STOCK WATCH

SEAMEC (60.00) has beaten the estimate of all analysts, including the most optimistic one, by declaring stunning result for Dec’08 quarter. Due to the continuous deployment of its entire four vessels, it registered total revenue of Rs 104 cr and huge profit of Rs 55 cr equivalent to an EPS of Rs 16 for the single quarter. Remarkably it reported an OPM of 59% which indicates that vessels are deployed at healthy charter rates. Thanks to this quarter, it was able to record 60% growth in topline to Rs 269 cr and 30% increase in bottomline to Rs 47 cr for the year ending Dec ’08. This works out to an EPS of Rs 14 for the full year. More importantly, management is optimistic about continuous engagement of all four vessels for the full CY09. With no dry dock expected in the current year and long term contract for vessel deployments already in place, this could turn out to be a bumper year for the company. Although there is the risk/probability of order cancellation due to slowdown of oil exploration and production activities or re-negotiation in charter rate of vessels, still its worth a punt at current levels. Its not only a debt free MNC but also a cash rich company having potential to generate Rs 60 ~ 70 cr cash thru core business operation. For CY09 it can report revenue of Rs 325 cr and net profit of Rs 80 cr i.e. EPS of Rs 24. With just one more encouraging set of nos for March quarter, share price can easily double even from current levels.

Action Construction Equipment (11.00) is the undisputed leader in hydraulic mobile crane manufacturing with more than 50% market share. It also manufactures other construction equipments like mobile & fixed tower cranes, back hoe and wheeled loaders, lorry loaders, fork lift trucks etc. Lately company also ventured into and introduced new products including concrete pumps, piling rigs, crawler cranes and truck mounted cranes apart from tractors. Company supplies equipment to very big groups such as Reliance, L & T Simplex, Essar, NCC, IVRCL, Punj Lloyd, BHEL, Gammon etc. Financially company has done excellent for FY08 and reported excellent set of nos for H1FY08. However for the Dec qtr, suddenly its topline as well as bottomline fell drastically, maybe due to ongoing slowdown in construction activities. Despite this for the first three quarters it has recorded 25% increase in sales to Rs 352 cr and 20% fall in profit to 22 cr. Thus it has already clocked an EPS of Rs 2.40 till date on current equity of Rs 18 cr having face value as Rs 2/- per share. Recently, it has also signed an MOU to acquire a Chinese company. Considering the company’s leadership position and future prospect of construction equipment industry, this share can be bought at current levels for long term.

Jaihind Projects (40.00) core area of specialization & operation includes laying oil & gas pipe lines across the country. It has capability to lay pipelines from 4” to 56” in diameter thru different terrains ranging from rocky to desert and snowy to marshy land. Apart from GAIL - its biggest client, JPL also undertakes projects for ONGC, Cairn Energy, BPCL, IOC, GSPC, GSPL, Mahanagar Gas, Reliance Infra, L&T, Delhi Jal Board etc. To scale up its operation, JPL is now looking to enter the construction and laying of pipeline business in the international markets particularly in Gulf regions. On the back of excellent Dec’08 quarter nos, it has registered 75% rise in revenue to Rs 153 cr, where profit before tax shot up 230% to Rs 15 cr for the nine months ending Dec 2008. As per unconfirmed reports, JPL has bid for more than Rs 2000 cr contract apart from having healthy order book position. After taking tax provisions into consideration, company is estimated to end FY09 with topline of Rs 225 cr and bottomline of Rs 13 cr i.e. EPS of Rs 18 on current equity of Rs 7.10 cr. For FY10, it can earn a PAT between Rs 16 ~ 18 on total revenue of more than Rs 300 cr. Despite the risk of substantial equity dilution in future, investors can but this scrip at current levels.

Gujarat Apollo (55.00) is the undisputed leader and India's No.1 manufacturer of road construction & maintenance equipment. With nearly four decade of experience, it has expertise in manufacturing asphalt plants, sensor paver finisher, bitumen sprayer, rollers, kerb paver, road marking and road maintenance equipments. In order to de-risk its revenue model, last year it entered into a technical collaboration agreement with a German company to manufacture jaw crushers, impact crushers, wheeled/crawler mounted & skid mounted crushing plants, grizzly feeders, screens, conveyors, etc. It is building a brand new factory near Ahmedabad specifically for manufacturing of compaction equipment and is expected to begin production in few months. Although there are apprehensions regarding slowdown in construction activities but company is expected to be least affected due to its association with road construction activities only. On a standalone basis it may end the current year with sales of Rs 200 cr and net profit of Rs 23 cr. Although no official consolidated figures are available, still it is roughly estimated to clock a turnover of Rs 300 cr and PAT of Rs 30~32 cr on a consolidated basis for FY09. These figures translate into standalone EPS of Rs 15 whereas consolidated EPS works out to Rs 19 on equity of Rs 15.75 cr. Scrip can appreciate 50% within a year.

Lloyd Electric & Engineering Ltd - Rs 18.00

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 is expected to bring in significant business synergies in terms of cost efficiencies, technology absorption etc. In line with its goal to increase its global presence, LEEL has recently incorporated a wholly owned subsidiary namely ´Lloyd Electric FZE´ as a free trade zone establishment in RAK, United Arab Emirates.

However, the global turmoil, liquidity crunch, slowing down of world economy with most developed countries going into recession has hit all the industries across the world. And LEEL is no exception. Secondly it also has to pay for bad timing decision of making international acquisition of Luvata Czech. With plunging topline and rising interest cost, company is certainly going thru a bad phase domestically as well as internationally. Sarcastically, LEEL has neither disclosed the acquisition cost nor it is making the Luvata’s quarterly financial statement public. Else one could have evaluated the impact on the financial health of the company. No wonder, due to these uncertainties share price of the company has been decimated to sub Rs 20 levels. The company which earned net profit of Rs 55 cr from core business operation last year is now available for Rs 55 cr. Financially, LEEL’s sales fell by 15% to Rs 411 cr and PAT declined by 55% to Rs 20 cr for nine months ending Dec’08. Although the retail demand for air conditioners may remain low in the current calendar year as well, but the sharp fall in copper, steel, aluminium and other metal prices, increased government spending on railways & massive investment by Metro Rail are few of the positive factors for the company. Also not to forget, with extremely low penetration, there is tremendous demand potential for air conditioners in India over the long run. To fund its growth plan LEEL has issued 50 lakh convertible warrants @ Rs 225 per warrant. Considering the current market price, it’s but obvious that warrant holders will let it lapse in March 2009. On a standalone basis it may end FY09 with sales of Rs 500 cr and PAT of Rs 20 cr i.e. EPS of Rs 6 on current equity of Rs 31 cr. With reserves of over Rs 300 cr, Gross block of Rs 224 cr, & debt/equity ratio of 0.45x, it seems all the negatives have been factored in the share price. However, scrip may witness some panic selling as around 23 FII’s including Morgan Stanley, Bank of New York etc are still holding 25% stake in the company. Long term investors can safely accumulate this scrip during panic times to get a multibagger return in 2~3 years.

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Accurate Transformers Ltd
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Kirloskar Electric Ltd
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Kirloskar Electric Company Ltd - Rs 28.00

Established in 1946, Kirloskar Electric Company Ltd (KECL) is one of India’s leading & oldest manufacturers of electrical and power equipment. When India embarked on an indigenization drive to substitute for imports in the mid seventies, KECL took the lead in the electrical engineering sector to maintain the international quality standard. Interestingly when Indian Railways built the first of the Power cars for Rajadhani, it was KECL who brought out customized generators for tough working in coaches subjected to horizontal and vertical accelerations. With a rich experience of over six decades, KECL has even closely worked with Indian Defense establishment to take up innovative tasks requiring high degree of expertise like containerized power supply units for missile projects, power sources for application in high security communication systems etc. Thus, the main business activity of KECL is the manufacture and sale of a diverse range of electrical and electronic equipments which has been broadly divided into following three segments.

· Rotating Machines: KECL derives round about 45% of total revenue from sales of AC/DC motors, AC generators, DG sets, tractions etc. Infact it was the first company in India to manufacture AC Motors way back in 1948. Remarkably, till late nineties four out of five AC generators manufactured by the organized sector in India were made by KECL. Although company is a pioneer in supplying DG sets to Indian Army, Air Force, & Defense, it ventured into retail marketing in 2006 and offers a wide range under the brand name “BLISS”. On the other hand its traction equipment division being a key supplier to Indian Railways caters to mainline electric and diesel locomotives. Apart from above, the recent merger with Kaytee Switchgear will strengthen KECL’s capability in manufacturing of rotating machines.

· Power Distribution Equipment: With nearly half of the total revenue coming from this division, KECL boast of being the first company in India to acquire ISO 9000 certification in transformer manufacturing. It produces both power as well as distribution transformer in a wide range up to 50 MVA in 200 kV class. Besides it is among the few companies to produce several types of special transformers like furnace, flame proof as well as conventional dry type, earthing, special converter, high voltage testing, short circuit testing, nitrogen gas cushioned, cast resin etc. At the same time, its Switchgear division manufactures high voltage switchgear in the range of 3.3 to 36kV for indoor as well as outdoor applications. It even produces and supplies Circuit Breakers and Panels to a wide range of applications, from large substations to small stand-alone switching requirements of state electricity boards, utilities, power generation, mining, defense applications and industries like cement, steel, paper, textile, chemical and other process industries.

· Others: This segment constitutes the balance 5% of revenue and consists of manufacturing of other electronics and execution of projects. It makes Auxvertor, thyristor controlled Battery Charger, regenerative and non-regenerative thyristor Converters, Digital Readouts, Invertors etc. In collaboration with Toshiba Co. Ltd, Japan it manufactures a wide range of UPS from 0.5 KVA to 50 KVA which find extensive application in supplying continuous and conditioned power to all critical equipment in banking, insurance, IT & medical fields. Its Project division compliments the core business to offer a complete system of electric control and automation. It has developed expertise in design, engineering, supply, erection and commissioning of electrical switchyard upto 220kV. It also undertakes small projects of power generation thru non conventional energy sources including hydel, wind, solar, co-generation and other gas based and diesel based power projects.

KECL operates thru six manufacturing facility with five in Karnataka and one in Kolkatta. Recently, it has setup up a Greenfield plant at Kondhapuri, Maharashtra which can manufacture both vast Resin and oil filled transformer thereby enhancing the transformer manufacturing capacity significantly. Besides, to meet the growing demand from power sector, KECL has also put up a new manufacturing facility in Gurgaon Haryana for rotating machine. Last fiscal it added five new sales offices thereby taking the total count to 30 offices across India. Apart from modernization and expansion, KECL is now focusing to make bigger and larger machines/transformers where margins are pretty high. At the same time it is also thriving to increase its presence in switchgear & other electronic products. Its DG sets division which mainly caters to sectors like hospitals, telecommunication residential, utilities & industrial market has last year introduced DG sets with a capacity rating of 12.5 kVAto 25 kVA which augments its existing range of 30 kVA to 160 kVA. On the back of strong domestic demand, KECL derives less than 5% from exports; but its products are well accepted in USA, Europe, Canada, Hong Kong, Australia, China, Singapore, South Africa, Malaysia, Pakistan, Bangladesh etc.

In order to consolidate and integrate its operation, company has recently merged Kaytee Switchgear Ltd (KSL) & Kirsloskar Power Equipments Ltd (KPEL) with itself. KPEL is engaged in the business of manufacturing and selling of cast resin dry type transformers and oil filled transformers with a turnover of more than Rs 100 cr. On the other hand KSL manufactures rotating machines likes AC/DC motors, alternators, other components etc having a turnover of Rs 400 cr. Notably, KSL was actually a 74% subsidiary of KECL and all the quantity produced by it were sold to or manufactured for KECL only, under contract manufacturing / subcontracting arrangements. As a part of consideration for this merger, company has allotted 1.73 cr equity shares and 11.76 lakh preference shares of Rs. 100/- each to the shareholders of KSL & KPEL. Post merger, company has reported a topline of Rs 653 cr and bottomline of Rs 22 cr for nine month ending Dec’08. Importantly, company has reported an OPM of more than 9% for the latest Dec’08 which is quite encouraging. At the same time higher interest cost has dented the bottomline. Due to industrial slowdown, lower GDP estimates and global turmoil, KECL may not register aggressive growth in medium term but has tremendous growth opportunity in long run. For FY09 it may clock a turnover of Rs 850 cr and net profit of Rs 28~30 cr. This works out to an EPS of Rs 6 on expanded equity of Rs 50.50 cr. Due to drastic fall in metal prices and synergies of merger, KECL has the potential to improve its margin going forward and can report an EPS of more than Rs 8 in FY10. Investors are strongly recommended to buy at current levels as share price can double in 12~15 months.

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