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India Globalization Capital: The Most Compelling Value On The NYSE

India Globalization Capital: The Most Compelling Value On The NYSE

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IGC Article by Biotech Breakthoughs
IGC Article by Biotech Breakthoughs

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Published by: BiotechBreakthroughs on Mar 26, 2013
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India Globalization Capital: The Most Compelling Value On The NYSE Thesis My newest idea features a quintessential turnaround

story: a fallen angel that i s in the early stages of a game-changing transformation offering tremendous upsi de as it materializes. The company presently trades near all-time lows despite t urning the corner to profitability last quarter and projecting continued earning s acceleration. It is also a play on the red-hot dry bulk shipping sector. Sever al tailwinds discussed below should help drive this turnaround and consequently propel the share price. The name of the company is India Globalization Capital ( #IGC). A Brief History As those who follow my work are well aware by now, I engage in exhaustive resear ch in an attempt to unearth under-the-radar, undervalued companies that I consid er on the verge of being discovered by Wall Street. Specifically, I look for und erfollowed companies with game-changing catalysts that will lead investors to st art piling into their shares. Occasionally, my focus is on a shorter-term event, such as an earnings report. CombiMatrix (#CBMX) surged 170% and China Auto Logi stics (CALI) virtually doubled following my articles discussing this particular kind of catalyst. A biotech reaching certain significant milestones often attrac ts investors' attention as well. EDAP TMS S.A. (#EDAP) has risen 50% since I hig hlighted the company's advances in the treatment of prostate cancer. Atossa (ATO S), my most recent biotech idea, is trading near all-time highs as the investmen t community takes notice of patients' recently expanded access to their Breast H ealth technology. I even do my best to provide real-time commentary, both in the Comments section of my articles and on Twitter (@BioBreakthrough), when it may be advisable to take some profits off the table if I consider the stock over-ext ended or played out. As a result, the average maximum gain following my prior fo ur ideas has been well in excess of 100%. In addition to the various catalysts discussed above, Wall Street particularly l ikes to reward a turnaround story, and my newest idea focuses on just that: a hi dden gem on the verge of a monumental transformation. My Newest Idea Normally, I do not delve into the penny stock world, but an exception is warrant ed for my current idea for several reasons. First, following the meteoric quintu ple surge of Fannie Mae (#FNMA) and Freddie Mac (#FMCC), I have received numerou s inquiries as to which stock may be the next to follow a similar trajectory. Se cond, unlike Fannie and Freddie, which trade over the counter, IGC trades on the NYSE, which lends some additional credibility. Additionally, the company's shar es are sitting right near all time lows, despite a turnaround in the business, w hich i believe creates an opportunistic entry. IGC is a special situation stock, a fallen angel with a transformational acquisition for which the market has not yet given it credit. Profitable penny stock turnaround stories have performed e xceptionally well in this market. Sutor Technology, a microcap Chinese steel com pany, surged 150% following an earnings report reflecting a similar turnaround a s IGC's. Finally, a number of intriguing biotech stocks I am watching are not cu rrently providing ideal entry points, and the broader market appears vulnerable. As such, I prefer to present an idea that offers minimal risk relative to the u pside potential, rather than discussing an overcrowded stock subject to profit-t aking on market weakness. I assess IGC's risk of 10c to the downside and $1.5 up side over the next few months as an enticing risk-reward scenario. Wall Street Loves a Turnaround Wall Street richly rewards companies that appear to be in the midst of successfu lly turning around a once struggling business. Witness the recent meteoric rise in the shares of Netflix (#NFLX). Shares plummeted from $300/share to the $50s f ollowing a variety of missteps at the company. Following a perceived turnaround

at the company, however, shares have since surged back to near $200/share in a s hort period of time. Most recently, behold the epic runs of the beleaguered GSEs Fannie Mae and Fredd ie Mac. Even though the value of their common equity is in serious question, spe culative money has piled into shares based on a housing recovery, projected prof itability, and a LIBOR manipulation lawsuit, among other things. IGC, coincident ally trading at the same levels as Fannie and Freddie shares before their specta cular rise, is also a turnaround story. Purely from the perspective of a specula tive investment, IGC makes much more sense than either Fannie or Freddie. The co mmon equity is much more secure, the company is significantly less levered and e ncumbered, and it has a market cap of less than 1/2 of 1% of the GSEs. Is India Globalization Capital the Netflix, Fannie, or Freddie of the Asian mini ng and materials sector? Trading on the NYSE, IGC operates as an infrastructure company providing materials catering primarily to the rapidly growing economies in China and India. IGC has four main divisions: Mining and Quarrying Beneficiation of Iron ore Export of iron ore to China Highway and Heavy Construction Shares of India Globalization Capital have plummeted a breathtaking 97% from the ir highs just 5 years ago. Coincidentally, the company had not posted an annual profit over the past five years. However, all of this is about to change: a monu mental transformation is in its early stages at IGC. Last quarter, revenues surg ed almost 300% year over year. The company reported a GAAP profit vs a loss of 9 c from the prior year. Shares rose over 120% in the days following the earnings report, but have since settled back down, providing an opportunistic entry point . The comments of Ram Mukunda, CEO of IGC, confirm theserious momentum behind th is turnaround: We are now filling orders from our Chinese customers through our trading operati ons. We expect to increase this activity as we expand our suppliers beyond India and China. In the future the lower margin trading business is expected to trans ition to higher margins as we supply high-grade iron ore from our beneficiation plants. Iron ore prices have started to recover from their lows of $86 per ton i n September 2012 to around $125 per ton. A number of recent macroeconomic developments will help to fuel this turnaround even further. Just this month, Indian prime minister Manmohan Singh expressed co nfidence that India would return to a 7-8% growth rate over the next couple of y ears. Moody's recently affirmed this 7% projection, declaring the December quart er the bottom of the cycle. In September, China approved a $157 billion stimulus package for infrastructure spending. That same month, the highest court in Indi a lifted a ban on iron ore mining in the southern part of the country, enabling IGC to begin shipping iron ore to enhance production at their Chinese plants. This powerful combination of expanding markets, increased margins, higher prices , and a massive infrastructure stimulus program in place should provide serious tailwinds to IGC's momentum. In fact, IGC projects profitability for the upcomin g fiscal year beginning April 1, 2013. This will be the first year of profitabil ity in 7 years, representing a watershed moment for the company. The Next Shipping Play to Fly Sky High The tankers and dry bulk shippers are the hottest sector in the market right now , with speculative money piling into shares. Names like Genco (#GNK), Frontline (#FRO), Diana (#DSX), and Nordic American (#NAT) have surged higher. This streng th is attributed at least partially to the acceleration in manufacturing activit y in China just released, measured by the Purchasing Managers Index (#PMI). Jim Cramer has also warmed up to the sector, asserting that dry bulk shipping rates have likely bottomed. Private equity magnate Wilbur Ross is establishing a $500

fund to buy distressed shipping assets. IGC profits in multiple ways from a resu rgence in this sector. IGC's Mining & Trading subsidiary operates two shipping h ubs, the Krishnapatnam port (east coast of India) and Goa port (west coast of In dia). IGC's Logistics Unit provides logistical support for the transportation of infrastructure materials. As such, IGC is an under-the-radar beneficiary of thi s sector momentum, and the cheapest way to play the momentum in this sector. Valuation Following its acquisition of Ironman, which it was able to purchase dirt cheap, IGC has four mines in Inner Mongolia and three beneficiation plants with over $5 00 million of estimated reserves measured at $125 per ton. One research report s uggests that IGC is trading at a significant discount to its small cap peers usi ng a ratio of Enterprise Value to Reserves. Using this metric and very conservat ive estimates would imply a median fair value of shares of well above $1, repres enting substantial appreciation form current levels. Paying a significant premiu m for IGC shares would represent pocket change for a large player in the mining space such as BHP Billiton (#BHP) or ArcelorMittal (#MT) who may wish to acquire IGC to corner these reserves. Recently, a widely followed M&A blog reported rum blings of a massive Chinese contract to be awarded to IGC. I have no color on th e probability or veracity of this chatter, but it does offer yet another potenti al impetus for shares of the company. Risks IGC's impressive turnaround may be affected by lower iron ore prices, a downturn in the Chinese and Indian economies, or changes in government policy and regula tion. Even though IGC's corporate office is based in the U.S., all small cap com panies with operations in China have come under intense scrutiny. I believe shar es at these levels are excessively discounting this skepticism. Though I have co mbed through all the available SEC filings, press materials, videos, research re ports, and the like, I have not personally been on site to visit the company's o perations. The fact that a former director purchased over 1 million shares in th e open market, and has not sold a single share, may further assuage prospective investors. Conclusion Rarely does one have the opportunity to invest in a $20 million NYSE-listed comp any trading near historic lows, yet profitable, holding $500 million of estimate d reserves, and with several tailwinds to stimulate growth even further. Investo rs interested in speculating on a small-cap turnaround story with explosive pote ntial may want to take a serious look at India Globalization Capital. IGC curren tly offers one of the best risk/reward profiles in the equities market, providin g an easy, inexpensive way to participate in the growth of two of the largest gl obal economies. It is an extremely compelling turnaround story, projecting profi tability and rapid revenue growth. For the reasons discussed above, I see signif icant upside and minimal downside for shares of IGC from these levels.

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