McNally Bharat – buy at declines at around Rs.100

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McNally Bharat

McNally Bharat is a good engineering company in India
McNally Bharat is a good engineering company in India

McNally Bharat

Golden jubilee year

The shares of McNally Bharat Engineering Company Ltd (shortly called as McNally Bharat) are traded in the stock markets at Rs.130 now. This year is its golden jubilee anniversary year. The company is reengineering its strategies for future business valuations. Deepak Khaitan is the Executive Chairman of the company. The company is trying to nurture its coal and mineral technology and also its equipment subsidiary McNally Sayaji Engineering to increase their enterprise and market valuation levels.

Company has 10 overseas subsidiaries

The company is mainly in the business of coal beneficiation. It wants to expand into iron ore beneficiation. It also wants to spread to all mineral producing countries so that its geographic reach is widened. The company also wants an overseas listing. It has already established wholly owned subsidiaries in China, Indonesia, Russia, Zambia and Brazil. The company is taking steps to start a subsidiary in Australia. In Zambia, the company is in the business of copper ore beneficiation for Vedanta group. In Brazil, it is in the business of coal beneficiation for Vale. McNally Bharat has raised its stake in London Stock Exchange-listed Specialist Energy Group Plc to 13.88% from 11% through open market buying of shares through its overseas arm. Specialist Energy is a maker of electric motors and pumps. Specialist Energy is eyeing India and China as its two key markets for products designed for the thermal power, oil and gas sectors. McNally Bharat is the largest holder in Specialist Energy. McNally Bharat is planning a further hike in its stake in Specialist Energy. It is also negotiating with the owner of Specialist Energy Nviro Cleantech for a strategic tie-up with it. Specialist Energy reported a loss of 4.07 million pound sterling in the latest half year.

Share price crashes

The Hong Kong based private equity firm EIG is holding around 10% in the company’s subsidiary McNally Sayaji. Before this year, its stake will increase to 13% after the conversion of warrants. There is also a plan to list the subsidiary in NSE. It is at present listed only in the regional stock exchanges. The subsidiary is also planning for a new unit in Vadodara, which will be ready in a year’s time. The subsidiary is expected to bring in a turnover of Rs.400 crore. The promoters are holding 35% stake in McNally Bharat. It is a turnkey project execution and bulk material handling company. It provides solutions in the area of power, steel, aluminium, mineral bifurcation, coal washing, civil and industrial water supply etc. The company also manufactures through its subsidiary McNally Sayaji Engineering a wide range of products required for its different projects like crushing, mobile crushing and screening plants, material handling equipments etc. The acute slowdown in the capital goods and industrial segments has affected the company and brought its stock price crashing from a high of Rs.180 to Rs.130 now in just three months’ time.

Order book full

For the financial year 2010-11, the company’s operating margin at 7% does not look inspiring. Expenditure due to outsourcing of jobs and high staff costs has affected the company’s margins. Revenue growth was 18%, which was lower than the 50% growth recorded by the company in the previous financial years. The only positive aspect of the company is its order book worth Rs.3700 crore. This will give the company increase in revenues for the next two years at least. The company has huge loans that will affect the company because of the rising interest rates. The company is also extending its credit to its customers for more number of days, which means its margins will be affected.

Orders galore

There is an optimistic outlook for the power sector. Therefore, McNally Bharat may receive a good order flow in Q3 and Q4. This may drive its revenue growth but how far the company can improve its margins is again a question mark. B.M. Khaitan group bought out the stake held in the company from the Birlas and are trying their best to nurture the company to good health. Recently, McNally Bharat has added another vertical namely construction business as a standalone activity and plans to scale up this to get 25% of its total revenues out of it. The just retired Divisional Head of Larsen & Toubro has joined this company and his experience will drive growth for the construction activities. In Q1, McNally Bharat recorded a 28% increase in total income and 24% increase in post-tax profit. Khaitan recently resigned from the position of Vice Chairman & Managing Director of Eveready Industries. McNally Bharat bagged an Rs.379 crore turnkey contract from Bhilai Steel for installation of a coke oven by-product plant complex. McNally Bharat has received an order from Bhavnagar Energy Company Ltd for design, manufacturing and commissioning of ash handling and disposal system package for 2X 250 MW thermal power project at Padva, Bhavnagar district of Gujarat at a cost of Rs.109 crore. McNally Bharat has received an order from Neyveli Lignite Corporation Ltd for design, fabrication, erection and commissioning of bucket wheel excavator for Rs.118 crore. The schedule time for completion is 30 months. McNally Bharat has received an Rs.108 crore order for turnkey commissioning of the conveyor system at the coal handling terminal of Karaikal Port.

Buy at declines at around Rs.100

The share price of McNally Bharat was at a high of Rs.385 in April 2010. It has crashed to the present level of Rs.130, eroding the wealth of the investors. Analysts are recommending buying the shares at this low price. But I differ from this. In my opinion, investors should wait patiently for the share price to fall still further. At below Rs.100, the shares can be a good buy for short term and medium term holding for decent gains.

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