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Monday, July 6, 2009

Jhagadia Copper Ltd & ABC Gas International Ltd:-Future growth prospects and outlook

1)Scripscan:Jhagadia Copper Ltd

Story:Jhagadia Copper Ltd is a perpetual takeover play and it is easy to spread rumours about it. Jhagadia Copper was earlier called SWIL, because it was a division of Shalimar Wire. In its attempt to set up a copper extraction business in the mid-1990s, SWIL bit off more than it could chew. The project was much bigger than SWIL’s business at that time and the industry went into a severe downturn. The project became sick. Financial institutions like IDBI and ICICI, which had lent a lot of money to the project, then stepped in and took over the copper unit. At the end of the June 2007 quarter, financial institutions including ICICI Bank, LIC, IFCI and Gujarat Industrial Investment Corporation had a major stake. The unit has been available for purchase but neither Anil Agarwal of Sterlite nor Kumar Birla of Indo-Gulf found Jhagadia an attractive buy. This company is the largest producer of LME Grade ‘A’ copper cathodes using the secondary smelting route in India. This means that Jhagadia does not own a mine and has to buy copper scrap and extract copper by melting it. That is not a great business because, while copper prices have quadrupled in the past four years, it is copper companies with captive mines that can take advantage of it. Secondary producers buying copper scrap hardly make any money. Not only that, the copper bull run has attracted fresh investments into copper mines and supply is now poised to match demand. The chairman of Jhagadia Copper, former IDBI chairman PP Vora, is himself bearish. In mid-2007 he told a TV channel that TC/RC (treatment charges and refining charges of converting copper scrap to copper) “are very low on the spot basis today. In fact, they are so low that overall it is hardly marginally viable. On a long-term basis, it is moderately all right but it is not at a very high profitability in any case.” He also added that “the long-term progress is that supply would be in excess of demand and because of that, the long-term outlook is going to be bearish.” Clearly, there is no earnings momentum here.So, what is keeping the stock price ticking? Fresh rumours of a possible takeover. From LN Mittal to SAIL to Sterlite, all possible names have been springing up as likely suitors. While the company is definitely a takeover target, given that the institutions have no interest in owning it forever, the question is who would want to buy it and at what price? Our question is: if the owners, who are willing sellers of the plant, could not find a buyer during the metal mania we have seen since 2003, when can the institutions find one and at what price? It’s a high-risk play as a takeover stock but, since the absolute stock price is low, it may still be worthwhile to bet some money on it at the current price of Rs5.

2)Scripscan:ABC Gas International Ltd

Story:ABC Gas International claims to be India’s “leading and pioneering provider of copper plumbing systems for hot and cold water services” for domestic and commercial establishments such as hotels and restaurants. Its website claims that “it was ABC who first introduced the concept of Copper Plumbing in India since 1992, hitherto unheard of.” According to the company, copper plumbing is the most popular choice in the Western world and is now the leading choice in India for many prestigious buildings and five-star and deluxe hotel projects. Builders, like Ansal, Hiranandani, DLF, Rahejas, etc, and top hotels, like Taj, Oberoi, Hyatt, ITC and The Leela, have apparently made copper pipes the first choice in their plumbing work.The website does not say whether ABC is the supplier to these big names. ABC also claims to provide “total designing, supplying, installation and maintenance of network of gas piping system.” Finally, it claims to supply copper-tube products “sourced globally from some of the leading suppliers of the world. It takes pride in its long-standing and exclusive associations with quality manufacturers like Mettube (Malaysia) and NIBCO (USA).”Surely, ABC is in a great business with spectacular growth in sales and profits. Won’t that also explain why the stock has been shooting up? ABC, which is listed only on the Bombay Stock Exchange (BSE), moved from Rs1.73 on 21 March 2007 to Rs27 on 6 april 2009. Let’s look at the fundamentals of this company. They are a shocker. Hardly any revenues,profits to talk about.Is this a phantom company? How can the stock of virtually a shell company like this be listed, let alone hit the circuit for days together? The BSE and Securities and Exchange Board of India both have surveillance systems and can ask questions. Most likely, they are unaware. If they have asked, their investigation is not having much of an impact on the manipulators.

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