HT Media

It is one of the oldest and most venerable names in Indian media space. The HT Media (HTM)has a foothold in all the media and entertainment segments, be it virtual or real and has managed to create a large and captive audience. In the print media, its flagship product Hindustan Times newspaper is arguably the most read daily in the national capital region (NCR) region and in the financial capital, Mumbai it is among the top three -- growing at close to 4 per cent. Its recent venture Mint, a joint venture with the US-based Wall Street Journal, is the second-largest business daily in India and is still growing at a rapid pace of 25 per cent.
Despite the downturn, the company has done well to increase its revenue in the last quarter of FY09. Its revenue rose to Rs 337 crore i.e. a 6.4 per cent jump y-o-y. For the financial year FY09, the revenues were up by 12 per cent. But the profits for FY09 were down to Rs 85.2 crore on the back of higher newsprint prices, slow-down in the advertising revenue and adverse foreign currency movement. Though on the positive side its radio business has turned around in Q4 FY09, which would now be able to contribute to profits in FY10. Moreover, with newsprint prices going down by almost 35 per cent and the recent cost-cutting exercise on the manpower and overheads fronts will certainly bear fruit FY10 onwards. Brics Securities is of the view that HTM will grow at 52 per cent CAGR through FY11.

But tough competition from India’s number one newspaper, the Times of India, owned by Bennet & Coleman, HT is having trouble managing its expansion activities. With its inability to grow its market in the English language space, its historically high market share (30% of the revenue) in the Hindi-dominated region has consistently pulled it out of the woods. But this kind of lop-sided revenue stream has its benefits. Looking forward, vernacular advertising, according to Brics Securities will grow at over 30 per cent, which will contribute to a 7 per cent rise in total ad sales and 5 per cent growth in overall revenue.

However, the management has to come up with something spectacular to fill the gap between itself and the Times of India, which now has a very vibrant TV entity in the form of Times Now, a general news joint venture with Reuters, to really come into the reckoning as an overachiever that investors should be interested in.

Valuations

Even with a question mark on the ability of the management to have compelling strategy to compete with the Times of India, still the current valuation of the company makes it a very attractive buy. At a price-to-earnings ratio (PE) 6.5 times its forward earnings, it discounts historical 3-year range of PE by over 55 per cent. Jagran Prakashan, another competitor with expansionary intent, is trading at a higher PE (7.9x) than HTM. The stock’s price has already factored in the strategic gap that exists in the company’s future. According to a Brics Securities report. If HT is able to increase its margins in the next 12 to 18 months, then it will be able to grow its bottomline (52%) despite a slowdown in the topline.

ITC

Despite decent growth rates estimated for this fiscal, there is limited upside to the ITC stock

For a large part of 2008 and until March 2009, the stock of ITC outperformed the broader markets, thanks to its defensive attributes including steady financial performance and strong cash flows that find favour during uncertain market conditions. But, at current valuations as well as considering some recent developments, it makes one wonder whether the stock will continue to deliver outperforming returns. While among recent events are the company’s March 2009 quarter performance, which was somewhat subdued, and the hike in value-added tax (VAT) by the Maharashtra government, the stock’s current valuation (PE of 19.4 times estimated 2009-10 earnings) is also not cheap.

Recent concerns?

Last week, the Maharashtra government recommended a hike in the VAT rate on cigarettes from 12.5 per cent to 20 per cent. While analysts estimate that Maharashtra accounts for about 10 per cent of ITC’s cigarette sales (in value terms) and a small price hike across key brands could offset the proposed hike in VAT, they fear that similar moves by other state governments could force ITC and other players to raise prices. Thus, it poses a threat to ITC’s cigarette volumes in 2009-10.

While the fears could well prove unfounded, the past data indicates that price hikes have a strong impact on volume . Any sharp increase in prices negatively impacts volume growth—a moderate price hike can still support healthy volume growth. Even in the last two fiscal years, when the tax on cigarette was hiked by 30 per cent (2007-08 Union Budget) and excise duty on non-filter cigarettes was hiked between 140-390 per cent (2008-09), it has had an impact on ITC’s cigarette volumes.

For ITC though, it has a fairly robust track record in the business, which enjoys a domestic market share of over 75 per cent. The company has been consistently investing in its business through use of technology, product innovation, marketing, and has strong brands. While these have helped it in passing on any cost increases to consumers, they have also helped in overcoming extra-ordinary times. For instance, after the hike in duty on non-filter cigarettes last year, ITC discontinued sales of such products and through various measures was able to upgrade amajority of customers to the higher priced filter cigarettes.

This along with select price increases helped its cigarette revenues to grow by 13.9 per cent to Rs 7,557 crore and profits by 15.1 per cent to Rs 4,184 crore in 2008-09, even as volumes are estimated to have declined by 3-4 per cent.

Going by history, ITC’s stock valuations are largely linked to the growth in its cigarette volumes. The sentiments get impacted as the government tries to curb the category and that impacts the PE. Hoping that there won’t be any major negative surprises, and assuming (at worst) a moderate hike in taxes, analysts are expecting ITC to clock volume growth of 4-5 per cent in the cigarette business in 2009-10. This is comparable to the average growth in the last five years and suggests that the company should continue to generate strong cash flows to pay dividends as well as nurture other businesses.

Non-tobacco FMCG Most of these businesses, like packaged foods, apparels and personal care, have strong growth potential. But, in the last two quarters (Q3 and Q4 of 2008-09), growth rates have slowed down to 10-15 per cent year-on-year as compared to 28-30 per cent in Q1 and Q2 of 2008-09 and 45-50 per cent quarterly growth in 2007-08.

While the economic slowdown could be partly responsible, in the branded packaged foods business the company has been focussing on consolidating its portfolio in select high margin categories.

The branded apparels sales were also impacted, especially the mid-segment brand ‘John Players’. Here too, ITC is taking various measures (closing unviable stories, renegotiating rentals) to improve productivity.

Going ahead, while the company continues to invest towards scaling up these businesses, analysts expect the focus on profitability to result in the segment’s losses reducing by about 20 per cent in 2009-10.

Also, given the high base (sales of Rs 3,000 crore), sustaining high growth rates may not be possible and hence, they are projecting sales to rise by 15 per cent in 2009-10.

Others Among other key contributors, the agri and paper and packaging businesses have shown an improvement in profitability. Last year, the company completed the expansion of capacities of pulp and paperboard leading to better sales growth and profitability in the latter half, which is expected to sustain in the current year as well.

In the agri business, while revenues were flat in 2008-09, it was largely due to a 51 per cent fall in sales (led by lower soya volumes and rationalisation of the commodity portfolio) in the March 2009 quarter. Notably, profit margins improved due to better realisations in the leaf tobacco business; profits thus nearly doubled to Rs 256 crore in 2008-09. While analysts don’t expect sales growth to be high in this business, margins are likely to be sustained in 2009-10.
The weak economic environment and terror strikes in Mumbai last year impacted the industry’s fortunes and, ITC too reported a decline in sales and profits. The current year however, may find some cushion from commissioning of new capacities. Nevertheless, hotels contributed less than 7 per cent to profits in last year.

Outlook

Overall, the key growth drivers for ITC in 2009-10 are seen as the cigarette, non-tobacco FMCG and paper businesses. Analysts expect the company’s total sales to grow by 14-15 per cent and profits by 16-18 per cent over the next two years.

While the longer-term prospects look decent given the investments ITC is making in growth potential non-tobacco FMCG businesses among others, at Rs 197, the stock trades at 19.4 times the estimated 2009-10 earnings (and 16.7 times 2010-11 EPS), which is not cheap and is also not far from its fair value (based on a sum of parts valuation) of Rs 206 per share, as estimated by analysts.

Jaiprakash Associates Ltd

Company sells-off shares to take advantage of the big rally in stock market & prune debt
It seems to be the flavour of the season. A week after Reliance Industries, infrastructure company Jaiprakash Associates Ltd (JAL) followed in selling treasury stock that it had got when it merged Jaypee Cements, and other subsidiaries, with itself. Jaiprakash raised around Rs 1,190 cr from the sale of 5 cr treasury shares in bulk deals last week. This was the second such sale of treasury shares for the company, which sold 2.5 cr shares on June 18 at Rs 200 a share to raise Rs 500 cr. JAL shares closed 6.34% lower last Wednesday (when the shares were sold) to close at Rs 234.15, against a decline of 1% in the Sensex. The company sold shares at an average price of Rs 238.50 a share. JAL has got no forex exposure that can be adversely affected due to the global meltdown. Its series III foreign currency convertible bonds (FCCBs) issued in 2007 are due for conversation only in 2012.

A merger of four subsidiaries with JAL early this year resulted in the formation of around 21 cr treasury shares or 14.5% of the equity capital of the combined entity. Treasury shares are those issued to the parent company in lieu of the stake it holds in its subsidiaries. Since the parent company can’t hold its own shares, these treasury shares are being held by four trusts created for the purpose. JAL merged with itself Jaypee Hotels, Jaypee Cement, Gujarat Anjan Cement and Jaiprakash Enterprises.

The Delhi-based company, which is the flagship of Jaypee Group is an infrastructure player with operations in cement and cement production, engineering & construction, power, hospitality and real estate, went in for the share sell-off to take advantage of the big rally in the stock market and use it as an opportunity to prune debt, feel experts.

According to Amitabh Chakraborty, president (equity), Religare Capital Markets, selling treasury stocks is one of the ways to raise funds. Since equity market has rallied substantially, companies are enchasing on this opportunity.

The companies which had accumulated record amounts of debt during boomtime for expansion projects, now have little choice but to raise funds. In fact, Indian companies have raised record funds by selling shares to institutional investors this year, after Sebi relaxed pricing rules. About 26 companies so far, have raised Rs 17,800 cr by selling shares or convertible securities to institutional investors this year, according to Bloomberg data.

The move by Jaiprakash to raise funds is a bid to finance its proposed captive power plants and keep cash ready for a possible acquisitions or for setting up of cement capacity in Maharashtra and overseas, a top company executive said. “The funds raised will be used to finance our proposed 360 MW captive power plants and add more cement capacity,” said JAL executive chairman Manoj Gaur, adding that they will not go towards debt repayment. JAL has a total debt of Rs 9,500 cr and a debt-equity ratio of 1:9, as of now. The company has no plans to sell any more treasury shares in the next three months.

Experts feel that as the market improves, the company will continue to sell treasury shares in phases to fund its projects that include cement plants and expressways. The proceeds of the first round of treasury share sale was slated to finance the Formula 1 track in Greater Noida, a cement plant in Andhra Pradesh and Yamuna Expressway between Noida and Agra.

Jaiprakash Associates has also recently raised Rs 1,000 cr through an issue of five-year non-convertible debentures (NCDs) to Standard Chartered India at a coupon rate of 11.5%.

ICI India

Profile

ICI (India) Ltd is one of India’s leading manufacturers of paints, specialty chemicals and industrial starch. It was set up in 1911, when its parent company, based in the UK opened a trading office in Kolkata. Till the year 2000, ICI expanded its horizons through mergers and acquisitions was well. Since 2001, it has been on a rationalisation exercise where it is looking to get out of small businesses and companies where it was not in a commanding position in the market. ICI’s mainstay business arm, the paints business, is well established, having well — popularised brands like Dulux and Duco.

Promoters
Imperial Chemical Industries was the parent company of ICI. It held a stake to the tune of 54 per cent in the subsidiary. However, the parent company itself was acquired by Azko Nobel NV of Netherlands in 2008. According to the company’s shareholding pattern for the Q1FY2010, promoter holdings are still at 54 per cent, while the other major stake holders are institutional investors, which hold 20 per cent and out of this insurance companies hold 12 per cent and foreign institutional investors (FIIs) hold 5 per cent.

Investment Rationale

• Improved Margins

As per ICI’s Q1FY2010 results, the company’s net sales grew by 5.6 per cent year-on-year (YoY) to Rs 240 crore. Though the company’s paints business, registered a moderate growth of 6.9 per cent during the same period, profit before interest and tax (PBIT) margins improved significantly by 9.4 per cent.

• Lower Costs

The primary reason behind the company’s improved margins is the lower raw material costs. This was due to a sharp correction in crude oil prices, from some of the highest points reached ever, and the consequential decline in crude derivative prices. The raw material cost as a percentage of sales slumped by 631 bps YoY to 51.7 per cent in Q1FY2010. The same stood at 53.8 per cent in Q4FY2009.

• Rising Profits

ICI has strategically increased its spending on brand building exercises, especially for its paints business. Due to this, the other expenditure as a percentage of sales surged by 428 bps and hence, negated the substantial gains from raw material cost savings. This has restrained operating profits rate at a 30.12 per cent growth to Rs 27.2 crore, which could have been higher, but for the expenses incurred. However, the spending exercise is likely to generate dividend in terms of rising demand in the foreseable future.

• High Cash Reserves

The pile of cash the company holds in its reserves amounts to Rs 1,000 crore. While the company is not really looking out for acquisitions, but when and if such an opportunity arises, this sum can be useful. It can always serve as a cushion in hard times and to fast track growth during spikes in demand.

Risks & Concerns

• The Slowdown Effect

The demand for paints is directly related to construction and housing development. If the demand for the construction space does not pick up then the company’s plans of expansion through means of new plants, if implemented, could become a liability.

• Rising Raw Material Prices

With oil prices being range bound for now between USD 60-70/barrel, if it moves up any further, the company runs the risk of hurting its operating profits. It cannot even look for alternatives as oil is an important constituent for paints. Hence any significant increase in prices can affect the overall performance adversely.

• Monsoon Effect

If monsoon is deficient, which increasingly is not looking a possibility, then it will affect rural demand (since the majority of the farm income is derived from monsoon-related agricultural produce, any lag in the weather will cut rural income hugely thereby affecting demand) and hence become a barrier in the company’s growth. If the scene does not improve, then cheaper alternatives like sand paints or wallpaper will become serious competitors. The increasing use of wall tiles could also pose a threat in this case.

Valuation

Although it has been reported that the industry could see a marginal correction of 1-2 per cent in prices across the board, but even after that, it is expected the industry will report overall growth.

At current market price, the stock trades at 12.0x and 10.6x its FY2010 and FY2011 expected earnings respectively and discounts its core earnings per share (EPS; i.e. earnings excluding the other income) of Rs 27 by 9.7x for FY2010

Aban Offshore

The stock of India’s largest offshore oil services company, Aban Offshore has been on the upswing since May. The stock touched a peak of Rs 1,144 in June giving investors nearly three times their investment in just one month. Though the stock came off nearly 50 per cent from the highs subsequently, it has since then recovered most of the lost ground and is currently trading around Rs 1,000 levels. The heightened activity in the stock is the result of newsflow indicating that the company has been able to restructure its $3.2 billion (Rs 16,000 crore) of foreign currency debt. Last Friday, the company also announced its intention to raise funds through global depository receipts or placement of equity to institutional investors.

The acquisition of Sinvest, a Norwegian oil drilling investment company three years ago, for an enterprise value of $2.2 billion has led to a large amount of debt on Aban’s books. High day rates for oil rigs in 2007 and first half of 2008 on the back of rising oil prices meant robust profit margins and cash flows. With the oil prices coming off from their $145 per barrel highs in July 2008 to under $40, and now to around $65, has resulted in lower demand for offshore vessels and idle assets for Aban. Of the total debt, the company is due to pay about $435 million (Rs 2,175 crore) in 2009-10. A third of this ($142 million, Rs 710 crore) is to be paid by the end of this calendar year. Considering that the company is expected to generate cash of around $250 million (Rs 1,250 crore), it will still be short by about Rs 1,000 crore. The company has reportedly been in talks with Indian banks, which own three quarters of Aban’s debt, for a two year moratorium on principal payment. Analysts believe that the repayment flexibility is likely to come with stiffer interest rates. Little wonder, the company is considering options like fully convertible bonds, ADRs, GDRs and qualified institutional placement of equity, or even listing of its Singapore subsidiary, to raise long-term funds and to make good the shortfall.


Idle assets The Sinvest acquisition expanded Aban Offshore’s fleet and the company currently has 20 drilling rigs and one floating production unit. While its entire Indian fleet of seven rigs is deployed, an equivalent number belonging to its Singapore subsidiary is lying idle. Although there has been some improvement in demand for rigs in the last 2-3 months, the day rates of offshore (Jack up) oil rigs have tumbled by half to around $100,000 currently from a year ago indicating that demand for jack up rigs (15 of the 20 rig fleet) is still weak. Analysts say that the company is likely to place its two deepwater assets on contract over the next two months which should ease the pressure on cash flows as they fetch about $400,000 per day. The outlook in the short term, however, does not look too good. The world rig count at 1,987 is down 42 per cent from year ago levels. With the fortunes of the sector linked closely with crude oil prices, any sustained improvement in the prices which are hovering at around the $60-$70 mark would help improve utilisation rates, and hence profitability.

Financials

High day rates in 2008-09 helped Aban record a 350 per cent increase y-o-y in net profits to Rs 554 crore. The topline also grew by a hefty 50 per cent to Rs 3,183 crore. The 2008-09 performance was marred by an impairment charge of Rs 151 crore in Q4, leading to higher depreciation and losses of Rs 130 crore for the period. Considering that the company has a debt to equity ratio of around 11 and a squeeze on cashflows, the going could get tougher. Analysts say that the restructuring of debt where the company gets favourable terms would hinge on improvement in cashflows. Unless there is a turnaround in operational parameters (higher day rates and full utilisation of fleet) and macroeconomic factors (price of crude oil), it would be difficult to place equity, and even if it does, Aban will have to contend with asignificant dilution. Due to idle ships, analysts estimate that the company is likely to post losses in the first half of the current fiscal. A Morgan Stanley report says that the company will make losses in the first half of 2009-10 of Rs 286 crore on revenues of Rs 671 crore. The company made net profits of Rs 111 crore in the same period in FY09 with revenues at Rs 749 crore.

Conclusion

At current price, the stock is trading at 7.65 times its estimated 2009-10 earnings of Rs 130. Considering that the stock has made considerable gains over the last couple of months and the difficult operating environment in the shortterm, investments can only be considered on sharp corrections.

Voltas

A recovery in demand and robust order book augur well for Voltas

For now, the worries haven’t vanished totally and some concerns still exists, which pertain to the slowdown in the international operations (contributes 60 per cent to the project business); largely the gulf countries. For instance, during 2008-09, there was a 40 per cent contraction in flow of new orders from international markets, which analysts attributed to slow down in capital expenditure, particularly by crude oil producing countries due to lower oil prices.

In comfort zone

But, given the company’s current order book of Rs 4,700 crore, the same is good enough for the company to maintain a revenue growth at about 20 per cent this year. And, for the next year and beyond, if the recent improvement in the economic environment is sustained (including the rise in crude oil prices, which have crossed to $70 per barrel), then expect Voltas’ order book to swell further. Notably, the management, too, has guided for robust order inflows from countries like Qatar, from 20.5 per cent in 2007-08 to 11.6 per cent in 2008-09. While a meaningful recovery could take another 2-3 quarters, analysts believe that the company’s move to cut down its inventory levels coupled with the recovery in industrial activity and winning of an Rs 210 crore order for mining equipment from Hindustan Zinc, are all good signs. Nevertheless, the segment holds good long-term prospects.

Evolving opportunities

Meanwhile, the company’s second largest revenue contributor (22.5 per cent of sales) is the unitary cooling systems division, which includes residential and commercial ACs, commercial refrigeration and water coolers. This business is expected to report stable 10-12 per cent revenue growth on a sustainable basis. During 2008-09, revenues grew by 11.3 per cent, while operating profit margins were up at 7.4 per cent, albeit marginally. Although this is a highly competitive segment, the company is among the leading players (second in AC segment). In light of the rising income levels of individuals, increasing affordability, higher availability of electricity and demand from the commercial office and retail segments, the long-term prospects of this business too are good.

Outlook

The company operates in three growing segments, where the penetration levels are still low in India compared to some of the international markets. Its leadership in these segments and increasing focus on expansion into foreign markets should help it sustain healthy growth. Attributes like consistent revenue track record, regular dividend payments and negligible capex needs put the stock in better light. The stock trades at 16 times and 13 times its estimated 2009-10 and 2010-11 earnings.

Synonymous with air-conditioning, Voltas once again proved its mettle in the electromechanical project business when it bagged two larger orders worth Rs 300 crore pertaining to the Chennai and Kolkata airports. This comes immediately on the back of a good set of results declared on May 29. These events have led to the stock rising 35 per cent as against the BSE Sensex’s four per cent gain since then. For those who think they might have missed the bus, don’t lose hope as there is scope to make healthy returns in the long-run. Larger than perception

Many people view Voltas as an air conditioning (AC) company. Yes, it is a dominant player in the commercial and residential AC segment, but there’s a lot more to it. Post it’s restructuring in 2003, Voltas increased its focus on the engineering segment to emerge as a niche player in the electro-mechanical projects (MEP) and services business. This segment includes complete turnkey solutions for work related to central air-conditioning (airports, malls, offices, etc), refrigeration and solutions for water treatment and management.

The move helped Voltas de-risk its revenues as well as reduce its dependence on the low margin business, where stiff competition and seasonality were among concerns. It has also helped the company reach higher scale and tap upcoming opportunities in the projects business, where profit margins are relatively better.

The recently won orders worth Rs 300 crore for electro-mechanical work at the Kolkata and Chennai international airports is in addition to similar orders won in the past. For instance, while Voltas completed the project for the new Hyderabad international airport last year, it has completed similar projects for the worlds largest passenger terminus of Hong Kong International Airport as well as the Mumbai airport. Going by the various estimates, the opportunities in this segment is huge as the government is also planning to invest in over 30 new non-metro airports besides, modernising existing airports of the country.

There are equally large long-term opportunities in segments like metro railways (stations), shopping malls, hospitals, hotels, education institutes, corporate buildings, high rise towers, multiplexes and cold storage. The company has already has a successful track record of having executed several projects in these segments. However, over the last one year, analysts were worried about the slowdown in these segments and the impact of high raw material prices on the company’s profit margins. But, the MEP segment, which accounted for 62 per cent of total sales, reported a revenue growth of 53.7 %

Cosmo Films

Cosmo Films’ recent acquisition at an attractive price could propel it to a high-growth zone
THE year gone by might not have been great for Cosmo Films, but the future certainly appears exciting considering its recent acquisition of GBC Print in the US at a throw-away price. Long-term investors should not miss this opportunity for a healthy capital appreciation and an attractive dividend yield

Business:

Cosmo Films (CFL), promoted by Mr. Ashok Jaipuria in 1981, is one of the global leading manufacturers of Bi-axially Oriented Polypropylene Films (BOPP) with an annual capacity of 91,000 tonne spread between its two plants located at Aurangabad in Maharashtra and Vadodara in Gujarat. BOPP film is used in packaging most consumer goods ranging from soaps, food & soft drinks, toys to cigarettes.

CFL is also India’s largest producer of thermal lamination film, which is mainly exported to Western countries. Exports represent a major chunk of the company’s business representing nearly 45% of its FY09 net sales. However, the proportion has come down from 56% in FY08 due to the economic slowdown in the US and Europe.

Growth Drivers:

To strengthen its position in thermal lamination film segment, the company acquired GBC Commercial Print, a division of ACCO brands of USA, in June 2009 for $17.1 million. GBC is an industry leader in thermal films and equipments with three plants in the US, Netherlands and Korea. The deal values GBC at around one-sixth of its annual revenues of $100 million. In comparison, Cosmo is right now trading at around one-third of its annualised topline.

The demand for packaging film is growing strongly at around 8% globally and over16% in India. To cater to the demand the company has expanded its capacity at a cumulative annual growth rate (CAGR) of 7.4% over last five years, with nearly 12800 tonne capacity added in FY09.

The demand for thermal lamination, where the company is now a global leader, is expected to grow rapidly as the traditional solvent based lamination is environment unfriendly. At the same time, the scenario on the raw materials front is likely to be comfortable due to expected oversupply conditions in polymer industry with new plants coming up in the Middle East and China.

Financials:

Over last five years, the company’s net sales have increased at a CAGR of 13.5%, while the profits have grown at 44.1%. During FY 09, the company’s performance was under pressure as the economic slowdown affected its exports. Still the company posted a jump in its profits due to Rs 44.7 crore written back towards change in depreciation method.

The company has gradually improved its gross profit ratio to 16% in FY09, however, the net profit ratio weakened marginally to 6.5% from 7.6% in the previous year. The company has a long history of generating healthy operating cash flows. The debt-equity ratio stood at 1 as at the end of March 2009.

Valuations:

At the current market price, CFL is trading at 5 times its earnings for past twelve months adjusted for extraordinary income. The company has proposed Rs 5 per share as dividend for FY09, which gives a yield of 4.8%. Other companies in similar business are trading at earnings multiples of 3.5 to 7. With the acquisition of GBC, the company’s consolidated net sales for FY10 are likely to jump to Rs 1,189 crore with net profit around Rs 71 crore. The current market price is less than three times the estimated earnings for FY10.

Federal Bank

Federal Bank has emerged as one of the fastest growing banks in the last three years. Investors are advised to consider exposure to the stock for the long term
Beta 0.8
Institutional Holding 70.1%
Dividend Yield 1.6%
P/E 8.4
M-Cap Rs 4143 cr

Federal Bank is the country’s fourth-largest private bank by balance sheet size. This oldgeneration private bank was set up at Travancore (modern-day Kerala) in 1931, six decades before the bigger newgeneration private banks came up post-reforms. A major chunk of its business is concentrated in the south and Kerala contributes almost half to its loan book. The bank has 624 branches in 24 states and is now increasing its presence in neighbouring states like Tamil Nadu, Andhra Pradesh and Karnataka. A market capitalisation of just over Rs 4,000 crore and a balancesheet size of Rs 39,000 crore make Federal Bank one of the smaller banks in the country, but it ranks high on many key parameters. The bank’s net interest margin (NIM) — which is a measure of spread between the cost of borrowing and yield on loans — was 4.1% in 2008-09, the highest reported by a small bank. Only Kotak Mahindra Bank and HDFC Bank fare better on this count. In fact, the bank has maintained an NIM of about 3.5% for seven years now.

Federal Bank has managed to reduce its non-performing assets (NPA) to one of the lowest within a decade. Its net NPAs formed 0.3% of net advances in 2008-09, bettered by only three other banks. In contrast, the bank was struggling with higher NPAs at the start of this decade as these unrecovered loans formed 10% of its advances in 2000-01.

A dose of capital infusion in 2007-08 improved the bank’s capital adequacy ratio (CAR) to 20.1%. As per the Reserve Bank of India norms, banks have to maintain a minimum CAR of 9%. This shows that Federal Bank has a sufficient capital base. However, the capital infusion has resulted in dilution of return on equity (RoE), which fell from 21.3% in 2006-07 to 12.1% in 2008-09. At the current levels of CAR, the bank does not need to raise capital like other banks and no further dilution is expected in near future. Federal Bank’s net profit has risen at an average rate of 30% in the last three financial years, making it one of the fast-growing banks in the country.

A diversified loans portfolio places the bank in a better position to tackle economic slowdown compared to its peers. Loans to corporate, retail and small and medium enterprises segments comprised 37%, 31% and 32% of the total loan portfolio in 2008-09. In the last five years, the bank has increased the share of retail loans in total lending. In 2003-04, retail loans formed only 19% of the loan book.

In a country that continues to face a shortage of housing units, Federal Bank’s strategy of focusing on home loans can not be better timed. In FY 2009 housing loans formed 59% of retail loan book. In fact, secured lending like mortgages helps maintain high asset quality.

The bank also holds 26% stake in life insurance company, which is a joint venture with IDBI Bank and Fortis Insurance Co.

Everonn Systems

It is a leading education and training company. Initially created for working on computer education projects in Tamil Nadu and elsewhere it was funded by Net Equity Ventures and Virmac Investments and in 2007 it came out with an IPO of Rs 50 crore. Recently, it acquired Toppers Tutorial, a Patna-based company providing coaching to students preparing for IIT JEE.
Currently, it has a partnership with some state governments to bridge the digital divide under the scheme of ICT@schools. It provides full-fledged courses in private schools and colleges. Everonn also has experience in creating educational and training management programs from premier institutions like IIMs, XLRI, IIT, LIBA, MICS, MAHE, for working professionals and students all over the country.

In Q3FY09 its profits went up to Rs 7.8 crore, a rise of almost 95 per cent q-o-q. For the nine months ending December 2008, its profits stood at Rs 17.46 crore compared Rs 7.24 crore for the same period last year. It is currently trading at a PE of 14.28 which is lower than its historic PE of 34.48. The stock is worth a try considering it is in a recession-proof business like education, and considering the opportunities that are available in this space.

Torrent Pharma

While FY08 was under pressure due to losses registered by its German arm, Torrent Pharma is showing signs of recovering to a profitable FY10
GIVEN its performance and growth potential, Torrent Pharma is a relatively under-valued stock in the Indian pharma space. However, the stock has out-performed the broader indices in the past 12 months. While the Sensex declined by over 40% last year, the stock is trading around the same level.

The company has been on a growth path in the past two fiscals. While the losses registered by the German subsidiary adversely impacted its overall growth in FY08, the company is showing signs of a recovery and is likely to bounce back by FY10.

Business:

Incorporated in 1972, the Ahmedabad-based Torrent Pharma is engaged in the production of drug formulations and contract manufacturing. The domestic branded formulations, exports and contract manufacturing contribute 44%, 45% and 11% to the company’s total revenues respectively. The company has a strong presence in the high-value chronic therapies of cardio vascular, gastrointestinal, central nervous system (CNS) and anti-diabetes. The company’s top 10 brands constituted 41% of its total domestic formulation sales in FY’08 as against 44% in the previous year.

Torrent’s major international operations are situated in Brazil, Europe, Russia and the former Soviet republics in Eastern Europe and Central Asia. It has nine wholly owned subsidiaries in various regulated and semi-regulated markets abroad. The pharma company’s other revenue source is contract manufacturing, which largely comprises of sourcing, manufacturing and supplying insulin formulations under a third-party brand name.

Torrent is steadily ramping up its product development activity. Research and development (R&D) expenditure account for 7% of its revenues, with a 70:30 spend ratio towards product development and discovery research. The company has a healthy product pipeline for the US and European markets on expiry of the patents. It also undertakes new drug discovery research and currently has seven new chemical entities (NCE) in diabetes and related ailments.

Growth Strategy:

The domestic formulations business and operations in the semi-regulated markets of Brazil, Russia and countries in Eastern Europe and Central Asia are the growth drivers for the company. These markets are witnessing a double-digit volume growth. The company is bullish on its international generic business. Many of its international operations have achieved critical size, leading to revenue traction.

Torrent’s domestic business also benefits from the tax-free status enjoyed by its manufacturing operations. Its units, located at Baddi and Sikkim, enjoy tax exemption for 5 and 10 years respectively. This enables it to compete effectively in a pricesensitive market.

Financials:

The company’s net sales rose at a compound annual growth rate (CAGR) of 28.7% over the past five years to Rs 1355 crore in FY08. The net profits have grown at a CAGR of 25% to Rs 134.6 crore in FY08. At an average dividend payout of 25% over the past three years, the company’s dividend payouts have grown at a CAGR of 12% over the past five years, half than the corresponding profit growth. The company has positive operating cash flows and a debt equity ratio lower than one.

The company’s sales growth in FY08 was weighed down by de-growth in its German subsidiary Heumann in wake of severe price erosions and a volume shift to unexplored segments. The company expects to shift 70-80% of Heumann’s manufacturing to India. The subsidiary is thereby expected to break even in FY10.

The past twelve months have reflected the recovery in the company’s operations and profitability. The position is likely to improve going forward. Recent measures such as realignment of field operations, cost-cutting, and shifting of manufacturing from Germany to India are expected to beef up the profit margins.

Valuations:

Torrent has outperformed the Sensex and is currently valued at little over its annual turnover. It witnessed a stable 22% return on capital employed (ROCE) over the past two years. It is an under-valued stock among similar-sized peers and holds promise for investors looking for value in the mid-cap space.

Colgate-Palmolive

Colgate-Palmolive India, an Rs 9,280 crore corporate, started its India journey way back in 1937 when its best-known product Colgate Dental Cream, was put on sale from the back of a pushcart.

Since then, it has come a long way, having built up a pan-India presence, including an over 4 million strong retail outlet strength to dominate the Rs 3,100 crore Indian toothpaste segment, where it commands more than a 50 per cent market share.

But, the company has been facing stiff opposition from a number of competitors, both large and medium sized in the form of HUL and Dabur. Yet it has never taken a backward step and boasts of a 46.6 per cent market share of the oral care segment — toothbrush (37%), toothpowder (45.8%) and toothpaste (50.2%).

With the company already having a very strong market presence, it requires no extra money to splurge on control and domination exercises to maintain marketshare, and that means it is debt free. The company's RoCE and return on equity (RoE) too are at a comfortable 150 per cent.
A very powerful financial position also lends the company strength to pursue goals confidently — there is a lot more of the market left to tap. Toothpaste penetration in the country was 57 per cent in 2008, leaving virtually half the population uncovered.

However, tangible gains may be forthcoming, with the population upgrading from the toothpowder to toothpaste category. But there is certainly room to improve on the per capita consumption aspect. While in China the same is 255 grammes per year, in India it is just over 100.

To battle the economic slowdown in 2008, the company raised prices. There was an immediate positive gain as it helped it to log a very strong earnings growth. In the June quarter, the company's sales growth was clocked at 15 per cent and net profit at Rs 102.78 crore. The company's net profit jumped by 43 per cent when compared to that of last year's — in March quarter net profit growth was 38.6 per cent.

The effect of cost cuts was not negative even on volumes. The company has reported an overall year-on-year (YoY) growth of 12 per cent — largely driven by the good performance of brands like Colgate Dental Cream, Active Salt, Max Fresh and Cibaca. Expectations are that volume growth in FY2009-11E will be in the range of 11-12 per cent.

In the current season of worries, Colgate-Palmolive does not even have to fear what the gods are going to deliver in the shape of the monsoon. It is virtually free of the shackles of the monsoon courtesy its product line.

With most factors being positive, margins are expected to expand handsomely. As such for FY2009-11E the company is expected to post a topline growth of above 14 per cent.
With its market price hovering around Rs 644, the stock is trading at 22.2x FY2011E revised EPS of Rs 29.

Dalmia Cement

Dalmia Cement (Bharat)’s exposure to both the cement and sugar sectors will continue to provide growth opportunities
THE current boom in the cement and sugar industry has shifted focus to players like Dalmia Cement (Bharat), which have a presence in both these sectors. The company is shortly bringing on stream additional cement capacity to the tune of 2.5 million tonnes and its capacity would reach 9 million tonnes by October 2009. This should help Dalmia Cement (Bharat) to grow its net sales aggressively in FY10 and FY 11. In the case of cement, the current boom is thanks to government-fund infrastructure projects and housing in smaller towns.

Also, Dalmia is well positioned to take advantage of domestic sugar prices currently at Rs 30 per kg levels, a jump of 51.5 % y-o-y, given a global shortage of this commodity. The stock currently trades with a P/E of 6.9 times its trailing four quarter earnings, which is lower than that of other players in sugar like Triveni Engineering and Industries, and other south-based players like India Cements.

Current capacities:

Dalmia Cement Bharat’s cement capacity is currently 6.5 million tonnes, and it includes 2.5 million tonne capacity at Kadapa, Andhra Pradesh, which was brought on stream in March 09. This capacity at Kadapa involved a capex of Rs 800 crore and the company utilised a combination of internal accruals and debt.

This additional capacity at Kadapa is expected to help Dalmia Cement’s topline to expand by nearly Rs 780 crore in FY 10, and that’s despite fears of a drought in the country, which could dampen demand for cement in the short term. During FY 09, the company’s total operational income amounted to Rs 1778.68 crore, with cement alone accounting for 72.1 % of its topline and sugar 17 %. Dalmia Cement, also has a 21.7 % stake in OCL India, whose dispatches amounted to 2.75 million tonnes during FY09. Meanwhile, in its sugar business, Dalmia Cement has a capacity of 22,500 TCD (tonnes of cane per day) at three locations in UP.

Planned Capex:

In a bid to leverage the growth opportunities Dalmia Cement is also setting up a 2.5 million tonne plant at Ariyalur, Tamil Nadu, at a cost of Rs 800 crore. This cement plant is expected to be commissioned in next two months and will ramp up Dalmia Cement’s capacity to 9 million tonnes.

The additional capacities have been funded by internal accruals and debt, and this had resulted in the company’s debt equity ratio at 1.72 the end of FY 09, as compared to 1.48 a year earlier. However, cash flows from the new capacities should help to bring down Dalmia Cement’s leverage ratio over the next few years.

Financials:

Dalmia Cement’s operating profit margin declined 200 basis points y-o-y to 28.6 % during the June 09 quarter, despite 32.2 % growth in its net sales. Pressure on its margins was due to higher input costs . Meanwhile, in its cement division, despatches rose 12.6 % y-o-y in the June 09 quarter, while realisations grew an estimated 5.4 % y-o-y to Rs 3880 per tonne ( net of excise duty). In its sugar division, its realisations grew 37 % y-o-y to Rs 23,566 per tonne in the June 09 quarter.

Valuations:

Dalmia Cement (Bharat) trades at a P/E of 6.9 times and it could be a long-term buy for investors looking to gain from growth opportunities in the cement and sugar sector.

Barak Valley Cements

Barak Valley Cements trades at a P/E which is lower than that of other smaller cement companies
BARAK Valley Cements, a mini cement company with operations the in north–eastern part of the country, enjoys one of the highest realisations per tonne basis given limited competition in its markets. No doubt the northeastern region has grappled with an uncertain operating environment, given rebel movements in various states and relative economic backwardness, but this region has also witnessed strong demand for cement over the past few years.

For instance, in the key Assam market alone, total cement consumption amounted to 1.65 million tonne in FY 09, as compared to 1.05 million tonne in FY 06. This has been primarily due to government-funded infrastructure and development projects, coupled, with rural housing projects.

However, despite the growth in cement consumption in the region, analysts point to cement supply lagging demand although exact figures are difficult to get. As a result, a large part of the supply to the northeast comes from players outside the region. Hence, for companies such as Barak Valley Cements, it provides growth opportunities over the medium term. Also, Barak Valley Cements, given its location, enjoys various fiscal and tax benefits, including excise duties exemption, income tax benefits and working capital interest subsidy.

Capacity:

The company’s cement capacity at the end of FY 09 was 2.47 lakh tonne, expanded from 1,51,800 tonne in FY 07 at a cost of Rs 23 crore. Barak Valley’s plant is located in Assam’s Karimganj district and is well connected to the key consumption centers, including Guwahati, Shillong and Agartala.

In addition, in late FY 08, Barak Valley, through its subsidiary Badarpur Energy, had brought on stream, a 6 MW biomass-based power plant. This project was set up at a cost of nearly Rs 35 crore. These projects have been financed through an IPO of Rs 23.77 crore in October 07, coupled with internal accruals and loans.

Barak Valley Cements also enjoys synergies with regard to key raw materials for cement production, such as limestone and coal. In the case of limestone, its requirement is largely met from its subsidiary Meghalaya Minerals & Mines, whose operations are not too distant from its cement plant.

Financials:

Barak Valley Cements’ standalone operating profit margin declined 900 basis points to 24 % during the June 09 quarter despite net sales that improved 24.1 % to Rs 28.7 crore. Pressure on its operating profit margins in the June 09 quarter was due to higher costs for power, oil & fuel, which was not offset by higher realisations.

The company’s despatches amounted to 52,133 tonne in the first quarter of FY 10, a rise of 14 % and realisations grew an estimated 9.8 % to Rs 5,510 per tonne. For all-India player ACC, its realisations were estimated at Rs 3,840 per tonne during the June 09 quarter, a rise of 13 %.

Valuations:


Barak Valley Cements trades at a P/E of 8.3 times which is lower than that of other mini cement companies like Sagar Cements and Shiva Cement. The stock could be a value buy for the long term.

Cadila Healthcare

Beta 0.3

Institutional holding 17.5%

Dividend Yield 1.2%

P/E 14.9

M-Cap Rs 4,578cr

ONE of the top ten pharma companies (by sales) in the country, Cadila Healthcare’s stock went up by 56% in the last four months, outperforming the Pharma Index that rose by 43% during the period. At twice its revenues, the company looks fairly valued for its size and business. However, considering Cadila’s growth potential, it looks to be an attractive long-term bet. Nevertheless, any short-term rally in the stock does not look sustainable, as the market seems to have discounted most of the current good news.

Business:

Ahmedabad-based Cadila Healthcare is the flagship company of the Zydus Cadila group. It is engaged in manufacturing of formulations, active pharmaceutical ingredie-nts and consumer products. A lit-tle over half of its revenues are contri-buted by its operations in India, 30% from regulated mark-ets like US, EU and Japan and the rest from emerging markets. In the domestic market, it manufactures drugs related to cardiology, gastro-intestinal, women’s healthcare and respiratory illnesses. It is also involved in contract manufacturing space thro-ugh joint ventures with Switzerland based Nyco-med and US based Hospira.

Growth Strategy:

Cadila’s growth comes primarily from its exports. In FY09, the company acquired Spainish generic player Laboratories Combix, and followed it up by acquiring South Africabased Simalya Pharmaceuticals. The company is now actively strengthening its regulatory drug pipeline to enter new territories. The company has filed a total of 92 ANDAs and 76 DMFs. Cadila invests 6% of its revenues in R&D. The company which plans to be a research driven pharmaceutical firm, is currently working on 6 New Molecular Entities (NME). The company expects to have at least 10 active R&D programs in clinical research by 2011. It has entered into a new drug discovery and development agreement with Eli Lilly in the area of cardiovascular seg-ment. The company may receive milestone payments of up to US$ 300 million and royalties on sales if a molecule is commercialized by Eli Lilly. Cadila has also integrated its restructured con-sumer business into its subsidiary Zydus Wellness.

Financials:

The Rs 2800 crore company logged a better than expected performance in FY09. And it has set itself an ambitious target of doubling its revenues to $1 billion (Rs 5000 crore) by FY2011. To achieve its target, the company is betting on the ramp up of its operations in its joint venture contract manufacturing business and export formulations. The company’s earnings would be further boosted as its joint venture with Hospira has started commercial operations from May this year.Amajor concern, however, is the slow rate of growth registered by its domestic business, the highest contributor to its revenues currently. During FY09, its Indian business operations grew only by 10%, lagging behind the average industry growth of 12%.

Valuations:

Given the multipronged business and the significant scale up in its operations, the company’s stock, unlike its peers, had been under valued till recently. With most large pharma companies having taken a beating due to poor performance or clamp-down by US FDA, the market turned to stocks having untap-ped value. Cadila Healthcare was one such stock with a lot of value intact. However, with most of the value having been realised, the stock looks fairly valued in the near term. For long term investors, it is good buy, while the investors with very short term horizons can probably give it a miss.

ABG Shipyard

The company, with reserves of Rs 200 crore and a strong balance sheet, is likely to find it easier to raise debt to fund the acquisition. It has time till August 24 to change its offer price

WITH ABG Shipyard jumping in the fray to acquire Great Offshore, the battle between it and Bharati Shipyard has intensified. As things stand, ABG Shipyard holds a 9% stake in Great Offshore and it has made an open offer to acquire an additional 23.5% stake in the company at Rs 520 per share, which will up its stake to 32.5% in Great Offshore. This would entail an outgo of Rs 654 crore. Compared to this, Bharati Shipyard holds a 19.5% stake. However, with both ABG and Bharati getting serious about their moves, analysts feel things will not end too soon and do not rule out a revision in offer price, even from here.

Buying Great Offshore is lucrative and the opportunity is hard to miss. ABG and Bharati make ships and supply vessels that are used by offshore oilfield firms like Great Offshore. The saga of Great Offshore dates back to December 2008, when chairman Vijay K Sheth approached his friend PC Kapoor, managing director of Bharati Shipyard for a loan of Rs 240 crore. This was an amount he owed two financial institutions — IL&FS and Motilal Oswal. In exchange for the funds, Sheth pledged 14.89% of his stake in Great Offshore with Kapoor. These shares were earlier placed as collateral with the two financial institutions.

Great Offshore is a rare case of an Indian promoter losing control on account of the stock markets crashing. Vijay Sheth raised the money in 2007 by pledging his shares in order to buy out his cousins’ stakes in the company. Under the Sheth family settlement in 2007, Vijay Sheth was to buy out the equity stakes of his cousins in Great Offshore which was carved out of Great Eastern Shipping as part of division of assets between the family members.

In May 2009, with Great Offshore unable to repay its loan, Bharati Shipyard acquired the shares pledged by Sheth in a cashless deal taking Bharati’s stake in Great Offshore to 14.89%. However with no management control, even rival ABG Shipyard took a fancy to Great Offshore.

Globally there are several instances of ship builders being asset owners. For rival Bharati Shipyard, it has an even higher synergy as Great Offshore has been its customer for many years.

As of now, one could say that the battle could move either way. While Bharati Shipyard has the advantage of being the first mover, having acquired the 15% stake at a lower price of Rs 320 per share, ABG Shipyard has acquired the 9% stake by paying about Rs 160-170 per share more than what Bharati paid. ABG Shipyard, has reserves of Rs 200 crore and with a stronger balance sheet, it would find it easier to raise debt to fund the acquisition as compared to Bharati.

The two companies have time till August 24 to change their offer price. Some significant shareholders who hold more than 1% stake in the company and could help clinch it are Videocon, financial institutions and mutual funds. As of now this one has the makings for a photo-finish.

Rashtriya Chemicals & Fertilisers

With more natural gas becoming available, Rashtriya Chemicals & Fertilisers has short-term as well as long-term triggers for profit growth

RASHTRIYA Chemicals & Fertilisers (RCF) could emerge as a key beneficiary of the rising availability of natural gas in India. As additional capacities become available, dependence on subsidies will decrease. All this, along with positive policy changes, make RCF an attractive bet for a long-term investor.

Business:

Mumbai-based RCF is one of India’s largest producers of fertilisers and industrial chemicals. It has two operating locations, one at Trombay near Mumbai and the other at Thal in Raigarh district, and is India’s third-largest fertiliser producer. It makes urea and complex fertilisers and has a combined capacity of 25.1 lakh tonnes per annum (TPA). It also produces chemicals such as methanol, methylamines, nitric acid and ammonium bicarbonate. RCF also imports and sells urea, muriate of potash (MoP) and diammonium phosphate to support its product portfolio.

Growth Drivers:

RCF is set to receive an immediate boost from increased availability of natural gas — it is to get 3.05 million cubic metres per day (mcmd) of gas from Reliance Industries, which will enable it to restart its 3.3-lakh-TPA urea plant at Trombay by this month-end and cut down naphtha consumption at its Thal plant.

By September, it will also restart its 3.2-lakh-TPA complex fertiliser plant at Trombay, which was closed due to an accident. RCF’s Rapidwall project to produce low-cost pre-fabricated walling systems from gypsum produced at Trombay will start operations by end-April and the company is also revamping its methanol plant to add more capacity and cut energy consumption.

All these initiatives will raise output, raising turnover and boosting bottomline. Lower costs will bring down its subsidy bill. The lower dependence on government payments, typically made two to three months after actual production, will help cut RCF’s short-term borrowings and interest costs. In the long run too, RCF has various expansion projects planned to drive growth. It has set up a joint venture with Rajasthan State Mines & Minerals (RSMML) to set up a 3-lakh-TPA di-ammonium phosphate (DAP) fertiliser plant in Rajasthan at a total estimated cost of Rs 900 crore. This project involves a 2:1 debtequity ratio. The company is also de-bottlenecking its Thal plant to scale up urea manufacturing capacity to 20 lakh TPA by mid-2010 from 17 lakh TPA now. At Thal, it is also considering a 1.2-million-TPA brownfield urea expansion. RCF has also entered into a joint venture with Gail for a coal-bed-methane project and with National Fertilisers and KRIBHCO for revival of a defunct fertiliser plant.

Financials:
RCF’s net sales have risen at a cumulative annualised growth rate (CAGR) of 20.5% between 2004 and 2008. In the same period, its annual profit stagnated at around Rs 150 crore. However, the company seems to be back on the growth path and posted a 61% rise in net profit at Rs 172 crore for the ninemonth period ended December ‘08.

For FY08, the company’s debt-to-equity ratio jumped to 0.75, as it had to borrow nearly Rs 900 crore more towards working capital because of rising dependence on government subsidy payouts. For the year to end-March ‘09, the company may report an increase in the debt-to-equity ratio as it has been unable to sell nearly Rs 700 crore of bonds. However, the situation is likely to improve in the current year.

The company has booked a forex loss of Rs 122 crore for the ninemonth period ended December 31, ‘08 due to currency fluctuations. Since the company doesn’t carry any foreign currency debts, this mainly represents the import obligations.

Valuation:

RCF’s stock is now trading at 10.9 times earnings for the last 12 months. We expect the company to post a net profit of Rs 327 crore in FY10, which translates to a forward P/E of 7.5 at the current market price. Other major urea manufacturers such as National Fertilisers and Chambal Fertilisers are trading at P/E of 13.2 and 11.1 respectively.

Risk Factors:

The company may have to write off mark-to-market loss on the bonds, which it is unable to sell due to their illiquid nature.

Balmer Lawrie

A cash-rich business with strong growth record makes Balmer Lawrie an interesting long-term investment idea
Beta 0.89
Institutional holding 18.65%
Dividend Yield 4.5%
P/E 6.7
M-Cap Rs 728.5 cr

THE Rs 730-crore Balmer Lawrie (BLL), a staterun unit with mini-ratna status, is a mid-cap with long-term promise. Headquartered in Kolkata, BLL is a debt-free company with rising dividends every year. It has a healthy record of sales and profits growth, which makes it an ideal investment candidate for long-term investors.

Business:

BLL operates in eight distinct strategic business units including industrial packaging, greases & lubricants, logistics services, engineering & technology, logistics infrastructure, travels & tours, leather chemicals and tea.

The company is India’s largest producer of metal drums used in packaging chemicals and lubricants. Travel & tours services bring in the major share of revenues, while the logistics services account for the highest profits. The company has a wholly-owned subsidiary in the UK carrying out logistics business.

Balmer Lawrie Investments (BLIL), which is 59.67% owned by the government of India, holds a 65.7% stake in the company. It was created in 2001 with a view to divest the government’s stake in Balmer Lawrie. The new UPA government, which is considering selling stakes in profitmaking PSUs, may look at BLL as a divestment candidate as it is a non-core, but profitable, public sector firm.

Growth Drivers:

Balmer Lawrie is a debt-free, steadily growing company with strong presence in all the industries in which it operates. The company has plans to grow inorganically by acquisitions in the areas of travels & tours and logistics and has a budget of Rs 100 crore for this.

During the past five years, the company has grown at a cumulative annual growth rate of 12.6% at topline to Rs 2,007 crore for the year ended March 2009, with the PAT growing at a CAGR of 28.8%. BLL has a strong track record of paying dividends, and during the period its dividend payout has increased at a CAGR of 41.7%

Financials:

The global financial slowdown hasn’t left Balmer Lawrie untouched. Its operating performance stagnated in FY09 and the net profit was propped up by a spurt in nonoperative income. Revenues went up 13.7% in FY09 at Rs 2,007 crore and profits grew by 9.3% to bring in Rs 109 crore.

The services sector did well during the year with travels and tours posting 19% growth and logistics services growing at 21%. Both these businesses posted healthy improvement in profits as against a fall in profit for manufacturing businesses such as industrial packaging and lubricants. With established businesses and very low annual capex, the company has maintained its return on employed capital to beyond 40% for last four years.

Valuations:

The company’s current market capitalization of Rs 728.5 crore is just 6.7 times its annual profit of the year ended March 2009, out of which Rs 150 crore is represented by cash equivalent. The dividend yield works out to 4.5%. We expect the company to post an EPS of Rs 77 in FY10, which discounts the current market price by 5.7 times.

Engineers India

Established in 1965, Engineers India (EIL) provides engineering and related technical services for petroleum refineries and other industrial projects. This is a PSU, with the government holding being as much as 90 per cent, followed by 6.12 per cent belonging to mutual funds, insurance companies and FIIs. Though the stress area remains the oil industry, it has gained experience in unrelated areas like road & transport, ports & terminals, power projects, water & urban development.

The growing oil and natural gas sector has seen a major contribution from EIL. It has been forward looking and not at all insular, to script joint ventures when required. As such, it entered into a strategic tie-up with Tata Projects for EPC projects in the energy sector in India. For executing similar projects in the UAE, the company entered into a JV with Tecnimont, Italy. Such partnerships were needed as the company has an overflowing order book amounting to over Rs 5,000 crore.

With the government intent on developing both road and port infrastructure in the country, EIL’s stature and performances will ensure it always gets a major chunk of the large orders pie.
The company’s track-record has been strong. During the previous fiscal it improved its functioning to the extent of posting a 77 per cent jump in net profit. Its operating margins also improved to 57 per cent compared to 36 per cent in the previous quarter. This enabled the company to declare a 185 per cent dividend for the 2008-09 fiscal. With a cash holding of Rs 1,388 as of March 31, 2008, the company has a cash ratio of 1.11, which will allow completion of projects on time.

Asian Paints

Barring near-term concerns, the underlying growth potential and Asian Paints strong position in its business will help it deliver healthy returns

Beyond domestic borders

International operations add around 17 per cent to consolidated revenues with regions like Middle-East contributing substantially. The MiddleEast region along with emerging markets of SouthAsia has been the major growth drivers, each growing at above 35 per cent. Superior growth rates in these regions helped international operations to grow at 28 per cent in 2008-09 as compared to 12 per cent growth seen in 2007-08.

As the slowdown is sparing none, the resultant fall in crude prices was also anticipated to impact demand in the Middle-East markets. Analysts believe that even as there could be some shortterm pressures (in some markets), the longerterm potential is huge in these markets and Middle-East should continue to drive the company’s international sales. Meanwhile, Asian Paints is setting up a new plant in Egypt, which is perhaps some indication of the future. Overall, the company’s focused initiatives like product introductions, dealer tinting systems and also increasing operating efficiency would boost growth rates in the future.

Financials: Enviable

Barring short-term blips like the one seen in 2008, Asian Paints’ performance has been good with consolidated sales and net profits growing by 19 per cent and 30 per cent, respectively on an average in the last five years. Apart from positive cash flows for each of the last ten years, the company has also been generating high returns on the capital employed in its business (over 50 per cent in the last four years). These have helped it to payout an average 50 per cent of its net profit as dividend to its shareholders, which is high given that only a few Indian companies do so.
With the domestic economy showing signs of stability (expectations of an improvement from second half of 2009-10), the company should report decent growth in volumes. But, as realisations may not keep pace (due to price cuts), the sales growth is seen at 9-10 per cent in 2009-10. However, with prices of inputs lower, margins should improve helping the company report a profit growth of 15-18 per cent.

The average sales volume growth in the industry has a high correlation to the general economic activity, thus earlier high GDP rates has helped decorative as well industrial paints segments do well. With the economic outlook seen improving, the growth pressures should also subside. On the other hand, given India’s low per capita consumption of paint of around 750 grams; about half of China’s and much lower compared to developed market (15-20 kg), experts suggest that the demand should remain healthy in the long-run as well. The improving demographics and income levels, rising individual aspirations and planned investments in industrial and infrastructure capex are some macro factors that will provide a fillip to demand for paints. The prospect in other global markets where Asian Paints operates is also reasonably decent. Thus, expect the company to gain in the years to come. Meanwhile, analysts expect the company to clock 16-18 per cent annual growth in profits over 2009-10 and 2010-11. At Rs 1,108 the stock is trading at 19 times its estimated 2010-11 earnings. While it appears relatively expensive as compared to the BSE Sensex, it has commanded ahealthy premium over the latter. Investors with a long-term perspective can consider the stock on dips.

The decline in housing loan rates, focus on affordable housing, cut in excise duty on paints as well as on automobiles and the emphasis on infrastructure should help Asian Paints sustain decent growth rates. The relatively lower input costs are also helping the Rs 13,500 crore paint industry, two-thirds of which is controlled by the organised segment. Asian Paints is the largest domestic player with a market share of around 43-45 per cent in the organised sphere, about twice as large as its nearest competitor. Although the sharp slowdown seen in end-2008 also impacted Asian Paints, the company’s March 2009 quarter performance is reflecting visible signs of recovery and provides comfort. The company’s Rs 400 crore expansion programme is also on track for commissioning in April 2010, which will result in a 35-40 per cent increase in its domestic production capacity. This should help it capture any recovery in demand in the medium-term.

Decorative: Looking better

If experts are to be believed, the worst (for the economy) is behind us, and even though growth rates may not look up in a hurry, the current scenario should hold on. For Asian Paints, its sales volumes which were impacted in the December 2008 quarter were up by 12-13 per cent in March 2009 quarter. A combination of factors helped including strong demand in tier I and II cities, marriage season in March quarter and increased stocking by the trade post de-stocking in the December 2008 quarter.

Analysts now expect the company to clock 10-12 per cent volume growth in 2009-10, led by the improving environment and Asian Paints stronghold in the business. The company has a strong brand portfolio, which along with a presence at various price points would help reach to diverse pockets in the decorative space. Popular brands include “Tractor” in the lower-end paint range (distemper), “Royale play” in emulsions, “Utsav” in enamels in the interior walls space. Apart from leadership in interior walls space, the company has been focusing on external paints with brands like “Ace” and “Apex” and has emerged as the market leader in the external segment. Apart from its wide product range, access to distribution network of over 25,000 retail outlets ensures greater visibility for its products.

The other respite for the company has come in the form of lower costs. The paints sector uses around 300 raw materials (around 50 per cent crude-based derivatives) in the manufacturing process. The rapid fall in crude oil prices (and the rupee’s appreciation) have reduced pressure on the raw material front. Besides raw materials, the announcement of duty cuts in December 2008

Alstom Projects

Primarily engaged in the business of engineering, construction and servicing of power plants and equipment, Alstom Projects also delves into the transport sector in India, providing railway equipment and technology solutions.

Till the end of Q3FY09 order books of the company totalled Rs 6,500 crore. In January 2009 it received an order of Rs 400 crore. Considering the orders executed at the end of March 2009, the order book of the company stood at some Rs 6,100 crore.

The company has an eye out on the economic slowdown and while it is not looking to slowdown its aggressive approach, it is reducing inefficiencies — it has merged its power equipment with power services division for enhancing operational efficiency.

Despite tough market conditions, the company did well to increase profits by 83 per cent in FY09 compared to FY08. For FY09, average quarter-on-quarter (q-o-q) trend on earnings per share (EPS) was 53 per cent. It ended the year with a dividend of 100 per cent per share compared to 80 per cent in the previous year. With a cash reserve of Rs 394 crore at the end of March 2008 it is virtually debt-free.

With expertise in nuclear and hydro power Alstom Projects is well poised to take to new opportunities as and when the government starts stressing on execution. Its existing plants in Gujarat are well equipped to manufacture nuclear equipment.

Apollo Tyres

Putting the slowdown blues behind,Apollo Tyres has acquired companies overseas and is investing to tap the domestic market which is on an uptick

APOLLO Tyres, the secondlargest player in the tyre industry, (in terms of revenues) is likely to overtake MRF to become India’s largest tyre-maker after the recent acquisition of Dutch company Vredestein Banden BV. Inorganic growth, expansion in domestic market and improving operational efficiency make Apollo Tyres a good long-term bet for the investors.

BUSINESS:

Apollo Tyres (ATL), the flagship company of the Raunaq Singh Group primarily engaged in manufacturing of automobile tyres, tubes and flaps had consolidated revenues of Rs 4,984 crore for the year ended March ‘09. It has production capacity of around 850 tonnes/day in the domestic market and 300 tonnes/day from international operations. The company is a dominant player in the commercial vehicles segment. Till FY09, the company had a 27.3% market share in truck & bus tyres and 24% share in the domestic light commercial vehicle tyres. Introduction of radial tyres in the passenger car category helped the company to increase its presence in the car segment in the recent years. The company is building up capacity for radial tyres for trucks, thus readying itself for the next generation trucks.

GROWTH PLANS:

The company has undertaken couple of overseas acquisitions in the last one year. This is as per its strategy to diversify its presence globally and generate nearly 60% of its revenues from the overseas market.

Recently in May this year, Apollo announced the acquisition of Dutch tyre-maker Vredestein Banden BV for Rs 1,200-1,500 crore. Apollo Tyres plans to fund this acquisition with a mix of internal accruals and debt financing. Vredestein Banden BV has a strong sales and marketing network besides a production unit in Enschede, The Netherlands with capacity of 55 lakh tyres. It will give Apollo access to the challenging European market. Revenues from Vredestein Banden BV will be reflected in Apollo’s accounts from the current quarter of April – June 2009. The company is also planning a greenfield unit in Hungary. But this project has now been deferred due to global economic slowdown, which has hit the auto sector badly.

However, the company is bullish on the domestic demand and is making investment also expanding to tap the market in the country. To increase its presence in the radial tyres segment of commercial vehicles, Apollo Tyres has made an investment of about Rs 1,300 crore in Chennai for a greenfield project, which is likely to be operational by the end of this year. This plant, with facilities to make radial tyres for both trucks and cars, is going to have capacity of 180 tonnes/day, which can be augmented, to 450 tonnes/day depending on the demand. On a consolidated basis, Apollo Tyres’ turnover is projected to reach around Rs 7,500-8,000 crore for the year ending March ‘10, making it the largest tyre company in India in terms of revenues. In 2006, Apollo Tyres had acquired Dunlop South Africa. The acquisition gave the company a strong foothold in the African continent including a sales network of branded Dunlop Zones, besides two manufacturing units in Durban and Ladysmith.

FINANCIALS:

The year ended March ‘09 had been a challenging year for the company. Sales growth slowed to 6% from compounded annual growth (CAGR) of 18% in the previous three years on the consolidated basis. But the positive news is that rubber price has come down and is expected to get reflected in the financials in the coming quarters. Further, with demand for automobiles improving, the company is expected to register reasonable sales growth in the coming quarters. The industry, which registered a growth of only 2.2% for nine months ending Dec’08, has since recovered and is estimated to have recorded better demand as auto sales have improved. During the latest quarter ended June ’09, Apollo Tyres topline rose 10% to Rs 1,180 crore from the year-ago level on the standalone basis. Operating profit grew 75% to Rs 194 crore, while net profit nearly doubled to Rs 94 crore.

VALUATIONS:

At its current market price, the stock is trading at 13.78 times its earnings per share (EPS) for the yearended march ‘09 on the consolidated basis. In contrast its closest competitor, MRF is trading at a price-to-earnings (P/E) multiple of nearly 24. Assuming a modest 12-15% annual growth in revenues and continued improvement in operating margins, Apollo Tyres oneyear forward P/E ratio works out to around 9.4, which provides ample upside potential to long-term investors. Besides, Apollo Tyre has a dividend yield of 1.2%, which will only improve as profit grows.

Aban offshore Limited

Aban offshore Limited, incorporated in 1986, is an Indo-US joint venture that is in the business of providing and operating ships, vessels, rigs, structures, equipment and personnel required for on-shore and off-shore drilling and oil field services. It is India's largest offshore drilling entity in the private sector. India offshore Inc. its American partner provide both technical know-how and equity participation. It owns offshore oil rigs and also operates ONGC's rigs on a contract basis and provide drilling services. Aban Offshore also owns the only FPSO in the country. Six facilities are located on Mumbai High, while there is one each on the Persian Gulf and Indian east coast.

Key Risk :

The major risk for Aban Offshore at the moment is that its have debt of around Rs.16,000 crore and some portion of debt due to mature this year and the next. In 2006 when crude oil price starting to move up and outlook of commodity sector looking very bright, Aban acquired Norwegian drilling company Sinvest-ASA at an enterprise valuation of $ 2.2 billion, largely with debt.

Financials :

Aban Offshore net profit jumped four-fold to Rs 256 crore in Dec 2008 qtr. but failed to prevent its market capitalisation plunge 57.2% since the start of 2009 to Rs 1194 cr.The reason for the particularly poor performances on bourses is the negative perception in the market about the outlook for this sector with crude oil price falling.

Conclusion :

It is already discount all the negative perception in the market about its future outlook and now it is risk free investment for medium to long term investor. Last few days if market rumored to believe then some insider are buying at lower level and anytime its blast 20-30 percent from current level.

Balrampur Chini Mills

Profile

Balrampur Chini Mills Limited (BCML) came into being in 1975 and is today, India’s second-largest integrated sugar manufacturing company. From a crushing capacity of 800 TCD (metric tonnes crushed per day) to 12,000 TCD, BCML has come a long way.

Its allied businesses consist of manufacturing and marketing of ethyl alcohol and ethanol, generation and sale of power and manufacturing and marketing of organic manure. The company has nine factories located across the sugarcane-rich belt of eastern Uttar Pradesh.
The company’s distillery and power cogeneration units enable the efficient use of by-products besides providing a steady stream of revenue. This cushion allows BCML to perform well even during business downcycles.

Promoters

The company is promoted by the Saraogi family led by Vivek Saraogi, Managing Director. 31.34 per cent of the 37 per cent promoter shareholding is held directly by various members of the family and the rest 5.5 per cent is routed through their other companies. Institutions such as domestic mutual funds (18%) and FIIs (17%) are the other major shareholders of the company.

Investment Rationale

• Sugar Bull Phase

The Indian sugar industry is in for some good times. After two years of falling sugar prices due to bumper harvests, which severely dented sugar companies’ profitability, production for the sugar year (SY) ending in September 2009 is expected to fall by 45 per cent y-o-y to ~ 14.5 million tonnes. As a result, sugar prices have rallied over the past year — in May 2009 they jumped by ~55 per cent y-o-y. Estimates are that this deficit production situation would last at least till the end of the next sugar season.

Being one of the largest producers of sugar in the country, BCML is expected to be a key beneficiary of the bull phase in the sugar cycle and report a compounded annual growth rate (CAGR) of 59.2 per cent in its net profit over FY08-11. Profit growth would be achieved on the back of a substantial increase in the realisation of its sugar and distillery segments.

• Hefty Cash Flows

Over FY05-08, BCML has expanded its sugar manufacturing capacity by 2.6x to 76,000 TCD, doubled its distillery capacity to 320 kilolitre per day (KLPD) and increased its cogeneration capacity to 180 megawatt (MW). These expansions will allow the company to ride through the current sugar bull phase without any further capex expenses. This in turn will allow BCML to generate free cash flows of approximately Rs 580 crore in FY09 and Rs 545 crore in FY10.

• Strong Balance Sheet

The company’s debt-equity ratio of 1.4x in FY08 and 0.8x FY09E is much less than its main competitor Bajaj Hindustan’s ~3x for FY09E. This ratio also enables the company to deliver much better shareholder returns as its interests outgo is less. Hence, BCML is expected to deliver RoE of 17.4 per cent in FY09 and 20.8 per cent in FY10.

Risk & Concerns

• High Sugarcane Prices

The UP sugar industry is currently facing high sugarcane prices which are decided by the government in the form of state advised price (SAP). While the industry is fighting the arbitrary sugarcane pricing policy in court, the SAP for SY09 has been fixed at Rs 140 per quintal. Furthermore, due to the acute shortage of sugarcane in SY09, all sugar mills had to pay a price higher than the SAP. BCML had to pay Rs151 for per quintal of sugar-cane. Such higher-than-expected sugarcane procurement price remains a key risk.

• Government Interventions

Sugar carries a weight of 3.62 per cent in the Wholesale Price Index. Hence, the government keenly monitors its price movement. Also, in India sugar is a strong political commodity and the government tries its best to check any increase in sugar prices, but on the other hand, the SAP (in Uttar Pradesh) is normally increased irrespective of the sugar mills’ capacity to pay for sugarcane. And although the central government is undertaking measures such as duty-free imports to check the rallying sugar prices, these concerns can adversely impact BCML.

• Valuation

BCML is currently valued at an EV/EBIDTA of 7x FY11E, considering the hefty profit growth expected over FY08-11. Based on this valuation, we arrive at a fair value of Rs 148 for the stock. At the current market price of Rs 98, the stock trades at 9.7x its FY10 and 7.9x its FY11 EPS estimates and 5.6x its FY10 EV/EBIDTA and 4.7x its FY11 EV/EBIDTA estimates.

Being a diversified company BCML is a complete package in this space provided of course the government does not deal the sugar industry a bad hand

Bharti Airtel

Analysts say company's revenues and profitability can come under pressure in near future

INDIAN telecom czar Sunil Mittal’s dreams of forging a transnational alliance with Africa’s largest telco MTN have been shattered for the second time in less than two years, but analysts and market watchers view this only as a temporary setback. With domestic growth in India remaining steady and even as urban centres reach saturation levels, Bharti Airtel is set to explore global ambitions to expand its footprint and export the Indian business model of creating a ‘minutes factory’ — low cost and high usage — to emerging markets.

Bharti will continue to deploy a twin-pronged strategy — expand aggressively and retain its leadership position in the Indian market even as the Group Chairman Sunil Mittal and the telco’s director and former CFO Akhil Gupta chase deals similar to the size of MTN abroad.

At present, Bharti’s overseas operations include Sri Lanka, Seychelles and British Channel Islands. Even prior to MTN, Bharti had bid for licences across several markets in Africa and West Asia, an indicator that the telco views these regions as offering the most potential for growth.

While a section of the industry is of the view that Bharti would observe a cooling off period before it attempts another international venture, others share the opinion that India’s largest communications company will immediately look at smaller targets such as Kuwait’s Zain, Egypt’s Orascom, Dubai’s Warid Telecom and even Luxembourg head-quartered Millicom, all of which have operations across Asia and Africa and are looking for strategic partner.

Although expansion via M&A is still a possibility for Bharti, we believe that the company may have to screen smaller companies that might not be as appealing as MTN.

These smaller companies may be attractive considering that Zain and Orascom have reportedly been looking for partners over the last two years and, according to media reports, held talks with several global telcos, but were unable to clinch a deal with any potential suitor. Millicom is in the process of selling its Asian operations and Bharti is amongst the shortlisted bidders to buy-out its Sri Lanka operations.

At the same time, Bharti and MTN while calling off the talks, have not ruled out the possibility of salvaging the strategic alliance. Within 24-hours of the deal being called off, MTN’s second-largest shareholder, M1 Group, on Friday hinted that both telcos may work towards resolving regulatory hurdles and restarting talks. With time, Bharti confident to overcome any regulatory hurdles and achieve our longterm objectives. There was a lot of hard work invested in trying to combine these two entities into what would have been the leading emerging markets mobile operator.

Not all are convinced that Bharti will be third time lucky even if talks were to start again. Though Bharti’s media statement seems to leave some room for further engagement if/when the South African government reviews its stance, we see very little possibility of that happening.

Despite Bharti’s dominant position in India, a platform that will enable it to benefit from consolidation that is set to shake the domestic market over the next two years, analysts are also concerned that the telco’s revenues and profitability are set to come under increasing pressure in the immediate future. Calling off the deal won’t impact near-term earnings, but it raises our concerns about longer-term growth visibility, in our view. We believe that rising competitive intensity reduces prospects of near-term upside, and that medium- to longer-term growth may be hampered if pricing pressure continues longer than expected.

Dis-engagement with MTN would allow top management to focus on strategic issues revolving around tariff pricing, its ability to compete and eventually being able to drive a sustainable industry structure in the medium term. Also, money spent in acquiring Indian assets in an imminent consolidation (easing of M&A rules expected over the next three-six months) could generate better returns than geographical expansion.

Titan Industries

The consistent growth model of Titan Industries makes it a good long-term buy in the consumer goods space. The stock can be bought on dips

Beta: 0.09
Institutional Holding: 6.57*
Current dividend Yield: 0.88
Current P/E 19.21
Current m-cap: Rs 4,047 cr

THE economic slowdown in India is expected to affect the sales and profitability of the consumer goods companies. However, Titan Industries, with strong branding and wide retail presence, is less likely to be beaten down by the same. Titan Industries is India’s leading manufacturer of watches and jewellery and world’s sixth-largest manufacturer of branded watches. It dominates the domestic watch and the organised jewellery markets with a market share of 60% and 40% respectively.

BUSINESS

The Bangalore-based company designs, manufactures as well as retails watches, jewellery, sunglasses, clocks in Indian and international markets. Watches are sold under four main brands, namely Titan, Sonata, Fastrack, Xylus as well as a range of sub-brands like Raga, Edge, Octane, and many others. The company has a strong retail presence with a network of 260 ‘World of Titan’ showrooms and nearly 750 service centres. In 1995, the company forayed into the organised jewellery market with its brand ‘Tanshiq’. It is now India’s largest and fastest growing jewellery brand with 120 boutiques. The company ventured into mass jewellery through ‘Gold Plus’ brand that sells plain gold jewellery at its 30 showrooms. Titan has diversified into fashion eyewear by launching Fastrack eye-gear, sunglasses as well as prescription eyewear, sold through its 50 stores under Titan Eye+ brand. In 2003, the company ventured into precision engineering and machine building. The division supplies precision components to the avionics and the automotive industries. Titan is the OEM (original equipment manufacturer) of dashboard clocks and is a supplier of the same to car manufacturers in Europe and America.

FINANCIALS

Titan Industries’ topline has been growing consistently. It has clocked a compounded annual growth rate (CAGR) of 33% in the last five years ending March 2008. Operating profit during the same period grew by a CAGR of 23%, while net profit galloped at the rate of 90% per annum. In the last four quarters, the jewellery business contributed 70% to the company’s total revenues, whereas watches business accounted for around 27%. While the jewellery segment dominated the topline, watch segment accounted for nearly 60% of company’s profit before interest and tax in FY08. In the September ‘08 quarter, the company’s operating margin rose to its highest level, in more than seven quarters, as gold prices breached through a key $600 an ounce.

GROWTH DRIVERS

The company plans to take advantage of its strong brand positioning by launching innovative and theme-based products in both the watches and jewellery segments to drive up sales. So far, it has managed to show a steady growth in its retail expansion in FY09 with the launches of new showrooms for brands Tanishq, World of Titan, and Goldplus in line with its growth targets. The expansion plan for the eyewear segment, Titan Eye+ that right now contributes little to the topline is also on track with an addition of nearly 40 stores this financial year. The company has also signed distribution and marketing deals with Tommy Hilfiger and Hugo Boss for their range of watches and eye wear products.

RISKS / CONCERNS

The company’s considerable size of inventories is leading to a sharp rise in working capital requirement. In the last four financial years, net cash flow from operations declined by a CAGR of 3% against a rise in cash profit by a CAGR of 53%. In the same period, the inventories grew at a CAGR of 98%, which is very significant. While we believe that this rise, in recent quarters, could be to shield against volatile gold prices, it can put pressure on profitability. The company also needs to revive its eyewear and precession-engineering businesses, which contribute less than 3% to its revenues. However, they are still making losses.

VALUATIONS

In the past one year, while the Sensex has lost more than 50% of its m-cap, Titan Industries lost about 35%. On the other hand, since 2003, its m-cap has increased 10 times against a fourfold increase of the Sensex. At the current market price, the P/E is down 60% from its five-year average of 49. Considering that P/E could tick towards the lower side of its last twomonth range, of 17-21, the stock can be bought on dips. The consistent growth model of the company makes it a good long-term buy in the consumer goods space.

TICKING UP

In the last six quarters, Titan saw an average growth of 11% in net sales, 32% rise in operating profit and 35% in net profit

In the last four quarters, the jewellery business contributed 70% to the company’s total revenues, whereas, watches business accounted for around 27%

Plans to launch innovative and theme based products in both jewellery and watches segments

There has been a steady growth in retail expansion of showrooms for all brands in FY09

In last five years Titan’s mcap increased ten times outperforming a four fold increase in Sensex m-cap.

At the current market price, the P/E is down 60% from its five-year average of 49, making it a good pick

Titan showed a steady growth in its retail expansion in FY2009 with the launches of new showrooms for brands Tanishq and World of Titan Titan Eye+ contributes little to the top line is also on track by adding nearly 40 stores in the fiscal