Pitti Laminations – Multibagger

Pitti Laminations :
CMP: Rs.47.05

Background

Incorporated in 1983, Pitti Laminations Limited (PLL) is engaged in the manufacture of electrical laminations for use in various Motors, Alternators, Direct Current (DC) Machines, Pumpsets, Hydroelectric generators etc. The company also manufactures Die-Cast Rotors and Assembled Stators, besides manufacture and sale of Press Tools, Progressive Tools Jigs and Fixtures. PLL’s manufacturing facilities are located at Nandigaon (Andhra Pradesh). The company has established business relationships with Siemens, BHEL, Alstom Projects, VA Tech Hydro, Crompton Greaves, Cummins Generator Technologies, ABB, Marathon Electric India, and Bharat Bijlee etc. in the domestic market and GE Consumer Products (Canada), GE Transport System (USA), Groupo Electromechanico (Mexico), E-Mod (Germany), and Welco Technologies (USA) in the overseas market.

Investment Rationale & Conclusion

Pitti Laminations has been facing difficult times for the past few quarters. Let us analyze what went wrong for the company and inspite of current negatives what makes us positive on the stock.

What Went Wrong for the Company

Following the meltdown in various global economies witnessed last year, the export revenues of the company got severely dented. The company’s sales growth over the last four years which was mainly driven by exports to GE got greatly impacted on account of reduced order flow and reduced offtake by GE.

Inspite of achieving higher revenues in FY09 (compared to FY08), the company registered lower profits – this was on account of a loss of Rs.9.75 crores on hedging operations on its foreign exchange transactions. The aftereffect of the slowdown in various economies was reduced sales by the company in the first 9 months of the current FY (compared to same period last year). The company has made a loss of Rs.2.56 crores for the 9 months period ended December 2009 – the loss however is on account of an extraordinary expense of Rs. 5.60 crores towards costs related to engineering analysis for repair procedures, which the company has paid to GE.

What Has Changed & What makes us positive on the stock

The economic environment has been improving and the company has received orders worth over Rs.160 crores (US $ 36 mn) from GE, to be executed over the next 2 years.

From initially starting off with manufacture of electrical laminations for use in general purpose industrial motors (25 to 30 HP), the company’s sales mix has steadily shifted away from this segment in favor of application in machines used in the infrastructure sector (transportation, earth moving equipment, oil and gas exploration etc) and the power sector having relatively lower competitive intensity and lower business risk.

The company’s has registered much higher operating margins for 9 months ended Dec 09 over the same period last year. (17.32% against 10.58%). In view of the recent orders from GE and the initiatives undertaken by the company in the domestic markets, we believe the revenues of the company in FY11 can be significantly higher compared with FY10. Significantly higher revenues coupled with improved margins would have a multiplier effect on the profitability of the company. In view of the above factors, we expect the profitability of the company for FY 11 to be significantly higher compared to the current FY.

Valuation

The company currently has a market cap of roughly Rs.42 crores. In view of the order from GE & domestic sales, Sales of Rs.200 crores in FY11 may not be difficult to achieve. Assuming Operating margins of 15% conservatively (as against Margin of over 17% achieved in 9 months ended Dec 09), would result in an Operating Profit of Rs.30 crores. Factoring Interest, Depreciation and Tax, the company can easily achieve an EPS of Rs,12-14. The stock available at a PE of less than 4 and a Market Cap of Rs.42 crores for a company which can potentially make Operating Profit of Rs.30 crores in a single year, therefore looks very attractive.

The major concerns are – any slowdown in the economy would impact the capital goods sector. Moreover, high debt on the balance sheet is another major concern. The other major concern is low liquidity in the stock where the impact cost of buying and selling could be high. The stock is therefore advised for long term investors with an appetite for High Risk.

There is no doubt about the fact that the company has witnessed difficult times, we however believe that the worst may be getting over for the company. We believe the stock can witness a rerating once the effect of the positive factors gets reflected by way of improved financials of the company. The current negatives may therefore be an opportunity for the long terminvestors . Moreover, given the strong demand in the capital goods sector in the domestic markets, the stock has the potential to be a value creator over the long term. We believe the negatives are more or less factored in the current market price of the stock.