Hidden Gem : Ennore Coke Limited

Ennore Coke Limited
BSE:512369
CMP : Rs. 20.40 as on 5th Oct. 2007
TARGET: Rs. 80 in 18 months
Website: www.ennorecoke.com

ABOUT THE COMPANY

This company was incorporated as a public limited company on February 25, 1985 to carry out business of yarn, cloth, fibre and the business of leasing of moveable and immoveable properties. These activities were carried out till September 30, 2005.

Effective December 5, 2005 the controlling interest of the company was taken over by Shriram EPC Ltd., and Mrs. Vatsala Ranganathan. The new management has discontinued the above businesses of the company and has now entered the business of manufacturing met coke by purchasing the Coke Project from EPCPL situated at Haldia, West Bengal.

Ennore Coke Limited also plans to set up a power plant at the same location for generating 6 MW of power by utilizing the waste heat generated from the process of manufacturing met coke.

The company has also proposed to expand the manufacturing capacity of the Proposed Coke Project from 100,000 TPA to 300,000 TPA and increasing the capacity of generation of power from 6 MW to 18 MW at Haldia, West Bengal.

Some Other Data

Sector Analysis
A. COKE INDUSTRY
Coke, a derivative of metallurgical coking coal, plays a very significant role in metallurgical processes. Coke is the main source of heat and is also the reducing agent required to facilitate the conversion of metallurgical ores into metal in the smelting process. Major Coke production has traditionally been captive, i.e. Coke is produced in the coke oven batteries of integrated steel plants. Hardly any surplus coke is available from these captive coke oven batteries for outside sale. During the last 10-12 years, numbers of pig iron plants and even integrated steel plants have been built in India without captive coke making facilities, which now rely on imported coke. As a result, India is now importing coke in sizeable quantity. Most Indian coke oven batteries are located in the eastern region of the country. As a result, the various coke consumers in the western region and southern region of the country essentially import coke.

Keeping in view the above scenario in mind, ECL is now to engaged in Manufacturing of Met Coke and for this purpose has entered into an agreement on May 15, 2006 for purchase of Nonrecovery Coke Oven Project of 1,00,000 TPA of met coke at Haldia, West Bengal which is at present under implementation and being set up by Ennore Power & Coke Pvt. Ltd. (EPCPL). The requirement of funds for purchase of aforesaid met coke project of EPCPL is met out of the proceeds of the rights issue.

Further ECL after purchasing the met coke project from EPCPL and after completing the said project, also proposes to expand such met coke manufacturing capacity by 2,00,000 TPA out of the proceeds of the warrants issue.

B. POWER INDUSTRY
Power is a critical infrastructure for economic development and for improving the quality of life. The achievement of increasing installed power capacity from 1362 MW to over 100,000 MW since independence and electrification of more than 500,000 villages and towns are impressive in absolute terms. On account of inadequate generation capacity, the country is plagued by power shortages. The total energy shortage, during 2004-2005, was 43,258 million units, amounting to 7.3 % and the peak shortage was 11.7% per cent of peak demand. With increasing urbanization, industrial growth and per capita consumption, the gap between the actual demand and supply is likely to increase. In this scenario, the GOI expects that alternative/renewable sources of energy, such as wind energy, biomass energy and energy generated through waste heat recovery process are likely to play an increasingly important role in bridging the demand supply gap and conservation of fossil fuels.

In the manufacturing process of coke, volatile matter gets released from the raw coal in the form of gas and is burnt in the oven to produce heat for carbonization and after completing the process of carbonization the waste heat at very high temperature is released in the atmosphere. Such waste heat if utilized for generation of steam, same can be used in the steam turbine for generation of power at a very low cost and in an eco-friendly manner, as no raw material or any other fossil fuel is used in this process of generation of power.

With this view in mind, ECL proposes to set up a power plant of 6 MW capacity by using waste heat generated in the process of manufacturing of met coke in the premises of Met Coke project. The power project is financed out of the proceeds of the rights issue. Further, ECL has also purchased from EPCPL the Met coke project that is under implementation and at the time of expanding its capacity by 2,00,000 TPA, it would also expand the power plant capacity by 12 MW which will be financed out of the proceeds of the warrants issue.

Multibagger: Kirloskar Electric Company

India Infoline Picks,
Kirloskar Electric Company : Reco Price Rs. 270.70

Improving realizations leading to margin expansion should help bottom line witness 53.3% CAGR over FY07-09E. At the current price the stock trades at around 15x and 11x FY08E and FY09E EPS of Rs 18 and Rs 24.1 respectively. We recommend BUY with a one-year price target of Rs 361.

-Sharper focus on core operations to lead to revenue CAGR of 37.5% over FY07-09E
-Government and private sector capex to provide huge growth opportunities
-Improved realizations and tighter control on costs to expand OPM by 60bps by FY09E
-We recommend BUY with a one-year price target of Rs361, an upside of 38%

Sharper focus should result in revenues growing at 37.5% CAGR over FY07-09E: Restructuring, through transfer of certain assets and liabilities to a subsidiary and relocation of manufacturing facility, helped Kirloskar Electric Company (KECL) turnaround in FY06. The company’s new transformer unit in Mysore will help capitalize on robust demand expected over the next five years. We expect KECL to witness a strong CAGR of 37.5% between FY07-09E.

Government and private sector capex to provide huge growth opportunities: With the government announcing huge investments for the power sector, we believe there will be strong demand for power equipments, i.e. electric motors, transformers and switchgears. Coupled with this, huge capex plans have been announced by players from the metals, cement, oil and gas, and other sectors. KECL’s presence in most of these segments makes it one of the key beneficiaries of this oncoming demand.

Strong demand and improved realizations to expand operating margin to 13.4%: Strong demand arising out of government and private sector capex should improve KECL’s realizations. Average realizations for transformers and motors divisions, which contribute majority of the revenues, witnessed an improvement of 45.6% and 32% respectively in FY07. We believe robust demand will further improve average realizations for both these divisions.
Bottom line expected to witness 53.3% CAGR over FY07-09E, BUY: Demand arising out of investments planned by government and corporates over the next five years, should reap benefits for the company. Improving realizations leading to margin expansion should help bottom line witness 53.3% CAGR over FY07-09E. At the current price the stock trades at around 15x and 11x FY08E and FY09E EPS of Rs 18 and Rs 24.1 respectively. We recommend BUY with a one-year price target of Rs 361.

Investment rationale

Restructuring should enable revenues to witness 37.5% CAGR over FY07-09E: KECL has widened its product profile to meet varied and increasing demand. In the past, the company incurred losses during FY99-05 but restructured operations and turned around at both, operational and net levels in FY06. It transferred some of the assets and liabilities to its subsidiary and relocated its manufacturing facility. KECL also upgraded and integrated all its manufacturing facilities to enhance its operational efficiencies. Its new transformer unit in Mysore will help it capitalize on robust demand for transformers. The restructuring effort should enable it witness revenue CAGR of 37.5% over FY07-09E.

Electric motors and transformers division to be major drivers: KECL receives 96.2% of its revenues from electric motors (64.4%), transformers (19.8%), circuit breakers (7.2%), controls for generator sets (3%) and DG sets (1.8%). With an improved industrial scenario, we believe electric motor, transformers and switchgear division will be major drivers for the company. Motors and transformer divisions will together register 39.3% CAGR and switchgear division will witness 30% CAGR over FY07-09E.

Electric motors division: Electric motors find application in the power, cement, sugar, steel, telecom, paper industries. Capex announced by various players in these industries provides the division an opportunity to experience strong growth going forward. Initially it was in collaboration with Brush Electric UK for technical support and other technical collaborations with NEI Peebles Electrical Machines, Scotland and AEG, Germany. These tie ups enabled it to develop high capacity motors. KECL’s industrial motors gamut range from 0.12kW to 20,000kW in 63 – 1,250 frames.

Transformers division: We expect 41,320MW to be added over the XIth Five Year Plan against the target of
78,869MW, triggering a strong demand of 110,000MVA over the same period. The timely expansion at its Mysore unit, which manufactures a wide range of power and distribution transformers, is expected to augur well for the company. These transformers are supplemented by other variants i.e. flame proof, dry type, furnace and earthing transformers. In the past it had technical tie-ups with Brush Electric, UK; MWB, Germany; Rolls Royce, UK; and May & Christe, Germany.

Electronics and switchgears division: This division offers process industries customized packages in motors and drives. This helps the user industries to improve productivity, save energy and reduce lead time. Major consultants such as Engineers India Ltd., M. N. Dastur & Co., Avant Garde and Entech Consultancy have approved the company’s products. The product range includes DC drives in collaboration with Thorn EMI, UK, in a range
from 2.7kW to 2.5MW. The 2.2kW–160kW AC drives are consumed by plastic and textiles industries. Both these products are exported to Vietnam, Nepal, Bangladesh, Pakistan, Thailand, Lebanon, Indonesia, Malaysia, Philippines, South Africa and other African countries.

The switchgears division manufactures high voltage switchgears in the range of 3.3kV – 36kV. It caters to the requirements of state electricity boards, utilities, power generation, mining, defense applications and industrial clients from cement, steel, paper, textiles, chemicals and other process utilities.

Government capex over the next five years will boost demand: The government targets to add 78,869MW over the XIth Five Year Plan. However, we believe it will be able to achieve 41,320MW over the plan period. Despite lower addition there will be strong demand for motors, transformers and switchgears. The government’s focus on accomplishing “Power for all by 2012” mission and rural electrification during the plan period will fuel growth for all divisions of the company. Under Rajiv Gandhi Grameen Vidyutikaran Yojana it intends to electrify
all households in the country. It will also focus on the creation of a national grid in a phased manner by adding a transmission network of over 60,000ckm by 2012.

These programs will fuel demand for transformers and switchgears going forward. Better realizations and control on costs to expand OPM to 13.4%. Strong demand for all products - motors, transformers and switchgears – will help improve these divisions’ realizations. With copper expected to hover around US$7,500 per ton, we believe margins for the motors division will improve going forward. The company is expected to witness an improvement in margins due to huge demand coming from state electricity boards and industrial capex announced
over the next three–five years.

KECL is one of India’s leading electrical and power equipment manufacturers. Established in 1946, it manufactures AC motors, AC generators, DC machines, traction equipment, electronics, switchgears and transformers. The company also undertakes turnkey electrical projects. KECL has five manufacturing facilities, one each in Bangalore, Hubli, Tumkur, Govenahalli and Mysore. It also has a well-spread marketing network with 25 offices across India.

Concerns
-Growth dependent on reforms in the sector: Order flows are dependent on the pace of reforms undertaken by the government. Since this is a politicallysensitive issue delays in implementation are likely resulting in subdued
performance.
-Rising raw material prices: Rising prices of key raw materials could lead to contracting margins if the company is unable to pass on rising costs to the consumers.
-Economic slowdown: A slowdown in the economy will postpone various industries capex plans, which in turn will lead to a deferment in demand for KECL’s products.
-Competition from imports: Huge capex lined up by the government and private sector players will result in high demand for the company’s products. With this scenario in place, threat of foreign players and new entrants entering the market is high, which will lead to higher competition and pressure on margins.

Disclaimer:

This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It is not intended as an offer or solicitation for the purchase and sale of any financial instrument. Any action taken by you on the basis of the information contained herein is your responsibility alone and India Infoline Ltd (hereinafter referred as IIL) and its subsidiaries or its employees or directors, associates will not be liable in any manner for the consequences of such action taken by you. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, but do not represent that it is accurate or complete. IIL or any of its subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this publication. The recipients of this report should rely on their own investigations. IIL and/or its subsidiaries and/or directors, employees or associates may have interests or positions, financial or otherwise in the securities mentioned in this report.

Idea Cellular

Deven Choksey, KR Choksey


Idea Cellular : Reco Price Rs. 125.35

On EV/EBIDTA basis, Idea is trading at 21.5x which is at a discount to
TTML and a premium to RCom and Bharti. We believe Idea looks attractive
considering its entry into new circles and improvement of margins in the
existing ones.

Idea Cellular is a part of the US $ 24 billion Aditya Birla Group and a
leading GSM mobile services operator with licenses to operate in 13 telecom
service areas in India. The company has operations in Delhi, Himachal Pradesh,
Rajasthan, Haryana, Uttar Pradesh (W) & Uttaranchal, Uttar Pradesh (E), Madhya
Pradesh & Chattisgarh, Gujarat, Maharashtra & Goa, Andhra Pradesh and Kerala.
With the planned expansion into Mumbai, Bihar & Jharkhand.

Idea's footprint will cover nearly 70% of India's telephony potential. Idea
Cellular had 16.13 Million subscribers as on June 30, 2007, and had a market
share of 15.4% as on June 30, 2007 in its 11 service areas of operation. We
think Idea looks impressive due to the following reasons:-

Higher subscriber addition

We expect that the company will see a robust growth in its subscriber base in
the coming months in both new as well as existing circles. Moreover it is
expected to be allotted spectrum in Mumbai in the coming months.

Improvement in EBITDA margins

The EBITDA margins are expected to improve both in the existing and the new
circles. As more and more subscribers will be added and company will enter into
new circles, revenue flow will also be higher.

Hiving off tower business

Following the footsteps of Bharti and RCom, Idea Cellular has also decided to
hive off its tower business into an independent subsidiary. The Board of
Directors (BoD) has approved the demerger plan. So value unlocking is on the
cards.

Key Developments

Hiving off tower business

The Board of Directors of the company has approved the demerger of its tower
business into an independent subsidiary for possible transfer of passive
infrastructure which would lead to substantial value unlocking going forward.

Financial Performance

In Q1 FY08, Idea Cellular’s net profit grew by 259% to Rs 308.5 crore and
revenues were at Rs 1477.2 crore showing an increase of 64% on year on year
basis. This growth was mainly on account of robust subscriber addition. EBITDA
margins stood at 34.7% which also improved on a year on year basis from 33.7%
which was largely on account of improvement in network and marketing expenses.

Industry Scenario

While India is now the world’s fastest growing telecom market, our tele-density
continues to be lowest at about 20%, taking into account both wireline and
wireless phones. It is clear that India has a long way to go before we catch up
with the rest of the world or even with other emerging markets. It is expected
that telephony will continue to grow at the present rate of 6 to 7 million
additions per month over the next several years to reach the 500-million
connections mark by the year 2010.

Further growth in the subscribers is likely to come from circle 'c'. Telecom
companies have geared up to achieve the target growth in the subscriber numbers
and are expected do a capex of Rs 60000 crore in the coming years. Few major
developments that are likely to happen in the sector are:-

• Consolidation and M&A in the sector

• Listing of tower subsidiaries

• Launch of 3G services,IPTV,DTH and WIMAX

• Mobile number portability

• "Do-Not-Call Registry"

• Entry of global players

Spectrum Crunch: - Besides, almost each telecom company is facing acute shortage
of spectrum which is the indispensable resource for this sector. This problem of
spectrum crunch might hinder the growth targets of the companies and also cause
deterioration in the quality of service (QoS). Spectrum is yet to be vacated by
the defence ministry.

Though the government is keen to carry out the bidding for the additional
spectrum, COAI (association of GSM operators) has strongly opposed it and taken
the stand that the current policy is based on subscriber base is very clear.
They have even hinted to file legal proceedings against the govt. However, AUSPI
(association of CDMA operators) have opposed the current policy and is of the
opinion that GSM players have already been allotted the extra spectrum.
Department of Telecom (DoT) has formed a committee to look at this issue and
come out with a report. Seeing the deficiency of spectrum a study regarding the
efficient utilization of this

scarce resource will also be conducted.

Tower business hive off

These days almost every telecom operator is hiving off its tower business into
an independent subsidiary. Seeing the growth in the subscriber base passive
sharing of the infrastructure is a viable option especially when the growth has
to come from circle “C” where ARPU is comparatively lower. Total tower
requirement is estimated to be at 330000 towers by FY10. Such a model has
enormous potential to succeed in India because there are 7-8 operators in India
as compared to Europe and China where there are only 2-3 operators. Moreover it
is better for an operator to start tower business because their payback period
is comparatively lower.

The company has planned to hive off its tower business for possible transfer
of passive infrastructure. It would result in significant value unlocking. The
company had 13,160 cell sites as of Q1FY08 compared to 10,114 cell sites at the
end of Q4FY07. Around 4500 towers are on sharing basis. Out of 8.662 towers
about 4,900 are roof top towers and 3,700 are ground based. They have a tenancy
ratio 0f 1.3x. Company is expected to increase its cell sites to 20000 by FY08.

Aggressive method of recognizing revenue

Idea recognizes entire processing charge from Lifetime prepaid schemes as
revenue upfront, while RCom and Bharti amortize the same over 48 months and 24
months, respectively. Thus, Idea’s ARPU, revenues and margins, to that extent
are inflated. In Q1FY08 more than 30% of net additions were from new lifetime
prepaid scheme. We believe that the policy of booking entire processing fee as
revenues upfront would have contributed almost Rs6 to ARPU.

EBITDA margins increase by 100bps to 34.7%.

EBITDA grew by 69% Y-o-Y. The EBITDA margins in its ‘established’ circles
including Delhi, Maharashtra, Gujarat, Andhra Pradesh, Madhya Pradesh, Haryana,
Kerala and Uttar Pradesh (W) expanded by 40bps Q-o-Q to 38 percent. Losses in 3
new circles have come down to Rs 24.6 crore (-40% of revenues) from Rs 330 m
(-76% of revenues) in last quarter. Company saw reduction in network and
marketing expenses as percentage of sales by

160 bps. However access charges increased slightly. PAT increased 259% Y-o-Y due
to margin expansion, lower depreciation and interest expense.

At CMP, Idea is quoting at P/E multiple of 44.8x based on TTM basis June 07. EV/Subscriber
and EV/EBIDTA for Idea is Rs22630 and 21.5x respectively on TTM basis June 07.

Risks: The risks that could hinder the earnings growth of Idea in time to
come are as under:

- Inadequacy of spectrum required for future subscriber additions may hamper the
growth process of the company and may even deteriorate the quality of service

- Competitive structure of the industry poses further threat to the company’s
vision and it may even hit the operating margins substantially in order to carve
a niche in the market.

- Telecom is a highly regulated sector and as such needs many approvals for
undertaking a new project. Moreover there is generally a lot of pressure from
NGO’s in case of a minor increase in fares. Such oppositions and delay in
projects may also cause harm.

- Mobile number portability, if allowed might increase the churn rates.

- If the company enters new circles, incremental revenues will be less than
the expenditure done by the company because marketing and license fees will have
to be incurred.

Growth: The growth for the company in the coming years is likely to be fueled
by the following factors:

- Further penetration into the Indian markets would lead to huge subscriber
additions per month.

- Entry into the new circles subject to allotment of spectrum will fuel the
growth prospects.

- Inorganic growth may be an option to consolidate its position in the
Industry.

- Issue of NLD and ILD licenses to Idea will boost the revenues.

Idea is currently trading at P/E multiple of 44.8x on TTM basis June 07 which
is at premium to RCom but at discount to Bharti. On EV/EBIDTA basis, Idea is
trading at 21.5x which is at a discount to TTML and a premium to RCom and Bharti.
We believe Idea looks attractive considering its entry into new circles and
improvement of margins in the existing ones. However if it enters new circles
its expenditures would spiral up and will have to face tough competitions from
its arch rivals Bharti and Rcom. Hence long term investors can buy the stock.

Disclaimer: As per SEBI requirements it is stated that,Kisan
Ratilal Choksey Shares & Sec Pvt Ltd., and/or individuals thereof may have
positions in securities referred herein and may make purchases or sale thereof
while this report is in circulation.