COMMODITY SECTION BY MANSUKH NOV 2010

 GOLD AT THE FOOTHILLS OF A MARKET MANIA

The connotation of "foothills" is a perfect way of stating precisely where we are at in the collapse of the US Dollar based global financial system and the return of the king,gold,as money.It is perfect because while we are certainly seeing a movement towards a mania,with gold hitting fresh all-time highs in US Dollar terms on almost a daily basis throughout September and much of October,we are still far from reaching the top of the mountain.

We have begun to enter into the mania stage but,we are still a long away from reaching its peak.Here are arguments and proof for both statements.It should be pointed out,however,that we don't necessarily see gold as being in a "typical bull market".What we believe we are witnessing is the return to gold as money after decades of suppression. However,we believe that the mania phase of this progression will transpire.

It is our belief that once we reach the new paradigm,it actually will be the new paradigm. There will not be any denial nor "return to normal" because returning gold to functioning as money is in itself a return to normal.That is not to say that certainly gold will likely overshoot,by a great amount,its "true" value at the height of the collapse of the US Dollar based global financial system in terms of its value in comparison to other goods.And there will be a time when it will make sense to sell some or all of our your gold in favor of other assets.But for our purposes lets use the following chart to try to approximate where we currently are in the mania stage of gold.

For those that have been invested in this sector since 2004, we can recognize the period from 2004-2009 as being the awareness phase.And that brings us to August of 2010,which began the very first baby-steps into the mania phase.We can see all the signs of it around us now. Gold is mentioned more and more in the media and it has begun to start making all-time highs on a regular basis.

The dumb money,governments and central banks,are finally starting to catch on to what is happening.The central bank of Bangladesh bought 10 metric tonnes of gold from the IMF last month.This is on top of 212 tons of gold the IMF sold last year to the Reserve Bank of India, the Bank of Mauritius,and the central bank of Sri Lanka.And Saudi Arabia,Russia and the Philippines have recently announced big additions to their gold reserves.But how can we be sure that we aren't very close to the peak in the precious metals market?Nothing is certain in life but there are numerous indications that we are still early on in the mania phase.

As we can see,if we are near the top then this was one of the most disappointing bull markets in bubble history! In fact,just to match the gold & silver bull market of the early 1980s gold would have to quadruple in price from here to $5,200 per ounce.And we think this bull market will be much stronger than the 1980 bull market.

FUNDAMENTAL PICKS BY MANSUKH NOV 2010

Qtr & Yr Ended	Q2FY11	Q2FY10	FY10
Net Sales (Rs Cr)	1,021.95	609.89	2075.65
Op. Profit  (Rs Cr)	59.35	37.57	130.61
OPM (%)	5.80	6.14	6.29
Net Profit (Rs Cr)	33.82	14.90	56.49
NPM (%)	3.31	2.44	2.71
EPS (Rs)	2.85	1.26	4.77
Dividend (%)	10	7	10
Equity (Rs Cr)	118.55	118.55	118.55
Key Data Matrix  as on 30.10.2010
Current Market Price (Rs)			41.9
52-Week High/Low (Rs)			46.85/17.60
Market Cap (Rs Cr)			497.17
Face Value (Rs)			10
Latest Book Value (Rs)			32.70
Dividend Yield (%)			2.38
Beta (Sensex)			1.10
P/E (x) TTM			6.18
P/BV (x) TTM			1.28
EV/ TTM EBIDTA( x)			3.95
Average Monthly Volume (Lakhs)			3.3
Major Shareholders as on 30 September 2010
Promoters & Promoters Group (%)			30.44
Domestic Institutions (%)			3.77
Foreign (%)			0.02
Non-Institutions (%)			65.77

Mangalore Chemicals and Fertilizers Limited (MCF), part of the UB Group with group shareholding of 30.44% is the manufacturer of both nitrogenous and phosphatic fertilizers in the State of Karnataka.The Company has capacity to manufacture 2,17,800 MT Ammonia, 3,79,500 MT Urea,2,55,500 MT Phosphatic, 15,330 MT Ammonium Bi-Carbonate and 33,000 MT Sulphuric Acid annually.The factory is situated on the banks of the Gurpur River,in front of the New Mangalore Port and the plant is also well connected,both by rail and road.

FINANCIALS: During FY05 to FY10 the Topline of the company grew by CAGR of around 19%, Operating Profit and Net Profit of the company has also grown by 25% and 20% respectively. In FY10 due to poor monsoon the Net Sales of MCF came down by 16% to Rs 2075.65 crore over FY09, Operating Profit also declined by 1.5% to Rs 130.61 crore while MCF has managed to report more than 100% jump in Net Profit to Rs 56.49 over FY09. In Q2FY11 the Net Sales of the company surged by 67.5%, Operating Profit and PAT also grew by 58% & 127% respectively. The OPM & PATM of MCF for the same period were 5.8% & 3.3% respectively.

INVESTMENT GROUNDS
Industry Outlook

India's agricultural sector is the foundation of the rural economy and all socio-economic privileges and hardships always revolve around it, and any change in its structure draws a corresponding impact on the existing pattern of social equality. Fertilizer being the key efficiency booster in the entire production process occupies a center stage in rural economy. It is so significant that even the Indian National political scenario gets influenced by any amendments in the Fertilizer Policy.In FY10 Due to poor monsoon the fertilizer demand was slack down but now in FY11 the demand for both Nitrogenous & Phosphatic fertilizers is increasing steadily and expected to grow at a compounded annual rate of 5%. With the domestic production almost stagnant and the demand supply gap widening, the supply deficit has to be met from imports.
  

Nutrition Based Subsidy will add Volume Growth

To give the nourishment to Indian economy the government of India has also taken step to encourage the fertilizer sector in India and has implemented a scheme of Nutrient Based Subsidy scheme (NBS) with effect from 1.4.2010 and also announced concession rates for the year 2010-11 in advance, thereby facilitating import of higher quantities of Phosphatic and Potassic fertilizers. This move of the Government indicates a step towards further reforms in the fertilizer sector. MCF has also entered into agreements with leading suppliers of fertilizers abroad for import of DAP and MOP on a larger scale compared to last year.

Insured Gas Supply to improve the Margins

MCF is in process for receiving the gas supply to its Mangalore project and the work on the LNG terminal at Kochi is also progressing well. GAIL has already entered into a MOU with Governments of Karnataka and Kerala for right of use for laying the pipeline from Kochi to Mangalore. The gas pipeline connectivity to Mangalore is expected only by end of 2012. The Company is in final stage of concluding gas supply agreement with IOC and gas transportation agreement with GAIL. Considering the importance of fertilizer for ensuring food security in the country, Government of India has agreed to allocate gas on priority to fertilizer companies.

An Incredible Market Share in South India

MCF is the only manufacturer of fertilizers in the State of Karnataka. About 65% of the Company's products are sold in the State of Karnataka, which meets about 25% of the needs of the farmers in the State. The Company has maintained a modest share of the market in the neighboring States of Kerala, Tamilnadu, Andhra Pradesh and Maharashtra. MCF is also looking for diversifying into other products that are synergistic with the existing operations. In addition, MCF has increased imports of DAP and specialty fertilizers and a major thrust have been given to maximize trading operations and focus on the Integrated Nutrient Management business.