Top five picks - HitStocks!

Stock Opportunities My Top 5 Picks
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Hi

I would like to put forth my top 5 picks to be held for a period of around 2-3 years. Current prices at which the picks are made are attractive but since markets are correcting with a vengeance, one could add more on declines with a definite gameplan.

1). Ajanta pharma )-- consistent growth, good brands in domestic markets, strengthening its presence in overseas markets, relatively recession proof, reducing debt since around last few quarters. cmp 192, stock available at a pe of around 5-6. On a scale of 1 to 10, valuation is very attractive and so gets a grade of 9, conviction also at around 9.

2). **Aries Agro – **It is a play on the agri space. The company makes micro nutrients and seems to have good products in the space. Overseas revenues would start to contribute to topline significantly from fy 11-12 onwards and boost profitability. cmp 117-119, Conservative estimates for FY 11 are for eps of around 12-14. Valuation grade around 7, conviction around 8

3). **VST Tillers **cmp 439 This is a market leader in its space of tillers and now concentrating on small tractors. FY 11 eps likely to be around 55-60, very high ROE, excellent balance sheet and valuation comfort of land value at Whitefield in Bangalore. Valuation grade 9, conviction grade 10

4). **Globus Spirits cmp 158-159 **This company currently is into bottling for bigger players but has plans to launch its own brands and establish them in the markets. FY 11 EPS could be around 15-18, but real growth would start from FY 12. Management has maintained good balance sheet while concentrating on growth. Valuation grade around 7, conviction 9.

5). **Intl Travel House cmp 210 **This is an ITC group company which is into travel as the name suggests. Bulk of revenues comes from its car hire services but the management is now focussing on MICE segment for future growth-- meeting, conference, entertainment etc where there dont seem to be too many established listed players. Good debt free balance sheet and strong parentage. Valuation grade 7, conviction 9.

Besides these, I am looking at some large caps namely IDBI bank, IDFC, LIC HF, EssDee Aluminium and Mah Seamless for building up some positions in relatively larger caps. I am still observing the correction in these stocks and want them to stabilise before taking the plunge.

4 Likes
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Great going Hitesh. I hadnt managed to look at Ajanta Pharma and Globus Spirits at any good length. Seeing your conviction levels, now I will.

Will get back with comments on each as I spend a couple of hours or more on each opportunity highlighted by you. Perhaps most will deserve separate threads of their own.

Thank you for suggesting this…and a great beginning!

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Re: Ajanta Pharma

I had a first look. Some quick observations:

1). Long term sales CAGR of 23% and PAT CAGR of 47%

2). 5yr Sales CAGR 17% and EPS CAGR of 29%

3). Raw material/Sales has consistently been coming down from 56% of Sales in FY06 to 36% of Sales in FY10

4). NPM has been consistently increasing from 5% in FY06 to 7.5% in FY10

5). Top brand in Dermatology like Melacare

6). New state of teh art API facility set up in Waluj Aurangabad in Fy10

7). Acquired formulations facility to cater to the rest of the world markets in FY10

8). Very impressive 1HFY11 results - Sales growth 18%, PAT growth 58%. This should be maintained as there is no apparent seasonality in Sales as seen from past quarters. NPM has touched almost 9%

Seems like a good story that deserves its own thread.

I have some questions:

1). Tax rate is pretty low ~15-16% for FY10?

2). Promoters had pledged shares - at one point this had gone upto 25% from 14%. Its down to 1.7% of total shareholding. Do we know the circumstances, why??

3). Company has always had high debt. In Q2 d/e is down to 0.93

4). What is the reason for the impressive performance in 1HFY11 as compared to say FY10? One factor is that they have been repaying debts regularly so interest cost/Sales is down below 4% from some 6% in FY10 corresponding quarter, but that is probably not telling the whole story

5). Raw material/Sales has seen huge improvements -from 39% to 31% of Sakles in last few quarters. Is this the effect of the new API facility that must be catering to captive use mostly. Does it supply some 50% of captive needs?

Some of these answers may tell us more on the sustainability of growth and profitability going forward.

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Hi Donald,

Why do we have to choose Ajanta pharma when the rest 4 look better(except maybe not on valuation basis). I like VST Tillers the most among these & being a Bangalore based company maybe easier to meet the management. Regarding Ajanta Pharma, i believe its a tougher business to grasp(pharma is outside my COC) & given its debt levels(-ve FCF) it doesn’t make a very safe bet in the current scenario. Any particular reasons for liking Ajanta Pharma over the others ??

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Hi Siddharth,

Thanks for bringing this up. Among the 5, this was the stock I knew the least about:) probably rings true for most of us and on the overall market following basis too. Also seemed the most undervalued.

Taking that logic further, of the 5 it is probably the stock that can surprise the market the most with outperformance. In the last year especially it has taken decisive steps to move up the value chain like USFDA approval for Paithan plant, acquiring a formulations facility, etc. Margins, profitability, debt reduction, debtors management is all trending up with the growth. Its my hunch they may be on the cusp of becoming a much better-managed company. Another encouraging thing is on-the-ground feedback about this company, its products & direct salesforce is very positive!

And hence the potential for valuation gap/mismatch is the highest if we keep a 2 year+horizon. Needs checking out ofcourse by way of further digging, management interaction, dermatologist & other doctor feedback, etc.

Not to say, the others don’t find merit. They do…but in my view they are more well-followed, a VST Tillers needs not much debate, one can keepaccumulatingon secular falls.The next one I want to do is Globus Spirits.

But feel free to start a thread for any of these. VST Tillers is already there in the Stocks for the Long run, if something catches your attention go ahead do some digging and influence discussion direction.

Thanks

Donald

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Hi Donald,

Thanks for making things clear, i was initially surprised as despite Ajanta’s good growth it had the lowest ROCE levels among the other 5 stocks. I somehow don’t understand Pharma very well & am mostly turned away by the expensive valuations. Shouldn’t we take a basket approach in Pharma rather than stick to one company as it can be pretty hard to predict which one is going to be the winner. There are a few more small cap pharma companies trading at 1 digit P/Es maybe we can study more of them.

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Hi Siddhartha,

Among the five picks I think I agree with Donald’s argument about best chances of rerating being there with Ajanta Pharma. One can reasonably predict the growth of the company and hence it seems unless there is something we dont know or which might be unforeseen, there exists a good chance of price appreciation. Who knows, the next sector of bull market could be pharma.

Two more companies I have zeroed on are magma finance which is into cv and tractors etc financing (like shriram transport finance) which has come down to attractive levels of around 62-63 and another is Kaveri Seeds Ltd which is a low/negligible debt company which is in the sector of agri seeds and has reported very good results for its best quarter which is June qtr and is likely to report EPS of around 30 for FY 11 and with expanded capacities in place, is likely to show excellent growth. I am posting details of Kaveri seeds in the not so hidden segment.

I would urge other friends to put up their top five picks based on current prices so that our knowledge and perspective can be shared.

regards

hitesh.

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Hi Hitesh,

i would love to see education sector stock in this.

Regards,

vishal

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Hitesh ji,

I was reading abt Aries Agro in your blog. Any reason why the stock has had a steep fall from Rs 200 to current level of Rs 118?

Looking at the systemic nature of foodinflation and the FDI in retail, agri sctor does look attractive. VST is also a good pick linked to the sector I believe (Indirectly even Balkrishna). Do you take sector calls for diversification or based on macro parameters

Regards

Vinod

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Hi vinod,

Regarding the fall I dont know the reason why it fell from 200 odd to current levels of 115-120. In the first place I dont know why it went up to 200 in a hurry. Maybe too much optimism or froth?

Coming to valuation at current price, and looking at the last few quarter results plus the management speak in their presentation, I think they could do around 20% CAGR growth for next couple of years, so current valuation and further declines offer good entry point for someone with a 1-2 year horizon.

About taking sectoral calls, I dont take sectoral calls. I basically look at consistent growth coupled with reasonable valuation to take a call. There has to be a mismatch between valuation given by market and actual growth which could be delivered by the company. That’s where I think money can be made.

VST Tillers as I mentioned in the thread on long term picks, can be a good portfolio bet for a few years because I dont see too much saturation coming into tillers and small tractors market soon. And with the stock quoting at a PE of around 7-8 times its FY 11E earnings, with all other parameters like excellent balance sheet, cash flow, management bandwidth, land offering margin of safety etc in place, it looks like a good buy.

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aries agro q3 fy 11 results:

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sales up to 54 cr from 51 cr

net profits up to 7.8 cr from 6.43 cr

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9m figures

sales at 123 cr vs 103 cr

net profits at 13.47 cr vs 10.16 cr

9m eps not fully is 10.36 per share.(not annualised)

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as mentioned earlier company might end up the fy 11 with standalone eps of around 12-14. consolidated figures will be better due to contribution starting from its overseas subsidiaries namely golden harvest and amarak chemicals both located in gulf countries. company declares consolidated numbers at the end of full year only.

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Hi hitesh,

can you put some incomparisonwith camsonbiotech?

cheers

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incomparisonwith camsonbiotech?

cheers

these are from different sectors. camson is into seeds whereas aries is into micronutrient. so no use comparing them.

if you want to compare then camson can be compared with kaveri seeds ltd.

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Dear Hiteshji, Kindly add VENUS REMEDIES TO THE LIST.EPS 56(TTM) b.v 211 div:30%ROCE19% D/E0.83 kindly consider addindg this scrip.

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I have obtained Annual Reports ofVST Tillers for the years 2008-2009 & 2009-2010. can somebody help me get the report for 2005-2006,2006-2007, 2007-2008?

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Chairman, Sh. Pawan Chaudhary in the BOD meeting held today i.e. on 09.03.2011 stated that they want to expand their business in US, Canada and Russia for superspeciality Cancer oncology injections. Link: http://mmb.moneycontrol.com/india/messageboardblog/message_thread/4118978/5918978#m5918978

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Please put up more details on venus remedies if you can. I dont know too much details about the company but had read about some problems the company had faced with its depositors/creditors who had to go to court to get their money back and hence gave this scrip a miss.

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Hit bhai the FCCB issue has been resolved

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The following media reports are a few developments at the company during the last 6 months.

24th February 2011

"Sulbactomax" patent from Mexico strengthens Venus Remediesâ presence in Latin America
2nd February 2011

VENUS REMEDIES ANTI-CANCER DRUG âGEMCITABINEâ GETS UK MHRA APPROVAL
27th December 2010

VENUS REMEDIES TO EXPAND INNOVATIONS BASKET WITH SULBACTOMAX PATENT FROM RUSSIA & UKRAINE
8th December 2010

Venus successfully completed Phase III clinical trials of new Aminoglycoside molecule
29th November 2010

Venus bagged Vancoplus Patent from South Africa & New Zealand
3rd November 2010

Venus Remedies becomes first India company to get GMP certification from Saudi Arabia ( SFDA ) in Oncology & Carbapenem Injectable Space.
29th september 2010

VENUS BAGS COMPULSORY LICENSE FROM THAI GOVERNMENT FOR THE SUPPLY OF ANTI- CANCER DRUG
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I have one basic problem with venus remedies. Their last annual report shows that their oncolgy unit utilization was less than 10% of the plant capacity. Considering the focus they have been giving to cancer drugs this is pretty low. Any idea what the issue might be?