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Saturday, September 30, 2017

CP Ltd: The penny stock with Multibagger potential

Scripscan: CP Ltd
Cmp:19
Traded in:BSE

Quote: They say you are the average of your five closest surrounding. This quote had a meaningful impact on my life and needless to say in aspect of markets I have been surrounded by some amazing humble investors with full of wisdom and wits. The exposure and learning received from them could be termed overwhelming. Was having a recent interaction with my elder bro and mentor Singaraju about a particular stock and this is what he ended up with. Here's the quintessence.

Story:ASIA’S LARGEST LPG Cylinder manufacturer by capacity. Operating 16 cylinder manufacturing units with a mammoth capacity of 72 lakh cylinders per annum (including current expansions) & one more high-tech plant for high-pressure industrial cylinders in Vizag. Market leader in Indian cylinder market with around 20% share.

INDIA’S LARGEST private sector LBG Bottler offering services to all OMCs. Operates 60 LPG bottling plants & 4 blending plants (for blending propane and butane into LPG). The company claims to enjoy ~95% market share in the LPG bottling space which is outsourced by OMCs. A capital intensive and low margin business, though.

One of the INDIA’S LARGEST – among top 5 – Auto LPG Dispensing Stations (ALDS) network under the brand “Go Gas“. Through its 100% subsidiary C Go Gas Ltd, runs 110 ALDS of its own in prime locations, across 21 states. Have ambitious plans to add 50 more ALDS this fiscal and to scale upto having 250 ALDS throughout India in future.

One of the INDIA’S LARGEST LPG parallel marketers. Its packed LPG Cylinder retailing is also run under the well established brand name “Go Gas”, with ~20 lakh connections – now present in Maharashtra, Andhra Pradesh, Telangana, TamilNadu, Chhattisgarh, Madhya Pradesh, Gujarat, West Bengal, Jharkhand, Rajasthan, Goa, Karnataka & steadily venturing into new markets.

LPG transportation logistics services with 55 owned vehicles.Offers LPG cylinder repair services on a wide scale.Large presence Indonesian LPG market. Indonesian (70%) subsidiary PT Surya Go Gas Indonesia running ~5 bottling plants for Indonesian state-owned oil and gas company Pertamina & 2 cylinder making facilities.

Through Projects Division, operates turnkey projects in Africa and the West Indies relating to LPG/propane plants and piping.Through a Chinese JV, looking to produce Natural Gas Meters, betting on domestic gas pipe lines growth.

Asset Rich:After being taken over by Nagpur based Khara group in 2004, the company was rejuvenated itself over last decade – the new management infused new blood into the company with flurry of investments, mergers, JVs, acquisitions and takeovers. Subsequently the company is now sitting upon many great assets (as listed-out earlier), brands, retail distribution networks and valuable real-estate.Company holds free-hold lands worth of Rs.20 in B/S at cost price; this could be of valuable real-estate properties at current market rates.

Moving fast on the wheels of confidence, till date the company has invested Rs 950 crore on different verticals; and now has plans a further investment of Rs 600 crore on future expansions.
It will set up 30 additional LPG bottling plants and 150 auto LPG stations (ALDS). The schedule is to complete the entire expansion exercise by December 2018.C**** Group employs 4,400 people and with expansions, another 2,000 headcounts would be added.The company has tied up with IOC-Petronas for long-term supply of LPG and with SAIL for its steel requirements.

Management – The Good Part:When an established first generation entrepreneur – started life with a small utensil shop in Nagpur – says “My role model is business tycoon Dhirubhai Ambani, whose thoughts always gives me an inner strength” – that’s quite interesting.And when he cites one incident – he miserably stood for two whole days in front of a LPG distributor for getting a new connection in his boyhood – inspired him to spot a huge opportunity and to venture into LPG business... you tend to sit- up and take notice.Nitin Punamchand Khara had started from scratch and pulled out a national LPG conglomerate out of thin air; now has become a tycoon, a force to reckon with in Indian LPG industry. Also the Khara group has a past track record of taking over sick units and turning them around into profitable. The group had taken over many sick cylinder manufacturing units in Andhra Pradesh and Maharashtra a few years back and has managed to successfully turn them around.

Management – The Bad & Ugly:But the good vibes about Management ends here. All the declared numbers "Kind of seem odd" and are not so dependable for an analyst to crunch upon. Looks like a lot has been swept under carpet; only small parts are disclosed.Say for example: take the much vocally lauded ALDS (Auto LPG Dispensing Stations) division which is run under a 100% subsidiary C**** Go Gas Limited, with sizable investments. In FY2017, it had a sales of only 0.5 cr (0.25 cr in FY2016) & Net Loss at 0.15 cr (0.29 cr in FY2016). This division now runs about 110 ALDS on its own in prime locations. Somewhere else on media, they are very vocal about the strength of the brand, how they brought down the break-even of a new station to just 12 months from 24-30 months and their huge ambitions to scale- up to 500 stations and high average sales per station of 230 tonnes per annum. But the declared numbers are puny, nowhere near the actuals or potentials or investment made. Or take another much lauded Indonesian (70%) subsidiary PT Surya Go Gas Indonesia – which had an investments of about 75 crore, now running some 5-10 bottling plants for Indonesian state-owned oil and gas company Pertamina & few 3-kg cylinder making facilities. The declared numbers in FY2017 was kinda funny: Sales – 2.4 cr & Net Profit – 0.40 cr.During FY2017, the company incurred a forex expenditure of Rs 23 cr (Rs 27 cr FY2016) for purchase and import of LPG. Forex earnings are not so meaningful around Rs 0.7 cr (Rs 1 cr in FY2016) – from return on investments received from Indonesian subsidiary PT Surya Go Gas. Where are the revenues from the much lauded international operations??Reading the Annual Report 2016 & 2017 was a tamasha like Rahul Gandhi – numbers doesn’t add-up and tally anywhere. It hides more than it reveals.Very poor disclosure standards. In FY17 results declared, there was no consolidated balance sheet made available. The company website doesn’t bother to have an Investors section at all.

Complex Conglomerate:It’s a conglomerate with presence across the entire LPG value chain – with complex holding structure. Operates with too many subsidiaries and associates – 10 subsidiaries & 10 associates – despite the negligible reported numbers for them; would warrant a holding company discount.

...But still - a Value Buy: Yes, they are Not the cleanest of guys. Huge mismatch by the way the declared numbers & their size, scale, assets and operations. They would be siphoning out money big-time creating black money and hugely under invoicing sales and avoiding taxes. But no more these kinda operations possible on this much of scale—given the historic changes happening in the management of Indian economy. Now under the current regime, Chors are being forced to change; not much other ways around. As and when they do change and wake up to the potential of market-cap driven wealth rather than siphoning money, both topline and bottomline could be surging over next 2-3 years.Strong balance sheet with marginal debt.Despite topline fluctuations, company is profitable consistently.

LPG distribution – a brand driven consumer business. Generates good operating cash-flows.
Can fund the future expansions with internal accruals. Changing, Good Chor?!The recent promoter’s stack hike from 46% to ~57% is a huge green signal and more incentive to go professional. And still they are occasionally buying more through market operations. In an another development few days back, the company and its subsidiaries has bagged a huge order worth Rs 362 crore from BPCL, HPCL, and IOC. The order includes supply of 30,16,352 LPG cylinders with option of order for equivalent quantity next year. For the sake of comparison, they sold ~20 lakh cylinders in FY2017.This kind big of order win – with the possibility for one more order next year – is unprecedented & a first for the company. Perhaps indicates the changing attitude of management.We are quite perplexed when the MD declared in a recent interview that C**** Group had registered a turnover of Rs 1240 crore in the last fiscal (FY17) and is confident to chase the turnover of Rs 1500 crore in the current fiscal (FY18).The listed company is the flag-ship of the group; no other large meaningful company within the group. And the declared revenue for the listed co CP was Rs 499 crore in FY17. Then what did he mean? Perhaps a clue about the things to come??!! That will be wonderful, if it is.

Favourable Industry Trends:The Government in its drive to minimise the subsidy allowed in cooking gas, in a latest announcement has ordered OMCs to rise subsidised cooking gas (LPG) prices by Rs 4 per cylinder every month. This is good news and a boost to Private LPG Distribution sector.With the Central Government already refusing LPG subsidy to consumers earning more than Rs.10 lakh per annum, a ready- made market is now made available to private LPG parallel marketing companies.Due to these dismantling of LPG subsidy by the Government, the illegal sales of cylinders have shown a downfall, which is proving advantageous to the company.PAHAL - Direct Benefits Transfer for LPG (DBTL) of Petroleum and Natural Gas by Ministry of Petroleum and Natural Gas - has also encouraged the end of illegal sales of cylinders across the country, which is a further impetus to the segment.As crude prices are at a historic low, the demand for oil, gas and petroleum products has increased substantially in India and this has benefitted the sector.Historically, demand for petroleum products has traced the economic growth of the country. With the Indian economy expected to grow double digit in the long-term, the energy sector would benefit from the same, going forward.Additionally, replacement demand for LPG cylinders is rising, as distribution of LPG cylinders in India has gained momentum since the past decade.

Big Govt boost for LPG Infra:To cater to the demand, Government envisage an investment of the order of Rs.25000-30000 crore in LPG infrastructure including import terminals, pipelines and bottling plants. Fuel retailers IOC, BPCL and HPCL are planning to add another 4500 LPG distributors this fiscal to their existing LPG distributorship of 18500. These state-owned OMCs will also add 47 new LPG bottling plants over the next two years to their existing 189, expanding their total capacity by nearly 25% to 21 million tonnes in 2018- 19. State firms sold nearly 20.7 million tonne in 2016-17, mainly helped by more than 100% capacity utilization at several bottling plants and also with help from private players. But with the projected total demand of 24 million tonne in 2018-19, as per industry executives, the state firms alone can’t cope up with the demand but need to be supported by rabid private bottling capacity expansion.

LPG – sill underpenetrated:The LPG penetration in the country is around only 72% currently.Government aims take this to more than 95% households across the country in the next three years, entailing an investment of Rs.30000 crore. The 2011 census said there were about 24.7 crore households in the country. The oil ministry’s projection is to provide LPG connections to 26.87 crore customers by April 2019. The NaMo Govt is very determined to enroll 10 crore new cooking gas.All these government's ambitious plans are set to throw open big opportunities for private LPG bottlers and distributors – of which CP is leading the pack.

Industrial consumption too picking up:In order to replicate the benefits which CNG has given to the transport segment, cleaner gas fuels are now being promoted for industrial use.“LPG can be replaced in all sectors where there is a need for heating treatment. It is cheaper and cleaner than the existing fuels,” said Dharmendra Pradhan, Minister for Petroleum and Natural Gas, in a recent interview.Government’s policy initiative to switch to cleaner fuels for environmental concerns have been speeding up conversion of major industries from coal/other fossil fuels to CNG and LPG. LPG being a cleaner and cheaper fuel is becoming the preferred choice of industrial customers.  Delhi has already announced the ban on industrial use of high sulphur fuels in the city and is promoting a switch to cleaner fuels like LNG / LPG. The government has announced plans to build green corridors and ensure CNG stations on highways along Delhi and Mumbai.These demand-side boosts from the industrial segment provide significant tailwinds for gas retail companies.

GST bites:In the previous indirect tax regime, LPG attracted a zero or nil excise duty all over the country. VAT or sales tax was also nil on most states. However under GST, a 5% rate was levied on subsidised LPG and 18% for non-subsidised LPG. (Every household is entitled to 12 cylinders of 14.2-kg each at subsidised rates from OMCs in a year. Any requirement beyond that has to be purchased at market price).This essentially means that the LPG prices are likely to go up and impacting demand, could also be biting into sales for private players like CP. However, given the non discretionary nature of LPG, things will return to normal over time.

Acquiring a listed co – Globe Industrial Resources:In a recent development, CP is acquiring a listed company, Delhi based Globe Industrial Resources, listed on BSE and Metropolitan Stock Exchange of India Limited (MSEI).With already acquired more than 25% of shareholding, the company has announced an open offer for acquiring upto 49.66% of equity of Globe Industrial Resources from the public shareholders.The target company is said to be engaged in business of trading in textiles; it’s declared numbers are puny and reminds of a classic shell company.The rationale for this acquisition is not yet clear.

Valuations – going cheap:In every segment they operate, they are being quoted as ‘THE LARGEST’..!We are not sure whether it’s a valid point – but We are tempted to do a random comparison (DESPITE OPERATING IN DIFFERENT FIELDS) to get a perspective on valuations: If the largest Pepsi bottler Varun Beverges (sales-3850 cr/profit-150cr) can command $1.5bn valuation, why would the largest private domestic LPG bottler serving top OMCs with 95% market share for outsourced volume, 20% market-share for cylinders & with large international operation, reporting so trivial numbers and be available at 400 cr market-cap?

Stock - Long pause at yearly limit:After flurry of up circuits, the stock is now resting at the BSE yearly circuit limit of Rs 19 – for about 2 months. That will be relaxed on 1st of October.Looking at historical charts, travelling through wild swings of continuous up and down circuits (mostly in the range of Rs.5- 25) is not new to this stock; nearly over 2 decades, the stock has had so many of them.This time, will it be different?? Keep your fingers crossed..

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