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Friday, October 30, 2009

Premier Explosives - Small Cap Growth Stock

Secunderabad-based Premier Explosives Limited (PEL) is a small but growing company that will not appear on the radar of institutional investors. Its turnover for the year ended March 2009 was just Rs70 crore but it claims to be a manufacturer of the entire range of explosives and accessories in India.

PEL claims to have the widest range of products and technologies in explosives and accessories. The company also undertakes complete drilling and blasting contracts in collaboration with associates having drilling and excavation resources. Its manufacturing units are based in Madhya Pradesh, Andhra Pradesh and Maharashtra.

Founded in 1980 by AN Gupta, a gold medallist in mining engineering, PEL is a company with a difference. Look at its enviable track record in research & development (R&D) work. PEL’s R&D facility is recognised as an established research centre by the Centre for Scientific and Industrial Research (CSIR) and for doctoral studies by Osmania University, Andhra Pradesh.

In January 2007, the company had signed a long-term contract of Rs70 crore for 10 years (renewable for another 10 years) with Satish Dhawan Space Centre, Sriharikota (SHAR), belonging to Indian Space Research Organisation (ISRO) mainly for the operation and maintenance of the second propellant plant (SPP) project at SHAR. Recently, PEL has signed a memorandum of understanding (MoU) with the material science department of Gulbarga University for taking up R&D activities in the area of material sciences. The company has received a number of awards for R&D, environment conservation, industrial relations and technology. It won the prestigious Defence Technology Absorption Award 2007 from the Defence Research Development Organisation (DRDO), Ministry of Defence, Government of India. PEL also has two joint ventures abroad—Premier Synthas (Turkey) and Premier Georgia (Georgia), mainly for manufacturing explosives and accessories.

In August 2008, the company formed a joint venture with M/s VXL Technologies Ltd, Faridabad, called ‘VTL Premier Pyrotechnics Ltd’ for manufacture of pyrotechnic devices, fuses, etc, used for defence. The company also received a licence from the Indian government to manufacture propellants, pyros, hexanitrostilbene (HNS), hydrazinium nitroformate (HNF), a cyclic nitramine explosive called CL-20 and site-mixed explosives. This licence will help the company expand its product portfolio and the quantity of output ensuring higher revenues. Over the next two years, the company proposes to invest Rs50 crore for capacity expansion and backward integration, i.e., manufacturing raw materials used in the company’s products. Alongside, the company expects to obtain new orders as the Indian government proposes to increase defence expenditure by 33% for 2009-2010 and the fall in raw material prices could reduce manufacturing costs, currently (2008-2009) at 54.53% of the total cost.

Valuations & Outlook
The stock is trading at Rs66, which is not cheap. Its market-cap is 0.65 times its five-quarter sales (annualised) and five times its annualised operating profits. But its PE is 17—lower than 25 of Solar Industries. In FY08-09, PEL reported sales of Rs70.23 crore (a rise of 23% over the corresponding period the previous year); operating profit was down from Rs9.7 crore to Rs8.06 crore (-17%). For the June 2009 quarter, the company posted sales of Rs23.08 crore (up 51%) and operating profit went up 95% to Rs4.07 crore.

Over the past five quarters, its sales have grown by an average 28%. Its operating margin averaged 13% over the past five quarters. It would be worth buying this stock at Rs45.
Source: Moneylife

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