Natural Resources: Stock Up For 2008

At this very moment, we are witnessing a natural resource explosion of massive global dimensions ...

 

Nearly every resource under the sun is surging in value — gold busting through the $800 level ... silver up 18% ... platinum, 33% ... oil nearly reaching $100, its highest level ever ... and more.

 

Nearly every stock linked to natural resources is powering higher.

 

Every natural resource-based stock market — Brazil, Canada , Australia, New Zealand and more — is enjoying spectacular gains. Every natural resource-based foreign currency and every commodity-driven ETF is surging in tandem.

 

In sum, we have a natural resource explosion of massive, global dimensions.

Of course, corrections — sometimes moderate, sometimes sharp — are inevitable. But they're bound to be short-lived as three megaforces come together to drive the biggest natural resources boom of all time ...

 

Megaforce #1
Massive, Rapid Growth of the World's Largest and Most Populous Continent

 

Imagine a continent five times larger than the lower 48 states with thirteen times the population.

 

Then imagine a socio-economic transformation that combines the Industrial Revolution, the Information Age, and the rapid birth of fervent entrepreneurial spirit, all concentrated into one short generation.

 

That's the phenomenon called Asia today — steam­rolling ahead, overtaking the world's leading industrial powers and leaving many in the dust. Here are just the most recent results:

 

* China's third-quarter growth was an astonishing 11.5%, four times faster than ours, with spending on factories and property surging 26.4%, industrial production expanding 17.9%, and the country's trade surplus up 70% in the first nine months.

 

* India is not far behind. Economy — up 8.9% in the third quarter. Money flooding into the Indian stock market — $19 billion so far this year, already double last year's record $9.5 billion. Money to be spent on infrastructure and manufacturing — more than $500 billion in the next three years.

 

* Singapore's economy surged 9.4%, the longest expansion since 1991. Factories, financial services, construction — all booming.

 

* South Korea, Malaysia , Hong Kong, even traditionally troubled sisters like Indonesia and the Philippines — all following a similar path.

 

End result: A megaforce of unprecedented dimensions driving the demand for energy, metals, foods and more. Some examples ...

 

Aluminum consumption is rising at nearly 30% annually, hitting a record 14.6 million metric tons this year.

 

Nickel, used to make aluminum, is in such intense demand that inventories monitored by the London Metal Exchange have plunged a whopping 89% in the past 12 months to 3,702 tons. That's less than enough to last two meager days of global consumption.

 

Zinc stockpiles just hit their lowest level since 1991 due to overwhelming demand.

 

And despite the U.S. housing bust, copper demand has exploded to more than 18 million metric tons annually.

 

Gold demand is jumping 20% annually. In the third quarter, which ended August 31, India alone consumed more than half the world's total production.

 

Platinum demand is growing at the highest rate of all time.

 

Demand for coffee, wheat, corn, soybeans, even palm oil is off the charts.

And don't forget crude oil. OPEC nations are pumping at near capacity.

 

Mother Earth is straining to pony up the black gold. But it's still not nearly enough to satisfy the spiraling demand from Asia.

 

Result: The highest crude oil prices of all time in nominal terms, and very close to the highest of all time even in inflation-adjusted terms.

Megaforce #2
The Plunging U.S. Dollar

 

The U.S. dollar has now crossed a landmark that will go down in history as the turning point of our era: The greenback has plunged below its all-time low in 1992 to its lowest level of all time.

 

With this single, landmark event, the dollar has crossed from a period of slow, orderly declines ... to a new era of rapid, chaotic declines; from a time when its impact could be ignored ... to a time when its impact will be felt everywhere, especially on those assets that rise the most when the dollar falls — natural resources.

 

And as the greenback sinks, foreign currencies soar:

 

The euro is on a rampage, surging by more than 10 U.S. cents just since August and up 11.5% since the beginning of the year.

 

The Canadian dollar surpassed par with the dollar for the first time in 30 years — and then kept right on going. It now buys around $1.00 U.S., the most since 1960.

 

The Australian dollar, which bought 78 U.S. cents just two and a half months ago, now buys 88 cents ...

 

The Brazilian real has set a seven-year high ... the South Korean won and the Singapore dollar just hit their highest levels in a decade ... even the Chinese yuan, forcibly held down by the Chinese authorities, has jumped to a new high.

 

The impact on natural resources is both immediate and long term.

 

The reasons: Nearly all of the world's resources are priced in dollars. So almost as soon as the dollar falls, their prices have to adjust upward to compensate for the dollar's decline.

 

Meanwhile, international investors, still stuck with trillions in falling U.S. dollars, are not standing still. They see what's happening. And they're running for cover, switching from dollars to any and every contra-dollar asset they can lay their hands on — foreign currencies, gold, silver, other natural resources.

 

Buying contra-dollar investments has been the core of our strategy, and we certainly hope you've followed our lead. If so, you already own what millions of investors around the world now crave — investments that go up when the dollar goes down. If not, it's certainly not too late to start, thanks to ...

 

Megaforce #3
Central Banks Flooding The World With Paper Money And With Wild Abandon

 

The world's monetary authorities see the U.S. housing market in its worst downturn of modern times. They see hundreds of mortgage lenders going broke or on the brink.

 

And they see financial firms reeling from tens of billions of dollars in losses.

 

So they're panicking. Running the printing presses overtime.

 

In the U.S., the Fed has been injecting the most money into the banking system since the 9/11 attacks.

 

In Europe, the supply of money is exploding at its fastest pace in 28 years. In Asia, it's even more extreme — money pouring out of every nook and cranny and flooding into the global markets.

 

Meanwhile, interest rates — normally driven higher by surging economies and soaring commodity prices — are, instead, being held down or even pushed sharply lower.

 

Just in the last two months, the U.S. Fed has slashed its discount rate by 1.25 percentage points and its fed funds rate by .75!

 

The European Central Bank, hell bent on hiking its official rates just three months ago, abruptly stopped. And central banks all over the world did the same.

 

 

No Time Left! Take Action Now ... or Never

 

Look. We're not talking about a long-forgotten event or even a soon-to-come storm on the horizon. This is it! These megaforces are here now. Either you do something to adapt ... or you could be left behind.

 

These are opportunities that can change your life and secure your future ... while the pitfalls could erode — and ultimately destroy — your earnings, your savings and your retirement.

 

And if you're thinking the bulk of the commodity-price rises are behind us, think again. Measured in today's dollars, the price of almost every natural resource on the planet is still far, far below the peak price levels established the last time central banks did what they're doing today.

 

Just to match that peak, the price of aluminum would have to surge by over 2.2 times from its recent peak and the price of tin would have to jump by nearly 2.4 times.

 

If gold rises to the same level as it did back in 1980, measured in today's dollars, it would go to $2,271 per ounce — almost triple its most recent peak.

And for some commodities, the undervaluation today relative to their prior peaks is even more extreme: Cocoa, now in rising demand in Asia, would have to sextuple in price. Sugar would have to go up by more than eleven times!

 

Silver, meanwhile, would have to surge to $145, nearly 10 times today's peak.

No one can say with certainty that they will go that far. Nor can anyone be sure their rise will be contained to those levels. But one thing is obvious: There is no evidence that commodities are peaking ... and there's abundant evidence that they have much more upside potential.

 

Ditto for ETFs that track commodity-sensitive economies ... shares of companies profiting from the resources boom ... and foreign currencies that are rising in value as the dollar sinks.

 

What would it take to end this boom?

 

Almost three decades ago, Fed Chairman Paul Volcker ended the last commodity boom with Draconian money-tightening actions — jacking up interest rates by three full percentage points in one single announcement, slapping credit controls on the entire economy, sucking up the world's excess money like a giant vacuum cleaner.

 

Think about that scenario for a moment. Even in your wildest dreams, could you see today's Fed Chairman, Ben Bernanke , doing something similar?

 

If your answer is "no," then you can rest assured that the end of the natural resource boom is not today or any time in the foreseeable future.

 

So ... stick with it. Ride this boom as far as it will take you. When we see the opportunity, we will have you take profits along the way. But for the most part, our strategy is to guide you to opportunities that are still in their pre-take-off stage ... and use every subsequent correction as a buying opportunity.

 

This South American country's GDP surged 6.1% in the second quarter. It's where we're seeing the biggest gains in decades in employment, consumer spending, and investment ... where the single largest export is booming ... and where the currency is rising steadily against the U.S. dollar.

 

So how can a conservative investor participate in that country's stable-but-rapid growth?

 

Alternative energy company with soaring profits

 

A torrent of forces have converged to create the perfect storm for skyrocketing oil prices:

• Surging worldwide demand ...
  
  
• A new string of Fed rate cuts ...
  
  
• The U.S. dollar teetering on the verge of collapse ...
  
  
• New tensions between Turks and Kurds ...
  
  
• New attacks on oil-producing facilities ...

And no matter what you may already own in this sector, the time is right to branch out into alternative energy, fast becoming a national — and global — priority. One of our favorites: Solar energy.

 

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Ispat to fund expansion plans via equity route

Source : CNBC-TV18

Ispat Industries has a debt of about Rs 6500 crore. However, the company has plans for expansion, for which it wants to take the equity route. Speaking to CNBC-TV18, Anil Sureka, ED Finance said that they expect debt to come down by close to Rs 800 crore over the next four quarters. He added that they will finance their capex plans via promoters, internal accruals and convertible instruments.


Talking about the company’s expansion plans, Sureka said they will up their HR coil capacity to 3.6 mt and will also add a blast furnace. A 4.5 mt pellet plant and a one mt coke over battery has also been planned. They will also be setting up a 1200 MW power plant costing about Rs 5000-5500 crore in Chhatisgarh

Sureka clarified that LN Mittal has showed no interest in Ispat Industries. According to him, steel prices will improve further on raw material pressures.

Excerpts of CNBC-TV18’s exclusive interview with Anil Sureka:



Q: Before we talk about your expansions, just talk to us a little bit about what you are doing on the capital side. You’ve got nearly Rs 7,000 crores of debt. How much of that are you in a position to repay over the next four quarters? Would you need to raise any equity to finance some of these expansion plans? Just give us a layout.
A: Today you must have seen that our company has given a notice to the stock exchange for giving a warrant to the sponsors and that meeting will be taking place on December 22. This is basically to raise the equity side and the expansion scheme which of which we are now are in the implementation process, most of the money will be raised through the equity rated instrument only. That is also the way we are going to correct our debt equity ratio.



Q: Could you throw some numbers here? How much money would be pumped in by the promoters specifically, what their stake would go up to, whether you would issue any equity to non-promoter shareholders and what the debt will come down to in the next four quarters?
A: In the next four quarters the debt will come down by close to Rs 800 crore. How much equity we allot to sponsors will be decided in the board meeting only. Normally in a year we can give 5% equity voting rights to the sponsors. So it will be within that range.



Q: Where does your total debt stand at right now?
A: It is actually Rs 6500 crore.


Q: There are all kinds of rumours circling the market and you would be the best person to address them. Is it true that the Mittal family is showing any kind of interest in Ispat and you are in any sort of talks with them for some kind of stake sale?
A: This company belongs to the Mittal family only, Pramod and Vinod own the company.



Q: We are talking about Lakshmi Mittal’s family out here?
A: No I don’t thinkso, there is no such thing.



Q: Along with the debt reduction, what kind of capacity addition plan is it that Ispat has over the next four-six quarters?
A: We have planned that we’ll increase the HR coil capacity to 3-3.6 million tonne and we are also adding a blast furnace to support the capacity. We have also planned a pellet plant of roughly 4.5 million tonne. These are the major capex plan we have launched.

In addition to these, we have also launched a coke oven battery of 1 million tonne capacity. That will be in a separate SPV and it will be in a joint venture. All other projects will be in Ispat Industry.


Q: Could you give us a timeline of when this coke oven and the pellet plant would be up and running? What is the total investment that is required for all these expansions that you are talking about?
A: The coke oven will cost roughly Rs 900 crore and the pellet plant and the 3.6 million tonne blast furnace it will cost roughly Rs 1600 crore. The timeline for the pellet plant is roughly 27-months, coke oven is about 24-months and the other project between 12-16 months time.



Q: What kind of pricing do you see steel holding over the next four-six months as you go through the process of cleaning out debt and expanding capacity as well?
A: The steel prices will further improve, that is the industrial view because there is a lot of pressure on raw materials also. Raw material prices are going up and everybody knows that next year, the way things are happening in the iron ore business, industrially also the prices will go up.

Everybody is expecting that there will be a bit of upward movement in the raw material and that it should be the same in the HR finish goods also.



Q: Give us some details on the power project in Chhattisgarh. What kind of investment it would entail, by when you expect to commence work out there and what the capital investment structure is out there?
A: First I would like to address the 110-megawatt power plant which is already in the construction. This will be commissioned by November 2008. This is based on the blast furnace gases at Dolvy and it will meet roughly 30% of the requirement of the steel plant. So that will bring down the cost of power substantially.

Now coming to Chhattisgarh, we have signed an MoU with the government of Chhattisgarh for setting up a power plant of 1200 megawatt. It should cost around Rs 5000-5500 crore. Presently we are in the process of tying up the fuel, once that is tied up, then we will do the other activities too like the environmental clearances of the sector, etc parallel to that. But this will all be in a separate company, not in Ispat Industry.



Q: Just to ask that question again, since it keeps cropping up, are you sure that Lakshmi Mittal and Vinod Mittal have had no discussions about any kind of a joint development plan or expansion plan under the Ispat umbrella in India?
A: To my knowledge I am 100% sure.



Q: One word as well on what exactly you might look at in this equity route to raise finances?
A: One, we are talking to the sponsors. This week we will have a meeting for the allotment of warrant to them and the Board will decide. The other is we are raising finances for this Rs 1600 capex that we have planned. This will be mostly support by the sponsors, it will be a combination - sponsors, intellectuals or maybe some convertible instruments.

Q: But no more debt will be loaded on balance sheet, right?
A: The debt burden will not be much, we are trying to bring down the debt.

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New Multibagger: Shiv-Vani Oil

Shiv-Vani Oil-Drilling Profits

BSE 522175;

CMP Rs 551

Target: 1000 in 12 months

 

Shiv-Vani Drilling is likely to become one of the prime beneficiaries of the near $ 3 bn Oil Exploration Budget of Ongc over the next 2-3 years. The hunt for Crude Oil is on in right earnest, as the GOI opens ever more larger blocks to foreign and domestic oil explorers both on-shore and off-shore. The Key Mantra these days is Oil Security and beyond Mukta, Panna, Tapti, Lakshmi, Aishwarya and Cairns Mangala on-shore prospects, only the Deen Dayal and Dhirubhai fields in AP offshore have discovered either oil or gas, since Crude was discovered in the Assam-Arakan belt before independence and in the Bombay High segments in then early 70s.

 

Shiv-Vani has 25 onshore rigs under operation with one more getting added in FY08. Additionally, it has 4 offshore vessels and is seeking to acquire jack-up rigs and PSVs, which would diversify its Revenues from just onshore oil exploration to the Offshore Oil, Pipeline Construction, Gas Compression and Allied Services segment especially development of Coal Bed Methane blocks and gasification and re-gasification of Natural Gas as more gas becomes available for transport, in about 8 months from now from the Krishna-Godavari fields. Shiv-Vani is the biggest private sector rig owner and operator in India for on-shore operations with 4 seismic data acquisition equipment, 4 crew boats, 7 compressors, 233 drilling rigs, 425 logistic supply vehicles, that include cranes, bunk houses, trailers, prime movers and forklifts.

 

Shiv-Vani is undergoing a CAPEX of Rs 600 crore, a part of which has been financed through private equity placed with Citigroup Internationational Growth Partnership Mauritius at Rs 375 per share. This CAPEX is being made to prepare Shiv-Vani for the NELP VII which will offer 80 to 85 blocks covering an area of 352,000 sq kms.

 

While Ongc has been accounting for nearly 60 per cent of Shiv-Vani's Revenues, it is the entry of Cairn, Reliance, Videocon and GSPC which is making the field bigger and wider. Earlier this year Ongc had made an attempt to acquire 25 onshore rigs from UPET of Romania, which ultimately did not work out. Now Ongc is trying to acquire 17 Rigs for exploration in the Assam-Arakan Oil belt. Shiv-Vani is likely to be the prime beneficiary of this effort as it possesses the largest number of onshore drilling rigs in the country. Any newsflow on this count will work as a price trigger for Shiv-Vani.

 

Even though FY09 will turn out to be a year of massive growth for Shiv-Vani, but at 16 times FY08 forecast earnings Shiv-Vani Oil appears to be amongst the cheapest plays in the sector when compared to marginal oil drilling players like Garware Offshore and Jindal Drilling which offer just OSVs and 2 Oil Drilling Rigs between themselves.

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Sharekhan Investor's Eye dated December 03, 2007

STOCK UPDATE

Jindal Saw            
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs1,018
Current market price: Rs898

Price target revised to Rs1,018

Key points

• Jindal Saw Ltd (JSL), the largest pipe manufacturer in the country, continues to benefit from the huge opportunity in the sector due a surge in E&P activities globally and a strong domestic and export demand.
• At the end of the last quarter, JSL's order book stood at $715 million, which is executable by May/June 2008. Of this, $565 million orders are for Submerged Arc Welded (SAW) pipes while the remaining orders were for ductile iron (DI) and seamless pipes.
• The performance of the company is set to improve further going forward. The US operations had been a drag on company's earnings in the past. With the US division being hived off along with a better product mix due to higher contribution from seamless and DI pipes, the overall profitability of the company is set to improve.
• JSL has a big investment book with investments in various group companies, particularly Jindal Steel & Power and JSW Steel. The total investment value works out to Rs403 per share for JSL. We believe JSL has strong potential for value unlocking and the same is likely to trigger a re-rating of its stock. We value the core business of the company at 11x CY2009E earnings and take the investment value at a 75% discount to its current value.
• The company has an aggressive capital expenditure (capex) plan, as it is expanding its Longitudinal Submerged Arc Welded (LSAW) capacity by another 200,000 tonne by September 2008 and is adding 350,000 tonne to its Horizontal Submerged Arc Welded (HSAW) capacity. The total capex for the same would be Rs250 crore by the end of CY2008. The capacity expansion of the seamless pipes to 250,000 tonnes is also on schedule.
• We maintain our positive outlook on the company considering its leadership position in the industry and the scope for margin expansion. With the sale of the US operations, the company would also be sitting on a huge cash pile, which would partly be used for debt repayments and capacity expansions. We believe the stock is trading at attractive valuations at 17.1x its CY2008E earnings and 10.8x its CY2009E earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs1,018.

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SECTOR UPDATE

Automobiles

Four-wheelers sales continue to be robust
Sales of two-wheelers for November 2007 were slightly below our expectations. Production constraints are restricting the industry growth, which is witnessing a revival in sales after almost one year followed by new launches and festive season. The declining sales trend on a year-on-year (y-o-y) basis is poised to turn positive. The four-wheelers sales continue to be robust due to successful new launches. The growth rate of four wheelers is expected to decelerate in the second half due to high base of second half of last year.  

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Sharekhan Investor's Eye dated November 23, 2007

 

STOCK UPDATE

Grasim Industries        
Cluster: Apple Green
Recommendation: Buy
Price target: Rs3,950
Current market price: Rs3,627

Price target revised to Rs3,950

Result highlights

• Grasim reported a 25.3% yoy topline growth to Rs2,519.2 crore during Q2FY2008 on the back of robust realisations of the VSF division as well as pick up in the sponge iron and chemicals division.
• The overall EBITDA jumped by 51.3% yoy to Rs805.5 crore driven by a whopping 81% yoy growth in VSF profits which stood at Rs316 crore. The cement division's profits grew by 24.2% yoy to Rs442 crore whereas the sponge iron and chemicals division's profits jumped by 292% to Rs269 crore.
• Overall margins expanded by 550 bps to 32% mainly as the VSF margins expanded by 900 bps to 40%. The cement margins expanded by 110 bps to 32.3%.
• Interest expenses were up 13% yoy to Rs27.2 crore due to higher borrowings in the quarter whereas the depreciation increased by 15.8% yoy to Rs87.5 crore due to part commissioning of VSF expansion in FY2008.
• The other income increased by 14% yoy to Rs57.3 crore thanks to deployment of surplus cash. Consequently, the PAT was up 48.1% yoy to Rs500 crore, beating our expectations
• As we mentioned in our earlier reports, Grasim is expanding its cement capacity by 10.4 MMT including a 4.4 MMT plant at Shambhupura and 4.5 MMT Greenfield plant at Kotputli. The capex is progressing as per schedule whereby the facility at Shambhupura is expected to get commissioned by Q4FY2008 and at Kotputli by Q1FY2009.
• The company is expanding its VSF capacity by 94875 tonne to 366000 tonne including a 63875 tonne expansion at Kharach, Gujarat and 31000 tons at Harihar in Karnataka. Additionally, the company also has announced an Rs.840 crore Greenfield plant of 88000 tons at Vilayat,in Gujarat which is expected to be commissioned in the next 24 months. 
• The VSF division is peaking at the right time for the company in the wake of an expected downturn in the cement cycle in the next one-year. Going ahead the strong volume growth for the VSF business coupled with better realisations and cost control, will drive the cashflows of the company more than offsetting the fall in the cashflows of the cement business. Also, any surprise on the cement prices will only be positive for the company. Consequently, we believe this is one of the most comfortably placed companies in our cement pack. At the current valuations, the stock trades at 13.7x its FY2008E EPS and 15.7x its FY2009E EPS. The company's cement business is trading at valuation of USD 125 on the expanded capacity which is cheap considering the fact that benchmark valuations have gone up as mentioned in earlier reports. Taking cognizance of the cheap valuations of the cement business coupled with the positive outlook for the VSF business, we are upgrading our SOTP price target to Rs3,950 per share.

ICI India        
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs581
Current market price: Rs530

Diwali sales deferred to Q3

Result highlights

• The Q2FY2008 results of ICI India are not comparable on a yoy basis due to divestment of several businesses in FY2007. The net sales for the quarter stood at Rs239.1crore.
• The paints business revenue grew by 5.6% yoy to Rs202.2 crore in Q2FY2008. The growth appears subdued due to high base effect as the festive sales on account of Diwali got deferred to Q3 as against most of it being registered in Q2 of FY2007. Thus we expect the paints division to record handsome growth in Q3FY2008.
• The continued chemical business grew by 21.9% yoy to Rs36.8 crore. Thus the overall revenues of the continued businesses grew 7.8% to Rs239 crore. The discontinued business (surfactant and advanced refinish) had contributed Rs22.8 crore to the company's total revenues in Q2FY2007.
• The PBIT in the paint business declined by 3.8% yoy with a 90 basis-point contraction in the margin to 9%. The PBIT in the continued chemical business grew 41.9% yoy with the margin expanding by 234 basis-points to 16.6%. After the sale of the Uniqema business, the chemical business now contributes only 15.4% to the top line as against 21.7% in Q2FY2007.
• Overall, the operating margin stood at 12.5% against 13% in Q2FY2007. With a higher other income at Rs6.5 crore for the quarter against Rs3.9 crore in Q2FY2007 the adjusted net profit grew by 3.5% yoy to Rs21.3 crore.
• Pursuant to the scheme of buy back, till the end of the quarter the company has bought back 15.87 lakh shares against a target of buying back ~36.7 lakh shares (worth Rs211.06 crore). 
• The outlook for the business remains positive with the company following a strategy of divesting non-paint businesses and focusing more on growing the paints business. Further a cash pile of ~Rs700 crore leaves open inorganic growth opportunities for the company. 
• We have realigned our estimates for FY2008 and FY2009 considering H1FY2008 performance. The buyback of shares and the expected open offer by Akzo make the stock attractive for investors. Thus we expect the stock to remain an outperformer. We shall revisit our numbers and target price on further moves by Akzo Nobel. At the current market price of Rs530, the stock trades at 18x its FY2008E adjusted EPS of Rs29.4 and 16x its FY2009E adjusted EPS of Rs33.1. We maintain our Buy recommendation on the stock with a price target of Rs581.

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VIEWPOINT 

Siemens        

Forex gain boosts profit

Result highlights

• In Q4FY2007, on a standalone basis, Siemens reported a 46.2% yoy growth in the net sales to Rs2,193.2 crore led by 90% growth in the revenues of the transport business and 65% growth in the revenues of the power business.
• Adjusting for the mark-to-market gain of Rs128.5 crore. The operating profit grew by 73% yoy to Rs216.7 crore, resulting in an OPM of 9.9%. The OPM improved by 150 basis points.
• The net profit before exceptional items grew by 24.3% to Rs170.1 crore. The reported net profit grew by 125.6% to Rs308.6 crore.
• For FY2007 the net sales grew by 70.7% to Rs7,753.7 crore. The operating profit grew by 47.7% to Rs600.7 crore. For the full year OPM declined by 130 basis points to 7.7%.
• For FY2007 the net profit (before extraordinary items) stood at Rs432.1 crore which was up 20% yoy basis. The reported net profit grew by 65.6% to Rs596.5 crore.
• The company has announced a bonus issue in the ratio of 1:1 and a dividend of 240% (Rs4.80 per share). 

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Next Multibagger : Himalya International adopted by Reliance Retail

CMP : Rs 23.09

Target: Rs 100 in 15 months

BSE:526899

 

Business Profile
Himalya International (HIL) was incorporated in the year 1992. The company is promoted by Manmohan Malik and Sanjeev Kakkar. It is engaged in mushrooms and vegetables. The plants of the company are located in Paonta Sahib (Sirmaur, Himachal Pradesh).

The company works in close cooperation with CFTRI (Central Food Technological And Research Institute) located in Mysore, India.

HIL provides variety of products including mushroom products, potato products, dairy products and various products related to this. The company sells its products only in Indian market and in the US market.

It is also certified by the United States Department of Agriculture as a member of National Potato Promotion Board.

The company has a wholly owned subsidiary namely, Global Reliance, which takes care of all the shipment work of the company. It started importing food products from US department of agriculture and will market these products in India.

Financials

Himalya International registered a 91.27% growth in net profits to Rs 25.40 million for the quarter ended in September 2007 from a profit of Rs 13.28 million for the quarter ended in September 2006

Net Sales rose 31.88% to Rs 107.68 million for the quarter ended September 2007 from Rs 81.65 million for the quarter ended September 2006.

Recent Developments
13-NOV-07
Himalya International entered into an agreement with Reliance Retail, the largest retail player in the country, for selling its products in domestic market.

09-NOV-07
Himalya International entered into a contract with Dr. Beyer of State College, Pennsylvania, USA for biological consulting for its mushrooms operations and new plans to augment capacity. Under the contract, the company will be provided with latest technology that will boost mushroom yields from current levels by atleast 50%. Dr. Beyer will be paid fixed fee besides rewards based on increased yields. Dr. Beyer will also assist the company for its mega expansion plans of mushroom facilities.


Future Plans
The company decided to convert 100% EOU into DTA under EPCG scheme of the government of India. It has targeted a turnover of Rs 1,000 million by the year 2010.

In order to meet growing demands of foreign food products in India, the company forayed into importing.

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Turnaround : Western India Shipyard Will Scale New Heights Again

CMP: 23.80

Target: Rs 150 in 15 months    

BSE Code: 531217

 

Business Profile :Western India Shipyard
Western India Shipyard (WISL) was incorporated in the Union Territory of Delhi May 1, 1992. WISL is a composite ship and rig repair facility in the private sector. The company has the most advanced multi-dimensional and multi-purpose yard offering modern, streamlined, sophisticated ship and rig repair facilities and services. WISL is strategically located at Goa along the west coast of India. The construction of the `Jock Up Barge` namely, PMC-1 of the value of about Rs 188.1 million by the company for PMC Projects (India), is proceeding smoothly and the vessel is expected to be delivered sometime in Jan-Feb. 2007. The operations of the company`s floating dry-dock of 20,000 TLC capacity was suspended during the period from Jan. 21, 2006 to Feb. 10, 2006 to carry out mandatory repairs for the purpose of maintaining its statutory classification certificates. This had a material impact on the company`s operation and performance for the year ended Mar. 31, 2006.

Financials
The company reported a loss of Rs 21.36 million for the quarter ended Sep. 2006 as against the loss of Rs 24.94 million during the corresponding quarter in the previous year. Sales for this period increased 11.76% to Rs 141.50 million from Rs 126.61 million. WISL, for the year ended Mar. 2006, had reported a 10.70% increase in sales to Rs 427.93 million as against Rs 386.56 million for year ended Mar. 2005. The company incurred a loss of Rs 233.68 million in FY06 as against a loss of Rs 244.22 million in FY05.

Recent Developments
The company wins a major contract from PMC Projects (India), a Adani Group Company, for the construction of `Multi Utility Craft` valuing about Rs 35 million, under the India Flag.

The company wins 3 minor and medium size orders for repairing of 3 vessels namely MV Swatirani, MT Maratha and Pyari Amma valuing Rs 70.00 million totally.

Future Plans
WISL plans for the improvement of systems and ship repair methodology. It also plans to improve interaction with research agencies involved with ship repair and rig repair technology.

 

 

News Item1:

Source: http://www.equitybulls.com/admin/news2006/news_det.asp?id=19146

Western India Shipyard announces Scheme of Compromise and Arrangement

Western India Shipyard Ltd has announced about the Scheme of Compromise and Arrangement between Western India Shipyard Ltd (the "Company") with its Secured Lenders and Shareholders u/s 391 - 394 of the Companies Act, 1956 with ABG Shipyard Ltd as a confirming Party, as under :

"Background and Rationale for the Scheme :

The Company is presently engaged in the business of repairing, servicing, assembling and fitting of merchant ships and other sea going vessels. The Company had obtained various financial assistances / facilities by way of secured and unsecured loans, debentures, overdrafts, guarantees, working capital, etc. from various lenders. The account of the Company is a non-performing asset in the books of some of its lenders in terms of the provisioning guidelines issued by Reserve Bank of India (RBI).

The Company continues to have poor physical and financial performance since inception in spite of various reliefs and concessions extended by its lenders. The Company has entered into a number of debt restructuring efforts with its lenders, including the most recent corporate debt restructuring package by way of the Restructuring Proposal dated January 28, 2005 proposed by the Corporate Debt Restructuring Cell, a voluntary mechanism for Corporate Debt Restructuring (CDR), set up under the aegis of the RBI (the "Debt Restructuring Package"), but continues to remain a non-performing asset in the book of a majority of is its lenders. It has failed to meet its projections, making the various restructuring packages unviable. The Company also does not enjoy working capital limits required for turnover of approximately Rs 70 Crores as per the Debt Restructuring Package. Due to its poor financial performance, the Company has not been able to retire its debts lending to a huge debt burden. As of March 31, 2006, total debts of the Company were Rs 250.1 Crores, against fixed assets of Rs 122.8 Crores. Due to continuous poor performance and recurring huge losses, the net worth of WISL, has completely eroded. The accumulated losses as on March 31, 2006 are Rs 187.1 Crores. The Company faces a real threat of winding up if it continues its current state of affairs.

The Company has 424 permanent employees and around 250 employees on contract basis, whose interests shall be adversely affected if W1SL, is not revived. Taking into consideration the Company's financial position, any revival would require infusion of funds, settlement of debts and resolution of ongoing litigations.

ABG is a company incorporated under the provisions of the Companies Act, 1956 having its registered office at Near Magttalla Port, Dumas Road, Surat - 395 007. ABC is engaged in the business of shipbuilding and ship-repair. ABG has the largest private-sector shipyard in the country and specializes in the construction of medium sized support and defense vessels. The ABG Group is a leading market player in the Indian marine and shipping industry. The group has interest in all major marine and shipping activities, viz. ship-building and ship-repair, owning and chartering of ships and port operations. Pursuant to discussions between the Company, its major secured lenders and ABG. ABG has evinced interest in being involved in a proposal to rehabilitate the Company. Accordingly, the Company is proposing this composite scheme of arrangement with its secured lenders, with ABG as a confirming party, with a view to rehabilitate the Company into a viable and profitable company, wherein ABG's involvement includes a combination of cash infusion into WISL, and acquiring a hares in the Company pursuant to the provisions of this scheme of arrangement. As a step towards rehabilitating the Company, and to demonstrate its commitment thereto, ABG shall, immediately upon filing of the Scheme with the High Court, provide a loan of Rs 25,00,00,000/- to the Company towards urgent business requirements of the Company, and has also agreed to provide technical and marketing expertise through a Service Provider Agreement, to be entered into between ABG and the Company simultaneously or contemporaneously to the filing of this Scheme.

The Scheme provides certain options for the restructuring / one time settlement of the debt of the secured lenders of the Company with the involvement of ABG, along with other matters connected with the compromise and arrangement, including reorganization of share capital of the Company."

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Sharekhan Investor's Eye dated November 15, 2007

 

SHAREKHAN SPECIAL

Broking companies have a lot to cheer

The stock prices of the listed broking companies have grown phenomenally in the recent past. We therefore decided to take a sneak peak into what actually is driving this upsurge. We feel that the significant increase in the market turnover, which would drive earnings growth for these broking companies and the re-rating possibilities of these companies based on valuations commanded by the ongoing initial public offer (IPO) of Edelweiss Capital are actually pushing their prices up. 

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STOCK UPDATE

Hindustan Unilever     
Cluster: Apple Green
Recommendation: Buy
Price target: Rs280
Current market price: Rs200

Results below expectations

Result highlights

• Hindustan Unilever Ltd's (HUL) Q3FY2007 results were below our expectations. Net sales grew by 9.7% to Rs3,364.6 crore on the back of a 9.5% year-on-year (y-o-y) growth in HPC sales and a 16.8% growth in the sales of foods business.
• The overall operating profit margin (OPM) expanded by 16 basis points year on year (yoy) to 13.3% despite one-off adverse impact of the seven-week closure of the Assam unit that manufactures ~30% of personal products.
• The operating profit grew by 11.1% to Rs447.6 crore. However, the net profit rose by only 6.9% to Rs409.3 crore due to the higher tax rate of 20% in Q3FY2008 against that of 17.5% in Q3FY2007.
• Sales of soaps and detergents grew by a robust 12.8% yoy to Rs1,572 crore and the segment's profit before interest and tax (PBIT) margin improved by 440 basis points to 16.7%. The performance of the personal product segment was affected by the strike at the Assam factory that led the PBIT margin fall by 260 basis points yoy to 24.2%. 
• Sales of processed food segment grew by 32.5% yoy to Rs128.9 crore. Modern Foods that was merged with the company contributed a major chunk to the sales growth with sales of Rs23.8 crore. Thus the organic sales of the segment grew by 8% yoy. While the margins in the processed foods business improved, the profitability of ice cream business declined sharply on account of costs related to setting a new factory.
• The quarter witnessed the launch of water purifiers in Delhi and Uttar Pradesh (UP) thereby expanding the water purifier business to eight states. Pureit, HUL's in-home water purifier now serves three million homes. The business is gaining ground but being in initial stages we expect it to continue its losses for the next few quarters.
• At the current market price of Rs200 the stock is quoting at 24.9x its CY2007E earnings per share (EPS) of Rs8.1 and 21.9x its CY2008E EPS of Rs9.2. We maintain our Buy recommendation on the stock with a price target of Rs280.

Deepak Fertilisers & Petrochemicals Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs188
Current market price: Rs149

Price target revised to Rs188

Result highlights

• Net sales of Deepak Fertilisers & Petrochemicals Corporation (DFPCL) grew by 2% year on year (yoy) to Rs216.9 crore. The chemical division and the fertiliser division contributed 69% and 31% respectively to the net sales. The revenue from the chemical division increased by 29% yoy to Rs155.8 crore on the back of a strong contribution from isopropyl alcohol (IPA), while the sales from the fertiliser division dropped by 32% yoy to Rs70.7 crore due to reduced availability of phosphoric acid in the international market and lower availability of material for trading.
• Operating profit during the quarter grew by 26% yoy to Rs32.2 crore. A strong contribution from the chemical division expanded the overall operating profit margin (OPM) by 290 basis points to 14.9%. The segmental profit before interest and tax (PBIT) for the chemical division reduced by 0.3% to Rs37.3 crore with the margin declining from 31% to 24%. The loss in the fertiliser division reduced to Rs1.5 crore from Rs6.6 crore. The increased raw material cost including that of the outsourced ammonia and propylene decreased the segmental PBIT margin for the chemical division, while the higher price realisation reduced the segmental loss for fertiliser division.
• Interest expenses were higher by 7% yoy on account of the increased outstanding debt issued for new projects and capacity expansions. The depreciation charge also increased by 21% yoy during the quarter.
• The adjusted profit after tax (PAT) increased by 21.4% yoy to Rs21.9 crore with the margin expanding by 160 basis points to 10.1%.
• With the completion of retrofitting of ammonia plant, the company has increased its capacity to 130,000 tonne per annum (TPA) from 90,000TPA. This along with the increased natural gas availability and the additional ammonia storage tank would help the company in reducing its raw material cost as well as enhancing its nitric acid capacity.
• The completion of Dahej-Uran pipeline would improve the natural gas supply to Taloja plant from December 2007, which would help in replacing naphtha with natural gas for steam generation, depending upon its supply. Natural gas at around $8.5 per Million British Thermal Units (MMBTU) would cost almost half the price of naphtha.
• The company is expected to complete land acquisition process for its ammonium nitrate project in Orissa by November 2007. The plant with a 300,000TPA capacity is expected to be operational by November 2009.
• The company's specialty mall Ishanya, for interiors and exteriors, is expected to commence operations from the third quarter, ahead of the festive season. The company has already leased out nearly 80% of the 550,000 square feet leasable area at an average rental price of Rs46 per square foot.
• At the current market price of Rs149, the stock is trading at 8.7x its FY2009E earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.5x. The improved supply of natural gas would benefit the fertiliser division in the coming years, while its ammonium nitrate project would also start contributing from H2FY2010. In view of future earnings visibility, Ishanya, the company's specialty mall for interiors and exteriors is valued at Rs28.7 per share. We maintain our Buy recommendation on the stock with a revised price target of Rs188 valued at 11.0x its FY2009E earnings.

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SECTOR UPDATE

Telecommunications

Bharti remains our top pick
GSM operators added 5.7 million subscribers during October 2007, increasing the overall subscriber base to 159.7 million during the month. There has been a slight increase in net additions from 5.6 million subscribers in September to 5.7 million subscribers in October. Thus the month-on-month (m-o-m) growth in subscribers has decreased from 3.8% in September to 3.7% in October in spite of the beginning of festive season.

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Sharekhan Investor's Eye dated November 16, 2007

 

STOCK UPDATE

Network18 Fincap     
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs651
Current market price: Rs452

Listing of Web18 to unlock value
Network18 group has grown by leaps and bounds over the last couple of years in the fast growing Indian media and entertainment space. Network18 Fincap Ltd (Network18) the holding company of the Network18 group controls TV18 that owns two premium properties in the business news genre CNBC TV18 and Awaaz. Network18 group also owns a majority stake in GBN, the company that runs the group's general news channels CNN-IBN and IBN7. GBN also represents the entertainment arm of Network18 with its planned entry in the general entertainment genre, the biggest segment in Indian television entertainment, with the launch of a Hindi general entertainment channel through Viacom18. 

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SECTOR UPDATE

Cement

Industry dispatches up 9% during October
The industry dispatches maintained its growth rate of 9% year on year (yoy) in October. Among the top majors, both ACC and Ambuja Cements resumed their pre-monsoon level dispatch figures. ACC recorded a dispatch growth of 6.7% yoy to 1.76 million metric tonne (MMT), whereas that of Ambuja Cements grew by 3.6 % yoy to 1.48MMT. As AV Birla group companies Grasim and Ultratech didn't witness any capacity additions in last one year, their dispatch growth remained flat.

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Sharekhan Investor's Eye dated November 02, 2007

STOCK UPDATE

Bank of Baroda    
Cluster: Apple Green
Recommendation: Buy
Price target: Rs500
Current market price: Rs375

Price target revised to Rs500

Result highlights

• Bank of Baroda's (BOB) Q2FY2008 profit after tax (PAT) grew by 13.5% year on year (yoy) to Rs327.2 crore. The PAT of Rs327.2 crore was in line with our expectation of Rs321 crore. The PAT growth was primarily driven by a higher non-interest income. The net interest income (NII) growth was better than most of its peers. The operating expenses surged due to a higher provisioning on account of transitional liability of revised AS-15 guidelines and restricted the overall profit growth.
• We have revised our FY2008 and FY2009 earnings estimates upwards by 5% and 4% to Rs1,372.7 crore and Rs1,640.9 crore respectively. The upward revision in the earnings is to factor in the higher non-interest income growth and higher AS-15 related expenses likely to be reported by the bank going forward, which were not envisaged at the beginning of the year. 
• BOB's total assets grew by 19.5% yoy and 4.9% quarter on quarter (qoq), while the reported NII grew by 17.1% yoy and 8.5% qoq and the NII (adjusted for amortisation and AFS redemption loss) grew by 15.7% yoy, but remained stable on a quarter-on-quarter (q-o-q) basis. Its adjusted net interest margin (NIM) remained under slight pressure and declined by 11 basis points yoy and 9 basis points qoq. 
• The non-interest income grew by 41.1% yoy and by 35.8% qoq to Rs454.1 crore, driven by higher treasury and foreign exchange (forex) incomes. The higher non-interest income growth has been an industry trend for all public sector undertaking (PSU) banks during Q2FY2008.
• The operating expenses jumped up by 33.8% yoy to Rs798.3 crore mainly due to a 38.6% year-on-year (y-o-y) jump in staff expenses. The surge in staff expenses was led by Rs90 crore of AS-15 related expenses charged during the quarter. Spreading the cost equally between the two quarters (Q1FY2008 and Q2FY2008) the operating profit should improve to 21.1% yoy from 13.2% yoy. However, the core operating profit growth was moderate at 6.9% yoy. 
• Provisions and contingencies declined by 8.2% yoy and 30.7% qoq mainly on account of a decline in investment depreciation. 
• The bank's business growth has moderated with global advances up by 27.1% yoy from a 40% y-o-y growth reported during March 2007. The deposit growth has also moderated from 33% to 22% for the same period. This moderation is welcome and should help in avoiding undue stress on the NIM and maintaining a healthy asset quality. The bank's asset quality has improved with gross non performing assets (NPAs) down by 45 basis points to 2.33%, while net NPAs declined by 12 basis points to 0.55% sequentially. 
• We feel BOB is one of the public sector banks, which have exhibited maximum improvement in its earnings growth and return on equity (RoE). We expect BOB to deliver a compounded annual growth rate (CAGR) of 26.4% in earnings and almost a 400-basis-point improvement in its RoE to 16.1% between FY2007-09E. At the current market price of Rs375, the stock is quoting at 8.4x its FY2009E earnings per share (EPS), 4.2x pre-provisioning profit (PPP) and 1.3x FY2009E book value (BV). If we exclude the value of Rs40 per share of which Rs22 is from its 25% holding in the Unit Trust of India (UTI) mutual fund (which is likely to come out with an IPO [initial public offering] in CY2008) and the rest Rs18 is for its other holdings such as NSE and Reliance Petroleum etc, the stock is available at 1.1x FY2009E BV. The valuations are extremely attractive when we consider the strong earnings growth and the improvement in RoE. We maintain our Buy recommendation on the stock with a revised twelve-month price target of Rs500. 

Shree Cement   
Cluster: Cannonball
Recommendation: Buy
Price target: Rs1,625
Current market price: Rs1,417

Result marginally below expectations

Result highlights

• Fuelled by fresh capacities, Shree Cement's Q2FY2008 volumes grew by 34% year on year (yoy) driving its net sales by 48% yoy to Rs466 crore.
• The overall operating expenditure increased by 53% yoy to Rs264.8 crore on the back of rise in power & fuel costs and freight costs.
• On account of cost-push, the company's operating profit grew slower by 41% yoy to Rs201 crore. The margins fell marginally to 43.2%. The earnings before interest, tax, depreciation, and amortisation (EBITDA) per tonne expanded by Rs84 yoy and Rs55 quarter on quarter (qoq) to Rs1,348. 
• The other income jumped from Rs4.3 crore in the last quarter to Rs29.1 crore this quarter, as the company booked Rs16 crore as revenues from the sale of certified emission reductions (CERs) accrued to the company under the Clean Development Mechanism (CDM).
• Interest costs jumped by 214% yoy to Rs8.1 crore, whereas the depreciation provision more than doubled to Rs68.7 crore due to incremental capacities commissioned by the company at Ras. Consequently, the profit after tax (PAT) growth slowed down to 37% at Rs106.6 crore. 
• The company commissioned a 1.5-million-metric-tonne (MMT) line V clinker unit at Ras and a 2MMT grinding unit at Kushkhera in the first week of September. This will make available 2MMT of cement for the second half of the current fiscal.
• Taking cognisance of the commissioning of capacities ahead of schedule, we are upgrading our FY2008 volume estimate marginally by 2% and FY2009 estimate by 12%.
• Considering the higher volume assumption for FY2009, we are upgrading our FY2009 earnings per share (EPS) by 7% to Rs145.2. Also taking notice of the higher depreciation provision for the current year, we are downgrading our FY2008 estimates by 4% to Rs117.7 per share.
• Shree Cement has shown excellent project management skills by commissioning its capacities ahead of schedule. This has enabled the company to grow its volumes ahead of the industry. With the ongoing capital expenditure (capex), the company will be ramping up its capacity from 5 .6MMT to 9MMT by the end of FY2009. This will enable the company to sustain the momentum in the much needed volume growth. In the next couple of years, the company will become totally captive in its power consumption enabling it to exercise control over its power costs. Shree Cement's robust cash flows will aid the company in becoming debt free at the end of FY2009. At the current market price of Rs1,417, the stock trades at 12.0x its FY2008 EPS and 9.8x its FY2009 EPS. We continue to maintain our positive outlook on the stock with a price target of Rs1,625. 

Balaji Telefilms 
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs339
Current market price: Rs287

Price target revised to Rs339

Result highlights

• Q2FY2008 results of Balaji Telefilms Ltd (BTL) have outperformed our expectations. Despite substantially lower content hours, BTL's operating revenues were marginally down by 4.4% year on year (yoy) to Rs77.9 crore against our estimate of Rs72 crore.
• BTL hiked the rates of some of its shows under the commissioned content category that led to a jump in realisations. The commissioned programming realisations were up by 47.3% yoy and a strong 13.1% quarter on quarter (qoq) to Rs37.9 lakh per hour. Even in the sponsored category that contributes about 7-8% to the total revenues from the television content, realisations improved by 71% yoy and by 7.1% qoq to Rs4.5 lakh.
• Aided by the rise in realisations, the operating profit margin (OPM) was up by 680 basis points to 42.4% and the operating profit rose by 13.9% yoy to Rs33 crore. 
• BTL possesses a huge pile of cash and cash equivalents of Rs224 crore that led to a 182% year-on-year (y-o-y) increase in the other income to Rs6.4 crore. Further, a lower tax rate led to a strong 36.2% growth in net profits to Rs26.3 crore.
• BTL has tied up for two shows on INX Media's forthcoming Hindi general entertainment channel and for another show on Sony to go on air in Q4FY2008. The company is also in talks with other players like NDTV and Viacom-18 for its content on their forthcoming channels. We expect BTL to scale up its programming hours in FY2009 aided by the buoyant scenario for its content and pursuant to its foray into broadcasting from Q1FY2009.
• BTL bagged distribution rights for Ram Gopal Verma's Sarkar Raaj for ~Rs37 crore. The movie is scheduled for release in January 2008. BTL distributed Darling and Bhool Bhulaiya, while the former did not fare well at the box office the latter is running successfully and is seen as a big hit. BTL's co-production Woodstock Villa is expected to be in cinema halls by February 2008. We estimate BTL's movie business to have made a profit of ~Rs5-6 crore in H1FY2008.
• BTL remains one of our preferred picks in the media and entertainment space. We revise our price target on the stock to Rs339, valuing the content business at 15x FY2009E earnings and BTL's interest in the broadcasting joint venture (JV) at 2x investment. We maintain our buy recommendation on the stock. 

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Sharekhan Investor's Eye dated October 15, 2007

 

STOCK UPDATE

Axis Bank 
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs1,054
Current market price: Rs815

Price target revised to Rs1,054

Result highlights

• Axis Bank's Q2FY2008 numbers are much above the market's and our expectations with the profit after tax (PAT) reporting a growth of 60.4% to Rs227.8 crore compared with our estimate of Rs199 crore. The high growth was driven by a robust increase in both interest and non-interest income segments. Due to the excellent set of numbers reported during Q2FY2008 we have upgraded our earnings estimates by 15.7% and 16.7% for FY2008 and FY2009 respectively.
• The net interest income (NII) was up by 72.9% year on year (yoy) and 39.9% quarter on quarter (qoq) to Rs588.7 crore. However the bank had raised capital of Rs4,534 crore during the quarter and excluding the possible interest income earned on such float funds, the quarter-on-quarter (q-o-q) NII growth would moderate to 15.7%.
• The reported net interest margin (NIM) expanded by 36 basis points yoy and by 56 basis points qoq. Our calculation suggests that around six basis points were added to the NIM due to the possible income earned on the follow-on public offer (FPO) float funds. A marginal sequential increase in the NIM was expected as the asset yields were expected to improve after the low yielding priority sector advances taken on the books during Q4FY2007 had run off. However, the substantial portion of the expansion in the NIM was due to the improvement in the cost of funds brought about by the retirement of high-cost term deposits with the capital raised by the bank. 
• The bank's assets grew by 39.8% yoy and 5.6% qoq, driven by a strong advances growth of 53.5% yoy and 8.3% qoq. The deposits grew by 30.9% yoy and 8% qoq with an improvement in the savings deposits, which grew by 48% yoy and 17% qoq. The term deposits declined by 7.9% qoq, which helped the bank to improve its reported cost of funds by 25 basis points sequentially to 6.18% from 6.43% in June 2007. 
• The non-interest income was up 87% yoy and 4% qoq to Rs382.9 crore, driven by a higher trading income of Rs102.5 crore, which grew by 339% yoy and 6% qoq. The core fee income was also up by a robust 69% yoy and 7.1% qoq.
• The operating profit was up 85.3% yoy and 25.8% qoq to Rs368 crore while the core operating profit was up 70.8% yoy and 37% qoq to Rs368 crore. Provisions and contingencies grew by 236.3% yoy and 13.4% qoq to Rs114.5 crore. Despite the strong asset growth, the asset quality improved with the net non-performing assets (NPAs) at 0.55% of customer assets, down four basis points sequentially. 
• Axis Bank raised capital to the tune of Rs4,534 crore through a combination of global depository receipt (GDR), qualified institutional placement (QIP) and preferential allotment during the quarter. This helped to improve its capital adequacy ratio (CAR) to 17.6% (from 11.5% in June 2007) with the Tier-I CAR at 13%. This substantial capital-raising programme (almost 25% of the pre-issue equity) has depressed its return on equity (RoE) to 13.6% from 19%, which is along the expected lines. 
• The bank has also recently decided to foray into the mutual fund business. It has already set up its wealth management business and planned a private equity fund to invest in the infrastructure segment. We feel these are the building blocks that the bank management is putting in place and that would adequately complement its banking business. This strategy would also open up a new channel of steady fee income. Thus, its robust fee income growth could help in restoring the fall in its RoE much sooner than in the past occasions when it had raised capital. It has been registering a phenomenal asset growth without compromising on its margin and asset quality. All these developments make Axis Bank one of the best growth stories available in the private banking space.
• We have upgraded our earnings estimates by 15.7% and 16.7% for FY2008 and FY2009 respectively. The upward revision in the earnings is mainly because of the improvement in the core net interest income prospects with a decline in the term deposits during the quarter, the robust trend in the fee income and higher trading profits than envisaged at the beginning of the financial year. This has also resulted in our estimated RoE improving by 90 basis points and 150 basis points for FY2008 and FY2009 respectively.
• At the current market price of Rs815, the stock is quoting at 21.6x its FY2009E earnings per share (EPS), 10.1x its FY2009E pre-provisioning profit (PPP) and 3x its FY2009E book value (BV). We maintain our Buy recommendation on the stock with a revised 12-month forward price target of Rs1,054.

 

Tata Consultancy Services    
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,425
Current market price: Rs1,073

A decent performance

Result highlights

• Tata Consultancy Services (TCS) has reported a growth of 8.4% quarter on quarter (qoq) and of 25.8% year on year (yoy) in its consolidated revenues to Rs5, 639.8 crore during Q2FY2008. The sequential growth in the revenues was contributed by an 8.2% overall growth in the volume, an 85-basis-point improvement in the billing rates (including productivity gains) and a hedging profit of 86 basis points (around Rs45 crore). On the other hand, the appreciation in the rupee and offshore shift adversely affected the revenue growth by 51 basis points and 99 basis points respectively, on a sequential basis. 
• The earnings before interest and tax (EBIT) margin improved by 77 basis points to 23.8% sequentially during the quarter. This was contributed by the cumulative impact of the overall productivity gains (of 109 basis points), offshore shift (of 36 basis points) and hedging gains (of 79 basis points). On the flip side, in addition to the rupee appreciation (a negative impact of 30 basis points), the incremental wage cost of 117 basis points resulting from the promotions affected the margin during the quarter. The operating profit grew by 12% qoq and 18.5% yoy to Rs1,343.9 crore.
• The other income declined by 27.2% qoq to Rs110.5 crore, largely due to a lower foreign exchange (forex) fluctuation gain of Rs57.7 crore (compared with Rs107 crore in Q1). However, despite the higher tax rate (14% as against 11.3% in Q1FY2008) and a lower other income component, the company showed a sequential growth of 7.8% to Rs1,246.9 crore (after adjusting the Q1 earnings for the one-time write-back of Rs29.3 crore of provision made earlier). On an annual basis, the consolidated earnings have grown by 25.9%.
• In terms of the outlook, the company doesn't give any specific growth guidance. However, it has re-iterated that the demand environment continues to be robust with no signs of any slowdown in banking, financial services and insurance (BFSI) space and the US geography. The company signed three large sized deals of over $50 million (including one in the BFSI vertical) during the quarter. It also entered into master service agreements with three other clients (a couple of them from the banking space) that can potentially generate revenues equivalent to any other large deal. The pipeline of the large orders is also healthy with around 20 deals of over $50 million each. In terms of margins, the company expects to maintain the EBIT margin at around 25% in FY2008 (in line with the same as reported in FY2007). 
• In terms of key operational highlights, the net addition of 9,268 employees is higher than expectations. This coupled with the campus offers of 22,295 fresh graduates this season (up from around 11,500 in the last fiscal) clearly reflects the management's confidence in the growth outlook of the company. Another noticeable point is the healthy double-digit sequential growth in all the relatively new service lines (such as consulting, engineering, assurance, business process outsourcing [BPO] and enterprise solutions). Moreover, the BFSI vertical showed an 11.3% sequential growth during the quarter.
• At the current market price, the stock trades at 20.9x FY2008 and 17.3x FY2009 estimated earnings. We maintain the Buy call on the stock with a price target of Rs1,425 (around 23x FY2009E earning per share [EPS]).

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SECTOR UPDATE

Cement

Industry dispatches up 4% for September '07
For September, cement dispatches for the industry grew at a slower rate of 4.12% year on year (yoy) to 12.65 million metric tonne (MMT) as against 18% yoy in the same period last year. The two main reasons for the slower growth are lack of capacity additions in the last one year and the base effect. Amongst the cement majors, ACC reported a healthy growth of 12.3% yoy to 1.55MMT in September. On account of flooding in Gujarat, the dispatches of Ambuja Cement and UltraTech Cement were depressed during the month. Amongst the mid-caps in our coverage, Shree Cement continued to report a mammoth 80% growth yoy to 0.72MMT as it commissioned its 2-MMT grinding unit at Khushkera and its 1-MMT clinker at Bangur in the first week of September.

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MUTUAL GAINS

Sharekhan's top equity fund picks

We have identified the best equity-oriented schemes available in the market today based on the following 3 parameter : the past performance as indicated by the one and two year returns, the Sharpe ratio and Fama (net selectivity).

The past performance is measured by the one and two year returns generated by the scheme. Sharpe indicates risk-adjusted returns, giving the returns earned in excess of the risk-free rate for each unit of the risk taken. The Sharpe ratio is also indicative of the consistency of the returns as it takes into account the volatility in the returns as measured by the standard deviation.

FAMA measures the returns generated through selectivity, ie the returns generated because of the fund manager's ability to pick the right stocks. A higher value of net selectivity is always preferred as it reflects the stock picking ability of the fund manager

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Hidden Gem and Multibagger: Ennore Coke Limited

Ennore Coke Limited
BSE:512369
CMP : Rs. 20.40 as on 5th Oct. 2007
TARGET: Rs. 80 in 18 months
Website: www.ennorecoke.com

ABOUT THE COMPANY

This company was incorporated as a public limited company on February 25, 1985 to carry out business of yarn, cloth, fibre and the business of leasing of moveable and immoveable properties. These activities were carried out till September 30, 2005.

Effective December 5, 2005 the controlling interest of the company was taken over by Shriram EPC Ltd., and Mrs. Vatsala Ranganathan. The new management has discontinued the above businesses of the company and has now entered the business of manufacturing met coke by purchasing the Coke Project from EPCPL situated at Haldia, West Bengal.

Ennore Coke Limited also plans to set up a power plant at the same location for generating 6 MW of power by utilizing the waste heat generated from the process of manufacturing met coke.

The company has also proposed to expand the manufacturing capacity of the Proposed Coke Project from 100,000 TPA to 300,000 TPA and increasing the capacity of generation of power from 6 MW to 18 MW at Haldia, West Bengal.

Some Other Data






Sector Analysis
A. COKE INDUSTRY
Coke, a derivative of metallurgical coking coal, plays a very significant role in metallurgical processes. Coke is the main source of heat and is also the reducing agent required to facilitate the conversion of metallurgical ores into metal in the smelting process. Major Coke production has traditionally been captive, i.e. Coke is produced in the coke oven batteries of integrated steel plants. Hardly any surplus coke is available from these captive coke oven batteries for outside sale. During the last 10-12 years, numbers of pig iron plants and even integrated steel plants have been built in India without captive coke making facilities, which now rely on imported coke. As a result, India is now importing coke in sizeable quantity. Most Indian coke oven batteries are located in the eastern region of the country. As a result, the various coke consumers in the western region and southern region of the country essentially import coke.

Keeping in view the above scenario in mind, ECL is now to engaged in Manufacturing of Met Coke and for this purpose has entered into an agreement on May 15, 2006 for purchase of Nonrecovery Coke Oven Project of 1,00,000 TPA of met coke at Haldia, West Bengal which is at present under implementation and being set up by Ennore Power & Coke Pvt. Ltd. (EPCPL). The requirement of funds for purchase of aforesaid met coke project of EPCPL is met out of the proceeds of the rights issue.

Further ECL after purchasing the met coke project from EPCPL and after completing the said project, also proposes to expand such met coke manufacturing capacity by 2,00,000 TPA out of the proceeds of the warrants issue.

B. POWER INDUSTRY
Power is a critical infrastructure for economic development and for improving the quality of life. The achievement of increasing installed power capacity from 1362 MW to over 100,000 MW since independence and electrification of more than 500,000 villages and towns are impressive in absolute terms. On account of inadequate generation capacity, the country is plagued by power shortages. The total energy shortage, during 2004-2005, was 43,258 million units, amounting to 7.3 % and the peak shortage was 11.7% per cent of peak demand. With increasing urbanization, industrial growth and per capita consumption, the gap between the actual demand and supply is likely to increase. In this scenario, the GOI expects that alternative/renewable sources of energy, such as wind energy, biomass energy and energy generated through waste heat recovery process are likely to play an increasingly important role in bridging the demand supply gap and conservation of fossil fuels.

In the manufacturing process of coke, volatile matter gets released from the raw coal in the form of gas and is burnt in the oven to produce heat for carbonization and after completing the process of carbonization the waste heat at very high temperature is released in the atmosphere. Such waste heat if utilized for generation of steam, same can be used in the steam turbine for generation of power at a very low cost and in an eco-friendly manner, as no raw material or any other fossil fuel is used in this process of generation of power.

With this view in mind, ECL proposes to set up a power plant of 6 MW capacity by using waste heat generated in the process of manufacturing of met coke in the premises of Met Coke project. The power project is financed out of the proceeds of the rights issue. Further, ECL has also purchased from EPCPL the Met coke project that is under implementation and at the time of expanding its capacity by 2,00,000 TPA, it would also expand the power plant capacity by 12 MW which will be financed out of the proceeds of the warrants issue.

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