WINNING STROKES: THINK DIFFERENT:

• Salary Hike??!! Consumer Demand Will Increase??!!
• Technical Bounce in Crude does not sustain
• Dow & Nasdaq Rallies
• How will Indian Markets Behave on Monday??

My Recommended Sunil High Tech Engineers Ltd was recommended by Kotak Securities Ltd on last Thursday (14th August, 2008) at Rs.193 for a target of Rs.335:

SUNIL HI TECH ENGINEERS LTD (SHEL)

BSE Code: 532711

CMP: Rs.193.40

RECOMMENDATION: BUY

TARGET PRICE: Rs.335

FY09E P/E: 8.9X

Analysts from Kotak Securities Ltd recently attended a conference call of SHEL and are very positive about its growth prospects:

This stock as mentioned earlier was recommended by me, a couple of weeks back considering its huge order book position in the first quarter itself, Quality of management, increase in Government's Infrastructure Spending, recent flair for Infrastrucutre related stocks, etc. Now let's see what are the views of Kotak Securities Ltd on the stock........

• Revise FY09 earning estimates
• Kotak Securities Ltd continues to recommend BUY on SHEL with unchanged price target of Rs.335
• 74% upside potential from current level

Setting up of dedicated BOP and EPC team:

• The company has set up dedicated team in Mumbai for the BOP and EPC projects. The company has hired the best available talent with rich experience of having successfully completed EPC work of about 500 MW project.
• Recently the company has also bagged the 30MW EPC contract. With this the company has already started receiving enquiries from the private players to set up small power plants on EPC basis.
• The company has bagged its first Engineering Procurement Contract (EPC) job for 30 MW works and 60 KLPD Distillery Plant with 6000 TCD sugar for Gangakhed Sugar & Energy Pvt Ltd., in District Parbhani. The work is worth Rs.3.3 bn. Out of this Rs.1.5 bn is related to the power plant. This is the biggest single order Sunil Hitech has bagged since its inception. This has also marked its entry into growing EPC business. However this order is given by the company which is around 80% owned by the promoters of Sunil Hitech in their personal capacity.
• However the major benefits out of EPC are only expected by middle of next year as then the company would have completed almost 60% of the 30MW project. This would help it to qualify and bid for private EPC projects for setting up power plants upto 500 MW.

To form JV for UMPP work: The company has jointly bid for the part of the BOP work of the TATA UMPP. The total order is worth Rs.2.5 bn out of which SHEL portion is Rs.750 mn. However the company is L3 in the TATA UMPP project. Going forward the company would look to form strategic alliance with other companies to bid for part work of the BOP of the UMPP.

QIP money is being deployed in purchasing assets and working capital: In January 2008 the company made QIP of Rs. 810 mn at an issue price of Rs.360 per share. SHEL has already bought cranes worth Rs.150 mn and invested Rs.350 mn for its working capital requirements. The company still has Rs.310 mn out of the QIP which would be deployed in purchasing further high capacity equipments by December 2008.

Strong order book - poised for aggressive growth with EPC contracts:

• As of 30th June 2008, the total order book of the company stands at Rs.13.7 bn. This is 4.5x its FY08 revenues of Rs.3.1 bn. This strong order book is very encouraging and provides confidence for the future growth of the company.
• Almost 97% of the order book is in the power segment and balance 3% is for the steel sector. Within power, almost 66% is for thermal coal generation, 8% for Transmission & distribution, 25% for EPC and balance 4% for the Hydro power projects.
• The company has also significantly increased the portion of the order book form private players from around 50% last year to currently 67%. Going forward also Kotak Securities Ltd expects, orders form the private players for EPC of the power plants upto 500 MW. Looking at the current cost of coal based power plant of Rs.45 mn to Rs.50 mn per MW, the order book of the company would ramp up significantly on procurement of EPC projects.

Subsidiary performing well: The 85% subsidiary of SHEL that is manufacturing boiler pressure parts for power plants up to 500 MW is performing well. In FY08 it recorded revenues of Rs.206 mn with 11.5% operating margins and it recorded PAT of Rs.9.6 mn. As of 30th June 2008 it has order book of Rs.150 mn. The management is confident of ramping it up to Rs.1 bn of revenues in next three years.

Change in earning estimates:

• Looking at the strong order book and its expected execution over next 24 to 30 months Kotak Securities Ltd now expect the company to report higher revenues of Rs.5.5 bn in FY09E as against our earlier estimate of Rs.4.6 bn.
• However majority of the new orders are with higher component of bought out components which typically enjoy lower operating margins. Thus Kotak Securities Ltd, expects the company to report lower operating margin of 14.9% in FY09E as against our earlier estimate of 15.6%.

Change in Estimates (FY09E): Kotak Securities Ltd have also accounted for the increased interest cost on account of recent increase in interest rates and higher working capital requirements.

• On PAT level Kotak Securities Ltd expects the company to report marginally lower PAT of Rs.350 mn in FY09E as against our earlier estimate of Rs.353 mn.
• Accordingly Kotak Securities Ltd, expects SHEL to report slightly lower EPS of Rs.21.8 for FY09E as against our earlier estimate of Rs.22.0.

Valuation & Recommendation:

• At the current market price of Rs.193, the stock trades at 1.3x book value, 8.9x earnings and 6.6x cash earnings based on FY09E.
• Kotak Securities Ltd believes that the current valuation is very attractive considering the clear growth prospects of the company, going forward. This is due to strong order book of 4.5x FY08 revenues and superior execution capabilities. Also the revenue of the company are expected to grow at CAGR of 95.4% and net profits at CAGR of 115.1% from FY07 to FY09E.
• Kotak Securities Ltd has also done one year forward rolling band analysis for SHEL which revealed that currently the stock is trading at lower end of the band of 5x - 20x one year forward earning estimates which makes it attractive at current levels.

Kotak Securities Ltd remains positive and maintains a BUY on Sunil Hitech Engineers Ltd (BSE Code->532711) with unchanged target price of Rs.335, which provides upside potential of 74%.