STOCK WATCH

Micro Inks (125.00) - 70.50% subsidiary of Huber Group-Germany, is the market leader in India having three seamless ink manufacturing facilities across Daman, Silvassa & Chicago. It has presence across the value chain of the printing inks industry like pigments, flush pigments, resins and varnishes, additives and printing inks including offset ink, flexible packaging ink, screen ink, can coatings, UV coating etc. Today, it is amongst the few ink companies in the world having very high degree of backward integration. Hence, despite the sharp rise in raw material cost company posted encouraging nos for CY07 and even for H1CY08 with no fall in profit margin. It posted an EPS of Rs 27 for 2007 and gave 60% dividend which leads to a yield of 5% at CMP. Further it is expected to end 2008 with sales of Rs 1350 cr and PAT of Rs 80 cr i.e. EPS of Rs 32 on equity of Rs 24.90 cr. Moreover it is a strong bonus candidate as company has huge reserves of Rs 750 cr i.e book value of whopping Rs 310. Thus at current market cap of Rs 300 cr scrip is available extremely cheap at P/E multiple of less than 4x times and at 60% discount to its book value. Lastly the recent fall in crude oil price and sharp depreciation of rupee will have positive impact on the bottomline. Hence with a 52w H/L of Rs 478/120 it is one of the safe pick in current market sentiment.

Belonging to the world renowned Kalyani group, Automotive Axles (205.00) is currently the largest independent manufacturer of rear drive axle assemblies for commercial vehicles in the country. Besides it also manufactures brake assemblies and gear sets. It enjoys esteemed client portfolio, which includes names like Ashok Leyland, Tata Motors, M&M, Volvo, BEML, Maruti Udyog etc in the domestic market and Daimler Chrysler, Meritor etc in the international markets. In the last couple of years, company has increased drive axle capacity from 83,000 units to 168,000 units per annum. To cater the robust export demand, it is further augmenting the installed capacity to 240,000 axles under a capex of Rs 112 cr. Apart from this it is also enhancing its gear sets manufacturing capacity from 1,70,000 units to 3,20,000 units per annum. For the first three quarter of FY08 it recorded a growth rate of 35% in sales to Rs 611 cr, whereas net profit increased by 20% to Rs 48 cr. The recent fall in metal prices and sharp depreciation in rupee will give some relief to company on margin front. For FY08 ending Sept 2008, it may clock a turnover of Rs 800 cr and PAT of Rs 62 leading to an EPS of Rs 41 on current equity of Rs 15.11 cr. Scrip can appreciate 50% within a year.

The share price of Sunil Hi-tech (88.00) which raised Rs 81 cr in Jan’08 via QIP route @ Rs 360 per share has now been reduced to merely 25%. Moreover it has also issued 38 lakh warrants in Oct’07 to be converted @ Rs 146/- per share before April’09. Company is engaged in the niche segment of fabrication, erection & testing and commissioning of bunkers, ESPs, boilers, TG sets in the power plants, both in private & public sector. With a client list spanning BHEL, NTPC, Reliance Energy, Jindal Steel and Power, the SEBs of Maharashtra, Chhattisgarh and Madhya Pradesh, Sunil Hitech is also engaged in overhauling and maintenance to ensure proper functioning of plants, post-installation. The company also undertakes projects in the transmission and distribution segments. Remarkably, as on today it has an all time high order book position of more than Rs 1300 cr which is 4x times its FY08 turnover. With the ongoing liquidity crunch internationally, funding such huge projects is a challenge for the company. However, it has an under leveraged balance sheet with a low debt equity ratio of 0.60x times and can raise more debt comfortably. So despite taking into consideration higher interest cost it may end FY09 with a topline of Rs 500 cr and PAT of Rs 20 on conservative basis. This translates into EPS of Rs 16 on current equity of Rs 12.30 cr. At current market cap of merely Rs 100 cr, it’s a steal.

Asian Hotels (285.00) owns and operate three 5 star hotels under the brand Hyatt Regency. Its flagship hotel Hyatt Regency New Delhi has 508 rooms whereas its Mumbai and Kolkata hotel has 401 and 235 rooms respectively. As company derives 65% of its revenue in foreign exchange, the recent depreciation in rupee will improve its operating margin to some extent. For FY08 its total revenue grew by 25% to Rs 514 cr and profit jumped up 45% to Rs 132 cr posting an impressive EPS of Rs 58 on equity of Rs 22.80 cr. Even for Q1FY09 it reported satisfactory nos without any pressure on profit margin. Ironically, company having a net block of Rs 1425 cr and investments worth Rs 230 cr is today available at an EV of merely Rs 800 cr. Secondly, company is run by three promoter groups – Jatia, Gupta and Saraf family who have acquired independent interests in the hospitality industry. Hence to avoid any potential conflict of interest, company is demerging itself into three separate companies with each promoter group managing one of the hotel properties. Meanwhile the combined entity is estimated to register total revenue of Rs 550 cr and profit of Rs 125 for FY09 i.e. EPS of Rs 55. Investors can accumulate at sharp declines.

Smart Investments

Supreme Infrastructure India Ltd

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Cera Sanitaryware Ltd

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Aban Offshore Ltd - Rs 1080

Established in 1986, Aban Offshore Ltd (AOL) is the flagship company of the reputed Aban group and is engaged in providing oil field services for offshore exploration and production of hydrocarbons in India and abroad. Notably, it is among the top ten offshore drilling asset owners in the world. It, along with its subsidiaries possesses 21 offshore assets including fifteen jack-up offshore drilling rigs, three drill ships, one floating production platform and a jack-up rig & drill ship each on bareboat charter. It is also among the few global companies to facilitate oil exploration at water depths ranging from 250 ft to 7000 ft and drilling depths ranging between 20,000 ft and 30,000 ft. From having a predominantly Indian presence till 2005, AOL smartly diversified its footprint globally across 10 nations including Malaysia, Vietnam, Thailand, Brunei, China, Bangladesh, Iran, Qatar, Latin America and even across distant locations like Nigeria and Venezuela. It boasts of deploying its assets on charter with leading global and domestic E&P companies such as ONGC, Shell Brunei, Shell Malaysia, Cairn Energy, Petronas Carigali, Exxon Mobil, Chevron, Hardy Exploration, Oriental Oil Dubai, ROC Oil China, and GSPC to name a few. Of late, AOL has made an unrelated diversification into wind energy albeit in a small scale As of now, it’s a loss making venture as it posted a loss of Rs 22 cr for 2007-08.

Ironically, in the last couple of years, crude oil prices have seen an unprecedented rise from US$ 40 to US$ 140 a barrel thereby giving a boost to the global E&P activity. This strengthened the underlying demand for rig services, reflected in increasing enquiries, charter opportunities and the rising demand for deepwater drilling rigs. Even the charter day rates for jack up rigs which are mainly used only in shallow waters upto 400 ft, trebled to more than US$ 150,000 from the previous US$ 50,000. The need & pressure to find new discoveries enabled by the surging oil prices, has compelled oil and gas majors to explore deep waters which were till now less affordable as oil prices were low. Thus, committed oil explorers have already shifted to new deeper fields, expecting larger reserves in the deeper subterranean layers. The Tupi discovery in Brazil and the higher demand for deepwater rigs in the ‘Golden Triangle’ of West Africa, Latin America and the Gulf of Mexico, USA, is a case in point. In Southeast Asia, new gas discoveries in the KG Basin in the Bay of Bengal and in the Sarawak region of Malaysia have necessitated deployment of deepwater floater rigs or the new generation special capability advanced jack-ups of greater that 350 ft water depths. To capitalize this demand, AOL has aggressively ventured into lucrative deepwater drilling by deploying/acquiring drill ships namely Aban Ice, Aban Abraham, Deep Venture and semi-submersible rig Aban Pearl to carry out drilling operations in deep water. In fact, as things stand today, the additional demand for deep water rigs in Brazil alone is as high as 40 while rig availability is nearly nil. To sum up the situation, the global offshore drilling expenditure has increased to US$ 30 bn in 2007 from US$ 20 bn in 2005-06 and is further slated to grow to US$ 55 bn by 2011.

Notably, AOL is all set to capitalize the above opportunity since it has aggressively expanded in last couple of years. During last fiscal two jack up rigs were delivered and one semi submersible rig i.e. Aban Pearl was acquired. On the other hand in the current year, two jack rigs have already been delivered whereas two is expected to be delivered before March 2009. As a result, company’s nine out of 21 rigs are brand new and built within last two years. Besides, it has also upgraded Aban Abraham, a drill ship which is now deployed in West Africa at the rate of US$ 410,000 per day. Infact, all rigs (excluding undelivered) of the company have been deployed at healthy charter rate, barring 2~3 rigs for which active marketing are being carried by the company. Secondly, AOL hires out its asset across long and short term contracts. Long-term contracts facilitate stable revenues and comfortable debt servicing, while short-term contracts enable the company to capitalize on higher than average day rates and gain wider and extensive operational experiences with different operators. Despite working in a hazardous business environment, AOL boast of achieving 43.96 lac person-hours of accident-free operations as on 31st March 2008, which proves its execution capability and seriousness towards health and safety of workers.

Fundamentally, due to new vessel deployment and higher charter rate, AOL will register much better performance in the current year. But the full impact of expansion will be felt only in FY10, as by then all the 21 rigs will be deployed. For global operations AOL has formed a wholly owned subsidiary by the style Aban Singapore Pte Ltd which actually owns the 13 vessels (out of total 21) and is doing higher turnover than the parent company. Accordingly for FY08 on a standalone basis, AOL reported a topline of Rs 658 cr and bottomline of Rs 159 cr. However on a consolidated basis, due to higher interest cost and other factors, PAT stood lower at Rs 123 cr on higher revenue of Rs 2021 cr. But importantly it registered an OPM of 52% even on consolidated basis. After deducting dividend on preference shares, EPS works out to Rs 24 on equity of Rs 7.60 cr having face value as Rs 2/- per share.

In order to fund its expansion, AOL had raised around Rs 430 cr in 2006 thru FCCB route to be convertible into equity @ Rs 2789 per share. Nearly 50% bond has been converted at the same rate and balance bond holders are yet to exercise their option. Post all conversion, diluted equity works out to round about Rs 7.75 cr. Although company boast of having very tiny equity capital, but it has preference shares capital to the tune of Rs 306 cr on which more than Rs 25 cr has to be paid as dividend every year. For FY09, AOL may clock a consolidated turnover of Rs 3250 cr and NP (after preference share dividend) of Rs 500 cr on a. This translates into EPS of Rs 129 cr on diluted equity of Rs 7.75 cr. For FY10 company has the potential to double the NP to Rs 1000 cr.

Despite AOL expected to do remarkably well in coming years, its share price has been slaughtered down to Rs 1000 levels from a high of Rs 5500 in Jan’08. This drastic fall may be due to distress selling by few FII’s as they are holding more than 16% stake in the company. Meanwhile from above statement, it indicates AOL is currently trading at a P/E multiple of merely 8x times which is grossly cheap for a company with such caliber. Moreover company has a huge gross block of Rs 13500 cr including capital work in progress, against which it is available at an Enterprise Value of Rs 17500 cr.

But at the same time investors should keep in mind that oil production from shallow waters is almost stagnant. And with deep-sea drilling gaining importance, the demand for jack-up rigs, the key revenue spinner of the company, could be impacted over the long term. Also, the growing number of new players entering this field with new built jack-up rigs is adversely impacting charter day rates. Secondly, AOL along with its subsidiaries has a huge debt of Rs 12825 cr due to which interest payment forms a major component of cost. Thirdly, if crude oil price continues to fall sharply and settles down to sub US$ 70 levels per barrel, then the E&P activity may slow down globally. However AOL management is competent enough and well prepared to face any adverse challenges. To conclude investors are recommended to buy at current levels as share price can easily double in 12~15 months. Long term investors can expect much superior returns.

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Small & Beautiful

Gremach Infrastructure’s (45.00) main activity is to provide rental of construction/earthmoving machineries to infrastructure companies including L&T, Punj Lloyd, Shapoorji Pallonji, Gammon India, HCC, Gannon Dunkerley etc. It has a huge asset bank of heavy equipments ranging from compacters, rollers, concrete mixers, dozers, forklifts, loaders to excavators, PTR, dumpers, electronic sensor pavers, kerb laying machine, concrete batching and mixing plant. In addition to renting its owned equipments, it also hires equipments owned by other parties and rent to its own clients. In near future company has planned to enter into the business of renting of oil & gas drilling rigs and has accordingly placed order for design and manufacture of four rigs to a Chinese major. To cash on the real estate boom, company has diversified into setting up of SEZ and has got in-principle approval for 100 hectar Metal SEZ at Kolhapur & another at Dhule in Maharashtra. It has also taken 75% controlling stake in 11 Coal mine licenses in Mozambique. To fund its growth plant company has raised almost Rs 200 cr in Feb 2008 thru FCCB route to be converted into equity @ Rs 376 per share. Ironically, share price which hit a high of Rs 504 in Jan’08 is not finding any buyer even at Rs 50. Aggressive investor can buy at current levels.

The share price of Sunil Hi-tech (88.00) which raised Rs 81 cr in Jan’08 via QIP route @ Rs 360 per share has now been reduced to merely 25%. Moreover it has also issued 38 lakh warrants in Oct’07 to be converted @ Rs 146/- per share before April’09. Company is engaged in the niche segment of fabrication, erection & testing and commissioning of bunkers, ESPs, boilers, TG sets in the power plants, both in private & public sector. With a client list spanning BHEL, NTPC, Reliance Energy, Jindal Steel and Power, the SEBs of Maharashtra, Chhattisgarh and Madhya Pradesh, company is also engaged in overhauling and maintenance to ensure proper functioning of plants, post-installation. The company also undertakes projects in the transmission and distribution segments. Remarkably, as on today it has an all time high order book position of more than Rs 1300 cr which is 4x times its FY08 turnover. With the ongoing liquidity crunch internationally, funding such huge projects is a challenge for the company. However, it has an under leveraged balance sheet with a low debt equity ratio of 0.60x times and can raise more debt comfortably. So despite taking into consideration higher interest cost it may end FY09 with a topline of Rs 500 cr and PAT of Rs 20 on conservative basis. This translates into EPS of Rs 16 on current equity of Rs 12.30 cr. At current market cap of merely Rs 100 cr, it’s a steal.

Remarkably from the last three quarters, HBL Power System (165.00) has been posting excellent set of nos. Even for the last June’08 quarter, its sales shot up 130% to Rs 316 cr whereas NP zoomed up by 450% to Rs 33 cr registering a whopping EPS of Rs 14 for the single quarter. More importantly it reported a very healthy OPM of more than 20%. Company is the engaged in design, development and manufacture of industrial & specialized batteries, allied electronic products and DC systems in India. Infact it is the market leader in VRLA (valve regulated lead acid) and NCPP (nickel cadium pocket plate) batteries and enjoys 50% market share of domestic telecom market. Moreover it is among the very few companies in the world making ultra high specialties batteries for military use like thermal, reserve and torpedo batteries. Ironically, it stands 3rd globally for Nicad Passenger aircraft batteries and ranks 2nd for industrial alkaline batteries. Apart from supplying various batteries for train lighting, air conditioned coaches etc, of late company has designed and developed wide range of microprocessor based signaling products and power systems to cater to the needs of Indian Railways. Recently company has put up two new factories at Vizianagaram and SEZ Vizag in Visakhapatnam under a capex of Rs 150. After posting an EPS of Rs 28 for FY08, company is set to clock an EPS of Rs 45 for FY09 with sales of around Rs 1250 cr and PAT of Rs 110 cr. Just go and buy it blindly.

Jupiter Bioscience (56.00) is poised to become a global peptide solutions group having a broad canvas of peptide chemistry products, peptide reagents, coupling reagents, protective agents and supplier of key ingredients used in peptide based pharmaceuticals. It is operating in a very niche segment and is among the few companies in the world to have competency in synthesis of peptides. The technology focus of the company has enabled it to develop more than 400 products in its catalogue and establish a leadership position in the peptide business internationally. Last year company invested considerable resources in developing the processes for manufacture of generic peptide APIs. It has also finalized to acquire a manufacturing facility of Merck Life Sciences, Switzerland and has even signed a long term business contract with them. Besides company entered into a 10-year product purchase agreement with Ranbaxy on peptide pharmaceutical for gloabal market and as per contract allotted 31.77 lakh warrants @ Rs 147. Last fiscal it raised 100 cr thru QIP route @ Rs 153 per share. Further it cancelled the 27.50 lakh equity shares allotted to promoters and instead issued 40 lakh warrants @ Rs 182 to strategic investors. For FY09 on a standalone basis, it can report sales of Rs 175 cr and NP of Rs 40 i.e. EPS of Rs 18 on diluted equity of Rs 22.50 cr. A strong buy.