Nelco Ltd: Sky is Coming Down

Information is precious and revolutionary. Mankind witnessed the magical transformation from just being humanoids to current state because they could transfer the precious information about this world and its behavior to others and some among us could use that information for collective development. Our knowledge about the world helped us in better understanding of ourselves and of course the grand schema of the life. We might have discovered much about our world and life but still the biggest mystery of our development timeline is that we have not solved any mystery at all- whatever we have discovered was already there to be discovered only we were “Ignorant” about the same. So if we can see we have not really solved any mystery at all, we just eradicated our ignorance…electricity was always there since the dawn but Benjamin Franklin could only discover it in 1752. So we did not solve the mystery of Electricity but only ended our ignorance.

And if we could see again, we’ll realize that the one and only mystery is GOD and it appears that we’ll never be able to solve it because a black and white camera can’t capture a colored image. And if we could still see again we’ll realize that understanding those who claim (Even looks) the Godness is even bigger mystery. But still no denial to the fact that when Gautam Buddha left his palace he was looking for the “information” to solve the mystery of God.

What can be solved is Ignorance not Mystery.

Now is the age of speed…information is valued relative to its speed of transfer. Gigantic efforts are underway all the time to equip ourselves for faster delivery of information to us. Internet is one of the biggest transformational force and its effectiveness and use increases with speed. So speeds of GBPS are fast becoming the norm. Faster and wider Internet will bring the next industrial revolution. But our visual of internet is very narrow as we can only visualize cable broadband (or 3G/4G/5G) but most do not know that cable/terrestrial broadband can’t reach each and every nook of this globe….it is the Satellite Internet which has this distinction of reaching each and every corner of our globe.

Nelco Ltd is a Tata group (Tata Power is the parent) company dealing in the business of providing satellite connectivity (VSAT). Nelco, through its Tatanet brand, provides VSAT connectivity to banks, oil and gas companies, government and educational institutions etc. It is ranked third (19% market share) in the list of top 5 where Hughes communications (around 40% market share) and Airtel (22% share) tops the chart. But the difference between Airtel and Tatanet is not significant. Hughes is a global $1.3B VSAT giant offering both hardware and services solutions.

Nelco ltd has undergone massive restructuring recently and it has disposed of a number of non-core businesses in its quest to grow big in VSAT. Nelco is well placed to witness high growth in VSAT business going forward.

Satellite Internet (Satcom) industry is very small in India at present relative to the size, diversity and economic growth of the country. So in my view, this small size doesn’t warrant to be tested first on financial parameters. Financial analysis is relevant when an industry has reached maturity in coverage and operational scale. But for a sunrise sector, financial analysis can take back stage for a while as the sector will achieve financial scale over time if it has inherent business sense (High future profitable topline growth). 

Sometimes I feel that understanding when and how to use financial analysis is more complex than learning various financial analysis tools itself. Like, for example, let’s take the case of ROE…I have seen people using this ratio to compare one stock with other industry stocks when in fact this ratio should be used first of all for comparing it with the COST OF EQUITY of the stock under analysis. Cost of equity of each organization is different keeping in view the riskiness of the operations of the organization. The more the riskiness higher is the cost of equity. ROE should be compared with this Cost of equity not with the ROE of other companies. Just let me give you a hypothetical example of PNB housing and DHFL. Both have ROE of around 15% but PNB trades at PE of 30 as compared to 20 of DHFL. Now I have seen reports which simply conclude that as ROE is same of the two stocks (not just these two) so DHFL is undervalued to the extent of 50% as compared to PNB. 

But business profile of DHFL is more risky because it provides housing loans to low income and self-employed people while PNB is more focused on salaried employees (just assuming) due to its banking reach. So keeping in the view the high riskiness of business of DHFL (due to high rate of default) cost of equity of DHFL should be much higher than PNB (so as its Bond Int rates) and at once the undervaluation margin of DHFL will disappear. This safety is the reason HDFC will go on commanding premium valuations even if its ROE is lower than others. Also, i do not have much faith in the financials of DHFL. They are into very risky business of providing loans to risky customers which keeping in view the nature of their earning profile should be highly unstable and so default risk is very high for DHFL but their results do not reflect this risk at all which i find very interesting. NBFC is a very difficult business as far as i can see so strict control and analysis of the client's riskiness is required especially for DHFL type of companies...sometimes i feel this is very complex and unreliable so i refrain from investing in NBFC's and very soon going to exit from most of my investents in JM Fin, edelweiss etc. I also do not invest in banks.

So I have always felt that for new emerging sectors/products (Like IOT, Geo-spatial, Agri warehousing finance) the focus should be on to evaluate whether they can create/add some value on its own as only that’ll ensure their long term viability. Affordable supply and corresponding high demand is the most significant factor for a new technology/product to achieve widespread acceptability and growth. So in the coming paragraphs we’ll endeavor to find out whether the Satcom industry in India can add some value (solve a problem) on its own, can create adequate supply at affordable prices in order to create long term value for itself. This is going to be more fundamental with least (or no) focus on financial data of the current industry players as at current scale it is not required. Moreover as Nelco belongs to Tata so I am more assured that they will be able to take care of the future funding requirements very easily.

Satellite Internet: a silent revolution is happening in the SKY

(if Satcom can create value and cost effective supply)

Satellite internet is not a mystery. It is with us for decades because for certain activities satellite internet is the only viable option like for Maritime and in-flight connectivity, oil and gas exploration services, weather forecasting etc. Cable/terrestrial broadband can’t cover the moving ships in the sea or flying planes.

Earlier, satellite internet suffered due to complexities related to design and technical capabilities of earlier satellites, high costs, low demand, internet itself was in primitive stage, usage of internet/connectivity were few and new age concepts like IOT, Big data, artificial intelligence were part of fairy tales…and most because of the inherent advantages of cable broadband in meeting the demand from an crowded urban habitat. Digging land and laying cables for broadband is very costly and becomes a sound business only when there are enough takers of the internet service. So earlier demand centers for internet were urban areas where high population density and paying capacity prompted the big investments in cable broadband.

But cable broadband was and still is not an option when the target is to provide connectivity to far flung hinterlands as costs of laying cables are prohibitory high to serve the demands of sparingly populated remote areas. So economies of the game did not allow cable broadband to penetrate deeper. Satellite internet always had the capability of providing reliable internet but due to demand and supply constraints never allowed any meaningful growth in satellite internet. 

However, gradually as the technology and supply improved, satellite internet witnessed growth from sectors where there were no other options but to look up. These sectors were in flight connectivity, moving ships in the sea, oil and gas exploration services, weather forecasting etc. And these are the sectors which will continue to be covered by satellites.

But overtime satellites have undergone massive technological upgrade resulting in the high growth in the supply of satellite bandwidth leading to fall in prices. Parallely, new emerging businesses applications like Bank ATM ‘s and growing paying capacity of the people at remote locations resulted in the corresponding rise in demand. All these factors indicate to a stunning growth phase for satellite internet coming shortly.

Developed countries like US, Canada and Europe etc. are having fairly developed consumer VSAT markets and they have been able to provide internet connectivity to most of their remote locations. While for countries like India, VSAT is only about industry applications like ATM’s, Oil and Gas exploration, defense etc.

New emerging applications for Satcom: Terrestrial internet has limitations in that it can’t reach far flung mobile things like planes, ships, oil rigs in the sea etc.  Growing satellite internet capacities are paving the way for new business opportunities like in-flight connectivity. IFC has become a prime selling point for airlines in countries like USA. Now the fight is for reliable and fast connectivity. Quality could become an issue, not only for U.S. airlines, which are currently 50 percent equipped for IFC, but for those in the rest of the world, which currently has only about 7 percent equipage, as carriers outside of the U.S. increasingly look to offer Internet. There are 5,000 aircraft connected globally today. There are 30,000 commercial aircraft that need to be connected by 2022, and when you add business jets on top of that, you can see we are in the very early stages of in-flight connectivity. 

Apart from more robust experience for passengers, High quality IFC can result in the enhanced airline operations and security. IFC can be used for black box streaming or even a video recording of what is happening on the plane that can be transmitted in real time and stored on the ground. The same is true for ships.

Broadband on trains can be provided by terrestrial communication as well, however it depends on the train route. For India, which has the largest railways tracks many of the routes don’t have terrestrial communication coverage and thus satellite communication is the only solution to provide seamless connectivity.

IOT success will depend upon Satcom: Industrial Internet of things (IOT) is going to revolutionize the way we are doing businesses. Connected talking machines are going to result in more efficient use of resources, inventory control, supply chain management, preventive maintenance etc. These are still early days of the adoption but even this shorter demonstration period benefits have emerged out to be significant. 

In IOT, sensor fitted machines (or devices) are supposed to communicate with other devices and send small bits of data over long ranges which is quite opposite to the conventional 3G/4G technology which are suited for sending large volume of data. But data generation is low in IOT although it may be continuous or at specific breaks so current networks 3G/4G will not suit to IOT as these consume high power (The reason your smartphone battery is always out before lunch). So IOT will require different set of networking solutions (reliability is the key) and hardware (sensor etc.). Moreover machines and things are located in the remote far flung areas where conventional internet can’t reach.

So this is where the role of satcom in IOT is getting bigger. According to research firm Gartner, more than 20 billion connected things will be in use worldwide by 2020. These vast numbers of things also includes planes, sea borne ships and containers, underground pipes, remote rigs etc. and no single communication technology especially terrestrial internet can cover all these. And there will be no scope for a failure even for a small amount of time as otherwise the whole motive behind IOT will get defeated. Like a security sensor in a remote bank ATM needs reliable and secure internet to report a security breach. Monitoring assets, communicating with remote facilities and managing unmanned, remote sites can all be done through satellite internet. Tracking of cargo vehicles, ships to get the status of the cargo can only be done through Satcom as mobile networks break down easily in the remote locations. 

Other futuristic applications like self-driven cars can’t function without a reliable satcom. 

Satcom can complement terrestrial internet: One of the most significant development is the increasing use of satcom by telecom providers as backup to supplement their terrestrial networks for reaching far flung areas.

Satcom is quick to deploy: Establishing a VSAT link with a satellite typically requires only a few hours (similar to tuning and establishing a DTH connection). That is why after the launch of the satellite into orbits, internet connectivity via VSAT could be achieved very quickly for remote locations as compared to fibre-based solutions.

Reliability: Satellite Networks are very reliable. That is why mission critical applications like Bank ATM’s, Navy and Point of Sale appliances use VSAT. They are not affected by natural calamities like earthquakes, storms etc. in July-2015 Nepal suffered a massive earthquake but satellite phones as well as sat-backed Broadband Global Area Networks (BGAN) were widely used by aid agencies to coordinate rescue and rehabilitation. The need for the same was felt during the Chennai floods of December 2015, when rescue operations were cut off from victims for almost two days. 

Security: Satellite internet is more secure than terrestrial internet mainly due to the fact that communication takes place between vsat terminals at our place and satellite in encrypted mode and it is more difficult to intercept and hack a laser beam in the sky. Cybersecurity will be a major consideration when contemplating a future where software is the most important element of almost everything like our cars.

However the biggest of all the revolutions ever happened in Satellite connectivity is happening now. High throughput satellites (HTS) are going to result in massive increase in the bandwidth supply and fall in the prices.

HTS Satellites: The game changers

(Affordable scalable supply)

High Throughput Satellite (HTS) has many times (20 times on avg) the throughput of a traditional FSS (fixed-satellite service) satellite for the same amount of allocated spectrum thus significantly reducing cost-per-bit. HTS satellites cost around 50% more than the traditional satellites but can provide more than 100 GBps of capacity which is 100 times more than the capacity offered by conventional Ku-band satellites. So this higher capacity results in lower cost per bit…in fact very lower. A conventional Ku band FSS satellite could cost $100 million per gigabit per second, while a HTS could supply similar for $3 million!!!

Traditional FSS (fixed-satellite service) use wide beams to provide coverage over a large area (over thousands of kilometres), HTS uses spot beams that focus on a narrower area (hundreds of kilometres). This reduces the range of a beam from covering entire continents or countries to towns and regions. They maximize aggregate throughput though re-use of frequencies between spots (Leaving the HTS working details for now due to length of this study).

There is high activity taking place in HTS across the globe and high investments have been made already but much higher investments are planned in order to cater to the coming higher demands for data from internet hungry world. The significant rise in the capacity of HTS is going to change the rule of the game forever and satellite internet will emerge as an able competitor as well companion to terrestrial networks. Like, ViaSat-1, launched in 2011 by ViaSat Inc, could carry up to 140 Gbits which was more than all the satellites covering North America combined, at the time of its launch.

More than a dozen HTS satellite systems have already been launched and several more will go into orbit in the coming years. First HTS named Thaicom 4 (IPSTAR) was launched in 2005 the services of which are also used by India. Around 100 HTS systems are underway with investments of $17B and another 120 HTS systems will be deployed in next decade. Given this level of investment activity, global HTS capacity supply is set to more than triple from 680 Gbps in 2015 to 3 Tbps by 2020!!! This is substantial by any standards and we’ll see new emerging business solutions coming to life with cheap and reliable sitcom.

HTS is going to change the economics of satellite communications ushering a new era of high performance and affordability for ultimate consumers and thus additional value can be built into VSAT propositions. A study by NSR (Northern Sky Research) finds that the satcom industry will be redefined by the promise of HTS capacity, seeing HTS revenues increase tenfold from 2016-2026, culminating in a $17 billion annual market by 2026.

Our own ISRO is not staying behind in this race and have big plans for HTS connectivity for India (More on this in the next sections).

Latency issues: One of the biggest issues faced (or created) by satellite internet is latency which is the length of time that it takes our signal to travel from your home to the satellite in orbit above the Earth), and then down to a ground-based gateway which connects you to the internet. Our current satellites are stationed 22300 miles above ground which seems high for signals to travel but in fact these are tiny when you’ll realize that our signal travels at the speed of light (186,282 miles per second). So this latency is a microsecond phenomenon with satellite internet usually has around 638 ms, compared to latency of some 50-150 ms or less on a typical cable network.

But this is not such a big issue and the chances are that you will not even feel this “delay” unless you are indulging in some high graphic online video game. However HTS has been able to lower the latency to 130 ms which is comparable to our cable broadband systems.

Big plans of Spacex and Oneweb for Satellite Internet: Satellite internet is not some fairytale startup but it is an area in which who’s who of the global tech giants and investors are investing. One of the biggest venture in Satcom is Spacex which is the brain child of Elon Musk, the CEO/Investor of Tesla Inc which already is the front runner in Electric vehicle and Lithium batteries. Spacex has gigantic plans to launch around 4425 low earth orbit satellites (LEO). For a perspective, at present there are around 1400 satellites in service across the globe out of which 50% are communication satellites. Low earth orbit satellites (between 1,150-1,350km above earth as compared to 35000 km of current satellites) will improve the internet speeds to compete with broadband offering low latency in the neighborhood of 30ms. SpaceX wants to start launching these satellites in 2019.

The idea is that this constellation of 4,425 will be able to provide coverage to every part of the planet. Earlier Google had big plans for expand its cable broadband in America but later on it invested $1B in Spacex Instead which shows how big investors are seeing the opportunity in satcom. 

Alongwith Spacex, OneWeb is another venture investing big for Satcom. OneWeb is a London-based consortium backed by Richard Branson of Virgin airlines, Sunil Bharti Mittal of Airtel and Japan’s SoftBank.

India is also witnessing some activity here as Astrome, a start-up based in Bangalore wants to send a bunch of LEO’s at about 1,400 km from the Earth’s surface and plans to offer 10-15 mbps connection for Rs 1,000 to Rs 1,200 which is comparable to current price points in Bangalore.

Where is India amid this high activity in the SKY

As shared earlier, the major factor which results in the widespread use of a new product/technology is the cost. Although subsidies can give the impression but they never provide a long term solution. We have witnessed the same in mobility and we are witnessing the same in solar power where lower costs are paving the way for more adoption and thus even more price fall. I think that the significant fall in the price of bandwidth by HTS will be the catalyst which will result in the widespread adoption of the satcom. 

For long term survival, a business should be able to provide a viable solution on its own. It should solve some problem cost effectively. Satcom is going to solve the last mile connectivity problems cost effectively.

Cable TV/broadband operators and landline telephone companies have spent billions laying cables, digging up pavements and roads in a costly and time-consuming way. Fiber optic cables turn very expensive when they are used to service low populated and difficult hilly terrains. It costs high (around Rs. 2 lac to 3 lac) to lay one KM of optical fibre so if there are not enough consumers, recovering capital costs become a challenge. Mobile towers are also very expensive as apart from the high cost in the setting up of the tower they require continual supply of power which makes them a very costly choice.

India is a vast country with varied landscapes from islands, desserts to tough hilly terrains. According to Census 2011, 833.5 million people live in villages, against 377.1 million in urban India. Despite that, only 3.06 per cent of the rural population has access to broadband, whereas 19.55 per cent of the urban population enjoys broadband connectivity. Although terrestrial networks are growing fast but as per estimates nearly 25-30 per cent of the country may never be covered by these terrestrial options. Also, developing ground infrastructure is an incremental process—it is not possible to provide connectivity to a village unless its surrounding areas are already connected.

VSAT is the only viable option for providing these remote areas under internet connectivity. Indian Govt has big plans for making India a digital country. Digitization has been proved to be a factor behind the higher economic growth and general awareness and high living standards. Like, India is poor because our farmers are poor; farmers are poor because they do not have access to finance, new technology, education, pricing trends etc. As there is no bank so a farmer has no choice but to sell his produce cheap to local money lender or get credit at high rates. 

A World Bank study estimates that a 10-percent increase in broadband connectivity in a country can increase its GDP by 1.38 percent. In the case of India, research has shown that 100-percent internet connectivity by 2020 can add an extra $1 trillion to its GDP. With quality internet, people living even in far flung areas can also avail banking services through their mobile phones, and benefit from the financial security that comes with it. Banking services are especially important in developing regions with large agricultural economies, where credit and secure savings accounts help farmers prepare for the coming season and ride out bad weather and soft markets. Our current broadband penetration levels (mainly urban) are low at 20% and without a nationwide coverage of reliable broadband our dreams of achieving Digital India, Smart Cities, 100% Financial Inclusion and others shall remain un-fulfilled.

So our Govt has ambitious plans for connecting rural India. BharatNet is a step in this direction but due to practical reasons the movement is slow. Govt wants to cover all the villages under banking, quality education through internet, to connect around 2.5 lakh gram panchayats under BharatNet. But as explained earlier, terrestrial internet has its limitations so VSAT has a role to play. In fact, banking industry is the prime user of vsat in India and it has connected around 110000 ATM’s with VSAT and these are poised to grow to 200000 by 2020.

Last year, demoney caused the temporary halt in the growth of ATM’s in rural India but it is back to growth. But Tatanet secured more than 45% market share of the incremental VSAT deployment in off-site ATMs during the year. Tatanet deployed 6998 vsat systems for bank ATM’s last year. 

The Govt. had awarded 10 licenses for Small Banks, 11 licenses for Payment Banks and 4 New Banking licenses last year. Rural India is the focus area for new banks as urban banking is already covered. So the demand for VSAT from these new banks will be high in the future.

Current status and issues faced by Satcom in India

The SatCom market in India is fairly mature with close to 250K terminals deployed over the last 20 years although these are all related to B2B. India currently has 38 operational satellites in orbit but most of the Satcom capacity is used by Govt itself.

First of all, Satcom is not properly understood in India. The general perception is that it is super hi-tech, complex and unaffordable for most categories of telecom users, suitable only for star wars and the elite and hence of no relevance for a highly price-sensitive emerging market like India. The same thing we thought when mobiles phones were first launched in India where call rates were highest but two decades later we have the cheapest call rates across the globe. 

But on one hand, we have one of the lowest telecom call rates in India but on the other hand satellite internet charges in India are around 300 times of USA. And we can very easily realize the need for the introduction of private sector players, enhanced and fair competition, an independent and empowered regulator like TRAI.

So far Indian Satcom policy was not in the favor of private sector although Indian Govt approved the open sky policy in year 2000 and allowed Indian  and  foreign  satellites  to  be  used  in  DTH  services with the condition that Indian satellites would be given the preference. However to implement that DOS (Department of space) would acquire and allocate   necessary   transponder   capacity   from   foreign   satellites   to   meet   the   specific   requirements of private customers.  Antrix, the marketing arm of ISRO, after aggregating the requirements of the Indian customers, would enter into back to back agreements with foreign satellite owners for short term  periods,  so  that  the  service  could  be  brought  back  to  INSAT  system  as  and  when  Indian satellite capacity was available. 

On the same lines, the VSAT operators like Tatanet are required to lease satellite transponder space only from Antrix Corporation Ltd. Antrix arranges for the Transponder space in satellites belonging to ISRO or foreign satellite operators. So effectively, Indian Satcom policy was only about giving preference to ISRO satellites and DOS being the middleman for private players.

But a lot of satellite transponder capacity is lying vacant over India, which includes both foreign and Indian satellites. But due to the role of Antrix as a middleman and provider of service, the prices are high as users like DTH/VSAT could not get the benefit of lower prices from foreign players. A number of private players have requested Indian Govt for the permission to launch their own satellites for India but these are not permitted (although I think there may be a reason for this which I have explained in the coming sections). 

Broadband India Forum (BIF), a technology neutral lobby of several tech companies serving satellite and telecom sector that promotes broadband, said the telecom department (DoT) and the regulator need to work together with the Department of Space (DoS) for commercial satellite communications to provide high speed broadband connectivity in remote and rural parts of the country. DOS should focus on space technology for strategic ambitions of the country but commercial communication is a different area where DOT and TRAI should have been playing more decisive role just like they were responsible for the high growth of mobile telecom in India once it had been opened for private and foreign players.

Launch of HTS satellites by ISRO: The potential game changer

ISRO, the pride of India, has annual budget of around $1.4B which is dwarfed by the annual budget figure of $19B of United States. Still ISRO has achieved big within financial constraints. India is respected across the globe for its mature capabilities in Space tech courtesy ISRO. Around 1/3^rd of the capacity of ISRO is reserved for defense, radio etc. so ISRO was always tight handed when it came to commercial satellite operations. It never was the focus area. 

Indian DTH players still procures around 75% of satellite transponder capacity from foreign companies and pays around 1000 cr as lease charges annually. But a decade ago, this figure was very low as DTH was in its teething phase. Satellite internet for general public is not visible at that scale. As stakes involved were insignificant, so ISRO and Indian Govt has never taken the commercial operations that seriously. But now stakes are getting bigger and bigger.

So ISRO has upped the ante also. ISRO has big plans for making India independent in commercial satellite sector and it is launching 3 HTS satellites with main focus on providing satellite connectivity. ISRO has plans for 3 HTS satellites-GSAT-19, GSAT-11 and GSAT-20. These are potential game changers and can revolutionize communications by empowering a digital India and providing Internet services and streaming like never before. The GSAT-19 has already been launched in June-2017 and it is not having transponders, and instead it will beam data using multiple frequency beams.

GSAT-19 is having 8 beams with capacity of 4 GBPS which is the equivalent of four communications satellites launched by India so far. But as per scientists of ISRO, GSAT-19 is just a trailer the real movie is GSAT-11 and 20. GSAT-11 is a mega satellite whose panels are the biggest India has ever made at over 4 meter in height, in addition this giant bird will have effectively 32 beams streaming data at 14 GBPS like never before. Once this satellite hits the orbit, satellite-based Internet streaming will become a total reality for India. The launch of GSAT-11 is planned in Jan-2018. Even bigger bird, GSAT-20 is planned for the launch in the second half of 2018. 

GSAT-20 is a giant. There are forty beams on board, each with two polarizations, essentially making it 80 beams. The capacity in terms of speed will be more than four times that of the GSAT-11, at 70 GBPS. Together, the GSAT-19, the GSAT-11 and the GSAT-20 will be able to provide 110 beams, and 88 GBPS of connectivity. The GSAT-19 has been powered for the first time with indigenously-made Lithium-ion batteries. Similar batteries can be used to power electric vehicles like cars and buses in the future.

These are big events and apart from high speed internet, television services will be delivered through the internet, and users can even browse the internet through their televisions. The satellite will transmit the data to Wi-Fi towers placed in the locality, and from there relayed to homes through dongles connected to the television sets.

I think, this planned launch of big HTS satellites was the main reason for Indian Govt to disallow the applications of private players like Hughes for launching their own satellites for India. When ISRO is spending so much for these satellites it is natural that it would prefer to protect its interests first.

What all this mean for Nelco

I think that the implications of this huge increase in the capacity will enable VSAT players like Tatanet to offer more services at much cheaper rates. 

As of June-2017, out of total VSAT base of around 280000 in India, Hughes communication accounts for 100000 connections, While Bharti is at 71000, Nelco at 56000, HCL commet at 27000 and BSNL is at 19000 connections. 

Nelco Ltd is a subsidiary of Tata Power Ltd. After going through difficult phase for almost a decade it started to dispose of its other businesses to focus on VSAT business. In this process, in Jan-2015, it sold its defense business of Unattended Ground Sensors (UGS) on a slump sale basis for about Rs 8.3 crore to its parent Tata power Ltd. Then, in Mar-2015, it sold its managed services business to Mumbai-based ATM e-surveillance firm Securens Systems Private Limited for up to Rs 2.6 crore on slump sale basis. These transactions have been resulted in cost control and freeing up of working capital which enabled faster topline and bottom line growth for Nelco.

During last 2 years, Nelco has managed to return to profitability. It has PBIT figure of around 10 cr and NP figures of around 6 cr with annual topline of 144 cr. This year, in the first half, its topline is 73 cr vs 70 cr last year. But it has managed to show much better performance in other operational metrics and has shown net profit of 4.84 cr vs 3 cr. Finance costs are down at 3.23 cr vs 4.56 cr. Tatanet secured more than 45% market share of the incremental VSAT deployment in off-site ATMs during the year. Tatanet deployed 6998 VSAT systems for bank ATM’s last year. Nelco accounts for more than 70% of the rigs for offshore oil exploration in India.

During FY 2016-17, Nelco has incorporated another wholly owned subsidiary, i.e. NNPL to carry on the business of VSAT based Satellite Communication, Value Added Network (VAN), Electronic Data Interchange, sales and maintenance of Satcom equipments including VSATs etc.

These are early days for VSAT industry in India and I think it is better to leave aside the financial data for at least next 2 years. This sector will witness high growth during the period and new business opportunities in the field of new dedicated business services, hardware and repair and maintenance will emerge. Nelco has Tata power as parent and in case of any need accessing funds for accessing any new business opportunity in the above segments will not be a problem for Nelco. For me, the financial and business clout of Tata group will turn-out to be one of the biggest growth catalyst for Nelco like another group company Tata communications is already a significant player in terrestrial internet and IOT so this can help Nelco in garnering new business opportunities. 

Before the advent of the VSAT internet for general consumers in the future, the near term triggers are opening of In-flight and maritime connectivity. India is perhaps the only country other than North Korea, which does not allow in-flight Wi-Fi services. Even international airlines flying over India have to switch off Wi-Fi when they travel over India.

As per the estimates the VSAT industry in India to more than double in 2 – 3 years’ time once the license for offering the Maritime and Aero Communication services are given. The market potential of these two services will be in excess of 1000 Crore in the next 5 years, of which Nelco expects to get a fair share. 

However in a major step in this direction, Trai (Telecom Regulatory Authority of India) is all set to release the much-delayed and much-awaited recommendations for In-Flight Connectivity (IFC) by the end of December-2017. Trai has been delaying the recommendations on in-flight connectivity (IFC) for a long time now. With the increase of broadband usage in recent times, Trai is looking to provide broadband connectivity to passengers on board. Any positive outcome (The chances of the same are high) by TRAI will result in the re-rating of the Nelco as at present market is not aware of the growth prospectus of Satellite internet in India. For market, internet is all about the fight of the trinity-JIO, Airtel and Vodafone (Idea included). But I feel here Nelco may emerge out as a winner for us.

After selling non-core businesses, Nelco has started investing in capacity expansions. In FY-2016-17, the company had set up a new Extended-C VSAT Hub in Mahape. The initial capacity was 24 MHz, which will be augmented in due course. The company has also added 18 MHz of Ku band capacity in its Dehradun Hub during the year. It has plans to set up one more Ku band VSAT hub in FY18 to further increase the satellite bandwidth capacities for coming opportunities in Indian VSAT market.

At CMP of 120, it is available at a market cap of just 270 cr which is very low for 3^rd biggest VSAT player for a big and high growth economy like India. Nelco was earlier advised around 85 last year at this blog. I have done 2nd round of buying few days back around 114. Will buy the last tranche when something concrete will emerge on the policy front in India. Can emerge out as a big winner but as most of its performance is happening in the future and policy issue is also here; so it deserves only risky portion of your portfolio. 

      

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).

Indian Sugar Sector: A Bitter Mess of Politics and Policies Stocks covered EID Parry, Praj Ind.

 After the recent post on Praj Industries (Click here for the post) I am getting repeated queries on the Indian Ethanol and sugar sector. I generally avoid commodity stocks like steel, sugar etc. But my interest in sugar sector was mainly due to the hunt for a player who can establish first Indian premium sugar brand. EID parry was a step in this direction ( Click here for the first part) and (here for 2nd part on EID). EID was earlier advised around 160 and then at 300, CMP is 370 and i have done buying recently around 300. I do not follow sugar stocks that keenly and for that reason not a regular tracker of sugar industry. But will try to share my view on the sector. Indian sugar sector (Like every other sector) is a victim of shabby govt planning and control. 

But let me tell you some good things first:

Indian sugar industry which was going through the pain for last 2-3 years had witnessed some revival last year mainly due to local and global rise in sugar prices and some corrective policy measures from govt.

Drought lead to low production in Maharasthra and Karnataka last year and rising global prices result in the price rise in India which saved the ailing sugar industry. In 2016-17, Indian sugar production was around 20.3 MT and over all consumption at about 24 MT which was the main reason for the price rise. Globally demand was higher resulting in high prices which further provides the support to Indian sugar industry.

Global supply declined because of increase in the use of sugarcane for producing ethanol in Brazil due to the increase in mandated ethanol blending in gasoline, from 25% to 27%. And in other places like Thailand, China’s production declined on account of decrease in the area under cultivation due to high producer costs. This was normal consolidation where low prices put pressure on the supply side. 

Indian government also introduced various measures to boost exports and curtail sugar imports which resulted in the growth of wholesale sugar prices in India. The government in December 2015, announced production subsidy @ Rs.4.50 per quintal of cane crushed which should be paid directly to the farmers on behalf of the mills and after the rise in the sugar prices it had been withdrawn.

But now again, global prices are falling due to supply issues. India is also going to witness high sugar production this year…around 25% growth. Area under sugarcane cultivation has also been increased by some 10%. But this time, Indian Govt has imposed import duties. Wholesale prices this time are around Rs. 36 per/KG. So all that means that Indian sugar prices may not fall that much to lead sugar industry again into mess.

Now let me come to messy part:

I have already mentioned the mess created by politics and Govt in Indian agriculture in so many of earlier posts. Sugar industry is one of the prime victim of political melodrama and policy quagmire. Millions of farmers cultivate sugar cane so in order to lure their votes central and state governments fix sale price (via all types of MSP, FRP or SAP) of sugarcane to be paid by sugar mills turning sugar cane into a major cash crop and every year more and more farmers are lured to grow sugarcane. Maharashtra grows sugarcane when in fact it is not suitable at all to grow sugarcane as most of its sugarcane producing areas does not receive adequate rainfall.

This year also, area under sugarcane cultivation has also been increased by some 10%. So we can see that more sugarcane is getting produced in India and Sugar mills are under legal compulsion to buy and crush all the sugarcane produced in their areas. It results in much higher production of sugar than the actual demand. India produces on average around 35 million tonnes whereas demand is around 24-25 MT resulting in the over production of 10 MT which depress the sugar prices and sugar mills incur heavy losses which also hamper their capability to pay the farmers dues on time. So to overcome this crisis, either the Govt pays the farmers the arrears through subsidy (like it did last year) or it buys out the excess sugar from mills at higher prices or it allows mills to export excess sugar produced by offering export incentives which are nothing but a part of the cost of sugar production in India as global prices are down so Indian mills are  forced to sell sugar in international markets below their cost and to make their losses good Govt offers them export benefits!!!!...???? AMAZING…isn’t it!!!

In Maharashtra, in the last five years, sugarcane prices have gone up drastically as compared to other crops like wheat, soybean, cotton or paddy. So although sugar prices are falling but farmers are still growing more and more sugarcane because they are assured of price and procurement by mills.

And to make the matter worse is the shortage of pulses and oilseeds in India due to which India is forced to import pulses and oilseeds worth thousands of crores. India imports 60% ( Production of 9 MT against demand of around 24 MT) of its edible oil needs valuing some 70000 cr!!! The figure for the import value of pulses is 20-25000 cr which is around 25% of India’s demand for pulses!!! 

One of the primary reasons for this shortage is the usage of agro resources like land, water, Govt support on on excess production of cash crops (Political crops!!) like sugarcane, rice etc. All this leave little for the support of oilseeds and pulses. States like UP, Karnataka and Maharashtra provide preference to sugarcane for water supply and almost 100% sugarcane area is under irrigation. Loan free schemes, Interest free schemes are launched regularly by Government to save the farmers which left very little in the hands of Govt to spend on more important pulses and oilseeds. Our government does not even have a regular focused agro policy as they keep changing their actions like at one time they impose export restrictions and then all of a sudden reduce the import duty, they say publically that grain production is sufficient but then they allow the imports and lower the import duties…they just don’t know what they are doing and what is their target. We also don’t know when this mess will end….political masses are very consistent in creating and making people living in mess.

So all this creative policy making results in overproduction of sugarcane and sugar and an industry marred with high losses and farmer overdues. But at least now I feel that our government will impose import duty to keep domestic sugar prices well above cost of production in order to safeguard mills and farmers (and of course themselves). So I don’t see big headwinds in the sector in the near future. 

Mess and More Mess

But this is not the ideal solution as we should first of all solve the issue of high cost of sugarcane cultivation in India. The reasons for high cost of production in India are many like shortage of water and irrigation facilities, poor land selection by farmers due to assured prices as most of the sugarcane produced in our country has low sugar content of below 10%, less use of adequate fertilizers, micro-nutrients and pesticides resulting in low productivity , very small land holdings etc. Sugarcane is a very stubborn crop: has some 12 month cycle, needs huge amount of water regularly, not economical to store sugarcane due to low value and low sugar content, as it has low sugar content compare to its weight and loses sugar content quite fast so mills have no other option but to crush it sooner. So much to make it a sweet deal!!!

But please do not think that our Government is doing something good for farmers and mills by loan waiver and interest waiver schemes because all the money that they wasting is taxpayers money and they are just wasting it to lure the farmers to remain in the power. 

Like, it is mandatory for each sugar mill to sell 10% of its production to central government at lower price than market value (Levy sugar) so that our highly intellectual government can meet its targets to distribute low cost sugar through PDS. The result of this charity-Rs. 3000 cr burden on sugar industry which ultimately falls on taxpayers.

This entire policy quagmire has resulted in the dire consequences for country as situation of our precious natural resources like land and water is worrisome. So it is better to leave the theme of “Poor sugarcane farmers” and to make farmers aware of the other better opportunities in other commercial crops like pulses, oilseeds, horticulture, fruits etc.

Direct Ethanol production is one of the Option

However, due to complexities of the sugar sector due to involvement of politics means that current production status quo may be maintained and we may continue to have excess sugarcane cultivation. But one thing I would like to mention is that Indian sugar companies derive substantial portion of their profits from ethanol and spirit so in my view it would be great if our government could allow direct production of ethanol from sugarcane juice rather than from molasses. This will increase the production of ethanol manifold along with ensuring the better demand supply situation for sugar in the country.

Conversion of excess sugarcane to white sugar is foolish and must stop. Instead, our Government should assess the demand of sugar in the country and should direct to use some part of sugarcane for producing ethanol directly. So I hope that in the future our government will come up with some better and long term policy with regard to production of ethanol directly from sugarcane juice and if that happens then there will be high re-rating of the sugar stocks.

But still nothing compared to the quantum growth which will occur to Praj if its 2G ethanol project is a commercial success.

Last year UP based stocks tasted the sweet success

I am not tracking many sugar stocks apart from EID Parry which is my favorite due to strong brand recall, visionary management, high share of institutional sale, high growth bio-pesticides and nutraceutical business. EID parry is one of the most efficient producers of sugar in India and associated with introducing revolutionary technologies in sugarcane production in areas it operates. It has very strong relations with farmers which shows the high ethical standards of the company. 

In the bull run of sugar stocks last year, south and western states based stocks did not given that much returns as most of the southern and western states suffered drought last year and not enough sugarcane was available for crushing and enjoy the high sugar prices. So UP based companies made the most of the Bull Run as they had the production and inventory to supply sugar to all India. Stocks like DCM, Dalmia and Balrampur has given high returns ranging from 500% to 1000% as they witnessed quantum jump in their profits. In fact, I think that even in this year, UP based companies may be the only ones carry good quantity of sugar stock. But I do not track any other sugar sector company besides EID so not sure which is the best bet now. However, whenever I’ll got some spare time then will try to find something in northern India sugar industry and will share the same. By the way, I am holding DCM Shriram which is the parent of DCM Industries which is into sugar. DCM Shriram was suggested around 60 at this blog and it is trading at 530 and I am still holding this one.

All the growth witnessed by south based players like EID parry was due to price increase not due to volume growth. EID, in 2016-17, crushed 44.44 lac MT of sugarcane as compared to 56 lac MT last year a drop of 20% and total sugar production was at 4.33 LMT as compared to 5.87 LMT last year.

It was all downhill for south based sugar companies last year-Still I like EID Parry

This year rain was good especially Maharashtra witnessed good rains and it is expected that Mharashtra will see some 70% growth in the sugar production next year. Karnataka also got good rains and so that will help EID parry to some extent but Tamil Nadu and AP didn’t get too many so EID has given the guidance of overall crushing of 39 LMT down from 44 LMT last year which implies that EID will have to focus on imports of raw sugar to meet its production targets but realization will be impacted due to high cost of import of raw sugar.

However, EID has got the approval from Indian Govt for the duty free import of raw sugar of 64000 tonne and so it is expecting to meet its previous year sales volume. It is expecting that Karnataka will make up to some extent the loss suffered in Tamil Nadu. Last yeat although It crushed less sugarcane but due to sugar stocks of previous season it managed to salvage the downhill. 

I also feel that Drip irrigation and river interlinking project can save the chronic issue of high dependence on rain water in India. Maharashtra has even made the use of drip irrigation mandatory for sugarcane cultivation which I feel is a step in the right direction.

South India was the corner stone of water conservation in India during ancient times. But at present state like Tamil Nadu has exploited 80% of its irrigation potential and some 142 water blocks are in over exploited zone out of total 385 water blocks. South India receives two monsoons a year and we also hear the news of Chennai getting flooded every now and then. So then what is happening to all this water? Actually the reason is high ground water based irrigation systems while earlier they were using techniques like rain water harvesting for better use of rain water which they are not doing now and the result is severely depleted ground water levels. All this has turned water surplus southern India to water depleted. 

But now some parts of Tamil Nadu are trying to revive their century old traditions of using rain water more efficiently and also focusing more on organic farming which needs much lesser water due to lower use of chemicals. Moreover Southern states are more suitable for sugarcane cultivation and TN has highest yield in India almost twice of UP. So they should plan to better manage their water resources.

EID is the preferred supplier to Institutional customers due to its high quality products, global certification and customization. Institutional sales always accounts of high share of 40%-last year it was also at 44%.

Last year, the Company commenced the sale of Bonsucro certified sugar, produced from sustainable sugarcane, to a large multinational. With importance on sustainable cultivation practices gaining ground globally, food and beverage manufacturers are taking the lead. E.I.D Parry’s Bonsucro certified sugar will prove a competitive advantage for the company in the long term.

EID’s effort to grow its premium quality and highly nutritious sugar brands “Amrit” and “Vita” and regular premium sugar brand “Parry’s” will bring high growth as there is still a vacuum in Indian branded sugar industry as all the sugar consumed is of bulk quality.

EID has just opened its export based sugar refinery in Nellikuppam which is an SEZ and it imports raw sugar and exports white sugar. It is one of India’s first zero discharge refinery. This year turnover was 1878 cr with NP of 14 cr. The refinery produced nearly 5.98 lakh tonnes of raw sugar and exported 5.96 lakh tonnes. EID is looking to expand the production further and this will be a huge value creator.

At present there is no doubt that Sugar sector in south India is stressed but a lot of efforts are underway to solve the crisis and I think out of this some long term and sustainable solutions will emerge out of this like drip irrigation, rain harvesting etc.
But it also means that sugar prices will remain high in South India as compared to other parts of India and EID may be able to make up for some volume loss due to this.

As shared earlier I am highly optimistic of its nutraceutical business under which it produces, brands and sells algae based nutritional products demand of which are growing fast worldwide. This business is not small and clock around 230-240 cr revenues

EID Parry has very strong R&D in place for nutraceutical product as it is currently the only company in the world with the capability to produce all the three algae-based dietary supplements, including Spirulina, Chlorella and Astaxanthin. In May-2017 it has received the approval from USFDA for its India facility for organic microalgae cultivation and processing which is a 130 acres facility located in Oonaiyur, Pudukottai district in Tamil nadu. This is a significant move as the same will enhance the credibility in the global market. Already the company has witnessed higher sale in European region after the approval. Algae based nutritional products are a growing rage in the western world and these are being consumed in a variety of novel ways like in health drinks etc.

India’s per capita income is also growing fast and as per the experience of the developed economies after a certain level, more growth in income will make people consume and spend more on nutritional supplements. Same thing will be going to happen in India. Only thing which I expect from the management of EID parry is to spend more on brand and product promotion as there are not many people in India who are aware of the presence of algae based nutriceutical products. So I think there are interesting times ahead for organic and herbal nutritional products in India and I don’t see any reason for EID parry to miss this high growth opportunity.

So sugar mills in northern part of the country are poised for another good year but I think most of the growth has already been factored in the current prices wherein in case of EID no value has been assigned for sugar business at all when it is one of India’s best sugar producer. Moreover EID has a lot of unused capacity which in a good cropping year will yield bumper profits and that will provide huge upside from current levels. But still hunt for another pick in sugar sector is also underway and I’ll share the same if find something.

Also, as explained in the earlier posts, the current market value of the EID parry is 6500 cr which just covers its investments in Coromandel International; 62% share in Coromandel is values around 7000 cr after giving holding company discount of 30%. So that means that you are getting standalone EID with some 2500 cr turnover absolutely free and that is a sweet deal!!

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)