These companies have strong underlying economic growth prospects, they are off the radar of most analysts and their stock prices have not already run up 

Forging Ahead

Ahmednagar Forgings has several good quarters ahead

We have been looking for auto-component companies that would benefit from the steady growth of the automobile sector. Ahmednagar Forgings (AFL) appears to be one of those. AFL's products include piston assemblies for railway locomotives, crown wheels and pinions, rear-axle shafts, hub assemblies, crank shafts for heavy and medium commercial vehicles applications, two-wheeler crank shafts, steering knuckles, connecting rods and caps. AFL's domestic clients include Ashok Leyland, Bajaj Auto, Hero Honda, Mahindra & Mahindra, Tata Motors etc, and the railways and the defence. The company is now controlled by the Amtek group. A merger between AFL (along with other group companies) and Amtek Auto was planned in July 2008 but was shelved in January 2010 due to changed business circumstances.

In the June quarter, sales and operating profit grew by 58% and 92%. Over the past three quarters, sales and operating profit shot up by 47% and 103%. Its operating margin is high (24%). Even after a robust performance in the June quarter, the stock is trading cheap. Its market-cap to sales and operating profit ratios are just 0.2 and 0.91, respectively. At its peak in 2006-07, the stock was trading at over Rs280 but had crashed to around Rs20 in November 2008. It is now around Rs122.

Value Embedded

The planned de-mergers of Murli Industries will help its low-priced stock

Murli Industries is into solvent extraction, paper, power and cement. It produces a wide range of paper products like duplex, newsprint and printing paper, cream-wove and map-litho. Duplex paper is used for making duplex paperboard for packaging. The major customers of Murli are Philips India, Ranbaxy, Dabur India, Haldiram Foods and garment brands like Dollar and Lux. Its customers for newsprint are Dainik Bhaskar, Dainik Jagran, Rajasthan Patrika, Eenadu and Sakaal while the clientele for writing & printing paper includes Western Press, Sundaram Multicap, Navneet Publications, Thomson Press, Orient Press and Godrej. Murli has recently expanded its newsprint capacity by nearly 75% to 140 tonnes per day (tpd) and commissioned a greenfield paperboard plant with a capacity of 225tpd.

Murli Industries also sells micro-filtered edible oil under the brand name Rasila. De-oiled cake is used mainly as cattle and poultry feed. Apart from domestic sales, it exports de-oiled cakes to The Philippines, Indonesia and Vietnam. Its 18MW captive power plant meets the power requirement of the paper and cement divisions. It had diversified into the cement sector in 2008 by setting up a plant in Chandrapur, Maharashtra with an installed capacity of 3mtpa. It had planned to set up two plants in Rajasthan and Karnataka both with an identical capacity of 3mtpa, along with two captive power plants of 50MW each at a total investment of Rs1,135 crore each.

However, these projects were planned in 2007-08 when the market was extremely bullish and smaller companies could easily raise money from a variety of sources. But the situation has changed in the past two years. In fact, given the company's small net worth of Rs265 crore at the end of FY08-09 and large borrowings, capital-intensive growth plans appear too ambitious. According to the Economic Times, Murli Industries has approved a de-merger plan to divide the business into four segments - soya, paper, cement and infrastructure, the last one being the latest sector it plans to enter. It has 300 acres of land in Nagpur which will be given to an infrastructure company to set up logistic projects there.

The June quarter has been good with sales and operating profit growing 71% and 82%, respectively, over the year-ago period. Average sales and operating profit growth over the past three years have been 47% and 48%, respectively. Its operating margin is high (27%). Even after a good June quarter, the stock is cheap. It is currently trading at around Rs97.

On Track

Phillips Carbon Black is riding on tyre demand

Booming automobile sales are creating a demand for tyres which, in turn, is creating a demand for carbon black, a key ingredient for tyres.

Phillips Carbon Black (PCB) is the largest manufacturer of carbon black in India with a total capacity of 360,000 tonnes. It is increasing the capacity at its Mundra (Gujarat) plant by 50,000 tonnes to 90,000 tonnes. Its expansion programme is well-timed as tyre manufacturers are also on an expansion drive. Carbon black accounts for 12%-13% of the raw material cost of tyres. PCB is also setting up Vietnam's first carbon black plant (65,000 tonnes) to capitalise on the growing preference for setting up tyre plants there, for domestic as well as export demand. The total investment is about $60 million, which will be funded by a debt: equity mix of 2:1. The plant is expected to commence operations in Q3 FY11-12.

The process of manufacturing carbon black emits gases which was earlier flared or released into the atmosphere. They can be now used for generating electricity for captive use and sale. A carbon black plant of 90,000 tonnes can service a power plant of 15-16MW. PCB has a capacity of 60.5MW across the four carbon black manufacturing plants and is increasing capacity by 18MW. The company sells excess power through the power exchanges. Power is certainly going to earn lucrative profits for PCB due to easy availability of raw material and low cost of generation (70 paise/unit) including interest and depreciation. This is nearly offset by 60 paise/unit realised from sale of carbon credits. Performance of PCB has been great. Over the past three quarters, sales and operating profit are up 62% and 90%, respectively. It operates at a margin of 13% which is low. But the stock is cheap. It is currently trading at around Rs215.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security).

  — Moneylife Digital Team