Sunday, January 13, 2008
We asked you to give your picks for 2008
Out of the over 60 recommendations by you! Here are we think are the best justified picks
Recommendations of Lowkey
1) PSTL: The company is a value buy on FY09E EPS basis(@Rs 530) and the growth story gives strength to that. It is the largest Multiplex chain in the world and OPM are comparable to other multiplxes even though it operates mainly in Tier1 and Tier2 cities simply because of the digital transmission technology. The overall structure of the company involving dimple advertising, the digital transmission, international footprint, production, distribution and Food malls only strengthen the strong growth being seen in the bottom line.
The current EV of PSTL is less than its US, Malaysia and Singapore subsidiaries.
2) Williamson Magor and Company Ltd:
The group has other listed companies like Eveready and Williamson Tea Assam Ltd(which is the largest tea estate in India). The company has just concluded a tie up with D1 Oils. The company is involved with Jatropha plantation and bio fuel production. The idea of securing loans to the farmer and supplying them Jatropha seeds and then buying them at a gauranteed price means that even if the margin is considered at Re 1 per Litre, the bottom line should increase by 20x times in the next 3-4 years. The promoters are good and business plan and excution more transparent than IKF Technologies(the other listed company in this space). The company has a big promoter holding (67%) unline IKF(4%), however, this reduces the free float of the stock and so the price will remain range bound until the stock is split or restructured. Keep a lookout for Crude prices and liquidate your holdings in this company if crude hits $60 per barrel since then price of bio diesel becomes unviable.
3) Adani Enterprises: should show a steady growth over a period of next two years. The group has good plans and management has shown strong execution.
Recommendations of Sridhar Kondoji
My picks for the year 2008 and for next few years are
1) Dish and WWIL (wire & wireless)
2) Rajesh exports
3) IGL (indraprastha gas)
1) Dish and WWIL: I am assuming that households will continue to spend money on home entertainment and can't cut down on expenses even if India enters slow growth era. There is still huge subscriber base to go after. Even though DISH and WWIL belong to same parent and are competing with each other i see room for both these companies to survive and leave a possibility of merger going ahead for the benefit of shareholders and bring value to their investments.
2) Rajesh exports: This is one of my favorite pick. Being a goldsmith, i know how time consuming the process of buying gold and making ornaments. Going forward consumers will be reluctant to wait that long to wear the ornamnets and just head to jewellery retail outlets to buy their ornaments. Whether Gold price goes up or down, the margins of retail outlets like Rajesh exports will be maintained. Also with a large and innovative design gallery, they will continue to lure customers away from traditional jewellers like our family.
3) IGL (indraprastha gas)
I like their PNG and CNG business. However i see huge money in PNG segment going forward for the convenience it brings to consumers who are used to cylinders. They are leaders in this segment and have first mover advantage and they are set up to take advantage of this position.
4) Educomp: More and More schools will adopt Educomp and they will reap the benefits of their hardwork they put in all these years. They are moving in the right direction. This will be a true multibagger in next few years.
The markets ended on a divergent note last week. The BSE Sensex gained 140 points, while the NSE Nifty shed 74 points.
The Sensex, which surpassed the 21,000-mark, found it difficult to sustain above the mark owing to profit taking. From a low of 20,438, the index rallied to a fresh all-time intra-day high of 21,207 and finally ended the week at 20,827.
The Nifty touched a fresh all-time high of 6,357 and then tumbled to a low of 6113, before settling with a loss of 74 points at 6,200.
The short-term trend seems confusing. The Sensex may see 21,300 on advances, while it may drop to 20,350 levels in case of weakness. The on-going results season and overseas cues are some of the factors that would add to the market volatility.
There is firm support for the Sensex on the monthly chart around 19,300 to 19,700. The broad range for this quarter is between 18,200 and 22,350, while 19,000 and 21,570 would be significant support and resistance points.
The Nifty, which has trailed the Sensex so far this year, is likely to find strong support around 5,950 in case of a further downmove. On the upside, it may target 6,500 by the month-end. The broad range for the index is 5,400 and 6,870.
The index is well above its 20-day moving average, which is 6,073, and the 50-day moving average which is 5,915. The 9-day RSI is also comfortably placed at 59.
Investors with a two-three year perspective can consider taking exposure to the stock of Carborundum Universal (CUMI), a leading player in the abrasives and industrial ceramics space.
Ongoing expansion in capacity, growing focus on export markets, and a foray into the power tools business make CUMI an attractive investment. Besides, CUMI’s recent acquisition of VAW, a Russian abrasives manufacturer, also holds potential given the global shortage of alumina grains.
At current market price of Rs 161, the stock trades at about 14 times its likely earnings for 2008-09. Investors can, however, accumulate the stock in lots given the volatility in the broad markets.
With strong demand drivers in place, CUMI has embarked on a timely expansion in capacities. Apart from leveraging on the buoyant domestic demand, CUMI may also benefit from an increased exposure to exports.
The management expects to increase its export contribution to about 40 per cent from the current levels of about 22 per cent in two-three years.
CUMI plans to set up marketing presence in Europe, US and South-East Asia through subsidiaries or strategic partners. These apart, CUMI’s planned foray into power tools business (market size of about Rs 400 crore) also holds significant potential.
This foray, apart from helping CUMI capture a share of this relatively high-growth and less tapped market, will also help it make the transition to an integrated player. This may be beneficial to profit margins.
The company already supplies consumables to the power tool industry (they account for 30 per cent of the power tool price).
For the quarter ended September 2007, CUMI recorded a lower net profit of Rs 12.3 crore, despite a 23 per cent growth in revenues.
Higher depreciation and interest cost in addition to an exceptional expenditure because of VRS payment explains the 21-per cent dip in earnings.
Given CUMI’s high reliance on debt for funding capex, the pressure on earnings may remain over the next year.
Nonetheless, this is no cause for concern given the healthy growth in revenues across all business segments and expected payoffs from the capex.
Investors with a two-three year perspective can consider investing in the stock of Ansal Housing and Construction (Ansal Housing). Proven execution capabilities, a good number of ongoing projects and healthy financials suggest that the company’s present earnings growth may sustain over the medium term.
However, being a small player in the realty market and a small-cap stock poses higher risks than those faced by larger players. Investors willing to take these risks can consider buying the stock in small lots (as the stock is prone to sharp surges and declines).
At the current market price of Rs 310 the stock trades at 10 times its trailing 12-month earnings on a standalone basis. We believe the price is at a steep discount, even after considering the lower premium enjoyed by regional players.
While the subsidiary businesses of hospitality and car sales and services are significant contributors to the consolidated revenues, they are yet to make much impact on the per share earnings. The consolidated picture may require attention if there is an accelerated growth in these businesses.Focussed approach
Ansal Housing is a developer with predominant presence in Tier-II and Tier-III cities in North India. Unlike a number of players foraying into smaller cities after establishing a foothold in the bigger ones, Ansal had entered these markets very early in its business cycle, thus providing it with an edge in not only buying low cost land but also establishing its brand.
The company had completed projects in upcoming cities such as Ghaziabad and Greater Noida as early as 2002.
Ansal Housing has about 55 million sq feet of developable area, a majority of which is already under progress and a part of which may be booked by FY-09, lending visibility to medium-term revenues.
The projects in hand are well-diversified across residential and commercial buildings, malls, apartments and group housing. Over 50 per cent of the current land bank is ear marked for selling of plots. Plot development has traditionally constituted a high proportion of Ansal’s revenues. The company has been successful in this strategy on account of three issues.
In smaller towns, there exists stronger demand for individual plots (which can be built into independent houses) than apartments. Two, selling of plots around the vicinity of a bigger project (that the company develops) provides scope for commanding better prices. Three, in projects such as integrated townships, selling plots typically frees cash flows that can be deployed for developing the township.
As there is little value-addition in plotted developments, the projects do not normally command high-profit margins. However, Ansal’s OPM of 33 per cent in FY-07 suggest that it has managed high profitability mainly on account of low-cost land. That net profits have grown at a CAGR of 135 per cent over the last three years also suggests that the company has been a major beneficiary of a surge in land prices.
While we expect the OPMs to moderate as the company replenishes its land bank, a more active entry into the construction of various realty projects (as indicated by the current projects in hand) may provide some cushion to the profit margins.Subsidiaries hold potential
Ansal’s restaurants in Greater Noida and its car dealership venture with a Japanese company have witnessed healthy revenue growth over the last couple of years. The company’s tie-up with Radisson Worldwide for restaurant chains across India and expansion of its car sales and service business if successful may warrant a look at the consolidated numbers.
Steep hike in the price of construction materials and equity expansion with delayed earnings growth are impending risks. The latter now appears insignificant going by the recent approvals received for preferential warrants.
With a growing retail presence, strong brands, improving product mix and an international acquisition strategy that could strengthen its exports business, Gitanjali Gems is set to accelerate growth over the next two-three years.
At the current market price of Rs 412, the stock trades at about 16 times its likely FY-09 earnings per share. The valuation is at almost a 50 per cent discount to Titan Industries, which owns the Tanishq brand of jewellery retail stores. In terms of size, Gitanjali’s domestic jewellery business is as large as Tanishq and the company has well-known brands such as Nakshatra, Gili and D’Damas in its bouquet. This makes it fairly well-placed to capitalise on buoyant domestic consumption trends as well. The risk of a slowdown in exports is somewhat mitigated by rapidly increasing share of the domestic business in overall revenues. Margins are also likely to improve with the increase in the export of higher value-added items. These factors may help the stock command improved valuations in the future. Gitanjali is also involved in the development of special economic zones for gems and jewellery and is now developing 200 acres of land in Hyderabad.
While this could lead to additional revenues from real estate, we have not factored payoffs from this business into our estimates. The company lacks a track record in this business, which is, in any case, fraught with risk. An investment in the stock can be considered with a two-year horizon.Growing branded retail presence
Gitanjali Gems has a promising domestic retail business, which at Rs 1,432 crore, accounted for 40 per cent of its revenues in FY-07. The share of domestic revenues improved to nearly 50 per cent in the first half of FY-08. Gitanjali Gems retails gold and diamond jewellery under well-known brands such as Gili, Nakshatra and Asmi (the latter two have received marketing support from DTC till date). It also has a joint venture with the U.A.E-based retailer, Damas, to sell jewellery in India under the name D’Damas.
Recent developments point to an increasing focus on the domestic segment. One is its acquisition of the Nakshatra brand from Diamond Trading Company (DTC), the marketing arm of De Beers, for Rs 100 crore. This strengthens the company’s grip on the market at a time when other traditional jewellery exporters are also getting into the branded retail business. Nakshatra is also a fairly mature brand now and this may mean marginal incremental investments on brand building from here on.
Gitanjali has also recently entered into a joint venture with an Italian fashion group, Mariella Burani, to introduce the latter’s luxury and fashion products in India through a chain of stores. It struck a similar joint venture with Italian jewellery and watch retailer Morellato, which makes brands such as Cavalli, Moschino and Miss Sixty under licence, for distribution of watches and jewellery brands in India.
With a wider product range and potential to tap the premium end of the market through tie-ups with international retailers, Gitanjali is likely to make larger strides in the domestic retail space.Improving product mix
While domestic retail is likely to drive revenue growth, operating margins are also likely to improve as the company’s product mix shifts from low-margin cutting and polishing of diamonds (CPD) towards jewellery. Jewellery sales now account for 40 per cent of revenues. This share is likely to increase on the back of growing outsourcing of fabrication of jewellery to India. Gitanjali is also well-placed to capitalise on this trend with the acquisition of two retail chains in the US, Samuels Jewellers (100 stores) and Rogers (50 stores). The $100-million retailer, Samuels, will outsource 60 per cent of its fabrication work to Gitanjali.
While higher jewellery sales will increase on the one hand, the acquisitions provide direct access to the US market. A presence in retailing may give the company higher margins than would be the case with sales to international wholesalers.
The ability to command better prices as a result of these bodes well for profitability in the backdrop of higher prices of gold and precious stones. Gitanjali may also be better placed to withstand any slowdown in exports to the US compared to other gems and jewellery exporters.