Tata communications Ltd: A Treasure Under Sea-2nd Part. Also Covered: Cybertech Systems

Tata communications Ltd (TCL) was recommended at 400 (Click here for earlier study). It touched 780 but last day declined 10% to 640. Market has given thumbed down to its Mar-17 quarter results in which it has posted a loss of 209 cr. But it is appearing bad only on the surface as the results are impacted by issues like one time provision of 872 cr, one of cable repair expenses, demonetization effect and low revenue after sale of data center business etc. Now is the season for mangoes in India. But mangoes are sweet only if left for proper ripening. But if we consume them raw and after finding them bitter may discard the tree cheaply. Friday’s fall was just like throwing away raw mangoes when the need was to wait for the maturation. And I have picked up more of TCL at 640 (Avg cost is 400) and will be buying more at every fall.

TCL is in massive reconstruction phase…big strategic planning is underway. It has made big investments in making the capacities which are huge even by global standards. Like its Subsea cable network of 500000 KM (200000 km is underground) is the largest globally owned by a single owner. TCL owns this large network independently while other big networks are owned by consortium of global companies like Airtel and Reliance. This large network provides TCL strong pricing and better cost control. TCL is reshuffling its product and services portfolio to bring in better synergy, focusing on its core area of communication solutions and more sweating of its assets. I remember it had grand plans for Data center business few years back but this year it sold off majority of the data center business to cut the high debt. So decisions making and changes are happening fast here.

TCL is transforming its Commodity business into Value added services

In last 5-6 years it has transformed itself from commodity business of wholesale of voice and data services to a new age communication technology company providing high valued enterprise solutions to global giants like Formula one. In its earlier Avatar the company mainly offered wholesale cable capacity or bandwidth to carriers like telecom or Mobile service operators (like Airtel, Idea etc.) who then pack their voice and data services on it and sell it to general public and businesses. With largest sea fibre network in the world it is going to see huge growth in managed service business. It is already a force to reckon in the field of Cloud and IOT. It has already started its IOT services in Bangalore and Mumbai. 

After the sale of majority stake in its Data center and Neotel business, its debt is down by some 5000 cr (Need to recheck) which will further raise the margins. This quarter Interest cost is down to 78 cr from 100 cr which will come down further. Last day, one analyst was comparing TCL with other Telecom stocks and saying that the fall was expected in line with the other telecom stocks. But TCL is very different from them…most of all it is in B2B business which surprisingly is a better model in telecom due to low competition (Due to client stickiness as business houses don’t change their service provider frequently), lesser regulations (No TRAI), low capex (No high spectrum costs). 

Moreover business houses are yet to fully embrace the communication revolution in their businesses although at personal and individual level communication storm has penetrated deeply. But businesses are realizing the power of lightening communication in a world of scarcity of resource and cost pressures amid cut throat competition. So any disruptive technology solving this for organizations is a big revolution in itself. Like use of IOT (Internet of things) in power management can save big money (Some have reported around 15% cost savings which are huge by any standards), sensor fitted big machines talk and communicate the state of operation and any danger (like overheating). Machines communicate if there is a repair required which if prevented before breakdown can save high repair costs and production losses. Shipping lines can better utilize their sensor equipped containers as they know their position real time.

So IT systems were the most significant industrial revolution (of course after Electricity) and machine to machine communication will be the even bigger as it will result into much higher degree of control over business process.

I feel that opportunities are much bigger in B2B than personal mobility sector. Personal mobile phones are made to consume data (Low creativity/productivity scope) but things like IOT and Bundled services by TCL offers huge benefits to business houses. In recent deal with US media giant Vice Media, TCL will provide them complete solution starting from high speed data capture, transfer, storage, security, cloud, processing capabilities; all of which are accessible across different geographies as if they were in the same location. IOT can bring in big cost savings and better use of costly resources.

Like for F1 racing, Tata provides extremely high speeds of 1 Gbps at all tracks to handle all of the data needs. Cars fitted with 150 censers transmit large volumes of data in real time to data centre located inside the race course (which may be in US) and also send the same to their Europe headquarter in real time. HQ and guys in the stadium can tell a driver to take a particular angled turn to save one-tenth of a second and that one-tenth can be the difference between winning and losing!!!

Emerging markets like India to drive the huge growth in data consumption benefitting TCL More

99% of the global internet traffic is routed via subsea cables. Subsea cables are being used for long and dated back to 1854 when first inter-sea cable was installed for telegraphic service. At present, Antarctica is the only continent which is not connected via physical subsea cables mainly due to tough terrain and commercial issues. Satellite internet is being used there but due to low bandwidth and latency issues the research stations produce more data than what can be transmitted via satellite internet. Satellite internet is just 1% although for some applications like Shipping/Air Travel satellite internet is the best option along with the hinterland where laying cable is very difficult involving huge capital investment as compared to low number of prospective customers. Furthermore, with submarine cables data is guaranteed to go from A to B, whilst with satellites a strong weather phenomenon could cause disruption to data transmissions. 

Laying subsea cable is very costly and time consuming. But in spite of the huge growth in Data consumption worldwide which has been doubled in last 2-3 years and still growing at breath neck speed, still the utilization levels of international subsea cable are at old levels. This is due to advancement in technology which has enabled more data transmission (from 10 GBps to 100 GBps) via same cables implying ample capacity worldwide to meet the future high demand for data. They have developed optical fibre cables which can transmit data at 99.7% of the speed of light!!! Also there is huge capacity unused in “dark cables” worldwide. Dark cables are subsea cable networks which are not being used currently but will be switched on to cater to the future high demand.

Emerging markets like India will be at the forefront in the growth of data consumption. TCL have cable landing stations in Mumbai, Kochi and Chennai. These are the places which connect India to international subsea cables network. Tata Communications is the only Tier-1 global telecommunications company in India. Tier-1 companies are those having large global network of cables connecting places across the globe; these networks serve as the backbone of the global internet. TCL has huge bandwidth available at these landing stations and around 50% cables are “dark cables” and I think with huge growth of data consumption in India TCL is going to gain big as its capacity utilization levels will increase. As India is connected to world via port cities hence cost of internet to Northern cities is more and there is high latency (Means slow internet speed). But now a cable is being established from Bangladesh to Agartala which will cater to Northern Indian markets.

TCL to become a force in IOT

TCL is investing big for the growth of IOT in India. It is working on the execution of Low powered Wide area network (LPWAN) based on LoRa IOT technology which has shown great results. Actually things are different in IOT. In IOT 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 for IOT as they consume high power (The reason your smartphone battery is always out before lunch). So IOT will require different set of networking solutions and hardware (sensor etc.). LoRa operates in 900 Mhz band which is suitable for transmission of data over long ranges, low power consumption. Traditional long-range wireless networks are not designed for low data rate devices that run on either no battery or a small size battery which are the main features of IOT networks. So LPWANs are designed for IOT where data transfer rates are not the prime motive, but range, battery life and cost are. Tata’s LoRa based LPWAN’s has shown much better results enabling communication in deep water or 50 meters underground making this technology better suited for metro stations and car parks where GSM and Wi-Fi are not suitable.

So design of the IOT application will be the key as each application has different power requirements like door lock system doesn’t require frequent power supply as it doesn’t need to relay data over distance continuously. It needs to send data periodically or at some predefined trigger like forced entry. So if it can be designed in a way to switch on “Sleep” mode in it then this can save a lot of power. This switch thing can be brought in by including some type of “Microcontroller” in the application design which will put the application in sleep mode or low power mode as per pre-defined set of events or triggers. Similarly for applications where data transmission rate is high like wearable devices for medical purposes then in order to ensure the continuous power supply energy harvesting solutions like solar power systems can be embedded into the application.

So these are still early days for IOT development and I am keeping a keen eye on this sector picking up some stocks which I feel are doing substantial work in this field like KPIT technologies, Schneider electric infrastructure. I have also picked up Cybertech systems and Software Ltd which is doing a great job in the Geo-spatial field and so many municipalities like Bangalore and Nagpur are using its geospatial product Geo-Civic for better controlling their revenue and city development. 

Tata Communications has been working closely with Semtech Corporation, a semiconductor company, to build the world’s largest IOT machine-to-machine network. The company is keen to contribute to India’s smart cities programme with this technology. I am sure that TCL will be one of the leaders in this space.

Demerger of Land Bank: A big catalyst

Also the most interesting part of the story is 740 acre land bank owned by the Company which was not the part of the deal when Tatas bought VSNL from govt. There is a quite bit of confusion in the market about the impact of solution land deal dispute as some are concluding that benefit of the land deal will accrue to TCL. Although the reality is something else. There was a dispute regarding payment of Stamp duty (around 500 cr) and capital gain on transfer of Land pursuant to the demerger of land holdings from VSNL. Actually NDA government didn’t want to sell the huge land holdings of VSNL; they only wanted to dis-invest the voice service business. So they designed their offer in that way only. As per the offer after the divestment land holdings was to be demerged into a separate company and shareholding pattern of the new demerged entity should be the mirror of shareholding pattern of VSNL prior to divestment. Hemisphere Properties India Ltd (HPIL) was the company that would hold the surplus land after the demerger

Prior to divestment of VSNL, Govt of India was having 51% share, 25% was with ADR ( VSNL was listed in New York Stock Exchange), 4% with Tata group and 20% with other shareholders. But after the divestment of 25% share by Govt to Tata, Tatas further bought 20% via open offer from existing shareholders. With their early 4% share, shareholding of Tata group became around 50%.

But in order to bring the shareholding of new demerged entity to be the mirror image of pre-divestment levels; deal required Tatas to transfer their 25% share (which they bought in divestment) in new demerged entity to Govt of India and 20% to old shareholders the shares of whom were bought by Tatas in open offer. So this was a complex set of thing. The main reason behind this complex deal was the fear of NDA government that if they try to sell the land before divestment then existing shareholders might object to it as they might take it as nationalisation of the VSNL.

But soon after the disinvestment, things became more complex. After the divestment the dispute arose as to who would pay the Stamp duty charges and capital gain tax on transfer of land. Actually the demerger of land holding from TCL (Resultant Company after the divestment) was tax free as per existing tax laws as shareholding of demerged entity was going to be same as of TCL. But it was going to be changed as per the earlier deal wherein Tatas were required to transfer around 45% share to Govt and old shareholders so effectively this demerger was a sale transaction and capital gain was required to be paid on this. Board of TCL refused to pay stamp duty and CGT as Tata wasn’t going to get anything from the demerger or sale of land. Tatas were right in their refusal but government didn’t take any decision for almost 14 years even when the benefit was going to accrue to them only. Tata blamed that they had to incur maintenance cost of the land every year although there was no activity on the land. Tatas even proposed to buy the land at a fair value which was also declined by the Govt. Due to this indecision by the Govt, Tatas were not able to raise or infuse further equity for growth instead they had to pile up expensive debt for all these years.

Finally the issue was settled by passing of Taxation laws (Amendment) bill in 2016 as per which Government exempted such type of transactions from capital gain tax. As per the bill, In case a public sector company is divided and as a result of the demerger the land or an asset comes to the government, this transaction is exempted (from capital gains tax) by putting in an explanation in The Income Tax Act. So the path is clear for Government to demerge the land holdings into another company. Most of the value will accrue to Government and Minority shareholders (Like us)….and the value of land (Around 10000 cr) per share is around 170-200!!! 

Thus, the major beneficiary of the proceeds of the sale of land now would be government, which has 51% stake in HPIL. Minority shareholders and ADR holders will get around 45%, while around 4% will go to the Tata group.

So although TCL won’t get much from the demerger (only 4%) but the most significant gain will be in the form of its ability to raise further capital for expansion. As due to this hangover and indecision on the part of Government, TCL was not able to raise more equity for their expansion plans as Government didn’t allow dilution of their stake in the company (26%) as they were not sure how this would impact their rights to the land holdings. Also, other investors might also have preferred the solution of this case before committing any investments into TCL. So TCL had to go for the debt route to raise capital for their expansion. I think this move will provide further re-rating as I am sure equity infusion will be done at much higher valuation due to inherent strength of TCL and lesser need for capital for growing the asset base. For me this is one of the most significant events in the time line of TCL.

The demand for data is only going to be got bigger and bigger. So there is no doubt that TCL is in a sunrise sector and it is doing most of the things right now. So I feel that things are only going to be better from hereon.

Good buy at CMP of 640 and even better buy at every fall.

(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)

AK Capital Services Ltd: A Revisit

As shared from time and time, I am seeing a bright future for Bond market in India. We have picked CARE Ltd and AK Capital services Ltd as they were going to be the major beneficiary of the growth in the bond sector in India. CARE Ltd was advised at 1000 (Click here for earlier study) and AK Capital was advised at 270 (Click here for earlier study). CMP of both are around 1600/- and 415/- respectively. CARE is in Bond rating business while AK Capital is the largest private sector merchant banker in India dealing in the placement of corporate bonds into the market. Ak Capital is having around 8% share of the Non-Bank corporate debt market in India. So at CMP of both, we are already sitting at decent profit. But this is nothing compared to the huge possible scale of growth in Bond sector. This year, as expected Bond sector has grown 20% as compared to credit growth of 5% of banks. Corporates are finding it cheaper to raise funds via bonds than getting the loan from banks. Further high NPA's has limited the risk taking capacity of banks and they are playing safe. But still bond sector is very small as compared to the size of Indian economy. I also feel that in order to play safe, Banks will resort to retail lending especially Housing loan business as i think this is the low hanging fruit which was somewhat ignored by Banks earlier as their focus was on Wholesale loan growth so we may witness some fight over here with banks lowering lending rates to compete with housing finance NBFC's. That's why so far i have tried to pick only those NBFC's which have diversified business model like Sundaram Fin, JM Fin, Edelweiss, TUBE (Cholamandalam), Piramal Enterprises Etc.

75% of the bond market is of Govt securities. Corporate bond market is very small at around 4% of the total debt raised by corporate houses. This figure is at 17% in China and some 14% in USA. These figures of china/USA are coupled with mature equity markets so India with less developed equity markets may need even more participation from Bonds. Even out of this 4%, some 80% bonds are placed privately by Public financial institutions like NHAI which are bought by Fund houses and pension funds.

 Public participation is very small in India. Indian Bond market is severely hampered by credibility, efficiency, reliability and liquidity issues which make general public to shy away from it and park their invest-able corpus in bank fixed deposits. But off late, RBI and Government has realized the vulnerability of banking system due to their higher exposure to corporate debt sector. So RBI is taking vital steps in promoting the bond market in India.  Bonds are the best option to finance huge funding requirements of Indian Infrastructure. Quite contrary what most people think, banks are not the best option for long term infrastructure funding requirements of the country due to their assets and liability mismatch as their liabilities (Term deposits like FD) are payable on an average after 3-5 years but their long term Infrastructure assets stay alive for around 15-20 years.

RBI has always expressed displeasure at banks not passing the cut in interest rates by RBI to public and corporates. Also after the demonetization, Banks, who are witnessing huge funds inflow, are reducing the interest rates on deposit steadily. So sooner people will realize the high return prospectus in Bond market just like they are investing more in equity markets as their traditional investment options like Gold and Real estate are not yielding any meaningful returns for long time instead these have turned quite risky. In the same way, people who prefer steady returns (like bank FD) will turn to bond market. So i feel that bond market will grow even bigger and should grow at 30% this year.

AK capital's promoters have raised their stake from 62% to 67% in last 2-3 quarters. Also AK Capital Finance, a subsidiary of AK Capital, has raised funds through Bonds issuance of 235 cr offering 9.55% to 9.70% with five to ten year maturities. Its Investors include provident funds, family offices, banks, high net-worth investors and corporates. This shows the trust in AK capital by the market participants. 

Although there is not much information about AK Capital in the analyst arena but the group seems credible and I think can turn out to be one of the biggest gainer of the growth of Bond market. I have invested more at 415.

(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)

EID Parry (India) Ltd: All Sugars are not Same-2nd Part

EID parry was advised around 170 at this blog in Oct-2015 (Click here for earlier study). Its CMP is 300 but i feel major growth is yet to come. Today i invested more at 300 and I’ll be investing much more in days to come. Apart from one of India's largest and most efficient producer of Sugar, it is the holding company of Coromandel international with 62% shareholding. But EID is investing big in diversifying its business to overcome the cyclical nature of its Sugar business. In sugar,  due to its high quality and ethical standards,  it is the preferred supplier to FMCG giants like Coca cola, Pepsico etc.  it is getting 32% of sugar business from these biggies. Sugar business is at 1800 cr out of 2500 cr. Sugar sector is out of the woods as global supply glut is ending but main factor behind the revival is much needed Government policies and focus on Ethanol blending. I have covered its sugar and Ethanol business in my earlier post. So in this post I’ll try to cover some more details about its other businesses.

Its other businesses have huge growth prospectus and these are in Niche areas. It has big ethanol business which is growing fast (300 cr turnover, with Op margins more than 20%). In Bio Pesticides, (Turnover 100 cr) it is one the largest global producer of Neem based pesticides. There is growing demand for organic pesticides across globe. But the most interesting part is its Nutraceutical business under which it produces Algae based new age super foods-Spirulina, chlorella, Astaxanthin. EID is the only company in the world producing these 3 algae based super foods.

Spirulina: An Incredible Super food

Demand for Spirulina is growing fast globally as it provides amazing health benefits.  It  is an incredible  source of high quality protein, vitamins, antioxidants, and other nutrients. As one of the oldest life forms on Earth, the use of spirulina as a food source dates all the way back to 9th century.  It does not need fertile land for cultivation, grows very fast in just 20 days, needs lower energy and water. It produces more oxygen than trees per acre by consuming carbon dioxide (Photosynthesis). So it is incredibly environment friendly. It even beats eggs (which are a global benchmark for protein) in protein concentration as it contains 65-70% protein as compared to 50% of whole dried egg (not our normal shell egg). But Eggs still win the race here as Spirulina is very costly (around 20-30 times) so it shouldn’t be taken as source of protein but for other great nutrients. It is better to stick to other sources of protein like fish, eggs or other veg sources.

Consumption of Spirulina have shown amazing health benefits like lowering of Blood pressure, prevention and recovery from cancer, energy boost, weight reduction etc. It improves eyesight and reduces the effects of age-related eye disease. Even NASA is using it for their astronauts in space. Spirulina has an extraordinarily high antioxidant count, which may help to fight free radicals that enter the body. Some animal studies suggest that spirulina lowers blood sugar to a great extent. In some cases, results show that spirulina has outperformed some of the most popular diabetes drugs, including Metformin. According to some evidence, spirulina can be effective not only on animals but humans as well. One study had 25 patients with type 2 diabetes take two grams of spirulina per day for two months, which significantly reduced their blood sugar levels.

Spirulina was used to treat those suffering from radiation sickness after the 1986 Chernobyl disaster. Doctors found that radioactivity levels in children were reduced by 50 percent in 20 days of dosing them with five grams of spirulina a day.

Two USA Subsidiaries: Never factored in by Market

So far EID is getting around 86% from export market where there is stiff competition so it is just like another company. But it has now shifted focus to India and its organic Spirulina is available under Parry's brand at Amazon in India. The standalone turnover of this vertical is around 70 cr and with growing demand for healthy foods in India, i think this one can witness huge growth in India. EID has two subsidiaries in USA for its Nutraceutical business: Valensa International (Based in Florida, USA) and Alimtec SA. Valensa is into Astaxanthin based formulations for cardio, joint and Eye health with turnover of around 170 cr. Alimtec is basically a supplier of Astaxanthin to Valensa with turnover of around 5 cr. Valensa is not a small company but it can be another potent force. Its formulations are using Astaxanthin which is a rage in western world due to it being regarded as the most potent Antioxidant nature has offered. It is known to cure joint problems, such as rheumatoid arthritis, BP, liver diseases, heart , cancer. It improves athletic performance because it is 550 times stronger antioxidant power than vitamin E, and is 6,000 times more potent than vitamin C!!!

                                               Astaxanthin Farming

There was a thought behind the acquisition of Valensa by EID. Valensa is a potent force in algae based formulations in USA along with Cyanotech. Currently Valensa is the distributor of Parry’s organic Spirulina in USA. There is a growing tendency in Americans towards meat substitutes and Spirulina is one of the best source of high quality protein. I can’t remember any veg protein source except Spirulina containing all the essential amino acids (Types of proteins).

The only factor hindering the growth of Algae based food supplements like Spirulina is awareness of people about it. I haven’t met anybody who has ever heard about it. So here I feel the responsibility is on companies like EID Parry to carry on big brand promotion wave to make people aware about it. But worldwide demand for algae based products is growing big and fast and it is only the matter of time when this will catch the attention of India just like Cod liver oil. Although i feel that these algae based veg supplements will replace Fish oils (for Omega 3) as it is not logical to use massive amount of fish for minute supply of fish oil.

Also, algae super foods are not an easy product to master and produce in bulk quantities. The demands for nutraceutical purity and set standards of nutrients needs highly sophisticated technological expertise. That's why the growth of algae was slow even in USA due to these quality factors as products of so many producers were lacking quality. Acceptance of Spirulina produced by EID in USA points towards high technical prowess.

Further, EID is working on developing natural food colors from Algae like Spirulina. Demand for natural food color is growing fast amid concerns regarding the harmful effects caused by synthetic food colors. So any positive outcome in this area will pave the way for further growth.

Branded Sugar: India is waiting for it

Further there is not any established Sugar brand in India whereas we have super brands in other staples like Salt (Tata), Floor (Ashirwad), Rice (India Gate, Daawat), pulses (Tata Sampann) etc. So EID has ventured into this area and its Parry's sugar brand (sulphur free sugar) is growing fast. It is spending big on brand promotion these days. It has also launched Parry Amrit sugar brand last year in Chennai and Bangalore which is 100% natural cane sugar (just like Jaggery) with all the goodness of essential nutrients. As I have mentioned many times brand loyalty for life essential products like food staples are very strong as we usually don’t want to play with our health whereas brand loyalty for sensory foods like Soft drinks or Maggie is relatively weak as we always love to try something new.

Moreover with rise in income and awareness levels, Indians are also going after premium quality products whether it is food or fashion. People are ready to pay more for a premium and high quality product like Parag Milk Foods's organic same day fresh milk (Under Brand Pride of Cows) is selling at Rs. 85 a litre in select cities like Mumbai, Pune. The demand is very strong and Parag is now expanding its reach and entered Delhi and Surat. This shift towards premium branded products is going to get much bigger with rising income levels of rural India, GST creating level playing field for Organized and Unorganized sector, improvement in the infrastructure and logistics enabling companies to penetrate deeper into India. So if EID is able to create something in this field one can imagine the future scope of scale. EID has all the essentials to successfully create a brand out of sugar- strong Murugappa group, financial clout, experience in brand creation, absence of a branded product etc. So I think if planned properly sugar can turn into Gold.

Most of all, Its 62% holding in Coromandel International (after giving 30% holding company discount) is valued at 5000 cr which, in fact, is the current market value of EID Parry!! This means its standalone business (With NP of around 150 cr to 200 cr) is available free.

EID parry is lauded across the globe for their Farmer friendly practices and the management is ethically very strong. In 2011, there was a storm in Tamil Nadu which destroyed all the cane crop of nearby villages. Farmers were devastated but then EID did something unexpected and bought the entire crop at regular prices to save the poor farmers. This feat was something from other world.

I am sure EID can create a brand out of Sugar. Madhur sugar brand from Renuka sugar is here but the group is deep into debt.

Good buy at CMP of 300 and even greater buy at every fall.

(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)

Linde India Ltd: Solid Gas!!!

 Linde India: It is a global Industrial, food freezing and healthcare Gas giant. It is already the biggest player in Air Separation units (ASU) for steel and oil & gas industry in India. Air separation plants are used in the process of separating atmospheric air from its basic components, which are primarily nitrogen and oxygen, along with argon and other rare gases. But ASU’s requires high technological expertise along with high initial investments. Linde India is getting its majority of revenues from ‘Onsite” business where it creates the Gas supply facilities at the place of customer and enters into long term gas supply agreements with the customer. It is a long term partner of Tata steel from the days of first steel unit at Jamshedpur. Other business vertical is packaged Gas business where it sells Gas products in packages. Healthcare Gas business is its fastest growing business vertical.

Benefits of recent big investments yet to come

Off late it has created 2 ASU at Tata steel’s new steel plant at Kalinganagar, Odisha. It is also commissioning the ASU units for Bosch and JSW steel. In last 2-3 years, Linde has invested around 2500 cr in India the benefit of which is yet to come. High depreciation and Interest charge is eating the NP but its top line is growing fast and  will see further high growth as both the ASU at Tata steel will run full stream. Its depreciation has been increased from 120 cr to 200 cr and interest charge from 40 cr to 120 cr in last 5 years. It has long term Gas supply contract with Tata steel which will provide the stability to future revenues. Its assets base is 3100 cr but its Market cap is just 3600 cr which shows the current under usage of assets but the same will see high growth from hereon. Its turnover is 1800-1900 cr.

Healthcare, Food freezing and Renewable energy gases: Future high growth areas

It is also a big player in Medical gases in India the use of which is growing fast in India. Its healthcare gas business is generating revenues of 150 cr. I think its Medical gas business will be a big surprise factor as the technological edge of Linde will ensure ample growth opportunities. India is witnessing fast creation of healthcare facilities. India is an emerging force for medical tourism and I have shared earlier also that Indian healthcare industry (mainly Medical tourism) is a much bigger opportunity than IT sector and I am sure the future multibaggers will emerge from this sector. I have already advised investing into Narayana Hrudayalaya and Healthcare Global enterprise. These two will revolutionize the world of healthcare with their low cost but high quality healthcare services.

From its Tata steel ASU plants apart from selling gases to Tata it’ll also make merchant sale of other gases/Liquid gases. For this it is laying the pipeline to cover maximum customers.

Linde is a global force in Food freezing cryogenic technology. Linde is investing 500 cr in AP (The home of Indian sea food export, Avanti feeds is also based in AP) for creating the cryogenic food freezing facilities. Due to its extremely cold temperature, liquid nitrogen is used to freeze food within minutes, instead of the hours traditionally required with other systems. The faster freezing causes the formation of small ice crystals, which then help ensure product moisture and quality are maintained longer. Cryogenic freezing offers distinct quality benefits, including a taste and texture more resembling fresh seafood. This is a vast emerging opportunity for Linde India.

Linde is also a major supplier of electronic gases for Solar PV manufacturing and maintenance of gas facilities at solar power plants. I don’t think we need any data to prove the high growth potential of Solar PV power plants in India. But the ideal game changer will be the manufacturing of Solar PV cell in India. Already a few companies has shown the interest in creating the manufacturing facilities for Solar PV cell.

But Steel sector is seeing recovery in India…more so after duty imposition on cheap Chinese imports. There is also a proposal for allowing the use of steel only made in India for Infrastructure prjects. I am seeing Linde India growing big from hereon.

Surprise Factor: Hydrogen Fuel cell

 Although not related to India, but Linde is a preferred supplier of Hydrogen for fuel cell vehicles across the developed world. The company has equipped around 90 refuelling stations in fifteen countries. Hydrogen-powered vehicles have long ranges and short refuelling times (quite the opposite of current EV technology)– benefits that are spurring the expansion of this technology by Governments across the globe. A fuel cell just releases water as a pollutant!! Linde is doing big research for producing hydrogen from renewable resources; like from electrolysis of water.

Hydrogen is the simplest element wherein an atom of hydrogen consists of only one proton and one electron. It's also the most plentiful element in the universe. Despite its simplicity and abundance, hydrogen doesn't occur naturally as a gas on the Earth - it's always combined with other elements. Water, for example, is a combination of hydrogen and oxygen (H2O). Hydrogen is high in energy yet it generates no pollution. NASA is using liquid Hydrogen powered engines for its space programs since 1970 wherein fuel cell powers the space shuttle and produces water as a by-product which is used by the crew for drinking!!!

At present Hydrogen is mostly produced from Hydrocarbons like Oil, natural gas, methanol, and propane. Hydrogen can be separated from hydrocarbons through the application of heat - a process known as reforming. Currently, most hydrogen is made this way from natural gas. But this also results in air pollution although not at the point of use of Hydrogen in vehicles but over the entire lifecycle from Gas recovery to Hydrogen production. Then another zero pollution option is to separate Hydrogen from water using electricity which is somewhat expensive right now. But extensive research is already going around the globe with encouraging results. But who knows we can see the Hydrogen powered vehicles overtaking battery powered electric vehicles.

 I am not a scientist but I think of an ideal situation where we can use off grid excess solar/wind power to produce Hydrogen from water and then transporting it via pipelines…just guessing. Right now due to costly battery technology excess power produced by solar and wind turbine is wasted. But I think it is better to use this for producing Hydrogen. Actually the equation is simple: production of Hydrogen by Reforming of Methane (Natural Gas) also requires power to heat and in the same way power is required for separating Hydrogen from water. So at places where we don’t have any natural gas supply (even if we can supply) the excess energy of Solar/wind power plants can be used for water electrolysis. But it is just my view.

Although at present there are no such Hydrogen powered vehicles in India. Setting of Hydrogen filling pumps are also a big challenge. But invention of a new revolutionary technology transforms and creates necessary supportive infrastructure at unimaginable speed. We are witnessing one such thing in 3G/4G and broadband in India. But still all this shows the inherent technological strengths of Linde India; enough to maintain the technical edge. Great buy at CMP of 430. I have entered in it at 400 2-3 days back and almost done with the buying.

Also a number of stocks are under study and I have bought all of them. But I couldn’t post the analysis of them due to extremely tight schedule due to annual account closing activities. However some details of these stocks have already been shared with the email subscriber group. I’ll post detailed study on these whenever I am free. So I am just mentioning these and my entry prices. Market may see a correction in April so keep an eye on these:

Aditya Birla fashion and Retail: Entry price at 144 and multiple buying after that around 150. Owner of the biggest Indian fashion brands Ven Heusen, Allen Solly, Louis Philippe, Peter England. It will huge growth in the future. Undervalued at CMP 160. Great Buy.

Mahindra Life space: Entered at 350. One of its kind Integrated industrial cum residential developer. It developed 1500 acres of industrial cum residential park in Chennai which is a great role model for smart cities in India. Also it announced the right issue at 292 which will further lower the average price. CMP is 410 after hitting 450. Good Buy for long term.

Bajaj Corporation: Entered at 370. CMP is 407. It is predominately a one product FMCG company with strong brand; Bajaj Almond drops hair oil apart from other hair oil brands. It acquired Nomarks 2-3 years back which deals in Ayurvedic skin care products. Bajaj corp gives around Rs. 12 dividends with EPS of around 15-16!

It has net worth of around 480 cr and its NP is around 220 cr (Net of Exceptional items)...so a great ROE of around 50% but this is not the complete story. It has around 270 cr as investments in Bonds/MF so if we leave this out from net worth then it is earning NP of 200 cr on net Net worth of 210cr (480-270)...an ROE of 100%!!!

But Bajaj hasn't grown much in last 2-3 years due to general slowdown especially rural. Growth may be strong with good monsoon and general trend in shifting to Light hair oils. Bajaj is focusing on growing Nomarks. But my main reason for investing is its investment portfolio of 270 (May be valued around 330-350 cr after recent run up in Bonds).I feel Bajaj will use this to make some acquisitions for inorganic growth. It looks fairly priced now. But i love these Bajaj people for wealth creation and superior Brand building capabilities than the likes of Tata. So this one looks risky due to low recent growth and 25 PE but safer due to Bajaj, dividend and strong brand power.

(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)