Investment Ideas: Bharat Forge,Global Telesytems,Chicago Pneumatics.
Investment Ideas September 28, 1999
Bharat Forge Ltd (BFL)
Forging Strengths (Buy Rs174)
Investment Rationale
BFL is a market leader in forgings. The company is the largest forgings manufacturer in Asia. The company's steel forgings capacity will be expanded to 1,20,000 tpa in the current year. The company ranks fourth in the world and in the short span of time will be promoted to number three.
The automotive sector has recorded excellent growth in the first five months of FY2000. More than 51% of the BFL's income is contributed by the automotive sector. In the first five months of the current year, production of cars and commercial vehicles has increased by 21.5% yoy and 46.2% yoy respectively. The trend of H1, is expected to continue in the second half of the year.
The exports are set to record a significant growth. Exports contribute 17% of the total turnover. In FY99, exports recorded a decline of 17% due to global recessionary trends. In the current year, the company has taken significant steps to boost up the exports. The company already has world class manufacturing facilities. The company is expected to be the supplier to world class companies like Volvo, Meritor, Mercedez Benz and others in USA. The company has recently received an export order worth $40mn from Meritor. The total exports in FY2000 are expected to touch Rs1000mn.
BFL's restructuring process will start reaping benefits in the second half of FY2000. The company has done a lot of restructuring exercise, which includes sale of investments, reduction of debt from the cash in-flows and better working capital management (early recovery of debts). The company is expected reduce further debt. The benefits of these exercises are expected to flow in from the second half of the year.
In Q1 FY2000, sales have risen by 26.2% yoy and net profit by 122.9% yoy. The company has maintained the operating margin. Reduction in interest burden, has boosted the net profit.
Valuation
BFL trading at 9.8x FY2000(P) earnings hold good potential to rise further. Being the market leader, revival in the economy and particularly in the main users sector and thrust for exports makes BFL an under valued stock at the current price.
Background
BFL, flagship of the Kalyani group, was established in 1961 in collaboration with Steel Improvement and Forge Co, USA. Commercial production of forgings began in 1966 with setting up of a plant at Mundhwa near Pune. Over the years BFL has put up large capacities, making it Asia?s largest forge shop. In FY95, it diversified into the manufacture of wheel rims. The present installed capacity for steel forgings is 70,900 tpa. It has various subsidiaries such as Bhalchandra Investments, Forge Investments, Mundhwa Investments, which have been the promoters investment vehicles in the past.
-Sachin Shah
======================
Investment Ideas September 30, 1999
Global Tele-Systems Ltd (GTSL)
Going Global (Buy Rs 572)
Divestment of consumer telecom business. The company is planning to move out of the consumer telecom business and plans to increase focus on telecom and software business. The consumer telecom business is characterised as high volume low margins business and selling off of the division will unlock funds from debtors and inventory. The division contributes around 18% to the total income. However the margins from the division is minimal at around 14% compared to the overall margins of 24% during FY99. The company has already appointed KPMG to assist the company in hiving off the business and is in talks with a couple of prospective buyers.
Shift towards exports. During FY99 the company?s exports revenue stood at Rs226.7mn ie a growth of 155% compared to the previous year. Contribution of exports to the total income has also jumped to 4.2% compared to 1.8% during FY98. Also the shift towards software services will lead to consistent export growth averaging around 100% in the next 2-3 years.
Well placed in the sector to capitalize on the boom in the telecom industry. The GOI?s new Telecom policy has plans to achieve a tele-density (number of people per 100 people) of 7 by FY2005 and 15 by FY2005. This will effectively translate into around 130mn lines by the year 2010 and a business opportunity of which is estimated at around Rs600bn. The company has developed significant skill and knowledge base in the segment, which will help in garnering a sizeable share of the chunk.
Software division to drive future growth. The company?s software and internet services will be the major growth driver in the next 2-3 years. The division?s growth will be driven by the rising appetite in the international and domestic markets for software services especially in the internet, e-commerce and extended ERP areas. The company has the right skill base and alliances which will help the company in capitalizing on the sector?s growth. Exports (Rs188mn) from this division grew by 125%yoy during FY99. The company set up new offices in the Middle East and New Zealand during FY99 and plans to expand its presence in the USA and Europe.
-R S Chari
====================
Investment Ideas September 29, 1999
Chicago Pneumatic India Ltd (CPIL)
Get Set ChicaGo (Buy Rs142)
Investment rationale
CPIL, a 51% subsidiary of Atlas Copco AB, Sweden is a leading player in compressors and pneumatic tools. The company has strong presence in reciprocating compressors and is gradually increasing its market share in screw compressors. The company commands 75% market share in the automotive air tools, which is growing at more than 30% yoy.
Compressor industry is now on upswing after registering decline for the two consecutive years since FY97. It is expected to register growth of 15-20% in the next two. Compressors are used in a diverse range of industries. Domestic demand has risen due to upswing in petrochemicals, chemicals, and textiles. Similarly, demand growth for pneumatic tools has pent up with uptrend in automobile and investment in construction, mining and infrastructure sectors.
CPIL has continuously enhanced the product value through innovative packaging. Its reciprocating compressor packages, self-contained dry air packages and high pressure compressor for PET blowing are best in the industry. For PET blowing compressors company has bagged orders from Pepsi and Parle and is expecting more orders from other reputed companies. The company has embarked upon cost restructuring exercise and has also reduced its inventory level significantly.
Exports of pneumatic tools to US market have started picking up in the last couple of months. The parent company has reorganized the marketing setup and distribution channels are streamlined both for the existing markets and to enter in new markets. The parent company has recently acquired RCA, second largest rental company in USA. RCA?s present inventory of construction tools is expected to exhaust in the next couple of years. Fresh replacement demand for pneumatic tools from RCA is expected to spurt export sales in the next two years.
Restructuring on cards CPIL intends to right size the manufacturing facility at Mulund. At present the plant contributes 20% of the turnover while accounts for 50% of the cost. The company might shift its manufacturing facility to Nashik and dispose of the land in the larger interest of the company.
Hidden treasure of worth Rs300mn in terms of 10% stake of Revathi CP and real estate property in case the CPIL closes down the Mulund facility. The parent company has already decided to increase its stake from 40% to 51% in Revathi CP. As per the SEBI guidelines the Parent Company will first buyout the shares from CPIL. Both these events are inevitable and its only matter of time.
Valuation
At Rs142, CPIL trades at 14.2x on FY2000 earnings. The uptrend in the user sectors namely automotive, FMCG (PET packaging of mineral water, beverages, food, edible oil), textiles and increasing exports to US markets argues well for CPIL. At price to book value of 1.9x at FY99 earnings CPIL looks extremely attractive. We rate stock as BUY.
Background
The company is a 51% subsidiary of the Atlas Copco AB, Sweden. It commenced its business in India in 1915 as a branch office of Chicago Pneumatic USA. In 1961 it became deemed public limited company. In 1976, the company diluted its stake to 64% by offering share to Indian public. Again in 1984 the company further diluted the stake to 40% under FERA Act. In 1993, the parent company increased its shareholding to 51% through preferential issue. The company is engaged in the business of manufacturing and selling of compressors and variety of pneumatic portable tools. The pneumatic tools division offers a wide range of tools such as grinders, drills, impact wrenches, aero riveters, chippers, hammers, pumps etc.
-Mukesh Singh (Probity) |
