Phillips Carbon Black Ltd - 155.00 Rs

Established in 1960, Phillips Carbon Black Ltd (PCBL), part of well known RPG group is the pioneer and largest manufacturer of carbon black in the country. Nearly 95% of carbon black production is consumed by rubber and tyre industry, while the rest find application in plastics, ink, paints and dry cells. Currently, PCBL is the undisputed leader with a capacity of 270,000 MTPA which is almost 47% of the total installed capacity of carbon black in India. It has also established a strong goodwill in the global market with more than 25% revenue coming from exports to over 15 countries including China, Japan, Indonesia, Iran, Sri Lanka, Vietnam, Turkey, Philippines, Australia, New Zealand and East African countries. Its top international clients include Bridgestone group, Goodyear, Trellebrog, Loadstar and Danang Rubber, whereas in domestic market it supplies to Apollo, MRF, Ceat, Birla & JK group. Out of the total export of this powdery substance from India, 70% is made by company alone and in the domestic market it has an overall share of more than 40%. Incidentally, it is the first carbon black company in the world to receive carbon credits and is an ISO 9001 & ISO 14001 certified company.

PCBL has three manufacturing units located in Durgapur (140,000 MT), Kochi (35,000 MT) & Baroda (95,000 MT) of which all are working at 100% capacity utilization. Under technical collaboration with big international players and equipped with latest equipments from world’s best manufacturers, company has a proven capability to produce 24 grades of carbon black. To compliment this it has captive power generation facility at each unit with a combined capacity of 18.50 MW. To cash on the buoyant economic condition, PCBL has chalked out massive 350 cr expansion plan to increase the capacity by 125,000 tonne i.e. by nearly 50%. It is putting up a greenfield project at Mundra, Gujarat to produce 75,000 MT of carbon black alongwith 14 MW captive power plant. It is also expanding its Kochi capacity by 50,000 MT and is adding 12 MW power generation facility. Both these projects are estimated to complete between Sept - Dec 2008. Meanwhile, to de-risk its revenue model, a 30 MW power generation plant from waste gas is being constructed in Durgapur with an investment of 115 cr. This is scheduled to become operational from March 2008. Hence post all expansion it will have carbon black capacity of 395,000 MTPA and power generation capacity of 74.50 MW. However the most important factor for company’s growth is that it has re-negotiated the pricing formula with the customers, so as to built-in escalation clause. Henceforth, the company would be able to pass on any increase in input cost and will be able to maintain its profit margin.

The momentum of growth in the economy coupled with expansion plans announced by various tyre companies in India to cater to increasing demand from OEMs as well as the replacement market would increase demand for carbon black. Secondly, all the international biggies are shifting to Asian region to make it a tyre manufacturing hub due to cost and other factors. This augurs well for PCBL as company is looking to increase its share in international market. To fund its growth plan company raised around 50 cr thru pref allotment of 75 lac shares @ 66 Rs in Nov 2006. It has recently issued another 30 lac warrants @ 149 Rs to mobilize 45 cr in future. Financially, it made a strong turnaround for FY07 with OPM improving considerably to 9% from 4% in FY06. It is further expected to move up to 12.50% in current fiscal. Accordingly it may register sales of 1050 cr and PAT of 65 cr which translates into EPS of 23 Rs on fully diluted equity of 28.25 cr. Off late, as the scrip has seen a smart rally, investors are recommended to buy at sharp declines for a price target of 225 Rs in 12`15 months. Besides, the major raw material for the company i.e. carbon black feedstock has close relationship with crude oil prices. Although, the revised pricing formula has adequate flexibility to respond to such changes but still the rising crude oil price is always a cause of concern.

Honda Siel Power Products Ltd - 240.00 Rs

Incorporated in 1985, Honda Siel Power Products Ltd (HSPP), erstwhile Shriram Honda Power Equipment Ltd is engaged in manufacturing of portable generators, water pumping sets and general purpose engines. Besides, it also offers a small range of end-use appliances such as brush cutters and engine lawn mowers. HSPP is a 67% subsidiary of Honda Motors Co. Japan, which is one of the world’s largest power products company. Hence the ‘HONDA’ brand is quite popular and trusted by millions of people in India. Infact, HSPP is the undisputed leader in portable gensets with nearly 70% market share, whereas it enjoys 20% market share for water pumps and engines. To achieve this it has a build up a strong distribution network with strength of over 800 dealers and 15 area offices spread across the country. Although not so lucrative, company has also been exporting to over 40 countries with Saudi Arabia, UAE, South Africa, Kenya being the key markets. Presently, exports contribute around 25% of sales revenue. Incidentally, HSPP was the first power products manufacturing company in India to have been awarded the ISO 9001:2000 certifications for its quality assurance systems & ISO 14001 for its environment management systems.

Under the technical collaboration of its parent company, HSPP has set up state-of-the-art manufacturing facilities at Greater Noida, Pondicherry and Rudrapur (Uttranchal) with a combined installed capacity of 1,75,000 units of portable generating sets /engines / pumping sets. Armed with the latest & world-renowned 4-stroke Honda technology, company has 25 models of generators, 6 models of engines and 10 models of water pumping sets. It boasts of launching the India’s first LPG run gensets which is doing extremely well along with its super silent series. Importantly, the Honda generators conform to the most stringent phase II noise & emission norms lay down by the Central Pollution Control Board, which the cheap Chinese products fail to. However, going forward the major growth for the company is expected to come from its engine and water pump sets division on back of strong industrial growth & increased mechanization in the agriculture/floriculture/horticulture sectors. On the other hand the generator segment is witnessing higher demand mainly from small industrial units and private set-up businesses due to continuing long power cuts in rural and semi urban areas. To understand the customer requirements better and on real time basis it has also put up its own showroom in Gurgaon

With a view to improve its profitability, last year company indigenized critical engine components such as carburettor assy, insulator carb, all non-asbestos types of gaskets etc and is further planning to manufacture spark plug, ring piston set, ring gear and connecting rod casting in house. Hence company has been able to reduce the import cost as percentage to the material cost to 27% in FY07 compare to 31% in FY06 and intends to further take it down to 25% for FY08. To bring down its logistic cost and improve operational efficiency, company is consolidating its manufacturing facility and has decided to re-locate Rudrapur plant (component manufacturing unit in 32 acres) to Greater Noida. Considering all the factors it may clock a turnover of 260 cr and PAT of 20 cr i.e. EPS of 20 Rs on equity of 10.14 cr. Moreover, this MNC is not only debt free but also has huge liquid cash to the tune of 108 cr which translates into 107 Rs per share. Despite such strong fundamentals, company is available at a market cap of merely 240 cr. It also has a huge reserve of more than 150 cr leading to a book value of 160 Rs making it a strong bonus candidate as well. If not, there is also a remote possibility of parent company opting for delisting the company. To conclude, investors are strongly recommended to buy at current levels as it can give 50% return in 12~15 months.

STOCK WATCH

Krone Communications (128.00) is a 62% subsidiary of US based ADC Telecommunications, which is world leader in communications network infrastructure and has presence in over 150 countries worldwide. Thus, Krone provides the connections for wireline, wireless, cable, broadcast and enterprise networks in India. Its innovative network infrastructure equipment and professional services enable high-speed Internet, data, video, and voice services to residential, business and mobile subscribers. Besides structured cabling solution, it also offers Wi-Fi and Wi-max solutions. In addition, the company enables wireless carriers to get more from their networks with its Digivance™ radio frequency transport solutions and ClearGain® tower-mounted amplifiers. Because of its hi-tech professional service its clientele includes corporate giants like Bharti Televentures, Reliance Infocom, Tata Teleservices, Siemens, HFCL Infotel, TCS, Alcatel, Cognizant, Lucent, etc to name a few. For FY07 ending Oct 2007, it is expected to report a topline of 90 cr and bottomline of 7.50 cr which translates into EPS of 16 Rs on small equity of 4.60 cr. That means this debt free MNC is available at a very cheap discounting of 8x times. In future, the parent company may also opt for delisiting which will trigger the share price to its real worth.

ANG Auto (170.00) is among the few companies in the world to be completely integrated – from the manufacture of components to sub-assemblies and assemblies and finally to vehicles. Today it the largest trailer manufacturing company in India with a capacity of 3600 trailers per year and will soon be No. 1 in Asia as it is augmenting the capacity to 6000 trailers. Notably, company has entered into a five year contract with Ashok Leyland for trailers, which is valued at 1500-1800 cr. Secondly, its patented automatic slack adjuster and the single piece dummy axle is witnessing strong demand from all over the world. Going ahead, it intends to manufacture suspension systems and is also setting up a forging unit at Bhiwadi, Rajasthan at capex of Rs 37. To consolidate its operations company has decided to merge ANG Auto Tech, its 75%subsidiary with itself. For FY08, it is expected to clock a turnover of 175 cr and profit of 25 cr on a standalone basis. This works out to an EPS of 19 Rs on fully diluted equity of 13.40 cr. Because of sharp rupee appreciation scrip is hitting 52week low, thereby giving good opportunity for long term investors to accumulate at declines.

Steel Cast (175.00) is a leading manufacturer of carbon steel, low alloy steel, high alloy steel, hadfield manganese steel and other superior grades of wear and abrasion resistant steel castings by sand molding and shell molding process. It basically supplies to host of OEM’s in segments like construction equipments, cement machinery, steel plant manufacturing, mining, aerobridge industry, shipping, power etc. In order to cater the increasing demand, company has expanded its capacity to 10,000 TPA in March 2007 and has recently enhanced it to 13000 TPA in Sept 2007. Ironically, it is among the very few firms deploying 6-Sigma methodology and philosophy in the organizational working of the company in association with M/s. Caterpillar. However, due to sharp rise in nickel and other ferro alloys prices, company’s margin has been impacted in last 3 quarters. That’s why the share price has tumbled down from a high 325 and is hitting 52 week lows. But from early June nickel prices have cooled down more than 35%, which will again improve the company’s margin in coming qtrs. Hence, on an estimated OPM of 17% for FY08 it may register sales of 125 cr and PAT of 10 cr. This leads to an EPS of 28 Rs on small equity of 3.60 cr. At a reasonable discounting by 8x times, scrip may cross 225 Rs in medium term.

Shakti Metdor (180.00) is a market leader in making special scientific doors, fire doors, stainless steel doors and general doors. In short it is one shop stop for total door solutions. It primarily caters to infrastructure industry, information technology, ITES, BPO, pharma and healthcare sector. In addition to performance door, company is examining the feasibility of introducing new products to cater to the building industry which are wood substitutes and would also compliment the current products. Apart from having an ISO 9001: 2000 certifications, it is stream lining its operations by implementing ERP from SAP business software. To maintain its leadership, company is regularly expanding its manufacturing capacity. Last fiscal only it commissioned the R&D centre and facilities training centre. On the export front, company is looking at South Asia, among other regions, as a possible growth area for its product and is actively exploring it. For FY08 it is estimated to clock sales of 75 cr and profit of 12.50 i.e. EPS of 45 Rs on a very tiny equity of 2.75 cr. Scrip has the potential to touch 250 Rs in short to medium term.