I have been looking at the following two companies for the past few weeks. I have yet to make up my mind on them. I generally prefer to buy at 50% of conservatively calculated intrinsic value of the company. Both the companies trade at a discount to instrinsic value, but above the 50% mark.

The companies are

Grindwell norton

My personal notes on each company

Grindwell norton

Grindwell norton is in the business of abrasives and refractories. The industry is dominated by two player – Carborundum and grindwell norton. Grindwell has been doing fairly well for the past few years. It has an average ROC of 15%+ for the past few years. It has been able to maintain a NPM of 10%+. The average sales growth has been over 15% on an average and the NP growth in excess of 20%. The asset ratios have improved, especially the Wcap ratio and the profit margins have improved from 7-8% to 10-11%. The company enjoys reasonable competitive advantage due to R&D support by parent, strong sales force, decent brand and a wide customer base. There are reasonable entry barriers in the industry too.

Grindwell has recently sold a stake and netted almost 100 Crs from the sale. The Company is debt free and has almost 100-150 Cr in cash and investments. The company is however trading at 20-30% discount to intrinsic value which is above my target price


SRF has the following business segments – Technical textile divison which is
includes tyre re-inforcements, belting fabrics etc. This division makes up almost 50% of the revenue, but contributes to less than 10% of total profits with Pre-tax margins of around 10%. This business segment is facing a lot of competition and has seen margins drop for the last few years. The chemical business makes up 40% of the revenue and almost 90% of the profit. This division is highly profitable with pretax margins in excess of 50%. The profitability of this division has gone up in the last few years. The rest of the revenue is from packaging films business. This business made a loss in 2006 and has just turned around in the current year.

The company has seen margins rise from 4% to around 10% (excluding one time CER gains). The ROC is around 15%+. Sales growth has been 15%+ and NP growth has been 20%+. The company looks undervalued on current measures. However the key point is the sustainability of the margins in the chemicals business. It is diffcult to see how the division would maintain such high margins. If the net margin of the company were to drop to around 6-7% from current levels (which are roughly the average margins), then the EV/Net profit ratio would be around 9-10. At these levels the company is at best undervalued by 20-30%. Need to do more analysis.


  1. Anonymous says:

    Good study on SRF…Please add further

  2. Anonymous says:

    SRF is my watchlist as well.
    Following are the key points which make the stock attractive

    — Low P/E ratio (around 3)
    — Carbon credits are going to be a regular contributor to income and not one time. (Rs 300 Cr/annum min)
    — Diversification away from low margin nylon cord. (chemical business, also talks abt petrochem plant)
    — debt can easily be retired

    The negatives are-
    — Management not very transparent
    — There are talks of stock price manipulation to keep it at low levels (through circular trading)

    Overall it looks a clear underpriced stock.

    There is also an excellent analysis by ANANKRIS on moneycontrol.com message board.
    Those really interested in this stock should definitely read his analysis of over last 6 months.


  3. Rohit Chauhan says:

    Hi alok

    can you let me know where did you find the 300 Cr no. for Carbon credit ?

    The management does not talk about it in the 2007 AR and keeps patting itself in that AR. In the current year’s AR when the profits have dropped, they have made a mention. i was not able to find the exact no. for it.

    In addition if the credits are this big, i would expect the management to give me more clarity on it (300 Cr would be 75% of the profit)

    i had a look at the board discussion and some points come accross
    – the whole valuation rests on the carbon credits
    – expansion plans – moving out from the current low return tyre cord to other businesses
    – possible demerger

    personally this idea is moving into my ‘too complicated and messy’ file with management issues, non core sources of income, lack of tranparency . it may be a perfectly clear to others, but i am finding this idea complicated and messy to analyse.

  4. Rohit Chauhan says:

    the promoters issued themselves warrants for around 3.3 million shares in march 2005 at 85/ share when the market price was 225 +.

    I am not comfortable with companies where the promoters gain at the expense of the minority shareholders. short term you may make money, but my own experience in the long term is bad.

    The company may become an arbitrage opportunity if a demerger happens

  5. madhavan says:

    There’s a post by Sanjay Bakshi on SRF. Might interest you:


  6. Anonymous says:

    Following details were given by ANANKRIS on moneycontrol message board on SRF Carbon credits issued/sold.


    No.- Date of issue- Monitoring period- CERs issued
    01 – 16/01/2006 – 01/07/04 to 30/09/05 – 5,42,829
    02 – 15/05/2006 – 01/10/05 to 31/10/05 – 6,72,271
    03 – 15/02/2006 – 01/11/05 to 31/12/05 – 12,95,449
    04 – 15/05/2006 – 01/01/06 to 28/02/06 – 13,12,676
    05 – 03/07/2006 – 01/03/06 to 30/04/06 – 7,87,990
    06- 04/09/2006 – 01/05/06 to 30/06/06 – 13,00,038
    07 – 02/11/2006 – 01/07/06 to 30/09/06 – 9,34,701
    08 – 21/03/2007 – 01/10/06 to 31/01/07 – 10,33,683
    09 – 01/06/2007 – 01/02/07 to 31/03/07 – 7,71,925
    10- 02/11/2007 – 01/04/07 to 30/06/07 – 9,72,340

    Total CERs issued till date- 96,23,902

    Further, issue of CERs 8,94,239 for the 11th
    Monitoring period from 01/07/ 07 to 30/09/07 is in
    the pipeline awaiting request from the Co.

    Details of CERs sold:

    Period( Qr) – CERs sold – Amount realized
    (Gross Amt./PBIT)

    March2006—- 1.40M -Rs. 93.85Cr/ 88.60Cr
    June 2006—- 1.00M –Rs.133.83Cr/117.69Cr
    Sept.2006—- 1.50M –Rs.148.82Cr/140.90Cr
    Dec. 2006—- 1.15M –Rs.122.28Cr/112.96Cr

    Total —5.05M – Rs.498.78Cr/460.15Cr
    ( Upto the period Dec. 2006)

    After Decemeber 2006 quantity of CERs sold and amount
    realised not disclosed by the Co and CER income merged
    with Chemical Business in the segmented results.

    Segmented results relating to Chemical Business ( including
    CER revenue )during the subsequent quarters given below:
    Period – Net sales Revenue

    March 07- Rs.140.04Cr
    June2007- Rs.131.01Cr
    Sept2007- Rs.127.69Cr
    Total – Rs.398.74Cr

    Considering quarterly average revenue from core chemical segment
    around Rs. Rs.50 Cr,( in case of no volume growth during this period)
    the element of CER income could be to the maximum extent Rs.250Cr ,
    for the last 3 quarters from sale of not more than 2.5Million CERs.
    This leaves not less than 2M CERs with SRF in addition to 0.9M to be
    issued for the period July07 to Sep 2007.

    SRF can generate 3.83M CERs annually from July 2004 and hence
    entitled for 11.5 M CERs for the 3 year period upto June 2007. SRF
    was issued 9.62 CERs during this period, short by 1.9M CERs. I presume that this shortfall can be due to stock of HFC to be incinerated/sold during this period and can be got issued in the subsequent period with in the overall limit of 3.83CERs per year. Storing of HFC gas is a continuous process where as the process of incineration of HFC is not. This is evident from the variations in CERs issued for different periods and incineration
    plant shut downs during these periods.

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