STOCK WATCH

Hyderabad Industries (Code:509675) (Rs.300), the flagship company of the CK Birla group is the pioneer and leader of the building products industry with 24% market share. Its product range include fibre cement roofing sheets, autoclaved aerated concrete blocks and panels called AEROCON, calcium silicate insulation product called HYSIL and jointing material for gasket. Recently, it started commercial production at its new asbestos cement sheets plant in UP taking its total capacity to 6,52,000 MTA, and is expected to report better numbers for the Sept’06 quarter. For June’06 quarter, it reported lower profit due to provision of exceptional item to the extent of Rs.4.40 cr. For future growth, it is implementing a Rs.100 cr. expansion involving setting up of two fibre cement sheet units and one autoclaved aerated concrete blocks manufacturing facility. It may end FY07 with a turnover of Rs.500 cr. and net profit of Rs.40 cr. i.e. EPS of Rs.56 on its tiny equity of Rs.7.50 cr. With 52-week high of Rs.585, it’s a screaming buy, which can easily appreciate by 50% in 6-9
months.

Surya Pharma (Code:532516) (Rs.86) is among the top five manufacturers of the Betalactum and Cephalosporin range of anti-infectives. It has also diversified into the high-margin lifestyle segments like anti-histamines and cardio vascular drugs and is enhancing its exports. Nearly half the production is exported to more than 60 countries across Europe, South East Asia, the Far East, Middle East, Latin America and Africa. Apart from carrying out massive capacity expansions at its existing facilities in Baddi and Banur, the company is setting up a new US-FDA compliant facility in Jammu. Last year, it raised around Rs.50 cr. via the FCCB route to be converted into equity shares at Rs.160 per share. For FY07, it is expected to report a top-line of Rs.275 cr. and bottom-line of Rs.27 cr., which translates into an EPS of Rs.15 on its fully diluted equity of Rs.18.25 cr. A good bet in the pharma sector, which can give 30% return in 12 months.

Bilpower Ltd. (Code:531590) (Rs.120) is the pioneer in the field of manufacturing of Electrical Laminations, Stampings and Cores and produces the largest range of transformer cores in India. It also enjoys highest brand preference for superior quality and performance. A few days back it declared terrific numbers for Sept’06 quarter as sales doubled to Rs.56.50 cr. while net profit increased by 50% to Rs.4.50 cr. registering a quarterly EPS of Rs.7.50. Although its OPM witnessed a 3% fall, higher volumes made up for compensated it and led to a sharp increase in bottom-line in the absolute terms. For FY07, it is estimated to clock a turnover of Rs.210 cr. with net profit of Rs.14 cr. This works out to an EPS of Rs.23 on its current equity of Rs.6 cr. and Rs.16 on its full-diluted equity of Rs.9 cr. Its one of the cheapest share in the power ancillary sector and can give handsome returns in the medium to long term. Just buy and wait.

Infosys has beaten the expectations of all analysts and gave a robust earning guidance, which indicates that future outlook for IT sector is promising. Aftek Infosys Ltd. (Code:530707) (Rs.58), a mid-cap tech company is trading extremely cheap and can shoot up sharply once its Sept.’06 numbers are out. Interestingly, the company is growing aggressively through the inorganic route and has taken over various small companies, which now form its subsidiaries with each one focused on a niche area in enterprise business management. It has a wholly-owned subsidiary by the name of Opdex in USA and Arexera Technologies GmbH in Switzerland. It also holds 33% in Seekport, 25% in Digihome, 17% in V-soft, and 15% in Elven. It reported fabulous numbers for the June’06 quarter and for the full year FY07 it may report a top-line of Rs.300 cr. with a net profit of Rs.89 cr., which would lead to an EPS of Rs.9 on fully diluted equity of Rs.19 cr. On a consolidated basis, it is a much stronger company and deserves much higher valuation than its current market cap ofaround Rs.530 cr.

Ceekay Daikin Ltd - Rs.87.00

Established in 1973, Ceekay Daikin Ltd. (CDL) is a leading manufacturer of clutches i.e. Clutch cover assembly and clutch disc for 4-wheelers and light commercial vehicles (LCVs) in India. In fact, it is India's largest manufacturer of diaphragm-type clutches apart from making coil type, DST type and clutch disc regular to silent type ranging from dia 155–381 mm. It commands a market share of 30% in the passenger car segment, 80% in the LCV segment and has a minor presence in the tractor segment. It caters to most OEMs such as Tata Motors, M&M, Swaraj Mazda, Toyota, Ford India, Hindustan Motors, GM India, Bajaj Tempo, Eicher Motor, Premier Auto, TAFE and Honda Siel. Maruti is the company’s largest customer contributing 33% of its top-line and 50% of the Maruti cars sold have CDL clutch assemblies. The company has an equity/ technical collaboration with Exedy Corporation (formerly known as Daikin Manufacturing Co.), Japan, who is the world leader in clutches and hold more than 30% stake in the company.

CDL operates in three shifts from two units based in Greater Noida and Aurangabad having a cumulative capacity to manufacture 15 lakh clutch plates and 11 lakh clutch covers per annum. It has vertical manufacturing process where all key components are manufactured in-house and is equipped with processing facility for pressing, machining, heat treatment, tool room, diaphragm spring and wire ring facilities. Both the facilities are TS16949 and ISO certified and for the first time CDL has touched a production and sales of 10 lakh clutch discs and 9 lakh clutch covers in 2005-06. Although it has installed capacities, it is investing around Rs.15 cr. in two years for adding balancing equipments and de-bottlenecking its existing clutch cover/disc assembly lines to meet the increasing demand and to set up a component facility at its Noida factory. Due to its non-competing agreement with Exedy Corp., its exports are restricted only to North America, Indonesia, Singapore, Srilanka, Australia and Europe. Hence to boost its top-line, the company is trying to increase its presence in the replacement market. Also, there is a possibility that Exedy Corp may start outsourcing from CDL due to lower manufacturing cost.

Fundamentally as well as financially, CDL is quite strong but has a Rs.45 cr. of high interest bearing debt on its books, which hampers its performance and eats away its major profit. However, the company is negotiating to bring down its interest cost further which may boost the bottom-line going forward. For FY06, its sales improved by 25% to Rs.86 cr. but its net profit increased by whopping 125% to Rs.5 cr. registering an EPS of Rs.13 on its tiny equity of Rs.4 cr. Although the first qtr was not that encouraging, still it is expected to clock a turnover of Rs.100 cr. and profit of Rs.6.50 cr. for FY07, which translates into EPS of Rs.16. To fund its expansion, the company may come out with a right issue or preferential allotment in the near future, which may dilute its equity to some extent. But at the current market cap of Rs.35 cr. and a P/E multiple of 5.5, this company is trading reasonably cheap and deserves much higher valuation. Investors are strongly recommended to buy it at current levels with a price target of Rs.120 (30% return) in 9-12 months.

Tonira Pharma Ltd - Rs.18

Tonira Pharma Ltd. (TPL) was incorporated in 1992 with the object to take over the running business of M/s.Pharmachem Laboratories. Today, it is one of the well-known manufacturers of bulk drugs, drug intermediates and active pharmaceuticals ingredients (APIs). It exports 95% of its product to more than 80 countries worldwide and hence has been granted 100% Export Oriented Unit status by the Government of India. In the domestic market, its clientele include Dabur India, Cadila Laboratories, IPCA Laboratories, Nicholas Laboratories, Zandu Pharmaceuticals, Neuland Laboratories, Anglo-French, Glaxo India, etc.

TPL’s main manufacturing facility located at Ankleshwar in Gujarat has WHO GMP approval and is certified ISO 9001:2000 by BVQI. But to enter into the regulated market, the company has invested around Rs.15 cr. and set up a second unit in Vadodara, Gujarat, with an annual capacity of 80 metric tonnes of product mix. This facility was commissioned in July’05 and is USFDA compliant. It also invested around Rs.3 cr. to modernize and expand its Ankleshwar factory thereby taking the total production capacity to above 200 metric tonnes. Besides, TPL also has a state-of-the-art R & D Centre at Vadodara, which has a full-fledged pilot plant to carry out the transformation of laboratory processes into industrial manufacturing processes. It also provides dedicated facilities for contract research and manufacturing services (CRAMS) apart from undertaking contract synthesis both on an exclusive and non-exclusive basis. The company has already filed patent for three molecules and four Drug Master Files (DMFs) in CTD format and is further planning to file at least 4 to 5 DMF shortly. In future, it intends to enter into formulations, which is a more value added product as compared to API.

Inspections have already been carried out at its Vadodara plant and the company is in the process of getting necessary approvals of various regulatory authorities such as US FDA, MCA (UK) and TGA (Australia). Recently, it signed a contract with top two US-based generic companies - Apotex Corporation and Teva Pharmaceutical to supply four different API (of anti ulcer, anti-inflammatory, antihistamine and anti-allergic) drugs for a period of five years. This is a huge achievement and a major breakthrough for TPL to enter the US market.

For FY06, its sales increased by 30% to Rs.30 cr. but net profit improved by 5% only to Rs.2.50 cr. due to increased interest cost and depreciation. For the June’06 quarter, its reported quite encouraging numbers with double digit growth at a time when most of the other mid-cap pharmas disappointed. For FY07, it is estimated to clock a turnover of more than Rs.35 cr. with net profit of around Rs.3 cr., which could result in an EPS of Rs.4 on its current equity of Rs.7.90 cr. with a book value of around Rs.24 and current market cap of Rs.14 cr., this scrip is available fairly cheap and can easily appreciate by 50% in 12 months or so.

STOCK WATCH

Ind Swift Labs (Code:532305) (Rs.72) is aggressively re-shuffling its product portfolio whereby it is weeding out the high volume-low margin products and is focusing more on exports to regulated markets. Earlier this year, the company put into operation three new manufacturing facilities to manufacture Statins, for Anti-Histmaines and the third for a New API facility at Jammu. Notably, all these facilities conform to USFDA standards and are expected to get approvals by Dec.’06 end. It has already filed 8 drug master files (DMFs) till date in USA, 50 DMFs in other European countries and expects to file 4-5 DMFs every year in the US over the next three years. Recently, it also inaugurated its state-of-the-art hi-tech R&D centre in Mohali, Punjab, and is in the process of increasing its present R&D strength of 85 to 150 scientists. Although FY08 will be its bumper year, for FY07 it is estimated to clock a turnover of Rs.250 cr. with a net profit of Rs.26 cr. i.e. EPS of Rs.12 on its equity of around Rs.22 cr. Scrip can shoot upto Rs.90 in the short-term.

Shivalik Global Ltd. (Code:532730) (Rs.29) is a vertically integrated, multi product company covering the entire textile value chain starting from the processing of yarn to the manufacture of readymade garments. To fund its expansion plan, the company raised around Rs.60 cr. through an IPO at Rs.60 per share in March’06. But instead of undergoing expansion, it took over an existing integrated textile unit – Shyam Tex International at book value for a consideration of Rs.25.70 cr., thereby getting the benefit of higher capacity with immediate effect. Besides, it is planning to relocate its 5 acres Faridabad plant and use this property for real estate development. On a consolidated basis, it is expected to register a top-line of Rs.300 cr. and PAT of Rs.13 cr., which translates into EPS of Rs.5 on its expanded equity of Rs.26 cr. Scrip has bottomed out and can shoot up 30-40% anytime. Grab it before it too late. A risk free bet.

Presently Upper Ganges Sugar & Inds. Ltd. (Code:530505) (Rs.145) has three sugar plants, one in UP and two in Bihar, with a total capacity of 14,500 TCD. It is expanding the crushing capacity for one of its Bihar unit from 2500 TCD to 5000 TCD with a sulphur free sugar refinery and is also setting up 18 MW co-generation plant. For more remunerative utilization of bagasse, it is putting up a 24 MW co-generation plant at its UP mill for export and captive use. Moreover, to meet the increasing demand for ethanol, the company has undertaken expansion of the distillery unit from the existing capacity of 55 klpd to 100 klpd. Recently it raised around Rs.70 cr. through a rights issue at Rs.150 per share. For rapid expansion, it may adopt the inorganic route by acquiring some existing sugar factories in Bihar or may opt for some greenfield expansion. For FY07, it can report total revenue of Rs.525 cr. with net profit of Rs.35 cr. leading to an EPS of Rs.30 on its expanded equity of Rs.11.55 cr. With the scrip trading cum dividend of Rs.5, it’s a screaming buy that can easily shoot upto Rs.210.

After consolidating for a long time, real estate & construction scrips have once again started to move up. In this segment, Vijay Shanthi Builders (Code:523724) (Rs.33) is a 25 year old south based company with a market cap of around Rs.35 cr. It is engaged in developing residential projects to suit middle income and higher income groups in Chennai and its outskirts. It is gradually shifting its focus to the more lucrative premium segment. It has completed more than 250 building projects and is currently developing Lilly Pond at Kilpauk, Upper Deck at Mylapore, Patio at Nugambakkam, Four Seasons at Adyar, Lake View at Ambattur, Orchid at Vellachery etc. Besides, it has finalized around 40 acres of land at Pallavaram for it forthcoming project called ‘Forest’. It reported encouraging numbers for the June’06 quarter and for the full year FY07 it is estimated to post revenue of Rs.125 cr. and profit of Rs.4.50 cr. This will work out to an EPS of Rs.4 on its equity of Rs.11.50 cr. With 52-week high as Rs.75, the scrip has the potential to give 50% return in a year’s time. Accumulate at sharp declines.

APW President Systems Ltd. (Code:590033) Rs.114

APW President System Ltd. (APW) originally began as a small-scale partnership firm in 1981 but was bought over in 1998 by Applied Power Inc of USA in 1998, which has a chain of manufacturing and distribution facilities in more than 70 countries. Collaborating with a worldwide leader in the enclosures industry enabled APW to access not only the latest product designs but also state-of-the-art manufacturing technologies and other group resources. Today, APW is one of the few manufacturers in India offering enclosures to every segment of the electronics industry. Although the major source of its revenue is from its racks and cabinets division but its technology product division is also growing at a phenomenal pace of more than 50%. In fact, this division was recently awarded the ‘Top Sales Growth' trophy for the Asia Pacific region by Avocent, who are the worldwide market leaders for KVM Products and high end Server Switches for large enterprise networks.

APW’s manufacturing facilities located in Pune and Bangalore are fully integrated plants inclusive of a hot phosphating pre-treatment line, wet-paint and powder-coating paint shops, chemical evaluation laboratory, digitally controlled machinery and huge storage, assembly and shipping areas. To meet the increasing demand, the company is regularly expanding its production capacities and the expansion underway at Pune is expected to be completed shortly in few weeks. Of late, APW has also made progress in Contract Manufacturing resulting in a spate of good orders, which kept both its plants operating at near optimal levels. Last fiscal, its Bangalore plant was visited frequently by very large multinational companies who discussed contract manufacturing opportunities and assessed the company's capabilities and manufacturing systems. Moreover, the company is regularly exporting its products to the Middle East markets, South East Asia and USA. The enormous growth in the IT and Telecommunication sectors augurs well for APW as its sales growth is directly linked with the major players in these two sectors investing in and upgrading their infrastructure or setting up new networks. Also, increased activity in the banking sector has led to high offtake of its products related to ATM parts.

For FY06, its sales grew by 40% to Rs.77 cr. but net profit jumped 75% to Rs.6.30 cr. However, it may not be able to maintain the same growth going forward as local manufacturers apart from facing stiff competition from Chinese cabinet manufacturers copy its products. Hence for FY07, it is estimated to report total revenue of Rs.90 cr. with profit of Rs.7 cr. This works out to an EPS of Rs.12 on its equity of Rs.6.05 cr. With foreign promoters holding 40% stake, the company deserves much higher valuation. Investors are advised to buy at sharp declines around Rs.100 levels as the scrip has the potential to appreciate 40% in 12-15 months.