Sharekhan Stock Idea

Elder Pharmaceuticals 
Cluster: Apple Green
Recommendation: Buy 
Price target: Rs410
Current market price: Rs298

The growth pill

Key points

• Elder Pharmaceuticals (Elder) has a diversified product portfolio that includes pharmaceuticals, consumer products and bulk drugs. It plans to launch new molecules and line extensions in the coming years. With big brands like Shelcal and Tiger Balm in its fold, the company has the ability to develop and grow big brands. Its bulk drug sales are also expected to pick up from FY2007 onwards. We expect its net sales to grow at a compounded annual growth rate (CAGR) of 20% over FY2005-08.
• Last year, Elder took concrete steps to boost its exports. The benefits of these initiatives will be seen over the next few years, as we expect its sales in the African and South-East Asian countries to start picking up. We expect the exports to grow at a CAGR of 46% over FY2005-08. 
• Elder has more than 25 marketing alliances with foreign companies to market their products in India. We expect these alliances to grow into contract research and manufacturing service (CRAMS) and marketing agreements in the long term. 
• The company is setting up manufacturing plants in excise-and tax-free zones to reduce the outsourcing of its finished products. As a result, its raw material cost will decrease sharply. We expect the tax savings to improve the net profit margin (NPM) significantly over the next two years. 
• We expect the net profit to grow at a CAGR of 49% over FY2005-08. At 7.8x FY2008E earnings, Elder is trading at a deep discount to its peers. Considering the strong growth prospects in domestic as well as export markets and cheap valuations, we initiate coverage on Elder with a 12-month price target of Rs410, expecting a 38% upside from the current levels of Rs298.
  

ENAM - India Strategy

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ITC - Merrill Lynch - BUY

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Sharekhan Shareholding Tracker

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All stocks not on a high despite boom

The dizzy rise in the equity markets has resulted in the danger that many investors will make decisions that might not be prudent from the investment perspective because they feel left out as everyone earns money while their portfolio seems to be going nowhere.

This is especially true for investors investing directly in equity, where a large number of shares are showing a negative return since the beginning of this calendar year.

The ETIG examined the prices of shares to see the kind of performance that has been delivered in the last few months. The period selected for the purpose was between the beginning of January '06 and the last traded price on April 20, when the sensex hit the 12,000 point mark.

There is data available on a total of more than 2,400 companies and out of these, 1,100 actually ended up causing a loss for their investors during this time. During the same period, the sensex has gained 28%. This means that many of those investing directly in individual scrips could have lost money.

Companies, whose prices have fallen, are evident across all groups of companies on the BSE. Among the A group shares, several of the public sector banks are not returning positive figures for their investors and this has added them to the losing list.

Vijaya Bank (-14%), Oriental Bank of Commerce (-12%), Andhra Bank (-10%), Allahabad Bank(-6%), Punjab National Bank (-5%) and Bank of Baroda (-3.5%) have been joined on the negative list by some private banks like ING Vysya Bank(-12%) and Indusind bank (-9%).

The technology majors might be going great guns as far as the frontline stocks are concerned but quite a few of them are also being hit by a fall in their prices.

Visualsoft for example, is down by nearly 48% while HCL Infosys has fallen by about 37% since January. On the fertilizer front, National Fertilizer as well as RCF have witnessed a fall in terms of share price.

On the oil refining and marketing side, Bongaigaon Refinery is down 4% while the situation is only slightly better for Kochi Refineries, HPCL, IOC and BPCL, but they still ended up with negative returns for their shareholders.

In addition, a few pharma companies from the A group, like Nicholas Piramal, Novartis, Abott and Wyeth, have also ended up with negative returns.

The list gets slightly bigger when one moves to the B1 and B2 group shares, where around 160 and 260 companies respectively, have taken a hit in their prices.

This covers a wide spectrum of sectors and industries The big chunk of such companies is present in the Trade to Trade segment, where more than 350 companies find themselves ending up with a negative return for shareholders.

Ashok Leyland - Update

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D S Kulkarni Developers

Expanding its footprint

The first among the many real-estate developers presently waiting to tap the capital markets

Pune-based D S Kulkarni Developers (DSKDL) constructs residential (accounting for 90% of the revenues) and commercial complexes since its inception in 1991. The company has till now completed 23 projects. Its major focus has been Pune (21 projects) and Mumbai (two projects). DSKDL has completed over 12.5-million sq ft of construction in Mumbai and Pune together.

DSKDL follows Accounting Standard 9 for recognition of revenue. Revenue is recognised after the construction of the project is completed in every respect. Inventories under work-in-progress are valued in accordance with the proportionate completion method: at the estimated cost incurred on the project at the time of finalising the accounts and the proportion of estimated profit earned on it.

In the nine months ended December 2005, sales revenue amounted to Rs 14.22 crore and the increase in inventories of complete tenements/work-in-progress was Rs 52.05 crore. As profit accrued from ongoing projects are accounted even though sales is accounted at a later date, the operating profit margin shows wild swings.

The DSK group claims to have a good land bank, which is a big asset for any developer. The group has been collecting land at low prices over the years. Group companies buy the land and then transfer it to DSKDL for development. The company has not disclosed the value of the land held by the group.

DSKDL is coming out with a composite rights issue (0.55 crore shares)-cum-public offer (0.55 crore shares) of 1.10 crore shares. Shares on rights basis will be issued to the existing shareholders at a fixed price of Rs 110. Post the composite rights issue and public offer issue, the company's share capital will double to Rs22 crore.

DSKDL plans to invest the proceeds of the composite issue for the development of nine new properties: seven in Pune, one in Mumbai, and one in Bangalore. The estimated cost by the company for development of these projects is Rs 550 crore. The nine projects and their locations are: Vishwa IT Park, DSK Garden Enclave, DSK Vishwa Saptapur, DSK Sayantara, DSK Sundarban, DSK Roshan, and DSK Vishwa V, VI, VII in Pune; DSK Madhuban in Mumbai; and DSK Bangalore Project in Bangalore

Strengths

* With increasing earning population, rising disposable income, expansion of retail and IT/ITES sectors in Pune, Mumbai and Bangalore, housing demand in these cities is growing.

* DSKDL claims to have delivered on time possessions for all its projects undertaken till date.

* DSKDL has been making profit since incorporation and paying dividend since FY 2003.

Negatives

* Land bank is an important parameter to evaluate a real-estate developer. However DSKDL does not own any land bank. Out of the issue proceeds (rights and public), the company is investing Rs 110.99 crore (Rs 12 crore for transfer of development rights) for purchase of land from its group companies, which are holding the land.

* Two non-resident Indians (Chandar T Bhatia and Asha C Bhatia, with a shareholding of 18.18% and 17.73%, respectively) have a stake of 35.91%, i.e., more than that of the promoter group's 24%.

* DSKDL had a negative net cash from operations in FY 2004 and FY 2005 of Rs 17.62 crore and Rs 22.75 crore, respectively, mainly due to the projects in progress.

Valuation

The 52-week high/low of DSKDL has been Rs 434.45 (12 April 2006) and Rs 60.67 (13 April 2005). The current market price of the stock is Rs 392 (ex- rights).

At the offer price band of Rs 250-275, DSK's PE works out to 149.5- 164.4 x FY 2005 EPS on a post-issue equity and 34.7 – 38.1 x 9-month FY 2006 annualised earning on the post-issue equity of Rs 22 crore. TTM PE for the construction sector is abnormally high at 42.7. Delhi-based Ansal Housing with an equity of Rs 14.60 crore and a net sales for FY05 of Rs 79.80 crore trades at a TTM PE of Rs 32.7

Sharekhan Investor's Eye

Aban Loyd Chiles Offshore 
Cluster: Emerging Star
Recommendation: Buy 
Price target: Rs1,760
Current market price: Rs1,325

Price target revised to Rs1,760

Result highlights

• Aban Loyd Chiles Offshore's Q4FY2006 net profit at Rs22 crore is in line with our expectations. The net revenues for the quarter grew by 17% to Rs120 crore. The growth was due to the deployment of all the company's vessels in the quarter as compared to the partial deployment in Q4FY2005. 
• During the quarter the operating profit margin (OPM) of the company declined by 2% year on year (yoy) to 57.3%, primarily because of the increase in the other expenditure and stores consumed. However the pleasing thing was that the margins of the drilling segment have improved by 2.8% to 37.1%. 
• The company's interest cost has declined by 14.6% on a year-on-year (y-o-y) basis and by 27% on a sequential basis, as the company has substituted its high cost debt with the funds mobilised through its recent $100 million foreign currency convertible bond (FCCB) issue. 
• The net profit for the quarter stood at Rs22.1 crore, a growth of 11.3% on a y-o-y basis and a growth of 20% on a quarter-on-quarter (q-o-q) basis.

In the wake of such high earnings visibility, drilling companies the world over are being valued at their FY2009 earnings potential. Similarly, Aban Loyd's full earnings potential will only be visible in FY2009 when it operates its full arsenal of 10 rigs and all of them are fully re-priced at today's high rates. Hence we shall ideally be valuing Aban Loyd on its FY2009 earnings. At the current market price of Rs1,325 the stock is quoting at 9.8x the company's FY2009E earnings per share (EPS) and 5x the company's FY2009E earnings before interest, depreciation, tax and amortisation (EBIDTA). Considering the high visibility of Aban Loyd's earnings and the possibility of the company going in for another acquisition in FY2007, we believe the stock's valuations are attractive. We maintain our Buy recommendation on the stock with a revised price target of Rs1,760. At our price target the stock will be discounting its FY2009 E by 13x and its FY2009 EBIDTA by 6.3x. 

Satyam - IL&FS Update

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DS Kulkarni Developers

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