OIL INDIA

Macquarie initiates coverage on Oil India with `Outperform' rating. Oil India, the second-largest national oil company in India, enjoys multiple growth drivers and yet quotes at nearly half the value of its global peers. Oil India's superior reservoir management skills have enabled it to grow production 5.3% per year over the past two years compared with a 3.1% annual decline for ONGC. Oil India's exploratory success rate of 76% is amongst the best globally and compares with the world average of 20%. The current subsidy share mechanism to fund under-recoveries on sale of petroleum products is ad hoc. This results in unpredictable earnings and deters investors' interest in Indian PSU oil companies. OIL trades at an EV/reserves of $9/boe and an EV/production of $35k/boepd, which is at a 30-50% discount to its peer group. Looking at valuations differently, Oil India's current stock price reflects a market assumption of a long-term oil price of about $65/bbl. In the long run, oil prices are expected to oscillate around $75/bbl, which we believe is the level required for major new developments to yield acceptable returns.

Plethico Pharma

Global Revenues Pick Up; Co Plans FCCBs To Cut Debt

 

PLETHICO PHARMA, a small-cap pharma company manufacturing nutraceuticals and over-the-counter products, has witnessed a gradual rise in its stock price over the past one year. The company's stock price surged by 280% over the past year, significantly outperforming the Sensex and ET Pharma Index. While the rise is quite steep, the stock has not undergone any re-rating. It has just managed to recover its losses in September-October 2008.

   Plethico, which closes its financial year in December, witnessed poor performance during the first half of 2009. The company's earnings increased revenues from the Commonwealth of Independent States (CIS) region. And as the consumer demand in the US improved marginally, its performance witnessed good progress in the third quarter. Its USbased subsidiary Natrol, which has a strong portfolio of brands in the healthcare and wellness space catering to the US and other export markets, is also showing stability in its performance.

   Consumer sentiment in the US still has significant scope for improvement. Increased export sales of Natrol from markets like CIS, Africa, Latin American countries, Gulf Co-operation Council (GCC) and South East Asian Countries are a major growth driver for the company, going forward. Revenues from the CIS region following its contract manufacturing deal with Tricon are also expected to boost Plethico's revenues.

   The company had raised FCCBs worth $75 million that will mature by October 2012. In view of this, the company's board of directors last week passed an enabling resolution to raise $100 million for debt repayment. Though the fund raising is likely to result in an equity dilution ranging between 13% and 18%, it will bring down the debt-equity ratio from the current level of 1.

   With a market cap of around Rs 1,300 crore, the company's stock is valued at a little over its annual consolidated revenues of over Rs 1,000 crore. It is trading at a consolidated price-to-earnings multiple of 11.3. This seems to be a fair valuation for the company, given its size and recovery in financial performance. If Plethico sustains its improved performance, it deserves to command better valuations.

 

HSIL

HSIL, earlier known as Hindustan Sanitaryware & Industries, enjoys a 40 per cent market share in the organised sanitary-ware industry. HSIL has increased its portfolio by adding more products in its bathroom and kitchen appliances products; it launched around 150 new products last year, of which, 60 per cent was in the premium category. Further, it has also started to venture into marketing and distribution of imported products to capitalise on its existing brand and distribution network. Besides, HSIL plans to increase its existing capacity by installing another kiln at its Bahadurgarh plant at a cost of about Rs 15-20 crore.

HSIL is expected to deliver revenue growth of 20.2 per cent and 23.7 per cent in 2009-10 and 2010-11, respectively on the back of enhanced product portfolio, increased demand and capacity utilisation. Its EBIDTA margins could stabilise in the 17-18 per cent range. However, higher depreciation and interest costs could be an over-hang. In 2009-10, HSIL’s PAT is expected to remain flat while in 2010-11, the same could increase by 29.1 per cent. Being an industry leader, HSIL is well positioned in the north as well as south to tap potential demand and is expected to grow faster than the industry. At Rs 61.25, the stock is trading at 8.2 times its 2010-11 EPS of Rs 7.5.

Lupin

An all-round growth delivered by Lupin bodes well for its future prospects

 

LUPIN, our recommendation of March 2008, has witnessed its stock price tripling in the past two years. It has emerged as an outperformer in the pharma space. Despite the spectacular rise, the company's stock, now counted among frontline pharma stocks, is still a good longterm buy. The company, over the years, has grown to be one of the 10 ten generic companies in the US, Japan and South African markets. Charting a remarkable growth in its revenues and profits, Lupin's stock is offering promising growth potential.

BUSINESS:

Lupin has significant presence in cardiovascular, diabetology, anti-infectives, pediatrics, CNS, gastrointestinal and others, while continuing to maintain its leadership position in its traditional segment of anti-TB. The company has been delivering strong growth across geographies with the US and Europe contributing nearly 40% to its total revenues. It is also increasing its presence in other markets. Even in the domestic market, the company is growing at a higher rate than average industry growth rates.

GROWTH STRATEGY:

Focus on the branded generic business in the US, identifying opportunities in emerging markets and building a strong product pipeline to be launched in the regulated markets seem to be the company's strategy for growth. The growing Japanese generic market augurs well for Lupin, which had been an early entrant in that market. Its recent acquisition of Antara, a cholesterol-lowering drug, brings good growth opportunity for the company in the US market. The company is also keen on inorganic growth and hence scouting for acquisitions in Latin America, Japan and the Middle East and is likely to announce a deal by this fiscal end. Even in the past, the company has grown through acquisitions in India and abroad. Its recent issue of FCCBs of $100 million (maturing in January 2011) is likely to provide it the warchest for acquisitions. Lupin is also eyeing growth opportunities in promising areas of biological molecules and contract manufacturing services.

FINANCIALS:

The revenues of the company grew at a compounded rate of 25% to Rs 3,776 crore over the past five fiscal years. The bottomline has grown at a CAGR of 42% to Rs 504 crore during the same period. The company estimates its revenues to grow at a rate of 25-30% for the next fiscal. Its operating profit margin have been steadily improving and are likely to improve by 50-75 bps over the next couple of years from the current annual margin of 19.4%. The company has been aggressively undertaking large capex since last three fiscals to fuel its growth appetite. Despite
this, it has been a consistent dividend payer with a dividend yield of 0.7%. At 32%, the dividend payouts have grown at a slower CAGR than the growth in its profits for the past five fiscals. Since the company is in an aggressive growth phase, it is using its earnings to fund growth.

VALUATIONS:

The company is valued at more than three times its consolidated annual sales. The company, with a fast growth track record, is trading at premium valuations of price to earnings ratio of 25 in line with leading companies like Cipla, Ranbaxy Labs and Sun Pharma. Lupin's stock has gained 163% in the past one year — significantly outperforming the Sensex. While investors may not witness a repeat of this performance, the stock remains a good long-term investment bet in the pharma space.

Fund Review: Reliance Natural Resources Fund

Launched in 2008, Reliance Natural Resources Fund is yet to show its mettle

   RELIANCE Natural Resource Fund is renowned in the mutual fund (MF) industry for creating an euphoria at the time of its inception. Launched at the peak of the bullrun — in January 2008 — the fund, whose name also coincides with one of the Reliance group companies, had set a new record by garnering about Rs 5,660 crore in its new fund offer (NFO) period.

PERFORMANCE    

Notwithstanding its initial euphoria, Reliance Natural Resources' (RNR) performance so far, has failed to impress. With the fund's launch coinciding with the market meltdown of 2008, it was almost impossible for investors to anticipate any returns from this fund in the very first year. In fact, the initial investors actually ended up losing about 41% of their capital invested into the fund in 2008. The only saving grace in its first year was probably the fact that despite its losses, RNR was better off than the major market indices —Sensex and Nifty — that lost about 46% and 44% in the period.

   However, the fact that the fund failed to make an impressive recovery even in the following year is probably turning down its investors. RNR managed to return just about 73% last year even as the Sensex and the Nifty returned about 81% and 76%, respectively.

   As this fund has a customised benchmark index, which has been created using BSE 200 index to the extent of 65% of the portfolio and MSCI World Energy index for the balance 35% of the portfolio, it is difficult to compare its performance vis-à-vis a particular index. However, even if one were to consider the performance of BSE 200 last year, the same has returned about 89%, way ahead of RNR's returns for the period.

   In 2010 too, so far the fund has lost about 3.5% of its NAV as compared to a decline of 2.1% and 1.5%, respectively, in the returns of the Sensex and the Nifty. So those who were carried away by the jubilation of the Reliance banner in January 2008, have today earned just about 0.8% returns on their initial investment — implying that Rs 10 invested in RNR about two years ago has grown to just about Rs 10.08 today.

PORTFOLIO    

Given the fund's performance and the market volatility, which has definitely impacted the fund's valuations, it is little surprising to see the fund's assets under management (AUM) shrink from over Rs 5,600 crore to about Rs 3,900 crore in a span of just two years since its launch. The corpus has been used by the fund to invest in both the Indian and the foreign equities as well as in units of foreign MFs.

   Among the fund's Indian holdings, most of the stocks incorporated in the portfolio currently have been acquired by the fund in 2008. An analysis of the fund's portfolio over a period of time shows its inclination to hold the stocks for the long term with occasional churning of the portfolio. However, despite its philosophy of long-term investments, only about 55% of the fund's picks are currently in the positive terrain today since the time these were last invested into by the fund.

   Some of the fund's timely picks that have turned out to be highly profitable include BEML, GAIL, BPCL, IOC and Triveni Engineering. However, those that are currently trading below their cost of acquisition include Punj Lloyd, Tata Power, Reliance Infrastructure and RIL among others.

OUR VEW    

Reliance Natural Resources is a sectoral fund and just like any other theme based fund, it carries the risk of a concentrated portfolio. A diversified equity fund is thus a far more preferred option to mitigate the risks arising out of market volatility. While Reliance fund house has many popular and successful sectoral funds too, RNR is yet to establish itself in the league of its siblings like Reliance Diversified Power. It is also important for the investors to note that investing in an NFO always carries a higher degree of risk as compared to an investment in any well-established fund, since an NFO doesn't have a performance record to justify an investment.

 

BHEL

   BHEL, the capital goods major, has underperformed the Sensex despite recording continued profit in the range of 20-40% over the past four quarters and promising outlook. The company has generated a return of less than 65% over the past 12 months; significantly lower than the Sensex and its other peers. While FY09 was muted in terms of financials with less than 10% profit growth, the company is back with 34% growth in 9MFY10. The company, which would be declaring its flash results for FY10 later this week, is likely to maintain its growth rate for the full year. The company is currently trading at around 30 times its trailing 12-month earnings, which makes it a considerably-attractive option. Investors can consider taking exposure in the stock from a medium-to-longterm outlook.

BUSINESS:

The company is manufacturer of a complete range of power generation equipment, with a market share of about 65% in the domestic market. It has recently completed the expansion of its capacity from 10,000 mw to 15,000 mw at a cost of about Rs 3,200 crore, and is further expanding it to 20,000 mw by the end of FY12, which would require an additional expenditure of Rs 1,500 crore. 

   While it was generating most of its revenues from PSUs so far, in the past few quarters, the trend has considerably changed with private sector companies accounting for 85-90% of fresh orders received by the company. Its business is structured around two segments: power and industry, with the first segment accounting for nearly 75% of revenues and profits. Further, in the industry sector also, significant revenue is recorded from captive power industry, which in turn is a part of power sector. As a result, its fortunes are closely linked to power sector, which the company is now trying to de-risk. It is expanding its product portfolio and venturing into manufacture of diesel and electric locomotives. It is also actively seeking diversification into nuclear power generation and non-renewable sources, especially solar power, which is expected to witness high growth in the longer run. The company is also present in the exports market, which can act as a buffer in case of creation of domestic overcapacity in the next 3-5 years. The company has also taken steps to maintain its lead in the super-critical range of equipment through various technology-transfer agreements and equity stake. The company has taken 26% equity stake in a number of joint ventures formed with the state generation utilities, which will implement the generation projects based on supercritical equipment. This will help popularise these equipment with the generation companies, while reducing the risk for them.

FINANCIALS:

The result for December 2009 quarter was quite impressive with 18% growth in net sales and 35% growth in net profits. Raw material, the major cost item, grew by only 10%, providing operating profit gain of 2.5 percentage point. Even though the commodity prices have risen considerably in the global market over the past few months, the company is favourably placed for the next 2-3 quarters, as it has to maintain the raw material inventory of nearly four quarters. However, other cost such as staff cost rose by 33%, whereas tax provision also rose by 35%. The company's nine months' financials is also impressive with 23% sales growth and 34% profit growth. The company is further expected to post a better final quarter sales figure as the company, like other projects-based company, has traditionally posted higher Q4 growth.

OUTLOOK :

The outlook for the company is very strong with continued inflow of orders, streamlining of new capacities that will aid volume growth, continued capacity addition in power sector and expansion of transmission network. The company has a huge orderbook position of Rs 1,34,000 crore, which is four-a-half-times its trailing four quarters' sales. In fact, its orders have risen faster than the sales over the past few years, which should become more manageable after the current round of expansion. While the first half of this fiscal being somewhat muted in terms of fresh orders, orders received during Q3 was nearly 60% higher than the average of the first two quarters of FY10, and can actually go up further in the next few months on the back of a bulk order from NTPC. The real challenge for Bhel would arise only after 2-3 years, when companies such as L&T, JSW Energy start their power equipment manufacturing operations. Until then, the company is expected to outperform, and investors may consider taking exposure in this stock.

 

INDIABULLS REAL ESTATE

The developments in Indiabulls Property Investment Trust (IPIT) and new project launches look inspiring. Total saleable area of IPIT has increased from 5 million square feet (MSF) to 6.3 MSF owing to change in FSI. It has 2 MSF of constructed office space, of which 0.9 MSF has been leased and another 0.3 MSF is expected to be leased in March 2010 quarter. The management expects new leases to be done at Rs 185-190 per square feet, up from Rs 175 earlier. The brokerage believes that IPIT is undervalued and estimates its equity value at Rs 6,000 crore or Singapore dollar $0.50 per unit (currently trading at $0.26). In 2009-10, Indiabulls Real Estate (IBREL) launched about 20 MSF of residential projects, including in Mumbai (9 MSF). Of the total, 2 MSF has already been sold (including 0.5 MSF in IPIT). IBREL recently raised Rs 2,700 crore through a QIP, which is yet to be deployed. The company is looking at strategic, big-ticket land-banks, particularly in Navi Mumbai, Dharavi and Mantralaya projects.

Since the stocks’ downgrade by the brokerage on July 31, 2009, it has underperformed the broader markets by 25 per cent. However, given the increase in saleable area at IPIT, pick-up in residential sales and bottoming of commercial lease rentals, it is upgrading the stock to ‘buy’ with target price of Rs 259 per share.

INDRAPRASTHA GAS

An equal joint venture by Gail and Bharat Petroleum, Indraprastha Gas supplies gas in the National Capital Region. It started with selling gas for powering Delhi's public transport fleet, but has subsequently entered the piped natural gas (PNG) segment for home and commercial use. The company recently completed 10 years of operations and sells 2.2 million standard cubic meters of gas per day (MMSCMD). Majority (95%) of the company's sales come from CNG (used for powering buses, three-wheelers and taxis), 5% from commercial customers and 3% from households. The company has been given marketing exclusivity in NCT of Delhi for three years. It has also received regulatory approvals for setting up city gas distribution network in Delhi's satellite towns of Greater Noida, Ghaziabad, Sonipat and Panipat. 

   IGL gets gas supply from Gail under administered price mechanism (APM). It grants IGL priority in the event of stoppage or any disruption in the supply. In addition, the company has signed agreements with BPCL and Gail for additional gas and has recently started marketing RLNG. It has also entered into an agreement with Reliance Industries for 0.31 MMSCMD of gas from the KG basin.

GROWTH DRIVERS:

The company has lined up Rs 1,600 crore of capital expansion plan for next the three years. The number of CNG vehicles in Delhi have grown at a CAGR of over 25% in the past five years and is expected to continue growing rapidly considering the governmental impetus. While the penetration in the existing market improves, geographical expansion will ensure sustenance of growth. In FY09, IGL started supplying in Noida and Greater Noida areas and will soon enter other adjoining cities where it has obtained regulatory approvals.

FINANCIALS:

After a high-speed growth phase between FY02 and FY07, when sales grew annually at 40% and profits at 84%, the company has entered a plateau. Since FY07 its net sales have grown at a CAGR of 17.8% while net profits grew at 14%. In the past five years, IGL's net worth has grown at a CAGR of 22.1%, while gross block grew at 14%. The company's 40% operating margin has fallen to 35% level in the past couple of years; however, the company has maintained its net profit margin above 20%. IGL's return on capital has been consistently above 40% in the past few years, while it remained a debt-free and cash-rich company.

Balkrishna Industries

 

At A Market Price Of Rs 619, Co Has A P/E Of Close To 7, Lower Than Average For Sector

 

MID-SIZE tyre company Balkrishna Industries (BIL) has seen its stock price soar almost five times in the past one year in line with the rest of tyre stocks, because auto sales revived and investors flock back to the stock market. The company benefited from an improvement in demand from sectors such as agriculture, construction, earthmoving and mining industries.

   However, from here on, the stock movement will hinge on different dynamics for the company, which is a niche player in the 'offhighway' tyre segment.

   BIL, an export-dependent Rs 1,400-crore company, makes tyres for infrastructure and agriculture-related vehicles whose demand is closely related to overall economic growth. It is one of the strongest players in the domestic market in the off-highway tyre segment, but commands a market share of close to 3% in the $11-billion global industry.

   The company derives about 90% of its total revenue from the overseas market, with Europe accounting for over two-thirds of total exports. With agriculture in the European continent highly mechanised for diverse set of farming equipment, including vineyards, demand for tyres is relatively hedged against economic slowdown that impacts most other tyre makers.

   This means that even as the Euro zone is yet to recover from the global economic recession, export demand for BIL may not be adversely impacted in the near term. BIL's consolidated revenues grew at compounded annual growth rate (CAGR) of 30% over the past four years whereas its operating margins were in the range of 18-20%. However, it has witnessed a marginal growth of 7.6% in sales for quarter ended December '09 on the back of higher realisation and register growth in net profits to Rs 47 crore, compared to Rs 17 crore a year ago on the back moderation in interest cost.

   BIL seems attractive compared to Indian peers, because it is able to operate at a higher operating margin of over 18% against the industry average of around 15% despite the fact that prices of natural rubber is trading in the higher territory due to higher margin from the OHT segment.

   However, as the company derives a major part of its revenues from global markets, the global economic outlook has a bigger bearing on its business than the fast-growing Indian market. Besides, currency fluctuation poses a threat to the bottom line.

   The company currently enjoys modest valuations compared to its peers. At the last traded market price of Rs 619, the stock has a price-earning ratio (P/E) of close to 7, which is marginally lower than the average for the tyre sector of 8. Historically, BIL scrip's P/E ratio has been much lower, compared to the top two tyre makers — MRF and Apollo Tyre. Currently, Apollo Tyre and MRF are trading at a P/E ratio of around 10 and 7, respectively.

   However, as the company is expected to post a reasonable top line growth on the back of improved global scenario in the coming quarters, investors can accumulate this stock on dips.

 

SESA GOA

The government has re-introduced a 5 per cent export tax on iron ore fines and doubled the duty on iron ore lumps to 10 per cent. Last year, it had withdrawn the duties on iron ore fines on account of the sharp dip in iron ore prices; however, it had retained a 5 per cent levy on lumps. A pick-up in iron ore exports (up 21 per cent yearon-year to 53.2 million tonnes in April-October 2009) and improved export realisations (by over 70 per cent since April) prompted the government to raise the iron ore duties. Sesa exports 90-95 per cent of its iron ore output. The brokerage expects Sesa’s 2009-10 and 2010-11 EPS to be negatively impacted by 3.3 per cent and 8.5 per cent, respectively. It has introduced 2011-12 estimates for Sesa and expects iron ore realisations to increase by 21.5 per cent (earlier 10 per cent) in 2010-11 and by 10 per cent in 2011-12, on the back of strong Chinese demand. Iron ore pricing negotiations are expected to start early next year (reports suggest a 20-30 per cent hike). But, considering what happened last year, it is difficult to predict whether China will accept the price hike.

At CMP, the stock is trading at 6.7 times 2011-12 estimated EV/EBITDA. The brokerage has recommended a ‘sell’ on the stock. At its target price of Rs 304, it will trade at 6 times 2011-12 estimated EV/EBITDA, which is at the higher end of its historic trading range.

Larsen and Toubro

Credit Suisse upgrades the rating on L&T to `Outperform’ with a revised target price of Rs 1,970. At a macro level, Credit Suisse expects supply/capacity growth to outstrip demand growth as the recovery sets in in ‘10. Clear and worsening general supply constraints have necessitated this change. Investor portfolios should again favour companies that benefit from the supply side acceleration. L&T is ideally positioned in this regard. Earnings estimates for L&T move up over 35% in FY11 and another 25% in FY12, led by the return of short cycle orders. Further, a strong macro will increase the order momentum and news flow on potential orders.

Over the past six months, L&T’s stock has tracked the Sensex, despite expectations of strong order inflows, as a weak order macro in H2FY09 impacted H1 earnings growth and broad industrial capex remained weak. Credit Suisse expects these factors to turn positive, ensuring outperformance of the stock in ‘10, irrespective of the market direction; however, absolute returns will depend on market moves given that the stock is not particularly cheap on near-term valuations.

PSL

HSBC downgrades PSL’s ratings to `Neutral’. PSL announced new orders for 112,000 tonnes of spiral pipes, awarded by infrastructure companies such as Larsen & Toubro and Nagarjuna Constructions. With this, HSBC estimates PSL’s order book at 614,000 tonnes, equivalent to four quarters of sales volume.

The y-t-d (year-to-date) order inflow of 212,000 tonnes is lower than the expected 9MFY10 volume sales of 280,000 tonnes, leading to the risk of an order book decline at the end of FY10. The FY11 EPS is to fall 24% y-o-y on lower margins, as forex gains recorded in FY10 are not expected to repeat. HSBC’s FY11 EPS estimate is 40% below Bloomberg consensus and PSL will need further orders of 200,000 tonnes to achieve 500,000 tonnes of annual volumes in FY11. HSBC switches to a PE multiple approach, as investors will increasingly focus on earnings-based rather than asset-based multiples.

On a one-year forward PE multiple of 10x (up from 7x) and September 2011E EPS, they arrive at a target price of Rs 180.

Den Networks, Hathway Cable and Datacom

 

RECENTLY-listed cable companies failed to fire up investor interest in them or the industry. These companies — Den Networks and Hathway Cable and Datacom — have disappointed their investors with poor listing gains below average hardly showered investors with good returns. Den Networks since listing has given only 18%, while Hathway Cable and Datacom has barely 2%.

   A prime reason for these companies to be out of investors' investing radar is because of their business model, which has hardly delivered substantial revenues not only for these two new companies, but also for already listed old players such as Wire & Wireless. These companies are heavily dependent on their revenues on two factors. First, acquiring local cable operators (LCOs). Second, digitising the subscriber base of these local cable operators. Acquiring local cable operators indeed brings these companies good subscriber base, however, the strategy of extracting a huge business from their subscribers has hardly been successful.

   The reason for this is the underdeclaration of paid subscribers by local cable operators to the multi-system operators (these new cable companies). To withstand tough competition in the highly-unorganised cable television operators focus on volumes and try to maximise the penetration in their area by resorting to low price strategy. The strategy works until the subscriber gets channels in his convenient price bracket.

   However, if multi-system operators try to affect a price hike, the subscribers resist and they risk losing customers to another local cable television operators. Furthermore, the penetration of digital cable television in India is less than 5%(around 6 million) and it is expected to reach just 12% by 2012, according to estimates by Informa Telecoms and Media group and Media Partners Asia (MPA), independent media research firms. Hence, the conversion ratio for these new cable companies has not being encouraging.

   Lack of infrastructure, inadequate investment and restrictive regulations continue to thwart the growth and penetration of digital cable television. Not to mention the immediate threat posed by pure DTH players like Dish TV, Tata Sky and others. This has prompted these companies also offer DTH services with offering such as settop boxes.

   Going forward, it is believed that these cable companies would leverage their network and infrastructure to offer bundled and customised services like broadband internet, video on demand and local news & entertainment, among others. However, for this to materialise, cable companies would first need to digitise a sufficient number of their existing analogue subscribers (around 86 million). This is a long-drawn project and investors may not have the patience to wait for so long.

 

TTK Prestige and Hawkins

 

While Prestige trades at a P/E of 14.44, Hawkins' stands at 12.3, a tad higher

 

The recovery in consumer durable demand has put wings in the stocks of kitchen appliances and utensils makers and it's showing in the stock prices of TTK Prestige and Hawkins Cooker, two leading manufacturers of pressure cookers and utensils.

   The stocks have not only gained close to 30% so far in 2010, but also have outperformed the Sensex in the past one year. Against a two-fold increase in the Sensex, these stocks have jumped more than five times since the recovery in the broader markets since March 2009. Moreover, both stocks made their all-time highs.

   On Monday, the momentum in the stock price came after Prestige announced the launch of a new range of induction stoves last Friday. These stoves runs through power, but don't generate flame and need induction compatible cookware. To support this requirement, the company is further planning to launch a new range of pressure cookers and cookware with an induction base that can also be used on conventional gas stoves and hobs.

 
   While for most part of past one year, the Hawkins stock seemed taking a lead over that of Prestige since early March this year, the latter has kept an edge over the former. The rising disposable income of the Indian middle class as well as a comparatively-defensive nature of the industry has helped both kitchen appliance majors sustain revenue growth in the past two years. However, Prestige's profit margins have remained on the lower side compared to that of Hawkins. One reason for this outperformance could be the company's diversification into the realty sector.

   On a standalone basis as well, for the year ended December '09, even as the revenues of both these companies grew by a similar 24%, Hawkins demonstrated a higher profitability growth. While the operating profit (PBIDT) more than doubled during the trailing 12-month period ended December '09, net profit grew by more than 125% against a growth of 81% in the PAT of Prestige for the period. At the current market price, Prestige is, however, trading at a P/E multiple of 14.44 which is closer to its past five-year average of 14.3. On the other hand, Hawkins is currently trading at a P/E of 12.3, which is a tad higher than its past five-year average of 8.5.

 

Goenka Diamonds - IPO

 

Considering that Goenka Diamonds' public issue may not lead to any significant improvement in its growth, investors can give it a miss

IPO details

Price Band: Rs 135-145
issue size: Rs 135-145 crore
Date: March 23-26

GOENKA Diamond and Jewels is another company in the gems and jwellery sector to enter the capital market with an initial public offering this year. It intends to use the proceeds of the offer to ramp up its retail activities, set up diamond processing and jewellery manufacturing facilities, invest in its subsidiaries and support the working capital requirement for the jewellery business. Goenka D & J is offering 10 million shares of face value of Rs 10 each in the price range of Rs 135-145 per share. The issue will constitute about 30.9% of the post-issue paid-up capital.

BUSINSESS:

The company has an integrated business model that includes sourcing of rough diamonds through various sources including its Russian subsidiary, MB Diamond. Then it cuts and polishes these diamonds for exports and jewellery manufacturing and markets jewellery through its retail stores. The company owns diamondprocessing units in a SEZ at Surat and Mumbai with a capacity of 60,000 and 15,000 carat per year, respectively. It also has a unit in Mumbai. Exports account for nearly 75% of its revenues with Russia, Malaysia being its major markets. Goenka D & S has also has forayed into retailing of jewelleries through two brands — G WILD and CERES. It owns five G WILD and one CERES stores.

EXPANSION PLANS:

A major portion of the proceeds (about 88%) will be utilised to meet the working capital of the jewellery business and invested in the loss-making Russian arm. A share of the proceeds will be used for increasing the number of G WILD and CERES stores to 22 and 3, respectively by FY12 and FY11. About 6% of its proceeds will be used to set up another jewellery making and diamond processing unit in Mumbai.

FINANCIALS:

In the past three financial years, standalone revenue and net profit have grown at (CAGR) of 146% and 218%, respectively. While the cash profit has grown on the similar line (CAGR of about 200%), net cash flow from operating activities has remained negative and has expanded by a CAGR of 60% in the period. The consolidated sales doubled in FY09 while profit margins hit by growth in input expense and 90% growth in interest cost. For nine months ended December 2009, profit margins showed a rebound.

RISKS:

While the sector itself has a high working capital requirement, it has grown by a CAGR of 133% in the past three financial years that is much higher than its peers, such as Renaissance Jewellery and Gitanjali Gems. Moreover, the inventories have also showed a higher CAGR of 110% compared to the industry average of
about 30-45%.

VALUATION:

Post-issue, the company will be valued at 9.8 times its annualised consolidated earnings for the first three quarters of FY10 at the lower end of the prize band and 10.5 times at the higher end. The valuation thus is higher compared to the P/E ratio of established players, such as Su-Raj Diamonds, Renaissance Jewellery and Gitanjali Gems in the range of 5.5-7. Given that the company has a very high working capital requirement for which it is also planning to utilise a major portion of the proceeds, IPO may not lead to any significant improvement in the company's revenue and profit growth. This besides the fact that the company has failed to generate positive operating cash flow in the past three financial years, investors could avoid this issue.

 

IRB INFRASTRUCTURE

Edelweiss maintains ‘Buy’ rating on IRB Infrastructure. Increase in toll collection is a significant positive for the company, which has always maintained that toll collection will pick up post stabilisation of the project. The project, which started collecting toll in February ‘09, had initially registered daily collection of about Rs 8.5 million. The toll rates were hiked by 8.4% in September ‘09. The interest rate for the Mumbai-Pune Expressway project has been frozen at about 10.6% for the balance of the debt repayment period. IRB’s two under development projects-Surat-Dahisar and IRDP Kolhapur-are progressing steadily. The company expects to commission them as per scheduled dates of August ‘11 and January ‘11, respectively. With the huge opportunity waiting in the wings as far as the road sector is concerned, there is no dearth of projects for IRB.

The company’s philosophy of waiting for the right project, manifested in its ‘pick-and-choose’ policy, will allow it to maintain its high level of profitability and gather lucrative projects. The target price for the stock is Rs 274 and does not take into account any future project wins which will be further value accretive for the company.

Sabero Organics

 

 

A scalable and sustainable growth model with a proven track record makes Sabero Organics an attractive investment

 

SABERO Organics is following a steady business model that requires a little capex to grow. Registering more and more products in overseas markets, introducing new products and expanding retail footprint are the three-pronged strategies the company has adopted. At a time when Indian agrochemical players are expected to gain from the pressure to improve agricultural yields and the shift of manufacturing base from western countries to Asia, long term investment in Sabero Organics can be considered.

BUSINESS:

Sabero Organics Gujarat (SOGL), which started as an agrochemical intermediates manufacturer in 1991, started manufacturing agrochemicals from 1998. Today, SOGL manufactures and supplies crop protection chemicals to large pesticide companies both in India and aboard focusing mainly on two chemistries — organophosphorous and dithiocarbamate. The company has a product portfolio of five insecticides, two fungicides and one herbicide — albeit with large market share. It is one of the largest producers of its two key products, mancozeb and glyphosate globally, which are currently the world's largest selling fungicide and herbicide, respectively. Insecticides and fungicides each bring in 40% of SOGL's revenues, while the herbicide — glyphosate — accounts for the balance 20%.

   The company has set up a total of six subsidiaries and associate companies in Australia, Europe, Philippines, Argentina and Brazil to obtain registrations locally as well as in neighbouring countries. It currently has 240 product registrations across 50 countries with over 100 registrations under process. It derives nearly two-thirds of its sales through exports.

GROWTH DRIVERS:

The company's growth strategy primarily focuses on expanding geographical reach through new registrations for its existing products, expanding capacities while gradually adding new products to its portfolio. The company, which is a relatively new player in the retail market, is also pushing its branded sales in India — currently stand at 30% of total — by increasing dealer network.

   The company recently doubled its mancozeb capacity to 30,000 TPA to become the world's secondlargest producer. It recently got its first registration in Brazil, which is world's leading agrochemical market for chloropyriphos — an insecticide. Three other registrations are expected later this year in Brazil. It has also obtained registrations in the UK and Germany and is expecting more in France and Spain.

   In addition, SOGL has tied up with a multinational firm to register its herbicide and fungicide products as a source for all 24 European Union countries, this year. The company introduced two new products — propineb, a fungicide and methamidophos, an insecticide —in 2009 and aims to launch two new products every year going forward.

   The company is not required to incur any major capex for increasing its sales from the present level and hence its focus will continue to remain on new registrations, new product launches and retail branding. As such the capex plan for FY11 is estimated around Rs 10-15 crore.

FINANCIALS:

In the past five years, the company has increased its profits at a cumulative annual growth rate (CAGR) of 61% while the net sales grew at 30%. The net worth has grown at 24% during this period. The company's debt-equity ratio has improved from 2.1 in FY05 to 1 in FY09. The company has steadily improved its operating margins from 10.6% in FY06 to 14.4% in FY09. For the year ended December 2009, the operating margins expanded to 18.4%. The company has a consistent record of generating cash from operations and clocked a 37.5% return on employed capital (RoCE) in FY09.

VALUATIONS:

The company is currently trading at a price-to-earnings multiple (P/E) of 6.6, which is good compared to its peers, such as Rallis India (16.5), United Phosphorous (14.3), Insecticides India (4.1) and Meghmani Organics (12.5). We expect the company to post net profit of Rs 47 crore in FY11. The current price is 4.7 times of its expected EPS for FY11.

 

Hindalco Industries

RBS maintains `Buy’ rating on Hindalco and raises the sum-ofthe-parts target price to Rs 180, reflecting the new earnings estimates for Hindalco. The RBS team raised its aluminium price forecast by 5-10% for ‘10-12 in the report. After a decline of 8% in ‘09, RBS expects aluminium consumption to increase 10% in ‘10 and 8% in ‘11-12. The metal’s widespread usage, which led to the ‘09 decline, is expected to provide a flipside to demand going forward, as global economies improve.

However, high inventory levels remain a threat to significant price upside. On the other hand, combined LME and Shanghai aluminium inventory q-o-q growth was at its lowest for two years in Q4FY09, which may mark the start of a trend. With Hindalco’s fully integrated domestic operations, any increase in aluminium prices directly flows to its bottom line. Hindalco offers strong exposure to aluminium prices and future low-cost capacity creation, given its plans to triple domestic capacity in three to five years.

Shree Cement

CLSA revises the target price on Shree Cement from Rs 2,000 to Rs 2,400 and maintains the `Buy’ call. Shree Cement’s management suggests that the firm’s power-capacity target is on track - it would commission 300 MW by March ‘11. Its cement capacity in December ‘09 exceeded the estimate and grew 22% y-o-y. CLSA expects a strong 53% y-o-y EBITDA growth in Q3FY10 and raises the EBITDA forecast by 3-6% over FY10-12, mainly to factor in an increase in cement capacity and higher earnings from the power segment. The group has entered into a fuel-supply agreement for 0.2 million tonnes of pet coke with an overseas firm. The company is to report some 50% y-o-y growth in EBITDA in Q3FY10, led by strong expansion of the overall volume by 22%, higher realisation and 70% y-o-y growth in power EBITDA. Meanwhile, despite a 120% y-o-y increase in depreciation charges on the back of the capitalisation of grinding units and power plants, a reduction of tax rates by 12 ppts y-o-y, to some 14%, would help reported earnings grow by 55% y-o-y. CLSA changes the depreciation projections and lowers the tax-rate assumptions, to upgrade EPS estimates by 4-25%.

Intrasoft Technologies IPO

IPO details
Price Band: Rs 137-145
issue size: Rs 50.7-53.7 crore
Date: March 23 - 26

ONLINE greeting card company, Intrasoft Technologies, is raising funds from the primary market to step up its branding and promotion and to purchase a new corporate office. Post-issue, the promoter group's stake will reduce to 59.4% from 79.3%. Intel Capital (Mauritius), who had made investments in the company in December 2007, will continue to hold 12.2% stake in Intrasoft after listing.

BUSINESS:

The Kolkata-based company runs 123greetings.com (123G), a greeting cards website. Its revenue depends upon online advertising. Currently, 65% revenue and 60% online traffic come from the US while the rest is from India.
   The company is the second-largest online greeting cards provider in the US after American Greetings. 123G attracted 90 million unique visitors last year, according to comScore Media Metrix.
   To expand its reach, the company has introduced two software facilities for users. Under Studio facility, card designers across the world can upload their designs to the website free of cost. This will help 123G cover more events and festivals across various countries. It's another facility prompts users if they supply a wrong e-mail id while sending e-cards.
   The company is also eyeing fast-growing online invitation business wherein users invite members of their user groups for social events. In July, it started gifting business by partnering with nine US vendors of gift items. The business currently contributes 10% to revenue.

FINANCIALS:

In five years ended March 2009, the company's revenue rose at a CAGR of 12% to Rs 23.4 crore. Net profit grew at a CAGR of 27.6%. The company's operating margin has expanded from 15.3% in FY05 to 24% in FY09. Its operating cash flows have witnessed volatility relative to net profits. For Intrasoft, cash flows are volatile due to minimum alternate tax (MAT) credit, faster depreciation method, and other income in the form of interest on fixed deposits.

VALUATIONS:

At the higher end of the price band, Intrasoft demands a P/E of 32.6 based on annualised net profit during the six months ended September 2009 and post-IPO equity. There are o strict peers to the company. Info Edge (India), which operates recruitment portal naukri.com, trades at a trailing 12 months P/E of 42. However, its business is largely driven by subscriptions unlike Intrasoft, which derives revenue through online advertisement.

CONCERNS:

Intrasoft is raising IPO funds to establish such partnerships. It needs
to be seen how well it can achieve its goal given that it competes with a big and well-established player. In FY11, the company's MAT credit will be over and it will attract a normal corporate tax rate of 33%. This is likely to erode its net profitability since it currently pays negligible amounts of taxes. The company expects to reduce the adverse impact through improved rate of advertisement. Again, the exact picture will emerge only after FY11. The company's valuations look aggressive given the fact that it operates in a very competitive segment and its revenue is based on highly volatile online advertisements. Further, its net margin level is uncertain post FY11 due to exhaustion of MAT credit. In this backdrop, investors may wait for valuations to drop post listing.

 

Biocon

Biocon has attractive growth opportunities going forward. It is a good bet for investors interested in the mid-cap space

   AFTER a poor show in earnings for the fiscal year 2009, India's leading biotech company Biocon has registered a good recovery in the current fiscal. With traction in its biopharma business and an improvement in the performance of its German subsidiary, Axicorp, the company holds attractive growth opportunities going forward. It is a good bet for investors interested in the mid-cap space.

BUSINESS:

The Bangalorebased company develops and manufacturers bio-pharmaceutical products for various medical ailments including cancer, diabetes and inflammatory diseases. The company's biopharma business model straddles both products and services.

   The company's statins business, which contributes nearly 30% to its revenues, has witnessed a strong growth in revenues. Further, the biopharma business has also gained from growth in domestic formulations business, insulins and immunosuppressants.

   Axicorp, the company's low-margin trading business, has showed improvement and the subsidiary is gaining from supplying to the tender floated by the German insurer AOK. Through its two subsidiaries, Syngene and Clinigene, the company provides end-to-end services from pre-clinical discovery research to human clinical trials. It contributes nearly 15% to the company's revenues.

   Biocon is also working on product development in view of the opportunity of launching biosimilars in the US and other regulated markets. The company has been steadily increasing spend on R&D. It now spends 7.5% of its revenues on R&D.

FINANCIALS:

The company's net sales have grown at a compound annual growth rate (CAGR) of 24.4% over the past five fiscal years to reach around Rs 1,608.7 crore in FY09. The net profits have rather grown in an erratic manner during the same period. Heavy MTM losses, high depreciation due to large capex and rise in interest costs put pressure on net profit in the recent past. Despite this, the company has been consistently paying dividend for the past six years.

   It has incurred high capex over the past three years. As the company's big-ticket capex are over, it is expected to generate more free cash flows going forward. However, the fact that the company earns majority of its revenues from lowmargin business segments of statins and Axicorp remains a concern.

GROWTH OPPORTUNITIES:

The patent for Atorvastatin is expiring in the UK in 2010 and in Germany in 2011 offering opportunity for the company to tap the $12-billion market. Given the increasing trend of R&D outsourcing, the company's contract research service business is likely to see strong earnings inflow in the coming years. Strong ramp up in the scale and number of projects under Syngene are likely to augur near-term growth. Launch of biosimilars in regulated markets and commercialisation of its oral insulin programme IN-105 are long-term growth drivers for the company. A possible listing of its subsidiary, Syngene, could lead to value unlocking for the company and its shareholders.

VALUATIONS:

The company's stock has been outperforming the Sensex since the middle of 2009. It is currently trading at a consolidated price-to-earnings value of 23. It is valued at two-and-a-half times its net sales. These valuations come on the back of promising growth prospects of the company across its various business segments. Investors with a long-term horizon are likely to benefit from the company's promising growth story.

 

Shree Ganesh Jewellery - IPO

 

 

Shree Ganesh Jewellery House's IPO looks to be a good bet for investors with higher risk appetite considering the cyclic nature of its business and significant growth in revenues

IPO details

Price Band: Rs 260-270
issue size: Rs 371-385.29 crore
Date: March 19 - 23

SHREE Ganesh Jewellery House is the second company from the gems and jewellery space to enter the primary market with an initial public offering in the past two months. The Kolkata based company plans to utilise the proceeds of the issue to expand its manufacturing capacities as well as retail presence in the domestic market. The company plans an initial public offer of 1.43 crore shares in the price range of Rs 260-270 which would comprise fresh issue of 1.21 crore shares and sale of 0.22 crore shares by Credit Suisse PE Asia Investments. The net issue will constitute 23.5% of the post issue capital while the fresh issue will represent about 20% of the same.

BUSINESS:

Shree Ganesh, a manufacturer and exporter of the handcrafted plain and studded gold jewellery, was incorporated in 2002. In March 2008, PE firm Credit Suisse invested Rs 80 crore in the company for a 10.99% stake at a price of Rs 300 per equity share. The company has four manufacturing units located in Manikanchan SEZ in West Bengal with a cumulative capacity to produce 30,500 kg of gold jewellery per year. For the FY09, the company utilised about 73% of its installed capacity. It has currently employs about 562 craftsmen (karigars) and also takes outsourcing orders from third parties. The company earns more than 95% of its revenue from exports to UAE, Singapore and Hong Kong. Shree Ganesh has a presence in the domestic market through 13 retail outlets, of which nearly half are on franchisee mode while four are owned or leased-in by the company. It has three outlets through shop-in-shop arrangements with Vishal Retail. Barring New Delhi and Kolkata, all these outlets are spread over tier II & tier III cities. The company markets products in the domestic market through the brand name 'Gaja'.

EXPANSION PLANS:

Shree Ganesh plans to set up new manufacturing units at Mondalpara and Domjur and also expand its manufacturing capacities at the Manikanchan SEZ. The new facility at Mondalpara will comprise a unit to manufacture plane and studded gold jewellery with annual capacity of 450 kg, a bangle manufacturing unit with an annual capacity of 600 kg and two units with a total capacity of 1,500 kg for manufacturing machine made Italian jewellery. The new facility at Domjur will have an annual installed capacity of 2,000 kg of diamond studded jewellery along with an electroforming and a gold refinery plant. The company also plans to expand its presence in the domestic market by opening another 46 outlets over the next three years. It also plans to own 14 of these outlets while others will be operated by shop-in-shop and franchisee basis.

FINANCIALS:

The company's standalone topline grew at a compounded growth rate of (CAGR) of 61% in the past three financial years. Net profit and cash profit experienced similar growth while the cash from operating activities grew by about 150% during the period. The consolidated revenue in FY09 grew by 96% compared to the previous year while the profit margins experienced a decline for the period due to a 180% jump in the interest cost. Inventories during the past three financial years have grown by 45% when compounded annually which is a bit higher than that of other competitors like Rajesh Exports (35%) and Su-Raj Diamond & Jewellery (32%) and Gitanjali Gems (42%).

RISKS:

The company's current operations are export driven while it intends to use close to 25% of the expansion capex on the retail business. Moreover, its current exports are concentrated towards UAE (50%) while more than 60% its revenues come from its top five customers.

VALUATION :

Post issue, the company will be valued at 9.6 times its annualised H1 FY 10 earnings at the higher end of the prize band and 10 times at the lower end. Hence, the valuation is a tad higher compared to the P/E ratio of established players, such as Su-Raj Diamond and Gitanjali Gems in the range of 8-9.5. The company operates in the niche handcrafted jewellery market and has demonstrated significant revenue growth. However, given the cyclic nature of the business, the concentrated exports revenues and the working capital requirement of the industry, the issue looks to be an attractive bet for investors with higher risk appetite.

 

Zuari Industries

Although there are multiple positives, proposed merger of Gobind Sugar & 1:1 share allotment will dilute earnings, value

KK Birla Group firm Zuari Industries has outperformed the market by a wide margin over the past one year. The scrip gained 397% in the past one year compared to the 184% jump in the benchmark Sensex.

This follows the overall buoyancy in the fertiliser sector since the first signs of deregulation since July 2008. The company has recently decided to merge its group company and Gobind Sugar Mills listed on the Kolkata Stock Exchange by issuing Zuari’s shares on a 1:1 ratio.

This will entail an issue of 32-lakh equity shares, which implies a dilution of 10.9%, taking ZIL’s outstanding equity to Rs 32.64 crore. Considering, the EPS of Gobind Sugar Mills’ for the year ended June ‘09 at Rs 24.7 against Rs 120.4 of ZIL, this amalgamation will bring down the EPS.

With low debt and a cash rich status, ZIL is increasing investments in its subsidiaries. Recently, the company created two subsidiaries — Globex and Zuari Fertilisers & Chemicals — for facilitating further investment-led growth. Based out of Dubai, Globex will carry on the commodities trading business, while ZFCL will manufacture fertilisers.

Similarly, ZIL plans to develop 73 acres of land near Mysore obtained way back in 2007 through acquisition of a real estate company. The company also subscribed to 62.4-lakh shares of Zuari Investments making it a subsidiary. The company already has interests in pesticides, furniture and financial and engineering services through its subsidiaries.

Zuari’s urea plant in Goa is yet to receive natural gas and is currently operating on liquid fuels. With Gail extending its pipeline till Dabhol on the western coast and planning to take it down till Bangalore, ZIL hopes to get gas by 2013. The company has already signed gas supply agreement with GAIL (India) for supply of RLNG. Simultaneously, the company has obtained government approval to revamp its plants to use gas instead of naphtha. The process will also increase the capacity of its 4-lakh tonne per annum urea plant, thanks to debottlenecking.

The government has recently approved nutrient-based subsidy policy with effect from April 1, 2010 and increased urea prices by 10%. These developments stand to benefit Zuari in the long run. Although there are multiple positives about the stock, the proposed merger of Gobind Sugar and the 1:1 share allotment will dilute earnings and value to the detriment of minority shareholders.

Bilcare

Stock Eyes Major Gains As Co's Revenues & Margins Set To Touch 30%

 

BILCARE, Rs 1,000-crore supplier of technology-driven niche pharma solutions, looks a promising bet in the mid-cap space. This Pune-based company is a provider of packaging solutions and clinical trial supplies to over 500 pharma companies globally.

   The company, which has a manufacturing facilities in the UK, US, India and Singapore, has made significant investments towards expanding its footprint. It earns half of its revenues from its overseas business, which is growing at a faster rate than its domestic business. The company's revenues have grown at an average y-o-y rate of 22% over the past 12 months with an operating profit margin of 23%.

   The company raised around Rs 150 crore through a GDR issue in January this year. The funds were used to buy back the outstanding FCCBs leading to reduction in the company's debt-equity ratio from 0.7 from 1.9.

   With sales of generic drugs increasing globally, the company's largest business segment of pharma packaging is likely to log robust growth. Rising R&D leading to higher number of clinical trials is also a trigger for the company, which supplies research based products for clinical trials. Bilcare recently doubled its capacity of supplies for clinical trial services with the opening of a second unit in UK. Anti-counterfeiting solutions is another growth driver for the company, as it is being adopted by an increasing number of drug manufacturers to check counterfeiting of their products. Recently it launched a technology-based solution in the US to prevent counterfeiting of drugs.

   Bilcare's stock has, however, been an underperformer since the past two years. It has grossly under-performed the Sensex. It is trading at a consolidated price-to-earnings multiple of 10 and is valued at a market cap of Rs 1,100 crore — slightly higher than its consolidated annual revenues. These are fair valuations for a small-sized company. Going forward, Bilcare's consolidated revenues are likely to increase by around 30% annually with operating margins improving further to 30%+ levels. Considering the company's growth prospects and the stock's sustained underperformance on the bourses, there appears to be room for further appreciation in the company's stock price.

 

Hidden Gems - EID-PARRY

This Murugappa Group sugar company holds promoter's stake of 65% in Coromandel Fertilisers, which is valued at Rs 2,717 crore at the current market prices. If one considers EID's market capitalisation of Rs 3,600 crore, its standalone enterprise value works out to Rs 1,067 crore. This is just 3.1 times the company's standalone PBDIT, nearly half of the current EV/EBITDA multiple of 6.2 attributed to a sugar company.

 

Hidden Gems - MAHINDRA HOLIDAYS AND RESORTS

Though perceived to be hospitality player, Mahindra Holidays and Resorts, considering the way it operates, follows a non-banking financial company (NBFC) business model. This is clear from a close scrutiny of its balance sheet. At the end of FY09, MHRI had a total debt of Rs 665 crore. Out of this, Rs 640 crore is unsecured debt, which is not debt in the traditional sense. According to the company's red herring prospectus, its average cost of funds from various banks ranged between 10% and 11.75%. It observed that the company's earnings come from the difference between the interest it pays to banks and the interest rate in-built into the EMI schedule of its members. It is seen that the spread between the EMI's interest component and the bank's interest maybe as high as 5%, depending on the interest rate cycle and this spread is the company's operating margin. So the company's revenue growth is tied to the interest rates rather than factors related to the hospitality industry.

Transport Corporation of India (TCI)

TCI

At 16 times On A Trailing Basis, Co’s Share Price Seen Reasonably Valued

MULTI-MODAL logistics player Transport Corporation of India (TCI), with a presence in segments such as trucking, supply-chain solutions and warehousing, has benefited from a revival in demand from the key user-segments like automobiles and consumer durables over the past few months. For instance, the Index of Industrial Production (IIP) grew at a brisk 11% yearon-year (YoY) in November ‘09 and there was also a corresponding improvement in trucking freight rates.

As a result, TCI’s operating profit margin improved by 50 basis points YoY to 7.2% in the December ‘09 quarter at a time when its net sales also grew 18.8% YoY to Rs 381.2 crore. Apart from an improved operating environment in the third quarter of the current financial year (FY10), the logistics major also benefited from its strategy of expanding its presence in higher-margin segments like supply-chain solutions and XPS cargo tracking, which provides door-to-door delivery services of goods.

The company’s logistics network includes 7.8-million square feet of warehousing space at the end of May ‘09, a rise of 20% over the past two years. As per various estimates, nearly 18-20% of this space is company-owned and the remaining is leased. In addition, its fleet includes 7,000 trucks and trailers (both owned and managed), coupled with five cargo ships with a capacity of nearly 16,500 deadweight tonne.

The improved operating environment for TCI has not gone unnoticed by the Street. The stock has risen nearly 6.5% over the past three months, compared to a 3.5% fall in the Sensex. Other larger players in the logistics segment, like Allcargo Global, have done much better during the period.

And despite the rise in the stock over the past three months, TCI, at CMP, trades at reasonable 16 times on a trailing basis. Other players like Allcargo Global trades at 16.6 times on a consolidated basis, while the largest player, government-controlled Container Corporation, trades at nearly 21 times.

Investors could consider making fresh investments in the company, in a bid to take advantage of the growth in the logistics sector over the next few years.

Hidden Gems - KESORAM INDUSTRIES

Part of the BK Birla, Kesoram Industries was initially a cotton textile and rayon manufacturer and subsequently diversified into heavy chemicals, spun pipes and transparent paper. However, currently tyres and cement account for over 95% of the company's revenue. In the past few years, the company has aggressively expanded its tyre division and it now accounts for 60% of revenue. At its current pace of expansion, Kesoram is likely to emerge as one the top three tyre makers in the country. The stock price, however, doesn't fully reflect this and the company market capitalisation is like that of a mid-cap cement maker. The stock is currently trading at 4.7 times its trailing earnings. In comparison similar sized cement and tyre makers, such as JK Cement, Binani Cement and JK Tyre, are currently trading in at around 5.5x.

Subex

A recovery in the global telecom space could benefit Subex. At current valuations, the stock looks attractive on a long-term basis

BANGALORE-HEAD quartered Subex, provider of fraud management and revenue assurance solutions to global telecom players, was one of the worst hit companies due to a slump in the telecom sector in the last eight quarters globally. The company struggled to remain afloat as its clients from the telecom sector postponed investments in new projects. Now, the worst seems to be over for the sector. Telcos are showing signs of revival, which means that the investments could get back in the sector. This augurs well for Subex.

BUSINESS:

Subex earned Rs 600 crore in the last fiscal from product licences and managed services. Though products contribute over 90% of the revenue, the company is keen on improving the share of the services component as this offers higher margins in the long term. Subex offers solutions to more than half of the top 70 telcos in the world. Apart from its biggest market in the US, it has 54 clients in the African continent and six in India. It has 1,200 employees on its payroll. Its clientlist includes Bell, Comcast, T Mobile, Telefonica, Verizon, BT, Zain, Vodafone, BSNL, Reliance Communications, and Telstra among others.

Inorganic growth has played an important part in Subex’s growth strategy. In the last five years it has acquired four companies in the field of revenue assurance, fraud management, and services fulfillment.

FINANCIALS:

Between FY04 and FY07, the company grew its topline four times aided by acquisitions. Its net profit shot up by a similar magnitude during the said period. However, the next two years proved to be challenging given the slowdown in the global telecom sector. Though topline continued to grow, profits were hard to come by. The company reported losses at the operating level in FY08 and FY09 since costs escalated at a faster pace than the revenues.

The December ’09 quarter reflects signs of revival as the company returned to profitability. It has also restructured foreign currency loans that are convertible into equity shares. This has reduced its debt burden by around 24%.

VALUATIONS:

Subex’s trailing twelve month (TTM) P/E (price-earnings ratio) cannot be considered since the company had posted losses during the first half of FY10. Assuming stable earnings per share for each of the quarters in FY11, its forward P/E comes out to be 6.7 at the current market price of Rs 66 per share. This makes it reasonably valued among the other mid-tier IT players which command P/Es of eight-to-ten.

GROWTH PROSPECTS:

Subex’s ’07 acquisition of services fulfillment player Syndesis went awry as global telcos cut new capex postsubprime crisis. Subex took a big hit because of this since it was betting on selling the next generation deliverables of Syndesis. Given the recovery in the telecom space currently, Subex is hopeful of reviving the Syndesis business. The company is also aggressively expanding its services portfolio, which would generate recurring revenue. With the restructuring of its FCCBs and other debts, its interest costs will fall. This will support its net margin in the future quarters. Investors can consider the stock on a long-term basis.

ITC

ITC’s cigarette business, its cash cow, has been doing well with volumes growing at a robust rate for three consecutive quarters. For the December 2009 quarter, volumes increased by about 8.5 per cent year-on-year, the highest rate in the last three years. ITC has been successful in churning good performance in its non-cigarette businesses as well. For instance, in its non-cigarette FMCG business, improved product mix in biscuits (Sunfeast and Bingo) and introduction of variants in personal care helped increase sales whereas sustained cost efficiencies lowered the losses. Its agri and paper businesses also reported improved profitability, while hotels is staging a recovery. With better business prospects on the anvil, the stock has outperformed the broader markets in the last 4-5 months. But, imposition of higher VAT by certain states and unfavourable budget initiatives on cigarettes could be overhangs for the stock, going ahead.

Cigarettes: Higher volumes Unfavourable taxation against cigarettes in recent years partly explains why volume growth for ITC’s cigarette business was not encouraging in 2007-08 and 2008-09. However, it did not disturb the company’s apple cart much as ITC still sells three out of four cigarettes in the country. With a portfolio of popular brands like India Kings, Gold Flake, Scissors and Bristol among others, ITC has managed to sustain leadership position.


In the 2008 budget, the imposition of excise duty on non-filter cigarettes and consequently ITC discontinuing sales of such products had impacted volumes. But, a more or less stable tax regime coupled with the company successfully upgrading customers to filter cigarettes has helped improve volumes. ITC’s cigarette volumes grew by an estimated 7.2 per cent in the first nine months of 2009-10. The faster growth in the December quarter was contributed by King-size premium, Gold Flake Filter and Scissors cigarettes. The introduction of brands like Gold Flake Kings Gold and Navy Cut Kings also enhanced sales.

Recently, ITC also increased the prices of premium cigarette brands like India Kings (by 10 per cent) and Benson & Hedges (by 5 per cent), besides keeping a tab on price increases in the non-premium and low-end filters like Scissors. At 17 per cent year-on-year growth in cigarette sales rounded the December quarter, as its best in the last seven quarters. Overall, expect cigarette volume growth to be around 7-8 per cent for 2009-10 and about 5-7 per cent in 2010-11 (barring sharp increase in duties).

Non-cigarettes: Good show as well A pick-up in economic activity and tourist flows has seen occupancies improve in the hotels business. For the nine-months to December 2009, while revenues and profits of the hotel business were down by about 17 per cent and 43 per cent, these were flat and down 16 per cent, respectively in the December quarter. Going ahead, expect its performance to improve further. ITC’s agri business that accounts for around a fifth of total revenues is also delivering better returns. A shortage leaf tobacco world-over and reduced levels of low-margin commodity trading helped improve overall realisations. Indicatively, EBIT margins improved to 11.5 per cent in December quarter, up from 8.1 per cent in the year ago quarter.

The paper and packaging segments operated at optimum levels. Consequently, its sales grew by 29.4 per cent during the quarter. Importantly, profit margins expanded to an all-time high of 24.8 per cent, up 700 basis points year-on-year, helped by higher sales of value-added products and lower pulp costs led by increased pulp mill capacity.

Better cost management and input sourcing saw its non-cigarette FMCG losses reduce to Rs 86 crore in the December quarter compared to Rs 127 crore in the same period last year. The segment could witness a reduction of losses in 201011, and the management expects to attain a breakeven in its non-cigarette FMCG portfolio in 201112. ITC plans to further improve its product mix in the soap category through launch of new products and variants in the first half of CY10. Overall, combined sales of non-cigarette FMCG businesses registered a growth of 23.6 per cent yearon-year in the third quarter of 2009-10. ITC’s initiatives should see this segment grow at 13-15 per cent for 2010-11.

Conclusion: Despite the ban on cigarette smoking in public places and players mandated to put pictorial warning on cigarette packs, the resilient and inelastic demand has ensured robust volume growth for ITC during the first nine months of the current year. For the second half, steady product prices (price hikes on select brands) would augur well for the company. Besides cigarettes, lower losses in the non-cigarette FMCG business, high profitability in the agri and the paper businesses, along with hotel business expected to deliver better performance in the coming quarters should ensure enhanced earnings visibility.

ITC’s overall margins in the third quarter stood at its highest in many years at 37.3 per cent. Going ahead, expect the margins to hover around 35-36 per cent in 2009-10 and 2010-11. Overall, ITC’s net profit is expected to grow by about 20 per cent in 2010-11. At CMP, ITC is trading at about 20 times its estimated 2010-11 earnings and can be accumulated on dips.

Hidden Gems - BOMBAY DYEING

Bombay Dyeing, like its contemporaries in the textile industry, suffered losses in the past two financial years. The Wadia group company, however, reported a net profit of 2.71 crore for the quarter ended December 2009. An improvement in the operating profits since the past four quarters have appeared from the company's real estate business, offsetting the negative effects of struggling textile/polyester business. For the year ended December 2009 while the real estate and properties collectively contributed 34% to revenue, PBIT from these segments were as high as 134% of total PBIT. It is, however, difficult to compare the valuation of the company to that of any real estate company or its peers, like Century Textile, which have a similar real estate segment since the latter's business is considerably influenced by its activities in cement business.

Hidden Gems - CHAMBAL FERTILISERS

This KK Birla group fertiliser company derives nearly one-sixth of its revenues and 18% of its profits from Shipping and Textiles businesses that together represent nearly half of the total capital employed in the business. Considering an average EV/EBITDA of 8 attributable to a fertiliser company, Chambal Fertiliser's current market capitalisation of Rs 2,551 crore accounts for its PBDIT only from fertiliser business. Thus an investor also gets investment in shipping and textiles businesses.

JK Lakshmi Cement

JK Lakshmi Cement is aggressively expanding capacity to take advantage of long-term growth opportunities

STRONG demand for cement, especially in the northern markets, coupled with the Budget’s focus on expanding infrastructure across the country is expected to help players including JK Lakshmi Cement. We had recommended this stock in our issue dated May 25, 2009, and since then the stock has gained nearly 57.8%. We believe that there is still potential upside in this stock over the medium term. The stock currently trades at about 1.2 times its trailing book value adjusted for the sub-division in the face value of its share, as compared to a range of 0.3 and 3.2 between March 2006 and March 2009. In addition, the stock trades at a P/E lower than that of other similar sized players like Binani Cement and JK Cement.

CAPACITY:

JK Lakshmi Cement’s capacity was 4.74 million tonne (MT) at the end of March 2009, a rise of 39.4% from two years earlier. The company caters to cement demand in the western and northern belt of the country from its facilities in Rajasthan and Gujarat. This expanded capacity has come at a time when demand, especially in the northern region, has been robust and estimated to have increased by nearly 15% y-o-y between April and December 2009. Demand in northern region has been driven largely by ramp-up in construction activities before the Commonwealth Games in Delhi and housing projects. The company had invested Rs 567.3 crore between March 2007 and March 2009, while its operational cash flow during this period was Rs 984.8 crore. As a result, its leverage ratio stood at 0.99 at the end of the previous financial year as compared to 2.5 in March 2007.

EXPANSION PLANS:


The company is attempting to take advantage of the strong demand conditions for cement in eastern region, with its plan to set up a greenfield project with a capacity of 2.7 MT in Chattisgarh at a cost of nearly Rs 1,200 crore. This facility is expected to be brought-on-stream during 2011-12. Cement demand had grown nearly 18% y-o-y between April and December 2009 in eastern region , as per various reports. JK Lakshmi is also expanding its clinker capacity by nearly 0.4 MT at a cost of almost Rs 145 crore and this facility is expected to be operational by January 2011, and this should help the company raise its capacity by 0.6 MT. This will result in its capacity reaching 5.3 MT by January 2011.Apart from expanding cement capacity, the company is also setting up a waste heat recovery system, which will generate 12 MW of captive power that is expected to come on stream in March 2011. In addition, the company is also setting up a 18 MW thermal power plant at cost of nearly Rs 80 crore and this facility is likely to be operational in 2011.

This will enable the company to save power cost, which is one of the key operational costs for cement makers. The company plans to use a combination of internal accruals and loans to finance its expansion plans. And given its strong cash flows from expanded capacities that had earlier come on stream, analysts are not expecting a rise in JK Lakshmi’s leverage ratio going forward.

FINANCIALS :

The company’s operating profit margin fell 120 basis points y-o-y to 25.2% in the December 2009 quarter, despite an 18.7% rise in its net sales to Rs 353.3 crore. Pressure on its operating profit margins was due to a 22.6% rise in transport, clearing and forwarding charges to Rs 591.4 per tonne in the third quarter, while other expenditure rose 16.8% y-o-y on a per tonne basis.

The company’s realisations rose by an estimated 1.8% y-o-y to Rs 3,037.9 per tonne in the third quarter of FY10 while despatches soared 16.5% to 11.63 lakh tonnes. A cause for concern for the cement industry is the rising cost of imported coal over the past few months. The recent Budget measures included a hike in excise duty by 2% and cement companies have passed on this cost to end-users. Also, a rise in freight costs due to higher diesel prices is expected to be passed on by the industry to consumers.

VALUATIONS:

At CMP, JK Lakshmi Cement trades at nearly 4.1 times its trailing 12 months earnings. Other players with similar size, including Binani Cement trades at nearly 5.3 times and for JK Cement it is 5.5 times. Investors could consider JK Lakshmi Cement in a bid to take advantage of the long-term growth opportunities in this sector.