Yes, the Flat Products Equipments India Ltd which was mentioned in the last week's posting as F...P...L...at Rs.85 hits the Second consecutive Buyer Freeze. Those who have asked for Tailor Made(Delivery) Portfolios, Enjoy!! Now Enjoy the following 2(two) Scrips.

From the Research Desk:

Avon Organics Ltd (BSE Code---531541) Book Value--->Rs.29.95 Debt/ Equity—>2.50 Resistances: R1----->Rs.27.6, R2--->Rs.47 & R3--->Rs.54. Stop Loss--->Rs.20.8 Buy at the CMP---->Rs.24

Introduction:

Two entrepreneurs, Mr. P R Agarwal & Mr. Rajesh Agarwal along with late Dr G S Sidhu, set up Avon Organics Limited (AOL) with an objective to serve worldwide markets with high value-added industrial products for the pharmaceuticals, agro and dyestuff & pigment industries. The year 1996 saw the establishment and successful commissioning of AOL's first grass root Diketene plant. The company's growth pinnacled when it doubled its production capacity by commissioning an additional 1000 TPA unit as part of its second phase in 1998. There after there was no looking back for the company except for a brief period in between, when the company suffered losses.

Company Info:

The Rs.46 Cr, Hyderabad based Avon Organics Ltd (AOL) is primarily engaged in manufacturing of Diketene Derivatives (Fine Chemials) and Ephedrine Derivatives(Biochemicals). Diketene is the basic unit for hundreds of derivatives in pesticides, chemicals, pharmaceuticals and dyestuffs. A highly classified technology has been sourced from Shanghai Peng Pu Chemical Works, China, and Xytel Technology Partnership, USA, and which now rests in the hands of a few chosen manufacturers across the globe. In a sprawling facility of 21 acres, the diketene plant is situated 60 kilometres from Hyderabad. In this endeavour, the company has been utilizing the services of professionals with multi-skilled backgrounds to analyse the quality standards requirements, evolve suitable processes and implement the same. A systematic approach encompassing the entire gamut of activities, including selecting vendors, maintaining in-process controls and monitoring the product even after it has left the factory is being practiced. Internal audit systems monitor all processes, while a master validation plan has been implemented to assure consistent quality. Experience in Fine Chemicals manufacturing and the opportunities in the sunrise biotechnology industry prompted AOL to enter into biotechnology sphere, by setting up a green-field venture at Chincholl Industrial Area in Solapur district of Maharastra. In the last quarter/fiscal, the Profitability of the Company was affected in the Diketene Division due to abnormal increase of raw material prices, power and fuel and other overheads, despite good contribution from Biotech Division.

Shareholding Pattern:

The promoters hold 26.6 % (25.19% in 31st March, 2006)-hence the promoters’ holding has increased marginally. The total public shareholding is 73.4 % [74.62% as of 31st March, 2006] –hence public shareholding decreased marginally. The institutional investors hold 2.42 %. Among the noted non-promoters, Prudential ICICI Trust Ltd - Emerging St holds 1.17 % and Andhra Pradesh Industrial Development Company hold 1.24 %. NRIs’ holding has increased to 1.92 % from 1.86% in 31st March, 2006. Meanwhile, the company had allotted 3,00,000 Equity shares of Rs 10/- each at a premium of Rs 60/- on Preferential basis to Promoters and 30,00,000 fully paid up equity shares of the Company of the face value of Rs 10/- each, for cash at a price not exceeding Rs 48/- (inclusive of premium of Rs 38/-), on Preferential basis to the Non-promoters.

Financials:

It has achieved a turnaround during the fiscal ended 31st March 2006; with a Net Profit of Rs 3.64 crore on a turnover of Rs 98.69 crore as against a Net Loss of Rs 1.09 crore on a turnover of Rs 89.1 crore in the previous fiscal [FY-2004-05]. This translates into a positive EPS of Rs.2. 94 against (-) Rs.1.11 for FY-04-05. For the Q1FY06-07, though the net sales decreased marginally to Rs.23.4 Cr from Rs.24.97.5 Cr, the net profit increased to Rs.91.7 lakh as compared to Rs.77.5 lakh compared to the same period previous year. The operating profits have also increased marginally to Rs.4 Cr from 3.85 Cr as compared to the corresponding period previous year. This is when the molasses prices were ruling firm and the crude oil prices reached $78 per barrel in the international markets. This shows the experience and efficiency of the management in dealing with such acute crisis-periods.

Investment rationale:

1. The company has initiated new projects involving an investment of Rs. 20 Cr to expand capacities, add new products and carrying on backward integration to improve competitive position in the market. The company is funding the project through the preferential issues and balance through internal accruals and debt. On account of expansion and backward integration programme, AOL expects to significantly improve its sales and profitability during this current fiscal. 2. According to the sources the company has entered into exclusive tie-ups with some pharmaceutical companies for intermediates, and is focusing upon the segment as a promising revenue stream in the future. 3. Earlier, the company went for debt revamp and reduced interest costs. The company has succeeded in converting some high cost debt (long term loans and working capital) into low-cost foreign currency non-resident (FCNR) loans. 4. Having already installed energy saving devices [UPS system] to counter the increased cost of generated power and fuel, the company is doing backward integration for pigment intermediaries of diketene division, for reducing the raw material cost and become more competitive. It has modernized the furnace to reduce, further fuel cost and increase the efficiency of the diketene plant. 5. The company has already increased the production of bio-tech division in the last fiscal. Moreover, it has increased the storage capacity of molasses division to procure and store molasses during the sugarcane crushing season; which will help meet at least 6 months requirement at lower cost. It is worth noting that the sugar cane crushing season will begin within some months from now and this is expected to pull the prices of molasses down. 6. The Company's certificate for quality systems under ISO 9001:2000 continues to be valid. 7. With its R&D and technical teams succeeding in their efforts to develop more new products in the Diketene Derivatives (fine chemicals) division, the company expects better contribution from new products and business opportunities in the years to come. a) In its Diketene Division various derivatives of 2-Aminothiazol-4-yl acetic acid derivatives, which are used in Cephalosporins, are under advanced stage of development. Last fiscal it has developed Dihydropyridine derivatives, which are used as anti-hypertensive and AOL has started commercialization. b) In its Biotech Division: i) Fermentation activity increased by more than 25% ii) Reduction in Catalyst by more than 60% ii) Statins development is in progress and favourable results could come at any time from now. The statins (or HMG-CoA reductase inhibitors) form a class of hypolipidemic agents, used as pharmaceuticals, to lower cholesterol levels in the blood by reducing the production of cholesterol by the liver; in people at risk for cardiovascular disease, because of hypercholesterolemia. 8.The expenditure on R& D has also increased as compared to the last fiscal. With world-wide pharmaceutical market to grow by 6-9% per annum according to some estimates, the pharmaceutical companies in India should rule the world due their: i) low cost production ii) increased focus on generic drugs, generic version of innovative drugs, which are mainly used by the ageing population of the west to reduce their high health care costs and iii) change in perception towards generic versions, that they could be as efficient as innovative drugs. 9. Since the rupee has more or less remained stabled during this quarter, this is expected to generate good export revenues for the company. The appreciation in the value of rupee has a negative impact on domestic selling prices and export realizations of both the divisions. 10. The Company has already phased / phasing out some of the products of Diketene Division, which are not economical. New products of high value are being added to boost the sales and turnover. Further, the company expects the process up-gradation in the biotech division to enable it improve capacity utilization. The company has already started marketing high value added new products in the diketene division. This is somewhat reflected in the results as of 31st March, 2006. Since the crude prices are expected to cool off further to below $60 per barrel, the company could see further improvement in both the top and bottomlines. It is to be noted that the raw material consumption includes the purchase of crude intermediates for manufacture of finished goods. 11. This fiscal the company should get good effects of monsoon. In the diketene business, monsoons play a major role in the demand for agro-chemical and pharma intermediates. 12. The 13th Annual General Meeting of the Company will be held on September 30, 2006, where new plans and initiatives could to be spelt out.

Risks and concerns:

1. Acetic Acid is one of the major raw material for diketene division, the price of the same is on an increasing trend due to drop in sugar cane production and increase in the prices of petroleum products. The Company has partly passed on the increased cost of inputs to the customers by increasing the selling prices. Further 25% of acetic acid requirements of the company are being met from the company's acetic acid recovery plant, wherein dilute acetic acid is being used as input which is available locally at cheaper rates. 2. Molasses, one of the major raw materials for biotech division, price of the same have gone up abnormally due to fall in sugar cane production last year. The rise in molasses price is only temporary and now is in declining trend. However the company has increased the storage capacity of molasses from 2000 tons to 6000 tons, which will meet six months production requirements of the unit. During the crushing season of four months the company is maintaining the storage levels at full and thus covering 10 months requirements at lower costs. According to a top source close to me, there are Rumours that Reliance which was sourcing molasses for its diketene plant, was backing out and might take the ethanol route (for its plant). Hence if this comes out to be true, it will swing the molasses prices in favour of the company. Molasses prices are still 30% higher as compared to last year. Also, since the sugar prices are gradually cooling down due to good sugarcane production in India and abroad and also due to ban in sugar exports, the molasses prices might fall further. Molasses are a by-product of sugar companies.

Conclusion:

In view of the cost control measures taken up by the company, flexibility in the product mix, further addition of more value added products and expansion of capacity in Biotech division to have large scale economies, the company is hopeful of achieving better turnover and profits as in the days to come. Hence considering all these factors, investments can be made in the scrip of Avon Organics Ltd at CMP of Rs.24 with a Price target of Rs.42 and Rs.70, within 8 to 18 months time. The scrip of the company is highly undervalued as of now.

This stock at the Present Price is nowhere near the first Target Price. Best wishes,

Suman Mukherjee

India.

http://finance.groups.yahoo.com/group/SumanSpeaks/