Tulsyan NEC Steel - A Steal :)

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.

Core Projects - The Unusual Victim

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.

Clutch Auto - Long Term Unique Story

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.