Revathi CP: Hold

Recommendation: Hold

Anup Menon

Trading at around Rs 200, the stock of Revathi CP may be a good stock to hold in a portfolio with a medium-to-high risk profile.

A major problem for the company is the lack of trading interest in the stock. Based on the latest annualised earnings per share, the price-earnings multiple for the company works out to around seven times. Though coal production has been moving up in recent times, the company's financial performance in the recent past is not all that impressive. Further, the operational risk factors are also worth watching.

Earnings performance: The company's financial performance for the first half of fiscal 2000-2001 is not very impressive. Sales revenues declined 14 per cent to Rs 23.55 crore compared to the corresponding previous period. In the same time-frame, operating margins fell 30 per cent to 27 per cent and post-tax earnings 12 per cent to Rs 4.61 crore. However, not accounting for `other income', the percentage decline rises to around 32 per cent. On an equity base of Rs 3.21 crore, the annualised earnings per share of the company works out to Rs 29.

Business profile: Revathi CP is in the business of manufacturing of surface drilling equipment such as blast-hole drills, water drills and other related products. It derives a significant chunk of its revenues from the coal sector. The company is part of the Swedish giant, Atlas Copco.

Prospects: The company's prospects depends to a large extent on the performance of the coal sector as a whole. From the point of view of coal production, the signs are healthy. For instance, during April-October 2000, coal production rose 8 per cent as against a decline of 1 per cent for the corresponding previous period. This augurs well for the company as its fortunes fluctuate with that of the coal industry as whole.

The coal industry, in turn, depends to a large extent on the performance of certain core sectors such as cement and steel, which are susceptible to changes in broad economic conditions. With the outlook for the overall economy not being all that good, the performance of the coal sector may be affected.

However, the company has managed to reduce its operational risk profile to some extent. For instance, it has been steadily increasing the share of revenues from sale of spares. For instance, for the year-ended March 2000, the sale of spares/services constituted close to 46 per cent of the overall turnover. This helps reduce the cyclical trends in the earnings profile.

Overall, given the nature of the company's business and its prospects, it would pay to watch out for changes in the operational risk profile of the company. Shareholders can stay invested and use uptrends to trim exposures.