OIL and GAS-Poised for a strong Show

So worries are not down for india. But as in the past, I am of the firm view that our problems are strategic not demographic or geographic. Take a view, more than 50% of us works around agriculture yet total contribution of the agriculture in GDP is just 17%. These 50% still lives a poor life…they are not the ones creating huge unmet demand for gold and oil. Balance 50% are those having huge resources , almost immune to any rise in the prices of gold and oil. But then what is the big deal? Why such a mess?

Because this leaves the scope for our Govt to interfere, to announce freebies for these poor peoples to earn their votes. Politicians need these poor people to come into power. So they rob of rich people big time and distribute a smaller part in such a way to these poor that they remain beggars forever. Why our govt went mad to curb the gold demand in order to reduce Current account deficit although there is still a debate whether Gold import is a current or capital account item? What about stepping up to make people use less oil? Because our Central and state Govt earns around 250000-300000 crores due to various taxes from oil gas sector.

Govt budget for fertilizer subsidy is around 100000 crores but sad news is we import maximum of our fertilizer needs. But poor management of the fertilizer and agriculture results only in wastages of huge resource. Bulk of the fertilizer is used for producing rice/wheat which our selfish Govt needs for Public distribution programs…again for votes.

Govt regulation results in under investment in fertilizer sector. We missed the bus in textile exports which can be a huge foreign exchange earner. Even Bangladesh surpassed us. We are doing the same in leather industry in spite of having highest number of livestock in the world. Same is the case for Marine exports.

Ok, Leave aside let’s come back to our favorite oil gas sector.  This is the one area which if our govt can tackle, can bring huge gains and recent policy action indicates that our govt is willing to go straight. Doubling of gas prices was the first one. Time bound deregulation of diesel was the next.  50% of our sedimentary basins are poorly explored /unexplored.

We dig around 200 wells a year to look for oil gas, USA does 2000 wells. Huge discoveries in last decade put india in the league of brazil/Australia and Israel. Even Pakistan has found huge reserve of oil gas near Barmer where cairn discovered. Focus energy has also found huge reserves of Gas around jaisalmer which can transform the area into an energy zone…gas based power plants for 1500-2000 MW can be set up. State owned GSPC is about to start producing gas from Deen Dyal block at KG-6. As per reports, east india has huge potential to be the centre of india’s oil gas independence. China’s interest in Arunachal Pradesh reaffirms the notion.

Also huge oil finds world over in recent times will surely put downward pressure on oil prices which is great news for india.

Hence it is time to pick oil gas stocks with both hands. I have bought shares in all of the oil gas producers. But my favorites are reliance, cairn india, Oil India and ONGC. BPCL is one of the best buys due to its portfolio of Oil gas assets. ONGC paid around 3 Billions $ for Videocon’s 10% share in Andarko oil block in brazil. BPCL holds 10% in the same, but total market value of BPCL is $ 3Bn, means we are getting its other oil gas assets all over the world, its huge refinery base and retail petrol pumps for free.

I am also very optimistic about Gas transportation companies…as they will benefit from fall in Gas prices globally. My old theory that users of the products are sometimes better than producers of the products, holds the premise in this case of gas transportation business. Gujarat State petronet is one of the same, it gets the gas from its parent GSPC. It is building around 12000 Km of nationwide gas piping infrastructure. I am sure india will announce huge gas discoveries within one or two years, particularly from the house of RIL which will benefit these companies and if we fails then these will import the same for us. I have picked GSPL at 50/- . Gujarat Gas (in city gas distribution, another area with huge scope) is also good (fallen from 400 to 200).GAIL and indraprastha gas are also good.

But my picks are RIL, cairn india, Oil India, BPCL, ONGC, GSPL, Gujarat Gas . 

Also world is moving towards finding oil in the deep corners of Sea, into the depths which were only a dream a decade ago. It is driving up the prices of Rigs. Our Aban offshore is at 215 all the way from 5000/- , battling with huge debts. But it can be a good pick at the current price only thing to see is its debt reduction plans which is critical for it to acquire new deep rig technology. i'll come back with detail study.

Regards

Goodricke Group-Enjoy a Nice Cup of Tea...

What is so peculiar about sachin tendulkar? Well he can judge or foresee FUTURE much better than anyone else. He can foresee much earlier where the ball is going after pitching and so there he is...smashing hundreds at will. Same is true also for stock picking. You can only earn astronomical returns if you can foresee or feel some type of growth story in any particular sector which is going to shape up much better in the future.

If you can find those sector which are going to witness greater activity in the future then you have almost done 70-80% of what is required to find a great stock capable of giving great returns...financial analytic skills would help to find the suitable company among the bunch....it just cant help you finding a company on an absolute basis. The main crux is your ability to continuously finding next big thing which is going to change our lives emphatically.

I am highly optimistic about agriculture sector...infact this is my favourite and something into which i see myself indulging as an active stakeholder in near future. I am picking agriculture stocks for quite a long time and all of them are going great.

Today our focus area is tea sector and the company under scanner is Goodricke group. I also like Mcloed russel but it has just got doubled after i picked it but couldn’t buy it. 

Our old sages and Rishis were just great, their works in the forms of various scriptures is just beyond imagination. They have touched every sphere of our visible and non visible life. Like Ayurveda, i mean how without any known expertise in terms of sophisticated laboratories, they can analyse human anatomy and devise solutions in the form of natural formulations which surprise even the today’s best doctors.

Not many people know that they have written a great detail about agriculture also. There is another VEDA, named Vrikshayurveda by Surapala which contains great details about soils, type of crops to be produced according to type of soil, pest and fertility management  via natural resources like they say that Fish flesh can eliminate all types of diseases of crops. They mainly use fermented formulations comprising Cow dung, cow urine along with various type of biomass.

One such experiment was done in Abali tea estate in Arunachal Pradesh in india where two person one swami valmiki from Karnataka and Binod saharia ( estate owner ) use the treasury of Vrikshayurveda to produce Organic tea using manures made from cow dung, pesticides made from cow urine and biomass reducing the cost of production to great extent, augmenting the production and enhancing the fertility of the soil and almost eliminated the various pests of tea plants. To surprise there are no mosquitoes in the estates which are the main cause behind the malaria in the labour force.

Why i find Vrikshaayurveda relevant to Goodricke? Well company has applied to RBI for venturing into dairy farming also after successfully running a 50 cows model experiment. In the initial phase they will maintain 2000 cows producing around 10000 litres of milk. However as per their plans, they will also collect cow urine and dung to make manures and pesticides for their tea plantations which would further cut their costs by 5%. I feel they are also using the knowledge of vrikshayurveda.

They are the first company in the sector to get the rainforest alliance Certification which is an indicator of their environmental friendly ways of producing tea, maintaining the biodiversity of the surroundings. RA certification is a hard process since they have very strict rules to follows like proper water usage and waste water discharge, soil management, reduction of chemical inputs, health and safety of workforce etc. This certifications will help in getting better price for their tea.

Now to the company, it is a subsidiary of Camellia PLC of UK listed which is a 1 lakh crore company dealing into farming produce like maize , barley , wine, pistas, tea, horticulture produce and distribution, banking and engg all over the world. Parent has told many times that they are looking to buy tea estates all over the world. They also made plans once in 2006 to venture into horticulture produce on the estates of Goodricke in india which are yet to begin....however i feel since the expertise of the parent is in the horticulture, we can see some positive step in this direction very soon because prices of the agri produce are increasing all over the world and they are not going to come down. For the record Goodricke has 10000 hect ( almost 25000 acres ) of tea estates in 17 gardens in india.

Prices of tea haven’t increased much as compared to other agri products so they are due for a ride. Tea plants are different business in the sense that they don’t require fresh seeding for every crop, infact tea bushes produce tea for 30-40 years....they just need labour hence labour cost is the main component of the total cost and this was the main reason for the loss shown by the company in june-12 qtr as wages are revised from last year by almost 30-40% and they have paid the arrears in this qtr. This is also the main reason for reduce cash in the books although company is earning good cash from operations since their estates are more than 100 years old. You will be surprised that such a huge land bank of 25000 acres are valued at just 65 crore in the books which i feel is the biggest wealth of the company.

Company is planting new tea bushes and till date around 1100 hectares have been planted with new tea bushes. In tea plantations, you need to leave the land free from tea for some years to enable it to rejuvenate so that it can recoup its nutritional and mineral balance and this is where the scope for horticulture crops comes in. 

They are investing greatly into dairy sector also which in india is mired with some very Indian problems like one of very low productivity per cattle as compared with the world average, but with the parent like camellia PLC which can really invest big time and bring their technological expertise into play augurs well for the company.

With the turnover of  547 cr net profit was 20 cr in 2012-13, NP was down mainly on account of payment of arrears of wage revision. It is having negligible debt in the books and so company can leverage on it in the future for its acquisition plans.

One more big thing is the opening of Tea Bars in the country. Although we Indian drink tea all day like an addiction but still it is a surprise just to find only 40 odd tea bars as compared to 1800 Coffee parlours in the country. It is because perhaps we take tea as a poor man’s drink and coffee the upper cut. However we still don’t know anything about drinking tea if we think that tea is made of milk only. The fact infact is that the true aroma and smoothness of tea can only be sensed without milk.

Tea is just like chicken where you can do as many experiments as you want to enhance its taste and aroma. You can add ginger, cinnamon, tulsi, masala, lemon, dry fruits etc. Ice tea is the next big thing to happen in the non alcoholic beverage segment in india. Companies are having big plans to revive the tea bars in the country, Goodricke is one of them...it is still running some bars in the country...i think they have one in Bhopal also( I’ll be visiting it in my next trip to Bhopal ).

This is one of the cheapest stock available in the sector relative to its superior balance sheet , high quality produce and strong parent.

Tea drinking is growing in the US at a faster rate than coffee, according to IBISWorld. In the last decade, the amount of tea consumed by the average American grew 22.5% and will rise an additional 3% in the next five years. Coffee slumped 1.9% between 2003 and 2013 and will grow less than 1% through 2018.

 In USA, Tea sales at restaurants, grocery stores and shops reached $15.7 billion in 2012, up nearly 32% from 2007, according to consumer goods research firm Packaged Facts. In the next two years, the market is expected to expand to $18 billion. Hotels and caterers are procuring Indian tea. And Americans have started preferring hot tea to the cold version.

Media reports say the tea-drinking demography is widening in the US and that aging baby-boomers and Redbullswigging youngsters are expected to buy more tea. 

The currency depreciation is likely to make prices of Indian tea more competitive in the international market. Exporters will have been at a disadvantage had the depreciation not happened this year when Kenyan prices are down.Kenya had a bumper crop in May when India lost a lot of trade enquiries to it. A softer Kenyan price would have pushed India out of the race in CTC in markets such as the UAE, the UK, Pakistan and Egypt.

McLeod Russel and others are expecting a 10 per cent jump in exports, while Goodricke Group expects 20 per cent.

Goodricke has started selling its TEA online and it is having big plans to foray into packaged tea which is a high margin business. I have seen their ads on TV and they are quiet serious about it as success in this move will be a game changer for the company.

Also the Centre’s decision to once again relax the norms for foreign direct investment (FDI) in tea plantations which may offer good investment opportunities for foreign companies in India in view of the recent devaluation of rupee. I am not in a position to comment on this but this can also be one of the better things for the sector.

What is so peculiar about tea? Well apart from the fact that it contains virtually nil calories (without sugar and Milk) and a cup contains only 40 calories with milk and sugar with about 300 calories of any cold drink but tea contains many of much needed antioxidants and vitamins. Latest research shows that it can cure low Blood pressure and many of heart diseases. It contains much lesser caffeine (1/3rd ) than coffee. So the need is only to promote it as a health drink.

But another thing which is distinctive about tea is the fact it is the only agricultural commodity which hasn’t seen price boom as seen by all other agri products whether it is onion or potato during last decade. The prices of other commodities have got trebled or much more in this period. But tea after the boom of 1998 just collapsed....because to reap the benefit of boom in prices tea growers started growing tea which was much more than demand at that time and so it crashed like anything forcing many estates to closed down. The revival happened to small extent in 2010.

But demand is getting increased by 3-4% every year with no real hike in production, so the equation is going to change very soon with demand outstripping supply significantly leading to awaited boom in tea prices because in this period of last decade, costs which are mainly labour have increased by 3 times and i feel this will force much needed consolidation in the sector with less efficient tea estates producing low quality tea will get out of the race and will be acquired by more efficient...the trend which we are and will be going to see in Indian telecom sector.

One more thing....we are talking about difficult time faced by tea growers during last decade....but we as consumers haven’t witnessed anything like crashing tea prices which infact are ruling at around 350/- per kg much more than of 100-150/- of last decade. Here is the catch....tea in india is allowed to sell only through auctions which is almost 150 years old system...but this should be a good system unless not marred by speculative forces. Big guns of tea market like Tata and HUL have great control over the auctioning of tea which is facilitated through authorised agents who are mere puppets in the hands of these big guns which control almost entire retail tea market of the world....tata tea doesn’t produce any tea at all now it acquires it from other producing gardens. So the wholesale prices were ruling around 100-120 last year...which are expected to see a boom this year due to shortfall in production around the world.

However E-auctioning route which has just started here will surely put a break to this speculative practice. But tea producing companies like Goodricke are now investing in establishing their own tea brands rather than selling in wholesale market.

 Goodricke is a good and safe buy...it is also giving dividends around Rs. 4-5/- which works around 3-4% of current price.

Regards,

(Views are personal and should not be taken as a recommendation for buy or sell a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)

Cairn India

I'm buying it from 280/-, one of the most undervalued shares from promising oil and gas sector. its pe ratio is around 4 as compared to 11-12 of ONGC (which is also low due to its subsidy share) mainly because of one reason...its dependency on single source for oil i.e. Rajasthan, which i feel is not justified and a bit overreacted.

cairn has also forayed into Sri lanka and Africa. it is looking for city gas distribution in rajasthan via JV with gail. It'll generate huge cash piles around 15000-20000 cr annualy...which are more than enough to grow further and distribute huge dividends.

India is planning for shale gas exploration in india, which will shape its energy portfolio the way it did for USA, and to fulfill that Cairn india/relaince ind and ONGC are the best fit.

I am already having ONGC from very low levels of 170/- and just recently picked reliance all the way from 850/- to 770/-

India's Current account Deficit is around 6.5% of its GDP, which is high. However high levels of CAD can be due to the fact that other countries are willing to credit us as they have faith in our growth story and can be adequately financed through long term foreign capital FDI inflow. But the absence of FDI inflow and currency devaluation (which at present is india) are dangerous signs.

In order to avoid it, there are two ways...either reduce your Import bill or increase your export bill. If india can't produce enough oil and Gas for its needs ( oil and gas accounts for 30% of indian import bill) then it should produce more wheat/Rice/Milk/Fruits and highly technical experts (for exporting services). But india is more than happy to let its Rice/wheat to rotten in its dirty warehouses in the name of food security ,instead of exporting it.

Although we are trying to counter this now by venturing into cold storage/Better yields and better transportation but another way is to develop our local energy sector. India is surrounded by sea from three sides which are sure to have huge oil and gas reserves along with sands of Rajasthan and Shale Gas reserves.

Hence this year can be great for oil and gas sector stocks. Govt is also looking for reforms in Oil and Gas pricing in india by increasing petrol/diesel/Gas  Prices, which i feel can be justified only in one way as it discourages us to spend less on petrol and diesel.

But there are much better ways to do this...we must and should develop best local city transport  via trains/Buses for our citizens at very low rates but with top quality services which will encourage people to leave their bikes/cars at home and use these instead, like it happens in all the developed countries. This will surely save a lot of Oil.

Govt should promote Bicycles more (it is good for health and Environment also) and give huge subsidy on Bicycles (It sounds funny, but can be an option).  Our universities can declare their premises as pollution free zones and encourage students to use cycles and Mass transport. I can’t remember the name of the country but i think it is Denmark, which has put great effort for the development of Bicycle culture in the country. It is one of the cleanest/Pollution free place in the world. 

Its capital, Copenhagen was elected Bike City as the first city ever. In Copenhagen 50% of all citizens commute by bike every day and there are more bikes than inhabitants. There are almost 400 kilometres of biking lanes among which you find the world’s busiest biking lane with up to 40.000 cyclist passing daily.

Though cycling is the cheapest mean of transportation next to walking Copenhageners love their bikes no matter their financial income. Many middle class families with kids in Copenhagen don't even own a car. They use their bikes to commute to work, bringing the kids to kindergarten etc. In fact 25 percent of all families with two kids in Copenhagen have a cargo bike.

Even top politicians ride their bike every day to parliament. A majority (63 percent) of the members of the Danish parliament commute by bike.

Regards 

(Views are personal and should not be taken as a recommendation for buy or sell a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)

Update: I have sold all of my holdings at around 305/- , some days after it approved a loan of around $1.25 billion to vedanta group companies at an interest rate of 3% above LIBOR for two years. I find it a big negative and it proves the apprehensions of corp gov standards in the group. so it is better to stay away from it and all the group stocks as well.

Eros International Media-Fresh Rays of Digital Dawn.

I am not a huge fan of hindi movies for they lacked terribly in content..most of the times acting is pathetic, direction is forgettable. The only humorous’ thing about our comedy movies is theirs being promoted as comedy. 3 idiot was last Indian movie which i liked (although i m not sure if it is also a remake). I remember watching a movie named “ Ek Ruka hua Faisla “....that was just great...i couldn’t believe the acting, direction and most the content....but only to found out later that it was a ditto remake of Hollywood movie “twelve angry men”. I haven’t seen as cheap and miserable comedy in my life as Golmaal 3....but i found it was a hit just like other miserable movies like Bodyguard, Ra One.

However this shouldn’t be the case for us for we lived in a country where in our glorious past...our great sagas, great warriors and great intellectual people, who lived a great life full of their valiant efforts to understand the intricacies of life, who felt the difference between comfort (sukh) and peacefulness and then out of their enlighten state of mind and from the learning  of their great life, they produced great masterpieces which today we regard as Purans, Granthas, Vedas. Each of these is a great work of creativity. Like in Patanjali Yogasutras...he starts with phrase “Atha Yoganusasanam” ( Means now ,the teaching of Yoga ), here the word “ATHA” is simply for a person who finds living life for the sake of accumulating pieces of metal ( Gold ) worthless and feels that life is something more than this and mystery around the life process attracts him. Just small word but great implication and so appropriate.

We shouldn’t have faced the dearth of great deep and meaningful ideas for movies upon which a storey can be built. We have a history of great warriors. Similar attempt was made in movie “Asoka” to show the great life of King Asoka...but Shahrukh looked pathetic in the movie...he failed miserably in exhibiting the proud, glory and fearlessness of a warrior through his eyes...same is for peacefulness and mystery which King Asoka felt when he renounced the worldly charms. However the same was shown brilliantly by Brad Pitt in the movie “TROY”. However sharukh was upto the mark in his expressions when he was seduced by Kareena Kapoor dancing meaninglessly in bare clothes.

Movies are a great medium to convey the message and they really can change the life of the viewers. Movies with larger than life themes can take the viewers towards a journey where after the end they won’t be the same old persons.

But a vacuum always attracts the air....our media industry is also at the same stage where the void created by nonsense movies is going to be filled. Because you can’t see the face of your beloved in Moon if you are hungry....although chances are high that you see a “Roti” on the face of moon. Moon ceases to be a metaphor of your beloved if you are hungry. So now with the growth that has happened in our country in past 20 years...i feel our people will move beyond routine life of bread, butter and sex and more meaning full content will be created.

Eros international is going to to be the biggest beneficiary of this paradigm shift. The company is into movies for past 30 years. Earlier they were just into distribution but now they have ventured into production also. Their biggest strength lies in their model which is a combination of risk and derisked. Before the theatrical release of the movie they presell the TV rights, DVD rights and DTH rights of the movie recovering upto 70-80% of the cost of the movie and then their bet will be on box office collection which if movie is a hit can skyrocket their profits. 

It may appear that they are losing the potential revenues if they don’t presell the rights. However the same can hold right if their movie was a flop...this step save them from those situations also and in the end both options will be even out with low value of sale of right in case of a flop is off setted by high price in case of a hit. But it is better to be in a stable journey....they can focus their eyes on box office which holds the biggest pie of the entire revenue chain.

Turnover in 2013 was 1068 cr with NP of Rs. 155 cr with EPS at 17/-.  With negligible debt and great management the company is poised for a stellar show. These days movies are shown via digital formats in multiplexes, so movies can be released on thousands of locations throughout the world on a single day, since it is easy to make digital prints which costs much less as compared to old tape prints ( Rs. 10000/- as compared to 80000/-)...also it isn’t easy to make pirated copies. As movies are released on thousands of locations so they earn revenues very fast just in few days as compared to months earlier. Definition of a hit is now based upon the collection not time. So movies are shown only for few weeks and then it is the turn for other one.

Next opportunity is the sale of TV and DTH rights. Company is having a huge library of around 1500 movies which it sells to tv channels for a fixed period....this can be a huge revenue earner for the company. Also with compulsory digitization announced, the earnings of broadcasters are going to see huge jumps which make them to pay higher price for the TV rights of a movie, which augurs well for the company. Also company has earmarked new avenues for revenue like internet, pay tv, iptv.

It also sells the international right of the movie to its parent eros international PLC at 30% of cost plus 30% markup which ensures stable revenue stream for the company. Eros is the company which is credited with the honour of taking the Indian movies on global footprints. It has inked a deal with leading Indian channels Zee, Sony, Colours to sell the TV rights of its movies.

Company came out with its IPO in 2010 at a price of 175/- which was at PE ratio of 15 which was very reasonable and it was subscribed 29 times. CARE gave it the rating of 4 out of 5. It was around 300 and it is now at 138/- i am buying it from 190/- and also bought at 113/- and i m going to buy more. Movie houses which do not have proven record of producing out hit movies cant trade at higher PE ratio since movies are a risking business....but the derisked model followed by the company makes only 30-40% of the cost of the movie vulnerable to a loss. However keeping in view the fanfare among Indians for the movies, i am not sure if any movie has made losses at the net level.

So it should command a much higher PE ratio than 8 at current price. It is also having a cash of 400 cr which is more than sufficient for its future growth plans and needn’t to go for debt.

India has the capability to produce many Disney and warner Bros. Indian media industry is poised for a strong growth and a complete overhaul. Hollywood is looking to india for VFX and 3D content for its movies...our prime focus has made 200 VFX for Avatar movie (I am holding prime focus from 25). Indian media sector is at the same crossroads where once our IT sector was...and then IT came into life with a bang...same is going to be the fate of our media sector and no one is better suited to reap the benefits than Eros.

Eros is having some big movie releases this year. Their Grand Masti has got grand opening. Two movies are with Superstar Rajnikant, Kochadaiyaan-The Legend and Rana. Other includes Deepika/Ranveer Starrer RAM LEELA, Tanu weds Manu Season 2. It has also entered into partnership with HBO to launch Movie centric channels which are Ad free with 30% interest. These channels are Subscription based and Eros can benefit from huge library of Movies.

Movie on Demand segment on digital cable TV/DTH platform will be a game changer for the movie industry. With the availability of Big screen LCD/LED/plasma TV’s, one can enjoy the movie best at his home. I don’t find the business of running multiplexes attractive enough in india due to very high taxes (Our Govt just can’t let us relax even after sucking our blood with high taxes everywhere). At present, i don’t have data, but i think that multiplex chains are earning profits mainly from other avenues of revenue like costly Food and refreshments, advertisement. Due to high prices of land costs are very high.

TV 18 Broadcast also falls into the  category of Eros. I am holding it from 18/-.

 Regards

(Views are personal and should not be taken as a recommendation for buy or sell a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)

Updates Dated 29/01/2017: Eros International has been advised to sell pursuant to its lousy accounting standards.

Blog Post Link: https://oscillationss.blogspot.in/2017/01/eros-international-media-avoid-this.html