STOCK WATCH

Kamat Hotels (138.00) primarily operates a 245 room five star Ecotel hotel “The Orchid” near Mumbai domestic airport and 190 room service apartment ‘Lotus Suites’ (now renamed as VITS) near Mumbai international airport. In Dec’07 cmpany has opened another 100 rooms five star hotel called “Garh Heritage” in Pune and a 200 room “Orchid Hotel” in Vaishnodevi. Besides it runs around 10 highway restaurants which contribute less than 5% of turnover. Notably, company is adding 130 rooms to “The Orchid” with an investment of Rs 80 cr and has a capex of Rs 250 cr for setting up various properties under VITS brand at Aurangabad, Nagpur, Pune, Nashik, Goa, Baroda etc. To fund its expansion plan, last year company raised a capital of Rs 80 cr thru FCCB route to be converted into equity shares @ Rs 225 per share. For FY08, it reported 30% growth in topline as well as bottomline to Rs 148 cr and Rs 27 cr respectively. This translates into EPS of Rs 20 on current equity of Rs 13.80 cr. Incidentally, foreigners contribute around 40% of the total revenue but company follows single-rupee tariff system. Although company boasts of very aggressive expansion plan but is actually slow in execution. Hence on a conservative basis for FY09 it may report total revenue of Rs 175 cr and net profit of Rs 30 cr which works out to an EPS of Rs 17 on diluted equity of around Rs 18 cr. A strong buy for 50% gain in 12~15 months.

Blue Bird (36.00) is one of the leading manufacturers of paper based notebook products and office stationery. Although notebook forms the core business, company has also ventured into publishing academic textbooks and self study books for children apart from general publications in subjects such as ayurveda and biographies. It also offers end to end solutions for commercial printing. The marketing and sales team at company supports the distribution network of over 600 dealers and distributors spread across 18 cities in India, as also overseas representatives in many countries. In order to cater the central and south India market efficiently, company has put up two new plants at Indore and Bangalore apart from having its main plant in Pune. Financially, company is weak in managing receivables as it has very high debtors equivalent to four months of sales. This has led to huge debt and recently to fund its working capital requirement company has privately placed Rs 100 Crores Redeemable NCD with LIC Mutual fund for one year. Hence interest cost is the biggest drag on company’s financial. Despite having healthy margin, for FY08 it is estimated to report total revenue of Rs 485 cr and NP of Rs 28 cr i.e. EPS of Rs 8 on equity of 35 Rs. Still it can easily give 30~40% return within a year from current levels.

Kolte Patil (88.00) is in the midst of developing 28 projects (24 in Pune and 4 in Bangalore), with a total saleable area of around 18 million sq. ft. consisting of 10 residential complexes, 11 commercial development, 5 IT parks, 1 integrated township & 1 service apartment. In addition, it has entered into MOU or has acquired development rights for another 22 million sq. ft. of saleable area in and around Pune and Bangalore. Although the actual land bank owned by the company is less than 15 acre but the development right is equivalent to whopping 755 acres of land. With this company has a total developable space of massive 40 million sq. ft. For FY08, its revenue jumped up 60% to Rs 369 cr and net profit shot up 55% to Rs 129 cr after paying tax to the tune of Rs 37 cr. Hence it reported an EPS of Rs 17 on equity of Rs 75.30 cr. Assuming the company to report lower operating margin of 30% for FY09 (against 43% in FY08), still it is estimated to clock a turnover of Rs 650 cr and PAT of Rs 150 cr i.e. EPS of Rs 20 cr on current equity. In short although the profit margin of company is too high to believe still scrip can give decent return in medium term.

Due to hardening of interest rate, rising CRR and recent hike in repo rate, banking sector has taken a huge beating on the bourses. Most of the banks are trading at 52W low levels and Allahabad Bank (65.00) is no exception. It is among the very few banks which are trading at huge discount against their book value. Moreover Allahabad bank is fundamentally a strong bank with Gross NPA at 2%, Net NPA at 0.80%, Capital Adequacy Ratio above 12%, Net interest margin at 2.80% and most importantly having a book value of Rs 117. For year ending March 2008, it registered 20% growth in total deposit and gross advance whereas its Net profit shot up by 30% to Rs 975 cr. This works out to an EPS of whopping Rs 22 on current equity of Rs 447 cr. Agianst this it declared 30% dividend. Hence scrip is current trading at a P/E ratio of less than 3x times and with a dividend yield of 5% at CMP. To maintain its growth momentum, bank has got the approval for opening 116 more branches and has additionally applied for authorization of 180 more branches during the current financial year. Besides bank is focusing to improve its fee based income and has made tie-ups with several organizations for marketing of mutual funds and insurance products. A safe bet.

Small & Beautiful

Kamat Hotels (138.00) primarily operates a 245 room five star Ecotel hotel “The Orchid” near Mumbai domestic airport and 190 room service apartment ‘Lotus Suites’ (now renamed as VITS) near Mumbai international airport. In Dec’07 cmpany has opened another 100 rooms five star hotel called “Garh Heritage” in Pune and a 200 room “Orchid Hotel” in Vaishnodevi. Besides it runs around 10 highway restaurants which contribute less than 5% of turnover. Notably, company is adding 130 rooms to “The Orchid” with an investment of Rs 80 cr and has a capex of Rs 250 cr for setting up various properties under VITS brand at Aurangabad, Nagpur, Pune, Nashik, Goa, Baroda etc. To fund its expansion plan, last year company raised a capital of Rs 80 cr thru FCCB route to be converted into equity shares @ Rs 225 per share. For FY08, it reported 30% growth in topline as well as bottomline to Rs 148 cr and Rs 27 cr respectively. This translates into EPS of Rs 20 on current equity of Rs 13.80 cr. Incidentally, foreigners contribute around 40% of the total revenue but company follows single-rupee tariff system. Although company boasts of very aggressive expansion plan but is actually slow in execution. Hence on a conservative basis for FY09 it may report total revenue of Rs 175 cr and net profit of Rs 30 cr which works out to an EPS of Rs 17 on diluted equity of around Rs 18 cr. A strong buy for 50% gain in 12~15 months.

Blue Bird (36.00) is one of the leading manufacturers of paper based notebook products and office stationery. Although notebook forms the core business, company has also ventured into publishing academic textbooks and self study books for children apart from general publications in subjects such as ayurveda and biographies. It also offers end to end solutions for commercial printing. The marketing and sales team at company supports the distribution network of over 600 dealers and distributors spread across 18 cities in India, as also overseas representatives in many countries. In order to cater the central and south India market efficiently, company has put up two new plants at Indore and Bangalore apart from having its main plant in Pune. Financially, company is weak in managing receivables as it has very high debtors equivalent to four months of sales. This has led to huge debt and recently to fund its working capital requirement company has privately placed Rs 100 Crores Redeemable NCD with LIC Mutual fund for one year. Hence interest cost is the biggest drag on company’s financial. Despite having healthy margin, for FY08 it is estimated to report total revenue of Rs 485 cr and NP of Rs 28 cr i.e. EPS of Rs 8 on equity of 35 Rs. Still it can easily give 30~40% return within a year from current levels.

Kolte Patil (88.00) is in the midst of developing 28 projects (24 in Pune and 4 in Bangalore), with a total saleable area of around 18 million sq. ft. consisting of 10 residential complexes, 11 commercial development, 5 IT parks, 1 integrated township & 1 service apartment. In addition, it has entered into MOU or has acquired development rights for another 22 million sq. ft. of saleable area in and around Pune and Bangalore. Although the actual land bank owned by the company is less than 15 acre but the development right is equivalent to whopping 755 acres of land. With this company has a total developable space of massive 40 million sq. ft. For FY08, its revenue jumped up 60% to Rs 369 cr and net profit shot up 55% to Rs 129 cr after paying tax to the tune of Rs 37 cr. Hence it reported an EPS of Rs 17 on equity of Rs 75.30 cr. Assuming the company to report lower operating margin of 30% for FY09 (against 43% in FY08), still it is estimated to clock a turnover of Rs 650 cr and PAT of Rs 150 cr i.e. EPS of Rs 20 cr on current equity. In short although the profit margin of company is too high to believe still scrip can give decent return in medium term.

Due to hardening of interest rate, rising CRR and recent hike in repo rate, banking sector has taken a huge beating on the bourses. Most of the banks are trading at 52W low levels and Allahabad Bank (65.00) is no exception. It is among the very few banks which are trading at huge discount against their book value. Moreover Allahabad bank is fundamentally a strong bank with Gross NPA at 2%, Net NPA at 0.80%, Capital Adequacy Ratio above 12%, Net interest margin at 2.80% and most importantly having a book value of Rs 117. For year ending March 2008, it registered 20% growth in total deposit and gross advance whereas its Net profit shot up by 30% to Rs 975 cr. This works out to an EPS of whopping Rs 22 on current equity of Rs 447 cr. Agianst this it declared 30% dividend. Hence scrip is current trading at a P/E ratio of less than 3x times and with a dividend yield of 5% at CMP. To maintain its growth momentum, bank has got the approval for opening 116 more branches and has additionally applied for authorization of 180 more branches during the current financial year. Besides bank is focusing to improve its fee based income and has made tie-ups with several organizations for marketing of mutual funds and insurance products. A safe bet.

Smart Investments

Grauer & Weil Ltd

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Shree Ganesh Forgings Ltd

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Associated Alcohols & Breweries Ltd - 40.00 Rs

Incorporated in 1989, Associated Alcohols & Breweries Ltd (AABL) is one of the largest distilleries in India and the flagship company of the Associated Kedia Group having interests in liquor manufacturing and bottling. It is among the few companies in India to have a presence in every aspect of the value chain from potable alcohol, country liquor, Extra Neutral Alcohol (ENA), grain spirit (extra fine grade, triple distilled), rectified spirit, Indian Made Foreign Liquor (IMFL) to bottling scotch whisky. It has its own IMFL brands across entire range of whisky, rum, gin and vodka to cater Indian customers and even boasts of having strong portfolio of popular brands such as Red & White, James McGill & Bombay Special in Whisky, London Bridge in Gin and Jamaican Magic in Rum. Besides, AABL is a leader in Madhya Pradesh and sells country liquor in 10 districts through the Government and has sales of approx 2.5 million cases annually. Apart from marketing its own brands, AABL also manufactures and bottles IMFL and Scotch whisky for many Indian and international companies. Broadly, it derives 25% of revenue from country liquor, 25% from IMFL segment and balance 50% comes from bulk supply of ENA & grain spirit.

AABL has a sophisticated manufacturing facility at Khodigram in Indore-Madhya Pradesh, with a rare operational flexibility to manufacture alcohol through grain and molasses route thus providing insulation against raw material price or supply volatility. With record grain prices, most of the alcohol is produced from molasses. Presently, it has an installed production capacity of 42 million litres per annum. However plant is working at 70% capacity utilization as it made a production of 30 million litres for FY08. In addition, company has 10 bottling lines in two different sections equipped to pack around 1,00,000 cases per month. Remarkably, AABL is a sole supplier of triple distilled fine grade grain spirit to Diageo for Smirnoff Vodka in India. It is also the only liquor company in India bottling Glen Drummond single malt Scotch whisky for Mason & Summers, a leading liquor company. It also manufactures and bottles reputed international brands like HAIG Scotch Whisky, Captain Morgan Rum, Master Stroke Royal Classic Whisky etc. At the same time it is looking to market its own brand in the international market.

To capture domestic and international demand and increase its share, company has chalked out a huge greenfield expansion plan under a capex of Rs 50 cr to re-configure its production process to extract greater efficiency. Accordingly it is setting up a multi-pressure ENA plant to replace the older plant and increase the installed capacity to 65 million litres per annum. It also intends to put up a 2 MW bio-gas fuelled cogeneration captive power plant with a new 20 tons per hour boiler. Further a Reverse Osmosis water treatment plant with a 1,650 cubic mtr capacity per day is being set up and a plant to collect, pressurize and sell carbon dioxide is being considered. However all the above projects are estimated to complete by mid 2009.

Meanwhile, AABL has been able to improve its profit margin due to strict cost control. It has recorded 200 basis point increase in OPM to 8% in FY08 from 6% in FY07 and is further slated to register 10% OPM for FY09. Its sales increased by 50% to Rs 120 cr and PAT zoomed up 140% to Rs 5.60 cr for FY08 posting an EPS of Rs 8 on current equity of Rs 6.80 cr. However, company has allotted 35 lac warrants in June 2007 which is due to get converted by Dec 2008 @ 24 Rs per share and will dilute the equity by 50% to Rs 10 cr. So for FY09 on the back of better capacity utilization, AABL may clock a turnover of Rs 150 and PAT of Rs 7 cr which translates into EPS of Rs 7 on fully diluted equity of Rs 10 cr. At a fair valuation by 8x times, scrip can shoot up to Rs 60 within a year. But equity dilution is a concern as to fund its capex company is looking to raise Rs 30 cr by equity route which may further dilute the equity to Rs 15 cr.

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Decolight Ceramics Ltd - 18.00 Rs

Incorporated in 2000 by Shri Girishkumar Pethapara, Decolight Ceramics Ltd (DCL) - part of Gujarat based Deco group is mainly engaged in production of Vitrified ceramic tiles and porcelinato tiles. It specializes in manufacturing all types of vitrified tiles broadly in sizes of 605 x 605 mm & 807 x 807 mm and in many variants like mono colours, special colours, marble prints, matt finish, granite (salt and pepper), full body multicharge) etc. Notably, its products are approved by various entities hence company has direct sales to builder, contractor, corporates, housing boards etc on one hand whereas on the other hand it also markets its product in the retail segment under its own brand name ‘Granolite’. In near future, DCL is contemplating to setup its own retail outlets to improve the margins. Vitrified tiles have become extremely popular over the years due to ease in laying, strength, durability, hygiene and most importantly are available at one fourth the cost of Italian Marble. Hence they are widely used as floor tiles in residential complexes, commercial complexes (SEZ, IT parks, airport, hotels, call centres etc.) and retail spaces (shopping malls, multiplexes etc.). Today, with having more than 5000 dealers in India and exports to more than 20 Countries, Granolite is rapidly becoming a well known & reputed brand.

Initially, starting with a production capacity of 3,000 sq mtrs per day of vitrified tiles, DCL today boast of having a capacity of 12,000 sq mtr. Of these 6,000sq mtr has been added last year only. Based on Chinese technology, company plant is located at Ceramic City ‘Morbi’ in Gujarat which fulfills 70% needs of the ceramic industry in India apart from having ample supply of clay. As power constitutes the major cost, company has put up coal gas plant which ensures efficient fuel consumption and substantial savings compare to conventional fuel cost. Further company has taken trials of Pet coke firing system which is slated to be even cheaper than coal gas technology. Moreover, it has installed one 1.25 MW Wind Turbine Generator and is in the midst of installing another two turbine aggregating to 3.35 MW from Suzlon.

Recently, company has diversified into Aluminium Composite Panel (ACP) and has set up a plant with an installed capacity of 25,000 sq ft per day which started commercial production from end May 2008 only. In future company intends to take this capacity to 35,000 sq ft per day. ACP is used primarily as exterior covering of commercials buildings and corporate houses. While adding to aesthetic beauty of the structure, it also provides good thermal as well as sound insulation. It is also used in the inner surface and walls of the buildings. The product has recently been introduced in the Indian market and has significant market potential with less competition. Incidentally, DCL can use its established distribution network to market this product as ACP is also a construction material.

Last year in May 2007, DCL raised nearly Rs 45 cr thru IPO route at Rs 54 per share. This was largely to fund the capacity expansion of vitrified tiles, set up a plant for ACP & install wind turbine generators. It has fully utilized the funds as per projections and is estimated to get the benefit in current fiscal. Even for FY08, it has registered excellent performance. Sales increased by 60% to Rs 81 cr and net profit shot up 75% to Rs 8.80 cr even after making high tax provisioning of Rs 5.80 cr which is 40% of PBT. This translates into EPS of Rs 5 on expanded equity of Rs 18.30 cr. Accordingly for FY09 it can report a topline of Rs 100 cr and bottomline of Rs 10.50 cr i.e. EPS of Rs 6. Hence the company is available fairly cheap at an EV/EBIDTA of less than 3x times. Besides, there is a remote possibility that in future promoter may think of merging group companies like Deco Ceramic Industries, Decogold Glazed Tiles Ltd with DCL. Investors are advised to buy at current levels with a price target of Rs 30 in 12~15 months. However, investor should keep in mind that there is stiff pricing war in ceramic industry from the local unorganised segment and from Chinese players as well.

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