July – September 2005

October 21, 2005

You may be surprised as to why the equity exposure is increasing with a rising Sensex level, instead of the other way round.

The reason is that stocks that were previously unattractive became candidates for inclusion in the portfolio because of the appearance of catalysts.

For instance, Binani Industries is even more attractive today at Rs.60 – Rs.70/- than it was three months ago at Rs.40/- There are three reasons for this:

J P Morgan has bought a 25% stake in Binani Cement recently and imposed corporate governance standards of a high order. The financial closure of the expansion of Binani Cements from 2.2 million t p a to 5.00 million t p a is complete. The brownfield expansion should be operational in Rajasthan before February 2007.
The company is going in for a swap that gives the option to the shareholders to convert 20 shares of Binani Industries into 25 shares of Binani Cement and 25 shares of Binani Zinc upto 50% of the capital. The capital of Binani Industries would halve and the asset value/share would double after the swap is complete in December/January.
The financial closure of Binani Zinc’s backward integration and induction of a financial partner is almost complete. The operating margin of Binani Zinc should improve substantially in the next two years, even without a further increase in the price of zinc.

Similarly, Century Enka is buying back upto 30% of the equity from its foreign collaborators, Accordis. This combined with increase in capacity of its main raw materials, increase in price of competing fibre cotton, and expansion of the nylon tyre cord capacity could give an eps of Rs.50-Rs.55 in 2006-2007. At current levels of Rs.215/- it is demonstrably cheap. But the major trigger is the reduction in equity capital.

We continue to look for such portfolio picks, but are in no hurry to buy just to keep up with the Sensex. The stock picks must be trading at significant discounts to intrinsic value and that is a discipline we will never compromise on. We only hope that we don’t stay on the party too long!

If there are any queries, please do not hesitate to get in touch with me.

Warm Regards,

Chetan Parikh