My Top 5 Picks

Stock Opportunities
1

Hi,

My picks are primarilybasedon growth potential of the businesses and available at a reasonable valuations. No necessarily in the order or really value picks with margin of safety.

  1. JHS Svendgaard - Contract Manufacturing. Can grow at over 35% to 40% for the next 3 to 4 years. And a good buy at current levels of 75 to 85.

  2. Piccadilly Agro - A misunderstood / undiscovered story. Considered and valued as a sugar company, but has transformed into a brewery. Derives over 70% of its revenues from the brewery segment and growing well, hence a perfect candidate for PE rerating. Available in a reasonable range of 36 to 40.

  3. A. K. Capital - A good play on the growing corporate debt and bond market in India. A leader with nearly 30% market share. A good buy between 380 - 420 levels.

  4. Marg Ltd. - A good mix of real estate, infra, EPC and port. Like the port the most amongst other areas. All areas doing good and growing well. Company available at a market cap which is less than the valuation of the port along. Other businesses available as good as free. Also has recently fallen from 240 odd levels to 125 which appears to be a good entry point. Available below book value too.

  5. Photoquip - More of a desert rose, as Peter Lynch would refer. A good company in a boring and out of favor sector. Exclusive distributor of Elinchrome (high-end and mid-range photography tools and accessories). Also manufactures and exports certain components to the parent, Elinchrome. Has recently gotten into mini-photo studio market, through a dye sub technology (which is again a dying technology) with very few survivors left in the market. Good buy at any level around 50.

Regaards, Manish.

2

Hi Manish,

Interesting picks. I have heard good things about Piccadilly and Photoquip but haven’t been able to devote time on them. Would be great if you could post your detailed observation/summary.

Thanks & Regards,

Ayush Mittal

http://dalal-street.in/

3

Hi Ayush,

Will try to make some notes on Piccadilly and post them here in the next few days. While for Photoquip you can check Amit Arora’s Blog on multibaggersindia.blogspot.com. Its a very good blog. Just search this one and you will find lot of details and discussions on Photoquip and many other good stories.

Regards.

4

Hi manish,

Please clarify on below points

JHS,

I have looked over and noted that promoters arecontinuously sellingtheir stake in open market and remaining % arepledged.

Piccadilly Agro,

not able to find the actual capacity and utilization

Regards,

Vishal

5

Hi Vishal,

The promoters have not been continuously been selling. They may have sold a very small quantity which could be for any reason, and should not be read too much into as its not at all significant. By the way, where did you find this information and what is the exact quantity they have off loaded?

The company has recently approved a preferential allotment of 25 Lakh shares at Rs.97.75 to Tano Mauritius IndiaFVCI. This is a venture capital company, and thesame is basically for the purpose of further expansion. The company has laid down a road map forthe same.

Tano Mauritius will hold around 14.8% in co: JHS Svendgaard

To reach 100% utilisation in FY12: JHS Svendgaard Labs

As for the pledging, yes, most of the promoters stake has been pledged. But this is not recent. This was done quite sometime ago, and nearly 50% of this will come back to the promoters in the next few weeks as per their arrangement with the bank.

Plan to release pledged shares by FY12-13: JHS Svendgaard

Plus if we notice from the results, the company is doing really well and definitely warrants the required expansion. This also clarifies my concerns regarding any equity dilution / issue of shares, as the EPS growth would easily keep pace with the issue of additional shares for growth / expansion which seems to be necessary at this stage. Imagine Procter and Gamble trusting a company of this size and giving them an order to manufacture 10,000 tons of Tide detergent every month. Definitely speaks something about the company and their capabilities. And above all, the management is very transparent and coming out with a detailed explanation for each and every move from the company (as can be seen from above interviews), unlike most other managements of companies of similar size.

JHS Svendgaard Q3 net jumps 138.88%

On Piccadilly, let me collect some more details and get back to you through my next message.

Regards.

6

Hi manish,

Thanks for the information ,please look into the insider trading section of the bseindia.com.

furthur can you put more light on the company expansion plan.

Thanks.

7

Hi Manish

Please find the below details on JHS sold by Nikhil Nanda,apart from below list some more stake is sold by him on 24thMarch,16thFeb

3rdMarch 75000@78

24thFeb 75438@82

21srFeb 50438@82

19thFeb 75000@80

Regards,

Vishal

8

Hi Vishal,

I would not read too much into the sale of the shares by Nikhil Nanda. Its just about 3 lakh shares, which can be for any reason. He may have a personal financial need or whatever. It just amounts to about 2.5 or 3.0 crores in terms of money, which he may need for some commitment.

JHS Svendgaard has an installed capacity of about 300 million tooth brushes. They cater to lot of of retail, FMCG and pharma companies such as Cipla, Big Bazaar, Elder, Lavoris (of US) and the likes. Additionally, they had set up a detergent manufacturing facility to manufacture about 10,000 tons of Tide every month for Procter and Gamble. The plant would be manufacturing 17 variants of Tide detergent. They have already started using this plant since Dec 2010 or so, though still not running at full capacity. As per the management interview its evident that they would be utilizing 100% capacities by FY 2012 end. Guess that’s why more expansion planned now for around then. The following link I had posed earlier does speak about the expansion, with the money they have raised from Tano Mauritius.

Tano Mauritius will hold around 14.8% in co: JHS Svendgaard

Getting into the details of the current set up, the company counts some of the marquee companies in the oral care, retail and FMCG industry as its clients. Additionally, the company operates primarily from two facilities. And both these facilities are in SEZs (Noida and Himachal Pradesh) which make them eligible for various tax benefits and subsidies.

The company enjoys the status of preferred supplier for oral products for various national and global companies. The company also supplies products to several leading pharma companies - manufacture of AM PM mouthwash and tooth brushes for Elder Pharma, tooth paste under the brand name “Lavoris” for Evergreen of USA, tooth paste and mouthwash for Cipla under their brand “Sefdent” and tooth paste branded Close-up for Church & Dwight of USA. The company has also licensed India rights for “Infectiguard” the third largest brand hand sanitizer brand of US. In the retail segment the company has been manufacturing tooth paste branded as “SACH” for Big Bazaar, the largest retail chain in India. Big Bazaar sells SACH brand across all their retail outlets. And after the contract for manufacturing Tide from Procter & Gamble, the company is now expecting more orders for manufacturing tooth brushes and other FMCG productssuch as Shampoos and other skin care products for them.

Coming to the manufacturing facilities, the first one is situated out of a Noida based SEZ and is 100% export oriented unit. This makes the facility eligible for duty free imports and other tax benefits. Additionally, there are also benefits such as single window clearance for exports, saving time involved in customs clearance and hence resulting in faster execution of deliveries. The second unit is Kalaamb, Himachal Pradesh. This unit has the same advantages as the Noida unit, and also stands to gain from the industry friendly policies of Himachal Pradesh state. The most significant benefits being 100% excise exemption for first 10 years, 100% exemption from income tax for first 5 years and 30% for the next 5 years. Plus the unit also enjoys 15% capital subsidy on processing machinery and lower power tariffs. These strategic benefits provide a great competitive advantage to the company in addition to higher operating margins and post tax margins. Its anyone’s guess as to what these advantages could do to the earnings of the company.

To me the opportunity seems enormous - beyond what we can think or visualize. What has started as dental care and detergents today, could be just about anything such as beauty, skin care, shaving, and so on tomorrow.

Regards.

9

Hi Ayush / Vishal,

As mentioned earlier, my notes on what interested me towards Piccadilly other than its financials and good performance off late.

Till FY 2007 there was nothing much to talk about Piccadilly. They were like most other sugar companies from the north, making a loss. At the end of FY 2007, the company was only into sugarcane crushing and thus into production of raw sugar, however they had started with the setting up of liquor facility. So, till FY 2007 they were largely a loss making company. For FY 2008 the company had started with the liquor production and sold some 2.17 million cases. In that year the company made a net profit of just Rs 12 million but that was on account of 50 million loss from Sugar Division. At the end of FY 2008 the company had some 270 million capital work in progress, so they were still expanding their liquorfacility. For FY 2009 the company sold 2.86 million cases with a turnover of 480 million. The company achieved Rs 54 million profit from liquor and 32.9 million profit from Sugar i.e. around 87 million net profit. At the end of FY 2009 the company had 430 million capital for work in progress. This was again for the expansion of liquor unit. For FY 2010 the company did a turnover of Rs 820 million from liquor unit which is almost a 70% increase in revenue for liquor unit over FY 2009. The company achieved a Profit before Tax of around 170 million from liquor unit and assuming 33% tax, a net profit of Rs 113.9 million, so more than 100% increase in net profit from the liquor unit of the company. At the end of FY 2010 the company has close to Rs 600 million debt on its books, however most of it has gone towards expansion, as its added to the gross block. Between FY 2009 and FY 2010 the gross block of the company increased by Rs 330 million from Rs 830 million to Rs 1160 million, while there is another Rs 130 million capital work in progress. This clearly shows that there is some more expansion underway which would get added to the existing capacities in the days to come.

Regards.

10

Good ideas. Thanks Manish, I like your ability to think differently.

A K Capital had some issues. We had looked at this before. will try to locate the notes and post. Piccadilly seems interesting, as does JHS.

I am travelling from tomorrow, so may take some time to revert.

Please continue the good work.

-Donald

primarilybasedon

11

Interesting picks Manish.

Regarding picadilly agro it seems to be gradually getting on track in terms of giving out good results.

JHS again I had looked earlier but got turned off by the promoter issues but as you say if they are trivial it needs to be looked at closer.

12

Hi Vishal,

I think I may have a probable answer to your query on sale by Nikhil Nanda. From a detailed look at the insider trading and share holding pattern, it appears that they are trying to balance the holding between Sushma Nanda, another person from the promoter group and Nikhil Nanda, the managing director. If you observe Sushma Nanda bought nearly 8 lakh shares on 30th Sept 2009, when the price was very low. And now in the last few months, between last quarter of 2010 and now, the total quantity Nikhil Nanda has sold is just about the same. This might also be kind of investment for capital gains by the promoter group in their own stock, why not when they know the potential. This is why I thought we should not read too much into it. All in all, with this sale by Nikhil Nanda, the overall promoter group holding still remains almost unchanged.

Regards.

13

Hi Donald,

Thanks for the kind words. And the pleasure is all mine. Look forward to hearing from you on A. K. Capital.

Regards.

14

Hi Hitesh,

I personally do not see any promoter issues at JHS. I have clarified to Vishal on the insider trading issue, to the best of my knowledge. This is of course, just my best guess and as I perceive the issue. And I personally have found the management to be very transparent - at least going by their communication and interviews on all small issues. This level of communication from a small cap / micro cap companies is unheard of. Clear communication on capacity utilization, pledging of shares, expansion plans and issue of additional equity. Its clearly evident they are gearing up to be a bigger player and behaving like one. Again may be its my perception. But that’s what growth investing is all about, especially in small caps and micro caps - Unknown, unknowable and unique investing :slight_smile:

Check an interesting report on the same athttp://www.hks.harvard.edu/fs/rzeckhau/InvestinginUnknownandUnknowable.pdf

Regards.

15

Hi Manish,

Thanks for clarification.please put some comments on AK capital services.

Thanks

16

Hi Vishal,

My notes on A. K. Capital. These may be a little dated as I had prepared them sometime ago. And I am just explaining about the company here and not getting into the numbers, which are available from many Web sites and annual reports of the company. Needless to say the company has an excellent balance sheet and has been growing well year on year, which is why I even bothered to look into it in more detail.

Background

A. K. Capital Services Limited is the flagship company of AK Group. A. K. Capital is Indiaâs leading SEBI registered Category - I Merchant Banker engaged in providing various fee based services such as fund mobilisation through issue of debt, equity, structured hybrid instruments and through loan syndication, etc for various Central & State Government Undertakings, Private & Nationalised Banks, Financial Institutions & Private Sector Corporates. In a very short span of time emerged as one of Indiaâs leading Merchant Banker for the Indian Corporate Debt / Fixed Income Securities market through Private Placement / Public Issues and for Management Consultancy, Advisory Services, Financial Restructuring, etc. In the Year 2007, A. K. Capital Services Ltd won the Prestigious International Financing Review (IFR), Asia Bond Deal of the Year 2006 Award in Hong Kong for successfully structuring & placing Rs 1,500 million perpetual bond issue for UCO Bank, one of the leading Public Sector Bank in India. The company is also winner of âEntrepreneurship Excellence Award 2010 â for development of Indian bond market.â

A. K. Capital has been playing a pivotal role in debt market private placements for banks, the government and other financial institutions, is one of the biggest competitor of Mumbaiâs oldest brokerage house Darashaw & Co. A. K. Capital had consistently been there in the top two arrangers of debt through the private placement route for six consecutive years from FY03 to FY08. AK group has a dedicated team of over 125 qualified professionals spread in length as well as breadth all over the country specifically focusing on marketing and sales of Bonds, Debentures and other Financial Products to ensure coverage of maximum spread of Investors. AK group has coverage through its professionally managed offices at all Metros and major Sub-Metros of the Country including Mumbai (Head Office), New Delhi, Bangalore, Kolkata, Hyderabad, Chennai, Ahmedabad, Pune, Coimbatore. The Company had two subsidiaries at the beginning of 2009, A. K. Stockmart Private Limited and A. K. Capital Corporation Private Limited. During the year Girdhar Vanijya Private Limited became subsidiary of the Company. The company has acquired 70.83 percent stake in a non-banking finance company (NBFC), Girdhar Vanijya, for Rs 1.48 crore. Through the NBFC, A. K. Capital has started an investment banking unit for the bond market.

The Company with its subsidiaries offers a range of financial products and services as follows:

Corporate debt raising through private placement of bonds and debentures, initial public issue of bonds and debentures, project financing and working capital finance.

Investment banking including raising equity capital through Initial Public offerings (IPO), Follow on Public offerings (FPO), Rights Issues, Qualified Institutional placements (QIP). The equity capital market activities involve providing advisory and placement services pertaining to the raising of equity and quasi equity funds for its corporate clients.

Stock broking and Distribution services include offering products such as equities, derivatives, depository services, distribution of mutual funds, etc.

Investment in bond and debentures through treasury operations.

Key Strengths

Brand Image - A. K. Capital Services Limited is one of the leading domestic financial services group in India. This category I merchant banker has well established Brand which has been built over the years.

Market Share - A. K. Capital has 32% market share in private debt placement. During last year market share of debt mobilization by the company for Government Organizations and Financial Institutions stood at 42%, for PSU and PSU Banks stood at 29%, for Central and State Government Undertakingsstood at 22% and for State Government Undertakings and State Level Financial Institutions stood at 23% and for private sector companies stood at 8%. The Company’s focused approach, strong liquid balance sheet, cost efficiency, risk management and diversified income streams has helped it grow year on year.

Expanding Corporate Bond / Debt Market - By now its a known fact the the corporate bond / debt market is growing well in India. It has been growing at over 34% CAGR for the last three years. We have seen an increasing number of corporates issuing bonds and raising debts in the open markets in the last year and current year, which augers well for the company. As of now the company is an undispited leader in this space.

Last, but not the least, I feel that the consistent growth in revenues, and increase in market share, makes the company’s stock ideal for P/E re-rating too.

Regards.

17

Hi Manish,

Thanks for the information can you clarify more that what actually this “corporate bond / debt market” why company requires this?

I have looked company named sumedha Fiscalserveswhich is into same line of business, can you compare both and put forward some comments

Regards,

Vishal

18

Hi Vishal,

Any company could need debt and could either raise it through banks, financial institutions and investment firms OR issue corporate bonds / FDs. Even government keeps raising debt by issuing bonds on a regular basis. To give a few examples if you have noticed current issues by Tata, JP Associates, Sriram Transport Finance or numerous other companies. These need to be planned, structured and distributed to raise money just like an IPO. The same would be useful to such companies. Plus, even when loan is raised through banks or institutes, when loan amounts are large the same need to be syndicated - meaning structured and negotiated where multiple institutions get together and provide the loan. This are all services offered by A. K. Capital and the company is a leader in this space.

And yes, Sumedha Fiscal is also a very good company, but much smaller. Its actually a micro cap - Market Cap of Sumedha is 15 Crores while A. K. Capital is 268 crores. Sumedha is more into brokering and financial services. Just getting into the corporate bonds / debt space now. But A. K. Capital is much larger and a leader in this space, hence cannot be compared with Sumedha Fiscal. Although, Sumedha Fiscal too is available at attractive valuation currently and is a good company to invest in. It had recently fallen a lot, due to results much below expectations for the last quarter. However, it seems to be on track to recover easily from the same in the next quarter or two.

Regards.

19

Hi Manish,

JHS,

company profile is good,growth is intact but still concern is share holding which is decreasing every Q and in last 1 yeardecreasedby 4%

20

Hi Donald,

Can you please tell what issue you are taking about with A K Capital

Regards,

Vishal

Hi,

My picks are primarilybasedon growth potential of the businesses and available at a reasonable valuations. No necessarily in the order or really value picks with margin of safety.