ZeeNut's Grizzlies ....

A couple of months ago ,on a couple of investor forums, this author had listed a set of issues that could potentially rear up & trip the current bull run in the Indian Stock Markets. The same are reproduced below in random order, as they hold true even today.

A close watch on these grizzlies over the coming weeks & months would perhaps be prudent, as the situation continues to be volatile & uncertain :

1. Trade War resulting from US branding China a Currency Manipulator

2. Burst of the China Property / Debt Bubble

3. Middle East flare up / Iran Nuclear Issue Snowballing

4. Any Sovereign Default (prime candidates : PIIGS) & it's Domino effect

5. End Of The Great Liquidity Cycle : Unwinding of Stimulus in US / India / Globally; belt tightening by various governments

6. Double Dip Recession

7. Tension with our neighbours Pakistan / China

8. Big rise in Oil & Metals

9. Unexpected political uncertainity with UPA's LS majority coming under question

10. Rise in India's own Bank Rates to control rising Inflation

11. Internal Security Issues : Naxalite issue snowballs, or a major terrorist strike

12. Further SCAM's  - accounting ones or stock market ones 

13. Company Earnings Disappointments

14. Adverse impact of Direct Tax Code proposals

15. Failure of the 2010 Monsoon

16. Impact of US Financial Reforms.

[ Note : Some of the above grizzlies are closely linked with each other, for example fiscal contraction arising out of an end to the great liquidity cycle can actually prompt the "double dip recession" if not timed right. ]

With so many uncertainities, the author would advise a cautious rather than a cavalier approach to the stock markets at the current moment, and keeping Capital Preservation top of mind.

GEI Industrial Systems : Water Scarcity + Power Scarcity = A Bright Future !!

BSE Code    : 530743
Website        : http://www.geiind.com/
CMP            : 131.50 (closing price, 18.06.2010)
EPS (FY10) : ~ Rs 10

In his seminal work "Common Stocks, Uncommon Profits", Phillip A. Fisher laid down the top criteria for stock selection as being whether the company in question had the products or services with enough potential to make possible a sizeable increase in sales for several years to come.

GEI Industrial Systems (GEI) is one such firm blessed with precisely the sort of products that have a ready & increasing market in years to come.

The company’s main products are Air Cooled Heat Condensers & Heat exchangers, primarily for the Power and Oil & Gas sectors.

These air cooled products are fast replacing water cooled products, owing to the fact that availability of sufficient water for industrial users is becoming a big problem in India, as a burgeoning population competes with industries for a water pool that is not enough to supply both, and is not getting augmented quickly either.

This situation is unlikely to get better, on the contrary things could get even worse.

Secondly, with the mammoth plans for power generation already announced – and the power-starved country certainly needs that - the main market the company caters too is also staring at huge growth. Oil & Gas sector is also growing at a good pace.

So Water Scarcity + Power Scarcity = Good Times for the Air-Cooled Condenser & Heat Exchanger Industry.

Which brings us to the 2nd important consideration : Does GEI enjoy any competitive advantage - say market leadership / technology leadership / Cost leadership etc – that will give near certainty that the company will enjoy the fruits of the superb opportunity outlined above ?

In fact there is : GEI is a market & technology leader in it’s field, with a 40-50% share of the Air Cooled Heat Condensers & Heat exchangers market in India.

So how fast is growth likely to scale up ? Well, GEI is expanding capacity at a frenetic pace. A leading business magazine recently quoted the management as projecting to double turnover (~250 Cr currently) in 2 years time, and aiming at quadrupling it by 2015, which would make GEI a leading global player. Currently the company has an order book of over 400 Cr, giving visibility for the next 15-18 months.

Recommendation :

Given the humungous market potential & the market leadership enjoyed by GEI, the only thing that remains to be decided is what would be a decent entry price. After all, one does not want to enter a great business at an atrocious price, thus shooting oneself in the foot.

The author believes that a small entry at Rs 130 or below, followed by averaging at declines is the right way to go about entering & accumulating this stock, strictly for a 3-5 year holding period.

Author : Bosco Menezes

Recommendation Date : 20.06.2010

Disclaimer/Disclosure :

At the time of writing this article the author has a position in the stock covered by this report. The author or any of his dependent family members may make purchases or sales of the securities mentioned in the report while the report is in circulation. Readers/recipients of this report are strongly advised to do their strict due diligence, and should be aware that the value of investments can go down as well as up. The author shall not be liable for any direct or indirect losses arising from the use of the contents of this report, and readers are therefore cautioned to use the information contained herein at their own risk. In fact, readers would do well to seek the advice of a qualified independent advisor. The author certifies that all of the views expressed in this report accurately reflect his personal views about the subject company at the time of writing this report. Feedback / brickbats may be hurled at the author at boscom@gmail.com .

Capital Trust Ltd – Going Grameen

While agreeing with the basic hypothesis that there is a fortune at the bottom of the pyramid, this author has for long felt that the microfinance business in particular, despite it’s undoubted potential, was a bit too risky to warrant investment. Indeed over the course of the last few months, quite a few reports have stressed the burgeoning of NPA’s in the microfinance sector in India, not helped by the growing tendency of the microfinance clientele to take loans from multiple institutions.

Still, when the author came across the recent comment of Mr. R. R. Nair, Chief Executive of LIC Housing Finance, that “about 80% of demand is from the low-income segment, so for long-term sustenance of business growth I think the microfinance business is necessary”, he decided that it justified a closer look at listed microfinance companies in India, with a view to see if any of them warranted investment.

Given the very limited universe of such companies, it was not difficult to do some quick research, and in doing so the author came across the following press release from a company called Capital Trust Ltd (BSE Code : 511505) , which caught his interest :

http://www.indiaprwire.com/pressrelease/financial-services/2010050449639.htm

Synopsis :

Going through the article, and thereafter going through the latest annual report of the company, as well as the company’s website http://www.capital-trust.com/ , one finds that :

• The company entered the microfinance business in FY09, and achieved profitability in the very first full year of microfinance operations (FY10).

• Company has a vastly experienced management team & board of directors

• The company focuses on North India, where the microfinance penetration is abysmally low.

• The company currently operates 25 microfinance branches, servicing over 22,000 clients, with total loans outstanding of Rs 12.4 Cr, and enjoys a default rate of under 1%

• Company projects profit of Rs. 3.1 Cr in 2011, giving an EPS of Rs 4 on current equity of Rs 7.5 Cr

• The company aims to have an outstanding loan book of Rs 1373.3 Cr by 31.3.2015, as against the corresponding figure of Rs 12.4 Cr on 31.3.2010. That’s 110 times current loan book, in 5 years time !!

• To meet the funds requirement in keeping with the proposed growth, the company has appointed a New York based investment consultant to initially raise Rs 20 Cr foreign equity and Rs 36 Cr debt .

Risks :
Obviously there are a lot of risks, some of which are :

• Maintaining a low level of NPA’s, particularly with the increasing trend of clients to access loans from multiple agencies simultaneously

• Growing competition

• Ability to raise funds at regular intervals & at reasonable cost

• Government regulations, which might impose higher provisioning, or curtail the gamut of activities of microfinance companies

Recommendation :

The stock quotes in the Rs 65~70 range currently. Assuming the company meets it’s guidance of PAT of 3.1 Cr for the current year, the PE stands at approx 17 times current years projected EPS, which suggests that it is fully priced.

However, if the company can come even close to achieving the sort of growth it has outlined for itself, the stock could well be selling cheap currently. The question is, can it actually deliver ? Can one trust some capital investment in Capital Trust Ltd ?

The answer to that will become evident in the next couple of years. For now, the author suggests actively tracking this firm, and committing capital based on one’s conviction levels.

Author : Bosco Menezes

Recommendation Date : 20.06.2010

Disclaimer/Disclosure :
At the time of writing this article the author has a position in the stock covered by this report. The author or any of his dependent family members may make purchases or sales of the securities mentioned in the report while the report is in circulation. Readers/recipients of this report are strongly advised to do their strict due diligence, and should be aware that the value of investments can go down as well as up. The author shall not be liable for any direct or indirect losses arising from the use of the contents of this report, and readers are therefore cautioned to use the information contained herein at their own risk. In fact, readers would do well to seek the advice of a qualified independent advisor. The author certifies that all of the views expressed in this report accurately reflect his personal views about the subject company at the time of writing this report. Feedback / brickbats may be hurled at the author at boscom@gmail.com .