Sunday, October 31, 2010

Half Yearly Review

With most 2nd Quarter results out, thought it was time for an update on some recent picks & a few other stocks in my portfolio :

Vulcan Engineers
BSE Code : 522080
Covered On : 4th Feb 2010 (Price : Rs 22.65)
CMP (31st Oct 2010) : Rs 52.45
HY EPS : ~ Rs (-) 0.55
Current Recommendation : Hold

This author attended the AGM of the company & came away with the feeling that things are on track. Following is a summary of what was discussed at the AGM :-

Introduction to Terruzzi Fercalx & the business:
• Founded in 1897, still manufactures some products that they manufactured 113 years ago
• 4 business lines :
  • Lime Technologies : Lime plants, Lime kilns & plants for byproducts of lime. This is their major business & the major client industry is the steel industry.
  • Autoclaves – for various industries, particularly Aerospace & Glass Industries. In India, Terruzzi has supplied autoclaves to Larsen & Toubro, Tata Composites & also to Pilkington’s automotive glass factory in Vizag.
  • Freeze Dryers & Vacuum Dryers , used in Pharma industry etc
  • Biomass Gasification (new line of business where they see good potential) – producing power from waste of different types.
 • Main competition in India comes from some other foreign companies

Why Vulcan, plans for Vulcan : 
• Needed a local partner to subcontract some work to, for Indian lime plants projects , so it got associated with Vulcan in 2006
• When the owners of Vulcan indicated they would not mind cashing out, moved to buy their stake, as they expect India to be a very important market for them.
• Intends Vulcan to be an independent entity able to stand on it’s own feet & procure and execute projects on it’s own locally & in Asia.
• Regardless of who bids for the projects, execution will be decided on how it is most feasible to execute, based on geography , capability & cost-effectiveness. So if Terruzzi bags a project in Japan, it may execute it though Vulcan in future once capabilities are built. It will also use India as the base for their Middle East projects.
• Currently for their bids in India major chunk is executed by Terruzzi, smaller chunk by Vulcan. This will change gradually, however there are certain critical parts which they will continue to manufacture in Italy exclusively as their plant & expertise there has been built and fine tuned over decades & cannot be replicated in the foreseeable future. They are unwilling to take chances with quality.
• Will continue Vulcan’s existing business of various types of furnaces, and continue to use the “Vulcan” brand, however will tie-up with one or more top players in the Furnace industry so that Vulcan get’s access to latest technology in furnaces.
• Will introduce Terruzzi’s other products (autoclaves etc) gradually in India through Vulcan after building up Vulcan’s expertise & capabilities.
• Intends to revive Vulcan’s manufacturing & fabrication facilities at the Ahmednagar plant which is mothballed since long. Has already started planning on this & expects to have the plant operational by end 2011.
• Terruzzi-Vulcan combine’s major customer in India is SAIL. Currently executing both types of it’s lime kilns for SAIL. They are heavily dependent on spending of the steel industry.
• Current order book of Vulcan is Rs 33 Cr, It has participated in 2 more tenders from SAIL
• Company has met various financial institutions & banks for tying up loans to fund it’s working capital needs & further investment in plant & machinery.
• They have no plans for any equity dilution at the moment to raise necessary funds.

 Impressions on Promoters/Management : 
• The Italian promoters & management gave me the impression of being sincere, professional , competent & committed.

Author’s View : The author would be very comfortable holding for the long term (unless we get signs in the interim that we were wrong in our assessment of management intentions or capabilities).


UMESL 
BSE Code : 532398
Website : http://www.umesl.co.in/
Covered On : 14th March 2010 (Price : Rs 28.70)
CMP (31st Oct 2010) : Rs 43.75
Consolidated HY EPS : ~ Rs 0.37
Current Recommendation : Hold

UMESL came out with good Q2 results, though the consolidated numbers were brought down by the losses in the K12 schools management division. 

Usha Martin Academy : The company’s management & business courses are in demand & the academy has put in a sterling performance for the half year. Student enrollment was 40% higher than the corresponding period the previous year.

UM Schools : UMESL has started it’s schools management initiative by enabling 12 K12 schools in the eastern region. It has started the primary section in these schools & will scale up till 12th standard over the next few years. Obviously being the 1st year of operation, student occupancy is low, but this is expected to pick up as the schools establish a name for themselves in quality education (should be a given, with the Pearson connection).

The company plans to enable another 2 dozen + schools in the next academic year, and would manage around 200 schools in 5-7 years time.

While the new schools would be a drag on the bottom line (in the consolidated numbers) in the first 2-3 years of operation, the author feels that they will be milch cows at a later stage.

Vocational Training : UMESL has announced it’s entry into vocational & technical education. It will enable students to be industry ready with it’s technical & vocational courses. This is a crying need of industry, and UMESL is moving in the right direction to tap this need.

UM People Search : This recently started Recruitment Services division of UMESL plans to have a presence in all major cities in India by the end of the financial year. Once it establishes itself as a top recruitment company over the next few years (which this author expects to happen, given the pedigree & connections of the promoter group), this division could turn out to be another money spinner for UMESL.

Author’s View : To sum up, though the stock trades at 43X it’s face value of Rs 1/-, the author suggests to hold , as the earnings picture can change completely over the next few years.


Balaji Amines 
BSE Code : 530743
Website : http://www.balajiamines.com/
Covered On : 20th Aug 2009 (Price : 91.40)
CMP (31st Oct 2010) : Rs 239.55
HY EPS : ~ Rs 25.02
Current Recommendation : Hold / Accumulate on declines

Balaji Amines has come out with sterling results for the 2nd quarter, on top of a good 1st quarter. Indications are that the 3rd quarter is also looking robust. The company produces mainly import substitute & specialized/monopoly chemical products enjoying good pricing power.

The company is in the process of seeking necessary approvals for it’s import substitute PVP K30 product, this should happen in the next financial year at which time it’s numbers will see another jump. The management probably miscalculated the time it would take to commercialise this product, but the experience will hold them in good stead going forward.

Author’s View : Continuous innovations & expansions have always been the hallmark of this company , helping it grow at a scorching pace over the last 5 years. Industry feedback, both on their products & the integrity of the management, is universally good.

So with the latest results confirming that the company is on track for yet another year of robust growth, the author recommends holding the stock, and also further accumulation on declines.

Note : The company has recently announced a stock split, with the face value of the stock to be reduced to Rs 2/- from Rs 10/- . This should improve liquidity in the counter. Record date has been set for Nov 19th, 2010.


GEI Industrial Systems
BSE Code : 530743
Website : http://www.geiind.com/
Recommended on : 20th June, 2010 (Price : 131.50)
CMP : Rs 204.30
Consolidated HY EPS : ~ Rs 8.33
Current Recommendation : Hold

The company has come out with excellent numbers for the 2nd quarter, leading to a consolidated EPS of RS 8.33 for the half year, as against an EPS of Rs 9.48 for the full financial year ended 31st March, 2010.

Author’s View : The company is on track for robust growth over the next few years. Those holding the stock may continue to hold.


Axis IT&T 
BSE Code : 532395
NSE Code : AXIS-IT&T
Website : http://www.axisitt.com/
Recommended on : 2nd July, 2010 (Price : Rs 63.75)
CMP : Rs 105.15
Consolidated HY EPS : ~ Rs 2.26
Current Recommendation : Hold / Book partial profits

The company has come out with improved results for Q2.

Author’s View : The company & it’s subsidiary CADES Digitech carry huge losses in the balance sheet, however the presence of a strong cash rich promoter gives comfort.
The company continues to report a steady improvement in numbers, and looks to be on track for robust growth over the next few years. Those holding the stock may continue to hold, though partial profit booking can also be considered.


Capital Trust
BSE Code : 511505
Website : http://www.capital-trust.com/
Covered On : 20th June 2010 (Price : Rs 69)
CMP (31st Oct 2010) : Rs 103.65
HY EPS : ~ Rs 0.92
Current Recommendation : Book Partial Profits

The company has announced a preferential placement of equity shares & warrants to Taj Capital Partners Pvt Ltd (http://tajcapital.com/) & their associates. Warrants have also been issued to the promoters.

 A brief about Taj Capital Partners Pvt Ltd – it is a PE firm promoted by Rajat K Gupta & Parag Saxena. Mr. Rajat K Gupta is the chairman of International Chamber of Commerce (ICC), and Senior Partner Emeritus at McKinsey & Company. He is an independent Director of Procter & Gamble, AMR Corporation, Harman International, Qatar Financial Centre, and a Strategic Advisor to Sberbank. He is also the Chairman of the Board of Genpact and New Silk Route Private Equity. Rajat K. Gupta was also on the board of Goldman Sachs earlier.

The new strategic investors will hold 14.8% stake in the company. Furthermore if warrants are exercised, the new strategic investors will hold 21% of the equity, and this may trigger an open offer at that time. However it is entirely plausible that further strategic investors may be inducted by then, thus preventing the Takeover Code from getting triggered.

The move to enhance the equity base (at a very decent premium) is the right one for Capital Trust, as it not only brings in a marquee name (Rajat Gupta) into the company, giving it visibility, but it also brings in much needed capital. This may turn out to be crucial, as the MFI industry is facing some heat from regulators who may use the banks to arm-twist the industry into lowering interest rates etc. Less dependence on banks for funding would be in the company’s interest, particularly at this juncture.

Author’s View : Q2 results showed continuing improvement, but the big jump will come only from Q4 results onwards, after the proceeds of the current placement are deployed & lines of credit recently negotiated with banks are utilised. With scuttlebutt suggesting diversification into housing finance, gold loans etc, the best is probably yet to come for the scrip. However the market price is already richly discounting future prospects, so the stock may consolidate for a reasonably long period of time before results actually delivered, if they turn out to be good, can lead to another re-rating. A Hold can be contemplated for the Long Term, however, given the run-up in the scrip post the announcement of the placement, some profit booking may not be out of place, as a matter of prudence.


Zen Technologies
BSE Code : 590032
Website : http://www.zentechnologies.com/
Covered On : 22nd Jan 2008 (Price : Rs 135)
CMP (31st Oct 2010) : Rs 205.95
HY EPS : ~ Rs (-) 5.11
Current Recommendation : Hold

The company has made a loss of 2.82 Cr for the 2nd quarter, on sales of Rs 2.19 Cr. Order book as of the end of the quarter was Rs 3.26 Cr.

The company has tendered for a few hundred crores of defence orders. However the same has got delayed, and may start coming through in the current or next quarter.

The company is in ongoing discussions with foreign companies for collaborations & defence offset orders, but no deal has been struck as yet.

Author’s View : The author recommends a Hold at present. Q2 loss was in any case expected given the lack of orders on hand. However the company is optimistic about garnering a decent share of orders from the defence tenders participated in, and if it can indeed do so, the future is bright for the company. However investors should keep in mind that defence order cycles are often delayed & the stock may test one's patience.


FINAL NOTE : Notwithstanding the authors views/conclusions, profit booking, based on the investors circumstances, is never a bad idea, especially after the decent bull run we have seen over the last 18 months. As the saying goes …. A bird in hand ….

Author : Bosco Menezes

Recommendation Date : 30.10.2010

Update History : 15th Nov 2010 -> post Q2 results of Zen Technologies, the author has updated the section on Zen Technologies.

Disclaimer/Disclosure : At the time of writing this article the author has positions in many of the stocks 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 at the time of writing this report. Feedback / brickbats may be hurled at the author at boscom@gmail.com .

Friday, July 2, 2010

Axis IT&T Ltd : Sizeable Accumulated Losses, But Turnaround Likely To Gather Pace

BSE Code : 532395
NSE Code : AXIS-IT&T
Website     : http://www.axisitt.com/
CMP             : Rs 63.75 (closing price, BSE, 2nd July, 2010)


Background :
Axis IT&T (AITT) is an Engineering Design Services (“EDS”) company listed on BSE & NSE. The company delivers design based solutions to global engineering majors. The company’s clients include several Fortune 50 companies in the Aerospace, Aviation, Automotive, Manufacturing, Military, Semiconductor and Medical industries. AITT is licensed to design, develop and manufacture defense and aerospace hardware and software.

[ Update : The company is known as AxisCades Engineering Technologies Ltd since August 2014, following the merger of its subsidiary Cades Digitech Pvt Ltd. ]

The company was taken over in 2008 by Tayana Software Solutions Pvt Ltd, which is a subsidiary of Axis Aerospace & Technologies Pvt Ltd (AAT, website : http://www.axisaerospace.com/), which in turn is a subsidiary of Jupiter Capital Pvt Ltd (JCPL), promoted by ex-FICCI president & Member Of Parliament Mr. Rajeev Chandrashekar (http://www.rajeev.in/).

JCPL also owns Jupiter Aviation & Logistics (JAL), which is working on building the entire value chain for aviation industry. Right from designing software for the aviation industry, JAL is putting through the links for aircraft maintenance, repair and overhaul, training and also building a aviation SEZ and an airport at Hassan district of Karnataka.

AITT , which has carried forward losses of Rs 22 Cr as on 31.03.2009 (FY10 Annual Report is not out yet) has turned around in the last couple of years. It has expanded it’s development centre’s at Hyderabad & Chennai over the last year, benefits of which should be visible this year onwards.


Recent Developments :
In October 2009, AITT has aquired a majority (54.28 %) stake in CADES Digitech Pvt Ltd (CADES) , a product design and engineering services company with emphasis on aerospace, automotive & transportation sectors. [ Note : Source of funds for this acquisition is not clear.]

CADES has turned the corner in the second half of FY10, but it too carries the burden of heavy accumulated losses - 52 Cr till 31.3.2009 (FY10 Annual Report not yet out).

Headquartered in Bangalore, CADES has 15 offices in 10 countries across India, North America, Europe and Asia Pacific.

CADES is an Airbus “preferred partner” in India along with HCL, Infosys, TCS, Tata Technologies and Wipro, all of whom provide Airbus with engineering and/or IT services to design and support its aircraft. CADES is currently executing a 2-year multi-million dollar contract from Airbus for the design of A350XWB composite structures.

CADES is also a "preferred supplier" for Engineering Services to EADS, a global leader in aerospace, defense products and related services.

CADES is also executing projects for various Indian defence organisations such as Defence Research & Development Organisation (DRDO).

CADES was recently conferred with the prestigious “Emerging Company Award 2009 - Indian Design Suppliers for Aviation Market” by Frost & Sullivan.

In Feb 2010 CADES inaugurated it's dedicated offshore center of excellence for GCT-GED, to provide Design and Analysis services to global Aerospace OEM’s.

In a 2009 interview, the company's MD had projected the company to grow at a scorching 70% average growth rate in the coming 3 years, making it a USD 100 million (Rs 470 Cr @ 1 USD = RS 47) company by FY12.

The core competencies & future plans of CADES are addressed in the Frost & SullivanMovers & Shakers” Interview with S. Ravi Narayanan, Chariman & CEO, CADES (now also CEO of AITT) available on this link :
http://www.frost.com/prod/servlet/exec-brief-movers-feature.pag?mode=open&sid=189495122

From 1st April, 2010, Mr. S. Ravi Narayanan has taken over as the CEO of AITT. His background, given here in brief, inspires confidence :
• He is currently Chairman of FICCI Task Force on Defense Offset.
• An Aviation Professional for over 25 years.
• A Former Board Member of Airbus Engineering, India.
• A Former Board Member of Air India and Indian Airlines.

Also in April 2010, AITT announced plans to provide end-to-end services for the energy sector from designing a power plant to testing the processes. Newswires quoted a company official as saying “For putting up a 1-MW solar power plant it costs around Rs 17 crore, and Rs 10 crore for a thermal plant. The design cost involved will be around 2 per cent. With hundreds of power projects, including non-conventional energy, lined up in India the company has a lot of opportunity in this sector”.


Latest Results:
AITT reported Sales of Rs 77 Cr, with PAT of 3.25 Cr on a consolidated basis for the year FY10 (1.4.2009 to 31.3.2010). On an equity of a tad under 10 Cr (Face Value Rs 5/-) this works out to an EPS of Rs 1.63.

Interestingly, 33 Cr of Sales & 3.4 Cr PAT was clocked in the last quarter itself, majority of it contributed by CADES, suggesting that the company’s expansions and acquisitions over the last 12 months have finally started bearing fruit.


Recommendation :
It is difficult to recommend an outright "Buy" on AITT at the current valuations, given the considerable accumulated losses of the company & it's subsidiary CADES, as also the uncertain situation of the global economy, and especially the stock's big run up on the bourses – up over the last year (up 5-6 times).

However , the AITT-CADES combine caters to the engineering design requirements of the aerospace-defence-power sectors, among others, so the opportunity & potential is massive & unambiguous :
• Aerospace - Billions of USD are spent in engineering design services each year .
• Defence – A more than 10 billion dollar defence offset commitment to be met by global OEM’s .
• Power - Hundred’s of power plants lined up in India, of which 2% of the cost will be spent on Engineering design services – again a billion dollar market .

In fact Booze Allen Hamilton has projected India's offshore engineering servicees industry to become a USD 3 billion industry by 2020 .

With CEO Mr. S. Ravi Narayan leading the way, and as part of the Rajeev Chandrashekar group that has plans in place to straddle the entire Aerospace industry, it certainly appears that the AITT-CADES has the right pedigree & backing to build a bright future for itself as a big player in the global EDS industry.

Indeed, CADES' recent contract with Airbus for the design of A350XWB composite structures also clearly establishes that the combine is able to compete with the best in the global EDS industry. CADES would also be exhibiting it's capabilities at the Farnborough International Airshow 2010 to be held from 19-25 July 2010 , which would give further visibility to the combine.

To conclude, AITT has shown with it's acquisition of CADES in just the 2nd year since the new promoters took over, that it will use the acquisition route with telling effect to quickly acquire scale & capability. AITT is currently the only listed entity of the group.

So with the backing of  the cash rich promoter group, it is very likely that further strategic acquisitions will follow over the next few years. There is also the possibility down the line of a reverse merger with it's parent, or merger with other group companies in complementary businesses, and that could well change the balance sheet picture comprehensively.

Keeping the above in mind, this author recommends keeping the company under active watch. Investors are invited to research the company & the opportunity extensively, and keep tracking the company’s progress.

At an opportune time, when one is convinced that the potential rewards outweigh the risks, one may enter this stock.


Author : Bosco Menezes

Recommendation Date : 2.7.2010

Disclaimer/Disclosure :
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 at the time of writing this report. Feedback / brickbats may be hurled at the author at boscom@gmail.com .

Monday, June 28, 2010

ZeeNut's Grizzlies ....

A couple of months ago ,on a couple of investor forums, this author had listed a set of issues that could potentially rear up & trip the current bull run in the Indian Stock Markets. The same are reproduced below in random order, as they hold true even today.

A close watch on these grizzlies over the coming weeks & months would perhaps be prudent, as the situation continues to be volatile & uncertain :
1. Trade War resulting from US branding China a Currency Manipulator
2. Burst of the China Property / Debt Bubble
3. Middle East flare up / Iran Nuclear Issue Snowballing
4. Any Sovereign Default (prime candidates : PIIGS) & it's Domino effect
5. End Of The Great Liquidity Cycle : Unwinding of Stimulus in US / India / Globally; belt tightening by various governments
6. Double Dip Recession
7. Tension with our neighbours Pakistan / China
8. Big rise in Oil & Metals
9. Unexpected political uncertainity with UPA's LS majority coming under question
10. Rise in India's own Bank Rates to control rising Inflation
11. Internal Security Issues : Naxalite issue snowballs, or a major terrorist strike
12. Further SCAM's  - accounting ones or stock market ones 
13. Company Earnings Disappointments
14. Adverse impact of Direct Tax Code proposals
15. Failure of the 2010 Monsoon
16. Impact of US Financial Reforms.

[ Note : Some of the above grizzlies are closely linked with each other, for example fiscal contraction arising out of an end to the great liquidity cycle can actually prompt the "double dip recession" if not timed right. ]

With so many uncertainities, the author would advise a cautious rather than a cavalier approach to the stock markets at the current moment, and keeping Capital Preservation top of mind.

Monday, June 21, 2010

GEI Industrial Systems : Water Scarcity + Power Scarcity = A Bright Future !!

BSE Code    : 530743
Website        : http://www.geiind.com/
CMP            : 131.50 (closing price, 18.06.2010)
EPS (FY10) : ~ Rs 10

In his seminal work "Common Stocks, Uncommon Profits", Phillip A. Fisher laid down the top criteria for stock selection as being whether the company in question had the products or services with enough potential to make possible a sizeable increase in sales for several years to come.

GEI Industrial Systems (GEI) is one such firm blessed with precisely the sort of products that have a ready & increasing market in years to come.

The company’s main products are Air Cooled Heat Condensers & Heat exchangers, primarily for the Power and Oil & Gas sectors.

These air cooled products are fast replacing water cooled products, owing to the fact that availability of sufficient water for industrial users is becoming a big problem in India, as a burgeoning population competes with industries for a water pool that is not enough to supply both, and is not getting augmented quickly either.

This situation is unlikely to get better, on the contrary things could get even worse.

Secondly, with the mammoth plans for power generation already announced – and the power-starved country certainly needs that - the main market the company caters too is also staring at huge growth. Oil & Gas sector is also growing at a good pace.

So Water Scarcity + Power Scarcity = Good Times for the Air-Cooled Condenser & Heat Exchanger Industry.

Which brings us to the 2nd important consideration : Does GEI enjoy any competitive advantage - say market leadership / technology leadership / Cost leadership etc – that will give near certainty that the company will enjoy the fruits of the superb opportunity outlined above ?

In fact there is : GEI is a market & technology leader in it’s field, with a 40-50% share of the Air Cooled Heat Condensers & Heat exchangers market in India.

So how fast is growth likely to scale up ? Well, GEI is expanding capacity at a frenetic pace. A leading business magazine recently quoted the management as projecting to double turnover (~250 Cr currently) in 2 years time, and aiming at quadrupling it by 2015, which would make GEI a leading global player. Currently the company has an order book of over 400 Cr, giving visibility for the next 15-18 months.

Recommendation :
Given the humungous market potential & the market leadership enjoyed by GEI, the only thing that remains to be decided is what would be a decent entry price. After all, one does not want to enter a great business at an atrocious price, thus shooting oneself in the foot.

The author believes that a small entry at Rs 130 or below, followed by averaging at declines is the right way to go about entering & accumulating this stock, strictly for a 3-5 year holding period.

Author : Bosco Menezes
Recommendation Date : 20.06.2010

Disclaimer/Disclosure :
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 at the time of writing this report. Feedback / brickbats may be hurled at the author at boscom@gmail.com .

Capital Trust Ltd – Going Grameen

While agreeing with the basic hypothesis that there is a fortune at the bottom of the pyramid, this author has for long felt that the microfinance business in particular, despite it’s undoubted potential, was a bit too risky to warrant investment. Indeed over the course of the last few months, quite a few reports have stressed the burgeoning of NPA’s in the microfinance sector in India, not helped by the growing tendency of the microfinance clientele to take loans from multiple institutions.

Still, when the author came across the recent comment of Mr. R. R. Nair, Chief Executive of LIC Housing Finance, that “about 80% of demand is from the low-income segment, so for long-term sustenance of business growth I think the microfinance business is necessary”, he decided that it justified a closer look at listed microfinance companies in India, with a view to see if any of them warranted investment.

Given the very limited universe of such companies, it was not difficult to do some quick research, and in doing so the author came across the following press release from a company called Capital Trust Ltd (BSE Code : 511505) , which caught his interest :

Synopsis :
Going through the article, and thereafter going through the latest annual report of the company, as well as the company’s website http://www.capital-trust.com/ , one finds that :
• The company entered the microfinance business in FY09, and achieved profitability in the very first full year of microfinance operations (FY10).
• Company has a vastly experienced management team & board of directors
• The company focuses on North India, where the microfinance penetration is abysmally low.
• The company currently operates 25 microfinance branches, servicing over 22,000 clients, with total loans outstanding of Rs 12.4 Cr, and enjoys a default rate of under 1%
• Company projects profit of Rs. 3.1 Cr in 2011, giving an EPS of Rs 4 on current equity of Rs 7.5 Cr
• The company aims to have an outstanding loan book of Rs 1373.3 Cr by 31.3.2015, as against the corresponding figure of Rs 12.4 Cr on 31.3.2010. That’s 110 times current loan book, in 5 years time !!
• To meet the funds requirement in keeping with the proposed growth, the company has appointed a New York based investment consultant to initially raise Rs 20 Cr foreign equity and Rs 36 Cr debt .

Risks :
Obviously there are a lot of risks, some of which are :
• Maintaining a low level of NPA’s, particularly with the increasing trend of clients to access loans from multiple agencies simultaneously
• Growing competition
• Ability to raise funds at regular intervals & at reasonable cost
• Government regulations, which might impose higher provisioning, or curtail the gamut of activities of microfinance companies

Recommendation :
The stock quotes in the Rs 65~70 range currently. Assuming the company meets it’s guidance of PAT of 3.1 Cr for the current year, the PE stands at approx 17 times current years projected EPS, which suggests that it is fully priced.
However, if the company can come even close to achieving the sort of growth it has outlined for itself, the stock could well be selling cheap currently. The question is, can it actually deliver ? Can one trust some capital investment in Capital Trust Ltd ?
The answer to that will become evident in the next couple of years. For now, the author suggests actively tracking this firm, and committing capital based on one’s conviction levels.

Author : Bosco Menezes

Recommendation Date : 20.06.2010

Disclaimer/Disclosure :
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 at the time of writing this report. Feedback / brickbats may be hurled at the author at boscom@gmail.com .

Monday, March 15, 2010

UMESL - Educating Gen Next


Usha Martin Education & Solutions Ltd (Bse Code : 532398, formerly Usha Martin Infotech Ltd) belonging to the Usha Martin (Jhawar) group has ventured into the schools education space in India.

UMESL plans to have 12 schools operational from the next acedemic year starting April 2010 (primarily in West Bengal, Bihar & Jharkand), moving up to 50 schools in operation from April 2011, and further scaling up to 200 schools in a span of 5 years. Each of these schools will provide K-12 (kindergarten to 12th standard) high quality English medium education to students all over the country, with a focus on non-metro towns and cities.

UMESL has tied up with Pearson India, of the Pearson group to source educational content. With Pearson, a world leader in education publishing, the UMESL enabled schools will have the advantage of accessing their rich digital and non-digital K12 contents like books, worksheets, assessment tools and resources for teachers as well as their state-of-the-art ERP software for school systems

Usha Martin Academy, which runs three centres in West Bengal and Jharkhand for advanced management and technical education, with plans to launch several more, has also been brought under the UMESL fold.

Websites of UMESL  :-


Websites of the Pearson Group  :-




Recommendation :

UMESL can be picked up on declines, strictly for a 5+ years holding period. While the opportunity is indeed humungous, the business model needs better understanding & the execution skills will require close monitoring.

Investors should note that the face value of the share which is Rs 5/- currently will fall to Rs 1/- due to the writing off of certain loss making businesses against the share capital & reserves. At Rs 28.70, it is discounting its effective face value 29 times, which is extremely steep. However looking at how quickly it has been able to start it's first dozen schools (within a few months of it's announcement of entry into schools education) & also keeping the humungous potential of the sector in mind, an initial investment can be contemplated.

Once the business model of the company is studied & understood in more detail, a further call can be made.


Author : Bosco Menezes


Recommendation Date : 14.3.2010


Disclaimer/Disclosure : 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 at the time of writing this report. Feedback / brickbats may be hurled at the author at boscom@gmail.com .

Thursday, February 4, 2010

Vulcan Engineers Ltd : From A Frog To A Prince ?

[ Update : Vulcan Engineers has been renamed as Terruzzi Fercalx India Ltd from Sept 1st, 2014 ]

The Frog Prince” is an ancient but popular fairy tale. In the tale, a princess befriends a frog who is later magically transformed into a handsome prince, after being kissed by this princess.

Unlikely as it sounds, our very own local stock exchanges churn out such frog princes on a fairly regular basis.

Don’t believe me ? Well , let me explain …

Every year , for many years now, dozens of listed companies have been changing hands on the bourses . A majority of the companies taken over – though there are notable exceptions - are those doing little business & making limited profits.

The companies & persons taking over these companies come in various hues , ranging from people in the same line of business who think they can do a better job, to people who want to pursue a different line of business all-together, to people who simply want to list their existing businesses by way of a reverse merger , without taking the IPO route.

But a common characteristic of this lot is that they have an agenda & want to get the myriad benefits that come with being a public listed company.

If one is willing to put in the effort to separate the wheat from the chaff in such takeovers, one may be lucky enough to identify the next frog prince - a company whose fortunes are likely to improve dramatically as a result of being taken over.

Is the effort worth it ? To illustrate , let me throw you a figure – 60245.

That’s the number of times appreciation that a person would have earned by investing in a company called Jaybharat Sarees Ltd (JSL) - now Jaybharat Textiles & Real Estate Ltd - in December 2003, when it started trading following a takeover by Mr. Saurabh Tayal of the Tayal Group of companies in Jan 2003.

Yes, 10 shares of JSL purchased at Rs 12.25 per share on 24th December 2003 would have become 15375 shares as of today & each worth Rs 480/- at the close of trade on 3rd February, 2010 !! Giving a value of Rs 73,80,000 / - for the investment of Rs 122.50, a 60245 time’s appreciation , not even accounting for dividends received over the years.

Not every frog turns in to such a rich prince. Not even in 7 years time. Not even after being kissed by a princess.

But practically every year there are several companies taken over that give a 3-5 times appreciation over the next few years. And this is taking into consideration just those companies which are quoted daily (many more promising frog princes are suspended for trading due to past non-compliances, and some are simply not traded on a regular basis).

To quote more recent examples , consider Peerless Abasan Finance (now Shristi Infrastructure) which was taken over in 2006 by the Kanoria group, which gave multifold returns over the next 2 years, and Mewar Industries (now Brahmaputra Infraprojects), taken over in mid-2008 by the Brahmaputra group, which has already given 5 times return in about 18 months time.

And so, to repeat, if one is willing to put in the effort to separate the wheat from the chaff in such takeovers, one may be lucky enough to identify the next frog prince, and chance one's luck.

The author looks at these takeover / reverse merger stories with some interest, and in the past few months has tried to identify future princes from among the frogs. The author belives he has identified one such company that merits further due diligence – Vulcan Engineers Ltd.

Vulcan Engineers Ltd

Vulcan Engineers Ltd (VEL), a BSE listed company is in the business of designing, manufacturing & commissioning industrial furnaces, kilns & gas plants. For several years now it’s performance has been distinctly lackluster before a relative turnaround in the current financial year.

The company has now been taken over by Terruzzi Fercalx Spa (TFS), an Italian firm. A closer look at TFS would give the reader an idea of what is possibly in store for VEL.

Terruzzi Fercalx Spa

This company was incorporated in 2007 in Italy by the Terruzi group, a 113 year old group founded in 1987 by Daniele Terruzzi.

The company's website is : http://www.terruzzi.fercalx.com/

The company has been organised into 3 divisions :
  • Terruzzi Division – into autoclaves (sterilisers) for glass , aerospace , pharmaceutical industry , as well as erection of complete plants
  • Fercalx division – primarily into designing, manufacturing & commissioning of lime kiln plants for steel, ferroalloy, cement industries etc
  • Terruzzi Foodtech Division – the food & confectionary division
The company as a whole is a comprehensive engineering group involved in all phases of plant realisation , right from design to manufacture to commissioning, catering to various industries such as :
  • Steelmaking industry
  • Cement industry
  • Aerospace & Aircraft industry
  • Pharmaceutical industry
  • Food Industry
  • Lime industry
  • Paper & Pulp industry
  • Glass industry
  • Rubber Industry
  • Mining & Metals / Ferroalloys Industry
  • Environmental / Waste treatment Industry
The potential market for a company catering to the above industries is humungous, not just in India but the world over. Moreover, TFS has several patents & pending patent applications in it’s field of operation.

It is therefore no surprise that since commencing operations in 2007 , Terruzzi Fercalx Spa, despite it’s small size, has already grown in revenues by 25% in 2008 & a further 40-50% in 2009 (exact annual figure as of Dec 2009 not available) .

And no wonder that in it’s offer letter to VEL shareholders, TFS has given as it’s reason for the takeover, the “great growth potential” in emerging markets such as India.

It is not unlikely given the size of the market opportunity, that once TFS completes it’s takeover, planning, reorganisation & knowledge transfer to VEL, that VEL will itself follow a similarly scorching growth path.

In fact, over the next decade (yes, when the potential is so vast, investors need to think long term & not just short to medium term), it is not inconceivable that VEL will morph itself into a large engineering company, and the fulcrum of TFS's overseas operations.

To the author, the main risk appears is not in the business itself, results of which should start becoming visible in 18-24 months, but rather in the attitude of the new Italian promoters towards minority shareholders. After all, the Terruzzi Fercalx group is a private group run by the Terruzzi family, so this aspect will bear close watching.

Vulcan Engineers Ltd – Quick Facts

Bse Code : 522080
CMP : 22.65 (Closing on BSE, 3rd Feb , 2010)
Website of promoter (TFS) : http://www.terruzzi.fercalx.com/

Recommendation :
While it is impossible to say whether this frog will turn into a prince eventually, one can see from the facts presented above that it is certainly a possible candidate .

Keeping the above in mind, the author recommends investors to research VEL in greater detail, and keenly track the company going forward. Over the next decade this stock could transform not just it's own fortune, but an investor’s fortune too.

Disclaimer/Disclosure :
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 at the time of writing this report. Feedback / brickbats may be hurled at the author at boscom@gmail.com .

Revisions :
10th Feb, 2010 ->  Revised my figures for appreciation in JSL from 94000 times to 60245 times.
Reasons : Bonus in 2004 was 31:10 and not 31:1 shown on BSE website ("Filing & Other Info" tab) + Stock Splits also considered + CMP - closing price date corrected .

Sunday, January 3, 2010

Brief Update On Stocks Profiled in 2009 & Comments On The Market going into 2010

WPIL :

Covered On : 27th Oct 2009 (Price : 102.20 - Closing on BSE, 27th Oct , 2009)
HY EPS :  Rs 6.50
CMP (31st Dec 2009) : Rs 172

WPIL has put in a good performance for the half year & looks like doing even better going forward. The company looks well placed to participate in the revival of the Indian economy, and also in the nascent nuclear opportunity.

On the flip side, the author has found the company unwilling to address queries , with the CS questioning why the author (who is based in Mumbai) did not attended the AGM in Kolkatta and address queries to the management at that forum (despite the author explaining that it was impractical to expect shareholders to traverse to the opposite end of the country to attend AGM's) . Obviously the dynamism at the top has not percolated down to the secretarial function.

The author has booked profits in the counter after it's brilliant run over the last quarter of 2009, but may continue to track the company in light of it's future prospects.



Brahmaputra Infraprojects :

Covered On : 9th Sept 2009 (Price : 70.10 - Closing on BSE, 9th Sept , 2009)
HY EPS : ~ Rs 8.75
CMP (31st Dec 2009) : Rs 75.20

Brahmaputra Infraprojects has done well in the first half of the current year, and given the visibility of order book, should repeat the performance in the 2nd half. It is one of the cheaper listed infrastructure / road players, this could be partly because it is a recent takeover case, and has not been researched so far by institutions & brokerages.

Looking at the excellent prospects for the roads & infrastructure sector, the author feels the stock can be held for the long term.

Disclosure : The author continues to have a position in the stock.



Balaji Amines :

Covered On : 20th Aug 2009 (Price : 91.40 - Closing on BSE, 19th Aug , 2009)
HY EPS : ~ Rs 19.4
CMP (31st Dec 2009) : Rs 160

The half year results of the company have been excellent, and all indications point to a better 2nd half. The company has been discounted in recent times like an ordinary run of the mill commodity stock, whereas the reality is that most of the company's products are import substitutes, a result of years of R&D and technology advancement, where competition cannot just rush in, thus allowing sufficient market protection.

Couple the above with the management's excellent reputation for integrity, professionalism , innovation & hard work, and the author has no hesitation in advising a hold on the stock. Even after it's recent appreciation, at a price of Rs 160/- the stock discounts it's expected full year EPS of ~ Rs 40/- just 4 times - in other words, still run of the mill commodity stock valuations, considering that we are in the upper echelons of a bull market.

Disclosure : The author continues to have a position in the stock.


Tyche Industries :

Covered On : 4th June 2009 (Price : Rs 17.25 - Closing 3rd June 2009)
HY EPS : Rs 2.21
CMP (31st Dec 2009) : Rs 19.11

The author was a shareholder of this company for a few months & his interactions with them were primarily defined by a lack of interest on the company's part to address queries comprehensively and in a timely manner. On the dividend issue too, the author was made repeated promises which fell by the wayside & finally received the dividend a good 3 months after the record date.

Company's which do not treat retail shareholders well are not this author's cup of tea. The above experience, coupled with main promoter's links to Siris group , as well as the earlier non-disclosures of stake changes among directors & group companies as required statutorily, have combined to give the author an uncomfortable feeling, despite the company's decent financial track record of the last few years.

Therefore despite the satisfactory performance & attractive valuations, the author has exited the counter & stopped tracking the stock.


KRBL :

Covered On : 27th Jan 2009 (Price : Rs 66 - Closing 23rd Jan 2009)
HY EPS : ~ Rs 25
CMP (31st Dec 2009) : Rs 213.80

The stock has done well in 2009, and the company has done well on the performance front too, but having risen from 60-levels to 200-levels in a year, some profit booking would not be out of place.

The author does not hold the stock currently.


Zen Technologies :

Covered On : 22nd Jan 2008 (Price : Rs 135)
HY EPS : ~ Rs 16.5
CMP (31st Dec 2009) : Rs 278.60

Though this stock was not profiled in 2009, the author would comment on it as it is the single stock he holds from those profiled in 2008.

The company caters primarily to the defence sector, catering to it's requirement for various types of weapons training simulators. It also makes driving simulators for training of drivers of vehicles.

Defence orders have a long gestation cycle between tendering & receipt of the order, but historically the company has received majority of defence orders in the last quarter of the year, with last year being an exception .

The company is believed to have bid for large defence orders but as always , it is difficult to predict when the same will fructify. In light of previous experience, it is quite possible that the same may be announced in the Jan-March quarter, though it is also possible that the same may spill over to FY2011.

For the half year the company has done very well, but currently no fresh orders have been announced, so there is no earnings visibility at present.

In order to leverage it's strengths in the simulation sphere, the company has decided to enter the gaming industry. If it succeeds in this, it will be able to overcome the problem it currently faces of lumpy orders from defence sector, as well as open up a huge new revenue stream. The company has tied up with Sony to develop a car-action game for PS3.

The company has also made an entry into the European market for Driving Simulator Training. In many European countries it is compulsory for drivers to undertake such a course for obtaining & renewing their driving licences.

It is hoped that these initiatives will bear fruit & complement it's main revenue stream from Defence industry.

The author has booked some partial profits as a matter of prudence, but continues to hold and like the stock .


Closing Comments : State Of The Market

After the collapse of 2008, somewhere in early 2009 this author felt that this was shaping up to be a buy on dips market. However with Indian Lok Sabha (central government) elections on the horison, the author did not act aggresively on this premonition.

Months passed, green shoots sprouted, then withered and turned brown, then sprouted again. The opinion makers fought each other to convince their audience regarding their bullish & bearish prophecy's with formidable facts and figures to support their views, leaving most investors confused all through 2009. And entering into 2010, the opinion makers are still divided on where the world is heading, and many investors are still in two minds.

Meanwhile in India, the UPA retained power with more stable numbers, and minus it's Left Front allies, which turned out to be a game changer for the Indian stock markets. Coupled with cheap foreign money pouring in to emerging markets, the Indian stock markets doubled by the end of the year. Well before that, stock market bears had thrown in the towel .

Entering into Jan 2010 the author feels that he can indeed spot some of the symtoms seen towards the final stages of the historic bull run that terminated in Jan 2008, such as the increased risk appetite & confidence among retail investors, the huge daily lists of unknown and dubious companies making new highs, the proliferation of tips and buy recommendations from everyone & his dog, etc .

And yet, it is also a fact that a large number of retail investors & HNI's are sitting on comfortable cash positions which can come in & support the markets on corrections, provided there is no sentiment changer. So we have an unlikely situation of caution & exuberance cohabiting at the same time !

So what can be a sentiment changer ? One thing that comes to mind is a reversal of the net inflows into our markets. 80000+ Cr came in to the markets in 2009, if even a quarter of that were to exit in a compressed period of a couple of months, it could trigger a sentiment change that could ensure that the money on the sidelines stays on the sidelines, and removes the support underpinning this market.

So will there indeed be a sentiment changer ? And will it be in 2010 itself ? What could trigger this & when ?

Could it be an increase in US Fed rates as expected in the 2nd half of 2010, or could it be a few odd countries (or their proxies like Dubai World) defaulting on, or rescheduling their debt ? An Isreali attack on Iran's nuclear facilities leading to an oil spike, maybe ? A few more big banks going under ? The much touted "double-dip" recession , perhaps ? One or more terrorist outrage, even ?

Or maybe a local factor ? The fall of the UPA Govt in India for some reason ? Tension on the borders with China or Pakistan, maybe ?

The author cannot provide these answers.

But he can & will urge investors that at current market levels & beyond, "Capital Preservation" needs to be a key consideration.