ABC Bearings Ltd - 100.00 Rs

Founded in 1961, ABC Bearings Ltd (ABL) is one of the oldest bearing companies engaged in manufacturing of taper roller bearing, cylindrical roller bearing and spherical roller bearing. Infact it is India’s largest producer of taper roller bearing and third largest for cylindrical roller bearing after FAG and NRB. Roller bearings basically find application in light, medium & heavy commercial vehicle, multi utility vehicles, tractors, cars, two wheelers, three wheelers etc. In short the whole automotive sector is the main consumer of roller bearings. Hence company’s clientele includes auto majors like Tata Motors, M&M, Ashok Leyland, Eicher Motors, Swaraj Mazda etc. Ironically, ABL is the single source supplier for transmission bearings for Toyota group of companies for exports. As bearings are precision products requiring sophisticated machinery, intensive technology & skill requirements, ABL entered into a technical collaboration in 1998 with NSK of Japan, which is one of the world’s largest bearing manufacturers. Today, ABL boast of following SAP ERP system and having ISO 14001:2004, QS 9000, TS 16949 certification.

After closing down its Lonavala plant in 2005, ABL has consolidated its manufacturing operation at its new Bharuch plant in Gujarat. The plant is having NC / CNC grinding lines from world renowned manufacturers like BWF- Germany, Famir – Italy, IZUMI-Japan and is equipped with “in process & post process gauging”, logarithmic crowning units which ensures consistent quality and high productivity. ABL is even backward integrated thru its associate company called ‘MIPCO Seamless Rings Ltd’ which produces the forging for most of the bearings manufactured by the company. Currently company has a total installed capacity of 6.5 million bearings per annum which will be soon enhanced to 8.00 million thru the ongoing expansion plan. Due to stiff competition and in order to reduce its dependence on OEM’s, company is planning to increase its business from the replacement market as well. It has a strong distribution and service network of nine warehouses, 168 dealers, 1000 retailers and four regional offices. Although negligible still company directly exports to countries like USA, USA, Canada, Dubai, Italy, Singapore, Bangladesh, Srilanka, Indonesia etc.

Notably, few months back company has formed a 25% joint venture with NSK Ltd., Japan to set up a new plant in Chennai for manufacturing of bearings mainly for Japanese and other transplant customers. For future growth, ABL also intends to enter the railway bearing segment and supply wheel bearings for freight wagons. For FY07, it registered 20% rise in sales to 182 cr whereas net profit increased by 30% to 20 cr posting an EPS of 17 Rs on equity of 11.55 cr against which it gave 40% dividend. This is after providing extraordinary expense of 4.30 cr towards VRS, else in actual sense the NP stands at 24 cr i.e. EPS of 21 Rs. However, due to slowdown in auto sector company’s sales declined by 25% to 36 cr whereas profit dropped by 40% to 3.10 cr for the first quarter of FY08. Hence the share price tumbled sharply from 150 Rs to current levels of around 100 Rs. Still for FY08 it is expected to report sales of 175 cr and PAT of 16.50 cr (after VRS provisioning). This translates into EPS of 14 Rs on current equity. Notably, there won’t be any VRS provisioning from FY09. At current market cap of around 120 cr it’s a pure value buy. Moreover as per unconfirmed reports, ABL is having a surplus land of around 18 acres in Lonavala which can fetch around 5~10 crore. Only long term investors are recommended to buy at current levels as share price can double in 15~18 months.

STOCK WATCH

Tera software (75.00) is one of the leading e-governance solution providers, undertaking data entry/scanning works for digitization of information maintained under Right to Information Act. It also undertakes short-term projects like issue of photo ID cards, ration cards and election commission cards. In consortium with Electronics Corporation of India Ltd, company has bagged huge e-governance order, taking its total order book position to around 250 crore to be executed in next five years. For the June qtr its revenue increased by 50% to 15 cr whereas net profit shot up 70% to 3.25 cr. Notably, company derives 100% of its revenues from the domestic markets, hence it is totally unaffected by the recent rupee appreciation against US dollar. For FY08 it is estimated to report total revenue of 80 cr and PAT of 15 cr i.e. EPS of 12 Rs on equity of 12.50 cr. Moreover company also has few acres of surplus land in Hyderabad, which it plans to either sell or enter into JV with infrastructure company. Share price has the potential to cross 100 Rs in 6 months or so.

Ansal Buildwell (76.00), flagship company of the high profile Ansal Group is well known for developing shopping complex, malls, residential township, row houses, sky scrappers, corporate offices etc. Currently, it has various residential and commercial projects going on at Gurgaon and Amritsar. Notably, it has good land bank in Amritsar, Jaipur, Panipat, Faridabad and Jhansi. Recently it has acquired around 35 acres of land at Kochi for development of plots, villas and town houses. In near future company is planning to construct multi storeyed group housing society in Faridabad. Incidentally, it is also engaged in couple of hi-tech engineering projects. For the June qtr its topline grew by 30% to 28 cr but its PAT shot up 70% to 1.80 cr. Accordingly for full year it is expected to clock a turnover of 150 cr and profit of 10 cr. This translates into EPS of 14 Rs on current equity of 7.40 cr. Being available at 52 week low; this is one of the safest scrip and is bound to cross 100 mark in 6 months.

El forge (60.00) manufactures carbon, alloy and stainless steel forged components which are mainly used to manufacture engine parts, transmission parts, steering and suspension parts, break assembly parts, chassis parts, drive line and electrical parts. To move up the value chain, company is gradually shifting its product mix to machined components which have comparatively higher margins than forged products. Hence, it has recently put up a machine shop facility at Chromepet, especially for MICO. Moreover it is also setting up a world class manufacturing facility at Sriperambadur near Chennai which is expected to start commercial production shortly and will enhance the capacity to 23200 MTPA from 18200 MTPA. To fund this expansion company raised around 15 cr last year thru pref allotment of 12.15 lakh shares @ 120 Rs per share. Against this, today it is available at massive 50% discount. It reported decent nos for the June quarter and is expected to end FY08 with consolidated sales of 185 cr and profit of 10.50 cr which works out to an EPS of 12 Rs on diluted equity of 8.80 cr. Ironically, the scrip is trading at its 52 week low giving good margin of safety and can give 50% return in 9~12 months.

Orient Paper & Industries (430.00), flagship company of the renowned CK Birla Group is a diversified company having interest in papers, cement and electric fans with cement being the major profit centre. To cater the increasing cement demand, company is implementing aggressive expansion plan which will enhance its cement capacity from 2.4 million to 3.4 million TPA in the current year and subsequently to 5 million by 2008-09. Besides, it is putting up a 50 MW captive power plant for increased capacity. On the back of robust demand, company is augmenting its paper as well as electric fan manufacturing capacity also. For the June’07 qtr it recorded 13% rise in sales to 293 cr but NP jumped up by 75% to 44.50 cr posting an EPS of 30 Rs for the qtr. With the cement division doing exceptionally well, it may clock a turnover of 1250 cr and PAT of 165 cr for FY08. This leads to an EPS of 86 Rs on expanded equity of 19.29 cr. Interestingly; company is having huge surplus land in Orissa which is estimated to fetch approx 150 cr, if sold. Share price can easily appreciate 25~30% in 12 months.

Uni Abex Alloys (110.00) is engaged in manufacturing centrifugual-casting alloy thereby catering to core sector industries like petroleum, petrochemical, fertilizer, iron & steel, manufacturers of decanters, valves, heat-treatment plants, galvanizing plants and engineering industries. For the June qtr it recorded 60% growth in sales to 13.90 cr whereas its profit increased by only 20% to 0.95 cr due to lower other income. However on the positive side, company has been reporting very healthy margins from the last two quarter despite the sharp appreciation in rupee. Offlate company has been putting more thrust on exports due to higher margins and is expected to derive nearly 50% of revenue from it. On the back of 100% capacity utilization and higher operating margin it is expected to report a topline of 70 cr and bottomline of 5.50 cr. This works out to an EPS of 28 Rs on tiny equity of 1.98 cr. At a reasonable discounting by 5x times share price has the potentail to cross 150 Rs. Accumulate at declines.

El Forge Ltd - 58.00 Rs

Incorporated in 1934, El Forge Ltd (EFL) is one of the leading forging manufacturers in south India with over 40 years of experience in metal forming. It manufactures and markets carbon, alloy and stainless steel forged components for the automotive and process industries. The product range includes press forgings, upset forgings, drop forging etc which are mainly used to manufacture engine parts, transmission parts, steering and suspension parts, break assembly parts, chassis parts, drive line and electrical parts. It supplies both - forging and machining components to OEMs like Ashok Leyland, MICO, Bosch, Rane TRW, Sundaram Clayton, Lucas TVS, & Toyota. Besides, more than 25% of production is exported to countries like USA, UK, Germany etc.

EFL has four manufacturing facilities, one each at Chromepet, Gummudipundi and Thurapakkam in Chennai and one at Hosur in Tamil Nadu with total installed capacity as 18,200 MTPA. In order to become a leading global forging supplier, company is setting up a world class manufacturing facility at Appur Village, Sriperambadur near Chennai. Till now company has already invested 40 cr for this expansion and the plant is expected to start commercial production shortly. With this its manufacturing capacity will get enhanced to 23,200 MTPA. Meanwhile, EFL intends to move up the value chain by shifting its focus to machined components, which offers relatively higher margins than forged products. The company estimates to raise the share of machined components to 50% of its revenues in the next three to four years from the current 20%. To achieve this, company has set up a machine shop facility at Chromepet, especially for MICO with whom it has 30 years of relationship and derives 20% of its total revenue from it. On the other hand, company is approaching consumers of forgings in UK and Germany through its UK subsidiary company namely Shakespeare Forgings and has also been visited and audited by these European Companies. Hence its export business is expected to get a huge fillip in coming years.

On a consolidated basis EFL recorded sales of 141 cr and PAT of 7.85 cr which translates into EPS of 9 Rs on current equity of 8.50 cr. Company declared 14% dividend against 12.50% last year and the scrip is still trading cum-dividend. Last year, to fund its expansion plan, ELF raised around 15 cr thru private placement of 12.15 lakh equity shares @ 120 Rs per share. It also issued 3 lakh share warrants to promoters to be converted @ 132 Rs per share. To conclude, with revenues kicking in from new plant and higher export shipment, company is expected to end FY08 with sales of 185 cr and PAT of 10.50 cr on consolidated basis. This works out an EPS of 12 Rs on fully diluted equity of 8.80 cr. Despite such strong fundamentals, scrip is hitting new 52 week lows. Hence investors are strongly recommended to buy at current levels with an expectation of 50% return in 12 months.

Accurate Transformers Ltd - 127.00 Rs

Incorporated in 1988, Accurate Transformers Ltd (ATL) is the flagship company of the Delhi based Accurate group which has diversified interest in transformers, overhead line conductors, energy meters, insulating oils & chemicals. However ATL is engaged in manufacturing of power as wells as distribution transformers ranging from 25 KVA to 50,000 KVA in upto 220 KV class. These transformers are mainly supplied to various State Electricity Boards including those of Uttar Pradesh, Rajasthan, Punjab, Maharashtra and West Bengal on a made-to-order basis. As its transformers are in operation for years, the quality and reliability of company’s products is well established. Interestingly, ATL also carries out rural electrification project which involves the complete setting up of electricity in remote areas including the laying of lines, poles and substations. It has already implemented two such projects one at Etah district of Uttar Pradesh and another at Nainital District of Uttaranchal. With nearly 50% revenue coming from this segment, ATL’s business model is reasonably de-risked.

Being a nearly two decade old company, ATL has set up huge manufacturing facilities spread across Ghaziabad, Sikandrabad, Greater Noida, Dehradun & Haridwar. Although these plants are not equipped with latest hi-technological equipments, still it has a total installed capacity of more than 8000 MVA, which is quite huge. Unfortunately, due to mounting debtors and shortage of funds company has been working at very low capacity utilization. Hence it has ample scope to ramp up its operation provided it manages to get sufficient money as working capital. To overcome this situation, ATL is planning to raise more than around 10 cr thru preferential placement of equity shares to promoters and strategic investor. Moreover to cash on the infrastructure boom, ATL has taken forward steps in the business of rural electrification being upcoming and thrust area under the Rajeev Gandhi development program of the central government. Besides, it wants to further diversify in energy sector and has ambitious plans of venturing into power generation & distribution in future.

The government’s rural electrification initiatives such as APDRP, Power for all by 2012 program, restructuring of SEBs, entry of the private sector into the transmission and distribution segment etc, all these have led to substantial jump in demand of transformers. Accordingly, ATL also recorded 20% growth in sales to 180 cr and 40% rise in profit to 6 cr for FY07. Hence it reported an EPS of 20 Rs on tiny equity of 2.96 cr. Notably, ATL is earning very low profit margin compare to its peers and has scope of improving its margin in future. For the June ’07 quarter, sales increased by 40% to 26 cr but NP zoomed up 170% to 1.50 cr on back of higher margin at operating level. For FY08, company is estimated to report a turnover of 225 cr and PAT of 8 cr i.e. EPS of 27 Rs on current equity. This means the scrip is currently trading at P/E ratio of less than 5x times. However, the promoters don’t have a good track record and the scrip was de-listed due to non-compliance of provisions of the listing agreement. Secondly, they are making placement at low price which is against the shareholders interest. Despite all these concerns, the fact remain that company is operating in high growth sector and has enormous opportunity to grow leaps and bounds. Moreover, at an enterprise value of 55 cr, a company of this size is available fairly cheap. Investors are recommended to buy at current levels with a price target of 180/- Rs (i.e. 40% appreciation) in 9~12 months.

STOCK WATCH

Kamanwala Housing Construction Ltd (96.00) is engaged in real estate development of both residential as well as commercial property. It concentrates mainly in Mumbai city and is carrying out various residential projects at Andheri-E, Malad-W, Santacruz-W, Charni Road-E etc. Under commercial segment, it is developing ‘Pinnacle Corporate Park’ admeasuring 75,000 sq ft at Bandra Kurla complex apart from 1,00,000 sq ft residential cum commercial project at Versova, Andheri-W. On the back of booming real estate industry it made a strong turnaround for FY07 with sales of 83 cr (against 11 cr) and NP of 13 cr (against 0.50 cr). Moreover, it has also purchased two acre plot in Hyderabad and is developing another 35 acre land in joint venture with Prajay Syndicate. To fund its working capital requirement, it made pref allotment of 15.84 lakh equity shares and 19.95 lakh warrants @ 98 Rs per share in Dec 2006. Meanwhile, company has reported encouraging nos for the June qtr as well and is expected to end FY08 with topline of approx 125 cr and bottomline of 16 cr. This works out to an EPS of 25 Rs on fully diluted equity of 6.50 cr. Although its profit margin seems too high and company has a debt of more than 50 cr, still it has the potential to give 50% returns in a year’s time. Buy at sharp dips.

Ironically, Flat Products (312.00) is the only company in India having capabilities for designing, fabrication and installation of cold rolling mills, galvanizing lines and corrugating machines. It provides twenty different 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. Due to sharp rise in raw material cost and no escalation clause, its profit margin fell substantially in FY05 and FY06. But now the company is back on track and with steel & metal producers expanding aggressively worldwide including India, its order book is bulging constantly. For the June’07 quarter its sales jumped up 70% to 105 cr whereas NP shot up to 4.90 cr against 0.75 cr last year. Importantly, company has reported healthy OPM of 8~9% for the last two quarters. Hence, assuming it to clock 8% operating margin for FY08 it may report sales of 600 cr and PAT of 25 cr. This translates into EPS of 50 Rs on small equity of 4.94 cr. Secondly having a book value of around 170 Rs, scrip is ripe for bonus as well.

Pricol Ltd (27.00) is the largest manufacturer of dashboard instruments in India with nearly 80% market share. Infact it is a global supplier of automotive systems and component offering more than 60 products with over 2,000 variants. Inspite of having five manufacturing facilities across India, company has recently set up a greenfield plant in Pantnagar, Uttarakhand and is further putting up one more facility over there which is expected to commence operation shortly. For better customer service it has opened representative offices in USA and Germany and may also open in Italy soon. Moreover under a joint venture with Nava Khodro, it is setting up an assembly unit in Iran to be operational by end of this fiscal. For FY08, it is expected to clock a turnover of 650 cr and PAT of 35 cr i.e. EPS of approx 4 Rs on equity of 9 cr having face value as 1 Rs per share. Although its debt equity ratio is quite high but at the same time its gross block stands at whopping 395 cr. Due to some labour unrest at its Coimbatore factories, the share price has been beaten down to 52week low. Long term investors should take this opportunity and start accumulating at dips for a price target of 35 Rs in 12 months.

Shree Hari Chemicals (35.00) made a strong turnaround in FY07 with its operating margin shooting up to 15% against 6% in FY06 on back of higher price realization and better operating efficiency. It is one of the reputed manufactures and exporters of dyes and intermediaries and produces reactive, acid as well as direct dyes and a wide range of dye intermediaries like H-acid, Gama acid, Peri acid, vinyl suplhone etc. For the latest June’07 quarter its sales jumped up 40% to 16 cr and NP increased to 1.00 cr in comparison to 0.20 cr last year. On a very conservative basis also it is expected to clock a turnover of 75 cr and NP of 3.75 cr i.e. EPS of more than 8 Rs on equity of 4.50 cr. Importantly, company has decided to declare a maiden dividend for FY07 and is also planning to raise capital thru preferential allotment which may lead to re-rating of the scrip. At the current market cap of 16 cr, scrip is trading reasonably cheap and can give handsome return in medium term.