Plastiblends India - Value Buy

Plastiblends is India's largest manufacturer and exporter of colour and additive masterbatches and thermoplastic compounds for the plastic processing industry. It is part of Kolsite group which also has another listed company Kabra ExtrusionTechnik.

Financials
The average ROCE of the company over the last ten years is more than 20%. The number has been lower in recent years near 17% while it was much higher near 30% in the years between 2000-2003. The tide seem to have turned in the last two quarters and it looks like the good days are going to be back from this year.

Promoters
The promoters hold 59.91% in the company at the end of September 2013. The promoters are buying shares from the open market since last one year and increased their stake by more than 2% since last September when they held 56.84%.

Mutual Fund Holding
Some mutual funds were holding shares till last quarter but nobody holds it right now.

Valuations
The company's book value at the end of FY2013 was INR 90 so at the current market price of INR 88, it is trading below book value. Company has net current assets - debt worth INR 50 Crore while the market cap of the company is INR 115 Crore. The promoters are buying shares heavily from the market and so do I. I would recommend a buy on the company at this price.

Image courtesy of FreeDigitalPhotos.net

Jindal Drilling and Industries : Ben Graham Value Play?

Jindal Drilling and Industries was incorporated in the year 1983 with a focus on providing quality Offshore Drilling, Horizontal and Directional Drilling and allied services.

Financials
The company's average ROCE over the last ten years has been around 21%. The number fell to 16% last year. The company at the end of FY13 did not have any long term debt and the net current assets amounted to INR 262.34 crore. The company also has investements in joint ventures to the tune of INR 114.2 crore and has given loans to the tune of INR 207.03 crore.

Promoters
Promoters held very high stake to the tune of 83.48% in the company till December 2007. One of the citigroup company then acquired 10.47% stake at a price of 1000+ on 25 Jan 2008 when the share price touched all time high of 1088 (split adjusted) that brought the promoter holding down to 74.74%. The promotors held near 75% stake till March 2011. Then some holders were moved out of promoters to public (Bhagyalaxmi Finlease & Investment Pvt Ltd, Satellite Merchants Pvt Ltd, Babul Holding Pvt Ltd) so the promoter holding came down to 53.03% in June 2011. The promoters since are increasing stake in the company when their holding increased to 53.83% in Sept 2012 at a price anywhere between 250-350. Something really strange happened. Even though the company had good cash at the end of FY12 on its balance sheet, the promoters did a preferential allotment to themselves at a price of INR 280 in October 2012 raising around INR 77 crore. This has brought promoter holding to 58.78% in the latest quarter. The citigroup company that acquired shares at the peak had to sell them at loss in November-December 2010 at half the price (Who says FIIs are intelligent?).

Mutual Fund Holdings
Not a single mutual fund holds the shares right now.

Valuations
The book value of the company is INR 216 so the share at the current market price of INR 190 is trading below book value. Everything else looks good except for the fishy transaction of the promoters doing preferential allotment. The company also pays very negligible dividend. The shares of the company can be bought if you feel promoters are not cheating on you.

Image courtesy of domdeen / FreeDigitalPhotos.net

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:

Date	Transaction	Quantity	Price	Holding after Transaction
December 16, 2011	Buy	5,037	108.46	11,055,157
January 1, 2012	Buy	2,909	120.28	11,058,066
January 5, 2012	Buy	20,877	120.5	11,078,943
January 6, 2012	Buy	21,920	117.88	11,100,863
January 9, 2012	Buy	25,520	115.78	11,126,383
January 10, 2012	Buy	16,819	113.8	11,143,202
March 7, 2012	Buy	7,987	126.65	11,151,189
March 13, 2012	Buy	43,063	128.75	11,194,252
March 15, 2012	Buy	167,412	130.74	11,361,664

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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Are insiders fool?

Generally when the Sensex/Nifty trades at more than 20 times earnings, the insider buying to selling ratio remains very low. But when a stock become cheap, promoters buy shares of their own company, both to provide confidence as well as increase their stake in the company at a bargain prices. I had seen this happening a lot between October 2008 - May 2009. Banco Products, Sarla Performance Fibers, Precision Pipes & Profiles Company, Asahi Songwon, ZF Steering Gear and many other companies' promoters bought heavily to increase their holding in their companies. All these companies have generated extraordinary gains since the bottom in March 2009. Banco Products has gone up from INR 15 to INR 70, Sarla Peformance from INR 30 to INR 115 today, Precision Pipes from INR 35 to INR 100 today, Asahi Songwon from INR 13 to INR 68 today and ZF Steering has gone up from INR 100 to INR 295 today. Contradictory to general perception, even at this Sensex/Nifty levels, some of the promoters who were not able to increase their holdings at rock bottom prices in March 2009 have bought shares in their own company between September 2010 and February 2011 and their shares are available today below their own buying price. Some of the examples are given below in the table:

Company	No of Shares Bought (% Equity)	Average Price	Current Price
Dynemic Products	92563 (0.817%)	22.88	22.8
Wimplast	65547 (1.09%)	193.15	160
Ador Welding	23117 (0.17%)	164-201	167
Garware Wall Ropes	23718 (0.1%)	74.17	58
Patels Airtemp	33703 (0.665%)	NA	69

There might be more companies than what have been mentioned here. BSE/NSE does not provide a clean interface to easily find out the way to get insider buy/sell information. This clearly shows that there is a large gap in terms of valuation between Sensex/Nifty and small cap companies. When big companies are trading at 25-40 times earnings, the promoters of small-cap companies are not finding any takers. Some of the selling pressure is coming due to large institutional investor (read LIC) liquidating their stake in a company (read Garware Wall). Promoters may be trying to provide a floor to that.

I don’t think man should have to learn easy lessons in such a hard fashion. You should be able to learn not to pee on an electrified fence without actually trying it. - Charlie Munger

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Why book value matters?

Most of the value investor understands the importance of book value in determining the intrinsic value of a company. Book value represents the hard assets including its inventory, fixed assets minus depreciation and its cash/receivables minus all the liabilities like provisions, accounts payable etc...Ben Graham suggests not to pay much higher than book value while buying shares of a company.

If this criterion is strictly followed, there might be some set of companies that an investor may not be able to invest in ever. These companies include FMCG firms like Nestle, HUL and GSK Consumer since they distribute most of their earnings as dividends and so the book value of the company does not increase much. These companies also work sometimes on negative working capital so their book value will be very less compared to their earning power and so their intrinsic value can only be calculated based on their earning power.

But in bull markets, like the one we are in, investor enthusiasm stops differentiation between these companies and average small/mid cap companies. See the following table for the examples:

* 2006 numbers
Company	Book Value March 2005	EPS March 2005	Share Price September 2005	P/B September 2005	P/E September 2005	Book Value March 2010	TTM EPS	Share Price Today	P/B Today	P/E today
Ador Welding	63.36	19.95	260	4.1	13	108.45	21.22	170	1.57	8
GMM Pfaudler	36.39	5.21	116.94	3.21	22.45	62.9	8.07	94	1.5	11.65
GM Breweries	25.63*	14.3*	117*	4.57*	8.18*	60.12	17.73	101.8	1.69	5.74
India Nippon	122.4	22.86	286.5	2.34	12.53	187.17	30.95	242	1.29	7.82
Gateway Distriparks	62.39*	7.88*	131.4*	2.1*	16.67*	61.91	7.4	120	1.94	16.22
TV Today	35.58	2.83	96.15	2.7	33.97	52.56	-7.17	62	1.18	NA
Voith Paper	141.15	17.22	200	1.42	11.61	217.81	21.44	200	0.92	9.33

Most of the companies were purely trading at that time based on their earning power and the importance of book value was completely ignored by Mr Market. After more than five years, they are trading at prices lower than what they were trading at in 2005. The loss is not even compensated from dividends since capital erosion is far more than the cash received by an investor from dividends. The story may not end here. In the bear market of 2001-2002, these vary companies were trading at a steep discount to their book value and the same may happen when the next bear market comes. This doesn't mean the investor should shy from buying these names since the loss would be a notional loss unlike the loss that has happened over the last five years which is real.

The typical experience of the speculator is one of temporary profit and ultimate loss. - Benjamin Graham

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Sometimes number two (or even five) is better than number one

This is a long post with some examples. This post is to highlight the fact that it is not always number one in any particular industry, either in terms of sales or profits, who is the best. There might be special situations when some company down the rank in terms of sales and profits doing better than the leaders in its industry.

Elegant Marbles - A Ben Graham value play

I was looking at the list of companies trading below their book value and came across Elegant Marbles and Granites. The company's share is trading at INR 47. The company has equity worth INR 4.5 Crore of 45,00,000 shares of face value INR 10. This translates into a market capitalization of INR 21.15 Crore.

Negatives:

1. The company's business is not anything to write home about. The company is in a very competitive industry and profit margins are not high. The OPM varied between 3-7% in the last five years
2. Over the last ten years, company has paid dividend in each year except the year 2002. 
3. The company has mostly remained profitable except in 2005 when the company had an operating loss but due to other income the company remained profitable at net level. 
4. The tax/PBT is also less compared to 30% tax rate without any incentives. Tax/PBT was less than 10% in four out of the last five years.

Mr Market is noticing us

A few days back I had pointed out Mr Market's discrepancy in valuing two companies with almost the same kind of business profile. It seems that Mr Market has taken notice of our findings and the discrepancy and gap is reducing. I am talking about valuation gap between Titagarh Wagons and Texmaco. The market capitalization of Titagarh Wagons was 625 Crore at the time of writing previous article compared to 1717 Crore of Texmaco. Now Titagarh Wagon's market cap has gone up to 770 Crore while that of Texmaco has remained stagnant. Thus Titagarh Wagon share price has appreciated by 23.2% and that too in a span of just over three months. Our assumption was that Titagarh is undervalued by around 40% compared to Texmaco and we were expecting a market cap of around 1050 Crore for Titagarh which translates in to share price of around 550. Let's see if we get there or not.

You will not be right simply because a large number of people momentarily agree with you. You will not be right simply because important people agree with you. You will be right, over the course of many transactions, if your hypotheses are correct, your facts are correct, and your reasoning is correct. - Warren Buffett

Ch** bhi main, Kotwal bhi main

I was reading the list of companies trading at a big discount to their book value, and found one of them interesting. The company's name is "Priya Dyes and Chemicals". I looked at the annual results of the company and found that this might be a turnaround case in chemicals sector. I went to company's website and started reading at its annual reports. What I found in their "Auditor's report" section was that the name of the auditor is "M/s. M. L. Bhuwania & Co." and the name of the promoter is "SHRI A. K. BHUWANIA". The other surprise was that the company's name has changed to "Priya Ltd" and the biggest segment of sales for the company is "electronics items", "PCs", "thin clients", etc... The company was making losses in the year 2001-2002 and had accumulated losses till some time back. Don't know if the title fits with this company.

Fru****ted Promoters?

I want to introduce to you one fru****ted promoters, that of a company named FDC. Have you seen good companies buying back their shares at lifetime high price? (please exclude AA group companies from good companies). FDC is going to do that as mentioned here. The company is buying back its share upto a maximum price of INR 60 while the lifetime high for the company's stock price is INR 66 made on date 15 Dec 2004, yes almost 5 years back. That is the only reason why promoters are fru****ted. It has been five years and the company's stock price has gone down instead of going up. What about fundamentals? The companies profits have increased from INR 66.27 Crore in FY2004 to INR 83.21 Crore in FY2009, an increase of 25.6% while the stock price has gone down from INR 66 to INR 51.4, a reduction of 22.2%. This is not it. The company already bought back 51.82 lakh share at an average price of INR 34.31 aggregating INR 17.78 Crore during the first buyback plan announced on November 18, 2008. So the equity capital has decreased by around 3%, i.e. the market cap of the company from peak of INR 1263.64 Crore has gone down to INR 962.28 Crore i.e. by 23.85%. How is P/E of the company affected? The P/E in December 2004 was around 19.15 while today it is 11.56, a reduction of 40%. I agree with promoters that the company is undervalued at INR 51.4 and have a stake in the company but of course at a much lower price than the maximum buyback price. Happy Value Investing!!!!

Investors in Midcap stocks got a raw Deal

Investors in several midcap stocks are looking at a price the stocks had in mid 90's. Following is the small list that I had seen so far

Company	High Price	Year	Current Price/Equivalent Afert Bonus or Splits or Rights
FDC	500	1999	30/600
Kabra Extrusion	160	1992	70/140
Elgi Equipments	500	1997	30/600
Ador Welding	205	1996	86/130
Savita Chemicals	250	1994	125/210
Automotive Axles	125	1996	85/85
Balmer Lawrie	350	1992	230/275

The companys' fundamentals have improved a lot and also their profits and earnings per share. The market was pretty bullish on these stocks in mid 90's and is very bearish at this time, both unwarranted it seems. All of these companies have paid continuous dividends over the last 10 years and their balance sheet do not contain big debt but their prices reflect the most pessimism.