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.

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.