ALOK INDUSTRIES - SAFE AT THESE LEVELS

Established in 1986, Alok Industries is one of the largest vertically integrated Textile Companies in India is preferred as a Vendor by Global Gaints like Wal-Mart , Target, etc.
The Company announced excellent results recently where its Sales grew by 40.5% to 1241crores. Exports which make up 40% of sales, grew by 40% to 460 crores. The Net Profit should have shooted up but due to Hedgeing, did not reflect the Strong Dollar but this should get reflected in Dec and March results.
The Company has started to focus aggressively on Africa, Latin America and Gulf countries in order to reduce its dependence on the US and Uk.
The Company has been very active in increasing its capacities for the last four years, all of which should start to get executed by March 2009. The Company’s officials have said, that they have no funds requirement as of now and have already tied up for the same.
Alok should start extract benefit from its Capital Investment from the next fiscal.
Alok also has plans to foray into Fabrics used for Car Upholstery, etc and also wrinkle-free, stain-resitant, bullet-proof fabrics.
With the Govt of India too considering a Package to help Exporters, Alok should be major beneficiary.
Alok has taken a huge beating in the Stock Markets. From a High of 103, it is now trading at around 18 levels. With a Book Value of 67 and at a conservative estimated EPS of 8, the stock is now trading of PE of only 2.3. The Stock can be considered in small chunk for Long Term.
CAVEAT :
Rupee appreciation can impact profit margins of the company.


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BOC INDIA - A SAFE BUY

Safest Buy Now is BOC INDIA
Dear all,

BOC India was established in 1935 in Kolkata. Through seven decades of operations, it has set up itself as provider of complete solutions in gases business to the Indian industry. With over 20 production plants, comprising one of Asia's biggest air separation units; 40 warehouses and depots; 100 dealers; more than 100 dedicated tankers in the distribution fleet; - BOCI offers an wide geographic reach, thus bringing it closer to its customers in any part of the country. Headquartered in Kolkata, BOC India Limited employs 654 people and serves more than a lac customers.
BOC India which is quoting at 124 is one of the Safetest Buy in the Indian Stock Market today. The Company is Buying Back shares at 200. The Promoters hold a staggering 89.6% stake in the Company!!!
BOC india is a part of Linde Group which is the world's leading gases & engineering company with a turnover of Euro 12.3 billion & presence in over 100 countries.
In these times of tight liquidity the Company with a Capital of 85 crores, is sitting on a mountain of Cash in Hand of above 275 crores!. And Book Value of the Company is above 50.
The Company is already providing over 1290 tonnes per day of gases to TISCO which will go up substantially on TISCO's huge expansion programme. Similarly 1800 tonnes per day project to Jindal Vijaynagar too is being completed by end of 3rd Quarter of current year. Reflection of which will be in year 2009's result. 700 tonnes per day requirement is from Jindal Steel. Further big orders are expected from SAIL & Raourkela Steel. Thus company's gases production will increase substancially in near future & expected to go upto 5000 tonnes per day in next 3 -5 years.

Company is growing in its Medical gases segment & has restructured its hospital care business.

Solar Cell, photo Voltaic industry is offering a potential for gases industry. BOC India has won order from Moser Bear & has established a clear lead in this segment also. Tata Power, Reliance, videocon etc. has planned to make investment of Rs. 1,00,000 Crores in this sector, which too will provide oppurtunity to BOC.

The company will also trade in Helium Gases.

It has gained orders over 450 Crores in Engineering segment which would increase further in near future.

Hydrogen Fuel could be a big trigger in this counter. Linde is agressively pursuing in the field of Hydrogen as an alternative fuel. It may take many years to materialise but will be very positive factor for long term investor.

Company has projected a growth @ 50 % in one of its meeting.

The company is expected to reopen its buyback offer at 200 in about 6 months time. Buy now and submit the shares in buyback, and make a cool profit of about 60%.
Best of luck,
Srikanth Shankar matrubai


http://buycall.blogspot.com




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PIRAMAL HEALTHCARE

PIRAMAL HEALTHCARE LTD
BSE: 500302 | NSE: PIRHEALTH | ISIN: INE140A01024 |FV 2.00

Piramal Healthcare is among the leading producers of halothane and isoflurane. With its latest acquistion of Minrad Internation (a generic inhalation anaesthetics company), Piramal Healthcare is set to strengthen its global presence in the critical care space, as the deal will give Piramal immediate access into the US market for the country's largest selling inhalation anaethetic sevaflurane.
Piramal has been on the prowl for quite sometime with its acquisition of Rhodia's Inhalation Anaesthetics business in 2004 and 'Haemaccel' brand acquisition from PlasmaSelectAG of Germany.


RECOMMENDATIONS :
With the continued favourable environment for CRAMS business due to its inherent cost advantages, and strong MNC relations, Piramal will continue to be a big beneficiary of increased outsourcing from India. Its domestic business too continues to be strong and steady.
The Company should outperform its peers comfortably and can be considered for accumulation at every declines.


Other Brokerages Targets :
Angel Broking has maintained its Buy rating on Piramal Healthcare with a target price of Rs 340.
Kotak Securities has maintained its Accumulate rating on Piramal Healthcare with a target price of Rs 313.
Sharekhan has maintained its buy rating on Piramal Healthcare with a target of Rs 434 in its December 23, 2008 research report.
SBICAP Securities
has maintained its buy rating on Piramal Healthcare with a target of Rs 360.
Motilal Oswal has maintained its buy rating on Piramal Healthcare.
Religare research has maintained buy rating on Piramal Healthcare with target price of Rs 412.

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KINGFISHER AIRLINES - PROMISING GOOD TIMES

Kingfisher Airlines Limited Formerly known as Deccan Aviation Ltd. The Group's principal activity is to provide commercial passenger airline and a private helicopter and airplane chartering services in India.
After the Annual General Meeting, I had a chance to talk with the “King of Good Times”, Dynamic Chairman of Kingfisher Airlines, Dr.Vijay Mallya.


He announced “the worst is over for the Airlines Industry. Kingfisher Airlines Fundamentals is getting stronger by the day and we will start to break even from this month itself.
“I think the worst is over and there’s no reason why private equity investors who had expressed interest when oil was at $100 a barrel shouldn’t be more interested when oil is $36 a barrel,” Mallya said

SEE VIDEO OF DR.VIJAY MALLYA HAVING LUNCH WITH WE, THE SHAREHOLDERS ;


He said once the Govt brings the ATF under the ‘Declared Goods’ category, Kingfisher Airlines will immediately reduce fares.
“We can pass on pretty much majority of the savings and that would be good for the industry, make air travel even more affordable and stimulate an industry that has slowed down considerably,” claimed Mallya.
.
"Kingfisher will be the biggest airline in India by 2010 not only in terms of market share, as others claim. In all the aspects, it will be the biggest. Wait and you will see," he said, dismissing all related questions. Hyperbole? Like the man says, we will wait and see.

MY TAKE :
At least in Near Short Term of upto 1 year, things are looking much much brighter than it was in anytime of the Kingfisher’s history. The operations costs are lower and there are no visible signs of going up, and, the Airfares are not being reduced and surprisingly, the load factor is going up, which should all add up to “Good Times” for the Kingfisher Stock. Can expect an upside of at least 40% from here and expect the Stock to reach at least 50-55 by June End 2009. Buy in Small quantities as “Contra” Pick. The stock could be the Dark horse of 2009.





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SUJANA TOWERS LTD

SUJANA TOWERS LTD which was formed by the de-merger of tower division of Sujana Metal Products Ltd looks attractive at current level of around Rs.25 (Face Value 5).

Sujana Towers Ltd is in manufacturing of Power Transmission towers as well as Telecom Towers. In Power transmission segment it mostly sells towers to project engg companies or in some cases, forms JV for such projects where in its role remains as tower supplier and JV partner undertakes installations. Post its massive expansion, 80 per cent of the structural steel requirement of the lower division is being met through in-house production. The company currently utilizes 85 per cent of its galvanized tower capacity.

In order to meet the rising demand, it is further increasing its gavanised tower capacity by 75 per cent to 2,28,125 mtpa in Chennai, which is expected to be commissioned from January 2009. The additional capacity will be directed at meeting export demand for power and transmission towers from East and West Africa.
Sujana Towers Ltd is looking put up a new plant in Gujarat to produce galvanized steel parts with a capacity of 75,000 MTPA. Company is also contemplating to acquire a company in China for manufacturing of tower parts and set up a subsidiary in Hong Kong for sourcing cheaper raw material. Recently, it acquired 51% shareholding in Telesuprecon Ltd (Mauritius), undertaking Telecom infrastructure contracts in various cast / central African countries.

In this business, the delivery schedule adherence is most important and critical, so most of the companies won't carry large order
books, the order are taken for shorter periods of 1-3 months and cycle of execution and order intake continues. Almost all the telecom companies are clients of company, similarly all major turnkey players in power transmission business procures towers from Sujana Towers.
Fortunately, in the second half of CY09 almost all key inputs like Steel, Zinc, Welding Electrodes have become cheaper making Sujana more viable on the cost front.

The management sees huge demand for towers, both from the power and telecom sectors. In the power transmission business, the relationship with Deepak Cable continues Sujana Towers executing orders up to 400kVA. The company is making additional investment for 756kVA capacity, government board approval for which is awaited.

Looking to the expansion in capacities and growth potential in Power transmission, Telecom and Railway electrification, the
company is likely to post significant growth in coming couple of years. Going by management's estimates, company is likely to post good growth in top line and bottomline in coming years. Stock is available at 2X expected '09 earnings, which is quite attractive compared to other companies in the same Sector.
FIIs had a Steep Holding of nearly 48% in the company and seems to have Dumped this stock alongwith BlueChips and so it is no surprise that Sujana Towers fell from a massive 240 to a ridiculous 24 now. The expected EPS for the year is 12, which gives it a PE of only 2. The Stock looks attractive in view of its strong order pipeline, expansion program and sound market strategy. Most risks are priced in and stock seems to be building a base for the next rally.

Best of luck,
Srikanth Shankar Matrubai




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FORTIS HEALTHCARE - A MULTIBAGGER

Fortis Healthcare Limited (FHL), one of India’s largest private healthcare companies with network of 23 hospitals and more than 2600 beds has been hyperactive in acquiring stakes in Hospitals across India and is said to be eyeing Wockhardt and Manipal Hospitals.
The company is a leading player in the nascent healthcare services market that has high growth potential.The company is well placed to capitalise on the high growth potential for healthcare services.

Despite being a relatively recent entrant to the healthcare space, Fortis has used acquisitions and investments to build a strong reputation in specialised areas such as cardiac care and orthopaedics, and a sizeable scale of operations in this business. Fortis Healthcare now controls a network of 12 hospitals, of which seven are owned and the rest are under management contracts; these are located mainly in and around the National Capital Region. It also recently charted a foray into Western India by acquiring a stake in Mumbai-based Hiranandani Healthcare. The owned hospitals include Escorts Heart Institute and Research Centre (EHIRC) in Delhi, other Escorts hospitals in Amritsar and Faridabad and the Fortis Hospitals in Amritsar, Noida and Mohali. The company also operates 16 satellite "Heart Command Centres" in other hospitals. EHIRC enjoys a very strong reputation in cardiac care for its skilled doctors and efficiently-run operations. Future plans include greenfield projects in Jaipur, Delhi and Gurgaon, to scale up the current bed capacity of 1,800 by another 750 over the next two years. Plans are also afoot for further geographic expansion through acquisitions and management contracts. It recently took over the 180 bed Malar Hospitals in Chennai and launched high-end "Malar Heart Institute" there.

Demand prospects for healthcare services appear strong in the light of higher longevity and the demographic shift in the Indian population and acute shortage of hospital infrastructure (a deficit of 7.5 lakh hospital beds is estimated over the next six years). A rising incidence of lifestyle diseases and increasing penetration of health insurance, suggest that service providers may enjoy strong pricing power in the years ahead. Fortis Healthcare, as one of the two leading players in the domestic healthcare space, given its strong brand equity, is well-placed to capitalise on this opportunity.

The hospital business is highly capital-intensive, with a new facility usually taking a five-six year gestation period to break even at the net profit level. Apart from revenue per bed, profitability of a hospital depends, to a large extent, on the level of occupancy and the average length of stay for patients. Higher occupancy and a lower length of stay contribute to higher asset turnover, leading to better operating profit margins. Given that Fortis made its first foray into the healthcare space in 2001, its facilities, with the exception of the key Escorts facilities, are fairly new and, therefore, have relatively low occupancy levels at present. But the management has shown its skill and expertise in improving occupencies and earning better margins.

Financials :
The Company recently turned around and posted postive Profit After Tax for the First Quarter and reported Highest Ever EBIDTA for Sep quarter at 23.16 crores with a Growth of 44%.

Dismissal of Anil Nanda case against Escorts Heart Institute and Research Centre has mitigitated the legal risk hanging over its head since its IPO. The company is now free to execute its plans for growing the Escorts network and brand.
Fortis has the Largest Chain of NABH accredited hospitals in India. Fortis Escorts Hospital, Jaipur has also attained the distinction of being the first hospital in India to get NABH accreditation barely within 10 months of start of its operations. This is the fastest for any hospital in India.
Promoters hold about 74% stake in the Company and with the just announced Rights Issue of 1000 crores, they are sure to increase their Stake.


Risks
Business risks surrounding Fortis' operations arise from its ability to retain its skilled workforce and attract new patients at its smaller centres. Apart from this, a significant proportion of corporate clientele could result in pricing pressure as such clients may try to wrangle better rates. Given the aggressive expansion plans, there are significant execution risks to the revenue and profit projections.

CONCLUSION :
With the Promoters sitting on Huge Cash and the proposed Rights Issue giving some more cash, they can get a lot of Hospital Asset at distressed price (Wockhardt, Manipal, etc) and the Company is bound to be Multi Bagger in the years to come.

BUY



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GIC HOUSING FIN - ATTRACTIVE

GIC Housing-Dividend Play

As compared to big brothers HDFC and LIC Housing Finance, GIC has to do a lot of catching up to do, both in terms of gaining investor fancy and growing up size. A lower discount is justified, considering the company's indifferent performance in the past and the relatively poor disclosure standards.However, given the potential for growth in the housing finance sector and the company's performance over the past two years, a narrowing of the valuation discount appears justified. And apart from this, GIC has done well for itself and discerning investors should be buying the stock, if only for the dividend yield.

Net profit of GIC Housing Finance rose by 3% to Rs 30 crore in the half year ended September 2008 as against Rs 29 crore during the corresponding half of the same period previous year.

Operating income rose 16% to Rs 150 crore in HIFY09 as against Rs 131 crore during the previous half ended September 2007.

The company disbursed Rs 363 crore of loans, registering a growth of 9%. The Company recorded a Net Interest Margin of 1.4% for the half of FY2009.

The Net NPAs of the Company stood at 2.26 % as of September 2008.

The housing sector in the Country has been growing progressively and has a vast potential for further growth.

In an environment where banks are reluctant to lend to the housing sector, housing finance companies like GIC would be able to enjoy tremendous growth opportunities in times to come.

The stock trades at a P/BV of 0.5x. It is presently quoting at around Rs.38

At the current price it also provides an extremely attractive dividend yield of more than 11%.




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GANDHI SPECIAL TUBES - AVAILABLE AT DISCOUNT

Company Background



GANDHI GROUP is manufacturing automobile components since over 3 decades. The products are marketed all over India and are also exported all over the world including Germany, UK, South East Asian countries etc. GANDHI SPECIAL TUBES LTD. formerly known as GANDHI SPECIAL 07 TUBES LTD. was a project set up by GANDHI GROUP in technical collaboration with BENTELER of GERMANY. BENTELER is one of the leading enterprises in manufacturing of steel. Besides steel they manufacture welded and seamless steel tubes and are also producing pressed, drawn, stamped parts and tubular components.The project was for manufacturing small diameter welded and cold drawn seamless steel tubes. M/S BENTELER have supplied most of the critical machines and were involved in installation and commissioning of the plant and training personnel in INDIA as well as GERMANY. The plant situated at Gujarat, started commercial production in April 1988.



GANDHI SPECIAL TUBES LTD. have also subsequently started producing tubular components like condenser coils and wire on tube condensors at Halol plant mentioned above and have recently set up a unit at Pune to manufacture tubular components.



M/S Gandhi Special Tubes Ltd. have also started manufacturing of Cold Formed Tube Nuts for Fuel Injection Tube Assemblies as well as Hydraulic Tube Assemblies. This is a pioneering effort in India as hitherto tube nuts were being manufactured by machining.



Products



Small Diameter Welded Steel Tubes



The size range of small diameter welded steel tubes manufactured is 3.1 to 12.7mm Outside dimension and 0.5 to 1.5 mm wall thickness. Plain, inside and outside copper plated and outside zinc plated tubes are manufactured. These tubes find applications mainly in refrigeration and the automobile industry. The list of customers include major refrigerator manufacturers like Godrej, Voltas, Electrolux, Daewoo, Carrie etc and major automobile / engine manufacturers like Telco, Ashok Leyland, M&M, Simpson, Kirloskar Oil Engines, Maruti Udyog Ltd etc or their ancillaries.



Cold Drawn Seamless Steel Tubes



The size range of cold drawn seamless steel tubes manufactured is 3 to 75 mm Outside dimension and 0.5 to 7.5 mm wall thickness. GSTL is a pioneer in introducing cold drawn seamless steel tubes normalized / annealed in bright annealing furnace in India. This ensures soft and scale free tubes. These tubes find applications in high-pressure fuel injection tubing and hydraulic tubing. Most of the customers in India who were earlier importing these tubes are now buying these tubes from GSTL. The list of customers include Telco, Ashok Leyland, M&M, Simpson, Kirloskar Oil Engines, Mannesman Rexroth, Vickers, Wipro, SMS (I) Ltd, L&T, Tisco etc.



Tubular Components



Facilities at Pune plant for manufacturing tubular components include CNC and manual bending, hydraulic head forming, welding / brazing, flushing, pressure testing etc. Components manufactured are condensers, compressor parts, fuel injection tube assemblies, hydraulic tubes etc.



Cold Formed Nuts



In order to provide a complete product with end fittings, GSTL also started the manufacture of cold-formed nuts. These nuts have the following distinct advantages over machined nuts: High degree of reliability ensuring zero failures on account of cracked nuts, tensile strength, yield strength and shear strength increase due to cold working. Also, the unbroken flow lines follow the part contour, which increase the strength of the part and improved surface finish, which not only gives it a better look but also improves the life of the product and helps sealing where ferrules are used.



Investment Rationale



Gandhi Special Tubes is a niche player in small diameter seamless and welded tubes segment which caters to the automobile and general engineering industry. It has virtually no competitors in the small diameter seamless tubes segment but faces some competition in the small diameter welded segment from players like STI Sanoh India Ltd and Bundy Tubing. Also threat from new entrants is low as gestation period for new companies is long about 3-5 yrs. The technology required for its product is highly specialized and as a result the small diameter seamless tubes are high-margin value added products. The seamless tubes find application in diesel based automobiles and hydraulic equipments and the welded tubes are used in refrigerators and automobiles.



The Specialized and high quality nature of its products is evident from the fact that it developed a very special component for Volvo. The product was approved and now it manufactures this component for all Volvo’s component manufactures who export from India. One of the most important engines driving the growth of the Indian manufacturing sector is the domestic automobile industry, which has grown at a CAGR of 13% over the past 5 years. Further, multinational automobile companies like JCB India and Volvo are expanding automobile/excavator manufacturing capacities in India. Many new players are entering the Indian market and India is emerging as an automobile and automobile component manufacturing hub due to the availability of cheap labor, skilled Engineers and high-quality products. Even domestic auto component companies are investing about Rs. 30,000 crore to cash in on the automobile boom. It is expected that the automobile capacity in the country will double from 2.2 million units per annum to 4.4 million by 2010. This kind of growth in OEM auto manufacturers (one of GSTL’s major clients), gives GSTL the potential to ride on the progress of the auto industry in India.



GSTL is the exclusive supplier of seamless tubes to JCB India. JCB recently announced the opening of its second plant in Pune, Maharashtra, with an investment of $25 Million. Total investment of $75 Million has been made in Pune Plants, where world-class heavy-line machines will be manufactured for India and Pan Asia. Going ahead, it is expected that JCB will open a third plant in India in order to keep up with the robust demand and to capitalize on the growing market.



Further, GM is coming up with a special small car plant in India. The Volkswagen group is also coming to India with plans to manufacture 1,20,000 cars per year near Pune.



Being the only manufacturer of seamless welded tubes in India and a very cost-efficient import substitute, GSTL is witnessing a rise in demand for the same. Seamless welded tubes find applications in high-pressure diesel fuel injection, hydraulics and general engineering. Diesel engines are primarily found in commercial vehicles. With the Supreme Court’s ban on overloading of trucks above permissible limits, rising off-take of the small commercial vehicles and increased demand for construction related vehicles; commercial vehicles sales are slated to grow at a CAGR of 10-11% till 2010-2011. Further, the Indian commercial vehicle space is also seeing substantial interest from foreign investors.



Recently, Volvo acquired a 50% economic interest in Eicher Motors’ commercial vehicles business for $350 million while Daimler Trucks announced a strategic alliance with the Hero Group. In October, Ashok Leyland had announced an alliance with Nissan to produce LCVs. This results in increased demand for diesel engines that in turn results in augmented demand for GSTL’s specialized small diameter seamless tubes.



GSTL’s clients include reputed international and domestic automobile and general engineering companies. Over the years, GSTL has built a direct relationship with its clients and has received the necessary approvals for its various products. The list of a few clients is provided below.



1. Tata Engineering & Locomotive Co, Ltd.



2. Tata Iron & Steel Co. Ltd.



3. Ashok Leyland Ltd.



4. Maruti Udyog Ltd.



5. Mahindra & Mahindra Ltd.



6. Bajaj Auto Ltd.



7. Escorts group companies



8. L & T Case Equipment Ltd



9. Larsen & Toubro Ltd.



10. SMS India Ltd.



11. Steel Authority of India Ltd.



12. Bharat Heavy Electricals Ltd.



13. Bharat Earth Movers Ltd.



14. Bosch Rexroth India Ltd.



15. Vickers System International Ltd.



16. Lincoln Helios India Ltd.



17. Godrej Appliances Ltd.



18. Electrolux India Ltd.



19. Voltas Ltd.



20. Daewoo India Ltd.



21. Kirloskar Copeland Ltd.



22. Carrier Refrigeration Ltd.



23. Imperial Auto Industries Ltd.



24. Injecto Ltd.



25. Matchwell Engineering Pvt.Ltd.



26. Sebros Enterprises



GSTL is entirely a debt free company and has been able to fund its expansion of about 45 cr entirely from internal accruals.



Risk and Concerns



Ø The margins could come under pressure due to increase in input costs and other expenses.



Ø Competition from low cost manufacturing countries such as China.



Ø Adverse fluctuation in foreign exchange rates.



Valuation



At current market price of Rs 84, it is trading at 6.5 times FY08 EPS and 1.6 times book value with a dividend yield of about 2.9%. Also the company has high profit margins and return on invested capital The value of a debt free company has to be substantially more than the amount of debt it can comfortably service. It's a principle which was laid out by Ben Graham in Security Analysis and is known as the Debt-capacity bargain. On that basis it can be valued at Rs 130 assuming cost of capital to be 10%.



Value =earning per share /cost of capital



= 12.9/10%



= 130



Hence the business is available at 35% discount to intrinsic value.




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DECCAN GOLD - LIMITED DOWNSIDE

Ashish Chugh, investment analyst and author-Hidden Gems is of the view that there is limited downside in Deccan Gold Mines.

Chugh told CNBC-TV18, "Deccan Gold is the only listed company and it is the only first private sector company involved in gold exploration, this company has been promoted by Australian investors, who are involved in similar business in Australia. This company has got a large portfolio of exploration blocks, which are located mainly in four states and these blocks are located in the states of Andhra Pradesh, Kerala, Karnataka and Rajasthan. The total area of the block is an excess of 10,000 sq km. This company has got one of the most prospective blocks in the country in gold exploration."

He further added, "As of now the company has got no revenues because of the fact that they have applied for mining license for few blocks, but they are yet to get the approval from the Central Government and State Government for mining these blocks. The management expects to get the approvals and start producing in the third quarter or fourth quarter of FY10. They expect to do about 4 tonnes of gold every year and 4 tonnes of gold, if multiplied with the gold price of Rs10, 000 per 10 grams this translates into the revenue of Rs 400 crore. If we try to be conservative and say that they are able to do only 50% of what they are talking about, this would translate into Rs 200 crore revenues."

"Gold exploration it is a high margin business, something like oil exploration, where initial expenses may be high but the margins can be pretty good once they are able to start mining gold. So at a marketcap of Rs 80 crore, I think the downside from these levels looks to be very less. Even though I would recommend that the current price is about Rs 14-15, investors can choose to make a staggered purchase, which could be spread over the next 3-6 months at the price of between Rs 10-15."

"In the case of the unusual movement in the stock like the one we saw last year, when the stock went up from Rs 15 to Rs 150. Risk management is very important because this is a high risk stock, high risk because the uncertainty, which is attached with the kind of business it is involved in. But at the same time the returns in case every thing goes well for the company can also be very good."



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MAHARASTRA SCOOTERS - HIGH DIVIDEND YIELD

Maharashtra Scooters is a Bajaj Auto group company. In fact, this company has been promoted by Bajaj Auto Ltd along with Western Maharashtra Development Corporation. Till about two years back, this company was manufacturing scooters and supplying it to Bajaj Auto. It was in fact an ancillary to Bajaj Auto, but this company stopped the manufacturing of scooters two years back. As of now, this company has got no business of its own.



This company has got an equity capital of Rs 11.5 crore and its book value as on March 31, 2008 was about Rs 172.



This company is totally debt-free, it has got absolutely no term loans or unsecured loans or working capital loans. It is a totally zero debt company. This company has got cash close to Rs 95-100 crore in its books.



It also holds shares of Bajaj Auto Ltd, which got demerged into three companies ‑ Bajaj Holdings, Bajaj Auto and Bajaj FinServ ‑ last year. So, this company was holding about 33.87 lakh shares of Bajaj Auto and it now holds 33.87 lakh shares in each of these three companies whose value at the current price comes close to Rs 225 crore.



Besides these three companies, this company is holding Bajaj Auto Finance and Bajaj Hindustan shares also, which are valued at close to about Rs 17-18 crore.



In all, this company has got the quoted investments whose value at the current market price is close to Rs 250 crore. All investments which this company is holding are trading very close to their 52-week lows whether it is Bajaj Auto, Bajaj FinServ, or Bajaj Auto Finance.



So, at the current price of Rs 65, you have a company whose market capitalisation is just about Rs 75 crore, which is holding cash of Rs 100 crore and quoted securities of Rs 250 crore. This company paid a dividend of 60% last year. So, at the current price, the dividend yield itself comes to about 9%, book value is Rs 171 as against which the stock is available at Rs 65.



In a market where there is so much of uncertainty, here is a company that is holding a lot of cash in the balance sheet. It is giving a good dividend yield to shareholders, and this seems to be a safe stock in an uncertain market like this.



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MARG - INTERESTING

Marg is an infrastructure stock. This is in a sector which is out of favour as of now and there is a lot of negative sentiment surrounding this sector.



The company is into infrastructure as well as real estate. This company is into development of ports, airports, SEZ and they also into development of commercial and residential real estate. Most of their projects are in and around Chennai.



This stock had touched a high of about Rs 630 in January and currently trades close to Rs 35. It has dropped about 95% from its high, which it had touched early this year.



This is inspite of the fact that if you see the financials of this company, there has practically been no deterioration in financials till now.



In fact in the first six months of the current financial year, sales are up by about 80%, profit after tax (PAT) is up by about 42%, and the tax payment for the first half is more than double of what they did in the first half of last year.



Now, despite of any deterioration in the financials of this company till date, the stock price has dropped by about 90%. This drop in stock price is mainly because of negative sentiment surrounding this sector. Nobody wants to buy real estate or infrastructure today.



This is primarily on account of two things. One is fundamental factors. There has been a slowdown in the economy, stock markets have come down, and there has been a liquidity position which is getting worse by the day.



But having dropped by about 95% from its high, the major part of this decline seems to be on account of other factors like fear psychosis, which is surrounding investors. There is definitely a lack of confidence among investors in the market.



Even then I am not ruling out the possibility that in the next few quarters there could be a decline in the profits of the company, but that factor is already getting factored in the stock price. The current market capitalisation of the company is just about 90 crore, which is less than one year of operating profits.



As on March 31, 2008 the book value of this company was Rs 121 crore. As against the book value of Rs 121 crore, the stock trades at close to Rs 35 which is roughly 25% of the company’s book value.



From a current price, even if deterioration in the economy were to happen, the downside looks extremely restricted. In the case of liquidity easing off, these kinds of stocks can bounce back very sharply from their current levels.



The book value – even if you look at the gross block of the company ‑ is close to about Rs 425 crore. Given all these factors and that the stock has dropped about 95% from its high to Rs 35, the downside looks very restricted, and in case of conditions becoming slightly favourable, these stocks can jump up by 50-100-200% also in a short period of time.



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BAJAJ FINSERVE - ATTRACTIVELY VALUED

Bajaj FinServ is a company which was created out of the three way demerger which Bajaj Auto undertook. Bajaj FinServ was one of the companies which were created as a result of the demerger. Bajaj FinServ has got several businesses in its portfolio and most important is the insurance business of the Bajaj group which is Bajaj Alliance Life Insurance and Bajaj Alliance General Insurance
. Bajaj FinServ holds 74% in each of these two companies.



Besides insurance, the financial distribution business of the Bajaj group is Bajaj Auto Financial Distributors Ltd. Bajaj FinServ is a holding company for that and they also hold a substantial stake in Bajaj Auto Finance, besides the wind power business of the group.



This company holds 74% stake in both the life and the general insurance business of this group. The insurance business has been growing at a good pace for both the life and general insurance. In fact, the general insurance company is already a profit-making company. They made a profit of close to Rs 100 crore for FY08.



If you look at the balance sheet of Bajaj FinServ at the current market price, the market cap of this company is just about Rs 1,600 crore. The company has got cash and cash equivalents of more than Rs 800 crore on March 31, 2008. Assuming a 10% annualised rate of return, the holding would be valued at around Rs 860-870 crore as of today. They are holding Bajaj Auto Finance whose market value at the current price is close to Rs 100 crore. So, you are left with the insurance business which is available at a valuation of about Rs 600-700 crore at the current market price. They have a wind power business where the gross block is about Rs 300 crore. At the same time, there is a deferred tax liability of close to Rs 300 crore in this business.



The triggers for the stock can be once the insurance bill is table in Parliament and the later gives it approval for increase of foreign company’s stake from 24% to 49%. That could be a big trigger for this stock. In the event of both these companies offering higher stake to foreign stakeholders, it would lead to a complete re-rating of the stock.



Another comforting factor is that the promoters have been increasing their stake by buying from the market. If you see the shareholding pattern of the company between September 2008 and the disclosures which they have made to the stock exchange recently, one of the group companies which is Bajaj Holdings has already increased stake by more than 4.5% in the last 60-75 days. So, given all these factors, the stock is available at attractive valuation, and the real kicker can come from the offloading of stake in the insurance business.





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MSK PROJECTS - AN ARBITRAGE OPPORTUNITY

MSK Projects provides a very attractive arbitrage between the current market price of Rs 45 and the open offer price of Rs 84. This company is a construction company which started with residential and commercial projects but later diversified to the road sector and BOT (build-operate-transfer) projects.



The company achieved revenues of about Rs 244 crore for FY08 and made a PAT (profit after tax) of about Rs 17 crore. In the first half of the current financial year, both revenues and profits are up by 50%. The EPS on a TTM (trailing 12-month) basis is about Rs 9 and at the current market price of Rs 45, the stock is available at a price to earning ratio of 5.



Now, this company made a preferential allotment to a company called Shubhkam Holdings in October 2007. Shukhkam prior to this preferential allotment was already holding about 8.7% stake in the company. After the preferential allotment, their holding went up to about 24%. Since their holding went beyond 15% the open offer got triggered. Shubhkam Holdings announced the open offer at Rs 84 in October 2007.



This open offer has been delayed by more than one year because of the difference in the stand taken by the Securities and Exchange Board of India and the acquirer, under which the regulation of Sebi this open offer has to be made. The acquirer wants to make this open offer under regulation 10 of Sebi. This means that the acquirer is only a strategic investor whereas Sebi’s stand is that this open offer should be made under regulation 10 along with regulation 12, which means that acquirer would be a part of the promoter group.



Now, this appeal was filed by the acquirer with Securities Appellate Tribunal and SAT wide its order date October 23, 2008 has referred the matter back to Sebi for reconsideration and has asked the market regulator to give its decision on the matter.



If you look at the shareholding pattern of MSK, promoters and Shubhkam together hold about 46% in this company, which means 54% shares are the ones which are eligible to be tendered in the 20% open offer. Theoretically, the acceptance ratio will be 40%, given this ratio. But if you do an analysis of the open offer, which have opened and closed in the last one year, you will find that the actual acceptance ratio in most cases is much higher than the theoretical acceptance ratio.



Here also we have taken two scenarios. One is a conservative scenario where we have assumed a 50% acceptance ratio and a favourable scenario where the acceptance ratio is assumed at 70%. The purchase price in both cases is Rs 45. The open offer price in the conservative scenario is about Rs 84 while in an aggressive scenario we have taken it as Rs 90, because of the possibility of interest component being added to the open offer price. Time period for investment in both cases has been taken as six months and the value residual shares is taken as Rs 25.



Now, under a conservative scenario, you get an annualized return of about 42%. Taking an aggressive scenario or favourable scenario, the returns are more than 100%. In fact it comes to about 110%. So in a scenario where there is a lot of uncertainty and people are not willing to commit a lot of money into the stock market, I think this stock offers a very attractive arbitrage, since the open offer has got delayed by such a long time, people have probably forgotten about this arbitrage opportunity. In the uncertain times, it provides virtually a risk-free investment where returns can be between 40% and 100%. The major risk to this investment is prolonged delay in the opening of the open offer. The other risk is that the risk of open offer getting delayed, but we are ruling out that possibility because we don’t have any precedence where the open offer has been announced and then withdrawn at a later stage. So, that possibility is totally ruled out.



So, the only bigger risk which I can see with this investment is some inordinate delay in the opening of open offer which can pay gains for investors, but it is a good investment for somebody who is willing to take a calculated risk. In the uncertain times, I think 40% return on the investment should be good enough for many investors.





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NATCO PHARMA - UNDERVALUED STOCK

Investment Analyst, Ashish Chugh is of the view that Natco Pharma is a very undervalued stock and a safer investment.

Chugh told CNBC-TV18, "Natco Pharma is a very undervalued stock. It is a company based in Hyderabad. This company is mainly into the oncology business and this company is ranked number one in India in the oncology segment. The management expects to grow the oncology business by about 20% every year over the next three years.

He further added, "There are a few interesting developments taking place in this company, one is that this company is increasing its presence in the retail pharma space in the US through acquisition of retail pharma stores. They have already acquired three stores and they are scouting for more acquisitions in this space in the US."

"Secondly, this company’s major strength is research and they are currently doing clinical trials for oncology drug, which they have developed. The phase I of clinical trials have already begun and commercialization of this drug will lead to a substantial benefit to the company and the shareholders."

"Thirdly, this company has entered into a tie up with Mylan Inc for worldwide sales of a drug, which they have developed. This drug is called Glatiramer Acetate, the other company which is making and marketing this drug is Tava Pharmaceuticals of Israel. This drug is a USD 3 billion drug and Teva currently has a monopoly position in this drug. Now the agreement with the Mylan is that Mylan will do the clinical trials and they will incur all the expenditure, which is involved in the clinical trial for this drug and they will do the regulatory approvals and registration of this drug in the US."

"It may so happen that since this drug is going to threaten the monopoly of Teva, they may try to maybe delay the launch or they may file a suit against Natco Pharma, which may lead to a slight delay but whenever the commercialization of this drug happens, it could be a big leap forward for Natco Pharma."

"This company did sales revenues of about 330 crore for FY08. They made a profit after tax of about 42 crore-I am talking about the consolidated numbers, which means an EPS of close to Rs 14. At the current price of Rs 75, this stock trades at a price to earnings ratio less than 6."

"Another comforting factor or the margin of safety in this investment is that this company holds a land bank close to 300 acres, which is close to the new Hyderabad airport. This land bank alone is valued at between 250 and 300 crore, which is more than the current marketcap of this company which stands at about 200 crore."

"So one has a company, which is available at reasonable valuation, it is growing through the inorganic route by acquiring retail pharma stores in the US. There could be a very big trigger-it may take two-three years for that Mylan thing to materialize but as and when it materializes, it will lead to a quantum-it will basically position Natco on a different platform altogether. Also their strength in the oncology segment and the new drug discovery, which is happening. So one has a company which is trading at reasonable valuation and one has a good margin of safety also by way of the land bank of 300 acres which the company has. So at this price I think the stock merits investment."



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BAJAJ HIND - Results Bitter, Future Sweet

Bajaj Hindusthan

, the country's largest sugar manufacturing firm, posted a consolidated net loss of Rs 197.62 crore in the financial year ended September 2008 as against a consolidated net loss of Rs 4.01 crore last year. This loss was on a total income rose to Rs 2,120.26 crore in FY08 from Rs 1,812.86 crore in the last fiscal.



On a standalone basis, the net loss was lower at Rs.50.17 crore when compared to the consolidated net loss but higher than the Rd.45.65 crore net loss it posted last fiscal.



Despite the loss, company has declared a dividend of 60% at the rate of 60 paise on shares of face value of Re.1/- for 2007-08.



If one looks carefully, it becomes quite apparent that it is only due to forex loss and higher interest outgo in Q4, that the net loss has burgeoned. In fourth quarter ended 30th September 2008, the PBT of Rs.131.57 crore was due to forex loss of Rs.71.4 crore, which was earlier not booked due to non completion of capex. This apart, it also had a higher interest outgo of Rs.59.02 crore in Q4 against Rs.139.44 crore of FY08 on completion of capex,



UP government has recently announced SAP for sugarcane for season 08-09 at Rs.1,400 per MT. This year, lot of damage has been caused to the sugarcane crop in UP and hence mills are not likely to operate for more than 150 days in this season against, an average pf 180 days in the earlier years. So there would be mad scramble to purchase sugarcane by the mills even at a higher rate of more than Rs 1,400 per MT.



All this would give a great advantage to company, being the largest player. Due to lower estimated sugar production of India for season 08-09, at about 20 million tonnes, sugar prices will start rising from April 09, once general elections in the country happens and crushing in UP and Maharashtra stop. Sugar price can rise by about Rs 3 to Rs 4 per kg, after April 09, which will give huge advantage to the sugar mills.



Season 08-09 and season 09-10 is going to be excellent for the company and despite the loss, given the positive outlook for the sector, qualifies a good buy at the current rate of Rs.60.



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MYSORE CEMENT - A SURE SHOT WINNER

Mysore Cement-A Call At Rs 15.75
BSE 500292; CMP Rs 15.75

The way I would play Mysore Cement is to consider the current market price of the stock as a Call option with a one year expiry. And within the next 12 months I would expect the stock to double-a return of 100 per cent. Is it possible? Yes, it is.

Mysore Cement is now owned to the extent of roughly 60 per cent by the Rs 55,000 crore German major Heidelberg Cement. Post merger of IndoRama Cement and Heidelberg Cement Pvt Limited with Mysore Cement, the total cement manufacturing capacity with the company has risen to 3 mn tonnes. The corporate with units in Mysore, Damoh, Jhansi and Pune is now in a position to serve the south and west regions of India.

Consistent fund infusion from Heidelberg has turned Mysore Cement into a debt free corporate, with CY08 EPS expected to be slightly above Rs 5 per share. This makes the stock the cheapest play in the cement sector at a PE of 3 or more appropriately the corporate will earn enough to pay-off its Equity in 3 years.

Though signs of slow down are apparent, the recent moves by the GOI to reduce Cenvat on Cement, and the fall in Crude will reduce manufacturing costs through a majorly lower power and transport bill while cheaper cement will encourage more construction activity.

On a replacement cost basis too, Mysore Cement is under-valued. The 3 mn tpa capacity will cost Rs 750 crore should a greenfield unit be set up today, against the enterprise value of Rs 352 crore that Mysore Cement possesses today. If things proceed as per plan, the stock should double by December 2009.

What is important is that Heidelberg sees a great future for Cement in India. It had bought over the Birla and public stake at Rs 58 per share a year ago, and through fresh infusion of equity at Rs 54 per share paid off all institutional debt making Mysore Cement a zero debt company.

The plans as of now include doubling the cement capacity to 6 mn tpa by 2011-2012.

The Opportunity

The Indian economy is witnessing its best ever growth phase with the GDP expected to continue to grow between 8.5%-9%. It is well understood by the policy makers that the biggest obstacle to growth of over 9% or more is India’s infrastructure – especially the state of roads, ports and power. India spends 4% of its GDP on infrastructure investment compared with China’s 9%.

The Government of India has plans to raise the total infrastructure spending to 8% of GDP over the current five year plan. With the thrust on the infrastructure development, boom in housing sector and accelerated road and highways development, demand of cement is expected to be firm. In order to tap the future potential of the cement sector in India, the Company is contemplating the expansion of capacity from the existing 3.0 million tonnes per annum to 5.9 million tonnes per annum.

Outlook

Cement manufacturers have announced capacity increases, but gestation period of the projects has gone up due to capacity constraints of plant and equipment suppliers. This implies that new capacities are likely to take longer time to come on line and that the capacity utilization levels would be comfortably placed atleast for the next few years.

The demand for cement over the next five years will be robust enough to absorb 40 million tonnes of Greenfield capacity, according to CRIS INFAC’s (a subsidiary of CRISIL) news report on the long term outlook for the industry.

This capacity addition will require an investment of nearly Rs. 13,200 crores.

Industry profile

Industry structure and developments The Indian cement industry has a capacity of around 173.08 million tonnes per annum at the end of December 2007 as reported by the Cement Manufacturers Association (CMA). Against this, the cement production was 163.90 million tonnes during the period January to December 2007 exhibiting a growth of 7.12 %.

The cement despatches during this period were 159.20 million tonnes, showing a growth of 9 %. Western Region recorded a growth of 14% in cement consumption during the period January to December’07. Southern and Northern Regions achieved a growth of over 10%. Central and Eastern regions exhibited a growth of 4% and 3% respectively. Cement export during this period declined by 34% from 6.4 million tonnes in 2006 to 4.2 million tonnes in 2007, due to robust domestic demand.



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HTMT GLOBAL

HTMT Global offers everything you want in a company in tough market conditions.



A fluid world prices solidity at a premium. Oh, but that is baba aadam ke zamaane ki wisdom. Today even solidness is being extensively discounted.

The one stock where this is most visibly evident is HTMT Global. This company figures among the leading 15 Indian BPO vendors with an entrenched presence in voice-based services and a growing presence in non-voice transaction processing services.

It would be simplistic to pronounce that the company is available at a discount to its intrinsic value; in HTMT Global, it is serious enough to become a case study for all those B-school students who otherwise taqseem away their summers conducting thesis on deeply profound philosophies like ‘The future of the mutual fund industry in India’ and ‘Risk appetites of fixed income investors’.

But first the raw case for investing: HTMT Global is priced by the market at a market capitalisation of around Rs 240 crore (last week’s closing); the company possesses Rs 625 crore of cash on its books with negligible debt, despite reporting rising earnings over the last five quarters (pre-adjustments) and the possibility of delivering an EBIDTA of Rs 160 crore in the current fiscal.

This is why I like the company.
* Completely focused on vertical based service offerings like customer care and transaction processing. No software, no IT products. Focused ITeS company. Addressable market opportunity of $90-127 billion.

* Business classified as mission-critical, comprising the back-end hosting of the client’s customer management services. Existing client base of about 78 across India, Philippines and North America with no client attrition even in a challenging October and November.

* Delivery capabilities spread across India, Philippines, the US and Canada. Offshore centres located in Bengaluru, Mysore, Chennai, Mumbai, Hyderabad and Durgapur (India) and Manila (Philippines); onshore/near shore centres are located at Montreal (Canada) and Peoria, St. Louis, Waterloo, and El Paso (USA).

* About 76 per cent of revenues generated from voice-based services, largely linked to customer care (presales, sales, after sales, help desk support, product support and billing) Non voice-based offerings (24 per cent of sales) comprise healthcare adjudication services and insurance claim processing. Safe vertical selection; no customer from the mortgage or BFS segments; nearly 90 per cent of the business is inbound as distinct from telemarketing.

* Business stability secured through enduring customer relationships. Business reality highlighted by the need for stable back-end vendors. Relationships weighted more around capability and long-term pricing contracts than short-term bargain hunting by customers; also influenced by the ability of specialised vendors like HTMT Global to enhance client’s customer satisfaction and retention leading to growing volumes. Relationship pivoted around high Service Level Agreement scores, placing the company among top three BPO vendors for customers and reflected in a 50 per cent increase in business from two customers in the last couple of quarters.

* Posted growing profits in strong rupee environments over some of the last few quarters before the rupee weakened sharply. Business viability protected by an attractive 30-40 per cent wage and quality arbitrage opportunity for clients

* Negligible gearing has protected viability at a time when a number of international competitors with stretched balance sheets have exited the business in the last few months, enhancing an opportunity to improve market share. Fancy a balance sheet size of Rs 969 crore as on September 30, 2008 and a debt position of Rs 89 crore!

* Profitable balance of onshore (based in US) and offshore (India and Manila) business models; onshore business caters to clients needing back-end support for high end products; provides the company with an exposure to cutting-edge industry practices; provides a reference that leads to customer acquisition in other geographies; provides evidence to US policy makers that the company is creating jobs in US.

* Robust and growing domestic presence. The company was one of the first players to tap the domestic market for BPO services, which now contributes about 19 per cent of sales (Airtel is a client since 2005 contributing 15 per cent of sales).

* The US presence is conducted through a subsidiary called Affina, which shares a part of the profits with the erstwhile US owner; the agreement expires in December 2008 following which all the inflow will be retained; even as US margins are lower than in India, Affina turned profitable in the last two quarters of 2008-09.

* Proposed renegotiation of agreements with customers in January 2009 will translate into enhanced earnings.

* Increasing headcount by 3,000 this year to a total of 17,000; a Vashi (Mumbai) centre was commissioned in June 2008, a Chennai centre in September 2008 and a centre in North India is expected to go on stream by the end of this financial year.

* Significant cash buffer is a balm for weak nerves. Prior to de-merger of the combined entity, the Hinduja Group exited from the erstwhile Hutchison Essar in July 2006. The group sold its 5.1 per cent stake in the telecom service provider for $450 million in cash. Post de-merger, HTMT Global Solutions received its share of $110 million cash from the stake sale as a part of the stake was held by its Mauritius-based subsidiary ‘Pacific Horizon’. The company’s net cash on books is higher than its market capitalisation!

* There is a positive earnings momentum: EBIDTA margins have broadly climbed from 12.7 per cent to 18.9 per cent in the last six quarters; pre-tax and pre-adjustment profits have climbed from Rs 20.24 crore to Rs 33.65 crore during the period; topline has increased from Rs 143 crore to Rs 190 crore, indicating a sweet spot for the business.

Pray, then what could be the reason behind the company’s abysmal discounting? Theories abound.

Issues
* There is a perception that the company is largely supported by revenues from companies within the Hinduja Group; the reality is that not more than Rs 40 lakh was derived from BPO revenues for Hinduja Hospital of the company’s overall revenues of Rs 750 crore in 2007-08.

* The company generated $110 million from stake sale. The perception is that the company is under-utilising the war chest in terms of its potential. The reality is that the company has kept these funds in Mauritius; if it brings this money into India, there could be a tax implication of 33 per cent; the invested funds are generating a modest return of a little less than 5 per cent (post-tax). The war chest is being protected to acquire assets or companies or brands prudently. Even as the company maintains that this will be done only if the inorganic gambit is shareholder-accretive, investors have lost nerve.

If the strategy in panic-driven times is to sit on liquid assets, then it might help to remember a company where you can buy a rupee for a little more than just 30 paise! A wise investor had once said that the most profitable investing is when making money is as simple as simply going over and picking up cash that others have left around.


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HERITAGE FOODS - BUY

The Heritage Group, founded in 1992 by Sri Nara Chandra Babu Naidu (former Chief Minister of Andhra Pradesh) operates three-business divisions viz., dairy, retail and agri under its flagship company Heritage Foods (India) Ltd (HFIL). Presently Heritage's milk products have market presence in Andhra Pradesh, Karnataka, Kerala, Tamil Nadu and Maharashtra and has its retail stores across Bangalore, Chennai and Hyderabad. Its integrated agri operations are in Chittoor and Medak districts of Andhra Pradesh. Heritage Foods has its headquarters in Hyderabad, Andhra Pradesh

The company is listed on the BSE and NSE and falls in the T group category of BSE.

The BSE stock price trend of the scrip (BSE code: 519552) from 19.01.2007 to 19.12.2008 is as shown:

Closing Price Source: BSE

The scrip was Rs.272.85 on 19 Jan 07, reached the periodic high of Rs.444.05 on 06 Fec 07 and was Rs.73.25 on 19 Dec 08. The sudden spike during December 2007-January 2008 is due to the buying pressure during the bull run then. A trend line has been inserted to track the general periodic trend.



As on 31 Mar 2008, Total Income has risen by 80.73%, but PAT has dropped by 45.34% y/y. 2006, 2007 and 2008 have shown a falling trend for RoNW, which indicates decreasing profitability with the help of shareholders' funds. The rising Long Term Debt to Equity ratio indicates increasing dependence of debt as a source of financing. A plunge in PAT, PAT to Total Income ratio, RONW and EPS is seen between 2006 and 2007 because the company commenced retail business operations at the end of 2006 and incurred substantial start-up expenses.

Source: Company annual report 2007-08

The following factors appear favourable for the company:

· The company is expanding itself rapidly. 22 new units have been commissioned with procurement capacity of 2.51 lac litres per day (LLPD) in Andhra Pradesh and Maharashtra and 3 milk packing stations have been added totalling to 1.2 LLPD capacity in Andhra Pradesh and Karnataka. It also plans to spend 2.3 crores on expanding its dairy business further.

· The Indian retail market is expected to reach USD 427 billion by 2010. In the sway, the company plans to launch 30 more stores to the existing 70, thus aggregating to a total of 100 stores by the end of FY 2008-09. According to industry studies, people in South India have taken the supermarket-style of shopping very keenly. Hence, the company has a spread of more than 30 stores each in Hyderabad, Chennai and Bangalore.

· In order to distinguish itself from the competitors, HFIL has chalked out two strategies - Urban and Rural. The Urban strategy includes a home-delivery based model of retail goods as well as rewards and schemes for its customers. The Rural strategy includes deploying company representatives to sell FMCG products into rural areas. The company is confident that these strategies will help it win over its competitors in terms of market share.

· On 29 April 08, the Union Commerce and Industry Minister Kamal Nath assured that no foreign direct investment would be allowed in the retail sector. Hence, the company is relieved that there is no immediate threat of a foreign competitor entering India

Some risks pertaining to the company are as follows:

· The company has accepted that it is still considered as a regional and niche player in terms of expansion plans and geographical spread. This has led to hindrances in its recruitment policies, thus hampering the quality and quantity of manpower.

· As per the company's annual report, the company's size and scale of operations are small as compared to its competitors. It also faces a threat from future entrants.

· Since most cities in India are undergoing rapid urbanisation, the property and rental costs are rising sky high. This has a direct bearing on the company's profitability as its rentals payable are rising.

The following table analyses the current returns to an investor, if the stock was purchased at different periods of time.



The P/E ratio of HFIL is highest amongst its peers. This is one of the indicators of faith of the investors in the company. The stock is currently trading at its life-time low. To increase the revenue share from products, HFIL is establishing as well as increasing the production capacities for value added products such as ice cream, paneer, cooking butter, curd etc. This will help in its overall growth. Further, the above given positive factors seem to outweigh the risks, making the stock attractive. So, we conclude that the scrip is a good pick in the recent bearish markets.

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ABG SHIPYARD - out of Rough Sea?

ABG Shipyard formerly known as Magdalla Shipyard Private Ltd, is the flagship company of the ABG Group. The company is into shipbuilding and ship-repair activities. It has the distinction of being the largest private sector shipbuilding yard in India.

ABG Shipyard's state-of-the-art manufacturing facilities in Surat, is spread across 32.54 acres. This shipyard has the capacity to construct 23 ships on a modular basis. The yard has been certified by DNV - one of the world's leading registrars for certification as ISO 9001:2000 compliant.

The company is expanding its manufacturing facility in Surat and setting up a new shipyard in Dahej as well. The new facility in Dahej will have the capacity to build eight large vessels a year, ranging from Handymax and Panamax to Aframax.

These expansion plans have been financed through a mix of initial public offer proceeds, debt and private placement of equity. ABG raised Rs 157 crore through its maiden public offer, a majority of which would be utilized to fund the Dahej shipyard.

Financials
FY 06 FY 07 FY 08
Net Sales (Rs cr) 541.74 704.36 977.26
PAT (Rs cr)* 72.38 104.11 152.17
EPS (Rs) 19.77 22.84 31.55
RONW (%) 27.43 21.57 24.92
ROCE (%) 54.4 39.28 43.52
FY ending March 31 each year
*Net of non-recurring transactions


Investment Rationale
Diversified Product Portfolio
Shipbuilding sector is directly related to the fortunes of the shipping industry, which is cyclical by nature. Hence, to de-risk this factor, ABG has diversified its vessel offerings by catering to the oil and gas sector, short sea trade and the coast guard. The company has built support and utility vessels for oil and gas companies, and pollution control and interceptor vessels for the coast guard. These vessels are always in demand and provide a cushion to the company whereby it is not severely affected by the volatility in the shipping cycle.

Demand for Off-shore Vehicles
Of late, oil prices have touched record highs and that has led to a dramatic rise in the level of exploration activities with several oilrigs being set up. Normally, a single oilrig requires about 15 off-shore vehicles (OSV), which is an investment of around Rs 300 crore per rig, considering an average cost of Rs 18 crore to 20 crore for one OSV. In such a situation, the demand for OSVs is expected to be very strong. OSVs contribute about 30 per cent of ABG's order book. Recently, ABG bagged an order worth US$480 million from Essar Oilfields Limited, Mauritius to build tow self-elevating rigs as well.

Extension of Subsidy
Governments across the globe provide assistance to their domestic shipbuilding industry in the form of subsidy. Some countries like China provide assistance in the form of zero per cent interest and tax benefits. Such assistances have helped Asian companies out price their Indian peers in global biddings in the past. However, in 2002, the Indian government started a subsidy scheme under which it provides a 30 per cent subsidy for all export orders and domestic orders for ships greater than 80 meters. Such subsidy income, which constitutes about 16 per cent of ABG's shipbuilding revenues, will boost its earnings and enable it to compete with its international peers.

High Replacement Demand
The International Maritime Organisation has issued a directive to phase out all single-hull tankers by 2010 to reduce oil pollution in the oceans. This regulation will accelerate the demand for double-hull tankers. Furthermore, the average age of an Indian fleet is about 16 years. This factor will add to the replacement demand since 60 per cent of the current Indian fleet would need to be replaced within five years. ABG, which is expanding its capacity, would be optimally placed to capitalize on this buoyant demand.

Risks & Concerns
Discontinuation of Subsidy
Subsidy accounts for nearly 16 per cent of ABG's shipbuilding revenues and 13 per cent of the total revenue. Shipping Ministry of India is to provide subsidies worth Rs 400 crore to two major private shipyards, ABG and Bharti, but only ABG has received any amount from the ministry, and that too only Rs 20 crore. While the industry players are confident about receiving the subsidy, the wait may be longer. Furthermore, there are talks about the subsidy being cut down to 20 per cent.

Competition from Domestic, International Players
Domestic competitors include state-owned shipyards like Cochin Shipyard and private sector players, Bharti Shipyard are strong competitors. The company also has to compete against Chinese and South Korean companies. The competition can affect ABG's pricing and impact margins.

Order Cancellations
The shipbuilding sector has borne the brunt of the global trade and economic slowdown in the form of fewer new shipbuilding orders along with the cancellation of existing orders. However, the management of ABG has indicated that they have not witnessed any cancellations till now. Furthermore, ABG receives 20 per of the order amount as a non-refundable advance, which reduces the chances of an order being cancelled.

Valuations
ABG trades at 3.5x FY09E earnings and 2.2x FY10E earnings. Concerns of global economic growth slowing down and the credit crunch have led to decline in stock prices of shipbuilding companies. ABG's order book in excess of 10x FY08 revenues provides sustained revenue visibility, but concerns of current global trade slowdown and the renewal of subsidy by the Government of India prevail. ABG is at a 30 per cent discount to global average at 4.21x CY09E earnings. The target price would be at Rs 160, which means an upside of 38 per cent from current level.


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HDFC BANK - Safe as ever

HDFC Bank’s track record of consistent growth with high profit margins and robust risk management systems bode well for the future.




HDFC Bank’s ability to grow at over 30 per cent annually in the last nine years, along with superior credit risk management practices, which have helped it maintain asset quality, would ensure that it will be among the least affected in a slowdown. The bank’s focus on technology and superior margins with support from low-cost deposits will ensure profitable growth in the future.

The merger of retail focused-Centurion Bank of Punjab (CBOP) with HDFC Bank effective May 23, 2008, will shore up revenues in the medium-term. However, the synergies from the merger with start reflecting over 12-24 months, and boost profitability. Put together, the gains from organic and inorganic initiatives will help the bank sustain growth rates in excess of its historical average of 29-30 per cent, and in a profitable manner.

Post-merger
The inherent synergies of HDFC Bank and CBOP in their retail focus was the driver for the merger, which added around 400 branches to HDFC Banks’ branch strength of 760 (as on March 2008) along with a 15-20 per cent increase in the asset base to more than Rs 1.7 lakh crore. While the merger has helped increase the size of HDFC Bank, it has also led to some pressure on key ratios (see Merger Effects) for the combined entity; CBoP ratios were lower than that of HDFC Bank. The next pertinent question is the pace of integration, and how fast HDFC Bank can ramp up efficiency levels of CBOP to its own benchmarks.

The integration plan is on schedule. The re-branding of CBOP was completed in May itself; training processes to assign all the employees of CBOP in their new roles is marching ahead with almost 90 per cent of the people retrained. With regards the systems, treasury, wholesale banking and retail loan segments, they have already been integrated with HDFC’s platform, while the overall retail banking is expected to be completed in the next two months.

MERGER EFFECTS
Rs crore CBOP **
9 Mths HDFC Bank**
9 Mths Standalone
FY 08 Post-merger
H1 FY09
Net Int. Income 505 3,586 5,228 3,590
Other Income 459 1,734 2,283 1,237
Net Profit 123 1,119 1,590 992
Cost/income (%) 63.0 49.7 49.9 55.4
NIM (%) 3.6 4.3 4.4 4.2
CASA (%) 24.5 50.9 55 44.0
Net NPA (%) 1.7 0.4 0.5 0.6
CAR (%) 11.5 13.8 13.6 11.4
** Pre-merger and for nine months ended December 2007

The actual benefits will start to filter in the next 12-24 months, with improved productivity in terms of net revenue (net interest income and other income) and CASA (the ratio of low cost deposits to total deposits) growth of CBoP branches on par with HDFC outlets. But before that to happen, HDFC bank will have to shoulder the pressure in the medium-term.

For instance, on the efficiency front, the cost to income ratio has also increased from 50 per cent in March, 2008 to around 55 per cent in Q2 FY09 on the back of higher employee costs and integration costs, post the merger. The integration of the two banks’ technology-based platforms is expected to be completed by the end of this fiscal, and will improve the cost efficiencies going forward.

Likewise, the capital adequacy ratio (CAR) dropped to 11.4 per cent in Q2 FY09; this can partially be attributed to the merger blues and also organic growth of loan book. However, it is comfortably above the regulatory requirement of 9 per cent. Notably, CAR will improve and provide capital for future growth, if the promoters exercise their right to convert warrants and infuse Rs 3,500 crore (warrants already issued, conversion price of Rs 1,500 per share, deadline is December 2009).

STEADY GROWTH
Rs crore FY 2008 FY 2009 E* FY 2010 E *
Net Interest Income 5,228 7,805 10,600
Other Income 2,283 3,222 4,085
Net Profit 1,590 2,290 2,950
EPS (Rs) 45.4 54 66
P/BV (x) 3.2 2.4 2.1
E *: estimates for merged entity

Sustained growth
HDFC Banks’ net revenues have grown at a CAGR of 44.5 per cent in the last five years on the back of net interest income (NII) and other income growing by 43 per cent and 47.7 per cent, respectively. Net profits grew by 33 per cent; the lower pace is due to the bank’s prudent policy of higher provisioning (last three years).

Of late, HDFC Bank has been going slow on the retail loans and even CBoP’s non-issuance of fresh loans (since December 2007) to the two-wheeler and personal loan segments, has ensured comfortable NPA (non-performing assets) levels for the combined entity. Gross NPA and net NPA are up 40 basis points and 20 basis points y-o-y in Q2 FY09 to 1.6 per cent and 0.6 per cent, but are comfortable in comparison to peers. Analysts say that HDFC Bank, after the merger, would provide higher provisions to the combined entity in line with its own superior provision coverage of around 67 per cent (CBOP’s at 55 per cent). Although, it will add pressure on the profitability in the near term, it will help avoid slippages in asset quality in the future.

The advances haven’t slowed and this is indicated from the credit-deposit ratio rising from 63 per cent (FY08) to around 75 per cent in Q2 FY09. The recent CRR cut has released additional funds of around Rs 4,500 crore that could be used for further loan disbursements and provide support to NIMs (CRR balances with RBI do not yield any returns). The higher yield on advances and investments in conjunction with high interest rates has meant that NIM is still comfortable at 4.2 per cent.

Investment rationale
The demand from the domestic corporate sector is also robust as the external doors are relatively closed in view of the global liquidity crunch. This should also help offset any slowdown in retail lending and lower concerns pertaining to retail defaults. HDFC Bank’s ability to transfer its operational efficiencies to CBOP assumes importance for future growth. Considering its track record of successfully integrating Times Bank with itself in 2000, the bank will also accrue the benefits from the existing CBOP branch network through increased offerings of HDFC Bank products, which will help shore up revenues.

Superior NIMs, a high proportion of low-cost deposits (at 44 per cent) and an extensive branch network (now at over 1,400) will drive growth without appreciable cost pressures. This quality and profitable growth along with low valuations, provides an investment opportunity for long-term investors. At Rs 856.70, the stock trades at around 12.5x (traded at an average 20-25x in the last five years) and P/BV at 2.1x its FY10 earnings, and can deliver 18-20 per cent annually for the next few years.



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IPCA LAB

Ipca Laboratories’ focus on branded formulations and expansion into the US market will help it post strong growth rates over the next two years.




While the healthcare index has been quite resilient in the face of the equity meltdown dropping 28 per cent to Sensex’s 55 per cent over the last one year, some healthcare stocks have fallen quite sharply offering an attractive opportunity for investors. Once such scrip is Mumbai-based Ipca Laboratories, which despite registering robust rates and having strong cash flows lost about half its value since its peak in January this year and is trading at Rs 360 levels.

The company which gets about three quarters of its revenues from formulation sales (APIs make the rest), exports its products, largely in the high margin lifestyle segment (cardiovascular, anti-diabetics etc) to over 100 countries across the world and is preparing to expand its presence in the US market.

Exports
While Europe constitutes nearly half of the company’s exports, the company is now eyeing the US market especially in the formulations segment in a big way. The company has two tie-ups---one each with Ranbaxy and US-based generic pharma company, Heritage Pharma to distribute its formulations. While Ranbaxy has recently launched Metoclopramide tablets with annual sales of $27 million, Heritage introduced Propranolol tablets (annual sales $25 million). Ipca Labs’ executive director A K Jain says that the strategy of seeking out more partners will continue and the company will not establish a distribution network due to high costs and the need for a large generic portfolio (at least 100 ANDAs) to make it a viable proposition.

The arrangements are on profit sharing basis which includes the cost of manufacturing and marketing of the product. The company’s formulations exports to the US started in September and the company expects sales of about Rs 15 crore for FY09. Currently, formulation exports are being carried out from a smaller FDA-approved unit at Silvassa (the company has two units there) which is capable of manufacturing 9 products and the maximum exports turnover from this would be about Rs 40 crore.

Once its bigger units in Silvassa and at the SEZ unit in Indore get FDA-approved, the company expects to scale up to 40 products and earn a sizeable chunk of revenue over the next two-three years. While 28 products are under development, the company has applied for ANDA approval for 11 products. Overall, the company currently manufactures 65 APIs and two years down the line expects this number to move to about 100.

Domestic market
The company’s top brands in the country include the anti-malarial drug Lariago with sales of Rs 45 crore, Zerodol range (Rs 42 crore) (pain management) and Perinom, a drug to treat nausea (Rs 25 crore). While the company is planning to launch only one new drug per marketing division (it has eight divisions), its focus will be on brand building and consolidation rather than launching a larger basket of products. Driven by sales in lifestyle drugs which account for 30 per cent of the company’s business, IPCA expects to grow its domestic formulation business by about 17-18 per cent over the next two to three years.

ATTRACTIVE VALUATIONS
Rs crore FY08 FY09E FY10E
Net Sales 1,082 1,299 1,559
EBIDTA 229 292 359
Net Profit 141 169 203
P/E (x) 6.4 5 5
E: Estimates

Expansions
The company plans to invest about Rs 75 crore in the current fiscal. Major investments include upgradations of API facilities in Ratlam at a cost of Rs 20-Rs 25 crore and an equal amount at the formulation plant at Athal, Silvassa (used for exports to Europe). Imported packing lines will be installed at the Athal facility and will help the company triple capacities at the plant. The company has lined up a further Rs 100 crore investment for FY10 which includes the setting up of its Sikkim plant and the expansion at its SEZ unit in Indore. The expansions will be funded by small loans and internal accruals, which include annual cash profits in excess of about Rs 170 crore.

Investment rationale
In addition to utilising its internal accruals for expansions, the company plans to buy back shares up to Rs 60 crore at a price not exceeding Rs 600. The buyback plan allows the company to take advantage of the low prices and is expected to boost investor sentiment.

On the operational front, the company has had to grapple with high raw material (RM) costs due to supply issues in China in the last two quarters. However, better product mix and higher sales in APIs as well as branded formulations has helped bring down the RM to sales ratio to 35 per cent (40 per cent) and improve EBIDTA margins by 400 bps y-o-y to about 24 per cent in the September quarter.

Of its products, branded formulations fetch the highest EBIDTA margins of about 27-28 per cent while generics bring the lowest at 15 per cent with APIs contributing in line with the company’s overall margins of 22-23 per cent. Going ahead, higher branded formulation sales in the lifestyle segment is expected to help the company grow its sales by 20 per cent in the current fiscal. Its growth plans will get a boost once its facilities are approved by the US FDA and the company introduces a larger basket of formulations in the world’s largest healthcare market.

At Rs 360, the stock trades at just under 4.5 times its FY10 earnings and would fetch around 30 per cent returns over the next 15 months.


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Proctor & Gamble - No Gamble pure Logical Investment

Underpenetrated markets, low per capita consumption and well established brands will translate into high growth rates for Procter & Gamble.




A basket of popular products, access to superior technology and good understanding of consumer needs are factors that have helped Procter & Gamble Hygiene and Health Care (P&G) report robust growth rates in the past. The company, however, has not been resting on its laurels. In fact, P&G has been proactive in building near-term as well as long-term growth drivers, which will not only help maintain leadership in its businesses, but also in sustaining growth rates going ahead. In this light as well as given the current uncertain market conditions, this stock is a good investment, offering a combination of growth as well as safety at reasonable valuations.

Strong businesses
For decades, its ‘Vicks’ brand has been synonymous with remedies that cure cold and cough. Various innovations in the past have helped maintain healthy sales growth in the healthcare business (Vicks branded products; estimated market share of 17 per cent), which contributed a little over Rs 300 crore to sales in FY08. Going forward, says Pritee Panchal, analyst, SBICAP Securities, “There is a lot of potential in this segment, but don’t expect high growth rates-expect about 10 per cent annual growth on an average. That’s because, Vicks Vaporub, Formula 44 and Inhaler are seasonal products. Vicks Cough Drops (in candy form) though is more of confectionary product and will help this segment grow fast.”

The feminine care business, which sells sanitary napkins under the ‘Whisper’ brand, has reported an average annual growth rate of 20 per cent in the last five years. It clocked sales of Rs 340 crore in FY08, representing a year-on-year growth of 21 per cent. The growth rate was higher at almost 30 per cent in the first quarter ended September 2008, driven by 50 per cent growth in ‘Whisper Choice’ and 34 per cent in ‘Whisper Ultra’. Says Panchal, “A 50 per cent growth in the mass segment product (Whisper Choice) in Q1FY09 signifies growing acceptance, affordability and usage of these products among the middle-class urban women.”

Analysts expect this business to clock growth rates of over 22 per cent (average), which should help Whisper, a leader in urban India with a market share of 50 per cent (value terms), become a $100 million brand in two years.

Favourable prospects
While the slowing economic growth may have a marginal influence on demand, the fact that the company’s products are driven more by necessity rather than luxury (discretionary) provides comfort. Notably, the overall growth dynamics for the businesses continue to be very favourable.

Consider this. In case of sanitary napkins, statistics (source: company) indicate that there are 26.6 crore menstruating women in India, of which, only three per cent use branded sanitary napkins. Even if the economically weaker population is excluded, the penetration levels would be far lower than 32-60 per cent in other developing economies like Thailand, Philippines and China (in developed countries like USA and Japan, it is over 85 per cent). The other evidence of long-term growth opportunity is the fact that by 2050, more than half of India’s population will be under the age of 25 years.

That apart, the growing population of working women, increasing literacy levels, higher disposable incomes and the expanding middle- and upper-middle class are some key factors that clearly indicate the huge potential for companies like P&G and hence, will help drive growth rates in the future.

Right moves
Among various initiatives, the introduction of low value packs (Rs 5 pack of Vicks Vaporub) and mass segment products (Whisper Choice) has helped the businesses grow at a fast clip on the back of increased volumes. On the other hand, the company’s emphasis on delivering new solutions based on customer needs has helped it stay ahead of competition. For instance, in FY08, P&G upgraded its ‘Whisper Maxi’ product in line with customer needs.

In the long-run, P&G’s initiative through the ‘Whisper School Program’ will help raise awareness among consumers and build the path for future growth. The programme involves educating adolescent girls and mothers about hygiene care, and so far has reached 6 million girls (1.6 million in FY08). The impact of this programme has been encouraging. According to the studies undertaken, while two-thirds of the school girls were using cloth (instead of sanitary napkin) before the programme, only six per cent continued to use cloth after the programme.

ROBUST MARGINS
Rs crore FY08 FY09E FY10E
Net sales 646 775 910
Net profit 131 170 200
OPM (%) 28 28 28
EPS (Rs) 40.5 52 62
PE (x) 18.2 14 11.9
Source: CapitaLine Plus, analysts reports

In a recent move, the company tied up with National Rural Health Mission, Rajasthan, to educate the rural women about hygiene issues. Such measures should help improve education levels among women and thus, increase penetration of sanitary napkins in the rural areas, which so far has been negligible. In short, it should prove helpful for P&G in the long run.

Growth blocks in place
During FY06-08, the company invested nearly Rs 60 crore towards capacity creation (Rs 10 crore was invested in its Goa plant for hygiene products and Rs 26.7 crore in Baddi plants for healthcare products, in FY08 alone), thereby almost doubling the fixed assets to Rs 123.10 crore in 2007-08. While the two Baddi plants enjoy tax incentives and help the company lower its tax expenses, these investments are sufficient to take care of the company’s capacity requirements for the next few years. Nonetheless, the low capital-intensive nature of the businesses and high cash-flows suggest that internal accruals are more than enough to take care of future capex, whenever the need arises.

More importantly, the company enjoys the backing of its US-based parent, The Procter and Gamble Company, which offers the necessary technology and products, helping it to sustain growth rates. In return, the company pays royalty to its parent, which works out to about five per cent of sales. Even thereafter, P&G ends up with a hefty net profit margin of 20 per cent (partly helped by tax incentives), which is enviable.

Investment rationale
There is no doubt that the company has in place the key growth ingredients like strong brands, access to latest technology, healthy balance-sheet and an insight into consumer behaviour. The under penetrated markets, rising population of working women, low per capita consumption and, improving income and literacy levels are also conducive for long-term growth.

All these should help P&G achieve topline growth of 16-18 per cent for many years and become a Rs 1,000 crore company in the next three years. Notably, profits should grow faster at over 18 per cent, to some extent helped by lower taxes. At Rs 735, quoting at a PE of 14 times (not adjusting for the cash, worth Rs 51 per share, held as on June 2008), the stock can deliver 18-20 per cent annual returns for next two-three years.



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SBI - the Big Boss

Adverse times may not be bad for all. State Bank of India (SBI), the largest domestic banker with a share of around 16 per cent (in both, advances and deposits), is aiming to up its market share further and in a profitable manner. The above industry growth in advances in the recent past is just an indication. A wide branch network would sustain the management’s stance of improving its business share in these difficult times.



A focus on agriculture and rural segments would give it an edge compared to its private peers. Diversified loan portfolio, higher exposure to low cost deposits with improving cost efficiencies would ensure steady profitability. Consolidation of SBI with its affiliate banks (which command another 6-7 per cent of the market share) and unlocking of value from its subsidiaries make SBI an ideal pick for long-term investors.

Rural drive
Rural and agricultural segments are an under-penetrated market for the banking sector. The historical focus of public sector banks (PSB), vis-à-vis the private counterparts, in these areas, would stand them in good stead. SBI, the biggest of the PSU lot, owns 13 per cent of the industry’s total branches in rural areas; around 70 per cent (or 7,100 branches) of its total branches are in the rural and semi urban (RSU) regions.

SBI intends to improve its branch strength in RSU areas to around 10,000 by 2010, backed by enhanced use of technology. The improved operational efficiencies along with the typically higher CASA levels (low-cost current and savings account deposits) in rural areas would ensure sustained profitability, besides growing volumes.

Sound financials
The total interest income and the net profits have grown by an average 12.5 per cent and 16.3 per cent, respectively in the last 5 years. In the first half of 2009, in line with growing profitability, the net profits grew by 29 percent, above its five-year average due to lower growth in operating expenses, over the corresponding period. Recently, advances have grown at 37 per cent y-o-y in Q2 FY09, much faster than in FY08 (at around 23.5 per cent) indicating that credit off-take is high, with the bank’s inclination to increase its market share in the advances segment.

It is noteworthy that advances were robust to corporate and SMEs, in spite of SBI increasing PLR by 1 percentage point this August. The advance growth is witnessed at a time, when most of the banks are decreasing their credit off take, to avoid any probable increases in asset deterioration. As a preferred lender for many borrowers, the bank has been able to lend at higher levels for the deposits garnered, thus ensuring a credit-deposit ratio of above 77 per cent in the last two years. Although, net NPA (non-performing assets) have fallen from 1.8 per cent in FY08 to 1.34 per cent in Q2 FY09, the aggressive advances stance along with low provision coverage may lead to deterioration in asset quality in the future.

SBI holds the largest CBS-enabled branch network (around 10,500) with growing efficiency levels, reflected in the cost-to-income ratio improving from around 54 per cent in FY07 to around 45 per cent in H1 FY09. SBI is planning to add around 25,000 employees and aggressive expansion of around 1,500 branches during the course of next year, which would put pressure on the cost-to-income ratio in the near-term.

Despite increases in operating costs, the additional staff and branches would help to attract CASA deposits (which stand comfortable at around 40 per cent) along with increase in fee income (cross selling of insurance and mutual fund products). The higher CASA levels have enabled SBI to maintain net interest margins (around 3.16 per cent) at decent levels. Going forward, although mobilisation of higher-interest term deposits would put pressure on margins, the cut in CRR and repo-rate by the RBI could offset a large part of this pressure, enabling SBI to sustain margins at over 3 per cent.

VALUABLE BANKER
in Rs crore FY 2008 FY 2009 (E) FY 2010 (E)
Net Interest Income 17,021 20,894 24,151
Other Income 8,695 10,074 11,487
Operating Profit 13,108 16,674 18,806
Net Profit 6,729 7,834 8,312
EPS (Rs) 106.6 124.1 131.6
P/E (x) 10.7 9.2 8.7
P/BV (x) 1.47 1.3 1.16
E: Analysts estimates

Add-ons
The RBI’s roadmap of allowing foreign banks, to operate on par with domestic banks in India would pose greater competition to PSBs in the future. It becomes prudent for the domestic banks to consolidate to match the foreign counterparts in terms of size and scalability. Large branch network of more than 15,000, balance-sheet size of more than Rs 10 lakh crore, common technology platform along with about a fourth of total deposits and advances in the country, would create a behemoth- SBI group. While SBI and its associate banks have already integrated their operations to a large extent, the physical merger is expected to shape up in the future.

In fact, SBI has rolled out it plans in this regard with the merger of State Bank of Saurashtra (SBS) with itself in August 2008. Although opposition from employee unions is on the cards, governmental support is also vital as was the case with SBS, for the mergers to happen swiftly.

In addition to affiliates, SBI has exposure in other financial services businesses like life insurance (SBI Life), asset management (SBI Mutual Fund), investment banking (SBI Cap) though its subsidiaries. SBI Life and SBI MF are leading players occupying fifth and sixth positions in terms of market shares in their respective categories. Other subsidiaries operate in credit cards, factoring, security trading and primary dealership in money markets.

Investment rationale
A wide network, better connectivity (using IT) and strong brand equity would help the bank grow its rural business. The receipt of around Rs 1,700 crore through the debt waiver scheme in December 2008 will also be a positive in the near-term. SBI has observed a decline in CAR to 11.5 per cent in the latest quarter, due to growth in advances and this could be short-term phenomena as the bank is trying to raise capital.

Besides, the recent cut in risk weights would also increase its capital base in line with the RBI’s promulgated CAR levels of 12 per cent. A diversified loan book, judicious lending and stricter monitoring would keep the NPAs at reasonable levels, in these tough times.

The stock is available at around 9 times of its estimated FY09 earnings and P/BV of around 1.3 of its FY09 standalone book value. Industry leadership, well-spread out asset mix along with additional value of around Rs 300-350 per share (on account of value of affiliate banks and subsidiaries) together with attractive valuations, makes it a valuable proposition. The stock can deliver around 20-25 per cent in a year’s time.



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