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Known Gems

Rahul Oberoi/Money Today        Print Edition: May 2012

Like the gems, or ratnas, of ancient courts, the five Maharatna companies, owned by the government, are leaders in their space. They can be good investment options, say experts.

Since the start of the year till 30 March, Coal India, Indian Oil Corporation (IOC), National Thermal and Power Corporation (NTPC), Oil and Natural Gas Corporation (ONGC) and Steel Authority of India (SAIL) have given decent returns.

WHAT IS MAHARATNA?
How much a public sector company can invest without the government's approval is determined by its status.

For instance, Maharatna companies can invest up to Rs 5,000 crore, or 15 per cent net worth, in a project, while Navratna companies can invest up to Rs 1,000 crore. Mini Ratna companies can implement projects worth Rs 500 crore or an amount equal to their net worth, whichever is less.

FOR MAHARATNA STATUS, A COMPANY MUST HAVE:

> Previously held Navratna status, a level below the Maharatnas

> A minimum prescribed public shareholding under the Securities and Exchange Board of India regulations; it should also be listed on an Indian stock exchange

> An average annual turnover of more than Rs 20,000 crore during the last three years.

> An average annual net worth of more than Rs 10,000 crore during the previous three years.

> An average annual net profit of more than Rs 2,500 crore during the last three years

> Significant international operations.

ASSAYING MAHARATNAS

1. Coal India - The Black Gold

Business & Background: The world's largest coal producer accounts for 81 per cent of India's coal production. Coal is a major input in power, cement and steel companies.

Prospects: Power companies are using coal on a large scale. This will continue due to the huge shortage of power in India. Coal India is likely to raise prices by 12 per cent in the first quarter of 2012-13.

The stock had risen sharply after the company got the Maharatna status in early 2011 but gave up these gains due to the overall negative market sentiment. In the first three months of 2012, it has risen 10 per cent to Rs 343.

"The stock has entered the oversold region and can be considered for the medium term. It can rise above its previous high. It has strong support at Rs 310 and Rs 290. However, immediate resistance is at Rs 355, and over a period it can test even the Rs 375 level," says Alex Mathews, head, technical and derivatives research, Geojit BNP Paribas Financial Services.

Maharatnas’ fall from peak: The share price of Steel Authority of India is down around 67 per cent from its all-time high.
On 2 April 2012, the price to book (P/B) value of Coal India was 8.72. Those of peers Gujarat Mineral and Gujarat NRE Coke were 3.03 and 0.79, respectively. A lower P/B value means the stock is undervalued. It may also be a hint that something is wrong with the company.

In the first nine months of 2011-12, Coal India registered a net profit of Rs 6,841 crore, up 106 per cent from Rs 3,310 crore in the year-ago period. Gujarat Mineral and Gujarat NRE Coke made net profits of Rs 328 crore (up 25.24 per cent) and Rs 48 crore (down 4.72 per cent), respectively, as against Rs 262 crore and Rs 51 crore, respectively, in April-December 2010.

2. SAIL-The Steel Edge

Business & Background:
SAIL is a fully integrated iron and steel maker and produces both basic and special steel.

Prospects: Due to slowdown in domestic steel demand, fall in global prices and cost pressures, share prices of all big steel companies fell sharply in 2011. SAIL fell over 56 per cent and was at Rs 81 on 30 December 2011. Jindal Steel and Power, JSW Steel and Tata Steel fell 37 per cent, 57 per cent and 52 per cent, respectively.

Since the start of 2012, SAIL's stock has risen 16 per cent, more than other Maharatna companies and the Sensex, which has risen 12 per cent, or 1,886 points, to 17,404 during the period.

DK Aggarwal, chairman and managing director, SMC Investments and Advisors, says, "Due to slowdown in domestic steel demand, the stock saw heavy selling in 2011. It rose in 2012 on the back of strong fundamentals and low valuation."

On 2 April 2012, the stock was at 11.37 trailing 12-month price-to-earning ratio.

Status Card: IOC, NTPC and ONGC posted good sales growth during the first nine months of 2011-12 against the corresponding period a year ago.
SAIL is in the midst of a Rs 70,000-crore project to enhance annual capacity from 14 million tonnes to 23 million tonnes. It is also talking to Posco for jointly setting up steel plants at a cost of Rs 15,000 crore.

However, Sandeep Nayak, CEO, Centrum Broking, is not positive on the stock. "There are concerns over growth. Operational costs are likely to rise with the increase in employee costs in the executive segment. There may not be any substantial growth in earnings per share in 2012-13. We do not expect the stock to outperform. It should perform in line with the market," he says.

In April-December 2011, operating profits of SAIL and Tata Steel fell 12.7 per cent to Rs 5,556 crore and 1.15 per cent to Rs 9,053 crore, respectively, as against the year-ago period. However, those of Jindal Steel and Power and JSW Steel rose 18.68 per cent to Rs 3,090 crore and 24.86 per cent to Rs 3,997 crore, respectively.

3. ONGC - Exploring Giant

Business & Background: ONGC is in the business of exploration and production of crude oil and natural gas.

Prospects: The stock has touched a high of Rs 368 and a low of Rs 241 in the past one year. On 30 March 2012, it was at Rs 267.

Mayur Matani, research analyst, ICICI Direct, says, "ONGC is likely to expand revenue at a compounded annual growth rate, or CAGR, of 10.2 per cent between 2010-11 and 2013-14 on the back of steady growth in revenue from oil and gas sales and expansion of MRPL's revenues. The company is expected to make a net profit of Rs 22,903 crore in 2013-14. Any reform in fuel pricing or an increase in prices will add significantly to earnings and valuation. The stock can touch Rs 287 in the next 12-15 months."

Quote

There are concerns over growth. We do not expect the SAIL stock to outperform. It should perform in line with the market.

Sandeep Nayak

Chief Executive Officer, Centrum Broking

MRPL is a subsidiary of ONGC.

To understand oil companies, two points are important. One is global oil prices and the rupee's value against the dollar. A weak rupee benefits ONGC as higher crude oil prices mean it earns more per barrel of oil. The other is the subsidy burden. Oil marketing companies, or OMCs, get financial support from upstream companies such as ONGC for selling fuel below cost.

Rakesh Goel, senior vice president, Bonanza Portfolio, says, "Oil prices can fluctuate between $100 per barrel and $120 per barrel in the near future. The ONGC stock can touch Rs 310-325 in one year." On 3 April 2012, NYMEX crude oil was at $104 per barrel.

4. IOC - Oil's Well

Business & Background:
Indian Oil is India's flagship oil company with presence in the entire value chain-exploration and production of crude oil and gas to refining, pipeline transportation and marketing.

Prospects: Since the beginning of the year, the stock has risen 4 per cent. It was at Rs 262 on 30 March 2012. It had fallen 28 per cent last year and was at Rs 253 on 30 December 2011.

The government is giving some relief to OMCs, but overall there is pressure on margins and growth.

Quote

Coal India has strong support at Rs 310 and Rs 290. However, immediate resistance is at Rs 355, and thereafter at Rs 375.

Alex Mathews

Head of Research, Geojit BNP Paribas

According to an Ambit Capital report issued on 3 April 2012, in January-March 2012, the refining margin was $7.5 per barrel, lower than the $7.9 a barrel in October-December 2011. High crude oil prices and weak rupee may result in government oil companies ending 2011-12 with under-recovery-the difference between production cost and realisation-of a whopping Rs 1.4 lakh crore.

"If crude prices soften in the global market, OMCs stand to benefit as their under-recoveries will fall. Till March 2013, the stock can move between Rs 325 and Rs 340," says Goel. On 30 March 2012, it was at Rs 263.

5. NTPC-Powerful Presence

Business & Background:
NTPC was set up in 1975 to accelerate the development of power sector in India. It has with presence in the entire value chain of the power generation business. It has also ventured into consultancy, power trading, ash utilisation and coal mining.

Prospects: Market experts say NTPC is one of the best managed Maharathna companies. Power generation and distribution require a big push if India is to grow fast. With major initiatives expected on this front, NTPC is likely to find itself in a sweet spot.

Samar Vijay, director, InvestCare, says, "Infrastructure companies are tightly regulated. Investing in NTPC for the short term may not be very profitable. It is off recent highs but we believe it will perform well as the economic scenario improves."

"After a soft 2011-12, we expect NTPC to deliver on capacity targets and progress towards the development of soon-to-be restored captive coal blocks-thereby addressing key investor concerns of capacity growth and fuel security. In our view, this will potentially be the elusive trigger for a good stock performance," says Rakesh Mehta, Research Analyst, Fullerton Securities & Wealth Advisors Ltd.

Since the beginning of the year, the stock has risen 3 per cent. It was at Rs 163 on 30 March 2012.

NTPC's capacity is 37,014 mega-watt (MW). It commissioned 2,820-MW capacity in 2011-2012, less than the target of 4,320 MW.

A report by Angel Broking issued on 2 April 2012 said the stock was trading at 1.6 times 2012-2013 P/BV and could touch Rs 199 in the next few quarters.

According to a report by Finquest Securities issued on 21 March, aggressive expansion, assured fuel supply by Coal India and cost escalation clauses for upcoming projects will sustain profit growth and the stock can touch Rs 210 in the next few quarters. The return on equity is likely to grow 12.9 per cent, 15.1 per cent and 14.6 per cent in 2011-12, 2012-13 and 2013-14, respectively, it said.

SHOULD YOU INVEST?
Maharatna companies can be good investments in the long run as they got the title after proving their worth for three consecutive years. However, you should study the fundamentals of the company before investing and remain cautious.

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