Acrysil Ltd.- A blend of risk & opportunities

Acrysil is definitely a right balance of risks and opportunities. It's a company which is into manufacturing kitchen sinks. One would think that what makes me write on just any other kitchen sink manufacturing company. There is something unique about their sinks and that is, that about 75-80% of the material used in making it is Quartz mineral, cast by a means of special computer controlled polymerization casting process.

Their unique product in terms of quality and design makes then different from other stainless steel sinks available in the market as they are completely scratch free(Quartz being one of the hardest material) and have aesthetic looks. Even it provides the flexibility of choosing from a wide range of colors, thus matching it with the color of the walls of the kitchen.

The company has been reporting high NPM(net profit margin) in the range of 15-17%.The business has performed well, with productivity gains, growth in volumes and sustained margins notwithstanding rise in input costs.In the nine months ending Dec'08 the company had already posted sales of 42.7 Cr which was more than the entire sales of FY2007-08 at 30.3 Cr. Even the profit for nine months ending Dec'08 stood at 6.96 Cr,more than double of the 3.6 Cr for the entire FY2007-08. However, during the Mar'09 quarter, the company reported a substantial drop in sales. The revenue actually dipped by 50% in comparison to previous quarters, thus affecting the margins.

The company basically exports its sinks and that is understandable since in India the demand for high-end products is limited, but the thing is that demand can actually catch up in Metros where there is an inclination for such kind of products.

The company as of now is enjoying good overseas market and intends to establish its footprints outside India before making way into India. There may be good opportunities for this company, but one needs to assess the risks as well.

• The company depends on just one product for its growth. It can make or break the company in the years ahead.
• It has been enjoying very good growth over the last few years, but it still depends on exports for its revenues.
• It is to be seen, if the latest quarter results can in any way be termed as a general slackening of demand for its product.

In the past, the company has performed exceptionally well, and is available at quite cheap valuations. One needs to assess both risks and opportunities before taking a decision on it.

Note: The stocks discussed at MPS thru blog postings are neither a part of “Business Insights” issue nor a “Penny Stocks” which we reco/publish for paid subscribers. These are just stock specific views by MPS team; one MUST do the due diligence before doing any investment based on our reco.

To contact the equity analyst on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com

Affordable Housing- The way to go for real estate companies

A few months back, we had come out with an article (Link) on how affordable housing is the way to go, and how the real estate companies operating at tier-II and tier-III cities may be at an advantage. Our thrust on the idea of small and affordable housing is finally getting a push from the government too.

Any business idea becomes feasible, only when there is a demand-supply gap, when it is cost-effective, and when it serves the needs of the society. The realty boom between 2004-07 saw many high-end real estate companies launching large-sized and expensive homes in pursuit of higher margins. They used to add various frills to such homes to make them attractive, and this allowed them to charge huge prices. The prices increased several fold due to buoyant demand and easy credit. Later on, recession in US and other European countries lead to credit crunch across the world, with consequent increase in interest rates. This made such expensive homes unaffordable, and we all know that how some of the biggest real estate companies in India were virtually on the verge of bankruptcy.

Coming back to the point of demand-supply gap. According to a Goldman Sachs report more than 30 million units of this kind of low-cost housing is needed to support gowing urbanization. We all know that India is home to more than 100 billion people with more than 70% of its population being rural. With metros and other cities being a magnet to the migrants from villages and poorer states and with increasing income levels,there lies no doubt that market for affordable housing is immense.

Governments Initiative

As I said earlier, that govt. too seems to concur with our views. The Finance Minister finally proposed some incentives for home buyers in the form of interest subsidies, and extended tax-breaks for property developers for smaller homes. He has proposed an interest subsidy of 1% for home loans of up to Rs 10 lakh availed for houses worth up to Rs 20 lakh.

He has also proposed an extension of Section 80IB (10) of the Income-Tax act to housing projects approved before March 2008 and to be completed before 2012. The extension means a developer is exempt from tax on income from sale of houses of 1,000 sq feet built-up area within 25 km of municipal limits of major cities and 1,500 sq feet in other places.

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Now, the interest subsidy will definitely boost demand to a certain extent. But, there are many small-cap companies, which since inception concentrated on low-cost housing. So, many such companies which had their projects sanctioned earlier, but were not launching them due to a downturn, will now be incentivized to start their projects and complete them before 2012. These companies will have an advantage of tax-breaks on such projects, and mobilization of funds will not be a problem.

I would like to re-iterate my view, that real estate developers in affordable housing will rule the roost in the next major run-up of real estate companies. There are already many established and good penny stock companies available from this sector.

Note: The stocks discussed at MPS thru blog postings are neither a part of “Business Insights” issue nor a “Penny Stocks” which we reco/publish for paid subscribers. These are just stock specific views by MPS team; one MUST do the due diligence before doing any investment based on our reco.

To contact the equity analyst on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com

Voltamp Transformers- A moderate growth opportunity

Voltamp transformers, a company established way back in 1963. As the name suggests, that it is
into manufacturing various type of transformers. The Company has installed facility to manufacture oil filled power and distribution transformers up to 50 MVA, 132 KV class, resin impregnated dry type transformers up to 5 MVA, 11 KV class (In Technical collaboration with MORA, GERMANY) and cast Resin dry type transformers up to 7.5 MVA, 33 KV class (In Technical collaboration with HTT, GERMANY). To say it precisely, it is one of the leading transfromer manufacturing companies in India.

Voltamp Transformers Limited is among the top 3 players in building application transformers in the organized market and commands 20% market share in the industrial application transformers, with large installation base of more than 37000 transformers. Voltamp’s performance has been good year on year. Most importantly, it has been able to better its margins every year, and also it does not depend on debt to grow the way it has been growing.

Off-late there has been a revival in the transmission and distribution industry. It is not surprising, given the fact that there will be ample thrust on Power sector in the years to come. With an increase in power generation capacity, there will obviously be a need for transmission and distribution across the length and breadth of the country. The visible impact of it is in the form of increase in orders awarded to transmission and distribution companies from Power Grid Corporation since January.

Coming back to Voltamp Transformers.

The company's revenue dipped in December quarter, but, Voltamp’s sales once again picked up in the three months ended March ‘09 with a 23 per cent increase over a year-ago numbers. Net profits too grew at a healthy pace of 40 per cent compared to March 2008 quarter.

A comparison of results on year-on-year basis, provides an insight into the way the management has been performing. They have been improving their OPM and NPM on regular basis. Going forward, the margins may not improve the way as in the past, as the commodity prices have almost bottomed, and further downside is limited.

The important aspect about the performance of the company has been that it has been able to manage its expansions so far with internal accruals. This feature not only adds strength to the balance-sheet but also ensures that borrowing costs do not strain profits in future. So it also provides ample space for it to leverage itself.

The present capacity of the company stands at around 4,000 MVA, and for quite sometime it had put its expansion plan on hold. Even if it starts capacity expansion now on, it will take time. So, a major growth can't be expected, except for some moderate 50-60%

Note: The stocks discussed at MPS thru blog postings are neither a part of “Business Insights” issue nor a “Penny Stocks” which we reco/publish for paid subscribers. These are just stock specific views by MPS team; one MUST do the due diligence before doing any investment based on our reco.

To contact the equity analyst on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com

Sir, your views on Financial Technologies India ltd. and CNI Research ltd. I wish to invest in the two companies- Rohan Gupta, Chandigarh

Financial Technologies

Financial Technologies is definitely a very interesting and a completely different company from others. The Company, from time to time promotes and invests in ventures which utilize its core technological capabilities towards creating world class enterprises. The Company also divests such ventures from time to time to unlock shareholder value. Although this year, the company has not divested a major shareholding and so just considering the valuations of the company on the basis of P/E ratio would not be prudent.

It definitely gives a feeling of a great stock because of its holding in MCX. With people in India becoming more aware of such exchanges where they can trade and also hedge their positions, the volume of trade will definitely grow multi-fold in the years to come.

Even MCX-SX is waiting approval for launching itself into the equity markets. If it gets the approval, it will be next only to BSE and NSE. Financial Technologies can prove to be a good investment from a point of view of 3-4 years, and a systematic investment over a period of time would be a better idea.

CNI Research ltd.

While the company boasts of having 40,000 subscribers for its research services, but its income from its core activities of providing research on small and mid caps has been on a decline, and for this year, its income from its core activity stood at just Rs 1 Cr. A simple division of Rs 1 Cr from 40,000 amounts to Rs 250, which is not the rate charged by the company for its services, so the client base is definitely not 40,000. Also, there has been a continuous decline in its income from core activity, which means that the company has been losing its clients, and they may not be satisfied with its services.

Company also makes investment in other companies and when it divests its stake, the income obtained is registered as other income. That will remain choppy, and will depend on the market. Most importantly, its income from its core activity has been coming down, which is definitely not a good sign.

Note: The stocks discussed at MPS thru blog postings are neither a part of “Business Insights” issue nor a “Penny Stocks” which we reco/publish for paid subscribers. These are just stock specific views by MPS team; one MUST do the due diligence before doing any investment based on our reco.

To contact the equity analyst on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com

Ispat industries- Investment or trading, decide for yourself

Ispat industries ltd., a company that is a favorite amongst traders. There are daily more than 1 crore shares traded in the exchange. A trader is least concerned about the management of the company, its performance in comparison to its peers. He is also not bothered about the valuations, and the prospects of the company. All he looks for is the price fluctuations, and also the liquidity of the stock. So, for those who are into trading, the stock provides good movement on daily basis.

But what I have noticed is that some small investors get trapped into such non-performing stocks on the recommendation of brokerage firms (even if the recommendation was for trading purpose) because of not maintaining a stop-loss, and then when the stock price dips substantially, they are left with the only option of selling the shares at a loss.

My post on Ispat industries is directed to those, who wish to invest for long term, to make them aware of the fact that this company is not an investment material. If you wish to trade in this counter, then you can ignore this post.

A person invests in a certain company, so that at the end of investment period, he is able to make substantial capital gain on his holding. For that to happen, the management, the performance with respect to peers, and the valuations, should all be good. But, Ispat industries lacks on all such parameters.

Let me elaborate on certain points.

• The company is very inconsistent with its performance. Although it operates in a cyclical sector, so can't expect it to perform well, during the recessionary periods or when the commodity prices are very low. But, in this case, even the during the boom period from 2004-2008, its performance was lackluster. Now, I don't expect such a performance from a company registering sales in excess of 8000 Cr., because during those times, even a company registered with BIFR, could convert it self into a profit making company. So there lies no point in expecting it to do well when the steel prices have come down substantially.
• The company has huge debt on its balance sheet, and interest payments virtually eat into more than 80% of its operating profit. Wonder, what the company is doing with so much debt, because when I compare it with some of its peers like Bhushan steel, then I find that their expansion plans are larger than those of Ispat, but their interest payments stand at about 25% of that of Ispat industries. This speaks of the capabilities of the management, and the manner in which the company is being run.
• In Nov'08 UTI Asset Management had taken Ispat industries to court for a recovery of dues of Rs 99 Cr, outstanding as a part of four-year debt-recovery process. The company had initially defaulted in April 2005, after which it got approved a settlement mechanism, wherein it had to pay Rs 55 Cr upfront and balance of Rs 659 Cr in 35 installments. But, the company again defaulted on payment of remaining 99 Cr, and that made UTI take such an action. This point speaks of the liquidity issues that the company has been facing for many years.
• Indian promoters have already pledged a total of 95% of their 18% holding in the company.

All these points speak of the dire state of the company. Wonder, why it is not coming up with an issue of QIP or foreign placement like ADR's/GDR's to retire some of its debt, like others are doing. May be the company has realized the fact, that there may not be any subscription for such issues.

My advice to all those who wish to invest or those who are already invested (Investment is entirely different from trading), would be to take this opportunity to exit from this counter, and put in your money in a well managed and well-performing company.

On July 28th: The release of "Business Insights"- A wealth creating penny stocks for the month of July'09 with potential return of 20-50 times in 3-5 years holding (Available only to MPS subscribers)!!!

Only 2 days left to avail July issue of BI. Those who will subscribe after July 25th, will not receive July issue of BI, hurry!!!

Note: The stocks discussed at MPS thru blog postings are neither a part of “Business Insights” issue nor a “Penny Stocks” which we reco/publish for paid subscribers. These are just stock specific views by MPS team; one MUST do the due diligence before doing any investment based on our reco.

To contact the equity analyst on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com

Gremach Infrastructure equipments & projects ltd.- A proxy play on Infrastructure

Gremach Infrastructure equipments and projects ltd. is engaged in the business of providing construction /earth-moving machinery on rent to medium / large construction companies who are engaged in the business of constructing roads, airports, power projects, institutional & industrial complexes, multiplexes and residential buildings and other related infrastructural activities. They chiefly cater to Public Sector undertakings, private sector, CPWD and various national & international government aided projects.

It makes business sense for the firms implementing these numerous infrastructure projects to take these costly construction equipments on a rental basis as they would not like to block their money in procuring construction equipments which can be used for executing other projects as well. The other advantage of asking the equipment on rental basis is the availability of quality equipments without the hassle of their maintenance.

Gremach apart from renting its own equipments, also hires equipments owned by third parties and rent to its own clients. The company is a well-established player in the field of equipment hiring, and is now, diversifying into other businesses. In its most recent board meeting, the board members approved plans of entering into saw pipes and steel industry business through subsidiaries and special purpose vehicle companies. They are banking on the Finance Minister's announcement of setting up of long distance gas highways to facilitate transportation of gas across the length and breadth of the country.

Well, the plans are still in the initial stages, although it seems that company has already done some ground work in the form of fund raising through issuance of equity shares to the promoters, as well as other institutional investors. Around 4 cr 90 lakh warrants were allotted to promoters and some other investors. About 1 Cr 70 lakh shares have been issued on conversion of warrants. There's a definite chance of remaining warrants being converted into equity shares by both the promoters and the non-promoters, as the stock price stands above the conversion price of Rs 31.

It would have been better, if the company had gone in for the right issue, so that small investors could have benefited, but the management can't be blamed entirely for not coming with it. The time, at which they had approved preferential allotment of warrants, was such, that people would not have subscribed to the right issue, even at a discount. The good thing about the allotment has been, that even the promoters subscribed to it, thus maintaining their holding above 50% after conversion, a rather good sign.

Coming back to their rental business, because that will remain as a major contributor to their revenue for next 4-5 years. Although the FY 09 was a subdued one in terms of expenditure on infrastructure and other construction activities, but going forward the Government of India’s focus and sustained increased budgetary allocation and increased funding by international & multilateral development financial institutions for infrastructure development in India is expected to result in several large infrastructure projects in this region.

Therefore the company should prosper with the development of infrastructure in India, as the demand for construction equipments will pick-up once more projects are announced and subsequently executed. Financially the firm looks sound and even if I take into account all the shares( even the ones which have not been issued) the P/E for trailing twelve months stands at around 6-7 level. Keeping all the above things in mind, the company is worth its present valuations.

Note: The stocks discussed at MPS thru blog postings are neither a part of “Business Insights” issue nor a “Penny Stocks” which we reco/publish for paid subscribers. These are just stock specific views by MPS team; one MUST do the due diligence before doing any investment based on our reco.

To contact the equity analyst on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com

Pearl Polymers ltd. (PEARL PET) - A brand that does not qualify as an investment option

Pearl polymers ltd, a company rather well known by the name of PEARL PET. They are the pioneers in bringing ISBM (Injection Stretch Blow Molding) technology to India. Pearl Polymers Limited (PPL) is one of the most distinguished and reputed manufacturer and exporter of all types of PET containers and bottles in India.

They market their products under the "PEARL PET" brand name, and the company's pet jars are as evident in the market, as the products of Hindustan unilever. This is because, the worldwide preference of PET resin in manufacturing containers, has led to their acceptability across various industries such as pharmaceuticals, beverages, confectionery, personal care, liquor etc.

But, being a market leader does not necessarily make it a good investment option!!!

The management of the company realized the potential of a food grade and recyclable polymer as versatile as PET (PolyEthylene Terephthalate), and ventured in the field of manufacturing and exporting of all types of PET bottles, containers, jars etc. in 1984. Since then it has grown from 1 manufacturing machine in the beginning to about 40 now, but there has not been any product innovation. Also, the competitiveness in this business has grown many fold since 1984.

So, till now whatever growth the company has been able to achieve, it's been only on the basis of increase in volumes. But, there's a limit to it, as the number of players start increasing over a period of time, thereby eating up a part of market share, and also make the business highly competitive, thus hampering the margins.

That's exactly the situation, Pearl polymers ltd. has been facing for some time. There has not been any marked increase in sales for the last 4-5 years. In FY2005-06, it recorded sales of Rs 122 Cr, whereas this financial year ending March'09, the company recorded sales of Rs 154 Cr. I believe even long term govt. securities would give a far better return than that. Also on the operating profit front, there has hardly been any change in the last four years. In FY2005-06, the operating profit stood at Rs 15.7 Cr, whereas this year it was Rs 17 Cr.

Sometimes operating profit provide a better view of the growth in the business, as bottom-line can be easily manipulated by making amendments to taxes or depreciation charges. Also, along with the growth in profits, one should also look for growth in sales. This is because, a growth in sales is a better reflector of growth in demand for the product, and assures investors of the probable growth of the company. Whereas if the top-line is stagnant, with an increase in bottom-line, then it may happen that the company may soon run out of cost-cutting measures, thereby bringing in stagnation.

Pearl polymers ltd. has been facing stagnation for some time now, and until or unless, it comes out with another revolutionary product out of its kitty, the company will continue performing as it is now. I feel that investors can avoid this penny stock, which although has a strong brand name in the form of "PEARL PET".

Note: The stocks discussed at MPS thru blog postings are neither a part of “Business Insights” issue nor a “Penny Stocks” which we reco/publish for paid subscribers. These are just stock specific views by MPS team; one MUST do the due diligence before doing any investment based on our reco.

To contact the equity analyst on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com

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Life changing opportunities, knocking at the door, are you hearing!!!

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Are you a high risk taker? Do we really need to ask such questions to a stock market investors/traders? No, because anyone who invest in equity must understand that risk will always be there, it is part & parcel of life. Only way one can mitigate the risk is to consult a trusted and reputed specialist from the investment world, who understand the rule of money game and keeps a tab on the economy or stock to be more precise.

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And when you are willing to transfer all your risk & worries to HBJ Capital, then you MUST take exposure in penny stocks supported by MPS unit because their "Business Insights - A Wealth Creating Penny Stocks" has potentail to give 30-50 times returns in next 3-5 years of holdings. Can you imagine, your 1 lac investment will become 30-50 lac in just 3-5 years!!!

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MPS team is coming up with one such reco for the month of July available for ONLY MPS subscribers (refer one sample reco from MPS open for public Link).

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The salient feature of that wealth creating penny stock for the month of July'09 is (available to only the new subscribers of MPS subscribing before July 25th):-

1. The company under coverage is a first company to foray into the business in India, and is the only listed company in it's space. First mover advantage will always be there with this wealth creating stock.
2. The company's professional services are in huge demand in Metros, on account of expanding foreign tourism, and rising income of the middle class. Scale of opportunity is very high because company is in the business of solving the common problem. The service provided is a mix of convenience, safety, security and comfort, and this translates into a big business opportunity.
3. The market size of such services is going to be in the range of 8000-10000 Cr in a matter of 3-4 years, whereas the market cap of the company stands at just Rs 12 Cr, and that too when it is amongst the leaders in its business.
4. Also, the company is still undiscovered, as the business took off as late as 2006, so big fund houses have not jumped on to it yet. This will give the subscribers, an early mover advantage.
5. The opportunities run into more than 100 times for this company,as there are only a dozen players operating in the business, and this makes it one of the best available investment options in the market.

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Subscribe before July 25th to avail "10in3 - 10x in 3 years", "BI - 30x in 3 years" & "Flash Back - Last 12 reco Update" for the month of July!!!

Dear New Subscribers,

Pls subscribe before July 25th to receive July issues of “10in3 – 10x in 3 years - Small Cap Multibagger”, “Business Insights – Wealth Creating Penny Stocks” & “Flash Back – Last 12 months reco with latest update and reco on the top 3 to 5 stocks attractive at current price”.

Only 5 days left to avail July issues, hurry!!! Those who are subscribing after July 25th will not receive July issues of multibagger reports.

For more details call 098867 36791 (Sandeep Jain) or refer the link below:-

The dispatch schedule for “10in3” , “Business Insights” & "Flash Back" reports for the month of July’09.

Regards
Team MPS

SPEL Semiconductor- Govts. 200 million $ initiative may help the company

Unlike US and China, India still does not have chip-making technology. One of the reasons behind it, is lack of clarity on Semiconductor policy. The global giants do not like uncertainty, and avoid setting up their units in countries, with unclear and unfavourable policies.

The reason behind India not being able to achieve double digit growth, is lack of inner motivation amongst the citizens and also lackluster policies of govt. The difference between China and India is so evident from the power generation capacities of the two countries. While China is able to add 1,00,000 MW power generation capacity every year, whereas India is not even able to achieve the target of 78,000 MW in 5 years.

Coming back to chip-making technology, finally it seems that govt. has braced up itself for the home made processor, dubbed as "India Microprocessor". As per the announcement made by the govt., the processor design facility would be housed in a government-owned company, proposed to be called Zerone Corporation, with an initial investment of around $200 million. So, this initiative could kick-start the much-needed high-tech manufacturing in India.

A very important constituent of chip-making technology is its assembling and testing. These two processes, are an integral part of chip-manufacturing, and keeping that in mind, the first company that comes to mind is SPEL Semiconductor.

India is one of the fastest growing market for micro chips. The micro-chip market is estimated to touch a whooping $ 315 billion mark by 2015. So, with govt. setting up a facility, there may be an increase in opportunities for SPEL semiconductors ltd., as it provides the core facilities of packaging and testing.

SPEL semiconductor limited is India's first semiconductor IC assembly and test facility. The company does reliability tests, failure analysis, packaging of chips etc. Testing a chip is a prerequisite before releasing any Integrated circuit product to the market by the chip manufacturers. All the chips that are developed, are passed through various tests, during their entire development cycle, and after the complete testing, they are packaged in a way, so that they serve the right purpose.

Till now, SPEL semiconductor had been serving the global clients, and is basically into providing services for outsourced work. As always, India is a preferred destination in terms of outsourcing, on account of economically viable services provided by the companies here. But, outsourcing of Semiconductor Assembly & Test services, is still very minuscule in comparison to IT outsourcing.

Now, with govt. taking an initiative with an initial investment of around $ 200 million for establishing an Indian Microprocessor unit, SPEL semiconductor can benefit from it. This year it recorded revenues of Rs 81 Cr, with operating profit of Rs 21 Cr. For the last two years, its depreciation charge has increased on account of its expansion into new plants. The company is aptly leveraged with a debt/equity ratio of 0.5. As of now, the company operates as a 100% export oriented unit, but the company may exempt its upcoming new plants from that status, in order to serve domestic industry.

Only concern about SPEL is that, it provides Corporate Guarantee for the loans borrowed by M/s Natronix Semiconductor Technology Ltd upto Rs 60 Crores, as the operations of Natronix are complementary to SPEL's business. So, one never knows, that when an unknown liability may crop up, if the company defaults on its loan payment. Overall, Investors can expect a moderate return from this company.

On July 28th : The release of "Business Insights" - A Wealth Creating Penny Stock for the month of July’09 with potential return of 20-50 times in 3-5 years holdings (Available only to MPS subscribers)!!!

Note: The stocks discussed at MPS thru blog postings are neither a part of “Business Insights” issue nor a “Penny Stocks” which we reco/publish for paid subscribers. These are just stock specific views by MPS team; one MUST do the due diligence before doing any investment based on our reco.

To contact the equity analyst on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com

Restricted access to MPS from July 30th : It will provide value for money to our paid subscribers of MPS.

Restricted access to www.stoplosstrade.com (Trading Calls Focus) & www.multibaggerpennystocks.com (Penny Stocks Focus) from next week!!!

- Team MPS

Long term investment + Compounding = Millions

There was once a poet who fell upon such hard times, that he was no longer able to feed his family. Hearing that the king greatly encouraged talent and was famed for his generosity, the poet set off for the Royal Palace. When brought before the king, he bowed low and asked that he may recite a poem. On hearing his recitation, the king, well pleased, asked him to name his reward.

The poet, pointing to a finely wrought chess board before the king siad, "Your highness, if you place just one grain of rice on the first square of this chess board, and double it for every square, I will consider myself well rewarded." "Are you sure?" asked the king, greatly surprised. "Just grains of rice, not gold?" "Yes, your highness" affirmed the humble poet.

"So it shall be" ordered the king, and his courtiers started placing the grain on the chess board. One grain on the first square, 2 on the second, 4 on the third, 8 on the fourth and so on. By the time they came to the 10th square they had to place 512 grains of rice. The number swelled to 5,24,288 grains on the 20th square. When they came to the half way mark, the 32nd square, the grain count was 214,74,83,648- that is over 214 crores! Soon the count increased to lakhs of crores and eventually the hapless king had to hand over his entire kingdom to the clever poet. And it all began with just one grain of rice!

Moral of the story : Never underestimate the power of compounding. It is rightly called as 8th wonder of the world. If you stay invested in a good penny stock (or for that matter any good small cap company) with good opportunities, great management with tremendous implementation capability, for long enough, it will work wonders for you. A small money invested every month from the beginning of your work-life can lead to millions at the time of your retirement.

Team MPS

Southern On-line Bio technologies ltd.- A reasonable investment option

Southern on-line bio technologies is a name, that appears confusing when heard for the first time. Well, till you actually get to know about the businesses of the company, it will remain confusing as to what this online bio technology is.

Early on, the core business of the company was that of Internet Service Provider in the state of Andhra Pradesh and according to the estimates, it has 25% share in Andhra Pradesh in the field of Internet service. The company presently provides Internet Services as a Licensed ISP by connecting through Bharti Broadband Backbone. Later on sensing an opportunity in Bio-Diesel production, it started focusing on bio-diesel production in year 2005, and commenced production in 2007. So, the name of the company contains both on-line and bio-technologies to reflect the operations of the company.

Recent budget announcements regarding bio-diesel

In the recent Union budget announced by the finance minister, he gave a certain push to the use of bio-diesel as a fuel blended with conventional diesel. The announcemets that he made are:

• Duty paid High Speed Diesel blended with upto 20% bio-diesel to be fully exempted from excise duties.
• Reduction in Customs duty on bio-diesel from 7.5 to 2.5 per cent and abolition of dual taxation on bio-diesel.

The Union Cabinet approved the National Policy on Biofuel on September 12 last year. The policy aims to raise blending of biofuels with petrol and diesel to 20 per cent by 2017.

So, the inclination is certainly there to make bio-diesel as preferred fuel for blending, by exempting it from excise duties, and also by abolishing dual taxation. Do you know, that the main culprits that make us pay such a high price for fuels are duties and taxes levied at both state and central level.

A simple cost analysis, tells all. Currently the crude is trading at 60$/barrel. 1 barrel is equivalent to 159 litres. So, the price of crude comes out to be Rs 18 per litre. Now, to this add refining charges and logistic cost,and the total cost of refined product would come in the range of Rs 27-28 per litre, but we are made to pay Rs 45-50 per litre of petrol. This is because, dual taxation scheme is being followed at both central and state level. Some states like Uttar Pradesh charge higher duty, and therefore the price is even higher there.

Bio-diesel business of SBTL

Southern on-line bio was amongst the first few companies to start commercial production of bio-diesel in late 2007. At one point of time, it was the only listed company to produce bio-diesel meeting the standards specified by IS 15607, but now we all know, that how some junk companies have put bio in their names, and have made tall and false claims about the land under cultivation for Jatropha crops.

The company presently has a capacity of 40,000 litres per day. In Jan’08 it had won a massive order from Andhra Pradesh Government’s public transport utility APSRTC for supplying 3 lakh litres of bio-diesel per month to APSRTC’s 12 depots in the twin cities of Hyderabad and Secunderabad. The order then constituted 25% of the company’s total installed capacity. It also supplies bio-diesel to corporate clients such as Tata Indicom, Idea Cellular, Airtel, Taj and ITC group of hotels in Hyderabad, etc.

New bio-diesel plant

The company is in the last stages of setting up another bio-diesel plant with a capacity of 250 TPD. Once, the proposed unit will start production, the total installed capacity of bio-diesel for SBTL will go up to 6 times, its present capacity. The project cost of this second bio-diesel plant is estimated at Rs 90 Cr, out of which rs 36 Cr is equity and Rs 54 Cr is term loan.

The company registered a net profit of Rs 2.16 Cr, on an equity base of Rs 32 Cr. It also had to pay an interest charge of Rs 1.7 Cr. Its interest cost comes around 10-11%, and a further increase of term loan of Rs 54 Cr, will lead to an increase in interest payment of Rs 6 Cr annually. But, the second bio-diesel plant is expected to commence production from the third quarter of this fiscal, so considering full capacity utilization and six fold expansion, there may be a sizable increase from current EPS of Rs 0.66 to Rs 2.5 for FY2009-10.

Although some part of this news has already been discounted, which reflects in the current valuations of P/E of 24, but still the scope is there for a gain of upto 200%, if kept for about 2 years. As the profit for the whole year can go upto Rs 12 Cr, with an EPS of Rs 4 for FY2010-11, and a reasonable valuation of 10 times the earnings.

Note: The stocks discussed at MPS thru blog postings are neither a part of “Business Insights” issue nor a “Penny Stocks” which we reco/publish for paid subscribers. These are just stock specific views by MPS team; one MUST do the due diligence before doing any investment based on our reco.

To contact the equity analyst on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com

Prithvi Information Solutions ltd.- Go through this post before taking a decision on it

Prithvi Information Solutions ltd. is an IT consulting and engineering solutions company, which began its operations in the year 1998 in Hyderabad. The company operates under five strategic business units namely : Healthcare, Retail, BFSI and Telecom. The company's core business has been that of providing software solutions in the above mentioned fields. It's only now, that it has started supplying telecom products and services. Even then, 90% of its revenue comes from software solutions.

When it started of, its business model was based on on-site work, and was focused on software services for small and medium enterprises in the US. Although, this strategy has worked for it till now, but along with it comes a rider of low margin in comparison to its peers. Working on-site involves huge cost for the companies, and that in itself is evident from the low OPM of around 13-14% for Prithvi in comparison to the industry average of 23%.

In terms of performance, it has been just about OK, and nothing really exemplary or praise worthy. This fiscal the company reported higher revenue at Rs 1892 Cr in comparison to Rs 1112 Cr for FY2007-08, but the bottomline was down to Rs 36 Cr in comparison to Rs 63 Cr. The company accounted for Accounting Standard- 11 where provision for forex gain/loss is made in profit/loss statements. Had it not accounted for it, the profit would have been higher by 83 Cr.

On accounting front, I think there should be uniformity across the board, and each company should be made to follow the same standards. While ministry of corporate affairs has deferred the implementation of AS-11, but even before it was done, some companies were not following it, as it was resulting into huge notional losses for those companies. Now that its implementation has been deferred for the time being, so again, it should be ensured that no company follows it.

Leave behind the financials. In the case of Prithvi Information Solutions Ltd., more than the financials, there are other happenings which attracted me towards it , and made me write about it, so that investors can be cautioned or made to think before making an investment in it.

An important point that came to my notice was that Deutsche bank had filed an FIR against company and had stated that the company had defrauded the bank to the tune of 40 Cr. Although the company came out with justification, but nothing has come out of it yet. The important question that creeps in, is what made Deutsche bank file the FIR, and why the matter was not amicably solved b/w them.

More importantly, Price water house cooper resigned on June 4 from being the statutory auditors, just when the company was about to come out with results. This is rather shocking, as it creates doubts as to what made Price water house resign at such a critical juncture. I call it a critical juncture, as it's the time when companies come out with their audited quarterly and yearly results, and it's also the time when the work of auditors is of utmost importance.

There are no clear answers to the above two important questions, and these two happenings make me skeptical of the operations of the company, so I would rather suggest people to not to buy this counter.

Note: The stocks discussed at MPS thru blog postings are neither a part of “Business Insights” issue nor a “Penny Stocks” which we reco/publish for paid subscribers. These are just stock specific views by MPS team; one MUST do the due diligence before doing any investment based on our reco.

To contact the equity analyst on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com

Dhanus Technologies- Don't put in your money

Dhanus Technologies is a company operating in Communication services. It was incorporated in 1993 and offers Telecom Services, is into Tele-services, IT/ ITES and Telematics. The company came with its IPO in Oct,2007 and raised about 110 Cr through the same. It had then kept the price band in the range of Rs 265- 295.

The main purpose of coming with the IPO was to obviously to take an advantage of the booming market and also to expand the company's products which help track vehicle (fleet) movements. Although the promoters could raise money at reasonably high valuations, but the small investors have actually lost quite a money by making an investment in this company.

Let's look at different business verticals of the company:

Calling cards Division

This business vertical of the company has been a key contributor to its revenue for long. Earlier it used to contribute almost 50%, but now its share has dropped to around 33%. This business involves reselling talk-time of international telecom operators under the company’s own brand name to Indians residing or traveling abroad. Internationally, the MVNO (mobile virtual network operator) business is dominated by companies that enjoy strong brand equity in another line of business. which they leverage in this business (egs: Virgin Mobile and Disney Mobile). Dhanus does not have comparable brand value that could be successfully leveraged.

The competition in this space is already stiff, with Bharti Airtel, Reliance Communications and VSNL aggressively promoting their international calling cards overseas, imposing margin pressures and also gobbling up a bulk of market share.

In the quarter ending Mar'09, the company could clock revenue of just Rs 6 Cr from its calling card business, whereas last year the revenue from the same business stood at Rs 21 Cr, signifying that how badly it is losing ground in this space.

Fleet Tracking

This business division was supposed to be the new driver of growth for the company, as a substantial portion of the issue proceeds had been earmarked for expanding the company’s products which help track vehicle (fleet) movements. But, the performance of the company has been dismal with respect to this division also. This is a low margin business as providing this service involves tie-ups with VSAT (very small aperture terminal) players for provision of satellite bandwidth and the bandwidth is stiffly priced.

Already there are a few players such as CMC and HCL Infosystems which have an existing relation with govt. clientele. Also, from the performance of the company, it is quite evident that it is working under huge margin pressure. For its Fleetrac service, it could just get Rs 7 Cr in the Mar'09 quarter, whereas about an year ago it could get Rs 12 Cr, and this quarter it also reported a net loss of Rs 1.8 Cr.

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The business operations carried out by Dhanus technologies are not at all seasonal in nature or even affected by a downturn in economy. A decline in revenue is not at all a good sign for such a company, as it is clearly suggestive of the loss in the market share. Also, the company had very early on after listing, tried for inorganic growth. Acquistions in itself are not bad, but if an acquistion is being contemplated at such an early stage, and that too of the business which is not in complete allignment with the persent line-up, is not a healthy sign about the company.

I feel, that Dhanus technologies should be avoided by those who wish to invest in it, and also those who are currently invested in it, as it is operating in a highly competitive space, with some of the biggest names of the Indian corporate world, and it has been constantly losing the market share.

Note: The stocks discussed at MPS thru blog postings are neither a part of “Business Insights” issue nor a “Penny Stocks” which we reco/publish for paid subscribers. These are just stock specific views by MPS team; one MUST do the due diligence before doing any investment based on our reco.

To contact the equity analyst on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com

Saamya Biotech- Somewhat similar to Cals Refinery

While searching for my "Business Insight" pick for the month of july, I came across a whole world of stocks. Some of them were good, some bad and some have not even started with their business operations. Everyone knows about Cals Refinery, which is expected to start its refinery from 2011 or even 2012. The whole investor community is running behind Cals, expecting it to be the next money spinner for them.

Saamya Biotech is another one of those in the list of companies, that is yet to start with the operations, with the difference being, that the management of Saamya Biotech is expecting the commercial production to commence by the end of December 2009 (although, I believe, there could be some delay, as is the case very often).

The proposed Business plan

Saamya Biotech (India) Ltd. (SBIL), has been incorporated in Hyderabad with the aim to manufacture and market biopharmaceuticals and recombinant protein products of medical and industrial importance. The company has selected immunosuppressive, anticancer and orthopaedic & ophthalmic sector drugs for manufacturing in its plant. These drugs are high value products and have a wide and growing global demand.

In order to manufacture these drugs, company has entered into a technical collaboration with M/s. Biofin Laboratories s.r.l., Italy for transfer of production technologies originally for two high value drugs namely Daunomycin, an anticancer drug and Hyaluronic acid, an ophthalmic and orthopaedic drug. Also, the company has proposed to add to the production plan, two more high value drugs used in organ transplantation therapies and entered into collaborative agreement with M/s. Biofin Laboratories s.r.l., for the technology transfer of these two products too.

Financials

In terms of financials, there is nothing to talk about revenues. But, there is definitely a lot to talk of financial structuring of the whole project. Early on when the company hit the market with its IPO, the total project cost was proposed at Rs 28 Cr, out of which Rs 8 Cr had been put in by the promoters, Rs 15 Cr from the IPO and Rs 5 Cr from the financial institutions.

But, later on in 2008, the company decided to manufacture two more high value drugs used in organ transplantation therapies, and since then the total project cost is estimated at Rs 68 Cr. This move has delayed the commencement of production by 1 year, as the plant restructuring had to be done.

Additionally, the company had planned to acquire a synthetic drug manufacturing company in Hyderabad at a cost of Rs. 15 crores for manufacturing hemi synthetic drugs from the products produced from the biotech plant. Since the company does not have money to fund such an acquistion, so again it approached banks for the same.

The list of expansion plans does not end here, as Saamya Biotech has registered a subsidiary company in Malaysia in the name of Saamya Biotech (Malaysia) Sdn. Bhd. with the objective of manufacturing high value biopharmaceuticals. The project is estimated at a cost of Rs. 120 crores and the requisite funds are planned to be raised from Malaysian Federal Govt. and financial institutions as term loan to the extent of 80% project cost, with the remaining 20% being funded by promoters and the Malaysian govt.

Outlook

I came up with this post to give a feedstock to all those who wish to invest in highly risky counters, as again in this case the plans are big, but the valuations are down, as the company has not yet started the production. Saamya Biotech is most definitely not meant for risk averse investors.

Now, if all the proposed projects as envisaged by the promoters get materialized, then the total project cost would run somewhere into Rs 200 Cr, with the equity participation running into Rs 53 Cr.

The stream of revenues can't be predicted, as the pricing of the drugs and the plant capacity is still not known, but the current market cap of the company stands at just Rs 12 Cr, that is even the below the book value of 23 Cr. There is a striking similarity b/w Cals and Saamya in terms of proposed expansion plans, with the difference being in the scale of operations (Saamya Biotech operating at a lot lower level than Cals), and also that in case of SBIL, promoters have put in a lot higher money percentage wise, than in Cals.

Remember, that this counter is not meant for risk-averse investors, as nothing can be said of the promoters and the company with surity, till it actually start its operations.

Note: The stocks discussed at MPS thru blog postings are neither a part of “Business Insights” issue nor a “Penny Stocks” which we reco/publish for paid subscribers. These are just stock specific views by MPS team; one MUST do the due diligence before doing any investment based on our reco.

To contact the equity analyst on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com

Bag Films and Media Ltd- Road to profitability

A look at the financial statements of Media companies says all. There are only few media channels, and companies into content production, which have the potential of posting Net profits, else all others are reeling under the pressure of large expenses. Similarly those into Cable services, such as WWIL, Dish TV, etc are also suffering from gargantuan cost that they have to bear in comparison to the revenues.

Their condition might soon reverse for good, with the govt. of India mandating a Conditional Access System, for cable TV viewing. The Government's intention in implementing Conditional Access System is to make the pay channels rates uniform. The CATV Amendment Act, passed in December 2002, makes it mandatory for consumers to watch pay channels only through a Set Top Box (STB) in CAS implemented areas.

Although the act was passed in 2002, but still, not much has been achieved with regard to implementation of CAS across the length and breadth of the country.Till now, CAS has been implemented in only selected cities.

Now, why am I laying so much stress on CAS? This is because, Telecom Regulatory Authority of India (TRAI) has capped pay channels at Rs 5 per subsriber. The revenue share is also regulated with broadcasters taking away 45 per cent while 30 per cent stays with the MSOs and 25 per cent with the local cable operators. So, the revenue for the media channels will be greatly boosted, once the scheme is implemented across the whole of India.

Coming back to Bag Films

Business

BAG Films apart from producing television shows, also operates in the radio space,under the brand name Radio Dhamaal, via a separate entity BAG Infotainment. Also, about an year and a half back, it came with its two national channels. They being: News 24 and E 24 ( A channel dedicated to Bollywood news).

Recently the company took another initiative of launching its two channels News 24 and E 24 on 3G mobile technology. BAG`s new media initiative also includes video streaming, animation and gaming, interactive content for broadband and mobi-sodes specially developed for mobile phones and handheld devices.It has also set up 50:50 animation joint venture - Seiun and BAG Films - with a Korean company.

Financials

On the standalone basis, the company reported a net profit of 1.5 Cr, but on the consolidated front, it has reported a loss of Rs 94 Cr for this fiscal and a loss of Rs 53 for the previous fiscal. An interesting thing that came to my notice while going through both standalone and consolidated result is, that in the standalone income they have included lease income of Rs 17 Cr for this fiscal, while in consolidated results, the lease income stands at just Rs 1.94 Cr. The rational behind it is not very clear.

The reason behind huge losses on the consolidated front is its venture into television broadcasting. Television broadcasting, requires the company to have deep pockets. There are just few companies which are profitable in the television broadcasting business, one of them being Zee, else the fate of all others is same. The reasons behind it could be:

• Burgeoning cost of distribution
• slow growth in DTH penetration and digitization of Indian cable network
• continued under reporting of subscribers and cut throat competition in broadcasting

Outlook

The road to profitability for companies operating in television broadcasting will largely depend on how fast the govt. is able to implement the CAS scheme throughout India. Implementation of CAS is of utmost importance to such companies as addressability through CAS and DTH would mean that the problem of under declaration of subscribers by cable operators would eventually come to an end, thereby ensuring a greater subscription pie. The fees through subscription can even go beyond advertizing fee, and this will benefit all the companies operating in broadcasting, such as BAG films and Media, NDTV etc.

Note: The stocks discussed at MPS thru blog postings are neither a part of “Business Insights” issue nor a “Penny Stocks” which we reco/publish for paid subscribers. These are just stock specific views by MPS team; one MUST do the due diligence before doing any investment based on our reco.

To contact the equity analyst on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com

It's upto RBI now!!!

There are several accounting norms and standards that are followed by the companies, and which impact them in different ways. Accounting Standard such as AS-11 garnered the attention, because it suddenly led to the reporting of huge losses in the profit and loss statements of the company. Similarly, one of the lesser-known accounting norms has come to the fore , after a recent visit of leading banks to Reserve Bank of India (RBI) for relaxing the provisioning norm for home loans and other assets.

It's very interesting in the sense that it requires banks to provide for the entire exposure to a borrower if one of the loans given to him turns bad. A better way of understanding this norm would be, that if a customer defaults on credit card dues, the bank will have to classify not just the card outstandings, but also the home and auto loans taken by the same borrower as non-performing assets, even if the borrower has been regular in paying the EMIs (Equated Monthly Installments) for the home and auto loans.

How does it Impact banks ?

Banks are affected if they have to make a provision for non-performing assets, as higher provisioning leads to lower income for banks. This is because, once a loan is classified as a bad account, the bank has to set aside 10% of the outstanding loan as a provision, thus affecting its net profit, as interest can't be earned on that amount. Also it enlarges the ratio of bad loans of the banks, which gives a bad name to the bank, and also keeps away the investors.

With a slowdown in loan demand from corporates, banks are now turning towards retail loans, but they want RBI to make an amendment in the above mentioned accounting norm. They want good loans to be segregated from the bad loans, so that they don't have to make higher provisions in case of a default in one of the loans take by the borrower.

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Actually it makes sense to segregate such loans, as the rate of default in the case of credit card loans is a lot higher in comparison to any other loan, and its across the world. So, it does not make sense to co-relate credit card loan with any other, as borrower may continue paying his EMI on home loans.

The ball is now in the court of RBI, and it all depends on how soon it takes an action on this issue. A move in favour of the banks can certainly give a stimulus to credit growth and also improve the margins of the banks, which until now have been suffering in the wake of slowdown in credit growth.

Team MPS

Vishal Retail- Let's understand it

Vishal Retail was once the fastest growing retailing groups in India. It had been very aggressive in opening its outlets across various parts of the country under the brand name "Vishal Mega Mart", but now it has pruned that expansion plan a bit. Vishal Retail came quite late with its IPO in year 2007, which was hugely subscribed. Such was the euphoria at that time, that people were willing to pay just about any price for the IPO. How can one forget the IPO of Reliance Power, where Mr. Anil Ambani was asking people to pay a price of Rs 450 per share for a company which had no operations, and where he himself had just paid Rs 10 for the same share.

It's really amazing, since Indians are known to be good at bargaining, but in the case of stocks, they just forget the whole idea of ownership in the business, and look at stocks as a piece of paper. When the price falls, they term the whole process of investing in stocks as risky, and ultimately make a promise of never investing in it again, thus losing out on an opportunity to make huge gains.

Coming back to Vishal retail, where a similar fall from a high of Rs 1000 to a low of Rs 25, must have scared another set of people. Actually it is scary, to see your Rs 1,00,000 turn into a meagre Rs 2500, but in the first place, people should not have actually put in money into it with a view of investment, as it was already trading at a P/E of 50 and above. Also, from a look at volumes when it started its downfall, its quite evident that many people may still be holding their investment in Vishal Retail, as the volume was not very high during those days.

Let's now go through the present situation

Business

Vishal Retail sells ready-made apparels (including its own brands) and a wide range of household merchandise and other consumer goods such as footwear, toys, watches, toiletries, grocery items, sports items, crockery, gift and novelties. The company has around 180 stores spread across more than 100 cities.

Vishal Retail's half of revenues come from apparel sales in North India. The company basically caters to the needs of middle and lower class through its apparel division and has therefore established its stores in tier-III cities pre-dominantly, apart from the Metros and high end cities.

Financials

All was well with Vishal Retail, until recession gripped the whole world, and the large amount of debt in its books started haunting it in the form of large interest outgo. Recession led to the sluggishness in the sales, and interest payments, dampened the already less margins. Also, the company had started diverting from its core competencies, and was planning to enter restaurant business. Personally I maintain the view, that in most of the cases diversificaions lead to di-worsefications.

In the recent times, company had to shut down many stores, lay-off many people, and has now started outsourcing its manufacturing operations, which until now it had been doing on its own. The basic reason, for closing down stores is that company has not been able to rotate its inventory at a comfortable pace, and there has been a sizable build up of it. For a company in retail, its very important to sell its products at a rapid pace, as only then cash can be generated, otherwise huge inventory build up can take place, leading to blockage of liquidity.

The company has not come up with its annual results, although they should have been out by now. In the nine months ending Dec'08, it has been able to register sales of just a tad above Rs 1000 Cr, with a net profit of Rs 20 Cr. The last two quarters have been dismal as it could only clock in profit of Rs 6 Cr from the two, whereas interest payment has already crossed a mark of Rs 70 Cr, and is expected to touch 100 Cr.

Outlook

The very important question that comes up is, will Vishal Retail go the Subhiksha way ? According to me, the answer to it is definitely no. Vishal retail is a lot matured company in terms of its presence across India, its revenues and also management. The management of the company was quick to assess the situation and has rightly taken steps of consolidating its stores in the same city. Similarly to bring the cost down, it has started outsourcing some of its activities.

The company got a breather from its lenders in the form of approval to roll over about a third of its near-term debt, which was maturing this fiscal. So, the situation is certainly not that grim as was with Subhiksha, and the current stock price has almost factored in all negatives about the company.

But, if I talk in terms of growth, then in the medium term that will be certainly muted for about year or so, as the company has slowed down on its expansion plans in the wake of dwindling footfalls, and also the debt burden will certainly weigh over its earnings for the time being. Long term prospects, as a whole are good for organized retail, and Vishal being an early entrant into it, will certainly have an advantage over others.

Note: The stocks discussed at MPS thru blog postings are neither a part of “Business Insights” issue nor a “Penny Stocks” which we reco/publish for paid subscribers. These are just stock specific views by MPS team; one MUST do the due diligence before doing any investment based on our reco.

To contact the equity analyst on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com

Rohit Ferro- See for yourself, what excessive debt can do!!!

A few days back, I had talked about Facor Alloys, and here I am again with my views on a company which operates in the same segment, and has rather same set of products on offer i.e. ferro alloys. Rohit Ferro is a perfect example of one of those commodity stocks, which can bring you a lot of wealth during the peak of cycle and then suddenly take away almost all of it during doom. It also tells us that people start noticing debt in the balance sheets of the company, only when sentiments are down, otherwise they ignore it completely.

I have mentioned it time and again, that commodity stocks are cyclical and huge amount of wealth can be made in them, provided you invest in them at a time when the markets are ignoring them and also exit them completely at a first sign of distress. The waiting period for gains to be realized may extend up to 3-4 years, but then to enjoy the fruits, one needs to have patience.

Excessive debt

Rohit ferro is an aggressive player and has enhanced its capacity tremendously. When it started its operations back in October'2003, then it just had a capacity of 24000 TPA (Tonnes Per Annum), and now it has enhanced it up to 1,80,000 TPA. The capacity increase reflects in its revenue which has increased from Rs 126 Cr in FY2005-06 to about Rs 874 Cr in FY2008-09.

For expansion of such a large scale, the company has to either plough back into its reserves, go for equity dilution, or take up loans. Rohit ferro took on excessive debt to funds its plans and that's what proved to be a spoiler for the company. Till last year it had Rs 211 Cr as debt on its books, but this year interest payments of Rs 44 Cr tells me that debt portion has more than doubled to somewhere around Rs 450 Cr.

Investors on a whole don't like a debt/equity ratio for a company not into a growth sector. We all know what happened to real estate companies or Aban offshore, where the Market cap was eroded by almost 95%, and similar is the case with Rohit ferro. At one point of time, it had touched a high of Rs 190 and soon after that it came down to Rs 12, so a 93% wash-off.

Advantages

I believe that Rohit Ferro has seen worst of all, and with its huge expansion and capacity enhancement, it can certainly be at an advantage than others, although it may take some time. The ferro alloys prices have almost halved from their peaks in 2008, and going forward there should not be much drop, as demand has again strenghthened. So with a capacity of 1,80,000 TPA, it can really boost its revenues and run its plants at full capacity once the price of ferro alloys resume their upward trend.

While expanding its capacity, it also did a sensible thing of going for backward integration by acquiring some 60% interests in coal mines in Indonesia through its subsidiary in Singapore. Coal being an important raw material, determines the overall margins of the company, so with acquisition of interests in coal mines, it will be able to protect itself from the escalation in the prices.

Also the company invested heavily in its captive power plants, and that reflects in its cost of power and fuel. Companies producing ferro alloys need regular supply of power to run their huge furnaces. Expenditure on power runs into almost 25% of their total expenditure for such companies, so it makes sense for them to invest in captive power generation. Facor Alloys Ltd. had almost spent 58 Cr to secure total revenues of Rs 258 Cr, whereas Rohit Ferro spent just Rs 128 Cr on a total revenues of Rs 874 Cr. That in itself, speaks of the cost advantage the company has over others.

Valuations

I shall not value Rohit Ferro in terms of just P/E because that won't be a correct method of valuing it. Its profits were badly hit both on account of large interest payments and also on account of decrease in prices of ferro alloys across the board. Now the market cap of Facor alloys stands at 85 Cr, whereas that of Rohit ferro is just about 99 Cr. As I said earlier that Rohit has a total capacity of 1,80,000 TPA whereas Facor has just 72,000 TPA. Similarly Rohit Ferro has a captive power generation capacity of 110MW and also 60% right in coal mines in Indonesia.

Its just that the performance of Rohit Ferro has been bad due to above mentioned reasons, and hence it is being valued so cheaply. This company can prove to be a multibagger, but one will have to keep patience for the cycle to attain its peak.

Note: The stocks discussed at MPS thru blog postings are neither a part of “Business Insights” issue nor a “Penny Stocks” which we reco/publish for paid subscribers. These are just stock specific views by MPS team; one MUST do the due diligence before doing any investment based on our reco.

To contact the equity analyst on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com

Deccan Gold Mines ltd- The wait for the jackpot can be long

Deccan Gold Mines Limited (DGML) is the first private sector gold exploration company in India to be listed on the Bombay Stock Exchange and its also the only listed company in the gold exploration sector. India is a rich country in mineral resources, but it can't be said of gold as India produces just 3 tonne of gold per annum as compared to 300 tonne, produced by Australia.

A part of the reason for India having suffered in developing its gold mining potential is due to lack of adequate exploration expenditure, the nationalistic policies of the governments with regard to gold mines and a non investor friendly mineral policy. Things are changing for good now, with govt. laying emphasis on PPP model and allowing private sector to invest in exploration and production business, as evident in the case of oil blocks, under the NELP policy.

Gold Mining

Gold mining business is definitely an uncertain one. A great deal of investment is made in first analyzing the fields for gold reserves and then huge investments are made in the exploration part. The technology these days is sophisticated enough to determine the quantity of gold reserves, but then sometimes it does happen that the reserves don't turn out to be as estimated, and therefore the investment cost turns out to be higher than the revenues generated.

On the other hand there could be windfall gains, if the exploration process turns out to be successful and if the company is able to find huge reserves in any of the fields.

Prospects of DGML

In case of India it is believed, that it has huge gold reserves, even equal to that of Australia. Well this augurs well for any company in gold exploration and also the New Mineral Policy, 2008, seems to be in favor of expediting the whole process of granting license for exploration activities.

There is a three stage process for acquiring complete rights over a mine. The three stages are as follows :

• Applying for Reconnaissance Permits (RP)
• Applying for prospecting license (PL) and lastly
• Mining leases (ML)

A look at status applications dated May'08 for DGML and its subsidiary reveals that by May'08 it could not achieve much success in achieving grants for its applications for various RP's, PL's, and ML's. Its been more than a year since May'08, so actual status is not known, but certainly the company is still in the process of doing surveys and has still not started with the mining process.

In its most recent exploration report of Dec'08, it is quite evident that Ground Magnetic surveys are being carried out, and the process of trenching, drilling etc, is yet to start.

Financials

DGML can't be talked of in terms of its present stream of revenues, because there is hardly any. The management had guided a revenue figure of around 300-400crs for 10-11, but to me it rather appears to be a tough target to achieve, as I can envisage from the present status of their operations. Once the process of mining begins, the margins for this business are definitely going to remain high, but the core issue remains, that when will the process begin as there is still not a glimmer of hope.

Outlook

DGML is one of those companies where you invest with great deal of enthusiasm, expecting that one day the company will hit the jackpot and the stock price will rise multi-fold, but the wait for such an expectation to turn into a realty gets longer and longer. There's no denying of the fact that an announcement by the company regarding its finding of reserves of gold can turn it into a multibagger, but then again as I said that the wait for it can be very-very long.

Note: The stocks discussed at MPS thru blog postings are neither a part of “Business Insights” issue nor a “Penny Stocks” which we reco/publish for paid subscribers. These are just stock specific views by MPS team; one MUST do the due diligence before doing any investment based on our reco.

To contact the equity analyst on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com