Z F Steering Gear (India) Ltd - 205.00 Rs

Belonging to well known Firodia group of Kinetic fame, Z F Steering Gear India Ltd (ZF) was incorporated in 1981 to manufacture mechanical - worm & roller and power steering gears in financial and technical collaboration with M/s. ZF Friedrichafen AG Germany, world's largest independent steering gears manufacturer. Today, ZF is market leader in both mechanical and hydraulic power steering gears especially for commercial vehicles and tractor industry. Its product range includes ball and nut power steering gear, rack and pinion power steering gears, worm and roller manual steering gears, intermediate shafts, vane pumps, steering columns, bevel gears box, universal joints, servocom steering gear etc. It has an enviable clientele including all auto majors like Tata Motors, Ashok Leyland, M&M, Eicher Motors, Escorts, Bajaj Tempo, Swaraj Mazda, PunjabTractors, Volvo, L& T John Deere, New Holland etc. Off late, it has entered passenger car segment by supplying rack & pinion power steering gears for ‘Indica’ car. In near future, company is looking to develop new products such as collapsible steering column for cars, telescopic steering columns for HCV, aluminum pump for higher HP engines, pump parts localization etc

ZF’s state-of-the-art manufacturing plant at Pune-Maharashtra is equipped with advanced specially designed machinery from ZF Germany for manufacturing critical components and has its own in-house heat treatment facility consisting of sealed quench furnaces, pit carburised furnaces for case carburising, nitriding etc. To cater the rising demand, last fiscal company expanded its installed capacity of power steering fears from 150,000 to 240,000 per annum and of mechanical steering gears from 100,000 to 120,000 per annum at a capital expenditure of approx. Rs. 7 crore. Against this, it sold 124,811 units and 92,155 units respectively for entire FY07. Moreover, in view of encouraging response from the automobile manufacturers, ZF is in the midst of further expanding the production capacity to 300,000 units of power steering gears and 150,000 units of mechanical steering gears. Secondly, it has entered into a 26:74 joint-venture with its collaborator ZF Lenksysteme, GmbH, to promote a new company for developing and manufacturing new products which will be different and not competing with its current product range. Importantly, sales of commercial vehicles are increasing due to improvement in road-infrastructure and also the ruling of Supreme Court to ban overloading of commercial vehicles. It recorded a growth of 33%, producing 520,000 vehicles during 2006-07 compared to 391,083 vehicles in the previous year. On the other hand, tractors also recorded 20% rise in sales on the back of increased focus by the government in providing subsidies. Thirdly, with India emerging as the hub for small-car manufacturing, many players have announced capacity expansions and many new international-players have taken initiative in setting-up their state-of-art production facilities in India. And since ZF’s future prospects are closely linked to the demand for commercial vehicles, multi-utility vehicles and tractors, it is expected to do much better in the coming years.

Financially, ZF is by and large a debt free company. Infact, it has invested around 37 cr in unlisted firms which yields handsome dividend in form of other income. Promoters currently hold about 72% of the equity, of which German collaborator is holding 26% stake and Bajaj Tempo holding nearly 10% stake. Management of the company is very professional and investor friendly with an impeccable track record of uninterrupted dividend payment since last two decades. For FY07 they paid 80% dividend which gives a yield of 4% even at CMP. Ironically, ZF has still not tapped the global market which presents a huge opportunity to be explored in future. At the same time with zero revenue from exports it is not affected by the sharp rupee appreciation unlike other auto ancillary companies. Infact, it has benefited to some extent as it imports few of its raw material. For FY07 it registered 15% growth in sales to 217 cr whereas NP increased by 20% to 27.50 cr posting an EPS of Rs.30. However, the first two quarter nos for FY08 are not so encouraging as sales declined by 10% to 95 cr and NP remained flat at 11.75 cr. Hence on a conservative basis it is estimated to clock a turnover of around Rs 205 cr and Net profit of Rs 24 cr which leads to an EPS of 27 Rs on equity of 9 cr. Considering debt free status of company with healthy cash EPS of 40 Rs, huge reserves of 80 cr, strong promoter holding, high dividend yield and 52W high low as 297/160 Rs its fairly a value buy at current market cap of 180 cr. Investors can expect 40% appreciation in 12~15 months. But at the same time one should note that rising import of cheaper power steering gears from China is a threat to the company

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Indoco Remedies Ltd - 295.00 Rs

Promoted by Mr. Suresh Kare in 1947, Indoco Remedies Ltd (IRL) is engaged in research & development, manufacturing, marketing and distribution of pharmaceutical products and services in the domestic and international market. Basically, it manufactures API’s, formulations and provides contract research and manufacturing services (i.e. CRAMS). Besides, it has a unique revenue inflow from the dossier development and marketing them. Over the years IRL has a built a strong brand portfolio of 120 products across 11 major therapeutic segments. Earlier, it was focusing on acute therapies like - respiratory, anti-allergy, anti-infective, dental, ophthalmic etc which are volume led business. But off late it has also ventured into the high growth and lucrative lifestyle segment like anti-diabetes, cardiovascular, central nervous system, nutrition, dermatology etc. It has a strong presence in domestic formulation market with more than 75% of total revenue coming from it, whereas the balance 25% comes from export to over 33 countries globally including regulated and semi regulated markets. Notably, company boasts of having 10 brands which are among the top five in their respective segments with Febrex Plus, Cyclopam, Vepan, Sensodent and ATM being the most successful. In order to ensure focused sales approach, IRL has created separate marketing divisions namely Indoco, Spade, Warren, & Surge-Radius, each with specific therapeutic focus and working as an independent profit centre. This year company created two more divisions – Warren Excel and Spera.

Presently, IRL has five facilities for formulation - Goa Plant I, Goa Plant II, Baddi and the rest two plants at Aurangabad & Tarapur for non regulated market. Post acquisition of La Nova Chem and merger with SPA Pharma Ltd, IRL is now backward integrated to manufacture API for captive consumption as well as export with two commercial manufacturing facilities - one at Patalganga & second at New Mumbai. Importantly, company’s Goa plant II is USFDA certified for ophthalmic & injectables whereas the Goa plant I is approved by MHRA-UK & Darmstadt Germany. To fully integrate into CRAMS space, company has set up a state-of-the-art standalone R&D Centre at Rabale, near New Mumbai equipped with facilities like synthetic chemistry labs, F&D, AMD, regulatory and IPR cell. The unique feature of this R&D lab is the Kilo-lab, which can produce one gram to several kilogram quantities of APIs and key intermediates for pre-clinical phase to phase-III clinical studies. The lab intends to take up NDDS research and expects to commercialize the first NDDS product in calendar 2008. In order to maintain the growth momentum for the domestic formulations, the company has been launching around 25 new products every year and is expected to maintain the same pace for coming two years as well. However, currently it is looking forward to capitalize on export opportunities in the high margin regulated markets like US and UK. Under contract manufacturing, company has 21 projects for Germany, 9 for UK & 6 for Eastern Europe. But most importantly, IRL has entered into US market through a supplying pact with Nexus Opthalmic and has already made one shipment to USA. Moreover, it has recently finalized long term joint venture partnership with Amneal Corporation, New Jersey, U.S.A. to develop and manufacture ophthalmic formulations for marketing it in US. Besides, with its product registered in over 50 countries it will continue to export to other non regulated markets as well.

Meanwhile, IRL is taking various initiatives to increase its presence in global market. Like, apart from doing 14 projects for formulation research, it has undertaken six projects for custom synthesis (molecules under Phase-I, II, III) with innovator companies. Notably, for formulation division company has already filed 3 ANDA whereas 10 is underway and another 12 in pipeline. It has also completed 6 CTDs while 8 are under way and 12 in pipeline. For the less regulated market, IRL has filed 3 dossiers in SA, 47 dossiers in CIS, 1 dossier in Brazil and 3 dossiers in AU, NZ. On the API front, company has 9 molecules for DMF, COS & EDMF in CTD format for regulated market under various stages of submission and 8 molecules are in pipeline for regulatory submission. To summarize, IRL has laid the foundation and is now poised to enter into a strong growth trajectory in coming few years.

Although company doesn’t have any capex plan currently, it intends to set up a second manufacturing facility in Baddi, HP with the same capacity as in the present plant, in next two years. Financially, company has amalgamated La Nova Chem (India) Pvt. Ltd., Indoco Healthcare Ltd. and the Pharma Division of SPA Pharmaceuticals Pvt. Ltd with itself. For FY07, company recorded net sales of Rs.326 cr and PAT of Rs.42 cr thereby posting an EPS of 35 Rs. It reported encouraging nos for the first qtr as well. Accordingly, it is expected to clock a turnover of 375 cr and NP of 48 cr for FY08 ending June’08. This translates into EPS of 39 Rs on current equity of 12.30 cr. Hence at reasonable discounting by 12x times scrip has the potential to touch 475 Rs (60% appreciation) in 15~18 months. Investors are strongly recommended to buy at current levels.

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Belonging to Duncan Goenka group, Stone India (158.00) is undisputed leader in locomotive brake systems and has a huge range of mechanical and electrical products for the railroad industry. It boasts of having its own patented beam mounted brake system for all types for freight wagons. Off late, it has ventured into the railway electronics business through introduction of a slew of high value power electronic products like inverters, converters and power supply system for coaches, locomotives, EMUs and metros. Currently, company generates about 90 per cent of its revenue from railways and has a market share of about 25-30 per cent. It has appointed Telewira Tegas SDN BHD, Malaysia, as an exclusive agent for turnkey project work relating to freight car, passenger coach and locomotive up gradation and maintenance for Malaysian railways. Recently, it has partnered with Sumitomo group Japan for manufacturing of air springs which are technically far superior to the existing mechanical suspension system. Importantly, to diversify its product portfolio, it has set up a greenfield facility at Nalagarh, Himachal Pradesh which is likely to go on stream this fiscal itself. Hence for entire FY08 it is expected to register sales of 100 cr and PAT of 13.50 cr i.e. EPS of Rs 18 on equity of 7.60 cr. At a modest discounting by 12x times scrip can touch Rs.220 in medium term.

Wanbury (138.00) is the world’s largest producer of Metformin Hydrochloride - a diabetes management product and Salsalate, an anti-inflammatory drug. With its two USFDA certified plant for multi-products, company already has 23 DMFs with US and is looking to file another 4~5 DMFS in near future. As a part of its growth strategy, it has launched a super specialty research division `Osteolife' catering to orthopedic health issues such as osteoporosis, osteoarthritis and pain management. Recently, company made the first overseas acquisition with the generic ethical formulation business division of IFC-Spain, which owns 17 brands in various therapeutic segments like traumatology, pain management, asthma, anti depressants, anti eplileptics, anti ulcerants, cephalosporin’s, beta blokers etc and is targeting a revenue of Euro 33 million (i.e. Rs 200 cr) with an EBITDA of Euro 8-10 million (i.e. Rs 50~60 cr). Hence on a consolidated basis including the Cantabria business, it is expected to clock a turnover of 375 cr and PAT of 35 cr for FY08. This leads to an EPS of 26 Rs on current equity of 13.60 cr. However on fully diluted equity of 21 cr (post conversion of all warrants & FCCB’s) the EPS works out to 17 Rs. Scrip has the potential to touch Rs.200~220 in medium term.

Royal Orchid (142.00) operates in hospitality sector with major presencein Bangalore. Currently it manages eight properties including five star hotels, budget, resort, serviced apartments etc with a total room strength of around 655 rooms. Interestingly, company follows a unique “Asset light” business model of taking properties on lease or entering into a contract for managing & operating the existing hotel instead of owning them outright. This has helped the company manage its funds efficiently, have lower payback period on its projects & earn attractive operating margins. In the next few months, it is planning to open “Royal Orchid Central” – four star category hotels at Pune (120 rooms) and Hyderabad (65 rooms) to cater the business class. Subsequently it has plans to open five star hotels at Mumbai, Bangalore and Delhi. But for major growth, company wants to target the lower end of the hospitality pyramid and has plans to set up a chain of 50 budget hotels across India under the brand ‘Pepper Mint’ in next 3 to 5 years. For FY08, it may report total revenue of 150 cr (excl. other income) and NP of 35 cr on consolidated basis i.e. EPS of 13 Rs on equity of 27.25 cr. For FY09, EPS is expected to shoot upto 16~17 Rs. Accumualte at declines.

Lokesh Machines (118.00) is engaged in the design, development and manufacture of custom built special purpose machines and general purpose CNC (computerized numerical controls) machines along with their components. Presently, it derives 70% revenue from machining division whereas rest 30% comes from auto component division. Company primarily caters to customers in the auto OEM, auto ancillaries and general engineering space. Hence it supplies mainly to Tata Motors, Bajaj Auto, Force Motors, Cummins, Bharat Forge, Kirloskar Oil Engines, Everest Kanto Cylinders etc with separate dedicated facilities for M&M and Ashok Leyland. Off late, it has also made a foray in the overseas markets with orders from M/s FPT Industries Spa-Italy, Honda Motorcycles-Japan and HOWA-Japan. Further, its technical partner Wenig Wemas-Germany has also placed initial order of 100 machines worth 20 cr. For the latest Sept qtr, sales grew by 25% to 28 cr and Net profit increased by 50% to 3.40 cr. To fund its growth plan company came out with an IPO at Rs.140 per share in April 2006 and raised Rs.42 cr. On listing day it hit a high of 300 Rs, whereas and currently it’s available at 15% below its issue price. For FY08 it is expected to clock a turnover of 110 cr and PAT of 14.50 cr which leads to an EPS of 12 Rs on equity of 11.80 cr. Scrip can easily appreciate to 175 levels in a years time.

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ADF Foods Ltd
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Mount Shivalik
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Small & Beautiful (Guj)

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Apart from being a leading caustic soda manufacturer, Chemfab Alkali (105.00) has ventured into fast growing retail health care segment and also manufactures water purifying machinery & sells packaged drinking water under brand name “TEAM”. It is also the only Indian manufacturer of multi bore hollow fibre ultra filtration membranes, whose marketing is done by M/s Dupont, worldwide. Notably, company has already opened three outlets of ‘Team Health Shoppe’ at Chennai to market its own ‘Team Eubio’ care products as well as proven products from other manufacturers. Thru these shops it offers a range of health care, body care, beauty care, skin care hair care and other nutritional food products. Its ‘Energy Herbal Water’ which can neutralize acidic wastes in the body and reduce weight has been a super hit and is witnessing strong demand. Few months back, due to some labor unrest at the manufacturing plant, its last two quarter performance got hit badly but now everything is fine and company is back on track. Thus, it is expected to report sales of 110 cr and profit of 16.50 cr for FY08 which leads to an EPS of 18 Rs on small equity of 4.60 cr with face value as Rs 5/-. Despite marginal fall in net profit this fiscal, company is expected to maintain 100% dividend which gives a handsome dividend yield of around 5%. Moreover in future, management may de-merge its health care division which will lead to re-rating of the company.

Blue Bird (72.00) is one of the leading manufacturers of paper based notebook products and office stationery products like executive notepads, diaries, arch-lever files, perforated pads, registers, filler papers and folders. Although notebook forms the core business with more than 80% revenue, company has also ventured into publishing academic textbooks and self study books for children apart from general publications in subjects such as ayurveda and biographies. It also offers commercial printing under which it designs and prints annual reports, brochures, catalogues, offer documents, coffee table books, calendars, greeting cards, magazines, text books, publications etc. In order to cater the central and south India market efficiently, company has recently put up two new plants at Indore and Bangalore apart from having its main plant in Pune. It is also expanding its distribution network and has ambitious growth plans for publication division. Although, its H1FY08 nos are not so encouraging, still it is expected to end FY08 with sales of 550 cr and PAT of 30 cr i.e. EPS of Rs 9 on equity of 35 Rs. Considering its IPO at Rs 105 in Nov 2006 and 52 week H/L as Rs 128/55, it still has the potential to rise 20~25 % in short term.

Like other IT scrips, investors are selling Tera software (82.00) also in fear of rupee appreciation with knowing that company derives 100% of its revenues from the domestic markets. Hence it is totally unaffected by any sort of rupee appreciation against US dollar. It is actually is one of the leading e-governance solution providers, undertaking data entry/scanning works for digitization of information maintained under Right to Information Act. It also undertakes short-term projects like issue of photo ID cards, ration cards and election commission cards. In consortium with Electronics Corporation of India Ltd, company has bagged huge e-governance order, taking its total order book position to around 250 crore to be executed in next five years. Recently, company has been selected as empanelled vendor for rollout of IT services in govt sector through National Informatics Centre Services Inc. for a period of one year which can be extended for another one year. On the back of excellent half yearly nos, company is estimated to report total revenue of 75 cr and PAT of 16 cr i.e. EPS of 13 Rs on equity of 12.50 cr for FY08. Moreover company has few acres of surplus land in Hyderabad, which it plans to either sell or enter into JV with infrastructure company. At a modest discounting by 12x times, share price has the potential to cross 150 Rs in medium term. In short it’s a mini Vakrangee Software.

Roto Pumps (64.00) is a reputed manufacturer of progressive cavity pumps and twin screw pumps which have very wide application in agriculture, domestic and industrial sector. Besides India, it has warehouse cum marketing office in Australia and U.K. and also good network of distributors spread across the globe. On the back of strong industrial growth and robust demand for its product, company has undertaken an expansion cum modernization plan at its manufacturing facilities. It recorded 24% growth in sales to 18 cr and 40% rise in net profit to 1.20 cr for half year ending Sept’07. Accordingly it may register a topline of 40 cr and bottom-line of 2.75 cr for fiscal year 2008. This translates into EPS of 9 Rs on a small equity of 3.09 cr. Hence with promoters holding 70% stake, the floating stock is very low. This means scrip can see a vertical rise if it catches market fancy. Moreover for FY09, company has the potential to post an EPS of more than Rs 12. At the current enterprise value of Rs 26 cr, scrip is trading fairly cheap. Long term investors should keep accumulating at decline for a price target of 100 Rs in 12~15 months.

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