[T.S.R:10924] STOCK IDEAS

 

ARTON ENGG- A TATA GROUP MIDCAP GEM

 

Story:In the EPC Division, the company provides end-to-end solutions, right from design and engineering, project management and construction, to providing quality assurance and guarantees. The company undertakes projects relating to tank farms, petroleum depots and terminals (Oil and Gas), DG set based power plants, fuel handling systems (Power), and residual design and engineering for food processing industry. In the Construction Division, AEL is into construction of tanks, silos, pipelines and equipment erection (Mechanical), industrial civil works and structural works for plants (Civil) and Composite Contracts like refinery turnaround-shut down jobs. The company specializes in turnkey project execution for the oil and gas industry. The Reliance Group, the Essar Group are among its repetitiveclients.Artson Engineering Ltd became a TATA group company after Tata Projects took majority stake and management control of AEL. This has led to a significant PE re-rating for the company. Also, due to infusion of fresh funds as well as settlement of debt, the book value per share would also go up.Reverse merger with tata project is a probable scenario.Strategically, it makes sense for the Tata Group to have a single company, instead of two companies in the same business.Therefore, after taking majority stake in AEL, a reverse merger of Tata Projects and AEL would be very logical. In such a case, the upside potential of AEL would be tremendous due to the PE re-rating as well as a total change in the scale of business.At CMP of Rs.65, the stock looks definetly expensive.It would a better buy on declines say at 48-50 levels.But, Given the company proven expertise and experience in its area of operations,improving financial performance, and the involvement of Tata Projects Ltd.,I believe that AEL presents a good investment opportunity at dips for long term investors.Investment in this company should be made only by investors with high-risk appetite.

 

FUTURE GROWTH PROSPECTS & OUTLOOK OF RUCHI SOYA , JVL AGRO,KS OIL,SANWARIA AGRO & GUJ AMJ EXPORTS

 

After a subdued fiscal''09, the vegetable oil industry is likely to see a recovery on account of consumer demand.It was a healthy 2007-08 for the vegetable oil industry, but the downturn in the following year caused due to a fall in consumer demand and high input prices, hurt financials. However, today, the industry can already smell the aroma of recovery this year with rising consumer demand and its increased thrust on branded and value-added space yielding positive results.The big five players in the sector - Ruchi Soya, JVL Agro, KS Oils, Sanwaria Agro and Gujarat Ambuja Exports - saw their aggregate net profit fall by 14% in 2008-09 on 15% higher aggregate sales due to rising prices.The high volume-low margin nature of the business took its toll on the companies during the December 2008 quarter when their operating margins were hit the most due to a drop in consumer demand for vegetable oil and poultry demand for the largely-exported oilmeal.High prices of oilseeds also increased their procurement costs. Oilmeal exports were down 49% to 15.8 lakh tonnes during January-April 2009 compared to the corresponding period in the previous year on declining production of meat and lower demand for compound feeds and, thus for oilmeals, according to the Solvent Extractors'' Association of India.While the operating margins collapsed for all the five large companies during the December quarter, only a handful, such as KS Oils and Sanwaria Agro, could salvage their profit margins in the March quarter. KS Oils recovered fast because the company commands a dominant share of the less-cluttered mustard oil market and has a prominent presence in the branded market, securing 40-50% of its edible oil revenues from the branded business.

Last year''s downturn has changed the way vegetable oil companies run their business: not only have the large players started building brands and manufacturing value-added derivative products such as soya granules and soya nuggets, they are now also selling their branded products to the new retail chains and contract-manufacturing for their private labels.Lower duties too have played a role in changing the fortunes of the industry. The zero customs duty on crude palm oil and the recent scrapping of 20% import duty on crude soybean oil have made it cheaper for the companies to import and refine oil than buy oilseeds locally for crushing and then refine the oil. Also, this being an off-season for kharif oilseeds, profit margins in the import business are better as compared to the domestic business of procuring oilseed and processing it into oil.Another positive sign for the investor is that large players such as KS Oils, Ruchi Soya and Sanwariya Agro are planning capital expenditure to fund capacity expansion. KS Oils is going ahead with its backward integration project to develop palm plantations in Indonesia and Malaysia. For this, the company recently announced its plan to raise Rs 450 crore, and has received a term-sheet commitment of Rs 390 crore from its promoters and the three private equity investors. Similarly, Ruchi Soya has raised Rs 350 crore, by issuing Rs 245-crore preferential warrants to promoters and Rs 105-crore preferential equity shares to foreign institutional investors. Sanwariya Agro is planning to raise Rs 100 crore for manufacturing value-added soy derivatives.The next quarter is likely to be better for the sector with a possible recovery in operating margins. Companies establishing presence in branded space in oil and oilseed derivatives stand a better chance of growth rather than ones that operate in the unbranded space or are only into pure-play trading.

 

APAR IND- LONG TERM GOOD BET

Story: Apar is the market leader in transformer oils with over 55% market share in India under the brand POWEROIL. The company focus is more on the power transformer side (132 Kv 800 Kv), where it has more than 60% market share. Apar domestic customers include BHEL, Emco, Crompton Greaves, Bharat Bijlee and Alstom among others.One of the largest player of conductors in domestic market with around 25% market share.Apar has a strong presence in conductors and is the second largest manufacturer in India with around 25% market share after Sterlite Technologies. Apar is the largest exporter of conductors from India. The export markets span Middle East, Japan, Europe, USA, South America and Africa. Apar has manufacturing facilities at Silvassa and Nalagarh (Himachal Pradesh) with a total capacity of 97,097MT.Huge capex expected in power transmission sector, which will boost ancillary industries.For the 11th Plan Rs1,400 billion is planned to be spent on transmission schemes, against Rs744 billion in the 10th plan. Power transformers account for around 70% of the transformers market where as the distribution transformers constitute around 30%. With increased focus on power related infrastructure, the transformers industry has seen high growth rate in volume as well as value terms.Export market: A lucrative advantage-Apar is the largest conductors exporting company in India. Its product goes in more than 43 countries with significant presence in Africa. It is expected that demand for transmission conductors is expected to grow by a CAGR of 8-9% till CY 2011.At CMP of Rs146, the stock is trading at 6.7x its FY2010 estimates and 5.5x its FY2011 estimates and an EV/EBITDA of 0.91x and 0.88x its FY2010 and FY2011 estimates respectively. We INITIATE coverage on the company with a BUY rating with 12 month price objective of Rs 201, implying a P/E multiple of 9.00x FY 2011 earnings, which is an upside of 34% from CMP. We value the company at EV/EBITDA of 1.89x on FY2011(E).

 

 

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