Weekender

Latin Manharlal Securities Pvt Ltd

August 5th, 2011

Index
Sensex Nifty Auto Bankex Cap Goods Cons Durables FMCG Healthcare IT Metal Oil & Gas Power Realty

Closing
17305.9 5211.3 8312.7 11833.2 12277.8 6393.7 3913.5 6219.3 5459.0 13062.0 8636.5 2343.4 1889.0

Chg
-891.3 -270.8 -446.1 -614.6 -718.0 -362.0 -179.6 -201.4 -376.4 -954.8 -163.0 -112.5 -152.4

Chg (%)
-4.9% -4.9% -5.1% -4.9% -5.5% -5.4% -4.4% -3.1% -6.5% -6.8% -1.9% -4.6% -7.5%

SNAP SHOT During the week ended 5th August 2011, Markets continued its downtrend with the steepest fall recorded on Friday 5th August. Benchmark indices dropped 4.9% WoW triggered by sell-off in Global markets and concerns over global economic growth. Concerns also emerged over the adverse implications of the large spending cuts in the US, the world's biggest economy. The US Senate emphatically passed emergency legislation on Tuesday to avoid a first-ever government default. The US debt ceiling has been raised by US$2.7 trillion in two stages, $1 trillion immediately and US$1.7 trillion in four months. But that might not be enough to maintain its coveted AAA debt rating, according to Fitch Ratings. Closer home, in an attempt to tame inflation the RBI last week increased key lending rates by 50 bps and raised its March12 inflation target to 7% as against the previous estimate of 6%. Following the RBI move a number of commercial banks have raised their lending rates. The market sentiment remains edgy, with investors worried that higher interest rates will crimp corporate profit growth. Reports of weak monsoon rains also weighed on the investor sentiments. Rains were reported to be 22% below normal in the week to 3 August 2011 according to the meteorological department. With the Result season coming to an end, investors are more focused on the post-result management commentary to gauge the future earnings outlook. On the backdrop of Hazy global scenario all eyes are now on the US Federal Reserve's one-day policy meeting on Tuesday, 9 August 2011. At their last meeting in June 2011, Fed officials decided to keep the central bank's balance sheet at a record to spur the slowing economy after completing $600 billion of bond purchases. The Fed has held its target for the short-term federal-funds rate inside a lowest-ever range of 0% to 0.25% since December 2008.
5600

World Index
Dow Nasdaq Hang Seng Nikkei FTSE 100 Brazil Russia Mexico Singapore Strait * As on Friday 4 pm

Closing
11383.7 2556.4 20946.1 9299.9 5259.8 52811.4 1789.7 33322.6 2994.8

Chg
-856.4 -209.9 -1494.1 -533.2 -557.9 -5896.9 -169.8 -2595.2 -194.5

Chg (%)
-7.0% -7.6% -6.7% -5.4% -9.6% -10.0% -8.7% -7.2% -6.1%

Top Gainers
Chambal Fertilis Bharat Petroleum Adani Enterprises Lt Indian Oil Corp Hind. Petrol * As on 5TH AUG'11

Closing
92.5 699.5 618.1 332.1 402.6

Chg (`)
6.4 39.6 31.9 17.0 19.9

Chg (%)
7.4% 6.0% 5.5% 5.4% 5.2%

Top Losers
Bharat Forge Ltd BF Utilities Ltd. Reliance Capital HDIL Educomp Solutions * As on 5th AUG'11

Closing
278.7 620.5 494.8 124.1 301.9

Chg (`)
-50.4 -108.2 -80.7 -18.4 -44.0

Chg (%)
-15.3% -14.8% -14.0% -12.9% -12.7%

Metal
Gold ($/oz) Silver ($/oz) Aluminium ($/MT)?* Copper ($/MT)* Lead ($/MT)* Zinc ($/MT)* * As on Thursday

Closing
1666.4 39.4 2447.3 9329.5 2475.3 2303.0

Chg
51.4 -0.3 -163.8 -464.5 -161.8 -192.0

Chg (%)
3.2% -0.6% -6.3% -4.7% -6.1% -7.7%

Nifty
5516.8 5456.6
5404.8 5331.8 5211.3

Date
1-Aug-11 2-Aug-11 3-Aug-11 4-Aug-11 5-Aug-11 # NA - Not Available

DII (Cash)
508.1 557.2 544.8 NA NA

FII (Cash)
-618.9 157.2 -82.7 -801.1 NA

FII (FO)
574.4 128.0 -651.2 -1382.9 -1391.8

5500
5482.0

5400 5300 5200 29-Jul 1-Aug 2-Aug 3-Aug

ADR's
Infosys ICICI Bank HDFC Bank Tata Motors Wipro

Closing
58.2 42.8 32.7 19.4 11.0

*Chg ($)
-3.7 -2.8 -2.0 -1.9 -1.0

Chg (%)
-5.9% -6.2% -5.8% -8.9% -8.5%

4-Aug

5-Aug

Research Desk

GDR's
RIL SBI L&T

Closing
35.2 102.2 36.4

Chg ($)
-2.3 -8.0 -2.0

Chg (%)
-6.1% -7.3% -5.3%

Global Economic Update United States:

Latin Manharlal Securities Pvt Ltd

Banking Data
Credit Growth Deposit Growth

17-Jun-11 Chg (` (` Cr) Cr)

4086326 5488682 84805 143981

Chg (%)
2.1% 2.7%

US Mortgage Bankers Associations index Increased by 7.1% for the week ended July 29, 2011 compared to prior week fall of 5.00%. The groups refinancing gauge rose by 7.8% and purchases index Increased by 5.1% for the same period. US vehicles sales stood at 12.20 million for the month of July 2011 up from 11.41 million sold in June 2011 and a revised 11.54 million vehicles sold in July 2010. Initial Jobless Claims dropped by 1,000 to 400,000 from revised figure of 401,000 for the week ended July 30, 2011. Continuing Claims increased by 10000 to 3.730 million for week ended July 23, 2011 from earlier revised claims of 3.720 million of previous week. US Factory order for June decreased 0.8% to $440.7 billion compared to 0.6% rise in the month of May. U.K. & Europe: UK PMI service Index accelarated to 55.4 in July from 53.9 reported in June. Bank of Europe kept their bank rate unchanged at 0.5% for the month of August. Unemployment rate in Italy fell to 8.0% in June from 8.1% recorded in May. France consumer spending on manufactured products increased 1.1 in June after decling a revised 1.2 percent in May. Asia: Japan vehicle sales dropped 27.60% for the month of July compared to 23.30% drop in the month of June. Bank of Japan kept its target rate unchanged at 0.10% for the month of August.

Economic Calendar Date Economic Data

UNITED STATES 10-Aug 10-Aug 11-Aug 11-Aug 12-Aug 9-Aug 9-Aug 9-Aug 10-Aug 11-Aug 12-Aug MBA Mortgage Applications Wholesale Inventories Initial Jobless Claim Continuing Claims U. of Michigan Confidence UNITED KINGDOM Industrial Production(YoY) Total Trade Balance GERMANY Current Account (EURO) Cunsumer Price Index(YoY) JAPAN Japan Buying Foreign Bonds Industrial Production YOY%

Previous
-5.00% 1.80% 398K 3703K 63.70 -0.80% -4060 6.9B 2.40% 440.4B -1.60%

Primary Articles Inflation

CURRENCY, CRUDE & G-SEC

79.2

USD-JPY
78.89 78.45
44.9 44.7 44.4

USD-INR
44.8 44.6
44.3 44.3

11.56%

11.58%

11.13% 10.49%

10.99%

78.6 78.0 77.4 77.21 77.15

77.06

44.2 43.9

44.1

25-Jun

2-Jul

9-Jul

16-Jul

23-Jul

76.8
1-Aug 2-Aug 3-Aug 4-Aug 5-Aug

1-Aug

2-Aug

3-Aug

4-Aug

5-Aug

95.1 92.8 90.5 88.2

94.89

Crude ($/bbl)
8.50% 93.79
91.93

Govt. Yield
8.45%

8.40%
8.30%

8.35% 8.26%

8.32%
8.31%

86.63 85.9 1-Aug 2-Aug 3-Aug 4-Aug

8.20% 86.27 8.10% 5-Aug 8-Jul 15-Jul 22-Jul 29-Jul 5-Aug

Research Desk

Latin Manharlal Securities Pvt Ltd

GEI INDUSTRIAL SYSTEMS LTD. (GEI)

CMP (05/08/11): `156 Rec: BUY Target: `202 Upside: 30% Eq. Capital (FV `10): `16.62 Crs Market Cap: `259.3 Crs Shareholding: Promoter-41.41%, FII-21.19%, Public-27.18%, FIs & MFs-10.23% 52-w H/L: `239/136

COMPANY PROFILE
GEI Industrial Systems Ltd (GEI) is a Bhopal based company manufacturing air cooled steam condensers and heat exchangers. Originally, it was formed as an ancillary unit of BHEL. GEI products are mainly used in industries like Power Generation Plants, Refineries, Fertiliser plants etc. GEI is a leader in air-cooled condenser technology and is gaining acceptability due to scarcity of water and also some state governments forcing for replacing of water cooling system with air cooling system by law. Its group companies are GEI Godavari Engineering, GEI Foods Pvt Ltd and GEI FHM Consultants. The company is now receiving very good order flow mainly from power plants and is also planning to introduce some new products like Deaerator, HP heater, LP heater etc. PRODUCT BASKET Air Cooled Steam Condensers Air Cooled Heat Exchangers Air Cooled Process Gas Coolers Cooling Modules & Radiators Water Cooled Air Compressors Coolers Ambient Air Heaters

MANUFACTURING UNITS There are 2 manufacturing facilities. One of the facilities is in Govindpura spread over 8 acres where manufacturing of headers, fin tubes, bundle assembly and testing is done. The 2nd Unit is at Mandideep about 25 K.M from the existing workshop is spread over a vast area of 30 Acres having 5 large work shop for carrying out fabrication of large fabricated assemblies of Air cooled heat Exchanger and Air cooled vacuum steam condensers and facility for shop run test.

INVESTMENT POSITIVES
Growing demand for Air cooled condensers
Having realised the harmful side-effects of water used in condensing technology, Tamil Nadu was the first state to ban the use of water for this purpose. This was followed by Chattisgarh and Rajasthan, where water availability is a problem. Moreover, with the industry moving towards euro norms and other international industrial standards and increasing environment consciousness, players have started to shift away from water condensers to alternative air-cooled condensers. Maintenance cost of Air Cooled units is 25% of those of Water Cooled Systems. This augur well for GEI as it is the largest player in air-cooled condensers apart from other two unorganised players. Currently, air cooled steam condensers make up 70% of GEIs order book, the balance being taken up by heat exchangers for the oil and gas industry.

Tie-up with Innospin expected to add to the growth momentum

GEI has formed a technical alliance (JV) with Innospin of Switzerland, to locally manufacture and supply aircooled steam condensers. This is a strategic initiative that will enable GEI to tap the huge opportunity offered by Mega Thermal Power Projects, especially super critical power projects. The products will be manufactured in GEI's manufacturing facility in Bhopal.

Research Desk

Latin Manharlal Securities Pvt Ltd

Technology transfer and design support provided by Innospin will not only enable GEI to expand its market share and make foray into the global market but also target better topline and bottomline growth. With the tie-up, GEI is set to be the only Indian company that will be equipped to locally manufacture and supply aircooled condensers to new and upcoming super critical thermal power stations. The tie-up will help GEI to penetrate into air cooled steam condensers for 600 mega watt and above power generation segment. GEI claims to have a 60% market share in the air-cooled condenser market. The joint venture will get its first order in the next six months. It expects at least one or two orders for aircooled condensers for supercritical power plants in the current fiscal. The average ticket size for the aircooled condenser order for a supercritical power project is `125-150 Crs.

Capacity expansion largely on track

GEI is in the process of augmenting its capacity to manufacture air-cooled condensers to 5000 MW by 2013E from the current 3000 MW, at a cost of `105 Crs. Phase I and II of the capital expansion plan is completed and the facility is operational right now. In Phase I & II the company has invested about `55 Crs. On completion of Phase III the capacity will increase to 5000 MW from current 3000 MW. Phase I is to full-fill captive fabrication requirement of GEI. But Phase II is partly for EPC and BoP (Balance of Plant). GEI has been a supplier to power projects set up by Ultratech cement, Shree cement and Jaypee Group. The capex is partly funded from the proceeds from issue of cumulative convertible preference (CCPs) or warrants. Promoters have granted warrants to themselves at a price of `250 convertible within 18 months (from May 24, 2011). Prevailing Current Market Price was around `170-180 at that time. Banyan Tree (an Aditya Birla Private Equity fund) has been granted CCP shares (each convertible at ` 250 per share within 18 months of allotment.

Healthy Order Book

GEI currently has order backlog of `400 Crs with ` 125 Crs worth order booked during 1QFY12. The current order book comprises of orders from Power (~70%) sector and Oil and Gas (~30%) segment. The company is expecting order inflow of `550 Crs in FY12E compared to an order inflow of `600 Crs in FY11. The company's orders are fixed price contracts. We believe with the back of increase in capacity and technological tie up with Innospin GEI expects an increase in order inflow from UMPP, EPC, and alternate fuel segment in the coming quarters translating to buoyant growth and solid returns. The company has given a guidance of consolidated net revenue of `550 Crs for FY12E.

Reputed Clientele
GEI's client list includes BHEL, Tata Electric Company, HPCL, ONGC, Bharat Pumps and Compressors, IPCL (Baroda), Reliance Industries, Toyo Engineering, UHDE KTI, Mangalore Refineries, Davy Power Gas, Chemtex, etc.

VALUATION
At the CMP of `156, the stock is trading at 6.9x its FY12E EPS of `22.48. We recommend BUY on the stock with a 12-18 months target price of `202, providing an upside of 30% from the current levels.

Research Desk

Latin Manharlal Securities Pvt Ltd

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