Stock Reco's for Feb 25-28... concluded!

Union Bank of India
Recommendation: Buy
CMP = Rs 125
Price target: Rs 150

• The net interest income (NII) of Union Bank of India (UBI) grew by a strong 20.7% year on year (yoy) on the back of a 35% growth in its advances. However the net interest margin (NIM) was down by 11 basis points.
• The bank's core operating profit grew by a strong 21.2% as the operating expenses were kept under control during the quarter.
• The bank's Q3FY2006 results are not strictly comparable with that of Q3FY2005 due to a provisioning done in that quarter on account of the transfer of securities from the available for sale (AFS) and held for trading (HFT) portfolios to the held till maturity (HTM) portfolio.
• At the current market price of Rs125, UBI is quoting at 5.0x its FY2007E earnings per share (EPS) and 0.9x its FY2007E book value. The bank is expected to generate an average return on equity (RoE) of 21.2% over FY2005-07E despite a 10% dilution.
• I reiterate Buy recommendation on the stock with a price target of Rs150.

UTI Bank

Recommendation: Buy
CMP = Rs 323
Price target: Rs 360

• UTI Bank reported a 30.2% year-on-year (y-o-y) growth in its net profit for Q3FY2006 to Rs131.7 crore. The growth was ahead of our expectations.
  The net profit growth came on the back of a 53.7% y-o-y growth in the net interest income (NII) and a 24% y-o-y growth in the fee income.
• The bank's advances grew strongly by 48.5% year on year (yoy) in Q3FY2006; its deposits too grew by 60.5% yoy during the same period.
• The bank's net interest margin (NIM) expanded by four basis points yoy and by 14 basis points quarter on quarter (qoq) in Q3FY2006.
• Its net non-performing assets (NPAs) as a percentage of its customer assets improved markedly by 35 basis points yoy and by eight basis points qoq. The NPAs now stand at 0.95% of the net customer assets.
• UTI Bank's Tier-I capital adequacy ratio (CAR) stood at a comfortable 7.54% on December 31, 2005 whereas its overall CAR stood at 11.77%.
  At the current market price of Rs323, the stock is quoting at 12.2x its FY2008E earnings per share (EPS) and 2.2x its FY008E book value (BV).
• I reiterate Buy recommendation on the bank with the price target of Rs360.

Stock Reco's for Feb 25-28

State Bank of India
Recommendation: Buy
CMP = Rs 884
Price target: Rs 950

• At the current market price of Rs884 the bank's stock is quoting at 7.5x its FY2007E stand-alone earnings per share (EPS) and 1.2x its consolidated book value.
• I maintain Buy recommendation on SBI with a price target of Rs950.

Surya Pharmaceuticals

Recommendation: Buy
CMP = Rs 147
Price target: Rs 205

• Surya Pharma's net sales were up 31% year on year (yoy) in Q3FY2006 to Rs60.2 crore as against Rs45.9 crore in Q3FY2005 on the back of good contract manufacturing orders.
• At the current market price of Rs147 the stock is trading at 5.8x its FY2007 earnings estimate. I maintain Buy recommendation on Surya Pharma with a price target of Rs205.

Television Eighteen India

Recommendation: Buy
CMP = Rs 411
Price target: Rs 485

• Television Eighteen India (TV18) reported a strong 55% year-on-year and 23.7% quarter-on-quarter growth in its consolidated revenues for Q3FY2006 to Rs38.1 crore backed by the strong performance of the news and Internet & content operations.
• I believe that TV18's business model has become more robust with the inclusion of the channels Awaaz and CNN-IBN in the bouquet. Looking at the company's robust business model, the stock is attractively quoting at 14.6x its FY2007E EPS and 8.6x its FY2007E EBIDTA.
• I reiterate Buy recommendation on the stock with price target of Rs485.

TIL

Recommendation: Book Profit
CMP: Rs 213

• TIL's revenues grew at a low rate of 11.2% quarter on quarter (qoq) to Rs115.3 crore. The revenue growth was low despite the fact that the company does more business in the second half of the year.
• TIL's profit after tax (PAT) grew by only 71.5% yoy to Rs2.1 crore, even after considering the other income of Rs0.8 crore. The Q3FY2006 results of TIL are below expectations.
• This stock has achieved my earlier price target of Rs 224 and I recommend booking profit.

UltraTech Cement

Recommendation: Buy
CMP = Rs 507
Price target: Rs 620

• UTCL's net sales for the quarter grew by 5% year on year (yoy) to Rs783 crore (after adjusting the freight and trading sales impact). The growth was driven by a 12.8% increase in cement realisation.
• Cement volumes were down 6.9% owing to floods in the southern region, which restricted production in the southern plants. The tax outgo of Rs19.2 crore (at a tax rate of 44.6%) restricted the net profit to Rs24 crore.
• Hence, I recommend Buy option on this scrip.

Run up to the Budget 2006 - Understand what it means...

When the Finance Minister reads out the Budget, you will come across various economic terms. Here's a simplified dictionary on some common terminologies that will help you to understand the budget easily.

BUDGET
The Finance Minister proposes the total revenue that the government would generate in the year through taxes and income through profits from government undertakings and, more importantly, where all this would be spent. Eg, for defence, education, developmental activities, etc.

BUDGET OUTLAY
This is the amount of total expenditure the government would make for different purposes in the year.

GDP
Gross Domestic Product is the total worth of output (production) from all sectors - including agriculture, manufacturing and even services - being made in the country over a year. A GDP growth rate suggests in percentage terms the difference in the increase, or decrease, in production of goods and services compared to previous year.

PER CAPITA INCOME
This is the total amount of GDP divided by the number population. It suggests how much an Indian earns on an average.

INFLATION
An important term. It's the aggregate of increase in prices of commodities in the country. There is an index and a wholesale price index (WPI) consisting a number of commodities ranging from fuel to foodgrains. Change in the prices of these commodities is reflected in the WPI, reflecting whether the inflation is increasing or decreasing.

FDI
Foreign Direct Investment is the investment made by a foreign organisation or a foreign government in India through a joint venture with a company or by setting up its own manufacturing or service houses, or by acquiring a portion of equity shares in an Indian company.

SLR
Statutory Liquidity Ratio is the percentage of the public's deposits collected by banks which they have to keep with the Reserve Bank of India (RBI). The banks cannot use this portion of deposits for giving loans or making investments. The banks can pay their SLR dues by buying government securities.

CRR
Cash Reserve Ratio is another proportion of the public's deposits that the banks have to keep with RBI, but in the form of cash. It means that the banks cannot use all the deposits they get from the public. Increase in CRR or SLR may increase the interest rates for loans as the banks are left with a smaller investible money.

CAPITAL MARKET
The stock markets include the BSE, NSE and other regional stock markets. The Initial Public Offers (IPOs) for equity shares are basically a part of these capital markets.

MONEY MARKET
This is the market for government securities including treasury bills, government bonds, commercial papers, etc in which mainly the banks and financial institutions trade in.

REVENUE DEFICIT
It is the gap between the total income of government and its expenditure on government employees and various government departments for their functioning.

FISCAL DEFICIT
This is the revenue deficit of the government along with the government's borrowings, which is its liability.

SURCHARGE
This is a tax on tax! That is, if you are paying 10 per cent of tax and 2 per cent is the surcharge; you have to pay 2 per cent additional tax on the amount of 10 per cent tax you pay, or 10.20 per cent.

CESS
Ii is similar to surcharge but the revenue generated by the government through cess is spent on a specific purpose, eg, education cess.

SOPS
Sops are incentives in terms of reduction in taxes or giving special privilege to any sector.

SUBSIDY
It's the amount of expenditure the government bears for activities like generating employment, providing education, alleviating poverty or for agricultural development.

AID
This is a loan government offers at very low or zero rate of interest or on very easy terms for development activities for specific purposes or for industries.

Stock Reco's for Feb 25-28

Reliance Industries
Recommendation: Buy
CMP = Rs 887
Price target: Rs 1,000

• Reliance Industries Ltd (RIL) reported a 15.1% decline in its net profit for Q3FY2006 due to a 50-day shut-down at its Jamnagar refinery and a lower other income.
• With the company setting up new capacities, the petrochemical business is expected to continue the healthy performance. RIL has commenced the test production from its oil block in Yemen. The company indicated the existing reserve estimates for gas at its various fields.
• At the current market price of Rs887, RIL’s stock is quoting at a PER of 13.3x its FY2007E EPS. I maintain Buy recommendation on the stock with a price target of Rs 1,000.

Sanghvi Movers

Recommendation: Buy
CMP = Rs 636
Price target: Rs 800

• In Q3FY2006 revenues of Sanghvi Movers Ltd (SML) grew by 131.6% to Rs44.7 crore during the quarter, driven by the better utilisation of its assets and the ongoing capacity expansion exercise. Driven by the better utilisation of its assets and operating leverage, the operating profit grew by 144% to Rs29.9 crore.
• SML's Rs161-crore capacity expansion plan for FY2006 is on track. The company added Rs45 crore worth of cranes in Q3FY2006, thereby implementing in M9FY2006 Rs120 crore worth of the Rs161-crore expansion plan for FY2006.
• The stock trades at 4.7x FY2007E cash earnings per share (EPS). We are raising our price target to Rs800.

Satyam Computer Services

Recommendation: Buy
CMP = Rs 743
Price target: Rs 820

• Satyam Computer Services announced a growth of 9.6% quarter on quarter (qoq) and of 39.4% year on year (yoy) in its consolidated revenues to Rs 1,265 crore during the third quarter. The consolidated revenues were ahead of our expectations of Rs1,255 crore.
• Unlike some of its peers, the company has effectively managed the foreign exchange (forex) fluctuations and reported a net forex gain of Rs2.4 crore in Q3FY2006 as compared with a gain of Rs2.8 crore in Q2FY2006 and a huge loss of Rs23.1 crore in Q3FY2005. Consequently, the other income stood at Rs33 core as compared with Rs31.6 crore in Q2FY2006 and Rs2 crore in Q3FY2005.
• Satyam has revised upwards the annual growth guidance once again. The consolidated revenues are estimated at Rs4,780-4,786 crore (as against Rs4,700-4,718 crore earlier) and earnings are projected at Rs30.31-30.36 per share (up from Rs29.12-29.23 per share).
• I maintain Buy call on Satyam with the price target of Rs820 per share.

Shree Cement

Recommendation: Buy
CMP = Rs 538
Price target: Rs 585

• The company recorded on operating profit of Rs751 per tonne of cement in Q3FY2006, the highest in the industry till date. The net sales during the quarter grew by 7.4% to Rs144.3 crore driven by an 8.7% improvement in the cement realisations.
• A 7.4% top line growth and an 840-basis-point improvement in the OPM resulted in a 38% improvement in the operating profit for the quarter.
• With a 28% reduction in the interest cost, a 29% decrease in the depreciation cost and a lower tax rate, the pre-exceptional net profit for the quarter jumped by a staggering 138% to Rs39.2 crore. The reported net profit figure stands at Rs28 crore.

Stock Reco's for Feb 25-28

Punjab National Bank
Recommendation: Buy
CMP = Rs 467
Price target: Rs 500

• Punjab National Bank's (PNB) net interest income (NII) grew by 17.3% year on year (yoy) to Rs1,207.4 crore for Q3FY2006 on the back of a strong growth of 31% yoy in the advances.
• The adjusted operating profit excluding the treasury income grew by a strong 26.5% yoy to Rs562.3 crore.
• At the current market price of Rs467, the stock is quoting at 7.2x its FY2007E EPS and 1.3x its FY2007E adjusted book value. I reiterate buy recommendation on the stock with a price target of Rs500.

Ranbaxy Laboratories

Recommendation: Buy
CMP = Rs 381
Price target: Rs 600

• The net sales of Ranbaxy Laboratories for Q4CY2005 were up 8.2% quarter on quarter (qoq) to Rs1,387.7 crore due to a 25% qoq growth in its US formulation revenues. On a year-on-year (y-o-y) basis however the net sales were down 1.2%.
• The price erosion in the US markets continues but the non-US markets have shown a significant growth. The R&D expense and litigation costs are expected to stabilise in CY2006, resulting in higher margins.
• The company guidance for CY2006 is an 18% increase in sales and a 16% rise in the earnings before interest, depreciation, tax and amortisation (EBIDTA) margin.
• At the current market price of Rs381, the stock is trading at 26.3x CY2006 earnings estimate. I maintain Buy recommendation on Ranbaxy with the price target of Rs600.

Orient Paper and Industries

Recommendation: Buy
CMP = Rs 250
Price target: Rs 335

• Orient Paper and Industries Limited (OPIL) recorded revenues of Rs207.7 crore in Q3FY2006, a growth of 19.5% year on year (yoy), aided by the cement as well as paper divisions. The cement and paper divisions registered a top line growth of 28.1% and 8.1% respectively.
• The operating profit, however, increased by 112.2% to Rs24.3 crore due to margin expansion. The profit before tax (PBT) during the quarter increased by 425% to Rs9.8 crore yoy.
• OPIL trades at 10.5x its FY2007 earnings and FY2007 enterprise value/earnings before interest, depreciation, tax and amortisation (EV/EBIDTA) of 7.8x. At the current market price, the cement business of the company is valued at US$59 per tonne, which is the cheapest in the cement sector. I maintain sum-of-part valuation target of Rs335.

Ratnamani Metals and Tubes

Recommendation: Buy
CMP = Rs 333
Price target: Rs 375

• The Q3FY2006 results of Ratnamani Metals and Tubes Ltd (RMTL) are above our expectations. Its revenues grew by 121.9% to Rs118.5 crore over last year. The massive growth in the top line was achieved on the back of a strong order book.
• RMTL has reported a net profit of Rs20.9 crore for M9FY2006 as compared with our FY2006 estimate of Rs24.5 crore. Given the company's robust order book position, we are upgrading our FY2006 and FY2007 estimates.
• The stock trades at 11.3x the FY2006 and 8.3x the FY2007 earnings estimates. We maintain our Buy recommendation on the stock with the price target of Rs375.

Stock Reco's for Feb 25-28

New Delhi Television
Recommendation: Buy
CMP = Rs 187
Price target: Rs 245

• New Delhi Television Ltd's (NDTV) revenues grew strongly by 30.3% year on year (yoy) and by 62.0% quarter on quarter (qoq) to Rs68.3 crore during Q3FY2006.
• The net profit adjusted for the employee stock options (ESOPs) declined by 31% yoy to Rs10.5 crore.
• I believe that NDTV is evolving as a complete media play with multiple revenue triggers in place. NDTV Profit, its business news channel, has started gaining ground in terms of revenues. NDTV now has global tie-ups for broadcast of its channels in the USA, the UK and Canada.
• The stake sale of the new to-be-launched general entertainment channel would also provide substantial upside from here. What's more, its Internet vehicle, www.ndtv.com, has been rated the sixth best news site globally.
• At the current market price of Rs 187, the stock is quoting at 23.4x its FY2007E earnings per share (EPS) and 12.2x its FY2007E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). I maintain Buy recommendation on the stock.
  

Nicholas Piramal India

Recommendation: Buy
CMP = Rs 240
Price target: Rs 325

• Nicholas Piramal's consolidated net sales for Q3FY2006 were up 17.3% year on year (yoy) to Rs402.6 crore due to additional revenues from the acquisition of Avecia and Rhodia.
• The R&D expense increased by 10.3%, causing the earnings before interest, tax, depreciation and amortisation (EBITDA) margin to decline from 17.1% in Q2FY2006 to 11.8%. The profit before tax saw a decline of 30.9% yoy to Rs28.7 crore from Rs41.6 crore in Q3FY2005 aided by increased depreciation costs.
• At the current market price of Rs 240, the stock is trading at 18.9x FY2007 earnings estimate. I maintain Buy recommendation on Nicholas Piramal with the revised price target of Rs 325.

Orchid Chemicals & Pharmaceuticals

Recommendation: Buy
CMP = Rs 260
Price target: Rs 355

• Orchid Chemicals and Pharmaceuticals has received the USFDA's approval for 1 gm/vial and 2 gm/vial of Cefoxitin, a second-generation cephalosporin having a market size of US$45.million. Orchid is launching this product in the USA exclusively through Apotex from January28, 2006.
• Limited competition due to technology barrier and a good marketing network through Apotex are expected to prevent price erosion and result in large Orchid's share in the Cefoxitin market.
• At the current market price of Rs260, Orchid is trading at 7.7x its FY2007E cash EPS. I reiterate Buy recommendation on Orchid with the price target of Rs355.

ORG Informatics

Recommendation: Buy
CMP = Rs 160
Price target: Rs 194

• The consolidated net revenues of ORG Informatics declined by 40% quarter on quarter (qoq) and by 3.7% year on year (yoy) to Rs29 crore in Q3FY2006. The sequential drop was largely due to the higher base effect resulting from the completion of a large system integration project in the previous quarter.
• However, the operating profit margin (OPM) zoomed up to 10.3% from 4.5% in Q2FY2006 and 3.9% in the corresponding quarter of the previous year. The higher contribution from the high-margin telecom business boosted the overall profitability.
• For the nine-month period, the earnings have grown at 619% to Rs 4.3 crore. The performance is in line with our full-year estimates of Rs7.1 crore.
• I maintain Buy call on the stock with a one-year price target of Rs194.

Stock Recos for Feb 20-24

Madras Cement
Recommendation: Buy
CMP = Rs 1855
Price target: Rs2,032

• Madras Cement Ltd’s (MCL) Q3FY2006 net profit at Rs9.54 crore is in line with our expectations. The net sales for the quarter stood at Rs242.6 crore registering a growth of 50.9% year on year (yoy). The growth in the sales was driven by a strong 22% growth in the volumes and a 23.7% growth in the realisation per tonne.
• The company could have performed even better but for water logging in many of its markets consequent to the torrential rains in the southern region, which led to the reduction of dispatches as access to the markets was often curtailed.
• The operating profits stood at Rs41.6 crore, marking a growth of 73.5% mainly on the back of improved operating profit margins (OPMs). The OPMs for the quarter, improved by 220 basis points to 17.1% primarily due to a 13% reduction in the power and fuel cost, as a result of commissioning of the new captive power plant at its Alathiyur plant.
• Helped by a 23% growth in the cement realisations and a 13% reduction in the power and fuel cost MCL’s EBIDTA per tonne grew by 42% to Rs373.
• The depreciation charge during the quarter increased by 24.5% yoy, mainly due to the commissioning of the new captive power plant. Consequently, the net profit for the quarter stood at Rs9.5 crore, registering a staggering growth of 242% yoy.
  

Maruti Udyog
Recommendation: Buy
CMP = Rs 699
Price target: Rs850

• Maruti Udyog Ltd's (MUL) reported better than expected numbers for Q3FY2006. Income from operations grew by 8% yoy on back of a 7% growth in volumes and a 1.1% improvement in realizations.
• The operating profit margins improved by 258 bps to 15% due to control on costs mainly on the raw material front and other expenditure. 77% reduction in interest cost and 35% lower depreciation lead to the Profit after tax for the quarter growing by 41% to Rs 339 cr.
• At the current market price of Rs 699, the stock is quoting at 15x on its FY2007E earnings per share (EPS) and 9x on EV/EBIDTA basis. I reiterate Buy recommendation on the stock with a revised price target of Rs850.

MRO-TEK
Recommendation: Buy
CMP = Rs 88
Price target: Rs113

• The net revenues of MRO-TEK grew by 1.3% quarter on quarter (qoq) and by 39.6% year on year (yoy) to Rs36.8 crore in Q3FY2006. The healthy quarterly revenue run rate of over Rs35 crore is much higher than the average of below Rs30 crore reported in the last fiscal.
• The operating profit margin (OPM) was flat at 17.8% on an annual comparison basis but declined by 90 basis points as compared with that in the previous quarter. The sequential decline was largely due to a 15.2% jump in the selling, general & admin (SG&A) expenses.
• On an annual comparison, the 19.3% growth in the profit before tax (PBT) was relatively lower than the revenue growth due to an increase in the interest outgo and depreciation charges during the quarter.
• The net profit, before the extraordinary items and prior year adjustments, stood at Rs4.55 crore, in line with our estimates. However, prior adjustments of Rs0.29 crore boosted the earnings to Rs4.8 crore. On an annual basis, the figures are not comparable due to the one-time write-off of Rs6.5 crore taken in the third quarter of the previous year.
• The company had reported a net loss of Rs0.8 crore in Q3FY2005.
• The company announced its maiden interim dividend of 25% (or Rs1.25 per share) during the quarter. Given the fact that all of its term loans have been repaid and there isn't any requirement for substantial capital expenditure (capex) in the near future, the dividend policy is likely to be more liberal going forward.
• I maintain Buy call on the stock with the one-year price target of Rs113.

Stock Recos for Feb 20-24

KEI Industries
Recommendation: Buy
CMP = Rs 265
Price target: Rs330

• The net revenues of KEI Industries Ltd (KIL) for Q3FY2006 grew by 38% to Rs76 crore. The cable division led the growth in the revenues, growing by a strong 32.1% year on year (yoy). A lower effective rate of excise duty during the quarter also aided the revenue growth.
• The operating profit margin (OPM) grew by 310 basis points to 14.2% and this led to a whopping growth of 76.5% in the operating profit to Rs10.8 crore.
• The net profit of the company grew at an even higher rate of 140.6% yoy to Rs7.5 crore as the effective tax rate came down from 26.9% in Q3FY2005 to 22.9% in Q2FY2006.
• Against earlier full-year earnings estimate (diluted) of Rs21 per share, KIL has already reported earnings of Rs17.7 per share for M9FY2006. The ramp-up at the Silvassa plant has been much higher than expectations. Also the high-tension cable plant is expected to come up in March 2006. Taking note of these developments, earnings per share (EPS) estimate for FY2006 by 16% and that for FY2007 by 7.2%.
• At the current market price of Rs265, the stock quotes at 7.7x its FY2007E EPS and 5.2x its enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). I maintain Buy recommendation on KIL with the price target of Rs330.

Lupin
Recommendation: Buy
CMP = Rs 845
Price target: Rs1,130

• Lupin's net sales for Q3FY2006 stood at Rs426.9 crore as against Rs279.6 crore in Q3FY2005, an increase 52.7% year on year (yoy) backed by the doubling of revenues from the domestic bulk market and a five times increase in the sales of formulations in the export market.
• The operating margins increased by 322 basis points on a year-on-year (y-o-y) basis at 13.49% as the operating profit doubled to Rs57.6 crore. The pre-R&D expenditure included a non-recurring forex loss of close to Rs12 crore without which the operating margin for the quarter would have been even higher.
• The interest and depreciation costs increased to a lesser extent but lower other income resulted in a net profit of Rs44.2 crore in Q3FY2006 as against Rs24.5 crore in Q3FY2005, an increase of 80.4% on a y-o-y basis.
• At the current market price of Rs845, the stock is trading at 13.6x its FY2007 earnings estimate. Estimates for FY2006 and FY2007 are revised upwards and maintain Buy recommendation on Lupin with a target price of Rs1,130.

Stock Reco's for Feb 20-24

Jaiprakash Associates
Recommendation: Buy
CMP = Rs 376
Price target: Rs 458

• Jaiprakash Associates Ltd's (JAL's) Q3FY2006 stand-alone net profit at Rs57 crore was below our expectations of a net profit of Rs66 crore. The primary reasons were higher interest costs and lower other income. The net sales for the quarter were up 19.7% to Rs797 crore driven by a sharp 30% growth in the company's cement revenues.
• The operating profit margin (OPM) jumped by 340 basis points to 21% due to a sharp jump in the margins of the construction business. The OPM for the cement business fell marginally by 40 basis points during the quarter due to higher fuel costs. Overall, the operating profit during the quarter jumped by 43% to Rs167 crore.
• As the company commissioned a new 1-million-tonne grinding unit at its Tanda plant and a captive power plant during the quarter, its depreciation charge jumped by19% and interest cost increased by 15.5% during the period. Overall, its net profit during the quarter jumped by 27% to Rs57 crore.
• At the current market price of Rs376, the stock is discounting its FY2007 consolidated earnings by 13.5x and its FY2007 consolidated earnings before interest, depreciation, tax and amortisation (EBIDTA) by 7.1x. I maintain Buy recommendation on the stock with a revised price target of Rs458.

JK Cements
Recommendation: Buy
CMP = Rs 170
Price target: Rs 205

• JK Cement Ltd (JKL) has reported a net profit of Rs7.8 crore for Q3FY2006; the same is above our expectation of Rs5.2 crore.
• The net sales for the quarter at Rs221.7 crore are up by 7.7% quarter on quarter (qoq), driven by a 0.5% growth in cement volumes and a 7.2% growth in cement realisation.
• The operating profit margin (OPM) is up by 130 basis points primarily because of flat employee and other costs. Consequently the operating profit for the quarter has jumped 28% qoq.
• The improvement in the OPM was restricted by a 13.5% increase in the freight cost per tonne, and a 17.8% increase in the power and fuel cost.
• Both these cost increases are a result of the rising fuel prices. For example, during the quarter the diesel prices went up by 5-7% and JKL uses diesel to burn its DG sets.
• With stable interest cost and depreciation charge, the net profit for the quarter has jumped an impressive 59.2% to Rs7.8 crore.

Movers & Shakers on Feb 20

• ICICI Bank, which inked a deal with BayernLB of Germany, ended with steady gains.
• Micro Technologies rose sharply on reports that the company has signed a strategic deal with UK-based Sony Ericsson PBU M2M.
• Jain Irrigation Systems moved up on reports that it has acquired Parle's mango processing units for Rs14 crore.
• HCL Infosystems tanked on reports that it may lose revenue on sharing the territory for the distribution of handsets with Nokia.
• GAIL, which announced that it might consider a proposal to set up a special purpose vehicle for the construction and operation of a gas processing facility in Australia, ended at lower levels.
• Punj Lloyd ended marginally lower, despite winning a contract worth Rs125 crore from HPCL.

TOP GAINERS
Company.............Price (Rs)......% Change
Ashok Leyland.......37.75.............4.57
Dr. Reddy's..........1331.8.............3.49
Maruti Udyog........787.05............3.36
Rolta India...........228.35............3.30
HLL......................238.8.............3.13

TOP LOSERS
Company.............Price (Rs)......% Change
HCL Infosys..........180.1.............(30.21)
Micro Inks.............438.25............(6.65)
Container Corp......1385.0............(6.55)
Visualsoft..............193.1.............(5.2)
Exide Industries.....230.9.............(4.45)

IPO Profile: Gitanjali Gems Ltd.

Issue details

• Bid/Issue opens on : February 16, 2006
• Bid/Issue closes on : February 21, 2006
• Issue Price : Rs.170-195 per equity shares of Rs. 10 each
• Minimum application : 35 equity shares and in multiples of 35 equity shares thereafter.
• Maximum Retail Bid Amount :Rs. 100,000.

Capital structure

• Authorised share capital: 70,000,000 Equity Shares of Rs. 10 each
• Issued capital before the issue: 41,998,495 Equity Shares of Rs. 10 each
• Issued capital after the issue: 58,998,495 Equity shares of Rs. 10 each
• Promoters, promoters group and PAC share pre-issue: 95.24%
• Promoters, promoters group and PAC share pre-issue: 67.80%

Background
Gitanjali Gems Ltd. (GGL) is one of the largest integrated manufacturers and retailers of diamonds and jewellery in India. It sources rough diamonds from various primary or secondary sources then engages in the cutting, polishing and retailing of diamond and other jewellery both in India and abroad. Gitanjali Gems has got two-diamond manufacturing facilities located at Borivali in Mumbai and at the SEZ in Surat. It has also got a 100% export oriented unit in SEEPZ Mumbai, which produces gold and platinum studded jewellery.

There are two jewellery-manufacturing facilities at MIDC, Mumbai, which produce branded jewellery for the retail operations in India. The company exports to all the major international markets and has a workforce of over 2300 employees. Some of the better-known brands under which the company sells its jewellery are Nakshatra, Asmi, Gilli and D’Damas.

Objectives of the issue
The Company plans to utilize a majority of the proceeds of the issue towards capitalization of subsidiaries, joint ventures and associate companies. The company plans to scale up its retail operations by setting up additional retail outlets. It also plans to set up additional diamond and jewellery manufacturing facilities in Hyderabad and Mumbai. The company has high working capital requirements because of its line of business and some proceeds from the issue will go towards working capital requirements.

Points to consider

1. Industry growing at a robust Pace
2. Branded jewellery in India and GGL
3. Distribution network and retail outlets
4. Concerns
   Two of the significant brands under which the company sells its products under, Nakshatra and Asmi, are not owned by the company. This could have a significant bearing on the company being able to acquire new customers, as people recognize the brand more than the company which manufactures the product. Going forward, this could impact earnings if the license from DTC, which owns these brands is withdrawn. On the financial side, the company has not provided for contingent liabilities to the tune of 49.18 crores, which could be a negative if it materializes.
5. Financials
   Gitanjali Gems Ltd has recorded a net income of 1153.13 crores in the six months ended September 30th 2005. The revenue and profit figures are not comparable with previous years and quarters figures because the company has undergone a complex restructuring program, amalgamating 5 of its group companies into itself. Net profit for 6 months ended September 30th 2005, was 24.47 crores. The margins in this business are low irrespective of the players.
6. Valuations
   The issue is being offered in a price band of Rs. 170 to Rs. 195. The stock is valued at 20.27x H1FY06 annualized earnings of Rs. 8.39 at the lower price band and 23.25x H1FYO6 annualized earnings at the upper band on a post dilution basis. This is a one off play in the market as far as branded jewellery business is concerned. We expect the margins to improve as the company shifts more towards selling branded jewellery. The company has strengths in branding and a good distribution network. Investors can subscribe to the issue for short term listing gains as well as long term investment purpose.

(For Risk factors and other details please refer Red Herring Prospectus)

Source: ICICI Direct

IPO Profile: K Sera Sera Productions Ltd.

Issue details

• Bid/Issue opens on : February 16, 2006
• Bid/Issue closes on : February 22, 2006
• Issue Price : Rs.64-70 per equity shares of Rs. 10 each
• Minimum application : 100 equity shares and in multiples of 100 equity shares thereafter.
• Maximum Retail Bid Amount :Rs. 100,000.

Capital Structure

• Authorised Capital: 2,50,00,000 equity shares of Rs 10 each
  2,50,00,000 preference shares of Rs 10 each
• Issued Capital before the issue: 1,45,12,259 equity shares of Rs 10 each
  38,40,524 preference shares of Rs 10 each
• Issued Capital after the issue: 1,95,12,259 equity shares of Rs 10 each
  38,40,524 preference shares of Rs 10 each
• Promoters share pre-issue: 29.91%
• Promoters share post-issue: 22.25%

Background
K Sera Sera Productions Ltd (KSSPL) was incorporated as Garnet Paper Mills Ltd in 1996. The promoters of KSSPL purchased the company in 2002 and changed its name. The company is involved in film production, distribution and producing television content through its subsidiary, Twenty Twenty Television Company Ltd. The company has produced nine films.

Objectives of the Issue
KSSPL will use the issue proceeds for building infrastructure facilities for existing operations, fund distribution business, working capital for producing films and general corporate purposes.

Requirements of Funds
Acquisition of office premises........4.5 crore
Funding of distribution activities........3.00 crore
Funding film production.........25.00 crore

Points to consider

1. Industry Growing at Robust Pace
2. Strong pipeline of movies ahead
3. Movie distribution and television content production to hurt bottomline
4. Incomplete contract with Sahara India Mass Communication
5. Financials
   KSSPL posted a topline of Rs 37.51 crore for the FY05 compared to Rs 24.31 crore for FY04, while its bottomline decreased to Rs 2.25 crore from Rs 3.54 crore. In H1FY06, the company clocked an income of Rs 32.19 crore and posted a profit of Rs 5.24 crore due to success of movie Sarkar. It is making losses in the television venture and barely breaking even in the distribution business.
6. Valuations
   The issue is being offered at a price band of Rs 64-70. The stock is valued at 23.79x-26x H1FY06 annualised earnings of Rs 2.68 on a post-issue dilution basis. The issue provides an arbitrage opportunity to investors as it is priced at a discount of 6.66% - 14.66% to the market price of Rs 75 per share. However, the company is moving to produce medium to high-budget films which is a high risk business where as it is still trying to establish a foothold in the film distribution and television arena. Investors may thus look at KSSPL for registering listing gains as integrated media players with similar valuations offer a better portfolio bet for the long-term.

(For Risk factors and other details please refer Red Herring Prospectus)

Source: ICICI Direct

NEW Section: IPO Profile...

Hello buddies,

I propose to start a new section on IPO Profile.

The primary purpose of this section would be to discuss the upcoming IPOs, background of the company, broad profile of its industry, and some comments around it.

I would reuqest all of you to please voice your opinions around it. Also, pelase do not hesitate to contact me (sagargeminimumbai@yahoo.com) in case you need to ask / suggest something.

Thanks a ton for your continued support.

Keep visiting this space and share this knowledge.

Stock Reco's for Feb 13-17

Infosys Technologies
Recommendation: Buy
CMP = Rs 2,835
Price target: Rs 3,057

• Infosys Technologies' consolidated revenue growth of 10.4% quarter on quarter (qoq) to Rs 2,532 crore is in line with our expectations. The improvement of 200 basis points (bps) in its operating profit margin (OPM) qoq to 34% was largely driven by the steep depreciation of the rupee.
• However, the other income component slipped to a negative Rs 5 crore as compared with a positive Rs 44 crore reported in Q2FY2005. The decline could be attributed to the huge mark-to-market losses incurred on the forward foreign exchange (forex) contracts.
• Consequently, the earnings grew by 7.1% qoq to Rs 649 crore as compared with the consensus estimates of around Rs 660-665 crore.
• At the current price, the stock trades at 23.7x its FY2007 estimated earnings.
• I maintain Buy call with the one-year price target of Rs 3,057.

International Combustion (India)
Recommendation: Buy
CMP = Rs 355
Price target: Rs 450

• The revenues of International Combustion India Ltd (ICIL) grew by a robust 29.3% year on year (yoy) to Rs 16.3 crore in Q3FY2006 on the back of the strong performance of the heavy engineering division (HED).
• The operating profit margin (OPM) of the company improved by 620 basis points yoy to 16.9% in Q3FY2006 mainly on account of the lower material cost and the leverage effect coming into play.
• The robust performance on the operating profit front was reflected in the bottom line as the net profit grew 110.4% yoy to Rs 1.4 crore. The earnings for the quarter stood at Rs 6.5 per share, in line with our estimates.
• The HED continued with its growth momentum in the quarter registering a strong revenue growth of 41.2% yoy to Rs 12.9 crore. But the PBIT margins saw a marginal fall of 170 basis points yoy to 26.1% primarily on account of the change in the product mix.
• ICIL has a healthy order book of Rs 50 crore which is 1.1x its FY2005 revenues, thus imparting a strong visibility to its earnings. The order book grew by 56.0% on a quarter-on-quarter (q-o-q) basis.
• I expect the company to report earnings of Rs 22.9 per share in FY2006E and of Rs42.5 per share in FY2007E. ICIL is currently trading at a PER of 8.3x its FY2007E earnings and 4.9x its FY2007E enterprise value/earnings before interest, depreciation, tax and amortisation (EV/EBIDTA). I am tempted to maintain Buy recommendation on the stock with a price target of Rs450.

ITC
Recommendation: Buy
CMP = Rs 152
Price target: Rs 170

• ITC's net revenues grew by a robust 42.4% year on year (yoy) in Q3FY2006 to Rs 2,556 crore, powered by a strong growth in all the business segments.
• All the businesses reported a high double-digit growth for Q3FY2006 with the main business of cigarettes growing at 19%, the highest growth ever in the last fifteen quarters.
• The adjusted operating profit grew at a slower pace of 30% yoy to Rs 878.3 crore for Q3FY2006 as the operating profit margin (OPM) fell by 330 basis points yoy to 34.3%. The margin dropped on account of a margin contraction in the agri business.
• ITC's adjusted profit after tax (PAT) increased by 26.3% to Rs 567.1 crore.
  To take into account the splendid performance of Q3FY2006, we have upgraded our numbers for FY2006 and consequently for FY2007. At the current market price of Rs 152, the stock is attractively quoting at 21.7x its FY2007E earnings. I maintain Buy recommendation on ITC with a price target of Rs 170.

VERY URGENT...CAPGEMINI Consulting India requires Executives for BPO Practice

Company Overview: Globally Capgemini have over 5000 employees in BPO. These employees work out of a network of centers in Toronto, Malmo, Krakow, Guangzhou, Mumbai, Bangalore and Adelaide. Capgemini is recognized as a world leader in BPO, particularly in F&A BPO, with the globally largest BPO deals in 2003 and 2004; as well as established thought leadership in transformational BPO.

In India, BPO started in 2004, and has been grown in niche areas. In 2006, we will expand both size and scope by focusing on F&A BPO. Much of this growth will be driven from our new centre in Kolkata, where we are opening our third BPO centre.

As part of setting up BPO in Kolkata, we have started recruitment for our first project in Kolkata. We are recruiting candidates for Accounts Payable, Credit Control (Collections) and Procurement functions.

The following skills are required

• Graduate with excellent command of spoken and written English, and strong interpersonal/communication skills
• 2-3 years commercial experience in Finance and Accounting environment
• At least 2 years collections experience within professional services environment managing blue-chip client relations
• Strong analytical and organizational skills
• Manipulate data to an advanced level using spreadsheets
• Microsoft Office
• Providing solutions with limited escalation
• Ability to articulate and influence both internally with colleagues and externally with clients
• ERP systems experience

Job Location: Kolkata

Experience: Min 3 years

If you meet above criteria, send your updated CVs to -> Sagar.Toshniwal@capgemini.com

NOTE: If you do NOT meet the following criteria, do NOT send your CVs, else they will be PERMANENTLY DELETED from our database.

VERY URGENT... CAPGEMINI Consulting India (Mumbai / BAnglore / Kolkata)

Company Overview: In an organization that brings together 60,000 people world-wide, in an ever-changing and competitive world, and in a Group where collaboration is part of our genetic structure, frequent and broad internal communications are vital. The Internal communication team at Capgemini sets out to fulfill this vital function. Internal Communications implement and promote content-sharing through a wide range of written, oral and visual media including the web, TV and podcasts. In addition to the Talent website, Group Internal Communications use television, podcasts, newspapers, brochures and more to communicate on the main events in the life of the Group. Requires JOURNALISTS for Internal Communications team.

Key Responsibilities:

1. To act as an internal journalist and corporate writer for all established internal news and information service.
2. Responsible for the research and redaction of articles on a variety of subjects for an established, web-based internal news and information service.
3. Gather background information, interview staff and write articles on a daily basis about Company news, Business wins, Capgemini in the press, Analyst reports, Technologies, etc.

Experience:

1. Background in communications, including writing skills
2. Highly credible, strong oral communications skills
3. Thourough understanding of the IT Outsourcing industry with an ability to research information and to report facts accurately

Job Location: Mumbai, India

Experience: 4-6 years in areas mentioned above

Kindly send your updated CVs to -> Sagar.Toshniwal@capgemini.com

NOTE: ONLY if you meet the above mentioned criteria, please send your CVs; Else they will be DELETED permanently from our database.

Stock Reco's for Feb 13-17

HDFC Bank
Recommendation: Buy
CMP = Rs 745
Price target: Under review

• HDFC Bank's net interest income (NII) grew by 52.6% year on year (yoy) for Q3FY2006 on the back of a 58.8% growth in its advances to Rs 38,000 crore driven by a 75.6% increase in its retail advances.
• The bank's deposits grew by 36.8% yoy during Q3FY2006. However, the growth came on the back of high-cost term deposits, which put pressure on the net interest margin (NIM).
• The operating expenses went up by 61% as the bank aggressively expanded its branch network during the quarter. The benefits of this expansion will accrue in the quarters to come.
• The net profit for the quarter grew by 31.3% to Rs 224.4 crore. The growth could have been higher but for the higher provisioning made for the non-performing assets (NPAs).
  At the current market price of Rs 753, the stock trades at 21x its FY2007E earnings per share (EPS) and 4x its consolidated book value. i maintain Buy recommendation on the stock.
  

Hyderabad Industries
Recommendation: Buy
CMP = Rs 500
Price target: Rs 700

• Hyderabad Industries Ltd (HIL) reported a 5.2% increase in its net sales in Q3FY2006 to Rs 95.4 crore. However, on a like-to-like basis, the building product division's revenue grew by 18.8%.
• Despite a 5.2% increase in the top line, HIL reported a flat growth in the operating profit. The operating profit margin (OPM) declined by 59 basis points to 11.6%. The decline in the OPM was primarily due to an increase in the raw material cost. The raw material cost as a percentage of sales increased from 43% in Q3FY2005 to 48.2% in Q3FY2006.
• HIL is utilising its strong cash flows from operations to pay a large portion of its debt. The reduction in the debt lowered its interest cost by 61.2% to Rs0.9 crore in Q3FY2006.
• The company has reported a net profit growth of 22.5% for Q3FY2006 to Rs 5.7 crore. However, the numbers are below our expectation and we are downgrading our FY2006 and FY2007 estimates. Let us expect the company to report a net profit of Rs 42.9 crore in FY2006 and of Rs 46.5 crore in FY2007.

ICI India
Recommendation: Buy
CMP = Rs 373
Price target: Rs 420

• For Q3FY2006 ICI India reported impressive results that are much better than our estimates.
• The company's revenues grew by 17.7% year on year (yoy) in Q3FY2006 to Rs 257 crore on the back of a splendid performance by its paint business.
• The operating profit grew by a sharp 62.3% yoy to Rs 37.0 crore as the operating profit margin (OPM) expanded by a whopping 395 basis points.
• However, the reported net profit was much lower at Rs 8.3 crore as during the quarter ICI India sold its rubber chemical business to a joint venture and booked a notional loss of Rs 10.1 crore. However, adjusted for the one-time extraordinary items, the net profit grew by 72.7%.
• At the current market price of Rs 373, its stock is quoting at 15.5x its FY2007E earnings per share (EPS) and at 11.9x if one adjusts the value of its cash and cash equivalents. We believe that these valuations are attractive and the stock is available at a good discount to its peers. I maintain Buy recommendation on the stock with a revised price target of Rs 420.

Stock Reco's for Feb 13-17

Emco

Recommendation: Buy
CMP = Rs 525
Price target: Rs 600

• Emco's revenues for Q3FY2006 grew 67.0% year on year (yoy) to Rs 97.1 crore on the back of higher order booking of Rs 117 crore during the quarter. The operating margins were down 220 basis points yoy to 13.0% primarily on account of higher raw material prices (mainly copper). But on a quarter on- quarter (q-o-q) basis, the margins were maintained at 12.9-13.0% range.
• Emco's net profit grew to Rs 6.1 crore registering a y-o-y growth of 98.4%. The earnings for the quarter stood at Rs 7.9 per share.
• Emco's order backlog grew by Rs 20.0 crore (4.7% qoq) to Rs 445.0 crore, thus imparting a strong visibility to the revenues and the ensuing earnings.
• Considering the robust macro economic scenario, high revenue visibility, strong earnings momentum, strong balance sheet, improvement in return ratios and attractive valuations (PER of 10.4X FY2008E earnings and Ev/Ebidta of 7.0X FY2008E); I will initiate price target at Rs 600 discounting its FY2008E earnings at 12X.

Genus Overseas Electronics

Recommendation: Buy
CMP = Rs 147
Price target: Rs 180

• Genus Overseas has reported a net profit of Rs 1.68 crore for Q3FY2006, which is in line with our expectations.
• The net sales for the quarter stood at Rs 26.3 crore, down 32%, primarily because of a fire incident that resulted in some finished goods inventory loss and consequently restricted the dispatches of meters during the quarter.
• Further there was labour unrest at the company's plant in Jaipur, and there was a loss of production for 10-12 days during the quarter.
• In FY2005 Genus' product portfolio did not consist of 3-phase meters. However with its entry into the high margin low volume 3-phase energy meters, there is a change in the company's revenue mix. Consequently the operating profit margins have improved substantially from the earlier 11.7% to 18.3%.
• The operating profit for the quarter is up 15% to Rs 4.47 crore. The interest expenses for the quarter are up 56% and consequently the net profit for the quarter has not shown any growth and stood at Rs 1.68 crore.
• The total order book stands at Rs 414 crore, which at 2.7X its FY2005 revenues provides a strong earnings visibility.

Godrej Consumer Products

Recommendation: Buy
CMP = Rs 561
Price target: Rs 674

• The net sales of Godrej Consumer Products Ltd (GCPL) grew by 10.2% year on year (yoy) to Rs 169.1 crore, powered by a strong 16% year-on-year (y-o-y) growth in the branded portfolio. The sales of the Godrej brand of soaps grew by 11.5% yoy whereas the personal care business grew by 21.2% yoy.
• The profit before interest and tax (PBIT) margin of the soap segment stood at 7.7% (down 20 basis points yoy). The decline was mainly on account of a change in the product mix (which shifted towards lower-margin, high-volume products), and higher ad spend during the quarter (8.9% of sales).
• The net profit grew by 31.1% yoy on the back of the strong performance of the personal care business both on the revenue and margins fronts. The earnings for the quarter stood at Rs 6.0 per share as against Rs 4.6 per share a year ago.
• GCPL is currently trading at 19.5x its FY2008E stand-alone earnings and 16.7x its FY2008E consolidated earnings. We believe the valuations are attractive considering the strong growth momentum expected in its earnings over the next two years. I will maintain Buy recommendation with a price target of Rs 674.

Stock Reco's for Feb 13-17

Crompton Greaves
Recommendation: Buy
CMP = Rs 880
Price target: Rs 1,008

• The revenues of Crompton Greaves grew by 37.3% in Q3FY2006 to Rs 647.9 crore. The growth was achieved on the back of the strong performance of power systems (revenues up 60.6%) and consumer products (revenues up 21.5%).
• The power system and consumer product divisions were the key drivers of the company's good performance in Q3FY2006. The profit before interest and tax (PBIT) margin of these divisions improved by 250 basis points and 60 basis points yoy to 9.7% and 8.8% respectively.
• The net profit of Crompton grew by 73.3% yoy in the quarter to Rs 54.7 crore. There was an extraordinary expense of Rs 11.5 crore on account of a voluntary retirement scheme (VRS).
• Crompton is currently trading at 14.0x FY2008E consolidated earnings. A healthy compounded annual growth of 44% in the earnings over the FY2005-08 period, the strong visibility of the earnings and the improving financial ratios of the company make the stock an attractive investment.
• I maintain Buy recommendation on the stock and roll over the earnings multiple to FY2008E with a price target of Rs 1,008, discounting the FY2008E consolidated earnings by 16x.

DCM Shriram Consolidated
Recommendation: Book Profit
Current market price: Rs 98

• In Q3FY2006 the revenues of DCM Shriram Consolidated Ltd (DSCL) grew by 18.4% aided by a volume growth. The capacity expansion undertaken by the company in the last one year increased the volumes of its chemical, plastic and sugar businesses. The turnover from the traded goods increased by 10.5% to Rs 242.4 crore.
• The chemical business, which had been driving the company's growth for the last two quarters, reported a dull performance. Though the revenues from this business grew by 4.9%, a drop in the caustic soda realisation affected its profit before interest and tax (PBIT) margin.
• The sugar business reported a healthy growth of 77.4% in the top line, as the company expanded its capacity. However, the sugar division's PBIT declined by 6% during the quarter due to the high cost of the inventory carried forward from last quarter. The company is further expanding its sugar capacity from 14,000 tonne crushed per day (tcd) to 33,000tcd.
• The plastic business reported revenues of Rs 63.2 crore in Q3FY2006 as compared with Rs 55.2 crore in Q3FY2005. Weak polyvinyl chloride (PVC) prices and higher input cost caused the PBIT of this business to decline from Rs 16.7 crore in Q3FY2005 to Rs 8.3 crore in Q3FY2006.
• DSCL reported a 24.5% year-on-year (y-o-y) decline in its net profit to Rs 24.8 crore. The stock has appreciated by 113% since then. Hence I recommend booking profit on it.

HIT List - Feb 15

INVESTMENT OPTIONS graph for Feb 14

SECTOR UPDATES graph for Feb 14

CASH IS KING!!!!! (Part 2)

SELECTION CRITERIA

Companies must have a good net surplus cash

(net surplus cash = cash + bank balances + liquid investments + investment in group companies - short-term debt).

• The company must have a very low debt to equity ratio, high operating margins and operating profits, high dividend payout ratios, high cash EPS and superior returns on capital.
• There should be a consistency in cash flows in the past and the ability to generate cash for the next 2 to 3 years.
• Further, run a check on the management competencies and their ability to manage cash and put it to good use.

INVESTMENT CAVEAT

Critics point out that at this moment, cash rich companies are trading at high P/E ratios and are expensive. Besides, at the end of the day, it is valuation that ultimately matters. Against that backdrop, such stocks would fail to provide protection once the bear phase kicks in. However, when all stocks are expensive, cash-rich companies with concrete business plans could offer greater price stability and better downside protection.

CONCLUSION

As the market booms into uncharted territory, volatility is likely to increase manifold in the future. You could be better off investing in frontline stocks with strong cash flows and which hold a prominent position in their respective industries. Moreover, only look at companies that belong to sectors on which you are bullish.

IN BRIEF

• With the stock market overheated and valuations over-stretched, adopt a conservative strategy and invest in stocks that have a brimming cash kitty and strong future expected cash flows.
• Cash-rich companies can fund their expansion plans with considerable ease even in a difficult business environment.
• Such companies amongst other attributes must have a very low debt to equity ratio, high operating margins and operating profits and high dividend payout ratios.
• Critics point out that at this moment, cash rich companies are trading at high P/E ratios and are expensive. However, when all stocks are expensive, cash-rich companies with concrete business plans could offer greater price stability and better downside protection.

CASH IS KING!!!!! (Part 1)

It’s celebration time on Dalal Street with the Sensex breaching the breathtaking 10,000 mark. At this juncture, do you feel tempted to corner a piece of the action by taking the plunge into equities?

If you do, here’s a word of caution: the stock market is overheated and valuations are overstretched. So, think twice. Your prime concern right now should be capital preservation and not returns.

THEREFORE… It is better to adopt a conservative strategy and invest in stocks that have a brimming cash kitty and strong future expected cash flows.

CASH-RICH COMPANIES – NEED OF THE DAY

The present bull-run, which started in 2003, is one of the longest in the history of the Indian capital markets. However, the current Sensex peak has warped the risk-return equation. Now, a lower return expectation is accompanied by higher risk. In such a scenario, it is safer to invest in cash-rich companies that represent real assets. What’s more, such companies are better placed to weather any future downtrend.

BENEFITS ALL AROUND

A robust economic growth and limited capital spend by India Inc., during the last 3 years, has resulted in huge liquid cash reserves with companies. Banking on their cash reserves, such companies can fund their expansion plans (organic or inorganic), with considerable ease even in a difficult business environment. Needless to say, such companies would rely less on borrowed funds and hence their interest outgo would also be moderate. Moreover, being cashrich, such companies can reward their shareholders in the form on special dividends.

Stock Reco's for Feb 13-17

Bajaj Auto
Recommendation: Buy
CMP = Rs 2,019
Price target: Rs 2,370

• Bajaj Auto Ltd's (BAL) stand-alone revenues for Q3FY2006 grew by 24.6% year on year (yoy) on the back of a 14% growth in volumes and a 9.3% growth in realisations.
• The growth in the sales of three-wheelers helped the company expand its operating profit margin (OPM) by 289 basis points to 17.9%. As a result the stand-alone operating profit grew by 48.5% yoy.
• The stand-alone adjusted net profit grew by 50.1% to Rs290.8 crore.
  The gross premium written during the quarter in the life insurance and general insurance businesses grew by 296% and 83% respectively. However, the insurance business reported a loss of Rs26 crore for the quarter due to the transfer of Rs35.6 crore to its policyholders' account to fund the deficit in the policyholders' account of the life insurance business.
• A strong growth in Q3FY2006 leaves room for upgradation of earnings estimates for FY2006 and FY5007.
• At the current market price of Rs 2,019, the stock is quoting at 17.5x its FY2007E stand-alone earnings per share (EPS) and 10.2x on enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) basis. I reiterate Buy recommendation on the stock with the price target of Rs 2,370.
  

Cipla
Recommendation: Buy
CMP = Rs 440
Price target: Rs 510

• In Q3FY2006 Cipla's net sales increased by 30.9% year on year (yoy) to Rs780.62 crore on the back of a 35% increase in its export revenues.
  The operating profit margin (OPM) was maintained at 20.4% this quarter. This resulted in a 32% increase in the operating profit to Rs 158.9 crore.
• Increased interest and depreciation costs and lower other income resulted in an 18.4% decline in the profit after tax (PAT) to Rs 102.6 crore yoy. The net profit margin for the quarter stood at 13.1%.
• The company had Rs 72.7 crore of exceptional revenue from the insurance claims due to the damage caused to its goods at its Bhiwandi godowns by the Mumbai floods in July 2005.
• At the current market price of Rs 440, Cipla is trading at 21x FY2007 earnings estimate. I maintain Buy recommendation on Cipla with the revised price target of Rs 510.
  

Container Corporation of India
Recommendation: Buy
CMP = Rs 1,292
Price target: Rs 1,450

• Container Corporation of India (Concor) reported a net profit of Rs 137 crore for Q3FY2006. The 35% year-on-year (y-o-y) growth was higher than our estimates on account of a lower tax rate during the quarter.
• Its revenues grew by 25% year on year (yoy) in Q3FY2006 to Rs636 crore mainly driven by a strong growth in its export-import (exim) and domestic revenues. The exim revenues grew by 26% y-o-y to Rs 506 crore and the domestic revenues grew by 21% yoy to Rs 130 crore. Both the segments registered an impressive growth in realisations (exim 12.2% and domestic 19%).
• However, the margins fell by 190 basis points, as Concor has not yet passed on the 15% freight rate hike carried out by the Indian Railways in December 2005. The other income grew by 25% y-o-y and the depreciation grew by 21% yoy to Rs 20.7 crore due to a jump in the number of wagons acquired over the past one year.
• The tax rate for the quarter fell to 20% in Q3FY02006 against 30% last year, thanks to the 80IA benefits enjoyed by the company for investing in inland container depots (ICDs) and wagons after April 2001. As a result, the net profit grew by 35% yoy to Rs 137 crore during the quarter.

Stock Reco's for Feb 13-17

Alphageo India
Recommendation: Buy
CMP = Rs 100
Price target: Rs 135

• Alphageo India Ltd (AIL) has reported a net loss of Rs 31 lakh for Q3FY2006 against our expectations. The net loss was a result of a higher-than-expected interest outgo of Rs 69 lakh during the quarter.
• The interest charge in turn was higher on account of the Rs30 crore debt that the company has taken to set up its two 3-D seismic survey crews. The revenues for the quarter stood at Rs160 lakh, down 77% over last year. The results are not comparable on a year-on-year (y-o-y) basis, as the two 2-D crews did not operate in the third quarter. Consequently the company did only data analysis job during the quarter.
• Till November 2005, severe weather conditions prevailed in Arunachal Pradesh and Mizoram, where AIL is executing two contracts for Oil India Ltd (OIL) and Oil and Natural Gas Corporation (ONGC) respectively. Since then, the company has resumed operations on the ONGC contract. However work on the OIL contract has not resumed yet, as OIL has postponed the operations in Arunachal Pradesh.
• AIL has bagged an order worth Rs 4 crore from HOEC for a 2-D contract. The crew that was to work on the OIL contract will now commence survey for the HOEC contract. The company intends to finish the survey by the end of this fiscal.
• The fourth quarter will see all the company crews (ie two 2-D crews and the two new 3-D crews) in full operation. Hence its revenues would increase from Q4FY2006 onwards. I believe that the revenues and earnings would begin to grow exponentially on a y-o-y basis from Q1FY2007.

Associated Cement Companies (ACC)

Recommendation: Buy
CMP = Rs 547
Price target: Rs 600

• It is currently trading at 18x its FY2006 earnings and continue to be bullish.
• I am tempted to revise our price target for ACC to Rs600 and maintain my positive stance on the company, primarily due to the strong cement demand in the western region, improving pricing of cement on the back of a favourable demand-supply scenario and the capacity expansion plan proposed by the company.

Balmer Lawrie & Company

Recommendation: Buy
CMP = Rs 575
Price target: Rs 600

• The management of Balmer Lawrie and Co is quite optimistic about the company's future growth prospects. I am tempted to revise the price target for the stock to Rs 600. The new price target is 10.3x the company's FY2008E earnings.

ULIPs @ 10000 - To buy or not to buy Part 2

Markets have touched 10,000 and experts are divided on the direction the markets will take now. But you have to make those tax saving investments before March. So do ULIPs make sense?

Let us investigate it in detail...

1. Stay invested for the long-term – at least 7 years

Says Puneet Nanda, Chief Investment Officer, ICICI Prudential Life Insurance, “Life insurance, and hence ULIPs, should be viewed as a long-term investment. Hence, any person buying such a product must do so with a long term horizon, say 5-7 years at the least, in which case the immediate level of the markets do not make a huge difference.”

Sanjay Tripathi, Head Marketing, HDFC Standard Life Insurance agrees, “There is never a good or a bad time for investing in equity funds of ULIPs, if you are looking to remain invested for a long period (more than 10 years).”

2. Invest systematically

Certified Financial Planner Kartik Jhaveri suggests, “I would say that for any equity investment of less than 7 years, mutual funds are better options. ULIPs are good if you are looking at a time horizon of more than 7 years. And more so, I would recommend a regular investment”

Just like a systematic investment plan is useful for rupee cost averaging in a mutual fund scheme, the same can be applied to ULIPs. Says Nanda, “We encourage our customers to invest regularly, in a monthly/quarterly mode, which works as a systematic investment plan and enables them to reap the benefits of the highs and lows of the market.”

3. Don’t be tempted by a short-term exit option

Apart from the fact that returns from equities even out in the long term, Jhaveri gives more reasons why a ULIP makes sense for a longer time horizon, “In ULIPs, the administrative costs are collected upfront from the first year’s premiums. These costs would be recovered only in a longer period and hence it makes sense to hold on for the long-term.”

While insurance agents may convince you that you can withdraw after a period of three years, Jhaveri advices that its best to stay off that temptation.

How long it takes for charges to be recovered. Even if your fund grew at 10% a year every year, it would still take you anywhere between 3 and half to 5 years to recover your premium amount, let alone get returns. So you would be in a profit position only after that time period. Of course, if your fund grows faster than 10%, the break even would happen faster.

4. Manage your funds according to your risk profile, not market movement

Tripathi says, “For effective planning, one has to understand the current and future financial goals, risk appetite and portfolio mix. Once this is done, the next step is to allocate assets across different categories and systematically adhere to an investment pattern.”

What this means is that if you think you have made enough in equities and want to move to a safer option, you can always switch to a debt option.

Nanda agrees, “The rules that apply to a person – to understand his/her risk profile and time horizon and then invest with a company that they are comfortable with.” Moreover, Tripathi advices that investors should look at their life stage needs before choosing their ULIP.

5. Look at product features

Tripathi says, “For good long-term value, the investors should look at product – features, flexibility and the charging structure, particularly the fund management charges. Investors should also keep in mind the past performance of the fund with respect to benchmark indices and quality of the stocks in the portfolio.”

ULIP @ 10000 - To buy or not to buy

Markets have touched 10,000 and experts are divided on the direction the markets will take now. But you have to make those tax saving investments before March. So do ULIPs make sense?

The markets are scaling dizzy heights. And insurance agents are using this opportunity to push sales of equity-linked insurance policies. It’s an easy sell after all – the returns of the last year are bound to be attractive bait for prospective investors. But the darker side – ULIPs have long lock-in periods of at least 2-3 years. So if the markets take a dip after you have invested, you will have little opportunity to exit.

To find out if you should invest in equity ULIPs at these high levels. The answer is unanimous – expect returns from ULIPs only in the long-term, irrespective of market levels. For the short-term, stick to mutual funds. Given that ULIPs are good for the long-term, experts suggest tips to make the most of ULIP investments in this bull run.

Some key pointers:

1. Stay invested for the long-term – 7 years minimum
2. Invest systematically
3. Don’t be tempted by a short-term Exit option
4. Manage your funds according to your risk profile, not market movement
5. Look at product features

We will discuss each of these points later in the coming posts.