Archive for the ‘Quick analysis’ Category.

 

I have a preliminary list of companies, which I am looking at more closely now. These companies have passed the 5 min smell test (nothing obvious to reject these companies), but now require a more detailed analysis to make a decision.

I am listing two such ideas below. I do not hold any of the companies as of today and may not buy the stock if the company is not good enough for any specific reason

Geojit BNP Paribas
This is a financial services company – providing stock broking, portfolio management and other distribution services. The company has over 5 lac clients and now over 500 offices across the country.

I personally, use their brokerage service and have found to them to be on par with the other brokerage services. I am not pitching their service to you – I don’t have any financial relationship with them – just a customer as anyone else.

The company’s business is tied to the fortunes of the stock market and is very volatile. The company has grown its revenue from 80 odd crores to around 250 cr +. The net profit has grown from 18 Crs to around 50 Crs in 2010. This growth however has not been a smooth upward trend. As expected, 2009 which saw a severe bear market, saw a drop of 20% in revenue and 80%+ drop in net profits.

In spite of the volatility, the company has been doing well by expanding the client base and offices. The company is now selling at a very attractive valuation of less than 10 times earnings (with 30% of the market cap in the form of cash). In addition the company is also expanding in the gulf countries through various Joint ventures

Finally a key point – Rakesh jhunjhunwala is a director and a majority shareholder in the company. That in itself, does not mean that we should close our eyes and buy the stock. However, the company is definitely worth a closer look

Caution – If you look at the price history, you will realize that the company has dropped in price in the last 6 months. Now if that excites you, welcome to my world. A stock which has dropped in price in the recent past is good place for me to start investigating – does not mean I will buy the stock, but will definitely start analyzing it.

Deccan chronicles
This is a very interesting idea. It is a company which is way out of my comfort zone – It’s a publishing company which has also invested in an IPL franchise.

The reason I got interested is that the entire company is selling for 1600 Crs and a sum of part value is around 4000 Crs (caution – this is just a back of the envelope calculation)

Let’s look at the various parts –

Deccan chronicle news papers
Supposedly, one of the leading papers in the south (based on the numbers provided by the company – 13.8 lakh readers in 2009 up from 4 lakh readers in 2005).

The newspaper business is generally a very profitable business and has great economies of scale – the marginal cost of adding a subscriber is fairly low and the contribution to the profit from each additional subscriber is fairly high.

This business made around 260 Crs in 2010 and can conservatively be valued for 3000 Crs.

IPL team – Deccan chargers
The other business, if you can call it that, is the IPL team – Deccan chargers. This business is barely profitable, but the latest auctions have netted around 350 Million dollars – which comes to around 1500 Crs and change.

Now, this valuation can be debated (depending on one’s point of view and whether India progresses in the world cup :)) – but let’s value this at 50% of the above auction price for the time being – 750 Crs

Beyond, the above two above business, there are some smaller business which I will ignore for the time being.

Total value
So the total asset value is around 4000 Crs and the debt of around 600 odd crores is offset by the cash on the books. Also, I will not worry about the debt as the newspaper business is pouring cash.

So the company is selling at less than 40% of asset value. In addition, the company has also announced a buyback of almost 270 Crs, which at current prices will reduce the share count by another 15%.

What am I still waiting for ?
So why I have not sold my dog, my car and my cow (ok, I don’t have a cow :)) and bought this stock. There are a few things which give me a pause.

–        I have to make up mind about the management. Is the management like other publishing companies like sandhesh – using the cash flow from a superb business (publishing) in all kinds of ventures or are they astute capital allocators? Market will value this company at the appropriate valuations only if the management allocates the cash flow from the core business into attractive areas

–        What is a publishing company doing in the sports franchise business?

Anyway, if something is too good to be true, it usually is. I am still trying to look closely at the company to see what I am missing here

As always, please do your research before you buy the above stocks. I am not recommending these stocks and have no interest in doing so.

 
 

I am currently in the process of looking for new ideas and have shortlisted a few. I have done some preliminary analysis and these ideas have made through the initial filters. However, these ideas need deeper analysis to make a final buy decision. I am discussing one such idea in this post – Amara raja batteries

Amara raja Batteries
The company is the no.2 batteries manufacturer in india and supplier to the industrial, automotive and telecom sectors. The company also has a strong presence in the after market with the amaron product range.

The company has grown its topline at 25%+ per annum and its net profit 20% per annum. This growth has not been a smooth upward trend. The company had a drop in profitability during the 2003 to 2005 time period. The company has managed to pay off most of the debt it acquired for adding capacity and now has a debt equity ratio of around 0.1

The company has maintained a return on capital in excess of 20% in the last 5 years, however the period from 2000-2005 was a period of poor returns due to lower margins and requires more investigation on the causes of the poor performance. The asset turns of the company has improved steadily from 2000 onwards.

The company has been expanding its retail distribution and is also expanding its relationship with various OEMs. The company is focusing on expanding its relationship with 2 wheeler OEMs now.

The company has done well over the years and provided good returns to the shareholders. The company has provided almost 36% annual return over the last 10 years, excluding dividends. This return has come partly through PE expansion during the period (from 4 to around 10 now) and the rest through an eightfold increase in the net profits.

In summary, the company is atleast worthy of a more detailed analysis.

IT companies
I have exited all my holdings in the IT industry. I have had positions in Infosys, patni and NIIT tech at various points of time. I have exited these companies mainly for valuation reasons. I personally feel that the risk reward for IT companies is not attractive at currently valuations.

If the prices were to drop to 2008 levels (when midcaps were selling for 2-3 times earnings), then I will not hestitate in creating new positions again.

 
 

About
Patels airtemp is in the business of condensers, heat exchangers and air conditioners. The company is in the same industry and business space as Blue star limited which is a better known company. You can find more about the company here

Financials
The company has been business since 1973, but has started doing well for the last 5 years. The ROE of the company has increased from 7% to around 30% in 2009. The company is almost debt free and may have some excess cash by the end of 2010.

The company had a revenue of 72 Crs and 8.7 cr net profit in 2010.

Positives
The company has grown its topline by more than 30% and bottom line 40%+ in the last 6 years. However at the same time the growth has come from extremely small base. The company has paid off its debt and is now debt free.

The company has a fairly diverse clientele and supplies its products to a wide variety of industries such as cement, chemicals, petrochemicals, textiles and engineering. In addition the company has the benefit of an ever expanding and growing market for its products.

Risks
The company is in a very competitive business with competitive advantages related to scale of operations. A substantial portion of the business comes from projects which involves competitive bidding. The company has started growing in the last few years and it remains to be seen if the company will scale up and enter the big leagues.

The current margins are in the range of 10%+. Blue star which is in a similar business has margins in the range of 5-7%. The ROE for both the companies is in the same range as Blue star is a more efficient user of capital compared to Patels airtemp. The efficiency is mainly to the size of the company. The difference in margins could be due to the pricing/ quoting approach of the companies.

If blue star is more aggressive in bidding, then we are likely to see Patels airtemp follow the same path if it intends to grow beyond the current size. If this happens, we are likely to see a reduction in net margins, though the bottom could still grow with the topline.

Conclusion
One can look at the financials of the company and assume that patels airtemp would continue to grow at the same rate. If one can make an assumption or have a strong reason to believe that the performance of the last 4-5 years will be repeated then the company is a bargain.

At the same time, one should also consider the fact that the company has been in the biz since 1973 and managed to grow to just 16 crs in the first 30 yrs. The rapid growth and improvement in the performance has come in the last 6 years.

I personally have not been able to make up mind on which scenario will play out and plan to follow the company and dig deeper. It is easy to assume that the company will repeat the performance of the last 6 years, declare the company to be undervalued and buy into it. I however would prefer to investigate deeper and watch the company for a while before buying into it.