STOCK WATCH

Although Mazda Ltd (60.00) is not expected to record spectacular growth in coming year, still it’s a value buy at current levels. For FY09 it reported 35% rise in sales to Rs 80 cr and 40% increase in PAT to Rs 9.25 cr thereby posting an EPS of Rs 22 for FY09. 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. However for Q1FY10 it recorded 15% fall in sales and profit to Rs 15 cr and 1.70 cr respectively. Accordingly it may end FY10 with sales of Rs 80 cr and profit of Rs 8.75 cr i.e. EPS of Rs 20 on tiny equity of 4.26 cr. 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 3x times, scrip is trading fairly cheap. Considering the market sentiment, one can even buy for good short term gains as well.

Accurate Transformers (80.00) is engaged in manufacturing of power as well as distribution transformers ranging from 1 MVA to 40 MVA - in up to 220 KV class. It is looking to venture into manufacturing of higher capacity power Transformers of 160 MVA in near future. It has expertise to carry out rural electrification project which involves the complete setting up of electricity in remote areas including the laying of lines, poles and substations. As per management company is working at very low capacity utilization due to high working capital requirement and shortage of funds. On a gross block of Rs 11 cr company claims of having 5 manufacturing plants with an installed transformer production capacity of 8000 MVA, of which 3000 MVA in Dehradun and Haridwar are relatively new and enjoy income tax and excise exemptions. For FY09 its sales improved by 10% to Rs 195 cr whereas net profit remained flat at Rs 7 cr thus posting an EPS of Rs 24 on a very tiny equity of Rs 3 cr. For Q1FY10 also it posted 10% improvement in sales as well NP to Rs 27 cr and 1.10 cr respectively. Sarcastically, company seems to have borrowed the funds at high interest rate resulting into substantial interest cost which eats up more than 50% of operating profit. Accordingly it may clock a turnover of Rs 210 and NP of Rs 8.50 for FY10 i.e. EPs of Rs 29 on current equity. Buy for short term gains.

Continuously for the last three quarters, SEAMEC (180.00) has been reporting terrific performance. For Q2FY09 i.e. June’09 quarter its revenue shot up 65% to Rs 100 cr whereas net profit increased 8 fold to Rs 60 cr from Rs 7.50 cr in the corresponding period last year. For H1FY09 company has already clocked an EPS of Rs 36 till now. Despite such powerful performance, marketmen are skeptical of its future profit margin, as to at what rate company will hire out its vessels. But considering the current trend and improvement in demand for such vessels, it seems that company will be able to clock some long term deals at healthy charter rates. As of now, company’s all four vessels are deployed and none of its vessel is expected to go for dry dock in the current fiscal. Even for next fiscal, chances of dry dock of any vessel are quite negligible. Fundamentally, 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. Although H2FY09 may not be as good as H1FY09 still it may clock a turnover of Rs 350 cr and PAT of Rs 170 cr for FY09 ending Dec’09. This translates into EPS of Rs 50 on equity of Rs 33.90 cr. Investors can accumulate this scrip at sharp declines for a price target of Rs 280 within 15 months

Cosmo Films (100.00) is one of the dominant players in the Bi-axially Oriented Polypropylene Films (BOPP) market in India with a 23% market share and also one of the lowest cost producers of BOPP films in the world. It currently boast of having an installed capacity of 56000 MTPA of BOPP films, 21000 MTPA of thermal lamination films & 3000 MTPA of metallized films. Importantly, company is the only Indian player to manufacture thermal laminated films which is a high margin business. Despite demand supply mismatch, company is working at 100% capacity and is further expanding its BOPP capacity to 136000 MTPA & metalized films to 10500 in phases. It has even started a coating film with a capacity of 12000 MTPA last year. Recently company acquired GBC, a USA based company for Rs 80 cr. This company provides thermal lamination films and equipment in Europe, North America, Japan and the Pacific region and has sales of nearly Rs 500 cr. Post this acquisition, Cosmo Films has emerged as the global leader in thermal lamination segment. However considering its not so encouraging performance for Q1FY10 and fall in BOPP prices, it may end FY10 with sales of Rs 650 cr and profit of Rs 35 cr i.e. EPS of Rs 18 on current equity of Rs 19.40 cr. Meanwhile, the promoter group didn’t opt to convert the 31 lac convertible warrants which were allotted to them @ Rs 107 in Feb’08.

Gremach Infra Equipment & Projects Ltd - Rs 35.00

Incorporated in 1991, Gremach Infrastructure Equipment & Projects Ltd’s (GIEPL) main activity is to provide rental of construction/earthmoving machineries to medium & large construction companies who are engaged in the business of infrastructure developments like constructing of roads, airports, dams, power projects, mining activities, housing & civil construction and other related activities. GIEPL’s business is flourishing rapidly as it makes business sense for the construction companies to take these high cost construction equipments on a rental basis instead of blocking their capital in procuring equipments which may not be used for executing other projects. The other advantage of taking the equipment on rental basis is the availability of quality equipments without the hassle of their maintenance. Thirdly, with rapid technological developments, the cost of replacement of these equipments is also very huge and hence the developers now prefer to take equipments on rent rather to own them. Over the year, GIEPL has pursued a strategy of diversifying the selection of machinery/equipment according to different business segments in the infrastructure sector. In addition to renting its owned equipments, company also hires equipments owned by other parties and rent it out to its own clients. Infact, GIEPL has been deriving majority of revenue from renting of equipment which are exclusively owned by third parties. This is possible due to the fact that, company has established a very strong network so as to have a geographical reach as well as a diversified industrial and project segment.

Remarkably, GIEPL is among the handful of large player in the organized sector, which is presently being dominated by small unorganized players. But as the project location are diverse and the equipment requirement at various sites may vary, only bigger companies with strong financial muscle like GIEL can fulfill the requirement. Secondly, company has an edge over its peers as it has huge asset bank of heavy equipments ranging from compacters, rollers, concrete mixers, dozers, forklifts, loaders to excavators, PTR, dumpers, electronic sensor pavers, kerb laying machine, tunneling boomer, concrete batching and mixing plant. Moreover it also has a vast pool of skilled labour that include mechanical engineers, civil engineers, mechanical experts, technicians, and operators etc. who operate and maintain the equipment. Because of all these factors, GIEPL boats of having a very strong clientele base that includes all the major infrastructure players in the country such as L&T, Punj Lloyd, Shapoorji Pallonji, Gammon India, HCC, Gannon Dunkerley etc. Incidentally, company adopts direct marketing approach and has set-up a separate Tender department to procure contracts from public sector undertaking as well as from private clients. As of now, company has a centralized maintenance department & workshop in Kalamboli, Navi Mumbai spread over an area of 450 sq. mtrs each.

As a part of its diversification plan, GIEPL has taken 75% controlling stake in 11 Coal mine licenses in Mozambique having an aggregate 13,520 hectares (appx. 13.52 cr sq. mts) of land in prime region of Moatize, Africa. With the global shortage and crisis of hard coking coal, the future prospect of this business looks terrific. Infact in Oct’08 only company stuck coal in the range of 1~3 mtrs depth making it a full open cast mines. Moreover company expects the coal reserve to the tune of 200 million tonne in these mines which is huge. On the other hand witnessing a sharp jump in E&P activities earlier, company even entered into the business of renting of oil & gas drilling rigs. Accordingly it has signed the MOU for 40 on-shore rigs with China's biggest oil & gas rig manufacturer “BOMBO”. Simultaneously, company has also ventured into setting up of SEZ and has received formal approval for 100 hectares Metal SEZ at Kolhapur & another at Dhule in Maharashtra. Although in short term above diversification looks a drain on company’s cash flow, but in long term it may emerge as a sustainable and profitable business.

Meanwhile due to global liquidity crunch and a significant slowdown in domestic construction activity, GIEPL’s performance also took a hit. Its topline as well bottomline declined sharply in the last few quarters. However, of late the infrastructure development & construction activity has started picking up and the industry is expected to be back on growth track soon. To conclude, with govt’s special emphasis on creating physical infrastructure and massive investment being planned in coming years, company’s core business of renting equipment will do well. This concept is growing rapidly and gaining wide acceptance as the penetration level in India is quite low at 2%, compared to UK at 80% and North America at 35%. In order increase its equipment bank & fund other growth plans, GIEPL had raised almost Rs 200 cr in Feb 2008 thru FCCB route to be converted into equity @ Rs 376 per share. Subsequently conversion price has been reset to Rs 282 per share. Surprisingly in June 2009 when the scrip was trading at Rs 30 odd levels, more than 16% of the FCCB holders amounting to US$ 0.82 cr opted for conversion to equity shares @ Rs 282 per share. What made them do so, only they can reply. This is despite the fact that GIEPL has recently taken the approval for FCCB back in March’09. At the same time taking the benefit of crash in the share price, promoters went ahead and made an allotment of whopping 4.90 cr warrants in June’09 to themselves to be converted into equity at merely Rs 31 per share. And infact within the same month they opted to convert 1.8 cr warrants diluting the equity capital to Rs 34.40 cr currently. With this new preferential allotment of 4.90 cr warrants they will smartly let their old allotment of 1 cr warrants lapse which was to be converted @ Rs 123 per share. Despite Rs 55 cr fresh capital infusion, company is looking to raise more money thru other avenues like selling of old machinery, surplus land, ESOP, fresh debts etc to funds its other projects, capital expenditure and working capital requirement. Notably, its outstanding FCCB to the tune of Rs 165 will be due for redemption only in 2013.

Fundamentally, GIEPL reported 15% rise in revenue to Rs 295 cr but 30% fall in PAT to Rs 26 cr for FY09. Even for Q1FY10 it recorded 30% fall in topline to Rs 71 cr and 60% drop in bottomline to Rs 4.50 cr. However it is expected to clock bumper growth in coming years on the back of substantial capital expenditure and starting of commercial operation by its other divisions. Company has also highly leveraged itself with the debt equity ratio of more than 2.5x times. For FY10, it may clock a turnover of Rs ~375 cr and NP of Rs 25 cr leading to an EPS of more than Rs 7 at current equity of Rs 34.40 cr. Although no further FCCB conversion is expected, but the warrant conversion will lead to further 90% equity dilution to Rs 65 cr. So the fully diluted FY10 EPS works out to Rs 4. Considering the company’s growth plan and aggressive attitude, investors are advised to keep a close track on the share price and accumulate it between Rs 30~35 levels for handsome gain in long term.

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