Coal India Limited | A Cool Player In Your Portfolio

CMP: 276.50. Both on NSE & BSE (19/05/2017)


Till now all the power generation companies are heavily dependent on the imported coal. Lack of domestic coal availability has led to this situation. The current import quantity is 65 million tonnes, which is almost 51 percent of the total coal requirements. If this surge continues, the day is not far away that, India becomes completely dependent on the imported coal for its power generation needs. Then, why Coal India? Of no use???

Shakti – The Power Policy to Reduce Coal Imports

In order to change this situation, ‘The Cabinet Committee for Economic Affairs’ has approved a new Coal Linkage policy called ‘Shakti’ – The Power. This policy is an auction based and  This is a scheme to harness the thermal power generation in India.

The total thermal power capacities in India, in the private sector tunes until 30,000MW. Out of which, 2/3 are equipped with ‘Long-term Power Purchase Agreements’ (PPAs). Shakti, the new power policy is going to benefit all these private players in the thermal power sector. Under this policy, all the thermal power generation companies with PPAs will get the right to get the fuel from ‘Coal India Limited (CIL)’.

A total 20.000MW private power generation sector is going to be benefited under the new policy. In 2009 CIL issued a ‘Letter of Allocation’ to few power projects. The total capacity of these power projects stands at 12,000MW. And, another 8000MW without LOAs, but with short-term ‘MOUs’ (Memorandum of Understanding). But CIL failed to provide the fuel.

Coal India Limited is the Biggest Beneficiary

In this entire activity stream the biggest beneficiary is ‘The Coal India Limited’. It’s going to be benefitted @Goventment’s focus on the harnessing of power generation. The total import percentage of coal falls to 12% (547 MT) of the total Coal India’s production capacity in the financial year 2017. The target is to achieve zero imports. Just a 10% hike in Coal India’s production can make this possible to happen.

All the state-owned power companies have already reduced their imports. 25 million tonnes in FY16 to 12 million tonnes in FY 17. Targeting ‘zero-imports’ this year.

The aim of Shakti is clear. It ensures that all the power projects are supplied with enough coal as per the linkages provided. A  long fuel supply agreement will be signed off with competitive tariffs. It will benefit the plants that have signed Power Purchase Agreements on the basis of imported coal.

Benefits of Coal India Investors

The stock has been under-performing, since for the past one year. Currently trading around 277, almost a 52 week low, the stock is trading at 14 times of its fY18 earnings. This usually happens considering the huge cash in the books, zero debt and finally its monopoly in the sector

Analysts were expecting Rs. 15-17 per share earnings (EPS) in Coal India in the fiscal year 2017. But, this new policy has changed the number to Rs 20 per share. That’s how the investors are going to benefit.

The same should reflect on Coal India’s earning, which is expected to increase to about Rs 20 a share as against analyst expectations of about Rs 15-17 per share in fiscal 2017. The stock has been, a big under-performer in the past year. At the current price of Rs 277 per share, the stock is trading at 14 times its FY18 earnings, which is reasonable considering the huge cash in the books, its monopoly status in the sector and the zero debt.

Till now Coal India has been a favorite pick of the dividend lovers. One who would like to park their capital safely under the roof of Giant Company that will securely pay off its return in the form of a dividend. A dividend yield of 10.09% is better than any bank fixed deposit. But, after the implementation of new coal policy, the tradition is going to be changed. It’s no more a dividend pick, but running to sit in the peer basket of growth picks.

Among the power companies, the immediate beneficiaries are GMR, Adani Power, Reliance Power, Vedanta, KSK Energy, CESC. Shortage of fuel linkages has led these firms and their power plants, operating at below financially viable levels.

Why to ‘Buy’?

Since for a month I’m feeling that the stock is going to sit in a technically bullish position. But, there was no fundamental support for my analysis. But, after the announcement of the Shakti policy, I’m recommending to buy it for your long-term portfolio. In the long run you will realize what is meant by ‘The power of compounding’, the success mantra of Mr Warren Buffet.

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Corporate Debt And Its Variations

There are four basic activities that companies usually show as the  sources of generation and use of cash. They are – the income from operations, cash generated by selling assets and /investments (if any), capital generated by issuing new shares and finally the cash flow due to debt. Most of the companies generate cash flows by using all these 4 mediums. But, few differ from, heavily relying on any particular one and less on the others.


As a part of expansion /fastening the growth, companies mostly rely either on debt or issue equity, either to the public or private players to accumulate the required capital. In the case of debt, interest cost adds-up to the borrowed capital. The result is that there is a negative cash-flow number on the balance-sheet. So, the borrowed funds need to be utilized efficiently, to make the overall cash flow a positive good number. Lets discuss about it in detail.

What is ‘Debt’

Whether it is an individual or a company, when the current finances don’t allow to make large purchases /harnessing the business activities, the most preferred alternative is making debt /borrowing the amount required, from the lender. This happens under an agreement that, the borrower will pay back the borrowed amount, later in the future, usually with along with an interest and that too at an agreed rate.

Hence, debt can be defined as the process of borrowing, a certain amount of capital, by one party (either by an individual or a company) for the purpose of financing the current needs, from an another party, usually called, the lender, under an agreement that, the borrowed party repays the borrowed amount called the debt, along with an agreed rate of interest, later in the future.

In the case of businesses, debt is a good alternative method of making the business a successful one, if utilized properly for its growth.

Types of Debt

Personal Debt

Credit Card Debt, Mortgages, Auto Loan and personal Loan fall in this category. Here the banks are the lenders /creditors, and the investors are the borrowers.

Corporate Debt

This type of debt is done by the companies rather than the individuals. Companies when they need funds, issue Bond and Commercial Papers. Through bonds and commercial papers they collect the required funds and utilize the same for the growth of their businesses. This type of debt facility is particularly in the corporate sector and not available to the individuals. Here, investors are the lenders /creditors and companies are the borrowers.

Types of Corporate Debt

Bonds

Bonds are a type of debt instruments, that allows companies to collect funds in a very amicable manner from the investors. Here investors may be either individual /institutional investors. Once the bonds are issued by the company, they are available to the public as well as institutional investment firms through banks and other financial investment channels.

A bond is a written agreement between the issuer company and the investor. Through bonds companies sell a ‘promise of repayment’ in the future. This repayment includes an interest rate called Coupon and the original amount received. The coupon rate is decided by the company at the time of issuance itself.

Each bond has its face value and the coupon rate. The purchaser of the bond receives the basic amount that’s invested at the end of the maturity period. And, the Coupon Rate, periodically at an intervals fixed at the time of issuance /at the end of the maturity period.

Commercial Papers

When companies are in scarcity of funds to pay off the accounts receivable, inventories and to meet all the short-term liabilities, they usually issue commercial papers.  During 1985 – 1990 there, the world economy witnessed a trend called the liberalization. This was the background push for the introduction short-term monetary instruments called the commercial papers in the Indian Money Market. An effective reform to avail the funds for short-term obligations by the corporate companies. This can be considered as an innovation in the financial system of India.  These are the most short-term instruments in Indian Money Market since 1990 onwards.

Prior to injection of commercial paper in Indian money market, that is before 1990, the corporate companies had to borrow the working capital from the commercial banks. Under this traditional process, companies were pledging the inventory as a collateral security. The introduction of commercial paper in the Indian money market avoided, all the hassles of borrowing the working capital, from the commercial banks. But, because of not backed by any form of collateral, here there are chances of default risk by the companies. This is usually called the corporate default problem. That’s the risk associated with these monetary instruments.

Role of Credit Rating Agencies

Credit Rating Agencies rate the companies depending on their secured credit. Hence it is always desirable to invest in commercial papers of companies with high credit ratings. That’s a company with high credit rating has, less chances of default risk. Others are riskier.

Companies with high credit rating has the advantage of finding buyers without discount to their cost. Whereas low credit companies need to offer a substantial discount (higher cost) for their debt.

In India, the maturity period of commercial papers ranges from 15 days to 1 year. Whereas in the United States, it’s no longer than 270 days.

Debentures

A debenture is just like a bond, but not not backed by any collateral. The credit and faithfulness of the issuer company are its underlying security. Debentures are issued to raise the short-term capital. Companies when they are expected to pay for future expenses or for expansion plans, they raise the capital through the issuance of debentures.

In corporate finance, a Debenture is a medium to long-term debt instrument, used by large companies to borrow money, at a fixed rate of interest.

In other words, a debenture is a movable property, issued by a company in the form of indebtedness, specifying the dates of redemption, repayment of principal and interest. Debentures may or may not create a charge on the assets of the company.

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Opto Circuits (India) Ltd. | Is It Going To Make Upper Circuits | When And Why?

Company Name: Opto Circuits (India) Ltd.


Industry: Meditech (Medical Technologies)

Sector: Hospitals & Medical Services

CMP NSE: 9.95

CMP BSE: 9.96

It was the year 2012, the month Aug and the date 17. Motilal Oswal Securities have given a neutral rating to ‘Opto Circuits (India) Ltd. The target price was Rs.173 at the then market price of Rs.147.55. It was the call given after the knowing  fact that the  balance sheet was under the stress and indicating its negative future cash flows. That’s what is called,  the power of goodwill, Opto Circuits (India) Ltd., has had on its records.

Opto Circuits (India) Ltd. – A Victorious Beginning

This 1700 Crore company, Opto Circuits (India) Ltd, started its journey in 1992, as a manufacturer of Sensors. These Sensors as a peripheral components were supplied to the large scale medical equipment manufacturers. Since from then the company has been operating under two segments – The health Care and Information technology. The motto was and is clear – Guaranteed Quality And Innovation.

‘Products and Business’ – The Brand of Quality Assurance

Opto Circuits (India) Ltd., is a multinational medical device company. It designs, develops, manufactures, markets and distributes a range of medical products that are used by healthcare establishments in more than 180 countries. The company specializes in vital signs monitoring, vascular treatments, emergency cardiac care and sensing technologies.

Their other products include optical sensor, security systems, medical electronics and chip-on-board assemblies. These high quality peripheral products are provided by them for many reputed companies around the globe.  All are high in demand.

Proved Marketing Expertise

Apart from manufacturing, OCIT has an efficient marketing wing too. Highly reputed brands like MED Aid, Critical Care Systems, Euro care, Unetixs and Cardiac Science are marketed by Opto Circuits. All these are, USFDA listed and CE marked products and gained reputation in a very short span of time.

List of Prestigious Awards – A Symbol of Repute

If, bagging a single award is a hallmark of purity and prestige  for any business, what we can say about the list of awards that ‘Opto Circuits (India) Ltd., has in its basket?!!!
  • Annual Export Award (2011)
  • Best Performer I Electronics (2007 – 2008) & (2008 – 2009)
  • Overall Best Performance in VSEZ (2009 – 2010)
  • Forbes’ 200 ‘Best Under a Billion Asian Companies (For 2011der)

Why, Dr. Vinod Ramnani, CMD, Opto Circuits (India) Won the Prestigious ‘NextGen Entrepreneur of the Year Award?

For methodically moving up the value chain from non-invasive medical products to high-tech branded devices. For building a research-driven cross-border organization.

These are, a very few of very renowned awards that Opto Circuits India has bagged. There are many others too, try to add here asap.

But Why the Free-Fall

Apart from  such an astonishing and winning history, the stock value has been falling from its all time high of 262 to the recent all time low of Rs.8.12 is a matter of big concern. Sometimes one small (wrong) aggressive step may lead to destruction. That’s what happened in the case of ‘Opto Circuits India Ltd.”. Aggressive expansion. This is the common mistake done by many businesses that led to their devastation. That’s what happened in the case of Opto.

Since from 2oo1 Mr. Romania started to acquire many small and big companies in India, Europe and United States. Paid up sums were very huge. As a result, the Bangalore based and headquartered Opto Circuits India Ltd., turned in to a fairly formidable healthcare products company. The profits that were generated were distributed back to the investors in the range of 30% -40%.

Mr. Ramnani, supposed to stop there itself. But he couldn’t. In the year 2010 he spent $60 million towards 3 acquisitions, which is, a quarter of the company’s $245 million annual revenue. This, finally anyway, led to a huge fall in the stock price from Rs.222.91 in 2012 Feb’ 22nd to 143.35 in June 2012. And, the company couldn’t digest the acquisitions, and the fall continued to the year 2013 to the recent low of Rs. 8.1 on Feb’11, 2016.

Fundamental Analysis

Pros

Current Asset Base

Total current Assets of around Rs. 1700 Crores, against the total equity share capital of Rs. 242.32 Crores is a very good concern and safety net for its investors.

Book value

The current book value of Rs.69.67 against the Current Market Price of  9.96 is saying that it’s a value pick and just buy for a long hold.

Cons

EPS

Its current Zero EPS is not a big concern, once the company receives all the benefits and seed capital for its proper functioning. Once the business picks up, the EPs starts to appear and grow quarter to quarter.

Contingent Liabilities

These a contingent liabilities figure on the balance sheet. An around Rs 689. 95 Crores of contingent liabilities, the company has to overcome in the future. For a well established business like OCI, this number is not so big. I have a hope and trust in the company’s return-to-back future prospects.

Technical Analysis

As a technical analyst I’m sure that the chart is on its bullish trend. If not so promptly, but will move forward very soon.

Why I Recommend To Buy

PMO Push – A Great Hope for Its Future Performance

After PMO push, Dept of Pharmaceuticals fast tracks formulation of medical devices policy

In order to attract FDIs, The Prime Ministers Office has been pushing the ‘Department of Pharmaceuticals’ to fast tract the ‘Medical Devices Policy’. In a meeting convened by the Prime Minister, this issue has been discussed in detail. According to the department of Pharmaceuticals (DoP), the work on this policy has been expedited and will be released soon.

India imports its 80% of its medical device requirements. The police assumed much significance in this regard too.

According to sources, there is an understanding that a robust medical devices policy is required to help realize the full benefit of the relaxation of the FDI policy. FDI up to 100 per cent through the automatic route is permitted for the manufacturing of medical devices in the country

Along with Opto Circuits, the other companies engaged in manufacturing of medical devices include Siemens, Poly Medicure and BPL. There is a need for FDI in the sector as the domestic medical device industry is fragmented into small and medium enterprises and primarily manufactures products such as disposables. The draft National Medical Device Policy, 2015, had proposed incentives for both new and existing medical device firms. It had asked for interest subsidy to MSMEs, concessional power tariff, seed capital, viability gap funding, tax benefits to the sector, minimum or zero duty on raw materials and incentives for exports.

*** There was an order of Rs.91 Crores, from PHILIPs Health care, in December 2016, for the supply of various Medical Devices. And, this will definitely strengthen the business in future. A sure-shot hope.

  • All these are my concerned points about the business, that made me to suggest to buy this value pick for your long-term portfolio. The rest is all your will and wish.

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