Hameed-13june2005

MARKET BUZZ:

(May not be useful for day-traders.)

SWIL-Reaching the stage of Transition

The Khaitan promoted SWIL (BSE 504920), will soon be gobbled up by the biggest global copper miner and refined copper producer Phelps Dodge, claim insiders. While US based transnational Placer Dome, and Indian corporations Sterlite and Hindalco also are believed to be in the race, the baton is likely to fall in the hands of Phelps Dodge. The Khaitan's who own 32.6 per cent of the Rs 128 crore Equity are likely to be bought out at a price of Rs 30 per share, and so would be the institutions which own 48.92 per cent of the Equity. The acquirer is likely to make an open offer to acquire the 14 per cent shareholding with the local public, thereby enabling the de-listing of SWIL shares from the bourses.

Even though takeover rumours have been on and off for a while, the strategically large equity interest of ICICI (13.2 per cent Equity), IDBI (13.2 per cent), IFCI (4.8 per cent), LIC (6.6 per cent), GIIC (5 per cent), GSFC (1.8 per cent) and New India Assurance with a 1.41 per cent equity have helped edge out spirited resistance from the original promoters.

SWIL has set up a 50,000 TPA Copper Anode and Cathode project in Jhagadia, Gujarat. Late in 2004, the Cathode project was started with the commissioning of the Anode Furnace. This followed the cold commissioning of the Refinery. The basic raw material for this unit, Copper concenterate, copper bearing scrap, ashes and residues will be supplied by the MSTC.

However, with Phelps Dodge coming into the picture the raw material supplies will no longer remain a concern. This will be Phelps 5^th large investment in Asia after Japan, Korea, Philippines and Thailand.

Phelps Dodge Corp. is one of the world's leading producers of copper and molybdenum, the largest producer of molybdenum-based chemicals and continuous-cast copper rod, and among the leading producers of magnet wire and carbon black. The company and its two divisions, Phelps Dodge Mining Co. and Phelps Dodge Industries, employ more than 14,000 people worldwide.

Thermax-Boiling Up Competition

Thermax, which is a leading player in the industrial boilers business, is benefiting from the pick-up in investments in the manufacturing sector. Also, rising prices of oil and other liquid fuels are prompting manufacturing units to look at alternate fuels for meeting their energy needs. This is proving to be to Thermax's advantage as the company can produce boilers for burning 80 different type of fuels.

Deregulation in captive power policy is resulting in power-intensive manufacturing units (cement, sponge iron and chemicals) shifting towards captive power and waste-heat recovery boilers. Fresh order inflow (standalone) grew 63% in 9M FY05 to Rs.9.9bn and this is 1.7x 9M FY05 revenues. Pick-up in Thermax's user sectors, shift towards alternate fuels, a strong balance sheet and expected robust earnings growth has prompted us to initiate coverage with a bullish outlook.

Investment rationale

Strong competitive position in growing business of process heating (boilers) :

In addition to increase in industrial capex, growth in this division is being driven by two factors: increased preference for solid fuels like coal, petcoke and biomass over oil; and captive power generation from waste heat. Thermax is well-positioned to capitalise on this opportunity given that it has a 40% and 60% market share in low and medium capacity boilers, respectively.

Cogeneration business is looking upbeat:

In cogeneration, Thermax provides equipments for generating power and steam from 80 different kinds of feedstocks (largely agri-waste). This is working in its favour as liquid fuel prices have been spiralling in recent times. The company has already received orders of a cumulative size of 87 MW in the current fiscal.

Current order book position at Rs.8.5bn up 112% yoy:

In FY04, Thermax group received orders worth Rs.12.14bn, highest in the history of the company. In the current year, the company has received fresh order inflows to the tune of Rs.9.9bn (standalone), up 63% and equivalent to 1.7x 9M FY05 revenues. Similarly, its other subsidiaries have also shown strong traction in order inflows. Consolidated order book position stands at Rs.12.2bn, up 73% yoy, thus indicating that its subsidiary businesses are also doing well.

Management has revised upwards the guidance of 40% revenue growth in FY05, to 50%:

The company has reported a topline growth of 67% (standalone) yoy in 9M FY05. Given the robust order book position equivalent to 1.7x revenues, we expect revenue growth in FY06 to be robust. Accordingly, we are projecting a 30% increase in FY06 (consolidated) revenues to Rs.14.7bn.

Risk factors

With the substantial jump in order booking, the pressure is now on the Thermax management to meet its delivery deadlines. In turnkey projects, a delay in project execution could entail severe penalties.

Slowdown in industrial growth; Elongation in working capital cycle

Valuation

We expect Thermax to report 31% CAGR in consolidated earnings between FY05-07E. At 14.5x FY06E earnings, we recommend a BUY with a target price of Rs.738. Thermax is currently trading at EV/EBITDA of 7.0x FY06, which is at a discount to frontline engineering companies.