Navin Flourine (BSE code - 532504)

How do you think does the profits of a company increase.

a) By increasing sales and at the same time maintaining the expenditure % to sales

b) If sales cant increase then by reducing cost so that the expenditire % to sales decreases

I guess conventional wisdom says that largely these are the only 2 ways of increasing the bottom line. And chances are that both these modes will entail some capex as well

Let me discuss today one more way of profit generation. Its called carbon credits. Am sure a lot of you already know about it but for the benefit of those who do not let me first explain this.

Now we all know that there is a lot of talk globally about global warming and about the need to do something about it. After a series of discussions amongst member nations under the UN an agreement as to what needs to be done was formulated under what is known now as the Kyoto protocol. Without getting into too much detail the following were decided upon

a) The developed nations through individual entities need to reduce their greenhouse gas emissions (from Carbon dioxide) by a certain %age (since they were thought to be the ones who had industrialised and hence contributed the most to global warming)

b) The developing nations through individual entities were urged to curb their emissions by investing in energy efficient processes which could lead to lower emissions of these gases.

Simply put , there is a demand side which is the developing countries and there is a supply side which is the developed world.

India falls under the category of developing country.Hence individual companies in India have a lot of opportunity in curbing their emissions by shifting to better processes and at the same time get them carbon credits as well. So much so for the supply side of the equation. These reductions as certified by UNFCCC are called Certified emission rights (CER) also commonly known as carbon credits and can be sold to entities in the developing world so as to help them attain there targets of reducing emissions.

On the other hand the entities in developing countries are required to reduce their emissions or buy CERs from the market so that the emission reduction targets are achieved. This is where the fun is. The entities in developed world are already much more efficient than the ones in the developing world when it comes to emissions. And to top it they are being asked to reduce their emissions even further. This is where CERs have a huge market. 

This is what wikipedia has to say about the emissions market.

For trading purposes, one allowance or CER is considered equivalent to one metric ton of CO₂ emissions. These allowances can be sold privately or in the international market at the prevailing market price. These trade and settle internationally and hence allow allowances to be transferred between countries. Each international transfer is validated by the UNFCCC. Each transfer of ownership within the European Union is additionally validated by the European Commission.

Climate exchanges have been established to provide a spot market in allowances, as well as futures and options market to help discover a market price and maintain liquidity. Carbon prices are normally quoted in Euros per tonne of carbon dioxide or its equivalent (CO₂e). Other greenhouse gasses can also be traded, but are quoted as standard multiples of carbon dioxide with respect to their global warming potential. These features reduce the quota's financial impact on business, while ensuring that the quotas are met at a national and international level.

Currently there are five exchanges trading in carbon allowances: the Chicago Climate Exchange, European Climate Exchange, Nord Pool, PowerNext and the European Energy Exchange. Recently, NordPool listed a contract to trade offsets generated by a CDM carbon project called Certified Emission Reductions (CERs). Many companies now engage in emissions abatement, offsetting, and sequestration programs to generate credits that can be sold on one of the exchanges.

^{This full article can be accesses through this link (wikipedia)}

^{Infact Barclays capital predicts that this is a market estimated to be worth about 30 billion euros in 2007. and could grow upto $1 trillion in a decade. (article link)}

The next question that would come to your mind now is why is it that carbon credits are not being talked about with as much fervour as I think they should. To my mind there seems to be 2 reasons for the same.

a) The Kyoto protocol talks about the emissions reduction mechanism till 2012 only. And there is no clarity on what would happen after that. Hence people are sceptic about what will happen to the carbon credits post 2012.

b) In the largest market EU the emission reduction targets set are not very strict as of now.

But all this is set to change. And the positive developments are on the anvil. So what are they

a) There is talk about what happens to the emissions reduction thing post 2012. This was discussed in Copenhagen in December 2009. Unfortunately nothing concrete could be agreed upon. But there is hope that by the end of 2010 or the beginning of 2011 some concrete proposals should be formalised.

b) Prior to Copenhagen the US had not agreed to reduce emissions like the countries in the EU. This was quite ironical as the US is the world's largest emitter of green house gases. However it seems to have changed its mind and has agreed to come on board and reduce its emission levels. 

c) The EU is in the process of formalising stricter norms for emissions reduction post 2012. Failing which the corporates will have to pay a penalty. This penalty amount is likely to range from about 40 euros to 100 euros.

The current price of CER is about 13 euros per CER. (link)

The next question you might have is which are the companies in India which are likely to benefit from carbon credits. We have a whole host of them and a simple search on google should give you their names and hence I am not going to list all of them. 

I would only like to mention the company that I personally like. Its called Navin Flourine. It is a well managed company belonging to the Arvind Mafatlal group and it deals in flourochemicals and refrigerants. There are three segments to its business – speciality fluorochemicals, bulk fluoride and refrigerants. The speciality fluorochemicals are used in making agrochemicals, antibiotics for the pharmaceutical industry, pigment for the petrochemical industry and toothpaste for the personal-care industry. Bulk fluoride is used by aluminium companies. Two more products derived from fluorine, CFC and HCFC 22, are used in refrigeration. Thus the fate of its business depends on sales growth of air-conditioners, aluminium products and the pharma sector.

With the poised growth of the Indian economy all these sectors are likely to do quite well and hence Navin too should do just as well. And to top it all it is supposed to get 2.8 million CERs per annum till 2017. Even at current price of 13 euros and exchange rate of 55 euros per rupee it translates into a revenue of approx Rs 200 crores odd per year. (Check out this link on the UNFCCC website). And if the prices of CERS go up your guess is as good as mine as to the amount of windfall profit that Navin is going to get. 

And the best thing is the very low equity base that it has. Just 1 crore share. So the EPS from just the sale of carbon credits is likely to be about Rs 140 odd post tax. So that makes the current PE at about 2.5 only. And mind you we have not even taken into account the revenues from its business operations. 

And the best thing is that the next tranche of CERs could come very soon and could spike up the share price. 

Happy investing

Ganesh Polytex (BSE code - 514167)

Recently during one of my assignments I stumbled across a waste management company called Ganesh Polytex. This company is into recycling of plastic pet bottles. On first glance it looked a shaaby company since I could not find any website for this company. Also the financials for the company are good but not something to rave about. But then I came across this writeup which convinced me about it being a good investment opportunity. Am pasting the article for reference.

Ganesh Polytex all set to become India's No.1 company in Waste
Management
The capacity expansion of 18,000 tpa expected to be operational in March 2010 will take the total capacity of Ganesh Polytex to 57,600 tpa making it the largest player in recycled Polyester Staple Fibre (Fibrefill) in the country.

GPL is one of the leading manufacturers of Recycled/ Speciality Polyester Staple Fibre (Fibrefill) in India through recycling of post-consumer pet bottle waste. The company has a capacity to produce 39,600 tonnes per annum (tpa) of Recycled Polyester Stale fibre, which is next only to Reliance Industries limited's annual production capacity of 42000 tpa. The company is having two manufacturing units at Kanpur and Rudrapur (Uttrakhand). GPL is riding on high growth path and it reported impressive growth in the December'09 quarter both in turnover and profitability.
The Company's business model is interesting as it is transforming post-consumer pet bottle waste (which is otherwise hazardous for environment being non bio-degradable in nature) back again into environmental friendly, hygiene, and comfortable fibres helping industrial users to manage quality nice and meanwhile save better. Besides procuring the Waste from vendors, the company has set up its own procurement centres in different cities to insulate itself from raw material shortage as well as price fluctuations. Finished product finds application for spinning of yarn, stuffing in toys and other life style products like pillows, quilts, mattresses and furniture, non-woven carpets and fabrics, medical & packaging textile, geo textile, fur fabrics, construction and paper industry and other technical textile. Recycled PSF replaces 100% virgin PSF in textile sector due to its most distinctive advantage of cost-effectiveness and it replaces Foam, Cotton, P.P. fibre etc. in other industrial sectors due to its durability, comforts and hygienic characteristics besides cost-effectiveness. GPL product range includes low-end basic segment to mid and high-end premium segment. Polyester has now become common man's fabrics in terms of prices, durability and comforts in comparison to cotton and other fibres. With growth in the economy and growing middle class, the per capita consumption of polyester fabric is also set to increase both for clothing and non-clothing applications. In fact, with growing per capita income consumption of non-clothing fabric will grow at much faster rate than clothing fabric. As Recycled Polyester Fibre is suitable both for clothing and non-clothing applications, its demand is improving both in textile and industrial sector. This bodes well for GPL as it has strong presence in both the sectors. Foreseeing the coming uptrend in the user industry and to capitalize upon the available growth opportunities, company is expanding capacity of its Rudrapur plant by 18000 tpa at an estimated cost of Rs. 30 crore to be funded through a moderate mix of debt and equity. Expansion in capacity is expected to improve the operating margins by around 250 basis points making it more profitable. Its ambitious growth plans include enhancing the recycling capacity to over 100,000 tpa in stages over the next 2-3 years, building up of yarn spinning capacity to integrate its operations forward and to improve margins, foraying into manufacturing of down stream products and entering into horizontal integration through producing more value added products like Partially Oriented Yarn (POY), packaging sheets, etc. from Waste. These growth plans are likely to propel CAGR of 35-40% in its top and bottom lines during next five years. The Company's sales and net profits have grown up at healthy compound annual growth rate (CAGR) of 28% and 30% respectively in the past four years. Its EBIDTA (earnings before interest, depreciation, tax and amortisation) improved to Rs. 17.10 crore in FY08-09 from Rs. 5.77 crore in FY06 on the back of improved product mix. In the December'09 quarter, sales grew by 39% to Rs.52.56 crore. EBIDTA rose by 33% to Rs.6.16 crore. Net profit grew by 169% to Rs.2.85 crore. The company is likely to close this fiscal reporting 40% growth in revenues along with 52% rise in EBIDTA and 105% rise in net profits. Company is moderately leveraged. It is not paying any dividend in the past mainly to fund the capacity building exercise during last four years. However, with improved financials, it has decided to reward the shareholders by declaring interim dividend of 5% for F.Y. 2009-10.

At Rs 47.25 its an excellant buy for long term. Please note that this stock should be held for atleast an year to reap the full benefits.

Happy investing

Cellphones - a 200,000 crore market in India in 2012 - Part 2

Thanks a lot for all the response and queries on my earlier post on the cellphone market and spice mobile
Would again urge all the readers to post yr messages on the blog itself rather than writing directly to me. So that everyone can read them.

The questions put forward by all of you can be summarised in the following 3 questions.
a) Whether the management is credible enough?
b) There seems to be a lot of competition and cheaper imports which could dent the market for smaller players. Will Indian players benefit?
c) What are the future prospects of spice mobile?

Will try and cover the question on management credentials in this part and the rest 2 in the next part.

To understand the management we have to go back about 15 to 20 odd years and see what they have been doing and then draw inferences out of it.
The spice group which was earlier known as M corp was created as a result of a bitter business battle within the Modi family in the eighties and nineties. And a look at the various things that the Modi group has done you will find a common thread of being the first mover in a lot of spaces.
From the first xerox machine in India to the first mobile service to venturing into PC hardware the group has been ahead of its peers. Thus it formed JVs with Xerox for photocopier machines, Luft for aviation, Alcatel for telecom equipment. The group also had the honour of connecting the first mobile phone call in India between then West Bengal Chief Minister Jyoti Basu and then Union Minister for Telecommunications Sukh Ram in 1995. It had also set up the first mobile telephony equipment manufacturing unit with Alcatel. Though the modi group was not successful in taking all of these to the next level but still it cannot be denied that Mr B K Modi is really good at identifying the great business opportunities of the future. And the best thing is that he is able to recognise his failure quite easily. He may not say it publicly but if you look at the timing of his exit from businesses you will realise that he is pretty good at it.
A classic example is the selling of Spice communication business to Idea in 2008. He was not able to scale up the business and hence he sold out. We all talk about how The Singh brothers of Ranbaxy got a great deal by selling off their stake in Ranbaxy. I think the selling of Spice communications is equally commendable. Some of us may call it sheer luck but I think going by Mr Modi's track record I would like to give him credit. He sold off his stake just 3 months before the crash. and that too at an absolutely fantastic price. He sold it at an EV/EBITDA of close to 17 times. The Bharti Zain deal is at EV/EBITDA of close to 10 and we think that it is an expensive deal. Think about it. Not only that it also got money for non compete agreement.

Let me give you another example. We all know about the satyam saga. Do you guys remember the first person who stood up and said that he wanted to buy Satyam. Yes, he was Mr Modi again. When all analysts were saying that Satyam is finished this man saw value in it.

So what is important to note here the astute understanding of this man in recognising opportunities and his knack for seeing value. His failure to scale up is a point of concern though.

Also the point about cooking up books and management quality. Guys lets get real. All companies do it. Maybe not to the extent of Satyam but all of them do it. I cant quote examples but if you keep your eyes and ears open you will often read a lot about these kind of things. And nobody can be sure which company is going to be the next Satyam. But thats a risk we all have agreed to take when we have ventured in the stock market. How many of the analyst recommended Infosys in 1995 or could say for sure that Infosys management was impeccable in 1995. Dont think anyone did. So personally I think the key is to look for value. We may fail but we may succeed too.
Infact I don think during these 15 to 20 odd years there has been anything against Mr Modi to alarm us on the quality of management.

So for a man who has proved himself for 15 years I think I am going to go with him this time

Dont know if you guys have seen his interview to CNBC Asia.

If you really are a value investor I guess you should.

These are the links for the video on youtube. Please do watch it.

Part 1
Part 2
Part 3

Happy investing