Rallis India - Value Buy

Rallis India is one of India's leading agrochemical companies. The company deals with pesticides, speciality fertilisers, micronutrients and seeds.

Rallis has an extensive distribution system with more than 1,500 distributors and 30,000 dealers nationwide. It also has marketing alliances with several multinational agrochemical companies, including FMC, Nihon Nihyaku, Dupont, Syngenta, Makhteshim Agan and Bayer.

Investor with Low to Medium risk horizon can consider investment into this stock with a horizon of 12 months. At the current price of Rs. 465/- the stocks trades around 5 times it's trailing 12 month EPS of 95. The current quarter results includes a one time profit from sale of land of Rs.873.8 million. Taking into account the income from company core business, excluding the one time payment on sale of land the company trades at 13.7 times it's 12 month trailing EPS of 34. At the current valuation the stock is available at a discount to it's peers like Bayer. Buy the stock with a target price of Rs. 660/- based on it's FY08E EPS of 44.

The company currently has a good domestic presence and the international business currently accounts for just 22% of the company’s revenues. The company currently is taking aggresive initiative to grow it's international business in the short to medium term. Rallis is also looking for strategic acquisitions and licensing deals in the international market to enhance it's global presence. Currently the global agrochemical business accounts for a huge $35 billion of which more than two-thirds is off-patented (without patent exclusivity) products. Rallis initiative of tapping into the off-patented international business can prove better earnings visibility and margins in the future.

Fundamentals

1) In the domestic market, Rallis is the second largest player after Bayer CropScience Ltd.
2) International business expected to grow at a faster rate in days to come.
3) Rallis currently enjoys about 14% market share in the local pesticide and crop-protection market.

Risks

1) The Company´s business is seasonal in nature and the performance can be impacted by weather conditions.
2) Delay in the initiative to increase it's international business.

Buy Hotel Leela venture

Investor with medium to high risk appetite can consider investment into Hotel Leela venture with a horizon of 24 months+. Hotel Leela venture operates in the premium 5-star deluxe category owning 4 hotels in Bangalore, Goa, Kovalam and mumbai with a total of 1086 rooms.

At the current market price of Rs. 49 the stock trades at 15 times it FY08E EPS. Offlate hotel industry in Bangalore is witnessing decline in ARR (Average Room Rate) and Bangalore accounting 46% of it's revenue can impact the company's topline. On the other hand the declining ARR will be offset by better realization from the mumbai property which contributes to 32% of it's revenue.

Since there is no major additions coming on before FY09, the current market price justifies it's forward earnings. Investor considering investment into this stock can buy on declines.

Betting on upcoming projects as below

1) The company is Expanding operation by developing projects in Delhi, Chennai, Pune, Hyderabad and Udaipur.
2) Entered into a Contract for management of The Leela Kempinski Gurgaon, Delhi (NCR) 319 room, and The Leela Residences Kempinski gurgaon 90 serviced residences.
3) Additional 29 more rooms are being added in Goa and also setting up an IT park and a Commercial Complex in Chennai.

The above projects are expected to be completed by FY09 and FY10. The company plans to double it's room count after the implementation of the above projects. The company has opened sales and marketing offices in London, Dubai and appointed GSA in singapore.

After the complete expansion in place the company's revenue is set to grow @75% p.a. The stock can prove on to be a good multibagger play.

Fundamentals

1) The average occupancy rate is around 80%.
2) Strong presence in 5-star deluxe category.
3) Aggressive capex to add exponentially to the revenues.

Risks

1) A slowdown in economy can reduce the occupancy rate and also the ARR.
2) Bangalore accounting for 45% of its revenues, earnings remain vulnerable to decline in tariffs and occupancies.
3) With number of luxury service apartments increasing in last couple of years, corporate occupancy is set to decline.
4) Strong rupee appreciation can offset the margin's partially for dollar based room tariff's.

Dish TV - A Turn around story

Before I begin, If you are a short term trader please skip this recommendation.

Dish TV is one of the early entrant in the Direct-to-home (DTH) arena and currently the only listed player in this segment. As of 30th June'07 Dish TV has a strong 2.1 million subscribers. The company is currently investing to acquire subscribers and is yet to break even. The average cost of customer acquisition currently is around Rs. 2000/- per subscriber. Dish TV currently enjoys a market share of 75% in the DTH business which is going to provide a better edge for the firm when competition steps up with new entrants. The company currently has 170 channels in it's basket, which is the highest in the industry.

Dish TV is currently present in 4300 towns through more than 30000 dealers and 400 distributors. There are over 10000 service personals and 1000 call center agents to deliver more value to customers. Currently top 50 cities accounts to 33% of the subscriber base which shows the demand is equally distributed across pan India and not only in metros.

Based on the Estimates the company is expected to generate Operating profit by FY09 and net profit by FY10. Considering the current demand scenario analyst estimates the subscriber base to grow at compounded annual growth rate of 25% till FY12. The existing subscriber investment is expected to add on to the revenue growth by around 20-35% q-o-q.

The company is currently moving around it's 52 week low of Rs. 69/-. Adopt a invest on decline strategy on this stock. Invest in smaller chunks at regular intervals rather than having it brought in lots.

Fundamentals

1) Market share of 75% in the DTH segment.

2) The company has a established dealers and distributors network and wide coverage across pan India.

Risks

1) The company is currently a loss making firm. It has a negative operating profit till date.

2) Stiff competition expected from new entrants like Reliance, Sun, Barathi etc. in the years to come.

3) Initial investment being made currently per customer acquisition and advertisement costs is likely to impact the operating profit for sometime.

4) The company is planing an additional capex of Rs. 1300 crores through debt and equity. This inturn will increase the interest expense and can further dampen the earnings visibility.

5) Customer service being a key to this industry, the firm is expected to increase the on call personals and call center executive for faster and prompt service. This inturn is going to add to the expenses of the company.

Buy Chennai Petroleum

Despite it's strong underlying business, Chennai Petroleum (CPCL) has always maintained a low profile as compared to it's peers like BRPL and MRPL. With strong GRM's and refinery capacity expansion CPCL outlook seems to be positive and is expected to fetch better valuation going forward.

At the current market price of Rs. 280/- the stock traders at 7.3 times it's trailing 12 month EPS. The net profit in Q1 FY08 increased by 27% y-o-y despite 4% drop in revenues. The decrease in revenue seems to be attributed to the 15 days shutdown of one of CPCL's distillation unit. The Gross Refining Margin during the first quarter was an impressive US $8.76 per bbl as compared to US $6.64 per bbl during the corresponding quarter of the previous year. CPCL Q1 FY08 OPM stands at 7.28% as compared to FY07 OPM of 4.89%, thanks to the strong GRM's.

CPCL expects the Q2 GRM to be around the range of US $7.5 per bbl and the whole FY08 GRM in the range of USD $5.5-7. Based on the long term crude price assumption of USD 60/bbl and Re/USD assumption of USD 40 the stock trades around 5.8 times it's FY08E EPS of 48. Based on the factors discussed earlier CPCL has a target of Rs. 355/- with a time frame of 12 months.

Fundamentals

1) The company is expected to increase their refining capacity to about 12 million tonnes from the current 10.5 million tonnes by mid 2009.

2) Excellent and consistent financial track record.

3) Good track record of consistent and high dividend payment.

Risks

1) Stronger rupee can offset the realization by better GRM's.

2) Drop in price of CPCL products in International Markets.

Buy Tamil Nadu Newsprint (TNPL)

Investors with medium to low risk profile can consider investment in TNPL with a horizon of 18-24 months. At the current market price of Rs. 99 the stock trades at 8 times it's 12 months trailing EPS of 12.5. Despite the firm raw material prices, the company saw a marginal increase in the operating margin during the first quarter of 2008.

The company is in the process of completing it's Rs. 565 crore mill development plan which is slated to go on stream by October '2007. After the mill development plan in place the paper production is expected to raise to 2.45 lakh tpa from the current 2.3 lakh tpa.

The company margins are further set to raise in second half of FY08 after the mill development plan in place. The stock is currently trading at 6 times it's FY08E EPS of 16. Based on it's FY08E earnings the stock has a target of Rs. 132.

The company is planing to set up a mini cement plant with lime sludge generated as a waste product at it's paper unit. This is expected to be operational by march 2009. The company is also evaluating option to build a IT park at it's vacant Ambattur plot.

Fundamentals:

1) Modernization and Capacity increase of paper production.

2) Building Cement plant to utilize the waste generated out of paper production.

3) The company is sitting on an vacant land in chennai. Evaluating IT park to be constructed over there.

Risk:

1) Increasing raw material prices.

2) Rupee appreciation to crunch margins on paper exports.

3) Decline in International paper prices can impact the Operating margin of the firm.

Buy HCL Technologies

At the current market price of Rs. 284, the stock trades at 17 times it's trailing 12 months EPS. The stock is currently available at a huge discount compared to other large cap IT shares such as Infosys, Wipro etc.

The company Jun'08 quarterly results were good compared to Tier 1 companies due to it's pro-active hedging strategy. The company has hedged around 85 percent of revenues which should partly mitigate the risk of rupee appreciation.

Based on Jun'08 EPS, the stock trades at 13 times it's FY08E earnings. Investment can be considered in this stock with a horizon of year to two. Based on it's FY08E earnings the stock has a target of Rs. 390.

The company has seen good increase in business from the Asia-Pacific and European region. This together now constitutes to around 30 percent of it's revenue and provides a better geographical spread of revenues.

Fundamentals:

1) Better geographical spread and pro-active hedging strategy against rupee appreciation.

2) Strong multi million dollar clients with repeat business.

3) The company has unique client profile in aerospace and automotive which contributes to 25 percent of it's revenue.

Risks:

1) Further rupee appreciation.

2) US economic slowdown and also MNC's like accenture and IBM offering services comparing to the billing rates of Indian companies.

3) Very high employee attrition.

Buy Neyveli Lignite

At the current market price of Rs. 73, the stock trades at 19 times it's trailing 12 month earning per share. This makes the stock sufficiently valued at this level.

On the other hand the stock is available at a discount to it's peers based on it's Annualized quarterly June' 08 EPS of 6.72. The stock is trading at 11 times it's FY08E earnings. Neyveli had taken an hit on it's financials for the last two years due to delay in acquisition of land which had taken an hit in lignite production and due to the order passed by CERC on lignite transfer pricing upto 2004. Having the above two already taken care this must not impact the earnings in the quarter's to come.

Based on FY08 earnings Neyveli has a target of around Rs. 105 at a one year time horizon. Not to mention the massive expansion going on which will start reaping benefits in FY09. If the investor has patience to hold the stock for three years this can turn out to be a multibagger stock.

Fundamentals:

1) Good financial track record.
2) High profit margins (more than 30%)
3) High cash reserves and low debt position
4) Massive expansion ahead.
5) Disinvestment of additional stake a bonus.

Risks:

1) Any New order affecting the pricing of power and lignite.
2) Delay in getting the project approval for expansion, which is happening now.

Updated on 24-Sep-2007

Target 1 of Rs. 105/- as recommended above crossed today. Return of 50% within one month of recommendation.

Stock Long term growth story still intact. Hold on if you are a long term investor.
Short term traders can book partial profits at current levels and re-enter on dips.