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201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 1
Hercules Hoists – Speculation at its Best Rating - SELL
Shareholding Pattern (as of June 30, 2011)
Public holding more than 1% of the Total No. of Shares (as of June 30, 2011)
Sl. No. Name of the Shareholder No. of Shares Shares as % of Total No. of Shares
1 Pramodkumar S Nevatia 388,240 2.43
2 Heinrich De Fries GmbH 800,000 5.00
3 Kishorilal F Jhunjhunwala 440,000 2.75
4 Nirmal P Jhunjhunwala 598,500 3.74
Total 2,226,740 13.92
Promoter, 69.53%DII, 0.02%
Others, 30.45%
BSE Group B
BSE Code 505720
Market Capitalization Rs.408.00 Cr
Face Value Rs.1
52 Wk High (BSE) Rs.371.00 ( 28 July, 2011 )
52 Wk Low (BSE) Rs.199.00 (25 Feb, 2010)
CMP (As on 19 Sep, 2011) Rs. 255.60
201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 2
About the Company
Hercules, an integral part of the eminent Bajaj group, one of India's top-notch Business House,
has come a long way since its inception in 1962. The Company is considered specialists in the
manufacturing of material handling equipments and has continuously surpassed its standards of
excellence.
Hercules manufactures material handling equipments under INDEF brand, namely Chain Pulley
blocks, Chain and Wire Rope electric Hoists, Ratchet Hoists, Roll-out Racks, Light Profile
Systems, Pulling and Lifting Machines, H.O.T/E.O.T/Jib Cranes, Floor Operated Stacker Cranes
and Stores Stacker Cranes.
Hercules has a Modern Machine Shop, Assembly Lines and Testing facilities. The Company has
ISO 9001 accreditation from RWTUV of Germany since, May 1997.
Hercules supplies its products to various industries namely Iron and Steel, Cement, Oil and Gas,
Chemicals, Construction, Material Handling Equipments’ Manufacturers, State Electricity
Boards, Turnkey Solution Providers, etc, wherever unit loads are moved.
Hercules’s esteemed clientele includes M&M, Tata Motors, Maruti Udyog, Bajaj Auto,
Ford India, Escorts, SAIL, Jindal Ltd., Bokaro Steel, Tata Steel, L&T, Ambuja Cements
ACC Ltd. , MSEB, MPEB, RSEB and many more.
Hercules has 4 Windmills of 1.25 MW each, producing 54.27 lacs units of energy in FY11.
201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 3
Sell rating Rationale
a) No relation between Hercules Hoists & Atlas Cycles
There is a perception in the market that both Hercules Hoists & Atlas Cycles are involved in the
manufacture of bicycles. This is evident from the price chart of the past 6mths which shows that these two
stocks move in tandem with each other & they have outperformed the Sensex (ref. fig 1). But in reality
both these companies cater to completely different segments & are in no way related to each other (ref.
table 1).
Fig 1:
Table 1:
Particulars Hercules Hoists Atlas Cycles
Segment It is involved in the manufacture of
material handling equipment.
It is involved in manufacturing of
bicycles & steel tubes.
Products Chain Pulley Blocks, Electric Hoists,
Cranes
Bicycles catering to different segments
of the market.
Clients Industries Mainly consumers
201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 4
b) Speculative Buying
Month Avg Volume (BSE+NSE) Avg Delivery (%)
Apr-11 1,03,353 19.87%
May-11 26,684 26.17%
Jun-11 82,999 12.94%
Jul-11 11,11,238 6.24%
Aug-11 2,52,308 12.84%
Sep-11 (till 16 Sep) 5,09,622 9.35%
Month Open Price High Price Low Price Close Price
Apr-11 230.90 268.00 229.00 244.15
May-11 245.10 246.85 221.15 233.70
Jun-11 233.70 262.00 227.10 241.75
Jul-11 244.40 371.00 242.00 324.20
Aug-11 329.75 337.80 220.00 231.15
Sep-11 (till 16 Sep) 236.30 276.00 217.30 252.70
As the avg volume increased from April to July as indicated above, the avg delivery %
volume decreased.
The avg volume suddenly increased in the month of July with lowest delivery % volume &
stock touched 52 week high of Rs.371.
The stock gained 34% in just 1mth (June 11 to July 11).
However, the stock could not sustain the momentum in the month of August & erased off all
the gains of July 7, making a bottom of Rs.220 resulting in huge losses for traders.
201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 5
A closer look at month of July will clear things….
Date Volume (BSE+NSE) Delivery (%)
19-Jul-11 40,51,805 4.51%
20-Jul-11 54,33,574 3.73%
27-Jul-11 52,13,988 4.69%
28-Jul-11 31,79,143 6.29%
Date Open Price High Price Low Price Close Price
19-Jul-11 282.00 336.40 280.00 327.80
20-Jul-11 327.50 362.40 324.25 334.55
27-Jul-11 315.00 362.00 312.00 352.55
28-Jul-11 345.00 371.00 339.50 344.60
As of 30 June11, the FREE FLOAT in the stock is 48.75 LAC SHARES.
If we take a look at the VOLUME on 20 July & 27 July, it is 54 LACS & 52 LACS respectively with
very low delivery percentage. The stock has 0% FII holding & DII holding is just 0.02%.
This surge in volumes was despite no institutional activity & no major change in shareholding
pattern which indicates only artificial volumes done by traders.
Therefore, we can say that there was rigging in the price of the stock which enabled it to move from
a low of Rs.250 on 5 July to a high of Rs.371 on 28 July, a gain of 48% in just 23 days.
Inspite of such speculative buying, the stock continues to trade in B group whereas Atlas Cycles was
put in T2T segment from 5th
Aug 2011 to 7th
Sep 2011.
We urge SEBI to investigate this irregularity & act in the interest of minority shareholders.
201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 6
c) Expensive Valuations – Stock trades at 3.44x FY11 Net Sales
FY 11 (Rs.Cr) Hercules
Hoists
Sanghvi Movers TIL McNally
Bharat
L&T
Net Sales 118.59 361.25 1380.59 2252.68 52,089.14
PAT 29.91 86.31 60.20 63.36 4456.17
P/E (x) 13.67 5.38 7.09 7.70 23.49
Market Cap/Sales (x) 3.44 1.49 0.29 0.17 1.83
Price to Book (x) 3.60 0.97 1.24 1.24 3.80
As seen from above data, Hercules Hoists just a manufacture of material handling equipment is
commanding a market cap/sales ratio even higher than L&T, a premiere diversified engg firm. Such high
valuations are unwarranted for a company which has grown at a CAGR of 8% from FY07 to FY11.
If we consider the FY11 Net Sales of Rs. 118.59Cr then also the market cap to sales ratio comes out
to be 3.44x which is still expensive compared to the rest.
d) Slowdown in Infrastructure & Capital goods sectors
The Company is engaged in the manufacturing and marketing of Material Handling Equipments and its
demand potentialities are linked with infrastructural development, capital equipment growth and big
projects expansion activities. Due to slowdown in these sectors, shrinkage in order book is eminent which
will have an impact on company’s topline & bottomline.
e) Sluggish Order book
During June’11, the orders received stood at about Rs. 30Cr as against Rs. 23Cr in the corresponding
previous quarter, while the outstanding order book stood at around Rs. 15Cr as against Rs. 19Cr for
June'10.
f) Replacement orders
The company gets majority of the orders as repeat orders from existing clients. There is lack of new
orders which limits the growth of the company.
201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 7
g) Rumors of Land Sale
There are rumors in the market that the company will sell its Mulund factory land but the company has
clearly indicated that it does not intend to sell the land in near future as it is cash surplus & does not
require any cash flows.
Value of the Mulund land
i) Total area is 4175 sqmt = 4175*10.76 = 44,923 sqft
ii) Cost of TDR (Transfer of Development Rights) = Rs.2500/sqft = Rs.2500*44,923 sqft = Rs.11.23Cr
iii) Assuming Cost of Construction = Rs.1500/sqft = Rs.1500*44,923 sqft = Rs.6.74Cr
iv) Total Cost (ii+iii) = 11.23+6.74 = Rs.17.97Cr
v) Saleable Area = 44,923*2.5 = 1,12,308 sqft
vi) Assuming market rate of Rs.9000 sqft, the value of saleable area = 1,12,308*9000 = Rs.101.08 Cr
vii) Value of land (vi-iv) = 101.08-17.97 = Rs.83.11Cr
Even if assume that the Mulund land is sold in future, then the true deal value may not get reflected
in the P&L as in most land deals 30-40% of the value is unaccounted. Hence, minority shareholders
may not benefit.
h) Lack of business visibility
The company has shifted its operations from Mulund to Khopoli & it has closed its Mulund factory. The
Khopoli factory has capacity of turnover of 300Cr but the company is expecting a turnover of 140Cr for
FY12 i.e more than 50% of capacity will remain unutilized. Therefore, it can be concluded that the
company does not see robust growth going forward.
i) Threat from Unorganized sector & Chinese imports
The Company faces competition from the unorganized sector manufacturing similar products as well as
imports from China, which are cheaper. The Company is also facing competition from foreign
manufacturers, who have set-up operations in India.
201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 8
Performance Highlights – Q1 FY12
Particulars (Rs. Cr) Q1 FY12 Q1 FY11 YoY (%) Q4 FY11 QoQ (%)
Net Sales 29.44 28.40 3.66% 33.06 -10.95%
Other Operating Income 0.77 0.36 113.89% 0.80 -3.75%
Total Income 30.21 28.76 5.04% 33.86 -10.78%
Expenditure
a) (Inc)/dec in stock-in-trade 0.06 -1.15 -105.22% -0.76 -107.89%
b) Consumption of raw
materials
13.46 12.82 4.99% 15.76 -14.59%
c) Purchase of Traded Goods 0.07 0.41 -82.93% 1.64 -95.73%
d) Employee cost 1.44 1.21 19.01% 1.35 6.67%
e) Manufacturing Expenses 0.98 1.16 -15.52% 0.28 250.00%
f) Other expenditure 3.30 2.70 22.22% 3.53 -6.52%
Total 19.31 17.15 12.59% 21.80 -11.42%
EBIDTA 10.90 11.61 -6.12% 12.06 -9.62%
Depreciation 0.50 0.50 0.00% 0.52 -3.85%
Interest 0.03 0.08 -62.50% 0.03 0.00%
Other Income 0.67 0.41 63.41% 0.58 15.52%
PBT 11.04 11.44 -3.50% 12.09 -8.68%
Tax 3.33 3.65 -8.77% 3.83 -13.05%
PAT 7.71 7.79 -1.03% 8.26 -6.66%
Equity share capital (FV-Rs.1) 1.60 1.60 1.60
EPS (Rs.) 4.82 4.87 5.16
EBIDTA Margin (%) 37.02% 40.88% 36.48%
PAT Margin (%) 26.19% 27.43% 24.98%
201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 9
Income Statement
Particulars (Rs. Cr) FY10 FY11 FY12 (E)
Net Sales 84.40 118.59 136.38
Other Operating Income 1.74 2.42 3.03
Total Income 86.14 121.01 139.40
Expenditure
a) (Inc)/dec in stock-in-trade 1.24 -1.25 -0.63
b) Consumption of raw materials 43.96 55.28 65.46
c) Purchase of Traded Goods 0.92 2.83 3.07
d) Employee cost 4.17 5.00 6.05
e) Manufacturing Expenses 3.85 4.21 4.77
f) Other expenditure 8.66 12.06 13.64
Total 62.80 78.13 92.37
EBIDTA 23.34 42.88 47.04
Depreciation 1.97 2.03 2.12
Interest 0.39 0.21 0.23
Other Income 3.23 3.18 3.34
PBT 24.21 43.82 48.02
Tax 7.21 13.90 15.37
PAT 17.00 29.92 32.66
Equity share capital (FV-Rs.1) 1.60 1.60 1.60
EPS (Rs.) 10.63 18.70 20.41
201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 10
Balance Sheet
Particulars (Rs. Cr) FY10 FY11 FY12 (E)
Sources of Funds
Equity Share Capital 1.60 1.60 1.60
Reserves & Surplus 87.54 111.87 136.10
Loan Funds 3.98 1.77 1.95
Deferred Tax Liability 5.04 5.12 5.27
Total 98.16 120.36 144.92
Application of Funds
Fixed Assets 32.92 33.62 35.30
Investments 11.47 24.57 33.66
Deferred Tax Assets 1.69 1.46 1.75
Current Assets, Loans & Advances 68.94 80.91 98.45
Less: Current Liabilities & Provisions 16.86 20.20 24.24
Total 98.16 120.36 144.92
201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 11
Ratios
Particulars FY10 FY11 FY12 (E)
EPS (Rs.) 10.63 18.70 20.41
P/E (x) 24.06 13.67 12.52
BVPS (Rs.) 55.71 70.92 86.06
Dividend per Share(Rs.) 2.00 3.00 4.50
Dividend Payout (%) 18.82% 16.04% 22.05%
ROE (%) 19.07% 26.37% 23.72%
ROCE (%) 22.95% 35.45% 32.17%
EBIDTA Margin (%) 27.65% 36.16% 34.49%
PAT Margin (%) 20.14% 25.23% 23.95%
Interest Coverage (x) 54.79 194.52 192.26
Debt/Equity (x) 0.04 0.02 0.01
Current Ratio (x) 5.56 5.73 5.81
Asset Turnover (x) 0.86 0.99 0.94
Inventory days 157.04 134.53 126.64
Debtor days 66.12 54.22 65.49
Creditor days 27.35 26.08 25.90
Market Cap/Sales (x) 4.83 3.44 2.99
EV/Sales (x) 4.68 3.31 2.86
EV/EBIDTA (x) 16.94 9.15 8.30
201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 12
Recommendation
At CMP of Rs.255.60, the stock is trading at P/E of 13.67x FY11 EPS of Rs.18.70 & at Market Cap/Sales
ratio of 3.44x FY11Net Sales of Rs.118.59Cr.
In our view the stock is grossly overvalued & deserves a fair valuation 2.30x FY11 Net Sales & we
therefore advise selling at current levels for a potential downside of Rs.170 - 180 within next 9 mths.
201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 13
Technical View
The stock has made lower tops at Rs.370 (7 Sep, 2010) & Rs.345 (28 July, 2011) on daily closing
basis.
The stock had made intermediate bottoms at Rs.206 (25 Feb, 2011) & Rs.223 (5 Sep, 2011).
Currently, the 200 dma is at Rs.253 & 100 dma is at Rs.251.
The stock is showing weakness with clear distribution in charts around Rs.280 – 330 levels.
The stock has had a sharp slide from the recent top of Rs.370 to Rs.220.Currently, it is showing
dead cat bounces from lower levels.
The chart indicates weakness & there is possibility of entering the old range of Rs.150-230.
201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 14
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201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 15
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