Wired for growth

Sensible move

India Infoline Ltd (IIL), among the top-tier brokerages in the country, announced after market hours on Monday that it was selling a 22.5% stake in its 100% subsidiary, India Infoline Investment Services (IIISL), to Singapore-based Orient Global for $76.7 million (Rs 300 crore), thus valuing the subsidiary at Rs 1,333 crore, or about 20% of IIL’s current market value of Rs 6,427 crore. The same day, RBI approved the increase in FIIs’ holding limit in IIL to 100%.

These developments seem to have had a positive impact on the stock, which jumped 11.4% to Rs 1,284.70 on Tuesday. Although it corrected by 6.3% the next day, it’s still up over 5% as compared with the 1.6% decline in the BSE Sensex.

IIL’s move seems to be in the right direction, simply because the infusion of Rs 300 crore into IIISL will provide it much-needed capital to expand the latter’s businesses.

IIISL, which is a non-banking finance company, offers margin-funding facilities to equity investors. It also provides personal, car and housing loans (through subsidiaries Moneyline and India Infoline Housing Finance).

Interestingly, this business is growing at a fast pace (net income was up six-fold to Rs 20.60 crore in Q2 this fiscal), albeit on a low base.

Analysts maintain that this is a high-margin business where yields are high, while net interest margins are over 5%.

Also, IIL intends to capitalise its 600-branch network to provide loans to customers across 60 cities by end-2008, which is a positive.

Notably, IIL’s other fee-based service offerings like insurance, distribution of mutual funds and IPOs, etc are also growing fast. All these should help lower the share of the equity-broking business, which is now around 56%, and thus help further de-risk the business.

Meanwhile, IIL’s stock has outperformed the broader BSE index since November last year. Now at Rs 1,199.80, up 332.6% in the last one-year, the stock trades at 35 times its estimated earnings for 2009.

Though valuations at these levels appear expensive, that’s largely because growth rates have been high and the market believes that the company’s future prospects are good, which should hold true unless the macro environment changes for the worse. The diverse revenue streams also add on the positive side. To sum up, the stock deserves attention on declines.

Wired for growth

Godawari Power and Ispat Ltd, which got listed only in April last year, has done reasonably well on the bourses, having risen 178.6% since its close on the first day of listing.

The company, with a product portfolio that includes sponge iron, steel billets, steel wires, wire rods and ferro alloys, makes an interesting story. To its credit, it is the third-largest producer of sponge iron in India and one of the larger players in the mild steel wires segment. Its facilities are located in the mineral rich area of Siltara Industrial Estate, near Raipur in Chattisgarh.

Meanwhile, its performance has been fairly good. For the six months ended September 2007, the company has reported a year-on-year growth of 68% in revenues at Rs 348.42 crore, 85% rise in operating profits at Rs 71.88 crore and 55.8% rise in net profit at Rs 42.37 crore. The lower growth in net profit was on account of a dip in other income and rise in interest costs.

The company has recently concluded the first phase of its capacity expansion plan under which capacities of sponge iron, steel billets, steel wires, and captive power were increased by 60-110%.

The sponge iron capacity stands at 495,000 TPA and that of steel billets at 400,000 TPA. This should stand the company in good stead to garner the surge in product prices in the backdrop of a growing economy and firm global prices.

Thus, expect growth rates to be sustained in the near-to-medium term.

Going forward, the sponge iron and billets production (low margin, intermediate products) will be utilised mainly for captive consumption, as the company intends to move up the value chain with greater share of wire business in the total revenue pie. Hopefully, margins will expand, too. It also intends to manufacture carbon steel wires and power transmission wires, which have good prospects.

The company also generates captive power from waste gases produced at the kilns, which are supplied to its induction furnaces.

The recent power capacity expansion (from 28MW to 53MW), which is sufficient to meet its own requirements, augurs well. Of this, at no incremental costs, the company will be eligible for carbon credits for its 42MW waste heat-recovery power plant, adding to its topline and bottomline.

The company has been allotted iron ore mines with reserves of 15 million tonnes (forest clearance awaited) and non-coking coal mines with reserves of 63 million tones, resulting in backward integration and 30-40% raw material cost savings.

Godawari Power is exposed to the cyclical nature of the steel space, but as the story is shaping up, with the increased focus on high value products and increased raw material and power security, the prospects look promising.

Coming to the price, at Rs 287.35, the stock is trading at a PE multiple of 10 (based on last 12 months profits) and appears to be a good bet, at least in the medium term.