* WHY BUY * longer term potential

[enlyten]

This is why buy:
issued one year ago, all that was planned has been done, keep doing research on this baby. the more i look
into this the better it looks. India is the New china:
http://www.sricon.in/
http://www.technibharathi.in/

About

India Globalization Capital, Inc. (IGC) was incorporated in 2005 and is based in Bethesda, Maryland. IGC controls two infrastructure companies: Sricon Infrastructure Private Limited ("Sricon") and Techni Bharathi Limited ("TBL"), both in India. IGC was formed to acquire operating businesses located in India through merger, capital stock exchange, asset acquistion or other similar business combination. IGC has three core competencies:

Highway and other heavy construction;


Mining and Quarrying;


Civil Construction and engineering of high-temperature plants.

IGC is the only Indian infrastructure company listed and trading in the United States.



IGC Businesses

Sricon Infrastructure:
An Infrastructure development company based in Nagpur, Maharashtra

Engaged in Civil Engineering construction activities since 1974

Qualified to bid on contracts up to $116M per contract.

Operates 5 quarries (for construction aggregate)


Techni Bharathi Ltd. (TBL):
Engages in national infrastructure development in India: roads, tunnels, canals, bridges, airport taxiways and dams, hydro power generation.

Incorporated in 1982; located in Kerala, India.



India Globalization Capital (IGC)
1/10/2008 | Long/Short Equity
Submitted By: Yaser Anwar


Idea:

Long India Globalization Capital (IGC)

• Synopsis: IGC is paying 50 % or less for the real value of its targets, which the targets accept because IGC's investment gives them the potential for better business opportunities and greater personal gain through management incentives (achieving 85% of targets, as required for pro rata incentive compensation clause).

• India today, with its rural isolation and cities separated from many parts of the country like islands, is a bit like the US in the 1920s and 1950s, when it spent dramatically on the national highway and interstate systems.

• According to World Bank: Lane capacity in India is insufficient and most highways have two lanes or fewer; 70% of India's population lives in rural areas, and 40% of villages do not have access to all-weather roads, leaving them isolated during monsoon season; and currently, only 1/3rd of routine road maintenance needs are being met.

• The Indian govt. has announced US$ 475 bn in infrastructure by 2012 including US$ 40 bn for highways, $ 160 bn on power and other similar projects. The Indian government says that 55% of the country’s population has no electricity in the face of potentially explosive demand growth. Per capita electricity consumption in India is 585 kilowatts per yr vs. 1.35K in China vs. 12K in the US and worldwide average of 2.4K. The govt. projects a need of 68.5K more megawatts of power by 2012 with estimates of only 27K MW to be added through ongoing and planned projects.

• IGC has signed three agreements to acquire companies or partner with them at a discount to public market prices: Sricon, Techni Baharthi Limited (TBL), and Chiranjjeevi Wind Energy (CWEL).

• All three deals are in areas of huge expenditure by federal and local governments in India, and two of the companies could reap even larger profits with cash to improve their balance sheets. In two cases then, IGC is a public company acting as a private equity firm, injecting cash and incentivizing management to achieve greater efficiencies and growth.

• The margin of safety is strong and potential return quite high. The confirmed backlog alone for Sricon and TBL all but guarantees a certain level of performance and higher valuations when combined with IGC's infusion of cash and the resulting improved financials and lower cost of capital.

• In sizing up prospective investments, IGC management insists are finding companies with years of operations, committed family ownership, strong experience and backlogs in long-standing, core, essential markets targeted for vast increases in govt. spending and deregulation.

• According to Prime Minister Singh India needs US$ 150 bn in FDI over the next years to fund these needs and faces a significant shortfall. In light of the shortfall, India has developed very foreign investor friendly rules to attract FDI in this sector. My previously highlighted high conviction buy, Cheung Kong Holdings, is one of the firms bidding in the BOT (build, operate, and transfer) program by the government in response to a 24 bn shortfall in new road construction.

• Under the BOT program, the National Highway Authority of India identifies potential toll roads and puts them out for bid. The winning bidder then builds and collects tolls for 15-30 years before transfer. Sricon has already completed a BOT project and is pre-qualified to bid on more, and TBL has years of experience in all types of road and other infrastructure engineering.

• IGC is acting as a private equity firm for Sricon, injecting cash and bringing operating improvements in three main ways:

a) Sricon does not have the cash to gain favorable pricing from vendors- it can't pre-pay and apparently doesn't always pay vendors on a current basis. IGC believes that its cash investment will give Sricon the ability to get better materials pricing and gain five percentage points in margins.

b) With IGC's cash, Sricon can buy equipment that it currently must lease. Vertical integration should add three more percentage points to margins.

c) Finally, Sricon's current debt service is at 13.5%! Due to the improved balance sheet, IGC sees an improvement down to 9%. Reducing the cost of capital should bring margin improvement of 5-7% percentage points.

• Overall, IGC projects Sricon's net margin to rise from 3-5% to 14-18%. Please look at these numbers from the form 14A filed by IGC:



• What would you pay for a company whose confirmed backlog will lead to a tripling of revenues and for whom additional capital will bring improved operating and net margins leading to a gain in net income of 13x?

• Considering that Sricon management agree to the targets by contract there must be something to them; they should know their businesses best and have a fairly high level of confidence in their ability to achieve these results. Plus even if they achieve just 85% of the targets (as required for pro rata incentive compensation), investors will benefit.

• Valuation: IGC is paying $28.75 million for 63% of the company, giving Sricon a post-acquisition value of $45.6 million. The following table provides a combination of management's analysis for Sricon and my view of what it makes for valuation:



• PE is not my favorite metric, but in the absence of many years of reported free cash flow, we can use it here to give us a range of outcomes. Sricon could still provide excellent value creation even if it comes up short of IGC's estimates.

• Remember that it's not just wishful thinking that revenues at Sricon will triple in FY 2008. The company has a backlog of almost 20x its 2007 revenues. Cash from these projects can be realized without any improvement in finances or additional contracts. Once you accept that, you still have to overcome the hurdle that net income will explode 13x.

• Assume that IGC is able to help Sricon achieve net margins of 14-18%. Applying 16% right down the middle to the $33 million in revenues projected for 2008 gets you there. Add a reasonable multiple on those earnings and voila, you're at Table 2's 428% to 533%!!

• You may ask, "How do we know that the acquired companies won't just commit US-style accounting shenanigans to reach these lofty targets?" Because IGC has the contractual right to appoint all of its targets CFOs to enforce requirements of US accounting and reporting standards. And all of IGC principles have strong financial backgrounds and credentials to bolster their scrutiny.

Moving on to the next deal- TBL

• Founded in 1982, Techni Bharathi Limited (TBL) offers a wide range of infrastructure services, including highway, railroad, and other heavy construction, as well as civil and engineering works for power plants, tunnels, bridges, airports, and dams.

• Like Sricon, TBL has a history of successful projects for a long list of government clients. TBL founded and grown by V.C. Antony, who also founded a company in 1976 that became one of the top 10 construction firms in India. In 1997 he retired as TBL's MD, turning over operations to his son Jortin.

• A huge difference between TBL and Sricon is that TBL is an engineering firm, providing intellectual capital, while TBL has salaries, of course, it does not need to buy heavy equipment, as Sricon does.

• Short-term margin expansion: As with Sricon, IGC sees immediate margin expansion due to improved finances, lifting net margins from 3-5% to 13-15%. This is expected to produce the following numbers for 2008 and 2009:



• As with Sricon, TBL management's incentives are based on these numbers and IGC has the right to appoint the company's CFO. Also, management received incentive shares pro rata for reaching 85% of the targets.

• Valuation: Through two transactions involving common and convertible shares, IGC has offered $12 million for 77% of TBL on a fully diluted basis, constituting a post-acquisition valuation of $15.6 million, and has offered $8.9 million for 74% for a post-acquisition valuation of 12 million.

• The following table uses the $12-15.6 million range valuation range, assuming that both transactions occur and that convertible shares are converted.



• Again, you'll note that even if IGC comes up short, there is plenty of room for excellent returns, making it a multiple-bagger in Peter Lynch's terminology.

Moving on to the last deal: Wind Energy Limited

• After meetings with Chiranjeevi Wind Energy (CWEL), IGC decided it wanted to own its own wind energy farm and sell the electricity. It solicited bids to construct a farm and found that CWEL's bid was 25% to 30% below competition. CWEL's CEO has 15 years of experience in the manufacture, assembly, installation, and maintenance of Wind farm equipment. The CWEL project manager for the IGC wind farm installation has years of experience following training in Denmark, the country with the world's largest concentration of wind energy.

• Where the first 2 targets are amenable to some traditional and clear valuation metrics, this one is not an acquisition and requires different thinking (IMO). CWEL's acquisition price: 28.5 million, projected first-year revenues $4-5.5 million and EBITDA of 4.3 mn, and EV/EBITDA of roughly 6.6

• These numbers include the expected sale of the wind farm's carbon credits, 70-80% debt financing, and delivery of a complete turnkey operation. They also assume a far lower EV/EBITDA multiple than any of comparable farms IGC studied in North America, France, and New Zealand.

• IGC's Form 14A states among other things that CWEL's incentives include the potential for more IGC projects if the farm is successful. For now let's say that IGC is likely to acquire an asset using 70-80% financing that will produce high margin revenue and is worth more than the cost. And it is doing so in a country with many established wind farms, with a company that has produced many wind farms, in a region with high wind energy raw material and where electricity is in sever shortage.

• In conclusion, should IGC complete all three deals, we're paying 50 cents or less for $1 or more worth of assets. TBL and Sricon's backlogs along give us a deep value margin of safety. IGC issued warrants in connection with its IPO on March 8, 2006. Each warrant entitles the holder to purchase a share of IGC for $5.

• Total institutional ownership is around 60%, including 7.6% stake owned by renowned value investor Seth Klarman of Baupost Group.

• Main catalysts and risks: IGC operates much like a private equity firm, so completion of deals is a main catalyst. As we've seen with Chueng Kong Holdings, for conglomerates to sport valuations that reflect the sum-of-their-parts, they must buy cheap and sell high. IGC will need to consider a myriad options for returning value to shareholders, such as dividends, spin-offs, buybacks et al.

• Hence, there is execution, acquisition related risks, but also the political environment in India. Though I wouldn't be worried about the politics because so far India has been remarkable in that aspect- see this latest Bloomberg article.