ABG Heavy Industries (current market cap of Rs 50 crore) is basically a play on the economy, therefore, when the economy is picking up, the stock is bound to do well. But the stock is also defensive play during a slowdown by virtue of the nature of its business.

The company has two businesses. One, it buys and leases cranes and loading equipment to ports (this is 70 per cent of its business in terms of revenues). Two; ports. The JNPT and Chennai Port Trust are its major clients. And second is the charter hire and erection business.

The container handling business which is confined to ports functions as an annuity business where the company is assured of a steady cash flow (sinceits is essentially a leasing business and the company operates like a finance company). Thus, even during the worst phase of the slowdown, the company was able to earn an EPS of Rs 10 per share and payout a dividend of Rs 3.5 per share. But this is also a business that is difficult to grow without tapping fresh sources of finance.

But what the market is betting on for growth now is the second business which is the real play on the economy. Growth in this business directly corresponds with investments in infrastructure and the core sectors. Even during the slowdown, the company managed to bag orders from projects like Reliance Petroleum's Jamnagar refinery, Essar Oil and Mangalore Refinery. Any improvement in infrastructure spending and port development will directly benefit ABG Heavy Industries.

The cost structure of the company is such that profitability is very sensitive to interest rates. Operating profit margin is around 70 per cent. But gross margin is around 30 per cent, with interest cost normallyconsuming around half of the operating profit. The softening of interest rates has thus benefitted the company in the first quarter of the current year. Interest costs were lower by 10 per cent. Besides, an increase in operating margins pushed up net profit for the quarter by 30 per cent. Consequently, the outlook for the entire year is also that much brighter; hence the rush for the stock.

Western Hatcheries

Western Hatcheries, the country's leading and most integrated poultry producer has had a bad run in the first quarter of the current year, breaking with the rising trend in earnings seen last year. The main reason for the fall in profitability is the rising cost of poultry feed, which is the major raw material. Further, the trend of rising broiler prices has also flattened out.

Revenues remained flat in the quarter over the corresponding quarter last year, while the operating profit dropped by over one third, reflecting the sensitivity of the bottomline to feed prices. The impact on the netprofit was even greater dropping by one half. The stock has also responded to this unexpected development, losing one third of its value. Unless the imbalance in feed prices improves, profitability for the rest of the year will be similarly impacted.