STOCK WATCH

At the time when most of the auto ancillary companies are reeling under pressure, Hi-tech Gears (45.00) is constantly churning out encouraging performance quarter after quarter. For the Sept’08 qtr it registered 40% rise in sales to Rs 92 cr whereas net profit jumped up 65% to Rs 4 cr posting an EPS of more than Rs 4 for the single quarter. Even for H1FY09, the topline has improved by 25% to Rs 173 cr and bottomline increased by 35% to Rs 7 cr. With its world class manufacturing facilities at Bhiwadi & Manesar, company is one of the leading manufacturer and exporter of gears and engine/transmission components. Last fiscal company revalued one of its lands situated in Gurgaon, Haryana from its cost price of around Rs 1 cr to nearly Rs. 33 cr thereby crediting approx 32 cr to revaluation reserve. For future growth company is targeting to increase its export substantially and may report total revenue of Rs 325 cr and profit of Rs 8.50 on conservative basis for FY09. This translates into EPS of Rs 9 on equity of Rs 9.40 cr. It may again declare 30% dividend for FY09 which gives a yield of whopping 7% at CMP. Having 52W high as Rs 180, scrip has corrected substantially and can easily appreciate 30~50% in a years time.

For the latest Sept’08 quarter, sales of Ind Swift Lab (25.00) increased by 35% to Rs 146 cr and PAT improved by 45% to Rs 10.50 cr. Hence it has already posted a NP of Rs 20.50 for six months ending Sept’08 against a PAT for Rs 31 cr for entire FY08. Notably, company has started exporting to USA in a big way after getting USFDA approval in Sept 2007 for its API manufacturing facility at Derabassi Punjab for Clarithromycin. It is now expecting to get a second USFDA approval in 2009 which will further boost the export revenue. Presently, exports constitute around 40% of sales with company having presence in 45-50 countries across globe. For future growth the company has a robust product pipeline of 25 products which includes few blockbuster drugs as well. It has successfully filed over 72 DMFs with the US, Canadian, UK and European Drug Authorities. Hence company has been aggressively expanding its capacity and has increased the gross block by almost five times to Rs 470 cr from 100 cr in 2005. For FY09 it may report sales of Rs 550 cr and NP of Rs 30 cr i.e. EPS of Rs 11 on diluted equity of Rs 27.50 cr. To fund its growth plan, company made a pref allotment of 28 lac warrants @ Rs 70 in March 2007 and recently allotted another 25 lac warrants @ 70 to promoter group. With a book value of whopping Rs 97 and expected CEPS of 18~20 Rs, scrip is trading relatively cheap at a P/E ratio of less than 2~3x times. Although company has an high debt on its books, still it a good bet at current levels.

Diamond Power infrastructure Ltd (110.00) is a leading manufacturer of transmission & distribution conductors, power & control cables & speciality cables. After the acquisition of Western Transformers in March’07 and Apex Electricals in July’07, company has also ventured into transformer production with installed capacity of 7500 MVA for power transformer and 5000 MVA for distribution transformer. Recently company announced fantastic result for the Sept qtr. It doubled its topline as well as bottomline to Rs 175 cr and 20.80 respectively. Even for six months ending Sept’08 it has registered more than 100% growth in sales to Rs 353 cr and profit to Rs 40 cr. To cater the rising demand and increase it export revenue, company is setting up power equipment park spread across 110 acre in Vadodara which would have manufacturing facilities for 50,500 Mt of conductors, 48000 Mt transmission tower plant, 25,000 kms of LT cables, 3200 kms of HT cables and 3000 kms cables of EHV cables. The park expected to go on stream by Dec 2009, will also have space for setting up 50 ancillary units for power equipment manufacturers. Company has already achieved the financial closure for this 260 cr capex plan. Meanwhile for FY09 it may clock a turnover of Rs 650 cr and PAT of 55 cr i.e. EPS of Rs 31 on current equity of 17.60 cr.

Supreme Infrastructure’s (42.00) core competency lies in construction/widening of roads & highways, but it also undertakes other infrastructure projects like integrated nallah development, drainage work, laying of railway tracks, construction of minor bridges, development of IT Park, residential tower, RCC building, strengthening of sea wall and laying of tetra pods etc. Its area of operation is mainly concentrated in Mumbai region and few parts of Maharashtra & Bangalore with major clients like NHAI, MCGM, MMRDA, MSRDC, MUTP, PWD, BMC, AAI, BPT, TMC and also private agencies like Hiranandani, K. Raheja, Pratibha Ind, BARC, Sadbhav Eng, Mundra Port etc. Importantly, company has its own captive ready mix concrete plant, asphalt mix plant, quarrying and crushing unit & paver block manufacturing unit. For the latest Sept’08 qtr it posted revenue of Rs 66 cr and profit of Rs 6 cr against Rs 18.50 cr & Rs 1.50 cr last year. It has already clocked an EPS of Rs 11 for six month ending Sept’08. To cater the increasing demand for RMC, company is contemplating to almost double its RMC capacity to 300 cum. per hour by adding two new RMC plants in Mumbai and other city. With a massive order in hand of more than Rs 500 cr, it may register a topline of Rs 250 cr and NP of Rs 18 cr. This translates into EPS of Rs 13 on equity of Rs 13.90 cr. At a reasonable P/E multiple of 5x time scrip can appreciate 50% in a years time.

Smart Investments

Phillips Carbon Black Ltd

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Voltamp Transformers Ltd

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Ratnamani Metals & Tubes Ltd - Rs 65.00

Established in 1983, Ratnamani Metals & Tubes Ltd (RMTL) has emerged as a multi-product, multi location company providing total piping solutions to a diverse range of industries. Its business can be categorized mainly into two segments — stainless steel tubes & pipes and carbon steel pipes. Under the carbon steel division, company makes high frequency welded (HFW) & electric resistance welded (ERW) pipes apart from manufacturing longitudinal submerged arc welded [L-SAW] pipes & helical submerged arc welded [H-SAW] pipes of large diameter. These pipes are primarily used for continuous transportation of large quantities of oil, natural gas and water over the long distances. On the other hand, its stainless steel division produces seamless and welded tubes and pipes in various grades, conforming to different ASTM and DIN standards. It also manufactures large diameter electric fusion welded (EFW) stainless steel pipes in single long seam upto length of 12 meters. Stainless steel tubes and pipes are typically used in heat exchangers, boilers, condensers, refrigeration, instrumentation, hydraulics, fuel injection, exhaust systems for automobiles apart from being used as general piping for power plants, space application and special piping for nuclear applications. Thus, RMTL mainly caters to the niche markets of emerging sectors like oil & gas, petrochemicals, fertilizer, water distribution, refinery, chemical, power plants, sugar, automobile, food and dairy, paper, pharmaceutical, nuclear, aeronautics, space research centres, atomic energy, ship building, railway coaches etc. About 50% of its turnover comes from oil, gas, petrochemical industry followed by 20% from power and rest from others. It enjoys a large domestic customer base like BHEL, L&T, Reliance Industries, IOCL, HPCL, BPCL, GAIL, Alfa Laval, Alstom Power, NTPC etc. At the same time exports represent 45% of revenue as RMTL is an approved vendor of hydrocarbon majors like Shell, Total, Chevron, Exxon Mobil, Agip KCO, Bechtel, TOYO Eng, Aker Kvaerner, Linde, BASF, Chiyoda, Dow Chemicals, BTT France etc.

RMTL has two state-of-the-art manufacturing plants at Chhatral and Kutch in Gujarat having total installed capacity of 19000 MTPA for stainless steel and 300,000 MTPA for carbon steel. However last fiscal the capacity utilization for stainless steel segment remained at 70% and for carbon steel segment stood at 30%. Remarkably, RTML meets its 100% power requirement from its own 24 windmills generating 20.54 MW of green power. It has also got itself partly backward integrated by establishing hot extrusion line which has reduced its dependence on imported material to some extent. Apart from above units, company operates two mobile plants for making large diameter SAW pipes at the customer’s site. These plants can be dismantled and re-erected within a short span and can produce pipes having diameter in excess of 36” NB upto 135” NB in various thicknesses depending upon the project requirements. As a part of forward integration, RTML has recently set up a 3 layer polyethylene and epoxy coating line with capacity of 2.7 million sq mtrs. To maintain its growth momentum it has also expanded its SS welded tube capacity by 3000 MTPA and is in the process of doubling its H-SAW pipe capacity by 100,000 MTPA thru Brownfield expansion in two phases. Post expansion, its production capacity for stainless steel will stand increased to 22000 MTPA and that of carbon steel to 400,000 MTPA. Company has also developed titanium tubes for application in power industry to begin with which will be later on extended to cover aerospace, defense, water desalination, etc. Further, company has outlined capex of Rs 90 cr in FY10, which includes setting up large diameter and higher thickness stainless steel welded pipe plant with capacity of 1500 MTPA and re-organisation of the existing plant at Chhatral.

As of now RTML has a decent order book of more than Rs 500 cr to be executed over the next 6~9 months. Out of these 50% order is for carbon steel and 50% for stainless steel division. And moreover only 20% is export order with rest 80% to be supplied locally. Incidentally, the demand for pipes is expected to remain strong for next 3~5 years due to committed investment in power as well as oil & gas exploration and production sectors. Besides, sizable demand is also anticipated from replacement of old pipes. In Sept 2007, to fund its expansion plan company made a pref allotment of 4.50 lac warrants to be convertible @ Rs 950 (FV Rs 10/-) per share. But looking at the CMP, the conversion may not take place hence no equity dilution is expected in near future. Financially, for FY08 it recorded 50% growth in sales to Rs 845 cr and 40% increase in PAT to Rs 90 cr despite taking a hit of Rs 27.50 cr due to M2M losses on derivative instruments. For H1FY09, its sales improved by 25% to Rs 498 cr but net profit remained flat at Rs 49 cr. However company didn’t make provisions for notional forex loss, else its NP would have been lower by approx Rs 10 cr. Meanwhile, the recent fall in the steel and other commodity prices will relieve some pressure on its operating margin thereby having a positive impact on company’s bottomline. So taking everything into consideration, RTML is estimated to end FY09 with sales of Rs 1000 cr and profit after tax of Rs 80 cr leading to an EPS of Rs 18 on equity of Rs 9 cr having face value as Rs 2/- per share. Although company recently did a stock split but since its having huge reserves of more than Rs 200 cr on such a small equity and being in the 25th year of operation, it may declare a liberal bonus to cheer the shareholders. Hence investors are strongly recommended to accumulate this scrip at declines for a price target of Rs 110 in 15 months.

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Small & Beautiful

Last week, Accurate Transformers (30.00) came out with very encouraging set of nos. Although its sales declined marginally by 5% to Rs 32 cr but its operating profit shot up 60% to Rs 5.50 cr. Remarkably, its OPM improved substantially to 16% this quarter against 10% last year. However due to higher interest cost, PAT increased by 25% to Rs 1.40 cr thereby posting an EPS of almost Rs 5 for the qtr. Company 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 company is working at very low capacity utilization due to high working capital requirement and shortage of funds. Despite this it can clock sales of Rs 200 cr and PAT of Rs 6 for FY09 leading to an EPS of Rs 20 on a very tiny equity of Rs 2.96 cr. It’s a steal at current market cap of merely Rs 9 cr.

At the time when most of the auto ancillary companies are reeling under pressure, Hi-tech Gears (45.00) is constantly churning out encouraging performance quarter after quarter. For the Sept’08 qtr it registered 40% rise in sales to Rs 92 cr whereas net profit jumped up 65% to Rs 4 cr posting an EPS of more than Rs 4 for the single quarter. Even for H1FY09, the topline has improved by 25% to Rs 173 cr and bottomline increased by 35% to Rs 7 cr. With its world class manufacturing facilities at Bhiwadi & Manesar, company is one of the leading manufacturer and exporter of gears and engine/transmission components. Last fiscal company revalued one of its lands situated in Gurgaon, Haryana from its cost price of around Rs 1 cr to nearly Rs. 33 cr thereby crediting approx 32 cr to revaluation reserve. For future growth company is targeting to increase its export substantially and may report total revenue of Rs 325 cr and profit of Rs 8.50 on conservative basis for FY09. This translates into EPS of Rs 9 on equity of Rs 9.40 cr. It may again declare 30% dividend for FY09 which gives a yield of whopping 7% at CMP. Having 52W high as Rs 180, scrip has corrected substantially and can easily appreciate 30~50% in a years time.

Recently, Vivimed Labs (48.00) has reported terrific nos on a standalone basis for the Sept’08 qtr. Its net profit more than doubled to Rs 7.75 cr on 10% higher sales of Rs 44 cr. The OPM for the qtr shot up to 28% in comparison to 19% last quarter. Moreover on the consolidated basis its sales and profit stood at Rs 133 cr and 11.70 cr respectively for H1FY09. However its not clear whether company has re-stated the FCCB amount and made provisions for notional forex loss. Anyway, company is a speciality chemical manufacturer catering to segments including oral care, sun care, skin care, hair care, natural extracts, preservatives, anti microbial, anti oxidants, anti-aging molecule etc. Infact it is world’s 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. Few months ago it 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. Organically as well company has been expanding its capacity and has chalked out Greenfield expansion plan in Uttaranchal and Hyderabad. Looking at the CMP, its 60 cr FCCB may not get converted into equity, hence no equity dilution is expected in near future. For FY09 it is slated to report 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. A safe bet.

Bharat Gears (30.00) has once again declared excellent result for the Sept’08 qtr. Sales grew by 30% to Rs 74 cr whereas NP shot up 120% to Rs 2.90 cr. Accordingly it has already earned a PAT of 6 cr on sales of 140 cr for H1FY09 against profit of Rs 2.50 cr on sales of Rs 108 cr for H1FY08. Company 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. After a gap of 7 years it again became a dividend paying company be giving 10% dividend for FY08. More importantly it has successfully brought its total debt to Rs 50 cr from Rs 80 cr in FY05. However the share price has tumbled down sharply in the recent meltdown and is now become one third from its high of Rs 90 in Jan’08. Despite the slowdown in auto sector, company may report sales of Rs 250 cr and net profit of Rs 10 cr for FY09. This works out to an EPS of Rs 13 on equity of Rs 7.80 cr. With a healthy book value of Rs 46, scrip is trading fairly cheap at an EV of hardly Rs 75 cr and P/E multiple of less than 3x times. Only aggressive investors are advised to accumulate at declines.

Voltamp Transformers Ltd - Rs 350.00

Established in 1963, Voltamp Transformers Limited (VTL) is a leading manufacturer of customized transformers for industrial, building and power applications. It has special expertise in production of dry type vacuum resin impregnated (upto 3 MVA/11 kV class) and cast resin transformers (upto 7.5 MVA/33 kV class) apart from manufacturing regular oil filled power & distribution transformers, induction furnace transformers & unitized substations. Infact, company is the market leader in dry type transformers with around 40% market share. Unlike other transformer makers, VTL's focus is on the non-SEB industrial and engineering segment, which has enabled the company to preserve profitability on a consistent basis. Company caters to a wide spectrum of transformer users in various industries like petrochemical, oil refining, cement, paper and pulp, pharmaceuticals, automobiles, steel, power plant, building, metro rail applications, mining and minerals and many others. Its client base includes the leading business houses, well known PSUs and large cooperatives such as Reliance Industries, Jindal Steel, Bharatforge, Hindalco, Guj Alkalies, Kirsloskar group, JK Cement, Siemens, ABB, L&T, Torrent Power, Suzlon etc to name a few. Notably, company derives nearly 40% of total revenue from distribution transformer, 35% from power transformer & balance 25% from dry type transformer.

As of today, VTL has three manufacturing units, each for power, distribution & dry type transformer at Makarpura, Vadodara with a combined production capacity of 9000 MVA per annum on a three shift basis. Surprisingly, VTL has consciously taken low exposure to state electricity board which constitutes nearly 5% of total sales. As per the management, SEB market for transformers has large volumes but is characterized by stiff price competition and also the credit period is high resulting in huge receivables position thus bloating the working capital. However in case of downturn, company always has the option to increase its supply to SEB. But currently with nominal revenue contribution from the SEBs, VTL’s exposure to receivable risk, due to financial ill health of SEBs, is low. On the other hand, company has focused on the dry type transformer segment aggressively as it is a highly lucrative business offering higher margins than oil filled transformers and only few players manufacture them. Also the technology used is not easily available. Accordingly, VTL has license agreements with two German companies for manufacture of vacuum resin impregnated dry type transformers and cast resin dry type transformers.

To meet the rising demand of transformers, VTL is in the midst of Greenfield expansion and is putting up manufacturing facility at Vadadla, Vadodara with an investment of about Rs.35 cr. The plant, expected to become operational by April 2009 will enhance the capacity by more than 50%, thereby taking the total transformer manufacturing capacity to 13000 MVA from 9000 MVA. Post expansion the capacity across business segments will stand as distribution transformers – 5000MVA, power transformers – 6000MVA and dry type transformers – 2000MVA. With govt aggressively pressing for accelerated development of power generation, transmission and distribution capacities, transformer industry is expected to continue a CAGR above 15%, for the next five years period. In view of this, VTL, being one of the oldest and established players in the transformer sector, is expected to benefit. Secondly with the increasing demand of dry type transformers, their contribution in the overall sales is bound to increase which in turn will give a boost to the operating margins of the company. Thirdly the recent fall in copper price will also positively impact the bottomline going forward. Meanwhile, VTL’s has satisfactory order book position of around Rs 400 cr.

Recently, VTL came out with encouraging set of nos for the Sept qtr. Sales grew by 15% to Rs 170 cr but PAT jumped up 50% to Rs 27 cr on back of better operating margin which stood at 22% against 19% last year. Accordingly for six months ending Sept’08, it recorded 25% & 40% growth in sales and NP to Rs 340 cr and 50.50 cr respectively. Hence it has already posted an EPS of Rs 50 for H1FY09. So for the entire FY09 it may clock a turnover of Rs 650 cr and profit of Rs 85 cr i.e. EPS of Rs 84 on equity of Rs 10.10 cr. It may even declare a dividend of Rs 15 for FY09 which gives a yield of more than 4% at CMP. Fundamentally also company is quite strong being debt free and having huge reserves of more than 150 cr, liquid cash worth Rs 60 cr, ROCE of 95% and ROE of 60%. Considering the 52w high of Rs 1940, scrip has been battered down mercilessly to 20%, thereby giving a good opportunity for long term investor to accumulate for a price target of Rs 675 in 12~15 months.

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