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Honda Siel Power Products Ltd. (Code: 522064) (Rs.227) engaged in manufacturing and marketing of portable generator sets, portable engines, internal combustion engines, pumping sets, water pumps, lawn mowers, spare parts and other related products in India. A 67% subsidiary of Honda Motor Co. Japan, it is the undisputed leader in portable generators with its ‘Honda’ brand commanding more than 70% market share. The company also boasts of launching India’s first LPG run gensets along with its super silent series which are doing extremely well. Going forward, however, its major growth is expected to come from its engine and water pump sets division on the back of strong industrial growth and increased mechanisation in the agriculture/ floriculture/ horticulture sectors. To consolidate its manufacturing operations, the company is shifting its Rudrapur (Uttarakhandl) plant to its factory at Greater Noida in Uttar Pradesh. Hence for the short-term, the company is incurring substantial costs along with production loss. But this restructuring will prove beneficial in the long-term. Accordingly, it may end FY08 with sales of Rs.240 cr. with PAT of Rs.20 cr. i.e. EPS of Rs.20 on its equity of Rs.10 cr. Accumulate at sharp declines only as the scrip may drift below Rs.200 level.
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Belonging to the high profile RPG group, Phillips Carbon Black Ltd. (Code: 506590) (Rs.200) is the pioneer and largest manufacturer of carbon black in the country. In fact, it is the undisputed leader with a capacity of 2,70,000 MTPA, which is almost 47% of the total installed capacity of carbon black in India. It has also established a strong goodwill in the global markets with more
than 25% revenue coming from exports to over 15 countries including China, Japan, Indonesia, Iran, Sri Lanka, Vietnam, Turkey, Philippines, Australia, New Zealand and East African countries. To cash on the buoyant economic condition, the company has chalked out a massive Rs.350 cr. expansion plan to be completed by December 2008, whereafter it will have carbon black capacity of 3,95,000 MTPA and power generation capacity of 74.50 MW. Importantly, to protect its profit margin, the company has re-negotiated the pricing formula with its customers with a built-in escalation clause. Accordingly, it is estimated to clock a turnover of Rs.1050 cr. with profit of Rs.85 cr. for FY08 i.e. EPS of Rs.30 on a conservative basis. For FY09, it has the potential to post an EPS of Rs.40. Accumulate at declines.
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Blue Bird (India) Ltd. (Code: 532781) (Rs.48) is one of the leading manufacturers of paper based notebooks and office stationery products like executive notepads, diaries, arch-lever files, perforated pads, registers, filler papers and folders. Although notebook forms the core business with more than 80% revenue, the company has also ventured into publishing academic textbooks and self-study books for children apart from general publications on subjects such as ayurveda and biographies. It also offers commercial printing under which it designs and prints annual reports, brochures, catalogues, offer documents, coffee table books, calendars, greeting cards, magazines, text books, publications etc. In order to cater to central and south India markets efficiently, the company has recently put up two new plants at Indore and Bangalore apart from having its main plant in Pune. It is also expanding its distribution network and has ambitious growth plans for its publication division. The company operates with a very high interest cost. Otherwise, it’s trading extremely cheap at an EV/EBIDTA of hardly 4 times. For the current fiscal, it is expected to report total revenue of Rs.485 cr. with net profit of Rs.28 cr. i.e. EPS of Rs.8 on its equity of Rs.35 cr. Considering its IPO at Rs.105 in November 2006 and 52 week high/low as Rs.94/44, it’s a screaming buy at current market cap of merely Rs.170 cr.
Investment Calls
* Garware-Wall Ropes (Rs.134.15) specializes in providing customized solutions to the Cordage and Infrastructure industry across the globe.
Its Geo-synthetics Division specialises in providing customized solutions using Geo synthetics products for various applications in the Infrastructure industry. Geo-synthetic products find application in roads, railways, canals, groundfills and waste management. This division is expected to grow at the rate 50% per year over the next year in view of the huge demand for this product.
The company has reported sales of Rs.290 cr. with net profit Rs.18 cr. for the first nine months of FY08 against Rs.241 cr. and net profit of Rs.15.5 cr. in the same period of FY07. Full year sales are likely to be around Rs.390/400 cr. with net profit of Rs.24 cr. yielding an attractive EPS of Rs.12. The stock has reacted from the high of Rs.259 to the current level of Rs.124 where it looks attractive for long-term investment. Investors can keep a watch on this stock to add on reactions.
* Indian Hume Pipes (Rs.745.15) - The Central and State governments are laying emphasis on infrastructure development in the country and water supply has always been an important infrastructural activity for any populous location. For urban and rural water supply projects, the main customers have always been the Public Health Engineering Departments of various State Governments, Corporations, Municipalities, Water & Sewerage Boards etc. There is huge potential for water supply, sewage disposal, head works, treatment plants etc. Investors should stay invested. The company has total 28 manufacturing units some of which are closed. Thus it has huge real estate worth which is a big trigger for the stock. Although the stock has already flared from the levels when we first recommended it but investors can still continue to hold for better targets.
At present, the order position of the company is around Rs.950 cr. on its very small equity base of Rs.4.84 cr. For FY07, sales were Rs.340 cr. with net profit of Rs.14 cr. For Fy08, its full year sales are likely to be between Rs.375 to 390 cr. Stock is at almost half the price of its 52-week high. Investors can add this stock on reactions for good long-term target.
* PNB Gilts (Rs.30.20) - In 1996, the RBI introduced the system of Primary Dealers with a view to strengthen the institutional infrastructure of the Government Securities market. Six entities were granted licences of which PNB Gilts was one. The company was established as a wholly owned subsidiary of Punjab National Bank with an initial paid up capital of Rs.50 cr. which is also the minimum capital requirement for a Primary Dealer.
It came out with an IPO of Rs.3.5 cr. shares at an offer price of Rs.30 per share aggregating Rs.105 cr. in July 2000, which increased its paid-up capital to Rs.135.01 cr. and reduced the holding of Punjab National Bank to 74.07%.
During the years, the company has emerged as a leading primary dealer in the country. It has to its credits:
> The first standalone Primary Dealer to come with an IPO and get listed.
> The first PD to achieve ISO 9001:2000 certification.
> The first to obtain a P1+ rating from CRISIL for its short-term borrowing programme.
At present, the rating from CRISIL is for borrowing up to Rs.250 cr. For the first nine months of FY08, the company has achieved higher income of Rs.137 cr. against Rs.88 cr. while net profit shot up by almost 100% from Rs.26 cr. to 51 cr. With the interest rate expected to come down, the company is very likely to report higher profits in coming years.
The book value of the share is around Rs.40 and with expected EPS of Rs.5.5 in the current year, the stock looks very attractive at Rs.29/30 levels while the 52-week high is Rs.54. The stock is available at issue price of Rs.30 when it came out with IPO about 8 years back. Investors are advised to accumulate this stock as a safe investment with good long-term view for target price of Rs.60 over the next one year.
Rohit Ferro Tech Ltd. (RFTL) (Code: 532731) (Rs.82.30)
has announced highly encouraging results for Q3FY08 wherein its net profit moved up sharply by 309% to Rs.20 cr. Based on this, the scrip is likely to clock an EPS of Rs.18 for FY08. Since the share is trading at a P/E of just 4, it has all the potential to advance smartly in the medium-term.
A well-differentiated player from the ferro alloys sector with 60% revenue coming from exports RFTL manufactures High Carbon Ferro Chrome, Ferro Manganese and Silico Manganese through the Submerged Arc Furnace (SAF) route. The total capacity works out to 1,50,000 TPA with its two plants in West Bengal and Orissa.
The company has recently converted two of its 9 MVA furnaces (30,000 TPA) to produce ferro manganese in place of high carbon ferro chrome.
The management's decision to diversify into manganese alloys is due to higher production, better margins and better availability of raw-materials. Ferro manganese requires only 2800-3000 units of electricity whereas ferro chrome needs about 4000 units. Hence the same 9 MVA furnaces will produce more tonnage of ferro manganese than ferro chrome. RFTL is ISO 9001:2000 certified and enjoys ‘Two Star Export House’ status exporting ferro chrome to China, Japan, Iran, Korea, Taiwan, Germany, Turkey, USA and European countries. China is its major export market accounting for about 80% of its total exports.
During FY07, its sales advanced by 56% to Rs.196 cr. but net profit was up by 79% at Rs.20 cr. Its EPS was Rs.5.8 and it paid a dividend of 10%.
During Q3FY08, sales grew by 220% to Rs.140 cr. and net profit shot up by 309% to Rs.20 cr. For the first nine months of FY08, net profit advanced by 218% to Rs.42 cr. on 191% higher sales of Rs.354 cr. while the EPS for the nine month period was Rs.12.
RFTL’s equity capital is Rs.34.5 cr. and with reserves of Rs.88 cr., the book value of the share works out to Rs.36. The promoters hold 61% in the equity capital, foreign holding is 1%, PCBs hold 17% leaving 21% with the investing public.
Power is the major cost and accounts for about 40% of its production cost. RFTL has tied-up with the West Bengal State Electricity Board (WBSEB), which supplies power at a competitive rate of Rs.2 per unit at its existing Bishnupur plant.
For its new projects, the company has entered into an agreement with Northern Electric Supply Corporation (NESCO) and Grid Corporation of Orissa (GRIDCO) for uninterrupted power supply for the next five years at the rate of Rs.2.06 per unit against Rs.3 to Rs.3.50 per unit in other states. The lower power and fuel costs will have a positive impact on RFTL’s operating margins.
The company has applied to the Government of Orissa for a mining lease for chrome ore as well as manganese ore, which will make it an integrated player to some extent.
It has decided to enter into a joint venture with its Iranian partners, in the form of a Company to be incorporated in Iran, to explore the possibilities of marketing as well as sourcing raw materials. Currently, the company exports its finished products and also imports raw materials from Iran.
The company is increasing its ferro chrome capacity from 1,50,000 TPA to 2,00,000 TPA to be completed by 2010 and is also planning forward integration into stainless steel manufacturing. RFTL is also setting up a coal-based power plant of 110 MW for the captive purpose for which it has already been allotted land by the Orissa government. The plant would be commissioned in the next 18 months according to company sources.
Ferro alloys are a blend of iron with a high proportion of elements such as manganese, silicon, chromium and molybdenum are used for manufacturing all grades of steel including stainless steel, alloy steel, castings and other engineering products. It is used as an additive for imparting strength and quality needed for a particular grade of steel and has a good demand.
The growth of the ferro alloys industry is in direct proportion to the growth of the steel industry, which is currently booming. Buoyed by the upsurge in industrial activity, especially in construction, automobiles consumer durables, the ferro alloys sector is growing at a healthy 20% per annum. Globally, the upturn in international aerospace and industrial gas turbine markets is also fuelling the demand for ferro alloys.
The company expects to wind up FY08 with sales of Rs.550 cr. and net profit of about Rs.62 cr., which would result in an EPS of Rs.18. Sales are expected to move up to Rs.650 cr. in FY09 with net profit increasing to Rs.75 cr., which would yield an EPS of Rs.21.7.
At CMP of Rs.82.30, the share is trading at a P/E of 4 on FY08 estimated EPS of Rs.18 and 3.3 on FY09 projected EPS of Rs.21.7. At a reasonable P/E of 6, the share is likely to move up to Rs.108 by the time the annual results are announced and Rs.130 in the medium term. The 52-week high and the low of the share has been Rs.127/24.
Micro Inks Ltd. (MIL) (Code: 523886) (Rs.316.25)
an MNC with over 70% stake by the German major Huber Group. It has produced excellent results for CY2007 posting an EPS of Rs.26.7. Incorporated in 1991 as Hindustan Inks & Resins, MIL is one of the largest printing ink companies in the country with its presence in liquid inks, resins, adhesives and enamels. The company started its operations in the early Nineties and emerged as a market leader in India by 1999. Today, it has established its presence in over 70 countries and is among the Top 5 in the world.In February 2006, MHM Holding (Huber Group of Germany) acquired 50.5% shares from the Bilakhia Group and 20% through a public offer at Rs.675 per share taking its total holding to 70.5% in the company. With this acquisition, the Huber Group has become the 5th largest group in the ink industry globally. The Huber Group has a global presence through 25 companies in Europe and 9 companies outside Europe.MIL has a wide product portfolio and is the market leader in India. The printing ink industry essentially consists of four elements viz. pigments, resins, additives and solvents and MIL. It has diversified into a number of related products and undertaken backward integration to manufacture pigments, flushes, resins and additives - the critical raw materials for inks. Its products are resins, varnishes, pigments, waxes, flushes and printing inks and it is the second largest manufacturer of alkali blue, a special pigment. Packaging, printing and publishing are the main user industries of printing inks.
MIL is headquartered at Vapi, Gujrat and has three manufacturing units in Vapi, two units in Silvassa and one in Daman in India and another in Chicago, USA through its wholly-owned subsidiary. Its Silvassa manufacturing facility is one of the largest single-location ink plants in the world. In September 2004, it commissioned a PLC controlled liquid ink plant and sheet fed ink plant at Silvassa.
Its production capacity of printing inks, resins and varnish, adhesives, wire enamels, fine chemicals and press chemicals stand at 3,03,000 TPA, 52,600 TPA, 7,800 TPA, 3,450 TPA, 640 TPA and 5,000 TPA respectively. In June 2007, MIL commissioned a plant to manufacture 18,000 TPA intermediates in Vapi at an investment of nearly Rs.28 cr. for captive use.
For calendar year ending 31st December 2007, MIL recorded consolidated sales of Rs.1500 cr. against Rs.885 cr. in the previous nine months ended 31st December 2006 reflecting a rise of 28% on an annualized basis. Net profit for the CY07 was Rs.66 cr. against a net loss of Rs.45 cr. in the previous nine months. Its consolidated EPS works out to Rs.26.7.
MIL’s equity capital is Rs.24.9 cr. and with reserves of Rs.422 cr., its consolidated book value of the share works out to Rs.180. The promoters, Huber Group, holds 70.5% in the equity capital, Indian promoters, Bilakhias, hold 4.5%, Reliance Capital Trustee holds 4% while mutual funds like HDFC and HSBC together hold 8% and the balance 13% is held by the investing public.
The outlook for the ink industry is positive and USA, Japan, Germany, UK, France, Spain, Italy and China account for 80% of the global market and among them USA alone has a 35% market share.
Being the market leader in the ink industry and due to strong backward integration and effective cost management coupled with brand name, quality and distribution network of Huber Group, The MIL share is certainly a value buy. During CY08, sales are expected to go up to Rs.1950 cr. and net profit to Rs.90 cr., which would result in an EPS of Rs.36.
At the current market price of Rs.316.25, the share is trading at a P/E of 11.6 on CY07 EPS of Rs.26.8 and a multiple of 9.4 on its estimated EPS of Rs.36 for CY08. The share is recommended with a target price of Rs.500 in the medium-to-long-term. The 52-week high/low of the share has been Rs.495/253.
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GM BREWERIES
The shares of the breweries are attracting good interest in view of their bright prospects. Within this segment, the share of G. M. Breweries Ltd. (GMBL) (Code: 507488) (Rs.88.60) is recommended for decent appreciation in the long-term. Its excellent Q3FY08 results went unnoticed by marketmen. According to a technical analyst, who tracks the counter, the share looks quite attractive as it is in the long consolidation mode.
Incorporated in 1981, GMBL manufactures country liquor at Vasai near Mumbai and is the market leader in this segment. It came out with its IPO at a premium of Rs.5 aggregating Rs.8.44 cr. in September 1993 to part-finance its expansion. Although the company has the facility to blend and bottle both Indian made foreign liquor (IMFL) and country liquor, its concentration has been on country liquor due to the competitive market conditions in the IMFL segment.
GMBL has been achieving impressive progress both in terms of value and volume in the production of country liquor during the past three years. With the installation of additional bottling lines in FY07, GMBL now has the capacity to process 8.26 cr. bulk litres of country liquor per annum out of which only 63% has been utilised. The company has tremendous potential to utilise the balance capacity by penetrating into the interior districts of Maharashtra and taking advantage of its brand image.During FY07, its sales advanced by 12% to Rs.173 cr. but net profit declined by 11% to Rs.11.9 cr. when it posted an EPS of Rs.12.5 and paid a dividend of 18%. But during Q3FY08, although sales grew by 11% net profit jumped by 86% to Rs.4.4 cr. from Rs.2.4 cr. in Q3FY07. The EPS for Q3FY08 amounts to Rs.4.7.
During the first three quarters of FY08, net profit surged by 46% to Rs.12 cr. on 9% increased sales of Rs.137 cr. During this period, operating profit and net profit margins advanced to 15.3% and 12.3% from 8.8% and 6.7% respectively from the previous corresponding period. The EPS for the 9 months works out to Rs.12.8.
Its equity capital is Rs.9.4 cr. and with reserves of Rs.24.2 cr., the book value of its share works out to Rs.35.7. The value of its gross block has gone up to a whopping Rs.72 cr. up from Rs.59 cr. in FY06. It debt-equity ratio for FY07 improved to 0.4:1 from 1:1 in FY06. The promoters hold 68.4% in its equity capital, NRIs hold 2%, PCBs hold 3.7% leaving 25.9% with the investing public.
GMBL's products have been enjoying consistently good brand image for the past several years and enjoy a virtual monopoly in the country liquor segment in the districts of Mumbai, Navi Mumbai and Thane. It is the single largest manufacturer of country liquor in Maharashtra.
Given the tremendous potential in the interiors of Maharashtra, GMBL has recently doubled its capacity.
With the increase in the price of IMFL at the consumer level due to high taxation, there is a downward shift towards cheaper liquor where by country liquor is increasingly preferred by the lower middle class. With the increase in population, the prospect of country liquor is on the upsurge.
The valuations of the liquor industry have been improving due to accelerated consolidation and foreign majors have been showing great interest in taking over Indian liquor companies.
GMBL’s net profit is expected to increase to Rs.18 cr., which would give an EPS of Rs.19 in FY08. At the current market price of Rs.88.60, the share is trading at a P/E of 4.8 on FY08E against the industry average P/E of 34. A conservative P/E of even 10 will take the share price to Rs.190 in the medium-to-long term. The 52-week high/low of the share has been Rs.160/69.
Sarup Tannery
BSE Code: 514412
Last Close: Rs.34.20
This Jalandhar based leather products manufacturing company has an equity base of just Rs.3.25 cr. and the promoters hold 74.36% stake in the company. This year, the company posted mind blowing results. For the first nine months of FY08, while sales jumped 22.48% net profit jumped 66.67% as the nine month profit crossed last whole year’s profit. For Q3FY08, its sales jumped by 28.93% but profit skyrocketed by 103.85%. Last year, the company had declared 12% dividend.
Yesterday, the government made some positive announcement for the leather sector, which will benefit this company. Buy for investment purpose with a stop loss of Rs.31 for upper target of Rs.38 and Rs.40. The stock can go up to Rs.51 level in the long run. It is the best stock for short-term as well as medium-term investors in the current uncertain market. This stock is also for good dividend yield and is a low risk, high capital appreciation scrip.
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