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Saturday, April 25, 2009

JK Lakshmi Cement,Murudeshwar Ceramics,Shri Lakshmi Cotsyn,Ankur Drugs and Allcargo Global:Future growth prospects and outlook

1)Scripscan:JK Lakshmi Cement Ltd

Story:Cement companies are expected to report a very robust March quarter, probably the best in the current financial year. Higher product prices, a better-than-expected improvement in demand, lower input costs and a host of fiscal measures initiated by the government to protect the industry are likely to help companies report higher revenues, strong margins and good profits. Here is a cement stock which is very attractively priced and which has not rallied like a Birla Corp or Shree Cement. JK Lakshmi Cement Ltd’s (JKLCL) market-cap is just 0.22 times its December-quarter annualised sales and 0.82 times its operating profit. Its sales have been rising by an average 10% over the past five quarters but higher costs in the June and September quarters have hit its profitability. Its operating profit declined by an average 10% over the past five quarters. But this was largely due to the pressure on profit growth which the company faced during the June and September quarters of 2008. The December quarter has been good with just 9% YoY decline in operating profit; March 2009 promises to be better. Another factor that goes in favour of the stock is its strong margins. Its operating margin averaged 26% over the past fivequarters. Another factor that we have been focusing on is the quantum of debt that companies carry on their balance sheets. JKLCL carries a slightly higher debt than other cement companies, but it is still at manageable levels. Its annualised operating profit for the December quarter is 45% of its total debt but it spends an average of just 3% of its operating income in servicing the interest cost while only 11% of its operating profit goes towards payment of interest.The company is expanding its capacity aggressively. It is reportedly planning to invest Rs1,000 crore in setting up a greenfield facility in Chhattisgarh which will increase its existing capacity (of 3.6 million tonnes) by another 2.7 million tonnes over the next two years. It has invested Rs210 crore in its existing facilities to add 1.2 million tonnes of manufacturing capacity recently. After a sluggish April-November period, demand for cement has picked up since December. Smaller cities, rural areas and government infrastructure projects have been the main drivers of growth for the company. Also, remember around 45% of its produce is procured by the government for infrastructure projects.A great buy at dips.

2)Scripscan:Murudeshwar Ceramics Ltd

Story:Building materials suppliers have piggybacked on a booming real estate sector to report strong fundamental growth over the past few years. The crash in real estate decimated their stocks prices. We believe, the price reflects known uncertainties, especially since many of them have reported decent results even in the depressing December quarter. One of them is Murudeshwar Ceramics Ltd (MCL). This company began with the manufacture of glazed ceramic tiles and gradually diversified, pioneering vitrified tiles for the Indian market. However, it isn’t growth that has us analysing this stock but its current valuation. Trading at Rs16, its market-cap is just 0.15 times its December-quarter annualised sales and 0.52 times its annualised operating profit.If one were to look at the toplineperformance, this would probably not qualify as an interesting stock. Revenues have been declining over the past three quarters. On an average, operational income was down 10%. Its operating profit too has been declining, down by an average 21% over the past five quarters. The good news, however, is that it has been able to arrest a decline in operating profit in the December quarter when operating profit was up 1%.Importantly, while growth has been poor, even in an economic environment which has hurt almost all sectors, MCL continues to operate at strong margins. Its operating margin averaged a healthy 26% over the past five quarters. In fact, after a dip in the September quarter, its margins have shot up again in December.Another important factor on which this stock qualifies as a good pick is its debt level.Its interest cost averaged 9% of its operating income and 33% of its operating profit over the past five quarters. One advantage that large, established and brand-owning tiles companies have is that, despite the real estate sector not doing well, these can still record sound growth by servicing the replacement market. Available at a fairly cheap valuation, it makes sense to buy the stock at the current rates.

3)Scripscan:Shri Lakshmi Cotsyn Ltd

Story:The market crash has decimated the price of many companies while they continue to perform as well as before. As a result, growth stocks have suddenly become cheap. Look at Shri Lakshmi Cotsyn (SLCL) which is an integrated multi-product and multi-market player in a beaten down sector, textiles. Its product range includes bed-linen, terry towels, denim and bottom weights, readymade garments, fusible interlinings, embroidered fabrics and zippers. It services large institutional clients with a range of uniform fabrics, ballistics, fabricated equipments such as sleeping bags and tents and fabrics like haversacks, facelets, protective clothing and casualty bags.This diversified range of products is probably what has helped it create a niche for itself where other textile companies have faltered. Over the past five quarters, its sales have been growing by an average 35%; its operating profit was also up 35%. Its operating margins have averaged 15% over the past five quarters. The December quarter was as good as any other quarter. There was no sign of a slowdown. Revenues went up 24% and operating profit was up 26%. It has drawn up a Rs800 crore expansion plan for diversification of existing verticals as well as acquisitions.Another interesting aspect about SLCL is that the company aims to become a supplier to the armed forces. It has entered into a joint venture with Armet Armored Vehicles of the UK for the manufacture of bullet-proof, seven-tonnes armoured defence vehicles, the first of which will be rolled out by the end of this year. This will further add to its portfolio of defence-related products which include uniforms, infra-red fabrics, bullet-proof helmets and jackets meant for high-altitude areas. SLCL currently trades at Rs32 at which price the market-cap is a ridiculous 0.05 times its annualised sales for the December quarter and 0.34 times its operating profit.The risk-reward ratio is hugely in favour of investing.

4)Scripscan:Ankur Drugs and Pharma Ltd

Story:Ankur is a company focusing only on contract manufacturing for large pharma companies like Ranbaxy, Cipla, Wockhardt, Glenmark and Nicholas Piramal. It has done this business well and, in the process, de-risked its business model. Last year, it signed a technology agreement with Labtec GmbH, Germany and Applied Pharma Research SA, Switzerland for manufacturing and marketing of ‘rapid film’ formulations – a new drug delivery system for oral drugs developed on the basis of transdermal-patch technology. Ankur is the first company to launch ‘rapid film’ in India and other countries and enjoys the exclusive manufacturing rights for it for 15 years in India, Bangladesh, Sri Lanka, Pakistan, Africa and other countries.Ankur continues on a strong growth path, though the December 2008 quarter has seen a slowdown in its growth rate. Its sales have been growing by an average 125% over the past five quarters and its operating profit was up 155% over the same period. For the December quarter, its sales grew 33% over the year-ago period but its operating profit was up only 5%. Operating margin was 13% during the December quarter, down by a few percentage points. Why are we re-visiting the stock? When we last wrote about the stock, it was trading at Rs259. From there, it has steadily lost ground in line with the broader market and currently trades at Rs82. At the current price, the stock is extremely attractive. Its market-cap is just 0.15 times its annualised December quarter sales and 0.99 times its annualised operating profit.

5)Scripscan:Allcargo Global Logistics Ltd

Story:When the business cycle is on an upswing, one of the biggest beneficiaries is transportation and logistics. Strong linkages of this sector with every kind of economic activity pushed up the demand for freight forwarding and containers business. Unfortunately, we have just come off a boom period and are still some time away from the next upcycle. A synchronised global slowdown has led to manufacturers cutting down their production and shrinking trade. This obviously means a bleak future for companies in the transport and logistics sector for the medium term. However, not all logistics companies are the same. Allcargo Global Logistics Ltd (ACGL) is growing through various subsidiaries and in segments that have less competition. ACGL operates in seven key areas of the logistics business including multi-modal transport, container freight stations, project and ODC cargo handling, airfreight, transport logistics, equipment hiring and oil rig & supply vessels management. Its multi-modal transport operations contribute to 66% of revenues and 29% of profits; 29% of its revenues comes from container freight station operations which contribute 61% of its profits. Equipment hiring business is yet to contribute much – 9% of revenues and 10% of profits.The key point about ACGL is that it is a leading LCL (less-than-container-load) consolidator – one of its most significant advantages. It is insulated from the slowdown affecting container services. As an LCL consolidator, the company aggregates small cargo loads from various destinations and delivers them across the globe. This ensures a steady business and better capacity utilisation even during a slowdown. This is evident in the company’s growth for the September and December quarters. Its consolidated operational revenue for the September quarter was Rs632 crore, up by a robust 56% over the corresponding year-ago period while operating profit went up to Rs71 crore, a rise of 174%. For the December quarter, its revenue was up 38% over the corresponding period last year – to Rs638 crore – while operating profit almost doubled to Rs57 crore from Rs29 crore during the same period. ACGL’s main strength comes from its global subsidiaries which are major contributors to turnover and profits. On a stand-alone basis, the company’s revenues for the September quarter were Rs138 crore (up 77%) while, for the December quarter, revenues rose by 65% over the same period last year – to Rs141 crore. Its operating profit for the September quarter was Rs42 crore (up 188%) and for the December quarter, it was up 109% at Rs35 crore.Its long-term appeal has got Blackstone, one of the world’s largest private equity companies, acquiring 10.38% stake in the company last year. With a strong footing in the logistics business, ACGL is a fairly good bet in these volatile times. Play for the long term.


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