Tuesday, October 16, 2007

UT Ltd - Turnaround Candidate

UT Ltd (Bse Code : 526879) is India’s leading manufacturer of Hydraulic Cylinders, and is poised to be a total hydraulics solution provider in the mobile earth moving machinery & truck hydraulics industry.

Sales breakup of UTL is :
· 35-40% Truck hydraulic systems [ Main Clients : Ashok Leyland, Telco, Eicher ]
· 30-35% Earthmoving machinery hydraulic systems [ Main Clients : BEML, Caterpillar, Telco ]
· 10-15% Other Hydraulic Cylinders
· 10-15% Hydraulic Elevators (up to 6 floors)
Above %’s include maintenance/servicing contracts which is approx 6% of the total sales. They have service centre’s all over the country.

Company’s main activity is manufacturing of hydraulic cylinders, though the company had got in to trading (import & selling of hydraulic machines) a couple of years ago. The company has 3 manufacturing facilities : Budge Budge, Kolkata, West Bengal; Hosur, Tamil Nadu; Sahibabad, Uttar Pradesh.

The company’s main raw material is steel tubes (ISMT) which it uses to build it’s products. Steel tubes prices have been fairly stable in the last 2 years. These prices in turn depend on steel prices.

The company’s main competitors are Wipro Infrastructure Engineering (formerly Wipro Fluid Power) & Hyva (India) Pvt. Ltd., a fully owned subsidiary of M/s Hyva Holding b.v. of The Netherlands.

Current Performance :
The company has been making losses in recent times because of it’s low margin front-end hydraulic systems (front end tipper) business - the company imports these systems & sells the same in India - and being on the wrong side of currency fluctuations. But it is exiting from it’s low-margin products, and should complete it's exit from these products by Oct 2007. So while Q1 of FY08 showed a loss & Q2 should also follow suit, the company is expected to turn around from Q3 onwards.

To quote from the Directors Report for the year ended 31st March, 2007:
Your Directors are pleased to inform that your Company has maintained its market share and posted Gross Turnover of Rs. 10057.49 lacs as against the previous years turnover of Rs. 10145.71 lacs. This is explained by the fact that the Company, during the course of last year, consciously decided to withdraw from the low profit margin product range. Though there has been a small drop in the overall sales compared to last year, we have achieved a 10.75% growth in the sales of the core product range.
The Net Profit for the year under review is Rs. 66.27 lacs as against the previous years net profit of Rs. 267.23 lacs. Net Profit is lowered due to a) the impact of Euro fluctuation and b) higher interest cost on account of the additional inventory of the low-margin products from which your company has since withdrawn.

Outlook Going forward :
The company in looking to achieve faster growth in both top & bottom-line going forward.
In quest of this it is focusing on various front’s :
· The company is enhancing it’s productive capacity by introducing new & upgraded technology, and state of the art machinery.
· Cost Control – It is looking to import more from Chinese suppliers who are the lowest cost producers of steel tubes
· It is trying to build better volumes from existing clients by offering better prices, which are possible because of a combination of their exit from loss-making businesses/products & economies of scale.
· The company is targeting to benchmark itself as the lowest cost producer of hydraulic equipment in the world.
· It is trying to leverage & extend it’s existing relationships to become “Strategic Partners” of some of it’s domestic & global clients, which can lead to big scaling up in volumes.

Quoting again from the Directors Report for the recently concluded fiscal :
Your Company has identified new markets, both Indian and global where due to value added products, realizations will improve substantially in the financial year 2007-08 and your Company is confident of achieving good topline as well as bottomline growth, on year-to-year basis.

Industry Outlook :
Globally the construction equipment industry has grown to 114 billion USD, with an 11% growth in the last fiscal. The Indian construction equipment industry grew by 34% from 5064 Cr to 6800 Cr in the last year, far ahead of India’s GDP growth of 9.4%, pushing up demand for hydraulic systems.
This trend is likely to continue in the next few years too, and UT Ltd is looking to exploit these opportunities & become a one-stop shop for global & domestic players to source their hydraulic systems.

Negatives (Industry/Company) :
· Steel prices are gradually rising & hence the prices of steel tubes would follow suit.
· Chinese manufacturers have also entered the Indian market, targeting price-sensitive Indian customers
· Management has failed to deliver on analyst/investor expectations in the past. An immediate point of concern is that the company's CEO has left the company in Sept 2007, as per a company announcement. It is important that a new CEO should be appointed as a top priority, so that the company's transition from a promoter-managed company to a totally professionally-managed company proceeds smoothly.

Author’s Projections & Recommendation :
The author expects the company to do a top line of Rs 110-115 Cr in the current year, and a bottom-line of Rs 3-5 Cr.

For FY09 the company’s initiatives are expected to bear fruit & the author expects the company to do a top-line of Rs 130-140 Cr & bottom-line of Rs 15-16 Cr.

The company would need much larger working capital to realize it’s plans & the company is looking at various options including debt/preferential issue etc to address this need. In fact, a preferential issue for 10% equity dilution was announced at Rs 52 , but later shelved as the promoters wanted to re-consider the options.

Taking into account an equity dilution of 25% & based on the above bottom-line estimates made by the author, the author has made the following projections of share price 21-months forward (by July 2009) :

Equity : 7.61 Cr (after expected dilution of 25%)
Projected Net Profit for FY09 : 15 Cr
Projected EPS for FY09 : Rs 19.71
Projected Price by July 2009 (based on author’s expectation of EPS of 19.71 for FY09 & a P/E Ratio of 10) : Rs 197

Current Market price is Rs 43.05. The author recommends a buy on the stock in the range of Rs 35 - Rs 50, for a 21-month target of Rs 197.

Author : Bosco Menezes

Recommendation Date : 16.10.2007

About the author :
The author is an avid investor, currently taking a break from his professional career as an IT professional.

Prior Performance of the author’s recommendations :
The author has released one prior "formal" research report, and the same is summed up as follows :
Company : Almondz Global Securities Ltd
Reco Dt : 21.2.2007
Reco Price : 62.60
Recommended Holding Period : 24 months
Target Price / Reco : “Potential Multi-bagger”
CMP (16.10.2007) : 77.35
% Gain / Loss as on 16.10.2007 : + 23.56%

The author has also made several other informal recommendations on message boards & investor forums. Prominent winners have been Peerless Abasan, Electrotherm, Jaybharat Textiles & Real Estate, Phoenix Mills & Marg Constructions (all gave multi-bagger returns). There has also been one prominent loser - Kallam Spinning (down approx 20% since the recommendation made at the start of 2007). Some more picks have gone nowhere, such as Interlink Petroleum, Frontier Springs etc.

At the time of writing this article the author has a position in the stock covered by this report. The author or any of his dependent family members may make purchases or sales of the securities mentioned in the report while the report is in circulation.
Readers/recipients of this report are strongly advised to do their strict due diligence, and should be aware that the value of investments can go down as well as up. The author shall not be liable for any direct or indirect losses arising from the use of the contents of this report, and readers are therefore cautioned to use the information contained herein at their own risk. In fact, readers would do well to seek the advice of a qualified independent advisor.
The author certifies that all of the views expressed in this report accurately reflect his personal views about the subject company.