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!!!!

Image: Dino De Luca / FreeDigitalPhotos.net
Bookmark and Share

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 / FreeDigitalPhotos.net

Bookmark and Share
Related Posts with Thumbnails