On The Right Tracks

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When markets start to heat up it is advisable to find lesser known counters that are expected to provide decent returns. Therefore our recommendation this time is Stone India, an engineering company which has mainly been associated with Indian Railways.  There are various macro as well as micro factors that have led us to recommend a buy on the counter despite the company posting a loss in FY09.

On the macro front, while the increased outlay in the Railway Budget 2009-10 seems to be major driving factor for the company, there are factors on the micro front such as an expected improvement in the margins on account of a drastic fall in steel prices (a major raw material for the company) and expected higher realisation from its new products. Further, after posting losses in FY09, the company has posted good topline and bottomline in Q1FY10. The increased stake by the promoters provides a better comfort level too. Our advice to investors is to buy the scrip at its current level with a target price of Rs 60 in the next one year.

As regards the company’s business, it can be divided into three major areas viz. carriage, locomotive and train power. Carriage includes products like brake slack adjusters, air brake system coaching and air brake system freight. The locomotive business group has products like diesel loco brakes, electric loco brakes and air dryers. The train power business segment includes products like pantographs, air-conditioning and rectifier regulators.

With the railway budgetary outlay having been increased by Rs 2,840 crore to Rs 40,745 crore, this will surely turn out to be a growth driver for the company. The addition of new line and acquisition of 18,000 wagons in 2009-10 (11,000 in 2008-09) is expected to create good opportunities for the company too. On the micro front, the margins are expected to improve on account of a steep decline in steel prices. The company’s margins got impacted in FY09 on account of higher steel prices which it could not pass on. Secondly, its new products like electronic brake systems, control systems for pneumatic suspensions, new end-of-train telemeters, air springs and trade brake units are expected to be ‘better margin’ products.
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Stone India has recently bagged an order for air springs worth Rs 4.59 crore and the company expects to receive more such orders during the year. This product will be supplied from its plant at Kolkata as well as from its new plant at Nalagarh, Himachal Pradesh which commenced production in Q1FY10. While it is true that pledged shares (3.2 per cent of total shares and 8.40 per cent of promoter holding) is a negative factor, an increased stake by promoters to 38.28 per cent as on June 30, 2009 from 32.25 per cent in December 2008 provides some comfort.

On the financial front, while its topline increased in FY09, the company posted loss. But the performance in Q1FY10 has been better wherein its topline was at Rs 22.51 crore and its bottomline stood at Rs 0.96 crore as compared to Rs 21.51 crore and net loss of Rs 0.27 crore in Q1FY08. Therefore, investors would do well to buy the scrip at its current level with a price target of Rs 60 in the next one year.