3i Infotech Ltd - 145.00 Rs

Established in 1993 by ICICI Bank, 3i Infotech (3i) has progressed over the years from a back office processing unit of the ICICI group to a technology company providing IT services and solutions to over 500 clients in more than 50 countries through 10 offices worldwide and 10 development centres in India. Infact it has emerged as the fourth largest Indian software products company offering a comprehensive range of software products & solutions primarily for banking, insurance, capital markets, mutual funds, telecom, manufacturing, retail & distribution industries. In addition, it offers a broad range of software services such as custom software development, IT consulting, enterprise application integration (EAI), business process outsourcing (BPO), managed IT Services, and specialized services such as product re-engineering, compliance consultancy, data warehousing, business intelligence etc. Besides, 3i is recognized as one of the major national players in the e- Governance consultancy space in India. Importantly, 3i derives revenues from products and services in a 1:1 ratio which differentiates it from other IT companies. Premia, Kastle, Amlock, iBoss, Data Scan, Awacs, Mfund, Veda, Xroadz etc are few of its popular software products for core banking, insurance, stock exchange surveillance, treasury, risk & wealth management, mutual funds etc. It also has an ERP product suite, providing solutions for the retail, manufacturing, distribution, trading, fashion, and automotive, pharmaceutical and chemical industries. Interestingly, 3i provides complete end-to-end outsourcing solutions to various industries mainly in the domestic market and specializes in non-voice based BPO services. This division is doing extremely well with nearly 15% of the total revenue coming from it. 3i’s quality certifications include SEI CMMI Level 5 for software business and ISO 9001:2000 for infrastructure services and BPO operations.

Geographically, 3i derives around 30% revenue from India, 25% from USA, 20% from Western Europe, 15% from Middle East & Africa and the balance 10% from Asia Pacific region. Apart from ICICI group being its largest customer, 3i boast of serving international biggies like Prudential Assurance, Finansa, AIG, Emirates Bank, RAK Bank, Hong Leong Bank, SBI Factors, Oriental Insurance, HP, GSK, Al Ansari, Solidarity Islamic Insurance, Commercial America Insurance, Standard Chartered, Deutsche Bank, Pidilite Industries etc. In order to beat the competition and grow at a rapid pace, company is betting high on inorganic route and has adopted an acquisition-led strategy to acquire new capabilities and foray into new geographies in the BFSI space. Ironically, it has made over 20 acquisitions globally in last few years and is further looking for acquisition opportunities in China, North America (Brazil and Spain) market. At the same time it is also growing organically and has launched its first International Data Centre in Chennai which will offer managed hosting services for application and disaster recovery solutions. Additionally, it has introduced its remote IT infrastructure management services through its global network and security operations center. Meanwhile, it also setting up mini centres of excellence for operating systems (Microsoft, Red Hat Linux, AIX, Solaris), databases (Oracle, MS SQL, MySQL, DB2), messaging solutions and IT security labs for ethical hacking and vulnerability assessments and niche application infrastructure solutions.

And most importantly, with net dollar inflow of less than 10%, 3i is hardly affected by the rupee appreciation compare to its peers. In short, company has a well diversified and a de-risked business model in terms of offerings (products/services nearly 1:1 with coverage of entire BFSI spectrum), geography (no region >30% of revenues) and customers (ICICI Bank and other Top 10 clients’ concentration has been on a decline). To fund its various acquisitions, company raised nearly Rs 175 cr and Rs 400 cr in April’07 & July’07 respectively thru FCCB route. These are convertible into equity shares @ Rs 154 & Rs 166 respectively leading to an equity dilution of approx 30% going forward. On the back of excellent H1FY08 nos and considering the strong order book position, company is expected to report total revenue of Rs 1200 cr and net profit of Rs 175 cr. This translates into an EPS of Rs 13.50 on current equity of Rs 130 cr. But on a fully diluted equity of around Rs 175 cr, EPS works out to Rs 10. Due to strong economic growth in India & acquisition led strategy; 3i has the potential to post an EPS of about 13 Rs for FY09. Hence at a reasonable discounting by 18x against FY09 earnings, scrip can move up to Rs 230 (i.e. 60% appreciation) in 12~15 months.

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Bihar Tubes Ltd - 200.00 Rs

Incorporated in 1986, Bihar Tubes Ltd (BTL) is primarily engaged in manufacturing of steel pipes & tubes. It has broadly divided its product range into four segments – galvanized pipes, ERW pipes, pre-galvanized pipes and hollow pipes. The first two categories are the most common type of pipes manufactured by several organized as well as unorganized players under stiff competition with low margin. But for the third segment i.e. pre-galvanized pipes, BTL is the pioneer and only company in India producing it. Although a new product in India, pre-galvanized pipes & tubes are very successful in international market due to saving on zinc cost as they have a zinc coating of 80-120 gm/mt while that for galvanized tubes is 400 gm/mt. And for the last segment viz. square and rectangular hollow pipes, BTL is the second largest manufacturer in the country after Tata Steel. Hollow pipes are mainly used by construction and infrastructure industry as the cement concrete structures are being replaced by steel sections. Today BTL, possess the capability to provide nearly 150 kinds of tubes across thickness, layering, treatment and chemical composition, thereby emerging as a one-stop shop for customers with varied requirements. To summarize, company’s products are used in diverse sectors linked closely to India’s growth like oil and gas, water management, mass rapid transportation, construction, engineering, automobiles, sugar, power and agricultural equipment industries. Moreover around 10% of revenue comes from export to over 35 countries like US, Colombia, Nigeria, Ireland, Middle East, Africa and Germany.

BTL currently has four tube production mills in Sikandarabad, UP out of which three have their technology imported from Kusakabe, Japan. To cater the rising demand, last fiscal only company has increased its overall capacity of steel pipes and tubes from 60,000 to 125,000 MTPA. BTL has a network of 100 distributors throughout the country with a strong presence in north and south India where it markets products under the popular 'APL Apollo' brand name. It also sells directly to various institutional customers from engineering and construction space such as L&T, BHEL, Reliance, Nagarjuna Construction, BSNL, Suzlon Energy, Era Construction, Simplex Infrastructure. Indian Railways, Tata motors, Gammon, BL Kashyap, Triveni Engineering, among others. As a step towards backward integration, BTL took over a small company called Apollo Metalex having a capacity of 24,000 MTPA for galvanising sheets. Besides to improve its profit margin, it is shifting its product mix in favour of hollow sections and pre-galvanized products since these earn relatively higher realizations. It is also aggressively setting up branches across India with a view to having a pan-India presence. For future growth, BTL is foraying into the automobile sector by creating a capacity of 35,000mtpa for boiler tubes, air heated and shock absorber tube. It is setting up a facility in Maharashtra to manufacture infrastructure pipes, API grade pipes and precision tubes. The company is also looking to scale up the value chain via the manufacture of 20”- diameter tubes and is currently setting up a tube mill for this purpose. With a view to curtail input costs, company is undertaking backward integration via the set up of a fully integrated 100,000 MTPA HR skelp plant at Sikandarabad.

In a bid to ramp up its capacity and expand its geographical reach, BTL is making an acquisition in western India and is in the final stages of negotiation. In future company intends to have total installed capacity of 300,000 MTPA along with its own coating plant. Moreover, recently BTL has entered into 80:20 joint venture agreement with Kusakabe to set up a 12,000 MTPA facility for manufacture of stainless steel pipes and tubes with an investment of 20 cr. To fund its growth plans, company has already issued 31.75 lac warrants to be converted @ Rs 140 per share. Further, company is contemplating to come out with an FCCB issue to the tune of US $ 20 million. On the back of strong performance for the first two quarter, BTL is expected to end FY08 with sales of Rs 260 cr and NP of Rs 16 cr. This leads to an EPS of Rs 25 on current equity of Rs 6.40 cr whereas the diluted EPS works out to Rs 12.50 on equity of Rs 12.75 cr. For FY09 it has the potential to post an EPS of Rs 17~18. Hence, investors are advised to buy at sharp declines with a price target of Rs 250 (i.e. 25% returns) in 12 months.

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STOCK WATCH

Although share price of all the companies with real esate tag has shot up dramatically, Bombay Oxygen (8000.00) led by Mr. Shyma Ruia is trading at 40% discount to its recent high of Rs 13000. Company is basically into production of industrial gases like oxygen, nitrogen, argon, acetylene etc. Offlate, company has completely shifted its manufacturing plant from LBS Marg, Mulund-Mumbai to Kalwe-Thane thereby making the 14 acre land totally free for development. This is the prime propery just opposite famous Nirmal Life style mall and can be utilized for commercial as well as residential purpose. Ironically, company is available at an enterprise value of only Rs 130 cr although the value of this Mulund land alone is worth Rs 300 cr at current market price. And if company plans to develop it under joint venture it can easily generate Rs 500~600 cr in couple of years. Besides, being a 50 years old company it has a huge gross block 71 cr with Rs 11 cr debt on a very tiny equity of Rs 1.50 cr having face value of 100 Rs per share. On the back of healthy reserves of 37 cr its book value stands at Rs 2550. Promoters are holding 59% stake out of which 20% is under litigation and hence company is getting very poor valuation. Also scrip is traded only in physical form. Still it’s a value buy as share price can quadrupled once the matter is sorted out.

JK Lakshmi Cement (205.00) is expected to report very encouraging nos for Dec qtr on back of saving in power cost coupled with higher price realization for cement. Company has fully commissioned both its captive thermal power plants of 18 MW each, thereby making significant savings in power cost which will boost its bottomline. Secondly, company has replaced high cost debts by cheaper funds to the extant of Rs 325 crores, which will reduce interest costs going forward. On the other hand its expansion project for enhancing the capacity from 3.4 million MT to 5 million MT per annum is progressing as per schedule and is expected to be commissioned by Oct 2008. It is also looking to put up a new Greenfield plant in Chhattisgarh having the capacity to produce 2.5 million tonnes of cement per annum. Moreover, it is operating 5 RMC (ready-mix concrete) plants and hopes to add at least 5 to 6 plants more in near future. On the back of terrific nos for Sept qtr, it recorded 50% growth in sales to Rs 534 cr and Net profit increased by 130% to 142 cr for H1FY08. Hence even on a conservative basis, it may clock a turnover of 1100 cr and PAT of 210 cr for FY08 which translates into EPS of Rs 37 on current equity of Rs 57 cr and Rs 34 on diluted equity Rs 61.20 cr. Investors can buy at current levels for a target of Rs 280 in six months or so.

Although share price Liberty Phosphate (31.00) has shot up smartly in recent past still it’s trading cheap compare to other fertilizer scrips. Company is the largest manufacture of Single Super Phosphate, commanding more than 14% market share. Presently, it has four manufacturing units having total installed capacity of 463,000 MTPA of SSP fertilizer. Against this, its production stood at only 280,000 tonne for FY07 i.e. capacity utilization of merely 60%. For current fiscal company is estimated to produce and sell around 3,50,000 tonne representing 25% rise in volume terms compare to FY07. In order to fund its higher working capital requirement and improve the operating efficieny, company earlier raised Rs 10 cr thru preferential allotment of equity shares and redeemable preference shares. With this placement, promoter raised their stake to 43% currently from 36% in Dec’06. Now, company is meeting on 11th Jan 2008 to consider raising further capital thru another preferential allotment of equity shares to promoters. Hence company is now on a strong footing and may end FY08 with sales of 175 cr and PAT of 3 cr. This works out to an EPS of 5 Rs on diluted equity of 6.13 cr. At the current market cap of merely 20 cr, this scrip still has the potential to appreciate 50% from current levels. Accumulate at declines.

Once again GM Breweries (148.00) has come out with very encouraging set of nos for the Dec quarter. Although, sales improved by only 10% to Rs 49 cr but NP shot up 85% to Rs 4.40 cr on back of lower raw material cost. It recorded a healthy OPM of 14% against 10% last year. It is the single largest manufacturer of country liquor in the state of Maharashtra and enjoys virtual monopoly in the districts of Mumbai, Navi Mumbai and Thane. With the installation of additional bottling lines last fiscal, company now has the capacity to process 8.26 crores bulk litres of country liquor per annum. Hence it is expected to end FY08 with sales of Rs 190 cr and NP of Rs 15.50 cr. This works out to an an EPS of Rs 17 on equity of Rs 9.40 cr. Having a gross block of whopping Rs 68 cr, low debt equity ratio, strong cash flow, decent margins etc, company deserves much better discounting. With 68% holding promoters are investor friendly and has an uninterrupted record of dividend payment from the day of listing. At a modest discounting by 12x times, scrip has the potential to cross Rs 200 mark in 3~6 months. Long term investor can expect a price target of Rs 325 in 15~18 months.

Value Picks for 2008

Value Picks for 2008

Sr. No	Company Name	Current Price (Rs)	Target Price (Rs)	Expected Appreciation*
1	ANG Auto	165	225	40%
2	Bihar Tubes(avoid)	195	300	50%
3	GM Breweries	140	225	60%
4	Hind Rectifiers	210	325	55%
5	Honda Siel Power	270	375	40%
6	Indo Asian Fuse Gear	155	220	40%
7	International Combustion	545	875	60%
8	Lokesh Machine	125	175	40%
9	Mazda Ltd	95	150	60%
10	Micro Technologies	310	450	45%
11	Numeric Power	850	1350	60%
12	Rama Paper	33	50	50%
13	Spanco Tele	230	325	40%
14	Stone India	175	250	40%
15	Tera Software	95	175	80%

In alphabetical order * By Dec 2008

Smart Investment (Guj)

Orient Ceramics

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Kamanwala Housing

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Small & Beautiful (Guj)

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Although share price of Anjani Portland (50.00) has moved up smartly in recent past still it has lot of steam left. Under the leadership of Mr. K V Vishnu Raju, company has made a strong turnaround in FY07 and is further growing at a healthy pace in FY08. Notably, it has a captive limestone mine, captive power generation unit and state-of-the-art technology from Nihon of Japan. In line with its modernization and diversification plans, company acquired a grinding unit in an open auction conducted by A.P.I.D.C which has further augmented its grinding capacity. On the back of robust performance, company gave maiden dividend of 10% for FY07. For H1FY08 it registered 50% growth in sales to 59 cr and 60% rise in NP to 8.60 cr. On an estimated OPM of around 26~27%, it can record a PAT of 16 cr on topline of 125 cr for FY08. This works out to an EPS of 9 Rs on equity of 18.40 cr. Buy for a target of 75 Rs in a year’s time

Post its recent merger with two group companies M/s N.R. Paper and Boards Limited and Suman Paper and Boards Ltd, NR Agrawal Industries (34.00) has become one of the largest manufacturer of double coated duplex boards (heavy weight coated) and newsprint with total installed capacity of 130,000 MTPA for duplex board and 40,000 MTPA for news print. Besides, to diversify its product range, company has started manufacturing cream wove i.e. writing & printing paper form this fiscal. Moreover, as per unconfirmed reports it has acquired 90 acres of land near Vapi to set up a 125,000 MTPA Greenfield plant for newsprint cum writing and printing paper. Despite company facing some pressure on its margin, it may end FY08 with sales of Rs 325 cr and PAT of Rs 9 cr. This translates into EPS of little more than Rs 5 on current equity of Rs 17 cr. Accumulate at declines.

Aro Granite (95.00) is one of the largest manufacturer and exporter of modular granite tiles and slabs with the share of more than 5% of India’s total export of granite products. Company is in the midst of expanding its tile capacity to 5,40,000 sq mtr from 1,80,000 sq mtr, whereas slab capacity will be enhanced to 3,90,000 sq mtr from 2,95,000 sq mtr. To meet its raw material requirement company has started importing rough granite blocks from Saudi Arabia, Norway, Brazil & Finland etc. As company has reported lacklustre performance for first two qtr its share price hasn’t moved for quite long time. For FY08 it is expected to report a topline of Rs 110 cr and PAT of Rs 14 cr i.e. EPS of 19 Rs on small equity of 7 cr. In order to increase the liquidity, the equity shares of the company have also been listed in NSE from April.2007. On the back of huge expansion, FY09 is expected to be much better and share price can appreciate by 50% in 12~15 months.

Belonging to Aditya Birla group, Bihar Caustic (90.00) is among the leading manufacturers of caustic soda, chlorine and hydrochloric acid. After increasing its caustic soda capacity by 50% last year, company is now further expanding it from 225 to 265 TPD by addition of electrolysers as well by debottlenecking. Besides, it is putting up a stable bleaching powder plant at an estimated cost of Rs.7.50 cr to be operational by mid 2008. But most importantly, company has recently set up an aluminium chloride project and expects to produce and sell about 12000 MT of aluminium chloride in FY08. On the margin side, company is consistently reporting an OPM of around 45% and NPM of more than 20% which is excellent as per any standards. For FY08 it is estimated to clock a turnover of 185 cr and profit of 40 cr which leads to an EPS of 17 Rs on equity of 23.40 cr. Fundamentally, the scrip can move upto Rs 120 in six months. Moreover, there are also rumors of company getting merged with Hindalco which can trigger the share price further.

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