Carborundum Universal: Buy

Investors with a two-three year perspective can consider taking exposure to the stock of Carborundum Universal (CUMI), a leading player in the abrasives and industrial ceramics space.

Ongoing expansion in capacity, growing focus on export markets, and a foray into the power tools business make CUMI an attractive investment. Besides, CUMI’s recent acquisition of VAW, a Russian abrasives manufacturer, also holds potential given the global shortage of alumina grains.

At current market price of Rs 161, the stock trades at about 14 times its likely earnings for 2008-09. Investors can, however, accumulate the stock in lots given the volatility in the broad markets.

With strong demand drivers in place, CUMI has embarked on a timely expansion in capacities. Apart from leveraging on the buoyant domestic demand, CUMI may also benefit from an increased exposure to exports.

The management expects to increase its export contribution to about 40 per cent from the current levels of about 22 per cent in two-three years.

CUMI plans to set up marketing presence in Europe, US and South-East Asia through subsidiaries or strategic partners. These apart, CUMI’s planned foray into power tools business (market size of about Rs 400 crore) also holds significant potential.

This foray, apart from helping CUMI capture a share of this relatively high-growth and less tapped market, will also help it make the transition to an integrated player. This may be beneficial to profit margins.

The company already supplies consumables to the power tool industry (they account for 30 per cent of the power tool price).

For the quarter ended September 2007, CUMI recorded a lower net profit of Rs 12.3 crore, despite a 23 per cent growth in revenues.

Higher depreciation and interest cost in addition to an exceptional expenditure because of VRS payment explains the 21-per cent dip in earnings.

Given CUMI’s high reliance on debt for funding capex, the pressure on earnings may remain over the next year.

Nonetheless, this is no cause for concern given the healthy growth in revenues across all business segments and expected payoffs from the capex.

Via BL

Ansal Housing and Construction: Buy

Investors with a two-three year perspective can consider investing in the stock of Ansal Housing and Construction (Ansal Housing). Proven execution capabilities, a good number of ongoing projects and healthy financials suggest that the company’s present earnings growth may sustain over the medium term.

However, being a small player in the realty market and a small-cap stock poses higher risks than those faced by larger players. Investors willing to take these risks can consider buying the stock in small lots (as the stock is prone to sharp surges and declines).

At the current market price of Rs 310 the stock trades at 10 times its trailing 12-month earnings on a standalone basis. We believe the price is at a steep discount, even after considering the lower premium enjoyed by regional players.

While the subsidiary businesses of hospitality and car sales and services are significant contributors to the consolidated revenues, they are yet to make much impact on the per share earnings. The consolidated picture may require attention if there is an accelerated growth in these businesses.

Focussed approach

Ansal Housing is a developer with predominant presence in Tier-II and Tier-III cities in North India. Unlike a number of players foraying into smaller cities after establishing a foothold in the bigger ones, Ansal had entered these markets very early in its business cycle, thus providing it with an edge in not only buying low cost land but also establishing its brand.

The company had completed projects in upcoming cities such as Ghaziabad and Greater Noida as early as 2002.

Ansal Housing has about 55 million sq feet of developable area, a majority of which is already under progress and a part of which may be booked by FY-09, lending visibility to medium-term revenues.

The projects in hand are well-diversified across residential and commercial buildings, malls, apartments and group housing. Over 50 per cent of the current land bank is ear marked for selling of plots. Plot development has traditionally constituted a high proportion of Ansal’s revenues. The company has been successful in this strategy on account of three issues.

In smaller towns, there exists stronger demand for individual plots (which can be built into independent houses) than apartments. Two, selling of plots around the vicinity of a bigger project (that the company develops) provides scope for commanding better prices. Three, in projects such as integrated townships, selling plots typically frees cash flows that can be deployed for developing the township.

As there is little value-addition in plotted developments, the projects do not normally command high-profit margins. However, Ansal’s OPM of 33 per cent in FY-07 suggest that it has managed high profitability mainly on account of low-cost land. That net profits have grown at a CAGR of 135 per cent over the last three years also suggests that the company has been a major beneficiary of a surge in land prices.

While we expect the OPMs to moderate as the company replenishes its land bank, a more active entry into the construction of various realty projects (as indicated by the current projects in hand) may provide some cushion to the profit margins.

Subsidiaries hold potential

Ansal’s restaurants in Greater Noida and its car dealership venture with a Japanese company have witnessed healthy revenue growth over the last couple of years. The company’s tie-up with Radisson Worldwide for restaurant chains across India and expansion of its car sales and service business if successful may warrant a look at the consolidated numbers.

Steep hike in the price of construction materials and equity expansion with delayed earnings growth are impending risks. The latter now appears insignificant going by the recent approvals received for preferential warrants.

Gitanjali Gems: Buy

With a growing retail presence, strong brands, improving product mix and an international acquisition strategy that could strengthen its exports business, Gitanjali Gems is set to accelerate growth over the next two-three years.

At the current market price of Rs 412, the stock trades at about 16 times its likely FY-09 earnings per share. The valuation is at almost a 50 per cent discount to Titan Industries, which owns the Tanishq brand of jewellery retail stores. In terms of size, Gitanjali’s domestic jewellery business is as large as Tanishq and the company has well-known brands such as Nakshatra, Gili and D’Damas in its bouquet. This makes it fairly well-placed to capitalise on buoyant domestic consumption trends as well. The risk of a slowdown in exports is somewhat mitigated by rapidly increasing share of the domestic business in overall revenues. Margins are also likely to improve with the increase in the export of higher value-added items. These factors may help the stock command improved valuations in the future. Gitanjali is also involved in the development of special economic zones for gems and jewellery and is now developing 200 acres of land in Hyderabad.

While this could lead to additional revenues from real estate, we have not factored payoffs from this business into our estimates. The company lacks a track record in this business, which is, in any case, fraught with risk. An investment in the stock can be considered with a two-year horizon.

Growing branded retail presence

Gitanjali Gems has a promising domestic retail business, which at Rs 1,432 crore, accounted for 40 per cent of its revenues in FY-07. The share of domestic revenues improved to nearly 50 per cent in the first half of FY-08. Gitanjali Gems retails gold and diamond jewellery under well-known brands such as Gili, Nakshatra and Asmi (the latter two have received marketing support from DTC till date). It also has a joint venture with the U.A.E-based retailer, Damas, to sell jewellery in India under the name D’Damas.

Recent developments point to an increasing focus on the domestic segment. One is its acquisition of the Nakshatra brand from Diamond Trading Company (DTC), the marketing arm of De Beers, for Rs 100 crore. This strengthens the company’s grip on the market at a time when other traditional jewellery exporters are also getting into the branded retail business. Nakshatra is also a fairly mature brand now and this may mean marginal incremental investments on brand building from here on.

Gitanjali has also recently entered into a joint venture with an Italian fashion group, Mariella Burani, to introduce the latter’s luxury and fashion products in India through a chain of stores. It struck a similar joint venture with Italian jewellery and watch retailer Morellato, which makes brands such as Cavalli, Moschino and Miss Sixty under licence, for distribution of watches and jewellery brands in India.

With a wider product range and potential to tap the premium end of the market through tie-ups with international retailers, Gitanjali is likely to make larger strides in the domestic retail space.

Improving product mix

While domestic retail is likely to drive revenue growth, operating margins are also likely to improve as the company’s product mix shifts from low-margin cutting and polishing of diamonds (CPD) towards jewellery. Jewellery sales now account for 40 per cent of revenues. This share is likely to increase on the back of growing outsourcing of fabrication of jewellery to India. Gitanjali is also well-placed to capitalise on this trend with the acquisition of two retail chains in the US, Samuels Jewellers (100 stores) and Rogers (50 stores). The $100-million retailer, Samuels, will outsource 60 per cent of its fabrication work to Gitanjali.

While higher jewellery sales will increase on the one hand, the acquisitions provide direct access to the US market. A presence in retailing may give the company higher margins than would be the case with sales to international wholesalers.

The ability to command better prices as a result of these bodes well for profitability in the backdrop of higher prices of gold and precious stones. Gitanjali may also be better placed to withstand any slowdown in exports to the US compared to other gems and jewellery exporters.

Reliance Power IPO Notes

Reliance Power IPO Notes

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Weekly Watch

Weekly Watch

Reliance Power IPO

Reliance Power IPO

Air India IPO in second half of 2008

The Union government may consider selling shares in National Aviation Co. of India Ltd, or Nacil, which runs Air India, in an initial public offering (IPO) in the second half of 2008, even as the state-run firm prepares to select joint venture (JV) partners for a handful of related businesses in a bid to increase revenues.
The proposed float and new ventures are part of the restructuring exercise that the firm is going through after the government merged two of its airlines—Air India and Indian Airlines—into Nacil.
The merger is expected to be completed by the end of fiscal 2009.
“We may consider issuing an IPO in the second half of this year,” said Union aviation minister Praful Patel. He had said earlier that about 10-15% of the merged entity’s equity would likely be sold to enhance the carrier’s equity base.
Meanwhile, the JVs are modelled on German carrier Deutsche Lufthansa AG, which, too, restructured from a state-owned airline with most of its revenues coming from passenger operations to a more diversified portfolio.
Like Lufthansa, Nacil, too, will work under six different business units: domestic and international passenger operations, cargo operations, maintenance and repair work, ground handling services, low-cost carrier, and training.
To bring in specialist expertise, Nacil will partner private groups for three of the above units—in aircraft maintenance, ground handling operations and training—over the next one year.
It has already struck a deal with logistics firm Gati Ltd leasing out five of its freighter aircraft, most of which were converted old aircraft, for cargo operations.
Of the rest, said Air India’s chairman and managing director Vasudevan Thulasidas, the airline is seeking alliances for four dedicated aircraft maintenance centres or firms running MRO (short for maintenance repair and overhaul) operations across the country as also for a ground handling partner.
Thulasidas said the airline will have a controlling stake in all JVs.
“We are hoping to sign the agreements with Boeing and Airbus this month. For engines we have to select somebody; so the request for proposals we will be able to publish this month, components will come a month or two later,” he said.
Two separate MRO units formed with Boeing Co. and Airbus SAS will also “have a third partner, who will be a MRO specialist, a company from abroad”, he added.
Airlines in India together have a fleet of more than 310 aircraft currently, including 140 owned by Air India, with another 480 slated to join over the next five years, creating ample catchment for such maintenance centres.
Boeing’s wholly owned subsidiary Alteon Training has also been selected for creating a JV facility for pilot training in Hyderabad.
“This will be built from scratch because there is land available (in Hyderabad),” said Dinesh A. Keskar, vice-president (sales) of Boeing’s commercial aeroplanes business, adding the facility will also be open for use by private airlines such as Gurgaon-based SpiceJet Ltd eventually.
Nacil is also shortlisting a partner for ground handling operations both in India and abroad.
It already has a tie-up with Singapore Airport Terminal Services Ltd for ground handling at the new airports of Bangalore and Hyderabad that start operations by March.

Weekly Positional Calls

Buy Century Textiles

Buy Educomp

Buy Bharti Airtel

Buy HCC

Buy Rolta

Future Capital Holdings IPO Analysis

Future Capital Holdings IPO Analysis

Grey Market - Reliance Power, Future Capital, J Kumar Infra Projects

Future Capital Holdings 700 to 765 570 to 580


Reliance Power 405 to 450 350 to 360


SVPCL 42 DISCOUNT


Porwal Autocomponents 75 DISCOUNT


Precision Pipes & Profiles 150 20 to 25


J. Kumar Infraprojects 110 to 120 22 to 25

Axis Bank, Prism Cement, BOI, South Indian Bank

Axis Bank, Prism Cement, BOI, South Indian Bank

ITC Ltd

ITC Ltd

Axis Bank, Bharati Shipyard, Infosys, Motilal Oswal, Nitin Fire, Indian Hotels

Axis Bank, Bharati Shipyard, Infosys, Motilal Oswal, Nitin Fire, Indian Hotels

Stocks you can buy this week

Patel Engineering

CMP: Rs 949.70

Target price: Rs 1,149

Macquarie has maintained an ‘outperform’ on Patel Engineering after the company announced better-than-expected margins, which made up for marginal disappointment on the topline. “The topline in (third quarter) came in marginally below expectations.

However, EBITDA margins more than made up for the shortfall,” said the report, adding, “the company recorded an EBITDA of Rs 592 million (Rs 59.2 crore), up 26% Y-o-Y.” According to the brokerage, the company is pre-qualified for Rs 60 billion (Rs 6,000 crore) worth of projects, processing of which is expected in the near term.

The management has indicated that they would bid for orders worth Rs 100 billion over next 12 months, adds the report. The company’s order book currently stands at Rs 55 billion (Rs 5,500 crore), 3.4 times trailing 12 months’ revenues. The order book number does not include any in-house build-operate-transfer (BOT) projects, notes the report.

ABG Shipyard

CMP: Rs 936.65

Target Price: Rs 1,096

Prabhudas Lilladher has put an ‘outperformer’ rating on ABG Shipyard after the company’s topline grew by 68% Y-o-Y to Rs 2,584 million (Rs 258.4 crore), accompanied by strong operating margin of 25%.

“On account of higher-than-expected EBIDTA margin, we are raising our margin estimate for FY08 from 19% to 24%, which is an increase of 18% to our earning estimate,” said the brokerage.

“We are also revising our FY09 turnover estimate upwards by 20% to Rs 18.9 billion (Rs 189 crore) on account of the expansion at Surat,” it added. The company has announced Rs 4 billion (Rs 400 crore) expansion of its Surat facility, which will increase its fabrication capacity by four times, noted the report. The brokerage added that in order to fund expansion, the company has issued four million warrants to its promoter at a price of Rs 796.

Further, the company plans to raise Rs 8 billion (Rs 800 crore) through a QIB issue and the estimated equity dilution, post-issue, is likely to be 22%. “Currently, the stock trades at 16 times FY09 estimates. We rate the stock an ‘outperformer’ with a price target of Rs 1, 096,” said the report.

Shree Cement

CMP: Rs 1,325.10

Target Price: Rs 1,693

ICICI Direct has upgraded Shree Cement to ‘outperformer’ after the company reported a 44% increase in its topline on account of its 1.5 million tonne per annum (TPA) capacity addition during the quarter.

“Cement despatches during the quarter amounted to 1.52 million tonne, up by 17.9% Y-o-Y,” said the report. Strong demand boosted realisations to Rs 3,440 per tonne in Q3FY08 from Rs 3,230 per tonne in Q3FY07, while operating margins improved from 45.12% in Q3FY07 to 46.27% in Q3FY08, it added.

While profit before interest, depreciation and taxes increased by 56% during the quarter, the company’s 18 MW captive power plant (CPP-IV) at Bangur City, Rajasthan, resulted in cost savings. However, the report added, higher depreciation costs due to the capacity expansion impacted the company’s bottomline.