HDO - Buy (IL&FS INVESTSMART)

HINDUSTAN DORR-OLIVER LTD. (HDO) - BUY

Engineering Success………..

HDO has made rapid strides in its core EPC business, engineering a ~5.4x
growth in less then four years with significant contribution from mineral
beneficiation and environmental infrastructure business. However we believe
that the best is yet to come for HDO as the company is well positioned and
has expertise to get into the bigger league with higher ticket contracts.
We expect HDO to grow 49% & 35% CAGR in revenues and profits respectively
through FY08~FY10E, driven primarily by water infrastructure business,
manufacturing proprietary Industrial products, ore sepearation business and its
planned focus on engineering support centre.

Investment Logic

# Healthy Order book comfortable enough to tide over the near term
concerns: The current order backlog of Rs.7bn is 2.3xFY08 billings. Based on
the pipeline bids, enquiries, and the Capex cycle we expect order accretion to
gain momentum in next few quarters and grow at 17% CAGR for the next two
years.

# Getting into the big league with Diversified Portfolio – Market
positioning, expertise and executional capabilities has made HDO a preferred
Vendor across many groups / Industry. Traction is expected in award of big
ticket contracts in the next few quarters.

# Increased manufacturing to stem margins: We expect that higher
demand for its proprietary Industrial products is likely to prop the blended
margin going forward with ~14% revenue contribution by FY10.

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