With an RoE of 25%, Aarti Industries is a good long-term bet in the chemicals sector
We have talked about this stock before. It has not yet made the kind of move it should have but Aarti Industries (AIL), the flagship company of the Aarti group, is one of those solid small-cap stocks that are available cheap. Aarti manufactures organic and inorganic chemicals at its facilities at Vapi, Sarigam and Jhagadia in Gujarat. It has a presence in four different segments—agro-chemicals, basic chemicals, pharmaceuticals and specialty chemicals. The company also manufactures rubber chemicals and surfactant intermediates. Aarti Healthcare, the bulk drugs division of AIL, manufactures active pharmaceutical ingredients (APIs) at its Tarapur and Dombivili units in Maharashtra. Its clients include large companies like Ranbaxy, Sun Pharma, Cipla, Astra-Zeneca, Maral Labs, Cadila, Dr Reddys Laboratory, etc. AIL also undertakes contract manufacturing of products with applications in specialty segments. It is a dominant player in nitro-chloro-benzene (NCB)-based basic and specialty chemicals and benefits from strong operating efficiency. It has the largest NCB production capacity in India, of 60,000 tonnes per annum. The company caters to diverse end-user industries such as pharmaceuticals, dyes, pigments, rubber chemicals and agro-chemicals.
AIL is expanding its basic chemical range with nitro-toluene and derivatives. Its growth in the specialty chemicals segment depends on domestic demand as well as exports. Global specialty majors are establishing bases in high-growth Asian countries to participate in their growth and leverage their low-cost advantage.
Much of this investment until now has been in China, a trend likely to change in future as India establishes itself as a reliable and cost-effective supplier. The specialty chemicals business is the major revenue earner for the company, contributing 71% of the revenue in the December 2009 quarter. Agro-chemicals, basic chemicals and pharmaceuticals contributed 4%, 17% and 8%, respectively, in the same period. Its products are exported to USA, UK, Germany, Spain, Italy, Switzerland, Belgium, Japan, Korea, China and Russia. In 2007, it formed a joint venture with Sojitz Chemical Group, Japan, for manufacturing specialty chemicals in Gujarat for applications in high-end polymers, additives and high-purity electronic chemicals. Its operating margin is 16%. Its market-cap is just 0.3 times sales and 2.36 times its operating profit for the December 2009 quarter. The return on equity is a healthy 25%. Buy now and hold patiently.
Neha International (Rs173)
Incorporated in 1993, Neha International Ltd (with its subsidiary Globeagro Holdings) is engaged in the floriculture business in India and Ethiopia. It exports its products to countries like the Netherlands, Japan, Greece, Canada, Switzerland, the United Kingdom and Oman. Its operating profit was just Rs30 lakh for the quarter ended December 2009 and net sales was Rs4.73 crore. For the March 2009 quarter, it reported net sales of Rs6.68 crore and operating profit of Rs1.06 crore. Despite such lacklustre financials, the stock price has skyrocketed 1509% between 30 January 2009 and 26 April 2010, from Rs12.30 to a whopping Rs197.95. There is no justifiable reason for such a steep run-up in just three months.
This would mean existing operators would have to pay 3G rates for additional spectrum
The Telecom Regulatory Authority of India (TRAI), in its recommendation on spectrum allocation and pricing, today suggested that additional 2G spectrum could be sold to existing operators at a price that is based on the auction of 3G spectrum that is currently under way, reports PTI.
The telecom regulator has also mooted delinking the sale of spectrum from issue of license, as is the current practice.
Raising the quantum of minimum amount of spectrum (contracted amount of 6.2 MHz to the operators), the regulator said: "All the spectrum beyond 6.2 MHz will have to be paid for at the current market price (linked to 3G price) by GSM operators and for the CDMA operators the spectrum assigned beyond the contracted amount of 5 MHz will have to be paid for."
Dealing a big blow to several existing operators like Bharti Airtel, BSNL and Vodafone Essar, the regulator said these service providers will have to pay an additional one-time charge for the spectrum they hold beyond 6.2 MHz, which will be paid at the current price of spectrum up to 8 MHz and after that it will be charged at 1.3 times the current price.
This would mean existing operators would have to pay 3G rates for spectrum they hold above 6.2 MHz. The big three players—Bharti Airtel, Vodafone and BSNL—hold around 10 MHz spectrum in many key circles.
Endorsing the telecom ministry's decision not to auction 2G spectrum two years ago, TRAI chairman JS Sarma said, "It is not feasible to subject the spectrum in 800-900 -1800 MHz band to auction process, considering that the amount of spectrum after meeting the obligation of contracted spectrum is very limited and the number of claimants for additional spectrum would be extremely few,"
The telecom ministry's decision to sell 2G spectrum in 2008 at 2001 prices had become the subject of a major controversy, with the opposition parties alleging a scam that cost the government Rs60,000 crore.
Telecom minister A Raja's decision to allocate mobile licenses with 4.4 MHz of 2G spectrum at a price of Rs1,651 crore to a host of companies that included realty player Unitech Wireless, Videocon, Swan, prompted the allegations of corruption.
Consequently, the CBI was roped into to look into the allocation of giving away spectrum at rates much below the market price.