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Write about products and trends that interest me, primarily in the healthcare and intellectual property fields. Deep due diligence and discussing opposing viewpoints keep me interested and involved with SeekingAlpha. Always behind companies striving for cures to chronic diseases, and... More
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  • India Globalization Capital; A Company Rising From The Dead

    Throughout the past couple of weeks, there has been a significant amount of renewed investor interest in the beat-down, written-off stock India Globalization Capital (NYSEMKT:IGC). Upon doing further research myself, I believe there are multiple reasons to appreciate this stock, as many traders and investors alike do not seem to comprehend the multi-pronged business. Although currently in penny land, I see a good potential opportunity in IGC. A construction and iron-ore specialist company with its domestic base in Bethesda, Maryland, it has been beaten down silly over the past couple of years, down approximately 95% since it was first listed in April 2006. However, IGC is in line to finally start being on investors' good sides due to smart acquisitions to capitalize on business opportunities not only in India, but more importantly, in China. IGC has five main strategic business units:

    1. Ironman, a Chinese iron-ore beneficiator [purifier] and extractor that IGC recently acquired in late 2011

    2. Techni Bharathi, an Indian infrastructure company

    3. IGC Mining & Trading, which operates two hubs (but really one that counts; more on this later) where iron ore is shipped to-and-from, and traded in India

    4. IGC Logistics, which deals in material logistics and shipping

    5. IGC Materials

    The Troubles

    IGC has been, and will continue to be, one of the numerous victims of harsh iron ore legislation in India. In case you are not familiar with iron ore, it is one of the most commonly used metals today, and can be found in everyday products: engineering mechanisms, automobiles, basic machinery, etc. It is used to make pig iron, which is subsequently one of the main materials in steel. The Indian Supreme Court has initiated two bans with an inevitable third on the way since 2011, banning, in particular, mining exports in once dominant states (India's richest state, Goa, in October 2012, Karnataka in 2011, in addition to significant added pressure on Odisha [formerly called Orissa] [WSJ]), decreasing India's aggregate global mining export share from 21% in 2007 to 4.9% in the first eleven months in 2012 (more on that here). It has been speculated that India will start to import more iron ore than it exports, which is practically unimaginable for a country that once was one of the most commanding exporters. This undoubtedly hurt IGC in many capacities, but particularly its Goa trading hub, as it could not export iron ore. This country-wide weakness allowed international competitors like Rio Tinto Group (NYSE:RIO), Vale SA (NYSE:VALE) and BHP Billiton (NYSE:BHP) to eat up market share.

    The Competitive Advantage of Krishnapatnam

    IGC - India Mining and Trading owns two trading centers in two different Indian states, one in Goa like I mentioned previously, and one in Krishnapatnam, located in Andhra Pradesh. While the Goa hub cannot currently export iron ore pursuant to the ban, the Krishnapatnam port can. This has recently turned into a key asset as Andhra Pradesh has not faced the sharp sanctions issued in similar states. This represents a very large competitive advantage as other Indian companies iron ore export revenue streams have been largely, if not completely, eradicated. From a strategic perspective, Krishnapatnam lies on the East coast of India, right on the Bay of Bengal coastline. This provides a shorter trip to China on the way to-and-from the beneficiation process as compared to other mines/hubs in Goa and similar states, which are located on the West coast of India.

    The Added Value of Ironman

    Ironman (http://www.hfironman.net/en/index.php), IGC's recent Chinese acquisition completed in late December of 2011, is one of the key drivers behind IGC's potential. Ironman has fascinating technology that extracts iron dust via magnets, then use a wet/dry purification technique that has a byproduct of 65%-67%, high quality Fe ore (more on that here). This is fascinating technology, which, very importantly, is also environmentally friendly (more on that later). Ironman is based in the vicinity of Beijing (250 miles away) and is within 185 miles of two seaside ports, and has rights to its current land until 2018 (taking into account China's overall land mass, those distances are not as vast as they may seem). It is estimated that this area has "well over 3,000,000 tons of iron ore deposits". At the moment, global iron ore prices are bouncing off of last year's lows (but down-trending currently after hitting 15 month highs in February), at around $135 USD / ton. So, Ironman's reserves could easily be valued at over 400 million. IGC's current market cap, approximately 16.73 million, sits at less than 5% of this value. So, to put it in perspective, one of IGC's five strategic business units has reserves that are 24x its current market capitalization.

    The best part about Ironman, in my opinion, is their green, environmentally friendly processes. Pollution, particularly industrial, has been in Chinese, and world, news a good amount for being the driver behind cancer and other harmful diseases, in addition to the ridiculous smog that covers a significant part of China's biggest Mainland cities (I would suggest you just search "China Pollution"). Ironman does not use chemicals for purification, replaces the sand that it extracts the iron ore from, re-uses and conserves water, irrigates land, and plants trees and shrubs in the area. Pollution from iron ore processes (more on that here), is widely documented and noxious. Innovative processes like Ironman's are essential, from a macro perspective, for China to getting pollution under control.

    The Potential for Techni Bharathi

    Remember Techni Bharathi, IGC's Indian infrastructure strategic business unit? IGC, after forming a partnership with Techni Bharathi in 2007, recently acquired 100% of the company in December of 2012 (here). They were one of the guys behind several huge Indian infrastructure designs, including the Cochin International Airport in Nedumbassery, India, the National Highway Authority of India, multiple Indian railroads, hydro-electric plants, and other notable infrastructure development projects. While the majority of this work was completed years ago, India is facing a growing need for upgraded facilities nationwide. According to this WSJ article, even the Canadian pension fund is looking for investment opportunities in India, as it is starting to get overcrowded and placing a burden on existing roads, railroads, and airports, which just so happen to be the same projects that Techni Bharathi contributed to before. The SME Times is similarly reporting that, "India plans to use $1 trillion in infrastructure development … rolling out massive developments touching rail, road, telecoms, power, and airport infrastructure." This coincides with the BRICS (Brazil, Russia, India, China, South Africa) plan to help fund an aggregate $4.5 trillion in infrastructure issues (more on that here). Needless to say, a decent opportunity rests in the hands of Techni Bharathi going forward, with some of the same projects that they worked on in the past needed once again.

    Risks

    As with any stock, particularly one with a small market capitalization and sub-1 stock price, there are multiple risks present. Usually, the company is a sub-1 stock for a reason. While IGC was the victim of harsh legislation and didn't necessarily do anything wrong, there are still a number of risks to understand. The biggest risk that I see is the lack of demand for its products. While China iron ore demand is expected to increase by 50 million tonnes (not tons) in 2013, it is not enough to keep up with other steel importers (particularly the big 3 of Vale SA, BHP, and RIO). Keep in mind that China produces approximately half of the world's steel. This is a key issue as the vast majority of IGC's revenue either goes into steel through China, or is traded in India, likely to be used by the buyer in steel production. If China's growth continues to slow down relative to the past couple of years, this potentially could be a huge problem for IGC's cash cow. Another risk to consider is the possibility of further iron ore legislative reform in Andhra Pradesh. While there is nothing currently on the table, any potential reform would be severely damaging to IGC's Krishnapatnam business (currently 3 of India's 28 states face such damaging reform). Also, the lack of certainty revolving India infrastructure is something to consider. It is uncertain when the afore-mentioned projects will commence, or if they will commence, who will be used to perform them. While IGC has its fingerprints on earlier infrastructure developments, it is uncertain whether or not they will be involved the second time around. One last thing to keep in mind is the financing provided to IGC by asset manager Bricoleur. IGC owes Bricoleur an outstanding 1.8 million dollars, in addition to 171,000 shares each month this debt goes unpaid in lieu of interest (this started 2/1/13). For a company that is just turning profitable, this debt will most likely to a while to be re-paid, and with approximately 64 million shares issued, the Bricoleur dilution could start to weigh down IGC's stock price.

    It is uncertain whether or not this mixture of diversifiable and un-diversifiable risks will get in the way of IGC's potential. More information will be known when IGC discusses its Inner Mongolia mines progress (could not start until Chinese winter ended).

    Bad Press

    I have read on several forums that "because this company has business operations in China, it's a scam" and "hiring a new audit firm before a fiscal year is a bad sign." Not exactly. One of the reasons IGC hired its current audit firm, ASA & Associates, is because of their extended resources. They have offices all over India and preferred relationships in China, in addition to a larger team than their previous auditing firm, Yoganandh & Ram. They are also a member of NIS Global, which is overseen by ex Big 4 accountants and other professionals to provide a "one-stop shop" for customers, particularly international corporations. There were no inconsistencies with numbers, no red flags, etc. In my eyes, this legitimizes IGC if anything; a more widely known accounting firm provides accountability, responsibility, and (should) add confidence to current and potential investors (see here on Chinese scam stocks with questionable accounting information).

    CEO Comments

    IGC is headed up by noted engineer Ram Mukunda. He holds a variety of awards and distinctions, including being a Council Member at the Harvard Kennedy School of Government, Ernst & Young Entrepreneur of the Year, and the University of Maryland Distinguished Engineering alumnus award (more here). He also has a highly distinguished background in the telecommunications industry, so, his expertise could be potentially handy for developing some afore-mentioned telecom infrastructure in India. He recently commented that he is optimistic for IGC's outlook this year for a couple of reasons. One, more Chinese contracts are getting filled, and he expects this activity to increase as IGC expands from just India and China. He was also enthusiastic about the climb in iron ore prices (to increase the margins delta), described above, that have changed significantly since 2Q12 lows.

    Conclusion

    I believe IGC represents a good opportunity. It would be a slam-dunk if steel, so, subsequently related, iron ore, supply wasn't overwhelmingly large as opposed to demand. IGC recently eliminated a lot of fixed overhead in an order to be profitable, and posted a profit of .01 EPS last quarter, which represented its first profitable quarter in quite a while. In addition to what I mentioned before about Ironman and Techni Bharathi, you have IGC-Logistics, which focus lies within shipping / transport. Needless to say, this is a very hot sector right now with various private equity, bulge bracket IB's, and market commentators saying this market sector is where to be (manufacturing activity around the globe starting to pick up, with the Economic Times specifically saying China and India is the place to be [IGC only has operations in these two countries].) Then you have IGC-Materials, who could feasibly provide the support and/or raw materials for Techni Bharathi, or any contractor, to build the inevitable infrastructure upgrades coming to India. Finally, you have their trading business, with IGC's export hub in Krishnapatnam, Andhra Pradesh, unaffected to date by any significant, non-diversifiable iron ore legislation (although that could always change). Recently, Mukesh Ambani, India's richest man (and energy magnate), was on CNN for his first interview in a decade. When asked specifically about India by Fareed Zakaria, he said he was "very bullish", even after Zakaria mentioned the lack of infrastructure development. Some specific comments were, "India has aspirations of a billion people, all the billion people count ... India is a bottom up story." All in all, IGC is not a scam; it is a speculative company who got beaten up during the bad times, but who could turnaround substantially in better times due to smart investments in promising markets.

    Disclosure: I am long IGC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: BHP, RIO, VALE, IGC, long-ideas
    Apr 02 11:33 AM | Link | Comment!
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