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.

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.

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............

Pick of the week
Gulf Oil Corporation Ltd
BSE Code: 506480
CMP: Rs.27.90

Introduction: Gulf Oil Corporation Ltd is a juxtaposition blend of diverse business areas such as industrial explosives, mining products, lubricants, specialty oils and chemicals, active pharmaceutical ingredients (bulk drugs) and pharmaceutical formulations. Various divisions and subsidiaries are:
(a) Industrial Explosives Division: Explosives/Accessories, Metal Cladding, Defense Products and Wind Energy
(b) IDL Consultant Division: Mining Service and Construction Service
(c) Specialty Chemicals Division: Active Pharma Ingredients and Formulations
(d) Lubricants Division: Automotive Lubricants, Industrial Lubricants, and Petroleum Products
(e) Subsidiaries: IDL Agro and IDL Buildware.

Shareholding Pattern: The promoters hold 45.73% while the general public holds 54.27%. Gulf Oil International Mauritius Inc is the only promoter of the company and which holds 45.73% of the shares of the company.

Financials: In Q3FY09, the total income of the company showed a rise of around 18% to Rs.216.01 Cr as against Rs.196.6 Cr in the same period previous year. However the net profit of the company suffered due to higher cost of raw material and most importantly on account of provisions for exchange fluctuations of Rs.6.03 Cr and higher interest charges. The net loss of the company for the Q3FY09 came out to be Rs.5.6 Cr as against Rs.6.54 Cr in the same period previous year. For the nine months period ended 31st December, 2009, the turnover increased by 26% to Rs.748 Cr and Profits after tax was Rs.1.78 Cr after provisions for exchange fluctuations of Rs.17.29 Cr.

Investment Rationale:
1. Gulf Oil Corporation Ltd is a Hinduja Group Company. It has its explosives factory in Hyderabad, spread over 600 acres. Company had planned to set up knowledge city in 100 acres. It is reliably learnt now that the Government has given approval to shift this factory out of Hyderabad. Company has already given huge VRS package to around 4700 employees and now just 250 employees are there at Hyderabad factory. Apart from Knowledge City, company will also be constructing residential and commercial complex.
2.The company received necessary approvals from the Karnataka Government for setting up of an IT SEZ on its land situated at Yelahanka, Bangalore on the Bangalore—Hyderabad Highway. The project assumes significance as it is strategically situated 14 Km from the new Bangalore International Airport. This will have a supporting infrastructure for Hospitality, Shopping, and Entertainment in an international ambience.
3.The Company is also planning to finalize development plans for its land in Bhiwandi and Delhi
The Board of Directors of the Company had earlier approved a restructuring of the Company’s business in accordance with which, the Specialty Chemicals Division of the Company would be transferred effective from April 01, 2008 to IDL Specialty Chemicals Ltd (formerly IDL Agro Chemicals Ltd), a wholly owned subsidiary. The Scheme of Arrangement for restructuring has also been approved by the Shareholders and Unsecured Creditors.
5.The company’s lubricant division came out with the new products in the name of Gulf Cargo Power and Gulf Super Duty. It also entered into new segments like Diesel Generator sets, largely used by telecom sectors, with a new range of lubricants co-branded with Ashok Leyland.
6.The company’s explosives division reported a robust growth of 44% Y-o-Y. This robust growth in sales was due to increased sales both in the domestic and export markets. This division received a new contract from Coal India Ltd, for the supply of explosives to their subsidiaries with effect from 1st December, 2008. The new order has a price variation mechanism linked to raw material prices which would help stabilize margins in the subsequent quarters. Exports were strengthened with new orders from South East Asia, Easter Europe and Africa. This division is progressing well on its goal of achieving 20% of turnover of exports.
7.The company’s mining division is doing excellently well which included the activities from the newly started Nigahi mine of NCL (a subsidiary of Coal India Ltd) in addition to Dudhichua mine in the same region. The division also started its first Manganese ore mining work of Adhunik Group in the Barbil region after completing the mine development work. The mine infrastructure work at Utkal Alumina Ltd is progressing well after a good start last year. Due to the high technical standards and quality of work, the Division is being offered various contracts in the mining and construction sectors. Currently the order book position of the Division is valued at Rs.500 Cr.
8.The company is planning to raise US$ 100 million by way of issue of GDR/ADR/FCCB or otherwise (as was passed by the shareholders last year).

Conclusion: The Company is going to benefit from the fall in the price of major raw materials and this is expected to show up in the following quarters’ results. In the commercial vehicles segment the Division continued to achieve significant growth with higher market penetration of Ashok-Leyland Gulf co-branded lubricants led by India’s first long drain diesel engine oils with extended service period of 36000 Kms.
Gulf brand promotion activities were stepped up with sponsorship of two wheeler racing events including National Dirt Track Championship. Economy standi-pack pouches were launched to cater to diesel segments in rural markets and the response has been very encouraging.
In future the restructuring of the Specialty Chemical division, will drive its revenue growth. The Specialty Chemicals Division has obtained Certificate of Suitability for a cardiovascular drug, Enalapril Maleate from the European Directorate for the Quality of Medicine and HealthCare. This would give access for the molecule in the European markets. Application has been filed for a Cephalosporin for Certificate of Suitability with EDQM.
In 2007, its share price touched Rs.350. It has also paid 75% dividend last year. The shares are trading near its book value of Rs.29 and 52-week low price of Rs.24.80. Hence there is minimum downside from the current price of Rs.27.90.

Chart-Talk: From the charts it is found that the stock is above its major support of Rs.27.5 and is in the highly oversold region. Though RSI and ROC is not indicating a clear trend however, MACD and Bollinger Bands are in super buy mode. However, since this is more or less a momentum counter like PSTL, it is move when the markets start to move up in tandem. Hence buy the scrip as long as it is above Rs.27.5 and don’t average if its falls below that levels unless you get some special positive signals.

Note: The Stock of Gulf Oil Corporation Ltd, was recommended to the Paid Groups in the Sunday/Monday Report (23--02-09). The stock hit the upper circuits on the early trade on the next day, i.e. on 24th February, 2009.

Pick of the week:
Hanung Toys & Textiles Ltd.
Bloomberg Code: HTT@IN
Reuters Code: HATT.BO
CMP: Rs.24.5
Book Value: Rs.97.46
52-Week High/Low: Rs.273/Rs.24.25
Face Value: Rs.10
EPS: Rs.30.18
Dividend: 15%
P/E: 0.81
Market Cap: Rs.61.71 Cr
Industry: Toys and Textiles

Introduction: Hanung Toys and Textile was set up in technical collaboration with a South Korean company. Hanung Toys and Textiles Ltd is the largest manufacturer and exporter of Non-Toxic, child safe stuffed toys in India. The company’s products include bedding, curtains, sheets, throws, cushions, decorative pillows, soft toys, window curtains, floorings, beanbags, etc. The company has Walt Disney’s franchise in India for Disney Soft Toys and Cushions.
The company has the EN-71, ASTM and BS-5852 certifications. It has been awarded ISO 9001:2000 for quality management systems to manufacture, supply and export furnishings and stuff toys.

OVERVIEW: Hanung Toys and Textiles Ltd is engaged in the manufacturing of Stuffed Toys /Plush Toys and Home Textiles. Since incorporation in 1990, the company has continued to do well. In the initial formative years, company gained immensely from its technical tie-up/ collaboration with South Korean company.

Hanung Industrial Company Limited, as they helped establish well known Korean manufacturing practices and quality systems. After initial five years of collaboration, it has since been independently operating its manufacturing. Its toys manufacturing unit is established in the Noida Special Economic Zone (NSEZ) wherein the benefits of duty free imports and single window clearance for imports/exports are available.
Thus its business units consist of toys manufacturing facility, home furnishing production facility and textile processing facility located in Noida. Roorkee & Bhiwandi. Its new production units in NSEZ & Roorkee enjoy 100% tax holiday for first five years. Products made by the company have found wide acceptability in the domestic market as well as in the competitive overseas markets. Domestically its brands Play-n-Pets and Splash are available with all major retailers.
With a well established distribution network spread over towns, the products are distributed/ sold through number of outlets. In the Stuffed Toys /Plush Toys category, the company is the market leader and has the major share of the market. Further on the domestic front company has taken the lead by setting up its retail stores both in Home Textiles as well as Stuffed toys/Plush toys.
On International front, it mainly deals with the overseas markets viz. Europe, USA, Latin America and the Middle East and has been able to attract and retain known names. The Company has been serving these markets with both stuff toys and home furnishings and its customers are primarily large importers/ whole sellers that service the respective retailers their country.
Internationally, the Company’s products are sold in over 30 countries. Products made by this company are available with the leading, Tier One, top most retailers in the world. Besides, the company is also making products for some of the Finest International Brands. The company’s business in the international market has continued its growth trajectory.
Shareholding Pattern: The promoters hold a whooping 62.28% while the general public holds 37.72%.

Financials: In the September, 2008 quarter, the company came out with brilliant set of numbers. The total income of the company for Q2FY09 came out to be Rs.166.95 Cr as against Rs.117.2 Cr in the same period previous year. The net profit of the company for Q2FY09 came out to be Rs. e Rs.19.44 Cr as against Rs.13.73 Cr in the same period previous year. The EPS of the company for Q3FY09 came out to be Rs.7.72 as against Rs.5.45 in the same period previous year. Both the net profit and operating profits were flat in Q2FY09 when compared Y-o-Y.
Investment Rationale:
1. The Company operates in two segments viz stuff toys and textiles. The company has the order book size of over Rs.1500 cr executable over 4 years time frame.
2. The company has signed long term export order tie-up with leading US buyers, for exporting home furnishing and soft toys. These agreements will provide greater strength and better revenue stream to the company.
3. Hanung Toys & Textiles Ltd currently is negotiating with two U.S. Companies for acquisition. The talks are on the advanced stage.
4. The Company has signed MOU with a Chinese Company to buy latter's soft toy business in China by acquiring 100% stake in the said Company. The company is reportedly is having a toymanufacturing unit clocking annual sales of around $50-60 mn in China. The transaction would cost around $20 mn to the company. The Chinese acquisition will also bring the advantage of low cost technology, larger infrastructure and new clients to the Company.
5. During FY08, the Company has started production in its new home textiles unit at Roorkee. The Roorkee unit has various tax benefits & accordingly higher capacity utilization of this unit will further boost the profitability of the Company in the coming years.
6. The company is rapidly increasing its retail network, having opened its first Retail store for soft toys in Delhi on February 14, 2008
7. The board has approved issue of FCCBs & equity shares, GDR/ADR's, QIP's or any other financial instruments for US $50 mn for part financing capex/acquisition programs of the Company. This may increase the paid up capital of the company by about 25% assuming a conversion price of about Rs.250 per share in case of GDR/ADR's.
8. After the recent acquisition of a small number of shares, JM Financial Mutual Fund holds 9.51% of company's share capital.
9. The brilliant results in the September, 2008 quarter is due to better capacity utilization,
efficiency and aggressive marketing of value 10. Activities relating to exports, initiatives taken to increase exports, developments of new exports markets for products and services, and export plans.

During the FY08 and H1FY09, 15 new customers were added. All these customers have the potential and will be converted into US$ 10 Millions each, or more, in the next two years. Some of these have already been converted into US$5 Million plus accounts. Products made by Hanung Toys and Textiles Ltd are available on the shelves of Bloomingdales. William-Sonoma Group, Macy's, Dillards, BBB, JC Penney, Target Stores, HBC. Rona, Home Depot, Wal-Mart, Anna's Linens, LNT, Tuesday Morning, Ikea, Francodim, Conforama, Homebase, Argos, etc.
Key Concerns:
1. Threat from China: China is the largest manufacturer of soft toys bat present. But, recent complaints about quality have lead Western companies to look to other countries for outsourcing.
Moreover, the recent news that government of India has slapped a ban on import of toys from China after cheap supplies from the neighboring country upset the applecart of the domestic manufacturers augurs well for the company. The ban, notified by the Directorate General of Foreign Trade (DGFT), will remain valid for six months. While the government notification did not cite the reason for the ban, sources said it was concerned over a rise in imports of toys. Most of the varieties, including wheeled toys, dolls, stuffed toys, toyguns, wooden and metal toys, musical instruments, electric trains and puzzles are covered under the ban. The Toys Manufacturers Association of India said it was pleasantly surprised by the decision of the commerce ministry to prohibit shipments of cheap toys from China. “We welcome the decision. It is good for the industry,” association president Raj Kumar said, adding it is in the interest of the country. In the face of global downturn, Indian industry has been clamouring for protection from aggressive Chinese manufacturers.
2. Foreign Currency Risk: The Company’s export earnings are around 74% (in FY07) and with rupee trading at historic levels as compared to USD, the company stands to benefit by this unusual INR movement. However, the Company's revenues are largely insulated from currency fluctuation risks because:
a) Domestic revenue contributes around 20-25% of total revenue.
b) Natural hedge by way of import of raw material for stuffed toys to the extent of 30%
of total revenue.
c) Exports to IKEA are denominated in Indian rupees.
d) According to company sources remaining risk is fully hedged by long- term derivative deals.
Thus, the Company is largely insulated from currency fluctuation risk because of its unique revenue model giving it a natural hedge.
3. Impending slowdown in the U.S. and, in Europe can affect future demand of the Company’s products.
Industry Outlook:
The Indian toy market is around Rs.2000 cr, of which the organized stuffed toy market accounts for about Rs.300 cr and is growing at over 25% annually. There are three basic reasons for high growth in the stuffed toy market.
Firstly, the disposable income of people has grown very fast in the last three to four years. This coupled with changing income distribution promises future expansion of demand. Hanung with its established brands of toys like Play-N-Pets and Muskan is well poised to take advantage of this trend.
Further, gifting of stuff toys seems to be catching up in a big way. Mushrooming of shopping malls and mini markets is abetting these changes in tastes. The company has already tied up with a number of shopping malls in the country for this purpose.
There were reports in a section of the media that the US authorities and consumer protection groups found harmful amounts of toxic lead content in Chinese-made toys and this have led to less import of Chinese toys in the recent times and could be one of the principle reasons for the growth of domestic industry.
Also, the global toy makers like Toys “R” Us, Chicco and Clementino are shifting focus from China and have increased their sourcing from India while big retailers such as Ikea, Tesco, Metro, among others, have begun to place big orders on Indian Companies.
Recommendation:
At the current market price of Rs. 24.5, the stock is dirt cheap, considering the future potential of the company. The company is well positioned to capitalize on the growth in the burgeoning toys and textile markets. The company has a capacity to produce 20 mn toys per annum and 8 mn meters of textile furnishings segment.
Between Mattel, Funskool and Hanung Toys, it has about 15-18% market share. The company has the domestic brands of Play-N-Pets and Muskan in soft toys and Splash in home furnishings.
Hanung toys has more than 100 distributors and access to 3,000 retail stores and multi brand outlets including Kids Kemp, Lifestyle, Land Mark, Archies, Globus, Hyper City, Shoppers Stop, India Bulls, Wellspun, Odyssey, among others. Its overseas clients include IKEA (Sweden), Debenhams (UK), Wal-Mart ASDA (UK), Metro Group (Germany/Italy) and Marko Group (Poland).
It has witnessed better margins because of increasing focus in the domestic market and has signed long term export contracts with some leading clients globally. These agreements will provide greater strength and better revenue stream to the company.
If the growth prospects, as reflected in various contracts and plans fructify, this company has a potential to be a long run multi-bagger.

Short term set backs due to recession should be treated as opportunities to buy more shares. Therefore one can buy the share at the CMP of Rs.24.5 with a short term price target of Rs.60—Rs.65. Please keep a strict Stop Loss of Rs.21.75 and Rs.17.5 (exit) in case of any short term trade.

Note: The stock was recommended to the Paid Group yesterday (26th January, 2009) at Rs.24.5.

Vikash Metal & Power Ltd
BSE Code: 532677
CMP: Rs.8.89
Face Value: Rs.10
EPS: Rs.3.59
Div: 5%
Book Value: Rs.24.12
P/E: 2.48
Market Cap: Rs.31.22

Introduction: Vikash Metals, a VKP group company is an insurgence of Impex Ferrotech Ltd. Impex Ferrotech, in its own right was born way back in 90's. The journey began in the year 1995 with Ferro Alloys and from its humble beginning, the company has achieved such heights that in the following quarter of the century, the company crossed turnover of over Rs.200 crores, which no one ever dreamt of.
The growing demand in the alloy & metal and infrastructure sector resulting in the Industrial growth was the vision of Group Chairman, Shri Vimal Kumar Patni, coupled with the Government's “Look East Policy” thus providing many more opportunities in West Bengal in particular. Vikash Metal & Power Ltd, the Fully Computerized and Automated Integrated Steel Plant is a part of the esteemed Impex Group.
An Impex Group Company, Vikash Metal & Power Ltd.(VMPL) was Incorporated in 1996 & is in the manufacturing of Sponge Iron , MS Billets,TMT Bars & Strips. The group’s product range spans a wide array of Structural Products to Ferro Alloys serving the nation with pride.
Vikash Metal & Power Ltd, manufacturing sponge iron in its unit having capacity of 100 tpd x 4 kiln and MS Billets in its induction furnace capacity of 8 MT x 3 along with Concast Plant serve large section of the Structural and Infrastructure industries, with the slogan 'From Structure To infrastructure”, using world's most advanced technology, the TEMPCORE process under license from Centre De Recherches Mettalurgigues (CRM) Belgium. “Vikash” brand TMT bars are supplied to leading construction companies and turnkey projects. Apart from receiving the prestigious ISO 9001-2000 SGS certification, the company has also received accreditation by UKAS Quality Management System, Geneva, Switzerland.
Ensuring quality, the group with its Vikash brand TMT Bars has created high demand in the infrastructure sector and turnkey projects believing in Values, Trust, Respect and Fellowship.

Shareholding Pattern: The promoters hold 58.95% while the general public holds 41.05%. Among the general holding Corporate Bodies hold 17.46% of the shares of the company.

Financials: For Q2FY09, the company came out with superb set of topline though the bottomline suffered due to higher expenditure, interest and depreciation. The total income of the company came out to be Rs.133.8 Cr as against Rs.60.9 Cr in the same period previous year. The net profit of the company for Q2FY09 came out to be Rs.1.69 Cr as against Rs.2.8 Cr in the same period previous year. However, the expenditure is expected come down drastically due to the fall in the price of raw materials.

Investment Rationale:
• The Commercial production of Ferro Silico Managenese & Ferro Managanese has started from October 18, 2008.
• Vikas Metal and Power Ltd (VMPL) is looking for opportunities to acquire /enter into JV / alliance with any other entity engaged in the same line of business to reap more profits.
• VMPL had started commercial production from its Hot Rolling Mill having a capacity of 1,50,000 MTPA since September, 2007 while company has started the commercial production of additional 65000 MTPA Sponge Iron Plant & 85500 MTPA MS Billet Plant in June, 2007.
• VMPL has some more expansion plans which includes: (a) Pelletization Plant: 487500 MTPA, (b) MS Billet Plant: 28500 MTPA and (c) Brequetting Plant: 60000 MTPA. Apart from this company is in the final stage of executing its 10 MW Waste Heat Recovery Power Plant.
• VMPL’s Waste Heat Recovery based captive power plant has been registered under CMD project with UNFCCC. The captive power plant is based on waste heat recovery module whereby flue gas released by the sponge iron kilns is used to generate steam in the boiler thereby replacing fossil fuel for generating power. It will involve reduction of 55,000 metric tones of CO2 equivalent per annum, which will lead to a substantial revenue inflow by selling CE R credits, which will accrue to the company for a period of 10 years.
• VMPL has signed an MOU with Bihar State Electricity Board for execution of 2X250MW thermal project in Begusarai. This Project is requiring an investment of Rs.2500 crore which will be funded through a mix of debt and equity and is likely to be commissioned by 2011. The company has approached the Union coal Ministry for coal blocks & has been allotted 300 acres of land by the Bihar Industrial Area Development Authority at Bagusarai. The company even has future expansion plans for setting 2000MW power plant in phases.

Key Concerns:
• Escalating Raw Material Prices: Raw Materials comprise of around 76 % of Company’s sales.
High prices of Iron ore & Steel Scraps may put some pressure on company’s margins, but during last year company has been successful to offset this pressure by increasing the Sponge iron prices & shifting its focus on MS ingots. This year the raw material prices are likely to remain low.
• Slowdown in the global economy: Steel is a cyclical industry & dependent on growth of many sectors viz. Automobile, Infrastructure & construction. However India is concentrating on infrastructure development & a lot of development is to be seen in the short term as well as in the long run so demand for steel looks intact.

Conclusion: At the current market price of Rs.8.89, the stock is dirt cheap. Considering the pace of growth of the company one can buy the scrip taking time horizon of 12-18 months for at least 60% to 70% returns from the current price. However, from the chartical point of view one should only buy the scrip above Rs.8. 50, below which it could break the bullish pattern.

Note: This scrip was recommended to the Paid Group on last \Sunday (11-01-09). The discounts for the Paid Packages, closes/ends on 31st January, 2009.

Pick of the week
XL Telecom & Energy Ltd: Presence in Energy sector to spur growth
BSE Code: 532788
Face Value: Rs.10
Book Value: Rs.105.23
Dividend: 10%
EPS: Rs.26.14
P/E: 1.81
Market Cap: Rs.88.67 Cr

Introduction: XL TELECOM & ENERGY LIMITED is mainly engaged in manufacture of telecom equipments and is increasing its presence in energy segment, under which it manufacture ethanol and solar modules. In Telecom, the company is largely engaged in manufacturing of CDMA Mobile Handsets, CDMA & GSM Fixed Wireless Phones, SMPS Power Systems, fusion splicing machines, cable jointing kits. It is among the dedicated suppliers to TATA, Reliance, BSNL, MTNL, Indian railways, Department of Defense, etc. In
Energy Segment, the company is engaged in new emerging products like Ethanol and Solar Photovoltaic Products. The company has technology collaboration with international technology companies including Corning (for cable jointing kits and accessories), Kyocera Wireless Corporation (for CDMA handsets) and Axesstel (for CDMA fixed wireless phones). In FY 08, revenues from Telecom Segment were about 44% and Energy Segment was about 56%.
Shareholding Pattern: The promoters hold 28/13% shares of the company while the general public holds 71.87% of the shares of the company. In the public holding FIIs, Mutual Funds, Venture Capital Funds and Financial Institutions together hold 25.16% of the shares of the company.
Financials: For Q3FY09, the company came out with very good results. The total income of the company for Q2FY09 came out to be Rs.258.13 Cr as against Rs.151.70 Cr in the same period previous year. The PBT of the company for Q2FY09, came out to be Rs.15.04 Cr as against Rs.8.2 Cr in the same period previous year. The net profit of the company more than doubled to Rs.14.99 Cr as against Rs.6.03 Cr in the same period previous year. This gave an EPS of Rs.7.98 in Q2FY09, as against Rs.4.16 in the same period previous year. Also, what is encouraging is that both the net and operating profit margins of the company increased in Q2FY09 as against Q2FY08.
Industry Overview:
TELECOM: With a strong population of over 1.1 Billion, India has become one of the most growing and promising markets in the world. During 2003-2007, the country witnessed the number of phones increasing by more than triple and total tele-density rising from 5.1% to 18.2%.
According to the industry information:
• The total telecom subscription in India surged at a CAGR of over 38% from fiscal 2003 to fiscal 2007, making the country the third largest telecom market in the world.
• Mobile phones accounted for 80.2% of the total telephone subscriber base at the end of March 2007.
• India’s telecom services industry revenue is projected to reach $54 billion in 2012, as compared with $31 billion in 2008. India is expected to touch a telecom subscriber base of 700 mln by 2012.
SOLAR: India, with abundant sunshine throughout its landscape & is uniquely placed to reap the benefits ofsolar energy.
However, solar energy is yet to take off in India compared to its shining growth in Japan, the US, and Europe. The government’s policy to promote semiconductor fabrication facilities and other micro and nano technology manufacturing under the Special Incentives Package Scheme (SIPS), has attracted unprecedented levels of interest and investment proposals from the industry.
While the total size of the Indian solar industry at present is minuscule compared to global scale as well as in terms of the energy requirements of India, this scenario would undergo a paradigm shift as the above mentioned investments take concrete shape in the next few years. To put things in perspective, the entire world’s energy consumption in 2007 was around 0.50 ZJ. Now comparing that to the total solar energy available to the earth was 3,850 ZJ. The world currently uses polycrystalline silicon cells to capture solar power. But as technology upgrades and the efficiency of photovoltaic cells improve, the cost per MW, which is the highest among all sources, could fall. As usage doubles efficiencies of scale could reduce cost by 18%.
Solar PV industry is expected to grow from $15.6 billion in 2006 to $69.3 billion in 2016.
Investment Rationale:
• PHENOMENAL Q1 FY09 AND FY08 PERFORMANCE: The Company recorded phenomenal top line growth of 71% to Rs.257 Cr as compared to Q1 FY08 which stood at Rs.150 Cr. There was a massive bottom line growth from Rs.6 Cr to Rs.15 Cr constituting 149% growth. In FY08, net sales grew to Rs.654.01 Cr from Rs.523.14 Cr registering 25% growth. The company registered 98.91% net profit growth in FY 08 from Rs.20.18 Cr to Rs.40.14 Cr.
• FORWARD INTEGRATION IN SOLAR MODULE CHAIN: The Company has been pioneer in the Solar Module manufacturing, for over 15 years and has been working on to capture the Complete Value Chain of Solar Industry. As of this strategy, the Company is in advanced stage of implementing the 120 MW Solar Cell manufacturing facility in SEZ, Hyderabad with a capital outlay of Rs.360 Cr. Looking at the growing global demand for Non-Conventional Energy Power Generation in the Global Market Place, the company has decided to embark on forward integration in Solar Value Chain, by entering into EPC Segment of Solar Farm Establishment and also 'Power Generation' using Solar Technologies. The company is also exploring the opportunities to establish solar farms in Italy, southern France and other European countries through its 100% subsidiary, Saprashva.
• GLOBAL ORDERS TO RISE: During March 08, the Company has secured orders worth Rs.153.90 Cr for the supply of Solar Panels to the European Market, and the customer is a large Power Utility Company in Europe. The Total Pending Order Book for the Export of Solar Panels with this Order stands at more than Rs.700 Cr worth of Solar Panels. The Company is bullish on entering as a vendor with this large Power Utility Company and is confident that over the period the Customer engagement would be extremely fruitful with multiple repeat orders.
• SOLAR FARM MODEL TO BOOST REVENUES: During October, 2008, the company has set up a 1.6-MW solar power plant in Spain, with an investment of €9.5 million (Rs.75 Cr approx.). The plant is the first in the series of plants (solar farms) the company is planning to set up in Europe to generate over 300 MW solar powers over the next three years. The company has signed a PPA for 25 years with the Spanish utility company. The project is expected to generate about €19 million revenue (Rs.150 Cr).
• CAPEX (Capital Expansion): During FY08, the Company has increased the Solar Module Capacity from 24 MW pa to 180 MW pa. Further as envisaged in the previous year, the Company is further expanding the Module capacity of 40 MW semi-automated plant in addition to 180 MW current capacity and also investing in Solar Cell manufacturing capacity of 120 MW. These two expansion projects are in advanced stage of implementation and as of 30th June 08, the Company has already invested about Rs.210 Cr as against the total CAPEX plans of Rs.360 Cr. The Project is expected to commission by Q4FY09 and commercial production is expected to begin in March 2009. In ethanol division, they are looking at establishing the Distillery for meeting the Raw Material requirement for the Ethanol Production and the Plant is in advanced stage of implementation. The Company has already incurred about Rs.27 Cr of CAPEX of the total Rs.72 Cr Project Cost as of 30th June 2008. The Plant is expected to be commissioned in the second quarter of 2009.
• RAW MATERIAL SUPPLY CONTRACTS: During Aug 08, LDK Solar Company, a leading manufacturer of solar wafers has signed a five-year contact to supply multi-crystalline solar wafers to the company. Under the terms of the agreement, LDK Solar would deliver approximately 300 MW of multi-crystalline silicon solar wafers to XL Telecom over a five-year period, commencing in the first quarter of 2009 and extending through 2013. During July, the company also signed five year contract with Mola Solaire Produktions to deliver 125 MW of solar wafers to the company between 2008 and 2013.
• Even after adjust, the Foreign Currency Convertible Bonds (FCCBs), as per Clause 5.28 of the Offering Circular, the initial conversion price of FCCBs was reset from Rs.260.00 to Rs.160.00 which is a multiple of the cost price. This indicates that the stock of the company is expected to come near to this level.
Concerns:
• Competitors like LG and Samsung have established their own units in India to manufacture CDMA handsets. These companies are cost efficient due to high volume and would compete in the tough, price sensitive market in India.
• The company is substantially increasing its SPV (Solar Photovoltaic) capacity from existing 24 MW per annum to 180 MW per annum. This has an inherent a risk of sudden fall in global demand, resulting in underutilization of capacity.
• Delay in execution of new projects and consequential business opportunities.
• Any sudden appreciation of INR would seriously affect the export business being planned in the Solar Segment.
• The demand for solar power may take a hit in coming years as the US and Europe struggle with convulsions in the financial markets and slowdown.
Graphical Check and Conclusion: From the charts it has been found that the stock of the company is in the highly oversold territory and a bounce is expected anytime soon. From the charts it could be further concluded that the stock is still trading above its strong support of Rs.47, which is unlikely to break in the days to come if the market condition remains buoyant. Moreover, MACD and Stochastic are in buy mode. With the chance of immediate war receding, the markets are expected to move up from here…..
One can buy the scrip at the CMP of Rs.47.50, with a strict SL of Rs.47 ...........

Note: Above is from the Sunday Report sent to the Paid Groups on Last Sunday (28th December, 2008). The stock is hitting continuous Upper Circuits.

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.