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The CWIP debate
Should one value CWIP while valuing metal companies? We believe that
this is a grey area but are not in favour of valuing CWIP given the spate of
project delays that have plagued the sector. Given that most stocks are
below our target prices, the market, too, does not seem to be valuing
CWIP. If we were to value CWIP, our target prices will rise across the
board and most sharply in the case of SAIL and Hindalco.
CWIP will rise sharply across metal companies by end-FY12
q Capital work-in-progress (CWIP) will rise sharply across Indian metal companies by
end-FY12 since most companies are commissioning large projects over FY13-14.
q FY12-end debt, which is important while valuing companies on FY13 EBITDA, will
include a substantial portion for projects that are not yet contributing to EBITDA.
q CWIP as % of market-cap is highest for BHUS (120%), HNDL (64%) & SAIL (63%).
Should one value CWIP or not?
q Very holistically, it seems unfair to not give any value to CWIP since this effectively
means that new projects are being assigned negative equity value, which penalizes
all companies that are in a growth phase.
q However, two factors make us reluctant to value CWIP – 1) The spate of project
delays in the sector has significantly weakened visibility of timely project
commissioning and eventual project economics; 2) Given lack of visibility on
commodity prices beyond the very near-term, the market is much more near-term
earnings focussed in case of metals sector stocks than stocks in other sectors.
q One option is to value CWIP in case of projects where substantial progress and
milestones have been achieved and where there is greater visibility of timely
project commissioning. However, this becomes a subjective exercise and many a
times it is difficult to distinguish between companies on the same.
What happens if we start valuing CWIP?
q If we value CWIP, our target prices will rise across the board. The increase will be
highest for SAIL and Hindalco.
q Bhushan is trading at 8x EV/EBITDA and the market seems to be giving some value
to its CWIP. But this might be because CWIP is exceptionally high in case of
Bhushan. SAIL, too, is trading at a slightly high EV/EBITDA but we believe that
consensus EPS is poised to see sharp cuts and expect SAIL’s stock to come off.
q The truth might very well lie somewhere in between. The true value of each stock
might not as low as our target prices but might not be as high as by valuing CWIP.
We believe that confidence on the projects needs to improve for this theoretical
value to start getting reflected in stocks, which might not happen on a 12m view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The CWIP debate
Should one value CWIP while valuing metal companies? We believe that
this is a grey area but are not in favour of valuing CWIP given the spate of
project delays that have plagued the sector. Given that most stocks are
below our target prices, the market, too, does not seem to be valuing
CWIP. If we were to value CWIP, our target prices will rise across the
board and most sharply in the case of SAIL and Hindalco.
CWIP will rise sharply across metal companies by end-FY12
q Capital work-in-progress (CWIP) will rise sharply across Indian metal companies by
end-FY12 since most companies are commissioning large projects over FY13-14.
q FY12-end debt, which is important while valuing companies on FY13 EBITDA, will
include a substantial portion for projects that are not yet contributing to EBITDA.
q CWIP as % of market-cap is highest for BHUS (120%), HNDL (64%) & SAIL (63%).
Should one value CWIP or not?
q Very holistically, it seems unfair to not give any value to CWIP since this effectively
means that new projects are being assigned negative equity value, which penalizes
all companies that are in a growth phase.
q However, two factors make us reluctant to value CWIP – 1) The spate of project
delays in the sector has significantly weakened visibility of timely project
commissioning and eventual project economics; 2) Given lack of visibility on
commodity prices beyond the very near-term, the market is much more near-term
earnings focussed in case of metals sector stocks than stocks in other sectors.
q One option is to value CWIP in case of projects where substantial progress and
milestones have been achieved and where there is greater visibility of timely
project commissioning. However, this becomes a subjective exercise and many a
times it is difficult to distinguish between companies on the same.
What happens if we start valuing CWIP?
q If we value CWIP, our target prices will rise across the board. The increase will be
highest for SAIL and Hindalco.
q Bhushan is trading at 8x EV/EBITDA and the market seems to be giving some value
to its CWIP. But this might be because CWIP is exceptionally high in case of
Bhushan. SAIL, too, is trading at a slightly high EV/EBITDA but we believe that
consensus EPS is poised to see sharp cuts and expect SAIL’s stock to come off.
q The truth might very well lie somewhere in between. The true value of each stock
might not as low as our target prices but might not be as high as by valuing CWIP.
We believe that confidence on the projects needs to improve for this theoretical
value to start getting reflected in stocks, which might not happen on a 12m view.
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