STOCK WATCH

Jindal Polyfilms (120.00), a leading player in flexible packaging, basically makes polyester films (BOPET), polypropylene films (BOPP), metallised films and coated films with in house ability to produce polyester chips (93800 TPA) for captive consumption. It is the only company in India to offer PVDC coated BOPP and Pet films having a capacity of 4500 TPA to manufacture PVDC, Acrylic and LTS coated films. On the back of robust demand company has been regularly increasing its production capacity and has recently installed two new wide width metallizers taking the total capacity of metallizers to 40,000 TPA. Shortly, it is slated to begin operation of two new BOPP Lines which will double the capacity to 180000 TPA. For future growth, company is contemplating a capex of Rs 500 cr to install one new line each for BOPP & BOPET of 40,000 TPA and 25,000 TPA respectively along with metallizers and coating film line. Although this expansion will be operational in a phased manner in next 2-3 year, but post completion company will boast of having BOPP capacity of 220,000 TPA and BOPET capacity of 111,000 TPA. With petroleum being the basic raw material, company is going to be immensely benefited from the drastic fall in crude oil price. Even on the conservative basis it is estimated to report a PAT of Rs 85 cr on sales of Rs 1350 cr. This translates into EPS of Rs 30 on equity of Rs 28.10 cr. Although company hasn’t actually begin the buy back, but it has approved the buyback of 25% capital at a price not exceeding Rs 350 per share. Buy at declines.

Belonging to RPG group, Phillips Carbon (40.00) is the undisputed leader with a capacity to produce 270,000 MTPA of carbon black which is almost 47% of the total installed capacity of carbon black in India. Out of the total export of this powdery substance from India, 70% is made by company alone and in the domestic market it has an overall share of more than 40%. Recently, in order to generate extra revenue from sale of power, company has put up a huge 30 MW power generation plant which went on stream from Sept 2008. For future growth company is looking to expand its installed capacity by whopping 140,000 tonne thru Greenfield as well Brownfield expansion along with adding another 32 MW of captive power generation facility. In short, post all expansion by March 2010, its carbon black production capacity will stand augmented to 410,000 MTPA and power generation capacity to 80.50 MW. Going forward company is expected to see some margin pressure due to fall in the carbon black prices, although part of it will be compensated by fall in carbon black feedstock prices. Looking at H1FY09 figures and forex loss, company may clock a turnover of Rs 1100 cr and PAT of Rs 45 cr for FY09 i.e. EPS of Rs 16 on equity of Rs 28.25 cr. It may declare 25% dividend for FY09 which gives a yield of more than 5% at CMP. Interestingly, couple of months back warrant holders opted for conversion of 30 lac warrants @ Rs 149 per share and since then scrip has fallen drastically. A good bet at current levels.

Panama Petrochem (70.00) manufactures specialty petroleum products for diverse user industries like printing, textiles, rubber, pharmaceuticals, cosmetics, power and other industrial oil. The product portfolio of the company consists of transformer oil, liquid paraffin, petroleum jelly, cable jelly, ink oil, rubber process oil and antistatic coning oil. It manufactures more than 80 product variants with major supplies to corporate’s like BPCL, Micro Inks, Alok Industries, Merck, Bayer Cropscience, JBF, Usha Martin, Cipla, government ordinance factories to name a few. Recently, company has developed a new product called mining oil for mining industry which is in its testing stage and is expected to be launched in the market soon. To maintain its growth momentum, company is in the midst of huge expansion whereby it more than doubling its production capacity to 159,000 MT from 69,000 MT currently. But most importantly the drastic fall in the crude oil prices is a big positive for the company as base oil forms the major part of input cost. Considering the encouraging performance for first two quarters, company may end FY09 with net sales of Rs 350~375 cr and PAT of Rs 15 cr i.e. EPS of Rs 32 on current equity of Rs 4.80 cr. With a dividend yield of more than 5%, book value of Rs 121 and PE multiple of merely 2x times, it’s one of the safe bet in current market sentiment.

International Combustion (135.00) 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 merely 2x times which is extremely 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. Recently it reported satisfactory nos for the Sept’08 quarter and is poised to end FY09 with sales of Rs 110 cr and NP of Rs 12 cr i.e. EPS of Rs 50 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

Shanthi Gears Ltd - Rs 32.00

Established in 1969, Shanthi Gears Ltd (SGL) is a leading manufacturer of industrial gears, gearboxes, geared motors and gear assemblies. Infact, it is the second largest player in industrial gear segment with 20% market share and at the same time is the undisputed leader in the customized product segment where the manufacturing is as per clients’ requirements. Incidentally, company does not supply any of its products to the automobile sector although the name suggests being an auto ancillary company. Starting out as a gear manufacturer for the textile industry, SGL now caters to a wide range of industries like power, sugar, paper, material handling, construction equipment, steel and cement industries. Gears are the basic building blocks in the equipment which is mainly responsible for controlling movement of machine parts in any machinery and have widespread applications. Its products range includes worm gear boxes, helical & bevel helical gear box, geared motor, custom built gear box, mill gear box, open gearing, CNC machine tools and products for the textile industry. It also manufactures high-precision gears for the marine and aviation industry. Remarkably, SGL is also the only listed manufacturer of gears for helicopters and light combat aircrafts to Hindustan Aeronautics Ltd. Of late, company has even started manufacturing gearboxes of 250 KV for windmills, Besides, SGL also offers consultancy services for engineering design. Being one of the most preferred suppliers, its clientele includes Tata Steel, SAIL, BHEL, Atlas Copco, Ingersol Rand, L&T, ACC, Siemens, Mitsubishi, Elgi Equipment, Hindustan Aeronautics, Rolls Royce etc to name a few.

Perhaps SGL is the only gear manufacturing company having all processes in-house including cutter manufacturing with nothing being sub-contracted. Secondly, it has its own wind mills with capacity of 5.16 MW, which makes it nearly self sufficient in its power requirements. SGL has consistently invested in upgrading its infrastructure to improvise upon its manufacturing capabilities and churn out world-class products. At the same time, it has also integrated and augmented its production capacity to be able to meet increasing demand for its products. Hence today, SGL boasts of having six ultra modern plants in Coimbatore equipped with state-of-the-art manufacturing machines and quality control equipments. However, in order to consolidate/streamline operations, company is in the midst of shifting/relocating couple of its small unit to large unit. This is expected to complete by March 2009 and will lead to some saving in cost of production going forward. Meanwhile, to capitalize the huge opportunity in renewable energy like wind power, SGL is looking for potential tie-ups with a global technology partner for production of higher capacity gears for windmills. On the other hand, round about 10% of revenue comes from exports to countries like USA, UK, UAE, Germany, Canada, Malaysia, Singapore, Indonesia, Belgium, Netherlands, Taiwan and Nigeria. This segment is slated to contribute more in future as company has tied-up with international original equipment manufacturers like Atlas Copco Airpower (for supply of high precision gears) and GE (for supply of marine gear boxes). Whereas here in India, investments in core sectors like power, construction, steel, cement and others are likely to be the chief propellers for demand of industrial gears and gearboxes.

On the raw materials front, approximately 55% accounts for steel rods and steel forgings, 25% for foundry and the remaining 20% for bearings, etc. Hence the recent fall in steel and other metals will reduce its input cost considerably and may give a good fillip to its bottomline in coming qtrs. And secondly, SGL is expected to maintain the profit margin as its quality products command premium in the market and moreover custom made products which enjoy higher margins constitute more than 50% of total sales. In 2005, to fund its growth plan, SGL had raised around Rs 50 cr thru FCCB route to be converted into equity @ Rs 58 per share. Out of this more than 50% is it yet to be converted or else may come up for redemption in 2010. For six months ending Sept’08, it recorded nearly 15% growth in sales and NP to Rs 126 cr and 23 cr respectively. Accordingly it may end FY09 with sales of Rs 260 cr and PAT of Rs 40 cr i.e. EPS of Rs 5 on fully diluted equity of Rs 8.60 cr having face value as Rs 1/- per share. Historically, SGL has been reporting very healthy profit margin and has an uninterrupted dividend track record for last 20 years. Even for current fiscal it may maintain 120% dividend which gives a yield of 4% at CMP. Apart from above fundamentals, SGL has about 18 acres of land in prime location of Coimbatore and depending upon the opportunities available as well as the requirements of the company, SGL may unlock value by selling this land in future. Moreover if rumors are to be believed then India’s largest windmill manufacturer Suzlon, through its subsidiary Hansen Transmission (world’s fifth largest maker of gearbox), was interested in taking a stake in SGL. If it happens, this may lead to re-rating of the company and share price may see a vertical rise. Considering all the factors, investors are recommended to keep accumulating this scrip at every decline as share price can easily double in 12~15 months.

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Small & Beautiful

Diamond Power infrastructure Ltd (95.00) 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.

Ahlcon Parenterals (13.00) - manufacture of life saving Intravenous Fluids and medical disposals, has made arrangements with several international agencies for increasing the base of export markets. It has been regularly adding many new foreign customers to its existing list and is putting special thrust to increase direct and indirect exports. It has already filed product dossiers in both the regulated as well as unregulated markets and the registration formalities with more than fifteen countries are in progress. Accordingly company has upgraded its production facilities to conform to latest GMP standards as per international guidelines and specific requirement of the giant pharma customers. Since the plant is working at 100% capacity utilization, company is undergoing aggressive expansion to almost triple the small volume parenteral capacity from 59 million units to 162 million units. At the same time, it will continue to produce 32 million units of large volume parenteral. For the latest Sept qtr, its sales increased by 15% to Rs 11.60 cr but PAT fell marginally to Rs 1.30 cr posting an EPS of nearly Rs 2 for the quarter. However for entire FY09 it may register sales of Rs 45 cr and profit of Rs 3.50 cr leading to an EPS of Rs 5 on equity of Rs 7.20 cr. With 61% promoter holding, book value of Rs 38 and Net Block of nearly Rs 30 cr, scrip is available fairly cheap at an EV of around Rs 20 cr. Only patient and long term investor should buy.

Panama Petrochem (70.00) manufactures specialty petroleum products for diverse user industries like printing, textiles, rubber, pharmaceuticals, cosmetics, power and other industrial oil. The product portfolio of the company consists of transformer oil, liquid paraffin, petroleum jelly, cable jelly, ink oil, rubber process oil and antistatic coning oil. It manufactures more than 80 product variants with major supplies to corporate’s like BPCL, Micro Inks, Alok Industries, Merck, Bayer Cropscience, JBF, Usha Martin, Cipla, government ordinance factories to name a few. Recently, company has developed a new product called mining oil for mining industry which is in its testing stage and is expected to be launched in the market soon. To maintain its growth momentum, company is in the midst of huge expansion whereby it more than doubling its production capacity to 159,000 MT from 69,000 MT currently. But most importantly the drastic fall in the crude oil prices is a big positive for the company as base oil forms the major part of input cost. Considering the encouraging performance for first two quarters, company may end FY09 with net sales of Rs 350~375 cr and PAT of Rs 15 cr i.e. EPS of Rs 32 on current equity of Rs 4.80 cr. With a dividend yield of more than 5%, book value of Rs 121 and PE multiple of merely 2x times, it’s one of the safe bet in current market sentiment.

Austin Engineering (48.00) is the leading manufacturers of all types of antifriction bearings namely ball, tapered roller, spherical roller, needle roller and thrust bearing. Despite being relatively small in size, it offers widest range of bearings from 50 gms to over half a tone. Infact it is among a handful of customized bearing manufacturers worldwide to produce bearings with 1200 mm diameter. It supplies bearings to the different category of buyers like automobiles, defence, state road transport corporation, steel plants, thermal plants, cements plants, sugar and paper industries, fan and pump industry and material handling equipments. Beating all the expectations it reported 30% growth in sales to Rs 23 cr and 60% jump in PAT to Rs 2.60 cr for the Sept’08 quarter. Incidentally, company derives 40% of its revenue from export to most quality conscious markets like USA & European countries. It has even setup 100% subsidiaries in USA and Italy, which act as marketing front-end. In near future company intends to venture into manufacturing of geared slewing rim bearings for heavy earth moving and construction equipment and special bearings for aerospace application. Moreover the recent fall in steel and other metal prices will give some relief to the company on the margin front. Thus, although there is slowdown in industrial growth and auto sector is going thru a bad phase, still this small bearing company can register a topline of Rs 75 cr and bottomline of Rs 5.50 cr. This works out to an EPS of Rs 16 on tiny equity of Rs 3.50 cr. Accumulate at sharp declines.

Smart Investments

Balaji Amines Ltd

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Bihar Caustic Ltd

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Lloyd Electric & Engineering Ltd - Rs 25.00

Incorporated in 1988, Lloyd Electric and Engineering Ltd (LEEL) was primarily setup as a backward integrated unit of Fedders Lloyd Corp, the leading group company to manufacture coils for air conditioners. Since then it specializes in the custom design and manufacture of heating and cooling coils including 'U' bend and return bend tubes for heat exchanger coils, system tubing, header line etc and sheet metal items for air-conditioning and refrigeration applications. Over the year it has emerged as India’s largest manufacturer of evaporator and condenser (E&C) coils with around 60% market share. E&C coils are critical components in AC manufacturing next only to the compressor and account for approximately 20% of the cost of manufacture. Of late, company has got itself forward integrated into lucrative business of contract manufacturing of window/split air conditioners for various multinational companies in India. Thus it has become an OEM supplier to almost all AC manufacturers in India and its clientele includes Samsung, Electrolux, Carrier, Haier, Voltas, Blue Star, LG, Hitachi, Onida, Symphony, National, Whirlpool, Diakin etc. It even provides customized AC solutions for institutional clients like railways, defence, telecom etc apart from undertaking airconditioning services for luxury buses including Volvo etc. As of now, LEEL derives roughly 60% revenue from coils, 30% revenue from contract manufacturing of AC’s and balance 10% from railways.

Presently, LEEL is operating thru three manufacturing facilities located at Bhiwadi (Rajasthan), Kala-Amb (Himachal Pradesh) and a new plant in Dehradun (Uttaranchal) with an total capacity to manufacture 14,00,000 coils & assemble 4,00,000 air conditioners. It even boasts of having technology advantage to manufacture 400 different types of coils. But the biggest positive for the company is that it’s KalaAmb and Dehradun facilities are located in tax free zones thereby giving an edge to the company over its peers. For Indian Railways - one of its major customer, LEEL manufactures roof mounted packaged AC unit for railway coaches on turnkey basis which includes designing, manufacturing, supplying, installation and maintenance. Hence it has set up service station all around India like at New Delhi, Mumbai, Chennai, Bangalore, Hyderabad, Lucknow, Jaipur, Guwahati and Culcutta specially for maintaining the AC package units installed on the railway coaches.

To maintain its growth momentum, LEEL has signed a MoU with Air International Transit Pty Limited, an Australia-based company for designing, manufacturing and supplying of AC package units to Metro Rail Corporation in India which is adding up 800 new coaches to its fold leading to sizable business opportunity. LEEL is already executing orders for Delhi metro and considering the first mover advantage expects to get a substantial order from the upcoming metro project in Mumbai, Bangalore & Hyderabad. With this tie up, company is also exploring the export potential in air-conditioning of Metro Rail coaches in developed countries. Towards its mission to emerge as world’s No 1 coil manufacturer and increase its global presence, LEEL in May 2008 acquired a company called Luvata in Czechoslovakia, which is one of the top five leading manufacturers of coils serving the heating, ventilation, air conditioning and refrigeration (HVACR) industry in Europe with market share of 5% in free coil market i.e. non captive segment. This acquisition for an undisclosed sum is expected to bring in significant business synergies in terms of cost efficiencies, technology absorption etc. In line with its expansion & modernization plan, LEEL has planned a capex of Rs 20 cr at Luvata for the current fiscal.

With the increase in disposable income, change in lifestyle and drastic fall in prices, demand for air conditioners both in retail & institutional segment is rising at healthy pace. Secondly with increased government spending on railways, metro rail expansion, growing contract manufacturing business and huge export potential, the future prospect of LEEL looks promising. On the other hand, although the recent fall in copper, aluminium and other metal prices are positive for the company, but considering the LEEL’s cost plus margins model, it may not improve its profit margin. Financially, to fund its growth plan LEEL has issued 50 lakh convertible warrants @ Rs 225 per warrant. However due to current market sentiment, it’s but obvious that warrant holders will not opt for conversion. Meanwhile for H1FY09, sales drop by 5% to Rs 309 cr but PAT fell sharply by 40% to Rs 17.90 cr. Accordingly on a standalone basis it may clock a turnover of Rs 650 cr and NP of Rs 30 for FY09 leading to an EPS of Rs 10 on current equity of Rs 31 cr. As company hasn’t made the Luvata quarterly result public, its difficult to say whether consolidated nos are better or worst against standalone. And since marketmen expect the Luvata acquisition to be a drag on LEEL’s financial its share price has been hammered down mercilessly to 10% from a high of Rs 220 in Jan’08. Although, in short term LEEL may take a hit of higher interest cost due to Luvata acquisition but in long term it will prove beneficial for the company. Investors are strongly recommended to buy at current levels as it can turn out to be a multibagger if held for 3~4 years.

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