Sunil Hitech Engineers

As investments in the power sector is gathering pace, there is dearth of companies who can provide engineering services required to build the power plants. Sunil Hitech, which is in the fabrication, erection and commissioning work, has been a key beneficiary of this demand. No wonder, the company currently has an order book of Rs 2,062 crore, which is 3.5 times its 2008-09 revenues and provide visibility for the next two years. As a result of its efforts to move up the engineering value chain, the company has bagged balance of plant (BOP) power projects from Mahagenco and L&T. The advantage of this move is that the company not only qualifies for BOP contracts of up to 250 MW, it can also eye for large size projects in this segment and garner higher revenues. Sunil Hitech’s stock is currently trading at a PE multiple of 8 times which is attractive for acompany, which is operating in a growing industry and is expected to report strong growth in earnings over the next two years. Historically, the company’s stock has been trading in the range of 10-22 multiples, which is higher as compared to its current PE. The gains from an investment in this stock could come from growth in earnings as well as a possible rerating.
With inputs from Sarath Chelluri the company is now moving into other states on the back of its increased scale and bidding capacity. The stock is trading at Rs 187, which discounts its 2010-11 estimated earnings by 5.5 times. The valuations are reasonable for a company which is operating in a fast growing industry. Strong order book, high revenue growth, good margins, robust return ratios, regular dividends and low debt-equity are among key factors that make agood case for investment in this company.

SREI Infrastructure Finance

EPS Dilution Likely In Short Term, But Both Will Gain From Synergies In The Long Run

KOLKATTA-BASED SREI Infrastructure Finance, a non-banking finance company (NBFC) which is into financing of infrastructure-related segments, has announced an amalgamation with Quippo Infrastructure.

   The company's main lines of business are equipment finance, project finance & advisory. This is where the amalgamation part comes into play as Quippo Infrastructure is an equipment bank. For instance, Quippo has a partnership with Tata Teleservices, featuring the largest independent telecom infrastructure in India. Apart from it, Quippo has oil & gas drilling equipment and construction equipment as well.

   Now that Quippo will be a part of SREI, the company will have the advantage of synergies. For instance, if a contractor approaches the company, Srei has the option to rent, lease or sell the equipment, which no other finance company in India is in a position to do. There are bound to be synergies in the long run. However, in the short term, the amalgamation will result in dilution of earnings per share, one reason why the stock took a 25% hammering during the last one month, while the Nifty lost just 8%.

   Infrastructure equipment financing comprises two-thirds of the assets under management, with the remaining one-third under project financing. There are synergies between these lines of business as well. For instance, the contractors to whom Srei provides finance under equipment financing can get business from the project it finances. Therefore, the various business segments of the company such as project finance, advisory and equipment finance are inter-related.

   On the liability side, loans from domestic banks and financial institutions constituted more than 50% of the total funds during the previous fiscal. Close to 13% of its funds were raised from the bond market. On the assets side, the company has a good asset quality, which is evident from its low non-performing assets (NPAs) or bad loans.

   At a consolidated level, NPAs are minuscule. In equipment financing business, NPAs were less than 1% of net advances at the end of December 2009. The company reported an net interest margin or NIM of 5.1% in the quarter ended December 2009. At the current level, its NIM is one of the highest in the NBFC segment. However, its stock trades at a discount to other players in the NBFC industry. At current levels, it is trading at a price to book value (P/BV) ratio of 1.1, while IDFC, which is also an infrastructure finance company, is trading at a P/BV of 3.2. Clearly, SREI Infrastructure Finance is trading at a huge discount to its fundamentals.

J Kumar Infra Projects

A relatively smaller sized construction company, J Kumar Infra Projects is expected to grow by over 50 per cent annually, over the next two years. This is primarily given its healthy order book of Rs 1,300 crore, which is over three times its 2008-09 revenues.

The order book is expected to further improve as the company has already bid for about Rs 3,000 crore worth of projects. The company has adiversified portfolio given that it undertakes construction work for transport, irrigation, pilling, bridges, airport runways and buildings. Notably, the company mostly undertakes projects of government agencies, where investments are higher and are less affected by economic slowdown. Also, as majority of its revenues come from Maharashtra is organised into telecom software products, services and automotive, industrial and utility business. Though software products were the key contributor to its topline accounting for 40 per cent historically, currently services contribute almost 95 per cent to the topline.

The company has been able to improve its margins in 2008-09 to 23.5 per cent from 14 per cent in 2007-08, on the back of a 22 per cent growth in revenues and lower selling and administrative costs. However, the cut in R&D expenditure of communications companies has dented revenues as well as margins in the current fiscal. For the 9 months ending December 2009, sales were down 21 per cent while operating profits were down 37 per cent with margins at 17.6 per cent. How the margins move going ahead will depend on the pace of pickup in IT spending of communications companies.

The company is, however, bullish and is betting on the pickup in demand for handsets (increasing subscriber base and use of smart phones, especially in the emerging markets) and semiconductors. Sasken is also diversifying its presence post its acquisition of Ingenient Technologies, an embedded multimedia software solution provider, in the December quarter. At Rs 178, the stock is trading at 6.5 times 2010-11 estimated earnings of Rs 27 and looks attractive.

Jindal Saw

Considering its diversified product portfolio of pipes supplied to customers in the auto, power, water, sewage and oil and gas sectors, Jindal Saw is well placed to take the advantage of rising demand in the user industry, especially in India wherein the potential is huge. The revival in crude oil prices and investments, particularly in the export market, would also benefit Jindal Saw.

The company currently has an order book of about Rs 3,400 crore (including export order worth Rs 1,200 crore), which provides good visibility for the medium-term. The domestic pipes industry is growing on account of the demand from the water and oil and gas sectors. The new gas discoveries and increased capex on exploration and production activities has led to new orders coming in. GAIL is expected to finalise three new pipelines and could award orders for about 1 million tonnes of pipes over the next 12 months, including orders for 400,000 tonnes of saw pipes by March 2010.

Jindal Saw is expanding its capacities and setting up 200,000 tonne ductile pipe capacity and 100,000 tonne HSAW capacity, which will be operational by June 2011 and December 2010, respectively. On the back of its expansion plans and opportunities in the sector, its revenues and earnings are expected to grow at about 18-20 per cent annually, over the next 2-3 years.

NIIT Technologies

 

THE stock of mid-tier IT company NIIT Technologies has fallen sharply in the current stock market slump. In the past one month, the stock has fallen by 11%, faster than the 9% decline in the benchmark Sensex.

   The recent fall in the stock price and improved financials in the third quarter make valuations of NIIT Technologies reasonable at current levels.

   During the time period, NIIT Tech has outperformed broader market indices. In three months, it has posted a return of 9% compared with the fall of 3% in the Sensex. Over a six-month period, the stock has gained 25% against the 1% drop in the Sensex. It has shot up more than two-fold from its year-ago level during which time the Sensex rose by 69%.

   Like most other mid-sized IT companies, NIIT Tech's business has been hit due to a slump in global IT spends. It has reported a year-on-year drop in sales during each of the four quarters ended December 2010. The company's profitability was also under pressure since its topline shrank faster than its operating costs.

   However, the company's performance in the December 2010 quarter reflects signs of revival. Its sales grew sequentially for the second quarter in a row and this time with a healthy jump of 178 basis points in operating profitability. Its US business is experiencing a recovery. The company's fresh order intake in this region has nearly doubled to $34 million from the quarter-ago period. Overall, new orders have grown in size to $57 million from the lows of $43 million in the June '10 quarter.

   The company's management has cited improvement in business from troubled banking and finance vertical and new orders in logistics vertical as reasons for the better show. Another indication of revival is the expansion in its headcount during the December quarter. This has happened after a gap of four quarters, each of which saw a sequential fall in the workforce.

   At Monday's closing price of Rs 158.4, the stock is valued at 8.3 times its trailing 12-month earnings. P/Es of some of the other mid-tier IT players, including Mastek and Hexaware Technologies, fall in the range of 9-14. The company has booked orders worth its six-month sales. It has started witnessing traction in its major business verticals. Given this, NIIT's stock looks reasonably priced at the current level.

 

Dishman Pharmaceuticals

Crams major Dishman Pharmaceuticals has seen its sales grow 27 per cent CAGR during FY 2004-09, while its profits have grown by 37 per cent during this time. The company operates through four business segments or divisions which in addition to its core business of CRAMS, includes marketable molecules (MM) and its two acquisitions,

Dutch company Solvay’s vitamin business and Swiss-based Carbogen-Amcis (CA) which offers drug development and commercialisation services. While the prospects from this contract research business is good, the short term outlook is uncertain as pharma MNCs cut their R&D costs and restructure operations. Its Carbogen business which is being restructured saw a 41 per cent year-on-year drop in revenues in the December quarter to Rs 67 crore. Further, a 48 per cent decline in its MM division due to a plant shutdown (for FDA inspection) led to a 21 per cent dip in overall revenues for December 2009 quarter to Rs 222 crore. Its Solvay business barely grew in the quarter due to uncertainty post the merger with Abbot Labs. The management is targeting an overall revenue growth of 20 per cent in 2010-11 due to higher business from Solvay and Astra Zeneca, commencement of its Chinese operations and entry into the high potency drugs. The stock is down 14 per cent from the start of the year and considering that March 2010 quarter could also be weak, it could remain subdued. At Rs 207, the stock is trading about 11 times its 2010-11 estimated EPS of Rs 18.5. Investors could choose to buy at dips.

VA TECH WABAG

Water treatment company. Bought out by Rajiv Mittal and his colleagues with private equity assistance. Took over its parent to become an India-based global player.
Secret Sauce VA Tech Wabag's Austrian roots and local management gives it a twin advantage of global technology and economical costs.
Financial Dashboard This has been one of ICICI Ventures best investment ever. It sold a part of its stake realising an annualised return of over 240 percent over five years.
What the Smart Set Saw A competent management, a bunch of patents and a growing opportunity.

Many years ago, Rajiv Mittal was just another employee in UK-based Wabag Water Engineering, which later became VA Tech Wabag. A quirk of circumstances and the early leadership lesson saw Mittal stave off big competition from the likes of engineering giant Larsen and Toubro to buy the Indian arm of VA Tech in 2005. Another set of events finally culminated in Mittal buying out the Austrian parent in 2007, overnight making him a global player with a presence in 19 countries and a large research establishment in Vienna.

 

The demand for water industry is exploding. The desalination business is expected to grow at 26 percent per year. It is this opportunity Mittal is poised to tap.

Mittal and his colleagues, who had invested Rs. 10 crore for a minority stake in 2007, are worth more than Rs. 400 crore for their current 38 percent stake. Investors like Singapore Investment Board, Passport Capital and Satra have latched on to the story buying 30 percent in the last one year. ICICI Ventures, which helped Mittal in the management buyout, made its biggest ever return when it sold a part of its stake. As Mittal and ICICI Venture mull an initial issue of shares in the coming months, VA Tech may well be poised to be the next hot stock on the block.

 

VA Tech has a great presence in the government sector — cleaning up sewage water in cities and fixing drinking water supplies. Mumbai, which now sends its sewage into the Arabian sea, is set to put out a $1billion contract in the next couple of years to treat it and reuse the water for non-potable purposes. Mittal has been making his rounds to the city and is confident of winning a few contracts. Recently, his firm won the biggest desalination project in Chennai, with IDE as its partner.

 

However, the opportunity is attracting serious competition already. Having managed to set up a Indian multinational leader, VA Tech now has to defend it turf, retain its talent and keep its cost competiveness to stay remain the leader in its business. Mittal is already tied up with Chennai-based Anna University to do local research and is also setting up a local research centre to augment its existing centre in Austria. Says Mittal: "Water technology is still evolving and we have as much as an opportunity as anyone else in the business."

SHRIRAM TRANSPORT FINANCE

Belongs to Chennai-based Shriram Group. Lends to small truck owners. Focusses on the segment not taken by banks.
Secret Sauce Built scale in a niche business by understanding the customer well.
Financial Dashboard ChrysCapital invested at Rs.35 per share in 2005; TPG Newbridge came in at Rs. 112 per share in 2006; JM Finance/Blueridge/Tiger Global paid Rs. 300 per share in 2007.
What the Smart Set Saw An ability to minimise risk in a segment considered high-risk.
Guiding Light To streamline the business by eliminating the middlemen dominating the truck resale business.

It is an unusual business model by any count. As soon as its customers become large enough, Shriram Transport Finance Company (STFC) asks them to take their business away to a bank. The company will only lend to truckers who own between one and four trucks. A bulk of the lending is for the resale of old trucks. Yet, the model, which has helped build a customer base of 1.4 million customers and an asset value of 27,000 crore for the Chennai-based company, has been hugely successful. STFC has over the past 30 years built up a rapport with the trucker fraternity which has been impossible for anyone else to replicate so far.

So how does one make money by lending to a category that was left out by traditional lenders for being high-risk? "Serving sub-prime customers was no easy task," says R. Sridhar, managing director of STFC. "For years, STFC would get a lower credit-rating because of the customer profile, leading to more expensive funds. Finding resources from the banks and institutions for this large but credit starved segment was an ardous process.''

 

Despite this handicap, the company was able to bring in institutional credit to the market that it built up simultaneously. The rates at which it lends have softened to 16-18 percent per year from above 20 percent even four years ago. Ironically, the company's large customer base helps it spread the risk, says Sridhar.

 

One measure of STFC's success is the returns that the Delhi-headquartered private equity firm ChrysCap reaped last month, when it sold off its holding at 11-12 times its investment. ChrysCap earned more than Rs 1,400 crore on the investment it made five years ago.

 

The focus at STFC these days is to expand the business further, by pushing out the traditional truck brokers who dominate the resale market. This is being done by organising the sales of repossessed trucks at auctions all over the country. STFC finances the purchase but without any commission, saving money for both buyer and seller. The company has begun maintaining a nationwide database of trucks, with pictures of the machine and details of its condition and age. Truckers can access these on touch screens and decide if they want to buy a vehicle.

 

C and C Constructions

C&C Constructions is small size construction player with diversified geographical and revenue mix. On the back of opportunities in the construction sector, the companys order book has grown constantly from mere Rs 109 crore in 2004-05 to currently at Rs 3,100 crore, which is about four times its 2008-09 revenues and good enough to ensure growth in the next 2-3 years. The roads segment accounts for almost 56 per cent of the order book followed by buildings at 27 per cent, railways at 13 per cent and water and sewerage accounting for the remaining. The company is making inroads in segments like water and power transmission wherein it has already got contracts like supply and errection of 400 kv transmission lines from Power Grid. The stock is trading at 8 times its trailing earnings and 4.5 times its estimated earnings for year ending June 2010.

The valuations look good considering the strong order book and future growth prospects. Analysts expect the companys revenue to grow by 50 per cent annually for 2009-10 and 2010-11. Growth beyond 2010-11 should also remain good considering the opportunities in the sector. Although the company came out with an IPO in around 2007, it has been consistently paying dividend since the last seven years.

Gold ETFs post negative return, but better stocks

GOLD ETFs gave an average negative return of 2.56 per cent in January. However, they outperformed the Nifty and Sensex during the month.

After moving above Rs 18,000 per 10 gm in the first week of December, gold prices have largely been following a downward trend. In December too, the returns were negative at 7.27 per cent.

Against an average monthly price of Rs 16,370 in December, the prices were bettered in January to Rs 16,734.

However, during the year-long period from January 2009 to January 2010, gold ETFs gave positive returns of 20 per cent.

In the three-month period from November to January, Kotak Gold gave a return of 1.89 per cent, while Reliance Gold gave 1.87 per cent. "Even at 2.56 per cent, gold has outperformed Nifty funds, which have given a negative return of 6.13 per cent. Sensex funds gave a negative return of 6.34 per cent in January," said Krishnan Sitaraman, director of Crisil Fund Services.

There has not been much activity in gold in January as the US dollar was moving up. We had advised investors to book profit when prices hovered around $1220 an ounce. Since the first week of December, investors have been retaining their positions without much selling or fresh buying.

However, in February prices may move upward and fresh buying is recommended at $1080 level. In a couple of weeks, gold is expected to gain $35 and move up to $1100. But we advise taking short positions as after it breaks $1073, gold may move

 

United Bank of India IPO

 

United Bank of India's offer price looks attractive given high loan growth, improvement in asset quality

IPO details
Price Band: Rs 60-66
issue size:  Rs 300-330 crore
Date: Feb 23 - 24


STATE-OWNED United Bank of India is operating mainly out of the eastern part of the country. Of a total 1,453 branches, more than 80% are in the eastern and north-eastern part of the country. However, the bank is now trying to expand its footprint. For instance, out of 128 branches opened since March 2007, only 33 are in eastern India. With a balance sheet size of Rs 72,000 crore, it is one of the smaller public sector banks (PSBs). 

   The bank has made a considerable improvement during the past five years of its operation. For instance, its loan book has grown at a compounded annual growth rate (CAGR) of 34.8% in the period FY2004-09. At this pace, it is clearly one of the fastest growing banks in the industry. During the same period, deposits grew at a CAGR of 19.1%. Clearly, advances have grown at a much faster rate than deposits, which has led to an improvement in the creditdeposit (CD) ratio. 

   The CD ratio improved from a mere 35% in FY04 to 65% in FY09. This shows that the bank's effectiveness in extending credit has substantially improved. United Bank's loan book grew at higher than industry rate even in the current fiscal. The year-to-date (YTD) growth rate in the loan book stood at 15.5% for the bank as on September 30, 2009, while the industry's credit grew by only 3.7%. 

   The bank has improved its asset quality too. Its net non-performing assets (NPA) stood at 2.4% of net advances in FY05, which came down to 1.3% in September 2009. However, even at current levels, its NPAs are slightly higher than other banks of similar size. 

   For instance, the average net NPAs of Corporation Bank, Andhra Bank and Bank of Maharashtra stood at 0.7% of their net advances in September 2009. 

   United Bank's other strength lies in the fact that it has high share of low-cost current account and savings account (CASA) deposits, which formed 34% of total deposits as of September 2009. Not many banks command such a high share of CASA deposits. The annualised net interest margin (NIM) stood at 2% in the same period. In the past two fiscal years, average NIM stood between 2.2 and 2.3%, an area where it lags behind most well managed banks which command a NIM of close to 3%. 

   Another criteria, on which the bank's performance falls short of industry standards is return on assets (RoA). Its annualised RoA
stood at 0.7% as of September 2009 significantly lower than industry average RoA of 1% in FY09.

VALUATIONS:

The management has indicated that the initial price offering would be in the price band of Rs 60-66 per share. The book value stands at Rs 94.75 per share. At the higher end of the price band, the price to book value (P/BV) ratio stands at 0.7. The other relatively smaller state-owned banks such as Corporation Bank, Andhra Bank and Bank of Maharashtra are trading at a P/BV of 1.2. Given the valuations of peers, the bank's IPO is clearly at a discount. 

   Though its performance falls short of its peers on a few parameters, the offer price still looks attractive for retail investors especially in the light of the high loan book growth and improvement in asset quality. 

   Moreover, the management has announced a discount of 5% for retail investors. It makes sense for long-term investors to subscribe to the issue.

 

Bharati Shipyard

Shipyard companies are trading at low valuations given that there is lull in the industry and concerns over new orders. In case of Bharati Shipyard though, its strong order book provides confidence.

The same currently stands at about Rs 5,000 crore, which is more than five times the company’s 2008-09 sales providing good revenue visibility for the next two years. The concerns over visibility in new orders have also meant that the companys stock is currently available at 4-5 times its 2010-11 estimated earnings. On the back of its order book, analysts are expecting the company to register a good revenue and net profit growth in 2010-11. Bharati has been eyeing orders from other segments like defence to counter the slowdown in the offshore segment. The defence sectors orders are expected to flow in the near future considering that India is looking for reducing its dependence on imports. However, as Bharati generates a large part of its revenue from the offshore vessels, revival in the offshore activity is critical. If the revival happens on the back of the improvement in the global economy, Bharati will benefit on two counts.

Firstly, due to its presence in the shipbuilding space and secondly, due to its recent acquisition of Great Offshore, which is a forward integration given that the latter is in the business of providing offshore oil services.

Apollo Tyres

After a dismal 2008-09, the auto sector has taken off in the last four months recording higher sales in key auto categories of cars and commercial vehicles (CV). Commercial vehicle sales, for example, have doubled in the month of January visa-vis the year ago period. This is likely to help Apollo Tyres, the country’s largest CV tyre maker.

The company reported a 12.2 per cent sequential growth in consolidated revenues for the December 2009 quarter to Rs 2,296 crore. At the standalone level, higher raw material (natural rubber) costs meant that OPMs fell 90 basis points to 15.4 per cent despite Apollo increasing prices by 5-10 per cent. With natural rubber prices at historical highs, expect margins to be under pressure in the fourth quarter unless the company hikes its tyre prices further. With the commissioning of its Chennai plant in the first quarter of 2010-11, and completion of a brownfield expansion by March 2010 should help Apollo meet the increased demand for radial tyres.

The company which has subsidiaries in South Africa (Dunlop) and Netherlands (Vredestein) is planning to improve the utilisation levels and operating profit margins of the former. If it manages to do that then overall margins could improve going ahead. At Rs 55, the stock is trading at 7.3 times its 2010-11 estimated earnings, which is not demanding and investors can consider taking an exposure to the stock.

CEBBCO

Makes steel bodies for goods carriers. Promoted by Kailash Gupta and Ajay Gupta

Secret Sauce Technical knowledge that combines knowledge of motion technology and steel fabrication.

Financial Dashboard Jacob Ballas, which has New York Life as its anchor investor, has invested in the company at a valuation of Rs. 110 crore. Today the company is being valued in the range of Rs. 500-600 crore.

What the Smart Set Saw An entrepreneur who had built deep relationships within the heavy vehicles industry and who was nimble enough to adapt his business model in the worst of times.

Guiding Light To use knowledge and technology to be the largest player in fabrication for goods applications like trucks and railway wagons.

For Ajay Gupta, opportunity was born out of a crisis. Gupta had just invested Rs. 40 crore to automate his plant when the goods carrier market went into a cold freeze in 2008. "In adversity, you can either sit and wait for the situation to clear out or try and figure a way out. Ajay did the latter," says Vinay Shah, CEO, Mosaic Capital, whose firm also provides corporate finance advice to Cebbco.

Forced to look for alternatives, Gupta figured that Cebbco's fabrication strength and domain expertise could be applied to one sector that wasn't moribund: Indian Railways. He decided to move into the territory decisively. And in a short time, he established a successful business there.

Gupta took charge at Cebbco, his father-in-law's company, only five years ago when it was a Rs. 20-crore company making "bodies" for Tata trucks. Aided by low costs of conversion, Gupta took the business to Rs. 116 crore. The railway business is helping the fast ramping up.

 

There is a risk that it may get some tough competition for the wagon business. But Cebbco is going beyond just wagons and doing refurbishment for locomotives as well. His investors believe that Gupta should not take his eyes off the core business. "I think Railway business is great and it was commendable the way Ajay has gone out and got this business, but he should keep his core business extremely competitive," says Bharat Bakshi, Jacob Ballas.

Sasken Communication

The company is a key player in providing network solutions including technology research and development for existing telecom players. Recently, it got an order from Inmarsat, which operates a global satellite network and offers mobile communications services, to design and bring into pre-production next generation of handsets, a first-of-its-kind order for an Indian company.

However, it is fighting to remain competitive, like its other IT cousins. The management has slashed 5 management positions to 3, with existing managers doing double duty. They are also in the process of trimming the workforce. Sasken has also filed a petition in court asking for approval to restructure its businesses so that it can remove unproductive assets from its balance-sheet, and create a contingency fund for worst-case scenarios.

In the 9 months of FY09 it’s profits stood at Rs 24.2 crore, up by 35 per cent y-o-y. Its efforts to control costs are showing results in the operating margins, which stood at 19 per cent compared to 14 per cent in Q2 FY09. Current prices have taken into account short-term risks plaguing the company. Compared to its historic valuation levels it is trading at a 27 per cent discount.

Sintex Industries

At PE Multiple Of 10.8, The Stock Of Water Tanks Player Appears To Be Fully Valued

ON A day when the markets cheered strong economic numbers and the Sensex gained 2.3%, the stock of Sintex Industries shed 1.4% to close at Rs 248.6, following dampened quarterly numbers.

The scrip is now trading at a price-toearnings multiple of 10.8, at which it appears fully valued considering its future growth prospects. The company has underperformed the broad market since the start of 2009 registering just 27.7% gain till date against a 71.9% jump in the Sensex. In 2007, the scrip had substantially outpaced gains in the Sensex. However, the market meltdown of 2008 saw it lose sheen.

Well-known for manufacturing water tanks, the company has over the past few years entered into an array of businesses through a series of acquisitions. Its subsidiary Zeppelin Mobile Systems acquired a mobile tower company Digvijay for Rs 64.5 crore to emerge as a total solution provider in the telecom space. Zeppelin clocked a turnover of Rs 66.7 crore in the first half of FY2010, representing 7.2% of the company’s consolidated turnover.

For quite some time, the company has encountered problems. It had raised close to Rs 1,800 crore in FY09 through issue of FCCBs, QIP and preferential allotment for an acquisition, which did not happen due to the market meltdown. Its acquisition of Geiger Tech in Germany a year ago ran into trouble, when the company filed for bankruptcy. Sintex’s other overseas subsidiaries Wausaukee Composites in the US and Nief Plastics in France, too, have been hit by the global economic slowdown.

The company, which invested Rs 500 crore in its organic growth in FY09, carried a cash balance of Rs 1,168.5 crore as of end-March 2009. In fact, the other income earned on this surplus cash balance at Rs 156.3 crore in FY09 represented nearly 48% of the company’s consolidated net profit. A drop in other income was the main reason behind a fall in its profitability during September 2009 quarter.

Investors of Sintex Industries can take heart from the fact that despite a fall in profits, the company has maintained its operating profit margin at the past year’s level. The company’s domestic business continues to do well with rising capacity utilisation. However, the company is likely to report a dismal profit growth in the December 2009 quarter considering the high level of other income in the corresponding quarter of the previous year. An economic revival in the US and Europe next year and a well-timed acquisition could see the company grow its profits substantially in FY11.

SUN TV Network

DTH Subscriber Base Grows To 4 M, Regional Advertising Posts Impressive Growth

SUN TV Network has been one of the better-performing stocks in the media sector during the current rally. In the past three months, the stock has been up 17% while the Sensex clocked returns of just around 3% during the period. The company justified the stock surge by reporting better-than-expected earning growth during the September 2009 quarter.

Sun TV reported a 20.54% growth in its net profit during the September 2009 quarter at Rs 130.56. Its income from operations rose to Rs 320.3 crore this quarter from Rs 237.8 crore in the corresponding quarter last year. For the halfyear ended September 30, 2009, the company posted a net profit of Rs 250.36 crore, up 18.74% as against Rs 210.85 crore in year-ago period.

Sun TV continues to dominate the South India television market with the highest share in top 100 programmes and has maintained its leadership position despite growing competition. Its revenue growth has been led by higher subscription revenue from DTH and strong regional advertising growth. Its DTH subsidiary, Sun Direct DTH, subscriber base grew to four million at the end of the second quarter. On the international subscription front, the Chennai-based company has made a shift from per subscriber versus to fixed fee model. The company is looking for an overall growth of about 15% in its topline and 40% growth in net profit during the year ending March 2010.

According to the management, one of its companies in the radio business has become EBIDTA positive and it expects other companies in the radio business to be EBIDTA positive by the next year. At its current market price, the stock is trading at around 29 times its net profit during trailing 12 months. The stock should command a premium to other broadcasting companies in the current environment taking into account its dominance in the southern market, its encouraging performance during the slowdown and higher revenue visibility compared to others.

SUDHIR GENSETS

Makes power generators using know-how from Cummins. Promoter Sudhir Seth is transforming the business into a service-driven one.

Secret Sauce Extensive range of electricity generators powered by know-how from a three-decade-old "marriage" with Cummins, all put together at six manufacturing plants

Financial Dashboard Net sales - Rs.900 crore; Net profit margin – between 11-12 percent. Net sales CAGR over the last five years 21 percent. Goldman Sachs and GE Investments together invested Rs.300 crore in 2007 for a 10 percent stake, valuing the company at Rs.3000 crore.

What the Smart Set Saw An efficient, stable and profitable market solution to India's perennial power woes.

More than three decades after Sudhir Seth decided to manufacture power generators to address the electricity shortfall faced by small and medium Indian businesses, the energy shortage hasn't abated. Meanwhile, Sudhir Gensets has become a Rs.1,000 crore company with over 40,000 customers across India.

With a 60 percent share in the segments that he operates in, Sudhir is today buys giving his business a services touch. The company has now started to rent out gensets to real estate and infrastructure projects. The company expects this new revenue stream to account for 5 to 7 percent of revenue.

Sudhir's rapid growth over the last few years was powered to a large extent by the telecom and real estate sectors, both of which were building cell sites, homes and offices at a furious pace. As growth for both sectors got broad-based towards middle India, where power was unreliable at best or absent at worst, Sudhir became the de-facto power utility.

But with telecom and real estate growth rates much slower than earlier, the company started looking for newer sources of revenue. The services business has emerged as one answer.

 

Till now Sudhir Gensets was only interested in making the sale, with post-sale servicing being done by local dealers. But after realising the importance of steady maintenance revenue, it has started offering its own maintenance services to customers in Punjab to begin with. Seth says the pilot has been extremely promising, even helping it grow its marketshare by 5-6 percent in the state due to a better understanding of customer needs born from frequent service interactions.

 

Offering turnkey project management and implementation services around power projects and electricity contracts is another area of growth. "Rather than selling our products to contractors, we become the contractors," says Seth's son, Rahul, who is also the company's joint managing director. "The response has been so overwhelming that we are setting up a new manufacturing plant in Manesar to address this additional demand," says Seth.

ACME TLELPOWER

Manufactures "passive" infrastructure products like enclosures, air conditioners and power management units for telecom companies. Founded by Upadhyay, 39.
Secret Sauce Materials that cool electronic equipment using very little electricity
Financial Dashboard Net sales (for the 14 months to May 2009) was Rs.2,130 crore; Net profit was Rs.505 crore; five year CAGR of 128 percent for sales and 122 percent for profit; Rs.300 crore cash flow generated from operating activities in a 14 month period; raised Rs.197 crore from DB International, Earthstone Holdings and Kotak Mahindra Capital in 2007 by selling 1.66 percent in 2007 and another Rs.400 crore from Monsoon India Inflection Fund and Jackson Heights Investments in 2008 by selling 3.35 percent. Acme's valuation in both cases was around $3 billion. But when market conditions delayed Acme's planned 2007 IPO, the company was forced to buy back most of the shares held by these investors.
What the Smart Set Saw A great inventor who understands energy applications inside out and has been able to build a business of Rs. 2,000 crore in just six years.

It is not often that a fast-growing company with revenues in hundreds of crores is able to expand without having to dilute the capital or borrow heavily. One could argue that when a company reaches revenues of Rs. 100 crore, its need for capital balloons and the entrepreneur must necessarily resort to external financing.

Manoj Upadhyay was able to reach Rs 1,500 crore without diluting any stake and needed to take just Rs. 100 crore as debt. Considering that his clients were huge companies like Airtel, Vodafone and such like his products must have enjoyed a huge advantage to command the premium that they did. His internal accruals were huge enough to fund the growth.

And he has done this through fulfilling a very simple need of mobile companies. He reduced costs of operating shelters that house mobile companies' base-stations. Almost 35-40 percent of costs of running these shelters can be attributed to electricity costs in cooling electronic equipment inside a base station. Upadhyay's company makes materials that maintain AC-like temperatures without electricity and even air conditioners without any compressors.

 

But with the telecom sector bleeding from falling tariffs and intense competition, Acme is trying a new tack to keep growing. It is setting up towers of its own. The maximum number of telecom towers that are economically feasible for operators is around 350,000, says Upadhyay. That number could be 450,000 if operators could get "Delhi prices in Mizoram" from their towers.

 

Enter "Ultra Low Cost Solution" (ULCS), Acme's most complete and power-efficient solution for telecom sites, which it claims consumes 40 to 60 percent less energy than existing solutions. "A typical multi-site tower uses 25-30 KW of energy, we can now do it in 5 KW," he says.

 

Upadhyay is now setting up his own towers using his ULCS solution, in remote and hitherto unviable locations, to offer them on a rental basis to telecom operators. The only other way his customers can buy ULCS is if they buy a ten-year service agreement from Acme.

 

As the telecom sector keeps attracting more and more entrants and they launch more services, expect Acme to retain its top slot.

HIMADRI CHEMICAL

India's largest maker of coal tar pitch, used in making aluminium and graphite. Founded by Kolkata-based Choudhary family. The second generation, led by Anurag Choudhary, has taken charge.

Secret Sauce Has the technology to convert even low quality tar into high quality coal tar pitch; has the scope to expand portfolio to 22 products from seven.

Financial Dashboard In 2008-09, revenue was $78 million, core profit margin was 38 percent.

What the Smart Set Saw "A quality product that is backed by robust customer service and technology expertise ," says Vivek Chhachhi of CVCI, who says it was Himadri's customers who helped spot and later recommended the company to the private equity major.

Guiding Light To become India's largest 'carbon corporation'.

 

It is easy to miss Himadri Chemicals' plant in Singur, near Kolkata; being a lesser-known neighbour to the unfinished unit of Tata Motors' Nano project. And even the few who did notice it, might not have guessed that what runs through a refinery-kind of network of pipes and storage tanks is coal tar.

Coal tar? Himadri Chemicals' CEO Anurag Choudhary is used to the casual reaction from people. "Most think it is the tar used to make roads," he says. But for Choudhary, coal tar is a multi-billion dollar opportunity that was first spotted by his father and three uncles back in 1987.

 

The main product made out of coal tar is coal tar pitch (CTP) that is used in making aluminium and graphite. "It was totally dominated by the plants of Steel Authority of India. But there was a 500 percent difference in the raw material price and selling price of CTP. We spotted the opportunity," says Shyam Choudhary, Anurag's father.

In 2007, Himadri unsuccessfully tried to take over Rutgers Chemicals, a Germany-based industry leader in CTP. But for Anurag, the whole experience was an eye-opener.

"Rutgers, a $1 billion-company, was making 22 products out of coal tar. We were making only two. So we decided to instead invest for organic growth," he says.

Three years later, Himadri's portfolio has expanded from two to seven products. "Almost 75 percent of coal tar pitch we make is used by aluminium companies, who are doubling their capacities in the next two years. We are also quadrupling our capacity and setting up another unit in China, the world's largest market and maker of aluminium," says Anurag.

 

He now wants to produce over 20 products at the Hooghly unit. Enough reasons for Bain Capital to find its first investment in India in Himadri last year and for Citigroup Venture Capital International, which had fist invested in 2006, to stay put for "at least three more years."

 

 

Dena Bank

THE buzz in the banking industry on a likely consolidation among state-owned banks, after a meeting between finance minister Pranab Mukherjee and PSU bank chiefs, appears to have been the driver for the rise in stock price of Dena Bank. The scrip has gained 31% in November 2009 compared to just 6% gained by the Nifty, with the market viewing the bank as a potential acquisition target for one of the large state-owned banks.

Despite the recent upsurge in price, the stock still remains one of the cheapest banking stocks in terms of valuations. The Dena Bank stock is trading at a price-to-book value (P/BV) ratio of 1.1. Most of the banks are trading at a much higher price than their book values. In fact, top state-owned banks such as State Bank of India, Punjab National Bank, Bank of India and Bank of Baroda are trading at an average valuation of roughly two times their book value. However, Dena Bank, historically, has traded at much lower valuations.

What is disconcerting is the huge fluctuations in Dena Bank’s performance from quarter-to-quarter. For instance, in the past four quarters, the year-onyear growth in profit ranged from 68%, at best in the June 2009 quarter, to 0% in the March 2009 quarter. In fact, on other parameters, the bank’s performance has been better than many of its peers. For instance, in FY09, it posted a net interest margin (NIM) of 2.9%. Even in earlier financial years, its NIM hovered close to 3%, which is considered as a benchmark in the banking industry.

The bank posted a return on assets (RoA) of 1.02% in FY09, which is roughly close to the banking industry average. It reported a capital adequacy ratio of 11.6% at the end of September 2009 which is in line with regulatory norms.

At around 1% of its net advances, its net non-performing assets or bad loans’ asset quality is satisfactory, if not the best in the industry. In a nutshell, the bank’s performance on the basis of these parameters is not a cause for concern. However, its growth rate is one of the lowest in the industry. In the past five financial years, its profit has not even doubled, which makes it one of the slowest-growing banks.

From a strategic investor’s perspective, Dena Bank can offer value with a branch network of 1,120 branches. But from retail investor’s point of view, it seems that, at current levels, the price has factored in synergies of consolidation, to an extent, which makes the current rise in price speculative.

FIREPRO SYSTEMS

Founded by N.S. Narendra; Provides fire protection and security solutions
Secret Sauce Follows the integrated approach to make sure that the customer gets all the services under one roof. Went global early and now gets 25 percent of revenues from overseas.
Financial Dashboard AIG Investments (now PineBridge Investments) invested Rs. 50 crore in 2006 for 23 percent. Recently Standard Chartered PE invested Rs. 150 crore, at four times the valuation that Pinebridge invested at.
What the Smart Set Saw A company that looked and behaved like its IT peers but was catering to a faster growing construction industry.

N.R. Narayana Murthy probably doesn't know N.S. Narendra though both of them attended the same college — Mysore's National Institute of Engineering — but 20 years apart. The similarities don't end there. Like Murthy, Narendra also founded his company in a small room with a capital of a little more than R.s 10,000 back in 1993. And very much like Infosys, today Firepro is a synonym for its industry - fire protection and security solutions.

And to do that, Narendra first focussed on project delivery to differentiate Firepro from the mom-and-pop companies that had come to dominate the market. So when Intel was developing a 500,000 square feet property in Bangalore and had a specific deadline to finish it, it chose Firepro. "This is important because about 35 percent of the business comes from repeat customers," says Narendra.

 

But when the competition from multinational like Honeywell and Siemens increased, Narendra did what nobody else had done before. "We followed an integrated model from 2000. While others would specialise in security and automation or fire suppression system, we brought every service under one roof as technology was evolving. We even now work with IT companies like Cisco to provide network solutions like developing city surveillance system for Bangalore."

And to make sure that he always had the edge, Narendra invested in people. Of the 1,500 employees, 80 percent are technically qualified. He even managed to lure people employed with international fire protection companies and information technology firms to work for him. And Narendra has been willing to pay for talent with salary packages for senior positions increasing five-fold within two years.

 

Firepro's revenue have jumped from Rs. 20 crore in 2002 to Rs. 500 crore last year. A fourth of this revenue comes from international operations – another differentiator for Firepro. Next on his agenda — one on which Narendra has made "a certain amount of investment" (as he puts it) — is providing premium home automation solutions for high-end customers.

 

The initiative has also seen the company trying to transform itself from a business-to-business company to a business-to-consumer company. It has opened an outlet in Bangalore with plans for more in other cities.

 

The big question, of course, is whether the Indian market has evolved enough to demand expensive home-security solutions that involve using the remote control or a handset from anywhere in the world to monitor what is going on at one's home? Narendra is willing to take the bet and so are his two investors – AIG and Standard Chartered PE.

Hitachi Home Life Solutions

At The Current Market Price, Its P/E Of 10 Exceeds The Average For Past 5 Years

WITH the recovery in demand for consumer durables, Hitachi Home Life Solutions (HHLS), Rs 400-crore subsidiary of Japan's Hitachi Appliance, also demonstrated a revival in its financial performance during the last two quarters. The stock outperformed both the Sensex and ET Consumer Durables index as its market cap has more than tripled since 2009 against a 70% gain in Sensex. The stock reached its all time high recently after the company reported a 61% y-o-y jump in its topline for the quarter ending Decmeber 2009. 

   Hitachi manufactures a range of home and commercial air conditioners. The company is also in the business of trading VRF (Virtual Routing and Forwarding) systems, rooftops, chillers and refrigerators. The company is also engaged into marketing a wide range of products including storage systems, information and physical security products, nuclear medical equipments, power and industrial equipments, and plasma & LCD TVs. The company's brand positioning has strengthened in the past couple of years backed by extensive advertising and brand promotion. 

   In the past five years, Hitachi topline has grown at a compounded annual growth rate (CAGR) of 18% while the net profit has expanded at a rate of 38% during the period. The profitability has showed a rebound in the latest two quarters when considered on an year-end basis. After a decline of 1% y-o-y for the quarter ending March 2009, the revenue showed a rebound in the past three quarters. While the topline has more than doubled in the quarter ending December 2009 compared to last year, the operating and net profit showed a rebound from an average loss of about Rs 4 crore each in the corresponding quarter last year. 

   The company's performance in the first two quarters of FY10 was also affected by an increase in the inventories. In the past five financial years, its inventories have grown at an alarming CAGR of 85%. The company has, however, has showed a healthy growth of 57% in the cash flow from operating activities during the period compounded annually. 

   The company now has plans to push its products in tier-II and tier-III towns and has launched a new line of air-conditioners branded Kaze (Japanese for coolest breeze). The brand is being launched in about 60 towns across the country. Hitachi is targeting a market share of 5-6% in air-conditioners and refrigerators across the country, without giving up on its premium brand status. 

   While the stock is trading near its all-time high, at the current market price, its P/E ratio stands at around 10, which is higher than its average for the past five years and the valuation looks overstretched.

 

Kabra Extrusiontechnik

Shares Gain 50.3% Since Mid-December As Against 5.6% Fall In Benchmark Sensex

 

Defying the overall weakness in the stock market in the past couple of weeks, the shares of Kabra Extrusiontechnik (KETL) traded near its all-time high to close at Rs 188.5 on February 2, 2010. Although the superb December 2009 quarter performance was one key element in the latest upsurge, the scrip has substantially outperformed markets in the past one month. KETL shares have gained 50.3% since mid-December as against a 5.6% fall in Sensex. 

   KETL recorded a handsome 572% jump in its December 2009 quarter profit at Rs 6.5 crore, although its sales grew only 42% to Rs 49.1 crore. The company was able to maintain prices of its plastic extrusion machinery although the raw material costs eased. KETL is a debt-free company with healthy operating cashflows. The company's cash and equivalent investments have grown at a cumulative annual growth rate (CAGR) of 49.7% between FY05 and FY09. 

   After steadily growing profits at a CAGR of 34% for five years, the company had reported a fall in profit in FY09. Even in the first half of FY10, the company's performance was only marginally better than the year-ago period. Against this background, the sharp jump in its third quarter profits hints at improvement in the future prospects of the company. 

   The plastic extrusion machinery industry is closely linked to the plastic consumption, which is growing fast in India. The demand for conventional PVC pipes is growing in double digits due to increasing irrigation activity as well as new applications in construction and infrastructure segments. Similarly, pipes manufactured from HDPE are gaining popularity in applications such as telecom ducting, water supply and natural gas distribution. Additionally, the consumption of packaging films is growing in industries such as food processing and healthcare. All these factors augur well for KETL, which had faced some sluggishness in net sales in the past three years. 

   To benefit from the increasing demand, KETL is planning an aggressive investment of Rs 85 crore over the next 24 months.

PLASTIC MONEY

KETL recorded a
handsome 572% jump in its December 2009 quarter profit at Rs 6.5 crore, although its sales grew only 42% to Rs 49.1 crore
The demand for
conventional PVC pipes is growing in double digits due to increasing irrigation activity

 

Dish TV

A$100 million GDR issue and proceeds from a rights offer are likely to help India’s largest direct-to-home (DTH) service provider, Dish TV to expand its subscriber base and fend off competition. The company, which has a market share in the region of 37 per cent, is fighting with five other players with deep pockets---Tata Sky, Big TV, Sun Direct, Airtel and DD Direct Plus---for a larger share of the Rs 3,000 crore market. The improvement in subscriber numbers will provide economies of scale leading to reduced costs, and help the company make net profits in less than two years.

Timely investment Dish TV issued GDRs to US-based asset management firm Apollo Management at Rs 39.80 per share aggregating to $100 million or about Rs 470 crore. The investment which values the company at around Rs 4,200 crore will lead to an equity dilution by 11 per cent with the promoter’s stake coming down to 66-67 per cent from 74.5 per cent. Analysts say that the gains from an increase in subscription volumes and lower costs due to the scale benefits will be higher than the dip in future earnings per share due to the dilution. Prior to the GDR issue, the company has since the start of the year raised about Rs 700 crore out of the planned Rs 1,100 crore rights offer in tranches. The company is planning to raise the balance (Rs 410 crore) in the third and final tranche shortly. Thereafter, the company would need another Rs 400 crore till the end of 2010-11 to take care of the subscription acquisition expenses.
Considering that the acquisition cost for each subscriber is Rs 2,500 (set top boxes are subsidised and commission is paid to distributors), the company needs about Rs 1,125 crore over 200910 and 2010-11. The management believes that the money will be enough to fund its subscriber acquisition plans till the end of 2010-11 when it expects to report net profits. The focus is thus on adding new subscribers.

Expanding base While Dish TV had the first-mover advantage when it launched its services in 2003, aggressive competition has meant that the company has had to work harder to retain its market share. While the sector has expanded from a million subscribers in 2006 to about 16 million now, Dish TV has moved from just under a million to over 6 million subscribers and has a market share of 37.5 per cent. The industry is expected to add about 9 million new subscribers this calendar year, of which, the company expects to grab about 2-2.25 million. The company has acquired about 1.3 million subscribers for the year and expects to add another 8 lakh subscriber before the year runs out. The company management believes that the new cash infusion will help it to aggressively expand its services and distribution network and ensure that at least 20 per cent of incremental subscribers choose Dish TV. In addition to expanding its base, the company is also planning to control costs by bringing down the expenditure on content as well as on distribution.

Scale benefits has been able to save on content costs, which is the single largest component of its expenditure. The 3-4 year fixed contract with broadcasters and content providers has helped the company bring down cost of content services as a percentage of sales from 60 per cent earlier to about 46 per cent now. The company believes that as the subscriber base grows, the fixed nature of cost would translate to incremental revenues per new subscriber added. It is this high cost of content which analysts identify as one of the main reasons that new players are unlikely to come into this segment.

The second area the company could save on is collection cost viz. commission paid to the distributor or retailer on the prepaid cards they sell. The industry is currently paying 6-7 per cent of the amount collected which is likely to come down to 3-4 per cent going forward. The company believes that the combination of these factors should provide benefits to the extent of about 5-7 per cent of revenues.

Further, the company plans to improve its ARPUs, which fell by 15 per cent from its May 2009 peaks to Rs 139 in the September quarter, to Rs 150 in 2009-10 and further to Rs 170 by 2010-11. The company is hoping that customers will upgrade to higher packages and value-added services but expects the shift to happen gradually. Another area where Dish TV could gain is on the licence fee, which may be reduced from 10 per cent of gross revenues to 6 per cent and this will mean savings for DTH companies such as Dish TV.

Conclusion Moves by Dish TV to bring down costs and enhance its ARPUs have helped it report an operating profit of Rs 23 crore in the September 2009 quarter as compared to a loss of Rs 39 crore in the December 2008 quarter. For 2009-10, on estimated revenues of about Rs 1,100 crore the company should be able to register operating profits of Rs 100 crore as against a loss of Rs 188 crore in 2008-09. The company, which saw losses of Rs 476 crore at the net level for FY09 expects to turn corner by the end of 2010-11 and believes that the cash flow after that should help take care of costs and expansions.

Since the company is currently making losses and there is no listed peer, analysts peg the fair value for the company’s shares using the discounted cash flow method at Rs 50-Rs 60, which gives returns upwards of 25 per cent at the lower end.

Considering that the acquisition cost for each subscriber is Rs 2,500, the company needs about Rs 1,125 crore over 200910 and 2010-11

Taj GVK Hotels and Resorts

Low Debt And Good Dividend Record Make It A Safe Play For Investors

 

TAJ GVK Hotels & Resorts closed 6% higher on Tuesday. Besides the positive news relating to hotel stocks due to recovery in business and tourist travel, the company has been on the radar of investors and analysts for its properties at strategic locations such as Hyderabad, Chennai, Chandigarh and Jaipur. 

   In the past one year, the stock has given returns of more than 150%, while the benchmark Sensex has given 67% for the same period. The company's current market price of Rs 149 is quite lower than its new peak of Rs 163 on January 19 this year. The possibility of its stock gaining momentum from hereon is quite high. 

   Much of the good news is in the form of third Indian Premier League (IPL) season (IPL season 3) that would take place at venues such as Vizag, Chennai, and Mohali. The company has a strong presence in Hyderabad, Chandigarh and has recently launched a property in Chennai. The company may see its occupancy levels rising to more than 80% in Chandigarh and Hyderabad, because of IPL matches. The company is also building a new property in Begumpet, Hyderabad. In the December quarter, the company's room occupancy levels in Hyderabad surged to nearly 72% on a yearon-year basis, compared with around 64% in the December 2008 quarter. While in Chandigarh, its room occupancy levels were the same as last year's December quarter at 73%.

The company had been offering attractive room rates to increase occupancy at its properties in the past few months. However, room rates are now expected to move northwards, as the political turmoil in its key market Hyderabad (the Telangana issue) has subsided and there has been a general increase in business and tourist traffic across the country.

Investors could accumulate the stock at these levels, considering the possibility of an upside in revenues and profitability in the forthcoming quarters. What makes Taj GVK even more attractive is the fact that it is one of the least-indebted among all leading hotel companies. The company has a good dividend-paying record. In the past, it had routinely paid around a quarter of its net profit as dividend to the shareholders and the balance being utilised to fund growth.

 

ACB (INDIA)

Promoted by G.C. Mrig, Capt. Rudra Sindhu and Major Satya Sindhu; Washes coal to reduce its ash content helping power plants to become more efficient and eco-friendly.
Secret Sauce Seasoned team, favourable regulation and sustained
demand for coal.
Financial Dashboard In 2006, Warburg Pincus bought a 24 percent stake for Rs. 310 crore. Aryan plans an IPO this year to raise Rs. 1,000 crore. Warburg will sell 10 percent. Aryan Coal's valuation now stands nearly seven times its 2006 level.
What the Smart Set Saw First mover advantage.
Guiding Light To go beyond coal-washing and expand power generation capacity.

In 1998, when Mrig and his two friends founded Aryan Coal Benefications Ltd, the annual production of coal in India stood at about 250 million tonnes. Indian coal typically has high ash content that keeps combustibility low and affects the efficiency of power generation equipment. Only 5 percent of the coal production in the country was "washed" to reduce the ash content and most saw no need for this extra expense.

So it was not surprising when Mrig, who had spent 40 years in the industry including as managing director of Bharat Coking Coal Ltd., found it tough to get orders for his new company. His friends even wrote him off, saying, "Aapne toh paisa duba diya," (you have wasted your money).

That was then. Now annual mining has increased to about 450 million tonnes. The government has made it compulsory for power stations located 1,000 kilometres or more from mines to wash the coal. Given that four out of 10 power stations in India are located in such faraway locations, the scope for the coal-washing business has expanded.

ACB has 62 million tonnes of coal-washing capacity, nearly half of the 130 million tonnes capacity in the whole of the country.

Private equity watchers now think that Aryan might do for Warburg Pincus this year what Bharti did for it nine years ago. And both investments were made by Pulak Prasad, who has since started his own hedge fund Nalanda Capital. Just the way Prasad spotted Sunil Mittal's execution he was able to see Mrig's understanding of this industry and execution skills.

Most of ACB's washeries are located very close to the coal fields and the transportation costs are low. The company has massive operating profit margins of 44 percent that the company makes. Crisil expects ACB to benefit from the increase in demand for washed coal and stringent prequalification requirements that restrict new players. So, its market share is not under threat in the foreseeable future.

ACB doesn't waste the coal reject that remains after the washing either. It uses the material to runs some small power plants. With 4 million tonnes of coal reject coming free every year, this has become a very profitable way for ACB to dispose the waste.

Mrig says he got the idea to recycle the waste when he saw gold miners in South Africa going after dumped mines and the Chinese extracting most out of low-quality coal.

But now it wants to enter the big league. It plans to build a 1,200 MW power plant in Madhya Pradesh and a 1,100 MW plant in Chhattisgarh.

Sobha Developers

Company To Gain From Rising Share Of High-Margin Realty Business

 

Bangalore-Based realty player Sobha Developers has gained 9% on the bourses in the past one month on expectations of good results. The stock has staged a better show compared with a 6% decline in the benchmark BSE Sensex. The scrip touched its 52-week high of Rs 319.7 on January 19, 2009.
   Sobha's stock performance has shown a consistent improvement for quite some time. For instance, in the past three months, the stock earned 20% returns, and over a sixmonth period, it returned 22%. On an annual performance basis, the stock outperformed the benchmark indices. 

   The company reported a 68% growth in revenue for the quarter ended December 2009 at Rs 309.3 crore. Land sale of Rs 54 crore is part of the above sales. Going ahead, Sobha Developers expects to generate around Rs 150 crore from land sale. In fiscal 2011, the company further expects to monetise Rs 250 crore worth of land. This will help in the overall debt reduction for the company, which has a debt-to-equity ratio of 0.87. The share of contractual business and the Infosys contract in Sobha's total revenue has come down, thus hinting at the rising share of high-margin realty development business. It has an order book of 5.5 million sq ft, valued at Rs 455 crore and which will be recognised over the next 5-6 quarters. 

   Its net profit shot up five-fold to Rs 40.8 crore during the December quarter. The company expects to maintain this growth momentum. A revival in the realty sector has added to investor confidence, though the trend took more time to become visible in Bangalore than in Mumbai. 

   Sobha is expected to launch value homes with a price tag of up to Rs 40 lakh, which will generate volumes for the company. It has sold six lakh sq ft of space, which has not yet reached the revenue-recognition stage. Out of the total receivables of Rs 2,068 crore, around Rs 934 crore is to be expended on project cost. Thus, it clearly shows visibility of future revenue potential. 

   At an annualised EPS of Rs 13.72 and current market price of Rs 276, it is trading at a price-to-earnings multiple of 20.4 times. This makes it a fairly-priced stock for investors seeking an exposure to the southern parts of the country.

 

Rajesh Exports

A Low Brand Recall, High Debt-Equity Ratio & Steep P/E Make The Stock Unattractive

 

The third quarter results of Rajesh Exports, one of the leading jewellery manufacturers and distributors, seems to have caught the market attention of investors given a more than 8% rise in the stock price in the past three trading sessions. The stock outperformed the broader market as well as ET Retail and ET Consumer Durable index since 2009. It has seen a four-fold increase in the period against an average increase of 65% in Sensex and ET Retail.

   For the quarter ending December 2009, the topline expanded by 65% compared to the same quarter last year. The operating and net profits doubled to Rs 67 and Rs 44 crore respectively, in the latest quarter compared to last year's. Overall stability in the business and persistent jewellery demand form the Asian countries helped the company break out from the sluggish performance of the past six quarters. Profit margins remained in a squeeze from June 2008 to September 2009 quarters even as the revenues grew by an average 45% in the duration.

   Rajesh Exports claims to be present in the entire jewellery value chain, from refining to retailing gold jewellery. The company's owns a manufacturing facility with a built-up area of over half a million square feet, which it claims to be the world's largest. Its product portfolio is divided into Asian, western and diamond jewellery. The company also forayed into the retail business with two chains of retail outlets: Laabh, a high-end niche segment dealing with diamonds, and Shubh, which is gold-centric and caters to the mass to middle markets in the South. Initially, the company had announced plans to open 200 Laabh stores in two years and 100 Shubh stores in the South by December 2008. However, in July 2009, it decided to consolidate its retail brands by converting three Laabh stores into Shubh outlets. The decision was taken as running two brands was proving to be a strain for the company.

   In the past five financial years, the sales have increased by 29% compounded annually, while the net profit grew by a CAGR of 33%. However, cash profit grew by a CAGR of 19% in the period and the net cash from operation turned negative for FY09.

   A high debt-equity ratio is a concern (2.1 for FY09) for the company as loan funds increased by 29% during the period, in line with a CAGR of 23% in the working capital. The company also lacks strong brand positioning which is a key aspect to survive in the industry while the retail business is already in trouble.

   In this backdrop, the stock looks overvalued at the current market price as its P/E stands near 36, three times its average in the past two years and more than triple the same since 2001. The stock is demanding 16x its earnings based on an annualised EPS of 6.8 for FY10, which does not look reasonable.

 

Emami

WITH its ambitious plans of inorganic growth by acquiring brands and building a diverse product portfolio, Kolkata-based Emami is an FMCG company to watch out for. The company’s stock has moved up by 18% in the past two months against the Sensex’s movement of 11% during the same period.

The Rs 1,000-crore Emami made the big-ticket acquisition of Zandu Pharma last year and also acquired two smaller Bengal-based companies — Lakshmibilas Hair Oil Company and M Bhattacharya, a small homeopathy drugs company.

The company has plans to acquire new brands in the personal and healthcare segment. It is currently in talks to acquire an edible oil brand. It is also reportedly looking to buy Godrej Hershey’s beverage brands — Jumpin and XS. If this acquisition fructifies, it will transform the company into a onestop shop for entire gamut of FMCG products, from face creams to edible oils and juices and beverages. Never before has a company of the size of Emami successfully dealt with such a disparate business segments. It has to be seen how the company works with such a profile.

In the past, Emami has bought companies in distress and managed to turn them around to generate profits. The company’s management is confident of replicating a similar kind of success with its acquisitions in new categories like foods. Financially, Emami is in a good shape with almost a dent-free balance sheet and steadily improving operating margins.

However, the company’s stock is currently trading at a price-to-earnings multiple of 35. This seems a little too high for a mid-sized company. Recent earnings performance has not been very satisfactory — with the company reporting a mere 5% y-o-y increase in its consolidated net profit (on a trailing four-quarter basis). Going forward, it will have to generate a better earnings growth to justify its high valuations and big growth plans.