Friday, March 30, 2012

>ASIA MACRO & STRATEGY OUTLOOK: We face a dichotomy of US growth optimism & China growth pessimism

Shifting Sands in Expectations

■ We face a dichotomy of US growth optimism & China growth pessimism — We don’t think expectations can diverge too much for too long – US growth optimism and China pessimism may both be too elevated – our US growth forecast only modestly upgraded, while in China’s case, data may need to get worse before policy easing picks up, and we expect that should be forthcoming soon.

 Manufacturing recovery provides support for many smaller open economies — Many of our smaller open economies are expected to post quarterly expansion in 1Q 2012 onwards, with the help of tech-led recovery and brighter US growth prospects, with inventory de-stocking risk looking manageable. On the other hand, China’s elevated PMI Finished Goods Inventory could highlight waning IP momentum in the near term.

■ Most Asian CBs agree with us – less concerned with growth risks vs. inflation — Policymakers are weighing US growth upside risk more than China growth downside risk in the backdrop of sticky core and inflation expectations and oil risks. Many have already shifted tone from earlier dovish to more neutral (e.g. Indonesia, Philippines), neutral to slightly more hawkish (Korea, Malaysia), and even from previously slightly dovish to slightly more hawkish (Singapore, Thailand).

■ India, Vietnam and China are exceptions — India and Vietnam have hiked policy rates a lot and have more room to ease, though in India’s case, less room than before given oil/subsidy risks. China is another exception – growth/inflation/inflation expectations have come off significantly – and it is likely to use RRR cuts as a monetary easing tool, but if easing is delayed and inflation is coming off to the sub 3% range, an asymmetric rate cut cannot be precluded.

 FX as a policy easing tool? — We doubt RMB is “close” to fair value (though likely “closer” to fair value than before), given our expectation of resumed FX reserve accumulation, albeit at a slower pace. Nonetheless, we think by keeping it in a tight range, it is being used as a policy easing tool, which on top of JPY weakness, will undermine the Asia FX outlook, especially for trade-dependent countries which compete with these countries and have weak domestic demand.

■ Risk to further back up in US yields complicate our view on assets — Heavily owned fixed income markets – Malaysia, Indonesia, and to a lesser extent Korea – could be relatively vulnerable. MGS has already outperformed swaps by a decent margin over others and could be a source of relative vulnerability. We still prefer PHP bonds to IDR local government bonds. On external debt, higher yielding sovereigns/quasi-sovereigns (e.g. Sri Lanka, Vietnam) offer better cushion than lower yielding Indonesia and Philippines.

To read full report: STRATEGY OUTLOOK

>Indian agriculture and tractors

Highlights of the Indian agricultural sector

  • Has always been a key sector of India’s economy
  • Currently contributes ~18% of Indian GDP
  • Accounts for ~10% of India’s exports
  • Second largest producer of rice and wheat in the world
  • Largest producer of pulses
  • Fourth largest producer of coarse grains
  • Second largest producer of vegetables, groundnuts and fruits
  • Current average growth rate: 2.8%

Highlights of the Indian tractor industry
  • The Indian tractor industry has developed over the years to become the largest tractor market in the world.
  • From just about 50,000 units in the early eighties, the size of the tractor market in the country has grown to over 600,000 units.
  • Increased use of tractors for haulage and non-agricultural applications.
  • The opportunities are still huge considering the low farm mechanisation levels in the country, when compared to other developed economies across the world.
  • After a splendid performance during the last two to three years, the Indian tractor industry is believed to head for a slowdown, which we believe is a myth.


We interacted with commercial vehicle manufactures, fleet operators and body building units to understand the implications of the announced excise duty hike on truck chassis. This will lead to an increase in chassis price for transporters by 4%. Based on our interactions with fleet
operators, we believe this increase will put further stress on their profitability. Though the move is aimed at incentivizing the sale of completely built units (CBUs) by OEs and organised body builders, we understand that currently CBUs account for only 15% of OE sales. Our
interaction with fleet operators also suggest that more than 95% of body-building work is done at local garages/unorganized units due to cost savings and greater flexibility in terms of customization to specific needs. As a result, the impact of 4% will be felt by most fleet owners.

Though OEMs have raised prices to the extent of excise duty hike, we believe that given the weak demand and continued pressure on fleet operators’ profitability, OEMs will have to give discounts to support demand. Within the CV segment, we expect partial under-recovery especially in the M&HCV goods segment. However, given the strong demand environment in the LCV segment (we also hold positive view driven by under penetration, low investment
and last mile transport), we expect the price hike to get absorbed in the market place.

We continue to maintain our volume growth estimate for M&HCV segment at 8-9% for FY13E (in-line with 8-9% for FY12E). However, we foresee downside risks to our FY13E numbers given the stress on fleet operators’ profitability (Our Oil and Gas analyst expects diesel hike in April 2012) and macro indicators still suggesting lack of pick-up in the investment cycle. We wait for macro indicators to show meaningful signs of revival to review our cautious view.

Within the Commercial Vehicle space, we continue to maintain Sell call on Ashok Leyland (CMP Rs.29, TP Rs.27, downside of 8%) and Hold rating on Tata Motors CMP Rs.273, TP Rs.300, Upside of 10 %).

  Budget proposal: The recent budget has proposed increase in the excise duty for chassis from earlier 10%+ additional Rs.10,000 to 15% now (standard excise duty increased from 10% to 12% and Rs.10,000 has been replaced by an additional 3%). Chassis sales account for more than 85% of overall trucks sales.

  …Impact on vehicle cost: This would lead to an increase in chassis cost for transporters by 4% and 2-2.5% for CBUs (if a transporter buys from OEM or gets the body built by
organized players).

  …Our take: We believe that given the soft demand outlook for M&HCV goods segment coupled with negligible rise in fleet operators’ pricing power, it would be difficult for OEMs to pass on the excise hike in full. This would lead to partial under-recovery and impact margins.
Even if OEMs decide to completely pass on the hike, we believe it will have to be compensated by discounts.

  Neutral on the CV segment: We continue to maintain our Sell rating on Ashok Leyland and Hold on Tata Motors.


>COX & KINGS:Has four segments - Education, Hotel breaks, Adventure and Camping (Technical view)

Holidaybreak acquisition-one-off PAT impact to reverse in FY13 Cox & Kings (C&K) acquired UK-based Holidaybreak (HBR), an education and activity travel group with market leading positions in UK and other major European markets in late Q2 FY12. Acquisition was made for an EV of US$730mn in a business that generated ~US$100mn EBIDTA in FY11 (Oct-Sep). HBR business has a strong seasonality with bulk of profits accruing in H2 (Apr-Sep). For instance, H1 FY11 saw headline pre-tax loss of US$28mn whereas FY11 posted headline PBT of US$53mn. Since C&K would consolidate the loss making Oct-Mar period, we expect FY12 PAT to be adversely impacted but situation would reverse with full year consolidation in FY13.

Holidaybreak: resilient model with leadership position
Holidaybreak offers educational and activity-based tours with FY11 group revenues of US$711mn and EBIDTA of ~14%. It has 4 segments- Education, Hotel breaks, Adventure and Camping with the first two accounting for over ~54% of revenues and 57% of EBIDTA in FY11.
Within the education segment, PGL is the leader in outdoor residential trips for students with centres spread across Europe, largely on ownership basis. Acquisition would fortify C&K’s revenue mix with the addition of a sturdier education business to the high growth leisure
travel business.

India outbound growth to remain robust
Of the nearly 20% of the 13.6mn outbound travelers from India who bought a travel package in 2011, C&K accounts for ~50% share; it expects India outbound to grow at a robust 30% yoy. Over the FY09-12 period, C&K India revenues have probably witnessed a ~26% cagr and we build in a healthy ~22% compounded growth over FY11-14.

Margins to improve, valuation appears attractive: BUY
Q3 FY12 EBIDTA was impacted by HBR merger which has a seasonally lean period in Oct-Mar while higher interest expense took its toll on PAT. However, the impact would reverse from FY13 upon full year consolidation. C&K would drive synergies on both revenue (C&K outbound generates European hotel bookings worth US$51mn to whom Hotel break bookings can be marketed) and cost fronts through group buying. Expect consolidated margin, return ratios to improve as HBR is fully integrated; valuations at 8.4x EV/E appears attractive. Recommend BUY.

Technical View
Cox and Kings is a channeling stock with an upward tilt. The stock’s price action is controlled by two parallel trend lines. Shown below is the primary ascending trend line, which connects consecutive higher lows. The stock hit a trough of Rs153 in December 2011. After that, on multiple occasions in January 2012 and February 2012, it bounced back from the primary support line. Upon reaching the lower trend line, the stock bounces until it reaches the upper trend line. This acts as resistance as well as a profit-taking zone, making the upside potential target of the current pullback to Rs220. Prices are not always perfectly contained in a channel; it only shows areas of support and resistance for price targets. So, any kind of decline towards lower ascending trendline, which coincides with 20-DMA (Rs181), is likely to act as a strong support and entry point. Cox & Kings was in a downward spiral for the last two months of 2011. The intermediate rallies faltered near the long-term bearish resistance line on daily chart (see below). However, recent chart pattern has been encouraging with strength in volumes; the stock is trading close to its 200-DMA, which coincides with neckline of an Inverted Head and Shoulders pattern. Any move above Rs195 (200-DMA) would confirm a breakout from the above mentioned pattern and ignite bullish momentum. Another argument supporting our optimistic view is the positive crossover in the daily RSI. A move above Rs195 would also result into negation of a bearish pattern, which is considered to be positive. Based on the above mentioned technical observations, we advise accumulating stock at current levels for medium term target of Rs220.


>INDIAN INNERWEAR SECTOR: Page Industries, Lovable lingerie and Rupa & Company

Along the consumption bandwagon!

The Indian apparel sector is expected to grow from | 1,709 billion in 2010 to | 4,700 billion by 2020E, representing a CAGR of 10.8%. Of this, the innerwear market currently valued at ~ | 14,300 crore (in 2011) is expected to grow to | 43,700 crore by 2020E, growing at a CAGR of
13.2%, outpacing the growth of the overall apparel market. Also, the women’s segment that has historically been smaller in size compared to the men’s segment is expected to grow at a faster pace (CAGR of 15% over 2010-2020E as compared to 10% CAGR in the men’s segment). The women’s innerwear segment is likely to touch | 30,000 crore from the current | 8,500 crore. On the other hand, the men’s innerwear segment is likely to grow from | 5,800 crore in 2010 to | 13,700 crore in 2020E. Improving Indian demographics and increased preference for proper fits, sizes, etc. lend credence to the growth of organised players in the Indian innerwear market. Organised players (including Page Industries, Lovable Lingerie and Rupa & Company, among listed players) are well poised to capture this growth. We are initiating coverage on the Indian innerwear space with a BUY rating on Page Industries. Based on the current valuations, we believe that the upside potential in Lovable Lingerie is limited and, hence, have a HOLD rating on the same.

                          Shift from unorganised to organised segment to aid overall growth
The Indian apparel market has been witnessing a shift towards the organised segment. The share of the organised segment in the overall pie has increased from 13% in 2005 to 16% in 2010 and the same is expected to go up to 40% in 2020E. The organised apparel market is expected to grow at a CAGR of 21.3% during 2010-2020E (faster than the overall apparel industry, which is slated to grow at 10.8%). This augurs well for organised players.

Higher share of premium products to aid margin expansion
The premium and super-premium category in both the men’s and women’s segment has witnessed a higher growth than other segments. With increasing disposable incomes and customers’ willingness to shell out more for better quality products, domestic innerwear manufacturers are working towards increasing the share of premium products in their product portfolio. On the back of this, we expect a margin expansion in the range of 50–250 bps (across our innerwear coverage universe) by FY14E.

Sector multiple lower than that of consumption stocks
 We believe the stocks in the innerwear segment like Page Industries, Lovable Lingerie and Rupa & Company are similar to consumption sector stocks like Marico, Dabur, Titan Industries, Asian Paints and Jubilant Foods. The performance of these (consumption) companies is also driven by brand preferences, rising disposable incomes, etc. The innerwear segment stocks are trading at a multiple of 22-25x one year forward earnings. We believe this sector deserves to trade at such multiples considering the superior return ratios, healthy free cash flow generation, consistent growth and healthy dividend payout. Our comparison with stocks in the consumption space reveals that the stocks in the Indian innerwear space are still trading substantially lower than the average P/E of 29.6x (FY13E EPS) for all consumption stocks taken together.



Orient Paper & Industries Ltd (OPIL) is a 76-year old Bhubaneswar (Odisha) based company established in 1936. It is a multi-product and multi-locational company belonging to the C. K. Birla Group. The company’s operations can be broadly categorized under 3 Divisions viz: Cement, Paper and Electrical Divisions. The company’s paper unit is located at Amlai, Madhya Pradesh, Cement units at Devapur in Andhra Pradesh and Jalgaon in Maharashtra Mr. Chandra Kant Birla is the chairman while Mr. Manohar Lal Pachisia is the managing director of the company. In cement, the company has earned a solid reputation. The company’s products are sold under the brand name ‘Orient’. i.e. Orient Cement, Orient Fan and Orient Paper. In appliances, Orient, has become a household name. A pilot pulp and paper plant of the company was commissioned in February 1978. The pulp mill was redesigned for production of bleached pulp from rags, hemp, cotton, stalk, etc., as also from bamboo or other forest and/or agricultural residues. In September 1982, a cement plant was commissioned at Devapur (AP) with an annual capacity of 9 lakh tonnes. By end 1990, the second unit of the cement factory was commissioned.

In 1991, the company undertook to supply technical know-how for the manufacture of paper in and outside India. The first stage of oxygen bleaching was commissioned for improved brighteners of paper and the second stage of chlorine di-oxide bleaching were commissioned in 1992 and 1993 respectively.

In 1996, the company's 6 MW Back Pressure Turbine was commissioned at Amlai to reduce power cost and reduce dependence on outside supply. The new tissue plant at Amlai was also commissioned in 1997. In 2005, OPIL introduced high speed table fans in the Appliances Division while the Amlai paper mill of the company had installed and commissioned a fly ash brick making plant with a capacity of 15,000 bricks per day in March 2006. During 2006-07, the Cement Division of the company received the Phase-II of TPM certification from ISO-9001 and in the same year it developed nine clones of eucalyptus suitable for semiarid regions under the Paper Division. In October 2007, it diversified into manufacturing and marketing of CFL products at an estimated investment of Rs.40 crore.

■ Growth Plans: OPIL is planning to set up a greenfield cement plant in the Gulbarga district of Karnataka with a capacity of 3 million TPA (MMTPA) at an estimated investment of Rs.1,720 crore. Land acquisition for the project is at an advanced stage. Further, the company is setting up a 55 MW power plant at its Paper Division at Amlai to fully cater to the requirements of both the paper and caustic chlorine plants at an investment of Rs.174 crore. It is also planning to increase the production capacity of fans to 90 lakh units per year. Diversification: The company has plans to further diversify the range of its electrical appliances by addition of household appliances such as mixers, geysers, coolers, room heaters etc. in addition to fans and lighting products.

■ Carbon Credits: Its claim for carbon credits for the Cement Division for 2008-09 for issuance of 1,28,895 CERs is in the final stage of UNFCC approval, which is expected to be accounted for in the year the amounts are realized.

■ Performance: For FY11, company posted a total revenue of Rs.1989.36 crore with net profit of Rs.143.10 crore netting a basic EPS of Rs.7.42 and diluted EPS of Rs.7.41 for the year.
Latest Results: The company notched a total income of Rs.578.43 crore with a net profit of Rs.42.40 crore posting a basic EPS of Rs.2.20 and diluted EPS of Rs.2.16 for Q3FY12.
Financials: The company has an equity base of Rs.19.29 crore with a share book value of Rs.45.41 (FV: Re.1). The company has a debt:equity ratio of 0.64 with RoCE of 18.45% and RoNW of 17.24%.

■ Share Profile: The company’s share with a face value of Re.1 is listed and traded on the BSE under the ‘B’ group. Its share price touched a 52-week high/low of Rs.66/Rs.44. At its current market price of Rs.61, it has a market capitalization of Rs.1249.80 crore.

■ Dividends: The company has been paying dividends as shown below: FY12 - 100% (Interim Dividend), FY11 - 150%, FY10 - 150%, FY09 - 150%, FY08 - 120%, FY07 -100%.
Shareholding Pattern: The promoter holding in the company is 33.61% while the balance 66.39% is held by non-corporate promoters, institutions, mutual funds and the Indian public. Mutual Funds like Franklin India, HSBC, L&T, Templeton India, BNP Paribas, ICICI Pru, Reliance, UTI, Birla Sun Life, Canara Robeco and Religare have added the company’s shares to their various schemes.

■ Prospects: With the Indian economy is poised to grow at a rate of above 8%, cement consumption is bound to return to a growth rate of a minimum 10% per year, which should result in restoring capacity utilization to a healthy level.

While the demand for cement in Andhra Pradesh may take somewhat longer to recover, we feel that this is a passing phase and normal demand growth should return in due course. However, OPIL remains one of the lowest cost producers of cement in India and is, therefore, well-positioned to face any short-term downturn in cement realizations. The demand for cement is expected to increase by around 10% per year during the next few years. As the company’s capacity utilization increases, full benefit of the captive power plant will also become available. The proposal is to set up a cement plant of 3 MMTPA along with a 50MW power plant at Gulbarga, Karnataka at an estimated to cost Rs.1720 crore is slated to be completed in around 33 months after completion of land acquisition. Further, the off take of electrical goods and paper is also likely to increase going ahead. Hence, the company is confident and optimistic about future prospects of its overall business.

Conclusion: OPIL is an existing, profit making and dividend paying company belonging to the C K Birla Group. In view of its highly encouraging performance and expansion plans, the company is expected to post a robust performance in the days to come. At its current market price of Rs.61, the OPIL share price is discounted over 9 times its 9 months earnings of Rs.6.52. Considering its low P/E multiple, high payouts and robust performance, the OPIL share may be added to one’s portfolio for steady gains.


>Will the PM bite the bullet?

Coalition politics may take its toll on the country's economic growth as it separates good economics from good governance. Coalition politics may also roll the heads of efficient ministers like Dinesh Trivedi and derail his progressive budget. Coalition politics may also compel the FM to undermine the compulsions of fiscal consolidation. Coalition politics may put the reforms on hold. In fact, it is responsible for putting the economy in a pause mode. 

As soon as the Budget was announced, it was very clear that the FM did not walk his talk and a lot which is desirable may come in installments. Both the PM and FM are hopeful of a consensus to emerge to make some major moves. In all likelihood with the narrow and selfish mindset of regional parties, which want to stick to their local political support and simultaneously milk the Centre, the move forward may not come through. Sensing this the PM said if need be we shall bite the bullet and the FM went overboard to state that if need be we shall bite the ballot! 

The market, as smart as it could be, understood the firmness in this resolve. From four days prior to the budget till date the FIIs have been net buyers despite the net sell figures of the DIIs all through. It is this net inflow which gives credence to biting the bullet attitude, which is absolutely necessary in getting the Indian economy on the fast track. 

Both the BSE Sensex and the CNX Nifty are looking up since the beginning of the week. Infrastructure, banking, power, cement, logistics and construction have been on the buyer's list. Very soon, the price rise in Petrol, Diesel, LPG, CNG, power and rationalisation of fertilizer subsidy shall take place, which shall act as a prelude for many more reforms to follow. The market expects a partial recovery for oil marketing and power supply companies. Bimal Jalan, the ex-RBI Governor and a member of the BJP think tank on economics, is right when he says "India is at a crossroad. Over a period of time, certain fundamentals have emerged that create a disjuncture between the economic power that India holds and the political reality that India is." 

Economically India is unstoppable but for its politics. And only if the government takes care of the politics, people will take care of the economics. In 2009-10 India's reputation both as a democracy and global emerging power was at its peak. Everything was going very well; there was exuberance in the system. Both FDI and FII flows were up. The Sensex and the Nifty were booming too. Backed by a sharp and strong financial system, India emerged from the global financial crisis almost unscathed. But in last three years people are getting dismayed with the way things are going. Governance problems, corruption cases coming to the fore plus scams of all kinds and magnitudes have led to this feeling of great discomfort. 

Biting the bullet or biting of the ballot simply means getting India back on the rails of high growth. Heal the wounds of corruption and scams, get back on the road to rapid development. Prepare the party or UPA to face the next election with confidence. Bring the global economic realities like rising crude, rising food prices, and India becoming the favorite investment destination for the ‘aam aadmi’. Ensure availability of better opportunities in education, health and employment and the common man shall have no complains on rising taxes and cost of living. In fact, inflation is an imminent sign of growth and its absence is a sign of saturation. 

FIIs have got the message loud and clear and the pumping in of big money through FII route is a proof enough of the change which is in the offing. As Indians we are still complacent about this and shall join the bandwagon in the second and third leg of the upmove. IMF has hailed India's budget as one which brings India on the path of fiscal consolidation. It appreciates India's return to infrastructure development, helping itself realise its full growth potential. This is what is unfolding on Dalal Street and whoever reads it and interprets it earlier gets the best mileage. So let Manmohan bite the bullet or Pranab bite the ballot, or Mamta hold the governance at ransom, the wooing gimmicks shall not work anymore.

>Premier Explosives: For explosive gains

The share of Premier Explosives Ltd. (PEL) (Code 526247) (Rs.60.50) is being recommended for decent gains in the medium-to-long-term. 

PEL is one of the major companies manufacturing the entire range of explosives and accessories for the civil requirement. Two of its plants are located in a mining area (close to Singareni Collieries) in Andhra Pradesh and enjoy the benefit of being close to the end-users. Two other plants are located at Maharastra and Madhya Pradesh. Starting as a Small Scale unit in 1980, it was founded by Mr. A. N. Gupta, a Gold Medallist in Mining Engineering. 

The product range includes Pyro Cartridges, Special type squibs, Smoke markers, Mob Control devices, etc., and high energy materials like CL-20, CR Compound and HNS and bulk explosives. PEL also manufactures solid propellants and critical components that power missiles, including the recent Agni-IV and has expanded its production facilities. Its products go to the energy, mining, infrastructural development and defence & space sector. 

PEL's R&D facility is recognised by the Council for Scientific and Industrial Research (CSIR), Government of India, as an established research centre. It is also recognised as a research base for Ph.D. work by Osmania University, Andhra Pradesh. PEL has obtained accreditation from the National Accreditation Board for Testing and Calibration Laboratories (NABL) for its laboratory situated at Peddakandukur.

 PEL has ISO 9001: 2001 accreditation. Most of the products are ‘CE’ certified. PEL is in the process of implementing 6 Sigma & NABL accreditation. 

During FY11, net profit shot up by 69% to Rs.10 crore on 6% increased sales of Rs.95 crore. EPS stood at Rs.12.3 and a dividend of 20% was maintained. During Q3FY12, sales rose 35% to Rs.29 crore and net profit by 79% to Rs.3.3 crore. OPM and NPM vastly improved to 17.7% and 10.5% from 14.3% and 7.9% respectively in Q3FY11. The Q3FY12 EPS stood at Rs.4.1. 

During 9M FY12, sales moved up by 13% to Rs.76 crore, net profit also surged by 13% to Rs.7.8 crore. The 9M FY11 EPS works out to Rs.9.6. PEL’s equity capital is Rs.8.1 crore and with reserves of Rs.27.8 crore, the book value of its share works out to Rs.44. The value of the gross block is Rs.43 crore whereas the debt equity ratio is 0.13:1. The promoters hold 41.9% in the equity capital. With NRI holding of 6.1% and PCBs holding of 8.7% leaves 43.3% with the investing public. During FY10, an additional facility was commissioned at Neyveli, which started production from October 2009. It also established an 800 kW wind mill in Pushpathur village in Tamil Nadu. 

PEL recently completed a new expansion project at an investment of Rs.10 crore and added to its existing manufacturing unit at Peddakandukuru in Nalgonda district of Andhra Pradesh. It will cater to the needs of tactical missiles like the Nag, Astra, Akash, and Pinaka. The present facility for tactical missiles was an attempt to help the country reach self-reliance in defence supplies. The main users of explosives are sectors such as energy, mining, infrastructural development and defence & space. These sectors are growing at rapid pace as the country's GDP is growing at about 7% p.a. 75% of India’s power generation is coal based paving way for increased usage of explosives. Increased mining of coal for power generation and of iron ore, etc., for infrastructure development and higher allocations to defence and space sectors will certainly boost the prospects of the explosives industry.

PEL, which already caters to the defence & space sectors, foresees challenging technological opportunities in the coming years. It will work to enhance its presence in this sector and is poised to benefit from its core strength in this niche area.

PEL has demonstrated over time that it is a reliable private partner with its consistent quality of products and technical ability in various projects undertaken by the Advanced Systems Laboratory and the DRDO. PEL has already supplied critical components like the ‘smoke less' composition (which helps an aircraft avoid detection after the launch of the missile) for the Astra missile. PEL has been producing solid propellants since 2003. In the successful November 2011 launch of Agni-IV (beyond 3,500-km range intermediate range ballistic missile), Premier Explosives made the second of the two stage rocket motors along with the two igniters. 

The Igniters and Daisy-2 motor produced by PEL met all the quality parameters in static test as well as the flight test. PEL, the traditional private sector manufacturer of explosives for mining and commercial sectors, has specialised in meeting some of the niche demands of India's strategic sector — defence and space. For FY12, PEL is expected to post a net profit of Rs.11.5 crore on sales of Rs.110 crore. EPS would work out to Rs.14.2, which is expected to go up to Rs.16 in FY13. At the current market price of Rs.70.50, the share is traded at a P/E multiple of 4.9 on FY12 earnings and 4.4 times FY13 earnings. The share is recommended with a target price of Rs.90 in the medium-term. This will translate into a gain of over 28%.


>Liberty Phosphate: For solid gains

The share of Liberty Phosphate Ltd. (LPL) (Code: 530273) (Rs.68) is recommended for solid appreciation in the medium-term based on the company’s expansion plans and its highly encouraging results. 

Incorporated in 1987, LPL manufactures single super phosphate (SSP) and sells the fertilizer under the ‘Double Horse’ brand for various crops like oil seeds, groundnut and potato. 

LPL also produces SSP in granulated form called GSSP. It also makes nitrogen, phosphorus and potassium (NPK), fertiliser, soil conditioner, phospho bupsum, magnisium sulphates, and zinc sulphate. LPL has four manufacturing units situated at Udaipur (Rajasthan), Nandesari (Gujrat), Kota (Rajasthan) and Pali (Maharashtra). The company’s state-wise SSP capacity is as follows: Rajasthan 800 tonnes per day (TPD), Gujarat 200 TPD, Maharashtra 150 TPD, and Madhya Pradesh 300 TPD. 

Proximity to raw material sources/markets coupled with a dedicated multi-disciplinary work force has enabled LPL to respond to spurts in demand. 

The raw material required for manufacturing SSP is Rock Phosphate and Sulphuric Acid. Indigenous rock phosphate is available in plenty from the Jhamarkotra mines, Udaipur. 

Sulphuric Acid is supplied by Hindustan Zinc situated at Udaipur. Presently, the company purchases about 10,000 tonnes per month of sulphuric acid for its various units by way of long term agreement with Hindustan Zinc. LPL’s prestigious clients include Tata Chemicals, Zuari, GNFC, Chambal Fertilizers, Gujarat Agro Industries, Oil Federation and MP Agro Industries and various farmers. 

LPL, the largest producer and supplier of Single Super Phosphate (Powder & Granulated) plans to boost its production capacity from 5,62,000 MTPA to 9,24,000 MTPA. 

Currently, the unit at Udaipur in Rajasthan is operating at full capacity of 2,64,000 TPA of SSP/GSSP. The company recently completed capacity expansion at its Nandesari unit in Gujarat from existing 1,00,000 TPA to 1,98,000 TPA. LPL has applied for capacity expansion at its unit in Kota in Rajasthan from 132000 to 198000 TPA of SSP/GSSP. Environment Clearance is under process and is expected to be finalized by May 2012. Besides, LPL plans to expand capacity at its Pali unit in Maharashtra from 66000 to 132000 TPA and to install a SSP plant of 132000 TPA capacity at its Rae Bareilly unit in Uttar Pradesh. During FY11, net profit ballooned by 411% to Rs.33.1 crore on 78% higher sales of Rs.364 crore and the EPS stood at Rs.23. 

During Q3FY12 net profit advanced 25% to Rs.12.6 crore on 32% increased sales of Rs.109 crore. During 9MFY12, net profit surged 39% to Rs.33 crore on 8% higher sales of Rs.324 crore. The EPS for 9MFY12 works out higher at Rs.23. LPL’s small equity capital of Rs.14.4 crore is supported by reserves of Rs.74 crore, which gives its share a book value of Rs.61. The promoters hold 55% in the equity capital. Foreign holding is 13.9% and with PCBs holding is 2.4% leaves 28.7% with the investing public. 

Coming to its future prospects, SSP is a straight phosphatic multi-nutrient fertilizer which contains some other essential micro nutrients in small proportions. It is a poor farmer's fertilizer (price-wise) and an option to optimise the use of phosphatic fertilizers. It also helps to treat sulphur deficiency in soils (40% Indian soil is sulphur deficient) for further enhancement of yields at the least cost. In various crops like oilseeds, pulses, sugarcane, fruits and vegetables, tea etc, which require more of sulphur and phosphate SSP is an essential fertilizer.

India is the second largest consumer of fertilizers in the world next to China. Demand for fertilizer will keep on increasing in future to ensure food security of the country. To meet the increasing demand future policies should encourage creation of domestic capacity of fertilizer as international prices are volatile.
Currently, the fertilizer industry operates under stringent regulations. The FM has recently in his Budget Speech emphasised more focus on SSP industry and related crops.

LPL can lay claim to be the catalyst in the transformation of Indian Agriculture with high capacity and strong dealership network catering 13 States in the country directly as well as through co-partners and pioneer fertilizer companies like Chambal Fertilizers & Chemicals, GNFC, Zuari Industries. During FY12, LPL is expected to register sales of Rs.450 crore with net profit of Rs.40 crore, which would fetch an EPS of Rs.27.8. At the current market price of Rs.68, the share is traded at a P/E multiple of 2.4 on FY12 estimated earnings. A conservative P/E of even 4 will take its share price to Rs.100 in the medium-term and fetch a decent gain of about 50%. LPL’s business is dependent upon policy dispensations of the Government. Any change is likely to affect the projections and plans.



Promoted by Mr. Ajay Kumar Bishnoi and Mr. Amul Gabrani in 1990, Tecpro Systems Ltd. (TSL) is engaged in providing turnkey solutions in material handling, ash handling, balance of thermal power plant (BoP) and pollution control system. From a modest beginning as an equipment suppliers, TSL has gradually progressed to providing complete material handling solutions. Over the years, it has developed extensive in-house mechanical, electrical, civil design and engineering capabilities with an established track record of executing turnkey projects in the power, steel and cement industries. It has successfully created an in-house design and engineering team consisting of 300 engineers and experienced project management team which gives it control of the entire process, from conceptualization to commissioning of a project. Its business activities are broadly classified into the following four segments:

 Material Handling Solutions (50%): This is the flagship business of TSL where it undertakes turnkey projects of material handling systems for power, cement, steel, ports, coal and aggregate process plants for mineral processes. These projects involve design, engineering, manufacturing, supply, erection and commissioning of material handling systems, associated structural and civil work, electrical and instrumentation work and auxiliaries like dust control, suppression systems, ventilation systems and fire fighting systems. It specializes in creating systems that can be stationary, mobile or semi-mobile with typical capacity upto 300 tonnes per hour (TPH). TSL offers several types of conveyor systems like troughed, flat belt, pipe, screw, drag chain or salt chain conveyors and belt conveying systems for handling of bulk material from fine material like cement, lime powder to rocky materials like iron ore and limestone to cement and fertilizer bags and difficult materials like bauxite, clay, lignite and bagasse. Till date, TSL has executed over 1000 material handling projects on turnkey basis and has over 200 projects in hand to be executed.

 Ash Handling (40%): TSL forayed into ash handling solutions pursuant to the merger of
Tecpro Ashtech Limited, which has been engaged in the business of ash handling systems for over 40 years and has provided turnkey ash handling solutions in several thermal power projects. Ash handling in the power, cement or steel plants is extremely critical considering the environmental impact of the ash spillage and storage and disposal. Hence TSL utilizes different ash handling technologies including pneumatic conveying, slurry and pumping of ash in liquid state or solid conveying through conveyors. It has expertise in creating Bottom Ash System, Fly Ash System, Coarse Ash System, Ash Slurry Disposal System etc which includes water pumping facility, compressed air facility, electrical power distribution system, PLC based controls and instrumentation system, civil and structural works. Till date, TSL has executed over 75 ash handling projects on a turnkey basis and has over 30 projects in hand to be executed.

 BOP & EPC (10%): Leveraging its project management track record in material handling and ash handling solutions, TSL of late has ventured into the EPC business and started taking BoP contracts for coal-based thermal power plants and liquid fuel handling. It has executed contracts on turnkey basis, which include coal handling solutions, ash handling solutions, setting up of cooling towers, switchyard and plant electrical, water treatment plants and other auxiliary civil constructions. It either enters into collaborations or outsource to a third party supplier for providing BTG packages. Its EPC business is focused on providing integrated turnkey solutions for small power plants based on Indian or imported coal, washery rejects and biomass as main fuel. TSL received the first EPC order in 2007 whereas the first BoP order it got was in August 2009.

Other Business: TSL through its various subsidiaries also has presence in other areas like supply of air pollution control equipment, waste processing, waste water treatment & waste heat recovery. It provides turnkey solutions for management and processing of municipal solid waste that can be used as either land fill or for generation of fuel, which is used as an alternative fuel for burning in kilns in the cement industry or in boilers. In August 2011, it acquired 100% stake in Ambika Projects, a Chennai based company engaged in the business of water & waste water treatment with presence in Chennai, Mumbai and Sultanate of Oman.

TSL has four manufacturing facilities in India, of which, three are at Bhiwadi, Rajasthan, and one at Bawal, Haryana. It manufactures stackers, reclaimers, crushers, screens, feeders and fabricated structures at its factory in Bawal, Haryana. The first unit at Bhiwadi, Rajasthan has facilities for manufacturing pulleys, idlers & rollers, structures, feeders, screens, conveyor systems, conveyor components, crushers and screen parts whereas the second unit has a casting division. The third unit manufactures ash handling equipments. For sales and marketing it has a pan-India presence with its head office in Chennai and design, engineering & marketing offices at Gurgaon, Chennai, Kolkata, Mumbai, Hyderabad, Pune, Ahmedabad and Bangalore. Through its subsidiaries in Dubai and Singapore and marketing office in Johannesburg, South Africa, it caters to the needs of Middle East, South-East Asia and African markets. Importantly, TSL has eight foreign collaborations for various material handling equipment and technologies and three collaborations in relation to ash handling operations. In July 2011, it entered into an agreement with US-based Advanced Conveyor Technologies to get technical support for design, distribution and installation of overland conveyor projects. Earlier, it had entered into two new technology tie-ups one with Pneuplan Oy of Finland for projects involving pneumatic conveying for fly ash and another with Nanjing Triumph of China in the waste heat recovery segment. Within a short time of this collaboration for waste heat recovery, TSL bagged two orders from Ultra Tech and one order from Shree Cement aggregating Rs.224 crore. Waste heat recovery is a relatively new concept to the Indian cement industry, wherein the exhaust gases produced during production of cement are used as fuel to produce power. This is a high potential business as power is being generated by using waste gas thereby saving cost of power. TSL is confident of bagging many more orders in this space in the near future as there are only a few players. 

During 2010-11, TSL strengthened its foothold to become one of the leading players in the BoP space. It won two prestigious orders from APGENCO aggregating to about Rs.1,978 crore for Rayalaseema Thermal Power Project Stage IV (1x600 MW) and Kakatiya Thermal Power Project Stage II (1x600 MW). In addition, it was awarded an order by Kohinoor Power for design, engineering, project management & supply of a 66 MW power plant in Jamshedpur. Ironically, TSL normally bids for only those projects where BTG has already been ordered, environmental clearances obtained, land & coal linkages achieved and financial closure done. This ensures that these orders are more likely to get executed within the planned timelines. As of December 2011, TSL has a robust unexecuted order book position of Rs.4600 crore, which is 2.5 times its FY11 turnover, thereby providing strong revenue visibility for the next 4-6 quarters. In the first three quarters of FY12, it won fresh orders to the tune of Rs.1600 crore. The order book comprises 58% for Material Handling division, 34% towards BOP and the rest 8% is for Ash Handling division.

Going forward, TSL intends to move towards providing more value-added engineering services and improving the manufacturing and project execution capabilities. It intends to foray into the supply and commissioning of water treatment plants, coal washeries, port handling operations and other projects in the infrastructure sector. In order to acquire technical expertise in these new ventures, it is looking to enter into technical collaborations or strategic tie-ups with international companies with advanced manufacturing technologies or acquire existing companies with such technical expertise. On the other hand it has formulated a simple strategy to participate in large projects in the BoP & EPC space under consortium bidding and jointly execute projects to build a versatile track record. The size of the opportunity in the Balance of Plant segment of power plant is huge. It is expected to attract investments worth Rs.1.6 trillion over the next five years. Such growth is expected primarily from coal based capacity addition during the next five years. Recently in the Budget 2012, government has decided to provide some tax benefits to power sector and proposed to scrap customs duty on imported coal and a concessional CVD of 1% to steam coal for a period of two years till 31 March 2014. This step is estimated to bring down electricity generation cost by 12 paise per unit. Also, an improving economic scenario, continued government focus on infrastructure investment and pick-up in private capex augurs well for companies providing material handling solutions for the core industries. Further, the company intends to set up 100% subsidiary in Indonesia to tap opportunities available in the bulk material handling and mining sector there. 

On the financial front, TSL registered 40% jump in revenue to Rs.1430 crore whereas PAT grew by modest 10% to Rs.29 crore for the nine month ending December 2011. Given the nature of business and accounting practices adopted, TSL recognizes majority of the revenue & profits during the last quarter of the financial year. Hence it is expected to end the current fiscal with a topline of Rs.2500 crore with PAT of Rs.150 crore i.e. an EPS of Rs.30 on its current equity of Rs.50.50 crore. Although TSL has debt:equity ratio of little over 1, debtors outstanding of 200 days and negative cash flow from operating activities, it is normal for a growing company in EPC space. At the current market cap of Rs.800 crore, it is trading grossly cheap at a P/E multiple of 5 times. Investors are strongly recommended to buy the stock current levels and add more on declines. At a reasonable P/E multiple of 8 times, its share price has the potential to move up to Rs.240 within a year. Long-term investors can expect much higher returns.

Thursday, March 29, 2012

>Iran Sanctions Crisis Roils Energy, Shipping (REUTERS)

  • Iran oil exports fall as sanctions take toll
  • Shell scrambles to pay $1 bln bill for Iran oil
  • U.S. exempts 11 states from Iran sanctions; China, India exposed
  • India pushes refiners to cut Iran imports, despite sanctions scorn
  • Saudi oil sales to US jump; Iran response or just business?
  • Catch me if you can - oil sanctions against Iran
  • RBS halts India tanker payment due to Iran sanctions
  • Shell scrambles to pay $1 bln bill for Iran oil
  • U.S. exempts 11 states from Iran sanctions; China, India exposed

To read report in detail: Oil sanctions against Iran

>CUMMINS INDIA LIMITED: Expansion at Phaltan Megasite to fuel Cummins future growth Engine

■ Substantial Revenue growth despite multiple headwinds: Despite of high interest rates and commodity prices coupled with uncertain global environment, the company has been growing at a CAGR of 16.47% for the last 5 years. It is poised to grow at a CAGR of 14% for the next 5 years with improved outlook on export demand and substantive growth across all segments, particularly in segments like power generation and industrial business which contribute around 45% and 20% to the total revenue respectively.

■ New products to aid to future growth; Margins bottoming out: Cummins elasticity of adopting the new technology and using the same efficiently will help the margins to bottom out. It will significantly benefit from the enhanced products built‐in with new emission power generation norms and industrial engines due to superior product development capabilities. Hence, with the improving demand scenario and correction in commodity prices, there will be an upside in EBITDA margins, going forward.

 Expansion at Phaltan Megasite to fuel Cummins future growth Engine: Cummins is well placed with its expansion initiatives at Megasite, Phaltan. It constitutes almost 10 facilities in total, out of which 4 are operational and remaing would be operational by 2016 and contribute additional INR1500 crores to the overall revenue. The 2 operational facilities namely Upfit centre & MIDC SEZ would add up annual capacity of 20,000MW & 51,000MW respectively.

■ Power Generation Business to act as power booster: The company expects the Power generation business to grow at a CAGR of 12‐15%% over the next five years. The growth will be mainly driven by 1) market growth 2) LHP export opportunity at MIDC SEZ 3) larger penetration in the domestic LHP market (though might come at lower margins) and 4) tapping the bio mass opportunity. The company anticipates some pre‐buying behavior to show up before the change in the emission norms in July 2013 which would contribute heavily to the revenues. Cummins is confident that it will be able to penetrate the market much better post the norm change, given its technology leadership and readiness with the product to meet the revised needs of the customers

■ Cummins‐Cash enriched and Steady Balance Sheet: The Company has enough cash to carry on its future operation and expansions. It has strong balance sheet with healthy reserves and low debt.

To read full report: CUMMINS INDIA

>INDIA GAS: Growth will hinge upon the pricing of regasified liquified natural gas (RLNG)

Shifting focus from availability to affordability

We believe India’s gas sector growth will hinge upon the pricing of regasified liquefied natural gas (RLNG) rather than being a function of the widely accepted notion of supply constraint. The sector, which set a new paradigm in the energy space on the back of domestic gas in 2010, will now be driven by RLNG until domestic supply perks up. We believe that despite the euphoria over surging domestic gas supply fading, the earnings of players in this sector are fairly intact. We assign Buy rating to Gujarat State Petronet, Petronet LNG and GAIL (India) who are direct beneficiaries of the RLNG play in India, while we have Sell rating on city gas distribution (CGD) companies such as Indraprastha Gas and Gujarat Gas Company as they
seem to be entering a phase of margin contraction.

Gradual soft pricing of LNG in the offing: We have assumed average LNG free-onboard (FOB) spot price of US$15/mmBtu for FY13E as well as FY14E compared to an average of US$16.18/mmBtu in the first nine months of FY12, implying the cost economics of natural gas will continue to be favoured by the non-core sectors. We believe the current trend of softening spot LNG prices will continue on account of companies preferring to rely more on spot/medium term cargo rather than on long term contracts due to price distortion caused by the advent of shale gas. Our interaction with industry stalwarts indicated that ~35mtpa of RLNG capacity is being withheld by suppliers as they feel current spot prices are depressed and ~8.2mtpa of
contracts will be available for renewal from 2014.

Pricing to drive medium-term consumption growth: In the wake of dwindling production of domestic gas, consumption growth will hinge upon the ability of midstream companies to source LNG at US$15/mmBtu FOB in the medium term. Our analysis reveals that gas consumption can post a 9% CAGR over FY11-16E if noncore sectors remain dependent on RLNG with the core sector continuing to rely on domestic gas. Average LNG cost of US$15/mmBtu is vital for consumption growth as historical evidence shows that this level acts as a threshold limit for oil refineries, petrochemicals and CGD companies to determine their propensity to consume natural gas or switch to other liquid fuels.

Slim chances of across-the-board limit on marketing margin: The oil ministry has asked the regulator, PNGRB (Petroleum & Natural Gas Regulatory Board) to set the quantum of marketing margin that can be charged by a gas marketer. Our interaction with PNGRB officials indicated that as per the PNGRB Act, the regulator has no legal standing to limit marketing margin unless under Section 11(a) it finds concrete evidence of profiteering, or unless natural gas gets a notified status. Upcoming gas infrastructure to allay fears of tight gas supply: Indian companies will be investing US$28-37bn in gas infrastructure over the next four-five years. With the infrastructure in place, gas supply potential over this period is expected to increase to 336mmscmd from 185mmscmd currently by FY16, of which ~40% will be accounted for by RLNG terminals.

To read full report: INDIA GAS SECTOR

>ANIL: High growth potential for Indian starch industry compared to global average (STARCH APPLICATIONS)

Well placed to cash in on the potential opportunity

  High growth potential for Indian starch industry compared to global average: The starch industry in India is at a nascent stage with the per capita consumption of starch in the country being the lowest at 1.3kg compared with 64.5kg in the USA and over 10kg in many comparable Asian countries. However, the same is likely to improve in the coming years, as
starch finds diverse applications in the food and beverage, paper, pharmaceutical, textile and animal feed industries. Thus, with the rising demand for starch products from various industries, the Indian starch industry is expected to grow by around 15% per annum in the coming years.

■  Anil, largest player with wide product portfolio: Anil is one of the top three players in the domestic starch industry with an organised market share of close to 20%. However, in the high-margin value-added starch products it has a market share of 40-50%. Research and development (R&D) has played pivotal role in Anil’s success, helping the company to gradually shift from a commodity product business to a business of value added products. The company has reputed clients including players like ITC, Nestle India, Amway, Dabur, Heinze, Lupin, Arvind Mills and Raymond.

Robust track record with aggressive expansion plans: Anil has grown its revenues at a robust 31% compounded annual growth rate (CAGR) in the tough period of FY2008-11. The improving revenue mix in favour of value-added products has enabled it to double its operating profit margin (OPM) to 17.2% from less than 10% earlier, resulting in an exponential growth at
76.7% CAGR in its earnings during the three-year period. Going ahead, we expect Anil’s revenues to grow at a CAGR of 25% over FY2011-14 and the increasing proportion of the value-added products would further boost the margins to around 19% in the next two years.
To achieve the same, the company is expanding its manufacturing capacities to 1,000 tonne per day (tpd) in a phased manner, aims to launch new products and enhance its geographical reach to newer overseas markets.
■ Additional triggers—food processing park and land bank: The Anil group of companies received the approval from the ministry of food processing industries of India to set up a Mega Food Park project in Gujarat. The group will form a special purpose vehicle (SPV; a
consortium of companies from the food processing, logistic and infrastructure businesses) in which Anil will have a majority stake of 40%. The group will bring in land of 87 acres (valued at around Rs25 crore) for its 40% stake in the SPV. Once the project is completed it will add tremendous value to the stock of Anil. The company’s manufacturing facility is located at
Bapunagar, Ahmedabad in an area covering 1.5 lakh square metre. In future the company could shift its manufacturing facility to a special economic zone / tax benefit zone, thereby unlocking value in terms of land bank (the Bapunagar land area is currently valued
at Rs800-900 crore).

Outlook and valuation: With the enhancing capacity, Anil is well poised to cash in on the opportunity created by the increasing demand for starch in the domestic market. With most of the starch consuming industries growing at a healthy rate we expect Anil’s top line to grow at a CAGR of 25% over FY2011-14. Further, with an expected improvement in the OPM, the bottom line is expected to grow at a CAGR of 37.0% over FY2011-14. At the current market price the stock trades at 3.5x its FY2013E earnings per share (EPS) of Rs70.4 and 2.3x its FY2014E EPS of Rs106.1 (rough estimates). We see potential for a substantial upside in the stock over the next 12-24 months. Historically, the stock has traded at price/earnings (PE) multiple of 4-5x its one year forward earnings.

Company background
Anil is the flagship company of the diversified Anil group. It is a leading player in the Indian corn wet milling industry having a robust manufacturing infrastructure as well as R&D and application development capabilities. The company, established in 1939, manufactures a varied range of corn-based products, such as native starch, chemical starch, modified starches, dextrins, dextrose monohydrate, liquid glucose, corn syrup and sorbitol. Anil’s manufacturing facility is located in a prime locality in Ahemdabad spanning an area of 150,000 square metre and is close to an international airport. Its core strengths are R&D, technology and product development, which led to a strong improvement in its profitability in a short span of time. Anil’s top line and bottom line grew at CAGR of 31% and 77% respectively over FY2008-11.

Starch industry: an overview

Global starch market
Starch is one of the most popular biomaterials having diversified applications in the food and beverage, paper, pharmaceutical, textile and animal feed industries across the globe. The present global starch market is around 70 million metric tonne (MT) and is expected to grow and reach around 80 million MT by 2015. The modified starch market is expected to be the fastest growing segment over this period, thanks to the rising health awareness across the globe and the growing functional and nutritional needs in the global economy that are resulting in a higher usage of innovative modified starches. Though corn starches, wheat starches and potato starches are popular starches across the globe, corn starches are the most popular and most widely used across applications. China has the highest production of starch with 17.5 million tonne production, surpassing the USA with 13 million tonne of starch output.

Indian starch industry
The Indian organised starch industry has an estimated size of around Rs2,000 crore. The industry is at a nascent stage comprising around 40 products from corn derivatives while the international market comprises more than 800 starch and derivative products. With companies globally focusing on innovations in their product portfolio through R&D, the demand for starch sweeteners and other derivatives has picked up in a number of industries in India as well as in the international markets. During the period 2005-10, the Indian starch industry grew at a CAGR of 21.81% and is expected to grow at 15% per annum in the coming years.

Key positives
 Anil, largest player with wide product portfolio: Anil is one of the top three players in the domestic starch industry with an organised market share of close to 20%. However, in the high-margin value-added starch products segment it has a market share of 40-50%. The company’s capacity utilisation in FY2011 stood at 75%, which was an improvement over the 60% capacity utilisation recorded in FY2008. To grab a larger share of the domestic starch market and meet the increasing demand, Anil is planning to enhance its capacity to 1,000 tonne per day in a phased manner. R&D has played a pivotal role in Anil’s success, helping the company to gradually shift from a commodity product business to a business of value-added products.
It has strong clients such as Nestle India, Dabur, Heinze, Lupin, Raymond, Vardhaman, Arvind, Century Textiles and BILT. The top five clients contribute close to 10% of the company’s top line.

Top line growth to sustain at 25% in the coming years: Anil manufactures a varied range of starch products used in various industries, such as food processing, beverages, confectionery, textiles, pharmaceuticals and paper. Most of the industries are growing at 15-25% per annum. With an increase in the demand for value-added products in the domestic and international markets, we expect Anil’s top line to grow at a CAGR of 25% over FY2011-14. The growth will be driven by a mix of volume growth and improved sales realisation over the same period. While the volume growth is likely to remain in mid single digits, the realisation growth would be in the 16-18% range in the coming years.

OPM to stand at 19% in FY2014: The company has increased its focus on selling value-added high-margin products which has helped it to clock better realisations. The contribution from the value-added products has risen from 30% in FY2008 to 70% in FY2011. This along with stringent cost reduction measures has aided the company to achieve a strong improvement in the OPM. The OPM of the company improved to 17.2% in FY2011 from 9.1% in FY2008. The company expects the contribution from the valued-added products to go up to 80% in FY2014, which will help it to achieve an OPM of around 19%. Thus, the company is expected to post a strong operating performance in the coming years.

Key risks and concerns
A working capital intensive company: Being in a commodity-linked business the company has a high conversion cycle of around 180 days. Since most of Anil’s value-added products are in the introductory phase, the credit period given to the customers for such products is high in comparison with that for some of the other products in the portfolio. Unless these value-added products attain certain maturity, we don’t expect the cash conversion cycle to improve
substantially and hover in the range of 180-190 days in the coming years.
Debt/equity ratio stands at 2.0x: The company’s debt/ equity ratio currently stands at 2.0x, as it requires short-term debt for its working capital requirement. Also, the company is planning to fund its capacity expansion plan by raising funds through debt. Hence, we expect the debt/equity ratio to stand at around 2.0x in FY2012E. The higher interest cost is likely to
put some pressure on the bottom line growth in the near term. However, we expect the debt/equity ratio to improve to 1x by FY2014.
Increase in raw material prices to affect marginsMaize is one of the key raw materials for manufacturing starch. The maize prices have gone up to Rs13.5 per kg in March 2012 from Rs12.9 per kg in March 2012. The prices have currently stabilised at around Rs12 per kg. However, any significant upward movement from the current level would put pressure on the
company’s margins if Anil is not able to pass on the entire hike in the raw material prices.

Outlook and valuation
With the enhancing capacity, Anil is well poised to cash in on the opportunity created by the increasing demand for starch in the domestic market. With most of the starch consuming industries growing at a healthy rate we expect Anil’s top line to grow at a CAGR of 25% over FY2011-14. Further, with an expected improvement in the OPM, the bottom line is expected to grow at a CAGR of 37.0% over FY2011-14. At the current market price the stock trades
at 3.5x its FY2013E EPS of Rs70.4 and 2.3x its FY2014E EPS of Rs106.1 (rough estimates). We see potential for a substantial upside in the stock over the next 12-24 months. Historically, the stock has traded at PE multiple of 4-5x its one-year forward earnings.