CHI Investments – Update

ETIG has recommended deep discounted holding companies for long term investment in it’s article: http://epaper.timesofindia.com/Default/Scripting/ArticleWin.asp?From=Archive&Source=Page&Skin=ETNEW&BaseHref=ETM/2009/09/07&PageLabel=19&EntityId=Ar01900&ViewMode=HTML&GZ=T

CHI Investments has topped the list and is still available at approx 84% discount to it’s NAV J. We had recommended CHI Investments at just Rs 25 in our blog post: http://dalal-street.in/chi-investments-interestingly-mis-priced/

With better discovery by investors, this mispricing should reduce going forward. The gap can reduce to 50% of NAV like in other holding cos. If so, the stock has potential to reach Rs 125-150+ in long term. Another positive factor in this stock is – that it is listed both on NSE & BSE and has decent liquidity unlike other small holding cos (which are illiquid). Also, CHI Investments has investments in cos which are related to power sector and have high growth plans.

With increasing media coverage and shareholders, the risk of unjust merger is also getting reduced.

Shilpa Medicare – Update

YTD graph of Shilpa MedicureWe recommended SML in our blog on 26th July, 2009 @ 90. The stock has witnessed a fantastic upmove and has been hitting upper circuits since last few days. The stock was locked up at 161.70 today J

At CMP, we advice small/partial profit booking but at the same time one shouldn’t underestimate the long term story in this stock. The stock still has long term potential for the following reasons:

  1. The company is all set to emerge as the biggest & dedicated player in the Oncology segment.
  2. The company has fantastic operating margins of 25-30% and the company is growing @ 30%+.
  3. For co’s growing at such pace with such high margins, the PE multiples could be in the range of 15-20.
  4. If so, price target of Rs 200 can be achievedJ.

Other triggers are:

  1. The company is expected to receive USFDA approval by the end of this year.

Apart from that, we are awaiting the annual report of the company and looking for industry/market updates. Chip in your updates, if any.

Albert David

Hi Friends,

Have a look at this small sized pharma company which has been performing very consistently over the years yet the valuations are cheap.

The pharma sector is going through very good times and one should invest in good company still available at reasonable valuations. Good things are:

  • At CMP of 75, the stock is trading at less than 6 times FY 09 EPS of 13.2 and much less than the BV of 100+.
  • The company has a good dividend track record and paid a dividend of 35% last year hence giving a div yield of 5%.
  • Company though not aggressive yet is a slow and steady performer with clean balance sheet. They did major upgradation, expansion and modernization of their facilities a year back and the positive effects should be seen in coming quarter nos.
  • They have very strong cash flow as the company is very disciplined on the Inventories and Debtors position.
  • Their Q1 nos were pretty good and if they repeat or improve the same, the company should be able to post an EPS of 17-20 for FY 10 and stock has potential to give 50-100% in a year.

This is one of the stock ideas in which one can lock his profits .

Views Invited

Financial Snapshot:

Year

200203

200303

200403

200503

200603

200703

200803

200903

201003

   
Type

Full Year

Full Year

Full Year

Full Year

Full Year

Full Year

Full Year

Full Year

Full Year

   
Sales Turnover

95.60

103.33

114.39

101.79

127.42

141.16

158.12

183.91

200.00

   
Other Income

2.78

4.30

4.79

3.02

3.79

2.26

2.21

2.14

   
Total Income

98.38

107.63

119.18

104.81

131.21

143.42

160.33

186.05

200.00

   
Total Expenditure

86.43

93.83

103.04

92.54

113.97

121.51

137.84

160.75

   
Operating Profit

11.95

13.80

16.14

12.27

17.24

21.91

22.49

25.30

28.00

   
Interest

2.86

2.41

1.73

1.73

1.50

2.48

3.84

5.15

5.00

   
Gross Profit

9.09

11.39

14.41

10.54

15.74

19.43

18.65

20.15

23.00

   
Depreciation

3.15

3.45

3.47

3.92

3.87

4.77

6.73

7.95

8.00

   
Tax

2.00

2.74

3.69

2.42

4.45

7.56

4.59

4.66

5.00

Best

Worst

Reported PAT

3.94

5.20

7.25

4.20

7.42

13.20

7.33

7.54

10.00

11.50

8.00

                     
EPS  

9.11

12.70

7.36

12.99

23.12

12.84

13.20

17.51

20.14

14.01

PE  

10

10

10

10

10

10

10

10

12.00

6.00

Exp Price  

91.07

126.97

73.56

129.95

231.17

128.37

132.05

175.13

241.68

84.06

CMP (7-Aug-06)      

90

90

90

90

90

75.00

75.00

75.00

                       
OPM %

12.50

13.36

14.11

12.05

13.53

15.52

14.22

13.76

14.00

   
NP %

4.12

5.03

6.34

4.13

5.82

9.35

4.64

4.10

5.00

   
                       
Dividend %

16%

18%

20%

20%

25%

30%

30%

35%

     
Dividend Amt

0.91

1.03

1.14

1.14

1.43

1.71

1.71

2.00

     
Payout %

23.10

19.81

15.72

27.14

19.27

12.95

23.33

26.53

     
                       
ROCE:

20.66

23.33

27.55

15.25

21.19

20.82

14.78

15.21

     
                       
M Cap:

42.83

                   
BV:

100

                   

Jaihind Projects

“First I determine themes that will be played out over the next several years. Then I identify groups of stocks that reflect those themes.” – Ralph Wanger

Working on the above advice, we all will agree that the next big opportunity is in the Gas Sector. Early beneficiaries will surely be “pipe line laying” companies.

Jaihind Projects (JPL) is a leading player in this space and is scaling up very aggressively. I have been bullish on JPL for quite some time and feel that there is enough potential.

About Jaihind Projects (http://www.jpl.in/)

  • It is only listed dedicated player available in this space.
  • Company has been doing this work for major PSUs such as Gail, IOC, GSPL etc for several years. Gail, GSPL etc have ambitious targets for building pipeline network across India, JPL should surely gets its share in future orders.
  • The company has grown from just 50 Cr turnover in 2005 to 325 Cr turnover last year.

Going Ahead:

  • Company is expected to achieve a turnover of atleast 500 Cr+ this year and if they are able to maintain their historical operating margins at around 12%, the company has potential to achieve Net Profit of atleast 20-25 Cr.
  • Which will result into an EPS of say 20-25 on an expanded equity of close to 10 Cr.
  • At current market price of less than 100, the forward P/E is less than 5. Considering the things will go well, stock has potential to more than double in two years period.

Risks:

  • The company has been taking debt to expand so if there are delays, the company can be adversely affected.
  • The company has been diluting equity by issuing shares to promoters on preferential basis.
  • The company doesn’t pays dividend to conserve cash for growth.

Do work out the calculations and share the views.

Shilpa Medicare – A strong bet on Oncology

The company has come out with very good June Qtr nos and deserves a closer tracking.

About the company and the business:

  • Company has been expanding in the Oncology space and wants to be the largest Oncology API manufacturer in India apart from big formulation cos which do production for captive use. This space has lesser competition and hence quite high margins
  • Go through the announcements of the regulatory approvals the company has achieved in last 1 year. Co claims to be one of the few cos to get such approvals
  • Company expects to get USFDA approval by year end.

On Financials:

  • Company has scaled up from just 25 Cr topline in 2003 to 138 Cr last year and targeting close to 200 Cr this year.
  • Margins have been on the rise over the years due to co’s deliberate move from low margin to high margin business. The margins are currently at 25%+…on a turnover of 200 Cr this will result into an operating profit of 50 Cr, from this we should subtract the interest and taxation cost, which shouldn’t be more than 7.5 & 10 Cr respectively. We get a figure of 35 Cr+ as potential cash flow this year and NP could be close to 25 Cr, conservatively.
  • For margins calculations I have been removing the forex adjustments. Last year the company suffered a notional 10.85 Cr forex loss on the outstanding ECB. In this quarter there is a gain of 2.9 Cr.
  • There are some losses in the consolidated nos, as the company did an acquisition in Austria last year. These losses are expected to come down soon.

Why I like the company:

  • I like companies with scalable business model having high operating margins. Shilpa is growing fast with operating margins expected to remain very healthy around 25%.
  • The company seems honest and has been applying conservative accounting policies. The company has been providing good amount of depreciation and tax at the maximum rate.

Valuations:

  • Currently trading at less than 8 times expected FY 10 EPS of 12 (this EPS is excluding forex gains/losses). Not very cheap but a strong buy on declines.

Annexure 1:

Year

200303

200403

200503

200603

200703

200803

200903

201003

Type

Full Year

Full Year

Full Year

Full Year

Full Year

Full Year

Full Year

Full Year

Sales Turnover

24.11

35.66

37.51

47.62

68.39

95.81

138.09

200.00

Other Income

1.78

0.73

1.12

1.27

2.36

2.52

0.90

Total Income

25.89

36.39

38.63

48.89

70.75

98.33

138.99

200.00

Total Expenditure

23.68

30.88

32.79

40.58

56.79

77.22

102.00

Operating Profit

2.21

5.51

5.84

8.31

13.96

21.11

36.99

50.00

Interest

0.29

0.46

0.31

0.39

0.32

0.85

4.92

7.00

Gross Profit

1.92

5.05

5.53

7.92

13.64

20.26

32.07

43.50

Depreciation

0.30

0.82

1.00

1.77

2.30

3.51

6.05

9.00

Extraordinary Adj

0.00

0.00

0.00

0.00

0.00

0.00

10.85

0.00

Tax

0.63

1.74

1.24

1.88

3.48

5.44

8.39

9.00

Reported PAT

0.99

2.49

3.29

4.27

7.86

11.31

6.78

25.00

EPS

0.74

1.85

2.40

2.46

4.53

5.32

3.08

11.35

PE

12.00

Exp Price

136

CMP (26-Jul-09)

95

OPM %

9.17

15.45

15.57

17.45

20.41

22.03

26.79

25.00

NP %

4.11

6.98

8.77

8.97

11.49

11.80

4.91

12.50

Mcap

209.24

ROCE:

21.73

39.54

29.53

17.61

21.34

12.21

CHI Investments – proposed merger impact

Dear Friends,

RPG group has proposed the merger of the listed finance cos viz. CHI Investments, Summit Sec, Octave Investments, Brabourne Ent with RPG Itochu Finance. As per the preliminary analysis, I feel the scheme and ratios are unjust to the shareholders of CHI Investments.

There are two issues in this amalgamation:

1) RPG Itochu Finance Ltd shouldn’t be a blank company i.e. it should offer value equivalent to the value being offered by the merging companies. Explanation: We have been informed that RPG Itochu is having equity of close to Rs. 5 Cr without having any significant operations, assets or profitability on balance sheet. If so, it will reduce the current value of the merging companies by 50+%.

2) The swap ratios seem unjust:

The logic in all these four cos is: They are just holding cos, so the best way to value them is – consider the market value of investments they have and consider the exchange ratio accordingly, while RPG is trying to give benefit to Summit Securities which has the least value (refer column F below) among all the four listed companies.

Here is the calculation sheet:

Merger Impact (as on 13th July)

Equity

CMP

Current Mcap of Company

MV of Invest.

Ratio (MV of Invst/Mcap of Co.)

1 Share of RPG Itochu for

New Equity creation in RPG Itochu

Cost to shareholder in new co.

A

B

D

E

F = (E/D)

G

(A/G)

H = B*G

Summit

48.51

8.4

40.75

165

4.05

16

3.03

134

Brabourne

14.39

7.75

11.15

58.04

5.20

28

0.51

217

CHI Investments

11.46

28

32.09

258.80

8.07

6

1.91

168

Octav Investments

3.01

20

6.02

26.11

4.34

21

0.14

420

507.95

5.60

MValue of Investments per share in new company (436.93/5.60)

907.19

RPG group is trying to give more value to Summit Securities where the ratio of MV of investments to MCap of the company itself (i.e.. column F) is the lowest. i.e.. 4.05 times vs 8.07 of CHI Investments. So the company having the least value has been offered the best swap ratio (refer column H) and other companies i.e.. CHI Investments and Octave are being penalized L

The approximate damage to the shareholders of CHI is:

Damage to shareholders of CHI Investments
Earlier After Merger
M Value of Investments per share

225.83

907.19

Cost to shareholder

28.00

(CMP)

168.00

(As per merger ratio of 1:6)
Ratio (of Value of Investments per share)

8.07

5.40

Damage:

33.05%

This is a clear case of unjust value erosion to the shareholders of CHI Investments. We should take the matter to the company and SEBI etc.

If the management’s intention is to just consolidate the cos into one company, why merge these into RPG Itochu?? Why not merge the other 3 companies into CHI Investments which itself is listed on both BSE & NSE.

At the bare minimum, they should revise the swap ratio for shareholders of Summit Securities to 1:56 from 1:16 (Logic: CHI holds value 8.07 times while Summit has value of only 2.31 times so swap ratio for Summit should be 2 times more than current ratio). Ideal swap ratio for Summit Securities should be 1:40, if swap ratio for CHI is 1:06, to bring the shareholders to the same level.

Management should provide details on RPG Itochu and the rationale for these swap ratios.

If the swap ratio gets corrected it will result into value-unlocking for CHI Investments.

Assumptions:

  1. All calculations have been done considering RPG Itochu finance to be a new company created for the purpose of merger or having a very small equity capital.
  2. I haven’t considered the value of unlisted investments in the above companies (they are less than 10% of the total investments).
  3. Haven’t considered the impact of merger of Instant Holdings with KEC, which is a subsidiary of Brabourne Enterprises.

P.S. There were few updates on the Value of investments in the companies the effect of which has been updated on 26th July 09.

UPDATE: The most important question in this amalgamation scheme is – What does RPG Itochu Finance Ltd has to offer ?

As per recent updates, it has been known that RPG Itochu Finance Ltd is having an equity of close to 5 crores with no significant operations. If so, then this merger will reduce the value of merging companies by 50+%. The effect of the same is not reflected in the tables above.

CHI Investments – Interestingly mis-priced

chi investments

CHI Investments

Investment Rationale:

  • Holds investments worth Rs. 224.00 Cr as on 11th May, 2009 while it’s own market cap is just Rs. 28.50 Cr. The company is debt free. (Annexure 1)
  • Compared to other investment/holding companies, CHI is available at just 1/10th of the value of investments it holds while others trade at about 1/4th of the value of investments they hold. (Annexure 2)
  • The company majorly holds shares of CESC & KEC International, the stock should move at least linearly to the stock price movements of both the stocks and with better stock discovery, the discounting can reduce giving it a multi-bagger potential. Being in power sector and leaders in their business areas, both CESC & KEC International are expected to do well. (Read the latest Business Line : KEC targets to be a $ 2 billion company in 3-4 yrs.)
  • CHI Investment receives almost 4-5 Cr as dividend/interest income annually.

Continue reading CHI Investments – Interestingly mis-priced