Financial Investment Grounds And Fundamental Pick For Essar Oil

“The safe way to double your money is to fold it over once and put it in your pocket “

Essar Oil, part of Ruia family's Essar group is engaged in exploration and production (E&P), refining and marketing of oil and oil related products. With the production capacity of 14 MMTPA oil refining it has also 1,635 retail outlets of fuel station across the country. In E&P business it is producing about 35,000 scmd from 33 production wells and also has 2C contingent resources of 148 mmboe. Globally it also has refining capacity 300,000 bpsd and also having a controlling stake of 50% stake in Kenya Petroleum Refineries Ltd's 80,000-bpsd refinery.

FINANCIALS: Since FY06 to FY11 the Net Sales of the Essar oil has grown at CAGR of 136% while on account of high cost raw materials it beard losses up to FY09 but now in FY11 the Net Sales jumped by 28.7%% to Rs 46988 crore over FY10 and Operating Profit rose by 114% to Rs 2557 crore, the PAT for the same period also surged 2155% to Rs 654 crore. The OPM & PATM of Essar oil for the same period stood at 5.44% & 1.25% respectively. In Q4FY11 the Net Sales surged by 27.4%, Operating Profit & PAT also grew by 132% & 78% respectively.

INVESTMENT GROUNDS

Industry Outline

After facing an economic slowdown in FY09 the worldwide demand for oil is now on its peak level and even in 2011 the demand for oil has suppressed the highest ever demand of 2010, the global demand for oil in 2010 was 87.81 mmbpd while in 2011 it touched 89.35 mmbpd. The mass consumption is coming from Asian region (0.78), Middle East (0.25) and Latin America (0.20) mmbpd. Despite increase in consumption of Oil & Gas world wide the per capita oil consumption in India is one of the lowest among major countries. In 2010 the annual per capita oil consumption in India was 0.9 barrels/person while in other developing countries like Russia, Brazil and China it stood at 7.5, 4.4 and 2.3 barrels/person in the same period. However, USA and European countries still have the highest per capita oil consumption, In USA it is around 19.4 and in EU it 9.7 barrels/person. The situation is almost the same for the consumption of gas. However, the demand for petroleum products in India is growing at fast rate the demand for oil grew at 6.5% in FY11 from 1.4% in FY06 and demand for Gasoline also increased from 4.8% to 10.9% for the same period.

Capacity Expansion will help to improve the GRM…

Essar oil is enhancing the production capacity of existing refining up to 18 MMTPA from current capacity of 14 MMTPA. The increased production is expected to start from mid Q4 CY11. Essar Oil is also ready to optimize the cost of its six refinery units which is scheduled to be completed by September 2012. This optimization will further enhance its production capacity up to 20 MMTPA and also increase the complexity (GRM) of the company up to US$11.8 from current US$6.1. Further under phase-II Plan company has also targeted to achieve the capacity up to 38 MMTPA. After achieving this much of capacity Essar oil will enjoy the complexity of US$12.8.

Expanding Presence in Retailing by adding more Outlets…

Essar oil is currently running 1,635 retail outlets across the country and to increase the presence in oil marketing segment it aimed to extend 5000 outlets across the country, currently 254 outlets in various stages of construction. Recently company has commissioned two CNG stations in association with Sabarmati & GSPC and also focusing on ALPG & CNG pumps through tie Aegis, Sabarmati Gas and GAIL Gas respectively. Besides this, company is also focusing on revenue from non fuel business and formed alliances with various Govt agencies to for that.

Exploration and Production Business also rapidly growing…

In Exploration and Production segment Essar oil has also presence through diverse portfolio of offshore and onshore oil & gas blocks. Currently it is producing about 35,000 scmd from 33 production wells and also got the approval from MoPNG for drilling another 500 production wells in Raniganj. In Raniganj to start commercial production the construction of 48-km gas evacuation pipeline from Raniganj to Durgapur has also been completed. Company has also signed contracts for 4 Indian Coal Bed Methane blocks with estimated resources of over 7.6 tcf.

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FUNDAMENTAL PICKS BY MANSUKH DEC 2010

Target Price: 305 
UFLEX Ltd, India's largest flexible packaging company engaged in manufacturing of Polyester chips, Films, Coated Film, Laminates, Pouches, Holographic films Gravure cylinders, Inks and adhesives to all types of packaging & printing machines, offering total flexible packaging solution. Headquartered at Noida UFLEX has capacity of 25000 TPA with the market presence in 80 countries including USA, Canada, UK, Russia and African as well as Asian Countries. UFLEX clients include almost all leading FMCG players in the Indian market.

FINANCIALS: During the last five years (FY05-FY10), the Top line of UFLEX has grown at CAGR growth of 9%, Operating Profit and Net Profit of the company has also grown by 18% and 25% respectively. In FY10 the Net Sales of UFLEX rose by 2.95% to Rs 1579.58 crore over FY09, Operating Profit also surged by 24.62% to Rs 287.43 crore, UFLEX has also reported more than 20% jump in Profit after Tax to Rs 85.74 crore over FY09. In Q2FY11 the Net Sales of the company surged by 41%, Operating Profit and PAT also grew by 146% &328% respectively. The OPM & PATM of UFLEX for the same period were 29% & 14% respectively.

INVESTMENT GROUNDS
Industry Outlook
The Flexible packaging market has excellent growth potential in the food and processed food, personal care, FMCG and retail sector. The demand for smaller packaging and increasing consumerism due to higher purchasing power has been a boon for the flexible packaging market. With the introduction of innovative and new products, Indian Flexible Packaging Industry will lead to faster growth at a rate of around 25% annually. With the advent of newer plastic films, other novel materials and new technologies, the industry will be looking at better quality of the products and thereby, increased sales volumes. In fact, the market is expected to treble its output in the next few years owing to the greater demand from the food and processed food and retail segments.
     
Eying an Extensive Market Share by FY11
UFLEX is eying to capture the significant market share in flexible packaging industry in next 1-2 years. Currently UFLEX is enjoying 21% market share and further targeting to achieve 25% by the end of this fiscal year. The company is trying to attain this target by augmenting its consolidated revenue from Rs 2300 crore to Rs 3500 crore by end of FY11. If the company achieves this revenue target than the market share of the company will also significantly rise and may arrive at 40% by FY12.

Capacity Expansion to boost Topline
UFLEX has planned to boost its Topline by adding more capacities in both domestic and overseas markets. UFLEX has lined-up a capex of Rs 900 crore over the next two years. The company has planned to enhance its packaging capacity in both domestic and overseas markets to 3.35 lakh TPA from the present 2.35 lakh TPA by FY 12. Company's exposure to the plastic film business has increased due to commissioning of first line of polyester film project with 26400 TPA polyester film capacity at Mexico and the capacity will further increase after commissioning of second line of PET film with a capacity of 26400 TPA and commissioning of 35000 TPA of BOPP film, 30000 TPA PET film & 12000 TPA of CPP film in Flex P Film, Egypt. These expansions will have considerable increase on the profitability of the Company.

Exiting from non-core business will help to focus on existing business
To focus on its core business UFLEX has exited from a non-core business. UFLEX has sold 70% stake in AKC Developers to its joint venture partner Hanjer Biotech for 98 crore. In 2007-08 UFLEX picked majority stake in AKC Developers for the Rs 43 crore. AKC Developers is involved in municipal solid waste processing projects under the public-private partnership model. Further UFLEX has also estimated to exit from its non-core business of MSK Project, Telecommunication and Real Estate by Q3FY12 with estimated price of at Rs. 175 crore.