Sharekhan Investor's Eye dated September 21, 2006

Selan Exploration Technology
Cluster: Ugly Duckling
Recommendation: Buy 
Price target: Rs94
Current market price: Rs67

Development efforts yield results

We attended the annual general meeting of Selan Exploration Technology Ltd (SETL). The key takeaways from the same are given below.

• Recent efforts to develop oil assets bear fruits: SETL has discovered significant amount of recoverable oil deposits from the four wells drilled at its Bakrol oil field. It has already commercialised two of the oil wells and hopes to enhance the oil production volume by 35-40% during the current fiscal.
• Future plans chalked out: Under the next phase of development of its oil assets, the company has already organised services (like drilling and cementing) to drill four more wells. Given the encouraging findings of the data collected from the development work, SETL plans to induct a strategic partner to generate resources needed for further development of oil assets and also acquire the required technical expertise.
  

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SECTOR UPDATE

Cement

Rain drain

Key points

• The incessant floods in the states of Maharashtra, Gujarat, Rajasthan, Andhra Pradesh and Madhya Pradesh slowed down the growth in cement the dispatches to 4.35% in August. 
• A higher base of August 2005 also subdued the growth figures. Last year the floods had affected the cement dispatch figures for July 2005. As a result, the dispatches that had lagged in July 2005 had picked up significantly in August 2005.
• Despite the severe rainfall and floods in the country this year, cement prices remained firm at around Rs205 per bag, up by a very handsome 30%. The southern and western regions registered a very high rise in cement prices on a year-on-year (y-o-y) basis. 
• Going forward, we expect the cement dispatches to regain their momentum on the back of a pick-up in the construction activity post-monsoon. Cement prices may rise by Rs5-8 per bag during November 2006.
• This will be extremely positive for cement companies, as their earnings would receive a tremendous boost owing to the double impact of rising volumes and the substantially higher cement realisation.
  

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FIEM Industries IPO

Promoted by J.K.Jain, FIEM Industries is one of the leading manufacturers of automotive lighting and signaling equipment and rear-view mirrors. Major business comes from the two-wheeler segment of the vehicle industry. The company is capable of catering to the needs of almost all segments of the automobile industry: two-wheelers, three-wheelers, light commercial vehicles (LCVs) and tractors.

FIEM has technical support agreement with Ichikoh Industries, Japan. Ichikoh is supplier of automotive lighting, rear-view mirrors to major Japanese vehicle manufacturers such as Nissan Motors, Tyota Motor Corporation, and Daihatsu Motor. It has also entered into a memorandum of understanding (MOU) with Zadi Divisione Fanaleria CEV Spa, Italy, for producing products as per Zadi's specification for the European as well as the Indian markets. However, this MOU is yet to be converted into any agreement.

Customers of FIEM, both in India and abroad, range from TVS Motor Company, Honda Motorcycles and Scooters India, Suzuki Motorcycle India, LML, Kinetic Engineering., Kinetic Motor Company., Majestic Auto, Scooters India, General Motors, Hyundai Motors India, Skoda Auto India, Swaraj Mazda, Ashok Leyland, HMT Tractors, and Tractors and Farms Equipment to Piaggio Italy, Aspock Systems GmbH, Austria, and Geka, Germany.

The objects of the issue are to put up new manufacturing facilities and expand existing facilities. FIEM is setting up a 100% EOU (Unit-V) at Hosur, Tamil Nadu, and a unit at Nalagarh, Himachal Pradesh, a state that accords various tax benefits. Commercial production at both the units is expected to commence by January 2007.

Strengths

• The Indian auto component industry is expected to experience robust growth over the coming years. Growing demand from domestic original equipment manufacturers (OEMs) coupled with massive export opportunity created due to outsourcing by global OEMs and Tier 1 companies will be good for FIEM's growth. Already an established player with good technical collaboration, the company is expanding aggressively to capitalise on new opportunities as also to win over business from competitors, which are not aggressive. However, if it fails to tie up enough new business for the new and expanded capacities, its financials will suffer.

Weaknesses

• FIEM is dependent on TVS Motors, which accounted for around 70% of the total income in FY 2006. This makes it vulnerable to the fortunes of TVS Motors and also reduces its bargaining power with TVS Motors.
• The details of the MoU/ joint venture agreement by FIEM with Korea Airconditioners Company and Aspock Holding GmbH, Austria, for entering into totally new auto ancillaries such as air-conditioners and wiring harness are not available. These can increase the risk profile of the company.
• The FY 2006 performance is extraordinary, with sales up 24% and net profit 136% due to the sharp rise in operating profit margin (OPM) from around 9% in the past four years to 12.6%. This is despite the sluggish sales and profit of its largest customer, TVS Motors.

Valuation

The post-IPO EPS based on FY 2006 earning works out to Rs 6.6. At the offer price band of Rs 125-145, the PE range is 18.9x to 21.9x. The TTM PE of the Auto Ancillary-Lamps industry is around 13.5.

Sharekhan Eagle Eye (equities) for September 21, 2006

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Sharekhan Investor's Eye dated September 20, 2006

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Gateway Distriparks
Cluster: Cannonball
Recommendation: Buy 
Price target: Rs250
Current market price: Rs159

Financials continue to impress

Key points

• During FY2006 GDL registered a 45% growth in its revenues on the back of a 14% rise in the throughput handled and a 30% increase in the realisation per twenty-foot equivalent units (TEUs). 
• The growth in the volume and the realisation improved GDL's operating profit margin (OPM) by 540 basis points from 55.1% to 60.4%. Consequently the operating profit jumped by 59.1% to Rs83.8 crore. 
• Towards the end of FY2006, GDL had come out with a USD85-million global depository receipt (GDR) issue and garnered around Rs375 crore. As the majority of the funds had not been utilised, the same had been deposited in banks. The cash that GDL had on its books was utilised to pay off its debts worth Rs50 crore. Hence we saw a very significant nine-fold jump in its other income and a 45% decline in its interest charge in FY2006. 
• Although with the repayment of the debts GDL's debt/equity ratio has come down to 0.06, yet the excess un-utilised capital is hurting its return ratios. Its return on capital employed (RoCE) has come down from 27% to 20% and its return on net worth (RoNW) has fallen from 21% to 12.7%. 
• In 2006 GDL commenced its rail container freight (RCF) service. It is now setting up its second rail linked inland container depot (ICD), which will ply on electric route connecting the Jawaharlal Nehru Port Trust (JNPT) to northern India. 
• GDL has expanded the capacity of its container freight station (CFS) at JNPT by 36,000 TEUs to 216,000TEUs. Further with huge cash of Rs352 crore on its books, GDL is now actively looking to acquire an existing CFS at Nava Sheva. 
• JNPT is all set to commission its third container terminal at Nava Sheva, taking its container handling capacity from 2.4 million TEUs currently to 3.6 million TEUs. Hence GDL's move to expand its Nava Sheva facility augurs well for its profitability.
  

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SECTOR UPDATE

Pharma

Data protection cheers MNC pharma!!

Key points

• The Government of India is on the verge of allowing 5-year data protection.
• Data protection implies the safety of the clinical trial and test data provided to the regulatory authorities by innovator drug companies. This means that other companies cannot make use of the innovator's data to obtain marketing authorisations for drugs. 
• The implementation of data protection would enhance the confidence among the MNC associates to launch innovative products in the domestic market. Indian subsidiaries have been traditionally restricted from launching new products from their parent's portfolio due to lack of data protection.
• The regulation is likely to benefit Indian companies, which have shifted their focus from being pure generic players to innovative players, as it would protect their research data from being copied in the future.
• The increasing launch of new products by MNCs would increase the pressure on domestic companies to reduce drug development costs. This would provide a boost to players in the contract research and clinical data management space. 

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VIEWPOINT

Monsanto India

Sowing seeds of growth
We recently attended the annual general meeting of Monsanto India Ltd (MIL). The company is a 72% subsidiary of Monsanto Co., USA and is in the business of manufacturing and selling herbicides (used for controlling weeds) and seeds (corn and sunflower). The company is not to be confused with Mahyco Monsanto, another joint venture of Monsanto that sells the controversial BT cotton seeds. 

As the herbicide and agrochemical market has become increasingly generic and competitive, MIL's focus has shifted towards the higher margin seeds business. The contribution of the seeds business has jumped from 21% of revenues in FY2001 to 53% in FY2006. As part of this portfolio restructuring, MIL has sold one of its herbicide products, Leader, to Sumitomo Chemicals recently. 

Trading Calls

Buy Indiabulls at Rs 445-431. Stop Loss at Rs 415. Target of Rs 454 and Rs 492

Buy HPCL around Rs 290.85 with stop loss of Rs 286

Trade at your own risk

Trading Calls

Buy GEI Hamon around Rs 47.90 with stop loss of Rs 46

Buy HPCL around Rs 290.85 with stop loss of Rs 286

Trade at your own risk

Trading Calls

Buy IPCL with stop loss of Rs 285 for a target of Rs 355

Buy Bharti Airtel with stop loss of Rs 430 for a target of Rs 550

Buy ICSA with a stop loss of Rs 691 for a short-term target of 900

Buy R K Forgings with a stop loss of Rs 110 for a short-term target of Rs 146

Buy TCS with stop loss below Rs 1012 for a target of Rs 1045

Buy Bharti Airtel with stop loss below Rs 453 for a target of Rs 480

Trade at your own risk

Movers & Shakers

• Gabriel India zoomed on reports that the company will be selling its Mumbai property for Rs85 crore.
• Alstom Projects advanced on bagging multiple orders worth Rs330 crore from NTPC, Tata Power, Nalco and GEA Energy Systems.
• Ceat gained after it announced that it would cut the prices of truck and bus tyres by 4-5%.
• Nandan Exim rallied sharply on reports that the company would raise up to Rs100 crore through the issue of FCCBs/GDRs/ADRs.
• Diamond Cables gained on bagging two orders worth Rs14 crore.
• Thermax moved up on receiving an order worth Rs88 crore from a cement company.
• Chettinad Cement Corporation edged higher on plans to set up a new greenfield cement manufacturing unit at Ariyalur near Trichy in Tamil Nadu.
• i-flex Solutions inched up on launching the i-flex Process Framework for Banking tool.
• Magma Leasing declined despite reports of the company signing a car financing deal with Maruti.

Sharekhan Investor's Eye dated September 19, 2006

Genus Overseas Electronics
Cluster: Ugly Duckling
Recommendation: Buy 
Price target: Rs270
Current market price: Rs219

Genius over the seas

Key points

• Genus Overseas has entered into a joint venture with Brazilian company, Mobix Wireless Solutions Ltd, to set up a greenfield manufacturing unit in the country. 
• The plant will have a capacity to manufacture one million electronic energy meters; both single and three-phase ones.
• The proposed project will entail an investment of USD15 million which will be financed through a mix of debt and equity. 
• At 100% utilisation, the joint venture will clock a turnover of Rs200 crore and enjoy better margins on account of Mobix Wireless Solutions' brand image.
  
  
  

Welspun Gujarat Stahl Rohren
Cluster: Emerging Star
Recommendation: Buy 
Price target: Rs84
Current market price: Rs74

Bags fresh order worth Rs700 crore
Welspun Gujarat Stahl Rohren (WGSR) has announced fresh order booking of Rs700 crore for the supply of line pipes to the oil & gas companies. What's important is the fact that the large part of the new orders has been received from the overseas market including an order worth Rs450 crore from the USA, which is a developed and highly competitive market. 

The company has also strengthened its position in Iran with an order worth Rs200 crore. Earlier the company had bagged orders from National Iranian Gas Company ($50 million) and PetroIran Development Company (around $52 million). Other notable overseas order wins in the past couple of years are the Rs500-crore order from Indonesia (PGN) and Rs301-crore order from Algeria (Story Transgas). The large orders reflect that the company has been able to establish itself in the niche area of high-pressure oil & gas segment globally.

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Amaranth Won't Scare The Markets

Any fallout from the recent losses suffered by a pair of hedge fundsthat came out on the wrong side of a bet on natural gas prices probablywon't include a ripple through the financial markets or a governmentrush toward more regulation.

More likely, the onslaught of moneythat's been poured into hedge funds over the past four years--roughlydoubling their assets to over $1 trillion, according to the Hedge FundsIndustry Association--may slow down a bit as investors take a breathand pay closer attention to their funds' strategies and their managers'styles.

"You've got to know your fund manager," says investmentadviser John Mauldin, who publishes a newsletter that tracks the hedgefund industry. "So many investors just look at past performance, whichis not a reason to buy a fund."

His comments come in the wake ofreports that Greenwich, Conn.-based Amaranth Advisors, a fund with anestimated $7.5 billion in assets, has lost 35% of its value this yearthanks mostly to a recent drop in natural gas prices. Amaranth'stroubles come on the heels of those of MotherRock, LP, an energytrading fund that has suffered big losses since June and plans to shutdown. Funds that trade energy have been through volatile times lately,with natural gas prices off 20% since the beginning of September andcrude oil down to $64 a barrel from $78 last month.

Industryexperts say hedge funds have been taking greater risks of late, tryingto chase the 15% to 20% returns of a few years ago, which have mostlydried up recently. The average hedge fund returned 8% last year,according to industry tracker Hennessee Group, in line with the averagemutual fund.

But in the investment world, the hedge funddepartment is where the big boys play. And the territory is generallyfilled with experienced people who appreciate the risks involved andwho know how to take their losses. A one-sided bet on natural gas orany other energy product is going to produce big gains orlosses--exactly what a hedge fund investor expects.

"Investorsare supposed to understand the risks, assuming they're properlyqualified," says attorney William Natbony, a senior partner in thefinancial services group of Katten, Muchin Rosenman in New York.

Anda failing fund isn't very unusual. About 5% of the estimated 7,500 to9,500 hedge funds fold every year, the Hennessee Group says, largelybecause impatient investors with a lot of choices don't offer much of agrace period to managers who bring home lackluster returns. Even a bigloss by a fund like Amaranth is unlikely to have much of a trickle downeffect, according to Natbony.

A 35% loss "still means that 65% of the assets are in place, so the fund is properly collateralized," he says.

Thefallout of the two funds may serve to bring back voices calling formore SEC regulation of the industry. Just yesterday, Rep. Mike Castle(R-Del.), spoke out in support of more transparency while calling for astudy to examine hedge funds' impact on the economy. But Mauldin saysthat regulation would produce little value, since any new rulesprobably wouldn't take direct aim at a fund's particular assets.

"Aregulator can tell them to play by the rules, but won't tell them whatthey can or cannot invest in," he says. Fraud cases in hedge funds, hesays, are pretty minimal compared with public companies, rendering morerules largely useless.

Kotak - Everest Kanto

Kotak recommends a BUY on Everest Kanto

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India's Architectural Wonders

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India's forthcoming wave of slick contemporary architecture, even beyond offices, symbolizes the Asian nation's rocketing economy, which first began to open up 15 years ago. Via a series of superlative skyscrapers, shopping centers, and residences that are the tallest, the largest, the "greenest," or the first of their kind, the country is quickly presenting itself as a 21st century global power.
In 2005, for example, Infosys Technologies opened its $65.4 million Global Education Center in Mysore. Located on a 270-acre, $119 million campus, the facility is the largest IT training center in the world, accommodating 4,500 trainees at any given time and hosting up to 15,000 per year. The center is being expanded to handle double the number of employees. While its glassy, futuristic design might evoke corporate buildings in Silicon Valley, the campus also features an Indian touch: a cricket pitch.

A MODERN TOUCH.  Software, engineering, and management-consulting giant Wipro commissioned Indian architect Vidur Bhardwaj to design an office in Gurgaon based on the traditional structure, the haveli (a house built around an open-air courtyard). Meanwhile, Tata Consultancy Services, a division of mega-conglomerate Tata Group, will soon see a sprawling, $200 million campus in Chennai designed by noted Uruguayan architect Carlos Ott (a nod to Tata's expansion into Latin America).

Buildings will feature a step-like structure recalling those found in centuries-old South Indian temples—only these are rendered in ultra-contemporary glass. It's scheduled to be completed next year and will boast the tallest tower in Southern India.

"By proposing to build their offices referencing Indian architectural design in this age of globalization, Indian companies are sending several messages," observes Islamabad (Pakistan)-based Saeed Shafqat, who teaches courses on South Asia at Columbia University's School of International & Public Affairs, in an e-mail interview.

"They're saying India has a heritage that is coming of age. And that Indians are taking genuine pride in their history, culture, and architectural contributions even in the modern era," Shafqat continues. "Finally, they are saying that Indian multinationals are a force to be reckoned with. [The new architecture] suggests economic self-confidence and strong national identity."

PROCEEDING WITH CARE.  But some experts believe architects and corporations should proceed with caution when planning structures with obvious Indian references. Plans for brand-building via recognizably Indian design motifs could seem simplistic or theme-park-like in their approach.

"Culturally specific motif application is not new. To some extent, it is an easy way to refer to the notion of cultural context," observes Vishakha Desai, President of the Asia Society, the nonprofit organization founded 50 years ago by John D. Rockefeller III to foster deeper understanding between Asian nations and the U.S.

She points to structures such as SOM's Jin Mao tower in Shanghai, completed in 1999 and known for its pagoda-like details, as an earlier example of too-obvious, recognizably "Asian" architecture.

MOVING BEYOND MOTIFS.  "The real challenge for contemporary Indian architects is to understand the historical principles of Indian architecture and design, as well as the specific materials used traditionally and appropriately in the climate," says Desai, who holds a doctorate in Indian art history. "They need to think beyond the quick, knee-jerk reaction of simply adding an 'Indian' motif."

Some architects commissioned to design projects to be completed within the next 10 years are doing exactly what Desai suggests. New York architects Tod Williams and Billie Tsien, for example, have designed a new Bombay campus for Tata Consultancy Services (to be completed by 2010) that incorporates elements such as a jali, a traditional carved screen used for centuries as both sunshade and ventilated wall.

Williams and Tsien's jali is more angular and contemporary and less florid than screens of the past. But it serves as a nod to Indian architectural history as well as providing an eco-friendly way to keep offices cool using natural shade and ventilation.

Sustainability is now a real consideration within Indian architecture. The country, which is highly dependent on coal for energy, is widely known to be one of the world's most polluted.

A study published in June, 2006, by the Community Environmental Monitors (CEM), an independent environmental health agency, indicated that millions of Indians in both urban and rural environments were exposed to up to 32,000 times more than the globally accepted standards for 45 harmful chemicals and 13 carcinogens.

As if to combat such disturbing images of India's polluted landscape, Indian and international architects commissioned to design edifices in India are increasingly producing "green," or eco-friendly architecture.

Sharekhan Eagle Eye (equities) & Derivatives Info Kit for September 19, 2006

Featuring ...

Fedders Lloyd

Finolex

Dewan Housing

Escorts

Nocil

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Sharekhan Investor's Eye dated September 18, 2006

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MRO-TEK
Cluster: Apple Green
Recommendation: Book out 
Current market price: Rs67

Book out
MRO TEK is a cash rich company and does not have any significant requirement for capital expenditure in the coming years. Consequently, the dividend policy is likely to remain liberal that would result in a decent dividend yield at the current level. However, the inability of the company to grow in the robust demand environment would continue to act as a drag on the stock's valuation. We advise booking out of the stock.

Sundaram Clayton
Cluster: Apple Green
Recommendation: Buy 
Price target: Rs1,550
Current market price: Rs1,040

Annual report review

The key takeaways from the latest Sundaram Clayton Ltd's (SCL) annual report are mentioned below.

• Good performance in FY2006: SCL delivered a strong performance as its top line rose by 17.3% to Rs629.3 crore in FY2006 as both the die-casting and brakes divisions rendered good performances. The net profits for the year marked an increase of 39.8% to Rs74.5 crore in FY2006. 
• Improving operating metrics: The company continued to generate strong cash flows, while the return ratios also marked an improvement during the year as the return on capital employed (ROCE) improved to 27.8% as compared with 26.7% last year while the return on net worth (RONW) grew to 23.7% as against 21.9% last year.
• Both divisions perform well: The brakes division performed well in FY2006 and the outlook remains bullish with the implementation of the norms such as IS 1852-2001 and the implementation of the anti-lock braking systems (ABS). The revenues from sourcing to WABCO are also expected to rise in the coming years. The die-casting division also showed a remarkable volume growth and the exports prospects for the division are quite bright.
• Capex: For FY2007, SCL has lined up a capital expenditure (capex) of Rs49 crore for the brakes division and that of Rs75 crore for the die-casting division. 
• Reiterate Buy: At the current market price (adjusted for value of investments) the stock trades at 11.1x FY2008E earnings and 9.2x FY2008 earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with a price target of Rs1,550

PN Vijay Financial - BSEL & Suzlon

Suzlon still a buy? and what about BSEL?

Thanks Akash

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