Stone India.....Rs 53.90....

Friends,
I have been going through the google and I found article written on Stone India in Out Look Profit.....Well, I went through that and liked it and hence pasting it here.
The reason I read was, Stone India was my first penny stock pick when I use to write at MMB and I remember I gave a call at Rs 7....and then Stone India went on to touch 250 something.....so any news or story on Stone India always facinates me.
I think one can think of taking a small exposer here in Stone India....ofcourse after DD....
On Turnaround Track
Fast-growing demand for high quality rail equipment from ongoing metro rail projects is opening up huge opportunities for Stone India
Pramod Bhat
Everybody loves a turnaround story. We know the ones in Bollywood because they’re the ones that are written about most. But there are many in real life that are perhaps more inspiring. It’s hard not to root for the underdog who beats the odds to come out a winner. Now, we have one from the stock markets that goes by the name of Stone India. After working its way through the economic slump, this G P Goenka group company seems to have readied its comeback script.
But what exactly is Stone India’s business? In a few words, it’s an engineering company which specialises in railway infrastructure and accessories. Stone India is hoping to become a one-stop shop for railway clients some day soon.
Today, its fortunes are closely intertwined with the spending plans of the Indian Railways, its biggest customer that accounts for about 90 per cent of the company’s sales. Going forward, there would be a continued surge in spending in this transport segment, taking into account the dedicated freight corridor or the metro rail projects across various cities. This should give the turnaround hero, Stone India, enough opportunity to surprise investors with a happy twist in the tale.
Cast in stone
First, a little bit about the industry that Stone India operates in. As economies expand, the demand for goods and commodities increases and so does the need to transport them from place to place. In India, the explosive economic expansion of the past few years has resulted in a shortage of various goods and transport modes.
On its part, Indian Railways, the largest railway operator in the country, has raised outlays for rolling stock. (See chart, On track) Rolling stock refers to all vehicles that move on the railway, powered and unpowered, like locomotives, railroad cars, coaches and wagons. In the past six years, the outlay has jumped by 17 per cent (compounded basis) and it currently stands at Rs 12,393 crore. In addition, the dedicated freight projects and expenditure on metropolitan rail transport projects are likely to lead to higher demand for rolling stock from public and private companies. For Stone India, therefore, a period of good growth is relatively assured.
Chugging along

The company’s fortunes are closely linked to the Indian Railways’ rolling stock outlay, which has grown at a good pace of 17 per cent CAGR since FY05
Stone India makes locomotive brake systems and offers a range of mechanical and electrical equipment for the railroad company. Says Amitava Mondal, managing director, Stone India, “At Stone, we have three main lines of business, namely carriage brake group, locomotive brake group and the train power group.” The carriage product group mainly deals with the supply of airbrake system for wagons and coaches and distributor valves. The locomotive product group deals with the supply of pneumatic braking equipment for the railways, as well as air dryers for locomotives and EMUs. The train power group supplies train lighting equipment for passenger coaches and pantographs. “In the brakes business, spread over carriage, diesel and electric locomotives, we have about 25 per cent of the market,” Mondal says.

The company has two plants, one in Kolkata (West Bengal) and the other in Nalagarh (Himachal Pradesh). Apart from the Indian Railways, Stone India’s other clients include Texmaco, Titagarh Wagons, Modern Industries, Hindustan Engineering Industries, Jupiter Wagon, and Jessop & Company. Its main competitors include companies like Knorr Bremse, Faively Transport, Kerala Electrics and Escorts.
Hitting a rough patch
After a good run, Stone India’s fortunes reversed in FY09 as raw material prices surged. Unable to pass on the costs to customers, it was forced to absorb most of the price hikes. “The main reason for a drop in profitably in 2008-09 was mainly on account of an unexpected rise in the steel prices and various input costs. Stone India takes up fixed-price tenders from various railway outfits, like Diesel Locomotive Works, Chittarajan Railway Works, Zonal Railways, and the input price increases could not be passed on for these tenders,” informs Mondal.
Total sales plunged to less than Rs 81 crore from nearly Rs 90 crore a year, a fall of almost 10 per cent. It also reported a loss of Rs 8.60 crore against a profit of more than Rs 9 crore in FY08. Of course, in FY08, profit was also inflated by the fact that it had transferred Rs 8.10 crore from the capital reserve account, and this accounted for a big chunk of the net income reported by Stone India. Without the transfer, the company would still have reported a profit, albeit a nominal figure, for the year. “However, off late the Indian Railways is allowing price variation clauses,” says Mondal.

Building scale
Going ahead, freight may throw up phenomenal opportunities for Stone India. If the talk of a dedicated freight corridor becomes a reality, the company’s fortunes will get a super-boost. With the dedicated freight corridor project becoming a reality in the near future, there is enough opportuity for the company to grow. The recently developed bogie mounted brake system is expected to lead growth and there is also the emerging opportunity to retrofit the same in the existing fleet of 2.5 lakh wagons.
The company inked a joint venture deal with US-based RailRunner NA Inc in September last year for making freight cars. The business is likely to be routed through a wholly-owned subsidiary called Stone Intermodal. Says Mondal, “Stone Intermodal will manufacture specially designed rolling stock bimodal vehicles which will have the flexibility to operate on the road as well as on rail without any terminal facility or with major material handling equipment.”
Earlier, the company had suggested that it could invest close to Rs 150 crore in this venture in two phases. The company is expected to retain a majority stake in the subsidiary even after the infusion of private equity. Debt levels in the subsidiary are expected to be minimal.

Another tie-up that has benefited the company is one with Japan’s Sumitomo Electric Industries, for making air springs. (Air Springs provide superior air cushion ride for passengers on trains running at higher speed. Sumitomo Electric Industries is a lead supplier of air springs for Bullet Trains in Japan.) The company expects to sell about Rs 12 crore of air springs per annum. Most of the newer products are produced at the Nalagarh plant (in Himachal).
The company is also expanding its capacity in Kolkata for which land has been acquired. About Rs 14-15 crore will be needed for the expansion. Company officials emphasise that the existing capacity and the expansion at Kolkata, which may come on-stream in a year, will be more than sufficient to service the growth plans of the company.
“In the first nine months of the current year, we have clocked Rs 71 crore in top line and Ebitda is at 9 per cent. With high value products from our new unit at Baddi, which also enjoys tax holidays, we expect to improve top line and margins in the coming years,” says Mondal.
Even margins are expected to look up and may stabilise at around 12 per cent on the Ebitda level, and at a net level they may remain in a band of 7-8 per cent on a net income basis in FY11. The company expects to return to the black with a net profit of Rs 5-6 crore in FY10.


Going cheap
The stock appears cheap at current levels, given the turnaround status of the company. On a price-to-sales (P/S) basis, the company is definitely undervalued compared with its peers. Stone India trades at a P/S ratio of 0.65 and a price-to-book ratio of 1.5, much lower than large engineering companies like L&T, Siemens, ABB, Alstom and Bharat Bijlee. (See table. Jewel stone)
So far, few institutional investors have shown interest in Stone India. The only large investor is National Insurance Company, which holds a 2.3 per cent stake in the company. The company has paid nominal dividends in three out of the past five years (it is unlikely to pay dividends for FY10), with the dividend payout ratio averaging 10 per cent.
The potential embedded in the growth of the railways has attracted interest from even the larger players like L&T, which bought a 14 per cent stake in Kalindee Rail Nirman (a turnkey project executor in railway track, signaling and telecommunication projects) in November 2008.
Stone India’s shares are trading at less than six times estimated earnings for FY11, rather low for a company operating in a stable growth environment. Buy with a 24-30 months horizon.