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.

FIIs reduce holding in one-third of BSE 500 stocks

BL Research Bureau Foreign institutional investors (FIIs) may have continued to pour money into the Indian markets in recent months, but they weren’t uniformly bullish on all stocks or sectors.

FIIs have actually trimmed their stakes in half of the BSE Sensex companies in the quarter from June to September 2009.

Big names as Bharti Airtel, ONGC, BHEL and ICICI Bank saw a dip in FII ownership over the past quarter. Over 180 companies in the BSE 500 basket also saw a fall in their FII holdings in this period.

Media shed

Shareholding patterns, in fact, show that it was a limited set of stocks that benefited from FII buying in recent months, as they continued to cash out where stock prices had run-up.

FIIs reduced holdings in many index and mid-cap stocks, even as they subscribed enthusiastically to qualified institutional placements.

Media and entertainment was one sector that FIIs singled out for significant selling, trimming their stakes by between 3.5 and 9 percentage points in stocks such as Television Eighteen, NDTV, Wire & Wireless and Entertainment Network.

FIIs have, in fact, been pessimistic on media stocks from the June quarter itself, when stocks such as Balaji Telefilms, Zee News and Reliance MediaWorks saw a drop in FII holdings.

No sector bias

Outside of cutting exposure to media stocks, FIIs did not display much of a sector bias in trimming their holdings and instead, took a stock-specific view for their buys and sells.

For instance, within the sugar sector, the stock of Balrampur Chini Mills saw FIIs trim their stakes by 5.7 percentage points, but Shree Renuka Sugars saw a 4.7 percentage point increase in FII holdings.

While FII holdings in Gammon India fell by 5 percentage points for the quarter, their holdings climbed steeply in stocks such as Maytas Infrastructure, Lanco Infratech and Nagarjuna Construction. They trimmed stakes in mid-sized software player Tanla Solutions, while adding in 3i Infotech.

The realty sector, which raised massive funds through the qualified institutional placement route, was the rare one to see an across-the-board increase in FII holdings. Companies such as Unitech, Hindustan Construction Company, HDIL, DLF and Sobha Developers all saw major increases in FII stakes.

Overall, the level of FII holding in the BSE 500 universe has risen negligibly in the September quarter; from 13.3 per cent in end-June to 13.9 per cent by end-September.

The preceding June quarter saw the FII holdings rise more sharply from 12.5 to 13.3 per cent.

Retail investors make Rs 1.9-lakh cr in market rally

Promoters walk away with Rs 13 lakh crore.

BL Research Bureau Stock price gains have generated crores of rupees in notional wealth for investors holding on to equities so far this year. However, only a small slice of this may have accrued to retail investors.

Stocks in the BSE 500 added over Rs 24-lakh crore in market capitalisation in 2009, mainly through price gains. Of this notional wealth, retail investors saw an accretion of Rs 1.9 lakh crore, while promoters of India Inc walked away with over Rs 13 lakh crore.

These numbers are based on the shareholding patterns of the BSE 500 companies, which account for nearly 94 per cent of the total market capitalisation on the exchanges.

Lion’s share for promoters

Across-the-board gains in stock prices have expanded the market value of the BSE 500 stocks from about Rs 29-lakh crore at the start of this year to about Rs 53-lakh crore now. It is the promoters, holding 56.7 per cent of the market cap of these companies, who raked in the lion’s share of this wealth. That’s probably one reason why the Forbes Rich List released last week showed a doubling of the number of Indian billionaires!

Next in the line of beneficiaries were Foreign Institutional Investors (FIIs) that saw the value of stocks held shoot up by Rs 3.6-lakh crore. Domestic institutions — mutual funds and insurance companies — saw a Rs 2.2-lakh crore addition to their assets from the rally. Individual investors can probably take heart from this, as it is retail savings that domestic institutions redirect into the stock markets.

The accretion to market capitalisation, or notional wealth mentioned above, is a function of both the increase in the number of shares held by investors and the price gains on their stocks, though the latter accounted for the bulk of the gains. Adjusting for changes in the shareholdings, the FIIs pipped all other classes of investors in generating stock price returns. The FIIs saw an 80 per cent stock price appreciation on their holdings between January 1 and now, while retail investors saw a 75 per cent appreciation.

Retail investors cash in

The numbers show that company promoters continue to hold a sizeable, 56.7 per cent, stake in the market capitalisation of the BSE 500 companies (based on end-September 2009 data), even after selling into the rally this year. The FIIs own 13.9 per cent of the market cap, having hiked their stakes from 12.8 per cent at the start of 2009. Domestic institutions too have added to their holdings, and now own 9.1 per cent.

Retail investors, who now hold about 8 per cent of the outstanding market value, have marginally reduced their equity stakes since January. Consistent selling by retail investors over the past few months suggests that they may have used rising stock prices to convert a portion of their equity holdings into cash.

BRIC markets lead the surge

India stands at 10th place with 87% return in 2009.

The BRIC magic has worked this calendar year too with all four countries – Brazil, Russia, India and China – placed among the top 15 in the performance table.

Brazil’s Bovespa index has returned 142 per cent in dollar terms since the beginning of this year and is placed at the top of the returns table containing leading global benchmarks. Russia’s RTS Index comes third with 121 per cent return. India’s Sensex is placed at the tenth spot with 87 per cent gains and China’s Shanghai Composite Index is in the fourteenth place with 74 per cent.

China’s benchmark has slipped five places from the ninth position it was at, towards the end of last week following the sell-off in Chinese stocks this week after their banking regulator asked Chinese banks to improve their capital adequacy ratios.

It is not just the BRIC markets but the entire emerging market universe that has returned stellar gains this year. The indices yielding 3-digit returns and placed among the top ten gainers among global benchmark indices include Peru Lima Index, Jakarta Composite Index and Argentina’s Merval index.

Developed Market indices have yielded relatively lower returns with the Dow returning only 19 per cent this year and the UK’s FTSE and Germany’s DAX returning less that 40 per cent.

The gains in BRIC markets was driven by global funds moving in to these equities once the dollar began its steep decline since April this year. With the waning of fears of a prolonged global recession from the second quarter of 2009, risk appetite returned; leading money back to riskier asset classes such as emerging market equity.

The rapid economic growth envisaged in the BRIC economies in the years ahead has also been a strong factor in attracting funds. IMF, in its world economic outlook has noted that after contracting by about 1 per cent in 2009, global activity is forecast to expand by about 3 per cent in 2010.

The rebound is to be driven by China, India and a number of other emerging Asian countries. Organization for Economic Co-operation and Development (OECD) has echoed this sentiment in its semi-annual outlook, expecting China and India and Brazil to grow by 10-, 7- and 5 per cent in 2010. The report expects Russia’s turnaround to be even more dramatic.

Strength in the currencies of Brazil, India and Russia since March has also been an incentive for foreign funds, since their returns are enhanced by currency gains. Brazilian ‘Real’ has appreciated 26 per cent this year while the Indian Rupee is up 4 per cent.

The out-performance of emerging markets and the BRIC quartet in 2009 is also due to the fact that their equity markets had a relatively benign first quarter. Most of the emerging market benchmarks including India did not re-test their October 2008 lows, while the Dow dived 26 per cent in the first three months before turning around.

Unitech: High-risk, high-return deposit

Vidya Bala

The fixed deposit scheme of Unitech is suitable for investors who can stomach some risk. The sharp downturn witnessed in the real estate sector, fund crisis faced by many players in the sector and the slow pick-up in demand for real estate place the business of Unitech in the high-risk category. Unitech's large size, established brand name and improved financials have, however, been steadily aiding recovery.

The attractive interest rates of as much as 12 per cent per annum for a three-year period can be construed as a premium payout for the risk involved.

Investment strategies

Investors can adopt a two-pronged strategy to reduce their risk term/exposure.

Short tenure: One, investors can restrict the term of their fixed deposit to six months to one year, locking their money for a short period and yet enjoying an interest rate of 11 per cent – a return not presently available in bank fixed deposits and most credit worthy financial institutions.

A six-month deposit is, however, available only under the cumulative option (where interest is paid on maturity) and would entail a minimum investment of Rs 25,000.

Interest payout: Investors can consider the two-year interest payout option (called Scheme A), available on a quarterly basis, at 11.5 per cent per annum. This would allow cash out on the interest, even as the principal continues to earn returns.

Net of tax, assuming a 10 per cent tax slab, you would earn an interest of 10.3 per cent if you opt for a two-year term under Scheme A.

A payout option, would however, require you to invest a minimum sum of Rs 25,000. Banks currently offer a maximum of 7.5 per cent for up to 2 years.

Cumulative option

While the above two investment strategies would be our preferred mode of investments, individuals who can assume higher risk can consider taking the two-year cumulative option where interest would be compounded and paid out only on maturity. Without doubt, the cumulative option is certain to offer superior yields as you earn “interest on interest”. Besides, the company has made the cumulative scheme attractive by compounding interest on a monthly basis.

For instance, if you consider the two-year cumulative scheme, Rs 10,000 would grow to Rs 12,572 at the end of two years, at an interest rate of 11.5 per cent. This would work to a yield of 12 per cent over the term. However, net of tax (assumed at 10 per cent), the yield would be about 11 per cent.

Investors can refrain from the three-year term as bank interest rates may themselves see a revival. The latter would then provide a safer and attractive option.

The company

Unitech is among the few real estate developers with a pan-India presence. The company's present projects measure to 21.5 million sq.ft. across nine cities, that include large projects in Gurgaon, Noida, Mumbai, Chennai and Kolkata. After being hit by the 2008 real estate crash, Unitech was also faced with a situation of mounting debt by late 2008. While it took resorted to a debt restructuring programme initially, the company thereafter offered residential projects at discounts to market prices and launched a number of affordable homes in order to revive working capital flows. Simultaneously in 2009, it successfully raised about Rs 4500 crore of equity in two tranches through qualified institutional placements.

These measures have enabled the company to bring back its net debt to equity ratio to a healthy 0.6 times in September, from a worrying 1.8 times in March. A good portion of the QIP funds have been used to repay debt, with the rest being ploughed for construction work.

The company has sold 50 per cent of the total area launched, a good part being residential projects. It has raised about Rs 550 crore through these sales so far; the rest of the payments, being mostly linked to construction, would only flow in a staggered manner. The company's interest obligations appear adequately covered by profits, despite decline in earnings over the past year and a half.

Additional interest: The fixed deposit scheme offers an additional 0.5 per cent per annum for its employees, shareholders (minimum holding of 100 shares), property owners as well as senior citizens above 60 years.

A small-cap strategy

An investor with a wide exposure to small caps can beat the Nifty.

Astronomers say life exists on earth because of the Goldilocks Principle. The planet is neither too hot nor too cold; it's just the right temperature like the porridge Goldilocks ate. The investor's equivalent would be the stock, which is receiving just the right amount of attention.

While being a gross over-simplification, it is true that over-hyped stocks also tend to be inflated in price. Completely ignored stocks can continue to be ignored, and under-priced. Of course, there is subjectivity involved in judging the ‘right amount’ of attention. Are we talking substantial institutional coverage and occasional headlines? Are we talking ‘passing mentions’ in business channels or single column items in pink papers?

Any of these may qualify because investment is a subjective exercise. Some prefer to enter a stock early before it has institutional support. Others enter only when there is solid institutional coverage. Still others only enter when it's a big company and making headlines.

Quite often, the attention is a function of size. Big companies are rarely completely off the radar because media and institutional investors track them with dedication. Quarterly statements are dissected and usually, there is guidance and forward projections. Changes in management, in marketing strategy and ad budgets are also noted and debated.

Midcaps also make the news with regularity. At the least, analysts collate quarterly results and do the slicing and dicing. Small caps very rarely make the news unless something unusual happens. Some small caps never make the news beyond statutory coverage at the time of IPOs.

The low risk investor focusses on the highly-covered large caps. These are generally the least volatile segment due to the widely-disseminated information. Of course, stocks as a class are always volatile assets but there are two further safety factors available for large caps.

One is that they contain large institutional holdings and that puts a floor on price. The second safety factor is that they are liquid; there is always a chance of cutting losses. The medium risk investor focusses on mid-caps. Here too, there is usually institutional coverage. Volatility tends to be more than with large caps. But there is usually enough reserve liquidity to cut losses and enough institutional holding to put floors on prices.

Only big risk-takers touch small caps because these tend to extra volatility and carry extra risks. There is usually no institutional holding and hence, no floor. There is also a great deal of opacity and absence of information in terms of governance, marketing strategy (if any), etc.

However, given the lack of information, any coverage of a small-cap is worth noting. It usually denotes either an exceptionally favourable event or an exceptionally unfavourable one. There is a high “signal to noise” ratio because there is little noise.

Between May 2004, when the first UPA government took charge, and January 2008, there was a bull run. The Nifty, which is of course, large-caps, generated returns of around 392 per cent from trough to peak. The NSE Midcap Index registered returns of around 440 per cent and the BSE Small Caps returned 704 per cent. Between January 2008 and October 2008, the Nifty lost 65 per cent while the Midcaps lost 73 per cent and the Smallcaps 77 percent.

If we assume passive holdings between May 2004-October 2008, the Nifty was up 77 per cent (CAGR 15.5%) while the Midcaps was up 46 per cent (CAGR 10%) and the Smallcaps was up 85 per cent (CAGR 16.5%). The movements can be viewed in the light of the theory that high risk needs to be associated with higher returns. The Nifty follower risked less than the small cap dabbler but on balance, gains less. The Midcaps investor was the worst off.

However, there is another practical point. The Nifty is easily tracked and hedged, via index funds and derivatives. The Midcaps comprises 234 companies, while the Small Caps comprises 474 companies and neither is covered by index funds. Both are impossible to track for small investors.

At best, we can say is that an investor with wide coverage of small caps would have a good shot at beating the Nifty. But the excessive volatility makes it possible that there would be a large negative (or positive) tracking error in benchmarking any small caps portfolio to the Smallcaps Index. This is where some judicious filtering on the basis of the Goldilocks Principle may help.

Global economy is still weak, says IMF

The head of the IMF, Mr Dominique Strauss-Kahn, said here on Monday that although the worst of the global financial storm had passed, the world economy remains "highly vulnerable."

"Today the storm has passed. The worst has been averted thanks to a bold and rapid policy response and thanks to cooperation," he told delegates at the annual conference of the Confederation of British Industry (CBI) — Britain’s biggest employers group.

"We can say that the recovery has started but everyone understands that it is very fragile and still dependent on policy support. The financial conditions have improved but are still far from normal."

Mr Strauss-Kahn, who is the managing director of the International Monetary Fund, added: "The economy ... (is) getting better, but (is) still highly vulnerable."

"During the crisis, everyone was united by a common purpose. Going forward, this might dissolve. So the road ahead will be less clear cut."

The governments have committed trillions of dollars in stimulus and guarantees and central banks have cut interest rates to record lows since the financial crisis intensified after the collapse of Lehman Brothers in September 2008.

Mr Strauss-Kahn added that nations needed to cooperate more to build on signs of worldwide economic recovery.

"The global economy has made remarkable progress over the past year, but as we stand on the cusp of recovery, new and complex challenges are already popping up," he said.

"How do we deal with these challenges? In my view, there is really only one fundamental answer — to persevere with the spirit of cooperation that has brought us to this point."

He added: "The challenges... all require cooperation. We need cooperation on exit strategies. We need cooperation on the new growth model. We need cooperation on financial sector regulation."

The CBI is meanwhile focusing its latest annual London conference on how businesses can best recover from Britain’s longest rece-ssion on record. Britain is the last major world power still mired in recession, after the eurozone, France, Germany, Japan and the United States all emerged from a steep global economic downturn.

Query Corner: Fresh long-term uptrend in Indusind Bank

Please let me know the prospects of Voltamp and Alstom Projects. Sultan Mohideen

Voltamp Transformers (Rs 741.7): The recovery from the March low of Rs 265 in Voltamp is halting at the key intermediate-term resistance of Rs 900. The stock has been unable to penetrate this level over the last four months and has been moving in a narrow range just below it. The medium-term trend in this stock however continues to be up and if the stock holds above Rs 650, then it can move higher to Rs 1,100 or Rs 1,300 over the next twelve months.

Investors with a medium-term perspective can hold with a stop at Rs 650. Decline below Rs 650 will imply an impending move to Rs 510. Long-term investors can hold the stock as long as it trades above this level.

Alstom Projects India (Rs 521.3): In our review of this stock in July 2008, we had indicated that the long-term support was in the zone between Rs 200 and Rs 240. Alstom Projects rebounded many times from this zone between October 2008 and February 2009 before moving up to the recent peak of Rs 610. Immediate resistance for the stock is at Rs 650 that is half of the losses recorded in 2008. If this level is surpassed, the stock can rally to Rs 760.

Investors with a short-term horizon can hold with a stop at Rs 470 while long-term investors can hold with a deeper stop at Rs 345.

I am holding Indian Hotels purchased at Rs 86 and Deepak Fertilisers at Rs 64 for the last one year. Please tell me whether both the stocks will touch Rs 115 in next 3 months. Alok Varshney

Indian Hotels Company (Rs 83.9): Indian Hotels faces strong intermediate term resistance at Rs 86 that occurs at 38.2 per cent retracement of the 2008 fall.

The stock moved beyond this level in the second week of November but has not managed a strong close beyond this level yet. However the medium-term trend continues to be strong and the stock could attain the levels of Rs 104 or Rs 115 in the next three months. Investors with a medium-term perspective can hold the stock with a stop at Rs 78.

The stock has formed a long-term trough at Rs 34 in March and even if the stock launches in to an intermediate decline, it is likely to find support at Rs 56. Long-term investors should therefore hold this stock with a stop at Rs 55.

Deepak Fertilizers & Petrochemicals Corporation (Rs 90.3): Deepak Fertilizer is also in a strong medium-term up-trend and can attain your target of Rs 115 in the next three months. The stock has retraced half the slide from the December 2007 peak of Rs 167.

Key intermediate resistance for the stock is at Rs 110 and Rs 128 and the stock can form a peak between these two levels also. Stop-loss for investors can be at Rs 82. Breach of this level will pull the stock down to Rs 67.

I am planning to invest in Indusind Bank at current levels. What are the stock's prospects? J K Venkatesh Prasad

Indusind Bank (Rs 120.7): In our review of this stock in August, when the stock was poised at Rs 95, we had noted a positive bias in the medium-term outlook and a possible move towards Rs 105 or Rs 135 in this period.

The stock recorded the peak of Rs 145 on October 20 and has turned volatile since then as the previous all-time high was at Rs 136, recorded in December 2007 is in the vicinity. The spectacular move from March low of Rs 26 denotes that a fresh long-term up-trend is in motion in this stock.

However one-leg of this up-trend could have ended at Rs 145 and the stock appears to be in a medium-term correction that can result is a sideways movement between Rs 100 and Rs 150 for a few more months.

Investors wishing to buy this stock can do so in declines close to the Rs 100 mark with a stop at Rs 95. Subsequent supports are Rs 86 and Rs 72. Minimum target on a break-out above Rs 145 is Rs 174.

What are the prospects of Electrotherm India and Lloyd Electric and Engineering? TomlinTomichan

Electrotherm India (Rs 250): This stock is biding its time after the recent peak of Rs 306. The medium-term view on this stock will stay positive as long as it holds above Rs 218.

If this level is not breached, a rally to Rs 360 or Rs 430 can be expected over the ensuing 12 months. Investors can therefore hold the stock with a stop at Rs 200. Key medium-term support for the stock exists at Rs 160.

Lloyd Electric & Engineering (Rs 55): This stock is making a valiant effort to claw upwards from the July low of Rs 27. Key medium-term resistance for this stock is at Rs 62, where it is currently pausing.

Though the trend along both the short and medium-term time frames continue to be up, the stock could get in to a mild decline from here that pulls it down to Rs 45. Investors can hold the stock as long as this support holds.

Those wishing to buy the stock can do so on a firm weekly close above Rs 65. The medium-term target would then be Rs 96.

What are the technical prospects of Pidilite Industries for the next 12 months? Sanjeev Shahane

Pidilite Industries (Rs 196.2): The crash of 2008 made Pidilite Industries halt at the long-term support band between Rs 80 and Rs 90 and the stock has recouped almost all the losses since then. There will however be some difficulty in surpassing the long-term resistance zone between Rs 200 and Rs 220. Inability to surpass this level will result in the stock moving sideways between Rs 130 and Rs 200 for the next 12 months. Long-term investors can therefore hold with a stop at Rs 120 while those with a shorter investment horizon can divest some of their holding in the resistance band mentioned above.

Long-term target on a strong break above Rs 220 is Rs 300.

Kindly advise me on the short and long-term targets of Parsvanath Developers. Suresh Dabke

Parsvanath Developers (Rs 104.5): This stock continues in the throes of the bear's grip. The medium-term resistance at Rs 165 remains unconquered and as long as the stock remains below this level, it is expected to vacillate in a wide band between Rs 50 and Rs 150. In other words, the stock can move close to its March lows over the medium-term. Long-term outlook will turn positive only on a weekly close above Rs 165. Subsequent target is Rs 250.

The short-term trend in the stock is also down and a decline to Rs 91 or Rs 76 is possible in this period. Short-term investors can hold it with a stop at Rs 85.