STOCK WATCH

At a time when the Sensex has crossed the 12000 mark and all engineering companies are richly discounted, International Combustion (Code No: 505737) (Rs.380) is trading fairly cheap. Under licence from Danfoss Bauer-Germany, the company offers a comprehensive range of Geared Motors, Gear Boxes and Electric Motors manufactured on specially designed inter-linked CNC production lines. It also manufactures and markets a wide range of mechanical and electro-magnetic vibrating screens, feeders & conveyors to handle all types of bulk materials. Besides, it also markets ‘Raymond’-an American brand roller mill, pulverisers, grinding mills, mechanical air separators and flash drying systems, which are in strong, demand. For FY07, it is expected to report a turnover of Rs.85 cr. and NP of Rs.7.25 cr. i.e. an EPS of Rs.30 on a very tiny equity of Rs.2.40 cr. Having huge reserves of Rs.25 cr., it’s a strong bonus candidate as well. A solid buy for medium to long term.

Ramsarup Industries (Code No: 532690) (Rs.84) is a leading manufacturer and exporter of steel wires, galvanized wires, TMT bars and rods, which are primarily used in the power, housing and infrastructure sector. Presently, it has an installed capacity to produce 1,37,000 MT of steel wire and 72,000 MT of galvanized wire with 87,000 MT capacity of TMT bars. Besides, it is expanding its product portfolio by setting up a structural mill with an installed capacity of 1,35,000 tonnes to produce medium structurals like angles, channels and beams at a cost of around Rs.70 cr. For FY07, the company is estimated to register a topline of R1250 and bottomline of Rs.38 cr. which means an EPS of Rs.22 on its equity of Rs.17.50 cr. It’s a well managed dividend paying company with 67% promoters’ stake. A screaming buy.

Being underperformers for long, textile scrips are now gradually catching up and have started to rise. Eastern Silk (Code No: 590022) (Rs.225), a leading producer of silk fabric recently came out with impressive numbers for the March’06 qtr. Sales increased by 70% to Rs.80 cr. whereas NP rose 60% to Rs.5.40 cr. For the full year ending 31 March 2006, sales were up 15% to Rs.387 cr. but NP jumped 55% to Rs.38 cr. It reported an annual EPS of Rs.28 on its diluted equity of Rs.13.50 cr. For future growth, it is expanding its weaving capacity at its Bangalore unit by 4,50,000 metres per year, which will include double width jacquard and velvet fabrics. Besides, it is also setting up an in-house facility for made-ups with capacity of 1500 sets / day. To fund this expansion, the company has already raised Rs.57.50 cr. through private placement @ Rs.250 per share. For FY07, it may register total revenue of Rs.475 cr. and NP of Rs.46 cr. i.e. an EPS of Rs.29 on its fully diluted equity of Rs.15.80 cr. The scrip has the potential to cross Rs.300 in 9~12 months.

Indian Toners and Developers Ltd (Code No: 523586) (Rs.32) is a leading manufacturer of compatible black toners for photocopiers, laser printers, digital machines and multi-function machines like scanners, printers and fax copiers. It is the undisputed leader in the domestic market and the single largest exporter of toners and developers from India. To increase its global share, the company is regularly augmenting its capacity and has recently increased it to 1200 MT from 700 MT earlier. The full impact of this expansion will be visible in the current fiscal. It may earn a NP of Rs.5 cr. on sales of Rs.45 cr. for FY07. This will lead to an EPS of Rs.6 on its current equity of Rs.8 cr. In the bullish sentiment, the scrip can hit Rs.50. Buy and hold it for a year.

Although most of the large cap as well as small cap steel scrips have witnessed a sharp rally, National Steel (Code No: 513179) (Rs.26) hasn’t appreciated much. Zinc prices are scaling new highs and as the company manufactures galvanized steel also, marketmen are not so sure about its bottomline. But it should be noted that with the rise in zinc prices, the price of galvanized steel has also been raised. Due to strong demand, steel companies are able to pass on this rise in raw material cost to customers. Moreover, because of such wide fluctuation in raw material cost most of the contracts are signed with escalation clause. Surprisingly, in such a market, a company having a capacity of 2,10,000 tonnes of galvanized steel and 2,40,000 tonne of cold roll steel is available at market cap of merely Rs.85 cr. It’s a steal and pure multibagger if held for 2~3 years. Just go and grab it.

VST Tillers and Tractors - Rs.100.00

Established in 1965, VST Tillers and Tractors Ltd (VST) was promoted as a joint venture by VT Velu and VT Krishnamoorthy in technical collaboration with the Mitsubishi group of Japan, which currently holds more than 4% stake in the company. VST manufactures power tillers (10-15BHP), tractors (18.5 BHP), diesel engines & precision components like crankshafts & connecting rods. Its products are sold under the brand name - VST Shakti, Mitsubishi-Shakti and Euro Trac. The company is the undisputed market leader in the Indian tiller market enjoying more than 50% market share. It also exports its products to countries in South & East Asia, Middle East, Africa, Eurpose, USA etc. It is also into trading supplying imported machinery from other countries such as rice transplanters, combine harvesters, garden tillers, reapers, hedge trimmers, bush cutters, hole diggers etc

VST has three manufacturing facilities spread across Bangalore, Mysore and Hosur. The total installed capacity is around 13,000 units of tillers and tractors combined. Currently, it is working only at 70% capacity leaving ample scope for further growth with no capex requirement in the short term. Its power tillers already have a strong presence in Karnataka, Tamil Nadu, Maharashtra, Orissa, Gujarat and is gaining market share in West Bengal and Andhra Pradesh. Its tractors division is growing at an enormous pace with strong demand coming in especially from Maharashtra and Gujarat. Its precision components division besides contributing to revenue continues to supply critical engine components for captive consumption. Last year, this division won TS16949 certification, which will help in further developing the overseas market for its engine component business. In order to beat the competition and increase its market share in the lower end tillers market, VST has decided to import Chinese tillers in the CKD form, assemble them at its Hosur facility and market them under a new brand Dragon Power Tiller (14 HP horizontal four stroke single cylinder) through its marketing and distribution network. The company is also in negotiation with its technical partner, Mitsubishi, for setting up a 50:50 joint venture to manufacture diesel engines for power generators and tractors.

To maintain the GDP growth rate, both the Central and State Governments have accorded priority to agriculture and rural development by providing subsidies to small and marginal farmers. This augurs well for the company as its business model is very much dependent on such Govt. schemes. Considering all the factors, the company is expected to clock a turnover of Rs.150 cr. and NP of Rs.7.50 ~ 8 cr. for FY07. This means an EPS of Rs.14 on its equity of Rs.5.80 cr. With a market cap of only Rs.58 cr. and book value of nearly Rs.80, dividend yield of 3% and 52W H/L of Rs.161/68, this scrip is a value buy and has the potential to give 50% return in 12~15 months.

Paradyne Infotech - Rs.68.00

Incorporated in 1997, Paradyne Infotech Limited (PIL) is Mumbai-based IT Company focused on three main strategic business areas viz. - software services, managed services & system integration. It also offers BPO services, which largely comprise of database management services for existing clients. PIL’s services and enterprise solutions are in the areas of e-Commerce, Business Intelligence, Business Process Management and Customer Relationship Management that are provided to specific industries like Banking, Financial Services, Insurance, Education & Research, e-Governance, Manufacturing & Retail, Healthcare and Telecom. Its managed services include facilities management, network management, remote management, disaster recovery management, maintenance services, application management and database management. PIL has a good resource base of technical professionals for system integrations like database integration, application integration, server integration, desktop and operating system (OS) integration, network integration, security integration and storage integration.

PIL has developed two key software products ‘HrWorQ’ & ‘FinWorQs’, which got a good response from the market and are doing well. HrWorQ is a complete integrated solution, which provides a new generation IT architecture for the Human Resource management within an organization. FinWorQs is a core banking technology that is completely centralized, customer-centric, fully integrated solution addressing the needs of Foreign Banks, Nationalized Banks and Co-operative Banks. It has an impressive clientele, which include JM Morgan Stanley, IDBI Bank, Corporation Bank, SBI, Indian Navy, HUDCO, Reliance Infocomm, Idea Cellular, Hughes Telecom, ONGC, IPCL, Globus Stores, KPIT Cummins etc. Notably, PIL has various strategic and partnership alliances with international biggies like Oracle, Sun Microsystems, Veritas, IBM, Acer, CISCO, APC, HP and Microsoft. It has recently won the coveted Deloitte Technology award for being among the 500 fastest growing technology companies across Asia Pacific region. The company also has a wholly owned subsidiary called Sundune Corporation in USA, which looks after the implementation and support functions as well as exclusively marketing its products in USA.

In Oct 2005, it came out with IPO to raise around Rs.14 cr. for funding its modernization & expansion plan including upgradation of products, infrastructure, R&D lab and a software development centre apart from setting up data and call centres. For future growth, PIL is aggressively shifting its focus from system integration to software services, which would improve its profit margins going forward. On a conservative basis, we expect it to report sales of Rs.125 cr. and NP of Rs.10 cr. For FY07, this works out to an EPS of Rs.9 on its equity of Rs.10.90 cr. Hence with reasonable discounting by 12 times, it can cross Rs.110 (50% appreciation) in 9~12 months. Buying recommended on declines.

STOCK WATCH

SAIL and Tinplate Co. of India Ltd (Code No: 504966) (Rs.90) are the only indigenous producers of tinplate with TCIL enjoying more than 35% of the market share. Due to increasing demand, the company is regularly expanding its capacity and has recently completed its first phase of expansion taking the total installed capacity to 1,70,000 from 90,000 TPA earlier. It is now undergoing the second phase of expansion to double its capacity to 3,50,000 TPA by 2007~08 with an investment of Rs.200 cr. It has also invested in downstream value added facilities like printing and lacquering. For FY07, it is estimated to report sales of Rs.525 cr. and NP of Rs.48 cr. which translates into an EPS of Rs.17 on its current equity of Rs.28.90 cr. The company is expected to come out with excellent March numbers on 27th April. The TCIL scrip is trading fairly cheap and can easily appreciate 50% in 6~9 months. A strong buy.

South Indian Bank (Code No: 532218) (Rs.60) is on a huge expansion spree and is aggressively opening branches in un-represented pockets like MP, UP, Jharkhand, Orissa, Jammu, Uttaranchal, Assam etc. It plans to increase its network from 435 branches to 500 branches spread across 22 States and build a networth close to Rs.1,000 cr. with total business volume of Rs.25,000 cr. by the end of 2008. Nearly 75% of its branches has adopted core banking technology (Finacle). Its capital adequacy ratio (CAR) after the recent public issue stands at 12.51 % and as per estimates its net NPA has slipped below 2% in FY06 from 3.81% in FY05. It has reserves of a whopping Rs.450 cr., which translates into a book value of more than Rs.70. The bank will also get around Rs.23 cr. from IOB for its shares of Bharat Overseas Bank, which will boost its bottomline. With expected NP of Rs.55 cr. i.e. EPS of Rs.8, it is one of the cheapest private banks and has a market cap of less than Rs.450 cr., which makes it an easy takeover target.

Gupta Synthetics Ltd (Code No: 514116) (Rs.151) is a reputed manufacturer of partially oriented yarn (POY) and fully drawn yarn (FDY) with ultra modern plants at Surat and Silvassa. To cater to the rising demand, the company has recently enhanced its production capacity of FDY by 15,000 TPA with a capital outlay of Rs.25 cr. It is also exploring possibilities to take up a backward integration project by installing a Continuous Polymerisation (CP) plant to reduce its dependence on foreign suppliers. It’s also planning to increase the capacity for POY and other texturised yarn. Recently, it decided to make a preferential allotment of 16 lakh warrants to be converted into equity shares at the rate of Rs.155 per share. For FY07, it may report sales of Rs.350 cr. and NP of Rs.14 cr. This works out to an EPS of around Rs.45 on its diluted but tiny equity of Rs.3.20 cr. Although rising crude oil prices is a concern, still it is quite cheap at its market cap of less than Rs.50 cr.

Most marketmen doubt the capability of the promoter’s of Petron Engineering (Code No: 530381) (Rs.169). At a time when all the infrastructure companies are boasting of huge orders in hand, this company has not taken the full benefit of the strong economy. It is least aggressive and has still not increased its networth to bid for bigger projects. Despite all this, it is a value buy and can give handsome returns in the long run. Its takeover by any large engineering company will be the biggest trigger for this scrip. As per sources, the company has a healthy order in hand of more than Rs.400 cr. For FY07, it can register a turnover of Rs.380 - 400 cr. and NP of Rs.12 cr. which means EPS of Rs.16 on equity of 7.50 cr. Scrip has the potential to hit Rs.220 in a 9-12 months.

Jupiter Bioscience (Code No: 524826) (Rs.145) is perhaps the only peptide company in Asia with technology to manufacture peptides from the basic stage and among the ten such companies in the world. For catering to the regulated markets its subsidiary Jupiter Bioscience (USA) is in the process of setting up a GMP facility in Maryland for the manufacture of custom peptides, clinical peptides and peptide-based generic active pharmaceutical ingredients (APIs). Here in India, it has recently acquired a modern manufacturing facility from the pharma major Aurobindo Pharma located at Khazipally for a consideration of around Rs.15 cr. and is spending close to Rs.25 cr. for expanding this facility. The company has embarked upon a huge expansion programme involving a capital expenditure of Rs.94 cr., which will be funded through ADR/GDR/FCCB routes and through preferential allotment to promoters. For FY07, it is expected to report EPS of Rs.15 even on its diluted equity of Rs.17 cr. Scrip has the potential to cross Rs.250. A screaming buy.

Suryalata Spinning - Rs.78.00

Incorporated in 1983, Suryalata Spining Mills Ltd (SSML) is engaged in the manufacture of synthetic blended yarns of polyester/viscose, 100% polyester and 100% viscose counts ranging from 20s to 60s and black dope dyed yarn. Besides exporting its product to Italy, Turkey, Taiwan, Iran, Srilanka, Indonesia, Nigeria and other European countries, SSML also caters to the domestic markets of Bhilwara, Ichalkaranji and Bhiwandi, which are large textile processing and producing centres. It has two Spinning Plants one in Andhra Pradesh and the other in Maharashtra. Unlike other players, both its facilities are ultra modern and equipped with hi-tech machines from world renowned manufacturers such LMW, Turmac Engineering and Murata Machinery Ltd, Japan.

Last year, the company completed Rs.8.60 cr. expansion cum modernization programme at its AP factory and a couple of months back it enhanced its Maharastra unit capacity by 7200 spindle at a cost of Rs.11 cr. With this expansion, its present installed capacity stands around 65,000 spindles. To diversify its product portfolio, the company is foraying into the manufacture of cotton yarn and is setting up two new units one in AP (25000 spindles) and the other in Maharashtra (20,000 spindles) at an investment of Rs.90 cr. These units are expected to commence commercial production from December 2006 and will be eligible for various incentives and exemptions allowed by the AP government as per the SIIP policy 2005-2010. Moreover, to become an integrated player, it is planning to set up a weaving and processing unit with a capacity of 50,000 metres per day at an initial cost Rs.35 cr. It is also considering a proposal to set up a Rs.25-cr. garment facility with a capacity of 10,000 trousers a day.

Post-quota regime, EU and US companies are increasing the outsourcing of their requirements from India due to its edge in availability of raw material, skilled labour etc. over competing countries. Taking into consideration its expansion plans, it is expected to report sales of Rs.210 cr. with NP of Rs.9.50 cr. for FY07. This translates into EPS of Rs.17 on its current equity of Rs.5.45 cr. As the full impact of the expansion will come only in FY08, it may report more than Rs.300 cr. in sales.
Although the company may raise around Rs.30 cr. through FCCB/preferential allotment etc. in future, which may dilute the equity capital to some extent, still it’s trading cheap with current market cap of only Rs.40 cr. The scrip has the potential to appreciate 25~30% in a year’s time and can even double in 24~30 months.