14th Motilal Oswal Wealth Creation Study : Winner Categories & Category Winners

The 14th Motilal Oswal Wealth Creation Study was held on 17th Dec -2009. Mr. Raamdeo Agrawal, Managing Director of Motilal Oswal Group, commissions an Annual Wealth Creation Study every consecutive year. The Motilal Oswal 14th Annual Wealth Creation Study (2004-09) is divided into three parts i.e. Wealth Creation Theme: Winner Categories + Category Winners = Formula for Wealth Creation in the NTD Era, The Wealth Creation Study Findings & Market Outlook.

Wealth Creation Study findings analyzes the top 100 wealth creating companies during the period 2004-09. Wealth created is calculated as change in the market cap of companies between 2003 and 2009, duly adjusted for corporate events such as mergers, de-mergers, fresh issuance of capital, buyback, etc.

Reliance Industries emerged as the biggest wealth creator for the third time in a row. It created 1514 billion RS worth of wealth contributing 15.6% of total wealth created in FY09. Unitech was the Fastest Wealth Creator in FY09, for the second time in a row. Its 5-year stock price CAGR is a staggering 122%. Five companies - HDFC, Sun Pharma, Reliance Inds, Hero Honda and Infosys - featured among the top 100 wealth creators in each of the last 10 years. HDFC was ranked as the most consistent by virtue of its 10-year price CAGR being the highest.

A Winning Formula For Wealth Creation was the theme for this year's wealth creation study

A blend of Categories benefiting from India's Next Trillion Dollar GDP opportunity & their Scalability was the formula for Winner Categories. The formula used for the winning investments was the combination of the category winners & the respective reasonable valuation. The formula for category winners was the combination of the winner categories, the entry barriers & the great management. A combination of the Winner Categories & the Category Winners was the most important recipe for the Wealth Creation Study.

Winner Categories: India's NTD Era will see a huge boom in consumption and savings/investment, which will throw up several Winner Categories i.e. those which grow at over 1.5x GDP growth rate, and are consolidated in nature. The study identifies 21 Winner Categories which are Finance - Credit rating, Finance - Housing, Engineering - Turnkey, Alcoholic beverages, Auto - 2 - wheelers, Finance - Credit rating, Auto - Cars & SUVs , Auto - Tractors, Capital Goods - Power equipment, Construction, , Finance -Banks & Private sector, Finance - Banks & Public sector, Finance - Brokerages, FMCG - Personal Care, FMCG - Processed Food, Gas distribution, Infrastructure, Insurance, Media - Entertainment , Real Estate, Retailing , Telecom.

Category Winners: These are companies from Winner Categories, which possess high Entry Barriers and great managements. Being able to do what rivals cannot is the definition of competitive advantage. Entry Barriers is a simpler term for sustainable competitive advantage - The existence of barriers to entry means that incumbent firms are able to do what potential rivals cannot. Great management is one which successfully defends or even increases Entry Barriers and manages growth at least in line with category.

Winning investments: Significant wealth was created over the long term by Category Winners bought at reasonable (not necessarily cheap) valuation. The model portfolio constructed in this study for the NTD Era was based on the above principles & it would have outperformed the markets if purchased any time during the last five years. The category winner in Auto (2 wheelers) was Hero Honda, Auto (Cars & SUVs) was Maruti Suzuki, Auto (Cars & UVs/tractors) was Mahindra & Mahindra, Capital Goods (Power equipment) was BHEL.

The category winner in Finance (Housing) was HDFC, FMCG (Personal Care) was Dabur India, FMCG (Processed food) was Nestle India, Engineering (Turnkey) was Larsen and Toubro, Finance (Banks & Private Sector) was HDFC Bank, Finance (Banks & Public Sector) was SBI, Infrastructure was Mundra Port, Media (Entertainment) was Sun TV, Retailing was Pantaloon Retail & Telecom was Bharti Airtel, Finance (Credit rating) was CRISIL.

It can be concluded that the NTD Era will be marked by sustained boom in investment, discretionary spend, and savings. Winner Categories and Category Winners will enjoy exponential growth in profits. Category Winners bought at reasonable valuation will create significant wealth over the long term.

Use correction as opportunity to buy: Analysts

Indian stocks slid for the sixth consecutive trading day on Wednesday tracking weak Asian and European cues amid global nervousness over US President Barack Obama’s bank reform plans and monetary policy tightening in China. The strengthening US dollar, perceived a safe haven for risk-averse investors, added to the woes of risk assets like equities.

Indices saw a major cut and India’s benchmark index, the National Stock Exchange’s 50-share Nifty, plummeted over 150 points to end the day at 4,853, its worst single-day fall since August 2009. The markets also recorded their highest volumes ever, in part also because of futures and options expiry on Thursday.

“The trend turned negative once the Nifty broke the 5,200 level,” said Technical Analyst Sudarshan Sukhani. “Short-term traders are advised stay on the sidelines and be patient. They will get better prices.”

Fundamental analyst Satish Betadpur, Managing Director of IIR Group PLC, said investors should “let the dust over the Obama and China stories settle down before coming in to buy”. “Until that settles, no matter how good earnings are in our part of the world, markets are going to be weak,” he said.

“The market had run up too fast,” said Rajen Shah of Angel Broking. “We recently cautioned our clients to book about 25% of their profits.”

‘Valuations are a bit more comfortable’

Betadpur of IIR Group said, as a result of the correction, select large-cap stocks were now starting to look attractive.

The Nifty has shed 421 points in six trading sessions, a fall of about 8%.

Betadpur recommended investors shift from mid-cap stocks — considered high-beta — to frontliners as the valuation gap between them was narrowing. “There are large-caps stocks in pockets like infrastructure and banks that we would like to own,” he said.

In the two sectors, investors could look at JP Associates and Axis Bank, he said. “JP Associates has posted reasonable earnings but has corrected for no fundamental reason. If you believe in the infrastructure space, that is the company to own. Similarly, Axis Bank is well-run bank but is correcting along with the others,” he said, “Maybe we don’t enter a full position right away but we definitely start building positions in those names.”

Asked his view on construction and engineering giant Larsen & Toubro, which has seen a sharp sell-off after posting dismal third-quarter results — the company attributed it to execution delays but said its order book was intact — Betadpur said, “It is a stellar company, which has had a little bit of a hiccup. If it corrects a little more, we get involved in that space.” He added he was positive on the overall infrastructure sector.

Shah of Angel Broking, however, said the better bargains were still in the mid-cap space. “There are several companies that posted exceptional December results and which are quoting at 4-5 price-to-earnings (P/E) ratios.”

The Sensex — currently at about 16,200 — could go down to 15,000 levels, Shah said, but recommended investors to buy companies if they had conviction in their fundamentals.

“If you feel this is a stock, which I like at this level, just go ahead and buy it. It could go down 10% from here as well but if it’s a good company with good fundamentals, it’s going to be rewarding.”

14th Motilal Oswal Wealth Creation Study

Reliance Industries, Unitech, HDFC - biggest, fastest, most consistent wealth creators 'Winner Categories + Category Winners' formula unveiled to find wealth creators

Every year, Mr Raamdeo Agrawal, Managing Director of Motilal Oswal Group, commissions an Annual Wealth Creation Study. The Motilal Oswal 14th Annual Wealth Creation Study (2004-09) is divided into three parts -

1. Wealth Creation Study findings
2. Winner Categories + Category Winners = Formula for Wealth Creation in the NTD Era
3. Market Outlook

Part 1: Wealth Creation Study findings

Part 1 analyzes the top 100 wealth creating companies during the period 2004-09. (Wealth created is calculated as change in the market cap of companies between 2003 and 2009, duly adjusted for corporate events such as mergers, de-mergers, fresh issuance of capital, buyback, etc.)

The key highlights of this section are:

• Reliance Industries has emerged as the biggest wealth creator for the third time in a row. It has created 1514 billion RS worth of wealth contributing 15.6% of total wealth created in FY09.
• Unitech is the Fastest Wealth Creator during 2004-09, for the second time in a row. Its 5-year stock price CAGR is a staggering 122%
• Five companies - HDFC, Sun Pharma, Reliance Inds, Hero Honda and Infosys - have featured among the top 100 wealth creators in each of the last 10 years. HDFC is ranked as the most consistent by virtue of its 10-year price CAGR being the highest.
• For the last six years, the biggest wealth creator in India has emerged from Oil & Gas - the first three years led by ONGC and next three by Reliance.
• This year, NMDC has the unique distinction of featuring in both the biggest and the fastest wealth creators list.
• This year, eight of the top 10 most consistent wealth creators are consumer-facing businesses with strong franchise.
• Comparing the performance of the top 100 Wealth Creating companies(Wealthex); over the entire period, the Wealthex outperformed the Sensex by 83%, Wealthex earnings CAGR was 24.2% compared to 18.8% for the Sensex and the Wealthex P/E was 16.3x, lower than 16.8x for the Sensex.
• Oil & Gas continues to be the largest wealth creating sector. However, over the last five years, its share has fallen from 43% of wealth created to 22%, clearly indicating value cmigration to sectors such as Telecom and FMCG. Telecom's rising share of wealth created can be attributed to superior PAT CAGR of 62% over the last 5 years. On the other hand, FMCG PAT CAGR is a muted 14%; however, the sector has seen a valuation re-rating, more so given the flight to safety phenomenon during the market downturn in FY09.
• FY04-09 marks a semblance of the MNC resurgence, with number of top wealth creating companies more than doubling from 10 to 23 and share of wealth created increasing from 7% to 14%. A major factor for this resurgence is FMCG, led by ITC, Hindustan Unilever and Nestle.
• 74 of the top 100 wealth creating companies had a base market cap of less than Rs50b in 2004.
• A sure shot formula for multi-baggers is -

- P/E of less than 10x

- Price/Book of less than 1x

- Price/Sales of 1x or less

- Payback ratio of 1x or less.

• Of the top 100 wealth creators, 66 were companies which enjoyed entry barriers. These companies accounted for a disproportionate 86% share of the total wealth created.

Part 2: Winner Categories + Category Winners: Formula for Wealth Creation

The theme of this year's study outlines a winning formula for wealth creation

1. Winner Categories = Categories benefiting from India's Next Trillion Dollar GDP opportunity + Scalability

2. Category Winners = Winner Categories + Entry Barriers + Great management

3. Winning investments = Category Winners + Reasonable valuation

Winner Categories: India's NTD Era will see a huge boom in consumption and savings/investment, which will throw up several Winner Categories i.e. those which grow at over 1.5x GDP growth rate, and are consolidated in nature. The study identifies 21 Winner Categories:

1. Alcoholic beverages 12. Finance - Housing
2. Auto - 2 wheelers 13. FMCG - Personal Care
3. Auto - Cars & UVs 14. FMCG - Processed Food
4. Auto - Tractors 15. Gas distribution
5. Capital Goods - Power equipment 16. Infrastructure
6. Construction 17. Insurance
7. Engineering - Turnkey 18. Media - Entertainment
8. Finance - Banks, Private Sector 19. Real Estate
9. Finance - Banks, Public Sector 20. Retailing
10. Finance - Brokerages 21. Telecom
11. Finance - Credit rating

Category Winners: These are companies from Winner Categories, which have high Entry Barriers and great managements.

Winning investments: Category Winners bought at reasonable (not necessarily cheap) valuation create significant wealth over the long term. The study constructs a model portfolio for the NTD Era, based on the above principles.

Model portfolio for India's NTD Era

1. • Auto - 2 wheelers : Hero Honda
   • Auto - Cars & UVs: Maruti Suzuki
   • Auto - Cars & UVs/tractors: Mahindra & Mahindra
   • Capital Goods - Power equipment: BHEL
   • Engineering - Turnkey: Larsen and Toubro
   • Finance - Banks, Private Sector: HDFC Bank
   • Finance - Banks, Public Sector: SBI
   • Finance - Credit rating: CRISIL
   • Finance Housing: HDFC
   • FMCG Personal Care: Dabur India
   • FMCG Processed food: Nestle India
   • Infrastructure: Mundra Port
   • Media - Entertainment: Sun TV
   • Retailing: Pantaloon Retail
   • Telecom: Bharti Airtel

Part 3: Market Outlook

• Corporate profit to GDP has bottomed out and should hit new highs in the next 4-5 years on the back of sustained economic performance.
• Sensex EPS: Expect 15-20% growth beyond FY11; but no significant P/E re-rating from current levels.
• Despite expected Sensex EPS growth of 25%+ in FY11, markets are unlikely to cross earlier peak of 21,000 in next 12 months.
• Inflation concerns, strong pipeline of issuances and current rich valuation will cap significant market upmove, despite fairly healthy earnings outlook.

Penny-Wise: Investment tips to cut transaction costs

Here are a few tips on where you should invest in order to reduce your transaction costs.

Art: It’s a long-term and illiquid investment. You incur huge transaction costs both while buying and selling. We recommend that you take the direct route in this one. If you can buy straight from the artist, nothing like it. When you can’t, get yourself a curator to help you select the artist. Galleries typically charge a mark-up of 25-30% on each painting. Curators can bargain it down for you.

Skip art funds. The costs are much higher and you don’t know what you are paying for. You don’t know how they churn their portfolios either. There’s too much secrecy on that front. This is an asset class where you can get killed with one wrong move.

Property: Owning physical property is complicated and expensive. The registration fee and stamp duty can add about 10% to your purchase cost in most states and you cannot recover that when you sell.

Co-operative housing societies and builders also charge transfer fees when you sell a property, points out chartered accountant Gautam Nayak. The legal limit for transfer fees is Rs 25,000 but one of our friends just paid more than Rs 3 lakh for selling a one-bedroom house.

Keeping a property locked is a sure way to lose money. You lose the rent and pay for the maintenance. The best way to invest in this asset class is through real estate mutual funds. As of now, there are a few venture capital funds (ICICI and HDFC run a couple of them) but they are illiquid. When mutual funds make a big entry in India, don’t miss them.

Gold: Exchange traded funds are the way to go for the shiny metal. If you buy physical gold, you have to worry about the cost of storage, wealth tax, etc. If you have gold in hand then you can’t even trade it on a regular basis. With ETFs, fees are reasonable. They are liquid and backed by real gold.

Fixed Income: If you are the kind that wants to flip bonds within a year, then mutual funds are the way to go. Due to the favourable tax treatment given to MFs, they are a much cheaper route for the retail investor than buying bonds directly or investing in fixed deposits. If you are investing for less than a year you should go in for the dividend distribution scheme because dividends are taxed at 14 percent. If you sell bonds on the open market, the returns are taxed at 33 percent.

Commodities: Commodities involve more frequent transactions and hence higher costs. One way to play the commodities market is to buy shares in companies that will benefit from them. For instance, if you think the price of aluminium will rise, you can invest in Hindalco. But if you do want to invest
directly in commodities, make sure you get a discount in the brokerage depending on the volume of your trade. Financial planners can help you bargain down the rate.

Equity: Shop for the lowest brokerage costs. Big banks and well-known brokerages charge a premium for their brand. Leaders like ICICIDirect levy the highest brokerage for delivery trades ranging between 0.7% to 0.8%. A company like Motilal Oswal or Geojit, on the other hand, charges 0.3%
percent to 0.5% for the same. You can have multiple demat accounts. Use that leeway.

The Good Investor’s Checklist

Operating Cash Flow: A company can report a net profit without generating a net cash inflow. But cash is the oxygen of any business. Wide fluctuations or sustained negative cash flows are an indicator of trouble.

Dividends: A profit-making company must decide between funding its growth and rewarding its shareholders. The ability to pay dividends after spending for expansion marks a good company. Divide the payout by the share price to get the dividend yield.

Price to Earnings Ratio: P/E is the most popular ratio among investors. But use it only as one of many inputs. Compare the P/E of your company with that of its competitors.

Price-to-Book Value: It compares a company’s market price with the value of its tangible assets. Banks typically use this ratio. However, the ratio is not useful for companies with large intangible assets like patents and brands.

Debt-Equity Ratio: Each industry has its peculiar need for debt. A software firm can get along without borrowing, but an infrastructure company must borrow heavily. Understand the appropriate level for the industry.

Interest Coverage Ratio: The company’s ability to pay the interest on its borrowings is key to its solvency. Divide the Earnings Before Interest and Tax (EBIT) by the interest outgo (both the numbers are found in the profit & loss account) to get the ratio.

Return Ratios: A stock should earn you more than fixed deposit rates. Look for Return on Net Worth (earnings as a proportion of total shareholders’ funds) and Return of Capital Employed (earnings as a proportion of total capital including debt).

Satish Betadpur's under Rs 50 stock picks

City Union Bank:

This is a small bank in Chennai that lends to SME segment and they give working capital loans to the SME segment. They have just finished their fund raising, so they have very high capital adequacy ratio, Tier I is 13% and valuations are very attractive at the price to book of 1.2, very high ROE (Return On Equity) and no NPA (Non-Performing Assets). So this is a clean bank that is right now geared up for growth. As credit off take is going to pick up, we are all expecting that to happen this quarter and this year, the bank should show tremendous earnings growth. So this is a very good bank, clean bank to pick up and own for the long term.

On Hilton Metal Forging:

This is a stock that was listed in 2007. They listed it at Rs 70 at that point. Today, it is at Rs 22. This is a stock that is geared towards oil and gas and petrochemical industry. They make pipe fittings and flanges for other industry. So as oil and gas and petrochemicals start growing, this stock will start doing well. They fell through hard times in the last couple of years after listing because the economy went weak and oil and gas industry also fell under hard times as oil prices fell. If you look at this stock, they can do a Rs 4 EPS (earnings per share) in 2011 very easily, that is a very conservative estimate. So at that price you are getting this stock at a P/E of 5-6. So it is a small cap name, good fundamentals and attractive valuations. So I think it is a good clean story, no management issues and stuff like that, so this is a story about this stock.

On Himatsingka

This again is a complete turnaround story. They did what most companies in India did in 2007, which was go by brands around the world and expand aggressively and then the recession hit, 2008-2009 has been tough years for them. Now, they are coming out of all of this and capacity utilization for their bed and linen factory is almost at 100%. They have also built captive power plants, so that will help improve margins. Their order book is very strong and they are high in bed linen silk manufacturer. So its a turnaround story that has come down from a Rs 140 level to now Rs 42-43. This can again easily have an earnings of about Rs 5 in 2011, so you are getting it less than 10 P/E at this point so again a clean, long term investment story.

On Gammon Infra

Today, I think it has correcting a little, so for long term investor it is a good opportunities to buy. This is a company that is in the best sectors of infrastructure. We like infrastructure as it is and within infrastructure, they are in roads and ports. They are consolidating, they are holding in ports. Valuation again is pretty reasonable because by 2011, we can easily see them do Rs 2 EPS, this is conservative EPS estimates and at that level you are getting it at under around 10-12 times earnings. There is plenty of headroom for investors. If you do get it for a lower level definitely buy it, even today’s level it is very attractive for buying. I think this can easily hit Rs 30 very easily in the next few months or at the best in a year.

Ashish Chugh recommends promising sub Rs 50 stocks

Investment analyst Ashish Chugh is bullish on SSPDL, IFGL Refractories and Andhra Cement. He advises investors to buy into these sub Rs 50 stocks.

IFGL Refractories:
IFGL Refractories is currently trading at a price of about Rs 48-49. This is a refractory company based in Orissa. Besides the plant in Orissa, this company has got two major subsidiaries called Monocon International and Hofmann Ceramics. In total this company has got manufacturing operations in seven countries. Now, 2008-2009 was a difficult year for this company mainly because of the fact that the steel industry saw a meltdown and the steel industry biggest customers. As a result of which the second half of the company was not that good. The company suffered losses in the second half of 2008-2009.

In the first half of the current financial year company has achieved a profit of close to Rs 17 crore. We have been recommending the stock on CNBC-TV18 earlier also but what reinforces your liking for the stock is the recent interview, which the management of the company had on your channel about a few days back now. They mentioned that the second half of the current financial year can be substantially better than the first half. We also believe that the worst maybe over for the company.

The company, which had installed its expansion project at Kandla, has now restarted that project. That project will add about Rs 150 crore to the revenues and that will become operational in 2011 and besides this, the company also looking for more overseas acquisitions. Now because of the company’s organic and inorganic expansion projects, which are going on, company has the potential to become a significant player in the world refractory market over the next couple of years.

So at the current market cap of about Rs 150 crore and price-to-earning of about 4-5, we do not see too much of downside from these levels. At a PE multiple of 4-5 the stock looks undervalued.

Srinivasa Shipping and Property Development Limited or SSPDL:
SSPDL is a very interesting real estate company where the current market cap of the company is very small compared to the kind of projects this company is doing. SSPDL is basically a play on the realty market in South India. This company is executing projects in Chennai, Bangalore, Kerala, Hyderabad and Vizag. The company has recently completed one project called Alpha City in Chennai, which is an IT park and also part rented that project.

Incidentally, Alpha City project was nominated for the category of Best Commercial Property by CNBC-Awaaz Crisil Real Estate Award in 2008. Besides this, company is also doing some other projects called Chennai Central, which is a shopping mall covering an area of 1.27 lakh square feet in Chennai, construction of which is expected to commence shortly. Then it is doing Matrix Tower in Chennai, which is again an IT park of 2 lakh square feet. It is doing a project called Promenade on 10 acres in Chennai covering an area of 11 lakh square feet, which besides mall and office complex will also house Novotel and Ibis brand of hotels.

This company is doing Northwoods in Hyderabad on 42 acre land, which comprises of 200 villas. The company is doing Retreat, which is a 120 acre gated community in Hyderabad. Then Retreat project in Bangalore covers about 48 acres and is located at Devanahalli, which is close to a new airport and it is also doing Retreat in Kerala on an area of close to about 320 acres. Besides these real estate projects, the company has also taken building contracts.

The company has got close to Rs 100 crore of construction contracts for buildings. Major ones being TCG IT park valued at about 36 crore, NSIC office complex about Rs 25 crore and one more group housing project worth about Rs 18 crore.

Another interesting thing is that Indiareit Fund Advisors, which is a company promoted by Ajay Piramal group, has also invested in some of the projects of this company. So I believe that at the current market cap of Rs 40 crore and the current price of Rs 35 per share, I think this does not reflect the full potential of the company.

The expected sales revenues from these various projects can be many times more than the current market cap of the company. Of course, there could be concerns over the short-term, which we saw with the most real estate companies. So at the current price of about Rs 35 per share, I don’t see too much of downside from these levels and if all goes well with the company, the stock has the potential to be a multiplier in the years to come.

Andhra Cement:
We like Andhra Cement because of the capacity expansion, which is going in the company. This is a GP Goenka group company, which has got two cement plants with a total capacity of 1.4 million tonne per annum. In FY09, this company achieved a sales of close to Rs 370 crore, profit after tax (PAT) was about Rs 60 crore, which results in an EPS of about 4.5. At the current price of about Rs 28, stock is traded at a price to earning multiple of about 7.

Now this company is undertaking a capacity expansion, which will take its capacity from 1.4 to 3.5 million tonne per annum. The increased capacity is going onstream in the next couple of days – maybe next week as what GP Goenka mentioned in a recent interview with CNBC-TV18.

So you have a company which is available at a price to earning multiple of about 7 on the old capacity and with the new capacity going onstream next week, which is going to potentially add the turnover by 2.5 times since the capacity is going up from 1.4 to 3.5 million tonne per annum, I think at the current market cap of about Rs 350 crore and the current P/E of 7, the stock is undervalued.

Another thing is that promoters have been increasing their stake in the company through market purchases and there has been a lot of inter state transfer between the promoters also. So promoters also realize the potential of the company and heartening fact is that the promoter’s stake in the company is close to 75%. So over the next few years, there is potential for dilution.

I see Andhra Cement is one of those candidates where potentially since there is a lot of interest in the cement companies from foreign players, there could be some kind of a strategic investor coming into the company or maybe some majority stake being given to some potential investor. Andhra Cement maybe a fit case where those possibilities exist.

Fundamentally, also at a price to earnings multiple of 7 on 1.4 million tonne capacity, of course, earnings are going to grow up when the expanded capacity goes on-stream. So at Rs 28 again, this is a market where midcaps and smallcaps have run away quite a bit.

To look for a safe stock in this kind of a market is slightly difficult. Andhra Cement at Rs 28 looks to be a stock where the downside looks restricted even if the market falls. And since the earnings are going to rise in the coming years, there is scope for significant appreciation from these levels.

SP Tulsian's sub Rs 50 stocks to power your portfolio

SP Tulsian of sptulsian.com is bullish on Tourism Finance, Ugar Sugar and Donear Industries. He advises investors to buy into these sub Rs 50 stocks.

Donear Industries

Donear Industries is into textile and they have a very strong brand Donear Suitings for which Yuvraj Singh is the brand ambassador. The company has set up a new textile plant in Surat with an investment outlay of about Rs 220 crore for which they have gone for a borrowing of about Rs 120 crore. Prior to that it was a debt-free company and it has been doing quite. It had given bonuses in last five-years with a very high promoter stake of 90%, which the stock exchanges has asked them to reduce to 75%.

But since the Surat project of Rs 220 crore, which had gone onstream just six-months back, the company have been providing depreciation on the written down value method while all the listed companies are providing depreciation on the straight-line method. This is was because of the policy having adopted for written down value method. The depreciation burden has been quite high and that has resulted into the net loss.

If the company would have opted to provide depreciation on the straight-line method, there would have been net profit. If you see their H1 performance, they had a topline of close to Rs 115 crore in which Surat project has not contributed much – with a net loss of about Rs 5.80 crore and in this Rs 5.80 crore the depreciation element was at about Rs 17.5 crore. So if I take the cash profit element, the company had posted a cash profit of about Rs 11 crore for six-months on a equity of close to about Rs 10.40 crore.

The share has a face value of Rs 2 and now this Surat project will start contributing to the topline as well as to the bottomline. Maybe, I don’t know what would the logic will be, it may prevail upon the management to opt for the change in the depreciation policy and if they opt to do that – there would be a reversal of depreciation, which can result in a huge write back of the depreciation which can improve the bottomline.

But even if you take on a fundamental basis with a market cap of the company at about Rs 165 crore, as I said the debt is only to the extent of Rs120 crore – this company with an enterprise value of Rs 300 crore is ruling at a very low valuation. Their brand itself has been estimated in the past at about close to Rs 130-140 crore.

There is good upside. We have been seeing renewed interest coming in the textile stocks. I think if someone can take a call on this stock with six months view, one can expect at least 60% return from hereon.

Tourism Finance:

Tourism Finance is promoted by – one can call it a semi public sector undertaking (PSU) with IFCI holding 32% and 25% held by State Bank of India (SBI), Life Insurance Company (LIC) and four other insurance companies.

The company is into providing finance to tourism related projects. It has been giving a consistent performance. In fact this has not been in the news. If you look at FY09, they had an EPS of about Rs 3.6 which is likely to be maintained for FY10 as well.

The book value of this share at present is about Rs 37 and I think it is ruling at a price to book of 70% with a price of about Rs 26. We have seen all – whether it is small PSU banks or maybe financing or lending institutions to the power sector – have appreciated in the last six months by about 50-70%.

But I do not think that this has come into focus of analysts or maybe even investors. If somebody can take a call, I don’t think that there is any downside. The way we have seen a run up especially in stocks like LIC Housing and GIC Housing, this can also come on the radar.

IFCI holds a 32% stake and since IFCI is also regaining its health and again loaded with news, this could also be tagged along with the company or we may see a good restructuring or maybe even infusion of fresh funds to enlarge the level of activity.

If all those things can happen, I won’t be surprised if the company surpasses Rs 5 EPS for FY11. As I said, the book value is close to Rs 38 now which could rise to about Rs 42-43 by then. The stock has very good potential to appreciate by about 50-60% in the next six months.

Ugar Sugar:

Ugar Sugar has not participated in the run up for a simple reason that for September 2009, the company had posted a net loss. This has been scaring investors and keeping them away. The state with the most advantage in the sugar sector is Karnataka because there you have a recovery of 11.5-12% plus you are not seeing such a hue and cry for the sugarcane price as well.

All the mills, whether it is Ugar or Renuka Sugar are paying a price of about Rs 240-250 for a recovery of 11.5% which translates to an equivalent price with 10% recovery to about Rs 220.

Now this company has recently commissioned a new mill of 2,500 tonne in this season. The old mill at Ugar had a capacity of about 10,000 tcd. If you take any sugar mill in the country, I do not think that anyone will be able to exceed the production what they have done in the previous years because of the overall low production of sugar expected in the country.

However, this company is likely produce about 17 lakh bags of sugar for this season against 15.5 lakh in the previous year.

Apart from that they have 56 megawatt (MW) cogeneration capacity. Even the debt portion of the company is not very stiff. It is at about Rs 130-140 crore which has largely realized to finance the working capital. The December quarter results are likely to be quite good. The company should be able to post a profit after tax (PAT) of about Rs 36-40 crore on an equity of about Rs 11.25 crore, which is at present.

So once the results are out for the December quarter, we all know that even in the March quarter there will be more sweeteners because of the increase in prices and operation of the cogeneration plant. These two quarters can drastically change the view on the stock. I won’t be surprised if this stock reaches about Rs 35 maybe by April end in this year.

Ten success stories in unheard of sectors

Mick Jagger, the only surviving dinosaur from the Jurassic period, said that he became interested in cricket when he watched a young Dennis Lillee tear into bowl. Business is less a spectator sport and more a narrative. But how do you figure out who is the big story? Only a few entrepreneurs manage to make it big. Those manage to grow big create wealth for themselves, their shareholders, their employees and suppliers.

Most entrepreneurs in Forbes India’s “hidden gems” list fit the bill. They make their money in businesses as varied as coal tar pitch, cooling solutions, water desalination, building truck bodies and even water treatment. They overcome adversity. Most are unlisted companies who will go public some time. There are a few that are listed but they are still small and have growth left in their sails.

Perhaps the most critical task for us was identifying these companies. We decided to use a surrogate way. We decided to follow the moneymen. We pored over a list of 800 deals private equity companies had done over the last four years and looked for companies seeing a sharp rise in sales, profits and valuation.

Then we did the taste test. A few discreet calls to a few private equity investors that have made some serious money told us that the companies in our list were thought of highly. We applied a third hurdle. If there were more than one private equity investor in the company then that was one more thing in the favour of the company. Having identified the gems, we got Dun & Bradstreet to verify the financial numbers that companies were disclosing to us. Only when the numbers added up did we move ahead.

The list that emerged had one very interesting common feature. Except for three companies, Acme and ACB (India) and Firepro, other seven companies are actually old businesses that been refurbished through smart business model changes and passionate entrepreneurship. Almost 90% of the businesses in India are family-owned. Once they were thought of as middling companies who would disappear once the IIT-IIM crowd took to business. That has not happened. Instead, the family-owned businesses have gone out, picked up new technology, learnt to value professionals and experimented with business models. For instance, Himadri Chemicals and Cebbco are such companies. The great thing is that the gems in our list are scattered all across the country — from Jabalpur to Thrissur.

This is why it is great to see blue-blooded Wall Street firms understand and finance some of these old businesses. Ten years ago, Goldman Sachs would have financed an IT services firm. A company like Sudhir Gensets would have been dismissed as an old entity with a commoditised business. But today, Goldman has put money in Sudhir because it knows that the company serves a real need that is unlikely to disappear in a hurry.

ACB (INDIA)

Promoted by G.C. Mrig, Capt. Rudra Sindhu and Major Satya Sindhu; Washes coal to reduce its ash content helping power plants to become more efficient and eco-friendly.
Secret Sauce Seasoned team, favourable regulation and sustained
demand for coal.
Financial Dashboard In 2006, Warburg Pincus bought a 24 percent stake for Rs. 310 crore. Aryan plans an IPO this year to raise Rs. 1,000 crore. Warburg will sell 10 percent. Aryan Coal’s valuation now stands nearly seven times its 2006 level.
What the Smart Set Saw First mover advantage.
Guiding Light To go beyond coal-washing and expand power generation capacity.

In 1998, when Mrig and his two friends founded Aryan Coal Benefications Ltd, the annual production of coal in India stood at about 250 million tonnes. Indian coal typically has high ash content that keeps combustibility low and affects the efficiency of power generation equipment. Only 5 percent of the coal production in the country was “washed” to reduce the ash content and most saw no need for this extra expense.

So it was not surprising when Mrig, who had spent 40 years in the industry including as managing director of Bharat Coking Coal Ltd., found it tough to get orders for his new company. His friends even wrote him off, saying, “Aapne toh paisa duba diya,” (you have wasted your money).

That was then. Now annual mining has increased to about 450 million tonnes. The government has made it compulsory for power stations located 1,000 kilometres or more from mines to wash the coal. Given that four out of 10 power stations in India are located in such faraway locations, the scope for the coal-washing business has expanded.

ACB has 62 million tonnes of coal-washing capacity, nearly half of the 130 million tonnes capacity in the whole of the country.

Private equity watchers now think that Aryan might do for Warburg Pincus this year what Bharti did for it nine years ago. And both investments were made by Pulak Prasad, who has since started his own hedge fund Nalanda Capital. Just the way Prasad spotted Sunil Mittal’s execution he was able to see Mrig’s understanding of this industry and execution skills.

Most of ACB’s washeries are located very close to the coal fields and the transportation costs are low. The company has massive operating profit margins of 44 percent that the company makes. Crisil expects ACB to benefit from the increase in demand for washed coal and stringent prequalification requirements that restrict new players. So, its market share is not under threat in the foreseeable future.

ACB doesn’t waste the coal reject that remains after the washing either. It uses the material to runs some small power plants. With 4 million tonnes of coal reject coming free every year, this has become a very profitable way for ACB to dispose the waste.

Mrig says he got the idea to recycle the waste when he saw gold miners in South Africa going after dumped mines and the Chinese extracting most out of low-quality coal.

But now it wants to enter the big league. It plans to build a 1,200 MW power plant in Madhya Pradesh and a 1,100 MW plant in Chhattisgarh.


FIREPRO SYSTEMS

Founded by N.S. Narendra; Provides fire protection and security solutions
Secret Sauce Follows the integrated approach to make sure that the customer gets all the services under one roof. Went global early and now gets 25 percent of revenues from overseas.
Financial Dashboard AIG Investments (now PineBridge Investments) invested Rs. 50 crore in 2006 for 23 percent. Recently Standard Chartered PE invested Rs. 150 crore, at four times the valuation that Pinebridge invested at.
What the Smart Set Saw A company that looked and behaved like its IT peers but was catering to a faster growing construction industry.

N.R. Narayana Murthy probably doesn’t know N.S. Narendra though both of them attended the same college — Mysore’s National Institute of Engineering — but 20 years apart. The similarities don’t end there. Like Murthy, Narendra also founded his company in a small room with a capital of a little more than R.s 10,000 back in 1993. And very much like Infosys, today Firepro is a synonym for its industry - fire protection and security solutions.

And to do that, Narendra first focussed on project delivery to differentiate Firepro from the mom-and-pop companies that had come to dominate the market. So when Intel was developing a 500,000 square feet property in Bangalore and had a specific deadline to finish it, it chose Firepro. “This is important because about 35 percent of the business comes from repeat customers,” says Narendra.

But when the competition from multinational like Honeywell and Siemens increased, Narendra did what nobody else had done before. “We followed an integrated model from 2000. While others would specialise in security and automation or fire suppression system, we brought every service under one roof as technology was evolving. We even now work with IT companies like Cisco to provide network solutions like developing city surveillance system for Bangalore.”

And to make sure that he always had the edge, Narendra invested in people. Of the 1,500 employees, 80 percent are technically qualified. He even managed to lure people employed with international fire protection companies and information technology firms to work for him. And Narendra has been willing to pay for talent with salary packages for senior positions increasing five-fold within two years.

Firepro’s revenue have jumped from Rs. 20 crore in 2002 to Rs. 500 crore last year. A fourth of this revenue comes from international operations – another differentiator for Firepro. Next on his agenda — one on which Narendra has made “a certain amount of investment” (as he puts it) — is providing premium home automation solutions for high-end customers.

The initiative has also seen the company trying to transform itself from a business-to-business company to a business-to-consumer company. It has opened an outlet in Bangalore with plans for more in other cities.

The big question, of course, is whether the Indian market has evolved enough to demand expensive home-security solutions that involve using the remote control or a handset from anywhere in the world to monitor what is going on at one’s home? Narendra is willing to take the bet and so are his two investors – AIG and Standard Chartered PE.

by Prince Mathews Thomas


HIMADRI CHEMICAL

India’s largest maker of coal tar pitch, used in making aluminium and graphite. Founded by Kolkata-based Choudhary family. The second generation, led by Anurag Choudhary, has taken charge.
Secret Sauce Has the technology to convert even low quality tar into high quality coal tar pitch; has the scope to expand portfolio to 22 products from seven.
Financial Dashboard In 2008-09, revenue was $78 million, core profit margin was 38 percent.
What the Smart Set Saw “A quality product that is backed by robust customer service and technology expertise ,” says Vivek Chhachhi of CVCI, who says it was Himadri’s customers who helped spot and later recommended the company to the private equity major.
Guiding Light To become India’s largest ‘carbon corporation’.

It is easy to miss Himadri Chemicals’ plant in Singur, near Kolkata; being a lesser-known neighbour to the unfinished unit of Tata Motors’ Nano project. And even the few who did notice it, might not have guessed that what runs through a refinery-kind of network of pipes and storage tanks is coal tar.
Coal tar? Himadri Chemicals’ CEO Anurag Choudhary is used to the casual reaction from people. “Most think it is the tar used to make roads,” he says. But for Choudhary, coal tar is a multi-billion dollar opportunity that was first spotted by his father and three uncles back in 1987.

The main product made out of coal tar is coal tar pitch (CTP) that is used in making aluminium and graphite. “It was totally dominated by the plants of Steel Authority of India. But there was a 500 percent difference in the raw material price and selling price of CTP. We spotted the opportunity,” says Shyam Choudhary, Anurag’s father.

In 2007, Himadri unsuccessfully tried to take over Rutgers Chemicals, a Germany-based industry leader in CTP. But for Anurag, the whole experience was an eye-opener.

“Rutgers, a $1 billion-company, was making 22 products out of coal tar. We were making only two. So we decided to instead invest for organic growth,” he says.

Three years later, Himadri’s portfolio has expanded from two to seven products. “Almost 75 percent of coal tar pitch we make is used by aluminium companies, who are doubling their capacities in the next two years. We are also quadrupling our capacity and setting up another unit in China, the world’s largest market and maker of aluminium,” says Anurag.

ACME TLELPOWER
Manufactures “passive” infrastructure products like enclosures, air conditioners and power management units for telecom companies. Founded by Manoj Kumar Upadhyay, 39.
Secret Sauce Materials that cool electronic equipment using very little electricity
Financial Dashboard Net sales (for the 14 months to May 2009) was Rs.2,130 crore; Net profit was Rs.505 crore; five year CAGR of 128 percent for sales and 122 percent for profit; Rs.300 crore cash flow generated from operating activities in a 14 month period; raised Rs.197 crore from DB International, Earthstone Holdings and Kotak Mahindra Capital in 2007 by selling 1.66 percent in 2007 and another Rs.400 crore from Monsoon India Inflection Fund and Jackson Heights Investments in 2008 by selling 3.35 percent. Acme’s valuation in both cases was around $3 billion. But when market conditions delayed Acme’s planned 2007 IPO, the company was forced to buy back most of the shares held by these investors.
What the Smart Set Saw A great inventor who understands energy applications inside out and has been able to build a business of Rs. 2,000 crore in just six years.

It is not often that a fast-growing company with revenues in hundreds of crores is able to expand without having to dilute the capital or borrow heavily. One could argue that when a company reaches revenues of Rs. 100 crore, its need for capital balloons and the entrepreneur must necessarily resort to external financing.

Manoj Upadhyay was able to reach Rs 1,500 crore without diluting any stake and needed to take just Rs. 100 crore as debt. Considering that his clients were huge companies like Airtel, Vodafone and such like his products must have enjoyed a huge advantage to command the premium that they did. His internal accruals were huge enough to fund the growth.

And he has done this through fulfilling a very simple need of mobile companies. He reduced costs of operating shelters that house mobile companies’ base-stations. Almost 35-40 percent of costs of running these shelters can be attributed to electricity costs in cooling electronic equipment inside a base station. Upadhyay’s company makes materials that maintain AC-like temperatures without electricity and even air conditioners without any compressors.

But with the telecom sector bleeding from falling tariffs and intense competition, Acme is trying a new tack to keep growing. It is setting up towers of its own. The maximum number of telecom towers that are economically feasible for operators is around 350,000, says Upadhyay. That number could be 450,000 if operators could get “Delhi prices in Mizoram” from their towers.

Enter “Ultra Low Cost Solution” (ULCS), Acme’s most complete and power-efficient solution for telecom sites, which it claims consumes 40 to 60 percent less energy than existing solutions. “A typical multi-site tower uses 25-30 KW of energy, we can now do it in 5 KW,” he says.

Upadhyay is now setting up his own towers using his ULCS solution, in remote and hitherto unviable locations, to offer them on a rental basis to telecom operators. The only other way his customers can buy ULCS is if they buy a ten-year service agreement from Acme.

As the telecom sector keeps attracting more and more entrants and they launch more services, expect Acme to retain its top slot. He now wants to produce over 20 products at the Hooghly unit. Enough reasons for Bain Capital to find its first investment in India in Himadri last year and for Citigroup Venture Capital International, which had fist invested in 2006, to stay put for “at least three more years.”

SUDHIR GENSETS

Makes power generators using know-how from Cummins. Promoter Sudhir Seth is transforming the business into a service-driven one.
Secret Sauce Extensive range of electricity generators powered by know-how from a three-decade-old “marriage” with Cummins, all put together at six manufacturing plants
Financial Dashboard Net sales - Rs.900 crore; Net profit margin – between 11-12 percent. Net sales CAGR over the last five years 21 percent. Goldman Sachs and GE Investments together invested Rs.300 crore in 2007 for a 10 percent stake, valuing the company at Rs.3000 crore.
What the Smart Set Saw An efficient, stable and profitable market solution to India’s perennial power woes.

More than three decades after Sudhir Seth decided to manufacture power generators to address the electricity shortfall faced by small and medium Indian businesses, the energy shortage hasn’t abated. Meanwhile, Sudhir Gensets has become a Rs.1,000 crore company with over 40,000 customers across India.

With a 60 percent share in the segments that he operates in, Sudhir is today buys giving his business a services touch. The company has now started to rent out gensets to real estate and infrastructure projects. The company expects this new revenue stream to account for 5 to 7 percent of revenue.
Sudhir’s rapid growth over the last few years was powered to a large extent by the telecom and real estate sectors, both of which were building cell sites, homes and offices at a furious pace. As growth for both sectors got broad-based towards middle India, where power was unreliable at best or absent at worst, Sudhir became the de-facto power utility.

But with telecom and real estate growth rates much slower than earlier, the company started looking for newer sources of revenue. The services business has emerged as one answer.

Till now Sudhir Gensets was only interested in making the sale, with post-sale servicing being done by local dealers. But after realising the importance of steady maintenance revenue, it has started offering its own maintenance services to customers in Punjab to begin with. Seth says the pilot has been extremely promising, even helping it grow its marketshare by 5-6 percent in the state due to a better understanding of customer needs born from frequent service interactions.

Offering turnkey project management and implementation services around power projects and electricity contracts is another area of growth. “Rather than selling our products to contractors, we become the contractors,” says Seth’s son, Rahul, who is also the company’s joint managing director. “The response has been so overwhelming that we are setting up a new manufacturing plant in Manesar to address this additional demand,” says Seth.

CEBBCO

Makes steel bodies for goods carriers. Promoted by Kailash Gupta and Ajay Gupta
Secret Sauce Technical knowledge that combines knowledge of motion technology and steel fabrication.
Financial Dashboard Jacob Ballas, which has New York Life as its anchor investor, has invested in the company at a valuation of Rs. 110 crore. Today the company is being valued in the range of Rs. 500-600 crore.
What the Smart Set Saw An entrepreneur who had built deep relationships within the heavy vehicles industry and who was nimble enough to adapt his business model in the worst of times.
Guiding Light To use knowledge and technology to be the largest player in fabrication for goods applications like trucks and railway wagons.

For Ajay Gupta, opportunity was born out of a crisis. Gupta had just invested Rs. 40 crore to automate his plant when the goods carrier market went into a cold freeze in 2008. “In adversity, you can either sit and wait for the situation to clear out or try and figure a way out. Ajay did the latter,” says Vinay Shah, CEO, Mosaic Capital, whose firm also provides corporate finance advice to Cebbco.

Forced to look for alternatives, Gupta figured that Cebbco’s fabrication strength and domain expertise could be applied to one sector that wasn’t moribund: Indian Railways. He decided to move into the territory decisively. And in a short time, he established a successful business there.

Gupta took charge at Cebbco, his father-in-law’s company, only five years ago when it was a Rs. 20-crore company making “bodies” for Tata trucks. Aided by low costs of conversion, Gupta took the business to Rs. 116 crore. The railway business is helping the fast ramping up.

There is a risk that it may get some tough competition for the wagon business. But Cebbco is going beyond just wagons and doing refurbishment for locomotives as well. His investors believe that Gupta should not take his eyes off the core business. “I think Railway business is great and it was commendable the way Ajay has gone out and got this business, but he should keep his core business extremely competitive,” says Bharat Bakshi, Jacob Ballas.

SHRIRAM TRANSPORT FINANCE

Belongs to Chennai-based Shriram Group. Lends to small truck owners. Focusses on the segment not taken by banks.
Secret Sauce Built scale in a niche business by understanding the customer well.
Financial Dashboard ChrysCapital invested at Rs.35 per share in 2005; TPG Newbridge came in at Rs. 112 per share in 2006; JM Finance/Blueridge/Tiger Global paid Rs. 300 per share in 2007.
What the Smart Set Saw An ability to minimise risk in a segment considered high-risk.
Guiding Light To streamline the business by eliminating the middlemen dominating the truck resale business.

It is an unusual business model by any count. As soon as its customers become large enough, Shriram Transport Finance Company (STFC) asks them to take their business away to a bank. The company will only lend to truckers who own between one and four trucks. A bulk of the lending is for the resale of old trucks. Yet, the model, which has helped build a customer base of 1.4 million customers and an asset value of 27,000 crore for the Chennai-based company, has been hugely successful. STFC has over the past 30 years built up a rapport with the trucker fraternity which has been impossible for anyone else to replicate so far.

So how does one make money by lending to a category that was left out by traditional lenders for being high-risk? “Serving sub-prime customers was no easy task,” says R. Sridhar, managing director of STFC. “For years, STFC would get a lower credit-rating because of the customer profile, leading to more expensive funds. Finding resources from the banks and institutions for this large but credit starved segment was an ardous process.’’

Despite this handicap, the company was able to bring in institutional credit to the market that it built up simultaneously. The rates at which it lends have softened to 16-18 percent per year from above 20 percent even four years ago. Ironically, the company’s large customer base helps it spread the risk, says Sridhar.

One measure of STFC’s success is the returns that the Delhi-headquartered private equity firm ChrysCap reaped last month, when it sold off its holding at 11-12 times its investment. ChrysCap earned more than Rs 1,400 crore on the investment it made five years ago.

The focus at STFC these days is to expand the business further, by pushing out the traditional truck brokers who dominate the resale market. This is being done by organising the sales of repossessed trucks at auctions all over the country. STFC finances the purchase but without any commission, saving money for both buyer and seller. The company has begun maintaining a nationwide database of trucks, with pictures of the machine and details of its condition and age. Truckers can access these on touch screens and decide if they want to buy a vehicle.

VA TECH WABAG

Water treatment company. Bought out by Rajiv Mittal and his colleagues with private equity assistance. Took over its parent to become an India-based global player.
Secret Sauce VA Tech Wabag’s Austrian roots and local management gives it a twin advantage of global technology and economical costs.
Financial Dashboard This has been one of ICICI Ventures best investment ever. It sold a part of its stake realising an annualised return of over 240 percent over five years.
What the Smart Set Saw A competent management, a bunch of patents and a growing opportunity.

Many years ago, Rajiv Mittal was just another employee in UK-based Wabag Water Engineering, which later became VA Tech Wabag. A quirk of circumstances and the early leadership lesson saw Mittal stave off big competition from the likes of engineering giant Larsen and Toubro to buy the Indian arm of VA Tech in 2005. Another set of events finally culminated in Mittal buying out the Austrian parent in 2007, overnight making him a global player with a presence in 19 countries and a large research establishment in Vienna.

The demand for water industry is exploding. The desalination business is expected to grow at 26 percent per year. It is this opportunity Mittal is poised to tap.

Mittal and his colleagues, who had invested Rs. 10 crore for a minority stake in 2007, are worth more than Rs. 400 crore for their current 38 percent stake. Investors like Singapore Investment Board, Passport Capital and Satra have latched on to the story buying 30 percent in the last one year. ICICI Ventures, which helped Mittal in the management buyout, made its biggest ever return when it sold a part of its stake. As Mittal and ICICI Venture mull an initial issue of shares in the coming months, VA Tech may well be poised to be the next hot stock on the block.

VA Tech has a great presence in the government sector — cleaning up sewage water in cities and fixing drinking water supplies. Mumbai, which now sends its sewage into the Arabian sea, is set to put out a $1billion contract in the next couple of years to treat it and reuse the water for non-potable purposes. Mittal has been making his rounds to the city and is confident of winning a few contracts. Recently, his firm won the biggest desalination project in Chennai, with IDE as its partner.

However, the opportunity is attracting serious competition already. Having managed to set up a Indian multinational leader, VA Tech now has to defend it turf, retain its talent and keep its cost competiveness to stay remain the leader in its business. Mittal is already tied up with Chennai-based Anna University to do local research and is also setting up a local research centre to augment its existing centre in Austria. Says Mittal: “Water technology is still evolving and we have as much as an opportunity as anyone else in the business.”

MANAPPURAM FINANCE

Thrissur-based lender against gold collateral. Promoted by P.H. Nandakumar
Secret Sauce Low-cost, high-speed working capital lending against one collateral most Indians have: Old gold ornaments.
Financial Dashboard Sequioa Capital invested in 2006 at Rs. 130 a share. UK-based fund Ashmore-Alchemy invested a year later at Rs. 170 a share. Today, the share price is Rs. 677.
What the Smart Set Saw Lending to customers who aren’t necessarily poor but who would never access a bank. All lending backed by gold!

Lending against gold is an age-old business and at the face of it quite simple. After all, what does a lender do? He assess the value of jewelry and gives out a loan on a substantial portion of its value. Theoretically, then, this should be a totally commoditised business. But then, there are some like Manappuram Finance that take it a professional notch higher.

Till 2006, the business trudged along with a growth rate of around 15-20 percent per year. Then in 2006, something changed. ICICI Bank saw a potential in bankrolling entities who were reaching out to the unbanked. And Nandakumar decided to step on the gas. He borrowed to boost his lending capacity, but also raised equity to keep a leash on his own gearing. As a result, Manappuram’s network has grown from 50 branches in 2006 to almost 900 branches today.

Nandakumar likes to keep each branch very small and leanly staffed. When the business grows, he doesn’t go for a bigger office but opens a new branch. “Our aim is to give a loan in five minutes. Today. it takes about 10-15 minutes still. We want to cut that down,” says I. Unnikrishnan, president.

The gold lender’s costing is his advantage. “Assume 20 minutes for a loan. So 25 loans a day? Assume 20,000 loan size. That’s just Rs. 5 crore business. My costs are less Rs. 2 lakh per branch. It would be hard for a bank or even an NBFC to keep their costs so low,” says Unnikrishnan. So players like Fullerton, Reliance Money, Shriram Chits and even Mahindra & Mahindra Finance tried getting into the gold loan business but haven’t been able to scale up.

What’s next? “There is no reason why can’t grow to 2,000 or 3,000 branches across India. After all, gold is there in almost every Indian household.” Ask Nandakumar whether he sees any risks and pat comes the reply: “Yes if the price of gold falls to zero then we are in trouble.”

NITESH ESTATES

Bangalore-based real estate developer; promoted by Nitesh Shetty.
Secret Sauce Uses the joint venture model to build some of the best addresses in Bangalore.
Financial Dashboard Och-Ziff Capital Management Group, one of the biggest hedge funds in the world, has quadrupled its investments since 2007.
What the Smart Set Saw A young entrepreneur with verve and a differentiated, low-risk business model in a fast growing business.
Guiding Light For now, it is adrenalin. Says Nitesh Shetty, 32, “We wanted to show that young companies can fight the big boys.”

Nitesh Shetty was all of 24 when he started building some 80,000 square feet of property in the heart of Bangalore city where he grew up. Shetty, at that time, had no experience in the real estate business and his first tryst was a lost court case with a prominent city builder. Shetty had managed to convince the owner of the property to jointly develop the piece of land under his firms’ brand name. The trick worked.

Today Nitesh Estates is developing over 8 million square feet of hotels, housing, commercial and retail space in the country. This includes the Rs. 700 crore Ritz Carlton project – the first one from the global chain in the country. Pitched against veterans like Delhi-based DLF and Unitech who accumulated land over decades, Shetty has made a name for itself by a joint venture model. Nitesh Estate doesn’t buy land but instead it makes the land owner a partner and gives him a portion of the total revenue from the developed property. Not only does Shetty save the capital for buying the property, but he also saves a considerable time in land acquisition.

Shetty, a national tennis player and a close friend of Mahesh Bhupati, started an advertising business borrowing Rs. 12,000 from his mother. His company, Serve and Volley, got a big break when it won the contracts for advertising in the Delhi and Calcutta Metros. Shetty wanted to do something bigger and a property in M.G Road, Bangalore’s high street bought him into the thick of the business.

In the real estate business, this far, only companies with big land banks attracted high valuations. Shetty, however, worked with an asset-light model through his joint ventures. After six years, Nitesh’s 8 million sq.ft. under development compares well with new players like India Bulls real estate and Phoenix Mills. Shetty’s projects are mostly in Bangalore but he is slowly expanding to other cities. The company is developing luxury villas in Goa and will shortly issue shares to raise capital to expand its operations. With cities like Mumbai redeveloping their old precints, Shetty is looking at a large opportunity that won’t vanish in a hurry.

Ashish Chugh's hidden gems for February

Ashish Chugh, Investment Analyst and Author of Hidden Gems is bullish on Orient Ceramics and Tulsyan NEC. He recommends a buy on these two smallcap companies with 1-2 year horizon.

Orient Ceramics:


Orient Ceramics is a Delhi-based company manufacturing ceramic tiles. This company has got its manufacturing plant located in Secunderabad in Uttar Pradesh. Off late the company has been doing lot of initiatives to increase the market share. The company has introduced new ranges of tiles. These new ranges have got good response from the market.

The company is planning to open more retail stores and also have larger distribution network of distributors and retailers in various cities where they are currently not present. The third thing is that the company has also decided to start retailing of other construction related items, which makes it a one stop shop for all construction needs.

On the financial side:

For FY09 the company achieved sales of about Rs 225 crore and made Rs 6.4 crore in profit after tax (PAT), which results in an EPS of about Rs 6-6.5.For the first nine-months of the current financial year, sales are at Rs 175 crore. The PAT is up by 35% to about Rs 6 crore. For full year, expected sales are around Rs 250 crore with a PAT of Rs 8.5 crore, which results in an EPS of about Rs 8. At the current price of about Rs 45, the stock is trading at a price to earnings multiple of about Rs 5-6.

This is a full tax paying company. The company pays tax with no concessions. If you look at the market cap of the company this company has a market cap of about Rs 45 crore. Sales is Rs 250 crore and cash profit is Rs 20 crore, which means it is going at less than two-and-a-half year’s of its cash profit. This company has a dividend history of the past 20 years. Only during 1993 it skipped dividend. Otherwise from 1990 to 2009, the company has been regularly paying dividend. Considering all these factors at the market cap of about Rs 45 crore the stock qualifies as a value buy.

Tulsyan NEC


This Company is listed on BSE as well as NSE. It got its listing permission from NSE a couple of months back. This is a company, which is in two lines of business: Steel and woven sacks. The company manufactures TMT bars, MS alloys and billets in the steel division. They also manufacture HTP and PP woven sacks. Tulsyan NEC is not ideally one of those steel companies which you would want it to be in terms of backward linkages. The company as of now doesn’t have any backward linkages. It buys steel scrap/sponge iron for manufacture of steel and it also buys power from the grid. It doesn’t have its own captive power source.

But if you look at the other positives of the company, this company is available at a market cap of just about Rs 33 crore. The company does sales revenue of about Rs 650-700 crore. This company has been a profit making company for the past 15 years. It has made profit not just at the operational level but also in the net level in the last 15 years. The company has got a track record of dividend for the last ten years which is uninterrupted – even during the worse phases of the steel cycle this company has paid dividend in the last 10 years.

The company made an operating profit of about Rs 46 crore last year and operating profit for the first nine-months is about Rs 31 crore. PAT for first nine months is about Rs 4.5 crore, which results in an annualized EPS of about Rs 12. At the current price of about Rs 65 this stock is trading at a PE multiple of about 5-6.

The other good thing happening here is that the company is now going in for backward linkages, about 2-3 months back this company has acquired a sponge iron plant called Chitrakoot Steel and Power Limited, which has got a 30,000 tonne per annum for sponge iron capacity, which they are increasing further to about 1 lakh tonne per annum. The company is also putting up a 35 megawatt power plant. They have already acquired about 75 acre of land. This will be operational in Q3 2011, which is FY12.

Considering all this, the company had been making good profits for the past 15 years without any backward linkages. Now the backward linkages are coming. The market cap of the company is just about Rs 33 crore – even assuming a 1% increase in net profit margins on a sales of Rs 700 crore results with an EPS increase of about Rs 14.

Of course, this is not an ideal steel company in terms of linkages but its available at a market cap just about Rs 33 crore on sales of Rs 700 crore. The downside from these levels looks extremely restricted but once the linkages are there, obviously, the profitability will go up. Also there is a potential for huge upscale increase in profits after the linkages are available.

So at the current price of Rs 60-65 I think it’s a stock to accumulate for the next maybe two years. Once the linkages are in place the profits can go up really sharply.