Zen Technologies - Rs.63.00

Incorporated in 1993, Zen Technologies Ltd. (ZEN) is a pioneer in the design, development and manufacture of world class, state-of-the-art training simulators for the defense sector. In fact, it was the first company in India to commercialize PC-based visual simulation technology for small arms training simulators. A simulator is nothing but a training device that duplicates artificially the conditions likely to be encountered in some operations. Apart from training security forces, simulators are extensively used for weapons training, aviation, maintenance, medicine, power plants, bridges, ships and entertainment. The four main products of the company that are widely accepted by the market are Small Arms Training Simulator (ZEN SATS), Hand Grenade Simulator (ZEN HE36S), Advanced Weapons Simulator (ZEN AWeSim), and Driving Training Simulator (ZEN DTS). Last fiscal, it introduced two new products TacSim (Tactical Engagement Simulator) and ATGM (Anti-Tank Guided Missile Simulator), for which it has partnered with SAAB Training Systems, Sweden, for production of TacSim. Besides, it also manufactures Tactical Reconnaissance system (ZEN TReS), Forward Observer Simulator (ZEN FOS), Radar Scan Converter (ZEN RSC), Integrated Missile Simulator (ZEN IMS) etc. Recently, it has also developed a cabin crew simulator with great potential for in-flight cabin crew training.

To develop simulators, the company has also acquired a range of skills including software, electronics, mechanical, and optics which gives it an upper edge over its competitors. ZEN has supplied simulators to over 70 customers all over India but its main customers are Defence Services, State Police forces, Para Military forces and the Navy of a South East Asian country. Notably, its simulators are widely accepted by Indian Security Forces. Now with its ZEN DTS product, the company is targeting the civilian market in a big way. Moreover, it has been participating in the overseas defence exhibitions, wherein strong interest is being shown in simulators. Hence to set up its foothold in international market, ZEN has decided to establish a subsidiary in United Arab Emirates (UAE) to tap the Middle East and African counties. After bagging an Information Security Management System (ISMS) certificate as per ISO/IEC 27001:2005 standard by STQC, the company is betting big on exports and is partnering with strong local organizations in the overseas market.

ZEN is also expanding its base to meet future needs and has bought land near the Hyderabad new international airport for construction of world-class integrated facilities. Ironically, its share, which hit a high of Rs.325 in Aug.’05, is available at mere Rs.60 due to constant selling by FIIs. For FY06, its sales as well as net profit have improved by around 10% to Rs.20 cr. and Rs.7 cr. respectively. However for H1FY07, its top-line was flat at Rs.4.50 cr. and it reported a net loss of Rs.0.60 cr. compared to net profit of Rs.0.30 cr. due to higher provision for R&D expenses. Due to dependence on business from government organizations, its quarterly results will be quite lumpy and corresponding quarter on quarter results will be uneven. For the full year FY07, it is expected to register total revenue of Rs.18 cr. with net profit of Rs.4.50 cr. i.e. EPS of Rs.6 on its equity of Rs.7.63 cr. Investors can buy at current levels as the risk:reward ratio is quite favourable with a price target of Rs.90 (50% appreciation) in 12-15 months.

FCS Software - Rs.91.00

Incorporated in 1993, FCS Software Solutions Ltd. (FCS) is engaged in creating customized software solutions, maintaining software applications and creating digital content solutions for its clients. The business model of the company is to create dedicated software developing teams for its customers, which helps reduce the development cost of its clients and make them more efficient. In short, the following three segments are its core competency:

IT Consulting Services: This segment constitutes about 55% of its total revenue and provides Application Maintenance including ongoing functional and application support for a customer’s application maintenance needs. It also provides toll-free voice access, e-mail and chat support 24x7 customer care service.

E-learning & Digital Consulting: The contribution of this segment is about 25% to FCS’s the total revenue and it develops and manages E-learning solutions that help organisations achieve optimal performance. The solutions are tailored to meet specific organisational requirements that set a definite road map for increased return on investment.

Product Engineering Services (PES): About 20% of its total revenue is generated by this segment and it specifically focuses on servicing software product companies. All services, processes and teams are structured to provide Software Product Life Cycle Management.

In a decade of its existence, FCS has carved out a niche for itself in core IT areas like e-learning, digital content services, IT consultancy and product engineering services. It derives nearly 100% of its revenue from USA and its major clients are Canon, Domino, John Deere, AIG in E-Learning & Digital Consulting, GE Transportation, Ace Technologies Inc., Savant Consulting, Oxford Global in IT Consulting business and Synergy Technology, Knowles Electronics, Digital Intelligence Systems Corp., United Software Consulting Solutions Inc, Eliassen Group Inc. for Product Engineering assignments.

Its offshore development centre in India is based in Noida apart from a development centre and marketing office at San Jose, USA. In 2005, the company enhanced capacities by setting up one more unit at Punchkula in Haryana. With the global demand for IT Applications rapidly increasing, FCS is aggressively expanding its infrastructure for which it has been allotted around 2 acres plot in the Chandigarh Technology Park. FCS has further bought another 1 acre plot in Noida. Besides, it was also awarded a plot/building Rs.1.5 cr. at an auction by Punjab and Haryana High Court but the matter is under litigation although the company has made the payment.

In Aug.’05, FCS raised around Rs.17.50 cr. through an IPO at Rs.50 per share. From it, the company has already deployed more than Rs.8 cr. till Mar.’06 and the balance has been invested in fixed deposits with banks. For FY06, its top-line grew by 35% to Rs.116 cr. and bottom-line increased by 60% to around Rs.15 cr. due to better operating efficiency. Maintaining the same trend for H1FY07, its revenue increased by 35% to Rs.72 cr. whereas profit improved by 40% to Rs.10 cr. Accordingly for the full year FY07, it is expected to register sales of Rs.150 cr. with net profit of Rs.19 cr. This works out to an EPS of Rs.14 on equity of Rs.14 cr. For FY08, it can report an EPS of Rs.18. Hence at a reasonable discounting of 12 against its FY08 earnings, the scrip has the potential to touch Rs.200 mark (i.e. 100% return) in 12-15 months.

Stock Watch

As stated earlier, all cement companies are likely to report excellent numbers for the Dec.’06 qtr. JK Lakshmi Cement (Code:500380) (Rs.181) has already announced terrific results. Sales zoomed up by 50% to Rs.229 cr. whereas profit multiplied 5 times to Rs.55 cr. On the back of higher price realization and it registered an EPS of nearly Rs.10 for the quarter. Notably, it reported an OPM of 32% compared to 20% in Q3FY06. To cash on this boom, the company is putting up two grinding units of 5 lakh tonnes each, one of which one is expected to commence operation soon and the second by Dec.’07. Post expansion, its cement capacity will stand augmented to 4 million tonnes. It is also setting up a 36 MW pet coke based captive power plant, which is expected to be operational by June’07 and will lead to substantial saving in power to the extent of Rs.30 cr. per year. For FY07, it may clock a turnover of Rs.800 cr. with net profit of Rs.160 cr. and post an EPS of Rs.25 on its diluted equity of Rs.64.90 cr. Scrip has the potential to touch even Rs.300 in the medium to long-term.

All the liquor scrips have appreciated handsomely in the last few months. Even Mount Shivalik and IFB Industries zoomed up recently but GM Breweries (Code:507488) (Rs.113) is still trading cheap. It made a very smart turnaround in FY06 by registering an OPM of around 16% compared to 7% in FY05. Even for the first two quarters of FY07 it reported a healthy OPM of around 14%. It is the single largest manufacturer of country liquor in Maharashtra and enjoys virtual monopoly in the districts of Mumbai and Thane. It also has the facility to manufacture IMFL but is not utilizing it. Company is investor-friendly and has an uninterrupted record of dividend payment from the day of listing. For FY07, it may report sales of around Rs.185 cr. with net profit of Rs.14 cr., which will lead to an EPS of Rs.15 on its equity of Rs.9.40 cr. At the current market cap of Rs.100 cr., it’s a screaming buy. Buy in huge quantities as the scrip can shoot up sharply post the Q3 results on 25th Jan.

Aro Granite (Code:513729) (Rs.108) is one of the largest manufacturer and exporter of modular granite tiles and slabs with more than 5% share of India’s total export of granite products. For the Dec.’06 quarter, both sales and NP rose by 40% to Rs.25.40 cr. and Rs.3.60 cr. respectively. To meet the increasing demand, the company has increased its tile capacity substantially to 5,40,000 sq. mts from 1,80,000 sq. mts, whereas the slab capacity has been enhanced to 3,90,000 sq. mts from 2,95,000 sq. mts. For FY07, it is estimated to clock a turnover of Rs.110 cr. with net profit of Rs.15.50 cr., which translates into an EPS of Rs.22 on its current equity of Rs.7.02 cr. Last year, one of the promoters, Mr. Prem Arora, sold his entire 25% stake in the company to the other promoter and strategic investor at Rs.75 per share. Now the company is fully managed by Mr. Sunil Arora and is on a strong growth trajectory. Notably, FY08 will be a bumper year for the company as its full capacity will become operational.

In spite of steep rise in residential property prices and marginal upward revision in interest rate, the demand for housing loan is quite robust. Can Fin Homes (Code:511196) (Rs.69) recently announced very heartening result for the December’06 quarter. Its total revenue grew by more than 30% to Rs.49.50 cr. whereas PAT was up by 45% to Rs.9.50 cr. registering an EPS of Rs.4.75 for the quarter. The nine months figures are much more encouraging. On a conservative basis, it is expected to end FY07 with top-line of Rs.190 cr. and profit of Rs.33 cr. which means an EPS of Rs.16 on its equity of Rs.20.50 cr. Due to lack of interest of institutional investors, the scrip is trading very cheap. As on 31st Mar.’07 its book value is estimated to get enhanced to more than Rs.95. It is also expected to declare 30% dividend, which will result into an yield of more than 4%. On the back of such a strong fundamentals and promising future prospects, the scrip is bound to cross Rs.100 in medium-term. Just hold on to it patiently.

Most mid-cap IT scrips have rallied sharply in the past few weeks and Aftek Ltd. (Code:530707) (Rs.71) is no exception. However, it is still discounted very poorly compared to its peers due to promoter concerns and link with some big operators. It has come out with good set of numbers for Q3FY07. Net sales increased by 30% to Rs.82.50 cr. and net profit improved by 25% to Rs.25 cr. In line with the management’s intention to grow inorganically, the company has decided to increase its stake in Digihome Solutions Pvt. Ltd. to 51% from the present 25%. Moreover, it is awaiting High Court permission and shareholders approval to merge C2Silicon Software Solutions Pvt. Ltd. and Elven Micro Circuits Pvt. Ltd. with itself. For FY07 on a standalone basis, it may report a top-line of Rs.325 cr. and PAT of Rs.110 cr. i.e. EPS of Rs.11 on its fully-diluted equity of around Rs.20.70 cr. Scrip can touch Rs.90 in couple of months.

Transpek Industries - Rs.93.00

Transpek Industries Ltd. (TIL) was actually set up in 1965 for manufacturing Transparent Acrylic Sheets and hence was named ‘Transpek’. Since then, the company has grown into a leading manufacturer and exporter of a range of chemicals servicing the requirements of textiles, pharmaceuticals, agrochemicals, polymers etc. In fact, today TIL is Asia’s largest manufacturer of Thionyl Chloride and Acid Chloride. Thionyl Chloride is an intermediate for crop protection chemicals in the agrochemicals industry. Managed by the Shroff family of Excel Industries fame, TIL used to be the largest and only manufacturer of sodium hydro sulfite, safolite, safoline, zinc oxide and zinc dust. But these businesses have been transferred to Transpek Silox Industry Ltd., a joint venture company.

With it’s expertise in sulphur and chlorine chemistry and ability to undertake projects involving sulphonation, acid chloride reaction, friedel-craft, esterification and high pressure reaction, TIL also does Custom Synthesis and Toll Manufacturing. Notably, its R&D activity is so strong that the manufacturing technologies for all its existing products are developed in-house. In fact, last fiscal it adopted improved technology for the manufacture of Thionyl Chloride and with de-bottlenecking enhanced its installed capacity from 16500 TPA to 19500 TPA. It is further planning to expand the capacity to 24000 TPA. Moreover, it has also commissioned the continuous Acid Chloride plant, which will lead to consistency in production and quality, better efficiency and lower man-power requirement. It is putting special thrust on exports and is in the process of tying up business with several reputed overseas companies. Also in order to hedge itself from the seasonality in business, the company is focusing on other market segments such as intermediates for pharmaceuticals, dyes and polymers.

Fundamentally, the company is doing extremely well. For the six months ending 30th Sept.’06, while sales increased by nearly 40% to Rs.47.50 cr. net profit zoomed 120% to Rs.4.30 cr. importantly, its OPM improved substantially to 21.50% against 16% last year. Assuming the same growth record, it is estimated to end FY07 with sales of Rs.100 cr. and net profit Rs.9 cr. This will lead to an EPS of Rs.18 on its current equity of Rs.5.07 and it may declare 35% dividend for FY07. Having a book value of Rs.70 and with a dividend yield of nearly 4%, this scrip is trading fairly cheap at P/E multiple of 5. Investors are recommended to buy it at declines with a price target of Rs.150 i.e. 50% return in 12-15 months.

IG Petrochemicals Ltd - Rs.72.00

Incorporated in 1988, IG Petrochemicals Ltd. (IGPL) is the world’s third largest producer of Pthalic Anhydride (PAN), mainly used in the manufacture of plasticizers for production of PVC products, shoe soles etc., Alkyd Resins used for manufacturing paints and as an intermediate in the production of dyes and pigments and for the in production of unsaturated Polyester Resins. IGPL is a recognized EOU with exports accounting for 75% of sales. It is an ISO accredited 9001:2000 company for Quality Management Systems from BVQI. A few years back, the company was in a very bad shape and registered as a sick company with BIFR. But by aggressive debt restructuring and better market conditions, it made a smart turnaround and is now on a strong footing. It has also been de-registered from BIFR in June’06 as its net worth has positive.

IGPL’s plant is located at MIDC-Taloja in Maharashtra, 50 kms away from JNPT in Nhavasheva and has an installed capacity of 1,20,000 MTPA. It uses the Orthoxylene Oxidation method which produces high-pressure steam that makes the plant self-sufficient in power and steam requirements and is therefore, one of the most cost-effective plants for manufacturing PAN in the world. Earlier, the company had to import its main raw material i.e. Orthoxylene at higher prices but now sources 70% indigenously from Reliance Industries at much lower cost. Also the price of PAN has risen substantially due to strong demand from the user industries. Importantly, the company is now working at 100% capacity utilization compare to less than 75% in FY06 and is planning to expand its production capacity to meet the rising demand. With higher capacity utilization coupled with better price realization, the company is witnessing one if its best times and is expected to end FY07 on a buoyant note.

Last fiscal, the company undertook major financial restructuring by settling the debts and liabilities of all banks and financial institutions. This was made possible by an investment of Rs.125 cr. by Spinnaker, a global fund, in the form of convertible debentures. Recently, IGPL came out with stunning numbers for the Dec.’06 quarter. Sales increased by 50% to Rs.150 cr. whereas it registered a net profit of Rs.10.90 cr. against net loss of Rs.15.60 cr. last year. Notably, it recorded the highest OPM of around 14% due to high realization, low raw material cost and increased capacity utilization. Besides, the recent fall in crude oil prices also augurs well for the company. For FY07, it is estimated to clock a turnover of Rs.600 cr. with PAT of Rs.33.50 cr. This translates into an EPS of Rs.13 on its current equity of Rs.26.30 cr. and EPS Of Rs.11 on its diluted equity of Rs.30.80 cr. Investors are advised to accumulate this scrip at sharp declines only as it has the potential to hit Rs.100 (50% appreciation) in 15-18 months.