Tuesday, December 21, 2010

Suryachakra Power - What are the Short Term & Long Term Prospects?

Suryachakra Power Corporation Ltd's (BSE: 532874 / SURYACHAKRA) recently announced GDR plans, and the subsequent postponement of it, has raised the question of where the scrip is headed in the short-term and long-term. SPCL is also going through an amalgamation with a group company. 

The GDR plan perhaps got shelved for now also due to the deep correction in the market, that did not spare the Suryachakra scrip also. From a recent attempt to create a new 52-Week High, it has fallen to near 52-Week Low levels.

Suryachakra Power Corporation Ltd, which had its IPO priced around Rs. 17-20 in June 2007, is now trading slightly below the IPO levels, for the same Rs. 10 face-valued share. With no bonus, rights, splits, or dividends in its almost three-and-a-half year listed history, the current price levels - in itself - should come across as very discouraging for most investors.

The Suryachakra scrip, however, had a brief stint in wealth creation for its original investors, when in late 2007 and early 2008, it appreciated to a price range of Rs. 50-60. This was not at all a bad performance as within less than a year, the price had gone up to around 300% of the original IPO price.

However, ever since then - which was also Suryachakra's all-time high, the scrip has been on a long-term decline, falling to an all-time low of around Rs. 7 in late 2008 and early 2009, and the current 52-Week High is standing at Rs. 23.65, which is a good 60% lower than its all-time high. Considering that this 52-Week High had recently also proven to be a major resistance, the short-term promise in this scrip seems doubtful.

Another aspect to Suryachakra's lackluster performance in the bourses is the almost 80% dilution in equity that happened in FY'2008. Though the doubling in net profit that year sort of justified this near doubling of equity, two weak points were there. Firstly, total income had appreciated by only 16.47% in that year, and secondly, the net profit margin was quite low at just 3.64%. And in the next fiscal, FY'2009, net profit nosedived by 62% compared with the previous year, thereby leaving the earnings per share (EPS) at just 19 paise.

This, coupled with the capital market turmoil in 2008-09, is probably what took the scrip to its deep bottom of Rs. 7 odd. 

However, now, within two years' time, the Suryachakra scrip has partially recovered, at least near to its IPO levels. The recovery was aided by what was perhaps its best year-on-year performance in 2009-10, when net income jumped by over 50% and net profit zoomed by 250%. Though the profit jump was on the low base created in FY'09, it was also a good 37% above FY'2008 levels, that is, before the fall.

Notably, the FY'10 EPS, which discounts the dilution in FY'08, now stands at all-time high of 68 paise.

Now, the question going forward is what kind of an upside is possible in the scrip due to the proposed GDR and the ongoing amalgamation plans.

Though the deferring of the GDR may also signal an inability to raise money at even these low levels, for existing investors it can be taken as a short-term positive as it would also postpone further equity dilution. 

However, the amalgamation of a Group company, Suryachakra Energy & Infrastructure Pvt. Ltd. (SEIPL) into Suryachakra Power will dilute the equity by a further 46%. SEIPL and its 100% subsidiary, Namratha Bijli Pvt. Ltd., are developing four power projects with a total capacity of 300 MW, in comparison with Suryachakra Power Corporation's current capacity of 60-70 MW from six plants. 

As none of SEIPL's plants are now operational, it remains to be seen whether there is enough value accrual in this merger to offset the significant dilution in equity.

The company has provided a sort of FY'11 guidance in a recent media interview, which puts the net income at Rs. 300 crore and net profit at Rs. 10 crore. It is not clear, however, whether the guidance is for the merged final entity. The merger appointed date has been filed as 1st April 2010.

If we take the guidance as for the currently existing, unmerged entity, and if the guidance finally holds, there is a good upside seen as income will grow by 43% and net profit by 100%. But, if it is for the merged entity, the upside is definitely lower, by around 50% due to the dilution involved. Still, if the guidance holds, this is a reasonably good upside of around 50%.

However, the guidance itself seems challenging as the first two quarters have seen lacklustre performance in income, which has dipped significantly quarter-to-quarter, though net profit has seen an uptick in the September quarter, after faring poorly in the June quarter.

One development that may better Suryachakra's prospects in the coming four quarters is that it will get a hitherto pending profit adjustment from the Andaman & Nicobar Administration as 12 EMIs.

Taking all these into consideration, Suryachakra Power Corporation Ltd (SPCL) is a company worth watching for any solid price breakouts. The first can be a sustained move above Rs. 20, which will give it better visibility, and the second breakout can be new sustained 52-Week Highs above Rs. 23.65. 

However, for those willing to be bet on the Suryachakra story now, the recent correction can be an opportunity for a first value-investment as the scrip is now available beneath its book value. However, such investors should be willing to either book losses on a downtrend or average on lower prices. 

The scrip has relatively low volumes, and being listed on BSE only, can present liquidity problems too. But this may change as they have decided to go for an NSE listing too.

Looking at the Power sector's price performance across various time-frames in the current year-to-date, nothing seems rosy. And in the sector, Suryachakra's position though decent by income, is unattractive by profits, assets, and market cap. 

Suryachakra Power is also not a very cheap stock, as it trades at the industry average P/E of 22. The key problem area seems to be the net profit margin, which even in the guidance stands at 3.33%. An improvement on this front, if possible due to the amalgamation, is something to watch out for. Also, an eye should be kept on the merged final entity's book-value per share.

The promoter group of Suryachakra was earlier involved in the aquaculture business, and had two listed companies in that line of business, which later went defunct and got delisted from the exchanges when restrictions came upon the aquaculture industry.

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