Financial Wisdom By Kalidas

Stock

Sector

Market

Ref No

Symbol -NSE

ABSHEKINDS

BSE at

16,158

NSE at

4,760

Date

CMP (6Nov09)

14.60

Target ST

21.00

Target LT

43.50

Year High

17.00

Year Low

5.25

ST Hold

6 months

LT Hold

18 Months

Current PE

9.13

% Down Peak

14.11%

Downside

-15%

Upside

+198%

PE 2010*

5.00

Div Yield% CMP

0.00

Buy Range

Up to 18

Sell  Range

>36

Comments

1. Company’s Sales growing at enhanced speed of 30%. Sales (1388 crores –up 30%)
2. Expansion expenses slowing down, that is, expansion is nearly over, production near.
3. Revenue  may rise over  30%  on compounded basis for next 3 years
4. Quarterly reports from 06/2009 and 09/2009 have returned to profit… With expansion over, there could be rise in cash profit (actual profit may be less due to higher depreciation)
5. For last two Quarters, the EPS is 1.94 (cumulative) which may rise to Rs 3.20 for full year, placing 2010 PE at below 5.  Next year could be even better – bringing EPS to over Rs 4
6. Negative factor is higher debt. The company may have to raise more capital. However, higher capital or greater number of shares will be accompanied by higher revenue and profit.
7. Applying even 12 times normal PE, the stock could rise to minimum Rs 36 and maximum 43
8. The company is in Textiles, Paper, Yarn, Chemicals and Energy (Power) business. It is likely that the company may attain Revenue target of over Rs 3000 crores in less than 3 years.  Presuming PAT at 9%, the company could make Rs 210 crores at discounted PAT of 7%. . Current shares outstanding at 22 crores which may rise to 30 crores in 3 years. It works out to Rs 7/shr on enhanced capital. The stock could therefore move to even Rs 80 or more if the expanded capacity starts contributing faster.
9. Company’s  export market (Terry Towels for which JC Penny used to be major customer) may be slow, but other domestic business will do very well.
10. Company’s debt level is very high (Debt to Equity 4:1). Higher capital, more profit will bring down to less than 2:1 in 3 years.
11. This is a strong recovery play. One will be investing into future rising star that may rich magic Sales number of Rs 4000crores or nearly $ 1 billion in less than 4 years.
12. One will be investing into well diversified business of textiles, yarns, paper, chemicals and power. The risk of recession is relatively less than other pure export dependent textile company.
13. My assessment is much above other brokers. Read their opinion as well before investing.
14. Unless Interest rates rise rapidly, which is not possible in India, the risk to revival and expansion story is much less.

Links

Stock Behavior

The stock is up by over 50% since July 2009 in tandem with the market.  Buying now will result in entry at higher price. However, for small priced stock, this is inherent risk. If you have strict discipline, wait for major correction when you can buy probably 30% cheaper than now.

Due to weak market overseas, best entry level could be less than Rs 10, more preferably Rs 8 to 9.20 levels. However, I would not wait for that level. The stock is still within my Buy range.

The company could suffer severely if FOREX losses (mentioned below) mount. Some irresponsible banks in India, notably ICICI, Axis Bank appear to have sold lot of Forex derivative products to their customers. Many sued the banks unsuccessfully.(result not known)

Forex derivative loss is the only major negative feature for this company. Since the amount is not ascertainable, we can not form any judgment. Not much will be known in immediate future. This is why if you make solid gains in the stock due to better numbers on other side of balance sheet, be a seller with a view to buy back on 30% fall from sale level. 2013 is years away. Avoid chasing stock.

Post-Purchase Care

• Watch Quarterly number carefully, If third quarter is profitable, add more to position.
• The company ran into FOREX losses last year which is a black spot for the company. Due to lack of details, I can not foresee losses in future. However, if Forex losses are higher this time, reduce the position by 50% because the debt level is high. Add more if profits are maintained.. Note the following extracted from Company’s quarterly numbers for Sep 09

During the previous years, the Company has hedged its foreign currency exposure by taking various derivative options from various banks having maturity up to January 2013. These derivative options are proprietary products of banks, which do not have a ready market and as such are marked to a modeL, which is usuaLly bank specific instead of being marked to market. In view of the significant uncertainties associated with the above derivative options whose uLtimate outcome depends on the future events, the Loss on such derivative options cannot be determined at this stage.