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 :

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) :

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 .

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 .