STOCK WATCH

In anticipation of rise in steel prices in coming months, steel scrips are gradually coming into action and Modern Steels Ltd. (Code:513303) (Rs.57), manufacturer of alloy steel and special steel seems a good bet at current levels. The company is now putting more thrust on production of value added products including stainless steel. It has installed a Vacuum Degassing plant of Denelli make in its melting shop and a converter was also installed for the production of stainless steel. Also, post rolling facilities of peeling and grinding of bars was commissioned in the last fiscal. For future growth, it is enhancing its melting capacity from 1,00,000 to 2,27,000 MTA and the rolling capacity will be increased from 50,000 to 1,54,000 MTA. For FY07, it may register a turnover of Rs.300 cr. with net profit of Rs.10 cr. i.e. EPS of Rs.21 on its current low equity of Rs.4.80 cr. Scrip has the potential to double in 12-15 months.

Laffans Petrochemicals Ltd. (Code:524522) (Rs.24) engaged in the manufacture of ethylene oxide derivatives such as Ethoxylates, Glycol Ethers, Acetates, Triethonal-amine and Brake fluids is the only Butyl Glycol and Methyl Glycol manufacturer in India along with their respective acetates. Besides, it also produces 'Theic', an unique surfactant for the wire enamelling industry with micron size of less than 100, which is produced by only 3/4 manufacturers worldwide. Recently, it started catering to emulsifiers in the agrochemicals industry and has introduced products based on propylene oxide where the demand is expected to grow. It reported quite encouraging numbers for the June’06 quarter and for the full year FY07, it may clock a turnover of Rs.160 cr. with net profit of Rs.5 cr. i.e. EPS of Rs.6 on its equity of Rs.8 cr. With a book value of Rs.42 and a market cap of less than Rs.20 cr., the scrip is available extremely cheap and can appreciate 50% in 6-9 months.

Tulsyan NEC Ltd. (Code:513629) (Rs.47) is one of the old and reputed manufacturers of TMT bars/ billets and synthetic products such as poly woven sacks/bags. TMT bars meet the demand for construction in housing/infrastructure sectors and poly woven sacks/bags meet the demand for packing of cement/sugar/fertilizers and other bulk-packaging requirement. For the June’06 quarter, it reported stunning numbers with sales improving by 40% to Rs.88 cr. whereas net profit doubled to Rs.1.80 cr. registering an EPS of Rs.3.6 on its small equity of 5 cr. Due to the buoyancy in the metal sector, it has taken on lease a rolling mill with a production capacity of 36000 MTPA at Coimbatore, Tamil Nadu. For future growth, it is installing a new rolling mill of 1,50,000 MTPA and is undergoing capacity expansion of 10,500 TPA in the plastics division comprising of FIBC, PP Bags and fabrics. For FY07, it is estimated to clock a turnover of Rs.350 cr. With net profit of Rs.5 cr. i.e. EPS of Rs.10. At its current market cap of merely Rs.20 cr., this scrip is trading extremely cheap.

Aarti Industries Ltd. (Code:524208) (Rs.36) has already commenced operation at Block–I of its Tarapur USFDA compliant facilities and started exporting validation batches to regulated markets. Meanwhile, it is in the process of completing the work at Block-II, III and IV during the year and may start commercial production in the near future. Further, it is setting up a new project for a downstream product called Para Amino Phenol (PAP) in Gujarat. More importantly, crude oil prices have tumbled down to around $60, which augurs very well for the company, as it constitutes a major part of its input cost. For FY07, it is expected to report sales of Rs.825 cr. with net profit of Rs.55 cr., which translates into EPS of Rs.7 on its fully diluted equity of Rs.37.75 cr. Relatively speaking, it is a safe bet to get 50% return in the medium-term.

The ban on sugar exports is expected to be lifted in October’06 and all sugar scrips are rising smartly. DCM Shriram Industries Ltd. (Code:523369) (Rs.89) is one of the best bets as it has most modern sugar factories at Daurala in U.P apart from a huge alcohol plant of 45,000-kilo litres capacity. It has recently increased its cane crushing capacity to 10,000 TCD from 8000 TCD and is further set to increase it to 12000 TCD along with modernisation of the sugar plant and powerhouse. Moreover, it is also engaged in the business of alcohol, fine chemicals and rayon. It reported encouraging results for June’06 quarter and can clock a turnover of Rs.775 cr. and net profit of Rs.32 cr. for the full year FY07. This will lead to an EPS of Rs.21 on its equity of Rs.15.30 cr. Having a 52-week high/low as Rs.240/Rs.72, the scrip can give 50% return in a years time.

Ahlcon Parenterals - Rs.48.00

Promoted by Ahluwalia Contracts (I) Ltd. and Mr. Bikramjit Ahluwalia, Ahlcon Parenterals (India) Ltd. (APIL) was originally incorporated in 1992 under the name and style of ‘Gujarat Inject (Rajastan) Ltd.’ but was subsequently renamed to APIL in 1993. Within a short span of time, APIL has become a leading manufacturer of specialty parenteral products of large volumes and eye & eardrops of small volumes. Today it is engaged in manufacture of life-saving Intravenous Fluids and medical disposals by employing the aseptic Form-Fill-Seal Technology imported from Switzerland. In fact, APIL has developed a niche market for specialty products of high quality standards with very few competitors to match. Its product range includes Dextrose, Saline, Electrolytes, Amino Acids, Fat Emulsion, Blood Substitutes, Injectibles, Eye Drops etc.

APIL’s manufacturing facility located at Bhiwadi, Alwar, Rajasthan, is equipped with highly sophisticated fully integrated production process wherein by one continuous operation the container is blow formed, filled with the solution and sealed. The entire process takes place in a completely sterile environment within the machine untouched by human hands, which eliminates all risks of contamination. Notably, its manufacturing facility is WHO-GMP and ISO-9001-2000 certified and it is in the process of getting MCA-UK certification soon. Encouraged by the overwhelming success of its diversification into ophthalmic products, the company is adding more value-added ophthalmic products and is expanding its existing Infusions and Anti- microbial solutions. Moreover, it has already initiated the process of setting up a state-of-the-art Testing facility and Formulation development laboratory equipped with the best infrastructure. Even though the major share of its revenue is contributed by contract manufacturing, the company has started building its own branded products and is putting more thrust to market such products in the domestic and global markets. On the export front, it has made arrangements with several international agencies for increasing the base of exports and is planning to increase direct and indirect exports to many countries.

In spite of uncertainties prevailing with respect to excise duty on MRP basis, APIL reported healthy numbers for FY06. Its sales grew by 25% to Rs.45 cr. but net profit trebled to Rs.6.70 cr. on the back of higher operating margins. For the June’06 quarter, it reported double digit growth on both top-line as well as bottom-line. With its technological edge and with long-term outsourcing arrangements with major pharma giants, APIL may end FY07 with a turnover of Rs.50 cr. and net profit Rs.7.50 cr. This translates into EPS of Rs.10 on its current equity of Rs.7.20 cr. It may declare 20% dividend for FY07, which means a yield of more than 4% at CMP. With its 52-week high/low as Rs.83/ Rs.39, the scrip is a relatively safe bet at current levels. Investors are advised to buy with a price target of Rs.65 (35% return) in 9-12 months.

Shivalik Global Ltd - Rs.27.00

Established in 1997, Shivalik Global Ltd. (SGL) a vertically integrated multi-product company covering the entire textile value chain starting from the processing of yarn to the manufacture of readymade garments, has grown at an enviable pace and is today placed in the select club of textile export oriented units in the country. Besides its own manufacturing for direct exports, SGL is also acknowledged as a leading processor. Its apparel & export division exports 100% of its production to USA, EU, Canada, and non-quota countries. PVH, Arrow, Woolrich, Motherhood, BHS, John Forsyth, Basic Red are few of its international customers.

SGL’s manufacturing plant in Faridabad has complete in-house divisions for knitting, dyeing and processing, yarn dyeing, woven process, sewing thread and garments manufacturing and equipped with modern technologies. To increase its production capacity and fund its expansion plan, SGL raised Rs.60 cr. in March’06 through an IPO. But instead of undergoing an expansion, it took over an existing 6-year old integrated textile unit, Shyam Tex International, at book value for a consideration of Rs.25.70 cr. and paid through a mix of cash and stock. With this acquisition, its annual production capacity gets enhanced to 3.9 million pieces of garments, 58 million metres of dyeing, printing and processing of woven fabric, 5400 MT of knitting & 8200 MT of dyeing and processing of knitted fabrics. Moreover, SGL is re-locating its plant for which it is acquiring 15 acres of land from the Government of Haryana and has already made 10% initial payment amounting to Rs.1.51 cr. Thereafter, its Faridabad land of 5 acres, which is situated in a prime location, will be developed for commercial use.

With such large integrated facilities, creative designs, product development, strong marketing network and a large pool of technical and managerial talent, SGL is well poised to capitalise on the unfolding opportunities in textiles and knitted garments both in the domestic and global markets. Incidentally, after hitting a high of around Rs.90, the share price has tumbled down sharply due to the poor market sentiments. However, the company is quite good fundamentally and is estimated to report sales of Rs.300 cr. and profit of Rs.13 cr. for FY07 on consolidated basis. This works out to an EPS of Rs.5 on its expanded equity of Rs.26 cr. Considering SGL’s plan of developing its Faridabad property, which may fetch around Rs.350 cr. in FY08 or FY09, the scrip is grossly undervalued at the current market cap Rs.75 cr. Investors are strongly recommended to buy at current levels because even if we exclude the real estate story, the scrip has the potential to touch Rs.40 (40% appreciation) in a year’s time.

STOCK WATCH

Belonging to the L.N. Agrawal group, Suryavanshi Spinning Mills Ltd. (Code: 514140) (Rs.50.45) is one of the most modern hi-tech spinning mills of South India with an installed capacity of more than 1,00,000 spindles. It is also engaged in knitting, yarn dyeing, fabric dyeing, processing and manufacturing of fashionable garments. A few months back, it raised Rs.13 cr. by a preferential allotment of 15 lakh shares at Rs.87, which will be utilized to add 35,000 spindles at a separate unit and for repayment of high cost debt. Besides, the management is also planning to merge its other group company Suryavanshi Textiles engaged in garment manufacturing with itself. For FY07, it may clock a turnover of more than Rs.300 cr. with net profit of around Rs.10 cr. i.e. EPS of Rs.14 on its equity of Rs.7.15 cr. At the current market cap of Rs.37 cr., it’s one of the cheapest textile scrips.

Due to the strong demand, steel companies continue to raise the price of galvanized steel whereas zinc prices have cooled off from their recent highs. This will have positive effect on National Steel & Agro (Code: 513179) (Rs.21.50), which has a capacity of 2,10,000 TPA of galvanized steel apart from 2,40,000 TPA of cold roll steel capacity. For the June’06 quarter, sales increased by 30% to Rs.440 cr. and net profit grew by 7% to Rs.4.50 cr. At the current market cap of Rs.70 cr., this Ruchi group company is available for a song. Once the company returns to the dividend list, the scrip will attract better valuation and may easily double from hereon. For FY07, it may clock a turnover of Rs.2200 cr. and net profit of Rs.20 cr. which will lead to an EPS of Rs.6 on its equity of Rs.32.60 cr. With cash EPS of more than Rs.13 and book value of Rs.52, the scrip can give handsome returns if held for 15-18 months.

Sanjivani Paranteral Ltd. (Code: 531569) (Rs.33) has steadily progressed by manufacturing high quality medicines mainly injectibles since 1998 for many reputed companies and has emerged as one the biggest manufacturers of injectibles in the country. Its manufacturing facility which is WHO GMP certified is located at Taloja in Maharashtra and can manufacture high grade antibiotics and life saving injectibles used in various pre and post operative infections. For the June’06 quarter, its sales grew by 35% to Rs.17 cr. whereas net profit increased by 50% to Rs.1.30 cr. It is now planning to launch anti-cancer products in India through a tie-up with an European multinational. For FY07, it is expected to report a turnover of Rs.70 cr. and PAT of Rs.5 cr. which will lead to an EPS of Rs.8 on its current equity of Rs.5.90 cr. This fundamentally strong scrip is thus trading cheap and has the potential to touch Rs.60 levels in the medium term. The main trigger for the share price will be the merger with its other group company, Sanjivani Pharmaceuticals.

Due to the buoyancy in Sugar, Oudh Sugar Ltd. (Code: 507260) (Rs.112), a K.K. Birla group company, is implementing an aggressive expansion plan involving capital expenditure of Rs.480 cr. From the coming crushing season, its capacity will be expanded to 22000 TCD from 18000 TCD currently. Besides, it is in the process of setting up a green-field plant in Gorakhpur (U.P.) with a capacity of 7000 TCD. Hence post expansion, it will have a consolidated crushing capacity of 29000 TCD, captive power generation of 30 MW and two distilleries of 75 kilo litres per day. For the year ending 30th June’06, its top-line grew by 40% to Rs.501 cr. whereas its net profit zoomed up 300% to Rs.45 cr. registering an EPS of Rs.25 and it declared Rs.4.50 per share as dividend giving yield of 4% at CMP and is currently trading cum dividend. To fund its expansion, it may raise money through the equity route, which may dilute its share capital to Rs.20.20 cr. For FY07, it may clock a turnover of Rs.550 cr. and net profit of Rs.45 cr. A best bet in the sugar sector.

To meet the growing demand for its products in the domestic and export markets, Plastiblend India (Code: 523648) (Rs.136) has embarked on a major expansion. It is expanding the capacity at its existing facilities in Daman from 24,000 to 35,000 TPA in phases by March’07 and is also setting up a new unit at Uttaranchal with an initial capacity of 5,000 TPA, which will be again operational by March’07. The whole capex of Rs.20 cr. will be funded by internal accruals only as it is a cash rich and debt-free company. It reported fantastic numbers for the June’06 quarter with sales improving by 45% to Rs.29 cr. and profit grew by 40% to Rs.3.70 cr. It is estimated to end the current year with a top-line of Rs.100 cr. and net profit of Rs.13 cr. i.e. EPS of Rs.20 on its equity of Rs.6.50 cr. Notably, the company has a strong track record of handsome dividend payout of above 30% and a current dividend yield of around 5%. Buy at sharp dips.

Aarti Industries - Rs.38.00

Established in 1984, Aarti Industries Ltd. (AIL), is a leading chemical company manufacturing benzene-based downstream and derivative products and has a diversified portfolio divided into four business segments viz. Basic Chemicals, Speciality Chemicals, Agro Chemicals and Pharmaceuticals. AIL is among the largest manufacturers of benzene based intermediates in India with more than 50% market share. Its Inorganic Acid division, manufactures sulphuric acid and its derivatives, in Speciality Chemicals it produces alkylated amines and toluidines, chloro phenols, fluoro compounds and other specialty chemicals. It also makes various bulk pharmaceuticals and agro chemicals comprising of Quinalphos & Carbendazim. Presently, AIL manufactures more than 100 products that are exported to around 65 countries including USA, UK, Germany, Spain, Italy, Switzerland, Belgium, Japan, Korea, China, Russia, etc. It also has representatives in USA and a subsidiary company in UK to provide better services to its overseas customers.

AIL has five manufacturing units, which are of global scale and are situated in Gujarat & Maharashtra. They are highly integrated coupled with cost-efficient manufacturing process at low capital investment. In addition to the Single Super Phospate (SSP) fertilizer manufactured from a by-product, the company has set up a unit to produce Di-calcium Phosphate - a veterinary item from dilute sulphuric acid. Its API Division is managed by its subsidiary Aarti Healthcare which focuses on research and manufacturing, APIs/ advanced intermediates in niche segments viz: anti–hypertensive, anti–asthamatic, anti-cancer, anti-inflammatory, anti-allergic, anti-diabetic, anti-depressants and anti-thalassaemic. As a measure of forward integration, AIL has started contract research and custom synthesis activities at its new plant in Vapi. It is also developing customised products under Secrecy Agreements. Recently, it commenced operation at Block–I of its Tarapur USFDA compliant facility and has started exporting validation batches to the regulated markets. Meanwhile, it is in the process of completing the work at Block-II, III and IV during the year and may start commercial production in near future. Further, it is setting up a new project for downstream product called Para Amino Phenol (PAP) at Jaghadia, Dist. Bharuch in the state of Gujarat.

Importantly, raw materials account for nearly 70% of the company's manufacturing costs and Benzene accounts for one-third of that. Its margins were, therefore, under pressure due to the rising crude oil price. But now that the crude oil price has slipped below $62, it may report better margins in coming quarters. Although, its first quarter numbers were not that encouraging, still on the full year basis it could report sales of Rs.825 cr. with net profit of Rs.55 cr., which translates into an EPS of Rs.7 on its fully diluted equity of Rs.37.75 cr. Besides, it’s an investor friendly company with a good dividend payout ratio. Investors are recommended to buy with a price target of Rs.60 (70% appreciation) in 15-18 months.