Dear Readers,

We would like to share with you details on the Special situation recommendation to our Alpha + members in the month of Aug’12 – Orient Paper and Industries Ltd (NSE Code – ORIENTPPR) at Rs 63.50

Orient Paper de-merger opportunity was originally initiated in Jan’12 at Rs 50 and subsequently closed in Mar’12 at a gain of ~21%. Earlier, we had to close the opportunity as the High Court approval was taking much time. However, when we re-initiated the opportunity on 1st Aug’12, the company had received all the approvals for the de-merger including the approval from the High Court and only the receipt of certified copy of the judgement was pending.

Note: This report is being shared only for the purpose of information; do not construe the same as buy/sell advice. Our Alpha + members are invested in the stock and we therefore have a vested interest.

Download Here: Orient Paper and Industries (NSE Code – ORIENTPPR) – Aug’12 Special Situation Recommendation

Well there are many undervalued stories out there in the market, both due to depressed market conditions and market negligence. However, what is important is “The Trigger”. Yes, as has been observed in many cases, Special situations on account of various corporate actions (rights issues, de-mergers, de-listing, open offers, etc) act as a strong trigger for bringing forth the hidden/suppressed values (of land bank, business unit, etc.) out on the table.

Note: Special situation/Risk arbitrage recommendations are a part of Alpha Plus Portfolio service.

Best Regards

Ekansh Mittal

http://www.katalystwealth.com

Ph.: 0120-4109766, Mob:+91-9818866676

Email: info@katalystwealth.com

Dear Members,

We would like to share with you details on the stock recommendation to our Alpha and Alpha + members – Cera Sanitaryware Ltd (NSE Code – CERA) at Rs 165.

Note: At Katalyst Wealth, we don’t rule out a possibility of a downside of 10-15% (we can’t predict and therefore never attempt to catch bottoms) and would therefore suggest only serious long term investors to consider investing in the stock.

Download Here: Cera Sanitaryware Ltd (NSE Code – CERA) – Katalyst Wealth Alpha Recommendation

Cera Sanitaryware ltd (NSE code CERA) – Katalyst Wealth alpha recommendation

Cera Sanitaryware Ltd (NSE Code – CERA)

Cera, a Gujarat-based company, was established in 1980 as Madhusudan Industries Ltd. As a part of restructuring of the business in November 2002, the sanitaryware division was demerged and was named Cera Sanitaryware Ltd.

Cera is the third largest sanitary ware company in India and has a 20%+ market share. The company is engaged in the manufacturing of ceramic wash basins, wash basin pedestals, bidets, water closet pans, flushing cisterns, urinals and similar sanitary fixtures etc.

Cera has also launched its Cera Bath Studios and Galleries in various parts of the country to cater to the premium sanitaryware segment. The company’s marketing activities take place through regional offices at Bangalore, Mumbai, Pune, Chandigarh, Chennai, Cochin, Delhi, Hyderabad, and Kolkata; it has a marketing network of 500 dealers and 5,000 retailers spread across the country.

Cera Sanitaryware – Key Investment Highlights

Strong Brand Equity – In the sanitary ware segment, there’s a strong brand identity against that in Tiles segment. At present there are only three major players i.e. HSIL, Parryware Roca and Cera. Cera’s achievement of 20% + market share is commendable in the light of the fact that Cera started almost 20 years later than HSIL and 30 years later than Parryware.

Strong Marketing & Distribution network – Cera sells its products through a marketing network of 500 dealers and 5000 retailers spread across the country. It’s difficult to replicate such a network and is one of the major business moats for Cera against the onslaught from foreign players and other local players.

Relatively slowly changing industry – It’s a relatively slow changing business (makes it easier for us to hold it for long term in comparison to education or technology stocks where the trends change very fast and thus a company doing well today may end up on a losing side in a very short period of time).

No Institutional holding – There’s no institutional holding in Cera, probably because of low liquidity. We believe the company is still out of sight of smart investors. Once they come to the party, the stock can get re-rated to higher PE multiples. At present the stock is quoting at 8.5 times trailing twelve months earnings.

In a sweet spot – We find Cera in a very sweet spot where they have been generating good cash flows from operations (almost in line with earnings) and have been able to deploy capital at good returns.

Very attractive valuations – Murugappa group sold of their 47% stake in Parryware-Roca joint venture in 2008 for a sum of Rs 720 crore while the company had recorded a turnover of Rs 360 crore for FY 08, thus valuing the company at 4 times its annual turnover. Cera’s market cap is approximately equal to its annual sales. Though not 4 times, however Cera can still get re-rated to twice the annual sales considering its efficiency and growth.

Best Regards,

Ekansh Mittal

http://www.katalystwealth.com/

Ph.: 0120-4109766, Mob: +91-9818866676

Email: info@katalystwealth.com

Dear Readers,

Auto-ancillary space constitutes some very good companies that have delivered exceptional returns in the past. Though, it’s never been a cake-walk for the companies and their shareholders on account of automobile demand (both passenger and commercial vehicles) being cyclical, however the long term prospects of the Indian Automobile industry seem promising especially with India gaining acceptance as the manufacturing hub with the multinationals.

Now, as the title suggests, in this short note we would like to share some preliminary research on ZF Steering Gear India Ltd (NSE Code – ZFSTEERING; BSE Code – 505163), which is a Joint Venture with ZF Lenksysteme Gmbh and manufactures and supplies Hydraulic Power and Mechanical Steering systems in India.

Disclaimer: Our Alpha and Alpha + members may/may not be holding the stock in their respective portfolios. This note should in no way be construed as buy/sell advice on the stock and should only be referred for the purpose of basic information on the company.

Basic Details

ZF Steering Gear India is a joint venture with ZF Lenksysteme Gmbh. The Indian promoters hold 47.48% stake in the company while the Joint Venture partners from Germany hold 25.79% stake in the company.

Some details on foreign JV Partner: It’s important to note here ZF Group from Germany specializes in design, research and development, and manufacturing activities in the automotive industry with annual revenue in excess of 15 billion Euros.

Further, the Steering systems division of ZF Group commenced production in 1932 and is currently known by the name of ZF Lenksysteme Gmbh with equal equity contribution from ZF Friedrichshafen AG and the well known Bosch group.

Coming back to ZF Steering India, the product portfolio of the company includes: Hydraulic Power Steering Gears including components/spares and Mechanical Steering Gears including components/spares.

The company supplies its Steering gear systems primarily in the Commercial vehicles segment including tractors and off-roaders with minuscule contribution from Passenger vehicles segment.

As per the various reports and the below illustration, ZF Steering leads the domestic commercial vehicle segment with  more than 45% market share and its only significant competitor (with similar market share) is Rane TRW Steering Systems Limited, while about 10% of the sales is accounted for by the imports. Almost 65% of the Tata Motor’s requirement in the CV segment is met by ZF whereas in case of Ashok Leyland, it meets nearly 35% of its requirements. Further, ZF is the sole supplier of steering gears for Eicher Motors & Man Force.

Performance snapshot

In the above illustration the data for the last 7 years adequately covers the good and the bad of the commercial vehicle sales cycle. Over the same period, the performance of ZF Steering has been stable with consistent growth except for FY 09 when the commercial vehicles sales itself dropped by 22% in comparison to FY 08.

The good point about the above performance is that the company has been able to maintain 46-48% market share in the commercial vehicles segment while retaining high profitability. On absolute basis and even on comparing the performance of the company with other auto ancillary companies including steering gear manufacturers, ZF Steering probably commands the highest operating and net profit margins and enjoys good terms of payment with both creditors and debtors enabling it to generate high cash flows from operations.

On excluding other income (largely dividends, interests on surplus funds), the company has consistently been able to maintain operating margins in the range of 19-21%, which points towards the fact that management has been good with cost control and has also been able to pass on the increase in the cost of raw materials to the OEMs.

The operating efficiency and strong cash flows also reflect in the robustness of the Balance sheet of ZF Steering as the company retains only 17 crore short term borrowings pertaining to business operations, while the remaining long term borrowings are in the form of deferred sales tax loans and the loans pertaining to the solar project of the company.

Even though company holds ~100 crore in equity and debt funds, it may have opted for Solar power project loan as the first quarterly installment is payable from 30th Apr’13 and the management may consider prepaying the loan once the installments start.

As mentioned above, the company has invested ~100 crore in equity and debt funds and has been consistently earning 5-6 crore annually by the way of profits on sale of investments and dividends.

Though, such kind of liquidity lends strength to the balance sheet and help overcome tough economic conditions, it also points to the fact that management has been finding it tough to invest such large sums of money at higher rate of return.

Some other important details

ZF Steering has 26% stake in ZF Lenksysteme India Pvt Ltd (ZFLI) which has recently set up a new manufacturing plant for steering systems.

The plant has the initial production capacity of 70,000 commercial vehicles steering systems and approximately 400,000 passenger car steering systems which can be further ramped up, based on market requirements.

As long as ZFLI focuses on passenger car steering systems, there won’t be conflict of interest between ZF Steering and ZFLI. In case ZFLI ramps up production capacity of commercial vehicles steering systems, it could be a cause of concern for the shareholders of ZF Steering since the foreign JV partner would like to promote ZFLI over ZF Steering on account of its 74% holding in ZFLI against 25.79% in ZF Steering.

Growth prospects and Valuations

Since ZF Steering supplies steering systems to commercial vehicles segment, its future prospects are directly linked to the sales trend of commercial vehicles in India and its ability to maintain or further grow its market share.

As far as sales trend of commercial vehicles in India is concerned, the 28% annualized growth (from the small base of FY 09) achieved during the last 3 years may not get repeated at least for the next 2-4 years, however on the back of strong demand originating from the rural segment for the light commercial vehicles the commercial vehicles industry is expected to sustain 13-15% annual volume growth over the next 5 years.

Besides 13-15% volume growth, ZF Steering can also benefit from the increasing use of hydraulic power steering systems in the M&HCV segment and also in the LCV segment as the realizations for the hydraulic power steering systems are ~3.7 times that of mechanical steering systems.

Valuations: ZF Steering is currently quoting at a market cap of Rs 280 crores. After accounting for debt and investments in equity and debt funds, the surplus fund available with the company is ~30 crores and thus the approximate enterprise value of the company is Rs 250 crores.

On ignoring the effect of other income, the company recorded a net profit of Rs 35 crore for FY 12. Considering the operating efficiency, association with a reputed German company, 45% market share in the area of operations and the ability to pass on the cost inflation to OEMs; the current valuations seem to offer a reasonable medium to long term investment opportunity.

Disclosure: I am not invested in the stock at the moment and the same has not been recommended to Alpha and Alpha + members.

Best Regards

Ekansh Mittal [ekansh@katalystwealth.com]

Dear Readers,

In the past we have invested in various stocks with high dividend payout and high dividend yield, last being NRB Bearings (NSE Code – NRBBEARING).

In most of the cases, the modus operandi was to pre-empt the probable dividend payout (before the company announcement) based on the dividend payout history and the performance of the company for the previous financial year and later on sell the shares as the company announces the dividend or on the cum-dividend basis just before the ex-date.

Yes, in cases with high dividend yield (in excess of 5%), our past experience suggest that as soon as the company announces the dividend there’s a rush to buy the stock which leads to much higher appreciation in the stock than the yield on offer. Similarly, in general there’s also a good appreciation in the stock before the ex-date and thus we consider selling at 10-20% gain in a month than wait for the stock to go ex-dividend.

In this post we would like to bring to your notice another such opportunity in the case of Empee Distilleries Ltd (NSE Code – EDL). The company has its board meeting on 10th Aug’12 when it will announce the dividend (if any) for FY 12.

Disclaimer: Please don’t construe this note as buy/sell advice and the readers are suggested to carry out their own due diligence. The stock has not been recommended to Alpha + members.

We believe, considering the track record of the company, high promoter shareholding, dividend payout during the last 4-5 years and the performance for FY 12, it is very likely that company will repeat the dividend they paid last year i.e. Rs 5/- per share.

As on 8th Aug’12 the stock is quoting at Rs 71.00 and thus if the company does announce a dividend of Rs 5/- per share, that would be a dividend yield of 6.95% which is obviously very good being tax free in the hands of shareholders. Moreover, as in the previous cases the stock may witness some buying frenzy and thus offer good short term capital gains without having to wait for dividend.

Here it is important to note that there’s an element of speculation considering that we will get to know about the dividend and the quantum (if any) on 10th Aug’12 and not before. If the management decides to skip the dividend or lowers the payout (the probability being very low), there could also be minor losses.

Best Regards

Ekansh Mittal [ekansh@katalystwealth.com]

Dear Readers,

At Katalyst Wealth, being an Independent Equity research and Stock investment advisory firm, we get many queries from prospective subscribers/clients. However, at times we are asked questions that tell us so much about the lack of application of Common Sense with respect to investment in stocks/equities.

Over the years I have realized that there are some individuals who get it naturally when it comes to investing in stocks and they realize the wealth creating potential of the same, while there are many who just don’t get it and either shy away from stocks or turn to speculative activities like intra-day or other variants of trading.

We too shy away from such potential clients and have therefore clearly stated that, “For whom all our services are suitable and for whom all our services are not suitable“, at the FAQ section (LINK).

Well let’s review some of those queries below:

What’s the minimum guaranteed annual return can I expect?

This is one of the most common questions and underlines the fact that many still don’t understand the nature of stock markets. Investing in stocks isn’t a smooth ride like a bank deposit. If we could guarantee a minimum annual return in excess of 14-15%, most of the banks will have to shut their shops, as they only offer 8-9% annually.

One can get much better returns to the tune of 30-35% CAGR and more on his/her portfolio, however the road to the same is not simple and short. Some years it will be (-5%, -10%), some years 10%, some years 50% and even more and thus it’s all about keeping a long term perspective (minimum 3 years) when investing in stocks.

Obviously, one gets adequately rewarded for keeping patience and taking risks. There can be no better illustration for the same than the annual performance of Berkshire Hathway, the investment vehicle of Warren Buffett. The annual performance varied from -9.6% to 59.3% with the Compounded Annual Gains of 20.20% for 1965-2010. Yes, only 20.20% (as many would say) and yet we know where he stands in terms of personal wealth.

So, if one is looking for guaranteed returns, you should probably turn a blind eye to stocks. Until and unless you start understanding the nature of stock market, it’s better to keep away from it, as its ruthless to those who don’t understand it.

Other service providers are advertising, “Earn 10% return per month, Earn 1 lakh per month” while you are saying 25-35% on an annualized basis and that too over a long term. Why then should I subscribe to your service if I can get 10% per month elsewhere?

This is another classic that we come across many a times. Our simple reply to such queries is, “Our services are not meant for you sir and you should probably go ahead with the one who can help you earn 10% return on your capital per month.“

The reason is simple, one can really not explain it to people who cannot apply common sense. If the service provider can help you earn 10% per month through intraday or short term trading, why is he himself not trading? A simple calculation tells us that at 10% per month, your capital doubles every 8th month. So, if you start trading with 5 lakhs, your capital will grow to 40 lakhs at the end of 2 years and if you can grow your capital at such a pace, the service provider (offering you 10% per month) should probably be on the Forbes list by now . Moreover, everyone in India would be so rich and leave all other productive activities and indulge in trading on the tips provided by the so called experts.

Do you offer intraday or positional trading tips?

No matter how much we explain it through our mails (through the many investment opportunities shared) that we focus only on Long term investment and Risk arbitrage/Special situation opportunities, the above question arises in many of our conversations with potential subscribers/clients.

I personally believe that all those who seek intraday trading service or trading service of any sort are either out of their jobs, business, etc or are thoroughly disinterested in their profession. In their search for easy money and for some daily engagement, they end up noticing above advertisements “Earn 1 lakh per month”, etc and fall prey to them. Also, they want their families to believe that they are doing something important, stressful and are busy, while not doing anything but just gazing at screen and in the process end up losing their all important hard earned savings.

I don’t see any other reason for so much interest in casino like activity and that too at the cost of losing one’s money.

I like investing in stocks with a price less than Rs 50 as they multiply fast and even if they go zero, the maximum I can lose is Rs 50. Do you recommend such stocks?

While we find the above argument laughable, we also feel pity for those who believe in the above manner because it tells us a lot about how they perceive stocks.

Typically, for such investors buying 10 shares of a stock ABC with a Face Value (FV) of Rs 10 and a stock price of Rs 500 is different from buying 100 shares of the same stock ABC with a FV of Re 1 (assume stock split from FV 10 to FV 1) and a stock price of Rs 50

The above were only some of the many queries faced by us.

The purpose of writing this is not to mock at anyone’s thought process, but probably help him/her reflect back and start applying some COMMON SENSE.

For those who understand, no explanation is needed.

For those who do not understand, no explanation is possible.

Ekansh Mittal [ekansh@katalystwealth.com]

Dear Readers,

This is to inform you that on 2nd Aug’12; a Special Situation opportunity was initiated for all the Alpha plus members.

The best point about the above Special situation opportunity is that all the regulatory hurdles have been overcome and therefore there cannot be any delay from here on. This point alone reduces the risk substantially.

The opportunity can be accessed (click HERE) (requires log in and password)

Well there are many undervalued stories out there in the market, both due to depressed market conditions and market negligence. However, what is important is “The Trigger”. Yes, as has been observed in many cases, Special situations on account of various corporate actions (rights issues, de-mergers, de-listing, open offers, etc) act as a strong trigger for bringing forth the hidden/suppressed values (of land bank, business unit, etc.) out on the table.

Most importantly, as in the above case, with Special situations one is aware of approximate investment duration.

Well, without diverting from the subject further, please find below the salient features of the Special Situation opportunity (initiated on 2nd Aug’12) for all the Alpha Plus Portfolio members:

• The company belongs to a reputed business house of India
• The company has multiple business units and commands a leadership position in one of its business units.
• On the basis of conservative estimates, we believe there’s a potential for 50% upside from the current enterprise value of the company.
• Most importantly the company has a very good track record and is currently available at a dividend yield of more than 3%

Best Regards,

Team Katalyst Wealth

Ph.: 0120-4109766, Mob: +91-9818866676

Email: info@katalystwealth.com