Long Term Stock Tips - 3

COMPANY: ASSAM COMPANY (ACL)

Close Price: 24.90 (11-Apr-2008)

ASSAM COMPANY (ACL) is a tea plantation company, which operates in Northeast India. It had annual turnover of around Rs 150 crore in Fy 07 with a current market capitalization of Rs 760 crore.

The company currently depends on the tea plantation business for 95% of its revenues. In future, ACL’s revenue growth will be driven by the success in its petroleum exploration and production (E&P) business.

GROWTH DRIVERS:

1. The company has invested in a few oil & gas blocks in the Northeast. Hence it has capability to generate substantial revenues and profits this year onwards.

2. The company holds stakes in two highly prospective oil blocks in Assam operated by Canada-based Canoro Resources.

3. Apart from the blocks shared with Canoro, ACL independently holds three small proven oil fields on a contract basis from ONGC for development.

4. ACL has formed a joint venture company with Texas based Austin Exploration to expand its geographical reach. This venture currently holds stakes in eight exploration blocks in Australia and USA, and is eyeing four exploration blocks in Mongolia.

5. The company has floated a special economic zone (SEZ) with Gujarat state petroleum, which has received in principle approval from the central government. It plans to invest around Rs 2000 crore in this project over the next two years.

VALUATIONS:

Considering its growth prospect one can consider an investment in this stock with 12 months horizon for huge upside potential. The current market capitalization 760 crore is too less compare to its future sales of around 2500 crore from E&P business alone.

RISK FACTORS:

Petroleum E&P is a long term and capital-intensive business. Any delay in execution of the proposed development plans, or any substantial and sustained fall in international crude oil prices, will have a substantial impact on the company’s balance sheet.