Stock Idea - Visa Steel

Recommendation: Buy

CMP = Rs 51.85 (at the time of this recommendation)

Target price = Rs 62.2

Key points:

• Background: Visa Steel Ltd. (VSL) is a part of the Kolkata-based Visa Group. The company currently produces pig iron, low ash metallurgical coke, ferro chrome and to some extent chrome concentrates. VSL is currently operating a blast furnace with production capacity of 225000 TPA of pig iron and a stamp charged coke oven plant of 400000 TPA. The company is also operating a chrome ore beneficiation plant and a chrome ore grinding plant with capacity of 100000 TPA each. VSL has manufacturing facilities in Kalinganagar and Golagaon, both in Orissa. The company has also been commissioning a 300,000 tonnes sponge iron facility by FY09. VSL is an emerging integrated special and stainless steel player by Fy11. Apart from India, Visa Steel has a strong global presence in countries like China, Australia, Indonesia, Switzerland, UK and Hong Kong.
• The performance of VSL has been remarkable in the past couple of quarters, mainly because of the sharply higher realisation from its coke and ferro chrome business. The company has stabilised its pig iron facility after a shutdown during the last couple of quarters. One of the two DRI kilns with a capacity of 150000 has already been commissioned. Full benefits are likely to come from Q3FY09 onwards and from Q2FY09. Good backward integration in terms of raw materials and expected firmness in coke and ferro chrome prices should help the company to do well in the near future.
• Since the company is already producing the raw materials for these two plants, there will be a significant cost reduction for the new plants. Adding to this, an additional 25 MW power plant by March 2010 would further help the company to reduce its costs and even earn some revenues as well. According to the latest development, the company is likely to set up a 2.5 MTPA steel plant in Chhattisgarh within three or four years.
• Shifting focus to manufacturing segment: The Q1FY09 result also indicates a significant transformation in the business of the company. Unlike previous years and quarters the revenues from the trading segment have come down sharply. Contribution of the manufacturing segment has been on the rise. Going forward the company plans to further scale down its trading business and concentrate more on its manufacturing segment. These robust numbers in Q1FY09 came despite a nil contribution from one of its major products, that is, pig iron due to a planned shutdown for a refractory lining in Q4FY08. However, the pig iron facility has been stabilised and is expected to contribute to the topline from Q2FY09.
• Sales were 10205 tonnes. The sponge iron plant of 300,000 tonnes capacity, along with 50 (2 x 25) MW power plant through waste heat recovery are expected to start functioning from Q2FY09. Thus, additional revenues from pig iron and sponge iron along with expected higher sales volume in coke and ferro chrome will further boost the topline, whereas lower power cost will support the bottomline from Q2FY09 onwards. Bright prospects for coke and ferrochrome price in the near to medium-term future is likely to help the company to enjoy strong realisations.
• Financials: Continuing its stellar performance since Q4FY08 Visa Steel reported an even more robust growth in earnings during the first quarter (April-June) FY2009, mainly driven by fairly higher sales volume and strong realisations from its two major segments (LAM coke and ferro chrome). Net sales soared more than 275% to Rs 255.73 crore against Rs 68.07 crore in the corresponding quarter of the previous year. Manufacturing activities, with a turnover of Rs 232.4 crore or almost 91% of the total net sales, mainly contributed to the growth in topline. Turnover from trading activities remained far lower at Rs 23.4 crore.
• Valuation: The backward integration into iron ore, chrome ore, steam coal, coke and power will help the company to expand its margins significantly, going forward. In addition, commissioning of fresh capacities in Q2FY09E and late FY10E would help it to expand its topline along with improved cost structure. The planned setting up of stainless steel and bar & wire rod plant during end FY10E is also going to be one of the key triggers for the company.
• I strongly recommend Buy call on this stock with price target of Rs 62.20, which is 3.12x of its FY10E EPS for an investment horizon of 3- 6 months.

Invest Wisely in dividend yielding stocks - Q3-2008

The recent volatility on the stock markets is posing challenges to investors looking for safe returns. High dividend yield stocks offer a safe haven to investors where safety is priority than high returns. So even if the market remains volatile going ahead, an investor can still get a decent return on investment, thanks to good dividend yielding stocks. The dividends are paid no matter what direction stocks moves and can provide a higher yield on investment in a weak market.

Here is the list of the high-dividend-yield companies:

Company name	Expected on	Dividend	Face value (Rs)	CMP (Rs)	Dividend Yield (%)
Banco Products	Aug 21	70%	2	32.3	4.3
Wyeth	Aug 22	300%	10	479.65	6.3
Indiabulls Real	Aug 27	675%	2	312.85	4.3
Indiabulls Sec.	Aug 27	375%	2	72.05	10.4
Savita Chemicals	Aug 28	115%	10	263.95	4.4
Gillanders Arbut	Sep 4	40%	10	86.8	4.6
Andhra Sugars	Sep 12	50%	10	112.4	4.4

Source: ICICIdirect.com Research

Stock Idea - GVK Power

Company background:

GVK is a diversified business entity with its primary focus on urban infrastructure projects. The company also has a significant presence in the hospitality, services and manufacturing sector. In the Indian growth story, GVK has realised the need for infrastructure development and embraced this challenge to create world class infrastructure, particularly in power, airports and roads. The company has an asset base of close to Rs 50 billion (US$1.22 billion) and an order book worth around Rs 150 billion (US$3.66 billion). GVK also has the strength of 7,000 technical professionals with the required capabilities.

GVK Power has two power plants, the 220 MW Jegurupadu-II and 464 MW Gautami plant. These are lying idle due to non availability of gas. Gas availability is expected to commence from October 2008. This should help to increase its revenues in its power division. With projects ranging from power, infrastructure, realty, coal mines and expected oil and gas blocks, GVK Power is expected to put up a good performance in the coming year and post good numbers. Also GVK Power may announce commercial production in next 6 months.

Financials:

• As the company has an exposure towards airports, any unforeseen event like terrorist attacks can impact the arrival of passengers, thereby impacting revenues.
• GVK also has exposure to real estate with respect to areas around the airport. A slowdown in real estate can significantly affect revenues from this segment. Slowdown in India's GDP growth can hamper infrastructure spending and, thus, have an adverse impact on the infrastructure sector.
• The Q1FY09 revenues increased by 10.8% yoy, driven by a 6.2% and 14.6% yoy increase in revenues of the power and roads divisions, respectively. EBITDA grew slower than sales at 3.2% yoy, as EBIT margins of the power division dropped by 570 bps yoy due to major maintenance expenses on one turbine of the J-I power plant.
• Interest cost (-54% yoy) came in lower than expected due to repayment of loans of the J-I power plant. Other income fell 18.6% yoy due to investment of cash surplus in SPVs. GVK provided tax at 9.6% in Q1FY09 as compared to 22.9% in Q1FY08 and estimates of 20%, mainly due to lower other income.
• GVK's share of profits from MIAL increased by 39.1% yoy to Rs 12.3 crore, driven mainly by a 67% yoy increase in non-aero revenues at the Mumbai airport. Consequently, PAT post minorities and after adding share of income from associates, jumped 88% to Rs 40.5 crore.

Valuation:

• GVK pure play on infrastructure: I believe that with the government expected to spend $494 billion on infrastructure spending during the Eleventh Five Year Plan, the company will be on a roll as it will provide ample opportunities for companies like GVK to grow substantially. GVK, with its diverse business mix including airport projects will definitely benefit the company.
• With a diverse portfolio of infrastructure projects and revenue visibility on key projects over the next couple of quarters, GVK is strongly poised to benefit from the huge infrastructure rollout planned in India over the next five years.
• GVK is currently trading at 34x FY10E earnings. I maintain a strong Buy call on this stock with a target price of Rs 49 over next 3-6 months.

Stock Idea - Orchid Chemicals & Pharmaceuticals

Recommendation: Buy (again!!)

CMP = Rs 256 (at the time of this recommendation)

Price target: Rs 300

Key points:

• Orchid Chemicals has entered into a collaborative drug discovery deal with US-based global pharmaceutical major, Merck & Co. As per the deal, Orchid would be undertaking the late-stage development and manufacture of an anti-coagulant drug candidate initially discovered and developed through Phase I clinical trials by Merck. Towards this, Orchid has acquired a majority stake in Diakron Pharmaceuticals, a US-based drug discovery and development company, which has an exclusive license agreement with Merck for the compound.
• Orchid plans to further develop the drug up till Phase II (a) clinical studies and then outlicense it to a global pharmaceutical company for further development and commercialisation, sometime in FY2010. The company will conduct a 25-30-patient Phase II (a) study on the compound which is estimated to cost around $4 million.
• Orchid’s consolidated profits would take a $2-3 million hit due to an increase in the R&D spend on this study. However, the deal is a significant milestone in Orchid’s R&D efforts, as it vindicates Orchid’s R&D capabilities, and could pave the way for more such collaborative drug discovery deals in the future. Orchid would also gain from Diakron's worldwide distribution rights once drug is launched commercially.
• At the current market price of Rs 256, Orchid is discounting its FY2009E earnings by 15.7x and its FY2010E earnings by 11.9x.
• I maintain a very positive and Buy recommendation on this stock with a price target of Rs 300.

This festival season, add Golden Shine to your portfolio

In the current economic scenario where inflation is threatening to get out of control, investors need to invest in asset classes, which have a positive correlation with inflation. Gold is one such asset which has historically done well during periods of high inflation. This is because during such times investors shift their holdings toward hard assets as the purchasing power of paper money starts dwindling.

An analysis of the price of gold during the high inflationary period of 1970's in the United States shows that gold gave handsome returns during the years when inflation was on an uptrend. As average inflation shot up from 6.5% in 1977 to 13.58% in 1980, the average annual price of an ounce of gold also zoomed from USD 147 to USD 615 . Once inflation was brought under control post 1980, the price of gold also started receding.

Gold exchange trade funds (ETF) are one of the most convenient ways of investing in gold.

Gold ETFs are open-ended mutual funds that put your money in physical gold and issue units to you in demat form. Investing directly in to bullion has storage and security issues. In case of jewelry there is too much of spread between the price and the value for it to be considered as true investment. Gold ETFs can be traded easily on the stock exchange at a transparent price and in convenient denominations, making it a more 'liquid' investment as compared to gold bullion. Another advantage is that investments through ETFs do not attract wealth tax provisions.

Currently, there are five gold ETFs listed on the National Stock Exchange. ETFs have outperformed the stock market indices with an average return of 42% in the last one year. For an average investor ETFs are the best route to get more out of his gold investments. An allocation between 5% - 10% of their portfolio to gold is recommended.

Stock Idea - Mold-Tek Technologies

Recommendation: Buy

CMP = Rs 72 (at the time of this recommendation)

Price target: Rs 169

Key points:

• Q1FY2009 revenues of Mold-Tek grew by 23% yoy to Rs 33.9 crore. While the plastic division’s revenues grew by 24% yoy, the KPO division’s revenues grew by 18.2% yoy during the quarter. The operating profit margin improved by 312 basis points during the quarter on account of better profitability of the plastic division. The earnings before interest and tax margin of the plastic division improved by 10 basis points. Consequently, the company’s operating profit grew by 52.6% yoy to Rs 5.5 crore during the quarter.
• The interest and depreciation grew by 63.2% and 20.6% respectively during the quarter. The company’s net income grew by 54.9%. yoy to Rs 4.2 crore. It also announced that the high court of Andhra Pradesh has approved the de-merger of its structural engineering KPO operations and the plastic packaging product manufacturing division.
• Mold-Tek is witnessing traction in its high-rise building business. It has added 2 new & prominent clients in Canada and one in Amsterdam. To cater to these clients and the potential new clients, the company plans to expand its HRB team from 50 to 170 members. It also plans to open a new branch in Nasik and the revenues from this branch are expected to flow from Q3FY2009.
• At the current market price, the stock is trading at attractive valuation of 4.9x FY2009 earnings estimate and 3.7x FY2010 earnings estimate.
• I maintain Buy recommendation on the stock with price target of Rs 169 over next 6-7 months.

Stock Idea - Ratnamani Metals and Tubes

Recommendation: Buy CMP = Rs 786 (at the time of this recommendation) Price target: Rs 1,110 Key points:  The revenues of Ratnamani Metals and Tubes Ltd (RMTL) grew by 31.4% to Rs 249.7 crore on account of a strong volume growth in both the stainless steel and carbon steel pipe segments. The operating profit of the company grew by 24.1% to Rs 56.4 crore in the quarter. The operating profit margin declined by 133 basis points to 22.6% due to an increase in the other expenses. The company's other expenses as a percentage of sales increased by 353 basis points to 11.2% in Q1FY2009. RMTL's interest cost declined by 29.8% while its depreciation charge rose by 20.9% in Q1FY2009. During the quarter, the company made a provision to the tune of Rs 7.86 crore for a mark-to-market loss on its exposure to forex contracts. The reported net profit increased by 12.6% in the quarter. The combined order book of the company stood at Rs 700 crore at the end Q1FY2009 as against Rs 650 crore for the same period last year. At the current market price, the stock trades at price-to-earnings of 6.2x and 5.2x its FY2009 and FY2010 estimates. I maintain a strong Buy call on this stock with a price target of Rs 1,110.