Facor Alloys Ltd.

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A week back we had mentioned about Facor Alloys as one of our Mahurat Picks. The stock was in action today and up by about 16% to Rs 7.73. As the stock is crossing the level of Rs 7 after about 6 months, the action may have just begun.

First of all, I’ll like to thank Rohit for bringing to notice the merits in this company at his blog. He had discussed the stock about 6-7 months back, since then the company has posted much better than expected numbers.

Facor Alloys is in the business of chrome alloys, which are used in the steel industry. The industry is highly cyclical and the fortunes are linked to the steel industry cycle. South Africa is worlds largest producer of Alloys (60% share), over the last few years, India’s alloy industry has gained importance and is growing rapidly due to acute power shortage in South Africa.

Over the last few years, the company has very well re-structured itself. The debt has been wiped off, preference capital paid off + the company now has excess cash on balance sheet of about 35 Cr + Investments of 15 Cr in unlisted group company. Hence excess cash + investments is almost 40% of Current M Cap of about 130 Cr and provides a lot of comfort.

We feel the stock is a valuepick at these levels of about 7-7.50 and a re-rating may happen in the stock. Several positives are:

  • The chrome alloy cycle seems to have turned positive.
  • Co has been growing steadily by generating cash from internal accruals. This year expected revenues are 400 Cr+
  • Co has posted excellent Q2 numbers.
  • Cash Equivalent on Balance Sheet is almost equal to 40% of Current M Cap
  • The company has been paying a dividend of 15% for last 2 years (FV = 1). Hence giving a dividend of 2%+ at these prices.
  • Stock is available at 1.2 times BV of 5.6
  • Stock is trading at just 5 times TTM PE

Risks:

  • Being a highly cyclical business, the earnings are highly volatile.
  • Its a commodity natured business.

Company Financials:

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Company Website

Wish you a very Happy and Prosperous Diwali

Dear Friends,

Wish you and your family a very Happy & Prosperous Deepawali!

Previous year has been excellent for Equity Investing and the long term looks equally opportunistic.

On the auspicious day of today, we would like to mention few new ideas which investors may explore and initiate investing on Muharat Trading today:

  1. Mangalore Chemicals (45.50)
  2. Facor Alloys (6.60)
  3. Nitin Spinners (13.50)
  4. Sree Rayalseema Hi-Strength Hypo (63)
  5. 3M India (3960)

Looking forward to your views.

Best Wishes. Happy Investing.

Valuation of Gravita India (new IPO) vs Pondy Oxide

We came across the IPO document of Gravita India. It is one of the major competitor to Pondy Oxide and both are operating an identical business. Interestingly, Gravita despite being a smaller company when compared to Pondy, is going public at more than 3 times the valuations commanded by already listed Pondy Oxide.

Here is a quick comparison sheet to highlight the huge valuation gap between two companies:

Comparison sheet    
Pondy Oxide Gravita India
Capacity (MT) 32000 24000
Standalone Turnover 158 105
Standalone NP 5.8 5.77
PE Ratio 7 22
Consolidated Turnover 232 159
Consolidated NP 12.31 13.23
PE Ratio 3.25 9.5
M Cap 40 170
Notes:    
1. Capacity is calculated on Standalone basis and
addition of various sub-segments    
2. M Cap of Gravita is based on price at upper band  

As highlighted by Gravita in its various articles and documents, the lead recycling business has great potential due to strong battery demand, we feel Pondy Oxide is a much better bet when compared to Gravita as the valuations are very attractive in Pondy Oxide.

With the IPO of Grativa opening tomorrow, investors will get more informed about this sector and might discover the undervaluation in Pondy Oxide.
Gravita India Website | Pondy Oxide Coverage

Balaji Amines

Balaji Amines Ltd (BAL) is one of the largest Amines & Amine derivatives player in India. This field is limited to a handful of players as the technology is not freely available. Over the years, BAL has been developing newer products and technologies to maintain its leadership position, through its in-house R&D department. As of now, BAL is one of the lowest cost producer in the industry.

Methlyamine (20,000 MTPA) and Ethylamine (6,000 MTPA) are their core products and with leadership position, the earnings from these products remain stable. Over the last 4-5 years, the co has been doing a lot of R&D to develop new high potential products. Here is a snapshot of the R&D expenses:

R&D Expenditure (Cr.) 2005 2006 2007 2008 2009 2010
Capital Exp 0.00 5.90 2.97 4.19 16.03 6.22
Revenue Exp 0.14 1.12 1.37 0.54 0.00 2.78
Total 0.14 7.02 4.34 4.73 16.03 9.00

New Products are – NMP, Morpholine, PVP etc. Among these, NMP & Morpholine have started doing well and BAL has plans to triple the capacity (in phases) of NMP by the end of this year. PVP is a high potential, high margin product and the company has been able to break into the monopoly of international players like BASF, Huntsman etc. BAL is waiting for regulatory approvals like EU – GMP, USFDA etc to market the product and scale up production. If successful, it can be a big trigger as the margins will be very high in this segment.

BAL caters majorly to the Pharma industry and has relationship with some of the leading players like – Sun Pharma, Ranbaxy, Matrix etc. It also supplies to Agro Chemicals, Refineries, Rubber etc industries.

Good Past track record:

  • From a modest beginning, the company has come a long way. The turnover has grown consistently at CAGR of 27.61% over last 11 years from 23 Cr turnover in 2000 to 262 Cr turnover in 2010.
  • The profitability has had a similar strong growth.
  • Over the years company has become backward integrated by way of in-house R&D.

Future Growth triggers:

  • Major expansion in the capacity of NMP is coming up by the year end. BAL is expanding the capacity from 6000 MT to 22000 MT.
  • Company has a good land parcel in centre of Solapur. Company is in process of setting up a 4 Star hotel with 100 rooms and use the additional land for corporate office purpose.
  • BAL is trying to get mandatory approvals for commercial exploitation of its new product – PVP which has high potential.
  • BAL has also planned a major expansion of its core product – Methyl & Ethyl amine.

Valuations:

  • After going through consolidation phase during 2008-2009, the company is back to growth phase and is expecting to @ 35% to 350 Cr turnover.
  • BAL may be able to do an EPS of over 40 this year and stock is available at 6 times expected earning.
  • The company has a BV of 140.
  • For FY 2012, BAL may very well do a turnover of over 500 Cr.
  • The company has announced stock split from Rs 10 to 2.

Risks:

  • The company has a high debt and as the company has announced a hotel project, the debt may increase further and put pressure on earnings.
  • Chemical industry can have volatile phases hence giving lumpy earnings.

Valuation Sheets:

Complete Financials and analysis

Company Website

Poly Medicure – Dream Run

We had discussed about Poly Medicure and their plans to become a major global Medical Disposable player. The article highlighted about their expansion plans ahead and target to be a 300-400 Cr company by 2013. We had discussed the stock @ Rs 100 (adjusted 1:1 bonus) and the stock price has tripled to Rs 315 in just 10 months!!

So what does the stock hold for existing investors?

The company is expected to post a turnover of 170 Cr+ this year with an EPS of 18-20.

As the stock has given multi-bagger returns and valuations are not cheap anymore, one should do partial profit booking at these levels and explore our other ideas. For long term perspective, the stock still holds value as the company is a leader in the healthcare field where the potential is unlimited. Its not easy to find such good companies again. The company is on a growth path and has lined up several expansions.

We have been holding this stock for few years and had lot of faith on the future potential of the company and quality of management. Few important learning from this investment:

  • Look for companies whose end product has ever increasing demand. In the case of Poly, the medical disposable space has a great future.
  • Look at crucial ratios like – High Operating margins, consistent growth, High ROCE. Poly has had very good operating margins in the range of 18-20%, consistent growth of 25-30% and consistent ROCE of 25%+ hence the company has been able to scale up quickly majorly from internal accruals.
  • Look for young, dynamic and ambitious management.
  • Buying into a quality company at cheap valuations is a sure shot multi-bagger thing 😀

Pondy Oxide – Management Meet

Few weeks back we had discussed about Pondy Oxide and we were asked some good questions by our readers. We always love the creative criticism and this was wonderful.

To know the answers to some of the doubts, my good friend Donald Francis did an extensive research and also had a meeting with the management.

Some of the pending questions to which we got answers were about why the company is so leveraged at around 2 times debt to equity ratio, and who are the top clients ?

Amara Raja is a top client. We have several top battery manufacturers in Export Markets. Korea Indonesia and Malaysia are our top markets followed by Srilanka & Vietnam. We also export to Japanese customers like Yuasa.
We are trying to bring down our financing cost. This will come down by 15-20% easily as we have better terms now on FCPC (Foreign currency packing credits) $ credit norms -Libor+200 bps. Its likely that inventory & debtors will remain at these levels due to more focus on export market.
Please check out the complete report (requires free login) to know detailed answers to many other questions and also find many other reports of meetings with some companies.
Few takeaways from his meeting:
  • The outlook is robust due to ever increasing demand for batteries hence continuous demand for lead and lead oxides.
  • FY 09 was indeed a very tough year. Since then then company has re-aligned a lot of things, changed its business model so as to reduce the effects due to volatility in lead prices.
  • Major achievement has been penetrating the exports market. In FY 2009, the export sales were 16.64 Cr, in FY 2010 the company did 50.88 Cr and for FY 2011, the company expects to cross 100 Cr as export turnover.
  • The growth momentum witnessed in Q1 is sustainable.
  • Plants are now running at high utilization levels and the company plans to take up new expansion in a year.
  • Co aims to reach the 500 Cr turnover milestone in next 3 years.
  • Entry barriers – Licence is required for carrying out lead refining and related activities. Its not easy to get a new licence hence the players are limited. Pondy Oxide would probably be having a 8-10% market share.
  • Amara Raja is their top customer. Pondy is already supplying to top battery manufacturers in Export markets. Tata-Yusa is also their customer.

Initial discussions with Pondy Oxides Management [ Thanks to Donald via ValuePickr]

Camphor Allied & Chemicals – Update

We had recommended the stock on 4th July, 2010 @ 100. Since then the stock has done quite well and the price has more than doubled in just 3 months. As the underlying logic while recommending the stock was deep undervaluation, the stock seems to have got the needed attention 🙂

We feel investors may sell at-least 50% at these levels to make their holding free. Some other stock ideas which can be considered for investment are – Balaji Amines & Pondy Oxide.

ABC Bearing

Indian Bearing industry comprises of 10 major players and several units in unorganised segment. Due to technology barriers, the industry is dominated by foreign players like SKF, FAG Bearing etc. and hence these players have high margins.

ABC Bearing is one of the largest player in tapered roller bearings which find usage in CV & Tractor industry. ABC has the technological collaboration with NSK, Japan and hence it has also developed a certain market share for itself. The co has a long standing relationship with automotive majors like Tata Motors, Ashok Leyland, Mahindra etc.

Comparison Chart:

If one analyses the financials of the company, the company has had high operating margins in the range of 20-25%. Between FY 2002 and FY 2007, the company had grown steadily from 65 to 182 Cr turnover and had very strong profitability. In FY 2008 & 2009, the CV industry went through a rough phase and so did the company had a decline in turnover and profitability. Now the CV segment is back to strong growth and ABC should do well. Based on the last few quarter numbers, the company is already posting all time high turnover (200 Cr annualised).

Expansions:

  1. The co has constructed a new factory in Uttarakhand in a record time of 4 months. The plant was inaugurated on 28th March, 2010. This plant will primarily cater to the Ashok Leyland’s Uttarakhand plant. Sales growth should start coming up in next few quarters.
  2. The co is setting up another manufacturing facility for – Slewing Bearing & Large bearing. This is expected to get completed by end of this year.

Valuations at CMP of 155:

  • For FY 2011, the company is expected to post a turnover of 205 Cr+. i.e.. a growth of more than 25%
  • For FY 2011, the co may be able to post a NP of more than 25 Cr+, hence an EPS of more than 22.
  • Stock is trading at about 7 times expected FY 2011 earning.
  • The co has consistent record of high dividend pay-out of 25-30%. Last year the company paid a dividend of 45%.
  • Co has enjoyed high ROCE of 30%+ consistently.
  • Its almost a debt free company. Co repaid a loan of about 50 Cr in FY 2010.

If one looks at the valuations of bigger players in the industry like SKF, NRB, FAG Bearing etc, they trade at 15-20 PE.

Given the strong growth prospects for the company ahead over next 1-2 years, it seems to be a good growth story at attractive valuations.

Company Website

Sunflag Iron – Update

We had mentioned about Sunflag Iron. Since then then the stock price has appreciated by just 10% while the fundamentals and the outlook seems to be getting stronger.

We had mentioned that the company has been acquiring coal blocks since last few years and getting backward integrated. The latest annual report gives a strong confirmation on the same:

Excerpt from the FY 2010 annual report:

“During the year under review, the total coal production at Belgaon Coal Block is 140,147 MT as against of 51,234.41 MT in the previous year, which is about 174% higher than the previous year.”

If one analyses the Fixed Asset schedule and the investment section, the company has been stepping up the investments for captive coal blocks after the success from the Belgaon coal mine. For eg: The co has invested 10 Cr+ in subsidiary – Khappa Coal Mine which is JV between Sunflag Iron (63.27%) & Dalmia Cement (36.73%).

Future expansions as per the annual report:

Compelling Valuations at CMP of 34:

  • FY 2011 Expected turnover is 1650 Cr+, with expected NP of 110 Cr+
  • Stock is trading at less than 5 PE on expected FY 2011 earnings
  • Stock is trading at 1.25 times BV of 25.50
  • Debt Equity ratio has improved to 0.80 : 1

Promoters have been regularly buying from open market and have increased their stake from about 40% in September 2008 to about 51% as of now.

Company Website

Pondy Oxide

We are always in search of undervalued and under-researched mid/small caps. Pondy Oxide appears to be one!

Pondy Oxides and Chemicals (POCL) is one of the India’s leading metallic oxides and plastic additives producers. Its products are Zinc Oxide, Litharge, Grey Oxide & Red Lead. These products are used in battery industries and automobile sector. India has been witnessing a steep growth in the usage of Lead consumption due to sharp rise in use of Lead acid batteries in automobiles, invertors and UPS. POCL specializes in refining of Lead and related metals.

POCL extracts lead and other metals from scrap batteries and re-uses the same after refining. POCL has been able to refine Lead to 99.99% purity through its R&D department. This form of lead is being imported in India for manufacturing of VRLA batteries.

POCL has a impressive growth track record – the company has been grown from just 20 Cr turnover in 2001 to 230 Cr in 2010. Still the company is available at a M Cap of just 30 Cr.

POCL has 3 business segments – 1. Metals 2. Metal Oxides 3. Plastic Additives

The company is one of the major player in the Metal Oxide Segment. It ranks among the top 10 players in India.

The company claims to be having a 30%+ market share in Plastic Additives segment in India. POCL has been innovative and develops new products through it’s R&D department to stay ahead of the competition.

POCL caters to the top players of the battery industry – Exide Ind, Amara Raja, HBL power etc.

Trigger:

POCL has a subsidiary Lohia Metals Pvt Ltd. The company holds 51% stake in it. In FY 2010, the company did about 75 Cr of turnover and posted a NP of 6.50 Cr. Therefore on the consolidated basis POCL is having an EPS of 12.25 vs EPS of 5.74 on standalone basis.

Valuations at CMP of Rs 30:

  1. The company has been growing at a CAGR of 30.69% for last 10 years. Turnover has grown from 20.81 Cr in 2001 to 232 Cr in 2010.
  2. The stock is available at 1.2 times standalone BV of about 25 and 1 times consolidated BV of 30.
  3. The stock is trading at a PE of 5 on standalone earning and a PE of just 2.5 on consolidated earnings.
  4. POCL has a fantastic track record of consistent high dividend. The stock is still available cum dividend of 12%. Giving a high dividend yield of 4%
  5. The company has posted a very strong Q1. The standalone turnover has increased from 26.51 Cr to 60 Cr. If the company is able to repeat the trend, POCL may be able to do a turnover of 250 Cr vs 150 Cr last year on standalone basis.

So here is a strong growing company available at cheap valuations.

Risks:

  1. Being a metal sector company, it is prone to risk of high volatility in metal prices. For eg in 2008-09 when the metal prices tumbled sharply, the company had to suffer inventory losses and the profits were wiped out for the year.
  2. As per FY 10 Annual report, company has raised loans for expansion hence Debt Equity ratio is high at 2:1.

Company Website

Yearly Consolidated (Valuation Sheet)

Yearly Standalone (Valuation Sheet)