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Tuesday, October 17, 2006

Dredging Corporation of India Ltd.

Company background
Dredging Corporation of India Ltd. (DCI) is the largest player in the maintenance dredging market in India with a market share of over 85%. It has a capacity of 80mn cubic meter and operates at around 100% capacity utilisation. Dredging Corporation has 10 Trailer Suction Hopper Dredgers (TSHD) and 2 Cutter Suction Dredgers (CSD). DCI executes maintenance dredging contracts at the Kolkata, Haldia, Paradip, Vizag, Kochi and other ports. The thrust on developing the port infrastructure would throw up opportunities worth Rs. 60bn for DCI. Further the Sethusamundram project alone would be throwing a big opportunity for DCI.

Key Investment Points.
Huge Dredging opportunities: The National Maritime Development Programme (NMDP)has earmarked an investment of Rs 603bn in port infrastructure creation till 2014.This would lead to investment in various dedging projects to the extent of Rs 60bn in various capital dredging projects. Dredging work worth Rs. 2.3bn is currently in progress at Paradip port. Going forward a large number of such kind of capital dredging projects are going to be executed. DCI being the market leader would get a large share of the opportunity. DCI’s growth rate has been impacted due to the lack of Dredgers. The company plans to get over the shortage of Dredgers by taking Dredgers on lease. This would impact the margins on incremental revenues as lease rentals would be high. Therefore operating margins on incremental revenues would be lower.

Sethusumandram Project is a mammoth opportunity: The Sethusamundram project proposes linking the Palk Bay and the Gulf of Mannar on the east cost of India by creating a ship cannel. The cabinet committee of economic affairs (CCEA) has approved DCI as the capital Dredger for 69mn cubic meter of work. The capital outlay for the project is estimated at around Rs 15-20bn and is to be completed within the next 2-3 years. The Sethusamundram project in itself presents a huge opportunity for DCI.

Focus on International opportunities: Dredging Corporation is also eyeing the international markets and is in the process of firming up a joint venture partner for setting up operations in Bahrain for carrying out dredging work in the middle east countries.

Attractive valuations: At current prices Dredging Corporation is available at 9.8xFY07E and 8.6xFY08E and 1.7x FY06 P/BV. Further the company has a zero debt status and has a cash balance of Rs 4.72bn in its books, which translates to Rs. 168 per share. The company also has a decent dividend yield at 2.5% (FY06 dividend).

Discipline while Investing is the Key to Success

The bull run before the market meltdown during the Q1FY07 was the longest and most sustained rally in the history of Indian equity market. The market seems to have come a full circle and the bulls have brushed-off the beers once again and emerged victorious. To everyone's delight it has taken just three months for the markets to regain the level of highs of 12500 from the low of 9000 in the month of June. The benchmark BSE Sensex and S&P Nifty are now nearing their record levels. Does this imply that stocks are again too expensive?

Although the emerging markets have witnessed a lot of volatility, it has been repeatedly said that India growth story is still growing strong and has the potential to sustain the momentum of the current pull back. The Indian economy is experiencing a paradigm shift, as it is moving away from being an agricultural driven economy to an IT-driven, service economy and such rapid economic growth has boosted the prospects of Indian corporate sector and consequently improved the confidence of global and domestic investors. With the Indian economy looking good in long term and GDP growth rate projected at 8% plus, markets have recognized the potential growth by escalating the stock prices.

Though some feel that the valuation are justified in view of the long-term opportunities that India offers, rest are cautious in their stance. This raises the obvious question, would the current rally be sustainable when considerable amount of buying from the institutional side has already pulled the market up quickly to all time high levels again.

Investors are already wary of their experiences in May and June, when the markets tanked. Unexpected gains could disappear just as quickly as they appear unless there is a workable strategy to help their money grow. There are some dos and don't of investing which if followed religiously could do wonders. Investing is not tricky; it is a simple process that requires planning.

* Instead of looking at the levels of the markets, investors should look to book profits whenever the portfolio has achieved the targeted appreciation levels, or when the investment objectives have been met and not be too greedy and adopt a disciplined approach towards investing.

* There are many investors who often lose sight of their long-term financial objectives in order to fulfill their short-term needs. While at times it may become absolutely necessary to do so, investors need to remain focused on longer-term goals. This can be made possible by analyzing various options rather than rushing to look for easier ways to make money.

* The key for successful investing is of "getting in" & "moving out" at the right time, which is easier said than done. The smart investor is one who enters the market at its bottom or at average levels and leaves the market when it gives the first sign of sinking, and since it is not possible for a common investor to correctly time the market; it is advisable to invest regularly in small amounts irrespective of the market movement.

*The effect of "moving in" at a wrong time i.e. at market peak can be negated to some extent if portfolio is built with longer-term perspective. This is because the market cycles will take care of the intermediate volatility. While portfolio rebalancing and booking profits periodically would negate the effect of moving out at wrong time.

Though markets are on a cyclical high but still there are sizeable opportunities in the market even at current level. What's required now is the focus not on speculative stocks but on those that offer real potential. Studies after studies have shown that equity provide superior returns in longer term. Ride through the market's swings and stay invested and do not forget to book the profits whenever investment objectives are met. If investments are actually guided by the strong fundamentals then certainly it won't pester the rational investors whether the market goes up or down.

Market falters after touching new intra-day high

The Sensex was on the verge of touching the 13000 level in early trades and touched a new intra-day high of 12994 before profit taking pulled it down and weighed on the
sentiment throughout the session. The fall came after the Sensex had notched up gains of 574 points in the last three trading sessions. On the back of weak Asian indices, early trades saw the Sensex slip into the red after adding 66 points to its previous close. The cautious trend with a negative bias prevailed for the rest of the trading session, with the index taking a sharp dip in the afternoon to touch the day's low of 12819, 109 points below its last close. Renewed buying in metal and other counters saw the Sensex pare losses to a considerable extent and end the session with losses of 44 points at 12884. The Nifty shed nine points to close at 3715.

Dragging down the Sensex, HDFC Bank tumbled 3.58% at Rs1,009, HLL declined 2.19% at Rs232, HDFC fell 2% at Rs1,515, Infosys dropped 1.13% at Rs2,074, NTPC lost 2.13% at Rs128, TCS dipped 1.46% at Rs1,114, Grasim slipped 1.67% at Rs2,624 and Gujarat Ambuja Cements was down 1.11% at Rs120. However, Satyam rose 3.27% at Rs450, BHEL advanced 1.95% at Rs2,463 and Hero Honda moved up by 1.57% at Rs758.

On the sectoral front, the BSE Metal index jumped 1.33% at 8908 while the BSE FMCG index fell 1.12% at 2048. The market breadth was negative. Of the 2,556 stocks traded on the BSE, 1,646 stocks declined, 838 stocks advanced and 72 stocks ended unchanged.

Movers & Shakers

* Cadila Healthcare gained on receiving the USFDA nod to market Zonisamide capsules in the USA.
* Micro Technologies declined despite signing an agreement for Home Security System Micro HSS with Macrosoft Associates of the USA.

Among the metal stocks Hindustan Zinc soared 9.74% at Rs820, Binani Industries surged 5.24% at Rs309, SAIL gained 4% at Rs86, Kalyani Steel added 3.88% at Rs321 and Lanco Industries moved up by 3.67% at Rs41. Bhushan Steel Strips, Ispat Industries, Sterlite Industries and GMDC were up 1-3% each.

Over 93.08 lakh Nandan Exim Bank shares changed hands on the BSE followed by Atlanta (79.03 lakh shares), Gayatri Projects (46.80 lakh shares), Action Construction Equipment (36.31 lakh shares) and SAIL (34.67 lakh shares).

Value-wise Atlanta registered a turnover of Rs265 crore on the BSE followed by Hindustan Zinc (Rs198 crore), Gayatri Projects (Rs148 crore), Reliance Industries (Rs129 crore) and Satyam (Rs98 crore).

Kotak - Container Corporation

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Kotak - TCS

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Zenith Birla (India)

Zenith Birla (India), part of the Yash Birla Group, manufactures ERW welded steel pipes (black and galvanised) and high speed steel (HSS) cutting tools including drills, reamers, cutters, taps, and tool bits. The company had undertaken a major restructuring exercise, hiving off or selling loss-making units. After divesting from the steel, paper, chemical and textile businesses, the company is now focusing on steel pipes and tubes.

The steel pipe division is located at Khopoli in Maharashtra and has an installed capacity of 1,20,000 tonnes of steel pipes. The HSS cutting tools, marketed under the brand,ITM, are manufactured in two units located at Nashik and Aurangabad.

Zenith Birla (India) has lined up a follow-on public issue to raise Rs 131 crore. The capital raised after meeting the issue expenses will be deployed to set up additional facilities for manufacturing mechanical tubes (primarily used in the automobile sector) at Khopoli, contribute to the working capital requirement of the existing business, be used as margin money for the mechanical tube business, and meet the preliminary and pre-operative expense and contingency requirement. The cost for setting up the mechanical tube project - mechanical tubings (cold drawn welded- CDW) at Khopoli will be Rs 88.22 crore. It will have an installed capacity of 60,000 tonnes per annum. Commercial production is scheduled from December 2007.


  • US is the largest importer of steel pipes worldwide and has been at the top of the list of countries where Zenith Birla (60% of sales come from exports) is regularly exporting steel pipes. Zenith Birla has a competitive advantage since it has 0% anti-dumping duty as against 7.08% for majority of domestic manufacturers. However, if fresh anti-dumping duty proceedings are initiated by the US pipe industry against imports of pipe from India, then it may affect the financial position of the company.
  • Growth prospects for pipe demand in India are also encouraging.


  • Apart from Zenith Birla (India), there are other players within the sector such as Tata Tubes and Bhushan Steel that are likely to add CDW capacity, leading to oversupply.
  • After the issue, promoters holding will be reduced significantly from 32.85% earlier to 24.67%.
  • There are other companies within the group that manufacture standard pipes and cutting tools, leading to conflict of interest and diversion of attention.
  • Zenith Birla (India) has consistently incurred losses since 1989-90 to 1994-95 and then from 1999-00 to 2002-03. The company has been referred to the Board for Industrial and Financial Restructuring. Consequently there has been reduction in capital.
  • It has been changing the financial year-ends consistently since the past few accounting periods, making comparison difficult.


The 52-week high/low of Zenith Birla (India) has been Rs 83 (12 May 2006) and Rs 30.0 (15 June 2006). The current market price of the stock is Rs 64.9.

At an issue price of Rs 55, Zenith Birla’s (India) PE works out to 38.1 times FY 2006 earning and 18.3 times three months ended FY 2007 annualised earning on post-diluted equity. While the sector TTM PE is 8.7, companies such as Jindal Saw, Welspun Gujarat, PSL and Surya Roshni, which like Zenith Birla have a presence in the ERW segment, is trading at a TTM PE of 11.6, 14.3, 12.4 and 8.2, respectively. Bhushan Steel, with a presence in the mechanical tube segment where Zenith Birla is planning to venture, is trading at a TTM PE of 7.4.

Sharekhan HighNoon

The Nifty witnessed considerable volatility in early trades and currently a minor correction towards 3680 seems to be in force...

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Commodities Buzz

As most of the Indian demand comes during the fourth and first quarters, the next two quarters are the best quarters for physical consumption. Our sources indicate that the investment demand has picked up in India, which is at the cost of the jewellery demand.

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Sharekhan Investor's Eye - Oct 16

KEI Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs500
Current market price: Rs361

Power packed performance

Result highlight

  • In Q2FY2007 KEI Industries (KEI) recorded a robust growth of 96% year on year (yoy) in its net profit to Rs10.1 crore. The growth was in line with our expectations.
  • KEI's net sales for the quarter rose to Rs136.8 crore, up 108.6% yoy and by 37.7% quarter on quarter (qoq). The revenues from the cable segment grew by 105.3% yoy and by 35.6% qoq on the back of expanded capacities.
  • The operating profit grew by 142.5% yoy and by 45.2% qoq as the operating profit margin (OPM) expanded by 225 basis points yoy and by 83 basis points qoq.
  • However, the pressure on the raw material cost continued as the raw material consumed (RMC)/sales ratio increased by 100 basis points to 70.1% during the quarter.
  • The profit before tax (PBT) increased by 137% yoy and by 39.5% qoq. However, the net profit grew by a lower 95.8% yoy and by 33.2% qoq because of a higher effective tax rate.
  • KEI is planning a foreign currency convertible bond (FCCB) issue of $35 million (Rs150 crore) to fund its expansion at Uttaranchal. The funds would be raised over the next three to four weeks. The promoters are ready to dilute their stake up to 10% which means the issue may be priced at Rs440-450 per share.
  • At the current market price of Rs361, the stock quotes at 7.4x its FY2008E earnings per share (EPS) and 4.5x its enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on KEI with a price target of Rs500.

Crompton Greaves

Cluster: Apple Green
Recommendation: Buy
Price target: Under review
Current market price: Rs240

Margins under pressure

Result highlight

  • Crompton Greaves' revenues grew by 48.6% year on year (yoy) in Q2FY2007 to Rs824.0 crore, beating our expectations. Although all its three divisions reported a strong performance, the power system division led the pack with a revenue growth of 68.7% yoy to Rs449.7 crore. The revenue of the consumer product division grew by 33.3% yoy to Rs225.3 crore and that of the industrial system division grew by 36.8% yoy to Rs226.1 crore.
  • The raw material cost/sales ratio spiked to 75.6% in Q2FY2007 from 69.5% in Q2FY2006 largely due to an increase in the prices of the base metals like copper and steel, and the inability of the company to pass on the same to its customers. However, lower employee and other expenses muted the impact of the same. Consequently, the operating profit margin (OPM) reduced by 60 basis points yoy to 8.9% and the operating profit for the quarter grew by 39.1% to Rs73.6 crore.
  • The profit before interest and tax margin of the power system division declined by 50 basis points to 8.0% during the period. The high-margin businesses maintained their margins (the consumer product division's margin was up 10 basis points to 9.7% and the industrial system division's margin was up 20 basis points to 13.6%).
  • Crompton Greaves moved out of the ambit of the minimum alternate tax (MAT) in Q3FY2006 and hence paid tax at the full tax rate in Q2FY2007 as against at the MAT rate in Q2FY2006. Also, it provided for deferred tax to the tune of Rs7.5 crore. The increased tax provisioning led to a slower growth of 25.0% yoy to Rs40.7 crore in the profit after tax. But the growth was still in line with our expectations.
  • The top line and PBT of its Belgium subsidiary, Pauwels, stood at Rs595.38 crore and Rs21.3. crore respectively during the quarter.
  • The stand-alone order book grew by 0.6% sequentially and by 20.0% yoy to Rs1,800.0 crore in Q2FY2007. The consolidated order book stood at Rs3,739.0 crore.
  • The board has announced a bonus of two shares for every five shares held.
  • The stock is currently hovering around our price target of Rs239. Although the top line performance of Crompton Greaves in H12007 has beaten our estimates, yet there is a severe threat to the OPM going forward and the same poses a risk to our call. We are in the process of revising our estimates and may revise our price target as well.
  • At the current market price of Rs240, Crompton Greaves is trading at 28.4x its FY2008E stand-alone earnings and 19.1x it's FY2008E consolidated earnings.

UltraTech Cement

Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,000
Current market price: Rs886

Results below expectations

Result highlight

  • UltraTech Cement Ltd (UCL) has announced a net profit of Rs127.4 crore for Q2FY2007 and the same is below our expectations, primarily because of higher-than-expected power & fuel cost and other expenditure.
  • The company's revenue for the quarter grew by a healthy 58.3% to Rs1,004 crore driven by a 17% rise in its cement volume and a 35.2% increase in its cement realisation.
  • The operating profit for the quarter grew by 291.8% to Rs254.5 crore as the operating profit margin (OPM) expanded by 15.1 percentage points to 25.3%. The same was however below our expectations primarily because of higher-than-expected power & fuel cost and other expenditure.
  • During the quarter UCL�s jetty situated at its Gujarat plant was non-operational for about 15 days. Hence the company not only lost some export volumes but also had to incur an additional expense of Rs15-20 crore on its repairs. Also the packing cost has gone up by Rs10 crore. This in turn increased the other expenditure per tonne by 30% yoy. Had these costs not been there, the company would have easily met our estimates.
  • During the quarter UCL's cost per tonne of cement increased by 12.5% against a 35% rise in realisation per tonne. Hence its earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne in the quarter stood at Rs691 against Rs206 per tonne in Q2FY2006.
  • On the back of flat interest cost and depreciation charge, the net profit for the quarter registered a quantum jump to Rs127.4 crore during the quarter.

Tata Consultancy Services

Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,325
Current market price: Rs1,130

Margins firm up

Result highlight

  • For Q2FY2007 Tata Consultancy Services (TCS) has reported a growth of 8.2% quarter on quarter (qoq) and of 42% year on year (yoy) in its consolidated revenues to Rs4,482.2 crore. The sequential revenue growth was largely driven by a 10.8% quarter-on-quarter (q-o-q) growth in the international business with the domestic revenues declining by 14.3% on a sequential basis. The international business witnessed a strong volume growth of 11.33% sequentially.
  • The earnings before interest and tax (EBIT) margins improved sharply by 294 basis points to 25.3% on a sequential basis. Apart from the impact of lower visa cost, the margins were boosted by an offshore shift (67 basis points), gains from foreign exchange (forex) movement (50 basis points) and an overall improvement in the employee productivity (driven by better realisations and operational efficiencies). The EBIT margins were also positively impacted by the write back of Rs46.8 crore worth of provisions (made for the provident fund earlier) and lower provisioning for bad debts during the last quarter. The operating profit grew by 21.4% qoq to Rs1,229.4 crore.
  • Consequently, despite the sharp decline in the other income to Rs7.7 crore (down from Rs66.8 crore reported in Q1), the consolidated earnings grew by 15% qoq and by 43.7% yoy to Rs991.5 crore (higher than the consensus estimate of around Rs835 crore).
    w In terms of outlook, the company does not provide any specific growth guidance. However, the management reiterated that the demand environment is quite favourable. It is also confident of maintaining the EBIT margins at around the 25.8% level (on the full year basis) in line with FY2006. This implies a significant improvement in the EBIT margins in the second half as the margins stood at 23.9% during the first half ended September 2006.
  • The company has announced an interim dividend of Rs3 per share.
  • At the current market price the stock trades at 27.8x FY2007 and 22.1x FY2008 revised earning estimates. We maintain our Buy call on the stock with a price target of Rs1,325.
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