The Quiet before the storm!!

Is this the quiet before the storm?..
- Market place/Index is at its peak and the question is about tightening of credit in US (various support mechanism / schemes for housing sector have been discontinued)
- In India (3 G license out flows to the govt and Income tax outflows..)
- Inflation still rising but govt is assuring that industry that liquidity will be maintained at adequate levels..

Generally after recession when the credit tightening happens the first time fear is ..
- Is the money going to move out into safe havens like Govt bonds from stock and commodities??
- Are the stocks overpriced??

I get the inkling that we are just at the cusp of a rally.. there is going to be a rally from these levels.. there is bound to be sectoral rotation but value stocks both at the index level and at the small/mid cap levels will move upwards.. so GAEL, Jayant Agro, NHPC, Pitti Laminations should gain from these levels in a rising market and hold on to their gains in a falling market. Best of Luck!!

Gujarat Ambuja Exports: Announcement: Very Strong Buy!!

Gujarat Ambuja Exports on July 16,2010 published a company update.

Meeting of board of directors and audit committee of the company on July 28,2010. The agenda of the meeting is:
1. Re-numeration of Executive directors and payment of commission.
2. Recommend increase in re-numeration of Vice President (VP) Works
3. To approve Audited Financial Results for year ending March 31,2010
4. To approve unaudited Financial resuts for the Quarter 1 ie Quarter ending June 30,2010
5. To consider recommend appointment of VAT auditors.
6. To recommend Final Dividend if any for the Financial Year 2009-2010

So in the next 2 weeks we will see latest quarterly results and will also come to know if Gujarat Ambuja Exports will give additional dividend for the year ending March 2010.

The latest Quarterly shareholding pattern had some important developments which I think we as individual investors need to review with a different set of eyes..

Conclusion: GAEL is right now poised .. poised for a leap beyond our imagination because the stock has moved firmly into the hands of strong hands and we can expect only good news to flow which will support the share price further. From now till July end the stock price could be volatile to shake the weak hands further.. and will be an opportune time for new investors and investors waiting on the sidelines.. if and when the stock corrects.. Investors already invested in GAEL should be ready to hold their stocks with a long term perspective as GAEL stock is right now at its bottom not anywhere close to its expected share price..

40 would be the first stop where we can offload some shares .. Personally I would not advise selling GAEL even at 40.. Hope we all have the foresight to look beyond the obvious (GAEL already close to its 52 week high!! of 32)

=Happy Investing

Gujarat Ambuja Exports: Review: Shareholding June 2010

Gujarat Ambuja Exports Limited (GAEL).

CMP: 28.10
Market Cap: 388.77Cr
Sales TTM: 1410.60Cr
Gross Profit TTM: 114.53Cr
Net Profit TTM: 49.29Cr
ROCE March 2010: 17.65% (calculated!)

GAEL as we all know is "The Best Buy" recommendation and receives a fair share of review at this blog.(link) The June 2010 shareholding has been published and is available in BSE and NSE websites.

The following is the comparison of the March 2010 and June 2010 shareholding data.

1. FII Foreign Institutional Investors were the largest sellers selling 36.69 lakh (3.669 million) shares reducing their holding to 4.07 lakh a reduction of 90%.
2. The shares offloaded by FII has been bought by corporates (21.56 lakh), High Net worth Individuals (10.24 lakh), Mutual Funds (3.5 lakh), Individual Investors (1.10 lakh) and Promoters (29,180 shares)
3. Corporates holders have the largest increase in the past 3 months increasing their shareholding from 2.55% to 4.11% avg holding for corporate account is 8,808.5 shares.
4. Small Individual investors share holding has also consolidated in the hands of few investors avg share holding has increased to 618.2 from 613.60 shares
5. High Net worth Individual (HNI) Investors has increased from 18 to 25 and the avg holding of HNI investors increased to 93,336.9 shares from 72,820.83 shares

Shares are being consolidated in the hands of few... specially corporates and HNI investors. Corporate accounts have low holdings (8,808.5 shares) which indicates that corporate accounts could be the vessel for short term holding till it gets transferred to promoters/HNI's in bulk...

Conclusion: If we look at GAEL's March 2010 results we can see an improvement in ROCE to 17.65% and an improvement in bottom line. GAEL Enterprise Value is about 442.9Cr which is very cheap for a company of GAEL size (1600Cr sales) and stature.

Ideal value of GAEL is around 1 times sales i.e. per share price of more than 100 per share. I would suggest new investors to invest at current price levels (Rs28.10) for 1.5 to 2 year target of 100+.
- We are already aware of promoters accumulating shares from the market .. latest price at which promoters have bought shares from market is Rs 22.05 on June 1,2010
- We also know that buyback (reduction in equity) was done at Rs 34.26 per share in 2008 for 9.66 lakh shares. (link) Which makes the move to 40 levels a given target.
- Promoter increasing shareholding and reduction in equity by share buyback..both these activities will provide the base for the share price to increase..
- Consolidation of shares in the hands of few (Promoters and HNI's) augur well for long term investors in GAEL.
- Increase in dividend payout, Increase in operating margins and quarterly net profit is what needs to be tracked along with promoter activity (buy/sell)
- GAEL is a perfect stock for armchair investing for the next 2 years making it a multi-bagger for sure!!

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SKM Egg: Value buy...

SKM Egg
CMP: 17.95
Market Cap:47.26Cr
Debt: 50.08Cr (March 2009)
Reserves: 30.86Cr (March 2009)
ROCE (March 2009): 25.49%
Sales TTM: 125.17Cr
Gross Profit TTM: 14.61Cr
Net Profit TTM: 1.4Cr
Debt Equity: 0.88 (March 2009)
Long Term Debt Equity: 0.52 (March 2009)
Site: http://www.skmegg.com/

SKM Egg Products on the face of it looks to be a fairly valued stock..
Enterprise Value = 47.26+50.08-1.54 = 95.8Cr Sales of Twelve Trailing Months (TTM) is 125.17Cr

What really makes SKM worthwhile investment is their product Egg Powder.
1. India has one of the largest (top 3) bird populations in the world.
2. India is also cost competitive and one of the lowest cost producers.
3. SKM is a listed entity in Egg Powder business which is a good margin business. Venky's promoters also have Egg Powder business but it is not part of the listed Venkys but the unlisted parent company Venkateshwara Hatcheries Pvt Limited.
4. SKM promoters are also one of the largest animal feed manufacturers in India and have good relations with the farmers. http://www.skmfeeds.com/
5. Largest export markets of Egg Powder are Europe and Japan. SKM manufacturers 4500MT of Egg Powder
6. SKM Egg is the largest exporter of value added Egg Powder making 65% of India's exports of Egg Powder.
7. SKM Egg is also getting into the branded egg business http://skmbesteggs.com/
8. SKM Egg has its own farm rearing 1.5 million birds
9. SKM Egg has also started Feed manufacturing (new segment) to control all inputs which is required to meet the high standards for Euro and Japanese markets.

Conclusion: SKM Egg seems to be fairly valued right now due to its debt. Considering its ROCE is above 20% and high value added product for developed markets.. I foresee a reduction in debt and ride back to profitability.. with top line growth and branded egg kicking off. One must remember that this is a long term play. recent quarter results were good but was helped by other income. So we have the largest player at an attractive valuation with good growth potential. Long Term Buy!!

NHPC a long term buy!!

NHPC National Hydro Power Corporation
CMP: 31.90
Market Cap: 39239Cr
Reserves: 6798Cr
Networth (March 2009):17980.62Cr
Debt: 12,234Cr
Sales TTM: 4331.98Cr
Gross Profit TTM: 3892.41Cr
ROCE (March 2009): 6.13%
Debt Equity Ratio (March 2009): 0.68
Avg. Cash Flow From Operations (2007-2009): 2236.88Cr
Current Installed Capacity: 5175MW (March 2010)
Company Website: http://www.nhpcindia.com/

NHPC as we all are well aware is the largest Hydro power generator in India. NHPC operates 13 hydro power stations with a total aggregate capacity of 5175 MW (year ending March 2010).

Power generation is a regulated industry with limited scope of returns (fixed around 15-16% return on Equity). NHPC by all terms looks like an expensive proposition with limited return potential.

Let us compare numbers of NHPC with Tata Power the largest Private sector power utility in India.

As one can see Net profit of NHPC is 2090Cr while Tata Power its 947.65Cr
1. Networth to Equity for Tata Power: 39.03 and NHPC: 1.60
- Since a power project has fixed returns on Equity and Equity=Networth.
- Tata Power Rs 100 NW = Rs 16 profit, EPS = 16 *39.03 =  624.48
- NHPC Rs 100NW =Rs 16 profit, EPS=16*1.60 = 25.6
Networth/Equity ratio is high for Tata Power hence the EPS growth for every additional rupee of earning gets multiplied by 39 times while for NHPC EPS earning gets multiplied by 1.60 times.

2. Tata Power Avg Cash flow from Operations  for 3 years is: 737.18Cr while NHPC it is 2236.88Cr
So NHPC has 3 times more cash flowing in from operations than Tata Power for the past 3 years. Additional Cash flow from Operations from NHPC over Tata Power (2236.88 - 737.18)*3 = 4499.1Cr additional cash flows from NHPC in last 3 years.

3. If we look at the market cap, Net Profit for past Twelve Trailing Months (TTM) and the Current Installed capacity we can see that NHPC is available at a discount (almost 50% based on Installed capacity and Net profits)

- 11 projects having aggregate installed capacity of 4622 MW are under active construction. With the commissioning of these projects, NHPC would become a 9500 MW company likely by 2013
- NHPC is actively pursuing clearances from Government of India for several hydro projects having aggregate capacity of 9631 MW. Out of these, seven projects with aggregate capacity of 5965 MW are planned to be implemented by NHPC on its own
- Hydro power is a renewable economic, non polluting and environmentally benign source of energy. Hydro power stations have inherent ability for instantaneous starting, stopping, load variations etc. and help in improving reliability of power system. Hydro stations are the best choice for meeting the peak demand. The generation cost is not only inflation free but reduces with time. Hydroelectric projects have long useful life extending over 50 years and help in conserving scarce fossil fuels.

Tata Power has current Hydro power capacity of 447MW and the rest are Thermal power plants which have the potential of increase in fuel costs. NHPC is only Hydro power and all future capacity expansions are going to be in Hydro power only. Hydro power as stated above .. generation cost reduces with time!!
Development of New Hydro Power plants in the private sector is low due to unprofitable tariff structure
(so there is a possible hydro power plant tariff improvement which will benefit NHPC)
With the eminent Oil crisis in the horizon energy prices are bound to escalate while NHPC's generating costs are going to reduce which should make NHPC more profitable.
With the oil deregulation the next step would be power (energy) deregulation (no wonder NHPC shoots up with OIL price deregulation)
 
Conclusion: Right now the investment community is not looking at the generating capacity and fuel costs while making an investment in power companies. Investors are looking at growth in EPS ..Tata Power by virtue of a Networth/Equity ratio of 39 will see the EPS rise much faster for every additional rupee of additional earnings...
NHPC on the other hand with 60% higher generating capacity and 3 times more Operating Cash flows is being discounted because its Networth/Equity ratio is poor: 1.60. Even in 2013 Total Power Generating capacity of NHPC will be higher than that of Tata Power.. and since its 100% hydro power fuel costs are capped. 
At present NHPC Networth 17,980Cr is twice that of Tata Power which gives it more equity to take larger projects and hence cash flows from operations will continue to be higher for NHPC.
NHPC Networth /Equity will also rise steadily . but we cannot really expect to surpass Tata Power's Networth/Equity.
If we look at NHPC with the right set of eyes we can see the deep discount in NHPC and the rising energy prices will be favourable for NHPC. Invest for long term 5+ years and expect NHPC to at least triple from these levels irrespective of where the market is heading.

Arman Financial and Ganesh Polytex: Avoid!!

Arman Financial:
CMP: 30.30
Market Cap: 12.35Cr
Debt: 9.79Cr (March 2009)
Reserves: 3.25Cr (March 2009)
ROCE: 15.20% (March 2009)
Debt to Equity: 1.34

ARMAN FINANCIAL SERVICES LIMITED was originally incorporated on 26th November, 1992 as an erstwhile Arman Lease & Finance Ltd. The company is a public limited listed company. It issued 28,00,000 Equity shares of Rs. 10 each on 21st August, 1995 aggregating to Rs 280 lacs after receiving an overwhelming response from the public for its public issue which was oversubscribed by 7 times in the category of small investor and more than 22 times in case of applicants with application of more than 1000 shares.

The main objects of the company consist of providing a wide spectrum of financial services both Fund based and Non Fund Based activities which includes term loans, collateral free credit, other forms of credits, thrift and savings and insurance. Arman also plans to render financial services to people by acting as intermediary for banks and financial institutions in the cities, towns, villages of India

1. Company is in Micro finance area which is a "Hot" area.

2. Arman has -ve cash flow from operations for past 3 years or so..
3. Promoter shareholding is decreasing (There is however accumulation of shares in hand of few public investors)
4. Interest cover ratio is 1.68

Conclusion: Company maybe in a hot area of micro finance but since the company does not have access to cheap funds it is always going to be difficult to survive. Banks are supposed to enter into this area (indirectly) and we could see greater competition. No dividend.. low promoter holding.. public shares in the hands of few... stock has already given returns of 350% greater than the Sensex. This is an Avoid at all cost. There could be a freak valuation ... but still whosoever is going to buy the stock at a higher price is going to be the greater "Fool"
==Next==Next==Next==Next==Next==Next==Next==Next==

Ganesh Polytex:
CMP: 47.55
Market Cap: 63.57Cr
Debt: 61.36Cr
Reserves: 14.12Cr
ROCE: 15.63%
Sales TTM: 198.97Cr
Debt to Equity Ratio: 2.75

Conclusion:
Ganesh Polytex produces polyester staple fiber and textured/twisted yarn. company has increased capacity and is expecting a very bright future.. Ganesh has positive cash flows from operations ...unfortunately the stock is already priced at a premium. Debt Equity ratio is high.. and there is preferential capital of 4.5Cr all this makes Ganesh Polytex a very expensive proposition. The company is also in a fiercely competitive business (every business is competitive unless you have a monopoly!!) so I think the promoters are being too ambitious.. Negatives have not yet been factored into the price ..Avoid at the best.. if you like the Indian textile story one should look at Arvind group (now Arvind Mills also has the real estate twist)