Sen­sex closes be­low 31K

Money Times - - Market Review - By Deven­dra A Singh

The Sen­sex de­clined 216.60 points to set­tle at 30921.61 while the Nifty closed at 9520.90 fall­ing 54.05 points for the week end­ing Fri­day, 30 June 2017.

Last week, PM Naren­draModi stated that the roll-out of the GST from 1 July 2017, will be his­toric and the world will wit­ness how po­lit­i­cal par­ties of dif­fer­ent ide­o­log­i­cal hues came to­gether to usher in this ma­jor re­form. He also strongly favoured mak­ing the coun­try self-re­liant in the de­fence and tech­nol­ogy sec­tors. GST, be­ing the big­gest tax re­form since In­de­pen­dence, will re-shape In­dia’s busi­ness land­scape by mak­ing the coun­try an eas­ier place to do busi­ness in and would bring down bar­ri­ers be­tween states. It was launched at a grand func­tion in the Cen­tral Hall of Par­lia­ment on the mid­night of 30 June 2017.

GST over the medium-to-long-term is ex­pected to lead to higher rev­enues for the Cen­tre and the states while boost­ing the size of the econ­omy hav­ing a pos­i­tive im­pact on the GDP. It would unify the $2 tril­lion In­dian econ­omy and 1.3 bil­lion peo­ple into a sin­gle mar­ket. Ac­cord­ing to CII Pres­i­dent, ShobanaKami­neni, the land­mark GST is In­dia’s new tryst with des­tiny which will unite all the states of the coun­try once again.

“In In­dia, we are going through his­toric times and a new tryst with des­tiny which will unite all the states of the coun­try once again. The GST, in its best form, has the po­ten­tial to in­crease growth sub­stan­tially once all the un­cer­tainty peels away”, she said.

On the global front, the con­fer­ence held in UK ti­tled ‘UK-In­dia Eco­nomic Re­la­tions: Be­yond Brexit’ was in­tended as a stock-take of the bi­lat­eral re­la­tion­ship. Y K Sinha, In­dia’s High Com­mis­sioner to the UK, de­scribed Bri­tain’s exit from the 28-na­tion bloc Euro­pean Union (EU) as a chal­lenge and an op­por­tu­nity for the ties. “The his­tor­i­cal and mul­ti­fac­eted re­la­tion­ship be­tween the two coun­tries will con­tinue to strengthen even af­ter Brexit. In this re­gard, the two coun­tries have al­ready set up a Joint Work­ing Group on trade to fur­ther pro­mote the bi­lat­eral eco­nomic part­ner­ship”, he added.

Sinha said that the ar­eas of co­op­er­a­tion be­tween the two coun­tries are dig­i­tal econ­omy, smart cities, ed­u­ca­tion, fi­nan­cial and pro­fes­sional ser­vices, health­care and phar­ma­ceu­ti­cals, in­fra­struc­ture, man­u­fac­tur­ing, de­fence and se­cu­rity, star­tups, tourism and hos­pi­tal­ity.

The event also marked the launch of a new re­port, ‘In­dia in the UK: In­dia’s Busi­ness Foot­print in the UK’ cel­e­brat­ing the suc­cess sto­ries of In­dian com­pa­nies based in Bri­tain.

CII di­rec­tor-gen­eral Chan­dra­jit Ban­er­jee said that a CII-KPMG sur­vey of In­dian com­pa­nies in the UK shows that 50% of the com­pa­nies be­lieve Brexit could have pos­i­tive or no im­pli­ca­tions for their UK op­er­a­tions. “The other half has a mod­er­ate level of con­cern re­gard­ing ac­cess to sin­gle mar­ket and global tal­ent. Most com­pa­nies have de­lib­er­ated on their post-Brexit strat­egy but are not con­sid­er­ing ma­jor al­ter­ations as yet. This au­gurs well for the con­tin­ued strong in­volve­ment of In­dian com­pa­nies in the UK econ­omy”, Ban­er­jee added.

On the macro-eco­nomic data, In­dia’s fis­cal deficit touched Rs.3.73 lakh crore dur­ing the April-May pe­riod or 68.3% of the bud­geted tar­get for FY17. The fis­cal deficit was 42.9% of the full-year tar­get dur­ing the same pe­riod a year ago. Net tax re­ceipts in the first two months of FY18 were Rs.67670 crore.

In­dia aims to bring down its fed­eral fis­cal deficit to 3.2% of GDP in FY18 com­pared to 3.5% in FY17. The In­dian stock mar­kets re­mained closed on Mon­day, 26 June 2017, on ac­count of Id-Ul-Fitr (Ramzan Id). Key in­dex closed lower on Tues­day, 27 June 2017, on global cues. The Sen­sex was down by 179.96 points (-0.58%) to set­tle at 30958.25.

Key in­dex fell on Wed­nes­day, 28 June 2017, on mod­est sell­ing of eq­ui­ties. The Sen­sex was down by 123.93 points (0.40%) to close at 30834.32.

Key in­dex was up on Thurs­day, 29 June 2017, on fresh buy­ing. The Sen­sex climbed 23.20 points (+0.08%) to close at 30857.52.

Key in­dex gained on Fri­day, 30 June 2017. The Sen­sex was up 64.09 points (+0.21%) to set­tle at 30921.61. Na­tional and global macro-eco­nomic fig­ures will surely dic­tate global mar­kets move­ments and in­flu­ence in­vestor sen­ti­ment in the near fu­ture.

The GST im­ple­men­ta­tion will be closely watched by the in­vestors. All the States and Union Ter­ri­to­ries (hav­ing as­sem­blies), ex­cept Jammu & Kash­mir, have ap­proved the State Goods and Ser­vices Tax (SGST) Act. The gov­ern­ment ex­pects GST to rev­o­lu­tionise In­dia’s tax­a­tion sys­tem and is be­ing mar­keted as ‘one na­tion one tax’. On the night of Fri­day, 30 June 2017, a spe­cial func­tion was held in the Cen­tral Hall of Par­lia­ment House with a num­ber of pro­grams to wit­ness the change in tax struc­ture and im­ple­men­ta­tion of GST across the coun­try. The mon­soon ses­sion of Par­lia­ment will com­mence on 17 July 2017, the day the vot­ing for the pres­i­den­tial elec­tion will take place. The Cab­i­net Com­mit­tee on Par­lia­men­tary Af­fairs (CCPA) has rec­om­mended hold­ing the ses­sion from 17 July11 Au­gust 2017, ac­cord­ing to sources in the com­mit­tee.

Coim­bat­ore, Tamil Nadu and set­ting up a project to man­u­fac­ture value-added pressed and fine blanked me­tal com­po­nents, which be­came op­er­a­tional in 1995 and 1996 re­spec­tively. In Septem­ber 1995, it was ISO 9002 cer­ti­fied by RWTUV, Ger­many. In 2000, it ac­quired man­u­fac­tur­ing fa­cil­i­ties in the cold form­ing sec­tions and prod­ucts of Tube In­vest­ments of In­dia Ltd at Tara­pur and Chen­nai.

Since more than 50% of its net worth was eroded in June 2001, PIL be­came a sick in­dus­trial unit. How­ever, it man­aged to im­prove its fun­da­men­tals and was out from the BIFR net very soon. Diver­si­fy­ing its prod­uct mix, the Com­pany con­tin­ued to in­crease the pro­por­tion of value-added prod­ucts like cold formed me­tal pro­files, engi­neer­ing com­po­nents and road safety sys­tems.

PIL man­u­fac­tures cold-rolled coils (CRCs) of nar­row width up to 700 mm, which are supplied to the au­to­mo­bile and the white goods in­dus­tries. In the au­to­mo­bile sec­tor, its clients in­clude Jay Bharat Maruti and Mahin­dra & Mahin­dra while in the white goods sec­tor, it sup­plies CRCs to Go­drej, Kelv­ina­tor and Voltas. The au­to­mo­bile sec­tor ac­counts for 50% of its to­tal sales. Its rev­enue seg­ments in­clude rail­ways, so­lar, steel, au­to­mo­bile and the en­vi­ron­ment. PIL es­tab­lish its first man­u­fac­tur­ing plant at Is­na­pur near Hy­der­abad with an in­stalled ca­pac­ity of 30,000 TPA to man­u­fac­ture Cold Rolled Steel Strips (CRSS). It turned into a prof­itable or­ga­ni­za­tion in the very first year of op­er­a­tions. In 1997, it en­hanced the plant’s ca­pac­ity to 50,000 TPA.

Post lib­er­al­iza­tion, PIL em­barked on a se­ries of strate­gic ac­qui­si­tions and ex­pan­sion plans like the ac­qui­si­tion of Na­gar­juna Steel Ltd, Press Me­tal and as­sets of Wayne Burt Petro­chem­i­cals, erst­while Bai­ley Hy­dro, for ven­tur­ing into the Hy­draulic Cylin­ders seg­ment. It also estab­lished a new man­u­fac­tur­ing fa­cil­ity at Chen­nai and set up an as­sem­bly unit at Ho­sur, near Ban­ga­lore, to meet the re­quire­ments of auto com­po­nents.

PIL’s listed sub­sidiary, Pen­nar En­gi­neered Build­ing Sys­tems (PEBS), is en­gaged in the de­sign, man­u­fac­ture, sup­ply and in­stal­la­tion of pre-en­gi­neered steel build­ings and build­ing com­po­nents. PEBS is the sec­ond largest busi­ness ver­ti­cal of the Com­pany and also the most prof­itable one. Its fac­tory was the first in In­dia to re­ceive a gold rat­ing from the In­dian Green Build­ing Coun­cil. Its rev­enues and mar­gins have grown con­sis­tently since 2010 with sales of Rs.491.2 crore in FY17. It has started op­er­a­tions from a leased plant in Vado­dara and in­tends to com­plete its own plant in the cur­rent fi­nan­cial year. With an ever grow­ing or­der book and new growth ver­ti­cals of high rise build­ings and engi­neer­ing ser­vices, PEBS is well-placed to con­tinue on the path of high growth. Pen­narEn­viro (PEL) is another sub­sidiary of PIL en­gaged in the Wa­ter and En­vi­ron­ment In­fra­struc­ture busi­ness to pro­vide turnkey so­lu­tions viz. Wa­ter Treat­ment Plants (WTPs), Sewage Treat­ment Plants (STPs), Ef­flu­ent Treat­ment Plants (ETPs), Ef­flu­ent Re­cy­cling Plants (ERPs), Zero Liq­uid Dis­charge Plants (ZLDPs), etc. PIL is a pi­o­neer in the field of ad­di­tives and sup­ply­ing spe­cific pre­mium high tech­nol­ogy ad­di­tives. PEL has built strong core ca­pa­bil­i­ties in in­stru­men­ta­tion and civil de­sign. It posted sales of Rs.101 crore in FY17 and is the fastest-grow­ing ver­ti­cal of the Com­pany.

Cur­rently, PIL op­er­ates in a di­verse range of sec­tors in­clud­ing gen­eral engi­neer­ing, so­lar en­ergy, rail­ways, build­ing con­struc­tion, wa­ter treat­ment, au­to­mo­tive and spe­cial­ity ad­di­tives. It has a strong pres­ence in engi­neer­ing, in­fra­struc­ture and cap­i­tal goods seg­ments. While this di­ver­si­fi­ca­tion does af­ford it a level of pro­tec­tion from gen­eral mar­ket down­turns, some of its ver­ti­cals such as in­dus­trial com­po­nents did strug­gle to grow rev­enue and scal­a­bil­ity. See­ing the bright prospects in the so­lar busi­ness, PIL had ini­tially in­vested Rs.2.9 lakh and ac­quired 29,411 shares in Pen­nar Re­new­ables in Oc­to­ber 2015. Pur­suant to the in­vest­ment, Pen­nar Re­new­ables be­came a sub­sidiary of PIL. Dur­ing FY17, it fur­ther in­vested Rs.49.5 crore for 49.8 lakh shares in Pen­nar Re­new­ables. For FY17, PIL’s net profit rose 6% to Rs.46.7 crore on 18% higher sales of Rs.1549 crore fetch­ing an EPS of Rs.3.9 and a div­i­dend of 10% was de­clared. Dur­ing Q4FY17, its net profit rose 11% to Rs.18 crore on 32% higher sales of Rs.465 crore fetch­ing an EPS of Rs.1.5. The de­cline in steel and com­mod­ity prices dur­ing the year re­sulted in a de­cline in sell­ing prices across most of its prod­uct cat­e­gories. How­ever, mar­gins im­proved in al­most all its busi­ness ver­ti­cals due to the com­bi­na­tion of a higher per­cent­age of higher mar­gin or­ders and bet­ter spreads. With an eq­uity cap­i­tal of Rs.60.2 crore and re­serves of Rs.472.2 crore, PIL’s share book value works out to Rs.88. With to­tal debts of Rs.417 crore, cash, loans given and cur­rent as­sets etc. of Rs.301 crore, its net debt works out to Rs.116 crore and net DER 0.21:1. PIL holds 54% or 1.85 crore shares in the eq­uity cap­i­tal of Rs.34.3 crore of its sub­sidiary – PEBS, the mar­ket value of which is cur­rently ~Rs.249 crore. The pro­mot­ers hold 36.4% in the eq­uity cap­i­tal, FIIs hold 13.4%, DIs hold 12.6% and PCBs hold 4.1%, which leaves 33.5% stake with the in­vest­ing pub­lic.

The In­dian in­fra­struc­ture and cap­i­tal goods sec­tors have been cap­tur­ing growth of late. PIL is fo­cused on cap­i­tal and man­age­ment on grow­ing in high-mar­gin ver­ti­cals. Rail­ways, so­lar, pre-en­gi­neered build­ings and en­vi­ron­ment busi­nesses re­ported high growth in terms of rev­enues and prof­itabil­ity.

With grow­ing or­ders from the In­te­gral Coach Fac­tory and

RCF pro­pelled rev­enue growth in the rail­ways seg­ment. PIL ex­pects this growth to be a part of a multi-year trend al­low­ing its rail­way rev­enues to grow, fu­elled by an in­creas­ing off-take of rail­way coaches and wagon com­po­nents. While the wagon com­po­nents ver­ti­cal is more volatile, PIL sees more en­quiries and steady or­der book growth. It con­tin­ues to in­vest in scal­ing its man­u­fac­tur­ing ca­pac­i­ties and up­grade its tech­nol­ogy plat­form by procur­ing laser fi­bres stretch-form­ing and spe­cialised in­fra­struc­ture for the man­u­fac­ture of coach roof as­sem­blies.

PIL’s so­lar and rail­ways busi­ness ver­ti­cals to­gether achieved 50.5% growth to reach Rs.293.4 crore in sales. The so­lar mo­d­ule mount­ing sys­tem (MMS) ver­ti­cal is split be­tween PIL and PEBS. While PIL man­u­fac­tures multi-mod­u­lar struc­tural com­po­nents, PEBS pro­vides turnkey de­sign, sup­ply and erec­tion of MMS sys­tems in­clud­ing civil and DC works.

The so­lar rev­o­lu­tion in In­dia which started with the Na­tional

So­lar Mis­sion cur­rently ex­hibits high growth rates with the state so­lar poli­cies driv­ing a rapid ex­pan­sion in the de­mand for the in­stal­la­tion of so­lar pho­to­voltaic plants. This has cre­ated a large mar­ket op­por­tu­nity and ac­cord­ingly so­lar rev­enues of the Com­pany scaled dur­ing FY17.

The re­vival in the over­all capex cy­cle will boost PIL’s rev­enues and prof­itabil­ity. The Com­pany con­tin­ues to evolve into a stronger engi­neer­ing com­pany. The ro­bust In­dia out­look, growth of man­u­fac­tur­ing and au­to­mo­bile in­dus­try, the Min­istry of Rail­ways’ fo­cus on a mas­sive $140 bn in­vest­ment plan give strong rev­enue vis­i­bil­ity going for­ward. PIL is ex­pected to notch an EPS of Rs.5.2 in FY18 and Rs.6.8 in FY19. At the CMP of Rs.52.20, the stock trades at a for­ward P/E of just 10.03x on FY18E and 7.67x on FY19E earn­ings re­spec­tively. The stock has the po­ten­tial to ap­pre­ci­ate by over 41.76% to Rs.74 in the medium-to-long-term. The stock’s 52-week high/low is Rs.58/39.50.

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