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Wednesday, September 9, 2009

Bajaj Electricals Ltd and HEG Ltd:Future growth prospects and outlook(buy/sell/hold?)

1)scripscan:HEG Ltd

Story:HEG is a diversified company with interests in graphite electrodes and power but it is the power business that is fetching it more profits. Graphite electrodes are used mainly in electric arc furnaces (EAF) in steel plants to melt steel scrap. Their demand is, therefore, sensitive not to steel prices but to steel production volumes through the EAF route which is increasing rapidly.The outlook for graphite electrodes business seems to be improving. In its latest quarter (Q1FY10), HEG has reported marginally lower graphite sales volumes compared with last year. Revenues touched Rs232.2 crore, a 2% decline over the corresponding quarter last year but EPS increased 50% -- from Rs6.6 per share in Q1FY09 to Rs9.9 per share this quarter. Contribution from exports stood at 65.5% of net sales, while domestic sales contributed 34.5%. Any reduction in profits from reduced volumes in FY10 is likely to get offset by higher realisations of graphite electrodes and reduction in raw material costs.HEG, currently, has an order book that is only half its capacity which it was not certain to achieve a few months back. It is operating at 60% of installed capacity; the management expects it to improve to around 70%-75% by the end of this year. HEG has cut production by 35%, enabling it to sell surplus power in the merchant power market. Power sales are expected to generate additional profits in FY10, which will be EPS accretive. The company is gaining from a reduction in raw material costs. Power and fuel costs were down on the back of lower capacity utilisation levels in the graphite electrodes unit. At present, HEG’s plant capacity is 60,000tpa. In view of the current slowdown in steel industry, HEG has moderated its expansion plans from the present 60,000MT to 66,000MT (as against 80,000MT planned earlier) at a marginal cost of Rs42.5 crore. This should help HEG maintain its lead in manufacturing graphite electrodes.In the power division, HEG has commissioned a 33MW thermal power plant in May 2009. The full benefits of this plant will accrue from second half of this year. Post-expansion, total power plant capacity has increased to approximately 77MW. The company has significantly improved its margins. Operating margin stood at a fantastic 36% compared with 26% previously. PAT margin touched 18% from 12.5% earlier. HEG’s market-cap is 1.12 times sales and 4.21 times operating profit. Not cheap; but buy this stock on 20%-25% decline.

2)scripscan:Bajaj Electricals Ltd

Story:Bajaj Electricals is known for its consumer appliances division (water heaters, mixers, food processors, microwave ovens, air coolers, steam and dry irons, electric kettles, etc) as also for its lighting and luminaries division. But it is the third division, engineering and projects (E&P), that is turbo-charging the company.The revenue contribution from lighting segment grew 8.5% to Rs188.5 crore in the June quarter over the year-ago period. The division markets fluorescent tube lights (FTL), general lighting service lamps (GLS), compact fluorescent lamps (CFL). The luminaries division markets a range of commercial, industrial, flood lighting and street lighting. It has a technical design cell to carry out specific illumination layouts for various applications. In FY08-09, it developed a photolux application design software to aid the lighting professional to design the illumination accurately. It has also entered in a new business line, integrated intelligent building management systems (IBMS). This manages the high-voltage controls, fire and access & security control of a building. The company has been able to post 19.9% growth in FY08-09 in this segment over the same period last year on continuous improvement in the product category, overcoming the intense competition in the lighting business. However, in the June quarter, the growth has been slower.The E&P division carries out project operations such as high-mast lighting, installation of telecom towers and power transmission & distribution. Some of the major projects that the company has completed are: illumination of the SMS Cricket Stadium in Jaipur and designing, supplying, installation and commissioning of lighting of Chennai Port’s container terminal. While the high-mast division contributed a larger part of the total revenue that E&P segment generated in the last financial year, the major thrust area in future will be rural electrification. The rural electrification plan of government, called Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), aims to provide electrification to the below-poverty line (BPL) families. The allocation for RGGVY was Rs28,000 crore in the 11th Five Year Plan which has been revised to Rs35,000 crore in the Budget. Bajaj has received four major orders through National Electric Supply Company Limited (NESCL) and National Hydro Power Corporation (NHPC) totalling Rs360 crore which has to be completed within 18 months. Its plant at Ranjangaon manufactures high-mast poles and has increased the manufacturing capacity by 25,000 poles per annum last year by commissioning a new line of product, viz, octagonal poles. E&P segment grew 82.4% in the June quarter over the year-ago period. The order book for the E&P segment consists of Rs900 crore at the end of this quarter; about 50% of its revenue will come from rural electrification. In the June quarter, it posted a growth of 15% and 43% in sales and operating profit growth, respectively. This growth is because of the high margin segment of E&P. The operating profit margin averages 10%. Its market-cap is 0.57 times its sales and 5.63 times its operating profit.

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