Prime Pick: ABG Heavy Industries.
Rajiv Goel (Investor's Guide,ET Online)
INTERESTED in a dividend paying company with a book value of Rs 75, EPS of Rs 13 and available at just Rs 24?
That is the ABG Heavy Industries scrip which has been ignored by the markets. ABG has a good level of cash generation. Long term contracts ensure stability of revenue inflow. Its nemesis, high interest costs, is being mitigated by using cash earned. Thus, while it continues to earn a good level of cash from its operations, cash inflow will further improve with a fall in interest. Cash EPS stands at over Rs 20.
Background
ABG is engaged in port infrastructure development which includes bulk and container handling, development of modern container freight stations, tank terminals, warehousing and construction, maintenance and operation of new berths and cargo handling facilities. Besides, it is into charter hire business - operating, maintaining and hiring out heavy duty equipment to a wide sector of services and industry.
ABG group has been ranked among the top five companies in Asia Pacific by the reputed International Cranes IC 50 listing in June ?98. It is a pioneer in port infrastructure business and also a market leader in charter hire and heavy lifts business.
It also undertakes erection and construction jobs for projects in steel, cement, power, petrochemicals, refining and fertiliser industries. It has executed projects on a turnkey basis covering the total scope of detailed engineering, procurement, fabrication, erection and commissioning. ABG has expertise in plant shutdown and annual maintenance/ revamp jobs where availability of high capacity cranes and access equipment at short notice often helps clients reduce production down-time.
ABG?s presence in the business of bulk and container handling has been consolidated with the company winning several contracts against global and domestic bids. ABG is also in the process of developing modern container freight stations, tank terminals and warehousing.
Substantial investments have been made in mobile cranes, tower cranes, port cranes and container handling equipment.
The ABG group is promoting ABG Goa Port, strategically located on the west coast of India. It would build two berths capable of handling large vessels. ABG Heavy Industries would invest Rs 8-10 crore in the project.
Business prospects
ABG has derived a significant part of its turnover from port related services, income from which form 75 per cent of turnover. The balance comes from charter hire of cranes.
ABG has long term contracts with JNPT-I and II for 10 years years which would give an income stream of Rs 210 crore each in the next 10 years. The Chennai Port Trust (CPT) - I and II would give a revenue stream of Rs 31 crore and Rs 40 crore respectively in the next 8 years. CPT would give a revenue of Rs 25 crore in the next 10 years. Thus, these long term contracts will generate a revenue stream of Rs 510 crore in the next 10 years.
New projects
ABG has entered in a contract with the CPT for the supply, installation, testing, commissioning and maintaining of a Rubber Tyred Gantry Crane for container handling at the port. This would be on a lease basis with the trust for 10 years and subsequently the rights of the equipment will be transferred to the port. While the crane would come at a total cost of Rs 7.75 crore, a lease rental of Rs 25 crore would be payable by CPT to ABG during the lease period.
Financials
ABG recorded a revenue of Rs 18.56 crore in the first quarter, which was a nominal growth over the previous fiscal. The bottomline has recorded a 20 per cent growth over that of the previous year. Around 75 per cent of the income has come from lease rental of port infrastructure facilities while 25 per cent has been accounted for by charter hire services. Major expenditure by the company is accounted for by interest and depreciation charge which also include lease equalisation charges. The company endeavours to reduce the interest outgo through repayment of loans at the first available opportunity.
Financial institutions (FIs) enjoy a charge over receivables and as a result, a part of receivables automatically goes to reduce the debt burden. Depreciation charge is on account of heavy investments in infrastructure equipment.
The company enjoys a good cash EPS. In ?99, it had cash earnings of Rs 20 crore, net of lease equalisation charges.
Since ABG is running an infrastructure related facility, it is exempted from income tax payments under Section 10, as well as from the payment of MAT.
Outlook
OF the Rs 11.32-crore equity, promoters hold 70 per cent, FIs, mutual funds and banks 8 per cent and the public the balance 22 per cent.
With the general economic slowdown and no new projects coming up, the business of charter hire, erection and heavy lifts business did not gain much momentum. The implementation of a few large scale industrial projects is likely to provide growth to these activities as ABG had secured prime contracts from Reliance Petroleum, Mangalore Refinery and Essar Oil, among others, in the past.
The company has been shortlisted for building infrastructure facilities for the CPT along with other eight parties. The company will decide whether to bid for the project, based on the economic viability of the project. Promoters are against going into projects which carry some risk.
All cash generated by the company would go in for the reduction of term loans. The promoters have assured that ABG Heavy Industries will not make any investments in other companies besides ABG Goa Port.
While the cash flow of Rs 510 crore in the next 10 years is assured, the company would continue to bid for more port infrastructure projects. Bidding for two projects is expected to start soon. Charter hire business will continue and exhibit growth alongwith new mega projects.
At a PE of just 2 and a book value of Rs 75, the scrip is available at just Rs 24. A good medium term buy.
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