STOCK WATCH

For the latest Dec’08 quarter, Tilaknagar Industries (75.00) registered 50% growth in sales to Rs 63 cr and 30% increase in profit to Rs 6 cr. Even for nine months ending Dec’08 its sales is up by 45% to Rs 152 cr and PAT has increased by 30% to Rs 14 cr posting an EPS of Rs 25 for the first three quarters. Company is basically engaged in manufacturing, marketing and selling of Indian Made Foreign Liquor (IMFL) encompassing the brandy, whisky, gin, vodka and rum segments. It derives more than 60% revenue from whisky and nearly 35% from brandy. As a part of its growth strategy, company is in the midst of doubling its capacity in Shrirampur, Maharashtra from 50,000 liters of alcohol per day to 1,00,000 liters of alcohol per day, together with investments in cost saving equipments. The entire project is expected to be financed by a capital outlay of Rs. 70 cr. Notably, company is present in 15 states with 19 operating units. Last year it took over Surya Organic Chemicals in Karnataka and Prag Distillery in Andhra Pradesh. Besides this, it has 4 lease arrangements and 12 tie-up arrangements across for carrying out manufacturing and bottling activities, ensuring proximity to large markets. Company had issued 45 lac warrants to promoter group @ Rs 157 which may simply lapse by May 2009 considering the CMP. It may end current year with sales of Rs 210 cr and PAT of Rs 18 cr i.e. EPS of Rs 31 on current equity.

Last week Indag Rubber (20.00) came out Dec qtr nos as per expectation. Its sales were marginally down to Rs 20 cr but NP fell by 50% to Rs 1.30 cr posting an EPS of Rs 2.50 for the quarter. Its operating margin stood at 10% against 15% last year. Accordingly for nine months ending Dec’08 it has earned a net profit of Rs 4.50 cr on sales of Rs 57.50 cr. Thus it has already clocked an EPS of Rs 9 till date. Company is one of the reputed players in tyre retreading business. Company’s margin has been affected due to unprecedented rise in prices of basic raw materials particularly poly butadiene rubber, natural rubber, carbon black and rubber chemicals. Due to high prices of tyres, retreading of tyres has become all the more necessary as tyres retreaded with quality material and retread process give about the same mileage as new as new tyres, at a much lower cost per mile and are environmentally friendly. Of late the raw material prices have come down and once the company start reporting healthy margin its share price will shoot up sharply. Meanwhile for FY09 on a conservative basis it may register sales of Rs 75 cr and profit after tax of Rs 4.50 cr only i.e. EPS of Rs 9 on equity of Rs 5.25 cr. A good bet for medium to long term.

In contrast to industry estimates, JK Lakshmi (40.00) has posted encouraging result for the Dec qtr. Sales grew marginally by 5% to Rs 297 cr and NP declined by 8% to Rs 56 cr. However it posted a healthy OPM of 26% for the quarter and the average margin for first three quarters works out to 23%. Notably it has already earned an EPS of Rs 20 for nine months ending Dec 2008. Company 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. For FY09, now it is estimated to report a turnover of Rs 1125 cr and profit of Rs 135 cr which leads to an EPS of Rs 22 on current equity. Although experts are still apprehensive about the demand supply scenario going forward, investors can buy it as a contrarian’s bet for medium term. At the same time, a huge of debt of Rs 700 cr on its books is a cause of concern.

Yuken India (60.00) is one of the reputed manufacturers of power saving hydraulic pumps & valves which are very popular in heavy engineering industry as effective means of automation and hence find extensive use in various key sectors like machine tools, material handling equipment, construction machinery, drill rigs, automobiles, defence, steel, power & cement plants, plastic machinery etc. Besides it also manufactures complete hydraulic power units as per customer specifications, cylinders, parison controllers, actuators, accumulators and power packs. Due to phenomenal demand, company has doubled its hydraulic casting products capacity to 2400 TPA and is further augmenting it to 6000 TPA within next couple of year. Besides it made a tie up with Hydrocontrols SPA Italy to produce and market state-of-the-art mobile control valves especially for agriculture, construction, earth moving and lifting machineries. Fundamentally, from the last two quarters company’s margin came under pressure due to increase in input/raw material cost and sharp depreciation in rupee. But with the recent fall in metal prices across the board, its margin will improve in coming quarters. So despite dismissal performance for H1FY09, it may end FY09 with topline of Rs 100 cr and bottomline of Rs 2.75 cr. This translates into EPS of Rs 9 on a tiny equity of Rs 3 cr. If things get better it can report an EPS of 15~20 for FY10. Share price of this MNC Associate can easily appreciate 50% within a year.

Small & Beautiful

Emco Ltd (33.00) 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 neighboring countries. Presently company has an impressive order book position of Rs 1300 cr. For the latest Sept qtr sales grew by 25% to Rs 231 cr and net profit improved by 10% to Rs 11.30 cr. Accordingly it is expected to clock a turnover of Rs 1150 cr and PAT of Rs 58 cr for FY09. This translates into EPS of Rs 10 on current equity. At a modest discounting by 8x times share price can double within a year.

Last week Indag Rubber (20.00) came out Dec qtr nos as per expectation. Its sales were marginally down to Rs 20 cr but NP fell by 50% to Rs 1.30 cr posting an EPS of Rs 2.50 for the quarter. Its operating margin stood at 10% against 15% last year. Accordingly for nine months ending Dec’08 it has earned a net profit of Rs 4.50 cr on sales of Rs 57.50 cr. Thus it has already clocked an EPS of Rs 9 till date. Company is one of the reputed players in tyre retreading business. Company’s margin has been affected due to unprecedented rise in prices of basic raw materials particularly poly butadiene rubber, natural rubber, carbon black and rubber chemicals. Due to high prices of tyres, retreading of tyres has become all the more necessary as tyres retreaded with quality material and retread process give about the same mileage as new as new tyres, at a much lower cost per mile and are environmentally friendly. Of late the raw material prices have come down and once the company start reporting healthy margin its share price will shoot up sharply. Meanwhile for FY09 on a conservative basis it may register sales of Rs 75 cr and profit after tax of Rs 4.50 cr only i.e. EPS of Rs 9 on equity of Rs 5.25 cr. A good bet for medium to long term.

In contrast to industry estimates, JK Lakshmi (40.00) has posted encouraging result for the Dec qtr. Sales grew marginally by 5% to Rs 297 cr and NP declined by 8% to Rs 56 cr. However it posted a healthy OPM of 26% for the quarter and the average margin for first three quarters works out to 23%. Notably it has already earned an EPS of Rs 20 for nine months ending Dec 2008. Company 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. For FY09, now it is estimated to report a turnover of Rs 1125 cr and profit of Rs 135 cr which leads to an EPS of Rs 22 on current equity. Although experts are still apprehensive about the demand supply scenario going forward, investors can buy it as a contrarian’s bet for medium term. At the same time, a huge of debt of Rs 700 cr on its books is a cause of concern.

Being the Asia’s largest manufacturer of air compressors, Elgi Equipment (31.00) is involved with the design, development and production of exhaustive range of electric and diesel powered, centrifugal, reciprocating, borewell, railway air compressors etc. As air compressors are used in a wide range of applications, company caters to almost all sectors of industry. Besides it also derives 20% revenue from providing total service station solutions through the supply of a range of equipment and tools for two, three & four wheelers. Ironically company deals in or manufactures more than 128 equipments generally required by full-fledged garage. However to concentrate on each business segment company is hiving off its automotive equipment business into a separate wholly owned subsidiary called ATS-Elgi Ltd. Of late to cash on its rich experience company also started offering end to end mechanical engineering solutions and contract manufacturing services of precision engineered part to clients who are looking for cost-effective, subcontracting solution. It is also looking to increase it global presence for which it has formed a subsidiary in China and has also entered into joint venture with M/s. J P Sauer & Sohn, Germany for manufacturing air compressors. For FY09 it is expected to report a topline of Rs 450 cr and bottomline of Rs 35 cr i.e. EPS of Rs 6 on equity of Rs 6.30 cr having face value of Rs 1/- per share. A screaming buy at current levels.

Gujarat Alkalies & Chemicals Ltd - Rs 70.00

Established in 1973, Gujarat Alkalies & Chemicals Ltd (GACL) has emerged as the largest producer of caustic soda in India commanding a market share of 18% in domestic chlor-alkali industry. With Caustic-Chlorine being it's prime product, company has diversified into value added products like sodium cyanide, sodium ferrocyanide, chloromethanes, hydrochloric acid, potassium carbonate, phosphoric acid (85%), hydrogen peroxide etc. Its product portfolio of 26 chemicals provides dual benefit to the company by hedging against any cyclical fluctuations in the Chlor-Alkali Industry. Presently, company derives nearly 65% revenue from chlor alkali business and the rest 35% comes from the other value-added product. Thus company cater to host of industries like textiles, pulp & paper, soaps & detergents, alumina, water treatment, petroleum, fertilizers pharmaceuticals, agrochemicals, dyes & dyes intermediates to name a few. Besides company has made its presence felt across the globe by exporting products to USA, Europe, Australia, Africa, Far & Middle East countries, China and South Asian markets. Notably, GACL is accredited with IS/ISO 9001:2000, ISO 14001:2004 and IS 18001:2000 certifications and has been ranked among the top 25 listed Companies in respect of excellence in Corporate Governance by The Institute of Company Secretaries of India for last three consecutive years.

GACL is operating thru two manufacturing facilities located at Vadodara and Dahej which have dual advantage of proximity to the raw material suppliers and the end users. Notably, all its plants are running on Mercury free Membrane Cell Technology as company has converted from traditional mercury cell technology way back in 1989. On the back of regular expansion over the years, GACL now boast of having an installed capacity of 412,550 MT of caustic soda lye/caustic potash thereby enjoying the tremendous economies of scale and becoming one of the lowest cost producer of caustic soda. Despite such enormous capacity its plants are working at more than 100% capacity utilization against industry average of around 80%. Remarkably, most of the company’s plants are integrated in such a way that part of finished product of one plant is consumed input for the other plant. As power constitutes one of the major input costs, GACL has put up a captive co-generation power plant of 90 WM in Dahej which runs on cost effective natural gas. For this it has entered into contracts for supply of natural gas & regassified LNG with M/s. GAIL and GSPC. To meet its Vadodara complex power requirement, it has promoted a joint power generation company namely GIPCL and is also setting up captive renewable wind power facility in Kutch.

To maintain its growth momentum, last fiscal GACL successfully commissioned a new 12540 TPA hydrogen peroxide plant, 16500 TPA anhydrous aluminum chloride plant & 33000 TPA caustic flaking plant at Dahej. As a step towards achieving self sufficiency in energy requirements, company has recently set up 23.75 MW wind energy farm in Kutch. Maintaining its growth strategy, company is contemplating to commission sulphate removal system, set up another 330000 TPA caustic flaker unit and undertake expansion of caustic soda plant by 16500 TPA through de-bottlenecking of existing plant at Dahej in the current fiscal. It is also looking to add another 39 MW of wind power generation capacity at Kutch. Apart from all these GACL has signed a joint venture agreement with DOW Europe GmbH for setting up a 2,00,000 TPA Chloromethanes plant at Dahej at an estimated Cost of Rs.600 Crore with 50-50 equity partnership. A JV company with Dow-GACL SolVenture Ltd. has been incorporated on 1st July, 2008 in Gujarat. It is also considering putting up 90 MW captive power plant along with hydrazine, hydrogen peroxide & polyols project. The JV is expected to start its manufacturing operations by 2011 and will market its product in SAARC countries. To summarize, GACL has planned new projects involving investments of about Rs 2,500 cr over next 3 to 4 years, to diversify, add new products, enlarge portfolio and expand its existing capacities.

Despite being one of the lowest cost producers, performance of GACL depends a lot on the prices of its product which are quite volatile due to market dynamics. Secondly it also faces threat from cheap imports although anti dumping duty has been imposed on import of products like caustic soda lye/flakes and potassium carbonate from various countries. For H1FY09, GACL has reported encouraging set of nos as sales increased by 35% to Rs 729 cr but PAT grew marginally to Rs 138 cr due to substantial fall in other income. It has already clockedan EPS of Rs 19 for first half. Last fiscal, company had got Rs.16 crore compensation for CTC phase out under Montreal Protocol and Rs.16.50 crore against carbon credit. Considering all the factors, company may end the current year with sales of Rs 1250 cr and PAT of Rs 180 cr on conservative basis. This works out to an EPS of Rs 25 on current equity of Rs 73.40 cr. Although company has taken a hit due to mark-to-market loss on derivative exposure, still its not substantial and within company’s tolerance limit. Having an gross block of Rs 2200 cr, reserves to the tune of Rs 1000 cr (Book value Rs 147), low debt equity ratio of 0.3:1, EV/EBIDTA of approx 2x times, it’s a value buy at current market cap of merely Rs 500 cr. Long term investors can buy at current levels for 50% gain in 12~15 months.

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3i Infotech Ltd
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GM Breweries Ltd
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GM Breweries Ltd - Rs 50.00

Promoted by Mr. Jimmy Almeida, GM Breweries (GMBL) was incorporated in 1981 to manufacture alcoholic liquor. Since then it has emerged as the single largest manufacturer of country liquor in Maharashtra and enjoys virtual monopoly in the districts of Mumbai and Thane. Earlier, it also used to make and market Indian made foreign liquor (IMFL) like brandy, rum, whisky etc as Pioneer Special Doctor Brandy, Hot Shot Rum and Reporter’s Choice Whisky but due to competitive market conditions, it has been concentrating on country liquor for the past few years. Its country liquor brands like GM Doctor, Tango and Punch are fast-selling and quite popular brands. However, the country liquor industry is dominated by illegal & unorganized small players to evade the high duty structure. And GMBL being the only organized & large player in whole of Maharashtra; pays 60% of its gross sales (or one can say 170% of its net sales) towards excise duty and sales tax. For FY08 it paid a massive Rs 246 cr only towards excise duty. Hence, Maharashtra govt is getting more than one fifth of the total excise duty on country liquor from GMBL alone.

GMBL’s plant is located in Thane and has the facility to blend and bottle both IMFL and country liquor. Interestingly, all products are manufactured using in-house know-how and no outside technology is being used in manufacturing. With the installation of additional bottling lines last fiscal company now has the capacity to process 12.84 crore bulk litres of country liquor per annum. However company produced and sold nearly 5.50 crore bulk litres only in FY08 which represent capacity utilization of less than 45%. This indicates that company has got huge potential to utilize the balance capacity by penetrating into interior districts of Maharashtra taking advantage of its brand image. This seems quite possible as company's products have been enjoying good brand image from the consumers for the past several years. Meanwhile, GMBL is making representations at various levels of the government to take effective steps to curb the illicit market in the interest of the industry, revenue of the state as well as the public health. For the next couple of years, company doesn’t have any major capex plan as the existing capacity is enough to cater the demand, at least for the next five years. Interestingly, till now the company has been funding its expansion plan through a mix of debt and internal accrual and hasn’t diluted its equity since its IPO in 1994.

Financially, GMBL has been doing well with cash generation of Rs 15~20 cr thru operating activities and has consistently been reporting an OPM of nearly 15% for the last 3 years. But due to considerable increase in input cost led by recent hike in prices of rectified spirit, company reported lower profit in the last two quarters. Its operating margin drastically fell down to less than 8%. Accordingly, despite reporting 15% rise in topline to Rs 101 cr its PAT declined by 55% to Rs 3.45 cr for six months ending Sept 2008. But prices of rectified spirit which shot up to Rs 35 per litre during Sept’08 has already cooled off a bit and is further slated to fall in near future. This will substantially reduce the margin pressure on the company. Thus GMBL may report disappointing nos for Dec quarter as well but it will post much better performance for FY10.

Fundamentally, GMBL is on a strong footing with a huge gross block of Rs 81 cr (net block Rs 61 cr) and reserves to the tune of Rs 36 cr. With no major capital expenditure company has a very low debt equity ratio of 1:3. Remarkably, company has been earning very high return on Capital Employed & Net Worth, which stands at 45% and 37% respectively for FY08. With 70% promoters holding, company boast of having an uninterrupted record of dividend payment from the day of listing. Incidentally, promoters have increased their stake by 2% in the last two quarters which is a positive sign. For FY09 it is estimated to register net sales of Rs 210 cr and PAT of Rs 9 cr i.e. EPS of Rs 10 on equity of Rs 9.40 cr. But for FY10 it has the potential to clock an EPS of more than Rs 15. To conclude, GMBL with a sustainable business model is trading grossly cheap at an Enterprise Value of merely Rs 60 cr. Long term investors are advised to gradually keep accumulating the scrip at sharp declines for a price target of Rs 75 in 9~12 months.

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