Archive for the ‘Quick analysis’ Category.

 

Lakshmi machine works
LMW reported  Q3 results recently and overall the result are as expected. I have analysed the company earlier here . The company had a terrible 2009 and reported an almost 60% drop in profits. This was expected in view the recession in all the developed countries.

The topline growth and the profits have now started recovering and are back to around 50-60%  of the pre-crisis levels at around 30 crs per quarter. It will ofcourse take a longer period (I don’t know how long) to reach the pre-crisis levels and surpass it. Overall the company is performing as I thought it would. You can find the detailed analysis here – look for the file valuationtemplatelmw.xls. Finally, I think the intrinsic or fair value of the company has remained unchanged.

IT results – Infosys, NIIT tech and Patni
I have a holding in all of the above companies, though I have been cutting the position size for some time now. Most of the IT companies have declared their Q3 results and it has been mixed bag overall. I am reviewing the result for the three companies I hold.

Infosys had a small drop in the topline (1%) and and similar drop in the bottom line. They have reported a small (around 8%) growth in the net profit for the first 9 months of the year. The company has almost 13000 crs of cash on the books and continues to earn a high return on equity and a much higher return on tangible capital (building , receivables etc). The company has given a guidance of a small growth for the rest of the year and has yet to give a guidance for 2010. The stock price currently is discounting some growth for the next few years. My own estimate of fair value is around 2600-2800 and hence I have been reducing my position in the stock.

NIIT tech reported a 7% drop in topline on YOY basis and 2% increase on QoQ basis. The net profit went up by 10% on QoQ basis and doubled on an annual basis. The increase has been mainly due to reduction   of the hedge losses. If one were to eliminate the impact of the hedges on topline and bottom line, the revenue and net profit are more or less flat. The company has reduced the impact of the hedges on the balance sheet and in the investor call have indicated that they will keep a limited currency hedge going forward – some return of common sense there. The company expects moderate growth going forward. I have also revised the fair value of the stock upwards by around 10%. My personal estimate of fair value for the stock is around 240 rs.

Patni reported results which are in line with that of the industry. It reported a 3.3% growth in topline on QoQ basis and a 8.9% drop on Yoy. The net profit dropped by 17.2 % on YoY and now stands at around 171 crs. The company should be able to deliver to deliver around 500 crs in terms of net profit in 2009 and carry around 2000 crs of cash on the books by the year end. The company also completed a successful buyback during the early part of 2009 at an attractive price. The company results are not great, but more or less in line with the industry and as per expectations. I have revised the fair value of the company upwards by around 5%. My personal estimate of fair value for the stock is around 530.

I think on an overall basis, the IT companies I hold have performed as per expectations. In addition, they are now showing signs of growth for 2010. At the same time the valuation of these companies reflects that and more. As a result the stock price for most of these companies is now much closer to the fair value and I have started reducing my position size as the prices keep rising.

Container corporation of India (CONCOR)
The company reported a 5% growth in topline in the current quarter and a flat bottom line. The company has achieved a 10% growth in topline for the first 9 months and 5% drop in the profit for the same period. The company has two business segments – exports and domestic. The company provides containerized transport for exported goods, mainly out of ports and also provides for domestic transport of goods, mainly through rail services. As expected the export part of the business has shown a drop in profitability due to the slow down. The company has been able to reduce the impact by improving the performance of the domestic business.

CONCOR is a great business with enormous competitive advantage, conservative and good management and good growth opportunities. The company should start growing again once the export business recovers. The company however is not cheap and sells close to its fair value.

Additional note : I am not buying any of the companies reviewed in the post. If however the stock price keeps rising, I may start reducing my positions further.

 
 

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.

 
 

I recently came across this article which highlighted some stocks which have jumped more than 100% in the last one month. Out of curiosity, I decided to do a quick analysis of some of these stocks to see if I may have picked any of these stocks based on the fundamentals and valuation. The analysis which follows has not been done in depth and is usually the quick check I do to reject or continue further research on the stock.

Essar Oil
The statement I check first is usually the balance sheet. Essar oil has a debt of almost 10000 Crores with a debt equity ratio of 1:5. In addition, the company has had losses in the last 3 of 5 years. The management also does not inspire confidence in this company. In a nutshell, the company and its fundamentals are too speculative for me.

Jai corp
The company has a very low debt level and seems to have raised considerable equity, to the tune of 2000 odd crs to fund the SEZ and real estate initiatives . Due to this high level of liquid cash, the company has considerable other income too. The income statement, net of this non core income, shows a profit margin of 6-7% (fy 2009).

Based on an expected turnover of around 400 Crs, the core operating profit after tax could be in the range of 25-30 Crs. Based on the above numbers, the company seems to be selling at a PE of around 40 (after netting cash from market cap and considering only the operating income).

The market is clearly pricing some of the new initiatives in the current price. It is quite possible the new initiative would do well and the current price could be a bargain. However evaluating SEZ and real estate initiatives is beyond my circle of competence and hence I avoid such types of ideas.

KLG systel
The company looks very cheap based on fundamentals selling at around 3-4 PE (based on Enterprise value). However I started with the analysis of the balance sheet and saw warrants being issued to promoters and some strategic investors at a price of around 351 when the market price was in excess of 400. The dilution was around 10-11% due to the warrants. In addition the company has also raised some usd 22 million through Foreign Currency Convertible Bonds.

My analysis of this company ends here. I am not interested in companies where the minority shareholder is diluted by preferentail allotment of warrants at prices lower than market price. If you think warrants in themselves are free, then by that logic call options which are similar to warrants should be free too. Have you seen any call options available for free in the stock market (especially with a strike price below current price?)

If the company needs capital, when why not have rights issue where all the existing shareholders get an equal opportunity ?

Selection criteria too strict ?
Should it be otherwise ? I typically hold 12-15 stocks in my core portfolio. A new idea should be of equal quality and better valuation for me to replace an existing one.

 The above analysis was done in matter of a few hours. Unfortunately (or maybe fortunately) for me all the stars and planets and the rest of the stuff has to line up for me to start investigating the stock further. Even with all due diligence, I manage to get it wrong several times. I am definitely not stepping into those ideas where there are red flags or the company itself is out of my circle of competence.