Sharekhan Eagle Eye (equities) for October 04, 2006

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Sharekhan Investor's Eye dated October 03, 2006

Universal Cables
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs179
Current market price: Rs109

Ready with new power

Key points

• The management of the company sounded very upbeat on the growth prospects of the cable industry in general and that of Universal Cables Limited (UCL) in particular.
• The power, instrumentation and control cables industry is likely to see a huge continued growth in demand backed by the government's thrust on the power generation sector and capital expansion plans of India Inc.
• To take advantage of the same, UCL is implementing a capital expansion plan of Rs64 crore, wherein it will double its capacity of medium tension (MT) cables and put up a new capacity of extra high tension (EHT) cables (>220 KV).
• UCL will be the only player in India to produce EHT cables after Cable Corporation of India. UCL will slowly reduce its focus on the low-tension cable segment (<11>
• During FY2006, UCL merged one of its associate companies, Optic Fibre Goa Limited (OFGL) with itself. The implied consideration of the deal works out to Rs37 crore. UCL is confident about extracting a good return on the investment from this deal.
• We expect substantial improvement in UCL's operating profit margins and return ratios as it moves towards higher end products and OFGL turns profitable.
• At the current market price of Rs109, the stock is quoting at 8.3x its FY2008E earnings per share and 4.4x its FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We reiterate our Buy recommendation on the stock with a revised price target of Rs179. The reduction in the price target is on account of the equity dilution due to the amalgamation of OFGL where there is not much clarity on the returns on the investment made.

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SECTOR UPDATE

Automobile

Revving up yet again

• Bajaj Auto delivered a powerful performance in September recording an overall growth of 37.5% year on year (yoy), mainly driven by strong motorcycle sales.
• TVS Motors reported another month of strong performance as the overall sales marked an increase of 33.9% to 162,200 vehicles during September.
• Maruti Udyog sold 59,420 vehicles in September 2006, marking a growth of 20.6%. The company sold 56,606 vehicles in the domestic market while the exports for the month stood at 2,814 vehicles.
• Tata Motors reported a 23.8% growth in its overall sales (including exports) to 49,157 vehicles for the month of September 2006.
• M&M's utility vehicle (UV) sales were up by 5.8%, and the sales of the new Scorpio stood at 3,368, rising by 6.4% yoy.

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Movers & Shakers

• Electrotherm India hit the upper circuit breaker of 5% on reports that the company plans to raise Rs100 crore.
• Rana Sugars slipped despite announcing plans to install an ethanol-manufacturing unit at its existing distillery in Punjab.
• Sakthi Sugars was down despite announcing that it has repaid debts by availing loans at a cheaper rate from the banks and institutions.
• Sri Adhikari Brothers Television Network inched lower despite getting the board's nod to raise $15 million.

Emkay - Manugraph

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Thanks Ashis

Indiabulls Monthly Report

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Citigroup - Sugar

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Sharekhan Eagle Eye - Sept 29 - GDL

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Sharekhan Investor's Eye - Sept 28

India Cements Cluster: Ugly Duckling Recommendation: Buy  Price target: Rs315 Current market price: Rs220 Back in the reckoning Key points   Prime beneficiary of upturn in south: In FY2006 cement consumption in the southern region grew by 25%. With large infrastructure projects and manufacturing bases of MNCs coming up in the region, consumption is expected to grow at a CAGR of 11% for the next few years. Also fresh capacities here shall come up only in H1FY2009. Hence cement prices are expected to remain firm for the next two years. Thanks to its high leverage to cement prices, India Cements Ltd (ICL) shall benefit the most from this boom. More growth from capex plan: Encouraged by the improvement in its financials and considering the scope for more improvement, ICL plans to raise its capacity by 2 million tonne by December 2007 at a cost of Rs350 crore. This shall take its total capacity to 11 million tonne. The entire capex shall be funded by the proceeds of a recent FCCB issue.  Balance sheet transformed: With bouts of capital infusion through various routes, viz private placement, debt replacement and GDR issue, ICL's balance sheet has improved in the past few years. Its debt/equity ratio has come down to a much respectable 1.8:1 in FY2006 from 6:1 in FY2005. With a strong free cash flow, we expect the ratio to drop further to 0.3:1 in FY2008. The RoNW should also improve from 4.3% in FY2006 to 27.7% in FY2008. Trading at a huge discount to peers: At the current market price of Rs220, ICL is trading at 8.8x its FY2008E earnings and 6.1x its EV/EBITDA. On an EV/tonne basis, it is trading at USD109 per tonne of cement. That's a huge discount of 30% to some of its peers who are trading at an average valuation of USD150 per tonne of cement. In view of the steep growth expected in its earnings and the improvement in its balance sheet, the discount is not justified. We recommend a Buy on ICL with a price target of Rs315. Download here

Mphasis BFL - ML & Alembic - Anand Rathi

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Hanung Toys and Textiles

Hanung Toys and Textiles (HTTL) manufactures and exports stuff toys and home furnishings. Incorporated in 1993 as a stuff toy manufacturer in technical collaboration with a South Korean company, it began to independently manufacture stuff toys five years later. In 2002, HTTL entered home furnishings and textile processing.

Presently, HTTL has capacity of produce 1,10,00,000 pieces per annum of stuff toys and 12,50,000 pieces pa of home furnishings. The company mainly exports to Europe, the US, Latin America and Middle East. But now it is increasing its focus in the domestic market and has launched its stuff toy brands Play-n-Pets and Muskan and home furnishing brand Splash.

HTTL is to set up an integrated home textile unit with a total cost of Rs 153.44 crore, which includes 72 airjet looms with superior quality wider width weaving capacity of 21,000 meters per day and processing capacity of 1,05,000 meters per day in addition to the existing processing capacity of 60,000 meters per day. The company also plans to part substitute its existing working capital requirement of around Rs 15 crore. The expansion is to be funded with a term loan of Rs 90 crore under the TUF (Technology Upgradation Fund) scheme and the balance through an IPO.

Strengths

• HTTL is the largest player in the organised market of stuffed toys and its co-branding initiatives with Walt Disney Company and Percept Picture Company (for Hanuman) can fuel growth in the domestic market due to the retailing boom in India.
• The project is to be located in Uttaranchal, where the company enjoys various tax benefits.

Weaknesses

• The inventory-holding period is around 150-180 days, which is considered to be very high. This is attributed to the fact that the raw material (in case of stuff toys) is imported and the company has to maintain finished goods stock for its buyers. Moreover, of the total expansion of Rs 168 crore, around Rs 48 crore will be used for meeting existing and future working capital requirement. Even though net profit in FY 2006 was Rs 12.98 crore, cash flow from operating activities was a negative Rs 2.07 crore.

• The capacity utilisation in the home furnishing sector has been 12%, 26% and 53% in FY 2004, FY 2005 and FY 2006, respectively, which is considered to be significantly low.

• Post expansion, processing facilities will meet only 12% of its fabric requirement in-house as HTTL has a 21,000-meter per day weaving capacity and 1,65,000-meter per day processing capacity.

• Chinese competition is a key threat to its business.

Valuation

HTTL has allotted shares to Bennett Coleman and Company (BCCL) at Rs 150 in February 2006. The current offer price band is Rs 85-95.

The FY 2006 financials do not include financials of two group companies Hanung Furnishings and Hanung Processors for the period April- October 2005. However, the financials for the first quarter ended June 2006 includes the financials of both companies that have been merged with the flagship company. Because of these, financials are not comparable.

The first quarter of FY 2006 gives an annualised EPS of Rs 7.7. Considering this EPS, PE will be 11 to 12 times on post-issue equity. Due to HTTL’s presence in stuffed toys (which fetches 60% of its profit), there is no comparable listed company. However, Alok industries and Welspun India, which are much larger and integrated players in home textiles, trade at a TTM PE of around 9 and 17 times, respectively.

Sharekhan Eagle Eye - Sept 28

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Sharekhan Investor's Eye - Sept 27

Orient Paper and Industries
Cluster: Vulture's Pick
Recommendation: Buy 
Price target: Rs800
Current market price: Rs579

Capex plan on track
After an exceptional first quarter performance, Orient Paper and Industries is all set to cash in on the booming cement cycle. It has lined up a capital expenditure (capex) plan of Rs205 crore for the next two years. As part of the capex plan, it is augmenting its cement capacity to 3 million tonne and paper capacity to 30,000 tonne per annum. Further, to rationalise its fuel cost the company is also setting up a 30-megawatt captive power plant. 

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VIEWPOINT

Zenith Infotech

Stock value at its zenith
Zenith Infotech's revenues are expected to grow at a robust compounded annual growth rate of 60% over the two-year period FY2006-08. However, the stock appears to be fully priced after considering the huge (possible) equity dilution planned to raise resources. At the current market price the stock trades at 25.2x FY2007 and 14.7x FY2008 estimated earnings (on a diluted equity base). 

Movers & Shakers

• Rajesh Exports advanced on announcing the launch of Laabh Jewellers.
• United Phosphorus rose on signing a deal to buy Dupont's Bensulfuron-methyl business.
• Sical Logistics hit the upper limit of 5% on the likely acquisition of Bergen Offshore Logistics.
• Ranbaxy inched up on announcing the launch of Storvas in Malaysia.
• Sonata Software was locked at the upper limit of 5% on signing an agreement to buy a 50.1% stake in TUI Infotec.
• Escorts notched up gains on receiving Rs114 crore from its stake sale in Carraro to its joint venture partner, Carraro Italy.
• McNally Bharat Engineering jumped on bagging an order from France-based Solios Carbone.
• Dr Reddy�s Laboratories was marginally up on reports that the company has signed a deal with ClinTec International to jointly develop an anti-cancer compound, DRF 1042.
• Monnet Ispat slipped despite announcing plans to set up a Rs4,200 crore power plant in Orissa.

The Lost World - Jay Dubhashi

We Indians have a love-hate relationship with foreign companies, usually known as multinationals. We know that in this globalised world, we simply cannot avoid them and at the same time, we are not entirely happy about their presence in our midst.

So, from time to time, we crack the whip and ask them to behave. But they know they are here to stay and take it all in their stride. Fifteen years ago or so, before the economy was thrown open, things were different. Indian companies, whether in soft drinks or automobiles, were sitting pretty. They had a nice monopoly business going and since they never had to compete with foreign companies, they were clueless about their impact.

Ramesh Chauhan of Parle, who had built a profitable soft drink business from scratch, was initially rattled when news came that Coca-Cola had received a license to operate in India. Since I was all for Swadeshi, he believed that I might be of some use. So he came to see me.

I asked him if he knew Coca-Cola people. No, he said, he didn't. I told him that I knew some of them and had visited their offices in Atlanta. I told him that Coca-Cola's entry would be followed by Pepsi's-- or was it the other way round-- and Parle would have to take on two giant multinationals in a small market. Did he have the capacity to do that? A few weeks later, I heard that Parle had sold out to Coca-Cola for a hundred crore, which was a great deal of money then. That was the end of the nascent soft drink industry in India for it is either Coke or Pepsi now and there is no other choice for the consumer.

Things were a little different with the auto industry, but not all that different. When Maruti was taken over by Suzuki, I wrote in my column that companies like Premier Automobiles would soon be on their way out, just as Coke had replaced Parle. For Suzuki would be followed by other foreign auto companies and they would sweep the market.

Not so, wrote Vinod Doshi, who ran Premier Automobiles at the time. He actually took the first plane to Delhi from Bombay and came to see me. I have now forgotten what arguments he put forward, but within months he had signed up with Fiat of Itlay and had, in effect, sold out to them and virtually closed down his business, just as I had predicted.

I have not met Doshi for a long time, but, as far as I know, his Premier plant is no more. One more Indian business has fallen prey to yet another multinational.

It must be said both the soft drink business and the automobile businesses are flourishing. I am told that we are now producing or selling a million cars a year, about ten times more than what we did before liberalisation. The same must be the case with soft drinks.

I used to drive a Premier, now I drive a Maruti. But I neither drink Coke nor Pepsi because they don't suit me. Incidentally, I have never seen the inside of a McDonald's, either here or in the US, for reasons that have nothing to do with the fact that Mc Donald's is a foreign business. I just don't like hamburgers and I am allergic to French Fries.

Friends tell me that the Indian economy is booming and GDP growth is in the region of 7 to 8 per cent., if you go by RBI's calculations. Good luck to RBI and its bulging foreign exchange coffers. But I am not sure who the real winner is. The Indian consumer has certainly won. But, in my heart of heart, I cannot help feeling that India has lost. Jai Hind.

DCB - IPO

DCB is a new private sector bank, which has embarked on revitalization plans. As part of revitalization plan, the bank has in
place a new management team & the board of directors committed to improving bank’s operational performance & overall business.

DCB’s business is concentrated in certain regional centers, primarily Maharashtra, AP and Gujarat. The Bank has 106 interconnected branches including 5 extension counters & 34 Satellite offices, spread over 26 cities in the country. It also has an ATM network of 58 interconnected onsite and 43 interconnected offsite ATMs.

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