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.
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.
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