Arcotech Ltd. was established in 1981 for manufacturing internationally acceptable quality of Copper & Brass Strips and Foils. It has become one of the leading manufacturers of Copper/Brass Strips and Foils in India by creating a niche of producing micro thin foils up to 0.04 mm with close tolerance. 

The company has now expanded and increased its product range to include other Non Ferrous alloys like Phosphor Bronze, Nickel Silver, Nickel Brass, Cupro Nickel, Aluminium Bronze, Tin Bearing Copper and Silver Bearing Copper etc. These are produced in the form of semis like ingots, strips, sheets, plates, foils, copper bus bars in India. They have plans to broaden the range of products to include thingslike tubes, coin blanks, rods and wires.

Arcotech is contemplating to set up a green field project in the state of Gujarat, India to manufacture Aluminum semis. This will be an integrated facility and will prove to be a synergy to the Copper division. Aluminum demand has been growing at 10% CAGR since last 5 years and is expected to grow at 15-17% for the next five years in India.


Let's take a look at the company's financial performance:

Arcotech has grown remarkably over the past few years, although from a bottom, as copper prices declined significantly during the meltdown in 2008. And that is my major objection, I usually avoid cyclical industries like this, the company has executed well but should a recession come I believe they are toast. Arcotech is trying to diversify it's operations, but it's still relying heavily on  copper. Furthermore, margins have declined almost every year, which is a result of intense competition from bigger players like Sesa Sterlite or Hindustan Copper.

Valuation

I did a three stage DCF valuation with the following assumptions:
- 1st stage profit growth of 25% for the next 5 years
- 15% for years 6-10
- 4% terminal growth rate
- discount rates of 12%, 14%, 16%

I believe that given it's small size and rapid growth, rates of 14% and 16% are more applicable. Based on this, Arcotech offers only 16% upside in a positive scenario (with a share value of 419 Rs.). That is, if it grows by 25% and 15% respectively. Valuing cyclical companies with DCF is always tricky, as the earnings might wildly fluctuate. The stock is currently selling for a P/E of 23 and P/S of 1.2.

Summary

I didn't purchase Arcotech for a simple reason: it has no competitive advantage. It might have grown fast, but there are limits in the industry with extremely narrow margins. As Warren Buffett said: "Time is the friend of a wonderful company, and enemy of the mediocre". I will not buy such a stock, because there are so many other wonderful businesses out there.

Arvind Remedies Ltd was established in 1988 under Dr.Arvind Shah, Managing Director and CEO. The company has 30 pharmaceutical brands in 10 states. They offer various products in GP segments like Analgesics, Antioxidants, Haematinics, Antibiotic, GIT drugs, and also specialty herbal products for diabetes and herbal cream for bed sores and prevention of keloids after surgery or wounds. The stock has a market cap of 397 Rs.Cr.

The world pharma market is estimated to have grown by 2.5% in 2013 to reach the size of US $ 975 bn. While average revenue growth in  developed markets was only .36% in emerging markets of Asia Africa Australia and Latin America, the growth was about 10.7%. 
United States remains the largest pharmaceutical market globally, and also the largest generics market.

The Indian pharma industry during 2013-14 grew by mere 6.1% and reached size of approx Rs.823 bn. 
However it has been globally ranked third in terms of volume and tenth in terms of value. The market is 
expected to grow at a compounded Annual Growth Rate of 12% over the next five years. 

The key factors influence growth of healthcare sector are growth in population, increasing incidence of 
diseases, increasing affordability, rise in insurance and government schemes. 

According to their annual report, this will be the company's main focus and growth strategy:

"ARL can play vital role by going for registration of off patented products for exports and developing the outsourcing market. Key strategy will be to focus on the new and latest molecules approved by the authorities and share with top companies who can market these products, focus on additional dosages in large and small volume parenterals and injectables in powder and liquid forms."


Let's take a look at ARL financials:

Arvind's revenues and profits have skyrocketed over the past couple of years, with margins improving significantly even in the face of competition. That is a great sign, the Indian pharma market has grown steadily, but attracted a lot of competition. If Arvind Remedies can expand margins in such an environment. Long-term debt/equity is slightly above 1, which is higher than the industry average, however they have enough current assets to satisfy near term  obligations.

There are two major red flags with Arvind Remedies: inventories rising faster than sales (58% vs. 38%), and operating cash flow was negative last year, due to an increase in receivables and inventories. Rising inventories might mean, that ARL is preparing for a good season or that demand is low and the company keeps producing goods that nobody is buying. In this case, I think I will stick to the first option, as they managed this really well in the past.

Valuation

Using a 3 stage DCF model I came up with the following value:
- 16%,18%,20% discount rates
- Long term growth of 20% for the next 5 years, 10% for years 6-10
- 4% terminal growth rate

The company looks dirt cheap. Using conservative estimates (20% growth and a 20% discount rate), I arrived at a value of 756 Rs.Cr., which implies a share value of 110 Rs. That's a potential of at least 90% in that stock, and if it grows faster (last year sales and profits grew 40%), it can be a multibagger. With a P/E of 5.8 and P/S of 0.4, the stock looks like a total bargain.

Summary

The stock has been on the run after the company cancelled a planned demerger of it's new factory, which will produce generics for the US market. Arvind Remedies offers a great risk/reward scenario - if it doesn't work out, my stop loss will be hit and I will lose a small amount, however if it continues to grow like in the past, it is significantly undervalued. The stock needs to cross the 60 Rs. mark before I buy it.

Shilpi engaged in the business of the manufacturing cables for various applications used in the Telecom Sector,
Automobiles and Consumer durables sectors and the also trades in cable accessories including various types of cables and their accessories widely used in automotive, telecom infrastructure, instrumentation etc. and also deals in manufacturing various copper conductors.

The company is one of the leading manufacturers of RF cables in the country and they are actively promoting aluminum-based RF coaxial cables. Besides it is cost-efficient compared to copper cables while at the same time, the technical parameters are comparable to any other copper cable. 

Shilpi does business mainly in the following sectors:

RF CABLE MARKET
As a consequence of an explosion of mobile device usage, subscribers expect more services, data, capacity and speedier networks – whether they’re outside or inside. 

As a result, addressing the coverage, quality and capacity requirements of In Building users is mandatory. Thus IBS is going
to be critical in the coming months especially with the launch of LTE/4G services. IBS providers mainly use ½” and 7/8” RF
cable along with related accessories . Thus there will be a large requirement for these this type of cable in the coming months

AUTOMOTIVE SEGMENT
The automotive industry in India is one of the largest in the world and one of the fastest growing globally. India’s passenger car and commercial vehicle manufacturing industry is the sixth largest in the world. According to recent reports, India is set to overtake Brazil to become the sixth largest passenger vehicle producer in the world.

BUNCHED COPPER WIRE
The totalrequirements of bare copper wire/bunched copper wire is around 6 lakh M.T. per annum. Out of which,the organized sector requirement is around 3.5 Lakh M.T. and the unorganized sector accounts for around 2.5 Lakh M.T

WHITE GOODS INDUSTRY
The white goods industry plays a key role in Electrical appliances such as Washing machines, refrigerators, Microwave ovens, ironing machines and even air conditioners are considered as white goods. Shilpi believes there is a business potential of around Rs. 800~1000 crs for wire and cable industry in India in this segment.

The industry is very competitive and there is also a foreign exchange risk, as the company exports some of it's products and doesn't hedge the transactions. Let's look at financials:

The company is growing at an incredible pace, with sales rising 83% and profits 72%. Operating margins have decreased but, but net margin ticked up a bit. While profits went up almost tenfold, EPS increased only six times from 4.43 to 24.89 Rs. (58% growth YoY). This is due the increase in shares outstanding by 50% in 2012, in the recent year, this has decreased to only 7%. There haven't been any insider purchases recently.
Valuation

The most interesting about the company is it's valuation. Assuming 25% profit growth for the next 5 years, then 12.5% for years 5-10 and 2% terminal growth rate, I get the following value:

Even with a 20% discount rates and conservative growth estimates (the company grew 80% this year), Shilpi Cable Technologies looks significantly undervalued, with a potential of at least 140%. If it can grow at least 25% for the next few years, the stock could be multibagger. As you can see the stock increased sharply from 20 Rs. to 60 (market cap 310 Rs.Cr.). but I still think it's undervalued and might go higher.

I have created a three-stage DCF model to value more than 500 Indian stocks. The valuation was done with the following assumptions:

- Growth for the next 5 years - Half of the past 5-year profit or sales growth (whichever is lower)
- Growth for the years 5-10 - Half of the above mentioned rate
- Terminal growth rate of 2%
- Discount rates of 10%, 12%, 14% (for smaller companies it's best to use 14%, for larger ones use 10-12%)
- profit for the last 12 months

FULL LIST OF 540 UNDERVALUED / OVERVALUED INDIAN STOCKS

Valuing so many stocks is a challenge, given that each one has unique fundamentals and expected growth. I just did a calculation of what are the companies worth, if they can maintain only half of their past growth in the future. DCF models work only with companies which have stable cash flow and are usually in a mature phase. Companies with negative earnings were omitted. Some values might be unreliable, if there is a big difference in expected growth rates in the past and analyst projections for the future.

Here are some notable examples (using discount rates of 10%, 12%, 14%), a negative value means a stock is overvalued, positive is undervalued:
Name                                                                        Market cap (Rs.Cr.)      10%                    12%                         14%

Amara Raja Batteries Limited (ARBL) is the technology leader and one of the largest manufacturers of lead acid batteries for both industrial and automotive applications in the Indian storage battery industry. The company holds a dominant market share in the telecom industry, UPS sector (OEM & Replacement) and maintains a significant presene among other industry segments. Both Johnson Controls Inc. and Galla Family own stakes in the company.

Amara Raja is also a leading manufacturer of automotive batteries under the brands - Amaron® and Powerzone, which are distributed through a large pan - India sales & service retail network. The company supplies automotive batteries under OE relationships to Ashok Leyland, Ford India, Honda, Hyundai, Mahindra & Mahindra, Maruti Suzuki, and Tata Motors. The company’s Industrial and Automotive batteries are exported to Asia Pacific, Africa and Middle East

Amara Raja is the second largest automotive battery manufacturer and the largest supplier of Industrial storage battery in India. It entered the automotive battery segment only in FY01 post its JV with Johnson Controls Inc (JCI, USA) when it 
introduced AMARON batteries based on Zero maintenance technology for the first time in India.

Competition

The company is growing steadily and increased revenues even during the financial crisis of 2008-2009, during which many automotive and industrial companies slump. Margins and sales growth have decreased in recent years, however the operating and net margin are slowly rebounding. This might also be a result of lower lead prices, which represent 80% of costs for Amara Raja's products.

Valuation

Using a three stage DCF model, I have derived an estimated value with these assumptions:
- Profit growth of 20% for the first 5 years, 10% for years 5-10 and 2% thereafter
- discount rates of 12,13 and 14%

At current prices (488 Rs.), Amara Raja Batteries seems to be fairly valued or slightly overvalued. The problem with valuations is, that even if you get it right, the stock might continue to much higher levels, and you can miss out on a lot of profit. That's why I will keep holding this one and sell only if it starts declining.

Kajaria Ceramics is the largest manufacturer of ceramic/vitrified tiles in India. It has an annual aggregate capacity of 46.60 mn. sq. meters, distributed across seven plants-Sikandrabad in Uttar Pradesh, Gailpur in Rajasthan, four plants in Morbi in Gujarat and one at Vijayawada in Andhra Pradesh.

Let's take a look at financials:

Using a three stage DCF model, I arrived at the following value with these assumptions:
- profit growth of 20% for the next 5 years, 15% for years 5-10 and 4% thereafter
- discount rates of 11%, 13%, 15% using the Capital asset pricing model (CAPM)

Even after assuming a very optmistic growth of 20% and 15%, Kajaria Ceramics is not worth more than 4000 Rs.Cr. according to my DCF valuation. That implies a downside of at least 10% for the stock. The company is executing and growing well, but at these levels, the margin of safety is nonexistent and buying this stock would present an unfavorable risk/reward ratio. That doesn't mean it can't go a bit higher though. DCF valuation is only a rough metric and Mr. Market can carry stocks far beyond their reasonable values.

Looking at some of it's competitors (indirect or direct), Kajaria Ceramics is valued around the average, with slightly higher profit,sales growth and ROE.

It is a good business with a leading position in India, however I'm not a buyer at these levels. I will rather sit and wait till a more favorable opportunity appears.

I have created a proprietary screening system for stocks. I rank them based on insider buying, growth, valuation and momentum. Even though these are my top picks, I do further research to filter them out. And remember, always use a stop loss with momentum stocks.

Here is a list of good undervalued stocks with P/B ratios below 1 and market cap higher than 1000 crore:

10. Shipping Corporation of India Ltd.

The Shipping Corporation of India was established on October 2nd, 1961, by the amalgamation of Eastern Shipping Corporation and Western Shipping Corporation. As the country’s premier shipping line, the SCI owns and operates around one-third of the Indian tonnage, and has operating interests in practically all areas of the shipping business; servicing both national and international trades.

Market cap: 1127 Rs.Cr.
Price to book: 0.44
Price to sales: 0.22
P/E: 17
Dividend yield: 1.8%
Sales growth: 7.4%

9. Ballarpur Industries Ltd.

Bilt Paper B.V. is India’s and Malaysia’s largest manufacturer of Writing and Printing (W&P) paper. Company’s step down subsidiaries includes, BILT Graphic Paper Products Limited (BGPPL), India’s largest writing and printing paper manufacturer and Sabah Forest Industries (SFI), Malaysia’s largest pulp and paper company.

Market cap: 1127 Rs.Cr.
Price to book: 0.44
Price to sales: 0.22
P/E: 17
Dividend yield: 1.8%
Sales growth: 7.4%

10. HCL Infosystems Ltd.

The company works in the computer hardware industry.
Market cap: 1589 Rs.Cr.

Change in promoter holding: +5%
Price to Sales: 0.25
Dividend yield: 0%
Price to Book value: 0.86
Sales growth: -31%

Hinduja Global Solutions is a pure play business process outsourcing service provider headquartered in Bangalore, and is a part of the Hinduja Group.  The company does business in more than 10 other countries including Philippines, USA, UK, Canada, France, Germany, Italy, Netherlands, Mauritius and Jamaica. The company claims to be a world leader in Customer Relationship and Business Process Management. Around 25% of their revenues comes from India, while 27% is USA and 22% is from Canada.

Let's take a look at the company's financials:

1. Interactive Brokers

The undisputed leader in online trading, Interactive Brokers offers the best and cheapest solutions for investors and traders worldwide. Commissions get as low as $1 per trade, depending on the exchange and product you are trading. IB offers stocks, options, warrants, bonds, futures, forex, funds, etfs and many others, on exchanges in US , Europe (almost all countries), Asia (Japan, India, Hong Kong, Singapore, Korea) and South America. The catch is, that you need a minimum of 10 000 USD to open an account.

The company also offers master account solutions for hedge funds and advisors , through which they can manage their clients. I myself have an account with IB simply because they are the best and cheapest. I also manage some of my clients through here, as it offers a safe and convenient way for funds management.

2. Charles Schwab

Schwab is a relatively old company, which offers online trading for stocks, options, bonds and mutual funds. Their fees are sometimes higher, but you can open an account with as low as 1000 USD. The good thing is, that they also offer stock markets in Hong Kong, Japan, Canada, UK and the rest of Europe.

3. Saxo Bank

The Danish bank emerged as a leader for European retail investors, offering a lot of exchanges at affordable prices. You can trade all European and North American stocks, plus Singapore, Hong Kong, Australia, Tokyo. The company offers stocks, bonds, forex, futures, options, CFDs and funds. You also get lower commissions if you trade more frequently or deposit a large sum in the account.

4. Fidelity Investments

One of the largest investment companies in US, Fidelity has a wide range of products in nearly 25 countries and 16 currencies. You can trade stocks, funds, options and bonds in North America, Europe, Hong Kong, Japan, Singapore and South Africa. Fidelity is definitely one of the cheapest brokers out there, beaten only by Interactive Brokers.

Each broker has different commissions, and they might not accept customers from certian countries. So check individually before you open an account, to find the best one that suits you.

Cadila Healthcare is an Indian pharmaceutical company headquartered in Ahnedabad, Gujarat. Currently, it is the fifth largest pharma company in India, with a significant presence in generic drugs. It was founded in 1952.

The global pharmaceutical market is estimated to have expanded at the rate of 3-4% during 2012 and reached the size of over US$ 980 bn. The growth in 2012 was lower compared to the earlier years, especially in developed markets.

The Indian pharmaceutical market, which had been continuously growing at around 15% for the last few years slowed down, registering a growth of 11.9% during the financial year 2012-13, and crossed Rs. 70,000 crores. The key reasons for this slow growth was the strong base of the previous year, lower discretionary spending and defering of treatments. 

Chronic segments registered a higher growth as compared to the acute segments. Diabetics, urology, anti-malarial and CVS therapeutic areas registered a higher growth during the year (Source: AIOCD AWACS report).

Manufacturing is done in 4 formulation plants, 2 technical centers and 20 depots spread across India. The company has also more than 4000 distributors and 50 000 dealers for it's products.

According to Insecticides, the Indian agrochemicals market is expected to grow to $1.95 billion in 2014, and $3.5 billion in 2015, presenting a lot of opportunities for growth. The reason for it is, that India's consumption of agrochemicals per hectare is one of the lowest in the world - 0.58/ha, compared to 4.5 kg/ha in US or 11 kg/ha in Japan. This suboptimal usage translates to crop losses of 20-30% per year.

The average 5 year sales growth rate is 24%, profit growth rate is 14%, which means there has been a decline in margins, as can be seen on the chart above.

VALUATION

I did a three stage DCF valuation, with the following assumptions:
- discount rates of 8,10 and 12%
- terminal growth of 2%
- Growth for next 5 years (1st stage) of 15% and 5 years thereafter 7.5% (2nd stage)
- Growth for next 5 years (1st stage) of 10% and 5 years thereafter 5% (2nd stage)

The company seems undervalued even under pessimistic conditions (10% discount rate and only 5% growth), giving a price of 511 Rs., giving a 19% upside from it's current levels of 430 Rs.

RISKS
- the main risk here seems to be competition, which is bigger and better capitalized: Bayer Cropscience, Atul, PI Industries, Monsanto, Dhanuka Agritech, Rallis India and others.

Overall, it's a very solid and fast-growing business in a competitive field. The shares seem undervalued a bit, but it all depends on the future growth they can achieve. I believe the Indian agrochemical industry is still in early stages, and the number of companies in the field demonstrates it's future potential.

Almost 20 years, fund manager and expert on quantitative finance James O'Shaugnessy published his book "What works on Wall Street." In it he argued, that buying stocks with low price to sales, price to book and price to cash flow ratios outperforms a stock index significantly. So let's take a look at some of India's biggest companies selling for low price to sales multiples:

10. Union Bank of India

Market cap: 13866 Rs. Cr.
Price to Sales: 0.47
P/E ratio: 8.1
Dividend yield: 1.48%
Sales growth: 16.8%
Promoter holding: 60%

Dividends are an important part of shareholder's return. Some companies do not pay them and reinvest all their earnings, there are usually smaller businesses in rapidly growing industries. Mature companies pay out most of their earnings in dividends, as growth opportunities are depleted and markets saturated. Look for companies which can grow their dividends and maintain a stable payout ratio.

10. NTPC

Market cap: 125043 Rs. Cr.
Dividend: 3.79%
Payout ratio: 37.7%
Industry: Utilities
P/E: 11.39

9. Multi Commodity Exchange of India 

Market cap: 3150 Rs. Cr.
Dividend: 3.89%
Payout ratio: 40%
Industry: Commodity exchange
P/E: 20