Kallam Spinning - Rs.32.00

(KSL) was promoted by Shri Kallam Haranadha Reddy and associates and belongs to the reputed Kallam Group of Industries with vast experience in ginning, pressing, oil extraction, spinning and other cotton related business. It was originally incorporated as Kallam Agro Ltd but its name was subsequently changed to KSL in 1997. Since then, it has emerged as leading producers of combed cotton yarn in South India. With the abolition of the quota system, textile/garment export from India is poised for a massive growth in future which means proportionate rise in the demand of yarn as well. Besides, favourable govt policies and stable cotton prices are good for cotton yarn manufacturers. Due to better price parity and strong demand, KSL has partially shifted the thrust from exports to the domestic market but is still planning to set up an EOU spinning mill to tap the higher end market of USA and Europe.

KSL’s Mill is located at Guntur in AP with an installed capacity of 22,608 spindles. It also has a Hydel power plant with a capacity of 1.6 MW for captive consumption. To cater the rapidly increasing demand, KSL is implementing Rs.22 cr. capex plan under which it is putting up a new spinning mill at Dhulipalli near Sattenapalli in Guntur with a production capacity of 14,500 spindles. The whole project will be funded mainly through debt and partially through internal accruals and is expected to become operational by the end of this fiscal. Besides, there are good prospects for expansion of its spinning capacity because of the booming demand for cotton yarn in the post quota regime.

On the financial front, KSL has already got a term loan of around Rs.15 cr. from Andhra bank under TUF scheme and the bank has reduced the interest rate to 9.50% for all existing loans. It sales were flat at Rs.32 cr. in FY05 but NP zoomed 170% to Rs.2.70 cr. posting an EPS of Rs.4 on its equity of Rs.6.85 cr. Notably for the first six months of FY06, it has already earned a NP of Rs.2.52 cr. which is equivalent to its NP for the whole of FY05. Hence for the full FY06, company may report a topline of Rs.35 cr. and bottomline of Rs.4.50 cr. which transforms into an EPS of around Rs.7. Moreover, the company is yet to receive balance insurance claim of Rs.1.51 cr. from New India Assurance which will add to its other income in future. FY07 will even be more rosy due to the impact of expansion and it can sport an EPS of Rs.11~12. Investors are strongly recommended to buy as this scrip, which can double in 12~15 months.

STOCK WATCH

Bhagyanagar Metals (Code No: 512296) (Rs.27.50) is a good speculative buy. Company has finalized a scheme of restructuring under which it will demerge its metal / telecom business to Surana Infocom / Bhayanagar Telecom and will acquire infrastructure business from Surana Infocom / Surana Telecom. It will also merge Value infrastructure, an unlisted company with itself. Accordingly it will rename itself as Bhagyanagar Infrastruture, a pure infrastructure company and is planning to raise Rs.70 cr. through FCCB route to part-fund the development of an IT park, which would have about 3,50,000 sq. ft. of office space near the GE facility at Hyderabad. Only aggressive investors are advised to buy as promoters don’t enjoy good reputation as far as share market is concerned.

In a market where engineering and infrastructure companies are richly discounted even against their FY07 earning, Petron Engineering (Code No: 530381) (Rs.222) is available at reasonable PE multiple of 12 against its FY06 earning and at a market cap of with Rs.160 cr. Investors might not be aware that it has orders in hand of nearly Rs.400 cr. as it doesn’t inform the exchange every time it bags an order. For FY06, it may report a turnover of around Rs.385 cr. and NP of Rs.13.50 cr., which works out to an EPS of Rs.18 on its tiny equity of Rs.7.50 cr. A solid buy.

Sugar is the flavour of the season and the entire sugar sector is being re-rated. Simbhaoli Sugar (Code No: 507446) (Rs.119), one of the oldest and largest integrated sugar producers is still available at a reasonable valuation. It operates two mills in UP, one having a capacity of 9500 TCD at Simbhaoli and the other at Chilwara whose capacity is being expanded to 6000 from 3800 TCD currently. It is also setting up a new plant with 4500 TCD capacity at Ghaziabad, which will be operational form next season i.e. Oct 2006. Apart from setting up a new 60 KLPD ethanol plant at Chilwara, the company is expanding its ethanol capacity by 30 KLPD and distillery capacity to 120 KLPD at Simbhaoli unit. It also intends to setup a co-gen facility of about 26 MW and 24 MW at both its plant. Just grab it before it shoots up.

Due to the fall in freight rates, shipping sector has been an underperformer in 2005. Still GE Shipping (Code No: 500620) (Rs.243) has performed reasonably well and made a smart upmove last week. Its demerger is already finalised and shareholders will get 4 shares of GE Shipping and 1 share of Great Offshore Ltd. for every 5 shares currently held. This will unlock shareholder value substantially as the offshore business is richly discounted by the market. From the CMP 20~25% appreciation can easily be expected post demerger. Hold it patiently as the dividend yield is also good.

Mid caps and small caps are back in action, hence Fenoplast (Code No: 526689) (Rs.19) is expected to see some action in the near future. It is a reputed manufacturer of PVC leather cloth and PVC films. PVC cloth is used for domestic upholstery, automobile upholstery, soft luggage, footwear industry etc whereas its PVC films are used for blister packaging meant primarily for the pharmaceutical industry. Nearly 30% of the production is being exported to over 28 countries including UK, USA, Germany, France, Holland, South Africa and Singapore and it has a huge reputed domestic clientele. For FY06, it may post sales of Rs.100 cr. and NP of Rs.1.40 cr. i.e. EPS of Rs.3 on its small equity of Rs.4.60 cr. Having a book value of Rs.27 and market cap of merely Rs.9 cr. it can once again test its high of Rs.29.

Indo Asian Fuse Gear (Code No: 532658) (Rs.158) is among the top three players in the domestic compact fluorescent lamp market besides being a leading manufacturer of electrical safety devices such as miniature circuit breakers, HRC fuses, transformers, switchgears wires & wiring accessories, industrial plugs & sockets, contractors relay, distribution boards etc. It is undergoing rapid expansion by setting up 3 units at Haridwar at an investment of Rs.66 cr. For future growth, the company has entered into a joint venture with Nordex Lighting Spa of Italy to manufacture specialized outdoor lighting equipment. Company is planning to acquire two firms in the UK and Germany in a bid to ramp up its international presence. For FY06, the company is expected to post an EPS of Rs.12 which may shoot up to Rs.18-20 in FY07. Scrip has the potential to touch Rs.250 within 12 months.

Nilkamal Plastics - Rs.191.00

Nilkamal Plastics Ltd (NPL) is India's leading manufacturer of moulded furniture and material handling crates. In fact, it is the world's largest manufacturer of moulded furniture and Asia's largest plastic processor of moulded products. Under its material handling division, NPL has the largest variety and widest range of plastic crates and an elite clientele from all sectors of industry & business like automobiles, bottling, breweries, engineering, electronics, food processing, retail chains, logistics, pharmaceutical, textile, garments, dairy, fruits and vegetables etc. The furniture product range comprises chairs, dining tables, coffee tables, sofa sets, trolleys, shoe racks, multipurpose racks, baby chairs, stools etc to mention a few. NPL is now in the process of launching moulded plastic office furniture under the brand name ‘Novella’, apart from introducing storage cabinets and wrought iron look alike rocking chairs for the home segment. Soon it will be launching a range of cabinets for libraries/studies and innovative designs of sofa set among other products. It also has its exclusive stores – ‘Nilkamal Home Ideas’ in as many as 20 B&C class towns and is planning to set up 15 more stores in the next six months.

NPL has five huge state-of-the-art manufacturing facilities located across the four corners of the country besides having joint venture manufacturing plant in Srilanka & Bangladesh. It also has warehousing facility along with marketing office in Ajman Free Zone in UAE, which caters to the requirement of customers in the Middle East & Africa. Recently, NPL diversified into lifestyle furniture business by setting up special large format retail chain under the brand name ‘@home’ that offers imported furniture, home furnishing and accessories. It has already set up 3 stores each in Pune, Mumbai & Ahmedabad and is planning to set up 27 more @home stores in major cities in the next three years and also set up over 40 franchisee operations in smaller towns and cities. Although most of the products available at these stores are currently imported, NPL is looking at tie-ups with international furniture and home furnishing brands to exclusively market them through the @home stores. Also in the pipeline is setting up of a full-fledged kitchen and office solutions facility within the @home stores under the brand names @kitchen and @office respectively. In addition to this retail venture, NPL eventually plans to set up a manufacturing base in India for particle board furniture. In future, NPL also intends to diversify into the business of construction and real estate development.

With increasing disposable incomes and aspirational lifestyles, there is a huge potential in retailing of lifestyle and home furniture business. For the first six months ending 31st Sept’ 05, its sales grew by 6% to Rs.165 cr. but NP was down 24% to Rs.4 cr. due to higher raw material cost. For the full year, it may clock turnover of Rs.350 cr. and NP of around Rs.9 cr. which works out to an EPS of Rs.11 on a small equity of Rs.8.50 cr. Although rising crude oil prices is a concern, its retail venture will improve margins going forward. It can even report an EPS of Rs.18 and Rs.25 for FY07 & FY08 respectively. Hence long-term investors can accumulate this scrip at declines with a price target of Rs.250 (55% return) in 15~18 months.

Nectar Lifesciences - Rs.225.00

Nectar Lifesciences Ltd (NLL), erstwhile Surya Medicare Ltd, was incorporated in 1995 by Mr. Sanjiv Goyal as a joint venture with Punjab State Industrial Development Corporation Ltd for the manufacture of oral and sterile range of Active Pharmaceutical Ingredients (APIs) and formulations. Today, NLL is among the largest manufacturers and exporters of Cephalosporins (antibiotic used to treat bacterial infections) and Semi Synthetic Penicillins. In fact, it is among the few life saving API manufacturing companies with facilities to produce sterile APIs through both Lyophilization and Crystallization processes. Its products are WHO-GMP certified and are exported to over 70 countries across 5 continents and it enjoys an ‘Export House’ status.

NLL’s state-of-the-art manufacturing plant is spread over a massive area of 5,00,000 sq mtrs at Derabassi Punjab with an installed capacity of 950 MT. Its facilities & systems have been audited and approved by technical & regulatory teams of major pharmaceutical companies around the world. NLL is undergoing a major expansion of Rs.100 cr. that includes setting up a formulations plant at Baddi as forward integration, a second unit for sterile cephalosporin facility adjacent to Unit I at Derabassi and a hitech R&D centre and a Quality Control centre. Recently, the company has set up and commercialized a dedicated manufacturing facility (Unit-III) for Ranbaxy for manufacturing a key intermediate of a non-cephalosporin API. These facilities are USFDA, UKMCA, MHRDA and other regulatory bodies compliant and are expected to get all the approvals soon. To diversify its present product portfolio, NLL is planning to enter into the non antiboitic segment like cardiovasculars (statins and prils) and anti-histamines (fexofenadine). Steadily, it is building a presence in the high value generic markets and looking to increase its contract research, custom synthesis and contract manufacturing services for the regulated markets post US FDA approval. For future growth, it is planning to take a strong position in Phytochemicals which will be fully integrated greenfield operation with its own cultivation of speciality herbs, extraction and purification offering quality herbal products.

In June 05 NLL came out with its IPO rising around Rs.90 cr. by issuing 38.7 lakh shares @ Rs.240 per share. That means that currently the scrip is trading below its IPO price. For FY05, NLL reported a topline of Rs.221 cr. and bottomline of Rs.12.60 cr. For the first six months of FY06, NLL has already posted very impressive numbers with Sales reporting 24% rise to Rs.134 cr. and NP more than doubled to Rs.10 cr. For the full year, it may clock a turnover of Rs.280 cr. and NP of Rs.22 cr. which works out to an EPS of Rs.15 on its current equity of Rs.14.89 cr. The real growth and impact of expansion will be visible only in FY07 and FY08. Although there is a risk of huge equity dilution in future, only long-term investors are recommended to buy with a price target of Rs.380 (70% appreciation) in 2 yrs. It’s another Lupin or Orchid Chemicals in the making.

STOCK WATCH

A few months back, Sujana Universal (Code No: 517224) (Rs.25.05) raised US$ 16 million via the GDR route by allotting 2 cr. equity shares @ Rs.35 per share. It has further decided to issue 40 lakh equity shares to promoters which will expand the equity to Rs.45.40 cr. The company basically deals in all types of bearings, light engineering components, automobile components, castings and domestic appliances. Lately, it also commissioned facilities for the manufacture of telecom and transmission towers. For FY06, it can earn a NP of Rs.25 cr. i.e. an EPS of Rs.5.5 which can rise to Rs.35 cr. in FY07. Investors can expect a price target of Rs.40 in the medium term and Rs.75 in 2 years time.

Looking off of caustic soda prices is good for paper manufacturers. Rama Paper (Code No: 500357) (Rs.28.00) which hit a high of nearly Rs.60 is currently quoting at Rs.28. Due to buoyancy in the paper industry, the company is going for capacity expansion by adding 18,000 TPA of production facilities for high value paper and intends to set up a 6 MW captive power plant. Besides, it is also planning to foray into the business of power generation and deal in sugar and other allied products. Recently, it made a preferential allotment of 25 lakh shares to promoters @ Rs.35. Moreover, higher tax provision by the company confirms its prosperous future ahead. It is one of the cheapest available paper scrip, which can double in 9~12 months. Just grab it!

Although not a niche player in the pharma sector, Syncom Formulations (Code No: 524470) (Rs.90.00) can be bought for handsome gains due to its cheap valuation. It has more than 250 products to offer in ethical, generics, OTC and herbal range which it plans to take to 500 products in the next 2~3 years. Having successfully established its footprint in more than 15 countries of Africa, Latin America, C.I.S. and Asia, the company is putting more thrust on exports by tapping new countries. Due to efficient working capital management and healthy cash position, the company has pre-paid its entire loan and become a debt free company last fiscal. It also has some plan to diversify into power, construction, coal business and investment. For FY06, it may post an EPS of Rs.16 and its share price can appreciate by 50% in 6~9 months,

Mid caps and small caps are again on fire with hundreds of scrips hitting circuit filters. In such a scenario Videocon Appliances (Code No: 500945) (Rs.28.60), which hit a high of Rs.38 is bound to rise in coming days. Ashok Parmar has already exited the scrip so no selling pressure is expected. In spite of having a whopping Rs.1200 cr. in sales, its market cap is merely Rs.100 cr. Having reserves of more than Rs.360 cr. on its equity capital of Rs.33 cr., its book value stands at around Rs.80. It’s been a consistent performer even in such a competitive market and is a regular dividend paying company. Of late, the whole Videocon group has been re-rated due to its huge foray into oil exploration business and capital raising efficiency. The share price of this scrip is estimated to cross Rs.75 in 12 months.

Chemical scrips are once again being fancied in the market with a whole bunch of companies on fire in this sector. Gujarat Alkalies & Chemicals (Code No: 530001) (Rs.137.65) being the largest producer of caustic soda, is still trading reasonably cheap with a market cap of around Rs.1000 cr. In spite of some correction in caustic soda prices, the company is expected to report an NP of around Rs.200 cr. i.e. an EPS of Rs.27 on its current equity of Rs.73.50 cr. Interestingly, it has become the first Indian entity to get carbon trading credit, which it plans to sell in the international market for a sum worth Rs.60-70 cr. Scrip has the potential to cross Rs.200 mark in the medium term. Accumulate at sharp declines.

Few days back, Hazoor Media (Code No: 532467) (Rs.13.50) came out with its November quarter numbers which are quite satisfactory. Its total revenue grew by 12% to Rs.4.70 cr. and NP increased by 10% to Rs.1.27 cr. thereby reporting a quarterly EPS of Rs.1.45. It is basically into production of media content in diversified software categories viz. entertainment, film and film based programmes, sitcoms, news and current affairs, game shows catering to the demands of media companies in the international market. It also provides infrastructure services like shooting locations, floors, studios, post production processing facilities, filming equipments and qualified trained manpower to film & entertainment industry. With 52 week high of Rs.21.50, a book value around Rs.22 and with an expected EPS of Rs.5, this dividend paying company deserves much better valuation.