Our Picks For the Year 2008

On the stocks which are already on our recommended list we feel Orchid Chemicals and Riddhi Siddhi Gluco Biols will emerge as clear winner in this new year.

On the large cap we like

ONGC (CMP Rs. 1236.50/-)

The stock currently trades at 12 times it's FY08E EPS of 105. At the current price the stock is an excellent value buy. Being an Oil Exploration company the high oil prices is set to benefit it's top line and bottom line growth. ONGC's aggressive gas discovery this year provides a positive outlook for re-rating in this counter.

On the Smallcap front our picks are

Shri Lakshmi Cotsyn Ltd (CMP Rs.197/-)

The stock currently trades at less than 6 times it's trailing 12 month EPS. With aggressive expansion plans and strong operating margins among textile stocks, the stock is a good value pick for the coming year.

Himalya International (CMP Rs. 27/-)

The stock currently trades at around 9 times it's trailing 12 month EPS. With growing domestic retail sector this food processing company is expected to see aggressive growth in both top line and bottom line earnings.

On the Midcap stocks we bet on

JK Lakshmi Cement (CMP Rs.198/-)

Coming soon...Watch out our blog for a detailed analysis on JK Lakshmi Cement

Wish you all a very happy and prosperous new year

Year 2007 has been yet another blockbuster year for the stock markets. The market saw a spectacular bull run for the fifth consecutive year.
The sensex this year was up by more than 45%. The broader indices (Midcap and Smallcap) this year posted exceptional returns outperforming the sensex returns.

Year 2008 can be challenging and as per analyst predictions can turn out to be a first bear market after 5 years of spectacular bull run. The questions remains whether the year forward can offset the global economy challenges and continue the bull market running streak.

The challenges that remain ahead in 2008 are

1) Impact due to US Credit Crisis.
2) Deteriorating Consumer Spending in developed economies.
3) Rising cost of commodities and crude oil.

Domestic challenges include

1) High crude oil prices which Indian markets has still not taken into consideration.
2) Continuing Rupee Appreciation.
3) High raw material prices.

Although major challenges are attributed towards developed economy like US, Europe and Japan, we cannot rule out the fact the correction in the developed economy is likely to have a repercussion on the rest of the world. Albeit the fact that the Indian economy has come to stand on stronger structural pillars, the growth trajectory is still highly dependent on the developed economy.

In the upcoming year inspite of the economical challenges we are positive on select pharma stocks, Infrastructure and Energy Sector, Select Automobile counter. We caution our subscriber and readers to take a conservative call on Textile and select metal stocks. We are expecting some revival in International Sugar prices and recommend a wait, watch and pick strategy on this counter. We see a consolidation phase in IT arena with more M&A, at the sametime expect this sector to underperform the broader indices.

Coming soon... Watch out our blog for top picks of the year 2008.

Our performance

As of today our blog completed four months, thanks to the continuing support of our subscribers and readers. Our subscriber feedback has been the main driver in Improving the content of our blog.

All of our recommended stocks have ended this year on a positive note. Neyveli Lignite (241%), Alok Textiles (64%), Chennai Petro (51%), Hotel Leela (46%), Dish TV (41%), Orchid Chemical (33%) and TNPL (27%) have been the star performers.

With this we wish you once again a very happy and prosperous new year and like to start the new year with the quote of Warren Buffet, the greatest investor of the era,
"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1"

Warm Wishes,
Srivatsan Srinivasan

Best Tax Saving Mutual Fund (ELSS)

With the Indian financial year around the corner, Tax planing is one activity which comes on everyone's mind. In this article we will cover one of the tax saving instrument, Equity Linked Saving Schemes (ELSS).

Equity Linked Saving Schemes are mutual funds that invest in the stock market and also give tax benefit under Section 80C. Apart from tax benefits these mutual funds have exploited the rally in equity markets very well.

For three years ended Nov'07 most of the top funds in this category have given an average yearly return of around 60%.

Funds like SBI Magnum tax gain, Principal personal tax saver fund, Sundaram BNP Paribas Tax Saver have generated sensation returns of more than 130% per annum during the last 5 years. Not to say most of this is attributed to the exceptional Bull run of the Indian Stock Market.

With the Global economy showing a steep slowdown, the question remains can these mutual funds continue the sensational returns. Below are out top ELSS mutual funds picks which we feel will continue to beat the Index return.

The parameters we have considered in evaluating these mutual funds are

1) Past performance for the last 5 years.
2) Funds Sectoral concentration.
3) Portfolio and Fund management dynamics.

1) SBI Magnum Tax Gain Scheme

NAV: 67.57 (Dividend), 67.62 (Growth)

Absolute Return

Duration Return (%)
2007....... 54
3 year..... 343.8
5 year..... 1,475.9

Top Investment Sectors - Engineering, Banking/Finance, Oil & Gas, Cement, Metal & Mining
Asset Allocation - Equity (87%), Debt (1.32%), Cash (11.15%)

2) Sundaram BNP Paribas Tax Saver

NAV: 21.77 (Dividend), 45.76 (Growth)

Absolute Return

Duration Return (%)
2007...... 65.2
3 year.... 251.3
5 year.... 939.9

Top Investment Sectors - Banking/Finance, Engineering, Metal & Mining, Oil & Gas, Cement
Asset Allocation - Equity (96.30%), Cash (3.70%)

3) Principal Personal Tax Saver Fund

NAV: 213.88

Absolute Return

Duration Return (%)
2007...... 81.8
3 year.... 237.3
5 year.... 674.6

Top Investment Sectors - Engineering, Metals & Mining, Oil & Gas, Banking/Finance, Conglomerates
Asset Allocation - Equity (93.47%), Cash (6.53%)

The returns in the above mutual fund are subject to market performance. These are high risk instrument as entire asset is allocated to equities.
Individuals with Low risk and moderate return can Invest in the below ELSS mutual fund. The fund has an excellent track record and is one of the few funds to withstand the 2000 market crash.

Templeton India Pension Plan

NAV: 18.02

Absolute Return

Duration Return (%)
2007....... 25
3 year..... 74
5 year..... 176.9

Top Investment Sectors - Banking/Finance, Engineering, Conglomerates, Oil & Gas, Telecom
Asset Allocation - Equity (40.59%), Debt (51.73%), Cash (7.68%)

The above stock (Templeton India Pension Plan) has a lock in period of 3 years and a Exit load of 3% if redeemed before the age of 58 years.
This fund can also be considered as an additional pension plan if vested till the age of 58. Consider for a person with average age of 30, Investing Rs. 10,000/- per year for 20 years (Rs. 2 Lakhs), with a average return of 12% per annum can yield you around Rs. 20 Lakhs at the terminal year of the policy.

For Individuals who have already exhausted their tax eligibility, watch out this page for multibagger stock recommendation.

Tata Steel - A fundamental play

Tata Steel is one of the lowest cost and most cost-efficient steel producing companies in the world.

After a series of acquisition, Tata steel this year acquired 100% shares of corus group, a 21 million tonne capacity steel producer with plants in UK and netherland. The acquisition of Corus has transformed Tata Steel from a domestic steel producer to an international steel company with global scale.

Even though the acquisition was a very high bid compared to it's initial offer the company seems to be doing things in the right manner. Raw material security is a significant imperative for the long-term sustainability of Steel company success. Tata Steel is actively exploring operations in resource-rich countries for iron ore and coal, as also seeking fresh leases for iron ore and coal at various locations in India. On this path tata recently entered in to JV with riversdale.

The company main challenges ahead is the integration of corus. Currently the combined entity Operating margin is around 13% in compared to it's standalone Operating margin of around 40%. The key is to improve the combined entity Operating margin to atleast around 28%.

Other risks we foresee in the medium term are

1) High debt instrument incurred on account of corus acquisition together with corus existing debts in place.
2) Increase in equity capital to fund the acquisition.
3) Commodities prices including steel has shot up enormously in the past few years. With the world economy seeing a recession the prices of commodity is expected to fall drastically.
4) Demand-Supply in steel seen neutral due to huge steel capacity expansion seen in china.
5) Raw material security has reduced to 17% from 80% with corus acquisition.

At the current market price of Rs. 833/- the stock trades at around 12 times it's fully diluted FY08E EPS of Rs. 68. We are not seeing any exceptional rise in the bottom line current year and at this price the stock seem to have a over run up. We expect the stock to correct and stabilize around Rs. 680/- in the medium term (6-8 months). At around Rs. 680/- we initiate a buy call on Tata Steel with a horizon of 3 years for investor with medium to high risk profile. The stock can turn on to be a potential multi bagger for long term investors.

Expansion Details

1) Tata Steel had initiated steps to establish three green field steel plants with captive iron ore mines in Orissa, Chattisgarh and Jharkhand, which would add an additional capacity of 23 million tonnes. In addition the company is planing to increase these capacities to 56 mpta by 2015.
2) The expansion project in it's Jamshedpur works to produce 6.8 mtpa is expected to complete by June 2008.
3) The company is subsequently increasing it's Jamshedpur crude steel production to 9.7 mtpa by FY2010.
4) The company is setting up a coke (main raw material for steel) making facility, with a production capacity of 1.6 mtpa. The production is expected to commence in 2008.

Other expansion details are not covered as part of our current analysis.

Positives

1) Tata Steel branded products Tata Pipes, Tata wiron, Tata Shaktee, Tata Tiscon, Tata structura, Tata bearings, Tata agrico to add exponentially to it's topline and bottom line growth.
2) Domestic steel demand to fuel up companies topline.
3) Tata Steel is the preferred supplier of steel to major auto manufactures including Toyota, Honda, Hyundai, Ford etc.
4) By 2015, the company plans to increase it's steel production capacity to 50 mpta which is around 8 times it's capacity on a standalone basis.

Buy Riddhi Siddhi Gluco Biols Ltd

Riddhi Siddhi Gluco Biols Ltd (RSGB) is the largest manufacturer of starch, liquid glucose, dextrose monohydrate and other derivatives, high maltose corn syrup and byproducts like corn gluten meal and enriched fibre, which are used in various applications such as chocolates, processed foods, glass and medicines, paper, glucose and textiles.

RSGB controls about 17 per cent of the total starch market. With the current expansion in place the market share is expected to increase around 25% by FY09. Currently exports constitutes around 10% of it's revenue and the company is projecting exports to increase 25% of it's revenue by FY10.

RSGB major revenue comes from clients like Nestle, HUL, Ranbaxy, Ballarpur, ITC, Grasim, Indian Rayon and Godrej.

At the current market Rs. 237/- the stock trades at around 10 times it's trailing 12 month diluted EPS of 24. Investor with medium to high risk profile can consider investment into this stock with a horizon of 20 to 24 months. We expect the stock to do EPS of around 38 in FY09E. Based on our FY09E the stock has a target of around Rs. 440/-

Positive on

1) The company recently added 500 tpa of starch capacity which is expected to be reflected in FY09 earnings.

2) Roquette which has around 14.95 per stake in RSGB and is also the world 5th largest starch manufacturer. Roquette will help RSGB add more value added products in its portfolio by way of providing technology and knowhow. The new products will be for nutrition, biotech and health and dextrose for sugar free goods.

3) The new value added product will help RSGB realize better margins.

Risks

1) Increase in Raw Corn Prices. Corn prices are in Increase due to US policy on using corn as alternate fuel.

2) There has been under utilization in the first two quarters of FY07 due to fire in one of it's plant. The company seems to be back in business after 5 months of severe disruption.

Orchid Chemicals - A Value Buy

Orchid is a globally recognized, integrated pharmaceutical company with core competencies in the development and manufacture of Active Pharmaceutical Ingredients (APIs) and Finished Dosage Forms as well as in drug discovery.

Orchid product range for the US market comprises 21 antibiotics and 20 non-antibiotic dosage forms, many of which are also aimed at European as well as other regulated and emerging markets.

Currently regulated markets like US, Europe and Japan contributes to around 77% revenue, while the less regulated market like Hongkong, China, India etc contributes to around 23%.

At the current market price of Rs. 222/- the stock trades at around 13 times it's 12 month diluted EPS of 17.08. Last two quarters the company saw a good spurt in their Operating Margin. The EBITDA margin improved significantly to around 35% during the quarter. This was made possible due to their new product Cefixime and Cefdinir. We expect the company to do EPS of around 21 in FY08. Based on it's FY08E EPS, Orchid has a target of around Rs. 340/- with a horizon of 12 to 15 months.

Betting On

In the antibiotics space Orchid expect to launch new products in the cephalosporins, betalactams and carbapenem spaces between 2007 and 2010 in US, EU and Japan. In the non-antibiotic space, Orchid is developing a robust pipeline of over 80 products covering diverse therapeutic segments.

Orchid is done with it's investment phase and hereon the investment is expected to get translated into revenues. Orchid has invested in and completed projects for expansion and diversification in the cephalosporin, betalactam and non-penicillin, non-cephalosporin (NPNC) or lifestyle drug spaces. Cephalosporin projects have already been translated into revenues; betalactam, carbapenem and NPNC projects will translate into revenues in this fiscal and beyond.

Orchid has also entered into the CRAMS (Custom Research and Manufacture Segment) with two agreements under execution

1) With Pfizer Inc. for animal healthcare products
2) With Biovitrum AB to undertake medicinal chemistry

Fundamentals

1) Cephalosporin and betalactam dosage form facilities would start generating remunerative generic business in Europe from the second half of 2007-08.

2) The Company intends to establish a marketing presence in Japan, the second largest pharmaceutical market in the world (estimated at around US$ 60 billion).

3) Entered into marketing alliances for antibiotics as well as non-antibiotics dosage forms with major pharmaceutical players in the US and Europe, strengthening its regulated market position.

Risks

1) Orchid further dilution of Equity can reduce the Earnings visibility.

2) Rupee appreciation against the dollar can impact the Operating Margins.

3) Cost control and taxes imposed by government can reduce the profitability of the firm.

Buy Alok Industries - A hidden gem in Textile Arena

Alok Industries Operates in a diversified business portfolio ranging from Home Textiles, Retail (Home and Apparels), Garments, Spinning, Yarn and Apparel Fabrics.

Alok revenue mix comes from Home textiles (18%), Textursing (26%), Apparel Fabrics (49%), Garment (2%) and Cotton Spinning(5%).

Currently Exports account for 35% of the total revenue. Out of which exports to US account for 53% and Asia 24%.

At the current market price of Rs. 66/- the stocks trades at around 6 times it's trailing 12 month EPS. Investor with a Low to medium risk profile can consider investment into this stock with a horizon of 18-24 months. Since the company has major additions coming up across it's businesses, it is too early to set a target price for the stock. The company seems to me a multibagger in the making.

Inspite of the rupee appreciation the company current quarter Operating margin were flat at 26.35%. This was made possible due to the mix of it's high margin business and diversified geographical portfolio. The Net profit margin were not impressive but it is expected to increase with the current expansion in place.

Alok's current significant customer base include Walmart, Kohls, Bed Bath and Beyond, GAP, CK, Ambercrombie & Fitch and others.

Expansion Details

1) Alok is scaling up it's Home Textile capacity from 60 to 82.5 million meters p.a. This is expected to get completed by end of FY2008.

2) Alok is adding a Terry towel manufacturing unit of 6,700 TPA and expected to commence operation by end of FY2008

3) Alok is currently increasing it's garments capacity from 8 to 15 million pieces p.a by FY08. The company is expected to get better realization on garments as 80% of it's garment is exported to EU territories.

4) Expansion of it's Texturising capacity from 75,500 TPA to 118,000 TPA is on the way and is expected to add in FY09 revenues.

The company has further expansions to it's plate which will be effective FY09. The details of these expansions are not covered in the current analysis.

Positives

1) The company subsidiary is planing to add around 100 stores as part of it's retail wing (H&A) by end of March' 2008. Currently it operates around 14 stores in major metros.

2) Alok has entered in to a agreement with "Aisle 5 LLC", under which it will manufacture and distribute home decor, bath, sleeping and dining home products in US and Canadian Market.

3) Acquisition of 60% stake in Mileta, a czech company to add to revenues.

4) Alok has signed a trademark license with peacock alley to market it's home linen products in the domestic market.

Risks

1) High Debt/Equity ratio.

2) Frequent increase in equity base which inturn has dampened the Earnings Per Share

3) Further rupee appreciation can impact profit margins of the company.