ViJiT
Vijith Pujari
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
Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,525
Current market price: Rs1,108
Sound as a BEL(L)
Key points
*
Growing addressable market: The healthy increase in the capital outlay of the defence budget and the government's efforts to reduce dependence on imports for critical equipment and security systems has considerably increased the size of the addressable market for the defence equipment manufacturers. With its wide range of product portfolio, R&D capabilities and a proven track record, Bharat Electronics Ltd (BEL) is well poised to effectively tap the same.
*
Civilian orders and export business to aid overall growth: BEL has taken steps to improve its market share in the civilian market, especially the fast-growing broadband access equipment and telecom segments. It has bagged some prestigious large civilian contracts recently including the Rs500-crore order from MTNL. In exports market also, it is expanding its reach and has set an aggressive revenue target of $24 million in FY2007 (up from $13.7 million in FY2006).
*
Scope for positive surprises: With the recent modernisation and expansion of its manufacturing facilities as well as its technical capabilities, BEL is actively looking at tapping the huge opportunity in the contract manufacturing service space. The additional capacities shall also make it the preferred contender for any foreign supplier looking at partnering with a domestic entity as per the offset clause for any contract worth over Rs300 crore from the defence sector.
*
Attractive valuations: BEL's net revenue and earnings are estimated to grow at a CAGR of 16.4% and 14.1% respectively, over FY2006-08E. The current valuations do not capture the improved growth outlook and the free cash & cash equivalents of Rs385 per share expected by the end of FY2008. We recommend a Buy on BEL with the price target of Rs1,525.
WS Industries India
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs112
Current market price: Rs49
Annual report review
We recently analysed the annual report of WS Industries (WSI) and here we present the highlights of the same.
*
During FY2006 WSI's revenues grew by a decent 22.5% to Rs147 crore. A flat interest charge for the year and reduced depreciation caused WSI's net profit to grow at 104% year on year (yoy) to Rs4.3 crore.
*
WSI's operating profit margin (OPM) remained largely flat at 10.1%, restricting the operating profit growth to 21%. A 32.7% increase in the raw material cost and a 35.4% rise in the power and fuel cost as against a 22.5% growth in the revenues negated the benefit of operating leverage.
*
The management says that the market for its product in the short to medium term is very encouraging. The company has participated in several large tenders and is confident of converting a sizeable portion of the same into firm orders that will sustain its strong order book position of Rs110 crore.
*
The management has devised a three-pronged strategy to transform WSI's approach towards business: (1) expand the capacity at the current facility at Chennai; (2) set up a greenfield plant for hollow core insulators; and (3) stabilise the source of income through the realty venture.
*
The strong investments lined up for the transmission and distribution (T&D) sector will drive the order book in future. We have valued WSI's core business at Rs60 per share (8x FY2008 earnings), but the stock offers significant upside due to the huge value offered by the realty venture. We estimate the value of the realty venture to be close to Rs80 per share of WSI. We remain positive on WSI and maintain our Buy recommendation on the stock with a price target of Rs112.
Omax Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs178
Current market price: Rs97
Annual report review
The key highlights from the latest Omax Auto's annual report are mentioned below.
*
FY2006 performance: Omax Auto registered a good top line and exports growth, but the profitability declined due to a rise in the employee and power costs and higher interest cost.
*
Efforts to increase efficiencies: The company plans to undertake a number of measures in order to increase its operational efficiencies. The use of low-cost fuel, captive material consumption and increased automation and productivity are expected to achieve the same and aid in improving its margins going forward.
*
Export expected to surge: The management has an export target of Rs50 crore for FY2007 as against exports of Rs26.6 crore in FY2006. The current export order book of the company is to the tune of Rs150 crore, which is to be executed within the next three years.
*
Capex plans: Omax has aggressive plans to expand capacities across all its units including the units at Dharuhera, Binola and Bangalore. For the current fiscal, the estimated capital expenditure is Rs61 crore.
*
Reiterate Buy: At the current levels, the stock discounts its FY2008E earnings by 4.7x and enterprise value (EV) by 3.5x. The stock appears to be attractive at these levels and we maintain our Buy recommendation on the stock with a price target of Rs178.
Reliance Industries
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,250
Current market price: Rs1,155
It is solid, not gas
Recently there have been several news reports on Reliance Industries stating that the gas reserves in place in its KG-D6 block could be as high as 50 trillion cubic feet (tcf), almost three times the existing reserves as reported to the directorate of hydrocarbons.
We have revised our price target on the stock to take into account the earnings of the company for FY2008 and the value of Reliance Retail. We believe that with newer and exciting businesses lined for investment, RIL is set to enter another era of strong growth for itself over the next five years. We maintain our Buy recommendation on the stock with a price target of Rs1,250.
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.
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.
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.
BASF India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs300
Current market price: Rs220
Piggybacking on consumption boom
Key points
*
We expect BASF India (BASF) to benefit from the changing demographics and the resulting consumption boom in India.
*
BASF’s products are used in industries like white goods, textiles, home furnishing, paper, construction and automobiles all of which have been growing at a fast pace in contemporary times.
*
To capitalise on the resulting opportunity, BASF is expanding the capacity of its two key products, expandable polystyrene and polymer dispersion, which are used in the white goods industry and paper industry respectively.
*
We expect BASF’s revenues to grow at a compounded annual growth rate (CAGR) of 31% and its earnings to grow at CAGR of 32.8% over FY2006-08E.
*
It has seen consistent return ratios in the past five years. It has RoCE of 24.8% and RoNW of 17.1% for FY2006; the same are expected to improve to 33.8% and 23.8% respectively by FY2008E.
*
BASF has a dividend yield of 3.3% and a high dividend pay-out of 40% which provide a margin of safety to the investment.
*
At the current market price of Rs220, the stock is quoting at 7.6x its FY2008E earnings per share (EPS) and 4.3x its FY2008E EV/EBIDTA.
*
We believe that the stock is trading at attractive valuations given that:
- the outlook for the company’s business is very bright over next two years;
- the return ratios, RoCE and RoNW, are likely to show sharp improvement; and
- the dependence on agrinutrients business is likely to reduce substantially.
*
We recommend a Buy on BASF with a price target of Rs300.
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.
ORG Informatics
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs190
Current market price: Rs89
Price target revised to Rs190
The key takeaways from the latest annual report of ORG Informatics are given below.
*
Significant scale-up in operations: ORG Informatics’ consolidated revenues have grown at a compounded annual growth rate (CAGR) of 75.7% over the past three years. The management expects the mega orders bagged in the last fiscal and a healthy order pipeline to further boost its growth momentum in the current fiscal.
*
Improving profitability: The robust growth in revenue has been accompanied by consistent improvement in the operating profit margin (OPM) due to the reoriented business strategy to focus on the high-value solution and service business.
*
Better operational metrics: It generated free cash flow of Rs12.2 crore in FY2006. The return ratios have also improved dramatically with the return on average capital employed (RoACE) and return on average net worth (RoANW) at 37.5% and 43.2% respectively. The debt/equity ratio stood at comfortable level of 0.46 times.
*
Reduction in promoter holding is a concern: On the flip side, the promoter holding has declined by 10 lakh shares to 74.6 lakh equity shares (63.8% stake holding).
*
Re-iterate Buy recommendation: At the current market price the stock trades at 7.6x FY2007 and 5.6x FY2008 estimated earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs190 (12x FY2008E earnings per share, including the convertible warrants in the equity base).
Tata Tea
Cluster: Apple Green
Recommendation: Buy
Price target: Rs970
Current market price: Rs764
Price target lowered to Rs970
Key points
*
Tata Tea Ltd (TTL) would be raising Rs420-460 crore through the preferential allotment of shares and warrants to its promoter, Tata Sons. We expect the allotment to result in equity dilution of 10-11% for TTL. However, it is not clear as to how much funds will be raised through direct equity and how much through warrants.
*
TTL requires Rs1,100 crore for various acquisitions that it has done over the past few months. We expect the company to raise the balance amount required by selling its investments in group companies as well as its North India Plantation Operations.
*
We expect TTL to raise short-term debt of Rs320-550 crore depending upon the amount of the warrants and their conversion period.
*
We have lowered our earnings per share (EPS) estimates for the stock to take into account the short-term debt along with the equity dilution. Accordingly we have revised our EPS estimates from Rs57 to Rs49.5 for FY2007 and from Rs64.5 to Rs59.5 for FY2008, ie a dilution of 13.4% and 7.7% respectively. We have not taken the numbers of Energy Brands Inc into account.
*
We expect the lack of clarity with regard to the stock’s earnings to continue till the management of the company clears the cloud over the funding structure for its inorganic expansion.
*
Taking both the above factors into account, we are lowering our price target on the stock to Rs970 per share.
*
Over the long term, we expect TTL to be a good candidate for re-rating as:
— it becomes a pure play on the branded fast moving consumer goods (FMCG) business, and
— it reduces its exposure to low-yielding investments in the group companies and invests in high-growth companies like Energy Brands Inc.
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
Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,525
Current market price: Rs1,108
Sound as a BEL(L)
Key points
*
Growing addressable market: The healthy increase in the capital outlay of the defence budget and the government's efforts to reduce dependence on imports for critical equipment and security systems has considerably increased the size of the addressable market for the defence equipment manufacturers. With its wide range of product portfolio, R&D capabilities and a proven track record, Bharat Electronics Ltd (BEL) is well poised to effectively tap the same.
*
Civilian orders and export business to aid overall growth: BEL has taken steps to improve its market share in the civilian market, especially the fast-growing broadband access equipment and telecom segments. It has bagged some prestigious large civilian contracts recently including the Rs500-crore order from MTNL. In exports market also, it is expanding its reach and has set an aggressive revenue target of $24 million in FY2007 (up from $13.7 million in FY2006).
*
Scope for positive surprises: With the recent modernisation and expansion of its manufacturing facilities as well as its technical capabilities, BEL is actively looking at tapping the huge opportunity in the contract manufacturing service space. The additional capacities shall also make it the preferred contender for any foreign supplier looking at partnering with a domestic entity as per the offset clause for any contract worth over Rs300 crore from the defence sector.
*
Attractive valuations: BEL's net revenue and earnings are estimated to grow at a CAGR of 16.4% and 14.1% respectively, over FY2006-08E. The current valuations do not capture the improved growth outlook and the free cash & cash equivalents of Rs385 per share expected by the end of FY2008. We recommend a Buy on BEL with the price target of Rs1,525.
WS Industries India
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs112
Current market price: Rs49
Annual report review
We recently analysed the annual report of WS Industries (WSI) and here we present the highlights of the same.
*
During FY2006 WSI's revenues grew by a decent 22.5% to Rs147 crore. A flat interest charge for the year and reduced depreciation caused WSI's net profit to grow at 104% year on year (yoy) to Rs4.3 crore.
*
WSI's operating profit margin (OPM) remained largely flat at 10.1%, restricting the operating profit growth to 21%. A 32.7% increase in the raw material cost and a 35.4% rise in the power and fuel cost as against a 22.5% growth in the revenues negated the benefit of operating leverage.
*
The management says that the market for its product in the short to medium term is very encouraging. The company has participated in several large tenders and is confident of converting a sizeable portion of the same into firm orders that will sustain its strong order book position of Rs110 crore.
*
The management has devised a three-pronged strategy to transform WSI's approach towards business: (1) expand the capacity at the current facility at Chennai; (2) set up a greenfield plant for hollow core insulators; and (3) stabilise the source of income through the realty venture.
*
The strong investments lined up for the transmission and distribution (T&D) sector will drive the order book in future. We have valued WSI's core business at Rs60 per share (8x FY2008 earnings), but the stock offers significant upside due to the huge value offered by the realty venture. We estimate the value of the realty venture to be close to Rs80 per share of WSI. We remain positive on WSI and maintain our Buy recommendation on the stock with a price target of Rs112.
Omax Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs178
Current market price: Rs97
Annual report review
The key highlights from the latest Omax Auto's annual report are mentioned below.
*
FY2006 performance: Omax Auto registered a good top line and exports growth, but the profitability declined due to a rise in the employee and power costs and higher interest cost.
*
Efforts to increase efficiencies: The company plans to undertake a number of measures in order to increase its operational efficiencies. The use of low-cost fuel, captive material consumption and increased automation and productivity are expected to achieve the same and aid in improving its margins going forward.
*
Export expected to surge: The management has an export target of Rs50 crore for FY2007 as against exports of Rs26.6 crore in FY2006. The current export order book of the company is to the tune of Rs150 crore, which is to be executed within the next three years.
*
Capex plans: Omax has aggressive plans to expand capacities across all its units including the units at Dharuhera, Binola and Bangalore. For the current fiscal, the estimated capital expenditure is Rs61 crore.
*
Reiterate Buy: At the current levels, the stock discounts its FY2008E earnings by 4.7x and enterprise value (EV) by 3.5x. The stock appears to be attractive at these levels and we maintain our Buy recommendation on the stock with a price target of Rs178.
Reliance Industries
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,250
Current market price: Rs1,155
It is solid, not gas
Recently there have been several news reports on Reliance Industries stating that the gas reserves in place in its KG-D6 block could be as high as 50 trillion cubic feet (tcf), almost three times the existing reserves as reported to the directorate of hydrocarbons.
We have revised our price target on the stock to take into account the earnings of the company for FY2008 and the value of Reliance Retail. We believe that with newer and exciting businesses lined for investment, RIL is set to enter another era of strong growth for itself over the next five years. We maintain our Buy recommendation on the stock with a price target of Rs1,250.
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.
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.
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.
BASF India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs300
Current market price: Rs220
Piggybacking on consumption boom
Key points
*
We expect BASF India (BASF) to benefit from the changing demographics and the resulting consumption boom in India.
*
BASF’s products are used in industries like white goods, textiles, home furnishing, paper, construction and automobiles all of which have been growing at a fast pace in contemporary times.
*
To capitalise on the resulting opportunity, BASF is expanding the capacity of its two key products, expandable polystyrene and polymer dispersion, which are used in the white goods industry and paper industry respectively.
*
We expect BASF’s revenues to grow at a compounded annual growth rate (CAGR) of 31% and its earnings to grow at CAGR of 32.8% over FY2006-08E.
*
It has seen consistent return ratios in the past five years. It has RoCE of 24.8% and RoNW of 17.1% for FY2006; the same are expected to improve to 33.8% and 23.8% respectively by FY2008E.
*
BASF has a dividend yield of 3.3% and a high dividend pay-out of 40% which provide a margin of safety to the investment.
*
At the current market price of Rs220, the stock is quoting at 7.6x its FY2008E earnings per share (EPS) and 4.3x its FY2008E EV/EBIDTA.
*
We believe that the stock is trading at attractive valuations given that:
- the outlook for the company’s business is very bright over next two years;
- the return ratios, RoCE and RoNW, are likely to show sharp improvement; and
- the dependence on agrinutrients business is likely to reduce substantially.
*
We recommend a Buy on BASF with a price target of Rs300.
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.
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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.
ORG Informatics
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs190
Current market price: Rs89
Price target revised to Rs190
The key takeaways from the latest annual report of ORG Informatics are given below.
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Significant scale-up in operations: ORG Informatics’ consolidated revenues have grown at a compounded annual growth rate (CAGR) of 75.7% over the past three years. The management expects the mega orders bagged in the last fiscal and a healthy order pipeline to further boost its growth momentum in the current fiscal.
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Improving profitability: The robust growth in revenue has been accompanied by consistent improvement in the operating profit margin (OPM) due to the reoriented business strategy to focus on the high-value solution and service business.
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Better operational metrics: It generated free cash flow of Rs12.2 crore in FY2006. The return ratios have also improved dramatically with the return on average capital employed (RoACE) and return on average net worth (RoANW) at 37.5% and 43.2% respectively. The debt/equity ratio stood at comfortable level of 0.46 times.
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Reduction in promoter holding is a concern: On the flip side, the promoter holding has declined by 10 lakh shares to 74.6 lakh equity shares (63.8% stake holding).
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Re-iterate Buy recommendation: At the current market price the stock trades at 7.6x FY2007 and 5.6x FY2008 estimated earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs190 (12x FY2008E earnings per share, including the convertible warrants in the equity base).
Tata Tea
Cluster: Apple Green
Recommendation: Buy
Price target: Rs970
Current market price: Rs764
Price target lowered to Rs970
Key points
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Tata Tea Ltd (TTL) would be raising Rs420-460 crore through the preferential allotment of shares and warrants to its promoter, Tata Sons. We expect the allotment to result in equity dilution of 10-11% for TTL. However, it is not clear as to how much funds will be raised through direct equity and how much through warrants.
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TTL requires Rs1,100 crore for various acquisitions that it has done over the past few months. We expect the company to raise the balance amount required by selling its investments in group companies as well as its North India Plantation Operations.
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We expect TTL to raise short-term debt of Rs320-550 crore depending upon the amount of the warrants and their conversion period.
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We have lowered our earnings per share (EPS) estimates for the stock to take into account the short-term debt along with the equity dilution. Accordingly we have revised our EPS estimates from Rs57 to Rs49.5 for FY2007 and from Rs64.5 to Rs59.5 for FY2008, ie a dilution of 13.4% and 7.7% respectively. We have not taken the numbers of Energy Brands Inc into account.
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We expect the lack of clarity with regard to the stock’s earnings to continue till the management of the company clears the cloud over the funding structure for its inorganic expansion.
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Taking both the above factors into account, we are lowering our price target on the stock to Rs970 per share.
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Over the long term, we expect TTL to be a good candidate for re-rating as:
— it becomes a pure play on the branded fast moving consumer goods (FMCG) business, and
— it reduces its exposure to low-yielding investments in the group companies and invests in high-growth companies like Energy Brands Inc.