Shrachi Securities - Rs.47.00

Incorporated in 1989, Shrachi Securities Ltd (SSL) is the flagship financial services company of the Shrachi Group, which has diversified interest in Real Estate, Engineering, IT, Hospital, Packaging, Alcohol etc. SSL offers a wide range of financial products and services from financing passenger cars and light commercial vehicles to heavy commercial vehicles and construction equipment. Earlier, the company was known as Shrachi Infrastructure Finance and only recently acquired its current name. Today, SSL has emerged among the 10 biggest commercial vehicle financing companies in India. The company operates through 57 branches covering 12 major states and has a consortium of 12 banks led by Bank of Baroda.

SSL does not just finance in its own right; it finances commercial vehicles and construction equipment jointly with Citicorp and HDFC Bank leveraging their brand equity. Interestingly today SSL is the largest alliance member for HDFC and second largest for Citicorp on a national basis. Its main income is earned in the form of origination fees and collection charges (linked to collection efficiency) since interest spreads are typically low with yields on these assets relatively low compared to SSL’s own cost of funds. The fee based earning nature of this business is a positive as it partially insulates SSL from the yield volatility prevalent in commercial vehicle financing market. In short, it’s a professionally well-managed company with NPA level of around 1.50% only against the industry average of more than 5%. SSL also has a 100% subsidiary, Shrachi Auto Pvt. Ltd., which has the dealership of Ashok Leyland vehicles in Jharkhand and Bajaj Tempo in Ranchi, the capital of Jharkhand

For FY05, SSL’s disbursement grew to Rs.540 cr. against Rs.303 cr. in FY04 registering growth of 79%. Its capital adequacy stood at above 20% compared to the minimum 12% required by RBI. Its total income grew by 30% to Rs.25.40 cr. whereas its NP zoomed 140% to Rs.7.20 cr. posting an EPS of Rs.8.50 on its current equity of Rs.8.50 cr. and it declared a dividend of 15% for FY05. Due to the increasing importance of infrastructure financing, the company has proposes to expand its infrastructure funding operations for which it is planning to raise capital through preferential allotment and other means like FFCB, ADR etc, which will dilute its equity substantially in future. For FY06, the company may report a total revenue of Rs.35 cr. and NP of Rs.8.50 cr. Aggressive investors can accumulate this scrip with a price target of Rs.75 (65% return) in 12~15 months.

Winsome Textiles - Rs.25.75

Incorporated in 1980, Winsome Textile Industries Ltd (WTIL) is a part of the well diversified Winsome Group, which has a strong foothold in textiles through its group companies like Winsome Spinners, Winsome Yarns, Winsome Spectrum, Winsome Knitwear etc. WTIL manufactures 100% raw cotton white yarn in the count range of NE 10s to NE 40s both carded and combed, single and folded. It also produces the finest quality melange yarn in 100 per cent cotton as well as cotton blends with viscose, polyester, acrylic, linen, modal, wool and silk which are used to make high value woven garments. Today, Winsome is the largest producer of melange yarn in India. It exports to more than 20 countries in the Far East, Europe, USA etc. and nearly 50% of its total turnover is accounted by exports.

WTIL’s spinning unit is located at Baddi in Himachal Pradesh with a capacity of 25,000 spindles while the group can boast of an installed capacity of more than 1,00,000 spindles with 9,500 kg per day yarn/fibre dyeing unit. It is an ISO9001-2000 certified company alongwith ISO14001 Environmental Management System Certificate issued by the Bureau of Indian Standards. Last year in March 2004, WTIL completed a modernization project leading to an increase in its combing capacity, replacement of 11 Ring Frames and other equipments without any cost overrun and as per TUFS guidelines. For future growth the company is implementing Rs.10.50 cr. capex plan to add 5 combers to convert part production of carded cotton yarn to combed yarn, which offer higher contributions. Also, some balancing machines are being planned for the Dyeing House to increase production. Notably, this whole exercise will be financed by debt and internal accrual without any equity dilution. The group is also planning to foray into manufacture & export of knitwear garments in a big way.

For FY05, its sales grew by 15% to Rs.128 cr. whereas its PBT was Rs.58 lakh compared to Rs.7 lakh last year. It managed these figures in spite of the fact that the company’s first half of FY05 was affected due to higher cotton prices and low yarn prices. However the current first qtr. numbers are quite encouraging. Although sales revenue flat at Rs.31 cr. the NP spurted 150% to Rs.1.08 cr. leading to an EPS of Rs.1.80 for the June’05 qtr. Given its small equity of just Rs.5.9 cr. and reserves of Rs.21.4 cr., the book value of the share works out to Rs.46. The value of its gross block as on 31st March 2005 stood at whopping Rs.119 cr. It also has investments whose current market value is more than Rs.10 cr. In spite of such strong fundamentals, the company’s current market cap is merely Rs.15~16 cr. For FY06, it is expected to report Sales of Rs.150 cr. and NP of Rs.4 cr. i.e. an EPS of around Rs.7. Investors are strongly recommended to buy this scrip with a price target of Rs.50 (i.e. 100% appreciation) in 9~12 months.

STOCK WATCH

Petron Engineering (Code No: 530381) (Rs.254.50) came out with its much-awaited June’05 numbers. Though its turnover increased by 17% to Rs.67.20 cr. but its NP doubled to Rs.4 cr. in spite of higher tax provision of Rs.2 cr. Its OPM for this qtr stood at 13% compared to 8% last year. It has a very healthy order position of more than Rs.350 cr. and institutional investors have started to take an interest in this company. In future, Petron Engg. is expected to come out with preferential allotment at a healthy premium to the current market price. With an expected EPS of around Rs.18, the scrip is trading reasonably cheap compared to its peers making it a best buy in the infrastructure sector.

Due to removal of quota system under WTO, textile companies are expected to witness a phenomenal growth for which reason Kallam Spinning (Code No: 530201) (Rs.31.70), a South based cotton yarn manufacturer is undergoing expansion. By its Rs.18 cr. capex plan it will increase the spinning capacity from 22,608 to 33,648 spindles by March 2006. The whole expansion will be financed by debt and internal accruals without any equity dilution. For FY06, the company is estimated to report sales of Rs.40 cr. and NP of around Rs.5 cr. i.e. an EPS of Rs.7 and may even declare more than Re.1 as dividend. For FY07, it will report much better numbers due to expansion. A good long term bet.

Manali Petrochemicals (Code No: 500268) (Rs.22.90) is planning financial restructuring under which its accumulated losses of Rs.35 cr. will be set off completely by 25% reduction in the paid up value of its share capital to the extent of Rs.28 cr. together with an amount of Rs.7 cr. out of the Share Premium Account. Although numbers of shares and EPS figures will not change, this will lead to a re-rating of its share price due to a healthier balance sheet. For FY06, it can report Sales of Rs.350 cr. and NP of Rs.40 cr. Share price target of Rs.30 can be expected in 6~9 months.

Sugar is not the currently flavour giving good opportunity to accumulate strong sugar stocks. Upper Ganges (Code No: 530505) (Rs.259.35), a KK Birla group company, which has a cane crushing capacity of 12500 TCD, seems a good bet at CMP. Company has finalised the merger of the sugar division of New India Sugar Mills with a capacity of 17,500 TCD with its subsidiary Saran Trading Company Ltd. Besides, it has approved the expansion of the its distillery at Sehor from its existing capacity of 55 to 100 KLPD. To fund this expansion, the company will come out with a right issue in the near future, which will trigger the scrip to new highs.

Market players due average numbers in the last two qtrs, in general, are ignoring the Pharma sector. Still, its future prospects are very promising and it’s a good defensive sector in the current market. Aarti Drugs (Code No: 524348) (Rs.132.90) is one such pharma company, which is ignored by investors and dumped by punters because of being in T2T category. For the June qtr, Sales decreased 8% to Rs.61 cr. but NP jumped 32% to Rs.4.10 cr. due to better operating margins and lower interest cost. For FY06, it may post sales of Rs.300 cr. and NP of around Rs.22 cr. Accumulate at current levels as the scrip seems to have bottomed out with a price target of Rs.200 in 6~9 months.

In the current small cap carnage, aggressive investors can buy DHP India (Code No: 531306) (Rs.20.90) at current levels. This Kolkata based company manufactures domestic pressure regulators for LPG cylinders, hosepipes and their parts. Due to declining demand in the domestic market, the company is exploring the export market, which is much bigger. It is also setting up a new factory at Howrah in West Bengal and which is expected to start operations this fiscal itself. It will double the current manufacturing capacity. For FY05 its Sales & NP increased by 55% to Rs.6 cr. and Rs.1.2 cr. respectively registering an EPS of Rs.4. It even declared Rs.1 dividend for FY05. Share price can rise 50% in 6 months or so.