GM Breweries Ltd - Rs 50.00

Promoted by Mr. Jimmy Almeida, GM Breweries (GMBL) was incorporated in 1981 to manufacture alcoholic liquor. Since then it has emerged as the single largest manufacturer of country liquor in Maharashtra and enjoys virtual monopoly in the districts of Mumbai and Thane. Earlier, it also used to make and market Indian made foreign liquor (IMFL) like brandy, rum, whisky etc as Pioneer Special Doctor Brandy, Hot Shot Rum and Reporter’s Choice Whisky but due to competitive market conditions, it has been concentrating on country liquor for the past few years. Its country liquor brands like GM Doctor, Tango and Punch are fast-selling and quite popular brands. However, the country liquor industry is dominated by illegal & unorganized small players to evade the high duty structure. And GMBL being the only organized & large player in whole of Maharashtra; pays 60% of its gross sales (or one can say 170% of its net sales) towards excise duty and sales tax. For FY08 it paid a massive Rs 246 cr only towards excise duty. Hence, Maharashtra govt is getting more than one fifth of the total excise duty on country liquor from GMBL alone.

GMBL’s plant is located in Thane and has the facility to blend and bottle both IMFL and country liquor. Interestingly, all products are manufactured using in-house know-how and no outside technology is being used in manufacturing. With the installation of additional bottling lines last fiscal company now has the capacity to process 12.84 crore bulk litres of country liquor per annum. However company produced and sold nearly 5.50 crore bulk litres only in FY08 which represent capacity utilization of less than 45%. This indicates that company has got huge potential to utilize the balance capacity by penetrating into interior districts of Maharashtra taking advantage of its brand image. This seems quite possible as company's products have been enjoying good brand image from the consumers for the past several years. Meanwhile, GMBL is making representations at various levels of the government to take effective steps to curb the illicit market in the interest of the industry, revenue of the state as well as the public health. For the next couple of years, company doesn’t have any major capex plan as the existing capacity is enough to cater the demand, at least for the next five years. Interestingly, till now the company has been funding its expansion plan through a mix of debt and internal accrual and hasn’t diluted its equity since its IPO in 1994.

Financially, GMBL has been doing well with cash generation of Rs 15~20 cr thru operating activities and has consistently been reporting an OPM of nearly 15% for the last 3 years. But due to considerable increase in input cost led by recent hike in prices of rectified spirit, company reported lower profit in the last two quarters. Its operating margin drastically fell down to less than 8%. Accordingly, despite reporting 15% rise in topline to Rs 101 cr its PAT declined by 55% to Rs 3.45 cr for six months ending Sept 2008. But prices of rectified spirit which shot up to Rs 35 per litre during Sept’08 has already cooled off a bit and is further slated to fall in near future. This will substantially reduce the margin pressure on the company. Thus GMBL may report disappointing nos for Dec quarter as well but it will post much better performance for FY10.

Fundamentally, GMBL is on a strong footing with a huge gross block of Rs 81 cr (net block Rs 61 cr) and reserves to the tune of Rs 36 cr. With no major capital expenditure company has a very low debt equity ratio of 1:3. Remarkably, company has been earning very high return on Capital Employed & Net Worth, which stands at 45% and 37% respectively for FY08. With 70% promoters holding, company boast of having an uninterrupted record of dividend payment from the day of listing. Incidentally, promoters have increased their stake by 2% in the last two quarters which is a positive sign. For FY09 it is estimated to register net sales of Rs 210 cr and PAT of Rs 9 cr i.e. EPS of Rs 10 on equity of Rs 9.40 cr. But for FY10 it has the potential to clock an EPS of more than Rs 15. To conclude, GMBL with a sustainable business model is trading grossly cheap at an Enterprise Value of merely Rs 60 cr. Long term investors are advised to gradually keep accumulating the scrip at sharp declines for a price target of Rs 75 in 9~12 months.

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Vivimed Labs (40.00) 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. Last year 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. Recently, company has decided to acquire Har-met International Inc a small importer of pharmaceutical & cosmetic product, based in USA. Organically as well company has been expanding its capacity and has chalked out Greenfield expansion plan in Uttaranchal and Hyderabad. Presently it boast of having five manufacturing facilities spread across Karnataka, Andhra Pradesh & Uttaranchal. Considering its Q1FY09 nos and acquisition of UK company, company is estimated to report a 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. It has raised nearly 60 cr thru FCCB route which may not get converted into equity considering the CMP. Accumulate between Rs 30 ~ 40 levels to get handsome gain over long term.

Being the Asia’s largest manufacturer of air compressors, Elgi Equipment (30.00) is involved with the design, development and production of exhaustive range of electric and diesel powered, centrifugal, reciprocating, borewell, railway air compressors etc. As air compressors are used in a wide range of applications, company caters to almost all sectors of industry. Besides it also derives 20% revenue from providing total service station solutions through the supply of a range of equipment and tools for two, three & four wheelers. Ironically company deals in or manufactures more than 128 equipments generally required by full-fledged garage. However to concentrate on each business segment company is hiving off its automotive equipment business into a separate wholly owned subsidiary called ATS-Elgi Ltd. Of late to cash on its rich experience company also started offering end to end mechanical engineering solutions and contract manufacturing services of precision engineered part to clients who are looking for cost-effective, subcontracting solution. It is also looking to increase it global presence for which it has formed a subsidiary in China and has also entered into joint venture with M/s. J P Sauer & Sohn, Germany for manufacturing air compressors. For FY09 it is expected to report a topline of Rs 450 cr and bottomline of Rs 35 cr i.e. EPS of Rs 6 on equity of Rs 6.30 cr having face value of Rs 1/- per share. A screaming buy at current levels.

Part of B M Thapar group, Greaves Cotton (75.00) is enaged in production of diesel/petrol/LPG engines for power generation, agro equipment & atumotive apart from manufacturing gensets, agro equipment and construction equipment. Besides, it is also engaged in marketing high technology systems for marine, aviation and electronic applications. In 2007, to increase its presence in global market it acquired, Bukh Farymann Diesel GmbH (renamed as Greaves Farymann Diesel GmbH) which is engaged in the manufacture and marketing of single cylinder diesel engines. However it is reporting loss due to weak economic condition in US & Europe. On the other hand Greaves Cotton is also facing lower demand in India for its automotive engine due to slowdown in 3 wheeler segment. But its infrastructure equipments business is doing exceedingly well. To keep the momentum going company has been expanding its product portfolio by introducing new products, tapping new markets and creating new manufacturing facilities. It has set up new units at Aurangabad, Pune and Gummidipoondi. Moreover the recent fall in all the commodity prices will ease some pressure on input cost. Although it may again report a sharp decline in NP for FY09 still it is estimated to clock a turnover of Rs 1350 cr and PAT of Rs 75 cr which leads an EPS of Rs 15 on equity of Rs 48.80 cr. At current EV of Rs 400 cr its worth a buy.

Being a 67% subsidiary of Honda Motor Co. Japan, Honda Siel (150.00) is the undisputed leader in the field of portable generators with its “HONDA” brand commanding more than 70% market share. Infact company boasts of launching India’s first LPG run gensets which is doing extremely well along with its super silent series. For the first time company has achieved the sales volume of over 100,000 Units (112,517 units) in domestic markets for FY08. At the same time to reduce the input cost, company has indigenised few of the critical parts of engine which it use to import earlier. Thus it has successfully reduced the import content to 19% from 22% and is further slated to bring it down to 15% in the current year. Moreover to consolidate the manufacturing operations company is shifting its Rudrapur (Uttaranchal) plant to its factory at Greater Noida in Uttar Pradesh. Although it may disrupt the production in short term but surely will beneficial in long term. Considering its encouraging performance for H1FY09 it may register sales of Rs 275 cr and PAT of Rs 24 cr i.e. EPS of Rs 24 on equity of Rs 10 cr. Financially, it is not only a debt free but a cash rich company holding more than Rs 100 cr as liquid cash. So at current market cap of Rs 150 cr investors are effectively getting this MNC company for Rs 50 cr i.e. at Rs 50 per share. Due to current market sentiment, its share price has fallen 50% which may motivate the foreign promoters to buy back and delist the company from Indian bourses. In case they don’t opt for delisting, then may give handsome bonus in FY10 being its silver jubilee year. A solid buy

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IMP Powers Ltd
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Genus Power Infrastructure Ltd
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IMP Powers Ltd - Rs 48.00

Established in 1961, IMP Power Ltd (IMP) is engaged in manufacturing of entire range of power & distribution transformers, electrical & digital measuring instruments, testing equipments, test benches etc. It specializes in HV & EHV power, distribution, special Purpose, furnace, thyristor duty transformers & reactors ranging from 10 KVA to 150 MVA upto 220 kV class which is a very wide range and meets all requirements of customers under one roof. Being one of the oldest players and pioneers in the power equipment segment, it boasts of having a rich experience of nearly 5 decades. It has vendor approval from almost all the State Electricity Boards, major turnkey EPC contractors, big corporate houses and even from few international majors as well. IMP has been supplying its transformers to PSU like MSEB, RRVPNL, APTRANSCO, GEB, MPEB, BEST, NTPC, Power Grid etc and to leading private players including L&T, BHEL, Reliance, Crompton Greaves, IVRCL, Jyoti Structures, Siemens, ABB, Kalpataru, NTPC, KEC, Nagarjuna, Tata Power and many more. It has also been exporting its products to various countries such as U.K., Africa, New Zealand, Australia, Malaysia Cameroon, Dubai, Kenya, Nigeria, Ghana, Sri Lanka, Jordan, Nepal, Bangladesh etc for quite some time. However due to robust domestic demand, it derived only 6% revenue thru export in FY08. In short, it is among the few companies catering to all three sectors i.e. public, private & exports.

IMP has two factories – one at Mumbai & other at Silvassa. Till now, its 5 acre Silvassa facility was having a total installed capacity of 3600 MVA but only couple of months ago company has completed the expansion thereby taking the production capacity to 7000 MVA. This expansion has propelled IMP into one of the top 10 EHV and Power Transformers manufacturing companies in India. Importantly, IMP is the only transformer company in India in the zero sales tax zone enjoying 15 years (till 2012) sales tax holiday for its Silvassa unit. Secondly, it has got itself backward integrated through manufacturing of OLTC & RTCC in house thereby emerging as one of the lowest cost manufacturer of transformers. These are one of the critical components for manufacture of transformers. On the other hand, company has also upgraded its Kandivali plant to manufacture complete range of analog meters such as ammeter, voltmeter frequency meter, dynamometer type watt meter, power factor meter, phase sequence indicator, KVA Meter etc. in addition to high end meters like maximum demand indicator, trivector meter, multifunctional and kWh meters. It has recently launched 96 sq mm size electronic counter & digital display energy meters with pulse output as well as with communication ports which are in huge demand in market. Besides it has also developed a new family of products i.e. Transducers which will be launched shortly.

As a result of the Indian Government's huge plan to generate and distribute power, and also to substantially reduce T & D Losses in the next decade, the demand for transformers will be buoyant in the next decade. It is estimated that additional demand for transformers would be around 150,000 MVA per annum. In addition, another 20,000 MVA is expected from replacement market. Thirdly with growing transformer market in South Africa, Middle East and Europe, export of energy efficient transformer, which have low losses and low noise levels is also growing at a healthy pace. With the sharp fall in copper prices, realization price per transformer has also fallen proportionately. For year ending June 2008, IMP registered 30% rise in sales to Rs 134 cr and 25% increase in PAT to Rs 9.40 cr thereby posting an EPS of Rs 14. To fund its expansion plan, company has issued 11.80 lakh compulsorily convertible preference shares to be converted into equity by March 2009 @ Rs 161 per share. At the same time it also issued 7 lakh warrants (@ Rs 161/- only) out of which 4.50 lakh warrants are yet to be converted. On the back of excellent performance for Q1FY09, company can clock a turnover of Rs 200 cr and net profit of Rs 11.50 for FY09. This works out to an EPS of Rs 14 on diluted equity of Rs 18.20 cr. Investors are recommended to buy at current levels as share price can easily appreciate 50% within a year.

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Small & Beautiful

Yuken India (60.00) is one of the reputed manufacturers of power saving hydraulic pumps & valves which are very popular in heavy engineering industry as effective means of automation and hence find extensive use in various key sectors like machine tools, material handling equipment, construction machinery, drill rigs, automobiles, defence, steel, power & cement plants, plastic machinery etc. Besides it also manufactures complete hydraulic power units as per customer specifications, cylinders, parison controllers, actuators, accumulators and power packs. Due to phenomenal demand, company has doubled its hydraulic casting products capacity to 2400 TPA and is further augmenting it to 6000 TPA within next couple of year. Besides it made a tie up with Hydrocontrols SPA Italy to produce and market state-of-the-art mobile control valves especially for agriculture, construction, earth moving and lifting machineries. Fundamentally, from the last two quarters company’s margin came under pressure due to increase in input/raw material cost and sharp depreciation in rupee. But with the recent fall in metal prices across the board, its margin will improve in coming quarters. So despite dismissal performance for H1FY09, it may end FY09 with topline of Rs 100 cr and bottomline of Rs 2.75 cr. This translates into EPS of Rs 9 on a tiny equity of Rs 3 cr. If things get better it can report an EPS of 15~20 for FY10. Share price of this MNC Associate can easily appreciate 50% within a year.

Being a 67% subsidiary of Honda Motor Co. Japan, Honda Siel (150.00) is the undisputed leader in the field of portable generators with its “HONDA” brand commanding more than 70% market share. Infact company boasts of launching India’s first LPG run gensets which is doing extremely well along with its super silent series. For the first time company has achieved the sales volume of over 100,000 Units (112,517 units) in domestic markets for FY08. At the same time to reduce the input cost, company has indigenised few of the critical parts of engine which it use to import earlier. Thus it has successfully reduced the import content to 19% from 22% and is further slated to bring it down to 15% in the current year. Moreover to consolidate the manufacturing operations company is shifting its Rudrapur (Uttaranchal) plant to its factory at Greater Noida in Uttar Pradesh. Although it may disrupt the production in short term but surely will beneficial in long term. Considering its encouraging performance for H1FY09 it may register sales of Rs 275 cr and PAT of Rs 24 cr i.e. EPS of Rs 24 on equity of Rs 10 cr. Financially, it is not only a debt free but a cash rich company holding more than Rs 100 cr as liquid cash. So at current market cap of Rs 150 cr investors are effectively getting this MNC company for Rs 50 cr i.e. at Rs 50 per share. Due to current market sentiment, its share price has fallen 50% which may motivate the foreign promoters to buy back and delist the company from Indian bourses. In case they don’t opt for delisting, then may give handsome bonus in FY10 being its silver jubilee year. A solid buy.

Transformer & Rectifiers (150.00) is one of the leading manufacturers of power & distribution transformers, furnace transformers, rectifier transformers and specialized transformers. It currently manufactures transformers up to 220 kV class and has an installed capacity of 7,200 MVA transformers per annum. To cash on the boom in power sector, company is setting up a Greenfield plant in Moraiya, near Ahmedabad with an installed capacity of 16,000MVA. The new plant, expected to be operational by March’09 would be capable of manufacturing transformers upto 756kV class, though the company initially intends to manufacture transformers of 220kV and 400kV classes. As of now, company has order book position of Rs nearly Rs 400 cr, out of which 70% comprises of power transformers. For the H1FY09 it has registered 55% increase in sales to Rs 195 cr and 75% jump in net profit to Rs 22 cr. Accordingly it may end FY09 with sales of Rs 400 cr and NP of Rs 36 cr i.e. EPS of Rs 28 on current equity of Rs 12.90 cr. Importantly, it will start reporting substantial growth from FY10, as new plant will begin operations by then.

Part of Aditya Birla group company, Bihar Caustic (30.00) is among the leading caustic soda producer in the northern and eastern region of the country. Besides, it also produces liquid chlorine, hydrochloric acid, sodium hypochlorite, compressed hydrogen and has even ventured into aluminum chloride. Recently it has also set up a 25 TPD stable bleaching powder (SBP) plant as a value added product for chlorine utilization. As power constitutes one of the major input cost, company has put up its own 30 MW coal based captive power plant. Considering market condition and demand, company is augmenting the capacity of its caustic soda plant from 265 TPD to 300 TPD at a capital investment of Rs 30 cr. Although company is vulnerable to caustic soda price movement, but with Hindalco being its parent company & biggest customer, the margin of safety is high. Notably, company enjoys the highest operating margins among it peers - even better than Gujarat Alkalies and Chemfab Alkali. Financially company is doing excellent, although it reported drastic fall in profit for Sept’08 qtr as the boiler of the power plant tripped due to mal functioning of safety device and hence company has to purchase power from outside for time being. Still it may end FY09 with topline of Rs 200 cr and NP of Rs 38 cr i.e. EPS of Rs 16 on equity of Rs 23.40 cr. Apart from all this, company is contemplating to rechristen itself as Aditya Birla Chemicals (India) Ltd.