Sunil Hitech Engineers Ltd - Rs 75.00

Incorporated in 1998, Sunil Hitech Engineers Ltd (SHEL) is engaged in the niche segment of fabrication, erection & testing and commissioning of coal handling plants and ash handling plants, bunkers, turbine hall generator buildings and erection, testing and commissioning of boilers and auxiliaries like Electro Static Precipitator (ESP) both in private & public sector. Thus, it is one of the very few engineering turnkey service provider which is tightly focused in the ever growing power sector. Lately it started construction of steel plant as well. So company basically receives the orders for the construction of thermal, hydro and captive power plants and major steel plants. It executes the order, supplies the labour and materials, construct the plant, install the plant, conduct the testings and handover the plant in working condition to the customer. It is also engaged in overhauling and maintenance of the plants to ensure the proper functioning of the plant post installation. Broadly, power plants need three essential components namely boiler, turbine and generator along with a range of other electrical, mechanical ontrol and instrumentation systems and civil buildings to become a complete power plant. These other components comprise the Balance of Plant (BOP) package. And SHEL has expertise in critical and difficult boiler erection works up to 500 MW and is amongst the handful companies prequalified to undertake BOP packages up to 660 MW. Besides, in transmission and distribution business SHEL takes up erection of EHV transmission lines & substations of 132 kV, 200 kV & 400 kV. It also has experience of working with foreign EPC players like SEPCO China and Skoda Exports.

Importantly, SHEL has an impressive order book position of nearly Rs 1300 crore out of which more than 90% are the BOP jobs within the power sector. However this also includes EPC contract of Rs 329 crore received from one of promoters group company engaged in power generation. Secondly, around 30% of the order book constitutes government orders whereas balance 70% is from private players. Apart from above, company is L1 bidder for another Rs 500 crore of orders, which will keep its order book ticking. With presence in states like Madhya Pradesh, Uttar Pradesh, Maharashtra, Tamil Nadu and Haryana till now SHEL has already worked on projects of 9,850 MW and is currently working on projects in one way or another in excess of 20,000 MW. Being a preferred supplier, company has a long list of clientele including majors like NTPC, BHEL, MSPGC, Reliance group, Jindal group, Sterlite, Hindalco, Tata Power, L&T, Punj Lloyd and various state electricity boards apart from couple of clients in China and USA. Thru its subsidiary, SHEL has a production facility for boiler pressure parts in Nagpur where it manufactures coils like reheater, economizer, LTSH, water wall panels and pressure part like bends and reducers used in boilers up to 500 MW. Having received accreditation for the products from various electricity boards, it now competes with the likes of BHEL and Alstom in the segment. After this backward integration, company in future intends to take up complete power plant projects on EPC basis mainly in the range of 5MW to 60 MW.

On the macro front, government has set an ambitious target of providing ‘Power for All’ during the Eleventh Plan. Thus, in order to achieve this goal about 100,000 MW of fresh capacity addition is targeted by 2012. Additionally, 36,000 MW is expected to be added by nine Ultra Mega Power Projects (UMPP). SHEL has already made a joint bid for the BOP work for the Mundra UMPP. Besides it is also contemplating to bid for UMPP awarded to Reliance Energy and Tata Power. Incidentally, each UMPP (of 4000 MW) has potential BOP work of around Rs 640 crore. This stands to be huge untapped opportunity for SHEL. Secondly, massive investment for upgradation of old power plants in addition to power sector reforms would continue to create enormous business opportunities for the company as it has presence across the entire power supply chain from power generation to power transmission and distribution. In order to meet the increased working capital requirements for larger BOP works, SHEL has already raised Rs 81 cr by placement of 22.50 lakh shares at Rs 360 per share thru QIP route during Jan’08. Earlier in Nov’07 it also made a preferential allotment of 38 lac warrants to be converted into equity @ Rs 146 per share before April’09. However, considering the CMP the warrant holder may not opt for conversion.

Financially, SHEL is doing exceedingly well and has doubled its topline to Rs 242 cr with 60% rise in PAT to Rs 13.70 for H1FY09. Favorably, company has an under leveraged balance sheet with a low debt equity ratio of 0.60x times and hence can raise more debt comfortably. So despite taking into consideration higher interest cost it may end FY09 with a topline of Rs 500 cr and PAT of Rs 20 on conservative basis. This translates into EPS of Rs 16 on current equity of Rs 12.30 cr. Secondly it has huge reserves to the tune of Rs 145 cr on small equity leading to a healthy book value of Rs 128. Against the net current assets of Rs 120 cr, company is currently available at a market cap of less than Rs 100 cr. Although company may see less order inflow coupled with lower margin, still it qualifies a decent buy at current levels. Long term investors can buy safely as scrip can easily appreciate 50% in 12~15 months.

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STOCK WATCH

At the time when most of the auto ancillary companies are reeling under pressure, Hi-tech Gears (45.00) is constantly churning out encouraging performance quarter after quarter. For the Sept’08 qtr it registered 40% rise in sales to Rs 92 cr whereas net profit jumped up 65% to Rs 4 cr posting an EPS of more than Rs 4 for the single quarter. Even for H1FY09, the topline has improved by 25% to Rs 173 cr and bottomline increased by 35% to Rs 7 cr. With its world class manufacturing facilities at Bhiwadi & Manesar, company is one of the leading manufacturer and exporter of gears and engine/transmission components. Last fiscal company revalued one of its lands situated in Gurgaon, Haryana from its cost price of around Rs 1 cr to nearly Rs. 33 cr thereby crediting approx 32 cr to revaluation reserve. For future growth company is targeting to increase its export substantially and may report total revenue of Rs 325 cr and profit of Rs 8.50 on conservative basis for FY09. This translates into EPS of Rs 9 on equity of Rs 9.40 cr. It may again declare 30% dividend for FY09 which gives a yield of whopping 7% at CMP. Having 52W high as Rs 180, scrip has corrected substantially and can easily appreciate 30~50% in a years time.

For the latest Sept’08 quarter, sales of Ind Swift Lab (25.00) increased by 35% to Rs 146 cr and PAT improved by 45% to Rs 10.50 cr. Hence it has already posted a NP of Rs 20.50 for six months ending Sept’08 against a PAT for Rs 31 cr for entire FY08. Notably, company has started exporting to USA in a big way after getting USFDA approval in Sept 2007 for its API manufacturing facility at Derabassi Punjab for Clarithromycin. It is now expecting to get a second USFDA approval in 2009 which will further boost the export revenue. Presently, exports constitute around 40% of sales with company having presence in 45-50 countries across globe. For future growth the company has a robust product pipeline of 25 products which includes few blockbuster drugs as well. It has successfully filed over 72 DMFs with the US, Canadian, UK and European Drug Authorities. Hence company has been aggressively expanding its capacity and has increased the gross block by almost five times to Rs 470 cr from 100 cr in 2005. For FY09 it may report sales of Rs 550 cr and NP of Rs 30 cr i.e. EPS of Rs 11 on diluted equity of Rs 27.50 cr. To fund its growth plan, company made a pref allotment of 28 lac warrants @ Rs 70 in March 2007 and recently allotted another 25 lac warrants @ 70 to promoter group. With a book value of whopping Rs 97 and expected CEPS of 18~20 Rs, scrip is trading relatively cheap at a P/E ratio of less than 2~3x times. Although company has an high debt on its books, still it a good bet at current levels.

Diamond Power infrastructure Ltd (110.00) is a leading manufacturer of transmission & distribution conductors, power & control cables & speciality cables. After the acquisition of Western Transformers in March’07 and Apex Electricals in July’07, company has also ventured into transformer production with installed capacity of 7500 MVA for power transformer and 5000 MVA for distribution transformer. Recently company announced fantastic result for the Sept qtr. It doubled its topline as well as bottomline to Rs 175 cr and 20.80 respectively. Even for six months ending Sept’08 it has registered more than 100% growth in sales to Rs 353 cr and profit to Rs 40 cr. To cater the rising demand and increase it export revenue, company is setting up power equipment park spread across 110 acre in Vadodara which would have manufacturing facilities for 50,500 Mt of conductors, 48000 Mt transmission tower plant, 25,000 kms of LT cables, 3200 kms of HT cables and 3000 kms cables of EHV cables. The park expected to go on stream by Dec 2009, will also have space for setting up 50 ancillary units for power equipment manufacturers. Company has already achieved the financial closure for this 260 cr capex plan. Meanwhile for FY09 it may clock a turnover of Rs 650 cr and PAT of 55 cr i.e. EPS of Rs 31 on current equity of 17.60 cr.

Supreme Infrastructure’s (42.00) core competency lies in construction/widening of roads & highways, but it also undertakes other infrastructure projects like integrated nallah development, drainage work, laying of railway tracks, construction of minor bridges, development of IT Park, residential tower, RCC building, strengthening of sea wall and laying of tetra pods etc. Its area of operation is mainly concentrated in Mumbai region and few parts of Maharashtra & Bangalore with major clients like NHAI, MCGM, MMRDA, MSRDC, MUTP, PWD, BMC, AAI, BPT, TMC and also private agencies like Hiranandani, K. Raheja, Pratibha Ind, BARC, Sadbhav Eng, Mundra Port etc. Importantly, company has its own captive ready mix concrete plant, asphalt mix plant, quarrying and crushing unit & paver block manufacturing unit. For the latest Sept’08 qtr it posted revenue of Rs 66 cr and profit of Rs 6 cr against Rs 18.50 cr & Rs 1.50 cr last year. It has already clocked an EPS of Rs 11 for six month ending Sept’08. To cater the increasing demand for RMC, company is contemplating to almost double its RMC capacity to 300 cum. per hour by adding two new RMC plants in Mumbai and other city. With a massive order in hand of more than Rs 500 cr, it may register a topline of Rs 250 cr and NP of Rs 18 cr. This translates into EPS of Rs 13 on equity of Rs 13.90 cr. At a reasonable P/E multiple of 5x time scrip can appreciate 50% in a years time.

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Ratnamani Metals & Tubes Ltd - Rs 65.00

Established in 1983, Ratnamani Metals & Tubes Ltd (RMTL) has emerged as a multi-product, multi location company providing total piping solutions to a diverse range of industries. Its business can be categorized mainly into two segments — stainless steel tubes & pipes and carbon steel pipes. Under the carbon steel division, company makes high frequency welded (HFW) & electric resistance welded (ERW) pipes apart from manufacturing longitudinal submerged arc welded [L-SAW] pipes & helical submerged arc welded [H-SAW] pipes of large diameter. These pipes are primarily used for continuous transportation of large quantities of oil, natural gas and water over the long distances. On the other hand, its stainless steel division produces seamless and welded tubes and pipes in various grades, conforming to different ASTM and DIN standards. It also manufactures large diameter electric fusion welded (EFW) stainless steel pipes in single long seam upto length of 12 meters. Stainless steel tubes and pipes are typically used in heat exchangers, boilers, condensers, refrigeration, instrumentation, hydraulics, fuel injection, exhaust systems for automobiles apart from being used as general piping for power plants, space application and special piping for nuclear applications. Thus, RMTL mainly caters to the niche markets of emerging sectors like oil & gas, petrochemicals, fertilizer, water distribution, refinery, chemical, power plants, sugar, automobile, food and dairy, paper, pharmaceutical, nuclear, aeronautics, space research centres, atomic energy, ship building, railway coaches etc. About 50% of its turnover comes from oil, gas, petrochemical industry followed by 20% from power and rest from others. It enjoys a large domestic customer base like BHEL, L&T, Reliance Industries, IOCL, HPCL, BPCL, GAIL, Alfa Laval, Alstom Power, NTPC etc. At the same time exports represent 45% of revenue as RMTL is an approved vendor of hydrocarbon majors like Shell, Total, Chevron, Exxon Mobil, Agip KCO, Bechtel, TOYO Eng, Aker Kvaerner, Linde, BASF, Chiyoda, Dow Chemicals, BTT France etc.

RMTL has two state-of-the-art manufacturing plants at Chhatral and Kutch in Gujarat having total installed capacity of 19000 MTPA for stainless steel and 300,000 MTPA for carbon steel. However last fiscal the capacity utilization for stainless steel segment remained at 70% and for carbon steel segment stood at 30%. Remarkably, RTML meets its 100% power requirement from its own 24 windmills generating 20.54 MW of green power. It has also got itself partly backward integrated by establishing hot extrusion line which has reduced its dependence on imported material to some extent. Apart from above units, company operates two mobile plants for making large diameter SAW pipes at the customer’s site. These plants can be dismantled and re-erected within a short span and can produce pipes having diameter in excess of 36” NB upto 135” NB in various thicknesses depending upon the project requirements. As a part of forward integration, RTML has recently set up a 3 layer polyethylene and epoxy coating line with capacity of 2.7 million sq mtrs. To maintain its growth momentum it has also expanded its SS welded tube capacity by 3000 MTPA and is in the process of doubling its H-SAW pipe capacity by 100,000 MTPA thru Brownfield expansion in two phases. Post expansion, its production capacity for stainless steel will stand increased to 22000 MTPA and that of carbon steel to 400,000 MTPA. Company has also developed titanium tubes for application in power industry to begin with which will be later on extended to cover aerospace, defense, water desalination, etc. Further, company has outlined capex of Rs 90 cr in FY10, which includes setting up large diameter and higher thickness stainless steel welded pipe plant with capacity of 1500 MTPA and re-organisation of the existing plant at Chhatral.

As of now RTML has a decent order book of more than Rs 500 cr to be executed over the next 6~9 months. Out of these 50% order is for carbon steel and 50% for stainless steel division. And moreover only 20% is export order with rest 80% to be supplied locally. Incidentally, the demand for pipes is expected to remain strong for next 3~5 years due to committed investment in power as well as oil & gas exploration and production sectors. Besides, sizable demand is also anticipated from replacement of old pipes. In Sept 2007, to fund its expansion plan company made a pref allotment of 4.50 lac warrants to be convertible @ Rs 950 (FV Rs 10/-) per share. But looking at the CMP, the conversion may not take place hence no equity dilution is expected in near future. Financially, for FY08 it recorded 50% growth in sales to Rs 845 cr and 40% increase in PAT to Rs 90 cr despite taking a hit of Rs 27.50 cr due to M2M losses on derivative instruments. For H1FY09, its sales improved by 25% to Rs 498 cr but net profit remained flat at Rs 49 cr. However company didn’t make provisions for notional forex loss, else its NP would have been lower by approx Rs 10 cr. Meanwhile, the recent fall in the steel and other commodity prices will relieve some pressure on its operating margin thereby having a positive impact on company’s bottomline. So taking everything into consideration, RTML is estimated to end FY09 with sales of Rs 1000 cr and profit after tax of Rs 80 cr leading to an EPS of Rs 18 on equity of Rs 9 cr having face value as Rs 2/- per share. Although company recently did a stock split but since its having huge reserves of more than Rs 200 cr on such a small equity and being in the 25th year of operation, it may declare a liberal bonus to cheer the shareholders. Hence investors are strongly recommended to accumulate this scrip at declines for a price target of Rs 110 in 15 months.

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Small & Beautiful

Last week, Accurate Transformers (30.00) came out with very encouraging set of nos. Although its sales declined marginally by 5% to Rs 32 cr but its operating profit shot up 60% to Rs 5.50 cr. Remarkably, its OPM improved substantially to 16% this quarter against 10% last year. However due to higher interest cost, PAT increased by 25% to Rs 1.40 cr thereby posting an EPS of almost Rs 5 for the qtr. Company is engaged in manufacturing of power as well as distribution transformers ranging from 1 MVA to 40 MVA - in up to 220 KV class. It is looking to venture into manufacturing of higher capacity power Transformers of 160 MVA from FY10. It 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. Unfortunately company is working at very low capacity utilization due to high working capital requirement and shortage of funds. Despite this it can clock sales of Rs 200 cr and PAT of Rs 6 for FY09 leading to an EPS of Rs 20 on a very tiny equity of Rs 2.96 cr. It’s a steal at current market cap of merely Rs 9 cr.

At the time when most of the auto ancillary companies are reeling under pressure, Hi-tech Gears (45.00) is constantly churning out encouraging performance quarter after quarter. For the Sept’08 qtr it registered 40% rise in sales to Rs 92 cr whereas net profit jumped up 65% to Rs 4 cr posting an EPS of more than Rs 4 for the single quarter. Even for H1FY09, the topline has improved by 25% to Rs 173 cr and bottomline increased by 35% to Rs 7 cr. With its world class manufacturing facilities at Bhiwadi & Manesar, company is one of the leading manufacturer and exporter of gears and engine/transmission components. Last fiscal company revalued one of its lands situated in Gurgaon, Haryana from its cost price of around Rs 1 cr to nearly Rs. 33 cr thereby crediting approx 32 cr to revaluation reserve. For future growth company is targeting to increase its export substantially and may report total revenue of Rs 325 cr and profit of Rs 8.50 on conservative basis for FY09. This translates into EPS of Rs 9 on equity of Rs 9.40 cr. It may again declare 30% dividend for FY09 which gives a yield of whopping 7% at CMP. Having 52W high as Rs 180, scrip has corrected substantially and can easily appreciate 30~50% in a years time.

Recently, Vivimed Labs (48.00) has reported terrific nos on a standalone basis for the Sept’08 qtr. Its net profit more than doubled to Rs 7.75 cr on 10% higher sales of Rs 44 cr. The OPM for the qtr shot up to 28% in comparison to 19% last quarter. Moreover on the consolidated basis its sales and profit stood at Rs 133 cr and 11.70 cr respectively for H1FY09. However its not clear whether company has re-stated the FCCB amount and made provisions for notional forex loss. Anyway, company is a speciality chemical manufacturer catering to segments including oral care, sun care, skin care, hair care, natural extracts, preservatives, anti microbial, anti oxidants, anti-aging molecule etc. Infact it is world’s 2nd largest manufacturer of Triclosan - an antibacterial used for oral care and one of the top three companies for Avis – a chemical which improves UV absorbing ability of Sunscreen. Few months ago it acquired 100% stake in M/s James Robinson,UK which is an international manufacturer and supplier of speciality chemicals used in hair dyes, pharmaceuticals and photographic films/prints to ophthalmic sunglasses. Organically as well company has been expanding its capacity and has chalked out Greenfield expansion plan in Uttaranchal and Hyderabad. Looking at the CMP, its 60 cr FCCB may not get converted into equity, hence no equity dilution is expected in near future. For FY09 it is slated to report consolidated sales of more than Rs 225 cr and net profit of Rs 17 cr. This leads to an EPS of Rs 18 on current equity of Rs 9.40 cr. A safe bet.

Bharat Gears (30.00) has once again declared excellent result for the Sept’08 qtr. Sales grew by 30% to Rs 74 cr whereas NP shot up 120% to Rs 2.90 cr. Accordingly it has already earned a PAT of 6 cr on sales of 140 cr for H1FY09 against profit of Rs 2.50 cr on sales of Rs 108 cr for H1FY08. Company manufactures a wide range of ring gears and pinions, transmission gears and shafts, differential gears, gear boxes etc which find application in heavy, medium and light duty trucks, buses, tractors, passenger cars, utility vehicles, and forklift trucks, etc. After a gap of 7 years it again became a dividend paying company be giving 10% dividend for FY08. More importantly it has successfully brought its total debt to Rs 50 cr from Rs 80 cr in FY05. However the share price has tumbled down sharply in the recent meltdown and is now become one third from its high of Rs 90 in Jan’08. Despite the slowdown in auto sector, company may report sales of Rs 250 cr and net profit of Rs 10 cr for FY09. This works out to an EPS of Rs 13 on equity of Rs 7.80 cr. With a healthy book value of Rs 46, scrip is trading fairly cheap at an EV of hardly Rs 75 cr and P/E multiple of less than 3x times. Only aggressive investors are advised to accumulate at declines.