Balkrishna Industries – Not just any regular tyre company

Its logical not to go for tyre companies as long term investment as the business model is not very attractive cause:

1. No competitive edge hence no pricing power and high competition

2. ROCE are low

This is where Balkrishna Industry (BKT) stands out. This company has had a spectacular track record of:

1. Growing at 30.47% CAGR for last 11 years!!! Yes, the company had a turnover of just 98 Cr in 1999 and last year, the company was able to post a turnover of 1407 Cr.

2. Net profits have also grown at the same pace.

3. ROCE has on average remained in the range of 20-25% for last 5 years.

4. Consistent healthy margins

5. Good dividend pay-out.

WHY is the the difference between Balkrishna Ind and other tyre cos so huge?? Reasons:

BKT operates in the OHT (Off Highway tyres) segment i.e.. the tyres find application in the agricultural and construction equipment segments. BKT exports 90% of its production to developed countries and 75% of the sales are to the replacement market.

Globally this industry is leaded by Bridgestone, Good year and Michelin…and as this business involves high customisation and labour, these global companies are unable to maintain their competitiveness. BKT has been able to provide the quality at 30% cheaper prices and hence is gradually gaining market share. As of now, BKT has a market share of 2-3% and the company aims to increase the market share to double digits in next 5 years.

The company has 1900 SKUs – one of the highest in the industry and the company claims to have an expertise in developing the new SKUs in-house in the least time.

Other positives:

During the crisis last year, BKT prudently held back the planned expansions to better the balance sheet. Result – the interest cost has reduced majorly and so has the debt equity ratio. The cash flows are coming in.

Going ahead, I feel the company will be back on growth to gain market share.

At CMP of 590 and declines, the company is available at attractive valuations for a long term investment perspective.

Happy New Year!!!

Hi Friends,

Yeah, I’m a bit late in conveying my new year wishes as last few days have been highly hectic.

Markets have been roaring and stocks are flying. I think we should be careful going ahead and should start building cash levels. Q3 nos will be very important to judge the price vs value for many stocks.

Among the stocks we have discussed at our blog earlier, almost all have done extremely well. Few updates:

Manjushree: After very good returns in short term, I think we should do partial profit booking here.

Fresenius Kabi: Stock has done quite well and looks a bit expensive now. One may book profits on rise here.

Suprajit Eng: One can continue to hold.

Jaihind Projects: I feel the best is yet to come. One may look to add more on declines.

Siemens Healthcare: One should exit due to the merger announcement.

Asian Hotels: Stock has moved up smartly as expected but more room is left.

Few new stock ideas which can be considered at current levels and declines: Vipul Ltd, Himatsingka Seide & Tata Sponge. (I’ll post detailed logic later)

Few Updates

Refer to our earlier posts, we were quite optimistic on selected pharma sector stocks.

Albert David: Has risen from 70 levels to 130.

Fresenius Kabi: Has risen from 70 levels to 113.

Shilpa Medicare: Mentioned at our blog @ 90, is trading at 190 now.

I hope our readers had acted on the calls and made good profits. We would advice booking partial profits at current and higher levels.

Some updates:

Shilpa Medicare has got listed on NSE also.

Jaihind Projects is convening a board meeting to appoint Delloite as their statutory auditor. This should be a very positive move for long term and provide comfort to investors.

Asian Hotels has uploaded few statutory details relating to the demerger. I would advice investors to go through the documents. The documents are available on BSE Website (announcements section)

Delivering on Q2 expectations

Most of the stocks we have discussed till now have done very well in Q2 nos. In reference to the post on the pre Q2 stock ideas : , both the companies have done well.

Ahlcon Parentals:

http://www.bseindia.com/xml-data/corpfiling/announcement/Ahlcon_Parenterals_India_Ltd_311009_RSt.pdf

The company seems to be back to decent profitability. The expected growth may come up by next qtr. Stock has potential to get better discounting.

Fresenius Kabi:

Rupees in Crores

Quarter ended Year to Date Year ended
Sep 09 Sep 08 % Var Sep 09 Sep 08 %Var Mar 09 Mar 08 % Var
Sales 99.81 58.24 71.4 197.78 136.41 45.0 257.94 240.88 7.1
Other Income 4.59 125.36 -100.0
PBIDT 37.13 -28.83 LP 77.04 11.88 548.5 -41.13 168.54 PL
Interest 5.23 5.24 -0.2 10.75 10.02 7.3 21.97 7.86 179.5
PBDT 31.90 -34.07 LP 66.29 1.86 3464.0 -63.10 160.68 PL
Depreciation 3.09 2.95 4.7 6.21 5.80 7.1 11.81 5.43 117.5
PBT 28.81 -37.02 LP 60.08 -3.94 LP -74.91 155.25 PL
TAX 4.89 -4.01 LP 10.21 0.52 1863.5 1.12 6.19 -81.9
Deferred Tax 1.76 0.67 162.7 0.91 1.48 -38.5 1.66 -0.28 LP
PAT 22.16 -33.68 LP 48.96 -5.94 LP -77.69 149.34 PL

The company has done much better than the expectations. The margins have exploded and are above 30% now. At this rate and based on the expansion plans of the company, the company may deliver excellent returns in long term.

The company also seems to have attracted the attention of few fund managers (track the mutual fund holding in this company).

Suprajit Engineering

“I am more confident today, than a year ago, that Suprajit is better prepared” – Managing Director , Suprajit Engineering Ltd.

Hi Friends,

Keep a tab on this company. This is a good company in a good sector with very good long term prospects.

The company is known for it’s leadership position in the automotive cable market – The company is now expanding into non-automotive cable market which is 20 times bigger in size than the automotive cable market. As per my reading – the promoters are honest, shareholder friendly and ambitious and after a lot of consolidation in last couple of year, the company seems set to be back on a steady growth path.

The past track record of the company is fantastic. They have grown from just 33 Cr turnover in 2002 to 206 Cr last year.

For this year, I expect the company to do a turnover of 190-200 Cr+ (on standalone basis) and a NP of 14 Cr+, resulting into an EPS of 12+, conservatively. With the new plants coming up, the company may be able to maintain these growth rates for coming years.

Read about the updates of the Company on BseIndia.

Rather than providing the details myself, I would like you all to go through the co’s website, annual report etc to get more details and take informed decision.

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

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!