Valecha Engineering - Rs.121.00

Valecha Engineering Limited (VEL) was promoted by Valecha Brothers as an entrepreneurial concern in 1957 and was converted into a public limited company in 1993. VEL specializes in construction of infrastructure, civil engineering works such as Highways, Airports, Flyovers, Bridges, Tunnels, Canals, Water supply schemes, Sewerage projects, Irrigation Dams, Storage reservoirs, Buildings, and foundation engineering with sophisticated pile drilling Hydraulic Rigs. VEL has entered into a number of technical collaborations as well as joint ventures with overseas companies bringing the latest technical know-how in executing the projects. The management team consists of qualified professionals with relevant experience and expertise to ensure a proper techno-economic feasibility of the projects undertaken to achieve the objectives without any time and cost overruns. This is backed by state of art technology and using the latest techniques in construction. The company also plans to go global and is in talks with a UAE / German company for Middle East projects and is in search of an active local partner over there.

Almost 70 per cent of VEL’s revenues come from execution of road projects. It is also the largest piling company in the country. Capital adequacy, appropriate equipment, expertise and past experience, track record of timely project completion are some of the requisites for pre-qualification. VEL has thus pre-qualified for Rs2700 cr. worth of works in the NHAI projects. The Centre’s thrust on investments in infrastructure with increased participation from the private sector comes as a major boost to VEL with its current order book swelling to more than Rs350 cr. The company still expects good orders in this fiscal and is very bullish about its future prospects for the next 5 yrs.

Financially, the company has a strong balance sheet with a low debt equity ratio of 1:1 compared to its peers. Moreover, as a promoter of Jyoti Structures it holds more than 10 lakh shares at an average price of Rs40 whereas the CMP of Jyoti Structures is around Rs 140. For the six months ending 30 Sept. 2004, it reported robust numbers with turnover increasing 47 per cent to Rs70.30 cr. whereas its NP increased by 44 per cent to Rs4.02 cr. With such large orders in hand, the company will do much better in the second half and is expected to report total revenue of Rs180 cr. with NP of around Rs10 cr. Due to its small equity of Rs4.50 cr., any small increase in profit will lead to a sharp increase in EPS. With an expected EPS of Rs22 in FY05, it discounts very cheap at a PE multiple of only 5. A strong buy at CMP, which can give minimum 50 per cent return in the next 12 months. Long term investors can expect much higher returns.

Bihar Caustic - Rs.51.00

Bihar Caustic & Chemicals (BCCL), incorporated in 1976 is a Joint Venture between BSIDC(Bihar State Indl. Development Corp.) and Aditya Birla Group. It is one of the leading manufacturers of Caustic Soda in the eastern region. Its product portfolio consists of three products: Caustic Soda and the by-products of Caustic i.e. Liquid Chlorine and Hydrochloric Acid. Since the last few months, the chlor-alkali industry has been witnessing steady improvement in electrochemical unit (ECU) realizations and the trend is accelerating. Moreover, due to the current global upturn in the Aluminium, Iron and Steel and Paper industry, Caustic Soda prices have shot up more than 30 per cent in international market. And as far as BCCL is concerned, it is positioned very well in terms of capacity utilization with its parent company. Hindalco (along with INDAL) buying nearly 75 per cent of its total production of Caustic Soda whereas, the existing capacity for products like Chlorine and Hydrochloric Acid is well absorbed by the network of ancillaries already set up.

Its manufacturing plant at Ghanshyamkunj at Rehta in the state of Jharkhand has an installed capacity to produce 51048 TPA of Caustic Soda, 39600 TPA of Liquid Chlorine and 29040 TPA of Hydrochloric Acid. As caustic soda production is power intensive, the company has put up a 30 MW coal based captive Power Plant due to which company enjoys stable and economic power supply. Further, the company has installed sodium hypo chloride plant to utilize chlorine in its pursuit of value addition. It has also been successful in increasing caustic soda production by operating the plant at 225 KVA load. To encash the demand growth of its product in tandem with the significant growth in the principal user segments i.e. Aluminium and Steel industry, the company is in the process of finalizing the project for conversion of existing mercury technology to energy efficient and environment friendly membrane technology with simultaneous capacity expansion of caustic soda by 50 per cent i.e. increase in capacity from 150 TPD to 225 TPD at an estimated investment of Rs.112 cr. And to utilize the hydrogen as a value added product, the company is setting up a Hydrogen Bottling Plant at a total cost of Rs.2.80 cr. Recently, the company successfully restructured its long term debt from Financial Institutions by reducing the rate of interest. It has also returned to the dividend list after a gap of four years. Promoters hold 65 per cent stake and the rest is with the general public.

For the quarter ending 30th Sept 04, its net sales was up 8 per cent to Rs.26.30 cr. whereas NP jumped 150 per cent to Rs.7.10 cr. due to higher unit price realisation resulting in an EPS of Rs.3. Its OPM also improved 700 basis point to 49 per cent compare to 42 per cent last year. Considering the fact that the global prices of chlor-alkali products led by caustic soda are showing no signs of retreat, the company's profit margins are likely to improve in the second half of the current year and we expect it to clock a turnover of Rs.115 cr. and NP of Rs.26 cr. This works out to an EPS of Rs.11 on current equity of Rs.23.40 cr. Currently this scrip is trading at less than 4 PE, which is quite cheap compared to its peers. Investors should buy with a price target of Rs.80 i.e. 60 per cent appreciation in the coming 12 months.

STOCK WATCH

Raipur Alloys (Code No. 504614) (Rs.63.90) is reportedly doing well. For the first half ending 30 Sept. 2004, it reported Net Sales of Rs83.50 cr. up 50 per cent and NP of Rs9 cr. registering an EPS of Rs7. For the full year, it should earn an EPS of Rs16. The scrip will gradually cross Rs100. Hold it for medium to long term.

Bongaigaon Refineries (Code No.500072) (Rs.92.15) is discounted poorly as marketmen fear that its benefit of only 50 per cent excise duty being in the North East may be withdrawn by the government. For the six months ending 30 Sept. 2004, its net sales was up 57 per cent to Rs2148 cr. and NP jumped 54 per cent to Rs293 cr. Trading at 4 PE on an expected EPS of Rs22 for FY05, makes it quite undervalued and it is sure to be re-rated going forward. Moreover, it’s a handsome dividend paying company.

Tata Sponge (Code No.513010) (Rs.151.60) is enhancing capacity from 2,40,00 TPA to 3,90,000 TPA and has ambitious expansion plans for the future with an investment of over Rs1000 cr. For the first six months of FY05, its Net sales grew 37 per cent to Rs114 cr. and NP jumped an impressive 86 per cent to Rs29.40 cr. Considering the robust sponge iron prices, it is expected to report an and EPS of Rs32 for the full year. It’s a good bet at current levels.

Cement prices have increased by Rs15 ~ 20 per bag in the South and other parts of India, which led to a sharp rally in cement stocks except Deccan Cements (Code No.502137) (Rs.58.95). Its sales was up 19 per cent to Rs62 cr. and NP doubled to Rs3.90 cr. in the first half of FY05. Its second half will be much better and the company is expected to post an EPS of Rs12 for the full year. Share price has the potential to appreciate 50 per cent from current levels. Hold patiently.

Crude oil prices have softened substantially and analysts expect it to stabilize at current levels and Savita Chemicals (Code No.524667) (Rs.162.05) will be a big beneficiary since its the main raw material for the company. But in spite of high crude oil prices, the company posted robust numbers in H1FY05 . Sales was up 35 per cent at Rs234 cr. whereas NP rose 7 per cent to Rs12.70 cr. For the full year FY05, it will report an EPS of more than Rs30. Accumulate it for handsome gains in the medium term. Apart from a good dividend, it is ripe for a bonus too.

Indo Asian Fuse Gear (Code No.517318) (Rs.87.50), manufacturer of switchgears, is having the best of times with good orders pouring in. Company is expected to do much better in future given the huge export opportunity and the booming power and construction sector. For the first half of FY05, its Net sales was up 87 per cent and NP zoomed to Rs5.70 cr. from just Rs0.30 cr. last year. For FY05, it can report an EPS of Rs14. Buy at dips for long term as the share price can double in 15~18 months.

Man Industries (Code No.513269) (Rs.88.30) may rise further before its December results are out. It has a strong order book and the company expects more orders in coming months. For FY05, it should report an EPS of Rs18. Share price can rise 30~40 per cent from the current level once its Q3 results are declared.