Lloyd Electric & Engineering - Rs.138.00

Incorporated in 1987 and belonging to the Delhi based Punj Group, Lloyd Electric & Engineering Ltd. (LEEL) is in the business of manufacturing heat exchanger coils and sheet metal items for air-conditioning and refrigeration applications. In fact, it is India’s largest manufacturer of evaporator and condenser (E&C) coils for air conditioners. E&C coils are critical components in AC manufacturing next only to the compressor and account for approximately 20% of the cost of manufacture. Importantly, LEEL is the only Indian company to get US certification of quality for its E&C coils. The company also undertakes contract manufacturing to assembled room ACs, which are then sold by the OEMs under their respective brand names. LEEL is an OEM supplier to almost all AC manufacturers in India and it clientele includes Samsung, Electrolux, Carrier, Haier, Voltas, Blue Star, LG, Hitachi, Whirlpool, Diakin and the Indian Railways. Besides, it also exports its products to the Middle East, Australia, Asia and Africa.

LEEL has two manufacturing facilities located at Bhiwadi in Rajasthan and Kala-Amb in Himachal Pradesh. Recently, it has set-up a new manufacturing unit in Dehradun (Uttaranchal) to manufacture room air-conditioners, components of air-conditioners and electronic goods. The Bhiwadi plant has a capacity to produce 625,000 coils and assemble 20,000 ACs per year. The Kala-Amb plant can manufacture 400,000 coils and assemble 2,00,000 AC’s per annum. The biggest positive for the company is that it enjoys a 10 year excise duty and income tax exemption at its Kala-Amb and Dehradun facilities and would be paying sales tax at a concessional rate of 1% as compared to the normal 4%. Hence it is economical for AC manufacturers to outsource their manufacturing to LEEL making it a win-win strategy for both. Besides, the company has signed a MoU with Air International Transit Pty Limited, an Australia-based company for designing, manufacturing and supplying of AC package units to Metro Rail Corporation in India. It has also tied up with a Korean company, Hanyung Alcobis, for the manufacture of roll bond and frost-free coils for refrigerators. To cater to the rising contract manufacturing demand, LEEL is planning to double its AC assembling capacity to 400,000 units per year in the near future.

Last fiscal, LEEL raised around Rs.130 cr. through a GDR issue to be converted into equity at Rs.140 per share. Moreover, recently it got Rs.45 cr. by converting 40 lakh warrants issued in August 2005 into equity shares at Rs.125 per share. It reported very encouraging numbers for the December’06 quarter and is estimated to end this fiscal with sales of Rs.475 cr. with net profit of Rs.43 cr. This works out to an EPS of Rs.14 on its diluted equity of Rs.31 cr. For FY08, it may post an EPS of Rs.18. Notably, FII’s are holding around 26% stake in it with 6% held by mutual funds. Couple of weeks back, the company has hiked the FII limit to 74%, which indicates that FIIs are quite interested in this company. At a reasonable discounting by 12 times against its FY08 earning, its share price can once again test Rs.220 levels in 12-15 months.

Gayatri Projects - Rs.238.00

Incorporated in 1989, Gayatri Projects Ltd (GPL) is engaged in the execution of major civil works including national highways, irrigation projects, mass excavation, bridges, ports, airports and industrial civil works. It has a rich experience of completing projects worth Rs.2500 cr. in the last 16 years and has successfully accomplished around 650 kms of highways, 1000 kms of irrigation canals, 21 irrigation projects, 7 projects of dams and reservoirs, 9 highways and runway projects, 8 site leveling projects and 3 industrial projects. It has also executed various site preparation and grading, construction of roads, drains, ponds, reservoirs and industrial structures for reputed companies like Nagarjuna Fertilizers, Reliance Petroleum, Jindal Vijzayanagar Steel, Visakhapatnam Steel Plant, HPCL, etc. Moreover, it has done specialized works for Indian Railways, Port Trusts and Airport Authorities. GPL also provides design, engineering, procurement, construction and project management services for various infrastructure projects. Although the company has executed various projects in different sectors of infrastructure, its expertise lies mainly in the road and irrigation sectors.

Since inception, GPL has built a huge fleet of construction equipments including heavy earth moving machines, concrete mixers, batching plants, road equipments, quarry equipments, transportation equipment and various other equipments for fabrication and erection plants. Presently, GPL has projects worth more than Rs.1000 cr. of Public Works/ Irrigation departments of various State governments namely Andhra Pradesh, Madhya Pradesh, Chattisgarh and Gujarat apart from other clients. Of these, highway projects constitute around 40% and the rest 60% are irrigation projects. In addition, it has to execute projects worth Rs.1400 cr. in a joint venture with other prominent construction companies. Thus, it has pending orders of Rs.2400 cr. to be completed over the next 3 years. Importantly, GPL has bagged one toll project and two annuity based projects under the BOT format from National Highways Authority of India (NHAI). To maintain growth, the company intends to expand its execution capabilities in industrial construction and focus on pursuing EPC contracts as they enable it to become the main contractor and bid for a higher number of critical projects.

To fund the execution of the Meerut-Muzaffnagar BOT project and for repayment of debt, GPL came out with an IPO of 29 lakh shares including sale of 19 lakh shares by Videocon group at Rs.295 per share. Thus it raised about Rs.29.50 cr. from which Rs.20 cr. went into creating a SPV for BOT project and around Rs.7 cr. was kept for repayment of debt. GPL is now planning to raise further capital of around Rs.130 cr. through the FCCB route. As per the recent budget, Section 80(I)A exemptions have been withdrawn for sub contractors with retrospective effect from FY 2000. Since GPL did not take the benefit, it will not have any major impact. But it was planning to take the benefit from FY07, so its tax outgo will be affected to that extent. However as GPL enjoys one of the best margins in the industry, for FY07 it is expected to register a turnover of Rs.500 cr. and PAT of Rs.28-30 cr. i.e. EPS of Rs.28-30 on its equity of Rs.10 cr. And considering its huge order book position, it may report a top-line of Rs.650 cr. and PAT of Rs.45 cr. for FY08. This works out to an EPS of Rs.45 for FY08. On an expected diluted equity of around Rs.13.50 cr., the EPS will work out to Rs.33. Still GPL is trading grossly cheap compared to its peers. Despite promoter concerns and high debts, investors are strongly recommended to buy GPL for a price target of Rs.400 (70% appreciation) in 12-15 months.

STOCK WATCH

Great Offshore (Code: 532786) (Rs.515.45) is India’s largest integrated offshore service provider operating in two broad segments – ‘Port & Terminal Services’ and ‘Oil & Gas Offshore’. While the former involves providing berthing, unberthing, towing of vessels and other harbour services to ports, the latter involves exploratory drilling, offshore support and construction services to oil & gas companies. For the December’06 quarter, it reported total revenue of Rs.148 cr. and profit of Rs.37.50 cr. resulting in an EPS of Rs.10 for the quarter. It has a fleet of 39 vessels, which includes 25 Offshore Support Vessels (OSV), 11 Harbour Tugs, 1 Construction Barge and 2 Drilling Vessels. For FY07, it may register a top-line and bottom-line-line of Rs.550 cr. and Rs.150 cr., which may shoot upto Rs.650 cr. and Rs.200 cr. for FY08 respectively. This translates into EPS of Rs.40 and Rs.53 for FY07 and FY08. Hence at a reasonable P/E of 16-18 times against its FY08 earning, its share price can appreciate to the range of Rs.850-950. A good medium-term bet.

International Combustion (Code: 505737) (Rs.262) offers a comprehensive range of geared motors, gear boxes and electric motors manufactured on specially designed inter-linked CNC production lines. It also manufactures and markets a wide range of mechanical and electro-magnetic vibrating screens, feeders & conveyors to handle all types of bulk material. Of late, it has started manufacturing Microfine Classifiers, which has a strong market potential. For the December’06 quarter, its sales improved by 20% to Rs.19.50 cr. but net profit increased 40% to Rs.1.90 cr. registering a quarterly EPS of Rs.8.50. To meet the increasing demand, an expansion programme has been initiated by the company for augmenting the manufacturing capacity of its Gear Box/Geared Motor Division. It is also upgrading the manufacturing capacity of its Heavy Engineering Division. For the full year FY07, it may clock a turnover of Rs.78 cr. with net profit of Rs.7.50 cr. i.e. EPS of Rs.31 on its diluted equity of Rs.2.40 cr. For FY08, its EPS is estimated may shoot above Rs.40. At a reasonable discounting by 14 times, the scrip has the potential to touch Rs.550. Besides, it has huge reserves of around Rs.30 cr. making it a strong bonus candidate as well. A screaming buy.

From the high of Rs.60, the share price of Patels Airtemp (Code: 517417) (Rs.35.70) has corrected almost 50% to around Rs.30 currently. The company is involved in the design and manufacture of industrial process plant equipments like pressure vessels, heat exchangers, air cooling & air heating equipment, dehumidification plants, air conditioning and refrigeration equipment and coils etc. For the December’06 quarter, its net sales jumped by 75% to Rs.12.50 cr. whereas net profit almost doubled to Rs.0.77 cr. It caters to core industrial sectors like power, refineries, cement, engineering, chemicals, fertilizers, textiles, pharma which are doing extremely well. It may end FY07 with a turnover of Rs.45 cr. and profit of Rs.2.35 cr. leading to an EPS of Rs.5 on its current equity of Rs.5 cr. For FY08, it has the potential to report an EPS of Rs.7. At the current market cap of around Rs.18 cr., this engineering company is available fairly cheap and can easily appreciate 50% in 6-9 months.

Goodyear India (Code: 500168) (Rs.143) manufactures tyres and rubber goods for automobiles with presence in all major segments except two wheelers. The company is a pioneer in introducing tubeless radial tyres for passenger cars. Importantly, it has technical-cum-financial collaboration with Goodyear Tyre, USA, which holds 74% equity stake and is among the top three players in the world. For the nine months ending 30th September 2006, its net sales increased by 25% to Rs.590 cr. but net profit grew over 6 times to Rs.35 cr. Importantly, its OPM doubled to 7% compared of 3.5% last year due to fall in rubber prices. It has an aggressive capex plan of Rs.80 cr. to double its production capacity by 2008. Besides, it has plans to open 300 multibrand format shop-in-shop outlets in the next two years. For the full year ending December’06, it may report sales of Rs.800 cr. with net profit of Rs.50 cr. i.e. an EPS of Rs.22 on its equity of Rs.23 cr. For CY07, if rubber prices remain low, its EPS can rise upto Rs.28-30. A good bet in the auto ancillary sector.