The tint is showing

Samtel Color stock looks richly valued

The Samtel Color stock joined the market rally rather late, in November, to be precise, but ever since it has risen sharply and hit a nine-year high of Rs 74.75 earlier this week.

Although it has now corrected at Rs 63 levels, the gain since early November still stands at a handsome 142 per cent. In the same period, the BSE Consumer Durables index has risen 47 per cent.

Is the sudden euphoria in the stock justified? The story doing the market rounds is that like other companies in the consumer durables industry, Samtel is also expected to benefit from the pick-up in the economy.

The company makes colour picture tubes (CPT) and since penetration levels in the colour television (CTV) segment is just around 12 per cent of the Indian population, growth prospects are good.

Nonetheless, a look at the company's results for the nine months till December 2003 shows that the year has not been good for the company. A comparison with last year's results doesn't make much sense as there were two World Cups (soccer and cricket) in FY03.

But in the first nine months of this fiscal, the company reported a loss of Rs 2.9 crore at the PBT level, owing to pressure on margins and higher depreciation charges. Operating margin fell over 500 basis points because of a number of reasons.

First, because of a lot of stock in the pipeline soon after the cricket World Cup in March 2003, demand for CPTs fell in the first quarter of the year, causing a major dent on margins. Secondly, import duty on CPTs was lowered by 5 per cent in last year's budget, and Samtel had to take price adjustments as a result.

Finally, exports (which enjoy slightly lower margins) accounted for a larger proportion of sales this year. The good thing about this year's results is that the company still managed to maintain sales at last year's levels. Its market share has improved to 40 per cent, compared to last year's 37 per cent.

Going forward, the company expects the CTV market to grow 15 per cent in the next few years. Higher volumes should normally result in higher margins, but there could be a negative impact owing to a further lowering of import duties from the current 25 per cent.

Besides, competition from plasma display panels and liquid crystal displays is expected to be higher going forward. On the positive side, a higher proportion of flat screen tubes in sales (which are more profitable) could make up for these negative impacts.

In FY03, which was a good year with the two World Cups, the company had an EPS of Rs 4.93, which discounts the current share price around 13 times. It may be a while before the company gets back to that level of profit, and based on current earnings it's rather richly valued.

Haldia Petrochemicals IPO

Haldia Petrochemicals is planning to raise Rs 400 crore via an initial public offer (IPO) by May this year. Needless to say, this is to take advantage of the unsatiable appetite among investors currently.

But analysts describe Haldia's finances as precarious. It has debt of over Rs 4,500 crore with an average interest rate of 14.5 per cent. This situation is in sharp contrast to top Indian companies, which now raise loans at just 6.5-7 per cent.

The company is also planning to get permission from the finance ministry, to replace expensive domestic loans with cheaper overseas borrowings. If the company manages to lower its average cost of borrowing, it will go a long way in helping its IPO prospects.

While senior management is working on improving the balance sheet, analysts point out that Haldia's performance is expected to gain in strength in the medium term, due to an upturn in the petrochemicals cycle. Demand for the company's polyolefins is surging as manufacturers are boosting production of packaging items, pipes and injection moulding items such as tumblers and buckets.

It also has the advantage of being situated in the East, as it is the only petrochemical producer there. The company has diversified its market base, through its marketing tie-up with GAIL for distributing its products in the north.

In the first seven months of the year, Haldia sold 435,000 tonne of polymer compared with 560,000 in the whole of last year. Although it will be a while before the company comes out of the red, company officials are optimistic of achieving an EBITDA of Rs 600 crore this year, against Rs 300 crore last year.

With the upcoming issues of ONGC and GAIL India, it will be interesting to see if there's appetite for another offering in the oil and gas sector. What works in Haldia's favour is that one of its promoters, the Chatterjee Group, is expected to underwrite the IPO, a move which should impart confidence to potential investors.

With Contributions from Mobis Philipose & Amriteshwar Mathur