Smart Investments

Madhucon Projects Ltd
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Shanthi Gears Ltd
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Bihar Caustic & Chemicals Ltd - Rs 28.00

Bihar Caustic & Chemicals Limited (BCCL) was incorporated in 1976 as a joint venture between the Aditya Birla Group and the Bihar State Industrial Development Corporation, primarily with the objective of catering to the caustic soda requirements of Hindalco and to contribute towards the economic development of the backward region of Palamau district in Jharkhand. Today, it is among the leading caustic soda producer in the northern and eastern region of the country. Apart from caustic soda it also produces liquid chlorine, hydrochloric acid, sodium hypochlorite, compressed hydrogen and has recently ventured into aluminum chloride. In India, about 45% of the chemical industry depends upon the caustic soda industry as essential inputs for a host of industries like soap and detergent, aluminum, paper & newsprint, fibre, glass, tyre, chemicals & petrochemicals, pharmaceuticals, water treatment, dyes, textiles, oils, etc. However being a subsidiary of Hindalco Industries, BCCL is having an added advantage of assured off-take of caustic soda by the parent company. It also has a hydrogen bottling facility which provides an additional stream of revenue.

In early 2006, BCCL shifted the manufacturing process of the plant from its earlier mercury technology to the latest energy efficient and environment friendly state-of-art membrane cell technology. Simultaneously it also expanded is caustic soda production capacity by 50% from 150 TPD to 225 TPD. Last fiscal it again increased the capacity by 20% to 265 TPD by addition of electrolysers as well by debottlenecking. So presently its plant boast of having an installed capacity of 265 TPD of caustic soda, 200 TPD of liquid chlorine, 130 TPD of hydrochloric acid, 150,000 Nm3/day of compressed hydrogen and 3 TPD of sodium hypo chlorite. Well in order to gainfully utilize the additional chlorine (by product) produced after caustic soda expansion, BCCL commissioned an aluminum chloride plant from June’07. This plant has a capacity of 12000 TPA and has produced around 5200 tonne of aluminium chloride for last fiscal. Aluminum chloride is basically used as an input for manufacturing of aluminum. Secondly, BCCL has also set up a 25 TPD stable bleaching powder (SBP) plant as a value added product for chlorine utilization. This plant has also started production of about 25 tonne per day with optimum quality as per international standard. With both these new products namely aluminum chloride and bleaching powder, company is estimated to boost its topline by Rs 40~45 cr per year. Secondly, as caustic soda production is power intensive, BCCL has put up its own 30 MW coal based captive power plant due to which its energy costs are lower than its peers. Although company is vulnerable to caustic soda price movement, but with Hindalco being its parent company & biggest customer, this is relatively a safer bet.

To maintain its growth momentum in future as well, BCCL is now in the process of further augmenting the capacity of its Caustic Soda Plant from 265 TPD to 300 TPD at a capital investment of Rs 30 cr. The requisite order has already been placed and the expanded capacity is scheduled for commissioning by end of current fiscal. Fundamentally, BCCL is doing quite well as for FY08 it reported 20% and 45% growth in sales and PAT to Rs 174 cr and 49 cr respectively. Notably, BCCL also enjoys the highest operating margins among it peers - even better than Gujarat Alkalies and Chemfab Alkali. However for the Sept’08 qtr it recorded a drastic fall in profit on the back of very high power and fuel cost as during the quarter the boiler of the power plant tripped due to mal functioning of Safety device. Hopefully things are back to normalcy and company is estimated to report normal profit for coming qtrs. Considering caustic soda price haven fallen much recently and assuming it to remain stable in future, BCCL can clock a turnover of Rs 200 cr and profit of Rs 38 cr i.e. EPS of Rs 16 on equity of Rs 23.40 cr for FY09. To highlight the importance of BCCL being a Aditya Birla group, it will be soon renamed as Aditya Birla Chemicals (India) Ltd. So despite belonging to such a reputed group and having strong fundamentals like high profit margin, low debt equity ratio, huge reserves, good dividend yield, consistent growth etc, scrip is poorly discounted at P/E multiple of less than 2x times and EV/ EBIDTA of 2x times. There is also a possibility of BCCL getting merged with Hindalco industries. But if this happens, the true value of BCCL wont be unlocked, as the merger ratio will more favorable to the parent rather than subsidiary. Still investors are recommended to buy at current levels as scrip can easily double within a year.

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STOCK WATCH

Jupiter Bioscience (40.00) is poised to become a global peptide solutions group having a broad canvas of peptide chemistry products, peptide reagents, coupling reagents, protective agents and supplier of key ingredients used in peptide based pharmaceuticals. It is operating in a very niche segment and is among the few companies in the world to have competency in synthesis of peptides. The technology focus of the company has enabled it to develop more than 400 products in its catalogue and establish a leadership position in the peptide business internationally. For H1FY09 it has already clocked an EPS of Rs 9 as it reported 15% growth in sales to Rs 60 cr and 10% increase in PAT to RS 14 cr. Last year company invested considerable resources in developing the processes for manufacture of generic peptide APIs. It has also finalized to acquire a manufacturing facility of Merck Life Sciences, Switzerland and has even signed a long term business contract with them. Besides company entered into a 10-year product purchase agreement with Ranbaxy on peptide pharmaceutical for gloabal market and as per contract allotted 31.77 lakh warrants @ Rs 147. Last fiscal it raised 100 cr thru QIP route @ Rs 153 per share. Further it has allotted 40 lakh warrants to be converted @ Rs 182 to strategic investors. For FY09 on a standalone basis, it can report sales of Rs 150 cr and NP of Rs 30 i.e. EPS of Rs 20 on current equity of Rs 15.40 cr. A strong buy.

Currently, Godawari Power (60.00) is the 4th largest manufacturer of coal based sponge iron and also one of the leading manufacturers of mild steel in India. It completed its Phase-II expansion in Sept 2007 and boasts of having an installed capacity of 495,000 TPA for sponge iron, 400,000 TPA for steel billets, 120,000 TPA for HB wire rod alongwith 53 MW of captive power plant. Due to adverse market condition company has temporarily cut down the steel billets and ferro alloys production and has decided to sell the entire surplus power in open market. It has also dropped down the buy-back plan which was approved earlier. Importantly, company has acquired mining license for iron ore and coal in Chhattisgarh. Couple of days back it got the in-principle approval from govt for diversion of 110 hectares of forest land for iron ore mining at Chhattisgarh. For which it expected to begin mining activities by June 2009. It has also made investments in two JV companies - Chhattisgarh Captive Coal Mining Ltd and Raipur Infrastructure Company Ltd for development of coal mines and setting up railway sliding for captive use. Recently company has decided to venture into cement production along with executing backward integration plan which includes setting up of 0.6 mtpa iron ore Pelletization plant, 0.1 mtpa iron ore Beneficiation plant, 1.2mtpa iron ore Crushing plant etc. Although company has already earned an EPS of Rs 25 for the first two quarters of FY09, but considering the sharp drop in sponge iron prices it may report disappointing nos for the next two quarters. Accumulate at sharp declines

From a high of more than Rs 1000 early this year, share price of KLG Systel (70.00) has become one fifteenth and is still hitting new lows. Company specializes in offering technological solution for entire business life cycle i.e. right from concept and creation, through plant design, project execution and management operations & optimisation to expansion/ revamp. It also provides on-line IT solutions to distribution utilities, using its self-developed software Vidushi, SG61 Technology and solution for determining the transmission & distribution losses, fixing the areas of power theft, on-the spot billing & cheque collection, increasing revenue collection efficiency of the utilities and addressing consumer grievances. Recently it has demerged the power systems solutions business into a new subsidiary named KLG Power in which IBM group company has invested Rs 12 cr for taking 1.20% stake, thereby putting the valuation of KLG Power Ltd to whopping 1000 cr. Ironically against this, KLG systel - the parent company which is holding the rest 98.80% is available at a market cap of Rs 90 cr. For FY09 on a standalone basis it is expected to clock a turnover of Rs 240 cr and profit of Rs 30 cr i.e. EPS of Rs 24 on current equity of Rs 12.60 cr.

WS Industries (25.00) is a leading manufacturer of high voltage electro-porcelain transmission insulators and sub-station insulators. It deals in other products as well like dropout fuses, isolators, lightning arresters, coupling capacitors, capacity voltage transformers, instrument transformers, line traps and reactors. To cater the rising demand, company is setting up a Greenfield plant in Visakhapatnam to double the manufacturing capacity of substation insulators to 16,000 tons. The project is almost completed and may start commercial production in this fiscal itself. Besides, its transmission insulator unit with installed capacity of 8,000 tonne is running at full capacity. Lately company has also ventured into turnkey project execution i.e. designing, execution and construction work of transmission lines of below 220 KV. Meanwhile, its subsidiary company has completed the construction of the 1st phase (300,000 sq ft) of the Software Technology Park in association with TCG group. Due to sudden liquidity crisis and slowdown, company may report a turnover of Rs 225 cr and profit of Rs 11 i.e. EPS of Rs 5 for FY09. Scrip can appreciate 50% as soon as market sentiment improves.

Small & Beautiful

Voltamp Transformer (310.00) has special expertise in production of dry type vacuum resin impregnated (upto 3 MVA/11 kV class) and cast resin transformers (upto 7.5 MVA/33 kV class) apart from manufacturing regular oil filled power & distribution transformers, induction furnace transformers & unitized substations. Infact, company is the market leader in dry type transformers with around 40% market share. Currently company is in the midst of putting up a Greenfield plan with an installed capacity of 4000 MVA thereby taking the total transformer manufacturing capacity to 13000 MVA. This plant being set up with an investment of Rs 35 cr is expected to get ready by April 2009. For the Sept’08 company reported 15% growth in sales to Rs 170 cr whereas PAT jumped up 50% to Rs 27 cr. Incidentally it has already posted an EPS of Rs 50 for H1FY09. And with the recent fall in copper prices, its margin is expected to improve which will positively impact the bottomline going forward. So for the entire FY09 it may clock a turnover of Rs 650 cr and profit of Rs 85 cr i.e. EPS of Rs 84 on equity of Rs 10.10 cr. Being debt free and having huge reserves of more than Rs 150 cr, liquid cash worth Rs 60 cr, ROCE of 95% and ROE of 60% it’s a screaming buy.

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. Remarkably, it is also the only listed manufacturer of gears for helicopters and light combat aircrafts to Hindustan Aeronautics Ltd. Of late, company has even started manufacturing gearboxes of 250 KV for windmills. For six months ending Sept’08, it recorded nearly 15% growth in sales and NP to Rs 126 cr and 23 cr respectively. 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. Accordingly it may end FY09 with sales of Rs 260 cr and PAT of Rs 40 cr i.e. EPS of Rs 5 on fully diluted equity of Rs 8.60 cr having face value as Rs 1/- per share. Moreover if rumors are to be believed then 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 SGL. If it happens, this may lead to re-rating of the company and share price may see a vertical rise

Elecon Engineering (35.00) 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. As on 30th Sept 2008, it has an pending order in hand of Rs 1772 cr comprising of Rs 1527 cr for MHE division and Rs. 245 cr for gear division. On the back of satisfactory H1FY09 nos, it is estimated to clock a turnover of Rs 950 cr and net profit of Rs 55 cr for FY09. This translates into EPS of almost Rs 6 on current equity of 18.60 having face value as Rs 2/- per share. Moreover the promoters are constantly buying shares from open market to increase their stake thru creeping acquisition. A solid bet.

Jyoti Structure (55.00) 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, its current order book stands at an all time high value of more than Rs 3500 cr. Meanwhile, company has reported encouraging set of nos for both Q1 & Q2, and is expected to end FY09 with topline of Rs 1650 cr and PAT of Rs 75 cr leading to an EPS of Rs 9 on current equity of Rs 16.20 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.

J K Paper Ltd - Rs 16.00

Incorporated in 1960, J K Paper Ltd (JKPL) belongs to one of India’s leading business houses – JK organisation, which has a diversified presence in automotive tyres, cement, v-belts, oil-seals, power transmission system, clinical research, food & dairy products, sugar, agri-seeds and pulp & paper. Today with more than dozen of popular brands, JKPL is India’s largest producer of branded papers and commands 40% market share in branded cut size papers. Infact it has played a pioneering role in converting paper from a commodity to a branded product. So apart from being the first to brand paper in Indian market, JKPL is also the first to introduce surface-size woodfree paper. Thus, company is primarily engaged in production of writing & printing paper and has recently ventured into high-end coated packaging boards as well. Notably, it commands top 2 position in most of its segment and the value added products like coated and branded papers constitute more than 70% of its sales. With a broader product basket, JKPL has emerged as a leading one-stop-shop paper company in India.

Office Documentation: It offers a range of office documentation papers from economy to premium grades which include multi purpose papers for use in desktop, inkjet and laser printers, fax machines, photocopiers and multi-functional devices. Company’s “JK Copier” brand is the undisputed leader with “Easy” and “Sparke” as value for money brand and “JK Excel Bond” being in premium category

Uncoated Paper & Board: JKPL manufactures a range of uncoated writing & printing paper for varied needs including premium diaries, Hi end exercise book, notepads, quality books, calendars, maps etc. Apart from this, it also produces MICR cheque paper as well as high-end pulp boards, ledger papers and parchment grades. It “JK Evervite” and “JK Maplitho” paper have been acknowledged in the market for its superior performance and excellent printability.

Coated Paper & Board: During 2005, JKPL commissioned a 46,000 TPA state-of-the-art coating plant and since then offers a range of single sided / two sided coated paper and board made from in-house base paper for better quality control. Its “JK Eco Cote” & “JK Cote” brand are extensively used for making posters, brochures, folders, premium Books, calendars, direct mailer, catalogue, pamphlet etc. It also markets photo paper under the brand name “JK Phtovista’

Packaging Board: Last year in Oct 2007, JKPL also forayed into high-end coated packaging board to exploit opportunities in fast growing segments of the economy like pharmaceuticals, FMCG products, ready to eat food segments etc. and growing exports of cartons to the West. Within months of market launch, “JK TuffCote”, “JK Ultima” “JK PureFil” & “JK Tuffpac” have been accepted as strong brands in the packaging board market. Accordingly, JKPL has already captured 20% market share of this segment in less than one year from production start up.

JKPL operates two integrated plants in India one in the East - in Rayagada, Orissa with a capacity of 125,000 TPA and the other in the West - located in Songadh, Gujarat with a production capacity of 55,000 TPA. Last year it commenced commercial production at its Rs 300 cr state-of-the art multi layer packaging board plant having a name plate capacity of 60,000 TPA, thereby taking the total installed capacity to 240,000 TPA. As of now, all its plants are working at more than 100% capacity utilization. Importantly, JKPL continues to remain self sufficient for its power requirement as it also augmented its power generation capacity by 12MW for the new board plant. To ensure better availability of raw material, JKPL is aggressively pursuing its social forestry programme by distributing nearly 35 million seedlings to farmers annually and has now brought over 65,000 hectares under this project. It also has one of the strongest distribution networks which include 11 warehouse, 140 distributors & 2500 Dealers covering the remotest corners of India. Moreover, it is exporting to more than 40 countries including Sri Lanka, Bangladesh, Middle East, Africa, Australia, Singapore, Malaysia etc.

On the macro front, 8~8.5% demand growth for paper & boards in India is among the fastest in the world. In printing and writing papers, demand is being led by factors like increasing thrust on education, growing requirements from printers and publishers originating from accelerated industrialization, increased economic activity and enhanced advertising and communication needs. Paper based packaging will get a boost with increasing rural demand for FMCG and consumer durables, growing penetration of modern and urban retailing and India's rising exports. In addition, there is a progressive shift in consumption towards branded and value added paper and board products. Despite such healthy growth, the per capita consumption of paper in India is only 7 kg against 324 kg in USA, 20kg in China and 24 kg in Indonesia.

Financially company has been doing well and has reported 40% growth in sales to Rs 546 cr for H1FY09. However the PAT remained flat at Rs 19 cr due to provisioning of unrealised foreign exchange loss of Rs 8.40 cr during the six months ended September 30, 2008. At the same time company didn’t recognize Mark to Market unrealised gains on currency and interest rate swaps amounting to Rs 13.50 cr. Although the recent softening of pulp prices is likely to have positive impact on company’s margins in coming quarters still its availability and volatility in price remains an impediment in the growth of the industry. Accordingly for FY09 it may clock a turnover of Rs 1100 cr and net profit of Rs 35 cr leading to an EPS of Rs 4.50 on current equity of Rs 78.20 cr. At the same time it may post a Cash EPS of more than Rs 15. Well as of today, FCCB of approx Rs 20 cr is outstanding and may come up for redemption in 2011 as the bondholders may not opt for conversion @ Rs 95 per share. To conclude, although its debt equity ratio and interest cost is alarmingly high, still investors can accumulate at sharp declines as it can appreciate 50% within a year.

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