Archive for category Stock Research

ISGEC Stock Story

ISGEC has been one of the very good winners in 2014 in my portfolio. Due to multiple requests to expand on this story, I have prepared a quick presentation to detail the story.

Contrary to public opinion on twitter and whatsapp, identifying and working on this business was a complete collaborative effort. Om and Dhruvesh – two very good friends of mine worked on this story along with me and were critical in various thought processes, scenario analysis and tons of brainstorming. Due to these two people and two people alone was the reason why I had the confidence to take a bigger position than usual on a Capital Goods story. We traveled to Yamunanagar from Mumbai, Hyderabad and Bangalore for the AGM in August 1st week. It was a fantastic learning experience along with being a super fun trip.

Hope the story becomes more clear with this presentation. Let me know if you have any questions on the business (and not the current price and prospective future price, as I don’t have ANY clue where the price will go in the near or distant future).

Link to the presentation below:

Isgec_Stock Story

Disclosure: This is NOT a Buy/Sell/Hold recommendation discussion. This blog is only for educational purposes. Om, Dhruvesh or me are neither research analysts nor do we have any fancy sounding certifications. All three of us are still invested in the story. Please contact your financial adviser before taking any decisions.

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Stock Analysis: Poly Medicure

Poly Medicure is a leading supplier of Intravenous (IV) Cannulae, Safety IV Cannuale, IV infusion sets and blood bags. Safety IV devices itself is globally a $300-350 Mn annual market size today. (This was a 20 year patent granted to Braun in 1999, so is valid till 2018).

They manufacture around 95 products.

Subsidiaries in China and US. Egypt is a joint venture. China has been a major factor in reduction of raw materials.

Major RM is plastics, which is dependent on crude oil. Custom duty on medical and life saving equipment reduced by the Govt. in Feb’13 budget.

Revenue growth of 25% (approx.) and NPM of 12-13% from the past 3-4 years. See no reason why the revenue increase won’t continue at about 20% and NPMs sustain at 12-13% for the next 2-3 years. Forex derivative contracts expired in Oct 2012. Now, only simple forward hedging.

B Braun, BD, Hospitec, J&J, 3M and Poly Medicure are among the main players in this space. Poly Med won cases against B Braun in India and Germany and Malaysia but lost in Spain. They are planning to tie up with major OEMs and contract manufacture for them. No major plans to foray on its own due to huge costs involved.

Safety IV Cannuale sells at Rs. 18/- while IV Cannuale sells at Rs. 6/- even though it costs only Rs.0.5/- for safety. Currently, Poly Med sells IV Cannuale majorly and Safety IV Cannuale only in some geographies.

Has 3 plants – Faridabad, Jaipur and Haridwar. No expansions possible in the existing Faridabad and Haridwar plants. Jaipur SEZ plant to be operational by March 2014. They have got new land in HSIDC, Faridabad. Capital expenditure of Jaipur SEZ – 38 cr (21 cr loan, 17 cr internal accruals). Investing in Haridwar plant to focus more on domestic market. In FY14, domestic market contributed only 50-60 cr. Rest from exports. Got USFDA approval for its Faridabad plant in Dec 2010.

R&D as a % of sales:

They have increased R&D spend as a % of sales from the past 3 years.












a) Increase in RM costs (crude oil proxy)

b) Exchange rate fluctuations (although, it’s a net exporter)

c) Changing import duty structures (although, off late, govt. has framed favorable policies towards medical and life saving devices)

d) Medical devices heavily regulated (nature of business)

Related Party Transactions and Compensation:

They score pretty high on related party transactions and compensation as a % of sales.

Series of related party transactions with Vitromed healthcare

VitroMed txns






15 cr

11 cr

8 cr

8 cr


21.5 cr

15 cr

13 cr

10 cr

% of PolyMed Sales





MD & ED’s compensation





MD&ED’s comp

3.5 cr

3.1 cr

2.17 cr

1.73 cr

Sales of PolyMed

252 cr

209 cr

170 cr

136 cr

PAT of PolyMed

24 cr

19.2 cr

21.7 cr

16.4 cr

% of Sales





% of PAT





Valuation and Investment theme:

Polymed looks like a 20-25% compounding story with a fairly high probability from these levels. FY13 250 cr sales, 24 cr profit. FY14E 300-310 cr sales, 40 cr profit.

Next 3 years, even if sales double (and assuming NPMs would remain at 12-13% – op. leverage would be set off by increased depreciation of Jaipur SEZ) implies 72 cr profit. Assigning a 20 multiple leads us to 1400 cr marketcap. Current marketcap 750 cr. Implies a 25% CAGR from current levels

Jaipur SEZ spend is about 38 cr and expected sales is about 100-120 cr (2.5-3x asset turnover). If some OEM comes along and if Jaipur SEZ can deliver full demand, sales can double in 2 yrs, and the CAGR would jump to 40%.

Management compensation seems extremely high. Related party txn with Vitromed also needs to be monitored.

However, there is a long ramp for Poly Medicure to grow at 20-25% CAGR. Medical disposable business is an evergreen huge business (unless, there is suddenly a replacement of IV Cannuale with some other tech.) And FY18-19, Poly Med can start selling Safety IV Cannuale anywhere in the world (Braun’s patent expires). Safety IV cannuale is 3-4 times more expensive than IV Cannuale. Think about the impact on revenues and margins.

Disclaimer: This is not a recommendation to buy/sell. This post is only for educational purposes. Please do your own diligence before buying/selling Poly Medicure

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Stock Analysis: Sabero Organics

I had researched on Sabero Organics about a month back but was too lazy to update on the blog. Thought would rectify it in the new year 🙂

I have not yet invested in the stock. Still reading and researching. Right now, the opportunity costs of investing are pretty high.


Sabero Organics – manufactures agro-chemicals – fungicides, herbicides and insecticides. Sabero is a leading manufacturer of generic products in the agro-chemical space.

Investing theme is broadly – i) patents of major patented agro-chemical products will expire in 2014 ii) Due to increasing environmental concerns and consolidation in China (along with appreciation of yuan), there is a significant possibility of lower production from the Chinese along with better price from India iii) Significant operating leverage and synergies that can be achieved by the Coromandel group.

Their major products in each of the segments are:

1) Herbicide – Glyphosate

2) Fungicide – Mancozeb (registered in the first country in Europe (France) recently); potential of Mancozeb worldwide is $500M; current share is 10-11%; aspiration to take to 20%; it contributes 35-40% of Sabero’s sales (while other core products such as Acephate, Monocrotophos, Glyphosate each contribute 15 per cent to the total sales respectively with the balance 15 per cent coming from Chloropyriphos and others intermediates.)

3) Insecticides – Monochrotophos (main competitor: United Phosphorous)

Share of revenue of Fungicide:Insecticide:Herbicide is 40:40:20

They have subsidiaries in Australia, Europe, Brazil and Argentina.

2009 – 10 AR

Customers of Sabero Organics:

a) 30% of business from MNCs

b) 40% of business from domestic and international B2B

c) 30% of business from dealer distribution network

Sabero is setting up a plant in Dahej SEZ at a cost of Rs. 55 cr. Potential sales of 2-3 times investment. Funded from $9M in ECB debt and rest from internal accruals.

Increased capacity of Chloropyriphos by 50% by Sep 2010.

2010 – 11 AR

2 plants shutdown primarily due to project executions and EMS (environmental) objections

Started supplying to Brazil. Got technical registration for Mancozeb (Brazil is the 2nd largest customer after US in agro-chemicals)

Dahej plant will manufacture synthetic pyrethroids, which have a potential market size of $600M-$700M

Main RMs of Sabero – Ethylenediamine (suppliers are Akzo Nobel, Huntsman and BASF) and Phosphorous, Acetic Anhydride (main supplier Celanese)

Mancozeb plant working at 60% capacity

Supply to Europe has not begun as data protection gets over in June 2011 (Update: In 2013 AR, they do indicate they have registered in France)

40% marketshare in Monochrotophos, rest 60% with United Phosphorous (Cheminova exited the business, leading to a duopoly here)

The joint venture to co-venture partner Markan is under arbitration (Update: In 2012 AR, they have resolved it, taking a hit of approx. 2cr)

2011 – 12 AR

Coromandel (and its subsidiary Parry Chemicals) take 74.57% ownership; Sabero will contribute only 5% of Coromandel’s revenue.

There was a PIL (public interest litigation) filed against the company. Considerable investments were done in environmental management systesm and processes. April 2011 – they were manufacturing 0%; Dec 2011 – their capacity was ramped up to 75%

Manufacture of formulations has begun in Dahej in March 2012

Case with Brazilian company settled

Propineb, with a market potential of $150M – commercialization will begin next year

There has been a sharp fall in the number of Glyphosate herbicide manufacturers, and there can be a 30% reduction in capacity due to consolidation in China in the next 3-5 yrs

Power, fuel and utilities costs shot up to 13.6% vs 7% last year

RM costs also rose sharply

Domestic scale up didn’t happen properly because of availability of products (due to constrained capacity) and erratic monsoons

2012 – 13 AR

Many agro-chemicals going off-patent and due to GM seeds, there has been diversion of R&D funds from agrochemicals to GM seeds

Propineb has been launched (worldwide market of $110M)

Current status of registrations: 296 registrations on 16 products in over 54 countries (183 unique proudcts/country combo)

There has been a 40% increase in trade payables and 100% increase in trade receivables, while sales have grown by only 44%. The massive increase in trade receivables vis-à-vis sales is shown up as negative operating cashflow (-19cr) for the first time. (Are they pushing products on lenient terms then?)

There is absolutely no mention of the status of the Dahej plant.

There are planning to do some capital investment in utilities (drawing board stage), and are targeting EBITDA margins from current 10% to 15%. They can potentially do a 1000 cr turnover in FY15.






































Net Fixed Assets






Fixed Asset Turnover



















H1 FY14 PAT is 26 cr. Given H1 and H2 are similar for Sabero, FY14 PAT would be 52 cr. (There would be no tax impact this year because 61 cr is carried forward from FY12. 7.7 cr has been set off. This 52 cr can also be set off against 61 cr). Tax impact would be 30% from FY15 (unless we know further status of Dahej in which case, it may be a bit lower).

PAT 52 cr. Mkt cap – 492 cr. P/E of 9.5 (Even EV/EBIT (since Sabero has debt) is about 9.5). What would be a fair valuation for such a company?

For FY15, assume best case scenario:

1000 cr turnover, 15% EBITDA margins would imply 150 cr EBITDA. 30 cr interest deduction. 120 cr EBT. 30% tax – PAT would be 84 cr. On a similar 10x multiple, we are looking at 70% upsides from here.

On a realistic basis, 1000 cr turnover, 10% EBITDA, would lead to 50-55 cr of PAT. There is no growth between FY14 and FY15 in PAT (due to full taxation in 2015). Beyond that, there are too many variables.

Of course, increased demand for Mancozeb from Europe (if France is done, other countries can’t be far behind) may further provide tailwinds.


The major risk I see here is any PIL would lead to further pullbacks as production might be stopped. Also, GPCB has given time till mid-Feb to clear out some backlogs on environmental concerns. I think getting a clearance would be paramount (although, given Coromandel’s pedigree, don’t see much of a risk here).

Another major risk is obviously steep increase in RM prices. This is a risk on balance – as production of end product from other countries is dwindling, and as is the manufacture of phosphorous from China. We may get into a higher pricing scenario, but so would our RM cost increase. Net-net, I don’t see an asymmetric benefit of China rampdown.

Another risk is inter-party related transactions – say, if the Dahej plant production is being restructured to be a backward integrated supplier for Coromandel-Liberty merger, then the upside is going to be very limited. We need to be careful of the pricing structure here. Of course, delisting is another risk (will lead to re-investment risk)

Disclosure: I have not invested as of yet. This is not a buy/sell recommendation. This post is only for learning and posterity. Please do your own due diligence before investing

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MCX – Undervalued?

Back to blogging after a long long pause.

Anyway, given the hullabaloo around NSEL, FT and MCX, there have been certain conclusions that NSEL is a gone case and so is FT. The only remaining entity of Jignesh Shah’s empire is MCX. And an opportunity to buy an exchange with a significant moat in the commodity trading business for about 2000 cr seems enticing for many.

For those who are new to MCX and want to understand more about MCX, Rudra has got a very comprehensive explanation about its business model, its competitive advantages and risks here. He has covered all angles (the blog is obviously before all the ruckus on NSEL in August).

The price action of MCX below – 1 year back, it was quoting at about Rs.1500/-. Around start of this financial year, it quoted at about Rs.850/- (The budget in Feb’13 proposed and imposed a commodities transaction tax (CTT) on all non-agricultural commodities which led to a drastic fall in volume). Then about August, the NSEL saga struck and the price dropped to a low of Rs. 238/-. It recovered a bit, and HDFC Mutual Fund bought a large quantity at about Rs. 293/-. Yesterday, it quoted at around 410/- and today, it was up by 10% to 455/- (a market cap of Rs.2300 cr).


We are all fascinated by bottom-fishing, but we are always unsure of getting stuck at the bottom. And so it was with MCX. Nobody bought at Rs. 238/- (when cash per share, seemingly on B/S and again confirmed by Sep 2013 B/S was about Rs. 180/- a share). Now, when the price has doubled (seemingly after FMC has ring-fenced and necklace-spiked MCX from the vultures), people have developed an immense interest in MCX’s seemingly unbreakable moat, its multitude of competitive advantages and why it’s a great buy at these levels, given normal profitability.

Given the state of affairs, I decided to see the volume of contracts at MCX (obviously, more the no. of contracts, the more MCX revenues and profits boost up, just like a toll-bridge). The major products traded at MCX are only four – Gold, Silver, Copper and Crude. Rest of the commodities are too small to be even counted (inspite of MCX’s major push towards agricultural commodities – FCRA hasn’t yet come up with regulations for options on commodities, which are crucial for agricultural commodities – and given the NSEL fiasco, they won’t be in a hurry). So, here I plot the contract volume of all 4 products –



As you can see, volumes have plummeted in the initial part of the year due to CTT, and most probably plummeted further after the NSEL fiasco. Of course, not much commodity volatility globally across these 4 commodities is also one of the reasons for this poor performance. On an average, y-o-y since August, Gold’s contracts have gone down by 60%, Silver by 63%, Copper by 63% and Crude by 74%.

For the year ended FY13, MCX ended up with 299 cr of net profit. Analysts who assumed this profit to be the base case, and who assumed that volumes at an exchange will ALWAYS grow are in for a rude shock with MCX. The profit for Q1 FY14 was Rs. 60 cr, Q2 FY14 was 27 cr and given the severe contract volume drop in Q3, I would expect MCX profit to end up somewhere around 18 – 20 cr (if not less). Net-net, if a similar trend continues through to next year, I would expect MCX to end up with profits around Rs. 125 – Rs 130 cr.

In my view, this needs to be the base profit expectation (maybe even lower, given that Gold is about to break $1200 internationally and there might be further lack of interest due to absence of options) to evaluate MCX rather than the elusive Rs.300 cr as the base case. Applying a 20x P/E (it’s at 10 P/E TTM, but exchanges with such moat I think should trade fairly at 20 P/E), we arrive at a market cap of Rs. 2600 cr, a measly 13% above current price levels.

Contra-viewpoint: Of course, all of these fundamental valuations go out of the window if a reputed player like HDFC/Kotak take over 26% of the company (from Jignesh Shah). In that case, the market price can fly anywhere, maybe even double. But I am still not buying.

Long term view: Even considering a HDFC/Kotak buying out the stake, the price may double from here in quick time (< 1-2 years). But am I confident that the volume of commodities traded at MCX would increase 20% year-on-year for the next 10 years? I am really not sure. Hence, I am not taking a bet for now, inspite of a decently high probablity that there are a couple of good triggers for an increased market price in the short term. As and when I learn more about MCX’s business or about FCRA’s view on introducing commodity-related options at MCX, I may change my view. But for now, I am letting this pass, purely based on fundamental valuations than bet my money on any buy-out speculation (which may come true after all).

Disc: Not invested. Still studying the MCX stock (business)

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Interesting Corporate Actions – PVR Ltd and TV18

There have been a few interesting corporate actions over the past 2 months. I will elaborate a couple of them here.

a) PVR Ltd – The first one is from PVR Ltd. (of PVR Cinemas fame). I observed this strange set of events way back in August and yesterday’s Devesh’s tweet on the event was the final push required to write this blogpost.

In summary, PVR Ltd. did a buyback in 2011 (in the May-Oct timeframe) and now sold shares (in the Aug-Oct timeframe). You’d wonder if PVR was in the entertainment business or financial engineering business. On the whole, it seems to be value-accretive to PVR, but this buy-sell stuff in the space of 1 year is a little unsettling.

The details.

PVR in June 2011 announced a buyback of shares not exceeding Rs. 26.21 cr representing 9.99% of the company (as an aside, a buyback greater than 10% requires a EGM and hence most companies don’t do it), with the max. share price of Rs. 140/-. 10% of 27,149,372 shares (total equity) represented 2,714,937 as per audited Balance Sheet at March 31, 2011. The Company proposed to buy-back a minimum of 562,000 Equity Shares.

Anyway, cut to the chase, as per this September 2011 notice, PVR had bought back 1,388,328 shares utilizing Rs. 15.82 cr (excluding brokerage and taxes) and that was the end of the buyback (that is approx. 5.1% equity was bought back at an average price of Rs.114/-). As an aside, the book value (net of debt) of PVR Ltd. as of March 2011 was Rs.126.12 cr. That is, 12.55% of book was used to buy approx 5% of equity back – not a great buyback by any standard, but not extremely poor either.

Anyhow, that was history. Cut back to the present. Aug 2012. This news item indicates that a private equity player called L Capital wanted to buy 10% of PVR’s equity at a price of Rs. 200/- (a 7.5% premium on the then market price Rs.186/-). This translated to 28.85 lakh shares (well, there were just 2.595 cr shares after the buyback and then PVR issued a some fresh shares (0.3 cr shares) to L Eco (at Rs.200/-) leading to equity dilution and hence now the equity is actually 2.85 cr shares). With this sale, PVR gets Rs. 57.7 cr for further expansion.  (There is a small bit on further Rs.50 cr investment from L Capital into PVR Leisure, a PVR subsidiary (and PVR will eventually have only a 35-40% stake in this business), but that is not pertinent to this discussion).

So, net-net,

PVR bought back 13.88 lakh shares for Rs. 15.82 cr in Sep 2011.

PVR sold 28.85 lakh shares for Rs. 57.7 cr in Sep 2012.

Is it value-accretive to PVR? Certainly. Even if you consider that the 13.88 lakh shares which were bought back were sold, the firm netted a gain of 75% within one year without considering the extra benefits of the network of a private equity player, the extra investment into the PVR subsidiary etc. Also, the debt has not increased due to the equity sale, so hurrah!

But should PVR indulge in this buying and selling of equity frequently? The jury is still out on that one.

b) TV18 – This Network18 group has always fascinated me. Not like a Page Industries fascinating, but fascinating with their ingenious financial engineering capability.

This time, the Network18 media group decided on the rights issue part of engineering. Of course, all and sundry do know about the Reliance-Raghav Bahl-ETV-Network18-TV18 story and complications, so I will not get into it (please to google, if you are not aware of it – the twists and turns will put the movie ‘Race’ to shame).

I will analyze this TV18 rights issue as an ‘expert’. That is, I will try to exactly explain why the stock moved from the lows of 20 to the highs of 30 today. (Actually, to be fair to ‘experts’, I am cheating. I had done this analysis much before and only blogging about it today). I have had no positions nor will I ever have positions with the Network18 media group. Their skill in shortchanging minority shareholders is unparalleled and since I have a day job, I can’t monitor their schemes daily.

Anyway, here’s the analysis I had done once the rights issue was declared –

The rights issue size of TV18 is Rs. 2700 cr. For every 11 shares held, 41 shares will be issued on a rights basis, each share costing Rs. 20/-. CMP of TV18 Rs. 22/-. If I had 100 shares today (as total equity), post-rights issue, I will have 500 shares for the company. But since the equity is coming through at close to market price, major correction may not happen. In fact, there might be upsides (unless of course, the management dreams up something else). The management of Network18 stock will garner money through its own rights issue and invest in TV18 rights issue. Therefore, the chances of higher allotment are very low (and since the rights price is very close to market price, why would I want to go for a higher allotment?)

The stated intention of the management is that total debt of TV18 would be re-paid and remaining amount would be used to fund the acquisition of ETV channels. The possible increase in revenue due to acquisition of ETV channels aside, this debt repayment has very interesting ramifications on the EPS of TV18.

Consider the P&L statement for the year ending March 31, 2012 (I am looking at standalone results. The consolidated results are much worse, and they are losing money at an operating level). The EBITDA of the company is Rs. 97.42 cr. The interest payment is Rs. 93.48 cr. That is, 96% of the money generated is funding the interest costs. What would happen if the interest costs vanished, since the debt would be extinguished? Let’s do a small financial exercise –

Assume revenue doesn’t increase (which is a pessimistic assumption, since ETV channels are going to earn some revenue). So, EBITDA, say will be around Rs. 97 cr. Now, there are no interest costs to service since the debt has been extinguished, utilizing the funds from the rights issue. Depreciation of Rs. 25 cr. Therefore, PBT is Rs. 72 cr. Due to accumulated losses over the past 6 years (yeah, they have been losing money in all six except the year ending 2012), taxes would be zero. Profit would be Rs. 72 cr.

Now, the equity base currently is 34 cr shares. March 2012 profit is Rs. 9 cr. That is Rs. 0.26 per share. The equity base will increase by 135 cr shares, taking the total equity base to 169 cr shares.

Therefore, technically (forget the interest of June 2012 quarter for a moment), the EPS would be Rs. 72 cr/169 cr =  Rs. 0.42 per share, an increase of 63% in EPS, without any increase in revenue. Of course, now we consider June 2012 interest and Sep 2012 interest (sum approx to Rs. 58 cr). That would bring down the EPS to Rs. 0.09/-, but that’s only in the short term.

If the tailwind of digitization works (Safir Anand’s pet topic) and ETV revenues flow through, at the very least, TV18 is going to earn a decent profit, maybe equivalent to March 2012 profit, but with zero debt. A stronger balance sheet ideally should propel this stock to greater heights. Even considering consolidated results, if the management pays off the entire debt as claimed, I think TV18 will generate a decent profit at the end of FY13. However, I am not buying. Too many ifs and buts.

P.S: If you are on twitter and not following Devesh  (@_devesh_) and Safir (@safiranand), you are missing on interesting conversations. Go, follow!

Disclosure: I have no positions in PVR and TV18 (or Network18). This is not investing advice. This post is only for analysis purposes and not a buy/sell recommendation.

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Investment Note – Haldyn Glass Limited

I had shared an investment note with a few of my investor friends for their inputs and guidance about 6 months back. The stock is up 50% from the time of my investment note. Although I liked the prospects of the company (due to the reasons that will soon be clear), I was not too sure of its customers paying up (Kingfisher primarily) and some balance sheet vulnerabilities. Due to that, I had just taken a 2% allocation in the stock rather than more. In hindsight, I should have loaded up, but hindsight vision is always 20/20. So, no regrets.

The latest quarter results have been very encouraging. The year-end results indicate a 50% jump in EPS with a 66% reduction in debt. In fact, this stock came on my radar due to debt reduction. The other stocks that I am evaluating on this theme are Andhra Petro and Sanghvi Movers.

Disclosure: Still hold the shares bought in Nov’11. There has been some fraud to the extend of Rs. 16 cr (announced in Q4’12) that has presumably been written off against Reserves. Still evaluating. As of now, wouldn’t recommend fresh buying at these levels till some clarity emerges.

–Investment Note follows. This note was written in Nov’11 and hence will not reflect the latest figures. Views invited.

(Word document to download)

Investment Note – Haldyn Glass Limited – Debt Reduction theme


We have a

a) Severely undervalued company (the peers quote at much higher multiples, inspite of similar margins and return ratios)

b) Debt reduction (38% in just couple of quarters). Maybe more in the coming quarters.

c) Promoter buying

d) It is almost a debt capacity bargain (and the Graham number etc. is far above the CMP)

Views invited.

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Smart Money Managers (VC/PE/Hedge Funds) – India Stock Market

a) I wanted to compile a list of smart money managers (from the VC/PE/Hedge Funds space) along with their portfolios (most probably, not complete portfolios) in the Indian Stock Market. This list is copied straightaway from Devesh Kayal’s tweets (since I hate twitter search and that search usually doesn’t lead anywhere, I have compiled this list on a more user friendly and searchable forum).

Name of the Fund Stocks held
Sequoia Capital e-Clerx, DHFL, PI Industries, Pratibha Industries, TD Power, Hindustan National Glass, Ess Dee Aluminium, Infotech Enterprises, Lovable Lingerie, Edelweiss, Mannappuram, SKS Microfinance
Nalanda Capital Exide, CUMI, Page Industries, Havells, Shree Cement, AIA Eng, Mindtree, Ahluwalia Contracts, Supreme Industires, Kewal Kiran Clothing, Berger Paints, Voltamp Transformers, Ratnamani Metals, Triveni Engg, Kirloskar Oil Engines, Mastek, Vaibhav Gems, V-Guard Industries
Barings PE Manappuram Finance, Muthoot Finance, Mphasis, TD Power, Balmer Lawrie Investments, Shilpa Medicare, KS Oils
Standard Chartered PE Redington India, PI Industires, Innoventive Industries, Man Infracon
ChrysCapital HCL Tech, ING Vysya Bank, Hexaware, KPIT Cummins, NCC, Gammon India, Pratibha Industries, Ahmednagar Forgings, Simplex Infra, Shriram City Union, Titagarh Wagons, Spanco, JMT Auto
Amansa Capital Cholamandalam Investment and Finance, Max India, Whirlpool India, Greaves Cotton, Rallis India, ENIL, Gujarat Pipavav Port, Blue Star, Kirloskar Oil Engines,  Edelweiss Capital, CUMI, OnMobile Global, Tube Investments of India
Arisaig Partners Colgate, Nestle, GSK Consumer, Marico, Godrej Consumer, Britannia, Jubilant Foodworks

Of course, we need to express caution before rushing to buy these stocks. For one, some of them (like Mastek, Vaibhav Gems, SKS, KS Oils) have been disasters. Two, these funds buy a bunch of stocks. Even if some turn out to be duds, overall their portfolio might come out as a winner. Selectively buying from this list without any research would lead to poor results. Three, this list of companies might not be a complete list, and some of these funds might also be following a long/short strategy. Summary? Don’t buy any of these stocks without further research. This is just a good indicative starter list for research.

b) If you liked the stocks above, and would like to know more VC/PE funds which are focused on India, here’s a list – – let me know if you compile a stock list from some of these VC/PEs. For one, here’s a link to Citigroup’s India portfolio (includes Citigroup Venture Capital India investments) – Link

c) Here’s a list of hedge funds focused on Indian markets (I couldn’t get any stocks list from this hedge fund list though)

The four largest hedge funds focused on India are HSBC GIF India Equity Fund, Aberdeen Indian Global Equity Fund, JP Morgan India Fund and Fidelity India Focus Fund. Of course, it is just a matter of googling the Top 10 holdings for these funds, so I will dispense away with it.

Now, for some reading links for the weekend –

d) We all go through a stage where we tend to read a lot of books, lot of authors with different styles etc. on investing, spend a ton of time and money going through these books, making notes etc., but haven’t yet had the guts to make an investment? Well, here are three good links which talk through that –

e) We all need to improve ourselves in almost all respects all the time(that’s a fiendishly global statement, isn’t it?). Investment process is probably the easiest of the lot. Here’s a short note from the wonderful Greig Speicher on 10 ways to improve your investment process. Very good read.

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Why the Cashflow statement is important?

My first point of analysis of any stock is the Cashflow statement. (Well, I don’t choose to evaluate stocks whose debt is very high and hence technically, you can say Balance Sheet is my first point). I don’t do an in-depth analysis right away, but I just glance through different items of the Cashflow statement to see if anything is largely amiss (if it is, then I dump the stock analysis, and move on to the next – there are soo many to evaluate!). In this blogpost, I will elaborate on one such cash flow statement which I thought looked very dicy (The reason I came to evaluate the stock was because some other investor had suggested I look into it). I shall name the stock later in the analysis, just so that revealing the name doesn’t put you off (oh, I don’t track that industry!, you know 🙂 ).

Anyway, here is a snapshot of the cashflow statement (from their Annual Report 2010-11).


Just glance through the statement. I found three items which were quite alarming to say the least.

a) Provision for doubtful debts have shot up more than 90% in one year. Of course, provision doesn’t mean actual loss, but then again, why have the provisions shot up by such a significant percentage?

b) The customers don’t seem to pay this company at all (look at the increase in sundry debtors) (I don’t want to calculate percentage increase here) and

c) Nobody seems to be buying (well, not technically) if you look at the increase in inventories (300% increase!).

This by itself, of course, should not put you off on the stock. Let’s dig a little deeper into the Annual Report. Here’s another snapshot which is relevant to the points mentioned above.


Two points again –

a) Finished goods have gone up by 80%. Either the customers are not buying this company’s products, or the company has grossly overestimated their product demand. Finished goods seem to be sitting in the warehouse.

b) Sundry debtors have increased dramatically, and so with Sundry debtors increase the doubtful debts. Why did Sundry debtors go up so dramatically? Has the company relaxed its collection norms or have the sales increased dramatically?

Let’s look at a snapshot of its P&L and Balance Sheet items (to see if the sales have increased dramatically).

Particulars Mar’11 Mar’10 Mar’09 Mar’08 Mar’07 Median
OPM(%) 20.87 24.86 24.20 17.56 12.23 20.87
NPM (%) 12.48 15.03 12.80 7.86 3.55 12.48
Asset Turnover 1.33 1.53 1.76 1.37 1.37 1.37
RoA (%) 16.55 22.92 22.48 10.79 4.85 16.55
FL 1.50 1.42 1.52 1.85 1.77 1.52
RoE (%) 24.87 32.56 34.15 19.98 8.57 24.87
RoCE (%) 24.37 32.97 37.11 19.56 12.81 24.37
RoIC (%) 17.06 23.08 25.98 13.69 8.97 17.06
Debt Growth (%) 45.80 7.32 -23.73 28.83   18.07
Sales Growth (%) 12.19 7.56 31.32 22.11   17.15
Op.Profit Growth (%) -5.82 10.51 80.96 75.35   42.93
Net Profit Growth (%) -6.79 26.31 113.77 170.49   70.04
EPS Growth (%) -8.64 -19.55 63.19 152.71   27.27


Reading off this snapshot, we realise that Sales growth has only been 12%, while Sundry debtors growth has been…

The name of the company is Orient Abrasives. Abrasives are usually used in a wide variety of industries and Orient is one of the four listed players on the market (the other three being Carborundum Universal, Wendt India and Grindwell Norton). In brief, Orient Abrasives is into two categories of abrasives – Electrominerals (which are actually grains mined from mines and has different uses like making machine tools, SPV cells, abrasive) and Refractories (used in lining of different industries to protect from heat). They have the lowest P/E across the 4 listed players. Orient Abrasives P/E is 9 while others vary from 16 to 23.

Competition Analysis

Let’s put up some important figures for Orient Abrasives and its competition (all the return ratios are the medians of the company’s performance over the past 5 years)

Particulars   CUMI Orient Wendt GN
Sales Growth 3 yr CAGR 18.06% 9.85% 25.42% 24.81%
5 yr CAGR 18.69% 17.94% 12.26% 20.53%
Op. Profit Growth 3 yr CAGR 23.34% 2.02% 34.70% 26.70%
5 yr CAGR 17.81% 34.08% 13.20% 17.00%
Net Profit Growth 3 yr CAGR 44.18% 8.50% 44.96% 26.36%
5 yr CAGR 17.93% 61.53% 17.14% 17.21%
EPS Growth 3 yr CAGR 44.10% -14.27% 34.31% 24.75%
5 yr CAGR 20.61% 31.95% 16.32% 16.80%
OPM (%)   18.41% 20.85% 27.64% 17.72%
NPM (%)   7.75% 12.80% 16.46% 11.34%
RoA (%)   8.13% 16.55% 20.42% 21.25%
RoE (%)   13.48% 24.87% 20.57% 21.25%
RoCE (%)   15.30% 24.37% 31.26% 31.20%
RoIC (%)   10.71% 17.06% 21.88% 21.84%

(Figures in Blue are the highest across the competition for that category. Figures in Red basically means ‘it sucks’).

The table gives a clear picture of why Orient Abrasives has been beaten down by the market. Its past 3 year history has been close to pathetic, while its competition has grown by leaps and bounds. And with no new initiatives from the management, I don’t see why the market would re-rate it. 5 year record is pretty stellar though – anybody trying for the logic of ‘reversion to mean’ here?

Having said that, look at the table again at other investing contenders. We can easily see that Wendt has been an outperformer in this category, while Grindwell Norton comes a close second (and both are debt-free). Compare these two companies (forget Orient Abrasives for a moment) with Carborundum Universal and you’d see that Wendt and GN are much better performers than CUMI.

But what does the market say? The market says that CUMI is worth 25 times PE multiple, while Wendt is worth only 18.5 times PE multiple and GN is much lesser. In fact, as recently as March 2011, Wendt was quoting at 11 PE multiple, while CUMI was quoting at a 19 multiple even though performance of Wendt was much better than CUMI. Delisting mania took over, and Wendt shot up promptly to what I thought was still slightly undervalued figure of 1500 (CMP: 1700) and a 17 PE multiple (currently 18.5).

What does that indicate? It indicates that I should do this industry analysis more often that I do so that we could have had a 60% gain in Wendt, compared to a paltry 25% gain in CUMI off March 2011 figures 🙂 Also, that tells you that Mutual Funds are somehow fascinated with CUMI (most mutual funds have this stock) rather than other improved plays like Wendt (probably, they don’t want to get entangled in this delisting mania).

Would I invest in this company?

a) There is something awry in their collection process through which debtors and doubtful debts are increasing at an alarming rate.

b) There seems to be an unusual buildup in their finished goods – which leads me to believe that the company is not really efficient in managing customer demand.

c) If you look at their Jun 11 quarterly results (Q2 results have not yet been declared), there has been an increase of 17% in sales, but a degrowth in profit (and if you look at the table above, it is evident for the entire year 2010-11).

d) Debt has increased considerably over the past year. Although interest is easily covered by its earnings for now, we need to keep a watch on this figure. If it jumps again, we have a cause for concern.

e) Let’s try to estimate FY12 EPS. The median NPM over the past 5 years is 12.48%. Assume a 15% increase in sales (3yr CAGR is just 10%, but let’s be a little optimistic here). We end up with 420cr sales, which translates into 52cr net profit. EPS will be around Rs. 4.4. Let’s take a PE band of 8-12 (I don’t expect a PE rating higher than 12 for the simple reason that there is no kicker in sales/profits/new ventures etc over the past 3 years and recent quarters). That gives us an optimistic PE range of Rs. 35-Rs. 52. Not too much margin of safety, is there?

Therefore, I shall pass.

Where can I go wrong in this analysis?

a) Sentiments in markets, terrific bull market etc.

b) Probably the management is coming up with lots of new things, and I haven’t dug deep enough into their business.

c) Haven’t done Competitor analysis. If anybody has already done this, please share. Done now

d) My basic reading of these accounting statements is wrong.

e) I have taken only 5 yr data (which doesn’t cover an entire business cycle), while I should have taken 10.

Disc: Haven’t invested in this stock. Will not invest unless I am offered a convincing alternative explanation. I am bullish on this sector though and am reading through a few things. Please do poke holes in my argument.

P.S: If anybody is interested in DCF, the median FCF over the past 5 yrs is 8.41. So plug it into a two stage growth model and let me know what comes out as intrinsic value per share.

P.P.S: The biggest grouse I have is most companies don’t release their balance sheets and cash flow statement quarter on quarter. I hope they do. But then again, I also hope for winning KBC panch koti maha muni. So yeah. That’s that.

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Holding Companies

I have been meaning to write about holding companies for a while now, but as usual my laziness has been overpowering. However, flipping through this fortnight’s Outlook Money pushed me into writing about this today.

Outlook Money has published the following 5 holding companies along with the details –

Name of Company Mkt Cap(cr) Value of Investments (cr) Div Yield(%) Major Investments Discount to Net value(%)
Kalyani Investment Company 217 1388 0 Bharat Forge, BF Utilities 84.37%
Maharashtra Scooters 363 1673 2.47% Bajaj Auto, Bajaj Holdings and Inv, Bajaj Hindustan 76.10%
Nalwa Sons Investments 325 1193 0 Jindal Saw, JSW Steel 72.25%
Bombay Burmah Trading Corp 595 1953* 1.65% Britannia, Bombay Dyeing 69.54%
Bajaj Holding and Investments 7934 22582 4.91% Bajaj Auto, Bajaj Finserv 64.87%
* net of debt          

The article goes on to say that all these holding companies are at a huge discount and the discount has to correct itself in the future. The argument goes that even if say, Kalyani Investment Company quadrapules in 5-10 years, you have a 39%-18% CAGR depending on the time frame.

I have had mixed results with investing in holding companies and in general have come to a conclusion that I am better off not looking and studying these companies since the opportunity cost is a little high (Market might realise about undervaluation in such companies after a long time, if at all).

How do we value holding companies? In my view, there are two types of holding companies. One, its a pure holding company and two, it also has an operating business along with holding a chunk of shares in other companies (mostly in related industry segment).

Let’s take Outlook Money’s thoughts a little further. Let’s take the most undervalued of them all. Kalyani Investment company is a pure holding company (it got demerged from Kalyani Steels and holds 14% stake in Bharat Forge, 17% in BF Utilities and 31% in Hikal). A pure holding company receives dividends from its respective stock constituents and distributes to its shareholders/reinvests to increase stake in its constituents. So, in general, it should valued only by the dividends the shareholder receives. What if I as a shareholder don’t receive any dividends? How do I value that company then? If the company doesn’t have plans to liquidate its investments (if it did, then the huge undervaluation is justified), have not read any plans to distribute dividends – then on what basis should I invest in Kalyani Investment company?

One, I have no idea. And two, this huge undervaluation theory sounds bunkum to me as we have evaluate the firm only on the basis of the dividends we receive (liquidation I guess is pretty much out of question). Let’s calculate the intrinsic value of Kalyani Investment and Company. Bharat Forge on average has declared 175% dividend over the past 5 years (FV Rs. 2), BF Utilities has declared no dividends over the past 5 years, Hikal has declared an average of 70% dividend (FV Rs. 10) and Kalyani Steels has declared on average 40% dividends (FV Rs. 5). So, doing some weighted average magic, we arrive at a dividend of Rs. 3.42 per share. Assume a little higher dividend, say Rs. 4 per share. Assume this dividend is perpetual. At 10% AAA bond rate, and post tax 7% bond rate, the price works out to about Rs. 60/-.

Calculating the intrinsic value as follows –

Company Div/share No.of shares (in lakhs) Kalyani Investment’s % shares (lakhs) Kalyani Investment’s dividend (lakhs)
Bharat Forge 3.5 2327.94 325.9116 1140.6906
BF Utilities 0
Hikal 7 164.4 50.964 356.748
Kalyani Steels 2 436.53 165.8814 331.7628
Sum of Dividends received       1829.2014
No. of Kalyani’s shares (lakhs)       43.65
Dividend per share       41.91

So, dividend per share of Kalyani Investment and Company is Rs. 42/-. In the case where all this dividend is paid out perpetually to the shareholders, assuming 10% AAA bond rate and after tax rate of 7%, the value per share of Kalyani Investment and Company is Rs. 42/7% = Rs. 600 per share. The current market price is around Rs. 520. So, technically it is undervalued only by 15% (not much margin of safety mind you, because you don’t know whether dividends will be paid out) and not 85%.

The usual argument for holding companies is that the discount should not be more than 50% (although, I have had a hard time understanding the logic behind this number). Also, some investors say that in the West, the discount is not more than 10-20% and hence 85% undervaluation is huge. Well, in the West, the investors will force you to liquidate these investments for the payouts (and that’s due to better corporate laws out there) and hence the discount is 10-20% unlike in India.

Again, I have had mixed results with holding companies (luck?). I would not recommend buying or holding pure holding companies. What I do certainly recommend is to evaluate certain companies which have operating businesses along with holding significant chunks of other stocks. Some of these are Majestic Auto (hold Hero Honda shares), Sandesh Ltd. (hold Hero Honda shares), Carborundum Universal (hold Wendt India shares), EID Parry (hold Coromandel Int’l shares), Tata Chemical (hold Rallis India shares) among many others. Here, there are multiple catalysts – good operating businesses, liquidating some investments, buyout/takeover etc.

For those who are interested in the list of holding companies (pure as well as mixed), here’s one list.

Thoughts invited.


Indian Banks exposure to Real Estate and Infrastructure

Citigroup Global Markets has come up with a report which documents among various parameters, the loan book exposure of Indian Banks to sectors like Infrastructure and Real Estate (as a % of total loan book). Here’s the information they have gleaned from RBI website and various Company reports.

Bank Power Telecom Other Infra Total Infra Real Estate Total Exposure
Andhra Bank 21.5 0.9 NA 22.4 5 27.4
Yes bank 6.9 8.3 5.1 20.3 5.6 25.9
OBC 10.9 2.2 5.8 18.8 6.4 25.2
Canara Bank 13.3 4.4 5 22.7 NA 22.7
ICICI Bank 5 0 5.1 11.2 10.1 21.3
Central Bank NA NA 21 21 NA 21
Corporation Bank 8.3 4.1 4.7 17.1 3.4 20.5
AXIS Bank 4.4 3.9 5.8 14.1 3.5 17.6
Kotak Mahindra Bank NA NA NA 6.5 10.4 16.9
SBI 3.8 3 5.8 12.7 1.8 14.5
Union Bank 8 NA 3.1 11.1 1.8 12.9
Federal Bank 7.2 1.2 2.5 10.9 NA 10.9
BOB 2.6 2.2 3.4 8.2 2.7 10.8
HDFC Bank 2.3 1.3 NA 3.6 4 7.7

Now, we all know that with increasing interest rates, many real estate and infra companies might not be able to make regular payments and hence the NPAs on Banks’ balance sheets will increase. This in turn will lead to increase in provisioning for bad assets which in turn mean lower profits. Lower profits obviously mean lower stock prices. (Also, this will mean Banks would be very wary of lending to these companies for any new projects/working capital. So that’s another bummer for both Banks (since it would be earning less than if it lends) and the Infra/RE companies).

Anyway, the list does point out that

a) Among Govt. banks, the highest exposure to these sectors are with Andhra Bank, Oriental Bank of Commerce (OBC) and Canara Bank (Corporation bank is almost there!). The least exposures are with Bank of Baroda (BoB), Union Bank and SBI. Since the market has punished all Govt. banks equally, there is a chance of mis-pricing among these three less exposed banks.

b) Among Private banks, the highest exposure to these sectors are with ICICI Bank and Yes Bank (incidentally, Goldman Sachs has upgraded both these banks to ‘Conviction Buy’ list: hat-tip Sunil Arora). The lowest exposures are with HDFC Bank (expected) and Federal Bank.

Apart from this broad based data presentation, I do intend to hypothesize that the Infra sector is not much of a problem in terms of regular payments. Usually this sector is Govt. sponsored and regular payments to the Bank might not be so much of an issue. However, real estate is a problem and with increasing interest rates, and interest in buying homes dying down (obviously due to astronomical prices – who charges Rs.3 lac for a parking place? (they charge here in Bangalore)), these companies might not be able to make regular payments. Hence, looking through the list, it is obvious that ICICI Bank and Kotak Mahindra Bank have the highest exposure to Real Estate and hence are at a higher risk than the other banks (among Govt. Banks, it is OBC).

I also intend to crib at one aspect of the report. The Citi report downgraded Govt. banks like Andhra Bank, OBC and Canara bank due to higher Infra and RE exposure. In the same breath (and report), Citi has upgraded ICICI Bank to a ‘Buy’. You read that right. ICICI Bank – a Bank which has a higher exposure compared to most other banks (Infra and RE combined, RE alone) in the list has been upgraded to a ‘Buy’. I am not sure of the reasons behind it but the double standards don’t sound too right (they obviously are way more knowledgeable than me. Also, they might be getting some investment banking business from ICICI. God knows).

*The Citi report has ICICI combined exposure mentioned as 29.2. Not too sure how the numbers were added up. I added up Infra and RE to arrive at the number.

Disc: Own HDFC Bank.

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