STOCK WATCH

For the latest Sept’08 quarter Accurate Transformers (30.00) has come out with 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.

Bharat Gears (28.00) 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.

Savita Chemicals (155.00) specializes in manufacturing of petroleum specialty products like transformer oils, liquid paraffin, petroleum jelly, white mineral oil, automotive and other industrial lubricants. Of the total sales, transformer oil constitutes around 45%, white oil/liquid paraffin’s around 35% and lubricating oil balance 20%. In lubricating oil segment, company is present in both automotive (85% of lubricant sales) and industrial (15% of lubricant sales) segment. It has a tie-up with Idemitsu Kosan, Japan to market its lubricating oils under ‘Idemitsu’ brand name thru network of dealers and auto part shops. Importantly, company enjoys 40% market share in transformer oil, hence will be immensely benefitted with huge capacities planned in power generation. Secondly, the sharp fall in crude oil prices will also boost up its margin as base oil forms its major raw material. Apart from petroleum business, company has also setup wind mills with an installed capacity of 26.3 MW which will be augmented to 34.9 MW in this fiscal. Although company is negatively affected by the rupee depreciation being a net importer, still it may register net sales of Rs 950 and PAT of Rs 58 cr leading to an EPS of Rs 40 on equity of Rs 14.60 cr for FY09. Buy at major corrections.

For the Spet’08 qtr Gremach Infrastructure’s (35.00) revenue increased by 45% to Rs 78 cr but NP declined by 15% to Rs 7.90 cr on the back of sharp fall in operating margin. Company’s 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. For the six months ending Sept’08 it has already registered an EPS of Rs 13 by earning PAT of Rs 20 cr on topline of Rs 180 cr. Accordingly for FY09, on a very conservative basis it may clock a turnover of Rs 300 cr and NP of Rs 24 cr i.e. EPS of Rs 16 on equity of Rs 15.20 cr. Although in near future company may see a sharp fall in revenue due to unprecedented slowdown in construction sector, but going forward it is expected to regain normal business post liquidity crisis. Interestingly, it 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 35. Aggressive investor can buy at current levels.

Small & Beautiful

Lately Numeric Power (280.00) has declared very disappointing result for the Sept qtr. Sales remained flat at Rs 103 cr but PAT declined by 50% to Rs 4.90 cr due to sudden fall in profit margin. It reported an OPM of less than 8% against more than 13% last year. However the sharp fall in lead prices and other commodities may give some relief to the company going forward. It is India’s leading manufacturer of uninterrupted power supply (UPS) systems, stabilizers and power conditioners. It also undertakes turnkey projects and offers end to end solution for SCADA/EMS package, large network of industrial process, power transmission support systems and distribution management. It has been ranked as No.1 online UPS manufacturer & power electronic company of the year for the last 15 years in a row by Soft Disk journal. It has also been ranked as No 1 offline UPS manufacturer for second consecutive year by the same magazine. Recently, it ventured into solar power generation using Photo Voltaic Modules and initially intends to develop solar hybrid UPS systems. Accordingly, it walked out of JV with SOCOMEC SA of France as it primarily prevented the company to tap the solar 3 phase UPS products. But at the same time it has developed its own products in higher range of 3 phase category which are fairly successful in the market. Considering its HIFY09 performance, it may clock a turnover of Rs 400 cr and profit of Rs 30 cr i.e. EPS of Rs 59 for FY09. Fundamentally, company has very low debt on its book and has huge reserves making it a strong bonus candidate.

For the Sept’08 qtr, JMC Projects (70.00) reported 75% rise in revenue to Rs 323 cr and 60 increase in operating profit to Rs 24.70 cr. But due to higher interest and depreciation cost, PAT remained flat at Rs 6.80 cr. Being a 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 H1FY09 it has already posted an EPS of Rs 8 with 75% rise in sales to Rs 636 cr and 20% increase in NP to Rs 14.70 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. For FY09 it may clock a turnover of Rs 1350 cr and profit of Rs 25 cr for FY09 leading to an EPS of Rs 14 on current equity of Rs 18.14 cr. Accumulate at sharp declines only

Being one of India's leading EPC (engineering, procurement and construction) and BOT (build, operate and transfer) contractor, Madhucon Project (55.00) is engaged in execution of infrastructure projects, such as expressways and national highways, BOT toll roads, irrigation & water supply, bridges, flyover, dams, tunnels, spillways, canal systems, sewage treatment, railway projects and property development projects. Lately, company has diversified into business of mining and power in a big way. Presently it boast of having an massive order book of more around Rs 4500 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. As of now it is operating one coal mine of 3200 hector in Indonesia and second coal mine of 19000 hector is under exploration stage. For FY09 company may report total revenue of Rs 1000 cr and profit of Rs 45 cr leading to an EPS of Rs 12 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 55 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 200 cr.

Sujana Towers (20.00) is basically engaged in manufacturing of galvanized steel towers used in the power transmission and telecom tower sectors. Hence it is definitely going to benefit from the recent fall in steel, zinc and other commodities as they form the major part of the input cost. However the effect of this will be visible only from March’09 quarter nos. Meanwhile, company also offers various services including engineering and consultation, turnkey installations, inspection and maintainance of towers etc. It has set up two large scale units at Hyderabad to emerge as India's largest galvanized steel tower manufacturing company. It has expanded its towers capacity at Hyderabad from 28,125 TPA of galvanized towers to 128,125 TPA. In the light of fast growing demand for supply of power transmission and telecom towers and associated services within the country as well as in the neighboring countries, it is in the midst of setting up another 100,000 TPA manufacturing facility at Chennai in order to cater to the domestic and export market. It also intends to set up / acquire subsidiaries in the Middle East/ South East Asia in the area of power transmission and telecom infrastructure services. Recently, it acquired 51% shareholding in Telesuprecon Ltd (Mauritius), undertaking Telecom infrastructure contracts in various cast / central African countries. For the trailing twelve months ending June 2008 it report total revenue of Rs 582 cr and profit of Rs 46 cr i.e. EPS of Rs 11 on current equity of Rs 20.70 cr. Worth a punt at current levels.

Smart Investments

Sunil Hi-Tech Engineers Ltd

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Indotech Transformers Ltd

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Madhucon Projects Ltd - Rs 55.00

Established in 1983, Madhucon Projects Ltd (MPL), flagship company of Madhucon group is engaged in execution of infrastructure projects such as expressways and national highways, BOT toll roads, irrigation & water supply, bridges, flyover, dams, tunnels, spillways, canal systems, sewage treatment, railway projects and property development projects. In order to emerge as a diversified infra player and insulate itself from any potential slowdown in a particular segment, company has lately diversified into business of mining and power in a big way. Being one of India's leading EPC (engineering, procurement and construction) and BOT (build, operate and transfer) contractor, MPL is a leader in construction of highways and expressways. Infact it has built more than 500 km of highways in the golden quadrilateral road network. NHAI, State Highway Development Corp, Irrigation & CAD Departments of state governments, Hyderabad Urban Development Authority, Coal India, Konkan Railway, Indian Railways, IOC, etc are few of its major clients.

To facilitate concentrated working and fast expansion, company presently operates thru following diversified business verticals.

· BOT Toll based Project: At present MPL is executing four BOT toll based national highways of 330 KMs namely Agra-Jaipur expressway, Karur-Dindigul expressway, Trichy-Thanjavur expressway & Madurai-Tuticorin expressway. Out of these, the first two projects are near completion and are expected to commence operation shortly. The latter two is estimated to complete during FY10.

· Water Resources including Irrigation: Currently company is executing six irrigation projects in Andhra Pradesh and constructing one dam across Penuganga river in Maharashtra

· Highways / Flyovers / Other Infra projects: Under this division, MPL boast of having an order of constructing 220 km of national and state highway apart from few other infrastructure orders including one major flyover in Maharashtra.

· Energy: To derisk its revenue model, MPL has recently ventured into power segment and has notably bagged a single EPC order of nearly Rs 1000 cr from M/s Simhapuri Energy Pvt Ltd for setting up two thermal plant of 135 MW each in Nellore, Andhra Pradesh. The project has already been funded and plants are estimated to go on stream by 2010. Besides, MPL 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 on BOOT basis two hydel power project of 165 MW at Etabu & 150 MW at Elango, both in Arunachal Pradesh.

· Mining: Another latest diversification by MPL is into coal sector. As of today, its subsidiary in Indonesia is busy operating 3200 hectors of coal mine in East Kalimantan. 1000 TPH crusher and automatic loading plant is under construction and expected to be completed by January 2009. So most probably company will being commercial production of coal in FY10 which will boost the revenue as well as profit next year. Moreover it has also started exploration activities in its second cola which is spread across 19,000 hectares of land in Sumatra, Indonesia.

· Building and Property Development: MPL is putting special thrust to accelerate the growth of this segment. It is in the midst of developing couple of commercial property with a total project cost of Rs 900 cr. It includes the construction of 4 Star hotel cum service apartments and shopping mall cum multiplex in 9 acres of land in Kukatpally, Hyderabad.
Presently, MPL has unexecuted order in hand of roughly Rs 4500 cr which is almost 6x times its FY08 turnover, thereby ensuring strong revenue visibility for coming years. On the segment wise, 35% order relates to Road i.e. highways and flyovers, 30% from Irrigation, 20 from power and balance 15% consist of real estate development. Company is also studying the overseas markets and keenly watching the developments with a view to make an entry into the world markets at an appropriate time. Meanwhile, as the net worth and capital requirement for BOT toll based project, power project & coal projects are high, MPL has recently transferred these divisions to a separate subsidiary called Madhucon Infra Ltd on arms length basis.

To meet the growing traffic NHAI has taken up implementation of National Highway Development Projects of over 24,000 kms, and govt is planning major investments for the dedicated freight corridors of over 2,700 kms of new railway lines which shall be coming up in western and eastern corridors. MPL has already taken major initiative to capitalize the opportunities which would accelerate the growth of the company. For FY09 company may report total revenue of Rs 1000 cr and profit of Rs 45 cr leading to an EPS of Rs 12 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 55 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 200 cr. Investors can buy as share price can double in 15~18 months.

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Sunil Hitech Engineers Ltd - Rs 75.00

Incorporated in 1998, Sunil Hitech Engineers Ltd (SHEL) is engaged in the niche segment of fabrication, erection & testing and commissioning of coal handling plants and ash handling plants, bunkers, turbine hall generator buildings and erection, testing and commissioning of boilers and auxiliaries like Electro Static Precipitator (ESP) both in private & public sector. Thus, it is one of the very few engineering turnkey service provider which is tightly focused in the ever growing power sector. Lately it started construction of steel plant as well. So company basically receives the orders for the construction of thermal, hydro and captive power plants and major steel plants. It executes the order, supplies the labour and materials, construct the plant, install the plant, conduct the testings and handover the plant in working condition to the customer. It is also engaged in overhauling and maintenance of the plants to ensure the proper functioning of the plant post installation. Broadly, power plants need three essential components namely boiler, turbine and generator along with a range of other electrical, mechanical ontrol and instrumentation systems and civil buildings to become a complete power plant. These other components comprise the Balance of Plant (BOP) package. And SHEL has expertise in critical and difficult boiler erection works up to 500 MW and is amongst the handful companies prequalified to undertake BOP packages up to 660 MW. Besides, in transmission and distribution business SHEL takes up erection of EHV transmission lines & substations of 132 kV, 200 kV & 400 kV. It also has experience of working with foreign EPC players like SEPCO China and Skoda Exports.

Importantly, SHEL has an impressive order book position of nearly Rs 1300 crore out of which more than 90% are the BOP jobs within the power sector. However this also includes EPC contract of Rs 329 crore received from one of promoters group company engaged in power generation. Secondly, around 30% of the order book constitutes government orders whereas balance 70% is from private players. Apart from above, company is L1 bidder for another Rs 500 crore of orders, which will keep its order book ticking. With presence in states like Madhya Pradesh, Uttar Pradesh, Maharashtra, Tamil Nadu and Haryana till now SHEL has already worked on projects of 9,850 MW and is currently working on projects in one way or another in excess of 20,000 MW. Being a preferred supplier, company has a long list of clientele including majors like NTPC, BHEL, MSPGC, Reliance group, Jindal group, Sterlite, Hindalco, Tata Power, L&T, Punj Lloyd and various state electricity boards apart from couple of clients in China and USA. Thru its subsidiary, SHEL has a production facility for boiler pressure parts in Nagpur where it manufactures coils like reheater, economizer, LTSH, water wall panels and pressure part like bends and reducers used in boilers up to 500 MW. Having received accreditation for the products from various electricity boards, it now competes with the likes of BHEL and Alstom in the segment. After this backward integration, company in future intends to take up complete power plant projects on EPC basis mainly in the range of 5MW to 60 MW.

On the macro front, government has set an ambitious target of providing ‘Power for All’ during the Eleventh Plan. Thus, in order to achieve this goal about 100,000 MW of fresh capacity addition is targeted by 2012. Additionally, 36,000 MW is expected to be added by nine Ultra Mega Power Projects (UMPP). SHEL has already made a joint bid for the BOP work for the Mundra UMPP. Besides it is also contemplating to bid for UMPP awarded to Reliance Energy and Tata Power. Incidentally, each UMPP (of 4000 MW) has potential BOP work of around Rs 640 crore. This stands to be huge untapped opportunity for SHEL. Secondly, massive investment for upgradation of old power plants in addition to power sector reforms would continue to create enormous business opportunities for the company as it has presence across the entire power supply chain from power generation to power transmission and distribution. In order to meet the increased working capital requirements for larger BOP works, SHEL has already raised Rs 81 cr by placement of 22.50 lakh shares at Rs 360 per share thru QIP route during Jan’08. Earlier in Nov’07 it also made a preferential allotment of 38 lac warrants to be converted into equity @ Rs 146 per share before April’09. However, considering the CMP the warrant holder may not opt for conversion.

Financially, SHEL is doing exceedingly well and has doubled its topline to Rs 242 cr with 60% rise in PAT to Rs 13.70 for H1FY09. Favorably, company has an under leveraged balance sheet with a low debt equity ratio of 0.60x times and hence 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. Secondly it has huge reserves to the tune of Rs 145 cr on small equity leading to a healthy book value of Rs 128. Against the net current assets of Rs 120 cr, company is currently available at a market cap of less than Rs 100 cr. Although company may see less order inflow coupled with lower margin, still it qualifies a decent buy at current levels. Long term investors can buy safely as scrip can easily appreciate 50% in 12~15 months.

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