Friday, January 25, 2013

Buy: Southern Online Bio Technologies Ltd
BSE Code: 532669
CMP: Rs.4.73
There is some mindless selling going on in the counter of Southern Online Bio Technologies Ltd, even as the company spoke of to raising an amount Rs.6.25 Crores by way of preferential issue of 62.50 lakh Equity shares to promoters and others at face value of Rs.10 per share.  Let us examine a bit of the company in the current context:
  • The activities of the Company can be broadly classified into two segments, viz., Internet Service Provider (ISP) , Manufacturing of Bio Diesel, Used Cooking Oil trading and Contract. The ISP division provides Internet Bandwidth to the Corporate Clients, Educational Institutions, Cyber Cafes, & Individual etc.., The Bio Diesel division manufactures the Bio Diesel. The company does, Cross Country Trading of Used Cooking Oi, as is mentioned above and  which is often overlooked.
  • Post Preferential Allotment, the Promoters' Holding in Southern Online Bio Technologies Ltd has shot up from 17.48% [6,049,479  shares of the company] to 24.96% [10197896 shares of the company]. This will be reflected in  the December, 2012, quarter's shareholding pattern in the website of Bombay Stock Exchange. Besides this, Foreign Institutional Investors hold 14.62% of the shares of the company while Private corporate Bodies hold 19.98% shares of the company. Also, NRI’s / OCB’s / Foreign Nationals hold 4.59% of the shares of the company. Post Preferential Allotment, the Public Shareholding has gone down from  36.24% to 35.84%.  This means ~64.15 % of the shares of the company is  on strong hands and hence this gives Premium Value to the share price, which is trading at a discount to both its book  value and face value
  • The Company has two Biodiesel Units:
    1. One is at Samsthan Narayanpur Village & Mandal, Nalgonda District with 30,000 Liters per day capacity .
    2. The other unit is at APIIC-SEZ, Atchutapuram, Rambilli Mandal, Visakhapatnam with 2,50,000 Liters per day capacity.
    The Company has been supplying biodiesel to various well reputed customers like Kirloskar Oil Engines, Panama Petro Chem, Ipsa Texchem, Sovino foods Pvt Ltd, Real Bakers Pvt Ltd, Anand foods Pvt Ltd, Parle group, Evergreen Energy Inc., Witmans Industries, Biking Foods Pvt Ltd and other traders
  • The Company has been providing a wide spectrum of services, which includes basic services like Internet access, E-mail etc. and value added services such as Add on hours. The Company presently provides Internet Services as a Licensed ISP. The Company’s services include the following: (i)Server Co-Location (ii) VOIP Services, (iii) Leased Line services (Terrestrial and RF links), (iv) Dedicated Servers, (v) Networking Solutions, (vi) Web Hosting.
  • Plant at Vizag: All modifications have taken place and Raw Material supply & finished product contracts are signed and are in place. The unit is ready for production. Once the additional working capital is infused production will be commenced. in-principally agreed to fund the required additional working capital for Vizag Unit as per the TEV study done by the lead Banker, Bank of India. Accordingly proposal was sent to their respective consortium banks Head offices for approval of additional working capital
  • Plant at Tondiarpet, Chennai: Having experience in setting up two Biodiesel units, now the company has got an order from
    Indian Railways Organization for Alternate Fuels (IROAF), Ministry of Railways to set up/construct, maintenance and operation of 30 tons per day capacity biodiesel unit at Tondiarpet, Chennai. The Company has started implementing the Biodiesel project for IROAF. The progress of execution of the project is satisfactory and it is expected to complete next year, i.e, 2014.
  • Enhancement of Credit Facilities from Consortium of Banks: During FY12 the company has got additional sanction of Rs.24.52 crores towards the pending Capex creditors and addition of new equipment for the Capacity enhancement and operational flexibility. Also Additional Funded Interest Term Loan (FITL) of Rs.10.71 crores was sanctioned to provide Interest moratorium for the existing Term loan [Do you remember the Suzlon Energy Ltd story?]. Originally Rs.44.65 crores of working capital was sanctioned for both units Viz Nalgonda and Vizag units together and the same was eroded due to delay in stabilization of the Vizag Unit. As such eroded NWC of Rs.22.00 crores is converted to working capital Term loan (WCTL) based on the September 2011 current assets and the balance of Rs.22.65 Crores was only available as working capital limits for both the units, which was not sufficient to run the Vizag Plant.  Above additional facilities were sanctioned and joint documentation was executed by all the banks in the month of March 2012 without funding the eroded additional working capital limits. However in the recent consortium meeting held on 13th June 2012, all consortium banks have in-principally agreed to fund the required  additional working capital for Vizag Unit as per the TEV study done by the lead Banker, Bank of India. Accordingly proposal was sent to their
    respective consortium banks Head offices for approval of additional working capital. According to my sources, this in the final stages of processing
  • The recent increase in prices of edible oils which are used as raw material for Bio Diesel in western countries presents cutting edge to the company which has designed its plant for non edible oils and animal fat. By using non edible oils as feed stock the company is far away from the growing criticism of diverting food for fuel upsetting the economies of various countries. 
Outlook for the Industry:
A. ISP Division: The internet is allowing a greater flexibility in working hours and locations especially with the spread of unmetered high speed connections and web applications. The internet can now be accessed almost any where by numerous means especially through mobile internet devices Mobile phones, data cards, cellular routers allow users to connect to the internet from any where. The low cost and nearly instantaneous sharing of ideas, knowledge and skills have made collaborate software. Internet  significantly facilitates the process of development of nations and its citizens in all  respects be it economic, social or cultures.
B. BIODIESEL Division: The global market for Biodiesel is entering a period of rapid transitional growth, creating both uncertainty and opportunity. A fundamental transition in global fuel
production is now happening. India is an energy deficient nation by global standards, with global demand and global energy prices likely to increase in the medium to long term, the macro economic impacts, especially in terms of balance of payments, could adversely effect the country’s future development. This grim energy prospect for India has forced policy makers to intensify their efforts to search for alternative fuel options. In this context, biofuels may offer options for meeting part of India’s energy needs.
India’s total biodiesel requirement is projected to grow to 3.6 Million Metric Tons in 2011-12, with the positive performance of the domestic automobile industry. Analysis from Forst & Sullivan, Strategic Analysis of the Indian Biofuels Industry, reveals that the market is an emerging one and has a long way to go before it catches up with global competitors. The Government is currently implementing an ethanol-blending program and considering initiatives in the form of mandates for biodiesel. Due to these strategies, the rising population and the growing energy demand from the transport sector, biofuels can be assured of a significant market share in India. Jatropha incentives in India is a part if India’s goal to achieve energy independence by the year 2012. Moreover, the Indian Railways has started using the oil (blended with diesel fuel in various ratios) from the Jatropha plant to power its diesel engines which was great success. Currently the diesel locomotives that run from Thankavur to Nagore section and Tiruchirapalli to Lalgudi, Dindigul and Karur sections are using Biodiesel (petro blend of jatropah oil). In one of the biggest initiatives for bio-fuels production in the country, India Railways is
poised to setup four bio-diesel plants costing around Rs.120 crores. While two bio-diesel esterification plants are going to becommissioned at Raipur and Chennai by 2013 the other units will be set up subsequently.

Our country is in an enviable position to become a world leader in biofuel sector and there by ensuring a multi dimensional micro and macro benefits for the economy in the medium to long term. In the long run the growth of biofuel sector in our country will directly and positively impact our trade deficit by reducing oil imports and foreign exchange outflows while enhancing energy security. In addition the revenues from carbon credit to the industry earnings will further improve its viability. By 2020 India will become largest
biodiesel processing, blending, consuming nation. Biodiesel will be viewed as an integral component of national energy security which
will increasingly relies on clean indigenous renewable fuels.

Capital work in Progress: Capital Work in Progress includes additional equipment for enhancement & modification of Estrification unit / Distillation unit and LLE.
Financials: For Q2FY13, the company came out  with flat topline and a much better bottomline. The Net Loss of the company decreased from Rs.15.57 Cr in Q2FY12 to Rs.5.44 Cr in Q2FY13. Even there was improvement in the OMP and NPM. In face NPM turned out to be positive [3.90%]  in  Q2FY13 as against  -34.74%  in Q2FY12.  In fact if  you closely look at the Q3FY13, results then  your would find that:
Total Income: Rs.27.74 Cr
Totall Expenditure: Rs.26.66 Cr
This gives a clear profit of Rs.1.08 Cr, instead of a loss. Hence, at EBIDTA levels it is making profit, with a single plant in operation.  Now consider what will  happen when the other two plants will start working, within a short time? According to my sources,  even in Q3FY13, the company is expected to show better financial performance and the Net Loss is expected to come down. It is therefore a turnaround case and should be bought into in all declines, before it starts  hitting upper circuits once again. For more on the company please, CLICK HERE.