Sunflag Iron – Update & Ideas

A Blog of Value Investing

We had discussed about Sunflag Iron and provided an update earlier. At that time the company had been posting substantial improvement in operating margins and hence much better net profits and it seemed that the improved was because of the backward integration the company had been doing over last 2-3 years. But since last 2 quarterly results, the margins have taken a hit and so have net profits.

As the whole midcap space has undergone a strong correction in last 3 months, there are several other interesting ideas available at good valuations. One may consider switching out from Sunflag Iron into new ideas.

Some new ideas on which we are researching are:

  • Prathibha IndustriesInfrastructure company growing consistently at a CAGR (Compounded Annual Growth rate) of 50%+ for last few years. Had recently placed shares to Chrys Capital at almost 60% premium to CMP.
  • Astral Poly Technik Astral is the first licensee of Lubrizol of USA to manufacture the most advanced CPVC plumbing system in India. CPVC is fast replacing the GI pipes market in the plumbing area. The company has strong CAGR growth and similarly bright future.
  • Avanti FeedsAvanti Feeds is the leading manufacturer of Prawn, Fish Feeds and Shrimp Processor and Exporter from India. India’s marine export market had undergone a slump during the last 5 years and now seems to be back to previous levels. The future is bright for the sector. This company could be well positioned to capitalize the same.
  • Nitin SpinnerWith the textile sector doing well, this company has good financials and is available at attractive valuations.

There was an interesting discussion on TATA Motor DVR by Prof. Bakshi ji at his blog. Tata Motor DVR have 1/10th the voting right of the common stock but they carry higher economic right by way of 5% higher dividend. So for a retail shareholder (most of us don’t vote) DVRs are better investment as they carry higher dividend. Yet, TATA Motor DVRs (CMP = 660) are trading at almost 45% discount to the price of TATA Motor shares (CMP = 1160). The discount is quite wide here and hence one should work on this idea.

Edit: The TATA Motor DVRs are also available in F&O (Future and Options) hence the instrument is highly liquid and so are related opportunities.

Above are new ideas at initial stage of research. It would be great to receive inputs from the readers.

  • Green World Investor

    1) Tata Motor DVR discount has been discussed for the last couple of years.The discount has only become wider because of technical issues etc.Don’t know what a good time to invest in this stock is? I guess if you want to invest in Tata Motors you might want to invest here but just on the basis of discount does not make sense currently.

    2) Infra companies have corrected greatly.I think you might find a number of infra companies even big ones trading at low valuations.All have show fantastic growth

    Any updates on

    a) Facor
    b) Pondy
    c) Balaji Amines.

    These stocks are looking more attractive at these prices probably.

    • Ayush

      Hi,

      Yeah, ideally those who are bullish on Tata Motors or already own the same, should convert their holding into DVRs. As of now the awareness about the DVRs is very limited in the general public…hence creating awareness will converge the discount.

      We are unaware about the technical issues if any. Please highlight the same.

      Most of the infra cos don’t look attractive caus usually they have following issues – 1) High Debt 2) High Inventory/Debtors 3) Corporate Governance Issues. Hence during slowdown, infra stocks take a hit due to uncertainty on future. In the case of Pratibha, good thing is that they have raised money recently by giving pref allotment to reputed investment group – Chrys Capital. It brings a lot of comfort.

      All the three stocks – Facor, Pondy & Balaji are doing inline with their earlier expectation. Yes, at current levels the valuations are attractive but as they are small cos, concentrated bets should be avoided. More emphasis should be given to new ideas.

      Regards,

      • Hi Ayush,

        How would one go about purchasing DVR’s instead of stock? I am NRI using ICICI Direct – are there any limitation on purchasing of DVR’s?

        • Ayush

          I don’t think there would be limitation on purchasing the same. Still, it would be better if you consult ICICI Direct.

          Regards,

  • Rohit Kathotia

    Hi,
    am a little disappointed with your advice, a few months back you were really bullish of sunflag now all of a sudden you are telling to switch, now in future what will the basis on which some should buy a share on your recommendation as probably you may again come and say “please switch from this share as it is now performing will” please a a more solid research on the company before you publicly give any advice.

    P.S I had purchase sunflag on your strong repeated recommendation on your website

    • Ayush

      Hi Rohit,

      We welcome your participation and sharing of views. We would like to share our view in this regard:

      Stock Picking/Investing is a continuous process and one invests based on understanding of publically available information. After initial analysis, one has to keep track of quarterly results etc. to monitor if things are going as per expectations or not. Many often, despite applying all logics, research may not be fruitful. So these are inherit risks in investing.

      In the case of Sunflag Iron, the fundamentals have changed. Earlier the company was doing a NP of about 25-30 Cr per quarter but since last 2 qtrs, the profits have fallen off by approx 50% to 13-14 Cr. While the stock price has fallen just 15-20% levels and in line with the market fall. In the same period, most of the mid caps are down 30-50%. Had the fundamentals of the company not been strong, the fall must have been much stronger.

      Like Keynes had said – “When the facts change, I change my mind. What do you do, sir?”

      Its very important to explore new ideas and if one gets a better idea, then one should switch over to that one.

      We feel that you should look at the performance based on the performance of other calls also. In stock market one can’t be 100% right…a 60-70% success ratio is considered very good. I would suggest you not to concentrate investment in just one or two stocks. Portfolio should be diversified over atleast 10-15 stocks. Also, buying should be usually done in SIP mode.

      Regards,

  • usha

    Hi Ayush

    Any view on ABC Bearings. Its taken a steep hit too. ? thanks usha

    • Ayush

      Hi,

      Its a good company, one may add at CMP and on declines.

      Regards

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  • Raju

    Ayush, how about Rayalseema Hi S.. I bought it in Dec at a high price, it’s languishing at 40 rs. Pls update.

    Raju

  • Daido Japan will buy stake in Sunflag, may be in 2012. This stock is damn cheap at Rs.23. Target is Rs.45 in 2 years. Advantage : Coal Mine, New JV for coal with CIL, JV for Iron Ore, Promoters increasing their stake regularly since last 15 – 18 months.

  • kc

    hi ayush, what is your call on hdil, is it good to short at the cmp

    • Ayush

      Hi,

      Sorry, don’t track the same. We prefer Ansal Infra & Ashiana Housing in the real estate space.

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