DSIJ Mindshare

7 Muhurat Buys for 2011

The performance of the Sensex over the last one year is evidence enough to indicate how matters change in a short span of time. The Diwali of 2011 and that of 2010 are indeed very contrasting pictures. Where there is pessimism, despair and dejection all over in the current environment, there was cheer, optimism, and happiness during the same period last year.

To put this in perspective, 2010 saw market optimism, the Sensex touching a historical high, a pickup in economic activity, a strong demand scenario and stronger industrial growth. In contrast, this year’s Diwali sees a fairly bleak picture, with the Sensex down by more than 16 per cent on a yearly basis, a decelerating economy, deteriorating IIP numbers, rising interest rates, ram-pant inflation, and rising concerns over the US and the Euro zone. No wonder then, that investor confidence is not only dented, but has been pressed to the lowest at this point of time.

As for the domestic story, the fundamentals are intact, but certainly strained by rising interest rates and hardened inflation. While many experts believe that the days of hardened interest are here to stay, a surprise move by the RBI to fuel growth could actually act as a trigger for the market. Our sense is that, though the markets have been range-bound for some time now, a possible uptrend in the near term cannot be ruled out either. Hence, the time seems right and also auspicious on the eve of Diwali, to do some new stock picking for the Muhurat day.

As has been our tradition, we, at DSIJ, have sculpted a strong Rs 10 lakh portfolio for your benefit, comprising about seven stocks that we believe could not only light up but also add that sparkle to your Diwali this year, and create that alpha for you in the coming period. The selection process has been a thorough research-oriented 
exercise, where we followed a top-down approach by selecting the sectors and then handpicking companies within those sectors.

This might seem easy, but it has indeed been a toiling task for our research team, which has been very choosy and has focussed on a small group of sectors that could do well even in the current scenario. The sectoral themes that we have selected include pharmaceuticals, auto, select auto ancillary, PSU plays, fertilisers and last, but not the least, banks. While many might be surprised at our selection of the auto sector, it should be noted that we have selected companies that are related to the two-wheeler segment, which has been doing well. Besides, the remaining sectors are more of a mix of safe play, aggression and contra calls.

As for stock selection, the approach was to select fundamentally strong businesses available at low valuations. While this may sound easy, the actual search surely wasn’t! The final hand-picked list came up after a lot of discussions, deliberations and certainly a lot of rejections, as many scrips could not meet our stringent criteria.

What follows is an extensive write up on the scrips, indicating why they would do well. Besides, a review of last year’s recommendations is also appended below, which gives our take on the current status of those recommendations and the action to be taken.

Review Of Last Year’s Recommendations

Staying Put - The Right Strategy

We, at DSIJ, have always been transparent when it comes to our recommendations, and we may be the only magazine to also carry a review of the same. This review has twofold benefits. First, it benefits our readers/investors, who can take timely action. It helps them book profits, exit and make money, or hold on to an investment for better returns. Secondly, it is also a ready reckoner for us, as it helps us to gauge our own performance.

Like every year, last year too we had recommended a portfolio of stocks for Diwali. This was a pack of 11 stocks as Muhurat Buys, with a total portfolio value of Rs 10 lakh. If one dissects this portfolio, one can see that we had a very good mix of sectors that included the likes of pharmaceuticals, PSU logistics, chemicals, banks and financial[PAGE BREAK]

institutions, auto ancillary etc., which, we expected, would do well. From these sectors, we recommended companies like INEOS ABS, Divi’s Laboratories, Tata Chemicals, Concor, Whirlpool, Jubilant Life Sciences, Oriental Bank and Sintex.


It should be noted that as we went to press at that time, the Sensex was at around 19983 levels, and on the Muhurat day itself, it closed above 21000 for the first time in its history. That was the peak that the market saw, and since then it has been in a downtrend. In fact, the sentiment has been so bad that the Sensex hasn’t even managed to touch 20000 after that. With volatility gripping the market, it has been a very shaky ride for investors on the back of global and domestic factors. The shadow of this gloomy scenario is seen in the performance of our portfolio too, which is down by about 19.90 per cent. However, the silver lining here is that there are two counters, namely INEOS ABS and Divi’s Laboratories, which have yielded positive returns.

The Sensex too has been dented to the extent of more than 16 per cent, clearly showing that volatility has spared no one and the impact has been across the board. In fact, even if you look at the performance of the fund management industry, it is quite clear that no one, among even the most astute of fund managers, has been spared by the volatile and uncertain market condition. The NAVs of all equity diversified funds have been in the red, if compared on a point-to-point basis over the past one year.

A point worth noting here is that our magazine’s main edit had clearly mentioned that the market was surging on the back of strong FII flows, and it would correct the moment they stop buying. We had also categorically said that investors shouldn’t be in a hurry to buy these stocks, as the market would give enough opportunities to buy them at lower levels. We believe that you would have followed our advice, and hence, though the table given shows a point to point comparison, the actual impact on your portfolio could be quite low.

Now, what is important from our readers’ point of view is, what should you do with this portfolio? One thing is clear that these recommendations are fundamentally strong counters, and the impact is more to do with the market sentiment, rather than any-thing else. Hence, the best strategy is to stay put in the scrips which are in the red, while one can book profits in counters like INEOS ABS, which has yielded a 68 per cent return. It is only a matter of time when the valuations catch-up game could begin in the rest of the counters.[PAGE BREAK]
AJANTA PHARMA Buy  321

In the entire pharmaceuticals space, there are many counters that are still not on investors’ radars but are trading at attractive valuations, and could be the best contenders for a place in one’s portfolio. One such company is Ajanta Pharma (APL), which discounts its trailing twelve-month earnings by a mere 7.35x, along with a dividend yield of 1.56 per cent. The company has been paying dividends consistently for the last six fiscals.

APL is a branded generics player, and operates in therapeutic segments like cardiology (21 per cent), dermatology (27 per cent) and ophthalmology (22 per cent). It has also started gaining strength in the new segments of orthopedics, gastroenterology and ENT – the three combined together contribute to about seven per cent of its topline.

The company also supplies two cough syrups and one protein supplement to government hospitals for treating malnutrition. This segment brings in about 23 per cent of its revenues. In the ophthalmology segment, the company ranks number seven as per the latest ORG IMS survey, while in dermatology and cardiology, the company ranks at numbers 18 and 31 respectively in the domestic market.

APL has 1380 product registrations in different markets, with over a 1000 waiting in the pipeline. This reflects the strong R&D capabilities of the company. During the last fiscal, APL launched 23 new products in different therapeutic segments, and wishes to maintain the same run rate going forward too.

After establishing a strong foothold and gaining expertise in the emerging markets of Asia (50 per cent), Africa (42 per cent) and Latin America (eight per cent), for its next stage of growth, APL has now stepped into the highly-regulated US market to benefit from the phenomenon of top drugs going off-patent. Ajanta had filed two ANDAs in 2010, and was recently granted approval for both. The company is now among the select few Indian companies to have its products approved for the US market. It is also expected to get two other ANDA approvals during the current fiscal. Further, the management is looking at filing four-five ANDAs per year in the US market going forward. The foray into the US market and the recent approval from the UK MHRA would help step up the growth trajectory of the company.

It plans to set up a new manufacturing facility in Aurangabad to cater entirely to the regulated markets, with a capex of around Rs 130-140 crore. This will be funded through a combination of debt and internal accruals. The company also plans to enter the European market in full swing after the commencement of the plant.

APL reported a stellar performance during Q1 FY12, with its topline growing by an impressive 29.5 per cent at Rs 127.31 crore, backed by an increase in sales from the new launches as well as from its existing product portfolio. Its EBITDA was at Rs 21.28 crore, registering growth of 19 per cent in Q1 FY12, as against Rs 17.86 crore during Q1FY11. The company has been able to bring down its interest cost by 36 per cent, from Rs 4.4 crore to Rs 2.8 crore. Its debt has come down from Rs 250 crore in FY09 to Rs 191 crore in FY11. Further, its net profit stood at Rs 12.53 crore for Q1 FY12, up by 80 per cent on a YoY basis.

The company is quite bullish about its performance going forward, and is expected to maintain an EBITDA margin of 20-22 per cent for the next two years. Its topline is slated to grow at 18-20 per cent in the present fiscal. On the valuation front, the stock trades at a P/E of 7.35x. Its EV/EBITDA stands at 5.44x, and the dividend yield stands at 1.56 per cent. We believe that the stock is likely to catch up with its valuations going forward, and is sure to add a sparkle to one’s portfolio during Diwali. We recommend a ‘buy’ on it, with an upside of 20-25 per cent from the current levels over the next one year.

BAJAJ AUTO Buy 1609

There are very few counters in the current market that are trading in the positive zone on a year-to-date basis. Bajaj Auto is one such counter which is up by more than 10 per cent, as compared to a 17 per cent decline in the Sensex. Rather, Bajaj Auto has even outperformed its peers like Hero MotoCorp and TVS Motors significantly, and we are recommending this scrip to our readers as there are convincing reasons for the same.[PAGE BREAK]

First, it is the strong volume growth witnessed in the H1 FY12 in the domestic as well as the export market, the momentum of which is likely to be sustained in the second half as well. Second, the margins which were under pressure are expected to improve on account of the declining raw material prices. Further, there are certain additional factors like the entry of its three-wheelers in the Karnataka market, the launch of its Boxer 150 CC bike in the rural markets and the launch of a light commercial vehicle.

On the valuations front, the scrip scores well, with its CMP discounting its trailing four-quarter earnings by just 13.44x and an EV/EBITDA of 10x. A significantly noticeable factor about Bajaj Auto’s performance in H1 FY12 is that despite a difficult macro-economic scenario, it has managed to post strong volume growth of 16 per cent in the two-wheeler segment, which brings in around 88 per cent of its revenues. Even growth in the three-wheeler volumes was strong at 23 per cent. In fact, HI FY12 recorded the highest ever half-yearly volume sales. This growth momentum is expected to be sustained in H2 FY12 also, the prime reason being the buoyant export markets of South Africa and Indonesia. On the domestic front, its performance in the rural market is expected to drive volume growth.

The launch of the Pulsar 250 cc bike in December 2011 is expected to add to the zing. However, we are of the opinion that the launch of its Boxer 150 CC in the rural markets will be a major volume growth driver. We do not expect any severe impact of rising interest rates, as only 26 per cent of two-wheelers are sold on finance. In the three-wheeler segment, its entry in new markets like Karnataka is expected to push the growth curve upwards.

While volume growth is expect-ed to continue, the margins are also expected to improve. Raw material prices have declined significantly, and the company will enjoy the benefits of the same in H2 FY12. Its EBITDA margins, which are currently at around 19 per cent, are expected to improve to 20 per cent. Further, with exports contributing to around 32 per cent in two-wheeler and 65 per cent in three-wheeler revenues, the depreciating rupee is expected to be beneficial for the company.

One area of concern is that of the Duty Entitlement Pass Book (DEPB) benefits being taken away. We feel that the impact will be marginal, as it will be replaced by a new scheme and the benefits will come down from nine per cent to 5.50 per cent, but will still be there. The management has stated that it will partially compensate the same by hiking the product prices and by passing the burden on to the dealers.

Bajaj Auto has earmarked capex of Rs 500 crore over FY12-13 for R&D, investment in KTM toolings, its four-wheeler project and maintenance. This would start the addition of new capacity by Q4 FY12. The impact of the same will be seen only in FY13.
On the financial front, FY11 was good, with a topline of Rs 15998 crore and bottomline of Rs 2615 crore, as against Rs 11508 crore and Rs 1811 crore in FY10. Even Q1 FY12 has been good, and with better volume growth, Q2 FY12 is also expected to be as impressive. Putting together all these factors, we expect the company to post a bottomline of Rs 3050-3075 crore for FY12. This will result in an EPS of Rs 106 and P/E of 15.17x. Our recommendation to investors is to buy the scrip at its current levels with a target price of Rs 1850.

BALMER LAWRIE & COMPANY Buy 592
 
While investors usually prefer to add zing to their portfolio, a Diwali portfolio wouldn’t be complete without a right blend of aggression and stability. There is no better scrip to name here than Balmer Lawrie & Company, a PSU, Category I, Mini Ratna company.

While portfolio stability is just one factor, there are many other reasons that make Balmer Lawrie a stock that could lighten up your Diwali this year. First, Balmer Lawrie has been a consistent performer, with its profits growing every single year in the last decade. In fact, a similar trend was also seen in the revenues during the same period, barring FY10 when its revenues slipped, though only marginally. This, in itself, vouches for the inherent strength of Balmer Lawrie, and the fact that it grew during difficult periods in FY08 and FY09 only reflects how well it can manage adversities too.[PAGE BREAK]

Second, Balmer Lawrie has diversified interests, with almost 38 per cent of its revenues coming from the travel segment. Other business areas where the company has interests include industrial packaging (23 per cent), logistics (19 per cent) and lubricants (17 per cent), while the balance comes from some others that include performance chemicals, tea and refinery & oilfield services. This de-risks its business, as the company is not dependent on a single segment to drive its revenue growth.

Besides, the company is getting aggressive to drive its future growth. This includes an outlay of Rs 20-50 crore towards the acquisition of tour and travel companies. Balmer Lawrie mainly caters to the travel requirements of all major central government ministries, PSUs, semi-government departments, etc. This makes it a very steady recurring business for the company. It is also launching an e-commerce portal for its travel business by early next year, on similar lines as that of www.makemytrip.com. The travel segment is the largest segment, and contributed Rs 874 crore to the revenues of the company in FY11. It expects this segment to bring in at least Rs 1000 crore in revenues by FY12.

The company is looking at acquisitions to strengthen its industrial packaging and lubricant businesses, and is expected to spend about Rs 20-50 crore for the same. Also, with the expansion of handling capacities in its logistics segment at Kolkata and Chennai, the container freight stations are expected to further push up revenues.

Apart from strengthening its performance in the chemicals segment by foraying into construction chemicals, Balmer Lawrie is also reviving its tea segment. With the introduction of a modern packaging unit, it is looking forward to become a major third-party blender and packer, with plans to also launch its own brands: Tarang and Balmer Lawrie – The Tea. All this should help the company grow even stronger in the coming years.

The other factors that make the scrip attractive are consistent dividend payouts, liquid cash and its zero-debt status. It has been an investor-friendly company, with dividends being paid consistently for the past 21 years (its FY11 dividend stood at Rs 26 per share, dividend yield of 4.3 per cent). Moreover, the company has Rs 267 crore or Rs 164 per share in liquid cash in its books, which makes up for 27 per cent of its market cap.

Thus, with no interest outgo, Balmer Lawrie is insulated against high interest rates at one end, and at the other end, it benefits from the high cash balance, earning a good interest income. The icing on the cake is its valuations. On a trailing 12-month earnings basis, Balmer Lawrie is available at a PE of a mere 7x and EV/EBDITA of just 5x. This, we believe, is low and gives room for further upside. Hence, one can buy Balmer Lawrie with a one year target of Rs 750.

CASTROL INDIA Buy 472
It pays to know how a company has navigated a difficult environment in the past. It throws light on the consistency and its ability to steer clear of difficult economic phases, and this feature is always regarded highly in the stock market. In uncertain times like the ones we are presently in, players like these are highly sought after by investors.

Castrol India is one such company combining the above characteristics. Castrol’s bottomline has consistently gone up in the past six years. Even in 2008, when most of the companies witnessed a decline in their bottomline, Castrol posted a strong growth. Further, the scrip came out almost unscathed in 2008, a period in which equity markets witnessed severe declines globally. These two factors indicate the strength of the company.[PAGE BREAK]

In addition to this, other compel-ling factors like its debt-free status, a strong cash kitty of Rs 750 crore and a history of consistently having paid dividend to its shareholders provide com-fort. Another factor that adds strength to our conviction in this stock is the declining crude prices, which augurs well for the company, as it will result in an improvement of its operating margins.

On the valuations front, with an EV/EBITDA of 12x and its CMP of Rs 472 discounting its trailing four-quarter earnings by 23x, it looks a bit expensive, but then consistency is always rewarded on the bourses with a higher premium. Further, being an MNC and its promoters holding almost 71 per cent of the shares, there is the potential of a buy-back offer.

Castrol has two business segments – automotive (contributing 85 per cent of revenues) and the industry segment (which brings in 15 per cent of revenues). An interesting fact about Castrol is that while it is second only to IOC in the overall lubricants market (with a 20 per cent share), it has a leadership position in the automobile segment.

With the automobile segment witnessing a decline in its growth rate, this is likely to cast a shadow of doubt on the growth prospects of the company in this segment. However, the vehicle density is increasing, and there is a huge replacement market for its products in this category. Further, the two-wheeler sales volume is still strong, thereby pro-viding good opportunities of growth.

Castrol has done well both on the pricing as well as on the product innovation front, seizing opportunities as and when they have emerged. It has been aggressive and proactive in increasing its product prices, without waiting for pressure to develop due to any sharp movement in the crude oil prices. In 2008, the company managed the unpredictable upward spiral in crude oil prices very well. In Q2 CY11 too, despite lower volumes, Castrol managed to post better topline growth on account of higher realisations. The management has stated that, “Given the decline in crude, the base oil price is expected to soften positively, thus impacting the company’s performance during the second half of the year.”

Castrol has a very good history of dividend payment. Actually, due to the lower capital expenditure and working capital requirement, it is very aggressive in rewarding its shareholders through dividends. In CY10 too, it paid a dividend of 150 per cent (Rs 15 per share), and also recommended an interim dividend of Rs 7 in H1 CY11.

On the financial front, despite a difficult scenario, it reported good financial performance in H1 CY11, where its topline stood at Rs 1540.70 crore and the bottomline at Rs 279.10 crore, as against Rs 1398 crore in topline and Rs 267.50 crore in bottomline during the same period last year. It is expected to put up a stronger performance in the second half on account of better margins. Considering the same, we expect the company to post a bottomline of Rs 605-610 crore. Our recommendation to investors is to buy the scrip with a target price of Rs 575 from its current levels of Rs 472.

CHAMBAL FERTILISERS& CHEMICALS Buy 87

In the past, the markets were always skeptical about investing in fertiliser companies, citing government intervention and regulations as one of the principal negative factors affecting the growth of companies in this sector. This has pretty much changed over a period of time. Some great multi-baggers have emerged from this space over the past one year, and one such stock is Chambal Fertilisers & Chemicals (CFCL), which has constantly attracted the investing fraternity’s fancy. The scrip is up by 12.9 per cent on an YTD basis, as against the benchmark BSE 200, which is down by almost 18 per cent. Moreover, the company also has the reputation of consistently rewarding its investors by way of dividends since 1996.

CFCL is one of the largest private sector fertiliser producers, catering to over 10 states in the northern, central and western regions of India. It is also into the trading of other agricultural inputs like DAP, MOP, SSP, pesticides and[PAGE BREAK]
seeds, thus positioning itself as a one-stop shop for agri-inputs.

CFCL’s business also includes a shipping division with a fleet capacity of six Aframax tankers, and a textile division that manufactures cotton and synthetic yarn. However, its fertiliser business drives its growth and brings in 88 per cent of its total revenues, with the balance 12 per cent coming from the shipping and textile divisions.

There are key factors that we believe will change the future of this sec-tor and that of CFCL for good. The Union Budget 2011-12 has opened up a number of positive opportunities, like the allocation of higher farm credit amounting to Rs 475000 crore, grant of interest subvention for short-term crop loans, direct cash subsidy to end-users of fertilisers and various tax benefits, which will result in an increase in demand for fertilisers and benefit the companies at large.

Of course, the key trigger for the stock is the recent proposal by an empowered group of ministers to free urea prices and bring it under the Nutrient-Based Subsidy (NBS) policy. We believe this to be an extremely positive step by the government, auguring well for all urea producers, especially CFCL, as it will enable the company to price its product at the global levels, resulting in better control over its revenues and profitability. With over 51 per cent revenues coming from urea sales, and a 10 per cent market share, one can only ascertain the positive out-come of urea deregulation on the company’s performance going forward.

CFCL is expected to receive an average additional subsidy of Rs 1127 per MT on its total capacity. This, coupled with the hike in urea prices, would enable the company to earn better sales realisations going forward. Based on our case scenario analysis of its FY11 earnings, we expect CFCL to post an incremental consolidated EPS of Rs 1.82 per share. We further expect CFCL to benefit from the urea de-control policy, as it will help the company to differentiate its products by offering value-added products to the farmers and charging a premium.

The proposed de-merger of the shipping business will also prove to be a catalyst, which will not only drive the stock price further, but will also reduce CFCL’s debt burden to Rs 1640 crore as against Rs 2580 crore currently. This will further translate into an improvement in its ROCE, which will then stand at 16.4 per cent as against 13.5 per cent at present. The management has reckoned that the debt pile-up on the balance-sheet from its shipping division hurts its growth prospects while, at the same time, the division has attained a size where it can operate and grow by itself.

On the valuation front, the stock is currently available at P/E multiples of 11.10x its TTM EPS of Rs 7.81, which we think is a very fair valuation in comparison to that of its peers.

CITY UNION BANK Buy 43
The current wave of economic crisis in most parts of the world has led to the under-performance of the equity market. The fallout of this has been that banking has turned out to be among the worst-performing sectors – down by 18 per cent year-to-date. However, this has also thrown open an opportunity to pick up good and quality banking stocks at attractive valuations. City Union Bank (CUB), a Kerala-based, old-generation, private sector bank that has been consistently paying dividends for the past 19 years (its dividend yield stands at two per cent), is one such bank whose stock has out-performed the sector and is down by 12 per cent year-to-date, against an 18 per cent decline in the BSE Bankex.

CUB’s credit growth for the first quarter of FY12 stood at 33.02 per cent, which is significantly higher than the industry average of around 22 per cent achieved during the same period. What is important to note is that credit growth has not taken place due to any lopsided exposure of the loan book. The bank has a very well-diversified loan book, and some stressed sectors like textiles and metals do not form a large part of it – these constituted only[PAGE BREAK]

10 and seven per cent of the total loan book respectively, at the end of Q1 FY12. The quality of assets is also reflected in the lower net NPAs, which are down from 0.54 per cent of advances at the end of Q1 FY11 to 0.51 per cent at the end of Q1 FY12.

Going forward, the management does not expect any dramatic increase in the slippages or stress on the assets. However, we believe that even if there is any increase in the stress level on the assets of the bank, it has one of the best-in-class net interest margins to protect it from any such contingency. CUB’s NIM increased from 3.56 per cent (Q1 FY11) to 3.59 per cent, even after the recent hikes in interest rates. The management expects to maintain this ratio at 3.3 per cent for the year. This confidence comes from the fact that two-thirds of the total assets of the bank are loaned towards working capital and cash credit, and the remaining one-third is in term loans. Higher allocation towards working capital helps the bank to re-price its book faster than the term loan book, and hence leads to maintaining healthy margins.

In addition to better margins, the bank is also adequately capitalised to face any sharp drop in asset quality. At the end of Q1 FY12, CUB’s capital adequacy ratio stood at 12.22 per cent, of which Tier I constituted 11.39 per cent. Looking at the bank's strong performance, institutional investors have increased their stake over the last couple of quarters, from 23.44 per cent at the end of Q3 FY11 to 24.41 per cent at the end of the June 2011 quarter.

Despite such a healthy balance-sheet and a good financial performance, the scrip is available at a price to book value of 1.65x, and if we adjust it for the NPAs it works out to 1.73x. This certainly looks attractive if we compare it with the BSE Bankex, which is trading at 2x, and most of the other private sector banks that are trading above 2x of their book value. At the given level of return on assets of 1.57 per cent and return on equity of 21.36 per cent, we believe that the scrip is available at very attractive valuations, and you can bank on it this Diwali to add that sparkle to your portfolio.

TVS SRICHAKRA Buy 388

There are some companies that prefer to keep a low profile and do what they do best. TVS Srichakra (TVSS) is one of those very few companies. We came across this counter during our shortlisting process, and after a detailed analysis, we believe that this scrip can certainly light up your Diwali this year.

TVSS caters mainly to the two-wheeler and three-wheeler segments, and is the second-largest manufacturer of tyres in this segment, with a 25 per cent market share. It enjoys good brand recall for its products – MRF is the market leader, with a 28 per cent share. In fact, it is also strengthening its presence in the replacement market, and has been focussing a lot on brand-building. This can be seen from its advertising spend, which has increased to Rs 13.4 crore in FY11 from a mere Rs 5.4 crore two fiscals ago.

What further augurs well for TVSS is its client list, which includes top manufacturers such as TVS Motors, Hero MotoCorp (formerly Hero Honda), Bajaj Auto and Yamaha Motors. While there is an overall slowdown in the auto segment, only the two-wheeler segment hasn’t really felt the heat, and has been growing at a brisk pace every single month. In Q2 FY12, the two-wheeler segment grew by almost 18 per cent, where other segments have seen a flat to negative growth. Besides, with the festive season picking up pace, the demand is expected to perk up from here.

Another factor that needs to be considered is that only one out of four two-wheelers is financed, compared to three out of four in the passenger car segment. This, we believe, makes the demand for two-wheelers more robust, with rising interest rates not playing spoilsport.[PAGE BREAK]

To cater to this ever-increasing two-wheeler demand, TVSS has briskly ramped up its capacities. Its tyre manufacturing capacity has increased by a massive 170 per cent in FY11 from just two years back. This includes the newly-started plant at Uttarakhand in July 2009, and also the expansion of its Madurai plant. All this should help drive its revenues further up.

That apart, in a bid to de-risk its business, TVSS is now focussing on manufacturing radial rear tyres for the tractors segment. The only factor of concern is the price of rubber, along with its high DE ratio of 2.25x. However, while rubber prices were high last fiscal, they have certainly corrected since April 2011, and are now stable. Besides, TVSS’s DE ratio has been more than 2x over the last five years, but despite higher debt resulting in higher interest cost, what is commendable here is that it has still been able to post higher profit growth, which augurs well for the company.

TVS Srichakra is not only part of the strong TVS Group, but also has extensive experience in the auto space over the years. Also, the very fact that its promoters are steadily increasing their stake in the company over the last three fiscals (39.48 per cent in FY08 to 44.39 per cent in FY11) only reiterates their confidence in the business and its future.

On the financial front, TVSS grew at a three-year CAGR of 34 per cent in topline and an even better 62 per cent in bottomline. For Q1 FY12, its topline grew by 54 per cent to Rs 351 crore (Rs 227 crore), while its bottom-line increased by 64 per cent to Rs 12.10 crore (Rs 7.40 crore). At its trailing 12-month earnings, the scrip is available at a PE of 6.67x and EV/EBIDTA of 4.7x. This, we believe, is low for a briskly growing company such as TVSS. With the company having a 22-year consistent dividend paying history (FY11 dividend of Rs 12.5 per share on FV of Rs 10, dividend yield of 3.26 per cent), one can buy TVSS with a one year target of Rs 450.

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