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.