Multibagger Series - a cooling stock

-
Dear Readers,

Markets are witnessing outrageous bleeding on collective sentiments related to various national and international issues. Some good stocks even fell more than 50% from their year high and offering a wonderful opportunity for patient investors. But considering the dense of ongoing negative pulses and associated sentiments, we should be very careful on any investment decisions related to equities. I hope market may provide better discounts in recent future, probably with in the first half of year. There are no visible serious fret factors for long term investors and whatever happening is a cycle of provisional actions, based on sentiments derived from series of negative cues.

It seems the level of crashes were not corresponding to the depth of sentiments or its at the lesser side. The overall impacts on the recent series of negative reports were strong enough to bring our indices down to some 25-30% but it was just below 20%. Even after a flood of negative issues and unparallel corruption revelations in the recent past, people are still buying our stocks and keeping faith on the market, FII's are still pouring money to our market even smaller in size. Remember, there is a buy for every sell. Just list out the chain of scary issues occurred in last couple of months; Alarming figures on inflation, negative IIP data, negative bank rates, increasing fuel price, spreading middle east anarchy, gigantic corruption revelations including Adarsh Flat, commonwealth games, 2G Spectrum, S-Band, harassing Radia tapes and now the obscurity raised by DMK on Govt’s existence..

There is some sure and different charm exists with our market/economy; otherwise the above reasons were more than enough to bring our indices to another historic lows. But there is some stubborn strength is underlying somewhere with our economy. The main pillars are still strong, which affirms my confidence or makes me more positive on our market. Market is really struggling to regain the charm, I would like to suggest you all, keep your faith on good companies headed by genuine management, which will surely bestow you good returns in the long run. Putting entire money in few stocks or having big numbers in certain stocks at a go, will not exactly the smart side in view of the ongoing scenario. This tact may prove hazardous considering the dynamic response of market to even trivial negative news threads. Accumulation in small batches at possible lower levels, the only strategy which will be beneficial or at the safer side in future. Because market is started responding quicker than ever and like anything corresponding to the tempo of our times.

I would like to place few inputs on an outstanding company as promised earlier. First of all, let me thank to Mr Mahesh, Bangalore, who grabbed my attention to this company in last year, reminded as well encouraged me to talk on the scrip. After a close scrutiny, I hope this company can provide superior returns in the long run for patient investors. Myself, already been analyzed and firm to consider it as a multibagger on the basis of differentiation and sensible monopoly in the segment. Moreover, I am confident on this company and the products/services they are configuring as an essential service to the vibrant Power/Energy/Oil sectors. Subsequent lines are plain personal conclusions, compilations or convictions to have this stock, I am satisfied with the horizon developing by this company considering the available data and feels the path ahead is promising. I have good faith on this company, their business model as well on its proficient management.

BSE Code - 530743

Scrip - GEI Industrial Systems Ltd

CMP – 170.55 (07/03/2011)

EPS – 15.34

PE – 11.12

BV – 52.57

FV - 10

52 Week L/H – 91.10/238.90

Promoter’s holdings – 41.41%

Chairman/MD – Mr. C E Fernandes

GEI Industrial Systems Ltd, an ISO 9001-2000 certified company with ASME’ "U" Stamp engaged in design, engineering, manufacturing, installation, commissioning and maintenance of extended surface heat transfer technology mainly for Power, Oil and Gas industries. The company is specialized in Heat Transfer Technology, an obligatory element for entire engineering processes irrespective of nature and size. It offers a wide range of equipments/installations including air cooled vacuum steam condensers, air cooled heat exchangers, process gas coolers, cooling water systems, transformer oil coolers etc. The company provides its products/services to a vast range of engineering installations such as power plants, crude oil/Petroleum refineries, CNG/LNG terminals, petrochemical/chemical plants, Oil and Gas fields, off shore gas processing platforms, fertilizer plants, metallurgical industry, electrical locomotives, cement plants, Sugar industry etc.

GEI have clear domination in the segment as well there is no Indian or listed Indian entities as competitors except a couple of foreign players. The company holding a market share of 45% in Air Cooled Heat Exchangers in the Oil & Gas Sector and about 70% in the Power segment. It has an admirable track record in the Oil, Gas and Power sector installations in both American continents, Europe, Africa, Asia and Australia. GEI has also entered into marketing agreement with X-Wire, an American company, to tap the US market and to meet up its outsourcing requirements in the heat exchange platform. GEI is also engaged as a major contractor to the massive Rural Electrification schemes of Govt. of India, targeting electrification of more than 1 lakh villages in different provinces of our nation, to be completed over the next 3-4 years.

GEI having the essential expertise and proved experience in the air cooling space is likely to be the key advantage to their rising demand. The conventional water cooling system depends on constant water availability and the paucity of water is the main obstacle for cooling processes at certain engineering sites. Water shortage has been detected as one of the prime reasons for many recent disorders/shutdowns in power plants all over India. GEI’s indigenously designed air-cooling concept work on freely available air, instead of diminishing water for cooling processes.

In a survey of India’s water situation, about 21 million wells drilled are lowering water levels in most of the country. In North Gujarat, the water level is falling by 6 meters (20 feet) per year. In Tamil Nadu, wells are drying almost everywhere and falling water tables have dried up 95% of the wells owned by small farmers. And the story is same or more worsen in other states. You can estimate the future business potential of this company by connecting the above stunning facts on water scarcity; moreover 70% of our planned power additions are setting up in water-scarce areas. The company will surely benefits from the rising demand for its air-based cooling systems from power/energy and petroleum industries, since accessibility of water is drastically retreats. In India, these two industries are highly reliant on water for their cooling requirements and are facing operational troubles at times when sufficient water is not available.

GEI is prepared to gain from the anticipated massive power projects by providing air-cooled solutions that offers remarkable benefits over conventional water-cooling systems. The company is undergoing a 100cr expansion plan, which will greatly enhance its capacity by end of this year. The expansion will allow GEI to double it’s order intake capacity to Rs. 1000cr from the current 500-600cr levels. It is estimated that, on the completion of proposed expansion plan, the company will emerge as one of the top three players in the segment globally.

Any threat of new entries in the segment is limited because the entries in such businesses are purely related to proved expertise/experience. Conglomerates who make considerable investments on large projects must verify the technical expertise, competence and capability on prompt deliveries from the partner. I don’t feel any fresh player’s entry as a threat in recent future, because the experience or past performance is appreciated largely in such service segments and that’s the lone eligibility condition to adopt such a partner. Normally, our power players will hardly try their luck with any newbie in the sector to play on their huge investments. .

There will be a huge investment in the power transmission and distribution area which is estimated to be around Rs. 4500 bn .Considering the vast prospective in this field, GEI has also stepped in to the power transmission business. A separate group, GEI- Power Transmission Business Group has been shaped in the company itself and experts in these fields have been recruited recently. The company also prepared to enter in to the area of Power Generator components, heavy fabrication and machining of generator components etc. GEI is planning to expand this potential business to the tune of around Rs. 2.5bn by next 3-4 years.

The dominant client base including established players and the probable demand on their products/services are indicating a clear horizon for the company in the future. I have listed few selected domestic and international players who are constantly getting cooled by GEI:-

ABB Ltd
Bharat Oman Refineries Ltd
Bharat Pumps and Compressors
BHEL
BPCL
Cairn India Ltd
Chennai Petroleum Corporation Ltd
Crompton Greaves Ltd
Davy Power Gas
Dresser Rand, USA
Engineers India Ltd
Essar Oil Ltd
G.S. Engineering, Dubai
General Electric, USA
Hanover Middle East, Oman
HPCL
IOC
IPCL
Kirloskar Pneumatics Co. Ltd
Larsen & Toubro Ltd
MRPL
ONGC
Oil India Ltd
Oman Refinery Co, Oman
Petronet LNG Ltd
Punj Lloyd Ltd
Reliance Industries Ltd
Samsung Engineering Co. Ltd
Sarda Energy
Shell LNG
Shree Cement Ltd
Shree Renuka Sugar
Solar Turbine, USA
Sri Ram EPC
Tata Electric Co. Ltd
Tharmax India Ltd
Thyssen Krupp
Toyo Engineering
Transturbo Engineering Sdn Bhd, Malaysia
Veco Engineering, Abudhabi
Walchandnagar Industries

The company also grown in a consistent manner, profits in the past 5 years grew at a CAGR of around 50%. I would not like to talk much on the technical side as it is easily available. With the outstanding track record in engineering expertise, manufacturing capacity, product innovation and global cost competitiveness, GEI remains solid to work out the best business with in the sphere.

Let me conclude, the majority is confident on the power sector and its a fact that power/energy is one of the most demanding business of the time. Ample funds have been committed by Govt as well private players in the Power/Energy sector as its the key to economic growth of any developing nation. A rough statistics, India is likely to commission 50000MW in the 11th 5 year plan and an anticipated 100000MW in the 12th Plan. Its sure that, increased investment in the Power & Oil sector by the Govt as well private players will provide enormous business opportunities to the company. I think, it will be a wise decision to accumulate GEI in small batches, who cools the head of power/energy/oil sectors, it will surely cool us too in the long run.

Comment please…..

Regards

Shabu Thachat – sthachat@gmail.com

-