Thursday, June 14, 2012

Panama Petrochem : A value buy or value trap?

Panama Petrochem was incorporated in the year 1975. The company is in the business of manufacturing and exporting petroleum specialty products.

The company's average ROCE over the last ten years is 28.65%. The number had fallen to as low as 9% in FY03 and is hovering higher than 30% for the last three years. The company at the end of FY12 did not have any long term debt while net current assets amounted to INR 152.63 Crore most of which is held as cash. Out of this $13.99 million (around INR 62 Crore at exchange rate of INR 44/$) came from GDR issue in July 2011, when company issued 4,91,469 GDR at a price of $28.486 and each GDR amounted to 5 equity shares, i.e. at a share price of INR 253.68. The operating cash flow of the company over the last five years has increased sharply compared to the years 2003-2007 but has remained below the net profit of the company for most of the years and was even negative in FY08. The company's total income has risen from INR 31.66 Crore in FY02 to INR 583.65 Crore in FY12. The net profit of the company has risen from INR 1.33 Crore in FY02 to INR 30.63 Crore in FY12. The company's total income declined by 12.8% in FY10 and the net profit declined in FY03 by 68.5%, in FY09 BY 21.1% and in FY12 by 16.78%.

The promoters hold 43.9% in the company. The company was not paying any dividends till FY03. In the last ten years, the company has diluted its equity from INR 3.76 Crore to INR 8.6 Crore, i.e. by more than 128%, which is a big negative for me since a company generating good cash flow doesn't need to dilute any equity or take much debt.

Mutual Fund Holding
There is not a single mutual fund holding this share. This can be considered contrarion positive.

The book value of the company at the end of FY12 is INR 260.2. At the current market price of INR 148, the company is trading at just 57% of its book value. The latest results show that the company hasn't utilized anything from its GDR issue. The current market capitalization is INR 122 Crore and the cash and bank balance at the end of FY12 was INR 152.63 Crore. So if the company is liquidated today, you get more money per share than its stock price. This is compelling valuation except for the promoters.

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Saturday, May 26, 2012

I was wrong about CFS business

I had written about CFS business profitability to head south? on March 16, 2009 but the latest results from Gateway Distriparks show that the reverse is happening. The ROCE earned by GDL at that time was 20.15% but for FY12 results, it is 174.17/639.50 = 27.24% compared to 113.03/586.10 = 19.28% for FY11. Although some numbers do not make sense to me. The result published on NSE website for FY10 shows capital employed in CFS business as INR 273.30 Crore while the latest results on BSE show the same at INR 586.10 Crore, even though the total in all segments in both the results add up to INR 687.94 Crore. The difference started in results between FY08 and FY09 when capital employed dropped in CFS business from INR 441.83 Crore to INR 325 Crore but the depreciation in FY09 was just INR 44.47 Crore. In the same year, the capital employed in Rail Transportation business grew from INR 153.83 Crore to INR 426.89 Crore. Even the last year result on BSE shows capital employed in CFS business at INR 273.31 Crore so this year's results can be considered incorrect it seems but still we can say that even with the results with lesser capital employed, ROCE would come much higher.

I had also mentioned about investment by LIC in the company at an average price of INR 153 in year 2007. The current price of INR 143 is still below the investment price of LIC. The company came out with IPO at INR 92 in 2005 and also bought back shares in January 2009 at an average price of INR 81.


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Thursday, May 24, 2012

Sun TV Network

Sun TV Network was incorporated in 1985. It started with publishing magazines and then diversified in to television broadcasting.

The average ROCE of the company over the last ten years has been 38.35% as per the balance sheet of the company and has risen to 48% in the last year. The company is debt-free. The company at the end of FY2011 has net current assets of INR 921.24 Crore and investments of INR 271.67 Crore. The operating cash-flow of the company over the last ten years has been positive. The total income of the company over the last ten years has increased from INR 147.52 Crore in FY01 to INR 2062.16 Crore in FY11. The profit after tax has increased from INR 40.86 Crore in FY01 to INR 769.76 Crore in FY11.

Even though the company has a single business of broadcasting, its revenue source is diversified. The revenue break-up over the last four years is as below:
Broadcast Fees125.63130.36134.28153.78
Movie Distribution-28.2867.49221.32

This shows that advertising is around 50-60% of the company's revenue, subscription around 25% and 15% comes from broadcast fees and movie distribution. The first two are actually linked together since higher viewership will increase both advertising as well as subscription income.

Promoters hold around 77% in the company at the end of FY12. The promoters seem minority shareholder friendly as can been in the dividend distribution of INR 8.5 per share as interim dividend in FY12. The management's fixed salary is 3% (1.5% each to Chairman and Managing Director and Joint Managing Director) of net profit which is a bit on the higher side.

Mutual Fund Holding
Mutual fund holding was pretty dismal till december 2011 quarter. But in the first quarter of 2012, a large number of schemes have bought shares of this company.

The book value of the company at the end of FY11 was near INR 60 and may end up being INR 70 after this year's results on Friday, 25 May. At the current market price of INR 250, the share is trading at more than 3.5 times book value. At the current market capitalization of INR 9866 Crore, the share is trading at almost 18 times last five years average profit of INR 540 Crore and 13 times trailing twelve months net profit. The company's IPO came in 2006 when shares were issued at INR 875 which for split/bonus adjustment result in price of INR 218.75 today. So the current price is just 15% higher than the IPO issue price in 2006. The company does not look a compelling buy at this price but can be bought after some decline.

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Sunday, May 13, 2012

Hydro Power Sector

Following listed companies are in the hydro power sector in India:

  • Jaiprakash Power Ventures
  • NHPC (National Hydroelectric Power Corporation)
  • SJVN (Satlaj Jal Vidhyut Nigam) 
This sector is utility so returns on capital are controlled by government and the companies cannot charge the amount they wish from their end-users/customers. The following table summarizes their financial conditions:
Financial RatioJaiprakash Power VenturesSJVNNHPC
Market Cap (Crore)9777788022141
Net Worth (Crore)5170720524584
Debt (Crore)12381175314569
Average ROCE (five years)10.1515.206.41
Average Interest Cover (five years)2.55.484.76
Interest Cover (last year)1.628.125.68
Mutual Fund HoldingHDFC, etc...ICICI, Tata, etc...UTI, ICICI, Tata, etc...
Dividend Yield4.23.33
On most of the parameters, except price/book ratio, SJVN is better than the other two. JP power ventures is highly indebted and most probably will not be able to meet its financial obligations sometime or the other in the next few years. How can a value investor like me suggest you to buy the shares of a company whose bonds are not investment grade? So the best investment looks like SJVN at this point of time.
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Saturday, May 12, 2012

Update on Unichem Laboratories

I had discussed about promoters buying shares of Unichem Laboratories on September 15, 2011. The share price was hovering at INR 144 at that time. I had advised the readers to wait for INR 100 to enter the scrip. The share price did go to INR 100-110 between November and December but bounced back sharply and went to INR 160 in January and is still trading at INR 132 and change. But the promoters are still buying shares from open market as can be seen in the transactions below:
DateTransactionQuantityPriceHolding after Transaction
December 16, 2011Buy5,037108.4611,055,157
January 1, 2012Buy2,909120.2811,058,066
January 5, 2012Buy20,877120.511,078,943
January 6, 2012Buy21,920117.8811,100,863
January 9, 2012Buy25,520115.7811,126,383
January 10, 2012Buy16,819113.811,143,202
March 7, 2012Buy7,987126.6511,151,189
March 13, 2012Buy43,063128.7511,194,252
March 15, 2012Buy167,412130.7411,361,664

The promoter P. A. Mody's stake in the company has gone up to 12.39% from 11.61% in the August, 2011. The average buying price this time is INR 126.17. Even the latest results from the company puts the diluted EPS at INR 9.09 and the book value is at INR 84. So at the current market price of INR 132, the share is trading at 1.57 times book value and 14.52 times earnings. Even though P/E looks a bit stretched for a small company, remember that they have record low margins this year. The operating profit margin of 12.49% this year is lower than the lowest margin of 14.19% reported in March, 2000, that is twelve years back!!!! If you trust the promoters, then start buying rather than waiting for 100 on the scrip.

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Thursday, May 10, 2012

Update on Sonata Software

I had written about Sonata Software being a value buy or a value trap on 18 December, 2011. The company's share price at that time was hovering around INR 23 and is still trading at INR 21 and change. I dug more data on insider trading in the company to find following:
PromoterDateTransactionQuantityPriceHolding after Transaction
Bhupati Investments and FinanceDecember 2, 2011Sell2,360,00025.418,433,580
Bhupati Investments and FinanceDecember 15, 2011Sell2,100,00023.216,333,580
Bhupati Investments and FinanceFebruary 29, 2012Sell175,06822.9816,158,512
Bhupati Investments and FinanceMarch 1, 2012Sell269,80022.715,888,712
Bhupati Investments and FinanceMarch 2, 2012Sell254,86221.8715,633,850
Bhupati Investments and FinanceMarch 5, 2012Sell547,21020.9415,086,640
Bhupati Investments and FinanceMarch 6, 2012Sell28,3032115,058,337
Bhupati Investments and FinanceMay 2, 2012Sell5,000,00018.8510,058,337
Viren RahejaMay 2, 2012Buy2,500,00018.858,250,000
Akshay RahejaMay 2, 2012Buy2,500,00018.858,250,000
Except for the last two transactions, all of them are sale of shares by one of the promoter group companies and that too at prices going lower and lower and even the buys are inter-promoter transfer. Even though Bhupati Investments held 15,058,337 shares after March 6 transaction, due to pledging, they held just 933,337 shares on 30 March, 2012. The same promoter released some of his pledged shares on April 30 to take shareholding to 5,283,337 and sold 5,000,000 of them to other promoters on May 2.

There were rumors of multiple companies including Wipro, Oracle and  HCL, Ingram in race to acquire Sonata in the later part of 2010 when the share price was hovering around INR 60. Now when the price is one third of that, nobody is talking about any acquisition. Even the above trading shows conflicting views of two different promoters on the company's future. Let's see which promoter turns out to be right.

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Tuesday, April 17, 2012

Large Disparity across sectors/sizes

Have a look at the following table:
CompanyMarket Cap (INR crore)P/EP/BPrice/Sales
Asian Paints32,00033165
Titan Industries21,00039203
Dabur India19,50035175
Glaxo Consumer11,50035104
TTK Prestige3,90035305

The companies mentioned above are today considered high quality. But look at the figures and see that they are trading at mind-boggling valuations. Price/Book of 30 times for a consumer goods company which was making losses in FY2003 and is trading at more than 35 times TTM earnings with less than 0.4% dividend yield!! All the FMCG companies have discounted more than 5 years of earnings growth in their valuations. Generally, an FMCG company is a reasonable buy if you get it at 2.5-3 times sales. Most of the ones above are trading at 50-100% higher valuations then their reasonable price.

Now look at the table below:
CompanyMarket Cap (INR crore)P/EP/BPrice/Sales
Oil India27,5007.71.72.3
Maharashtra Seamless2,7008.31.51.3
Balmer Lawrie9006.51.70.45
ZF Steering330721.1

There is clearly a big disparity between the valuations of companies in the tables above. On one hand the investors are so enthusiastic about the prospects of the company that they are willing to pay more then 30 times earnings and on the other hand they are not willing to give even a P/E of 10. There is a difference in terms of size in many of the companies in terms of market cap but the gap would narrow down if both the companies are having similar kind of P/E, P/Sales multiples. This is what is called Stock Market!!!!

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Saturday, April 14, 2012

Oil India: A value buy?

Oil India Limited was incorporated in 1959 and became a wholly owned Government of India enterprise in 1981. The company is in the business of oil and natural gas production and exploration as well as transportation.

The average ROCE of the company over the last ten years according to the company website is 21.81% but the reported number is lower than the actual in recent years because the company started accumulating large amount of fixed deposits since 2006 onwards which resulted in lower return on capital. The actual ROCE is much higher than 25% on an average. The total debt of the company at the end of FY2011 is INR 1026 crore while net current assets + investments are at INR (11206 + 890) = 12096 crore out of which Fixed Deposits itself accounted for INR 11524 crore. The operating cash flow of the company over the last ten years has remained positive and has remained almost equal to the net profit of the company. The net sales of the company over the last ten years has risen from INR 2024.2 crore in FY01 to INR 8303.4 crore in FY11, i.e. 15.16% compounded annually. The profit after tax of the company rose faster than sales from INR 467.4 crore to INR 2887.7 crore, i.e. 19.97% compounded annually. The company's sales and PAT both declined just once in the last ten years in years 2002 by 5.4% and 2007 by 3% respectively which shows the stability of the business.

The Government of India owns 78.43% of the company. This negatively impacts the performance of the company. The company has to bear the subsidy burden of selling the petrol and diesel below the cost of production. This shows in the results of the company as the company sold crude oil at average price of $58.54 (INR 2667) compared to the prevailing market price of $87 (INR 4300) per barrel. Due to political constraints, I doubt there ever be a time in our lifetime when this subsidy will go away.

Mutual Fund Holding
There is not a single mutual fund holding shares of this company. This is a big positive for the company since nobody is interested in buying it right now.

The book value of the company is INR 262 per share and so at the current market price of INR 462 per share, the share is trading at 1.76 times its book value. At the current market capitalization of INR 27823 crore, the company is trading at just 12.55 times its five year average net profit of INR 2218 crore and just 7.8 times its trailing twelve month net profit of INR 3564.72 crore. The company seems to be a compelling buy at this price.

Image: Rosemary Ratcliff /

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