Sunday, December 5, 2010

Sanghvi Movers

Company Profile  

Sanghvi Movers Ltd. (SML), a flagship company of the Sanghvi Group,operating since 1989, is the largest crane hiring company in India, 3rd  largest in Asia and 9th  largest in the world . It has a fleet of 370 medium to large sized heavy duty hydraulic and crawler cranes with capacity ranging from 20 tons to 800 tons. The crane hiring business is the main business line for the company contributing around 99% of the  turnover . The company also provides basic engineering and lift planning services along, as it helps in determining the time, labor, type of equipment required and flow of work.These cranes are used in the power, refineries, steel, cement and construction sectors, for purposes such as plant erection, heavy lifting and maintenance services.Lets take a closer look at the company to determine whether its worthy of an investment.

Balance Sheet Quality
Sanghvi operates in a capital intensive industry and hence generally sports a high Debt/Equity ratio. The D/E is currently about 1.01 and Debt has grown 10 times in 10 years from 44 crs to the present 470Crs as the company has also grown. The company borrows heavily when the economy is doing well & remains conservative during slower times. Between 2000 - 2004 the D/E was well below 1 , but from 2005 to the present it has remained more than 1 but steadily reducing after peaking to about 3 in 2006. 

The current ratio has remained well above 1 for most years. The Cash Conversion Cycle is a huge negative value as the company has no inventory due to the nature of the business & the large Days Payable Outstanding. I am not sure how useful this metric is for Sanghvi as ideally its should have been a positive value for a capital intensive business. Accounts receivables have grown at 39.7% CAGR which is a worrying sign although Payables have also grown at 41% CAGR.

Sanghvi has over the years shifted focus to Higher Tonnage Cranes(>100MT) where competition is lesser and enjoys a dominant market share which enables it to earn good profit margins. The operating profit margins have been in the range of 66-75% in the past 5 years as there are very little expense by the way of maintainence of cranes, transportation & labor charges. The company has also consistently improved its Net profit margin from 13.4% in 2004 to 26.4% in 2010. This has mainly been on account of focus on higher Tonne(100MT+) cranes which have better margins. Asset turns have been on the lower side ranging between 0.47-0.35 in last 5 years touching 0.35 in 2010. This depends on the utilization rates(and lower idle time)of the cranes. The Return on Capital Employed(ROCE) has ranged between 15% - 24% in the last 6 years and has gotten better with improving margins. 

Cash Flow
A look at the trend of Cash Flow from operations (CFO) w.r.t Earnings before Interest,Depreciation & Amortization (EBIDA) between 2000 - 2010 shows that SML has manged strong cash flows  with good working capital management(Further the company has no Inventory due to the nature of the business) & control over Payables & Receivables. 

The Cash Return on Capital Employed(CROCE) has been close to the ROCE in most years ranging between 15 - 22% in the past 7 years. Coming to the important metric Free Cash Flow(FCF), SML has had consistent -ve FCF(except 2010) despite strong Cash Flow from Operations mainly due to the Capital Intensive nature of the business. The chart below shows the FCF ,Net Profit & CFO trend over the last 6 years.

Beginning in 2004 upto 2009, Sanghvi undertook aggressive CAPEX plans by purchasing a lot of High Tonnage cranes to capitalize on the Infrastructure boom during the period. Going forward, one can expect similar Capex plans to buy more cranes which will need to be funded by both Internal cash flows & debt. This will need to be watched carefully as the company will need to balance Growth & Balance sheet strength going forward.
SML has managed to grow its sales at 25.7% CAGR over the 10 years 2000 - 2010 and Net profits at 36.5% CAGR during the same period. Much of this growth has come between 2004 - 2009 as can be seen from the chart below. 

The CAGR growth rates over the last 5 & 3 years  in Sales have been 34.5% & 22.9% and in Profits 45.8% & 24.2% respectively.There was Sales & profit De-growth in 2010 mainly due to slowdown in infrastructure activity. The company had a good 2009 despite the Recession mainly as it gets 40%+ of its revenues from the Power Sector which was relatively unaffected. Going forward, with the kind of thrust on Infrastructure growth in India, Sanghvi has good growth visibility to maintain its good performance .

At the Current Market Price of Rs 184 , Sanghvi Movers's Market Cap is 798 Crs & Enterprise Value is 1266 Crs. The table below shows the various important valuation metrics for TTM & 3,5,10 Year averages .

                                    TTM           3Yr AVG     5yr AVG    10yrs Avg
          P/E                   8.82               9.06                   11.61              21.88
          P/CF                4.67                6.04                     7.72             18.32
          EV/EBIT      6.84                7.04                    8.77              16.27
          P/BV               1.7              Div Yld         1.63% 

SML appears Cheap on most counts even considering the 3 & 5 Year Averages for a company growing at 25% and with good Margins & ROCE . The only Comparable & Listed competitor is ABG Infralogistics(Caters Specifically to Port Sector) which Trades at a P/E of 26 despite being smaller & inferior to Sanghvi on most counts. 

Some of the Positives of Sanghvi Movers that come to my mind are :
  1. Near monopoly in higher capacity cranes : SML focuses on the higher capacity cranes market, since the below 100 MT capacity segment has many players operating in it. SML has approximately 65% market share in the above 100-150 MT crane segment and approximately 80% market share in the above 250 MT crane segment.The margins get better with higher tonnage. The company’s strategy is to deploy a majority of its cranes on a medium to long-term basis. This provides stability to earnings besides increasing utilization rates.
  2. Pan India Presence : SML has a network of 10 depots, which are strategically located to enable it to have a pan India presence. These depots not only reduce costs but also save time spent in transporting cranes from the depot to the site. For transporting Cranes, the company has a fleet of in-house trailers constituting 45 Volvos (100MT) and 35 trailers of 25 MT- 35 MT to reduce dependence on outside transport services. This has enabled  the company  to  reduce costs and save  time  involved  in moving cranes from one location to another.
  3. Thrust on infrastructure to spur demand for cranes : Cranes are an essential component for infrastructure building. With massive investments lined up both by the government and the private sector we can expect the company to benefit from the increased demand. Around 0.5-0.7% of infrastructure spending translates to crane hiring charges.Power, Refineries, Steel, cement and construction sectors are witnessing good growth and have lined up huge capex. This augurs well for the company.
  4. Strong Client base  & Sourcing : SML’s clients are major players in their respective industries. Major clientele of the company under various industry segments include Suzlon,BHEL,Enercon,Reliance etc. SML sources cranes  from major  international  players  like Liebherr  (Germany), Terex Demag (Germany), Manitowoc (USA), American crane & Hoist (USA), Kobelco (Japan), and Kato (Japan). The company has established relations with crane vendors around the world.
  5. Aggressive ramp up in crane capacity : After having aggressively added to its capacity over the last couple of years (total capex of Rs. 896 cr over the last 5 years), SML had, in keeping with the slowing economy, cut down on its capex plans.However, with an improvement in the market, the company is expected to resume its aggressive Capex plans.
The Main Risks that Sanghvi Movers faces can be summarized as below:
  1. Customer Concentration : About 40% of the company's revenue comes from the Power Sector & the top 5 clients account for a major chunk of the revenue. Although SML has been able to reduce this dependence by diversifying into Refineries, Cement & Construction, a loss of few main customers can hurt it.
  2. Debt & interest Rates :  Being a capital-intensive industry, the company has funded a major part of its capex via the debt route and a significant hike in interest rates would have an adverse impact on  its profitability. Increase in  interest rates could impact the net profit margins of SML. The company has done well to bring down the D/E from 2.9 in 2006 to about 1 in 2010.
  3. Slowdown in economy  : If the economy slows down , it may lead to curtailment in the capex plans of client companies or in execution which may may lead to a reduction in the utilization rate.In such a situation,one can expect Sanghvi Movers to take a considerable hit on its topline and bottomline. However the company does have some insularity to this due to its major customers being in the power sector as we saw in 2009. 
  4. Competition & Manpower :  Crane renting industry is an unorganized industry with a large number of players. The  less  than 100 MT  capacity  segment  is highly  competitive  and there  are  large number of players. However, in the above 100 MT capacity segment, there are very few players. This is because cranes in this segment are expensive and need highly skilled manpower to operate and maintain.The company's operations may get affected on account of increase in competition in Crane Hiring Business, shortage of trained operators, mechanics and engineers.
  5. FII Shareholding : SML has foreign shareholding of about 34%, which comprises of different institutional investors. These shareholders have been invested in the company for a considerable length of time, which reflects their confidence in SML’s business. However, on the downside, there could be selling pressure when there is a sustained rise in price increasing the stock’s volatility.
Sanghvi Movers in my view is a proxy for the Infrastructure story that is to play out in our country.In the preceding boom in Infrastructure between 2003-2009 ,SML did well to grow its Topline ,Bottomline & improve margins. It would need to repeat that in the coming years while making sure it doesn't take on too much Debt. With history on its side and a reasonable Valuation i believe Sanghvi Movers makes a good long term bet.

Disclosure : Long Sanghvi Movers. Please read the Disclaimer

Wednesday, December 1, 2010

MOIL IPO Analysis

Hello Folks its been a long time since my last post & a lot has happened in the Markets with the Sensex Hitting 21k in diwali & the current correction to 19k levels. I have been very busy with work off late and hence i couldn't post but at the same time i have been looking at  a lot of companies. Hopefully i shall be more active from now on.

Apologies again for my delay in posting this Analysis of MOIL with just 1 day to the close of the Issue.Hopefully it would help some of you who are still confused whether to invest or not. I went through the Prospectus, various research reports & Annual Reports to come of with the following write up.

Company Profile

MOIL, a Miniratna PSU, accounts for nearly 50% of India’s Manganese ore production. Currently, MOIL operates 10 mines located in Maharashtra (six mines) and Madhya Pradesh (four mines). In addition to Manganese ore production, the company has diversified into high value-added products  HCFM and EMD. The company also operates two wind power plants, with total capacity of 20MW, in Nagda hills and Ratedi hills, Madhya Pradesh. 

The IPO entails issue of 3.36cr equity shares priced in the band of  Rs 340–375. The issue of 3.36cr equity shares by the central and state governments represents 20% of the company’s total outstanding share capital. The company will not receive the offer proceeds, as the proceeds are part of the government's divestment plan.

  1. Largest producer of manganese ore in India with access to significant reserves : MOIL accounts for nearly 50% of India’s manganese ore production, distantly followed by Tata Steel (16%), Sandur Manganese (10%) and Rungta mines (7%).  The company holds approximately 17.0% of the proved reserves of manganese ore in India which is 21.7 million tonnes of proved and probable reserves and a total of 69.5 million tonnes of measured, indicated and inferred mineral resources of manganese ore. 55.0% of  MOIL's ore reserves have an average manganese content of 40.0% or higher & 27.5% have an average manganese content of 36.0%-39.9%  & none of the mines produce low grade manganese (i.e., below 30.0% manganese content).  
  2. Well positioned to capture the growth potential of the Indian steel industry : As more than 90% of Manganese world over is used in Steel Making, the fortunes of MOIL have been tied to the domestic steel industry. CARE Research expects domestic steel demand to increase at a 9.2% CAGR over FY2011–15. Thus, demand for manganese ore is expected to increase at a 9.0% CAGR over the next two-three years. This is an indirect way to play the Infrastructure story to unfold in India.MOIL due to its  significant reserves, is well positioned to serve the increase in demand expected from the steel industry.                                                              
  3. Low cost and efficient operations : As the largest producer of manganese ore by volume in India, MOIL is able to achieve economies of scale in procurement of input materials, production efficiency, marketing, sales, and other aspects of its operations. The Dongri Buzurg mine is fully mechanized and all other mines are semi-mechanized. Mechanization allows for higher recovery rates, permitting an increasing percentage of manganese ore to be recovered by way of crushing, screening and sorting of waste, thus improving productivity and higher sales. The company owns all the equipment it uses in its operations and third parties are primarily used for overburden removal. This gives MOIL flexibility in operations as it doesn't depend on third parties for operations.All of the above elements favor cost-efficient production, which increases MOIL's profitability and make it one of the lowest cost producers of Manganese ore. 
  4. Strategic location of mines provides it with advantages : MOIL's mines are located in central India, in the states of Maharashtra and Madhya Pradesh which have well-developed road and rail infrastructure. The central location gives it a marketing advantage over competitors, as it facilitates transportation of products, resulting in lower cost and faster time of delivery for its customers. Also, higher transportation costs associated with imported manganese ore provides MOIL with improved competitive positioning in the market.                                                    
  5. Solid Financials  : MOIL is a debt free Company with 1763 Crs Cash on its books. It benefits from a strong liquidity position that gives it significant flexibility & ability to pursue acquisitions abroad if required. MOIL has enjoyed Healthy Net profit Margins ranging between 43-48% in last 3 years. It also has excellent cash flows & is Free Cash Flow positive.The Company's strong Balance Sheet and cash flows from operations provide it with sufficient resources to fund projects, working capital requirements and maintain a healthy level of cash on its balance sheet.
  6. Strong capabilities for exploration, mine planning and research development :  The company is actively involved in exploration and development activities to increase its proved manganese ore reserves. An area of 814.71 hectares in the State of Maharashtra has been reserved for MOIL by a notification from the Ministry of Mines. It has applied for prospecting licenses with respect to this area. MOIL has a planning division that includes geologists and mining engineers that focuses on exploration activities at potential mineral deposits.
  7. Experienced senior management , large pools of skilled manpower & Stable Staff Cost : MOIL has an experienced management team with an average of over 20 years of experience in the mining industry and skilled employees who possess significant industry experience. It maintains good relations with its employees and unions and has not lost any significant employee time due to strikes or labor unrest for the past 25 years. As compared to other PSUs, MOIL is relatively insulated from volatility in its salary cost, as the wage agreement is effective for a 10-year period. The wage agreement for non-executive employees will expire on July 31, 2017 and that for executive  employees will expire on December 31, 2016 .Employee costs represent the most significant portion of its operating expenses.
  8. Expansion through capacity addition and JVs for Forward Integration : MOIL has undertaken expansion plan at its existing mines to augment its production capacity to 1.5mn tonnes by FY2016E from the current levels of 1.1mn tonnes.  At Balaghat, Gumgaon and Munsar, shaft sinking and deepening of existing shafts is underway. MOIL intends to expand its value-added capacity and, thus, has entered into JVs with SAIL and Rashtriya Ispat Nigam Ltd. (RINL) to set up two ferro-alloy plants in Chhattisgarh and Andhra Pradesh. The proposed installed capacity in case of the JV with SAIL is 1,06,000 tonnes and that in case of RINL is 57,500 tonnes.  The plants are expected to be commissioned by June–July 2012. These capacities will enable MOIL to increase sales of value-added products and also improve margins.
  1. Fortunes tied to Steel Industry : The manganese ore industry is highly dependent on the prospects of the steel industry, as 94% of manganese ore produced is used in the production of ferro alloys, which is consumed in the steel industry (90% of ferro alloy produced is used in the steel industry). Manganese ore prices have been very volatile historically and had fallen by more than 50% during the downturn in 2008. Any adverse changes in steel demand can have a negative bearing on manganese ore prices.
  2. Client Concentration Risk : MOIL's top ten customers represent approximately 51.5% of their sales of manganese ore. Key customers include Maharashtra Elektrosmelt Limited and Bhilai Steel Plant (“Bhilai”), which are both subsidiaries of SAIL and which together accounted for 22.1% of sales revenue . If MOIL fails to enter into new agreements on acceptable terms with any of its top ten customers, and SAIL in particular, its results of operations and prospects could be materially and adversely affected. 
  3. Implementation of new mining policy to include 26% profit sharing : To curb illegal mining and fast-track approvals for mining rights, the government has proposed a new bill that requires miners to share 26% of profits with local people affected by their mining projects. Recently, the bill has received an  in-principle approval from the Group of Ministers (GoM) and the proposed bill is expected to be placed in the parliament for approval during the upcoming winter session. Although the proposed bill lacks clarity, the implications of the new profit-sharing rule on MOIL’s earnings could be severe.
  4. Limited mine life for some of the operating mines : The reserves at Kandri, Beldongri, Chikla and Tirodi are expected to exhaust in the next 6–9 years based on FY2010 production levels. These mines produced 32.5% of the total manganese ore in FY2010. Thus, in the absence of any significant reserves accretion at the existing or new mines, the company’s performance could be affected in the long term.
  5. Other Mining Related Risks : Mining operations are subject to a number of operating risks like poor mining conditions resulting from geological, hydrologic or other conditions; adverse weather and natural disasters, such as heavy rains, flooding and other natural events affecting operations,  safety and environmental regulations or changes in interpretation or implementation of current regulations.Seven of the mines MOIL currently operates are underground mines.Underground mining activities are inherently risky and hazardous and prone to fires and explosions.

Financial Performance

MOIL Registered an Impressive Growth in Sales & profits of 22.9% CAGR & 41.8% CAGR respectively from 2001 - 2010 . The chart below shows the trend of Sales & Net Profit Growth. As we can see the growth has been lumpy & the Net profits have gone up significantly since 2005 mainly on account of higher Margins. The Topline grew by 23.% CAGR in past 5 years & 37.7% in past 3 years showing how good the recent years have been for MOIL. Similarly ,the net profits grew by 29.7% CAGR & 52.5% CAGR in last 5 & 3 years respectively.

This can be understood better when looked at with the physical production of Manganese ore & the Cost realization(`000)/Tonne as shown in the chart below from 2001-2010.While the Managnese production grew by just 5.9% CAGR the Price/tonne went up by 24.03% CAGR during the same period. MOIL due to its dominance & quality ore made most of this boom. However the demand grew so much that India was a net Importer of Manganese in the last 3 years.

MOIL being one of the lowest cost producers of Manganese in the world ,has very high Net Profit Margins & Return in Equity(ROE) as shown in the chart below. However between 2001 - 2004 the NPM was just around 9 - 12% but Jumped to 31% in 2005 & has stayed between 31-48% between 2005-2010. The ROE has stayed between 28-59% during the same period. This was mainly on account of better price/tonne as shown above & improved efficiency.

I had the cash flow data of MOIL for only the past 5 years during which it exhibited excellent cash flows and healthy Free cash flow. The chart below shows the Free Cash Flows and net profits between 2006-2010. With the kind of Free cash  MOIL has been able to generate one can be rest assured that it will have no problems paying dividends & the cash balance is likely to grow in the future .


Considering the amazing response the Issue has already seen its safe to assume that the price will be fixed at upper band of Rs 375 which translates to a price of Rs 356.25 for Retail Investors after the 5% discount. This translates to a Market Cap of 5985 Crs,however due to the 1763 Crs Cash on books the actual value of the company turns out to be 4222Crs . The table below shows the various important valuation metrics for TTM & 3,5,10 Year averages wherever data was available.

                           TTM          3Yr AVG      5yr AVG     10yrs Avg

          P/E             9.07              7.83               11.34            20.35
          P/CF           16                8.85               12.52
          P/FCF         17               10.11              14.54
          P/BV           2.1
          Div Yld       1.57%

MOIL looks attractively priced whichever way one looks at it on absolute terms. Especially on Trailing Twelve Months(FY10) & 3yrs avg basis it looks quite cheap for a company with such high ROE and growth. Its important to look at average valuations also as this is essentially a commodity company which is cyclical in nature. It looks reasonably priced even w.r.t. 5yr avg considering the  past growth it has had. On a relative basis there is no comparable competitor in India, however MOIL is cheaper than other mining companies like  CIL,NMDC,OMDC,Sandur Manganese etc. Globally, Citic a direct peer of MOIL got listed in November in Hong Kong at a P/E of 42 & P/BV of 7. Further when compared to other Global Mining biggies who have lower margins than MOIL it still appears attractively.


Value Investors generally tend to  ignore IPOs. However as one saw with the IPO of Coal India, fundamentally good companies priced reasonably make for good investments. MOIL i believe fits the bill too what with a  5 star rating from CARE highlighting its fundamental strength and an attractive price. While i am not sure how much listing gains MOIL would fetch but i am confident it makes for a good long term bet.

Disclosure: I have Applied for MOIL IPO. Please read the Disclaimer