From The Smart Investor-->Political 'gains'
April 19 to 25, 1999
Political gains
Last week's upheaval at the Centre has thrown up some good investment opportunities. The Smart Investor Team reports
Last week saw extreme volatility at the bourses. With the teetering government finally falling so shortly after the dismissal of the BSE president, the weak markets plummeted further. Saturday, the day of the denoument saw a 400 point intra day movement. But while it would be unrealistic to assume that investors would have escaped unscathed from the mad selling spree that followed, it would be downright paranoid to not use this as an opportunity to enter the markets.
Indeed, investors who have lost wealth because of the hammering can use this as an opportunity to bring down the average cost of their investment. Consider this. If an investor holds, say, 100 shares of Silverline bought at Rs 360, he could now buy another 100 shares at their current price of Rs 214. This would pitch the average cost of 200 shares at Rs 287. Resources permitting, another 100 shares would push his acquisition cost down to Rs 262 a share. And since Silverline is one of the stocks in the forefront of the software boom, this lower average cost pushes up returns when the markets start to rise.
Software, of course, will continue to be a front-runner on the bourses, but there are also a clutch of lesser-noticed scrips that provide attractive buying opportunities. These are shares that have seen prices shoot up over the past few months, and plunge last week.
The Smart Investor has identified five picks that have ridden the market roller-coaster but are good buys because they are fundamentally sound as well. Investors are however cautioned to wait for the market to stabilise before committing funds a prices are likely to fall further.
Fulford India
Fulford India is a 40 per cent subsidiary of pharma major Schering Plough of the US. Fulford has the advantage of access to the rich product pipeline of the US parent, which is a leader in biotechnology, genomics and gene therapy. Genomics could be broadly defined for gene modification therapy and it goes beyond that.
The major plus point about the Indian company is that it is sharply focused only on dermatology, oncology, anti-histamines and anti-biotics. This has helped the company develop strong brands in each of these segments.
Among the most profitable of its businesses is dermatology where its skin ointment Quadriderm, a Rs 41-crore brand, has a 37 per cent market share. In anti-histamines, it has a strong brand name in Polarmine and it recently enhanced with the introduction of a non-sedating anti-histamine, Alaspan, which has reportedly been well received in the market. Launched in August 1998 is a Rs 3.5-4 crore brand and is growing by a strong 20 per cent plus.
In anti-biotics, Fulford again has two strong brands, Gentamycin and Garamycin. The company has now launched a third-generation cephalosporin, Procadax. Oncology is a recent thrust area for the company. In oncology its products Ethyol, Drogenil, and Intron-A are received well in the market. The contribution from Oncology is 14 per cent.
Fulford has launched six products over the last two years, some of them top-selling products from the parent. But the downside is that half its sales come from products that are under the Drug Price Control Order (DPCO). Indeed, many of Fulford's best-sellers — Quadriderm, Gentamycin, Geramycin, Tinaderm — are under DPCO.
This is probably why Fulford has one of the lower operating profit margins in the industry at 5.4 per cent. Also, Fulford imports bulk drugs from its parent. To improve margins. future introductions from the parent's stable will be in critical therapeutic areas. Besides, a major portion of the dermatology products may get over-the-counter (OTC) recognition including a famous sunscreen lotion from the parent's stable. The company is also looking at indigenising some bulk drugs.
Fulford's current equity is Rs 3 crore. With a small equity, regular product introductions and expanding critical therapeutic presence leaves enough scope for earnings expansion. If the current budget is approved, pharma companies will get automatic approval for stake increase up to 74 per cent. The chances of the parent increasing its stake from 40 to 51 per cent becomes a close bet though nothing has yet communicated by the company. At the current price of Rs 627, the future potential is immense, especially if you have a two-year perspective.
SmithKline Beecham Consumer
The company draws its strength from its two very successful brands — Horlicks and Boost. Horlicks, which started out as a milk substitute to take advantage of the milk shortage in the country, has been nimble enough to position itself as a milk additive now that milk is freely available. And it has managed to retain its stronghold in its traditionally strong southern and eastern India markets, which are also the highest consumers (80 per cent) of white beverages. The brand is now extending its reach to the north and west.
Horlicks has a 54 per cent share of the beverages market. Since the market for white beverages is growing at 6-8 per cent, the volume growth for Horlicks is bound to taper down to this level. This is already visible in the first quarter results of 1999-2000 where topline growth has slowed down to 8.7 per cent. However, because of the strong pricing power of the brand, this is not an unduly negative development.
More importantly, there is no other beverage in the segment to threaten its monopoly over the market. Complan,the other major product in the sub-category, has a market share of only 18 per cent. This crucial brand has been managed very well by the company — it has been launching various versions of the mother brand like Horlicks Junior, Mother Horlicks (for pregnant women) etc to straddle the various sub-segments of the market.
The company is operating at over 100 per cent capacity. It is, now setting up an additional 26,000 tonne capacity for Horlicks which is to come on-line in 2002. If volumes in the Indian market do not pick up, the company always has the option to export.
Also, consumers who have moved away from milk substitutes like Horlicks have been weaned towards Boost, a brown beverage. Though Boost has a market share of 9 per cent of brown beverages, it faces more competition than Horlicks as Bournvita is a stronger brand with 10 per cent share of the market.
The two beverages contribute about 85 per cent to Smithkline's turnover. The company has extended its Horlicks brand to biscuits, which have an 8 per cent market share. Financially, the company has a return on capital employed of about 53 per cent and an operating profit margin of 19 per cent, one of the best in the industry. At Rs 586 the scrip is a good buy.
Punjab Tractors
At Rs 1,274 this looks like a good buy because the company stands to gain tremendously from the strong growth in the agricultural sector. According to a report by UTI Securities, agricultural growth in 1998-99 will show a strong rise of 8.5 per cent. This, in money terms, translates into a huge Rs 32,200-crore income for the sector. The regions that are expected to benefit most from this are the northern states of Punjab, Uttar Pradesh, Harayana, Madhya Pradesh and Rajasthan. Since the northern region accounts for the bulk (about 87 per cent) of the national wheat output, companies in this region stand to gain.
So Punjab Tractors with a major presence in this region is clearly placed on fertile ground. In Punjab, it commands a market share of 24.5 per cent, in Harayana 16.1 per cent while in MP and UP its market share is 17.7 per cent and 19.9 per cent respectively.
The tractor industry is expected to grow at around 8-10 per cent. However, given Punjab Tractor's proven ability to gradually advance its market share year after year, there is no doubt that the company will grow faster than the 8-10 per cent that it clocked. The company has doubled its market share from 8.5 per cent in 1983 to 16.6 per cent. It intends to increase its market share to 20 per cent over the next two years.
Apart from this, the company is also well placed in other states in central and southern India, from where growth is expected (the northern markets are said to be largely saturated).
Such is the company's strength that it has the distinction of being the only company to conduct sales entirely against customer advances. It does not have the concept of sales depots or warehouses either, which is a common practice of competition. Orders are generated directly by the field force which works in conjunction with the marketing function. This business cycle ensures a shorter working capital funds requirement, thus increasing profitability. With its consistent performance and ability to outperform the industry by as much as 50 per cent, Punjab Tractors is a good buy. It is also a likely bonus candidate as it has a good reserve position.
Zee Telefilms
The present political situation has seen the share prices of Zee Telefilms (ZTL) dipping by almost 18 per cent to Rs 845. ZTL, being a major beneficiary of the budget, had seen its share price shoot through the roof to touch a new high of Rs 1,058. The budget had offered complete exemption from tax on earnings from TV software etc. With the fate of the budget still hanging, the scrip has moved back to pre-budget price, which is an excellent level to enter the scrip.
ZTL is the sole supplier of media software for all the channels in the Zee stable, which are now being marketed together as the Zee Network. It has a cost-plus agreement with Asia Today Ltd (ATL), a joint venture company between Subash Chandra and Murdoch, on a mark-up of 15 per cent. ZTL retains the right to resell the software to other channels, provided there is no conflict of interest with ATL. Given the large demand for Indian programmes in several countries, ZTL has exported software to Mauritius, Fiji, the UK, the US and South Africa. Zee has a reach of 22 million households (with 90 per cent penetration in cable and satellite TV market). Further, over 60 per cent of the top 20 TRPs belong to the Zee Network.
As a strong brand building exercise, ZTL has instituted annual ‘Zee- Cine Awards' for excellence in Indian cinema. It recently launched a film magazine, Premiere. In line with its long term plan of being a one- stop entertainment shop, ZTL is also venturing into production of Hindi films. Also on the card are seven regional language channels. ZTL has also initiated integration of its different activities into one business, at the operational and managerial level.
For the nine months, its revenues were up 34 per cent to Rs 164.60 crore and net profit was up by 29 per cent to Rs 43.79 crore. Recently, ZTL managed to hike its advertising rates by 25 per cent. Buy at Rs 865.
Larsen & Toubro
Higher government spending in the infrastructure sector is likely to benefit Larsen & Toubro (L&T). L&T is the largest engineering, procurement and construction (EPC) company in India. It also has a big presence in cement, construction and electricals and earthmoving machinery. The company is in a position to take advantage of any uptrend in infrastructure activity because of its strong technical skills developed by way of over 30 alliances.
Engineering and construction contracts account for over 50 per cent of revenues. The company is the largest private-sector turnkey contractor and a leader in the construction industry. L&T is the second-largest manufacturer of cement in the country and cement contributes 23 per cent to the turnover. It will be commissioning the Tadapatri Phase I (2 mtpa) during 1999-2000. This will increase its cement capacity to 10.65 mtpa. It is also the market leader in switchgear and petrol-dispensing pumps.
The company will now see increasing exposure to Build, Operate and Own (BOO) /Build Operate Own and Transfer (BOOT) projects as opposed to being a pure contractor. This help the company in getting more contracts and getter margins. It is now focusing on becoming a world class EPC/construction player with a turnover of Rs 10,000 crore by 1999-2000.
In order to be better focused, L&T is hiving off its earthmoving division into a joint venture (JV) with Komatsu of Japan. It will, however, continue to market and service these products. The company sold off its loss-making shipping division for Rs 76 crore, which cushioned its first half of 1998-99 losses. It also plans to hive off its balance construction equipment business into another joint venture with a global player.
At the present level of Rs 192 levels, the stock is attractive for medium to long term.
business-standard.com |
