ICSA:BUY

ICSA, a Hyderabad-based solution provider in power distribution segment, supplies customized products for power utilities in the filed of energy management, energy audit and control, data acquisition system using GSM technology. ICSA offers products like intelligent automatic meter reading, distribution transformer monitoring system, agriculture load management etc.

ICSA has diversified into Oil & Gas sector, where it provides solutions for checking pipeline spill offs, corrosion etc. It does EPC work for the distribution sector but is fast consolidating as a technology solution provider.

ICSA’s Apr-Jun 2008-09 results were above the brokerage estimates, with revenue growing 13.8 per cent over Jan-Mar 2007-08, which is seasonally the strongest quarter. Revenue posted for the quarter is Rs 240 crore, EBIDTA at Rs 61.9 crore and profit after tax at Rs 40.4 crore.

ICSA’s order book at the beginning of the fiscal stood at Rs 900 crore and out of the order pipeline of Rs 1,350 crore, it has bagged order worth Rs 225 crore taking its order book to over Rs 1,000 crore. The current order book stands at 1.68X FY08 revenue.

ICSA has been awarded permission by the board of non- conventional energy development corporation of Andhra Pradesh to set up a 20 MW capacity wind power project in Anantpur, Andhra Pradesh and is in the process of setting up wind farm, later which it would enter into the power purchase agreement with DISCOM. However the brokerage has not accounted for capital expenditure for the said project as well as revenue and tax benefits accruing out of it, for their 2008-09 estimates.

ICSA has secured patent registration for two of its designs, automatic meter reading apparatus protector for pipeline for Oil & Gas.

The brokerage has revised upward revenue estimates for 2008-09 by 15.62 per cent to Rs 1,155 crore.

At the market price of Rs 312 , ICSA is trading at 8x FY09E EPS of Rs 41.6.

Stock Analysis: Mercator Lines

Marines logistics company Mercator Lines is currently trading at attractive valuations after recent correction. This small cap is attracting the attention of mutual funds and brokerage houses in recent times due to its exceptional improvement in the net profit. Except SBI, almost all the major fund houses have significant holdings in Mercator Lines. Mercator wants to become integrated supply and logistics solutions provider for companies especially for power sector. Mercator is betting big on dredging and offshoring businesses to improve margins.

Mercator Lines Stock price analysis:
CMP: 83
P/E: 11.3
EPS: 7
1 year high-low: 185-43.

Mercator Lines Stock target price: (P/E and EPS are estimates) :

In my view, valuations are conservative over 2 year duration. Bull markets and reversal in economy slow down may increase EPS and P/E of the company. Forward P/E for Mercator Lines for FY2010 is around 4.5 which is very lucrative if you consider its expansions and acquisitions.
1 year target: 130-140 (EPS 13-14 and P/E of 10).
2 year bear market target: 220-230 (EPS 22-23 and P/E of 10).
2 year bull market target: 240-260 (EPS 24).

Ideal entry price: 70-75.

Why I am recommending Mercator Lines?:

1. Company is an aggressive expansion mode and it already has 12 dry carriers, 4 dredgers and 13 tanks.
2. Dry bulk rates will continue to rise for some time.
3. 72% holding in Singapore subsidiary.
4. Aggressively entering into the high margin off shoring business. Shipping and offshoring are some of the best sectors for long term investors.
5. More than 30% increase in net profit margin in the last quarter.
6. It entered into coal sector by acquiring a block in Mozambique and operations will begin from 2010. It is planning to ship the extracted coal to India to sell it to power plants as it has shipping contracts with power companies like Tata Power and Reliance Power etc. This coal block has 3 million tonnes of coal reserves.
7. Strong management which is expanding the company strategically.
8. More than 50% of revenues is expected to come from non-shipping businesses in the coming years.
9. It has 2 coal mines in Indonesia. Mining earnings will occupy significant slots in the FY2010 earnings.
10. Mercator has clients like Reliance, Tata power, SAIL and Arcelor Mittal etc.

Final stock analysis:

No one should invest for short to medium term in bear markets. If you can invest and aggressively accumulate Mercator Lines on every fall, you will get very good returns in 1-2 years time. Mercator Lines is one of the best small cap stocks for long term investors with 2 year horizon. All its acquisitions (especially mining) and expansions will yield results in the 2-3 years.

Praj Industries:Bio Fuel

Biofuel technology and equipment provider Praj Industries is always loved by Stock market investors. Pune based alternative fuel major attracted legendary investors like Vinod Khosla and Rakesh Jhunjhunwala. Praj Industries is in good position to capitalise on the world search for alternative energy sources due to high crude oil prices. Praj Industries developed ground breaking Lignocellulosic technology to produce ethanol from non-crop products like Sugarcane.


Significant News:

1. Praj Industries started the commercialisation of Lignocellulosic technology process- Biomass magazine (July, 2008). Praj started commercialisation process 1 year earlier than analysts’ expectations.
2. Praj recently got Rs 1.2 billion order for bio-ethanol equipment from UK-based Vivergo. Company set up manufacturing unit at Kandla SEZ to meet global demand.
3. Praj Industries won the Star SME award at Business Standard annual awards function.
4. Biofuel equipment agreement with Maple Energy for its South American plant.

Praj Industries Stock analysis:

CMP: 165
P/E: 19.6
1 Year high-low: 273-100.


Image source: Business Week.

Praj Industries target price: It is better for short term investors to stay from this scrip. Long term investors can accumulate more on further fall without hesitation.

1 year target: 220-230 (EPS will be around 10 and P/E will improve to 22). This is a conservative estimate due to current bear market conditions.
Ideal investment duration: 3-4 years.

Interesting statistic: Praj Industries gave more than 2500% returns in the last 5 years.

Why Praj Industries is a good long term stock?

1. Praj has 10 years experiences in Biofuels and has 9% market share in global Biofuel market. It is an undisputed leader in India.
2. Lignocellulosic technology developed by Praj will provide huge commercial opportunities.
3. Government policy of ethanol blending with petrol is another opportunity.
4. It is a zero debt company which is good in high interest rate times.
5. It is in alternative energy business which has good prospects in these high crude oil price times.
6. It is providing advance technology to firms like Tata Chemicals and Praj has more than Rs 900 crore order book from 35 countries.
7. Most of the mutual funds increased their holdings in Praj Industries in May.
8. Its global acquisitions will add revenues to the balance sheet in the next 1-2 years.
9. Analysts are expecting 25% growth in sales and 30% growth in profits. Praj may beat their expectations due to Lignocellulosic technology.
10. Sugar companies will make huge investments in Biofuel space- huge demand for Praj technology and solutions.

Negative triggers for Praj Industries:

1. Change in policies of Governments towards Biofuels due to food shortage.
2. Government interference in sugarcane prices is another concern.

Advice for technical investors:
Praj Industries is currently trading just above its strong support levels. Fall to below 158 levels is a concern. This information is only for the sake of short term investors.

Verdict: If you believe in the alternate energy theory, you should buy Praj Industries. It has strong management, giant investors’ support, vast experience, ability to grab upcoming opportunities; ability to develop new technologies coupled with strong growth visibility made Praj Industries a strong buy for long term investors with 24-30 months horizon. Tata Sons bought 7% stake in Praj Industries and Praj is working closely with Tata Chemicals in the Biofuel space.