FRIDAY CAPITA TELE RECOMMENDATION

CAPITA TELE RECOMMENDATION DT:3RD AUGUST 2007





GEI Industrial Systems

Condensing the hot Power and Oil & Gas sectors

The regulatory compulsion and the fast growth in user industries augur well for the company’s growth

Buy
GEI Industrial Systems

BSE Code
530743

NSE Code
Not listed

Bloomberg
GEIH@IN

Reuter
GEIH.BO

52-week High/Low
Rs 93 / Rs 38

Current Price
Rs 82 (as on 3rd August 2007)


Formerly known as GEI Hamon Industries, GEI Industrial Systems (GEI) is a specialist in Heat Transfer Technology. It is into Design, Engineering and laying of condensers, power transmission and other auxiliary engineering services for Power Plants (combined cycle steam based and gas turbine based plants, nuclear power plant, hydroelectric power plants and gas and diesel engine based power plants), Petroleum refineries, LNG terminals, Petrochemical and chemical plants, Oil and gas fields, Off shore gas processing platforms, CNG filling station, Electrical locomotives, Fertilizers plants, Metallurgical industry, Cement plants and Power utilizing equipments.

Traditional water condensers are not environment- friendly

GEI focuses on air-cooled condenser technology. Traditionally, in power plants and in any industry wherever co-generation plant is utilized water is used as a medium to keep the condensers cool. Particularly in large industry or large power plants, whenever hot steam is generated, the entire steam is collected in a big container through connected pipeline and then purified water is passed from the other side of the container, converting the hot steam into water. Further that impure water, which may be filled with chemicals etc depending upon the industry and the fuel used to generate power, needs to be removed or eliminated or often mixed with earth water. This impure the earth water. This makes the natural water hazardous. However industry keep on using this water condensing technology as it is much cheaper to any other alternatives. However gradually with increasing government regulations and environment- consciousness, use of this traditional technology is giving way to air-cooled condensing, where air replaces water as a cooling medium. GEI stands to benefit from this trend in a big way.

Governments have started focusing on efficient utilization of water

Having realized the disadvantage and harmful side effects of the water used in condensing technology, TamilNadu was the first state to ban the use of water for this purpose. This was followed by the States of Chattisgarh and Rajasthan, where water availability is a problem.

Recently, PMO has formed an advisory council to ensure the effective utilization of earth water. So slowly but surely the Government is understanding the unproductive and harmful utilization of water. Equally with the industry moving towards the EURO norms and other industrial standards, and increasing environment consciousness, the players have started to shift away from the water condensers to its alternative Air Cooled Condensers. This augurs well for GEI as it is the largest player in Air cooled condensers apart from other two unorganized players in the industry.

The target industry of the company’s product is growing fast

There are two types of Air Cooled condensers that are manufactured by GEI, namely air-cooled heat condensers, used in oil & gas & refinery sectors and air-cooled steam condensers, utilized in power stations.

In Oil & Gas sector, the air-cooled heat condensers are utilized at all the stages of oil exploration, processing and transportation stages. Also it is used in refinery sector to condense the vapour at different temperature to result in petrol, diesel, kerosene, LSHS, asphalt etc depending upon the temperature. With massive amount of investments happening in oil & gas sector and in refineries, there is good opportunity for the growth of the company’s products. Although the company’s product will cater to small portion of the total investment, this will still augur well for the company considering its present size.

In power sector, the steam condensers are utilized in all sizes of power generation plants whether they are captive or ultra-mega projects. The hot steam is allowed to enter in the company’s equipment and on the other side, natural air is allowed to pass. The fans inside the equipments will convert the hot steam into cool air and will pass it on to the atmosphere through a connected chimney.

As per the projections in the 10th and 11th Five Year Plan of the Govt. of India, new capacity addition in Power Generation have been projected as 1,10,000 MW. This translates to an investment of Rs 400000 crore approximately in the power generation field. Of this, upto 50000 MW of power capacity contracts has already been awarded and another 28000 MW of the capacity contracts will be awarded by this year-end. Correspondingly there will be huge investment in the transmission and distribution area, which is estimated to be about Rs 450000 crore.

Wants to venture into electrical package apart from the present mechanical presence

The company so far caters to a small segment of the entire power elector mechanical equipment market. Also its presence in power transmission business is very limited. Often with power technology becoming more sophisticated and considering the vast requirement of power, it is very economical to go for higher capacity power generation. Also it is equally economical for a power utility player to call for bids and award an entire EPC contract to the most competitive player.

Already players like Thermax India are into this sort of business. It produces boilers and collects the other requirements like turbines, alternators, auxiliaries etc from other players. It collects condensers from GEI.

Hence GEI has plans to venture into EPC contract and also to scale up its Transmission line business. However in the initial stage the company would only be a regional player in the states of Tamilnadu, Chattisgarh and Rajasthan where it has its strong foothold.

Very recently, the company has formed a separate business group viz. GEI- Power Transmission Business Group to avail of the tremendous potential of the power transmission business.

At present, the company is engaged in the field of 33 KV sub-stations, including control buildings, erection of new sub-stations, upgradation/ renovation of existing sub-stations, capacity augmentation of switchyards. It has enough capability for executing Switchyard Project in Higher KV range also. Its experienced manpower includes engineers who have experience with BHEL, Power Grid Corp. of India (PGCIL) and ABB.

GEI’s engineering services business unit offers services primarily in the areas of Heat Exchanger & Condenser Services, 33 KV / 11 KV Switchyards, Switchgear Applications and Transportation Systems.

Strong order book

As on July 2007, the company had Rs 175 crore worth of orders in hand out of which export orders were around Rs 35 crore. Further there are many orders, which are under negotiations. NTPC is one such company with which GEI is negotiating for converting the water condensers to air-cooled condensers.

The financials are growing stronger

In engineering company, quarterly results never give a true picture of the entire year. Nevertheless, for the quarter ended June’07, the net sales grew by 685% to Rs 27.64 crore. The PAT was up by 314% to Rs 1.53 crore. First quarter accounts for very small portion of the annual revenues and profits.

In FY 2007, the sales grew 57% to Rs 108.39 crore and PAT went up 50% to Rs 5.30 crore.

Attractive valuation

For FY’08, we expect the company to register net sales and net profit of Rs 175 crore and Rs 11.73 crore. This gives an EPS of Rs 8.2 on equity share capital of Rs 14.13 crore. Current market price of Rs 82 discounts this only 10 times.

GEI Industrial Systems: Financials





0303 (12)
0403 (12)
0503 (12)
0603(12)
0703(12)
0803(12P)

Net sales
37.24
48.67
60.83
69.18
108.39
175.00

OPM %
9.2
12.0
12.2
15.3
13.4
14.0

OP
3.44
5.85
7.42
10.6
14.54
24.50

Other income
2.55
1.83
1.95
0.09
0.42
0.65

PBIDT
5.99
7.68
9.37
10.69
14.96
25.15

Interest
4.47
5.16
5.26
4.58
4.66
5.60

PBDT
1.52
2.52
4.11
6.11
10.3
19.55

Depreciation
1.13
1.72
1.49
1.48
1.47
1.77

PBT
0.39
0.8
2.62
4.63
8.83
17.78

Tax
0.30
0
0.40
1.09
3.53
6.05

PAT
0.09
0.80
2.22
3.54
5.30
11.73


0.1
0.6
1.6
2.5
3.7
8.2

* Annualised on current equity of Rs 14.13 crore of face value of Rs 10 each
Figures in crore, Source: Capitaline Corporate Database




GEI Industrial Systems: Result





0706(03)
0606(03)
Var. (%)
0703(12)
0603(12)
Var. (%)

Sales
27.64
3.52
685
108.39
69.18
57

OPM %
12.9
49.1

13.4
15.3


OP
3.56
1.73
106
14.54
10.6
37

Other Income
0.32
0.03
967
0.42
0.09
367

PBIDT
3.88
1.76
120
14.96
10.69
40

Interest
1.4
1.02
37
4.66
4.58
2

PBDT
2.48
0.74
235
10.3
6.11
69

Depreciation
0.39
0.37
5
1.47
1.48
-1

PBT
2.09
0.37
465
8.83
4.63
91

Tax
0.56
0

3.53
1.09
224

PAT
1.53
0.37
314
5.30
3.54
50

EPS (Rs)*



3.8
2.5


* Annualised on current equity of Rs 14.13 crore of face value of Rs 10 each
Figures in crore, Source: Capitaline Corporate Database


Terms & Disclaimer :
Keep all our advice strictly confidential. It should not be shared in any form with others.
Though all care is taken in arriving at recommendations, the equity shares may rise or fall in a manner not foreseen.
Hence Capital Market or any of its employees will not be liable for any loss suffered.