Reliance goes bargain hunting3 min read . Updated: 11 Sep 2007, 01:28 AM IST
Reliance goes bargain hunting
Reliance goes bargain hunting
Shares of Reliance Industries Ltd (RIL)continued their outperformance on Monday, after the company announced the acquisition of integrated polyester-to-textile manufacturing assets in Malaysia from the receivers and managers of Hualon Corp. The shares have outperformed the National Stock Exchange Nifty by 38% since January.
RIL hasn’t disclosed the price it has paid for the 0.5- million-tonne polyester capacity and the downstream textile manufacturing capabilities, but analysts are betting that the acquisition came cheap. For starters, polyester is in a downcycle. But more importantly, Hualon was running huge losses, was heavily indebted, and recurring defaults on loan repayments had forced the company to be put into receivership.
A recent report by The Edge Daily of Malaysia puts Hualon’s accumulated losses at RM1 billion ($290 million or Rs1177.4 crore) and outstanding debt at a whopping RM4 billion ($1.16 billion). For perspective, the company had revenues of $800 million in the year till December 2006. One of the main reasons for Hualon’s losses and indebtedness was difficulty in collecting payments—mostly from related companies. More than half of Hualon’s receivables on December 2005 were due from a firm in which several Hualon directors had interests. Since RIL is acquiring only the manufacturing assets, it won’t have to contend with the baggage of accumulated losses and debt. Besides, analysts point out that RIL can step in by providing its surplus purified terephthalic acid to the Malaysian arm and cut input costs.
Hualon also has a relatively high employee base of 7,000 employees, which analysts are seeing as further scope for cost-cutting.
The purchase of Hualon’s assets may add only 4% to RIL’s turnover, but assuming that the acquisition came cheap (unfortunately, the company hasn’t provided this basic detail), it can be seen as a smart way of adding assets in a downcycle.
NTPC gets re-rated
The NTPC scrip hit a new high on Monday, as the country’s largest power generator signed a deal with Bharat Heavy Electricals Ltd (Bhel) to set up a joint venture which will jointly bid for power projects both at home and abroad, including ultra mega power projects.
The NTPC stock is up more than 15% in the last one month and the fall in the markets last month didn’t leave a scratch on the scrip.
The reason, simply put, is that NTPC is in the process of getting re-rated. There have been a number of triggers for the stock lately, not the least of which has been the decision to award eight coal blocks to the company, which will be used for captive mining.
This will, of course, improve efficiencies at the company. But that’s not the whole story. Analysts say that NTPC will form a subsidiary to mine the coal blocks. And while the parent company gets the statutory 14% return on equity, the subsidiary, even if it supplies the coal to NTPC at the prices charged by Coal India Ltd, will get a higher margin.
In other words, on a consolidated basis, it’s an opportunity for the firm to earn a rate of return higher than that laid down statutorily.
A power analyst points out that the return on equity could move to as high as 19-21%. This is the reason why the NTPC stock has been putting up such a good show. The joint venture, too, has the same potential of allowing NTPC higher than the statutory returns.
There are also other factors, such as the fact that NTPC has been able to improve its plant load factor, which not only enables it to save fuel but also earns it efficiency incentives that allow it to get more than the 14% stipulated return on equity.
Add to that the company’s expansion programmes and the fact that the stock will find a place in the Nifty with effect from 24 September, and you have plenty of reasons for the stock to make new highs.
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