Nesco Ltd

We value investors are a funny breed. I have over the past couple of years experienced that though we might share the same framework and thought process for some explicable reasons the portfolio of value investors rarely seem to match beyond maybe 20 – 30% of stocks. I regularly compare notes with my fellow friends and value investors Rohit Chauhan and Neeraj Marathe ( and a few more ) and funnily I have found that all of us have different stocks that we are comfortable with.

So it was a interesting that during the last week of December it transpired out of conversations/emails that all three of us have been independently looking at a company - Nesco Ltd. So we decided that post the year end break without discussing individual thought processes or our view on the company, we will put out posts on our blogs with our perspective on this investment opportunity. We thought it would be an interesting exercise for us as well as the readers of our blogs to have a post on the same company at the same time. The idea is not to see who is right or who is wrong. All three of us know that even if we reach a consensus, all three of us could be very wrong and even if all of us have different conclusions, all three could be very right! Well thats the best thing about investing, there is no one way of doing things.

You can check out Neeraj Marathe’s post at  http://neerajmarathe.blogspot.com/  and Rohit Chauhan's post at  http://valueinvestorindia.blogspot.com/ 

So here goes my side of the story 

Nesco Ltd was established in 1939 as New Std Engg and operated in the capital goods business. The company had plants in multiple locations in Mumbai which it finally consolidated at a single location in Goregaon on the Western suburbs of Mumbai with a 70 acre plot.

The company started incurring losses in its capital goods business and gradually shifted to the business to Gujarat and converted the Mumbai land bank into a exhibition and convention centre. The size of the land bank coupled with close proximity to the airports and the national highway has enabled it to become one of the premier exhibition centres in the country and has conducted over 500 exhibitions and events at the location. The closest competitor in Mumbai, Nehru Centre is less than 1/15^th the size in terms of exhibition space.

The company has also converted its old plant sheds into IT parks and is in the process of constructing a large IT park ( IT park 3). IT park III will have nearly 8,00,000 sq feet of space and the company has leased  out a significant chunk of this project which is under construction and should be ready for fit outs in the next couple of months. 

The management has been conservative and has repaid the debt on the books and has used the internal accrual route to fund expansion for the IT park that it is setting up. The management has clearly stated plans for IT park IV and IT park V where it intends to use the cash flow generated out of the exhibition business and rental income to fund construction of the remaining IT parks.

Financials

FY 2011

a) Income

1)       Convention Business -  65.62 crores ( up 21% over previous year)

2)       IT Park ( rent Income ) – 51.61 crores

3)       Capital Goods business -  16.82 crores ( Down from 24.8 crores in the previous year)

4)       Income from investments and other income -  10 crores

b) Cash/ Investments on Balance sheet -  168 crores

c) Net Profit -  68 crores

d) Cashflow from operations -  78 crores

HY -  2011 -2012

a) Income

1) Convention Business -  25 crores ( HY 2011 -  21 crores )

2)       IT Park ( rent Income ) – 51.61 crores

3)       Capital Goods business -  15.29 crores (HY 2011 -  6.61 crores )

4)       Income from investments and other income -  3.15 crores (  HY 2011 -  3.63 crores )

b) Cash/ Investments on Balance sheet -  215 crores

c) Net Profit -  25 crores

Dividend policy

The dividend payout ratio has been poor because the management has chosen to reinvest the cashflow in construction of the new IT building. The management intends to maintain the same as it is averse to taking debt and will use internal accrual to fund further construction over the next four to five years. One can’t argue against this thought process of the management considering the high operating margin and ROCE.

Valuation

The company is currently available at a market cap of Rs 800 crores with no debt on books. Against which we have

Cash / Investment on Books -  215 crores

Net Profit – 68 crores ( Last year) 

IT Park III should start contributing from next year and on a conservative estimate of Rs 80 per sq feet should generate an additional Rs 50 crores of revenue in FY12-13. 

So net cash of the company is available at 5-6 times and which would appear low for a company with high ROE and with steady cashflow and huge entry barrier to the business.

Risks

1)       Though cashflows over the next 4- 5 years are slated to be lined up for construction of IT park IV and V, subsequent to which there is lack of clarity on what the management intends to do with the cashflow going forward. The bladder problem of management either earmarking the cash for its capital good business or blowing it up into unrelated diversifications exists.

2)       The historical low dividend payout ratio though can be argued as logically correct at this stage of the business could however turn out to be a constant thought process for the management.

3)       The biggest risk that I perceive is that the entire business model is constructed around a piece of land in a single location in Mumbai. Mumbai is currently the most expensive city in this country with respect to real estate prices. There is a situation of oversupply of commercial property in Mumbai. The company stands exposed to not just a generic correction in real estate prices ( hence associated rent income )  but more importantly derating of the Mumbai real estate market. There is a increasing trend of companies shifting their IT / ITES operations out of Mumbai to other locations like Bangalore/ Pune/ Gurgaon etc. Case in point is that Intelenet which occupies one of the building did shift a significantly large process of over 2000 ppl to Aurangabad. TCS Eserve which occupies one of the other buildings is expanding its operations in Ahmedabad and other Tier II cities. Considering the 4- 5 year window when shareholders could possibly look at actual cashflow, this is a large risk that the business carries.

 My viewpoint

Prima facie the company appears to be cheap with relatively steady cashflows. I intend to look at company from a different angle.

Is Nesco a cash bargain / holding company and hence should be valued accordingly?

Lets examine the management competency variables

1)       The biggest achievement of NESCO is the piece of land at Goregaon which it fortuitously acquired a long time back.

2)       The current business model and cashflows are dependent on this piece of land.

3)       Can we say the management has competency in the real estate business and can take up more projects beyond this piece of land like any other real estate developer. 

4)       Is the same true about the Convention business? Do we think the management has competency to set up x more convention centres across the country and run it?

5)   The only operating business that management is running which is the capital good business has a chequered past track record.

So lets flip the coin and look at NESCO as a holding company / cash bargain opportunity.  We have a plot of land which on a conservative basis can be valued at RS 2000 crores + 200 crores ( Cash on balance sheet) = Rs 2200 crores.

This piece of land through rent and the convention centre generated about  68 crores of net profit last year . (I m keeping the calculations simple at this point of time without valuing the capital goods business separately) 

Effective yield of 3.4%. This yield should go up to about 5 % with the IT building III coming to play.

The market today values

Holding companies -  25% of intrinsic value

Cash bargains  -  40-50% of cash on balance sheet

 ( One can argue on the merits and demerits of these discounts but if one feels otherwise clearly there are better managements who could  be looked at for cash bargains)

 Considering the relatively lower yield being earned as compared to other cash bargains and management risk we can value the company at about 40% holding value.

 Value of the company -  40%* Rs 2200 crores -  880 crores

Current market cap  - Rs 800 crores.

Conclusion

Considering the lack of visibility of cashflow payout to the shareholders over the next 4- 5 years, I would like to look at this opportunity a couple of years down the line as clarity emerges on the management’s thought process and visibility on dividend payout and deployment of future cashflows.

Abbott Labs

I had originally put out a post on Abbott labs about 2 year back when I added it in my portfolio. The link is enclosed below.

http://investingvalues.blogspot.com/2008/05/stock-idea-abbott-india.html

I had bought it around the Rs 540 mark when the markets were around the 16500 range. The stock ended today at 1134 with the index at 17,400 levels. Along the way I sold about 50% of my holding around the 735 mark and continued to hold the rest.

So on a like to like comparison Abbott has delivered me over 110% return as compared to the Index which delivered about 4% in the same period. ( I haven’t factored in the dividends that came thru and the share buyback that took place).

Thought process

1) My original premise on Abbott was the fact that it was a great business with high ROE and throwing out surplus cash every year. Though there are other pharma companies with a similar structure, what I liked about Abbott was the fact that the parent globally had a philosophy of returning cash back to shareholders in the form of dividend or share buybacks which made it more attractive as a holding.

2) I also along the way anticipated that the parent which was generating surplus cash would direct that surplus cash into acquisitions with a greater focus on emerging markets. Abbott acquired Solvay and followed up with its current acquisition of Piramal Healthcare making it the largest pharma company in the country.
The market has of course carried out a round of PE re-rating and assigned it a PE in sync with large MNC pharma companies from the tier 2 pharma company PE that it was getting.

Doesn’t all of the above make me sound like a great analyst?

I want to bring here the interesting concept of “Hindsight Bias”. To quote Wikipedia “Hindsight bias is the inclination to see events that have occurred as more predictable than they in fact were before they took place”. Simply put we believe that we predicted or were prepared for event that have happened in the past. Invariably most people will recognise hindsight bias when something goes wrong. For Ex Most people will tell you that they knew that the sub prime crisis was waiting to happen.

The real challenge of hindsight bias to recognise it when something goes right for you. For ex In Abbott’s case my hypothesis was based on point 1 of the thought process that I have listed above.

Point 2 of how I predicted that they would be acquiring companies in India and become the largest pharma company in the country is complete hogwash and a attempt at making me look very intelligent and insightful.

So the return that the stock generated from about Rs 540 to about Rs 725 was my stock picking skills but the return from there onwards to 1100 bucks is pure luck :-). But then I m not complaining.

I though however believe in a concept which I call “ Positioning for luck”. Will write a separate post on that.

Flurry of activity - Altered Annual Averages

Last week was a flurry of activity for me in terms of the transactions done in the market. I think I managed to alter my annual averages. I tend to rarely trade so it is invariably 1 or 2 transactions a month on which I would disturb my broker.

Solvay Pharma
I had written earlier on Solvay Pharma after the global announcement by Abbott Labs to takeover the Pharma division of Solvay Pharma globally.
http://investingvalues.blogspot.com/2009/10/kahi-pe-nighaein-kahi-pe-nishaana.html

I had entered the stock with the thought of seeing where the market prices the stock post the announcement. The stock has finally settled around the 900-920 mark and I exited the stock with a nominal loss. Will now wait and monitor to look at opportunities where the market could potentially misprice the stock. Afterall there is atleast 6-9 months before the open offer could get announced.

Abbott Labs
I had originally posted on Abbott Labs here.
I had also written about the Solvay acquisition seems to have unintended consequence to the Abbott stock. I exited 50% of my holding in Abbott around the 735 mark. The stock has given me a 36% return versus the Bse sensex which has delivered about 3% return in the same time frame. I haven't factored a additional 3% dividend return and the share buyback that happened along the way.

Suashish Diamonds

I entered and exited Suashish Diamonds on last Friday. One of the few day trades that I would have done. Will write a separate post on this interesting case.

Gwalior Chemicals Update

I had earlier posted on Gwalior Chemicals at this discussing about the opportunity.

http://investingvalues.blogspot.com/2009/06/gwalior-chemicals-special-situation.html

The deal has been consummated with shareholder and regulatory approvals coming through. Except for a amount of 75-100 crores the company has received the balance amount. This amount is currently lying in a escrow account which will be released to the company on achieving some of the deliverables stated in the deal. I at this stage don’t see to much hiccups on this count.

Management had announced a board meeting on the 23rd Sept to discuss the dividend/ share buyback. However the board of directors had to make a unscheduled trip to the US hence the same has got postponed. I last spoke to Sanjeev Pathak the company secretary yesterday and the directors were still not back. According to him the board meeting should ideally happen before the 15th of October.

Kahi pe Nighaein kahi pe Nishaana - Solvay pharma & Abbott Labs

Solvay Pharma
Last Monday I came across the news article of Abbott Laboratories globally taking over the Pharma division of Solvay. Solvay in India has a listed pharma subsidiary called Solvay Pharma.

Since Monday was a holiday on account of Dussera, I expected the market to not react to the news very fast and digest it completely. The stock had closed the previous trading day at Rs 818. The stock open at 860 and gradually made its way up till and by afternoon I think CNBC had picked up the news and the stock finally closed at 949. I managed to pick stock from 861 to 940 with a average price of Rs 920. Couldn’t move fast in the morning as I got stuck in a meeting but there was clearly a window of opportunity in the morning.

From the way the deal is structured globally there is a open offer that needs to happen according to me from Abbott.

Solvay India released their press release the next day on the deal

http://www1.bseindia.com/xml-data/corpfiling/announcement/Solvay_Pharma_India_Ltd_300909.pdf

Quoting a line from the press release

“ This transaction is expected to closed in the first quarter of 2010, pending the approval by the relevant competition authorities”.

First quarter 2010 sounds so far away that the market lost interest promptly pushed the stock price down and it closed at 909. On Thursday the stock closed at 919 after trading as low as 863 thru the day. Lets see how this plays out.

Now let me come to the more important reason for this post. The law of unintended consequence came into play.

Abbott labs.

I had earlier in my post in May 2008 recommended Abbott at a price of Rs 540 and the Sensex was at 16525. The link is enclosed here. The rationale was a impending buyback at that point at Rs 630. More importantly the parent and the Indian subsidiary had a track record of buybacks and the business throws out steady cash.

The company did a 5% buyback at Rs 630 and announced a Rs 14 per share dividend along the way.

So how did Abbott India react to the news

25/09 – 577 ( Before the news)
29/09 – 679 ( On Tuesday – up 17.5 %)
30/09 – 731
01/10 - 692

The stock is up 20% since the day of announcement. Frankly I don’t see what role Abbott India will have in this acquisition expect for a possible merger at a later date. I am not complaining :-).

Like the title of this post Kahi pe Nighaein kahi pe Nishaana ( Aim somewhere and hit something else)

kahee pe nigaahe, kahee pe nishaanaa

jeene do jaalim banaao naa deewaanaa

Movie - CID ( 1956 )
Singer - Shamshad begum
Music - Op Nayyar
Here’s the Youtube link to it.
http://www.youtube.com/watch?v=m0M669No30c

Long hiatus

Back after a long hiatus to writing the blog. Part dictated by work part by a vacation in Kerala. I have been there before but it always amazes me the diversity in beauty that India has from the rain shadowed vast expanse of Leh to the thick tropical kind of greenery of Kerala.

Update

IL& FS Investmart
I had written earlier on IL&FS Investmart covering the original hypothesis and the follow up action on the idea.

1) http://investingvalues.blogspot.com/2008/11/dabur-pharma-il-investmart-two-to-tango.html - Nov 2008

2) http://investingvalues.blogspot.com/2009/06/dabur-pharma-il-investmart-update.html - June 2008

3) http://investingvalues.blogspot.com/2009/06/il-investmart-bingo.html - June 2008

I finally exited the stock in the Rs 270 range where it has been hovering for sometime. Along the way the company has now become HSBC Investdirect. The delisting process is on track with shareholder approval been received for the same.

I decided to exit as opposed to wait till the final delisting event as my belief is that there is maybe a further 10% on the table. Looking at deploying the money in other opportunities or sit on cash.

From my original investment at Rs 84, the stock has delivered a absolute return of 221% over a 10 month period. If only I could find one like this every 6 months :-)

Aditya Birla Chemicals ( Bihar Caustic) - Q3 results

Sensex - 8197
Price - 31.15

I had originally posted on Aditya Birla Chem here followed by updates on the Q1 and Q2 results.

The company’s Q3 results are back on track post slight downturn in Q2 because of the boiler blast which affected production. Sales has grown sequentially from Rs 46 crores in Q2 to Rs 49.8 crores in Q3. More importantly Net profit has grown from Rs 6.4 crores to Rs 12 crores where the Q2 profitability was affected due to one time expense on repair and maintenance. Quarterly EPS moved up from 2.78 to 5.14.

Cumulative EPS for first nine months 13.6 and annualise EPS works out to be Rs 18.33. The stock currently is trading at nearly 1/3rd its book value and a P/E ratio of 1.71 times.

The company also got rechristened to Aditya Birla Chemicals from Bihar Caustic. I continue to hold the stock and add at opportunities

Tata Steel CCPS - Better bet

Tata Steel issued 547,251,605 2% Convertible Cumulative Preference Shares (CCPS) of Rs. 100 each at an issue price of Rs. 100 each aggregating to Rs. 5,473 crores in Sept 07. As per the terms of the issue, six CCPS of Rs.100 each are compulsorily and automatically convertible on 1st September, 2009,into one Ordinary Share of Rs. 10 each, at a premium of Rs. 590 per share

Since it is a preference issue the preference shareholder has a higher right to the dividend than the equity shareholder. So unlikely that Tata Steel will skip dividend on the CCPS. The outflow is about 110 crores in terms of dividend.

A lot of water has flown below the bridge since then and the CCPS is currently trading around the Rs 23-24 mark. The Tata Steel stock has got hammered down in the current downturn with steel prices on a downward spiral.

I have listed down possible scenarios in terms of the Tata Steel stock price a year down the line. Looked at 5 possibilities, price remaining same, +10%, +20%, -10% & 20%. So if we buy 6 CCPS and multiples thereof I have listed down the cashflows out of the trade and the payoff in terms of return ( IRR)

Bihar Caustic - Q2 Results Update

BSE Sensex - 8937
CMP - 31.7

I have written about Bihar caustic here and followed up with a update on the first quarter result here.

The second quarter result came in disappointing with both a sequential as well as YOY drop in net profit. The company had a blast at its boiler plant and hence resulted in lower production ad additional one time expense in repairing the plant. It also resulted in increase of fuel cost for production as the boiler plant was catering to the captive power plant.

So minus the one time impact the results would have been much better

But the stock has got hammered down post the results and closed today at Rs 31.7 down 57% from where I had originally looked at the stock. The stock is currently available at

Equity - Rs 23.3 crores
Reserves - Rs 193.8 crores
Book Value - Rs 93
Price/ Book Value - 0.33
H1 EPS - 8.89
Annualised P/E – 1.74

Negatives
Commodity prices have spiralled down worldwide so Q3 & Q4 operating and net profit margins will get affected. So we will see the downturn on that count.

Corporate Action
The Board has passed a resolution rechristening the company to Aditya Birla Chemicals Limited.

I continue to hold the stock and add more to my positions.

Mather & Platt Pumps - Delisting Play

Last month amidst the chaos that was playing out, I came across a announcement on the BSE (18th of October) about the outcome of the EGM conducted at Mather & Platt Pumps.

Mather & Platt Pumps is owned by Wilo which is a German company.

Details of the EGM is linked here and it gave a go ahead to the management to explore potential delisting of the company. The stock was hovering around the Rs 146 mark and I bought some stock. The company announced its delisting offer on the 23rd of October. I have enclosed the link here. Was caught up in work so didnt focus too much on it.

Surprisingly in the panic the stock still didn’t move. I managed to pick some additional stock at Rs 149 on the 27th of October. So the information was available in the public domain for over a week and the stock refused to move at all.

It started moving subsequently and I exited some of my positions today around the Rs 200 mark. My estimate is that the bookbuilding will throw up a price around the 200 – 220 mark. Not waiting to catch the top and also it is more tax efficient to exit through the stock exchanges.

Dabur Pharma & IL&FS Investmart - Two to Tango - Arbitrage Bet

I had written earlier on the potential arbitrage opportunity in Dabur Pharma and here on how it almost didn’t play out. The arbitrage has become far more attractive now.

Dabur Pharma
A quick recap. Dabur Pharma was acquired by Fresenius and it made a open offer at Rs 76.50 and acquired the mandatory 20% in the open offer. Fresenius’s stake post the open offer is 90.89% in the company.

IL& FS Investmart
IL&FS Investmart was sold off by Etrade to HSBC which wanted to expand its securities business in India. HSBC also made the mandatory 20% open offer at Rs 200. Its stake post the open offer in ILFS Investmart is 93.86%.

So what is the bet?

In both the cases the public shareholding has fallen below 10% post the open offer and according to SEBI both the companies have to either delist or the respective promoters have to offload their stake to bring it down below 90%.

In the event of the company delisting then as per SEBI rules the last open offer price has to be offered to the remaining shareholders to exit for a period of 6 months after delisting.

What are the potential payoffs?

Dabur Pharma
Current Price – 38.5
Exit Price - 76.5
Delisting Return - 98%
Potential Downside - 20%

ILFS Investmart
Current Price – 84
Exit Price - 200
Delisting Return - 138%
Potential Downside - 20%

Possible scenarios

1) Both get delisted - Returns - 118% ( Too good to be true :-)) – Probabaility – 25%
2) Dabur delisted, ILFS stays listed - Return 39% - Probability – 25%
3) ILFS delisted, Dabur stays listed - Return 59% - Probability – 25%
4) Both stay listed - Return (-20%) Probability - 25%
Potential Payoff - ( 0.25*118% + 0.25*39% + 0.25*59% + .25*(-20%) )= 49%

Disclaimer - I have a position in both the stocks and kindly do u r own due diligence before taking a decision.

Repro Ind - Q2 results

Index - 10683
CMP - 86.7

I had written here about Repro Industries and my liking for the business and the stock. I had followed that up with analysing the Q1 results here.

The company announced its Q2 results and it is in line with expectations. Sales increased dramatically over last year from Rs 44 crores to Rs 63 crores a increase of 43%. The increase sequentially over the Q1 quarter is about 36%.

The Q2 quarter invariably has higher sales due to the balance sheet printing business however it has lower margins.

The net profit has grown at 10% over last year from 3.8 crores to 4.2 crores. The reduced net profit margin is due to a mark to mark provisioning of Rs 2 crores on forex loss. Minus that the net profit would have moved from 3.8 crores to 5.4 crores a jump of nearly 42% at the operational level.

Half yearly EPS stands at Rs 8.57 per share and the cash EPS stands at Rs 12.26 per share.

I have added more to my position on the stock around the Rs 90 mark. Stock is available around a PE of 5-6 on FY09 profits.

I have uploaded the FY 2008 balance sheet here

Abbott India - Buyback Update

I had in my previous post stated about the pending buyback offer. The buyback offer through the tender has commenced from today and will be on till Sept 2nd. The link to the details and forms are available here.

The company is buying back 7,97,500 shares at a price of Rs 630 per share. The management has gone for a lower buyback price compared to Rs 650 offered in the previous buyback. The paid up equity capital will reduce from Rs 14.47 crores to Rs 13.68 crores.

I wouldn’t be surprised if another buyback is announced post completion of this one as the parents philosophy is to aggressively buyback shares worldover.

Stock Update - Bihar Caustic - Q1 Results

I had in my earlier post recommended Bihar Caustic. The company announced its Q1 results yesterday and the results were on track or better than expected.

Sales and net profit grew by 11% on a trailing quarter basis. On a year on year basis the growth is very impressive. The company should clock a EPS of over Rs 20 for the year and should increase book value to over Rs 100 per share.

The stock is available at a PE of 3 and closed yesterday at Rs 68.

Repro India - Q1 results

I had in my earlier post recommended Repro India. The company announced its Q1 results today.

Sales have improved from 37 crores to 46 crores a jump of 24%. Net profit improved by over 70% growing from 3.02 crores to 5.15 crores. Quarterly EPS moved from 2.75 to 4.69.

More importantly OPM improved from 17% to 20% primarily driven by growth in exports which now constitute 47% of sales. International business has a higher operating margin as compared to domestic business.

The only downside is that having been caught in work, I havent had the time to add to my position :-(. Post results today the stock moved to the upper circuit closing at 113. I guess a few down days on the market should help me buy some more of this stock.

Repro India - Value Added Print Solutions

CMP - Rs 108

Sensex - 13469

My one and a half year old daughter liked the balance sheet. The numbers appeared to seem a lil boring for her but she identified with the animation characters that smiled back at her from the balance sheet :-). Considering the fact that she is one of the key objectives of my savings plan, it is natural for her to have a say in the matter. Well she whole heartedly recommends my decision on Repro India.

I like the company and the simplicity of its business model. Importantly if the management gets it right it has the potential to be a good multibagger.

Lot of us would have over the years unknowingly, experienced a Repro product. The company has been one of the largest designers and printers of balance sheet over the years. Tata Steel, Wipro, Vedanta, Hindustan Unilever, DLF etc

Company
Repro is one of India’s largest integrated print solutions companies. The company has evolved over the years from catering to the domestic market to expanding its capabilities across the world.

Printing process outsourcing is one of the new evolving stories in the outsourcing business. India is emerging as a significant outsourcing option for companies and publishers across the world. Advantages of outsourcing to India beyond the cost is the availability of English speaking talent which is evolved in cutting edge graphic arts technology.

1) Domestic business
Out of a turnover of about 155 crores, nearly 80 crores came out of India. Customer segments that the company addresses.

a) Retails & Childrens Educational books - Educational books covering text books, nursery rhymes, colouring books etc catering to publishers like Orient Longman, Egmont Imagination, Encyclopedia Brittanica, Oxford press, Jeevandeep publishers etc.

b) IT books and Manuals- Repro handles the entire print based fulfilment for Microsoft operating system and other application products. So the next time you buy a Windows Xp or Vista pack, the print material that comes with is printed by Repro. It client base in this segment includes IBM, Sun Microsystem, HP, Compaq, Aptech, NIIT .etc

c) Catalogues & Magazines- The company prints magazines like PC quest, Gladrags, Seventeen, Cine Blitz, Business Barons, Femina Girl etc.

d) Lottery tickets - It is India’s largest solution provider in the area if lottery tickets servicing customers like Playwin Lotto etc.

e) Corporate balance sheets – As discussed before servicing clients like Tata Steel, Wipro, Vedanta, Hindustan Unilever, DLF etc

f) Stationary Products - Makes customised stationary products for corporates.

2) International business
This is where the real traction is coming thru. The company has over the last few years expanded the international business. It has customers base across Africa, USA & UK.
Surprisingly Africa constitutes a lions share of the international business.

The company in the international segment works closely with educational publishers like Mcgraw Hill, Longman, Pearson , Oxford University Press, Heinemann etc. It also works with mass market publishers like Mordern publishing, Igloo, Arctus, Beaver Books etc.

It works closely with the largest publishers in South Africa, Nigeria, Ghana etc.

The company is expanding its relationship with these publishers across geographies. The company is in the process of setting up a facility in a SEZ to cater to the international markets.

Financials
The company increased sales from 131 crores in FY 07 to 155 crore in FY 08 largely driven by increase in export revenues. PAT grew from 9.4 crores to 15.5 crores. EPS grew from Rs 9 to Rs 14.24.

Cash EPS went up from Rs 14.35 to Rs 20.08. RONW improved from 11% to 16%.

The stock is currently trading at 108 available at a PE discounting at about 7.5 times last years earning. I would recommend a buy on the stock.

Ps: One of the interesting things about the company is the list of non executive directors
Mr J J Irani - CEO of Tata Steel
Mr Alyque Padamsee – Lintas
Mr U R Bhatt - Ex Head of Jardine Fleming
Mr Sanjay Asher - Partner Crawford & Bailey
P Krishnmurthy - Ex Vice Chairman of J M Morgan Stanley

Well a pretty strong list of corporate chieftains who have agreed to be on the board of a 150 crore company. If not for anything else, I would atleast be assured that the numbers printed on the balance sheet are accurate.

Disclaimer - I m not recommending buying the stock based on my statements. Kindly do u r own analysis to reach that conclusion.

Stock Idea - Abbott India - Update

CMP - 550
Sensex - 13802

In my earlier post I had recommended Abbott India. The stock has since moved up by 2 % as compared to the Sensex which has lost 16 % in the same period.

The buyback through the form of a tender offer which I had stated in my blog has finally received SEBI approval. The buyback of 5.83% of the equity of the company will happen at Rs 650 per share.

The company also announced its Q2 results. Sales was up from 157 crores in Q2 07 to 170 crores in Q208, a rise of 8%. Profits however remained flat at 18 crores with cost pressures kicking in.

The company will however deliver EPS growth because of reduction in the equity capital post the buyback.

Stock Idea - Abbott India

CMP - 540.6

Sensex - 16525

Abbott India is the subsidiary of Abbott Laboratories which is a century old company with operations across 130 countries. Abbott in India has a strong brand equity and has a network of 18 distribution points, which cater to 11,000 stockists and 70,000 retailers.

Abbott India’s product portfolio in India covers

1. Primary Care, which markets products in the areas of Pain Management, Gastroenterology, with well-known brands like Brufen, Digene, Cremaffin.
2. Specialty Care – Metaboloics & Urology provides solutions in the areas of Thyroid, Obesity, Diabetes and Benign Prostratic Hyperplasia.
3. Specialty Care - Neuroscience has a varied portfolio, with specialty products in the Neurology and Psychiatric segments.
4. Hospital Care, offers products in the field of anesthesiology and neonatology namely Forane, Sevorane and Survanta.

Financals

Let me start the discussion with assumption that I am going and buying this business out. The current equity base of the company is about 14.47 crores. At the current market price of Rs 540 the company has a market cap of Rs 826 crores.

The company had approx Rs 167 crores as of Nov 07 ( FY 2007) of cash lying on its balance sheet.

So we are buying the business for about Rs 659 crores. The business did a topline of about Rs 620 crores for FY 07. The company has increased topline from Rs 459 crores in FY 2005 to current Rs 620 crores in 07 on a net block which has gone up marginally from 31 crores to 36 crores.

Net profit has increased from 59 crores to 68 crores but more imp EPS has increased at a faster pace from 38.72 to 46.43 in the same period due to reduction in share capital from 15.3 crores to 14.5 crores.

The business generated a bottomline of approx Rs 51 crores from operations excluding the other income generated on the investment portfolio so is available on a PE of 10.9 on current years earnings.

Management Philosophy

The parent Abbott limited has a track record of increasing dividends for 35 consecutive years. The parent spent > $ 1 billion is share repurchases worldwide in 2007 and has plans to increase that to $ 2.5 billion worldwide. It generates about $ 4 billion of operating cashflows every year. The presentations available on the parents website will give you a flavour of the same.


The Indian company paid a dividend of 17.5 % dividend for the FY 2007 and hence provides a dividend yield of 3.2 %. The company carried out a share buyback of 5 % of the companys capital at Rs 650 per share through the year and has filed for buyback of a additional 5% of the company at Rs 650 per share which should happen in the first half of calendar FY 08.

Investment Rationale.

Beyond the stable earnings growth which is defensive in nature and not subject to economic cycles, good ROCE etc what is it that interests me in the stock ?

There are other MNC pharma companies like Pfizer, Merck etc which deliver similar numbers and are sitting with cash on their balance sheet and have a strong product portfolio. So why Abbott ?

I believe the key challenge for a value investor is not finding out companies that have cash on their balance sheet and are cheaply available. It is in finding out what the management would do with that cash. In India where shareholder activism is non existent or at a very nascent stage, it is imp to have managements that use that cash judiciously.

I like Abbott on that variable where it derives its philosophy from its parent. The management consistently maintains a high dividend payout ratio and utilises cash for share buybacks. The public shareholding is about 34% so effectively 1/7th of your portfolio in Abbott will deliver 20% assured return this year as the company finsishes it 5% share buyback program.

The stock wont be multi bagger but I believe that one wont lose money on this one.

Disclaimer - I m not recommending buying the stock based on my statements. Kindly do u r own analysis to reach that conclusion.

Stock Idea - Bihar Caustic & Chemicals

CMP - 72

Sensex - 16860

Not the most endearing or sexy sounding name with context to the stockmarkets. But then whats in the name.

Bihar Caustic is part of the Aditya Birla Group. It is a subsidiary of Hindalco and was promoted alongwith the BSIDC ( Bihar State Industrial Dev Corporation). Hindalco owns 56.31 % of the equity and BSIDC owns about 8.69 %.

The company’s current installed capacity covers ..

Caustic soda (100%NaOH) 92,750 mt
Liquid chlorine 65,785 mt
Hydrochloric acid (100%) 29,040mt
Sodium hypochlorite 1,800mt
Compressed hydrogen 17,42,400nm3
Aluminium chloride 12000tpa

The company also has a 30 MW captive power plant and has just commissioned a stable bleaching powder plant March 08.

Investment rationale.
The company has a captive customer in the form of Hindalco. It nearly meets 80 % of Hindalco’s caustic soda which is required in the aluminium manufacturing process. The Aditya Birla group has a large chemicals business portfolio spanning multiple companies and is amongst the largest caustic soda mfgs in the country.

BCCL benefits from group initiatives in R & D and developing best practices in manufacturing.

Financials ( Rs in crores)
Year--------Sales--------Net Profit--------Cash Profit
Mar 05--------107.9--------26.4--------34.7

Mar 06--------111.5--------26.1--------35.4

Mar 07--------143.2--------33.7--------49.6

Mar 08--------174.7--------49.2--------66.5

Current Equity Capital – 23.3 crores
EPS - 21.07
Cash EPS - 28.54

Current Stock Price - Rs 72
Current PE = 3.31
Current Book Value - Rs 86.4
P/BV - 0.83

One of the counter arguments would be that it is in a commodity business and subject to the vagaries of commodity cycle.

The company has constantly worked towards moving up the value chain by producing value added products so as to reduce its exposure to the commodity cycle. The bleaching powder plant commissioned in mar 08 is a case in point. The company also sells excess power that it generates to JSEB.

Anyway the margin of safety on the stock is high with a strong promoter background and captive customer coupled with attractive valuations. I currently hold a position in the stock.

Disclaimer - I m not recommending buying the stock based on my statements. Kindly do u r own analysis to reach that conclusion.