Saturday, December 18, 2010

Cals Refineries - What the Future Holds

The case of Cals Refineries (BSE: CALSREF / 526652) continues to riddle investors, as it has done for most part of its existence.

One one hand, you have one of India's most promising refinery projects being planned by Cals, and on the other hand, you see it trading as a penny stock for so long that you lose hope.

Again, on one hand, you see Cals Refineries as a company with an equity capital of nearly Rs. 794 crore - many highflying listed companies have smaller equities - and a nearly identical Net Worth of Rs. 787.25 crore as of March 2010. Even now, while trading at less than half its book-value, the market-cap of Cals is a not-too-small Rs. 374 crore.

But on the other hand, you also see Cals Refineries as a company whose projects have practically not gone anywhere, after the initial fundraising, despite numerous promises and rescheduled deadlines.

Though it is not listed in NSE, it used to get a certain respect in some value investing circles, maybe due to its status as a B Group share in BSE - unlike many penny stocks that fall in the T Group - as also due to its inclusion in the broad-based BSE 500 index. Cals Refineries GDR is also trading in the Luxembourg Stock Exchange. It also had high visibility, as on many days it was the top-traded scrip by volume in BSE, even though total traded value would be around Rs. 1 crore only on many such days.

But now even this respect seems to be dented somewhat as it has been shifted recently to the T or Trade-to-Trade segment in BSE where overheated and speculative shares are regulated so as not to go overboard in rapid price-action.

But in one way, this came at a most unfortunate time for Cals, as after a long period of unfruitful waiting for its Financial Closure (FC) to happen, it had recently delivered a relief goal when an investment arm of Kuwait headquartered Kharafi Group agreed to invest $150 million in Cals Refineries. This is a major positive step if it gets fulfilled, as $150 million or Rs. 675 crore is 85% of Cals' equity capital.

Earlier, there were speculations that lead bankers who were trying to syndicate loans for Cals' FC, like BNP Paribas and SBI Caps, were asking the promoters to bring in fresh capital, so that lenders would agree to fund despite the value erosion in Cals' market cap.

So, if the Kharafi deal goes through, financial closure for Cals seems very much possible in the short-term, and this will be a major milestone that can create a breakout for the Cals scrip from its long-term trading range and possibly create a new 52-Week High above 65 paise. On a really positive news flow stream, and favourable and sustained capital market environment in the country, Cals may even travel near to its book-value per share of 99 paise.

But the proposed Kharafi deal also presents some difficulties, as, at Rs. 675 crore, the new infusion is nearly double (1.8 times) of Cals' current market cap, and this raises the doubt whether this is some sort of a takeover. As of now, the public understanding is that the Kharafi arm will be an equity participant. But considering Kharafi Group's operations in the refinery engineering business, chances are that they are also planning to be a strategic investor in Cals, or even more eventually.

There is also an issue of dilution brought in by the Kharafi deal, but since EPS is expected to be non-existent for some more years, it seems to be a non-issue. By book-value-per-share also, the deal will dilute ,but probably make up due to the probable increase in net worth.

Now to the question of whether retail investors should consider Cals at all. Here, the most important thing to note is that, despite all its credentials, Cals Refineries is now trading as a so-called penny stock. Such stocks, trading below Rs. 20 in the Indian market, have a market dynamics of their own, as due to the extremely low costs, large stock market operators tend to hoard huge quantities and offload at will. Often, retail investors would be at the receiving end of such operations. Earlier there were reports that Ketan Parekh or his associates were involved in trading various penny stocks including Cals.

The recent Upper Circuits or no-seller status on consecutive days that nearly doubled the scrip within days, and the subsequent Lower Circuits or no-buyer status on consecutive days, is a case in point for the risk involved. 

On other occassions, the share price can stagnate without hope for months, or drag down slowly, as it happened for most part of the last two years. So it goes without saying that extreme caution is required at all penny stock counters, including Cals Refineries.

In recent weeks, it has also become somewhat difficult to buy or sell the scrip, due to the successive Upper or Lower Circuits. For anybody wanting or willing to bet on the Cals story, better will be to wait till the circuits ease out, and stability returns.

But in any case, the most prudent step would be to limit one's exposure to the bare minimum possible, as the risks involved will be high. Investors should be willing to forego their entire investment in penny stocks, which means only really disposable money should be invested.

By bare minimum, it is meant that those levels where brokerage percentages doesn't hurt the buying price much. Many broking firms charge exorbitantly by percentage when it comes to dealing in penny stocks. But at some broking firms, buying for around Rs. 7000 wouldn't hurt much by way of brokerage charges.                

Despite the probable investment by Kharafi, despite the possible FC, and despite their ambitious plans, what Cals is undertaking is a very challenging project with significant additional investment and debt involved - Rs. 5000-10,000 crore - for years to come. As such, it is wise to always have an eye on its net worth or book-value, as in case a takeover happens, this will be a crucial figure.

Also, though wild future price targets are often touted by enthusiastic investors for Cals - from Rs. 3000 to Rs. 300 to Rs. 30 - it is better not to be carried away, and keep a small calculation in hand. For the seven listed refineries in the country, excluding Cals, the average price-to-book-value ratio (P/BV) comes to just 2.26 times. Taking this as a standard for Cals too, the probable target price in the long-term for an almost up-and-running Cals would be just Rs. 2.24 (0.99 BV X 2.26 P/BV). Even if you apply the industry's most favourable P/BV ratio - Essar Oil's 4.86 times - the Cals' long-term target wouldn't cross Rs. 4.81.

Of course, a highly profit-making Cals for many years, can add to its book-value, and present significantly more upside.

But thinking from current book value of 99 paise and from current share price of 46 paise, even these modest targets amount to 5 or 10 times appreciation, or to 500-1000% of original investment. This is what is beckoning investors, but the caveat is of course that so many complex financial, engineering, and business feats need to be surmounted by Cals to reach even these basic levels.

First of all, if and when the FC happens, Cals needs to get the working refinery it brought in Germany dismantled and shipped to India, and re-erected in Haldia. Already, the company is contesting in Delhi High Court a case against one of its international contractors to prevent them from selling the refinery to a third party.


  1. Brilliant analysis,thanks a lot...

  2. Intelligent analysis by StickAsk team!!
    But why the existing Cals Investors do not understand the reality? Why they are day dreaming to make their investments 50-100 times in 3-4 years? I strongly feel that Cals will never succeed to start the so called "refineries"!

  3. Brilliant analysis,iam really impress with the analysis u made on cals and sanraa,i have two words for you "god of analyst"

    Keep the good work going :)

  4. Thanks Sir.

    Truly Helpful !