Stock Review: Nava Bharat Ventures

Nava Bharat Ventures was started in 1972 under the name of Nava Bharat Ferro Alloys (NBFA). In 1975, it started manufacturing ferro silicon at Paloncha in Andhra Pradesh. In 1980, the company ventured into the production of sugar and related by-products. In 1997, it entered into power generation with the objective of becoming self-sufficient in this regard. Given the mismatch between the demand and supply of power, its decision to produce power for captive use soon changed into a decision to supply power to the grid. In 2005, the company forayed into the development of real estate and Special Economic Zones (SEZs). In July 2006, NBFA changed its name to Nava Bharat Ventures (NBV). Next, it set up a wholly-owned subsidiary in Singapore known as Nava Bharat (Singapore) Pte. Limited for its foray into international trade.

 

Business

Power. NBV currently has an installed capacity of 237 MW: 143 MW of this is located in Andhra Pradesh and 94 MW is in Orissa. In March 2010 the company announced that it would set up two plants of 150 MW each in Andhra Pradesh. Its Zambian power project of 300 MW is expected to achieve financial closure by the end of FY11.

 

NBV informed the Bombay Stock Exchange (BSE) on July 14, 2010 that the company had sold 52 per cent of its shareholding to Essar Energy in the upcoming 1,050 MW power project in Orissa. This project was jointly owned by Nava Bharat and Malaxmi Group. It has also agreed to sell its balance stake at a later date.

 

Ferro alloys. NBV is the second-largest producer of ferro alloys in India with a total installed capacity of 2,00,000 tonnes per annum (TPA). Currently it is focusing on the production of silico manganese. Ferro chrome and ferro manganese production account for a small share of total production.

Ferro alloy is a power-intensive industry. South Africa is its main producer and exporter. Earlier, it had a competitive advantage due to the availability of low-cost power and cheap ore. The other main producers are Kazakhstan, China, Brazil, Russia and India. Recent tariff hikes and irregular supply of power to ferro alloy producers in South Africa augur well for Indian producers.

 

Industry outlook. After October 2008 economies around the world witnessed a severe recession. Most steel producers had to significantly cut production due to lack of demand. Ferro alloy prices declined by more than half from their peak levels. With the global economy recovering, ferro alloy prices have begun to recover but they are still well below pre-crisis levels. The current installed domestic capacity of 3.25 million tonnes per annum (MTPA) is more than sufficient to meet domestic demand. Most ferro alloy plants are still running well below their full capacity.

 

Sugar. Sugar and its by-products accounted for only 8 per cent of the company's revenue in FY10. NBV has an integrated business model that makes its sugar venture non-cyclical, thereby resulting in a more stable bottomline. As part of this model, the company also produces value-added by-products such as ethanol. It also uses its own captive power.

Recently the government has hinted at a possible decontrol of the sugar sector. If implemented, this segment of NBV's business is likely to become more profitable.

 

Real estate. NBV has a small presence in real estate through its subsidiary Brahmani Infratech. This subsidiary has only one project. It has entered into a joint development agreement with Mantri Technology IT Parks Private Ltd for the development of an IT-ITES oriented SEZ in Hyderabad, which will also have commercial and residential spaces within. This project has 250 acres of land.

 

International operations. Nava Bharat (Singapore) Pte Limited looks after NBV's international operations, which include its international ferro alloys business, and its Zambian and Indonesian operations. It has off-take rights and majority interest in a coal mine in South Kalimantan, Indonesia. This venture will support its new merchant power business in India. The extraction and trading of coal is awaiting forest clearance by the Indonesian government. Its Zambian venture has coal reserves of 65 million tonnes of high-grade coal and another 65 million tonnes of power-grade coal.

 

Strengths
Business model. NBV's dynamic business model is its strengths. While in the beginning the company was into the production of ferro alloys, it then also ventured into power production in order to benefit from the opportunities available in that area.

Focus on backward integration. The company's focus on backward integration in all segments is a strategy worth noting. After setting up its ferro alloy plants, the company focused on setting up captive power plants to provide electricity to the former. Similarly, now NBV is trying to secure coal supplies for its power plants. And as stated earlier, even the sugar plant is fully integrated.

 

Stable earnings. The dynamic business model discussed earlier enables NBV to earn stable profits.

 

Weaknesses
Coal supply. Its power plants are coal based. This creates a concern since it is dependent on external sources for coal supply.

Ferro alloys. The cyclical nature of the ferro alloy business, whose fortunes are tied to those of the steel industry, is another cause for concern.

Power rates. NBV has not entered into long-term power purchase agreements (LPPA) with the power grid. This makes it vulnerable to fluctuations in the price of power.

Declining realisations. Merchant power rates continue to decline due to improvement in supply of power. Deterioration in the financial positions of state utilities has also affected payments.

Policy risk. The company's operations in countries like Zambia and Indonesia are vulnerable to policy risk, in case the political scenario deteriorates rapidly.

 

Financials

In the past five years, NBV has reported a return on capital employed (RoCE) of over 15 per cent every year except in FY06. In fact, in FY08 and FY09 the company had reported a ROCE of over 30 per cent, while in FY10 it had a RoCE of 25 per cent.

The company has improved its return on assets (RoA) to an impressive level. In the past three years, its RoA has never fallen below 20 per cent.

NBV has enjoyed a high operating profit margin (OPM) of above 40 per cent between FY08 and FY10. The company's net profit margin (NPM) has remained above 30 per cent in the last three years.

 

Valuations

The company's current PE is 7.5 times (September 22, 2010). This is marginally higher than its five-year median PE of 7.33 times. Moreover, its earnings per share (EPS) has grown over the last three years at a compounded annual growth rate of 33.31 per cent. Hence its PEG stands at an attractive 0.23. You may buy this stock with at least a three-year horizon.