India Stock market views

Tulsyan NEC Steel - A Steal :)

2010-03-22T19:19:00.001+05:30

On Tulsyan NEC

This Company is listed on BSE as well as NSE. It got its listing permission from NSE a couple of months back. This is a company, which is in two lines of business: Steel and woven sacks. The company manufactures TMT bars, MS alloys and billets in the steel division. They also manufacture HTP and PP woven sacks. Tulsyan NEC is not ideally one of those steel companies which you would want it to be in terms of backward linkages. The company as of now doesn’t have any backward linkages. It buys steel scrap/sponge iron for manufacture of steel and it also buys power from the grid. It doesn’t have its own captive power source.

But if you look at the other positives of the company, this company is available at a market cap of just about Rs 33 crore. The company does sales revenue of about Rs 650-700 crore. This company has been a profit making company for the past 15 years. It has made profit not just at the operational level but also in the net level in the last 15 years. The company has got a track record of dividend for the last ten years which is uninterrupted – even during the worse phases of the steel cycle this company has paid dividend in the last 10 years.
The company made an operating profit of about Rs 46 crore last year and operating profit for the first nine-months is about Rs 31 crore. PAT for first nine months is about Rs 4.5 crore, which results in an annualized EPS of about Rs 12. At the current price of about Rs 65 this stock is trading at a PE multiple of about 5-6.
The other good thing happening here is that the company is now going in for backward linkages, about 2-3 months back this company has acquired a sponge iron plant called Chitrakoot Steel and Power Limited, which has got a 30,000 tonne per annum for sponge iron capacity, which they are increasing further to about 1 lakh tonne per annum. The company is also putting up a 35 megawatt power plant. They have already acquired about 75 acre of land. This will be operational in Q3 2011, which is FY12.
Considering all this, the company had been making good profits for the past 15 years without any backward linkages. Now the backward linkages are coming. The market cap of the company is just about Rs 33 crore – even assuming a 1% increase in net profit margins on a sales of Rs 700 crore results with an EPS increase of about Rs 14.
Of course, this is not an ideal steel company in terms of linkages but its available at a market cap just about Rs 33 crore on sales of Rs 700 crore. The downside from these levels looks extremely restricted but once the linkages are there, obviously, the profitability will go up. Also there is a potential for huge upscale increase in profits after the linkages are available.
So at the current price of Rs 60-65 I think it’s a stock to accumulate for the next maybe two years. Once the linkages are in place the profits can go up really sharply.

Nifty Divident Yield - 10 Years

2008-10-28T17:52:00.003+05:30

Duration - 1 Jan 1999 to 28 Oct 2008

Minimum Value - .59

Maximum Value - 3.18

Average Value - 1.54

Median Value - 1.43

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Nifty P/B Chart - Last 10 Years

2008-10-28T17:44:00.004+05:30

Duration - 1 Jan 1999 to 28 Oct 2008

Minimum Value - 1.92

Maximum Value - 6.55

Average Value - 3.77

Median Value - 3.795

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Nifty PE Chart - Last 10 Years

2008-10-28T17:24:00.012+05:30

Duration - 1 Jan 1999 to 28 Oct 2008

Minimum Value - 10.68

Maximum Value - 28.47

Average Value - 17.84

Median Value - 17.685

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Core Projects - The Unusual Victim

2008-10-18T10:57:00.004+05:30

Shareholders of Core Projects, a Mumbai-based IT company in the education space, were in for a shock as the share price tumbled from the Rs 240-level to close at Rs 46 in just a week. Around December 2007, the share price was around Rs 464.60 and Core Project was seen as one of the fastest growing IT companies in Maharashtra.

The Deloitte Technology Fast 50 India 2007 Program conducted by Deloitte Touche Tohmatsu, Asia Pacific, recognizes fast growing technology companies in terms of their revenue growth over three financial years. In this, our third year, we recognize 50 growing technology companies across India.

In the second place, with a three-year revenue growth of 2,167 percent is Core Projects and Technologies Limited, value leader providing best-of-breed IT solutions which enhance the functionality of global customers.

in fact, a leading business magazine featured the company as one of the few investor friendly companies. Early in the year, AV Birla Group's private equity firm, TGS Investments, took a strategic stake in the company by investing around Rs 13.73 crore. Nothing much has changed fundamentally in the company reckons analysts, as the company largely focuses on education and related businesses. Being a small company, it has been growing at around 100% levels.

In the first quarter, the company recorded a turnover of Rs 64 crore, and net earnings of around Rs 13 crore, which were 27% higher as compared to the same period previous year. Company sources maintain that this sell-off has more to do with the market conditions and not anything drastic with the company. The reason for this huge slide, according to analysts and trade experts, lies in the small- and mid-cap stocks.

“In bear markets small- and mid-cap companies face such pressures which is not new at all,” says Hasit Pandya, director, HPMG Shares and Securities. The company was cornered by operators, especially after it came in limelight, after the AV Birla interest and its FCCB issuances in May 2007. The shares started tanking on Friday, when they fell to Rs 140, after opening at Rs 229.

Analysts also reckon that around 16.75 lakh shares were converted from the $80 million issue, in May 2007. The conversion price was Rs 165.25 and with the share price in the 200-plus zone it meant straight profits for the investors. For a large-cap compay, this sell-off would have been absorbed smoothly. And then rumours that the shares pledged by some investors were offloaded after margin calls were unmet, added to the selling pressure. Sooner, there was a high net worth individual-led sell-off as the prices tanked further on Monday when they fell to Rs 59.65, after opening at around Rs 129.Volumes started mounting on Friday and around 15 lakh shares changed hands. Generally around 70,000 to 80,000 volumes are reached on this company, reckon market experts. The selling continued to gain and volumes touched... 1.91 crore on Monday and 2.18 crore shares changed hands on Tuesday. The company has an equity capital of Rs 37.96 crore with an Rs 2 face value and such heavy volume sell-off amounts to around 10% of the outstanding shares. Hence, this at the moment looks like a classic case of a company facing the small- and mid-cap vagaries.

GPIL - Quick update

2008-02-26T11:43:00.000+05:30

Firm to set up coal-based plant in Jharkhand or Chhattisgarh.

Godawari Power and Ispat (GPIL), an integrated steel manufacturer based in Chhattisgarh, is mulling foray into commercial power generation with projects in Chhattisgarh or Jharkhand with capacities ranging between 300 to 1,000 mw with coal and coal rejects as fuel.

A consortium led by GPIL has been allocated four coal blocks at Nakia and Madanpur in Chhattisgarh with 243 million tonnes of total reserves, of which, GPIL’s share is 63 million tonnes. Of this, 40-50 per cent will be wastage such as coal ash and gases during coal processing.

GPIL was planning to optimise its coal mines with coal rejects-fired power plants as part of its backward integration expansions, said sources familiar with the development. GPIL would start mining by 2009 and set up power generation facilities by then, added sources.

“Our board of directors is yet to consider or finalise any plan and, now, we are concentrating only on the existing expansion plans to increase our operating margins. We may enter into commercial power business in future since our businesses are closely associated with power generation,” said Dinesh Gandhi, director, finance.

GPIL is a mid-sized integrated steel player producing sponge iron, steel billets, steel wires, wire rods and ferro alloys and generates captive power from waste gases produced at its steel manufacturing facilities.

GPIL currently has 53 mw of captive power consumption, which includes a 25 mw captive power plant commissioned in the first half of 2007-08. Of this, 11 mw is produced using byproducts of sponge iron.

According to sources, B L Agarwal, managing director of GPIL, in his personal capacity has picked up 25 per cent stake in Maruti Clean Coal and Power, a company floated in Chhattisgarh to set up a 270 mw coal-fired power plant with an investment of Rs 1,000 crore. However, GPIL has not firmed up any fuel linkages for this project, sources said.

GPIL is setting up a coal washery unit and a 0.6 mega tonnes per annum (mtpa) pelletisation plant with an overall capital expenditure of Rs 230 crore. This expansion would reduce the raw material cost helping increase operating margins up to 40 per cent.

With captive iron ore and coal mines ready for raw material supply by 2009, the company could enter into areas such as power production in a big way, said sources.

GPIL - As Reliable as Steel

2008-01-28T10:11:00.000+05:30

Strong growth in the domestic infrastructure sector has boosted many allied business segments, including companies which manufacture steel wires and rods.

There are a number of small players in this segment, but only companies with large volumes and backward integration capabilities are expected to do well. Godawari Power and Ispat (GPIL) is one such player. GPIL has invested in a steel billet unit, sponge-iron production plant, iron ore and non-coking coal mines, with the aim of insulating itself from the vagaries of input prices and improving operating profit margins. At the current price level GPIL’s financials and future plans make it an ideal pick for investors with a 2-3 year horizon.

BUSINESS: GPIL manufactures mild steel wires, which are used as binding wire and barbed wire. To manufacture this end product, it produces all the required raw materials.

This gives it two advantages — firstly, it is independent of the variability in the supply in raw materials, and secondly, it generates a higher operating margin. It also utilises waste heat generated during sponge iron-making process to produce power. This makes it self-sufficient in power. GPIL also manufactures ferro-alloy, which provides better operating margins.

GROWTH DRIVERS: GPIL has been allotted an iron ore mine with estimated reserves of 15 million tonnes (mt), the final approval for which is pending. Once the company obtains this approval, it will take around four months to start mining the ore. This means the company will have sufficient captive iron ore supply for the next 30 years.

This will also increase its operating margin to 35-40% of its net sales from the current 18%. GPIL is setting up a pellet plant at a cost of Rs 235 crore, which will utilise the iron ore fines to make quality coke.

This will improve its capacity utilisation. The company was granted a sales tax waiver of Rs 300 crore in early ’00, which can be utilised till ’11. This will directly add to its bottomline.

FINANCIALS: The company’s net sales and net profit have witnessed a compound annual growth rate (CAGR) of 59.8% and 89.8%, respectively in the past three years. Its current market capitalisation, at Rs 685 crore, is 1.55 times its FY07 net sales, which is the same as the industry average. GPIL’s operating margin, at around 18%, is nearly double that of peers like Ramsarup Industries and Bansal Wire Industries. Similarly, GPIL’s return on capital employed (RoCE) and return on equity (RoE) are 20% and 30%, respectively — slightly higher than that of other players in this segment.

VALUATIONS: The effect of the new pellet plant, captive iron ore and coal mines will be reflected in the company’s financials in FY10 and will also help to improve its operating margin to around 35%. The estimated EPS for FY09 and FY10 are Rs 47 and Rs 107, respectively. This translates into forward P/E multiples of 5.6x and 2.5x, respectively, at the current price level, providing sufficient upside growth potential. The EV/EBITDA multiples for FY09 and FY10 are 4.0 and 2.0, respectively.

Moreover, if GPIL increases its dividend payout ratio consistent with the past two years, it will result in a 10% dividend yield after three years at historical investment cost. Hence, investors are advised to buy this stock at current levels of Rs 265 with a horizon of 2-3 years.

Assam Company - Multibagger of the Next Decade.

2008-01-14T22:27:00.003+05:30

Some Quick Facts -

Tea Business is out of slump and tea prices are a lot higher than last year.
By early 2010, the oil production will be atleast 5000 b\day. Assam companies share will be around 2000 b\day. At just $60 and $ at Rs45, the yearly revenue will be 197 Crores.
Royalties and other expenses for oil will be a max of $25. Profit from the above revenue will be around 115 Crores.
By 2015, Oil output will be around 20,000 b\day. That is around 460 Cr profit per year. This is an EPS of around 15. a PE of just 10 will take the stock price to 150. At CMP of Rs 12, this is a upside of 1250%
Gas production, Tea plantation and SEZ is not even considered in the above calculations.
All the above assumtions are most conservative. Actual oil output and price realizations might be much higher.

Assam Company (ACL) is a tea plantation company which operates mainly in North-East India. It had an annual turnover of around Rs 150 crore in FY07 with a current market capitalisation (m-cap) of Rs 1,350 crore. The company has invested in a few oil & gas blocks in the North-East. Its fortunes are set to undergo a sea change as new oil discoveries generate substantial revenues and profits this year onwards.

The company holds stakes in two highly prospective oil blocks in Assam operated by Canada-based Canoro Resources. According to estimates by independent experts, these fields together hold proven and probable (2P) reserves of around 460 million barrels of oil and around 1.3 trillion cubic feet (tcf) of natural gas. Canoro has drawn up plans to monetise these reserves in a phased manner starting ’08.

Growth Drivers : As the support infrastructure gets ready, the production of nearly 4,190 barrels of oil equivalent per day (boepd) will commence from one field within next the three months. With this additional production, the total output will cross 4,500 boepd; ACL’s 40% share stands at 1,800 boepd.

It is expected that over one-third of the total production will be crude oil, while the rest will be natural gas. Even at an average realisation of $80 per barrel of crude oil and $2.3 per mmbtu of natural gas, this single field will generate revenues of nearly Rs 100 crore annually for the company.

Apart from the blocks shared with Canoro, ACL independently holds three small proven oil fields on a contract basis from ONGC for development, with estimated oil reserves of 30 million barrels. According to the contract, ACL will hold 35% and 70% participating interest in oil and gas, respectively.

These proven fields are on a high-speed development path with new wells being drilled at more locations. At the same time, several existing producing wells are being refurbished. This provides potential for a further upside in petroleum production for ACL. To expand its geographical reach, ACL has formed a joint venture (JV) company with Texas-based DMG Exploration. This JV, named Austin Exploration, currently holds stakes in eight exploration blocks in Australia and the US, and is eyeing four exploration blocks in Mongolia.

The company has floated a special economic zone (SEZ) with Gujarat State Petroleum (GSPC), which has received in-principle approval from the central government. This SEZ aims to provide various engineering products and services to hydrocarbon and energy industries.

Out of the required 450 hectares (approx 1,110 acres), the company has already received possession of 317 hectares. It plans to invest around Rs 2,000 crore in this project over the next two years.

Financials : The company currently depends on the tea plantation business for 95% of its revenues. It reported just 5% growth in net sales during the nine-month period ended September ’07. The net profit during the period declined by 25% on a year-on-year basis to Rs 4.8 crore. However, in future, ACL’s revenue growth will be driven by the success in its petroleum exploration and production (E&P) business.

Valuations : Considering its growth plans, ACL is expected to post a PAT of around Rs 75 crore on turnover of Rs 230 crore during CY08. On a fully diluted equity capital of Rs 36 crore, its forward EPS works out to Rs 2.1. Based on this, the scrip, which is currently trading at Rs 44.30, is commanding a forward P/E of 21.3. Considering the potential in the E&P business, we believe there is substantial upside for investors with a 12-month horizon.

One of the accepted ways of valuing a petroleum E&P company is based on its proven reserves. On a conservative basis, if we value every barrel of proven oil reserve at $4, the value of ACL’s share of proven reserves comes to around Rs 2,900 crore. The valuation of the E&P business is substantially higher than its current m-cap.

Risk Factors : Petroleum E&P is a long-term and capital-intensive business. Any delay in execution of the proposed development plans, or any substantial and sustained fall in international crude oil prices, will have a substantial impact on the company’s financial performance.

GV Films - Studio Cities

2007-09-19T11:24:00.000+05:30

GV films, a leading media company, today said it would build 'studio cities' in 23 tier-two cities in south India in the next three years. Each costing Rs 20 to 40 crores, it would have five screens, shopping malls and food courts, S Venkataramani, Vice President, G V Films, told a press conference.

The first one, which is completed, would be opened soon at Thanjavur, he said.

Total cost of the project would be around Rs 700 crore and funding would be done through internal generation, he said

The company had won the prestigious Seoul Drama award, considered to be the Oscar for television serial, for its three dimension television sop 'Mayavi', the first to be won by an Indian company, he said.

It was selected from over 130 entries, he said.

The company planned to dub the serial in other Indian and foreign languages, he said adding that it was negotiating with foreign producers for joint production of animated TV serials.

Rana sugars - Ethanol Plant

2007-06-22T12:40:00.000+05:30

Rana Sugars Ltd, part of the Chandigarh-headquartered Rana Group, has plans to set up an ethanol unit in Moradabad (Uttar Pradesh) at a cost of Rs 80 crore. The proposed unit will have a production capacity of 180 kilo litres per day of ethanol.

The plant will also have the facility for co-generation of 6 Mw of power, which will be sold to the state electricity board. The project will be funded through debt, internal accruals and the Centre’s sugar development fund.

“We are going to infuse fresh capital of Rs 80 crore into the proposed project in Moradabad district, on the premises of the sugar mill there. Work on this project is likely to start by October and will take 13-14 months to complete,” said Rana Inder Pratap Singh, the company director.

The setting up of the ethanol plant will make the plant a complete integrated unit. The company will sell the ethanol to oil companies. “According to the government regulations, once the company starts commercial production of ethanol, it is bound to sell to oil companies at the rate set by the central government,” he added.

Recently, the company’s new sugar unit at Moradabad, which has a crushing capacity of 5,000 tonnes of sugarcane per day and facilities for co-generation of 20 Mw, of power has started commercial production. In addition to this, the company’s second new unit, which has a crushing capacity 5,000 tonnes of sugarcane per day at Rampur district (Uttar Pradesh), will be operational by October 2007.

“The company hopes to achieve a turnover of Rs 500 crore by the end of this financial year, as the two new sugar mill at Moradabad and Rampur district will be operational,” he said. Last financial year, the company’s turnover was Rs 200 crore.

The group has also diversified into textiles, informatics and infrastructure. In last financial year, the turnover of the group was Rs 330 crore and this year it hopes to have a turnover of Rs 650 crore.

The group also plans to enter real estate and is looking at developing a housing project in Mohali with an investment of Rs 150 crore.

“Once we get all the necessary clearances from the state government, we will start construction,” Singh said.

Rana Sugars - New Capacity

2007-06-13T12:44:00.000+05:30

Looking at the good returns from the power segment, Amritsar-based Rana Sugars Ltd, a part of the Rana Group, is enhancing its co-generation power capacity from 20 Mw to 30 Mw, with an investment of Rs 40.8 crore.

The existing unit is an integrated sugar plant with a capacity to crush 5,000 tonne of sugarcane per day and facilities for the co-generation of 20 Mw, situated in Buttar Sevian village, Amritsar.

At present, out of its total installed co-generation power capacity of 20 Mw, the company is selling about 10 Mw of surplus power to the Punjab State Electricity Board (PSEB). The rest is used for its own consumption.

Therefore, the company is now enhancing its installed co-generation power capacity from 20 Mw to 30 Mw, out of which the company would be selling power capacity about 19.60 Mw of surplus power to PSEB.

Speaking to Business Standard, Rana Sugars Ltd General Manager (Finance) Manoj Gupta said, “The project would require a capital investment of Rs. 40.80 crore and would be funded through cash accrual and term loan from the banks and likely to be commissioned by October.”

Last year, the company set up a distillery unit with a capacity to produce 60 kilolitres per day, with an initial investment of around Rs 39 crore at Patti, Amritsar.

The company is utilising molasses, a by-product of its sugar and grain products, for the manufacture of rectified spirit, ethanol and potable alcohol.

The company imported machinery from China, in which 50 per cent of wash and impurities is evaporated and the remaining is burnt in boilers, without polluting the environment, making it a pollution free unit.

The setting up of the distillery enabled the company to fully integrate its operations. Its existing sugar plant at Amritsar produces 200 tonne of molasses per day.

Also, the company’s is setting up two sugar units at Moradabad and Shahbad, both in Uttar Pradesh, with a capital investment of Rs 418 crore. The proposed units will be integrated units each with a capacity to crush 5,000 tonne of sugarcane per day and facilities for co-generation of 20 Mw of power.

While the Shahbad unit has started the new plant at Moradabad (Uttar Pradesh) would be operational by October. Besides the sugar industry, the group has diversified into textiles, informatics and infrastructure.

GV Films - 8000 English Movies

2007-05-09T11:30:00.000+05:30

In the biggest library buyout in the Indian entertainment space, GV Films is effecting a $43.56-million (Rs 175 crore) acquisition of around 8,000 Hollywood titles from Pinewood Films, an investment arm of a UK based distributor.

On April 30, GV raised $40 million through GDRs listed on the Luxembourg exchange to fund the acquisition. The process was managed by Zurich-based Bremer Bugmann Seiler Capital Partners AG and Bank of New York.

A company official said the deal has been confirmed, while verification of the tittles were currently on. The company, which has produced some of the biggest blockbusters in the South Indian film industry, said the deal covered the worldwide Internet, DVD and cinema rights, which featured Hollywood titles from the 1940s to the late 1970s.

Some of the notable titles in the library include Sherlock Holmes And The Secret Weapon (1943), Attack Of The Monster (1969), Murder On Flight 502 (1975), Clashes Of The Ninja (1986), Ghost (1963) and Murder With Music (1941).

It is believed that the impending acquisition would strengthen GV’s nascent webcasting business, which already has rights for 6000 Indian tittles. The first listed domestic entertainment company is betting big on its webcasting business along with the Studio City project, which involves setting up of multiplex, retail gallery and budget hotel across 23 locations, to bounce back from a difficult phase following the death of its original promoter some years back.

GV has mainly been a production and distribution entity with Tamil blockbusters directed by Manirathnam—Nayagan, Anjali and Dalapathi—to its credit. The company also forayed into television production with a 3D offering Mayavi currently airing on Jaya TV .Earlier this year, GV announced Bollywood foray after roping in Anees Bamzai.

Teledata - Multibagger or Loser?

2007-04-02T16:32:00.002+05:30

Teledata Informatics Ltd has announced that, it plans to split the Company into three separate entities, focusing on specific businesses. The demerged entities will be Teledata Marine Solutions Ltd, Teledata Technology Solutions Ltd and Teledata Informatics Ltd (the Company). The scheme has been filed with the Chennai High Court for its approval. The process is expected to be completed in three to four months time, and the shares of the de-merged entities are expected to be listed by April, 2007.

The 3 demerged entities have a gamut of activities ranging from Logistics Software Products and solutions, Marine software solutions, Port management & LPG distribution, Marine Insurance Services, ERP, Education, Communication and Agro Biotech. Teledata Informatics the stock in focus has the following subsidaries

Hyper Sascom Ltd
Teledata Education Management Systems Ltd
Insoft Systems Pte Ltd
iMax Networks Ltd
Voicetec International
Kryptos Networks Pvt Ltd

In a new development today, Teledata Informatics invested USD 105 million in Singapore headquartered eSys Technologies. Teledata Informatics Ltd announced that the Company had strategically invested USD 105 million to acquire majority stake in Singapore headquartered IT Distribution major and PC maker eSys Technologies Pte Ltd. The investment will enable the Company capitalize on the synergy between the Company and eSys which would help accelerate the business levels with tremendous prospect.

Now before the demerger takes place if one would buy 100 shares of Teledata Infomatics @ Rs. 58. It would result in 100 shares of Teledata Infomatics , 50 shares of TD Marines and 50 shares of TD Technology. For FY 08 expected EPS of Teledata Infomatics is Rs. 12 , of TD Marine Rs. 30 and of TD Technology is Rs. 20. Even at P/E of 5.0 the share appears to be a multibagger. Buy is definetly recommended.

Clutch Auto - Long Term Unique Story

2007-04-02T09:54:00.000+05:30

Long-term investors can use the current dip in the market to build up positions in Clutch Auto. The company is India’s largest manufacturer of automotive clutches with the know-how to manufacture the full range of clutch plates and assembles for commercial vehicles (CVs) and heavy-duty applications.

In the past, the company suffered a bad patch due cash-flow problems and high-cost debt burden. It also took time to master the clutch technology. But the worst is over now. The company is likely to be a major gainer due to an over 30% YoY growth in CV sales and auto component outsourcing from India.

Technology development: Globally, clutch manufacturing is a proprietary technology controlled by a handful of companies in Japan, West Europe and North America. Clutch Auto has joined this elite club and is the biggest supplier to CV and farm equipment manufacturers in India.

Due to its efforts in re-engineering and R&D, the company has filed 18 patents in India and 11 in the US for its in-house innovations in clutch technology. Having access to its own technology gives the company an advantage over its domestic competitors, which depend on their foreign JV partners for technology. This not only reduces their time-to-market, but also makes their products costlier, as they have to pay royalty and technical fees to their foreign partners.

The low-cost manufacturing base in India gives Clutch Auto a competitive edge over global majors like Eaton Corporation, Luk, Valeo, Exedy Corp and ZF Friedrichshafen. At present, exports account for around 30% of the company’s net sales, with North America being its biggest market.

Low-cost expansion: Having consolidated its operations, the company is now working on a three-year capacity expansion (capex) plan to triple its production capacity to 4 million units of clutch plates and clutch assemblies by FY10, from around 1.4 million units currently.

Expansion is being done at a relatively modest cost of Rs 30 crore — almost a third of its FY06 gross block of Rs 87 crore. The company says basic infrastructure and common facilities are already in place. It merely has to invest in some balancing and finishing equipment to raise its capacity.

With operating margins at 16% during April-December ’06 and set to improve further, capex will be funded via internal accruals, thus protecting the company’s bottomline from an increase in interest rates.

The capex is part of its plan to triple its revenues to Rs 650 crore by the end of financial year ’09-10, against the estimated Rs 210 crore at the end of March ’07. During the same period, contribution of exports in its revenues will rise to 50% from around one-third at present.

To control its raw material cost, the company recently acquired the assets of Gurukripa Founders & Engineers (GKF), a promoters’ concern. GKF is engaged in the production of castings used in clutch manufacturing. This acquisition will give the company a better control over its input costs. It is now in the process of augmenting it capacity to 1,200 tonnes per month from 750 tonnes.

Financial restructuring: The company has implemented a debt-restructuring plan, under which, it pre-paid a part of its loan by raising equity and refinancing the balance with low-cost term loans. This resulted in a significant turnaround in Clutch Auto’s financial ratios.

From a high of 4.9 during FY04, its debt-to-equity ratio declined to 1.3 during FY06 and is expected to improve further to 0.8 during FY07. Interest coverage during the period improved from 2 in FY04 to 5.4 in the first nine months ’06-07. This has significantly strengthened the company’s balance sheet, making it less vulnerable to any downturn in the industry’s fortune and rise in interest rates.

Financials: In the first nine-months of FY07, Clutch Auto’s net profit jumped 42% YoY to Rs 12.2 crore, while its operating profit grew 35% YoY to Rs 21.7 crore. Its bottomline growth was led by a 39% YoY growth in net sales to Rs 139 crore and savings on account of slower growth in interest payment and depreciation allowance.

While the former grew 35% YoY, the latter grew a mere 4.3% YoY. The only dampener was raw material cost, which zoomed 49% YoY.

Valuations: At the current market price of around Rs 108, the stock is valued at around 3.6 times its FY08 estimated EPS of Rs 30. This is extremely cheap and provides significant upside potential for investors with a 12-18-month horizon.