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Small Cap Multibaggers – Part 2

October 8, 2007

Check out the Small Cap Multibaggers in our Stock Research Section. Here are 3 more small cap stocks added to the same coverage.

Gujarat Apollo Industries:
Gujarat Apollo Industries (GAI), holds ~30% market share in the domestic road construction equipment industry. It is a key beneficiary of investments being made for up gradation and widening of roads and expressways under the National Highway Development Programme (NHDP), golden quadrilateral etc. A large part of these investments, estimated to be in excess of INR 2.2tn

Till date, only 15% of the total targeted roads under NHDP are complete, implying that a huge chunk of the budgeted investments are yet to be expended. This means that apart from the existing pent up demand, there is a good demand visibility for GAI over the next few years. Moreover, the company’s venture into new geographies through exports is likely to de-risk it from the rising interest rate concerns in India. With the capacity expansions in place, we expect GAI to achieve a turnover of INR 2.8 bn by FY10, with an improved product mix favouring better margins. At 11.1x its FY07 earnings, we consider GAI as the best proxy to the Indian road and infrastructure boom.

International Travel House:
The USD 53.5 bn Indian tourism industry (2006) is slated to grow to USD 128 bn by 2016 (Source: World Travel & Tourism Council (WTTC)), led by Government of India’s (GoI’s) tourism promotion efforts through “Incredible India” campaign, strong economic growth, rising income levels, consumerism, and increasing business, and domestic travel.

Given the booming tourism sector, the ITC pedigree, launch of portal, and strong focus on the car rental industry, the prospects of ITHL appear extremely bright. We expect ITHL’s revenues and profits to grow at 28% and 29.7% CAGR, respectively, between FY07 and FY09E. At the CMP of INR 165, the stock trades at 9.9x FY08E EPS of INR 16.7 and 7.7x FY09E EPS of INR 21.4.

Phoenix Lamps:
The Indian market for compact fluorescent lamps (CFLs) has been growing at ~40% over the past few years and is currently valued at INR 7 bn. India produced 44 mn CFLs in FY06, a mere 6% of the total number of traditional incandescent bulbs produced during that year. Phoenix Lamps, a leading player in CFLs, is looking to triple its current capacity of 25 mn units to 75 mn units by FY09E.

Phoenix Lamps’ CFL business, which has been growing at 34% CAGR over FY04-07, is likely steer the company’s growth over the next few years on the back of its leadership position in a radically changing industry. Sales and profits have grown at 23.4% and 49.4% CAGR, respectively, over FY04-07. Profits have grown at a faster pace as compared to sales over the last three years on account of lower tax rates.

Sarla Performance Fibers:
Sarla Performance Fibers (SPF) is the only producer and processor of multi-filament polyester and nylon textured yarn in India, catering to a varied set of applications and end users. As on FY07, SPF earned ~ 63% of its revenue from exports whereas the 10% was deemed exports. SPF is only export focused player has been successful in meeting and maintaining client specifications and is thus one of the preferred suppliers for most of its clientele.

Due to its focus across various geographies, SPF is well positioned to capture the huge opportunities across its product segments. Also, the Honduras JV is likely to provide an added upside to revenue growth once it is consolidated. That apart, a break through in high tenacity yarn will lead to margin expansion going forward. At CMP of INR 126, the stock trades at 8.1x its FY07 earnings.

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