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.

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.

Oversexed guy in a whorehouse.

Warren Buffett once quoted this when Forbes asked him how he was feeling with the market crash in 1974

Well that’s how I am feeling :-). Unfortunately unlike Buffett, I don’t have the spare money to enjoy (and a wife who is watching over my shoulders :-)).

Though everybody is shouting from the rooftops on how the environment is vitiating and how the market can go below 12,000 and then 10,000, I will stick my neck out and say that this is the time to start building on your portfolio.

I m not saying buying stocks like RNRL, Ispat etc just because they have fallen 75 % from the top. They could and most likely will shrink further, But there are a lot of great companies with visible earnings available at mouth watering valuations. I agree that valuations might become even more mouth watering ( what is cheap can become cheaper) but then its tough to catch the top and bottom of the market.

I believe that equities are the best bet to ride out inflation. They might underperform in the short run due to sentiment but companies with low debt on the books and strong cashflow’s will be better positioned to increase marketshare and hence encash as the cycles turn.

One of the advantages of inflation is the fact that replacement costs for companies which have already build capacities in terms of land, plant & machinery etc keeps going up. It provides a natural hedge to the depreciating value of your money as the value of those assets go up. Look at historical costs of putting up a cement plant or building a brand compared to putting up or building one now.

Avoid companies where a lot of the valuation is based on future growth which requires capital. These companies will or have already witnessed serious contraction in their PE ratio as growth tapers off due to lack of capital or that it comes at a high cost.

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.

Yeh na thi Hamaari Kismat ……

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

Well what does Ghalib have to do with investing other than feeling poignant with the current state of the capital markets :-).

I have been struggling over the years to overcome one of the behavioural biases that I suffer while placing a order. In a fairly well traded stock there is enough liquidity and the impact cost of a trade is very small. So the market at a particular moment has the right price for the stock ( I m not talking about valuations here) based on the buyers and the sellers in the market.

The bias that I am referring to originates when I am buying a stock, I tend to put a price slightly lower than what the market is trading at to get a so called better deal. The implicit assumption by doing this is that one believes the market at that moment is inefficient and the actual price of the stock should be lower than what it is traded at.

Similarly when one is selling, one tends to place the sell order at a slightly higher price than where the stock is currently trading. Same implicit assumption that the market is inefficient however, this time the view is diametrically opposite that the market is paying less than what you believe is the fair price.

This is the dissonance where the market can’t be inefficient both ways. I have missed out on a lot of buying or selling opportunities and like Ghalib waited forever for the price to come :-).