Corporation Bank

The movement of Corporation Bank’s scrip has been swift after it’s results and after a few months of underperformance, the stock appears to be heading towards it’s earlier highs. While the banking stocks were out of favor for some time after RBI introduced some surprise regulatory measures, Corporation Bank’s underperformance was also because of below expectation results in Q3FY07. The bank faced severe margin pressure. After subsequent rate actions and PLR hikes, the bank has been able to improve it’s margins and should be able to hold them stable as the effect of PLR hike translates better in the current quarter. Corporation Bank’s net profit has registered a 18% YoY growth to Rs.1,185m in Q4FY07 and 20% YoY growth in FY07 to Rs.5,361m.

Fee income shows good growth:

The bank’s other income has shown a good 20% YoY growth. Core fee income has also shown a similar growth increasing to Rs.2,450m. Recoveries in written-off loan accounts have been stronger in FY07 jumping to Rs.1,152m from Rs.734m in FY06. The total other income of the bank was Rs.5,658m in FY07.

Other initiatives:
The bank plans to add about 69 more branches to it’s network in FY07. Besides, it has also launched an employee reward program to motivate employees perform better. Centralisation of loan approvals has led to better diligence and Corporation Bank has been able to arrest incremental slippages.

Valuation:
The bank’s scrip trades 9.1x it’s FY07 EPS Rs.37.4 and 1.3x the BV Rs.263. The bank shall appear cheaper on the FY08E BV assuming conservative and FY07 type growth assumptions. We feel there is a good amount of upside still left in the scrip and the bank share may perform further.

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Bearings manufacturer Timken India Ltd (TIL)

Bearings manufacturer Timken India Ltd (TIL), erstwhile Tata Timken Ltd, has gained around 20% over last week, on the back of good profit registered in the quarter ended March 2007. The bottomline of the company suffered due to increased steel price, the primary raw material, and resulted into sharp erosion of market price from Rs150 in the beginning of the calendar to Rs 120 couple of days back.

The Potential :

TIL has the potential to grow exponentially becoming the favored choice of outsourcing for its global parent, Timken Inc., USA. TIL’s surplus capacities will enable the company handle big orders and can even grow two folds without major capex. The expansion of its American parent will augur well for the company, as orders might pour in owing to TIL’s ‘Indian advantage’. Recently the US company has shifted production of ‘embedded bearing pillow block’, a specialized product with use in heavy industrial machines, to its Indian subsidiary due to cost advantage. The product, reportedly contributes around $10m to TILs export revenue. Timken, USA expects India to be a key contributor to its target of growing its Asian business going forward.

Background :

TIL provides complete friction management solutions at lower costs. It manufactures Tapered Roller Bearings and AP Cartridge Tapered Bearings from its Jamshedpur facilities with respective capacities of 4 million units and 150,000 units a year. These bearings find applications across sectors like infrastructure, automobiles, engineering and agriculture. TIL’s customers are from the Rail, Heavy Industries and Automotive sectors. More than 40% of its revenues come form exports. Having access to its parent’s large worldwide network TIL is planning to scale up its operations.

Financials and Valuation :

The zero-debt company has been in a steady growth trajectory – both in terms of topline and bottomline for last couple of months. However, the growth rate has slowed down due to continuously expanding base. Despite increasing raw material prices the company has been able to maintain the operating profit margin, on annual basis, at around 19%. After a poor performance in the previous quarter, TIL presents decent bottomline in Q1FY07 (December ending). Net profit grew by 25.8% yoy at Rs.100m, which is attributed to 380 bps expansion in operating profit margin to 22.66%. However, the topline remains almost flat at Rs.790m. The current market price of Rs.160 is 25.4x the annualized Q1FY07 EPS of Rs.6.3.

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Automotive Stampings & Assemblies Ltd.

Automotive Stampings & Assemblies Ltd. (ASAL) became a joint venture involving the Tata AutoComp (TACO) Systems in 1997 of the Tata Group. Since 2000, ASAL is entirely managed by TACO with over 80% equity participation. ASAL manufactures auto components such as exhaust systems, clutch covers for commercial vehicles, steering yoke assemblies and engine mounting brackets, sheet metal and mufflers for the automobile industry.

Over the years, ASAL has built an extensive manufacturing base, in-depth knowledge of market needs and trends and developed a vast range of offerings. The company has three large-sized manufacturing plants at Chakhan in Pune, Halol in Baroda and Faridabad with a total capability to supply nearly 30,000 tonnes of components and assemblies a year.
With a range of presses, both hydraulic and mechanical with single action and double action and other required equipment of international standard, its plants are fully capable of making complex sheet metal components of different sizes. Its quality accreditations include ISO/TS 16949, which implies one of the best production facilities combined with the prescribed standards.

ASAL has extensive manufacturing capability to meet the present and future demands of a large segment of the automotive industry. ASAL is the preferred supplier to Tata Motors, Fiat, M&M, L & T, John Deere, GM, Volvo India, Piaggio, John Deer USA, Ford Europe, Gujarat Setco and Trellborg (Germany) among others. Its exports of Rs.27 cr. during FY06 amounted to 10% of sales revenue.

ASAL has produced excellent results for Q4FY07, wherein its net profit skyrocketed by 490% to Rs.5.8 cr. on 14% increased sales of Rs.89 cr. For FY07, its net profit jumped by 130% to Rs.10.8 cr. on 13% higher sales of Rs.313 cr. and the EPS works out to Rs.10.6. The company’s results during the last three quarters of FY07 include Rs.10.2 cr., which is the gain on remission of sales tax liability. The Q4FY07 results do not include this income.

ASAL’s equity capital is Rs.10.2 cr. and with reserves of Rs.38 cr., the book value of its share works out to Rs.47. The promoters hold 80% stake in the equity capital.

In latest developments, Gestamp Automocion S. L. (GASL), Spain has acquired 38.24 lakh shares comprising 37.5% of the equity capital from the Tata Group. It also made an open offer to acquire shares at Rs.94.96 per share from the existing shareholders. GASL is expected to provide new technologies such as hot stampings, tailor welded blanks, hydro forming, roll forming, steel service centre and blanking activities to ASAL.
As the future prospects of the company have improved with the financial and technical collaboration with the said Spanish company, marketmen believe the open offer is unlikely to meet with success. Coming to its future prospects, with the domestic automobile industry growing at 13% and outsourcing of components at a high, the Indian auto components industry has cruised along at top speed in the last fiscal. According to estimates by the Automotive Component Manufacturers Association (ACMA), domestic production increased by 17% in 2005-06 to $10 bn. (approx Rs.40,000 cr.), while exports jumped by 30% to $1.8 bn. (approx Rs.7,200 cr.).

Meanwhile, the domestic industry is set to grow manifold over the next few years as the Indian auto components industry will invest about $1 bn. towards ramping up capacities and acquiring newer technologies every year for the next 10 years. The auto component industry has grown from $2.4 bn. in 1997 to $8.7 bn. in 2004-05.

The acquisition of sizable stake by a foreign major and its highly encouraging outlook together with sustained positives of the industry will help re-rate the company. ASAL is likely to post sales of Rs.400 cr. with a net profit increasing to Rs.20 cr., which would result in an EPS of Rs.20 for FY08. Its shares are traded at Rs.102 at a P/E of just 5.1 on FY08E earnings and are strongly recommended for sizeable appreciation in the medium-to-long term. Even a conservative P/E of 8 will take its share price to Rs.160 level. The 52-week high and the low of the share has been Rs.110/60.

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Buy Autoline Industries
CMP:230; Target Rs 450
Investment Approach: Medium Term (1-1.5 Years)

Autoline Industries is a design engineering and manufacturing solutions provider focused on sheet metal assemblies and formed tubular products, with integrated engineering, tool design and manufacturing facilities, in Pune, India. Tata Motors, which buys components for passenger cars and commercial vehicles, is Autoline`s largest customer accounting for about 85% of revenues in FY 2006. Apart from Tata Motors, the customers include M&M, Bajaj Auto, Kinetic Engineering, Fiat, Stokota, among others. Though Autoline commenced activities by contract manufacturing of sheet metal components, the range of products presently cover sub-assemblies, formed tubular products like silencers, exhaust systems, brake shoes, load bodies for light and heavy commercial vehicles, etc.

The company has embarked upon an aggressive expansion plan. The company has doubled up its capacity to 450 load bodies per day, to meet the requirements of 400 load bodies per day as indicated by Tata Motors. The company was earlier supplying 250 load bodies a day. The company is setting up a new facility for the manufacturing of all kinds of load bodies for heavy vehicles at Chakan in the premises of Unit-II. Production in this capacity will begin from June 2007.

The company in February 2007 has acquired 51% in Stokota`s global operations for Rs 66.8 crore in cash and equity. Stokota is Europe`s leading maker of custom-made vehicle bodies like tippers, trailers, cement bulkers, oil & gas fuel tankers. The acquisition of Stokota has opened up new markets in Europe, South-East Asia, Australia and the US for Autoline Industries.

Autoline raised Rs 75 crore through an IPO in January 2007 to upgrade and expand Autoline`s Chakan facility in Pune; set up another manufacturing facility at the same location; relocate and consolidate a couple of smaller units; establish a corporate office; fund acquisitions, and provide long-term working-capital resources.

In August 2006, the company entered into a MoU with Detroit Engineered Products Inc., a company based in Detroit, USA, and engaged in high-end design engineering services and providi ng services to almost all leading automobile companies in the world such as General Motors, Ford Motors, Toyota, Honda, Hyundai, etc. Earlier this month, the company acquired a 51% stake in Detroit as a strategic investor.

Also, exciting times lie ahead for the Indian automotive component industry taking into account the increasing demand from global auto majors and also the domestic car industry, which is growing at a impressive rate of over 16%, driven by a rising consumer base. The sales of the company increased 65% in FY07 to Rs 183 crore as compared to Rs 111 crore in FY06. The net profit of the company increased 114% to Rs 15 crore in FY07 against Rs 7 crore the previous year.

The turnover in FY08 is expected to increase more than double, due to doubling-up of capacity, wherein production has already begun. Also post acquisition of Stokota, we expect the orders to increase. Net profit in FY08 is also expected to increase more than double.

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Indotech Transformers Ltd

Indotech Transformers Ltd (ITTL) is one of the leading transformer companies from South. It manufactures both power and distribution transformers with an installed capacity of 3,350MVA. Out of which power transformer capacity stands at 2,400MVA. Currently it has two manufacturing facilities in Tamilnadu, one at Thirumazhisai, mainly having capacity for power transformers and the other one at Pallakad for distribution transformers. Recently the company moved its Saidapet distribution transformer facility to Thirumazhisai and set total capacity of 750MVA for this facility there with a total capital cost of Rs 37m.

Capacity Addition

Nearly 75% of ITL revenue comes from power transformers and rest from distribution transformers. However the topline is still dominated by the sale of transformers, ranging from 11KV to 132KV class. Now the company is planning to move upwards in the value chain by manufacturing transformers of up to 400KV class. For this the company is currently setting up a facility at Kanchipuram with a planned capacity of 4,100MVA with an estimated Capex of Rs.490m. Here the company plans to manufacturer conventional Transformers (with capacity of 4,000MVA) ranging from 132KV class to 400KV class and also dry type transformers (100MVA) for industrial and commercial use. We expect with this the company may see good improvement of margin in FY08. The company plans to commission this facility by the end of Q2FY08.

Capacity planned in 11th Plan

Region MW
Tamilnadu 6152
Andhra Pradesh 5443
Karnataka 2300
Kerla 403
Rest of India 62162
Total 76460
Source: MoP

Better working Capital Efficiency

The transformer industry is working capital intensive. Further due to unimpressive financial of the state electricity boards (SEBs), companies with significant exposure to the SEBs face the pressure on working capital as fund get tied up with SEBs for long periods. Indotech derives nearly 70% of its turnover from SEBs. Despite that the company has been managing its working capital well as compared to other manufacturers with considerable exposure to SEBs. We expect the company will maintain the same performance going forward.