STOCK WATCH

Although J Kumar (90.00) reported lower top line as well as bottom line for the June qtr in comparison to preceding March qtr, still it’s a good bet to buy at declines. For the June qtr its revenue and net profit stood at Rs 89 cr and Rs 7.60 cr respectively. It’s a Mumbai based small EPC company with a primary focus on construction of roads, flyovers, bridges, railway over bridges, subways, irrigation projects, commercial and residential buildings, railway buildings and piling works. It also has a ready mix concrete plant for captive use. Its operations are largely confined in the state of Maharashtra with majority in Mumbai itself. The company is a class I A contractor with PWD, Government of Maharashtra. Importantly, company owns a large fleet of modern construction equipments like Hydraulic piling rigs, Putmiester Mobile boom placer concrete pump and stationery concrete pumps, RMC plants, transit mixers, various capacity cranes, poclains, front end loaders, JCBs and tippers. Due to govt’s special focus & aggressive spending on infrastructure, company is witnessing best of its time and boast of having an all time high order book position to the tune of Rs 700 cr executable in next two years. Accordingly for FY09, it is estimated to report total revenue of Rs 400 cr and PAT of Rs 28 cr which leads to an EPS of Rs 14 on current equity of Rs 20.70 cr. In the beginning of the year, company raised more than Rs 70 cr thru IPO route @ Rs 110 per share. Investors can safe accumulate this scrip between Rs 75~80 levels.

Being a 55% subsidiary of Charter Plc, Esab India (360.00) is the leader in Indian welding and cutting industry with a market share of 20% in industry and 40% in organized market. Notably, it is now the only major international brand with a manufacturing, selling and distribution network across the broad range of welding products in the Indian market. It has a wide and comprehensive range which includes welding consumables, reclamation consumables, arc equipment, industrial gas equipment, cutting machines and working environment products. For the June qtr, it reported 30% increase in sales as well as profit to Rs 114 cr and Rs 18.50 respectively. Of late company has set up a new facility for manufacture of flux cored wires and stick electrodes at its site in Irungattukottai. It is also undertaking significant expansion of capacities at its Nagpur and Khardah Plants for Wires and Electrodes. Last fiscal company made Esab Welding and Cutting Systems Limited as its wholly owned subsidiary and is further contemplating to merge that with itself. For the year ending Dec 2008, this MNC is expected to clock a turnover of Rs 425 cr and profit of Rs 65 which translates into EPS of Rs 42 on equity of Rs 15.40 cr. Hence a reasonable discounting by 12x times scrip can move up to Rs 500 in 12~15 months.

Ratnamani Metals (775.00) is a Tier 1 project pipe player and draws demand from large scale industrial investment in sectors like oil & gas, petrochemicals, power, fertilizer, pharmaceuticals, sugar, etc where the pipes are used in high temperature and highly corrosive environment. About 50% of its turnover comes from oil, gas, petrochemical industry followed by 20% from power and rest from others. So it’s basically engaged in manufacturing welded and seamless stainless steel (SS) pipes & tubes, carbon steel (CS) LSAW, HSAW and ERW pipes. To cater the rising demand company is adding 3,000 TPA of capacity in stainless steel tubes and pipes segment, which is to be operational shortly thereby taking the total stainless steel capacity to 21,900 tonne. In carbon steel segment, it is adding 100,000 tonne of HSAW capacity through brown field expansion in current fiscal, which will double its HSAW capacity of 200,000 TPA and take the total carbon steel capacity to 400,000 TPA. For the latest June’08 quarter its sales grew by 30% to Rs 250 cr and NP increased by 15% to Rs 25 cr posting an EPS of Rs 28. Considering company’s order in hand of Rs 650 cr as on date it may clock a turnover of Rs 1100 cr and net profit of Rs 100 for FY09. This works out to an EPS of Rs 106 on diluted equity of Rs 9.45 cr. However last fiscal company provided whopping Rs 27.50 as mark to market loss on derivative instruments. Secondly, the rising steel price may affect its profit margin to some extent. Hence investors are advised to accumulate only at sharp declines.

Gandhi Special Tube (70.00) is engaged in the manufacture of small diameter welded and seamless tubes, which act as an import substitute. In the seamless tube segment, GSTL faces virtually no competition as the technology required to produce this is highly specialized. The welded tubes primarily find application in the Refrigerator, Automobile and general engineering industry and the seamless tubes are used in Diesel based automobiles and Hydraulic equipment. Importantly company derives more than 65 % revenue from seamless tubes which have higher profit margin. The company also manufactures tubular components like condensers, compressor parts, fuel injection tube assemblies, hydraulic tubes etc. In Nov 2007 it completed its Rs 35 expansion plan of increasing the capacity by 2400 tonne. Interestingly, for its power requirement company has put up 5 wind mills generating 5.35 MW of power. Despite the rise in raw material prices, company posted excellent performance for the June quarter as sales grew by 30% to Rs 23 cr whereas net profit shot up 60% to Rs 6.80 cr registering an EPS of Rs 5 for the single quarter. On a conservative basis it is expected to end FY09 with sales of Rs 100 cr and PAT of Rs 21 cr i.e. EPS of Rs 14. Scrip can easily appreciate 50% in a years time.

Small & Beautiful (Guj)

Gandhi Special Tube (70.00) is engaged in the manufacture of small diameter welded and seamless tubes, which act as an import substitute. In the seamless tube segment, GSTL faces virtually no competition as the technology required to produce this is highly specialized. The welded tubes primarily find application in the Refrigerator, Automobile and general engineering industry and the seamless tubes are used in Diesel based automobiles and Hydraulic equipment. Importantly company derives more than 65 % revenue from seamless tubes which have higher profit margin. The company also manufactures tubular components like condensers, compressor parts, fuel injection tube assemblies, hydraulic tubes etc. In Nov 2007 it completed its Rs 35 expansion plan of increasing the capacity by 2400 tonne. Interestingly, for its power requirement company has put up 5 wind mills generating 5.35 MW of power. Despite the rise in raw material prices, company posted excellent performance for the June quarter as sales grew by 30% to Rs 23 cr whereas net profit shot up 60% to Rs 6.80 cr registering an EPS of Rs 5 for the single quarter. On a conservative basis it is expected to end FY09 with sales of Rs 100 cr and PAT of Rs 21 cr i.e. EPS of Rs 14. Scrip can easily appreciate 50% in a years time.

Although J Kumar (90.00) reported lower top line as well as bottom line for the June qtr in comparison to preceding March qtr, still it’s a good bet to buy at declines. For the June qtr its revenue and net profit stood at Rs 89 cr and Rs 7.60 cr respectively. It’s a Mumbai based small EPC company with a primary focus on construction of roads, flyovers, bridges, railway over bridges, subways, irrigation projects, commercial and residential buildings, railway buildings and piling works. It also has a ready mix concrete plant for captive use. Its operations are largely confined in the state of Maharashtra with majority in Mumbai itself. The company is a class I A contractor with PWD, Government of Maharashtra. Importantly, company owns a large fleet of modern construction equipments like Hydraulic piling rigs, Putmiester Mobile boom placer concrete pump and stationery concrete pumps, RMC plants, transit mixers, various capacity cranes, poclains, front end loaders, JCBs and tippers. Due to govt’s special focus & aggressive spending on infrastructure, company is witnessing best of its time and boast of having an all time high order book position to the tune of Rs 700 cr executable in next two years. Accordingly for FY09, it is estimated to report total revenue of Rs 400 cr and PAT of Rs 28 cr which leads to an EPS of Rs 14 on current equity of Rs 20.70 cr. In the beginning of the year, company raised more than Rs 70 cr thru IPO route @ Rs 110 per share. Investors can safe accumulate this scrip between Rs 75~80 levels.

Bharat Gears (35.00) is a global supplier of automotive gears and heat treatment furnaces. It manufactures a wide range of ring gears and pinions, transmission gears and shafts, differential gears, gear boxes etc which find application in heavy, medium and light duty trucks, buses, tractors, passenger cars, utility vehicles, and forklift trucks, etc. For FY08 its sales was up 20% to Rs 236 cr and net profit increased by 15% to Rs 10 cr thereby posting an EPS of Rs 13 on equity of Rs 7.80 cr. It again returned to list of dividend paying companies as it declared 10% dividend after a gap of 7 years. More importantly it has successfully brought its total debt to Rs 50 cr from Rs 80 cr in FY05. Thru its manufacturing plants in Mumbra, Thane and Faridabad, company caters to national and international majors like M&M, Tata Motors, Ashok Leyland, Bajaj Auto, Hero Motors, Hindustan Motors, BEML, JCB, Dana Corporation (USA), EATON (USA), and John Deere (New Holland). Unfortunately from a high of Rs 90 in Jan’08, the share price of the company has become one third and is available at an enterprise value of merely Rs 75 cr. For FY09 it is expected to report sales of Rs 250 cr and net profit of Rs 11 cr i.e. EPS of Rs 14 on current equity. Hence, despite rise in input cost and anticipated slowdown in auto sector, it’s a screaming buy at current levels.

Cosmo Films (80.00) is the pioneer and one of the largest manufacturers of Bi-axially Oriented Polypropylene Films (BOPP) in India with an installed capacity of 77,000 MTPA. It also manufactures thermal lamination film, an export focused product, which has higher margins. To maintain its future growth company is expanding its capacity by adding two BOPP lines of 40000 MT each. The first line is expected to be commissioned before March, 2009 for which orders have been placed for all major equipments. In addition, it is also adding two new lines in thermal lamination and increasing its capacity from 13500 to 19500 MT per annum. To fund all these it recently placed 31 lakh warrants to be converted @ Rs 107 per share. It has also taken the approval for issue of 10 lakh equity shares under ESOP. For FY08 it sales improved by 10% to Rs 585 cr but its NP zoomed up 80% due to better operating margin, lower interest & lower depreciation cost. It reported an EPS of Rs 23 and declared 50% dividend which give an yield of more than 6% at CMP. However in this year it may face margin pressure due to rise in crude oil with polypropylene being its main raw material. Hence it may clock a turnover of Rs 625 and profit of Rs 35 cr i.e. EPS of Rs 16 for FY09 on diluted equity of Rs 22.50 cr

Smart Investments (Guj)

Indag Rubber Ltd

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Seshasayee Paper Ltd

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Aegis Logistic Ltd - Rs 158.00

Founded in 1956, Aegis Logistic Ltd (ALL) started operations as a specialty chemicals manufacturer and supplier to the paints industry. In 1977, company diversified into liquid logistics management when it set up a port terminal in Mumbai to handle ships carrying cargo of chemicals. Later in 1994, it became India’s first company to set up a private refrigerated liquefied petroleum gas (LPG) terminal with know-how from Tractebel Gas Engineering of Germany. Today, ALL is engaged in providing integrated supply chain management services to the Indian industry which includes product sourcing, shipping, impor/export custom clearance, storing, moving and distributing petroleum products to the end user. From its headquarters in Mumbai, company serves clients all over India in the automobile, steel, glass, ceramic, petroleum, chemical, vegetable oil and petrochemical sectors. The main products handled by company are LPG, naptha, diesel, caustic soda, motor spirit, EDC etc. Company has segregated its business process into five heads namely - tank storage and terminalling, chemical distribution, gas Storage and distribution, petroleum distribution and logistics management services. Hence broadly, ALL’s business model can be divided into following two segments:

· Liquid logistic (20%): The company owns and operates one of India’s largest private sector liquid terminal located on a 20-acre plot at Trombay having storage capacity of 165,000 KL with 26 tanks of sizes ranging from 1,100 KL to 10,000 KL. During 2007 company acquired a majority stake of 75% in Adani group’s Sealord Containers Limited located at Trombay with a storage capacity of 75,000 KL. Immediately it also acquired 100% stake in Konkan Storage Private Limited at Kochi having a storage capacity of 51000 KL. So presently ALL boasts of having a total capacity of around 290,000 KL. Notably, company specializes in handling hazardous chemicals and dangerous goods classified under the Petroleum Act as Class A, B and C with IOC, BPCL, HPCL, Reliance, Supreme Petrochemicals, HLL, Jubiliant among its main customers. Ironically, due to higher profit margin almost half of the company’s profit came from this segment in FY08, although it contributed only 20% to top line. Hence considering the robust future outlook, ALL is setting up a third terminal in Trombay with a capacity of nearly 55,000 KL by FY10. Moreover company also intends to emerge as a national player and has accordingly acquired land in Haldia and Mangalore port. For future, it’s looking to have setup in Kandla and Chennai port as well.

· Gas Storage & distribution (80%): ALL imports, markets and distributes bulk propane, propylene and LPG to a variety of industrial customers in the western region and is one of the largest private sector suppliers in India. It operates a 20,000 MT fully refrigerated LPG terminal which is connected to Pir Pau Jetty by 12" low temperature steel pipelines. It also offers gas storage and handling to various LPG bulk suppliers on an open user terminal basis. Of late ALL has ventured into lucrative business of marketing and retailing of LPG thru autogas dispensing stations under the brandname ‘AEGIS Autogas’. This business is presently at the take-off stage with vehicles being increasingly converted into gas-based vehicles due to unprecedented rise in crude oil price. Intially, company is targeting only Tier 2 cities and has already opened 38 retail outlets across five states. It intends to open 100~150 such stations in next couple of years and achieve sales volume of nearly 100,000 MT of LPG thru retail sales. Importantly, it plans to set up around 90% of the stations under the dealer owned dealer operated (DODO) model, with only 10% under the company owned dealer operated (CODO) model. To conclude, the retailing business alone is estimated to contribute sales of around Rs 250~300 cr by FY10 which will boost the profit margin of company substantially.

Recently, ALL took over its 70% joint venture undertaking namely Hindustan Aegis LPG, which actually owned the refrigerated LPG terminal. Effective 01/04/2007, ALL has become the owner of that terminal. So now it doesn’t have to pay the tankage charges which it used to pay for the usage of the terminal facility. Against this acquisition company has allotted 36 lakh equity shares to the other 30% share holders of Hindustan Aegis and also absorbed approx 30 cr of debt. Fundamentally, ALL has been doing excellent and ended FY08 on quite a buoyant note with 55% rise in sales to Rs 374 cr and 65% jump in PAT to Rs 39 cr. This translates into EPS of Rs 20 on expanded equity of Rs 19.90 cr. Accordingly for FY09 it is expected to clock a turnover of Rs 450 cr and net profit of Rs 45 cr i.e. EPS of Rs 23 on current equity. Considering company’s aggressive expansion plan for LPG retailing and to have pan India presence in liquid logistic, scrip is trading extremely cheap at current market cap of less than Rs 350 cr. Investors are strongly recommended to buy at current levels and add on every declines for a price target of Rs 275 (i.e. 75% appreciation) within a year.

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SKF India Ltd - Rs 205.00

Established in 1923, SKF India Ltd (SIL), a part of the US$ 6 billion global AB SKF Group, is a leading technology & solutions provider of products, solutions and services in the area comprising bearings, seals, mechatronics,, services and lubrications systems. With 90% revenue coming from bearings, SIL is India’s largest bearing manufacturer commanding more than 30% market share across the country. Out of that 90% nearly 10% comes from export to various countries around the world. Well bearings are used in the rotating parts of virtually every machine or product manufactured by industry. The automobile industry is the major user segment for bearings, followed by general engineering, heavy industries and railways. Importantly SIL manufactures all types of roller bearing, ball bearing, bearing units, bearing housing, plain bearing etc in hundred of sizes thereby having an extensive product range and literally providing solution for any and every conceivable application. According to the specific industry segment SIL has created following four profit centre or business units.

· Automotive Business Unit (30%): is responsible for sales to the car, light truck, heavy truck, bus and vehicle component industries and the vehicle service market. The products include wheel hub bearing units, taper roller bearings, small deep groove ball bearings, seals, special automotive products and complete repair kits for the vehicle service market.

· The Electrical Business Unit (20%): is responsible for sales to manufacturers of electric motors, household appliances, electrical components for the automotive industry, power tools, office machinery and two-wheelers

· The Service Business Unit (20%): offers mechanical services, predictive and preventive maintenance, condition monitoring, decision-support systems and performance-based contracts. It also supports industrial customers with knowledge-based service solutions to optimize plant asset efficiency.

· The Industrial business Unit (30%): is one of the fastest growing units as it has four specialized business areas namely aerospace, railways, lubrication systems and actuation & motion Control.

Besides above SIL also manufactures precision textile machinery components for textile mills, spindle manufacturers and drafting conversion manufacturers. It even helps customers/textile mills modernize existing machines. Currently, SIL operates thru two manufacturing plants based in Bangalore and Pune. However for future growth, it is putting up a new plant in Haridwar, Uttarakhand with a capacity of 48 million pieces of bearing which will cater to two wheeler market segment. The plant sis expected to start commercial production by mid 2009. Last fiscal it launched power transmission products as a new product range to capture the growth in the energy sector. Of late, SIL also got engaged into marketing, sales and distribution of large size bearings for industrial segment being produced by another group company. Sarcastically, SKF group has recently set up a new unit in Ahmedabad not under SIL but thru SKF Technologies India Private Ltd with an investment of Rs 270 cr to manufacture large bearings. Besides, AB SKF in India also manages another wholly owned subsidiary called SKF Sealing Solutions Pvt. Ltd which offers customers complete sealing solutions based on its leading edge technology.

With India expected to emerge as one of world’s largest economies, it is bound to witness phenomenal growth in industrial, infrastructure and engineering including automotive sector. Hence the future prospects of bearing industry as well as SIL are quite promising. However the rise in steel price is a cause of worry, as it forms the basic material and accounts for almost 45 per cent of total cost. Besides, the competition from unorganized segment is getting intense day by day. Still SIL is expected to do well on the back of strong goodwill and wide distribution network. Financially also it’s on a very strong footing as it continue to be a zero debt company. For year ending Dec 2007 it reported 20% rise in sales to Rs 1568 cr and 60% jump in net profit to Rs 161 cr posting an EPS of Rs 30 on equity of Rs 52.70 cr. However the H1FY08 figures are not so encouraging due to decline in OPM and single digit growth in topline. Accordingly for CY08 it may clock a turnover of Rs 1725 cr and PAT of Rs 145 cr leading to an EPS of Rs 27. Hence it means the scrip is currently trading a PE ratio of less than 8x times which is extremely cheap for such a professionally well managed & debt free MNC engineering company. From CY09 company is expected to maintain healthy double digit growth on the back of revenue generation from new Haridwar plant. Investors are strongly recommended to buy at current levels with a price target of Rs 325 (50% appreciation) with 12~15 months.

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