Where to invest in 2011?

After witnessing a sharp and meteoric move up in 2009, the markets started the year 2010 on a very optimistic note. But if we take a look at the kind of returns equity as an asset class has provided in 2010 on YTD basis, it seems that it was a year of consolidation. This is exactly what we had predicted a year back by asking our investors to keep expectations low in 2010.

In terms of returns, the year 2010 may not look exciting however it turned out to be an eventful one due to a number of things that happened this year. On the global front, issues regarding the Euro zone debt crisis and the troubles in the developed world continued in one way or the other. However, emerging economies recovered sharply and came back to normal or in some cases with better growth rates. As a result, the emerging markets were flooded with huge foreign institutional investments and India was no exception. In 2010, on year to date basis, the net FII inflow is Rs 1,31,021 crore which is the highest in history. The noticeable factor is this was on the back of around Rs 80,000 crore that the FIIs had invested in 2009. Despite such a huge inflow, the Sensex remained highly range bound and only surged by 14 per cent in 2010.

Although there were some opportunities in the small cap and midcap space, this was a highly volatile arena.This is clearly seen from the fact that in 2010, the BSE Small Cap Index opened at 8,358 then touched a high of 11,191 in November 2010 and is currently trading at 9282. Similar volatility was witnessed in the BSE midcap index. So it was not easy to make money in the year 2010. Despite such a difficult and confusing scenario, our performance has been marvelous. While the broader indices remained highly range bound our portfolio, 'Where To Invest In 2010', has provided returns of 53 per cent. The way we had predicted the market movement and handpicked the portfolio, clearly points towards our high quality research and efforts to create value for our investors. However, this is the past and the markets are mainly dependent on future events, so investors will be more curious to know what happens next in 2011? So let's see what are the various factors that can guide the market in 2011?

We are of the opinion that it will not be easy to make money in 2011 either. After touching the 21,000 mark, the Sensex has witnessed a significant decline and has also impacted the overall sentiments and we expect the same to spill over in 2011 also. Apart for the sentiments, there are other factors which we feel are going to impact the market negatively in 2011. The first factor is inflation as well as the interest rate cycle and the second one is crude oil prices. Inflation has been a major factor of worry in 2010 and mostly remained above the 10 per cent mark. Although food inflation is moderating, it is likely to remain on the higher side as it is more of a supply side issue. So with rising inflation, we expect that the RBI may opt for monetary tightening and go for a hike in interest rates. The rate hike will not only impact the GDP growth expectations but will also hurt the earnings growth. Another factor impacting inflation will be fuel prices. If crude oil (which is currently nearing the USD 90 per barrel mark) continues its upward move, it will create further inflationary pressures. In addition, crude oil being the base for many raw materials, input costs may increase impacting company margins.

On the earnings front, growth has been satisfactory in H1FY11. But at current levels, the Sensex is trading at 22.50x of its trailing four quarter earnings. So to sustain these kinds of valuations at least 20 per cent earnings growth is required. As mentioned earlier, the inflationary pressures may impact the earnings growth. So considering all these factors we again recommend the investors to keep expectations low in 2011. However, whatever the market scenario, we have to create value for our investors. And like every year, we are again recommending a portfolio for 'Where To Invest In 2011.'

The portfolio is picked up by our research team after selecting the sectors we are bullish on. We have recommended counters from Pharmaceuticals, Infrastructure, Automobile ancillary, Textile and IT. Considering the current scenario, we have tried to make a balanced portfolio. While L&T, HDFC, TCS and CESC are included to provide stability to the portfolio scrips like SpiceJet, Swaraj Engines and Suryalata Spinning Mills have been added to add some zeal to the portfoli o. We expect our portfolio to provide 20 per cent returns in the next year. This may not sound exciting but we feel this would be better returns as compared to other asset classes. The DSIJ research team wishes you a happy and a prosperous new year. Let 2011 bring good luck and fortune for all our readers[PAGE BREAK]

We Continue To Create Alpha For Our Readers
The year 2010 has been an eventful year for the stock market. After consolidating for almost 8-9 months, the sharp rise in FIIs inflows took the market to new highs with overall gains of more than 20 per cent during Diwali time. But global uncertainty and unfolding of some domestic scams took its toll with the market shedding most of its gain. Thus, with a 12 per cent gain on a year to date basis, the Sensex sums it all.

The Dalal Street Investment Journal (DSIJ) had recommended a 10 lakh portfolio in our special issue 'Where To Invest In 2010.' We are happy to inform you that our portfolio has given returns of 53 per cent against the Sensex gain of 16.68 per cent during the same period. If readers can recollect, DSIJ had given bountiful returns to investors even in 2009 and we have done it again in 2010! While many might wonder how we do it, the simple answer is that we do things differently. Hence, if one looks at our portfolio, it's a mix of aggression and stability. Secondly, we pick companies that are not in the limelight but are good hidden gems waiting to be discovered. This ensures that the scrips are available at good valuations and last but not least we give weightage to the scrip more scientifically so that the portfolio's oveall returns are on the higher side.

Just to recap, we recommended 11 scrips last year. Our portfolio comprised of companies such as Spice Mobile, SRF and Rane Madras, which gave handsome returns of 209 per cent, 136 per cent, 73 per cent respectively. Other scrips included Bayer Crop Science, Federal Bank, Bilcare, L&T, etc. They all appreciated handsomely and hence we would suggest our readers to book profits in these counters barring Larsen and Toubro, which has been recommended this time too. (Federal Bank was recommended to book profit in our issue dated July 18, 2010 at Rs 315).

However scrips such as Mangalam Cement, NTPC and Geodesic did not perform as expected. But we believe there is still potential in these scrips and it's only a matter of time before they catch up with the valuations, hence one should continue to hold the same.

Atul
After witnessing the euphoria of October and the first week of November that helped the Sensex to reach its all-time high, the market has entered into a volatile and choppy session, thus making investors nervous and indecisive. In this kind of a scenario, investing in a scrip that not only provides capital appreciation but also the required stability to your portfolio with better dividend yield makes better sense. We believe that Atul is one of the scrips that suit such criteria with a dividend yield of 2.3 per cent and a steady dividend paying history of 11 years. What is more comforting is that the promoters are increasing their stake in the company. In the last couple of quarters this has gone up from 41.92 to 43 per cent. It shows the confidence of the promoters in the future of the business.

Atul, formerly known as Atul Products, is a part of the Lalbhai Group with interests in textiles and chemicals. Atul's business can mainly be divided into two broad divisions serving seven business areas. The two divisions are colours and specialty and other chemicals. For the half year ended September 2010, the colour segment posted sales of Rs 169.52 crore, contributing 22 per cent of sales while the remaining 78 per cent was shared by specialty and other chemicals clocking in sales of Rs 597.6 crore.[PAGE BREAK]

Atul's future growth will take place both organically and inorganically. Last year the company acquired Polygrip for Rs 8 crore and entered the Rs 500 crore rubber and PU-based adhesives market in India. The company now intends to double its production over the next two years and use synergies of its retail infrastructure to promote the brand. On the organic front, the company is making an investment of Rs 46 crore to significantly improve the manufacturing process and throughput of p-Cresol. Currently this segment contributes 24 per cent of the revenue. In the recently announced H1FY11 results the company saw its sales increasing by 36 per cent to Rs 759.16 crore. It was speciality and other chemicals that grew by 43 per cent whereas the colours division was up by 16 per cent. During the same period the profit of the company increased by 43 per cent to Rs 71.9 crore, helped by the fall in the interest burden and other expenditure.

In fact the interest cost of the company is coming down as a percentage of sales from FY01 when it was at a level of 10 per cent. At the end of H1FY11 it was 1.7 per cent. This has primarily been helped by the increase in sales and the repaying of debts. In the last fiscal the company repaid debts of Rs 45 crore and currently its debt equity ratio is 0.66 times. In addition to its strong balance-sheet, what makes the scrip attractive is its valuation. Currently the share price of the company is available at a trailing PE of 6.55 times and EV/ EBITDA of 4.9 times. This is certainly good. Also, what adds fancy to the scrip is its investment in other listed companies at Rs 52 per share. This means that the company's business is available at just Rs 110 per share. Therefore investors would do well to take exposure in the counter with the expectation of 20-25 per cent appreciation in the next one year.

CESC
In uncertain times, stability provides solace and this is the main factor for recommending CESC to our investors. CESC which currently has 1225 MW power generation capacity generates steady cash flow from this business. We feel, in a scenario where there is uncertainty prevailing about the earnings growth, this factor itself provides comfort to the investors. On the growth front too, the company scores high with robust expansion plans to take its capacity to 2425 MW by 2014 and 5665 MW by 2016. But the major reason for recommending CESC is the expected turnaround in its retail business, Spencer's and also the likely relaxation in retail FDI.

In the past, CESC has indicated that it is looking at selling some stake in its retail subsidiary. Going ahead, the business is expected to turn around and will contribute significantly to the bottomline of the company. As mentioned earlier, its power generation business is earning steady cash flows and in FY10 it added Rs 433 crore to the bottomline.

The firm's profitability is expected to improve further as its new 250 MW plant started in February 2010 and the impact of full year operations will be seen in FY11.

As regards the expansion plans, CESC intends to transform from a regional to a national player in the Indian power utilities segment. To begin with, it intends to commission 600MW power generation capacity each at Chandrapur (Maharashtra) and Haldia (West Bengal). There are additional expansion plans too.

The most beneficial factor in terms of funding is that CESC seems to be comfortable as the growth option is not equity dilutive. Currently, apart from steady annual cash flows it also has cash and liquid investments of Rs 1,350 crore. Even the debt-equity ratio is comfortable at 0.5x, providing opportunities to leverage growth.

In retail, Spencer's currently has 208 stores with a 0.9 million sq ft area under operation. It achieved EBITDA breakeven at store level in H1FY11.This we feel is the first step towards achieving EBITDA breakeven at the company level targeted by FY13. With the company's strategy of closure of unviable stores, rent renegotiations, operational efficiencies and reduction in area under operations, the target may well be achieved before the scheduled date. We feel that with the retail business expected to start earning profits and the probable hike in FDI in retail, CESC may unlock value in the same.[PAGE BREAK]

On the financial front, after posting a strong performance in FY10, the firm has carried momentum in H1FY11. Here, it posted a topline of Rs 2201 crore and a bottomline of Rs 265 crore as against Rs 1784 crore and Rs 231 crore in H1FY10. On the valuation front, the scrip is trading at PE of 10.60x and the EV/EBITDA stands comfortable at 8.90x. With the power business generating a steady cash flow and the retail business expected to turnaround, we recommend investors to buy this scrip at current levels.

FDC
FDC makes both formulations and Active Pharmaceutical Ingredients (API) in the pharmaceutical space. Its expertise in ophthalmic and ORS dosage forms has helped it spread its reach across the market. It also has a presence in various therapeutic segments such as anti-infectives, dermatologicals, respiratory and haematinics. With about 90 per cent of its turnover from the domestic market, FDC is pursuing in the regulated and semi- regulated markets for sterile ophthalmic and oral solid dosage forms. With its strong presence and R&D expertise, the firm is poised to take advantage of this potential.

The company has maintained a high ROE of more than 30 per cent with a very conservative balance sheet. FDC has maintained excess cash and financed growth with the free cash flow generated from operations. The company has also been able to maintain a topline and bottomline growth in excess of 15 per cent and 30 per cent on a CAGR basis for the last three years in spite of high competition and change in the operating environment.

The company has a consistent track record of introducing several new products every year and currently spends almost 3 per cent of sales on research and development (R&D) which is a crucial investment in the pharmaceutical business. The R&D spends will be mostly used to develop off patent molecules in the form of generics for local and export market is likely to garner better results going forward. In addition, the company is also into the consumer health space, which is closer to FMCG than pharmaceutical products and requires a different set of skills and focus.

On the financial front, for the recently concluded H1FY11, the company has posted decent gains in both its topline and bottomline. The topline witnessed a growth of 8.64 per cent on a YoY basis for H1FY111 and stands at Rs 380 crore as against Rs 349 crore for H1FY10. The bottomline for H1FY111 stands at Rs 85 crore as against Rs 73 crore for H1FY10. On the valuation front, the company discounts its trailing twelve month earnings by 12 times which is much cheaper as compared to its other listed peers. The EV/EBITDA stands at 9.53 times and the debt to equity is negligible at 0.01 times. FDC also has investments which are equivalent to Rs 12 per share and the dividend yield stands at 1.80 per cent. The company has an uninterrupted history of paying dividends since the last ten years. At present, we believe that FDC can find a place in any investor's portfolio and be an ideal candidate for those who wish to garner better returns in the coming year.

Greaves Cotton
Greaves Cotton (GCL) manufactures a wide range of industrial products such as diesel and petrol engines, agro equipment, generation sets, and construction equipment. GCL currently has more than 80 per cent market share in the single-cylinder diesel engine segment in India. Other compelling reasons for recommending this scrip are the expected turnaround in the infrastructure segment, focus on nonauto engines division and the pick up in demand for auxiliary power and the agri segment. On the valuation front the scrip is placed well with its CMP discounting its trailing four-quarter earnings by 17.75x and EV/EBITDA of 9.67x.[PAGE BREAK]

GCL, that was earlier heavily dependent on Piaggio for its engine segment business, has been making inroads into other OEMs, including Tata Motors and M&M. Recently GCL developed an engine specifically for Tata Motors' Penguin project. The company has this sole supply contract for a period of ten years and supplies have already been started on a small scale. An all-India launch is expected by March 2011 and the volumes from this product could be large on complete ramp-up. In anticipation of this, GCL is stepping up its capacity expansion in FY11 by investing Rs 60 crore in the first phase which will have a capacity of 80,000 units. Similar capacity will be added in the second phase in FY12 itself.

Together the expansion will increase the company's auto engines production from 3,60,000 to 5,20,000 units per annum.

Meanwhile, certain questions were raised about the growth in the single cylinder diesel engine segment as new emission norms may impact the sales growth. In response to this, GCL is working on the model and is expected to come out with the same in the near future. This will have a marginal impact on the margins but its sales growth will remain robust. In addition to this, the company's infrastructure equipment division is expected to turnaround in FY11 and may contribute significantly from FY12. This division bore the brunt of the credit crisis in 2008. However, due to the expansion in the infrastructure sector and the renewed thrust on road building it is expected that the demand will rise to significant levels.

GCL is also planning to expand its non-auto engines business. Currently the bulk of the engine-related revenues for GCL are accounted by the three wheel passenger and cargo vehicles which have grown at 8-12 per cent CAGR in the past few years. The nonautomotive engine segment has higher growth potential driven by stand-by power and agricultural, marine and infrastructure applications. GCL plans to strengthen its presence in the marine engines segment. GCL is also focusing on spares (18-20 per cent of revenues), and the revenue from this segment has climbed steadily in recent years. GCL has also started providing channel financing for distributors.

On the financial front it posted a strong performance in FY10, ending June. GCL carried the momentum forward in Q1FY11 and posted topline of Rs 378.39 crore and bottomline of Rs 36.27 crore as against Rs 321.22 crore and Rs 23.90 crore respectively for Q1FY10. On the valuation front the trailing four-quarter earnings discounts the CMP by 17.75x and the EV/EBITDA is at 9.67x. Considering the strong financial performance and in view of the company's future growth outlook, our recommendation is to buy the stock with a target price of Rs 115.

HDFC
HDFC has been helping millions of its customers over the last three decades to fulfil their dreams of owning a home. And it has not only satisfied its customers but also its shareholders in terms of stock returns. In the last five years HDFC's stock has yielded return of 45 per cent CAGR compared to 31 per cent by the Sensex. It is not only by way of capital appreciation that the shareholders are rewarded but also through the good dividend distributed by the company. It has a track record of paying uninterrupted dividend since the last 21 years and for FY10 it paid a dividend of Rs 36 per share which works out a dividend yield of 1 per cent after adjusting for split.[PAGE BREAK]

The reason that HDFC is able to maintain this enviable position is due to its growth in the loan book without compromising the asset quality. Over the last five years the loan book of the bank has increased on an average by 20 per cent whereas its net NPA has remained in tight control within the vicinity of 1 per cent. The latest quarterly result reflects this wherein the company's loan book has increased by 18 per cent and its net NPA is just 0.2 per cent at the end of Q2FY11. The increase in loan book was a shade below its long-term average due to the teaser rate offered by the various banks and NBFC to attract customers. Going forward, with an increase in interest rate and the withdrawal of teaser rates by various banks, HDFC will again catch up with its long-term average.

As regards its asset quality, HDFC has been improving it for 23 quarters in a row on a YoY basis. The reason for such high quality of assets is HDFC's average loan-to-value of 68 per cent that also provides the required margin of safety. In addition to good asset quality, what really separates HDFC from the other banks and NBFCs is its low cost to income ratio that is below 10 per cent compared to more than 35 per cent for most of the banks. There are concerns about the rise in interest rate and its impact on NIMs but we believe HDFC could maintain its strong NIM of above 4 per cent for some more time because a major portion of its loan portfolio comprises loans at floating rate. In contrast, only 28 per cent of HDFC's funds originate from term loans. This suggests that a rise in interest rates would have more effect on the company's assets than on liabilities, providing scope for margin expansion.

Apart from these factors, what makes HDFC's scrip more attractive is its investment in various subsidiaries like HDFC Bank, HDFC Mutual Fund, HDFC Life Insurance, HDFC ERGO General Insurance, etc, the book value of which works out to be around Rs 200 per share at the end of Q2FY11. If we include the book value of HDFC of around Rs 119 per share the adjusted book value per share is Rs 319 that gives a price to book value of around two times compared to some of the private banks and NBFCs trading at more than three times of their adjusted book value. Therefore investors should definitely add this stock to their portfolio for stable and better returns.

Indoco Remedies
The pharmaceutical sector has always been seen as a safe haven for investors to park their funds. Interestingly, if we look at its performance over the last two years, the pharma stocks have outperformed the benchmark index by miles. In this domain, Indoco Remedies (IRL) ranks 22nd as per the latest ORG IMS prescription audit in the domestic space. The company has a wellbuilt brand portfolio of more than 200 products in various therapeutic segments, including cardiovascular,anti-diabetics, CNS, nutrition, and dental care. The company is strongly placed in the domestic market with almost 70 per cent of its revenues derived from the same. The remaining is through exports of which 80 per cent is from the regulated markets with a major share from the UK and Germany markets.

Through the export formulation segment, IRL does contract manufacturing, supplies different molecules, and sells dossiers. It has tie-ups for certain abbreviated new drug applications (ANDAs) and has started filing its own ANDAs as well. Indoco is exploring the tender business model structure and is entering into partnerships for further penetration into the semi-regulated markets. It has entered into new dossier licensing and supply deals with Watson Inc and Aspen Pharmacare in Q4FY10. The deal includes ophthalmic and a few patented products, the filings for which have already begun and approvals are expected from FY13E.[PAGE BREAK]

It has also entered into a dossier licensing with Aspen and a supply deal for seven ophthalmic products to 30 emerging countries which is expected to start from FY12E. In order to cater to the increasing demand and opportunities it is setting up a new plant in Goa (Plant II) through which it would double its tablet manufacturing capacity. The trials, production, and validation activities are expected to commence by January 2011. The expansion of the ophthalmic sterile facility has been completed while the validation activities are in progress and batch manufacturing is expected to start soon.

On the financial front, for H1FY11the company's topline witnessed growth of 26 per cent on a YoY basis at Rs 248 crore as against Rs 196 crore in H1FY10. Its bottomline witnessed growth of 15 per cent on a YoY basis at Rs 30 crore for H1FY11 as against Rs 26.13 crore for H1FY10. On the valuation front the company discounts its trailing 12-month earnings by 13 times. The company has a divided yield of 1.4 per cent and its EV/EBITDA is at 9.50 times. At this point of time we believe that IRL can be an ideal candidate to include in your portfolio to garner better results in the year ahead.

Larsen & Toubro
The worst financial crisis since the great depression a couple of years back is over. Now, we are moving ahead towards the new dawn by means of global recovery. The emerging markets as a whole are leading the way towards recovery and India, as a part of the pack, is one of the brightest stars that have outshined the other members in the pack. Here in India, recovery has come by means of domestic consumption and building of infrastructure. Infrastructure expenditure forms a major chunk of government spending. Larsen & Toubro (L&T), one of the largest Indian conglomerates with interests spanning areas like engineering, construction technology, etc., is likely to benefit from the thrust on the building of infrastructure in the country.

In the recent past, the Prime Minister has said that to sustain the GDP rate to more than 8 per cent, India needs to double its infrastructure spending to USD 1 trillion in the 12th five year plan. L&T, as we know, is the biggest player in the infrastructure space and is likely to benefit the most from this spending. Going forward, that will accordingly reflect in the order book of the company. The order book of the company stands at 2.62 times of its FY10 consolidated topline. As of H1FY11, the company has an order book of Rs 1,15,400 crore, of which order inflow of Rs 35,200 crore has come only in the first half of the present fiscal.

The power sector formed a major 47 per cent chunk of the total order inflow followed by the infrastructure segment which contributed 28 per cent while hydrocarbons, process and others contributed the rest. L&T has received orders worth Rs 2,161 crore for its different segments in the first week of December 2010. L&T Finance, which is a 100 per cent subsidiary of the company, has filed for an IPO and is looking forward to raise around Rs 1500 crore. The IPO of the finance arm will show value unlocking of the company and the finance business valuation would become attractive.

On the financial front, for the recently concluded H1FY11, the topline witnessed growth of 12 per cent on a YoY basis and stands at Rs 17,216 crore as against Rs 15,395 crore in H1FY10. The bottomline witnessed growth of 23 per cent on a YoY basis and stands at Rs 1,431 crore for H1FY11 as against Rs 1,158 crore for H1FY10. The EBITDA margin witnessed an improvement of 90 bps for H1FY11. On the valuation front, We feel that the thrust on building infrastructure and generating more power is likely to provide the company with the edge that will garner better results for shareholders in the coming period. Scrips like L&T are such that they bring stability and help to strengthen an individual's portfolio base. Hence, we suggest that our readers include the scrip to stabilize as well as to make better profits in 2011.[PAGE BREAK]

SpiceJet
There comes opportunity with every crisis and nothing can be truer than what is going on in the aviation sector that has been in the news for quite a time, unfortunately for all the wrong reasons. There has been a media report on the default of payments to banks by airline companies and the latest conflict between the airline operators and the civil aviation ministry over the increased fares is giving this sector the tag of untouchability for the investors. Nonetheless, SpiceJet is a company that is clearly providing the investors an opportunity amidst the current crisis.

SpiceJet operates 122 flights daily to over 19 domestic destinations and is the most profitable airline in the country. This has been helped by the continuous increase in the market share of the company that has risen from 12.6 per cent at the end of FY10 to 13.6 per cent at the end of October 2010 and is likely to increase to 16.5 per cent by the end of FY12. We believe that it will achieve this with the addition of Bombardier Q400s to the company's fleet. SpiceJet has recently placed an order for 15 Q400s regional turbo-prop aircraft, the delivery of which will start in June 2011. The Q400s will have 78 seat configurations and will strengthen the company's tier II and tier III city presence, which are currently under-served. Additionally, the Q400 turbo-props are fuel-efficient and will also be exempt from domestic airport navigation and landing charges which currently is Rs 30,108 per departure.

SpiceJet is looking to fund its fleet expansion through the US Exim Bank. The company currently has net cash of Rs 12 crore and therefore even after raising funds we believe that the debt equity ratio will be at a comfortable level. In addition to its strong balance sheet, the one significant factor in favour of the company is its lean cost structure. It's operating CASK (cost of available seat kilometer) is 20 to 40 per cent lower than its peers primarily due to higher fleet utilisation as a result of faster turnaround of aircrafts, lesser cabin crew compared to its peers, and lower ticketing and reservation costs relative to the domestic players.

This is clearly reflected in the financial result of the company. For Q2FY11, the revenue of the company increased to Rs 628.17 crore as against Rs 440 crore posted during the same quarter last year. But it was the profit of the company that saw a substantial jump and turned to black from red during the same period. The company posted profit of Rs 10 crore as against loss of Rs 101 crore incurred for Q2FY10. Coming down to valuations, the company's scrip is currently trading at 16 times its last 12-month earnings and EV/EBITDA of 19 times. This might look little expensive but looking at the growth potential of the company and its impressive balance sheet one may take exposure in the counter with a price target of Rs 110 in the next one year.

Suryalata Spinning Mills
A portfolio wouldn't be complete if it doesn't have a certain zing factor to it and these scrips help in creating that alpha for the portfolio. Taking a cue from this, we have selected Suryalata Spinning Mills. It is a fairly unknown scrip from the textile universe, which we believe packs quite a punch. It has the potential to not only deliver good results but also give a good upside to investors' portfolios in 2011. Based out of Secunderabad, Suryalata Spinning Mills (Suryalata) is a manufacturer of polyester, viscose and blended yarns. The company has two manufacturing units, located at Kalwakurthy and Urkondapet, about 100 kms from Hyderabad with an installed capacity of 72,000 spindles.[PAGE BREAK]

Around 62 per cent of its revenues are generated from the domestic market while the balance 38 per cent comes from the exports front where it supplies to countries such as the US, Italy, Taiwan, Iran, Brazil, Argentina, etc. Well, so far so good, but what makes Suryalata attractive to us is the massive Rs 210 crore capex that it has undertaken to drive future growth. The plan includes increasing spindle capacity to 2 lakh spindles over the next 2-3 years and adding a 10 MW power plant for captive purposes. The slated expansion is being funded through a combination of debt, equity and internal accruals. According to media reports, Suryalata has already tied up with banks for term loans and it is in discussions with private equity firms to divest stake and raise funds. The process has already started as Suryalata commissioned 10,080spindles at its Urkondapet at a cost of Rs 19.46 crore in Q4FY10. While this is already generating revenues, Suryalata expects to another add 35,000 spindles in its Urkondapet facility by August- September 2011. Once commissioned, it will give another good push to the firm's revenues from the second half of FY12. If this was not enough, Suryalata is also setting up a 10 MW power plant, which would be used for captive consumption. This again augurs well for the company as firstly it ensures continuous power supply to its facilities (the company faced power crisis in prior fiscals), thereby improving utilisation levels and pushing revenue growth. At the same time, it also reduces overall power costs, thereby expanding margins and profits further.

Coming to the financial performance, for H1FY11, Suryalata's revenues increased 38.23 per cent to Rs 111.80 crore (Rs 80.88 crore) while profits increased 254.46 per cent to Rs 7.55 crore (Rs 2.13 crore) on account of commissioning of new capacities. For FY11, as a whole, Suryalata could post revenues of Rs 220-224 crore while its profits could be around Rs 14-15 crore. At these estimates, the scrip is available at a PE of 4x and an EV/EBIDTA of 7x. While Suryalata looks attractive on the PE basis, on the EV/EBIDTA basis it looks a bit steep as the company has more debt on the books. However, one should note the average cost of it debts are around 6 per cent, which is due to the benefit of the funds raised through Technology Upgradation Fund (TUF). Hence, one can still buy Suryalata at a CMP of Rs 162 with a one-year target of Rs 202.

Swaraj Engines
If we are talking about the crème de la creme for the year 2011 the list wouldn't be complete without the fantastic scrip of Swaraj Engines (Swaraj). A manufacturer of diesel engines and diesel engine components for tractors and commercial vehicles, Swaraj certainly looks placed in a sweet spot to drive its future growth at a much rapid pace and hence is a 'musthave' scrip in one's portfolio. With 93 per cent revenues coming in from the sale of engines to Mahindra's Swaraj division and 7 per cent from the sale of engine components to Swaraj Mazda for their commercial vehicles, the company has been growing at a three-year CAGR of 30 per cent in topline and 36 per cent in bottomline. And this growth looks ustainable going forward considering the fact that the parent company Mahindra & Mahindra owns 33 per cent in Swaraj and is expanding its tractors' capacity across its plants The[PAGE BREAK]
decision was taken by M&M as it is struggling to meet the domestic demand due to the existing production lines running at full capacities. According to a media report, the company is spending around Rs 120 crore to increase Swaraj's capacity from 60,000 to 80,000-85,000 per annum. This will create ample demand for the diesel engines of Swaraj. To absorb and deliver this kind of demand, M&M is also expanding Swaraj's engines capacity to from 39,000 to 60,000 units per year with an investment of Rs 40 crore to be funded through internal accruals.

There are plans to increase the capacity further to 1,00,000 units per year in the second phase. Besides, one should not forget that M&M is a market leader in the tractor business with a massive 41 per cent market share. Also, the growth in the agriculture sector at around 4 per cent for FY11 and the government's thrust on investing in technology to increase farm produce will create more demand for tractors in the coming years. All this augurs well and will push Swaraj's growth to another trajectory altogether. Besides, the commercial vehicles sector too is doing well and Swaraj Mazda has put up a good show in H1FY11 so that the overall picture for Swaraj looks buoyant. There also are other factors that one cannot afford to ignore. These include the debt-free status of the company, good cash and liquid investments, and a good dividend track record of 19 years.

Swaraj has a strong balance-sheet and has been debt-free since the last five years and this not only gives good room for funding their expansion plans through debt if the need be but has also helped in keeping its margins healthy with zero interest outgo. The company has Rs 114 crore of cash and equivalent, which is almost 20 per cent of its market cap and translates into Rs 105 of cash per share. Last but not the least, in terms of valuations for H1FY11, Swaraj's revenues and profits increased by 25 per cent to Rs 171 crore and by 12 per cent to Rs 21.51 crore respectively. For H1FY11, Swaraj could post revenues and profits of around Rs 340-350 crore and Rs 40-42 crore respectively. At these estimates Swaraj is available at PE and EV/EBIDTA of 14x and 8x, thus making it an attractive buy at its CMP of Rs 486 with a one-year target of Rs 567

TCS
When there are concerns still lurking around in the global economies and the fear of double recession still persists, many might question the inclusion of an IT scrip in the portfolio for 2011. But the kind of steady recovery shown by the IT/ITeS sector in the last few quarters, the better than expected performance from TCS and the fact that the scrip provides not only solid stability but also a good upside potential makes it a must-have in one's portfolio. A good indicator for better days for the IT company can be seen from TCS's hiring plans that continue to get revised every quarter.

If in Q4FY10, the company was set to hire 30,000 people for FY11 then in Q1FY11, the number was revised to40,000. Post the Q2FY11 results, thisfigure has touched the 50,000 mark- much higher than its industry peers. The recruitment number moving up by more than 66 per cent in two quarters from the initial estimate, clearly indicates that there is good business in the pipeline that TCS anticipates and is already gearing up for the same. This is quite in contrast to the prior two fiscals where the company almost put a freeze on recruitments due to the global slowdown and a lack of projects. In fact the management, which be very conservative, looked quite optimistic and upbeat during their recent Q2FY11 results Concall, thus giving an impression that the recovery is indeed in place and better than previously expected.

TCS has been consistently generating better than expected volumes over the last few quarters. In fact in Q2FY11, with sequential volume growth of 11.2 per cent, TCS is ahead by quite a mile considering peers such as Infosys and Wipro have shown volume growth of 7.2 per cent and 7.4 per cent respectively. The company should be able to achieve higher growth in the coming period given the fact that it is consistently winning new and large deals every quarter. What strengthens our confidence further is that TCS's focussed approach has enabled it to see double-digit growth across all verticals on a sequential basis in Q2FY11. This is quite an achievement considering that biggies such as Infosys, Wipro and HCL have failed to show similar growth consistency across verticals. Besides, the demand scenario has drastically improved with customers now coming forward and willing to spend on their IT needs. This we believe has a threefold benefit for TCS. Firstly, it will help increase volumes in the coming quarters; secondly, clients' budgets (to be finalised in the coming two quarters) could be on the higher side and thirdly, the icing on the cake may come in the uptick in pricing with demand getting stronger. All this will help to push TCS's revenue growth even further in the coming quarters.Last but not the least, the valuations at FY11 estimates that the TCS scrip is available at a PE of 25x and a PEG of 1.38x, which we believe is attractive and makes it a good buy at a CMP of 1075 with a one-year target of Rs 1300.