Bharati Shipyard Ltd - Rs 95.00

Incorporated in 1976, Bharati Shipyard LTD (BSL) is the second largest private shipyards in India. It is engaged in design and construction of sea-going, coastal, harbor, inland crafts and vessels apart from undertaking ship repair activities. Over the years, company has upgraded its product range from the simple inland cargo barges, passenger vessels to sophisticated deep-sea fishing trawlers and state-of-art dredgers, to the technological marvel of the highly maneuverable and power-packed ocean going tractor tugs, chemical carriers, bulkers, cargo/container ships, tankers etc. Importantly, company has special expertise in construction of offshore support vessel required for oil exploration industry. Infact, worldwide BSL ranks seventh in terms of order book for offshore vessels. It is also the sole Indian player with order of an oil rig. Actually, BSL is constructing a 350-feet self-elevating jack up drill rig for Great Offshore which is first of its kind for any Indian private shipyard. With delivery of this rig by end of this fiscal, BSL would join the elite club of global companies that manufacture off-shore rigs. Apart from above business, company has put up a wind farm in Dhule Maharashtra, consisting of 14 wind energy generators with a total capacity of 15 MW at an investment of Rs 85 cr.

At present, ship building industry is being dominated by Korea, China & Japan as they control nearly 90% of the total global market. Against this India hardly has 1% share, which indicates the growth potential of this sector in the country. The shipbuilding industry is witnessing robust demand, as shipping companies across the globe are undergoing aggressive expansion to cater the rising sea traffic on the back of strong growth in global economy. On the other hand the increase in E&P activity worldwide has stimulated a strong demand for offshore vessels like drill ships, support vessels and rigs, which are essential to oil exploration. Lastly the huge replacement demand has given a strong fillip to ship building industry. To avert potential accidents regulators fix age limit/criteria on ships whereby they are not allowed to operate after crossing a particular age limit or certain criteria. Ships are also generally scrapped as they get old, because rising maintenance cost makes them unfeasible to operate. And as shipbuilding is a very labor-intensive industry, India has an edge with availability of highly skilled labor at lowest cost compared to global peers like Korea, Japan, Norway and other European countries. Today, India ranks 8th in terms of order book and is looking to increase its share to 2%~3% globally in coming years. Also one of the prime reasons for orders flowing towards Indian yard is due to the fact that, all global shipyards are booked fully for next 4~5 years. Hence, Indian shipyards took advantage of this situation as they managed to offer attractive delivery dates and competitive prices.

Currently, BSL boast of having an all time high order book position of Rs 4800 cr which is almost 7x times its FY08 revenue. This is to be executed in next three years, ensuring a strong revenue visibility. And interestingly 70% of the order book constitutes of offshore vessels which offer better margins as they require high degree of technological skill and superior quality of engineering compare to other vessels like tankers, bulkers etc. BSL operates through 4 yards located at Ratnagiri, Ghodbunder(Thane), Goa and Kolkatta, with latter two yards being relatively smaller in size. Moreover, Ghodbunder yard mainly manufactures the body of the ship (hull), which is then towed to Ratnagiri yard where the major portion of the work is done. In order to cash on the buoyancy in the ship building industry, BSL in the midst of Greenfield expansion of setting up two new yards at Dabhol (Maharashtra) & Mangalore (Karnataka) with an investment of more than Rs 1000 cr. The Dabhol yard, spread across 250 acres will have capacity to manufacture vessels up to 100,000 Dwt and being a deep-water port is capable of constructing semi submersible rigs and other rigs. Whereas Mangalore yard, which is located in SEZ being promoted by ONGC will specialize in building tankers, bulk carriers, containership, chemical carries and rigs. This yard will be spread across 50 acre and will have the capacity to construct 5 to 6 vessels per year up to 60,000 Dwt. Further, BSL is contemplating to establish one more SEZ at Usgaon (Maharashtra).

For future growth, company is expecting to get good orders for oil rigs as it has the first mover advantage in rig construction. With average age of mobile offshore drilling rigs worldwide to be more than 25 years, a huge demand is anticipated in coming years either through a life enhancement program or by phasing out the older rigs with new built ones. And ironically, China, Korea and Japan have less presence in this segment as they have larger capacity yards which are more viable / economical for bulk carriers, tankers and containership rather than offshore vessels. Besides, BSL has entered into a 50:50 JV with the diversified Apeejay group to set-up a 250,000DWT large scale shipyard on the east coast of India catering primarily to cargo vessels. The total investment in the 900 acre project is estimated to the tune of Rs 2000 cr to be made over three and half years.

To fund its expansion plan, during 2005 BSL raised around Rs 450 cr in two tranches thru FCCB route to be convertible into equity at the rate of Rs 422 & Rs 498 respectively. Out of these more than 50% has already been converted and considering the current market price the chances for conversion of the balance bonds in near future are quite bleak. For FY08 it recorded 65% jump in sales to Rs 702 cr and 45% increase in PAT to Rs 107 cr posting an EPS of Rs 39 on equity of Rs 27.60 cr. It declared encouraging result for Q1FY09 as well. But importantly, BSL has been recognizing government subsidy as per 2002 scheme of 30% subsidy, although it is yet to receive it physically from the govt. As on March 2008 nearly Rs 160 cr is shown as subsidy receivable under Debtors. Moreover the subsidy scheme was officially valid upto August 2007 and no further clarification has been received from the govt. Despite this BSL continues to record the subsidy amount as revenue in its P&L A/c.

Hence as a matter of conservatism and excluding the subsidy part, BSL is estimated to clock a turnover of Rs 825 cr and PAT of Rs 65 cr for FY09. This translates to an EPS of 24 on current equity of Rs 27.60 cr. Even if we consider the fully diluted equity (post all conversion of FCCB) of Rs 32 cr the EPS works out to Rs 20. On the other hand, if subsidy is taken into consideration then it can register total revenue of Rs 900 cr and NP of Rs 110 cr i.e. EPS of Rs 40 on current equity. Ironically the scrip which hit a high of Rs 865 in Jan’08 has been mercilessly battered down to sub Rs 100 levels. This may be due to distress selling by FII’s like Merill Lynch, AIG, JP Morgan etc who were holding 14% stake. Fundamentally, BSL boast of having huge reserves to the tune of Rs 550 cr i.e. book value of Rs 208 and low debt equity ratio. Secondly, the sharp rupee depreciation may also have a positive impact on company’s bottomline. To conclude, although scrip may continue to slide in the current market sentiment, still investors are strongly recommended to buy at current levels as scrip has the potential to double in 12~15 months. Investor can expect much higher returns if kept for long term.

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STOCK WATCH

Recently, Indotech Transformer (215.00) came out with excellent set of nos. Sales improved by 30% to Rs 65 cr and net profit jumped up 40% to Rs 14 cr posting an EPS of Rs 13 for the single quarter. For H1FY09 it has already registered an EPS of Rs 23 against Rs 16 for the same period last year. Company is one of the leading manufacturers of distribution & power transformers in South India. It is also amongst the few who have the technology to manufacture mobile transformers, which adhere to American Standards. From Feb’08, it commenced manufacturing activities at its new Greenfield plant at Kancheepuram. With this, company augmented its installed manufacturing capacity to 7450 MVA from 3450 MVA earlier. Moreover company now has the capability to manufacture large power transformers upto 315 MVA, 400KV class. Earlier, the company has also commissioned a dry type 100 MVA transformer plant in July 2007 for which it has signed a MOU with DuPont (USA). Presently, company has an order book of more than Rs 100 and is expecting to get further Rs 50 cr in near future. For FY09, it may clock a turnover of Rs 225 cr and profit of Rs 40 cr resulting into an EPS of Rs 38 on a conservative basis. Considering company’s very low debt equity ratio and impressive profit margin, investors can buy at current levels for a price target of Rs 280 in 6~9 months

Madhucon Project (75.00) is engaged in execution of infrastructure projects, such as construction of national highways, fly-overs, dams, tunnels, aquaducts, bridges, coal handling plants, railways projects, power projects, workshops, and residential cum commercial ventures. Presently it boast of having an order book of more than Rs 5000 cr. Couple of months back it bagged a single EPC order of nearly Rs 1000 cr for setting up two thermal plant of 135 MW each in Andhra Pradesh. Besides it has entered into MOU with Jharkhand govt for setting up 1000 MW thermal power plant at total cost of Rs 4800 cr. It has also been awarded 2 hydel power project of 315 MW in Arunachal Pradesh. Moreover, company has a strong portfolio of BOT projects with four NHAI toll based road projects of 330 km. It has also diversified by operating one coal mine of 3200 hector in Indonesia and second coal mine of 19000 hector is in exploration stage. For FY09 company may report total revenue of Rs 1000 cr and profit of Rs 50 cr leading to an EPS of Rs 14 on current equity of Rs 7.40 cr with face value as Rs 2/- per share. Despite being a huge diversified infrastructure company its share price has been decimated to Rs 75 from high of Rs 870 Rs in Jan’08. Although funding its massive projects will be a challenge for the company, still it seems a good bet at current market cap of merely Rs 275 cr.

Due to ongoing carnage, share price of Easun Reyrolle (58.00) has crashed to Rs 60 levels from the high of Rs 380 in Jan’08. In order to make some global acquisition, company raised round about Rs 250 cr in Jan’08 thru GDR & FCCB route to be converted into equity at the rate of Rs 315 and Rs 400 per share respectively. It hasn’t made any major acquisition and is still sitting on huge cash. Company is engaged in field of power management encompassing protection control products, automation systems, automatic metering products & switchgears. Lately it has also ventured into EPC and turnkey business of erection of substations and the entire T&D projects. Notably, company has now fully absorbed the technology of 61850 domain in which only players like ABB, Siemens and Areva are present. 61850 domain is a protocol, which ensures connections in-between hybrid and complex substations so that the power transmission and distribution happens smoothly. For future growth it is aggressively eyeing companies in Europe and US, which are strong in technology. With order in hand of nearly Rs 200 cr, it may end FY09 with sales of Rs 250 cr and profit of Rs 25 cr i.e. EPS of Rs 12 on current equity of Rs 4.15 cr having face value as Rs 2/- per share. Investors are strongly recommended to buy as scrip can double within a year.

JMC Projects (85.00), part of Kalpataru group is among the top seven players for building and factory construction in India & has also been recognized as India’s sixth fastest growing company by the latest “Business Today” June’08 edition. It has successfully ventured into fields of turnkey execution involving civil, mechanical, electrical, HVAC, fire fighting, architectural and landscaping works. Lately, it has started focusing on infrastructure and power projects and is aggressively bidding for contracts to construct bridges & flyovers, roads & highways, railways stations, marine work, water supply & irrigation projects and construction of power plant. This has resulted into massive order in hand position of more than Rs 2000 cr as on March 2008 which is twice its FY08 turnover. For FY08 its revenue jumped up 80% to Rs 915 cr and PAT almost doubled to Rs 31 cr posting an EPS of Rs 17 on equity of Rs 18.14 cr. In future company intends to up railways, airports and water management projects on an EPC basis which will further add to its bulging order book. On the back of healthy performance for Q1FY09 it may clock a turnover of Rs 1350 cr and profit of Rs 32 cr for FY09 leading to an EPS of Rs 18 on current equity of Rs 18.14 cr.

Jyoti Structures Ltd - Rs 55.00

Incorporated in 1974, Jyoti Structure Ltd (JSL) is among very few companies worldwide, which possess the capabilities to execute total turnkey jobs that involve setting up both high voltage power transmission lines and substations. In each of these lines, it undertakes projects on a global scale, offering a complete range of services from design, engineering consulting, tower testing, manufacturing, construction and project management. JSL has an expertise to take on turnkey projects for transmission lines from 33 kV to 800 kV and substations upto 400 kV irrespective of terrain, location and requirements of power utilities within and outside India. About 60% of its orders come from transmission projects, 20% from substation and the rest 20% from rural electrification related distribution projects. However JSL is largely dependent on order from As far as dependence on customer is concerned, it derives nearly 40% of total revenue from Power Grid, followed by 35% from various State electricity boards, and rest from private players. With a rich experience of more than three decades company boast of executing projects across 36 countries worldwide.

In order to provide end-to-end solutions, JSL has built two manufacturing units in India i.e. Nashik and Raipur. With state of the art CNC machines, these manufacturing units are capable of making proto types, fabricating and galvanizing transmission towers and structures, microwave towers, wind mill tower, railway electrification structures, etc up to 76,000 MTPA. Besides, its wholly owned subsidiary JSL Structures is having a capacity to manufacture another 19800 tons of transmission line towers. It also has in-house tower testing station up to 1000 kV at Igatpuri. Notably till now, JSL has supplied almost 700,000 MT of towers and has constructed approx 20,000 ckt kms of transmission lines for various utilities in domestic and exports markets. On the back of huge flow of investments in the power transmission and distribution segment, JSL current order book stands at an all time high value of more than Rs 3500 cr. Out of these, almost 80% of the orders are from domestic and the rest are from abroad, mainly Dubai, Libya, Oman, Qatar and Namibia.

For future growth, JSL is equally betting on international market and has formed a 20:80 joint venture company - Gulf Jyoti International (LLC) - with the Gulf Investment Corporation, Kuwait to establish a power transmission tower manufacturing facility in the United Arab Emirates (UAE). The new facility will have the latest technology and equipment that will enable the plant to achieve a production capacity of 33,000 tonne per annum on a two-shift basis. To tap the business in South Africa, the company has formed a JV named Jyoti Structures Africa in Johannesburg to participate in transmission line business opportunities in Southern Africa, in which it has 70% holding. This subsidiary has already received an EPC contract for 765 KV transmission line of Rs 93 crore to be executed in one and half year’s time. As per latest report, both these joint ventures have order in hand of Rs 160 cr and Rs 240 cr respectively.

Under 'Rajiv Gandhi Grameen Vidhyutikaran Yojana' government is looking to electrify all un-electrified villages and to provide access to electricity to all households in next five years. It is also striving to increase the per capita consumption to 1000 units and provide quality and reliable power to all by 2012. Importantly, development of the transmission network has to been done in tandem with growth in generation capacity to avoid mismatch between generation capacity and transmission facilities. Based on estimated generation capacity addition including Ultra Mega Power Projects in XI Plan, there is huge opportunity for the transmission line companies like JSL. Financially, JSL has recorded 40% and 30% growth in revenue and profit to Rs 1370 cr and Rs 72 cr respectively for FY08. Even for Q1FY09 it has maintained the growth momentum. Accordingly for FY09 it is estimated to register a topline of Rs 1650 cr and PAT of Rs 80 cr leading to an EPS of Rs 10 on current equity of Rs 16.20 cr with face value as Rs 2/- per share. However, as still a whopping 21% stake is held by FII’s as on 30th Sept’08 and that too by Citigroup, Morgan Stanley, Bears & Sterns, DSP Merill, JP Morgan etc, scrip may see some more distress selling in near future. Hence investors are advised to keep accumulating this scrip at sharp declines for a price target of Rs 120 (i.e. 100% appreciation) in 12~15 months.

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Smart Investments

Jyoti Structure Ltd

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FAG Bearings Ltd

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Small & Beautiful

Emco Ltd (52.00) is the third largest manufacturer of transformers in India and a leading player in electronic energy meters and turnkey electrical projects It offers widest transformers range from 5 kVA, 11kV right up to 315 MVA, 400 kV for power generation, transmission & distribution. It is one of the leading players in manufacturing special application transformers like furnace transformers (for Steel Industry), large rectifier transformers (for Chemical Industry) and traction and locomotive transformers (for Railways). With acquisition of Urja Engineers Limited, company can now construct EHV Power Transmission Lines upto 765 kV on a total turnkey basis and boasts of having a tower manufacturing facility up to 45000 MT/Annum. To maintain its growth momentum, company has decided to set up a transformer manufacturing plant in South Africa to meet the growing demand in the African region and neighbouring countries. For FY08 it registered 45% growth in net sales to Rs 944 cr whereas profit shot up 60% to Rs 64.50 cr posting an EPS of Rs 11 Rs on equity of Rs 11.77 cr having face value as Rs 2/- per share. On the back of satisfactory nos for the latest June’08 quarter it is expected to clock a turnover of Rs 1250 cr and PAT of Rs 70 cr for FY09. This translates into EPS of Rs 12 on current equity. It’s a screaming buy at share price can double within a year.

KEI Industries (20.00) is a complete cable solutions company with the widest product range encompassing high tension and low tension power cables, control and instrumentation cables, rubber cables, flexible & house wires, submersible cables, OVC/poly wrapped winding wires, and stainless steel wires etc. It has been ranked among the top three cable manufacturing company in India. Presently, it is having an all time high order book position of more than Rs 400 cr. To cash on the buoyancy in the industry, company is undergoing expansion of LT cable by 7000 km and is also adding 1500 kms of HT cable thereby taking the total installed capacity to 54000 km of LT and 4500 km of LT. To widen its product range, KEI is considering a technical collaboration or a joint venture for the Extra High Voltage (EHV) cable project. Of late KEI has started focusing on lucrative retail segment thru aggressive advertising and marketing of house wires & flexible wires. Although company has been reporting lower profit margin for last two quarters due to increase in raw material and other expenditure, still it is expected to clock a turnover of Rs 1200 cr and PAT of Rs 45 cr for FY09 i.e. EPS of Rs 7. Investors can safely add this scrip as the downfall from current level is minimal

Man Industries (40.00) is one of India's largest producers and exporter of large diameter Longitudinal submerged arc welded (LSAW) pipes and Helically submerged arc welded (HSAW) pipes. Infact it is the only company in India to manufacture 18 mtr long HSAW pipe. Recently, company has started a new production line for HSAW pipes with a name plate capacity of 200,000 MTPA thereby equalizing the total production capacity to 500,000 MTPA each for LSAW as well as HSAW. Remarkably it has also bagged new orders to the tune of Rs 1100 craking the current order book position to Rs 1500 cr. To become a global player, company is setting up a HSAW pipe manufacturing plant with an capacity of 300,000 MTPA in USA under a capex of Rs 400~450 cr. Despite company posted disappointing nos for Q1FY09, still on the back of expanded capacity it may report a topline of Rs 1750 cr and bottomline of Rs 75 cr i.e. EPS of Rs 14 on current equity of Rs 26.60 cr. As FCCB is convertible at much higher price than the CMP, bond holders may not opt for conversion thereby eliminating the risk of equity dilution in near future. With the high of Rs 177 in Jan’08, scrip is now available at cheap valuation with a market cap of merely Rs 200 cr

Bharati Shipyard (95.00), second largest private shipyards in India is engaged in design and construction of bulkers, cargo/container ships, tankers, dredgers, passenger vessels, chemical carriers etc. It has special expertise in construction of offshore support vessel required for oil exploration industry and is the sole Indian player with order of an oil rig. Currently, company boast of having an all time high order book position of Rs 4800 cr which is almost 7x times its FY08 revenue, thereby ensuring a strong revenue visibility. Apart from operating thru four shipyard as of today, company in the midst of Greenfield expansion of setting up two new yards at Dabhol (Maharashtra) & Mangalore (Karnataka) with an investment of more than Rs 1000 cr. Besides, it has entered into a 50:50 JV with the diversified Apeejay group to set-up a 250,000DWT large scale shipyard on the east coast of India catering primarily to cargo vessels. To fund its expansion plan, during 2005 BSL raised around Rs 450 cr in two tranches thru FCCB route to be convertible into equity at the rate of Rs 422 & Rs 498 respectively. Out of these more than 50% has already been converted and considering the current market price the chances for conversion of the balance bonds in near future are quite bleak. For FY09, BSL is estimated to clock a turnover of Rs 825 cr and PAT of Rs 65 cr without taking govt subsidy into consideration. This translates to an EPS of 24 on current equity of Rs 27.60 cr. It’s a screaming buy at current levels.

Elecon Engineering Company Ltd - Rs 48.00

Established in 1951, Elecon Engineering Company Ltd (EECL) is a leading manufacturer of bulk Material Handling Equipment (MHE) and Asia’s largest producer of industrial gear. From a modest start of design and manufacture of Elevators and Conveyors from which incidently, the company derives its corporate identity viz. "Elecon", it has grown over the years to be known as a pioneer of the concept of mechanized way of bulk material handling equipment in India. For more than 5 decades, EECEL has been supplying hi-tech equipment to core sectors such as steel, fertilizer, cement, coal, petrochemicals, lignite and iron are mines, power stations, defense and port mechanization in India and abroad. It has reputed clientele including NTPC, BHEL, NMDC, Tata Steel, ACC, Grasim, Jindal group, L&T etc. Having its manufacturing facility only in Gujarat, EECL operates thru following two business segments:

• Material Handling Equipment Division (55%): Under this division, company is engaged in design, engineering, manufacture, supply, erection and commissioning of several MHE including trippers, wagon tipplers, stakers, reclaimers, crushers, feeders, scrapers, conveyors, roller screen, ship loaders, wagon loaders etc. Over the years EECL has gained special expertise in designing and execution of turnkey contracts for crushing, screening, stacking, blinding and reclaiming plants for bulk materials such as coal, limestone, iron-ore, bauxite, overburden, rock phosphate and fertilizer.

• Industrial Gear Unit (45%): In India, EECL is the largest player in industrial gear with 26% market share. It manufacturers exhaustive range of helical gears, worm gears, planetary gears, hi-speed gears, coupling etc apart from gears motors for precision applications. Its product find application in virtually every industry engaged in manufacturing or in power generation field. It also has technical skill in providing customized gear boxes for steel mills, high speed turbines, sugar mills, marine vessels, coast guard ships, plastic extrusions, antena drives and for satellites in the Indian Space programme.

• Wind Mill Division (New Business): With a strategy of diversification, last fiscal EECL started a new business of setting up of Wind Turbine Generator (WTG) farms and manufacturing of WTG gear boxes. It has signed technology tie-up agreement with Turbowinds NV, Belgium for the windmill farms. For certification of windmills upto 600-KW the company has signed an agreement with C-WET. Company has already executed couple of orders by setting up a 6 WTG wind farm in Gujarat and 4 WTG wind farm in Maharashtra. It has also started manufacturing of WTG gear box having capacity of 1 MW to 2 MW, which is the import substitute, thereby becoming the first Indian company to manufacture gearboxes of such sizes. Apart from tax benefits corporate entities are now getting more & more conscious about green power and global warming. Since it’s a new venture, EECL is yet to prove its credentials but this sector holds tremendous potential for future growth and the management is betting on the same.

As on 30th Sept 2008, EECL has an pending order in hand of Rs 1772 cr comprising of Rs 1527 cr for MHE division and Rs. 245 cr for gear division. More importantly, management says that company is having live enquiries of around Rs 2500 cr which may get converted into firm order in coming months. Incidentally, company came out with its Sept’08 quarter result last week only. Sales improved by impressive 35% to Rs 252 cr but PBT remained flat at Rs 24 cr. After higher tax provision PAT declined by 7% to Rs 16 cr. Similarly for the H1FY09 it registered 35% growth in sales to Rs 421 cr but NP remained flat at Rs 28 cr. So on conservative basis, it is estimated to clock a turnover of Rs 950 cr and net profit of Rs 55 cr for FY09. This translates into EPS of almost Rs 6 on current equity of 18.60 having face value as Rs 2/- per share. Last year, company gave 2:1 bonus due to which its equity got expanded to 18.60 cr from Rs 6.20 cr. In line with general market sentiment, share price of this company has also collapsed to sub Rs 50 levels from high of Rs 340. Despite this investors are advised to buy at declines in the range of 35~40 Rs for a price target of Rs 75 in 15 months.

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