STOCK WATCH

Shanthi Gears (32.00) 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. Remarkably, it 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. For six months ending Sept’08, it recorded nearly 15% growth in sales and NP to Rs 126 cr and 23 cr respectively. Incidentally, 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. 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. 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

Elecon Engineering (30.00) is a leading manufacturer of bulk Material Handling Equipment (MHE) and Asia’s largest producer of industrial gear with 26% market share in India. For more than five decades, it 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. With a strategy of diversification, last fiscal company started a new business of setting up of Wind Turbine Generator (WTG) farms and manufacturing of WTG gear boxes. It has 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. As on 30th Sept 2008, it 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. On the back of satisfactory H1FY09 nos, 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. Moreover the promoters are constantly buying shares from open market to increase their stake thru creeping acquisition. A solid bet.

Bharati Shipyard (60.00), 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 first Indian player to bag an order of an oil rig. However, the shipyard sector is going thru rough phase as Baltic freight index has crashed dramatically and no shipping company is placing fresh order for ships. On the contrary, there is the great risk of order cancellation if the current situation persists for longer duration. Secondly the crude oil prices have also fallen substantially forcing the oil companies to reduce their E&P activities. Meanwhile, company has 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. Although company hasn’t got any order cancellation, still it may have to renegotiate some orders with lower realization. Due to slump in business, it has slowed down its Greenfield expansion and other capex plan. Notably, 50% of its FCCB has already been converted into equity and the balance FCCB of more than Rs 200 cr may come up for redemption in Dec 2010. For FY09, company 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 seems all the negative has already been factored in the share price and technically also scrip seems to have bottomed out.

Till now cement industry was facing double whammy with falling cement prices and rising input cost. Now, although the input cost have soften but at the same time demand has also taken a hit due to slowdown in construction activities. Despite this JK Lakshmi (30.00) appears to be one of the safest & cheapest bet in current sentiment. It has recently expanded its production capacity to 3.65 million TPA and is in the midst of taking it further to 4.75 million tonne by end of this fiscal. The recent fall in coal and pet coke prices augurs well for company as it has fully stabilized the working of the 36MW captive thermal power plant. To maintain its margin, company has increased the sale of blended cement which now constitutes more than 75% of total sales. Secondly it is also constantly expanding its RMC business and currently has a total of 9 RMC plants in operation with an overall production capacity of 5.58 lacs cu.mtr. Depending upon the market situation, company is also contemplating to setup a new cement plant in Chattisgarh with a capacity of 2.7 million tonne of cement. Last year company got nearly Rs 40 cr on allotment of 41 lac shares @ 97.50 Rs against convertible warrants. Incidentally, company has already posted an EPS of Rs 11 for H1FY09 and is expected to end FY09 with sales of Rs 1050 cr and PAT of Rs 85 cr i.e. EPS of Rs 14 on equity of Rs 61.20 cr. However, a huge of debt of Rs 700 cr on its books is a cause of concern.

Small & Beautiful

Bharati Shipyard (60.00), 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 first Indian player to bag an order of an oil rig. However, the shipyard sector is going thru rough phase as Baltic freight index has crashed dramatically and no shipping company is placing fresh order for ships. On the contrary, there is the great risk of order cancellation if the current situation persists for longer duration. Secondly the crude oil prices have also fallen substantially forcing the oil companies to reduce their E&P activities. Meanwhile, company has 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. Although company hasn’t got any order cancellation, still it may have to renegotiate some orders with lower realization. Due to slump in business, it has slowed down its Greenfield expansion and other capex plan. Notably, 50% of its FCCB has already been converted into equity and the balance FCCB of more than Rs 200 cr may come up for redemption in Dec 2010. For FY09, company 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 seems all the negative has already been factored in the share price and technically also scrip seems to have bottomed out.

Supreme Infrastructure’s (28.00) 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. A decent buy for agressive investors.

From a high of more than Rs 1000 early this year, share price of KLG Systel (70.00) has become one fifteenth and is still hitting new lows. Company specializes in offering technological solution for entire business life cycle i.e. right from concept and creation, through plant design, project execution and management operations & optimisation to expansion/ revamp. It also provides on-line IT solutions to distribution utilities, using its self-developed software Vidushi, SG61 Technology and solution for determining the transmission & distribution losses, fixing the areas of power theft, on-the spot billing & cheque collection, increasing revenue collection efficiency of the utilities and addressing consumer grievances. Recently it has demerged the power systems solutions business into a new subsidiary named KLG Power in which IBM group company has invested Rs 12 cr for taking 1.20% stake, thereby putting the valuation of KLG Power Ltd to whopping 1000 cr. Ironically against this, KLG systel - the parent company which is holding the rest 98.80% is available at a market cap of Rs 90 cr. For FY09 on a standalone basis it is expected to clock a turnover of Rs 240 cr and profit of Rs 30 cr i.e. EPS of Rs 24 on current equity of Rs 12.60 cr.

Till now cement industry was facing double whammy with falling cement prices and rising input cost. Now, although the input cost have soften but at the same time demand has also taken a hit due to slowdown in construction activities. Despite this JK Lakshmi (30.00) appears to be one of the safest & cheapest bet in current sentiment. It has recently expanded its production capacity to 3.65 million TPA and is in the midst of taking it further to 4.75 million tonne by end of this fiscal. The recent fall in coal and pet coke prices augurs well for company as it has fully stabilized the working of the 36MW captive thermal power plant. To maintain its margin, company has increased the sale of blended cement which now constitutes more than 75% of total sales. Secondly it is also constantly expanding its RMC business and currently has a total of 9 RMC plants in operation with an overall production capacity of 5.58 lacs cu.mtr. Depending upon the market situation, company is also contemplating to setup a new cement plant in Chattisgarh with a capacity of 2.7 million tonne of cement. Last year company got nearly Rs 40 cr on allotment of 41 lac shares @ 97.50 Rs against convertible warrants. Incidentally, company has already posted an EPS of Rs 11 for H1FY09 and is expected to end FY09 with sales of Rs 1050 cr and PAT of Rs 85 cr i.e. EPS of Rs 14 on equity of Rs 61.20 cr. However, a huge of debt of Rs 700 cr on its books is a cause of concern.

Genus Power Infrastructure Ltd - Rs 76.00

Founded in 1994 Genus Power Infrastructure Ltd (GPIL) erstwhile Genus Overseas Electronic Ltd is amongst the leading integrated metering solutions' providers and the pioneer in implementing AMR (Automatic Meter Reader) technology. It manufactures wide range of high-end programmable multi-functional intelligent single phase & three phase electronic meters with in-built advanced security and anti-tamper features such as AMR enabled meters, trivector meters, panel meters, time of the day meters, audit meters, etc. But importantly, over the last few years GPIL has significantly transformed itself from only a meter manufacturer to an entrenched power infrastructure player. It now derives more than 50% revenue from EPC power T&D projects where it provides absolute solutions for power transmission & distribution system. As a step forward, GPIL has also launched IT enabled distribution transformer metering system, feeder monitoring and management system, smart street light management system with value added software application for providing end to end solutions for energy management. Today, GPIL operates in following four verticals.

· Metering Solutions: GPIL deals in all types of electronic meters such as residential meters, industrial meters, agricultural meter, substation meters, audit meters, grid meters, group meters, special meters (prepaid / rail mounted) etc. It specializes in providing AMR solutions for comprehensive billing using PLCC, RF, GSM and GPRS technologies which ensures drastic reduction in power pilferage, less AT&C losses, effective load management, improvement in quality of power supplied, customer satisfaction and maximization of revenue generation.

· Engineering Construction & Contracts: GPIL has vast technical expertise for commissioning new substations (design, engineer, supply, installation, erection, testing and commissioning sub-stations) or working out capacity augmentation, renovation and modernization of existing substations. Being an EPC contractor it also executes turnkey T&D projects like setting up transmission towers, execution of civil work, laying of cables, installation of transformers etc. Company also undertakes rural electrification projects, energy accounting and auditing at all distribution levels, comprehensive billing solutions for utilities etc

· Power Backup Solutions: GPIL boast of successfully introducing most advanced Sure Sine Wave inverter technology in India. Its revolutionary ASIC technology customizes wave form needed by different appliances hence ensuring 100% of their safety. It makes several inverters in the range of 400 VA to 100 KVA and for high load electronic system, it provides home UPS, online UPS and high frequency & line interactive UPS in the range of 3 KVA to 100 KVA. Although on a small scale, GPIL has also forayed into renewable energy segment with products like solar panel and solar water heater. Getting itself backward integrated and to offer complete power backup solutions, it is contemplating to launch a full range of batteries (lead acid, tubular) under the “GENUS” brand name.

· Hybrid Microcircuits: GPIL manufactures superior hybrid microcircuits which are used in all electronic components and find vast application across all the industries. The bulky printed circuit boards are becoming outdated and are now aggressively getting replaced with miniature hybrid microcircuits. Company has advanced design software such as VISULA, OrCAD for design of hybrid microcircuits and PCBs.

GPIL perhaps has one of the biggest manufacturing units of energy meters and power electronics in the country with its two plants located at Jaipur (Rajasthan) and Haridwar (Uttranchal). In order to sustain the growth momentum, last year company has set up a new facility at Alwar (Rajasthan) for manufacturing of poles, distribution transformers, etc. with an investment of Rs 50 cr. It also entered into two joint ventures in Brazil to manufacture electronic energy meters & provide state-of-art AMR technology. Meanwhile it continues to export its product to over 20 countries and is now focusing meter export to SAARC, Middle East, African and Latin American countries, where power reforms are taking place in a big way. Thus GPIL has become a global player with manufacturing facilities in India & Brazil, marketing offices in Singapore & USA and a full fledged sourcing office in China.

As of now, GPIL has an order book position of more than Rs 700 cr which is 1.5x times its FY08 turnover. Besides it has participated in tenders of more than Rs 6000 cr, out of which it is already a ´L1´ bidder in tenders worth Rs 1400 cr. Thus its order book will keep ticking as an when the order gets confirmed. Moreover, with continuous thrust of govt on power sector reforms through its various programmes, schemes, policies and regulations the future prospects of power sector looks very encouraging. Ironically, during last year company has raised Rs.84 crore by way of issue of 15 lac equity shares @ Rs 560 per share on preferential basis to fund its organic and in-organic growth and long-term working capital requirements. After this, share price went up to hit a high of Rs 1000/- in Jan’08 but has now been slaughtered down by 90% to sub Rs 100 levels. Considering its encouraging performance for Sept’08 and H1FY09, GPIL may report sales of more than Rs 500 cr and PAT of Rs 35 cr on conservative basis. This translates into EPS of Rs 24 on diluted equity of Rs 14.80 cr. Although GPIL has a debt on higher side and scrip may continue to witness distress selling from Citigroup, Morgan Stanley & Merrill Lynch, still long term investors are recommended to buy at current levels as share price can double in 15~18 months.

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Smart Investments

Madhucon Projects Ltd
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Shanthi Gears Ltd
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Bihar Caustic & Chemicals Ltd - Rs 28.00

Bihar Caustic & Chemicals Limited (BCCL) was incorporated in 1976 as a joint venture between the Aditya Birla Group and the Bihar State Industrial Development Corporation, primarily with the objective of catering to the caustic soda requirements of Hindalco and to contribute towards the economic development of the backward region of Palamau district in Jharkhand. Today, it is among the leading caustic soda producer in the northern and eastern region of the country. Apart from caustic soda it also produces liquid chlorine, hydrochloric acid, sodium hypochlorite, compressed hydrogen and has recently ventured into aluminum chloride. In India, about 45% of the chemical industry depends upon the caustic soda industry as essential inputs for a host of industries like soap and detergent, aluminum, paper & newsprint, fibre, glass, tyre, chemicals & petrochemicals, pharmaceuticals, water treatment, dyes, textiles, oils, etc. However being a subsidiary of Hindalco Industries, BCCL is having an added advantage of assured off-take of caustic soda by the parent company. It also has a hydrogen bottling facility which provides an additional stream of revenue.

In early 2006, BCCL shifted the manufacturing process of the plant from its earlier mercury technology to the latest energy efficient and environment friendly state-of-art membrane cell technology. Simultaneously it also expanded is caustic soda production capacity by 50% from 150 TPD to 225 TPD. Last fiscal it again increased the capacity by 20% to 265 TPD by addition of electrolysers as well by debottlenecking. So presently its plant boast of having an installed capacity of 265 TPD of caustic soda, 200 TPD of liquid chlorine, 130 TPD of hydrochloric acid, 150,000 Nm3/day of compressed hydrogen and 3 TPD of sodium hypo chlorite. Well in order to gainfully utilize the additional chlorine (by product) produced after caustic soda expansion, BCCL commissioned an aluminum chloride plant from June’07. This plant has a capacity of 12000 TPA and has produced around 5200 tonne of aluminium chloride for last fiscal. Aluminum chloride is basically used as an input for manufacturing of aluminum. Secondly, BCCL has also set up a 25 TPD stable bleaching powder (SBP) plant as a value added product for chlorine utilization. This plant has also started production of about 25 tonne per day with optimum quality as per international standard. With both these new products namely aluminum chloride and bleaching powder, company is estimated to boost its topline by Rs 40~45 cr per year. Secondly, as caustic soda production is power intensive, BCCL has put up its own 30 MW coal based captive power plant due to which its energy costs are lower than its peers. Although company is vulnerable to caustic soda price movement, but with Hindalco being its parent company & biggest customer, this is relatively a safer bet.

To maintain its growth momentum in future as well, BCCL is now in the process of further augmenting the capacity of its Caustic Soda Plant from 265 TPD to 300 TPD at a capital investment of Rs 30 cr. The requisite order has already been placed and the expanded capacity is scheduled for commissioning by end of current fiscal. Fundamentally, BCCL is doing quite well as for FY08 it reported 20% and 45% growth in sales and PAT to Rs 174 cr and 49 cr respectively. Notably, BCCL also enjoys the highest operating margins among it peers - even better than Gujarat Alkalies and Chemfab Alkali. However for the Sept’08 qtr it recorded a drastic fall in profit on the back of very high power and fuel cost as during the quarter the boiler of the power plant tripped due to mal functioning of Safety device. Hopefully things are back to normalcy and company is estimated to report normal profit for coming qtrs. Considering caustic soda price haven fallen much recently and assuming it to remain stable in future, BCCL can clock a turnover of Rs 200 cr and profit of Rs 38 cr i.e. EPS of Rs 16 on equity of Rs 23.40 cr for FY09. To highlight the importance of BCCL being a Aditya Birla group, it will be soon renamed as Aditya Birla Chemicals (India) Ltd. So despite belonging to such a reputed group and having strong fundamentals like high profit margin, low debt equity ratio, huge reserves, good dividend yield, consistent growth etc, scrip is poorly discounted at P/E multiple of less than 2x times and EV/ EBIDTA of 2x times. There is also a possibility of BCCL getting merged with Hindalco industries. But if this happens, the true value of BCCL wont be unlocked, as the merger ratio will more favorable to the parent rather than subsidiary. Still investors are recommended to buy at current levels as scrip can easily double within a year.

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