Edelweiss - Precision Wires - No more copper woes - Maintain Buy

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Mar 9, 2007, 5:45:30 AM3/9/07

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We met the management of Precision Wires post its disappointing Q3 results. Key takeaways are:

INR 45 mn loss during the quarter due to steep fall in copper prices: on an average, the company maintains an inventory of ~800 tonnes (finished products as well as raw material). A 17% drop in prices of copper during the quarter, led to an inventory loss of INR 45 mn for the company

Copper price as on 30^th Sept'06	Copper price as on 29^th Dec'06	Loss due to price fluctuation
USD 7600	USD 6300	INR 45 mn

Hedging mechanism to be implemented Q1FY08 onwards: Hitherto, the company did not have any hedging mechanism in place since it takes orders with a lead time of not more than 3 months and it passes raw material fluctuations, if any, to its customers. However, the company has to bear the risk of price fluctuation during the quarter (beginning and end of quarter). With increasing fluctuations in raw material prices, the company is working out a hedging strategy with NCDEX which is to be implemented Q1FY08 onwards.

Source: Edelweiss research

Increased job work to further reduce raw material risk: Historically, the proportion of job work for round winding wires has been 15-20% of total sales. The management has decided to increase the proportion of job work for round wires to 35% and the recently launched flat wires to 75%. This significantly mitigates raw material risk and reduces working capital requirements.

Flat winding wires launched during the quarter: Through technological collaboration with Invex, Italy, the company has installed capacity to produce 4,500 tonnes of enameled strips, taped conductors, and CTC (Continuous Transposed Conductor) used in transformers and other high tension equipments used by the power sector.

Financials & outlook: We have downgraded EBITDA by 13.8% and 13.6%, and net profit by 22.2% and 19.8% for our FY07 and FY08 estimates respectively. At the CMP of INR 135 the stock trades at 6.2x revised FY08E EPS of INR 21.7 and 4.5x revised FY09E EPS of INR 29.7. In view of the above measures reducing raw material risk, launch of new products for the power sector, and rising EBITDA per tonne, we maintain our BUY recommendation.