Bharat Gears - Rs.46.00

Bharat Gears Ltd, promoted by Bharat Steel Tubes and Raunaq & Co. in collaboration with ZF Friedrichshafen (ZFF), Germany, was incorporated in 1971 to manufacture automotive gears. The foreign collaborator holds 26 per cent stake in the company. Today, it is one of the largest gear manufacturers in India producing a wide range of gears - hypoid, spiral gears and differential gears, which go into axle assemblies and parallel axes gears and shafts that make up the gear box assembly. The company supplies to OEMs in Tractors, Trucks and Bus and Utility vehicles. It also serves the replacement market and exports to overseas market. The Company also specializes in heat treatment furnaces, manufactured and installed under licence from Holcroft, USA. It has a diversified client base with many OEM manufacturers including M&M, Ashok Leyland, Toyota Kirloskar Auto Parts, Volvo India, TAFE, Hindustan Motors, Escorts as domestic clients and New Holland, L&T John Deere, Same Deutz-Fahr, ZF Hungary, ZF China, Funk USA, TDI USA are some of its international clients. Its gear manufacturing units are located in Mumbra near Mumbai and Faridabad in Haryana near Delhi.

Bharat Gears actual turnaround in Q1FY05 was thanks to the financial restructuring package, which was approved under Corporate Debt Restructuring (CDR) scheme in FY04. Under this scheme, financial institutions and banks sanctioned additional term loans amounting to Rs.12.05 cr. and enhanced working capital facilities. Further, 10 per cent preference shares of Rs.2.08 cr. have been issued to institutions and banks as part of their dues. Monies were also received from ZFF and Indian promoters aggregating to Rs.3 cr. as stipulated in the CDR package. A part of the company's corporate office premises was sold during the year resulting in a profit of Rs.5.51 cr. Proceeds from this sale were utilised towards repayment of term loans. Total repayment of long term loans in FY04 amounted to Rs.6.46 cr. Further repayment of other term loans/debentures/10 per cent preference shares falling due for repayment during the year were rescheduled / rolled over in terms of the CDR package. In short, this restructuring scheme has resolved most of the issues and has brought the company back on track.

The benefit of this financial restructuring in FY04 can be seen in the first half FY05 results. In both the quarters, the company reported good profits with substantial improvement in operating margins. For the half-year ending September’04, it registered Net sales of Rs.66 cr. up 70 per cent and earned a NP of Rs.2.30 cr. against a net loss of Rs.6.40 cr. last year. Currently, the company is also concentrating on exports and has receiving good orders from Europe, China, USA and the Middle East. Here in the domestic market also, the demand is expected to increase due to the aggressive growth plans of all OEMs in the auto sector and tractor sales picking up. To sum up, the future looks promising for the Bharat Gears and it could post a sale of Rs.120 cr. and earn a NP of Rs.4.75 cr. i.e. an EPS of Rs.8 on a small equity of Rs.6 cr. With auto outsourcing expected to boom in coming years, this auto ancillary should be accumulated for 100 per cent appreciation in 18~24 months.

Finolex Industries - Rs.63.00

Finolex Industries Ltd., (FIL), a part of the Finolex group promoted by Mr. PP Chhabria, was incorporated in 1981 and is today the largest PVC & PVC pipe manufacturer in India. It makes a wide range of PVC pipes and fittings for diverse applications in agriculture, housing, telecom, industry etc. It also manufactures specialty pipes and fittings, namely SWR (Soil, Waste and Rain Water) pipes and fittings for the construction industry and ducting for the telecom industry. It has a huge distribution network and enjoys a strong brand value.

The company has advantage over its competitors since it is backward integrated with its own PVC resin plant, which contributes nearly 70 per cent of turnover. Though the price of its raw materials have risen. PVC prices too have shot up, which will enable the company is able to maintain its profit margin. Its PVC resin plant, which makes suspension grade PVC and paste grade PVC has been set up in technical collaboration with Uhde GmbH of Germany under technology licence from Hoechst AG and currently has a capacity of 1,30,000 TPA. Its Pipes Division and associated concerns consume about 45,000 TPA of PVC. Its Pipe & Fittings Division with two ultra modern plants at Pune and Ratnagiri has the capacity to manufacture 58,000 TPA of pipes. To exploit the rising demand from agriculture, irrigation and housing sector, the company is doubling the PVC resin capacity to 2,60,000 TPA and increasing the PVC pipes capacity to 80,000 TPA at an investment of Rs.500 cr., which will be funded by internal accruals of Rs.150 cr. and by Rs.350 cr. of debt. The new capacity expects to be commissioned by end 2005, which will increase its market share from 16 per cent to 30 per cent. As part of its expansion plans, the company also plans to construct a breakwater facility so that its jetty, which is utilized for importing the feedstock for manufacture of PVC as well as for importing LPG, can be used in the monsoons too.

As far as shareholding is concerned promoters stake are 19 per cent but Finolex Cables and its subsidiary hold 32.40 per cent, which comes under non-promoters. Thus indirectly, the promoters stake can be said to be above 51 per cent. Recently, the company came out with very good Q2FY05 numbers. If we see its half yearly numbers ending Sept. 2004, the company’s Net Sales has increased by 25 per cent to Rs.482 cr. and NP has more than doubled to Rs.56 cr. leading to an EPS of Rs.4.50. Historically, its second half has always been better than its first half. Considering the upturn in the petrochemical cycle, the government thrust on agriculture and irrigation projects and the boom in housing sector, the company is to clock sales of Rs.1030 cr. and NP of Rs.125 cr. Given this perspective, Finolex Industries is trading quite cheap at a PE of 6 on an estimated EPS of Rs.10. The long-term prospects are very bright and investors are advised to buy at every dip to fetch a minimum appreciation of 50 per cent in the next 12 months. Its share price can even double in 2~3 years.

STOCK WATCH

A reputed analyst is quite bullish on Shah Alloys. The company has reported encouraging numbers for the Sept.’04 quarter with a top-line growth of 22 per cent and the bottom-line growth of 45 per cent. For the full year FY05, the company could post an EPS of more than Rs.35 and its share price is expected to shoot up substantially in future.

Although sales were down again this quarter for Murli Agro Products, its operating profit was up 24 per cent and it maintained a NP of Rs. 2.30 cr. recording an EPS of Rs. 3.30 for Q2FY05. Also, its paper division is reported to be doing well and the company is expected to report an EPS of Rs.12 for FY05. A good medium term bet.

Garware Polyester appears the best bet from the packaging sector. For H1FY05 ending Sept.’04, its sales grew by 21 per cent whereas NP increased by 29 per cent in spite of higher tax provisioning. For FY05, it could report an EPS of Rs.12. A good buy.

Despite the cut throat competition and price wars leading to worries about its operating profit, Videocon International continues to post robust numbers quarter after quarter. Short-term traders can accumulate with a price target of Rs. 65.

Some market-men feel that Varun Shipping can turn out to be a dark horse in the Shipping sector as it has potential to post an EPS of Rs 6 on its expanded equity of Rs.108 cr. They also predict a re-rating of the scrip once it gets listed on the Singapore Stock Exchange.