Archive for the ‘Rejected investment ideas’ Category.

 

About
Shakti Met Dor is a leading manufacturer of steel doors since 1995. The company was established primarily to manufacture steel doors, windows, and other building material products to cater to the construction industry. Shakti has expanded its facility to 180,000 Sq.ft of manufacturing and warehouse space capable of producing 300,000 doors and frames. Shakti has seven sales and marketing branches across the major metropolitan cities in India.

Financials
The company is in a niche business and has done fairly well in the last 8-10 years. The ROE has been maintained in excess of 20% with the recent drop due to new CAPEX and higher receivables. The Debt levels have gone up due to the new capacity and due to high additions to accounts receivables in the current year.

The inventory turns has remained at around 10 turns per year and the working capital turns in range of 3.5-4 which seems the reasonable. The total asset turns are at 2.3 which is likely to improve to around 3 with the capex being completed in the last one year.

The one key area of concern is the increase in accounts receivables which is now at around 150 days. I think this needs to be watched closely over the next few years.

Positives
The company operates in a profitable niche and has been able to scale up well in the last few years. The company has been able to deliver a topline growth in excess 20% in the last 10 years and bottom line growth (inspite of the recent drop) in roughly the same range.

The company has recently completed its capex cycle and with the growth in the construction, IT and other user industries, should be able to grow well. In addition the profit margins are likely to improve in the next few years, if the company is able to reduce the debt load and control the raw material costs. The improvement is not a given, but based on the past performance likely to happen.

Risks
There are several key risks in the business. The number one risk is the delisting plan of the company (see here). The management plans to delist the company and has offered around 195/ share. The management holds 56% of the company and needs 34% more to delist. Around 100 shareholders (including the promoters) hold around 90% of the company. I do not have details of these shareholders, but if the management has an informal agreement with them, then the delisting may happen at the proposed price. The minority shareholders holding 10% of the stock will not matter much in the reverse book building process.

A consent order was passed by SEBI on non-compliance of the company of the Substantial Acquisition of Shares and Takeovers Regulations in June 2010. It seems the promoters were acquiring the shares from the market since 1998 and have not disclosed it. This information is missing from the annual reports till 2008-2009. I think this does not inspire confidence

The other risk is the increase in the accounts receivables. This may not be as much as risk as the last quarter of 2010 has seen a sudden increase in topline and hence the year end numbers could be inflated due to that. However one has to watch this number closely as the debt more than 6 months doubled in 2009 and the total debt has increased further in 2010. This increases the risk of bad debt write-offs in the future.

Management quality checklist
–        Management compensation: On the higher side. Management compensation is around 12% of net profit
–        Capital allocation record: Has been sensible and good till date.
–        Shareholder communication – Not good. The management has not been transparent in their communication (see the point on risks above)
–        Accounting practice – Seems fine for most part with all the mandatory disclosures in the latest AR.
–        Conflict of interest – None in the notes to account. However see the risks section where there have been such incidents.
–        Performance track record – Good from a business performance perspective. Corporate governance standards have not been satisfactory.

Conclusion
I started this analysis a few days back and was impressed with the fundamentals. On looking through the BSE filing, I noticed the delisting notice from the company and was thinking of this as an arbitrage or long term opportunity. However the nature of the shareholding (thanks to ninad for pointing that out), I have concerns on how the delisting will work out for the minority shareholder. In addition, some of the past actions do not inspire confidence.

As I discussed in the last post, my valuation template has a checklist which I go through before doing a more detailed analysis on the company. On running through the checklist, I have come across the risks mentioned earlier in this post. I am not too comfortable with those risks and hence inspite of good fundamentals have decided to drop this idea.

Note: If you hold the stock and don’t think the above issues are material enough, it may be so. However I am more conservative and don’t want to put my money on the line to test it out.

 
 

Now that I have managed to irritate some of you, by rejecting stocks which you hold, let me push it still further J

Torrent cables: Erratic performance in the past. Loss in the current year and some years in the past.

TRF ltd: Negative cash flow. High accounts recievables being funded by supplier debt

Bharat bijlee: Poor cash flow. Rough estimate is 20% of net profit, hence the valuation is double the current PE. Fairly valued.

Allied digital services ltd: Raised new capital, majority of which has been used in accounts receivables

Ganesh housing: Fully valued or overvalued. Constantly raising capital for growth

Supreme industries: very low free cash flow and low margins.

UB engineering: Negative networth. Business turned around in the last 2-3 years.

Some quarterly results

Some of the companies, I hold currently have declared their quarterly results. A quick review and some thoughts

VST industries: The company reported a 40% increase in topline and 50% improvement in bottom line. Volume growth seems to be driving the top and bottom line in case of this company. I do not have access to the reasons behind it and hence it is difficult to evaluate the sustainability of the performance. I need to analyze if the growth is being driven by some new products as it is unlikely that the existing products would suddenly do so well.

Asian paints: The company is now firing on all cylinders. The company has reported a 100%+ growth in net profits. This has been a long term holding for me and as I have written in the past, I am also an ex-employee of the company. I am not surprised with the performance of the company. The company has a long history of good performance and has increased its market share and competitive advantage substantially in the last few years. The valuations of course reflect the strength of the company

NIIT tech: The company reported a 12% decline in topline and similar decline in the bottom line. The key reason behind it are the hedging losses. The company has been able to improve its operating margin during this period. There is nothing much to get excited in the current quarter results and with rupee appreciation, it is likely that the negative impact of the hedges will be reduced. I do not expect much in terms of the performance, which has clearly been a disappointment for me. I have marked down the intrinsic value of the company accordingly.

Maruti Suzuki: The company reported a 45% increase in topline and 90%+ improvement in net profits. The topline has been driven by domestic growth and major increase in exports. The bottom line has been driven by moderation of various commodity prices. The performance has been as expected in view the good monthly sales numbers and the stock price has already factored in this performance. As I have written earlier, I have started exiting this position.

I will be posting on the results of the other companies in the coming weeks as they are published and I am able to complete my review of the numbers.

 
 

Recently I shortlisted a few stocks which passed through the basic filters and did a quick 15-20 min analysis to sort them into two buckets – the ‘go bucket’ and ‘No go bucket’. The ‘no go bucket’ are the rejected stocks on which I will not be spending any more time for further analysis. I may have rejected some stocks which may turn out to be good ideas later, but I prefer the sin of ommision than commision. The ‘Go bucket’ has stocks which have to go through more detailed analysis before I commit money to them.

 No Go bucket

 Torrent pharma – A profitable pharma company into bulk drugs and formulations. Growing well and has a clean balancesheet. Have not looked into detail, but the valuation seems to be around 15-16 times latest earnings. Have scanned the financials very briefly and cannot find anything wrong. However it is in the No go bucket as the valuations are not too cheap. May come back later after I run out of ideas.

 Diamines and chemicals – This is a very small company with turnover of 20-25 Crs and Net profit in the current year of 6-7 Crs. It sells for a market cap of 35 Crs and so it seems to be very cheap at a PE of around 6. The company had a negative networth till 2003 and seems to have turn around since then. Has a high Debt equity ratio of almost 0.7. Although looks cheap, I am not comfortable due to the small size of the company and inconsistent operating history. No further analysis on this company.

Go bucket

Poly medicure – A health care company into health care disposables. Currently growing in double digits with this years topline likely to be around 80-85 Crs and net profit to be between 7-8 Crs. The ROE is 20% plus range and the entire company is selling at around 75 Crs, with a PE of around 8. Had a brief look at their website and was unimpressed. No annual report or financial available on the company website. Worth further investigation for the time being

Ultramarine and pigments – A small company into dyes and pigments with an annual turnover of around 60-70 Crs which has been stagnant for the last 4-5 years. Net profits have zoomed from 4 Cr to almost 18 Crs (expected) for the current year. Capital invested in the business has come down in the meantime with investments on the balance sheet of around 25 Crs (FY 2005) and low debt of around 5 Crs. Capital requirements in the business seem to be low and hence the business seems to have good free cash flow and a return on invested capital of almost 50%. Definitely worth a closer look.

next post : i would be listing more ideas in both the buckets

ps : Please see my disclaimer. I would not want anyone to lose money based on my analysis