STANDING TALL; Some Companies on Investors' radars

These are difficult times for industry. India Inc has had to battle domestic and global challenges. Yet there are some companies that have done relatively well despite the headwinds that have battered their sectors.  investors' radars

Suraj Sowkar 

 Investors have little to cheer about these days. With uncertainty in the markets, the talk is more about gloom-and-doom scenarios. On the one hand, a policy paralysis at the Centre has stalled the growth of India-focused companies, and on the other, the burgeoning European crisis has hit the revenues of many export-oriented companies. In such a situation, companies from sectors like infrastructure, capital goods and banking, which depend on economic growth, have taken a beating in their earnings. 

But amid this tough operating environment, some companies in such sectors have weathered the storm and reported a reasonably good performance. At a time when their peers were reeling under a severe fall in earnings, these companies, due to their strong business model, were able to sustain their profits. In some cases, they continued to grow at a healthy rate. 
The stock returns of some of the sectors reflect the pessimism among investors. These sectors have given negative returns over the past two years. The valuations of companies with a relatively better performance have also been affected. Due to the negative sentiment, the stock returns of the betterperforming ones have been flat. 
That presents an opportunity for investors to take a closer look at these companies which have stood strong at a time when industry and their peers have been beaten down. Despite the 
tough times, these companies 
show healthy earnings visibility 
for the coming quarters. 
ET Intelligence Group puts these 
companies under the scanner to help you understand how and why that have sailed through while their peers are struggling with a gradual erosion of wealth and revenues.

ABG SHIPYARD 
The shipping industry is currently in a downturn due to a drastic fall in freight rates. This is mainly because of oversupply of vessels and a slowdown in global trade. To tide over this situation, many shipping companies, which had ordered large-sized vessels in 2008, have either cancelled or delayed deliveries. ABG Shipyard, the country's largest private shipyard, builds smaller-sized ships where the oversupply is lower. In addition, it builds specialised ships for clients, which ensures the company a reasonable operating margin. The company's EBIDTA margin in the financial year 2012 of 29% is the highest in the industry. ABG Shipyard currently has an order book of over 16,000 crore, which is to be executed over the next four years. This gives it healthy revenue visibility for the next five years.

BHARAT PETROLEUM 
Indian petro retailers are bleeding money by having to sell products below cost and are entirely dependent on government support for profitability. But BPCL stands out with its strong exploration portfolio. The company has performed better than its peers IndianOil and HPCL on the bourses and commands a premium valuation. 
With 18 overseas exploration blocks, BPCL is second only to ONGC Videsh among Indian companies in terms of the number of overseas exploration assets held. Among its blocks, Rovuma Basin offshore in Mozambique has made a couple of high-potential discoveries. BPCL's 10% stake in this exploration asset is now valued at over $2 billion or nearly half of BPCL's current market capitalisation of 26,267 crore. In addition, the company commissioned its 6-million tonne refinery at Bina in Madhya Pradesh which has been set up in a joint venture with the Oman Oil Company. The company had earlier voiced the possibility of an IPO for the Bina refinery, which would unlock value for investors. BPCL has also invested in natural gas and LPG businesses.

GREAVES COTTON 
Greaves Cotton is the country's pioneer in the manufacturing of automotive engines. It also has a presence in agriculture equipment, gensets, construction equipment and industrial engines. Since agriculture and automobiles are the key industries that this company caters to, it has so far not faced the same kind of backlash as other engineering companies, especially those that cater predominantly to the power and industrial sectors. 
While the business model has helped, the company has also gained from the fact that it has near zero debt with a reasonable amount of cash on its books and has managed its working capital well. All this has left it in a better position compared to its peers in the 
current environment where high 
interest rates have significantly 
impacted the operational expenses of many companies. The company is now focusing on technical collaboration with international partners to increase its foothold in the manufacture of engines for four 
wheelers and construction equipment. It is also giving serious consideration to expanding its low cost and high margin after sales services business segment. The stock price, however, currently trades near its 52-week low, factoring in the negative sentiment and margin pressures.

ENGINEERS INDIA 
Engineers India is one of the leading engineering consultancy companies of the country. While consultancy is the company's core business, it is gradually establishing itself as a complete turnkey EPC (engineering, procurement and construction) solutions provider. For EIL, its high-margin consultancy business has significantly helped the company post better margins than its peers. However, it may be difficult for EIL to retain the over 30% margins it has enjoyed in the past as the company is gradually increasing its footprint in the EPC segment. However, EIL is still better placed than its peers as it has zero debt on its books, large treasury investments and a reasonable amount of cash. The stock currently trades at a price-earnings multiple of less than 13, which is at a discount to its relatively larger peers in the industry.

HDFC BANK 
The slowdown in industrial production and the government's increasing budget deficit are the biggest concerns for the banking sector. Industrial production grew at a slow pace of 1.1% and 4.1% in January and February and contracted 3.5% in March 2012, worsening the case for a revival in corporate sector projects, where the bank is still heavily exposed. To ease the tight liquidity situation in the banking system the Reserve Bank has lowered the cash reserve ratio twice so far this year. But with inflation still on the rise the likelihood of another reduction is not so close at hand. The sharp fall in the value of the rupee only worsens the outlook for most lenders given their large exposure to the corporate sector. 
Even in such an environment, HDFC Bank has managed growth, profitability and risk well. While most banks have reported an increase in bad loans and are struggling to maintain margins, HDFC Bank has consistently shown improvement on both accounts. It registered 22% credit growth compared with the 17% growth for the sector during the last quarter. In addition, it has maintained its net interest margin at 4.2% in the March 2011 quarter, which is one of the best in the industry.

HINDALCO 
A sharp rise in the price of fuel and caustic soda, key aluminum making ingredients, has driven alumina refining costs higher, significantly increasing the cost of production for aluminum making companies. At the same time, there is a supply surplus in the global aluminum market and demand is growing at a slower pace. Because of the demand-supply situation, LME aluminum prices are not expected to cross $2,638 on average through 2012, representing a 3.8% increase over 2011. 
In such a scenario, it is very hard for companies to increase profitability as their margins suffer. Even a low-cost producer backed by good management such as Hindalco would find it difficult to operate under such conditions. However, compared to its peers Hindalco is a stronger company. It commands one of the highest margins in the industry at 15-18%. With a stock price of 107 it trades at a P/E of less than 10, which is very cheap compared to its peers. The stock would be due for a rerating only when a significant improvement is seen in the global aluminum industry.

MBL INFRASTRUCTURES 
The construction and infrastructure industry has been impacted by several macro-economic problems since the last one-and-a-half years. Since infrastructure projects require high debt, a rise in interest rates has severely dented the profits of these companies. A slowdown in orders and delay in regulatory clearance have added to their woes. 
MBL Infrastructures (MBL) is a smallsized construction firm catering to rail, road and industrial segments. Due to backward integration of its business, the company has been able to maintain a higher operating margin compared to its peers. The company has an in-house crusher and quarrying plants, which reduce its raw material costs. MBL's strategy has been to venture for projects from reputed clients. For instance, in the roads segment, it bids for projects only from NHAI or sponsored projects of World Bank or ADB. In addition, as a company policy, it maintains low debt. The current debt-to-equity ratio of MBL is 1.2, which is one of the lowest in the industry. As a result, MBL is one of the least impacted by the current downturn in the industry.

OBEROI REALTY 
The real estate sector continues to remain under pressure from factors like poor demand, low liquidity, high borrowing costs and delay in execution of projects. However, Oberoi Realty has been an exception of sorts. It is one of the very few debt-free companies in the sector. It has, therefore, been performing relatively better than most of its debt-laden peers. 
Oberoi Realty focuses on premium development projects in the island city of Mumbai. Besides, developing land acquired by it, the company also develops land owned by third parties on a revenue-sharing basis. Unlike other realty players, the company has not piled up any debt for acquiring a land bank or 
    for development of its land bank. It 
    generates positive cash flows and 
    has a cash balance of 1,293 crore 
    on its books. Its new launches in 
    Worli and Mulund, though delayed, are likely to be the revenue drivers in FY14. Being debt-free, the company trades at a premium valuation to its peers. However, its current valuation has factored in these developments.

POWER GRID CORP OF INDIA 
Power Grid is the biggest transmission company in the country, with a near monopoly in interstate transmission. The company's business mainly involves building grids and providing transmission lines to power producers. It charges a predetermined rate which allows it to generate a return on equity of 15.5%. 
This model insulates the company from factors such as lack of fuel availability or low demand from state electricity boards. Due to its low-risk business model, it's stock has significantly outperformed the ET Power index. 
The company's low-risk model has allowed it to undergo huge capex unlike other power sector companies. Its earning per share has more than doubled in the last five years. The company is expected to continue reporting a steady performance in future. Power Grid has huge expansion plans and is on track to complete its projects ensuring strong return on equity.

VARDHMAN TEXTILES 
The textile industry is in the midst of a revival. Companies across the value chain have been able to dispose off their inventories slowly. In this situation, one of the more efficiently-managed companies in the sector, Vardhman Textiles, is expected to be one of the main beneficiaries. The company has planned a capital expenditure of 1,000 crore for FY13E. It plans to add 50,000 spindles, taking the total count to 9.8 lakh spindles. It also plans to add 400 looms and 30 million metres of fabrics to its present capacity of 90 million metres and 900 looms. The company's strong focus on processed fabrics, which has high realisation, is a lucrative strategy. It also aims to consume yarn internally to boost its fabrics business. Unlike its peers, which are heavily indebted and have a debt to equity ratio of over 3, Vardhman Textiles has a low debt to equity ratio of 1.3 
For FY12, the company suffered inventory losses due to weak demand and a sharp fall in prices of cotton and yarn. In the last one year, cotton prices (Shankar-6 variety) fell by 23%, while yarn prices declined by 22%. Besides this, the company had high interest cost which resulted in a 71% y-o-y decline in its net profits for FY12. The worst is over for the company as demand is expected to pick up in the coming quarters with inventories across the value chain being disposed off.