estate boom having abated in India, many players have chosen to hand back the land they acquired to the government. Land acquisition is very touchy subject with farming communities and the 2 SEZs (if the come to fruition) could be a game changer for RIL.
The Haryana SEZ (close to New Delhi) is showing some sings of life with reports of a possible Japanese partner picking up equity http://birlaa.com/2010/04/12/mitsui-in-reliance-sez-haryana/
The Raigad SEZ (close to Mumbai) is the second mega SEZ that RIL is pushing for but the Supreme Court has ruled against speeding up land acquisition and the farmers have voted overwhelmingly against selling their land and do not wish the state to acquire their land either - http://timesofindia.indiatimes.com/city/mumbai/CM-to-decide-fate-of-SEZ-in-Raigad/articleshow/5241174.cms
7. Reliance IMG
RIL has also singed an agreement with IMG, the global sports marketing conglomerate to develop pro-sports leagues in India. If you do not follow the business of sports, you may not be aware that a cricket league in India has gone from zero to USD 4 billion in 3 years http://www.business-standard.com/india/news/ipl-brand-value-doubles-to-413-bn-brand-finance/89167/on
IMG manages the execution of the IPL and have made a couple of forays in India earlier so they are familiar with the landscape.
Mukesh Ambani personally owns the Mumbai franchise in the cricket league (IPL-Indian Premier League) and clearly sees how the young population of India can be hooked on to sports other than cricket. As part of that Reliance-IMG has assigned 30 year deal with the Basketball Federation of India (BFI).
With no indoor stadiums or pro-league in basketball, it will take a lot of time and investment before a serious replication of the IPL can be attempted, but long term, for a country where almost half the population is less than 30 years of age, pro sports leagues does seem like the place to be. http://www.imgworld.com/press_room/fullstory.sps?iType=13708&iNewsid=6650053&iCategoryID=
8. Stock Split
Late last year (October, 2009) RIL stock was split (1:1) http://www.ril.com/downloads/pdf/PR07102009.pdf
RIL has a history of stock splits to reward its investors. The founder (father of Mukesh and Anil) Dhirubhai Ambani, was the catalyst in many ways in developing the equity culture in India and he always rewarded the retail investor.
With all of the above projects having long gestation period and RIL having the free cash flow to fund the capex, I strongly recommend buying and holding this stock for the long haul (until the next stock split).
9. Additional Expansion
RIL has aggressive plans to enter the power (electricity) generation http://www.businessweek.com/news/2010-06-18/reliance-industries-ready-for-big-surge-forward-update1-.html and chemical products http://www.expressindia.com/latest-news/RIL-mulls--9-bn-investment/635634/
Recommendation
India, a market of 1 billion plus people is chronically energy starved. The state has finally realized this and they have planned for what they call UMPP (Ultra Mega power Project, I believe). These mega power projects are supposed to be granted expeditious approvals (although it might still take a couple of years). So far IL was locked out of the bidding due to the non-compete with Anil Ambani. But now with that gone, RIL is once again a 21st century growth stock India play.
For those of you who are wary of investing in bloated conglomerates, I hear you. However, I would urge you to think of RIL like a mutual fund and take the great with the not so great business results that may lie in store for its business units.
Pricing information on the RIL GDR is available at http://www.lse.co.uk/shareprice.asp?shareprice=RIGD&share=reliance_industries_ld_gdr_(each_repr_2_ord_inr10_level1)(144a)
India’s largest corporation, Reliance Industries Limited (RIL) represents a great opportunity for a diversified play on one of the larger BRIC opportunities. And for non Indian investors, RIL stock is available as a GDR in London, UK.
Core Business:
RIL, started off in the polyester space and has undergone a massive backward integration. They own the worlds largest petro-chemical complex in the Western state of Gujarat in India. The immediate growth are for Reliance is the monetization of the D6 natural gas deposits in the Krishna Godavari (KG) basin off India’s eastern coast.
RIL is a bit pricey at a PE of 21 http://www.business-standard.com/stockpage/stock_details.php?bs_code=1331 so if may want to wait for the right opportunity. However, this is a business that has a net margin in the high teens (fluctuating with refining margins for now, until the gas production from D6 is ramped up) and has many things on the go for it - http://www.business-standard.com/india/markets/dataresult.php?leftnm=0&subLeft=7&selcat=1&subCnt=1&selsubcat=Quarterly%20Results&txtSearch=&topsub=&ToShow=Data&BSCODE=1331&Type=61
What does the future hold for Reliance:
1. More Upstream & Downstream activities in the energy exploration sector in India
Upstream
The D6 find, the petroleum finds by Cairn India, additional finds by reliance on the West cost of India in Gujarat all show signs that many of the under explored blocks in India hold reasonable potential of additional oil and gas finds.
The D6 oil find as an example, is just 1 of many blocks that Reliance owns amongst others in the vicinity http://www.energy-pedia.com/article.aspx?articleid=138085 and even D6 has not been fully explored.
Downstream
RIL had a chain of gas stations (900 company owned and 500 franchise owned http://in.reuters.com/article/idINIndia-44200920091124?feedType=RSSfeedName=businessNewsutmsource=feedburnerutmmedium=feedutmcampaign=Feed3Areuters2FINbusinessNews28News2FIN2FBusinessNews29) across India that were shut some time ago as gasoline (petrol) was sold at subsidized rates in India. Many of them re-opened late 2009.
The government of India on June 24, 2010 however has decided to end those subsidies and move to a market driven mechanism for the pricing of gasoline - http://online.wsj.com/article/SB10001424052748703615104575328281829586188.html
This along with eventual decontrol of diesel prices at an undetermined date should allow RIL owed gas stations to make a comeback across the country at retail level.
2. A clean break in the Ambani versus Ambani dispute
For a few years now, the two sons of the late founder Mukesh Ambani (RIL) and Anil Ambani (non RIL assets and businesses) had been sparring in India’s courts about allocation of natural gas at a preferential rate for the younger brother. As part of a non-compete the elder brother Mukesh was restricted from having RIL enter some key areas of business like telecom, power etc. These are business areas where the younger brother Anil operates in.
The non compete was scrapped in May and RIL is now free to operate in any business sphere it wishes to. http://www.reuters.com/article/idUSTRE64M13D20100523
3. Reliance Infotel
India recently concluded its auction for 3 spectrum and RIL has come in and bought 95% of Infotel. Infotel was the only company win spectrum in all 22 service areas in India - http://news.bbc.co.uk/2/hi/business/10296831.stm
The billion dollar price tag is easily affordable given that the D6 natrual gas find is projected to spin off billions each year - http://www.thehindubusinessline.com/2009/04/03/stories/2009040351930200.htm
India has been adding 20 million or so cell phone subscribers each year and the cell phone towers can barely keep pace. RIL executives were part of setting up Reliance Infocom, the wireless company owned by the younger brother Anil so this is not an alien space for them. Moodys however, does rate this venture a bit risky, so you should do your own homework - http://www.businessweek.com/news/2010-06-21/reliance-industries-risk-rises-on-telecom-unit-says-moody-s.html
4. Reliance Retail
For those of you who have not lived or been to India, it may come as a surprise that the retail distribution in India is massively fragmented. Inefficient, mom and pop stores are encouraged and efficient chains are constrained as they are seen as evil corporations devouring the livelihood of the self employed.
Despite that Walmart has made a play for India through a joint venture with another Indian company (unlisted) and as middle class aspirations change, it is natural the people wish to shop in a better ambience.
Reliance Retail, India’s largest grocery chain (1,150 stores and 5.5 million loyalty members) is closing in on $1 billion in sales and the company hopes to grow 10 fold over the next 5 years - http://www.theaustralian.com.au/business/in-depth/ambani-flags-bigger-retail-role-at-reliance/story-e6frgaho-1225882724159
Reliance has multiple formats of organized retail being tested in India for a variety of verticals apart from groceries.
5. Reliance & Shale gas play in the US
If you believe in the future of shale gas in the US, then that’s another reason why you should think of Reliance. Reliance has closed two shale gas deals in the US this year - 45% stake in Texas, US-based Pioneer Natural Resources Co. for $1.32 billion in June and In April, RIL took a 40% stake in Atlas Energy Inc.’s core Marcellus shale acreage position in the US for $1.7billion.
Apart from just access to the promising acreage RIL is also intent on learning new gas extraction technologies - http://www.livemint.com/2010/06/24103938/RIL-acquires-Pioneer-stake-for.html
6. Reliance & SEZs
Reliance has two very big SEZ (Special Economic Zone) projects that have been hanging fire for some time. The two projects (MahaMumbai and Haryana SEZ). With the real estate boom having abated in India, many players have chosen to hand back the land they acquired to the government. Land acquisition is very touchy subject with farming communities and the 2 SEZs (if the come to fruition) could be a game changer for RIL.
The Haryana SEZ (close to New Delhi) is showing some sings of life with reports of a possible Japanese partner picking up equity http://birlaa.com/2010/04/12/mitsui-in-reliance-sez-haryana/
The Raigad SEZ (close to Mumbai) is the second mega SEZ that RIL is pushing for but the Supreme Court has ruled against speeding up land acquisition and the farmers have voted overwhelmingly against selling their land and do not wish the state to acquire their land either - http://timesofindia.indiatimes.com/city/mumbai/CM-to-decide-fate-of-SEZ-in-Raigad/articleshow/5241174.cms
7. Reliance IMG
RIL has also singed an agreement with IMG, the global sports marketing conglomerate to develop pro-sports leagues in India. If you do not follow the business of sports, you may not be aware that a cricket league in India has gone from zero to USD 4 billion in 3 years http://www.business-standard.com/india/news/ipl-brand-value-doubles-to-413-bn-brand-finance/89167/on
IMG manages the execution of the IPL and have made a couple of forays in India earlier so they are familiar with the landscape.
Mukesh Ambani personally owns the Mumbai franchise in the cricket league (IPL-Indian Premier League) and clearly sees how the young population of India can be hooked on to sports other than cricket. As part of that Reliance-IMG has assigned 30 year deal with the Basketball Federation of India (BFI).
With no indoor stadiums or pro-league in basketball, it will take a lot of time and investment before a serious replication of the IPL can be attempted, but long term, for a country where almost half the population is less than 30 years of age, pro sports leagues does seem like the place to be. http://www.imgworld.com/press_room/fullstory.sps?iType=13708&iNewsid=6650053&iCategoryID=
8. Stock Split
Late last year (October, 2009) RIL stock was split (1:1) http://www.ril.com/downloads/pdf/PR07102009.pdf
RIL has a history of stock splits to reward its investors. The founder (father of Mukesh and Anil) Dhirubhai Ambani, was the catalyst in many ways in developing the equity culture in India and he always rewarded the retail investor.
With all of the above projects having long gestation period and RIL having the free cash flow to fund the capex, I strongly recommend buying and holding this stock for the long haul (until the next stock split).
9. Additional Expansion
RIL has aggressive plans to enter the power (electricity) generation http://www.businessweek.com/news/2010-06-18/reliance-industries-ready-for-big-surge-forward-update1-.html and chemical products http://www.expressindia.com/latest-news/RIL-mulls--9-bn-investment/635634/
Recommendation
India, a market of 1 billion plus people is chronically energy starved. The state has finally realized this and they have planned for what they call UMPP (Ultra Mega power Project, I believe). These mega power projects are supposed to be granted expeditious approvals (although it might still take a couple of years). So far IL was locked out of the bidding due to the non-compete with Anil Ambani. But now with that gone, RIL is once again a 21st century growth stock India play.
For those of you who are wary of investing in bloated conglomerates, I hear you. However, I would urge you to think of RIL like a mutual fund and take the great with the not so great business results that may lie in store for its business units.
Pricing information on the RIL GDR is available at http://www.lse.co.uk/shareprice.asp?shareprice=RIGD&share=reliance_industries_ld_gdr_(each_repr_2_ord_inr10_level1)(144a)
Wednesday, January 13, 2010
Gas Authority of India Limited (GAIL)
The Company
In the energy starved country of India, GAIL has a 78% market share of natural gas transmission. GAIL operates in all aspects of natural gas value chain – import of natural gas, Exploration, Distribution via pipelines to city grids that are coming up fast across the nation.
It has started to take some steps in the international market too.
Triggers for Growth
1. Urban lifestyle – As Indian urbanizes, end users are bound to move away from the prevalent system of having cooking gas delivered in metallic cylinders when households run out of gas. The “always available” concept of cooking gas in the Indian household is a vast market. Parts of New Delhi, the Indian capital have only had their first brush with piped cooking gas in the last year or two.
Through its nine joint ventures (JVs), GAIL has a presence in more than 12 cities. It plans to expand its network to 45-50 cities in the next 4-5 years. (http://www.moneycontrol.com/news_html_files/news_attachment/2010/GAIL_MOST.pdf)
2. Domestic Gas Finds – The vast gas finds in the Krishna-Godavari basin will mean that India’s energy mix will accommodate this domestic source of energy and hence the companies that lay down new pipelines to distribute the gas across India will have an inbuilt advantage that will be very hard to replicate.
From 2009 through to 20014, India’s gas production is set to treble and GAIL’s transmission volume is expected to double (http://www.moneycontrol.com/news_html_files/news_attachment/2010/GAIL_MOST.pdf)
3. LNG Imports – GAIL is also an equity participant in PetroNet a company that is dedicated to setting up ports in India for the import of LNG to Indian shores (http://www.petronetlng.com/).
Competitive Advantage
1. The Petroleum & Natural Gas Regulatory Board has set a 12% post tax Return on Capital Employed as a key benchmark that locks in a healthy margin.
2. The planned capacity expansion (in terms of length) from 6,624 km to 12,285 km and 154 mmscmd to 279 mmscmd cannot be replicated by a competitor in a few years.
Recommendation
If you are looking for a solid asset in these turbulent times, GAIL represents a good opportunity for the long term investor.
In the short term, GAIL may be required to hand out some money to subsidize the losses of the OMC (Oil Marketing Copanies) but it is not alone as far as that hand out is concerned (http://www.financialexpress.com/news/PM-to-look-into-petro-product-pricing--subsidy-burden-sharing/566663/). A contrarian view on this front might be that one day, the Indian state will be forced to free petroleum pricing and there could be a nice little bump in the share prices of the upstream companies (Including GAIL) to be enjoyed at that time.
GDRs for GAIL trade in London - http://www.lse.co.uk/shareprice.asp?shareprice=GAID&share=gail_(india)_ld_gdr_(repr_6_ord_inr10)(reg_s)
In the energy starved country of India, GAIL has a 78% market share of natural gas transmission. GAIL operates in all aspects of natural gas value chain – import of natural gas, Exploration, Distribution via pipelines to city grids that are coming up fast across the nation.
It has started to take some steps in the international market too.
Triggers for Growth
1. Urban lifestyle – As Indian urbanizes, end users are bound to move away from the prevalent system of having cooking gas delivered in metallic cylinders when households run out of gas. The “always available” concept of cooking gas in the Indian household is a vast market. Parts of New Delhi, the Indian capital have only had their first brush with piped cooking gas in the last year or two.
Through its nine joint ventures (JVs), GAIL has a presence in more than 12 cities. It plans to expand its network to 45-50 cities in the next 4-5 years. (http://www.moneycontrol.com/news_html_files/news_attachment/2010/GAIL_MOST.pdf)
2. Domestic Gas Finds – The vast gas finds in the Krishna-Godavari basin will mean that India’s energy mix will accommodate this domestic source of energy and hence the companies that lay down new pipelines to distribute the gas across India will have an inbuilt advantage that will be very hard to replicate.
From 2009 through to 20014, India’s gas production is set to treble and GAIL’s transmission volume is expected to double (http://www.moneycontrol.com/news_html_files/news_attachment/2010/GAIL_MOST.pdf)
3. LNG Imports – GAIL is also an equity participant in PetroNet a company that is dedicated to setting up ports in India for the import of LNG to Indian shores (http://www.petronetlng.com/).
Competitive Advantage
1. The Petroleum & Natural Gas Regulatory Board has set a 12% post tax Return on Capital Employed as a key benchmark that locks in a healthy margin.
2. The planned capacity expansion (in terms of length) from 6,624 km to 12,285 km and 154 mmscmd to 279 mmscmd cannot be replicated by a competitor in a few years.
Recommendation
If you are looking for a solid asset in these turbulent times, GAIL represents a good opportunity for the long term investor.
In the short term, GAIL may be required to hand out some money to subsidize the losses of the OMC (Oil Marketing Copanies) but it is not alone as far as that hand out is concerned (http://www.financialexpress.com/news/PM-to-look-into-petro-product-pricing--subsidy-burden-sharing/566663/). A contrarian view on this front might be that one day, the Indian state will be forced to free petroleum pricing and there could be a nice little bump in the share prices of the upstream companies (Including GAIL) to be enjoyed at that time.
GDRs for GAIL trade in London - http://www.lse.co.uk/shareprice.asp?shareprice=GAID&share=gail_(india)_ld_gdr_(repr_6_ord_inr10)(reg_s)
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