Value Buy......Screaming at the Loudest....

Oriental Carbon & Chemical Ltd. (OCCL) and Sree Rayalaseema Hi-Strength Hypo Ltd. (SRHHL)

I had mentioned these two stocks last October. From the October levels, they have fallen down. A lot in case of SRHHL. OCCL even fell down to 100 levels but has managed to recover till 133, the CMP. OCCL and SRHHL was broken down on very small volumes. However the optimistic views that I shared wrt them, still stands strong. Infact, I think they have become more attractive in terms of valuation and has a massive amount of value to be realized. In my view, over long term, value always gets realized. So here are two stocks screaming out loud - VALUE BUY.

OCCL is a manufacturer of insoluble sulphur which is used in tyres. I am very optimistic about the auto sector in the long term, thus the demand for insoluble sulphur is set to increase. OCCL is in a kind of monopolistic position, thus putting it in a very sweet spot and making it a great attractive target for merger or aquisition. Value is always realized when there is a potential buyer, and with its monopolistic position in the market, its value can possibly be realized.

OCCL is available at almost its book value and has posted an earing of Rs. 36.30 for the year ending March 2011 as against Rs. 28.61, showing a growth of 26.7% y-o-y. This is incredible. Its PE at the CMP stands at just 3.24. It is a good dividend paying company with dividend yield of 3%. A good thing about it is that it has a very small equity of just Rs.10.31 cr. Thus even a small rise in its earning can reflect in a much higher rise in its market price. A potential MULTIBAGGER.

SRHHL is the only Indian manufacturer of Calcium Hypochlorite. Although being blessed with adequate rainfall, alot of it is wasted and there is less and less of CLEAN and SAFE water available per person. Due to this, water treatment industry has changed considerably during the last 50 years and is growing with each passing year. Thus a lot og growth potential lies ahead for companies involves in manufacturing of water treatment chemicals, just like SRHHL. SRHHL is one such company that is 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.

SRHHL is available at such high discount, almost at 0.63 times its book value at the CMP. Its EPS for the year ended 2011 stood at Rs.18.97 against Rs. 3.28 in the previous year, showing a growth of 4.78 times. At the CMP and the FY11 earnings, its PE stands at just 2.25. It paid a dividend of Rs.1.5 per share resulting in a dividend yield of 3.5% at the CMP. Like OCCL, even SRHHL has a very small equity base of Rs.10.45 cr. It looks very attractive at the current valuations.

Happy Value Investing.

Karuturi Global Limited (KGL) BSE Code: 531687 NSE Id: KGL

Risky bet

CMP (BSE): Rs. 12.44

CMP (NSE): Rs. 12.40

Industry - Agricultural Products

More food will have to be produced worldwide over the next 50 years than has been during the past 10000 years combined.

In an interview, Warren Buffet said that he would rather have all the farmland in the US than all the gold the world has ever produced. This is simple logic- when hunger strikes, we crave for food and not gold.

More than crude, the more enduring challenge would be how to feed the world population which is set to rise from 7 billion to 9 billion by 2050. This will require a 70% increase in food production. Not that the world does not produce enough food for 7 billion people, it does. But the problem arises due to the poor infrastructure due to which about 30-35% of fruits and vegetables are destroyed in transit. Thus with such massive challenge in front of us, it is the time to concentrate on AGRICULTURE. Karuturi Global is one such Indian company that has identified agribusiness as its prime growth domain.

Karuturi Global was incorporated in 1994 and today it is a world leader in production of cut roses with operations spread across Ethiopia, Kenya and India. With an area of over 239 hectares under Greenhouse cultivation, they annually produce around 555 million stems of quality cut roses, essentially for exports to high-value markets such as Europe, Middle East, Far East, Australia, New Zealand and the US.

After identifying agribusiness as the next prime growth domain, they have taken up cultivation in Ethiopia on a mega scale to become a key player in the global agro-products market. They have acquired around 7.65 lakh acres of land in Ethiopia and they aspire to become a complete agriculture production company. Their goal is to make a significant contribution to alleviate the global and african food crisis. Their other business interests include food processing, floriculture retailing and information technology.

Global Scenario:

The demand- supply situation is tightening and this could put the world in a very delicate situation since demand is soon expected to outstrip the supply. It is not that the world does not produce enough food for 7 billion people. It definitely does. However there is a lot of wastage due to poor infrastructure and inadequate facilities.

So now Karuturi Global's goal is to alleviate the global food crisis, and the aim is to become a complete agriculture production company with global presence. Thus in the 1st phase, they are cultivating cereals (maize and rice) on the 70000 hectares of land and oil palm on the 20000 hectares land of the total 311000 hectares of land that they have acquired on a lease basis in Ethiopia.

Maize is considered to be the third most important cereal grain in the world after wheat and rice. In developed countries, maize is consumed mainly as second-cycle produce, in the form of meat, eggs and dairy products. In developing countries, maize is consumed directly and serves as staple diet for some 200 million people. Most people regard maize as a breakfast cereal. However, in a processed form it is also found as fuel (ethanol) and starch. Global demand for maize to increase by 45% - Global cereal demand in 2020 is estimated at 2.1 billion MT and will show a major shift in the favor of maize with demand estimated at 852 million. This reflects a substantial growth of 72% for maize in developing countries.

Business Segments:

(1) Floriculture:

Floriculture has witnessed significant growth in the past few decades, and has today matured into a dynamic, global and fast-developing industry. While the developed world viz., the EU, the U.S. and Japan, continues to account for two-thirds of the world market for cut flowers, developing countries situated along the equatorial line have now emerged as major producers and exporters. The main drivers for this paradigm shift are favourable climatic conditions for cultivation, and lower production and labour costs.The floriculture industry has been blooming at a healthy 11-13% over the past few years and is expected to maintain its growth momentum. And, Karuturi Global, the world’s largest, multi-location producer and exporter of quality cut roses, aims to spearhead this growth and consolidate its position in the global market. They have identified two African nations0 Ethiopia and Kenya for developing their production base. Their distribution network includes auctions (for about 55%) and the remaining 45% is distributed directly to wholesalers and retailers.

They even have their own retail initiative in India called 'Flower Xpress', which aims at revolutionise marketing of flowers directly to the end-users. Under this initiative they have a total of 22 shop in shops and stand alone outlets located at highly accessible and strategic locations in Bangalore, Chennai, Hyderabad, Delhi and Mumbai. Along with this it has also picked up 54% stake in Mumbai based Florista. Florista has chains of floral designing boutique stores spread across India. It speacializes in designing exquisite flower arrangement and decorations made from exotic flowers imported from across the world. It currently has 15 retail boutique stores in India and has a strong network. Karuturi is planning to merge its retail operations carried under the brand name 'Flower Xpress' with Florista. This will result in consolidation of KGL's retail presence. The main aim is to tap the potential of the modern retail, improving visibility and branding and to become the largest retailer in the floriculture space in India, Thus with this aim, KGL intends to aggressively grow the retail network in India to over 100 stores in 2 years.

(2) Agriculture:

After setting a firm footing in floriculture, Karuturi Global commenced its onward journey. The goal now is to alleviate the global food crisis, and the aim, to become a complete agriculture production company with global presence. They identified Ethiopia as a land of opportunities, especially for agro-based businesses. A stable political and macroeconomic system, suitable climatic conditions, abundant availability of low cost, favourble investment climate, disciplined and productive work force, and above all, easy access to the African market are some of the key factors favouring Ethiopia.

They acquired 311,000 hectares of land on lease hold basis from Ethiopian Government in Baka and Gambela region in Ethiopia. They intend to cultivate short, medium and long gestation crops. In the first phase they intend to cultivate cereal crops (rice and maize) on 70,000 hectares and oil palm on 20,000 hectares.

(3) Food Processing:

They have set up a food processing plant with an installed capacity of 6,000 tonnes per annum at Tumkur, located about 85 kms from Bangalore. At this facility, they have taken up bulk processing and bottling of gherkins (baby cucumbers), essentially for exports to Europe and the U.S. Depending on the type of pickles prepared in sweet or sour tastes, they are bottled and preserved in acetic acid, vinegar or brine medium. Encouraged by the promising response to the food processing business, they have initiated steps to take up bottling and exports of other vegetables such as raddish, beetroot, carrot, baby corn, jalapenos and green ball peppers. The produce for their food processing plant is currently procured from farmers under a contract farming model. To supplement this, they intend to acquire around 200 acres (approximately 81 hectares) of land near Mysore for cultivation of gherkins and other vegetables.

(4) IT Business:

Their highly-profitable IT business division is growing at rapid pace. They have obtained a Category-A licence for Karnataka state and have been a prominent internet services provider (ISP) to large MNCs and medium-sized companies, and their R&D centres in and around Bangalore. Given the thrust for broadband penetration in India, they have entered the consumer broadband business. They have tied up with cable operators in five cities of Karnataka to provide last mile access.

Their business has been showing remarkable progress, growing at 30-50% over the past few years. To expedite their expansion, they are adopting the inorganic route. They have taken over Estel Communications, an ISP with pan-India presence, robust network and excellent client-base. They are also toying with the idea of acquiring other B-category ISPs in South India. In the times to come, Karuturi Global aims to develop the plug and play broadband service products, which will substantially augment revenue flow.

KGL has an equity of Rs. 56.08 cr and reserves of approx Rs. 719.69 cr. It has a total debt of around Rs. 439.72 cr. Its debt equity ratio comes to about 0.6. Its book value stands at Rs.13.83 which means the stock is currently available at a discount at just 0.9 times the book value. On a consolidated basis, it earned a total of Rs. 3.03 per share which is currently available at around Rs. 12.5. Thus the PE for KGL stands at just 4, which therefore makes KGL very attractive for investments at current levels.

KGL's 52 week high and low are Rs.38.70 and Rs. 10.49 respectively. Its touched its 52 week high on 21st Oct last year. However now it has come down loosing almost 70% in span of just few months. The reason behind this is supposedly thought to be SPECULATION. However, people with long term view in their mind can have a look at KGL. Although it seems risky, owing to the speculation, the business prospect seems much more promising to me. So someone who is ready to take on the risk can look at KGL. Depending on ones risk tolerance, investment in KGL should be viewed.

Happy Investing,

Purvi P. Shah

Paper Sector - Finally in the Limelight

The focus on the paper sector was definitely missing. It was there, people knew about its future future prospects, but still it did not interest many. However, the AP Paper and International Paper deal has definitely done the trick. It has helped the paper sector to come in the limelight.

In one of my earlier post, I have analyzed West Coast Paper Mills Limited. I highlighted the huge potential that the paper sector holds. I will list down certain interesting points

• Globally, paper and paperboard consumption is estimated at around 365 million metric tons (MT) and it is expected to increase to 402 million MT by 2012.
• The Asian paper industry is growing at higher rate in comparison with North America and Europe (the market leaders) because of lower manufacturing cost in comparison with Western countries due to lower labour cost.
• The Indian Paper Industry accounts for about 1.6% of the world’s production of paper and paperboard and there is tremendous scope for growth present in the Indian paper industry.
• India’s per capita consumption of paper and paper products is around 8 kgs as against the world average of 56 kgs.
• Japan has the highest per capita consumption of over 250 kg in Asia, followed by Singapore of over 145 kg. The developed countries like US, Canada, Germany and UK enjoys higher per capita consumption of 300 kg, 243 kg, 233 kg, and 202 kg respectively.
• Even an increase of 1kg per capita consumption will result in an additional 1.2 million tonnes demand for paper.

Valuation:

International Paper (IP) will buy up to 75% stake in AP Paper Mills for upto $423 million (around Rs. 1860 cr). This is the first major domestic acquisition by a foreign paper company. IP has decided to aquire 53.5% from the company's promoter - LN Bangur for about $257 million in an all cash deal. IP will also make an open offer for the remaining 21.5% promoter holding in the company for $104 million and will pay another $62 million as a non-compete payment to the sellers. This deal is expected to be complete by the third quater of 2011.

AP Paper Mills has two mills with a combined annual capacity of about 250000 tonnes of uncoated freesheet paper. With the deal that has been stuck , you can very well valuate the other paper businesses. West Coast Paper Mills has a total capacity of 320000 tonnes per annum, which can be relatively valued at around 2400 crores on the basis of the AP Paper - IP deal. Compared to this, the current market capitalization of West Coast stands at just around 500 cr, which just shows what huge potential lies in front of it. Even if we take conservative valuation into account, the stock is still undervalued and very attractive. Think about it. You can do your own math and can check it out for yourself.

The reason I chose West Coast from all the paper companies because I really like the company's business model and the various initiatives that it has taken over the years. You can read it in my earlier post.

http://purvismultibaggerstockideas.blogspot.com/2010/07/west-coast-paper-mills-limited-bse-code_26.html

Happy Investing,

Purvi P. Shah

CCL Products (India) Limited. BSE Id: 519600 NSE Code: CCL

Given enough Coffee, I could rule the world.

CMP (BSE): Rs. 187

CMP (NSE): Rs. 187.25

Industry: Tea and Coffee

CCL Products (India) Limites (CCLPR) was formed in 1994 and commenced its commercial operations in the year 1995. CCLPR is a profit making, Export Oriented Unit (EOU), with the ability to import green coffee into India from any part of the world, and export the same to any part of the world, free of all duties.

CCLPR is engaged in the manufacture of Soluble Instant Spray Dried Coffee Powder, Spray Dried Agglomerated/ Granulated Coffee, Freeze Dried Coffee, as well as Freeze Concentrated Liquid Coffee. Their soluble instant coffee is prepared from carefully chosen Arabica and Robusta coffee beans, roasted and processed to perfection. In addition to 100% pure soluble instant coffee, they also have the ability to supply flavoured coffee, decaffeinated coffee, organic coffee, Rainforest coffee, Fair Trade coffee, Dual and Triple certified coffee as well as Chicory-coffee mix as per the required specifications of the customer, and can also offer the customers the option of highest quality customised products. CCL Products is also in a position to offer a range of in-house products to its customers.

CCLPR's state-of-the-art Soluble Instant Coffee Manufacturing Plant is located at Duggirala Mandal, Guntur District, Andhra Pradesh, India, with a current combined capacity of more than 20,000 MTs, per annum. CCL Products has the distinction of setting up India’s first Freeze Dried Instant Coffee Manufacturing Plant in the year 2005. CCLPR has adapted Swiss and Brazilian Technology, purchased from world renowned pioneers in turnkey Instant/Soluble Coffee technology at its Plant. This adaptation of technology has enabled CCLPR to produce international quality soluble coffee, which is currently being exported to more than 58 countries around the globe.

Industry Analysis:

Coffee is the most widely consumed drink in the world, with approximately half-a-trillion cups consumed every year. Among all the beverages consumed in India, coffee ranks third, after tea and plain milk. Approximately 90% of world coffee production is represented by the species Coffee Arabica; about 9% by the species Coffee Robusta; with minor production from the species Coffee libericia. The industry can be segmented into filter coffee and instant coffee. The country produces only 4.5% of the world’s coffee, but exports 70-80% of its output. Italy, Russia and Germany are the top three buyers of Indian instant coffee.

India has traditionally been a long known mature market for coffee and a country where Roast & Ground Coffee is a consumers’ preferred choice. But the trends are gradually changing in this fast paced world, with consumers shifting to soluble instant coffee. Within this new increased demand for soluble instant coffee, around two-thirds of soluble instant coffee is being sold as private label coffee. Consumption of soluble instant coffee is on the rise, with growth rates often outstripping those for Roast &Ground Coffee. Consumption is rising not only within the traditional tea-drinking societies of UK, Russia, India and Japan, but also in emerging new markets in Eastern Europe and China. And CCLPR has a state-of-the-art Soluble Instant Coffee manufacturing plant producing almost 20000 MT of coffee every year.

There are several reports available indicating that coffee is a USD 70 billion market per year, globally including USD 9 billion a year in North America alone, yearly. All these and many more, only confirm the belief that the coffee is going to be one of the best markets to invest and reap in the results.

Opportunities for CCLPR:

• The major portion of the soluble coffee is currently being met by the private labels. Since CCLPR is one of the private label soluble coffee provider, the future looks bright for CCLPR in the times to come.
• CCLPR has adopted a business model, wherein the fluctuating prices of green coffee have minimum impact on the sales of the Company. This has been achieved by entering into fixed contracts with customers taking the prevailing green coffee prices at the time of entering into the contract.
• Being the only company in the world to offer all the 4 types of soluble instant coffee from one location, CCLPR has already made its mark in select global markets, for its products, and is now exploring newer markets for all its products.

CCLPR stock is quoting at just 1.25 times its book value. Its PE stands at 9.10 in an industry where the average PE is 13.61. Its market capitalization stands at Rs. 249.43 crore at the current market price. This when compared to CCLPR's expected FY11 sales of Rs. 325- Rs 350 crores, puts CCLPR in a very attractive position. It is a regular dividend paying company and has good dividend history.

It has a very small equity base of just Rs. 13.3 crores. Its reserves stand at Rs. 187.03 crores. Its interest coverage ratio is 3.53, which again puts CCLPR well within the safety zone. The debt equity ratio stands at 0.78 which is fair enough. Its EPS for FY10 was Rs.20.30, while its EPS in the first 3 quaters of FY11 stands at Rs. 18.08 and with one more quater to go, I think it will be definitely better.

In the last one year, the prices of coffee has almost doubled. This has reflected in the rally showcased by Tata Coffee, which will benefit from this price rise to a very large extent. In case of CCLPR, this price rise will not be reflected with huge earnings as it has entered into future contracts where it sells its produce at a predetermined fixed rate. But this increase in coffee price is not just a short term phenomenon. Coffee demand is on a rise and will continue to rise as many predominantly tea drinking populations are slowly shifting to developing the coffee habit. So the future is definitely very bright for the coffee sector and the companies operating in this domain. So sooner or later CCLPR is set to benefit from the surging demand for coffee.

Tata Coffee has had its own share of rally and seems quite overpriced to me. But the rally is still left for CCLPR and at current valuations it seems very attractive. A good long term investment. A good investment would be to buy this stock on dips.

Happy Investing.