Lloyd Electric & Engineering Ltd - Rs 18.00

Incorporated in 1988, Lloyd Electric and Engineering Ltd (LEEL) was primarily setup as a backward integrated unit of Fedders Lloyd Corp, the leading group company to manufacture coils for air conditioners. Since then it specializes in the custom design and manufacture of heating and cooling coils including 'U' bend and return bend tubes for heat exchanger coils, system tubing, header line etc and sheet metal items for air-conditioning and refrigeration applications. Over the year it has emerged as India’s largest manufacturer of evaporator and condenser (E&C) coils with around 60% market share. E&C coils are critical components in AC manufacturing next only to the compressor and account for approximately 20% of the cost of manufacture. Of late, company has got itself forward integrated into lucrative business of contract manufacturing of window/split air conditioners for various multinational companies in India. Thus it has become an OEM supplier to almost all AC manufacturers in India and its clientele includes Samsung, Electrolux, Carrier, Haier, Voltas, Blue Star, LG, Hitachi, Onida, Symphony, National, Whirlpool, Diakin etc. It even provides customized AC solutions for institutional clients like railways, defence, telecom etc apart from undertaking airconditioning services for luxury buses including Volvo etc. As of now, LEEL derives roughly 60% revenue from coils, 30% revenue from contract manufacturing of AC’s and balance 10% from railways.
Presently, LEEL is operating thru three manufacturing facilities located at Bhiwadi (Rajasthan), Kala-Amb (Himachal Pradesh) and a new plant in Dehradun (Uttaranchal) with an total capacity to manufacture 14,00,000 coils & assemble 4,00,000 air conditioners. It even boasts of having technology advantage to manufacture 400 different types of coils. But the biggest positive for the company is that it’s KalaAmb and Dehradun facilities are located in tax free zones thereby giving an edge to the company over its peers. For Indian Railways - one of its major customer, LEEL manufactures roof mounted packaged AC unit for railway coaches on turnkey basis which includes designing, manufacturing, supplying, installation and maintenance. Hence it has set up service station all around India like at New Delhi, Mumbai, Chennai, Bangalore, Hyderabad, Lucknow, Jaipur, Guwahati and Culcutta specially for maintaining the AC package units installed on the railway coaches.

To maintain its growth momentum, LEEL has signed a MoU with Air International Transit Pty Limited, an Australia-based company for designing, manufacturing and supplying of AC package units to Metro Rail Corporation in India which is adding up 800 new coaches to its fold leading to sizable business opportunity. LEEL is already executing orders for Delhi metro and considering the first mover advantage expects to get a substantial order from the upcoming metro project in Mumbai, Bangalore & Hyderabad. With this tie up, company is also exploring the export potential in air-conditioning of Metro Rail coaches in developed countries. Towards its mission to emerge as world’s No 1 coil manufacturer and increase its global presence, LEEL in May 2008 acquired a company called Luvata in Czechoslovakia, which is one of the top five leading manufacturers of coils serving the heating, ventilation, air conditioning and refrigeration (HVACR) industry in Europe with market share of 5% in free coil market i.e. non captive segment. This acquisition is expected to bring in significant business synergies in terms of cost efficiencies, technology absorption etc. In line with its goal to increase its global presence, LEEL has recently incorporated a wholly owned subsidiary namely ´Lloyd Electric FZE´ as a free trade zone establishment in RAK, United Arab Emirates.

However, the global turmoil, liquidity crunch, slowing down of world economy with most developed countries going into recession has hit all the industries across the world. And LEEL is no exception. Secondly it also has to pay for bad timing decision of making international acquisition of Luvata Czech. With plunging topline and rising interest cost, company is certainly going thru a bad phase domestically as well as internationally. Sarcastically, LEEL has neither disclosed the acquisition cost nor it is making the Luvata’s quarterly financial statement public. Else one could have evaluated the impact on the financial health of the company. No wonder, due to these uncertainties share price of the company has been decimated to sub Rs 20 levels. The company which earned net profit of Rs 55 cr from core business operation last year is now available for Rs 55 cr. Financially, LEEL’s sales fell by 15% to Rs 411 cr and PAT declined by 55% to Rs 20 cr for nine months ending Dec’08. Although the retail demand for air conditioners may remain low in the current calendar year as well, but the sharp fall in copper, steel, aluminium and other metal prices, increased government spending on railways & massive investment by Metro Rail are few of the positive factors for the company. Also not to forget, with extremely low penetration, there is tremendous demand potential for air conditioners in India over the long run. To fund its growth plan LEEL has issued 50 lakh convertible warrants @ Rs 225 per warrant. Considering the current market price, it’s but obvious that warrant holders will let it lapse in March 2009. On a standalone basis it may end FY09 with sales of Rs 500 cr and PAT of Rs 20 cr i.e. EPS of Rs 6 on current equity of Rs 31 cr. With reserves of over Rs 300 cr, Gross block of Rs 224 cr, & debt/equity ratio of 0.45x, it seems all the negatives have been factored in the share price. However, scrip may witness some panic selling as around 23 FII’s including Morgan Stanley, Bank of New York etc are still holding 25% stake in the company. Long term investors can safely accumulate this scrip during panic times to get a multibagger return in 2~3 years.

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Accurate Transformers Ltd
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Kirloskar Electric Ltd
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Kirloskar Electric Company Ltd - Rs 28.00

Established in 1946, Kirloskar Electric Company Ltd (KECL) is one of India’s leading & oldest manufacturers of electrical and power equipment. When India embarked on an indigenization drive to substitute for imports in the mid seventies, KECL took the lead in the electrical engineering sector to maintain the international quality standard. Interestingly when Indian Railways built the first of the Power cars for Rajadhani, it was KECL who brought out customized generators for tough working in coaches subjected to horizontal and vertical accelerations. With a rich experience of over six decades, KECL has even closely worked with Indian Defense establishment to take up innovative tasks requiring high degree of expertise like containerized power supply units for missile projects, power sources for application in high security communication systems etc. Thus, the main business activity of KECL is the manufacture and sale of a diverse range of electrical and electronic equipments which has been broadly divided into following three segments.

· Rotating Machines: KECL derives round about 45% of total revenue from sales of AC/DC motors, AC generators, DG sets, tractions etc. Infact it was the first company in India to manufacture AC Motors way back in 1948. Remarkably, till late nineties four out of five AC generators manufactured by the organized sector in India were made by KECL. Although company is a pioneer in supplying DG sets to Indian Army, Air Force, & Defense, it ventured into retail marketing in 2006 and offers a wide range under the brand name “BLISS”. On the other hand its traction equipment division being a key supplier to Indian Railways caters to mainline electric and diesel locomotives. Apart from above, the recent merger with Kaytee Switchgear will strengthen KECL’s capability in manufacturing of rotating machines.

· Power Distribution Equipment: With nearly half of the total revenue coming from this division, KECL boast of being the first company in India to acquire ISO 9000 certification in transformer manufacturing. It produces both power as well as distribution transformer in a wide range up to 50 MVA in 200 kV class. Besides it is among the few companies to produce several types of special transformers like furnace, flame proof as well as conventional dry type, earthing, special converter, high voltage testing, short circuit testing, nitrogen gas cushioned, cast resin etc. At the same time, its Switchgear division manufactures high voltage switchgear in the range of 3.3 to 36kV for indoor as well as outdoor applications. It even produces and supplies Circuit Breakers and Panels to a wide range of applications, from large substations to small stand-alone switching requirements of state electricity boards, utilities, power generation, mining, defense applications and industries like cement, steel, paper, textile, chemical and other process industries.

· Others: This segment constitutes the balance 5% of revenue and consists of manufacturing of other electronics and execution of projects. It makes Auxvertor, thyristor controlled Battery Charger, regenerative and non-regenerative thyristor Converters, Digital Readouts, Invertors etc. In collaboration with Toshiba Co. Ltd, Japan it manufactures a wide range of UPS from 0.5 KVA to 50 KVA which find extensive application in supplying continuous and conditioned power to all critical equipment in banking, insurance, IT & medical fields. Its Project division compliments the core business to offer a complete system of electric control and automation. It has developed expertise in design, engineering, supply, erection and commissioning of electrical switchyard upto 220kV. It also undertakes small projects of power generation thru non conventional energy sources including hydel, wind, solar, co-generation and other gas based and diesel based power projects.

KECL operates thru six manufacturing facility with five in Karnataka and one in Kolkatta. Recently, it has setup up a Greenfield plant at Kondhapuri, Maharashtra which can manufacture both vast Resin and oil filled transformer thereby enhancing the transformer manufacturing capacity significantly. Besides, to meet the growing demand from power sector, KECL has also put up a new manufacturing facility in Gurgaon Haryana for rotating machine. Last fiscal it added five new sales offices thereby taking the total count to 30 offices across India. Apart from modernization and expansion, KECL is now focusing to make bigger and larger machines/transformers where margins are pretty high. At the same time it is also thriving to increase its presence in switchgear & other electronic products. Its DG sets division which mainly caters to sectors like hospitals, telecommunication residential, utilities & industrial market has last year introduced DG sets with a capacity rating of 12.5 kVAto 25 kVA which augments its existing range of 30 kVA to 160 kVA. On the back of strong domestic demand, KECL derives less than 5% from exports; but its products are well accepted in USA, Europe, Canada, Hong Kong, Australia, China, Singapore, South Africa, Malaysia, Pakistan, Bangladesh etc.

In order to consolidate and integrate its operation, company has recently merged Kaytee Switchgear Ltd (KSL) & Kirsloskar Power Equipments Ltd (KPEL) with itself. KPEL is engaged in the business of manufacturing and selling of cast resin dry type transformers and oil filled transformers with a turnover of more than Rs 100 cr. On the other hand KSL manufactures rotating machines likes AC/DC motors, alternators, other components etc having a turnover of Rs 400 cr. Notably, KSL was actually a 74% subsidiary of KECL and all the quantity produced by it were sold to or manufactured for KECL only, under contract manufacturing / subcontracting arrangements. As a part of consideration for this merger, company has allotted 1.73 cr equity shares and 11.76 lakh preference shares of Rs. 100/- each to the shareholders of KSL & KPEL. Post merger, company has reported a topline of Rs 653 cr and bottomline of Rs 22 cr for nine month ending Dec’08. Importantly, company has reported an OPM of more than 9% for the latest Dec’08 which is quite encouraging. At the same time higher interest cost has dented the bottomline. Due to industrial slowdown, lower GDP estimates and global turmoil, KECL may not register aggressive growth in medium term but has tremendous growth opportunity in long run. For FY09 it may clock a turnover of Rs 850 cr and net profit of Rs 28~30 cr. This works out to an EPS of Rs 6 on expanded equity of Rs 50.50 cr. Due to drastic fall in metal prices and synergies of merger, KECL has the potential to improve its margin going forward and can report an EPS of more than Rs 8 in FY10. Investors are strongly recommended to buy at current levels as share price can double in 12~15 months.

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STOCK WATCH

Diamond Power Infrastructure Ltd (90.00) registered 10% rise in sales to Rs 140 cr and 20% jump in NP to Rs 16 cr for the Dec’08 qtr. However the nine months figures are much encouraging as sales are up by 60% to Rs 493 cr and profit before tax has shot up by 70% to Rs 56 cr. However company hasn’t made any tax provision and will do at the end of the year. It 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. 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. Partners. Meanwhile for FY09 it may clock a turnover of Rs 675 cr and profit after tax of Rs 60 cr i.e. EPS of Rs 29 on current equity of Rs 21 cr. Incidentally, company has recently repaid the short term loan to the tune of Rs 40 cr to Clearwater Capital.

As TATA group is witnessing some liquidity crunch, share price of all group companies are trashed like anything. Share price of TRF Ltd (230.00) which is a pioneer in providing solutions for bulk material handling/ processing systems and equipments and port and yard equipments has also been reduced to one tenth from the high of Rs 2100 in Jan 2008. For Dec’08 qtr it reported excellent set of nos as its sales zoomed up by 140% to Rs 141.50 cr and PBT shot up by 190% to Rs 24 cr. However due to extraordinary item of Rs 13.30 cr on reversal of earlier sales its net profit recorded only 20% growth to Rs 6.70 cr. Else it would have recorded a PAT of Rs 16.50 cr i.e. EPS of Rs 30 for the single quarter. Despite slowdown company has been regularly bagging huge order and recently got Rs 100 cr order from Andhra Pradesh Power Generation Corporation Ltd. Few months back it was awarded more than Rs 400 cr order by Damodar Valley Corporation. Presently company boast of having a very strong order book position of more than Rs 750 and hence it has set a vision to grow five times in next five years. It also owns a subsidiary, York TEA-Singapore, which produces and distributes trailer undergears, and has a market presence in 27 countries. A solid bet.

In the current sentiment even the blue chips are getting hammered badly. Share price of Thermax Ltd (155.00) which hit a high of Rs 950 during early 2008 is now available for Rs 150. Company is a global solution provider in energy and environment engineering. It offers products and services in heating, cooling, waste heat recovery, captive power, water treatment and recycling, waste management and performance chemicals. It caters to host of key industries and has presence across the globe. Financially company has been doing satisfactorily and reported marginal decline in sales and NP for the Dec’08 qtr. Thus, for first three quarters it has reported flat sales of Rs 2309 cr and marginal fall in net profit to Rs 193 cr. Recently company has won a Rs 450 crore order for setting up a 60 MW captive power plant in AP. Energy intensive industries such as iron & steel, petrochemicals, paper and cement, are increasingly utilizing the company's waste heat recovery expertise to keep their energy costs down. It may end FY09 with EPS of Rs 22 on current equity. Once the situation improves, the share price can shoot up by 50% in short term. Keep accumulating at declines.

Techno Electric (60.00) is a large engineering, procurement and construction (EPC) contracting company primarily focused on the Indian power sector. Ironically, it has worked in one capacity or other in setting up of more than 50% of the power generating capacity in the country i.e. more than 50,000 MW. It has presence in all the three segments of power sector i.e. generation, transmission and distribution. It is among the very few Indian companies to have license to execute electrical installations upto 400 kV. As a part of its diversification strategy, TEECL has ambitious plan to be a major power producer in the field of non-conventional energy through setting up of biomass power generating units all over the country. Presently it boast of having an unexecuted order book position of more than Rs 600 cr. For FY09, TEECL is expected to report total revenue of Rs 500 cr and PAT of Rs 55 cr i.e. EPS of Rs 10 on equity of Rs 11.42 having face value as Rs 2 per share. It is not only a debt free company but a cash rich company having liquid investment worth Rs 150 cr and cash balance of Rs 25 cr as on 31st March 2008 which is equivalent to almost Rs 30 per share. Investors can safely buy this scrip at current levels

MIC Electronics Ltd - Rs 22.00

Incorporated in 1988, MIC Electronics Ltd (MIC) is a pioneer in design, development, manufacture & supply of true color LED Video Displays, LED Lighting products and solution. Infact, it is the only integrated LED display manufacturer in India with design-to-manufacture capabilities. Hence it has virtually a monopoly in LED business in domestic market. An LED (light-emitting diode) is usually a small area of less than 1 mm2 light source, often with optics added directly on top of the chip to shape its radiation pattern and assist in reflection. The technology behind LED is based on semiconductor technology, which is also the basis of modern computers. Importantly, MIC has collaboration with Nichia Corporation Japan, which is the global leader in LED technology with 33% market share worldwide. Apart from LED business, MIC also deals in high end electronics and telecommunication equipments and is also engaged in development of telecom software. Presently, company is deriving more than 65% of revenue from LED division where as the balance comes from electronics and telecommunication division. Notably, the company is more of embedded software and solutions company and less of an hardware company as it imports most of its hardware requirement. Based on the application, MIC has broadly segmented its operation into following three categories

· LED Display: This segment comprises the development, production and sales of video displays, text, graphic & animation displays. Its outdoor and indoor portfolio ranges from display sizes of 90 inch to video walls/large format display size of 512 inch. LED displays are immensely popular because of their programmability, making targeted marketing and interactive interfacing possible. Like websites, they can be networked and updated remotely with fresh and topical content. These displays find vast application in outdoor/indoor advertising, railways, malls, banks, sports events, live entertainment, award functions & stock exchanges. Company even offers LED displays for rentals during election rally meetings, music concerts and weddings on a small scale. It has launched a huge 120 inch LED TV for close viewership, primarily targeting malls and corporate boardrooms. Other products include LED/LCD based 3D display systems.. Remarkably, it has introduced "Mobile LED Video Display" concept in INDIA and has its premier product named as 'DigiWheel' which is now available in trailer model and truck model. Company is also into LED signage business where, display is used to show the direction of arrows, kms, distance etc. It is already executing an order for LED Variable Message Signs (VMS) for highway projects in Andhra Pradesh & Tamil Nadu worth 8 cr.

· LED Lighting Solutions: LEDs represent the most energy and cost-efficient lighting source, consuming 10 times less power than CFLs (compact florescent lamps). Moreover the annual running cost of LED lighting is 50% lower than CFLs, with no replacement required for a minimum 11 years. With increasing volume and improving technology the manufacturing cost of LED is coming down sharply. So undoubtedly this is the future technology for lighting solutions. As per estimates, by 2025 more than 50% of the existing lighting will be replaced by LED lighting around the world. With the first mover advantage, MIC is targeting grid-based and non-grid based lighting, rural and urban street lighting, solar-powered lights, commercial and residential lighting. It is also looking to mark its presence in automotive/aircraft cabin & brake lights, road traffic signal lights etc which is a huge market in itself. Besides Indian railway offers a massive opportunity as LED lighting can be used to replace coach lighting, signal lighting, door and path way lighting, platform lighting, yard lighting, emergency lamps, railway colony lighting etc. Importantly, MIC has provided the LED lighting for all the aero planes of Kingfisher airlines, which proves the capability and growth potential of the company

· Electronics and Telecommunication Solutions: This division provides software solutions as well as electronic hardware and products to telecom service providers. It has diversified products including the digital loop carrier on optical fibre on synchronous digital hierarchy ring, broadband DLC for triple play (voice/video/data) applications; CDMA/GSM based WLL terminals and phones, hand-held computers with in-built GSM/CDMA modems. The company is importing most of these products, but provides the after sales and maintenance service. To compliment the hardware it also provides various software services like interconnecting billing service, CDR data collection systems, teleconference solutions, prepaid calling card services, automatic payment reminder services, automatic telephone bill enquiry, fax services and such other I- Computer technology services. However MIC is gradually reducing its focus on this business vertical, in view of its low margins and extended receivables cycle. Couple of years back it represented around 65% of total revenue, but in the latest Dec’08 qtr its share has come down drastically to 20%

To become a true global player, MIC is also enhancing its presence in the international market and has a direct presence in the North American, Korean and Australian markets thru wholly owned subsidiaries. It also has arrangement with local importer in Middle East & South Africa. Moreover along with Latin America Futbol Corporation, USA a sports management company, MIC has formed a 50:50 joint venture company called Sports LED Media (SLM), which has won a contract for LED Display in 50 stadiums in Latin America. Importantly, it is estimated that SLM would buy LED screens from MIC for US$ 50 million over next couple of years. MIC is in talks with Lamar Advertising, the second largest US outdoor advertising company to provide end-to-end display screen solution. Earlier it entered into a strategic partnership with LEDSTAR of Canada to deploy Intelligent Transportation Systems (ITS) and LED Variable Message Signs (VMS). Recently MIC has also entered into an MOU with a renowned lighting company in Italy which enabled the access to European markets and others like Russia, Morocco & Eastern European countries. To increase its market share and cash on the huge opportunity, MIC commissioned a state of the art fully automated manufacturing line at Hyderabad on 29th October 2008. With this EOU facility, company has doubled the production capacity of LED display to 2400 modules from 1200 modules earlier. Company is further contemplating to take its total capacity to 3600 modules. To maintain its growth momentum, MIC is setting up of manufacturing unit for LED true colour displays, LED lighting solutions and solar based LED lighting products at Fab City SEZ near Hyderabad for which it has already been allotted 50 acre of land on lease.

Last week, MIC got the RDSO (Research and Design Standard Organization) approval for its unique & innovative video cum train info display system thereby becoming the first and only company to get such approval. This fully automatic system takes data using satellite, displays station specific train information and simultaneously makes the announcement. Notably, railways have the aggressive plan to install 100 such boards in A & B category stations. Besides, increased focus of the Indian Railways on advertising has created a significant business for the display market. They would be coming out with a tender for LED display at 100 stations i.e. 600 screens. MIC has already made presentations to the Railways and is expected to get good order. Earlier, it received an order and license from Delhi Metro for installation and maintenance of 25 nos of full color day and night LED Video display boards at 8 metro stations worth Rs 45 cr. On the other hand, company has identified the market of worth more than Rs 1000 cr for LED lighting in railways. It is negotiating in a big way with the railway department to allow the LED lights in all the long distance trains. MIC is also targeting the forthcoming elections and would be investing about Rs 30 cr on 60 screens which could take the rental income to Rs 3 cr per month. Company is also entering the entertainment business through self owned digital theme parks and theatres.

To conclude, demand for the LED based products is expected to be shoot up significantly in the coming years on account of growing spending by the advertising agencies (specially outdoor), Indian railway, rural electrification, malls, airports, event managers among the others. And MIC with proprietary technology and increased capacity is all set to cash on this opportunity. Operationally company is doing well as it registered 30% growth in topline to Rs 312 cr whereas PAT doubled to Rs 66 cr for year ending June 2008. Even for the six months ending Dec’08, net profit has shot up 70% to Rs 40 cr despite marginal fall in topline. This is due to the fact company has reduced its high volume low margin telecommunication business and is now focusing solely on LED based segment. Thus it clocked an OPM of 35% in the current year against 20% in the corresponding previous year. To fund its expansion plan, in July 2008 MIC issued 1.75 cr convertible share warrants at Rs 122 each on preferential basis and has already collected Rs 38 cr (18% instead of 10%). However looking at the current market price and general sentiment, warrant holders may not opt for conversion. But being highly under leveraged with a debt equity ratio of 0.1x times, MIC can comfortably raise debt to fulfill its requirement. Conservatively for FY09 ending June’09 it is estimated to clock a turnover of Rs 275 cr and PAT of Rs 65 cr on a standalone basis. This works out to an EPS of Rs 6.50 on current equity of Rs 20 cr having face value as Rs 2/- per share. The estimated fully diluted EPS works to Rs 5. On the other hand, on a consolidated basis MIC can report a NP of Rs 75 cr i.e. EPS of Rs 7.50 on current equity. Thus a company operating in such a fast growing industry and having a high OPM, NPM, ROCE & ROE is trading grossly cheap at an EV of Rs 300 cr. On the flip side, high debtors indicate company’s incapability to manage receivables. Ironically, scrip is trading below its April 2007 IPO price of Rs 30 (adjusted for Rs 150 with face value as Rs 10) Thanks to the global turmoil and vertical crash in stock market, its share price has become one tenth in matter of few months. Investors are strongly recommended to buy at current levels for a price target of Rs 60 in 12~15 months.

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