Bhagyanagar India Ltd: Underpriced metal stock
(BSE Code: 512296) (CMP: Rs.33.15) (FV: Re.2)
Incorporated in 1985 and controlled by the Surana group, Bhagyanagar India Ltd (BIL) manufactures non-ferrous metal products like copper rods and lead sleeves. It forayed into wind power generation in 2007. It started its copper division through a takeover of two units - India Extrusion and Gangappa Industries. Its product profile includes enamelled and paper-covered copper strips used by Lucas, Bosch India, TVS, BHEL, Crompton Greaves and Sahney Paris. It embarked on forward integration of its copper division to manufacture jelly-filled telephone cables and later enhanced its capacity to meet the rising demand. It also set up a unit to manufacture field coils. During the 1990s, it commissioned a new unit to manufacture jelly filled cable with a capacity of 6 LCKM at IDA Nacharam. Currently, its total capacity for Jelly Filled Telephone Cable stands at 49 LCKM. In the metal-copper division, it manufactures copper rods, copper foils, copper pipes, copper sheets, annealed bare copper strips, paper insulated copper conductors and insulated copper coils (Field Coils). Its products find extensive applications in the OEM segments of Telecommunications, Power & Distribution Transformers, Heat Exchangers, Switchgears, Solar Panels and Auto Ancillaries. Bhagyanagar Metals is a 100% subsidiary whereas BIL holds 72.4% in Solar Dynamics Pvt Ltd (SDPL). Its associate companies include Globecom infra Ventures India Pvt Ltd (50% stake), GMS Realtors Pvt Ltd (50% stake), Bhagyanagar Entertainment & Infra Devel Co Pvt Ltd (47% stake), Bhagyanagar Infrastructure Ltd (22% stake), Surana Solar Ltd (SSL) (24% stake) and Bhagyanagar Cables Pvt Ltd (26% stake).
BIL currently has an installed capacity of 9 MW comprising 7 wind turbines in Karnataka and 6.4 MW comprising 5 wind turbines in Tamil Nadu through its subsidiary viz. Solar Dynamics Pvt Ltd. It recently demerged its solar and real estate divisions into separate listed entities. BIL holds investments in SDPL and SSL. Since both the companies are engaged in the Solar industry, these investments are also being transferred to SDPL.
BIL holds interest in the real estate segment through three subsidiaries - Bhagyanagar Properties Pvt Ltd (BPPL), Scientia Infocom Pvt Ltd and Metropolitan Ventures Pvt Ltd. Its subsidiaries hold 25 acre land at Gachibowly in Hyderabad. Huge funds are required to develop such a large property and hence, it plans to identify a strategic investing partner for joint development. Debt for this project will be taken exclusively by its subsidiary so that BIL’s existing cash flow is not affected.
BIL has invested in the equity capital of these companies and given them unsecured loans as well. These investments and loans are being demerged to BPPL, which shall be a listed company with mirror image share-holding as that of BIL. Since BIL supplies major copper and allied products to the auto ancillary industry, it now plans to foray into the manufacture of automotive components as OEM products.
For FY17, BIL’s net profit zoomed 108% to Rs.5.2 crore (Rs.10.8 crore before exceptional expenses) on marginally higher sales of Rs.326.8 crore fetching an EPS (without exceptional expenses) of Rs.3.6. During Q1FY18, net profit jumped 27% to Rs.1.4 crore on 13% higher sales of Rs.107 crore (excluding MAT credit of Rs.1 crore in Q1FY17) fetching an EPS of Re.0.4.
With an equity capital of Rs.6.4 crore and reserves of Rs.97.5 crore, BIL’s share book value works out to Rs.32.4. Net debt of Rs.75.6 crore gives it a DER of 0.73:1. The value of its net block is Rs.72.4 crore. The promoters hold 74.8% of the equity capital, FIs hold 0.3%, DIs hold 4.6%, the government holds 0.3% and PCBs hold 1.5%, which leaves 18.5% stake with the investing public.
The size of the Indian copper industry is ~5,00,000 tonnes, which as a percentage of the world copper market is just 3%. Copper is a ~$8 bn industry in India growing at 5-7% CAGR per annum. In the domestic market, growth in copper
consumption was strong at 8% during the current financial year. Moreover, domestic production remained strong, driven by higher production by the domestic custom smelters. India has a huge growth potential in copper consumption for the next 20-25 years given the government’s focus on smart cities, rapid urbanization and investments in infrastructure.
India is expected to be the 6th largest copper market by 2020 with major consumption sectors being Electrical, Transport and Telecommunications. The electrical and power sectors account for nearly one-third of the refined copper consumption. Demand from other industries such as transport, consumer and electronic goods and industrial machinery is also expected to remain strong on the back of growing end-user demand and increasing investments. The user industries namely the Telecommunications, Power & Distribution, Transformers, Heat Exchangers, Switchgears, Solar Panels and Auto Ancillaries are doing extremely well following the infrastructure push by the government. Therefore, BIL’s products will be in good demand.
BIL is one of the oldest industrial houses in India with diverse business streams (manufacturing of various copper products, non-conventional energy (Wind and Power). Based on its current going and bright industry prospects, BIL is set to notch an EPS of Rs.5 in FY18 and Rs.6.5 in FY19. At the CMP of Rs.33.15, the stock trades at a forward P/E of 6.6x on FY18E and 5.1x on FY19E earnings. A reasonable P/E of 8.5x will take its share price to Rs.42.5 in the medium-term and Rs.55.25 thereafter.