Indian Stock Market Blog

Valecha Eng- Buy. January 13, 2007

Posted by Bhavin in Fundamental Analysis.
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Valecha Engineering’s strong order book, improved balance sheet and plans for diversification augur well for its earnings growth. An investment can be considered in the stock with a 2-3 year perspective. At the current market price the stock trades at eight times its expected earnings for FY08 and is at a significant discount to peers.

Valecha is an engineering, procurement and construction (EPC) contractor for roads, piling works and airport runways. The company’s order book of over Rs 800 crore is over four times its FY06 revenues. Road projects account for 70 per cent of the orders. While road projects are low-margin in nature, the company has managed to maintain its operating margins at 7-8 per cent on the back of better margins from piling projects. Until 2005, the company was unable to ramp up its order size as its diminutive net worth acted as a constraint in bidding for larger projects. In 2006, it managed to expand its net worth by 3.5 times. The company now appears well placed to bid for larger orders given its technical qualification and the improved capital adequacy. Increase in the size of orders may also pep-up operating margins. The company has executed airport runways in cities such as Mumbai and Chennai. With the airport privatisation activity gathering steam, the company appears well placed to bag similar orders from developers of airports.

While Valecha is less diversified than bigger players such as IVRCL Infrastructures, it now plans to diversify to BOT annuity, real estate and hydropower projects through special purpose vehicles. We expect real estate to play an active role in revenue contribution in the long term while the proportion of road projects may come down. The risks to the investment stem from the fact that Valecha is a small-cap stock with a market capitalisation of about Rs 140 crore and may be quite vulnerable to a corrective phase. The stock has declined by about 45 per cent since May in line with market trends and concerns about margin pressures on smaller construction companies. However, Valecha could contain such pressures through price escalation clauses built into its contracts. Moreover, the stock’s decline has made valuations more attractive.

Expert On Small Cap. January 13, 2007

Posted by Bhavin in Fundamental Analysis.
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Sundaram BNP Paribas Mutual Fund is shortly rolling out two new closed-end funds — Select SmallCap and Equity Multiplier. Both products have a cap on fund size (Rs 330 crore for the SmallCap Fund and Rs 550 crore for the Equity Multiplier) and will follow a more concentrated approach to investing than existing funds from the stable. The fund manager, Mr Anoop Bhaskar, explains the rationale for the new launches and discusses the proposed investment strategies in depth.

Excerpts from the interview:

What is the rationale for the Select SmallCap Fund and where will it invest?

Sundaram Select SmallCap will invest in stocks of small-cap companies. We define small-cap stocks as those with a market capitalisation below that of the 100th stock in the CNX-500 index. Currently, this threshold is at Rs 5,000 crore. The BSE Smallcap index has been in bearish mode over the past year; peaking in September 2005 and lagging the market since.

We believe this is one segment where, even if the market is at 14000 levels, the valuations are compelling. There are several companies that we like, trading at price earnings multiples of just 7-8 times, half the levels for large-cap stocks. We believe there are several companies whose sales will double in 3-4 years time and so should their market value. The top ten stocks in this fund will make up 35-40 per cent of the corpus and we hope to maintain the average market cap at about Rs 1,000 crore. We will try to have 20-25 per cent of the portfolio in companies with a market cap of less than Rs 1000 crore, 25-30 per cent the Rs 1000-2000 crore range and the balance in over Rs 2000 crore.

Though a purely small-cap fund should focus on stocks below the Rs 1000 crore threshold, there are practical constraints to doing that. One problem with going for very small-cap companies is that the regulators and the stock exchanges tend to be very stringent in shifting stocks to the trade-for-trade segment and that leads to very low liquidity. This is one of the reasons why we adopted a more flexible definition for this fund.

Sundaram BNP Paribas already runs S.M.I.L.E fund, which targets small-cap stocks. Isn’t there a high degree of overlap with that fund?

Not really. The S.M.I.L.E was a multi-cap fund that aimed to have a sizeable allocation to small-cap stocks. But there are certain practical constraints to operating a small-cap fund with an open-end structure. If you are an open-end fund, your performance tends to get rated on the same basis as all other open-end funds, with investors making no distinctions between mid-cap, small-cap and large-cap funds.

Hence, if the market is oriented towards large-cap stocks, if you are running an open-end fund, you too have to have an allocation to large-caps to ensure performance. This is why we thought a closed-end structure is better for a small-cap fund. In a closed-end fund, you have the luxury to take long-term calls which can turn out to be multi-baggers, without daily pressures.

Closed-end funds launched earlier have not delivered good performance. Doesn’t a closed-end fund give an undue advantage to the fund manager?

We are aware of that. That is why we have set a cap on fund size, which we believe offers comfort to investors. Setting out how much we plan to raise in advance will help us deploy the funds quickly and stick closely to our mandate.

We thought that a time period of 3-5 years would give investors enough time to earn healthy returns from their investment. Also, provided the fund fares well, we will be aiming to declare dividends from the third year onwards so that we return cash to investors as and when good returns accrue. This should help work around the constraint of the lock-in period, for investors.

Who are the target investors for this fund?

We are not targeting first-time investors. This fund is for experienced younger investors who already have an equity investment. Such investors can allocate 10-15 per cent of their portfolio to small-cap stocks through this fund and expect a reasonable return over a 5-year period.

We feel that very few retail investors have really benefited from staying invested through the entire rally of the past five years. This fund, by being closed-end, instils the discipline to stay invested for a five-year period. Unless we are really unlucky, we should be able to deliver with this fund, especially given the fund size.

Where will the Equity Multiplier Fund invest and who are its target investors?

This is a select focus fund with a closed-end structure; the top ten stocks may account for about 35-40 per cent of the assets. We found that investors often shell out relatively high fees to portfolio management services to acquire a concentrated portfolio.

The Equity Multiplier Fund will offer such investors a concentrated portfolio within the fee structure of a mutual fund. We will invest across sectors and market capitalisation ranges, with a larger weight to large-cap stocks. We will try and target absolute returns; with clear profit triggers on each stock which we will stick to, irrespective of market conditions. We may take concentrated stock and sector calls (within SEBI limits, of course). This fund could have a high churn, with certain portions of the portfolio set aside for say, six-month and one-year calls. While this will be an aggressively managed fund, the Select SmallCap fund will be a buy-and-hold fund.

IPO and Prices!! January 13, 2007

Posted by Bhavin in Fundamental Analysis.
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Imagine if you had invested Rs 9500 (100 shares at an issue price of Rs 95) in the public offer of Infosys Technologies in 1993. After adjusting for all the stock splits and bonuses over the years, your investment would now be worth Rs 29,440,000, an appreciation of a staggering 3,000 times in the 14-year period, not including the dividends that the company has paid. A host of such successful IPOs such as Bharti Tele-Ventures (issue price of Rs 45), Indiabulls (issued at Rs 19), including recent ones such as Everest Kanto Cylinders (issue price of Rs 160), Educomp Solutions and Tech Mahindra have turned in stupendous returns over the years.

Though investors often look upon initial public offerings (IPOs) as a moneymaking exercise and focus on listing gains, it pays to evaluate IPOs from a long-term perspective. A look at the factors that should be considered while buying into an IPO.

Don’t go by subscriptions alone: More often than not, investors base their decisions on the subscription figures received by the offers. Given the IPO stampede that we are seeing now, the subscription figures do tend to influence listing gains, but may not be a good guide to the long-term prospects of a company. Subscription numbers are often a function of market conditions at the time of the offer. Even a good IPO may flounder in a declining market, while a fly-by-night company may rake in the money if the market is in good shape. As a long-term investor, you need to evaluate an IPO from the point of view of whether you would like to buy into the business for which funds are being raised.

Don’t go by absolute price: Do you believe that an IPO priced at Rs 10 is a safer bet than one priced at Rs 1,000? Not really. In fact, focussing only on IPOs with a low absolute price may leave you with a portfolio of companies with barely any credentials. Companies with a track record of good financial performance would already have a reasonable level of earnings and are likely to price their IPOs at a high absolute price. When evaluating IPOs, try and get an idea of the valuations, or how the offer price discounts the company’s potential earnings, rather than its absolute price. If the overall outlook for a sector and a detailed assessment of the company’s prospects vis-à-vis its peers appear positive, even high-priced IPOs could turn out to be a good bargain. Offers of companies such as Suzlon Energy, AIA Engineering or even the recently listed Info Edge or Sobha Developers have been among the top-performing ones in recent times, but none of them would have caused a blip on your radar if you were looking for IPOs priced below Rs 100! In hindsight, these offers were a steal at their issue price, given that they listed at a substantial premium and have never touched the offer price levels again!

The business at a good price: IPO investing is based on the belief that investing during the offer gives you an opportunity to get a bargain price for that company. After all, why park money in the public offer at a fixed price, when the same stock would be available on the tap in the secondary market in about a month’s time. Thus, valuations should play an important role in influencing the decision to invest in an IPO.

For instance, consider a company X, which is slated to make an IPO. Assume you are convinced about the company’s business model and the management’s ability to successfully steer its progress. In other words, you believe that investing in the company could provide good returns. At such a stage, the only factor that might influence your decision would be the valuation of the price. Is the offer priced at a discount, at a par or at a premium to its peers? If at a premium, do you think the business really offers something new or unique that justifies the premium? Answers to questions such as these should influence your assessment. If you feel that the offer is priced stiffly, you can safely stay way and consider investing through the secondary market at a later date.

Don’t base decisions on listing performance: Like subscription numbers, a stock’s returns on the day of listing are also often a function of short-term factors such as market conditions at the time of listing and the near term results expected from the company. Investing in any IPO locks your money for nearly a month. If during the lock-in period (the time from application until listing), the market crashes, your stock’s debut could be lacklustre. If you have bought into an IPO because you believe that the project has the potential to deliver healthy growth over the long term, have the conviction to stick with your choice. Bharti Air-Tel, which saw its stock plunge below its offer price on listing, has turned out to be one of the strongest wealth creators in recent years.

Investing in IPOs, much like investing in the secondary market, requires considerable effort on your part. But if you are worried about missing out on such offers as that of Infosys Technologies, you can be rest assured that the chances of such a miss are now minimal, in the light of an improved market efficiency and the coverage most offers get from various analysts and brokerage houses, which can supplement your own efforts.

With IPOs becoming more frequent and institutions getting more selective in choosing between them, listing gains on every IPO are no longer a given. Therefore, every investor must be aware of the general market trends and the nuances of basic research. For, in the world of investments, if such ignorance were considered bliss, then bliss could be very expensive!

Safe Bet. December 28, 2006

Posted by Bhavin in Fundamental Analysis.
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Is India’s IT industry a growing or a mature business? The market seems to have veered around to the view that IT is a mature business, if you look at the valuations given to small and medium enterprise (SME) IT companies.

While majors like Infosys, TCS, Wipro, Satyam, HCL Tech and Tech Mahindra continue to enjoy market confidence, and high discounting, market seems to think that the second and third-rung companies have little future. So, the market is saying it’s time the IT industry consolidates, the smaller guys need to exit and leave the business to the four-five large companies. That is what you may expect in a maturing business.

Take a look at the valuations some of the SME IT companies are commanding. Mastek, which has been amongst the top underperformers in recent years, is quoting at a P/E of 11 times, and gives a dividend yield of 3% (its amazing how most analysts and investors ignore dividend yield). 3i Infotech has a similar P/E, though dividend yield here is only 1%. NIIT Tech again has a good dividend yield of 2.2% and a P/E of only 13. Tata Elxsi and Zensar have a dividend yield of 2.6% each. Most of these companies perhaps have spare cash on the balance sheet, since IT typically is a cash-generating business unless you spend it on acquisitions.

So do these companies really have no future? Most analysts and fund managers we have talked to over the last few months believe so. They say these companies will grow at rates substantially lower than biggies. This has turned out to be true as well in most cases. However, if you forget the comparison with biggies, then these companies aren’t doing that badly. Let’s look at some growth rates.

Hexaware has grown sales at over 25% and net profits at close to 50% this year. NIIT Tech has grown sales at 32% and net profits at 94% in the first half of FY07. 3i is growing sales at 47% and net profit at 85%. Mastek has been growing sales at 22% and net profit at 32% in the last two quarters. KPIT has grown sales at 46% and net profit at 62% in 1H07. While Tata Elxsi has grown a little slowly, Geodesic has grown both sales and net profit at 100% or more.

In other words, many of these companies are growing reasonably well. So why are their discountings so low? We believe this may be because there is so much overall growth, that the market is ignoring mid-cap IT. Three years ago, these growth rates would have looked fantastic, and even fund managers may have piled on. Currently, there are better returns elsewhere.

At this time, IT isn’t sexy anymore. Compared to real estate, IT is old economy. But for those looking for conservative returns with a margin of safety on the downside, some of these companies may be worth a buy.

KRBL. December 19, 2006

Posted by Bhavin in Fundamental Analysis.
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KRBL is well on track to maintain its leader position in the rice business due to aggressive expansion, growing consumer preference towards branded rice & quality, margin improvement and rising contribution from sale of by-products.

Company Background

KRBL Ltd is the largest exporter of Basmati rice and a significant player in the branded food industry. KRBL’s milling and packing units, located at Ghaziabad (UP), Dhuri (Punjab), Alipur (Delhi) and Gandhidam (Kandla), enjoys the strong support of its procurement network for basmati rice that spreads across Punjab, Haryana, Uttranchal and Uttar Pradesh. In FY05, overall sales stood at Rs 505 crore and around 70 per cent of which came from exports to 25 countries such as the US, Europe, Africa and the Gulf countries. The company has a network of 26 lakh retailers, 87 distributors and 434 dealers across the country with popular brands like Doon, India Gate, Nur Jahan, Aarati, Necklace, Bemisal, Shubh Mangal and Lotus.

Industry Outlook

India being the largest producer and exporter of basmati rice commands premium over its traditional rivals in terms of prices and quality. The total rice market in the country is estimated to be worth around Rs 1,00,000 crore of which only 10 per cent of the rice is branded. The branded rice sales have taken off in recent years and have been growing at around 15 per cent in the domestic market compared to 5 per cent for unbranded rice. The branded rice sales growth is an impressive 25 per cent in the international market as compared to stagnant sales of unbranded rice. Added to this, of the Rs 3500 crore worth of basmati rice produced, only around Rs500 crore worth is sold in branded form. On the pricing front, Basmati rice prices are expected to increase by Rs 7-8 per kg due to steady export demand supported by lower crop. KRBL, with its strong franchisee network and a total export market share of 11% in value terms is likely to reap the benefits of growing penetration of branded rice including basmati.

Expansion

The company is all set to commission, the largest rice mill in the world at Dhuri, Punjab, with a capacity to produce 170 metric tonnes per hour. It has invested a total of Rs 100 crore in the infrastructure expansion of the mill including land acquisition, expanding refining capacity and adding railway lines near the plant, after acquiring its assets at a cost of Rs 15.80 crore. The company hopes to utilize the plant for milling both basmati & non-basmati rice and also intends to exploit bran and husk, the two key by-products of the rice-milling plant. Husk would be utilised to extract furfural, for which there is good demand in the industrial sector. The bran would be used to produce around 50 tonnes of rice bran oil per day and carries a premium pricing of around Rs 85-90 per litre. Expansion at Duri would not only enable the company to achieve cost competitiveness and reap profits from economies of scale, but could also provide a strong fillip to its overall margins due to increased contribution from by-product division.

Backward Integration

KRBL pioneered the concept of contract farming almost 10 years back to boost the quality and yield of rice. It currently has 1 lakh acres of land under cultivation, spread across states such as Uttar Pradesh, Punjab etc., which it plans to increase to 2 lakh acres by 2007. The company procures about 35-40% of its paddy requirement through contract farming, which is expected to increase going forward and is expected to have a beneficial impact on the margins of the company. The company has also decided to market seeds and presently it markets seeds of basmati rice and wheat, the annual contribution from this being Rs 5 crore.

Diversification into non-basmati

KRBL after establishing its presence in the basmati rice segment is now aggressively expanding into non-basmati segment with a variety from the South. `Sorna Masuri’ is grown in Andhra Pradesh, Karnataka and in Tamil Nadu and the demand of which is set to grow in the coming years because of demand from South Indians living abroad. The company is targeting exports of over 40,000 tonnes and expects higher contribution to its turnover from non-basmati varieties in the coming years.

Topline & Bottomline to improve substantially

We expect KRBL topline to register a growth of 57.14% in FY06 on the back of improvement in volumes due to commencement of operation by Dhuri Plant in the second half of FY06. The bottomline is slated to grow by 74.69% in FY06E to Rs 28.44 crore and 33.02% in FY07E to Rs 37.83 due to higher margins. Although margins in the non-basmati segment are lower, the company is expected to improve profitability due to rising exports and increasing contribution from sale of by-products.

Financials:
During H1FY06, KRBL posted a strong 88.77% growth in net profit to Rs 15.8 crore (Rs 8.37 crore) and 43.85% rise in topline to Rs 328.66 crore (Rs 228.48 crore) as compared to previous corresponding half. The topline growth can be attributed to growth in the domestic basmati market segment and higher exports which were mainly driven by non-basmati rice segment. Margins improved by 375 basis points due to improved realizations, cost rationalization and cutting measures including lowering ad spends.

Concerns

Rice processing companies including KRBL require significantly high inventory levels, as basmati rice has to be aged for 12-18 months before it can be processed. Also unfavorable monsoon condition could dampen rice crop as a result, margins could come under pressure due to high inventory carrying cost.

Valuations

KRBL is set to report significant jump in profitability on the back of capacity expansion, growing consumer preference towards branded rice & quality, margin improvement on better economies of scale and rising contribution from sale of by-products. It is expected to post an EPS of Rs 15.91 for FY06E & Rs 21.16 for FY07E. We believe that the current discounting of 6.3x its FY07E is on the lower side among its peers, thus increasing the chances of a potential re-rating. The stock has the potential to generate returns in excess of 40% in a 6-9 month time frame to Rs 190 levels taking a PE multiple of 9.

FII And India. December 1, 2006

Posted by Bhavin in Fundamental Analysis.
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An American decided to write a book about famous churches and temples around the world. So he bought a plane ticket and took a trip to china. On his first day he was inside a temple taking photographs when he noticed a golden telephone mounted on the wall with a sign that read “$10,000 per call”. The American, being intrigued, asked a priest who was strolling by what the telephone was used for. The priest replied that it was a direct line to heaven and that for $10,000 you could talk to God. The American thanked the priest and went along his way.

Next stop was in Japan. There, at a very large cathedral, he saw the same golden telephone with the same sign under it. He wondered if this was the same kind of telephone he saw in china and he asked a nearby nun what its purpose was. She told him that it was a direct line to heaven and that for $10,000 he could talk to God. “O.K., thank you,” said the American.

He then traveled to Germany and France, Switzerland, Russia, Tibet and Thailand. In every church and temple he saw the same golden telephone with the same “$10,000 per call” sign under it. The American, amazed by this, decided to travel to India to see if Indians had the same phone. He arrived in India, and again, in the first temple he entered, there it was – the same golden telephone, but this time the sign under it read “One Rupee per call.”

The American was surprised so he asked a holy man about the sign. Swami, he said, I’ve traveled all over World, and I’ve seen this same golden telephone in many churches and temples. I’ve been told that it is a direct line to Heaven, but in the USA, Europe, and even throughout Asia, the price was $10,000 per call. Why is it so cheap here?” The priest smiled and answered, “You’re in India now, son – it’s a local call”.

Corporate 2007. November 24, 2006

Posted by Bhavin in Fundamental Analysis.
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Even in ordinary times, putting together a list such as this one is a devilishly difficult task. After all, there’s something or the other happening at every company. So, how do you decide which to drop and which to keep? And in these extraordinary times, zeroing in on 20 companies to watch is a million times harder. The economy is booming, companies large and small are betting big on acquisitions, new products, new markets, and new strategies. Private equity and venture capital is flowing into little-known firms, start-ups are mushrooming across sectors, and interesting new technologies are emerging both online and offline. Therefore, to bring you a list of 20 companies to keep an eye on next year, BT’s reporters and editors across the country spoke to a variety of experts, including D-street analysts, fund managers, investment bankers, private equity and venture investors, bankers, and senior executives.

As you can imagine, the list we ended up with comprised more than just 20 companies. To whittle it down to the required number, we employed a few filters: One, the company needed to be most popularly cited by our experts; Two, the list needed to be well balanced in terms of the nature and size of companies; Three, the company should not have featured in our listing the previous year. However, we had to make an exception in the case of two companies-Tata Steel and Maruti Udyog-simply because they seemed to be on everyone’s to-watch list. For good reason. Next year, Tata Steel will begin putting India Inc.’s biggest overseas acquisition, Corus, to work; next year, too, Maruti, having once retreated from the diesel car market, will again seek to displace Tata Motors’ Indica as the diesel car of choice. The others also have a lot going for themselves.

ABB
Stepping Up the India Charge

It has grown for each of the past 24 quarters, upped revenues from Rs 1,000 crore to around Rs 4,000 crore in that time, and boosted profits from Rs 65 crore to analysts’ estimate of Rs 290 crore this year. Is it possible then, that there’s more steam left in ABB India, subsidiary of the Geneva-based power-automation-engineering giant? Yes, say analysts, because with the economy on a roll and investment in infrastructure and industrial projects gathering speed, ABB is plugged into a multi-billion-dollar opportunity. According to estimates, there are power and industrial projects in the pipeline worth several hundreds of crores. No wonder, ABB’s order book is brimming over, with contracts worth Rs 4,211 crore over the next several years, and folks in Geneva have declared India a “prime focus” country. In response, the engineering giant is ramping up manufacturing capacities in the country. By the middle of 2007, it would have completed a $100-million (Rs 450 crore) investment programme that will not just boost throughput, but increase the breadth and depth of portfolio offerings in the market place. Says Ravi Uppal, Vice Chairman & MD, ABB India: “There is no cap on capex. We will continue to invest whatever it takes.” Apparently, investors have no issues with the strategy. ABB India’s stock price has almost doubled to Rs 3,490 in the last one year alone and trades at a p-e multiple of 51.

ADLABS
The Picture Gets Bigger and Better

Like in every good bollywood movie, the Adlabs’ story has had a happy twist. “If you ask me whether I knew the business would assume this scale before July last year, the answer is no,” says Manmohan Shetty, Chairman & MD, Adlabs. June 2005 was when Anil Ambani’s Reliance Capital bought a majority stake in Adlabs Films. “The money, new talent, and management have helped create a media house present in every sphere of entertainment business,” says Shetty, who runs a movies-to-film processing-to-multiplex group. How life has changed is evident not just from its Q2 results (revenues up 115 per cent to Rs 50 crore) but also investment plans. In the film production business, from investing Rs 15-20 crore a year hitherto, the company is now investing Rs 60-70 crore. It has struck a multi-film, co-production deal with Ashok Amritraj’s Hyde Park Entertainment, set up a new animation arm that is already working on a 3D film called Superstar, and plans to invest Rs 40-50 crore in film distribution. Shetty is also looking to grow his 50-screen multiplex business fourfold, and scale up television content production following the purchase of a majority stake in Siddhartha Basu’s Synergy Communication. Plus, “the demerger of the radio business is expected to unlock substantial shareholder value,” says Chiraj Negandhi, an analyst with Enam.

AIRCEL
New Owner, New Plans

My mandate is to make Aircel a national player from a regional player,” says Jagdish Kini, also answering the question why the erstwhile C. Sivasankaran-owned mobile services company made it to our list this year. As you might know, Malaysia’s Maxis group (and Apollo) acquired Aircel in January 2006 and has since obtained licences to operate in nine circles. It has applied for 14 more as part of its plan to offer services across India. Maxis’ proposed investment in cellular roll-out, 3G spectrum and WiMax is $3 billion, or Rs 13,500 crore. Aircel, which has 3.8 million subscribers mainly in Tamil Nadu, is betting on WiMax, or last-mile, wide-area wireless broadband (It WiMaxed Baramati with Intel). Neither the investments in nor the revenues from WiMax are expected to be significant, yet “Aircel hopes to get a first-mover advantage,” says Ram Shinde, Aircel’s Head (Business Solutions).

BARTRONICS
Coming Soon to Every Pack in Your Shopping Bag

Mumbai-based Karvy Stockbroking has been quietly accumulating the Bartronics stock since it was at Rs 55 about five months ago. And Ambareesh Baliga, the firm’s Vice President, has no intentions of taking his eye off the stock, which now trades at over Rs 100. “It’s one of the best proxy plays available in the organised retail space,” says Baliga. What does the Rs 30-crore (at the end of March 2006) Bartronics do? The Hyderabad-based company makes a wide variety of data capturing equipment such as barcode scanners, terminals and printers, smart card readers, and RFID tags. Interestingly enough, retail is currently a small part of Bartronics’ business, “but we believe it will definitely constitute a major portion of our business in the next two years,” says MD & CEO Sudhir Rao. Accordingly, Bartronics is shifting focus to smart cards and point of sale (pos) systems, and hopes to become a Rs 200-250 crore company in another two years. RFID-based solutions fetched half of Bartronics’ revenues in the first half of current fiscal. But Rao is betting big: “We are working towards a Rs 1,000-crore sales target,” he says. Baliga must be smiling.

BHEL
Power-packed PSU

How’s this for growth potential? India plans to add 674,000 mw of power capacity over the next 25 years, and there’s only one end-to-end domestic manufacturer of power plants in the country: BHEL. “The company currently has limitless order intake and earnings visibility,” quips Satyam Aggarwal, a power industry analyst at Motilal Oswal Securities. “There were some concerns over BHEL lacking supercritical technology (requiring a plant of at least 4,000 mw with constituent units of 800 mw or more), but those issues seem to have been sorted out,” he adds. To some extent, yes. BHEL’s Chairman & Managing Director, Ashok K. Puri, for instance, has struck deals with France’s Alstom (for boilers) and Siemens (turbine generator sets) for supercritical plants for ultra mega power projects. More importantly, he’s lined up Rs 1,000 crore for acquisitions abroad. “India must learn from the Dabhol debacle and acquire technology. Otherwise, we could be investing billions on buying equipment and not know how to run them,” he says. BHEL’s topline surged 41 per cent last year to Rs 14,525 crore, and this year it may cross Rs 20,000 crore.

BillDesk
They are Killing the Bill Queues

In early 2000, three Arthur Andersen executives-M.N. Srinivasu, Ajay Kaushal, and Karthik Ganapathy-quit their cushy jobs to launch a start-up out of a small house on suburban Mumbai’s Carter Road. The trio thought they had a great payment management service idea (read: third-party bill collection) and, hence, kicked off IndiaIdeas. And, boy, were they right. Today, as many as 25 banks (Citi, SBI, HDFC Bank, among others) and more than 100 companies (including Hutch, Reliance Energy, Tata AIG) are part of IndiaIdeas’ electronic payment gateway, BillDesk. “We are the largest player with over a million bills processed every month,” says Kaushal. BillDesk already has 240 employees across 30 cities, but has plans of ramping up operations. “There is a huge potential. The share of online billing, which is less than 2 per cent, is expected to go up to 6-8 per cent in the next three to five years,” says Kaushal. There are plenty of believers in BillDesk’s business model. In June this year, SBI and us-based venture capital firm Clearstone Ventures invested $7.5 million (Rs 34 crore) in the company. So, expect an IPO a few years down the line.

DLF
The IPO is in Sight Again

The Delhi-based real estate giant DLF’s initial public offering (IPO) may well have been a top contender for the most talked of non-event of the year. The company had been planning to roll out one of India’s biggest-and realty’s biggest-IPOs aimed at raising more than Rs 10,000 crore, until its minority shareholders cried foul and forced SEBI to show the red flag. When BT went to press, DLF, which had been valued between Rs 77,200-85,300 crore, had an extra-ordinary general body meeting coming up on November 14 to settle the issue. That means the IPO is in sight again. “If the minority shareholder issue is resolved, then the public offer could hit the market during the January-March quarter,” confirms Rajeev Talwar, DLF group’s Executive Director. The IPO, however, is not the only reason why DLF has made it to our list. The other reason is, of course, the real estate boom. The Indian real estate market estimated at $40-45 billion (Rs 1.8-2 lakh crore) is expected to grow at 20 per cent compounded annual growth rate over the next five years or so, according to UBS Investment Research. And DLF has plans for everything from houses to commercial buildings to SEZs. “Eventually each of (these) verticals should become large enough to become separate companies,” says Talwar. Now, that is some ambition.

Dr Reddy’s
The Recipe is Working

It’s possibly the highest-ever quarterly sales announced by an Indian drug company. For the second quarter of this year, Dr Reddy’s Labs announced a year-on-year 245 per cent growth in topline to Rs 2,004 crore and a 214 per cent jump in net profits to Rs 280 crore. If all goes well, Dr Reddy’s will be pushing a billion dollars in revenues before 2007 is rung out. “The acquisitions added a lot of firepower to the business coupled with a few upsides,” says company CEO, G.V. Prasad. The new acquisitions such as betapharm fetched a fifth of the Q2 revenues, and international sales made up an impressive 88 per cent versus 61 per cent same period last year. There are two other reasons to watch Dr Reddy’s: One, its generic version of GSK’s $1-billion drug Zofran (an anti-emetic), Prasad says, is likely to get an approval. That could mean Rs 225 crore in profits during the exclusivity period. Two, one of its new molecules (balaglitazone) for treatment of diabetes is expected to enter phase III of clinical trials over the next six months, making Dr Reddy’s India’s first company to have a phase III asset. Also, Prasad isn’t ruling out more acquisitions abroad.

Ginger
Smart Basics for Road Warriors

It was an idea borrowed straight out of C.K. Prahalad’s bestseller on bottom of the pyramid (bop) marketing. No surprises, then, that Indian Hotels’ budget hotel subsidiary, Roots Corporation, is pleased as punch with the results. Its no-frills budget hotel Ginger, launched in June 2004, has been a roaring success. All Ginger properties (Bangalore, Mysore, Haridwar, Pune, Trivandrum and Bhubaneshwar) have a simple layout and design with around 100 rooms in each property. Since land price is a key determinant of the eventual tariff, most of these hotels are located on the outskirts or at least outside the central business district, where prices tend to be more reasonable. There’s no room service or travel desk or swimming pool, but the rooms have everything a budget-conscious business traveler would need, including Wi-Fi. Also, there’s a closed circuit camera in the lobby of all Ginger hotels for greater security. There are just two types of rooms, single bed (180 sq. ft) and double bed (220 sq. ft) with transparent prices of Rs 999 and Rs 1,199, respectively that are uniform across properties. “We call our model smart basics, which means good quality at affordable prices,” says Prabhat Pani, CEO, Roots. By March 2008, Ginger hopes to be in 30 cities. Road warriors, rejoice.

GMR Infrastructure
The Long Road from Jute to Airports

If the Hyderabad airport gets up and running by April 2008 and Delhi too sports a spiffy new one by 2010, air travellers will have one Bangalore-based company to thank: GMR Infrastructure. The Hyderabad airport is a Rs 2,284-crore project, while Delhi’s has a cost of Rs 7,000 crore. That should make GMR one of the biggest infrastructure developers. For a company that entered infrastructure only in the 90s, GMR has been able to bag some big projects. The airports apart, GMR has landed a number of road projects under the Golden Quadrilateral project. Focussing on project development, as opposed to mere execution, has enabled GMR, which once was in the jute business, to build assets worth Rs 15,000 crore from Rs 900 crore in 1999.

GMR executives say that the group has a healthy blend of fixed and volume-driven revenues. Investors in the newly-ipoed company have nothing to complain about. The stock is trading 70 per cent above the issue price of Rs 210. “As India’s infrastructure needs explode, GMR Group will strive to meet them,” says Chairman G.M. Rao. Investors expect as much.

Idea Cellular
Its Time Has Come

For Sanjeev Aga, the last several months have been incredibly busy. After the Tatas sold their stake in Idea to the Aditya Birla Group, the cellular services provider went on an overdrive and launched operations in three new circles (Rajasthan, Himachal Pradesh, and Uttar Pradesh-East), taking the tally to 11. Between March and September this year, the subscriber base jumped 54 per cent, and first half revenues rose 38 per cent to Rs 1,906 crore and net profit by 160 per cent to Rs 192 crore. “We are in a very strong position in the circles we operate and our renewed focus will help us to power ahead,” states Aga, who has taken over as Idea Cellular’s Managing Director from his earlier assignment as MD of Aditya Birla Nuvo.

The big story for Idea is yet to unfold, though. With a pan-India launch on the anvil and licence awaited for the National Long Distance Service (NLD) service, growth-and a place alongside Bharti, Hutch and Reliance Infocomm-appears inevitable. Then, there’s the IPO story. With Idea already valued at Rs 12,000 crore following private equity investment from Providence Partners and ChrysCapital and its footprint growing, the company can only get more valuable. “To us, nothing is more important than Idea being a top-notch company. We want it to be a class act,” says Aga in modesty. A good idea, too

Kale Consultants
Reprogrammed, But Keeping Its Fingers Crossed

It’s possibly the only reinvention of its kind in the Indian it industry and if it works, it may well inspire several other small companies to find their own niches. Founded in 1986, Kale continued to operate in a number of industry verticals but without achieving viable scale in any of them. Starting 2001, the Pune-based company began spinning out all the verticals (banking, generic software, and healthcare) and selling them to willing buyers. In October 2004, it acquired Cognosys, a travel solutions company, and merged it with itself. “We focussed on the airline vertical as we’ve had some global exposure there,” says Vipul Jain, CEO & MD, Kale. With the result, the Rs 73-crore firm has emerged as a focussed airline software and BPO player, offering outsourced services to airlines that include passenger revenue accounting, cargo management and travel solutions for travel companies. Over the years, Kale has shifted to a ‘per transaction’ model from the “licensing model’ it followed earlier. “We have the foundation. Now we are looking to leverage our position to cater to the entire travel industry,” says Jain. Investors aren’t yet convinced, since the stock has stayed stoically between Rs 90 and Rs 100 for a year now. Just the same, it’s a reinvention worth watching.

Larsen & Toubro
A Makeover on Many Fronts

Not too far in the future, Larsen & Toubro may look very different than what it does today. While its flagship engineering and construction business still fetches 70 per cent of the revenues, Chairman & Managing Director A.M. Naik seems determined to turn the conglomerate into a bigger and even more diversified entity. Among L&T’s new forays are the ones into shipbuilding, defence equipment, and nuclear power. Simultaneously, Naik is pushing L&T into newer markets overseas in the core business. For instance, West Asia and China, he says, will be important makets. “Gulf (alone) will bring in $1 billion (Rs 4,500 crore) in revenues next year,” says Naik. In power, L&T Power Development is moving from merely building power plants to running and maintaining them, thus creating steadier revenues. L&T Infotech, the IT arm, is planning to add 3,000 employees to the existing 8,000 by March 2008. Some time soon in the future, Naik expects 60 per cent of L&T’s revenues to come from projects, 30 per cent from manufacturing, and 10 per cent from services, against 75, 20, and 5 per cent, respectively, at present. “Infrastructure is a long-term play and the most demanding one,” he says. And few Indian companies can claim to have the sort of execution skills that L&T has.

Maruti
Driving (Back) Into Diesel

As a rule, a company never gets to be on our “to watch” list for two years in a row. If we are breaking that rule for Maruti, it’s for good reason. Next year is when the market leader will ride back into the diesel segment with a vengeance, putting pressure on Tata Motors’ small car, the Indica. This will mark Marurti’s second foray into diesel. The first attempt, made on the back of Zen diesel, didn’t quite work. This time around, Maruti is dropping a 1.3-litre diesel engine into the hot selling small car, Swift. Between the first and second attempt, Maruti has increased car making capacity from 4 to 6 lakh per annum, and also set up a diesel engine plant at Manesar near Gurgaon with an annual capacity of 3 lakh engines. “I look forward to 2007 with cautious optimism. There has been strong growth in this fiscal so far. This is a decisive year when many of our new projects go on stream,” says Maruti’s MD, Jagdish Khattar. The small diesel car segment accounts for 13 per cent of the car market. Expect the fight between Maruti and Tata Motors to be bruising.

Praj Industries
Betting on Biofuels

Be it the US or India, venture investor Vinod Khosla is a tough cookie. So, when Khosla, a former partner at Kleiner Perkins, decided to pick up a 10 per cent stake in a little-known Pune-based company, Praj Industries, people sat up to take note. Some years ago, India’s stock market bull, Rakesh Jhunjhunwala, had also picked up an identical stake in Praj. What’s special about the Rs 267-crore company? To put it simply, ethanol. Praj, promoted by IIT alumnus Pramod Chaudhari, specialises in setting up ethanol machinery and has executed projects across five continents. “We are the only company out of India offering end-to-end solutions in ethanol,” says the 57-year-old Chaudhari. Over the last 10 months, Praj has received an equal number of export orders, especially from the US. Chaudhari’s target: Make Praj a Rs 1,000-crore company by 2010. If ethanol-blended fuel takes off in the future, Praj will soar in tow.

Reliance Retail
The Game Changer

Back in may this year, reliance fresh was just a gleam in the eye of executives at Reliance Retail. By the end of October, they had launched the first store on Hyderabad’s Banjara Hills. That’s just one reason why Reliance is like an elephant in India’s organised retail industry. The other is, of course, the fact that no one else has the kind of investment plans hat Reliance has: Rs 25,000 crore across formats and across categories, ranging from produce to groceries to footwear to consumer durables, and vertically integrated supply chain. In 2007 (and beyond) more of Reliance’s retail strategy will unfold, potentially rattling existing players. “The end goal,” says Raghu Pillai, President and Chief Executive (Operations and Strategy), Reliance Retail, “is clear and that is to cover across all formats, 100 million sq. ft of retail space and have a topline of Rs 1 lakh crore by 2010-11.” Seems patently Reliance.

Shriram Transport Finance
Trucking On All Over

Financing commercial vehicles isn’t a terribly exciting business to be in. Three-fourths of the fleet owners who get their trucks financed own less than five trucks. Most of them are semi-literate, but that’s not the only reason why they aren’t the easiest of customers to handle. Yet, if private equity investors such as Citi, Newbridge and ChrysCapital have been falling over each other to get a piece of Chennai-based Shriram Transport Finance, it’s because the company knows how to make the business throw up oodles of cash. With Rs 9,000 crore in assets, Shriram churns out net interest margins of 9 per cent and logged a net profit of Rs 140 crore last year. And according to a study commissioned by Shriram, the opportunity for truck financing is set to boom. The study estimates a minimum potential demand of Rs 45,000-50,000 crore over the next 10 years. Of that, financing pre-owned trucks less than four years old and trucks between five and 10 years old, segments where Shriram dominates, will account for Rs 40,000 crore. Besides, the firm has also started financing new trucks, where it already has a 10 per cent share. “All the new trucks that are bought will come to us for modernisation funds once they are four years old,” says the company’s Managing Director R. Sridhar. By March next year, the company will grow assets to Rs 10,500 crore. Moral of the story: Businesses needn’t be exciting; they only need to be profitable.

Tata Steel
Now Comes the Tough Part

At Bombay House, the Tata Group headquarters, celebrations over the $8-billion (Rs 36,800 crore) Corus acquisition are long over. B. Muthuraman, Tata Steel’s Managing Director, is already hunkering down for hard work next year. “For us, the most important thing is to complete the deal in time (by January 2007) and then being prepared for the synergies to be worked out thereafter,” says the man about India Inc.’s biggest overseas acquisition so far. What Tata Steel makes of Corus-a much larger steel manufacturer, but much less efficient than the Indian buyer-will be important not just for the Tatas, but for Indian industry in general. After all, Tata Steel will be raising $6 billion (Rs 27,600 crore) in debt to fund the purchase, and how it handles a downturn-if any comes along-will be keenly watched by analysts and others. “We will be sharing our best practices. There will be operational synergies, market synergies, synergies on logistics management and on so many other areas,” says Muthuraman. One way or another, it has all the makings of a B-school case study.

TransWork
New Worlds to Conquer

A year ago, transworks, the Aditya Birla group’s BPO arm, was just one of the 200-odd BPO companies in India. But on July 3 this year, the Mumbai-headquartered operator changed all that with just one deal when it acquired the Santiago, Chile-based Minacs for $125 million (Rs 558 crore then) and in the process shot up the bpo rankings to #2. From being a company with revenues of Rs 164 crore, TransWorks metamorphosed to a Rs 1,350-crore vendor. “With the acquisition of Minacs, the company (which has more than doubled the headcount to 10,000) operates out of 25 centres spanning North America, Europe and India, and delivering services in 28 languages,” says Atul Kanwar, Managing Director, TransWorks. “We will be adding facilities in Canada, India & the Philippines in the near term to deliver an expanded range of services and solutions to our global customers.” Translation: watch TransWorks.

Videocon Industries
Raider in a Hurry

When it comes to numbers, Venugopal Dhoot rolls them out faster than TV sets off assembly lines in his factories around the world. “We have set a goal to be a $10 billion (Rs 45,000 crore) company in the next three years (from Rs 18,000 crore today) and by December 2007, the hope is to have a market cap of Rs 25,000 crore (compared to about Rs 11,000 crore at present and Rs 5,000 crore last year),” says the Chairman of Videocon. If not too many today doubt Dhoot’s determination, if not numbers, it’s because he’s won everyone’s respect in a spectacular fashion. In August last year, he acquired Thomson’s global picture tube business for Rs 1,300 crore and Electrolux Kelvinator India for Rs 400 crore, and is now close to gaining a controlling stake in Korea’s debt-ridden Daewoo Electronics in a deal worth Rs 3,300 crore. “The next three months will see some consolidation happening, but that doesn’t mean we will go slow on acquisitions,” declares Dhoot. “Next year is going to be hectic.” Better believe him

HOW THE 20 COMPANIES TO WATCH IN 2006 HAVE PERFORMED

Air Deccan
Has not had it easy. Its IPO in May drew a lukewarm response, forcing it to reduce its price band. On June 30, 2006, reported losses to the tune of Rs 340 crore for a 15-month period, despite which the airline has announced it would offer one lakh tickets for as low as Rs 9.
Bilcare
In October this year, it acquired DHP, a UK-based clinical trials services provider, for $5 million (Rs 22 crore). The company intends to evolve itself into a life sciences knowledge partner.

CavinKare
CavinKare is entering the home hygiene market with the launch of Tex, a toilet cleaner, tapping the Rs 100-crore toilet cleaner market. This year, the CavinKare group’s turnover is expected to reach Rs 575 crore as against Rs 572 crore in ’05-06.

Centurion Bank (now Centurion Bank of Punjab)
The bank, which completed its merger with Bank of Punjab in September last year, is currently in the news for its merger with Lord Krishna Bank, which has run into some rough weather.

DQ Entertainment
Plans to raise around $100 million (Rs 450 crore) to help its private equity investors exit and support its major expansion plans. It is also opening new facilities both within and outside the country.

Geometric Software
In October this year, it acquired the engineering services division of US-based Modern Engineering for close to $32 million (Rs 144 crore), with about $7 million (Rs 31.5 crore) in working capital loan. Just a few days after the acquisition, there were reports that the Godrej Group now wants to sell its stake (18.5 per cent valued at Rs 150 crore) in the company and is looking for potential buyers.

GVK Biosciences
Things are still looking up for a company that was one of the pioneers of bioinformatics in the country. In January, Wyeth Pharmaceuticals outsourced research services to GVK Bio; the deal was reportedly worth $8-10 million (Rs 36-46 crore).

Indian Rayon (now Aditya Birla Nuvo)
The company has had a good year, especially the last quarter, reporting a nearly 40 per cent jump in profits in the corresponding quarter from the previous fiscal.

Maruti Udyog
The government looks set to divest its 10.27 per cent stake in the company and is awaiting the Cabinet’s nod. The launch of an LPG version of WagonR by Maruti Udyog in July has done wonders for the ‘tall boy’ multi-activity vehicle, with sales more than doubling. Sales of WagonR Duo touched 13,200 in October, up 116 per cent over the July numbers of 6,100 units.

Midas Communication Technologies
In June this year, it came out with a new switch that enables faster deployment of cable internet. Called Catius, the new solution is targeted at the local cable operators (LCO) segment.

NTPC
Is hiring aggressively; plans to hire at least 1,000 people every year for the next three years. NTPC seems on course to add 22,000 MW capacity by 2012.

Rico Auto
Has benefited from the growing auto story. Like its competitors, Rico Auto is scaling up from producing individual components to making assemblies and systems. Has, however, registered a modest 14 per cent topline growth in Q2 this fiscal with a decline in bottom line (largely attributed to rising aluminium costs).

State Bank Of India
Was the only large PSU bank to register a fall in its net earnings (its net fell by 2.5 per cent) in Q2. The stock has, however, done well and has risen by about 20 per cent in the last six months. The bank, India’s largest, is eyeing a global presence, especially in markets like the West Asia.

Symphony Services
The $100-million (Rs 450 crore) firm is in an expansion mode; in June this year, it opened a second facility in Bangalore with plans to double capacity in Pune. It may also set up base in China. Symphony has registered 170 per cent compounded annual growth from 2002 to 2005.

Tata Steel
After acquiring Anglo-Dutch giant Corus, the company is all set to enter the Fortune 500 list, only the seventh Indian company that would be on the list. The combined entity would have revenues of over $22 billion (Rs 99,000 crore). The company hopes to return to its annual margin of about 30 per cent in the next four to five years.

Tejas Networks
This leader in next generation optical networking products has acquired $20 million (Rs 90 crore) in new equity financing. It plans to use this money to fund its international expansion plans and for R&D to develop packet-aware optical products. The company is eyeing Rs 250 crore in revenues this fiscal, up from Rs 130 crore during 2005-06.

TKML
It says it plans to launch a small car in the next two-to-three years and would look at a 10 per cent market share in the segment by 2010. It also plans to set up a second facility with a capacity of 150,000 units in Karnataka near its existing plant in Bidadi, near Bangalore.

United Spirits
After reaching the US and Europe, UB’s Vijay Mallya is all set to enter China and Russia. In September this year, UB acquired France-based wine manufacturing company Bouvet Ladubay, which gave it a strong distribution network to sell its products in the European and American markets, while helping tap the rapidly growing market for wines in India. The company has a 55 per cent share in the IMFL category.

Vimta Labs
In January this year, the company decided to raise Rs 125 crore to fund the second phase of expansion. The company inaugurated its new facility in March in Hyderabad.

WNS
When WNS Holdings listed on the NYSE in July 2005 (it raised $224 million), Indian stock markets were in the grip of a downturn after the May-June crash. But the stock has held up and is trading at 50 per cent higher than the price it was listed at. The company soon plans to enter East Europe and does not rule out using part of the money raised for acquisitions.

Mid-Cap Technology. November 21, 2006

Posted by Bhavin in Fundamental Analysis.
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While the BSE Tech Index may have gained over 1% in the last week, Technology Analyst at Angel Broking, Harit Shah, suggests that one needs to be selective in picking stocks when it comes to midcap technology space.

Q: What stocks are you recommending in the midcap technology space? Do you see headroom considering that IT has continued to hold out even on bad days?

A: If you are looking at midcaps software space, you need to be a little selective on that front. Currently, we would recommend companies like Prithvi, 3i Infotech, Infotech Enterprises .

These companies have got strength in their particular niche areas of operation and are not like the top tier software companies, who have strength across industries, across verticals, across service lines.

So obviously these are the kinds of stocks, which the investor should look at, if he is investing in a midcap IT stock.

Q: Product versus pure services?

A: I wouldn’t necessarily pick one over the other. For example, a company like 3i Infotech is a products cum services play. I am definitely bullish on certain software product companies like 3i Infotech.

Subex is another interesting play. We don’t track the stock at the moment, but it definitely is a very interesting play on the telecom space as far as products are concerned.

So I wouldn’t necessarily pick one over the other. You need to look into the merits of every individual company as a bottom up approach and then take a call.

Aegis Logistic Undervalued. November 21, 2006

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There is a report out from Karvy with an aggressive price target on Aegis Logistics. The brokerage likes the stock and believes that the current market price is not doing justice to it. It has a target price of Rs 220 on it.

Vikram Suryavanshi of Karvy Stock Broking discusses what the brokerage likes about the stock as well as what one can expect from it going forward.

Excerpts from CNBC-TV18’s exclusive interview with Vikram Suryavanshi:

Q: What is the gist of your report? What is the source of your optimism and why have you set a target price of Rs 220 for the stock?

A: They have a location advantage at Mumbai port and are already providing the sourcing, storage and logistic facility for crude for HPCL, BPCL and other customers. Secondly, they are coming with Aegis Autogas, which is retail network for their LPG distribution firms.

So currently, they are working around 36 LPG Autogas stations and planning to expand it to around 100 in the next two years. Apart from that, they are also leveraging their expertise in logistic handling facility in Mumbai. They are planing a similar facility in minor and major ports across India and that is one trigger going forward.

So all these triggers will be good, significant drivers for the company in terms of revenue as well as profitability.

Q: In terms of financials, what is that you expect them to report in sales and profits? What is the earnings per share target you have put on Aegis?

A: In terms of revenue, the growth is much higher because of the LPG buying and selling activities, where growth is significantly high. But still major profitability is coming from the logistics business, where they are getting service income.

I am expecting 90% profit from the company’s logistic business in FY07 and 75% in FY08. I am also expecting profit of around Rs 23 crore this year and Rs 32 crore in the next year. So that translates into an EPS of around Rs 14 for FY07 and Rs 20 for FY 08.

Blue Bird – Invest. November 19, 2006

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Blue Bird (India), a leading manufacturer of paper-based notebook and stationery products with the highest market share of 48% amongst large, organised players in India, is open for subscription with a public issue of 87,75,000 equity shares of Rs 10 each for cash at a premium to be decided through the 100% book-building process.

Its a good company with good track record. The money raised will be used to expand capacities, increase presence in publication, open offices in various cities and reduce debt. Experts believe, investors should subscribe to this issue with long gestation period.

Experts like RS Iyer of KR Choksey, SP Tulsian, Investment Advisor and Manish Bhatt of Prabhudas Lilladher give their views on both issues:

RS Iyer of KR Choksey Securities

Blue Bird is a good company. Since 30 years, the company is in production of notebooks. It shows that they are loyal and dedicated to the industry and their own products. They have developed good brand name in the market. As compared to Navneet Publications, the company’s margins are less because Navneet is more into publication while Blue Bird is into notebooks. hence, their publication part forms less part in their revenues.

But this public issue will help the company as it will help open branches in various cities and also enter heavily into publication business. Overall, the company wants to increase the revenue nearly Rs 500 crore in FY07. Their plants are neat and well automated with advanced technology. It shows real entrepreneurship.

Therefore its public issue looks very attractive. The price band is very cheap. It is an excellent issue. Investors should apply for this issue for short as well as long term.

On listing, retail investors normally sell shares, but they can hold this company for long term. FIIs will definitely buy company’s shares in bulk for long term and it will definitely list over Rs 130.

Investment Advisor, SP Tulsian

Blue Bird is a good issue. Investors should apply for this issue. It has good presence in the market with their good brand name. They are ramping up their brand name in the market. This money will definitely help the company for their new capacities. They want to grab major market share and enter heavily into publication.

Manish Bhatt of Prabhudas Lilladher

Blue Bird is an average issue. Investors can subscribe to this issue for listing gains as well as for long term i.e. more than one-year. They are increasing their exports. They are targeting more foreign universities. The company is mainly into print media. They have planned to expand their business more in Hyderabad, Bangalore and other states in south. Investors have to wait for long gestation period. The company can definitely achieve Rs 500 crore revenues in FY07. Therefore overall, the issue looks to be good.

Comments from Broking firms:

Keynote Capitals

Blue Bird is a leading player in the domestic notebook and stationary market with a track record of around 30 years. The size of the notebooks and stationery market is estimated at Rs 8000 crore (AC Nielsen ORG MARG report). Of this fragmented market, around 80% is held by the unorganised sector. Also large players account for 15% of the 20% share of the organised sector.

Success of the company’s business model will hinge on its ability to improve its brand equity, in the absence of which, scope for margin improvement would be limited. We believe given the valuation of 11.2x FY07E and 8.7x FY08E, investors may consider this IPO with a medium term view.

India Infoline

In the printing and stationery industry, Navneet Publications and Sundaram Multi Pap Ltd are the closest competitors of Blue Bird, BBIL. However, we cannot strictly compare BBIL with Navneet, which is more of a content and publication company than just a notebook and stationery products manufacturer. The issue has been priced in the range of Rs 90-105. We recommend investors to wait for some correction post listing and then take position in the company.

As of September 30, 2006, Rs 89.2mn has already been incurred.

The price band for the issue has been fixed at Rs 90 to Rs 105. The issue closes on November 22, 2006.

The company is raising capital through this public issue to finance the construction of its second major notebook manufacturing and printing unit in South India; to expand capacity at its existing plant in Pune and purchase the registered and corporate office premises presently on leave and licence; to expand its network of sales and distribution offices throughout India; to augment its long-term working capital requirements; and to repay some existing long-term debts.

In addition to notebooks, the company also manufactures products like files, perforated pads, registers and filler papers as part of its stationery business. Moreover, the company publishes study aids/educational materials and children’s books with in-house developed content and is also engaged in commercial printing of third-party content including textbooks, magazines, catalogues, calendars and annual reports.

During fiscal 2005, Blue Bird began export of notebooks and printed materials to Kenya, Ghana and South Africa. The company plans to expand both its market presence within India and in sub-Saharan Africa, with increased marketing efforts and penetration in the export market.

Blue Bird had total income of Rs 401.70 crore and net profit of Rs 25.12 crore in fiscal 2006. The company has posted improved performance during the first-half of the current year. For the period ending September 30, 2006, the company reported a total income of Rs 237.55 crore, 18.34% higher compared to the previous year’s first-half total income of Rs 200.75 crore. During the same period, net profit for the first half of fiscal 2007 at Rs 15.10 crore was 19.65% higher compared to the previous year’s first-half net profit of Rs 12.62 crore.

The book running lead manager to the issue are DSP Merrill Lynch and Karvy Investor Services. Intime Spectrum Registry is the registrar.

Delivery. November 17, 2006

Posted by Bhavin in Fundamental Analysis.
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One can buy following stocks for the best return in next one year:

Bata@205,

Apar Ind@232.60,

Bil Power Ltd@175,

Prithvi Information@380/=.

Regards,
Bhavin.

Reliance Downgraded. November 16, 2006

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The country`s No.2 domestic brokerage house after Kotak Securities says that it expect RIL`s earnings from crude oil refining to fall

For the second time this month the outlook on Reliance Industries Ltd. (RIL) has been downgraded by a local brokerage house. Motilal Oswal Securities has cut its recommendation on RIL from ‘ Buy’ to ‘Neutral’.

“We have cut our earnings estimates due to weaker refining margin expectations,” Motilal analyst Varatharajan Sivasankaran says in its note to the customers.

“We believe that expectations on the value of new businesses and/or reserve size of new discoveries have run up well ahead of time as well as available information,” the country’s No.2 domestic brokerage house after Kotak Securities says.

It may be recalled that earlier this month, Kotak had downgraded RIL stock to ‘ Underperform’ from ‘ In-Line’ citing Reliance’s rich valuations, weakening fundamentals and publicly available information on retail and oil & gas business.

While Kotak cut its target price of RIL to Rs1,100, Motilal has slashed its target price to Rs1,258. At 1:05 pm, the stock was quoting at Rs1,266.90, down Rs10 from the previous close. Earlier, it had touched a high of Rs1,288.

Motilal says that it is downgrading its earnings estimate for RIL by 4% to reflect weaker than expected refining margins, and is reducing the valuation of the refining business. “Weaker refining margin also impacts Reliance Petroleum (RPL) valuation,” it adds.

Most of the positives are already built into the estimates and positive surprises are unlikely, Motilal says, adding that it will review its recommendation on greater visibility on new businesses and new reserve announcements.

RPG CABLES. November 14, 2006

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RPG Cables, according to market sources, has planned to place its excess land at Thane for development. The market rumour doing the rounds suggests that it is close to wrapping up a real estate deal on the land, which is estimated to fetch around Rs 100 crore.

Market talk also suggests that its rehabilitation plan is also ready for submission before BIFR and its current order book position is healthier than before. The stock on Monday moved up by around five per cent to finish at Rs 38.45 with 1.14 lakh shares changing hands on the BSE.

RPG Cables had, in August, allotted 90,23,375 shares of Rs 10 each at a price of Rs 37 per share to its fixed deposit holders as per the scheme of arrangement sanctioned by the High Court of Karnataka. But in the quarter ended June 30, 2006, for accounting purposes it had consolidated its operational segment involving turnkey contracts with the main business power cables. In 2005, the results of house-wiring cables segment had also been merged under the power cable segment.

Banks Cheaper. November 14, 2006

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If you are looking for large capitalised banks with good liquidity, it is really in India then China, Brazil and on the margin maybe Turkey or South Africa, said emerging markets guru, Dr Mark Mobius at an international conference in Mumbai recently.

“In some cases, Indian banks are cheaper. However, the limitation and the reason why we don’t hold more is due to the foreign limit that we are running up against. That is one of the reasons Chinese banks have been quite popular,” he said, referring to the recent big Chinese IPO, ICBC.

Dr Mobius’ statement just reiterates the popular sentiment that there is good appetite for bank stocks and that there is a need to increase limit. However, in most bank counters (particularly PSU banks), FII investment has touched the upper limit.

As per RBI data, Public Sector banks in which 20 per cent limit has been reached and no further investments are permitted include Bank of Baroda, Oriental Bank of Commerce, Punjab National Bank, State Bank of India and Union Bank of India.

Public Sector banks in which 18 per cent caution limit has been reached and further purchases by FIIs/NRIs/PIOs are allowed only with prior permission of RBI are Andhra Bank, Canara Bank, Indian Overseas Bank and Vijaya Bank.

Marketmen, however, believe that it is highly unlikely that there will be any move by the Government in the near term towards increasing FII limit in banks.

“As such, at current levels while normal growth will happen in line with the broad market, there will be no re-rating in terms of multiples,” said a senior analyst with a leading domestic brokerage.

According to Mr Sandeep Shenoy, strategist with Pioneer Intermediaries, the capex cycle followed by strong buoyancy in consumer demand in real estate is driving offtake by banks. This is a good potent recipe for upward revision of bank stocks.

“However, value unlocking will only take place where M&As and consolidation and broader participation by overseas investors is allowed,” he added.

Analysts maintain that today pricing power is back with banks. According to Edelweiss Research, even after 9 per cent out-performance over the last six months, the sector has under performed the broader market by 21 per cent in the past one year. Recently allowed hybrid capital instruments are expected to add around 35 per cent to historical valuations.

“We believe demand for credit would remain strong both from corporate and retail sector despite rising interest rates. High deposit accretion and lower incremental CD ratio (67 percent) adds to our comfort on the funding ability of banks. We expect banks to sustain earnings momentum during Q3FY07E with stable margins.”

The stock of Andhra Bank ended at Rs 92.40 on the BSE, while Canara Bank closed at Rs 289.90, IOB at Rs 111.55 and Vijaya Bank at Rs 53.10 on the BSE.

ZEE CROSSES 340/= WITH NEWS. November 13, 2006

Posted by Bhavin in Fundamental Analysis.
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Zee Telefilms Ltd and Taj TV Ltd on November 13, 2006 have announced that in a strategic move the Company has agreed to acquire a 50% stake in the Dubai based sports channel, Ten Sports. The investment is based on an enterprise value of US$ 114 million (approx. Rs 513 crores).

This is a great strategic move for the Company that reinstates the Company’s seriousness and belief in the genre of sports broadcasting. Ten Sports is the leading sports channel in India with the highest viewership amongst sports channels. Ten Sports has rights to leading cricket properties like Pakistan Cricket Board, Sri Lanka Cricket Board and the West Indies Cricket Board. These rights combined with the BCCI neutral venue rights that Zee Sports has, creates the single largest repertoire of cricket programming. Among the other sports, Ten Sports also has rights to the UEFA Champions League, WWE, US Open, Hockey World Cup, which rate amongst the most popular programs in India. Zee Sports also has the rights to Indian football, Davis Cup, WTA, Italian Series A. Both the sports channels will be able to leverage these properties to its maximum potential across both the platforms.

Ten Sports, which is headquartered out of its state of the art office complex in Dubai Media City, also operates separate beams in the Middle East, Pakistan, Sri Lanka, Bangladesh and Hong Kong. This combined with the Indian presence of Zee Sports, makes the combination a true pan-Asian player in the arena of sports broadcasting.

On the acquisition, Mr Subhash Chandra, Chairman, of the Company said “This acquisition is an important step from Zee towards consolidation in the media industry. We are confident that this will add significant value for the shareholders of Zee. The acquisition of a stake in Ten Sports not only gives us a strong foothold in the arena of sports broadcasting across Asia but also strengthens our operations in the Middle East. I have known Mr Abdul Rahman Bukhatir for sometime now and have the greatest respect for him as a businessman and his leadership as one of the most successful conglomerates in the Middle East and more particularly the achievements that he has had in the areas of manufacturing, retail, construction, and especially the way he has popularized cricket in the Middle East. I am certain that our joint partnership will result in a mutually beneficial relationship.”

Zee Sports and Ten Sports will be able to draw significant amount of synergies from each other in operating in the Asian market place. Moreover, this move would consolidate the number of sports broadcasters in India, thereby bringing about a price correction in the burgeoning rights fees for various sports properties. Mr Himanshu Mody, Business Head, Zee Sports said “The addition of Ten Sports gives us a significant strength enabling further effective exploitation of all our sports properties. The operational synergies between Zee Sports and Ten Sports would be tremendous and we should be able to run the two channels at much better economies of scale.”

Following this move the Taj TV financial statements shall be consolidated on a line by line basis in the Company’s books. Taj TV’s average annual revenues for the next 3 financial years will stand at approx. US$ 50 million, whist the average EBITDA for the next three financial years will be approx. US$ 14 million.

Patel Enginnering. November 13, 2006

Posted by Bhavin in Fundamental Analysis.
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Macquarie Research is bullish on Patel Engineering and has recommended an outperform rating on the stock.

The Macquarie Research report on Patel Engineering

“The company has disclosed that it has a land bank totalling ~200 acres spread mainly across Hyderabad, Bangalore and Mumbai.

Given the stronger-than-expected growth momentum in the core business, we have upgraded our earnings estimates. Factoring in the higher earnings estimates and potential value of land assets, we increase our target price to Rs500 from Rs276, a 26% upside from current levels, and upgrade our recommendation to Outperform from Neutral.”

Impact

“We have valued the land bank conservatively as we await further details. For example, we have valued the Hyderabad land at Rs35m/acre, whereas recent land auctions by the government in the outskirts of Hyderabad have fetched prices in the range of Rs50–150m/acre. Our valuation of the Mumbai property located in Jogeshwari is derived from a 20% discount to the prevailing prices.”

“We have valued the land holding at Rs7.6bn (Rs125 per share). This contributes 25% to our sum-of-parts valuation. The announcement of development plans could provide significant upside to our valuations.”

“In addition, we have revised the valuation of the core business from Rs276 to Rs374, to account for revisions to our earnings estimates.

The core construction business is on a strong wicket. Standalone revenue in 1HFY07 has increased 48% YoY and profit has grown by 88% YoY. Strong order book position at Rs41bn (book-to-bill ratio of 4.5x) provides sufficient growth visibility.”

“Continued traction in order inflows would help sustain the growth momentum. Hydropower orders worth Rs7bn are at L1 stage (financial bid win stage) and formal awards are expected in the next few months. Earnings revision

Given the stronger-than-expected growth momentum, we have revised our FY07 and FY08 earnings estimates upwards by 12% and 20%, respectively.”

Price catalyst

12-month price target: Rs500.00 based on a Sum of Parts methodology.

Catalyst: Announcement of real estate development plans.

Action and recommendation

“Strong growth momentum in the core business should help maintain positive stock momentum. The announcement of real estate development plans in a few months could provide upside to our land bank valuation. We upgrade our recommendation to Outperform, with 26% upside from current levels.”

Adlabs- Buy. November 12, 2006

Posted by Bhavin in Fundamental Analysis.
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We are re-initiating coverage on Adlabs Films with a `buy’ on the stock. With strong financial backing from its promoter, the Anil Dhirubhai Ambani group (ADAG), Adlabs has the makings of a media conglomerate. It is making the transition from being a company focused on film processing and a budding interest in film exhibition to one that is involved in everything from production and distribution of films to multiplexes.

Scope for growth

Forays into providing television content, animation and home videos provide the company scope for broadening the revenue profile. ADAG’s aggressive entry into the media space, which includes plans in the Direct-to-Home (DTH) and cable network spaces, is likely to provide an impetus to Adlabs’ own growth plans. The de-merger of the radio business will free up Adlabs’ balance sheet from the heavy investments in this space, besides unlocking value for the shareholders, who will get to hold a direct stake in the radio business.

Over the next two years, revenue and earnings growth is likely to be driven by rapid expansion of multiplexes. The stock now trades at about 30 times its annualised FY-07 earnings, on a fully expanded equity base (post conversion of foreign debt). This is at a discount to peers, such as PVR and Inox Leisure.

The commercial risks of the new segments such as production and theatre exhibition are, however, higher than that in film processing(where Adlabs has a stronghold), asthe revenue stream is more dependent on the box office success of films. Earnings could, as a result, display a lumpy pattern. This makes it an investment option for those with an appetite for risk. However, as film processing is likely to continue to be a source of steady cash flow, the company remains a less risky alternative to pure-film or pure-exhibition plays in the sector. Exposures can be considered from a two-year perspective.

Good show in Q2

Adlabs turned in a spectacular performance in the second quarter and also in the first half. Revenues more than doubled, and profits expanded three-fold in the September quarter.

There was a massive expansion in operating margins from 46 per cent to about 60 per cent. It has been a blockbuster year for the Indian film industry. A series of box office hits buoyed revenues of its exhibition business, which witnessed a rapid addition of properties over the past year. Revenues from the segment expanded three-fold. Adlabs is investing heavily in building multiplexes in metros and the smaller cities and towns. It expects to have more than 100 screens by 2008, thus retaining its size advantage, even as its competitors are putting through heavy expansion plans.

With the onset of the multiplex era, the success of a film is decided in the first couple of weeks of screening. This has increased the demand for more prints.

Hence the continued buoyancy in its processing business, which, till FY-06, contributed more than 60 per cent of the revenues.

Changing revenue mix :

With the scaling up of the multiplex business, however,Adlabs’ revenue mix has undergone a change. Revenues from the exhibition segment accounted for a third of revenues in the first half of the fiscal, while the share of processing fell to about 30 per cent. Production, content and distribution accounted for the remaining third, where Adlabs is a recent entrant.

Adlabs has set up offices in the UK and the US for overseas distribution . Overseas markets now contribute at least 10 per cent to a film’s revenues, and offer better margins to distributors. Adlabs also has plans to expand its distribution presence in the domestic market.

Umrao Jaan and Jaan-e-man mark its entry into the domestic distribution market. The initial response to these films at the box office has been lacklustre. But the heavily marketed Umrao Jaan appears to have had a warmer reception overseas . The distribution segment is likely to act as a captive source of content once the exhibition business assumes scale.

Adlabs is also stepping up funding of films through co-production deals with reputed filmmakers such as Mr Ram Gopal Varma and Mr Prakash Jha. Its investments in production are not expected to exceed 15 per cent of its networth and will be spread over four to five films at least. Upcoming productions include Sarkar 2 and the Amitabh Bachchan-starrer Nishabd. It recently entered into a deal with Mr Ashok Amritraj’s Hyde Park Entertainment — this marks its foray into Hollywood productions. While these are high-growth businesses, they expose the company to box office performances to a greater degree.

With multiplexes likely to lead revenue growth over the next couple of years, these risks are higher. Moreover, given the scale of expansion across multiplex-operators, there can be overcrowding in some pockets, and this can affect occupancy rates and therefore, profitability. Adlabs might be able to reduce some of these risks through the sale of satellite TV rights and the proposed entry into the home video segment.

Other ventures

The company is also trying to diversify into television content. It recently acquired a majority stake in Mr Siddharth Basu’s Synergy Communications, the creators of the famous Kaun Banega Crorepati, and the popular reality-dance, Jhalak Dhikla Jha.

Given the significant resources at its disposal, Adlabs is likely to make forays into other segments as well.

It is likely to snap up some of the small fish in the business, which could fast-track growth across segments.

Glenmark- Buy. November 12, 2006

Posted by Bhavin in Fundamental Analysis.
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Exposures can be considered in the stock of Glenmark Pharma, which trades at about Rs 460. Though the stock has appreciated 40 per cent over the past three weeks on the back of the out-licensing deal struck with Merck of Germany for its anti-diabetic molecule, we believe that there still is some more steam left in the story. We have remained consistently positive on Glenmark’s prospects and continue to position it as a best play on the pharma R&D theme in the country.

The key driver of Glenmark’s stock in the recent past has been its ability to monetise molecules in its development pipeline through an out-licensing arrangement. The latest deal with Merck is once again a vindication of Glenmark’s forte in this space. The deal envisages an upfront payment of $32 million (about Rs 145 crore), which will be reflected in the latter half of the current financial. Another such deal could be concluded this fiscal (possibly on the anti-asthma molecule for the European geography). With four other molecules set to enter trials, we believe that news flow on out-licensing arrangements will remain strong and act as catalysts for the stock.

On the base business front, too, there are positive signs. The India business continues to grow at a rate that’s higher than the overall market, on the back of product launches and sharper focus on physicians. In the key US market, with a front end in place, Glenmark is ramping up filings with the US Food and Drug administration through alliances with partners. We expect the traction seen in these markets, as well as in other geographies, to sustain, going forward.

Clearly, the street appears to be attributing significant value to the R&D business, as the sharp run-up in price suggests. Any adverse developments on the discovery front – more so in the case of the two molecules that have been out-licensed – would be a major reversal for the stock, and, as such, would constitute the principal risk to our recommendation.

Reports. November 11, 2006

Posted by Akash in Fundamental Analysis.
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Zee.

Patni

Kotak Mahindra

Hero Honda

Cummins

Bharati Airtel

Nagarjuna Construction. November 5, 2006

Posted by Bhavin in Fundamental Analysis.
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A 79-per cent growth in post-tax earnings annually over the past three years is a reflection of Nagarjuna Construction’s (Nagarjuna) strong capability to exploit emerging opportunities. Riding on the domestic investment stream in roads and irrigation projects, Nagarjuna has transformed its identity from a building contractor to a well-diversified infrastructure player. The current order book further strengthens the case for sustained earnings growth.

At the current market price, the stock trades at 16 times its likely earnings for FY08 and is at a discount to some of its diversified peers. The valuations can be expected to get more attractive once the company covers more ground in its real estate venture and overseas projects. Nagarjuna’s current order book at over Rs 6,500 crore is 3.4 times its FY06 revenues. The company has so far had an order book execution cycle of 1.5-2 years. This adds high visibility to earnings over the next couple of years.

Nagarjuna has overcome its lack of experience in roads until a few years ago to become a leading player in the national highway-building projects. The company is well placed to retain its stronghold in the build-operate-transfer (BOT) space – a strategy which increasingly appears to be the way forward for road projects at the State and Central level.

While transportation and building structures could continue to dominate the revenue stream, we expect the real estate and impending gas pipeline division to contribute more actively in the next couple of years. In the real estate segment, Nagarjuna has a healthy land bank in tier-II cities and has plans to set up a wholly owned subsidiary for the same. The current projects at Jharkhand and Andhra Pradesh may act as reference points for the company’s expansion in this segment.

Nagarjuna’s operating and net profit margins have expanded on a Q-on-Q basis at a time when its peers have started to feel the margin pressure. Increasing order accumulation may, however, force the company to go for sub-contracting to ensure timely execution, which in turn may add to pressures on operating margins. The new Model Concession Agreement being formulated, suggests a cap on the toll price increase. This may have a negative impact on toll-based BOT projects that the company undertakes.

Money Multiplier Stocks. Have A Look. November 5, 2006

Posted by Bhavin in Fundamental Analysis.
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Auto Component Manufacturer : Ceekay Daikin.(PEG of below 1,Promoted by the Mahindras,Its trailing four-quarter average growth in operating profit was a superb 391% while its PEG stood at 0.20)

Mixed Sector: Apar Ind(Various value-added products and services in power transmission conductors, petro-leum specialities and synthetic rubbers, It is the largest manufacturer of aluminium conductors in Asia and the second largest in the world. It is also a market leader in transformer oils, With fixed price contracts in transmission conductors now behind it, all its new contracts have included a price variation clause, which is likely to provide a solid fillip to its operating margins.)

Textile Sector:

1. Vardhman Polytex, flagship of the Oswal Group. (Its manufacturing unit is situated in the hub of the cotton belt giving it a distinct advantage in raw material procurement – an easy access to low cost and best quality material. Vardhman remains an unfancied stock, but one with a very powerful recent record in operating profit.)

2. Welspun Syntex (It is sharply focused on home textiles such as furnishing and terry towels with customers spread across 40 countries. It is one of the largest exporters of polyester texturised filament yarn from India and a leading manufacturer of specialty polyester filament yarns. Its market-cap is just over 3.28 times it operating profit. The problem is that over the past three quarters, its performance has been a bit indifferent. Besides Welspun lacks the perception of a well-governed company.)

Pharma ector: Unichem Laboratories (Fast growing and reasonably valued companies with its operating profits having risen by an average of 300% during the last four quarters while its PEG ratio stood at 0.61. )

Agro Product: KRBL Limited, shortened from Khushiram Biharilal. (India’s largest exporter of basmati rice. KRBL is well placed to benefit from the rising demand for basmati rice in the international as well as the domestic markets.)

5 Construction Picks. November 4, 2006

Posted by Bhavin in Fundamental Analysis.
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The report states that India is under construction and it is visible all over. It covers eight companies that can potentially be 5-baggers over the next five years

India Infoline Ltd., one of the leading financial services companies in India, has released a comprehensive report on the Indian construction sector. The report states that, India is under construction and it is visible all over – houses, roads, ports, power plants et al. Favorable policy environment and easy flow of capital is helping India build and improve its woefully poor and inadequate infrastructure. Order books of all construction companies are overflowing and sustained revenues growth of 40-50% pa can be seen for at least next five years. Investors can have a double windfall, as rising EPS quarter after quarter invariably leads to P/E re-rating. Even with a reasonable Price/Earnings Growth (PEG) of 0.8x without factoring a euphoric re-rating, the report covers eight companies that can potentially be 5-baggers over the next five years.

The research further emphasizes that, investments to the tune of US$180bn in infrastructure development are expected over the next 3-4 years. The construction sector, accounting for 65% of the total investment on infrastructure development, has been the biggest beneficiary of the capex spend. Infrastructure in India is woefully inadequate and manifests itself in myriad ways in our daily lives – be it traffic jams or jam-packed trains or delayed flights or load shedding or goods stuck in ports or roads with pot holes. Even Urban infrastructure is crumbling and needs rejuvenation. This calls for immediate investments, that too over the next 10 years if India has to realize its dreams of being an economic powerhouse.

“Most Indian construction companies have built engineering and project management skills to garner the lion’s share of this spend. The construction sector is expected to witness 10-12% growth in the coming years on the back of high investments on infrastructure development. We believe that India has barely scratched the surface. China has been spending over 6.5% of its GDP on construction, for the last 10 years. In India’s case, construction spends stood at 4.5-5.8% of GDP prior to 1999-00 and reached 6% only in the last few years. China’s spend on construction is nearly 4x that of India’s,” said Sachin Neema, Head of Research, India Infoline. The amount of development planned by real estate companies itself will entail extensive construction work, let aside government orders.

“We met several companies and the buoyant mood prevalent was well expressed by a director of a large construction company, who said Just the requirements of DLF, already planned, can keep Gammon, Hindustan Construction, Nagarjuna Construction and IVRCL fully booked for two years,” said Amar Ambani, Research Analyst, India Infoline.

“With the rising share of construction in total bank credit and greater clarity having emerged with sources identified for a major portion of investments, funding issues are reasonably under control. Innovative measures like cess on petroleum products, privatization through BOT, budgetary support, borrowings from multilateral agencies and a buoyant capital market have helped. We do not envisage any funding bottlenecks to derail investments in infrastructure. We are overweight on the construction sector and believe valuations to be attractive. The sector offers high visibility with huge investments in the pipeline and order book of companies at 3.5-6.5x current turnover. Construction companies in India are scaling up fast and are expected to attain considerable size going forward,” Ambani added.

Elaborating on the investment rationale Ambani stated further, “We believe that the sector is placed to exploit the infrastructure spend, just like software services in mid 90s exploited the Y2K bug. There is considerable scope for a second round of re-rating, just like what happened to software services in the last decade. In the beginning, software services was compared to low value, manpower contracting. Strong revenue growth not only led to EPS growth on a quarter-on-quarter basis, but also drove multiple expansions. We expect the same story to repeat in the construction sector also.

The report has designed an interesting case study contemplating whether the IT story will repeat in construction. Scope for continuous re-rating exists with the comparison with software services extremely compelling. 15 years ago, the software services industry in India comprised small sized companies doing low value added ‘body shopping’ – manpower contracting, with strong investor concerns on quality of management. When India Infoline Ltd (then Probity Research and Services Pvt Ltd) came out with its seminal report on Indian Software Services Industry in 1998, it was met with huge skepticism. Investors and analysts used to ask questions like:

How will Infosys manage 10,000 employees?
Are software services not a manpower multiplication game?
ICDs of Company X have bounced
Shady management – This in fact was the most common refrain from investors not willing to buy the huge growth story

Thanks to the Y2K boom, IT companies scaled up aggressively. They not only became “professional”, but also set standards for corporate governance and transparency. Strong quarter-on-quarter performance for years, not only led to an expansion in EPS, but also in P/E. From times, when the sector traded at a discount to the market index, it started trading at a premium. A similar trend and sequence of events can be observed, taking place with the construction sector. A few years back, construction companies were trading at low multiples with reservations on management quality. Today, the opportunity at hand has worked in favor of these companies. They have geared up and possess the competitive ability and people to undertake complex jobs. Earnings performance has already resulted in a re-rating in the sector over the last 2-3 years. Revenue visibility still continues to be high and we expect EPS growth to drive a second round of P/E expansion. No doubt, these companies will raise capital; still they will be EPS accretive.

The research recommends investors to overweigh this sector and build a portfolio of stocks in construction universe. Top picks are Simplex Infrastructures (CMP Rs333), Hindustan Construction (CMP Rs128), Nagarjuna Construction (CMP Rs175), Gammon India (CMP Rs385), Patel Engineering (CMP Rs361) and IVRCL Infrastructures (CMP Rs287) among large caps and Valecha Engineering (CMP Rs208) and Era Constructions (CMP Rs358) in mid caps, in that order,” according to Ambani.

Moser Baer. November 3, 2006

Posted by Bhavin in Fundamental Analysis.
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Broking house, Anand Rathi Securities is bullish on Moser Baer. It has recommended buy rating on the stock with a long term perspective.

The Anand Rathi Securities report on Moser Baer:

“At present company is in to Optical storage media products [CD/DVD-R/RW], but soon is venturing into manufacturing of Solar Cells [Photo Volatic cells] through its 100% owned subsidiary – MB PV.”

“In its existing business, where it was bleeding till June quarter, the signs of improvement are visible in results of latest quarter. Further as per discussions in conference call and presentation of company post results; the performance of existing business will improve significantly following a 10% reduction in prices of key raw material -Polycarbonate sheets, along with a 10% rise in realisations for the products.”

“This will give a significant boost to profits in second half. Further in long term company is going to expand volumes of high value added products like -DVD-R and HD/Blu products in storage media category.”

“We are more bullish and enthusiased about the new products – PV cells. The demand for PV cells and Panels is quite strong in global markets and is growing at a fast pace. The global demand for PV cells is likely to grow five fold from USD 6 billion in ’06 to USD 30 billion by 2010. This offers huge potential for players in this segment.”

“This is a technology intensive product and thus to keep itself ahead, company has acquired 20% stake in Solaria & 10% stake in SolFocus; both PV technology development companies. The manufacturing process is not capital intensive and once you have right technology, the product [PV Cells/Panels] can be produced cost effectively. Company is setting up a large 80 MW PV manufacturing capacity at Noida SEZ at a cost of Rs 260 crore (Rs 2.60 billion). The first phase of 40 MW capacity wil commence trial production some times in Dec’06. The second phase of 40 MW will begin in Dec’07.”

“Company after stabilisation of this 80 MW capacity is looking for further expansion in PV capacity to over 200MW by 2010.”

“Looking to the valuations, the improvement in prospects of existing business is fully priced in the current prices, but the entry into new business of PV, its long term potential and its capability to generate large revenue and hefty profits in coming years, is not priced adequately in the current valuation of the company. Long term investors can buy the stock around current prices, with short to medium term trigger of commissioning of PV capacity of MBPV in Dec’06.”

“After peak of Rs 421, since last two years, stock is rangebound, moving between Rs 160 to Rs 240. But recently stock prices moved beyond Rs 260 level before correcting to current levels. Looking at weekly chart one can find a clear breakout with prices and shorter moving averages moving away from long term moving averages, on upper direction. This is very positive and can take stock to Rs 265 and Rs 290 in short and medium term.”

”Long term picture is still better, so LT investors can just Buy and Forget for new highs in couple of years.”

MNM November 2, 2006

Posted by Bhavin in Fundamental Analysis.
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Mahindra & Mahindra’s Farm Equipment sector shored up its industry leadership by clocking its highest ever numbers in October.

M&M sales for the month zoomed to 13017, a growth of 18% over the corresponding month last fiscal. Also, M&M tractor sales in five states namely Rajasthan, Gujarat, Chattisgarh, West Bengal and Orissa broke the company’s previous records.

The total sales volumes (domestic + exports) for the month stood at 13384, again an 18% rise over last fiscal. Export figures showed a healthy growth of 37% over the corresponding month last fiscal.

Commenting on the stellar performance, Mr. Gautam Nagwekar, Chief Operating Officer, Farm Equipment Sector, said, “The highest ever sales performance in October is in line with our efforts to sustain the volumes M&M tractors posted in the first half of the fiscal year. The festive season sales have contributed immensely to this growth.”

Cumulative sales (April to October) saw a growth of 27% over the corresponding period last fiscal. The company also posted a growth of 27% in sales including exports clocking 64307 numbers in April-October. Cumulative exports grew 26% in the same period.

Leadership

M&M reasserted its leadership position in the Indian tractor market selling a healthy 21,801 tractors in Q2 F2007 as against 17,096 tractors in Q2 F2006.

M&M’s excellent showing was in consonance with the 39.9% growth registered by the domestic tractor industry in the second quarter of F2007 over Q2 last year. The company’s exports registered a growth of 64.1% in Q2 with a sale of 1,764 tractors as against 1,075 tractors in Q2 F2006.

M&M had closed the last financial year with around 30% share of the Indian market, sustaining its position as the No. 1 tractor company in India for the 23rd year in succession. It was a position that the company assumed in 1983. M&M’s unbeaten leadership is built on a process of product development and technology, supported by innovative support services, marketing and state-of-the-art production facilities spread across India. M&M has the largest tractor manufacturing setup under a single roof, at Kandivili, Mumbai. Besides, it also has manufacturing facilities in Nagpur, Jaipur and Rudrapur.

Mahindras’ growth in the exports sector has been achieved by a slew of activities including enhancing distribution strength and franchisee reach.

M&M has a strong presence in all tractor segments i.e. below 25 HP, 25 HP- 35 HP and 45 HP above. Its popular models in the sub 25 HP category include the Bhoomiputra 235 DI and the Bhoomiputra 245 DI while the Mahindra Arjun Ultra range is popular in the above 35 HP category.

M&M has also been increasing its presence in all segments. Last year, the company introduced two new products – 235 DI and 245 DI — in the domestic market in the low HP segment and new Arjun Ultra-1 range in the high HP segment, which significantly strengthened the company’s position in these segments.

The stock market and crude oil have started their longest bear journey ever? November 2, 2006

Posted by Bhavin in Fundamental Analysis.
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The Dow falls below 12000 and crude oil below $58 a barrel. The market slowly understands that stagflation is changing into deflation driven deep recession if not a depression.

As predicted in India Daily stock market and crude oil have started their longest bear journey ever.

The underemployment is so pathetic that people are focusing on their homes to forget about everything else. The rates are going to plummet in coming days. But the huge trade and budget deficit will create a bottom very high compared to the enormous weakness in the economy.

Reports November 2, 2006

Posted by Akash in Fundamental Analysis.
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TV18

NTPC

NAGARJUNA CONSTRUCTION

MPHASIS BFL

IVRCL INFRASTRUCTURE

ZEE

WIPRO

PATNI

MERRIL LYNCH

TECHNICAL TREND

MARUTI

KOTAK MAHINDRA

IPCL

MODEL PORTFOLIO

IDFC

HERO HONDA

HCC

CONTAINER CORP

PNB

BHARATI ARTL

AREVA

Various Reports October 12, 2006

Posted by Akash in Fundamental Analysis.
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RIL Ind Report.

LNT Report.

ONGC Report.

IT Services Reports.

BHEL Report.

Auto Report.

Bajaj Hindustan: HSBC October 12, 2006

Posted by Akash in Fundamental Analysis.
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Bajaj Hind Report.

Infosys All Thumbs Up. October 11, 2006

Posted by Bhavin in Fundamental Analysis.
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Its other income is at Rs 66 crore (Rs 660 million) versus Rs 128 crore (Rs 1.28 billion).
The EPS is at Rs 16.75
Infosys Q2 adds 45 clients, gross addition of 10,795 employees
Infosys’ Guidence FY07
The company’s FY07 revenue growth guidance revised upwards at 45.5%
Its revenue guidance is of over USD 3 billion, EPS guidance of Rs 66
Its revenue guidance is up from Rs 13,400 crore (Rs 134 billion) to Rs 13,899 crore (Rs 138.99 billion).
The EPS guidance up from Rs 62.25-62.87 to Rs 66.

Brokerages see 25% rise in Q2 earnings!! October 8, 2006

Posted by Bhavin in Fundamental Analysis.
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Brokerages see 25% rise in Q2 earnings of banking, auto and cement sectors.

The automobile, banking and cement sectors are likely to see 20 to 25 per cent increase in their topline for the quarter ended September 30 as India Inc is set to witness another round of robust results in the Q2 earnings season beginning this week with the results of Infosys to be declared on Wednesday.

According to earnings preview by brokerage houses, information technology, pharmaceuticals and oil and gas sectors could also throw up positive surprises in the second quarter.

The second quarter of 2006-07, which saw 17.4 per cent increase in benchmark share index BSE Sensex, has also seen significant upward revision in earnings estimate, as risks such as interest rate hikes and crude prices lowered, they said.

“Some of these risks have lessened during the quarter. The interest rate cycle has turned down, with 10-year G-Sec yields falling from a high of 8.4 per cent in July 2006 to the current levels of 7.6 per cent. Crude prices have dropped by nearly 20 per cent, in turn, improving the outlook for corporate earnings and current account deficit,” said brokerage house Motilal Oswal Securities Ltd.

Among the sectors, cement is likely to beat others with a 38 to 40 per cent increase in topline, predicts a report by Sharekhan Ltd.

“The cement sector is expected to pick up from where its impressive Q1 performance ended. We expect the cement sector as a whole to report an impressive performance during Q2 owing to 9 to 10 per cent growth in the cement volumes and a huge 29 to 30 per cent rise in cement realisations. Hence, this sets a benchmark of 38 to 40 per cent growth in the topline,” the report said.

Despite the seasonal slowdown in demand, cement prices have remained firm and are once again set to increase as monsoon retreats. “In fact, we estimate a price rise of Rs 20 Rs 25 a bag in the next 6 to 8 months,” said BRICS Private Client Group, in its earnings preview.

On the automobile sector, Motilal Oswal report said major auto companies are expected to register a revenue growth of around 20 per cent, with EBITDA growth of 30 per cent YoY.

“Despite higher input costs in the second quarter of 2006, EBITDA margins increased by 440 basis points. We believe that strong volume growth in FY07 would help automobile majors to maintain their margins at 2006 levels.”

“Input costs of players across the industry spiralled in the first quarter, but with easing metal prices, cost pressure is expected to reduce in Q2, hence we estimate operating margins to be stable,” said a report by Angel Broking.

Another key sector which is expected to report good numbers is banking. Gaining from 46 basis points fall in the yield rates during the quarter, most of the banks are expected to lower their mark-to-market losses, the brokerage houses said.

“Better treasury incomes would allow public sector banks to write back provisions made for depreciation in their debt investment and thereby enable them to report higher profits in Q2,” the Angel Broking report said.

On the IT sector, the Angel Broking report added, “Amidst fears of global slowdown in the years, we believe that IT discretionary spending will get affected. While data from the US economy have been mixed, the Indian software companies have been strong. We believe that strong results from IT majors will allay such fears, as they are a good indicator of the spending patterns of global corporations, which seem to be robust.”

Hindujas cut IndusInd stake. October 8, 2006

Posted by Bhavin in Fundamental Analysis.
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Hinduja group promoted Ashok Leyland has reduced its stake in IndusInd Bank to RBI stipulated 10%. It sold around 2.89% to Credo Capital at Rs 46.06 a share.

Ashok Leyland, which held close to 13% stake in the bank, had to pare its holding before June 2005 to adhere to RBI guidelines. However, it had sought an extension from the regulator. RBI, in its ownership guideline, states that no single corporate entity can hold more than 10% in a bank.

Leyland held 75% stake in Ashok Leyland Finance (ALF). Following the ALF merger with IndusInd Bank in June last year, its stake rose to 15.3% in the bank.

Another major shareholder in the bank — IndusInd International Holdings (IIHL), a Mauritius-based company_ — holds little over 23%.

IIHL is largely owned by the Hindujas. Promoter and promoter group holding in IndusInd is at 31.34%. To meet the RBI diktat, the promoters will also have to pare their stake further in the bank.

The Akpo field, about 200 km off the Nigerian coast and operated by French energy giant Total, is expected to produce 225,000 barrels of oil a day when it comes on stream in the second half of 2008.

However, the government insisted Sapetro must relinquish the entire block, which was originally set to run through 2008.

Tata Cofee- Buy. October 8, 2006

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Investors can consider taking exposure in the Tata Coffee stock, which trades at about 18 times its 2005-06 earnings. The Eight O’ Clock (EOC) acquisition, instant coffee expansion plans, and the turnaround of the recently acquired tea plantations augur well for the stock.

The EOC acquisition provides Tata Coffee access to brands, while the Tata Tea distribution network provides its access to a wider geographical spread.

The company is planning a rights offer of partly convertible debentures (PCD) to partly finance its EOC acquisition and other capacity expansion requirements.

The PCD will have a face value of Rs 400, with Rs 250 convertible into equity on allotment and the debt component to be redeemed from the fourth year.

Tata Coffee derives a chunk of its revenue from coffee growing, processing and instant coffee manufacturing. Though the company has for long been susceptible to trends in coffee prices, the degree of this susceptibility is set to decrease with the company foraying into retailing and expanding its instant coffee operations.

Though prices are likely to remain flat on the back of strong inventory levels in major consuming countries, earnings growth for Tata Coffee would flow from its instant coffee and retail business.

Instant coffee business

Tata Coffee plans to focus on its instant coffee business. Higher value-addition from this segment is expected to be an earnings growth driver in the medium term. With this business providing higher margins and a respectable return on capital employed, Tata Coffee plans to increase the capacities of its existing instant coffee business. At present, the company operates two facilities with a total capacity of 4,500 tonnes. Volumes of its instant coffee business is set to rise with Tata Coffee setting up a 2,000 tonne plant.

Margins of this facility are likely to be higher as freeze-dried coffee commands higher realisations than spray dried-coffee.

Eight O’ Clock Coffee

In June, Tata Coffee entered in to an agreement for Eight O’ Clock Coffee (EOC), a coffee manufacturer and distributor in the US from Gryphon Investors for $220 million (about Rs 1,000 crore).

EOC is among the larger players in the gourmet coffee segment and among the top coffee retailers in the US. With EOC under its fold, Tata Coffee has access to a spectrum of established brands. With Tata Tea continuing its acquisition spree, prospects are bright for Tata Coffee as it could pursue other markets by leveraging Tata Tea’s distribution network in countries other than the US.

Tea business

With intent to diversify its risk profile, Tata Coffee acquired the South Indian tea plantation business of its holding company, Tata Tea, at the start of 2006. The decision is paying off with the company’s tea division having reported an earnings contribution in the first quarter of FY-07 despite lower prices compared to a year ago. With better Kenyan production figures and global tea prices heading southwards, sustaining earnings growth could be difficult in the near term. However, over the medium term, this division is expected to retain its profitability, with scope for a reduction in its growing costs.

Pepper, vanilla and timber, which are intercropped with coffee trees, contribute marginally to Tata Coffee’s revenue. Though revenues and earnings growth from these products are unlikely to be substantial, they provide the company an additional stream of revenue. Tata Coffee also cultivates cardamom, which helps in diversifying its risk profile. The company also has a presence in the vending business branded as Jiffy and coffee retail business in India through its Mr Bean outlets.

Petronet LNG-Buy. October 8, 2006

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After being in hibernation for the last couple of months when it remained range-bound in the Rs 45-50 band, the Petronet LNG stock turned active on Thursday hitting the upper circuit filter at Rs 58. While the stock appears fully priced after the surge, long-term investors can still take positions at the current price.

The capacity expansion at Dahej and the prospect of an important deal for LNG supply being tied up soon offer confidence in the long-term even as near-term earnings get a boost from the company’s strategy of contracting spot LNG cargoes for ready buyers.

An acceptance by Qatar of the government’s offer to pick-up equity in the company will be a big positive as the former will turn into a stakeholder in Petronet from the position of just being a supplier of LNG. Given India’s growing appetite for energy, especially natural gas, Qatar’s interest in Petronet may ensure adequate LNG supply on favourable terms.

Sole LNG play

Petronet LNG, promoted by IOC, ONGC, BPCL and GAIL, has a 25-year agreement for import of 7.5 million tonnes of LNG from Ras Gas of Qatar.

The Dahej import and re-gasification terminal takes up five million tonnes of this now; supplies of the balance will commence in 2009 when the capacity at Dahej is doubled.

Petronet is also in the process of beginning work on a second import terminal at Kochi, which is likely to go onstream by 2011 taking the company’s total re-gasification capacity to 15 million tonnes per annum.

The demand for natural gas is projected to shoot up to 300 million standard cubic metres per day by 2011 with supply lagging, leaving enough scope for Petronet’s business.

The key, of course, will be availability of adequate quantum of LNG on long-term contract. Petronet is in talks with the operators of the Northwest Shelf LNG project in Australia for a possible long-term supply for the planned Kochi terminal.

This is in addition to the request for 10 million tonnes placed with Qatar last week. The LNG business has turned into a sellers’ market now and there is big demand for the existing un-contracted supply sources, including in Qatar.

Access to LNG and its pricing will, therefore, constitute the major challenges facing Petronet in the medium-term, which will be covered if Qatar becomes a stakeholder in the company.

Assuming this does not happen, Petronet will be faced with a stiff challenge in arranging long-term supply for its expansion projects at competitive prices.

Along with the prevailing price of liquid fuel alternatives such as naphtha and fuel oil, the economics of the natural gas market will be determined by domestically produced gas, which is expected to enter the market by 2009.

Therefore, it is important for Petronet to get the best possible LNG price from its suppliers for it to be competitive in the domestic market.

Spot support

Given that buoyancy in revenue and earnings can come only from higher volumes, Petronet has actively sought out spot market LNG cargoes. The company has contracted four such cargoes in the first half of this fiscal with an equal number likely in the second.

The company has not faced any difficulty in marketing this gas at almost double the existing price given the comparatively high prevailing prices of liquid fuel alternatives. The advantage of this strategy is that re-gasification charges go straight to the bottomline as there is no extra cost involved. Thanks to this, earnings received a boost in the first quarter.

Spot cargoes will be a critical factor in keeping near-to-medium/term earnings and revenues buoyant till capacity expansion is completed and LNG from long-term contracts starts flowing in.

Investors with a long-term perspective can accumulate the stock at current levels.

PSL- Buy. October 8, 2006

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Investors can consider fresh exposure in small lots in PSL at its current price of about Rs 200.The stock is valued at about 10 times its likely FY-07 per share earnings. The stock’s current valuation has not fully captured the potential upside associated with its large-size orders. A robust order book, buoyancy in the oil and gas sector and a healthy volume growth from recently added capacities are encouraging trends for PSL in the medium term. However, there are concerns relating to the low trading volumes in the stock. Business prospects are positive and hence an expansion in its multiple is expected over the near-to-medium term.

PSL is a key enabler for infrastructure and construction projects and is engaged in various types of pipe coating and pipe manufacturing. Its supplies are largely to companies in the oil and gas transportation sector.

Currently, PSL has an order book of around Rs 1,600 crore, which is more than its revenue for FY-06. These orders are likely to be completed in the next 9-12 months, thereby improving its earnings visibility.

Activity in oil and gas exploration is set to intensify over the next few years; this is evident from the huge investment plans by various companies in the domestic and global markets. This is likely to translate into more orders for PSL.

That its order profile too has improved is another encouraging sign. From merely executing orders in the oil and gas business, PSL is now diversifying into areas such as design, engineering, supply and installation in offshore pipe coating. This model is likely to improve its margins.

PSL has an impressive clientele, which includes ONGC, GAIL, HPCL and IOC. It recently bagged an order from Reliance Ports and Terminal worth Rs 95 crore for the supply of anti-corrosion pipes, and another order from L&T worth Rs 270 crore for supply of coated pipes for the Rajasthan water pipeline project. These contracts are likely to act as catalysts in attracting more orders from the private sector.

PSL has virtually doubled the capacity of its pipes division with the addition of three pipe mills the last quarter. The aggregate pipe-manufacturing capacity of PSL now stands at 11,00,000 tonnes per annum. This is likely to ensure healthy growth in volumes for the company over the next few years.

PSL’s debt-equity ratio has improved from 3.8:1 last year to 2:1 now. This is still on the high side compared to the industry average of about 1.5:1. However, healthy cash flows from operations (in the region of Rs 100-150 crore) over the next few years are likely to be used to bring down its level of gearing.

Eyeing overseas markets

PSL is increasing focus in the overseas markets and has built a significant presence in West Asia and North-East African countries. It is in the process of implementing the high-pressure gas pipeline project in the UAE. The overseas operations, apart from de-risking its revenue-base, are also likely to result in widening its client base.

Lower-than-expected capacity utilisation and delays in project execution remain the principal risks to the recommendation.

Murudeshwar Ceramics- Buy. October 8, 2006

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Investors can consider exposure in the stock of Murudeshwar Ceramics with a 1-2 year perspective.

Increase in demand for ceramic tiles, strong presence in the high premium vitrified tiles segment, and various cost efficiency measures adopted augur well for the company’s earnings growth. At the current market price of Rs 100, the stock trades at six times its likely FY-07 earnings (on a diluted basis) and is at a discount to peers such as Kajaria Ceramics.

Cost efficiencies

Murudeshwar’s operating profit margins (OPMs) at 32 per cent is far superior to competitors with OPMs of less than 20 per cent in 2005-06.

While the expansion in ceramic tiles business is likely to reduce margins, cost efficiency measures adopted by the company can offer some protection.

Murudeshwar’s Karaikal plant enjoys lower fuel cost with natural gas supply. While the same is not yet available in its Hubli plant, it produces value-added products in non-standard sizes that typically fetch higher realisation to maintain the OPM.

It has recently gone in for superior technology called dry process that consumes lower power.

The above factors offer an edge over peers such as Nitco Tiles. It has its own quarry and processing unit of china clay — a key raw material, thus keeping manufacturing costs at bay.

Murudeshwar has a market share of about 30 per cent in the vitrified tile capacity. Vitrified tiles are priced between ceramic tiles and Italian marbles.

The tile is more scratch and break resistant and offers a substitute to natural granite and Italian marble at a lesser price. Murudeshwar has expanded capacity of this high-margin product.

While the proportion of vitrified tiles in the total revenue can decline as a result of heightened activity in the ceramic tile division, increased volumes in the latter segment is likely to sustain the bottom line.

Murudeshwar’s institutional clients constitute 60 per cent of total sales. Increased activity in the retail and office space is likely to keep demand robust.

Risks

The domestic tile industry continues to be threatened by cheap imports of Chinese products.

Levy of anti-dumping duty has not provided the needed relief as the tiles are still being routed through countries such as Indonesia and Malaysia.

This can affect the price realisation and market share of organised players.

Competition from low-cost tiles from the unorganised market also remains a concern.

Ashok Leyland-Buy. October 8, 2006

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Investors can consider buying Ashok Leyland at the current market price of Rs 49. The stock has been rising in the last two weeks following talk of a multinational commercial vehicle manufacturer picking up equity in the company. However, on fundamental factors alone the stock is an attractive buy for those with a long-term holding perspective.

There has been runaway demand growth in excess of 40 per cent for commercial vehicles in the first half of this fiscal, following the extraordinarygrowth in the overall economy. The strong freight market has ensured that neither high fuel prices nor higher interest rates would cause problems for transporters and in turn, vehicle manufacturers. Continued investment in infrastructure and on highway construction is likely to sustain demand for commercial vehicles, especially in the heavy category.

Ashok Leyland is well positioned to exploit the demand, especially for multi-axle and tractor-trailer trucks. The company has been unable to meet the demand from this segment in the first half and says the order book for the second is already full. However, in the other booming segment of sub-tonne commercial vehicles, where the Tata Ace is ruling the roost, Ashok Leyland does not have a presence. The recent acquisition of Czech light truck makerAvia may help the company fill up this gap in its portfolio, assuming that it decides to bring those models to India.

The company has a successful cost management programme in place, including e-sourcing of materials and components that has helped it reduce costs significantly. Ashok Leyland is also consciously de-risking its business model by focusing more on the non-cyclical sectors of defence supplies, spare parts and engine sales.

If the talk of a multinational vehicle manufacturer taking up equity in the company turns out to be true, it would be a major positive for Ashok Leyland’s business. The company needs to broad base its products and access latest technology to stay abreast of the high quality competition expected in the domestic market that now has almost all the big multinational commercial vehicle manufacturers. A big multinational partner will certainly help.