Stock Watch

As predicted earlier, Easun Reyrolle came out with stunning nos for the March quarter. It reported an all time high sales of 46 cr (up 45%) whereas NP zoomed up by 135% to 6.80 cr registering a mind blowing EPS of 20 Rs for the quarter. However for the full year its sales improved by 25% to 133 cr and profit grew by 35% to 17.70 cr. This translates into yearly EPS of 53 Rs on a very tiny equity of 3.33 cr. It also announced 12 Rs as total dividend (incl 2/- Rs as interim) which is the highest in its history. Offlate company has ventured into a new business area i.e. construction of projects on turnkey basis under which it will mainly concentrate on substation projects and power system automation project. For future growth it is setting up a 45,000 sq ft world class manufacturing facility at Hosur for medium voltage switchgear with an investment of Rs.12 cr. For FY08 it may clock a turnover of 175 cr and PAT of 23.50 ie EPS of 64 on diluted equity of 3.66 cr. To improve the liquidity management has already announced the stock split to 2/- Rs face value and with an estimated book value of 175 Rs (ie reserves of 65 cr) they may declare a bonus as well in future. Scrip can trade around 250 Rs post split.

Recently, International Combustion also announced every encouraging result. Sales increased by 15% to 24 cr and profit jumped up 50% to 2.80 cr ie EPS of around 12 Rs for the quarter. For the entire FY07, it recorded 20% growth in sales to 80 cr and an impressive 45% rise in NP to 8.30 cr. This works out to an EPS of 35 Rs on equity of 2.40 cr. Notably, this is after writing of 1.30 cr as bad debts else its NP would have been 9.50 cr. Due to some growth plans, it declared 50% dividend, same as last year. Company is a leading manufacturer of heavy engineering equipment, geared motors and gear boxes, vibrating screens and feeders, bulk material handling equipment, rubber/polyurethane screen decks and liners, Raymond grinding mills, air classifiers and flash drying system etc. Considering the strong economic growth coupled with huge outsourcing prospects it may end FY08 with topline of 100 cr and net profit of 11 cr which leads to an EPS of 46 Rs on current equity. Besides with more than 30 cr of reserves ie book value of 125 Rs, management may declare a liberal bonus this year. Share price can double in a years time. A screaming buy.

Having technical collabaration with Benteler of Germany, Gandhi Special Tubes is one of the leading manufacturers of small diameter welded steel tubes, cold drawn seamless steel tubes, tubular components and cold formed nuts. For the March’07 quarter its sales as well as PBT grew by 20% to 18 cr and 5.20 respectively. However due to higher tax provisioning its NP stood at 3.35 cr against 6.25 cr last year. On the full years basis the turnover increased by 10% to 61.50 whereas profit before tax grew marginally to 19.50 cr. After tax provisioning of 6.50 cr (against 2.40 cr) NP delined to 13 cr compare to 16 cr last fiscal. Hence it reported an EPS of 17.50 Rs on equity of 7.35 cr and gave 40% dividend for FY07. It has a impressice clientele including biggies like Godrej, Voltas, Tata Motors, Ashok Leyland, M&M, Maruti etc. Although its margins seem to under pressure due to rise in steel prices, still being a niche player it can report sales of 75 cr and NP of 15 cr for FY08 ie EPS of 20. With 52week H/L as 110/180 Rs scrip has the potential to touch 160 Rs in good sentiment

As textile sector is out of flavour, companies like Shri Lakshmi Cotsyn are available at reasonably cheap valuations.It has been manufacturing suiting shirting, embroideried and quilted fabric, industrial fabric apart from processing cotton sheeting. Recently it has set up a gigantic plant in Fatehpur andstarted producing denim, terry towel, wider width sheeting, heavy weight bottomwear fabric etc. It is also venturing into garment manufacturing in a big way. For the March quarter it reported 65% jump in sales to Rs.154 cr. whereas net profit almost tripled to Rs.12 cr. and registered 18% OPM against 8% in the last fiscal. For FY07 ending June’07 it can report sales of 550 cr and NP of 35 cr which can shoot upto 725 cr and 45 cr repectively for FY08. This means EPS of 24 Rs and 30 Rs on diluted equity of 14.80 cr. Company is rasing around 85 cr thru FCCB/GDR route which can dilute the equity further to around 21 cr. Buy at sharp declines only.

Manugraph India - 130.00 Rs

Established in 1972 and promoted by Mr. S.M. Shah, Manugraph India Ltd (MIL) is today, country’s largest manufacturer of newspaper web-offset and sheet fed offset presses. With a whopping 70% market share, company is the undisputed leader in domestic market with its product present in nearly all-major publication houses. It manufactures printing presses used by the newspaper industry and also makes products that are used for printing a variety of business/entertainment material such as brochures, pamphlets and booklets. Notably MIL is the only organized and niche player in manufacturing and installing the printing press, hence is the Tier-I supplier to large publishing houses like Times of India group, Indian Express group, Dainik Jagran Prakashan group, Hindustan Times, and other regional newspapers and publications like Gujarat Samachar, Malayala Manorama, Hindu, Sandesh , Deccan Chronicle etc.

MIL has two modern manufacturing plants at Kolhapur, Maharashtra, with a total installed capacity of 830 printing units. It makes various types of machinery with speed ranging from 25000 to 55000 copies per hour. Frontline, Hiline, Manuline, Starline, Newsline, Shiva, Cityline Express, Printmagic etc are its popular and successful brand names. Notably company has a tie up with MAN Roland, Germany under which they will sell MIL’s product worldwide and at the same time company gets the production and sales rights for the Uniset 60 newspaper printing machine manufactured by MAN Roland in India. MAN Roland is the worldwide leader in manufacturing web offset and sheet offset printing machines and has strong marketing reach across 50 countries. Currently exports contribute more than 30% of revenue with products being exported across the world.

Last year in Nov’06, MIL acquired Dauphin Graphic Machines Inc (DGM), a leading manufacturer of web offset printing machines based in Pennsylvania, USA for approx Rs 86 cr. Notably, DGM with annual sales of more than Rs 300 cr enjoys 60% market share in US/Canadian market for single-wide, one around press. Post this acquisition, MIL has become the world’s largest manufacturers of the single width press. For partial funding of this takeover, company made preferential allotment of around 4 lac shares @ 248 /- to FII’s. For FY07 it reported sales and NP of 369 cr and 46.50 cr respectively which means EPS of 15 Rs on a tiny equity of 6.08 cr having FV of 2/- Rs per share. Although its margin seems to be under pressure due to rising raw material cost, still for FY08 it may clock a turnover of 400 cr and NP of 45 cr on a standalone basis. ie EPS of 15 Rs. On a consolidated basis it is expected to report total revenue of more than 750 cr. Hence at a current market cap of less than 400 cr, scrip is trading fairly cheap. Incidentally in such a high market scrip is trading at its 52W low, hence investors are advised to buy at current levels with a price target of 210 Rs (ie 60% appreciation) in 12~15 months.

Lakshmi Electricals- 250.00 Rs

Incorporated in 1981 and belonging to the high profile LMW group, Lakshmi Electrical Control System Ltd (LECSL) is primarily engaged in manufacturing of electric and plastic components. Under the electric component division which contributes nearly 80% of revenue, it makes switchgear and control panel such as contactors, thermal overload relays, control relays, electrical control panels etc. Other electrical components include motor starters and motor control panels. It also provides customized control panels for original equipment manufacturers. All of these products are used in industrial applications for power supply and also find application in commercial and residential buildings. Balance 20% of revenue comes from industrial plastic component division which actually supports the manufacture of electrical mountings and components for switchgears. Besides it manufactures textile machinery components using engineering plastics mainly to cater the demand from Lakshmi Machine Works.

LECSL’s manufacturing facility is located at Arasur, Coimbatore and has a technical collaboration with Sprecher & Schuh, Switzerland, one of the leading manufacturers of low-tension switchgear items in the world. Last year, 4 sophisticated Engel [Austria] injection-moulding machines were installed as a part of the modernization program. Off late company has developed additional products like Automatic Power Factor Control Panel (APFC) and Limit Switches with many variants for wide range of applications, as also Solenoid Valves in defined executions. As a part of product diversification, its R&D division has developed a novel system for the feeding of raw material to the plastics processing machinery, under the trade name 'NeumaFeed'. A provisional patent application has also been filed. The other product range is 'LECS Robots' for use in conjunction with plastic injection moulding machines, capable of multiple functions. Moreover new products like 4 pole contactors up to 120 A, Autoswitch, ATS Controller etc have been introduced. Company has also installed 1.25 MW wind power plant for tax benefits.

Importantly, LECSL has a wholly owned profit making subsidiary called Harshini Textiles, which is into manufacturing of yarn and has a factory in Coimbatore with an installed capacity of 25200 spindles. It is in the midst of expansion to double its capacity to 50400 spindles. Besides, LECSL also owns 88,800 shares of Lakshmi Machine Works Ltd which at the CMP of 2650/- works out to whopping 23.50 cr. Whereas the whole market cap of LECSL is merely 60 cr. Company is coming out with its result on 31st May and it may end FY07 with sales of 68 cr and NP of 7.75 cr. Due to very tiny equity of 2.46 cr this translates into EPS of 32 Rs on a standalone basis and on a consolidated basis it can report 42 Rs EPS. Considering the rising demand of switchgear and control panels for the power and industrial applications, company is estimated to report sales of 80 cr and profit 9.25 for FY08 ie EPS of 38 Rs on standalone basis and 50 Rs including Harshini Textile earnings. Investors are strongly recommended to buy at current levels as share price can double in 15~18 months.

Stock Watch

Offlate, steel scrips have made a smart recovery and share price of companies like SAIL, Tata Steel, JSW etc are near its 52W high. On the other hand small cap steel scrips like Modern Steel haven’t rallied at all. The company is primarily engaged in manufacturing of special and alloy steel, stainless steel and bright bars. For FY07 although its topline grew by 15% to 276 cr but due to lower margin NP declined by 35% to 7.30 cr registering an EPS of 15 Rs on small equity of 4.80 cr. However for future growth company is enhacing the melting capacity from 1,00,000 to 2,27,000 MTPA and rolling capacity will be increased from 50,000 MTPA to 1,54,000 MTPA. Assuming that company maintains its OPM of 7%, it may end FY08 with sales of more than 300 cr and NP of atleast 8.50 cr on a conservative basis. This means EPS of 18 Rs on current equity. At CMP, company is available fairly cheap at an enterprise value of 100 cr.

Deepak Fertlizer has once again come out with good set of nos for the March quarter. Its turnover grew by 25% to 211 cr whereas PBT shot up by 85% to 39 cr. However due to extraordinary income of 13 cr in Mar’06 the NP stood almost flat at 28 cr. On a full year basis it recorded sales of 833 cr (up 50%) and NP of 93 cr (up 17%) which led to an EPS of 10.50 Rs on equity of 88.20 cr. Last year company commissioned its 70000 TPA Iso Propyl Alcohol (IPA) plant thereby becoming the only producer of IPA in India. Secondly company is setting up a greenfield integrated complex for nitric acid and ammonium nitrate at Paradip in Orissa which is expected to complete by 2009-10. Besides it is establishing Ammonia storage with 15000 MT capacity at Nhava Sheva port near Mumbai. Meanwhile, it has leased over 75% space of Ishanya, its design centre and speciality mall, to segment leaders in retail. Also company is in the process of securing additional supply of natural gas from other sources which will improve its capacity utilization and margin going forward. With an expected EPS of 12 Rs for FY08, share price can appreciate to 120 Rs in medium term.

Recently, Gonterman pipers one of the leading manufacturers of cast rolls and forged rolls announeced encouraging result for the March quarter. Sales grew by 25% to 41 cr whereas PBT increased by 145% to 6.90 cr compare to 2.80 cr last fiscal. After making tax provision of whopping 3 cr the NP stood at 3.90 cr ie EPS of nearly 3 Rs for the quarter. For the entire FY07 it recorded net sales and NP of 148 and 12.20 cr respectively. This translates into EPS of 9 Rs on equity of 13.90 cr. Notably, company’s OPM improved substantially to 22% against 17% last year. With domestic as well international steel industry adding capacity at fast pace, company is implementing expansion-cum-modernization plan of Rs.40 cr. to enhance its production capcity to 18,000 MT of fininshed roll from 12,000 MT. However for FY08 company is estimated to report sales of 175 cr and NP of 17 cr which works out to an EPS of 12 Rs on current equity. Secondly company has revalued its assets in FY07 which will boost its book value to the extent of 30 Rs per share. Scrip can give 50% return within a year.

Indo Tech Transformers is one of the leading manufacturers of power and distribuition transformer based in south India. For the March quarter it recorded 80% growth in sales to 57 cr and NP jumped up 160% to 10.30 cr registering qtrly EPS of almost 10 Rs. Ironically it reported an all time high OPM of 27% against 13% last year. For the full year its revenue increased by 70% to 156 cr and PAT shot up by 130% to 25.50 cr ie EPS of 24 Rs on equity of 10.62 cr. The present order book of the compony is around 150 cr and is expected to shoot up as company has bid for 350¬400 cr worth of tenders. Moreover its new power transformer plant at Kancheepuram with a capacity of 4000 MVA is expected to go on stream from Aug 2007. Meanwhile its Dry type transformer plant at Thirumazhisai with an installed capacity of 100 MVA is expected to commence operation shortly. Consrdering all the factor it is estimated to clock a turnover of 225 and profit of 34 cr for FY08 ie EPS of 32 Rs. Buy only at sharp declines.

Flat Products - 302.00 Rs

Established in 1978 and promoted by Mr. T. R. Mehta, Flat Products Equipment Ltd. (FPEL) is the only company in India having capabilities for designing, fabrication and installation of cold rolling mills. Cold Rolling Mill is the equipment required to convert hot rolled sheets into cold rolled sheets. Hence, FPEL enjoys a virtual monopoly in India while competing globally with players like Kawasaki & Hitachi (Japan), Siemens & SMS (Germany), DMS (France) and CMI Belgium. Presently, the company derives major revenue from metal cold rolling mills, galvanizing lines and corrugating machines apart from specialisation in other downstream processing mills and auxiliary equipments like skin pass mills, aluminum strip and foil mills, colour coating mills, tension leveling lines, mill automation equipments, metal processing lines, slitting and pickling lines etc. In fact, the company provides twenty solutions to ferrous and non-ferrous metal processing industry with its unique strength, state-of-the-art equipment building, process technology and project management capabilities.

The company has two units - one at Taloja Industrial Area, Maharashtra and the other in Silvassa, Union Territory of Dadra & Nagar Haveli. At present, the company has collaborations with T. Sendzimir as well as Bliss Salem, USA, for manufacture of cold rolling mills, with Achenbach Buschutten, Germany, for manufacture of aluminium strip and foil mills with Redex of France for manufacture of stretch levelling equipment and with Durmech Engineering, UK, for paint coating lines. Notably, all its collaborators are world leaders in their respective fields. Due to the huge market, FPEL has been concentrating on exports since the last few years and has made its presence felt in USA, Mexico, Europe, China, Korea, Malaysia, Morrocco, Turkey, Colombia, Bangladesh, Egypt, Kenya, Iran, UAE, Vietnam, Japan, Ethiopia etc. With steel and metal producers expanding aggressively worldwide including India, the company has huge order flows especially for exports. In fact its current order in hand position stands at a whopping Rs.1000 cr, which gives it a strong revenue visibility.

Earlier in 2003 & 2004, FPEL was doing well with an operating margin of 9-10% but due to sharp rise in raw material costs and with no escalation clause signed with customers, its margin fell substantially to 3-4% for 2005 and 2006. However the worst is over now and the company is executing contracts with better margins and with an escalation clause. Thus for March’07 quarter,it reported sales of Rs.234 cr. which was tad lower to entire FY06 sales of Rs.286 cr. Importantly, it made a strong turnaround by reporting an OPM of more than 8% after quite a long time. After tax provisioning of around Rs.6 cr. its net profit stood at Rs.12 cr. i.e. whopping EPS of Rs.25 for just one quarter. For full FY07, sales grew by 80% to Rs.511 cr. and net profit multiplied 7 times to around Rs.16 cr. i.e. EPS of Rs.32 on its tiny equity of Rs.4.94 cr. Assuming that FPEL has already turned around, it may clock a turnover of Rs.700 cr. with PAT of Rs.25 cr. for FY08. This translates into an EPS of Rs.50 on its current equity. However, with exports contributing to more than 70% of its total revenue, the sharp appreciation of the rupee is cause of concern. Still investors can buy the scrip at current levels as it has the potential to give handsome returns in medium to long-term.