Pick of the Week
Tulsyan NEC Ltd:
BSE Code: 513629
CMP: Rs.56.35
Book Value: Rs.109.97
Dividend Yield: 3.55%
Market Cap: Rs.28.18 Cr

Introduction: Incorporated in 1974 as National Engineering Cmopany, Tulsyan NEC Ltd (TNEC) manufactures rolled steel products. It tapped the capital market in 1994 for implementing a modernization-cum-expansion project. Its steel products include finished steel (84,000 TPA), MS Ingots (36,000 TPA) and MS billets (72,000 TPA). The company later on diversified into manufacturing packaging products such as HDPE/PP woven sacks & flexible intermediate bulk containers, the capacity of which at present stands enhanced to 28,000 TPA.
The company’s steel and TMT bars find application in housing & construction, power, Defense & Railways. Its bulk containers are used for packing cement, sugar, chemicals & fertilizers etc.

It is the Largest Multi-Location Steel Manufactures in South India, for TMT Steel Rebars. It has a wide spread manufacturing capacity, with the latest state-of-the-art technology. It has manufacturing facilities at Gumdipundi & Ambattur in Chennai, Bangalore, Coimbatore and Goa. It uses quality Billets which is manufactured in-house, conforming to IS: 2830/1992.

Its area of service covers the four Southern States including South Maharastra and Union Territories of Goa and Pondicherry. It supplies, in sections 8-40 mm dia & in grades of Fe-415, Fe-500, Fe-500 CRS (Corrosion Resistant Steel), all conforming to BIS Standards.

Shareholding Pattern: The promoters hold 65.59% while the general public holds 34.41%. The promoters have slightly increased their stake in Q2FY10, speaking Q-o-Q figures.

Financials: On a standalone basis, the total income of the company for Q2FY10 came out to be Rs.152.3 Cr as against Rs.217.7 Cr in the same period previous year. The net profit of the company for Q2FY10 came out to be Rs.1.5 Cr as against Rs.3.2 Cr in the same period previous year.

On a consolidated basis, the total income of the company for Q2FY10 came out to be Rs.153.77 Cr as against Rs.220.89 Cr in the same period previous year. The Net Profit after Mino Inter & Share of P & L came out to be Rs.1.77 Cr as against Rs.4.43 Cr in the same period previous year. However, the EPS of the company in Q2FY10, is alone on consolidated basis is Rs.3.54, which is good. The company is expected to clock an EPS of Rs.10—11 on FY10 on consolidated basis. For FY09, the consolidated EPS of the company was a whooping Rs.23.17.
Triggers:
(i) The Company's products are TMT Bars, Billets and Ingots in the steel division and in synthetic division it is PP Woven Sacks, FIBC and Woven Fabric. During FY09 with the completion of the enhanced capacity, the company has commenced the manufacture of ground cover and ventilated fabric. TMT Bars are used in the Construction Sector and the plastic products cater to the packaging needs of various industries such as Cement, Fertilizers, Food grains, Sugar, etc.

(ii) Tulsyan NEC Ltd has signed a Memorandum of Understanding for purchasing 100% shares of M/s. Chitrakoot Steel & Power P Ltd, Gummidipoondi, Tamil Nadu, a Sponge Iron manufacturing plant having capacity of 30,000 M.T per annum. The Company will be enhancing the Sponge Iron capacity and adding waste heat recovery Power Plant.

(iii) With the government stepping up expenditure on development of infrastructure like roads, ports, power, etc, the demand for steel is bound to increase. In anticipation of this demand increase, the company: (a) will have in place additional rolling capacity of 15 0000 mt/pa, during the current year, (b) Increase dealership network to over 200 dealers with more focus on rural sector, (c) Install a power plant of 35 MW at Gummudipondi for captive consumption, (d) Carry out backward integration by taking over the sponge unit in Gummudipondi. These expansions will not only make the company as the largest producer of TMT bars in South India among Secondary Producers but will also give it a competitive edge, by facilitating reduction of power and raw material costs.

(iv) The Cost of Steel Scrap and power are major costs incurred for producing Steel Rods. Volatility in the price of scrap affects the company's margin. To tide over the power requirement the company would be installing a 35 MW power plant at Gummudipoondi, as mentioned earlier.
(v) With globalization and liberalization the demand gap is ever increasing. With almost 3 decades of presence in the industry the company has earned a good name for its commitment to quality and timely supply. With the enhancement in production capacities the company is well poised to cater to a bigger market.
(vi) The raw materials for Steel Making are M.S. scrap, Sponge and for TMT Bars is Billets. PP granules are used for manufacture of plastic packaging products. This raw material is available in abundance within the country and can also be freely imported. Being in the commodity market the company continuously makes efforts for reducing the cost of production to sustain its margins.
(vii) The year 2008-09 witnessed an unprecedented economic crisis world over resulting in slowdown in almost all the sectors. While India hasn't witnessed the kind of major turmoil witnessed in some advanced economies it has certainly been impacted adversely. In the back drop of this crisis the working of this company has also been affected to some extent. FY09 saw shortage of power in Tamil Nadu and this affected the working of the Company. In the current year the power cut has been relaxed from 40% to 20% and it is expected to be relaxed further.
(viii) During Q2FY10, Wind farms of the Company have generated 1453368 units of Electricity and also the capacity of the Rolling Divisions at Gummudipoondi, in Tamil Nadu, has been increased by 150000 MT of TMT Bars and commercial production has also been started same period. The full benefit of this effect will however arise in the financial year 2010-11.
(ix)It has also signed a MoU with Suhayl Abdul Mohsin AL-Shoaibi & Sons Holding Company, Saudi Arabia for a proposed steel plant of 5,00,000 TPA in Saudi Arabia.
(x) In the plastics division, TNEC plans to install new capacity of about 2,000 TPA in its new facility at Kurnool (AP), which is expected to go on stream very soon.

Conclusion and Chart Check: Considering all the points mentioned above it have been found that the stock is a very good buy (on dips) for the medium to long term perspective. This essentially means that scrip would generate good returns for the shareholders over a period of 9 to 12 months time frame. Even at the current market price of Rs.56.35, the dividend yield of 3.55% is quite attractive. From the charts it has been found that some of the parameters are in buy mode. However, the stock has made a very strong bottom around Rs.51.5 which will be difficult to break on the downside and hence a little safe bet. The stock should be accumulated on all dips for the short term (3 months) target of Rs.XX (This portion is only for the Paid Groups). However, in the medium to long term the targets could be as high as Rs.XX (This portion is only for the Paid Groups).

Note: The Stock was recommended to the Paid Groups in the last week's Sunday Report.