Pick of the Week
Sarda Energy & Minerals (SEML) Ltd: Massive Growth ahead.
Face Value Rs.10
CMP: Rs.74.95
Book Value: Rs.117.94
EPS: Rs.57.54
Dividend: 20%
Market Cap: Rs.255.17
Target: Rs.85 & Rs.140

Introduction: Earlier known as Raipur Wires & Steel, Raipur Alloys & Steel was promoted in 1975 by the Tejpaul group, Mumbai. The Sarda group purchased it in 1979 and renamed it Raipur Alloys & Steel in 1985. It was again rechristened as Sarda Energy & Minerals (SEML) in 2007 after the merger of Chhattisgarh Electricity Company Ltd and Raipur Gases Pvt. Ltd with itself effective from April 1, 2006.
SEML is an integrated mill producing steel via sponge iron route at Siltara, Raipur (Chhattisgarh). SEML has recently raised its steel making capacity to 2, 40,000 tpa and captive power to 78 MW at a cost of Rs.440 crore. Sponge iron and steel making capacity has further increased to 3, 60,000 tpa a few months ago. The ferro alloys capacity is 66, 000 tpa. Captive iron ore mines meet up to 30% of the raw material requirement, which is very encouraging.
Shareholding Pattern: The promoters hold a whopping 69.01% while the general public holds 30.99%. Among the promoters Chhattisgarh Investments Ltd holds 32.94%, Sarda Agriculture & Prop Pvt Ltd holds 8.03%, and Prachi Agriculture & Prop Pvt Ltd holds 4.74% while G D Sarda holds 4.09% of the shares of the company. Among the non-promoters, LB India Holdings Mauritius II Ltd holds 7.73%, Infrastructure Dev Fin Co Ltd (IDFC) holds 5.41% and Reliance Capital Trustee Co Ltd holds 3.11% of the shares of the company, leaving very little floating stocks in the market. Moreover 57.47% of the total numbers of shares available are locked in for trade. This gives premium value to the shares of the company.
Financials: For Q2FY09, the company came out with spectacular results. The total income of the company for Q2FY09 came out to be Rs.348.74 Cr as against Rs.136.2 Cr in the same period previous year. The PBDT of the company more than doubled in Q2FY09 to Rs.64.76 Cr as against Rs.32.2 Cr in the same period previous year. Even after higher interest, tax and depreciation component the net profit of the company for Q2FY09 came out to be Rs.46.64 Cr as against Rs.24.07 Cr in the same period previous year. The EPS of the company for Q2FY09 came out to be a massive Rs.13.7 as against Rs.7.7. During H1FY09 whereas sales have advanced by 144 per cent to Rs.600 Cr, net profit has surged by 182 per cent to Rs.115.3 Cr.

Operating & Net Profit margins during H1FY09 stood at 30.8% and 19.2% respectively against 27.8% and 19.4% in H1FY08. However, while the operating profit margins remained flat, the net profit margins fell considerably in Q2FY09. During H1FY09, the company has recognized a net loss of Rs.21.3 Cr as a result of change in foreign exchange rates and is included in interest costs. This loss includes an unrealized notional loss of Rs.15 Cr (Rs.9.2 Cr for Q2FY09) on long term loans availed in foreign currency.

The loans are repayable between January 2011 and January 2015. SEML has also provided one-time expense of Rs.7.7 Cr in H1FY09 towards electricity duty demanded by State Government, which was claimed by SEML as exempt as per the prevailing industrial policy of the state government. It has also provided Rs.7.8 Cr for onerous contracts as per AS-29.
Investment Rationale:
1. SEML has captive iron ore mines with reserves of 20 million (mn) tonnes scalable to 28 mn tonnes. It has already received approval for raising the iron ore mines capacity five fold to 1.5 mn tonnes. It has also been allotted coal and manganese ore mines besides obtaining prospective mining license for five iron ore mines in Chhatisgarh with total reserves of 230 mn tonnes, which are expected to become operative in the next three-to-four years. The mining companies attractive high valuations in the market.
2. It is setting up 6 lakh tpa pelletization backward integration plant at a cost of Rs.130 Cr, which would become operative by April 2009. Although its captive coal mines have commenced production in FY08, its new coal mines will start production by April 2009.
3. SEML has signed memorandum of understanding with government of Chhattisgarh for setting up 1100 MW thermal power plant. The MOU replaces the earlier one of 600 MW signed on January 10, 2007.
4. It has signed a MOU with the Government of Chhattisgarh in July 2008 for setting up of a
cement plant of 2 million tpa capacity with clinker capacity of 1 million tpa at a capital outlay
of Rs.550 Cr.
5. The growth in global demand for steel, rising industry consolidation (ex-China) leading to greater production discipline, declining steel exports from China due to rising cost of metallic, trade friction with the Western world, and shortage of metallic is keeping steel prices at reasonable level. The Indian economy, especially infrastructure sector, is growing at a healthy pace. India spends about 4 % of its GDP on infrastructure investment as opposed to 9 % in China. The Government of India has planned to raise the total infrastructure spending to 8 % of GDP over the current Five-Year Plan. The GDP is expected to grow around 7% in FY09 and 8% in FY10, with India becoming fastest growing economies of the world overtaking China. In the view of this scenario, the demand of steel is expected to remain firm.
6. SEML is one of the largest manufacturer and exporter of Premium Grade Ferro Alloys from India. The growth in steel industry, where ferro alloys are used as additives, has pushed the demand of ferro alloys globally. The company is strengthening the raw material linkages, which will sharply reduce the cost of production and lead margin expansion by FY10. The company’s integrated pellitization plant, coal mines and captive power plant would significantly enhance profitability in the coming years.
Conclusion: With a coking coal supply crisis the world over and the resultant spike in prices, the production cost of pig iron for mini blast furnace units is on the rise. Consequently, sponge iron will remain the preferred route for steel making as it uses non-coking coal. The company aims to develop a steel-cum-power business model by increasing its power capacity by 48MW to 213MW in the long run. This will lend stability to earnings as captive power supply will reduce the cost of steel making, while commercial power sales will significantly offset the earnings volatility inherent in the steel business. At the CMP of Rs.74.95, the share is trading at a P/E of only 1.3, which below the industry average. Investors can buy the stock at the CMP of Rs.74.95 and on declines for short term targets of Rs.85 and Rs.130. The scrip has resistances at Rs.80 and Rs.88, which it needs to cross with good volume.

Graphical Check: The stock after touching a high of around Rs.88, in November, 2008, the price fell back to around Rs.58 in late November, 2008 only to rise again from December, 2008. The stock made a high of Rs.80, in December before falling back again. The stock is currently trading near its support of Rs.72.5 and is on an uptrend. Though Stochastic, RSI and MACD are in buy mode, CCI and Bollinger bands are not giving any clear indication of immediate massive rise in the price of the scrip. However, any buoyant market condition might completely change the scenario and the scrip could jump up suddenly. The good point is that the scrip has broken out its envelope pattern and is moving up. In any case the uptrend in the scrip is expected to continue though an immediate & sudden jump may not be seen. Please keep a SL of Rs.69 and Rs.57.5 (exit) for any short term trade.

Note: This stock was recommended to the Paid Groups in the Sunday Report sent on 21st December, 2008, to be bought on today morning. The stock hit the upper circuits in the initial trade.

Pick of the week:
Educomp Solutions Ltd; Banking on Very Strong Business Model
BSE Code: 532696
EPS: Rs.53.61
Dividend: 25%
Market Cap: Rs.3608.95 Cr

Introduction: Set up in 1994, Educomp Solutions Ltd is India's largest provider of technology driven education Solutions Company. It provides end to end solutions for K12 through licensing of digital content to enhance the teaching process. It aims to be a comprehensive provider of solutions in Indian school education economy and has expanded its offerings to cater to pre schools, online tutorials and professional development for teachers, etc.
Educomp Solutions Ltd is one of the fastest growing companies in the space in which it operates. Key positives include growing adoption of technology based education amongst K-12 (Kindergarten to Class12) private schools, low market penetration of fewer than 5 percent amongst private schools in India and increased spending by state governments on technology adoption in public schools. Besides revenue visibility is high as company enters in to 5 year contracts with private school. Educomp has now emerged as full service education provider.
Even assuming moderation in growth in Smart Class and government school business and zero additions to brick and mortar school projects, earnings downside is limited to 11% and 26% in FY10 and FY11E and we can only see around 15%--17%, downside risk to stock prices from current levels on PEG basis in 12 months to 18 months time frame.

Shareholding Pattern: The promoters hold 55.04% while the general public holds 44.96%. Among the General Public, FIIs hold 35.59%, while the mutual funds hold 1.9%.

Financials: For Q2FY09, the total income of the company came out to be Rs.103.65 Cr as compared to Rs.48.62 Cr in the same period previous year. The Profit before depreciation & tax of the company for Q2FY09 stood at Rs.54.5 Cr as against Rs.25.81 Cr in the same period previous year.
The net profit of the company for Q2FY09 came out to be Rs.25.4 Cr as against Rs.13.62 Cr in the same period previous years. This increase in net profit is inspite of higher tax and depreciation. The EPS of the company for

Investment Rationale:
1. The total number of schools under contract for the company’s Smart Class segment has reached 1267 schools comprising 1.43 Million students. The total number of schools under contract for the company’s ICT Solutions segment has reached 8915 schools comprising over 5 million students.
2. Historically company has observed the following seasonality i.e. Quarter I amounts to approximate 10 to 12% of the total revenue. Quarter II amounts to approximate 18 to 20% of the total revenue, Quarter III amounts to approximate 25 to 30% and Quarter IV amounts to approximate 38 to 47% of the total revenue. Since the last two quarters amount to higher amount of revenues, we could see the company achieving growth targets going forward.
3. Even considering a worst case scenario we can expect 32% CAGR, FCF turns positive: Even assuming Smart Class school additions to be at 600 schools p.a, 33% lower than FY09E and no further expansion in K-12 schools, the FY10E and FY11E estimates would be a CAGR of 32% (FY09-11E). Free cash flow though would turn positive from FY10E versus earlier assumption of FY12E.
4. Strong performance continues; Could raise guidance in Q3: Educomp reported strong 120% Y-o-Y growth in PAT (including forex losses on Foreign Convertible Bond) led by 151% % Y-o-Y growth in revenues. It added 231 schools in Smart Class versus MLE of 129 and could up guidance in third quarter.
5. Strong domestic growth story: With nearly 80% of the revenues of the Company coming from domestic market and presence in non discretionary education market, there is virtually very little risk to earnings.
6. Growth momentum continues: The Company added 231 schools in Smart Class as against to an earlier expectations of 129 schools. Cumulatively Educomp has now added 334 schools in 1H FY09 vs 172 last year. Since, as mentioned earlier Q1 and Q2 are seasonally weak quarters, Educomp could exceed their guidance of 767 school additions during the year. Management plans to conduct 140 sales seminars across 80 cities during H2 FY09.
7. Guidance: The Company hopes to maintain a Full year consolidated guidance of Rs.5.5-5.8 bn and PAT of Rs.1.4 bn-1.45 bn for FY09 despite forex loss of Rs.200 mn during 1H FY09.
8. Premium Valuations of the stock: There are ample reasons to believe that premium valuations of the scrip around 30x FY10E are fair, considering a superb 68 percent earnings growth over FY08-11E and de-risked revenue model, focused on non discretionary education spend and high exposure to domestic economy.

Risk: Risks to the valuation model discussed earlier, are delays in execution of contracts in government schools, acquisition related risks and managing multiple growth initiatives.

Chart-Check: The scrip after coming near Rs.2250 in late November, 2008, it fell back only to rise again almost to the identical levels in early December, 2008. The stock is on a downward channel now and could find its intermediate support around Rs.1950 and final support to the current downtrend at around Rs.1750.
This rock solid support should be considered as ultimate buying point in any correction in the scrip price. The stock is currently trading near its 10 and 20 SMA. Its 100 day SMA is around Rs.2800. The stock’s 200 day and 50 day EMA is around Rs.3000 and Rs.2250 respectively, which could be broken on the upside within the next 12 months time frame. MACD, Stochastic (Fast and Slow), and Bollinger bands though are currently in buy mode, I would prefer to buy the stock on any bounce around Rs.1950-Rs.2000 range, or near 20 day SMA. The Candle Stick Chart Pattern however, indicates that a little pain is left in the stock before it starts to move up.
Hence on Monday one can buy the stock after it has finished the initial correction phase and starts to move up. To sum up all, the stock should be purchased only above Rs.1950 and in bounces only. The stock should be exited around Rs.1750.

Conclusion: Educomp Solutions Ltd is one of the best stocks in the space in which it performs and outsmarts it competitors by miles. It works in the niche segment of the IT-Education segment whose valuation model will improve going forward due to the spread of computer education in urban as well as in rural schools. The stock should be purchased around Rs.1950—Rs.2000 range with an upside potential of around 45%--50% in the next 12 months time frame, piggybacking on a strong 54% earnings CAGR over FY09-11E. The stock in the range of Rs.1750---Rs.1950 has limited buying considering that over 80% revenues emerge from non discretionary K-12 education spend. With presence in Pre School, Kindergarten to class 12 (K-12) schooling/content, online/offline tutoring and vocational training (Raffles) Educomp Solutions Ltd has now emerged as full service education provider.
Even assuming moderation in growth in Smart Class and government school business and zero additions to brick and mortar school project the stock could reach a target of Rs.4000 by the end of FY11.

Note: This was the research report sent to the Paid Groups (Premium and Quickie) on 14th December, 2008. The stock gave more than 20% return in less than 7 (seven) days.

Associated Alcohols & Breweries Ltd
BSE Code: 507526
Book Value: Rs.51.22
EPS: Rs.9.86
Face Value: Rs.10
Market Cap: Rs.14.6 Cr

Peer Groups: Shaw Wallace, United Spirits, United Breweries, Jagatjit Industries, etc.

Introduction: Associated Alcohol & Breweries (AAB) is a mid sized distiller which took over Associated Distilleries, based in Madhya Pradesh in 1990 and expanded activities into manufacturing of highest grade liquors. Associated Alcohols & Breweries Limited (AABL) is one of the largest distilleries in India and the flagship company of the Associated Kedia Group – a Rs.1000 million liquor conglomerate with interests in liquor manufacturing and bottling. It currently manufactures and bottles bulk spirits for marquee brands like Diageo as well as, market its own brands of IMFL and country liquor. AABL has a presence in every value point of the liquor industry spanning:
• All varieties of potable alcohols.
• Country Liquor (CL).
• High quality Rectified Spirits (RS).
• Extra Neutral Alcohol (ENA).
• Extra fine, triple distilled Grain spirit.
• Indian Made Foreign Liquor (IMFL), in the whisky, brandy, rum, gin and vodka categories.
• Bottling scotch whisky for other international brands.
Shareholding Pattern: The promoters hold 49.54% while the general public holds 50.43%. Among the general public, corporate bodies hold 26.74% of the shares of the company. Hence we have very little floating stocks in the company giving high premium to the shares of the company.
Financials: For Q1FY09, the company came out with very good numbers. The total income of the company for Q1FY09 came out to be Rs.30.3 Cr as against Rs.29.5 Cr in the same period previous year.
The operating profit of the company for Q1FY09 came out to be Rs.3.34 Cr as against Rs.2.03 Cr in the same period previous year. PBDT of the company for Q1FY09 came out to be Rs.2.9 Cr as against Rs.1.5 Cr in the same period previous year. But, even with higher tax and depreciation components the net profit of the company for Q1FY09 came out to be Rs.1.91 Cr as against a mere Rs.78 lakhs in the same period previous year. Moreover, the operating profit margin and net profit margins of the company comparing Y-o-Y took a quantum jump indicating bright prospects of the company going forward.
Investment Rationale:
• Associated Alcohols and Breweries Ltd, operates a 42mn litres pa distillery which runs on both grain (mostly sorghum) and molasses that optimizes input costs. With the fall in grain & molasses, prices the company is expected to make huge profits going forward, as it has not reduced the price of its products.
• It would expand its distillery capacity to 65mn litres likely by Q4 FY09 along with better capacity utilization of 80% from nearly 75% at present. It has also undertaken de bottlenecking exercise which improved spirits production in FY09.
• It has managed to reduce its power cost to Rs1.8mn per month from earlier Rs2.7mn and plans are afoot to reduce power costs to nil through captive power plant of 2.8MW. Above expansions would cost Rs.51 Cr which would be funded through a mix of warrants (Rs.18 Cr) and placement of shares to investors.
• It is the sole domestic manufacturer of triple distilled grain based Extra Neutered Alcohol(ENA) for Smirnoff vodka, amongst the largest selling vodkas, owned by Diageo. It is also the only distiller in India to bottle ‘Glen Drummond’ single malt Scotch whisky for Mason & Summers. Separately, it is one of the leading sellers of country liquor in Madhya Pradesh with nearly 2.5mn cases sold annually in ten districts through the government. The Company derives about 25% of its revenues from sale of its own IMFL brands like ‘Royal House’, James McGill (in Whisky) and ‘Jamaican Magic’ (in Rum). It averages about 50,000 cases of IMFL in sales every month. The company enjoys manufacturing flexibility since dual stock nature of distillery and central location imply it can source molasses from Maharashtra and grain producing belts of Amravati and Akola.
• In house brands manufactured and marketed by the Company include consumer favourites such as Red & White, James McGill, Bombay Special (in the whisky segment), London Bridge (in the gin segment) and Jamaican Magic in the rum category. These brands are very popular in the local market and benefit the company by way of higher operating margins and realizations.
• Indian made foreign liquor (IMFL) is a US$9.3bn market with approximately 11 Cr cases sold in FY07 and is expected to grow about 10-12% over the next few years. With increased social acceptance of alcohol and rising incomes, per capita consumption, at less than one litre, is expected to provide tremendous growth opportunities for Associated Alcohol and Breweries Ltd.
• High interstate taxes and duties imply that each state acts as a country in itself which has meant that foreign brands have to tie up with local distillers and bottling units to gain a foothold in the domestic market. This strengthens the hand of local players, like Associated Alcohol and Breweries Ltd, who have the necessary manufacturing set up in place and is set to expand in the near future.
• Since alcohol constitutes a major source of revenue through excise, state governments have been reluctant to open the industry. However recent policy changes suggest the scenario may gradually change for the benefit of the industry.
Conclusion: The scrip of Associated Alcohols and Breweries Ltd could be purchased for at least 50% appreciation in the next 12 months time frame. Considering its completion of expansion by March, 2009, we could even expect higher price of the scrip going forward, provided the general market condition improves a bit.
From the charts we see the stock has given a major breakout and is expected to move up. MACD, Stochastic, Bollinger Bands, and CCI are in buy mode. Moreover, the candle stick chart pattern suggest a buy in the scrip. However, please keep a SL of Rs.18.5 for any short term trade. The resistances of the scrip are Rs.22.5, Rs.33 and Rs.37.5 where some profit booking should be done. Please keep a target of Rs.46 within 12—18 months time frame.

Note: This scrip was recommended on 7th December, 2008, in the Sunday Report sent to the Paid Groups.

Arshiya International Ltd
BSE Code: 506074
Face Value (FV): Rs.2
CMP: Rs.86.8
EPS: Rs.3.58 (Rs.17.9, for Rs.10, FV Scrip)
Book Value: Rs.77.78
Market Cap: Rs.509.97

Company Background: ARSHIYA INTERNATIONAL LIMITED is an integrated logistics player providing wide range of supply chain solutions. The company plans to expand its operations and has recently raised Rs.350 crores. It is setting up FTWZs for expanding operations, has joined hands with overseas majors of the industry and has thus gained a competitive advantage over other players. Its major operations are in India and Gulf region. It is in a knowledge driven logistics solution business which is in its nascent stage in India. The potential for growth arises from the need of the corporate to delegate warehousing and transporting of products and focusing on the core competency of themselves.

Industry Overview: Indian logistics sector is largely dominated by unorganized players operating on a very small scale, majority owning not more than five trucks. Such players account for almost 80% of the business of the industry. The trend is changing and inclination towards outsourcing the business needs of warehousing and transportation is increasing. Prior to the popularity of the concept of outsourcing of logistics, Indian corporate invested heavily on setting up warehousing and distribution channels.
Logistics outsourcing has gained popularity as the companies are able to reduce their overall cost of distribution by utilizing services of specialized players in the industry. Thus, the business of integrated logistics players is set to expand manifold in the coming years. To ensure core competency in the business, integrated logistics players are also focusing on end to end solutions and other value added services. The sector remains largely untapped in India offering significant growth potential.

Financials: For Q1FY09, the company came out with very good set of numbers. The total income of the company came out to be Rs.77.96 Cr as against Rs.45 Cr in the same period previous year. The profit before tax and depreciation increased to Rs.8.41 Cr as against Rs.2.92 Cr in the same period previous year.

Even after providing for higher tax and higher depreciation, the net profit of the company for Q2FY08, came out to be a whooping Rs.5.5 Cr as against Rs.1.91 Cr in the same period previous year. The EPS of the company fell in Q2FY09, fell due to increase in equity capital from Rs.8.74 Cr to Rs.11.75 Cr in the same period previous year. Another interesting point is that both the operating and net profit margins increased substantially in Q2FY09 as compared to the same period previous year.

Investment Rationale:
• Fully integrated solution player: The Company is a fully integrated logistics solution provider. It has joined hands overseas with BDP International, Cyberlog and Genco to cater to the clients in India and Gulf region. This provides a competitive advantage to the company. It renders wide range of services and is expanding its operations rapidly across the business segments.
• Setting up FTWZs: The Company has decided to set up Free Trade Warehousing Zones (FTWZs) in India at two locations viz. JNPT near Mumbai and Delhi. Another FTWZ will be set up at Sohar (Oman). The FTWZs will be first of their kind in India and will facilitate the company to cater basic and value added services to the clients.
• Fancy for Railway Sector-related stocks in the current market scenario: Off late it has been seen that a sudden fancy has arisen amongst the investors/traders, for the Railway Sector, related stocks. In case of Arshya International Ltd what is interesting is that the ongoing Containerized Rail Operation Project has been transferred to a Special Purpose Vehicle viz. Arshiya Rail Infrastructure Ltd a wholly owner subsidiary of the Company. The total project expenditure incurred till the date of incorporation of Special Purpose Vehicle and License to operate Containerised Rail has been transferred to Arshiya Rail Infrastructure Ltd at Cost. Moreover, out of net proceeds of Rs.341.87 Cr received by the company on placement to QIBs and Rs.17.49 Cr on conversion of warrants, Rs.258.97 Cr has been utilised for payment of Capital
advance and Capital expenditure for ongoing FTWZ Projects and Rs.100 Cr have been invested by subscribing to equity capital of wholly owned subsidiary viz - Arshiya Rail Infrastructure Ltd, a Special Purpose Vehicle for Containerized Rail Project. Thus this stocks could move up if its considering the current trend for the shares of the companies more or less connected to the railway sector.
• Positive on Charts: If we look at the daily charts of the company we see that the stock has made a permanent bottom at around Rs.78 and then a higher bottom at around Rs.82. The MACD is showing positive divergence pattern and could soon move in the positive territory. Moreover, the other chartical parameters like Bollinger Bands, Stochastic, and RSI are in buy mode. The Candle Stick chart pattern however does not give a definite trend for the days ahead.
• Broad array of services: The Company’s alliance with specialists in the sector both in India and abroad has helped to develop wide spectrum of services for the clients. The major services offered by the company are:
1. International freight transporting, global logistics management and consulting services by using the expertise of BDP India.
2. Providing of supply chain management technology solutions in collaboration with Cyberlog.
3. Logistics services in the retail warehousing sector by supplying products to large brand stores through Genco. Thus, the company offers all variety of services in the sector and has been catering in the 3PL format (third party logistics).

Downsides:
• Dependence on corporate: The company is in a services related business of handling products manufactured by others, warehousing and transporting of such products on time and in a proper manner. Deficiency in services can lead to loss of market share for the company.
• Regulatory clearances: The Company is setting up infrastructure to render services in India and Gulf region. Any delay in the clearances for such set up will dampen the operations and viability of business.
• Expansion spree significant; fund raising concerns: The Company has successfully raised Rs.350 crores by issuing equity capital at the rate of Rs.310 per share. But the company may not be able to do so, on a regular basis. To expand the operations, the company needs funds to the extent of Rs.1900 crores. Thus the company may leverage its balance sheet for expansion and face interest burden in the future.

Conclusion:Given the growth visibility of the sector, the competitive advantage of the company in the industry and past performance, it is expected that Arshiya International Ltd, will be able to multiply its revenues and profits manifold in the next three years to four years.
I recommend a BUY on the stock at the CMP of Rs.86.8 for a short to medium term target of Rs.130. The stock has to move above Rs.100 to show some momentum in its movements. Any crossover could take the stock above Rs.130 in the next few months time frame, provided the market condition improves a bit. The resistances for the scrip are Rs.95, Rs.100, Rs.112, Rs.125 and Rs.135 where some booking should be done. Keep a SL of Rs.77.5 (exit) for any short term trade. This stock is suitable for investors who need a steady income, but with less risk.

Note: The stock was recommended to the Paid Groups on 23rd November, 2008.

Sujana Towers Ltd: Towering Ahead:
BSE Code: 532887
Scrip ID: SUJANATWR
CMP: Rs.17.85
Face Value: Rs.5
Book Value: Rs.52.91
P/E: 1.44

EPS: Rs.12.4
Market Cap: Rs.73.96 Cr
52-week high/low: Rs.235/Rs.16.65

Introduction: Sujana Towers Limited (STL) was incorporated under the Companies Act, 1956. The Company has been incorporated to de-merge the tower division of Sujana Metal Products Limited pursuant to the Scheme of Arrangement and Amalgamation as approved by the Hon’ble High Court of Andhra Pradesh at Hyderabad on 10-04-2007.
Over the last 7 (seven) years, it has built an infrastructure that fulfils the requirements of the telecom and power industries with the highest grades of galvanized value-added products. The company has also made a distinct entry on the export front. Sujana Towers Limited is an ISO 9001:2000 certified company, among few of its kind in the country and also obtained approvals for supply from PGCIL, various State Electricity Boards and BSNL.

It client include BHEL, Deepak Cables, Subhas Projects Ltd, Reliance Infocom Ltd, Bharti Airtel, etc. To impart strength, longevity and resistance against atmospheric impact and peeling, its towers are galvanized. The Galvanizing process involves several stages for which it has set up two large-scale units at IDA Bollaram Industrial Estate, Hyderabad, to emerge as India's largest galvanized steel tower manufacturing company. Sophisticated equipments are pressed into use to fabricate and galvanize the towers, so that clients receive ready-to-erect structures.
Its main products include power transmission line towers (from 11 KV to 400 KV), and telecom towers (self support lattice towers upto 100 meters height, triangular/square cross-section, hybrid towers, angular/tubular towers, lattice Guyed masts and monopoles). It is only integrated tower manufacturer, in south India having an in house re-rolling facility for structural steel fabrication of tower and tower parts. Thus it has capacity to deliver ready to erect structures in customer—specified sizes in shortest time spans.
Lately to cash on engineering skills and sound technical knowledge, STL has forayed into providing services, like Engineering and consultation, Turnkey Installation, and Inspection and Maintenance. Through JV with EPC companies like Deepak Cables, Annapurna Construction, the company is already executing turnkey EPC projects in power segments and aims to emerge as turnkey contractor in the next couple of years.
Peer Group Companies:
• Areva T&D Ltd,
• Alstom Projects Ltd,
• KEC International Ltd,
• Kalpataru Power Transmission Ltd
• Jyoti Structures Ltd

Shareholding Pattern: The promoters hold 35.4% while the general public holds 64.6%. The following is the General Shareholding Pattern, which shows that who’s who of the mutual fund industry holding positions in the company.

Financials: For Q1FY09, the company came out with good set of numbers. The total income of the company for Q1FY09 came out to be Rs.164.63 Cr as against Rs.144.66 Cr in the same period previous year. The operating profit in Q1FY08 came out to be Rs.33.32 Cr as against Rs.19.74 Cr in the same period previous year. The profit before tax in Q1FY09 came out to be a whooping Rs.22.97 Cr as against Rs.15.74 Cr in the same period previous year. Net Profit of the company in Q1FY09 suffered due to a huge tax component of Rs.7.8 Cr, as against Rs.1.8 Cr in the same period previous year.
However, even then the Net Profit of the company, for Q1FY09 came out to be Rs.15.14 Cr as against Rs.13.90 Cr in the same period previous year. Now, while the operating profit margins jumped up during Q1FY09 as compared to the same quarter previous year, the net profit margin remained flat during this period.

Triggers:
• Expansion plans: Sujana Towers has embarked on an expansion which would take it capacity from 128,000 tpa now to 228,000 tpa this financial year. It has set up two large scale units at Hyderabad to emerge as India’s largest galvanized steel tower manufacturing company. It has expanded its towers capacity at Hyderabad from 28,125 TPA of galvanized towers to 128,125 TPA. In the light of fast growing demand for supply of power transmission and telecom towers and associated services within the country as well as in the neighboring countries, it is thinking of going for further expansion of capacities.
• Growth plans: In FY09 it is expected to have a net operating cash-flow of about Rs.62 Cr and by FY10, Rs.90 Cr. With such cash generation, it seeks to expand capacity and explore further growth opportunities.
• Bidding power: The enhanced scale of operations would enable it to bid for larger contracts. This would enhance its ability to more effectively take on the unregulated sector.
• Unlocking value: The business lines of Sujana Metal Products and Sujana Towers are distinct from each other in terms of profitability as well as future prospects and so we have to value them separately. The business lines of Sujana Metal Products and Sujana Towers are distinct from each other in terms of profitability as well as future prospects and so we have to value them separately. The two businesses combined into one entity, the company gets a lower valuation than what it could command if the were valued as separate entities. The hiving off of Sujana Towers has been completed, the effective date being May 4, 2007 and the appointed date being July 1, 2006. The hive-off would unlock value in the high-growth tower fabrication far more than could be obtained in low-growth metals and increase the valuation of the company as a whole.
• Economies of scale: Such economies would raise the EBITDA margin to 16%. The Company would also benefit from the assured supply of structural and billets from its parent company.
• Buoyant power and telecom sectors: Telecom-tower demand is rising as service providers enter new areas. India faces a shortage of 8% in Power. With the economy growing at over 7%, increase in power generation is an imperative. Besides, there are some power surplus states and regions and so power needs to be transmitted to deficit regions. The Power Grid Corporation plans to invest about Rs.360 bn in setting up a transmission network across the country.
• Telecom towers - demand doubling by 2010: India has about 160,000 towers, with a tele-
density of 18 per 100. According to industry estimates, tele-density is expected to rise to 30
per 100 by 2012. In fact, this is expected to drive demand for towers. As per industry estimates, India would need about 350,000 towers by 2010. This means demand would more than double.
• Towers business - demand far exceeds supply: The annual installed capacity of tower
manufacturing in India is about 90,000 tons. Conservatively speaking, we can see demand of over 8m tons in the next five years, compared to cumulative capacity of 4.5m tons.
• Benefit from the fall in metal prices: It is basically engaged in manufacturing of galvanized
steel towers used in the power transmission and telecom tower sectors. Hence it is definitely going to benefit from the recent fall in steel, zinc and other commodities as they form the major part of the input cost.
• To go for M & A: It also intends to set up / acquire subsidiaries in the Middle East/ South
East Asia in the area of power transmission and telecom infrastructure services. Recently, it acquired 51% shareholding in Telesuprecon Ltd Mauritius), undertaking Telecom infrastructure contracts in various cast / central African countries.
• Limited downside: The scrip came down from a high of Rs.235, scrip to Rs.17.85 and is trading at a considerable discount to its book value of Rs.52.91. Hence it has limited downslide.
• Moving into new areas: To cater to the rapidly increasing demand, the company is in the midst of setting up a Greenfield plant in Chennai, with installed galvanized tower manufacturing capacity of 100, 000 MPA. This plant will also have facilities to manufacture high mast light poles, railway electrification structures, etc. and will cater to the export requirements. The project has been fully funded and is expected to start operation by the end of Q3FY09, taking the company’s total capacity to 228, 000 MTPA.
• Contemplating to acquire a company in China: In future, STL is looking to set up a plant in
Gujarat to manufacture galvanized steel parts with capacity of 75, 000 MPTA. Company is also contemplating to acquire a company in China for manufacture of tower parts and set up a subsidiary in Hong Kong for sourcing cheaper raw materials.
• Preference Offer at high price: In October, 2008, the company made a preferential allotment of 80 lacks warrants to be converted @135 per share to fund its Chennai expansion plans.
• Healthy Order Book Position: The company has healthy order book position at present and is looking to aggressively to raise nearly Rs.300 Cr through equity route, to fund future plan.
• Positive on Charts: If we see the chartical patterns of the scrip, then we that the scrip is looking attractive near its immediate resistance and is near its 52-week low price of Rs.16.65, made some days back. The stochastic, MACD and Bollinger Bands indicate are in buy mode and the price of the scrip is expected to move up its immediate resistance of Rs.18, within the next few days, ofcourse depeding on the market conditions or provided the market condition improves a bit. Candle Stick Chart pattern indicates an immediate change in trend of the scrip of course with the overall improvement in the Stock Market conditions.

Concerns:
• Slowdown in capital expenditure in Power and Telecoms: A slowdown in the capital expenditure cycle in either of the sectors may have a negative bearing on the company's performance. But this seems unlikely given the real demand and shortage of power in India.
• Delay in capacity expansions:If there is delay in implementing the capex then projections for top line and bottomline can substantially fall short of expectations.
• Raw material prices: Main raw materials like steel structural and zinc make up 90% of the cost,whose prices have fallen drastically at present. But in future an sharp rise in the cost of these materials could have some impact on the margins of the business.

Conclusion: Valuation Multiples of Power transmission Towers EPC companies Traditionally, EPC cos. in this sector trade at forward multiples of about 12-15x FY08E earnings due to the great visibility in growth. On EV/EBIDTA, these companies trade at 7-9Xforward EBIDTA estimates.
STL has edge compared to numerous small manufacturers due to its huge capacity and economies of scale as well as due to its integrated operation. Given this and taking very conservative approach for discounting future earnings it is felt that STL should be valued at 6x future EBIDTA because it can only manufacture as per the specifications given by the customers but cannot design unlike EPC Companies like Kalpataru, KEC International and Jyoti structures. Hence one can buy the scrip at the CMP of Rs.17.85, for a possible price target of Rs.75— Rs.80, in 2 years time frame. Keep a SL of Rs.17.5 for any short term trade. The scrip has resistances at Rs.25, Rs.27.5, Rs.38, Rs.51 and Rs.67 and Rs.71, where partial profit booking should be done.

English Indian Clays Ltd:

The Co-generation Plant, Starts Operation and could further get huge benefits, under Clean Development Mechanism (CDM):

BSE Code: 526520

Face Value: Rs.10

CMP: Rs.273.85

EPS: Rs.41

Dividend: 70%

P/E: 6.61 (only)

Market Cap: Rs.122 (only)

Introduction: English Indian Clays Ltd (EICL) was incorporated on 18th November 1963, in technical and financial collaboration with English China Clays Limited, UK (now known as ECC Group plc, UK). The collaboration with ECC ceased in the year 1992. EICL has since been actively engaged in the manufacture and processing of China Clay of different grades for use as a coating agent and filling agent.

The Company has its clay manufacturing units at Veli, Thonnakkal and Kollam located in Thiruvananthapuram, Kerala. The company's clay mining and refining operations center around Trivandrum where the processing plant produces several grades of refined Kaolin (China Clay - both Spray Dried and Rotary Dried), Metakaolin and Calcined Kaolin (clays) to cater to the Paper, Paint, Rubber, Plastic, Fiberglass, Cement and Ultramarine industries. The plant is the biggest in South East Asia.

EICL has been successful in maintaining strict quality control and consistent conformity to international standards. The company has been certified to ISO 9002:1994 since 1996 and has now been upgraded to ISO 9001 : 2000. EICL has a well-equipped R&D Center, which is recognized by the Department of Science and Technology, Govt. of India.
EICL R&D has set up Application Laboratories that focuses on specific industry requirements to develop suitable grade of products and provides application support to customers to achieve best results from its products.

As pigment and extender, China Clay it is used extensively in the paper and paints industry. As filler, it is used in the manufacture of plastics, detergents, rubber goods and paper; as raw material, it is used by glass and ceramic industries for making fiberglass and porcelain respectively. As additive, it is used by the soap industry and it is also used by the paper industry for specialty coating purposes as well in order to impart strength and shine and water repellent characteristics to the paper.

EICL has marketing offices in Mumbai and Delhi and has marketing agents in Mauritius, South Africa, GCC, Yemen, Sri Lanka, Indonesia, Philippines, Jordan and New Zealand. This company is from the Brij Mohan Thapar Group.

Shareholding Pattern: The promoters' holding is a massive at 79.91% while the public holding is only 20.89 %. Among the non-promoters, Lotus Global Investment Ltd alone holds 6.69% of the shares of the company. Hence, the number of shares available for trade in the market is very less. It is also due to this factor, that the scrip had given huge returns to the share holders, in the past.

Financials: The result of the company for the quarter ending September, 2008 is absolutely fantastic and has silenced many critics. The total sales of the company for Q2FY09 came out to be whopping Rs.81.74 Cr as against Rs.68.1 Cr in the same period previous year.

The net profit of the company for the quarter ending September, 2008, became almost double at Rs.8.53 Cr as against Rs.4.8 Cr in the same period previous year (Q2FY08). Hence there is a massive jump in both the top and bottomlines. The EPS of the company for the quarter ending September, 2008 came out to be Rs.10.13 as against Rs.8.62 in the same period previous year.

The operating profit margin of the company also improved to 20.09% in Q2FY09 as against 15.85% in the same period previous year. The net profit margin of the company in Q2FY09, has also shown marked improvement at 11.23% as against 7.07% in Q2FY08.

What is more interesting is that the EPS of the company is Rs.41.45. But what makes the scrip attractive at the CMP, is the low floating stock--this further gives premium value to the shares of the company.

Triggers:

1. English Indian Clays Ltd has entered into Agreements with Wolkem Clay Pvt. Ltd. (WCPL), Kollam and Wolkem Industries Ltd. (WIL), Udaipur towards purchase of the assets of WCPL & WIL.The purchase is expected to be advantageous to the existing activities of the Company.

2. English Indian Clays Ltd earlier informed that the Board of Directors of the Company at its meeting held on January 25, 2008, has approved an issue of 7,44,830 Equity Shares of Rs.10 each at a premium of Rs.990 pre share aggregating to Rs.74.48 Cr on right basis in the ratio of 1:6 i.e. 1 (one) new equity share of Rs.10 each for every 6 (six) existing equity shares held on the record date, to part finance the upcoming starch manufacturing project at Shimoga (Karnataka). Do u remember the episode of Radhe Developers Ltd's case in this respect. In a similar move the scrip of Radhe Developers Ltd, (Which I recommended at Rs.7.5 in 2005--06 and which raised lot of eye-brows in the media), became more than 15 times in matter of some months.

3. English Indian Clays Ltd has recommended a final dividend @ 70% on paid up equity share capital of Rs.4,46,89,790 amounting to Rs.3,12,82,853, 5% on 10% Cumulative Redeemable Preference Share capital of Rs.10,00,00,000 amounting to Rs.50,00,000 and 5.5% on 11% Cumulative Redeemable Preference Share Capital of Rs.20,00,00,000 amounting to Rs.1,10,00,000 respectively for the financial year ended March 31, 2008--this is also massive considering the dividend yield. During the year the Company had paid an interim dividend of 5% on 10% Cumulative Redeemable Preference Shares and 5.5% on 11% Cumulative Redeemable Preference Shares respectively.

4. It is an ISO 9001: 2000 Company. Moreover, the company has commissioned the Co-generation Power Plant at Yamuna Nagar and the operation has started from 1st September, 2008. Hence any generation of revenue from the saving of power and from Carbon Credits would be seen in the following quarters. This is a great development in the company as the company could apply to the world body for getting mammoth revenues in the form of Carbon Credits.

5. Over the last 12 years, EICL products have established themselves in the international market. With Hydrous and Calcined Clays of quality comparable with the best grades available in the world, EICL products offer distinct techno-commercial advantage in Africa, South East Asia, Far East and Middle-East markets due to its geographical location.Two major Indian ports of Cochin & Tuticorin are 200 kms from the works. Frequent connections to all the major ports in the world are available from these ports.

6. Strong R&D with well equipped Application Laboratories are there at all the three manufacturing locations i.e Thiruvananthapuram, Yamunanagar and Puducherry.
The lab has Paper, Paint, Rubber, Cement and Ceramic industry specialists, supported by the most modern equipments, who constantly thrive for offering proactive solutions to the respective industries.

7. The Company's ability to sustain a steady and time bound supply schedule coupled with its constant striving for excellence has given it that extra edge over all its competitors in the field. With its rich reserves, hi-technology, vast experience of its motivated employees and deep commitment to quality, EICL is all set to take a place of pride the twenty first century as the preferred source for the best companies in the business.

Moreover, due to depreciation of value of INR against Dollar (USD), the company will be able to generated additional revenues.

Chartically Speaking, the stock is in the Highly Oversold Territory and a bounce could be expected anytime now, which could take the stock to around Rs.450---Rs.500 (or more) by January, 2009. The two chief Chartical Indicators, MACD and Bollinger Bands shows that the scrip is BUY MODE, at present. A cross over can take the stock to above Rs.700 in the next few months.

Buy the stock at the CMP of Rs.273.85 or when the market stabilizes for some decent appreciation in the days to come. The bear markets generally bounce back with vengence, especially when the market falls NOT due to Internal Fundamentals but due to some "Ripple Effect".

In the present circumstances, please buy the stock above Rs.270 in any case.

KEC International Ltd:

Weak Rupee to boost its income

CMP: Rs.240.05

BSE Code: 532714

EPS: Rs.34.93

Dividend: 50%

Market Cap: Rs.1184.52 Cr

Performance: Out-performer

Target: Rs.440--Rs.525

Introduction: KEC’s expertise lies in managing complete turnkey EPC contracts. It is a global leader in Power Transmission Engineering, Procurement and Construction, (EPC) business. KEC is the flagship company in the transmision sector of the Rs.11, 500 Cr RPG Group. RPG Enterprise has major presence in core sectors like Power, Tyres, Retail, Technology and Entertainment.

KEC International Ltd's forte lies in timely and cost effective execution of turnkey EPC contracts. It undertakes projects in transmission, distribution, rural electrification, substations and telecom infrastructure segments. From erecting India's first 800 KV Compact line to developing Canada's Tallest and heaviest transmission towers, KEC International Ltd has shown unparalled technical proficiency in delivering Best-in-Class Transmission Towers meeting the discerning demands of even advanced markets. Having successfully executed substation projects in Algeria, Oman, and in India, KEC International Ltd, has the envious distinction of being one-stop-shop offering a range of value added services and end to end solutions to the complex requirement of global clients.

The company’s business areas include:

1.Power transmission EPC

2.Rural electrification & distribution networks EPC

3.Sub-stations construction

4. Telecom infrastructure EPC

5. Railway projects

6. Design & tower testing services

KEC has tower manufacturing plants at Jaipur, Nagpur and Jabalpur. The company has access to manufacturing capacity of 180,000 mtpa. Of this, 110,000 mtpa is owned and the balance 70,000 mtpa is contracted. Company has tower testing stations at Jaipur, Jabalpur and Vashi with capability to test towers up to 1,000 Kv

KEC International Ltd (KEC), an RPG group company, is among the largest global power transmission EPC contractors. KEC derives about 66% of its revenues from international operations. Going forward, the company’s geographical mix will continue to be skewed towards international business.

Shareholding Pattern: The promoters hold 41.54% of the shares of the company while total public holding is 58.46%. According to the latest shraeholing pattern, among the non-promoters' holding Banks, Insurance Companies, Mutual Funds and FIIs hold 43.92% (42.90% in Q4FY08) shares of the company. What is interesting is that FIIs' holding has almost remained unchanged at 12.80% (12.89% in Q4FY08) in the last few quarters. This assumes significance when the many stocks are down due to heavy FII selling. Moreover, the general public holding is only 11.16% according to the latest shareholding pattern----this means only about 55 lakhs shares are in the hands of general public. This gives its shares a premium value over its peers.

Life Insurance Corporation of India Ltd (5.70%), FID Funds Mauritius Ltd (3.95%), HSBC Global Investment Funds A/c HSBC Global (1.42%), HDFC Trustee Company Ltd HDFC Prudence Fund (1.82%), HDFC Trustee Company Ltd HDFC Infrastructure Fund (2.10%), Reliance Capital Trustee Company Ltd A/c (1.56%), DSP Merrill Lynch Trustee Company Pvt Ltd - A/c (1.22%), BSMA Ltd (1.26%), SBI Mutual Fund - Magnum Tax Gain (1.23%), India Fund Inc (1.03%) , Tata Trustee Company Pvt Ltd A/c Tata Mutual (1.18%), Master Trust bank of Japan Ltd A/c (1.05%) etc. holds substantial stakes in the company.

Financials: For FY08, the company came out with good set of numbers. The total income of the company for FY08 came out to be Rs.2814.73 Cr as against Rs.2093.9 Cr in the same period previous year. The operating profits of the company jumped to Rs.354.6 Cr as againts Rs.251.94 Cr in the same period previous year. The profit before tax (PBT) was almost double at Rs.261.85 Cr as against Rs.159.3 Cr in the same period previous year. The net profit of the company in FY08 came out to be whooping Rs.172.2 Cr as against Rs.104.63 Cr in the same period previous year. This gave an EPS of Rs.39.56 in FY08 as against Rs.27.76 in FY07.

For Q1FY09, the total income of the company came out to be Rs.600.2 Cr as against Rs.511.6 Cr in the same period previous year. The net profit of the company came out to be flat at Rs.25.5 Cr as against Rs.25.31 Cr in the same period previous year. However, the results for the quarter ended June 30, 2007 do not include the results of the erstwhile RPG Transmission Ltd and the erstwhile National Information Technologies Ltd, which merged with the Company with effect from October 01, 2007 and hence are not comparable with the results for the quarter ended June 30, 2008.

Triggers:

1. Strong revenue growth: In FY08, KEC International’s (KEC’s) stand alone topline grew by 27% YoY to Rs25 bn. This growth was supported by a strong order inflow and timely execution of orders in hand. KEC International Ltd is expected to grow at a CAGR of 30% FY08-10. The key drivers behind this expected robust growth are rising opportunities in international markets as well as fresh investments undertaken in the Indian power sector.

2. Interest cost to come down: KEC’s interest cost increased by a meagre 14% in FY08. This difference is due to the fact that KEC is less dependent on debt for funding its working capital requirements. Going ahead, any cut in rates will have a positive effect on the company's top and bottomlines.

3. Both domestic and international orders have their pros and cons. International orders are fixed cost-based, while domestic orders have a price variation clause (which will protect margins). International orders from new geographies could result in higher margin orders, which would not be possible in the highly competitive domestic market. Since KEC International Ltd derives more than 66% of their orders from international operations and hence the margin is good. KEC was formed with a focus on international opportunities in transmission EPC. The share of international revenues was as high as 88% till four years back. The company increased its focus on Indian operations post FY04, when the government investments in the power sector picked up.

4. KEC International Ltd has a global presence with clients in over 40 countries. It has a strong presence in India, Middle East, Africa and Central Asia.

Moreover, a Joint venture company named KEC Power India Private Limited with M/s. Power Holdings Inc., USA as a joint venture partner, has been incorporated in the state of Maharashtra in the month of March, 2008. This company would provide services like conceptualizing, designing, developing power transmission and distribution lines, sub-stations and all types of power generating projects.

5. KEC International Ltd merged group companies RPG Transmission (RPGT) and National Information Technologies Limited (NITEL) with itself in August 2007. RPGT was engaged in the business of EPC contracting in transmission, rural electrification and railway electrification, a business similar to that of KEC. NITEL was engaged in the business of setting up telecom infrastructure.. This will further strengthen the Company both top and bottomlines.

6. Since the steel and other metal prices are crashing in the international markets and this is going to give tremendous impetus to the balance sheet of KEC International Ltd, because the orders were obtained when the metal prices were at their peak. This is expected to give solid net profits going forward.

7. Besides the traditional markets of Middle East and Africa, the company is constantly on a hunt for further opportunities in Central Asia and North America. The company plans to enter new geographical locations and capture opportunities in the rural electrification and sub-station markets. There is a huge potential for telecom tower infrastructure business in India and the company plans to capture opportunities in this area.

8. The company has a healthy order book. During FY08, the company completed 21 projects in the South Asian markets and 15 projects in International markets. The company has performed well by bagging 26 orders in the South Asian markets from the State utilities and Power Grid Corporation of India Limited and 27 orders in International markets from various countries including Afghanistan, Algeria, Ethiopia, Kazakhstan, Kenya, Oman, Namibia, Nigeria, Saudi Arabia and UAE. The company has successfully embarked upon the sub-station business by bagging sub-station packages in domestic markets and from Afghanistan and Kenya in the International markets.
9.The company is also executing Railway Electrification projects and has begun participating in Railway Composite projects. The company is being viewed as a quality EPC Player for telecom towers by all the major telecom operators in India. With huge investments and numerous projects envisaged in the infrastructure sector, the company, with its experience and proven competency in project management and execution is well equipped to grow further.

As the countries of the world draw up mega railway expansion plans to drive their national growth, KEC International Ltd is geared up to take the responsibility of an all-inclusive holistic EPC player in the global railway industry. And with a strong presence in over 40 countries it is well positioned to grab the lion's share.

10. For the first time in the company history, the revenues crossed Rs.600 Cr in the first quarter of 2009 (Q1FY09), which is no mean achievement. Moreover, it has a huge order book of more than Rs.5000 Cr to be executed over the next 18 months time frame. This is a sharp increase from around Rs.3250 Cr in 2007.

11. Improved industry scenario: The Union government plans to provide Electricity to all by 2012. This will require an additional power generation capacity of 100,000 MW, translating into heavy investment in generation and transmission and distribution (T&D). Power Grid Corporation of India plans to invest Rs 70,000 crore to develop and strengthen the National Grid. Projects worth over Rs 17,000 crore have been approved under the Accelerated Power Development and Reforms Programme (APDRP). Further, a rural electrification scheme – Rajiv Gandhi Grameen Vidyutikiran – involving an expenditure of Rs 16,000 crore has been unveiled. Besides, the Government has also proposed to set up a National Fund for Transmission and Distribution reform with a corpus of Rs. 1,00,000 crores.These aggressive investment plans is expected to benefit transmission companies including KEC International Ltd.

12. Emergence of a pure power player: Under a restructuring scheme that became effective in Dec 2005, investors of the erstwhile KEC International were allotted a share each in the two companies — KEC International and KEC Infrastructure — for every share they had held earlier. KEC International will carry on the core business of power transmission and distribution, while KEC Infrastructure would hold investments in group companies and non-core advances divested from the parent company. From the investor’s perspective, this move has unlocked value. The restructuring has brought in a pure player in the turnkey power solutions business under KEC International. The technical qualification and experience of the parent company in the power business has remained intact. This is resulting into significant improvement in the return ratios.

13. De-risked business model : KEC International Ltd had traditionally derived a majority of its revenues from exports. Till FY03, only 10% of KEC’s orders were from the domestic market. The company made a loss in FY02 and has since de-risked its revenue model. It now derives about 30% of its revenues from the domestic market. It expects a 70:30 revenue mix (International: Domestic), which is also reflected in its current order book. It has been able to capitalise on the power reforms in the country and has bagged contracts from Power Grid Corporation and orders for rural electrification programmes.

14. Move towards becoming a service provider: The company is also striving to move up the value chain through services such as satellite surveys and tower testing. It has received approval for a 100 % EOU Tower Testing facility and also extensively outsourced a large part of non-critical work. Outsourcing allows KEC to grow its business at a much faster rate and not get constrained by transmission tower production capacity.

15. North American JV to boost top line: In May 2006, KEC formed a 50:50 joint venture with Power Engineers Inc, USA, called KEC Power Inc. The JV bids for high-value projects in the US and North America. Apart from increasing its international presence, the move is helping KEC boost top line growth through new international orders.

Key Concerns:

1.Rise in prices of key inputs such as steel, cement and aluminum is the key concern for KEC. Costs of steel and aluminum account for about 16% and 9% of revenues respectively for the company. However, a sharp fall in the Steel and metals prices in the domestic and international markets is acting as a positive trigger for the company. Moreover most of the earlier oreders were plance when steel prices were higher 70% yoy.

2. Delays in government spending, as has been the experience in India in the past. Any Slowdown in infrastructure spending in Middle East, Africa and other regions where company derives a sizeable amount of its revenues could adversly affect its profitability.

3. In spite of de-risking the business model, the company’s export-centric revenue carries foreign exchange-related risks. Fluctuations in the currency cannot be anticipated at the tendering stage and hence the currency risk in each contract continues for considerable period. The risk is mitigated to some extent by limited hedging resorted by the company. However, at present the depreciation INR is acting as a boon for the company.

Conclusion: KEC International is well-positioned to leverage on the hig -growth domestic T&D market as well as take advantage of the huge investments in the Middle East and Africa.

As mentioned earlier, a couple of years back KEC International, which had the power business, was split into two entities, KEC Infrastructure and KEC International. KEC Infrastructure holds equity in Ceat, CESC, Harrisons Malyalam, RPG Life Science ( KEC Infrastructure, is the holding company), Philips Carbon Black etc. KEC Infrastructure thus holds investments in group companies and non-core advances divested from the parent company.

Considering the factors mentioned above it has been found that the shares of KEC International Ltd are highly undervalued and will soon go for re-rating. The stock is in oversold territory and other chartical patterns are in buy mode.

The stock could be bought at the CMP of Rs.240.05 with an immediate price target of Rs.440--Rs.525, in the next 3 to 4 months time frame. The stock is multi-bagger and will cross Rs.1000 in the next 18 months time frame. Please keep a SL of Rs.225 for any very short term trade.

Development Credit Bank Ltd:

Banking on SBI, HDFC Ltd and Tata Capital Ltd

BSE Code: 532772

CMP: Rs.29.75

Book Value: Rs.36.39

Market Cap: Rs.518.54

Target: Rs.55--Rs.65 in 3 to 4 months time frame

Stop Loss: Rs.22

Performance: Market Outperformer

Introduction: Development Credit Bank (DCB) is one of the emerging private sector banks in India and provides to its customers, access to over 30,000 ATMs and more than 80 state-of-the-art branches spread over ten states and two union territories. It has sought permission from the central bank to open 50 more branches. Earlier, the bank had announced plans to raise Rs.3--4 billion during the current fiscal to fund its growth plans for the next 18 months.

The wheels of change has made a positive difference and DCB is making its presence felt. The Bank has recently launched several value added initiatives and intends to become one of the country’s preferred and profitable private sector banks, providing a comprehensive suite of “best in class” products for specific market segments in chosen geographies. DCB has initiated a liability and select asset product led strategy, through a mix of owned and outsourced products and multi-channel capabilities.

Shareholding Pattern: The promoters' holding is 26.51% while among the non-promoters' holding, institutional investors hold 17.55% and the general public holds 28.25%. Among the institutional holding FIIs holding has decreased from 30.03% in Q4FY08 to mere 12.84% in Q1FY09, which is a positive sign (or we can see there are further scope of FIIs cornering the stock in future). Moreover the holding of Private Corporate Bodies has gradually increased from 10.14% in Q4FY08 to 15.49% in Q1FY09---this is a great news as far as this aggressive private sector bank is concerned.

Also, while the promoters holding has remained constant in the last few quarters, the holding of Mutual Funds/Banks/LIC/Financial Institutions, have almost doubled in the last few quarters, adding to already present positive developments. Besides this, State Bank of India, Housing Development Finance Corporation Ltd Tata Capital Ltd holds substantial stake in the company. There were rumours some months back that the bank could be taken over by any other these three entities.

Financials: For FY08, the results were simply excellent even when the interest rates peaked out and CRR rate was hiked a number of times. For FY08, the total income of the company came out to be Rs.736.7 Cr as against Rs.439.42 Cr in the same period previous year (almost doubled). Net profit of the company jumped to Rs.38.3 Cr in FY08 as against Rs.7.4 Cr in the same period previous year. The capital adequacy ratio also improved in FY08 to 13.38% as against 11.34% in FY07. Due to lot of initiatives taken during the whole fiscal of FY08, the net profit margin shot up to 6.68% as against 2.12% in the same period previous year.

In Q1FY09, the total income of the company came out to be Rs.204.2 Cr as against Rs.148.1 in the same period previous year. The profit before tax (PBT) of the company for Q1FY09, is a whooping Rs.25.1 Cr as against Rs.8.3 Cr in the same period previous year. However, the net profit for Q1FY09 came out to be Rs.5.4 Cr as against Rs.5.74 Cr in the same period previous year, due to higher (almost 6 times jump) provisioning for Contingencies. Capital Adequacy Ratio also increased considerably 13.67% in Q1FY09 as against 10.475 in the same period previous year. Thus the company is doing excellently well in the financial front.

Triggers:

1. It has a network of 80 state-of-the-art branches and extension counters spread across the states of Maharashtra, Gujarat, Andhra Pradesh, Karnataka, New Delhi, Rajasthan, Goa, Tamil Nadu, Haryana, West Bengal, Union Territories of Daman & Diu and Dadra & Nagar Haveli. It has a dedicated staff of over 1800.

2. Built on over 77 years of trust, tradition and togetherness, DCB was converted into a Scheduled Commercial Bank on May 31,1995, in the wake of India’s economic liberalisation. It was the only co-operative bank, which successfully crossed over and thrived in the face of change. The company has travelled a long route and made its presence felt in the domestic money market.

3. DCB Ltd is not just a Bank but is a Financial Supermarket. DCB Ltd offers an extensive range of products across its branches. Suitable variants of the basic products like savings and current accounts as well as innovative products such as the ‘DCB Trio’ and ‘Easy Business,’ keep DCB ahead of the pack. Demat Account and a range of investment products like mutual funds, insurance and bonds make the product offering complete.

4. Since its inception, DCB has always taken an active interest in developing low-cost customer deposit products and providing for the needs of small and medium businesses in select regions. It continues to fulfil every consumer need with great enthusiasm. The Bank is also suitably equipped with the latest versions of Finacle from Infosys and Oracle to provide seamless service to its customers.

5. Very recently this Mumbai-based Development bank, reduced its exposure to unsecured personal loans in a bid to maintain its net interest margins. According to a top source, to maintain net interest margins the bank has brought down its exposure to personal loans from 17 percent last fiscal which will be reduced to around to 12-13 percent probably by the middle of the next financial year.

The bank expects to see a growth rate of 30 percent in advances and a 35-40 percent growth in deposits in the current fiscal. The banks' net interest margin in 2007-08 was 2.9 percent and would be in the range of 2.9-3.1 percent in the current fiscal. The bank would raise the share of low-cost deposits to about 29-30 percent of its total deposits from its current share of 27 percent.

6. It was wonderful to see how the company improved post IPO. From only a profit of around Rs.66.3 lakhs in Q2FY07, the net profit has jumped to Rs.5.4 Cr in June, 2008 quarter---an almost 8 (eight) fold increase in matter of 2 (two) years. This attests to my arguments that this agresssive bank is moving at a rapid pace and therefore it was once the darling of FIIs. Now the institutions have made its their destination to lap up the shares of this company at brisk pace.

7. Now with RBI cutting the CRR by 150 basis points and further cut expected within some days, some more liquidity will be generated in system. This measure will release more funds of the banks for lending, which were locked-up in the coffers of RBI for a long period. Hence in future we could see massive jump in both the top and bottomlines of most of the banks (Private and PSU). Meanwhile there are also talks of cutting interest rates by the RBI. This is expected to suddenly give a great boost to the loan growth apart from generating a sizable treasury income for the banks in future.

8. The Bank has an active and robust treasury, managing its interest rate risks and liquidity by providing an uninterrupted flow of funds, positioning the Bank for future growth.
Over the last few months DCB aggressively expanded the product portfolio in response to customer needs and feedback. Products such as DCB Privilege Banking for Savings and Current Accounts, DCB Smart Trade, DCB Advantage Credit Card, and DCB Trio account, have been very popular with customers. Customers also enjoy a host of benefits such as an international debit card, DCB Customer Care phone banking, and internet banking.

9. The company is planning to get into asset management business and with a partner but till now had to shelve the idea because of bad market conditions. Development Credit Bank will enter this space as soon as the market condition improves a bit. The bank plans to raise funds in the near future but the amount will depend on the market conditions.

Conclusion: Considering all the factors mentioned above, it will be prudent to buy DCB Ltd at the CMP of Rs.29.75 for a target of Rs.55--Rs.65 in the next 3 -4 months time frame. Please put a SL of Rs.22 for any short term trade. This aggressive bank is going to surprise most shareholders in terms of growth and creating value for the shareholders.