Dead Presidents! - India Equity Research: Hidden Gems

The markets witnessed yet another volatile week with stocks and indices going down further. At the current sensex level of 12400, we may be close to a short term bottom as far as the markets are concerned. As mentioned in our report last week, we believe that in a bad scenario, the sensex may go down to around 12000 levels, however drop below 12000 in the short term atleast looks unlikely.

We had so many negative news all of a sudden - terminologies which was unheard of earlier - Yen Carry Trade, US Sub-prime Home Loan problem. Moreover, The Economist carrying the cover story "India Overheats" and Business Week carrying the cover story " The Trouble with India" took their toll on the already not so good sentiment.

Apart from this, March being generally a month when speculators like to be light on their positions and the brokerages reduce their leverage positions to clients, there is a complete absence of any major buying. The major force FIIs are also shying to make investments, primarily on account of global factors and may be looking for further falls to make an entry.

So, as of now, the sentiment looks hugely negative with no one willing to make major financial commitments to Equities.

The stock prices however have reached attractive levels. Investors may choose to buy selectively - however on a staggered basis. We feel the markets may consolidate around these levels for a while and may go up starting mid April.

Here are a few investment ideas :-

Bambino Agro

CMP - Rs. 12.50 BSE Code -519295

Bambino Agro is into food processing and manufactures Pastas, Macroni and Vermicilli. The company has been facing a tough time over the past few years, primarily on account of huge debt on its balance sheet, which it found difficult to service. The company has reached a settlement with the lenders and the debts have been restructured. The promoters have also agreed to bring in fresh funds into the company.

What we like about the company is its strong Brand and excellent distribution network. Infact, we could find the product occupying shelf space at not just big malls and supermarkets but was available at the neighbourhood "Kirana" stores too. (atleast in Delhi)

In the recent past, we have seen deals happening in the food processing sector at good valuations. Orkla Foods, Norway deal to buy MTR Foods is rumoured to have valued MTR at around Rs.400 crores. Similarly, Private equity players have taken stakes in Capital Foods (manufacturing Ching's Secret brand of sauces & Noodles), and Cremica Foods and these have received rich valuations.

Bambino has already achieved Sales of Rs.100 crores for first 9-months (Incidentally MTR Foods does Sales Revenue of Rs.150 crores).

Bambino with its market cap at just Rs. 8 crores looks attractive. The company of course had been bogged down with its own problems but now seems to be recovering. A stock for someone with High Risk appetite - however a potential multibagger.

Hind Industries

CMP - Rs. 24 BSE Code -526307

Hind Industries was recommended to our subscribers earlier is available at around Rs. 24. Even though the volatility in company's earnings on a quarter to quarter basis is a cause of concern, the potential of the business looks good.

The company being the largest and one of the only organized players and the huge scales on which the company (alongwith its subsidiary) operates has the potential to attract the Institutional Investor at a later stage.

Ansal Buildwell

CMP - Rs. 98 BSE Code -523007

The smallest of the three construction companies from the Ansal stable, Ansal Buildwell is undertaking housing & commercial projects primarily in Gurgaon and Kochi with the bulk of its revenues currently coming from Gurgaon.

Some of the projects of the company include Florence Marvel, Florence Elite, Navkriti Arcade, Royal Casa, Club Florence to name a few. The company's ability to acquire land banks at attractive rates is the key strength. Besides, the company is also doing projects in Nepal and Moradabad.

With revenues in excess of Rs.75 crores and PAT of Rs.6.4 crores for first 9-months, the stock looks attractive at the current market cap of Rs.75 crores and is available close to its 52-week low.

Eldeco Housing

CMP - Rs. 200 BSE Code -523329

Another small cap stock from the Housing construction space, Eldeco Housing is undertaking development of housing projects primarily in Lucknow. As per the Balance Sheet of 31.3.2006, the company has an inventory of Rs. 228 crores. This inventory will eventually get translated into sales in the coming years.

In the latest Annual report, the management also talks about having tied up new projects in Lucknow with an estimated value of more than Rs. 500 Crores.

The market cap of the company - just Rs.40 crores. Besides the value which is available at the current price, a big trigger for the stock could be that incase the management decides to merge its unlisted group company - Eldeco Infrastructure, which is several times bigger than Eldeco Housing - this would lead to formation of a much bigger entity and the interest of large market players in the company's stock.

(We wish to clarify here that there has been no confirmation or communication from the management regarding the merger of Eldeco Housing & Eldeco Infrastructure)

One of the negatives in the housing construction stocks however is the uncertainty regarding Sales numbers quarter on quarter since as per the accounting norms being followed by most of them, Sales are booked when possession of the unit is handed over. So in one quarter the company may hand over possession of hundreds of units and in the next quarter none, which leads to confusion in the minds of investors as to why the Sales have dropped or gone up suddenly. This may lead to huge buying and selling and hence huge price volatility in these stocks.

Jolly Board

CMP - Rs. 1000 BSE Code -502335

The company's 2 million square feet IT Park coming up at Kanjur Marg in Mumbai could ring in cash registers for the company. The company has entered into an agreement with Lodha Developers and out of the 2 million square feet of construction, the company's share would be 50%. Assuming the most conservative rental estimate for the space at Rs.30-40 per sq.ft., this would lead to a rental income of Rs.3-4 crore every month for the company. (not to mention the value of the property which could be between Rs.600-800 crores assuming a rate of Rs.6000 to 8000 per square feet).

The company currently trades at a market cap of Rs.90 crores, which is less than three years of its expected rental income. The downside looks restricted from here. The catch here is liquidity since the Equity Capital is just Rs.91 lacs out of which 90% is held by the promoters.

Electrotherm India

CMP - Rs. 435 BSE Code -526608

Electrotherm , our old favourite seems to be now getting the attention it deserves. Recently, India Advantage Fund (through its Investment Manager ICICI Venture) has taken close to 14% stake in the company at Rs.600 per share. The promoters have also taken warrants convertible into shares at Rs.600 per share, which shows the confidence of the management in the future of the company.

Having started as a manufacturer of Induction Heating furnaces, the company went on into backward integration and set up facilities for manufacture of Stainless Steel, Construction Steel/ TMT Bars, Structural & Alloy Steel, Ductile Iron Pipes, and has set up an automotive division manufacturing

The company's journey from Steel to Wheels is definitely exciting and augurs for its Shareholders. With the launch of Yo-Bykes, the company is now gearing up for the launch of Electric Three-Wheelers and Hybrid Buses.

With the world's focus on Alternative Energy, the products would have potential not just in India but also overseas.

Cement Sector

As regard, Cement sector, the entire cement pack is looking good for investment. Most of these stocks have given up almost 30-50% in the last 2 months. Many analysts have started comparing cement sector with the sugar sector arguing what government interference did to sugar can happen to cement too and we see more SELL reports today rather than BUY reports. We believe the comparison is unfair on account of the demand supply mechanics and the fact that the International Trading mechanics for the two commodities are entirely different.

I believe that for an investor having cement stocks in his portfolio, this is certainly not the time to get out. These sell reports are coming in after the event has happened and most cement stocks have already lost significantly.

With ACC near Rs.700, Ultratech at Rs.750, Gujarat Ambuja at close to Rs.100 levels, Birla Corp at Rs.200 & Mangalam at Rs.150, these could be levels to rather buy into these stocks. We feel what Mr. Chidambaram has done has been out of political compulsions rather than economic sense. We feel the decision could see a reversal once the Delhi Municipal Corporation Elections & UP Elections are out of the way. The fundamentals of the sector remain robust and the demand supply situation favours the manufacturers, atleast for the next 2-3 years. Even if the price of cement is frozen at the current levels, the companies would continue to make healthy profits. Another thing the market has probably forgotten is the fact that the whole production by cement companies is not sold in 50kg bags. A large part of the production goes to the Institutional or the bulk buyers. For long term investors, this could be an opportunity though a further fall from these levels not ruled out. If at all there is a further fall, it could be on account of the other factors and the extent of fall from these levels may not be large (5 to 10% at the maximum) .

Monday, March 12, 2007

Ashish Chugh - Hidden Gems

Chugh is a chor to Many people. Please keep that in mind before reading his views

March 12, 2007

Market View

Though March- early April look to be a good month to BUY; a further short term correction from these levels is not totally ruled out.

The markets have been badly battered in the last one to two months - it has been a across the board fall - be it large, mid or small caps -infact small and mid caps have been the worst hit with many of them loosing 30-50% of their values.

We feel the markets will consolidate over the next few days with increased volatility. The short term bias of the markets looks negative. With fear and uncertainty engulfing minds of investors & March being a month for tax planning and a time when brokerages try to reduce leverage to clients, a further drop from the current levels is not totally ruled out. However, the drop will provide an opportunity to accumulate.

What could trigger a rise :-

¬ Corporate Result Announcements - Announcement of good numbers from corporates and guidance would be a key for lifting the sentiment.

¬ The second and the more important trigger would be indications from the government regarding reigning in inflation & indications on end to high interest rate regime by announcement of appropriate monetary policies. Even a small drop of 25 basis points in interest rates would have a huge positive impact on the market sentiment, since it would signal an end to the uncertainty regarding a continuing high interest rate scenario.

¬ Global Liquidity/ Global Markets- We had seen a selloff in the Indian markets as a part of selloff in markets globally. Improvement in global sentiment would be a trigger for the Indian markets.

What to Do ?

The month of March looks like a good month to make investment and I am sure you will not regret if you look back after a few months - however there could be some more short term pain. Investors can therefore choose to stagger their purchases buying on dips/ on bad days. A short term correction from these levels looks likely and we believe a worst case short term scenario could be a sensex level of around 12000.

For the benefit of our new subscribers, we are giving here the nuances of investing in small and mid cap stocks and a few handy tips for the investors investing in such stocks :-

(Our old subscribers would have read this on earlier occasions too)

Investing in Mid & Small Cap Stocks

A number of our subscribers who have enrolled for Hidden Gems are first time entrants to the world of Equity Investing.

With the volatility being witnessed in the markets currently, many of them get swayed by the sentiment, getting in at the top and then selling out in panic, since everyone on the street starts giving bear market call, making a loss on their investment in the process.

Investors should realize that investing in Small & Mid-sized companies carries greater risk compared to the Large Caps.

Company Risk

Investing in Small & Mid Caps is based on the premise that these companies will increase their earnings and grow into larger, more valuable companies. However, as with all equity investing, there is the risk that a company will not achieve its expected earnings results, or that an unexpected change in the market or within the company will occur, both of which may adversely affect investment results.

Volatilty

Historically, small & mid-cap stocks have experienced greater volatility than other equity asset classes, and they may be less liquid than larger cap stocks. Thus, relative to larger, more liquid stocks, investing in mid-cap stocks involves potentially greater volatility and risk. The biggest risk of equity investing is that returns can fluctuate and investors can lose money.

Liquidity risk

Midcap stocks in general, trade in lower volumes than large-cap stocks, and this would render them more illiquid. Especially in the event of the market turning bearish, investors find the Small & Mid caps difficult to sell due to the absence of buyers. This may result in the stock price coming down substantially even on slight selling.

Besides, the other factors that increase risk are -

(a) Lack of Information on what's happening in the companies - since in most cases , the information disemmination platform for most companies is the Annual Report. Further, the disadvantage of small & mid caps over large caps is that the media actively covers the large caps.

(b) Earnings Volatility - Owing to their relatively small size, volatile growth/de-growth patterns are almost immediately reflected in their stock prices and valuations of Small/ Mid Caps.

(c) Management Concerns - Incase of many small & Mid-cap companies, the management concern may be a major factor in the minds of shareholders since very less is known & written about them.

A few Handy Tips for the Investors :-

¬ Donot invest in Equities with borrowed funds.

¬ Donot invest with funds which you may require for monthly household expenses or for other important financial commitment over a shorter time period say - daughter's wedding after a few months, child's education, buying a house etc...

¬ Diversify your portfolio, - as they say Do not put all your eggs in one basket.

¬ Keep booking profits on a regular basis.

¬ Contrary to the popular belief, investing in IPO also carries risk - Many investors tend to think that investing in IPO's is totally risk free with the perception that the stock once it starts trading cannot go below the IPO price. Some IPO investors also go to the extent of leveraging their position by putting in a margin towards IPO application with the rest being funded by the bank. The strategy may make good money for them depending upon at what levels the Stock Price opens and the ratio of allotment to the shares applied, however investors have to realise that in the event of the stock price moving down and the ratio of allotment being low, the investor may end up paying a substantial amount to the bank towards interest cost, thereby loosing heavily in the process, in some cases a substantial portion of the capital invested by him. So, with so many IPOs being planned and the promoters becoming greedy wanting the maximum possible premium for their shares, INVESTORS BEWARE.

Profit Booking - The only way to take money back home

Profit booking on a regular basis is a strategy will will take away a lot of pain in the event of a market fall/ correction. We would advise profit booking if the gains come in pretty much pretty soon. There are many cases on stocks recommended to our investors which have appreciated significantly - one can choose to book atleast part profit/ full profit depending upon one's temperament/ risk profile etc. Take for example- Vijay Shanthi Builders, which was recommended at Rs.25-30 & went to a high of Rs.185 only to fall back to Rs.75-80 levels Or Country Club which was recommended at Rs.80 and went on to touch Rs.450 to fall to Rs.250. Or Confidence Petroleum which went up from Rs.2 to Rs.9 to fall back to Rs.5. One could have atleast booked part profits in such stocks. As a thumb rule, we would advise investors to sell atleast 50% of the holdings if the stock appreciates by 75-100% so that there is less pain in case of a market fall. And incase the stock appreciates significantly even from your sale levels, you still can enjoy profits on your balance holdings

Monday, February 26, 2007

Ashish Chugh - HIDDEN GEMS - Linc Pen & Plastics

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Warning: Chugh is a CHOR to many. Be wary of his recos. Try to make quick profit and exit

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