Rama Papers Mills Ltd - 30.00 Rs

Promoted by Mr. Pramod Agrawal in 1985, Rama Paper Mills Ltd (RPML) primarily manufactures newsprint for the newspaper publishers and writing/printing paper for government supplies as well as for printing of text books and note books. It also produces coated/uncoated duplex board used to make packing material like cartons for industrial purpose and packaging of articles in pharmaceuticals, soaps, paste, apparels, and tea industries. However, company derives 60% of revenue from newsprint which is totally exempted from central excise and sales tax. It has wide client base including Hindustan Times, Jan Satta, Indian Express, Amar Ujjala, Dainik Jagran, Gujarat Samachar, Dainik Bhaskar etc. RPML enjoys a strong brand royalty as 80% of its customers are dealing with the company for more than 5 years. And since company is not into exports it is not affected by the rupee appreciation.

RPML is having three manufacturing units spread across 12 acres of land at Kiratpur in Dist. Bijnor in Uttar Pradesh. To cater the rising demand, it augmented its production capacity from 39,500 TPA to 44,000 TPA in Dec 2006 by installation of some balanc­ing equipments. More importantly, company has put up a captive power plant of 6 MW which commissioned operation only from April 2007. It incurred a total capital expenditure of Rs 31.50 cr for both the projects, financed by term loan of Rs. 22 crore and balance by internal accruals. Ironically, due to captive power generation, company is able to make substantial saving in power and fuel cost to the extent of Rs. 450 per tonne of paper produced, on a very conservative basis. This means, a straight away addition of minimum Rs 2 cr to the bottomline. Besides, only 4 MW is actually used for captive consumption with balance 2 MW being as surplus currently. To diversify its product portfolio, RPML is putting up an additional line of paper manufacturing machine to produce tissue and poster paper with annual capacity of 16320 TPA under a capex of 24 cr. For this company has already taken a bank loan and is planning to start the production by mid 2008. With this its total capacity will stand increased to 60,000 TPA.

Morever, company is contemplating to make some modifica­tions in all the machines in phases to be completed by 2009-10, which will further enhance its capacity to 80000 TPA. To fund its growth plan, company raised 8.75 cr in early 2006 thru private placement of 25 lac shares @ 35 Rs and now recently it again raised 7.50 cr thru preferential allotment of around 21 lac shares @ Rs 36 to promoter group. Hence its current fully diluted equity stands Rs 9.7 cr with 41% promoter stake. Financially, the first two quarter nos of the company were not so encouraging, maybe due to some disruption in its manufacturing facility. Hence for FY08 it is estimated to clock a turnover of 80 cr and profit of 5.50 on back of higher operating margin. But for FY09 it can report more than 100 cr of sales and 8.50 of PAT. This means an EPS of Rs 6 and 9 for FY08 and FY09 respectively. Moreover, against its gross block of Rs 79 cr, company is currently available at an enterprise value of only Rs 70 cr which is extremely cheap. Investors are strongly recommended to buy at current levels as share price can shoot up to 50 Rs in six months and 75 Rs in medium to long term.

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To take the advantage of the increased demand of Indian pharmaceutical products in the international market, Ahlcon Parenterals (68.00) - manufacture of life saving Intravenous Fluids and medical disposals, has off late made arrangements with several international agencies for increasing the base of export markets. It has recently added many new foreign customers to its existing list and is putting special thrust to increase direct and indirect exports. It has already filed product dossiers in both the regulated as well as unregulated markets and the registration formalities with more than fifteen countries are in progress. Accordingly company has upgraded its production facilities to conform to latest GMP standards as per international guidelines and specific requirement of the giant pharma customers. Since the plant is working at 100% capacity utilization, company is undergoing aggressive expansion to almost triple the small volume parenteral capacity from 59 million units to 162 million units. At the same time, it will continue to produce 32 million units of large volume parenteral. On the back of lackluster performance for the Sept qtr, scrip has been an underperformer for quite long time. As company is facing stiff competition in domestic market, it may end FY08 with sales of 55 cr and NP of 7.50 cr i.e. EPS of 10 Rs on equity of 7.20 cr. But with new capacity becoming operational and increase revenue from exports it has the potential to report an EPS of Rs 14 for FY09. Keep accumulating at declines

Seshasayee Paper (202.00) is engaged in manufacturing of printing/writing papers, packing/wrapping papers and specialty papers. Presently, it has the pulping capacity of 230 TPD and paper manufacturing capacity of 115,000 TPA. To enhance its environmental performance, it is implementing Mill Development Plan at estimated cost of 350 cr which will make the company self sufficient in wood pulp requirements. Under this plan, company is replacing its 30 yr old wood pulp mill of 230 TPD capacity with a comparatively newer but second hand pulp mill from USA which has advanced technological features, like RDH Pulping, Oxygen De-lignification, ECF Bleaching etc apart from having higher capacity of 350 TPD. However due to delay in supply of some key equipment, the project is expected to complete by March 2008. Meanwhile to de-risk its dependence on government and other agencies, company has entered into agreements with farmers holding over 3000 acres of land and planted Eucalyptus Hybrid/ Casuarina varieties to develop its own source of plantations. For FY08 it is expected to clock a turnover of 500 cr and NP of 45 cr which works out to an EPS of 40 Rs on equity of 11.25 cr. Despite company having high debt equity ratio, scrip can be bought at declines.

Eastern Silk (230.00) is among the few companies to be fully integrated from spinning, yarn dyeing, weaving, printing, embroidery, fabric dyeing, finishing to making made-ups. It has gradually moved up the value chain by putting special thrust on production of machine made high fashion fabric and home furnishing. It has recently completed expansion programme at its Anekal’s Unit 2 facility thereby taking the total fabric manufacturing capacity to 18.5 lac metres from 14 lac metres per annum. It is also setting up made-up plant at Bommasandra near Bangalore having an installed capacity of 1500 sets per day with an investment of 18 cr and is expected to commence operation in this fiscal itself. Incidentally, company derives 80% of total revenue from export, but at the same time 70% of raw material is imported by the company. Secondly, company also undertakes hedging activities and hence is protected from rupee appreciation to some extent. It reported encouraging nos for the first two quarters and is estimated to clock a turnover of 550 cr and PAT of 68 cr for FY08. This translates into EPS of Rs 43 on equity of 15.80 cr. For future growth, company is looking to make some foreign acquisition for which it may raise 240 cr thru FCCB/GDR route. It is also contemplating to split the face value of share to 2/- Rs from 10/- Rs which will improve the liquidity going forward.

Murudeshwar Ceramics (112.00) is one of the leading manufacturers of vitrified tiles, ceramic tiles and granites in India with its popular brand 'NAVEEN’. Importantly, company derives nearly 80% of revenue from sales of vitrified tiles which enjoy higher margin than the rest two. On the back of constant expansion, its present capacity stands at 6.3 million sq mtr of vitrified tiles, 2.7 million sq mtr of ceramic tiles and only 72,000 sq mtr for granites. Notably, institutional clients constitute 60% of total sales and retail clients constitute balance 40%. This is backed by a strong marketing network with 6 distributors, 74 show rooms, 45 depots and about 400 dealers spread across India. With the ongoing boom in construction sector, increasing mall culture and strong demand for hi-tech commercial complexes, the future prospect of the company is quite promising. It is expected to report a topline of 275 cr and bottomline of 30 cr on conservative basis for FY08. This works out to an EPS of 17 Rs on equity of Rs 17.50 cr. Notably, its Cash EPS stands at whopping 32 Rs. As current fiscal being a silver jubilee year for the company, it may declare liberal bonus for its shareholders. At CMP, scrip is trading at a P/E ratio of merely 6.5x times and is available at an EV of 400 cr which is below its gross block value of Rs 470 cr. However, icing on the cake is the 20 acres surplus land owned by the company near electronic city where it intends to develop IT park. Share price can shoot up to 175 Rs in medium term.

Z F Steering Gear (India) Ltd - 205.00 Rs

Belonging to well known Firodia group of Kinetic fame, Z F Steering Gear India Ltd (ZF) was incorporated in 1981 to manufacture mechanical - worm & roller and power steering gears in financial and technical collaboration with M/s. ZF Friedrichafen AG Germany, world's largest independent steering gears manufacturer. Today, ZF is market leader in both mechanical and hydraulic power steering gears especially for commercial vehicles and tractor industry. Its product range includes ball and nut power steering gear, rack and pinion power steering gears, worm and roller manual steering gears, intermediate shafts, vane pumps, steering columns, bevel gears box, universal joints, servocom steering gear etc. It has an enviable clientele including all auto majors like Tata Motors, Ashok Leyland, M&M, Eicher Motors, Escorts, Bajaj Tempo, Swaraj Mazda, PunjabTractors, Volvo, L& T John Deere, New Holland etc. Off late, it has entered passenger car segment by supplying rack & pinion power steering gears for ‘Indica’ car. In near future, company is looking to develop new products such as collapsible steering column for cars, telescopic steering columns for HCV, aluminum pump for higher HP engines, pump parts localization etc

ZF’s state-of-the-art manufacturing plant at Pune-Maharashtra is equipped with advanced specially designed machinery from ZF Germany for manufacturing critical components and has its own in-house heat treatment facility consisting of sealed quench furnaces, pit carburised furnaces for case carburising, nitriding etc. To cater the rising demand, last fiscal company expanded its installed capacity of power steering fears from 150,000 to 240,000 per annum and of mechanical steering gears from 100,000 to 120,000 per annum at a capital expenditure of approx. Rs. 7 crore. Against this, it sold 124,811 units and 92,155 units respectively for entire FY07. Moreover, in view of encouraging response from the automobile manufacturers, ZF is in the midst of further expanding the production capacity to 300,000 units of power steering gears and 150,000 units of mechanical steering gears. Secondly, it has entered into a 26:74 joint-venture with its collaborator ZF Lenksysteme, GmbH, to promote a new company for developing and manufacturing new products which will be different and not competing with its current product range. Importantly, sales of commercial vehicles are increasing due to improvement in road-infrastructure and also the ruling of Supreme Court to ban overloading of commercial vehicles. It recorded a growth of 33%, producing 520,000 vehicles during 2006-07 compared to 391,083 vehicles in the previous year. On the other hand, tractors also recorded 20% rise in sales on the back of increased focus by the government in providing subsidies. Thirdly, with India emerging as the hub for small-car manufacturing, many players have announced capacity expansions and many new international-players have taken initiative in setting-up their state-of-art production facilities in India. And since ZF’s future prospects are closely linked to the demand for commercial vehicles, multi-utility vehicles and tractors, it is expected to do much better in the coming years.

Financially, ZF is by and large a debt free company. Infact, it has invested around 37 cr in unlisted firms which yields handsome dividend in form of other income. Promoters currently hold about 72% of the equity, of which German collaborator is holding 26% stake and Bajaj Tempo holding nearly 10% stake. Management of the company is very professional and investor friendly with an impeccable track record of uninterrupted dividend payment since last two decades. For FY07 they paid 80% dividend which gives a yield of 4% even at CMP. Ironically, ZF has still not tapped the global market which presents a huge opportunity to be explored in future. At the same time with zero revenue from exports it is not affected by the sharp rupee appreciation unlike other auto ancillary companies. Infact, it has benefited to some extent as it imports few of its raw material. For FY07 it registered 15% growth in sales to 217 cr whereas NP increased by 20% to 27.50 cr posting an EPS of Rs.30. However, the first two quarter nos for FY08 are not so encouraging as sales declined by 10% to 95 cr and NP remained flat at 11.75 cr. Hence on a conservative basis it is estimated to clock a turnover of around Rs 205 cr and Net profit of Rs 24 cr which leads to an EPS of 27 Rs on equity of 9 cr. Considering debt free status of company with healthy cash EPS of 40 Rs, huge reserves of 80 cr, strong promoter holding, high dividend yield and 52W high low as 297/160 Rs its fairly a value buy at current market cap of 180 cr. Investors can expect 40% appreciation in 12~15 months. But at the same time one should note that rising import of cheaper power steering gears from China is a threat to the company

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Indoco Remedies Ltd - 295.00 Rs

Promoted by Mr. Suresh Kare in 1947, Indoco Remedies Ltd (IRL) is engaged in research & development, manufacturing, marketing and distribution of pharmaceutical products and services in the domestic and international market. Basically, it manufactures API’s, formulations and provides contract research and manufacturing services (i.e. CRAMS). Besides, it has a unique revenue inflow from the dossier development and marketing them. Over the years IRL has a built a strong brand portfolio of 120 products across 11 major therapeutic segments. Earlier, it was focusing on acute therapies like - respiratory, anti-allergy, anti-infective, dental, ophthalmic etc which are volume led business. But off late it has also ventured into the high growth and lucrative lifestyle segment like anti-diabetes, cardiovascular, central nervous system, nutrition, dermatology etc. It has a strong presence in domestic formulation market with more than 75% of total revenue coming from it, whereas the balance 25% comes from export to over 33 countries globally including regulated and semi regulated markets. Notably, company boasts of having 10 brands which are among the top five in their respective segments with Febrex Plus, Cyclopam, Vepan, Sensodent and ATM being the most successful. In order to ensure focused sales approach, IRL has created separate marketing divisions namely Indoco, Spade, Warren, & Surge-Radius, each with specific therapeutic focus and working as an independent profit centre. This year company created two more divisions – Warren Excel and Spera.

Presently, IRL has five facilities for formulation - Goa Plant I, Goa Plant II, Baddi and the rest two plants at Aurangabad & Tarapur for non regulated market. Post acquisition of La Nova Chem and merger with SPA Pharma Ltd, IRL is now backward integrated to manufacture API for captive consumption as well as export with two commercial manufacturing facilities - one at Patalganga & second at New Mumbai. Importantly, company’s Goa plant II is USFDA certified for ophthalmic & injectables whereas the Goa plant I is approved by MHRA-UK & Darmstadt Germany. To fully integrate into CRAMS space, company has set up a state-of-the-art standalone R&D Centre at Rabale, near New Mumbai equipped with facilities like synthetic chemistry labs, F&D, AMD, regulatory and IPR cell. The unique feature of this R&D lab is the Kilo-lab, which can produce one gram to several kilogram quantities of APIs and key intermediates for pre-clinical phase to phase-III clinical studies. The lab intends to take up NDDS research and expects to commercialize the first NDDS product in calendar 2008. In order to maintain the growth momentum for the domestic formulations, the company has been launching around 25 new products every year and is expected to maintain the same pace for coming two years as well. However, currently it is looking forward to capitalize on export opportunities in the high margin regulated markets like US and UK. Under contract manufacturing, company has 21 projects for Germany, 9 for UK & 6 for Eastern Europe. But most importantly, IRL has entered into US market through a supplying pact with Nexus Opthalmic and has already made one shipment to USA. Moreover, it has recently finalized long term joint venture partnership with Amneal Corporation, New Jersey, U.S.A. to develop and manufacture ophthalmic formulations for marketing it in US. Besides, with its product registered in over 50 countries it will continue to export to other non regulated markets as well.

Meanwhile, IRL is taking various initiatives to increase its presence in global market. Like, apart from doing 14 projects for formulation research, it has undertaken six projects for custom synthesis (molecules under Phase-I, II, III) with innovator companies. Notably, for formulation division company has already filed 3 ANDA whereas 10 is underway and another 12 in pipeline. It has also completed 6 CTDs while 8 are under way and 12 in pipeline. For the less regulated market, IRL has filed 3 dossiers in SA, 47 dossiers in CIS, 1 dossier in Brazil and 3 dossiers in AU, NZ. On the API front, company has 9 molecules for DMF, COS & EDMF in CTD format for regulated market under various stages of submission and 8 molecules are in pipeline for regulatory submission. To summarize, IRL has laid the foundation and is now poised to enter into a strong growth trajectory in coming few years.

Although company doesn’t have any capex plan currently, it intends to set up a second manufacturing facility in Baddi, HP with the same capacity as in the present plant, in next two years. Financially, company has amalgamated La Nova Chem (India) Pvt. Ltd., Indoco Healthcare Ltd. and the Pharma Division of SPA Pharmaceuticals Pvt. Ltd with itself. For FY07, company recorded net sales of Rs.326 cr and PAT of Rs.42 cr thereby posting an EPS of 35 Rs. It reported encouraging nos for the first qtr as well. Accordingly, it is expected to clock a turnover of 375 cr and NP of 48 cr for FY08 ending June’08. This translates into EPS of 39 Rs on current equity of 12.30 cr. Hence at reasonable discounting by 12x times scrip has the potential to touch 475 Rs (60% appreciation) in 15~18 months. Investors are strongly recommended to buy at current levels.

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Belonging to Duncan Goenka group, Stone India (158.00) is undisputed leader in locomotive brake systems and has a huge range of mechanical and electrical products for the railroad industry. It boasts of having its own patented beam mounted brake system for all types for freight wagons. Off late, it has ventured into the railway electronics business through introduction of a slew of high value power electronic products like inverters, converters and power supply system for coaches, locomotives, EMUs and metros. Currently, company generates about 90 per cent of its revenue from railways and has a market share of about 25-30 per cent. It has appointed Telewira Tegas SDN BHD, Malaysia, as an exclusive agent for turnkey project work relating to freight car, passenger coach and locomotive up gradation and maintenance for Malaysian railways. Recently, it has partnered with Sumitomo group Japan for manufacturing of air springs which are technically far superior to the existing mechanical suspension system. Importantly, to diversify its product portfolio, it has set up a greenfield facility at Nalagarh, Himachal Pradesh which is likely to go on stream this fiscal itself. Hence for entire FY08 it is expected to register sales of 100 cr and PAT of 13.50 cr i.e. EPS of Rs 18 on equity of 7.60 cr. At a modest discounting by 12x times scrip can touch Rs.220 in medium term.

Wanbury (138.00) is the world’s largest producer of Metformin Hydrochloride - a diabetes management product and Salsalate, an anti-inflammatory drug. With its two USFDA certified plant for multi-products, company already has 23 DMFs with US and is looking to file another 4~5 DMFS in near future. As a part of its growth strategy, it has launched a super specialty research division `Osteolife' catering to orthopedic health issues such as osteoporosis, osteoarthritis and pain management. Recently, company made the first overseas acquisition with the generic ethical formulation business division of IFC-Spain, which owns 17 brands in various therapeutic segments like traumatology, pain management, asthma, anti depressants, anti eplileptics, anti ulcerants, cephalosporin’s, beta blokers etc and is targeting a revenue of Euro 33 million (i.e. Rs 200 cr) with an EBITDA of Euro 8-10 million (i.e. Rs 50~60 cr). Hence on a consolidated basis including the Cantabria business, it is expected to clock a turnover of 375 cr and PAT of 35 cr for FY08. This leads to an EPS of 26 Rs on current equity of 13.60 cr. However on fully diluted equity of 21 cr (post conversion of all warrants & FCCB’s) the EPS works out to 17 Rs. Scrip has the potential to touch Rs.200~220 in medium term.

Royal Orchid (142.00) operates in hospitality sector with major presencein Bangalore. Currently it manages eight properties including five star hotels, budget, resort, serviced apartments etc with a total room strength of around 655 rooms. Interestingly, company follows a unique “Asset light” business model of taking properties on lease or entering into a contract for managing & operating the existing hotel instead of owning them outright. This has helped the company manage its funds efficiently, have lower payback period on its projects & earn attractive operating margins. In the next few months, it is planning to open “Royal Orchid Central” – four star category hotels at Pune (120 rooms) and Hyderabad (65 rooms) to cater the business class. Subsequently it has plans to open five star hotels at Mumbai, Bangalore and Delhi. But for major growth, company wants to target the lower end of the hospitality pyramid and has plans to set up a chain of 50 budget hotels across India under the brand ‘Pepper Mint’ in next 3 to 5 years. For FY08, it may report total revenue of 150 cr (excl. other income) and NP of 35 cr on consolidated basis i.e. EPS of 13 Rs on equity of 27.25 cr. For FY09, EPS is expected to shoot upto 16~17 Rs. Accumualte at declines.

Lokesh Machines (118.00) is engaged in the design, development and manufacture of custom built special purpose machines and general purpose CNC (computerized numerical controls) machines along with their components. Presently, it derives 70% revenue from machining division whereas rest 30% comes from auto component division. Company primarily caters to customers in the auto OEM, auto ancillaries and general engineering space. Hence it supplies mainly to Tata Motors, Bajaj Auto, Force Motors, Cummins, Bharat Forge, Kirloskar Oil Engines, Everest Kanto Cylinders etc with separate dedicated facilities for M&M and Ashok Leyland. Off late, it has also made a foray in the overseas markets with orders from M/s FPT Industries Spa-Italy, Honda Motorcycles-Japan and HOWA-Japan. Further, its technical partner Wenig Wemas-Germany has also placed initial order of 100 machines worth 20 cr. For the latest Sept qtr, sales grew by 25% to 28 cr and Net profit increased by 50% to 3.40 cr. To fund its growth plan company came out with an IPO at Rs.140 per share in April 2006 and raised Rs.42 cr. On listing day it hit a high of 300 Rs, whereas and currently it’s available at 15% below its issue price. For FY08 it is expected to clock a turnover of 110 cr and PAT of 14.50 cr which leads to an EPS of 12 Rs on equity of 11.80 cr. Scrip can easily appreciate to 175 levels in a years time.