Stock Idea: Sunflag Iron & Steel [BSE: 500404 |nse: SUNFLAG]

CMp: 27 | tp: 53| duration: 6-12 months November 29, 2010

company

Sunflag Iron and Steel company (SunFlag) belongs to the Sunflag group. It was founded by Satyadev Bharadwaj in Kenya. Sunflag’s products are used mainly in automobiles but also cater to industries like railways, defense, engineering and other infrastructure industries.

COMPANY DATA

Share Data

Market Cap (Rs)	438
Issued Shares (mn)	162,197,503
52 wk High/Low	36.1/21.75

Valuation Ratios

To 31 Mar	FY09	FY10	FY11E
Revenues (Rs in million)	1102	1349	1618
EPS (Rs)	2.69	5.85	6.72
P/E (x)	4.37	4.31	4

Shareholding Pattern (%) (Quarter ending Marh,2010)

Promoters	50.51
FIIs	0.09
MFs	0.05
Public	35.94
Others	4.47

positives

1. Sunflag has been consistently clocking good profits for the past 5 quarters before the quarter of September 2010 which was not good.

2. Sunflag has been slowly but steadily doing backward integration and takes care of operations from mining to finished products. It has also been investing in coal mines in collaboration with Dalmia cement company, giving access to vital coal resources. It is also in the process of manganese mining in Navegaon in Maharashtra. This is currently in the planning stage.

3. Sunflag’s promoter’s holding has consistently gone up to more tan 50% from about 40% two years back. This gives good confidence to the share holders.

4. Sunflag’s debt-equity ratio is 0.8 which is pretty low.

5. Sunflag’s peer comparison can be done with companies like Pennar, ISMT etc. The industry average has been traditionally between 10 and 12.

6. Sunflag’s OPM has been pretty impressive at around 14% and is expected to go up further because of advantages from backward integration.

7. Sunflag’s has forged a technical collaboration with Daido Inc, Japan to export steel to Japan. This could turn out to be a future game changer if Daido decides to hold stake in Sunflag, which seems to be a good possibility now.

concerns

1. Sunflag somehow has not been a favorite with the FIIs and MFs who are the movers and shakers in Indian stock market.

2. The new GOI proposal of sharing 26% of mining profits may prove to be a dampener for all companies with mining rights and Sunflag is not alone.

3. Sunflag’s recent trade union strike issues are not positive. A good worker-management relationship could help the investor plan for a long term investment in the company.

4. The recession fears are always lingering and even a small drop in automobile output could become a challenge for Sunflag. The probability of this occurring are pretty low anyways.

valuations

Sunflag is a value pick. It has been consistently clocking good profits and revenues and is expected to continue its trends in the future. With the planned expansions slowly and steadily contributing to the revenues and with some improvements in input raw materials through mines integration, we can expect Sunflag to improve the revenues and EPS steadily over the next few quarters. It is trading currently at 4 PE FY11E and with an industry average PE of around 10, even if we consider a conservative PE Of 8 we get a target price of 53, which gives a significant increase over the current price. With the Indian equity markets correcting recently, it is a good time to BUY Sunflag for some happy wallet days in the future.

disclaimer

This blog is to start posting my research reports on various stocks. The information and views presented in this report are prepared by me. The information is based on my analysis and on sources available on the public domain. Investors are requested to use this report as guidance and the final decision to be made by the investors themselves. I will not be responsible for any loss incurred by the investor based on this report.

Peer Comparison

Stock Idea: LAKSHMI ENERGY AND FOODS [BSE:519570 | NSE:LAKSHMIEFL]

CMP: 78 | TP: 140| Duration: 12-24 months October 10, 2010

Company

Lakshmi Energy And Foods (LEAF) is the new name of the company previously used to be called as Lakshmi Overseas Industries. LEAF is the leading firms in India that is into the manufacturing and processing of food grains. Its product portfolio includes cattle feeds, refined oils, whole wheat chakki atta, long grain white rice, long grain rice and more recently into varieties of basmati rice. It is recently expanding into electricity generation through husk and into wheat products.

Company Data

Share Data

Market Cap (Rs)	493 cr
Issued Shares (mn)	63,190,000
52 wk High/Low	175/76

Valuation Ratios

To 31 Mar	FY09	FY10E	FY11E
Revenues	6922	10500	14700E
EPS (Rs)	14.8	16.2	20
P/E (x)	6.6	4.8	3.9

Shareholding Pattern (%) (Quarter ending June,2010)

Promoters	44.97
FIIs	25.08
MFs	5.43
Public	11.55
Others	12.97

Positives

• · Strong presence in the non-basmati market domestically.
• · Foray into branded retail rice sales in the name of Lakshmi foods.
• · Retail foray will also reduce dependency on FCI purchases and hence volatile payments.
• · Foray into basmati market has proven beneficial and would have a super effect on the revenue stream going forward
• · Energy division which already generates 30MW power using the environment friendly bio-mass approach contributes to better operating margins and capacity expansions to almost 105MW in the next 2 years will be significant
• · Usually the quarter ending September is the best quarter because of lower raw material cost dependent on monsoons.
• · Favorable technical parameters. The price of 78 significantly discounts the 200DMA of 117 and the 50DMA of 91.
• · Fundamentally strong company available at super attractive valuations due to a one time quarterly pricing issue.

Concerns

• · Last quarter the shocking decision of the company to reprocess unsold finished goods and sell and the subsequent raw material price reductions contributed to a significant hit in the margins. But this we may expect as a onetime blunder by the company.
• · Floods in the northern part of India this monsoon could have caused significant damage to the standing crop. LEAF has significant rice fields in Punjab that was devastated by the floods. Waiting for some clarifications from the company on this front
• · Government’s decision to wait and watch to allow non-basmati rice for export is a dampener for the short term
• · Decision by Credit-Suisse to exit from LEAF was a dampener but IDFC fund house has bought LEAF from the market should balance it out.
  
  

Valuations

LEAF is a company with very strong fundamentals and currently available at super attractive valuations just because of a blunder (hopefully one time) by the firm and also because of nature’s fury as floods. It is trading at valuations of 4.8PE FY10 and 3.9PE FY11E. According to moneycontrol the industry PE is around 8. Considering PEs of 6, 7 and 8 we get target prices of 97.2, 113.4 and 129.6 respectively and for the long term we get a conservative target of 140 respectively. These are attractive returns and sure shot returns. Invest in LEAF for a period of 1-2 years and walk away to your banks with a lot of smile in your face. Recommend a strong BUY in this counter.

Disclaimer

I am a newbie into equity research. This blog is to start posting my research reports on various stocks. The information and views presented in this report are prepared by me. The information is based on my analysis and on sources available on the public domain. Investors are requested to use this report as guidance and the final decision to be made by the investors themselves. I will not be responsible for any loss incurred by the investor based on this report.

Stock Idea: Hinduja global solutions ltd [BSE:532859 | NSE:HGSL]

CMp: 420 | TP: 654 | Duration: 12 months October 2, 2010

Company

The BPO division of the Hinduja group is Hinduja Global Solutions (HGSL). The company started up by 2000 and went public by 2001 as HTMT. In 2006, HTMT divested its telecom and media stakes to become a pure play BPO player and named itself HGSL by December 2008.

Company Data

Share Data

Market Cap (Rs)	865.72
Issued Shares (mn)	20,589,223
52 wk High/Low	603/354.7

Valuation Ratios

To 31 Mar	FY09	FY10	FY11E
Revenues (Rs in million)	7975	8923	10707
EPS (Rs)	45.5	63.2	72.68
P/E (x)	9.8	7.1	5.7

Shareholding Pattern (%) (Quarter ending Marh,2010)

Promoters	68.2
FIIs	16.57
MFs	3.33
Public	7.43
Others	4.47

Positives

• HGSL has a diversified business model, with the centers distributed over India, Philippines, , Mauritius, UK and USA.
• HGSL is a with a huge cash pile of more than Rs.6423 million and this translates into a per share price of Rs.312 by itself..
• HGSL is available at a P/BV of 1.41 and a PER of 10.27. Comparing it with PER of its peers that trade in the range of 20-23, HGSL is available very cheaply.
• HGSL has one of the best margins in the BPO business, but this may become shorter and realistic with the tax breaks getting over for the software parks.
• HGSL has plans to extend its capacity (measured in terms of number of seats added in BPO industry) by around 2500 seats, and would be able to cater to more clients and hence significant increase in the top line value.
• HGSL is also expanding in Tier-3 cities like Nagercoil and Guntur, to take advantage of lower employee wage rates.
• HGSL is scouting for acquisitions, which will immediately start contributing to its revenues and will push the share price higher.
• US senate rejection of the Ohio state’s policy to abolish outsourcing of BPO services abroad is a huge shot in the arm for the Indian BPO industries.

Concerns

• Inefficient use of cash reserves by HGSL is an irritant
• Tax breaks in software parks are getting over for HGSL and will increase to 19% from 9%, though there is a possibility of HGSL offices moving to SEZs or government extending tax breaks.
• Possibilities of conservative protective government policies in western world could be a dampener for the entire BPO industry and HGSL will definitely get affected.
• High employee attrition rate of almost 50% is an irritant.

Valuations

HGSL’s share holders are just waiting for a big acquisition to happen, so that the acquired company’s revenue will immediately start having a positive impact on HGSL’s revenues. HGSL has lost almost 17% in the last one year just because it was not able to deploy the excess cash sensibly. HGSL at CMP is trading at 5.7 times FY11E PE. Even if HGSL can achieve its current PER of 9, we get a target of Rs.654. Now if the management finds a good acquisition in the near future this could add directly to the revenue and would give a trigger for the target price to head northwards. HGSL is a must in your long term portfolio.

Disclaimer

I am a newbie into equity research. This blog is to start posting my research reports on various stocks. The information and views presented in this report are prepared by me. The information is based on my analysis and on sources available on the public domain. Investors are requested to use this report as guidance and the final decision to be made by the investors themselves. I will not be responsible for any loss incurred by the investor based on this report.