Frontier Springs - Rs.16.00

Incorporated in 1981 and promoted by Mr. K. L. Bhatia, Frontier Springs Ltd. (FSL) belongs to the small Kanpur based Frontier group which has over 30 years of experience in the business of automobile & railway suspension parts like U-bolt, center bolt, coil springs, leaf springs, centre pivots, side assemblies, cast steel brake beams, buffer components, buffer assemblies, coupler components metal bonded etc. Out of these products Suspension springs, Leaf springs and Coil springs are made by FSL. The range of application of these springs varies from rail rolling stock to passenger cars. It also makes heavy and light hot coil springs for earth moving equipments, boiler plants etc. Apart from the Railways being a major customer, its clientele includes Ford, Opel, Daimler, BMW, Mercedes, Tata Motors, Texmaco, Kalyani Brakes, Central Ordinance Depot, Sunflag Industries, Usha Martin etc. Moreover its products are also exported to the UK, USA, Holland, Australia, Netherland and South East Asian countries. In short, it has a very good quality and design reputation both in India and abroad.

FSL’s manufacturing facility is located at Rania in Kanpur, UP, with an installed capacity of 10,800 MTPA. In order to obtain better space utilization, more fatigue life and weight reduction, different types of springs are manufactured at its plant. Variable load rates as well as fixed load rate coil springs are manufactured by high quality chrome vanadium and chrome silicon steel rods which are duly crack detected and epoxy powder coated. Incidentally, the group companies Frontier Alloy Steels and Frontier Metaprod help FSL get regular supply of raw materials thus giving it the much needed cost-efficiency advantage. Recently, it set up a new assembly line for the manufacture of heavy and light-coiled springs by importing the plant from Cogan Constructions, USA. The commercial production has already started and is expected to contribute an additional Rs.12 cr. of revenue per year, which is quite substantial for FSL. The company plans to further expand its Leaf Spring capacity as it is expecting some big order from a large UK based trailer manufacturer. Moreover, it has decided to diversify into the business of Air Suspension Spring, which has been indigenously developed. FSL has already engaged the services of M/s KPS Consultants and Impex Private Ltd., New Delhi primarily to explore the lucrative Technical Know-how and collaboration with some countries in Europe and China for manufacture of Air Springs.

FSL is thus well poised to encash the exponential boom in the Locomotive & Automotive Ancillary industry. The recent expansion and future capex will give a substantial fillip to its topline and bottomline in coming quarters. For the nine months ending 31st December 2006, its sales increased by whopping 60% to Rs.17 cr. whereas net profit jumped 140% to Rs.0.95 cr. with the massive expansion and modernization plans approved in the recent railway budget, FSL is expected to get some big orders in the near future. For FY07, it may report net sales of Rs.25 cr. with net profit of Rs.1.40 cr., which can shoot up to Rs.35 cr. and Rs.2.25 cr. for FY08. This works out to an EPS of Rs.4 and Rs.6 respectively. Investors are strongly recommended to buy the FSL scrip at current levels as its share price can easily double in 12-15 months.

Goodyear India - Rs.140.00

Established in 1922, Goodyear India Ltd (GIL) was originally incorporated as Goodyear Tire and Rubber Company (India) but was subsequently renamed as GIL in 1961 when it became a public limited company. This 85-year-old FERA company has a technical-cum-financial collaboration with Goodyear Tire and Rubber Company, USA which is also the holding company with 74% equity stake. Notably, the American parent is among the top three players in the world with presence in six continents and operating from 80 facilities in 28 countries. Here in India, GIL has emerged as a leading manufacturer of automotive tyres with 15% market share. In fact, it is the largest supplier of tractor tyres in the country and was the first to roll out tubeless radial tyres on Indian roads.

GIL has two manufacturing facilities: one in Aurangabad, which makes passenger car tyres and other facility in Haryana where tractor and other tyres are made. Except for two-wheelers, the company has presence in all major segments like passenger cars, heavy and light commercial vehicles, tractors & farm equipments etc. It supplies to most of the auto companies including Maruti, Tata Motors, M&M, Ford, GM, Hyundai, Ashok Leyland, Swaraj Mazda, TAFE, PTL, Eicher, Escorts, etc. It also commands a major market share in the Off The Road (OTR) segment by being the major supplier to Coal India Limited, Escorts, L&T, Tata Steel and other steel plants of the country. Importantly, it has strong presence not only in the OEM segment but also in the replacement market. Besides, its tyres are being exported to Australia, Dubai, Hongkong, Phillipines, Nepal, Bangladesh, Srilanka, Bhutan and Pakistan. Due to improved market conditions, GIL is finally implementing its Rs.80 cr. expansion plan to increase the production capacity at its Aurangabad facility from 4500 tyres per day to 10,000 tyres in the next two years. On the retail front, it has introduced international & multi-brand format 'Shop-in-shop' outlets, which not only sells tyres but also car accessories. GIL plans to open 300 such outlets by 2008 at an investment of Rs.50 cr.

The biggest turnaround for the tyre industry was the fall in the price of rubber, as it constitutes around 40% of the total raw material cost. Although, historically rubber prices are still trading high but in the last one year they have cooled off a bit. The RSS-4 Kottayam rubber price is currently trading around Rs.8700 per quintal compared to Rs.11500 in May 2006. Hence for the September 2006 quarter, GIL’s topline grew by 40% to Rs.212 cr. but NP zoomed by 10 times to Rs.15 cr. compared to Rs.1.50 cr. last year. It reported a healthy OPM of 10% after a long time. For the full year ending 31st December 2006, it may report net sales of Rs.800 cr. and NP of Rs.50 cr. i.e. an EPS of Rs.22 on its equity of Rs.23 cr. Hence at its current market cap of around Rs.325 cr., this MNC associate is trading at P/E ratio of than 7. However, as the performance of the tyre industry largely depends on the rubber prices, it’s very difficult to predict the future profit of the company. If the price of the rubber falls in future, the share price of the company will rise. Investors can buy at declines for a 50% return in 15-18 months.

STOCK WATCH

Hind Rectifiers Ltd. (Code:504036) (Rs.740) is a beneficiary of the recent railway budget as 50% of its revenue comes from the railways. It makes locomotive transformers, power electronics components and equipments. It manufactures diodes and thyristors (types of semiconductor devices), rectifiers, inverters and transformers that are used in locomotives. For the first three quarters, its sales grew by more than 20% to Rs.60 cr. whereas net profit jumped 55% to Rs.8 cr. To maintain its future growth, the company has modernized its Mumbai plant and is setting up two new plants in Uttaranchal, where it will get tax benefits as well. Commercial production may start by April 2007. For the full year FY07, it may report a topline of Rs.85 cr. with net profit of Rs.11.50 cr. But for FY08, it can report sales of more than Rs.100 cr. with PAT of around Rs.15 cr. on contribution from the new plant. This works out to an EPS of Rs.76 for FY07 and Rs.99 for FY08 respectively. It’s a solid buy for medium to long-term.

Accel Frontline Ltd. (Code:532774) (Rs.59.55) is a mid cap IT company which concentrates mainly on the four segments viz. IT Infrastructure solutions, IT Infrastructure Management services, Enterprise Software solutions and Business Process Outsourcing services. For the first nine months ending 31st December 2006, its topline grew by 20% to Rs.142 cr. whereas bottomline jumped 80% to Rs.9.50 cr. Couple of months back, it was been chosen by Sun Microsystems as its Strategic Regional Partner for Tamil Nadu and Kerala. Besides it recently acquired the banking solutions division of Telesis Global Solutions Ltd., a Chennai based Software Company specializing in software products for banking applications and implementation and migration services for core banking software in India, Middle East and African regions. The company is aggressively working to increase its global presence and has raised around Rs.39 cr. through the IPO route at Rs.75 per shares in October’06. It may end FY07 with total revenue of Rs.190 cr. and PAT of Rs.14 cr. i.e. an EPS of Rs.6 on its equity of Rs.22.50 cr. For FY08, it can report an EPS of Rs.8. Currently, the scrip is hitting new lows and is trading at 20% discount to its issue price. Accumulate at declines.

Another scrip which is quoting at 20% discount to its issue price is Sunil Hitech Engineers Ltd. (Code:532711) (Rs.80). It specializes in fabrication, erection, testing & commissioning of thermal power plants with high precision quality and timeliness. It also looks after overhauling and maintenance of the plant. For the current first three quarters, its turnover remained almost flat at Rs.98 cr. but net profit increased by 15% to Rs.4.30 cr. Recently, the company forayed into manufacturing of transmission towers by setting up a galvanizing plant at Nagpur with an annual production of 20,000 MT capacity. For the full year FY07, it is estimated to clock a turnover of Rs.150 cr. with profit of Rs.6.25 cr. But with a present order book position of more than Rs.500 cr. and still growing, its future earnings will be quite strong. For FY08, it can report a total revenue of Rs.200 cr. with net profit of Rs.9.50 cr. Hence, it is expected to report an EPS of Rs.6 for FY07 and Rs.10 for FY08 respectively. With its 52-week high as Rs.167, the scrip can easily appreciate 50% in 6-9 months.

Electrosteel Castings Ltd. (Code:500128) (Rs.390.70) is a water infrastructure company that provides techno-economic solutions in the area of water supply and sewerage systems. In fact, it is India’s largest manufacturer of ductile iron pipes and cast-iron pipes with a capacity of around 2,50,000 TPA. It also provides turnkey services, which encompass manufacturing; supplying, laying, operating and transferring complete ductile iron pipe projects. For the December’06 quarter, it reported stunning numbers. Its sales shot up by 50% to Rs.300 cr. and net profit almost tripled to Rs.29.50 cr. To reduce the cost of production, the company is setting up a sintering plant with a capacity of 850 tonnes per day (TPA) at Khardah and has also been allocated the Parbatpur Coal Block in the Jharia Coal Field for mining coal for captive consumption. To fund these projects, it had raised about Rs.340 cr. through the FCCB route to be converted into equity shares at Rs.450 per share. For FY07 & FY08, it is expected to report revenues of Rs.1100/ Rs.1300 cr. with profit of Rs.105/ Rs.130 cr. respectively. This leads to an EPS of Rs.51 and Rs.63 on its current equity of Rs.20.80 cr. However, on its fully diluted equity of Rs.28.50 cr. considering the full FCCB conversion at Rs.450 per share, the FY08 EPS works out to Rs.45. Buy at sharp declines only.