Friday, August 28, 2009


Investment Rationale
Opto Circuits (I) Ltd. (OCIL) is manufacturer of invasive and noninvasive medical devices, with strong brand equity and proven track record of pioneering products, rooted in proprietary technology.

The consistent ramp up in revenues and profits over the years (3 year CAGR of 80% and 70% respectively), brought about by organic and inorganic growth, underscores the management bandwidth, technology assimilation and implementation skills.

OCIL is focussing on improving the monetisation of its base of proprietary technology in the patient monitoring (Criticare) and invasive cardiac (Eurocor) segments, with a marked thrust on
increasing profitabililty of operations.

Its marquee products (viz. patient monitors and stents) are making significant inroads at home and abroad, as is apparent from the sales volumes and geographical distribution of revenues.
At the CMP of INR184, OCIL is trading at a PER of 7.7x and EV/EBIDTA of 6.9x, discounting its FY11e numbers.

OCIL is currently maintaining focussing on developing cost-effective and technologically superior products, while simultaneously expanding its reach in domestic and international markets through appropriate products at suitable price points. In the backdrop of increasing non-discretionary healthcare spend and greater product acceptance, the company is interestingly poised, in terms of revenue and profit growth. Hence we inititate coverage with a ‘BUY’ recommendation and a price target of INR295, which represents an upside of 60% from current levels.

To see full report: OPTO CIRCUITS


Company Background
DCM Shriram Consolidated Ltd (DSCL) is an integrated business entity, with an extensive and growing presence across the entire Agrirural value chain and energy intensive Chloro-Vinyl industry. With over 30 years of experience in managing large scale process industries with sustained high level of performance, DSCL meets the needs of a wide range of customers from farmers to industrial users, from house builders to business owners. With a large base of captive power produced at a competitive cost, the company aims at maximizing value creation in its Chloro-Vinyl businesses. High-value and knowledge based business being incubated by DSCL
include Hariyali Kisaan Bazaar, Fenesta Building Systems and Hybrid Seeds.

DSCL has manufacturing facilities at Kota (Rajasthan), Bharuch (Gujarat), and Ajbapur, Rupapur, Hariawan and Loni (UP). Its hydrid seed operations are at Hyderabad (India), Vietnam, Philippines and Thailand. The company also has its windows fabrication units at Bhiwadi, Bangalore, Mumbai, Hyderabad and Chennai.

The promoters hold a 55.3% stake in the company, institution holding is 16.5%, foreign shareholders (10.6%) and the rest is held by the public and non-promoter corporation holdings. LIC of India, New India Assurance Co, Reliance Growth Fund, Sundaram BNP Paribas Select Midcap Fund hold 8.1%, 1.2%, 3.3% and 1.1% respectively.

Business Segments
Chloro-vinyl Business (Chemicals and plastics business form 23.3% of consolidated sales in FY09)

Chemicals: This comprises of Caustic Soda (Lye and flakes), Chlorine (Liquid and Gaseous) and associated chemicals including Hydrochloric acid, Stable Bleaching powder, Compressed Hydrogen and Sodium Hypochlorite. The company has two manufacturing facilities located at Kota (Rajasthan) and Bharuch (Gujarat) with full captive power. It has recently increased the capacity of its chloralkali manufacturing facility at Bharuch from 200 TPD to 440 TPD and also set up a 48 MW coal based power plant to generate economical power at Bharuch. The capacity at Kota is ~330 TPD and the total captive power capacity is 143 MW.

Plastics Business: PVC Resins & Compounds
This is highly integrated, covering manufacture of PVC resins and Calcium Carbide, PVC Compounds and UPVC Fenesta Windows (a consumer product). The company is able to capture value at each stage of the entire value chain. PVC Resin is fully integrated with captive production of acetylene, chlorine and coal based power, located at Kota. PVC Compounds of which the company is the largest manufacturer in the organised sector is backed by an innovative Polymer Application Development Centre (iPAC) at Gurgaon, India.

Cement: (3.6% of consolidated sales in FY09) DSCL processes the waste sludge produced during the manufacture of calcium carbide to make cement. The company has a cement capacity of 4 lakh TPA.

Fenesta Building Systems: DSCL, in technical collaboration with Spectus Window Systems, UK, launched Fenesta, a contemporary range of unplasticized poly vinyl chloride (UPVC) windows and doors. These windows and doors have consistent quality, elegant designs, superior thermal and sound insulation, complete technical support, and are backed by warranty. The company has now indigenised the process at its state-of-the-art extrusion facility at Kota. DSCL has set up fabrication shops in all the five major cities and marketing presence across 11 cities. The business is evolving and the product has received good response in the market.

Urea (22.1% of consolidated sales in FY09): The company has the dual feed naphtha/LNG based urea plant with a capacity of 3.79 lakh TPA., located at its integrated manufacturing facility at Kota. It was operating on 100% LNG which has now been replaced by natural gas from the KG Basin.

Sugar (17% of consolidated sales in FY09): The company’s sugar business comprises of 4 facilities with a combined capacity of 33,000 TCD in Central U.P. and co-gen power capacity of 94.5 MW.

To see full report: DSCL


Tracker of Forthcoming Corporate Action from August 27, 2009 to September 09, 2009:

To see detail: EVENT TRACKER


High dividend yield stocks offer a safe haven to investors where safety is of greater priority compared to high returns. Hence, even if the market remains volatile, going ahead, an investor can still get a decent return on investment, thanks to good dividend yielding stocks. The dividends are paid no matter what direction the stocks move and can provide a higher yield on investment in a weak market.

To see full report: DIVIDEND YIELD STOCKS


Strategic Thoughts – Economics & Equity Strategy

Table of contents

Section 1 Economics Overview
– US Economics
– Euroland Economics
– Global Monetary Policy

Section 2 Equity Strategy Overview
– Global Strategy
– European Strategy
– U.S Corporate Profitability
– Asia/GEMs Strategy

To see full report: STRATEGIC THOUGHTS



Sugar prices in India are on a structural rise due to positive macro fundamentals and we expect them to firm up even further over the next 12-18 months. The primary reasons for this are:

1) A 45% YoY fall in sugar production in India in 2008-09 sugar season

2) Contracted area under sugarcane cultivation for next year due to diversion of cane into other remunerative crops

3) Expectation of further weakness in 2009-10 sugar season due to poor monsoon in large sugarcane producing states in India

4) Tightening of the global demand supply situation due to steady growth in consumption and lower production in India, the EU, Australia, Thailand and Pakistan

5) Expected low levels of closing sugar stocks for current as well as next year

India witnessed a significant drop in sugar production in sugar season 2008-09 due to diversion of cane into other remunerative crops, adverse climatic condition, fall in yield of sugarcane and lower sugar recovery. At 14.5 mn tonnes, sugar production for the year came down 45% YoY against about 22.5 mn tonnes of domestic sugar consumption. The prospects of an expected rebound in sugar production to around 20 mn tonnes for sugar season 2009-10 seem unlikely now due to poor monsoon in some of the large sugarcane producing states of India. With sugar consumption expected to grow at 2-3% annually, India is staring at two consecutive deficit years. The low closing sugar stock for the current year means India would have to import between 4-5 mn tonnes of additional raw sugar for next year to meet the deficit. The expected purchases
by India from international market have caused international raw sugar prices to spiral upwards. Brazil has allocated over 42% of sugarcane to sugar production compared to 39.5% last year due to the relative price spread in favour of sugar than ethanol; this allocation is expected to go up further by the end of the year.

We believe Shree Renuka Sugars is well positioned to take advantage of this situation. The fact that they are among the few sugar companies in India that have focused on building sugar refining capacity will work to their advantage. The company has visibility on its raw material for next year and we expect it to achieve a high throughput next year. We are bullish on the stock with a STRONG BUY rating and price target of Rs. 232.


The global sugar trade has been dominated by Brazil and EU. Brazil is the largest producer of sugar and has increased its production significantly since deregulation in 1999-2000 when sugar price controls and government mandated sugarcane prices were eliminated and private participation in sugar exports were encouraged. India is the second largest producer followed by

China, USA, Thailand, Australia, Mexico and Pakistan. Global sugar production increased from approximately 134 mn tonnes in 2000-2001 to 167.2 mn tonnes in 2007-2008 and expected to decline to 154.9 mn tonnes in 2008- 2009 (Exhibit I) according to F. O. Licht’s July 2009 estimates.

The world’s largest consumers of sugar are India and China followed by Brazil, USA, Russia, Mexico, Pakistan, Indonesia, Germany and Egypt. The world consumption grew from approximately 131 mn tonnes in 2000-01 to157.6 mn tonnes in 2007-08 and is projected to grow to steadily due to combination of world GDP growth and population growth (See exhibit in report)

To see full report: SHREE RENUKA SUGARS


Winds of change blowing across BOP bidding

The Central Electricity Authority has recently put out revised draft prequalification norms for Balance of Plant bidders. These indicate further dilution in pre‐qualification norms as it allows joint ventures to bid for turnkey BOP orders. By reducing bank guarantee requirements, it has
made consortium bidding financially competitive. Another significant change is the proposal to allow vendors from other industries, with similar experience, to bid for BOP packages in the power sector. We believe the proposed changes are likely to increase competition for turnkey BOP packages as bidding in consortiums and JVs becomes viable. Overall, the development may be adverse for established turnkey BOP contractors, while favoring material handling companies
and other BOP vendors.

Revised draft guidelines put out for BOP pre‐qualification norms
The Ministry of Power and the Central Electricity Authority on August 18‐19 hosted an international conclave on “Key Inputs for Accelerated Development of the Indian Power Sector for the XII Plan and Beyond.” The CEA has put out revised draft guidelines on qualifying requirements for bidders of BOP orders for coal/lignite‐based thermal power plants. The earlier guidelines were released in Jun08. These guidelines are not binding on State Electricity Boards; however, they have largely been following them while inviting bids.

Vendors from non‐power industries stand to gain
The CEA has changed several covenants in the Aug09 draft. The main change allows JVs to bid for BOP packages, from only consortium and individual companies earlier. The revised draft guidelines also mandate lower bank guarantees for JVs and consortiums. As per the earlier norms, higher financing costs were one of the key disadvantages for consortium bidders versus
individual bidders. The new norms allow vendors with relevant experience in other industries to participate in the power sector. This is likely to increase the vendor base and encourage bidding in consortium, while they were disqualified earlier on minor technicalities.

Dilution in norms to improve vendor base, increase competition
High entry barriers restricted the number of players capable and qualified to bid for turnkey BOP orders of 500MW and above from SEBs to five. We believe the number of vendors interested in entering the turnkey BOP space has increased. However, several companies at the conclave cited strict qualification norms that benefited existing players and were the key constraints for entering the space. The revised norms address several concerns and are likely to increase competition in turnkey BOP orders. The move to allow EPC contractors from other industries to participate in the power industry may not increase competition by much in individual packages as several domestic BOP package vendors (like those in material handling, civil construction and water treatment) operate in more than one industry.

To see full report: POWER SECTOR


Public issue of 12.5 million shares with a face value of INR10 at a price band of INR70-75 aggregating to INR 871.8 million - INR 934 million. The issue is through 100% book building process.

Jindal Cotex manufactures acrylic, polyester and polyester-viscose, and polyester cotton combed and carded yarns. The yarns are used in apparels, hosiery and garments.

Objects of the issue
1) Setting up a new facility for manufacturing of Cotton Yarn, Yarn Dyeing and Garments

2) Investment in subsidiaries:
a) Jindal Medicot Limited;
b) Jindal Specialty Textiles Limited

3) Meeting public issue expenses.

In FY09 company had an adjusted EPS of INR 3.5 but on a post issue basis EPS is INR 1.7 which translates into a P/E of 40.3 at the lower band(INR 70) and 43.2 at the higher band(INR75). Majority of the issue proceeds will be used for its subsidiaries which are foraying into “functional textiles”, a very nascent industry. Compared to its peers, like Ambika Cotton and Himachal Fibres the issue appears expensive. Hence we recommend “Avoid” to the issue.

To see full report: JINDAL COTEX LIMITED




Subros, the market leader in auto air conditioning business, is benefiting from revival in the volumes of its key customers Maruti Suzuki India (Maruti), Tata Motors and Mahindra & Mahindra (M&M).

Due to its market leadership Subros also has exclusive supply contracts for some of the latest launched products such as Maruti’s A-Star and Ritz and M&M’s Xylo. The company will also start supplying air conditioners to Tata Motors’ Nano from January 2010.

In a recent interaction, the company’s management indicated that it is planning to revive its capital expenditure (capex) plans and enhance its manufacturing capacity from 0.75 million units to 1 million units by the end of the current financial year. It would incur capex of around Rs70 crore over the next two years.

Given the improvement in demand environment and lower base of FY2009, we expect the company to report a stellar compounded annual growth rate (CAGR) of 38.2% in the net profit for FY2009-2011. Apart from double-digit volume growth, the earnings growth would also be aided by lower interest outgo. Consequently, we have revised our estimates sharply upwards for FY2010 and FY2011 by 12.5% and 40% to Rs3 and Rs4.2 respectively.

At the current market price the stock is trading at 8.3x its FY2011E earnings and enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) of 3.2x. We maintain Buy recommendation on the stock with revised price target of Rs42.


Bond yields inching up

Key highlights

The government of India (GoI)’s borrowing program and surge in supply of corporate papers have led to firming up of bond yields, with the yield curve shifting upwards in August 2009 vis-à-vis that in July 2009.

Our impact analysis suggests that public sector banks are relatively more exposed to marked to market (MTM) losses than private players (as has traditionally been the case). This will have potential impact at the profit before tax (PBT) level of the banks in a wide range (of
2% to 9%). Union Bank, Bank of India and State Bank of India among our coverage are likely to be worst affected in the form of MTM losses.

To see full report: SUBROS


Green Shoots or Greater Depression?

While we aren’t contrarian for the sake of being contrary, more often than not that is the position in which we find ourselves. Today, with the media falling all over itself to paint a rosy outlook for the economy while simultaneously voicing encouragement to the new administration in its remake of the nation in previously unimaginable ways, it’s hard not to question our conviction that the worst is yet to come.

Could the economy really recover this quickly from the traumatic trifecta of a record real estate bubble, leviathan levels of debt, and a global credit collapse? We don’t see it as remotely possible, but yet… but yet… there for everyone to see are countless happy headlines and breathless exhortations that the worst is behind us.

So, is it Green Shoots or Greater Depression? Getting the answer right is critical, because from it flow serious consequences to each of us. And not just in our investment portfolios but in how we organize our lives. Looking for an evidence trail leading to the correct conclusion, Casey Chief Economist Bud Conrad once again put in very long hours digging through the data. Here’s what he uncovered, about the claims of green shoots, and what may actually be in store for the economy moving forward.

Rather than accepting the many commentaries that our economy may be improving, let’s focus for a minute on the important forces that will play out over the decade ahead, and the minor improvements – from disastrous levels – that have given commentators such hope that the worst of our problems are behind us.

What Do the “Green Shoots” Really Look Like?
While some individual measures of economic activity appear slightly less dire than previously, it’s important to understand that most improvements are largely attributable to government intervention.

For example, at the onset of this crisis, commercial paper spreads rose to the point that this important source of corporate short-term funding had virtually shut down. Today, those spreads have returned to almost normal levels. But the bulk of this improvement is not due to a return of confidence in the economic system but rather to the Federal Reserve directly intervening in the market with several hundred billions of dollars.

And mortgage interest rates, which briefly dropped into the 4% range, did so not because of a surge in creditworthy borrowers or eager lenders… but rather because the Federal Reserve
launched a program of buying $1.25 trillion of mortgage- backed securities. Doing its part, the Treasury has poured billions into Fannie and Freddie and provides guarantees for their mortgages.

In these and many other instances, the “green shoots” that optimists have spotted are really just the visible manifestations of the massive interventions by an increasingly bankrupt government.

To see full report: SPECIAL REPORT


The company
Glodyne Technoserve is a fast growing company in the high potential IT infrastructure management space. The revenue of company has grown form Rs685mn in FY05 to Rs5010mn in FY09. The company has guided consolidated revenue of Rs6680-6880mn in FY10, a yoy growth of 33-37%. The company derives about 80% of its revenue from technology infrastructure management services (IMS), and rest comes from application development & other services. The company operates in India (75% of rev.) & USA (25% of rev.) geographies.

IMS – big untapped potential
As per various studies, while in general offshoring services have grown rapidly in past one decade, the services pertaining to remote management and maintenance of core IT infrastructure has been rather slow to gain popularity. As of now, only about 7 percent of the addressable market is being estimated to have been captured. Studies, e.g., by Mckinsey in 2008, have suggested that shifts in customer attitudes and economics could trigger rapid growth for these services.

E-governance and education– potential growth driver
The company traditionally has strong relations with government departments and public sector undertakings. With E-Shakti project, a five year Rs2840mn project under NREGS won by the company on BOOT basis from Bihar State government in FY09, the company has entered a high potential e-governance market. The company estimates it to be major growth driver in next few years. Through acquisition of Broadllyne Technologies – a managed application service
provider in the education sector, the company has also entered the fast growing education sector.

Product offerings
Glodyne’s main product offerings are Technology Infrastructure Management Services (Technology IMS) and Application Software Services (ASS). The company has a hybrid service delivery model including both onsite and remote delivery of services.




Robust domestic growth & double digit export growth drive combined volumes of passenger & commercial vehicles in July 2009…

Maruti Suzuki’s total volumes rise 33.433.4% Y-o-Y & 3.9% sequentially, Tata Motors’ volumes increase by 18.2% Y-o-Y & 5.9% sequentially, and M&M’s volumes up 22.6% Y-o-Y, but down 1.9% sequentially…

In July 2009, the combined volumes of passenger vehicles and commercial vehicles grew 22.8% Yo-Y and 2.1% sequentially, due to a growth of 24.7% Y-o-Y in domestic volumes and an increase of 14% Y-o-Y in exports. The government’s stimulus package, lower interest rates on vehicle finance, and excise duty cut helped drive industry volumes to some extent. The demand in July 2009 was also aided by pre-festival purchases by dealers. Total volumes in the PV segment were up 27.5% Y-o-Y and 1.6% sequentially to 181,431 units, on the back of domestic growth of 29.2% Y-o-Y coupled with an export growth of 20.8% Y-o-Y. Industry volumes in the PC segment increased by 28.9% Y-o-Y to 148,573 units.

Volumes in the domestic PC industry were up 30.9% Y-o-Y, while exports recorded a growth of
22.4% Y-o-Y. Volumes in the Utility Vehicles (UV) segment increased significantly by 15.5% Y-o- Y, but down 6.2% sequentially to 20,987 units, while volumes in the Multi-Purpose Vehicles (MPV) segment rose 34.7% Y-o-Y and 12.9% sequentially to 11,871 units in July 2009.

In the CV segment, total industry volumes rose by 5.2% Y-o-Y and 4.1% sequentially to 40,827

units. Volumes in the M&HCV segment declined by 5.9% Y-o-Y, but rose 3.6% sequentially to
17,911 units, while volumes in the LCV segment grew 15.9% Y-o-Y and 4.4% sequentially to
22,916 units. Total 4 wheeler volumes increased by 22.8% Y-o-Y and 2.1% sequentially to 222,258

Read in report on to find out how the major auto players fared in July 2009…

To see full report: INDIAN AUTOS