STOCK WATCH

Despite challenging times, Aditya Birla Chemicals (50.00) has reported encouraging result for the March’09 quarter. Sales grew by 15% to Rs 55 cr and profit increased by 20% to Rs 14 cr posting an EPS of Rs 6 for the single quarter. However for entire FY09 its topline was up by 15% to Rs 204 cr but bottomline declined marginally to Rs 46 cr due to sharp fall in operating margin to 35% against 44% last fiscal. Still it posted an EPS of Rs 20 for the full year and declared 15% dividend. Company, earlier known as Bihar Caustic is among the leading caustic soda producer in the northern and eastern region of the country 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. It has also set up a 25 TPD stable bleaching powder plant and 12000 TPA of aluminum chloride unit. To maintain its future growth, company is in the process of further augmenting the capacity of its caustic soda from 265 TPD to 300 TPD at a capital investment of Rs 30 cr. 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 3x times and EV/ EBIDTA of less than 4x times. Although company is vulnerable to caustic soda price movement, but with Hindalco being its parent company & biggest customer this is relatively a safer bet.

Retail investors are disappointed to see a fall in net profit for the March quarter of Supreme Infrastructure (50.00). But infact company has reported good set of nos. Its revenue zoomed up 180% to Rs 145 cr, whereas operating profit jumped up 85% to Rs 19.50 cr. However due to high interest cost and major tax provisioning in the last quarter, its report a decline of 15% in PAT to Rs 4.80 cr. Despite this, for the full fiscal its bottomline has increased by impressive 40% to Rs 27 cr on 145% higher sales of Rs 383 cr. Thus company has posted an EPS of Rs 19.50 for the FY09 which means scrip is currently trading at a P/E ratio of less than 3x times. Company’s 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. Lately company has bagged new orders to the tune of Rs 225 cr which include construction of flyover in Jaipur, widening of road and construction of bridge across the creek in Thane district, which is first of its kind for the company. Importantly, company has its own captive ready mix concrete plant, asphalt mix plant, quarrying and crushing unit & paver block manufacturing unit. With massive order in hand of more than Rs 600 cr and capex plan to double its RMC capacity to 300 cum. per hour, the future looks promising.

For the latest March’09 quarter, Tilaknagar Industries (130.00) doubled its sales to Rs 86 cr whereas net profit increased by 35% to Rs 7 cr leading to an EPS of Rs 12 for the single quarter. Accordingly for full fiscal, it recorded 65% increase its sales to Rs 240 cr and 30% rise in profit to Rs 21 cr i.e. EPS of Rs 37 on current equity. It declared 25% dividend for FY09. 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 this month considering the CMP. Recently, company raised Rs 8 cr thru issue of convertible preference shares @ Rs 94 per share. Sell now and buy later below Rs 100.

Mazda Ltd (58.00) has reported very encouraging result for the March’09 quarter as its sales shot up 45% to Rs 24 cr whereas NP jumped up 55% to Rs 2.70 cr. For the full year ending March 2009, it recorded 30% growth in net sales to Rs 80 cr & 40% rise in PAT to Rs 9.25 cr thereby posting an EPS of Rs 22 on tiny equity of Rs 4.25 cr. Company is among the few engineering companies in the world, manufacturing very specialized, high technology and critical equipments for various industries like power, refineries, fertilizers, chemicals, nuclear, sugar, paper, food, pharma etc. Broadly its product profile is segmented into vacuum system, valve division, air pollution control equipment, crystallizers and evaporators. Notably, it has a technical collaboration with world renowned Croll-Reynolds Inc. USA, who holds 12% stake in the company. Besides engineering, it also has a Biotechnology division dealing in carbohydrates, rare sugars and miscellaneous bio-chemicals. Lately, it has diversified into business of manufacturing and exporting soft drink drink concentrates, essence, jams etc in a small scale. Fundamentally, company is on a strong footing with very low debt equity ratio and good reserves. At an Enterprise value of Rs 30 cr scrip and at a P/E multiple of less than 3x times, scrip is trading fairly cheap. Keep accumulating at sharp declines.

Panama Petrochem Ltd - Rs 90.00

Established in 1975, Panama Petrochem Ltd (PPL) is one of India’s leading manufacturers and exporters of petroleum specialty products. Infact it manufactures more than 80 product variants used across 6-7 broad industry segments. 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 even has collaboration with Lubcon, Germany for distribution of their specialized products as well. Thus PPL caters mainly to industries like power, cosmetics, pharma, cables, resins, textiles, rubber, and other industrial oil. The liquid paraffin and petroleum jelly forms the core ingredient and base for most of the pharmaceutical & cosmetic products such as body lotions, hair care products, hand and skin creams, lip-care sticks, foot creams apart from all the dermatological preparations. On the other hand company’s other major product i.e. transformer oil is manufactured from imported base stocks for power and distribution electrical apparatus such as power transformers, capacitors, switch fears, circuit breakers and allied equipments. PPL’s clientele includes BPCL, Micro Inks, Alok Industries, Merck, Cipla, Government Ordinance factories to name a few. The products are usually manufactured according to the client’s individual specifications, thus getting lot of repeat orders from the clients. It also caters various power generation boards and atomic research centers with their required products.

PPL has four manufacturing facilities spread across Ankleshwar (Gujarat), Daman (Union Territory), Marol (Mumbai) and Taloja (Maharashtra) with total combined installed capacity of 69000 MTPA. Apart from being a renowned company domestically, PPL also regularly exports to different countries like USA, UK, Europe, Middle East, Australia, African Sub-continent, South East Asia etc. Currently it derives round about 25% to total revenue from exports. In order to take the benefit of favorable dollar rate and lucrative margin, company is trying hard to increase its export revenue and presence in major markets like USA, Africa, Europe and Asia. Here in India, its Daman plant was enjoying tax exemption which ceased during last year. Hence PPL is contemplating to set up a Greenfield plant at another tax free zone like Uttarakhand or Baddi. At the same time, it has also gone for an inorganic growth and has acquired a related private company called “Mobil Petrochem”. It has finalized the share swap ratio as one share of PPL for every two shares held in Mobil Petrochem. It has even got the court approval and is proceeding with allotment and merger formalities. As the details of Mobil Petrochem is not available publicly - being a pvt company, its difficult to say whether the merger is EPS accretive or dilutive. But it seems the promoter holding may go up post merger. Meanwhile, company has developed a new product called Mining Oil which is still in its testing stage and is soon expected to be introduced in the market for the consumption in the booming mining industries.

Being a petroleum product company, the major raw material consumed by the company is Base Oil which is imported. And notably, raw material constitutes 90% of the total production cost. Thus the drastic fall in crude oil prices helped the company to some extent to improve its operating margin by 300 basis point to above 12% from 9% last fiscal. The price of company’s product also fell accordingly, but still it has reported encouraging performance till date. It is yet to declare it March’09 quarter nos. But even for nine months ending Dec’08, it has clocked whopping 70% jump in sales to Rs 299 cr but only 40% increase in PAT to Rs 18.50 cr due to higher tax provisioning. Hence it has already clocked an EPS of Rs 39 till date on current equity of Rs 4.76 cr. So for the entire FY09 it may report sales of Rs 375 cr and PAT of Rs 22 cr on conservative basis i.e. EPS of Rs 46 on current equity. However the equation may change post merger from Q1FY10. In the meantime company is expected to declare 50% dividend which gives a yield of 5% at CMP. Investors can buy at sharp declines

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MIC Electronics Ltd - Rs 28.00

Established in 1986, MIC Electronics Ltd (MIC) is a pioneer in design, development, manufacture & supply of true color LED Video Displays, LED Lighting products and solution. Infact, it is the only integrated LED display manufacturer in India with design-to-manufacture capabilities. Hence it has virtually a monopoly in LED business in domestic market. An LED (light-emitting diode) is usually a small area of less than 1 mm2 light source, often with optics added directly on top of the chip to shape its radiation pattern and assist in reflection. The technology behind LED is based on semiconductor technology, which is also the basis of modern computers. Importantly, MIC has collaboration with Nichia Corporation Japan, which is the global leader in LED technology with 33% market share worldwide. Apart from LED business, MIC also deals in high end electronics and telecommunication equipments and is also engaged in development of telecom software. Presently, company is deriving more than 70% of revenue from LED division where as the balance comes from electronics and telecommunication division. Notably, the company is more of embedded software and solutions company and less of an hardware company as it imports most of its hardware requirement. Based on the application, MIC has broadly segmented its operation into following three categories

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  LED Display: This segment comprises the development, production and sales of video displays, text, graphic & animation displays. Its outdoor and indoor portfolio ranges from display sizes of 90 inch to video walls/large format display size of 512 inch. LED displays are immensely popular because of their programmability, making targeted marketing and interactive interfacing possible. Like websites, they can be networked and updated remotely with fresh and topical content. These displays find vast application in outdoor/indoor advertising, railways, malls, banks, sports events, live entertainment, award functions & stock exchanges. Company even offers LED displays for rentals during election rally meetings, music concerts and weddings on a small scale. It has launched a huge 120 inch LED TV for close viewership, primarily targeting malls and corporate boardrooms. Other products include LED/LCD based 3D display systems.. Remarkably, it has introduced "Mobile LED Video Display" concept in INDIA and has its premier product named as 'DigiWheel' which is now available in trailer model and truck model. Company is also into LED signage business where, display is used to show the direction of arrows, kms, distance etc. It is already executing an order for LED Variable Message Signs (VMS) for highway projects in Andhra Pradesh & Tamil Nadu worth 8 cr.

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  LED Lighting Solutions: LEDs represent the most energy and cost-efficient lighting source, consuming 10 times less power than CFLs (compact florescent lamps). Moreover the annual running cost of LED lighting is 50% lower than CFLs, with no replacement required for a minimum 11 years. With increasing volume and improving technology the manufacturing cost of LED is coming down sharply. So undoubtedly this is the future technology for lighting solutions. As per estimates, by 2025 more than 50% of the existing lighting will be replaced by LED lighting around the world. With the first mover advantage, MIC is targeting grid-based and non-grid based lighting, rural and urban street lighting, solar-powered lights, commercial and residential lighting. It is also looking to mark its presence in automotive/aircraft cabin & brake lights, road traffic signal lights etc which is a huge market in itself. Besides Indian railway offers a massive opportunity as LED lighting can be used to replace coach lighting, signal lighting, door and path way lighting, platform lighting, yard lighting, emergency lamps, railway colony lighting etc. Importantly, MIC has provided the LED lighting for all the aero planes of Kingfisher airlines, which proves the capability and growth potential of the company.

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  Electronics and Telecommunication Solutions: This division provides software solutions as well as electronic hardware and products to telecom service providers. It has diversified products including the digital loop carrier on optical fibre on synchronous digital hierarchy ring, broadband DLC for triple play (voice/video/data) applications; CDMA/GSM based WLL terminals and phones, hand-held computers with in-built GSM/CDMA modems. The company is importing most of these products, but provides the after sales and maintenance service. To compliment the hardware it also provides various software services like interconnecting billing service, CDR data collection systems, teleconference solutions, prepaid calling card services, automatic payment reminder services, automatic telephone bill enquiry, fax services and such other I- Computer technology services. However MIC is gradually reducing its focus on this business vertical, in view of its low margins and extended receivables cycle. Couple of years back it represented around 65% of total revenue, but offlate its share has come down drastically to 20~25 %.

To become a true global player, MIC is also enhancing its presence in the international market and has a direct presence in the North American, Korean and Australian markets thru wholly owned subsidiaries. It also has arrangement with local importer in Middle East & South Africa. Moreover along with Latin America Futbol Corporation, USA a sports management company, MIC has formed a 50:50 joint venture company called Sports LED Media (SLM), which has won a contract for LED Display in 50 stadiums in Latin America. Importantly, it is estimated that SLM would buy LED screens from MIC for US$ 50 million over next couple of years. MIC is in talks with Lamar Advertising, the second largest US outdoor advertising company to provide end-to-end display screen solution. Earlier it entered into a strategic partnership with LEDSTAR of Canada to deploy Intelligent Transportation Systems (ITS) and LED Variable Message Signs (VMS). Recently MIC has also entered into an MOU with a renowned lighting company in Italy which enabled the access to European markets and others like Russia, Morocco & Eastern European countries. To increase its market share and cash on the huge opportunity, MIC commissioned a state of the art fully automated manufacturing line at Hyderabad on 29th October 2008. With this EOU facility, company has doubled the production capacity of LED display to 2400 modules from 1200 modules earlier. Company is further contemplating to take its total capacity to 3600 modules. To maintain its growth momentum, MIC is setting up of manufacturing unit for LED true colour displays, LED lighting solutions and solar based LED lighting products at Fab City SEZ near Hyderabad for which it has already been allotted 50 acre of land on lease.

Lately, MIC got the RDSO (Research and Design Standard Organization) approval for its unique & innovative video cum train info display system thereby becoming the first and only company to get such approval. This fully automatic system takes data using satellite, displays station specific train information and simultaneously makes the announcement. Notably, railways have the aggressive plan to install 100 such boards in A & B category stations. Besides, increased focus of the Indian Railways on advertising has created a significant business for the display market. They would be coming out with a tender for LED display at 100 stations i.e. 600 screens. MIC has already made presentations to the Railways and is expected to get good order. Earlier, it received an order and license from Delhi Metro for installation and maintenance of 25 nos of full color day and night LED Video display boards at 8 metro stations worth Rs 45 cr. On the other hand, company has identified the market of worth more than Rs 1000 cr for LED lighting in railways. It is negotiating in a big way with the railway department to allow the LED lights in all the long distance trains. MIC also would be investing about Rs 30 cr on 60 screens which could take the rental income to Rs 3 cr per month. Company is also entering the entertainment business through self owned digital theme parks and theatres.

To conclude, demand for the LED based products is expected to be shoot up significantly in the coming years on account of growing spending by the advertising agencies (specially outdoor), Indian railway, rural electrification, malls, airports, event managers among the others. And MIC with proprietary technology and increased capacity is all set to cash on this opportunity. Thus, although it’s a two decade old company, but the space in which it is operating is at nascent stage. Operationally, company has reported dismissal performance for the last two quarters due to general economic slowdown. Accordingly for the nine months ending March 2009, its revenue has dropped 15% to Rs 197 cr but still PAT has improved by 25% to Rs 53.50 cr. This is because company has reduced its high volume low margin telecommunication business and is now focusing solely on LED based segment. Thus it clocked an OPM of 35% in the current year against 23% in the corresponding previous year. To fund its expansion plan, in July 2008 MIC issued 1.75 cr convertible share warrants at Rs 122 each on preferential basis and has already collected Rs 38 cr (18% instead of 10%). However looking at the current market price and general sentiment, warrant holders may not opt for conversion. But being highly under leveraged with a debt equity ratio of 0.1x times, MIC can comfortably raise debt to fulfill its requirement. Conservatively for FY09 ending June’09 it is estimated to clock a turnover of Rs 260 cr and PAT of Rs 65 cr on a standalone basis. This works out to an EPS of Rs 6.50 on current equity of Rs 20 cr having face value as Rs 2/- per share. The estimated fully diluted EPS works to Rs 5. Thus a company operating in such a fast growing industry and having a high OPM, NPM, ROCE & ROE is trading reasonably cheap at an EV of Rs 350 cr. On the flip side, high debtors indicate company’s incapability to manage receivables. Ironically, scrip is trading just at its April 2007 IPO price of Rs 30 (adjusted for Rs 150 with face value as Rs 10) Thanks to the global turmoil and vertical crash in stock market, its share price has become one tenth in matter of few months. Investors are strongly recommended to buy at current levels for a price target of Rs 60 within 12 months.

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MIC Electronics Ltd
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