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Sunday, May 23, 2010

Q&A: No Confidence in Confidence Petroleum.

Confidence Petroleum:
CMP: 7.60
Market Cap: 196.71Cr
Total Debt March 2009: 70Cr
Sales March 2009: 253.65Cr
PBDIT March 2009: 22.80Cr
Tax: 2.15Cr
Net Profit: 13.91Cr
Cash flow from Operations: -ve 3.35Cr
Return on Capital Employed: 8.83%
Enterprise Value= 196.71(Mcap)+70Cr(Debt) -14.93Cr (investments) -9.9Cr(cash)
EV: 241Cr

Confidence Petroleum is in the business of LPG Cylinders, Auto LPG filling stations.
Observations: Return on Capital Employed is 8.83% which is close to FD returns from corporates such as L&T Finance. So the companies return on Capital employed is poor and any additional debt or mismanagement of funds could easily push the company downhill.

Cash Flow from Operations -ve 3.35Cr well that gives an indication at the Operations level the company is still loosing money. The increased equity and additional debt financing all point to "No Confidence!!"

Company is in the business of retailing LPG filling stations.. which should cost a lot as each additional center needs investment capital.

Reliance discovered the largest gas find in the history of India and as per the production sharing contract .. a percentage of gas RIL is free to sell to anybody.. but Govt intervenes and is dictating the terms of a priority list of industries which will be supplied gas. So folks Petroleum/Oil is a barrel which is going to explode and I think in my lifetime we will see rationing of petroleum resources or very very high prices of oil.

All this is great news for LPG/CNG well Yes!! and No!!
Yes the demand will increase and everyone will be running behind any available quantity of LPG/CNG available.
No!! because Confidence is very very low in the food chain of LPG/CNG. Most likely the role of a provider that confidence wants to play could completely be done away with..
Look at all the piped Gas lines being setup in mumbai.. It is definitely more expensive to set up piped gas lines and cylinders would have been more cost effective.. but if we consider the future cost of transportation fuel.. and the transportation cost of hauling gas cylinders to each household..
I think piped gas is one of the cheapest way of transportation of fuel/CNG/LPG.

Conclusion: Confidence petroleum is really a new entrant in the business where we have established players with backing from GAIL, BPCL,HPCL. Also considering the near future all the assets being setup by confidence would be obsolete.. if people are forced to move to public transportation..en masse by the govt.

Look at Videocon.. I remember a few years back news was flashing in front of our eyes Videocon is the largest CPT(Colour Picture Tube) manufacturer in the world.. Thompson has sold all its plants to Videocon and now videocon has plants in every continent..  Look at the computer screen and look around you for CPT .. there are none around.. and all the investment made by Videocon has gone in dumps..

This is my personal view but Confidence is confidently moving towards a dead end.
- It is in a field where there is no moat and margins are going to be low..
- Company has a lot of capital expenditure in the future setting up new filling stations
- Does not have any back linkages like Reliance to provide LPG..
- Profits are going to be poor or dressed up.
- Divident payout not in sight in the near future as the company is still trying to reach a critical mass.
- Enterprise Value of 241Cr (approximately 1 times sale) is too high for a startup.
- Avoid

One can really look at GAIL if we need any exposure to natural gas or fertiliser companies as food is a very basic necessity and govt will always prioritise food safety(availability)

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