Flash News – Vol 22 : Issue: 25

Editorial
The Key Difference
The Mittals are expanding. POSCO is also geared into an expansion mode. We feel
Nippon Steel and US Steel - among the top ten largest steel producers in the world -
would also be having a similar strategy in place (in the medium term future) for their
expansions either organically or inorganically. This is the living and practical example of
what is going on in the steel industry - which is, in technical or financial terminology,
called as CONSOLIDATION. Significantly, this consolidation is happening in the global
STEEL industry, which comes under the category of COMMODITY.
Now let's look at the domestic scenario. Tata Steel - which is among the lowest cost
steel producer in the world - did not want to miss the lucrative business opportunity and
went on to acquire Corus - the largest producer of steel in the UK with a capacity thrice
that of Tata Steel - in its attempt to expand globally. The AV Birla group too (non-ferrous
metals - which is again a commodity), does not want to miss the bus, just as Agarwals of
the Vedanta group (again a non-ferrous metals player) are doing in their effort to expand
their capacities. All these names are India's leading business houses or empires.
This scenario of consolidation unfolding at the global and domestic levels among the
major commodity giants in their attempts to grab a larger share of the global market has
been driven largely by the prices of their respective commodities, viz. steel, aluminum or
zinc. This is the general scenario in the commodity-type businesses in which the most
successful investor WARREN BUFFETT does not like to take an exposure. Why?
Simply because price remains the sole determining or motivating factor for buying these
commodities, regardless of the brand name. For instance, a buyer of steel would be happy
to buy steel from the cheapest producer of steel regardless of the brand. The utility of the
steel manufactured by Tata Steel would also be fulfilled by steel produced by any other
steel producer such as Jindal Steel or SAIL. Hence, irrespective of the brand of the
commodity, the cheapest would be the winner. However, the moot question is - If Warren
Buffett would not be interested in a commodity business, then which type of companies
attract him? The answer: Consumer Monopolies. So which type of companies fall under
this category? Warren liked companies like Coca Cola, Wrigley (makers of chewing
gum), UST (makers of tobacco), Marlboro etc. While some of these brands may be
unknown to investors in India, they are consumer monopolies in the US or across the
globe. He believes in consumer monopolies that are 'bomb-proof', which, in other words,
rule the markets, in addition to their inherent pricing power.
Let's understand this taking live examples of India's two leading companies. The first
is Tata Steel operating in the commodity business, while the second is ITC, owners of
Superbrands such as Gold Flake, Wills and many more. Before taking through the
historical financial data since last nine-ten years which would make the picture clearer,
let's understand the basic first. If Tata Steel wants to increase the finished steel prices,
then it may have to lose some of its business to its competitors whose products are
available cheaply. In sharp contrast, it is quite hard to convince a smoker of ITC's Gold
Flake cigarettes to switch over some other brand despite umpteen number of hikes in
Gold Flake prices. This is the crucial difference between a commodity player and a
company operating in the consumer monopoly space - at least in the Indian context.
 Ideally, investors following Warren's strategy should look at the key difference such
as an upward trend in EPS over a longer period of time of, say, 5 to 10 years. ITC shows
an consistent upward trend (in 2005-06, ITC declared a bonus and split the share, hence
the decline in EPS) since 1997, while Tata Steel's EPS has been quite erratic until 2002 -
when the steel cycle started on its upward move. But for the cycle, Tata Steel's EPS
would have still remained erratic. Hence, unlike Tata Steel, ITC's growth has been
consistent and not cyclical, which makes it one among the most likely consumer
monopolies in India. Also, the difference in returns generated by these two companies
since 1997 is huge. While Tata Steel generated around 344 per cent return from 1997 till
date, ITC has generated a return of 778 per cent in the same period-more than double that
of Tata Steel. Hence, a consumer monopoly presents a lucrative investment opportunity
than a commodity play over a longer period of time. The key difference lies in searching
such consumer monopolies and holding them forever as they would continue to grow into
the distant future.

HISTORICAL EARNINGS
Year EPS (Rs)
ITC Tata Steel
Mar' 06 5.95 63.35
Mar' 05 88.28 62.77
Mar' 04 64.31 47.48
Mar' 03 55.41 27.53
Mar' 02 48.48 5.09
Mar' 01 41.00 15.05
Mar' 00 32.29 11.49
Mar' 99 25.40 7.67
Mar' 98 21.44 8.75
Mar' 97 14.14 12.75

Recommendations
Spanco Telesystems Face Value - Rs 10 Buy Rs 175
Ticker: 508976 Equity: Rs 15.82 crore H/L: Rs 224/75
● Spanco Telesystems has come out with a fairly impressive quarter over and
above H1FY07 numbers, which calls for re-rating of this counter, especially
after restructuring of its business action (by de-merging its BPO business) and
consequently reducing the equity capital
● During the September ended 2006 quarter, the company has reported a top
line growth of around 178 per cent to Rs 123 crore as against Rs 44 crore
reported during the previous corresponding quarter. Its bottom line too kept
pace with its top line growth and soared by 184 per cent to Rs 9.11 crore
against Rs 3.2 crore. While on the other hand for the first half of the current
fiscal its top line grew by 127 per cent to Rs 182 crore while its bottom line
grew by 14 crore. The reduction in the equity capital was to the tune of 21 per
cent (during H1FY07 over H1 FY06), which currently stands at Rs 15.82
crore (Rs 19.97 crore)
 ● The company has recently received a letter of intent from the Indian Railway
Catering and Tourism Corporation for setting up a call center for 'Railway
inquiry system'. Given the fact that it is a leading provider of networking and
integrated solution systems to various MNC's in addition to satisfying the vast
requirement of the defense sector, we feel investors with the long-term time
horizon of atleast 4-6 quarters in the perspective can enter at current levels of
Rs 174

Denso India Face Value - Rs 10 Buy Rs 108.60

Ticker: 520022 Equity: Rs 27.88 crore H/L: Rs 126.65/66
● Denso India, a leading manufacturer and supplier of various auto ancillary
components like starters, motor wiper, electric motors etc to some of the
leading domestic OEMs, has been amongst the most consistent performers in
terms of earnings growth since the last couple of years. Further due to the
increased penetration of passenger car and other vehicles in India since last
few years, owing to higher disposable income, Denso India is likely to
maintain its earnings momentum in future too
● Being a consistent performer since so long with high amount of clarity in its
future earnings, this certainly calls for a re-rating on this counter especially
after the phenomenal earnings growth during the first half of the current year.
In Q2FY07, it reported a top line growth of 21 per cent to Rs 124 crore (Rs
103 crore) with an exponential net profit growth of 77 per cent to Rs 7.65
crore (Rs 4.31 crore). Thus by looking at all the positive factors besides its
trailing four quarters PE of 13x, we feel that the investors can take long-term
positions on this counter

Cambridge Solutions Face Value - Rs 10 Buy Rs 121.20

Ticker: 532616 Equity: Rs 104.94 crore H/L: Rs 228/89
● Cambridge Solutions, formerly known as Scandent Solutions is a leading
integrated, global service delivery system provider, largely catering to Fortune
500 clients, in a wide range of IT and business process outsourcing services.
In fact, the company's BPO Subsidiary was named one of the top three
performing BPO companies by the Global Services media and neoIT during
the current year
● We feel the counter has been severely hammered by the investment
community especially due to decline in its net profit during the September
ended quarter 2006, it has reported a top line of Rs 44.41 crore and a net loss
of Rs 3.13 crore, which was largely due to the significant higher interest
numbers (Rs 4.71 crore)
● The company has been on an expansion/acquisition spree, in order to
consolidate its position in the across he globe. In a recent media release the
management announced a significant broadening of its network with the
opening of four new branch offices, amassing of major new clients adding
over Rs 46.5 crore in annualized revenue, besides the expansion of staff and
service capabilities. The four new offices located in the United States are at
Columbus (Ohio); Baltimore, (Maryland); Concord (California); and Baton
Rouge(Louisiana)
 ● Hence considering the overall positive fundamentals of the company we feel
that the investors can enter at current levels of Rs 117, which is available at a
significant discount to its 52-week high of Rs 228 and therefore the downside
is fairly limited. However it being a bargain buy at current levels, investors
need to hold it for a minimum period of next 5-6 quarters

Technicals
Momentum To Sustain
Sensex has continued its upward march, has gone on to touch and sustain above the
psychological figure of 13000 by posting an all time high of 13300.69 on 7.11.06
indicating the sustainability of its intermediate uptrend. Sensex is comfortably quoting
above the 55-week EMA, the 200-day EMA and also the 55-day EMA indicating
significant stability at lower levels. Sensex is receiving support at 12654 level, the
sanctity of which followed by 12100 level needs to be maintained for the current ongoing
positives to sustain.
Trend (Index): Up Last Index Closing: 13072.51
Support: 13030, 12925 Resistance: 13135, 13200
55 WEEK EMA: 10739.31 100 WEEK EMA: 9474.89
MACD: BUY MODE RMI: BUY MODE
ROC: SELL MODE RSI: BUY MODE
STOCHASTIC: SELL MODE

Mahaan Foods Buy Rs 15.85

Mahaan Foods bottomed out by posting an intra-day low of Rs 4.16 on 8.04.05, moved
sideways for quite a few trading sessions while continuous support came in the form of
the 5 level (support area) and continuous resistance came in the form of the 55-day EMA.
The scrip finally posted an intra-day low of Rs 5.22 on 9.05.05 and these levels have not
been seen since. Mahaan Foods commenced an intermediate uptrend from here (there
wasn't enough clarity on the long term front), struggled but overcame the 55-day EMA,
posted a series of progressively higher tops and bottoms, started moving within the
confines of an upward sloping channel, almost gave a throwover from this channel and
finally peaked at an intra-day high of Rs 18.83 on 16.06.05. The scrip almost gave a
downward key reversal from here, couldn't sustain these levels for long, entered a
corrective phase, declined to post an intra-day low of Rs 14 on 22.06.05, rebounded
smartly from here, posted a good but unsustainable rally to post a high of Rs 32.75 on
10.08.05 only for the scrip to enter a sharp correction. Currently Mahaan Foods seems to
be on the verge of entering a short term uptrend, has overcome the 55-day EMA and with
the oscillators looking positive indicating the possibility of a further upside from here.
Trading Pointers
Indicators: MACD-Buy RMI-Buy Stochastic-Buy ROC-Buy RSI-Buy
Support: 012, 009 Resistance: 016, 021
Targets: 1st Target: 019 2nd Target: 021 BSE Code: 519612
Stoploss: 011.50 (cls) 55 Day EMA: 010.11

Hyderabad Industries Buy Rs 309

Hyderabad Industries bottomed out by posting an intra-day low of Rs 19.10 on 4.06.04,
moved sideways for quite a few trading sessions while continuous support came in the
form of the 20 level (support level - refer to chart) and resistance came in the form of the
55-day EMA. The scrip finally posted an intra-day low of Rs 23.40 on 24.06.04 and these
levels have not been seen since. Hyderabad Industries commenced an intermediate
uptrend from here (but this time around there was distinct amount of clarity on the long
term front), struggled but eventually took support on the 55-day EMA, posted a series of
progressively higher tops and bottoms, started moving within the confines of an upward
sloping channel, almost gave a throwover from this channel and finally peaked at an
intra-day high of Rs 303.50 on 1.06.05. The scrip almost gave a downward key reversal
from here, couldn't sustain these levels for long, entered a corrective phase, declined to
post an intra-day low of Rs 250.50 on 21.06.05, rebounded smartly from here, posted a
smart but slightly unsustainable rally to post a high of Rs 611.90 on 18.08.05 only for the
scrip to post a fresh lower bottom. Currently it is on the verge of commencing an
intermediate uptrend, is looking set to post a higher top, higher bottom and with the
mechanical indicators looking positive, a further upside from these levels cannot be ruled
out.
Trading Pointers
Indicators: MACD-Buy RMI-Buy Stochastic-Buy ROC-Buy RSI-Buy
Support: 280, 247 Resistance: 318, 352
Targets: 1st Target: 340 2nd Target: 346 BSE Code: 509675
Stoploss: 280.00 (cls) 55 Day EMA: 292.35

Street Talk
Value Pick
With many fund houses getting bullish wireless telecom segment, Bharti Airtel (BSE
Code: 532454) looks like a value pick on a long term basis. Investment community can
expect some good in offing in near term horizon.

Momentum Call
Nitco Tiles (BSE Code: 532722) has seen a sudden jump in the volumes in last two days,
with some news in the offing the counter may stay in a momentum for short term to
medium term.

Bonus declared in last few days

Company Name Ratio XBonus
Date
KPIT Cummins Infosystems Limited 1:1 NA
Avon Properties 1:2 NA
Dabur India 1:2 NA
Nandan Exim 1:1 NA
Dolphin Offshore Enterprises (India) 3:5 NA
Apar Industries 1:3 NA
Balaji Amines 1:1 NA
Gupta Synthetics 2:1 NA
Alchemist Limited 1:1 NA
Crompton Greaves 2:5 NA
Hazoor Media & Power Limited 1:1 NA
3:1 means, 3 additional shares for every one held

Dividends declared in last few days

Company Name Dividend Div. BCDT
(%) Yield From
ICSA-India 12 NA
Usha International 125 NA
Porritts & Spencer (Asia) 30 NA
BLB 10 NA
Nods Worldwide 40 16/11/2006
Nandan Exim 7.5 16/11/2006
Alpine Housing Development Corporation 12.5 16/11/2006
Mohit Industries 10 16/11/2006
KSB Pumps 20 15/11/2006
Garden Silk Mills 15 NA
Gujarat Fluorochemicals 100 16/11/2006
NCL Industries 5 NA
JB Chemicals & Pharmaceuticals 55 13/11/2006
Akhileshwar Texports 5 14/11/2006
Varun Shipping Company 15 13/11/2006
Gateway Distriparks 15 14/11/2006
Sesa Goa 250 NA
Goldiam International 10 15/11/2006
Arvind Chemicals 5 NA
Tainwala Polycontainers 10 17/11/2006
Natco Pharma 12.5 10/11/2006
MRF 30 14/11/2006

Splits declared in last few days

Company Name Ratio* XSplit Date
KPIT Cummins Infosystems Limited 5:2 NA
Graphite India 10:2 NA
Gokaldas Exports 10:5 NA
Paramount Communications 10:2 NA
Lakshmi Energy & Foods 10:2 NA
HT Media 10:2 NA
Lakshmi Machine Works 100:10 NA
Jaipan Industries 1:10 NA
Vipul Infrastructure Developers 10:5 NA
Ontrack Systems 1:10 19/10/2006
(*10:2 means old FV Rs 10 & New FV of Rs 2)

‘A’ Group Companies’ NP Growth

Company Name Q2FY07 Q2FY06 NP
Net Profit Net Profit Growth (%)
Hinduja TMT Ltd. 12.1 508.2 4100.23
Asahi India Glass 0.51 13.78 2595.14
India Cements Lt 5.85 117.32 1905.47
Sterlite Optical Tec 1.17 19.85 1596.58
Aurobindo Pharma 3.65 54.64 1396.98
Century Textiles 7.41 77.02 939.4
Moser Baer India 2.81 25.97 825.58
Hind. Zinc 196 1298 562.24
Raymond Ltd 36.83 141.47 284.11
Finolex Cables 5.71 21.5 276.53
EIH Ltd. 8.03 27.46 241.96
JSW Steel 106.29 346.3 225.8
Guj. Amb.Cements 75.28 244.66 225
Indian Oil Corp 949.72 3050.27 221.17
Union Bank of In 61.1 194.16 217.77
Ingersoll Rand 5.34 14.74 176.02
United Phosphorus 14.66 39.98 172.71
Tata Tea 62.39 163.92 162.73
Gillette India Ltd. 19.33 50.5 161.25
Dr. Reddy's Labs 107.54 272.66 153.54
Mahi. & Mahi 157.21 386.48 145.83
HCL Technologies 89.39 205.83 130.26
Polaris Software 8.1 18.5 128.49
Jindal Stainless Ltd 44.02 97.05 120.46
Maha. Seamless 28.37 62.18 119.17