XL Telecom & Energy Ltd - Rs 29.00

XL Telecom & Energy Limited (XL) was originally incorporated as a private limited company in 1985 to manufacture and deal in cable splices, manufacturers of protection equipment and allied accessories for electronic telephone exchanges and other establishments. Subsequently in 1990 it got converted into public limited company and then gradually emerged as one of the fastest growing telecom equipment manufacturers. Simultaneously, during 1994 it also got itself engaged into solar energy sector although at a small scale. Thus it has been pioneer in solar module manufacturing with a rich experience of almost 15 years. Of late, to cash on the huge opportunity XL has aggressively moved on to non conventional energy business especially solar photovoltaic segment. Accordingly, the energy segment which constituted 55% of total sales last year, now contributes nearly 90% of revenue. Apart from solar energy company also has interest in ethanol production. Broadly company has divided its revenue model into two segments.

A. Energy Segment: This is sub categorized into following two divisions:

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  Solar Photo Voltaic Systems Division: This division now forms the core business and major revenue driver for the company. It makes solar photovoltaic modules / panels of various capacities ranging from 5Wp to 280Wp catering to domestic and international customer requirements. Starting with initial module manufacturing capacity of 24MW in 2005, XL has last year increased the capacity multifold to 180 MW. Moreover it is in the midst of setting up a huge Greenfield plant at Fab City (SEZ), Hyderabad under a capex of Rs 360 cr. With this it will add another 40 MW module manufacturing capacity thereby taking the total to 220 MW. Besides, to get itself backward integrated, XL is putting up a solar cell manufacturing facility with a rated capacity of 120 MW. The capex has been fully funded and the plant is expected to begin commercial operation within this calendar year. Along with this backward integration company has also moved up in the solar value chain by going into solar energy power generation through grid connected solar farms. During Oct 2008, its 100% subsidiary in Europe- ‘Saptashva Solar Ltd’ has established the first solar farm in Spain with an installed capacity of 1.60 MW, thereby perhaps XL becoming the first and only solar manufacturing company in the world to capture the complete solar value chain of – Solar cell to module to system to solar farm or power generation. It has also signed the power purchase agreement for 25 years with the Spanish utility company which ensures stable revenue. Importantly, Saptashva is looking for establishing series of such “Solar farms” across Europe which may lead this subsidiary becoming the largest customer for the holding company in terms of solar panels and EPC services. Infact, XL is very bullish of getting into EPC segment of solar farm establishment and has internal target to set up so many solar farms generating as much as 300 MW over next three years. On the other hand, recently company’s one of the end customer commenced operation at its largest 30 MW solar park using XL’s exported solar panels which proves the company’s credential.

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  Ethanol Division: Earlier company had aggressive plans about this division but with the drastic fall in crude oil price and unfriendly approach of govt, XL has decided to go slow. It has an ethanol fuel facility at Nanded in Maharashtra with a production capacity of impressive 1.5 lakh litres per day. The plant has been inspected and cleared technically by oil companies both in terms of capacity evaluation and the quality of the product being produced. In order to meet the raw material requirement for ethanol production, company is contemplating to establish the distillery unit for which it has already incurred about Rs.27 cr out of total planned capex of Rs.72 cr.
  

B. Telecom Segment: This segment use to be the main business for XL earlier, but due to saturation in Indian market and better opportunities in energy sector, company reduced its focus and efforts towards telecom. But still it continues to manufacture / market following products depending upon the demand scenario.

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  CDMA Handsets & Fixed Wireless Phone: XLTEL is the first Indian company to setup a manufacturing facility for CDMA mobile handsets in India, as an independent company. It has established only “ASSEMBLY” facility for manufacture of mobile phones in partnership with KYOCERA Inc of USA and has a capacity of about 35 Lakh handsets per annum. It is supplying multiple models to all CDMA Operators like BSNL, MTNL, TATA and Reliance. Similarly it has established partnership with AXESSTEL of US for Fixed Wireless Phones with BSNL as its main customer.

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  Switch Mode Power System : Under technology transfer from SMPS de Austria XLTEL manufactures and offers a full range of SPMS needed by telecom operator in their exchanges as well as BTS stations in the mobile segment

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  Outside Plant Accessories: Company has been a supplier of joining kits, optic fibres accessories, fusion splicers etc for over two decades and enjoys nearly 40% market share in joining kit business. Its plant at Hyderabad with a capacity of 20,00,000 Heat shrink sleeve & 5,00,000 cable jointing kits is setup in technical collaboration with Corning Inc.

Solar power is fast emerging as the most viable and eco-friendly power generation option for tomorrow with no moving parts, no noise and zero emissions. Solar power systems are used for a variety of residential, commercial and industrial applications generally described as either 'on-grid' or 'off-grid' in nature. The market for 'ongrid' applications, where solar power is used to supplement electricity purchased from the utility network, represents the largest and fastest growing segment of the market And as company’s most of the products are used in on-grid applications, XL’s focus remains on emerging grid connected solar solutions as against conventional stand alone solar power systems. Thanks to technological breakthroughs, the generation and distribution cost of solar power has come down substantially, but still solar energy constitutes only a small fraction of the world's energy output. It is estimated that Spain, Italy, and France will drive the solar power demand in near future apart from Germany, Japan and US being the largest markets for solar photovoltaic demand. As per consensus among the global research organization, solar products are slated to register 40% CAGR for next 10 years

In order to fund its growth plans, XL raised nearly 59 cr in Dec 2006 thru IPO route @ Rs 150 per share, then approx 175 cr thru FCCB and simultaneously even allotted 52,50,000 warrants @ Rs 135. With part of FCCB and warrants already been converted, the equity share capital currently stands at Rs 18.80 cr. Ironically, company has recently reset the FCCB conversion price to Rs 160 per share from Rs 260 originally. Despite this the holders may not opt for conversion as the CMP is trading at huge discount. For year ending June 2008 it recorded 25% rise in topline to Rs 654 cr but net profit doubled to Rs 40 cr posting an EPS of Rs 21. Despite very poor performance for the Dec’08 qtr, its H1FY09 looks impressive with 40% and 60% growth in topline and bottomline to Rs 359 cr and 15.80 cr respectively. It may end the current fiscal with sales of Rs 700 cr and PAT of Rs 25 cr leading an EPS of Rs 13 on current equity of Rs 18.80 cr. Ironically, company’s bottomline is getting hit due to significant interest cost on the loan which it has borrowed for expansion. It seems instead of capitalizing the same, XL is writing off as a revenue expense. It has a capital work in progress of nearly Rs 250 cr against current gross block of Rs 55 cr. So the day new plant comes into full action, XL will report substantial jump in topline as well as bottomline. So investors are strongly recommended to buy at current levels as share price can triple in 24 months. However investors should note that company has high debt and receivables to the tune of Rs 378 cr (including FCCB) and Rs 224 cr respectively.

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Emco Ltd- Rs 30.00

Incorporated in 1964, Emco Ltd (Emco) is the third largest manufacturer of transformers in India and a leading player in electronic energy meters and turnkey electrical projects. With its acquisitions, joint ventures and growth strategies, Emco has ensured its presence in all the major areas of the power sector and have come a long way from being a product supplier to end-to-end solutions provider in the transmission and distribution sector. The company has spread from one manufacturing location to seven manufacturing locations in India (three for transformers, two for meters & the rest two for transmission line towers) and is now poised to make its presence felt even in the overseas market. For better efficiency and to focus on each business unit, Emco has segmented its business into following four divisions:-

• Transformer Division (65%): This is the flagship division of Emco with three manufacturing plants having combined installed capacity of 20,000 MVA. It offers widest transformers range from 5 kVA, 11kV right up to 315 MVA, 400 kV for power generation, transmission & distribution. It is one of the leading players in manufacturing special application transformers like furnace transformers (for Steel Industry), large rectifier transformers (for Chemical Industry) and traction and locomotive transformers (for Railways).

• Meters Division (5%): This division has a state-of-the-art fully computerized manufacturing facility with an installed capacity of 1.3 million meters per annum - one of the largest in Asia. It offers metering solutions like tamper proof electronic energy meters, automatic meter reading solutions, prepayment metering solutions & high end metering like Trivector meters, Grid metering etc. It also offers a total energy and revenue management solutions to customers in the distribution business.

• Projects Divisions (30%): This division offers turnkey solutions from concept to commissioning of large electrical substation projects in the power sector. It focuses on turnkey projects in the T&D area, mainly catering to high voltage and extra high voltage substations up to 400 Kv and strengthening the sub-transmission and distribution network. It also undertakes entire industrial electrification work from designing to execution. Besides, with the acquisition and amalgamation of Urja Engineers Limited, Emco moved into the transmission line business enabling itself to offer a wider portfolio of products and solutions for transmission and distribution of power under a single roof to various customers. It can now construct EHV Power Transmission Lines upto 765 kV on a total turnkey basis and boasts of having a tower manufacturing facility up to 45000 MT/Annum. It also provides custom built outdoor packaged substation upto 1 MVA.

• International Division: This division basically offers the products and services of other divisions to the international market and currently derives around 20% of total sales from exports. With supplies to global majors such as SHELL, Global, Petrofac-UAE, Parsons-UK, Peebles-UK and other leading power utility multinationals in more than 30 countries, Emco has experience of designing transformers to meet various International standards like BS, IEC, ANSI, CSA etc and meeting the approval of independent Inspection agencies such as BVQI, Lloyds, Crown Agent, SGS and others.

With a goal to achieve 30% of revenue from international business, Emco has decided to set up a transformer manufacturing plant in South Africa to meet the growing demand in the African region and neighboring countries. For this it has signed a bilateral trade agreement with Edison Power (Pty) Ltd, a leading electrical contracting company from South Africa for this purpose. This 51:49 JV will set up a state-of-the-art plant capable of manufacturing all range of transformers upto 20MVA rating and having an initial name plate capacity of 2000 MVA per annum. Emco has also floated a 100% subsidiary in Singapore which has already made investments in solar renewal energy company, USA and in a coal mine company, Indonesia.

Apart from above, Emco has setup 7 wind mills of 1.5 MW each in Maharashtra. Besides getting additional revenue on sale of electricity generated to MSEDCL, Emco has also registered this project with UNFCCC under CDM and is expected to start trading in CER from current year. Moreover the company is also in the process of setting up a 540 MW Coal-based power project near Nagpur for which it has already obtained the coal linkage from Government of India and has procured the land for the project. The plant is expected to commission before mid 2010 with a total estimated outlay of Rs 1100 cr. Further the company has plans for synergic diversification in to switchgear business, up to 400 kv, which would further add to the top line and bottom line of the company. Incidentally, the management intends to double the company’s turnover every two years. Couple of weeks ago, Emco has bagged five huge orders to the tune of Rs 550 cr from Power Grid Corporation for 765Kv transmission lines project and supply of galvanized steel tower. Notably, this is one of the largest 765 Kv overhead transmission line order placed by PCGIL. With this, Emco now boast of having an unexecuted order book position of more than Rs 1500 cr.

Fundamentally, Emco has been performing excellent and been substantially benefited from the strong surge in investments towards improving the country's dilapidated T&D framework as also adding new transmission capacities. It caters to several govt and private entities such as MSEDCL, NTPC, APSPDCL, NDPL, Power Grid, IRCON, CSEB, KPTCL, ACC, Reliance group, Tata Group, Essar group, Aditya Birla group, Jindal group, Jai Balaji to name a few. For FY08 it registered 45% growth in net sales to Rs 944 cr whereas profit shot up 60% to Rs 64.50 cr posting an EPS of Rs 11 Rs on equity of Rs 11.77 cr having face value as Rs 2/- per share. Although the performance for the current fiscal till date is not so impressive still it is expected to do well in future. Traditionally, the last quarter has always been comparatively better due to dependence on govt orders and hence company is expected to end FY09 with a topline of Rs 975 cr and bottomline of Rs 45 cr which works out to an EPS of Rs 8 on the current equity of Rs 11.80 cr. Despite company having relatively a higher debt of more than Rs 300 cr, it’s a screaming buy. Investors are strongly recommended to buy at current levels as share price can easily double within a year.

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Apart from manufacturing power as well as distribution transformer a wide range up to 50 MVA in 200 kV class Kirloskar Electric (20.00) also produces 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. It is also one of the leading manufacturers of AC/DC motors, AC generators, DG sets, tractions 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. Recently, it has setup up a new plant at Maharashtra & Haryana for transformer & rotating machine respectively. In order to consolidate and integrate its operation, company has recently merged Kaytee Switchgear Ltd (KSL) & Kirsloskar Power Equipments Ltd (KPEL) with itself. Post merger, 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. 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.

HBL Power (100.00) is a technology focused manufacturer of several ranges of specialized application batteries i.e. nickel cadmium (pocket, fibre, and sintered plate), lead acid (VRLA, Tubular, LMLA), silver oxide zinc, lithium, thermal, etc. Infact it is the market leader in VRLA (valve regulated lead acid) and NCPP (nickel cadium pocket plate) batteries and enjoys 50% market share of domestic telecom market. Infact it is the world’s second largest player in nickel cadium alkaline batteries and stands 3rd for Nicad Passenger aircraft batteries. It also manufactures other power electronics such as thyristor controlled battery chargers, earth leakage monitors, battery monitoring systems, industrial chargers, uninterrupted power systems, distribution boards etc. It even has a dedicated railway division to execute end-to-end turnkey railway signaling works, starting from yard design, estimation, procurement, installation and commissioning. Recently it has put up two new factories at Vizianagaram and SEZ Vizag in Visakhapatnam under a capex of Rs 150 cr and is wow setting up a small facility in Mahape, New Mumbai. It is also planning to set up of JV Company in Saudi Arabia to manufacture Industrial Batteries. For the nine months ending Dec 2008 it has recorded 40% growth in sales to Rs 958 cr whereas PAT zoomed up 65% to Rs 73 cr thereby surpassing the entire FY08 net profit of Rs 67 cr by decent margin. Of late prices of lead, nickel, copper, tin and other metals has fallen considerably which may improve the operating margin of company in coming quarters. Still on a conservative basis, it may end FY09 with sales of Rs 1250 cr and PAT of Rs 80 cr i.e. EPS of Rs 33 on equity of Rs 24.30 cr

Sujana Tower (10.00) is basically into designing and manufacturing of telecommunication and hi-tension transmission towers. Its main products include power transmission line towers (from 11 KV to 400 KV) and telecom towers such as selfsupporting lattice towers upto 100 metres height, triangular/square cross-section, hybrid towers, angular/tubular towers, lattice Guyed masts and monopoles. Thru joint venture with EPC companies like Deepak Cables, Annapurna Const, company is also executing turnkey EPC projects in power segment and aims to emerge as turnkey contractor in next couple of years. Apart from having galvanized tower manufacturing capacity of 128,125 MTPA and heavy structural steel product capacity of 70,000 MTPA, company is in the midst of setting up a Greenfield plant in Chennai with an installed galvanized tower manufacturing capacity of 100,000 MTPA. For the trailing twelve months ending June 2008, it earned a NP of Rs 46 cr on sales of Rs 582 cr leading to an EPS of Rs 11 on current equity of Rs 20.80 cr having a face value of Rs 5/- per share. However, company has recently taken the extension to end the financial year in Sept 2008 with 15 months performance. Worth a punt

Vakrangee Software (22.00) is a leading provider of complete document and data management solutions encompassing large-scale data capturing & management, scanning, digitization and printing. To maintain its growth momentum, VSL is focusing more on private sector and is constantly adding large companies to its list from the banking and financial service, retail, power and telecom sector. It competently manages the printing of statements (monthly/quarterly/yearly), bills and mass communication collaterals of these private service providers. Its service matrix includes secured data hosting in the Data Centre, data composition/mining from the data dump like CRM data, transaction data, billing data, design of a one-to-one communication layout and superimposing the relevant text data of each customer of the client to make an effective and efficient personalized communication statement, followed by printing the data stream so prepared in a physical format or SMS/e-mail it to the end customer. At the same time it will continue to execute government projects and is soon expected to manage all the inbound documents related to passport issue. Currently its also busy in managing and printing new voting lists as well as voters' cards and slips as it being the election season. Since last three years, company’s topline and bottomline has been growing at an impressive CAGR of 90% and 160% respectively. Moreover, company has been consistently registering an OPM of more than 40% & NPM of 20%. Although company reported disappointing nos for the Dec’08 quarter it can end FY09 with topline of Rs 275 cr and bottomline of Rs 40 cr i.e. EPS of Rs 19 on current equity of Rs 21.40 cr. But before the March qtr nos are out.

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SEAMEC Ltd - Rs 48.00

South East Asia Marine Engineering & Construction (SEAMEC) is a 75% subsidiary of Coflexip Stena Offshore Mauritius Ltd which in turn is owned by Technip S.A of France, the largest oilfield engineering, construction and service group in Europe. SEAMEC operates multi-purpose support vessels (MSV) for diving and provides underwater/subsea engineering and construction, maintenance, inspection of under-water structures, rescue-operations and fire-fighting and other support services for offshore oil/gas installations located in India or abroad. Hence it is a pure play of charter hiring of MSVs, which are more specialized vessels than Offshore Supply Vessels (OSV) as they are equipped with Dynamic Positioning (DP) system and can go underwater for repair & maintenances of underwater pipelines. Notably, there are just about 30-35 MSVs operating in the world and Technip is the undisputed leader with 17 of them. In India, SEAMEC is a leader with 4 out of 6 vessels whereas the balance two are with ONGC. To conclude, SEAMEC specializes in vessel management, marine management, dive support, fire fighting, subsea construction, ROV support, pipelaying, rescue operations, logistics, mooring & de-mooring, cranage etc.

Earlier, SEAMEC owned three vessels viz., Seamec-I with 1700 DWT, Seamec-II with 2100 DWT, Seamec-III with 2100 DWT. In June 2006 it acquired a cable lay vessel named Seamec Princess (Ex Oceanic Princess) from M/S James Fisher Logistics Ltd. Post acquisition vessel was modified to DP-II Diving Support Vessel at Dubai dry-dock and put on charter with effect from 1st March 2008. This vessel is quite huge and technically more advanced compared to the existing three vessels. The current status of deployment of all the vessels is as follows:

SEAMEC-I - Hired out to M/s Dolphin Offshore Enterprises (India) Ltd
@ US$ 23,425 per day until 10th March 2010

SEAMEC-II - Hired out to Rana Diving Marine Contactors, Italy
@ US$ 95,000 per day until 30th April 2009

SEAMEC III - Hired out to Condux SA de CV, Mexico
@ US$ 59,000 per day until 3rd August 2009

PRINCESS - Hired out to M/s. Workboat International FZCO, Dubai
@ US$ 68,333 per day until 12th June 2009

From the above charter rates it can be concluded that company has still not felt the heat of recession or slowdown as all its vessels are given out at lucrative rates. So the key to company’s performance will be charter rates at which it will enter the future contracts. Due to the drastic fall in crude oil prices, the oil exploration and production activities have come down sharply and accordingly the rental charges for oil rigs, support vessels and other ancillary services also dropped due to fall in demand. To worsen the situation, most of the developed countries went into recession and liquidity crises also hit the world simultaneously. SEAMEC also faced some payment delays / early cancellation of contract etc with couple of its international customer but everything is settled now. Incidentally earlier, due to dry docking, minor accidents, repair etc some or the other vessel of the company was always out of work. But in the last quarter all its four vessels were deployed full time leading to the bumper performance by the company.

Most importantly, no vessel is planned for dry dock in the current fiscal and barring unforeseen circumstance like cancellations, accidents etc all the vessels are expected to be continuously employed. Even if company charters out it vessels at 30% lower rate, still it will do reasonably well. Earlier company was planning to acquire one more vessel but looking at the current scenario it has been dropped. It was also contemplating to bid for exploration and pipe laying engineering contracts on its own but again it has been put to back burner. Interestingly, despite being in a capital-intensive industry, this MNC is a debt free company. To comply with the listing agreement, foreign promoters have last quarter only brought down their stake to 75% from above 78%. It seems majority of promoter selling was taken over by Sundaram Mutual Fund. Financially, with a rocking performance for the last Dec’08 quarter company was able to end CY08 on quite a buoyant note. Total revenue increased by whopping 60% to Rs 269 cr whereas PAT improved by 30% to Rs 47 cr leading to an EPS of Rs 14 on the equity of Rs 33.90 cr. With huge reserves of Rs 275 cr and gross block of Rs 375 cr this debt free company is trading extremely cheap at an EV of Rs 175 cr. For year ending Dec 2009, it is roughly estimated to clock a turnover of Rs 325 cr and PAT of Rs 65 cr i.e. EPS of Rs 19 on current equity. Investors are recommended to buy at current levels, as share price can double within a year. However, it’s a non dividend paying company despite of making handsome profits.

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