Parekh Aluminex BSE Id: 532606 NSE Code: PARAL

CMP (BSE): Rs. 236.40

CMP (NSE): Rs.236.50

Industry: Packaging

Parekh Aluminex Limited (PAL) is the largest manufacturer and exporter of Aluminium Foil Containers (AFC), and also one of the biggest manufacturers in Aluminium Foil Rolls (AFRs) and Aluminium Lids, in India. They are the single largest player in the organised sector in India. In the fifteen years of their existence, they have carved a niche for their products in not just India, but the entire region, emerging as the leading name in AFCs in the entire sub-continent. The adaptability and the multi-purpose quality of PAL's products sees them being utilized in domestic, industrial and commercial sectors worldwide.

From packing food and food-related items, ash-trays, trays, medicinal trays, gas-mats, barbequing servers, bake trays and containers to new-born babies’ bath pans, pet foods servers and casseroles - PAL’s products have penetrated every sector and enrich lives at every imaginable juncture.

It is the first company in this category to receive the prestigious ISO 9001:2000 certification from BVQI, UK and the only company from India to break into the highly quality conscious European markets. They have two manufacturing facilities situated strategically close together in the tax havens of the Union Territory of Dadra and Nagar Haveli, India. They have managed to not just maximise profits for their investors, but also have a distinctive edge over competition in India and worldwide markets.

Their startegic and well-thought out business plan has resulted in the signing of a marketing agreement with one of the largest manufacturers of aluminium in the world, to market its products in Germany. Further PAL has acquired a Singapore based company by taking over its plant and machinery for making Aluminium Foil Containers, along with its customer base. As a result business of South East Asian Airlines such as Emirates Airlines, Singapore Airlines, Thai Airways amongst others have been added to the company's kitty.

PAL's growth story:

The rising middle class and its conscious efforts to demand hygenic product was skilfully turned into a profitable opportunity by PAL. This can be seen in the sales graph of PAL which went up from Rs. 162.8 million in 1998-1999 to Rs. 4212.6 million in 2008-2009. During the same period, net income rose from Rs. 3.91 million to Rs. 381.4 million. This growth was accompanied by growth in asset base and customers, upgraded technology, semi - automatic processes being gradually replaced by automatic processes. Further, the variety of products to be offered to customers, too has increased. This kind of impressive performance is a result of long vision, long term planning, meticulous implementation and dedicated efforts of the employees and management.

PAL's Edge:

• It has a strategic job-work order and tie-up with Hindalco Industries Ltd. (one of the largest manufacturers of aluminium in the country). This tie- up ensures PAL getting raw materials at preferential rates.
• It entered into an agreement with ALCAN, one of the largest producers of aluminium in the world, to market AFC's and AFR's in Germany, thus opening up the entire German markets for PAL.
• It acquired DES (Singapore) with its plant and machinery along with its customer base, which includes Emirates Airlines, Singapore Airline and Thai Airways amongst others.
• It is the biggest supplier of AFC to railways, flight kitchens, airlines and fivestar hotels.
• With the aim of meeting future demands, fueling higher sales growth and economies of scale and increasing profitability, PAL has increased its manufacturing capacity by four times in the last two years. The manufacturing capacity of AFC's has increased from 457 million to 1175 million peices, AFR's from 7.5 million to 15 million pieced and aluminium lids from 185 million to 470 million pieces, per annum.
• PAL has ventured into trial exports to newer markets like Nigeria, Yemen and Sri-Lanka, resulting in additional and bigger orders for their products.
• It has the distinction of being the manufacturer of the largest variety of AFC's in various shapes and sizes catering to a wide gamut of industries.

PAL is quoting at 5.35 PE in an industry where the average PE is about 10.81. It is quoting at almost its book value. It is a regular dividend paying company and its dividend yield come to about 1.24% at the CMP. Its sales are almost twice its current market capitalization which puts PAL well within the comfortable zone. It has a very small equity of just Rs. 12.94 crores. An increase in profits will be shared and distributed among a smaller base thus resulting in exponential rise in its stock price. Thus this is a very good positive. Its debt equity ratio stands at 1.37 which is well within the safe zone. Its interest coverage ratio stands at 3.18 which puts PAL well within the margin of safety.

Thus it can be considered as a safe investment. Its EPS for the year 2009-2010 was Rs. 35.20. However in the first two quaters of the current financial year it has already earned around Rs. 25.09 which is quite impressive. Over the years it has shown a consistent growth in its sales and with the current expansion, it will continue with this growth projectary.

PAL belongs to an industry which can be considered as a recession proof industry. It is something like a match box industry. Its demand never ceases. Thus according to me, this is a very good safe and long term investment and it has the potential to become a multibagger in future. Buying at current levels and on dips would be good.

Happy Investing

Cosmo Films Limited BSE Id: 508814 NSE Code: COSMOFILMS

CMP (BSE) : Rs. 162.50

CMP (NSE) : Rs. 162.55

Industry : Packaging

Cosmo Films Limited (CFL) promoted by Mr. Ashok Jaipuria in 1981, is one of the global leading manufacturers of Bi-axially Oriented Polypropylene Films (BOPP). Since inception CFL has maintained market leadership in both the domestic and export market. CFL has an annual capacity of 96000 MTPA spread between its two plants located at Aurangabad in Maharashtra and Vadodara in Gujarat.

CFL is also India's largest producer of thermal lamination films, which is mainly exported to Western countries. CFL also had 22000 MTPA capacity of thermal lamination films. In addition to this they have even set up a captive power plant of 8 MW to ensure uninterrupted power supply. In addition to this CFL is also planning to set up a new BOPP line of 35000 MTPA that is proposed to be commissioned in 2011-2012.

CFL's acquisition:

In order to strengthen its position in thermal lamination film segment, CFL acquired GBC's Commercial Print Finishing Business from ACCO Brands corporation of USA at a throw away price for almost $ 17.1 million. This business has manufacturing facilities in US, Netherlands and South Korea. This acquisition made CFL the largest producer of thermal films in the world. This acquisition also helped CFL strengthen its presence in the global markets including the key markets of Europe and USA.

Industry Analysis:

The demand for packaging film is growing strongly at around 8% globally and over 16% in India. To cater to the demand, CFL has expanded its capacity at a cumulative growth rate (CAGR) of 7.4% over the last 5 years., with nearly 12800 TPA capacity added in FY09.

(1) BOPP Films: They are a part of the flexible packaging industry and has emerged as one of the most popular high growth films in the world. Lower costs and convenience has added to the growth of BOPP in the last few years. Moreover, the growth in demand has been substantial both in developed as well as emerging markets on account of its recyclable nature and applications in a variety of non-food and food products. BOPP films is used in various markets such as food industry, tapes/adhesives, tobacco, certain industrial products, etc.

The worldwide demand for BOPP films has been increasing since 2002. The global BOPP film industry has expanded by 72%. Geographically, Asia is the largest market for BOPP followed by Europe and USA. In the last few years, the emerging economies have witnessed an improved standard of living, urbanization and increased per capita consumption, and this has all led to an increase in the demand for BOPP films. Although the BOPP industry has continued to witness growth, it continues to be plagued by the problem of overcapacity as well as raw material prices, particularly PP resins.

(2) Thermal Lamination Films: The demand for thermal lamination films where CFL is now a global leader is expected to grow rapidly as the traditional solvent based lamination is environment unfriendly. At the same time, the scenario on the raw material front is likely to be comfortable due to expected oversupply conditions in polymer industry with new plants coming up in Middle East and China.

Risk Factors:

• The capacity additions in the industry are far excess as compared to the increase in the demand.
• CFL is unable to completely pass on the unpredictable increase in raw materials costs due to competitive pressure which may affect its operating margins adversely.

However in order to mitigate its risks CFL's diversified product range, customer base, continuous emphasis on cost reduction, product innovation, etc came to its rescue to gain an edge over its competitors.

CFL has an equity base of just 19.44 crores. Its sales are almost double of its current market capitalization keeping in well within the attractive zone. It is quoting at almost its book value, at 1.08 times its book value. It is quoting at a PE of 6.45 in an industry where the average PE is 8.49. Its earnings for FY10 was Rs. 23.57. Comparing the half year earnings of FY11 to FY10 earnings, they stand at Rs. 13.11, which can be considered good. With the company completing its 35000 MTPA BOPP film expansion, I expect even more earnings which will put CFL in a growth trajectory. It is a regular dividend paying company. It paid a dividend of Rs.5 per share for FY10 which brings its dividend yield at 3.08% at the current market price, which is very good.

It has shown a consistent growth in its sales as well as its earnings over the past 5 years, which is very impressive. Along with its growth in sales, its debt has also increased over the years mainly to finance its expansion and acquisition plans. But since its major acquisition and capacity expansions are done (except the 35000 TPA BOPP expansion), there would be more cash flows from the increased and the newly acquired capacities and this will eventually lead to repayment of the debt. Thus it will eventually put CFL in a comfortable position and will lead to even more earnings for its shareholders. Even with the additional debt raised, its debt equity ratio stands at 0.9 which is well within the comfortable zone. Its earnings are able to cover its interest almost 5 times, which puts CFL well within the safety zone.

CFL looks very attractive for long term investment based on its post expansion earnings prospects. The supply in this industry is more than the demand, but looking at CFL's widespread reach it seems in a very good position. CFL is also a company that has been present in both domestic as well as export market since its inception. Thus I am very optimistic about this company and think it will turn out to be a very good long term investment. Buying at current levels and on dips would be good.

Happy Investing

Sree Rayalaseema Hi-Strength Hypo Limited BSE Code:532842 NSE Id: SRHHYPOLTD

Water has become a highly precious resource. There are some places where a barrel of water costs more than a barrel of oil.

CMP (BSE): Rs. 52.20

CMP (NSE): Rs. 51.65

Industry: Commodity Chemicals

Sree Rayalaseema Hi-Strength Hypo Limited (SRHHL), is a part of the TGV group. It is the only Indian manufacturer of Calcium Hypochlorite. It is one of the few companies in the world that are dedicated to research and development of products in water treatment and purification.

SRHHL is internationally recognized as the provider of unmatched quality products through its world-class sodium process technology developed through highly skilled in-house research and development team. It has grown to become a global leader in exports too.

Industry:

Without water, life is impossible. I would rephrase it and put it as without CLEAN and SAFE water, life is impossible. However there is less and less of clean and safe water available per person. Water treatment is something that touches nearly every individual or industry in one way or another as the water treatment industry seeks to bring impure water up to potable standards or better. And as the human population continues to grow exponentially, the need for clean water will grow with it. Responding to this trend, water treatment has changed considerably in the last 50 years and new advances and developments continue to shape the market. However, there has been various regulations regarding providing clean water, but with each new regulation, there has been restrictions on the use of certain chemicals and increased use of others. And as population will increase, providing clean water will become an increasingly difficult problem. Thus even if the water treatment chemicals industry is considered as a mature market, it still is that one sector that adapts and expands in response to market opportunities.

The various chemicals that SRHHL manufactures are

(1)Calcium hypochlorite: Calcium hypochlorite is an extremely versatile sanitation and disinfection product. SRHHL's Aquafit is a high grade calcium hypochlorite which has very wide applications in swimming pools and drinking water treatments. It is one of the few in the world and the only in India to manufacture and export calcium hypochlorite of 65%- 70% min chlorine content. A state-of-art sodium process technology developed through in-house R&D efforts has helped SRHHL to manufacture the product with chlorine content of 65%-70%. It is one of the few in the world and the only one in India, to manufacturer and export Calcium Hypochlorite of 65% - 70 % Min Chlorine content. In addition to this, it proposed to expand its calcium hypochlorite plant with 3 streams of approximately 6600 MTs each. With its current capacity being around 10000 MT's, after expansion its total capacity would be almost 30000 MT's.

(2)Stable Bleaching Powder: Due to its multi-dimensional properties, it finds ready application in a range of industries such as textiles, paper, leather, aquaculture and sugar industry. It is even used for water and sewage treatment.

(3) Monochloro Acetic Acid: SRHHL is a front-ranking producer in this product. It is used by all the leading manufacturers of Non-Steroid Anti-Inflamatory Drugs, pharmaceuticals, pesticides, organic chemicals, etc.

(4) Sulphuric Acid: It is used in steel, heavy chemicals and fertilizer industry.

Oppurtunities:

• The demand of Calcium Hypochlorite is growing in the international market.
• Most of the raw materials are easily available locally thus saving their logistic cost. SRHHL has a distinctive edge in the manufacture of this product because of indigenous raw material availability and supply of some specialized chemicals by Sree Rayalaseema Alkalies and Allied Chemicals Ltd.

SRHHL has a small equity of just 10.45 crores. Companies with small equity and good business models and products are always a good buy. If you look at the book value SRHHL is quoting at almost its book value which again makes it a good buy. Its PE is 9.41 compared to the industry average of 15.32. There is one negative point and that is that it is a non-dividend paying company, however if you look at the extent of expansion prospects, the company seems to be retaining back the entire profit so that it could be deployed for the expansion plan. This seems good as after the complete expansion, its calcium hypochlorite capacity will triple, leading to higher sales and higher profits, thereby increasing profitability for its shareholders.

Now if you compare the sales and the market capitalization of SRHHL, the sales is almost 4 times the market cap. This makes it even more an attractive buy. In addition to this when the capacity expansion is complete, the sales will almost triple, which will makes the investment in this company at the current valuation even more attractive. The earnings for FY10 was Rs. 3.28 per share. However if you look at the the first quater results and its earnings it is Rs. 6.14 per share. Now thats almost double earnings in just one quater and with 3 more quater results left.

Today its CRUDE, tomorrow its going to be safe and clean WATER. This is one such sector that holds a lot of potential and opportunities in the coming future. I have already talked about the future demand for water infrastructure in my earlier post of Electrosteel Casting. Well, water treatment chemicals too can be included in the same sector which holds the same kind of importance and presents the same kind of prospects. It is definitely a good value pick for long term investment.

Happy Value Investing.

Oriental Carbon and Chemicals Limited (OCCL) BSE Id: 506579 NSE Code: ORIENTCARB

CMP (BSE): Rs.139

CMP (NSE): Not traded in last 30 days (as per moneycontrol.com)

Industry: Chemicals

Oriental Carbon and Chemicals Limited (OCCL), is a company belonging to the Duncan JP Goenka group of companies. OCCL manufactures Insoluble Sulphur, Sulphuric Acid and Oleums. The core business of OCCL is manuacturing and sales of Insoluble Sulphur ,which is used as a vulcanizing agent in the rubber industry. In 1994, OCCL set up a unit for manufacturing of Insoluble sulfur which later emerged as the star product of the group.

(1) Insoluble Sulphur:

Insoluble Sulphur is mainly used in tyre industry. The Indian market for Insoluble Sulpur is growing more than the growth rate for the tyre industry due to increasing share of radial tyres in commercial vehicles which consume more Insoluble Sulphur. With the revival of the global economy, the auto sector has picked up significantly resulting in huge demands and huge growth in the auto companies. This has trickled down to the auto ancillary sector and hence the demand for Insoluble Sulphur is growing at a robust pace and this trend is expected to continue in the coming year as new tyre capacities are being added in India.

The consumption of insoluble sulphur in China is nearly five times that of India. This also indicates that there is an ample scope of demand increase in India. Thus the existing capacities will be diverted to cater to the domestic demand and the new capacities (11000 MTPA), being added up at the Mundra plant will cater to the international markets. With the increased domestic demand and increase in international customer / plants base the company does not see any difficulty in selling the new capacities.

OCCL’s Insoluble sulfur units are situated at Dharuhera, in the Indian State of Harayana. Insoluble sulfur manufactured in this plant is marketed as "Diamond Sulf" in India and around the world. One of OCCL's unit in Dharuhera as a designated Export Oriented Unit. The plant, through continuous innovations over the years, is counted among the best in the world. It adheres to total Quality norms and is ISO9001-2000 & EMS14001-2004 Certified. OCCL produces wide range of insoluble sulfur grades which are being widely exported to leading tyre companies around the world. In India OCCL is the undisputed leader with major market share.

(2) Sulphuric Acid and Oleums:

OCCL manufactures both Commercial Grade and Battery Grade Sulphuric Acid and Oleums. Sulphuric Acid finds its application as a dehydrating agent, catalyst, active reactant in chemical processes , solvent , and absorbent. It is used in the process industries from very dilute concentrations for pH control of saline solutions to strong fuming acids used in the dye, explosives , and pharmaceutical industries. Due to recovery in demand and normalization of the raw materials cost, the performance of the sulphuric acid has improved.

Value Addition and Combating Competition:

The demand of value added Insoluble Sulphur grades such as AS, HD grades is growing. The reasons for this are the advantage that it offers such as ease of handling and more production flexibility to the consumer. OCCL through continuous Research and Development efforts, has developed new value added grades many of which are now approved by international tyre companies. This gives an edge to OCCL against competitors from China in the international market besides helping to sustain realisation levels.

OCCL has a small equity base of just 10.31 crores. This is a big positive as the profits are divided among a smaller base and with capacity expansion and more profits, the stock of OCCL will take off exponentially. Thats why I try and go for companies with small equity base. Along with small equity, it is a low debt company with debt equity ratio standing at just 0.2. It is quoting at 1.55 times it book value. Its PE is 4.23 whereas the Industry PE is 5.71. However, in future with the additional capacity of 11000 MTPA, the sales and the earnings of the company will increase resulting in more value creation for the company. Its dividend yield comes to about 2.8% (Rs. 1.5/- dividend was paid for the year 2009-2010).

From FY 2009 to FY 2010, the EPS has increased from Rs. 7.41 to Rs. 28.61. This huge profitability was due to the stable raw material prices which resulted in good profit margins for the company. During FY 2009, the prices were very volatile and the prices of raw materials peaked resulting in low profitabilility. In FY 2010, prices were almost half of the peak prices, resulting in low cost for the company. Like FY2010, even in the current year the prices of the raw materials are stable, which means that it would prove profitable for the company.

With the global economy improving and the auto sector booming, I am very optimistic about OCCL. With the surging demand of insoluble sulphur, the additional capacity will bring in more earnings resulting in more value creation.Buying at current levels and on dips would make the investment in this stock attractive.

Happy Investing.

Emmbi Polyarns Limited (EPL) BSE Id: 533161 NSE Code: EMMBI

CMP (BSE): Rs. 17.10

CMP (NSE): Rs. 17.05

Industry: Packaging

Emmbi Polyarns Limited (EPL) is a newly listed company that is engaged in the manufacture and sale of FIBC (jumbo bags) and wowen sacks and various woven polymer based products like container liners, protective irrigation system, canal liners , flexi tanks, car covers, etc. EPL is one of the well established brands in the field of woven polyethylene and polypropylene product manufacturing industry. Its manufacturing facility is located at Silvassa. In addition to FIBC EPL also manufacture various woven polypropylene products including small bags, box woven bags, roofing underlayment fabric, courier bags, ground covers, silt fence and geotextiles.

Presently, EPL is involved in producing various types of packaging material for domestic as well as export markets. In domestic markets, EPL is one of the most active players for addressing the packaging needs of the FMCG products such as detergents, branded salt, branded wheat flour, etc. In recent years, EPL has acquired substatial share in the export market for the various packaging needs for products such as construction aggregates, chemicals, seeds, fertilizers, cements, foodgrains, etc. It even makes few value added products such as car/automobile covers, container liners, anti corrosive packaging, electrically conductive polymer based packaging, etc. Last year, EPL launched a new product called 'AquaSave', which was specially focused on the water conservation based product.

During this year, EPL successfully completed its IPO and raised an equity of Rs. 38.95 crore. The proceeds from the IPO will be used in its expansion program. Currently, EPL is under the expansion mode and will be enhancing its manufacturing capacity from the current level of 5000 MTA to around 18000 MTA, with theaddition of around 13000 MTA new capacity.

EPL has an equity base of Rs.16.49 crore. Its has a small debt equity ratio of 0.31 which keeps it well within the safety zone. It EPS has shown a growth of almost 25% from FY09 to FY10. At the CMP, EPL is quoting at a PE of 8.34 in an industry where the average PE is around 14.8. Its market cap is 28.2 crore whereas its sales for FY10 stood at 51.89 crore. Thus you are getting this stock at half the price of its sales and these sales are slated to grow almost more than 3 times post expansion. Its book value comes out to be Rs.27.10/share and at the CMP, EPL is available at a discount, with its P/BV at 0.63. This further adds on to make it a good buy.

EPL is present in both domestic as well as export markets owing to its distribution networks. Almost 40% of its sales come from the export markets and the rest 60% from the domestic markets. In addition to this, packaging industry is one industry that can be considered recession proof industry. Since EPL too belongs to this sector, I consider it as a safe bet and a good value buy.

Happy Value Investing.

Tata entering into the Protein Zone

An article in Business Line dated 5th Sep, 2010 stated that Canada and Australia specially grow pulses, just to export it to India, looking at its increasing demand for pulses (that is a key part of its meal). The potential that these 2 countries see is so high that they have some Special Economic Zone (SEZ) being set up, where pulses would be grown specially for India.

India produces 14-15 million tonnes of pulses and the target is to increase it to 38 tonnes by 2025 to meet the growing demand, ensuring that no protein deficiency problem arises among poor. Looking at this big opportunity, the Tata group has also decided to exploit this through its 2 companies - Tata Chemicals and Rallis India (subsidiary of Tata Chemical). They went on to do a pilot study in Tamil Nadu and Punjab to know everything from procuring seeds to growing to selling them.

Rallis even entered into a public-private partnership with TN-IAMWARM. Through this they gave seeds and a package of practices to about 1000 farmers to grow pulses on 3500 acre land. Rallis has developed seed farms to multiply and produce quality blackgram seeds. This has helped the farmers improve their farm yields and income by Rs.5000 per acre. Rallis then buys back the produce, packages it and sells it as Tata Urad Dal, under the brand name i-Shakthi. They are using the distribution network of Tata Chemicals to market the packaged pulses.

This is a brand new synergistic relationship showcased by Tata Chemical and Rallis India. By venturing into new and different projects together, in the future they can create alot of value for the shareholders.

In one of my earlier posts, I have mentioned about Tata Chemicals Limited (TCL). This stock is definitely a long term stock for me that I want to have in my portfolio for the rest of my life. It actually believes in creating value for its shareholders and at the same time helping out the society as well. It is in TATA's that we trust.

Happy Investing.

Dhunseri Petrochem and Tea Limited BSE Code: 523736 NSE Id: DPTL

Equity diluted by 200% , however the company value rose 10 times.

CMP(BSE): Rs. 173.20

CMP(NSE): Rs. 173.50

Industry: Packaging, Tea and IT

Dhunseri Petrochem & Tea Limited (DPTL) is the flagship company of the Dhunseri group. It is a result of merger of two manufacturing companies present under the Dhunseri group. One company was Dhunseri Tea and Industries Limited (DTIL) which was engaged in tea production and marketing as well as IT infrastructure development. It is among the top ten tea companies in India, with almost 3% of the total tea production in India. The other company was South Asian Petrochem Limited (SAPL) which is into manufacturing of PET resin and is one of the largest PET resin manufacturers in South Asia. Early in FY 11, the 2 companies merged to form DPTL. The main objective behind the merger of SAPL in DTIL was to generate a large, recurring and reasonably predictable cash flow leading to sustainable reinvestment. This will help them multiply its revenue size in one stroke.

Synergistic Benefits:

• Before the merger, DTIL was a 105.84 crore organisation. After its merger with SAPL, it went on to become a 1203.23 crore company.
• Before the merger, DTIL was in tea business. After the merger it is into 2 business and soon they are moving into a new business through development of IT infrastructure, which will give them an annuity income.
• Initially, DTIL used to market its product in just India. However after the merger, DPTL markets its product in 30 countries.

DPTL's PET resin plant is spread across 35 acres in Haldia, West Bengal. Its present capacity is 200000 TPA. In 2012, after the commissioning of the new plant, the cumulative plant capacity would be 410000 TPA. DPTL also has 11 tea estates in Assam. In addition to this, DPTL is also planning to set up a greenfield, state-of-the-art PET resin plant with a capacity of 420000 TPA in Egypt, which is expected to be commissioned by 2012.This will quadraple the current PET resin capacity to 830000 TPA within three years. The result would be a four-fold growth in topline in the next 3 years following the commissioning of the Egypt PET resin project and 100% growth in Haldia plant in the next 2 years. This will result in huge value creation for the shareholders. Optimistic about the value creation by DPTL, the promoters already hold 62.61% of the expanded equity.

Value Creation:

• The Jaipur Packet Factory and the investment division of Dhunseri Tea & Industries Ltd were spun off and merged with DI Marketing Limited. The main aim behind this was to focus on its three major business lines - PET resin, tea and IT infrastructure development.
• The consolidation will help DPTL multiply its revenues in one stroke. In addition to this it will enable them to combine their predictable cash flows from PET resin with those from the cyclical tea business and their largely predictable commercial annuity business.
• Initially SAPL was a 100% export-oriented unit (EOU). After the merger it will cater to the growing domestic demand with an option to export.
• A 8MW coal-fired captive power plant in Haldia was commisioned in early FY11. This will help them in energy management.

DPTL's Divisions

(1) PET Resin Division:

DPTL's PET resin plant product finds its application in the manufacture of PET bottles used in the packaging of mineral water, carbonated soft drinks, edible oil, cosmetics, etc. Its brand is known as ASPET. The global PET resin demand is growing at 7% CAGR. The PET resin industry holds out bright prospects because of population growth, widening applications and replacement of the container/glass bottles. DPTL is the second largest producer of the PET resin in the country.

India is one of the more attractive geographies PET resin consumption of owing to large population, annual population growth, growing incomes, rising consumption, around 9% GDP growth and a gradual replacement of container glass by a transparent polymer like PET. In India, the demand has grown by 15% YoY and is now expected to grow at 20% YoY over the next five years.

(2) Tea Division:

Tea is India's staple beverage. India is the second largest tea producer in the world (after China), accounting for over 25% of the total global production. Due to adverse weather conditions last year, there has been a major shortfall in tea production. As a result of this, India's tea exports rose by 20% in the first five months of the current year to 71.2 million kgs. The demand for tea is expected to increase further. The consumption in India is growing at 2.5- 3% across 2002-2009. However at the same time the incremental production is not growing at the same rate. It grew at a CAGR of 2.4%. This tight demand-supply scenario would keep the tea prices strong.

DPTL's tea division produces 10 million kgs of CTC and orthodox tea. It is a market leader in the packet tea segment in Rajasthan. Its brands are LAL GHORA and KALA GHORA. Its entire production is recognized as superior quality Assam tea. DTIL previously merged with its own group company Tezpore Tea Company Limited in 2007-2008. As a result, the production grew from 7.55 mn kgs to 10.4 mn kgs in 2009-2010. It has also invested in irrigation infrastructure resulting in 100% irrigation coverage of its gardens due to which its gardens have an average yield of 2265 kg per hectare compared to the industry average of 1900 kgs per hectare.

(3) IT-SEZ Division:

DPTL has set up a IT-focused commercial infrastructure at Bantala in Kolkata with the prospect of stable annuity revenue. Bantala is considered to be a preferred destination for IT-focused companies. The first phase of this project will be complete by early 2012.

Before merger, DTIL had an equity of 11.71 crores. During merger, for each 10 SAPL share, one DPTL share was credited to SAPL's shareholders a/c. If you consider this, then the equity of the resultant company DPTL increased by another 23.314 crore. This resulted in almost 200% dilution of the initial equity base of the DTIL, bringing the total equity base of DPTL to approximately 35.03 crores. Equity dilution is not viewed positive by some investors. However if you look at the synergistic value, it rose by 10.36 times from 105.84 crore organisation to a 1203.23 crore company. Thus inspite of equity dilution by over 2 times, the value rose by almost 10 times.

Now with the PET resin capacity at 200000 TPA all set to quadraple to 830000 TPA within 3 years, means there would be qudraple increase in the current sales just from the PET resin division. In addition to this, there will be steady rental income flowing in from its IT-SEZ division within 2-3 years. Apart from this, the tea industry is going to witness good growth in the coming years. All this put together, means a multifold increase in the sales of DPTL in the coming 3 years.

At the CMP, the stock is available at par with the book value. Its current market cap is almost half of its sales. It has a total debt of 397.56 crore which is less than its reserves of 571.54 crore. Its debt equity ratio is about 0.68 which is lower than the generally acceptable ratio of 2. In addition to this, its earnings are sufficient to cover its interest payment upto 6 times which keeps DPTL well within the safety margin. It is a dividend paying company with the dividend yield coming upto 2.33%. Its EPS for the year FY10 comes out to be approximately Rs.25 per share on the expanded equity. Thus its PE works out to be approx 6.5. It looks attractive to me based on its future multifold earnings capacity.

Buying at current levels and on further on dips would make investment in this stock very attractive. It appears as a strong long term investment to me.

Happy Investing.

Phillip Carbon Black Limited (PCBL) BSE Code: 506590 NSE Id: PHILIPCARB

CMP (BSE): Rs. 200.75

CMP (NSE): Rs. 201.30

Industry: Carbon Black

Phillip Carbon Black Limited (PCBL) is a part of the RPG group. In India, it is the pioneer and the leading producer of carbon black, a key input for tyre industry. PCBL's present installed capacity is 270000 MTPA. PCBL is not only the largest exporter of carbon black from India but also one of the largest in Asia in its field. It has 4 plants in India that are strategically located, which facilitates it to optimize its logistics cost within India as well as exports to Europe.

Industry Overview:

Last year, the demand for carbon black dropped by 7.5%. The global capacity utilization of carbon black was just 71% in 2009, due to the low demand in USA, Europe and South East Asian markets. However in spite of the global meltdown, India and China witnessed growth due to strong domestic consumption. In India, there was a 29% growth in demand in 2009, it went up to 605000 MT from 470000 MT.

Opportunity:

• Recently one of the global player in the carbon black industry announced closure of its facility in India. With this, the total installed carbon black capacity in India stands at 700000 MT. Out of this, almost 58.5% of the installed capacity would be with PCBL by the end of FY11.
• Currently almost all tyre companies in India are executing green field/brown field expansion projects to meet increasing demand for tyres from replacement as well as OE segments, particularly for passenger radial tyres.
• A few major global automakers have announced significant investments in India which will raise the demand for carbon black in future.
• The thurst on infrastructure development, particularly roads, coupled with the rise in domestic disposable income should have favourable impact on demand for tyres and consequently carbon black.
• Launch of the smaller car during FY10 has paved the way for development of smaller cars by other players in the auto industry, which should push the four-wheeler population in India. The auto companies may also cater to demand for smaller car in overseas markets from their facilities in India resulting in higher demand for carbon black.

Threat:

• Countries such as China, Russia, Australia and Thialand dump their carbon black in India at a low price. This serves as a threat to the India carbon black players. In order to counter this Anti-dumping duty was imposed on the import of carbon black. Still, the carbon black imports increased by 30% during FY10. Thus this threat of dumping will continue to prevail as long as global carbon black capacity utilization remains lower than that in India.
• Expansion of carbon black manufacturing capacity simultaneously by the domestic competitors.
• The feedstock for carbon black is the residual oil obtained from the distillation process of crude and is subject to high volatility. However the price of carbon black is revised once a quater. If PCBL is unable to timely pass on the increased CBFS cost, it may have an impact on the its profit.

Expansion:

PCBL has commissioned its 90000 MT carbon black plant at Mundra during the first half of FY10. This brings the total capacity of PCBL to 360000 MT. In addition to this, PCBL moved up in the global ranking from 10th to 8th position. In addition to this, PCBL has further decided to expand its carbon black capacity at Mundra by setting up another 50000 MT plant, which is expected to be commissioned during 3rd quater of FY11. This will bring the total capacity to 410000 MT by end of FY11. Further statutory clearances for the proposed 65000 MT carbon black is awaited.

Power Business:

PCBL has a total of 46 MW of power generation capacity. It has a 30 MW co-generation power plant at Durgapur and 16 MW CPP at Mundra that was commissioned last year. In addition to this it is further expanding its power generation capacity. It is expanding it CPP capacity by 8 MW at Mundra. It is expected to be commissioned this year. Further, a 10 MW CPP is being set up at Kochi. This is expected to be commissioned by the end of this financial year. Another 12 MW CPP at Vietnam is being planned. However, PCBL is awaiting certain statutory clearances. With this the total installed capacity will increase to 68 MW in FY11 and to 78 MW by FY12. They are further expanding it by another 80 MW.

Now, power like in the sugar industry is a by-product for PCBL, but if you look at the bottom line contribution last year it is more than 60% to the bottom line because the entire gas that is getting generated from the carbon black business is a feed stop for the production of power which is just about 60 paise per unit cost and this power is sold at Rs.5 per unit. This means a clear 733% margin in its power business. Out of the total power that is produced by them, 30% is used by them whereas 70% is for merchant sell.

New Initiatives:

PCBL with its R&D activities launched special carbon black grades for non rubber applications. These new grades are well accepted by the domestic customers and are comparable with the imported products. The contribution of this special grade carbon black in the overall topline of PCBL was modest during FY10. It has even chalked out plans to ramp up sales from this segment in the coming years.

PCBL is quoting at 2 times its book value at the CMP. Its PE is 5.09. It is one of the major player in carbon black industry. The dividend yield is almost 2.5% at the CMP. Its sales is more than twice its market cap. For FY 2010, its EPS was Rs.43.43. In FY2009 it made a net loss of Rs 64.84 however in FY10 it made a net profit of Rs.122.69 due to the revival of the auto sector, the main user of carbon black. In addition to this it is even earning good amount of profits from its power business. All put together,with auto sector booming and cost benefit in power generation, PCBL has all chances of moving into higher space with around 160 cr profit and by next year around 200 crore plus profit.

The auto sector is humming and so is the tyre and tyre retrofits sector where carbon black is used. And in carbon black, PCBL is the largest player in India. With the huge growth in auto sector, the carbon black demand is bound to increase, which makes the prospects for PCBL more attractive.

Had this stock been bought 2 years back, it would already had become a MULTIBAGGER till now. However it still looks attractive to me with the capacity expansion in both carbon black business and power business. Right now, the markets are overpriced, thus wait for some time and buy when the market corrects it self. At lower market price, this stock would become more attractive.

Happy Investing.

Graphite India Limited (GIL) BSE Code: 509488 NSE Id: GRAPHITE

CMP (BSE): Rs. 94.85

CMP (NSE): Rs. 94.75

Industry: Other Industrial Goods

Graphite India Limited. (GIL) is the largest producer of graphite electrodes in India and is one of the largest producer globally. GIL accounts for almost 6.5% of the global electrode capacity. The principal manufacturers are GIL has a total of 4 manufacturing plants - 3 in India at Durgapur (34KT), Bangalore (13KT), Nashik (13KT) and the 4th one in Germany (14KT). The total manufacturing capacity comes to approximately 78000 tonnes per annum. GIL has over 40 years of expertise in the industry and is globally competitive. GIL exports around 65% of it production to caters to its clients in over 50 countries. GIL also has facilities designed for the manufacture of calcined petroleum coke (30KT), impervious graphite equipment and glass reinforced plastic pipes and tanks. It also has an installed capacity of 33 MW of power generation through hydel and multi-fuel routes.

GIL manufactures the full range of graphite electrodes but it stays more focused on the high margin, large diameter, ultra- high power (UHP) electrodes. Currently, approximately 85% of GIL's total capacity is UHP. GIL is well poised in the global graphite electrode industry through its quality, scale of operations and low cost production base.

Industry Overview:

Graphite Electode is used in the electric arc furnace (EAF) based steel mills for conducting current and is a consumable item for the steel industry. The estimated world capacity of the Graphite Electrode in EAF is over 1 million MT. There are 2 basic routes for the steel production - (1) Blast Furnace (BF) and (2) Electric Arc Furnace (EAF). The EAF route to steel production has increased over the last 2 decades from 26% to 32% at the global level. This share of EAF is expected to grow further in years to come due to 3 main reasons - (a) an environment friendly and less polluting process, (b) low capital costs, (c) faster project commissioning time. Fresh investments in the EAF steel mills are characterized by large diameter UHP electrodes. It is expected that the demand for UHP electrodes will grow in proportion.

Due to the global meltdown, the global production of steel during 2009 was 1.2 billion MT, down almost 8.1% compared to 1.31 billion MT in 2008. A relatively weak demand in the steel consuming sector resulted in a steep fall in the demand of crude steel as well as graphite electrodes. Though the developed economies like Europe, USA and Japan, still continue to reel under the recessionary pressure, steel production and electrode demand in India and some Asian economies have recovered back to the pre-recession levels or in some cases even more. Currently, there will be softening of the electrode prices due to American, European and Japanese suppliers entering the Indian and the Asian market due to the demand. However, it is expected that by mid 2011-2012 the steel industry would revive to its full potential.

Expansion:

Foreseeing the revival of demand in the steel industry, GIL revised its expansion plan at Durgapur plant from 10500 MTPA to 20000 MTPA. The additional capacity will be commissioned with a low incremental cost of Rs. 67.5 crore. This additional capacity will be installed with eco-friendly, energy- efficient advanced technology leading to a more cost efficient and sustainable operation in the long term.

Backward- Integration:

One of the many backward integration initiatives by GIL, is its coke division at Barauni. It is engaged in the manufacture of Calcined Petroleum Coke (CPC), Electrode paste and the Tamping paste. CPC is the raw material used in the manufacture of regular and high power grade Graphite Electrode. It is also a raw material for fine grained high density graphite used in speciality graphite products and Impervious Graphite Equipment. Electrode paste is used in ferro alloy smelters and Tamping paste is used as a lining in aluminium and steel smelters.

Other Businesses:

(1) Graphite Equipment Business: The Impervious Graphite Equipment (IGE) division is engaged in manufacturing and marketing heat exchangers, ejectors, pumps and turnkey plants at its Nashik plant. The Graphite Equipments have wide range of applications in corrosive chemicals industries such as pharmaceutical, agro-chemical, chloro alkali and fertilizer industries.

Modernization and expansion work of this division to improve the overall manufacturing efficiency has been completed.

(2) GRP Pipes and Tanks Business: Glass Reinforced Plastic (GRP) Pipes and Tanks Division is engaged in manufacturing and marketing of GRP Pipes and Tanks. GIL converts users of conventional pipes to GRP through re-engineering, strategic marketing, superior product quality, competitive pricing and value added services. Second manufacturing line which will enable production of pipes up to a diameter of 3000 mm has been commissioned during the year.

(3)Power: GIL has an installed capacity of 33 MW of power generation through hydel (19.5 MW) and multi-fuel routes (13.5 MW). Power is a major cost input in the manufacturing of Graphite Electrodes. The cost of power from grid continues to rise year-over-year. The power requirement at Durgapur Plant will go up with the on going expansion. In order to reduce dependence on grid power and ensure availability of quality power at economical rate, GIL is setting up a coal based thermal power plant of 50 MW capacity at Durgapur. This will enable GIL to further optimise its cost of production and increase its competitiveness in the global market. It has also entered into a long term agreement with Wardha Power Company (WPC), to receive power supply and in turn made a commitment to invest Rs. 9 crore in WPC and is expected to commence later in the year 2010-11.

(4) Powmex Steels Division (PSD): PSD is engaged in the business of manufacturing high speed steel and alloy steel having its plant at Titilagarh in the state of Orissa. PSD is the single largest manufacturer of High Speed Steel (HSS) in the country. Its current market share is estimated at around 60%. HSS is used in the manufacture of cutting tools such as drills, taps, milling cutters, reamers, hobs, broaches and special form tools. HSS cutting tools are essentially utilized in automotive, machine tools, aviation and DIY market.

The last year, in spite of challenging business scenario, GIL posted a satisfactory performance, primarily because of its continuous cost optimization efforts throughout all the divisions. Capacity utilization of graphite electrode segment was 52% in FY10 as compared to 85% in FY09. Production was attuned to demand. Lower demand resulted in lower sales. Despite lower sales, the higher sales realization, lower input costs and reduction in the operational costs helped it in improving the operating margins. In FY10, the gross sales were Rs.1178 crore as against Rs. 1183 crore in FY09. In spite of no significant difference in the gross sales, the PAT stood at Rs.232 crore for FY10 against Rs.194 crore in FY09, showing a growth of almost 19.5%. The graphite electrode division is the main contributor to the revenues for GIL. In FY10 it contributed nearly 82% to the total revenues. It has a total equity of Rs.34.30 crore and reserves of almost Rs.1149.22 crore. Against this it has total debt of Rs.249.26 crore which brings it debt equity ratio to just 0.21 because GIL has repaid a significant amount of debt in the last 4 years. Thus it has highly de-leveraged itself which makes it more attractive for me.

GIL is quoting at 1.47 times its book value and is available at a PE of 7.88 at the current price. Its EPS for the FY10 was Rs.13.54 per share. It has shown a growth of approximately 34% CAGR in its earnings since the last 5 years. It is a regular dividend paying company and it paid a dividend of Rs. 3.5 per share (175%, FV - Rs. 2 per share) which brings dividend yield at 3.7% at the current levels. GIL's recent decision to add capacity and backward integration initiatives would add to the volumes in the future. Growing demand for graphite electrodes with the revival of the global steel industry and all around improvement in the operating efficiency can lift GIL's topline as well as bottomline in the coming years.

GIL does not only offer its customers quality products and services. It conducts business with a respect for the environment at every stage of its product cycle across all its plants. As a result, GIL is committed to sustainable development. It is a green company. This thing might not be important for some of the investors but to me it is, because a company which does its business keeping the environment in mind is a good company to invest in. For me, the best CSR is to do business while sustaining the environment and this is definitely one of them.

Till the global economy is revivied, the performance of GIL will remain strained, however once the global economy picks up and the steel industry picks up, the growth will be tremendous. With the steel sector expected to pick up in the mid 2011-2012, I foresee huge growth potential and huge volumes for GIL with the new capacity additions. The future of this company seems very good. It may be considered as a VALUE pick. A good long term bet.

Buying at current levels and at further dips would be very attractive.

Happy Investing.