Simran Farm - Query

Friends, 
I got this query from Kumra.


Hi Team,

Its true that simran farms is a gr8 pick but for no reason it has fallen down from 85 odd levels to 40....do u have any reason for this??? 


Whilst replying I realised that there were several reasons hence I am replying through a new post. Please appreciate that the reasoning given is my understanding of the situation.


The reasons are as follows.
a) The general downtrend in the market has reduced midcaps and smallcaps by an average of 50%-100% from their highs.
b) Monsoons are never a good time for poultry industry especially in North India because of festivals like "Navratri" etc. A lot of people also turn veggies during "Saawan".
c) Floods in North India led to dumping of products by farmers and this plummeted rates. Read this article on Economic Times.


Hence the profit margin for Simran plummeted in September 2010 quarter.


Let me leave you with a very interesting comparison between Simran Farms and Srinivasa Hatcheries. Sales for both the companies are about same but look at the market cap of both companies. Check it out guys.
Some of the difference can be ascribed to low levels of profit margin of Simran. But 16 crores compared to 114 crores. Thats a lot of difference. Isnt it?


Just imagine if Simran gets even close to the profit margins of Srinivasa Hatcheries.


Till my next post happy investing.

Chicken and egg story

Inflation seems to be on everyone's lips nowadays. Not because it is fashionable to talk about inflation but because its hurting everyone quite bad as soon as you venture into the market. On one of my recent visits it just occurred to me that amidst all this price rise if we could find a company which was benefitting we could possibly hedge the pinch to our pockets, (i.e., the increase in price of daily food would be offset by the increase in the share price of the company gaining from the inflation)

Hence, I put on my thinking cap to scout for companies which would benefit. I started trying to find companies which were producing and selling onions, garlic or tomatoes or other pricey vegetables. Soon I realised that my efforts were in vain.

However, a few days later whilst I was dining out at KFC I got the company I was looking for. It was companies engaged in the poultry sector. I tried verifying at the market (Eastern India) and realised that the prices of eggs and chicken too had shot through the roof. An average of 33% rise whilst the fodder price would not have increased to the same extent. However this was lot less than what had happened to the prices of vegetables. Hence I am sure the consumption of meat products must have substituted to some extent the usage of vegetables.

Again we add to this the fact that the cold has been particularly severe this year and the consumption of meat products go up quite a lot during winters you will realise what I am getting at.

Volume increase + price increase+ not much increase in price of input raw materials (Ideal combination for profit growth)

And the companies are

1) Venkys
2) Srinivasa Hatceries
3) Simran farms (My favorite as it has the potential to double form current levels of Rs 44 odd)

All of these have the potential to give atleast about 50% gains after the results come out. If you think my reasoning is good enough go for it guys. However, if you think my reasoning is flawed do let me know

Till my next post happy investing

Bonus and split – a valuation perspective

Friends, a belated happy new year to all of you

I was again quite busy for the past couple of months. Hence my absence. Unless some other assignment comes up I think from now on I should be on this blog atleast once every fortnight.

But in hindsight it was actually quite good to be away because it saved me from the ignominy of discussing a stock and then watching it crash. Its even better considering that some stocks have now come at mouth watering levels. Will try and dwell on them in the posts to come. But this post is largely dedicated to my views about bonus and stock split and what they actually mean.

In recent times the number of companies doling out bonus shares or doing share splits seems to have increased dramatically. And this phenomenon seems to cut across sectors and market capitalization. 
And what happens when these corporate actions are announced. The share prices invariably shoot up. There is a common feeling amongst the shareholders of being rewarded when they get a bonus share. I for one have never understood what difference it makes and why the prices should go up suddenly because from a valuation perspective nothing changes.  Thus I felt I should share my thought with all of you and get your inputs as well.
Before I go any further lets understand what happens to the equity share structure of a company when bonus shares are issued or share split happens.
First the difference.  In case of bonus shares the paid up capital increases and there is a corresponding reduction in the reserves. On the other hand in case in case of share split neither the paid up capital increases and nor is there a reduction in the reserves of the company.
But in both these cases the effect is the same. The number of shares increases.
Now to the valuation aspect of bonus shares / stock split. There are broadly 3 ways we could look at the valuations of a company.
a) Enterprise Value / EBITDA – This essentially means the value of an enterprise with respect to its cash earnings.
b) Book value per share – Simply put, this is nothing but the value of a business (assets less liabilities) divided by the number of outstanding equity shares.
c) Earnings per share – This again in simple terms would mean the net profit of a company divided by the number of outstanding equity shares.
To my mind the 3 measures mentioned above are key to identifying value.
So lets take an example to understand the implication of bonus shares / stock splits.
Suppose the number of outstanding shares of Company A is 1000 of face value Rs 10. It decides to issue bonus share in the ratio of 1:1 (one equity share of one share held). Say the ruling price of equity share in the market is Rs 400.
So, after the bonus shares are issued an investor holding 100 shares initially will have 200 shares and the ruling share price of Company A's shares would become close to Rs 200.

What else changes. To my mind nothing else. Assuming the post bonus price to be closer to Rs 200 the EV / EBITDA measure will remain about the same. The book value and EPS will become half of what it was pre bonus. But you will have more number of shares. Please note that if the price remains at Rs 200 then the value of investment will remain closer to Rs 40000. (ie Rs 400 X 100 shares = Rs 200 X 200 shares)

So what is the free share that we talk about?

Similarly in a stock split the same thing happens. A 1:1 split will have the same effect as a 1:1 bonus except that the face value of shares in both cases will be different.

So what is the purpose of issuing bonus shares (rewarding shareholders....huh) or doing stock split? It only increase liquidity which means you can find sellers when you want to sell and will find buyers when you want to buy at smaller levels of price.
A classic case is that of SEINVEST. When it was ruling at Rs 350 odd in March 2010 trying to buy even 500 quantity would have taken the price up to Rs 375 and vice versa.
Whereas look at it now after the bonus and the split.

However, where bonus shares has an advantage and scores over stock split is with relation to the tax benefit it provides if used judiciously. That process is called bonus stripping and you can read more about it here. (Bonus stripping)

Till the next post, happy investing

Sathvahana Ispat (BSE Code - 526093)

This one is a clear case of mistaken identity. Sathavahana Ispat is a Hyderabad based company which is engaged in the production of  coke. However, that is not how the analysts seem to be covering it. Here is one report by Sunidhi securites. (Report). Am sure if you search on the internet you will find some more reports.
However, I have my apprehensions. Not on the findings of the report but the perception of which industry Sathavahana belongs to. Before I dwell further on my thoughts let me give you some background about what Sathavahana is all about.

This company was incorporated in 1989 and manufactures pig iron through the mini blast furnace (MBF) route. In terms of cost of production the MBF route is not as effective as a proper blast furnace. However, its advantage is the low capital cost required. Subsequently this company also set up a coke plant to cater to its coke requirement. As an offshoot of the coke plant and to make efficient use of the Coke Oven gas (COG) the company also set up power plant. As of June 30th 2010 the capacities are as follows.
a) Pig Iron - 0.21 Million tonnes
b) Coke - 0.30 Million tonnes
c) Power - 30 MW
Stemcor the world's largest steel traders is an investor in this company.(Website)is one of the investors in this company and has just less than 15% stake in this company. Do you know the price at which it invested in the company. Stemcor has invested in this company at the rate of Rs 60 per share along with the promoters. (BSE notice).


Typically a MBF uses about 600 Kg of coke for every 1 ton of pig iron production. Thus this company already has an excess of coke. It is adding a further 0.15 million tonnes of coke making capacity and about 20MW of power generation capacity. (Source: Annual report 2010 - Directors report). All this expansion is going to be completed in the quarter ended 30th September 2010. Please note that there has been no increase in the pig iron capacity. Thus, it technically becomes a coke making company which also makes pig iron rather than a pig iron manufacturer which also manufactures coke. Need more evidence of this being a coke making company. Have a look at what Stemcor has invested in the company for. Not for the pig iron. Its coke. (Stemcor announcement)


Further evidence can be had if you you look closely at the Q1 FY11 results. All you have to do is to have a look at the segment information. Coke making + power generation has capital employed of 129 crores which is about thrice that of the capital employed in pig iron making. Need more evidence. Stemcor


Now for some more interesting observations. About 75% of the gross revenues come from coke making and power and about 78% of the profits come from coke + power. Even last year this part of the business was making profits even though pig iron was making losses.  If the Q1 FY11 results are any indication the company should close FY11 with EBITDA of about 75 crores of profit which is double that of last year. And mind you this does not include the additional profits that the additional coke making and power generation capacity is going to bring. The additional coke made would all be sold. According to Gujarat NRE coke MD (Link)coke is likely to be in short supply during FY11 and its prices are likely to firm upto above $500 per tonne. At 10% profit margins the addition EBITDA could be in excess of 30 crores from coke itself. (=$500X10%X150000X46). Not to mention the additional income that power is likely to bring.


Ennore coke with about the same capacity and with about 9 crores PAT trades at a MCap of about 166 crores which is the same as this company which could post a net profit in excess of 50 crores. Also it trades at a PE of about 18 whilst Sathavahana is at a PE of  less than 7 times on the basis of FY10 financials.
This makes this company a classic case where there is going to be profit expansion as well as a chance of PE rerating. Let me know if you liked it.


Till then happy investing


PS: A lot of you have written to me about the last 2 posts about Ganesh polytex and Southern ispat and your concerns surrounding them. Will cover them to the best of my understanding in the next couple of posts.

Southern Ispat & Energy (BSE Code - 531645)

This company is not about some niche story. This is a case of sheer undervaluation of stock. Again this is no great analysis. I just managed to chance upon the stock. If one of you would have looked at the financials I think you too could have recommended this stock as an investment opportunity.

Website : Southern Ispat & Energy

This was just one of the companies till the end of FY09. However, it is after FY09 when the management started taking a more aggressive strategy. And thus last year that is FY10 has been stellar.
Lets just give you pointers to what I saw.

a) Revenues have grown from Rs 39 odd crores in FY09 to 272 odd crores in FY10 (about 7 times)
b) Profit before interest and tax has grown from Rs 1.56 crores in FY09 to Rs 9.78 crores in FY10 ( about 6 times)
c) PAT has grown from Rs 0.73 crores in FY09 to Rs 7.33 crores in FY10 (10 times increase)
d) However during the same time the interest has gone up from Rs 52 lacs to Rs 62 lacs. The interest numbers not going up too much suggests that the growth is not burdened by debt.

If you look at the 1st quarter numbers they seem to vindicate that the company is clearly on a growth path.

(June 2010 results). Don't think these would need any further analyses.
 

Now what has the market done to its share price for all this announcement.


The price has plunged from Rs 48 odd levels in January 2010 to about Rs 13.
This means a PE of about 2 and a market cap of about Rs 14.5 odd crores based on June 2010 shareholding pattern. (1.1 crore shares X Rs 13)

So what next is in store for us. The following news flows could give some pointers to the future prospects of the company.

a) Meger of privately held Kerala Sponge with itself
b) Own power generation through waste heat recovery in the steel plant as well as coal based plants.
c) Purchase of company in Gujarat. (Management interview)
Some digging on the name of the target company revealed the name Newtech Forge & Foundry Limited. (Source link) - DealCurry.
You can check out the website of the target company on this link. (Newtech) 


What does all of this mean?
a) The company is integrating both backward and forward and this am sure will be reflected in the financial performance in future.
b) It is also alive to the opportunity that generation of power presents in current times.
c) The forward integration is infact even more interesting when the product portfolio of Newtech is looked at.
Did someone mention getting into auto parts manufacturing? Well if the entire company is being acquired then that is what is going to happen.


The board meeting on 7th April 2010 gives us some insights into how all this expansion will be funded. (Link)
You can imagine the scale of expansion.

The company has just recently concluded a GDR issue of about 3.23 crore shares.

Some of you all must be worried by now about the extent of promoter contribution. Yes, you are right it is quite low. Its about 20% and has remained constant all these years.  Frankly, I dont know why it is so low. But my hunch is that in future with the merger of Kerala Sponge the promoters share should go up as Kerala sponge is a privately owned company. Secondly I think the fall in share price could also be because the management wants to mop up shares at a low price. 


Now the interesting bit. On 27th of May 2010 1 crore warrants were issued to non promoters at Rs 32 per share (Rs 10 face value + Rs 22 premium). (Share warrant issue)


I have started investing. Do let me know if you think I have got it wrong somewhere.


Till then happy investing.

Ganesh Polytex - update

The stock price of Ganesh Polytex hasnt really moved as per my expectations since it was discussed on this blog. However, thats not affected the developments in the Company. So lets see what all has happened and its ramifications.

Ganesh Polytex has a website and I was lucky to have found it. Request you to go through it once. (Ganesh Polytex). In case you dont have too much time may I request you to atleast look at the corporate presentation once. (Corporate presentation). Once you have gone through the website I dont think you will need a 3rd party to tell you as to why it is a value buy even at the current levels.

For the ones who are still not convinced lets look at the questions that might arise.
a) A lot of corporates nowadays have snazzy websites but what is the possibility that these guys will deliver.
b) Is there any evidence to suggest that there is any method to their madness. In other words has the management lived up to its promise.
c) How confident is the management about the potential in the business potential.

The answers are as follows.
a) The website and corporate presentation does not make lofty claims. It does not go too far into the future. Infact it seems to present a very well thought out plan which incorporates the financing aspect rather well. This is best explained by what the management plans its debt equity ratio to be. When other corporates see a good opportunity and want to expand they over leverage whereas this company wants to maintain its debt equity ratio at 0.8 levels. Inspite having a business plan which would more that triple profits in the next 2 years the company is keen to keep its debt at manageable levels. Very commendable to say the least.
To top it the cash being generated is phenomenal. From just Rs 10 crores in FY09 the amount has gone up to Rs 24 crores in FY10. With a ROCE% of close to 16% you can imagine the impact on profits.
b) The answer is an emphatic yes. And the reason is simple. Just try and look for the execution of projects. Absolutely right on time. The economic scenario around the world has had no impact whatsoever. To my mind timely project completion is the best way a company can assure its stakeholders of it ability to create wealth. To top this execution capability the management seems sanguine enough to realise that forward integration will lea to further value creation. Hence it is also setting up a facility for manufacturing Recycled partially oriented yarn or POY.
c) Check out this link. Share holding pattern. These guys have increased their shareholding from about 45% to about 52%. And to top it the promoters are issuing to themselves approximately 30 lac warrants convertible into equity. This is approximately about 40% of the current number of shares held by them. From an investor's point of view I dont think anything can instill more confidence than capital infusion by the promoter.

If you go to the section "Analysts covering Ganesh Polytex" on this link you can find a variety of analysts covering this company. All have different targets and I suggest you go through them. Especially the one by HBJ capital is particularly interesting.

But if you are looking for targets price I suggest you refer to the 2nd last slide in the corporate presentation. This company is planning a revenue milestone of Rs 1000 crores within the next 5 years. The revenue in FY10 was Rs 200 crores only. This means a five fold jump. Again the margins are also likely to improve significantly in future due to forward integration. So the profits should also see atleast a 5 fold jump. Infact more. To top this the current PE is hovering around the range of 6 which is par for the course if this company is treated as a textile company. However this is not a textile company. This is a waste management company and hence its PE is bound to be rerated in the times to come.
The only uncertainty is the way the expansion is going to be funded. Depending on the funding mechanism I would be looking at returns of about 5 to 10 times in about 3 years.

Happy investing

Am back

Friends,

The last few months have been terribly tiring for me. Was extremely busy in both my personal and official life. But things have settled down now and I will soon start updating my blog.

And yes thanks for all those mails.