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Thursday, June 4, 2009

JRG Securities,Maithan Alloys Ltd,Saboo Sodium Chloro and Sagar Cements Ltd:Future growth prospects and outlook,buy/hold/sell?news,result and analysis

1)scripscan:JRG Securities Ltd

Story:A column on a wannabe regional financial services company? Tch. Now that would have been my reaction even a few weeks ago but time-even in zip mode-can humble.So here is my case. Geojit Financial Services reported a profit after tax of Rs 59.90 crore on an equity of Rs 20.90 crore (Rs 1 face value) for 2007-8. Everyone, including my mother-in-law, knows that if the national industry leader is expensive, buy the regional proxy; if the regional proxy is expensive, buy the alter ego.And so it is with JRG Securities. Take a look at the quarter-to-quarter numbers for 2007-8 and you might shrink. The company reported a profit before tax of Rs 9 crore on an equity of Rs 12.79 crore for the first nine months of 2007-8. Then came a drastic downfall with the company reporting a pre-tax loss of Rs 78 lakh in the last quarter.Any sane analyst would defer judgments until the company announces its first quarter results for 2008-9. I am not; I am sticking my neck out for some good (in my opinion) reasons:* The erstwhile management sold out to Barings Private Equity Partners.* Barings Private Equity Partners is headed by Rahul Bhasin; highly agreeable, razor sharp, always smiling; turns out he was part of a two-man team that kissed BFL Software before it turned into a handsome prince that was later merged with Mphasis and bought over by Electronic Data Systems Corp; it also appears that Bhasin and his man Friday bought into Jyothy Laboratories, nursed it through relative obscurity before the big time and the IPO. So if you believe in backing managements by buying their stock, then you have some competent people running this show.* What proof? It appears that within the first 60 days of changing the name plates, the new management has already rolled out a new insurance business line, recruited 700 people, relocated them to Kochi and written off Rs 5.56 crore in cleaning up the act (and balance sheet).* The company's business model revolves not just around the good old business of financial services that every one claims to be doing such an excellent job of providing, but financial services for the bottom of India's financial pyramid.What better place to start than Kerala, which is really an extension of West Asia in India on the financial parameter and the developed West when you considerliteracy.At some point, the rationalist notes that JRG's equity will increase to Rs 38.16 crore after the last warrant has been converted. But the optimist argues that JRG will make reasonable money even in 2008-9. The rationalist says that the take-off might take some years; the optimist insists that Barings Private Equity Partners is better off at enhancing value from a low-profit, low-PE reality if only you just have the patience to forget that you own the stock…. until one morning you find yourself rich.

2)scripscan:Maithan Alloys Ltd

Story:One way to pick stocks is to track a turnaround sector and gun for the most visible player. The other is to track a turnaround sector and identify the most underexposed proxy.The vigorous turnaround of the ferro alloys sector has highlighted the usual suspects: the Navbharats, the VBC Ferros, the Facors and the Rohit Ferro-techs. The unlikely underdog is clearly Maithan Alloys.Maithan what? Precisely. The company has been low on profile but high on achievement. Consider the numbers: turnover of Rs 378.45 crore, EBITDA of Rs 76.20 crore and net profit of Rs 36.55 crore in 2007-8. You can’t compare this with retrospective numbers as I can’t locate any records on the BSE website.The suspicious old bean is working overtime. How did the improvement happen? These are the reasons:Increase in ferro-manganese realisations from Rs 50-80 per kg in 2006-7 to Rs 80-120 per kg in 2007-8.Increase in installed capacity from 25 MVA to 49 MVA (corresponding to an approximate increase in production capacity from 48,000 TPA to 90,000 TPA based on a specific product mix).Increase in plant efficiency to 95%; industry average is around 80%.Increase in proportion of exports from 25% of sales in 2006-7 to 65% in 2007-8; retained its position as the only exporter (reportedly) of ferromanganese and silico-manganese alloys from India to Japan.Competent specialisation in the manufacture of niche ferro alloy products (ferro-manganese and ferro-silicon) through in-house research, resulting in value addition.Proximity to ore on the one hand and port (Haldia) on the other.Stable power cost of Rs 2.90 a unit from DVC.And this is why I like the company going ahead:Maithan has a manganese ore mine on its books. It is awaiting forest clearances and expects to bring it into operational play in 2009-10, extending its value chain.The company is expanding its capacity by 15 MVA and 15 MW during 2008-9.The company is part of a larger group engaged in the manufacture of ferro alloys (a small governance issue here), which enables it to competitively acquire raw materials.It is expecting an increase in exports to 65% of revenues in 2008-9 and 75% in 2009-10 with corresponding value addition.There has been a sustained increase in ferro-manganese realisations during the current financial year. Maithan claims to have posted revenues of Rs 100 crore during the first two months of 2008-9, raising prospects of annualised revenues of Rs 600 crore (provided there is no reversal in the price or demand trends). The company reported an EBITDA margin of 20% for 2007-8 and given the prevailing realisations it would not be unreasonable to expect a 500 basis point increase (provided raw materials do not poop the party). Equity Rs 9.70 crore.Get busy with the calculator.

3)scripscan:Saboo Sodium Chloro Ltd

Story:A foods and hospitality play at a deep discount to its net asset value. That is my case for Saboo Sodium Chloro, a low-profile Jaipur-based company that is likely to post fatter cheques to shareholders. Prime facie, this is what most shareholders will find:Saboo Sodium is engaged in the production of table salt; the company is also engaged in a hotel project in Jaisalmer and a ropeway-cum-property development project in Jaipur.Margins in the company?s table salt business have risen in the last four sequential quarters: -36% to 34% to 38% to 44% even as the business is still scaling in the conventional sense (top line of Rs 2.5 crore in the October-December quarter of 2007)The company reported a post-tax profit of Rs 2.75 crore in the first three quarters of 2007-8 with a particularly weak third quarter (profit after tax, PAT, Rs 94 lakh)I intend to track this stock for the following reasons:The salt business requires a challenging act between visibility,distribution and capex; overdo one and you are history. Saboo Sodium has a fair record; its Surya and Tota brands are the No. 2 (behind Tata Salt) in most of north India and a leader in Rajasthan.• The salt throughput will rise significantly in the next 12 months following investments in the Nawa factory (3 lakh tonne per annum) and greenfield outlays in Gandhinagar and Tuticorin (2.5 lakh tonne per annum each)• The company is playing an interesting incubatory role, growing its hotel and realty development projects out of accruals with a view to enriching corporate value.So what are these hotel and realty development plays?a) The acquisition of 75 acre in Jaisalmer to build a 300-room hotel. Project cost Rs 15 crore.b) The commissioning of a build-operate-transfer (BOT) ropeway between Jal Mahal and Amerkot in Jaipur with the incentive of leveraging associated real estate development, advertising spots and retail (in collaboration with a ropeways partner, Saboo Sodium holding 75% stake in a joint venture company). Project cost Rs 30 crore.A couple of immediate questions: is this a probable overextension considering that profit for the first nine months was but a fraction? Does the management possess the managerial bandwidth to execute?The management is optimistic of a PAT of Rs 4.5 crore for 2007-8 and twice this number in 2008-9. This cash flow will hypothetically be adequate to fund the staggered requirements of the salt expansion and the other two projects.Two big numbers to chew on: the prospect of overall revenues of around Rs 90 crore in 2009-10 at uncompromised margins across all three businesses and the leased Jaipur property (60 years) alone being valued at Rs 250 crore.Compare with a market capitalisaton of less than Rs 35 crore (based on fully diluted equity). Spot the opportunity?

4)scripscan:Rohit Ferro Tech Ltd

Story:We've heard of steel companies integrating backwards into ore, alloys and power; this one's about a ferro alloy company (Rohit Ferro-Tech) intending to move backwards into chrome ore and power on the one hand and forward into stainless steel on the other.How? Ferro chrome is riding an unprecedented stainless steel rebound; stainless steel demand is responding positively to a rising standard of living; improved standard of living is largely coming out of a liberalising India and China.Rohit Ferro is in the right place at the right time. Its consolidated ferro alloys (high carbon ferro chrome, ferro manganese and silico manganese) capacity of 1,80,000 tonne per annum went on stream in November 2007; production is expected to climb from 1,10,000 metric tonne in 2007-8 to 1,80,000 metric tonne in 2008-9; revenue is expected to strengthen from Rs 550 crore to Rs 800 crore during the period-at higher margins should the higher realisations sustain.These factors make the company an interesting stock: power tariff of under Rs 2 per unit in Bengal, profits from the Bishnupur plant 100% exempt for five years, the company enjoys a chrome ore advantage by virtue of being located in a chrome ore rich region (along the richest and largest in the world) and the export of chrome ore has been restricted by the government resulting in input cost control.It intends to commission a 110 MW power plant by 2009-10, keeping power cost to below Rs 2 a unit (as against Rs 3 a unit in Orissa today)It intends to acquire chrome ore properties globally (where they would be cheaper compared to India)It intends to manufacture stainless steel.A great buy at dips.

5)scripscan:Sagar Cements Ltd

Story:Sagar has now embarked on another challenging restructuring−to enhance capacity to 2.5 million TPA starting June 2008. To what extent will this expansion enable Sagar to rewire its DNA?Look at the numbers:The prevailing cost per installed tonne of grinding in the cement industry is around $60-75; Sagar expects to complete it for $35 through aggressive negotiation, utilities leverage and equipment reuse.Sagar has a cement plant consultancy, which is helping it to disaggregate plant modules, buy competitively and aggregate them without compromising quality or operational efficiency.Considering that Sagar has already done this for a number of cement companies, most of the parameters are no longer challenging for the company including 75 units of power per tonne of cement manufactured, ranking favourably with the industry?s best standard. Its loading of nearly seven tonnes per cubic metre of kiln capacity is probably among the best benchmark in the world.The incremental 1.9 million TPA of cement capacity is reportedly being commissioned for Rs 300 crore, a third of the cost being incurred by industry competitors.Despite this expansion, the company?s debt-equity ratio is a creditable 1.25 following financial closure.What makes Sagar interesting is that its fully diluted equity will be no more than Rs 14 crore after the 2.5 million TPA have gone on stream at the end of the first quarter of 2008-9.Perhaps it is this projected equitycapacity ratio as well as strong implementation skills that Blackstone evaluated when it decided to acquire shares in the company at Rs 190 each when the prevailing market price was Rs 70 a share.There is another point: the Sagar management indicates aggressive expansions after it has successfully commissioned its next phase, expecting to emerge as a 10-million TPA company in the next few years without bleeding its equity beyond Rs 20 crore.Should the company keep to its implementation schedule, this is one company whose market capitalisation is probably below its projected EBITDA a few years down the road.A great buy for long term perspective.

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