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April 10, 2011

Value Pick 6 : Indsil Hydro Power & Manganese Ltd



My new value pick cum hidden gem is Indsil Hydro Power & Manganese Ltd  from god's own country kerala .

Click Here for latest article on Indsil Hydro.



History :
             Indsil Hydro Power & Manganese Ltd was incorporated on 31 Aug.`90, Indsil Electrosmelts (IEL) was promoted by S N Vardarajan, who has interests in two other companies -- Coimbatore Steels and Sun Metals and Alloys. World Bank through Indian Renewable Energy Development Agency Limited (IREDA) has sanctioned Rs. 3500 lakhs as term loan towards part funding of 21 MW power project at Kuthugal project.During 1998-99, the Indsil Hydro Power & Manganese Ltd was awarded "KSIDC`S AWARDS FOR EXCELLENCE-99" in recognition for its outstanding performance in terms of employment generation, good labour relations, contribution to economy and profitability. The first phase of the company`s project Hydro Electric Power Plant at Kuthungal, Kerala involving one generator having a capacity of 7 MW was commissioned in May`2000. The company had successfully commissioned the 21 MW Kuthungal Hydro Electro Power Project during the year 2000-2001 which is the largest private hydel scheme in Kerala. Main business of Indsil Hydro Power & Manganese Ltd is produce low and high carbon silico manganese. Indsil Hydro Power & Manganese Ltd had given bonus share in Oct 2010 .


How Value Buy ( CMP Rs. 41 ):

           1) Indsil Hydro Power & Manganese Ltd  has 21 MW hydel electric power plant. For setting up new Hydro Electricity project capital cost is required in the range of Rs. 6 to 7.5 crore per MW . For 21 MW it will be in the range of 126 to 157 crores and we are getting  Indsil Hydro Power & Manganese Ltd in effective market cap of only 61 crores . It requires around  2-3 year for successfully commissioned of new built project , whereas we are getting company in less than half price and which is already operational.
           2) Main business of company is produce low and high carbon silico manganese . Indsil Hydro Power & Manganese Ltd  has smelter in Kerla & Chattisgarh (to be operational by June 2011). So we are not only getting hydel electric power plant at half price but also we are getting both these smelter plant free.
           3) Indsil Hydro Power & Manganese Ltd  also has accumulated land at cost of 2.09 crores and building at 29.75 crores in last 20 years which itself can be more than market cap of Indsil Hydro Power & Manganese Ltd . Indsil Hydro Power & Manganese Ltd  has office building in West R S Puram ,Coimbatore . I don't have much idea about R S Puram property rates.
           4)  Indsil group has an equal joint venture with the Muscat Overseas Group from the Sultanate of Oman that has one of the largest chrome ore reserves in the world where Indsil Hydro Power & Manganese Ltd has 25% stake.The project would have access to 100% captive chrome which would be made available from the existing mining operations of the Muscat Overseas Group. Indsil would be providing the technology, operating and marketing expertise for the proposed smelter project.

          Indsil Hydro Power & Manganese Ltd is trading on low PE of just 4 . if Indsil Hydro Power & Manganese Ltd continue to give 15% dividend despite bonus issue then dividend yield comes to impressive 3.7 % . For me, main advantage of bonus share of  any company is increase in dividend yield , since most of good companies do not drop dividend % after bonus share. Increase in liquidity is another advantage of issuing bonus share .

Management and Corporate Governance :
                I am quite impress with balance sheet of the company. Sundry Debtors  is less than Rs 2 crores which is quite impressive.I am most impressed with how company has reduce debt on the balance sheet in last few years .

Year
Debt
2006
40.17
2007
33.27
2008
24.61
2009
7.54
2010
5.88
         
               Management has already indicated that they are targeting zero or near zero debt for year 2011.Promoter are holding around 50 % while government holding is 6.64 % which gives quite comfort . I am not sure which government is holding 6.64%, but I think it should be Kerala state government.

Last year  Indsil Hydro Power & Manganese Ltd had given bonus share which augurs well.

              As far as corporate governance is concerned I have not seen any red flag .  I have no info on recovery of 2.1 crores invested in JV with an Indonesian Manganese mining venture. Due to  low quality of Manganese from that mine Indsil Hydro Power & Manganese Ltd had called off that JV. The investment had been primarily exploratory in nature. I have not gone through all the annual reports, company might have explained somewhere about recovery of balance amount.

Why it is available so cheap :
             Performance of company is dependent on price realization of low and high carbon silico manganese  . It is commodity and it is sure to be volatile . Last 3 year high PE of Indsil Hydro Power & Manganese Ltd  was 24 while low PE was less than 1 . Indsil Hydro Power & Manganese Ltd was also corrected along with market after last year's Diwali . 

Catalyst to achieve Intrinsic value :

            1)  Indsil Hydro Power and Manganese Ltd. is expanding its facility for manufacture of Low Carbon SilicoMVA SAP smelter in the State of Chattisgarh. The smelter is expected to go operational by June 2011. Indsilde-bottle-necking operations at its existing Palakkad facilities, as a result of which the Palakkad smelter would undergo a capacity expansion of around 25%. With both the above projects in place, the Company's capacity for production of low carbon sill manganese is expected to go up from the current 14,400 tons per annum to 28,500 tons per annum.
            2)  Indsil Hydro Power and Manganese has formed an 50:50 joint venture(named Al Tamman Indsil Ferrochrome LLC )  with the Muscat Overseas Group to set up a 75,000-tonnes per annum ferro chrome smelter in Oman Indsil group is going to have 50% stake in this venture. Indsil Hydro Power is going to be having about 25%. Indsil Hydro Power and Manganese Ltd would be entitled to royalties because Indsil Hydro Power and Manganese are going to be operating and marketing. Indsil Hydro Power and Manganese are going to be giving that assistance to the JV. So Indsil Hydro Power and Manganese will be entitled to some royalties as well as of course dividends/income from investment in equity. 
How many time do we hear that Indian partner is going to provide technical assistance in JV? Most of the times Indian partner are on receiving end  in that case Indsil Hydro Power and Manganese Ltd is quite unique.
The unit being built with an investment of $30 million would become operational by April 2012. It would generate $75 million ( $18.75 million for Indsil Hydro Power and Manganese Ltd ) in revenues during the first year of operations. The firm which counts Arcelor Mittal and Posco as its customers has long-term contracts that average between six months and two years.

             Click on following link to see Vinod Narasiman's interview but do not get carried away by numbers since he is referring whole group instead of only Indsil Hydro Power and Manganese Ltd.


         3) Last year hydro electric plan had generated 37.76 million unit which contributed PBDIT of 12.18 crores . This year monsoon was good so PBDIT may get increase.

Downside Risk :

          It can be quite volatile . Depends on demand of carbon silico manganese from Europe and japan which give better price realization but I am sure company is deeply undervalued at current price by seeing future potential.


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HAVE A NICE DAY .............. 


Click Here for latest article on Indsil Hydro.

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