Panasonic Carbon India (PCI) – Debt Capacity bargain or Value trap?

So, this good friend of mine pings me on Gtalk and is skeptical of PCI. He thinks its a bargain and yet he also thinks it is not. A classic dilemma! Let’s look at the company then.

I will not bore you with company details as you can easily look them up. A brief summary is that this is a company that manufactures carbon rods for dry cell batteries and has been manufacturing them since 1982.

CMP: Rs. 130/-

Shares outstanding: 48,00,000

Let’s look at the consolidated data for the past 5 years:

Particulars

Mar’11

Mar’10

Mar’09

Mar’08

Mar’07

Average

Net Worth

56.26

55.47

52.7

50.73

49.68

52.97

Total Liabilities

56.26

55.47

52.7

50.73

49.68

52.97

Net Block

3.94

4.43

5.31

6.03

6.82

5.31

Cash And Bank

54.86

52.28

46.46

42.26

40.99

47.37

Net Current Assets

52.32

51.04

46.77

43.47

42.69

47.26

Total Assets

56.26

55.47

52.7

50.73

49.68

52.97

Net Sales

22.35

29.08

30.44

25.23

30.98

27.62

Total Income

25.95

33.49

34.65

30.08

34.21

31.68

Total Expenditure

18.38

21.56

24.27

20.77

25.19

22.03

Operating Profit

3.97

7.52

6.17

4.46

5.79

5.58

EBIT

7.06

11.26

9.54

8.31

7.88

8.81

Profit after tax

4.7

6.69

5.9

4.97

5.09

5.47

EPS – Annualised (Rs)

9.79

13.94

12.29

10.36

10.61

11.40

Net Cash Flows from Operating Activity

2.57

4.77

5.31

-0.1

6.08

3.73

Margins (%) (Op profit/Net sales)

17.76286

25.8597

20.26938

17.67737

18.68948

20.21292

We can derive the following from the data:

Debt = 0

Book value = Rs. 117/-

Cash per share = Rs. 114/- (Hint: Look at the CMP)

Average assets used = Rs. 52.97 cr.

Avg sales generated = Rs. 27.62 cr (which means, capital turnover is just 0.5 – capital intensive company)

Avg margins = 20.22% (and hence ROCE is around 10%)

You think, great – almost 90% of market cap is in cash, debt is zero. Seemingly very little downside. Let’s see if this company is a debt capacity bargain (more info on debt capacity bargain here).

Average EBIT for the past 5 years = Rs. 8.81 cr

Lowest EBIT for the past 5 years = Rs. 7.06 cr

Since the latest year’s EBIT is lower than the average EBIT, let’s consider the lowest EBIT in our calculations.

Let’s consider an interest coverage of 3 (since it’s a stable company, as is evident in its earnings and history), and an interest rate of 12.5%

Interest expense that can be comfortably serviced by PCI = 7.06/3 = Rs.2.35 cr

Debt that can be taken up by PCI comfortably = Rs. 2.35/12.5% = Rs. 18.83 cr (debt capacity)

Cash available with PCI = Rs. 54.86 cr

Value = Rs. 73.69 cr (debt capacity+cash)

Current Marketcap = Rs. 62.4 cr.

Since Debt Capacity+Cash > Current Marketcap, this company is a bargain.

So, do we rush out and buy this company purely based on this quantitative analysis?

I would not do so, and my reasoning is as follows –

1) Almost every annual report for the past 5 years (in the MD&A section) talks about pricing pressures, and why they have to keep reducing prices to satisfy their customers (cue: no pricing power)

2) Although lithium batteries (and other technologies) are taking off big time even in dry cell batteries, PCI spends on average only 0.45% of its net sales on R&D. And most of this R&D is geared towards cost optimization (like, reducing heat, improving kilns) rather than new technology.

3) The Japanese control 50.72% of this company, which in itself is not a bad thing unless 80% of your sales comes from companies which are under the same owner’s control (subsidiaries, associates etc). Again, captive demand but with hardly any pricing power.

4) Inspite of burgeoning cash reserves much beyond their day-to-day requirement, management has not indicated any direction with respect to sharing this wealth with the shareholders. In fact, 90% of this cash lies in Fixed Deposits, which earn a measly 7% post tax return even in this increasing interest rates scenario. Your RoCE gets killed right there. I haven’t seen any indication on the utilization of cash in new technologies/special dividend/share repurchase etc.

5) Last but not the least, there has hardly been any growth in sales/profit for the past 5 years. In fact, there is de-growth. I am ok investing in companies with 1 or 2 years of de-growth, but 5 years is a little off.

Summary, I would not invest in this stock.

Thoughts invited.

Disc: Not invested in this stock.

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  1. #1 by neeraj on August 29, 2011 - 5:47 PM

    I completely agree with ur analysis Kiran..If one strictly follows Graham, one need not look at the qualitative factors, but merely invest based on the quantitative factors. However, i am also not very comfy with the same.
    I remember, coupla years ago, SKF had also become a debt capacity bargain! now thats where on wud like to put in big money…
    cheers!

  2. #2 by kdaaku on September 4, 2011 - 1:36 PM

    Hi Neeraj,
    I think Graham has had his success but investing in a diversified portfolio of all these quantitative bargains. But as you rightly put it, I guess we both are in that group of investors who cannot just go by the quantitative feel 🙂
    SKF was a debt capacity bargains?!! Whoa! Darn! Always next time 🙂

  3. #3 by Manish Gupta on September 17, 2011 - 10:14 PM

    How did u manage to get details of companies investment such as details of fixed deposits ?Good analysis of the company. i wish to learn from people like you and prof sanjay bakshi . keep the good work going . good luck .

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  6. #6 by Aditya Bhan on February 6, 2017 - 10:08 PM

    The stock has multiplied 4.2 times since this analysis. In recent times, though, it seems to have been undergoing a time correction. However, the fundamentals remain as solid as ever.

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