Cool Profits
Blue Star, the leader in air-conditioning, has ended the year 2007-08 with a sales growth of 40% and 116% growth in operating profit. This is the result of a wide network (24 offices, five manufacturing facilities, 650 dealers), the current boom in construction and investment in infrastructure development which is fetching huge business for suppliers of central air-conditioning. An extension of this economic growth is the expansion of medium-sized corporate and commercial establishments which are likely to support growth in the packaged air-conditioning products.

Where Blue Star scores is in its focused and segmented approach. Here are some examples. One of the fastest-growing sectors today is software and other outsourcing services. Blue Star is a leader in air-conditioning the new IT parks. Another fast-growing sector is telecommunications. Blue Star supplies air-conditioning for the telecom shelter segment. This will grow as telecom companies continue to expand. Blue Star has positioned itself as a specialist in commercial refrigeration for foods as well.

It also offers specialised solutions for banks, builders, hotels and hospitals. In the hospital segment, it has executed one of the largest healthcare projects for supplying air-conditioning to the Kokilaben Dhirubhai Ambani Hospital (earlier Mandke Hospital) in Mumbai. During 2007-08, Blue Star bagged its second project in healthcare, a Rs25 crore order from Dr Naresh Trehan’s MediCity, Gurgoan. During the year, Blue Star bagged a Rs38 crore project for air-conditioning India’s first locally designed fast-breeder reactor of Nuclear Power Corporation’s Kalpakkam project. Blue Star will air-condition the entire Kalpakkam project, including supply of water-cooled centrifugal chillers.

Blue Star estimates that 300 million sq ft of space for the IT/ITES and 370,000 cell sites for telecom companies, coupled with a planned investment of Rs269,000 crore in pharma, bio-tech, healthcare and electronic hardware, over the next five years, are likely to translate into a market of Rs14,100 crore for companies in the air-conditioning business. If you add to this another Rs23,500 crore opportunity likely to be thrown up by hospitality industry and infrastructure projects like airports, metro, retail and SEZ development, the future of Blue Star as a market leader that appears obviously bright. According to the company, the next five years look much better compared to the past five years when the total air-conditioning market in non-residential space was just Rs12,000 crore. Apart from orders flowing in from specific high-growth sectors, Blue Star hopes that another significant growth will come from revamp and upgrades of existing installations. But if the economy slows down, as is likely now, new projects will be implemented but upgrades will be postponed.

While implementing large air-conditioning projects, Blue Star noticed that many customers have not been able to get reliable mechanical, electrical and plumbing (MEP) services. It spotted opportunities there, especially since many customers have requested it to provide MEP services. It expects the integrated MEP contracting business to form 30% of its revenues from the current 10% over the next five years. To quickly enter this business, Blue Star has acquired the business of Naseer Electricals Private Limited, a leading electrical contracting firm with a strong presence in southern India, for Rs42 crore. Naseer Electricals enjoys an exceptional reputation as a leading player among software, infrastructure and retail segments having executed large electrical projects for several customers in these business verticals. Blue Star also has a successful record of delivering projects in Iraq, Syria, Indonesia, Malaysia, Libya, Sri Lanka, Saudi Arabia, UAE, Russia and Mauritius. The stock has had an excellent record and, at its current price of Rs412.95, is valued at 17.11 times its March quarter operating profit and 1.67 times its sales.

Small and Fast-moving
AurionPro is growing fast through acquisitions

AurionPro Solutions (formerly Value Added Information Distribution Services) is an eight-year-old technology products and solutions company, headquartered in Mumbai, with a subsidiary in Singapore and a joint venture company in the US. It has products like iCashPro, a full-fledged integrated suite for cash management comprising PayPro, CollectPro, AMLPro, ECS, DivPro, PDCPro, etc. Cash management is a banking service that allows corporate customers to manage their receivables and payables efficiently. iCashPro is a web-based system with Internet banking on the front-end and banking operations on the back-end which can function independently. In 2007, it was recognised as one of the fastest-growing technology companies (ranked number five in India) in the Technology Fast 50 India 2007 Program conducted by Deloitte Touche Tohmatsu, Asia Pacific.

AurionPro’s treasury management products are called Guava and DealPro. Guava provides integrated solution that integrates the full spectrum of treasury requirements – from the front office through to the middle office and back office. Banks also need to increase efficiency and reduce delays in execution of transactions between the treasury and the branches and DealPro helps in that process by offering a seamless straight-through processing. AurionPro also has products for risk management and wealth management. Its SmartLender product helps banks manage business and retail loan portfolios. Apart from these products, AurionPro provides various services such as application development and maintenance, business process outsourcing, consulting, etc. Development Credit Bank and ING Vysya Bank recently chose iCashPro over competing products.

The past two years have witnessed rapid expansion and growth, mainly through a series of acquisitions. In early 2007, it acquired E2E Infotech, headquartered in London, which specialises in developing components for market making, proprietary trading and brokerage for equity and equity derivatives trading. E2E has worked with over 40 financial institutions across Europe, the US and Asia. Late last year, it invested in Denver-based PaySimple which is a provider of payment management solutions for businesses across the US. As a part of the partnership, AurionPro has signed a long-term offshore development contract to develop PaySimple solutions. Immediately thereafter, it bought 100% control in Integro Technologies (Integro), a banking products company, headquartered in Singapore, whose portfolio includes products in the areas of loan origination, collateral management for Basel II compliance and Internet banking. Integro has development centres in Singapore and Malaysia and marketing offices in Thailand. Integro has a product development and implementation team of over 110 people and over 20 customers across multiple countries across Asia, including Standard Chartered, ABN AMRO, Citi and regional banks.

In March this year, AurionPro entered into an agreement to acquire SENA Systems Inc, headquartered in the US with offshore delivery centre in Pune. SENA is focused on identity and access management (I&AM), catering mainly to the security needs of banking, finance and insurance sectors. SENA provides the full spectrum of services to enable its customers to plan, assess, select, implement and integrate the complete I&AM programme and has a team of over 80 people mainly in the US and India. Also, in March 2008, AurionPro acquired a strategic stake in Maryland-based XTS, an innovator of enterprise management analytics software. In 2006, it acquired two US-based companies – Coban Corporation and SPS Corporation. AurionPro has had a superb March quarter when its operating profit grew by 229% and revenues by 223%. For the year as a whole, operating profit was up by 122% and revenues by 115%. The stock is currently trading at around Rs398 which means a market-cap that is 20.45 times its operating profit and 9.23 times its sales, based on the March 2008 quarter results. The stock is expensive but we do not know too many software companies enjoying these kinds of growth numbers and focused acquisition-driven growth.

Combo Deal
Telecom products, ethanol and PV cells make a great portfolio for XL Telecom. The stock is cheap too

XL Telecom is a misnomer. It, of course, manufactures telecom products but is into two other products that should keep the stock buzzing – photovoltaic (PV) cells and ethanol. Telecom accounts for just about 15% of its turnover, while energy (PV cells and ethanol which can be used as bio-fuel) contributes the lion’s share. XL Telecom’s manufacturing plant is located at Cherlapally on the outskirts of Hyderabad with a capacity of assembling and testing 10,000 Kyocera CDMA mobile phones per day. Other telecom equipment that it can manufacture include fixed wireless phones, fixed wireless terminals, broadband EV DO modems, 3G broadband gateways, switch-mode power supply systems, fusion splicers and cable joining kits. The buyers for these products are telecom service providers like Tata Teleservices, Reliance, BSNL, MTNL and international telecom companies like MTML and Telelinks as well as network integrators like Nortel and Ericsson. But the businesses that should give XL the status of a hot stock are alternative energy products – PV cells and ethanol.

XL can make PV cells with a capacity ranging from 75watts to 280watts with a total capacity of 25MW solar modules (expanding to 65MW). XL initially entered this segment to largely cater to BSNL’s rural public telephones. These telephones are often installed in areas which have erratic electricity supply but adequate sunlight during the day. To keep the telephone equipment on, PV cells are the answer. XL received an order valued over Rs30 crore in the first year and executed it on time and as per the required quality standards. Its PV cells are now marketed to MTNL, Indian Railways, Department of Defence, Telecommunications Consultants of India Limited, nodal agencies of the Ministry of Non-conventional Energy in various states and private sector companies. XL makes 150,000 litres of ethanol from molasses and de-natured spirit at Nanded, Maharashtra drawing its raw material from the sugar belt of south-western Maharashtra. XL has an order book of over Rs200 crore in the ethanol division for supplies to be effected till 2010 March and Rs575 crore in the PV cells division for export of modules. Financial numbers are great for now. XL reported revenues of Rs172.68 crore for the year ending March 2008 of which the telecom segment contributed Rs20.05 crore while the energy segment contributed the rest. Revenue growth for 2007-08 was up 58% and operating profit growth was 93%. XL has plans to invest Rs1,100 crore over the next five years in its solar division which includes setting up a 120MW solar cell manufacturing facility of Rs265 crore and augmenting capacity at its 100% export-oriented solar photovoltaic module plant from 25MW to 65MW, with an investment of Rs40 crore. The project will start commercial production by July 2008. On completion, it will become the largest producer of solar cells in the country catering to the European market and the US. The company has also entered the Spanish power generation sector through Saptashva Solar Ltd, its wholly-owned subsidiary and is set to start power generation from September 2008. The target capacity for the first year is 28MW and the project will have a 25-year power purchase agreement with a local utility company.

The problem with XL is its margins. Average operating margin over the past five quarters has been 9%. For the March quarter, though, OPM jumped to 15%. Even if the scorching growth slows down a bit and if the margins remain at the same level, the stock looks amazingly cheap. At the current price of Rs250.60, it is just five times the annualised operating profit for the March quarter.

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