Investment Idea: Stone India

Stone India is a part of Duncan Goenka group, the undisputed leader in locomotive brake systems and has a huge range of mechanical and electrical products for the railroad industry. It also manufactures few critical products for defence tanks and armoured vehicles.

Despite all these illustrious credentials, unfortunately, it has not got translated into good profit margins for the company. For the third quarter ended 31st December 2007, the company has shown an overall dip in the performance. On a qoq basis, the net sales dropped by 6% at Rs.18.60 crore. 90% of the company’s sales come from the railways but obviously; it has taken a beating during Q3. Expenditure was more or less consistent at Rs.15.73 crore, yet the lower sales led to the drop in the EBIDTA by 28% at Rs.2.88 crore. OPM dropped from 20.13% to 15.46%. PBT fell down further by 40% at Rs.1.89 crore and due to no provision for taxation; this was its PAT also. NPM slipped down from 15.98% to 10.18%.

The company is putting up a new facility at Nalagarh, Himachal Pradesh, expected to go on stream by end of March 2008. It is also contemplating putting up another new facility in Southern India, though all the plans yet only on the drawing board.

The stock of the company has taken quite a beating after the declaration of the Q3 results and the ongoing bearish trend also added on. Q2 results had also showed signs of a slowdown and this fall in Q3 is also worrisome.

With the Indian Railways planning to expand its network all over India and with the huge allocation earmarked for modernizing and expanding the railways network, clearly the company would stand to benefit. Being a supplier to the defence sector also, whose allocation has been increased in the Budget 2008-09, clearly the company could look ahead for some good times.
Despite the slowdown, given the expansions of the Indian Railways, the company might be able to get some better orders in the coming months. Based purely on this optimism, one can stay invested at the current rate of Rs.95.