Cover Story : Where To Invest in 2015

Last year there were early signs of a multi-year bull run when the country’s voters gave their first decisive mandate in the general elections of 2014. This change in mandate after 30 years was cheered with more than 30 per cent returns. In fact, the year started with a whole lot of expectations from the general elections that were held in May. The anti-incumbency mood across India, the muted growth phase over the last couple of years, the corruption cases and scams finally pushed the voters to open the doors for the BJP. The market, interestingly, started to rally in mid-February when the general elections were announced. The pre-election market rally built on hopes of a reform-oriented government and led the market to cross its previous highs.

This was quite a change from the previous year when the markets were struggling to move upwards due to disappointing macro economic data while inflation remained consistently high. At that time the rupee was depreciating rapidly against the dollar, the current account deficit was soaring, and the fiscal deficit was also alarmingly high. Policy paralysis was taking its toll on growth parameters and no wonder even the financial performance of India Inc. was not that great due to higher interest cost and the volatile rupee impacting the bottomline.

This year, though, the falling commodity prices released some pressure from import bills, subsidy, current account deficit, and inflation. Further, the implementation of diesel de-regulation that had been pending for a long time also upped the investors’ sentiments. The monsoon too turned out to be near normal levels after initial jitters, except in some parts of India. On the political front, the markets surged on account of PM Narendra Modi’s pro-business stances such as rejuvenating ‘Brand India’ to attract investments, the ‘Make in India’ call to revive domestic manufacturing, and the implementation of changes in the regulatory framework to facilitate “ease of doing business” in India. Also, due to Modi’s vote-winning abilities with the BJP establishing majority in important states like Haryana and Maharastra in October and now in Jharkhand, the domestic markets touched new all time highs on November 28. The simple reason behind this was the consistent flow of FIIs and the expected change in the country’s governance.In 2014 the FIIs poured in more than USD 17 billion in Indian equities which took the indices to a completely new orbit. Small wonder then that with such kind of returns investors have enough reasons to be cheerful this Diwali as well. However, the readers of Dalal Street Investment Journal have more reasons to celebrate as our portfolio of 2014 has created astonishing returns of 76 per cent (Table: Performance of ‘Where to Invest in 2014’). This clearly indicates our standard of research, which has always been at the core of wealth creation for our readers.

Reforms to Drive the Market

Despite the domestic market showing good returns, market participants seem to be worried over the pace of reforms. The government has started losing investors’ confidence as it is well behind its disinvestment target. There has been no actual investment happening in the economy, thereby restricting cash flows in the economy. Even the interest rate cut is not expected to boost economic growth, but it is the reforms that will drive the economy and generate the cash flows. Hence, we have repeatedly stated that the RBI should not cut the policy rates despite the easing inflation, which is predominantly due to lower crude oil prices. Now, the budget session will be the next big trigger for the markets.

Meanwhile, the Union Cabinet has finally given its consent to the long delayed Goods and Services Tax (GST). Though the GST Bill needs to be approved by the parliament before it can become a reality, the market is expected to give a big thumbs up to the government’s move. The implementation of GST will directly increase India’s GDP by an estimated 1-2 per cent.

Crude Needs to be Stabilised

The recent fall in crude oil prices is expected to benefit oil exporting countries such as India. The overall energy cost and raw material costs are expected to remain low in the year to come. However, a further fall in crude oil prices is expected to collapse oil exporting economies such as Russia and Venezuela which have already started showing signs of deteriorating economies. This very fact will also impact the other global economies as these countries will start cutting on spending and diverting from the capital expenditure of the oil industry.

Developed Countries – Short-Term Concerns

If we take a look at the markets at the current juncture it can be seen that profit booking has been happening since the last few trading sessions. Rather, the equity markets globally have witnessed some amount of selling pressure. The primary concern for this phase has been the expectation about a possible stance that may be taken by the US Fed in its forthcoming meets. The US Fed has already indicated that it may increase interest rates in early 2015. This has sparked fears of foreign funds taking a flight back to safety. The leading equity indices declined on this sentiment and India was no exception.

Further, there are worries due to the slowdown in European, Japanese and Chinese economies. Traditionally, growth in global economy and crude oil prices has been directly proportionate to each other. The falling crude oil prices are slowing down global economies and increasing worries over growth across the globe. We feel that these factors may affect the markets over a short-term period but the correction would be an opportunity to create a long-term portfolio.

FII Inflows to Continue

Foreign investments have increased significantly in the current fiscal and this trend is expected to continue further due to increased investors’ sentiments over India’s pro-business government. In contrast to other emerging economies like China, Brazil and Russia, India’s economic growth is expected to pick up materially next year. Furthermore, greater FDI inflows are expected to provide more stable funding for India’s current account deficit and improve the economy’s exposure to external headwinds. The heightened expectation about these inflows is based on the 4,896 queries received on the ‘Make in India’ web portal across various sectors. The government launched this programme to project India as an investment destination and develop, promote and market India as a leading manufacturing, design and information hub.

Macro Economic Data Improves

If we take a look at the various macro economic factors, there has been a lot of improvement over a year. The IIP, displaying a negative trend the previous year, has improved and registered smart growth for the period April to September 2014. Further, GDP growth for the last couple of quarters (June and September) was well above 5 per cent, signalling good signs of recovery in the economy. The HSBC Service and Manufacturing PMIs also showed readings of 52.60 and 53.50 during the latest September quarter – a sign of recovery. Inflation, both WPI and CPI, are registering a decreasing trend and the interest rates have remained unchanged at 8 per cent throughout the whole year. The RBI has signaled a rate cut in early 2015. The rupee also seems to be fairly stable against most of the leading currencies.

Valuations

We fairly expect the market to continue its march northwards and scale new highs in 2015. The implementation of reforms and improving macro economic factors will help increase the wealth of equity investors. On the valuation front, the Sensex is trading at 18.88x of its trailing EPS and we feel that the market is fairly valued considering its growth prospects over the next one year. We reiterate our Diwali prediction of the Sensex range of 29,900 – 30,000 considering the forward valuation of 19.50x in the next one year.

We are of the opinion that short-term corrections as in the month of December 2014 due to global cues should be taken as an opportunity to invest for the long term. Going ahead in the story we are recommending a portfolio of seven stocks to our readers. We recommend buying the same in a staggering manner. We believe the portfolio would be able to generate better than market returns.

BANK OF INDIA

Bank Of India | BSE CODE: 532149 | FACE VALUE: Rs.10 | CMP: Rs.289

Here Is Why:

• Expected fall in interest rate to improve the overall performance of the bank.

• Asset quality has stabilised and likely to improve.

• Available at attractive valuation of PBV of less than one.

The state-owned banks, after lagging in their performance in the last few years, are set to come back in the year to come. The public sector banks were most impacted by the slowdown in the economy as it left them saddled with high non-performing assets and slower credit growth. Regardless, the situation is expected to change as the economy turns the corner with a new reformist government at the centre. Bank of India (BOI), one of the PSBs, has already shown early signs of revival and will benefit as the economy gathers momentum.

One of the most important factors that changed in the last few months is the fall in inflation measured by the wholesale price as well as the retail or consumer price index. They both are at a multi-year low. This has already raised hopes of a rate cut earlier than expected. The bond yields are already reflecting a rate cut. The 10-year benchmark government bond yield in the last few months has come down by more than 80 basis points and is currently trading at 7.95 per cent. It is lower than the repo rate of 8 per cent. Historical evidence suggests that this is a precursor to the cuts in the key policy rates. The expected rate cut will improve the operating performance of BOI on all fronts, including credit growth, asset quality and treasury gains.

According to an analysis, each time the benchmark yields fall by one basis point, banks earn mark-to-market gain of around 4.5 paise on government security with a face value of Rs 100. At the end of H1 FY15 BOI has a total of Rs 28,173 crore investments under the ‘available for sale’ (AFS) category and according to back of envelope calculations, BOI will have notional gains of more than Rs 100 crore in its investment portfolio.

Besides, the second half of FY15 will also see good increase in fee income as we have seen transaction banking gathering momentum. The bank has even floated a new subsidiary engaged in merchant banking operations that will start contributing in the second half of the current fiscal. The fall in bond yields will have other positive spillovers too. This will help the bank to improve its asset quality. Though, the asset quality of the bank has deteriorated on a sequential basis it has improved on a yearly basis. Restructured loans plus NPA as percentage of advances has come down from 7 per cent of assets at the end of Q2 FY14 to 5.3 per cent at the end of Q2 FY15, though it is up sequentially from 4.9 per cent in Q1 FY15. We believe that as the economy picks up the asset quality will improve, thereby helping the bank to improve its performance.

The rise in economy will also help the bank to increase its credit growth. In the second quarter of FY15, BOI has already raised Rs 2,500 crore under Basel III AT1 instruments. Under Basel-III capital norms, additional tier-I capital will be included in the common equity tier-I (CET 1) capital. Banks should have 4.5 per cent CET 1 within the overall capital requirement of 8 per cent, applicable from January 2015. At the end of H1 FY15, the bank has CET1/T1 ratio at around 8.2 per cent, including 1H FY15 profits. The bank has even requested Rs 1,500 crore equity capital from its promoter i.e. the Government of India. Therefore, we believe the bank is well-placed to capitalise on future opportunities.

The shares of the bank are currently trading at Rs 290 against its book value of Rs 406.44 per share (at the end of September 30, 2014). Even if we adjust the book value for net NPAs it comes at around Rs 335. Therefore the BOI shares are attractively available at price-to-book value of 0.86x. Hence our recommendation is to take exposure in the counter with a price target of Rs 350 in the next one year.

CENTURY TEXTILES & INDUSTRIES

CENTURY TEXTILES | BSE CODE: 500040 | FACE VALUE: Rs.10 | CMP: Rs.495

Here Is Why:

• Improved utilisation in expanded capacities to drive revenue growth.

• Operating cum financial leverage to drive earnings growth.

• Warrants to promoters poses confidence.

The central government’s thrust on inclusive growth and overall development has improved the economic environment and has lifted business sentiments in the recent past; the same is likely to be continued. Century Textiles & Industries (CENT) is expected to be one of the key beneficiaries on account of the above as it operates in various industries like cement, paper, textiles and others (real estate) which are likely to have a positive bearing.

CENT, a diversified company from the BK Birla Group, is expected to have high earnings growth potential going forward as a result of both operating and financial leverage. Improved economic environment will result in better demand off-take in cement and paper segment leading to better utilisation of expanded capacities. This is also expected to have a positive bearing on the realisations of both the segments resulting in improved margin profile. Its textiles segment is also expected to report better performance due to revival in consumer sentiments as a result of improved economic environment and increase in exports. Better cash accruals on account of increase in operating profitability along with already infused funds by promoters is expected to reduce the debt and thereby the finance cost.

CENT has witnessed a CAGR (FY12-14) of 17 per cent and 28 per cent in revenue and EBITDA respectively. The earnings have been impacted during the same period as depreciation and interest expenses zoomed by 17 per cent and 45 per cent respectively. Higher depreciation was due to capacity expansion in the paper and cement segments and higher interest was due to charge-off to income statement instead of capitalisation (on account of commissioning of projects).

During FY14 the revenue and EBITDA increased by 12 per cent and 23 per cent respectively to Rs 6,666 and Rs 745 crore with operating margin of 11.2 per cent. The revenue contribution has changed slightly with cement, textiles, paper & pulp and others contributing 48, 25, 25 and 2 per cent in FY14 as against 50, 26, 21 and 2 percent in FY13 as there was a shutdown in its paper and pulp plant for a significant part of 4Q FY13.

During 1H FY15 its revenue increased by 13 per cent to Rs 3,593 crore; however EBITDA remained flat at Rs 379 crore and operating margin stood at 10.5 per cent. The revenue contribution changed slightly with cement,  textiles, paper & pulp and others contributing 51, 24, 23 and 2 per cent respectively. The debt to equity ratio has improved from 2.64 in 1H FY14 to 2.37 in 1H FY15 and increase in profitability is expected to improve further.

Over the last few years CENT has witnessed muted revenue growth (largely due to capacity constraints and economic slowdown) and volatile earnings performance (due to increased depreciation and interest expense due to expansion in paper and cement segments). With improved economic environment and expanded capacities in place, it is expected that higher revenue and earnings growth is visible for CENT going forward. Also the lease rentals from its two commercial properties will add cash flows as soon as the same are let out. Its surplus land at Worli, Mumbai (around 15-20 acres) also provides a cushion as the company will develop the same in a phased manner (plan not yet disclosed).

The company’s promoters are also confident of an uptick in business and profitability hence have subscribed to 1.865 crore warrants (20 per cent of current capital base). This will increase the promoter holding by 10 per cent on expanded capital base. With no further major capacity expansion plans in the pipeline (except for real estate development) and improved profitability, going forward the company might witness a re-rating of the stock. CENT at the current market price of Rs 495 is trading at an EV/ EBITDA of 15x and 12x for FY14 and annualized FY15E. CENT is trading at an attractive valuation with price target of Rs 750, providing an upside of more than 50 percent to investors.

GARWARE-WALL ROPES

Garware-Wall Ropes | BSE CODE: 509557 | FACE VALUE: Rs.10 | CMP: Rs.162

Here Is Why:

• Transformation of commodity to higher value-added business for different market segments.

• Acceptance of its new products in the aquaculture as well as agriculture markets.

• Aiming to grow its technical textile business, particularly in the defense sector.

Garware-Wall Ropes (GWRL) is one of India’s leading players in technical textiles with a widespread global presence. The company deploys its expertise in the engineering of polymers and its in-depth knowledge of customers’ needs. It provides application-focused solutions for various sectors, including deep sea fishing, aquaculture, shipping, agriculture, sports, infrastructure and transportation. The company is the largest producer of synthetic polymer cordage in the world, supplying to about 75 countries.

The aquaculture and agriculture sectors are major growth drivers for the company, contributing nearly 50 per cent of its total exports. Its sales are across several verticals and geographies, providing stability and hedging against business and economic trends along with a steady stream of revenue and profitability. The fishing industry is more of its traditional business, forming for about 30 per cent of the company’s total turnover. Aquaculture constitutes 15 per cent; agriculture 15-20 per cent; ropes 13 per cent; sports 10 per cent; geosynthetics 7 per cent; and the rest comprises segments such as coated fabrics, jute bags, woven sacks and reinforcements.

GWRL’s exports stand between 45-55 per cent of its revenue. While the domestic business is also growing, going forward its exports is expected to grow to 60-65 per cent of the turnover. During H1 FY15, the company’s net sales grew by 23.4 per cent to Rs 400.80 crore compared to Rs 324.71 crore in H1 FY14 while its PBT grew by 61.9 per cent to Rs 30.23 crore in H1 FY15 in comparison with Rs 18.68 crore in the same period last year due to lower depreciation and interest cost. Even in terms of bottomline, its net profit has grown by 68.3 per cent to Rs 20.61 crore in H1 FY15 as against Rs 12.24 crore in H1 FY14.

The company is expecting this positive trend to continue in the second half of the current financial year with significant gain in business from the agriculture, aquaculture and defense verticals. Its exports grew by 27 per cent in H1 FY15 over H1 FY14 due to the strong performance of its new products for the aquaculture and shipping segments. We expect the company to clock a turnover of almost Rs 800 crore in FY15E and Rs 925 crore in FY16E. With growing acceptance of its new products in the overseas’ aquaculture industry as well as in the domestic agriculture market, GWRL is poised to grow faster in the coming years.

The company is aiming to grow its technical textile business by focusing on import substitutes, particularly in the defense sector. Recently the company bagged an order on a pilot basis to supply specialised sheets to the army to cover radars. The market size of technical textiles in the Indian defense sector is estimated at Rs 1,300 crore. The company expects about Rs 100 crore from this sector over the next four years. Meanwhile, GWRL is restructuring its product mix to be margin-accretive through transformation of a low-value commodity into higher value-added business for different market segments. Hence, though the revenue may not witness sharp growth, its bottomline is set to show significant growth.

Going forward, we expect the EPS earning to be Rs 18 in FY15E and Rs 22 in FY16E. Currently GWRL is trading at 10.54x its TTM EPS of Rs 15.17 per share and in terms of its price-to-book value it trades at 1.2x its book value of Rs 134 per share, which looks quite attractive and will be re-rated in view of the strong portfolio, improving product mix, improving return ratios, and favourable balance-sheet. Therefore our recommendation is to buy this stock with a target price of Rs 300 in the next one year.

KAJARIA CERAMICS

Kajaria Ceramics | BSE CODE: 500233 | FACE VALUE: Rs.2 | CMP: Rs.561

Here Is Why:

• It is the biggest company in the sanitaryware/tiles segment listed on the bourses.

• The company is expected to benefit from the expected demand created by the ‘Clean India’ mission of Prime Minister Narendra Modi.

• The revenue growth for the company will be driven by capacity additions as its current capacities are operating at close to optimum utilisation.

Delhi-based Kajaria Ceramics is one of the largest players in the tiles segment in India. With a market cap of Rs 4,400 crore it is the biggest company in the sanitaryware/tiles segment listed on the bourses. Kajaria Ceramics is mainly a ceramic/vitrified tile manufacturing, marketing and selling company having a total annual capacity of 54.10 million square meters (MSMs). It has seven plants located in different parts of the country. It is also on a capacity expansion spree with a total of four acquisitions in the past. After the acquisitions the company has also expanded some of these capacities at a lower cost than greenfield investment requirements.

In the last four years Kajaria’s revenues have risen at a CAGR of 18 per cent while its net profit has grown by 21 per cent. The firm has seen a boost in both EBITDA and net profit margins due to which its net profit has shown five-fold growth over the last five years. Over the last four years the company has nearly doubled its capacity by organic and inorganic means. The robust operational and financial performance has also reflected on its stock price as the stock has proved to be a multi-bagger with over 470 per cent returns in nearly three years. Even in this year the stock is up by 89 per cent over its fantastic results. We believe that the stock still has a lot of steam left in it and one should not ignore this opportunity to invest in this company.

Though the company is in slightly luxurious products manufacturing, the company is expected to benefit from the expected demand created by the ‘Clean India’ mission of Prime Minister Narendra Modi. Further, the increasing focus of real estate players on affordable housing is also likely to boost the company’s performance. Meanwhile, to achieve further growth, actions have already been initiated to explore untouched markets, strengthen the distribution network, add new capacities, introduce new product designs, and upgrade the quality of the existing portfolio while keeping the pricing tag at an affordable level for the benefit of its customers located in suburban localities.

For the recent September quarter results the company has reported 13 per cent growth in topline to Rs 541 crore. The bottomline growth was even better at 48 per cent to Rs 40 crore. The EBITDA margins have also improved by 132 basis points to 15.03 per cent. Further, the margins are expected to remain strong due to improvement in its product mix, focusing on value additions, and better pricing scenario on improved demand. The production and volume growth was at 8 per cent and 7 per cent respectively in the quarter. This was however at a slower pace compared to the June quarter results where production and volume growth was at 19 per cent and 16 per cent respectively.

Currently its debt stands at Rs 207 crore which has decreased by Rs 19 crore in the last six months. The debt to equity ratio however stands at a comfortable 0.32x. The interest cover ratio is also at a comfortable level of 7.03x. The company has recently announced a greenfield project of up to 5 MSM annual capacities of polished vitrified tiles at a new location in Rajasthan. The project is expected to be completed by June 2015. The company is also planning to put up a brownfield facility at its existing location in Rajasthan for production of 3 MSM capacity of ceramic wall tiles. The production is expected to commence by March 2015.

In the near future, the revenue growth for the company will be driven by capacity additions as its current capacities are operating at close to optimum utilisation. The stock is currently trading at a price to earnings multiple of 30x of its TTM EPS Rs 18.85. Though the stock has run 470 per cent in nearly three years, our advice to investors is to buy this stock with a conservative target of Rs 700 which will yield 25 per cent returns in the next 12 months.

PREMIER EXPLOSIVES

Premier Explosives | BSE CODE: 526247| FACE VALUE: Rs.10 | CMP: Rs.274

Here Is Why:

• The Indian government intends to promote the domestic defense industry via self-reliance and exports.

• The company is increasingly moving into the propellant segment which is high margin business.

• PEL has received clearance to make propellants to be used for long range and medium range missiles imported from Israel.

India is one of the world’s biggest spenders on defense and the world’s largest importer of military equipment and munitions. To boost the domestic defense sector, the BJP-led government plans to open it up to private investments, including overseas investors who can bring modern technology to the table and boost self-reliance in defense equipment production. As such, the Indian defense sector will be a significant opportunity for both foreign and domestic players. In this set-up, Premier Explosives assumes importance as the sixth-largest manufacturer of explosives, manufacturing the entire range of commercial explosives and accessories for civil requirement.

Its product range includes emulsion and slurry explosives, LD cartridge explosives (for underground explosions), bulk explosives, detonators, detonating fuses, instantaneous electric detonators, electric delay detonators, permitted detonators and cord relays, to name a few. The products go to the energy, mining, infrastructure development, defense, and space sectors. PEL is also the only private entity producing oleoresin-based tear gas grenades used for mob control by law enforcement departments. The company developed this product in collaboration with Defense Research Development Establishment (DRDE), Gwalior.

The defense-related business of the company has grown more than five-fold from Rs 5.2 crore to Rs 26.7 crore in the period of FY10-14. The management believes that its defense and space sectors’ business will exceed the bulk explosive and detonator business within the next five years (as of now defense contributes 15-20 per cent). Compared to the explosives’ products, the defense products have a better margin profile. PEL has been working with the DRDO for over five years to absorb the technology and develop propellants and other products that are being used in various missile programs. In fact it already has the ‘first mover’ advantage by supplying propellants for Akash missiles.

PEL’s management now has visibility in purchases of propellants for missile programmes like Akash, Astra, and LRSAM. The company currently has a capacity for producing 1,000 tonnes of propellants but sells only around 80 tonnes. Propellants account for only 18 per cent of the company’s turnover presently but given the visibility they can be as equal a contributor to sales as its explosives. The margins in propellants are more than twice as that of explosives.

The earlier sample sent by the company has been stuck in a South Korea port with the government refusing to clear the consignment. Therefore a new set of samples is being prepared for dispatch to Israel. PEL is confident of meeting the stringent standards. Within a year the company expects orders to trickle in which though will be small in quantity (around 10-15) will be high in tonnage (each stage requires 4,000 kilograms of propellant).

Meanwhile, PEL reported weak sales in the first half of FY15 due to extended monsoon and elections which restricted the movement of explosives. However, going forward the company foresees a significant pick-up in sales for the third and fourth quarters of FY15. According to the company, in FY15 its revenue could be around Rs 180-200 crore as against Rs 160 crore in FY14. It is clear that the company is increasingly moving into the propellant segment, considered premium because it will help boost the margins. The company is expected to grow at 35-40 per cent of its earnings at Rs 15-18 per share in FY16E. Going forward, it will command a re-rating with multiple triggers and we recommend buying this stock with a one-year target price of Rs 390.

SINTEX INDUSTRIES

Sintex Industries | BSE CODE: 502742 | FACE VALUE: Rs.1 | CMP: Rs.92

Here Is Why:

• Strong visibility of revenue and earnings’ growth momentum.

• Expansion in textiles, a high margin segment.

• Increase in promoters’ holding provides confidence.

Ahmedabad-based Sintex Industries (SINT), earlier known as Bharat Vijay Mills, is a diversified company with business interests in textiles, custom moulding, and building materials. The central government’s thrust on education, healthcare, sanitation, cleanliness, affordable housing, etc., will keep provide the required growth momentum in building materials. And with an improved economic environment, the company’s diverse industry and product profile will keep its growth momentum strong in the custom moulding segment too. Hence we believe that SINT is expected to report high revenue and PAT growth going forward.

The introduction of new products and innovative distribution strategies has resulted in higher growth in its pre-fabricated products’ business from private customers. Its monolithic business continues to see consolidation with the focus remaining on improving its working capital. The CSR activities initiated by various corporates, as made mandatory by the Indian Companies Act, will also open up opportunities for SINT because its product profile matches certain CSR requirements and activities.

During FY14 the company’s consolidated revenues, EBITDA and PAT grew by 15, 25 and 13 per cent to Rs 5,843, Rs 964 and Rs 364 crore respectively with operating margin of 18 per cent. Revenue contribution from building material, custom moulding and textile segments was 47, 44 and 9 per cent with growth of 20, 9 and 16 per cent respectively in FY14. The operating margin profile also improved to 18, 13 and 25 per cent for building material, custom moulding and textile segments respectively during the same period. SINT derives around 25 per cent of its revenues from the overseas’ market (mainly through custom moulding and textiles segments) which grew by 30 per cent YoY in FY14.

During 1H FY15 the consolidated revenues, EBITDA and PAT grew by 21, 33 and 41 per cent to Rs 3,014, Rs 495 and 169 crore respectively. The building material, custom moulding and textile segments contributed 46, 44 and 10 per cent to the revenues with growth of 24, 16 and 34 per cent respectively. Meanwhile, SINT has undertaken major capex in its textiles segment by setting up a spinning project of 10 lakh spindles. The first phase of 3,20,000 spindles will be built at a cost of Rs 1,800 crore and is expected to start commercial production in FY16.

Though SINT has witnessed a turbulent business environment in the period FY12-14 wherein the revenue growth momentum slowed down and the operating margin witnessed a decline, it has maintained its operating and PAT margin in excess of 15 per cent and 5 per cent respectively. Its net debt to equity ratio stood less than 1. However with the improved business environment, the company’s growth momentum and margin expansion are back on track and it is believed that 2-3 quarters of sustained performance by SINT will warrant a re-rating of the stock.

The company’s promoters have increased their stake by 6.77 per cent through open market purchase and part conversion of warrants; the remaining warrants will are also be converted in due course. This leads us to believe that the promoters foresee a sharp improvement in the financial performance of the company in years to come. Equity dilution (7.7 crore shares) on conversion of FCCB to the extent of 17 per cent on diluted equity is still possible till 2017. SINT, at the current market price of Rs 92.50, is trading at an attractive valuation of 7.9x its FY14 earnings and 6.1x its FY15 annualised earnings with more than 50 per cent upside likely to be achieved in the next one year.

WONDERLA HOLIDAYS

Wonderla Holidays | BSE CODE: 538268 | FACE VALUE: Rs.10 | CMP: Rs.295

Here Is Why:

• Revenue and profit has increased at CAGR of 20 per cent and 29 per cent respectively for FY09-14 and expected to continue for the next few years.

• Strong balance-sheet with debt equity ratio of 0.04x at the end of H1 FY15.

• In-house manufacturing to maintain cost leadership.

The demographic dividend along with the improving per capita income of our country is going to build and lift many sectors and companies in our economy. One of such sectors is leisure and the company we are talking about is Wonderla Holidays (Wonderla), the largest operator of amusement parks in India. The company is promoted by Mr Kochouseph Chittilappilly (founder of V-Guard Industries and currently its chairman,) and Mr Arun Kochouseph Chittilappilly. Currently Wonderla operates two amusement parks, one in Kochi (Kerala, started in year 2000) and the other in Bengaluru (Karnataka, started in 2005). The company also owns and operates a resort beside an amusement park in Bengaluru under the brand name ‘Wonderla Resort’, which has been operational since March 2012.

The management of the company has now more than a decade of operational experience of successfully running the amusement parks. Over FY10-14, the revenue and profit of the company has increased at a CAGR of 22 per cent and 43 per cent respectively. Going ahead, we believe that company will be able to maintain the same run rate in revenue while the profit growth may moderate. The revenue part constitutes of two factors: one is footfall and the other is entry fee. The footfall for the period FY10-14 has grown at a CAGR of little more than 9 per cent and is expected to increase as the economy picks up. The entry fee has been increasing at a CAGR of 10.5 per cent over the same period and the management is confident of growing at around the same rate.

Besides, additions of new rides will help the company attract more footfalls. Moreover, Wonderla also operates a resort in the premises of its Bengaluru park, which will help the company to attract corporate events, parties, wedding functions, etc. The major boost in the company’s revenue will come in FY17 with the opening of its third amusement park in Hyderabad. Though the project has been delayed due to litigation on acquiring land, the management is confident of starting the park by FY17 and the park will be operational by December 2016.

The company has already gone ahead with its maiden public offer, which will fund a majority of the project while the rest will be financed by debt. In addition to this the company is also looking for suitable land in Chennai to open its fourth park. Looking at the strong balance-sheet of the company with debt to equity ratio of 0.04x at the end of H1 FY15, we believe that funding for the project will not be a problem.

The experience world over is that the share sale of services (like entry fee) and sale of products (like food and beverages) share equally in the overall revenue. Nonetheless, in the case of Wonderla, it is in the ratio of 80:20. Therefore, going ahead the non-ticket revenues are also likely to see strong sales growth. What is also peculiar about Wonderla is that it has set up in-house capabilities in Kochi to design, develop and manufacture rides. This reduces the overall capex, maintenance costs, and the downtime for a ride. According to the management, it manufactures rides at one-third of the cost of procuring externally and around one-third of such rides are manufactured in-house. This helps company to break even early.

Though some cynics will argue about the safety and quality of these rides, suffice it to say that the ride inspection was conducted by TUV, Germany, a global provider of technical, safety, and certification services. The current stock price of Wonderla discounts the trailing 12-month earnings by 28 times that looks little bit stretched. However, looking at the growth in earnings, strong balance-sheet and the expansion plan, one can take exposure in the counter at its CMP with a one year target of Rs 370 in the next one year.