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.

Piramal Life Sciences or Slot machines

I was reading the balance sheet of Piramal Life Sciences that a friend of mine handed over for me to evaluate.

Piramal Life sciences is the demerged arm of Piramal healthcare which is a research driven drug discovery company. It was formally the R&D unit at Nicholas Piramal. It focussed on four therapeutic areas cancer, diabetes, inflammation and infectious disease.

The balance sheet was a interesting read. The company has zero or negligible sales and is burning cash/ posting net loss of about Rs 25 crores a quarter. It posted a net loss of Rs 110 cores for FY 09 and has accumulated losses of about Rs 202 crores.

This is against a equity and reserve base of about Rs 183.6 cores effectively wiping out the balance sheet. Most of their molecules are still in Stage 1 and 2 of clinical trials.

They have been funding themselves thru short term ICD loans from the parent company and the auditor has even made a remark about using short term funding for long term asset.

Drug Discovery - Risky business
Drug discovery is a risky business with very high upfront capital commitment and low success rate. The payoff’s could be extremely high for a blockbuster molecule but it is tough to assign probabilities. The demerger model is essentially to derisk the parent company from vagaries of drug discovery.

Which brings us to the reason for this post …..

How does a retail investor believe that he can understand the risk return payoff of the drug discovery business when the parent pharma company itself is not sure on this?

I can understand venture funds investing in a business like this bcos that’s there capability set but a retail investor getting into a stock like this is beyond me.

I would rather go with a slot machine even though I know the odds are against me but atleast I understand the odds. The stock incidentally is quoting at Rs 55 giving it a market cap of about 125 crores.

Infosys - Stable friend

I have laid my hands on the current years Infosys balance sheet. As always it a joy to read for both the quantity and quality of disclosures.

Consolidated income has gone upto Rs 21693 crores a jump of 29.96% over the previous year. Net profit has grown to Rs 6828 crores from Rs 4941 crores a jump of 38%. The company continues to improve performance on all cost varaibales as a % of sales with operating profit at 34.08% . Sundry Debtor cycle has been bought down and stands at 16.7 % of revenues as opposed to 19.8% of sales last year.

EPS increased by 31.1% to Rs 99.76 per share from Rs 76.2 per share. Return on capital employed has improved from 41.38% to 42.9%.

Infosys continues to be a high margin high ROCE business with impeccable management track record. I see a few challenging years ahead but Infosys has the management and the organisational competency to ride thru this challenging phase.

A few other observations.

Cost of Capital
I had written last year about Infosys’s computation of cost of capital and the management decision to look at a minimum return of twice the cost of capital on average capital employed and thrice the cost of capital on average invested capital. The current cost of capital for Infosys is 12.18%. it has come down from 13.32% last year as Infosys has factored in 7% as return on risk free capital as opposed to 8% last year for computing cost of capital.

Dividend policy
The company has stated and is maintaining a dividend payout ratio of 30% of net profits which they has listed down as a strategy last year.

Cash on the balance sheet :-(
Cash and cash equivalents on the balance sheet have increased to nearly Rs 10000 crores which is invested in fixed deposits. This has been my only sore point with Infosys. I don’t get the logic on maintaining such high cash levels which is depressing ROCE.

Infosys management has always maintained that they would not be keen in looking at aggressive acquisitions to grow. It would invariably be niche acquisitions to fill skillset or geographical gaps. The business remains immensely profitable and throws out substantial amounts of cash every year. Infosys had also restructured its biggest cost variable - employee cost in the last downturn to incorporate a significant chunk of variable component in it to factor in significant downturns.
With so much buffer available in place I really don’t see the logic of maintaining such high cash levels. Ideally I would want the management to constantly buyback shares so as to reduce the equity base and improve EPS and ROCE.

I don’t even mind a lower dividend payout ratio and a higher share buyback program bcos share buyback is more tax friendly.

I continue to hold some Infosys shares and plan to retain them but not planning to add more as of now.

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

K Sera Sera - What would be would be

I was browsing thru announcements on the BSE site and came across this

"K Sera Sera Productions Ltd has informed BSE that the Board of Directors of the Company at its meeting held on October 13, 2008, inter alia, has considered the following points.

1. The Board has constituted the committee, who shall allot the Fully Convertible Warrants to Yes Bank Ltd on preferential Basis."

Yes bank making movies :-)

Clearly the company is in a bad shape and I m sure this is Yes Bank's way of converting a dud loan into a equity stake. I m sure we will see a lot of this going forward.

Tata Motors acquires Miljo Grenland

I had in a earlier post talked about how I like the way Tata Motors has and is in the process of evolving into a global auto major with both geographical diversity and expanded product portfolio covering cars, trucks, buses, earth moving equipment etc.

A step in the process has been a small ticket acquisition that they announced today.

From the Business Standard
Tata European Technical Centre plc, a UK-based subsidiary company of India's third largest passenger vehicle manufacturer Tata Motors, has today acquired a 50.3 per cent holding in Norway-based Miljo Grenland/Innovasjon, a company specialising in development of electric vehicles, for Rs 9.40 crore.
The balance of shares will be retained by the existing shareholders who will continue to be associated with the venture, the company said in a press release. Miljo will produce electric vehicles based on Tata Motors’ products, besides manufacturing of state-of-the-art super polymer lithium ion batteries and the development of related technologies.
"Tata Motors believes that this investment in Miljo will help the company realise its strategy to develop convenient, affordable and sustainable mobility solutions through electric and hybrid vehicles", stated the release.

Niche acquisition which will enable Tata Motors to expand their electric and hybrid car portfolio. Another piece of the jigsaw falling in place.

Balaji Telefilms – Smoke on the water

I had put a earlier post on Balaji Telefilms commenting on the divorce with the Star Group and how things could play out in terms of the Star stake sale.

Last few days I have been seeing a flurry of news items on the company. It started with news article stating that the company is planning to setup its own Hindi channel. So from a content provider it would make its transition to become a general entertainment channel. The divorce with Star clearly made sense as they would start competing in the same space. However this is speculation which the company has denied

It was followed by news reports that Balaji is taking over 9x channel from Indrani and Peter Mukhreja.

Too many news items swirling around. Clearly there is some fire smouldering somewhere which is generating all this smoke.

Plan to monitor this and analyse the business a little more.

Infosys Axon Deal- The times they are a changing

I had in my earlier post on Infosys commented on the investment policy that Infosys had laid out in its balance sheet by laying out a hurdle rate of twice the average cost of capital.

I had also commented on Infosys either needs to lower its hurdle rate to the cost of capital else return capital to shareholders. Clearly the times they are a changing :-).

I think the Axon deal is a positive for Infosys as opposed to earning interest on ICICI fixed deposits.

This will enable them to build a strong foothold in the SAP domain and move up the value chain. The deal is valued at 20 times current year earnings. Infosys will clearly be able to up the margins on Axon by increasing the offshoring content. I personally have dealt with Infosys as a organisation and am confident in the management ability to assimilate this deal and handle a smooth transition.

To me this is a flavour of things to come for the big 3 in the IT sector. Though TCS and Wipro have historically been relatively more aggressive in inorganic growth, I see Infosys utilising the spare cash on it balance sheet more aggressively.

DLF - To raise capital

"DLF, the country's largest property developer, plans to seek shareholder approval to raise as much as Rs 10,000 crore from institutional investors over the next 12 months, the company said in a notice to shareholders

The company will place a special resolution for a qualified institutional placement (QIP) before shareholders at its annual general meeting (AGM) on September 30, the company said. DLF may sell shares to investors within 12 months of getting the approval"

I had in my earlier post on 3rd July on DLF questioned the logic of the management in announcing a share buyback when clearly the core business was slowing and capital was scarce for real estate companies.

Now a month down the line the management is back trying to take approval from shareholders a to raise about Rs 10,000 crores of capital from institutional investors by doing a QIP. What can i say?

I had speculated in my earlier post that no significant buyback will take place and i will stick to that speculation.

Piramal Glass – Till debt does us apart

I was running through the Piramal Glass balance sheet and here are some observations. The company has operations in India, Srilanka and a plant in the US. The US operations are bleeding and clearly some of the acquisitions have been pretty expensive.

The company has a networth of Rs 155 crores against which it has a debt of Rs 1041 crores. Debt – Equity ratio of 6.7:1. Now that is a hell lot of debt on the books.

The company made a loss of 22 crores last year on a turnover of 817 crores. Marginally improved over last year where it made a loss of 37 crores. Operations generated a cash flow of 17 crores against which they paid a interest of 64 crores. So effectively they had to borrow money just to pay interest. They added about 336 crores of debt on the balance sheet.

Power & fuel constitute a significant chunk of the cost, almost 17% of sales. This will go up further this year hitting bottomline. About 510 crores worth of loans are repayable this year which effectively means that they would get funded at a higher cost increasing interest expenses.

On running through the balance sheet, the thought which came to my mind was that these guys are in some serious trouble. I then went to the BSE site and looked at the Q1 results.

It just keeps getting worse. Q1 loss of 11.4 crores as opposed to a FY 08 loss of 22 crores. Q1 interest cost has ballooned to 25 crores against a full year interest of 64 crores last year. Power & Fuel costs have gone up to 21% of sales.

This is a classic case of misplaced overleveraged acquisitions which can bleed a company dry.

But the best part is still to come, the company paid a dividend of 15% to the shareholders because the standalone results don’t reflect the loss. Paid out of borrowed money of course.

The stock is currently ruling at around the 145-150 levels against a book value of Rs 90 which is shrinking every year. The stock price has come down from the Rs 400 mark where it was hovering around six month back.

It would be interesting to watch how they dig themselves out of this hole.

Balaji Telefilms & Star Group Divorce

Few days back Balaji Telefilms announced parting of ways with the Star group with this press release.

Balaji Telefilms will have to acquire 25.99% stake that Star holds at a aggregate price of Rs 190 per share within a period of 240 days. In the event that the promoters Ekta Kapoor and family are unable to buy the stake, then Star has a option to sell this stake to a third party.

The press has been agog with all kinds of rumours as to who will buy Star’s stake. It started with ADAG and Eros and then followed up with PE funds like 3i, New Silk Route, Kotak etc.

The interesting part is the shareholding structure. Ekta Kapoor & family own 40% of the company. If ADAG or Eros were to acquire Star’s entire stake, it will result in the open offer getting triggered for 20% and could result in there stake being higher than Ekta Kapoor’s ( 25.99%+20% = 45.99%). It would be true if any of the private equity funds were to do the same.

The most likely scenario would be this stake being distributed across a few investors and not being acquired by a single investor. It would be interesting to see how things play out.

ITC Bingo - 2

In my previous post, as was rightly pointed out to me I had missed out on 2 business divisions in ITC

9) ITC Infotech

The company registered a total income of about Rs 400 crores on a consolidated basis and a bottom line of about Rs 10 crores. Not exactly a great set of numbers considering the peer group

10) Education & Stationary Products
The company registered a growth of 72% last year in terms of topline albeit on a small base. Its two flagship brands are “Classmate” for the student community and “PaperKraft” for the discerning working executive.

Some observations on ITC
1) Branding - The company has always managed to create a slight premium positioning for its brands. So whether it is the hotels business or Wills Lifestyle or Fiama Lifestyle. This has enabled the company to address the mass maket effectively whenever it has moved the brand down. It is relatively easier to move a brand from the premium segment to the mass market as opposed to the other way around.

2) The company boasts of a phenomenonal distribution network like HUL and hence is able to leverage that as it keeps expanding its product portfolio.

3) The E-choupal initiative is a great asset to have both from a sourcing as well as sales perspective for most of the divisions. This could potentially become one of the most attractive pieces in the ITC portfolio.

4) Management is clearly working aggressively in expanding the non tobacco portfolio and it wouldn’t surprise me if ITC sells off the tobacco business on a 10-15 year horizon and becomes a huge FMCG player taking on the MNC players like HLL, P& G, Nestle etc

5) Financial ratios like RONW might lower in the near future as the company invests money aggressively in building the FMCG business.

Investment Call
ITC to me is clearly a long term call on a 5- 10 year ( Not 2-3 years) horizon in which the company will transform itself. It is a compounding story which might compound at 15-18% a year unless something drastic comes up on the tobacco regulation front.

The stock however is currently available at 23 times last years EPS of 8.35. I would wait for it to reach lower levels before I buy the stock.

ITC - Bingo

I like the way ITC is evolving after running through its annual report. The company has been continuously de-risking itself from the tobacco business into other areas over the last few years.

The tobacco business continues to be the cash cow in the portfolio that generates the cashflow to be invested into the other business segments. The net income of the company has grown from Rs 4353 crores in 2001 to about Rs 14558 crores in 2008. I have taken net income as cigarettes have very high excise duties and levies and tends to skew the topline.

The interesting part is that Non cigarette income has grown from Rs 900 corores which was about 20% of Net turnover to about Rs 7300 crores which is over 50% of the net turnover.

ITC effectively today has a bigger non tobacco business than the tobacco business. It’s a dramatic metamorphosis of such large corporation. The company is doing some very interesting things in the agri domain which could potentially become a huge play for the corporate sector as Indian agriculture open ups.

A brief snapshot of the various business divisions and the brand portfolio that the company has built.

1) Cigarettes / Tobacco

The company is clearly the numero uno in this business and is the cash cow for the company. The company has no great competition in the domain and will maintain its marketshare in this business. The biggest challenge arises from the fact that finance ministers love cigarettes or atleast the revenues that come out of it. So it remains the favourite whipping boy in terms of taxes being levied.

2) FMCG - Food
a) Branded Packaged Foods

The company has built up a significant share in this segment. Both Aashirwad and Sunfeast are 1000 crore brands. The company launched the “Bingo” range of chips last year and is beginning to give Lays a run for its money.
b) Confectionaries
The confectionaries business grew by 40% last year. The company has 2 strong brands Minto and Candyman in the segment.
c) Ready to Eat Segment
The company sells products like Sunfeast Pasta, Aashirvaad Instant Mixes and has a strong export business where it markets under the “ Kitchens of India” brand.

3) Personal Care
The company entered the personal care business last year and has brands like Fiama Di Wills, Vivel Di Wills, Vivel & Superia. This is a 20,000 crore market with HUL being the big daddy of this business.

4) Hotels
It has emerged as the second largest hotel chain in India offering over 90 hotels across 77 destinations under 4 different brand propositions – ITC Hotels, Welcom Hotel, Fortune, Welcome Heritage & the Sheraton Franchisee aggregating about 6000 rooms. Turnover crossed the 1000 crore mark this year.

5) Lifestyle Clothing
The company has managed to carve a niche in the premium segment of the lifestyle retailing segment with the Wills Lifestyle range. The company has added a popular segment brand John Players to expand its portfolio.

6) Paperboards & speciality Paper
The paperboard segment delivered a growth of 13% last year with revenues of Rs 2364 crores

7) Safety Matches / Aroma Sticks
The company is the largest manufacturer of safety matches after it acquired Wimco Ltd. It also has a strong presence in the incense sticks segment with brands like Mangaldeep.

8) Agri Trading
This is clearly ITC’s pioneering work in terms of addressing and working closing the Indian agricultural economy. Its e-choupal model is a acknowledged case study in this domain and is today replicated by other organsiations. The divisions performance got hampered due to the ban on exports of agri commodities. However the company has constantly expanded its portfolio from tobacco to high value frozen foods, potatoes, spices, staples etc.

Will continue in my next post in terms of my take on ITC and whether it is a good bet at current prices.

Peninsula Land

I was running through the Peninsula Land annual report for the year 2008. The report threw up some interesting things and in a sense reflects the kind off trouble that the real estate industry is facing.

Like they say the devil is always in the details, I think in case of a real estate company the devil is in the numerous subsidiaries and SPV’s that get floated.

Rs in crores

The company’s sales numbers have decelerated considering the previous period is for nine months. Net profits have also shrunk and so have the Net Profit Margins.

But the interesting part is that though on a standalone basis inventory has gone up from 224 crores to 279 crores, the devil is really in the consolidated numbers. The increase in investments and loans and advances in the standalone numbers are essentially money routed to the various subsidiaries which hold the inventory.

So on a consolidated basis inventory is about 546 crores most of which would be undeveloped land. The real value of developed stock would be much higher. Total Sales last year of Rs 357 crores and unsold inventory of Rs 546 cores. With the environment turning negative, some of these balance sheets are not going to be looking very good for a few years to come.

Ranbaxy - The Soap Opera continues

I had written in a earlier post on how I was uncomfortable with the way Ranbaxy was shaping up after going thru its balance sheet. The stock was hovering around the 500 mark then.

Then came the news of the Daiichi takeover. I had written a post then on how it was a merger of two organisations that were struggling for different reasons, coming together and hoping to build something strong out of it. Stock moved to around the 600 mark and I sold off a large % of my very very small holding :-).

Now the US FDA has pulled up Ranbaxy. Not the first time though, Ranbaxy has a history of run-ins with the US FDA. Their US Hq got raided in FEB 2007. Here’s a link to that story. There are rumours of Daiichi exiting the deal flying around.

I now come to the reason for this post.

I read this interesting piece on Bloomberg. UBS pharma analyst Sonal Gupta states and I quote
"We believe there could be close to 50 percent downside to the stock if Daiichi Sankyo were to withdraw its current offer to buy a majority stake in the company,''.

So UBS believes that minus Daiichi taking over, Ranbaxy is worth only Rs 250 a share. Daiichi is buying Ranbaxy at nearly three times that at around Rs 729 per share.

UBS's call is building up a self fulfilling prophecy where based on the value assigned by UBS, would Daiichi withdraw the offer which would lead the stock to reach the 250 level.

What will Daiichi do? The soap opera continues …..

Blue Star - Shinning Star

I was reading the Blue Star balance sheet and it was a breath of fresh air. I was pleasantly surprised by the candidness and the clarity of management thought process.

Enclosing a few excerpts of the Chairman’s speech

“Actually we have been successful in controlling expenses for a number of years with a conceptually simple yet effective approach. Basically, we ensure that the increase in total expenses is significantly less than the increase in Gross Margin.

Blue Stars operating managers are well versed in a culture of accountability and cost consciousness and are entrusted to deliver business results while managing costs and cash flow. They did a excellent job last year. For ex, while Operating Income grew by 39% and Gross Margin by 51%, total expenses grew by only 24%. The difference flowed straight into PBT which grew by 137%. The mathematics is simple, but the results dramatic.”

Some more

“Capital turnover improved dramatically from 5.32 to 7.48. Borrowing reduced from 89 crores to 37 crores and debt/equit ratio reduced from 0.42 to only 0.14. This was a encouraging development because we clearly have proven a self financing business model. At a time when capital is likely to become scarce and more expensive, it is reassuring to have good internal cash generation and a strong balnce sheet”.

I just love the focus on costs in a year where the company increase topline from 1607 crores to 2270 cores and net profit showed a dramatic 145% jump from 71 crores to 174 crores. There is clarity of thought and the orientation to focus on profitable growth and not just growth.

I have experienced that in most balance sheets the “ management discussion & analysis” part is really given lip service and managements typically mouths some platitudes. The Blue Star discussion was excellent with detailed analysis of each of the business segments, plants & various functions. It was informative and the management has made a genuine attempt to educate as opposed to just informing the shareholder.

The business had a great time last year and things might slowdown a little bit this year bcos of the general slowdown.

Here’s a company which delivered RONW of 66% and ROCE of 81% last year. Consistent growth in profits in the last 10 years. The stock has a PE of about 20

So what’s the call …

I m clear that I will own stock in this company someday not just for performance but more importantly for the clarity of management thought process. At 20 PE I m unable to break the mental barrier of paying top dollar for a good business. So I will wait patiently and hope for a bad quarter or some bad news when the market irrationally hammers the stock down.

But then like I said in one of my earlier post maybe …

Yeh Na Thi Hamari Kismat, Ke wisaal-e-yaar, hota,
(It was not in my destiny, to be united with my lover)

Agar aur jeete rehete, Yahi Intezaar Hota
(If I had lived any more , I would still be waiting for it) …… Mirza Ghalib

Tata Motors

I had in my earlier post on innovation and investment talked about how the Tata group made it to the 6th position in Forbes Survey of most innovative companies. This was driven by the innovative work that went it to creating the Nano at the $ 2500 price point which could potentially revolutionise road transportation in the developing world.

I was reading the Tata Motors balance sheet and a lot of interesting things stood out.

The company has evolved over the years from a truck major to a full fledged auto major with interests spread across the globe.

1) Commercial vehicles
The company continues to hold over 60 % of the marketshare in the Indian market. The company has managed to maintain marketshare with products like the ACE. It is interesting to see extensions that the company has managed by extending the ACE platform to products like Magic & Winger. Sitting in the cities we might not notice these products but in rural India ACE has been a great success.

The company has registered export growth of about 11% to 39850 vehicles.

Bus Segment : The company is aggressively expanding its marketshare in the Bus segment. It has setup a joint venture in India with Marcopolo from Brazil for the same. The company also holds a 38% stake in Automobile Corp of Goa which is one of the largest bus body supplies in India. It is constantly increasing its stake in the company.

Defence: The company is aggressively looking at the defence segment in line with the groups strategy of focusing on this segment. It has unveiled a range of products in the current Auto Expo for the defence segment.

Global Network
Korea - Tata Daewoo commercial vehicle company managed a 38% growth in volumes. It increase marketshare from 24% to 32% in the HCV segment and from 28% to 34% in the MCV segment. It is the largest exporter from Korea in the HCV segment. Net profit increased by 81%.

Thailand & Asean countries- It has setup a subsidiary in Thailand and has introduced a 1 ton pickup truck in Thailand. The Thailand subsidiary will cater to the Asean market.

South Africa - It has setup a subsidiary in South Africa for assembling and marketing of the companys product in the African market.

Spain - It acquired a 21% stake in Hispano Carrocera which is a leading bus manufacturer in Spain. Tata Motors has a option to up its stake in the company. Hispano has a manufacturing plant in Spain which caters to the European market and one in Casablanca to cater to the Moroccan and North African markets.

Assembly Operations - The company has assembly operations in Malaysia, Kenya, Bangladesh, Spain, Ukraine, Russia and Senegal..

Beyond this the company has its sales and distribution network spread across the world. This link on the company site gives a nice flavour on the distributor network .

2) Cars - Passenger Vehicles
The car portfolio of the company comprises of the Indica, Indigo, Sumo & the Safari. Though the car business lost marketshare last year because of the delay in the launch of the new Indica, the company should gain traction with new launches this year.

The biggest upside in the car business would be the launch of the Nano in the second half this year.

The Jaguar and Land Rover acquisition moves the company up the value chain and more importantly takes the car business to the next level in terms of international spread. JLR has sales in over 100 countries with over 2200 dealers. It clocked abou $15 billion of revenues for the year ended Dec07. Jaguars launch of the XF series has improved both sales and bottomline in the first quarter.

The company also has a joint venture with Fiat in India for the manufacture and distribution of Fiat cars in India like the Palio and Stile.

3) Construction equipment.
The company has 60% stake in a joint venture with Hitachi in India called Telcon and recorded sales of over Rs 2700 crores last year. Telcon also acquired stake last year in two Spanish companies Serviplem and Comoplesa by acquiring 79% and 60% of these companies.

4) Other Business
a) Tata Motor Finance
The company disbursed nearly 9000 crores last year for financing of commercial vehicles and cars making it one of the largest vehicle finance companys in the country.

b) Auto Components
Tata Autocomp ( TACO) - The company owns a 50% stake in Tata Autocomp which is the groups holding company for promoting domestic and foreign joint ventures in auto components and systems.

Tal Manufacturing - Subsidary in the area of machine tools, fluid systems etc. It signed up a deal to supply structural components to Boeing for the Dreamliner 787 project.

HV Transmissions - Manufactures gear boxes and axles for heacy vehicles.

c) Tata Technologies - provides specialised Engg & Design Services, PLM, etc to leading global manufactures. It crossed the 1000 crores mark last year in terms of topline.

Conclusion
I like the the way the company is both expanding its product and global footprint. I have great faith in the Tata groups ability to handle cross border acquisitions and make them profitable. They demonstrated it with Tetley & Daewoo motors and are managing the Corus acquisition fairly well.

The company did about Rs 40,000 crores of consolidated topline last year with a bottomline of 2000 crores. The stock has got hammered down on count of higher fuel prices , economic slowdown and higher input costs.

Stock is available on a PE of about 8 at Rs 400. I am not recommending a buy at this point and wait to see the level of equity dilution that will take place to fund the JLR deal. Also the next few quarters are going to be challenging for the company. But on a more long terms basis I like the way the company is evolving itself to become a serious player in the global automotive market.

DLF announces buyback

Circa 2007
DLF did a IPO last year around the same time at around Rs 525 per share. The IPO has a series of controversies around it and took its time to get SEBI approval. It finally managed to sail through. The promoters diluted about 12% in the company and still continue to hold about 88% in the company. The real estate markets were on a song and the promoters got a good price for the dilution.

The objective of the IPO I presume was to raise capital so as to deploy the same in profitable projects earning returns for the shareholders.

Cut to 2008

Property markets are in a slump. Most developers are unable to raise capital from the equity markets, AIM, PE funds etc and the cost of debt has gone up substantially. Developers are facing severe cash crunch as demand has contracted at such high property prices.

So in such a tough environment where capital is scarce, what does the largest real estate company want to do?. It wants to return capital thru a buyback because it believes its share price should be higher.

Guys why did u take it in the first place last year when u didn’t need it? Or
Is managing the share price more important than managing the business?

“U cant fool all of the people all of the time” (or maybe you can). I can lay a bet that not a single share would get bought back. Anyway with a 88% promoter holding, there is only 2% of the capital that can be bought back without attracting the delisting norms.

I think SEBI should start questioning these strings of open ended buyback announcements where nothing happens other than trying to prop up the share price.

PS: Well Mr Ambani did his buyback of Reliance Infrastructure and it doesn’t seem to have helped the share price. Subsidiary Rel Power raised capital because it needed it and parent returns it back because it doesn’t need it. Well they could have transferred it from the parent to the subsidiary and saved us all the trouble. When something is expensive, all the propping up doesn’t help.

Raymonds – Doesn’t feel like heaven

I was running through the Raymond balance sheet for 2007 – 08. The company closed today at about 224 and has a 52 week high of about 474. It is trading around the 52 week lows. It caught the fancy of the markets with the real estate story.

The company has two divisions Textiles and the Files & tools division. The company hived off its denim business which was losing money into a joint venture. Sales was up for the year from 1374 crores to 1460 crores but profits were down from 201 crores to about 66 crores.

Now comes the interesting part ….

1) In the Directors report with respect to the textile division performance ( which is 85 % of the company), the management states and I quote

“ The growth in revenues was largely due to increase in volumes. High wool
prices, employment cost increases and issues in the ERP implementation has
resulted in decline in profit before interest and tax of the division from Rs
228 crores to 166 crores)”.

I can understand raw material cost increases and employee costs ( which went up from 225 crores to 233 crores - just 8 crores). Compared to this rent went up from 20 crores to 38 crores.

But the brilliant one is dip in profits because of teething problems in the ERP implementation :-). I have mixed emotions on this one. This really takes the cake.

2) The company has quoted investments of over 1000 crores invested in about 100 odd stocks and they traded in about 45 odd shares through the year. If I wanted a equity fund manager I would go to a mutual fund and not to Raymond. It would be wiser for the company to repay about 800 crores that it has on its balance sheet as opposed to dabbling in the stockmarkets.

3) In such tough times one would expect the company to work towards cutting costs. Well the company has a Aircraft on its balance sheet worth 98 crores. Maybe they have to fly the fabric in the skies to make it feel like heaven.

Lol and behold guess what … They bought 67 crores worth of boats and water equipment this year. I am speechless. Well Mr Singhania’s Page 3 lifestyle surely feels like heaven.

I don’t own stock in Raymonds and don’t intent to change that.