Smart Investment (Guj)

Z F Steering Gear India Ltd
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Indoco Remedies Ltd
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Small & Beautiful (Guj)

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Ironically, the share price of Rama Paper (34.00) which hit a high of Rs 59 in 2005 is still hovering around Rs.35, inspite of improvement in fundamentals. Off late, company has increased its paper production capacity to 44000 TPA and is further enhancing it to nearly 60000 TPA in near future. It is putting up an additional line of paper manufacturing machine to produce tissue and poster paper with annual capacity of 16320 TPA under a capex of 24 cr. But most importantly, company has put up 6 MW co-generation power plant for captive consumption which has already commenced operation leading to substantial saving in power and fuel cost. Last fiscal company raised around 16 cr thru equity route by making pref allotment to promoters and others @ 35 Rs. As on today promoters are holding 41% stake. For FY08 it is estimated to clock a turnover of 80 cr and profit of 5.50 on back of higher operating margin. This can shoot up to 100 cr of sales and 8.50 of NP for FY09. With means an EPS of Rs 6 and 9 for FY08 and FY09 respectively on fully diluted equity of 9.70 cr. Buying strongly recommended as share price can shoot up to 50 Rs in short term and 75 Rs in medium to long term.

Although share price Liberty Phosphate (35.00) has shot up smartly in recent past still it’s trading cheap compare to other fertilizer scrips. Company is the largest manufacture of Single Super Phosphate, commanding more than 14% market share. Presently, it has four manufacturing units having total installed capacity of 463,000 MTPA of SSP fertilizer. Against this, its production stood at only 280,000 tonne for FY07 i.e. capacity utilization of merely 60%. Earlier it raised 10 cr to fund its working capital requirement and hence may end FY08 with sales of 175 cr and PAT of 3 cr. This works out to an EPS of 5 Rs on diluted equity of 6.13 cr. At the current market cap of merely 20 cr, this scrip still has the potential to appreciate 50% from current levels. Accumulate at sharp declines.

Micro Forge (31.00) as re-listed in May’07 with the base price as 23.00 Rs. Since then it made a high of 52/- Rs in early June and has now settled down to 30/- Rs. It is engaged in manufacturing of forging and machined components for automobile industry with an installed capacity of 14,000 MTPA. Apart from making flanges, it also forges alloy steel, stainless steel, carbon steel for various auto part ranging from 0.5kg to 40 kg single piece weight. Company made a strong turnaround for FY07 as sales jumped up 40% to 79 cr but PAT increased multifold to 3.10 against 0.30 cr on back of improved operating efficiency. It has reported encouraging nos for the first six months as well and may end FY08 with a topline of 85 cr and bottomline of 3.50 cr. This translates into EPS of 6 Rs on equity of 5.60 cr. At an EV of less than 35 cr it’s a value buy and share price can once again test 50 levels in medium term.

Mazda Ltd (95.00) 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. It has a technical collaboration with world renowned Croll-Reynolds Inc. USA, who holds 12% stake in the company. Besides, company also has a biotechnology division dealing in carbohydrates, rare sugars & miscellaneous bio-chemicals and hence it recently diversified into business of manufacturing food and drink concentrates in a small scale under brand name “BCooL”. Presently, under FII category HSBC Financial is holding approx 8% stake which it acquired at 155 Rs in Dec 2006. For FY08 it may clock a turnover of 60 cr and NP of 5.50 cr which means EPS of 13 Rs on small equity of 4.26 cr. At a modest discounting by 12x times, share price has the potential to cross Rs 150 levels.

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Rama Papers Mills Ltd - 30.00 Rs

Promoted by Mr. Pramod Agrawal in 1985, Rama Paper Mills Ltd (RPML) primarily manufactures newsprint for the newspaper publishers and writing/printing paper for government supplies as well as for printing of text books and note books. It also produces coated/uncoated duplex board used to make packing material like cartons for industrial purpose and packaging of articles in pharmaceuticals, soaps, paste, apparels, and tea industries. However, company derives 60% of revenue from newsprint which is totally exempted from central excise and sales tax. It has wide client base including Hindustan Times, Jan Satta, Indian Express, Amar Ujjala, Dainik Jagran, Gujarat Samachar, Dainik Bhaskar etc. RPML enjoys a strong brand royalty as 80% of its customers are dealing with the company for more than 5 years. And since company is not into exports it is not affected by the rupee appreciation.

RPML is having three manufacturing units spread across 12 acres of land at Kiratpur in Dist. Bijnor in Uttar Pradesh. To cater the rising demand, it augmented its production capacity from 39,500 TPA to 44,000 TPA in Dec 2006 by installation of some balanc­ing equipments. More importantly, company has put up a captive power plant of 6 MW which commissioned operation only from April 2007. It incurred a total capital expenditure of Rs 31.50 cr for both the projects, financed by term loan of Rs. 22 crore and balance by internal accruals. Ironically, due to captive power generation, company is able to make substantial saving in power and fuel cost to the extent of Rs. 450 per tonne of paper produced, on a very conservative basis. This means, a straight away addition of minimum Rs 2 cr to the bottomline. Besides, only 4 MW is actually used for captive consumption with balance 2 MW being as surplus currently. To diversify its product portfolio, RPML is putting up an additional line of paper manufacturing machine to produce tissue and poster paper with annual capacity of 16320 TPA under a capex of 24 cr. For this company has already taken a bank loan and is planning to start the production by mid 2008. With this its total capacity will stand increased to 60,000 TPA.

Morever, company is contemplating to make some modifica­tions in all the machines in phases to be completed by 2009-10, which will further enhance its capacity to 80000 TPA. To fund its growth plan, company raised 8.75 cr in early 2006 thru private placement of 25 lac shares @ 35 Rs and now recently it again raised 7.50 cr thru preferential allotment of around 21 lac shares @ Rs 36 to promoter group. Hence its current fully diluted equity stands Rs 9.7 cr with 41% promoter stake. Financially, the first two quarter nos of the company were not so encouraging, maybe due to some disruption in its manufacturing facility. Hence for FY08 it is estimated to clock a turnover of 80 cr and profit of 5.50 on back of higher operating margin. But for FY09 it can report more than 100 cr of sales and 8.50 of PAT. This means an EPS of Rs 6 and 9 for FY08 and FY09 respectively. Moreover, against its gross block of Rs 79 cr, company is currently available at an enterprise value of only Rs 70 cr which is extremely cheap. Investors are strongly recommended to buy at current levels as share price can shoot up to 50 Rs in six months and 75 Rs in medium to long term.

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To take the advantage of the increased demand of Indian pharmaceutical products in the international market, Ahlcon Parenterals (68.00) - manufacture of life saving Intravenous Fluids and medical disposals, has off late made arrangements with several international agencies for increasing the base of export markets. It has recently added many new foreign customers to its existing list and is putting special thrust to increase direct and indirect exports. It has already filed product dossiers in both the regulated as well as unregulated markets and the registration formalities with more than fifteen countries are in progress. Accordingly company has upgraded its production facilities to conform to latest GMP standards as per international guidelines and specific requirement of the giant pharma customers. Since the plant is working at 100% capacity utilization, company is undergoing aggressive expansion to almost triple the small volume parenteral capacity from 59 million units to 162 million units. At the same time, it will continue to produce 32 million units of large volume parenteral. On the back of lackluster performance for the Sept qtr, scrip has been an underperformer for quite long time. As company is facing stiff competition in domestic market, it may end FY08 with sales of 55 cr and NP of 7.50 cr i.e. EPS of 10 Rs on equity of 7.20 cr. But with new capacity becoming operational and increase revenue from exports it has the potential to report an EPS of Rs 14 for FY09. Keep accumulating at declines

Seshasayee Paper (202.00) is engaged in manufacturing of printing/writing papers, packing/wrapping papers and specialty papers. Presently, it has the pulping capacity of 230 TPD and paper manufacturing capacity of 115,000 TPA. To enhance its environmental performance, it is implementing Mill Development Plan at estimated cost of 350 cr which will make the company self sufficient in wood pulp requirements. Under this plan, company is replacing its 30 yr old wood pulp mill of 230 TPD capacity with a comparatively newer but second hand pulp mill from USA which has advanced technological features, like RDH Pulping, Oxygen De-lignification, ECF Bleaching etc apart from having higher capacity of 350 TPD. However due to delay in supply of some key equipment, the project is expected to complete by March 2008. Meanwhile to de-risk its dependence on government and other agencies, company has entered into agreements with farmers holding over 3000 acres of land and planted Eucalyptus Hybrid/ Casuarina varieties to develop its own source of plantations. For FY08 it is expected to clock a turnover of 500 cr and NP of 45 cr which works out to an EPS of 40 Rs on equity of 11.25 cr. Despite company having high debt equity ratio, scrip can be bought at declines.

Eastern Silk (230.00) is among the few companies to be fully integrated from spinning, yarn dyeing, weaving, printing, embroidery, fabric dyeing, finishing to making made-ups. It has gradually moved up the value chain by putting special thrust on production of machine made high fashion fabric and home furnishing. It has recently completed expansion programme at its Anekal’s Unit 2 facility thereby taking the total fabric manufacturing capacity to 18.5 lac metres from 14 lac metres per annum. It is also setting up made-up plant at Bommasandra near Bangalore having an installed capacity of 1500 sets per day with an investment of 18 cr and is expected to commence operation in this fiscal itself. Incidentally, company derives 80% of total revenue from export, but at the same time 70% of raw material is imported by the company. Secondly, company also undertakes hedging activities and hence is protected from rupee appreciation to some extent. It reported encouraging nos for the first two quarters and is estimated to clock a turnover of 550 cr and PAT of 68 cr for FY08. This translates into EPS of Rs 43 on equity of 15.80 cr. For future growth, company is looking to make some foreign acquisition for which it may raise 240 cr thru FCCB/GDR route. It is also contemplating to split the face value of share to 2/- Rs from 10/- Rs which will improve the liquidity going forward.

Murudeshwar Ceramics (112.00) is one of the leading manufacturers of vitrified tiles, ceramic tiles and granites in India with its popular brand 'NAVEEN’. Importantly, company derives nearly 80% of revenue from sales of vitrified tiles which enjoy higher margin than the rest two. On the back of constant expansion, its present capacity stands at 6.3 million sq mtr of vitrified tiles, 2.7 million sq mtr of ceramic tiles and only 72,000 sq mtr for granites. Notably, institutional clients constitute 60% of total sales and retail clients constitute balance 40%. This is backed by a strong marketing network with 6 distributors, 74 show rooms, 45 depots and about 400 dealers spread across India. With the ongoing boom in construction sector, increasing mall culture and strong demand for hi-tech commercial complexes, the future prospect of the company is quite promising. It is expected to report a topline of 275 cr and bottomline of 30 cr on conservative basis for FY08. This works out to an EPS of 17 Rs on equity of Rs 17.50 cr. Notably, its Cash EPS stands at whopping 32 Rs. As current fiscal being a silver jubilee year for the company, it may declare liberal bonus for its shareholders. At CMP, scrip is trading at a P/E ratio of merely 6.5x times and is available at an EV of 400 cr which is below its gross block value of Rs 470 cr. However, icing on the cake is the 20 acres surplus land owned by the company near electronic city where it intends to develop IT park. Share price can shoot up to 175 Rs in medium term.

Z F Steering Gear (India) Ltd - 205.00 Rs

Belonging to well known Firodia group of Kinetic fame, Z F Steering Gear India Ltd (ZF) was incorporated in 1981 to manufacture mechanical - worm & roller and power steering gears in financial and technical collaboration with M/s. ZF Friedrichafen AG Germany, world's largest independent steering gears manufacturer. Today, ZF is market leader in both mechanical and hydraulic power steering gears especially for commercial vehicles and tractor industry. Its product range includes ball and nut power steering gear, rack and pinion power steering gears, worm and roller manual steering gears, intermediate shafts, vane pumps, steering columns, bevel gears box, universal joints, servocom steering gear etc. It has an enviable clientele including all auto majors like Tata Motors, Ashok Leyland, M&M, Eicher Motors, Escorts, Bajaj Tempo, Swaraj Mazda, PunjabTractors, Volvo, L& T John Deere, New Holland etc. Off late, it has entered passenger car segment by supplying rack & pinion power steering gears for ‘Indica’ car. In near future, company is looking to develop new products such as collapsible steering column for cars, telescopic steering columns for HCV, aluminum pump for higher HP engines, pump parts localization etc

ZF’s state-of-the-art manufacturing plant at Pune-Maharashtra is equipped with advanced specially designed machinery from ZF Germany for manufacturing critical components and has its own in-house heat treatment facility consisting of sealed quench furnaces, pit carburised furnaces for case carburising, nitriding etc. To cater the rising demand, last fiscal company expanded its installed capacity of power steering fears from 150,000 to 240,000 per annum and of mechanical steering gears from 100,000 to 120,000 per annum at a capital expenditure of approx. Rs. 7 crore. Against this, it sold 124,811 units and 92,155 units respectively for entire FY07. Moreover, in view of encouraging response from the automobile manufacturers, ZF is in the midst of further expanding the production capacity to 300,000 units of power steering gears and 150,000 units of mechanical steering gears. Secondly, it has entered into a 26:74 joint-venture with its collaborator ZF Lenksysteme, GmbH, to promote a new company for developing and manufacturing new products which will be different and not competing with its current product range. Importantly, sales of commercial vehicles are increasing due to improvement in road-infrastructure and also the ruling of Supreme Court to ban overloading of commercial vehicles. It recorded a growth of 33%, producing 520,000 vehicles during 2006-07 compared to 391,083 vehicles in the previous year. On the other hand, tractors also recorded 20% rise in sales on the back of increased focus by the government in providing subsidies. Thirdly, with India emerging as the hub for small-car manufacturing, many players have announced capacity expansions and many new international-players have taken initiative in setting-up their state-of-art production facilities in India. And since ZF’s future prospects are closely linked to the demand for commercial vehicles, multi-utility vehicles and tractors, it is expected to do much better in the coming years.

Financially, ZF is by and large a debt free company. Infact, it has invested around 37 cr in unlisted firms which yields handsome dividend in form of other income. Promoters currently hold about 72% of the equity, of which German collaborator is holding 26% stake and Bajaj Tempo holding nearly 10% stake. Management of the company is very professional and investor friendly with an impeccable track record of uninterrupted dividend payment since last two decades. For FY07 they paid 80% dividend which gives a yield of 4% even at CMP. Ironically, ZF has still not tapped the global market which presents a huge opportunity to be explored in future. At the same time with zero revenue from exports it is not affected by the sharp rupee appreciation unlike other auto ancillary companies. Infact, it has benefited to some extent as it imports few of its raw material. For FY07 it registered 15% growth in sales to 217 cr whereas NP increased by 20% to 27.50 cr posting an EPS of Rs.30. However, the first two quarter nos for FY08 are not so encouraging as sales declined by 10% to 95 cr and NP remained flat at 11.75 cr. Hence on a conservative basis it is estimated to clock a turnover of around Rs 205 cr and Net profit of Rs 24 cr which leads to an EPS of 27 Rs on equity of 9 cr. Considering debt free status of company with healthy cash EPS of 40 Rs, huge reserves of 80 cr, strong promoter holding, high dividend yield and 52W high low as 297/160 Rs its fairly a value buy at current market cap of 180 cr. Investors can expect 40% appreciation in 12~15 months. But at the same time one should note that rising import of cheaper power steering gears from China is a threat to the company

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