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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STOCK WATCH

Panama Petrochem (60.00) manufactures specialty petroleum products for diverse user industries like printing, textiles, rubber, pharmaceuticals, cosmetics, power and other industrial oil. The product portfolio of the company consists of transformer oil, liquid paraffin, petroleum jelly, cable jelly, ink oil, rubber process oil and antistatic coning oil. It manufactures more than 80 product variants with major supplies to corporate’s like BPCL, Micro Inks, Alok Industries, Merck, Bayer Cropscience, JBF, Usha Martin, Cipla, government ordinance factories to name a few. Recently, company has developed a new product called mining oil for mining industry which is in its testing stage and is expected to be launched in the market soon. To maintain its growth momentum, company is in the midst of huge expansion whereby it more than doubling its production capacity to 159,000 MT from 69,000 MT currently. But most importantly the drastic fall in the crude oil prices is a big positive for the company as base oil forms the major part of input cost. Accordingly for the first three quarters, company has recorded an impressive rise of 70% in sales to Rs 300 cr and 40% jump in bottomline to Rs 19 cr. Thus it has already surpassed the sales and NP of entire FY08 by decent margin. It may end FY09 with net sales of Rs 375 cr and PAT of Rs 22 cr i.e. EPS of Rs 46 on current equity of Rs 4.80 cr. With a dividend yield of more than 5%, book value of Rs 121 and PE multiple of merely 1.3x times, it’s one of the safe bet in current market sentiment.

Gayatri Projects (60.00) is engaged in execution of major civil works including concrete/masonry dams, earth filling dams, national highways, bridges, canals, aqueducts, ports, etc. Although the company has executed various projects in different sectors of infrastructure, its expertise lies mainly in the road and irrigation sectors. Of late company has moved up the value chain and is executing five lucrative BOT road projects which are estimated of having very healthy IRR of around 14%. It has also entered into joint ventures with DLF for construction of road on BOT basis and with ION Exchange for water transport projects. Moreover company boasts of having a massive order book position of more than Rs 3000 cr which is 4x times its FY08 turnover thereby providing strong revenue visibility. Notably, irrigation projects constitute 30%, transportation projects 60% and industrial building constitutes the balance 10% of order book. Despite having huge debt of Rs 450 on its books company can be bought at current market cap of Rs 80 cr. For the Dec’08 quarter, company reported 25% rise in revenue to Rs 256 cr but profit declined by 20% to Rs 10.70 cr. However for the nine months ending Dec 08, its topline has increased by 40% to Rs 670 cr and PAT has also risen by 15% to Rs 30.50 cr thereby posting an EPS of Rs 30 till date. Although promoters have chequered history, still the future prospect looks promising.

With a rich experience of 25 years, JK Lakshmi Cement (45.00) is a leading cement manufacturer and a proud owner of reputed “JK LAKSHMI” brand known for its strength, quality and performance. It has a wide network of about 1,500 dealers spread across Rajasthan, Gujarat, Delhi, Haryana, UP, Uttaranchal, Punjab, J&K, HP and Mumbai with 65% of sales coming from northern region and balance 35% from western region. Interestingly, company has also diversified into lucrative ready mix concrete (RMC) & plaster of paris (POP) business thru its brand “JK Lakshmi Power Mix” & “JK Lakshmiplast” respectively. Company has recently expanded its production capacity to 3.65 million TPA and is in the midst of taking it further to 4.75 million tonne by end of this fiscal. The recent fall in coal and pet coke prices augurs well for company as it has fully stabilized the working of the 36MW captive thermal power plant. To maintain its margin, company has increased the sale of blended cement which now constitutes more than 75% of total sales. Secondly it is also constantly expanding its RMC business and currently has a total of 9 RMC plants in operation with an overall production capacity of 5.58 lacs cu.mtr. In contrast to industry estimates, company posted encouraging result for the Dec qtr and is estimated to report a turnover of Rs 1125 cr and profit of Rs 135 cr which leads to an EPS of Rs 22 on current equity. Although experts are still apprehensive about the demand supply scenario going forward, investors can buy it as a contrarian’s bet for medium term. At the same time, a huge of debt of Rs 700 cr on its books is a cause of concern.

Vivimed Labs (40.00) is a speciality chemical manufacturer catering to segments including oral care, sun care, skin care, hair care, natural extracts, preservatives, anti microbial, anti oxidants, anti-aging molecule etc. Infact it is world’s 2nd largest manufacturer of Triclosan - an antibacterial used for oral care and one of the top three companies for Avis – a chemical which improves UV absorbing ability of Sunscreen. Last year it acquired 100% stake in M/s James Robinson,UK which is an international manufacturer and supplier of speciality chemicals used in hair dyes, pharmaceuticals and photographic films/prints to ophthalmic sunglasses. Recently, company has decided to acquire Har-met International Inc a small importer of pharmaceutical & cosmetic product, based in USA. Organically as well company has been expanding its capacity and has chalked out Greenfield expansion plan in Uttaranchal and Hyderabad. Presently it boasts of having five manufacturing facilities spread across Karnataka, Andhra Pradesh & Uttaranchal. Notably company has been churning out encouraging nos has reported 50% jump in net profit to Rs 16.50 cr despite marginal fall in sales to Rs 108 cr on standalone basis. On a consolidated basis it is expected to end FY09 with sales of more than Rs 275 cr and PAT of Rs 25 cr. This translates into EPS of Rs 26.50 on current equity of Rs 9.40 cr. It has raised nearly 60 cr thru FCCB route which may not get converted into equity considering the CMP. Accumulate between Rs 30 ~ 40 levels to get handsome gain over long term.

Bharati Shipyard Ltd - Rs 55.00

Incorporated in 1976, Bharati Shipyard LTD (BSL) is the second largest private shipyards in India. It is engaged in design and construction of sea-going, coastal, harbor, inland crafts and vessels apart from undertaking ship repair activities. Over the years, company has upgraded its product range from the simple inland cargo barges, passenger vessels to sophisticated deep-sea fishing trawlers and state-of-art dredgers, to the technological marvel of the highly maneuverable and power-packed ocean going tractor tugs, chemical carriers, bulkers, cargo/container ships, tankers etc. Importantly, company has special expertise in construction of offshore support vessel required for oil exploration industry. Infact, worldwide BSL ranks seventh in terms of order book for offshore vessels. It is also the first Indian player with order of an oil rig. Actually, BSL is constructing a 350-feet self-elevating jack up drill rig for Great Offshore which is first of its kind for any Indian private shipyard. With delivery of this rig, BSL would join the elite club of global companies that manufacture off-shore rigs. Apart from above business, company has put up a wind farm in Dhule Maharashtra, consisting of 14 wind energy generators with a total capacity of 15 MW at an investment of Rs 85 cr.

At present, ship building industry is being dominated by Korea, China & Japan as they control nearly 90% of the total global market. Against this India hardly has 1% share, which indicates the growth potential of this sector in the country. Until last year shipbuilding industry was witnessing robust demand, as shipping companies across the globe were undergoing aggressive expansion to cater the rising sea traffic on the back of strong growth in global economy. On the other hand the increase in E&P activity worldwide had stimulated a strong demand for offshore vessels like drill ships, support vessels and rigs, which were essential to oil exploration. Lastly the huge replacement demand has given a strong fillip to ship building industry. To avert potential accidents, regulators fix age limit/criteria on ships whereby they are not allowed to operate after crossing a particular age limit or certain criteria. Ships are also generally scrapped as they get old, because rising maintenance cost makes them unfeasible to operate. And as shipbuilding is a very labor-intensive industry, India has an edge with availability of highly skilled labor at lowest cost compared to global peers like Korea, Japan, Norway and other European countries. Today, India ranks 8th in terms of order book and is looking to increase its share to 2%~3% globally in coming years. Also one of the prime reasons for orders flowing towards Indian yard was due to the fact that, all global shipyards were booked fully for next 4~5 years. Hence, Indian shipyards took advantage of this situation as they managed to offer attractive delivery dates and competitive prices.

However in the last few months, the whole scenario has changed dramatically. Crude oil price crashed to sub US$ 40 levels from high of nearly US$ 150, leading to a drastic fall in the oil E&P activities. The Baltic dry freight index tumbled down sharply by 80~90% in matter of few months. Although bailed out by govt, the US banking system nearly collapsed which resulted into a tight liquidity crunch across the world. The global trade almost came to stand still for few weeks which eventually resulted into most of the developed economies going into recession. Thus most of the shipping companies/oil companies across the world were forced to cancel or postponed their capex plan which directly led to order cancellation for ship building companies. Incidentally or fortunately, the scenario for Indian shipbuilders is not as bad as they haven’t seen the order cancellation yet. Moreover as the dust finally settles down and world economy stabilizes, ship building industry will back on track.

Recently, BSL has successfully bagged a contract to the tune of Rs 281 cr from Ministry of Defence, for supply of 15 Interceptor Boats for Indian Coast Guard. It is for the first time that vessels with an articulate surface piercing propulsion, is being built by an Indian Shipyard and is being included in Indian fleet. These vessels are fast patrol vessels meant for guarding coastal areas and other assets including E & P installations along the coastal area. With this, BSL now boast of having an all time high order book position of more than Rs 5000 cr which is 7x times its FY08 revenue. This is to be executed in next three years, ensuring a strong revenue visibility. And interestingly majority of the order book constitutes of offshore vessels which offer better margins as they require high degree of technological skill and superior quality of engineering compare to other vessels like tankers, bulkers etc. BSL operates through 4 yards located at Ratnagiri, Ghodbunder(Thane), Goa and Kolkatta, with latter two yards being relatively smaller in size. Moreover, Ghodbunder yard mainly manufactures the body of the ship (hull), which is then towed to Ratnagiri yard where the major portion of the work is done. In order to cash on the buoyancy in the ship building industry, BSL in the midst of Greenfield expansion of setting up two new yards at Dabhol (Maharashtra) & Mangalore (Karnataka) with an investment of more than Rs 1000 cr. The Dabhol yard, spread across 250 acres will have capacity to manufacture vessels up to 100,000 Dwt and being a deep-water port is capable of constructing semi submersible rigs and other rigs. Whereas Mangalore yard, which is located in SEZ being promoted by ONGC will specialize in building tankers, bulk carriers, containership, chemical carries and rigs. This yard will be spread across 50 acre and will have the capacity to construct 5 to 6 vessels per year up to 60,000 Dwt. Further, BSL is contemplating to establish one more SEZ at Usgaon (Maharashtra).

For future growth, company is expecting to get good orders for oil rigs as it has the first mover advantage in rig construction. With average age of mobile offshore drilling rigs worldwide to be little over 25 years, a huge demand is anticipated in coming years either through a life enhancement program or by phasing out the older rigs with new built ones. And ironically, China, Korea and Japan have less presence in this segment as they have larger capacity yards which are more viable / economical for bulk carriers, tankers and containership rather than offshore vessels. Besides, BSL has entered into a 50:50 JV with the diversified Apeejay group to set-up a 250,000DWT large scale shipyard on the east coast of India catering primarily to cargo vessels. The total investment in the 900 acre project is estimated to the tune of Rs 2000 cr to be made over three and half years.

To fund its expansion plan, during 2005 BSL raised around Rs 450 cr in two tranches thru FCCB route to be convertible into equity at the rate of Rs 422 & Rs 498 respectively. Out of these more than 50% has already been converted and considering the current market price the chances for conversion of the balance bonds in near future are quite bleak. For FY08 it recorded 65% jump in sales to Rs 702 cr and 45% increase in PAT to Rs 107 cr posting an EPS of Rs 39 on equity of Rs 27.60 cr. Even for the current year till date it has reported a remarkable performance. For the nine months ending Dec 2008, it has recorded 45% jump in revenue to Rs 713 cr and 30% rise in PAT to Rs 95 cr. But importantly, BSL has been recognizing government subsidy as per 2002 scheme of 30% subsidy, although it is yet to receive it physically from the govt. As on March 2008 nearly Rs 160 cr is shown as subsidy receivable under Debtors. Moreover the subsidy scheme was officially valid upto August 2007 and no further clarification has been received from the govt. Despite this BSL continues to record the subsidy amount as revenue in its P&L A/c.

Hence as a matter of conservatism and excluding the subsidy part, BSL is estimated to clock a turnover of Rs 825 cr and PAT of Rs 65 cr for FY09. This translates to an EPS of 24 on current equity of Rs 27.60 cr. Even if we consider the fully diluted equity (post all conversion of FCCB) of Rs 32 cr the EPS works out to Rs 20. On the other hand, if subsidy is taken into consideration then it can register total revenue of Rs 900 cr and NP of Rs 110 cr i.e. EPS of Rs 40 on current equity. Ironically the scrip which hit a high of Rs 865 in Jan’08 has been mercilessly battered down to sub Rs 50 levels. It seems all the negatives have been already factored into the share price and accordingly it has bottomed out. Fundamentally, BSL boast of having huge reserves to the tune of Rs 550 cr i.e. book value of Rs 208 and low debt equity ratio. Secondly, the sharp rupee depreciation may also have a positive impact on company’s bottomline. To conclude, investors can buy at current levels as scrip has the potential to double in 12~15 months. Investor can expect much higher returns if kept for long term.

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