Flat Products - 302.00 Rs

Established in 1978 and promoted by Mr. T. R. Mehta, Flat Products Equipment Ltd. (FPEL) is the only company in India having capabilities for designing, fabrication and installation of cold rolling mills. Cold Rolling Mill is the equipment required to convert hot rolled sheets into cold rolled sheets. Hence, FPEL enjoys a virtual monopoly in India while competing globally with players like Kawasaki & Hitachi (Japan), Siemens & SMS (Germany), DMS (France) and CMI Belgium. Presently, the company derives major revenue from metal cold rolling mills, galvanizing lines and corrugating machines apart from specialisation in other downstream processing mills and auxiliary equipments like skin pass mills, aluminum strip and foil mills, colour coating mills, tension leveling lines, mill automation equipments, metal processing lines, slitting and pickling lines etc. In fact, the company provides twenty solutions to ferrous and non-ferrous metal processing industry with its unique strength, state-of-the-art equipment building, process technology and project management capabilities.

The company has two units - one at Taloja Industrial Area, Maharashtra and the other in Silvassa, Union Territory of Dadra & Nagar Haveli. At present, the company has collaborations with T. Sendzimir as well as Bliss Salem, USA, for manufacture of cold rolling mills, with Achenbach Buschutten, Germany, for manufacture of aluminium strip and foil mills with Redex of France for manufacture of stretch levelling equipment and with Durmech Engineering, UK, for paint coating lines. Notably, all its collaborators are world leaders in their respective fields. Due to the huge market, FPEL has been concentrating on exports since the last few years and has made its presence felt in USA, Mexico, Europe, China, Korea, Malaysia, Morrocco, Turkey, Colombia, Bangladesh, Egypt, Kenya, Iran, UAE, Vietnam, Japan, Ethiopia etc. With steel and metal producers expanding aggressively worldwide including India, the company has huge order flows especially for exports. In fact its current order in hand position stands at a whopping Rs.1000 cr, which gives it a strong revenue visibility.

Earlier in 2003 & 2004, FPEL was doing well with an operating margin of 9-10% but due to sharp rise in raw material costs and with no escalation clause signed with customers, its margin fell substantially to 3-4% for 2005 and 2006. However the worst is over now and the company is executing contracts with better margins and with an escalation clause. Thus for March’07 quarter,it reported sales of Rs.234 cr. which was tad lower to entire FY06 sales of Rs.286 cr. Importantly, it made a strong turnaround by reporting an OPM of more than 8% after quite a long time. After tax provisioning of around Rs.6 cr. its net profit stood at Rs.12 cr. i.e. whopping EPS of Rs.25 for just one quarter. For full FY07, sales grew by 80% to Rs.511 cr. and net profit multiplied 7 times to around Rs.16 cr. i.e. EPS of Rs.32 on its tiny equity of Rs.4.94 cr. Assuming that FPEL has already turned around, it may clock a turnover of Rs.700 cr. with PAT of Rs.25 cr. for FY08. This translates into an EPS of Rs.50 on its current equity. However, with exports contributing to more than 70% of its total revenue, the sharp appreciation of the rupee is cause of concern. Still investors can buy the scrip at current levels as it has the potential to give handsome returns in medium to long-term.

South East Asia Marine Engineering & Construction Ltd. (Code: 526807) - Rs.190.25

South East Asia Marine Engineering & Construction (SEAMEC) is a 78.24% 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.

Earlier, SEAMEC owned three vessels viz., Seamec-I with 1700 DWT, Seamec-II with 2100 DWT, Seamec-III with 2100 DWT but last year it acquired the fourth vessel ‘Seamec Princess’ which is being upgraded and will be ready only by Aug’07. This vessel is quite huge compared to the existing three vessels and will boost its earnings significantly once deployed. All the three MSVs are 1983 make and with no stipulations for any kind of phase out, there won’t be any replacement pressure for at least the next 10 years. Besides, the newly acquired Seamec-Princess is an originally 1984 built vessel, again re-built in 2001 and has a usable life of 15-20 years. With increased activity in the oil & gas sector in India and overseas, the demand for offshore vessels has increased leading to a substantial increase in charter rates. Seamec-1 is deployed with Dolhin Offshore for US$16000 per day, Seamec-II is with Condux SA for approx US$45000 per day and Seamec-III with Offshore Technology West Indies on a similar charter rate. The Seamec-Princess is expected to be deployed at a rate of around US$55000 per day.

Investors, should however, keep in mind that the company has planned to dry-dock Seamec-I during the current quarter and Seamec-II during Sept’08 quarter, which will impact its performance in the coming two quarters. But after that, it is estimated to report bumper results with the deployment of its fourth vessel. In short, CY07 will not be that encouraging also due to the sharp appreciation of the rupee but CY08 will be fabulous. Also in the next three months, the promoters will bring down their stake to 75% from 78% currently as per SEBI guidelines. Importantly, despite being in a capital-intensive industry, SEAMAC is a zero debt company. Secondly, the parent company Technip is learnt to have bagged Rs.1200 cr. order from Reliance Industries, which indirectly augurs well for SEAMEC. Considering all these factors, it may end the financial year ending 31st December 2007 with a revenue of Rs.185 cr. and profit of Rs.50 cr. i.e. EPS of Rs.15 on equity of Rs.33.90. For CY08, the topline can shoot up to Rs.250 cr. whereas bottomline is estimated to be Rs.80 cr, which means an EPS Rs.24 on its current equity. Hence investors are advised to accumulate this scrip in the coming six months with a price target of Rs.320 (70% appreciation) in 15 months.

Stock Watch

After few disappointing quarters Torrent Cables Ltd. (Code: 504096) (Rs.184) seems to be back on track if the last two quarters results are any indication. For the March 2007 quarter, it registered 30% higher sales at Rs.63 cr. whereas net profit increased by 45% to Rs.7.70 cr. i.e. EPS of Rs.10 for the quarter. The company managed to maintain a decent OPM of 19%. For the full year FY07, its sales and profit stood at Rs.190 cr. and Rs.19.50 cr. Respectively leading to an EPS of Rs.26 on its current equity of Rs.7.50 cr. Belonging to the reputed Torrent Group and operating in the high growth sector of power cables, it can end FY08 with topline of Rs.250 cr. with a bottomline of Rs.27 cr. i.e. EPS of Rs.36. Hence at CMP of Rs.180, the scrip discounts its FY08 earnings by just 5 times. It’s a value buy and investors can buy with a price target of Rs.250 for the medium-term.

JK Lakshmi Cement Ltd. (Code: 500380) (Rs.123) has once again reported fantastic numbers for the March 2007 quarter. Sales increased by 50% to an all time high of Rs.263 cr. whereas net profit zoomed by 160% to Rs.61 cr. on the back of better margins, lower depreciation and negative tax provision. For the entire FY07, sales were up 45% to Rs.844 cr. and PAT more than trebled to Rs.178 cr. i.e. a whopping EPS of whopping Rs.31 on its current equity of Rs.57 cr. Notably, the company has commissioned one of the captive thermal power plants of 18 MW, while the other 18 MW plant will start by June 2007 end where after the company will become almost self-sufficient for its power requirements. Also a, couple of months back it completed the capacity expansion and operational efficiency improvement plan thereby taking its total cement production capacity to 3.4 million tonnes. Going forward, cement prices are expected to soften but considering its expansion impact and saving in power costs, it can report sales of Rs.1000 cr. and PAT of Rs.160 cr. on a conservative basis for FY08. This translates into an EPS of Rs.26 on its fully diluted equity of Rs.61.20 cr. Scrip may see a smart rally in the near future.

Simplex Castings Ltd. (Code: 513472) (Rs.61) is part of the Simplex group of industries and manufactures heavy castings in grey cast iron, alloy cast iron, stainless steel and steel. These products are used primarily in steel plants, power plants, mining, cement plants, defence and the railways. For the March’ 07 quarter, its sales jumped up 35% to Rs.40 cr. and net profit more than doubled to Rs.2.20 cr. registering a quarterly EPS of Rs.3.70. For the full year FY07, its sales improved by 25% to Rs.134 cr. but PAT doubled to Rs.5.70 cr. i.e. an EPS of Rs.9.50 on its equity of Rs.6 cr. Incidentally, the company has shown the receipt from contract work to the tune of Rs.2.50 cr. as ‘other income’ for FY07. However for FY08, it may clock a turnover of more than Rs.150 cr. with profit of Rs.6.50 cr., which means an EPS of Rs.11. Buy at declines.

Although the current market cap of Garnet Construction Ltd. (Code: 526727) (Rs.69) is hardly Rs.60 cr. the company is betting huge on construction and real estate space with its Rs.1200 cr. ‘Magic Hills’ project at Khopoli near Panvel. Presently, the company has 400 acres of land under which it is developing the entire township project including apartments, row houses, independent bungalows, malls, IT centre and also educational facilities. It has also entered into an exclusive global marketing alliance with the Sternon Group (Dubai-based real estate developers, builders and promoters) to market this residential and commercial project to prospective buyers around the world. The project is expected to be commissioned by October 2007 for which the company is planning to raise around Rs.250 cr. through FCCB or QIP route. For FY07, it recorded sales of Rs.35 cr. and after tax provisions of Rs.3.35 cr., the net profit stood at Rs.6.65 cr. However, it’s a pure long-term buy and investors should buy on sharp declines only.

For a very long time Bihar Caustic & Chemicals Ltd. (Code: 500057) (Rs.54), an Aditya Birla group company, is trading in a very narrow range of Rs.50-60 despite of strong fundamentals. Last year, the company increased capacity by 50% to 75,000 MT and shifted to the energy efficient membrane cell technology. It has been reporting decent set of numbers for quite some time and ended FY07 with 30% higher sales and net profit at Rs.143 cr. and Rs.34 cr. respectively. This translates into an EPS of Rs.14.50 on its equity of Rs.23.40 cr. It declared 15% dividend, which gives a yield of around 3% at CMP. With the divestment plan of Gujarat Alkalies hotting up, scrips from this sector may come into action in the near future. Moreover, for FY08 it can report sales of Rs.160 cr. and PAT of Rs.36.50 cr. i.e. EPS of Rs.16 on its current equity. In spite of huge debt of more than Rs.100 cr., the scrip has the potential to give an average return of 25-30% in a year’s time.

Hind Rectifiers - Rs 725.00

Established in 1958, with the collaboration of Westinghouse, Brake & Signal, U.K. (who still holds 16% equity stake as on today), Hind Rectifiers Ltd (Hirect) has a rich experience in developing, designing, manufacturing and marketing power semiconductor, power electronic equipments and railway transportation equipments. Currently company derives 50% of its revenue from railways, 20% from power sector and the rest 30% from various industries like telecommunication, electronics, defence, aviation, R&D organizations, electro-chemical, steel, cement etc. Basically, its business is segmented into following four divisions:-

A. Equipment division: manufactures power supply equipments for R&D, Defence & Aviation, DC power system for electrochemical plants, rectifier for metal finishing, battery chargers and dischargers etc. It also offers specialised services such as customisation, automation and optimisation of controls and safety. Notably it has a technical tie-up with M/s Friem S.P.A., Italy in design & technology transfer of high current water cooled rectifier system for Electro-chemical applications.
B. Semi Conductor division: manufactures power diodes, power modules, thyristors & assemblies apart from supplying special devices and assemblies on request. To complement this, a full range of heatsink assemblies using IEC circuit configuration as well as custom design is also manufactured. These semi-conductors find use in industrial, military and transportation applications.
C. Railway Transportation division: manufactures transformer for rolling stock, auxiliary converter and inverter, track side DC substation equipment, rectifier for rolling stock etc. Out of 50% revenue from railways, 10% comes from locomotive transformers, 20% from rectifiers and rest 20% from invertors. Hirect has a technical collaboration with M/s Transtechnik, GmbH of Germany for design and development of inverter and auxiliary converters for traction application. In Collaboration with M/s. Nieke, Germany, company has upgraded its technology and infrastructure for manufacture of main transformer for AC/DC Dual Voltage EMU and BG AC EMU. It also has a tie-up with M/s Microelettrica Scientifica of ITALY for supply of resistors for railway application.
D. Trading division: Hirect has a separate small trading division under which it imports and markets semi-conductor fuses from BUSSMANN-Denmark, capacitors from ICAR-Italy and resistors from MICROELETTRICA SCIENTIFICA, Italy.

Hirect has two manufacturing plants spread across Mumbai and Nasik. Its Equipment division has an ISO 9001 & Semiconductor division has an ISO 9002 quality system. Although railway is its major customer, still it has a huge and reputed clientele including HLL, Indian Navy, Ordnance factory, ISRO, Bhabha Atomic, Hindustan Aeronautical, Nuclear Power Corp, BSNL, BHEL, BEML, Grasim, L&T, Tata Steel, Hind Zinc, Siemes, ABB, Crompton Greaves etc. The products are also exported to Australia, Bangladesh, Canada, Columbia, Italy, Malaysia, Middle East, Pakistan, South Africa, South Korea, Spain, Sri Lanka, Thailand, UK and USA.

Recently, Hirect has modernized all its plants in Mumbai and has setup green-field plants in tax free zone of Uttaranchal for manufacturing of equipment, semiconductor and the railway transportation system where it will enjoy 16% excise duty and 30% tax benefit. The commercial operation at Uttranchal plant has begun only in April 2007 hence the impact of this will be visible from coming quarters. Meanwhile, the railway budget and the recent semi conductor policy, both are quite favorable for the growth of the company. Hirect is expected to end FY07 with sales of 85 cr and profit of 11.50 cr ie EPS of 76 Rs on tiny equity of 1.50 cr. Due to revenue from new plant and tax benefit it may clock a turnover of more than 105 cr and PAT of 15 cr which means EPS of 100 Rs on current equity. Investors are strongly recommended to buy at current levels as share price has the potential to double in a year’s time. Moreover company is in its 50th year of operation, hence chances of declaring a liberal bonus and stock split is quite high. Secondly, in future management intends to completely shifts its Mumbai plant to Uttranchal and develop its Bhandup property which may be worth more than 25 cr.

Associated Profiles & Aluminium - Rs.40.35

Incorporated in 1987, Associated Profiles and Aluminium Ltd (APAL) belongs to the reputed and three decade old “ASSOCIATED” group which has expertise in manufacturing aluminium alloys ingots, aluminium door and window frames, designer aluminum grill, aluminium flooring, surface coating, structural glazing system and curtain wall system i.e. complete glass exterior for building structures. Infact one of the group company namely “Elesar Focchi” which has technical collaboration with ‘Focchi’ of Italy has a strong goodwill in the market with brands like Deco Frame, Deco-grille, Deco floor, Deco-tech, Elvisia and El-quadra. However APAL is engaged in manufacturing of only electrical grade wire rods which is eventually used by conductor manufacturers for distribution and transmission of electricity. Moreover these aluminium EC wire rods are also used for redrawing into wires/strips for manufacture of cables, conductors, transformer wires/strips and in various hardware or general engineering components. In short company’s fortune is dependent on growth of power ancillary industry which means ultimately on power sector.

APAL’s manufacturing facility namely ‘Hind Aluminum’ is located in industrial belt of Silvassa in Union territory of Dadra & Nagar Haveli. Incidentally company is the largest secondary producer of aluminum wire rods with the present capacity of 25000 tonnes for the melting of aluminium ingots, cold rolling and making of these wire rods. Due to higher margin, company is constantly exploring the possibilities of exporting its products and hence is keeping regular touch with various customers around the world. Although negligible presently, but in future export sales is expected to rise gradually. In the year 2005-06 APAL diversified into bauxite mining sector and is now doing full fledge mining activity in Village Mahadevia of Jamnagar district, Gujarat. Infact it has already made shipments of Bauxite ore to its customer in China. Besides, company has setup a Wind Turbine Generator project in Nandurbar district, Maharashtra with an annual installed capacity of 1250 KW. Few weeks back it has purchased another 1500 KW Wind Turbine Generator for Rs 9 cr which is located at Sangali district, Maharashtra. That means the revenue from its power generation business is expected to double in current fiscal. To conclude company has smartly de-risked its business by diversifying into mining as well as power generation.

Fundamentally as well as financially, APAL is on a strong footing with a professional backing by ASSOCIATED group. Ironically, company has a good track record of un-interrupted dividend payment since last 10 years. For the nine month ending Dec 2006, sales grew by 25% to 146 cr and NP increased by 40% to 4.70 cr. Accordingly, it may end FY07 with net sales of around 200 cr and PAT of around 6 cr which means EPS of 12 Rs on tiny equity of 5 cr. It already gave 12% dividend in March 2007. Hence scrip is available at a P/E ratio of 3x times against its FY07 earning. Considering the increase in revenue from mining and power business in coming years, APAL is estimated to clock a turnover of 220 cr and profit of 7 cr i.e. EPS of 14 Rs for FY08. Investors can buy at current levels as scrip has the potential to double in 12¬15 months