Watch this duo in third quarter
Two companies whose third quarter results I intend to track closely are Jindal Saw and Aksh Optifibre.
Jindal Saw is engaged in the manufacture of ductile, seamless and helical pipes and pellets. The company principally addresses the water and oil sectors, marked by fresh capital expenditure. The foreseeable quarters are possibly the first time in years that all the company’s businesses are expected to fire concurrently. The government’s guidelines favour Indian manufacturers over imports. The increase in steel price could strengthen pipe realisations. There is now an expectation that the UAE based subsidiary could enhance capacity utilisation and margins that make it Ebitda (earnings before interest, tax, depreciation and amortisation)-positive by the last quarter. There is also the question of ~3.58 billion of disputed arbitration, which, if awarded to the company, could strengthen cash flow. The company could well be a volume and value play in the foreseeable future.
While increased margins and profits would be predictable, the kicker could come from the way the company strengthens its balance sheet. The big question: Will the company announce an expansion (that could defer debt decline) or focus on sweating assets (that could drive profitability)? The net worth of around ~55 billion is offset by total debt of ~42 billion (including working capital). Should the company announce an embargo on capital spending, it would immediately imply a prospective debt decline, strengthening interest cover — and corresponding valuation.
This comforts me: The company’s Ebitda of ~ 2.68 billion in a particularly weak Q2 FY18 indicates that it should at least earn ~10 billion in a full year (any fool will tell you that), which makes the prevailing ~51-billion market cap appear reasonable. Now if the third and fourth quarters are significantly better, re-rating could be a distinct possibility.
My interest in Aksh Optifibre is not derived as much from its Q2 of FY18 results (Ebitda of ~150 million-plus) as much from the fact that the company doubled its optic cable capacity to nine million km, commissioned 150,000 km of optic fibre capacity, doubled its FRP (fibre reinforced plastic) rod capacity and raised fivefold its ophthalmic lens capacity — all from Q3 FY18. This makes the third quarter interesting and the fourth quarter completely compelling.
The substantial capacity expansion apart, these are some of the other realities that the markets may find difficult to ignore: The global optic fibre market is expected to sustain double-digit offtake growth, China and the US continue to pursue an aggressive optic fibre investment programme, India expects to double its optic fibre demand in three years and the country is hinting the implementation of 5G even before 4G has settled (indicating a sustained increase in fibre demand).
Two additional domestic factors appear interesting: Aggressive Smart City roll-out is likely to translate into fibre supply-cum-turnkey network implementation assignments across the sustainable future, resulting in highmargin service income. And, BSNL’s aggression in wiring the broad landscape of the country is expected to enhance sectoral cash flows, with attractive trickle-down for Aksh.