No stocks please, we are Indians

Indians prefer to park their savings in low-yielding bank deposits and postal schemes rather than a booming stock market, which they see as risky, a survey said this week.

Based on more than a million rural and urban households, it found about 45 percent of India's paid workers, or 144 million people, put their savings in bank deposits, and state-run banks were preferred over private ones due to government guarantees.

Commissioned by IIMS Dataworks and Invest India Economic Foundation last December and completed in June, the survey estimated India's paid workforce at 321 million.

About 105 million salary earners -- out of a population of 1.1 billion -- own a life insurance policy. About 21 million are expected to buy policies in the next 12 months, while 36 million invest in postal saving schemes, the survey said.

Over 50 percent of respondents felt investing in equities was risky and only 5.6 million had an electronic share holding account.

India's stock market hit an all-time high on Tuesday and has gained 11 percent so far in 2007, following a 47 percent rise in 2006.

The survey tracks behavioural patterns and preferences for financial products among individuals. More than 100,000 people from the sample households were polled individually. They were aged 18 to 59 and came from in 852 towns and 931 villages.

About 94 million paid workers live in urban areas. Females account for nearly 13 percent of the workforce, the survey said.

India has 4.3 million active retail equity investors, of whom 3.5 million live in urban areas. Approximately 135 billion rupees in fresh investments by workers are expected in the next 12 months, the survey said.

Mutual funds have about 5.3 million investors and 106 billion rupees of new investments are expected, it said.

India's gross domestic savings rate was 32 percent in 2005/06 -- its highest since 1950-51 and one of the highest in the Asia-Pacific region, according to central bank data.

Stocks you can pick up this week

Marico
Research: India Infoline
Ratings: Outperformer
CMP: Rs 552 (Face Value Rs 10)
12-Month Price Target: NA

Marico has acquired a hair cream and hair gel brand – HairCode from Egypt’s Pyramids Group for an undisclosed consideration. The Pyramids group has agreed for a non-compete agreement in hair creams and hair gels segments with Marico. The brand enjoys ~23% market share of the pre- and post-wash hair care market in Egypt. In September ‘06, Marico had acquired a hair care brand called Fiancee, owned by the Ready Group of Egypt.

With both these acquisitions, Marico has now achieved a dominant market share of ~50% in the Rs1.7-bn pre- and post-wash hair care market in Egypt. Both these acquisitions are expected to contribute ~Rs 95 crore plus to Marico’s consolidated turnover in FY08.

Omax Auto
Research: Angel Broking
Ratings: Buy
CMP: Rs 86 (Face Value Rs 10)
12-Month Price Target: Rs 105

OMAX has been transforming itself from a strong player in the Indian auto component industry to a global manufacturer of sheet metal component. OMAX is aggressively targeting overseas market and has export orders of Rs 150 crore, which is to be executed in the next three years. The company secured orders from Tenneco, Supersporx, Lkea, Delphi, Cummins and Piaggio for supply of various components. OMAX’s export revenue is to grow at a CAGR of around 45% between FY06-FY09 from Rs 26.6 crore to Rs 80 crore.

It’s OPM was under pressure largely due to increase in raw material, power and staff costs. The margin is expected to expand further in the medium term on account of various cost control measures initiated by the company. At the current market price, the stock is trading at a P/E of 8.3x FY07E earning and 6.8x FY08E earnings. The stock has corrected very sharply in the recent past and appears very attractive at EV/EBIDTA of 4.4x and PEG ratio of 0.8 on FY07E earnings (less than 1 PEG ratio indicates that the stock is trading at a discount) and has potential upside of around 20%.

Asian Paints
Research: Edelweiss
Ratings: Buy
CMP: Rs 715 (Face Value Rs 10)
12-Month Price Target: NA

Asian Paints’ EBITDA margins to increase from 13.0% in FY06 to 14.7% in FY09 due to shift towards higher margin products, favourable raw material outlook, and operational leverage advantages. The recent decline in crude oil prices is likely to result in improved gross margins, as the impact of inflation has been already passed on through price hikes. The international operations, in which Asian Paints lacks pricing power, are expected to benefit more.

The product mix is expected to shift in favour of higher margin products such as emulsions and exterior paints, as they will grow at a higher rate. Operational leverage advantage from scaling up is expected to boost margins further. At the current market price, Asian Paints trades at 25.1 times FY07E earnings and 20.1 times FY08E earnings. EV/EBITDA for the stock is 14.8 and 11.9 times on FY07E and FY08E, respectively. An EPS growth of ~25% accompanied by ROE of ~30% makes it an attractive stock.

Deepak Fertilisers
Research: Anand Rathi
Ratings: Buy
CMP: Rs 87 (Face Value Rs 10)
12-Month Price Target: Rs 120

DFPL is the only domestic producer of isopropyl alcohol (IPA), which until recently was fully imported to cater to domestic demand. IPA will significantly add to the revenues and is likely to contribute around 20% of FY09 revenues. Real estate unlocking further de-risks the revenue model. DFPL has been fractionally unlocking large land bank it has at prime locations in Pune.

Ishanya, a specialty mall, is a unique venture by the company and will add some stability to its revenue base. Availability of gas is to ease raw-material pressures from FY08. Margins have been under pressure due to non availability of natural gas in required quantities, which is likely to ease post the completion of Dahej-Uran gas pipeline by H2FY08, leading to resurrection of margins enjoyed earlier. At the current market price, stock is trading at a P/E of 8.1x and 6.1x and EV/EBITDA of 3.8x and 2.8x FY07 and FY08 earnings respectively. Anand Rathi feels the fruits of the capex underway currently will be realised from FY08 onwards.

Raipur Alloys & Steel
Research: Networth Stock Broking
Ratings: Buy
CMP: Rs 133 (Face Value Rs 10)
12-Month Price Target: Rs 200

Raipur Alloys and Steel manufactures 2,10,000 MT of sponge iron and 1,40,000 MT of steel ingots with captive iron ore and power. It is undergoing a structural change with a merger of group companies. Moreover, aggressive plans for backward and forward integration will enhance operating margins going forward. At the current market price, the stock is trading at a P/E of 9.3x FY07E and 5.6x FY08E and EV/ EBITDA of 7.4x FY07E and 5.1x FY08E on a consolidated basis. Networth Stock Broking recommends a ‘Buy’ with a one-year price target of Rs.200, considering P/E of 8x and EV/EBITDA of 6.5x.


Omax Auto
Research: Angel Broking
Ratings: Buy
CMP: Rs 86 (Face Value Rs 10)
12-Month Price Target: Rs 105

OMAX has been transforming itself from a strong player in the Indian auto component industry to a global manufacturer of sheet metal component. OMAX is aggressively targeting overseas market and has export orders of Rs 150 crore, which is to be executed in the next three years. The company secured orders from Tenneco, Supersporx, Lkea, Delphi, Cummins and Piaggio for supply of various components. OMAX’s export revenue is to grow at a CAGR of around 45% between FY06-FY09 from Rs 26.6 crore to Rs 80 crore.

It’s OPM was under pressure largely due to increase in raw material, power and staff costs. The margin is expected to expand further in the medium term on account of various cost control measures initiated by the company. At the current market price, the stock is trading at a P/E of 8.3x FY07E earning and 6.8x FY08E earnings. The stock has corrected very sharply in the recent past and appears very attractive at EV/EBIDTA of 4.4x and PEG ratio of 0.8 on FY07E earnings (less than 1 PEG ratio indicates that the stock is trading at a discount) and has potential upside of around 20%.

NRB Bearings
Research: Buy
Ratings: ULJK Securities
CMP: Rs 493 (Face Value Rs 10)
12-Month Price Target: Rs 551

NRB Bearings with an 80% market share, growing at a CAGR of 18.15% in the last five years, is expected to grow further more on account of surging demand from OEMs and increase in exports. It is undertaking an expansion programme of Rs 100 crore, which is to be completed by end-‘07. It’s expanding its roller bearing segment from 2.045 crore to 2.615 crore, and needle roller from 272.9 crore to 350 crore.

NRB is also setting up a subsidiary company at Thailand for manufacturing activities, and to cater to the growing south-east Asian markets, which will all together help NRB to strenghthen its overseas presence. NRB also enjoys highest margins in the industry despite huge competition and price pressure, from peer companies and OEMs. The stock has a strong potential and to be an outperformer.

Asian Paints
Research: Edelweiss
Ratings: Buy
CMP: Rs 715 (Face Value Rs 10)
12-Month Price Target: NA

Asian Paints’ EBITDA margins to increase from 13.0% in FY06 to 14.7% in FY09 due to shift towards higher margin products, favourable raw material outlook, and operational leverage advantages. The recent decline in crude oil prices is likely to result in improved gross margins, as the impact of inflation has been already passed on through price hikes. The international operations, in which Asian Paints lacks pricing power, are expected to benefit more.

The product mix is expected to shift in favour of higher margin products such as emulsions and exterior paints, as they will grow at a higher rate. Operational leverage advantage from scaling up is expected to boost margins further. At the current market price, Asian Paints trades at 25.1 times FY07E earnings and 20.1 times FY08E earnings. EV/EBITDA for the stock is 14.8 and 11.9 times on FY07E and FY08E, respectively. An EPS growth of ~25% accompanied by ROE of ~30% makes it an attractive stock.

Stocks you can pick up this week

Mangalam Cement
Research: Emkay
Recommendation: Buy
CMP: Rs 207 (Face Value Rs 10)
12-Month Price Target: Rs 306

Mangalam Cement (MCL) is a Rajasthan-based cement player with an aggregate capacity of 1.5 million tonnes. MCL repaid its entire long-term debt as on October ’06 and plans to expand its cement capacity by 0.50 million tonnes, which will be commissioned by September ’07.

It will also set up a 17.5-mw thermal-based captive power plant (to be commissioned by June ’07), which will result in savings in power cost to the tune of Rs 133 per tonne. Emkay expects cement prices to remain firm during FY07E and FY08E, since major capacity additions will come by end FY08E and early FY09E.

This will drive MCL to report a 21% CAGR topline growth between FY06 and FY08, with EBITDA margins improving from 24% in FY06 to 29.7% in FY08E and PAT increasing at a CAGR of 30% during the period FY06-FY08E.

With an expected CAGR of 30% in EPS over FY06-FY08E, Emkay expects RoCE and RoE levels to remain healthy at 28.5% and 36.0%, respectively, for FY07E, and 41.9% and 55.4%, respectively, for FY08E.

Biocon
Research: Anand Rahi
Recommendation: Buy
CMP: Rs 360 (Face Value Rs 5)
12-Month Price Target: Rs 400-460

Biocon is a leading biopharmaceutical company with strong R&D capabilities in fermentation technology, biotechnology and drug discovery. The company is a pioneer and leader in production of biopharmaceuticals through the fermentation route.

With focus on generics, bio-generics and drug discovery, the company is poised to grow exponentially in coming years. Its manufacturing capacity is set to rise four-fold. Moreover, with the commissioning of Biocon’s Biopark, volumes are likely to drive growth in coming years.

The company’s mainstay continues to be bio-pharmaceuticals. The competition in bio-generics is much less and the opening up of the biggest bio-generics market (USA) will boost growth potential for Biocon significantly.

In coming years, the company’s financials will improve, with sharp rise in volumes and wider range of products for the global generic markets. The long-term potential of the company lies in the success of its various R&D projects in drug discovery and drug delivery technologies.

This stock is meant for smart players looking for small downside, a modest upside in the short to medium term and very good long-term gains in a quality large-cap stock. So, it’s a stock for all classes and all time periods.

Bharati Shipyard
Research: Angel Broking
Recommendation: Buy
CMP: Rs 320 (Face Value Rs 10)
12-Month Price Target: Rs 450

Global order book registered a 29% CAGR over the period ’03-06. Going forward, a similar trend is expected on the back of growth in demand for vessels, which is a result of replacement demand and capex boom in the offshore segment (leading to increasing demand for offshore vessels).

India’s current market share in the world ship-building industry is around 0.3% in terms of dead weight tonne (DWT). It is set to gain market share on the back of cost competitiveness and availability of technically qualified manpower.

India also has a locational advantage (a vast coastline of 7,516 km). Bharati’s order book has shown a robust CAGR of 135% over the past three years. The company currently has an order book size of Rs 2,335 crore, which will sustain growth through FY09.

Completion of its Mangalore yard will further boost growth beyond FY09. The stock is currently trading at 17.8x FY07E earnings of Rs 17.9, 8.0x FY08E earnings of Rs 40.1 and 5.6x FY09E earnings of Rs 56.7. Angel initiates coverage on the stock with a ‘buy’ recommendation and a 12-month target price of Rs 450, giving a 41% upside from the current market price.

Sasken Communication
Research: Citigroup
Recommendation: Buy
CMP: Rs 492 (Face Value Rs 10)
12-Month Price Target: Rs 653

Strong presence in offshore R&D services and a turnaround in the products business in FY08E should ensure strong earnings momentum for Sasken in FY06-09E. Growth in the services business is being driven by higher acceptance of offshoring in R&D services.

The services business has marquee clients such as Nortel and Nokia. Citigroup expects the business to register revenue and EBITDA CAGR of 42% and 36%, respectively, over FY06-FY09. The Botnia acquisition has added further momentum to growth.

Sasken has been making significant investment in creating software for mobile phones. It forecast a 52% revenue CAGR over FY06-09 and a turnaround in FY08 for this business, with shipments expected to start over the next few months.

The loss-making products business has been a drag on overall profit. Hence, the stock looks expensive on P/E. Citigroup values the products business on a P/S basis and the services business on EV/EBITDA. Apart from sector risks, the products business has a high risk profile on the technology front and is exposed to delays in handset shipments.

Panama Petrochem
Research: Edelweiss
Recommendation: Buy
CMP: Rs 123 (Face Value Rs 10)
12-Month Price Target: NA

Panama Petrochem manufactures specialty petroleum products that serve as raw materials for various industries like inks and resins, textiles, rubber, pharmaceuticals, cosmetics, transformers and power cables. These industries are growing significantly on the back of strong demand growth for their manufactured goods, which in turn, is propelling Panama’s growth.

Panama also has a well-diversified customer profile, eliminating risks of revenue concentration. Panama has tied up with Petronas, the Malaysian oil and gas (O&G) giant, to distribute Petronas’ high-end auto lubricant ‘Syntium’ in India. Petronas is keen on entering the Indian market in a big way and plans to launch more of its products here.

Panama, the most likely medium for Petronas’ Indian foray, stands to benefit greatly, as the alliance will give Panama a foothold in the Rs 500-crore high-end auto lubes market in India. Depending on Syntium’s success, Panama will also start blending and packaging Petronas’ products at its Baddi plant in future.

Edelweiss expects this division to generate Rs 1.2 crore revenue in FY07E with gross margins of ~12%. It estimates revenues and profits to grow at 25% and 26% CAGR, respectively, between FY07E and FY09E. At the current market price, the stock trades at 5.7x FY07E EPS of Rs 23.2 and 4x FY08E EPS of Rs 33.

Stocks you can pick up this week

Sterlite Industries
Research: Enam Securities
Recommendation: Outperformer
CMP: Rs 542 (Face Value Rs 2)
12-Month Price Target: Rs 725

Sterlite plans to raise Rs 12,500 crore mostly for its commercial power venture, Sterlite Energy. The company has also filed a F1/preliminary prospectus with the US SEC for raising $2 billion.

The ADS proceeds will be used for the following: (a) A $41.9-billion investment in a 2,400-mw power project in Orissa through Sterlite Energy; (b) Acquisition of the government of India’s balance 26/29.5% stake in Hindustan Zinc — the value of which will be around $2.3 billion; and (c) Repay $50 million in debt.

The entry into the commercial energy business will be based on Sterlite’s existing strength of running the captive coal-based power plant for its aluminium smelters and zinc refinery. The existing power capacity of the company is 1,040 mw.

Sterlite Energy plans to build a 2,400-mw power plant in Orissa. Enam believes Sterlite is well-placed to benefit from additional funds that will be deployed for the new growth/high-return business — energy, with captive coal resources.

Apollo Tyres
Research: BRICS PCG
Recommendation: Buy
CMP: Rs 339 (Face Value Rs 10)
12-Month Price Target: Rs 475

Apollo Tyres has set a target of becoming a $1-billion (Rs 4,600 crore) company by FY07-end from its current turnover of Rs 3,000 crore, and plans to grow into a $2-billion player by ’10. It has charted out an aggressive growth blueprint, involving an investment outlay of Rs 600 crore over the next four years.

The management has set a target of doubling revenues to Rs 9,200 crore ($2 billion) by ’10. It is exploring organic and inorganic routes to achieve these objectives, and the recent acquisition of Dunlop Tyres, South Africa is in line with its strategy for growth. At the current market price, ATL is trading at 11.6 times EPS, 7.1 times cash earnings and 5.7 times EV/EBIDTA on 12-month forward basis.

Dunlop Tyres, at 10x CY07E earnings, works out to Rs 390 crore or Rs 77 per share of ATL. Excluding the fair value of Dunlop, ATL is trading at FY07E multiples of 8.7x EPS, 5.3x cash earnings and 4.5x EV/EBIDTA, which is almost 30% discount to the industry average.

Cranes Software
Research: Angel Broking
Recommendation: Buy
CMP: Rs 109 (Face Value Rs 2)
12-Month Price Target: Rs 125

Cranes Software started off as a distributor of third-party mathematical/scientific software products, and has since evolved to become a niche provider of such products to the global scientific and engineering community. The company has achieved this through its strategy of ‘acquire, enhance and expand’.

Through this evolution, Cranes now has a large addressable market in the region of around $40 billion, thus giving significant growth potential to the company going forward. Cranes enjoys one of the highest operating margins in the industry, at 54.5% (H1 FY07).

This is because the proportion of proprietary products in total sales has increased. Products enjoy significant operating leverage, and after recovery of associated fixed costs, all additional revenues flow straight to the profit before tax (PBT).

Gateway Distriparks
Research: CLSA
Recommendation: Buy
CMP: Rs 186 (Face Value Rs 10)
12-Month Price Target: Rs 215

Margins at Gateway Distriparks’ (GDL) Mumbai facility seem to be bottoming out with the start of the third container terminal. Additionally, the company’s attempts to geographically diversify are already visible, with the volume share of the Mumbai unit already dropping to 75% from more than 96% in FY05. JNPT CFS volumes and margins have now stabilised.

GDL’s container freight station (CFS) facility at Mumbai accounts for 90% of total profits and margins, and the facility has been under pressure due to competition from some of the new entrants. Margins dropped by nearly seven percentage points during Q4 FY06.

However, with the commencement of the third container terminal at the port, H1 FY07 volumes at the port grew by 21% y-o-y. Further ramp-up in the operations of the third container terminal will gradually remove supply overhang, improving margins, initial signs of which are already visible.

Garware Offshore
Research: Darashaw Equity Research
Recommendation: Buy
CMP: Rs 149 (Face Value Rs 10)
12-Month Price Target: Rs 200

Garware Offshore Services (GOSL) is in the business of providing offshore support vessels on a lease basis to companies involved in oil and gas exploration. The company’s only two clients are ONGC and British Gas.

Due to sky-rocketing oil prices, oil and gas exploration activities across the globe have seen huge investments. India, too, is encouraging public and private participation under its NELP policies.

Rise in exploration activities has made offshore industry very lucrative, with scaling demand for support leading to higher lease prices. GOSL is on an expansion spree. High debt-to-equity ratio is a growing concern.

At the current price of Rs 133, the stock is trading at a forward P/E of 10x and 6x of CY07 and CY08 earnings. Despite EPS growing at a CAGR of 48% over next the two years, the stock should trade at a modest P/E range of 14-16 due to its high leverage buyouts. Over a 12-month investment horizon, the stock can give returns of 48% with a price target of Rs 200.

Ranbaxy
Research: CLSA
Recommendation: Underperform
CMP: Rs 385 (Face Value Rs 5)
12-Month Price Target: Rs 320

Driven by poor organic profitability and a stretched balance sheet, Ranbaxy has underperformed the Sensex by 153% in the past two years. Cost-cutting initiatives and inorganic growth have contributed to a significant turnaround in profitability in CY06.

Future cost-cutting opportunities will be limited and a stretched balance sheet does not leave much room for further acquisitions. With 45% of the business being commoditised, Ranbaxy faces challenges in organic revenue growth.

Valuations on a price/sales basis may appear cheap at 2.3 times, but are not undemanding in comparison to global peers. Teva and Par Pharma trade at 2.7 times and 1.1 times respectively. Ranbaxy trades at a 50% P/E premium to Teva and valuations at 21.3x CY07CL are not cheap, given the low level of confidence in the company’s future earnings.

Expensing the interest on $440-million FCCBs will impact reported CY07 profits by 13%. Based on historical stock price behaviour, CLSA believes valuations based on price/sales may provide support at Rs 350 and provide a trading opportunity to play on news flows.

Stocks you can pick this week

ICICI Bank
CMP: Rs 874.80
Target Price: Rs 1,085

Brokerage house Macquarie Securities has upgraded its price target for ICICI Bank by 27% to Rs 1,085. Macquarie has cited increased visibility on its capital requirements and, partly, receipt of branch licences from the RBI as the key reasons for the upgrade. The brokerage has pegged at the value of ICICI Bank’s subsidiaries at Rs 195 per share. “We also see a slowdown in opex (operational expenses), especially given the trend of lower payments to outsourced agents for loan sales,” the Macquarie note to clients said.

Tech Mahindra
CMP:Rs 1113.60
Target Price: Rs 1,280

Merrill Lynch has initiated coverage on Tech Mahindra (TML) with a ‘buy’ rating and a price target of Rs 1,280. The brokerage has forecast a 27% CAGR between FY07 to FY09, driven by accelerating IT spend by top client BT (British Telecom) and rapid ramp up by AT&T, another key client. Merrill is of the view that the company can command a premium, compared with peers, given its domain focus, higher margin and returns.

MTNL
CMP: Rs 132.30
Target Price: NA

ICICI Securities has downgraded MTNL to 'hold' and lowered earnings estimates, citing margin pressures on account of the recent tariff revision for local and national long distance calls, and also the higher-than-expected dip in realisations from its mobile service business. The brokerage has accounted for income tax refunds over FY07 to FY09 as extraordinary income. "Accordingly, we value core operations at Rs117/share, tax-related upside at Rs30/share and surplus real estate at Rs27/share," the brokerage said.

S Kumar's Nationwide
CMP: Rs 77.65
Target Price: NA

Citigroup has reaffirmed its sell rating on S Kumar's Nationwide, citing rich valuations and pressure on operating margins. "Although the growth outlook for the company appears robust, at valuations of 13x FY08E (price earning ratio of 13 times estimated FY08 earnings), a 44% premium to the sector appears excessive, and we believe most of the growth is priced in," the Citigroup note on the stock said. The brokerage is of the view that the company's margins will stagnate ahead due to higher overheads on aggressive rollouts of stores and expansions.

Punjab National Bank
CMP: Rs 534.15
Target Price: Rs 660

Brokerage house Motilal Oswal Securities has retained its 'buy' target on Punjab National Bank with a price target of Rs 660, citing its low non-performing asset ratio as one of the key factors. "With slippages likely to remain low, NPA recoveries can provide upside to our estimates," the brokerage said in a note to its clients.

Gujarat Ambuja Cement
CMP:Rs 136.05
Target Price: NA

Brokerage house First Global Research is now betting on Gujarat Ambuja Cement as it feels the stock is more attractively valued compared to ACC. "The margin gap between GACL and ACC has not changed over the last four quarters, although the valuation gap has definitely narrowed and, in fact, GACL appears to be less expensive than ACC," the brokerage said in a note to clients. According to First Global, ACC is trading at a price earning ratio of 17 times estimated FY08 earnings, while GACL is available at a forward PE of 14.

Stocks you can pick up this week

Reliance Industries
Research: Enam Securities
Recommendation: Outperformer
CMP: Rs 1,286.25 (Face Value Rs 10)
12-Month Price Target: Rs 1,400

Reliance Industries (RIL) has filed a revised development plan with the Director General of Hydrocarbon (DGH) for the key KG-D6 block. In the amended plan, RIL has sought approval for 80mmscmd of gas production and has proposed proportionate increase in the capex.

Based on independent assessment, RIL expects the P2 (proved + probable) reserves at 11.3 TCF. This represents an almost 100% increase over earlier estimates. The management has not indicated the quantum of P1 reserves as of now, but it is expected to be around 6TCF (as per the filings of Niko Resources- RIL’s JV partner).

The management is likely to share details once the revised plan is approved by DGH. Enam believes the filing of revised development plan for KG-D6 is a significant event and strengthens the outlook on RIL’s new business initiative. Going ahead, improving policy outlook on gas pricing and achievement of project milestones will align RIL’s E&P valuation multiples to its regional peers.

Mangalam Cement
Research: India Infoline
Recommendation: Buy
CMP: Rs 204 (Face Value Rs 10)
12-Month Price Target: Rs 297

Mangalam Cement (MCL) has performed strongly, wiping out its accumulated losses in FY06. The strong demand for cement in the domestic market coupled with firm cement prices is expected to bring rich rewards for the company in the next 18 months. MCL is putting up a 17.5-mw captive power plant, which is expected to go on steam by June ’07.

MCL is also adding 0.5 million tonnes of new cement capacity to take its total production capacity to 2 mt by September ’07. The stock is trading at EV/tonne of $70 of its FY08 capacity of 2 mt. On EV/EBIDTA basis, it is quoting at 3.9 times, while on an EPS basis, it is trading at 5.6 times.

With improvement in the balance sheet and operational efficiencies, India Infoline feels the stock is undervalued and recommends a ‘buy’, with a target of Rs 297 within a year. The target price discounts estimated FY08 earnings by 8.0x and EV/EBIDTA by 5.5x.

KEI Industries
Research: ULJK Securities
Recommendation: Buy
CMP: Rs 361 (Face Value Rs 10)
12-Month Price Target: Rs 403

Kei’s revenue growth is strong for FY07, with an overall sales growth of 85%. Cables sales are expected to grow by 90%, stainless steel wire by 48%, winding flexible and house wire by 80% and others by 25%. Last year, KEI generated revenues worth Rs 23.5 crore through exports, of which Rs 10 crore accrued from the Gulf region.

The company is in the process of integrating backwards by setting up an aluminum properzi and PVC compounding plant, which is likely to be operational in six months at a capex of Rs 7-10 crore. This will strengthen the operating margins by reducing the cost of the company by Rs. 4-5 crore.

KEI plans to undertake a greenfield expansion with capex of Rs 180 crore in Uttaranchal in FY08. With the management’s above plan for capacity expansion and backward integration, KEI is set to enter higher growth orbit. ULJK estimates the fair value of the company at Rs 403 and expects the company will trade at a P/E of 7.9 times within 12 months.

KRBL
Research: BRICS PCG
Recommendation: Buy
CMP: Rs 143 (Face Value Rs 10)
12-Month Price Target: Rs 267

KRBL has posted a revenue growth of 28.4% y-o-y to Rs 230 crore during Q2 FY07 due to better volumes and higher realisations on both domestic and export sales. Higher sales led a 52.5% y-o-y rise in operating profit to Rs 31.46 crore, which expanded the operating margin to 13.8% compared to 11.6% in Q2 FY06.

Net profit stood at Rs 15.12 crore, registering 88% growth. The company plans to launch its own brand of rice bran oil in consumer packs by December ’07. It commissioned a 12.5-mw wind farm in August ‘06 at Dhulia, Maharashtra, and is planning a 3.5-mw power plant in Ghaziabad for captive consumption.

This will lead to power cost savings of around Rs 5 crore each year. BRICS maintains a ‘buy’ call on the scrip, but lowers its target price to Rs 267 from Rs 301 earlier, considering that the company’s integrated milling plant in Dhuri, Punjab commenced operations only in October ’06.

Taj GVK
Research: Pioneer Intermediaries
Recommendation: Buy
CMP: Rs 241 (Face Value Rs 2)
12-Month Price Target: Rs 325

Taj GVK Hotels & Resorts (TAJGVK) reported a jump of 38% in revenues to Rs 57.9 crore in Q2 FY07, on the back of higher average room realisations (ARR) and steady occupancy rates (OR) in Hyderabad. The average ARR across the three hotels of the group in Hyderabad at Rs 7,635 was higher by 41% y-o-y, while ARR in Chandigarh was ~Rs 6,000.

TAJGVK’s capital charges in Q2 FY07 remained stable y-o-y. While the interest burden stood at Rs 1crore in the quarter, against Rs 90 lakh last year, depreciation was static at Rs 3.2 crore. Net profit for the quarter rose to Rs 15.2 crore from Rs 9.4 crore in Q2 FY06 (+62% y-o-y). TAJGVK has commenced work on its 200-room, greenfield property in Begumpet in Hyderabad and is set to commission its 215-room property in Chennai by June ’07.

At the current market price, the stock is trading at a P/E of 19.1x its FY08 EPS of Rs 12.7. Pioneer Intermediaries makes its case for investment on the back of stability and visibility in the company’s earnings over the next 18-24 months, due to absence of significant room addition in Hyderabad and on account of potential upside in revenues from the Chandigarh property.

Spanco Telesystems
Research: Emkay Share
Recommendation: Buy
CMP: Rs 171 (Face Value Rs 10)
12-Month Price Target: Rs 217

Spanco Telesystems announced a robust set of independent results after the demerger of Sparsh — its domestic call centre business. The results are not comparable as Sparsh was not part of company in Q207. The total revenues of the company in Q207 were Rs 121.7 crore.

Telecom network integration business has surprised with total revenue of Rs 113.1 crore in Q207 compared to Rs 20.5 crore in Q206. EBIDTA for the quarter stood at Rs 16.6 crore, up 85% over the preceding quarter and PAT stood at Rs 9 crore. EPS for Q207 and H107 stands at Rs 5.7 and Rs 8.6, respectively.

Emkay Share expects the company’s PAT to be Rs 37.4 crore for FY07 and Rs 66.7 crore for FY08. Emkay values the listed entity at 9x FY07E EPS of Rs 24 or 5.2x FY08E EPS of Rs 42 and put target of Rs 217. Sparsh will be listed in due course with an expected target of Rs 47 (12x FY07E EPS of Rs 4).

The Surge Stocks

The empire is striking back. And how? New Economy is no longer the flavour in the menu of the India story. Fourteen of the top 25 gainers in market capitalisation (M-cap) in the list of Business Today's Top 500 companies are real estate and infrastructure companies. Brick and mortar, it seems, has become the alchemist's dream. Says Nilesh Shah, President, Kotak AMC: "The government has never been as serious about infrastructure development as it is now. The expectation of sustained earnings growth for companies in this space is driving the higher valuations." Among them, Unitech (up 2,190 per cent to Rs 14,786.5 crore) posted the highest gains, followed by Lok Housing & Construction (up 984 per cent to Rs 347 crore), Anant Raj Industries (up 767 per cent to Rs 1,826 crore), bf Utilities (up 723 per cent to Rs 6,306 crore) and Era Construction (up 469 per cent to Rs 597.5 crore).

But all the news isn't as bullish. Overall, the laggards (defined as companies whose shares underperformed the BSE Sensex) outnumbered the gainers in BT 500-267 companies lagged the Sensex, which recorded a 59 per cent rise in M-cap to Rs 14,02,575 crore, compared to Rs 8,84,195 crore in the first half of the previous year. Of these, 68 reported erosions in M-cap. Only 201 companies outperformed the Sensex; there were 32 new entrants.

"The rally in the market is mainly driven by institutional capital; the large-cap companies have registered impressive performances, so there was no major compelling reason for the big investors to shift their focus to mid-caps and small-caps. That is primarily why losers outnumber the gainers," says Shah.

Larsen & Toubro (L&T) clocked the largest gains among the Top 10 companies in BT 500. The conglomerate's M-cap surged 114.5 per cent to Rs 33,149 crore from Rs 15,460 crore in the corresponding period last year-taking it to the #10 slot, from #14 last year-on the basis of a Rs 31,000-crore order book backlog that is expected to rise to Rs 35,000 crore by the end of the year. Overall, it ranked 89th in terms of gains.

"Over the last 12 months, we've ventured into new businesses like shipbuilding, increased our presence in West Asia and commissioned three new manufacturing plants in China; we've also improved our overall margins by 2.5 per cent," says A.M. Naik, CMD, L&T. For the second quarter ended September 30, 2006, the company reported a 41 per cent rise in net profit to Rs 201.22 crore (Rs 143.05 crore), on a 12.3 per cent rise in net sales to Rs 3,736 crore (Rs 3,327 crore).

Apart from L&T, Siemens (up 145 per cent to Rs 16,997 crore), Hindustan Construction (up 114 per cent to Rs 3,195.06 crore), IVRCL Infrastructures (up 110.5 per cent to Rs 2,619.63 crore) and Crompton Greaves (up 99.5 per cent to Rs 5,336.13 crore) were the other gainers among the large infrastructure and engineering companies.

Says Ajit Gulabchand, CMD, Hindustan Construction: "Infrastructure projects remain a key driver for us, but there's also immense potential in real estate development. Revenues from Hincon Realty" (its real estate arm which is developing a 10,000 acre township near Pune) "still don't reflect in our balance sheet. Once this happens (complete development of 113 million sq. ft will take 10 years), it will show in the company's valuation." Hincon also plans to build an it park on its 2 million sq. ft property in Vikhroli, Mumbai, and has the option of developing 1,500 acres of land near Thane, Panvel, Pune and Nasik.

Meanwhile, Anil Agarwal's Sterlite Group has thrown up a clutch of winners. Four group companies-Hindustan Zinc (up 282.5 per cent to Rs 27,300 crore), Sterlite Industries (up 217 per cent to Rs 23,636 crore), Madras Aluminium (up 86.5 per cent to Rs 827 crore) and Sterlite Opticals (up 78 per cent to Rs 813.6 crore)-outperformed the bse Sensex. They benefitted from the rising prices of non-ferrous metals in the international market as well as a revival in the optical fibre business. The first two, in fact, made it to the list of Top 100 gainers at #17 and #21, respectively.

The Videocon Group also made large strides in the M-cap sweepstakes. Flagship Videocon Industries' M-cap jumped 169 per cent to Rs 9,446 crore from Rs 3,517 crore. This lifted it to #44 from #59 on our list. Says Venugopal Dhoot, Chairman, Videocon Industries: "The two mega acquisitions in 2005-Swedish white goods giant Electrolux AB's Indian subsidiary and French conglomerate Thomson SA's colour picture tube unit-have catapulted Videocon into the global league and are achievements of momentous significance for the group." Last year, the flagship also merged subsidiaries Petrocon India and Videocon International with itself. "Going ahead, we will consolidate the number of companies in the group and broadbase their boards," says Dhoot. He is betting big on oil. Videocon has a 25 per cent interest in the Ravva oil fields-which has proven reserves of 250 million barrels-on which it has already invested $180 million (Rs 828 crore). The group also has joint ventures in the oil and gas sector in Oman and Australia. The importance of oil to the group's financial performance shows up in its balance sheet. In the October 2005-March 2006 period (first half, as the company's financial year ends in September), oil and gas accounted for 19.3 per cent of revenues and 49 per cent of profits.

Among others, Financial Technologies was the best performing stock in the technology segment. The company's M-cap surged 125 per cent to Rs 6,429 crore (Rs 2,852 crore), lifting it from #72 to #55 in our M-cap rankings. The company earns revenues on every transaction done on the Multi Commodity Exchange (MCX), its subsidiary. (FT supplies its technologies to MCX and charges it on a per transaction basis.) The stock is mainly driven by the immense growth prospects of the exchange. The company also expects to benefit from the recently started Dubai Gold & Commodity Exchange, which uses its software on the same terms. "Going ahead, we plan to increase shareholder value by being present wherever there is digital transaction," says Jignesh Shah, CMD, Financial Technologies.

Unlike the IT and banking sectors, which largely underperformed the BSE Sensex, the financial services sector caught the fancy of investors. Companies like jm Financial, Reliance Capital and Indiabulls Financial Services cashed in on the sustained bull run and made good money on the bourses. JM Financial's M-cap surged 745 per cent to Rs 1,781.4 crore, lifting it from #517 to #165 the BT 500 M-cap rankings. Similarly, Reliance Capital's M-cap rose 123 per cent to Rs 10,974.5 crore from Rs 4,912 crore; and Indiabulls Financial Services' M-cap went up 83.5 per cent to Rs 4,534 crore from Rs 2,471 crore.

There were only minor changes in the Top 10 list. Reliance Industries retained its #1 position on the back of yet another impressive performance. The Mukesh Ambani led-company's M-cap grew 60.5 per cent, or Rs 53,359.5 crore, to Rs 1,41,641 crore. Reliance Communications and Larsen & Toubro are new entrants in the Top 10 club. For the first half of 2006-07, the former's average M-cap stood at Rs 37,202 crore, giving it #9 rank in the bt-500 m-cap hierarchy.

Other sectors like sugar, automobiles and cement also gave handsome returns to their investors.

Mystery Company

Why is the market paying a premium of 2,000 times earnings for a small wind power generating company with sales of Rs 16.46 crore and a net profit of Rs 1.93 crore? In the last one year, BF Utilities, a small Kalyani Group company, has seen its market capitalisation (M-cap) rise 723 per cent, or Rs 5,539 crore, to Rs 6,306 crore, from Rs 766.45 crore, taking it to #56 in M-cap rankings from #235. "The premium is because of the Bangalore-Mysore Infrastructure Corridor Project," says an analyst at a local broking firm.

BF Utilities holds a 74 per cent stake in Nandi Infrastructure Corridor Enterprise (NICE), which is building the Rs 2,250-crore Bangalore-Mysore Infrastructure Corridor Project and five townships alongside. Adds an analyst: "The project is caught in several litigations (it has also become a political hot potato in Karnataka); so the stock is overpriced at current levels (closing price on October 27, 2006, was Rs 2,256.20)."

The real reason for the massive premium is probably its large exposure to other group companies and the equity market. BF Utilities has become something of a holding and investment company for the Kalyani Group promoters led by Baba Kalyani. The total value of its equity holdings stood at Rs 625 crore on September 30, 2006, compared to Rs 254 crore on September 30, 2005.

The Laggards

Jet airways has been the biggest loser in the list of Business Today's Top 500 companies. Its average market capitalisation (M-cap) between the first half of 2005-06 and the first half of this financial year is down nearly 44 per cent, or Rs 4,723 crore, from Rs 10,744 crore to Rs 6,021 crore. Consequently, it has fallen to #57 in the BT 500 pecking order from #23 last year. Rising fuel and salary costs are primarily responsible for this. For the quarter ended September 2006, the company posted a loss of Rs 55 crore, compared to a net profit of Rs 61 crore in the corresponding period of the previous year.

This year, the laggards outnumber the gainers in BT 500. Of the top 500 companies, 267 companies underperformed the benchmark BSE Sensex that recorded a 59 per cent rise in M-cap to Rs 14,02,575 crore, compared to Rs 8,84,195 crore in the first half of the previous year. Of these 267 companies, 68 reported erosions in M-cap.

The performance of the pharmaceutical companies has also been disappointing. Ten of them witnessed a fall in M-cap. Ranbaxy Laboratories' M-cap is down nearly 20 per cent, or Rs 3,800 crore, to Rs 15,284 crore. Result: it plummeted down the rankings from #11 to #30. Biocon (down 11 per cent to Rs 3,873 crore), Nicholas Piramal (down 12 per cent to Rs 4,470 crore), Wockhardt (down 6.5 per cent to Rs 4,312.5 crore), Novartis (down 10.5 per cent to Rs 1,495.5 crore), FDC (down 9.6 per cent to Rs 824 crore), Ipca Labs (down 17 per cent to Rs 812 crore) and Abbott India (down 17.5 per cent to Rs 824.4 crore) were among the other losers in the pharma sector.

Among the other biggies, Reliance Energy was the worst performing stock in the power sector. A senior executive in a large domestic broking firm says: "Nothing concrete is emerging from the major projects announced by the company; there are concerns over its power projects in UP, its failure to bag any of the airport privatisation projects and its inability to pass on rising costs to the consumer." The company's M-cap eroded 5 per cent to Rs 10,582 crore (Rs 11,143 crore), dragging it down from # 21 to #39 in the M-cap rankings. Even Tata Power underperformed the BSE Sensex; its M-cap rose 30 per cent to Rs 10,147 crore from Rs 7,206 crore. This underperformance brought down the company from #28 to #41 in the M-cap rankings.