STOCK WATCH

XL Telecom & Energy (40.00) has been the pioneer in solar module manufacturing since last 15 years. Due to gaining popularity of this non conventional energy, company is in advanced stage of implementing the 120 MW solar cell manufacturing facility in Fab City SEZ, Hyderabad with a capital outlay of Rs 360 cr. For this it has also inked a five-year contract with Chinese firm LDK Solar to supply multi-crystalline solar wafers which is a key component for solar cell and panel manufacturing. It is also adding another 40 MW module manufacturing capacity thereby taking its total module manufacturing capacity to 220 MW. Remarkably, company has even got itself forward integrated in solar value chain by entering into EPC segment of solar farm establishment and has already succeeded in setting up its first solar farm in Majorca, Spain with an installed capacity of 1.6 MW. With this it has become the world’s first and only solar company to capture the complete solar value chain from manufacturing of solar cell to solar module to setting up of solar farm. After getting this success, company is now exploring the opportunities to establish such solar farms in Italy, southern France and other European countries in next 3 years totaling about 300 MW. Meanwhile, company has registered very poor performance for the Dec’08 quarter. Its bottomline is getting hit due to significant interest cost on the loan which it has borrowed for expansion. However for the year ending June’09 it may report 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. Although company has reset the FCCB conversion price to Rs 160 from Rs 260, still no equity dilution is expected in near future. Keep a close watch

Numeric Power (230.00) has eight world class manufacturing facilities spread across Pondichery-TN, Chennai-TN, Parvanoo-HP and Colombo-Srilanka, thereby emerging as the biggest integrated manufacture of UPS in India. It also undertakes turnkey projects and offers end to end solution for SCADA/EMS package, large network of industrial process, power transmission support systems and distribution management. It has an enviable and high profile clientele including Infosys, Siemens, Intel, Philips, Microsoft, Veritas, HDFC, Citibank, ICICI, RBI, NIC, Reliance, ABB, BMW, NCR, Nokia, major stock exchanges etc. As per rough estimates, around 75% of the ATMs in the country are fitted with UPS supplied by the company. Recently, company ventured into solar power generation using Photo Voltaic Modules and initially intends to develop solar hybrid UPS systems. To become more efficient, it is backward integrating into batteries and is scouting for a technology partner to set up a battery manufacturing unit. For nine months ending Dec 2008, company’s sales increased marginally to Rs 296 cr but PAT declined by 20% to Rs 23 cr. Hence it may end the current year with a topline of Rs 400 and bottomline of Rs 25 cr i.e. EPS of Rs 50 on current equity. However, it has the potential to clock a turnover of Rs 450~475 cr and NP of Rs 35 cr i.e. EPS of Rs 70 for FY10. A solid bet.

Elecon Engineering (40.00) is a leading manufacturer of bulk Material Handling Equipment (MHE) and Asia’s largest producer of industrial gear with 26% market share in India. For more than five decades, it has been supplying hi-tech equipment to core sectors such as steel, fertilizer, cement, coal, petrochemicals, lignite and iron are mines, power stations, defense and port mechanization in India and abroad. With a strategy of diversification, last fiscal company started a new business of setting up of Wind Turbine Generator (WTG) farms and manufacturing of WTG gear boxes. It has started manufacturing of WTG gear box having capacity of 1 MW to 2 MW, which is the import substitute, thereby becoming the first Indian company to manufacture gearboxes of such sizes. Currently, it has an pending order in hand of Rs 1800 cr comprising of Rs 1570 cr for MHE division and Rs. 240 cr for gear division. For the latest Dec’08 quarters, its revenue grew by 35% to Rs 245 cr but its net profit fell by 25% to Rs 12.50 cr on the back of substantial forex loss. Hence it may end FY09 with sales of Rs 950 cr and PAT of Rs 50 cr i.e. EPS of more than Rs 5 on current equity of Rs 18.60 having face value as Rs 2/- per share.

Jyoti Structure (65.00) has an expertise to take on turnkey projects for transmission lines from 33 kV to 800 kV and substations upto 400 kV irrespective of terrain, location and requirements of power utilities within and outside India. In order to provide end-to-end solutions company has two manufacturing facilities which are capable of making proto types, fabricating and galvanizing transmission towers and structures, microwave towers, wind mill tower, railway electrification structures, etc up to 76,000 MTPA. Besides, its wholly owned subsidiary JSL Structures is having a capacity to manufacture another 19800 tons of transmission line towers. On the back of huge flow of investments in the power transmission and distribution segment, it has an all time high order book position of more than Rs 3500 cr. Meanwhile, company has reported encouraging set of nos for current year till date and is expected to end FY09 with topline of Rs 1650 cr and PAT of Rs 70 cr leading to an EPS of Rs 9 on current equity of Rs 16.35 cr with face value as Rs 2/- per share. Apart from above, company is betting on international market and has formed a couple of joint venture companies in UAE and South Africa. Keep accumulating at sharp declines.

International Combustion (India) Ltd 140.00

Established in 1936, International Combustion India Ltd (ICIL) is recognized to be a leading manufacturer of sophisticated plant and machinery for core sector industries such as mining, steel, cement, petrochemical, construction, sugar, power, textile, paper, rubber, pharma, chemicals etc. From a modest beginning as a trading house, ICIL today boasts of manufacturing specialized range of engineering products under technical collaboration and license agreement from various global leaders. It has an enviable list of clientele including corporate giants like Tata, Essar, Jindal, Aditya Birla, Ashok Leyland, SAIL, NALCO, Atlas Copco, NTPC, HLL, Nirma, P&G, ABB, Alstom, Bajaj Hindustan, LMW, ITC, TNPL etc. According to its product profile, company has broadly segmented its business model into following two divisions:-

I. Heavy Engineering Division :
This is the main division as nearly 80% of total revenue comes from it whereas it contributes more than 95% of earnings. This division has been further divided into following three categories:-

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  Vibrating equipments: ICIL manufactures and markets a wide range of mechanical and electro-magnetic vibrating screens, feeders, sizers, & conveyors which can handle all types of bulk solids, whether large lumps or very fine grains, wet or dry, or whether abrasive such as scrap, flux and sinter. As accessories it also makes exciters, DC brake unit & monitoring system for vibrating machines.

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  Bulk Material Handling: Under this category, ICIL deals in spiralling belt elevators, scooping belt conveyers, girdle pocket elevators, apron feeder, mining haulages etc. as an intelligent solutions to suit even difficult to handle materials.

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  Grinding, Classfication and Drying system: ICIL offers complete grinding mill systems designed to pulverise and classify various kinds of material, including non-metallic minerals, fertilisers, chemicals and many other manufactured products. Importantly, it markets ‘Raymond” American brand roller mill, pulverisers, grinding mills, mechanical air separators and flash drying system, which can reduce many products by 95~98% or refine them below 10 microns

II. Gear Motors & Gear Box Division
Under license from Danfoss Bauer, Germany, ICIL offers a comprehensive range of geared motors, gear boxes and electric motors manufactured on specially designed inter-linked CNC production lines. It also exports these products to neighboring markets including Iran and Sri Lanka. Besides company has been chosen as the outsourcing partner by Danfoss Bauer itself and has even started exporting cast iron machine parts to them.

Currently, ICIL is having three fully equipped manufacturing facilities spread across Calcutta, Nagpur and Aurangabad. To have a cutting edge technology for manufacturing premium quality equipment, ICIL has made several tie-ups with international majors like Danfoss Bauer(Germany), Mogensen(Germany), IMS Engineering(South Africa), Alstom Power(USA), Gummi Kuper (Germany) and Tredomen Eng (UK) for each product group. It has also entered into a license agreement with Ecutec(Spain) to manufacture microfine classifiers. Ironically, all the players in user industries are ramping up their capacities which translates into a huge opportunity for company's products. To meet the increasing demand, an expansion programme has been initiated by the company for augmenting the manufacturing capacity of the gear box/geared motor division. It is also upgrading the manufacturing capacity of the Heavy Engineering Division. On the back of its wide product range and high engineering skill, ICIL is contemplating to enter the lucrative turnkey project segment in future.

Fundamentally, ICIL is on a strong footing with an reserves of around Rs 50 cr i.e. book value of nearly Rs 220 as on March 2009. Importantly it’s a debt free company and has never even raised any significant money thru equity route. In other words, there is no major equity dilution since 1995. It has been funding its capex plan thru internal accrual only. Being a seven decade old company, it has a conservative approach and believes in slow but consistent growth. In the last five years, it has recorded a topline CAGR of 30% whereas bottomline has grown at a CAGR of 140%. Besides it has an impressive ROCE of 40% and ROE of 25% on a very tiny equity of Rs 2.40 cr. On the back of poor performance for the Dec’08 quarter, it has posted marginal growth in sales to Rs 71 cr and 20% decline in net profit to Rs 6.50 for the first nine months. Accordingly for entire FY09 it is estimated to clock a turnover of Rs 95 cr and PAT of Rs 8.50 cr leading to an EPS of Rs 35 on current equity. Although management can declare 50% dividend but on a conservative note 35% dividend is expected for FY09. ICL is expected to benefit from the sharp fall in metal prices being its main raw material. It has the potential to earn a profit of more than Rs 12 cr for FY10 i.e. EPS of Rs 50. Hence with expected CEPS of more than Rs 60, and EV/EBIDTA of less than 2x, company is available fairly cheap at current market cap of merely Rs 35 cr. Ironically, scrip which crossed Rs 900 in Dec’07 tumbled down to as low as Rs 80 in March’09. However now it has marginally recovered to Rs 140 in a very short span. So investors are strongly recommended to accumulate it at sharp declines for a price target of Rs 280 (i.e. 100% appreciation) in 12~15 months. Moreover its a strong bonus candidate as well.

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STOCK WATCH

Man Industries (27.00) is one of India's largest producers and exporter of large diameter Longitudinal submerged arc welded (LSAW) pipes and Helically submerged arc welded (HSAW) pipes. Infact it is the only company in India to manufacture 18 mtr long HSAW pipe. Of late, company has started a new production line for HSAW pipes with a name plate capacity of 200,000 MTPA thereby equalizing the total production capacity to 500,000 MTPA each for LSAW as well as HSAW. Remarkably it has bagged huge order to the tune of Rs 1100 cr during Sept 2008. To become a global player, company is setting up a HSAW pipe manufacturing plant with an capacity of 300,000 MTPA in USA under a capex of Rs 400~450 cr. Take the benefit of new provision, company has decided to buyback its FCCB up to USD 50 million issued in May’07 and redeemable in May’12. More importantly promoters are constantly buying the shares from open market and increasing their stake thru creeping acquisition. Although the performance of the company has reported a sharp decline in the bottomline for the first nine months still it’s a good bet for long term. Having seen a high of Rs 177 in Jan’08, scrip is now available at only Rs 25. Negligible downward risk.

Shanthi Gears (30.00) is the second largest player in industrial gear segment with 20% market share and at the same time is the undisputed leader in the customized product segment where the manufacturing is as per clients’ requirements. Of late, company has even started manufacturing gearboxes of 250 KV for windmills. Incidentally, the recent fall in steel and other metals will reduce its input cost considerably and may give a good fillip to its bottomline in coming qtrs. Its Dec quarter nos were suppressed due to onetime extraordinary expenditure of Rs 7 cr as interest and forex loss towards redemption of FCCB. For FY09 it may clock a turnover of Rs 235 cr and PAT of Rs 38 cr i.e. EPS of Rs 5 on equity of Rs 8.17 cr having face value as Rs 1/- per share. Moreover if rumors are to be believed then at one time, India’s largest windmill manufacturer Suzlon, through its subsidiary Hansen Transmission (world’s fifth largest maker of gearbox), was interested in taking a stake in the company. As of now it is heard that promoters have put the company on the block and is waiting for the right price to exit. Take your bet. But if it really happens, this may lead to re-rating of the company and share price may see a vertical rise.

JMC Projects (75.00) part of Kalpataru group, is among the top seven players for building and factory construction in India & has also been recognized as India’s sixth fastest growing company by the latest “Business Today” June’08 edition. It has successfully ventured into fields of turnkey execution involving civil, mechanical, electrical, HVAC, fire fighting, architectural and landscaping works. Lately, it has started focusing on infrastructure and power projects and is aggressively bidding for contracts to construct bridges & flyovers, roads & highways, railways stations, marine work, water supply & irrigation projects and construction of power plant. This has resulted into massive order in hand position of more than Rs 2000 cr as on March 2008 which is twice its FY08 turnover. For nine months ending Dec 08 it has already posted an EPS of Rs 11 with 60% rise in sales to Rs 636 cr and marginal decline in NP to Rs 20.50 cr. In future company intends to take up railways, airports and water management projects on an EPC basis which will further add to its bulging order book. Despite higher interest cost and depreciation charge, for FY09 it may clock a turnover of Rs 1250 cr and profit of Rs 23 cr for FY09 leading to an EPS of Rs 13 on current equity of Rs 18.14 cr. Accumulate at declines

Savita Chemicals (130.00) specializes in manufacturing of petroleum specialty products like transformer oils, .liquid paraffin, petroleum jelly, white mineral oil, automotive and other industrial lubricants. It is India’s largest exporter of petroleum specialty products to South Africa, Australia, Middle East & South East Asia. Of the total sales, transformer oil constitutes around 45%, white oil/liquid paraffin’s around 35% and lubricating oil balance 20%. As company is working at almost 100% capacity it is setting up a Greenfield project with an investment of Rs. 15-20 cr for petroleum products to augment the capacity by around 25~30%. It also has a tie-up with Idemitsu, Japan to market its “Idemitsu”range of automotive lubricant and “Daphne” range of industrial lubricants which are rated one of the best in the world. Importantly, company enjoys 40% market share in transformer oil, hence will be immensely benefitted with huge capacities planned in power generation. Secondly, the sharp fall in crude oil prices will also boost up its margin as base oil forms its major raw material. Apart from petroleum business, company has also setup wind mills with an installed capacity of 26.3 MW which will be augmented to 34.9 MW in this fiscal. For the last Dec’08 qtr it reported a loss of Rs 3 cr as it took a hit of Rs 18 cr due to forex fluctuation. Buy for long term

ICSA (India) Ltd - Rs 90.00

Incorporated in 1994, ICSA India Ltd (ICSA) formerly known as Innareddy Computer Software Associates (India) Ltd is a Hyderabad based company engaged in constructing power transmission lines and substations apart from providing state-of-art Embedded technologies and software applications for the power, oil, gas and water sectors. It boasts of developing innovative products suitable for power utilities in the field of energy management, energy audit, control application which identifies distribution losses, and help the power utilities reduce their costs & streamline their operations. It also offers versatile data Acquisition system using several communication media such as GSM, CDMA, Satellite, Optical fiber and Radio Frequency. Thus the company’s main business motive is to bring down the cost per unit of power by optimizing critical production processes and minimizing transmission, distribution and transaction losses while at the same time save valuable consumer resources by real time audit and meter reading, billing systems, accountability and transparency systems, shortages and disaster prediction applications, SCADA (Supervisory control and Data Acquisition) and management solutions using best practices. Apart from power it also provides remote monitoring applications to multiple sectors like oil & gas, mining, irrigation, transport and water utilities.

Broadly, ICSA has divided its revenue model into following two segments:

· Embedded Solution/Products Division: This has now become the core business of ICSA as it derives nearly 60% revenue from such products/solutions. Ironically, ICSA doesn’t face any significant competition as it enjoys virtual monopoly for few of its product. This is because all the products of company are developed after strong in house research, then trial and tested thoroughly before being launched. Today, these products are very well accepted in the market and have gained a good reputation leading to frequent repeat orders. The list of its popular product includes Intelligent Automatic meter reading, Distribution transformer monitoring system, Theft detection device, Energy audit services, Pole top & Micro remote terminal unit to name a few. Apart from catering to power sector vertical, ICSA also has few products/solutions for water management and oil & gas segment such as Automatic water meter reading, Cathodic protection system, Pilferage detection system, Telemetric unit etc. Last fiscal, it launched two new unique products namely Remote street light control system & Agricultural load management system. Importantly, ICSA has already acquired the Intellectual Property Rights for most of its products/technology and is contemplating to acquire international and process patents in future.

· Engineering and Infrastructure Division: Presently, this division contributes around 40% of total revenue. Thru this division ICSA undertakes electrical infrastructure projects in power generation, transmission and distribution sectors both in India and abroad. On the EPC basis company has the capabilities in designing, supplying, transporting, erecting, testing & commissioning of 400/220/132 kV transmission lines & sub stations, outdoor & GIS sub stations. Whereas on the Turnkey basis it executes HVDC (High Voltage Direct Current) Distribution works, Rural Electrification works, Industrial Electrification works & construction of 33/11 kV Indoor & Outdoor Sub Stations.

Headed by Mr. G. Bala Reddy, ICSA follows an asset light business model under which it designs and develops prototype models of the product and outsources manufacturing. Thus it focuses on critical intellectual capital based operations, primarily research and development. That’s why R&D accounted for nearly 30% of the ICSA team in FY08. To summarize the business process, company procures the raw materials and supplies it to the contractors/job workers for the manufacture of components. The components manufactured are subsequently assembled by the company in its own unit and then the in-house embedded, production and quality control personnel, embed it with the requisite software, test and certify the product before dispatch. Thus the software which form the core of the product is developed and embedded in-house. With full faith and guarantee on the technology/product, ICSA does innovative concept-marketing whereby it promises a return on investment to its customers and also offers a one year free maintenance on the product. Although majority of its clientele includes various State Electricity boards, but company has started tapping private corporate with Reliance Energy, Tata Power already being its customer. Earlier it signed an agreement with OIL India Ltd to provide products and services in monitoring oil and gas pipelines which will forecast and control the rate of corrosion apart from addressing issues such as pilferage and thefts along the pipeline.

As a part of its inorganic growth, last year ICSA acquired the energy Meter plant of ECE industries in Hyderabad, thereby enabling itself to manufacture energy meters on its own capacity. Moreover in order to enhance the revenue and enjoy the tax benefit, it has diversified into non conventional energy and is setting up a 20 MW capacity wind power project in Andhra Pradesh out of which nearly 10MW has already being commissioned. On the international front, during last fiscal ICSA entered into a marketing joint venture with Global Digital in Malaysia to distribute, license and provide solutions in the field of telemetry for power, utilities, oil and gas, SAP compliance, using proprietary solutions (software and hardware developed by ICSA). It has also formed a subsidiary in Singapore to strengthen its presence in the Asian market.

To conclude, its very clear from above, that ICSA’s fortune depends majorly on power industry. And with the massive investment lined up in power sector, the future prospect of company looks promising. Currently it is estimated of having an unexecuted order book position of more than Rs 800 cr. This includes the recent order of Rs 460 cr bagged by the company from Bihar and Maharashtra State Electricity Boards. Importantly, government has made Energy Audit mandatory for all SEBs and distribution companies. This augurs well for ICSA and opens up a huge and sustainable opportunity as it offers end to end solution for energy audits. Secondly, government has proposed to undertake incentive financing to enhance the commercial viability of SEBs which will force the SEB to cut down their T&D losses thereby automatically creating huge demand for company’s product. Unfortunately, India has one of the highest T&D losses as high as 35% against 10% in China. Apart from above ICSA is expected to get infrastructure orders under APDRP and the RGGVY programmes.

Financially as well as fundamentally company has been doing excellent and riding the boom in power sector. Its topline as well as bottomline has grown at a whopping CAGR of 225% and 300% respectively in the last four years. Even for the latest Dec’08 quarter ICSA has recorded handsome growth and accordingly for the first nine months its sales jumped up 80% to Rs 825 cr and NP shot up 50% to Rs 134 cr. Thus it has already surpassed the sales and NP of entire FY08 by decent margin. Infact it is estimated to end FY09 with sales of Rs 1100 cr and PAT of Rs 170 cr leading to an EPS of Rs 36 on current equity of Rs 9.40 with face value as Rs 2/- per share. Incidentally during 2007 company had raised nearly Rs 200 cr (@ Rs 250 per share for FV as Rs 2) thru FCCB route out of which Rs 100 cr is yet to be converted. Interestingly, share price which hit Rs 650 in Dec 2007 was decimated to Rs 50 in March 2009. So despite low promoter holding & high debt investors can keep accumulating this scrip only at sharp declines. Scrip can appreciate 50% in a years time.

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ICSA India Ltd
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