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Honda Siel Power Products Limited- Initiating Coverage: April 2011

Honda Siel Power Products Limited (HSPP) is a joint venture between Honda Motor Co. Japan (67% equity stake) and Siel Ltd. People well versed with generators would recollect the name of Shriram Honda. The Company was earlier known as 'Shriram Honda Power Equipment Limited'. HSPP is engaged in the manufacturing and sales of Portable Generators, Water Pumping Sets, General Purpose Engines, Lawnmowers and Brushcutters. It has plants located in Greater Noida and Pondicherry.

Piramal Healthcare Limited: Buy back Update: November 2010

Piramal Healthcare Limited released a tender offer for Buyback on 9th December 2010.

The Facts:
Total Outstanding shares before buyback - 20.9 Crs
Maximum shares to be bought back - 4.18 Crs
Total Outstanding shares if buyback is successful - 16.72 Crs.

The buyback offer comes with an interesting opportunity. The record date for the buyback offer is Jan 08th 2011. The Buyback opens on Jan 17th 2011, and closes on Feb 7th 2011.

As per point number 22.9 of the tender offer document, shareholders can tender their entire holding for buyback. Since only a limited amount of shares are to be bought back (20% of 20.9 Crs = 4.18 Crs in this case), if the number of shares tendered is more than the number of shares to be bought back – then the following formula will be applied for calculating the accepted shares.

Number of shares accepted =
Number of Shares tendered by Shareholder / Total number of shares tendered
X total number of shares to be bought back

ABC Bearings Limited : November 2010

ABC Bearings Ltd (ABCL) is a leading original equipment manufacturer (OEM) to the automotive industry in the domestic as well as the overseas markets. The company caters to the medium and heavy commercial vehicles, tractors and other industrial sectors also. The product line consists of taper roller bearings, cyclindrical roller bearings, spherical roller bearings and grease. ABCL was formerly known as Antifriction Bearings Corporation and in 2002, changed its name to ABC Bearings Ltd. The company was established in technical collaboration with Steyr Daimler Puch, Austria under its original name and started its operations by manufacturing thrust bearings.

It is one of the leading players in tapered roller bearings, catering mainly to the M&HCV and tractor segments. The product portfolio consists of taper roller bearings, cylindrical roller bearings, spherical roller bearings and grease. ABCL is also the leading OEM (original equipment manufacturers) supplier to the automotive industry in the country and overseas.

The company has made a strong turnaround in FY10, riding on the auto sector boom and economic revival. The company has reported a profit of Rs. 205Mn as against Rs. 66Mn for FY09, clocking a growth of 212.5% after adjusting for an one time exceptional item. Efficient working capital management, utilization of cost-effective measures, reduction of excess work force and repayment of expensive loans has assited the company to put itself in the black.

Piramal Healthcare Limited : September 2010

Attractive Valuation (Business available for free)
Piramal Healthcare through its asset sale will end up accumulating a large amount of cash. Due to such a large cash inflow, the enterprise value of this business at a price of Rs. 500.0 per share, is zero. That means the market is valuing the remaining businesses of Piramal Healthcare at near zero. The remaining businesses are profitable and surely have a value greater than zero.

Quality of Business
Piramal is a 22 year old pharma company, which is one of the earliest players of the Indian Pharma Sector. Through strategic acquisitions in the early years, Piramal Healthcare has built up an enviable position in the Indian Pharma Sector. Their formulations business was purchased by Abbott at 10 times Sales ($3.72 Bn) whereas their Diagnostics business was purchased by SRL at 3 times Sales (Rs. 600 Crs). The management of Piramal Healthcare has proven its competence over the past couple of decades by making the company into one of the top 3 Pharma businesses in India.

Noida Toll Bridge Company Limited : August 2010

The Noida Toll Bridge Company Ltd (NTBCL) was formed as a Special Purpose Vehicle for taking on a project on BOOT basis (Build Own Operate Transfer). The project was to construct a bridge across the Yamuna river connecting South Delhi to Noida, operate it for a certain time period and then transfer it back to the New Okhla Industrial Development Authority (NOIDA).

In accordance with this, an agreement was signed on the 30th Dec, 1998between NTBCL and NOIDA.

Construction started immediately thereafter and the bridge was completed in 25 months. This was four months before schedule. Soon after, it was opened to traffic on the 7th of Feb, 2001. It is known as the 'DND Flyway'. The DND Flyway is an 8 lane Bridge that connects Noida to South Delhi across the Yamuna river. It is 552.5 mts long with a 27 lane toll collection plaza at the Noida end. It has a maximum capacity of 222,000 vehicles per day.

Given the gigantic stature of the project, funding was obtained on the basis of 30% equity, 70% debt. In all Rs.4,082 Mn were gathered through Rs.1,224 Mn equity financing and Rs.2,858 Mn debt financing. Debt came in the form of term loans from various banks and financial institutions for Rs.2,358 Mn and a Deep Discount Bond issue for Rs.500 Mn. IL&FS Transportation Networks holds 25.35% equity stake (Jun 2010) and is the Promoter of the Company.

Novartis India Limited : January 2010

Novartis India Ltd. (NIL) is the Indian listed arm of the Swiss pharmaceutical major Novartis AG. The parent is one of the top 5 pharmaceutical & healthcare companies in the world & holds 76.42% in the paid-up capital of Novartis India. The strong parental support provided by the Swiss major has helped the Indian subsidiary significantly in terms of new product introductions from its product basket & easy access to its rich product pipeline. The Swiss parent has recently increased its stake in the Indian listed subsidiary.

Novartis India has strong brands within its product basket that are market leaders within their respective therapeutic areas & have achieved considerable market share. These products have performed very well for the company over the years. These brands along with the new introductions are expected to maintain the growth momentum for the company going forward. Besides, we believe that Novartis India's increased focus towards the interiors of the country as the new growth market will help the company continue on its growth trajectory.

At CMP of Rs. 558, Novartis trades at 14.2x & 13.3x our FY10E & FY11E earnings of Rs. 39.3 & Rs. 41.9 respectively. It trades at 3.0x Price/Book Value of Rs. 188.7 per share for FY10E.

J K Lakshmi Cement Limited : October 2009

JK Lakshmi Cement (JKLC) is a part of the JK group (Hari Shankar Singhania) which is in to Tyres (JK Tyre), Paper (JK Paper), Sugar etc. The company mainly operates in the Western and Northern areas of India. JKLC commenced cement production in the year 1982 at Sirohi, Rajasthan & last year, it also started production from its second plant at Kalol, Gujarat. With the addition of this new plant, its total cement manufacturing capacity now stands at 4.75 MTPA. JKLC also produces Ready Mix Concrete (RMC) and Plaster of Paris (PoP). It has a captive power plant of 36 MW at Sirohi. JKLC has more than 2,000 dealers in its target markets.

JKLC trades at a substantial discount to its replacement cost and to its competitors. We believe that replacement cost is the best metric to value a cyclical business like cement. We conservatively value the company at $70/ton (at a 30% discount to its replacement cost) which translates to a stock price of Rs. 210.

Jyothy Laboratories Limited : August 2009

Jyothy Laboratories was established in 1983 by M.P. Ramachandran. It started by manufacturing and selling a single product, Ujala Supreme. As of now, they are into fabric care, household insecticide, surface cleaning, personal care and air care segments. Key brands include Ujala, Maxo, Exo, Jeeva and Maya. JLL was listed on the Indian Stock Exchanges in Dec 2007 through an IPO and priced at Rs 690. Since then, the stock has seen a split from Face Value of Rs 5 to Re 1 now.

Looking at the financials, JLL is a virtually zero-debt company, dividend paying, has good margins and a high ROE. It has a strong grip into its product categories and this has been possible mainly due to a distribution network that can even give the larger FMCG cos, a run for their money.

While some may have concerns about future growth for the Company, we rest assured on the basis of the upcoming national launch of Exo and the product categories itself (where JLL exists) which are all growing at a decent pace. All of this, available at a PE of 13.6x FY10E definitely seems a bargain to us especially when we look at the FMCG cos most of which are trading at a PE of 25+.

Gujarat Gas Company Limited : July 2009

Gujarat Gas Corporation Limited (GGCL) is a city gas distributor which operates in the cities of Surat, Ankleshwar, Bharuch, Vapi & Jhagadia (all in the state of Gujarat). The company is the largest private sector gas distributor in India and is promtoted by the BG group (65% stake).The company has 3000km of Gas pipeline and 29 gas stations. It has also applied for a licence to operate in the Bhavnagar and Kutchh regions.

Investment arguments include supply issues easing out, price increases for gas sales, volume growth and operation in one of the most industrialized states in the world.

Aventis Pharma Limited : July 2009

Aventis Pharma Ltd. (APL) is the Indian subsidiary of the global pharmaceutical giant Sanofi-Aventis S.A. The parent ranks amongst the top 3 pharmaceutical companies of the world & holds about 50% in Aventis Pharma Ltd. Sanofi-Aventis lends strong support to Aventis Pharma, in terms of new product introductions in the Indian domestic markets from its product basket & easy access to its strong & rich product pipeline. The parent has also looked at increasing its stake in the Indian subsidiary.

APL has transformed itself into a company catering to the chronic & critical-care therapeutic segments. It has several products that are market leaders within their respective segments & have grown at double digits over the years. APL is also achieving better results on the exports front year after year. We believe these products to continue their growth momentum & help the company to achieve higher profitability going forward.

We expect the company to achieve 8 - 10% CAGR growth in its top-line & bottom-line over the next couple of years. Besides, cash rich & debt free status adds to the defensive nature of the stock. At CMP of Rs. 1,110.0, the scrip trades at 14.3x CY09E & 12.9x CY10E earnings.

Solvay Pharma India Limited : May 2009

Solvay Pharma India Ltd (SPIL) is the subsidiary of Solvay Group of Belgium. The parent is one of Europe's leading pharmaceutical and chemical companies, holding 69% of the Indian company's equity of Rs 51 Mn. Solvay's commitment to India has ensured the flow of product from its global stable to India, as can be seen from the virtual overlap of the pharma portfolio of the parent and SPIL.

SPIL's focus on niche therapeutic areas, mirroring the parent's portfolio ensures limited competition and better margins, while new product launches ensure sales growth higher than that of the domestic market. SPIL has successfully launched number of products in the domestic market that have been performing well for the company. Also, SPIL does not have any of its current products falling under the DPCO net.

Despite the steep pricing of most MNC pharma companies, valuations of SPIL are attractive. It has a pure cash balance of Rs. 69.4 Mn. for CY2008. It's debt-free status & healthy cash flows year on year makes it a good long term bet. At CMP of Rs. 650, the scrip trades at 9.4x CY09E & 8.4x CY2010E earnings.

Patni Computer Systems Ltd. : May 2009

One such company which fits the garden variety Indian IT services framework is Patni Computer Systems Limited. One of the Top 10 IT companies in India, Patni caters to a client base of around 320 active clients across 30 countries. With over 20 Global Delivery Centres spanning across US, Europe & India, Patni also plans to setup base in China to leverage their recently acquired IT talent & infrastructure providing near shore service to its growing Asia Pacific clients.

Patni is a 30 years old company, has been one of those companies which started the IT services movement in India along with giants like TCS, Infosys & many more. Back in 1972, the duo of Narendra Patni & his wife Poonam Patni, took the first steps towards setting up an offshoring business from US. Later on they set up operations in Pune with just 20 people. Now Patni is 14500 employees strong all over the globe.

Patni, during its formative years had the likes of Narayan Murthy, Nandan Nilekani & S Gopalkrishan working for it, who later went on to start Infosys. But Patni sadly, grappling in the past with its hardware & software services portfolio, had to play catch-up with its rivals which might explain the scale to which the business grew despite being in the same business at the same time. Although now, Patni has also emerged as a formidable player in the Indian IT services space & has a similar services portfolio as the rest of the top ranking Indian Software Services companies.

Oracle Financial Services Software Ltd. : March 2009

An Indian IT [software] company by the name of i-Flex Solutions Limited is now a subsidiary of one of the biggest global corporations of our times, Oracle corp. Renamed to Oracle Financial Services Software Ltd (OFSS), has an 80% shareholding in it by the parent. It was chosen for its unique exposure to the Banking & Financial Sector, & also the expertise they had gained thereof.

OFSS in synopsis can be seen as a debt free company cushioned with a lot of cash (~ Rs. 8977 Mn) operating in an industry mired with pessimism, displaying strong operating performance year on year with an exceptionally strong footing in its domain of expertise, with a parent whose footprint in the domain can be optimistically leveraged in times to come. Hiving off from CITI Group way back in the early 90's had helped the firm gain significant head wind into the financial sector, acquiring new clients on the go when they realized that the firm was not motivated by CITI's influence.

OFSS is popularly considered to be a software product company, which might be a misnomer since it also engages in other service offerings like consulting, package implementation, application development & maintenance & allied services.

Fulford (India) Ltd. : March 2009

Fulford (India) Ltd. (FIL) is an affiliate of Schering-Plough Corporation, USA, which holds 53.93% in the company (December 2008) through its arm Dashtag, UK. It is one of the MNC pharmaceutical companies operating in the Indian domestic market, with a turnover of Rs. 1,867.4 Mn. for CY2008. The company focuses on therapeutic segments like Dermatology, Allergy & Respiratory, Anti-Infective, Hepatitis, Rheumatology, Oncology & Cardiovascular. FIL explores opportunities to strengthen its existing product portfolio through its parent's product pipeline or through in-licensing options with other pharmaceutical companies. The largest selling product for the company is Quadriderm RF Cream in the Dermatology segment. Other key products include Dipsalic F, Elocon, Alaspan, Netromycin, Remicade, ViraferonPeg, Integrillin etc. FIL enjoyed a market share of 0.39% as of December 2007.

We expect Fulford (India) Ltd. to achieve a growth of 10-13% CAGR over CY08-CY10E period, both in terms of its top-line & bottom-line. Besides, the company is cash-rich & completely debt-free. We expect the company to have approximately Rs. 280 per share as Cash & cash equivalents on its Balance Sheet as of December 2008. At CMP of Rs. 365, the scrip trades at 6.1x CY09E & 5.5x CY10E earnings.

IL&FS Investment Managers Ltd. : March 2009

Lazard Brothers established IL&FS Investment Managers Limited (IIML) in 1989 as Credit Capital Venture Fund, being India's first private sector venture capital company. It was basically a joint venture between Credit Capital Finance and Bank of India with equity contribution by ADB & later by IFC. The company went for its maiden public offering of 34 lac shares at par in 1990. IL&FS bought it in 1996, merged its PE business with the company and renamed the company 'IL&FS Venture Corp'. In 2002, the company was rechristened to its current name.

Exide Industries Limited : January 2009

Exide Industries Ltd. (EIL), we believe, is one of the few domestic companies that are favorably positioned to ride the growth wave of both domestic consumption as well as investments. The company plays the consumption story through its exposure to the automotive batteries space where it is a runaway leader, commanding 75-80% market share in the original equipment manufacturers (OEM) space (all segments put together) and 55-60% market share in the branded replacement market.

Multi sectoral exposure - a natural hedge Unique position and spread over a large no. of sectors viz., auto (OEM + Replacement market) and industrial (submarine + telecom + power + railways) augurs well for EIL's future plan of action. This multi sectoral exposure provides the company a natural hedge against any contraction if any, in a few sectors of our economy. This gives the management, confidence to face the emerging challenges with cautious optimism.

GlaxoSmithKline Pharmaceuticals Limited : January 2009

MNC Pharma companies like GlaxoSmithKline Pharmaceuticals Ltd. are reaping the benefits accruing from the shift to Product Patent regime from Process Patent regime in the Indian domestic market. It is a good long term, safe & defensive bet in these difficult times.

GSK's strong marketing field force coupled with patented product launches from its parent's strong pipeline, increase in its vaccines basket & focus on the high-growth chronic therapy segments like Cardiology, Diabetes etc. make it a good long term growth prospect. Besides these, its increased focus on new market segments of Hospitals & Rural areas, that account for a big part of the Indian domestic market, also augers well. Divestment of non-core businesses would also help the company to focus on its core business of pharmaceuticals.

GSK's India specific strategy of launching 3-4 products every year, Inlicensing deals, conducting Clinical trials for its parent & the parent's committed support gives it an edge over the rest. GSK has already launched about 5 products (both from parent's portfolio & in-licensed) in CY2008 & further plans to launch 6-7 new products in the next two years. We estimate 6.8% & 9.7% CAGR in GSK's top-line & bottom-line respectively over CY2007-2010E period. At CMP of Rs. 1,175, the scrip trades at PE of 20.1x & EV/EBITDA of 12.7x CY09E earnings.

Credit Rating Industry : January 2009

Opinion Dominion - Its all about Credibility !

The scandalous act of Satyam, aka India's Enron has brought many in the line of fire; the key being independent directors & auditors. We are more concerned with the auditors - which like the Credit Rating Agencies (CRA) are in the business of giving opinions. The auditors PWC is in greater trouble as just a few years ago, it was indicted for fraudulent accounting following the collapse of the Global Trust Bank. PWC lost its banking business post the GTB episode. We wonder if the share price of Satyam would go the GTB way and PWC India go the Arthur Andersen way, which had to be dissolved for its complicity in the Enron scam.

We perceive that CRA is one industry, which suffers from what N.Taleb would put it as 'a new kind of Ingratitude'.

...The person who imposed locks on cockpit doors gets no statues in public squares, not so much as a quick mention of his contribution in his obituary. "Joe Smith, who helped avoid the disaster of 9/11, died of complications of liver disease."
- Excerpt from The Black Swan

The business may also be classified as a Negative-Black Swan business. A negative-Black Swan business is one where the unexpected can hit hard and hurt severely. If you are in the military, in catastrophe insurance, or in homeland security, you face only downside. Taleb has a simple decision making rule, i.e. to be conservative when it comes to negative black swans.

Procter & Gamble Limited : January 2009

Procter & Gamble Hygiene and Health Care Limited (PGHH)

Core brands VICKS and WHISPER occupy the #1 (dominant) positions in their respective categories.
PGHH with its commanding position is best placed to capture underpenetrated markets; we expect FY08-10E EPS CAGR of 18%.
PGHH is designed for long-term sustainable growth

Business Opportunity
Underpenetrated markets, low per capita consumption and well established brands bestow opportunities for high growth rates. We forecast topline CAGR of 16% for FY07-FY10E and 27% CAGR for net earnings.

Focused approach to core competence
PGHH has identified healthcare (Vicks) and feminine hygiene as the long-term areas of growth. Vicks growing at 8.20% (CAGR FY04-08), is the largest selling healthcare product in India. Value correction and product upgrade have helped Whisper garner value market share of 50 % in urban India.

Wyeth Limited : December 2008

Maintaining the growth momentum
Wyeth Ltd. has maintained a steady growth rate in its Revenues & Profits over the years. The company has witnessed its Revenues grow at 9% CAGR over FY05-FY08 period. With constant restructuring efforts, the bottom-line has grown by almost 28% CAGR during the same period. We expect Wyeth to clock such healthier growth rates going forward.

Access to parent's product pipeline
Since the recognition of the Patent Laws in India in 2005, lot of global pharma companies have launched their patented blockbuster drugs in India through their Indian subsidiaries. Similarly Wyeth Ltd. has access to its parent's vast product portfolio still to be launched in India.

Valuations
We expect the company to achieve a growth rate of 10-13% CAGR over FY08-FY10E, both in terms of top-line & bottom-line. Generation of healthy free cash flows & reasonable dividend yields add to the defensive nature of the stock. At CMP of Rs. 415, the scrip trades at 10.5x FY09E & 9.5x FY10E earnings.

Castrol India Limited : December 2008

Bear Market Pick
A high dividend yield, sound business model and stable financials make Castrol India Limited (CIL) an attractive long term investment. Even amidst a slump in the automobile sector, the company's lubricants will still have a large potential market to tap.

Huge Brand Loyalty
Strong brand equity of its products is enabling CIL to churn out good cash flows year after year. This has enabled the company to sustain high inflationary regime, rising input costs and the recent increase in crude prices. CIL has been able to achieve good numbers due to high volumes and improved price realizations.

Valuations
At CMP of Rs. 315/- Castrol India Limited is currently trading at 12.5x CY09E earnings of Rs. 25.3/- This is fairly in line with the 12.3% CAGR growth in profits over the last 5 years.

Colgate Palmolive India Limited : December 2008

Colgate is the undisputed leader in the oral care market; we forecast EPS CAGR of 21.75% for FY05-FY10E, driven by 15% CAGR in sales, 68 bps EBITDA margin expansion and tax savings.

Colgate's main focus is to drive volumes, maintain market share in the oral care segment and margin expansion. We believe these objectives are achieved through appropriate advertising, extensive product portfolio, reinforce customer relations and operational efficiency.

FMCG industry is among the sectors that seem less affected by the slowdown. The size of oral care products is estimated at at US$ 537 million (source: IBEF).

PPFAS research has valued the stock on DCF and Relative valuation methodologies at Rs. 435. At the current market price of Rs. 385, the stock trades at 20x of FY09E earnings and 17.4x of FY10E earnings.

Beyond Bottom Fishing : November 2008

The synchronous carnage in the financial markets the world over is reflective of not just the extent of globalization that we have achieved, but also the price we pay for having the US currency as a standard benchmark for world trade. While the global & local regulators have done well with their rescue efforts in averting a Japan-like depression, things do not change automatically for the good. We perceive that every bear market, while the extent of fall gets steeper, the timeline is also reducing. There is so much of Instant Gratification in everything. You have one of the biggest & the most wide-spread slow-down and it would be surprising if the revival happens anytime soon. Infact, the money pumped in by the governments may go towards adding to the surpluses. Many bottom fishers have gone active on even cyclicals, justifying bottomed out valuations and more importantly the case that the markets move ahead of the business cycles. But how much ahead, when most of these companies (like real estate, cement, steel, etc.) are still to report a meaningful drop in the earnings as the cycle turns. Clearly the easy come - easy go(instant gratification) syndrome is visible not just in the sharp price movements, but also in the timeline.

One wonders if research makes any sense, more particularly after such an extent of damage. You have companies who have seen their market capitalization erode to levels even, below the cash on the books or their annual earnings. Still investors in these scrips loose money by every passing day. Just as a friend from another broking firm says, 'from these levels, anything & everything will go up in the longer run. Research is futile. Just track the liquidity movement.' We beg to dissent. Afterall, choice is empowering.

FMCG Sector Report - Indian Companies going conglomerate: September 2008

The FMCG sector seems to have finally joined India Inc's growth party by posting surprising double-digit growth in sales in the past couple of years. The Indian economy has maintained its growth momentum, with the GDP growth rate exceeding 8% every year since 2003-2004, and only now the effect is being seen in the largely defensive FMCG sector.

The Indian FMCG sector is the fourth largest sector in the economy with a total market size in excess of US$ 13.1 billion. The FMCG market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. (source: IBEF). FMCG sector will witness more than 50 per cent growth in rural and semi-urban India by 2010, according to an analysis carried out by the Associated Chambers of Commerce and Industry of India (Assocham).

A major portion of the monthly budget of each household is reserved for FMCG products. An average Indian spends around 40 per cent of his income on grocery and 8 per cent on personal care products. However, the per capita income level in India is still very low compared to the developed world. Besides, the penetration level of many products is also relatively low and several categories remain fairly unbranded.

Burgeoning Indian population, particularly the middle class and the rural segments, presents an opportunity to makers of branded products to convert consumers to branded products. All these factors provide a huge untapped potential for the industry.

Power Grid Corporation of India Limited - Power Interrupted!: August 2008

PGCIL can be best introduced as a large-cap stock with a near monopoly in a high growth & critical T&D segment. Given the hitherto regulatory protection & the sheer scale, PGCIL is unlikely to experience any meaningful competition in the foreseeable future. Another interesting facet to this monopoly play is the growth prospect on the backdrop of poor current power scenario & aggressive reforms. Moreover there is secured cost plus margins, which one may also refer as 'regulated' margins.

However, we initiate our coverage on this power major with a pessimistic stance. Briefly, we are not happy with the current valuations given the business model & the consequent impact on the financial performance. The business is highly capital intensive. Rs. 100 addition to the gross block of fixed assets would generate a mere Rs. 12.5 of revenues. PGCIL's key business is in earning a usage charge for the huge interstate electricity infrastructure that it owns. So, one sees that the ~entire business model of the company is asset driven. The poor asset turnover is decently compensated by the extremely high operating margins, which have consistently been over 80%. However, it is the huge depreciation (given the capital intensive business) and the huge interest costs (given the aggressive 70:30 leverage policy), that bring down the net margins to ~30%.

Indraprastha Gas Ltd : July 2008

Leaders world over have shown a growing concern towards the environment. With the price of a carbon credit increasing rapidly, it only shows the seriousness of different governments to reduce the emission levels across the globe. After industrial emission vehicular emission is the second biggest worry for global warming. A lot of research and development activity is taking place across the world to find ways to find a solution to this problem.

The proposed solutions could be in the form of promoting wind/solar energy for power or in building hybrid cars to reduce emission levels. Unfortunately the bulk of the work towards this cause is happening in the developed world. One of the more immediate & less polluting alternatives to oil and coal is use of gas as a power generation fuel & auto fuel. The availability of gas is dependent on the discovered hydrocarbon reserves.

The Indian government in 1998-99 launched the New Exploration licensing Policy (NELP), with a view to attract private sector. The government has launched the seventh round of bidding in this regard. The success of the NELP will result in reduction of India's dependence on import of fuel. This also means that a good amount of indigenous gas will be available in our country in the near future. 260 mmscmd of gas is expected to be available in our country by 2012. Fertilizer and Power sector will remain the main consumers of gas going forward.

Indian Offshore Industry : July 2008

Consider this. The odds for an oil exploration company to identify presence (seismic surveys, etc.) of any oil / gas / hydrocarbons at a given location is say 40%, the success rate to actually locate these would be say 20% and the likelihood of the company to commercially exploit these resources is say 25%. Then the overall probability of an exploration company actually realizing cashflows from the entire endeavour = 0.40 x 0.20 x 0.25 = 0.020 = 2% only.

This is the biggest frailty & vulnerability in the exploration business. But then its essentiality (critical demand - so, need to spend) & the economic viability (given the increasing prices - willingness & ability to spend) drive the efforts of these upstream companies. This contrasting nature of two sides of the coin is what makes the position of many offshore plays (rigs, support vessels & other services), extremely strong.

However, the buoyant day rates enjoyed by the offshore assets are not just a function of the demand desperation. Expected supply of the respective vessels would play a more critical role to determine the short to medium term equilibrium. We understand that the demand for oil is expected to increase at 2% annually and would necessitate a 7.5% - 8.5% increase in supply of rigs & offshore vessels. A little math suggest that based on the current orders, the incremental annual supply in the foreseeable future would be ~2% for rigs & ~5% for offshore vessels; still much lower than the incremental demand.

Jyoti Structures Limited - Power Uninterrupted: June 2008

Power is one sector which has been more than reasonably suffered from the onslaught of the liquidity crunch which hit the markets a few months. More than reasonably because of the significant higher element of the 'futuristic' aspect to the growth story. Think of this to further find support from the then ever-so buoyant equity markets; we comprehend why something is off a treadmill.

Jyoti Structures Ltd (JSL) is one of the many power ancillary stocks whose stock price has been severely punished on the back of slowdown risk & funding issues faced by the principal utility sector. Also the fear of increasing inflation to eat into the margins, as not everything gets covered under escalation provisions. We believe that for these very reasons, the scrip nosedived from Rs. 300 levels to Rs. 103 before settling at Rs. 125 levels presently.

Well it is the margin risk which is higher than the slowdown risk, considering the fact that the business earns just about 12-13% margins and steel prices having increased tremendously. This risk magnifies if one considers that the execution is over 18-24 months and the inventory holding period is minimal. Final concern is regarding the working capital intensity of the business and the poor free cash flows. JSL has a track record of negative free cash flows.

Gujarat Industries Power Co. Ltd - Lignite Ignite!! : May 2008

Surging fuel prices is making headlines everyday. Assuring fuel linkages and cut-throat competitive bidding are the new norms of the game of Power. Also the poor state of the capital markets is questioning the very conception of the numerous proclamations made in the past few quarters. All these, along with the continual execution-&-third party delays are the various issues perturbing the power utilities in the current buoyant but challenging times. No doubt, the sector which gave one of the highest returns last year has been unable to withstand the liquidity brunt with a negative 31.47 % absolute returns since its high of 4863 in Jan '08 (BSE Power Index).

In our maiden effort on a power utility company, we find Gujarat Industries Power Company Limited (GIPCL) to be a very promising bet with a unique positioning in the overall power generation space. GIPCL has been operating gas & lignite based power plants and catering to the power needs of various State promoted organizations. While the company has risen superbly on the front of debt restructuring and improving financial health of its key client, Gujarat Urja Vikas Nigam Limited (GUVNL), erstwhile Gujarat Electricity Board (GEB), GIPCL has also come in line of fire on account of the surging gas prices and expansion delays. But, if kept the past in the past, one would see GIPCL at the cusp of an interesting trajectory, in terms of both, growth and margin expansion. Finally, its the high assurance on the fuel issue and the visibility for margin expansion plus the same continuing for a hopeful further expansion, is what gives us the confidence in recommending this investing proposition.

Key highlights for why we like GIPCL :
Track record of steady financial performance. Hidden in the erratic reported numbers & declining OPMs, is a steady track record, when one adjusts for the pass through in gas prices and adjustments for extraordinary items.

Lakshmi Energy & Foods Limited - nICE rICE bABY: March 2008

There has been a sharp spike in food grain prices worldwide in the recent times. The situation in India is not too different. The rising inflation trend over the past few weeks has brought the agriculture segment under lens. News on ban on exports for food security, the double whammy of ever-increasing Minimum Support Prices to farmers and increasing subsidy bills on welfare schemes like PDS has kept commodity specialists busy peruse the government's tightrope fiscal -political moves.

We have seen the large farmers emerge as a powerful sect of the Indian society at large. The improved affordability & increased per-capita intake is causing the demand to outpace the supply growth, which is constrained on account of limited & withering cultivable-land reserves. Reformations like the emerging organized retailing, private sector & corporate participation in the farm sector, emergence of the commodity exchanges seem to have brought about some irreversible changes in the social -map of India. Possibly, the increasing food insecurity & rising inflation are the prices we pay for the encroaching urbanization.

In Lakshmi Energy & Foods Limited, we see a unique play of the agriboom story coupled with many unique facets, which make it stand out from its peers. A leadership positioning with scalability prospects and an entrenched surety on pricing, margins and volumes are the USPs. The impressive past performance inspires confidence in its sizeable future expansion plans. For a moment, we are surprised by the excellent margins and return ratios for this seemingly commodity player, which are comparable with some FMCG companies. We stand convinced post our research endeavours and highlight our thoughts in this report.

Indian Shipbuilding Industry - Waft of Hope!: March 2008

Paradigm Shift in progress
India to sky-rocket its position in the global shipbuilding business, with its share rising from just 1% of the global order book to 15% - the largest incremental growth amongst all shipbuilding nations! A play more on the strategic shift from high-cost shipbuilding stalwarts like South Korea & Japan, to low-cost destinations like India & China, rather than a mere demand-supply cycle - the cornerstone of our optimism for the sector!

Reflections on the order-book growth
ABG Shipyard Ltd. - Rs. 82,778 Million (10x FY08E Sales)
Bharati Shipyard Ltd. - Rs. 46,393 million (7.7x FY08E Sales)

Both have an edge in terms of lower setup cost, years of experience, and also an early mover advantage in terms of cashing on the huge opportunity provided by the sector.

Competition comes gatecrashing
SKIL Infrastructure, L&T, Reliance, Tata, Adani, Tuticorin Port Trust among others take a plunge.

With the strategic nature of growth pattern shaping up for the industry, a 10-fold increase in revenues in less than 10 years for both the companies under consideration and the increasing interest of various high profile participants, the undertone for the sector remains extremely positive. The concerns primarily revolve around execution, subsidy and competition. While we need to witness the execution smoothness or otherwise over the coming times, we have estimated the impact of any subsidy changes on both companies through a sensitivity analysis exercise. As for competition, these are early days and there is an enormous amount of momentum, still to catchup in the foreseeable future. Our analysis suggest that ABG and Bharati should not see the margin impact on account of any pricing pressure for the coming 3 years atleast. A possible reduction in the subsidy rate and allotment of SEZ status to the new facilities remain compensating uncertainties.

Looking Forward - Investment ideas for 2007

There was considerable debate at our end before publishing the book which you are currently holding. The past year has been a remarkable one for the Indian stock markets with many stocks displaying superlative returns. Many of the ideas contained in our February 2006 publication titled "Investment Ideas 2006" also did well. However, we believed that 2007 would find it difficult to follow in the footsteps of 2006 primarily because global and local factors were loaded against it. Consequently fresh investment ideas were becoming increasingly difficult to unearth, especially considering that we as a firm bend more towards the "Value" side of investing.

Finally, we thought that this year we would combine a few new ideas with updates on many existing ones which still merit consideration. Hence, it is through deliberate design, rather than coincidence, that this book appears more as "Performance Review 2006" rather than "Investment Ideas 2007".

Like the previous book, this one too contains large-cap as well as mid-cap ideas, and hence will appeal to a cross-section of investors. Defensive scrips such as BEL and Britannia rub shoulders with consumer discretionary/cyclicals such as TELCO, Ashok Leyland & Maruti and power sector related companies such as KEC International and Jyoti Structures. Our positive view on the banking sector is reflected in our coverage of stocks such as State Bank of India, Punjab National Bank and Indian Overseas Bank. As always, we have a take on some upcoming companies such as Kitex Garments (a micro-cap, if there ever was one), Centurion Bank of Punjab and SEAMAC, coupled with continuing coverage on VST Industries, Matrix Labs, Bombay Rayon, Infosys Technologies, Sonata Software, NIIT Technologies, Mphasis BFL.

Infosys' Acquisition of Axon Group Plc. : Viewpoint