Usha Martin Ltd - Rs78.50

Usha Martin Ltd (UML), the erstwhile Usha Beltron Ltd (UBL), the flagship company of the Kolkata based Jhawar group, was promoted in 1986 by Usha Martin Industries Ltd (UMIL) together with Bihar State Electronics Development Corporation in collaboration with AEG Cable of West Germany. UMIL was merged with UBL in 1997 and later the name of UBL was changed to UML in May 2003. As on today, UML is a fully integrated steel manufacturer right from iron ore, coal, power, pig iron to specialised steel, billets, wire rods & wire ropes. It is the second largest steel wire rope maker in the world producing special wire ropes for cranes, elevators, mining, structures, etc and steel cords for conveyor belts. It also manufactures jelly filled telephone cables, which contribute marginally to its total turnover. UML’s manufacturing facilities are located in Ranchi, Jamshedpur, Agra, Bangalore and also in Dubai, UK & Thailand through its subsidiaries. Its steel manufacturing facility at Jamshedpur is one of the largest amongst secondary steel manufacturers of special steel long products in the country.

Few months back, UML commissioned its backward integration project to manufacture 1,00,000 TPA DRI (Direct Reduced Iron) sponge iron plant and also installed a 10MW captive power plant utilizing the waste heat gases for power generation. It has also firmed up plans to expand its steel-making capacity from 2,20,000 TPA to 4,00,000 TPA. Importantly, UML has been allotted a coal block by the Ministry of Coal which has reserves of more than 30 million tonnes. Besides, the company is also pursuing iron ore mining activities. Due to sluggish cable industry, it has modified its cable plant in Ranchi to manufacture value added products such as bright bars, speciality wires and conveyor belt cords. It has bagged huge orders from OTIS for supplying and servicing elevator ropes in Western Europe and Asia except China and Korea for a period of three years. The company has also received a breakthrough in supplying high performance mining ropes to a customer in USA to whom it has been supplying medium-level mining ropes. In a most recent development, UML has acquired JCT's Steel Division manufacturing steel wire ropes and wire products at Hoshiarpur in Punjab for consideration of about Rs21 cr.

As a part of restructuring, it has swapped debt of Rs190 cr. and has brought down the interest cost from 13.5 to 8 per cent. IFC and DEG (Germany) have also extended 10 year loans till FY2013 of USD 21 million and Euro 10 million @ Libor + 2.75 per cent. Given the uptrend in the steel sector, UML posted impressive figures for six months ending 30 Sept. 2004. Its topline grew by 60 per cent to Rs568 cr and NP was up 123 per cent to Rs16.80 cr. Its equity capital is Rs.18.5 cr. and with reserves of Rs.410 cr., the book value of the share works out to Rs.116 on its face value of Rs.5. Since its backward integrated project was commissioned in the latter half only, it could close FY05 with total sales of Rs1100 cr. and NP of Rs40 cr. This works out to an EPS of around Rs11. Investors are advised to buy the scrip on sharp correction with a price target of 110 in the next 12 months.

Ambika Cotton Mills- 156.00

Promoted by P K Ganeshwar, M Rathanasamy and P V Chandran, Ambika Cotton Mills (ACML), was incorporated as Ambika Cotton Mills Private Ltd in 1988 and subsequently converted into a public limited company in 1994. It manufactures high quality contamination free cotton yarn used in hosiery and majority of its production is exported. It has established its name both in the international market and domestic market for its consistency and quality. Lately, it has diversified into manufacturing Compact Spinning Yarn, a premium yarn and the value of such yarn increases when made out of specialty cottons like PIMA (Cotton sourced from USA), GIZA (Cotton sourced from Egypt) and Australian Cotton, which goes into manufacturing premium branded shirts and T-shirts. Being in this lucrative niche market with such value added products, the company enjoys the highest profit per spindle in the whole country. It exports directly to Taiwan, China, Hong Kong, Turkey, Korea, Singapore, Egypt, Israel and through merchant exports to Peru, Germany, Italy etc.

Of its production capacity of 42,000 spindles, 11,000 spindles are of compact yarn and its present capacity utilization is 100 per cent. Recently, it set up Wind Energy Systems for captive power generation which has reduced its power cost substantially. 70 per cent of its power requirements are met by Wind Energy and the balance 30 per cent by the Tamil Nadu Electricity Board (TNEB). To cater to the increasing demand of its products with the removal of quota, the company is expanding capacity by another 21,000 spindles for manufacture of compact yarn (Elite Twist). The first phase involves setting up of 14,000 spindles including a 6.6 MW wind energy systems for 100 per cent captive consumption at cost of Rs67 cr. to be met by a term loan of Rs.50 cr. under the TUF Scheme and the balance Rs17 cr. through internal accruals and the project is expected to be operational by July 2005. After completion of the above first phase, the second phase involves addition of another 7,000 spindles of compact yarn to the total productive line taking its total capacity to 63,000 spindles of which 32,000 spindles will be of compact yarn.

For the six months ending 30 Sept. 2004, its total revenue grew 2 per cent to Rs42 cr. but due to cost reduction. Its NP jumped 78 per cent to Rs5.40 cr. in spite of higher depreciation. For the full year FY05, the company could register sales of Rs95 cr. with net profit Rs12.50 cr. respectively. On its current equity of Rs5 cr., the EPS works out to Rs25 Its CEPS is expected to touch Rs40. The Company has huge reserves and its book value stands at Rs110 as on 31st March 2004. Though the dividend payout is low, the management may reward shareholders with a liberal bonus in the future. For FY 2005-06, its sales and NP will see a substantial jump due to expansion plan. It may even report an EPS of more than Rs40 for FY06. Considering all this, the scrip is trading cheap at 6 PE providing a good opportunity for long term investors to buy. The scrip has the potential to double in 2 years.

STOCK WATCH

Shreyas Shipping, a leader in the container feeder segment, has recently purchased MV Orient Victory a 569 TEU second hand container vessel which will be delivered to the company by the end of January 2005. It has posted excellent results for Q3FY05. Total revenue was up 30 per cent to Rs.26 cr. and NP including extraordinary item jumped 170 per cent to Rs.16.45 cr. yielding an quarterly EPS of Rs.8.30. Excluding extraordinary item (ie reversal of deferred tax due to tonnage tax system) also, the EPS works out to 3.80 Rs. A good long term bet.

Bhagyanagar Metals which is now concentrating in assembling and trading of CDMA handsets to take advantage of the cellular revolution in the country came out with a good set of numbers for December’ 04 quarter. Net Sales doubled to Rs.35 cr. and profit after tax stood at Rs.7.85 cr. compared to Rs.62 lakh last year resulting in an EPS of Rs.12.50 on its current equity of Rs.6.30 cr. The company plans to venture into the manufacture of copper pipes and foils for solar heaters. For FY05, it can report an EPS of around Rs.40. Although the promoters are reducing their stake, investors can take some exposure for a handsome gain in long term.

Due to higher demand and better price realisation of caustic soda, Gujarat Alkalies has reported fantastic figures for the December 2004 quarter. Its Net sales are up 23 per cent to Rs.306 cr. and NP multiplied 3 times to Rs.49.50 cr. inspite of tax provision of Rs.43.75 cr. Its OPM also improved substantially for this quarter and stood at 40 per cent. For future growth, it has planned expansion in its Caustic Soda and Hydrogen Peroxide manufacturing facility at its Dahej plant at a cost of Rs.200 cr.Fundamentally, a strong company which can post an EPS of Rs.18 for FY05.

Metalman Industries is a manufacture of galvanized tubes consisting of Black & Galvanized Steel Pipes used in irrigation, tube wells, water conveyance, structurals, etc. conforming to ISI specifications. Due to the government’s thrust on agriculture, the company is facing good times and is expected to perform well in the future. For the first six months of the current year, its sales increased by 50 per cent to Rs.134 cr. and NP rose by 55 per cent to Rs.5.35 cr. For the full year, it is expected to post an EPS of Rs.10. Since it is a small cap and illiquid scrip, aggressive investors are advised to accumulate it.

Though the market has appreciated smartly and is trading above Sensex 6300 level, Reliance Industries is still trading quite cheap at Rs.520 level, thanks to the feud among the Ambani brothers. Due to the uptrend in the petrochemical cycle and higher refining margin, the company posted wonderful result sinceQ3FY05. Its topline increased by impressive 42 per cent to Rs.17768 cr. and bottomline grew by 52 per cent to Rs.2091 cr. The company is buying back its shares agressively form the market and may report an EPS of more than Rs.50 for FY05.The scrip has the potential to hitRs.750 in the next 15 months.

KIC Metallics is into manufacturing of Pig iron, castings and slag cement. It is in the process of setting up a steel billet manufacturing unit with a capacity of 150,000 TPA and is expanding the pig iron production capacity from current 120,000 TPA to 1,50,000 TPA. For Q3FY05, it posted splendid numbers with net sales rising 170 per cent to Rs.68.20 cr. and NP increased by 150 per cent to Rs.2.50 cr. On its current equity of Rs.3.70 cr. it works out to an quarterly EPS of Rs.7. For the full year, it may register an EPS of Rs.16. Recently; it approved preferential allotment of 6.35 lakh shares at Rs.80. A strong buy.

Sunflag Iron & Steel - Rs13.00

Sunflag Iron & Steel Company Ltd. (SISCL) was incorporated on 12th September, 1984 as a Public Limited Company in Maharashtra for setting up a composite steel plant for the manufacture of Mild and Alloy Steel Rolled Products. SISCL belongs to the Sunflag Group having diversified interests from making artificial leather, synthetic fibres, spinning, weaving, manufacturing of sophisticated garments to agriculture and agro based industries. The Sunflag group was founded by Shri Satyadev Bhardwaj in Kenya in 1937 and has its operations spread over 6 countries spanning 3 continents. SISCL caters to the demands of various core sector industries like Automobiles, Railways, Defence, Agriculture, Engineering Industry etc.

SISCL has set-up sophisticated Special Steel manufacturing technologies in collaboration with Krupp Industrietechnik GmbH, Mannesmann Demag Huttentechnik, MDS Mannesmann Demag Sack GmbH and Hamburg Consulting and Steel Engineering GmbH of West Germany. It has set up a state-of-art integrated plant at Bhandara district, near Nagpur, in Maharashtra with capacity to produce 2,00,000 TPA of high quality special steel using iron ore and non coking coal as basic inputs. The product mix covers a wide range such as Carbon Special Steel, Alloy Steel, Free Cutting Steel, Ball Bearing Steel and Spring Steel. In backward integration, it has a Direct Reduction plant which can produce 1,50,000 TPA of sponge iron for captive consumption in the Steel Melting Shop. Additionally, the fluid gases help generate 15 MW of electricity. Due to the rising international demand for steel, SISCL is putting more thrust on exports to the Far East, Middle East and other Asian countries. Currently, its plant is operating at more than 120 per cent capacity, which is a big achievement in itself.

Due to the ongoing boom in the steel industry, SISCL posted excellent results for all the three quarters of FY05. Last week, it came out with its third quarter numbers ending 31Dec. 2004. It posted 171 per cent growth in Sales at Rs206 cr. and NP stood at above Rs10 cr. compared to Rs0.50 cr. in the last corresponding quarter. Notably, it registered an impressive OPM of 18 per cent for this quarter. With the steel prices rising continuously in international markets and expected to remain high, the company can clock a turnover of Rs820 cr. with NP of Rs38~40 cr. in FY05. This would work out an EPS of Rs2.5 on its current equity of Rs162.20 cr. Thus the stock is trading at 5 times FY05 expected earnings, which is reasonably cheap and has the potential to appreciate by 50 per cent in the next 12 months.

Indian Acrylics - Rs14.00

Indian Acrylics Ltd (IAL) was incorporated as a public limited company in February 1986. It was originally formed as a joint sector project by Mr. R K Garg along with Punjab State Industrial Development Corporation Limited (PSIDC). Today, it is the largest manufacturer of Acrylic Staple Fibre (ASF) in the country with 35 per cent of the total domestic capacity. It enjoys the credit of introducing micro-deniers for the first time in India. The company has technical collaborations with world renowned M/s E T Du Pont de Nemours & Co. Acrylic fibre is one of the fastest growing fibres because of its outdoor performance appeal with characteristics like quick drying time, softness, excellent colour fastness, luxurious touch & drape, warmth in thermal construction, easy care, resistance to weathering, stain and wrinkle resistance etc. Since the last few months, ASF prices have risen smartly in international markets due to short supply on account of closure of some manufacturing plants in USA & Europe and the rising demand from China.

The company’s manufacturing plant is located in Sangrur district of Punjab with a capacity to produce 38,500 TPA of ASF. To reduce the operating cost, the company is de-bottlenecking to increase its capacity to 42,000 TPA, which is expected to be completed by this fiscal. The company is also planning on backward integration with the production of methyl acrylate, the raw material that along with acrylonitrile (main raw material) goes into the production of ASF. It plans to produce semi-dull fibres and other newly developed fibres to mitigate the seasonal effects on demand. It has installed Tow to top converters to produce ready to use Acrylic Tops and is setting up value added projects like Spinning and a Dye House. It has also embarked upon technology exports to Acrylic Fibre plants abroad. Its R&D team is continuously experimenting on developing new uses of acrylic fibres such as Mink blankets, Socks, Upholstery, Sarees, Dress material, T- shirts, Soft toys, Plush & Fur fabrics, blending with velvet and silk etc. However, the company is totally dependent on imported raw materials, mainly Acrylonitrile, which is highly price sensitive to international crude oil prices

Financially, IAL is a turnaround case. For the six months ending Sept. 2004, its Sales increased by 29 per cent to Rs144.50 cr. and it posted an NP of Rs25.40 cr. against a loss of Rs8.50 cr. last year. Its OPM stood at 28.50 per cent compared to 6.25 per cent in the corresponding period last year. To cash in on the rising demand, the company is giving a special thrust to develop exports to China, Taiwan, Iran, Syria, etc. Recently, it approved preferential allotment of around 13 lakh shares to promoters and their associates at the rate of Rs 13 per share. Considering all these factors and IAL’s initiatives to reduce costs, it can post sales of Rs300 cr. with NP of Rs45 cr., which works out to a diluted EPS of Rs3.5. The scrip is recommended for investment with expectations of 50 per cent returns i.e. a price target of Rs20 in 15 months time.