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Sunday, February 21, 2010

Buy PAE LTD - Target Rs 56

Most of us are aware of the fact that ever increasing global energy consumption equals environmental disaster unless we move to a de-carbonized energy system. IPCC (Intergovernmental Panel on Climate Change) has created too much hype around melting of glaciers by 2035 and that too without doing a detailed study, but one cannot sit back and say that we have enough fossil fuel for our lifetime, and global warming isn't going to effect us.

Countries like China, are already putting in great deal of money on securing their energy needs from both fossil fuels and from alternative sources of energy. In India, many smaller companies at their own level are working on various alternative sources of energy. Solar and wind are the two forms of energy. Solar energy had its share of criticism on various grounds, most important of them being cost and availability of raw material, which in most of the cases is silicon. Keeping the above factors in mind, our Saral Gyan team explored a company that is into potential alternative source of energy, and may not have to face constraints with respect to availability of raw material.


PAE is not into Solar Panels manufacturing on its own. On standalone basis, it is into the business of marketing and distribution of Lead Acid Storage Batteries to provide power storage in power back up systems. In addition to batteries, PAE also buys and/or builds power back-up systems from manufacturers and sells to OE, dealers and end users. It also provides total power solutions to end customers by doing installations, commissioning and service of large power back-up systems. Hence, PAE Ltd. is into power related business, but most of it is in the form of distribution and marketing. This is also evident from its low margin results. On a net sale of Rs 250 crore for FY 2008-09, it could only make a net profit of Rs 5.36 crore.

But looking at recent updates, PAE has forayed into Solar Panels manufacturing by taking a controlling stake (51%) in Shurjo Energy Private Limited, which was in need of funds to expand its capacity to 10MW from 2MW. In terms of the agreement, the company has totally invested Rs 5.06 crore in Shurjo Energy for acquiring 51% stake in the company.

Shurjo Energy Pvt. Ltd. is into manufacturing solar panels using CIGS Copper Indium Gallium diSelenide (CIGS), thin film technology which has "off grid" and "on grid" applications. The company has its manufacturing facility in Kalyani, West Bengal. Point to be noted is that CIGS technology does not use silicon as the active photovoltaic semiconductor and therefore does not suffer from any raw material supply problems. Shurjo also recently passed IEC 61646 & IEC 61730 tests (The certifications required for solar modules used in solar power plants in most markets worldwide) for its CIGS solar modules, opening up the Grid-connect market for its modules.

Studies show that CIGS material actually yields more energy per kW installed, compared to traditional crystalline products, due to its better performance in low light conditions (Source: web). As mentioned earlier the installed capacity stood at just 2MW, which will be ramped up to 10MW. One can expect additional revenue and profitability for PAE Ltd, because the company has 51% stake in Shurjo Energy Pvt Ltd.

PAE has touched 52 week high price of 57 Rs on 21st Dec 09 with couple of bulk deals on the same day (Source: BSE). Chairman and Managing Director of PAE Ltd, Mr Arvind Doshi shared his views on his company business and see profitability improving from FY 2011 onwards.

As per him, at present the company is doing 100% export to the tune of approximately Rs 10 crore. It is a small unit manufacturing latest models of solar panels, the latest technology is called CIGS. We recently got international certification also for these panels manufactured in India.

The basic film comes from a company in USA called Global Solar. PAE intend to market these panels including some of the equipment as complete units for domestic power generation as well as power generation for offices and industries in India. Initially, this will take a slow start in India. But we hope with the Copenhagen discussion this will gather a faster momentum in India. We will see a greater future in this line.

Saral Gyan Recommendation:

PAE last closing price on BSE was 40.25 with a market capital of 38 crore. Standalone PE ratio of PAE is 8.5. Looking at last 3 quarters share holding patterns, promoters have increased their total holdings continuously in last 3 quarters (48.78 % in June 09, 49.13 % in Sep 09, 50.12 % in Dec 09), hence management is confident to deliver good growth with increase in profit margins in future considering entry into solar panel business. Current market stock price of PAE Ltd gives an opportunity to buy the stock at current levels with limited downside risk.

We recommend buy for PAE LTD with a target price of 56 (appreciation of 40 % from current market price) in a time horizon of next 6 to 9 months. We believe investments in such stocks should be done keeping a long term view, hence partial profit booking is advised to investors once target price is achieved.

Note: The stocks discussed in Saral Gyan through posts are not a part of "Hidden Gems" issue which we recommend to our paid subscribers only. These are just stock specific views by Saral Gyan Team; one must do the due diligence before doing any investment based on our recommendation.