STOCK WATCH

Recently, Rama Paper (18.00) has started the commercial production at its new fourth unit with an installed capacity of 16320 TPA for tissue and poster paper. With this the production capacity of the company has now increased by nearly 40% from 44000 TPA to 60000 TPA. Currently company is working at almost 100% capacity utilization and has targeted to achieve 80% utilization for the new plant. So for FY10, it is estimated to overall record a ~25% volume growth. Moreover, company is already in the midst of modernization and up gradation of its existing three units. Further company is planning to get itself backward integrated and has accordingly bid for UP Co-operative sugar mill. For long term future growth company has aggressive plans, as it intends to double its total capacity by setting up 54,750 TPA Kraft paper manufacturing facility. Against the gross block of Rs 115 cr it has debt to the tune of Rs 63 cr leading to a debt equity ratio of 1.55x times. Last week company also took the shareholders approval to convert the preference shares into equity @ Rs 15 per share. This will lead to 35% equity dilution taking the equity share capital to Rs 13 cr. Although management claims to achieve a sales of Rs 150 cr and PAT of Rs 10 cr for FY10, but on a conservative estimate of 15% OPM it may register sales of Rs 130 cr and PAT of Rs 5 cr leading to an EPS of Rs 4 on diluted equity of Rs 13 cr. Ironically, management has not included the “Additional information pursuant to the provisions of Part IInd of Schedule VI of the Companies Act,1956” which is mandatory and relates to production, sales, raw material cost etc in the Annual Report 2008-09. Aggressive investors can buy for short term gain.

International Combustion (230.00) is a leading manufacturer of sophisticated plant and machineries like vibrating screens, feeders, sizers, conveyors, spiralling belt elevators, scooping belt conveyers, apron feeder, mining haulages etc for the core industries such as mining, steel, cement, petrochemical, construction, sugar, power, textile, paper, rubber, pharma, chemicals etc. It also offers complete grinding, classfication and drying system which can reduce many products by 95~98% or refine them below 10 microns. Under license from Danfoss Bauer, Germany, company markets comprehensive range of geared motors, gear boxes and electric motors. For FY09 it reported a topline of Rs 99 cr (up 5%) and bottomline of Rs 10 cr (down 15%) posting an EPS of Rs 41 on a very tiny equity of Rs 2.40 cr. Recently, company has acquired the global patent rights for the "Omni Screens" for all countries except South America from the collaborator M/s IMS of South Africa. Besides it has entered into a new agreement with ECUTEC to manufacture various new models of micro fine classifiers and Ball Mills for micro fine grinding, thereby enhancing the product range. However the management is not so aggressive and doesn’t have any major capex plan. Hence it’s a debt free company and infact holding liquid cash to the tune of Rs 18 cr that is equivalent to Rs 75 per share. So eventually one is getting the company at an EV of Rs 37 cr i.e. Rs 155 per share. To conclude although company may grow a CAGR of 10% still it’s a value buy at current levels. It’s a strong bonus candidate as well. Only long term investors are advised to keep accumulating at declines.

ICSA (205.00) boasts of developing innovative products suitable for power utilities in the field of energy management, energy audit, control application which identifies distribution losses, and help the power utilities reduce their costs & streamline their operations. The list of its popular product includes Intelligent Automatic meter reading, Distribution transformer monitoring system, Theft detection device, Energy audit services, Pole top & Micro remote terminal unit to name a few. Notably, products developed by the company also find application in other sectors including oil, gas, water, irrigation and mining which has thrown open a big opportunity for the company. On the other hand company has the capabilities in designing, supplying, transporting, erecting, testing & commissioning of 400/220/132 kV transmission lines & sub stations, outdoor & GIS sub stations on EPC. Whereas on the Turnkey basis it executes HVDC (High Voltage Direct Current) Distribution works, Rural Electrification works, Industrial Electrification works & construction of 33/11 kV Indoor & Outdoor Sub Stations. Meanwhile, government has undertaken incentive financing to enhance the commercial viability of SEBs which has forced the SEB to cut down their T&D losses thereby automatically creating huge demand for company’s product. Moreover, govt has also enhanced the allocation under APDRP scheme by 160% to Rs.2080 cr which augurs well for the company. Lately it has bagged huge orders to the tune of Rs 460 cr from Bihar and Maharashtra State Electricity Boards. It is expected to a turnover of Rs 1350 cr and PAT of Rs 165 cr for FY10. This works out to an EPS of Rs 35 on current equity of Rs 9.40 cr having face value as Rs 2/- per share. Keep accumulating at every declines.

Shanthi Gears (40.00) is a leading manufacturer of industrial gears, gearboxes, geared motors and gear assemblies. Infact, it is the second largest player in industrial gear segment with 20% market share. It caters to wide range of industries like power, sugar, paper, material handling, construction equipment, steel and cement industries with products ranging from worm gear boxes, helical & bevel helical gear box, geared motor, custom built gear box, mill gear box, open gearing, CNC machine tools to products for the textile industry. It also manufactures high-precision gears for the marine and aviation industry. lately, company has even started manufacturing gearboxes of 250 KV for windmills which has great potential. As company is in the process of revamping and restructuring the entire operational and organisational structure, it faced some labor problem which has been sorted out. Due to economic slowdown and revamping of operation its FY10 performance is expected to be lackluster. Moreover there are also rumors going on for quite long time that promoter has kept the company on the block and is looking for correct price to exit. For FY09, company had taken an exceptional hit of nearly Rs 7 cr as interest and forex loss towards redemption of FCCB during the Dec Qtr. Hence for the entire FY09 its sales was well as profit remained almost flat at Rs 253 cr and Rs 44 cr leading to an EPS of more than Rs 5 on the equity of Rs 8.20 cr having face value as Rs 1/- per share. Even for FY10, on a conservative basis it may report sales of Rs 200 cr and PAT of Rs 35 cr i.e. EPS of Rs 4.30. However for FY11 company is expected to be back on track and record an EPS of Rs 6.50. Buy only at sharp declines

Aditya Birla Chemicals (India) Ltd - Rs 75.00

Aditya Birla Chemicals Ltd (ABCIL), formly known as Bihar Caustic & Chemicals Limited was incorporated in 1976 as a joint venture between the Aditya Birla Group and the Bihar State Industrial Development Corporation, primarily with the objective of catering to the caustic soda requirements of Hindalco and to contribute towards the economic development of the backward region of Palamau district in Jharkhand. Today, it is among the leading caustic soda producer in the northern and eastern region of the country. Apart from caustic soda it also produces liquid chlorine, hydrochloric acid, sodium hypochlorite, compressed hydrogen and has recently ventured into aluminum chloride. In India, about 45% of the chemical industry depends upon the caustic soda industry as essential inputs for a host of industries like soap and detergent, aluminum, paper & newsprint, fibre, glass, tyre, chemicals & petrochemicals, pharmaceuticals, water treatment, dyes, textiles, oils, etc. However being a subsidiary of Hindalco Industries, ABCIL is having an added advantage of assured off-take of caustic soda by the parent company. It also has a hydrogen bottling facility which provides an additional stream of revenue. ABCIL is a member of several chemicals manufacturers' associations including Alkali Manufacturers Association of India (AMAI), Indian Chemical Council (ICC) and American Chemistry Council.

After shifting the manufacturing process of its plant from mercury technology to the energy efficient state-of-art membrane cell technology, ABCIL has been constantly expanding it capacity albeit at slow pace. Presently it boasts of having an installed capacity of caustic soda (300 TPD), liquid chlorine (250 TPD), hydrochloric acid (125 TPD), sodium hypochlorite (4 TPD) & compressed hydrogen gas (18,25,000 Nm3/A). Secondly, as caustic soda production is power intensive, ABCIL has put up its own 30 MW coal based captive power plant due to which its energy costs are lower than its peers. For value addition and effective utilization of chlorine, the company has commissioned 12,000 TPA aluminium chloride plant in the year 2007 and 17,500 TPA stable bleaching powder (SBP) plant in the year 2008. SBP is marketed under brand name of SHAKTIMAN and is basically used in textile mills for bleaching, sanitation, sewage systems, tanning process, organic synthesis and other applications. On the other hand aluminum chloride is mainly used as an input for manufacturing of aluminum apart from being used in pharmaceuticals, chemical intermediates, agrochemicals, dyestuffs and pigments, hydrocarbon resins, flavors and fragrances. Most importantly, with nearly 70% its production being taken by Hindalco, company has an assured and ready market for its product

Fundamentally, ABCIL is doing quite well as for FY09 it reported 20% growth in sales to Rs 205 cr although the PAT remained flat at Rs 46 cr. During the Sept’08 quarter the boiler of the power plant tripped due to mal functioning of safety device hence the power cost shot up for that period which dented its bottomline for time being. However the problem was rectified in the same quarter and post that company has been churning out good set of nos. Notably, ABCIL enjoys the highest operating margins among it peers - even better than Gujarat Alkalies and Chemfab Alkali. Even for the latest June’09 quarter its topline grew by 15% to Rs 60 cr and PAT improved by 20% to Rs 16 cr. It is one of the few companies which have been consistently reporting an OPM of ~40% and NPM of ~25%. For FY10 it is expected to clock a turnover of Rs 240 cr and PAT of Rs 60 cr leading to an EPS of Rs 26 on equity of Rs 23.40 cr. But 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 has been always poorly discounted by the marketmen. Currently it is trading at a forward PE multiple of 2.5x times and EV/ EBIDTA of 2x times. There is also a possibility of ABCIL getting merged with Hindalco industries. But if this happens, the true value of ABCIL wont be unlocked, as the merger ratio will more favorable to the parent rather than subsidiary. Still investors are recommended to buy at current levels as scrip can easily double within a year.

Click here to download Report (PDF)