Kernex Microsystems

Kernex Microsystems :- Rs.315.

An excellent engineering stock.

Introduction :-

Kernex Microsystems though established in 1991 was initially into developing, installing and maintaining software products upto 2003 have developed Anti Collision services (ACD) for Konkan Railways (KRC) . This product was developed by the company after five years of R & D, testing , field trials, and is the only technology company in India manufacturing and supplying net worked ACD's to KRC, who are the agency deploying the same for Indian Railways.The ACD system developed correspond to the functional and operational requirement of Indian Railways. The Company is the sole licensee of KRCL for manufacturing , installation, commissioning and providing maintainence support etc. of all types of ACD's excluding the auto braking unit. This exclusivity also gives scope to the company to work as technology partner for value addition by developing and providing Moving Block System , Satdham Safety System which are also based on ACD technology. The company also has exclusive international marketing rights of ACD's with a royalty payment to KRC as mutually agreed upon . The ACD's made by the company are suitable and cost effective on medium to low density route both for passenger and freight trains.

What is ACD's :-

ACD's are basically electro-mechanical products which has hardware, software and mechanical devices working together and are installed in engine, guard-wagon , and at Railway platform in station Master cabin with repeater installation every kilometer. These prevent head on collisions , rear end collisions, collisions due to derailment or at level crossing or due to inactive crew or due to train parting , or accidents due to landslides and falling boulders. The company also plans to add new features for detecting overflowing, rivers and bridges, detecting displayed tracks and detecting accidents in tunnels.

Scope of work :-

The Company has already installed ACD's on 736 km. on Konkan Railway and 1,730 km. from Katihar in Bihar to Dibrugarh in Assam. As per Corporate Safety Plan, submitted to the Parliament, Indian Railways have to cover 56,000 km. of tracks with ACD's in next seven years. This will cost about Rs. 1,875 crores which is about 6.5 % of the total corpus of Rs.31, 835 crores allocated as special Railway Safety Fund. Apart from this, the company will have regular business of maintainence of these systems and equipments, at about 15% as AMC, which also would give excellent Margin.
Apart from ACD's, the company has carried out a trial of 1.5 kms. Of Sky Bus Metro project built by KRC by providing Auto Driving Devices and Driver Control Console and trial run was successful in Auto Driving Mode. Hence, Sky Bus Metro project will be a new area, as such projects are at an advanced stages for implementation for cities like Goa, Mumbai, Hyderabad, etc.
Also, international markets has over 8 lakh km of track of medium to low density traffic requiring ACD type of equipments. Taking 30 % as an acceptable factor approx 2.40 lakh km. of rail track in the world need to have ACD's. Hence, about 10,000 to 12,000 ACD's will be required every year on conservative estimates. Also, as per agreement with KRC on 29-10-04, the company need to increase production capacity of ACD's from 4,200 ACD's to 9,000 ACD's.

Public Issue: -

The Company went public on 28-11-05 with an issue of about 40 lakh equity shares of Rs. 10 each at Rs.250 per share for Rs.99.01 crores . Due to this, the equity increased to Rs. 11.40 crores of which, about 59 % is held by the promoters . The issue was to finance project of Rs.99 crores for expanding facility to manufacture ACD from 4,200 ACD's to 10,000 ACD's per annum, and create facilities for manufacturing 1,000 Auto Driving Devices (ADD's) and 500 Advanced Railway Signal Systems per annum. The Company is also establishing an Intelligent Transportation Technology Centre in Nalgonda District of A.P. on 1,035 acres of land for simulation and testing of advanced transportation control systems. The company shall be opening four international market offices in North America (for North and South American countries) Italy (European countries) Mauritius (Africa) and Bangkok (South and South East Asia ) .
The issue evoked very good response and now the share is ruling at around 315 per share.

Financial Performance:-

For FY 05 the total sales was at Rs.53.28 crores while PBT was Rs.14.57 crores and PAT was Rs.8.96 crores giving an EPS of Rs.7.86 for 5 months ended 31-8-05 of FY 06 total income was Rs.19.42 crores with PBT of Rs.8.50 crores and PAT of Rs.6.25 crores. However, FY06 is likely to give an income of Rs.60 crores and PBT of Rs.18 crores and PAT of Rs. 12 crores giving an EPS of Rs.10.50 . Since the expansion shall be completed by May'07 the real jump in the performance will come from FY08 . For FY 07 a sales of Rs.100 crores PBT of Rs.36 crores and PAT of Rs.24 crores can be expected. This increase will come mainly from maintainence contract of over Rs.20 crores, on total value of contracts of Rs.150 crores having executed till FY06.
Considering demand scenario, the company may be able to cover 2,500 km. of track in 05-06, 4,000 km. in 06-07 and 7,500 km. in 07-08. Orders for ADD's for Sky-bus can also come in from FY 08. On top of these, maintainence contract will be of sizeable value, adding substaintially to the bottomline from FY07 and onwards.
Comparable Peers: - Though the Company is termed as a technology company, it will be treated more as an Engineering company in due course of time having exclusive, monopolistic and highly sensitive technological product profile. Similar companies are BEML, and Kalindee Rail Nirman. Hence, the company should command a P/E of 25 or above. Considering an EPS of above Rs.20 for FY 07, the share should rule atleast Rs.500 by September 06.

Conclusion :-

Due to recent listing, the share is changing hands and are being acquired by the informed and techno-savy investors. Once, the churning of Stock gets over , we would see a sharp jump in the share price on the lines of Everest Kanto Cylinder and A/A Engineering . Hence it is advised to buy the share at present level of around Rs.315 for a safe and consistent gain.


Disclaimer: Hold positions in the stock.