Tushar's Stock Tips

Tuesday, October 2, 2007

Sharekhan Investor's Eye dated October 01, 2007

PULSE TRACK

Strong invisibles help stabilise CAD
Export growth maintained in dollar terms

STOCK UPDATE

Selan Exploration Technology
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs155
Current market price: Rs154

Downgraded to hold

Key points

Selan Exploration Technology Ltd's (SETL) efforts to develop and monitise its oil fields have resulted in a 36.7% growth in its production volumes to 100,963 barrels of oil in FY2007. Encouraged by the results, SETL's management plans to undertake the second phase of development activity and expects to show a similar growth in production volumes in FY2008. However, the huge expenditure on the development of its fields has not only consumed all the cash generated by the company from its operations but has also added to the overall debt on its books.
The company has made an adhoc payment of Rs1.6 crore to the government towards the claim for profit petroleum in its oil field at Lohar. The provision for the same has not been made in the financial results as the company has filed an arbitration case against the claim. If the company losses the arbitration case, it could result in a significant hit on its earnings.
SETL has successfully scaled up the production volumes in FY2007, and it can potentially double the production volumes by FY2009 (assuming a favourable scenario resulting in an equally encouraging outcome of its forthcoming development efforts). However the recent steep appreciation in the share price already factors in the positives, with the stock trading at 15.3x FY2008 and 11.1x FY2009 earnings.
There are triggers that could result in a further re-rating of the stock as the management intends to undertake appraisal and valuation of its oil fields from one of the globally reputed agencies. The idea is to induct a strategic partner that would fund the company's ambitious plans in future. Consequently, given the fact that the stock appears to be fully valued but has re-rating triggers, we are downgrading our recommendation to hold on the stock and not to book out (in spite of the appreciation of 167% since our recommendation in March 2006).

SECTOR UPDATE

Automobiles

Last year's high base affects performance
September data shows that sales in the automobile sector have started picking up on a month-on-month basis, in keeping with the past trend. Every year, sales of automobiles take a dip during the monsoon season but pick up with the end of the monsoons and the onset of the festive season. On a year-on-year basis, there has not been much improvement though, partly due the high base of last year. Last September had seen higher sales as the festival season had commenced in October last year. This year the festival season has been delayed—it sets in from mid October with Diwali falling in November. We believe the recovery in sales would take some time to get reflected in year-on-year terms. The beginning of Shradh Paksh also impacted sales. Meanwhile, the major gainers during the month were Hero Honda Motors (Hero Honda) and Maruti Suzuki (Maruti).

Sunday, September 30, 2007

Sharekhan Investor's Eye dated September 28, 2007

STOCK UPDATE

Surya Pharmaceuticals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs205
Current market price: Rs83

Strong growth at cheap valuations

Key points

During FY2007, Surya Pharmaceuticals (Surya) has enhanced its production capacities and has improved efficiencies of its production processes through de-bottlenecking exercise. From a collective capacity of manufacturing 4,152 metric ton (MT) per annum, the company's current capacity stands at 5,423MT per annum marking an increase of 30%. The resultant capacity increase is expected to translate into higher revenues for the company's existing business of active pharmaceutical ingredients (APIs) and intermediates from FY2008 onwards.
Surya has also initiated construction of a new plant in the tax-haven state of Jammu. The Jammu plant will be constructed in line with the US Food and Drug Administration (US FDA) standards primarily to manufacture new APIs and sterile cephalosporins. With the commissioning of this facility, Surya will enter the high-margin injectable business. We expect the Jammu facility to contribute an incremental Rs100 crore to Surya's revenues in FY2009E.
Surya has recently entered the business of manufacturing menthol and its derivatives. The company primarily intends to sell these products to its overseas clients, and the company has started exporting these products in August 2007. We expect the menthol business to add Rs50 crore to Surya's turnover in H2FY2008E and Rs100 crore in FY2009E.
Having made a foray into the contract manufacturing space, Surya is now increasing its focus on the contract research area. The company is in advanced stage of negotiation with a British company for the development of a cost-effective process for a new molecule. Surya expects that partnering with the British company at this early stage of development will open up huge contract manufacturing orders for it, once the molecule gets commercialised. However, as the deal has not yet been finalised, we have not factored the upsides from this development into our estimates.
We have introduced our FY2009E revenue and earning estimates for Surya. We expect Surya's profit to grow at a compounded annual growth rate (CAGR) of 55.3% over FY2007-09E on the back of a 46.2% CAGR in the revenues and a 100 basis point expansion in the operating profit margin. Based on this, we have projected fully diluted earnings of Rs28.8 per share in FY2008E and Rs32.1 per share in FY2009E.
At the current market price of Rs83, Surya is trading at 3.6x its FY2008E diluted earnings of Rs23.2 and at 2.6x its FY2009E diluted earnings of Rs32.1. The stock is highly undervalued when compared with its peers like Ankur Drugs, Sharon Bio-Medicine and Granules India, which are trading at an average FY2009E price earning (P/E) multiple of 7x. At current prices, Surya offers a remarkable combination of strong growth at cheap valuations. We view this as a strong buying opportunity and hence maintain our Buy call on the stock with a price target of Rs205.

Marico
Cluster: Apple Green
Recommendation: Buy
Price target: Rs70
Current market price: Rs61

Growth momentum continues
The copra prices have strengthened in the last two months but Marico has taken a price hike of 3% in Parachute, which will offset the increase in its raw material cost and help it to safeguard its margin. The company has been able to maintain its market share at 48%. The launch of Fortune (agro tech foods) has been a non-event for Marico since the same has not been able to erode its market share.

Seamec
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs300
Current market price: Rs208

Unexpected damage
Seamec has announced that its vessel Seamec II has been damaged in its front portion due to a fire while the vessel was undergoing statutory dry-docking in a shipyard at Netherlands. The extent of damage is not certain as of now. However, it is clear that the dry-docking days for the vessel would get extended now, resulting in lower revenue and earnings for the company in CY2007.

SECTOR UPDATE

Banking

Banking sector poised for a re-rating
In this report we have discussed our views on the various macro aspects that have been a concern for the banking sector in the recent past. We have also delved into the various positive and negative factors that are likely to affect the banking sector in the medium term. Keeping in mind the strong interest of the investors in the financial sector, we feel the unfolding of the various positive triggers could lead to a re-rating of the banking sector in the medium term. Hence, we have revised our price targets for most leading banks (explained in detail later).

Banks	CMP* (Rs)	Old price target (Rs)	New price target (Rs)	Upside (%)
Bank of Baroda	322.0	366.0	400.0	24.1
Bank of India	260.0	280.0	325.0	25.0
SBI	1886.0	1780.0	2282.0	21.0
HDFC Bank	1433.0	1355.0	1694.0	18.2
Axis (UTI) Bank	768.0	725.0	960.0	25.0
*CMP as on September 27, 2007

Hindustan Organic Chemicals Limited : A Hidden Gem in PSU Area

Name: Hindustan Organic Chemicals Limited

BSE:500449

NSE:HOCL

Website: www.hocl.gov.in/index.asp

Current Mkt Price: Rs. 64.70 (as on 30/9/2007)

Target : Rs. 225 (18- 24 months)

Business Profile

Hindustan Organic Chemicals Limited (HOC) was set up by the Government of India in 1960 with the objective of attaining self-reliance in basic organic chemical needs. In fact this was the first endeavor to indigenise manufacture of basic chemicals and to reduce country's dependence on import of vital organic chemicals. HOC, started as small chemical unit, has today acquired the status of a multiunit company with two fast growing units and one subsidiary unit. The Company has achieved turnover of about Rs. 4500 million in 1999-2000.

It was expected that indigenous manufacture of these chemical intermediates will give impetus to downstream industries resulting in setting up of chemical units and achieving self-sufficiency for the country in this area. This objective of setting up HOC has been achieved and at present more than 500 units based on HOC's products have been set up all over the country which have not only succeeded in meeting the goal of self-sufficiency but also entered the international markets earning precious foreign exchange by exporting chemicals, dyes and drugs.

Main Manufacturing Units of HOC comprises

·The Nitro Aromatic Complex at Rasayani in Raigad District (Maharashtra)

·Polyurethane System House at Rasayani

·The Phenol Complex at Kochi (Kerala)

·The Polytetrafluroethylene (PTFE) Complex (Subsidiary) at Rudraram, Hyderabad (Andhra Pradesh)

HOC provides Basic Organic Chemicals essential for Vital Industries. The main products manufactured by HOC are Phenol, Acetone, Nitrobenzene, Aniline, Nitrotoluenes, Chlorobenzenes and Nitrochlorobenzenes. The raw materials used by HOC are Benzene, Toluene, LPG, Methanol, Naphtha and Sulphur, majority of which come from petroleum refineries.

HOC provides the basic organic chemicals essential for vital industries like resins and laminates, dyes and dyes intermediates, drugs and pharmaceuticals, rubber chemicals, paints, pesticides and others, touching virtually facet of everyday life.

It also produces the versatile engineering plastic polytetrafluoroethylene (PTFE) through its subsidiary.

Recent Developments

The disinvestment procedure of government`s 32.61 per cent stake in Hindustan Organic Chemicals Ltd (HOCL) is expected to be completed soon. Six chemical and fertiliser companies have submitted their expression of interest (EoIs) which include

Chambal Fertilizers and Chemicals, Vam Organic Chemicals, Schenectady India, Atul Ltd, Deepak Fertilisers and Petrochemicals and Rashtriya Chemicals and Fertilisers.

Financials

Technical Chart (Weekly)

Tuesday, September 25, 2007

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Friday, September 14, 2007

Q2FY2008 FMCG earnings preview: Sharekhan Special dated September 13, 2007

SHAREKHAN SPECIAL

Q2FY2008 FMCG earnings preview

Backed by a pick-up in demand in the semi-urban as well as rural areas, the fast moving consumer goods (FMCG) sector has seen the volume growth getting better every quarter. The revenue growth for the current quarter is likely to be driven by volume growth as well as improved pricing power of the FMCG companies.
Rising input prices is a concern for the industry. In the past quarters the FMCG companies had been able to combat this issue with price hikes, innovative products with higher realisations and prudent advertising spend.
We expect the earnings of the market leader in the segment, Hindustan Unilever Ltd (HUL), to grow by 17.2% year on year (yoy) backed by a 13% growth in the home & personal care (HPC) segment. We expect HUL's margin to improve from 13.1% in Q3CY2006 to 14.2% in Q3CY2007, primarily due to the price hike taken in many of its products as well as improved product mix.
ITC's growth is expected to be broad based with the reduction in the magnitude of the losses in the non-FMCG businesses. The imposition of the value added tax (VAT) and the price hike taken by the company in the first quarter of FY2008 had affected the growth of its cigarette business in that quarter and the second quarter is expected to witness a trailing effect of the same. Despite this, we expect higher realisations to boost ITC's bottom line by 11.2%.
In our past reports we had always opined that the implementation of VAT might have a dampening effect on the stock price of ITC but the same would likely be a temporary aberration. The recent spurt in the stock price substantiates our opinion. We continue to be bullish on the stock with a long-term perspective.
The long-term prospects of the FMCG sector appear favourable with the rising disposable income of Indians and the increased spending by them. We believe with strong free cash flows, high return on capital employed (RoCE) and sustainable growth, the sector still has considerable upside potential compared with the other sectors.

Thursday, September 13, 2007

Sharekhan Investor's Eye dated September 13, 2007

SHAREKHAN SPECIAL

Q2FY2008 FMCG earnings preview

Backed by a pick-up in demand in the semi-urban as well as rural areas, the fast moving consumer goods (FMCG) sector has seen the volume growth getting better every quarter. The revenue growth for the current quarter is likely to be driven by volume growth as well as improved pricing power of the FMCG companies.
Rising input prices is a concern for the industry. In the past quarters the FMCG companies had been able to combat this issue with price hikes, innovative products with higher realisations and prudent advertising spend.
We expect the earnings of the market leader in the segment, Hindustan Unilever Ltd (HUL), to grow by 17.2% year on year (yoy) backed by a 13% growth in the home & personal care (HPC) segment. We expect HUL's margin to improve from 13.1% in Q3CY2006 to 14.2% in Q3CY2007, primarily due to the price hike taken in many of its products as well as improved product mix.
ITC's growth is expected to be broad based with the reduction in the magnitude of the losses in the non-FMCG businesses. The imposition of the value added tax (VAT) and the price hike taken by the company in the first quarter of FY2008 had affected the growth of its cigarette business in that quarter and the second quarter is expected to witness a trailing effect of the same. Despite this, we expect higher realisations to boost ITC's bottom line by 11.2%.
In our past reports we had always opined that the implementation of VAT might have a dampening effect on the stock price of ITC but the same would likely be a temporary aberration. The recent spurt in the stock price substantiates our opinion. We continue to be bullish on the stock with a long-term perspective.
The long-term prospects of the FMCG sector appear favourable with the rising disposable income of Indians and the increased spending by them. We believe with strong free cash flows, high return on capital employed (RoCE) and sustainable growth, the sector still has considerable upside potential compared with the other sectors.

STOCK UPDATE

Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs500
Current market price: Rs417

Lipitor launch in Canada delayed; Ranbaxy to appeal

Key points

Pfizer Inc has succeeded in winning patent protection in Canada for its blockbuster drug, Lipitor, thereby prohibiting its rival, Ranbaxy Laboratories (Ranbaxy), from launching a generic version of the cholesterol-reducing drug until the expiry of the patent in July 2016.
The Canadian Federal Court in Toronto has ruled that Ranbaxy's proposed generic drug would infringe Pfizer Inc's patent that covers a crystalline form of atorvastatin (patent # 2,220,018) which is due to expire in July 2016. On the other hand, the Canadian court has granted a favourable ruling to Ranbaxy in the case of the patent # 2,220,455, which covers the process for making an amorphous form of atorvastatin and is also due to expire in July 2016.
Despite handing out a mixed ruling wherein the validity of the patent for crystalline atorvastatin has been upheld and the patent for the amorphous form of the compound has been invalidated, the court has ordered the Canadian health ministry not to issue a notice of compliance (approval) to Ranbaxy for marketing the generic version of Lipitor until the expiry of the patent covering the crystalline form of atorvastatin in July 2016, thereby preventing the company from entering the market until July 2016.
Ranbaxy has confirmed its intention to appeal against the ruling of the Canadian Federal Court to the Federal Court of Appeal in Canada and is confident of reversing the current ruling, thereby enabling it to launch the product in Canada before July 2016. Thus, Ranbaxy would be barred from launching the product until July 2016, unless it succeeds in reversing the court's current ruling in its appeal.
The unfavourable ruling received in Canada would come as a major setback to Ranbaxy in its battle for launching generic Lipitor in various markets across the world. However, we remain optimistic on the company's ability to receive a favourable ruling on all the four patents in its appeal in Canada. At the current market price of Rs417, the stock is trading at 23.6x its CY2008E earnings. We maintain our Buy recommendation on the stock with a price target of Rs500.

MUTUAL FUNDS: INDUSTRY UPDATE

Caution continues; strong cash position to spur buying
Assets under management (AUM) of equity mutual funds rose by 1.9% to Rs174,381 crore in August 2007 from Rs171,110 crore in July 2007. The 1.9% rise in AUM of equity mutual funds was in the backdrop of a 1.5% decline in the BSE Sensex in August 2007

Update On Tips (13th Sep 2007)

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Sharekhan Investor's Eye dated September 12, 2007

PULSE TRACK

IIP sharply down in July 2007

SHAREKHAN SPECIAL

Q2FY2008 Media earnings preview

Media and entertainment companies continued their march ahead. While Q1 marked fund raising activities by majors such as the TV18 group and UTV for their movie ventures and the disclosure of expansion plans in the entertainment business by companies such as Viacom18, Q2 marks the launch of NDTV's lifestyle channel "Good Times" and UTV's proposed launch of youth channel "Bindaas".
While the television news channels continue to slug it out in the stiff competition, the general entertainment space awaits the entry of new players. Among the existing channels, Zee TV continues to narrow the gap with the leader Star Plus that should get reflected in the increased ad revenues for Zee Entertainment.
This is the third quarter after the implementation of the conditional access system (CAS) in select areas of Mumbai, Delhi and Kolkata. We believe the impact of CAS in terms of enhanced pay revenues from these metros should be reflected in Q2 revenues of the broadcasters.
In a major step forward to ensure lower charges to direct to home (DTH) subscribers, the Telecom Regulatory Authority of India (TRAI) has enforced a regulation mandating the broadcasters to offer channels to DTH service providers on an a-la-carte basis. This may spell bad news for the broadcasters as it would curtail their ability to push weaker channels as a part of the bouquet and thereby impact their pay revenues. However, this may lower the overall content cost for DTH service providers, which may help them expand faster.
We expect a subdued bottom line performance from TV18 as it continues to spend heavily for future growth, while Saregama India's numbers should be impacted by the lack of major releases during the quarter.

STOCK UPDATE

Bajaj Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,550
Current market price: Rs2,393

XCD launch to improve margins
Bajaj Auto Ltd (BAL) expects its overall margin to rise in the second quarter of FY2008 on the back of sales of XCD, the recently launched 125cc motorcycle, and the closure of the Akurdi plant.

MUTUAL FUNDS: WHAT'S IN—WHAT'S OUT

Fund Analysis: September 2007
An analysis has been undertaken on equity and mid-cap funds' portfolios, indicating the favourite picks of fund managers for the month of August 2007. Equity funds comprise of all diversified, index, sector and tax planning funds, whereas mid-cap funds include a universe of 18 funds such as Reliance Growth, Franklin India Prima Fund, HDFC Capital Builder, Birla Mid-cap Fund etc

Disclaimer

This Document is subject to changes without prior notice and is intended only for the person or entity to which it is addressed to and may contain confidential and/or privileged material and is not for any type of circulation. Any review, retransmission, or any other use is prohibited. Kindly note that this document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.

The information contained herein is from publicly available data or other sources believed to be reliable. While I would endeavour to update the information herein on reasonable basis, I am under no obligation to update or keep the information current. Also, there may be regulatory, compliance, or other reasons that may prevent me from doing so. I do not represent that information contained herein is accurate or complete and it should not be relied upon as such. This document is prepared for assistance only and is not intended to be and must not alone betaken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. I do not undertake to advise you as to any change of my views. I may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject me to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. I may have used the information set forth herein before publication and may have positions in, may from time to time purchase or sell or may be materially interested in any of the securities mentioned or related securities. I may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall I or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind.