Manugraph India - 130.00 Rs

Established in 1972 and promoted by Mr. S.M. Shah, Manugraph India Ltd (MIL) is today, country’s largest manufacturer of newspaper web-offset and sheet fed offset presses. With a whopping 70% market share, company is the undisputed leader in domestic market with its product present in nearly all-major publication houses. It manufactures printing presses used by the newspaper industry and also makes products that are used for printing a variety of business/entertainment material such as brochures, pamphlets and booklets. Notably MIL is the only organized and niche player in manufacturing and installing the printing press, hence is the Tier-I supplier to large publishing houses like Times of India group, Indian Express group, Dainik Jagran Prakashan group, Hindustan Times, and other regional newspapers and publications like Gujarat Samachar, Malayala Manorama, Hindu, Sandesh , Deccan Chronicle etc.

MIL has two modern manufacturing plants at Kolhapur, Maharashtra, with a total installed capacity of 830 printing units. It makes various types of machinery with speed ranging from 25000 to 55000 copies per hour. Frontline, Hiline, Manuline, Starline, Newsline, Shiva, Cityline Express, Printmagic etc are its popular and successful brand names. Notably company has a tie up with MAN Roland, Germany under which they will sell MIL’s product worldwide and at the same time company gets the production and sales rights for the Uniset 60 newspaper printing machine manufactured by MAN Roland in India. MAN Roland is the worldwide leader in manufacturing web offset and sheet offset printing machines and has strong marketing reach across 50 countries. Currently exports contribute more than 30% of revenue with products being exported across the world.

Last year in Nov’06, MIL acquired Dauphin Graphic Machines Inc (DGM), a leading manufacturer of web offset printing machines based in Pennsylvania, USA for approx Rs 86 cr. Notably, DGM with annual sales of more than Rs 300 cr enjoys 60% market share in US/Canadian market for single-wide, one around press. Post this acquisition, MIL has become the world’s largest manufacturers of the single width press. For partial funding of this takeover, company made preferential allotment of around 4 lac shares @ 248 /- to FII’s. For FY07 it reported sales and NP of 369 cr and 46.50 cr respectively which means EPS of 15 Rs on a tiny equity of 6.08 cr having FV of 2/- Rs per share. Although its margin seems to be under pressure due to rising raw material cost, still for FY08 it may clock a turnover of 400 cr and NP of 45 cr on a standalone basis. ie EPS of 15 Rs. On a consolidated basis it is expected to report total revenue of more than 750 cr. Hence at a current market cap of less than 400 cr, scrip is trading fairly cheap. Incidentally in such a high market scrip is trading at its 52W low, hence investors are advised to buy at current levels with a price target of 210 Rs (ie 60% appreciation) in 12~15 months.

Lakshmi Electricals- 250.00 Rs

Incorporated in 1981 and belonging to the high profile LMW group, Lakshmi Electrical Control System Ltd (LECSL) is primarily engaged in manufacturing of electric and plastic components. Under the electric component division which contributes nearly 80% of revenue, it makes switchgear and control panel such as contactors, thermal overload relays, control relays, electrical control panels etc. Other electrical components include motor starters and motor control panels. It also provides customized control panels for original equipment manufacturers. All of these products are used in industrial applications for power supply and also find application in commercial and residential buildings. Balance 20% of revenue comes from industrial plastic component division which actually supports the manufacture of electrical mountings and components for switchgears. Besides it manufactures textile machinery components using engineering plastics mainly to cater the demand from Lakshmi Machine Works.

LECSL’s manufacturing facility is located at Arasur, Coimbatore and has a technical collaboration with Sprecher & Schuh, Switzerland, one of the leading manufacturers of low-tension switchgear items in the world. Last year, 4 sophisticated Engel [Austria] injection-moulding machines were installed as a part of the modernization program. Off late company has developed additional products like Automatic Power Factor Control Panel (APFC) and Limit Switches with many variants for wide range of applications, as also Solenoid Valves in defined executions. As a part of product diversification, its R&D division has developed a novel system for the feeding of raw material to the plastics processing machinery, under the trade name 'NeumaFeed'. A provisional patent application has also been filed. The other product range is 'LECS Robots' for use in conjunction with plastic injection moulding machines, capable of multiple functions. Moreover new products like 4 pole contactors up to 120 A, Autoswitch, ATS Controller etc have been introduced. Company has also installed 1.25 MW wind power plant for tax benefits.

Importantly, LECSL has a wholly owned profit making subsidiary called Harshini Textiles, which is into manufacturing of yarn and has a factory in Coimbatore with an installed capacity of 25200 spindles. It is in the midst of expansion to double its capacity to 50400 spindles. Besides, LECSL also owns 88,800 shares of Lakshmi Machine Works Ltd which at the CMP of 2650/- works out to whopping 23.50 cr. Whereas the whole market cap of LECSL is merely 60 cr. Company is coming out with its result on 31st May and it may end FY07 with sales of 68 cr and NP of 7.75 cr. Due to very tiny equity of 2.46 cr this translates into EPS of 32 Rs on a standalone basis and on a consolidated basis it can report 42 Rs EPS. Considering the rising demand of switchgear and control panels for the power and industrial applications, company is estimated to report sales of 80 cr and profit 9.25 for FY08 ie EPS of 38 Rs on standalone basis and 50 Rs including Harshini Textile earnings. Investors are strongly recommended to buy at current levels as share price can double in 15~18 months.

Stock Watch

Offlate, steel scrips have made a smart recovery and share price of companies like SAIL, Tata Steel, JSW etc are near its 52W high. On the other hand small cap steel scrips like Modern Steel haven’t rallied at all. The company is primarily engaged in manufacturing of special and alloy steel, stainless steel and bright bars. For FY07 although its topline grew by 15% to 276 cr but due to lower margin NP declined by 35% to 7.30 cr registering an EPS of 15 Rs on small equity of 4.80 cr. However for future growth company is enhacing the melting capacity from 1,00,000 to 2,27,000 MTPA and rolling capacity will be increased from 50,000 MTPA to 1,54,000 MTPA. Assuming that company maintains its OPM of 7%, it may end FY08 with sales of more than 300 cr and NP of atleast 8.50 cr on a conservative basis. This means EPS of 18 Rs on current equity. At CMP, company is available fairly cheap at an enterprise value of 100 cr.

Deepak Fertlizer has once again come out with good set of nos for the March quarter. Its turnover grew by 25% to 211 cr whereas PBT shot up by 85% to 39 cr. However due to extraordinary income of 13 cr in Mar’06 the NP stood almost flat at 28 cr. On a full year basis it recorded sales of 833 cr (up 50%) and NP of 93 cr (up 17%) which led to an EPS of 10.50 Rs on equity of 88.20 cr. Last year company commissioned its 70000 TPA Iso Propyl Alcohol (IPA) plant thereby becoming the only producer of IPA in India. Secondly company is setting up a greenfield integrated complex for nitric acid and ammonium nitrate at Paradip in Orissa which is expected to complete by 2009-10. Besides it is establishing Ammonia storage with 15000 MT capacity at Nhava Sheva port near Mumbai. Meanwhile, it has leased over 75% space of Ishanya, its design centre and speciality mall, to segment leaders in retail. Also company is in the process of securing additional supply of natural gas from other sources which will improve its capacity utilization and margin going forward. With an expected EPS of 12 Rs for FY08, share price can appreciate to 120 Rs in medium term.

Recently, Gonterman pipers one of the leading manufacturers of cast rolls and forged rolls announeced encouraging result for the March quarter. Sales grew by 25% to 41 cr whereas PBT increased by 145% to 6.90 cr compare to 2.80 cr last fiscal. After making tax provision of whopping 3 cr the NP stood at 3.90 cr ie EPS of nearly 3 Rs for the quarter. For the entire FY07 it recorded net sales and NP of 148 and 12.20 cr respectively. This translates into EPS of 9 Rs on equity of 13.90 cr. Notably, company’s OPM improved substantially to 22% against 17% last year. With domestic as well international steel industry adding capacity at fast pace, company is implementing expansion-cum-modernization plan of Rs.40 cr. to enhance its production capcity to 18,000 MT of fininshed roll from 12,000 MT. However for FY08 company is estimated to report sales of 175 cr and NP of 17 cr which works out to an EPS of 12 Rs on current equity. Secondly company has revalued its assets in FY07 which will boost its book value to the extent of 30 Rs per share. Scrip can give 50% return within a year.

Indo Tech Transformers is one of the leading manufacturers of power and distribuition transformer based in south India. For the March quarter it recorded 80% growth in sales to 57 cr and NP jumped up 160% to 10.30 cr registering qtrly EPS of almost 10 Rs. Ironically it reported an all time high OPM of 27% against 13% last year. For the full year its revenue increased by 70% to 156 cr and PAT shot up by 130% to 25.50 cr ie EPS of 24 Rs on equity of 10.62 cr. The present order book of the compony is around 150 cr and is expected to shoot up as company has bid for 350¬400 cr worth of tenders. Moreover its new power transformer plant at Kancheepuram with a capacity of 4000 MVA is expected to go on stream from Aug 2007. Meanwhile its Dry type transformer plant at Thirumazhisai with an installed capacity of 100 MVA is expected to commence operation shortly. Consrdering all the factor it is estimated to clock a turnover of 225 and profit of 34 cr for FY08 ie EPS of 32 Rs. Buy only at sharp declines.

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.