Invest in this diversified player with at least a five-year investment horizon
02-Feb-2011 •Shoaib Zaman
This company was started in 1972 and was earlier known as Nava Bharat Ferro Alloys (NBFA). It ventured into the manufacturing of sugar and its related by-products in 1980. Later in 1997 it entered into power generation. Realising that there existed a huge gap between the demand and supply of power in the country, it decided to go beyond producing power for its own captive needs and began to develop capacity for supplying power to the grid.
In 2005 the company ventured into the infrastructure space. Through special purpose vehicles it has entered into the development of special economic zones and other types of real estate. In July 2006 the company changed its name to Nava Bharat Ventures (NBV). It also set up a wholly-owned subsidiary in Singapore known as Nava Bharat (Singapore) Pte. Limited for undertaking international trade.
Focus on Africa: The company’s management has identified Africa as an important place to be present in. NBV has control over coal mines in Africa. It plans to use the coal for producing power. In several African countries there is a lot of demand for power and merchant power rates are attractive.
Business model: NBV’s dynamic business model is its greatest strength. While at the beginning the company was into the production of ferro alloys, it later changed its focus to power production in order to benefit from the opportunities in this sector.
Focus on backward integration: The company’s focus on backward integration in all segments is a strategy worth noting. After setting up ferro alloy plants, it decided to set up captive power plants for captive use. Similarly, now NBV is trying to secure coal supplies for its power plants. As stated earlier, even its sugar plant is fully integrated.
Coal supply: As its power plants are coal based, the company’s success very much depends on the regular supply of coal. This is a cause for concern as it depends on external sources for this crucial raw material.
Ferro alloys: The ferro alloy business is cyclical in nature. Currently, on account of low demand, a large percentage of the ferro alloy plant’s capacity is left unutilised.
Power rates: NBV has not entered into long-term power purchase agreements with the power grid. This makes it vulnerable to price fluctuation.
Declining realizations: Merchant power rates have declined due to improving power supply scanrio in India. As a result the company has suffered losses. However, the company’s management believes that merchant rates will improve from Q4FY11.
Policy risk: With operations in countries like Zambia and Indonesia, NBV faces geopolitical risks.
The company’s three-year average return on capital employed (RoCE) stands at 29.80 per cent, although it has been declining in recent years.
The current price-to-earning ratio of the company is 6.75 (December 2, 2010 figure). This is lower than its five-year median PE of 7.41. Over the last five years the company’s EPS has grown at a compounded annual rate of 37.72 per cent. This gives it a price-earnings to growth (PEG) ratio of 0.18.
The management is focused on power production. To mitigate the risk of falling merchant power rates in India, it has invested in Africa where power rates are higher. Investors with a high risk appetite may purchase this stock provided they have an investment horizon of at least five years.