WINNING STROKES: THINK DIFFERENT:

Ennore Coke Ltd after that spectacular results hit the buyer freeze in late trade. As expected the topline was robust while the company presented unexpectadly splendid bottomline. It seems the business has started to pick up steam. Moreover, many investors might have forgotten other two stories in the counter--Power (co-generation plant) and Carbon Credit. The stock is expected to cross Rs.100 in the next few months time frame and hence go on investing in this counter in all dips. The steel sector is looking up and hence this augurs well for the met-coke industry. The company also has a spectacular mining story.

Sanguine Media Ltd (CMP: Rs.3.34) was recommended to the Paid Groups during the market hours yesterday. There are some good news coming in the counter. The company had a board meeting yesterday and it is expected to declare Q1FY10 results soon, which in all probability would be better than the last quarter. The stock yesterday moved up with good volume unseen in the last 15 days. This scrip will be another multi-bagger after Ritesh Properties and Industries, Prajay Engineers Syndicate, Sicagen India Ltd, etc. Many do not know that the company is also into event management and gets substantial orders in this segment also.

XL Telecom and Energy Ltd came out with worst set of numbers for Q1FY10. The net sales were only Rs.5.6 Cr in Q1FY10, which is a matter of concern. However the other income component increased to Rs.1.14 Cr in Q1FY10, from 70 lakhs in Q1FY09. During the quarter, a subsidiary of the company has earned revenue of Rs.2.21 lakhs by the sale of Solar Power in Spain. However, considering that the company provided Rs.204.94 Cr towards MTM of inventories in hand (in view of sluggish demand in Europe), high interest cost due to loan for ongoing mega project (which is nearing completion) and other Capex, what I feel is that the bottomline is not bad.

It seems instead of capitalizing the interest cost on the loan which it has borrowed for expansion, the company is writing it off as a revenue expenditure. The stock hit the lower circuits to air the knee jerk reaction from the traders. But then following points needs to be looked into:

1. Crude Oil price is now moving up which generally pushes the demand for the renewal energies (Solar, Wind, Geo-thermal, etc). From $15 bn now, the solar photovoltaics market, at a 25-30% CAGR, is expected to reach $ 32-40 billion by 2010. Higher oil and gas prices, environmental concerns, aggressive subsidies and declining “solar” costs would lead to growth picking up. The growth in Europe has started to pick up with higher crude oil prices.

2. It has a capital work in progress of nearly Rs.250 Cr. So the day new plant comes into full action, it will report a sudden jump in topline as well as bottomline, like it happened in case of Ennore Coke Ltd. It is to be remembered that XL Telecom in order to tap the vast and growing opportunities in solar photovoltaics (a nearly $ 40bn marketsize by FY10 from the current $17bn) is setting up a solar cell facility of 120 MW in Hyderabad and ramping up the module-making capacity to 65 MW at an outlay of Rs 3bn. This would help integrate its solar photovoltaic business and will cater to the booming demand for SPV systems, chiefly in Europe and the US. The revenue from the energy segment is expected to dominate in FY10 onwards which according to some estimates would cross 70% in FY11. Earnings are expected to grow exponentially from FY10 onwards as the Mega-project gets completed.

3. The book value of the shares of the company is Rs.152.11 (Price to book is absured at 0.31), EPS of Rs.8.89, dividend yield of 3.21%. The P/E of the shares of the company is 5.26 against the industry average of Rs.32.53. Hence at this price it is still looking cheap--any spurt in demand in the European markets is expected to give exponential returns going forward. Moreover, the mega-project could start production within the next few months, which should kick start both the top and bottomlines.

4. Raw material makes up roughly 70% of the cost in the solar cell division. With approximately 80,000 tons of silicon capacity coming up globally by 2010, supply constraints are expected to ease. However, the company needs to clear up the inventory (even at a discount), which it might have made using higher priced silicon.

4. Earlier XL Telecom and Energy secured orders of Rs 2.2 bn to supply solar photovoltaic modules to Spain. Further, it is in the process of acquiring international certification (TUV) to cater to other high-growth markets. Any escalation of demand from other European countries and the US could bulge its order book going forward.

5. In order to fund its growth plans, XL Telecom raised nearly Rs.59 cr in Dec 2006 through IPO route @ Rs 150 per share, then approx Rs.175 cr through FCCB and simultaneously even allotted 52,50,000 warrants @ Rs.135. With part of FCCB and warrants already been converted, the equity share capital currently stands at Rs 18.80 Cr.

6. On the mandatory blending of ethanol with petrol (at 5%), demand for ethanol is expected to be between 650m and 680m litres a year. Earlier company had aggressive plans when the crude oil was shooting above $120 per litre. But with the drastic fall in liquid gold and unfriendly policies of the centre it has decided to go slow on the same. It has an ethanol fuel facility at Nanded in Maharashtra with a production capacity of 1.5 lakh litres per day. The plant has been inspected and cleared technically by oil companies both in terms of capacity utilisation and the quality of the products being produced. In order to meet the raw material requirement for ethanol production, company is contemplating to establish the distillery unit for which it has already incurred about Rs.27 Cr out of total planned capex of Rs.72 Cr.

7. Worldwide, annual Photo Voltaic (PV) cell installation is projected to reach 11 gigawatts by 2010, continuing at a 26% CAGR the next few years in spite of problems, notably a growing shortage of silicon feedstock and lack in demand from Europe/US. The overall PV market is expected to reach $40bn by 2010, from $17 bn now. Favorable policy changes in the US and Europe could further alter significantly the PV market estimates.

8. The company's telecom business used to be its main stay earlier but due to saturation in Indian market and better opportunities in energy sector, company reduced its focus and efforts towards this segment. But still it continues to manufacture / market CDMA Handsets & Fixed Wireless Phones. It has established only “ASSEMBLY” facility for manufacture of mobile phones in partnership with KYOCERA Inc of USA and has a capacity to produce about 35 Lakh handsets per annum. It is supplying multiple models to all CDMA Operators like BSNL, MTNL, TATA and Reliance. Similarly it has established partnership with AXESSTEL of US for Fixed Wireless Phones with BSNL as its main customer.

Concerns:

• Solar cell capacity is expected to grow much faster than demand in the coming days. This could squeeze prices significantly in the coming two years. However, favorable policy changes in the US and other developed markets can create fresh demand, quite difficult to now quantify.
• Since the solar division is an EOU, the appreciating rupee directly hits the sales figures. However, the company imports its raw materials, roughly 75% of the expenses. To some extent, this mitigates the overall risk.
• The company depends on government-run enterprises for telecom orders, which are quite uncertain. However, if Kyocera comes out with a low-priced handset, the company might get a huge order from CDMA operators, which would compensate for the uncertainty with regard to government-run enterprises.
• Though I believe that the company has a unique business model, but any delay in execution of the project may lead to lower then expected earnings.

Moreover, further inputs on Ritesh Properties and Industries Ltd, Ennore Coke Ltd, Vikash Metal and Power Ltd, CHD Developers Ltd, etc, will be sent to the Paid Groups in the Sunday Report.