Aurobindo Pharma Ltd - 325.00 Rs

Established in 1986, Aurobindo Pharma Ltd (APL) has come a long way to become India’s top five pharmaceutical companies and undisputed world leader in certain product categories. It has successfully transformed itself from a single-product API manufacturer to a fully integrated multi-product player, encompassing intermediates, APIs and formulations. After ensuring a firm foundation of cost effective production capabilities, APL eventually entered the high margin speciality generic formulations segment, with a global marketing network. Today it operates in over 100 countries and markets over 180 APIs and 250 formulations. It is one of the largest players in Semi Synthetic Penicillin and Cephalosporin space and is backward integrated into manufacturing key raw material P-Gen. The company mainly operates in six primary therapeutic categories of antibiotics, anti-retrovirals, cardiovascular/diabetology, central nervous system, gastroenterology and anti-infectives/allergies apart from having small presence in anti-inflammatory, anti-histamines, anti-asthmatics, erectile dysfunction etc. Presently, APL derives nearly 70% of the revenue from the sale of APIs and intermediates while about 30% comes from formulations. And in couple of year company intends to take this ratio to almost 50:50. As company is focusing to expand its presence in regulated markets like USA, UK and European countries, exports constitute to around 55% of total revenue.

Over the years APL has made mammoth investments in building a mega infrastructure for APIs and formulations to eventually emerge as a vertically integrated company. Hence it is able to offer products at a competitive price as the cost of production is very low. Today it boasts of having 11 state-of-the-art manufacuturing facilities across the globe, around 6000 employees, 20 overseas subsidiaries and half a billion dollar revenue. Remarkably, almost all the company’s facilities are approved by regulatory authorities such as the US FDA, UK MHRA, MCC (South Africa), ANVISA (Brazil), Health Canada and the WHO. However its overall capacity utilisation at API plants is less than 60%. Its R&D unit is spread across 1 lakh sq ft and has 700 scientists busy in developing intellectual property in the area of non-infringing processes and resolving complex chemistry challenges. Interestingly, APL is one of the largest DMF filer with the US FDA from India with 114 DMFs filed to date. Besides it has filed 100 ANDAs in US and 40 ANDAs in Europe, out of which 62 approvals (both final and tentative) have been received from US and only 7 approvals from Europe. Importantly, company has the infrastructure to market the new products at the shortest lead time and convert the approvals into invoicing. So the additional product pipeline is expected to improve the income stream in coming years coupled with improved capacity utilization. In order to increase its foot hold in Europe, company acquired Pharmacin in Netherlands with a portfolio of 203 market authorizations; and Milpharm in UK having 100 market authorizations.

For future, company is planning to invest around Rs 200 cr in SEZ at Jedcherla near Hyderabad, and Rs 160 cr in Pharma city near Visakhapatnam. It is also setting up one more state-of-the-art R&D facility exclusively to meet the needs of increasing business of contract research. Further, APL is constantly looking to grow inorganically and scouting to make few acquisitions in Europe especially in Italy, Spain & Portugal. Meanwhile company has sold off its loss making Chinese subsidiary catering to the local Chinese markets. In short, company is on track to make a strong presence in select premium markets such as US, Canada, Europe and Australia leveraging on the large product portfolio, well balanced therapeutic presence, world class manufacturing infrastructure and experienced marketing resources. To fund its growth plan APL has raised nearly Rs 900 cr thru FCCB route to be converted into equity shares @ Rs 1014 and Rs 879 in tranches.

Financially, on a standalone basis, APL is estimated to clock a turnover of Rs 2400 cr and profit of Rs 280 cr for FY08. To be on a conservative side, even if total FCCB gets converted at an average of Rs 550 the diluted equity works to Rs 35 cr having Rs 5 as face value. So the diluted EPS on a standalone basis for FY08 works out to Rs 40. Whereas, for FY09 it can post an EPS of Rs 50. Surprisingly, scrip hit a new low of Rs 233 in the recent carnage and has now bounced backed to Rs 320~330 levels. However on a consolidated basis it may report a topline and bottomline of Rs 2600 cr and PAT of Rs 240 cr for FY08 primarily driven by negative contributions from overseas subsidiaries. Still the consolidated EPS comes to Rs 34 considering Rs 35 cr as diluted equity having Rs 5 as face value. Investors are recommended to buy at current levels with a price target of Rs 550 in a year.

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Small & Beautiful (Guj)

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BSEL Infrastructure (60.00) is currently developing a whopping 5.30 million sq ft of land across real estate verticals including residential, hotel & hospitality, retail, commercial, & shopping malls, IT Parks etc and has acquired another 6.50 million sq ft of developable area for future projects. It has entered into strategic alliances with Unity Infraprojects for development of six shopping malls at various locations in Nagpur. In Pune, it has been awarded a project for constructing, operating and maintaining a 400 room hotel and a commercial project on 60 years renewable concessional agreement. Under its BSEL Narmada Nihar project – Gujarat, company is developing 260 hotel rooms of four star category with a club house and a restaurant. Again in a joint venture with Unity Infra, it has been allotted land for developing 1 million sq ft IT Park at Dona Paula, Goa in which company’s share will 0.50 million sq ft. And most importantly, it’s wholly owned subsidiary BSEL Infrastructure Realty (FZE) has acquired seven plots approximating 7.9 million sq. ft. in Ajman, Main Emirates City, UAE and is constructing BSEL Pearl tower – a 50 storied state-of-the-art architecture tower. Recently, company raised Rs 140 cr thru GDR @ approx Rs 65 per share which will take the fully diluted equity to Rs 87 cr. On a consolidated basis for FY08, it may register total revenue of 450 cr and PAT of 120 cr i.e. EPS of 20 Rs on current equity whereas diluted EPS works out to Rs 14. A screaming buy.

Indag Rubber (84.00) came out with excellent set of nos for Dec qtr. Sales improved by 25% to 20.50 cr but net profit jumped up 125% to 2.60 cr on back of increased capacity, higher realization and better operating efficiency. Company is one of the reputed players in tyre retreading business. It operates thru franchisee business by offering the technology, specialized equipment, retreading material, technical back up etc to the franchisee. It has a state of the art manufacturing unit to produce precured tread rubber along with allied items like cushion gum, repair gum, envelopes, other accessories and specialized equipment for retreading. Notably, the operations at its new plant at Nalagarh, Himachal Pradesh have stabilised at a high level of efficiency. To maintain its growth, company is looking to increase its market share in Tamil Nadu, Karnataka and Kerela, which constitute 30 percent of-the Indian retreading market. Besides, due to termination of joint venture agreement with Bandag Inc. USA earlier, company is now exploring the export markets like Middle East, Africa etc. Accordingly it is expected to clock a turnover of Rs 75 cr and PAT of Rs 8 cr i.e. EPS of 15 Rs on equity of 5.25 cr for FY08. buy at declines.

Uttam Galva (46.00) is the second largest manufacture of cold rolled and galvanized products like coils, plain sheets, corrugated sheets, CRCA and colour coated steel. It is undergoing massive expansion estimated to complete soon this year which will take its cold rolling capacity to 10,00,000 MTPA and galvanizing to 7,00,000 MTPA. Besdies, it already has a colour coating line with a capacity of 80,000 MTPA. In April’07 it raised 85 cr thru GDR @ 40 Rs per equity share. Earlier it had raised approx 200 cr thru FCCB which is yet to be converted into equity shares. With zinc prices remaining stable and steel price on an uptrend, company is expected to end FY08 with topline of Rs 3500 cr and bottomline of Rs 120 cr which means an EPS of Rs 11.50 on current equity and EPS of Rs 9 on diluted equity of 136 Cr (post FCCB conversion). However company is looking to raise further Rs 600 cr thru GDR/FCCB in near future which will dilute the equity substantially. Despite this and high debt, it’s a good bet at current levels.

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Smart Investment (Guj)

Stone India Ltd

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Blue Bird (India) Ltd

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STOCK WATCH

KLG Systel (780.00) specializes in offering technological solution for entire business life cycle i.e. right from concept and creation, through plant design, project execution and management operations & optimisation to expansion/ revamp. It also provides on-line IT solutions to distribution utilities, using its self-developed software Vidushi, SG61 Technology and solution for determining the transmission & distribution losses, fixing the areas of power theft, on-the spot billing & cheque collection, increasing revenue collection efficiency of the utilities and addressing consumer grievances. It already serves 16 of the 44 power distribution companies across the country and this business is estimated to constitue more than 75% of total sales in couple of years from 50% currently. On the other hand, to capitalize the Engineering Services Outsourcing (ESO) potential company has gained engineering design domain-expertise in various industry verticals and has ventured into planning, design and erection of large scale infrastructure projects in India. Hence it is aggressively bidding for EPC (Engineering procurement and commissioning) contracts and has recently acquired 51% stake in Atlantis Lab Pvt Ltd, a dedicated engineering solutions company. Further it is looking for other companies in the aerospace for acquisition. For FY08 it may report a topline and bottomline of more than Rs 300 cr and Rs 55 cr respectively. This works out to an EPS of Rs 42 on diluted equity (post FCCB conversion) of Rs 13.20 cr. However, for FY09 it has the potential to register an EPS of Rs 55 on fully diluted (post warrants conversion & ESOP) of Rs 14.50 cr. Accumulate only at sharp declines.

Selan Exploration (170.00) is involved in onshore drilling for exploration of oil and gas and presently boasts of owning four oil fields Bakrol, Indrora, Lohar, Ognaj and one gas field Karjisan; all in and around Ahmedabad, Gujarat. Incidentally, company has been producing crude from three oilfields as the mining lease for Ognaj oilfield is still awaited from the government of Gujarat. But its Bakrol field alone is stated to have oil/gas reserves of around 45 million barrel which is huge by any standard. However, due to limitiation of funds and not so aggressive management company produced only 1 lakh barrels of crude in FY07 and is expected to do 140,000 in current fiscal which may move up to 2,00,000 barrels in FY09. With assured offtake of the entire oil and gas production from these blocks by the government, as per the terms of the production sharing contract there is zero marketing risk Secondly, with international crude oil prices expected to remain high the future earning of the company looks very encouraging. Although company may report an EPS of Rs 11 for FY08, but considering its oil reserve company is available at fairly cheap valuation.

KEI Industries (88.00), the second largest power cable company in India is enaged in manufacturing of high and low tension cables (HT and LT), control and instrumentation cables, house wires and stainless steel wires. In near future it plans to manufacture Extra High Tension cables which will serve the modern power transmission segment. It is also contemplating to move up thevlaue chain from manufacturing and supplying cables to executing EPC contracts and manufacturing and supplying transformers. Last week company started commercial production at its new 100% EOU unit in Alwar-Rajasthan for manufacturing of HT and LT power cables. Hence it has increased its capacity by 10,000 Kms thereby taking the total cable manufacturing capacity to 50,000 kms per annum. Company has already registered excellent performance for H1FY08 and may clock a turnover of Rs 900 cr and PAT of Rs 58 cr for FY08. This translates into EPS of Rs 7 on fully diluted equity (post conversion of all FCCB) of around Rs 15.75 cr. But considering companys recent expansion and future growth plans it is estimated to report an EPS of more than Rs 10 for FY09. Depsite company having huge debt of Rs 310 cr, investors are advised to accumulate at sharp declines.

Though currently small but Ram Informatics (16.00) is a budding company in e-governance space. It has completed various IT projects especially for different divisions of govt of Andhra Pradesh like computerized administration of sales tax, tourism, state road transport corporation, AP housing board etc. Besides company has desgined, developed and maintains several govt portal like BangaloreOne(Karnataka), eSuvidha (UP), iSetu (Maharastra), Eseva, Sales Tax and Fire Service(AP) etc. Recently, it got an order from Karnataka govt for executing 'Karnataka One' project which is on Boot model for a period of 7 years and the revenue model is based on per transaction. Offlate, it has also won a contract to implement and manage `Bus Pass' automation system in the city of Visakhapatnam, A.P. on Build, Operate and Transfer (BOT) model for a period of 5 years. Few months back company has launched an insurance portal thru which it intends to tap 2%-5% of the agents of LIC for subscription to its portal for a nominal price per year apart from generating income via hosting Ads. On the other hand, it has developed smart software products for automation in banking, insurance &retail. It is also into education & training and offers courses for call centre training, corporate training etc. On the flip side it has invested whopping Rs 32 cr in its US subsidiary called Aravali Technologies Inc which has not yielded much returns.

Lok Housing & Construction Ltd - 200.00 Rs

Incorporated in 1986, Lok Housing and Constructions Limited (LHCL) is the flagship company of the Mumbai based Lok group which specializes in mass - housing and primarily caters to the needs of middle-income group. It has contributed significantly to the development of Mumbai and its adjoining suburbs with over 40 mini and mega residential complexes, commercial centres, from single storey bungalows to multi storey towers, simple flats to pent houses and plush condominiums comprised of 17000 units spread across 9 million sq feet area. Lok Nagari(Ambernath), Lok Terraces(Vashi), Lok Upvan(Thane), Lok Vatika(Kalyan), Lok Nisarg & Lok Kailsah (Mulund), Lok Vihar(Powai), Lok Darshan(Andheri) etc are few of the popular and big projects executed by the company. It is among the first few real estate players to develop an estimated 1.2 million sq ft of land in a single year way back in 1994. It boasts of being the first to start an SRA (Slum Rehabilitation Authority) project in 1994. Notably, it is also among the very few construction companies in India to have instituted six sigma quality system for operational excellence, timely delivery and seamless execution of large scale projects. Presently, it has several residential projects under construction including Lok Everest(Mulund), Lok Amber(Ambernath), Lok Nirman(Khar), Lok Prabhat(Virar) and few others at Thane, Kalyan, Marol etc.

Ironically, LHCL is having a land bank of whopping 1222 acres across Mumbai, Pune and Bangalore with development potential of 62.5 million sq ft. Out of these, 356 acres came into company’s belt due to merger with group companies. Most of the land has been acquired long back at very low cost and are located at Ambernath(80 acres), Kalyan(92 acres), Vasai(136 acre), Turbhe(180 acre), Pune(425 acres), Bangalore(240 acres) and balance 69 acre spread across Andheri, Malad, Khar, Thane & Virar in Mumbai. In order to consolidate and emerge as a bigger player, group recently merged Lok Shelter-involved in urban rehabilitation and reconstruction projects, Lok Global- involved in diverse infrastructure projects and Lok Holding-key vehicle to acquire land with LHCL. Thus, company has now got into two new promising business segment – infrastructure development and rehabilitation project. Although both has huge potential but company is betting high on the latter and is looking to participate in National Urban Renewal Projects comprising slum eradication projects & demolition and reconstruction of old and dilapidated buildings. Hence, it has already submitted a proposal to the state government to rehabilitate tenants of about 300 unsafe cessed buildings in Mumbai and simultaneously develop 6 million sq ft in the heart of the city in association with MHADA. Importantly, against this government may cross subsidize the cost of redevelopment thru sanction of Floor Space Index (FSIs). Hence it’s a win-win situation for either of them.

On the other hand, although Maharashtra govt has approved a proposal to repeal the Urban Land Ceiling Act but still no decision has been taken regarding development of saltpan land and the issue is under consideration. Incidentally, LHCL is holding nearly 180 acre as a salt pan land in Turbhe which it intends to develop into a top quality township on getting clearance. In future company plans to come up with a grand project to be constructed on any of its 125-150 acres of land and to be called as “The Lok International City” which will be a landmark mega township, resembling a small independent civilization and possibly a first of its kind in the country. Apart from robust demand for housing, real estate industry is expected to grow substantially in future due to various factors such as 100% FDI investment, reduction of threshold for integrated townships, real estate investment trust, availability of housing loan at lower interest rate coupled with Income-Tax benefits etc.

Fundamentally, company’s equity has got enhanced to Rs 42.88 cr against Rs 11.70 cr due to merger of group companies / warrant conversion and at the same time promoter holding got increased to 51% against 23% last year. To fund its upcoming projects, company is looking to raise more than Rs 800 cr thru QIB/FCCB/GDR/private placement etc in future. Accordingly it made a pref allotment of 762,200 shares to Bennett & Coleman @ Rs 197 and is planning to allot 50 lakh warrants to promoters @ Rs 354 per share. Considering LHCL’s huge land bank position in metros like Mumbai, Bangalore and Pune coupled with rising property prices, this company is available fairly cheap at a market cap of Rs 800~850 cr. Sarcastically, scrip hit a new 52W high of Rs 390 on 1st Jan 2008 but collapsed 50% in the recent carnage. Although it can go down further, still investors can easily expect 50% return from hereon in 12~15 months.

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J U S T C H I L L A X.!!!

Dear investors,

I know how painful it is to see our portfolio erode by 30~50% in a matter of two days. Its like, our hard earned money is just evaporating in front of us and we are helpless. Interestingly, this is happening without any unfolding of scam or political fallout or any major change in fundamentals on domestic front. But that’s how stock market is. So just Chillax – as we have no better option left with.

To begin with, nobody on earth expected such a massive fall in such a short time. Although few analysts and broking firms were bearish on Indian market, but they too were shocked by the magnitude of fall and the pace at which market crashed. No doubt, large caps had run beyond the so called fundamentals and a healthy correction was overdue. But the main culprit for this carnage is the global factor; especially sub-prime issue & potential recession in USA. I am not sure, but I think the biggies like Morgan Stanley, Merrill Lynch, Citigroup, UBS have already taken a hit of 40~50 billion US $ in their books till now and the world is still busy in calculating the extent of total damage. To worsen the situation further, rumors are afloat that CITIBANK will file for bankruptcy, which I feel is a rumor only. However, the way Asian markets like Hang Seng, Nikkei, Straits, Kospi, Taiwan market or even European markets like Brazil, Russia, FTSE are correcting there is some serious problem.

One can simply evaluate the pressure in which US Fed might be reeling under, as it has just announced an emergency interest rate cut by whopping 75 basis point taking it down to 3.5%. This is the biggest single rate cut in last two decades. This proves that USA’s economic condition is indeed deteriorating. In short, global issues will continue to haunt & dominate our domestic market. It will be interesting to see whether the ‘V” shape pull back takes place in our Indian market as anticipated by most of the market players. Personally, I am expecting a partial pull back but complete recovery or a new high will take much longer time. I hope and expect that our honorable FM - Mr. Chidambaram should announce some good news in this budget for our market as well as corporate world. To conclude, one may call this fall a deep correction or a crash but eventually it’s a comma and definitely not a full stop to the Indian bull market.

And oh yes, if you are among the lucky few sitting on huge pile of cash, I would advise to invest 50% of it immediately at current levels and balance 50% at further 10% fall, in case it happens. Buy any quality mid cap or large cap company with strong fundamentals, great visibility and good management. As most of the scrips are at mouth watering level its very difficult for me to name few of them. Do your own due diligence.


Regards
S A A R T H I