NMDC and other updates

nmdc

Markets have undergone a lot of correction (more visible if one considers the mid/small cap space), and though the economic indicators are not good and there is lot of uncertainty, but these are the times to plant the good ideas and make a strong portfolio for upcoming years.

For the last couple of years, most of the companies are grappling with the rising costs due to power, labour and inflation, and most of them are witnessing a slower growth and contraction in margins. Perhaps the fall in rupee is a way by which several export oriented companies will get some relief and would be able to regain the lost margins. But we should also remember that not all companies will be benefited. Due to a competition, much of the benefits would be taken away by the customers and hence we need to focus on high quality companies which have a pricing power and have done well in past. Most of the companies in our portfolio have been export oriented (and low on debt). We feel that the following may do quite well – Avanti Feeds, Oriental Carbon, Poly Medicure, MPS Ltd, Acceleya Solutions, GRP, Orbit Exports etc.

We discussed a couple of new ideas in our last post; here are more thoughts on them:

1. NMDC: Most of the PSUs have been beaten down by the markets and perhaps rightly so as most of them are inefficient. Due to undue govt influence/interference, corruption etc, they often destroy the value. Yet we feel that some of these PSUs are sort of monopolies in nature and some might have come down to very attractive valuations.

NMDC is India’s largest miner of iron ore – 20% of total production of India. The stock has fallen off about 40% over last one year and is now trading at a market capitalization of about Rs.40,000 Cr. The company is debt free, has Rs.20,000 Cr of cash on the balance sheet and is generating about Rs.6,000 Cr of net profits annually. At the current price of Rs.100, the stock is trading at just 6.25 times its earnings, at the price to book value of 1.40 and providing an attractive dividend yield of 7%. As per the latest presentation, the company is talking about volume growth of about 15% for FY14 and maintaining a 40% dividend payout of profits. Also, due to the rupee depreciation, the effect of fall in international prices of iron ore won’t be much for the company.

On similar lines, we are also studying Engineers India, Petronet LNG and BHEL.

2. Noida Toll Bridge: NTBL operates the DND flyover in Noida. It is a simple business model and has been discussed on several blogs. The company generates about 106 Cr turnover and 42 Cr net profits from operations. The interesting development is that the company has hiked the toll rates by about 15% from 1st April, 2013. Earlier there used to be agitations and company had to roll back the increases but this time the increase has sustained. Another good thing is that the debt is reducing quickly. This results into higher free cash flows and the company can pay out higher dividends. Despite the significant improvement in operations and profitability, the stock is available at multi-year low. We feel that this may be a good opportunity for short to medium term. However, we don’t have a long term view. One may also like to read the risk part on this idea.

Quarterly result updates on our existing ideas

GRP: As discussed earlier, the problems are continuing in the company and the company has posted a loss of 0.51 Cr in Q4. The problems are multiple: 1. The demand is weak due to the global recession and hence the new capacities created recently are quite underutilized 2. The power costs have risen due to increase in gas prices and there is severe shortage of power at the new plant 3. Due to fall in natural rubber prices and competition, the pricing power hasn’t been there.

The company has an excellent past track record and hence we feel that over a long term the company would be able to solve the above problems. However, in the short to medium term, the pain may continue.

Oriental Carbon: The company has done pretty well in this quarter considering the severe slowdown in the rubber industry. For the full year, there is a 10% drop in net profits despite a 4% increase in turnover. We feel the valuations are very attractive as the stock is trading at just 4 times earning, at price to book value of 0.60 and providing a dividend yield of 5%. We also note, that the company is currently operating at less than the optimum capacity utilization and thus the company can do very well whenever the environment improves. The company would be a beneficiary of rupee depreciation too.

Lumax Auto Technologies: The company has posted decent results considering the slowdown and negative growth in the auto sector. The stock seems to be available at very compelling valuations: 3.5 PE, 0.65 price to book value and providing a dividend yield of 5.5%. The company has had excellent cash flows and good ratios. The company has utilized the free cash to put up a new plant for Honda and it should be operational during Q1FY14.

Smruthi Organics: The company has posted a very poor set of results. The turnover has dropped to Rs.18 Cr from Rs.53 Cr last year resulting in a loss of Rs.2.2 Cr vs profit of Rs.1.4 Cr last year. The reason for the change is that the company has received audit qualifications from the European Department of Quality Management and hence the product supplies had to be stopped until the compliance is done. Usually it takes about an year to get a re-approval and hence the pain may continue for sometime. On the other hand, if one looks at a longer term potential, then here is a USFDA approved pharma company available at a market capitalization of just 25 Cr.

AstraZeneca Pharma: As discussed earlier, it is expected that the problems have been resolved and the company would regain its previous heights in near future. We came across an article which points towards 40% growth by the company in May, 13.

Avanti Feeds: As discussed during last post, the company has done very well and looks undervalued. As per recent articles, the coming year may be good for the company.

Screener Talks

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  • mallikarjun

    Hi Ayush

    Regarding NMDC, is it a conscious effort to have some large cap stocks in the portfolio to iron out volatility

    Regards

    Mallikarjun

    • Ayush

      Hi,

      The move is more due to the compelling valuations the stock seems to be trading at. Its rare to find big companies at single digit PE multiple with high div yield of 7%

  • Pratul Lobo

    Hi Ayush,

    Can you please let me know if Marksans Pharma is a good stock to invest in? It has completed a turnaround in FY 13 with 38 cr profit compared to 100 cr loss in FY 12.

    • Ayush

      We don’t track the same so not much idea. Any particular reasons/insights for such a turnaround and prospects going forward?

      • Pratul Lobo

        The company has reached an agreement to settle its FCCB obligations within FY 14. Also, the overseas subsidiaries have turned profitable. Another point I would like to make is that the promoter Mr. Mark Saldanha is aggressively buying shares in the open market. He has increased his stake from 48.39% in FY 12 to 51.25% as of yesterday.

        • Ayush

          But why did the co go into huge sudden losses earlier. What is their business model and advantages to maintain current nos and improve it further?

          • Pratul Lobo

            I think they acquired their overseas assets in UK and Aus in the bull run of 2007 and issued fccbs to fund their acquisition. Wrt business model, I would like you to help me out :). I know thru their Q4 balance sheet, they are into mfg and mktg of pharmaceutical formulations only

  • excel

    Hi Ayush,

    The 2013 tax rate for Noida toll bridge has nearly tripled.
    Any specific reason for the same?

    Regards,
    Excel

    • Ayush

      I think the tax rates were lower earlier due to unabsorbed depreciation/losses and normal tax rates should be applicable.

  • DeepakkumarPrasad

    BHEL as negligible debt of 123cr and has reserves of over 24K crore. If this is true how come its Cash from Financing Activity is always negative and is currently -1814 Cr

  • Roberto el S

    Hi Ayush,
    Are you positive on Chemfab? It is trading at less than 3 PE. With a dividend yield of 7, looks like there is nothing much to lose here.
    Roberto el S

    • Ayush

      Though the stock is cheap but we have exited Chemfab – as per their FY13 AR, the electricity prices have increased almost 35% and this is the biggest cost for the co.

      Ayush

  • BrainBought

    A great post for value investors wondering what to do with their money in this moribund economy! Investors need to realise the importance of fundamentals in making stock decisions, rather than following the herd and acting on baseless tips.

  • BrainBought

    A great post for value investors wondering what to do with their money in this moribund economy! Investors need to realise the importance of fundamentals in making stock decisions, rather than following the herd and acting on baseless tips.

  • Prashanth

    Hi Ayush/ Pratyush,

    Is there a way to screen the companies where promoters are continuously increasing their stake/buying from exchanges?

    • Hi Prashanth,

      You can try something like this:

      Change in promoter holding > 10% OR
      Change in promoter holding 3Years > 10%

      • Prashanth

        Pratyush,

        Those correspond to yearly and 3 year figure.
        In my opinion a small cap company during those periods is already re-rated or the re-rating would have begun.
        Results on a monthly basis would be of more help.
        Thanks 🙂

  • Hi Ayush,

    If you get a chance – do look at Ratnamani Metals. Valuations look enticing.

    Regards,
    Lloyd

    • Ayush

      Yes, Mr. Llyod,

      Ratnamani looks very interesting. Any data for clarity on growth prospects at your end?

      • I’ll still researching. I will share whatever inputs I have.

  • nikhil

    hi Ayush, could you give me your opinion on technofab engineering

    • Ayush

      Hi Nikhil,

      We used to track it and liked it for the undervaluation. However, due to sector problems and some negative feedback we exited and not tracking it closely.

      • Ketan

        Hi Ayush,

        Could you let me know, what was the negative feedback, and was it company specific? I’m holding the stock.

        • Ayush

          The same problems like other infra cos – lack of transparency, uncertainty in cash flows…projects getting stuck and hence the receivables are stuck.

  • Roberto el S
    • Ayush

      Hi Roberto,

      Thanks for the offer and would had loved to meet up. However, I left hyderabad yesterday and heading to bangalore now.

      Would meet up the next time possible

  • Mallikarjun

    Hi Ayush

    Have some concerns about cross shareholding pattern of poly medicure. Considering the business they are in why haven’t any institutional shareholders got into it. Is it because of liquidity/marketcap.

    Intend to increase the allocation to poly medicure.How do you rate the management

    Regards
    mallikarjun.

    • Ayush

      Hi,

      Very tough to comment on the shareholding thing you are referring to as being outsiders, its very tough to know the true story.

      If one looks at the past, the co has done superbly on the business side and has been a wealth creator. Hence I think management is very good.

      • mallikarjun

        thanku Ayush 🙂

  • hardtoget

    hey ayush, wantd to bring your attntn to – liberty phosphates seems to be at an interesting price & in better hands too. on Ajantha- there are many advising on profit booking, as both the price & PE have moved up, your views on both points pls.

    • Ayush

      Hi, not tracking Liberty Phosphate after our exit done earlier. Ajanta – yes, stock price has risen quite a lot over a short period and hence some profit booking can be done.

  • nikhil

    hi ayush,

    Can you give your views on Atul Auto and dhanuka agritech

    • Ayush

      We have already well discussed Atul Auto and we continue to remain invested. The co has been doing well considering the challenging environment we are in.

      Not tracking Dhanuka closely but heard good things

  • taramani

    PSU banks are trading at 3-4 PE multiples…u think these are good levels to enter?

    • Ayush

      To participate in any financial co, we need to understand the asset quality. There is a big and real concern on the quality of the assets of these PSUs hence until and unless one has done homework, it won’t be advisable to jump in because of low PE.

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