Pick of the Week: Hindalco

FOR MEDIUM TERM BUY BUY BUY

HINDALCO

BSE Code: 500440, CMP: 53.05, Target: 62

Hindalco Industries Limited, a flagship company of the Aditya Birla Group, is structured into two strategic businesses Aluminum and Copper and is an industry leader in both. A metals powerhouse with a turnover of US$ 14 billion, Hindalco is the world's largest aluminum rolling company and one of the biggest producers of primary aluminum in Asia. Its copper smelter is today the world's largest custom smelter at a single location. Established in 1958, Hindalco commissioned its aluminum facility at Reunion in eastern U.P. in 1962 and has today grown to become the country's largest integrated aluminum producer and ranks among the top quartile of low cost producers in the world. With a strategic intent to achieve vertical integration in the copper business, Hindalco acquired two captive copper mines in Australia - Nifty and Mt. Gordon through Aditya Birla Minerals Limited.

The aluminum division's product range includes alumina chemicals, primary aluminum ingots, billets, wire rods, rolled products, extrusions, foils and alloy wheels. The company's copper product range includes copper cathodes and continuous cast copper rods. It also produces precious metals, sulphuric acid, phosphoric acid, di-ammonium phospate (DAP) and other phosphoric fertilizers, and phospho-gypsum. In May 2007, Novelis became a Hindalco subsidiary with the completion of the acquisition process. The transaction makes Hindalco the world's largest aluminum rolling company and one of the biggest producers of primary aluminum in Asia, as well as being India's leading copper producer.

The stock has come down from over 200 levels to around 160-170. one can buy at current levels for a gain of 30-40 % upside in 6-8 months. Sales and NP for year ended 07-08 were 18982.6 Cr & 2812.9Cr. Sales and NP for latest Quarter 4647.5Cr & 696.8Cr. On YOY basis NP has increased by 11% & based on quarter latest its increased by 16% Dividend during year ended 07-08 was 185%

Pick of the Week: Larsen and Toubro

FOR MEDIUM TERM BUY : BSE Code : 500510, CMP : 760.35

BUY LNT @ 760 Target: 820

Larsen & Turbo

L&T is the best stock in current panic scenario, and at dips, for good upside in medium to long term. Few months back a study was done by Boston Consulting - BCG. They studied more than 3,000 companies from 14 developing countries to pick the top global contenders. L&T topped their lists. They primarily focused on corporations with annual sales of at least $1 billion, and atleast 10 % of their revenues coming from outside their home countries. Larsen & Toubro strength is to build infrastructure which is in short supply in India relative to demand. It is expanding its construction business overseas, primarily in the Middle East. Its global operations currently account for 25 percent of sales. Order book growth of 25% and 30% plus growth in topline over next few years is possible.

Larsen & Toubro (L&T) will set up a mini L&T' in the Middle East, in a bid to enhance its operations in the region. The company plans to increase the overseas share to 25-30% in the coming years and expecting $2-billion revenues from the region by 2010. It has many subsidaries.L&T Infotech IPO is likely in H2 2008. L&T Infra Development will go for IPO by 2009-10. Apart from this there are several triggers for L&T.

L&T will invest close to Rs3,000 crore to build the shipyard-cum-port facility. When fully operational, the shipyard is likely to employ close to 10,000 people.L&T plans to begin construction of ships by end-2009, with plans to deliver the first ship by 2010-11. L&T is the only entity in the private sector that holds a license from the government to build warship Larsen & Toubro Ltd (L&T) is exploring the possibilities of making components of passenger aircraft at its factory at Coimbatore in Tamil Nadu.ndia's demand for airlines at 1,100 aircraft worth $105 billion (Rs4.15 trillion), over the next 20 years, according to the Associated Chambers of Commerce and Industry of India. L&T signs 'favoured partner' deal with Chinese oil giant Sinopec.

Larsen and Tourbo Limited has now become the first Indian company to enter with such a deal with the oil and refining giant, the Sinopec group that is regarded as the largest Chinese company in terms of total sales. L&T has already signed MoUs, with Raytheon Space and Airborne Systems, Boeing Company and EADS N.V., for joint exploration of business opportunities in India's defense sector. The company will be competing with the state-owned Hindustan Aeronautics Ltd. The defence sector placing orders worth $120 billion in the next 10 to 15 years. Larsen & Toubro Ltd., India's biggest engineering company, plans to spend $5 billion on starting a power generation business to tap electricity demand in the world's second-fastest growing major economy.

Latest Results: - Larsen & Toubro's Q2 net profit was up 32.47% at Rs 461 crore as against Rs 348 in same quarter of last year. Its net sales stood at Rs 7682.20 crore as compared to Rs 5499.94 crore. Margins stood at 8.8% versus 10.7% (YoY

Pick of the Week: Suzlon Energy

FOR MEDIUM TERM BUY SUZLON ENERGY

Equity: 299.64 Cr, BSE Code: 532667, CMP : 54.55

BUY SUZLON ENERGY @ 55 Target: 62 to 64

Suzlon Energy is Asia's leading manufacturer of wind turbine generators (WTGs) having around 58% share of India's domestic installations (in 1HFY07). The company is also among the five largest manufacturers of WTGs globally in terms of annual installed capacity. It is the first Asian company to manufacture WTGs, which have MW and multi-MW capabilities. The products manufactured by Suzlon include rotor blades, control panels, nacelle cover and tubular towers. Suzlon enjoys cost advantages over its global competitors by way of operating manufacturing capacities in India. Also, the company has a subsidiary for technology development in Germany and an R&D facility in the Netherlands for rotor blade molding and tooling. These factors combine to provide Suzlon some kind of competitive advantage in the technology intensive and competitive global wind power equipment market.

We believe that, apart from the cost competitive advantage that is inherent in the wind generated power, the sector is also likely to benefit from countries' increasing move towards adopting the Kyoto Protocol towards reducing carbon-dioxide emissions by 2012. As far as Suzlon is concerned, the company's leadership position in the domestic market and rapid global forays on the back of manufacturing cost advantages and an integrated supply chain are likely to stand it in good stead over the long term. Suzlon strong business model in terms of in-house technology and superior design capabilities has led to a consistent increase in its market share. A bulk of Suzlon product requirements are manufactured at its Indian facilities, providing it a significant cost advantage. Further capacity expansion in the US and China will help the company cater to the strong global wind energy demand. It is also expanding capacity of Hansen Transmission, which obliterates concerns of gear box supply. With its people strength, aggressive vertical integration strategy, strong R&D program, expanding manufacturing capability and a clear focus on global high growth markets, Suzlon is poised for continuing its story of breathtaking growth the world over. Its primary customers in India include companies that have manufacturing facilities with high power consumption. These companies have high profitability and seek investment opportunities with stable returns. In India, Suzlon caters to leading corporate houses like the MSPL Limited, Bajaj Auto Limited, Tata Group and Reliance, to name a few. Suzlon order book position is a reflection of its strong market position and consistency in delivering to their customers. Our order book stands at around USD 4,335 million. Our domestic order book position is for a capacity of 441 MW and international orders for 3,726 MW.

Latest Results :- Suzlon Energy has announced its Q2FY09 numbers. Its Q2 standalone net profit stood at Rs 16.98 crore as against Rs 355 crore. The company's standalone revenues stood at Rs 2,226.25 crore versus Rs 1,687.46 crore.

Multibagger: 3i Infotech

3i Infotech
Cluster: MultiBagger
Recommendation: Buy
Price target: Rs79
Current market price: Rs45

Price target revised to Rs79

Result highlights

• 3i Infotech’s top line grew by 28.4% quarter on quarter (qoq) to Rs601.6 crore in Q2FY2009. The Regulus’ acquisition contributed 18.1% to the sequential growth in the top line and the organic revenues rose by 8.7% during the quarter.
• The operating profit margin (OPM) contracted 101 basis points to 20.8% sequentially in Q2FY2009 on account of unfavourable sales mix (higher revenue contribution from low-margin Regulus acquisition). Consequently, the operating profit went up by 22.5% qoq to Rs124.9 crore during the quarter.
• The net income was up 16.5% sequentially to Rs68.4 crore in Q2FY2009, slightly above our expectation of Rs66.6 crore. The net income was lower than the operating profit growth on account of higher interest and depreciation expenses.
• In terms of outlook, 3i Infotech has upgraded its revenue guidance and the fully diluted earnings per share (EPS) on account of Regulus’ acquisition and better than expected organic growth. The company has raised it revenue guidance to Rs2,200-2,300 crore from the previous Rs1,700 crore and has also raised the fully diluted EPS (including foreign currency convertible bonds [FCCBs]) to Rs14-Rs14.5 from the previous guidance of Rs13-13.5.
• The order book grew by 49.6% to Rs1,372.8 crore during the quarter. The order book includes Regulus’ order book of Rs300 crore. Adjusting for the same, the company’s order book grew by 16.9% to Rs1,072.8 crore in Q2FY2009. Though the strong order book provides visibility for FY2010, the uncertain demand environment from the financial meltdown in the USA and the anticipated slowdown in the Europe has put a question mark on FY2011 earning growth.
• On FCCB front, 3i Infotech did not provide for any foreign exchange (forex) loss or gain on outstanding FCCBs. The management has highlighted that the company has made investment in US Dollar, Euro and Pound Sterling from the proceeds of FCCBs, which provides natural hedge against FCCB borrowing. Moreover, the management has mentioned that there is no call option to the bondholder (ie the bondholder cannot redeem the debt before maturity) and there is no reset clause for the exercise price. However, we believe the redemption of FCCBs on maturity would increase the company’s leverage ratios significantly and is likely to remain an overhang on the stock.
• We have already incorporated the acquisition of Regulus in our estimates. Though the company has a strong order book, we have built conservatism in our estimates to reflect the uncertain demand environment. We have incorporated around 10% organic growth and incremental revenues from the acquisitions’ full-year impact in our FY2010 estimates. Consequently, we have revised downward our FY2009 earnings estimate by 1.1% and FY2010 earnings estimate by 10.2%.
• Given 3i infotech’s exposure in the banking, financial services and insurance (BFSI) vertical and the concern over the conversion of FCCBs, the sentiments toward the counter are expected to be weak in near term. However, the same is already reflected in 3i Infotech’s stock price. Considering the strong order book and the Regulus acquisition ensuring an earning growth of 27% during the period FY2008-FY2010, the stock is currently trading at attractive valuation of 3.1x FY2009 and 2.8x FY2010 earning estimates. In fact, the current valuation is the lowest since 3i Infotech’s listing in April 2005. Hence, we maintain our Buy recommendation on the stock with a revised price target of Rs79. We have also lowered our target price/earnings multiple to 5x to reflect the uncertainty on the demand environment in the BFSI vertical and the concern over the conversion of the FCCBs.

Multibagger: Sah Petroleums

Sah Petroleums Limited is a manufacturer of industrial lubricants in India and manufacturing wide range of industrial and automotive lubricants, specialties and process oils etc., under the brand name of "IPOL". The company started in 1973 as a private limited company and became listed in 2004. The company has its plants located at Vasai near Mumbai and at Daman. The plants at Vasai and Daman are equipped with High-Tech blending facilities, quality control labs and automatic filling and packing stations. The company also has one of the largest in-house storage farms in the private sector in India for storing oil sourced from all over the world.

Besides, the company has an all India sales and service network with offices / depots / CFAs located in Mumbai, Pune, Vadodara, Indore, Jabalpur, Jaipur, Delhi, Ghaziabad, Faridabad, Kaithal, Chandigarh, Patiala, Kolkata, Jamshedpur, Hyderabad, Bangalore and Chennai.

Financials:
The latest financials of the company are given as under:-

Particulars	Quarter Ended	Quarter Ended	Quarter Ended	Year Ended	Year Ended	Year Ended
	(Jun 08)	(Jun 07)	(% Var)	(Mar 08)(12)	(Mar 07) (12)	(%Var)
Sales	60.31	44.14	36.6	205.51	179.67	14.4
Other Income	0.76	0.51	49	6.7	3.96	69.2
PBIDT	5.43	4.01	35.4	22.67	15.38	47.4
Interest	0.66	0.48	37.5	2.72	2.93	-7.2
PBDT	4.77	3.53	35.1	19.95	12.45	60.2
Depreciation	0.29	0.21	38.1	1.01	0.74	36.5
PBT	4.48	3.32	34.9	18.94	11.71	61.7
Tax	0.83	0.32	159.4	0.28	1.45	-80.7
Deferred Tax	0	0	-	0.22	0.18	22.2
PAT	3.65	3	21.7	18.44	10.08	82.9

(Rs Crore)

Latest Data As On 20/10/2008
Latest Equity(Subscribed)–Rs. Cr	16
Latest Reserve –Rs. Cr.	67.58
Latest Bookvalue -Unit Curr.(Rs.)	26.12
Latest EPS -Unit Curr.(Rs.)	6.83
Latest Market Price -Unit Curr.(Rs.)	14.4
Latest P/E Ratio	2.11
52 Week High -Unit Curr.(Rs.)	29.3
52 Week High-Date	1/3/2008
52 Week Low -Unit Curr.(Rs.)	8
52 Week Low-Date	10/10/2008
Market Capitalisation (Rs.cr.)	46.08
Stock Exchange	BSE
Dividend Yield -%	1.74

Conclusion:
Sah Petroleums has a current Equity Capital of Rs.16 crores comprising of 3.2 crore Equity Shares of Rs.5 each. The current promoters of the company hold 1.74 crore shares comprising 54.47% of the equity while the Non-Promoter shareholding is 45.53%. 

The Board of Sah Petroleums in their Board Meeting on October 17, 2008 has resolved to issue 1.2 Crore Equity Shares of the company to NAF India Holdings Pvt. Ltd. at a price of Rs 26.65 per equity share on preferential basis, which comprises. This is roughly 27.27% of the diluted equity of the company. Since this investment constitutes acquisition of more than 15% Equity of the company, the transaction will necessitate a public announcement in compliance with the takeover regulations of SEBI. The acquirers alongwith persons acting in concert have made a Public Announcement for acquiring 88 Lakh shares, comprising 20% of the diluted equity at a price of Rs 48.50 per share. In all probability, the current promoters of the company would not be allowed to participate in the open offer. The current public shareholding is roughly 1.46 crore shares. Assuming all non promoter shareholders opt for the open offer and tender their shares, the acceptance ratio would be 60%, which means any shareholder tendering 100 shares in the open offer, will have 60 shares accepted by the acquirer at a price of Rs.48.50 per share. In reality, the acceptance ratio can be higher.

The stock of Sah Petroleums offer an attractive arbitrage with significant upside from the current levels, in these uncertain times.The caution here is that the time schedule for the open offer (December 4, 2008 as date of opening of offer) may get delayed, as has been seen in numerous other cases of open offer, due to delays in approvals & compliances.

Pick of the Week: Hindalco

FOR MEDIUM TERM BUY BUY HINDALCO

Equity: 175.32 Cr., BSE Code: 500440 (Rs. 64.20)


Buy: HINDALCO @ 64 to 65 Target 72 to 74

Hindalco Industries Limited, a flagship company of the Aditya Birla Group, is structured into two strategic businesses Aluminum and Copper and is an industry leader in both. A metals powerhouse with a turnover of US$ 14 billion, Hindalco is the world's largest aluminum rolling company and one of the biggest producers of primary aluminum in Asia. Its copper smelter is today the world's largest custom smelter at a single location. Established in 1958, Hindalco commissioned its aluminum facility at Renukoot in eastern U.P. in 1962 and has today grown to become the country's largest integrated aluminum producer and ranks among the top quartile of low cost producers in the world. With a strategic intent to achieve vertical integration in the copper business, Hindalco acquired two captive copper mines in Australia Nifty and Mt. Gordon through Aditya Birla Minerals Limited. The aluminum division's product range includes alumina chemicals, primary aluminum ingots, billets, wire rods, rolled products, extrusions, foils and alloy wheels. The company's copper product range includes copper cathodes and continuous cast copper rods. It also produces precious metals, sulphuric acid, phosphoric acid, dominium phosphate (DAP) and other phosphoric fertilizers, and phosphor-gypsum. In May 2007, Novelis became a Hindalco subsidiary with the completion of the acquisition process. The transaction makes Hindalco the world's largest aluminum rolling company and one of the biggest producers of primary aluminum in Asia, as well as being India's leading copper producer. The stock has come down from over 200 levels to around 160 to 170. One can buy at current levels for a gain of 30-40 % upside in 6-8 months. Sales and NP for year ended 07-08 were 18982.6 Cr & 2812.9Cr. Sales and NP for latest Quarter 4647.5Cr & 696.8Cr. On YOY basis NP has increased by 11% & based on quarter latest its increased by 16% Dividend during year ended 07-08 was 185%

Multibagger: Sintex Industries

BUY

Sintex Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Rs400
Current market price: 259

Sintex back on the buying list

Key points

* Monolithic business to drive revenue growth: Sintex Industries (Sintex), known for its water tanks, has pioneered the concept of monolithic construction in India and is the market leader in this segment. The business of monolithic structures, used in low-cost housing, is expected to drive Sintex’ revenue growth in future, on the back of the rising need for affordable and mass housing in India. This business division currently has orders of close to Rs1,400 crore and its revenues are estimated to grow at a CAGR of 98% over FY2008-10E.

* Acquisitions strengthen portfolio of plastic products: Sintex has acquired five companies since May 2006, spread across geographies and catering to niche markets. These acquisitions have been timely and would help Sintex to absorb latest technologies as well as expand its reach and customer base in the composite plastic business. The integration of all these companies can lead to substantial benefits in terms of leveraging of the acquired assets and expansion of the client base.

* Prefabs, another feather in the cap: Sintex’ pre-fabricated products are gaining fast acceptance in the country. There is a huge demand for these products which are increasingly finding use in primary school buildings, toilets and telecom tower shelters. Logistics remain a key to success here. Sintex is also increasing its prefabs capacity to 100,000 sq ft per day. The business is expected to grow at a CAGR of 45% over FY2008-10E.

* We re-initiate a Buy: We are re-initiating coverage on Sintex because at the current market price the stock is attractive, given that the company’s earnings per share (EPS) are estimated to grow at a CAGR of 34.7% over FY2008-10. Our price target of Rs400 for the stock is based on the average of our DCF and SOTP valuations. At our target price the stock would discount its fully diluted FY2010 EPS by 12.9x and quote at an EV/EBIDTA of 6.9x.

Pick of the Week: Praj Industries

FOR SHORT TERM MEDIUM TERM

BUY : PRAJ IND

Equity : 36.67 Cr, BSE Code : 522205, CMP : 115.50

PRAJ was established in 1984 with the objective of providing cutting edge solutions to the DISTILLERY INDUSTRY. India was the starting point. Sugar industry in India is the backbone of the rural economy. And, the future of this industry lay in value addition by way of co-products like Alcohol. Quality of Alcohol was the keyword. Praj focused on quality of spirit with the introduction of innovative technologies in fermentation, distillation and wastewater treatment.

Praj applied classical mass and heat transfer theory for more efficient separation of impurities during distillation with the introduction of Bubble cap trays and Hyper stat Grid Trays. In 1991, Praj established an R & D Center. Many new systems have been developed in this R & D Center, resulting in to seven patents. Praj's expertise in fermentation and distillation was complemented by its expertise in wastewater treatment solutions. In 1992 Praj's Sprannihilator System was given an award by the Govt. of India, Ministry of Chemicals & Fertilizers. In 1993, Praj also introduced Brewery Engineering, Plant & Equipment. In 1994, Praj went public. Its maiden IPO was oversubscribed seven times. Praj is listed on the BSE and NSE in India. Around this time, Praj also branched out in the international market with orders from Indonesia and Philippines

Today, Praj offers many more solutions for distillery and brewery wastewater treatment and utilization. PRAJ has also spread it's reach beyond India to over 35 countries ... across 5 continents... with over 350 references. Praj is perhaps the world's single largest supplier of molasses based distillery technology, plant and equipment. Praj has also diversified its range of solutions. Fermentation systems include technology packages for multiple feedstock including cane-molasses, cane juice and filtrate, starch based raw material like corn, sorghum , wheat, tapioca, tropical sugar-beet and many more. Today, Praj's operations cover three continents including Asia, Africa and South America through its own offices and to other alcohol/beer producing countries through its international operations out of India. Praj manufacturing facility is accredited with ISO 9001-2000 and ASME 'U' & 'H' stamp for pressure vessels and heating boilers. Facility for metalworking in Stainless Steel, Copper, Hostelry and higher alloys to international standards including TEMA, DIN, Ad Merk Blotter, BS and IS. The Quality Assurance cell pursues stringent testing at various stages of procurement and production. For every job, a Quality Assurance Plan is drawn up and all inspection is carried out in accordance with this plan. Approved by most leading Engineering Consultancies, the manufacturing facility is well connected by 'all-weather' roads and is located 180 kms from the Port of Mumbai. Sales and NP for year ended 07-08 were 701.6 Cr & 148.1Cr. Sales and NP for latest Quarter 154.8Cr & 24.8Cr. On YOY basis NP has increased by 71% Dividend during year ended 07 08 was 99%

Pick of the Week: Gateway Distriparks

Gateway Distriparks
Cluster: Cannonball
Recommendation: Buy
Price target: Rs236
Current market price: Rs87

Annual report review

Key points

Financial year 2008 proved to be a mixed year for GDL as the company’s top line saw a strong growth in this period on the back of an excellent volume growth. However, a change in the revenue mix in favour of the new businesses and the lower-margin container freight station (CFS) of Punjab Conware led to a decline in the profitability of the company during the year.

Despite challenges, the company expects the growth in the container traffic to continue in FY2009 and is in the process of expanding the capacity at its CFS at Visakhapatnam and setting up a new CFS at Kochi. Its inland container depots (ICDs) at Ludhiana and Faridabad are also expected to become operational in the next couple of years. Besides, the company would continue to aggressively expand its fleet in the rail business and has already placed orders for ten more trains.

The net cash flow from operations after working capital adjustments remained healthy for the company at Rs80.75 crore. The working capital management has improved as the net working capital cycle reduced to a negative 17.5 days in FY2008 as against a positive 14.6 days last year. On account of a strong capital expenditure (capex) owing to its entry into new businesses and a decline in its profitability, the return ratios dipped during the year. The return on capital employed (RoCE) dropped by 1.9% to 12.5% while the return on net worth (RoNW) dipped by 1.3% to 11.1% during FY2008. The current debt/equity ratio is comfortable at 0.3x and despite its big capex plans, we expect the ratio to be maintained going forward.

Increased volumes in the core business, combined with the deployment of more rails on the export-import (EXIM) route, are expected to strengthen the performance of GDL going forward. At the current levels, the GDL stock is trading at 9.3x FY2010E earnings. We maintain our Buy recommendation on the stock with a price target of Rs236.