Welspun Syntex

Welspun Syntex Ltd (WSL) is part of the reputed B K Goenka group (Welspun Gujarat). WSL is one of the largest exporters of Polyster Textured Filament Yarn from India. The company has two plants located at – Silvassa and Palghar, Thane.

Interesting points to note are:

  1. The company is doing a turnover of approx 400 Cr while the Mcap is just 35 Cr.
  2. The company is profitable and posted an Operating profit of 27.12 Cr and NP of 7.13 Cr in FY 2010.
  3. The company has restructured itself well over the years. The company had reduced the equity capital by 3/4th to make the Balance Sheet stronger in 2008.
  4. Now the company is trying to reduce debt .
  5. Company has a huge gross block of almost 300 Cr with an accumulated depreciation of almost 200 Cr.

Interestingly as the company has high turnover and comfortable debt position now, they can spend more on the modernisation and technology front to improve the operating margins of the company which are just 7-8% as compared to 12-13% of JBF Ltd. If done, it will have a huge positive effect on the fortune of this company.

Hidden trigger is that most of the equity is held by Promoters and Financial Institutions. Promoter’s holding is 37.69% & FIs holding is – IFCI 33.62%, IDBI Bank 6.19% and LIC 1.59%. Change of hands could be a major trigger in the stock.

Valuation @ Rs 15:

  • M Cap to Sales ratio is just .08 times.
  • Book Value = 21.60
  • TTM PE = 5

We view this small cap stock idea as an interesting long term turnaround story where the possibilities of value addition are huge.

Welspun

24 thoughts on “Welspun Syntex”

  1. Hi

    I have been considering JBF ltd for a while now… and I am tempted to ask why not JBF itself. It has registered good growth except for 2008-09 and has more comfortable profit margins.

  2. Hi Manish,

    Yes, JBF is also a good stock. The recent dividend of 60% makes it a safe bet also.

    The advantage in Welspun could be – it has qualities to become to become a multibagger. We just need more aggression from the mgmt here.

    Regards,
    Ayush

    1. dear ayush

      there is a recent increase in the companies finance cost expense is there any new debt which the company has taken.

      what are your expected targets for the company with [email protected] will they get benefit out of that.

      please do reply as i am invested in the company and value your comments

      1. Hi,

        Yes, the recent increase in finance costs is concerning but as they haven’t provided the Balance Sheet as on 31.03.12, we are not able to figure out the out-standing debt hence waiting for details and annual reports.

        I don’t think the rupee depreciation will affect much as they have balanced exports and imports.

  3. Its a commodity business with low ROE and it cannot grow at more than 10% without taking huge debt.There is a reason why it is trading at such a low PE.Before buying such stocks always ask yourself if you know something that the market doesn't. There are much better stocks available in the market.

  4. Dear Prabha,

    Many often PE ratios shouldn't be the only yardstick.

    While investing, its important to look at the downside first. We have discussed WSL, due to its low Mcap, strong promoters, High BV and improving financial health. It would be hard to find stocks at 1.5 times EBIDTA margins.

    I'll be glad to know your investment strategies and stock ideas. Please feel free to discuss.

    Regards,

  5. Ayush,

    1.What's the opportunity cost of investing in this company when you have 20-30% growers like Hawkins,Page Industries,Bluestar and Titan available.

    2.What percentage of your net-worth would you be comfortable investing in this stock?

    If this is one stock that is a part of a portfolio of 30 stocks then there isnt much wealth that you can generate from it even if it is five bagger.The point i am trying to get across is that quality of earnings is of paramount importance.Markets pay for growth and nothing else.No company will actually liquidate its asset for a book-value bargain to be profitable.And also even if that happens in a fire-sale you sell at much less than cost on books.

    Let me know your views.

  6. Dear Prabhakar,

    I agree with you…there is nothing like growth. We constantly search for growth stories at comfortable valuations…we generally avoid paying more than 20 times for growth…keeping in mind BV also. For eg: We had discussed stocks like Shilpa Medicare, Balkrishna Ind, Jaihind Project, Manjushree Technopack, Suprajit etc. at our site. Most of these stocks have already done quite well and still provide lot of value for long term investing.

    Apart from growth investing, we also believe value investing & turnaround stories which can provide better returns. We are full time into investing and recommend ideas after going through several other ideas.

    Usually small caps give exceptionally good returns when things click for them. WSL seems to be a story where the fundamentals are good and risk reward seems favourable.
    Regarding % of portfolio – Initially we start with putting 2-3% of our portfolio in such ideas…and later increase the allocation on getting more conviction and better prices.

    Do try out investing in fundamentally strong untold story with lots of possibilities. They do create lot of value and make a major favourable impact to your portfolio

    Regards,

  7. Ayush,

    Finally its a matter of individual style and comfort level.I believe in having concentrated portfolio of one to a maximum of five companies.So i have to be extremely picky about the quality of earnings and managements that i own.Also I believe there is no place for rigidity in investment.By avoiding to pay more than 20 times earnings one might miss a number of 30% growers that are abound.We are not a manufacturing economy like China or the USA of 70s.We are service oriented economy and 30% growth rates are not dangerous and very much sustainable.So my point is that when there are safer and surer companies out there why bother with this buy and hope it turns around business.But like i mentioned earlier ultimately its a matter of your individual style.

  8. Yes, Prabhakar. Its all about individual style and comfort levels.

    There are plently of 30%+ CAGR stocks which we have discussed at our blog. Most of them have niche area of their own and usually market leaders…add to it…they are still available at attractive valuations. Will like to have your views on them.

    Regards,

  9. Hi Ayush,

    How do you see this quarter numbers? After a quick rise, it has fallen down. What do you recommend?

    Regards,
    Manmohan

  10. I think the nos are good and the stock has a lot of value and potential.

    There is selling due to long time holding of FIs like IFCI etc. so the stock might have retraced.

    It seems to be a good buy at declines.

    Regards,

  11. SIR,
    Best expected price is 55.83 and full year exp. price is 44.41 for WELSPUN SYNTEX. Are these the target of price for the stock?

  12. These are the possibilities if the co is able to post the expected profits and the market gives the PE ratios of 10 or 12 respectively.

    Regards,

  13. Hi Ayush,

    The below are few developments as per the latest AR:
    1. 40% dilution of equity after pref allotment (page 3 of AR)
    2. After conversion of OCCPS, promoter stake will increase from 37.66 to 62.49
    3. The Company has been accredited with BBB rating as against BBB- previous year.
    4. The Company is under major expansion at total capital outlay of’ 168.37 Crores.
    5. Interest costs have been going up significantly
    6. Exports have increase by 36.87% YOY.

    The top line has grown quiet handsomely in past 2 years. In my view with major expansion, increase in promoter stake, limited downside, improving market sentiments makes it worth of re-looking into this stock.

    I will be enthusiastically awaiting your response.

    Regards,
    Manmohan

    1. Hi Manmohan,

      Went through the annual report.

      Yes, the co is implementing a major expansion of 160 Cr and the equity may not increase in near term till the promoters opt for conversion.

      So, overall yes, the valuations are cheap considering the size of company etc but it remains a cyclical and the increasing debt would be a negative. This preferential allotment to promoters is also not a good thing. So yes, it has value and may do well over medium term, but quality is not high and hence exposure should be limited.

      Ayush

      1. Hi Ayush, I think this stock needs a serious look. EPS of 3.78 this quarter. It has appreciated 30% and recently with good volumes. Your views will be appreciated.

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