Shareholders can consider booking profits on their holdings in Dr Reddy’s Laboratories (DRL). The stock has since our last ‘buy’ recommendation gained over 60 per cent. While a strong set of numbers in the just-ended December quarter, potential exclusivity revenues from products such as Prilosec OTC, Allegra D24 and Arixtra and the likely expansion in market reach through its alliance with GSK promise growth potential, the stock appears to have priced in most of these potential positives.

At the current market price of Rs 1,132, the stock trades at about 23 times and 19 times its likely FY-10 and FY-11 per share earnings, leaving little room for significant near-term upsides. Besides, the recent non-cash write-down of intangible for its German arm and lowering of the current year revenue guidance by the company will also check any near-term gains for the stock.

Strong business dynamics

The strengthening base business of Dr Reddy’s (minus exclusives), with a focus on US, Europe, Russia, CIS and India provides for a sustainable source of revenues in the coming years. The company put up a strong show in most of these markets even in the latest quarter. Minus the exclusivity sales of Imitrex that helped prop up revenues last year, the company recorded a decent 17 per cent growth in overall revenues during the quarter. Growth percentage would have been even higher had it not been for the lagging contributions from its US business. DRL’s US revenues suffered on account of voluntary product recalls, FDA inspection and late launches. But with all these issues resolved now, the US revenues can be expected to be back on growth track in a couple of quarters.

The management expects its US operations to drive the global generics growth in the coming years. Given its fairly strong ANDA pipeline and a stream of exclusive product launches lined up for the next couple of years, the US business does seem to hold the key to drive DRL’s growth aspirations. The management expects to achieve $3 billion of revenues by fiscal 2013.

But even as the US market may be the key to future growth, DRL’s improving prospects in the Russian and domestic market cannot be ignored. In the December quarter alone, it managed to grow its domestic revenues by about 34 per cent. While a low base would have also helped, what’s notable is that the company has taken to launching products to support growth (18 last quarter).

Having traditionally lagged most of its peers in this respect, the company’s strategy to launch products to drive domestic growth may help it keep up the momentum. So far this fiscal, DRL has launched 56 products across various therapeutic areas.

Supply-chain improvement, a strong field force and the company’s rural market initiatives may further help expand its domestic footprint. Another market in which the company has been able to scale growth rates higher than the industry average is that of Russia. Helped by a combination of price hikes and volume expansion, the company managed to grow its Russia income by about 45 per cent in the quarter. Though the company may not be able to maintain similar growth rates in future — price hikes were linked to devaluation of the ruble — Russia will continue to be a key growth market.

DRL’s PSAI segment (pharmaceutical services and active ingredients) also promises growth potential; the segment registered a 17 per cent growth during the quarter largely led by India and RoW markets. The cumulative DMF filings as of Dec 09 are 388.

Future growth drivers

Dr Reddy’s has a fairly strong pipeline of over 62 new drug applications pending approval by the US FDA (Food and Drug Administration). Of these, 35 are Para IVs and 13 are FTF opportunities. The company expects to launch two limited-competition products in the US in the next financial year — the generic version of GlaxoSmithKline’s antithrombotic drug Arixtra (expected in FY11) and a generic version of Sanofi-Aventis’s Allegra-D 24 (expected in first quarter FY11, $120 million market size). In addition to this, the management has guided for at least one high-value (low-competition) opportunity every year for the next 5 years.

DRL’s marketing alliance with GSK is expected to launch its first set of products in Mexico in the April-June quarter. Though the alliance may take two-three years to become a significant revenue spinner, it will help DRL spread its wings in markets it otherwise has little presence in.

Concerns

Betapharm, however, may continue to be a drag on the company’s earnings. The change to a tender-based model in Germany has pressured its profitability, forcing DRL to take non-cash hits on intangible assets and goodwill. The carry-forward value of intangibles for Betapharm has now reduced to €93 million (acquisition price €480 million in Feb 2006).

While the management does not expect any further fall in the value of its brands, it has not completely ruled out the possibility either. Any further impairment of intangibles, therefore, would pose a risk to earnings. Delays in the launch of products also pose a risk to expected earnings. : Hindu Business Line

Investors with moderate risk and return expectations can consider taking exposure in the abrasive and industrial ceramics manufacturer, Grindwell Norton. Pick-up in capex spending by user industries, ability to retain significant market share and profit margins, despite competition and pricing pressures, and technology support from the French parent shore up the earnings prospects for this company.

At the current price of Rs 144, the stock discounts its likely per share earnings for FY-11 by 12 times. The valuations are at a steep discount to peer Carborundum Universal.

While the company’s earnings grew at a compounded annual rate of 10 per cent over the last three years, muted growth in 2008 and partly in 2009 pulled down the overall performance.

Given the increased activity in auto, auto components and steel and non-ferrous sectors — key end-users of the company’s products — we expect earnings growth to scale up over the next two years.

A low-debt profile and utilisation of internal accruals also augur well, given the expectations of a climb in interest rates by end-2010.

Demand for abrasives

Grindwell Norton derives over 70 per cent of its revenues from sale of abrasives, predominantly used in industries such as automobiles, auto components, steel, foundry and fabrication as well as a number of other manufacturing industries.

The planned increase in capacity with the entry of overseas players in sectors such as auto and steel, could see significant traction in demand for Grindwell Norton; the company is part of the Saint-Gobain group, which is a world leader in bonded abrasives.

In the local market, Carborundum Universal and Grindwell Norton together garner around 65-70 per cent of the abrasive market, with the former, in a slightly more dominant position. However, the abrasives market is not entirely insulated from competition, despite heavy investment.

Small players catering to specific low-end products, high-end precision tools offered by players from Europe through local marketing networks as well as Chinese imports post a competitive challenge. As a result, the abrasive market faces pricing pressure.

However, backing of the group’s brand name could well act as a good reference for players such as Grindwell Norton, when it comes to dealing with bigger clients in the metal and auto industry.

Besides, cost-advantage by way of manufacturing units in India as well as backward integration into silicon carbide, a key raw material for abrasives, provide some edge for the company. With the aid of its parent, Grindwell Norton has also expanded in to export markets.

That the abrasive division is limping back to normalcy after a tough year in 2008, is evident from the segment’s revenues for the 12 months ended December 2009 (the company plans to change its accounting year to March). Abrasives sales of Rs 366 crore for the above period is, in fact, 10 per cent higher than that of the year ending December 2007; in other words, the company has managed to beat a year of peak performance.

Operating profit of the segment, though, remains lower than the corresponding level in 2007, suggesting that pricing power could be weak.

Key demand drivers

The company’s ceramics and plastics segment which produces silicon carbide and high performance refractories has witnessed robust growth and maintained profit margins, thanks to its key demand drivers — metallurgy (iron and steel) and construction industries, apart from internal consumption of silicon carbide for the abrasives division. However, this segment would be sensitive to any steep increase in input costs.

The segment could nevertheless benefit from improved volumes from any global increase in commodity demand, as the usage of its products in steel manufacturing as well as in refractories used for processing metals is quite extensive. For the 12 months ending December 2009, sales grew by a tepid 5.6 per cent to Rs 530 crore while net profits expanded by 11 per cent to Rs 61 crore.

Pick-up in business was, however, evident with a 30 per cent growth in sales and 42 per cent jump in profits in the latest ended quarter over a year ago. – Hindu Business Line

The increase in merchant power off-take from its capacity additions may more than compensate for the earnings dilution and high valuation premium dilution.

Investors with high-risk appetite and long-term investment horizon should hold on to the Jaiprakash Power Ventures (JPVL, until recently named Jaiprakash Hydro Power) stock.

The merger of the group’s power assets into the company may give it access to new capacity additions of about 1000 MW of hydro power in 15 months time, with further additions thereafter which could contribute immensely to the bottomline.

Despite the earnings dilution and high valuation premium being paid compared to peers, the increase in merchant power off-take from its capacity additions may more than compensate for the dilution beyond the next fiscal — FY-12. The benefits of the amalgamation may, however, accrue over the long term and carry challenges such as timely execution and adequate funding.

The recently renamed Jaiprakash Power Ventures has been created through the merger of the former Jaiprakash Power Ventures with Jaiprakash Hydro Power in the swap ratio of 1:3 (three shares of Jaiprakash Hydro for one of JPVL). The record date is set on January 04, 2010. As a precursor to this merger, Jaiprakash Hydro Power has already been renamed Jaiprakash Power Ventures.

The stock already appears to have factored in the near-term impact of the merger. The current market price of Rs 74.25, for Jaiprakash Power Ventures discounts its estimated FY-10 earnings by 65 times; but that works out to 16.5 times its estimated FY-12 earnings. This earnings/share also assumes dilution for the Rs 1500 crore of capital raising which is expected to be done over next few months.

Merger effects

JPVL (Jaiprakash Hyrdo) currently operates only a 300 MW run-of-the-river Baspa-II project in Himachal Pradesh . The merger of the former JPVL would mean that its total hydro generation capacity would reach 700 MW, post-merger. The merged entity would also have 12,770 MW of capacity added over the next nine years.

The merging company has a huge portfolio of power projects in the pipeline with good mix of hydro and thermal projects. High gestation period for the hydro projects under development may put pressure on the return on equity (ROE) of the company over the next few years, limiting the benefits from merchant power ROE (greater then 40 per cent).

The company will also benefit from CDM and certified emissions reductions on its hydro projects as well as due to the adoption of super-critical technologies for the thermal projects.

At the given swap ratio, the merging company’s business has been valued at Rs 7.7 crore/MW (based on Mcap/MW for the projects which attained financial closure), expensive compared to the likes of NHPC and Tata Power (trading at Rs 4 crore/MW).

However, the valuation may be justified as the company may realise higher returns from merchant power sale for the company. The ROE for the merchant power will be higher and, during the initial years, this would compensate for the regulated ROEs of the long-term power purchase agreement. This would also allow the company to plough back higher profits into future projects.

As there are too many players in the power sector, we expect only the early movers in merchant power to take advantage of the power deficit scenario in the country. In this context, JPVL with a high proportion of hydro projects (which carry no fuel risks) may be able to capitalise well on the merchant power opportunity and could sell around 40 per cent of it as merchant power.

On the thermal facilities, too the company has managed to get captive coal mines for the Nigrie thermal project.

However, the other thermal projects are yet to get fuel linkages, which poses a significant risk. According to a CEA document, coal linkages of Bina TPP, which is expected to be commissioned by FY-12, is under consideration.

Funding

JPVL’s earlier plans to come up with an IPO in 2008 were stalled due to weak equity market conditions. Though this merger may add scale, the funding of the power projects remains an area of concern.

The company now has plans to come up with a scaled-down Rs 1,500 crore follow-on offer or a private placement to take care of the future funding needs. As the projects are staggered over next nine years the company may not find it hard to fund equity of other projects with internal accruals.

The near-term funding for Nigrie thermal power project and Karcham Wangtoo hydro project is secured by discounting Rs 2,750 crore of future receivables and internal accruals.

The securitised receivables will be for a tenure of 14 years and may reduce the revenue base in the first two years. Once the new capacity additions kick in, the steep increase in revenue base may reduce the impact of this outgo.

Financials

The earnings of Jaiprakash Hydro were volatile in the last few years. As the company now operates only a 300 MW plant, the net revenues would depend on the output generated from the power projects and the pre-determined tariff which will moderate over the years. Over the next two years, investors in the merged entity have to budget, not only for limited earnings due to the regulated tariffs on current projects, but also for possible downside given that further securitization of revenues may put pressure on the topline.

However, beyond FY-12 with more than 1,500 MW coming up, the bottomline may see a sharp spike. By October, 2011 Karcham Wangtoo hydro project (55 per cent stake) and Bina Phase-I thermal power plants are the projects that may come on stream.

Outlook

Jaiprakash Associates’ expertise in EPC and BOP contracts in hydro project would reduce the execution risk to some extent. The company, in joint-venture with Power Grid, has also forayed into transmission. The key risks that apply to hydro-projects pertaining to natural disasters are relevant here. Rivers over which the company has projects are perennial and inconsistent water flow may lead to temporary plant disruptions.

According to the new hydro policy, if the projects get delayed, the proportion of power that can be sold through the merchant route will fall. HBL

With client ramp-ups and operations stabilising in banking and financial services, there may be sufficient room for capital appreciation.

Investors can retain their share holdings in Firstsource Solutions, a BPO player, considering the company’s healthy vertical and geographic mix, the revival in the deal momentum and benefits that accrue from macro trends such as vendor rationalisation by clients.

At Rs 34, the share trades at 17 times its likely 2009-10 per share earnings. This is at a premium to most mid-tier IT companies, but at a steep discount to peers such as WNS and EXL Services. These two companies are listed in the US and trade at over 43 times earnings. Firstsource generates revenues at higher operating margins (close to 15 per cent) than these players.

With operations stabilising in verticals such as banking and financial services and client ramp-ups witnessed over the next two years, there may be sufficient room for capital appreciation.

The company had a challenging 2008, with pricing cuts and declining volumes and losses due to FCCB borrowings on the back of a depreciating rupee, but seems to have witnessed significant revival in volumes and stable pricing over the last three quarters. FCCB losses have also come down significantly.

For the first half of this fiscal, the company’s revenues grew 16.8 per cent to Rs 973.2 crore, while from a loss in the first half of last fiscal, the company posted net profits of Rs 67.1 crore this time around.

In FY-09, Firstsource had seen its revenues grow by 33 per cent over FY-08 to Rs 1,749.4 crore, while net profits fell by 77 per cent to Rs 30.7 crore.

Client ramp ups

Firstsource derives its revenues from three verticals — healthcare, telecom and media and BFSI — by providing voice and transaction processing services. From excessive dependence on BFSI two-three years ago, the company now has a fairly healthy mix of revenues generated from verticals. Healthcare accounts for 37.6 per cent of revenues, while telecom and BFSI contribute 38.1 per cent and 22.4 per cent respectively. MedAssist, the US- based revenue cycle management company in the healthcare sector, that it acquired a couple of years ago, has enabled it to tap and expand its client base.

With the healthcare reform legislation on the anvil in the US, there is expected to be an expansion of Medicaid, a healthcare programme for low-income groups that would require high enrolment services, an area which is Firstsource’s key competency.

The company has witnessed a ramp up in revenues from its top five customers over the last three quarters, suggesting that volumes are starting to revive. Reinforcing this fact is the momentum in new deal wins by Firstsource such as that signed with a large telecom player in the UK and domestically with Idea Cellular.

Macro benefits

In the UK, the highly successful iPhone, with its high-end features and value-added services, is being used as key means by players to drive realisations.

With Vodafone, a leading player there, also recently joining the race, the subscriber base is set to ramp up. With its existing presence and association with key telecom players in the UK market, Firstsource appears well set to benefit from increase in back-end work volumes.

This apart, vendor consolidation undertaken by large clients in the US and the UK has been favourable to Firstsource, giving it more business.

In its BFSI vertical, which is stabilising, there is ramp up in volumes in the key collections segment as a result of delinquencies of the US- and UK-based customers. The company has won a new client which gives it entry into the relatively safer prepaid cards segment.

The company also derives over 12 per cent of its revenues from India, a key growth market for BFSI and telecom verticals. The deal signed with Idea Cellular reiterates this point. With many new players coming into the market and looking to rollout services quickly, outsourcing of back-end work would be a strategy, resulting in opportunities that players such as Firsrsource are well-placed to tap into.

A recent IDC report states that India’s domestic BPO market is set to grow at 33.3 per cent annually from $1.62 billion recorded in 2008 to revenues of $6.82 billion by 2013. This is expected to be led by BFSI, telecom, utilities, travel and hospitality segments.

Rupee appreciation against the dollar beyond the levels of Rs 45, at which the company is hedged, could pressure realisations. Although most Tier-1 IT companies have indicated that pricing pressures have abated, the situation with mid-Tier IT and BPO companies is still unclear. HBL

The premium valuation enjoyed by Concor during the slowdown was due to the lack of financial muscle among its competitors.

Shareholders with a long-term perspective can remain invested in the stock of Container Corporation of India (Concor) which, by far, is the most dominant multi-modal logistics player in the country.

Improving trends in container volumes helped by the recovery in Exim and domestic demand at a macro level, and Concor’s superior rail infrastructure network, hinterland connectivity, deep pockets and established rapport with its clientele at the company-specific level, underscore our recommendation.

At the current market price of Rs 1,270, the stock trades at about 17 times its likely FY-11 per share earnings.

While this is a tad expensive, what also underscores our ‘hold’ recommendation is the uncertainty over what market share gains would accrue to the many players, including Concor, in the container rail business, especially after the financial fortification of some of its competitors.

Note that to a great extent the premium valuation enjoyed by Concor during the slowdown (and before that) was due to the lack of financial muscle among its competitors.

Given the direct relationship between the capex incurred and likely revenues in the container rail business, the lack of financial strength among its competitors indirectly helped Concor’s business model. That has now changed with some players getting access to private equity.

Braving the slowdown

When most other players were grappling with the economic slowdown, cutting down on their capex plans or shelling out significant interest outgo to meet funding requirements, Container Corporation, helped by the sheer size of its operations, zero-debt status and depreciated asset base, managed to fare fairly well; it did have its share of misfortunes though.

Falling revenues from the high-margin Exim segment and running of empties had suppressed the company’s growth momentum, leading to lower revenues and profits.

From an over-20 per cent revenue growth levels in the three years to 2007, Concor’s revenue growth fell to as low as 2 per cent last fiscal.

But what’s commendable is that this did not prevent Concor from using the opportunity to add to its wagon fleet, improve its terminal infrastructure or even buy handling equipment. For instance, in FY-09 alone, the company added 1, 395 high speed wagons to its existing fleet of owned wagons; increasing its holding of high speed wagons to 8117.

What’s also unique to Concor is the significantly lower fixed cost (about 10 per cent of total expenses) structure it enjoys.

This appears to have afforded it better control over its margins during the difficult years.

While operating profit margins did contract during the slowdown (it went down from over 29.1 per cent in FY-07 to 27.2 per cent in FY-09), the extent of contraction would have been higher but for its many cost-management initiatives.

Improving outlook

The tight leash on costs plus lack of any interest liability (zero debt on its books) and a largely depreciated asset pool seem to put in their bit in helping the company sustain its net profit margins (at about 23 per cent) over the two-year time period.

After having roughed it out during the economic slowdown, the recent uptick in trade volumes portend better days for the company. Container volumes in November grew 21 per cent over the corresponding period last year and 7 per cent over the previous month.

The growth also appears to have been broad-based with volumes across major ports showing positive growth signs, albeit on the low base seen last year.

But the reversal in trade volumes would benefit Concor as also its competitors. It is in this context that the extent of gains that the company can extract for itself remains to be seen.

Though there’s no doubt that the balance is weighed in favour of Concor given its strong infrastructure, strategic alliances, end-to-end logistics solutions as well as the yet to be proved execution capabilities of some of its competitors may also keep a lid on its overall realisations. The company may even have to resort to aggressive pricing to keep its competitors at bay.

The onus of driving growth, therefore, may depend on the container volumes that it would be able to attract.

Here again, if the mix of domestic and Exim business continues to be tilted towards the low-margin domestic business, the company’s overall margins may get pressured.

The company’s performance over the next couple of quarters, therefore, may bear a close watch. HBL

Eveready Industries BUY

With power-hungry rural regions and a rising number of battery-powered gadgets, the company has strong growth prospects.

Investors with a medium-to-long time investment horizon can consider buying the stock of Eveready Industries. With power-hungry rural regions and a rising number of battery-powered gadgets, Eveready Industries, which holds a 51 per cent share of the Indian battery market, has strong growth prospects. At Rs 67 the stock is trading at 10 times its trailing one-year earnings.

The valuation is at a premium to Nippo Batteries which is trading at a PE of 8 times. However, the company’s size and prospects justify it. The battery industry, which had fallen prey to rising zinc prices, has shown improved growth on Zinc prices receding from their peaks of last year.

Apart from batteries, Eveready also sells torches, tea and mosquito repellents. The sales mix: 70 per cent batteries, 20 per cent torches, 9 per cent tea and less than one per cent contribution from insect repellents.

The battery business

Eveready manufactures ‘AA, ‘AAA’, ‘D’ and rechargeable batteries used in electrical appliances and gadgets. Replacement demand for batteries tends to be non- cyclical, but a high exposure to rural markets limits pricing power.

For instance, in November 2006, when zinc prices rose to all time highs ($4,580 per tonne on the LME),price increases by the company met with stiff resistance and battery sales fell by 600 lakh units (5 per cent) in 2006-07; overall margins (operating) dipped six percentage points. The company’s enduring efforts towards improving product mix have, however, been strengthening the company’s margins since then.

Eveready’s battery sales picked up in FY08 (volumes up 12 per cent) with higher market penetration. But sales suffered again in the economic downturn of 2008-09; volumes plunged 8 per cent. Even in the June ended quarter there was a slip in turnover. However, renewed recovery signals are evident now. The September-ended quarter has seen battery sales volumes rise 7 per cent.

New initiatives

Eveready’s September quarter sales were up 20 per cent and operating profit margins were up 3 percentage points to 13 per cent.

Eveready had, in April, launched a new class of LED (light emitting diode) lanterns. Pegged as an energy saver, this product has taken off well in the rural areas in the North and East and is replacing kerosene lamps in homes. Eveready’s total flashlight sales for the September ’09 quarter grew 16 per cent with LED lamp sales alone bringing in Rs 21.33 crore (8 per cent of the total sales). The company’s extensive distribution network will help it garner a large pie in this market dominated by unorganised players. The company’s lighting division is performing very well with the range of the newly launched GLS (General Lighting Service) lamps; the existing CFL lamps are also witnessing higher demand. The lighting division’s sales in the September ’09 quarter were Rs 25.30 crore (against Rs 9.42 crore in the same quarter, previous year).

Apart from conventional zinc carbon and alkaline batteries, Eveready is also focussing on developing its rechargeable battery business. It had, in May this year, taken controlling stake in the French rechargeable battery maker Uniross for a consideration of Rs 41.10 crore. With roots in Europe, Uniross has presence across the globe. Eveready already sells batteries, flashlights and mosquito coils under the brand ‘LAVA’ in the markets of Sudan, Egypt and Sri Lanka.

Eveready’s tea business holds a 5 per cent domestic market share. Sales growth has been flat over the last five years. In the September’09 quarter the segment’s turnover was Rs 17 crore against the Rs 20.4 crore in the same quarter last year.

Risks to business

After cooling from the highs of FY07 zinc prices have risen again from their lows; from $1,549/tonne in June to $2,300/tonne now. The prospects for zinc largely depend on how steel offtake shapes up this year, with the recovery in the global economy. However, even if prices do rise from current levels, they may not go back to last year’s bubble-driven peaks. An appreciating rupee is a positive for the company as it cuts input costs.

Financials

Eveready’s sales have been growing at an annualised rate of 7 per cent in the last five years.

After reporting net losses for two years in sequence in FY07 and FY08, the company returned to profits in FY09 on the cooling-off in input prices and higher price realisations. FY10 can be expected to be a good year for the company with the half-year numbers already showing a 13 per cent increase in sales and operating profits almost doubling.

After tax profits were reported at Rs 40.04 crore against the Rs 5.9 crore in the same period last year.

The current year may also see a one-time cash flow equivalent to Rs 115 crore due to the company transferring its leasehold premises at Navi Mumbai to HDIL.

The income will be shown in the books once the company finishes the formalities. Eveready’s debt burden too stands reduced from Rs 401.7 crore in FY08 to Rs 296.39 crore by FY09-end.

Lower interest rates may aid better profitability in the quarters ahead.

Anant Raj Industries BUY

Realty player Anant Raj Industries could be a prime beneficiary of the recovery in the real-estate market in the National Capital Region, including Delhi. This is especially so in view of the Common Wealth Games 2010 to be held there , .

A de-leveraged balance-sheet, comfortable cash position for execution of projects, focussed strategy of leasing assets and de-risked business model in segments such as hotels augur well for the company’s earnings growth over the next couple of years.

Investors with a high-risk appetite can consider limited exposure to the stock of Anant Raj Industries with a two-year perspective.

At the current market price of Rs 132, the stock trades at 11 times its likely per share earnings for FY-11. High concentration in Delhi and the NCR areas, as well as in the commercial realty segment , are risk factors, which if handled well, could benefit the company.

Asset-heavy model

Anant Raj Industries follows an asset-heavy model, which means that the company owns a good part of what it builds and chooses to lease most of them.

Lease of prime commercial and retail space in Delhi and the rest of the NCR and other cities adjoining Delhi, occasional offloading of such assets owned through stake sale, apart from sale of residential properties, are the key sources of revenue for the company.

Anant Raj holds 982 acres of fully paid land bank . The land was procured at low cost and as and when the Delhi Development Authority made allocations. Anant Raj has traditionally focused on commercial space lease, with a good 55 per cent of its saleable area coming under this segment.

In its recent venture, it pre-leased 70 per cent of its IT SEZ in Manesar, a fast growing industrial town in Gurgaon . Nevertheless, the NCR region, as demonstrated in 2008, is prone to sharp spells of correction. That said, the region was also among the first to recover.

Besides, studies show that the NCR region stands second in the country in terms of demand for commercial space. While Anant Raj faces risk by concentrating its commercial projects in NCR, the region lends itself well for companies wanting to build a rental-yield revenue model. Going by the company’s track record of handling office space leasing, the company may well continue to build on the lease model.

It has nevertheless, realised the need to diversify further and has about 33 per cent of its saleable area in the residential space. While it is developing a few mid-income housing projects in the outskirts, its flagship premium projects in the heart of Delhi, with capital values upwards of Rs 25,000 per sq. ft now, is likely to yield good returns. The company’s cash-rich position and in-house construction do not leave much doubt on execution delays.

De-risked hotel segment

Anant Raj has an interesting business model in the hotel segment. In its two properties near the Delhi airport, for instance, it has transferred the occupancy risks to third-parties in return for fixed rental income over six years, with escalation clauses after three years.

Similarly, in its hotel property forming part of the Manesar IT Park, it has tied up with the Hilton group on a per sq. ft, basis (not based on occupancy), with escalation clauses every three years.

Transferring occupancy risks to third parties would provide steady revenue streams, which would otherwise be writ with the volatility faced by the hospitality industry.

Internal Accruals

With a net cash balance of Rs 550 crore, post its negligible debt, Anant Raj is certainly among the cash-rich realty companies, a rare feature in the industry. Apart from lease revenue, it resorts to occasional land/stake sale in projects, thus monetising its assets. This strategy comes in handy, especially during periods of fund crunch.

As a result, revenue flow tends to be lumpy when the company resorts to sale of property. The company’s consolidated revenues have grown 56 per cent compounded annually over the last three years to Rs 251 crore in FY-09. Rental income close to doubled in the first half of FY-10 as more properties became operational.

The company’s operating profit margin tends to vary as a result of its sale-cum-lease model and is as high as 90 per cent in quarters when expenses on construction are low, even as the steady lease income flows. Source – HBL

Investors with a long-term perspective and a high-risk appetite can buy the stock of textile player Alok Industries. At Rs 21, the stock is at 6.1 times its trailing 12-month per share earnings. Investors should limit portfolio exposure to this small-cap stock.

Sustained exports, increased per client revenues and efforts to tap domestic markets, wide-ranged product lines and capacity expansion suggest strong prospects for the company over the medium term. The company’s planned exit from its realty arm to refocus on textiles may help trim its massive debt, which has been the key reason for the stock’s depressed valuations.

Segment spread

The company’s revenues are derived from apparel fabrics (54 per cent), followed by polyester yarn (21 per cent) and home textiles (17 per cent),cotton yarn (4 per cent) and garments (5 per cent). Individual product lines are varied within as well. Fabrics include poplins, lawns, voiles, canvases, satins and so on. Yarns include dyed yarn and organic cotton, among others, while home textiles include bed and bath linen.

Alok supplies fabric and garments for work wear and fashion wear to manufacturers and retailers such as Zodiac, Gap, and so on, in domestic and international markets. Technical and speciality fabrics such as fire-retardant fabrics, wrinkle-free and stain-free fabrics, tarpaulins, and so on, find growth markets in sectors such as Defence, automotives, hotels and hospitals. Alok has set up research and product development facilities to boost sales of technical fabrics.

Such broad-basing gives Alok the ability to capitalise on healthy prospects in some segments even as others may flag. Alok’s list includes repeat clients, and some of the bigger names such as Gokaldas, Walmart, JC Penny, and so on, which help mitigate the risk of drying up of orders.

Export markets

Even as textile exports flagged from the September 08 quarter onwards on waning consumer demand overseas, Alok’s exports managed a 2 per cent growth. Alok actually added clients during FY-09, as global retailers looked to consolidate suppliers to control costs. Alok’s diversified offerings and capacity expansions allowed it to meet client requirements, resulting in increased revenues per client.

For instance, JC Penny, which was sourcing only apparel fabric, began sourcing home textiles as well. Exports hovered at 40-45 per cent of sales over the past three years, with the exception of FY-09, when it dipped to 33 per cent. Alok plans to hold exports at 45 per cent levels. Global retailers and manufacturers are looking to source from India to cut their costs as consumer demand hints at staging a revival.

Domestic markets

With domestic consumer demand on an upswing and retailers seeing healthy sales, the domestic market holds bright prospects too. Alok’s distribution channel, its retail arm H&A, will serve to improve supplies to domestic retailers.

Formerly, H&A retailed home textiles, apparel and accessories to the value-for-money consumer market. H&A isnow changed to a wholesale value-for-money, cash-and-carry model, supplying smaller retailers and garment manufacturers. This move could enable foreign investments compliant with FDI norms, help bring in smaller clients, and spread the company’s reach over a wider geography.

The current store count is at 152, concentrated in north and west India. Planned count for end-FY-10 is 250 across metros, Tier-I and II cities pan-India, with a target of adding 250 stores per year after that. Though a tad ambitious, especially in the light of troubles faced by like-minded retailers, Alok plans to expand through franchisees. Capital requirement and store expenses such as rent will thus be minimal and risks muted to an extent.

Financials

The company’s sales clocked a three-year CAGR of 26.5 per cent, while net profits clocked a growth of 20.5 per cent in the same period. Sales growth has held at 40 per cent for the first half of FY10; net profits have grown 25 per cent.

Acquiring primary raw material cotton during season time as well as forex hedging strategies have helped operating margins improve steadily from 21.5 per cent in 2006-07 to 30.2 per cent in 2008-09. However, 50 per cent-plus growth in interest costs and depreciation have left net margins at a low 6.4 per cent.

Debt and interest

Alok’s debt is at Rs 6,910 crore, translating into a post-rights issue debt-equity ratio of 3.2 times, taken on to fund capacity expansion and working capital. Interest costs have wiped out almost half the operating margins of 30 per cent in FY-09 and 28 per cent in the first half of FY-10.

However, Rs 3,000 crore has been taken under the Technology Upgradation Fund Scheme floated by the Textiles Ministry. These loans carry a low 6 per cent interest rate and 10-year repayment frame.

Going forward, Alok’s debt requirement will be minimal with expansion complete by the end-FY10, and franchise mode of H&A store ramp-up. As sales step up to match capacity expansion, interest costs and debt load are likely to come down.

Further, Alok’s exit from its three commercial and residential realty projects will help trim debt. Exit will be complete, at the latest by end-FY11. Source – HBL