Ennore Coke Ltd.: Catch it young
BSE Code: 512369
Face Value: 10
Market Price: Rs.50.95
Performance: Market outperformer Market Cap: Rs.74 Cr
Sector: Metallurgical Coke (Met Coke) & Power
Stop loss for very short-term trade:Rs.41.9 & Rs.36
Target: Rs.150 in 600 days.
Introduction: Ennore Coke Ltd. (ECL) was incorporated as a public limited company on 25th February 1985 to carry out the business of yarn, cloth, fibre and the business of leasing of moveable and immoveable properties. These activities were carried out till 30th September 2005. Effective, 5th December 2005 the controlling interest of the company was taken over by Shriram EPC Ltd, and Mrs. Vatsala Ranganathan. The new management discontinued these businesses and entered into manufacturing met coke by purchasing the proposed Coke Project of EPCPL situated at Haldia, West Bengal. The company actually purchased the business and not just the plant & machinery. The company has a making a met coke factory and a power plant. 16
Shareholding Pattern: The promoters hold 61.64% while the investing public holds 38.36%. It is worth noting that Shriram EPC Ltd. is one of the promoters of the company. Mrs. Vatsala Ranganathan who is the co-promoter of the company is also the Whole Time Director of Shriram EPC Ltd.
Financials: Since the company’s projects are at an advanced stage of implementation, there are no major revenue streams at present. It reported some revenues by way of consultancy in making of project reports in the latest balance sheet. But its revenues are expected to take off with a big-bang after the implementation of the projects which are nearing completion.
Triggers:
• The construction of the met coke plant has been completed in January 2008. Thus its March, 2007 quarter(Q4FY08) will be excellent considering the revenues coming from the coke division as well. The company already has a list of ready-buyers for its products. The company has decided to increase its proposed capacity of 100,000 TPA to 130,000 TPA, which is in an advanced stage of implementation. This will be further increased to 300,000 TPA in the next 18 months.
• The company’s power projects are expected to be completed by March 2008. After that, the company will increase the power generation capacity from 6 MW to 18 MW at Haldia, West Bengal within the next 18 months. It is already in talks with the West Bengal State Electricity Board and with some other companies for the sale of power. This will generate additional revenues for it from FY09 and will use some of the power for captive use.
• It has a strong promoter in the form of Shriram EPC Ltd., which is one of the leading service providers of integrated design, engineering, procurement, construction and project management services for renewable energy projects, process and metallurgical plants and for municipal services sector projects throughout India. It also manufactures 250 KW wind turbine generators (WTG).
• Shriram EPC Ltd. is an ISO 9001:2000 certified company and has come up with an IPO (Intial Public Offering).
• Its production capacity, which is expected to be completed by January 2008, will be almost 22% of the capacity of Gujarat NRE Coke Ltd. But this company has a very low equity base of only Rs.15.5 cr. and reserves of Rs.15.03 cr. as compared to Gujarat NRE Coke’s equity capital of Rs.288.11 cr. without any reserves as per its latest balance sheet of 30th September 2007. This points to its high growth potential and is a real catch at the CMP of Rs.50.95.
• The company will import coke to be transformed into met coke and sold to user industries. Due to rupee appreciation, the company has already made a killing in some of its overseas contracts that were fixed sometime back. If the rupee further appreciates then the company will make further windfall gains as its products will be mostly sold in the domestic market.
• Due to high anti-dumping duty imposed following a written complaint by the Indian Metallurgical Coke Manufacturer’s Association (IMCOMA), there is virtually very little threat of cheap imports from Japan and other Asian Countries.
• ECL with its proposed sizeable manufacturing capacities is expected to cash in on the robust demand for met coke from its user industries — soda-ash plants, furnaces of steel plants, cast iron and brass foundries. India has largely been an importer of met coke from China and Japan. However, the shortage of met coke in these countries due to captive consumption needs, has led to substantial increase in met coke prices of late. Exports from China and Japan have been rationed over the past couple of months and its domestic price is expected to rise following the demand from user industries.
• While there is been a sharp increase in met coke prices, the price of prime coking coal — the raw material for met coke, has not risen in proportion. Hence going forward, the margins of ECL are expected to be healthy.
• ECL’s recent capacity of 1,30,000 MT per annum is nothing compared to the demand in the domestic market. Increasing its capacity to 3,00,000 TPA will, therefore, place it in better footing among its peer group and will give it the required critical size. As no major domestic met coke capacity expansion is likely, the prices of its products should remain firm.
• ECL’s 6 MW of power plant will be run by utilizing the waste heat generated from the process of manufacturing met coke and the company could apply for Carbon Credits, which could be an additional source of revenue.
Conclusion: Considering all the factors listed above, investors with a risk appetite can consider buying ECL at the CMP of Rs.40.45. Strong demand from the steel sector and steel capacity expansions could lead to higher earnings. At the CMP of Rs.50.95, the scrip looks cheap considering its huge earning potential in the next 18 months. The scrip could more than triple from the CMP in the next 500-600 days.