STOCK WATCH

International Combustion (340.00) is among the very few engineering companies which have been recording consistent and healthy growth in the last five years but still remains to be poorly discounted by the market players. Even for FY08 it registered 20% and 40% growth in sales and net profit respectively thereby posting an EPS of Rs 49. Currently its available at EV/EBIDTA of hardly 4x times which is grossly cheap by any standard for this debt free and dividend paying engineering company. It is engaged in manufacturing of heavy engineering equipment, geared motors and gear boxes, vibrating screens and feeders, bulk material handling equipment, rubber/polyurethane screen decks and liners, Raymond grinding mills, air classifiers and flash drying system etc. Hence it makes sophisticated plant and machinery for core sector industries such as mining, steel, cement, petrochemical, construction, sugar, power, textile, paper, rubber, pharma, chemicals etc. It reported satisfactory nos for the June’08 quarter and is poised to end FY09 with sales of Rs 110 cr and NP of Rs 13 cr i.e. EPS of Rs 54 on tiny equity of Rs 2.40 cr. Due to small equity, it also has an impressive ROCE of 40% and ROE of 25%. More importantly it has huge reserve of nearly Rs 45 cr which leads to a book value of Rs 192, making it a perfect bonus candidate. It’s a risk free bet which can give handsome return in the long run

In line with its earlier performance, Godawari Power (215.00) has once again announced excellent set of nos for the June’08 qtr. Sales increased by 90% to Rs 320 cr and PAT jumped up 80% to Rs 38 cr posting an EPS of Rs 13.50 for the quarter. Currently, compny is the 4th largest manufacturer of coal based sponge iron and also one of the leading manufacturers of mild steel in India. It completed its Phase-II expansion in Sept 2007 and boasts of having an installed capacity of 495,000 TPA for sponge iron, 400,000 TPA for steel billets, 120,000 TPA for HB wire rod alongwith 53 MW of captive power plant. Importantly, company has acquired mining license for iron ore and coal in Chhattisgarh. It has also made investments in two JV companies - Chhattisgarh Captive Coal Mining Ltd and Raipur Infrastructure Company Ltd. for development of coal mines and setting up railway sliding for captive use. Recently company has decided to venture into cement production along with executing backward integration plan which includes setting up of 0.6 mtpa iron ore Pelletization plant, 0.1 mtpa iron ore Beneficiation plant, 1.2mtpa iron ore Crushing plant etc. Considering its robust Q1FY09 performance it may clock a turnover of Rs 1350 cr and PAT of Rs 150 cr i.e. EPS of Rs 54 on current equity. Worth accumulating at declines.

For the latest June’08 quarter, Manugraph (90.00) has reported 40% growth in sales to Rs 135 cr and 30% increase in PAT to Rs 16.70 cr on a standalone basis. Last fiscal it worked at almost 100% capacity utilization and on the back of robust demand from national as well as international market, company is implementing a capex plan to enhance its installed capacity from 830 print units to 960 print units. Recently it participated in DRUPA 08 exhibition in Germany, where it got tremendous response. However in this fiscal as well, company won’t be able to turn around its US subsidiary Manugraph DGM, due to slowdown in US and as the effect of synergies will materialize in next fiscal. Meanwhile company’s agreement of business co-operation for marketing with MAN Germany ended mutually in July’08. But at the same time its selling agreement with MAN Ferrostaal continues. Considering its good order book position, company may clock a turnover of Rs 475 cr and net profit of Rs 55 cr i.e. EPS of Rs 18 on equity of Rs 6 cr having face value as Rs 2/- per share. Scrip has been consolidating at this level for quite some time now. Being India’s largest manufacturer of web offset and sheet fed offset presses this company deserves much better valuation.

Pioneer Distilleries (48.00) is a distillery manufacturing company engaged primarily in the manufacture of extra natural alcohol (ENA), rectified spirit (RS), denatured spirit (DS), and absolute alcohol (Ethanol). The fine grade of ENA manufactured by it is mostly used as raw material for many brands of renowned liquor manufacturing companies. Due to buoyant economic condition, company is planning to double the installed capacity to 200 KLPD for which statutory permission from the excise has been received. It is also contemplating to increase the capacity of ethanol plant from 30,000 to 130,000 ltrs per day. Besides, its 5 MW bio-gas based power project is expected to begin commercial production from October, 2008 which will also fetch carbon credits. Notably Tata Power has signed a 10 yr purchase agreement to purchase the entire power generated from this unit. Incidentally, company also owns around 300 Acres of land which is being used for agricultural purpose where treated effluent is used for cultivation. Company announced satisfactory result for the June qtr and may clock a revenue of Rs 75 cr and PAT of Rs 12 cr for FY09 i.e. EPS of Rs 10 on diluted equity of Rs 12.50 cr. Moreover at CMP the divd yeild works to more than 4%. A good bet in current sentiment.

Small & Beautiful

For the latest June qtr, Lokesh Machines (64.00) reported almost flat nos with NP of Rs 3.10 cr on sales of Rs 20.50. But importantly it reported a higher operating margin of 37% which indicates company may be able to maintain its profit going forward. Secondly it has declared a dividend of 25% which gives a yield of nearly 4% on CMP. Company 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. It derives 70% revenue from machining division whereas rest 30% comes from auto component division. It 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. Although it concentrates mainly on domestic market, but lately it has also made a foray in the overseas markets with good orders. On a conservative basis, for FY09 it can report sales of Rs 110 and PAT of Rs 11 cr i.e. EPS of Rs 9 on equity of Rs 11.80 cr. Accumulate at sharp declines.

Caustic soda prices have increased substantially in the recent past, but at the same time the input cost like coal have also shot up considerably. Accordingly, even though there was not much improvement in the profit margin still Bihar Caustic (72.00) reported fantastic nos for the June’08 quarter on the back of increased capacity and sale of aluminium chloride. It registered 55% growth in sales to Rs 53 cr whereas the net profit doubled to Rs 13 cr posting an EPS of Rs 5.50 for the single quarter. To maintain its growth, company has almost completed the expansion of its caustic soda capacity by 20% to 265 TPD by addition of electrolysers as well by debottlenecking. Last fiscal it also commissioned the stable bleaching powder plant with installed capacity of 60 TPD. Moreover its aluminium chloride project with a capacity of 12000 TPA is doing extremely well. At the same time company is taking initiative to reduce its total debt which will bring down the interest cost substantially. To conclude, company is expected to report a top line of Rs 200 cr and profit of Rs 52 cr for FY09 leading to an EPS of Rs 22 on equity of Rs 23.40 cr. Despite being a ‘Aditya Birla’ group company it has been very poorly discounted and is ripe for re-rating.

Accurate Transformers (100.00) is engaged in manufacturing of power as well as distribution transformers ranging from 1 MVA to 40 MVA - in up to 220 KV class. It is looking to venture into manufacturing of higher capacity Power Transformers of 160 MVA from FY10. It also carries out rural electrification project which involves the complete setting up of electricity in remote areas including the laying of lines, poles and substations. Unfortunately, despite having installed capacity of more than 8000 MVA company is working at very low capacity utilization of less than 50% due to high working capital requirement and shortage of funds. That’s why, at the time when its peer companies are growing at phenomenal pace this company has been registering normal double digit growth. Infact for the June’08 it posted marginal de-growth in topline whereas net profit declined by 35% to 1 cr. Despite this it can clock sales of Rs 225 cr and PAT of Rs 8.50 for FY09 leading to an EPS of Rs 29 on tiny equity of Rs 2.96 cr. Company is looking to raise fresh funds thru equity route mainly to fund its working capital requirement. Only aggressive investors can buy at current levels as scrip can double in year’s time.

Recently, Ramsarup Industries (118.00) has come out with decent set of nos for the June quarter. Sales grew by 10% to Rs 383 cr but NP increased by 25% to Rs 15.80 cr on the back of better operating margin. Company is engaged in manufacturing of various grades of steel wires (mainly used by power industry) and TMT Bars. To cater the rising demand company is expanding its total wire manufacturing capacities from 233,000 tonnes to 600,000 tonnes including the production of Low Relaxation Pre-stressed Concrete (LRPC) wires over the next two years. It has acquired 60 acres land in West Bengal and major plant and machinery are being imported from Italy. Importantly, to get access to cheaper and regular raw material supply, last year company took over Balasore Minerals Co, which has iron ore, limestone and dolomite mines located in neighboring Orissa state. But more importantly company is merging its other group company called Ramsarup Loha Udyog which is emerging as an integrated steel producer with captive production of sponge iron, pig iron, billets, power etc. As no official figures are available for the group company, so on a standalone basis company is expected to clock a turnover of Rs 1750 cr and PAT of Rs 65 cr for FY09. This translates into EPS of Rs 37 on current equity of Rs 17.50 cr. Post merger equity is expected to get diluted to roughly around Rs 35 cr.

Tantia Constructions Ltd - Rs 70.00

Established during 1964 in Kolkata, Tantia Construction Ltd (TCL) has gradually evolved over the years from a pure railway construction company to a full-fledged infrastructure company executing various diversified projects. Today it boasts of having presence in roads and highways, railways, tunnels, bridges and flyovers, urban instructure, sewerage and drainage, civil & housing construction etc. Lately, company also ventured into the lucrative marine infrastructure space, power transmission and distribution segment and aviation infrastructure. It is among the few companies which have very strong domain expertise in servicing the Indian Railways – earthwork, ballast, rail-track linking and welding, bridges, tunnels, electrification and signaling. Infact, TCL is among the five Indian companies capable of providing ‘foundation-to-finish’ for mega railway bridges spanning 2-km or more. More importantly, TCL has a very strong presence in the eastern and north-eastern region which gives it an edge, as very few players are interested in bidding in these regions due to difficult terrain. Company’s expertise can be evaluated from the fact that it has constructed over 250 km of roads in the hilly areas of Mizoram, coastal areas of Kerala, plains of Punjab/Haryana and plateaus of Karnataka. On the power project front, company has remarkably garnered the capability of in-house manufacturing and erecting transmission towers within a very short time. Incidentally, company has impeccable track record of completing every single assignment since inception.

In recent years TCL has executed various prestigious and large scale projects in the states of West Bengal, Assam, Bihar, Uttar Pradesh, Tamil Nadu, Kerala and Mizoram, and in neighboring countries like Bangladesh, Nepal and Bhutan. As more than 90% of revenue comes from government project it caters to several govt bodies including Indian railways, Kolkatta Metro railway, NHAI, State PWD, Central PWD, State Electricity boards, HIDCO, KMC, Airport Authority of India apart from NTPC, Ircon Int, SAIL, RITES, IOC etc. It enjoys excellent business relations and has good direct contact with govt resulting in repeat orders of similar nature, extension of projects of a higher value and a listing among preferred partners. Presently, TCL has diversified and huge order in hand position of more than 1000 cr to be executed in next 24 months. Out of that road projects is approx 45%, Railway 20%, urban infrastructure 25% and others 10%. Thus, company has a strong revenue visibility for coming years.

Going forward TCL is planning to bid for bigger projects in power transmission segment as it has executed various power projects and is now qualified to bid for the same. In near future company intends to foray into BOT & BOOT projects to boost up its margin. It is also looking to bag airport projects coming up in non- metro cities. To cash on the boom in civil construction, it is even contemplating to enter into real estate development. As a long term strategy, TCL intends to enter in logistics sector by constructing and owning ware-houses at strategic places across India. Water treatment, solid waste management and sewage treatment are also being considered to widen its work profile.

In March 2006, TCL came out with an IPO of 1.125 cr of equity shares @ Rs 50 per share with public net offer of 42.50 lakh shares. The issue was finally oversubscribed by whopping 83x times. Ironically, against the high of Rs 310 in 2006, scrip is hardly finding any buyer now at Rs 70. Infact it hit an all time low of Rs 56 in July’08 although its fundamentals have improved considerably in last couple of years. For FY08, its revenue jumped up 50% to Rs 362 cr and PBT increased by 30% to Rs 20 cr. However due to higher tax provisioning its PAT improved by only 15% to Rs 15.40 cr posting an EPS of Rs 10 on equity of Rs 15.60 cr. It declared lower dividend of 15% against 20% in FY07. Meanwhile, for Q1FY09 it recorded 40% rise in topline as well as bottomline to Rs 99 cr and Rs 5 cr respectively. Hence for entire FY09 it may clock a turnover of more than Rs 450 cr and profit of Rs 20 cr i.e. EPS of Rs 12 on diluted equity of Rs 16.30 cr. Recently company raised around Rs 30 cr thru FCCB route to be convertible into equity shares @ Rs 140. Considering the CMP, the possibility of conversion in near this fiscal seems bleak, hence not considered in calculating the diluted equity. Being discounted at less than 6x times, this scrip is available fairly cheap. Hence investors are strongly recommended to buy at current levels as share price can double in 12~15 months

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Smart Investments

Aegis Logisitic Ltd

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Bharat Gears Ltd

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Vivimed Labs Ltd - Rs 74.00

Incorporated in 1989, Vivimed Labs Ltd (VLL) is a speciality chemical manufacturer with prime focus on the Home and Personal Care (H&PC) segment. Its extensive range of speciality chemicals caters to segments including oral care, sun care, skin care, hair care, natural extracts, preservatives, anti microbial, anti oxidants, anti-aging molecule etc. In short company’s primary strength is in synthetic organic chemistry. Remarkably, VLL is the worlds 2nd largest manufacturer of Triclosan - an antibacterial used for oral care and one of the top three companies for Avis – a chemical which improves UV absorbing ability of Sunscreen. Of late thru acquisitions of Creative Health Care and merger of associated company VVS Pharmaceuticals & Pharmaceuticals Pvt Ltd, VLL has entered into the speciality pharma business as well. Infact today, VLL is an active player in CRAM (Contract Research and manufacturing) segment providing vendor partnerships ranging from molecular research to collaborative manufacturing. It holds a unique position in the international H&PC industry with supply-chain relationship with global leaders including - Unilever, L'Oreal, Procter & Gamble, Johnson & Johnson etc. Having exclusive tie ups with global logistics companies, VLL has been offering shipment, warehousing, redistribution and door delivery services to large global majors. It has global network of offices, representatives and distributors across America, Europe, Far East and the Asia Pacific region.

As of today, VLL has two speciality chemicals plants – one in Bidar (Karnataka) and second in Hyderabad(AP). Apart from these it has three other pharmaceutical finished dose plants one each at Hyderabad (AP), Kashipur (Uttaranchal) and Haridwar (Uttaranchal) where it manufactures all types of solid oral, liquid orals, topical applications, small volume parenterals, cytotoxic etc. As the demand for end products in H&PC industry (like skin care, hair care, oral care products) is growing substantially, VLL is also witnessing robust demand for its chemicals. It has been constantly expanding its capacity and has chalked out capex plan for coming years as well. It has already bought land in Uttranchal for Greenfield expansion and another 23 acre land in Hyderabad to set up state-of-the-art R&D centre and pilot plant. Meanwhile its CRAM division, is focusing on exploring joint ventures / strategic alliances with manufacturers and IP companies in the specialty chemicals sector to partner in areas ranging from custom synthesis to commercial production. It offers contract manufacturing services from less than 1 metric tonne to more than 100 metric tonne. On the other hand its R&D section, is busy in researching and collaborating for creating new drug delivery systems with special thrust on anti-obesity dieting products, anti arthritic drug, anti-wrinkler, an anti oxidant, an anti cancer drug and an anti acne products. Notably, it has undertaken new formulations in urinary disorder and psoriasis treatment and the results are very encouraging.

At the same time, VLL is also growing inorganically and has recently acquired 100% stake in M/s James Robinson,UK which is an international manufacturer and supplier of speciality chemicals used in hair dyes, pharmaceuticals and photographic films/prints to ophthalmic sunglasses. With manufacturing plants in UK, Germany and India, James Robinson now a 100% subsidiary of VLL also offers a novel range of photochromic dyes for a wide variety of applications including ophthalmics, plastics, coatings and inks, and fluorescent dyes for both textile and non-textile applications. To fund the acquisition and expansion plan, VLL has raised roughly Rs 60 cr thru FCCB of US$ 15 million in June 2007 to be converted @ Rs 185 per equity share. Not a single FCCB have been converted as on date and even after re-setting the conversion price lower the chances of conversion is less. For FY08, on a consolidated basis VLL reported a turnover of Rs 181 cr and PAT of Rs 16 cr i.e. EPS of Rs 17. Considering its Q1FY09 nos and acquisition of UK company, VLL is estimated to report a consolidated sales of more than Rs 225 cr and net profit of Rs 17 cr. This leads to an EPS of Rs 18 on current equity of Rs 9.40 cr whereas diluted EPS works out to Rs 13 on diluted equity of Rs 12.65 cr. Investors are strongly recommended to buy at current levels with a price target of 110 Rs within 12 months.

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