STOCK WATCH

To fund its future growth plans MIC Electronics (50.00) has decided to make preferential allotment of 1.65 cr warrants to promoters and others at the rate of Rs 44 per warrant. It is further contemplating to raise nearly Rs 150 cr thru QIP or FCCB route. Although this may lead to ~40% equity dilution but it will put the company on the fast track growth for coming years. MIC is a pioneer in design, development, manufacture & supply of true color LED Video Displays, LED Lighting products and solutions. Infact, it is the only integrated LED display manufacturer in India with design-to-manufacture capabilities. To cater the rising demand company is in the midst of tripling its total capacity to 50,000 modules from 15,000 modules. It is setting up a 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, company has got the RDSO approval for its unique & innovative video cum train info display system thereby becoming the first and only company to get such approval. Couple of months ago it signed an MOU with IOC for marketing high efficiency Solar LED Lantern thru their rural retail outlets. Earlier company bagged a long term contract for display of advertisement thru 50 nos of LED display system in Delhi. For FY10 it may clock a turnover of Rs 275~300 cr and profit of Rs 60 cr leading to an EPS of Rs 6 on current equity of Rs 20 cr having Rs 2 as face value. However for the next 3~4 years, company has the potential to record a CAGR of ~30%. A solid bet with a nominal risk of downfall.

HBL Power (300.00) is a technology focused manufacturer of several ranges of specialized application batteries i.e. nickel cadmium (pocket, fibre, and sintered plate), lead acid (VRLA, Tubular, LMLA), silver oxide zinc, lithium, thermal, etc. Infact it is the market leader in VRLA (valve regulated lead acid) and NCPP (nickel cadium pocket plate) batteries and enjoys 50% market share of domestic telecom market. Moreover it is the world’s second largest player in nickel cadium alkaline batteries and stands 3rd for Nicad Passenger aircraft batteries. It also manufactures other power electronics such as thyristor controlled battery chargers, earth leakage monitors, battery monitoring systems, industrial chargers, uninterrupted power systems, distribution boards etc. It even has a dedicated railway division to execute end-to-end turnkey railway signaling works, starting from yard design, estimation, procurement, installation and commissioning. Recently it has put up two new factories at Vizianagaram and SEZ Vizag in Visakhapatnam under a capex of Rs 150 cr and is now setting up a small facility in Mahape, New Mumbai. It is also planning to set up of JV Company in Saudi Arabia to manufacture Industrial Batteries. For FY09 its topline grew by 30% to Rs 1244 cr and bottomline increase by 35% to Rs 91 cr leading to an EPS of Rs 37. It reported satisfactory nos for Q1FY10 and is expected to register sales of Rs 1200 cr and PAR of Rs ~85 cr i.e. EPS of Rs 35 on current equity of Rs 24.30 cr. At a reasonable discounting by 12x times, scrip can move up to Rs 420 within a year. Meanwhile just to improve the liquidity company has decided for stock split into face value of Rs 1/- per share.

KLG Systel (200.00) 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 offers knowledge solutions mainly to oil & gas, process, power, metal, manufacturing and infrastructure sectors in India by providing a unique mix of industry domain expertise, software solutions, consultancy and training. 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. Having partnered with world leaders like Autodesk, COADE, IBM, Invensys, Microsoft, Oracle, Primavera and SAP, company boast of having close to 1500 customers that include Top 500 Indian companies (both from the government and private sector) and the Indian arms of Fortune 500 companies. Notably, KLG is among the thirteen companies who have been empanelled as an IT Implementation Agency for three roles, System Integrator (SI), GIS Solution Provider (GSP) and Meter Data Acquisition Solution Provider (MDASP) for the implementation of Restructured Accelerated Power Development and Reforms Programme of Government of India. On the other hand company is creating a new Enterprise business unit to address enterprise projects management, asset management and optimization needs of large enterprise who design, create or maintain asset intensive infrastructure. For FY10 on a standalone basis, it may report total revenue of Rs 275 cr and NP of Rs 32 cr i.e. EPS of Rs 25 on current equity of Rs 12.60 cr. Accumulate only at sharp declines.

Panama Petrochem (120.00) is one of India’s leading manufacturers and exporters of petroleum specialty products with an installed capacity of 69000 MTPA. It manufactures more than 80 product variants consisting 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. Incidentally, company’s import of raw material is much larger than export of product. Hence during FY09, company was negatively impacted by the depreciation in rupee and took a hit of massive Rs 17 cr for full year. Because of this it’s PAT declined by 20% to Rs 11.60 cr despite sales improved by 60% to Rs 367 cr for FY09. On the other hand company’s tax outgo also increased since it enjoyed Income Tax exemption on profit of Daman unit only up to March 31, 2008. Thus, for future growth company 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” by allotting equity shares. Accordingly, company’s equity got expanded to Rs 5.84 cr from 4.76 cr. However for Q1FY10 it reported 25% decline in net profit to Rs 5.40 cr whereas topline fell by 35% to Rs 62 cr. With rupee stabilization, company is not expected to take any further hit on forex loss in FY10 and is further slated to register sales of atleast Rs 325 cr and PAT of Rs 18 cr i.e. EPS of Rs 38 on expanded equity of Rs 5.84cr. Keep accumulating at declines.

Balaji Amines Ltd - Rs 105.00

Balaji Amines Ltd (BAL) was setup in 1988 for manufacturing of aliphatic amines in India to cater the growing requirements of value based specialty chemicals. Since then, it has emerged as the leading producer of methylamines, ethylamines and their derivatives. Importantly, BAL is among the few handful manufacturers across the world as amine manufacturing technology is a closely guarded process. And ironically company is using indigenously developed technology i.e. without any technical foreign collaboration. And remarkably, its one of the lowest cost producers of methylamines in the world. Today, it also produces specialty chemicals which are import substitutes like Morpholine, hydroxylamine, N-Methyl Pyrrolidone (NMP) etc and few natural products (herbal extracts) such as solanesol, calcium sennosoid, coleus forskohlii, camptothesin, Co-Enzyme Q-10, Tocopherols, Tocotrienols & SoyIsoflavones etc. Company’s products find application in various important industries including like pharmaceuticals, agro chemicals, water treatment, rubber chemicals, dyes & pigment, paper, explosives, rocket fuel oil refineries, photography etc. Besides, Morpholine - which is being manufactured by company for the first time in India through indigenously developed technology, finds extensive application in manufacture of corrosion protection compounds used in refineries, ships, steel plants etc. Being ISO 9001-2000 certified, company’s product are very well accepted in international market and it derives more than 20% of total revenue from export to several countries such as UK, USA, Canada, Latin America, Germany, Italy, Middle East, South Africa, France, Brazil, Mexico etc

BAL has two manufacturing facilities - one at Sholapur-Maharashtra for amines & derivatives and second one at Hyderabad – AP for natural products. Recently it has set up a third unit in Chincholi-Solapur, for production of Gamma Butyro Lactone (GBL), a raw material for manufacture of NPM with a name plate capacity of ~6500 TPA. With the commencement of this plant in July 2009, now BAL has, not to depend on import of GBL as its requirement can be fully met from captive production. This would reduce the cost of production of NMP and also enhance the product range to serve the domestic and export market. Interestingly, this GBL plant is first of its kind in India and is a 100% import substitute. Moreover, company has developed the manufacturing process in-house thru R&D with catalytic dehydrogenation. The hydrogen produced by dehydrogenation is further being utilized, for the first time in India for running the boilers. On the other hand due to constant expansion, company boast of having total combined installed capacity of 50,500 TPA for aliphatic amines and derivatives of amines. Against this company is working at less than 80% capacity utilization. It has strong presence in domestic market with major clients from pharma sector including Aurobindo, Aventis, Clariant, Dr. Reddy’s, Glaxo, Merck, Ranbaxy, Sun Pharma, Wyeth, Wockhardt, etc. Earlier it also entered into a long term strategic arrangement with BASF for supply of NMP. Notably, company is the only manufacturer for Morpholine and NMP with a monopoly status in India and hence, has set up a separate dedicated plant at Solapur to manufacture them.

Meantime, for future growth BAL is setting up Poly Vinyl Pyrrolidone (PVP) plant at Chincholi, Solapur, which will be again the first in India. Simultaneously it is also setting up 2.5 MW co-generation power plant at Tamalwadi, Solapur. Last fiscal it started power generation through windmill by establishing 1.5 MW windmill at Satara, Maharashtra. Further, it has always been the company's endeavour to continuously seek knowledge into newer products and technologies. It boasts of having two state-of-the-art R&D centers at both its plants. The R&D initiatives undertaken over the years have been one of the largest contributories in making the company a major player in speciality chemicals. Infact, for FY09 it has spent more than 5% of its revenue for R&D. Thus because of its strategic backward & forward integration, BAL has been able to maintain its status of one of the lowest cost producers.

Financially, company has been reporting very encouraging nos as sales has grown at a CAGR of 25% and PAT at a CAGR of 35% for the last five years. For FY09, its sales improved by 15% to Rs 252 cr and profit increased by 20% to Rs 15 cr. Thus it posted an EPS of Rs 24 on equity of Rs 6.50 cr. Incidentally, company is negatively impacted by the depreciating rupee as it imports lot of raw material, although to a great extent it gets mitigated due to exports. Most importantly, despite such volatility in raw material prices based on crude, BAL has been successful in maintaining a more or less stable operating margin. Even for Q1FY10 its PAT remained flat at Rs 5 cr despite reporting nearly 25% fall in sales. Accordingly for FY10 it may clock a turnover of Rs 250 cr and net profit of Rs 17 cr i.e. EPS of Rs 26 on current equity. At a modest discounting by 6x times, the share price can shoot up Rs 160 within 12~15 months. Investors are advised to buy keep accumulating at declines.

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