Deccan Gold Mines to begin production by end FY10

Deccan Gold Mines is the only listed gold mining company in India. According to a news report last week, the company expects to begin gold mining by end of 2010 and is looking to clock annual volumes of around 4 tonnes. I've written about Deccan Gold Mines in the past.

Annual gold production of 4 tonnes is significant. Here's a back of the envelope computation -

Assuming average realisation on Gold - Rs.8,500 per 10 gm (equivalent of a 'tola' in India)
1 kg = Rs.8.5 lac
1 tonne = Rs.85 crore
4 tonnes = Rs.340 crore

Most mining make anywhere between 25-30% profit at the net level, be it gold or iron ore or any other mineral. Eg. NMDC, GMDC, ONGC, Sesa Goa, etc.

At a production level of 4 tonnes, Deccan Gold stands to make around Rs.85-102 crore.

At the current market price of Rs.33.8 per share, the stock is quoting at a market capitalization of Rs.198 crore. Discounting the stock by around 10 times, renders it a value equal to Rs.1020 crore, resulting in a five times upside from the current levels.

That, over a period of 3 years !

The risk associated with this would be the following:

- Delay in mining operations
- Less than expected gold deposits
- Regulatory roadblocks

The risks associated with this stock have a significant probability of being realised. However, as I had mentioned in my previous post on Deccan Gold Mines, it should be seen more as a long term call option.


The news report that carried the article on Deccan Gold Mines is as follows:

India's Deccan Gold Mines Ltd expects to start gold production by end-2010 with the new mines policy likely to help the company speed up its exploration activity, a company official said on Wednesday.

"There has been a lack of adequate exploration in India because of regulatory issues," Sandeep Lakhwara, managing director of Deccan Gold, told Reuters in an interview.

"The new policy addresses these concerns and is a confidence building measure."

The company is targeting 4 tonnes of gold production annually, he said.

India's cabinet approved a long-delayed mining policy last week that could ease investment by foreign and domestic companies in the mining sector.

The policy could ease delays in grant of permits, guarantee a hassle-free move from prospecting to mining stage, and give a bigger time frame for exploration activity, Lakhwara said.

Currently, Deccan Gold, along with its associate mining companies, is awaiting the government's nod for 70 prospecting licences, 30 of which are for gold prospecting.

The company has been engaged in preliminary exploration since 2000 under reconnaissance permits from the government, Lakhwara said.

"Not all the 30 locations could have gold deposits. Even if we set up some mines it would be a huge success," he added.

With preliminary exploration focussed on Karnataka, Andhra Pradesh, Kerala and Rajasthan, Deccan Gold believes a target of 4 tonnes of gold production a year would be "feasible," Lakhwara said.

Deccan Gold, listed on the Bombay Stock Exchange, is owned by Rama (Mines) Mauritius Ltd, a company promoted by Australian individuals.

It expects some of its prospecting licences, that allow it to conduct detailed feasibility studies to ascertain gold deposits, within six months of the new mines policy coming into place.

At the next stage, that could take a year or two, the company could set up processing and production facilities, Lakhwara said.

India is believed to have rich deposits of gold, he said.

"Geologically, India is very similar to other countries where gold deposits have been found and on that basis, India should have a large quantum of gold," Lakhwara said naming Australia, Africa and Canada.

India's gold production is just a speck in the world's output of around 2,500 tonnes, the only producer being Hutti Gold Mines in Karnataka with about 3.5 tonnes of gold annually.

Luxottica short circuits Rayban Sun Optics shareholders

Luxottica, the parent company of Rayban Sun Optics India (the erstwhile Bausch & Lomb), seems to have short circuited the retail shareholders of Rayban Sun Optics India by making the following announcement (dated: 24-Dec-07) -

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Rayban Sun Optics India Ltd has informed BSE that in line with the previous communication of Luxottica Group S.p.A. dated January 11, 2007 and following the release of the related Non Objection Certificate by the Company, the Board of Directors have received a communication from Luxottica Group S.p.A. vide their letter dated December 17, 2007 that the Luxottica Group has incorporated a wholly owned subsidiary in India by the name, Luxottica India Eyewear Pvt Ltd.

Luxottica Group S.p.A has further advised that with effect from January 2008, Luxottica India Eyewear Pvt Ltd plans to commence distribution of luxury and fashion brand eyewear, other than RayBan, on a wholesale cash and carry basis.
--

Ever since this announcement was made the stock has taken a big plunge. Take a look at the following chart:














Since the announcement was made, the stock has dropped by 52% as against a 25% decline in Sensex. Now a lot of stocks have dropped by as much as 50-60% (including the Ambani pack), but they were also amongst the ones which had run-up like there's no tomorrow. Infact, Rayban was a gross underperformer during a large part of the 'now-historical' bull run. So why is that the stock witnessed such a drop. The explanation lies in the notification released to the BSE and that included in the 'notes to accounts' section of the recently concluded quarter.


The statements:

- Luxottica Group has incorporated a wholly owned subsidiary in India by the name, Luxottica India Eyewear Pvt Ltd.

- Luxottica Group S.p.A has further advised that with effect from January 2008, Luxottica India Eyewear Pvt Ltd plans to commence distribution of luxury and fashion brand eyewear, other than RayBan, on a wholesale cash and carry basis.

- The Board of Directors of the Company in their meeting held on December 21, 2007 noted the letter of December 17, 2007 received from Luxottica Group SPA Italy informing the company on their plan to transfer the business of distribution and sale of various luxury frames and sunglasses, other than RayBan brand to Luxottica India Eyewear Pvt Ltd a wholly owned subsidiary company of Luxottica Group SPA Italy. Accordingly, Luxottica Group SPA Italy discontinued supply of non RayBan brands to company [ Rayban Sunoptics, i.e.] with effect from February 2008. (Source: Notes to Accounts of the Dec'07 results).


The effect:

Even though this business was less profitable as compared to the company's core business in India of selling branded eye wear stuff under the aegis of the Ray Ban brand, it accounted for more than 60% of its business. The company had in recent times launched internationally famous fashion products under the brand of Dolce and Gabana. A significant part of Rayban's topline growth in recent years can be attributed to such new launches.

All this will be gone, starting this year.

The listed company is therefore likely to witness a significant drop in sales & profits starting the Mar'08 quarter.

A sharp drop in the share price reflects this, or so i think.

At the current price - Buy/Sell?

Before we write-off the stock, here's a few data points to consider:

- Mcap at current price (Rs.61): Rs.150 crore

- Cash & Cash equivalents: Rs.88 crore (69.8 cr as per Dec'06 AR + 18 cr cash profit in CY07)

- Mcap_net of Cash: Rs.62 cr

- PAT_from the overall biz in '07: Rs.17 crore (treasury inc - 7 cr + trading - 3 cr [assuming a 5% margin in the trading business] + 7 crore in core business [assuming a 18-20% margin in the core business])

- P/E ratio_net of the trading biz and treasury: less than 10 times.

Not a bad investment if you think hard and do the back calculations. The stock provides significant margin of safety, but does it provide enough head room for growth ??? I am still exploring that !!

Comments / counter-points??

Investment update - Patel Integrated Logistics

I recently picked up a few shares of a logistics company based out of Mumbai - Patel Integrated Logistics. At the current market price of Rs.63, the company is valued at a Mcap of Rs.100 crore (on a fully diluted basis). This for a company that possibly has the widest presence in India, so far as logistics and transportation are concerned.

Patel Integrated Logistics operates a fleet of around 1000 trucks and boasts of a pan-India presence. However, unlike many of the other leading players in the logistics space which provide all kinds of transport facilities - surface, air and sea-based, Patel offered only surface transport services.

It was more of a truck operator.

However, things seem to be changing for the good. The company is taking a lot of initiatives to offer full-fledged logistics services. These include - warehousing, FTL (full truck load), LTD (less than truck load), express delivery services (i.e. door-to-door, godown-to-door pick up and delivery, etc.), among others.

The company recently tied with Ashok Leyland to replace some of its old trucks and further induct new ones (225 trucks in toto). Further, it is also looking to fit vehicle tracking systems in all its trucks, thereby allowing it to track its fleet on a real time basis and optimally utilize trucks, in terms of route deployment and manpower. Each of these initiatives is likely to result in lower costs for the company in the years to come.

The single most important risk with Patel Integrated Logistics is the "Management's ability to Deliver".

However, given its reach and the scalability in the logistics space, Patel Integrated Logistics is an ideal takeover candidate. If the print media is to be believed, two major business houses (Mukesh Ambani-led RIL and the Future Group) were quite keen to takeover this company and the valuations on offer were in the vicinity of Rs.125-150 crore, a good 25-50% above the current levels.

Stock details:

CMP - Rs.63
Mcap - Rs.100 crore (on a fully diluted basis)
TTM Sales - Rs.282 crore
TTM PAT - Rs.5.1 crore
Trailing P/E - 20 times.
Dec'07 sales (y-o-y % change) - 8%
Dec'07 PAT (y-o-y % change) - 38%

While on a relative basis the stock is not inexpensive, it does offer significant upside from current levels, provided the management delivers or sells out to someone like RIL or the Future Group. Even if neither happens, and the company continues to operate at current levels of profitability, the downside could be in the range of 20-25%.

Imp Links:

Patel Integrated Logistics [link]
Patel Retail [link]
Patel Roadways [link]
Quarterly performance [link]

Sector outlook:

- India has one of the largest road networks in the world, carrying nearly 80% of the passenger traffic and 65 % of freight traffic throughout the country.

- Growth in demand for logistics services is directly correlated to the growth of the economy.

- Further, expenditure on logistics services in India amounts to about 13 per cent of the GDP against less than 10 per cent in most developed nations.

- This is largely on account of a grossly underdeveloped infrastructure. With Government's thrust on Infrastructure and development of Roads, the expenditure in this segment is expected to remain robust.

- In its bid to improve this scenario, Government of India has chalked out plans to invest about USD 350 billion in upgrading and creating infrastructure in India.

- This augurs well for logistics service providers in India.

Nicco Corporation Scheme of Arrangement

Nicco Corporation released the following announcement to the BSE on 4th Feb.

---------------------------
Nicco Corporation Ltd informed BSE that the Company has filed a Scheme of Arrangement with the Hon. High Court of Calcutta for transfer of its Cable business, to its wholly owned subsidiary Nicco Cables Ltd. This subsidiary will be convened to a Joint Venture with Prysmian (60% stake in the Joint Venture) a world leader in the energy and telecommunications cables industry with strong market position in higher-added value market segments.

Nicco will retain the remaining 40% in the Joint Venture and will receive a consideration price of Rs 133 crores (subject to adjustments) for the transfer of its cables division. The transaction will also result in, inter—alia, the debt relating to the cables business getting transferred from Nicco to the Joint Venture (subject to Hon. High Court, lenders and CDR approval).

Once the Scheme is implemented, Nicco Corporation Ltd will be a debt-free Company and will be able to employ the consideration from the transaction to aggressively grow its existing Project & Engineering Business in the Infrastructure, Petrochemical and Environmental areas. The current Order Book position of the Project Division is approximately Rs 300 crores and it has more orders in its pipeline, where it has emerged as the preferred L1 Bidder.
---------------------------

Sounds like a good deal for the existing shareholders. Given that Nicco Corporation, post the Scheme of Arrangement, will have the following characteristics:

- Debt free status
- an EPC business with an order book of over Rs.300 crore
- Cash infusion of Rs.130 crore
- Plenty of 'developable' land in Kolkata, that too are prime locations

Given that most Engg. companies are currently quoting at a Mcap / Sales ratio of anywhere between 2-3 times. If Nicco Corporation were to be quoting at anywhere near that number, the company's mcap could be quoting in the north of Rs.300-350 crore (primarily based on its Engg. business, compared to the current mcap of around Rs.250 crore). In addition, some value will be ascribed to its 40% holding in Nicco Cables (which will be owned and run by Prysmian as per the JV signed between the two companies a few months ago. Personally, I think, the Company is also looking to develop some of the large land it owns in Kolkata. That should provide a further filip to the stock price in the future.

Ofcourse, my argument is based on the following hypothesis:

- the Engg. will be profitable
- the Company will develop its land
- Prysmian will turn around and make Nicco Cables a profitable company

I've written about this company in the past [Link1, Link2 and Link3] and I hold shares of Nicco Corporation, bought at Rs. 24 per share, compared to the CMP of Rs.29.

Event study update: Pre-budget trades

The Union Budget for 2008-08 will be tabled on 29th Feb'08. This, probably, is the most awaited of all events in the Indian financial circles. Market movements are sharp in and around Budget time.

Hypothesis:
Can one trade (with the benefit of hindsight) or take a position to earn alpha returns based on this event?

Data:

The verdict:

[A month after the announcement of the Union Budget, the benchmark indices (BSE Sensex and NSE Nifty) closed below the pre-Budget levels on seven of the last ten occasions and of the total 17 instances they ended in the red 12 times]

Trading options:

- Undertake straddle trades, which means an investor buys both the at-the-money call and at-the-money put with at least two to three months left to expiration. However, the stock price must move significantly in order for the investor to make a profit, but the downside remains restricted to the amount of premium paid.

Exactly two years ago, I had done a small study on this. [Link]

Event studies: Bonus issues / Stock splits / pre-budget trades / index inclusions

Kaushik & Deepak have put a nice event study on investments in companies that have announced bonus or stock splits on their joint initiative Moneyoga. Their hypothesis :and the subsequent conclusion are as follows:

Hypothesis: Buy stocks of companies that have declared a bonus or split.

The verdict

We obtained several insights into how stocks perform before & after corporate actions such as a bonus or split. Here are the salient ones:

• Bonus stocks
  • If you invest an equal amount in every bonus stock on the effective date of the bonus (aka Ex-Date), you would not beat the index (Nifty-50), whether you held it for one day, one week or one year.
  • If you invest an equal amount in bonus stocks - but only the large cap ones - you would be better than investing in the small cap ones; yet you would barely match the index returns in the short term; but have to take twice as much risk (drawdown) as the index.
  • This is true regardless of the historical time periods tested (bull markets, bear markets, etc.).
  • This is true even if you bought the stock as soon as the corporate action was announced - usually 3-4 weeks before the Ex-Date.
  • The best scenario is when large-cap stocks are bought as soon as the bonus is announced and are held for 9 months or longer.
• Split stocks
  • The same conclusions as for the bonus stocks hold here as well; except that for large cap stocks, the strategy comes close to beating the index in the short term.

The full article with a nice graph depicting how the strategy works over a period of time can be accessed here.

While at event studies you might want to look at some of the event studies that I had undertaken in the past. These are:

1). How to play the markets a week prior to the Union Budget. [Link] ...to be updated for more recent data soon !

2). Does one gain by investing in stocks to be included in the Sensex ? [Link]

Reliance Power bonus issue ratio.... update

theIPOguru has a nice article (with computations) on the Reliance Power bonus issue. According to theIPOguru's analysis, Reliance Power's Board is likely to issue bonus shares in the ratio of 2:17. I agree, 1:17 or 2:17 is a more realistic ratio given the kind of price rise seen in the past few days. I had written on this earlier [link] where I had estimated a ratio of around 3:17.

Reliance Power bonus issue ratio ??

Reliance Power, one of the most hyped IPOs of recent times, dropped significantly below its issue price of Rs.430 per share. The company in an unprecedented move has offered to issue bonus shares to all non-promoters (individuals or institutions). Given that there are more issues lined up from ADAG's stable, the group can't afford a complete loss confidence of the retail investor.

The notification is as follows:

Reliance Power Ltd on February 17, 2008 has announced that a meeting of the Board of Directors of the Company will be held on February 24, 2008.

The Reliance Power Board will, inter alia, consider a proposal for issuing free bonus shares to all categories of shareholders, excluding the promoter group (comprising of Reliance Energy Ltd. and the ADA Group), and / or other measures, which will result in reduction of the cost of Reliance Power Ltd, shares below the IPO price of Rs 430 per share for retail investors, and Rs 450 per share for institutional and other categories of investors. [I think shareholders who were given 17 shares during the IPO will get an additional 3-4 shares, which will result in a significant drop in their acquisition cost, to around Rs.350 per share. This compares well with the current market price of Rs.415 per share].

Reliance Power's IPO closed on January 18, 2008, receiving an overwhelming and record breaking response, with commitments of nearly Rs 7,50,000 crore (US$ 190 billion), from nearly 500 institutional investors across the globe, and 5 million retail investors. The sheer scale and unprecedented magnitude of the response clearly reflected the pricing of the IPO as being in line with prevailing valuation benchmarks and market sentiments.

However, subsequent to the closing of the IPO, the global and Indian equity markets have suffered an extra-ordinary meltdown, with all benchmark indices down 15% - 20%, and leading Indian stocks down by an even greater range of 20% - 40%.

In line with this global trend, the Reliance Power stock price has closed below the IPO price, since listing on February 11, 2008.

From the time of opening of the Reliance Power IPO on January 15, 2008, the Sensex is down 13%, while the Reliance Power stock is down 11% from the IPO price for retail investors, and 15% for other categories of investors.

The decline in the Reliance Power stock price has been compounded by:

- a vicious and orchestrated campaign of market manipulation and market abuse

- unleashed by unscrupulous rival corporate interests

- to hammer down all Reliance ADA group stocks

- in an attempt to undermine our fair name and reputation, and

- cause losses to millions of genuine investors.

Reliance Power has formally written to SEBI seeking an investigation into the same.

Equity shares, by their very nature, are risk-bearing instruments, and there is no obligation on behalf of any issuer to insure investors against possible losses.

However, in keeping with the Reliance ADA Group's fundamental and over-riding philosophy of creating value for genuine long term investors, the Board of Directors of Reliance Power will be meeting as above, to consider appropriate one-time measures which will result in reduction of the cost of Reliance Power shares below the IPO price.

This will include, inter alia, consideration of a proposal for issuing free bonus shares to all categories of shareholders, excluding the promoter group (comprising of Reliance Energy Ltd. and the ADA Group), thereby protecting investors even from notional short-term losses on their shareholdings.

The proposal will result in dilution of the promoter group's shareholding in Reliance Power, which they have indicated they will accept in the broader interest of protecting and enhancing value for over 4 million institutional and retail investors.

Reliance Power has the world's largest shareholder family of nearly 500 overseas and domestic institutional investors, and over 4 million retail investors.

Reliance Power has a market capitalization of Rs 87,000 crores (US$ 22 billion) - among India's 10 most valuable private sector Companies, and a net worth of nearly Rs 14,000 crore (over US$ 3.5 billion) - among the top 5 private sector Companies in India on this parameter.

Reliance Power is implementing power projects with aggregate capacity of over 28,000 MW, by far the largest development pipeline in the country.

--

theIPOguru has a nice article on the Reliance Power bonus issue. The article can be read here.

Core Projects & Technologies - Interview with CMD (IT Education stocks)

Myiris.com interviewed Mr.Mansotra, CMD, Core Projects & Technologies recently.

Q). Core projects has been growing very rapidly since last couple of years. What is your perception about the current numbers and what would be your company's short term and long term strategy in next 2 to 3 years?

Ans.Our current year's guidance for top line is at Rs. 450 crs on a consolidated basis with a bottom line of about Rs. 80 crs. Our international business will grow at about 30 percent organically. On the India front, we are expecting to make substantial inroads on projects under the Sarva Shiksha Abhiyan initiative. The collaboration with CHL, a NASA sponsored institution, is also expected to contribute a lot to the company's business profile.

Q). What growth and profitability do you expect for current and next fiscal? Which segment would contribute maximum to the revenues?

Ans. We should be doubling our revenue every year for the next three years. Education is expected to contribute about 87% revenues in FY 10.

....read the full interview here.

I've written about this sector and the companies within [link, link]. The stock bore the brunt of the recent crash on the bourses. It has lost more than 50% of its value from the peak. Nevertheless, one can consider this stock (after proper due diligence, i.e.) as a long term call option, which if clicks can be a decent multi-bagger.

Drivers of stock prices - p/e expansion vs eps expansion

the chart depicts indexed movement in the P/E and the EPS of NSE's Nifty index...it is quite a useful chart to monitor...

Corn prices shoot up; Bullish on Monsanto India

Corn prices shoot through the roof

Bloomberg has an article on the recent spurt in the international prices of corn (commonly known as maize in India). A brief excerpt:

"Jan. 14 (Bloomberg) -- Corn rose to the highest ever in Chicago on speculation that global demand for feed and biofuel will exceed production for the seventh time in the past eight years.

World inventories of corn will fall to the lowest since 1984 on Sept. 30, the U.S. Department of Agriculture said Jan. 11. Inventories in the U.S., the world's largest producer and exporter, will be 20 percent smaller than forecast last month, the USDA said. Prices have jumped 49 percent in the past five months, even after last year's record harvest.

Corn futures for March delivery rose 17 cents, or 3.4 percent, to $5.12 a bushel on the Chicago Board of Trade. The price earlier jumped the exchange's 20-cent limit to $5.15, topping the record for a most-active contract of $5.135 reached in May 1996. The highest price for any contract was $5.545 for July futures in 1996.

Corn rallied 17 percent last year after surging a record 81 percent in 2006, on increased demand to produce ethanol and feed livestock and poultry."

What is driving up international corn prices?

The USDA estimated world corn output in the 2007-2008 season, which began Oct. 1, at 766.7 million metric tons, down from 769.3 million forecast in December. That compares with an estimated 703.9 million tons harvested last season. Global consumption will rise to 772.7 million tons, up from the 766.4 million forecast last month and 721.7 million consumed last year, the department said. This will turn things dramatically, i.e. from a surplus of around 48 million tonnes to a deficit of 6 million tonnes.

Factors driving up international corn prices are:

- Passage of the New Energy Bill that requires that around 25% of total energy consumption in the US be met through renewable sources, e.g. ethanol (from sugar or corn).

- higher demand from feed livestock & poultry

Impact on domestic corn prices?

As has been the case in most of the other commodities (agri or non-agri), a sharp increase in international prices have pushed up domestic prices too. Corn is no exception to this. Corn prices have moved up by over 50% in the past few months. They are currently quoting at around Rs.900 per quintal, compared to around Rs.500-600 per quintal a few months ago.

Higher domestic corn prices mean?

Higher corn prices have improved realizations dramatically for the farmers. As a result, more farmers are sowing corn today than at any point in the past. This has resulted in a substantial shift in the sowing pattern, from some of the other cash crops to corn. The area under cultivation this year amounted to a 74.6 lac hectares, compared to the normal area of 62.2 lac hectares. This is a substantial jump in the agriculture sector.

Those directly affected (i.e. the poultry sector which is the largest consumer of corn in India) have started voicing their concerns (link 1 & 2) about the incessant rise in corn prices.

What does this mean for Monsanto India?

Higher area under cultivation will result in a significant jump in demand for hybrid corn seeds, of which Monsanto is a clear leader. The company’s ‘Dekalb’ brand of corn seeds is a market leader and overall Monsanto has close to 30% share (which is expanding with every passing year). This should result in a healthy topline and an even better bottomline expansion.

Rally in corn prices augurs well for companies like Monsanto, which supply the seed for sowing. Monsanto is the largest supplier of corn seeds in the US (it is so in India too....with close to 30% share).

--

Disclosure: I have an open position in Monsanto in the portfolios that I manage.

I’ve written about this stock a few times in the past. You can read about it – first, second and third.

Is Anant Raj Industries taking over Nicco Corporation??

Nicco Corporation is one of the companies in which I had invested a few months ago. My observations on the company can be read here and here.

However, recently, I came across some very interesting bits of information in the bulks deals data released by the stock exchanges. One of the large investors Niraj Realtors (stake: 14.75%) has been continuously selling in the open market and the buyer on the other side has been a rather unknown company by the name of Rapid Estates Private Ltd. Infact, the latter has now cornered more than 5% stake in Nicco Corporation.

While one might be wondering as to why is Niraj Realtors selling....I am more keen to know who is Rapid Estates Private Ltd.

Now, according to this link (dated: 4-Dec-06), Rapid Estates Private Ltd. is a subsidiary of Anant Raj Industries, one of the fastest growing companies on Dalal Street in recent years, from being a rather unknown tile company to becoming a full-fledged real estate company with a mcap of close to Rs.9,000 crore.

The question :

1). Are the two companies (i.e. the one that has acquired more than 5% stake in Nicco Corporation and the one that is Anant Raj Industries' subsidiary) same??

2). If yes, why is Anant Raj Industries cornering a stake in Nicco Corpn?

The answer could be this:

- Nicco Corporation hives off cable business to Prysmian Cables for Rs.130 crore

- It then hives / divests its engineering business into a separate company or to some other company

- what will be left is a holding company with plenty of cash and lot of land (at book value) in Kolkata

- Anant Raj Industries may possibly take a strategic stake in the company and form a JV to develop that real estate.

Counterpoints???

AK'Nomics and Deccan Gold Mines.

Read theIPOguru's latest article in the Hindustan Times - "Muscle and Mining" under Ak'Nomics column that is featured every Saturday. In his article theIPOguru mentioned about a stock - Deccan Gold Mines, which as of 11th Jan was quoting at Rs.116. I had invested in this stock a couple of years back at around Rs.13.5 per share. It was then more of a long-term Call Option, given the tremendous upside potential for the stock, if it were to hit gold. The company's recent annual report talks in great detail about its mining operations and also offers details on the current policy regime in India. The company's annual report and website are quite informative.

At the current market price, DGML commands a market cap of close to Rs.700 crore, that for a company which has not produced an ounce of gold so far ! Looks a little far fetched, isnt it? Maybe it is. But, then like I mentioned earlier, it should be seen more as a long term Call option, which if it clicks can turn out to be a big multi-bagger!! Ofcourse, as is the case with options, one stands to lose the entire premium paid....

For those interested in having a look at this company, here are some useful links:

- Company website.
- Annual Reports
- A long and detailed interview with Mr.Sandeep Lakhwara, MD, DGML
- DGML's current projects

IT Education Stocks - Update

Today's ET has two articles on the Education sector -

1). Education sector new learning curve for investors

In 2007, companies such as Educomp Solutions posted whoppping returns of 374%, while Everonn Systems, which got listed in August 2007, gave returns of 130% in five months in 2007. That’s a lot of money. Not far behind are the old horses such as Aptech and NIIT, which fetched returns of 162% and 124%, respectively, in 2007. Not to forget another emerging IT Education company - Core Projects & Technologies - that delivered over 250% returns during 2007.

2). Business of education catches on with India Inc.

It's boom time for the education sector in India as the concept of 'business of education' catches on with India Inc. Considered a 'social responsibility' all these years till now and plagued by insufficient infrastructure, the Indian education sector has huge room for improvement.

--

Listed stocks in the IT Education space did well in 2007. Can they repeat their performance in 2008? My feeling is Yes, unless the bull run come to an end.

Sundaram Finance offers Value amidst an Over-valued financial services pack

Financial services companies (non-banking) have done very well on the bourses in recent weeks. Most companies in this space are quoting at price-to-earnings multiples of over 40+ and five times their book values. Consider the following:

- Reliance Capital: Consolidated P/E - 63.2 times
- India Infoline: 115.4 times
- JM Financials: 70 times
- IL&FS: 44 times
- Indiabulls Financial Services: 32 times
- Motilal Oswal: 50 times
- Edelweiss Capital: 100 times
-----------------------------------
- Industry P/E: 66 times

There is one company which is currently available at a significant discount to its listed peers - Sundaram Finance Ltd.

SFL reported a Consolidated PAT of Rs.140 crore for the year ended 31st March 2007. On a 12 month trailing basis, my estimate is that the company's earned a net profit of Rs.160 crore. At the current market price of Rs.837, the scrip is quoting at a P/E of less than 15 times. That too on a trailing basis.

SFL's primary business is hire purchase and lease financing of vehicles (commercial vehicles and passenger cars) and of industrial machinery.

The company also undertakes:

- bill discounting,
- commercial mortgage lending,
- mutual funds (thru Sundaram BNP Paribas AMC),
- home finance (Sundaram Home Finance, partly owned by BNP Paribas),
- general insurance (Royal Sundaram Alliance),
- logistics (infreight logistics),
- financial products distribution (Sundaram Finance Distribution), etc.


Addnl. Points / Counter points ???

Disclosure: I have an open position in this stock in the portfolios that I manage.

Indian farmer cheers the new US energy bill...

There is a long article on how the Indian farmer stands to benefit from the passage of the new US Energy Bills that is expected to result in a big demand for biofuels, and therefore for commodities used in producing the same, viz. sugar, corn, etc.

Read the entire article here.

For those of us who have invested in Monsanto India (based on 1 & 2), here's what Chairman of Monsanto India had to say in the aforesaid article:

" Money in hand, farmers are eagerly shopping for the next level of technology, be it drip irrigation or hybrid seeds, because they are more sure of profit. “When farmers succeed, we succeed. Seed and technology companies play a critical role in increasing yield and productivity. We believe the potential is enormous, and the belief is finding more believers,’’ says Sekhar Natarajan, chairman at Monsanto India."

Btwn, the stock has moved up dramatically in the last few trading sessions, up from Rs.1550 (when it was first mentioned on this blog) to Rs.2,170 at the close of trading yesterday.

Monsanto India: Investment Update

I had written about Monsanto India a few days ago. Then, the stock was trading at Rs.1,550. The stock has since moved up to Rs.1,942, a gain of 25%. Have put some more information on the stock in the form of links alongwith an excerpt below:

Link 1:

In India, management believes its cotton trait product has the potential to be planted on 15 to 20 million acres by 2010.Worldwide demand for cotton is projected to grow by about 20 million bales or 16 percent in the coming decade, according to an analysis published by Texas Tech University's Cotton Economics Research Institute in May 2007. China will remain on top in production, and the United States will fall to number three. India will rise to the second spot on the heels of recent technological breakthroughs in seed and production practices, according to the forecast.

Link 2:

When Hugh Grant took the top job at Monsanto in May, 2003, the company's nickname in some quarters was "Mutanto." A growing chorus of critics warned that Monsanto's genetically modified plant seeds would wipe out the monarch butterfly, give people virulent new allergies, and reduce the planet's agricultural diversity. Author Jeremy Rifkin predicted that genetically modified organisms (GMOs) would turn out to be "the single greatest failure in the history of capitalism." Paul McCartney urged the world to "say no to GMO." Prince Charles wrote an editorial arguing that genetic engineering takes "mankind into realms that belong to God and to God alone." During the 12 months preceding Grant's elevation, Monsanto's stock price fell nearly 50% to $8 a share. In 2002, the prior fiscal year, the company lost $1.7 billion. "We were pretty financially fragile," recalls Grant, 49, who speaks with the lilt of his native Scotland. Fewer than five years later, Monsanto is thriving. The St. Louis company's net income leaped 44% last year, to $993 million, on $8.5 billion in revenue. Monsanto shares, which closed at $104.81 on Dec. 5, have risen more than 1,000% during Grant's tenure. At 58.6, the company's price-to-earnings ratio is about two points higher than Google's. These numbers reflect a broader story: that Monsanto has quietly turned the tide in the war over genetically modified foods.

Link 3:

Over the last decade, innovation for ag-operational companies has focused more on the input side and how a farmer can get more benefits through seeds, Casale said. The shift has transformed investment in agriculture by both seed and chemical companies," he said. Monsanto spends about 10% of its total sales, which are expected to hit $10 billion next year, on research and development. Syngenta and other major seed producers also have robust research and development budgets and a pipeline of seed and chemical products to show for it. A majority of the spending focuses on genetically modifying seeds in order to produce a higher yield, said analyst Bill Selesky of Argus Research. If one result of global climate change could be increased drought, then drought-resistant corn and other crops would certainly help mitigate this stress," Selesky said. Seeds also are being genetically modified to withstand pesticides, resulting in better crop yields."Today, farmers are getting more bang for their buck," Selesky said.

Reliance Power Sector Fund, an interesting play

Investment Objective: The primary investment objective of the scheme is to seek to generate continuous returns by actively investing in equity and equity-related or fixed income securities of power and other associated companies. The scheme has been a top performer in recent weeks, delivering a phenomenal 109% return over the last 12 months. Link.

However, a closer look at the most recent fact sheet indicates some interesting developments. One, the scheme holds close to 32% of its assets in debt, derivatives, cash & other receivables, two, it holds very little of NTPC (the largest power generation company in India by miles) and nothing of Power Grid Corporation (the largest power distribution company in India, a monopoly at this point of time) and three, the scheme has mopped up close to Rs.2,380 crore in the last four months ended 30th November 2007.

I think the first point, i.e. holding close to 32% in debt, derivatives and cash is a clear indication of Reliance Capital getting significant allocations during the IPO of Reliance Power. And, given how most of the Reliance group (ADA or MDA) stocks have fared over the past few years, it won't be surprising if Reliance Power does well too, infact very well. This, despite the fact that Reliance Power might not earn great revenues till 2010-11. Well, if Reliance Petroleum can command a mcap of over a lac crore without refining a single drop of crude oil, then so can Reliance Power !!!

Point two is a little perplexing given that both, NTPC and Power Grid are light years ahead of their competition so to that extent any play of the power sector it incomplete without the two. And, it is quite ironical that NTPC, which is around 6 times bigger than Reliance Energy & Tata Power (in terms of sales) and around 8-10 times bigger (in terms of bottomline), is quoting at a P/E of 24 times whereas Reliance Energy and Tata Power are quoting at 33 times and 51 times respectively.

The third point (i.e. Reliance Power fund mopping up close to Rs.2,380 crore and most of it lying on the sidelines) indicates that their is still some more steam left in the power sector rally. Personally, I think most of the stocks in this sector are quoting at unheard of valuations. But, then history tells us that most of the bull markets end up in excesses.

Talking of power sector valuations, you may want to see these three charts that I had prepared a couple of weeks back. The charts provide a bird's eye view of the various segments of the power sector, their financial performance over the past three years and their current valuations. One sector that stands out is Power Cables. The sector has been growing at a rapid clip and is also attractively priced. Among the companies in this sector, I have taken a small exposure to Nicco Corporation.

Power Sector, Is their any value left in this sector?

I think Diamond Cables, KEI Industries and Nicco Corporation are worth a look. I have written about Nicco Corporation in the past, here and here.

Monsanto India - Great Stock, Cheap Valuations.

Monsanto India sells agro-chemicals (herbicides) and hybrid seeds in India. It's portfolio includes well-recognized brands such as - Leader (hived off recently), Machete, Roundup, & Fastmix (in the agro-chemicals segment) and Dekalb (corn/maize seed) and Bollgard Cotton (marketed through a JV with Mahyco).

Basic financials:

Sales (12M trailing) - Rs.338 crore
Net Profit (12M) - Rs.82.2 crore
3yr AVG RONW - 21%
P/E (TTM) - 16.6 times
Mcap - Rs.1,362 crore
Cash & Cash Equivalents (as of 31-Mar-07) - Rs.200 crore.
Approx Cash & CE (as of 30-Sep-07) - Rs.250 crore


Mcap_Net of Cash - Rs.1112 crore
P/E (net of Cash) - 13.5 times.

Listed peers Advanta and Kaveri Seeds are quoting at a P/E of over 25 times.


Investment Argument:

# BIG OPPORTUNITY - India is home to the world's largest tract of arable land, yet its farm's produce yields that are a fourth of the global average. This augurs well for companies offering agro-chemicals (especially herbicides) and hybrid seeds, which improve farm yields significantly.

# HIGHER DEMAND - Rising Consumption of Corn in India, thanks to increased consumption of western foods like Pizza, Sizzlers, and an increased usage of baby corn as a part of day-to-day cooking. Corn is also an important source of bio-diesel. Monsanto has a big winner in this category - 'Dekalb' (corn hybrid seeds). It is a global leader in corn seeds and has close to a 30% share in India.

# INCREASED AREA UNDER CULTIVATION - Higher crop prices, both in India and globally, and improving demand have resulted in a substantial shift from some of the other cash crops to corn. This year's Kharif crop pattern indicates this. Area under cultivation amounted to 74.6 lac hectares, as compared to the normal area of 62.2 lac hectares.

# STRONG PIPELINE - Monsanto India's parent company has a strong pipeline of new age hybrid seeds. R&D plays an important role in this industry with leaders such as Monsanto and Syngenta spending a significant amount of their revenues towards R&D.

# ROBUST RESERVOIR STATUS - Water levels in the 81 major reservoirs is healthy. They amounted to around 119% of the 10-yr average levels. Healthy water reservoir levels are an insurance against bad monsoons, and therefore render some predictability to the overall farming activity in India, which in turn determines the demand for farm inputs (such as herbicides and hybrid seeds, alongwith fertilizers).


At the current prices, the company can also be considered as a buy-back candidate. Infact, given that promoters hold close to 72.15% of the total equity, the cost of a buy-back will not be too high. Assuming, the company were to decide to undertake a buy-back, lets do some back of the envelope calculations -

Buyback price - Rs.3000 per share
Mcap at the aforesaid price - Rs. Rs.2,581 crore
Cost of the buy-back - Rs.718 crore (for a 27.8% share)
Current Cash & CE - Rs.250 crore
Actual cost of the buy-back - Rs.469 crore
Annual Cash Flow - Rs.92 crore
Pay-back period for the Company - 5.1 years. (Assuming 'NO' growth in cash flows, which is quite unlikely). Thus the pay-back period can be close to around 4-4.5 years.


Overall - At the current price, the Monsanto India scrip offers significant margin of safety with a healthy upside potential.

Points / Counter points ?????

Disclosure: Have a long position on this stock in the portfolios that I manage.