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.

Changes in Promoter Holding

Promoter’s Holding form a very important part in the stock analysis. Stocks with large Promoter Holding generally shows that a business is run by a family.

The factor that usually works in favour of companies with large promoter holdings is the fair amount of confidence in the promoters. The reason is that promoters are holding a significant chunk of their stock and low free float always helps the stock rally up.

Thus when it was analysed by Business Line and Money Control, stocks with the large Promoter Holding (50%-80%) clearly out-performed the stocks with the lower Promoter Holding.

We would like to share a list of changes in Promoter Holding during the quarter. The names are interesting and surely worth a look:

Continue reading Changes in Promoter Holding

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.

Where were we!

Dear readers, it has been more than a month since we last posted. Sorry for such a long wait.

While we were on official tours, audits and working on presentations, the world kept changing. A budget was presented, RPG group proposed the merger of its listed finance companies, Google Finance introduced many new features, Michael Jackson died mysteriously and much more. We will discuss about some of these events in upcoming posts.

Also, during this time, we were working on a new stock screener for our readers. We tried collecting past five years data of around 3500 companies. We are planning to release it within this week. Will love to have your views on it.

The ride of CHI Investments

CHI Investments has hit an another upper circuit closing at Rs.44.25. What a wonderful ride it is going on.

We recommended CHI Investments on 15th May on this blog, when its price was Rs.25.

chi-vs-sensex

CHI Investments may reach Rs.70 in near future and the old investors should start reducing their average costs (and enter into other value picks). However, we still recommend in holding a major part of the stock for a long term.

The real beauty of the stock is that it is still discounted at around 85% as KEC (forming 50% of its portfolio) too has seen a similar price rise. Seeing the recent trend, it wont be hard for the stock to reach the optimum levels and reduce the discounting.

Keep circuiting up CHI Investments!

The results season has arrived – start the scan

More than 50 quarterly results are announced these days, how to keep track of them ? We use the RSS Feeds created by us to scan through the results. Dad uses the RSS Feeds in Firefox Bookmarks bar and once in a day goes through the list of the latest results.

quarterly-results Continue reading The results season has arrived – start the scan

An Insight of a Term Loan Evaluation by a Bank

The evaluation process by banks are one of the most comprehensive evaluations and can be used to evaluate almost any company. The presentation below tries to cover this process in few slides. The various topics covered include evaluation of companies, management rating, economics, risks and cash flow study.

Term Loan Appraisal (view in full screen for easy reading)

Continue reading An Insight of a Term Loan Evaluation by a Bank

“5 Trading Mantras” from Dad

Formal education will make you a living; self-education will make you a fortune. – Jim Rohn

DAD had been into the markets for more than past 25 years. He successfully surfed the tides when others struggled. Being a broker cum investor for more than past 25 years, he has more experience than many books might teach. Below are his “5 Trading Mantras” which you probably have never read in any book of investing.

Continue reading “5 Trading Mantras” from Dad

Free Stock Screeners for Indian Stocks

UPDATES:

At Dalal-Street we have now developed an in-house stock screener at: http://www.screener.in

Screener.in is a powerful and exhaustive stock screener providing complete flexibility to sort, arrange and customize the search results. Screener also provides advanced options to save stock screens and also set automatic email alerts for them.

———-

Stock Screeners are tools to help us find the stocks based on performance. Though we recently said that we were yet to have a good professional stock screener, we were able to find many. In fact, we were unaware that even BSE had its own little stock screener. Here we compare and review the free stock screeners for Indian stocks.

5) BSE India – Stock Scanner

bsescreener

BSE India provides a small screener to find stocks based on the group, P/E ratio, EPS, LTP and Market Cap. The results are most up-to-date and accurate, however the options are limited.

Continue reading Free Stock Screeners for Indian Stocks