11 Muhurat Buys

'Kaun Banega Crorepati’ is back on our television sets with superstar Amitabh Bachchan once again keeping the spirit of the quiz session vibrant. Taking a cue from there, we too have started this story with a question. Let’s see if you can get it right. Of course, there are no immediate prizes to be won for the correct answer but yes, you could stand to gain in the long run. Are you ready? On which day of the year does the Indian stock market start in the evening instead of the usual morning hour? Easy, wasn’t it? That’s right - this is a once-in-year phenomenon that happens on the Diwali day when the stock markets starts trading in the evening. It’s called ‘muhurat trading’ and it lasts for only a couple of hours. The belief is that this is supposed to be the most auspicious day when investors buy shares mostly as a token gesture to signify that their perspective is bullish on the market for the next one year. As normally happens, the trading that takes place on this day shows no signs of aggression or volatility but moves in a very narrow range and with low volume. Our analysis suggests that the volatility is less than 1 per cent for the Sensex. However, there is something interesting that has been unravelled by the DSIJ research team. This is the fact that the market behaviour in the wake of the muhurat trading remains buoyant at least for the next 30 days. The data compiled by us shows that out of the past six years the Sensex yielded positive returns post one month from the day of muhurat trading in five years, barring last year when it underwent some minor corrections. Another interesting fact is that this is the first time in the history of the stock market when the Sensex is above the 20,000 level during Diwali. The previous high was in 2007 when the Sensex was at 18,907 on the day of muhurat trading. However, this time the returns from the stock market have not been as exciting as those of last year when the Sensex surged by 71 per cent from the Diwali of 2008 to the Diwali of 2009. This year the returns have been more subdued at 17 per cent and a major portion of that gain has come in the last few months. That’s because the Sensex kept swinging in a narrow range for almost eight to nine months.

Keeping the tradition alive, this year we have carved out a selection of 11 scrips that we believe should do well on the bourses in the next one year. Our selection process, as is the custom, has been made with lots of research and data crunching. We first identified sectors that are likely to do well in the next 12 months. Having done that, we further refined our search to select companies from that sector. From there started the process of selecting companies and contacting the management to get more insights into the company’s operations and future outlook. In the process we had to drop a few companies as they either did not beam out that wave of excitement or else our discussion with the management did not build up the required confidence which is so very essential for being included in our ‘mahurat’ portfolio. We have created a portfolio worth `10 lakh comprising these 11 scrips so that it can serve as a readymade model for anyone wishing to invest on those lines. We have given different weightages to each of the scrips keeping in mind the risk versus the returns ratio. We have also fine-tuned the portfolio with large-cap, mid-cap, and small-cap scrips so that investors can make the most of this portfolio. We are sure that our readers would make the right use of this information. As a matter of transparency we have also provided alongside last year’s portfolio vis-a-vis the current year’s valuations. The returns calculated do not include dividend that the investors must have received. We also take this opportunity to wish all our readers a very happy and safe Diwali. Let Goddess Lakshmi shower on each of us her blessings for prosperity, health, and progress.[PAGE BREAK]

It’s always good to review one’s own performance as it allows you to gauge yourself and also set higher benchmarks for future performances. We at Dalal Street Investment Journal (DSIJ) too believe in this and have been reviewing our performances for many years. Therefore, this year is no different. It was the same time during last year that we had published our list of muhurat buy recommendations for our readers and one year down the line it’s time to check out the results. If one looks at the last year’s recommendations what becomes apparent is that we had a good mix of sectors and were bullish on power, infrastructure, IT, PSU banks, IT, and FMCG. In these we selected what we felt were the best picks and recommended companies such as HCC, L&T, SBI, Colgate, Mphasis, amongst others. At that time the Sensex was trading at the level of 16,959. Thus, if one looks at the overall performance, the total portfolio is up by more than 21 per cent in the last one year whereas the Sensex, which has been witnessing brisk movement lately, is up by almost 18 per cent during the same period. Thus this clearly shows that our DSIJ muhurat buy portfolio has outperformed the overall Sensex performance. If we further dissect the portfolio it can be observed that barring two scrips viz. Tulip Telecom and Mphasis, which have given negative returns of 6 per cent, the rest have yielded positive returns, with the maximum returns given by a fairly low profile company called SRF with 93.36 per cent while the least being HCC with returns of 1.31 per cent and CESC with 2 per cent returns. The question now is this: With 21 per cent returns already in, what should one do with this portfolio? Would it be wise to book profits or would holding the portfolio further be a prudent strategy. Our sense says that one can book partial profits in scrips such as SRF, Syndicate Bank, SBI, and Ranbaxy which have given good upsides of 93 per cent, 45 per cent, 44 per cent, and 41 per cent respectively. Scrips such as HCC, CESC, Mphasis, Tulip Telecom - even though they have underperformed the broader markets - are still strong with the potential to give a good upside in the coming period. There is steam left in these scrips and it’s only a matter of time before they will catch up with their valuations. Given ahead in the cover story are strong 11 muhurat buys from our research team which will light up your Diwali this year.

SREI Infrastructure Finance
If the India growth story is to continue then infrastructure development has to maintain a good pace and hence no portfolio can afford to ignore infrastructure-related sectors, especially infrastructure financing which is sweetly poised to play a major role. Hence to add more flavour to the portfolio we are recommending SREI Infrastructure Finance (SREI). Infrastructure being the government’s priority, massive projects have been announced, which will require huge funding for execution. This opens up huge growth avenues for a company such as SREI, which is a direct beneficiary of the infrastructure story. Besides, SREI’s ability to provide all infrastructure financing-related solutions under one roof, may it be equipment financing, project financing or advisory, and also being a partner in infra projects makes it further attractive. [PAGE BREAK] This not only augurs well for the clients as it provides one-window solutions but also for the company which provides it with diverse streams of revenues. This we believe will help SREI deliver stronger results in the coming years. Secondly, what augurs well for SREI is its decision to merge Quippo Infrastructure Equipment with itself. Quippo is a unique company that offers telecom towers, oil & gas drilling and construction equipment, and power solutions on a rental basis. Once merged, SREI will become an integrated infrastructure company providing services beyond project and equipment financing to diverse sectors such as oil & gas, telecom, construction, and power. This will also broaden its revenue streams, thereby de-risking its business. SREI has also fixed the swap ratio at three shares of SREI for every two shares of Quippo. In fact, SREI has also proposed a bonus in the ratio of 4:5. The other advantage post-merger is that SREI’s net worth will grow to `2,400 crore from `790 crore. Besides, the company also wants to expand beyond infrastructure financing and has evinced interest to venture into banking. On the financial front SREI’s revenues increased by 15 per cent to `969.57 crore (`842.46 crore), while profits increased by almost 90 per cent to `156.80 crore (`82.57 crore). On adjusting for amalgamation and bonus, SREI is available at a price-to-book of 3x which looks fair for such a briskly growing company. Hence one can buy SREI at its CMP of `113 with a one year target price of `145.

Sintex Industries
Sintex Industries (SIL) is one of the leading providers of plastics and niche textile-related products in the country. Out of company’s total product portfolio, it is prefabs and monolith construction, which contributed approximately 36 per cent of FY10 revenue, will drive the company’s future growth. The confidence comes from the huge order book in the segment, which stand at `2,600 crore at the end of September 30, 2010, which is to be executed in next two year time. This segment is expected to clock more than 50 per cent growth in FY11. Monolith construction mainly derives its revenue from spending of Central and state governments on mass housing programmes like JNNURM and Indira Awaas Yojana. Similarly for prefab structures company has approvals in place from 17 states where it can bid for tenders and is actively negotiating with other states as well. It is also launching new products related to cold chains and a grisheds for farms to expand its product range in prefabs. Any increase in government outlay will further bolster the company’s order book. But due to payment delays in government orders the company requires higher working capital, which management is confident of managing without raising debts. The company is even contemplating to diversify geographically in north by acquiring a regional engineering procurement and construction player with strong execution capabilities. Even other segment like customs moulding is expected to do well as domestic automobile sector is firing on all cylinders. SIL manufacturers plastic manufacturers) are going for capacity expansion that will translate well for company’s this segment. Coming to the financials of SIL, recently announced Q2FY11 results were clearly ahead of the street expectation and net sales grew by 29 per cent on yearly basis to `923 crore. As expected it was monolithic which grew by 107 per cent Y-o-Y basis [PAGE BREAK]

that lifted the performance. Even the operating margin has increased by 40 bps and was 18.6 per cent. Net profit recorded yearly increment of 75 per cent and increased to `100 crore (Q2FY11) against `57.2 crore posted in last year same quarter. The CMP of `426 discounts last twelve month earning by 14.7 times and EV/EBITDA of 12 times. This looks attractive if we look SIL’s last quarter financial performance and last three year sales CAGR of 41.31 per cent and profit growth of 34.73 per cent. Therefore we recommend our readers to take exposure in the counter with target of 15-20 per cent gain from current price. 

Container Corporation of India
It’s essential to bring in the stability factor to one’s portfolio and hence it’s imperative to have a public sector undertaking (PSU) scrip in the final selection. Container Corporation of India (Concor) is that PSU counter from the very attractive logistics space that we believe will light up your Diwali this year and bring more firmness to your portfolio. When it comes to the one-stop logistics solution there is no better name in the industry than Concor – a carrier, terminal operator, and warehouse operator, which does everything in terms of coordinating with all the different agencies such as customs, ports, railways, road haulers, forwarders, custom house agents, and shipping lines, etc. The uniqueness of Concor comes with the benefit it gets from its long-standing relationship with the Indian Railways, may it be in terms of the terminals situated on leased railway land or the operational support and wagons it gets. Besides, with 94 per cent of its inland transport done through rail that is price competitive over long distances, Concor is able to pass on this advantage to its clients, thus giving it an edge over others. Besides, with the massive infrastructure it has built over the years, which includes 237 rakes (container rail industry has 330 rakes), 59 terminals, 15,754 containers, 10,194 wagons (including 8,837 high-speed wagons), and a market share of almost 28 per cent, Concor is bound to be a direct beneficiary from the growing trade in the country. Concor did face the impact of glob-al recession in the last fiscal but now things have considerably improved since the second half of FY10 with its export import (EXIM) volumes increasing by 10.4 per cent. EXIM contributes 78 per cent to the total revenues, while the balance is domestic. There has been a strong bounce-back in trade and the overall container traffic has witnessed double digit growth since December 2009. This momentum has also continued in the first two months of FY11 wherein the container traffic grew by 21.5 per cent and 20.9 per cent respectively. This augurs well for Concor as the bounce-back in trade should help sustain the container traffic in the coming quarters, thereby pushing revenue growth further. That apart, Concor is also a zero-debt company, which limits its interest cost outgo and helps keep its margins and profits healthy. On the valuation front, on trailing 12-months profits of ` 771 crore, the scrip is available at a PE of 22x and is still quoting at a discount to the broader markets. Besides, Concor has underperformed the broader market over the last six months and it’s only about time that the scrip will catch up with the valuations. Hence one can buy Concor at its[PAGE BREAK]

CMP of `1,292 with a one year target of `1,584. 

Jay Bharat Maruti
The automobile sector has witnessed a very strong volume growth in the preceding seven quarters and our recent cover story had mentioned that the growth momentum is likely to continue. The sustained momentum in volume growth in the auto sector would mean better volume growth for auto ancillary companies. With India expected to become a manufacturing hub for small cars, the opportunity is expected to widen further. Here one company which stands out is Jay Bharat Maruti (JBML). JBML manufactures and supplies auto parts to original equipment manufacturers of two-wheelers and passenger as well as commercial vehicles and tractors. Apart from benefiting from the volume growth in the auto sector there are certain other factors for recommending the counter. Along with its continuous dividend paying history, JBML is available at very attractive valuations with its CMP of `101 discounting its trailing four-quarter earnings by 9.43x, which is much lower as compared to its peers that are trading at double digit P/Es. Even its EV/EBITDA is just 3.07x. JBML’s product portfolio mainly includes body in white (BIW) parts, fuel neck, rear axles, and exhaust systems. Around 65 per cent of the revenue comes from BIW parts. Here the investors might be curious to know whether there are other players also and how JBML stands out differently. The answer is quite simple: JBML supplies auto parts to all the models of Maruti Suzuki India, a feat achieved by very few auto ancillary companies. Maruti also holds a stake of 29.28 per cent in JBML which provides a comfort level about the management. That apart, JBML also supplies to Honda Motorcycles and Scooters India, Eicher Motors, and M&M of which MSIL is the largest customer. Maruti is doubling its capacity addition plans from its earlier new addition of 0.25 million to 0.5 million (which is around 40 per cent of existing capacity). This is expected to be operational in phases from 3QFY12 and provides a large growth opportunity for JBML. Further, India is expected to become a manufacturing hub for small cars which will provide a good opportunity to JBML. 

With JBML belonging to the JBM Group which also caters to the inter-national markets, there is the possibility of tapping new customers from its group companies. Further, the company is also looking for some diversification. The slump in the auto sales in 2008 made the company think seriously to de-risk its business and one of the strategies it has adopted is to diversify its business. JBML is looking to foray into the aviation parts segment. But specific information about this investment is not yet available. On the financial front the performance has been very good. After posting decent growth in FY09 despite the difficult scenario, in FY10 it posted strong growth in FY10. The topline was `803.21 crore and net profit was `21.01 crore as compared to `691.73 crore and `10.36 crore respectively in FY09. It carried for-ward this momentum in Q1FY11 also. Further, one of the important rationales is its consistent dividend paying history of 20 years. At its current market price the dividend yield works out to be 2 per cent. Looking at the attractive valuation of the company and its future growth we advise our readers to take expo-sure to the counter with a one year horizon.

Jubilant Life Sciences
With an order book of USD 1 billion spread over FY11-FY15, Jubilant Life Sciences (JLS), previously known as [PAGE BREAK]

Jubilant Organosys, is certainly in the comfort zone on the revenue front and this is what has driven us to pick it as part of our Diwali portfolio. Of this, USD 245 million worth of orders are expected to be executed in the rest of FY11. In addition to the above, JLS has, in August, signed two new contracts valued at USD 51 million and USD 33 million respectively. The first one is a long-term contract in the contract research and manufacturing services (CRAMS) space with a leading US-based life sciences company. Further, JLS is in discussion with the same to increase the contract to more than 2.5 times.In the recent past the JSL board has approved the demerger of its agri and performance polymer business (APP) to concentrate on its Pharma and Life Sciences Products and Services (PLSPS) Division which will come into force from January 2011. The demerged entity will be known as Jubilant Industries, while Jubilant Organosys will be known as Jubilant Life Sciences. In the PLSPS division the company has three segments viz. CRAMS, pharmaceuticals, and healthcare. The product pipeline is very strong. In the CRAMS segment the company has a total of 59 products of which 29 are in Phase I and 14 and 16 in Phase II and III of clinical trials respectively. In the API segment JLS plans to file 8-10 drug master files (DMF) every year and has a total of 38 DMFs till date. As per their outlook, JLS has filed two new DMFs in Q1FY11. These filings provide good revenue visibility for the future. On the financial front JLS has reported topline and bottomline growth of 7.30 per cent and 82 per cent on a YoY basis for FY10 respectively. It has reported an EPS of `26.57 for FY10 as against `13.73 for FY09. At the current price the stock trades at a P/E of 13.29x on its TTM EPS which is much cheaper than the other listed players in the same space. Its EV/EBITDA is 11.14x which is also quite less as compared to its other listed peers. The contract research busi-ness which had witnessed a slowdown is likely to improve from H2FY11 as customer inventory de-stocking for CRAMS companies is coming to an end and we expect growth to rebound since its clients have commenced re-stocking activities.

JLS is also expanding its capacities in proprietary products and exclusive synthesis by 20 per cent through debottlenecking in API and for Vitamin B3. It is adding additional capacity of 10,000 MT, likely to be operational by the end of FY11. There is no major repayment of loans in Jubilant Organosys in the next three years other than the FCCBs of which an amount of USD 142 million is to be paid in May 2011 and YTM of USD 60 million is to be paid till March 2011 which will get converted to 1.54 crore equity shares of Re 1 each with a conversion price of `413.44. There is an option to convert the FCCBs into equity or carry them forward. The average cost of borrowing is at a very low level of 4.9 per cent. At present we feel that the company is an ideal candidate that will sparkle for a whole year till Diwali 2011. 

Oriental Bank of Commerce
One of the sectors helping the broader market index Sensex to reach its yearly high is that of banking. It currently has a weightage of approximately 20 per cent in the Sensex and the banking stocks have moved up by more than 25 per cent in the last three months compared to Sensex’ rise of 13 per cent. Despite most of the banking stocks reaching ripe valuations, Oriental Bank of Commerce (OBC), a public sector bank, is still available at an attractive valuation. At its CMP of `477.25, the scrip is still available at 1.85 times of its adjusted book value against the price-to-book value of 3.22 for the BSE Bankex Index. Also, despite rising by 88 per cent YTD, the dividend yield is at a healthy 2 per cent. The operational performance of the bank has been improving too. It is now one of the best in the industry. [PAGE BREAK]

The bank’s cost to income ratio has come down to 35.4 per cent (Q1FY11) as against 41 per cent (Q1FY10). As for the core earnings of the bank, for quarter ended June 2010 its net interest income (NII) shot up by 118.36 per cent on a yearly basis and reached `1,057.24 crore. This growth was primarily fuelled by its improved net interest margin (NIM), of 3.34 per cent as against 1.83 per cent that had prevailed for the same quarter last year and 3.27 per cent in the previous quarter. Apart from better credit growth (20.3 per cent), a sharp decrease in the cost of deposits that declined to 5.61 per cent as on June 30, 2010 as against 7.41 per cent on the corresponding date last year helped the bank to record such a high NIM level. Meanwhile, the bank’s asset quality is also well under control. Its gross NPA and net NPA ratios were at 1.7 per cent and 0.7 per cent respective-ly in the latest quarter. The resilience in its restructured accounts is laudable considering a slippage of `373 crore (a relatively low slippage ratio of 7 per cent of the total restructured accounts of `5,318 crore). On the back of a strong operating performance, the bank has improved its provision coverage ratio to 80.4 per cent. All this has helped the bank to substantially improve its return on assets that was at 1.03 per cent at the end of Q1FY11 as compared to 0.89 per cent in Q1FY10. Despite this, there still remain areas where it needs to catch up such as its CASA ratio which is still at 25 per cent as against more than 30 per cent of its peers while the contribution of non-interest income is just 16 per cent of the total income. In a recent development the Government of India has agreed to infuse capital in the bank that will help it to stimulate its future credit growth. Currently the CAR of the bank is just 12.4 per cent. Coming down to the bank’s valuation, it is currently trading at 1.85 times of its adjusted book value which is low compared to some of the other PSBs that are trading at more than two times. We believe that the improved performance, infusion of capital by the government, and the attractive valuation at which the scrip is available will add value to your portfolio. 

Tata Chemicals
Tata Chemicals (TCL), a Tata Group company, operates in three segments viz. inorganic chemicals, fertilisers, and consumer products. Its inorganic chemicals’ segment contributes 45 per cent (FY10) of total revenue and includes its primary product soda ash. TCL is the second-largest soda ash manufacturer globally with production capacities spread across continents such as the USA, the UK, Africa, and India. It owns 8 per cent of global soda ash capacity and more importantly, 35 per cent of TCL’s soda ash capacity is based on low-cost natural soda ash. After the fall in the prices of soda ash during the commodity price bust of 2008 post the Lehman Brother crisis, the prices have remained soft due to better incentives given by the Chinese government to its manufacturers. However, things are getting better now and we believe that the worst seems to be over for the soda ash price level, this being reflected in the prices of the first quarter of FY11. The average soda ash FOB China price was 13 per cent higher in Q1FY11 than in FY10 and Chinese manufacturers are generating cash losses. In other words, we expect the prices to move up further.[PAGE BREAK]

The other segment of TCL serves the agricultural sector and is into the fertiliser business. This mainly includes urea and phosphatic fertilisers and it contributed 36 per cent of the company’s consolidated revenue of FY10. TCL contributes 6 per cent to India’s urea production and has a market share of 12 per cent in the pesticides business (through its subsidiary Rallis India wherein it holds 50.06 per cent). After approving the pricing in terms of a nutrient-based subsidy (NBS) for complex fertilisers, the government is mulling the introduction of several other policy changes such as increasing the floor price of urea under the new investment policy as well as proposing higher allocation of gas to fertiliser manufacturers. This will help TCL to take a decision on doubling its urea capacity at its Babrala facility, approval for which has already been obtained from the concerned ministry. TCL has also ventured into consumer products with the launch of the ‘Swach’ water purifier. Within the nine months of its launch it has achieved monthly sales volume of 50,000 units and revenue of `5 crore.

Though at a nascent stage of roll-out, it has huge potential as it targets the bottom of the pyramid. In addition, TCL also has huge quoted investments with its current market value tagged at `2,145 crore. This works out to be around `90 per share, implying that the company’s main business is available at `340 per share. Currently the share price of TCL is discounting its 12-month earnings by 13.2 times and looking at factors such as the improved realisation of soda ash, supportive government policy, and the healthy contribution of its consumer segment, TCL will be re-rated and will provide at least 20-25 per cent appreciation from its CMP till next Diwali.

Texmaco
There can be no better counter to light up your Diwali festivities than Texmaco. A company from the sunrise sector, Texmaco has been a consistent performer over the years catering mainly to the Indian Railways. There are quite a few reasons why we believe that this company will do well. First, Texmaco is a direct beneficiary of the railway spend and considering the fact that the Indian Railways has projected a massive outlay of `41,426 crore in FY11, of which 32 per cent or `13,140 crore outlay is for rolling stock, Texmaco is bound to reap a rich harvest because it derives over 75 per cent of its revenues from wagons. That apart, there are other related factors such as the proposed 1,000 km of new rail lines, Indian Railways’ freight loading target of 944 million tonnes for FY11, modified wagon investment scheme which allows private operators to invest in infrastructure and run special freight trains, etc. All these will help fill the order book of Texmaco. Further, there has been an abnormal delay from the Indian Railways due to some legal issues for releasing wagon orders for FY10 while it is also expect-ed to procure a total of 18,000 wagons this fiscal. If this delayed order flows in even now, coupled with the targeted wagons for FY11, then it could create huge opportunities for companies such as Texmaco, which is a leader with 30 per cent market share. Some reports have put the estimated shortage at more than 25,000 wagons. But the big trigger for Texmaco has been the demerger that has taken place whereby it has restructured the company to shift its heavy engineering and steel foundry division into its wholly-owned subsidiary Texmaco Rail and Engineering (TREL), while retaining its real estate interest, investment, and mini hydel power under Texmaco. This scheme has already been approved and each shareholder of Texmaco would get one share of TREL for every one share held in Texmaco. [PAGE BREAK]

These shares would subsequently be listed on the bourses and would actually unlock huge value for investors, where the sum of the value of these two would be bigger than the current one. As for its real estate business which is currently at a nascent stage, Texmaco has also got a ruling in its favour from the Supreme Court for the 31-acre premise of Birla Mills. According to the ruling, the company would be required to surrender 65 per cent of this land bank to the Delhi Development Authority (DDA) and develop the remaining 35 per cent. The company aims to develop a shopping mall, residential society, and a commercial complex on the area, but the best part is that the DDA will have to pay Texmaco 50 per cent of the amount if it opts for any commercial development of the surrendered plot. Besides, Texmaco is also mulling to raise USD 30 million via GDR. However, there is no update on how the company intends to utilise the same. The icing on the cake comes in the form of its valuations wherein it’s trailing 12-month PE is at an attractive value of just 20x. This is at a discount to the broader market and gives room for catching up and upward movement. Hence one can grab Texmaco at its CMP of `161 with a one year target of `217. 

Whirlpool of India
After turning itself around in FY08, Whirlpool of India (WOI) has only grown from strength to strength and looking at the initiatives the management is taking to drive its future growth we believe that this scrip is poised to light up your Diwali this year. While the company has been quite successful in driving its growth mostly from the urban areas (60 per cent of its revenues), it has now decided to put more thrust on the Tier II and Tier III cities from where it expects to drive its future momentum. Factors such as low penetration of consumer durables, rising income levels, improving lifestyle, and rising discretionary spends of rural areas presents a huge untapped potential market for WOI to go further at a good pace. In fact, WOI has already taken initiatives in the last fiscal itself through road shows and dealer contact programmes in Tier II and Tier III cities that have been hugely successful, translating into adding more than 2,000 dealers to its network in the last fiscal itself. This increased presence will help WOI push its sales, the impact of which should be seen from this year onwards. Besides, WOI is also strengthening its dealer networks by looking at 700 small towns across the country to be able to increase its presence. That apart, despite intense competition, considering the strong demand for consumer durables, WOI had opted for two rounds of price hike (4 per cent in December 2009 and 2-3 per cent in May 2010) across its product range, which helped it post fantastic growth numbers in FY10. According to a report, WOI is expected to pitch for another round of price hikes of 2-3 per cent in the coming period. Considering that the festive season has just started, this hike could give a good push to its overall sales in FY11. WOI has also finalised capex of `400 crore spread over three years. The said capex would be towards production line upgradation, adding new features to existing products, and placing thrust on new diversifications such as water purifiers, modular kitch-ens, etc. All this coupled with the strong brand recall that the company enjoys will help WOI not only to sustain but improve its market share further which currently stands at 22 per cent for refrigerators, 17 per cent for washing machines, and 4 per cent for air-conditioners.[PAGE BREAK]

Also, the steep debt reduction programme initiated by WOI since April 2009 has resulted in the company becoming debt free by FY10. Thus, with no interest cost outgo, the margins will free up further, while any price hike WOI might undertake will only improve the margins and in turn the profitability. This augurs well for WOI. On trailing 12-month profits, WOI is available at a PE of 23.6x. Though this might feel steep, the way WOI has performed and has strong initiatives in place to drive its future growth there still seems to be a fair upside and one can buy WOI with a one year target of `365. 

INEOS ABS (India)
It is said that in uncertain times consistent dividend paying companies are considered to be the best bets. INEOS ABS (India) is one such company with a strong dividend payment history of 21 years along with the current dividend yield of 1x. But the consistent dividend payment is not the only factor behind recommending the counter to our investors. The other compelling factors are market leadership status, expected strong growth from user industries like automobile and consumer goods which will be catered through its recently expanded capacity, strong management bandwidth from MNC parentage like INEOS which is the third-largest chemical company in the world, and last but not the least, better financial performance. On the valuation front the scrip seems to be placed well with its CMP of `365 discounting its trailing four quarter earnings by 10.30 x while its EV/EBITDA works out to just 5x. INEOS ABS (India) manufactures engineering thermoplastics such as ABS (Acrylonitrile-Butadine-Syerene). It also manufactures SAN (Styrene Arcrylonitrile) for captive consumption and for open market sales. The product finds application in interior and exterior automotive parts, consumer durables, diagnostic equipments, and other IT and telecom-related products. Here the parent company (INEOS) believes that India has an advantage as a major engineering thermoplastics manufacturing hub in Asia. And the current rate of growth shows great prospects in the coming years. Hence to cater to the demand the manufacturing capacity has been expanded to 1,00,000 MTPA from 80,000 MTPA. As the basic infra-structure was available, it managed to carry out the expansion in just `20 crore (one-third of the actual cost) through internal accruals. There are also certain added advantages of INEOS being a global company, one of which is that INEOS also has ABS manufacturing facilities at US, Germany, Spain, and Thailand and the combined capacity makes it the third-largest ABS manufacturer in the world. Not only does this help INSEOS ABS (India) to add new products to its kitty but works in benefit of procuring the raw material (mostly imported) in an efficient manner. Being derivatives of crude, its raw material prices are highly volatile and efficient procurement helps in improving the margins. Further, the rising rupee works in favour of the company as the cost of raw material becomes low.

Power also forms a substantial part of its expenses and here INEOS ABS (India) has an edge because it owns 14 wind mills with a capacity of 8.60 MW (provided to the grid) and hence the net cost is a bit lower. This too adds to the margins. The caveat here is that any irrational increase in the crude prices and cheap imports from China could negate the positive factors.[PAGE BREAK]

However, the management seems to be well-equipped to take care of these threats. As regards the financials of the company, after posting a good performance in CY09 the momentum has been carried forward in H1CY10 too. Here the topline was `346.35 crore and bottomline was `33.78 crore as against `252.09 crore and `20.45 crore respectively for H1CY09. The profitability was higher on account of stable crude oil prices and cost-cut-ting initiatives. Taking into consideration factors such as the rising demand from all the user industries, MNC parentage, and proper raw material procurement, our recommendation to investors is to buy the scrip at its current levels.

Divis Laboratories
During the economic crisis that has just passed us by, the pharmaceutical sector has had to face a tough period too despite its defensive nature. However, it was comparatively less bleak as the spending in the developed market is more non-discretionary as compared to any other markets. The big pharmaceutical companies have been working on strategies like M&A, OTC growth, consumer products, and focusing on emerging markets to increase their dependence on cost-efficient sources for active ingredients. This augurs well for companies like Divi’s Laboratories (Divi’s) who benefit from more outsourcing opportunities from the big pharmaceutical entities abroad. In FY10 Divi’s spent `55 crore in capex while in FY2011 the company is in the process of setting up a new unit in its existing pharma SEZ to tap fresh opportunities at a cost of `200 crore. This provides a clear indication that the CRAMS companies are seeing better days going forward. The unit is likely to be completed by the end of 2011. The new opportunities are in the high potency and steroids segments. One important fact that we notice is that the dependence of the company on the regulated market in terms of revenue contribution has come down to 76 per cent in FY10 as compared to 82 per cent in FY09 which is a positive sign as the company is looking forward to the other emerging markets for growth opportunities. The company has been able to de-risk its portfolio of products as the top product contributed 18 per cent to total revenues while the top five prod-ucts contributed around 55 per cent to its total revenues in FY10. Divi’s focuses on launching few products but gaining significant market share in the launched products. The management has guided a revenue growth of 25-30 per cent for FY11 which is on the basis of recovery in its CRAMS business and new API launches to drive topline growth. On the financial front the company has posted impressive results as it witnessed good growth in both topline and bottomline on a YoY basis for Q1FY11. The topline witnessed a growth of 21.74 per cent on a YoY basis and was `264.78 crore for Q1FY11. The bottomline was `83 crore for Q1FY11 as against `4.29 crore in Q1FY10. At the current price the stock trades at a P/E of 22.02x on its TTM EPS and its debt-to-equity ratio is a mere 0.03x. The positive outlook on R&D outsourcing to India is likely to gain momentum given the unique combination of low costs and chemistry skills that India offers. Divi’s is likely to be a key beneficiary of the increased pharmaceutical outsourcing from India given its strong relationships with global innovator companies. At present we feel that the company becomes an ideal candidate that will sparkle till the next Diwali 2011.