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Friday, October 31, 2008

Rishi Laser Ltd - Good Small Cap investment

ScripScan:Rishi Laser Ltd
Industry:Engineering
BSE:526861
Face Value:10
Cmp:37
Target:60
Target percentage:60%+
Duration:6-9months.

Introduction:-
Rishi laser is a leader in the usage of Laser Cutting for manufacturing components and assemblies.Rishi laser ltd(RLL) set up its first Laser Cutting facility in 1995. Even though Laser Cutting was very popular in Western Countries at that time, Laser Cutting of metals was very new to India.The progress in the first five years was very slow because Laser Cutting was still looked as a very expensive method of processing steel. Also the Indian Engineering Capital Goods Industry was passing through a very difficult period in later nineties. The scenario has completely changed today for the sector and the company. The Engineering and Capital Goods sector is booming in India and Laser Cutting is fast becoming a very standard method of processing flat steel.The fabrication industry is highly fragmented and there are very few organised large Companies in the business.Rishi Laser continues to be the leader in the business in terms of capacity with several CNC steel processing machines.RLL is now embarking on major growth path to add further facilities to enhance capacity.

Initiatives:-
Rishi was earlier concentrating on only being a service provider.The management says," We increasingly found that this was limiting growth since customers were demanding further processes including bending, welding, painting etc. We therefore started moving towards value addition and supplies of assemblies and fabrications and this trend is expected to increase.Since the company is a service provider and a supplier of assemblies it became imperative to move closer to the customers.To move up the value chain the company has acquired the plant & machinery of a British Sheet Metal Fabrication Company and the same has been installed at its existing plants.On last fiscal the company commisioned separate facilities to create a foundation for large exports in coming years by making a small beginning in exports. The welding capabilities of the Company too have been strengthened to ensure capability to service the sector.
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Outsourcing Oppurtunity:
Due to increasing cost pressures,the European Companies are increasingly being forced to outsource components and assemblies. RLL is well placed to supply light and medium fabrications because of its modern facilities, good Engineering base and experience of similar supplies in domestic industry.We beleive,In the current global economic scenario the trend towards outsourcing will increase. Also it would be important to note that,India has a tremendous cost advantage where the items have a high Engineering content. RLLs products are not mass produced items and require Engineering inputs at all stages.Thus Outsourcing can become a huge growth provider for the company in future
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Risks And Concerns-
Rishi is a supplier to the Engineering Sector.So any down trend in Engineering Sector will have an adverse effect on the Company's prospects.Interest rate hardening and higher inflation could increase costs, which cannot be passed on to customers. Any appreciation of the Rupee will affect the profitability of the company's exports.Poor export infrastructure could force overseas customers to look at other countries for their sourcing needs.

Prospects:
The Company has continued to consolidate its position in the business by creating substantial additional capacity. The demand for quality steel profiles and fabrications made from such profiles, is very robust. Large capacity is a great competitive strength as deliveries can be made very fast as also greater flexibility/variety of supply is possible. As Indian Companies in' the engineering sector have increasing order backlogs their requirement is for quicker & timely deliveries. RLL is very well positioned to fulfill this demand because of its large capacities as also due to plants at multiple locations.Also it must be noted that the demand for steel is expected to grow substantially in the coming decade. The bullishness in this sector is evident from the huge capacity creation that is being planned by the steel sector. The proportion of sheet steel and plates consumed by the engineering sector will grow proportionately. The processing of this steel into Components, assemblies and fabrications will require huge capacity creation by the fabrication industry. We therefore expect the requirement for the company"s products and services to increase manifold.

Outlook-
The demand has grown for the sector and the company all round as the Engineering Industries have revived and are booming. As per CMIE the ongoing CAPEX by India Inc will be over Rs. 8,00,000 crores.The demand in Electrical Switchgear Industry and the Earth Moving sector has exploded due to increased spending on infrastructure. We believe that this process will get accentuated as India will have to spend increasingly large sums of money on infrastructure if GDP has to grow at 8-9% to p.a.The Company has moved towards more value addition to cut steel. By doing this the potential market that the Company can cater to has increased by 100 times. This has also opened opportunities for RLL to move from light fabrication to medium fabrication.The management adds," We believe that the opportunities in the medium fabrications are substantially higher - especially from the Earth Moving Industry".Thus all things are looking up for rishi laser and this all will take the company to newer heights.

Financials & conclusion:
Rishi has been consistently perfoming well over the last 4 years or so and the same trend is expected to continue in the coming years as well.We expect RLL to deliver a topline of aound 170crs and a bottomline of about 7.2crs for fy09 .With an equity base of 8crs the bottomline results in an EPS about 9rs.At the current price of 37rs RLL quotes at a P.E of slightly above 4 times.Another factor which well may interest our members would be the presence of Rakesh jhunjhunwala in the company.Yes the renowned investor is having 14% stake in the counter bought at 100rs.The company has got a good dividend coverage ratio with dividend yield coming to 5.5% at the current market price.

Present valuation looks very attractive at the moment and considering its leadership in the sector,the export potential,outsourcing oppurtunities and booming exconomy,WE BELEIVE RISHI LASER WOULD BE A SCRIP TO WRITE A NEW SCRIPTURE FOR ITSELF IN THE COMING YEARS.WE ASSIGN A BUY ON THE COUNTER WITH A TARGET OF 60RS.

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