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The SKS MicroFinance spat involving the founder-promoter Vikram Akula and the board on one side and the erstwhile CEO Mr Suresh Gurumani continues. In the past two weeks while none of the sides have openly traded allegations, media reports indicate that the spat is still very much alive.

Analysts across the board have agreed that such a sudden change in management is not good for the company and its perception with investors.  Mr NR Narayan Murthy’s (of Infosys fame) PE fund Catamaran has a stake in SKS Micro had reportedly advised the company to make a statement clarifying the details of sacking Mr Suresh Gurumani. The news article also states that a draft statement, circulated amongst board members, mentions investors requesting Mr Vikram Akula to return to a full time operational management position. This is purportedly the reason for the sacking of Mr Suresh Gurumani. However we do not believe this is the full story as in such as case Mr Suresh Gurumani would have been given another profile within the company or given adequate time to decide and move on. A sudden departure is always seen with suspicion.

SEBI, the regulator, has also asked the company to explain the reasons for sacking the CEO. SKS Micro has apparently responded to the query.

It has since transpired that Mr Suresh Gurumani, though sacked as the CEO, continues to be a director on the board of SKS Micro on the back of a Andhra Pradesh High Court Order. The order requires the company to continue Mr Suresh Gurumani as a director of the company. A bigger boost for Mr Suresh Gurumani is that same order also prohibits the new management and / or the CEO from taking any major policy decisions.

We believe that this is in essence bad corporate governance. We expect companies to be more transparent in their major policies, including those related to human resources. The top management drives policies which in turn is likely to drive growth. Any sudden changes therein unsettles investors and undermines the seriousness of founders to professionalize the management. Today’s board and management should remember that investors are well aware of inter-personal friction amongst management, and an open address of the issue is more appreciated.

The board of SKS Micro is slated to meet again on 22 October 2010, and Mr Vikram Akula and Mr Suresh Gurumani are both expected to be present. For investors, we can hope that the board first debates and approves the second quarter (Sept-2010 end) results and then debates the on-going issues within the management.

Since this was the first result declared after the company’s IPO during July-August 2010, I think it was nice of the management to present comparable financials for the previous year comparable quarter (June 2009) and preceding quarter (March 2010) as well. The management also mentioned that the business is cyclical with larger business being derived in the 2nd half (Oct to Mar). It is interesting to note that while the management has indeed provided quarterly disbursements for the past three years, none of the other data, including the Income Statement (Profit & Loss Account) have not been provided for the other quarters (i.e. not provided for quarters ending Sep-09 and Dec-09). In light of the management’s own admission that their business is cyclical and the fact that these were the first results declared after the listing the financial details for the intervening quarters would have helped analysts better.

It should be remembered that beginning October 1st we have entered the earnings season for the second quarter results, i.e. for the quarter ending September 2010; while SKSMicro has declared these results for the first quarter, i.e. quarter ending June 2010. Hence, I believe that these results for the first quarter, i.e. June 2010 could have been announced earlier.

One surprise, and investors do not like surprises – especially without explanations – was the firing of the CEO. Though the whole new management team was announced, the reasons for firing the erstwhile CEO was only hinted at during the conference call as performance related. Having ensured a spectacular listing, investors were left guessing the nature of performance issues within the management. This, in short, isn’t being investor friendly or transparent within a few months of listing. A recent example is that of Mark Hurd, the ex CEO of HP. While he was fired, the Board of HP in clear words spelt out the reasons for the same. Whether investors agree with it or not; or view it as too harsh is a separate matter – the fact is that HP clearly laid out to the investors the reasons for firing its CEO. That is indeed being transparent.

The result presentation is available here.

Since this was the first result declared after the company’s IPO during July-August 2010, I think it was nice of the management to present financial results for the previous year comparable quarter (June 2009) and preceding quarter (March 2010) as well. The management also mentioned that the business is cyclical with larger business being derived in the 2nd half (Oct to Mar). It is interesting to note that while the management has indeed provided quarterly disbursements for the past three years, none of the other data, including the Income Statement (Profit & Loss Account) have not been provided for the other quarters (i.e. not provided for quarters ending Sep-09 and Dec-09). In light of the management’s own admission that their business is cyclical and the fact that these were the first results declared after the listing the financial details for the intervening quarters would have helped analysts better.

It should be remembered that beginning October 1st we have entered the earnings season for the second quarter results, i.e. for the quarter ending September 2010; while SKSMicro has declared these results for the first quarter, i.e. quarter ending June 2010. Hence, I believe that these results for the first quarter, i.e. June 2010 could have been announced earlier.

One surprise, and investors do not like surprises – especially without explanations – was the firing of the CEO. Though the whole new management team was announced, the reasons for firing the erstwhile CEO was only hinted at during the conference call as performance related. Having ensured a spectacular listing, investors were left guessing the nature of performance issues within the management. This, in short, isn’t being investor friendly or transparent within a few months of listing. A recent example is that of Mark Hurd, the ex CEO of HP. While he was fired, the Board of HP in clear words spelt out the reasons for the same. Whether investors agree with it or not; or view it as too harsh is a separate matter – the fact is that HP clearly laid out to the investors the reasons for firing its CEO. That is indeed being transparent.

The result presentation is available here.

The Pipavav Shipyard, jointly promoted by SKIL and Punj Lloyd, has set-up an integrated shipbuilding and fabrication facility. Once the fabrication facility is completely operational, Pipavav Shipyard would be the largest shipbuilding site in India capable of manufacturing ships up to 400,000 DWT (dead tonne weight) and fabricate and construct offshore supply vessels (OSVs). Pipavav Shipyard comprises two sites. The SEZ unit is located on ~95 hectares of land and an EOU located on ~103.92 hectares of land (benefits of which are available till FY12). The construction of the shipyard (excluding the offshore yard) is expected to be completed in Oct-09.

Key Data

Project Costs (Rs Mn)

Order Book

• Pipavav Shipyard has a current order book of Rs44,596 mn (USD931.63 mn). This order book requires the company to deliver a total of 34 vessels, including 12 OSV’s for ONGC.
• Of the below detailed order book only Rs23,234 mn are firm orders. These firm orders are for 10 panamax size vessles and 12 OSVs. Of the balance Rs21,362 mn, orders for 8 panamax vessels worth Rs14,469 mn are under re-negotiation and an order worth Rs6,893 mn (4 panamax size vessels) is under arbitration.

Subsidy on Shipbuilding
The Government of India had instituted a shipbuilding subsidy scheme wherein shipbuilders could avail a 30% subsidy on the cost of the ship being built from the government. The caveat is that the shipbuilding order should have been placed before 14-Aug-07. Based on this criteria, all of the present order book of Pipavav Shipyard qualifies for this subsidy. This subsidy is available only on vessels ordered through the ICB (International Competitive Bidding) route, and hence the government has assurance of the subsidy demanded being within reasonable parameters. Further, the benefits are capped at 30% of the order value, thus benefits accruing on account of the SEZ / EOU status would decrease the actual cash subsidy that the company is eligible to receive.

The cost advantage that India offered, along with the subsidy provided by the Government (up to August 2007) helped improve the order inflow in the past 2-3 years. In addition, the Indian shipbuilding industry benefitted from orders being passed on from the traditional shipbuilding countries – Korea, Japan and China – as these were fully booked. In the near future, the capacities at these shipyards is likely to be freed up, resulting in increased competition. But most importantly the 30% subsidy incentive will not be available, and hence force the Indian shipyards to compete on a purely cost advantage basis, if any.

Comparative Valuations

On a comparative basis, though Pipavav Shipyard’s superior dockyard, product facilities as well as business potential from Punj Lloyd – a co-promoter – do deserve some premium to the peer-set, we believe that the inherent nature of the business continues to be cyclical, and the lack of proven execution (vessel delivery) track record correspondingly requires a discount to the same peer-set. We thus, believe that the premium demanded is unjustified, and the stock would be available at more reasonable valuations in due course.

GMR Infrastructure Analyst Meet Update

We attended GMR Infra’s Analyst Meet yesterday. Mr GM Rao address the analysts’ after a gap of about three years, i.e. the first time after the IPO. The key takeaways from the analyst meet are:

• Mr GM Rao gave the gathering a detailed view of the group from the beginning to date, and his idea of building a strong and long-lasting institution which could continually grow.
• He also mentioned that the group has an internal benchmark hurdle rate of at least 16% IRR for all their projects.

• The presentation mainly concentrated on a brief about the various operational and the under-development projects.

1. Airports – Delhi, Hyderabad and Turkey
2. Power – 823MW of operational power projects, 5,610MW of under development thermal power projects, and 1,190MW of under development hydro power projects. These include two hydro power projects (550MW) in Nepal. In addition, GMR Infra has acquired a 800MW under development gas-based power plant in Singapore.
3. GMR Infra’s parent company has acquired a 50% stake in InterGen which operates 8,086MW of power plants in various locations across the globe (UK, Netherlands, Mexico, Philippines and Australia).
4. Roads/Highways – six operational highway projects (three annuity-based and three toll-based), and two recently awarded under development projects.
5. Urban Infrastructure – this vertical mainly centres around developing SEZ’s. The group is developing a SEZ at the Delhi International Airport, two at the property around the Hyderabad Airport, and one near Chennai.

• The last few slides on the presentation detailed the present debt-equity position of the group. The presentation states that the present Networth is Rs84.25 bn, while its debt stands at Rs123.38 bn, indicating a debt-equity ratio of 1.5. It was further highlighted that on a standalone basis GMR Infra has a net cash position of Rs3.23 bn. The debt on the books of the various project SPV’s is Rs126.61 bn.
• To underscore the debt position, the management then highlighted the debt in each of the various project SPV’s and mentioned that the debt is largely on a non-recourse basis to GMR Infra, with the door-to-door tenor varying from 10 years to 17 years.
• Lastly, and in our view most importantly, the management indicated that they would be required to raise equity of Rs60.0 bn in the current fiscal, and another Rs15.0 bn within the next two years. This equity is planned to be raised as under:

It may be recalled that during the FY10Q1 results conference call the management has stated that they would not be raising any equity in the current fiscal and the funding requirement was not immediate (with the exception of small equity infusion required in the recently awarded road / highway projects). We, however, have estimated that the group would need to raise Rs45 bn in equity and another Rs182 bn as debt over the next three years.

Our estimate for the equity requirement is lower as it is based only on the existing projects at hand. We believe that the incremental equity issuance would partly take care of the funding requirements stemming for newer projects.

At current valuations, we do not believe the market factors in the risk associated with multiple projects, and execution issues therefrom. We find it difficult to justify the growth premium accorded by the market to the stock.

P.S.: The shareholder’s have approved a stock split from a face value of Rs2 per share to Rs1 per share. The record date for the stock split is 3rd Oct-09

The CCI earlier today approved the bulk tender route for ordering of 11 super-critical units of 660MW (total of 7,260MW for five projects) at an estimated cost of Rs400 bn. These units would be used by NTPC and Damodar Valley Corporation (DVC) for its various projects (see table 1 below for details). All these projects are scheduled to be commissioned in the 12th five year plan (12FYP).

Thus, of the 11 units, 4 units would be used for NTPC’s projects, 5 units for projects in which NTPC has 50% stake each, and the balance 2 units for DVC projects.

Key terms and conditions of the contract include

• phased indigenous manufacturing of the super-critical equipments in India
• award of contract through the international competitive bid (ICB) route
• separate bids to be invited for boilers and steam-turbine generators

The main advantage of this bulk tender would be in terms of the increased pace of indigenisation of super-critical technology. This assumes significance in light of the ~100GW capacity addition proposed during the 12FYP. The original proposal was for ~92GW, which is now increased on account of the expected delays in the 11FYP capacity addition programme. A majority of the 12FYP capacity addition is expected to happen using super-critical technology.

The CCI has also indentified key players who are expected to bid for this contract. These are as below:

The original proposal had stated that of the 11 units, at least 6 units would be awarded to BHEL if it the L1 bidder, else 5 units would be awarded to BHEL if it matches the L1 bid. However, today’s press release by the CCI is silent on this issue. This press release is also silent on the maximum number of units a player can bid for, whereas the original proposal had a restriction of a maximum of 3 projects (not units). This is intended to ensure increased participation as well as bring in more technology into the country.

Following the approval of Government of India, NTPC is required to go for Notice Inviting Tender (NIT) of bulk tendering of these 11 units within 45 days.

GMR Infrastructure

GMR Infrastructure‘s holding company plans to list itself on the London Stock Exchange. We believe that this would be positive for the stock as it would ease funding pressure for the group. GMR Infrastructure is slated to deploy a total of about Rs227 bn over the next three years, of which about Rs45 bn would be GMR Infra’s equity contribution in various SPV’s, & an additional Rs182 bn would be raised as debt funding for these projects. This does not include the USD1 bn bridge loan availed to acquire a 50% stake in Intergen and is due for repayment in May 2010.
[Business Standard]

Mundra Port consortium bags concession to operate Coal Terminal at Mormugao Port

MPSEZ has announced that it has won the concession to operate a coal terminal at Mormugao port. The concession is on a DBFOT (design, build, finance, operate and transfer) basis for a period of 30 years. MPSEZ has won this concession in consortium with Adani Enterprises (Not Rated). The coal terminal is expected to have a capacity of 6.5 MnMT per annum at an estimated cost of Rs252 crore. The revenue share agreed with Mormugao Port is 20%. The coal terminal is likely to begin operations in FY12. The concession agreement is scheduled to be signed on 27th August 2009 and the official date to operationalise the project is 28th February 2013, i.e. three years from starting of work on the project.

MPSEZ expects to fund the project through internal accruals as its equity portion, and debt-financing the balance portion.

I expect this news to have a positive impact on the company.

I have been quoted in Business Standard on 28th October, 2006. Below is the full article as it appeared in the supplement.

I have highlighted my quote in the article.

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Suzlon Energy to go slow on buyouts

Gayatri Ramanathan / Mumbai October 28, 2006

After pulling off one of the largest acquisitions in Indian corporate history in March this year, wind power major Suzlon Energy has ruled out further acquisitions.

“For the next three to four years we are looking at an organic growth for the company while we consolidate the Hansen acquisition,” Tulsi Tanti, chairman, told Business Standard.

Suzlon had acquired Belgian gearbox maker Hansen in March this year for $520 million (Rs 2,600 crore).

The wind power solutions company may, however, put up a turbine manufacturing plant in Portugal and double capacity at its China plant over two to three years.

Tanti said the Portugal plan was contingent on the company winning a Portuguese government tender for wind farms. “Other than this, we have no plans to put up a manufacturing plant anywhere except India as that gives us the maximum margins,” said Tanti.

He said that the Suzlon would also expand the capacity of its China plant to 1200 mw from the current 600 mw by FY 2008-09. “This will help us service the Chinese market, expected to grow to 30,000 mw by 2020, more efficiently,” said Tanti.

Analysts, however, pointed out that the company’s ability to borrow further may be in question given its current debt equity ratio which stands at 1.2: 1. Suzlon’s total debt is pegged at Rs 3,298 crore, of which Rs 2,600 crore was borrowed for the Hansen acquisition.

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I have been quoted in Business Standard’s Smart Investor Supplement on Tuesday last (29th August, 2006). Below is the full article as it appeared in the supplement.

I have highlighted my quote in the article.

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Low on energy
POUND WISE
Mitali Wagle / Mumbai August 28, 2006

Reliance Energy’s stock price reflects the ambiguity shrouding its ambitious plans to scale up its power generation capacity.

The Anil Ambani-owned Reliance Energy (REL) seems to be losing steam on the bourses. A leading private sector player in the power distribution business, REL announced plans to jack up its power generation capacity from less than 1,000 MW currently to over 13,500 MW by 2011.

Its Dadri project was to kick off in 2009. However, two years after the plans were announced, there is still no clarity on the time line for the projects.

Key issues like land acquisition, gas availability and pricing are still to be sorted out. Besides, the company is bidding for ultra mega power projects, which also will take time to materialise.

Thanks to the uncertainty, investors have shunned the stock. In the past twelve months, the stock has plunged 30 per cent even as the Sensex has gained 51 per cent.

At the current market price of Rs 446.20, the stock trades at a price-to-earnings multiple of 14.57. Based on earnings estimates for FY07 and FY08, REL is trading at 13.3x and 12.2x, respectively, while its competitor Tata Power is trading at higher multiples of 17.4x and 16.4x.

Is REL a value buy at the current levels? Analysts are divided on this. While some believe it is a good play on the future growth opportunities, others feel it may be premature to bet on the stock as revenue visibility for the next couple of years remains hazy.

Core businessAt present, REL derives a bulk of its revenues from its electrical energy business, which has delivered consistent growth.

In FY06, the segment contributed 79 per cent of the revenues against 70 per cent in the previous fiscal.

The distribution division supplies more than 5,000 MW of power to various areas of Mumbai, Delhi and Orissa. It has also applied to the Uttar Pradesh Electricity Regulatory Commission for distribution licences in Meerut, Ghaziabad and Noida.

REL’s Dahanu Power Station, one of the top performing coal-based power stations in the country, maintained a good performance despite lower demand because of heavy floods in Mumbai. Its other power stations at Samalkot and Goa are also doing well.

In the next couple of years, earnings growth from the existing energy business is likely to be muted unless state regulatory boards take some major steps to privatise more distribution circles.

The other significant revenue constituent for REL is its EPC division, which chipped in with 21 per cent (Rs 880 crore) to the company’s revenues in FY06.

The division takes up contracts for electrification, erection and operation of power plant equipment, grids, substations and transformers. It has bagged a rural electrification contract from the Uttar Pradesh Power Corporation (Rs 735 crore) and a power project order from Haryana Power Generation Company (Rs 2,097 crore).

Till March 2006, the EPC segment pocketed orders worth Rs 3,358 crore, to which in-house projects contributed 15 per cent. Considering the macro picture, the EPC business should help the company in boosting its growth prospects, believe analysts.

Promising futureAt present, REL’s 942 MW power generation business forms a small chunk of its revenues, but as and when the company’s proposed gas, coal, wind and hydro-based power generation projects in Maharashtra, Uttar Pradesh, Arunachal Pradesh and Uttaranchal fructify, the picture is likely to change.

The 7,480 MW Dadri (Uttar Pradesh) and the 4,000 MW Shahapur (Maharashtra) gas-based power projects are potential goldmines for REL, but given the present pace of progress it could take a while before they could be factored in the business valuations.

These two projects are likely to commence operations in mid-2009 and 2011 respectively.

REL recently bagged the Urthing Sobla hydropower project (Uttaranchal) and plans to develop the two hydro projects in a joint venture with the Arunachal Pradesh government.

Dadri dramaThe mega gas-based Dadri power project in Ghaziabad will, on completion, be the world’s largest power generation plant at a single location. The project was announced in February 2004, but it is yet to attain financial closure.

According to the gas supply agreement signed by the Ambani brothers, post-split, Reliance Natural Resources (RNRL) would source gas from Reliance Industries (RIL) and supply it to REL’s Dadri project at Rs 2.6 per kwh or $3.18 mmbtu.

However, the petroleum ministry has recently rejected the gas valuation formula citing that the price is significantly lower than the prevailing market price of around $8-10 per mmbtu.

Combined with this, RNRL’s intention to pocket marketing margin for the gas procurement is likely to impact the cost of the project that plans to draw heavily on gas procured from RIL, according to analysts.

New avenuesThe company is foraying into the transmission business and will participate in the construction of 300 km transmission line for the Parbati and Koldam hydropower projects in Himachal Pradesh.

Realising the potential in the higher margin infrastructure projects, REL is investing Rs 500 crore in two NHAI road development projects and Rs 2,360 crore in MRTS (mass rapid transit system) project in Mumbai, on a BOOT basis.

In FY06, REL’s net sales fell a marginal 2.7 per cent to Rs 4,019.07 crore. However, both operating profit and net profit grew 25 per cent to Rs 737.27 crore and Rs 650.34 crore, respectively.

Analysts expect the FY07 and FY08 revenues to be Rs 4,370 crore and Rs 4,820 crore, respectively. Though, purely based on valuations, the stock looks attractive, there is no near-term trigger for it. However, the scrip may be an interesting addition for a long-term investor.

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