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Monday, July 20, 2009

Chettinad Cement Corporation and Super Sales India and SRF Ltd:Future growth prospects and outlook,buy/hold or sell?

1)Scripscan:Chettinad Cement Corporation Ltd

Story:Chettinad Cement, a regional player based in the south, sells cement under various brands including Pavithram, Chettinad Royal Grade 53, Chettinad Grade 43, Chettinad PPC and Sulphur Resistant Cement. The company owns limestone mines located within a reasonable distance of its manufacturing locations enabling it to keep its costs low. In addition to manufacturing ordinary cement, the company has manufacturing capacity of 30 cubic metres per hour of ready mix concrete (RMC).Another factor contributing to the company’s lower costs and higher margins is its 15MW captive power plant.Rising product prices have also enabled the company to improve its margins which averaged at 34% in the past five quarters. Is the stock cheap? In fact, am surprised at how cheap it is. A fast-growing company at a reasonable valuation.The promoters completed a buyback of the stock in December 2007.This has put more than 90% of the stock in their control.With huge accumulated reserves, a bonus cannot be ruled out.A good solid cement bet to own.

2)Scripscan:Super Sales India Ltd

Story:Here is an odd one with high RoE and a reasonable valuation. It is a textile machinery dealer. Super Sales India (SSIL) operates as an agency for textile machinery manufacturers along with separate divisions for textiles and wind mills.The textiles machinery agency business has done well, thanks to a rising demand from textile mills. The expectation of higher sales following the end of the quota regime in textiles and garments led many Indian mills to embark on expansion.This was misplaced and the mills are not doing well. But, that has not dented the fundamentals of Super Sales which also services overseas markets. An equally interesting part of the business is the agency commission on CNC machine-tools. A strong demand from auto, auto-ancillary and engineering industries has contributed to the robust growth of this company. In another business line, SSIL purchased 75 wind mills in FY07 which generate almost 2.63 crore units of power.This is one area where SSIL is likely to do well; power generation is suddenly on everybody’s radar and income from wind power is tax-free. SSIL is, of course, part of the family that controls Lakshmi Machinery Works (LMW). It has an investment in LMW too which at present prices of lmw should come much higher to the presnet market price of super sales.A safe bet to buy at declines.

3)Scripscan:SRF Ltd

Story:SRF is into industrial textiles, refrigerant gases, packaging films and pharma intermediates. With seven production units in India and one in Dubai, its export market spans 60 countries. It is a leader in the nylon tyre-cord business.It has improved its margins which currently average 27%. The stock is not expensive either.SRF is presently is near to completion of its two projects – one for setting up the second line of biaxially oriented polyester (BOPET) films with a capacity of 27,000 tonnes, and the second for setting up a 15MW wind energy project in Tamil Nadu. The company seems to be betting big on the packaging films business which is growing at around 25% a year. Post-expansion, SRF would have a total capacity to manufacture 55,000 million tonnes of BOPET film a year.

4)Scripscan:Nagarjuna Agrichem Ltd

Story:Another company from the farm sector which combines a high RoE and reasonable valuation is Nagarjuna Agrichem. Nagarjuna manufactures a comprehensive range of pesticides and formulations and also does custom manufacture of fine chemicals. The company has the capacity to manufacture 10 million litres of liquid, 3,600 tonnes of wettable powders and 10,000 tonnes of granules a year of various products which include insecticides, fungicides and herbicides. Its market spans the entire Indian subcontinent as well as Europe, the Middle East, Japan, USA, Australia and Africa. Does all this get reflected in its fundamentals? Margins have averaged a decent 14% over these five years. Most importantly, Nagarjuna is a very efficient user of capital. Its RoE has averaged 41.27% over the past three years. Its recent performance has not been great which is why the stock is stagnating. The company has, however, maintained its operating margins . The stock is certainly reasonably valued and looks to be a good buy.

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