Blue Star : A fallen hero

In the past, I have written a lot of praise about Blue Star, ranging from how management utilized buy-back effectively in 2002-2003 to reduce equity capital, how high dividend-yielding low-debt companies turn out to be good investment when Blue-Star price went up from INR 30 to 1700, and how to find next Blue-Star.

Two months back I was discussing the balance sheet of Blue Star for the year FY11 with one of my colleagues. The company had increased its net current assets from INR 297.16 Crore to INR 668.49 Crore, i.e. an increase of INR 371.33 Crore, i.e. 125%. The company's debt to equity ratio suddenly went up from almost 0 to 0.72, and anything above 0.5 for industrial companies is considered bad as per Benjamin Graham. Even in the years 2000-2001, it had hovered around 0.55, i.e. near Graham's cut-off. Even the June 2011 quarter results show that the interest payment of INR 7 Crore was more than 25% of PBDIT (Profit before Depreciation, Interest and Tax) of INR 27.65 Crore. The alarm bells had already started ringing about the company's financials and I told my friend that Indian manufacturing sector seems to be under heavy stress.

Here comes the latest results and the company's interest payment suddenly went up to INR 30 Crore, that is more than twice its PBDIT of INR 14.59 Crore and the company has shown losses.

This set of events show how good balance sheet analysis enables a person to move their money out of a particular scrip at the right time. Hats off to Benjamin Graham.

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How right/wrong I was?

I write this blog and express my views not just on individual companies and their share prices but also overall market. Over the last one and a half year, I had observed on several occasions that Mr Market was either very enthusiastic or very depressed about a particular security or about general enthusiasm in top level companies that are part of Sensex/Nifty. How have I fared in my opinions? Following table summarises my opinion and today's outcome:

Date	Company/Sector/Market	Price Then	My View	Price Now
April 26, 2010	Mcnally Bharat Engineering	370	Negative	110
May 5, 2010	Deepak Parekh (Sensex)	17087	Negative	15792
May 7, 2010	Banking Sector	10505 (Sensex 16769)	Negative	9961 (Sensex 15792)
July 22, 2010	FMCG	3204.37	Negative	3819
September 3, 2010	Sensex	18221	Negative	15792

I also showed positive views on some of the small cap stocks like Indo Borax, Elegant Marbles, Small Caps. Although these companies haven't been multibagger but they have outperformed Sensex over the period they were recommended to now. Except FMCG sector, most of my calls were right in the above table. On the banking sector, I had put underperform rating for the next five years, but over the time period, it has done better than the Sensex it seems. Let's see if I come out winning my call or not.

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Voith Paper Fabrics: A value investment?

Voith Paper Fabrics was incorporated in the year 1968.

Financials
The average ROCE of the company over the last five years has been 15.978% with average operating profit margin of 27.12%. The operating profit margin of around 22% in the last two years was the lowest in the last eleven years. The average net profit margin was 14.52% for the last five years which is much higher than most of the companies in India. The company is debt free with net current assets worth INR 70.93 crore out of which INR 52 crore are just in fixed deposits. The asset turnover ratio of the company decreased from 1.30 in FY01 to 1.15 in FY06 to 0.88 in FY10. The company always had a positive cash-flows over the last ten years but the average in the last five years is lower than what it was between FY01 to FY05.

The average total income of the company has risen from INR 35.59 crore betwen 2000-2002 to INR 50.50 crore between 2008-2010, i.e 4.47% compounded annually. The average net income has also risen to INR 7.49 crore in 2008-2010 from INR 4.63 crore in 2000-2002, i.e. 6.2% compounded annually. The company had one down year in profits in FY08 when the profits declined by 33%. Revenues too declined in FY08 by 10%. 

Promoters
The company is a subsidiary company of a German company with promoter holding at 74.04%. The dividend payout ratio of the company has decreased from 30% in FY01 to less than 20% in FY10.

Mutual Fund Holding
No mutual fund schemes hold this share.

Valuations

The book value of the company is INR 217 and so at the current market price of INR 215, the company is trading just near its book value. If the net current assets of INR 71 crore is removed from the market capitalization, the company's market capitalization of INR 23 crore is less than 30% of what it earned in operating cash flow over the last ten years. The valuations are compelling to buy.

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VTM - A Ben Graham value play?

VTM Ltd's history dates back to 1946.

Financials
The average ROCE of the company over the last five years was 4.614% which is way below the average for BSE500 companies with average operating profit margins of 12.25% and net profit margins of 2.894%, most of the gap going into depreciation. There is a big surge in all these ratios in FY11 most probably due to high cotton prices. The company increased its fixed asset investment from INR 47.56 crore to INR 59.78 crore. The company is virtually debt free with net current assets + investments of INR 46.57 crore while debt at INR 6.23 crore. The company's asset turnover ratio declined from 1.3 to 0.61 between 2004 and 2010 but it went up in the last year to around 1.0. The company's average total income hasn't risen much over the last seven years. It was at INR 110 crore in 2004-05 and is still the same on an average even though the capital investment has gone up from INR 84 crore to somewhere around INR 140 crore. This shows that the business is very capital intensive (remember Warren Buffett's Berkshire Hathway?). If revenues do not increase, how would the profits go up? The profits are almost stagnant or may be declining due to high depreciation of fixed assets investment.

Promoters
The promoters hold around 75% in the company and dividend payout is on an average 50%.

Mutual Fund Holding
None of the mutual funds hold this stock since the company is very small and floating stock is also small.

Valuations
The company's book value is INR 227.47. At the current market price of INR 105, the company is trading almost near its net current assets - debt of INR 40.6 crore. The business is not very good. So I will wait for a higher margin of safety.





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Is Unichem Laboratories cheap?

The promoter of the company, Prakash Mody is heavily buying shares of the company from the open market. See the table below:

Date	Shares Bought	Amount	Average Price
8 Aug	7389	1090247	147
9 Aug	30983	4529405	146
10 Aug	9592	1397938	145
11 Aug	26209	3744218	142
12 Aug	14257	2094638	146
16 Aug	175946	25772570	146
17 Aug	3395	494256	145
18 Aug	5160	762878	147
22 Aug	14572	2091826	143
23 Aug	22580	3199009	142
24 Aug	6282	885110	142
25 Aug	1476	210933	143
26 Aug	2447	352137	144
29 Aug	4169	599724	144
30 Aug	15784	2243806	142
2 Sep	3000	426441	142
5 Sep	226882	32403021	143
Total	570123	82298157	144.35

His stake in the company has gone up from 11.61% to 12.24%. The company's operating profit margin over the last two quarters has been around 14-15%, which is lowest till 2002. Net profit margin of around 8.25% is also the lowest in the last ten years. But even at the current price of INR 144, the company trades at 2 times book and 15 times earnings. The (net current assets + investments) stands at INR 30 per share. The earnings are obviously depressed due to margin pressure, but the high P/E is still not justified. Even though the promoters are showing a lot of confidence in the company, I would wait for price to correct to at least INR 100 to enter the scrip. I already have some bought in 2009 at the split adjusted price of INR 60.

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Eimco Elecon - A Ben Graham value play

The eimco elecon engineering company was incorporated in 1974 as a joint venture between ELECON group and the indian public.

Financials
The average ROCE of the company over the last five years is 15.728% with average operating profit margin of 18.984%. The margins were highest in the years between 2007 and 2009 and in years 2000 and 2001. Net profit margin too were highest in years 2008, 2000 and 2001, in low double digits. The margins have shrinked to 7.2% in 2011 which is lowest in the last 13 years. This shows that the business is under severe margin pressure but still the margins are much higher than the average for all the companies in India. The company is debt free with (net current assets + investments) worth INR 114.05 crore. The assets turnover ratio of the company decreased from 1.81 to 1.06 between 2002 and 2006 but the same has improved again to 2.00 in FY2011. The company had negative cash-flow in FY2009 but the average operating cash-flow over the last five years is equal to the net-profit reported by the company. So the company is providing proper depreciation and not over-reporting the profits.

The company's average total income has risen from INR 72.98 crore between FY00-FY02 to INR 167.49 crore between FY09-FY11, i.e. 9.67% compounded annually. The net profits during the same time has risen from INR 8.653 crore in FY00-FY02 to INR 13.81 crore, i.e. 5.33% compounded annually. The company had three down years in profits over the last ten years, FY03 down by 45.27%, FY06 down by 5.83% and FY10 down by 16%. The revenues declined in two consecutive years in FY06 by 7.24% and in FY07 by 3%.

Promoters
The company is a family owned business and promoters hold 74.05% of the shares as of June 2011. The promoters increased their stake from 73.17% in the quarter ending December 2008. Dividend payout ratio of the company is 20% of the net profit which is less but is fine.


Mutual Fund Holding
As of June 2011, only HDFC growth fund holds this shares and that too bought at INR 216 in 2007 and INR 300 in 2006.


Valuations
The company's book value is INR 242 so the company at the CMP of INR 185 is trading below book-value as well as below its net current assets of INR 113 crore. The trailing twelve months EPS is INR 21.9 so the P/E comes at 8.45. I would recommend a buy on this company.


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Sensex Nifty EPS after FY11 results

It seems all the results are out and the Sensex EPS as of 6 June stands at 18420.11/19.58=940.76. The Nifty EPS stands at 5532.05/20.43=270.78. This compares with 828.5 on 27 May 2010 for Sensex, i.e. an increase of 13.55% YoY and 239.4 for Nifty, i.e. 13.1% increase YoY.

Sensex EPS drops after SBI results

I had tried to give an early indication of Sensex EPS for the year 2011 in an earlier post. I had assumed that since around 46% of the companies; that are part of the Sensex; had announced results that increased EPS by 12.6% YoY, there will be some more gains in EPS when all the companies finish reporting their results. Today SBI announced their horrible results for the year ended March 2011 and the Sensex EPS; which was prevailing at somewhere around 933 (18345.03/19.66) yesterday; dropped to 924 (18137.35/19.63) today. Nifty still does not seem to be reflecting it. This result was before the interest rate hikes of 25 bps of January 2011 and 50 bps of May 2011 since the bad loans take at least 90 days/three months to come into banks' books. God help those analysts predicting an EPS of 1200 or more for FY12 (1100 for FY11 by Rakesh J, 1070 for FY11 by Motilal Oswal, 1250 for FY12 by Raamdeo, 1345 by UBS and 1100 for FY11 and 1250 for FY12 by Credit Suisse). Those who are finding PSU banks cheap on P/B or P/E basis need to rethink about the correctness of the results being published by UBI, Bank of Baroda, PNB, Canara Bank, IOB, Indian Bank, Allahabad Bank, Central Bank of India and Andhra Bank. I had already written about a coming banking crisis in India in September 2010 and I still stick to it.