Updates and Follow-ups

Shilpa Medicare: The company has got funding from Barring Equity PE Fund. The co will be allotting 5 Lac warrants to promoters and 20 Lac shares to the PE Fund @ Rs 350/share. This is a major positive for the co in the long run and fundamentals will improve majorly.

Harrison Malayalam: We had discussed about the company a few days back. The company has come out with poor nos and the stock is down to 118 levels. We feel the intrinsic value of this company is much higher than the current M Cap of the company. Few reasons to substantiate our view:

1. The company has 57,800 acres of plantations. The value today would be multiple times higher than the Current MCap of just 210 Cr. Have a look at the 10 yr financial data of the company. in 2005, the co had sold 674 Hectares of one of its Rubber Estate and had got 33 Cr as other income. Similarly in 2006. the co had sold about 916 Hectares of another rubber estate and got 63 Cr as other income.

2. The asset value of the estates must have almost doubled since 2005. As of 2009, the company has about 25,000 Hectares of plantations. So if one extrapolates the above valuation, the real value of their assets would be huge.

3. Over the years the company has been able to reduce the labour and mechanize it’s plantations.

4. As Rubber & Tea prices are rising, logically the co should be making money.

5. The record date for the demerger should be announced in next few days.

Manjushree Technopack: We had earlier recommended MT at about Rs 32 here. The company has posted excellent Q1 numbers. MT is a proxy play to the domestic consumption story and the co should continue doing well. We expect the company co close FY 2011 with 195-200 Cr turnover and close to 15 Cr of NP. The stock should continue to do well.

Gujarat Reclaim Rubber: The co has posted a very good Q1. We expect the company to come out with better nos going ahead and the stock should do very well. The company had been featured in the latest “Tyre Asia” magazine and the article is a must read.

Balkrishna Industries: BKT continues to do well. The company has posted a good Q1 when other tyres cos suffered heavily on the margins side. The reason for good performance is the niche area the company is operating in. As per Q1 con-call of the co, the updates are:

1. The outlook is very positive. The co is already operating at 100% capacity and needs more capacity to fulfill additional demand.

2. Co is witnessing very strong growth in US markets. Share of EU has come down to about 55% from 70% earlier.

3. Co is adding about 20% capacity in next 1 year. At a cost of about 150 Cr

4. Co is undertaking a major expansion of about 900 Cr over the next 2 years. Post this the capacity of the company will get more than doubled.

5. Co wants to be a $ 1 Bln turnover company by 2015.

We feel that BKT is an excellent long term opportunity.

Sunflag Iron: As expected, the co continues to do very well. The promoters have been buying every other day from the open market. The stock is available at less than 5 PE and 1.2 times BV.

Harrisons Malayalam – Value Unlocking?

huge plantations

At CMP of 140, the co is trading at a Market Cap of about 255 Cr. Now first lets look at the assets of the company:

Harrisons Malayalam Limited (HML) has huge tea and rubber plantations spanning across 23,417 hectares i.e.. approx 57,800 acres. HML is the single largest producer of Rubber in the country with 18,300 acres under cultivation. It is also the largest grower of tea in South India having plantations spread across 15,000 acres. It is also one of the largest farmer of Pineapples in the region. Over the last few years, the company has also been a major processor of other agricultural produce from neighbouring farmlands.

HML through it’s 100% subsidiary – Harrison Financial, holds investments worth more than 225 Cr of group companies like – CES, KEC International, Ceat etc.

HML also has a small projects division. They won a 50 Cr KRCTC contract in January, 2010.

Though in the past the company hasn’t created value and has had a slow growth, but things seem to be changing and major positives are there for the company.

1. All time high Rubber prices:

The rubber prices have risen from about Rs 90/Kg to Rs 180/Kg.

2. Tea prices have been firming over last several months.

3. Management focussing on growth:

There was an article in Business Today magazine on HML, titled – “Entering unchartered waters”. As per the article, the company is doing the following to improve the performance:

a. “Moving away from selling produce as a commodity”. HML is trying to sell branded tea rather than selling it in auctions.

b. Upping land productivity (through re-planting old tea bushes and rubber trees with new high-yielding varieties and inter-cropping pineapples, bananas and other crops with rubber).

c. Upping labour productivity. (Mechanisation has increased to 50% in 2009 from 20% in 2008).

4. Demerger to unlock value:

HML had announced the demerger plans on 29th January, 2010. As per the details, the company is demerging the investment undertaking into Sentil Tea & Exports Ltd (STEL). The shareholder of HML will receive new shares of STEL in the ratio of 1:1.

The investments are worth 225 Cr+ and the equity capital of the new company would be 18.46 Cr. Even if STEL lists at 50% discount to value of investments, the listing price would be Rs 60+.

If one is to consider the replacement value of the huge plantations HML has, the value is unbelievable. Such huge assets can’t be created again. At such low Market Cap, the potential is huge.

Company Website: Harrisons Malayalam

Riddhi Siddhi Gluco Biols Ltd.

Riddhi Siddhi Gluco Biols is the largest producer of Starch & starch derivatives in India. The company has a market share of more than 25%.The most interesting thing about the growth of this company is – the promoters have build everything in just 20 years. They started from scratch in 1990 and today they control 25% market share and do a turnover of 750 Cr+. They now have three strategically located plants spread across different areas so that they can cater to customers across the County in the most efficient manner.

Starch & starch derivatives find application in diverse industries like – Paper, Textile, Pharmaceuticals, Adhesives, and Confectionery etc. Hence the characteristics of this industry is more like FMCG industry i.e.. the demand is ever increasing. The industry is expected to grow @ 15%+ for next few years. Riddhi Siddhi has been growing consistently with CAGR of 30% for last 5 years.

In India the per capita consumption of Starch is quite low as compared to the developed nations. The consumption is picking up every year. Another opportunity area is – as of now only 40 types of applications are done with Starch in India, while worldwide more than 1000 applications are there. So the company has a potential to do lot of value addition and grow.

If one analyses the past 10 year track record of the company, the company has had a wonderful CAGR of 27.58%. Very few companies can claim such growth rates. Operating profits & Net Profit CAGRs are even better.

A close look at the Balance Sheet of last ten year also gives some interesting insights –

  • The company had been growing by way of debt till the year 2005 and the balance sheet was quite leveraged. Debt equity was as high as 3.62.
  • In 2006, the company got equity participation from one of the biggest company in this business – Roquette. The French major took a 15% stake in the company.
  • Since then the debt problems reduced and the debt equity ratio has been steadily decreasing. The debt equity ratio is now expected to be close to 1 now.

In year 2008 & 2009, the company had a couple of tough years. Since then the company has been witnessing strong topline and operating margin growth. They have been using the cash flows in expanding the swiftly reducing the debt to make the Balance Sheet stronger. In 2009 & 2010, due lower interest costs, the increased operating profits are making direct impacts at Net Profit levels. This trend is expected to continue.

People feel that this business is cyclical. But a closer analysis of P/L for last 10 years reveals that the margins remain between 13-16%. So we should use these margins for calculating the fair value.

Valuations:

  • For Year 2011, we expect the company to do a turnover of close to 900 Cr.
  • At operating margins of close to 15%, the company may be able to post a Net Profit of 60-65 Cr, resulting into an EPS of 53-58.
  • At CMP of 285, the stock is available at a forward PE of less than 5.50
  • The company has a strong BV of 175.
  • Company has paid a dividend of Rs 5/share.

Trigger:

There were recent articles in media that the French partner of the company – Roquette (already holding close to 15%) wants to increase its stake to 51%. If so, it could lead to value unlocking and better future prospects.

Company Website

Good articles

“Dumbo could fly because he was a baby elephant. Adult elephants are aerodynamically unsound.” – Ralph Wanger in reference to preferring Small Cap Stocks over the Large Caps in “A Zebra in a Lion Country”

Here we are again to share some newspaper articles and blog posts we liked specifically.

1) When – How – What of Small Cap Stocks (Economic Times):

Finding the right small cap is one of the best way to wealth creation. The reasons is simple – they are usually available at 1/3rd the valuations of large caps with better to double growth rates. Also like the hugely successful small cap fund manager Ralph Wanger says – “Chances are, things have changed enough so that whatever made you a success thirty years ago doesn’t work anymore. I think that by concentrating on smaller companies, you improve your chances of catching the next wave.”

2) Investing in stocks is the best bet to beat inflation (Business Line):

A nice comparison of the returns provided Sensex, Gold Bonds and Fixed deposits and as expected, investing in stocks proves to be the best way to beat the inflation.

For over 25 years we have been working on this concept with a continuous effort towards finding a good undervalued small/mid cap stock ideas with strong fundamentals. We share about such ideas to have healthy discussions and connect to people with the similar approach.

Online links to both the above articles are – ET article & Business Line article.

3) Alice Schroeder (author of Snowball – the authorized biography of Warren Buffett) discusses Buffett’s approach towards investment

In the video Alice Schroeder takes us to a journey using a specific case study which was not discussed in the book.

Thanks to Pradeep for sharing the above video on his wonderful blog.

Do share your favorite articles through comments.

Camphor & Allied Products

Camphor & Allied Products is a pioneer in the field of Terpene Chemistry with technology from Dupont, USA. The products of the company are Synthetic Camphor, Terpineols, Pine Oils and Resins etc & they find application in Fragrance, Pharmaceutical, Soap & Cosmetics & Varnishes Industries. CAPL has two plants – first at Bareilly, UP & second at Baroda, Gujarat. CAPL also has a dedicated in-house Research Center.
CAPL has been witnessing major change in the performance and profitability since the change in the management in 2008. The company was taken over in 2008, via stake purchase and open offer @ Rs 167/share.
The new promoters are leaders in fragrance industry – Oriental Aromatics Ltd. Since then the turnover has increased from 105 Cr to 165 Cr and NP from 0.49 Cr to 10.18 Cr, yet the stock is available at Rs 100 only.

Attractive Valuations:

  • The stock is available at 20% discount to its BV of 125
  • Stock is trading at just 5 PE
  • At CMP of 101, the M Cap is just 51 Cr. Operating profit is close to 20 Cr.
  • Another compelling factor is the discount to the open offer price at which the company was taken over earlier.

Looking at the quick turnaround, much better revamped websites, strong tax pay-outs, the new promoters seem to be quite capable & honest. If the company continues the good performance, the stock should be prove to be an excellent long term investment and wealth creator.

Company’s Website: http://www.camphor-allied.com

Shakti Met Dor

When I first looked at this company 3-4 years back, I couldn’t believe that selling doors could be a highly profitable and organised business.

Yes, SML is a Hyderabad based company which specializes in Special steel Doors & Windows. The company has quickly scaled up from about 7 Cr turnover in 2002 to 80 Cr in 2010. SML caters to diverse industries like Pharma, IT, Hotels, Construction sector, embassies etc. Do make a visit to their website and one will instantly feel the quality and difference the company has. Visit to their Gallery section, speaks highly about their association with leading architects and contractors like L&T etc. They have experience of handling large prestigious projects like – Hyderabad Airport, Reliance Petroleum, TCS IT Parks etc.

A look at the numbers and other ratios between years 2002 – 2008

  • Was growing rapidly @ 47% CAGR
  • Had excellent operating margins consistently > 25%
  • Has had an track record of excellent ROCE in the range of 40-50%+
  • The business doesn’t involves lot of investment in Fixed Assets, Inventory and debtors.
  • The company has mostly carried moderate debt.

To repeat the above growth the company had carried out an ambitious plan to triple it’s production capacity and introduce new products. The expansion was funded through internal accruals and debt. To scale up, the company also opened offices in every metro. Year 2009 & 2010 were tough years for the company as capital expenditures and opening of new buildings had slowed down…hence the nos of these years don’t look good. Yet the company was profitable in these two years.

If one looks at the last two quarterly numbers of the company, the company has done 23 Cr for Q3 & 34.33 Cr for Q4. The sales seem to be coming back and company seems all set to reap the benefits of the expanded capacities.

In last few months the promoters have increased their stake through an open offer @ 180.

As per a latest announcement on BSE, the company has intended to delist the shares from BSE. Currently the promoters are holding 56% share and would need to buy 44% of additional shares. It won’t be an easy task and if promoters are serious to de-list, lot of value-unlocking may take place.

shakti

Welspun Syntex

Welspun Syntex Ltd (WSL) is part of the reputed B K Goenka group (Welspun Gujarat). WSL is one of the largest exporters of Polyster Textured Filament Yarn from India. The company has two plants located at – Silvassa and Palghar, Thane.

Interesting points to note are:

  1. The company is doing a turnover of approx 400 Cr while the Mcap is just 35 Cr.
  2. The company is profitable and posted an Operating profit of 27.12 Cr and NP of 7.13 Cr in FY 2010.
  3. The company has restructured itself well over the years. The company had reduced the equity capital by 3/4th to make the Balance Sheet stronger in 2008.
  4. Now the company is trying to reduce debt .
  5. Company has a huge gross block of almost 300 Cr with an accumulated depreciation of almost 200 Cr.

Interestingly as the company has high turnover and comfortable debt position now, they can spend more on the modernisation and technology front to improve the operating margins of the company which are just 7-8% as compared to 12-13% of JBF Ltd. If done, it will have a huge positive effect on the fortune of this company.

Hidden trigger is that most of the equity is held by Promoters and Financial Institutions. Promoter’s holding is 37.69% & FIs holding is – IFCI 33.62%, IDBI Bank 6.19% and LIC 1.59%. Change of hands could be a major trigger in the stock.

Valuation @ Rs 15:

  • M Cap to Sales ratio is just .08 times.
  • Book Value = 21.60
  • TTM PE = 5

We view this small cap stock idea as an interesting long term turnaround story where the possibilities of value addition are huge.

Welspun

Majestic Auto – Performance Updates

We had recommended Majestic Auto here at just Rs 60/- (then at approximately at 80% discount to its value of investments). The stock has been hitting upper circuits for last few days and is trading @ 138.75 now.

The valuation gap discussed earlier has now reduced to approx 52% now from 80% earlier. We would recommend investors to book profits at current levels and upsides.

The other stock idea on the similar concept is – BNK Capital. We had discussed the same at our blog here. BNK capital is still available at more than 75% discount to NAV value.

Best articles during the week

“I read about eight newspapers in a day. When I’m in a town with only one newspaper, I read it eight times”. – Will Rogers

Most of our investment ideas come small corners of the daily newspapers or the weekly magazines (or some interesting blogs). We often come across some interesting articles feeling an urge share with our readers too. So we will often compile (mostly weekly) these interesting articles and share the same here.

1. Gas Sector – Huge Potential ahead

It was an interesting article in Business World magazine on the Gas Troubles in India and the potential ahead. “9% Energy needs met by gas in India, while 24% is the world average”.

Arundhati Prasad, 36, who lives in the outskirts of Patna, has to queue up in front of a liquefied petroleum gas (LPG) agency’s office to get a cylinder of gas. Now compare Prasad to Mohammad Ali Bhatti of Dera Baba Bhuman Shah village in Pakistan’s Okara district: in addition to the gas used for cooking in his kitchen, everything from the refrigerator to lamps in the Bhatti home run on natural gas.

india_energy_pu

Read complete article here.

There are various charts, tables which provide a lot of understanding on this sector.

2. India’s Best Market Minds (19th March ‘ 10 Issue of Outlook Profit)

It was a really good compilation by Outlook Profit with the warm interviews of the “India’s Best Market Minds” including Jhunjhunwala, Sanjoy Bhattacharya, Prof. Sanjay Bakshi and many more .

While all the interviews are not available online, you can read the interview of Prof. Sanjay Bakshi and Abhay Aima online.

3. Poly Medicure Media Updates (in Business Standard, Hindu & Financial Chronicle)

We have discussed on this company couple of times here and here. The stock has been doing well and getting attention of investors.

The company has provided some updates in the media recently about the expansion plans.

4. India Motor Parts & Accessories Ltd (IMPAL) – by Siddharth Shukla

Siddharth has done a good detailed work on the stock. IMPAL has come out with good Q4 numbers and the stock shot up by 20%.

We will be sharing more interesting articles and blog posts regularly.

Also, we have come upon with a new commenting system powered by Disqus to have more better conversations. So, do leave a comment and feel free to share your favorite articles.

Gujarat Reclaimed Rubber Products (GRRPL)

Rubber recycling looks like a good business – as it is both profitable and eco-friendly. Given the rising prices and supply limitation of natural rubber, usage of reclaimed rubber is more economical (costs Rs 40/Kg) and bound to increase. Add to it the opportunity to expand this business. There was an article which highlights the opportunity for this sector – thanks to addition of almost 33 million vehicles in last 3 years in India.

GRRPL has established a nice for itself and has become the largest reclaim rubber manufacturer in Asia. GRRPL is one of the most organised and technologically advanced company in this sector. The company has been manufacturing one of the widest range of reclaimed rubber with highest quality parameters and exporting almost 60% of its production. GRRPL has the technical expertise to offer machinery and technical know how to manufacture reclaimed rubber.

Lets look at their track record:

  • Grown sales from 15.5 Cr in 2001 to 130 Cr in 2009. i.e.. at CAGR of 30%
  • Grown Net Profit from 0.68 Cr in 2002 to 13.54 Cr in 2009. i.e.. at CAGR of more than 50%
  • Has been a regular dividend paying company. Has been maintaining a dividend pay-out ratio of close to 18-20%
  • High tax paying company.
  • First to implement customised SAP in the industry.

Company has had good profitability and other ratios:

  • Co has maintained high ROCE – almost 40%.
  • Co enjoys healthy operating margins of 18-22%.
  • Co has good control over inventory, debtors and debts.
  • Cash Flows are positive.
  • Company had a Book Value of about 320 as on 2009. It should be close to 400+ as on 31.3.2010

Promoters:

Promoters seem to be honest, educated and highly capable people who have a strong value system and are there to create value in long run.

Valuations:

The company has a tiny equity of just 1.33 Cr. Till 3 months back, the stock was traded in “Z” group and in lot of 50 hence many investors didn’t had access to buy the stock even though they liked this company. Now the stock is in B group.

At CMP of close to 875, the company trades at 8 times FY2010E earnings and 4 times EBITDA margins.

It would be tough to find quality companies at less than 10 times PE with following advantages:

  • Leadership position in their business segment
  • Consistent high ROCE of 30%+
  • Consistent good dividend pay-outs
  • Consistent growth in past years with CAGR of 30%+

The company is in process of expanding its capacity and should create new records in terms of turnover, profitability and market-share. One may do well by accumulating the stock on declines with 2-3 yr perspective.

Company Website | Snapshot of Financials and Projections