Orient Paper

Trading at six times its trailing 12-month FY09 earnings, the stock of Orient Paper and Industries (Rs 54) appears to be a value buy. All three of the company’s key business segments — cement, paper and consumer electronics — appear poised to deliver reasonable growth. OPIL is on an expansion spree, invading the smaller semi-urban markets by spreading out its dealer network. With efforts to increase market share and improve operating efficiency, the company can tide over the current challenging situation.
Background

Orient Paper & Industries though began its business only as a paper manufacturer with a single machine in 1939, it now operates diversified businesses. About 60-65 per cent of the company’s revenues come from the cement business with paper and electrical goods chipping in with the rest. The company’s cement units cater to the markets in Andhra Pradesh and Maharashtra. In FY-09, the OPIL’s cement division reported a 20 per cent growth in net sales against the industry’s average 8 per cent; the company’s fan sales in the domestic market rose 10.6 per cent against the industry average of 4 per cent.
Cement’s share

OPIL’s cement capacity is now at 3.4 million tonnes (mtpa). This is set to increase to 5 mtpa as the new kiln at Devapur, Andhra Pradesh, commences operation . . Though the demand scenario in the southern markets has been dull in recent months, the company has been taking initiatives to expand its reach, which have been paying off.

In FY09, the company established 17 new depots — and added 330 stockists to its network, aiding a 22 per cent volume growth in Andhra Pradesh and Maharashtra.

With the commissioning of new capacity, the company is planning a further enhancement of dealer network and intensified brand promotion. The proposed cement capacities in the South, which have weighed on the utilisation rate of plants, however, remain a concern.

The recent June quarter numbers, which saw a 7 per cent volume dip, were impacted by the shutdown of the company’s kilns on up-gradation work.
Paper, welcome choice

In 2008-09, OPIL managed sales growth on higher realisations despite a 14 per cent decline in production on temporary shutdown of the mill. Branded retail stationery has been a fast growing market and the company entered this market last year with the launch of notebooks under the brand, ‘1st choice’.

OPIL’s new tissue plant of 15,000 tonnes capacity is also set to commence production this year and may aid realisations and margins in the paper business. The company is striving to improve the sales further by setting up a network for selling the new branded notebook and tissue products to institutional segments.

Initiatives like these may be crucial to sales as, similar to the case of cement, the paper industry too is marred by fears of a capacity overhang. 6.5 lakh tonnes of new capacity are expected to be added in the next one-and-a-half years.

This would leave a surplus of 4.5 lakh tonnes in the market as the industry is expected to grow at 5-6 per cent. The domestic market now absorbs 30 lakh tonnes of paper a year.
Electricals add strength

OPIL’s electrical division, which includes fans, compact fluorescent lamps and other lighting, reported a 53 per cent growth in operating profits in 2008-09 following a close to 20 per cent growth in sales.

The company is also the country’s largest exporter of fans. But following the slowdown in export demand during the year, the company increased its focus in the domestic (semi-urban) market.

OPIL’s fan sales in the domestic market rose by 11 per cent in FY-09.

The company is further looking to expand its distribution reach in Tier-II and Tier-III markets. Strong trends in semi-urban and rural sales have been key drivers in this business.

The company has been taking up several proposals to improve its cost efficiency — setting up heat recovery units to lower energy consumption, upgrading existing evaporators and boilers at its paper mills, reducing power and coal consumption in the cement kilns.
Cost efficiencies

The company is also commissioning a 50 MW captive power plant for powering its cement units (a 43 MW power plant for the paper mill is also being planned) and has completely automated cement packing plants.

OPIL’s sales have grown at a compounded annual rate of 17 per cent in the last three years. Penetration into new markets in the domestic region and higher realisations from the paper and cement segments have buttressed the growth.

The company’s operating profit margin stands at the industry’s average 24-27 per cent.

Financing the above capex should not also be a problem for the company as its debt-to-equity stands at a low 0.35. OPIL promises to deliver growth in the medium-to-long term.

LIC Housing Finance

Investors can consider accumulating the LIC Housing Finance stock, given the scope for better growth and easing margin pressures as the housing market revives and interest rates head higher over the medium term.

LIC Housing Finance (LIC Housing) has continued to display strong growth in disbursements in recent quarters, despite a slowing housing market and PSU banks aggressively growing this business by offering lower rates.

At the current price of Rs 653, the stock trades at nine times its estimated earnings and two times its estimated book value for 2009-10.

This valuation (price-book value) positions LIC Housing at a steep discount to HDFC, but at a premium to other financing companies such as GIC Housing Finance and Dewan Housing Finance.

Strong profitability ratios (return on assets of 2 per cent and return on equity of 23.8 per cent), improving asset quality over the years (Gross NPAs down from 4.7 per cent in 2005 to 1.5 per cent currently), strong marketing network (with more than 9000 agents covering 450 centres), credit rating (AAA from CRISIL) and strong parentage which helps it source funds at a lower cost than most other NBFCs are key investment arguments for the stock.

However, investors may have to bear in mind that the stock has risen 276 per cent from its 2009 lows in March due to a significant re-rating driven by internal restructuring.
Business

LIC Housing, promoted by Life Insurance Corporation, is the fourth largest mortgage financing company after HDFC, SBI and ICICI Bank with a market share of a little over 8 per cent in home loans.

More than 90 per cent of LIC Housing’s portfolio is made up of individual home loan borrowers while the rest is financing for home developers. Despite getting higher yields on project financing, the company continues to cap this segment at 10 per cent of the total portfolio.

The average ticket size of loans disbursed has risen from Rs 10 lakh to Rs 12.05 lakh in a year with just 58 per cent of the loans originating from top cities.

LIC Housing has around 158 marketing offices and a strong distribution network of more than 9,000 agents in the form of direct-selling agents, home loan agents and customer relationship associates across India. The company’s borrowing profile is skewed towards non-convertible debentures and term loans which forms over 80 per cent of the fund base.
Finances

As of June 30, the loan book stood at Rs 29,254 crore, a 29 per cent growth in a year. The company missed the bus during the housing boom, growing by 22 per cent in 2002-07, at a time when new housing loans grew by 30 per cent compounded annually.

Nevertheless, it has caught up in the last couple of years and has grown 28 per cent even as the industry saw growth moderating to 9 per cent.

LIC Housing has managed to grow its net profit by nearly 39 per cent during the period 2005-09 on a compounded annual basis, owing to strong growth in disbursements, coupled with fall in operating expenses.

The net profit for the latest June quarter grew by a modest 18 per cent despite a strong loan book growth of 29 per cent due to fall in net interest margins.

Net interest margins fell by 0.21 percentage points in a year, despite interest rates falling, due to aggressive pricing done in the housing portfolio to compete with its peers.

Though LIC Housing has managed to moderate costs through floating rate borrowings and incremental borrowings at lower rates, margin pressures may continue given the expanding portfolio of new loans which offer a fixed rate for the initial three years. These loans may put pressure on incremental yields; however, the existing loans which are reset every quarter may benefit from rising yields.

The disbursement-to-sanctions ratio of 80 per cent is quite good for the company given its retail focus.

Asset quality in the housing portfolio has improved over years as the company has a strong credit-appraisal mechanism and stringent loan-to-value criteria. The gross NPA ratio is at 1.51 per cent, a slight deterioration over the previous quarter. The net NPA at 0.65 per cent is flat compared to last year.

On the capital raising front, it has raised NCDs and term loans worth Rs 6000 crore this fiscal. LIC Housing also plans a QIP by selling around 1 crore shares to improve its capital adequacy, which is now at a sound 13.5 per cent.

The company is also entering lucrative businesses such as venture capital fund and LIC Care (providing dwelling centres for a growing population of senior citizens), but these are in the nascent stages. The company recently sold part of its stake in LIC MF to Nomura.
Outlook

The advantage the company has is that 50 per cent of the borrowing portfolio and 96 per cent of the loan portfolio are pegged to floating rates, reducing the impact of interest rate volatility.

The company cites improving housing demand since February this year as the trigger for its good disbursement growth.

That much of disbursements came from new home buyers (the ones switching the loans to LIC Housing were only 7-8 per cent of incremental disbursements) is also a positive as it indicates sustainable new home sales driving the growth.

This shows that the company can expect to capitalise on reviving housing demand. The falling age of home owners and moderating housing prices may aid asset quality. With the Eleventh Plan projecting a 24.7 million unit shortfall in housing units, potential for market expansion remains substantial.

LIC Housing may be able to leverage both on its strong distribution network (especially in urban and semi-urban areas) and rising ticket size of the loans.

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Pidilite Industries, Punj Lloyd, Globus Spirits

Pidilite Industries, Punj Lloyd, Globus Spirits

Earn your million

Getting really rich has always eluded the middle class. It always seems like you are just a few steps away, but your monthly salary does not seem to be enough to catch up with the elite crowd. If there were just a few simple rules to follow!

Albert Einstein once said that the power of compounding is indeed the eighth wonder of the world. Making your money benefit from the compounding that you learnt during your school days, is the key to hit a million.

We chalk out a few key points to help you build that million in your bank account.
Do your number crunching

As you start on the million rupee project, you first need to have clarity on how much you can set aside towards this key goal in life. For this you need to assess your net earnings (the amount that gets credited monthly to your bank account) — pull out the household expenses/commitments towards liabilities thereof and arrive at the net savings. Of this, you can set aside about 10-15 per cent as a buffer towards contingencies.

If you are a 25-year-old and in a position to set aside Rs 5,000 a month on a regular basis, in precisely 10 years with an achievable 10 per cent return, you would hit a million.
Chalk out your plan of action

Once you decide how much you can put aside, all you’ve got to do is settle on where to put the money. Stacking them up in your bank account is a sure way not to achieve the required corpus. Employ your money to work for you and pay you — that’s the best scenario to be in.

Now that your goal is fixed, evaluate your risk appetite and based on that, start scouting for the best investments to achieve the returns. Equity as an asset class provides superior returns, especially in the long term.

Statistics point out that globally they have been able to provide a 10 per cent compounded annual returns.

However, if a pure equity portfolio appears risky, arriving at an appropriate asset allocation is important. Strike a balance between direct equity, equity mutual funds, debt mutual funds, bonds etc.

The key factor in asset allocation is that one should not get carried away when the going gets good in equities and overexpose the portfolio to stocks.

Stay disciplined, focussed and at the end of the tenure, you will have what you set out to achieve. Always have a part of your investment into equities, with higher exposure while you are young and gradually reducing the same as you get older.
Buy right, hold tight

In the investment, time is your only ally — buy what you understand, hold on to it irrespective of all the intermediate glitches. Often, one tends to react emotionally; but fear and greed are the party poopers in the world of equities.
Get a reality checK

Being realistic is hard especially in the world of investments. If you have picked the wrong stock, don’t hold on to it till eternity — miracles don’t happen often.

Let go of the bad ones as soon as you are convinced that things aren’t getting prettier with your holding, its time to say your ‘goodbyes’.

Keep monitoring your portfolio, bear in mind that ‘Rome was not built in a day’ and this applies to your wealth creation as well.

(The author is CEO & Founder of Right Horizons Consulting.)

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Pratibha Industries

Investors with a medium-term perspective can consider buying the stock of Pratibha Industries.

After bottoming in December 2008 at the low of Rs 47, it has been trending upward. In late May 2009, the stock penetrated its key resistance around Rs 140 and has been in a sideways consolidation in the range of Rs 140 and Rs 185 for almost three months.

The counter recouped its bullish momentum and broke out of its consolidation phase on August 28. It is trading way above 21- and 50-day moving averages. The daily as well as weekly momentum indicators are featuring in the bullish region. We believe that the stock has the potential to move up to Rs 255 in the medium-term. Investors can buy it with stop-loss at Rs 165. Short-term traders can buy with a target of Rs 213 and tight stop at Rs 183.

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Globus Spirits IPO - Invest

Investors can consider participating in the Globus Spirits’ initial public offering, given reasonable growth prospects, the company’s track record and locational advantages.

The company plans to use the proceeds of this Rs 75 crore IPO (at the higher end of the price band) to ramp up its alcohol production capacity by 73 per cent through expansion at its existing Haryana and Rajasthan facilities.

In addition, it plans to enter 10 new states with its product line of Indian Made Foreign Liquor (IMFL) and acquire companies which supply to military canteens.

At the higher end of the price band (Rs 90-100), the offer is priced at 10 times trailing earnings on pre-issue capital (15 times 2008-09 earnings) while industry peers such as Tilaknagar Industries and GM Breweries are priced between 6 times and 11 times earnings.
Business

The company’s present product portfolio includes rectified spirit, used in industrial applications and country spirits, extra-neutral ethanol (ENA) — used in whisky, rum and white spirits.

While the ENA is supplied to breweries such as United Spirits and Seagrams India. The company has its own IMFL brands such as Officers Choice whisky.

In the country liquor segment, the company holds between 17 and 22 percent in Rajasthan, Delhi and Haryana respectively.

Globus Spirits has posted an average net sales growth of 31.5 per cent and net profit growth of per cent over the past three years.

Net sales for 2008-09 grew at 25.6 per cent. Net profit margin for 2008-09 stood at 6.5 per cent. Operating profit margins have averaged at 8.3 per cent over this period, in line with the rest of the industry.

Operating profits saw a two percentage point drop due to higher raw material costs.

Input prices pressures may remain high over the next six months, given poor cane and paddy output. However, with the expansion expected to be commissioned by March 2010 and cane output expected to see an improvement next year, these may not persist over the medium term.

The company’s operational flexibility to switch from molasses to grain-based ethanol production, may allow it to manage input costs. Capacity additions on a national level may also make for a challenging operating environment. The company has managed a 76 per cent utilisation for the last three years.

Besides, the company appears to have locational advantages on several counts. First, the company operates in Rajasthan and Haryana where ethanol production is limited and trade barriers towards imports exist. It also enjoys ready access to grain and molasses.

The IMFL market is growing at 10 per cent per annum and country liquor at 7 per cent. Certain IMFL products such as white spirits are growing at 40 percent.

Considering the company is targeting high volume, low margin products, barriers to entry are considerably eased compared to premium segment.

Investors however, should look to a strategy of booking profits on a targeted return on this stock. At Rs 100, the offer price offers limited margin of safety, given the low valuations ascribed to the industry by the market.
Offer details

The company plans to spend Rs 89 crore on expanding production and bottling facilities and foraying into new markets, of which 26 crore is through borrowing and accruals.

Jindal Cotex IPO - Avoid

Investors can avoid subscribing to the initial public offer of Jindal Cotex. Though the proposed projects have the potential to improve the company’s product mix, expand profit margins and reduce its exposure to the commodity cycle, the execution risks associated with the projects and the lack of experience in the proposed businesses make investing in the stock risky at this stage.

The offer price discounts the company’s 2008-09 earnings by about 20-21 times at the two ends of the price band, considering the pre-offer equity base.

As the equity base is set to double post-offer, payoffs from the proposed projects will hold the key to valuations. Though the company does not have strict comparables for its new projects, textile industry peers currently trade at four to nine times earnings.
Business overview

The Jindal Cotex group currently produces polyester, polyester viscose, polyester cotton and acrylic with a capacity of about 24,000 spindles of manmade fibres. On a small base, sales (mainly knitted cloth, acrylic yarn and acrylic tops) grew by 27 per cent annualised over the three years to 2008-09, while profits grew 76 per cent.

The company managed a 86-89 per cent utilisation on existing capacities, reasonable for the sector. The company’s reliance mainly on domestic markets rather than exports (13 per cent of sales) could be an advantage at a time when global consumer spending is under stress, even as domestic retailers are reporting improving footfalls and sales.

The company’s operating profit margins have hovered in the 8-9 per cent band in recent years, dipping to 7.3 per cent for 2008-09, probably on account of higher input costs linked to oil prices. The polyester market is a highly commoditised one with very little pricing power due to heavy fragmentation.
Offer details

The offer proceeds (Rs 93 crore at higher end of price band) will be used mainly to part-fund setting up of a new cotton yarn, dyeing and garments facility and an investment of Rs 81 crore into subsidiaries — Jindal Medicot and Jindal Specialty Textiles.

First, the company plans to, in two phases, set up production facilities for yarn dyeing, garment production (3000 t-shirts a day) and yarn production (50,000 spindles, post expansion); these projects may be of a sufficient scale to be viable; but may not offer much scope for margin improvement.

On the other hand, the foray into medical textiles and specialty textiles may help expand Jindal Cotex’s margins sharply (potentially in the 10-15 per cent range, against 8-9 per cent for the existing business). But the projects are in a nascent stage, with orders for nearly three-fourths of the plant and machinery yet to be placed. The dates of commissioning range from March 2010 to October 2010.

Both the forays into medical textiles and specialty textiles appear to hold good potential. Jindal Medicot plans to produce medical textile products which include crepe bandage, stretch bandage, and absorbent cotton wool. Comber Noir, from the company’s spinning arm, is a major raw material.

Demand for these products is consistent and currently met mainly by local suppliers, with estimates putting the market size at Rs 1,800 crore. The margins are likely to be better than those of the existing polyester unit.

The project to be set up in Himachal Pradesh, which had been delayed on account of land acquisition, is expected to commence production in March 2010.

Jindal Speciality Textiles, the other subsidiary, is to produce 60 million square meters of a variety of coated fibres including materials for banners (currently largely imported), boats, trucks, tents etc. This segment, again, is a fragmented one with SRF having a national presence and several small regional players.

However, the potential for import substitution and the higher margins make it reasonably attractive. This plant is expected to begin commercial production in October 2010, a seven-month delay from the intended start date.

While the company is entering potentially lucrative businesses, there are risks relating to the execution of the projects. In addition, value-added products such as coated fibres, T-shirts and medical textiles are far less commoditised than the company’s existing portfolio and may require materially different pricing, marketing and distribution strategies.

The company proposes to borrow close to Rs 250 crore to finance the new projects in addition to the Rs 93 crore in equity from the IPO.

With higher levels of gearing, execution needs to be immaculate and sales even more impressive. Given the execution risks and the relatively low margin of safety in the offer price, it may be prudent to wait and watch how this story pans out before looking at equity participation.

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Punj Lloyd

Punj Lloyd is a key beneficiary of the revival in activity in global oil and gas exploration and production, trigerred by a revival in crude oil prices. Order inflows of Rs 10,000 crore in the June quarter alone is a clear indicator of the revival.

The worst of the impact from the contentious contract of its subsidiary also seems to be over. Investors with a two/three-year perspective can consider investing in the stock, which currently trades at 13 times its expected consolidated per share earnings for FY-11. The equity base includes the recent institutional placement.

After two consecutive quarters (ending March 2009) of losses and tepid order flows, Punj Lloyd has made a positive start in the first quarter of FY-10. Apart from moving into the positive earnings territory with a healthy 14 per cent growth in consolidated profits in the June quarter, the company surprised markets with a massive order inflow that took its order book to Rs 27,900 crore, up 38 per cent over the year-ago period and 2.3 times its FY-09 revenues.

This surge in orders can be attributed to two reasons: One, a revival in capex spends in the areas of oil and gas pipeline, storage tanks and terminals and process facilities, on the back of stabilisation in crude prices as well as recent discoveries. Two, the crude oil price rally in 2009, which means a revival in the spending activity of economies such as West Asia and North Africa. In fact, it is the latter (Libya being a key contributor to orders) that has triggered the order flow for Punj Lloyd. With crude oil remaining range bound and contract values lower than a year ago, we expect Punj Lloyd to receive a spate of projects in the infrastructure space from these geographies.

Another key development is the company’s successful qualified institutional placement of Rs 670 crore in August. The funds would provide for the company’s heightened working capital requirement, and replace high-cost debt. This could, in turn, ease interest costs which have doubled over the past one year.

Punj Lloyd saw a two percentage point increase in its operating profit margins to 10.4 per cent in the latest quarter. However, with the present orders tilted in favour of infrastructure rather than pipelines, Operating Profit Margins are unlikely to cross the 10 per cent mark in the medium-term. Cost over-runs in fixed-price projects could also cause volatility in earnings.
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