Bhagyana­gar In­dia Ltd: Un­der­priced metal stock

Money Times - - Expert Eye - By Vi­hari

(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.

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