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).

BSE Code : 532398
Website :
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 :
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 :
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
Website :
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 :
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 ( & 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 :
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 .