My Second Value Creator For 2016
On January 2, 2016, I discussed my first value creator for 2016 – Mallcom (India). The stock has remained largely sideways in turbulent markets and I continue to expect great days ahead for the company.
In this article, I will be discussing my second value creator for 2016 (another company from the mid-cap space). Raunaq EPC International has a bright future and the company is trading at attractive valuations. The company has still not caught the eye of big investors and current levels are ideal for long-term accumulation.
Raunaq EPC International
Raunaq EPC International Limited is engaged in turnkey execution of engineering projects with execution of cross country piping, power station piping, hydrocarbon & industrial utility piping, civil works and EPC contracts.
In the past, the company has successfully executed diverse forms of pipeline and storage system projects across various industries such as power, oil & gas, petrochemicals, chemicals and cement among others.
The company is also diversified in the auto ancillary segment with wholly owned subsidiary by the name of Xelerate Driveline India. I will elaborate on the subsidiary later in the article.
Why Invest In Raunaq EPC International
Grossly Undervalued – Raunaq EPC International reported cash position of INR15.3 Crore as of September 30, 2015. During the same period, the company had non-current investment of INR15.7 Crore. The company’s cash and investment amount to INR31 Crore with Raunaq EPC International trading at a market capitalization of just INR35.2 Crore. Further, the company is trading at TTM PE of 11.0.
Strong Order Book – As of March 2015, Raunaq EPC International had an order book of INR135 Crore. In FY16, the company continues to procure orders (at a relatively slow pace). The order book ensures steady revenue and cash flow visibility for the foreseeable future. Slowdown in the oil & gas industry and the industrial sector as a whole has impacted order inflow, but the future is promising.
Foray In International Markets – Raunaq EPC International is looking to foray into African markets that hold big potential. In my view, Iran is also an attractive market after lifting of sanctions. Once the global economy stabilises and international orders flow, Raunaq EPC International will surge higher.
Quality Clients – Raunaq EPC International focuses on credit worth clients that can offer robust project level EBITDA margin. The company’s prestigious list of clients includes NTPC, BHEL, Larsen & Tubro, HP, Lanco, Jindal, and Reliance Energy among many others. Quality clients indicate the company’s strong positioning, visibility and successful work execution.
Smart City Projects – In the coming years, I expect Raunaq EPC International to procure water pipeline projects for smart cities. Recently, Raunaq EPC International executed an 80Km cross country water pipeline project for Hindustan Zinc in the record time span of only 15 months. With strong execution capabilities, more projects will be on offer.
Xelerate Driveline India Investment – Raunaq EPC International has investments amounting to INR15.7 Crore in this wholly owned subsidiary as of September 30, 2015. The subsidiary operates in the niche sector of manufacturing of clutch cover assemblies and clutch plates. For FY15, the subsidiary reported revenue of INR18.1 Crore and net loss of INR2.2 Crore. Currently, the company is developing product line with applications suitable for majors like Tata Motors, Eicher and Ashok Leyland among others. With the company being incorporated just 3 years before, I see huge growth potential in the coming years.
Strong Balance Sheet – Raunaq EPC International has a strong balance sheet with minimal debt (zero net debt) and a small equity base. The company’s balance sheet provides high financial flexibility for leverage when the order inflow is robust. A low equity base implies strong EPS and cash flow per share. I expect stellar numbers on these fronts once investments start picking-up in the industrial sector.
The key risk that I see is prolonged slowdown in the global economy and the Indian economy. Slowdown in the global economy can impact the company’s expansion plan in international markets. However, I do believe that the company’s order inflow within India will accelerate in the coming quarters.
Broad market volatility and decline is another risk factor, but that should not prevent long-term investors to gradually accumulate this gem. With a 3-5 year horizon, the stock looks promising to be a multi-bagger.
Raunaq EPC International has been sideways to lower in the last one year, but this should not discourage investors from considering exposure to the stock. The valuations are mouth watering and the company’s management seems good with quality project execution capabilities.
In a broad range of INR80 to INR130, the stock is worth accumulating and holding with patience. There is much value unlocking that is likely to come.
Note: The article is not a research report but assimilation of information available on public domain and it should not be treated as a research report.
Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”
Disclosure: It is safe to assume that I have long-term positions in the stock discussed. Investors should carefully do their own research and verify points discussed before investing.
Image Source: Company Website/Company Annual Report