WINNING STROKES: THINK DIFFERENT:

Buy XL Telecom and Energy Ltd (BSE Code-->532788) at the CMP of Rs.52.5 for a target of Rs.120 in the short term. The 52-week high and low for the scrip is Rs. I am soon putting a research report on the company at www.sumanspeaksplus.blogspot.com

Buy, Birla Power Solutions Ltd (BSE Code-->517001) at the CMP of Rs.11.36 for a target of Rs.18--Rs.22 in the next few trading sessions. A research report on the company would soon be placed in this blog.

KEC International Ltd hits the buyer Freeze on new order gains.

Also Associated Alcohol and Breweries Ltd hit the buyer freeze.Its was recommended some weeks back in the Sunday Report.

VBC Ferro Alloys Ltd hits the buyer freeze. The Ministry of Heavy Industries is in favour of withdrawing 5% customs duty currently imposed on steel and steel products.

Kohinoor Broadcasting Ltd hits the buyer freeze at Rs.3.17. The PAID MEMBERS WERE ASKED TO ACCUMULATE THE SCRIP FROM Rs.2.80, onwards, on some favourable news. But what was that News??

Essar Shipping Ltd hits the buyer freeze. The shipping stocks are expected to do well due to fall in the price of fuels and increase in the price of crude going forward.

Book some Profits in English Indian Clays Ltd, Easun Reyrolle Ltd (recommended at Rs.37.5) and ASM Technologies Ltd. at the current market prices.

Keep accumulating, Ennore Coke Ltd, L & T, Chowgule Steamships Ltd, Vijay Shanti Builders Ltd, Srinivasa Shipping and Property Development Ltd, Ram Informatics Ltd, Indowind Energy Ltd, Dolat Investmements Ltd, Sunflag Iron and Steels Ltd, Kolte Patil Developers Ltd, Reliance Industrial Infrastructure Ltd, etc.

U.B. ENGINEERING LTD.

BSE Code: 509992

CMP:Rs.39.7

Hemant K. Gupta

An Undervalued Engineering Stock

Until 2007, Engineering Companies were getting P.E. Ratio of 15-30 times as such companies were getting big, big orders from various sectors and Engineering Companies. started achieving 30% - 50% CAGR and such momentum was expected to be maintained. However, due to recent slowdown in Indian and global economy, engineering companies' growth may slowdown from next year due to fears of lower new order intakes.

And, share prices of various cos. in engineering sector just plummeted. Even if engineering companies cannot achieve same growth in future as achieved in recent past, these companies should maintain/sustain current performance levels. In such a scenario, if engineering companies are available at P.E. Ratio of 3-4, buying scrips of such cos. makes investment sense as falling metal prices can even enhance their profit margins. In such a scenario, U.B. Engineering share price of which is at Rs.39.7, appears worth buying. Belonging to Vijay Mallya, UB Engineering is engaged in EPC activities for different industries such as, power, cement, petrochemicals, and steel. Company is EPC contractor for electrical, mechanical and structural works.

Over the years, it has also developed capabilities across Transmission and Distribution sector and is qualified to take upto 400 KV Substation Projects. It has a dedicated segment which looks after maintenance and overhauling of power plants. In its history of 38 years, it has worked extensively in under-developed and developing nations of Asia and Africa although, it has also presence in S.E. Asia and Europe. Until last year, its track record was not satisfactory and company was in a mess. However, in FY07-08, company made a strong turnaround after OTS and infusion of funds from group companies. Now, company is poised for a bright future and hence the recommendation. UBEL has developed strong capabilities across different industries and this experience has led to the company obtaining pre qualifications for some of the very lucrative segments e.g. substations up to 400KV, qualification with leading power utilities and large corporates for structural work.

However, company got stuck in the vicious debt trap owing partially due to lack of attention by the promoters and sheer mismanagement. Problems started surfacing one by one. It had to forego many orders due to its constrained financial position. On the other hand, it was forced to accept fixed price contracts in which it incurred heavy losses due to cost escalation.

Zero funds infusion, loss making orders and operational inefficiencies pushed its funding requirements even further. Negative operating cash flows did not help either. It got into this viscious trap at the start of the decade which dealt major blow to its financials and to its reputation as well. Inability to execute orders in hand led to deterioration in the financials. Revenues were almost stagnant during 06-08 periods as against high growth posted by other EPC companies during the same period. Restructuring, Revival and Turning around: As on March 2006, Rs.92 crores was outstanding with the banks. Company got it settled in OTS for Rs.22 crs which was 42% of the principal outstanding. Group companies gave Rs.42 crores to pay the OTS amount and also to boost the net-worth of the company which was negative Rs.37 crores in Sept. 2007.

Then, for the purpose of paying back group company loans and to fund working capital requirements, in Jan. '08, it floated Rights Issue at the rate of Rs.126/share to raise Rs.60 Crs. OTS and Rights Issue proceeds have changed the face of the company completely and company started achieving better results: In FY08, Q4 was exceptionally good Quarter for the company as sales grew by nearly 200% with sharp jump in profit margin. Company has reported bumper results for H1 in current year. Sales in H1 are Rs.204 Cr as against Rs.77 Cr. in corresponding period of of previous year. PAT has zoomed to Rs.11.66 Cr as against Rs.2.56 Cr. in corresponding period of previous year. Normally, Engineering Companies like U.B. achieve higher sales in H2. Company has booked orders worth Rs.500 Cr in last 7 months and total order back log is around Rs.700 Cr to be executed in next 18 months which gives clear visibility to its earnings. At present, almost 50% of total orders are from substation segment while civil construction business accounts for 36%. Mechanical and overseas contracts constitute the rest of the order book. Structural segment wherein company does fabrication, installation and testing of steel structural of power and industrial plants has become a very high margin business for the company. Company has working capital funding limits of Rs.50 Cr Management is seeking further funding of Rs.100 Cr from the banks to take care of execution of its order book. Looking at orders in hand, U.B. is in a position to cross 600 cr. turnover mark next year. However, we have projected turnover of only Rs.510 Cr (if few orders are suspended in worst case scenario).

Stock of U B Engineering Ltd (a Vijay Mallya Group Company) is trading at 3.05x FY09E EPS and 2.47 x FY10E EPS which is quite low and PE expansion is likely to take place soon. If, stock has modest discounting of 7, it share price based upon FY09 EPS should be Rs.96 and Rs.119 based upon FY10 EPS. CMP is significantly lower (just 30%) compared to Rights Issue price. Investors can expect 50% appreciation in less than 4 months and up to 100% appreciation in 12 months. A good Buy in Engineering Industry.