Agro Dutch Inds - Rs.68.50

Incorporated in 1992, Agro Dutch Industries Ltd. (AGIL) was originally incorporated as Indo Dutch Foods Ltd, by Punjab Agro Industries Corporation Limited in the joint sector along with Mr. Malvinder Singh Bhinder and his Associates and is engaged in producing fresh white button mushrooms. Since then, AGIL has emerged as India’s largest and the world’s second largest integrated producer & exporter of mushroom constituting 85% of India’s total production and exports. Ironically, the company’s production is also equivalent to around 9 per cent of the annual mushroom production in USA

AGIL’s 100% EOU plant is located at Punjab, which produces over 80% of India’s wheat and wheat straw is the most vital substrate for mushroom growing. Interestingly, AGIL is the only integrated producer right from composting, cultivation, processing, can making and canning the mushrooms. Importantly, its high tech unit is equipped with climate controlled, concrete growing rooms, which ensures availablility of mushrooms each day round the year whereas China produces mushrooms only in the winter season. It has a technical collaboration with Dalsem of Holland.

Apart from the various incentives granted in the Union Budget, the biggest positive for AGIL was the sharp reduction in anti-dumping duty to below 1% from whopping 30% by USA. Since AGIL is the largest exporter to USA this change will have a substantial impact. Besides, Mexico has increased the anti-dumping duty on imports from China due to which Mexican orders are now flowing to AGIL. To cater to the increasing global demand and to become the worlds largest mushroom processor, AGIL is going for a Rs.100 cr. expansion and modernization, which will be funded by equity, debt and internal accruals. In the next 12 months, the company plans to increase its production capacity from 36,000 TPA to 50,000 TPA. It also intends to set up a Rs.35 cr. facility to manufacture cans in Chennai and become the No.1 can manufacturer in India. AGIL will also expand its IQF plant and diversify its product range to include frozen mushrooms for which the realization is better than canned mushrooms.

AGIL is also taking various initiatives to restructure its debt and reduce the interest burden (including non payment of dividend), which is as high as 10% of sales and equivalent to Rs.10 per share. Its June’05 numbers were quite disappointing with Sales down 35% to Rs.28 cr. and it reported a loss as the plant was running partially for due to some technical problem in its cooling system. Despite this, the long term prospect of AGIL look very promising and it may post Sales of Rs.140 cr. and NP of around Rs.9~10 cr. for FY06. Since the impact of the expansion will be seem in FY07 only, it may report Sales of Rs.200 cr. and NP of Rs.26 cr. This works out to an EPS of Rs.3.50 and Rs.9 on its diluted equity of Rs.29.50 cr. And as the acquisition cost works out to Rs.48 post-right issue (i.e. 1:1 @ Rs.25) basis, its FY07 earning is currently discounted by only 5 times. Hence only long-term investors are recommended to buy this scrip at declines as it can give 100% appreciation in 15 months.

Laffans Petro - Rs.25.00

Laffans Petro Ltd (LPL) was originally incorporated in 1991 in Maharashtra and was converted into a public limited company in 1992. Later, it shifted its registered office to Gujarat. It manufactures ethylene oxide derivatives such as Ethoxylates, Glycol Ethers, Acetates, Triethonal-amine and Brake fluids and sells it under the brand name ‘Laffcols’. It also produces speciality chemicals like surfactants (based on fatty alcohol), polyethylene glycols etc. Company’s products find application in a number of industries including chemicals, refineries, adhesives, ceramics, cosmetics, leather processing, pharmaceuticals, textiles, inks, paints, lubricants and paper. Its major customers include Goodlass Nerolac, Jenson & Nicholson, Berger Paints, Asian Paints, Castrol, Kalyani Brakes, Pidilite Industries to name a few.

LPL’s manufacturing plant located in GIDC at Panoli in Ankleshwar is set up with technical assistance from Reliance Industries. The unit has manufacturing capacity for Ethoxylated products of 15,000 TPA and Glycol Ether and its derivatives of 12,000 TPA. It is in close proximity to Reliance’s Hazira plant from where LPL gets regular supply of its basic feedstock i.e. Etheylene Oxide. Interestingly, the company maintains its own fleet of specially fabricated EO tankers and is the largest merchant consumer of pure ethylene oxide in the country.

Due to the high crude oil prices, the company’s margin has been under pressure for quite some time. It reported lower profits for FY04 though its topline maintained a healthy growth. But due to better product mix and higher price realization, LPL is expected to end FY05 with double-digit growth in its bottomline as well. It may register sales of Rs.140 cr. and NP of Rs.3.80 cr. for the year ending 30th Sept 2005. This works out to an EPS of around Rs.4.75 on its current equity of Rs.8 cr. For FY06, it can report an EPS of more than Rs.6. With a book value of Rs.33 a market cap of just Rs.20 cr. and FY06 earning merely discounted by 4x, this scrip is available quite cheap compared to its peers. Investors are strongly recommended to buy at the current low levels with a price target of Rs.40 i.e. 70% appreciation in 12~15 months.

STOCK WATCH

Metal scrips have been rising again turning analysts bullish once again towards this sector at least for the short term. In such a scenario, investors can look at Shah Alloys (Code No: 513436) (Rs.207.50). It came out with pretty encouraging numbers for June’05 qtr. While its sales grew by just 15% to Rs.258 cr., its NP jumped 42% to Rs.10 cr. due to lower interest cost. The company is the second largest stainless steel manufacturer and has ambitious expansion plans for future growth. Although it is not the preferred choice among institutional investors, still with an expected EPS of Rs.55 for FY06, its share price has the potential to cross Rs.250 in the near future.

Rama Paper (Code No: 500357) (Rs.42.50) which has recently come out of BIFR on restructuring intiatives is doing extremely well. It is into newsprint, writing & printing paper and duplex board for industrial use. It posted excellent results for June’05 qtr whereby its Sales increased by 15% to Rs.17.35 cr. but its NP jumped 140% to Rs.1.80 cr. on higher OPM. Company is taking all possible steps to repay its high debt and turn debt free for which it is raising around Rs.8.75 cr. through preferential allotment of 25 lakh shares @ Rs.35 each. It can post around EPS of Rs.9 for FY06 even on the diluted equity of Rs.7.50 cr. Scrip can rise by 50% in short to medium term.

Sugar scrips are buzzing on the bourses in anticipation of the bright future ahead. Purely on fundamentals Ponni Sugar (Erode) Ltd. (NSE Listed) (Rs.47.15), a south based sugar producer that enjoys export house status, seems a good bet. For FY05, while its sales increased by 11% to Rs.89 cr. the NP zoomed 140% to Rs.6 cr. posting an EPS of around Rs.7.50 on which it declared 10% dividend. The company is restructuring its debt portfolio replacing its high cost debt with lower interest bearing loans. Besides, it has huge inventory equivalent to around 5 months sales. For FY06, it may report an EPS of Rs.9. Buy at declines as the scrip can cross Rs.60 in a year.

Branded PCs have started to grow at a fast pace as people now prefer branded PCs over assembled computers. Zenith Computers Ltd. (Code No: 517164) (Rs.33.95), one of the largest manufacturer & seller of complete range of PCs, servers, LAN, WAN, Unix product etc is available reasonably cheap. For future growth, the company is focusing on its laptop business and is concentrating to increase exports to the Middle East. For FY06, it can earn a NP of Rs.6 cr. on Sales of Rs.320 cr. resulting in an EPS of Rs.4 on current equity of Rs.15.50 cr. In spite of strong fundamentals and huge growth potential, it enjoys a market cap of only Rs.50 cr. It’s a strong buy as the share price can rise 50% in 9~12 months.

Winsome Textiles (Code No: 514470) (Rs.27.60) belonging to the well-known Winsome group is engaged in the manufacture of a variety of 100% cotton yarn used for weaving and knitting. For the June’05 qtr., it posted encouraging results. Sales remained flat at Rs.31.30 cr. but NP zoomed 150% to Rs.1.10 cr. due to lower interest cost and better operating efficiency. The company has a very small equity of Rs.5.90 cr. but has huge debt of around Rs.75 cr. on which it pays around Rs.8 cr. as interest. In spite of this and coupled with the high depreciation of around Rs.5 cr., the company is expected to report a bottomline of Rs.4 cr. on a topline of Rs.145 cr. leading to an EPS of Rs.7 for FY06. With the benefit of corporate debt restructing and higher margins, it can easily post an EPS of Rs.10~12 for FY07. With a book value of Rs.46 and FY07 EPS discounting of just 2 times, this scrip can be a multibagger in the long run.

With crude oil trading almost near USD 70 per barrel, India Glycols (Code No: 500201) (Rs.173), the only producer of MEG through the molasses route, will definitely benefit as the price of molasses has not risen the way crude oil has. As polymer prices are rising, MEG (which is the basic raw material for polymer) prices have also started to move up. Apart from this, the company has recently completed its expansion and is all set to report a NP of Rs.100 cr. i.e. EPS of Rs.35 on Sales of Rs.725 cr. for FY06. Against this, it has a market cap of only Rs.450 cr. and is trading at a PE of less than 5x. Its share price can cross Rs.250 in the near future. A strong buy.