Tuesday 17 March 2009

Pick of the week
Thermax Ltd
BSE Code: 500411
CMP: Rs.157
P/E: Rs.6.84
Face Value: Rs.2
Dividend:400%
EPS: Rs.22.95
52-Week High/Low: Rs.622/Rs.150.5
Resistance zone: Rs.160—Rs.166.
Introduction: Thermax Ltd is a global solution provider in energy and environmental engineering. Itoffers products and services in energy sector (boilers, heaters & coolers, waste heat recovery, captive power production) and industrial environment friendly solutions (water treatment and recycling, waste management and performance chemicals).
Thermax Ltd is a market leader in providing small and medium sized industrial boilers; while its biggest rival BHEL focuses on large utility boilers.
It is well positioned to capture the market share of industrial and smaller utility boilers using its innovative technology. Capacity expansion will enable the company to fulfill the growing demand of boilers.Thermax brings its rich experience gained from customer engagements around the world. Through technology partnerships and strategic alliances, it provides superior value to help industry perform efficiently and profitably. With a dedicated sales & service network spread over South East Asia, Middle East, Africa, Russia, India, UK and the US, Thermax ensures innovative solutions and reliable support for client's business improvement. Strong capex announcement made by its user industries would continue to drive the order book of Thermax Ltd.
Shareholding Pattern: The promoters hold 61.98% while the general public holds 38.02 %. Among the general public, Arisaig Partners (Asia) PTE Ltd A/c Arisaig India holds 1.02% while Saif III Mauritius Company Ltd holds 1.74% shares of the company.
Financials: For Q3FY09, the company came out with flat top and bottomlines consider Q-o-Q. This is significant considering the overall economic downturn. The total income of the company for Q3FY09 came out to be Rs.803.83 Cr as against Rs.854 Cr. The net profit of the company for Q3FY09 came outto be Rs.72.3 Cr as against Rs.75.03 Cr in the same period previous year. This is on a very small equity capital of Rs.23.83 Cr. The year to date income of the company was Rs.2, 343 Cr (Rs.2, 311.3 Cr in the same period, last year), while profit after tax for the period stood at Rs.193 Cr (Rs.200.3 Cr in the same period previous year).
On a consolidated basis, year to date, Thermax group’s total income stood at Rs.2, 447.1 Cr (Rs.2, 464.2Cr) and profit after tax was Rs.183.5 Cr (Rs.207.8 Cr).The EPS of the company for Q3FY09 is almost flat at Rs.6.07, as against Rs.6.30 in the same period previous year. Even the operating profit margin is flat at 13.28% in Q3FY09 as against 13.43% in the same period previous year. The net profit margin of the company is also flat at 9.09% as against 8.87%in the same period previous year.
Industry Outlook:Thermax Ltd is power utilities manufacturer and a sophisticated player in the environment friendly solutions. Intense capital and technological requirements makes this sector of the market less fragmented. Total market share by sales of 4 (four) firms (Ecoboard Industries Ltd, Ion Exchange Ltd,Thermax Ltd & Western Paques) of pollution control equipment manufacturing industry is 98.8% in which the Thermax Ltd alone owns the 82.5% of share.
Thermax is second largest Power Equipment manufacturer, renowned supplier of industrial and utilitiesboilers, with a market share of around 21%, just next to the BHEL which stands at 69%.The ambitious target of 78,000 MW for additional power generation capacity taken up as part of the Eleventh Plan is slated to be on the fast track with the government already approving several megapower projects. It is widely expected that the intensive capital investment in mega power generation facilities will drive the demand of power utilities.
Steel, Cement and Petrochemicals are the sectors, which contribute 60% of the total order book forThermax Ltd. Thus, High capital expenditure in these sectors will be the main driving factor. Till some months back, the high interest rates regime have lead to the postponement of capital expenditure,which is going to change in the near future. It is expected that these sectors will be witnessing the increased investment in the near future
Investment Rationale:
(a) Good order book position: The Thermax group has an order book of around Rs.4,103 Cr as ofDecember 31, 2008 which is substantially up considering Q-o-Q. Last year Thermax bagged Rs.820 Crorder from an oil company under expansion in the Western India to build utility segment boilers which are currently only supplied by BHEL. In October, 2008, the company won a Rs.450 Cr order for setting up a captive power plant. The 60 MW power plant will be built and commissioned on a turnkey basis for a green field integrated steel complex in Andhra Pradesh. The plant will use process gases and blended coal as fuel. The Company is currently bidding for multiple projects with an average order size of Rs.500Cr.
b) Increased carry forward order book: Thermax Ltd has good carry forward order book, i.e.unexecuted orders. It is widely expected that a large pile of these orders are sufficient enough to takecare of revenue growth for few quarters incase of unexpected drop in the new orders.
c) Efficient Working Capital Management: The Company has been effective in managing the Debt Equity position at lowest possible over the past few years. This type of structure makes the earnings(EPS) less volatile, to have linear variability with its operating earnings (EBIT). This type of structure is unusual for a capital-intensive company. The main reason for this is the effective working capital management.Company has been able to maintain its cash conversion cycle by effectively increasing its creditor’s velocity in line with the debtor’s velocity. At the same time the company has been able to bring down thedays of inventory. The company’s advances from customers have gone up substantially in line with the increasing size of order book. Advances make the net working capital to be negative. We can expect thetrend to continue and this will allow the company to fund its capital expenditure with the internal accruals.
d) National Action plan on climate change: On 30th June ‘08, Prime minister of India, unveiled climate change action plan which seeks to promote sustainable development through use of clean technologies.The focus of this action plan is on implementation of energy efficiency measures, effective water resource management, and enhancement of eco-system services. Further, the clean environment is themain focus of this century. This in a way augments well for the environmental engineering division ofThermax Ltd.
e) Tie up with Balcke-Dürr GmbH and Babcock & Wilcox: In February, 2008, Thermax Limited and Balcke-Dürr GmbH, Germany signed a Technical Know How Transfer and License Agreement for dry and wet Electrostatic Precipitators (ESPs) — air pollution control equipment for power, industrial and utility segments upto 300 MW. The agreement will help Thermax to gain a rightful share of the air pollution control business emerging from this sector. Thermax Ltd has also signed a license agreement with Babcock & Wilcox (B&W) for utility boilers that grants the former, the right to engineer, manufactureand sell sub-critical B&W Radiant utility boilers in India. This should enable it to gain a strong hold in themarket for power utilities.
(f) New Manufacturing Facility: The Company has decided to set up a new manufacturing facility inIndia, which would manufacturer large boilers having a capacity ranging from 100 Mw to 800 Mw. Thecompany has signed a technical agreement with US--based Babcock & Wilcox Co for making sub--critical boilers in India, as mentioned earlier. The company plans to invest Rs.300 Cr in the Phase I of the project, which would have an annual boiler manufacturing capacity of 1,500 Mw.
(g) Cutting edge technologies: Thermax has sourced cutting-edge technologies for its business operations through alliances with world technology majors, like Babcock & Wilcox USA, Kawasaki Thermal Engineering Company, Japan; Eco Tech, Canada; Honeywell, USA; Bloom Engineering, Germany;Struthers Wells and Ozone Systems, USA. Through technology partnerships and strategic alliances, the company is expected to perform well going forward. With a dedicated sales & service Network spread over South East Asia, Middle East, Africa, Russia, India, UK and the US, Thermax ensures innovative solutions and reliable support for client's business improvement.
(h) Production on China plant to drive growth: Very recently the production at China unit of the company has started which will usher in a new beginning for the company. This plant has cost around $10million with a capacity to manufacture 200 chillers. It expects to reach full capacity utilization in a three-year time frame. China accounts for 50% of the $600 million global market for absorption chillers.In FY09, the company is carrying out a capex of around Rs.3 bn towards setting up a independent utility investment.
Concerns:
• Thermax Ltd may see selling pressure as institutional investors may churn portfolio in favour of companies with less dependence on private sector for orders.
• Most of the company's projects business and large boiler orders are at fixed price. Unless, the company builds cushion or hedges against steel price, the profitability on these orders are at arisk; given the probability of increase in steel prices in next few months.
• Given the prevailing economic conditions coupled with the credit squeeze, many industries are reviewing their capital expenditure plans.
• Since some of Thermax's revenue (packaged boilers and enviro chemicals) come from fast-moving products with very low invoice cycle hence revenue growth could taper off to around 12%-15% inFY09.
Conclusion and Chart-Check: The recommendation of Thermax Ltd is backed by three reasons, its strong financial performance, strong order book and most importantly company’s execution capability.The fact that the government has lifted the ban on coal linkage for Captive power projects, has spurred interest into such power projects. Thermax is aiming for a 10% market share out of the planned capacity in power generation by the private sector. With the significant private sector interest in power generation, Thermax Ltd is expected to generate sizeable revenue from utility boilers in the coming years.
What I feel is that India’s long-term story is intact and capital goods have a larger part to play in that.Hence, it is imperative at this stage to invest in fundamentally strong scrip like Thermax with a long term perspective. The scrip is available near its 52-week low price and most importantly the valuations also looking very attractive. Hence, considering the points mentioned above it is found that the scrip ofThermax Ltd could be purchased with a short term target of Rs.165—Rs.180. The scrip has a strong resistance around Rs.160—Rs.166 range.
On the charts it appears that the scrip has bottomed out in the short term and is poised to move up.The MACD, Stochastic (slow and fast), Williams % R, Bollinger Bands, and RSI are all in buy mode. Also good point is that the stock has not broken down the envelop pattern formed on daily charts. Moreover,it has given a minor breakout at Rs.155 and is looking to cross the stiff resistance zone of Rs.160—Rs.165, provided the market conditions remain buoyant. However, these days, the stock markets arehighly unpredictable and hence please keep a SL of Rs.148, (exit) for any short term trade. The stock atthe CMP of Rs.157 is available at throw-away price, considering the potential of the company. Last yearKotak Securities Ltd came out with a price target of Rs.526.
Note: The stock was recommended to Paid Groups in the Sunday Report (15-03-09) at the CMP of Rs.157.
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Wednesday 11 March 2009

Sunil High Tech Engineers Ltd
BSE Code: 532711
CMP: Rs.52.90
Book Value: Rs.127.62
52-Week High/Low: Rs.323/Rs.54.9


Introduction: Sunil Hi Tech Engineers Ltd. has over 15 years of crisp engineering execution andtechnical expertise in the fabrication, erection, testing and commissioning of thermal power plantsincluding doing individual works under BoP.
An ISO 9001:2000 certified company, Sunil Hitech undertakes the erection, testing and commissioning of boilers and auxiliaries of up to 500 MW capacity, pressure parts, ESP and piping, and structural work in main plant building, bunker bay and miscellaneous structures of up to 660 MW.
In addition to this, Sunil Hi Tech designs, supplies, transports and provides the commissioning of EHV lines of substations, CW pipelines, large diameter piping, bunker belts, steel flue can; ETC work for transmission and distribution lines, transformers sub-stations and allied works, as well as the EPC contract for fuel oil system and the erection of turbine generators.
Sunil HiTech has 125,000 tpa of steel fabrication capacity and specializes in building steel structures for thermal power plants and has also established a 1,00,000 tpa of equipment installation capacity inpower plants. The company takes up civil works for power plants of up to 500 MW. It undertakes manufacture, supply, and commissioning of super-heater Eco, reheater coils and equipment for thermalpower stations.
Shareholding Pattern: The promoters hold 53.20% while the general public holding is 46.80%. The latest public shareholding pattern of Sunil Hitech Engineers Ltd shows that SBIMF Magnum Sector Funds Umbrella Emerg funds hold 3 %, Citigroup Global Markets Mauritius Pvt holds 2.24%, Swiss Finance Corporation(Mauritius) Ltd holds 8.96 % and HSBC Asset Management -PMS A/C Signatur holds 2.56% of the shares of company.
Financials: For FY08, the company came out with wonderful set of numbers. The total income of thecompany for FY08 came out to be Rs.308.4 Cr as against Rs.146.4 Cr in the same period previous year.
The operating profit of the company in the same period came out to be Rs.50.09 Cr as against Rs.19.67Cr in the same previous year. The net profit of the company for FY08 came out to be Rs.21.01 Cr as against Rs.7.6 Cr in the same period previous year. The EPS of the company for FY08 came out to beRs.20.07 as against Rs.7.55 in the same period previous year.
The company came out with a whooping topline growth of 87%, Q-o-Q, in Q3FY09. The total income ofthe company for Q3FY09, came out to be Rs.148.6 Cr as against Rs.79.6 Cr in the same period previousyear. The profit before tax and depreciation jumped to Rs.16.02 Cr as against Rs.10.4 Cr in the same period previous year. The profit before tax also jumped to Rs.11.05 Cr as against Rs.8.05 Cr in the sameperiod previous year.
The profit after tax came out to be Rs.7.32 Cr as against Rs.5.34 Cr in the same period previous year. Thus for Q3FY09, the PAT after extraordinary items is up 37%, Y-o-Y. Moreover the company’s pending order book as of 31st December, 2008, stands at a whooping Rs.1298 Cr.
However, the net profit of the company suffered as the company invested Rs.22 Cr in long term investments including various Equity mutual funds and whose market value as on December 31, 2008 fell to Rs.8.62 Cr. As a prudent and conservative measure, the Board of Directors of the company, decided to provide a one time diminution in the value of these long term investments of Rs.13.38 Cr. These investments are intended to be held over a longer time frame / till maturity and hence actually the company came out with net profit even in this downturn, which is appreciable.
Investment Rationale:
1. The company’s focus on, crisp engineering execution and technical expertise coupled with its expanding product portfolio has enabled it come out with strong topline growth while maintaining margins in this tough operating climate, Q3FY09. The company hopes to see further expansionand growth in the following quarters.
2. The company’s order book consists of 30% from the government while the rest 70% from theprivate. Apart from the company has already bid for another Rs.600 Cr order, to add to theorder book.
3. The company has a pan India presence and is currently working on a number of power projects of more than 20k MW.
4. The company’ s list of clients include the who’s who of Industry: NTPC, BHEL, MSPGC, Reliance Group, Jindal Group, Hindalco, Tata Power, L & T, Punj Lloyd and various electricity boards. It hasalso overseas clients from USA and China.
5. Through its subsidiary, Sunil High Tech Engineers Ltd has a production facility for boiler pressures parts in Nagpur. Having received accreditation for the products from various electrify boards, it is now competing with the likes of Alstom Projects India Ltd and BHEL Ltd in this segment.
6. The Indian economy is growing at a brisk pace of 7-8% backed by buoyancy in the industrial and services sectors. Strong infrastructure support is crucial to sustain this growth. However, thepower scenario does not appear very encouraging, with the country facing an energy deficit of 9%and peak deficit of 14%. The power scenario in some states is even worse, with Maharashtra facing an unprecedented power shortage resulting in load shedding of 8-10 hours in some parts ofthe state. The grim Scenario is a sequence of the abysmally slow progress in capacity addition. During the earlier three Five Year plans, less than 50% of the capacity addition targets were achieved. India has added an average of around 19 GW to its capacity addition target in the Ninth and the Tenth plan periods (ten years). This is miniscule, as compared with China’s capacity addition of around 200GW over the last three years. Though both the countries faced a similar situation until about a decade ago, China, unlike India, was quick to assess the power situation andtook corrective measures. Though the Indian government has been setting higher targets each year, the achievement has been far from satisfactory. The original target set for the Eleventh Plan was around 67,000 MW, and subsequently revised to around 76,000 MW. It is estimated that around 47,488 MW of capacity addition will take place during the Eleventh plan. In order to maintain the current growth, the country will require faster capacity additions in the Eleventhplan. Further, additions to generation capacity will require concomitant capacity additions intransmission and distribution (T&D) as well. It is estimated that a total investments of aroundRs.3 trillion is required in the power sector in the eleventh plan. Of this, a major chunk (Rs.2.1trillion) is expected to be towards generation. This is going to have positive effect on companies like Sunil High Tech Engineers Ltd which has large presence in the power sector.
7. Apart from the new projects, the renovation and modernization (R&M) program thereby extending the life of power plants are the two options which would also help companies like Sunil High Tech Engineers Ltd as it has presence across the entire supply chain from Power Generation to T&D.
8. The company has also made bid for the BOP work for the Mundra UMPP. Besides this it is reportedly contemplating to bid for UMPP awarded to Reliance Energy Ltd and Tata Power Ltd.Incidentally each UMPP (Ulta Mega Power Projects) has the potential BOP work of around Rs.640Cr. This appears to be huge untapped potential for Sunil High Tech Engineers Ltd.
9. In order to meet the increased capital required to bid for larger projects, the company hasalready raised Rs.81 Cr by placement of 22.5 lakh shares at Rs.360 per share through QIP (qualified institutional placement) route in January last year.
10. The most important factor is that the company has basis and diluted EPS before extra-ordinary items as Rs.5.96 in Q3FY09 alone. The Board has also recommended an annual dividend @ 12%(i.e. Rs 1.20 per share) for the financial year 2007-08. Sunil Hitech has joined the league of bigger players and is looking to further strengthen its foothold in the industry by bidding forlarger, high-margin and more complex projects in competitive areas with acceptable levels of contractual risk.
Concerns:
1. Any rise in the price of raw materials is negative for the company. However, since the commodity,prices are near their all time lows, hence its does not face any immediate threat in this front.
2. Any slowdown in the power sector reforms could be damaging for the company’s overall performance. Moreover, if the high cost debt are not replaced by low cost ones, then going forward it could face some problems in its net profit margins.
Conclusion and Chart-Check: Sunil Hitech Engineers Ltd, with a growing order book and proper analyses of risks, has already joined the coterie of big players. However, the success of the Company's proposed expansion into BoP projects will depend on acquiring and retaining technical know-how. The company has very small debt-equity ratio and hence is in a comfortable position to raise further debt if necessary, to finance its large projects. The company is also looking at the possibilities to replace someof its high cost debt with its low cost debt, in a falling interest rate scenario.
At the CMP of Rs.52.90, the stock can be accumulated for short to medium term perspective for atarget of Rs.75—Rs.80. Though the daily charts are not giving an immediate buy signal however, its steep oversold position, calls for a bounce in the scrip in the short term, which could take it to Rs.62—Rs.63 ranges. Upon breaking this level we can look for the next target of Rs.75—Rs.80 and finally Rs.92, whichcould be the end of this upmove. One of the most comfort facts is that the share is trading at a considerable discount to its book value of around Rs.127.6.
Note: The stock was recommended to the Paid Group on 8th March, 2009 in the Sunday Report.
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Monday 2 March 2009

Pick of the Week
Nu Tek India Ltd
BSE Code: 533015
CMP: Rs.33.70
Market Cap: Rs.58.16
Company Profile: Incorporated in 1993, Nu Tek India Limited is a Telecom infrastructure serviceprovider, offering Infrastructure rollout solutions for both mobile and fixed telecommunication networks. It offers services to Telecommunication Equipment Manufacturers, Telecom operators as wellas third party infrastructure leasing companies in installing and maintaining Telecom Network Equipment& Infrastructure. Nu Tek undertakes turnkey projects, provide management expertise to their clients for infrastructurecreation and installation for telecom sites which includes Passive Infrastructure like Towers, TelecomShelters, Backup Power - DG sets, Battery Banks, Electrical Infrastructure, Earthing Stations andactive infrastructure like Base Transceiver Station (BTS), microwave, optic fibre, Base StationController (BSC), Mobile Switching Centres (MSC), IN (Intelligent networks), VAS (Value addedservices) equipments, transmission equipment such as STM’s and future ready 3G Nodes.
It is also providing technical support services in the High End Telecom segments such as RadioFrequency and Transmission Planning, Network Tuning & Optimization and Quality of Service (QoS) totheir clients.
Major clients amongst Telecom Equipment Manufacturers are: Nokia Siemens Networks Pvt Ltd,Ericsson India Pvt Ltd, Motorola India Pvt Ltd and Nortel Networks India Pvt Ltd. Major clients amongstTelceom Operators are: Tata Teleservices Ltd, Reliance Communications Ltd, Bharti Airtel Ltd, IdeaCellular Ltd, Vodafone Essar Ltd and VSNL. Major clients amongst third party infrastructure leasingcompanies are: Quipo Telecom Infrastructure Ltd, Essar TTIL Ltd, Xcel Telecom Ltd and IMI LTD.
The company came out with an IPO in August, 2008 in the price band of Rs.170—Rs.192, through 100%book building process. The Company intended to utilize the proceeds from the Issue to meet the cost of capital expenditure, overseas acquisitions and augmenting the long term working capital requirementamongst others.
Shareholding Pattern: The promoters’ holding is 43.55% while the general public holds 56.45%. Among the promoters Balyasny Si Ltd holds 9.56% of the shares of the company.
Financials: It has grown at a 3 year CAGR of over 45% in its income from operations to achieve Rs.95.2Cr with gross margins of 34% and Profit after tax (PAT) of Rs.21.2 Cr i.e. net margins of 22% for the FY2008. On a standalone basis the total income of the company for Q3FY09, came out to be Rs.31.09 Crand net profit of Rs.1.96 Cr. The operating profit margin is 12.46% and the net profit margins is 6.56%.The EPS of the company for Q3FY09 is Rs.1.29 which is quite healthy considering its peer groups. Itsnearest competitor GTL Ltd had an EPS of Rs.2.25 for the Q3FY09 and is trading currently atRs.229.80.
Investment Rationale:
• It has an order book of more than Rs.160 Cr. This includes work orders from Aircel / DishnetWireless Limited, Huawei Telecommunications, Ericsson, ATC Tower Company of India, ShyamTelelink Ltd. In addition, it has Letter of Intents of more than Rs.50 crore from other clientsagainst which work orders are yet to be received.
• Nu Tek India Ltd earlier informed BSE that the NONE of the shares held by the Promoters ofthe Company, has been pledged to any Institutions or any other person for securing any loan orGuarantee or for any other purpose. This is great news for any company in these days.
• It has diversified client base like telecom service providers, equipment manufacturers as well asthird-party tower infrastructure players. This gives several opportunities to tab the towerrollouts. With mobile subscribers still being added at 6-7 million per month and the entry of newpan-India players, there will be a big potential for new tower rollouts.
• To accelerate growth the company is exploring overseas markets and as a first step has set up asubsidiary in Turkey. They have a contract with Ericssion AB, Dubai to provide services to theiroperations in Middle East. Further, they are in the process of acquiring such companies / entitieswhich are complimentary to their requirements. The Company said earlier that it plans to utilize the funds generated from the IPO, both for its organic and inorganic growth. The company is also thinking of acquiring a company based in Nigeria.
• Nu Tek India Limited, which is one of the leading telecom infrastructure services providers, inthe last month appointed Raghavendra Kulkarani as its new Chief Executive Officer. His additionto the management team further strengthens Nu Tek's expertise and understanding of thetelecom industry. With an experience of over 29 years in the telecom industry, both in India andoverseas, Kulkarani also brings with him a rich pool of knowledge and experiences fromorganizations like Lucent Technologies and Soma Networks. Moreover, his managementresponsibilities till date have included organizational revitalization of the services team, solutionengineering, execution latest technology, telecom infrastructure projects, planning processes,strategic collaboration with external technology sources and outsourcing, which we are sure totake Nu Tek to better levels of performance.
Investment Concern:
• Its top client ZTE Telecom India Private Ltd contributed 17.75% of the total revenues in FY08whereas top 5 clients contributed 57.57% of the total revenues. Loss of any of these clients willaffect the financial performance of the company.
• The company performance is dependent on growth of the telecom industry. Any down trend intelecom industry will affect its performance.
• It has negative cash flow from operating activity of Rs.105.74 for the FY08. Unable to manage itscash flow properly in the future, will adversely affect its working capital requirement and in turnits financial performance.
Industry Profile:
• India has become second largest wireless network in the world after China overtaking USA.• The total number of telephone connections reached 308.51 million at the end of April 2008 ascompared to 300.51 million in March 2008. The numbers of subscribers are expected to reach500 million by 2010 & 650 million by 2012.
• The overall tele-density reached to 26.89% at the end of April 2008 as against 26.22% in March2008.
• The Indian telecom industry had a market size of Rs.1,052,870 million in 2006 and it is expectedto reach a size of Rs.3,449,210 million by 2012 at a growth rate of over 26 % and the sector willgenerate employment opportunities for about 10 million people during the same period.
• The surge in mobile services market is likely to see investment worth amount US $ 24 billion by2010. The total revenue of all telecom operators is set to nearly double to US$ 43.6 billion infour years from US$ 222.5 billion in 2006. The revenue share of mobile business would rise to76% in the same period from 57% currently.
Conclusion: The stock has deserves a better valuation as compared to its peers and hence at the CMPof Rs.33.70, the stock looks cheap. However, stiff competition, long receivables cycle and clientconcentration are key risks to the business.From the daily charts its can be said that most of the parameters are in buy mode. The candle stickchart pattern indicates an immediate start of the uptrend in the scrip. The stock can be purchased atthe CMP of Rs.33.70, for a short term target of Rs.42. Please keep a SL of Rs.31.50 for any short termtrade.
Note: This stock was recommended to the Paid Groups on this Sunday (1st March, 2009) to the Paid Group Members. Very soon the "Quickie Calls" (Short Term Calls) for this week to the "Quickie Group" members will be disclosed here............
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Pick of the Week:

Kernex Microsystems India Ltd: Basking on Huge land Holdings:

BSE Code: 532686
CMP: Rs.82.6

Book Value: Rs.105.43

Market Cap: Rs.103.25 Cr

 

Introduction: Established in 1991 and registered as 100% Export Oriented Unit with Software Technology Parks of India, Department of Electronics, Govt. of India, New Delhi, it is a ISO 9001:2000 certified company with expertise in Software, Hardware development and Systems Integration. It is presently engaged in the business of manufacturing, installing and maintaining of anti-collision systems as well as conceptualizing, designing, and developing certain railway safety and signal systems for Konkan Railways Corporation Ltd. These safety and signal systems are suitable for medium to low speed & density railway tracks like in India and other developing countries.

The company entered into a technology partnership with Konkan Railway Corporation Ltd, Navi Mumbai for design, engineering and development of anti-collision systems which provides safety to trains in Railways. It holds exclusive license for manufacturing, installation, commissioning and maintenance of anti-collision systems in India. It also has an outsourced facility for the Konkan Railways Corporation Ltd for manufacture and supply of ACDs and related accessories. It is also a technology partner for the development and implementation of ADDs for Metro Sky-Bus Urban Transportation System, Advanced Railway Signal Systems and other safety systems. It holds exclusive marketing rights of ACD systems all over the world except India.

Based on the concept and domain knowledge provided by Konkan Railway Corporation Ltd, it has developed the networked Anti-Collision Devices, using Global Positioning System, Radio Data Communication, Application Logics and Inter facing these with an Auto Breaking System developed by KRCL. With operations in USA and planned operations in Far East, Africa and Middle East, Kernex is truly a global player in the offing.

 

Shareholding Pattern: The promoters hold 55.74% while the general public holds 44.26%. Moreover FII hold 1.55%, while mutual funds/UTI holds 1.11%.

 

Shareholding belonging to the category
"Public" and holding more than 1% of the Total No.of Shares

 

Sl. No.

Name of the Shareholder

No. of Shares

Shares as % of Total No. of Shares

1

SMS Holdings Pvt Ltd

273,181 

2.19 

2

Somerset Emerging Opportunities Ltd

193,217 

1.55 

3

Enam Investment Services Pvt Ltd

137,500 

1.10 

4

UTI Mid Cap Fund

139,156 

1.11 

5

Vinaya Kumar Gavini

160,267 

1.28 

6

Challa Subrahmanay Sarma

186,212 

1.49 

 

 Total

1,089,533 

8.72 

 

 

Financials: For Q1FY10, the company came out with flat topline and a slightly subdued bottomline. The total income of the company for Q1FY10 came out to be Rs.5.82 Cr as against Rs.5.97 Cr in the same period previous year. The net profit of the company for Q1FY10 dipped due to higher interest and tax component to Rs.52.3 lakhs as against Rs.1.07 Cr in the same period previous year.

 

Triggers:

  1. The company would benefit from the Indian Railway’s move to focus more on signal modernization and increased usage of automated signaling systems. Kernex Microsystems (India), the Hyderabad-based railway safety product manufacturer is the only player in anti-collision devices for the Railways and is set to capitalize on the public sector transporter’s thrust on ‘safety’.
  2.  Kernex Microsystem last year announced to foray into infrastructure projects and power sector, the two most happening sectors of today.
  3. The company has redrawn its plans to carry on the expansion programme, wherever required, as against plans mentioned in the prospectus dated December 6, 2005 in regard to scheduled time of completion. However, establishment of new manufacturing centre for ACID, ADDS and Advanced Signal Systems, construction of various buildings, including machinery & external services, electrical supply, roads, sewage &  compound  walls, gates  and  other related security arrangements and also training centre, cafeteria and transit accommodation for trainees, R&D Block, administration and  manufacturing  facility is nearing completion.
  4. The Phase-1 of development of ACD systems has been completed and pilot project commissioned in the Q1FY10. Railways have accepted the ACD system for deployment in all the Railways. Orders are expected through Konkan Railways Corporation for Southern, South Central and South Western Railways in the near future.
  5. Honourable Railway Minister during the Railway Budget speech on 26th February, 2008, stated that ACD is found working satisfactory and therefore, proposed to be deployed in South Central and South Western and Southern Railways.  According to Railways Corporate Safety Plan, ACD deployment is to be completed all over Indian Railways by 2013-2014. This is music to the investors in Kernex Micro Systems.
  6. The Company has signed a contract in November, 2008 with Egyptian National Railways, Egypt for development and supply of 136 Semi-Automatic Level crossing Gates. The Contract is under execution.
  7. Its unique product, Multi-Section Digital Axle Counter has been developed under technical collaboration on schedule time and is under cross approval by RDSO, Lucknow, Indian Railways. It is to be noted that the company earlier dropped the product called TAWD, consequent to the dropping of the same by the Indian Railways, in view of anticipated huge demand for the product called 'Digital Axle Counter’.
  8. Its R&D Division has done number of improvements and changes in the application software and hardware as required by the Konkan Railway Corporation. This includes AMSS, upgradation of ACD Reporting System & ACD survey automation system.
  9. The company’s International Marketing division continued marketing operation for selling the ACD and related systems in Egypt, South Africa, Brazil, Pakistan, Australia and South Asian countries. Consequently the ACD System is short listed as one of the viable system for Egyptian Railways. South African Railways is also examining the possibility of integrating the ACD system with OBC system already installed in South African Railways, spoornet.
  10. The company has also been working on development of 'Multi Section Digital Axle Counter’ in collaboration with M/s Altpro, Zerob, Croatia.  Complete test data, technical details, company details and Safety case has been submitted to RDSO, Indian Railways. Discussions with Altpro, to jointly manufacturing the product and KMIL to Market the product to Indian Railways is in progress. Meanwhile M/s Altpro, Croatia has appointed Kernex as their Sole technology partner  / Altpro Agent / Joint Venture partner in Indian subcontinent  for their  product  range like Digital Axle Counter,  Train  detection  System, ATPS, SIFA, incident recorder and for other safety system.
  11. The company has entered into technology partnership with Tiffien Batch, Germany for providing Automatic & Semi Automatic Level crossing system, up to Sit 3 levels. This  should  help  Kernex  to  enter  into International markets in semi developed and under developed countries  like Africa  and South Fast Asia and Australia for the supply a  Level  Crossing Systems.
  12. The  company  has so far purchased over 243 Acres of land at  the  Warangal highway  near  Yadagirigutta and has also acquired over 157 Acres  land  at Amanagul,  Mehboobnagar  district and acquisition of further Land,  in  the area  is planned.  All equipments required for this project have been fully acquired. In case of SPAD, planning is in progress and the project is expected to be completed by Dec, 2009 as against the revised scheduled month of June, 2008. This is due to delay in finalization of specifications and requirements by Indian Railways.
  13. The development of Hot Box and Wheel Vibration Detection systems is in progress and is expected to be completed by 31st Dec, 2009 as against the revised scheduled month of Nov, 2008. This is due to delay in finalization of specifications. Another opportunity waiting in the wings is the provision of ATP system for Metro Trains that are planned in major cities of the country.  With technological collaboration, the company can become one of the important players in this field too.
  14. New Offices of the company are being established in Delhi, Chennai.  Guntakal and Hubli based on the release of new orders and also central survey centre at Hyderabad. Other  locations  will  be  taken up  in  phased  manner  as  per  the commencement of work ordered by Indian Railways. Kernex Microsystems (India) set up a 100% subsidiary in the US in September 2000 to implement software products of the company in that country. It is now engaged in developing and implementing software for the US corporate hospitals.

 

Concerns:

  • The biggest threat the company faces is from Multi Nationals, who want to sell their equipment in India. To gel over this competition, the Company is upgrading the technology at a fast pace.
  • Any delay in decision making, administrative and departmental procedures could delay the receipt of orders, making its facilities idle and under productive.

 

 

Chart Check and Conclusion: Considering the points mentioned above the stock could be purchased at the CMP of Rs.82.6 for 6 months to 9 months time frame for at least 50% appreciation from the current price. Moreover, an encouraging fact is that the promoters are technocrats and have wide experience in electronics/software industries, both in India and abroad and hence they possess a deep understanding of the business of the company. Another point which is worth noting is that the stock is trading below its book value of Rs.105.43

Now from the charts it has been found that the stock is in highly oversold territory and a small bounce cannot be ruled out in the short term. Though Bollinger bands are in buy mode however, other momentum parameters are still not giving an immediate buy for the scrip. Also, though the MACD is not giving an immediate buy signal but it could slowly drift towards the buy mode. The stock needs to close above Rs.85 on closing basis, to start rising again. If it crosses Rs.95 which looks probable the stock could touch as high as Rs.130. Please keep a SL of Rs.67 for any short term trade.

Pick of the week

DECCAN CHRONICLE HOLDINGS LIMITED

BSE Code: 532608

Face Value: Rs.2

CMP: Rs.37.85

EPS: Rs.5.5

P/E: 6.88

Dividend: 150%

Book Value: Rs.43.58

Market Cap: Rs.926.86 Cr

52-Week High/Low: Rs.224/Rs.36.15

 

Introduction: Deccan Chronicle Holdings Ltd, erstwhile Deccan Chronicle was formerly engaged in weekly and daily journals in Andhra Pradesh. The company acquired a news paper publishing business in December 2002; post which it established a strong foothold in the state. The company aims to be the leading publishing house in the country.

Deccan Chronicle, the flagship newspaper of the company is the leading English daily in Hyderabad and Andhra Pradesh. It publishes seven editions of the Deccan Chronicle in Andhra Pradesh from their printing presses located at Hyderabad/Secunderabad, Vijayawada, Rajahmundry, Vishakapatnam, Anantapur, Karimnagar and Nellore. It is the fourth largest circulated and read English daily in India. Besides Deccan Chronicle, the Company also publishes Andhra Bhoomi in Telugu (daily, weekly and monthly).

Deccan Chronicle covers latest local, regional, national and international news. The newspaper also provides business, sports, weather, city culture, beauty, and health related news and information through its online portal.

 

Shareholding Pattern: The promoters hold 63% while the general public’s holding is 37%. Among the non-promoters are a number of Mutual Fund houses which holds substantial stake in the company.

Shareholding belonging to the category
"Public" and holding more than 1% of the Total No.of Shares

 

Sl. No.

Name of the Shareholder

No. of Shares

Shares as % of Total No. of Shares

1

 EQ Advisors Trust - EQ/VQN Kqmpen Emerging Markets

2,715,990 

1.11 

2

 Deutsche India Equity Fund

3,166,001 

1.29 

3

 Merrill Lynch India Equities Fund Mauritius Ltd

3,542,473 

1.45 

4

 Ward Ferry Management Ltd A/C WF Asian Smaller

4,268,064 

1.74 

5

 Morgan Stanley Investment Management Inc A/c Morgan

3,888,224 

1.59 

6

 Life Insurance Corporation of India

3,429,892 

1.40 

7

 Franklin Templeton Mutual Fund A/c Franklin India

3,200,000 

1.31 

8

 Morgan Stanley Mutual Fund A/c Morgan Stanley Growth

3,675,000 

1.50 

 

 Total

27,885,644 

11.39 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Financials: For Q3FY09, the company came out with almost flat topline and subdued bottomline, due to general downturn in the world economy.

The total income of the company for Q3FY09 rose to Rs.228.3 Cr as against Rs.226.5 Cr in the same period previous year. Deccan Chronicle Holdings’ third quarter net profit fell 75% to Rs25.67 crore over the corresponding period a year ago. The net profit of the company for Q3FY09 came out to be Rs.25.7 Cr as against Rs.102.94 Cr in the same period previous year. For the nine-month period ended 31 December, Deccan Chronicle posted a net profit of Rs131.92 crore, a 51% decline from Rs269.29 crore last year.

The operating and net profit margins of the company decreased considerably Y-o-Y. The net profit suffered due to high raw material price (Rs.129.04 Cr in Q3FY09 as against Rs.82 Cr], higher staff cost (Rs.13.53 Cr in Q3FY09 as against Rs.6.53 Cr), and almost doubling of other expenditure (Rs.17.73 Cr as against Rs.9.8Cr). However with the government expected to come out with special package for the media sector, the company’s top and bottomline could change dramatically on the positive side.

 

Investment Rationale:

  • Advertisement, the main growth driver: Advertisement is the key revenue driver in the Indian newspaper giant. DCHL’s advertisement revenue accounts for nearly 80%-90% of the total revenue. The media industry, both print and electronic, is facing the impact of the global financial crisis in the form of decline in advertisement revenue. However, representatives of the print media had already approached the I & B ministry seeking an upward revision in rates of government advertisements. The government has almost assured to some stimulus package to the media industry and to tide over the situation.
  • Foray into new business: The Deccan Chronicle group has floated an international cargo airline company “Flyington Freighters Ltd”. The new company, which will start services from July this year, has placed orders for purchase of six A330-200F cargo planes from Airbus at a cost of $175 million each. While the aircraft delivery is slated for 2009-2010, Airbus has agreed to lease two aircraft to the company in the mean time.
  • Launching New Editions: In the middle of last year, Deccan Chronicle Holdings Ltd launched its Mumbai Edition of "Financial Chronicle" in association with the "International Herald Tribune". During the year, 2008, DCHL entered the Business daily market by launching its newest print offering, Financial Chronicle simultaneously from Hyderabad and Chennai and extended its presence in Bangalore and Mumbai recently. Also, it announced a tie up with International Herald Tribune for launching its branded 'World Business Section' inside Financial Chronicle. The Mumbai edition of the Financial Chronicle would have four pages of IHT's World Business Section and its logo would be put on the front page of the daily. But one should remain cautiously optimistic on DCHL's foray into this space as it is already crowded with several offerings by other big Print Media houses. During May 2008, the company finally launched its much awaited Bangalore edition of Deccan Chronicle.
  • Strengthening its base in Southern India: The company had already launched the Bangalore edition of Deccan Chronicle and approved an initial investment of Rs.25 Cr in addition to the use of existing assets in other locations.
  • Inorganic expansion: The company is expanding its reach through inorganic expansions. It had acquired control of Asian age Holdings, which publishes newspaper “The Asian Age” in five cities. The acquisition will help strengthen the brand image of Asian Age at the back of increasing print run. The company had also acquired Odyssey India Ltd (Odyssey) for Rs.61.2 crore, in a cash deal. Odyssey is a growing leisure retail chain, is engaged in sale of books, music, toys, greeting cards and FMCG products. This move was intended to notch advertisement from FMCG giants.
  • Buy Back of Equity Shares: The Board approved the proposal for buy back of equity shares of Rs.2 each of the fully paid up equity share capital of the Company, at a price not exceeding Rs.100 per equity share aggregating to Rs.180 Cr from equity shareholders other than the Promoters and persons in control of the Company. The maximum number of shares to be bought back through the Stock Exchanges shall not exceed 3, 50, and 00,000 Equity Shares of Rs.2 each which represents 14.29% of the paid up capital of the Company. However the Promoter Holding in the Company shall not exceed 75% of the Paid up capital of the Company post buy back. The minimum number of Equity Shares (minimum buy back shares) to be bought back is 1,00,00,000 Equity Shares of Rs.2 each.
  • Stimulus Package for the Media Sector to boost growth: Taking note of the difficulties faced by the media industry due to the financial crisis, the government last week said it will shortly announce a stimulus package for the sector. The I & B ministry has already sent certain recommendations about the package to the Finance ministry and the government is expected announce it soon. Moreover, the good point is that the said package is mostly concerning the print media and hence the scrip is expected to be positively effected more than those in the electronic media.  
  • Indian Premier League (IPL)--Profitable in the first year itself: Deccan Chronicle had bagged the rights for the IPL team of Hyderabad for US $107mn payable over the next 10 years. The IPL Hyderabad rights would be a part of Sieger Solutions. DCHL named the team Deccan Chargers and spent around $5.9mn in annual fees to recruit players. While there is every chance that the venture would achieve breakeven only after a couple of years, management has indicated that the IPL venture turned profitable for the company in the first year itself. DCHL clocked around Rs107.5cr revenue and incurred expenses to the tune of Rs88cr during its first year of operations. Hence, it made a neat profit of Rs19.5cr from the venture. Also Deccan Chronicle Holdings Ltd will not sell its Indian Premier League cricket team, Deccan Chargers, as there were no buyers in the market, a top official said. Deccan will review the decision to sell Deccan Chargers in three years from now as this downturn cycle was likely to be extended till 2012. It is to be noted that, Deccan Chronicle had in 2008 paid $107.01 million for the Hyderabad team for Indian cricket board’s Twenty20 series for 10 years.
  • Sieger Solutions – Potential unlocking on the cards: Sieger Solutions, a wholly owned subsidiary of DCHL, was formed in July 2006 to handle media space selling for DCHL for a pre-defined commission. However, Sieger has stopped clocking revenues from this model and now houses all the internet portals – Deccanchronicle.com, Papyrusclubs.com and Mydigitalfce.com. For FY2008, Sieger Solutions registered revenues of Rs.72 Cr and PAT of Rs.35 Cr primarily driven by a subscription based model from a website called Papyrusclubs.com (student community forums) under which it has tied up with several institutes to publish and share campus news over the Internet. Recently, DCHL also entered into an outsourcing agreement with New York Times (NYT) to manage their internet properties out of India as well as some of the development activities connecting to the digital space. Sieger Solutions is expected to rake in incremental revenues of Rs.150 Cr from this arrangement in FY2009. DCHL is also in talks to sell 5% equity stake in Sieger Solutions to NYT.

 

Conclusion:  During FY2008-10, we can expect DCHL to post a CAGR growth of 16% in Revenue aided by 18% CAGR growth in advertising revenues and 8% CAGR in circulation revenues. On the Earnings front, we can expect DCHL to report a CAGR of 15% largely boosted by a decline in interest costs

However, on the operating front, the DCHL is expected to post a subdued growth owing to a sharp decline in Operating Margins on account of stiff competition in Chennai, initial losses on account of the Bangalore edition and the Financial Chronicle launch, and higher newsprint prices. Hence, we can expect DCHL to post a CAGR growth of 9% in EBITDA during FY2009-10.

However, there are valid concerned on DCHL owing to its poor quality of growth (funding working capital requirements through Balance Sheet), scalability issues (too much dependence on single region), poor corporate governance (management not delivering on promises made – buyback, un-locking in subsidiaries) and unsustainable Margins (60% OPM as against peer average of 20%). While management has addressed some of these concerns – reduced debtor days to 90 days by securitization with ICICI for a 12% discount, and initiated talks with NYT to unlock value in Sieger, still some more clarity on the same is expected. Moreover, depreciating rupee is negative for the company as it imports newsprints.

Growing awareness among the common mass is leading to the rise in the circulation of newspaper. The growth was triggered mainly by India and china. DHCL occupies second position in the print industry and caters to the most part of the Southern India. Its paper Deccan Chronicle is the most read newspaper in Andhra Pradesh, Chennai and Hyderabad. The company is also eying a substantial share in Bangalore and is expanding to newer geographies which include Mumbai and Pune. Revenues of the company will also be triggered, by the upcoming expansion plans of Odyssey.

At the CMP of Rs.37.85, the stock is trading at dirt-cheap valuations considering its future upsides from the Sieger Solutions deal with NYT and IPL’s good performance. The valuation can also be corroborated by the growing advertisement revenues and increasing subscription.

Note: This Report is from the Yesterday's (08-02-09) Sunday Report which was sent to the Paid Groups, Yesterday (8th February, 2009

Is Satyam Computers Services Ltd, a buy at Rs.39.95 ??!!

To understand this fact, let us consider the following points, a little meticulously .........

                         Satyam Computer Services Ltd

 

Scrip Code :  500376

Quarter ending :  September 2008

 

Shareholding belonging to the category
"Public" and holding more than 1% of the Total No.of Shares

 

Sl. No.

Name of the Shareholder

No. of Shares

Shares as % of Total No. of Shares

1

 Aberdeen Asset Managers Ltd A/C Aberdeeninternational India Opportunities Fund ( Mauritius ) Ltd

23,800,000 

3.53 

2

 Fidelity Management & Research Company A/C Fidelity Investment Trust - Fidelity Diversified International-Fund

23,000,000 

3.42 

3

 ICICI Prudential Life Insurance Company Ltd

16,621,682 

2.47 

4

 Lazard Asset Management LLC A/c Lazard Emerging Markets Portfolio

14,490,567 

2.15 

5

 Aberdeen Asset Managers Ltd A/C Aberdeen Global Asia Pacific Fund

10,680,500 

1.59 

6

 Life Insurance Corportion of India

9,959,281 

1.48 

7

 Citigroup Global Markets Mauritius Pvt

8,203,186 

1.22 

8

 JP Morgan Asset Management Europe SARL A/c Flagship Indian Investment Co Maurities Ltd

8,179,448 

1.21 

9

 LIC of India Money Plus

7,941,345 

1.18 

10

 Swiss Finance Corporation Mauritius Ltd

7,515,806 

1.12 

11

 Government of Singapore

7,128,885 

1.06 

12

 Morgan Stanley Mauritius Company Ltd

7,096,342 

1.05 

 

 Total

144,617,042 

21.47 

 

The following Fund Houses sold shares yesterday in the open market due to too much panic created  by the "Media Terrorists":

 

1. SWISS FINANCE CORP MAURITIUS LTD===> Sold 7786759 shares at Rs.74.61
2. ABERDEEN INTERNATIONAL INDIA OPPORTUNITIES FUND MAURITIUS LTD===>Sold 9830811 shares of the company at Rs.43.41
3. ABERDEEN ASSET MANAGERS LTD ABERDEEN GLOBAL ASIA PACIFIC FUND===>Sold 4179064 shares at Rs.43.41 

 

Hence it can be concluded from the above data that Majority of Fund Houses feel that Satyam Computers Ltd will be able to come out of the mess created by its Founder Chairman Mr. B Ramalinga Raju??!!

Moreover, Sukumar Rajah, chief investment officer (CIO) of equity in India at Franklin Templeton Investments, which manages $4 billion of assets in the country, said in an e-mail, “This unfortunate development will be a short-term negative for market sentiment,”. Still, by forcing regulators to improve oversight, the incident “should be a Long Term Positive,” Rajah said.

 

According to a well known and reputed financial web-site, developing-nation stocks are trading near their cheapest levels in a decade after the global economic slowdown and a slump in commodity prices sent the MSCI Emerging Markets Index down 54 percent in 2008. In comparison, the MSCI World Index dropped 42 percent. Shares in the MSCI emerging-markets index trade at 8.8 times reported earnings, while developed shares fetch 11.5 times profit. Sensex companies trade at 9.5 times earnings.

Aberdeen Asset Management Asia Ltd., Satyam’s largest institutional investor as of September, said its investment outlook for India hasn’t changed. Funds run by Aberdeen own at least 5.12 percent of Satyam, according the Hyderabad-based company’s filings for the quarter ended Sept. 31.

“People will grow a bit more dispassionate, but you can say the same for the U.S. and elsewhere,” said Hugh Young, managing director at Aberdeen’s Asian unit, which manages $37.3 billion. “India has great companies that do the right things. Hopefully this is a one off.” He declined to say how many Satyam shares Aberdeen holds, or whether any were sold recently.

India’s $1.2 trillion economy may grow 7 percent in the year ending March 31, the slowest pace since 2003, according to government forecasts. The economy may expand at close to that rate in the next fiscal year as the global recession cuts exports and domestic demand wanes, Junior Industry Minister Ashwani Kumar said in New Delhi yesterday.

To understand the mammoth-ness of Satyam Computers Services Ltd let us take note of the following facts: Satyam Computer Services Ltd, employs 53,000 people, operates in 65 countries and serves almost 700 companies, including 185 Fortune 500 companies. More than half of its revenue comes from the United States.

The most encouraging news came from www.cnn.com which writes: "Analysts say Satyam is ripe for a takeover, and the government is expected to submit a formal report on the matter Thursday".

Therefore, can we construe that those highly skilled stock market professionals, who have purchased some shares of Satyam Computers Ltd will have a field day in the next few months??!!

However, the most horrifying part of this event is that that cash balance that was non-existent got certified by one of most reputed auditors in the world map, PricewaterhouseCoopers LLP.  This reputed auditor of Satyam Computers Ltd’s, declined to comment on the scandal, according to an e-mail from the New York- based firm’s public relations adviser, Edelman.

I had earlier discouraged all my  Paid Clients not to enter Satyam Computers Ltd, when it fell to around Rs.179---I was anticipting something like this, from my exprience durring the dotocm boom-bust cycle in the 1990s and early 2000. But is it time to buy this stock at the CMP of Rs.39.95, for the short term gains??!!

 

Prajay Engineers Syndicate Ltd: Accumulate on all declines;

BSE Code: 531746

Face Value: Rs.10

CMP: Rs.17.70

Book Value: Rs.152.34

EPS: Rs.17.87

P/E: 0.99

Dividend: 25%

Market Cap: Rs.70.26 Cr

Buying Price: The scrip should be bought above Rs.18.5

 

Company Background: Prajay Engineers Syndicate Ltd (PESL) was promoted by Mr. Chandra Mohan Reddy. It’s a 25 years old partnership firm converted into a public limited company in the year 1994. It pioneers in construction activities in the twin cities of Hyderabad-Secunderabad. Its Key developments include residential flats, townships, shopping malls, office buildings and group housings.

The company has developed around 6.7 million square feet over the past twenty years across more than 75 projects and a further 10.7 million square feet of land is under various stages of development. Prajay has a significant presence in the hospitality segment also, with three landmark ventures in the city: Prajay's luxury resort, the Celebrity Holiday Retreat and the 30 room Celebrity Boutique Hotel (located 500 metres away from the airport). Prajay has been the leader in identifying new locations that are today of strategic importance, which has given it huge cost advantage.

 

Shareholding Pattern: The promoters hold 16.42% while the general public holds, 83.58%. Among the general public FIIs hold a whooping 58.78% of the shares of the company.

 

 

Shareholding belonging to the category "Public" and holding more than 1% of the Total No.of Shares

 

Sl. No.

Name of the Shareholder

No. of Shares

Shares as % of Total No. of Shares

1

Copthall Maritius Investment Ltd

1,808,085

4.55

2

Goldman Sachs Investment Mauritius Ltd

852,543

2.15

3

Citigroup Global Markets (Mauritius) Pvt Ltd

2,130,796

5.37

4

ABN Amro Bank N.V. London Branch

1,518,952

3.83

5

Merrill Lynch Capital Markets Espana S.A.S.V.

1,487,223

3.75

6

Morgan Stanley Investments Mauritius Ltd

617,200

1.55

7

Swiss Finance Corporation Mauritius Ltd

1,047,459

2.64

8

S Madhuri Reddy

410,000

1.03

9

N Ravinder Reddy

2,020,100

5.09

10

Merlin Securities Ltd

5,336,134

13.44

11

GRA Finance Corprate

457,701

1.15

12

Clsa Mauritius Ltd

1,361,942

3.43

13

ABN Amro Bank N.V. London Branch

424,211

1.07

14

 BSMA Ltd

760,000 

1.91 

15

 Deutsche Securities Mauritius Ltd

2,358,893 

5.94 

 

 Total

22,591,239 

56.91 

 

 

Financials:  Though for Q2FY09, the total income was almost flat the net profit of the company suffered due to higher expenditure and higher depreciation, as can be seen below. The fact that the interest cost was more or less flat comparing Q-o-Q was a good sign. Moreover, the tax component was also less in Q2FY09, as compared to the same quarter previous year. However, due to the downturn, the operating margin and net profit margin took a quantum hit. However, this is going to correct in the next few quarters, due to the fall in the price of raw materials, in the last few quarters and also due to seasonal demand.

 

Standalone Result of Prajay Engineers Syndicate Ltd

 

Type

Un-Audited

Un-Audited

Un-Audited

Un-Audited

Un-Audited

Audited

 

Period Ending

30-Sep-08

30-Jun-08

31-Mar-08

31-Dec-07

30-Sep-07

31-Mar-08

 

No. of Months

3

3

3

3

3

12

 

Description

Amount (Rs. million)

 

Net Sales / Interest Earned / Operating Income

418.44

222.10

907.03

1,369.56

462.46

3,440.19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income

1.92

1.78

6.83

0.96

0.91

9.82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Income

420.36

223.87

913.86

-

463.37

3,450.01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditure

-270.24

-144.32

-904.12

-

-200.17

-2,061.87

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

-27.06

-24.94

-11.61

-27.97

-27.69

-90.87

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit Before Depreciation and Tax

123.06

54.61

-1.87

-27.97

235.51

1,297.27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

-9.11

-8.66

-7.89

-

-4.96

-22.52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit before Tax

113.95

45.96

-9.76

705.01

230.55

1,274.75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax

-39.03

-15.92

-41.06

-49.75

-76.58

-246.09

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Profit

74.92

30.04

-50.82

655.26

153.97

1,028.67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Capital

396.96

396.96

396.96

275.91

248.57

396.96

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS after Extraordinary items

1.89

0.76

-1.85

25.47

6.58

37.46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS after Extraordinary items

1.89

0.76

-1.85

17.32

4.05

37.46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nos. of Shares - Public

33,178,576.00

33,178,576.00

33,178,576.00

22,473,112.00

20,017,152.00

33,178,576.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent of Shares-Public

83.58

83.58

83.58

81.45

80.53

83.58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Profit Margin

35.88

35.82

1.07

-

56.91

40.35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Profit Margin

17.90

13.53

-5.60

47.84

33.29

29.90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash EPS

2.12

0.97

-1.08

-

6.39

26.48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes

Notes

Notes

Notes

Notes

Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Detailed

Detailed

Detailed

Detailed

Detailed

Detailed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key Highlights:

            The company earns 95% of its revenue from Real Estate and from Hospitality segment.

            In March 2007 the company posted a turnover of over Rs.2,000 million and profits of around Rs.800 million. It achieved Rs.1,000 million turnover in one quarter.

            Last year the company signed a joint venture with Sunway Group, Malaysia for development of residential condominiums projects in Hyderabad.

            Prajay Engineers' Land bank stands at approximately 850 acres 80% of which is in and around Hyderabad

            In the last twenty years of its existence, PESL has delivered 75 projects and developed around 6.7 million square feet.

 

Investment Rationale:

            The increased demand for residential units and commercial, office space for the IT and ITES companies suggest that the spurt will continue for years to come. An estimated inflow of Rs.5,508 billion investments in this sector will usher in development at a remarkable pace.

            Government thrust on infrastructure spending has given a tremendous boost to construction sector in terms of market size resulting in higher demand across the sector.

            Prajay Engineers Syndicate's base in the twin cities of Hyderabad and Secunderabad offers it a myriad of opportunities in the real estate sector. The rapidly growing IT/ITES industry in Hyderabad has its roots in the proactive role of the state government pitching Hyderabad as the 'Hi-Tec' city of India.

            The Government's decision to launch Bio Tech Park and Fab City has further given a boost to technology driven growth in Hyderabad.

            The company currently has around 31 projects underway and plans to construct around 37.6 million square feet in the next four to five years. All projects have credit Rating of A+ by FIs.

            With its visionary approach and contemporary building practices, cutting edge management discipline, Prajay is at the forefront of imparting dynamism to infrastructure development industry.

            The company is foraying into Tier II cities of Andhra Pradesh like Vizag and Vijaywada, by FY10.

            The company want to invest around Rs.500-600 Cr in the coming years to develop the hospitality segment; to create 1000 room capacity by 2009 in the 5 star, 4-star and the 3- star business class categories; and to develop 31 projects including residential, commercial, retail and hospitality projects, aggregating to around 37.57 million square feet over the next five years.

            PESL’s 100% subsidiary Prajay Holdings, has received a commitment of FDI recently, to the tune of rupees equivalent of US $ 36 million for one of its prime projects at Hyderabad wherein a development of around 40 lac square ft has been planned by the company.

            The company is riding high on the real estate and infrastructure boom: it has set a target of reaching Rs.1000 crore turnover by FY10.

            Future Focus: Premium Apartments, Ultra-modern Townships, Development of Golf course, Independent premium bungalows, Development of 3 and 5 star hotels, Infrastructure development, Shopping Malls. These are all high volume and high margin activities.

 

Conclusion:

As the trend of spiraling growth continues, there are miles more to go, and further milestones to achieve. With 31 planned and ongoing projects, which will culminate into construction of around 38 million square feet and the residential segment comprising of about 84 percent of the total area under development, the company is expected to do well in future. The stock at the current market price provides an investment opportunity and one should invest in it taking a call for 12-15 months horizon for at least 50% from the CMP of Rs.17.7.

Chartical Indicators: For the short term, buy the scrip only if it closes above Rs.18.5 on a daily closing basis. The MACD and CCI are in perfect buy mode, while Stochastic, Bollinger Bands, and Williams%R are also in buy mode.

Moreover, in the Candle Stick Chart Pattern, the inverted hammer, formation indicates that a significant decline has taken place in the stock price and the shorts are beginning to cover their positions---a very bullish indicator.

With this Candle Stick Chart Pattern, it is imperative to watch the next day's trading action. If the stock opens strong and remains strong during the day, then a key Reversal is likely in progress—a perfect time to bag the scrip.

 

Note: This stock was recommended to the Paid Groups in the Sunday Report of 30-11-08.