PROFIT FROM THE AGRI BOOM - 2 (FMCG)

Since FMCG companies are expected to be major beneficiaries of the growth in rural incomes it makes sense to focus on those companies which look to conciously increase their rural footprint. ITC is one such company in my opinion. In this post, I shall concentrate on the business prospects only and ignore the financials.

ITC operates in various segments and has a diversified product profile.
1. Hotels
2. FMCG
Cigarettes
Foods
Retailing
Personal Care
Education and Stationery
Agarbattis
Safety Matches
3. Paper Boards and Packaging
4. Information Technology
5. Agri Business
Agri commodities
Leaf Tobacco

Out of the above businesses, FMCG and Agri Business would provide a major thrust in the rural space thus benefiting form the agricultural and rural boom.

The FMCG business has products in various segments and at various price points providing a vast choice to consumers from every strata of society. The distribution reach is already there due to their cigarette network with pan wallas and other small vendors. Therefore ITC can effectively leverage this reach to enhance the availability of its other FMCG products like soaps, personal care products, Bingo and other food products. Again with increase in income, consumers in the rural space could migrate from beedis to cigarettes providing additional revenues.

The Company's 'e-Choupal' initiative is enabling Indian agriculture significantly enhance its competitiveness by empowering Indian farmers through the power of the Internet. This transformational strategy, which has already become the subject matter of a case study at Harvard Business School, is expected to progressively create for ITC a huge rural distribution infrastructure, significantly enhancing the Company's marketing reach. e-Choupal reduces transaction costs through elimination of middle men and ensures that farmers get optimum realisations for their produce. This link with the farmers is beneficial for ITC, since it provides a continuous stable source of inputs for its various businesses like agri exports where it is a major player and its foods business like biscuits, chips and atta. Also ITC's retail stores get a captive buyer base from this segment of farmers who come to e-Choupal to transact their business.

The above factors put ITC in an enviable position to capitalise on the boom in the agricultural sector and since the stock is reasonably priced at current levels, the case for investment into it is all the more stronger. Investors with a 3 year horizon can look to buy the stock.

Hitachi Results Update

Hitachi Home & Life Solutions (I) Ltd. Has delivered lackluster results for the first quarter.

Sales grew at a decent 25.36 % from 148.49 crore to 186.15 crore.
Other Income fell from 4.52 crore to 1.58 crore
Profit before tax remained flat at 20.96 crore compared to 20.49 crore.
Profit After Tax fell 8.75 % from 17.37 crore to 15.85 crore.

It seems that the company has been impacted by the rise in input costs particularly copper and plastics. We have to see how the company manages to handle these challenges from here on and whether it can continue to display the growth that it has shown in the past.

ICSA Q1 RESULTS UPDATE

I had posted on the attractiveness of ICSA (India) Ltd. in an earlier post.
It has reported encouraging results for the first quarter of FY 09.
Sales increased by 97 % from 122.63 crore to 241.50 crore (YOY)
PAT increased by 71.28 % from 23.92 crore to 40.97 crore (YOY)
The EPS for the quarter works out to 9.3.
The company paid taxes of Rs.14.14 crore for the quarter representing 25.65 % of the profits before tax.
In my opinion a high percentage of tax payout testifies to the genuineness of the reported figures as opposed to accounting jugglery and speaks well for the company.

VALUE BUY – AUROBINDO PHARMA

Aurobindo Pharma is a manufacturer of Active Pharmaceutical Ingredients (API'), formulations and intermediates, having a wide portfolio of products in various segments such as anti infectives, anti retrovirals, cardiovascular systems , CNS etc.

Strengths:

It has 5 units for manufacture of API' and 4 for manufacture of formulations, catering to regulated markets where norms relating to manufacture are extremely stringent. It has invested heavily in modernizing its plants to make them compliant with USFDA/European standards. This is a significant step in improving quality standards and would be beneficial to the company in the long run. A significant presence in US markets is accounted by a large number of approvals from the USFDA. In addition the company is in the process of filing for 30 more drug approvals in the coming years. Acquisition of Milmet Pharma (UK) and Prarmcin (Netherlands) has given it the required presence in major European markets. It has maintained its efforts to increase its presence in Europe by filing drug master files in various European countries. About 40 products are awaiting approval in various European countries, which could be a significant driver of revenues and profits going forward. In May 08 it has received 9 product approvals from MCC to market products in South Africa. It has now a total of 31 marketing authorisations approved by MCC.

Since the company manufactures a majority of the intermediates required for the manufacture of API', it has been relatively insulated from the cost pressures due to rising intermediate costs affecting a majority of its competitors. The company has focussed on diversifying its product portfolio by going into the formulations business, which is likely to impact bottom lines positively since formulations is typically a higher margin business as compared to API'.

Risks:

Prices of chemicals and intermediate inputs are on the rise due to the global commodities boom. This could have an adverse impact on the bottom line of the company.

The company operates in regulated markets of the US and Europe. Delays in the approval of drugs can have an effect on new launches thereby putting a constraint on the growth of the business. Also the quality parameters not only with respect to the final product, but also in the practices followed in their manufacture are very stringent, any slip ups can cause serious problems.

Financials:
For the year ended March 08, the company achieved sales of Rs.2234 crores, a growth of 19 % over the previous year.
Profits increased from Rs.229 cr. to Rs.290 cr. A growth of 27 %. However this was aided by an increase in other income from Rs.39 cr. To Rs.118 cr.
The EPS for the year stands at 53 giving a PE ratio of 5.5 at current prices. If other income is excluded, it gives an EPS from operations of 32.
The real undervaluation of this company is observed in its balance sheet. The company has Net Current Assets of Rs.1800 cr. as on 31.3.07. Against this the Market Capitalisation is just Rs.1500 cr. on date. This makes Aurobindo Pharma a real value buy.

ICSA (INDIA) LTD - A POTENTIAL MULTIBAGGER

What would you say if I told you about a company which is operating in two of the fastest growing sectors in India viz. Power and Oil & Gas, has seen sales grow 200 times in 5 years and profits grow 1400 times in that period. To top it its products enjoy patent protection and competitors if any are only in the unorganized sector.

ICSA (India) Ltd is one such company, having several patented products which are unique in preventing losses due to thefts and corrosion and these products have the potential to provide it with continuing revenues and profits for many years.

ICSA has a unique device for power monitoring and theft detection which is installed at junction boxes. It continuously monitors energy and sends signals to the base station. It also detects tampering and sends alerts to the control room. In addition it has products for intelligent automatic meter reading through wire and wireless communication. This aids power companies in billing customers without visiting the site. Another product is for remote street light control system whereby street lights can be controlled from remote locations by programming them to be switched on and off as per seasonal changes. It has a product for agricultural load management meant for supplying power to farmers during specified times during non peak hours.

Also the company is also involved in executing contracts for erection of small power distribution systems in rural areas.

The company has a range of products in pipeline applications. This product when installed in any pipeline (natural gas, water, oil) continuously monitors the pipeline with the help of intelligent cathodic protection system and notifies any abnormalities in the pipeline to the control room. It has entered into a strategic tie up with Oil India Ltd. To market this product in India and abroad, which testifies to the technical soundness of the product.

Because of the original and path breaking nature of these products, the company holds immense potential for sales and profits growth. Particularly so because transmission and distribution losses in India are currently at Rs.50,000 crores. In Budget 2008-09, the finance minister has provided Rs.800 crores under the Accelerated Power Development and Reforms Project (APDRP) aimed at reducing these losses. A proposal has been put up to set up a national fund for transmission and distribution reforms. These clearly indicate that reforming the power sector remains a priority for the Government and it is committed to bring down these losses from 35 to 40 % of power generated currently to 15 % in the 11th 5 year plan. Also power generation capacity is sought to be increased from 16000 MW now to 36000 MW by 2011. This presents a huge opportunity for contractors and suppliers in this sector.

ICSA is well place to capitalize upon the opportunities thrown up by aggressive investments not only in this sector but also in the oil and gas sector where Reliance is all set to commence its natural gas supplies to power and fertilizer plants.

Sales have grown from Rs.3.42 crore in FY 03 to Rs. 669 crore in FY 08. Net Profit has grown from Rs.0.09 crore in FY 03 to Rs. 126.5 crore in FY 08, yielding an EPS of 32.4 with the current market price discounting earnings by only 13 times for a company doubling its profits every year. The management has indicated confidence in sustaining 100% growth for the next 3 years, which their track record so far bears out.

Smart investors have already taken stakes in the company. Government of Singapore already holds 5 % in it. Goldman Sachs is an investor and so is Reliance Energy through its subsidiary and Tata group also has a stake. Long term investors with a time horizon of 3 years should consider investing into this stock with expectations of a 5 fold return during the period.