ZeeNut's Blog

Tuesday, January 31, 2012

Avanti Feeds Ltd - In Shrimp We Trust

Avanti Feeds Ltd (AFL) is a leading manufacturer of Shrimp & Fish Feeds in India. It is also a Shrimp Processor and Exporter.

AFL started its commercial operations in 1993 in technical collaboration with Pingtai Enterprise, Taiwan. Later the company expanded the capacity and enhanced technical and marketing capabilities by bringing on board Thai Union Frozen Products PCL (TUF) of the Thai Union Group , Thailand, one of the world's largest seafood manufacturers. Today TUF is closely associated with AFL with equity participation, technical collaboration and a marketing tie-up in India.

Avanti Feeds Units

AFL has two Shrimp Feed manufacturing units and one Fish Feed manufacturing unit, certified ISO 9001:2008, in Kovvur and Vemuluru, West Godavari District, Andhra Pradesh, India with a capacity of 70,000 MT per annum. AFL produces nutritionally well balanced and high quality feed, consistently, catering to the Indian prawn and fish farmers, at their door step.

AFL also has a Shrimp Processing and Exports Unit, certified ISO 22000: 2005 located in Gopalapuram, East Godavari District, Andhra Pradesh, India . This unit confirms to HACCP, USFDA, EU & BRC Global standards. It is also Aquaculture Certification Council (ACC) Certified for best aquaculture practices.

Avanti Thai Aqua Feeds Pvt Ltd (ATAFPL)

AFL & TUF entered into a JV to set up a shrimp feed manufacturing facility Avanti Thai Aqua Feeds Private Ltd, in Gujarat, India to cater to the demand for shrimp feed in the west of India. This company is now being merged with the parent. This merger is beneficial to AFL shareholders as it achieves a good increase in capacity for the merged entity, without a significant increase in equity, due to cancellation of cross-holdings.

Ready To Eat / Ready To Cook foray

AFL has ventured into domestic RTE/RTC market with an object of providing export quality shrimp ready to eat and ready to cook , by launching "PRAWN KING" brand products.

AFL envisages to cater to the prawn consumption of Hotels, Restaurants and households with these products.

It also aims to establish eateries-cum-shops to popularise shrimp products, and with this in mind, AFL has started an eatery in "Eat Street", Necklace Road, Hyderabad. AFL plans to open similar outlets in Hyderabad, and thereafter expand to other cities in phased manner

WindMills

AFL has also put up 4 windmills in Karnataka state. The electricity from these mills is being sold to the Karnataka Power Transmission Corporation under PPA.

White Shrimp (P. Vannamei) introduction in India - The Game Changer

In late 2009, the Indian government announced that it would allow the cultivation of the pacific white shrimp Penaeus Vannamei from the following stocking season, starting Feb 2010. This followed pilot projects undertaken by the Central Aquaculture Authority. Till then, Indian shrimp farms had been allowed to cultivate only the Indian Tiger Prawn (P. Monodon).

The reason for this decision lies in the Advantages the P. Vannamei species has over the P. Monodon, namely

More Disease Resistant : SPF (specific pathogen free) / SPR (specific pathogen resistant) white shrimp , though not totally disease-free, are more disease resistant than tiger prawn . Tiger prawn is prone to white spot disease.
Lower Cost : P. Vannamei requires a lower protein (20-35 percent) - and hence cheaper - diet during culture than P. Monodon (36-42 percent), and are more able to utilize the natural productivity of shrimp ponds, even under intensive culture conditions.
Higher Stocking Density : P. Vannamei can be cultivated at higher stocking density. P. Vannamei are amenable to culture at very high stocking densities of up to 150/m² in pond culture, and even as high as 400/m² in controlled re-circulated tank culture. Although such intensive culture systems require a much higher degree of control over environmental parameters, it enables the production of high numbers of shrimp in limited areas, resulting in better productivity per unit area than that currently achievable with P. Monodon in Asia.
Better Growth Rates : Under commercial conditions in Asian earthen ponds, P. Vannamei has displayed good growth & survival rates. In contrast, the growth (and survival) rate of P. Monodon has been declining in recent years.
Salinity Tolerance : P. Vannamei are tolerant of a wide range of salinities (0.5-45 ppt) and more amenable to inland culture sites than P. Monodon
Temperature Tolerance : P. Vannamei are more tolerant of low temperatures (down to 15°C) than Tiger prawn, enabling them to be cultured in the cold season. Thus increased yearly harvests are possible. Nevertheless, they grow better in warmer temperatures, (best between 23-30ºC comprising the majority of the tropical and subtropical world), hence in India, the typical season may be considered Feb-March to Oct-Nov.
Ease Of Breeding : P. Vannamei is an open thelycum species, meaning that they can be induced to mate and spawn easily in captivity (unlike the closed thelycum P. Monodon) which enables the culturist to close the life cycle of the shrimp, facilitating genetic selection (i.e. for improved growth rate and disease resistance) and domestication programmes. This feature permits much more control and enhancement of the cultured stock and allows the development of SPF and SPR stocks, which are already commercially available. This in turn relieves the expense, disease implications, environmental concerns, unpredictability and waste of relying on wild broodstock.
Larval Rearing : Higher survival rates in hatchery of 50-60% for P. Vannamei compared to P. Monodon (20-30%).
Marketing : White shrimp generally preferred over tiger shrimp in the US market due to taste. Strong local demand for white shrimp in Asia. Meat yield is higher for P. Vannamei (66-68%) than for P. Monodon (62%) .

Disadvantages include :

Growth rate of P. Vannamei slows after reaching 20 g, making production of large-sized shrimp slower. P. Monodon can grow to larger size, commanding higher price than P. Vannamei.

High competition on international markets for P. Vannamei as production is world-wide.

Handling, transportation and processing of P. Monodon is easier.

Shrimp culture in general is subject to the un-certainties of climatic conditions, diseases (even post SPF/SPR seed), international price fluctuations, foreign exchange fluctuations & anti-dumping duties.

Fallout Of The Momentous Government Decision

Prior to the introduction of P. Vannamei shrimp, the Indian shrimp production had been steadily declining, because of frequent virus attacks hitting the wild tiger prawn species.

But with the new change, the 2010 season saw a turnaround in the fortunes of the Indian shrimp farming industry (and consequently the shrimp feed industry). Taking cognizance of the opportunity, AFL entered in to a tie-up with TUF for technical knowhow & cost effective formulations, to make the most of the trend of switchover from Tiger Prawn to P. Vannamei.

If 2010 saw a revival of the Indian Shrimp industry, the next year 2011, saw the industry bloom, bolstered further by some special factors - disease hitting the Vietnamese shrimp, floods in Thailand leading to lower output - which led to Indian exporters capturing a greater share of the shrimp market. AFL made the most of this, reporting brilliant numbers for the financial year 2011-12 (9 month period).

While these special factors are unlikely to repeat in 2012, Indian shrimp manufacturers are expected to consolidate their position in the world markets.

Importantly, P. Vannamei having a lower unit-cost compared to tiger prawn, it has also opened up the possibility for greater domestic consumption in the country. With prices now comparable to other meats, domestic consumption of shrimp, especially in the RTC/RTE category, could throw up a big opportunity over the next decade.

The overall advantages of P. Vannamei shrimp over Tiger Prawn makes P. Vannamei farming 2-3 times more profitable than Tiger Prawn farming . With more & more farmers continuing to switch-over to P. Vannamei cultivation, and many new players entering the shrimp farming industry, looking to the excellent performance/profits of incumbents, there is now a scarcity of shrimp feed to meet the demand, which can only benefit shrimp feed players like AFL, which looks set to continue to do well.

Obviously, new entrants are announcing their entry into the shrimp feed industry also. But by tying up with TUF , whose pedigree the author feels is unimpeacheable, AFL should be able to maintain it's standing as one of the market leaders, for at least a few years to come. Besides having vast experience and expertise in P. Vannamei Hatchery, Feed and Culture, TUF also has a large wholesale and retail net work in USA, and will also support AFL in expanding it's processing and export market .

In fact, in it's last Annual report, the company has said it expects shrimp feed sales to increase yearly by 25% , and export of shrimp to grow at 10% per annum, till 2014-15.

Thai Union Frozen Products (Thai Union Group), Thailand - Brief Facts

AFL's collaborator TUF will hold 25.12 % of AFL's post-merger equity of Rs 9.08 Cr (post the merger of ATAFPL with AFL).

TUF Website : http://www.thaiuniongroup.com

Global Seafood Player, Global Workforce : 32000
The largest Asian (ex-Japan) seafood processor in sales value.
The world’s largest and most integrated canned tuna manufacturer
Brands - Chicken Of The Sea, Mareblu, Petit Navire, John West, Sealect, Century Tuna, Belotta, H. Parmentier, Fisho etc
Strategic Shareholders - Mitsubishi Corporation (Japan), Hagoromo Foods (Japan)
9 month sales (2011) - USD 2.4 Billion

TUF's Recent Awards & Recognition From Financial Community :

Award	By	Year
BCG 100 Global Challengers List	Boston Consulting Group	2011
Best-Managed Thai MidCap	AsiaMoney Magazine's Best Managed Companies Poll	2011
Acquisition of MW Brands – Best Thailand Deal	AsiaMoney Magazine's Best Managed Companies Poll	2010
One of the top 3 Best Asian Companies in the Food, Drink and Tobacco category	Euromoney Magazine’s Annual Best Asian Companies Poll	2010
Best CEO & Best CFO in Food & Agro Sector	Securities Analysts Association Of Thailand	2010

Avanti Feeds Ltd - In Brief

Company Website : http://www.avantifeeds.com/

BSE Scrip Id : AVANTIFE

BSE Scrip Code : 512573

CMP : Rs 97.45 (closing price, BSE 31st Jan, 2012)

FY11 EPS : Rs 4.24

FY11 Dividend : 10% (Rs 1/- )

FY12 (9 Months EPS) : Rs 30.37

Recommendation :

Avanti Feeds Ltd has put in a brilliant performance for the current year, even discounting the special factors (Thailand floods, Vietnam disease problems) that bolstered the Indian shrimp industry this year. Though Q4 is generally a slack quarter, AFL should end the year with an EPS in the Rs 30-Rs 35 range.

With the merger of it's JV with itself, AFL adds new capacity without much equity dilution. So even without the special factors listed above, this author feels that AFL should report similar or near similar numbers next year too. At it's current price, it discounts current year's (FY11-12) earnings just 3 times.

Seafood (including shrimp) consumption the world over is rising yearly, due to increasing world population & also because seafood is considered a healthier alternative to meats, and so the shrimp & shrimp feed industry should do well in the future too. By tying up with TUF, which is one of the largest producers of canned & frozen seafood in the world, AFL is assured of the best industry knowhow & practices.

This author feels that management integrity & capability of both AFL & TUF appears to be above board, and shareholders can expect both to be treated fairly & be part of a robust future.

Post Q3 results, AFL share price has fallen, probably because retail investors expected a similar result to the bumper Q2 results, not factoring both the seasonal nature of the industry, where H1 is always better than H2, nor the special factors (mentioned above) that dictated Q2's splendid performance. There is a possibility that Q4 results may also bring a similar reaction from retail investors.

However if discerning investors are convinced of the merits of an investment in AFL post their own research, the author suggests that it might be prudent not to wait for the "best possible price", as one but rarely achieves the same. Rather, they can start accumulating in small quantities in a staggered manner.

Author : Bosco Menezes

Recommendation Date : 31.01.2012

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

Wednesday, October 5, 2011

Kilpest India Ltd - Personalized Medicine For Your Portfolio

Kilpest India Ltd (BSE Code : 532067) is an established 38-year old Agri-input company, manufacturing & selling a range of crop-protection products like pesticides (including bio-pesticides), micro-nutrients & bio-fertilizers.

The company has a product portfolio of about 50 different products which it sells through a nationwide distribution network of over 2000 dealers. The "Kilpest" brand is well established in the north, particularly Madhya Pradesh, and in some areas it is even used generically by farmers when they wish to ask for pesticides in general.

Medical Diagnostics Foray

In 2010, Kilpest identified molecular diagnostics as a future growth-driver, and tied up with a leading Spanish Biotechnology company M/S Biotools B&M Labs S.A - focussed on molecular biology & diagnostics - and it's spin-off company 2B Blackbio S.L - a biotech company focused on Personalized medicine, nutrigenomics , pharmacogenomics & companion diagnostics - to form a new joint venture company 3B Blackbio Biotech India Ltd.

3B Blackbio Biotech India Ltd intends to lead the research and development of new tools in the field of personalized medicine, medical diagnostics, pharmacogenomics, as well as provide diagnostic tests to predict drug treatment effectiveness (Companion Diagnostics) and enter the field of nutrigenomics.

It has already put up a state of art GMP compliant biotech facility in Industrial area, Govindpura, Bhopal, the first plant of its kind in central India. The plant was inaugurated in April 2011 by Dr Narottam Mishra, Minister of Health, Govt of Madhya Pradesh, along with Mr. Erik Rovina Mardones, Commercial Counsellor, Embassy of Spain & Mr. Adrian Gutierrez, Chief Representative, The Centre for the Development of Industrial Technology (CDTI, www.cdti.es) - a public enterprise under the Ministry Of Science & Innovation, Spain, which promotes innovation & technological development of Spanish companies.

As reported by Pharmaceutical-Technology.com :

" The facility will produce molecular biology products such as PCR enzymes, PCR reagents, real time kits, reverse transcriptase kits, cloning vectors, electrophoresis reagents, nucleic acid purification, accessories and plastic products, molecular diagnostics, AGFoods kits, BIOFood ID kit, BIOFood mixed kit, BIOGenics standard kit and 3B control DNAs.

It will also manufacture equipments such as end-point thermal cyclers, real-time thermal cyclers and gradient thermal cyclers. 3B Blackbio Biotech India has an international patent for the gelification technology owned by Biotools B&M Labs.

The R&D team will focus on proteomic and genomic biomarkers and technology development to global standards. Its focus areas also include oncology, microbiology, allergy, cardiovascular, metabolic disorders and pharmacogenomics.

The customer services will include DNA & RNA extraction, sample isolation, microbial identification, micro-sequencing and genotyping complying with the latest GMP practices. Other services include companion diagnostic tests, human genetic tests, prognostic tests, critical referral tests, nutrigenomics, bulk clinical samples processing and fungal identification services."

(Source : Pharmaceutical-Technology.com
More information - including details of laboratory equipment - are available in the referred article :

http://www.pharmaceutical-technology.com/projects/3b-blackbio-biotech-india-manufacturing-plant

Tuesday, April 19, 2011

Premier Ltd - Rise Of The Phoenix ?

BSE Code : 500540
NSE Code : PREMIER
Website : http://premier.co.in/
CMP : Rs 94 (closing price, BSE, 18^th April, 2011) ; Rs 93.30 (closing price, NSE, 18^th April, 2011)

Premier Ltd (formerly Premier Automobiles Ltd), once a blue chip company from the Walchand group and a pioneer in automobile manufacturing in India, suffered a setback in the early part of the last decade, as labour & finance problems caused it to shut down it's automotive plants .

However in the last few years it has clawed back on to the growth path largely on the basis of it's heavy engineering capabilities , and it is now aspiring to regain it's lost glory in the automotive space.

The company currently has 3 divisions , as follows (source : company website) :

Engineering

Premier’s engineering division has focussed on alternative energy sources – specifically, the wind energy sector. It has developed and manufactured cutting-edge wind turbine components for companies such as Enercon.

In fact, Premier’s engineering division provides end-to-end solutions for wind turbine component manufacturing. This includes fabrication, machining, blasting and painting of wind turbine steel parts like disc rotors, stator rings, stator carriers, rotor housings and supporting structures.

Machine Tools

Premier’s CNC Machine Division has consistently distinguished itself by setting new benchmarks for industry excellence. Today, the company’s focus on high-end technology has resulted in a sophisticated line of CNC Machine Division.

Today, CNC Gear Cutting machines, Machining Centers, CNC Vertical Turning & Turn mill Centers and custom-built Special Purpose Machines bearing the trusted Premier label are regularly used by leading industries.

Automotive

Premier gave India the ubiquitous Premier Padmini. Today, Premier’s automotive division has reentered the passenger vehicle segment with the launch of India's first compact diesel SUV – the RiO.

Other products in the newly launched range of commercial vehicles designed specifically for Indian roads are : Sigma - a compact, multi-utility diesel van, and Roadstar - a highly versatile pickup truck.

So what's interesting ?

The company has recently indicated that it plans to achieve revenues of Rs 700 Cr in 3-years time & Rs 1000 Cr within the next 5 years (source : Corporate India magazine, pgs 52-54 in issue for the fortnight ending 31.3.2011). Now that's 3 & 4 times the current turnover.

It plans to do so on the basis of organic & inorganic growth. To fund acquisitions & further expansions, as well as retire debt, the company plans to monetize it's surplus land out of it's holding of about 216 acres at Dombivli near Mumbai.

Recommendation

If the company walks it's talk and is able to deliver on it's promises, there is a clear chance of re-rating in the coming 3-5 years.

Unlocking the value of it's land holdings will be critical to this, as currently interest burden takes away a large chunk of the profits, besides forcing the promoters to pledge a large part of their holdings as collateral for the increasing borrowings required to sustain the company's expansions.

Over the last couple of years, the promoters have steadily shored up their shareholding in the company, indicating their faith in the company's prospects.

To conclude, the author recommends investors to track this company closely & once convinced that the company is delivering on it's plans, investors can take an appropriate call.

Author : Bosco Menezes

Recommendation Date : 19.04.2011

Disclaimer/Disclosure :

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 & Sullivan “Movers & 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.