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Monday, March 3, 2008

Binani Inds - hugely undervalued

Binani Inds is trading at a huge discount to its net asset value and offers good upside potential to investors with a long-term view


THERE ARE some holding companies, which are highly undervalued in the stock market. The reasons for this can be many: low earnings visibility, insignificant operating revenue of the holding company or market inefficiency. Whatever the reason, it makes sense to include these value stocks in your portfolio. One such stock is that of Binani Industries (BIL), the holding company of Braj Binani group. At its current market price, it’s trading at a huge discount to its net asset value and offers good upside potential to investors with an investment horizon of 2-3 years.

BUSINESS

BIL is a holding company with three major subsidiaries — Binani Cement (BCL), Binani Zinc (BZL) and Goa Glass Fibre. BIL itself doesn’t have any operations. Recently, BCL nearly tripled its cement production capacity to 6.2 million tonnes (mt) and the full impact of the augmented capacity will be visible from FY09 onwards. BZL has a 38,000-tonne smelter plant located in Kerala. It was allocated mines in Rajasthan and plans to move zinc production closer to the mines in Rajasthan. Goa Glass Fibre is a relatively small company with net sale of around Rs 85 crore during FY07.

GROWTH DRIVERS


• Cement:
BCL is likely to be BIL’s main growth driver. BCL plans to double its global cement capacity to around 12 mt by FY10. It recently acquired a 2.2-mt cement plant in China and is in the process of taking over a grinding unit in UAE. China is the world’s largest cement market with annual production of 1,200 mt. However, nearly a third of Chinese production is accounted for by vertical kilns, which are polluting and are facing closure. BCL sees this as an opportunity, as its target company uses eco-friendly horizontal kilns.
Back home, BCL announced plans to set up a port-based 2.5-mt cement plant in Gujarat to supply clinkers to the UAE grinding unit, thus helping it tap growth opportunities in West Asia. BCL is eyeing opportunities in eastern India. If things go as planned, BCL’s revenues may cross the $1-billion mark by FY11.

• Zinc:
Though it’s one of the early investors in zinc production in India, BZL’s growth and profitability have been hampered by a lack of captive mines. Its Kochi plant depends on imported ore concentrates, making it highly vulnerable to prices and availability of ore concentrate in the international market. To overcome this, BZL is now in the process of securing three mining leases in Rajasthan and Gujarat for captive use. This will help BZL to significantly augment metal production, besides bringing down operational costs. Shifting metal production to Rajasthan will free nearly 1,000 acres of land near Kochi port, which BZL can commercialise after paying conversion charges to the state government. The market value of the land will run into hundreds of crores.

FINANCIALS

BIL’s net sales have more than doubled in the past three years and it has now become a profit-making company from being a loss-making one. The profit growth was primarily driven by BCL and BZL added to the topline growth. In the past three years, BCL’s net profit jumped nearly 15 times, while BZL’s topline more than tripled, thanks to higher zinc prices and capacity expansion. BIL’s expected to maintain the growth momentum on BCL’s capacity expansion and acquisition of captive mines for its zinc operations. BIL’s FY08 net profit is estimated to be 23.8% less compared to FY07’s, mainly due to a 50% fall in other income, higher depreciation due to new plants & machinery and higher minority interest.

VALUATIONS

Since BIL is a holding company and has no operations as such, the ‘sum of parts’ valuation method is most appropriate. BZL has no close competitor and it’s going to be a turnaround story once it gets the lease to mine zinc in Rajasthan. BZL’s smelting capacity is one-tenth that of Hindustan Zinc. After discounting 75% of Hindustan Zinc’s value and adjusting for the capacity, the fair value of BIL’s 90% stake in BZL is estimated to be around Rs 585 crore. Similarly, BIL’s current market value of the 65% stake in BCL is valued at over Rs 1,100 crore. Its other assets and subsidiaries are valued at around Rs 100 crore. So, BIL’s fair net asset value is calculated at over Rs 1,800 crore, more than three times its current market capitalisation, which seems highly undervalued. Investors can buy this stock as a value pick. santanu.mishra@timesgroup.com


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