7 Muhurat Buys for 2011

The performance of the Sensex over the last one year is evidence enough to indicate how matters change in a short span of time. The Diwali of 2011 and that of 2010 are indeed very contrasting pictures. Where there is pessimism, despair and dejection all over in the current environment, there was cheer, optimism, and happiness during the same period last year.

To put this in perspective, 2010 saw market optimism, the Sensex touching a historical high, a pickup in economic activity, a strong demand scenario and stronger industrial growth. In contrast, this year’s Diwali sees a fairly bleak picture, with the Sensex down by more than 16 per cent on a yearly basis, a decelerating economy, deteriorating IIP numbers, rising interest rates, ram-pant inflation, and rising concerns over the US and the Euro zone. No wonder then, that investor confidence is not only dented, but has been pressed to the lowest at this point of time.

As for the domestic story, the fundamentals are intact, but certainly strained by rising interest rates and hardened inflation. While many experts believe that the days of hardened interest are here to stay, a surprise move by the RBI to fuel growth could actually act as a trigger for the market. Our sense is that, though the markets have been range-bound for some time now, a possible uptrend in the near term cannot be ruled out either. Hence, the time seems right and also auspicious on the eve of Diwali, to do some new stock picking for the Muhurat day.

As has been our tradition, we, at DSIJ, have sculpted a strong Rs 10 lakh portfolio for your benefit, comprising about seven stocks that we believe could not only light up but also add that sparkle to your Diwali this year, and create that alpha for you in the coming period. The selection process has been a thorough research-oriented 

exercise, where we followed a top-down approach by selecting the sectors and then handpicking companies within those sectors.

Review Of Last Year’s Recommendations

Staying Put - The Right Strategy

We, at DSIJ, have always been transparent when it comes to our recommendations, and we may be the only magazine to also carry a review of the same. This review has twofold benefits. First, it benefits our readers/investors, who can take timely action. It helps them book profits, exit and make money, or hold on to an investment for better returns. Secondly, it is also a ready reckoner for us, as it helps us to gauge our own performance.

The Sensex too has been dented to the extent of more than 16 per cent, clearly showing that volatility has spared no one and the impact has been across the board. In fact, even if you look at the performance of the fund management industry, it is quite clear that no one, among even the most astute of fund managers, has been spared by the volatile and uncertain market condition. The NAVs of all equity diversified funds have been in the red, if compared on a point-to-point basis over the past one year.

A point worth noting here is that our magazine’s main edit had clearly mentioned that the market was surging on the back of strong FII flows, and it would correct the moment they stop buying. We had also categorically said that investors shouldn’t be in a hurry to buy these stocks, as the market would give enough opportunities to buy them at lower levels. We believe that you would have followed our advice, and hence, though the table given shows a point to point comparison, the actual impact on your portfolio could be quite low.

Now, what is important from our readers’ point of view is, what should you do with this portfolio? One thing is clear that these recommendations are fundamentally strong counters, and the impact is more to do with the market sentiment, rather than any-thing else. Hence, the best strategy is to stay put in the scrips which are in the red, while one can book profits in counters like INEOS ABS, which has yielded a 68 per cent return. It is only a matter of time when the valuations catch-up game could begin in the rest of the counters.[PAGE BREAK]
AJANTA PHARMA Buy  321

In the entire pharmaceuticals space, there are many counters that are still not on investors’ radars but are trading at attractive valuations, and could be the best contenders for a place in one’s portfolio. One such company is Ajanta Pharma (APL), which discounts its trailing twelve-month earnings by a mere 7.35x, along with a dividend yield of 1.56 per cent. The company has been paying dividends consistently for the last six fiscals.

APL is a branded generics player, and operates in therapeutic segments like cardiology (21 per cent), dermatology (27 per cent) and ophthalmology (22 per cent). It has also started gaining strength in the new segments of orthopedics, gastroenterology and ENT – the three combined together contribute to about seven per cent of its topline.

The launch of the Pulsar 250 cc bike in December 2011 is expected to add to the zing. However, we are of the opinion that the launch of its Boxer 150 CC in the rural markets will be a major volume growth driver. We do not expect any severe impact of rising interest rates, as only 26 per cent of two-wheelers are sold on finance. In the three-wheeler segment, its entry in new markets like Karnataka is expected to push the growth curve upwards.

While volume growth is expect-ed to continue, the margins are also expected to improve. Raw material prices have declined significantly, and the company will enjoy the benefits of the same in H2 FY12. Its EBITDA margins, which are currently at around 19 per cent, are expected to improve to 20 per cent. Further, with exports contributing to around 32 per cent in two-wheeler and 65 per cent in three-wheeler revenues, the depreciating rupee is expected to be beneficial for the company.

One area of concern is that of the Duty Entitlement Pass Book (DEPB) benefits being taken away. We feel that the impact will be marginal, as it will be replaced by a new scheme and the benefits will come down from nine per cent to 5.50 per cent, but will still be there. The management has stated that it will partially compensate the same by hiking the product prices and by passing the burden on to the dealers.

 

While investors usually prefer to add zing to their portfolio, a Diwali portfolio wouldn’t be complete without a right blend of aggression and stability. There is no better scrip to name here than Balmer Lawrie & Company, a PSU, Category I, Mini Ratna company.

While portfolio stability is just one factor, there are many other reasons that make Balmer Lawrie a stock that could lighten up your Diwali this year. First, Balmer Lawrie has been a consistent performer, with its profits growing every single year in the last decade. In fact, a similar trend was also seen in the revenues during the same period, barring FY10 when its revenues slipped, though only marginally. This, in itself, vouches for the inherent strength of Balmer Lawrie, and the fact that it grew during difficult periods in FY08 and FY09 only reflects how well it can manage adversities too.[PAGE BREAK]

Second, Balmer Lawrie has diversified interests, with almost 38 per cent of its revenues coming from the travel segment. Other business areas where the company has interests include industrial packaging (23 per cent), logistics (19 per cent) and lubricants (17 per cent), while the balance comes from some others that include performance chemicals, tea and refinery & oilfield services. This de-risks its business, as the company is not dependent on a single segment to drive its revenue growth.

Apart from strengthening its performance in the chemicals segment by foraying into construction chemicals, Balmer Lawrie is also reviving its tea segment. With the introduction of a modern packaging unit, it is looking forward to become a major third-party blender and packer, with plans to also launch its own brands: Tarang and Balmer Lawrie – The Tea. All this should help the company grow even stronger in the coming years.

The other factors that make the scrip attractive are consistent dividend payouts, liquid cash and its zero-debt status. It has been an investor-friendly company, with dividends being paid consistently for the past 21 years (its FY11 dividend stood at Rs 26 per share, dividend yield of 4.3 per cent). Moreover, the company has Rs 267 crore or Rs 164 per share in liquid cash in its books, which makes up for 27 per cent of its market cap.

Thus, with no interest outgo, Balmer Lawrie is insulated against high interest rates at one end, and at the other end, it benefits from the high cash balance, earning a good interest income. The icing on the cake is its valuations. On a trailing 12-month earnings basis, Balmer Lawrie is available at a PE of a mere 7x and EV/EBDITA of just 5x. This, we believe, is low and gives room for further upside. Hence, one can buy Balmer Lawrie with a one year target of Rs 750.

It pays to know how a company has navigated a difficult environment in the past. It throws light on the consistency and its ability to steer clear of difficult economic phases, and this feature is always regarded highly in the stock market. In uncertain times like the ones we are presently in, players like these are highly sought after by investors.

Castrol India is one such company combining the above characteristics. Castrol’s bottomline has consistently gone up in the past six years. Even in 2008, when most of the companies witnessed a decline in their bottomline, Castrol posted a strong growth. Further, the scrip came out almost unscathed in 2008, a period in which equity markets witnessed severe declines globally. These two factors indicate the strength of the company.[PAGE BREAK]

In addition to this, other compel-ling factors like its debt-free status, a strong cash kitty of Rs 750 crore and a history of consistently having paid dividend to its shareholders provide com-fort. Another factor that adds strength to our conviction in this stock is the declining crude prices, which augurs well for the company, as it will result in an improvement of its operating margins.

On the valuations front, with an EV/EBITDA of 12x and its CMP of Rs 472 discounting its trailing four-quarter earnings by 23x, it looks a bit expensive, but then consistency is always rewarded on the bourses with a higher premium. Further, being an MNC and its promoters holding almost 71 per cent of the shares, there is the potential of a buy-back offer.

Castrol has two business segments – automotive (contributing 85 per cent of revenues) and the industry segment (which brings in 15 per cent of revenues). An interesting fact about Castrol is that while it is second only to IOC in the overall lubricants market (with a 20 per cent share), it has a leadership position in the automobile segment.

Castrol has a very good history of dividend payment. Actually, due to the lower capital expenditure and working capital requirement, it is very aggressive in rewarding its shareholders through dividends. In CY10 too, it paid a dividend of 150 per cent (Rs 15 per share), and also recommended an interim dividend of Rs 7 in H1 CY11.

In the past, the markets were always skeptical about investing in fertiliser companies, citing government intervention and regulations as one of the principal negative factors affecting the growth of companies in this sector. This has pretty much changed over a period of time. Some great multi-baggers have emerged from this space over the past one year, and one such stock is Chambal Fertilisers & Chemicals (CFCL), which has constantly attracted the investing fraternity’s fancy. The scrip is up by 12.9 per cent on an YTD basis, as against the benchmark BSE 200, which is down by almost 18 per cent. Moreover, the company also has the reputation of consistently rewarding its investors by way of dividends since 1996.

CFCL is one of the largest private sector fertiliser producers, catering to over 10 states in the northern, central and western regions of India. It is also into the trading of other agricultural inputs like DAP, MOP, SSP, pesticides and[PAGE BREAK]

seeds, thus positioning itself as a one-stop shop for agri-inputs.

CFCL’s business also includes a shipping division with a fleet capacity of six Aframax tankers, and a textile division that manufactures cotton and synthetic yarn. However, its fertiliser business drives its growth and brings in 88 per cent of its total revenues, with the balance 12 per cent coming from the shipping and textile divisions.

There are key factors that we believe will change the future of this sec-tor and that of CFCL for good. The Union Budget 2011-12 has opened up a number of positive opportunities, like the allocation of higher farm credit amounting to Rs 475000 crore, grant of interest subvention for short-term crop loans, direct cash subsidy to end-users of fertilisers and various tax benefits, which will result in an increase in demand for fertilisers and benefit the companies at large.

Of course, the key trigger for the stock is the recent proposal by an empowered group of ministers to free urea prices and bring it under the Nutrient-Based Subsidy (NBS) policy. We believe this to be an extremely positive step by the government, auguring well for all urea producers, especially CFCL, as it will enable the company to price its product at the global levels, resulting in better control over its revenues and profitability. With over 51 per cent revenues coming from urea sales, and a 10 per cent market share, one can only ascertain the positive out-come of urea deregulation on the company’s performance going forward.

CFCL is expected to receive an average additional subsidy of Rs 1127 per MT on its total capacity. This, coupled with the hike in urea prices, would enable the company to earn better sales realisations going forward. Based on our case scenario analysis of its FY11 earnings, we expect CFCL to post an incremental consolidated EPS of Rs 1.82 per share. We further expect CFCL to benefit from the urea de-control policy, as it will help the company to differentiate its products by offering value-added products to the farmers and charging a premium.

The proposed de-merger of the shipping business will also prove to be a catalyst, which will not only drive the stock price further, but will also reduce CFCL’s debt burden to Rs 1640 crore as against Rs 2580 crore currently. This will further translate into an improvement in its ROCE, which will then stand at 16.4 per cent as against 13.5 per cent at present. The management has reckoned that the debt pile-up on the balance-sheet from its shipping division hurts its growth prospects while, at the same time, the division has attained a size where it can operate and grow by itself.

CUB’s credit growth for the first quarter of FY12 stood at 33.02 per cent, which is significantly higher than the industry average of around 22 per cent achieved during the same period. What is important to note is that credit growth has not taken place due to any lopsided exposure of the loan book. The bank has a very well-diversified loan book, and some stressed sectors like textiles and metals do not form a large part of it – these constituted only[PAGE BREAK]

10 and seven per cent of the total loan book respectively, at the end of Q1 FY12. The quality of assets is also reflected in the lower net NPAs, which are down from 0.54 per cent of advances at the end of Q1 FY11 to 0.51 per cent at the end of Q1 FY12.

Going forward, the management does not expect any dramatic increase in the slippages or stress on the assets. However, we believe that even if there is any increase in the stress level on the assets of the bank, it has one of the best-in-class net interest margins to protect it from any such contingency. CUB’s NIM increased from 3.56 per cent (Q1 FY11) to 3.59 per cent, even after the recent hikes in interest rates. The management expects to maintain this ratio at 3.3 per cent for the year. This confidence comes from the fact that two-thirds of the total assets of the bank are loaned towards working capital and cash credit, and the remaining one-third is in term loans. Higher allocation towards working capital helps the bank to re-price its book faster than the term loan book, and hence leads to maintaining healthy margins.

In addition to better margins, the bank is also adequately capitalised to face any sharp drop in asset quality. At the end of Q1 FY12, CUB’s capital adequacy ratio stood at 12.22 per cent, of which Tier I constituted 11.39 per cent. Looking at the bank's strong performance, institutional investors have increased their stake over the last couple of quarters, from 23.44 per cent at the end of Q3 FY11 to 24.41 per cent at the end of the June 2011 quarter.

Despite such a healthy balance-sheet and a good financial performance, the scrip is available at a price to book value of 1.65x, and if we adjust it for the NPAs it works out to 1.73x. This certainly looks attractive if we compare it with the BSE Bankex, which is trading at 2x, and most of the other private sector banks that are trading above 2x of their book value. At the given level of return on assets of 1.57 per cent and return on equity of 21.36 per cent, we believe that the scrip is available at very attractive valuations, and you can bank on it this Diwali to add that sparkle to your portfolio.

There are some companies that prefer to keep a low profile and do what they do best. TVS Srichakra (TVSS) is one of those very few companies. We came across this counter during our shortlisting process, and after a detailed analysis, we believe that this scrip can certainly light up your Diwali this year.

TVSS caters mainly to the two-wheeler and three-wheeler segments, and is the second-largest manufacturer of tyres in this segment, with a 25 per cent market share. It enjoys good brand recall for its products – MRF is the market leader, with a 28 per cent share. In fact, it is also strengthening its presence in the replacement market, and has been focussing a lot on brand-building. This can be seen from its advertising spend, which has increased to Rs 13.4 crore in FY11 from a mere Rs 5.4 crore two fiscals ago.

What further augurs well for TVSS is its client list, which includes top manufacturers such as TVS Motors, Hero MotoCorp (formerly Hero Honda), Bajaj Auto and Yamaha Motors. While there is an overall slowdown in the auto segment, only the two-wheeler segment hasn’t really felt the heat, and has been growing at a brisk pace every single month. In Q2 FY12, the two-wheeler segment grew by almost 18 per cent, where other segments have seen a flat to negative growth. Besides, with the festive season picking up pace, the demand is expected to perk up from here.

Another factor that needs to be considered is that only one out of four two-wheelers is financed, compared to three out of four in the passenger car segment. This, we believe, makes the demand for two-wheelers more robust, with rising interest rates not playing spoilsport.[PAGE BREAK]

To cater to this ever-increasing two-wheeler demand, TVSS has briskly ramped up its capacities. Its tyre manufacturing capacity has increased by a massive 170 per cent in FY11 from just two years back. This includes the newly-started plant at Uttarakhand in July 2009, and also the expansion of its Madurai plant. All this should help drive its revenues further up.

That apart, in a bid to de-risk its business, TVSS is now focussing on manufacturing radial rear tyres for the tractors segment. The only factor of concern is the price of rubber, along with its high DE ratio of 2.25x. However, while rubber prices were high last fiscal, they have certainly corrected since April 2011, and are now stable. Besides, TVSS’s DE ratio has been more than 2x over the last five years, but despite higher debt resulting in higher interest cost, what is commendable here is that it has still been able to post higher profit growth, which augurs well for the company.

TVS Srichakra is not only part of the strong TVS Group, but also has extensive experience in the auto space over the years. Also, the very fact that its promoters are steadily increasing their stake in the company over the last three fiscals (39.48 per cent in FY08 to 44.39 per cent in FY11) only reiterates their confidence in the business and its future.

On the financial front, TVSS grew at a three-year CAGR of 34 per cent in topline and an even better 62 per cent in bottomline. For Q1 FY12, its topline grew by 54 per cent to Rs 351 crore (Rs 227 crore), while its bottom-line increased by 64 per cent to Rs 12.10 crore (Rs 7.40 crore). At its trailing 12-month earnings, the scrip is available at a PE of 6.67x and EV/EBIDTA of 4.7x. This, we believe, is low for a briskly growing company such as TVSS. With the company having a 22-year consistent dividend paying history (FY11 dividend of Rs 12.5 per share on FV of Rs 10, dividend yield of 3.26 per cent), one can buy TVSS with a one year target of Rs 450.