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Published on: June 1, 2021, 6:02 a.m.
How to pick gems even in dark times
  • JSPL has now recorded its best performance in the steel sector and has turned around its outlook

By Lancelot Joseph. Executive Editor, Business India

Good assets, but a long way to go

A lot of homework is required to be done before taking exposure to a potential turnaround company and Reliance Power Ltd is a case in point. For the year ended March 2021, this ADAG power unit has apparently turned around. On a consolidated basis, it has posted a PAT of Rs454 crore, as against a loss of Rs4,271 crore in the year ended March 2020. Its EPS is 72 paisa, as against a loss of Rs14.48.

The company has four operating plants – Rosa I and Rosa II plants in UP (capacity: 1,200 MW), Butibori, Maharashtra (capacity: 600 MW) and Sasan Ultra Mega Power Project, MP (capacity: 3,960 MW). The total capacity of the operating power plants is 5,760 MW.

The company shares, which were trailing at a 52 week-low of Rs1.86 on 29 May 2020, had reached a 52-week high of Rs9.12 on 28 May. However, a further perusal of the accounts shows that the company has not provided for interest in respect of its ailing Vidarbha Power Station to the tune of Rs432 crore. It had entered into a PPA with the Adanis, which was terminated by them due to insufficient output.

Reliance Power has also considered gains, from the sale of two of its Bangladesh companies, of Rs432 crore. Its other plants at Dadri (one of its most ambitious projects, which was shut down due to non-availability of gas), Reliance Green Power and two others are shown as discontinued operations.

The company is still paying a huge interest of Rs2,538 crore. While this is lower than what was paid in the earlier years (Rs3,053 crore), it is still a large amount. The company has a net worth of Rs12,085 crore and an equity of Rs2,805. All these will dampen the market’s expectations of a rapid recovery.

The market is looking at the replacement costs. At the current rate, the total cost of setting up the operating plants would be close to Rs60,000 crore. Its market cap is about Rs2,000 crore. Hence, the assets are available cheap!

Riding high on change of guard

It is not necessary that all companies have to turn around from a loss-making to a profit-making company before being classified in the category of turnarounds. Over the last few years, we have seen a change in management doing wonders for ailing companies. When assets are handled by management with stronger hands and more cash pumped in, there is a high expectation of the company turning profitable once again. Bhushan Steel takeover by Tata Steel (now renamed Tata BSL) and Crompton Greaves Consumer Electricals being taken over by private equity firm Advent are two recent examples of how the new management has been able to change the fortunes of the companies. Ispat’s takeover by JSW is also a good instance of the same.

Similarly, CG Power & Industrial Solutions has changed hands and is now a Muruguppa group company. Given the track record of the Murugappas in turning over companies, smart investors have already started latching on to the shares of CG Power, with the shares moving up steadily over the last 52 weeks, from under Rs7 to R90. The premise is the company has a good brand, a good set of people and infrastructure that will be an asset in the hands of Murugappa group company Tube Investment.

Recently, India Ratings & Research (Ind-Ra) had upgraded the company’s long-term issuer rating to ‘IND AA-’ from ‘IND D’, with a stable outlook, giving a thumbs-up to the successful implementation of a restructuring programme for CG Power, leading to the settlement of claims. “A change in the company’s promoter and the infusion of long-term funds in the company is expected to result in an improvement in its credit profile,” said the agency, in its explanation. “The upgrade reflects a change in the company’s ownership and managerial structure, infusion of long-term funds by Tube Investments of India (TIIL) and TIIL’s commitment to Ind-Ra to provide a need-based financial support to CG Power in a timely manner.” 

Scripting a success story 

It is interesting to note that, until a few years ago, trade pundits had written off the company and its stock. It did not hold any future and was saddled with a massive debt of about Rs46,000 crore. But, today, JSPL has scripted an enviable success story under the leadership of Naveen Jindal, by its sheer determination to innovate and set new standards, along with enhancing capabilities. With an investment of $12 billion across the world, the company is constantly scaling its capacity utilisation. It has now recorded its best performance in the steel sector and has turned around its outlook. The script, which was at a 52-week low of Rs115 earlier, is now trading at Rs405.

In 2020, post-lockdown, when steel production saw a downward curve, JSPL decided to continue production with the available workforce – implementing all Covid-19 measures. It was a risk-involved decision that JSPL took but the company kept running its mills at 80-90 per cent utilisation. Instead of depending on the dampening domestic market to sell its products, JSPL was among the first companies in the nation to put in efforts to export its products through virtual meetings. As a result, the company’s steel production grew 8 per cent quarter-on-quarter in the first quarter and its sales were up 12 per cent.

JSPL is in the process of massively cutting down its debt. Primarily, the reduction would be due to two major factors – divestment of non-core businesses, such as its existing power units, and strong profitability in steel operations. JSPL has also adopted a 15:15:50 model – Rs15,000 crore EBIDTA; Rs15,000 crore net debt; and Rs50,000 crore gross turnover – by 2022. 

The deleveraging of JSPL’s balance sheet has come at an opportune time, as the industry has entered an up-cycle. While global steel prices are rising and are expected to remain buoyant for another two years, the prices of key raw materials of iron ore and coal are witnessing a downward trend. All these factors will improve its year-on-year margins and sustain them significantly. 

Transformational path

Tata Motors has faced several headwinds for 10 years (2006 to 2016). They include loss in market share, failure of the Tata Nano small hatchback, issues in quality, rising costs, and uncertainties around Brexit affecting its performance after the bold acquisition of JLR. 

However, over the last few years, the company is on a transformational path, making a potential turnaround. Its efforts to make structural changes in the organisation, such as discontinuing underperforming products as well as debt reduction measures, have started to bear fruit, with JLR returning to profit with positive cash flows. Meanwhile, the company is also in the process of spinning off its passenger vehicles business and has shifted its focus towards electric vehicles (EV). Lastly, Chandrasekaran’s management skills and Tata’s brand could combine to propel this stock to previous highs, if all goes well. With this, Tata Motors, which hit a 52-week low of Rs84, is currently trading at Rs317.

A timely bounce-back

The pandemic had made things worse for the already struggling domestic commercial vehicle (CV) industry. The CV business was the most hit vehicle segment by the pandemic-driven lockdowns. However, the industry is expected to witness a sharp recovery over the next couple of years, since the worst seems to be behind it now and the space has hit rock bottom. Ashok Leyland is well-placed to benefit from this turnaround. Improvement in economic activity, scrappage policy, revised load carrying norms, good monsoons and higher infrastructure projects will help drive growth, going forward. The counter is active at Rs124, after hitting a low of Rs42.

 

New value driver 

ITC is one of the most talked about stocks; the more so, because it has had a painful decade with the stock price not moving anywhere, disappointing investors. The share price after hitting a low of Rs163, has managed to improve to Rs217.

Meanwhile, high ESG headwinds due to the cigarette business, underperforming FMCG business, cash consuming hotel business and rising awareness of the health hazards of smoking, were some of the issues faced by the company. However, ITC is all set for a turnaround with its FMCG business continuing to scale, which could be the company’s new value driver. Profitability is low at present, but the investment phase is largely over and the company should start reaping the benefits. 

 Diversification pays

Venky’s results this quarter have been quite strong. It has reported 42 per cent y-o-y rise in revenue from operations in Q4 2020-21 and a profit of Rs78 crore in Q4 2020-21, as against a loss of Rs96 crore in Q4 2019-20. The improved financial performance was seen despite the company witnessing some negative impact in January 2021 due to the outbreak of bird flu. 

Venky’s share price is ruling at Rs2,350, after a low of Rs983. The company has also been reducing its business volatility by diversifying into soya processing, animal health products and poultry feed, which could aid further growth in the upcoming quarters. 

 Injected liquidity

Wockhardt has completed partial divestment of the Wockhardt India formulations business to Dr Reddy’s lab, which has injected adequate liquidity into the company. Besides, Wockhardt has consistently invested over the years to create a strong antibiotic pipeline and is now betting big on biotech products, which have a huge market potential. Further, it has a ‘fill and finish’ exclusive contract for 18 months from the UK government to supply Covid-19 vaccines. This deal has been extended for another six months, which is positive for the company. All these tailwinds act in the company’s favour, making Wockhardt a potential turnaround candidate, whose share price has moved to Rs659. 

Capital reduction

A BIFR case till recently, Gujarat Sidhee Cement Ltd’s (GSCL) paid-up capital had come down by 75 per cent to Rs36.15 crore. However, the company has now been able to improve its financials and consolidate its market position. Post-rehabilitation, it has returned to the dividend list and is today on a strong footing, with the scrip trading at Rs40.

GSCL was originally set up as a joint venture between the Gujarat Industrial Investment Corporation and the Mehta group. Its principal products/services are clinker and cement, which it manufactures and exports to Africa, the Middle East, Sri Lanka and Bangladesh. 

Frozen foods to drive

Shri Bajrang Alliance Ltd (SBAL), a part of the Goel group of Chhattisgarh, was into steel rolling. But it has now ventured into the frozen food business. The new generation started this business last year. Coming to the December 2020 numbers, the company has revenues of R45 crore from the steel business and R55 crore from the food business (in the first quarter of operations). The steel segment has delivered EBIDTA of Rs7.56 crore, while the food business delivered negative EBIDTA of Rs1.25 crore. As the operating leverage is yet to play its part, the EBIDTA is still negative. The company is doing campaigns to build its brands, as also TV shows (live) for product awareness.

Additionally, SBAL holds 9-10 per cent stake in Shri Bajrang Power & Ispat, which is going for a Rs500 crore IPO soon (may be valued at Rs2,000-3,000 crore). And, if one looks at the profit-and-loss account of Shri Bajrang Alliance, he/she will see that the share of profit from its associate is the major contributor to PAT. After the IPO of this associate entity, one may expect a major value creation for SBAL. The counter on the bourse has a flare-up, which will see the scrip touching Rs220, from a low of Rs17.

SBAL’s major driver of growth will still be the frozen food business, which it has entered into this year. The company has already tied up with Hyatt hotels and has even started exporting to Dubai and a few other countries.

Fallen angels

Every bull-run is marked by a few loss-making companies being buoyed up by rogue traders on some rumours or the other. However, not all fallen angels can really turnaround cases and, as such, investors have to guard themselves against such momentum stocks, whose prices see a sharp rise in prices on rumours of change in management, or a sale of asset or some such corporate action by the current management.

Unitech is a case in point. As is Suzlon, in the case of which every time there is some rumour or the other, the share prices do rise, only to fall back once the rumours are found to be without any basis.

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