Valuation Archives | Dalal-Street

Astral Poly Technik Ltd – BSE:532830

Real Estate/Construction sector is a huge area in India and the potential going forward is enormous. Plumbing and clean water transportation is a very important area and crucial part of a construction project. Repairing of plumbing work is a very troublesome and costly affair and hence one won’t compromise on this front.

The plumbing industry in India is undergoing a smart change. Earlier, GI Pipes used to dominate the market but now PVC and CPVC pipes are fast replacing the GI Pipes. CPVC resin is most hygienic compound for water transportation and is resistant to corrosion. Hence as awareness and quality consciousness is increasing, more and more people are adopting CPVC pipes for plumbing needs.

Lubrizol (earlier B F Goodrich a Fortune 500 Company, USA) has been a leader in development of CPVC and they hold the patent for the same. Astral Poly is the first licensee of Lubrizol of USA and have a techno-financial joint venture with Specialty Process LLC of USA. Continue reading Astral Poly Technik Ltd – BSE:532830

Riddhi Siddhi – French Roquette deal impact

We had discussed Riddhi Siddhi at Rs 285 at our blog here. The company did post much better than expected numbers and the stock had a fantastic run but the stock has been falling since last few weeks. The stock is now at Rs 360. Here is the price graph:

We had mentioned in our earlier post about the possibility of the French Co – Roquette acquiring a majority stake in the listed company. The deal has happened and the details are:

The French co will be doing a complete takeover of the 3 plants of Riddhi Siddhi.
The plants have been valued at approx. Enterprise Value of 1250 Crores. Today at CMP of 360, the Market Cap of Riddhi Siddhi is 400 Crore.
To make the transaction, Riddhi Siddhi will transfer the plants to its subsidiary. Initially the French co will aquire a majority stake with an option of total buy-out.
For the above arrangement, French co will cancel its existing 15% stake in the listed entity of Riddhi Siddhi.

The deal though looks good but the news hasn’t been welcomed by the market. Reasons:

Nobody was expecting a total sell out by Riddhi Siddhi’s management. Now the listed entity would be left with just Cash and a power foray.
The structure of the deal is such that there will be No Open Offer for the shareholders of the listed entity. Hence investors won’t get any major benefit of the takeover by French Company.
The structure of the deal questions the integrity of the promoters. Had it been a direct take-over, the promoters and minority & small shareholders would have been at same level.
It would take atleast 9 months to 1 yr for the deal to get fully completed.
The expected cash on the books would be at the disposal of the promoters.

Our friend – Neeraj Marathe made a detailed post

the market would continue to value the expected cash on the books at a steep discount in the range of atleast 30-50%.

feel SEBI should come forward and protect the interest of minority and small shareholders.

Conclusion:

Riddhi Siddhi was an excellent bet on the growing starch business but post acquisition the business is no longer left. The cash expected to come (in the listed company – Riddhi Sidhi) from the deal is around Rs.800 per share.

Like in other cases, market might value the stock at about 50%+ discount till there is enough transparency and comfort from the management. The gap could narrow only if the management is more transparent and shares the cash with the minority & small shareholders in the form of dividend payout, buyback etc.

In the meanwhile, as there has been a good correction in the mid-cap space, we feel there are better opportunities and hence we are switching out from Riddhi Siddhi.

Mangalore Chemicals & Fertilizers

MCF (Mangalore Chemicals & Fertilizers) is the largest manufacturer of chemical fertilizers in the state of Karnataka. MCF is part of the UB group and Dr. Vijay Mallya is the chairman of the company.

MCF has been a steady performer over the last few years and has been growing regularly at about 20% with stable margins.

The fertilizer sector as such is not a very attractive sector for investors as there are lots of Government policy influences and hence the returns are very much capped in this sector. But over last one year, the government has been bringing some changes and making better policies. There is also a small probability of Govt. decontrolling the urea sector.

What has aroused our interest in this stock? – the attractive valuations at which the company is available and the spectacular Q2 result by the company (though it may be a one time thing also).

Attractive Valuations (CMP 37):

Stock is trading at just 5 PE based on trailing twelve month results
Stock is available at 1.2 times FY 2010 BV and at equal to BV on expected FY 2011 results.

Stellar Q2 results:

IF the first 6 months of performance gets repeated, the stock will give excellent returns but a repeat of Q2 might not happen. A more likely scenario is – MCF might end up doing 2900-3000 Cr+ turnover with a Net Profit in the range of 75-85 Cr for FY 2011.

The interest cost have also reduced significantly and hence the company is in a very stable financial position. There is also is a possibility of the UB group selling out to a more serious player and may help in unlocking of the under-valuation.

In all, it seems to be a good low risk stock with high probability of better times ahead.

Financial Statements:

Company Website | Get the Company’s Annual Report @ reports.dalal-street.in

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:

Company Website

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:

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.
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:

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.
The stock is available at 1.2 times standalone BV of about 25 and 1 times consolidated BV of 30.
The stock is trading at a PE of 5 on standalone earning and a PE of just 2.5 on consolidated earnings.
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%
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:

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.
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)

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